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UIL Holdings Corporation (NYSE:UIL)

Q1 2013 Earnings Call

May 3, 2013 10:00 am ET

Executives

James Torgerson – President, Chief Executive Officer

Richard Nicholas – Executive Vice President, Chief Financial Officer

Susan Allen – Vice President, Investor Relations

Analysts

Operator

Good morning. My name is Michelle and I will be your conference operator today. At this time, I would like to welcome everyone to the UIL Holdings First Quarter 2013 Earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press the star then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you.

Ms. Susan Allen, you may begin your conference.

Susan Allen

Thank you Michelle, and good morning to everyone. Thank you for joining us to discuss UIL Holdings’ first quarter 2013 earnings results. I am Susan Allen, Vice President of Investor Relations. Participating on the call with me today is Jim Torgerson, UIL’s President and Chief Executive Officer, and Rich Nicholas, UIL’s Executive Vice President and Chief Financial Officer.

If you do not already have a copy of our press release and our presentation for today’s call, they are available on our website at www.uil.com. During today’s call, we will make various forward-looking statements within the meaning of the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Significant factors that could cause results to differ from those anticipated are described in our earnings release and filings with the SEC.

With that said, I will now turn the call over to Jim Torgerson.

James Torgerson

Thanks Sue, and welcome everybody to our call. The first quarter really positions us well for the year. We had a great start for the first quarter. Weather was much more cooperative this year than it was last year in 2012. For our first quarter of 2013, consolidated net income was 58.1 million or $1.01 per diluted share, which was up about 10% over the previous year’s first quarter. The earnings from all our operating companies were higher than the same period last year, although I have to admit the electric distribution was just slightly higher; but transmission was up 17.6% and gas was up 10.5%. Now the gas companies were nowhere near as negatively impacted by the weather in the first quarter of 2013. The heating degree days were actually 2.2% warmer than normal, but it wasn’t the 20%-plus warmer than normal year we had in the previous year so it was actually much, much closer to normal.

We also see a positive impact on the earnings from the gas customer conversions we had in 2012 and obviously 2011, so that’s going extremely well. As you can see, the gas conversions were up to 4,787 – that was more than double what we did in the first quarter of 2012, and the proposals in the Comprehensive Energy Strategy, which is now final, should provide the tools to enhance our growth strategy. Now, some of those tools we have – potentially a new customer rate, 25-year look at net present value to determine contribution aid in construction versus the 20 years we use currently, unbilled financing of equipment, pooling of requests, and also using some of our off system and capacity release dollars we get and using that to offset some of the CFs potentially – all of these are going to be proposed to the Public Utility Regulatory Authority. We have a filing we have to make first with DEEP – the Department of Energy and Environment Protection – and that’s going to be the first week of June. Actually, I think it’s scheduled for right after the end of the legislative session, and then DEEP will turn that around and file with the Public Utility Regulatory Authority, or we will in joint, the following week. So that still has a little ways to go.

On the next page – and I’m on Page 4 of our presentation – as I said, the gas conversions were almost 4,800 for the first quarter. Our target for 2013 is 12,200, and if you remember, we said back a long time ago in the beginning of 2011 that we were targeting 30 to 35,000 conversions of people to gas heating within the first three years. Now, we’re well on track – we’ve got 8,300 of that first year, 11,180 last year, so we’re well positioned to get within that range that we had set out earlier.

Now our 2014 to 2016 target is to convert 55,000 households and businesses to be using gas for heating. The 2014 target is 15,250. Now, it also means we need the tools from the Comprehensive Energy Strategy in order to make this all happen. As I said, we’re well on her way to our target this year without those tools, but to get those additional numbers of conversions we’re going to need more of the tools; and since they are in the strategy, now it’s just a matter of getting the PURA to go ahead with those.

Our gas sales on the next page – sales volume has declined due a lower normalized usage per customer, and that started in 2009 when the rates were established. You can see on our chart, and we’ve gone through this with you before, that it’s declined almost 6% during that time frame. So the gross margin decline in the period ends up impacting our earnings by about $0.09 per diluted share.

Now in the first quarter, we did see a little positive impact over the first quarter of 2012 and it added about a million dollars to our margin or about $0.01 a share. We have seen it start to move up again, and this is a 12-month moving average of the normalized use per customer.

On the next page, there are some strategic considerations here and so we really need to address this declining normalized use per customer, and really what we need to address is the under-earning and specifically at Connecticut Natural Gas. So the considerations we have, one is request regulatory approval to combine the Connecticut companies and looking at a decoupling mechanism for both of them. The others are really to request rate relief for either one or both of the Connecticut gas companies to establish rates that would reflect the decline in the normalized use per customer and at the same time request a decoupling mechanism. But a rate case would need to be filed by the middle of this year in order to be able to get rates into effect by the first of January.

The third thought is to utilize the Comprehensive Energy Strategy as a mechanism when we make those filings to request decoupling. We will definitely do that, but there is no time frame in which the Commission would really have to act under that, so I think it’s probably—we’re saying we’re probably going to need to file some type of rate case, but we’re still evaluating that and is it one company or two companies combined. So we’re still looking at that and seeing what makes the most sense from our standpoint. We’re still continuing our growth—the initiative of converting the households to gas.

If you look at the next page, we have our electric distribution rate case. We filed that on February 15. The schedule as of right now, the hearings are going on as we speak. There actually aren’t any hearings today, but they’ll resume again next week. Briefs will be due the end of May; reply briefs a week later. A draft decision is scheduled tentatively for the end of July, and then we’ll have a final decision by August 14. All of the information on the rate case really can be found on the regulatory page of the UIL website.

Some of the other things going on from a regulatory and legislative standpoint – the superstorm Sandy hearings, actually those start next week as well. We’ve been doing interrogatory responses for the last—probably since the end of the storm, and they still continue but there is a hearing next week. We don’t anticipate anything coming out of that that will negatively impact us, because I think by all consensus our people did a great job in restoring power during those storms. The fact that we got the award from EEI for restoration, I think is also a testament to the hard work our people put into this in getting people restored very quickly.

The renewal connection program, that is the program where we can build up to 10 megawatts of renewable generation. We put forth a plan to do that for about 7.6 megawatts, two-thirds of that being in Bridgeport and the balance in New Haven. They granted us that last year, but they granted at a return on equity of 8 ¾ equal to our current distribution return, and we had indicated we’d need something higher than that, more in the—well, we said we needed 9.5%, and so we’re not going forward at this point. But the docket has been reopened and there will be some discussions. They actually appointed prosecutorial staff to work on this, so we’ll see where that ends up; and it also could tie back into what we get for our electric distribution rate case ROE as to whether or not we proceed with that. But right now it’s not in any of our budgets, it’s not in any of our capital spending plans.

From the legislative session, the general session ends June 5. That assumes they get their budget passed, so that could extend; but right now, it’s scheduled for June 5 and implementation of the Comprehensive Energy Strategy is a big part of that. Some of the things we already talked about – I mentioned the expansion of the use of natural gas. The Governor wants it to go to basically 300,000 homes and businesses within the seven-year time frame. Our piece of that is about two-thirds, so about 200,000 homes and businesses. Our plans would say that it may take a little longer than seven years. Seven years – that’s almost 30,000 a year, and you can see our plans for the next three years from 2014 to ’16 are 55,000. So we are ramping up. We’ll do what we can to get there as fast as we can, assuming they put all the tools in place.

Now the other things that are in some of the legislative bills, there’s revenue items to implement the Governor’s budget, one of those being the auctioning off of the remaining customers that have not switched. That’s a revenue generator that the Governor is pushing and the taxes that should have ended, the generator tax and a few other things, are still on the Governor’s bill. So those things still need to be worked out. There is a shortfall in the state from a revenue standpoint that needs to be closed, and that’s why I’m not overly optimistic they’re going to get there by June 5; but there is that possibility.

And also, there is some activity around clean energy goals, tree trimming and so forth. There’s a Senate bill that was passed and its gone to the House that talks about renewable generation. There some discussion of how that will end up, but it would envision using large-scale hydro as an additional renewable, which would cause the need for transmission activity to be built in order to access those renewables. That’s still under discussion and we’ll see what the House does with that and then how they end up.

On the next page, we have the FERC ROE complaint. Actually there really hasn’t been much movement on that. The 206 complaint that was filed at FERC in September of 2011, the ROE methodology has been updated. It was updated in mid-April by all the parties. The state complainants recommend a base ROE now of 8.9. The munis in Massachusetts are at 8.5. The New England transmission owners still continue to support the base at 11.14, and it actually is in the range of reasonableness for certainly the complainants, although it is at the high end of the range. We believe that since it’s in the range of reasonableness, it’s kind of hard to say that rates are unjust and unreasonable, but this is going to play out over an extended period of time. FERC trial step came back with a revised number. They had been at 9.66; they’re now at 8.93 based on updates.

The hearing schedule – hearings start next week there. Briefs will be due in June. A decision by the ALJ is September, and then it’s going to be into 2014 before we see any answer by the FERC commissioners themselves. As we’ve said before, a 25 basis point change in the ROE impacts us by about $600,000 a year.

With that, I’ll turn it over to Rich Nicholas, who is going to talk about the financial results.

Richard Nicholas

Thank you Jim. Good morning everyone. I’m on Slide 10 and 11 of the slide deck, the details on the financial results. As Jim mentioned, all of our business segments had increased net income first quarter ’13 as compared to the first quarter of 2012. Let’s start with the electric distribution CTA and GenCon component.

While it was up just slightly period-over-period, we did see the benefit of moving to our central facility for the UI Electric operations and administration. That allowed us to get out of some rented space and reduce rent expense. Offsetting some of the O&M reductions, though, was a lower contribution from GenCon and that was really because of some true-ups that were recorded in the first quarter of 2012 for GenCon that increased GenCon’s contribution in ’12 that were non-recurring in nature. So no real degradation in GenCon, just that true-up did not recur this year. Also in 2012, we had the settlement of the transitional service offering incentive that, again, was a one-time item and is not there in 2013.

Moving to the electric transmission part of the business, solid growth there, 18% period-over-period primarily due to the growth in the transmission rate base, the transmission investments that we’re making, the return on our investment in the news project as well. Our overall transition ROE is 12.3%, and I should have mentioned for distribution in CTA we’re also—we’re at 10.05, down from the prior quarter as our rate base continues to grow, reducing that achieved ROE at the distribution part of the business.

Moving on to Slide 12, looking at the gas business, as Jim mentioned, the return to somewhat normal weather was certainly a big help for this year. Even though it was 21% colder than last year, it was still 2.2% warmer than normal; but pretty close, and we saw the benefit of that coming into our margin as well as a little better customer usage. Customer growth also contributed to margin growth, but as we talked about on our year-end call, increased pension and post-retirement expenses mainly due to a lower discount rate offset some of that margin improvement, as well as did higher uncollectables and some of the corporate allocations for our SAP systems now being used for the gas companies and the billing systems, which was only partially implemented in the first quarter of 2012. In addition, in other income and deductions last year, we had 3.5 million of weather insurance proceeds which obviously aren’t there this year because of the improvement in the weather results.

So moving on to Slide 13, when you add it all up, the improvement in margin was about $0.15 a share. As you can see, weather the biggest contributor there of $0.11, a penny from the normalized use per customer, and $0.03 from the growth in our customer base. That $0.15 was offset by, again, the lack of weather insurance was about $0.04 and O&M increased about $0.02, ending up with a $0.09 overall improvement in gas distribution. With that, the 12-month average March 31 ending ROEs are still in that 6 to 7% range, and as Jim mentioned we’ve got some strategies to look to improve those over time.

In the corporate segment, a small improvement overall, so a good start to the year. As we look at other parts of the financial part of the business in terms of liquidity, March 31 we had $363 million available to us on our credit facilities and we’ve only got about $41 million in maturities coming up later this year, so well positioned from a liquidity standpoint. We continue to evaluate all of the moving pieces to our business in terms of when we’ll need external equity, all of the various regulatory proceedings that Jim was talking about, and notably the Comprehensive Energy Strategy, the electric rate case, the renewable connections program, et cetera, as well as other aspects of our business plan and market conditions to determine potential timing around external equity.

Moving to Slide 15, we’re reaffirming our 2013 guidance again with a good start to the year, but still some variables, in particular the distribution rate case as we go out in time. We continue to maintain a total range of $2.05 to $2.15 for full year earnings per share.

James Torgerson

$2.05 to $2.25.

Richard Nicholas

$2.25 – excuse me, I misspoke. Thank you.

So look forward to seeing many of you at the AGA conference this weekend and over the next few days. Now we’ll turn it back to our operator, Michelle, to handle the Q&A session.

Question and Answer Session

Operator

[Operator instructions]

I have no questions in queue at this time.

James Torgerson

Okay, well thank you Michelle, and thank you all for participating today. I’m sure we’ll see a number of you at the AGA conference, as Rich said; and if you have further questions please don’t hesitate to call our investor relations people, or we’ll see you this weekend. Thank you very much.

Operator

That concludes this morning’s teleconference. You may now disconnect your lines.

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