Central Vermont Public Services Q3 2009 Earnings Call Transcript

Central Vermont Public Services Corp. (CV)

Q3 2009 Earnings Call

November 6, 2009 2:00 pm ET

Executives

Pamela J. Keefe – Vice President, Chief Financial Officer & Treasurer

Robert H. Young – President & Chief Executive Officer

Analysts

Paul Ridzon - Keybanc Capital Markets

Presentation

Operator

Greetings and welcome to the Central Vermont Public Service Q3 2009 earnings call. (Operator Instructions) It is now my pleasure to introduce your host, Pamela Keefe, CFO for Central Vermont Public Service. Thank you, Ms. Keefe, you may begin.

Pamela J. Keefe

Thank you for joining us this morning for the Central Vermont Public Service 2009 third quarter earnings teleconference. Our comments and responses to your questions this afternoon may contain forward-looking statements. Our earnings press release, our Form 10-Q for the third quarter of 2009, and our Form 10-K for the year 2008 contain forward-looking statements and associated risk factors that you should consider. Actual results could differ materially from those expressed in such forward-looking statements and I refer you to the safe harbor language that is contained in the earnings press release that we issued this morning. This release appears on the Investor Relations section of our website at cvps.com along with slides that will be referred to throughout today’s call.

Whenever we reference earnings per share, we will be referring to diluted shares of common stock.

With me today is CVPS President and Chief Executive Officer, Bob Young. Bob will provide an overview of the company’s earnings and an update on corporate and strategic developments. I will then describe the financial results in detail and we will leave time to answer your questions before we conclude the call.

Now I would like to turn things over to Bob.

Robert H. Young

Thank you, Pam and welcome, everyone. This morning we reported 2009 third quarter earnings of $6.2 million, or $0.52 per share of common stock. This compares to earnings of a year ago of $6.5 million, or $0.61 per share. Year-to-date, CVPS earnings were $18.6 million, or $1.57 per share, compared to $16.4 million or $1.55 per share a year ago. The small difference in earnings per share compared to the substantial increase in earnings is attributed to dilution resulting from equity issued in November 2008.

Given the continuing and pervasive economic challenges, I am pleased with our quarterly and year-to-date financial results. Our performance shows that we are still managing operating expenses well, which is softening the effect of declining revenues tied to the economic downturn. We also are continuing to meet or exceed our 17 service quality standards, which demonstrate our ongoing commitment to provide exceptional customer service and reliability.

Turning it slide two, while we are carefully scrutinizing all our costs and expenses, we remain committed to our broad plan to make core infrastructure upgrades and investments in the Velco transmission system. This capital expenditure strategy is central to improving both customer reliability and shareholder value over the long-term.

Over the next three years, we anticipate core business capital spending in the range of $48 million to $61 million annually. We will also continue to make periodic equity investments in Velco -- in fact, we expect to make a $21 million investment in Velco by the end of this year.

However, as you may know, the amounts available for investment depend on Velco’s project needs, their desired capital structure, and investment by other Vermont utilities, and are driven by Velco’s management decisions.

As I have discussed previously, our capital spending plans for the next few years include the implementation of our CVPS smart power program, a component of which is the installation of an advanced meter infrastructure. This program will be the largest non-power capital investment the company has ever made, with over $56 million in capital required over a period of several years, beginning in 2010.

I am very pleased to report that last year we learned that our joint application in Vermont for federal smart grid stimulus funds had been accepted by the U.S. Department of Energy. CVPS worked on the application with all of the state’s utilities, our regulators, the Governor’s office, and all of Vermont’s congressional offices, an effort that could bring $69 million to Vermont. CVPS is eligible to receive roughly $31 million to help us implement our smart power program, and we have begun discussions with DOE on the terms and conditions of this grant.

This federal funding will allow us to speed up the installation of new smart meters and will fund detailed studies of consumers’ reactions to various communications methods intended to help them respond to smart meter data. The grant will also fund a pilot study of what kinds of financial incentives will be necessary to get customers to reduce their demand during times of high peak prices.

Out of about 400 applications for federal stimulus funds, only one quarter were funded, so we are very gratified by the DOE decision. We believe our application was strengthened by the collaboration between regulators, politicians, and utilities and speaks well of our relationships within the state.

Another critical element of our long-term strategy is to continuously improve our financial position. Updates in this area are shown on slide three. The implementation of our alternative regulation plan has been an important part of our efforts for the past year. On October 30th, we filed our annual base rate filing with the public service board. CVPS has requested a rate increase of 5.91% or $16.6 million. This new rate request reflects cost increases in areas that are largely outside of our direct control, or that are needed to improve customer service and system reliability. Power and transmission costs, system investments and expenses such as depreciation, property taxes, medical and pension costs, comprise the majority of the items driving the request.

We consider this request to be relatively modest, especially considering that our rates will have increased just 12.6% since 1999.

Our base rate filing also contains the annual reset of our allowed ROE, which is a function of the annual change in yield on 10 year treasuries. For 2010, it will be 9.59%, down from 9.77% in 2009. You may recall that there is a 75 basis point dead band around the allowed ROE. We look forward to a public service board decision in December so new rates can go into effect with bills rendered as of January 1, 2010.

Moving to slide four, we continue to negotiate with Hydro Quebec and [Energy Vermont Yankee], on long-term power purchase agreements. Although my comments are limited by confidentiality agreements with each party, I can say that productive discussions continue. At this point, it is not possible to provide a timeline for agreements with either party or to say whether agreements definitely will be achieved. But I will emphasize that in both cases, we are actively engaged in cordial productive discussions. We remain hopeful that we can develop agreements that are beneficial to our customers.

The negotiations with [Energy Vermont Yankee] have been complicated by the high profile process for relicensing the VY plant. It is unclear whether the Vermont Legislature will in fact vote on the plant’s continued operation in the next legislative session in the absence of a contract proposal.

As I have said previously, regardless of whether we can achieve an agreement with Vermont Yankee, there is more than sufficient power supply within our region and Canada to serve our company’s long-term needs. We are putting the finishing touches on contracts resulting from our joint utility power supply RFP issued in 2008 and hope to have them finalized before the end of this year.

You may recall that CVPS and other Vermont utilities sought a total of 100 megawatts of supply, including up to 40 megawatts for CVPS. In a second RFP, CVPS sought an additional 100 megawatts contingent on the outcome of Vermont Yankees relicensing and contract negotiations. The response was very positive. Bidders offered more than 1,800 megawatts from a variety of sources, which clearly indicates sufficient supply is available in the market. We expect to make further solicitations in the coming years.

Meanwhile, our current power position remains long. To help reduce our overall power costs, we have just completed a forward power sale for 2010 that disposed of 564,000 megawatt hours to a power marketer. This accounts for all of our excess power except for a buffer needed for load variation. This sale is unit contingent so if Vermont Yankee experiences unplanned outages, we are relieved of any obligation to perform under the contract.

We have also covered our short positions during the next Vermont Yankee refueling outage scheduled for April 24th through May 19th, 2010. On a separate but related note, we have renewed insurance coverage for unplanned outages at Vermont Yankee for another year from March 2010 through March 2011.

At this point, I would like to turn the presentation over to Pam who will discuss our financial results in-depth. Pam.

Pamela J. Keefe

Thanks, Bob. Please refer to slide five for a summary of our third quarter and year-to-date financial results. CV’s 2009 third quarter net income decreased by $200,000, or $0.10 per share, compared to 2008. The primary drivers were lower operating revenues due to lower usage, particularly among our commercial and industrial customers, higher transmission expenses, and higher operating expenses, partially offset by lower purchase power expense and an increase in the [cash for render] values of the variable life insurance policies in a Rabbi trust.

The higher transmission expenses were due to increased costs from Velco and higher rates due to overall transmission expansion in New England.

Operating expenses were higher due to a variety of things, including regulatory amortizations, depreciations, outside services, and property taxes.

Purchase power expenses decreased due to a reduction in both short-term purchases and purchases from independent power producers.

The variable life insurance policy item is really just a return to more normal performance compared to poor results in 2008.

Equity and earnings of affiliates increased by $300,000, reflecting the $3.1 million investment we made in Velco in December 2008. Earnings for the quarter reflect a $0.06 impact of the November 2008 equity issue of 1.19 million shares.

Net income for the year-to-date period increased by $2.2 million, or $0.02 per share, compared to the same period last year. The primary drivers are the same as for the quarter, except that the impact of transmission expense and other operating expenses were more pronounced for the quarter versus the year-to-date period.

As a reminder, power and transmission costs are part of our quarterly power cost adjustment mechanism that trues up the income statement for variances between actual results and the level of those costs reflected in rates. The adjustment is reflected in rates with a two quarter lag. Earnings for the nine months reflect an $0.18 impact of the November 2008 equity issue.

For a more comprehensive analysis of CV's third quarter and year-to-date financial performance, please refer to the earnings release and 10-Q filing we issued this morning.

Turning to slide 6, the company’s cash position was $10.3 million at September 30th. We have a $40 million revolving credit facility that remains untapped at this point. CapEx for the first nine months was $21.3 million out of an estimated annual spend of $30.2 million, which is a slight decrease from our previous estimate of $32 million.

Our Q4 2009 forecast contains a $21 million investment in Velco but as always, the amount and timing are subject to change based on a number of factors. And we also have $5.5 million in debt maturing in the fourth quarter.

Given our results to date and our forecast of the remaining quarter, we are raising our earnings guidance range to $1.50 to $1.65 per share. We are seeing reductions in the original estimates of medical, leasing, and fuel costs. We have not had any major storm activity so far this year and the Rabbi trust performance I described earlier is a below-the-line item.

We will give earnings guidance for 2010 in January, as is our practice.

And with that, I will turn the call back over to Bob.

Robert H. Young

Thank you very much, Pam. As we reach the final stretch of 2009, CVPS is doing well, especially considering the difficult economic environment. We are making solid progress in achieving our long-term strategy, which is shown on slide seven.

First, we are continuing our capital investments in our core system and Velco. We are proceeding with plans for CVPS Smart Power, which will be the largest non-power capital investment we have ever made. We will also continually evolve our asset management plan which systematically upgrades ageing infrastructure. All of these efforts are focused on constantly improving customer service and reliability to keep pace with rising customer needs and demands.

Second, we remain focused on improving our financial strength, which will help us restore our credit rating to investment grade. We are managing our costs well and despite declines in retail sales and revenues, we have been able to raise our earnings guidance range for 2009.

Third, we are actively engaged on all fronts to secure the best power supply options available to our customers. We are taking a balanced approach to ensure there is less reliance on any single power source and that environmentally responsible suppliers remain a central part of our portfolio over the long-term.

We believe this straight forward approach is the best way to meet our companies, our customers, and our shareholders’ needs to grow and thrive.

Thank you for joining us today. At this point, Pam and I would be very happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from Paul Ridzon of Keybanc Capital Markets.

Paul Ridzon - Keybanc Capital Markets

Could you run through the drivers behind increased guidance again?

Pamela J. Keefe

Sure. One is the Rabbi trust performance, which is a below-the-line item. And we had budgeted pretty conservatively for that and we are actually seeing returns to more normal performance.

Secondly, we budget a five-year average for storm expenses and we haven’t had any storms this year. And then also, reductions in our original estimates of medical, leasing, pension, and fuel costs.

Paul Ridzon - Keybanc Capital Markets

So the Rabbi trust is upside versus budget but not different from what historically has been in kind of average?

Pamela J. Keefe

Yes, it -- usually it performs in a pretty narrow band and last year it performed very badly and this year it is sort of making up for the bad performance last year, so I would expect that going forward, it would return to its pretty tight range of performance.

Paul Ridzon - Keybanc Capital Markets

Is this year within that historic band or is this year exceeding the band?

Pamela J. Keefe

This is exceeding the band.

Paul Ridzon - Keybanc Capital Markets

Okay. And then on the cost cutting side, kind of what costs have you taken out kind of versus original budget?

Pamela J. Keefe

Well, we did go through a cost-cutting exercise that was primarily aimed at 2010 and beyond, so that will really play itself out going forward. It wasn’t so much aimed at 2009. I think for 2009, it is mostly in those areas that I mentioned already.

Paul Ridzon - Keybanc Capital Markets

And then the $16.6 million rate increase, how does that compare to what CPI minus one would have spit out?

Pamela J. Keefe

That is really the same because the -- if CPI, which is negative in the measurement period, if we had assumed that yes in fact that does go negative, we would just have more disallowed costs that we would pick up at the end of the year in the earnings adjustment mechanism. When we filed our base rate filing, we are making the assumption that per the board’s order, per the language in the order, it references inflation and so we are making the assumption that CPI itself cannot go negative, though we do still have the 1% productivity adjustment.

Paul Ridzon - Keybanc Capital Markets

Thank you very much.

Operator

(Operator Instructions) There are no questions in the queue at this time. I would now like to turn the floor back over to management for closing comments.

Robert H. Young

Well, just to thank all of you for being on the call with us today. I know most of the people on the call we had the opportunity to meet with in Florida just in the last few days and we appreciate your calling in for this earnings announcement. And again, if you have any further questions, please feel free to call Pam or myself whenever it strikes you. So thanks very much for your participation today.

Operator

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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