DPL Inc. Q4 2009 Earnings Call Transcript

Feb.12.10 | About: DPL Inc. (DPL)

DPL Inc. (NYSE:DPL)

Q4 2009 Earnings Call

February 12, 2010; 9:00 am ET

Executives

Fred Boyle - Senior Vice President, Chief Financial Officer & Treasurer

Paul Barbas - President & Chief Executive Officer

Analysts

Leon Dubov - Catapult

Brian Russo - Ladenburg Thalmann

Paul Ridzon - KeyBanc

Reza Hatefi - Decade Capital

Operator

Good day, ladies and gentlemen, and welcome to the DPL 2009 year end earnings reviews conference call. My name is Francine and I am your operator for today. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions)

I’d now like to turn the presentation over to your host for today’s call, Mr. Fred Boyle, Senior Vice President, Chief Financial Officer and Treasurer; please proceed sir.

Fred Boyle

Thank you. Good morning and welcome to DPL’s 2009 year end earnings conference call. I’m Fred Boyle, Senior Vice President, Chief Financial Officer and Treasurer. Before we begin today, I would like to remind everyone that all references to earnings per share are diluted, unless otherwise noted and that this call may contain certain forward-looking statements regarding plans and expectations for the future.

Investors are cautioned that actual outcomes and results may vary materially from those projected due to various factors beyond DPL’s control. Such matters are described in our 2009 Annual Report on Form 10-K. In addition today’s discussion will include references to non-GAAP financial measures as defined under SEC Regulation G. We are provided descriptions and reconciliation of non-GAAP to GAAP measures as part our presentation, which is also available at our website.

With me today is Paul Barbas, DPL’s President and Chief Executive Officer. Paul will provide an update on key operating matters and an overview of DPL’s 2009 performance. Following Paul’s comments I will review the 2009 year end financial results to discuss our 2010 earnings guidance and then open up for questions.

Now I will turn the presentation over to Paul Barbas.

Paul Barbas

Thank you, Fred. Good morning everyone and thank you for joining us today. DPL had a solid year despite the challenging economic times and mild weather. As we reported in our earnings release, diluted earnings were $2.01 per share for 2009 compared to $2.12 per share for 2008.

I would like to note that our 2009 earnings per share was unfavorably impacted during the fourth quarter of the year by unplanned outages of approximately $0.03 per share, cost associated with the repurchase of debt of $0.03, weather impacts, and a prior year tax adjustment of $0.01 per share, each for a total impact of $0.08 per share.

Before Fred provides additional details regarding 2009 earnings, I’d like to review the major accomplishments we achieved during 2009. First, 2009 was an active year from a regulatory standpoint, along with receiving commission approval for our new RPM and transmission cost recovery rider.

We received approval in June for our electric security plan settlement agreements. This was a significant accomplishment as it extends our previous rate plan and freezes distribution base rates through 2012, providing rate certainty to our customer.

Additionally, the ESP provided for the implementation of fuel cost beginning this year and allows the company to apply for the recovery of cost associated with new environmental legislation or regulation. We anticipate filing on our next ESP during the first quarter of 2012 to be effective of January 1, 2013.

Turning to our AMI and Smart Grid filing, the company’s plan is still under review by the commission. DP&L filed its updated case on August 4 of 2009, the intervene in parties including commission staff of Ohio Consumers Council and others filed their comments on December 15 of 2009, and we in turn filed a reply comment on January 8 of 2010. We expect to have a ruling during the first half of this year.

Second, we continued our work over the past several years to improve the company’s financial profile. As part of our effort, during 2009 we reduced the number of outstanding common stock warrants from $19.6 million to $1.8 million and we redeemed $227 million of long term debt. Of this amount, $175 million was redeemed when it matured in March 2009 and $52 million was redeemed during December. The December redemption related to the company’s 8.25% debt that is scheduled to mature during 2031 and was redeemed to the 7% premium.

Our efforts and performance were recognized by all three major rating agencies during 2009, each of which gave credit upgrades for both DPL and DP&L. We remain committed to maintaining our strong balance sheet, positive free cash flow and solid investment grade rating.

Third, the company continues to return value to our shareholders through dividend. In December, we announced quarterly dividend increase of 6%, which reflects an annualized dividend of $1.21 per share. This marks the fifth consecutive year that the dividend has increased and represents the $0.25 per share increase over the five year period.

Turning to our generation, total output was 7% above 2008 due to improved plan performance across the majority of our base load coal fleet. We generated over 16,600 gigawatt hours during 2009, compared to 15,600 gigawatt hours during 2008. Though generation was up through the year, unplanned outages at DPL and partner operated stations during the fourth quarter unfavorably impacted 2009 earnings per share by approximate $0.03.

As we move forward to 2010, the impact of unplanned outages on operations will be somewhat mitigated as a result of the company’s implementation of its fuel and purchase power costs effective January, 2010. That being said, our focus has been and will continue to be on delivering sustainable and optimal plant performance across our generation fleet.

Finally, we have recently two renewal generation initiatives as part of our effort to diversify our generation mix and to ensure compliance with our Ohio’s renewable energy requirements. In December of 2009, DPL began construction at a 1.1 megawatt solar array near our Yankee substation outside Dayton. The facility consists of 9,000 solar panels over 7 acres of land with expected capital cost of $5 million.

It is projected to be on line during the first half of this year and is expected to be the largest solar power facility in Southwestern Ohio. We are partnering with regional companies in this effort and will provide a Public Education Center as part of our commitment to the Dayton region and the environment. Earlier this month, we announced some alternative biofuel testing program at our Killen station, located along near Ohio River.

Biofuel can reduce emissions and provide an opportunity to produce renewable energy from existing coal burning power plants for creating potential new markets for local farmers and other biofuel producers. Once testing is complete, we will be able to determine the optimal mix of fuel to help meet our renewal energy requirements and maximize plant efficiency.

As we look forward, we will continue to consider additional opportunities to meet our renewable requirements. Such opportunities include expanding the current solar array facility, building additional solar array for other locations and coal-firing opportunities at other generating stations.

With that, I will turn the presentation over to Fred for a review of the 2009 financial results.

Fred Boyle

Thank you, Paul. As Paul mentioned, DPL’s 2009 diluted earnings were $2.01 per share compared to $2.12 per share for 2008. Our 2009 earnings reflect the unfavorable impact during the fourth quarter of unplanned outages at $0.03, the debt buyback of $0.03, weather impacts in our prior tax adjustment of $0.01 per share, each for a total of $0.08 per share.

Turning to specifics relating to our 2009 results; 2009 gross margin increased approximately $17 million compared to 2008. There are a variety of factors that led to this increase, the key ones being a $6 million increase in retail revenues due to an increase in retail rates associated with a recovery, environmental, transmission, capacity, and energy efficiency costs, which were partially offset by a 9% decrease in retail sales volume due to the economy and milder weather, and a $125 million reduction in purchase power costs due to lower purchase power prices and reduced purchase power volumes in the deferral of RTO related charges.

These favorable items were partially offset by a $27 million reduction in wholesale revenues due to a decrease in wholesale power prices of approximately 42%, partially offset by an increase in wholesale sales volume, a $57 million reduction in gains recognized from the sale of coal and emission allowances and $31 million increase in fuel costs due primarily to improved plant performance and an increase in the average cost of fuel.

As mentioned throughout the year, the economy and milder weather conditions had a significant impact on retail sales volume. Cooling degree days were 14% below 2008 and heating degree days were down 4%. For calendar year 2009, retail sales decreased 9.3% compared to 2008 on a nominal basis and 7.7% on weather normalized basis.

As you can see from the chart, on weather adjusted basis residential volumes were down 3%, commercial were down 6% and industrial were 16%. For 2010, we continue to project flat retail sales. However, we are seeing some positive signs particularly within the public service sectors such as Wright-Patterson Air Force Base, local Universities and Hospitals.

Continuing with other key 2009 drivers of earnings, operation and maintenance expense increased $24 million or 8% in 2009 compared to 2008. However, of this increase $12 million is the result of energy efficiency customer program costs and low income assistance programs, both of which are funded through retail rate riders and therefore have no impact on earnings. The remaining $12 million or 4% includes $6 million of increase in pension expense during 2009.

Depreciation and amortization expense increased by $8 million, mainly due to the FGD equipment being in service for the full year of 2009; general taxes decreased by $7 million due to lower property taxes and decreased exercise taxes due to lower retail sales volumes. Interest expense decreased $8 million due to the retirement of debt during 2008 and 2009, partially offset by the costs associated with our early debt redemption during December 2009.

As Paul mentioned earlier, we redeemed $52.4 million of our $195 million, 8.125% facility due in 2031. The transaction included a 7% or $3.7 million premium and $1.4 million write-off of unamortized debt costs during the fourth quarter. Because of this redemption going forward, annual interest costs will be reduced by approximately $4 million through 2031. Lastly, income taxes for 2009 increased $10 million or 9% compared to 2008, primarily due to an adjustment recorded during 2008 associated with Ohio Franchise Tax settlement.

Turning to liquidity and cash flow, DPL’s cash and cash equivalent totaled $74.9 million at December 31, 2009 compared to $62.5 million of December 31, 2008. The increase in cash and cash equivalents was primarily attributed to $526 million of cash generated from operating activities, net withdrawals of $14.5 million from restricted funds to fund pollution control capital expenditures, $5 million from the sale of a short term investment, $86.7 million related to the exercise of warrants and stock options in the third and fourth quarters of 2009.

These cash increases were partially offset by cash paid to retire $227.4 million of long term debt, $172.3 million of capital expenditures, $128.8 million of dividends paid on common stock and $89.6 million used to repurchase outstanding DPL common shares and stock warrants.

At December 31, 2009 DPL had used all the restricted funds held in trust of fund pollution control capital expenditures. As of December 31, 2009 our total liquidity was approximately $395 million. This liquidity position reflects DP&L’s combined $320 million credit facilities. We had no borrowings outstanding on the combined revolvers at the end of 2009.

Over the past year, we have discussed our improving free cash flow position. As of December 31, 2009 free cash flow, which we defined as net cash from operating activities plus capital expenditures in common stock dividends was $225 million.

Capital expenditures were $172 million and $244 million during the 12 month periods ended December 31, 2009 and 2008 respectively. For the period 2010 through 2012 DPL is projecting capital project additions of an estimated $590 million. The estimate does not however include capital costs that were reflected in DP&L’s re-file AMI and Smart Grid plan during August 2009. These costs totaled $270 million for the three years 2010 through 2012.

Capital projects are subject to continuing review and are revised in light of changes in financials and economic conditions low forecasts legislative and regulatory developments and changing environmental standards among other factors. We expect to finance our 2010 construction additions with a combination of cash on hand, short term financing and cash flows from operations.

Turning to our earnings guidance, we are affirming our 2010 earnings estimate range of $2.35 to $2.60 per share. As I mentioned earlier, this assumes flat weather adjusted retail sales from 2009 to 2010. Additionally, our 2010 guidance includes estimated wholesale sales volume of between 2,600 gigawatt hours and 3,000 gigawatt hours at an average $47 per megawatt hour on peak power price at the AEP Dayton Hub pricing point.

The 2010 forward curve for the AEP Dayton Hub has ranged between $44 and $51 per megawatt hour over the past few months. From an OEM perspective, we’ve remained focused on cost control and anticipate cost to be 4% to 5% higher in 2010. This excludes cost, but have a one for one revenue offset. A significant portion of the increase is related to higher pension costs, which are expected to increase another $6 million from 2009 to 2010. Lastly, generation output is expected to be relatively flat in 2010, compared to 2009 at 16,000 to 16,500 gigawatt hours.

With that, operator we will open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Leon Dubov - Catapult

Leon Dubov - Catapult

I was wondering if you guys could address, I know you mentioned what the average pricing was in your region. Can you maybe compare that with your kind of average generation rate for us and give us an idea, where we stand today versus where you think we might be sort of coming to the end of your transition period, given some of the fuel increases that we might see?

Fred Boyle

As far as comparing to the average generation rates, we’ve filed out the fuel costs, the initial ones for January and February, and then for the following three months; and the average rate that was filed as far as the fuel cost was in the $25 to $26 per megawatt hour range.

Leon Dubov - Catapult

That $25 to $26, is that the entire by passable portion of the bill for a customer that would chose to shop?

Fred Boyle

As far as that’s our fuel on purchase power.

Leon Dubov - Catapult

How much is the rest of the generation, I guess what was there prior to the $25 to $26…?

Fred Boyle

I don’t have that and we haven’t talked about what our total G rate is and it’s going to vary, part of the reason it varies by customer class and demand components, capacity factors, these kinds of things.

Leon Dubov - Catapult

Just on average, is it maybe another $25 to $26 or is it higher than that or lower than that…?

Fred Boyle

I don’t have that here.

Operator

Your next question comes from Brian Russo - Ladenburg Thalmann.

Brian Russo - Ladenburg Thalmann

Just on your 2010 guidance, I think the ‘10 guidance maybe back in the second quarter, you had assumed 3% increase in O&M expense, and I think now you’re assuming a 4% to 5% increase. Is that all attributable to that $6 million incremental pension expense or is there something else there?

Fred Boyle

It’s partially associated with $6 million, but there’s also some other increased cost.

Brian Russo - Ladenburg Thalmann

So I guess, you can say the guidance for O&M expense has creped up just a little bit?

Fred Boyle

Yes.

Brian Russo - Ladenburg Thalmann

Then on the load growth, assuming flat load growth, we are seeing several with other regional utilities that are forecasting 1% and 1.5% growth. I was just wondering, if you can comment on any signs of an economic recovery or a stabilization that you’re seeing in your territory?

Paul Barbas

We’re fairly comfortable with the flat projection right now. As Fred had mentioned, we’ve began to see some positive signs in the region, but not enough yet for us to really think about changing our projection.

Brian Russo - Ladenburg Thalmann

Are you still assuming $20 million of co-optimization benefits in 2010?

Paul Barbas

Yes, it’s $15 million to $20 million as what is embedded in our forecast.

Operator

Your next question comes from Paul Ridzon - KeyBanc.

Paul Ridzon - KeyBanc

Could you breakout your ‘10, ‘11 and ‘12 CapEx by year, both the base and the energy efficiency?

Fred Boyle

‘10, ‘11 and ‘12 are kind of ongoing CapEx is in the $200 million to $210 million range and then the incremental amount for the AMI and Smart Grid is in the $100 million range for each of those years.

Paul Ridzon - Keybanc

Which of your the plants did you have the outages at and what’s the status of those plants now?

Fred Boyle

They were really spread between three plants, Steward, Killen and Stuart. They’re all performing fine right now and again just as a reminder, some of this gets mitigated as we move forward with our fuel and purchase power clause.

Paul Ridzon - Keybanc

Those are DPL operated versus partner operated?

Paul Barbas

Zimmer is partner operated. The other two are DPL operated.

Fred Boyle

The impact was pretty well split between the two for the quarter as far as the impact on ‘09, the unfavorable impact we referenced.

Paul Ridzon - Keybanc

What weather was for the full year versus normalized EPS basis?

Fred Boyle

It was approximately $12 million at a gross margin, which was about $0.07.

Operator

Your final question comes from Reza Hatefi - Decade Capital.

Reza Hatefi - Decade Capital

I guess in comparison to your earlier 2010 guidance, O&M seems to be a little bit higher than your previous guidance. I guess what’s going on there?

Fred Boyle

It’s just as we’ve updated forecast, we’ve increased it by approximately 8%, a portion of it is the pension, but other operation cost across the system, just as we updated we’ve increased it.

Reza Hatefi - Decade Capital

So a little bit higher O&M and I guess you just said your expectations for a coal optimization of $15 million to $20 million, and I think before it used to be $20 million, is that right?

Fred Boyle

Yes, there’s some impact as far as what we received from the partners, some updates there.

Reza Hatefi - Decade Capital

So I guess, there is a little bit of a higher O&M and a little bit less coal optimization. I guess what is the positive offset to those in terms of guidance?

Fred Boyle

As far as our plant performance, we have a slight higher plant performance that we don’t see in the ranges embedded in there, but as far as what we’re anticipating on some of the outages and some modifications there.

Reza Hatefi - Decade Capital

Can you tell us, do you have the number for load growth in the fourth quarter like a weather normalized load year-over-year or a quarter versus quarter?

Fred Boyle

Yes, weather normalized it was approximately 6% to 7% down year-over-year delivering sale.

Reza Hatefi - Decade Capital

So fourth quarter 2009 was down versus fourth quarter ‘08?

Fred Boyle

That’s correct.

Operator

There are no further questions. I’d like to turn the call back over to Mr. Fred Boyle.

Fred Boyle

I’d like to thank everyone for listening in and we appreciate your interest. We look forward to taking to you at the end of the first quarter.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a great day.

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