DPL, Inc. Q2 2010 Earnings Call Transcript

|
 |  About: DPL Inc. (DPL)
by: SA Transcripts

DPL, Inc. (NYSE:DPL)

Q2 2010 Earnings Call

July 30, 2010

Executives

Fred Boyle - SVP, CFO and Treasurer

Paul Barbas - President and CEO

Analysts

Paul Ridzon - KeyBanc

Edward Heyn - Catapult

Operator

Good day, ladies and gentlemen, and welcome to the second quarter DPL Inc. earnings conference call. With us today are Paul Barbas, President and Chief Executive Officer, and Fred Boyle, Senior Vice President, Chief Financial Officer and Treasurer. My name is Crystal and I'll be 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)As a reminder, today's conference is being recorded for replay purposes.

I would now like to turn the conference over to Mr. Fred Boyle. Please proceed.

Fred Boyle

Thank you. Good morning, and welcome to DPL's second quarter 2010 earnings conference call. I am 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 and Form 10-Q for the second quarter of 2010.

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

Now I'll turn the presentation over to Paul Barbas.

Paul Barbas

Thanks, Fred. Good morning, everyone, and thank you for joining us today. I am pleased to report that DPL had a solid quarter both operationally and financially. Diluted earnings for the quarter were $0.53 per share, compared to $0.37 per share for the same period in 2009. And we remained on track to achieve our yearend earnings range of $2.35 per share to $2.55 per share. Fred will discuss the key drivers of earnings during his review of the quarterly financial results. Before Fred provides his review I'd like to provide an update on key operating matters.

First, building on what we experienced during the first quarter of the year, we continue to see signs of recovery with regards to our retail sales. For the first time since the end of 2008 we realized that increase in quarterly retail sales. Now for adjusting to weather total retail sales for the quarter increased approximately 5% compared to the second quarter of 2009. This improvement was driven by industrial sales which increased by approximately 15%. We experienced higher sales across multiple industries including automotive, metals, plastics and food.

This positive trend in retail sales began during the first quarter of 2010 and we anticipate it to continue as we move forward through the year. As we discussed during our first quarter earnings call, we are expecting to see future load and employment growth in our service territory from new distribution facilities such as Caterpillar and increase in usage as industrial customers start adding shifts and returning to more robust production levels and from Wright-Patterson Air Force Base as new missions continue to transition to the base.

Although it will take time to realize the full benefit from this load growth, we believe it is an indication that the recent economy has stabilized and is beginning to recover. As you know retail competition within the State of Ohio has increased over the past year to the depressed power prices. As you can see on the slide approximately 25% of the DP&L's retail load through the second quarter this year has been supplied by CRES providers; of this 25% of switch load, 99% was provided by DPL Energy Resources, which is our retail marketing subsidiary.

Based on annualizing the volumes associated with switched accounts to-date, we estimate 35% of DP&L's load is being supplied by CRES providers; of this 35%, we estimated that DPL Energy Resources is serving approximately 96% of the total switch load.

The impacts of switching on second quarter gross margin was approximately $3 million and for the calendar year 2010, we now estimate the impact will be approximately $15 million.

Turning to plant operations, combination of improved plant performance has seen through our lower forced outages rates and increased wholesale power pricing, results in higher generation output for the quarter. As you may recall, Zimmer and (inaudible) stations had extended outages during the second quarter of 2009. With both units operating as expected during the second quarter of 2010, we realized an 8% increase in output from our generation fleet.

Additionally, average on peak power prices during the second quarter of 2010 were $5 per megawatt higher than during the second quarter of 2009, mostly due to warmer than normal weather across the PJM footprint. Because of our improved plant performance, we were able to capitalize on the higher power prices resulting in an increase in wholesales volumes and revenues and the reduction in purchase power volumes. We remain committed to excellent plant performance and strive to continually improve our operationally efficiency.

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

Fred Boyle

Thank you, Paul. As Paul mentioned, we had a good quarter with DPL realizing diluted earnings of $0.53 per share for the three months ending June 30, 2010 compared to $0.37 per share for the same period in 2009. On a year-to-date basis, diluted earnings were $1.14 compared to $0.99 per share for 2009.

The key drivers of increased earnings for the second quarter of 2010 compared to second quarter in 2009, were higher retail revenues of $0.34 per share associated primarily with the recovery of fuel, capacity, transmission and environmental costs and a 7% increase in retail sales and higher wholesale revenues at $0.11 per share driven by higher wholesale sales volume and improved average market prices. These benefits were offset by lower gains from coal sales at $0.07 per share. Higher purchase power cost of $0.15 per share due to an increase in average market prices and the deferral of RTO related cost during the second quarter of 2009.

And lastly, higher O&M cost of $0.06 per share, resulting from a $5 million increase in insurance and disability cost, primarily associated with the number of employees filing for long-term disability during the quarter and $3 million increase in energy efficiency and low income assistance cost, both of which are funded through retail rate riders and therefore have an offset in revenues.

As you know, in 2009 the economy had a significant unfavorable impact on our retail sales volumes. However, as you can see from the chart weather normalized sales for the second quarter were 5% above the same period of 2009, reversing the negative trend in sales we had been experiences over the past several quarters. On an actual basis, retail revenues were 7% higher than in 2009.

On a year-to-date basis you can see that our total retail sales volumes were up 1.2% on a weather adjusted basis and 3.3% overall. Our year-to-date residential volumes are relatively flat to 2009 on a weather adjusted basis while our commercial volumes are down over 3.5%. We expect to see improvement in the commercial sector as we progress through 2010. At this time we project calendar year weather adjusted retail sales to be 2% higher compared to 2009.

Moving to other second quarter income statement items, general taxes increased $3.7 million compared to second quarter 2009 due primarily to higher property tax accruals. Interest expense decreased approximately $2 million due to the retirement of $52 million of long-term debt during December 2009. And lastly, income taxes increased $10.5 million due primarily to the increase in pretax income.

Turning to liquidity and cash-flow, DPL's cash and cash equivalence totaled $87 million at June 30, 2010 compared to $75 million at December 31, 2009. In addition, DPL had $47 million of short term investments at the end of the quarter. The increase in cash and cash equivalence was primarily attributable to $205 million of cash generated from operating activities, partially offset by $75 million of capital expenditures, $70 million of dividends paid on common stock and $47 million used to invest in short-term securities. DPL now had a combined $420 million in revolving credit facilities at June 30. Currently, we have no borrowings on these revolvers.

For the period 2010 to 2012 DPL is projecting base capital project additions to be $610 million. The estimate does not include capital cost that were reflected in DPL's refiled AMI and Smart Grid Plan. This plan, which was refiled in August 2009 is still pending with the PUCO and totals $270 million for the first three years. We have had settlement discussions with various interveners over the past few months and although we anticipated closure by this point in time, with summer vacations and a busy PUCO docket, we now expect that it will not occur until the last half of this year.

Capital projects are subject to continuing review and are revised in light of changes and financial 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 combination of cash on hand, short term financing and cash-flows from operations.

In addition to our on going maintenance CapEx and the AMI and Smart Grid proposal we are continuing to explore additional uses of capital. From a capital expenditure perspective, we are evaluating incremental investments related to our transmission system, associated with PJM assuming control of lines down to 138KB in addition to the 345KB they manage. Enhancements related to our distribution system and renewable opportunities.

From a capital structure standpoint, we will continue to consider stock and debt repurchases, as well as increasing the dividend. And finally, we are reaffirming our 2010 earnings guidance range of $2.35 to $2.55 per share. As was mentioned earlier, we now expect gross margin impact of switching to be approximately $15 million for the year and that weather normalized retail sales volumes will be 2% above 2009 levels.

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

Question-and-Answer Session

Operator

(Operator Instructions)And your first question comes from the line of Paul Ridzon with KeyBanc. Please proceed.

Paul Ridzon - KeyBanc

Good morning. Congratulations on the quarter.

Paul Barbas

Thank you, Paul.

Fred Boyle

Thanks, Paul.

Paul Ridzon - KeyBanc

How do you kind of do the calculus on uncertainty with regards to dividend tax when you consider the various capital options in front of you with regards to the decision between a buyback and a potential dividend increase?

Fred Boyle

Well, at this time, given the uncertainty as it relates to that tax, that's certainly something we factor into the consideration. But we're not at a point right now and really until we get resolution on the AMI/Smart Grid, which is significant capital cost for us, exactly where that's going to come out before we'll be making any final decisions as it relates to stock buyback, debt buyback, et cetera.

Paul Ridzon - KeyBanc

And I guess we'll get an update on the third quarter call? Is that the next opportunity to speak about it?

Fred Boyle

Yes, that would…

Paul Barbas

Unless we get a settlement or a ruling from the commission in between now and then, Paul.

Paul Ridzon - KeyBanc

You'll have a board meeting and then talk about it if something like that happens?

Paul Barbas

Well, certainly, if we have a settlement, then we do have board meetings between now and the third quarter call that we certainly would have the opportunity to talk about it.

Paul Ridzon - KeyBanc

Okay, thank you very much.

Paul Barbas

Okay.

Operator

(Operator Instructions)Your next question comes from the line of Edward Heyn with Catapult. Please proceed.

Edward Heyn - Catapult

Good morning. I just wanted to double-check on the timing regarding the potential for stock and debt buybacks or increasing the dividend. Do you need clarity post your current ESP to consider that capital deployment or is this more of a near-term potential phenomenon?

Fred Boyle

We review the dividend and other capital opportunities pretty regularly. So, no, I don't think we're waiting to see what happens post 2012. We'll be talking to the board about it throughout the year. And usually we have some type of discussion with the investment community after those discussions and decisions by the board. So, we anticipate talking about this maybe after both, third quarter call and as well once we complete the year.

Edward Heyn - Catapult

Okay, thank you very much.

Operator

There are no further questions. I will hand it back to Mr. Fred Boyle for closing comments.

Fred Boyle

Okay. Well, thank you everyone for listening and participating in the call, and we look forward to talking to you after our third quarter in October. Thank you.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect, and have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!