Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Unisource Energy Corp (NYSE:UNS)

Q3 2007 Earnings Call

November 2, 2007 12:00 am ET

Executives

James Pignatelli - Chairman, President, and CEO

Jo Smith - Director of IR

Analysts

Dan Eggers - Credit Suisse

Brian Russo - Ladenburg Thalmann

Robert Howard - Prospector Partners

David Frank - Catapult Partners

Operator

Thank you, and welcome to the UniSource Energy Third Quarter 2007 Conference Call. Today's call will be hosted by James Pignatelli, UniSource Energy Chairman, President, and Chief Executive Officer. First, I would like to turn the call over to Ms. Jo Smith, Director of Investor Relations.

Jo Smith

Thank you, and good afternoon. Thank you for joining us today. In a moment, Jim Pignatelli will brief you on the company's financial and operating results for the third quarter of 2007.

However, I first need to inform you that forward-looking information contained in this call with respect to the revenues, earnings, performance, plans, strategies, prospects, and other aspects of the business of UniSource Energy may involve risks and uncertainties. Actual events and results may for a variety of reasons prove to be materially different from those indicated in the forward-looking statements, estimates, and projections.

Factors that could influence actual future outcomes include but are not limited to, the outcome of regulatory proceedings, the cost of fuel and purchase power, performance at TEP's generating plants, weather, resolution of pending litigation matters, the cost of debt and equity capital, changes in asset depreciable lives, changes in accounting standards, the pace and strength of the regional economy, and other factors listed in UniSource Energy's Form 10-K and 10-Q filings.

In addition, the forward-looking statements in this call may include assumptions, expectations, predictions, intentions, or beliefs about future events. UniSource Energy cautions that actual future results may vary materially from those expected or implied in any forward-looking statements. More information about the risks and uncertainties related to these forward-looking statements are found in UniSource Energy's SEC filings, which are available free of charge on the SEC's website.

Now, I will turn the call over to James Pignatelli.

James Pignatelli

Thank you, Jo. Thank you all for joining us after those caveats, I can’t probably say about anything and [not relative to anything]. We are reporting our third quarter today earnings of $25 million or $0.66 per diluted share that’s compared to $28 million last year. This brings us to a $1.13 per diluted share for the year-to-date. These earnings are actually in line with our expectations and in line with the guidance, which we have previously given you.

The key factors really explain there are a lot of differences obviously between quarters, between third quarter last year and third quarter this year. But the key factors that drove the difference really arose from about a $2 million after tax cost, the increased amortization of the CTC. For the total year, we will amortize $76 million of the CTC in expense.

Another $1 million was incremental coal costs after tax, which we have discussed with you further that’s the increase in coal costs at basically [sunt] and some at San Juan. And then we had another impact this year due to increased outages on planned at San Juan, and Navajo, and I will talk a little bit about plant performances, as we get into this.

During the third quarter, we did enjoy, if you can enjoy harder summer weather in the desert, it resulted actually in our third quarter, cooling degree days being about 7% over the 10 year average. The use per customer was up. We are still seeing a 2% base growth in customer. But the usage per customer continues to go up as they use more and more electrical appliances.

However, without a fuel cost actually the incremental sales don’t really benefit us. We have minimal margin on these incremental sales and its one reason why it’s very important for us to achieve a fuel cost so that we can adequately protect our shareholder and provide great satiability to our customers.

Actually, when we look at our sales to some of our large industrials during the summer, they are actually buying it lower than what it’s costing us to provide the power that’s made up a little bit by the margin on residential but not entirely.

Looking at our plant performance Springerville units have just proven to be excellent again this year. Springerville units is operating at over 96% availability factor sent for in the third quarter out of their coal plant here operated at almost 97% availability factor.

For the third quarter, we had 94% weighted average availability factor. That availability factor was reduced by the performance of San Juan, Navajo and Four Corners. Year-to-date, we have 89% year-to-date availability factor, which on average of fairly consistent with where it should be last year year-to-date, we had a little bit over 91%.

Springerville on the year-to-date has operated at 92% and San Juan at 95%, Four Corners is what’s really holding us down this year operating at 75% availability factor and San Juan at 85.

I’ll just give you a little perspective. We are very pleased with our operating performance and you are going to see and hear from the other CEOs what they are doing to increase the operating performance at those plants. They will probably put some pressure on our O&M as we go out, say bring the performance at least plants up to where we would like to see him.

For the remainder of this year, we have now coal plant outages. We have none in the fourth quarter.

Looking at UES, UES is wide in line with the third quarter of last year. I only calling out EUS for one reason that’s because of our growth what we have been seeing 5% to 6% has dropped down to between 2% and 3%. Its still good solid growth rate, but its honestly much more manageable from my point of view.

Looking at Millennium, we had no transactions in Millennium in the third quarter. We have a current cash balance $24 million in there and we had made dividend payments to UniSource $15 million during this year. We are looking at couple of transactions that may come to fruition in the fourth quarter, but they are not included in any of our guidance at this point.

Looking for the outlook where do I see the rest of 2007 going? We are modifying our 2000 guidance. It’s previously was $1.55 to $1.85, we are modifying that to $1.50 to $1.75. I want to stress that this lowering the guidance is really basically because of two nonrecurring items.

We had anticipated our gas rate case in our prior guidance to be effective in the August timeframe. Obviously, it passed August and we still don’t have the rate increase in the gas case. However, it is scheduled for open meeting next week, and I would anticipate a decision. There is no reason that a decision cannot be made at that time and that we can’t give rates into effect sometime in this month.

Additionally, and that delay is taking about $3 million out of our prior guidance. Additionally, we have a FERC proceeding against El Paso. They are charging us for transmission. We have booked almost $3 million in transmission expense this year, and we booked the same approximate amount last year for transmission from Luna. We believe an ALJ agrees with us as well as work staff that there be should no cost to the transmission, that it’s covered under our prior contracts and agreements with El Paso.

We had anticipated in a minimum that we would not have to pay that or we would get that refunded during this year. So that’s not only additional $3 million in expenses, which we are incurring, but hopefully we will see $6 million refund in the relatively near future as soon as we can further to make a decision.

That I don’t believe we will get done this year. We have requested for to take action on as expeditiously because we are still have to pay the transmission fees. Hopefully that will get done soon, but we have taken that out of our forecast. And that’s why you really see those two items contributed $0.10, $0.15 drop in the forecast amount.

Looking forward after where we are on our stock sales. Our forward sales we still have 220 gigawatt hours to sell during the fourth quarter, actually 310 during the fourth quarter, but October is gone now. We still say with 220 gigawatt hours to sell.

We are budgeting sales price on a flat basis in the $55 range, on that right now on a flat basis for the fourth quarter. It’s probably a little bit higher than that every dollar increase over that $55. It produces about say $220,000 in revenue to it. Like I said I hope that the El Paso dispute, if concluded this year, there is an upside, which we are not planning on, but that hopefully could help us also.

Looking to 2008, we are going to hold guidance until February, until we see exactly how everything runs, where we are with the El Paso dispute. We are still doing our budgeting and we are still seeing an upward pressure on costs, so, I’m going to wait and hold until February. Any guidance, I give you in February you realize its going to pretty broad because, we will have some $60 million are known how we will be treated by the ACC.

We will be receiving continuing to receive revenues at our current rates. However, we will be deferring the recognition of some of those revenues subject to ACC’s final action. Next year is the transition recovery asset. We anticipated to be fully amortized in early May or late April. We will be amortizing approximately $26 million in expense versus $76 million in expense this year.

Looking at the UNS Gas case. We have, as I indicated an open meeting on November the 8th. The ALJ is recommended a little over $5 million rate increase. We have requested $9 million rate increase. The ALJ has recommended 10% return on equity and we have requested an 11% return on equity. I am hopeful that in the meeting with the Commission we will be able to increase the amount of Dollars that ALJ has recommended. I certainly think our positions are valid.

We have concluded UNS Electric, the rate hearing on a request of $8.5 million base rate increase. We expect a decision in early 2008. Major issue we have there is the inclusion in rates of a power plant that we are now building for UNS Electric as we replace the Pinnacle contract that they are currently under.

The main rate filing and I think all you are interested in, is the TEP rate filing. In July we have made an extensive filing. This is the first rate increase, that we have sought in over a decade. Our rates are actually 2% below, what they were in 1994 and that despite probably close 45% to 50% increase in consumer prices over that period of time. And as you will follow the energy sector no much higher rate of growth in the cost associated with providing energy.

We have been successful in holding these rates, because we have operated this entity very efficiently. We have squeezed out as many efficiencies as possible. We have restructured all our debt. We have obtained efficiencies capital efficiencies and we are coming to the end of the availability, we have continued to increase efficiency.

We will offset costs by building additional power plants that have been as produced benefits to us and it's really time for us to get the rate increase. We will actively and presumably prosecute the rate case. We are committed to providing safe and reliable service that at these rate levels it becomes more and more difficult to meet the high level of service with the community desires and should expect.

We also need a fuel costs one of the few entities that does not have a fuel costs. We have been successful in protecting our customer those of our expenses for our coal operations. However, we are even now cost of coal increasing and obviously cost of gas, as much higher than it was in 1994.

Consequently, we have requested anywhere from the 15% to 23% rate increase depending upon the methodology used. We still believe that we are entitled the market based generation rates that would produce about 22% rate increase.

We have provided the commission and the interveners with information based on cost of service case and that is about 23% rate increase and that includes a transition back to across the service and asset allow us to transition back to across the service. We will also included a hybrid case, which take out certain coal units places them at market and returns the remaining coal units to across that service treatment.

All proposals include a 10.75 return on equity. All proposals include 45% equity, 55% of debt. We have fuel and purchase power across in the cost of service and hybrid case in the market case. We do not have a fuel and purchase power because by design the rate continuously adjust to than existing cost at market.

The procedural schedule has been established for the prosecution of this case. I applaud the staff they’ve been supportive and the commission been supportive and getting this case completed. The staff now agreed to our schedule, which concludes hearings by around middle of May 2008.

This should allow adequate time to prosecute and order, which will be effective 01/01/09. In the commission decision, which established this procedure, the commission did find it was in the public interest to resolve this case, to establish new rates as of 01/01/09. I am optimistic that will be done and we will be successful.

With that, I will answer any questions you might have.

Question-and-Answer session

Operator

(Operator Instructions) Your first question comes from Dan Eggers with Credit Suisse.

James Pignatelli

Hi, Dan. How are you today?

Dan Eggers - Credit Suisse

Hi, good. How are you guys?

James Pignatelli

Fine, thanks. I just want to let you know I only be the guy. So, I will and ask any specific answers all those questions to.

Dan Eggers - Credit Suisse

Right, well. James, in terms of looking at the quarter the drag that came up with the Springerville lease been pulled quite earlier than expected, when we think about ’08 I know you are not ready to give away guidance. But is that create a bigger risk for third quarter ’08 number just a way of the bigger fuel burden continuing either the way at perhaps profitability in the summer month.

James Pignatelli

Well, actually given some cost of fuel and what the temperature of sales levels out there. We still make a little even at cost in the year $70, $80 range. We still will make a margin. The unfortunate thing is the Springerville 3 contract it was called back by Tri-State was priced in the $51 range.

We didn’t really receive too much energy from that this third quarter because as I would call it, it was told. We received just one month of benefit from that this third quarter. So, quarter-to-quarter that won’t be a material impact to us, Dan to when you look at next year versus this year.

Dan Eggers - Credit Suisse

Okay. How much contribution did you guys get from Luna in the quarter?

James Pignatelli

I don’t have that. Dan, we can to have that information (inaudible).

Dan Eggers - Credit Suisse

Okay, right. We’ll follow-up next week. Thank you.

James Pignatelli

Okay. Thank you, Dan.

Operator

Your next question comes from Brian Russo with Ladenburg Thalmann.

Brian Russo - Ladenburg Thalmann

Hello.

James Pignatelli

Hi, Brian.

Brian Russo - Ladenburg Thalmann

Can you just talk a little bit about the slowing growth at UES, what’s attributing to that?

James Pignatelli

Well, there are various factors that attributing. I think there is a slower growth at UES. UES is in some outlined territories, and it’s basically the growth was being, a lot of the growth was being driven on the electric side.

While the anticipation, the completion of the bridge below the dam thereby opening actually Las Vegas to this sector Arizona. And that growth has slowdown. The bridge, the dam is being delayed because of the crane failure. Additionally it’s a little bit held up I think, up there because of disagreements over water availability and water rights, which has slowed down some of the development.

When we get into the gas, its growth is more driven by the Prescott area. And that area of Prescott’s like that area has just slowed down and I think because of the housing markets with the sub-prime and other issues. So, I think, both are being affected by the housing market. But UES Electric is also reflecting a little delay in some growth expectations surrounding the expansion of Las Vegas into Nevada.

Brian Russo - Ladenburg Thalmann

Okay. And then it looks like, you still got a fairly wide range for the 2007 full year earnings guidance and I’m just wondering in terms of the fourth quarter, what’s get you to the top end versus the low end?

James Pignatelli

Well, top end, we’re successful in doing anything with FERC that’s going to affect the top end. The top end gets affected. By then sooner, we can get new rates in and the rate level at UNS Gas. You’re also affected by the price of power in the wholesale market. The gas, we don’t use so much gas in the fourth quarter. So, it’s more, how the price of power in November and December responds to the upward pressure that gas is currently doing.

We’ve seen some increase in the power prices. They’re probably on peak going up into the low to mid 60s and the same with the flat price is coming up. The other thing that we do benefit at this time in October and early November, we do get some benefits, if there is sea in California.

We didn’t get that real benefit because of fire situation in San Juan that didn’t produce higher sales in the California in October because of the condition they were in their fire situation. Other than that, we expect continuation on if we have any outages obviously it will impact, if we have any unplanned outages. But we don’t like to give guidance at a tighter band and than what we are currently looking at that 25% of band.

Brian Russo - Ladenburg Thalmann

Okay. And in terms of availability, wholesale pricing you said it’s strengthening a bit. Does fourth quarter of '07 prices or they higher than fourth quarter of '06?

James Pignatelli

They are slightly higher. The increasing later in the year than they did last year. In that function of actually a hurricane, as you spike price, gas prices in the August, September timeframe. Because of hurricanes you usually push up to fourth quarter prices for power little earlier.

Now, we are getting into the situation, where the fourth quarter, the gas prices and they can going up with oil at this point in time. We haven't really had a real close snap to start causing gas prices to go up. So, even though they are little higher than they were in the fourth quarter of last year as we look out it happening a little later.

Brian Russo - Ladenburg Thalmann

Okay. Thank you very much.

Operator

Your next question comes from Robert Howard with Prospector Partners.

Robert Howard - Prospector Partners

Hello.

James Pignatelli

Hi. How you doing, Rob?

Robert Howard - Prospector Partners

Good. Just going back with the, I guess increasing gas generation is that you were saying that it was caused by the lack of coal. And I guess, how much of that coal drop was, the loss of the 100 megawatt from Springerville 3 versus the bad performance at the other two plants?

James Pignatelli

We had great performance at ours.

Robert Howard - Prospector Partners

Right, right, yours, but--

James Pignatelli

Actually the difference in the coal production on the plants, the coal was about 52 gigawatt hours, say 50 gigawatt hours. Now, we’ve lost another 100 gigawatt hours for month because we had that for one month. It was a couple of 100 gigwatt hours probably during that timeframe.

Also during the third quarter of last year, we ran on hedging a little bit. You asked specifically about the contract. But we also got third quarter last year; we’ve got [full release] energy from Springerville 3. And that benefited us, as I recall around the $1 million last year.

So, I can get the exact number on how many megawatt hours, we pulled from Springerville 3 in last year. I think, it was around a 100, but I’m not sure megawatt hours. So, if we add that to the decrease I think, you will get close. You’ve got the, like I say, the full release energy, which was about $1 million and then you have about 100,000 megawatt hours that came out at Tri-State.

Robert Howard - Prospector Partners

Okay. And then I guess you were talking about the coal cost being higher, when had you reset those coal prices or they was that a contract that was, you had an increase due or rebind stuff a little bit?

James Pignatelli

Yeah, that is the [sunt] coal contract we entered into, it’s a three year contract last year and that produced an increase for the year of about $10 million to $12 million. That’s the major win. And there was also an increase in San Juan, but I’m not sure the contract linked on that, Rob when it was renewed, but I can give you that information in Florida.

Robert Howard - Prospector Partners

Okay, great. Thanks guys. See you in next week.

James Pignatelli

Okay, take care.

Operator

Your next question comes from David Frank with Catapult Partners.

David Frank - Catapult Partners

Yeah. Hi, Jim. How are you?

James Pignatelli

Hey, David it’s good to hear from you again. I have been on the call for a while.

David Frank - Catapult Partners

Well, we got a lot of guys, doing different things here now.

James Pignatelli

All right, welcome back.

David Frank - Catapult Partners

Thank you. Hey, Jim I want to ask you, you’ve talked in our opening remarks about the need for fuel cost and I just want to make sure I understand what you’re saying, usually when after fuel cost you give up all margins on wholesale sales and you’re just strewed up on your cost of purchasing power and fuel, is that type of fuel cost you are speaking up?

James Pignatelli

Well, a fuel cost, when we look at the net benefit between short-term all sort of sales and cost of fuel increases. We’re not benefiting the bottom-line at this point in time. The wholesale short-term sales helped us all through since 1994 and to offset higher O&M and other things because we were operating with the profit margin over what we had to buy power for.

Now, with the growth in the system, I don’t see that equilibrium anymore or that benefit anymore. And we co-offered a couple of different styles of fuel recovering mechanisms what I call Energy Cost Adjustments by which the company or the shareholder retain the operating risk, I think, you’ll agree on a certain level or certain capacity factor, and if you operate better than that the shareholder benefits, if you operate worse than that shareholder operates have deficit on that.

The other type of fuel costs is that more or like what APS has where operating risk of the plant shifted to the repair. And what you do, as you’ll just agree on essentially across the fuel per kilowatt hour as one of the basis basically gets to which sort of ensures your margin. If you sell more than or if your fuel cost more than it had been agree to in establishing the fuel cost. And if your fuel is less per unit then what should we do then you give that benefit back to the results.

So, you are in a neutral position. So, both of those have been proffered, David. But to your base question, I don’t see us benefiting any more from the hedge there are short-term wholesales provided us over the last 10 years.

David Frank - Catapult Partners

Okay. So, if that the case then, here you are going back to a fully regulated, traditionally regulated, integrated, vertically integrated utility and now its just about cutting the best regulatory deal I guess you can is that?

James Pignatelli

You make the assumption. We put all of our assets back on cost of service.

David Frank - Catapult Partners

Aside from Luna, yes.

James Pignatelli

The hybrid of the market would not have a fuel cost, you are just continuously changing to rate. The hybrid would have a fuel cost, but if it would only cover those assets that were, those generation assets, which were included in rate base, which we have taken back in to rate base.

David Frank - Catapult Partners

Right and I’m sorry. I don’t mean to speech up on this, but I just want to understand clearly that if you would be okay with an APS file, Arizona Public Service file fuel cost and I’m sure about how to decommission with other things you would get in your cases. Well, but that the kind of fuel cost you think, you need?

James Pignatelli

I actually to be honest with you more favorable to the other type of fuel cost, across where you take the benefit and take the risk of operating. However, sometimes the staff of the commission focuses on what they have done in the past.

Again I’m confident in my people; we’re going to operate our plants, and we’re going to operate them well. And I like to have the incentive of bettering my operation continuously and keeping efficiencies that I can produce in the operation of my system. That’s just my nature. So, my preference is really for that type of fuel cost.

David Frank - Catapult Partners

I understood. Thanks Jim.

James Pignatelli

Okay. Thank you all. I hope see you too in Hawaii, excuse, in Florida. It’s equally far for us.

Operator

(Operator Instructions)

James Pignatelli

Well, I want to thank you all for participating. And I look forward to seeing all of you in Florida. I’ll be there Sunday late afternoon be more than happy to say that and talk to anybody. Thank you so much for your continued attention and support.

Operator

This concludes today's conference call. You may now disconnect.

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!

Source: Unisource Energy Q3 2007 Earnings Call Transcript
This Transcript
All Transcripts