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

El Paso Electric Company (NYSE:EE)

Q1 2008 Earnings Call Transcript

May 6, 2008 4:00 pm ET

Executives

Steve Busser – VP, Treasurer and Chief Risk Officer

Frank Bates – Interim President and CEO

Scott Wilson – EVP, CFO and CAO

Analysts

Robert Howard Prospector Partners

Brian Russo Ladenburg Thalmann

Michael Lapides Goldman Sachs

Operator

Welcome to the El Paso Electric first quarter 2008 earnings conference call. All lines are currently in a listen-only mode. At the request of the company, today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the conference over to your host, Mr. Steve Busser. Sir, you may begin.

Steve Busser

Thank you, Dawn. Good afternoon, everyone. Thank you for tuning into the El Paso Electric first quarter 2008 earnings conference call. This is Steve Busser. I am the Vice President, Treasurer and Chief Risk Officer at El Paso Electric. Also on the call with me today, I have our Interim President and CEO, Frank Bates and our Chief Financial Officer, Scott Wilson. Today, we'll provide an update on our first quarter 2008 financial performance, including a discussion of our pertinent earnings drivers. We'll also update our 2008 earnings guidance and assumptions, our stock buyback program and finally we'll provide an update on our Texas and New Mexico regulatory developments.

I would now like to cover some items that will be pertinent to our call today before we get started. You should have a copy of our press release and if you do not, you can obtain one from our web site at www.epelectric.com on the Investor Relations page. Along with our call today, we have a webcast presentation available for your viewing as we progress through call. Both the audio and video presentation will be done via the web. To log on the webcast, you can do so via our web site. However, in order to ask questions during the Q&A session, you will need to be dialed in by a telephone. We currently anticipate that our first quarter 2008 Form 10-Q will be filed with the SEC no later than May 8, 2008.

As for upcoming IR events, we'll be attending the Goldman Sachs Power & Utility Conference in New York next week on May 13 and 14 and the EEI Financial Conference also in New York the week following on May 21 and 22. We will provide further updates on investor relations events on future conference calls. Please call our investor relations department if you have any inquiries or require further information.

A replay of today's call will be made shortly after our call ends at 800-839-2325 and will be available through May 21, 2008. A pass code is not required for the replay and can also be accessed via our web site.

Let me cover the Safe Harbor provisions before I turn the call over to Frank. Our comments and answers to your questions may include forward-looking statements. Be reminded that statements made on this conference call, other than statements of historical fact, are forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements as well as other forward-looking statements made by or on behalf of the company involve known and unknown risks and other factors which may cause the company's actual results in future periods to differ materially from those expressed here. Any such statement is qualified by reference to the risks and factors discussed in the company's SEC Act filings. Our 10-K and our SEC filings contain our forward-looking statements and also lay out the risk factors that should be considered in the context of the information that we will provide today. These filings may be obtained upon request from the company, on our web site or from the SEC.

The company cautions that the risk factors discussed in these filings are not exclusive. We do not undertake to update any forward-looking statements that may be made from time to time by or on behalf of the company. These statements, especially those made during the Q&A section of the call are subject to risks and uncertainties that are difficult to predict. Please refer to our SEC Act filings for a detailed discussion of these risks and uncertainties as actual results may vary from these statements. Now I'd like to turn the call over to Frank.

Frank Bates

Thanks, Steve. Good afternoon, everyone. I want to thank each of you for joining us on the call today. First, I'll go over EPE's first quarter 2008 financial results and I'll discuss significant items that are impacting the company. After that, Scott Wilson, our Chief Financial and Administrative Officer will discuss in more detail key earnings drivers for the quarter, the pollution control bond refinancing, 2008 earnings guidance and then he'll provide a regulatory update on activity in Texas and New Mexico.

Now turning to the first quarter of 2008, we are pleased to report another good quarter with earnings of $0.32 per basic share, our net income of $14.5 million. In comparison, we earned $0.33 per share in the first quarter of 2007; our next income of $15.1 million. If you adjusted our earnings for the executive severance payment and the unrealized losses recognized on our short-term debt and equity investments in the first quarter of 2008, we earned $0.36 per share compared to the first quarter 2007 earnings of $0.33 per share.

During the first quarter of 2008, our earnings were favorably impacted by higher non-fuel retail base revenues, primarily as a result of increased kilowatt-hour usage in the small commercial and industrial and other public authority customer classes, which contributed $0.03 per share to our earnings this quarter, an improvement in retained margins on our off-system sales resulting from an arbitrage sale transaction in 2008, which we did not have in 2007 that contributed $0.04 per share. Increased capitalized construction financing costs as a result of new utility investments required as part of our increased capital construction program, which contributed $0.03 per share and higher market prices for deregulated Palo Verde unit 3 power, which contributed $0.04 per share. These items were offset by the increases we experienced in our non-fuel operating and maintenance expenses at Palo Verde and at our gas-fired generating plants, which combined to decrease our earnings by $0.09 per share. Later in the call, Scott will provide you with additional commentary regarding each of our earnings drivers for the first quarter of 2008.

I'd like now to discuss the status of our new 280 to 290-megawatt combined cycle unit that we will be constructing in our existing Newman plant site in El Paso in order to ensure that we have sufficient energy available to serve the significant growth we expect in the near future. In mid-2007, we filed certificates of convenience and necessity, CCN applications, in both Texas and New Mexico. We received final approval on our CCN application in Texas in January 2008 and we obtained final approval in New Mexico in April 2008. Currently, we are waiting for approval on our air permit from the Texas commission on Environmental Quality and we anticipate obtaining that approval by the end of May 2008. We plan to begin construction on this combined cycle unit which will be called Newman 5 in July 2008 and the combustion turbines of this unit are expected to be operational by mid-2009. The steam turbine portion of this unit is expected to be operational before summer of 2011. This new generating unit will enhance the overall reliability of our system and will provide fuel savings due to increased efficiency.

Now for an operational and regulatory update on Palo Verde, currently Palo Verde units 1 and 3 are operating at 100% power. Also currently, Palo Verde unit 2 is undergoing its 14th refueling outage which began on March 29. This refueling outage is going well and Palo Verde unit 2 is expected to return to service in late May. In addition, in January of 2008, we completed the steam generator and low pressure turbine replacement on Palo Verde unit 3. All of the steam generators and low pressure turbines have now been successfully replaced at Palo Verde. These replacements are expected to improve efficiency, extend the life of the units and increase the probability of obtaining a plant license extension. Also note that our next scheduled refueling outage at Palo Verde will be for unit 1 and that refueling is planned to begin in October 2008.

The regulatory matters pertaining to Palo Verde unit 3 continues to be in a Nuclear Regulatory Commission's multiple/repetitive degraded cornerstone column of its action matrix. NRC placed unit 3 in this category in February of 2007. As a result of this NRC action, Palo Verde was required to undertake a plant-wide self-assessment and cultural survey in order to identify any other possible issues at the plant. During October and November of 2007, the NRC conducted a 95003 inspection at Palo Verde and in February 2008, issued a revised confirmatory action letter or CAL. On March 31, 2008, Arizona Public Service Company, the operating agent at Palo Verde, submitted to the NRC a list of specific tasks along with a detailed action plan on key metrics which must be obtained on 12 specific CAL actions by September 30, 2008 in order to address these outstanding operational issues. Due to this additional NRC oversight, we anticipate that our Palo Verde non-fuel O&M costs will increase by 15% to 20% in 2008. We will We will continue to closely monitor activities at the plant and will work together with the operating agent and other plant owners to improve overall operations and increase the level of performance at Palo Verde.

Turning now to our customer base, we expect our service area to be favorably impacted over the next five years as a result of the significant number of troops being stationed at Fort Bliss due to the United States government's base realignment and closure plant. Currently, the U.S. Army anticipates that approximately 37,000 troops and their families will be stationed at Fort Bliss by 2012 which will more than double the size of the current base population and substantially add to our total customer base of approximately 359,000 at the end of the first quarter of 2008. Since 2005, Fort Bliss has already gained over 7,000 new troops and now over 25,000 family members live on base. Fort Bliss is undergoing a $4.1 billion expansion and the estimated economic impact for the local region is $21.7 billion over the next seven years.

In addition, approximately 3,800 new troops will be stationed at White Sands Missile Range by 2013. We are excited about meeting the energy needs of both Fort Bliss and White Sands Missile Range and we look forward to continuing these long-standing relationships.

Before I turn the call over to Scott Wilson, our Executive Vice President, Chief Financial and Administrative Officer, I'd like to thank the entire team of employees at El Paso Electric for their contributions to these solid first quarter results. Thank you. Take it away, Scott.

Scott Wilson

Thanks, Frank. In this section of the presentation, I'd like to cover a couple things: First quarter 2008 earnings per share, key earnings drivers this quarter relative to first quarter 2007. I'd like to talk about some upcoming financing activities, specifically a new senior notes issuance and some refinancing of some pollution control bonds. We'd like to discuss our stock repurchase program, our 2008 earnings guidance and then give you a brief regulatory update. First quarter 2008 net income of $14.5 million as compared to net income of $15.1 million in the first quarter 2007. That translated into earnings per share of $0.32 in 2008 as contrasted to $0.33 in 2007. As Frank mentioned earlier, absent the executive severance and the investment income adjustments for changes in debt security values and equity security values, we would have earned $0.36 in the quarter.

First quarter 2008 earnings driver highlights. There are two primary categories that contributed to the positive earnings uptick, on the positive earnings upticks and they are revenues and AFUDC and capitalized interest. The revenue related results were by far the most important in terms of positive earnings drivers in this quarter. There were three revenue related items that contributed $0.11 to the quarter. The first were off-system sales. We had increased off-system sales were a function of increased revenues were a function of increased megawatt-hour sales which were partially offset by lower margins per megawatt-hour. That contributed approximately $0.04 per share in the first quarter. The second major revenue item are higher proxy market prices for deregulated Palo Verde 3 power sold to our retail customers. That contributed $0.04 per share in the quarter. And finally our retail based revenues increased 1.8%, primarily due to a 2.2% rise in retail kilowatt-hour sales. Primarily this increase was due to increased kilowatt-hour sales to our small commercial and industrial customers and public authority customers and that contributed $0.03 a share in the quarter.

The second major item after revenues in the quarter that contributed on a positive note to earnings in the quarter was AFUDC and capitalized interest. They increased primarily due to higher construction work in progress, balances subject to AFUDC and to nuclear fuel inventory capitalized interest nuclear fuel inventories balances rose due to increases in nuclear fuel prices and the sum of those two contributed $0.03 a share in the quarter.

Turning to some of the items that had a negative effect quarter-over-quarter on earnings, primarily two items both related to power plant operations. The first is Palo Verde non-fuel O&M increased maintenance cost at Palo Verde 2 and higher operating costs at all the units contributed to about a $0.06 a share reduction in earnings in the first quarter of '08 relative to the first quarter of '07. The Palo Verde 2 refueling that began in March 2008 happened in this quarter, while in the first quarter of 2007 the refueling outage for unit 1 actually did not begin until the second quarter of 2007. So there was no comparable refueling activity in the first quarter of '07 like there was in the first quarter of '08. Second, we had higher operating cost at all the units, primarily due to the increased inspection regime under the CALs and the other things that Frank mentioned earlier in his discussion of Palo Verde. Both of those again contributed to a reduction in earnings quarter-over-quarter of about $0.06 a share.

And then the second category of power plant operations that had a negative effect on earnings relative to the first quarter '07 is non-Palo Verde O&M, again a power plant item, and it really due to increased timing it increased due to timing of planned maintenance at local plants. In this quarter, we had some planned outages for some of our local gas-fired plants and in the first quarter of 2007, we did not have any such planned maintenance at local plants.

In the first quarter, continuing on with some earnings drivers, retail megawatt-hour sales were up 2.2%. Our customer account at March 31 was up 2.1%. Our off-system sales in the quarter, our gross margins were $15 million in the first quarter compared to $10.3 million in 2007. Our retained margins were $11.3 million in 2008 compared to $8.4 million in 2007. And in this quarter in 2008, we shared margins with New Mexico. We did not do that in 2007. That margin sharing was a function of our new rate agreement which became effective in July of 2007. So we had some additional margin sharing in 2008's first quarter that we did not have in 2007, yet our margins for the quarter in 2008 were still up almost $3 million. And finally, our megawatt-hours sold in 2008, about 1.1 million megawatt-hours compared to approximately 675,000 megawatt-hours in 2007's first quarter. Primarily, this was a function of our contract with IID, the Imperial Irrigation District. That contract began in the second quarter of 2007 and it's in full force. It's a three-year contract. It obviously was not around in the first quarter and that contributed the bulk of both the energy sales and the revenues that we saw in the quarter increase.

Turning now to Palo Verde operations, quarter one 2008 outage days, we had 26 days of planned, unplanned and equivalent outage days in the first quarter of 2008. That's compared to 20 outage days in the first quarter of 2007. The difference primarily, we had 10 more unplanned outage days in the first quarter of 2008 and that was due to the unit 3 exiting the steam generator replacement January 19, this year, rather than exiting in late December.

Turning to Palo Verde capacity factors, in the quarter, Palo Verde operated at 91.3% 2008. That's compared to 92.9% in 2007 and these are the capacity factors that correspond to the outage days that we just mentioned. Obviously, these capacity factors are more in line with our expectations.

Turning for a minute to the new financing activity, we are in the process of getting approvals to issue some senior notes. We have filings seeking to approve up to $300 million in new bonds over the next several years. These filings seeking approval have been made with the FERC and the New Mexico PRC. The additional financing will be used to fund the company's construction program, to ensure adequate liquidity and for general corporate purposes. We expect approvals from the New Mexico PRC and the FERC sometime in May, actually this month.

Next, we intend to refinance and reissue our pollution control bonds, the ones that are subject to a weekly auction rate. We had approximately $100.6 million in principal amount of these bonds outstanding. Since February, we've seen significantly higher interest rates relative to the rates that we were paying on these particular debt instruments prior to the subprime crisis. We, like everybody else, saw an increase in our interest costs in these weekly auctions. So we are currently working to refund and reissue the PCBs at a fixed interest rate. The FERC and the New Mexico PRC have approved this refunding and reissuing, and we anticipate completing this transaction in June 2008. But, as for the actual timing of the issue, we will monitor market conditions and issue these bonds when we feel the conditions are optimal.

Turning to our stock repurchase program, in the first quarter of 2008, we repurchased approximately 479,000 shares at a cost of $9.9 million. Since the inception of the share repurchase program in 1999 through the first quarter of 2008, we've repurchased 19.8 million shares at a total cost of approximately $279 million. We have a current 2 million share repurchase program that's been authorized by our Board, November 2007. Approximately 1.5 million shares remain available for repurchase at March 31, 2008.

Turning to 2008 earnings guidance, we are reiterating our range of $1.50 to $1.90.

Next, I'd like to have a brief regulatory update starting with Texas. We have a Texas fuel surcharge filing and in that filing, we requested a surcharge of $30.1 million which included interest in under-recovered fuel expenses. We sought recovery over a 12-month period. The PUCT ordered approval of this surcharge and we are beginning to collect the surcharge effective with bills this month. We have a current Texas fuel reconciliation case ongoing. It covers the period March 1, 2004 through February 28, 2007. We're seeking to reconcile $548 million in eligible Texas fuel in purchase power expenses. A settlement was reached with all the parties on staff and office of public utility council issues. This would resolve all issues associated with the staff in OPC without any write-offs by us. Absent settlement with the City of El Paso, the other primary party or active party in this docket, a hearing on city issues will occur in mid-July 2008 and a final order is expected by year-end.

Finally turning to New Mexico, there has not been any real activity on any of the matters that were open, open issues that we had: Rate investigation, which is still on hold, a purchase power and fuel investigation is also on hold, though the focus of this investigation has shifted to an industry-wide fuel reporting investigation that's currently ongoing in New Mexico; and finally, there's an executive compensation investigation going on and we filed data in December of 2007 and there has been no further action on that matter at this time.

And with that, that concludes my part of the presentation.

Steve Busser

So, Dawn, I guess at this point we normally take questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Our first question comes from Robert Howard with Prospector Partners. Your line is open.

Robert Howard – Prospector Partners

Hi, guys.

Scott Wilson

Hi, Rob. How are you?

Robert Howard – Prospector Partners

Good. That Credit Suisse contract, how long does that run, is that just one year or how long have you got it?

Scott Wilson

The Credit Suisse contract runs the same term as the IID contract which, if memory serves, it's through April 2010.

Robert Howard – Prospector Partners

So I guess you're saying that that contract is really where the wholesale offsets in sale increase [ph] to come from it. Was there any availability in terms of just kind of your regular plant operations that really didn't have anything the upgraded Palo Verde turbine didn't give you the significant extra amount compared to last year or anything?

Scott Wilson

Yes. Well, we did generate marginally more power in the first quarter from Palo Verde than we did in the first quarter of '07, but the primary difference, the IID contract, has a capacity component and an energy component, and we supply 100 megawatt to that contract from the Credit Suisse sale and then there was a contingent piece for up to 50 megawatts that we supplied from our existing generation which could be anything from Palo Verde to any of our fleet. So the Credit Suisse contract runs the same term as the IID contract and that's for 100 megawatts and we back fill that with the system contingent 40 megawatts to 50 megawatts come from our existing resources including Palo Verde.

Robert Howard – Prospector Partners

Okay. You guys were talking about, in 2008 or for this year, the Palo Verde non-fuel O&M costs possibly increasing significantly. I guess how much of this is sort of to fix some of these problems and resolve it for that or would any of this be possibly looked at as permanent?

Scott Wilson

Well, we would hope that this is something that they've got to do to get the plant in shape and that we would see some moderation in these costs or reduction in these costs in future periods. You'll probably recall when we talked about guidance back in November that we had anticipated a 10% to 12% to 15% increase in Palo Verde non-fuel O&M at that time and that again was related to trying to get the plant out of its degraded cornerstone. So we're hopeful that once the plant's back in the operational mode, in the good graces with NRC, that some of these costs that are being incurred out at the plant, would in fact not be necessary. But it's too early for to us make that call.

Robert Howard – Prospector Partners

Okay. That's it from me. Thanks.

Scott Wilson

Thanks.

Operator

Our next question comes from Brian Russo with Ladenburg Thalmann. Your line is open.

Brian Russo – Ladenburg Thalmann

Hey, guys.

Frank Bates

Hi, Brian.

Brian Russo – Ladenburg Thalmann

Hey, could you just remind us the total cost of that new generation build?

Scott Wilson

Yes, it's about $245 million, round numbers with AFUDC.

Brian Russo – Ladenburg Thalmann

Okay. Could you give us a sense of what the overall maybe maintenance capital expenditures or total CapEx is over say the next two or three years?

Scott Wilson

Well, our total CapEx, as we disclosed in our K, is about $840 million over the next four years. I think '08 is $208 million or $210 million. And so you can almost think of it as a $210 million a year kind of deal, plus or minus a couple million dollars.

Brian Russo – Ladenburg Thalmann

Right. And you mentioned the possible issuance of about $300 million in debt to help finance the new build. How should we look at kind of a target equity ratio and how might that play into your ongoing share buybacks?

Scott Wilson

First, let me clarify that the $300 million is something that we don't intend to issue right away the whole amount. We have authority to do this over a several-year period, so we would intend to issue debt as we need the funds. Our target equity ratio, we tend to think in terms of 46% to 48% equity ratio and so, coupled with the $300 million debt issuance, up to $300 million over the next couple of years and the fact that we would continue to add to retained earnings over that period of time and couple that with a 46% to 48% equity ratio, all other things equal, you could anticipate that it would make some sense to buy some shares back for that equity ratio.

Brian Russo – Ladenburg Thalmann

Okay. I know there seems to be no new information out of New Mexico on the reopening of the rate case. Do you get a sense that they have their hands full right now with some of the other utilities that operate in that state and that we might see a pickup in their investigation of El Paso Electric say in the latter half of the year?

Frank Bates

I would certainly submit to you that they're pretty busy with one particular utility but it's too early to speculate what that means when this case winds down, what that means for us, whether our issues will fire back up again or what the future holds. All we know right now is this stuff is on hold.

Brian Russo – Ladenburg Thalmann

All right. Could you give us the absolute dollar amount of the Palo Verde non-fuel O&M increases?

Steve Busser

I think that the best guidance we can give you, not knowing exactly what we said in the past, was on one of the slides here and that we expect about a 15% to 20% increase over last year and that's consistent with what we have baked into the guidance today.

Brian Russo – Ladenburg Thalmann

Can you tell us what the absolute cost was last year?

Steve Busser

It was about $89 million.

Brian Russo – Ladenburg Thalmann

Okay. And then just lastly, on the non-recurring type expenses that you outlined earlier, was some of that non-cash or was that a fixed [ph] cash?

Scott Wilson

On the investments, we had some debt securities. We invested a little bit of money in auction rate debt securities, student loan-backed paper, and some of that was subject to, for lack of a better term, mark-to-market. We took a small write-off there and then we had some equity investments in our Nuclear Decommissioning Trust that suffered a loss and under our accounting policies that loss needed to be recognized. So both of those were non-cash adjustments that reflected the fact that the market value of these underlying investments weren't equal to our book cost.

Brian Russo – Ladenburg Thalmann

Okay. Thanks a lot.

Frank Bates

Thanks, Brian.

Operator

(Operator instructions) Our next question comes from Michael Lapides with Goldman Sachs.

Michael Lapides – Goldman Sachs

Hey, guys, look forward to seeing you all next week. One quick question regarding the combined cycle at Newman. What parts of that construction project have been contracted and what remains uncontracted?

Frank Bates

The contract, if memory serves, the combustion turbine piece of that has been contracted, I believe, and that there is a negotiation going on for the combined cycle piece of it.

Steve Busser

Yeah. We haven't done that yet. We're out talking to folks about that now and probably will have something locked down fairly soon on that portion as well.

Frank Bates

But the CT portion has been contracted.

Michael Lapides – Goldman Sachs

Okay. And kind of second question a little bit unrelated. When we think about the earnings pattern throughout the year, you've got a Palo Verde outage that's going to go into mid-May, so impact the second quarter. In the third quarter, do you generally have any excess power to sell into off-system sales?

Frank Bates

Certainly, we do off peak and we do sell power in the third quarter. It's just not the margins because we're getting deeper into our generation mix, the margins aren't as good as they are in other parts of the year.

Michael Lapides – Goldman Sachs

Got it. Thanks, guys, much appreciated.

Frank Bates

Thanks, Michael. Look forward to seeing you next week.

Operator

I show no further questions at this time.

Frank Bates

Thank you, Dawn. And thanks everybody for joining us today. Have a good day.

Operator

Thank you for participating in today's conference. You may disconnect at this time.

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: El Paso Electric Company Q1 2008 Earnings Call Transcript
This Transcript
All Transcripts