UIL Holdings Corporation (NYSE:UIL)
Q1 2008 Earnings Call
May 7, 2008 10:00 am ET
Susan E. Allen - Vice President, Treasurer and Assistant Corporate Secretary
James P. Torgerson - President, Chief Executive Officer and Director
Richard J. Nicholas - Chief Financial Officer and Executive Vice President
Daniele Seitz - Dahlman Rose
Welcome to the UIL Holdings first quarter earnings conference call. (Operator Instructions) I now would like to turn the presentation over to your host for today’s conference, Susan Allen.
Susan E. Allen
Thank you for joining us to discuss UIL Holdings first quarter 2008 earnings results. I am the Vice President of Investor Relations and the Treasurer. Participating on the call with me today is Jim Torgerson, UIL’s President and Chief Executive Officer and Rich Nicholas, UIL’s Executive Vice President and Chief Financial Officer.
If you do not already have a copy of our press release or presentation for today’s call they are available on our website at www.UIL.com. During today’s call we will make various forward-looking statements within the meaning of the Safe Harbor Provisions of the United States Private Securities Litigation Reform Act of 1995. Significant factors that could cause results to differ from those anticipated are described in our earnings release and filings with the SEC.
With that now said I will turn the call over to Jim.
James P. Torgerson
There are numbers we show for the first quarter of 2008 are actually a very good quarter for us and it’s also really some very exciting opportunities that we have going forward which we want to talk about today. As you can see from the results the investments in transmission are paying off mainly due to the 100% construction work in progress we had in [inaudible]. The Middletown-to-Norwalk line will be operational in early 2009 and along with bringing that into our fold it will be bring benefits as expected into the Southwestern part of Connecticut and helping relieve some of the congestion that we’ve seen in that area.
The numbers on the first page of the handout are showing that we had earnings per share of $0.26 versus $0.22 in the first quarter 2007. That’s an 18% increase over the quarters. The distribution earnings continue to be affected negatively by lower sales. The weather-adjusted sales were down about 2% from the previous year’s first quarter and uncollectibles are another area where we’re still seeing issues which caused about a $0.02 decline over the previous year. On the plus side we are managing our O&M costs. Without the uncollectibles incorporated in there we really are on target from the allowed rates from our last rate case on O&M so we’re managing the O&M quite effectively except for the uncollectibles.
As I said the transmission earnings really have more than doubled. We’re really seeing the benefit there. Now we’re also executing on our 10-year plan which we laid out about a year ago. We have about $1.66 billion that we’ll be spending over the next 10 years and you can see from our charts that distribution will be about $938 million transmission a little over $700 million. The fact that transmission is down a little from the last time we talked about this is due to the fact that Middletown-to-Norwalk, the dollars have been spent primarily in 2007 and we have a little bit more to spend this year probably in the order of about $70 million to $75 million. The Middletown-to-Norwalk project will be coming in somewhere around $265 million to $285 million. It’s more than 80% complete today and as I said it will be in in early 2009.
The March 2008 FERC order which we just got in a little while ago and it really affected all of the New England ROEs. It actually raised the base level from 10.2 to 10.4 and is affirmed 100 basis point ROE incentive as long as the lines were completed and online by the end of 2008. We believe and we’ve asked for clarification from FERC that Middletown-to-Norwalk which will be operational in 2009 we had a separate order that laid out the return on equity that would be allowed for Middletown-to-Norwalk we believe that that applies but we’ve asked for clarification to make certain of that. The Trumble substation which we’ve been under construction will be operational next month.
The distribution returns are obviously below our allowed and we anticipate making a filing by mid-year of this year to seek rate relief that will provide the opportunity for us to earn our allowed rate of return starting in 2009. We’re doing that now because we’re not earning our allowed rate of return and we really have only three areas that are problematic for us. One is the lower kilowatt-hour sales which we need to deal with and that is we had a 1% growth in kilowatt-hour sales baked into the rates we have today. We’re not seeing that. We saw a decline of about 0.003% in 2006, about 0.008% in 2007 and as you can see we’ve see about 2% decline first quarter-over-first quarter this year.
On the good news the energy efficiency and conservation is working but it is having an impact and as you’re aware from the legislature that was passed last year when we file our rate case we will have to be seeking a decoupling mechanism which we fully intend to look and make sure we get that. That’s something that we would very much like to file for and we will and we think it’s going to be very important for us. It will also help us as we roll out or look at doing more as a way of energy efficiency and conservation so having the decoupling is going to be very critical to us.
The uncollectibles we’ve talked about already those are still going up. Rich will cover that I’m sure in a little more detail when we talk about the financials and the distribution rate base, that’s the other area where we need to get relief on. We actually have forecasts to spend more than what we have in the rates today so we’ll be requesting the Commission to allow us to spend more. In the even they determine that they don’t want us spending more on capital then we’ll back down to what level they do approve. But we do see the need to spend a little bit more than what is there today. A little history, in 2007 we had an allowed rate of 8.93%. This year we’re forecasting an ROE of somewhere between 8% and 8.5% on the distribution business. That is one of the reasons when we look forward we determined we need to do something today for the 2009 we’re not even worse off.
The other big thing is the peaking generation proposal we made in early March with our partner NRG. The 2007 legislation recognized and I think most people in the state recognized there is a need for additional Peaking Generation in Connecticut. So we’ve partnered with NRG to put together a proposal to do that. We also will be pursuing with our partner the potential to build even maybe some base load generation in the future that could provide additional benefits to customers. The structure of the partnership with NRG is really a 50/50 joint venture where we have each of us owning half of GenConn Energy which is the company that actually made the proposal and there would be a contract back to the utilities in the state, both CL&P and UI to collect the payments that would support these peaking generation and that will apply to whoever wins the bids. This is a competitive cost of service business that were put in by a number of companies.
We filed our proposal on March 3 and our base proposal is for 500 megawatts which would be 10 GE LM6000 which gives us an advantage because you can operate those with 50 megawatts so you the startups are less and you have a little more flexibility with the units. There are three sites that NRG already owns and they’re broken down. We actually gave four separate options to the Commission ranging from about 200 megawatts up to 500 utilizing from one to three sites. The initial ROE we proposed was 10.25%. The Commission determined that the floor for the ROE for any of these would be 9.75% over a lifetime and it’s indexed to the average of the utilities distribution rates in the state so CL&P’s and UI’s the average ROE and then the spread between that and the proposed ROE will carry forward and if the ROEs go up or down that spread will stay in place but with a floor of 9.75%.
We proposed a 50/50 debt to equity structure in a 30-year time horizon which is what the Commission had asked for. It will be project financed at the project level obviously. We believe that will provide a lower overall cost and it gives us a lot of flexibility. We have negotiated an equity bridge loan so that we won’t even put any equity into the project until a commercial operation begins. The hearings were held last week, the end of April. A draft decision is due by June 18 then the final decision by July 1 and we would target, assuming we’re awarded some level of participation, operations in June of 2010.
We have a chart which is shown on Page 11 of the handout we provided. It shows the different bids and this is public information, it came from all the different participants and you can see three of our proposals are actually Numbers 3, 4 and 5 then about the eighth one is another proposal. This is on the annual fixed revenue requirement and what those costs are and this reflects the competitive costs that people bid in and you can see they range from about $10.50 per kilowatt month up the $12.25. That’s important but what’s more important is what’s on the next page which one of the net benefits and the Commission will be looking not only at the cost but the net benefits that are determined and this is from the prosecutorial staff recommendation that went to the Commission. They recommended that GenConn which is our 50% ownership was included in six of the top seven rated portfolios, actually in the top three for sure and they were recommending portfolio F which is the second one as the one most that had the most certainty of achieving the forecasted benefit. We think that’s pretty good for GenConn and that was the proposal that had 400 megawatts for GenConn and then PSE&G had 150 megawatts.
One of the benefits we have using the LM6000 machines they are fast start machines, they go operational within 10 minutes, they have the 50 megawatts so you can start up fewer units when you’re actually meeting the peaking capacity. Those are some big advantages that GenConn has plus they’re all dual fueled with gas and oil. We believe that the GenConn proposal although it may not be the lowest cost initially does provide some of the highest levels of benefits of any of the proposals. The DPUC is going to be looking at this and keeping in mind that the prosecutorial analysis and recommendation is one of the OCC, the Office of Consumer Council, they also made a recommendation which ended up being our proposal number 4 which is for 200 megawatts. Other parties who made all their arguments at the hearing so then it’s up to the Commission to take in all the information and make their decision which would be independent of whatever these recommendations are. We’ll all just stay tuned and see how things go. But we’re happy with the position we’re in now.
The other thing we did is on April 1st we put in a request to the ISO-New England to look at a transmission line that would access renewables and I think most of you are aware of the renewable portfolio standards that have been enacted in much of New England. In Connecticut in particular we have a requirement by 2020 to have 20% of the electric energy used to be from Class 1 renewables and up to 27% to come from Classes 1, 2 and 3. With that we started looking at where we are going to get this extra energy from because we know that the renewables are not readily available in the state and probably not in much of New England. The only area of New England that seems to have some renewables would be some offshore wind and then perhaps some wind farms up in Maine.
We started looking around and recognized that the Canadians are planning an abundance of wind projects. Nova Scotia is looking at about 1300 megawatts to build, New Brunswick about 2500 megawatts. Then New Brunswick is also looking at expanding their nuclear capacity at Point Lepreau which would add significant more generation. That doesn’t qualify for the RPS standards at least not today. We like to hope we can get that changed because it may not be a renewable, it certainly doesn’t emit any carbon. I think that’s another area where we’re going to be looking to talk to our legislature about. Nevertheless that could add significant energy into the areas of Massachusetts and Connecticut where it’s needed today.
But the line we had suggested would run from possibly dual points in Maine in the Northern part or in Southern New Brunswick and come into Connecticut in the Norwalk and also a potential drop off point in Boston. The line we were proposing would deliver up to about 1200 megawatts, it would be high voltage DC cable and would have converter stations obviously at both ends and you have to convert the AC to DC and then back again. The initial capital estimates and these are very preliminary would be somewhere around $2.5 billion. We also made this proposal with a municipal utility; they are coordinating a group in both Massachusetts and in Connecticut. ISO-New England has put forth a straw proposal based on their April 30th advisory committee meeting and the straw proposal would look at three studies that really the study would encompass everything we had requested in the study request we put forth so we think that’s positive and we’ll see where they go with their straw proposal but we think they’re moving in the right direction and we’re hopeful that we will have the study done that reflects what we would like to do and what we would like to see and knowing full well that we would have to have some significant partners to accomplish this, with the cost of that project.
With that I’ll turn it over to Rich who will now talk about some of our operating results that we got in the first quarter.
Richard J. Nicholas
As Jim noted it was a very solid quarter for UIL. Net income for the quarter for continuing operations at $6.7 million as compared to $5.5 million in 2007 an increase of slightly over 20% and on an earnings per share basis a little bit higher average shares outstanding an 18% change in earnings per share of $0.26 versus $0.22. I would note that there is still a very slight amount of dollars in discontinued operations less than $100,000 after tax as we continue to prosecute some claims and spend some money on legal fees in order to do that but there is very little left there.
As you look at the quarter very strong on the transmission side. On the distribution side however as Jim said lower kilowatt-hour sales and we’re not alone in this. We are seeing that across the region in terms of the decline in kilowatt-hour sales and in particular with a 1% growth rate in the last rate case, the 2005 rate case, that gap is continuing to widen in terms of our actual sales versus what was assumed in rates. Again one of the major drivers in seeking rate relief.
On the uncollectible side our customers like many other utility customers are being pressured by general economic conditions, higher gasoline prices, home heating prices and we are working with them to avail themselves of various state programs. The Winter Moratorium on shutoffs for hardship customers did end May 1 so we are actively working with our customers to try and get payment plans set up, etc. As a result of the lower sales, the high uncollectibles we did report a combined distribution and CTA rate of return of 8.74%. That’s a full year 12 month ending March 31 as compared to our allowed 9.75%.
One of the other things affecting our sales this quarter was a fairly mild weather quarter compared to normal. We had 148 less degree-days about a 5% drop in degree-days for the quarter, not overly impactful but certainly on the negative side for the quarter. On the transmission side our earnings more than doubled from $0.09 a share to $0.19 a share quarter-over-quarter driven by the WIP in rate base for Middletown-to-Norwalk which is now over 805 complete and also the Trumble substation coming online in June of 2008 is adding to the transmission earnings as well.
Jim mentioned the FERC order on rehearing and while they increased the base rate of return by 20 basis points they also confirmed a 74 basis point upward adjustment due to the change in interest rates and confirmed that that was part of the overall rate of return going forward. They also confirmed the 50 basis point adder for being a member in a regional transmission organization and set out the 100 basis points for projects for 12/31/08 and then on a project-by-project basis they are after.
On the corporate side UIL Corporate a slight decrease in earnings there but it was at expected as we have taken cash that was sitting at the holding company and infused that into the utility. There is less earnings on short-term investments at the holding company. As a result of the first quarter as we look forward for the year we affirmed our 2008 earnings guidance with an overall continuing operations range of $1.82 to $2.02 and as we look out a little longer term a 5% to 8% compound annual growth rate over 2007.
Overall with the short term measures that we’re taking to manage expenses mitigate to the extent possible the impacts of sales on the collectibles and then taking regulatory action to get back to the allowed return, all of that underlies the earnings guidance. As always every year a major variable coming up will be the summer weather and how that affects us. One other item affecting the guidance at least versus 2007 is there are slightly lower incentives that we’re forecasting coming in from our conservation programs and energy independence act programs. On the transmission side with the change from the FERC order we’re currently forecasting a composite weighted average rate of return of 12.4% for 2008 on our overall transmission business.
To wrap up, a very solid quarter. We are positioned well for the future, very solid enterprise foundation and management team. We’ve got some very exciting opportunities both in distribution and transmission as well as looking at additional generation opportunities that really build on our partnership and our relationship with NRG. As we move forward as a pure play utility and we’ve demonstrated our commitment to the dividend and as we look out a little further into the future the project that Jim mentioned in terms of potentially accessing Canadian resources is a very exciting opportunity, we’ve got a very solid rate of return on our transmission business and we’ll look to build on those opportunities where we can in all phases of the business. With our compound annual growth rate in earnings of 5% to 8% through 2010 and a dividend yield in the 5% to 6% range on a given day a total return in the 10% to 14% range?
With that I’ll turn it back to our Operator, for the Q&A part of the session.
(Operator Instructions) Your first question comes from Daniele Seitz – Dahlman Rose.
Daniele Seitz - Dahlman Rose
I just was wondering if you could explain your intent to ask for this decoupling. Is it going to be a multi-year automatic adjustment on your rate of return according to the decline in sales and will actually ascertain the ROE? Will it come with a six-month lag or a one-year lag? Could you explain?
James P. Torgerson
Daniele, what we envision asking for and our plans are pretty much written the testimony already, is that we would be looking at receiving our requirement annually and you set the rates based on the amount of the revenue requirement and an assumed amount for sales. Then at the end of the year we true it up either giving back to the customers if we receive more on the revenue requirement or collecting more on the following year. So we would see it would probably be about a one year lag in getting the true up but from an accounting standpoint since we’d have it we’d be able to recognize the earnings one way or another on the revenue requirement annually so it would give us a lot more certainty as to what our annual revenues would be and revenue requirement and then the earnings on the distribution phase of the business.
Daniele Seitz - Dahlman Rose
I am assuming that you have already discussed that with the Commission and it is something that has already been implemented in the letter of the states. If you are filing sometime in June you anticipate a response from the Commission about nine months later?
James P. Torgerson
If we make a filing in June we would anticipate having a response by the end of the year and then implement rates by January 1 in 2009, its 180 days.
Daniele Seitz - Dahlman Rose
You mentioned that you are going to ascertain that the FERC agreement holds in terms of the rate of return allowed on transmission. Do you anticipate this to be relatively quick in terms of the response?
James P. Torgerson
We’re just asking for clarification. I would expect that we would get a response pretty quickly. This is limited to the Middletown-to-Norwalk project and we already have an order on it that says what we’re allowed to earn and with the additional incentives. The order they came out with in March is a little unclear. So we actually already made the filing and I would hope we get an answer pretty quickly from them. It is pretty straightforward, we’re not asking for anything more it’s just saying confirm what you had told us before.
Daniele Seitz - Dahlman Rose
I’m really excited this transmission line in Canada, etc. Do you need Canadian partners for that and some sort of a PPA commitment before you do the transmission line? I don’t know exactly how you are proceeding to get this done.
James P. Torgerson
Daniele, what we’re doing right now is asking the ISO-New England to do a study and they’ve come back with a straw proposal and they’re going to decide what they actually study but it looks like the study from their straw proposal would incorporate what we’ve requested which would be a summary cables. Assuming that’s what gets built which we think actually makes a lot of sense we would have partners probably domestic, potentially Canadians because it will just touch into Canada so we’ll have to deal with the import/export restrictions and requirements for moving energy out of Canada. I assume we’ll have to get a DOE permit or Presidential permit to allow that to occur. But then part of it would also be coming from Northern Maine so it’s just going to be touching it.
Whether the partners are Canadian or US we’re talking to a number of people right now and based on a meeting I was at this week at New England Commissioners Conference I saw New England seemed to indicate that there would probably be a need for two lines to be built to access renewables, whether they’re all in Canada or in Northern Maine. This was what said at the meeting the other day and it’s been our view too that there probably will be a couple lines built. The timing is, we’ll see how long it takes but in order to meet the requirements for the renewables we think the only way we’re going to do that in New England is to access these renewables that are going to be coming from Canada and the Northern part of Maine. Otherwise meet the requirements.
There are no questions in queue.
James P. Torgerson
If there are no further questions then I want to thank everybody for participating today. If you have follow up questions obviously please contact Susan or Michelle and I’m sure you all have their phone numbers. If not it’s on our website and how to get a hold of them. Thank you again and we’ll talk to you all soon.
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