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

Central Vermont Public Services Corporation (NYSE:CV)

Q2 2008 Earnings Call

August 11, 2008 2:00 pm ET

Executives

Robert H. Young - President, Chief Executive Officer and Director

Pamela J. Keefe - Chief Financial Officer, Vice President, Treasurer

Ann Warrell - Investor Relations Specialist

Analysts

[Danielle Six - Six Research]

[Paul Patterson - Glenrock Associates]

Operator

Welcome to the second quarter 2008 Central Vermont Public Services earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Ann Warrell.

Ann Warrell

Thanks everyone for joining us today at the CVPS 2008 second quarter earnings teleconference. As Amad said, I’m Ann Warrell and I’m the Investor Relations Specialist at CVPS. Before we begin I would like to point out to you that we may be discussing certain subjects related to our second quarter earnings that may contain forward-looking statements. I would caution that actual results could differ materially from those expressed in such forward-looking statements and I refer you to our Safe Harbor language that is contained in the second quarter earnings press release that we issued on Friday. This release appears on the Investor Relations section of our website at www.cvps.com along with slides that will be referred to throughout today’s call. Also during the call today we will be discussing earnings per share which in all instances refers to diluted shares of common stock.

Leading today’s discussion our CVPS President and Chief Executive Officer Bob Young and Vice President and Chief Financial Officer and Treasurer Pam Keefe. Bob will provide an overview of the company’s earnings and an update on corporate and strategic development. Pam will then describe the second quarter financial results in detail. We will leave time to answer your questions at the conclusion of the call.

Now I’d like to turn things over to Bob.

Robert H. Young

On Friday we reported 2008 second quarter earnings of $4 million or $0.38 per share of common stock. This compares to 2007 second quarter earnings of $1.5 million or $0.04 per share. For the first six months of 2008 CVPS reported earnings of $9.9 million or $0.94 per share up from $6.2 million or $0.58 per share for the same period in 2007. You may recall that during the second quarter of last year we experienced the worst storm ever to affect our company which significantly impacted our earnings. Pam will discuss our financial performance in detail in a few minutes.

So I would like to begin by sharing the latest information about the status of our alternative regulation proposal which is shown on Slide 2. The plan which was filed late last August is the central piece of our continuing effort to improve our financial position. It is designed to provide more timely power and non-power cost recovery through quarterly power cost adjustments and an annual base rate adjustment as well as an annual earnings sharing mechanism which provides incentive for cost containment. It has taken longer than we had hoped to work through this process due in part to an interruption last fall when our rate case was being wrapped up.

At this point however the process is nearing its end. The Public Service Board held hearings in the case on July 9 and 10 which were quickly concluded and briefs were submitted by CVPS and the Department of Public Service on August 8. We expect the Vermont Public Service Board to issue a decision by October 2. The alternative regulation plan if approved is scheduled to take effect on November 1. We are already working on the first base rate filing which is due the same day.

There is substantial agreement between CVPS and the Department of Public Service on most of the plan components including the allowed return on equity which will be 10.21%. At this point remaining issues relate mainly to the proposed caps on non-power costs and the proposed bands around the allowed return on equity.

Outside of the proposal we outlined in our filing last summer there are several other scenarios that could provide adequate and timely cost recovery for CVPS so we remain open-minded and flexible about how the details of the plan will ultimately unfold. I look forward to sharing the details of the plan with you after it is finalized in October.

At the same time we have been working with the Department of Public Service on a business process review which we agreed to conduct as part of last year’s rate case settlement. The review is being performed by an independent consultant and will help ensure that our critical business functions are operating as efficiently s possible. The business process review is well underway and will likely conclude by the end of the third quarter. We will update you on its notable findings and resulting action plans later this year.

Another area of importance is our negotiations for new power contracts beyond 2012 with Vermont Yankee and Hydro-Quebec which is outlined on Slide 3. In light of confidentiality agreements I cannot provide details but we remain on track to work out a proposal with Hydro-Quebec by the end of this year.

Discussions with Entergy are also continuing and we hope to have a contract proposal by early fall. This would be advantageous for Entergy given their interest in operating the plant beyond a 2012 license expiration. A beneficial agreement with the Vermont Utilities could help Entergy win re-authorization from state legislators and regulators. Entergy suffered a setback when Vermont Yankee was derated from July 11 to July 22 due to leaks discovered in the plant’s cooling towers including in the section of the cooling towers that partially collapsed last summer. The plant is now operating at 100% capacity.

During the derate CVPS used power that normally would have been sold into the market and purchased additional market power to meet our load. The net effect on CV’s financial performance will be seen in our third quarter earnings. Unplanned outages like this one underscore the importance of our plan to diversify our future power portfolio. While Vermont Yankee and Hydro-Quebec will likely be central pieces of our power mix going forward, we plan to decrease our overall reliance on these sources to reduce our exposure to any single power source. As part of our future energy planning we are looking at other domestic and Canadian contract opportunities.

As you know, our long-term planning also involves a period of intensified capital spending for infrastructure improvements outlined in our asset management plan. This strategy is expected to build rate base at an accelerated pace, 8% to 10% annual over the next five years and help to increase earnings and shareholder value. This projection is shown on Slide 4.

Looking at 2008 our planned capital spending of $41 million includes $19 million for generation, transmission and distribution; $11 million for our Southern Loop project; and $3 million for our SAP implementation among other items. This plan is outlined on Slide 5. I am pleased to report that our Southern Loop construction project is well underway including a new substation and installation of synchronous condensers which are large voltage support devices.

We are also making progress on our plans to select and install automated meter infrastructure technology as part of a broad plan to improve management of our electric system and enhance customer service. On August 1 we made a joint public announcement with the Department of Public Service about our collaboration to develop standards for new meter and communications technology that will significantly improve our service, efficiency and customer choices. Our program which we call CVPS Smart Power is intended to improve our metering, billing and service delivery into the future. This comprehensive program will encompass new planning and technology that will lead to more efficient use of electricity, improve storm restoration and outage management, and better management of our electrical system all of which will benefit our customers. We are now evaluating several technologies and expect to work with the officials at the Department of Public Service to help determine criteria that may be applied to all utilities and identify functions that are important for our specific service territory. We expect to make a capital investment of approximately $40 million in Smart Power.

Our plans for additional equity investments in VELCO remain largely the same as we described in May. We plan to make further investments over the next several years to support enhanced long-term system reliability and help stabilize rates. Based on recently updated information from VELCO we could invest up to $6 million this year. We will keep you apprised of any developments as they occur. In 2009 we expect to contribute about $21 million but the schedule for this and further investment quantities and timing is unclear.

Our financial performance in the first half of 2008 has been strong and we are making progress in our strategic plan. But it is impossible to ignore the coming winter and extreme difficulties many Vermonters will face as a result of steep increases in heating fuel and gasoline prices. At this point Congress has not released any additional funding for its [LIHEEP] allocation to the states even though costs for most petroleum based heat systems have nearly doubled since last year. We recognize that despite having the lowest rates of any major electric utility in New England, some of our customers will undoubtedly struggle to meet their basic expenses and pay their electric bills in the months ahead. We have already begun to address this situation by asking our customers to think twice before adding electric space heaters or converting to electric heat as they seek out heating alternatives. Our efforts are described on Slide 6.

In June CVPS and other Vermont utilities issued a joint statement encouraging Vermonters to be mindful that electricity may not be a cost-effective alternative heat source and that space heaters can create spikes in electric bills that some customers won’t be able to pay. Other popular alternatives such as wood and wood pellets are far more affordable. We want our customers to carefully weigh the options available to them before making short-term choices that create long-term financial burdens. Some Vermonters will face real hardship this winter no matter what. Understanding these realities, CVPS has committed $100,000 to the CVPS Shareheat Fund which provides emergency home energy assistance to Vermonters throughout our service territory. Shareheat began in 1987 and has provided over $2.8 million to Vermonters in need since that time. We solicit private donations which are matched dollar-for-dollar by CVPS. We are in the process of soliciting Vermont businesses to pledge additional matching funds and already have commitments totaling $40,000.

In the months ahead we will remain focused on our fundamental plan to maintain superior customer service and reliability, improve our financial position, and work on future energy planning initiatives. All of the initiatives I’ve discussed with you today are helping us to make measurable progress in these areas.

At this point I would like to turn the presentation over to Pam who will discuss our financial results in depth.

Pamela J. Keefe

For an overview of the second quarter earnings please refer to Slide 7. CVPS’ second quarter 2008 net income increased by $3.5 million or $0.34 per share compared to the second quarter of 2007. This increase was primarily due to a $7.1 million increase in operating revenues including a $6.1 million increase in resale revenues and a $2.4 million increase in equity and earnings of affiliates which resulted from the $53 million VELCO investment made in December of 2007. Resale revenues rose mainly because of higher average market prices and because of a 25% increase in the amount of excess power available for resale. This in turn was caused by a 3% decrease in our retail sales volume during the second quarter although retail sales revenues were up slightly due to the 2.3% rate increase that began February 1. While notable, the retail sales volume decrease reflects the slumping economy including the loss of a third industrial customer this year due to a plant closure and customers’ efforts to conserve energy. This trend is expected to continue through 2008 and possibly beyond. Nevertheless we are able to resell our excess power and we are using the currently favorable market prices to our advantage.

Purchased power expenses rose $1.5 million due to increased purchases from Vermont Yankee and independent power producers compared to the second quarter of 2007. This increase was partially offset by fewer short-term replacement power purchases compared to those incurred during the scheduled Vermont Yankee refueling outage in May of 2007 and decreased deliveries from Hydro-Quebec.

Other operating expenses rose by $900,000 compared to the second quarter of 2007 as a result of a $2.7 million transmission expense increase. This was due to higher costs for VELCO capital projects put into service, overall transmission expansion in New England, and lower reimbursements under the New England Open Access Transmission Tariff. Meanwhile storm costs were $2 million lower in the second quarter compared to the same period last year. As Bob mentioned earlier CVPS experienced its most damaging and costly storm ever during the second quarter of 2007 and storm activity in the second quarter of 2008 was relatively modest.

For the first six months of 2008 operating revenues increased by $11.6 million driven by a $10 million increase in resale revenues for the reasons I described previously. Other operating revenues rose $1.3 million as a result of revenues from transmission sales and retail revenues increased $300,000 during the period because of the rate increase that began February 1. That increase was largely offset by the decrease in sales volume I discussed earlier.

For a more comprehensive analysis of the company’s second quarter financial performance, please refer to our earnings release which was issued on Friday.

Turning to Slide 8, the company’s cash position was $6.5 million at June 30. As we have discussed previously cash on hand, cash flow from operations, and our $25 million credit facility will not be sufficient to fund our capital spending plan of approximately $41 million in 2008. You may recall that we issued $60 million in first mortgage bonds in May. The proceeds were used primarily to pay off the $53 million bridge financing for our 2007 investment in VELCO. The remainder is being used to help fund our own capital projects as Bob described earlier. We are also considering issuing up to $25 million in common equity late in the year or early in 2009 depending on our stock price and other market conditions.

At this point we are reaffirming the earnings guidance range of $1.50 to $1.60 per share for 2008 that we issued in February. So far the variability in several cost and revenue drivers is within the ranges we expected. As a reminder our allowed ROE is capped at 10.71% until the approval of an alternative regulation plan or our next rate proceeding.

Now I would like to turn the call back over to Bob.

Robert H. Young

With the first six months of the year behind us, I am pleased with the progress we’ve made to date. We are performing in accordance with our stated plan and expectations which is encouraging. There may be bumps in the road ahead such as the slowing economy and increased fuel prices. They will not deter us from achieving our long-term strategy which is shown on Slide 9.

As I reviewed for you earlier, we are implementing an accelerated capital plan to address our aging infrastructure. This will ensure that we continue to provide exceptional service and superior reliability for customers over the long term. We are improving our financial strength and looking forward to a decision in our Alternative Regulation Plan will help us restore our credit rating to investment grade.

Finally, we are engaged in collaborative planning opportunities and contract negotiations that will help us create an affordable, reliable and environmentally responsible electric future for Vermont.

Thank you for joining us today. At this point, Pam and I would be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from [Danielle Six - Six Research].

[Danielle Six - Six Research]

Given the fact that the six months earnings are already at $0.94 and you maintain the same expectations in terms of EPS for the year, are there any major negatives that we should be expecting in the third and fourth quarter? And also, I was wondering if you had experienced so far in the third quarter any major storms?

Pamela J. Keefe

In the third quarter we will see the impact of the Vermont Yankee derate and as described in our 10Q that we filed on Friday that will be about $2.3 million in total. $1.1 million of that will be increased power costs and $1.2 million will be reflected in lost resale revenues. In the third quarter we have had more storm activity than we saw earlier in the year; not so much in large discreet storms but we’ve had more continuous storm activity for several weeks now.

[Danielle Six - Six Research]

I recall last year in the third quarter you already had the effect of some storms as well. So do you sense that so far it’s relatively similar to last year?

Pamela J. Keefe

Last year we had a large storm at the beginning of August. This year as I mentioned before we haven’t had one single large storm but over probably the last six weeks or so we’ve had pretty continuous localized storm activity. So while it may not be of the same magnitude as last year certainly it has been more active than earlier in the year.

[Danielle Six - Six Research]

Since you mentioned that you’re anticipating that you may be announcing some new major contracts with Hydro-Quebec and Vermont Yankee, it sounds like you want to actually find some new sources of power so that it limits the amount of obviously the focus on these two sources. Does that mean that you may be announcing contracts with other power producers for those periods or could you elaborate on that?

Robert H. Young

As we have said Danielle, we certainly expect that both HQ and VY will be part of our mix going forward. That of course in the case of VY is dependent on their license being extended beyond 2012. We will also be going to the market place later on this year with an RFP, Request For Proposal, to seek out some other sources of power, probably renewable in particular which we would look to being a part of the mix going forward. So we definitely think that we will have a broader based power supply four or five years from now looking forward than we currently have today.

[Danielle Six - Six Research]

Could you actually tell me how much exactly you need in renewable and by what time? I don’t quite recall. I think there was a percentage that was required in megawatts. Can you give me an idea of how much you anticipate to need to be in compliance?

Robert H. Young

I don’t think it was a megawatt number. The burden that we have is that we effectively have to take the low growth that we have from the end of 2005 through 2013 and we have to cover that load growth either through energy efficiency or with new renewables.

[Danielle Six - Six Research]

So it’s pretty hard to predict given the fact that you’re having the effect of conservation now and you seem to be thinking that this decline in demand may last for at least the next 12 months. Is that your impression as well that actually conservation will actually slow down the demand growth?

Robert H. Young

It certainly is now. As Pam said our retail sales were 3% below budget in the first half of the year so we are seeing quite a response so far either through energy conservation measures themselves or lower business activity and that kind of thing that’s just cutting demand.

[Danielle Six - Six Research]

Originally, I apologize I should know that, on this new budget in terms of growth relative from the retail side since you have 3% below budget?

Robert H. Young

[Inaudible] this year’s budget probably around 0.5%.

Operator

Our next question comes from Paul Patterson - Glenrock Associates.

Paul Patterson - Glenrock Associates

The weather adjusted growth, do you have an idea about what the impact aside from weather from the economy you mentioned in your prepared remarks about the economy. I was wondering if you could say if you see any increase in conservation or anything like that happening?

Robert H. Young

I don’t have figures off hand but I suspect we could get you an answer to that Paul and get it back to you.

Paul Patterson - Glenrock Associates

I was just wondering if there’d been an impact like we’d seen with a few of the other utilities in your area. Could you remind me why the utility tax rate is so much lower than the other income?

Pamela J. Keefe

The tax on the operating?

Paul Patterson - Glenrock Associates

Yes. The tax rate, if I read your income statement right, is about $846 million and you’re utility operating income was $4.2 mililon after tax but that seems like a comparatively small number and for six months it’s similar as well, I’m coming up with a pre-tax utility operating income of something around $13.4 million and only $2.7 million in income tax expense.

Pamela J. Keefe

It’s a combination of things; the expected timing of our differences and as well our expectations for overall annual income. I would say you’re probably going to see it even out as the year goes on.

Paul Patterson - Glenrock Associates

So what’s the normalized tax rate we should be expecting or vis-à-vis your operating income? What’s the tax rate that would be more normal? What’s like what you budget?

Pamela J. Keefe

Like a 36.

Paul Patterson - Glenrock Associates

So this is unusually lower and that would probably even out in the next six months. Is that something to think about?

Pamela J. Keefe

That’s it exactly.

Operator

Our next question comes from [Danielle Six - Six Research].

[Danielle Six - Six Research]

This Smart meter project, do you anticipate that the beginning of the expenditures we look for next year?

Robert H. Young

They’ll actually start this year but they ramp up. It’ll be a small amount this year and then ramping up substantially over the next three years.

[Danielle Six - Six Research]

It’s a three-year project then. I’m supposed to be spreading this $41 million into that?

Robert H. Young

It’s basically from this year Danielle but a small amount this year. Primarily the capital spending will take place in 09 through 12.

Operator

We have no questions at this time. I would now like to turn the call over to Bob Young for closing remarks.

Robert H. Young

As I always say, if any of you have additional questions that you think of in the next several hours or several days, please feel free to pick up the phone, call me, call Pam Keefe or Ann Warrell and we’d be happy to try to answer them as they come up. We thank you very much for joining us today. Have a great afternoon.

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: Central Vermont Public Services Corporation Q2 2008 Earnings Call Transcript
This Transcript
All Transcripts