UIL Holdings' CEO Discusses Q3 2012 Results - Earnings Call Transcript

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UIL Holdings Corporation (UIL) Q3 2012 Earnings Conference Call November 6, 2012 10:00 AM ET

Executives

Susan Allen - Investor Relations

Jim Torgerson - President and Chief Executive Officer

Rich Nicholas - Executive Vice President and Chief Financial Officer

Analysts

Chris Ellinghaus - Williams Capital

Andrew Weisel - Macquarie Research

David Paz

Dan Fidell - Brean Murray Carret & Company

Operator

Welcome to the UIL Holdings’ Third Quarter 2012 Earnings Call. I will now turn the call over to Susan Allen.

Susan Allen - Investor Relations

Thank you, Maggie and good morning to everyone. Thank you for joining us to discuss UIL Holdings' third quarter 2012 earnings results. I am Sue Allen, Vice President of Investor Relations. Participating on the call 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 a presentation for today’s call, you can find them at 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 U.S. Private Securities Litigation Reform Act of 1995. Significant factors that could cause results to differ from those anticipated are described in the earnings release and filings with the SEC.

With that said, I will now turn the call over to Jim.

Jim Torgerson - President and Chief Executive Officer

Thanks, Susan and good morning everybody. We are actually doing this call from our emergency operations center since we are still winding down from the storm that hit us and I’ll give a little information on that in a minute.

For the quarter, net income came in at $15.7 million versus $12.2 million for the previous year. So, earnings were 29% higher and earnings per diluted share were $0.31 versus $0.24. Now, the 12 months, we are still running a little behind. We had net income of $74.8 million versus $78.4 million, so $1.46 versus a $1.54 for the year. And again, the warm weather we had from the affected gas operations in the winter and it actually continued in the spring. Also in the quarter, we did have a $2.7 million pre-tax income item related to the settlement agreement for procurement incentives during 2005 and 2006. So, that’s been subtle when we have that.

Also, when we look at our GenConn operations are now operating fully, as I think all of you are aware of the Middletown plant became fully operational in June of 2011. So, the comparison between the 12 months or I am sorry the 9 months ended in September, we showed $11.8 million income for GenConn versus the $8.2 million. Our gas conversions are actually ahead of target. We have converted 55% more customers year-to-date October than through year-to-date October ‘11. So, that’s going extremely well and we did get slowed down a little bit by the storm, but nothing appreciable. So, on news, we also have recognized $1.1 million pre-tax on the deposits we have made for the news project, the New England East-West Solution. And at this time, we are reaffirming our guidance for 2012 of $2 to $2.15 per diluted share.

Now, Hurricane Sandy obviously caused a lot of damage and those of you in New York and New Jersey certainly are still seeing the impacts of that. We had about 250,000 customer outages. The good news as of this morning 99% of our customers do have power and the expectation on the cost of the storm is somewhere right now in the $35 million to $40 million range. Obviously that number is going to be finalized over the next few weeks, but that’s our best estimate at this point. Probably 40% of that will be capitalized. 60% will be O&M, which we will defer as a regulatory asset and collected in the future when we ultimately do file the rate case, so that will be put on the balance sheet as a regulatory asset.

And I am following along the presentation, so on page 4, you can see we have converted 8900 customers so far from other fuels to natural gas. That actually already exceeds what we did in 2011. I think we had 8200 and compared to 2011 of 5740, so it’s a 55% increase. We are on target to meet our 10,200 goal for this year and obviously that 30,000 to 35,000 is still we’re looking to beat – to be in that range by the end of 2013.

Now, at the EEI Financial Conference where we are going to be providing our targets for 2014 and beyond and if you look at the chart you can see that each month we’ve – how we’ve been doing relative to our target and relative to 2012. And then the gas conversions that we’ve done throughout the year you can see we’re running ahead and again ahead of even last year’s total.

Now customers are still expressing a strong interest in converting financing options have been extended. We’re not seeing a lot of demand for the financing options at this point, but we expect that to change once we get into the competitive this Connecticut comprehensive energy strategy, so I’ll talk about in a second. As I think most of you are aware natural gas supply prices are staying low and projected to be low for the foreseeable future, so it’s still running about half the cost of heating oil. And so we still see a great opportunity for customers to convert. And I think as we’ve said in the past we generated above $300 of net operating income for every customer that we get for a full year.

Now the draft Connecticut comprehensive energy strategy was issued earlier in October so about a month ago. It provides expanded energy choices and what the governor and the Department of Energy is trying to accomplish is to have 50% of household to have the access or availability of natural gas today. Right now, statewide, it’s about 31% and just under 50% use oil. They want to flip that to where 50% of the household are using gas for at least to have access to it within the next seven years. So, that would mean we’ll be converting state wide about 250,000 customers and up to 75% of the bills in Connecticut, big challenge when I look at it we’re going to 10,200 this year. If we were to keep the target of conversions and this would be actually converting the people in seven years, we would have to average somewhere around 24,000 a year. So, we’ll have to gear up to do that. But some of the tools that are put in the comprehensive energy strategy look pretty good and they are ones we had frankly suggested a few of those I think and this is draft so it could change.

But looking at providing financing from a third party that would be able to put it on the bill on your gas bill and finance the heating equipment that a customer would need in order to do the conversion. Also for customers that wouldn’t require a main extension, we would have a new customer rate for those that require the main extension, and using that hopefully in lieu of a contribution in an area of construction. So, it’s a way a customer can again pay for it over time.

With those tools, we think that the customer would still be able to see a reduction in their heating bill. For example, if a customer is using a 1000 gallons of oil, they would save it in an order of magnitude $2000 a year looking at the heating equipment of it’s $6000 to $7000 to pay for it over for seven or eight years roughly $1000 a year. So, you are still seeing about a $1000 of the saving. We think that’s going to be fairly compelling for our customers to do that. And so it will require more advertising and more focused advertising as far as we are concerned, so that we get the people and stagger them as to when they come in. If all 160,000 or 170,000 that we would need to meet the 50% came at once, we obviously couldn’t do that, so we need to this over a period of time. We are also looking at other activities that would improve the environment. They want to create some clean energy jobs, but clean energy jobs that makes sense and in using clean energy and renewable energy sensibly not just spending a lot of money to build it. So, I think they are taking a good approach to using renewables.

The final strategy is expected to come out in early 2013. They have set a 60-day period for comments. I wouldn’t be surprised if that gets extended as a result of storm, but we’ll see what happens with that. The economy hasn’t changed much over the last few months we’re still looking in unemployment in Connecticut of just under 9%, nationally it’s just under 8% in our cities in Bridgeport, New Haven, Hartford, the unemployment rates actually are quite a bit higher in the cities themselves than the state average. When you look at the LMAs, they are a little bit less than the state average, but the LMAs obviously including the suburbs continuously do a little better.

And with that, I am not sure I (wanted) Rich Nicholas to talk about the financials. And just in case you are not hearing us well, keep in mind we are in our dispatch center, so the communication devices aren’t as good as we’d normally like.

Rich Nicholas - Executive Vice President and Chief Financial Officer

Thank you, Jim and thank you every one for joining us this morning. I’ll try and speak loudly without yelling, but following along in the presentation on slide 7, we have provided the bar graphs that show the net income by segment comparing with third quarter and year-to-date with 2012 versus 2011. And the narrative begins on slide 8.

As you can see for the third quarter, consolidated net income was up $3.5 million driven primarily by the increases in the distribution segment, which included that regulatory settlement that Jim mentioned earlier and I’ll go into that little more details in a moment. Year-to-date consolidated net income is down by $3.6 million or 5% year-over-year driven by the warm weather in the first half of the year, and we have worked to mitigate that with cost controls, but as you recall, it was record warmth during that period.

Turning to the individual segments, for the quarter, the electric distribution, CTA, GenConn and other was up $5.1 million, $2.7 million of that on a pre-tax basis was due to the settlement of the transitional standard offer. That goes all the way back to 2004 and actually to legislation in 2003 that provided that if we did a good job if you will better than average on procuring power for our customers, we could earn an incentive for this 3-year period ‘04, ‘05, and ‘06. We had disputed the order from the DPUC that initially disallowed our ‘04 results that was litigated, was appealed, and ultimately, was recently settled such that we were able to accrue the income from the 2005 and ‘06 period, but not the 2004. So, we did include that in income in this period and you would actually find that in the other income induction and deduction line on the income statement. No change in cash because we had actually built that into our rate and collected the cash from the customers early on during that period and we had already returned in cash the 2004 phase.

Also hoping that the quarter gave us the O&M controls, we did better fit from lower lease expanse as we moved out leased facilities and inter-company-owned facilities primarily our new building is in Orange, Connecticut. The year-to-date also was affected by that settlement of the transitional standard offer as well as the GenConn that Jim mentioned earlier, and the O&M cost controls that we have put in place.

For the 12 months ending September, the return on equity for the distribution and CTA component was 8.72% basically right around our allowed 8.75%. For electric transmission, the third quarter net income was up 600,000 and year-to-date was up 200,000, now both of those due to an increase in the rate base as well as our investment in the news project somewhat offset by lower allowance for funds used during construction. The weighted average ROE for the 12-month period for transmission was 12.3%.

Turning to the gas distribution business on slide 9, the net loss for the quarter increased by $1.1 million, the seasonal nature of the business loss in the third quarter is typical. And year-to-date, gas net income was down $11.8 million compared to 2011. Both the quarter and the year were impacted by the absence of a settlement in 2011 that had provided for $2.2 million of pre-tax of positive adjustment related to the CNG and SCG rate case settlement last year. So, obviously we do not have that in 2012.

In addition, the quarter was impacted by somewhat higher on collectables, but that was offset in part by the increase in margin from our customer growth. Year-to-date through September heating degree days are 20.3% although normal which increased margin by almost $18 million, and that was partially offset by the $3.5 million of weather insurance we have talked about in prior quarters. Preliminary basis for 12-month ending ROEs for SCG and CNG on a weather-adjusted basis are in the 6.5% to 7% range on the full rate base. Lastly, the corporate segment, the higher cost for the quarter is due to some higher short-term borrowings that we have in 2012 versus 2011.

Looking at our liquidity slide 10, we are in good shape at the end of the third quarter. And in addition, I would know that we have closed on an additional $100 million credit agreement. So with that and our existing credit facility that’s over $500 million of short-term borrowings that are available to us to meet our liquidity needs. Our refinancings for 2012 were all behind us. And as you can see, there is not significant refinancings coming up in ‘13 and ‘14 and ‘15 as well, there is just a $1.5 million sinking fund payment.

Also on the debt side, we do have a docket open at the Massachusetts DPU for a $20 million approval for long-term debt for Berkshire to meet their future CapEx needs. The record there has been closed and we are now awaiting a final decision. No changes in our credit ratings although we are expecting the annual update for Moody’s in the not too distant future. We are continuing to assess our equity needs particularly in light of the comprehensive energy strategy that Jim discussed and how those plans might impact us as we look to build out to reach additional customers.

On slide 11, we have affirmed our consolidated guidance of $2 to $2.15, but on a component basis, we do lower the gas segment and increase the distribution segment by $0.05 reflecting the results to-date for the year and our expectations for the fourth quarter, which do include our return to normal weather for the gas business. And we continue to maintain our focus on cost controls and getting those gas conversions in on target. I am looking forward to see many of you at the EEI Financial Conference in Phoenix. As Jim mentioned, we’ll discuss the updated forecast for gas conversions as well as we’ll present our updated view of the next 10 years for our capital expenditure plan.

I’ll now turn the call back to our operator, Maggie, for the question-and-answer period.

Question-and-Answer Session

Operator

(Operator Instructions) We do have a question from Chris Ellinghaus. Your line is live.

Chris Ellinghaus - Williams Capital

Hey guys. How are you?

Jim Torgerson

Okay, Chris.

Rich Nicholas

Good morning.

Chris Ellinghaus - Williams Capital

I got a bunch of questions. Based on the guidance for distribution, it appears that you are expecting a pretty significant fourth quarter and maybe you are not making the same adjustments for the year-to-date, but can you just talk about what kind of major drivers there might be in the fourth quarter year-over-year that would potentially lead to a pretty significant increase?

Jim Torgerson

Well, first it’s normal weather for gas operations.

Chris Ellinghaus - Williams Capital

Well, I am thinking on the electric side.

Rich Nicholas

On the electric, Chris in the fourth quarter of last year after high rain and then the snowstorm, we have a lot of O&M work that we cleaned up in the fourth quarter. Now, yet to be seen how much comes out of this storm, but our expectation is that it won’t be as much as last cover on.

Jim Torgerson

Yeah, we accelerated a lot of our O&M work in the fourth quarter of last year.

Chris Ellinghaus - Williams Capital

Okay.

Jim Torgerson

For electric distribution.

Chris Ellinghaus - Williams Capital

Yeah, I was going to ask can you give us any insight into what might be expensed in the fourth quarter from the storm?

Rich Nicholas

It’s really too early to say, I mean we are still doing restoration.

Jim Torgerson

Yeah right now my expectation is everything that we are doing with the storm is going to go as a regulatory asset, how much more we do. We did a lot last year, so I don’t see a lot more of O&M work being done in the fourth quarter for the storm.

Chris Ellinghaus - Williams Capital

Okay. Do you have any recollection at all from last year what the weather impact was on the gas business?

Jim Torgerson

No, we could.

Rich Nicholas

We’ll find out and we’ll just get it you. I don’t know off hand, Chris.

Chris Ellinghaus - Williams Capital

Okay. Then I’ll talk to you later in the week.

Rich Nicholas

Yeah, it definitely was a negative though and we actually I do recall we booked $2.5 million of weather insurance last year. So, the weather itself was even more negative in that.

Chris Ellinghaus

Right. I think Jim, you mentioned something about the news deposit, what was that number and were you saying that you’re booking something in the quarter getting quicker?

Jim Torgerson

That was the income we booked which is I think $1.1 million of income as a result of the deposits we made on the news project.

Chris Ellinghaus – Williams Capital

Okay.

Jim Torgerson

I think I’d tell our deposits are far in order of magnitude about $15 million.

Chris Ellinghaus – Williams Capital

Okay. And one last thing, can you just give us a little color on what you’re doing with O&M, it was down pretty significantly for the quarter did that have anything do with the storm restoration last year?

Jim Torgerson

Not, it wouldn’t have been so much in the third quarter, we just been managing it, obviously because of the warm weather we had for our gas business. We just have been managing the O&M very tightly, so that’s the answer right now.

Chris Ellinghaus – Williams Capital

Okay.

Jim Torgerson

We want to make sure, we’re trying to over mitigate as much of that short fall in margin as we can.

Chris Ellinghaus – Williams Capital

Okay, great. Thanks so much. I appreciate it.

Jim Torgerson

Okay.

Operator

Our next question comes from the line of Andrew Weisel. Your line is live.

Andrew Weisel – Macquarie Research

Hi, good morning guys. First, congratulations, it sounds like you’re making lot of progress with Sandy restorations, just if you could kind of continue the trends out from some of your earlier comments. Would that in anyway affect rate case plan for early next year in terms of the timing of the rate case filings or these accrued expenses would get folded into this rate case versus the next one?

Jim Torgerson

My expectation is that first off I doubt it will affect the timing maybe day is the not months or anything like that. And I fully expect that we would put in our request to recover over a period of time the costs of this storm. Combined with the last, I mean we’re talking a pretty big number now I mean we would what I think around $30 million that we had before this storm and we’re probably looking at another $25 million or so and that’s ballpark we’ll figure that out. But that’s going be added to that as a regulatory asset. So, we’re going be asking for recovery. Now, my guess is we’re probably going to have ask for recover over some extended period of time or it’s not going be the normal 3 to 5 years you might get because the size of it.

But maybe we can get do five or something, but we’ll just have to work through that. Our goal when we do the rate case and I think we’ve talked about this before since the CTA is expiring at the end of 2013, we want to be able to get our rate request in to increase rates and then including offsetting the storm cost. And our rate request and then offset that with the CTA that is expiring. So, customers really just see no change or hopefully even a slight decrease. So, we’re going to have to manage all these different components of it when we design what we are requesting. So, but I don’t see a change in the timing dramatically.

Andrew Weisel – Macquarie Research

Okay, thank you very much for that. Then again if you could continue on the O&M commentary, you mentioned short-term O&M cost controls do that basically imply kind of postponing things into next year or is it more I guess in other words, how do you think about the trajectory for maybe 2012 and the next couple of years for O&M expenses?

Jim Torgerson

We’re going to keep managing those expenses every year. I would say that we probably deferred some things. Some of its just things we didn’t do travel, training, entertainment all those things that you can just do away within a year some of them will come back next year. But again we’ll just keep managing. Some we did do some deferrals but not on maintenance that’s one area that we’ve refused to have any reductions. And I mean we need to do the maintenance and as a result all the maintenance we did do this year I think we’ve recovered from the storm rather rapidly I mean we’re down to where we have 20 to 100 customers out after one week. When we started with 0.25 million out, so I think we did – our peoples just did a great job, they did a phenomenal job of getting customers restored. So, I think the maintenance we do and we continued to do will be reflected in that. So, as far as O&M we’ll just keep managing it I don’t know – we don’t have a projection out there yet is to what’s going be, we usually don’t project that so but we’ll manage it.

Andrew Weisel – Macquarie Research

Okay, it sounds good. Then lastly on equity, previously you talked about not leading it through ‘13 maybe that could come sooner to fund renewables CapEx, it sounds like now it may come sooner also to support gas conversions, how should we sort of think of that in terms of when you’ll have a bit more clarity?

Jim Torgerson

The gas conversions probably I think will add an enormous amount of capital spending cost at least in 2013. We’re going to have to ramp up anyways and our target for 2013 is at that 30,000 to 35,000 range, so let me take 8,300 plus our 10,200 that’s 18,500, so 11,500 which isn’t a lot more. Now with the comprehensive energy strategy we expect that’s going to get finalized early in 2013, so then we are going to ramp up. I don’t know that we’re going to be doing too many more in ’13, but we’ll get our plan out and we are going to talk about it. So, I don’t see that doing it. The storm cost obviously we’ve put out a lot of dollars for that right now, so we are going to have to factor that in. And then the renewable energy project if that goes forward – if we decide to that that could accelerate – taking all those things in combination could accelerate our desire to issue equity earlier. If we do the renewable project that’s probably the biggest one so we’re factoring all those things and plus looking at what the equity markets are doing.

Rich Nicholas

Right. We could see an impact from the comprehensive energy strategy in years beyond ‘13.

Jim Torgerson

Yeah.

Rich Nicholas

If we have to build out name to reach new areas, reach (indiscernible) to those kinds of things. So, we are trying to assess all of that.

Andrew Weisel – Macquarie Research

Great. Thanks a lot for all the details.

Operator

Our next question comes from the line of David Paz. Your line is live.

David Paz

Good morning.

Jim Torgerson

Hi David.

David Paz

Just a quick question on the initial estimate of 35 million to 40 million, do you plan to essentially finance that with the short-term debt, that’s what we should look at it?

Jim Torgerson

Yes.

Rich Nicholas

Yes, yeah and it’s not all 100% incremental cash versus plan because obviously we aren’t doing some other things during the two weeks we are doing restoration.

David Paz

Right, okay and Jim I think you said that you will defer all the cost by additional threshold you have to meet before you can defer the remainder, is that right?

Jim Torgerson

Well, it has to, first of all, it has to be a major storm and this clearly was, so that’s the threshold. And the component that will be deferred is the O&M piece which we’re guessing is about 60% of the total of that 35 million to 40 million.

Rich Nicholas

The capital will go into rate base and would get built into the rate based development for the next rate case.

David Paz

Right, great. And I know it’s early, but just what’s your stance of how the state will use SB23 that was passed earlier this year in terms of evaluating the performance, any initial thoughts there?

Jim Torgerson

I think the performance of ourselves and I’ll say (indiscernible) as well has been very, very good. I mean if you at other states now grant at New Jersey and New York probably maybe more damaged than we did and obviously more customers out, but I think to say we had 99% of our customers restart within a week after that the storm of the century. I think it’s going to be looked at very favorably. We’re not hearing anything negatively from the governor he just said we’re getting those done and no negative comments and I’ve been on calls with him every day. So, I think it will be looked at positively or at least neutral let’s put it that way, let’s say neutral that we did a good job. We are not going to get any accolades, but we will. I don’t see too many negatives coming out. Will they review it out, probably I wouldn’t be surprised that PURA will have a review actually they probably have to as a result of the storm, the building came through that. It clearly was more than 10% of our customers for 48 hours, so they will review it but I see it is being positive for us at least, again we’ll say neutral I don’t see a negative. I think our peoples did a great job. I think we’re hearing that from some people too.

David Paz

Great. And just a separate question back on the gas business, I think you just saw this on your script, but the earned ROE is there on a weather-adjusted basis of about 200 to 250 bps below. Just again can you explain the factors and should we kind of see that going back towards the allowed ROEs, particularly the Connecticut facilities as we go through the rest of the year?

Jim Torgerson

Well, keep in mind, they are weather adjusted, but I think when you are looking at it 20% warmer than normal, the weather adjustment a little suspect. I think it’s kind of hard to adjust for that much deviation. Also that’s on the full rate base. You remember under our Section 338(h)(10) where we wrote up the assets to the full amount by eliminating the deferred taxes, that’s on that full rate base. So, my expectation is we are going to earn in the future on our – get our – earn at least on a lot of return on the gas operation. So, we’ll be managing that effectively as well. So…

David Paz

So just saw I guess Chris so, you effectively or you target to earn at least the ROE on the rate base numbers you guys project for us for ‘12, ‘15 going forward.

Jim Torgerson

Yeah, that’s our plan.

David Paz

Okay. And what’s the difference between I guess if you just look at the most recent rate base numbers you have for four rate base versus you adjusted, what’s the delta there?

Jim Torgerson

Well, on a ROE basis, one of the companies it’s about 100 basis points improvement on the excluding the 338(h)(10) Election and on the other company it’s a small change.

David Paz

Got it. Great, thank you so much guys.

Jim Torgerson

You’re welcome.

Operator

Our next question comes from the line of Dan Fidell. Your line is live.

Dan Fidell – Brean Murray Carret & Company

Good morning.

Jim Torgerson

Hi, Dan.

Dan Fidell – Brean Murray Carret & Company

Most of my questions were asked and answered. I guess the only thing remaining is may be if you can give us a little bit more color on the comprehensive energy program in terms of the potential upside for you guys I want to understand – I want to make sure that I understand correctly is this a potential doubling of the number of total gas customer conversations that you guys could potentially be doing it?

Jim Torgerson

Yeah, Dan. If we can ramp up to the extent that the plan would like to see which is, you are getting 50% of the state to have access to gas or at least using gas. Within seven years that would require a significant ramp up. We got to see if we can actually get to that level, we think we can, but it’s going to take us sometime. So, as you suggest it’s probably going to take a couple of years to get there. We are doing 10,200 right, this year, that’s our goal. Next year, we were thinking on the 11,000 range so to get that we are doing over 20,000 a year. It’s going to take a lot more resources, lot more trends of my guess it’s probably are going to take couple of years to ramp up to that. We’ll do it as quickly as we can. But then also you got determined what the demand is why the customers actually going to be converting we think so we think it’s a very compelling argument that tools that are going to be imply should drive more demand for customers to convert. So, we got to be prepared to ramp up to a level where we can satisfy that demand. So, it could very well be there. We see how things start going once the plan is finalizing. We get the tools in place to allow that to occur, but that’s going to be next year refer you and it’s finalized and tools are starting to be put in place.

Dan Fidell – Brean Murray Carret & Company

Nice, great. Thanks very much. We’ll look to circle with you guys here next week. Thanks.

Jim Torgerson

Great.

Operator

We have no further questions in queue at this time.

Jim Torgerson - President and Chief Executive Officer

Well, thank you. I appreciate everybody participating in the call today. We look forward to seeing you those of you who will be at the EEI Financial Conference starting Sunday. And so thanks again and we’ll see you soon. Bye.

Operator

That concludes today’s teleconference. You may now disconnect your lines.

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