TECO Energy (TE) Earnings Report: Q Conference Call Transcript

Transcription

1 TECO Energy (TE) Earnings Report: Q Conference Transcript The following TECO Energy conference call took place on April 28, 2015, 05:00 PM ET. This is a transcript of that earnings call: Company Participants Mark Kane; TECO Energy; Director - IR Sandy ahan; TECO Energy; CFO John Ramil; TECO Energy; CEO Other Participants Paul Ridzon; KeyBanc Capital Markets; Analyst Paul Zimbardo; UBS; Analyst Ali Agha; SunTrust Robinson Humphrey; Analyst Jim von Riesemann; Mizuho Securities; Analyst Andy Levi; Avon Capital Advisors; Analyst MANAGEMENT DISCUSSIO N SECTIO N Good afternoon. My name is [Gina], and I will be your conference operator today. At this time I would like to welcome everyone to the TECO Energy's first quarter results and 2015 outlook conference call. (O perator Instructions) Thank you, Mr. Mark Kane Director Investor Relations, you may begin your conference. Mark Kane (Director - IR): Thank you, Gina. Good afternoon everyone and welcome to the TECO Energy first quarter results conference call. We delayed a couple of minutes because we know we had a number of people dialing in because we know we're overlapped slightly with Edison International. O ur earnings along with unaudited financial statements were released and filed with the SEC a few minutes ago after the market closed. This presentation is being Web cast and our earnings release, financial statements and slides for this presentation are available on our Web site at TECO Energy.com. The presentation will be available for replay through the Web site approximately two hours after the conclusion of our call today and will be available for 30 days. In the course of our remarks today, we will be making forward-looking statements about our expectations for 2015 results and the sale of TECO Coal. There are a number of factors that could cause actual results to differ materially from those that we'll discuss today. For more complete discussion of these factors, we refer you to the risk factor discussion in our annual report on Form 10-K for the period ended December 31, In the course of today's presentation we will be using non-gaap results. There is reconciliation between these non-gaap measures and the closest GAAP measure in the appendix to today's presentation TheStr eet, Inc. Al l R i ghts R eser ved Page 1 of 9

2 The host for our call today is Sandy ahan, TECO Energy's Chief Financial O fficer. Also with us today is John Ramil, TECO Energy's CEO to assist in answering your questions. Now I will turn it over to Sandy. Sandy ahan (CFO): Thank you, Mark. Good afternoon everyone and thank you for joining us so late in the day. As is our custom for the first quarter, we released earnings and are holding our call this afternoon so that we can share our current financial results at our annual shareholders meeting, which is tomorrow morning. Today I will cover our first quarter results and economic update and our 2015 guidance with a quarter of the year now behind us. The appendix to this presentation contains graphs on the Florida and New Mexico economies and reconciliations of non-gaap to GAAP measures. In the first quarter, non-gaap results from continuing operations were $64.5 million or $0.28 per share, compared with $0.23 last year. GAAP net income was $58 million which includes a loss in discontinued operations of $5.8 million reflecting the operating results at TECO Coal. Net income from continuing operations was $63.8 million in 2015 and includes $700,000 of charges consisting of certain costs related to the New Mexico Gas integration. Excluding these charges, non-gaap results from continuing operations were $0.28 per share. Results in the quarter reflect about $0.04 of accretion from the acquisition of New Mexico Gas. Tampa Electric reported higher net income in the first quarter. Customer growth was a strong 1.7% and we had the first quarter effect of the $7.5 million base revenue increase that became effective November 1st of last year under Tampa Electric's 2013 regulatory stipulation. The strong customer growth and better weather resulted in first quarter energy sales 1.4% higher than last year. AFUDC also increased this quarter with higher investment balances in the Polk conversion process and other qualified projects. First quarter weather was a mixed bag. February was cool and wet, which helped Peoples Gas, but was not cold enough to create heating demand in Tampa Electric's service area. And March had cooling degree days significantly above normal, which had air-conditioners running early in the season. So March energy sales were up, but not to the same magnitude as the cooling degree days were. With a lower humidity and cooler nights, the unusually high daytime temperatures we saw in March don't generate the same energy sales volumes as they would in the continuously hot and humid summer months, when air-conditioners just seem to run Peoples Gas experienced a strong customer growth of 2% in the first quarter, a continuation of the growth that we saw last year. Customer growth was strongest in the Southwest Florida market that had been most impacted in the economic downturn. As well as in the Northeast Florida and Jacksonville areas. We saw higher therm sales to all customer segments, residential, commercial and industrial helped by February's cold weather and continued economic growth. O n the expense side, O&M was higher than last year, but only because O&M in 2014 included the benefit of a significant cost recovery. I'm really not trying to rub it in about how pleasant our winter weather was here but it was. But record tourism has been good for the local economy. According to Visit Tampa Bay, which is a visitor information organization for this area, hotel bed tax collections in the Tampa area set records every month in the quarter. And for the six-month ended March 2015 were almost 15% higher than they were in And both Tampa Electric and Peoples Gas have experienced higher sales to commercial customers in the hotel and 2014 TheStr eet, Inc. Al l R i ghts R eser ved Page 2 of 9

3 restaurant categories as a result of the record tourism. First quarter results at New Mexico Gas benefited from customer growth and of course the winter heating season. Although it was much milder than normal and about in line with New Mexico Gas is significantly more seasonal than Peoples Gas and the first quarter is a very strong quarter for them. Which resulted in about $0.04 of accretion to our first quarter earnings. We've made great progress on our integration activities. In addition to moving forward on a variety of marketing and development initiatives, just a few of the other key areas include initiating the migration of New Mexico Gas onto our IT platform for HR, financial and procurement activities. Volume pricing with common suppliers, coordinating gas supply activities, and meter repair outsourcing. The other net segment is what we used refer to as Parent other. The net cost in this segment was higher in the first quarter compared to last year driven by interest expense at New Mexico Gas Intermediate or NMGI, the parent of New Mexico Gas Company. And the interest that we no longer allocated to TECO Coal following its classification as a discontinued operation. The Florida economy continues to be a good story. Statewide, unemployment at the end of the first quarter was 5.7% an improvement of 8/10 of a percent from one year ago. At the same time, the state has added more than 284,000 new jobs over the past year. With the largest number of new jobs occurring in trade transport and utilities, business services, and education and health services. The biggest percentage gain this quarter occurred in the construction sector. Which posted at almost 10% employment gain. Hillsborough County, Tampa Electric's primary service territory, appears to be back to the pattern that was normal before the economic downturn, with Tampa area unemployment being better than both the state and national levels. The unemployment rate in the local area is down to 5.1%, a full 1% below where it was a year ago. Over the past year, the Tampa St. Petersburg area added more than 34,000 jobs with the largest gains in leisure and hospitality, followed by education and health services. Supported by the oil and gas industries and the large presence of governmental facilities in the state, the unemployment rate in New Mexico never came close to the levels that we saw in Florida, where job losses in the construction and financial services sectors were severe due to the housing market crash. The largest gains in New Mexico's year-over-year job growth of 13,000 came in the education and health services and professional and business services categories. Taxable sales both in Florida and in Hillsborough County continue to grow with the strong pace we've seen pretty consistently over the last four years. Reflective of the strong tourist season on the graph in the appendix you can see very strong uptick in January of this year. O n the housing front, more than 5,000 new single-family building permits were issued in Tampa Electric's service territory over the past 12 months and existing homes continued to sell at a strong pace. The March Case-Shiller report shows that selling prices in the Tampa market increased 5.7% year-over-year. But that doesn't seem to have dampened sales and the housing inventory remains at a healthy level of four months. The New Mexico housing market saw 5,500 building permits issued statewide in 2014, which was up 8% increase over In Albuquerque, the state's largest metro area, existing home resales have trended up steadily although slowly since the downturn, and the housing inventory is now about five months. And you can see all of these trends on the graphs in the appendix TheStr eet, Inc. Al l R i ghts R eser ved Page 3 of 9

4 Last October we announced that we had entered into an agreement to sell TECO Coal to a central Appalachian coal producer which operations in the same general area as TECO Coal. Contingent on the purchaser obtaining financing. The purchaser has been actively working to obtain the financing, meeting with investors, and working with them on due diligence. We recently extended the closing date to June 5, 2015 to allow additional time for the lenders to complete their due diligence and for the parties to complete negotiations and documentation to close. The selling price, which was revised in February to reflect market conditions, remains unchanged. We would receive $80 million at closing and have the opportunity to receive an additional $60 million over the next five years if benchmark coal prices reach certain levels. Discontinued operations in the quarter reflect the operating results of TECO Coal net of a small tax benefit. Those operating results include the impact of harsh winter weather on mining operations and rail service, as well as effects related to preparing the Company for the sale such as severance and other employee termination costs. We are maintaining our previously provided guidance for 2015 earnings per share from continuing operations in a range of $1.08 to $1.11. Excluding non-gaap charges or gains. And while weather is always a variable that can affect utility performance, our operating companies have typically been successful responding to weather variation within a reasonably normal range. We expect Tampa Electric to earn in the upper half of its allowed RO E range. That is being driven by customer growth, higher AFUDC, and the additional $7.5 million of higher base rates that became effective November 1st last year. We expect higher depreciation expense from normal addition to facilities to reliably serve customers. We're projecting lower O&M expense in part as we realize some benefits from acquisition related synergies and also from lower employee related expenses, including pension and retiree medical costs changes to the retiree medical program and growth in plan assets are contributing to that lower expense. We expect Peoples Gas also to earn above its allowed midpoint return of 10 3/4%. Like Tampa Electric, we expect the customer growth trends we saw in the first quarter and last year to continue and expect continued interest in vehicle fleet conversion to compressed natural gas. Even with current gasoline prices, the economics are still favorable and there are incremental benefits that users like to promote. At the end of 2014, Peoples Gas had 31 CNG filling stations on its system and the annual volume was the equivalent of about 60,000 Florida residential customers. We recently signed a contract to supply O rlando as it converts its fleet of 300 buses to CNG over the next several years. And we will also be supplying the city O rlando with CNG for its 35 trucks solid waste disposal operations. And finally the Peoples Gas expense profile should be similar to what I described for Tampa Electric will represent our first full year of ownership of New Mexico Gas Company and we expect it to be accretive in that first full year. Taking into account the performance of the regulated company, NMGI interest, and the shares we issued. We expect customer growth trends to be similar to the first quarter with a trend up through the year with growth in therm sales largely in line with customer growth. We expect lower O&M from acquisition synergies and we also have the rate credits, which will be about $2.5 million in 2015 and have the effect of sharing some of the synergies with customers. Since we only had four months of ownership in New Mexico Gas in 2014, the slide shows some information on previous years to provide some full-year context TheStr eet, Inc. Al l R i ghts R eser ved Page 4 of 9

5 The Form-2s filed with the New Mexico Commission reported New Mexico Gas net income of $23.7 million in 2013, which was a strong weather year with heating degree days about 5% above normal. And $18 million in 2012, when degree days were well below normal and the higher base rates that were approved the Commission became effective after the January peak load had already occurred. The 2014 Form-2 expect be filed next week and it will contain mixed results reflecting eight months of ownership by Continental and four months of our ownership. The segment we refer to as other net includes, interest at the unregulated finance company; interest at NMGI; certain unallocated corporate level expenses and consolidated tax impacts; and smaller operating companies, the only one of note being SeaCoast Pipeline. We anticipate that the net cost in 2015 here will be slightly higher than last year because of a full year of interest expense at NMGI. Although we won't be allocating interest expense to TECO Coal as we have in the past, the negative income -- impact from that will be offset by the benefit of refinancing a 6 3/4% note maturity with $250 million of floating rate notes at a much lower interest cost. With New Mexico Gas in our business mix, our quarterly earnings pattern will look different going forward. This slide shows the normal seasonal earnings pattern we expect from New Mexico Gas, a fairly normal pattern for gas distribution system with significant residential heating load. It actually complements our existing earnings pattern nicely contributing to higher first and fourth quarter earnings. While Tampa Electric strongest quarters with summer air-conditioning load will overlay the weaker quarters in New Mexico. As a result, the first quarter will now be one of our higher earnings quarters and the second quarter our lowest. The third quarter with the summer air-conditioning load is still expected to be our highest earnings quarter and fourth quarter will now reflect the start of winter in New Mexico. Because completion of our Polk conversion project is an important component of our 2017 outlook, I want to provide a brief status and construction activities you see here. In short, the project is on schedule and on budget. This is proven conventional technology and the project scope is actually smaller than the Bayside conversion project that we successfully completed on time and on budget in the time frame. And I will close with our upcoming investor communications schedule. We expect to file our 10-K at the end of this week. We'll be busy in May starting with the Citi and Deutsche Bank conferences in the middle of the month followed by the AGA conference the following week. And in June we will make our annual trip to Toronto and will meet with Canadian investors at the UBS conference. And now I will turn it over to the operator to open the lines for your questions. Q UESTIO NS & ANSWERS (O perator Instructions) Paul Ridzon, KeyBanc. Paul we can barely hear you please try that again? Paul Ridz o n (Analyst - KeyBanc Capital Markets): 2014 TheStr eet, Inc. Al l R i ghts R eser ved Page 5 of 9

6 Sure I will speak up. Can you give an update on in the event that June comes around and Cambrian can't get financing, do you still have fallback investors willing to step in? Yes, Paul this is John Ramil. We are working with Cambrian and their lenders and getting them the information they need to close the transaction. But as we've said all along, we are talking to others as well in the event that does not happen. Paul Ridz o n (Analyst - KeyBanc Capital Markets): Thank you very much. Alex Meisel, UBS Paul Zimbardo (Analyst - UBS): Good afternoon it's actually Paul Z imbardo, how are you? A quick question on the timing of the synergies. I remember you said that the head count reduction to be spread over three years. Is that ratable or is that front-end load or backend loaded? Any color there? It's - Paul, it's probably more than anything is probably ratable. We've probably done somewhere in the order of one third of those so far. The next wave will come as we complete the systems installations that Sandy spoke about earlier. And that will take another 30% to 40% and we'll pick up the remainder over the final year. Paul Zimbardo (Analyst - UBS): O kay great. I think you mentioned previously that execution here would potentially be able to delay a rate case in both jurisdictions for Tampa Electric and Mexico. Is that still in the cards as a possibility if successful? We have agreements for both Tampa Electric and New Mexico to not seek new rates before So that is number one. And number two is everything we see Tampa Electric is earning strong RO E for the foreseeable future. Paul Zimbardo (Analyst - UBS): O kay great. Thank you very much. Ali Agha, SunTrust. Thank you, good afternoon. John can you remind us what you're thinking right now with regards to the dividend and potential growth of the dividend from current levels? 2014 TheStr eet, Inc. Al l R i ghts R eser ved Page 6 of 9

7 Ali we have just paid the dividend early in the year. So $0.02. And our thinking on the dividend is still that we have a strong projected earnings growth over the next several years. When we couple that with modest dividend growth like we did earlier this year will be able to continue to grow the dividend. And at the same time the math works out where we will be reducing our payout ratio so that by the time we are out of our NOL position we're in that 70% so payout ratio where we target to be or less. All right and remind me when are you out of that NOL the position? Right now it looks like O kay. And separately, John, you've also said in the past New Mexico Gas could be a template for other similar acquisitions for you particularly on the gas utility side. Is that still your thinking and how should we think about that as we benchmark you over the next 12 months or so? When you think about what we saw in New Mexico Gas, we will continue to look at the same things. And that is a transaction that is accretive to shareholders, an area that we had the opportunity to grow at better than the national average. A transaction that is a doable size but a meaningful size for us where we can participate in state energy policies and those types of things. And those of you the types of things will be looking for. And we do like the [LVC] business. And last question on the coal front assuming that you're not seeing -- this transaction doesn't close and you're not seeing value out there from third parties, is a complete set of that business a possibility? Paul Ridz o n (Analyst - KeyBanc Capital Markets): That would be well down our list of options. We have a contract that we're working hard to get to closing and we have other entities that we're speaking to. Understood. Thank you. Jim von Riesemann, Mizuho Securities. Jim vo n Rie se mann (Analyst - Mizuho Securities): Good afternoon. Two simple housekeeping questions. O ne is, can you remind us of what the key timeline dates are for the pending coal sale? And the second question is if we could just discuss the synergy -- what you expect qualitatively in 2015? I guess it's a combination of headcount and systems integration. Did I miss anything? 2014 TheStr eet, Inc. Al l R i ghts R eser ved Page 7 of 9

8 O n synergies, it is what you mentioned. Plus other things that we're doing in the procurement area, the risk management area, the HR benefits area, the pension management area, many things like that. O n your first question, the dates for closing on the coal transaction is in the first week of June. Jim vo n Rie se mann (Analyst - Mizuho Securities): O kay. Thank you that's all I have gentlemen. (O perator Instructions) Andy Levi, Avon Capital Advisors. Andy Le vi (Analyst - Avon Capital Advisors): Hi, good afternoon. Just a little clarification around the longer-term earnings growth rate. I believe on your fourth quarter call, you gave a growth rate through 2017 on Tampa Electric and also on the gas utilities as well. Could we review that again and then I have a follow-up to that question. O r to the answer I should say. We are still where we have been all along, Andy, and that's we're looking at rate base growth in the six rate base growth in the 6% to 7% range. When you look at all our utilities together. And it's our objective to take that growth to the bottom line in terms of EPS. Andy Le vi (Analyst - Avon Capital Advisors): As far as 2017 obviously you haven't given guidance. But would you say that growth in earnings per share is linear? O r do see a potential significant uptick for 2017 relative to 2016? Because of obviously Polk coming on? It's going to be ratable. But when you look at our regulatory agreement, which has $110 million coming in 2017 on the expected in-service date of the Polk expansion, that's going to be a strong year. Andy Le vi (Analyst - Avon Capital Advisors): So we should see a substantial pick up I guess? So it's not linear? The growth rate is something like 5% to 7%, but maybe it's more in the midpoint in 2016 and then significant step up in 2017 to get to the high end of that growth rate? Is that the way to think about it? If you think about the growth we're seeing in terms of customers and sales, and continued work on synergies and efficiencies, that's going to help grow each year. And then when you drop $110 million of new revenue in 2017, that will be very strong year. Mark Kane (Director - IR): Andy, this is Mark. I'll be happy to work with you on a model -- a detailed modeling question off-line TheStr eet, Inc. Al l R i ghts R eser ved Page 8 of 9

9 Andy Le vi (Analyst - Avon Capital Advisors): Fair enough. Thank you very much. There are no audio questions at this time. Sir, you may take the call back over Mark Kane (Director - IR): If there are no other question thank you all for joining us after 5 p.m., and we look forward to seeing you at the various investor meetings and AGA. This concludes our call. Thank you. This includes today's conference call. Thank you for your participation. All rights reserved (c) 2014 TheStreet, Inc. Please feel free to quote up to 200 words per transcript. Any quote should be accompanied by "Provided by TheStreet" and a link to the complete transcript and Any other use or method of distribution is strictly prohibited. THE INFORMATION CONTAINED IN EACH WRITTEN OR AUDIO TRANSCRIPT (the "TRANSCRIPT") IS A REPRO DUCTIO N O F A PARTICULAR CO MPANY'S CO NFERENCE CALL, CO NFERENCE PRESENTATIO N O R O THER AUDIO PRESENTATIO N. THE TRANSCRIPTS ARE PRO VIDED "AS IS" AND "AS AVAILABLE" AND THESTREET IS NOT RESPONSIBLE IN ANY WAY NOR DOES IT MAKE ANY REPRESENTATION OR WARRANTY REGARDING THE ACCURACY O R CO MPLETENESS O F THE TRANSCRIPTS AS PRO DUCED, NO R THE SUBSTANCE O F A PARTICULAR CO MPANY'S INFO RMATIO N. THE TRANSCRIPTS ARE PROVIDED FOR INFORMATIONAL PURPOSES ONLY. THESTREET IS NOT PROVIDING ANY INVESTMENT ADVICE O R ENDO RSING ANY PARTICULAR CO MPANY TheStr eet, Inc. Al l R i ghts R eser ved Page 9 of 9