UniSource Energy Corporation Earnings Call Nuggets: Power Grid Pricing, Earnings Walk
On Monday, UniSource Energy Corporation (NYSE:UNS) reported its first quarter earnings and discussed the following topics in its earnings conference call. Here’s what executives shared with investors and analysts.
Power Grid Pricing
Kevin Cole – Credit Suisse: I just want to follow-up on the wholesale comment. So you are lowering for your guidance to $6 million, correct?
Kevin P. Larson – SVP, CFO and Treasurer: Yes, we’re.
Kevin Cole – Credit Suisse: Have you done much work on the, I guess with the San Onofre outages in Southern California, what that might that do to the power grid pricing if we do have like a normal to hot summer this year?
Paul J. Bonavia – Chairman, President and CEO: No, obviously we continue to follow it and I mean it could affect pricing in PV. We’re close enough to the California market that it could have an effect on us and I just read their statement on outages and what they have said is, it could potentially last through the summer. They have had a pretty decent water year so far in the Pacific Northwest and in Northern California, so that will offset the effect of the nuclear outages somewhat early in the year, early in the summer, but we may see some effect from it later on. Right now, it’s not showing up in the forward price curves.
Kevin Cole – Credit Suisse: What was the outcome of the lost revenue awards for 2012 and give an estimate for ’13, and further rate case?
Paul J. Bonavia – Chairman, President and CEO: This is for the energy efficiency Kevin?
Kevin Cole – Credit Suisse: Yeah.
Paul J. Bonavia – Chairman, President and CEO: You know where we are with UNS Gas first of all. I mean the Commission has said form the beginning that gas was a less complex issue than electricity as far as getting the rate structure right for an energy efficiency program. We are real pleased with where the UNS Gas came out. We’ve got a lost fixed cost recovery mechanism. We actually have it in-place as the energy efficiency program begins to take effect. So, we think we are in good shape on that side. On the electric side, as you know, we filed and setup a separate docket for Tucson Electric Power. For energy efficiency, rate reform is the way I look at it. That docket is still pending, we are waiting for an administrative order from the – or a procedural order rather from the administrative law judge. We don’t know whether the issue will get taken up in the separate docket, or whether it will get folded into our rate case. In Arizona we like to make rates in rate cases as a general rule. So, if that’s what happens then we would be following in our TEP rate case along the path that APS has followed in their rate case to get this piece of it taken care of. Generally, we’re encouraged by the fact that the Commission is taking this very seriously. They are engaged. The other parties are engaged and we seem to have general agreement that the fixed cost do need to be recovered. We do need to reform rates. People have their views on the mechanism, but it’s mostly a question of whether you do it in a rate case or outside. As long as we get it right, we will be pleased.
Kevin Cole – Credit Suisse: I guess on LFCR in the UniSource Gas rate case, do you expect the TEP LFCR looks similar to that, and then if so, can you provide us a detailed walk-through, how the LFCR will actually work? Actually, what’s the true up process, will there be a statutory timeframe to get it resolved and then will it be a fully docketed rate case where interveners can slow the process?
Paul J. Bonavia – Chairman, President and CEO: Yeah, I mean, if it’s in our TEP rate case then that will not slow the process. In terms of the likely detail, a lot of that work is still in process, but why don’t I call on Phil Dion here, our Public Policy Vice President to address some of this specifics you raised.
Philip J. Dion – VP, Public Policy: As Paul mentioned, the difference between the gas and electric will drive some of the differences in the lost fixed cost revenue, but some of the similarities in doing that will be to address through specifics how we pay for energy efficiency and do so in a timely manner. The other part of your question I make, if you could repeat that second part of your question, so I can better focus on that?
Kevin Cole – Credit Suisse: Once it’s get implemented, I guess I am trying to think through the timeframe for the annual true-up like will there be a statutory timeframe where it will keep I guess dragging on for multiple periods, and I guess derisk the true-up and then will it be a fully docketed every single year through the true-up, so treat itself into many rate case?
Paul J. Bonavia – Chairman, President and CEO: Right, so the question and I appreciate it because I couldn’t recall that part about the statutory. So, not statutory, but what we are going to request through our LFCR and TEP, our dates in which the filling will occur, dates by which the staff will have to respond to that and then ultimately the date by which the commission will have to issue an order. Now whether the commission or not will bind itself to that, that sort of way out remains to be seen, but I will tell you that for TEP and PPFAC that has worked out very well as where we have multiple fillings in front of the PPFAC and essentially the PPFAC has gone into effect every April 1st, although the requirement on the commission isn’t probably as ironclad as you’d like. So, deadlines are being met and so we anticipate something similar on the LFCR or whatever the mechanism that we’re going to call in the TEP rate case.
Brian Russo – Ladenburg Thalmann: Just one quick question on the earnings walk, what contributed to the plus $0.05 in the other category?
Kevin P. Larson – SVP, CFO and Treasurer: Brian it was just some miscellaneous components, $0.01 here and there. We had some benefit in less taxes than we expected and there was a plus component in the dilution calculation as well (indiscernible).
Brian Russo – Ladenburg Thalmann: So the TEP interest expenses that net, so you’ve got higher long-term borrowing costs offset by lower lease expense?
Kevin P. Larson – SVP, CFO and Treasurer: Yes, that is in that component.
Brian Russo – Ladenburg Thalmann: Just going forward from a quarterly perspective, should we see that $0.05 negative year-over-year quarterly drive-ins for depreciation and amortization to continue?
Kevin P. Larson – SVP, CFO and Treasurer: Yes, you should. We gave those as part of our guidance that we gave at the end of February in terms of the higher depreciation we are expecting here in 2012.
Brian Russo – Ladenburg Thalmann: Correct me if I’m wrong, but I think the staff filed something last week that recommended the loss revenues related to energy efficiency get included in the upcoming rate case, is that accurate?
Paul J. Bonavia – Chairman, President and CEO: Yeah, that’s their preference and the ALJ hasn’t ruled on that yet. In the meantime we will continue to collect under the existing surcharge factor will scale our programs accordingly, more important for us to get this right than to do it specifically in a separate docket.
Brian Russo – Ladenburg Thalmann: Understood. It looks like you had a fairly significant decline in industrial sales, could you just remind us what that was at TEP and then there is a fairly significant drop off in the mining sale at UNS Electric?
Paul J. Bonavia – Chairman, President and CEO: At UNS Electric to take that one first, it’s one specific mine, the Mercator mine which installed natural gas-fired generating equipment, I must say they’ve certainly picked a favorable time for them to do it, gas prices being as cheap as they are and right now what we’re seeing at UNS Electric is a drop off in kilowatt hour sales because they’re self providing. We haven’t seen a big drop off in revenue yet because they have a demand ratchet, but we have obvious baked into the forecast the effect of that when it finally comes. At TEP, it’s not any one customer in particular, it’s just what you’d expect that the mines and other industrials are managing their peak demand to try and continue to hold down their demand ratchet. Same kind of behavior that customers do everywhere and that I’ve seen all over the country and that’s what we’re seeing here. Obviously, the effect of that takes you right into the rate design aspects of our rate case.
Brian Russo – Ladenburg Thalmann: Okay good and is this a trend that you sense all your mining customers are going to adopt, I mean should we be conscious of other mining customers installing their own generation on-site?
Paul J. Bonavia – Chairman, President and CEO: I think people will always be looking at that, but for them, a lot of them the big question is whether they could make more money devoting the same capital to increasing their output with no upgrades or other mining improvements, which is their core business. I don’t think that anybody’s got any plans to launch a new generation building program and we know they’re all looking at upgrades to their mills and crushers and other facilities.
Brian Russo – Ladenburg Thalmann: Lastly, you have a discussion in the 8-K on basic and diluted shares outstanding and it looks like total shares diluted at the end of March 2012 is only 38.3 million. I thought we were supposed to use 41.6 million for full year fully diluted 2012 shares outstanding?
Kevin P. Larson – SVP, CFO and Treasurer: Brian, this is Kevin. On a full-year basis that will be correct, but given the quarterly results were so well, the only factor in the diluted shares to the extent that it reduces your earnings and actually if we add in more shares that actually is accretive to our earnings. So basically, the accounting math that has to work into that calculation, but on a full-year basis when you see much larger results versus just (iceling) on a one quarter basis, you should include the full number that you are representing?