TECO Energy, Inc. (NYSE: TE ) Q3 2015 Earnings Conference Call November 5, 2015 9:00 AM ET Executives Mark Kane – Director of Investor Relations Sandra Callahan – Senior Vice President, Finance & Accounting and Chief Financial Officer John Ramil – President and Chief Executive Officer Analysts John Barter – KeyBanc Capital Markets Operator Good morning. My name is Brandi, and I will be your conference operator today. At this time, I would like to welcome everyone to the TECO Energy’s Third Quarter Results and 2015 Outdoor Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Mr. Mark Kane, you may begin your conference. Mark Kane Thank you, Brandi. Good morning, everyone, and welcome to the TECO Energy third quarter 2015 results conference call. Our results from continuing operations along with utilities statistical pages and the earnings release were released earlier this morning. This presentation is being webcast and our earnings release statistical summaries and slides are available on our website at tecoenergy.com. The presentation will be available for replay through the website approximately two hours after the conclusion of our presentation 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 preliminary business drivers for 2016. There are a number of factors that could cause actual results to differ materially from those that we will discuss today. For a more complete discussion of these factors, we refer you to the risk factor discussion on our Annual Report on Form 10-K for the period ended December 31, 2014, and as updated in subsequent SEC filings. In the course of today’s presentation, we will be using non-GAAP results. There is a reconciliation between these non-GAAP measures and the closest GAAP measure in the appendix to today’s presentation. The host for our call today is Sandy Callahan, TECO Energy’s Chief Financial Officer. Also with us today is John Ramil, TECO Energy’s CEO. Now, I’ll turn it over to Sandy. Sandra Callahan Thank you, Mark. Good morning, and thank you for joining us today. This morning I’ll cover the status of the various filings that we have made with Emera for approval of the acquisition, provide a normal quarterly update, and confirm our 2015 outlook. The appendix to the presentation contains the usual graph from the Florida and New Mexico economies and reconciliations of non-GAAP results. Since we announced the signing of the agreement with Emera in early September, we have been busy working with Emera to make the required filings in a timely manner. We filed with the FERC on October 6, and asked for approval by March. We filed with the New Mexico Commission on October 19. The commission assigned a hearing examiner yesterday and we are waiting for a final order on that and for a schedule to be established in the proceedings. We filed an initial proxy with the SEC on October 6, and subsequently filed our final proxy on October 22, with a record date of October 21. We’ve scheduled the special shareholder meeting to vote on the approval of the merger for December 3. And over the next several weeks, we expect to make the Hart-Scott-Rodino filing and the filing with the Committee on Foreign Investment in the U.S. In the third quarter, non-GAAP results from continuing operations were $77.3 million or $0.33 per share, compared with $0.32 last year. Net income from continuing operations was $64.9 million in 2015, and that includes $12.4 million of charges, primarily associated with the pending acquisition by Emera. We closed the sale of TECO Coal this quarter, so I’m not including a report on discontinued operations in my quarterly update. There is a report on discontinued operations included in our earnings release. For the first nine months of the year, non-GAAP results from continuing operations were $203.6 million or $0.87 per share, compared with $0.84 last year. Net income from continuing operations was $190.2 million, compared with $179 million last year. In addition to the cost this year associated with the Emera transaction, both years include costs associated with the New Mexico Gas acquisition, $1.2 million integration costs in 2015, and $5.7 million of acquisition costs in 2014. Tampa Electric reported higher net income in the third quarter. Customer growth was a strong 1.8%, while energy sales were slightly lower than last year, reflecting degree days that were fairly normal, but rainfall in July and August that was 60% above normal. Base revenues in the quarter benefited from the increase that became effective November 1 of last year per the 2013 regulatory stipulation. And AFUDC increased this quarter with higher investment balances in the Polk conversion project and other qualified projects. Peoples Gas saw another quarter of 2% customer growth, again with the strongest numbers in the southwest and northeast areas of the state. Both customer and economic growth contributed to higher firm sales to retail customers, as well as transported for power generation customers and off-system sales were higher also, reflecting more coal-to-gas switching, as well as new generating facilities coming online. The local economy continues to do very well. And it was helped in the first nine months of the year by a very strong tourist industry that benefited from Chamber of Commerce weather, the hockey finals, and new international flights at Tampa International Airport. As an indicator of that, hotel bed pack collections in the Tampa area set records in the fiscal year ended September 20, 2015, with numbers 13% higher than 2014, which also was a record year. New Mexico Gas Company recorded a seasonal loss in the third quarter, always the weakest revenue quarter, because of the absence of heating load. Again this quarter, we saw the positive impact on O&Million, both from integration synergies being realized and an overall focus on cost reduction. Customer growth was 0.8% in the quarter. And to provide some perspective on that, in the first full quarter that we owned New Mexico Gas, which was the fourth quarter of last year, customer growth was half that at 0.4%. The other net segment formerly known as Parent/Other had a net cost in the third quarter that was lower compared to last year, due to some unfavorable tax items that were in 2014. Results also reflect interest expense at New Mexico Gas Intermediate, the parent of New Mexico Gas Company. And we only had one month of that interest in the 2014 period. And finally, the lower interest expense from a refinancing earlier this year more than offset the impact of no longer allocating interest expense to TECO Coal. The Florida economy continues to be a good story. Statewide unemployment at the end of the third quarter was 5.2%, down from 5.8% a year ago. And over that period, the state has added more than 236,000 new jobs. Hillsborough County, Tampa Electric’s primary service territory once again outpaced the state and U.S. levels with unemployment down to 4.8%, a full percent below where it was a year ago. Over the past year, the Tampa-St. Petersburg area added more than 28,000 jobs. A nice development in the local employment picture is an increase in the number of higher paying science, technology, engineering and math, or STEM jobs in the Tampa Bay area. According to a Bloomberg study, Tampa has more than 64,000 STEM jobs, representing more than 5% of the workforce. And that is the highest number and percentage among Florida’s major metropolitan areas. Growth in construction-related jobs in Tampa is being driven by record numbers and record values for building permits. In the 2015 fiscal year that just ended, the City of Tampa issued more than 23,000 building permits. Single family, multi-family and commercial, both new construction and modification, with a value of $2.4 billion. Those numbers represent a 20% increase from 2014, which also was a record year. Aggressive economic development efforts have brought almost 12,000 new jobs to the area over the past three years, including a number of higher paying professional and high-tech jobs. In New Mexico, the unemployment rate never came close to the levels we saw in Florida, because of the large presence of the oil and gas industry and governmental facilities in the state. Improvement though, has been slower than what we have experienced in Florida. And in September, the unemployment rate ticked up, primarily due to a slowdown in construction employment. Net job growth in New Mexico was 6,400 over the past year, a number impacted by some job losses in the oil and gas industry as a result of the recent movements in energy prices. The largest gains came in the education and health services, leisure and hospitality, and professional and business service categories. The Albuquerque area, which constitutes almost 50% of the state’s non-farm payroll, led the state in job creation, adding 6,600 jobs over the year and offsetting net job losses in some of the less populace areas. On the housing front, the good story in the Tampa area continues, with more than 5,800 new single-family building permits issued over the past 12 months, and existing homes continuing to sell at a strong pace. The October Case-Shiller report shows that selling prices in the Tampa market increased 6.1% year over year. With the strong pace of resale, the housing inventory remains at a healthy level of less than four months. In Albuquerque, New Mexico’s largest metro area, existing home resales have trended up steadily over the past year. There was a very strong acceleration in recent months, including a 33% year-over-year increase in June, and 26% in September. Selling prices have also trended up, and the inventory of homes available for resale is just under five months. You can see all of these trends on the graphs in the appendix. Our assumptions around guidance that we provided previously remain unchanged. 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. We still expect New Mexico Gas to be accretive to our full-year earnings, but it has been a challenge to overcome the very mild winter weather that started the year. We had great results on a cost side, and that is helping to offset the impact of disappointing first quarter weather. But we do need some normal cold winter weather to close out the year. Looking forward to next year, all indications are that we should continue to see strong customer growth at all three of the utilities. We expect the Florida utilities to earn towards the upper end of the respective return on equity ranges shown on the slide. Tampa Electric AFUDC earnings will grow next year, as the investment in the Polk conversion project reaches its peak. And in addition, a $5 million base revenue increase became effective November 1 of this year as a result of the 2013 settlement agreement. All of the utilities expect to record higher depreciation expense as a result of continued investment in equipment and facilities to serve customers. And of course, across the board, we will continue to be very focused on holding the line on cost. Our upcoming investor communication schedule includes being at EEI next week, where we will participate jointly with Emera in one-on-one meetings, and also we will be a part of Emera’s presentation at 10:30 on Tuesday morning. After the Emera acquisition announcement, we’ve been asked if we would continue to have quarterly conference calls. Because of the timing of EEI next week and our activities there, we decided to have a call this quarter. But future calls will be on an as-needed basis only. And now I’ll turn it over to the operator to open the line for your questions. Thank you. Question-and-Answer Session Operator [Operator Instructions] Your first question comes from the line of John Barter with KeyBanc. John Barter Hi, good morning, and thanks for taking my question. I guess looking in New Mexico, has the hearing examiner — do you have any expectation around when the hearing examiner will have a recommendation? Sandra Callahan The first thing that has to happen is, the hearing examiner will set a schedule for the proceeding. And we will then go through that process, and the hearing examiner recommendation really comes at the end of that process. Mark Kane One thing to remember, the New Mexico regulatory calendar, there is a PNM rate case, there is a Southwest Public Service rate case, and there is a whole PNM San Juan process also running concurrent with our process, so the commission has a very full calendar. John Barter All right, got it. And then I guess in Florida with the whole solar issue — is it Floridians for Solar Choice and then Consumers for Smart Solar — have either of those initiatives got the necessary amount of signatures to get on the 2016 ballot yet, or is that still progressing? John Ramil No. This a John Ramil. Neither one have gotten the signatures yet. They are both being acquired as we speak. John Barter Okay. Thank you. Operator [Operator Instructions] There are no further questions at this time. Mark Kane Okay. Brandi, thank you very much. Thank you all for joining us this morning. If there are no further questions, this concludes TECO Energy’s third quarter call. Thank you. Operator This concludes today’s conference call. You may now disconnect. 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. 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