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PNM Resources’ (PNM) CEO Patricia Collawn on Q1 2016 Results – Earnings Call Transcript

PNM Resources, Inc. (NYSE: PNM ) Q1 2016 Earnings Conference Call April 29, 2016 11:00 am ET Executives Jimmie Blotter – IR Patricia K. Collawn – Chairman, President and CEO Charles Eldred – EVP and CFO Analysts Ali Agha – SunTrust Robinson Humphrey Anthony Crowdell – Jefferies & Co. John Barta – KeyBanc Capital Markets Lasan Johong – Auvila Research Consulting Operator Good morning and welcome to the PNM Resources First Quarter Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Jimmie Blotter, Director of Investor Relations. Please go ahead. Jimmie Blotter Thank you, Rocco, and thank you everyone for joining us this morning for the PNM Resources First Quarter 2016 Earnings Conference Call. Please note that the presentation for this conference call and other supporting documents are available on our Web-site at pnmresources.com. Joining me today are PNM Resources’ Chairman, President and CEO, Pat Vincent-Collawn, and Chuck Eldred, our Executive Vice President and Chief Financial Officer, as well as several other members of our executive management team. Before I turn the call over to Pat, I need to remind you that some of the information provided this morning should be considered forward-looking statements, pursuant to the Private Securities Litigation Reform Act of 1995. We caution you that all of the forward looking statements are based upon current expectations and estimates and that PNM Resources assumes no obligation to update this information. For a detailed discussion of factors affecting PNM Resources’ results, please refer to our current and future annual reports on Form 10-K, quarterly reports on Form 10-Q, as well as reports on Form 8-K, filed with the SEC. And with that, Pat, I will turn the call over to you. Patricia K. Collawn Thank you, Jimmie. Good morning, everyone, and happy Arbor Day. Thank you all for joining us this morning as we report on the Company’s first quarter performance and take a quick look ahead. I’ll start on Slide 4 with a look at the numbers and our achievements from the first quarter. First quarter earnings were lower than last year but consistent with our expectations. Consolidated ongoing earnings were $0.13 per diluted share, compared with $0.21 per diluted share in the first quarter of 2015. In addition, today we are reaffirming our 2016 consolidated ongoing earnings guidance of $1.55 to $1.76 per diluted share. At PNM, concerted efforts to create a more favorable customer experience continue to pay off despite the challenges associated with high-profile filings such as our current rate proposal. J.D. Power reported the overall Customer Satisfaction Index reached a high point for PNM. I’m particularly proud of our customer service results which came in among the highest in our benchmark peer group. This achievement is the result of the effort and dedication of our employees from departments all across the Company who are focused on being responsive to and meeting the needs of our customers. Our Company has stayed the course, proactively communicating and sharing information that customers need the most. I’m proud of the work we have done. We know there is no silver bullet. It takes countless decisions being made every day on behalf of our customers. I’m confident our strategy is on target and we are doing the right things for our customers. I’m also pleased to say that TNMP has again been recognized by ENERGY STAR for the Company’s successful energy efficiency efforts. TNMP received the Partner of the Year Energy Efficiency Delivery Award for its high-performance Homes Program. The initiative promotes the construction of new ENERGY STAR certified homes and provides financial incentives and other assistance to homebuilders. This honor is on top of receiving ENERGY STAR’s Market Leader Award for the 11th consecutive year. So now let’s turn to Slide 5. Throughout the first quarter, we were preparing for the hearing of the New Mexico Public Regulation Commission regarding our $123 million general rate case. The hearing began on April 11 and after three full weeks of testimony it is scheduled to end today. As you all know, this filing is primarily driven by capital, the more than $650 million of investments we have made since our last rate increase to improve the electric service and better serve our customers. Our top priority is to achieve timely cost recovery to support strong credit metrics. I’m not going to speculate about the outcome. However, thanks to the knowledge and endless hours of preparation of our employees and our witnesses, we are confident that we presented a strong case. At this point, we anticipate a recommended decision by the Hearing Examiner in June with a final ruling by the Commission in July. We expect to implement new rates August 1. Part of our replacement power plant for BART includes adding a natural gas peaker on the San Juan site. On April 26, PNM filed an application for a CCN for an 87 million 80 MW facility. We hope to receive a procedural schedule in the next few weeks with the goal to have the facility online by June 2018 before the summer peak season. I’m also very pleased to say that on March 17, FERC issued an order approving the settlement in the PNM formula transmission rate case, which includes a 10% return on equity. On April 15, the Company made the final compliance filing for the rates that have already been in place. Going forward, rates will be updated annually on June 1, including this year. Over in Texas, on March 23, the PUCT approved TNMP’s most recent TCOS filing and new rates went into effect totaling $4.3 million annually. We plan to make our next TCOS filing in July with rates expected to go into effect in September. Now I’ll turn it over to our Chief Financial Officer, Chuck Eldred, for a more detailed look at the numbers. Charles Eldred Thank you, Pat, and good morning, everyone. I’d also like to say happy admin week for all the administrative assistance that help all of us in our daily work. So beginning on Slide 7, as Pat said earlier, we are reiterating our 2016 guidance of $1.55 to $1.76. As you know, this is a broader range than we typically provide because of our pending rate case at PNM. I want to remind you of the quarterly distribution of earnings that we provided to you when we issued the 2016 guidance. We have provided that information here for your reference. Because of the third quarter rate case implementation, we expect the second half of the year to have a higher percentage of our earnings than we normally see. With Q1 being 8% to 9% of our earnings for the year, our first quarter results of $0.13 is inside the guidance range for the quarter. Turning to Slide 8, let’s review the PNM’s load details. Load at PNM was down 1% compared to the first quarter of 2015. Residential was down but growth in the small commercial sector helps to offset that decrease. Industrial, although only a small portion of overall load, was down 7.2% between the periods. In this group, Intel is a large customer and they continued to show a decline on a year-over-year basis. As many of you are aware, they announced a major restructuring in their business during the first quarter earnings call. We are carefully monitoring the situation. We have received no communication from Intel that they plan to close this site. Our 2016 guidance range for the load of flat to down 2% considers sensitivities for changes to Intel’s load. We continue to see overall improved economic development efforts locally. This resulted in the Albuquerque Metro area having the best month for job creation in March on a year-over-year basis since May of 2007 at 1.6%. The bulk of that job growth was in private sector jobs. We anticipate that the increased focus on growing the private sector jobs will result in a more diverse and resilient economic base. We see some of the results of these efforts in our continued customer growth which is above forecast at 0.7%. Now moving to TNMP’s load on Slide 9, volumetric load for the first quarter of 2016 was down 1.6% compared to the first quarter of last year, but demand-based load was up 1.5% for the same period. Most of TNMP’s commercial and industrial customers are billed based on their peak demand, which is not reflected in the volumetric based load figures. This offsetting impact causes load in total to have a slightly positive financial impact for the quarter of about $0.005. Both volumetric and demand-based load were used to create a load forecast. We continue to expect load for the year to be at an increase of 2% to 3% compared to 2015. As you read in many publications, this has been a warmer and drier winter than normal in Texas. As a result, the quarter to quarter load comparison has likely been skewed by this, particularly in the residential customers as this group is more sensitive to weather. This has been more than an offset in our results by the demand-based customers which are much less sensitive to weather changes. Turning to Texas economy, as we talked about on our last earnings call, it continues to be strong due to its diversified base. While Houston is feeling the impact of the low oil and natural gas prices, the state overall is diversified and this helps to compensate for the weakness in the energy sector. The Permian Basin which TNMP serves a portion of continues to show the most strength in the oil market. We saw that Chevron made an announcement this week that it plans to invest more heavily in this area even though they’ll be cutting costs in other areas. Several other economic factors in the state also continue to show strength, including increases in building permits and existing home sales to name a couple. We see the impact of the strong economy by way of continued higher than forecasted customer growth at 1.6% for the first quarter 2016. Now Slide 10, let’s review the drivers for PNM. We purchased 64 MW of Palo Verde Unit 2 leases in January of this year. The savings from the lease purchase offset by the additional depreciation results in a $0.03 improvement to earnings in the quarter. Outage costs were $0.02 higher. While San Juan had outages in the first quarter 2015 for the SNCR installation, which were not experienced in the first quarter this year, Four Corners had an extensive outage this year. In addition to the planned outages at Four Corners, San Juan Unit 3 had a 12 day unplanned outage. We had higher depreciation and property tax expense of $0.02 due to increased investments. Lower market prices for Palo Verde Unit 3 sales caused results to be $0.02 lower this quarter and interest expense also reduced earnings by $0.02 because of the additional long-term debt that PNM entered into in August of 2015. Load, AFUDC and Navopache FERC Generation contract, each caused results to be $0.01 lower than Q1 of 2015. We also recorded $0.01 in Q1 of 2015 for the cumulative reimbursement of prior year’s Palo Verde spent fuel storage cost that did not repeat in 2016. Now moving to Slide 11, we’ll review TNMP and Corporate drivers. At TNMP, rate relief in the TCOS filings was up $0.01 compared to the first quarter of 2015. Weather was down $0.01 and depreciation and property tax expenses were also higher by $0.01. At Corporate, we were up $0.02 compared to the first quarter of 2015. This change was driven by less interest expense because of the repayment of the 9.25% debt in May of last year and the incremental interest associated with a financing agreement with Westmoreland, offset by additional interest expense from higher short-term debt balances. On a side note, since Westmoreland took over the San Juan Mine on February 1, we have been very pleased with the operational performance of the mine. Thing are running smoothly and the transition has gone very well. Westmoreland taking over the mine has proven to be a great benefit to our customers as well and the associated cost savings helped to offset the rate request that we have before the Commission now. In conclusion, I want to reiterate that we are pleased with the progress so far in the rate case. As Pat indicated, we believe that we have presented a strong case during the hearings. We expect to receive the Hearing Examiner’s recommended decision in June and ultimately to implement new rates at PNM on August 1. As a result, we plan to update our current year guidance to potential earnings power schedules and capital spending forecast during our second quarter earnings call. This concludes my comments and I’ll turn it back over to Pat. Patricia K. Collawn Thanks, Chuck. We are pleased to say that the Company continues to perform well. Customer satisfaction is up. We are confident we presented a strong case to support our rate increase. We continue to execute our plan and manage our businesses effectively and responsibly, and at all times the focus is on our efforts to serve our customers with safe, reliable and environmentally sensitive energy at low prices. I’m also pleased to say that as Chairman of the New Mexico Economic Development Partnership, I’m in a position to see the fruits of all of the policy changes that Governor has made to make New Mexico a more business friendly state. Our pipeline is as robust as I’ve seen it in many years. Thank you for joining us today. Operator, let’s now open it up for questions. Question-and-Answer Session Operator [Operator Instructions] Our first question comes from Ali Agha of SunTrust. Please go ahead. Ali Agha As per the call, Chuck, you mentioned that in your guidance you’ve assumed that new rates go into effect August 1 of this year. Can you remind me, is there some flexibility for the Commission to delay that or push it back, and if so, remind me what the sensitivity is for every month in delay? Charles Eldred I don’t think we have provided that in the guidance of the sensitivity. While Jimmie is taking a look to see what the numbers are, legally they could delay the rate case, the Hearing Examiner or the Commission, up to October 1 of this year. But we’ve seen that the Hearing Examiner, although the one month of lag that you are aware of, has been very disciplined towards trying to stay to this current schedule. So if you looked at the sensitivities, the implementation on August 1, we dropped the earnings about $0.08, and then September 1 it drops down about $0.07, and then $0.06 in October of one implementation of those rates. So you can see that. Jimmie can lead you to the guidance information to give you more detail if you need to reference some of the previous slides that we’ve prepared on that. Ali Agha Right. And then secondly, so if this comes into effect August 1, I recall, I mean if the timeline is not that the San Juan retrofit rate increase should go into effect beginning in 2018, historically has there been any precedents when you’ve had two rate increases in New Mexico so close to each other and is that a concern from a regulatory approval process with two back-to-back rate increases? Patricia K. Collawn Ali, everybody understands that the next one on the primary drivers of that are the San Juan to BART settlement. And so that will have some normal capital spending into it. But I think everybody understands that these are special circumstances with the BART settlement here that state settle for regional haze and will help us with the clean power plant. So long answer, I don’t think it has any worries for us on that. Ali Agha Okay. And then last question, on the load trends, first in New Mexico, any sort of light at the end of the tunnel where we may reach an inflection point and start to see at least load flattening? There’s constant negative trends for the last several quarters, so let me start with that. Are you seeing anything that tells you we may have bottomed out here? Patricia K. Collawn I think I’ll kind of give you a high-level answer, Ali, and then I’ll let Chuck fill in. I think what we’re seeing is the economy is starting to turn around. Chuck mentioned we’ve seen the best job growth since 2007. And I think that you’re seeing most utilities are having negative usage per customer growth on the residential side. They just haven’t seen the customer growth. The job growth here is going to help us bring back the customer growth on that. And as I mentioned, our economic development pipeline looks very strong right now. So we are starting to see some of those turn around. Charles Eldred I mean the trends are beginning to reflect more of a flattening indication on load because what we are benefiting from in the small commercial and some of the growth is being offset by still some of the economic hardship in the area of Albuquerque. But again, we are beginning to see some flattening, hopefully not much of a decrease, but certainly even the sensitivities I mentioned with Intel are still within that zero to negative 2% guidance range that we gave you. Ali Agha Right. And Texas, I think it’s the first time, at least in the recent past, you’ve broken out this demand side and volumetric load trends, but you put them together and you come up to a negative number. I know you mentioned that weather normalization may have been a challenge here, but anything else that concerns you on Texas? I mean we haven’t seen a negative load number there forever I think as far as I can go. Charles Eldred A lot of it, and we mentioned a little bit about the weather being unusual that first quarter that we’re a little sensitive on the weather normalization in that calculation because it was a drier period in Texas, it created a little different kind of adjustment as you think about weather modernization, but we added the demand-based load because we consider that. We could see that with the AMI implementation, we’re getting more readings and shifting customers more to that demand based to be more reflective of the type of customers that they are and providing that tariff. So as we go forward, we’ll continue to incorporate the demand-based load and be more reflective of the expectations of the entire load projections with that consideration. But as I mentioned, the end result even this last quarter was about $0.5 million, so $500,000 benefit on an earnings basis as a result of the load in first quarter. Patricia K. Collawn Ali, I think a key number to look at on that Slide 9 is, our customer growth forecast is 1% and we are at 1.6%. So our territories in Texas are still growing. We don’t see anything and a quarter does not a trend make, just as we kind of good quarter we don’t call it an upswing on the low growth for just one quarter, especially when it was a leap year normalized and a weather normalized and heaven only knows what else in there, it kind of tops out. We’re not changing our forecast on Texas. Ali Agha Understood. Thank you. Operator Our next question comes from Ben [Budis] [ph] of Jefferies. Please go ahead. Anthony Crowdell It’s Anthony Crowdell. I don’t know how it came in as Ben, but that’s okay. I’ve been called worse. On Slide 11 you have $0.01 benefit for the Westmoreland financing agreement for the quarter. Is that something we can annualize and make it $0.04 to $0.05? And when I compare it to the Slide 14, potential earnings power, shouldn’t that offset some of the Corporate and Other because that looks like it has not changed, it’s still at a $0.06 to $0.04 loss? Charles Eldred I think I’ve talked about it even on the last call. The Westmoreland would be about $0.04 benefit to eastern Corporate and Other. So that’s a good indication of what you can expect going forward. We haven’t updated potential earnings power slide to reflect any incorporation of the Westmoreland loan. So we are really intending to wait to the rate case that we have all the information necessary to update the slide. In that point in time, we’ll include the Westmoreland loan. So we just don’t want to put pieces of information out there. We really want to give you more of a comprehensive view based on the major driver, which is the rate case at PNM, to give you a better reflection of how we see all these additional earnings and the impacts of the rate case to be incorporated into the earnings power slide. Anthony Crowdell Great. Thank you so much. Operator Our next question comes from John Barta of KeyBanc. Please go ahead. John Barta So I guess if we go back maybe a month ago, it seemed like ROE, PV2 and the Balanced Draft Technology were probably the most contentious pieces of that rate case. Just after three weeks of hearings, do you have a better feel on any of those items just from talking with the staff, et cetera? Charles Eldred John, we really don’t want to bring any color to the results of the discussions going on, but I think you’ve certainly pointed out some of the areas the intervenors have questioned, but we look at this as a capital rate case. It’s being litigated with the idea that we think we can build the right record on our capital investments as being prudent and reasonable for the utility to maintain the reliability of the business itself. So there is a lot of different factors, so ROE, depreciation, some of the capital items that you’ve mentioned that intervenors had questioned, but again we felt like our testimony and the record that we’ve built was very solid and well justified the Company’s position to recover those costs. John Barta Okay. And then just in Texas on the load growth, so it sounds like the volumetric percentage is going to transition more to the demand-based load over the coming years. Charles Eldred You see the split-out. We really have taken that in consideration because it’s becoming more of a driver as the automated meter reading gives us a more accurate indication of the type of customers, commercial, industrial and the type of demand that they have on the system. It’s more reflective of that now going forward. So you’ll see us evolve into adding that additional component to our load forecast. Again, no concerns about TNMP’s continued guidance in growth of 2% to 3%. Just want to give you another variable how we’re driving towards those numbers. Patricia K. Collawn It’s easier for us to split it out now that we have the data from the automatic meter reading because that’s how it’s billed, and so it just provides another level of transparency. John Barta Okay, thanks. And then have you disclosed how many megawatts in total is? Patricia K. Collawn No. John Barta All right, thank you. Operator Our next question comes from Lasan Johong of Auvila Research Consultants. Please go ahead. Lasan Johong Question on kind of looking forward, in your presentations you put out 2017, 2018, 2019 outlook, have you taken into consideration the changes in Texas potential ORDC regulations, shutting down of the coal plants, build up of solar, more wind power probably as well, and how does that affect – I mean has that all been taken into consideration in your kind of outlook, how are you incorporating that into your outlook? Patricia K. Collawn The nice thing for us now is that since we’re a T&D utility, that really only impact it would have is if energy prices get extremely high over there, I think you would see customers starting to conserve, so our volumetric load might fall. Customers in Texas have been pretty inelastic to price sensitivity there. Their rates for example in Texas are higher than in New Mexico but their usage is a lot more. On the solar side, we’re seeing some solar penetration in Texas but not a lot. Texas does not have net energy metering, and so the solar potential or the solar penetration in Texas has been low, we’re seeing more of it, but so far all of the growth we have seen has been able to overcome that. So the trends we pay more attention to in Texas are sort of the overall economy and particularly our service territory since we’re sort of around Dallas. We’re south and east of Houston in a petrochemical manufacturing area, refining area, and then more over kind of in West Texas. So the thing that drives our numbers is more those general economic positions. And in the outlook we’ve put forward in terms of earnings potential, we haven’t really seen anything that drives us to believe we’ll see a lot of macro changes in the economy. Lasan Johong And based on [indiscernible], any kind of mass migration in customer usage or patterns of switching for example, as prices go up and down, do you think there’s vulnerability with bigger players, such as yourselves relatively speaking, versus smaller players who are more nimble and take more market risk shall we say, you don’t see shifts in customer or switching? Patricia K. Collawn No, we don’t really see that impacting our piece of the business right now. I think obviously the Texas market is in a little bit of flux right now in terms of where they are going to go with their regional haze plans and their clean power plants in terms of where the generation mix is, but we don’t see anything to incorporate into our numbers. Lasan Johong And lastly, Texas has experienced some really bad weather as of late, tornadoes, hurricanes, hailstorms and such. Any impact? Patricia K. Collawn No. The really bad weather that you saw kind of missed our service territories. It was more in the Houston Metro which is center point. So we’ve had some outages and some impacts but nothing major for us. Lasan Johong Great, that’s fantastic. Thank you very much for your time. Operator This concludes our question-and-answer session. I’d like to turn the conference back over to Pat Vincent-Collawn for any closing remarks. Patricia K. Collawn Thank you. And again, thank you all for joining us today. We hope you have a wonderful rest of your day and a wonderful spring and we look forward to talking to you again on the second quarter call. Have a great day. Operator And thank you. Today’s conference has now concluded and we thank you all for attending today’s presentation. You may now disconnect your lines and have a wonderful day. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. 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What Is Your Sell Criteria?

Every stock market cycle has its darlings – the stocks investors believe can do no wrong. I remember 1999 all too well. Microsoft (NASDAQ: MSFT ) and Dell (private since 2013) were two of the stocks that investors fell in love with during that era. However, those investors soon learned that loving a stock could have nasty consequences, because it is difficult to part with something you love. These stocks, and many others, were devastated in the ensuing months and years. The “unattached” owners of these stocks disposed of their holdings as prices dropped or earnings failed to materialize. These disciplined investors had pre-defined criteria to alert them it was time to sell. The stock lovers lacked such discipline and went through various stages of denial, justification, rationalization and other emotions as they watched their beloved stocks sink lower and lower. In the current market cycle, it’s hard to imagine a stock that is more loved than Apple (NASDAQ: AAPL ). Back in 1999, it was despised, and many analysts were not convinced the company would even survive, let alone flourish. Fast forward to 2012, it became the most valuable company in history in terms of market capitalization, surpassing Microsoft’s December 30, 1999, valuation. Yesterday, it was still the largest component of the S&P 500 Index, accounting for 3.17% of the Index. However, Apple’s stock price peaked 14 months ago at $133. On Tuesday, it closed below $105, and yesterday it closed below $98. That is more than 26% drop in 14 months. Apple released its quarterly earnings report, which is the reason for the new downdraft. Earnings fell short of expectations by coming in at $1.90 per share, which was 10 cents below expectations and 18.5% below a year ago. Revenue fell by 13%, marking its first revenue decline in 13 years, and the first ever since the stock achieved “darling” status. Apple also reported that iPhone sales fell for the first time in history. Now might be a good time to ask yourself if you are an investor or lover of Apple stock. It is already in a bear market, so if you haven’t sold it yet, then when will you sell it? You didn’t sell when it dropped 15%, and you didn’t sell when it dropped 25%. What will it take? A 50% drop? A 70% drop? Two quarters of declining revenue? Many people are selling their Apple shares, perhaps because it posted its first revenue decline in 13 years or perhaps because its price dropped below $100. Then again, an equal number of shares are being bought. It’s a high volume day for Apple. I’m not predicting further demise for Apple stock, as this could turn out to be a great buying opportunity. What I’m suggesting is that you objectively consider your criteria for selling Apple or any other stock. Be sure to have an exit plan, preferably before you buy. As expected, the Federal Reserve took no action at the conclusion of its FOMC meeting yesterday. Analysts are parsing the contents of the press release, so you can expect to see some forecast revisions for when the Fed will make its next move. Sectors: Signs of a significant sector rotation are visible again this week. The smokestack group of sectors, discussed here a week ago, are firmly in the leadership role again today. Energy and Materials swapped the top two positions, with Energy now completing its climb from last to first in the span of three weeks. Materials, now in second, has been no lower than fourth place for eight consecutive weeks. The Industrials sector rounds out the trio by maintaining its third-place position. Financials was a big upside mover, jumping from eighth to fourth. Healthcare also climbed four spots higher to grab sixth. These ascents forced the higher yielding sectors lower with Telecom sliding one place to fifth, Real Estate dropping to eighth, and Utilities plunging to tenth. Technology lost momentum, but it was able to hang on to its ninth-place ranking. Consumer Staples is now the weakest sector and sits on the bottom for a second week. Styles: Small-Cap Value assumed the lead, ending Mid-Cap Value’s seven-week stint at the top. Small-Cap Value has been the most volatile of the style categories, bouncing between second and sixth during these past seven weeks. Mid-Cap Value did not fall far, easing just one spot lower to second, while remaining prepared to resume the lead if Small-Cap Value’s volatility returns. Micro-Cap was the big upside mover, climbing three spots to third after being in last place just two weeks ago. Mid-Cap Blend fell four places to seventh, becoming the largest casualty of the relative strength rankings. However, it only gave up two momentum points in the process, while Mega-Cap lost six points and held its decline to a single spot. Large-Cap Growth is on the bottom for a second week. Global: The upper tier of the global rankings remains very steady with Latin America and Canada supplying the one-two punch for nine consecutive weeks. Pacific ex-Japan and Emerging Markets have not been as consistent as the top two, but the third and fourth place duo have held those spots the majority of these nine weeks. The top three are all resource-rich regions, and they are benefiting from strength in the Materials and Energy sectors. Fifth through tenth-place categories are compressed, allowing Japan to jump four places higher without much effort. A week ago, China was above this grouping, but it plunged six places lower and now sits at the bottom. Disclosure: Author has no positions in any of the securities mentioned and no positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) is received from, or on behalf of, any of the companies or ETF sponsors mentioned. – See more at: http://investwithanedge.com/what-is-your-sell-criteria#sthash.AfaA2gBD.dpuf

PPL (PPL) William H. Spence on Q1 2016 Results – Earnings Call Transcript

PPL Corp. (NYSE: PPL ) Q1 2016 Earnings Call April 28, 2016 8:30 am ET Executives Joseph P. Bergstein – Vice President-Investor Relations and Treasurer William H. Spence – Chairman, President & Chief Executive Officer Robert A. Symons – Chief Executive Officer, Western Power Distribution, PPL Corp. Vincent Sorgi – Chief Financial Officer & Senior Vice President Gregory N. Dudkin – President & Director, PPL Electric Utilities Corp. Analysts Paul A. Zimbardo – UBS Securities LLC Operator Good morning, and welcome to the PPL Corporation First Quarter 2016 Earnings Conference Call. All participants will be in listen-only mode. After this presentation there will be an opportunity to ask questions. Please note, this – that it’s (00:38) being recorded. I would now like to turn the conference over to Joe Bergstein, Vice President of Investor Relations. Please go ahead. Joseph P. Bergstein – Vice President-Investor Relations and Treasurer Thank you. Good morning, everyone, and thank you for joining the PPL conference call on first quarter results and our general business outlook. We’re providing slides of this presentation on our website at www.pplweb.com. Any statements made in this presentation about future operating results or other future events are forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from such forward-looking statements. A discussion of factors that could cause actual results or events to differ is contained in the Appendix to this presentation and in the company’s SEC filings. We will refer to earnings from ongoing operations or ongoing earnings, a non-GAAP measure, on this call. For reconciliations to the GAAP measure, you should refer to the press release, which has been posted on our website and has been filed with the SEC. At this time I’d to turn the call over to Bill Spence, PPL Chairman, President and CEO. William H. Spence – Chairman, President & Chief Executive Officer Thank you, Joe. Good morning, everyone. We’re pleased that you’ve joined us this morning. With me on the call today are Vince Sorgi, PPL’s Chief Financial Officer; and the Presidents of our U.S. and U.K. utility businesses. Moving to slide three, our agenda this morning starts with a discussion of our 2016 ongoing earnings forecast, an overview of our first quarter 2016 earnings results, and an operational overview. Following my remarks, Robert Symons, Chief Executive of our Western Power Distribution subsidiary, will provide an update on expected U.K. incentive revenues for 2017 and 2018, which we are increasing today. And Robert will also provide a general update on the completion of our first year under RIIO-ED1. Vince will then review our segment financials and provide a more detailed financial overview. Let’s move to slide four for a discussion of our 2016 earnings forecast. As we note on this slide, we’re reaffirming our 2016 forecast of $2.25 to $2.45 per share. The midpoint of this range, $2.35 per share, represents growth of 6.3% compared to 2015 earnings from ongoing operations. Our first quarter results were in line with our expectations, and we remain on track to deliver on this forecast despite the warmer-than-normal weather we experienced across our service territories to start this year. The significant investments we continue to make to build tomorrow’s energy infrastructure, coupled with our ability to begin recovering more than 80% of that investment in near real time, will drive our long-term sustainable growth. We expect to achieve compound annual EPS growth through 2018 of 5% to 6% off of our adjusted 2014 earnings from ongoing operations of $2.03 per share. We continue to expect strong EPS growth of 11% to 13% through 2018 from our U.S. operations, with 1% to 3% growth expected in the U.K. Turning to slide five. Today we announced first quarter 2016 reported earnings of $0.71 per share, compared with $0.96 per share from our first quarter 2015 results. Adjusting for special items, first quarter 2016 earnings from ongoing operations were $0.67 per share, compared with $0.77 per share a year ago. As expected, we saw a decline in earnings from ongoing operations in the first quarter as a result of lower earnings in the U.K. This stemmed from lower revenues due to the new price control period that began on April 1 of 2015. Higher domestic margins from rate increases at our Kentucky and Pennsylvania businesses were partially offset by lower sales volumes due to milder winter weather. Vince will go into greater detail on first quarter results a little later in the call, including a discussion of the timing of our U.K. earnings. As Vince will discuss, we did expect variability between quarters, with increased earnings weighted towards the back half of this year. Now let’s move to slide six for an update on our utility operations. This month, PPL Electric Utilities energized its Northeast Pocono transmission line a year ahead of schedule. The project includes 60 miles of new transmission lines, three new substations and additional improvements focused on making the grid more reliable, resilient and secure. We’re confident this line will deliver significant benefits for our customers. Completing major transmission project like this one, or like the Susquehanna-Roseland line we completed last spring, takes expertise in construction and project management. It also requires working closely with the public and coordinating with various permitting agencies. We’ve shown our ability to excel in these areas and deliver successful outcomes for our customers and our share owners. Turning to Kentucky, Louisville Gas and Electric and Kentucky Utilities continue to invest in environmental upgrades at existing generation facilities, while strengthening the diversity of our generation fleet. In late January, we filed environmental compliance and cost recovery plans with the Kentucky Public Service Commission, seeking approval and environmental cost recovery for $1 billion in upcoming environmental improvement projects. These projects are largely aimed at ensuring compliance with the EPA’s new Coal Combustion Residuals rule, which took effect the last year. The projects will involve capping and closing remaining ash ponds at our coal-fired power plants, building process water facilities and completing the second phase of a dry storage landfill project at our E.W. Brown generating station. The application review process before the Kentucky Public Service Commission is proceeding as we would expect. We expect to begin investments in these environmental improvements in the second half of 2016, and those will continue through 2023. In addition, we’re on track to complete the final baghouse installation at our Mill Creek generating station by June. This follows previous installations of baghouses at our Trimble County and E.W. Brown generating stations. We also expect to complete Kentucky’s largest solar facility in June. The 10-megawatt facility under construction at our E.W. Brown generating facility represents a cost-effective way to expand the benefits of solar to all customers. While portions of the project continue, we began generating our first solar power from the facility on April 14. Moving to the U.K., we continue to achieve strong performance against our RIIO-ED1 incentive targets, and Robert will now discuss that in more detail. Robert? Robert A. Symons – Chief Executive Officer, Western Power Distribution, PPL Corp. Many thanks, Bill, and good morning. Moving to slide seven. March 31, 2016 marked the end of the first full regulatory year under RIIO-ED1, and we are pleased to be providing an update on our full year performance against the RIIO-ED1 incentive targets. Before I go into the details, I would like to review a few key points of the incentive framework. The primary incentive mechanisms that contribute to incentive revenues include the interruption incentive schemes and the Broad Measure of Customer Satisfaction. Interruption incentive schemes include Customer Interruptions and Customer Minutes Lost. The broad measure of Customer Satisfaction measures the performance of customer satisfaction on a scale from one to 10 against the targets Ofgem has established with customers experiencing interruptions, requesting a connection, or making a general inquiry. Both of these incentive mechanisms are designed to encourage DNOs to invest and operate their networks so as to reduce both the frequency and duration of power outages. Turning to slide eight. On this slide, you will find our full year results against the performance targets set by Ofgem for regulatory year 2015 to 2016. WPD has improved Customer Minutes Lost and Customer Interruptions performance metrics by approximately 8% over the 2014 throughout 2015 regulatory year, which resulted in earning 77% of the maximum potential payout. This year, our operational efforts contributing to this success included several major asset replacement projects, significant rural network automation, and outperforming previous years’ reliability performance. As it relates to broad measure of customer satisfaction, WPD has also received reaccreditation to the U.K. government-sponsored customer service excellence standard and has once again achieved the highest level of compliance, which further demonstrates our continued commitment to excellent customer service. As shown back on slide seven and based on our better-than-expected performance on the quality of service and customer satisfaction, we now expect to achieve $115 million in total incentive revenue in calendar year 2017, above our prior range of $90 million to $110 million for 2017. As a reminder, these incentive revenues, while earned during the 2015 to 2016 regulatory year, will be received in the 2017/2018 regulatory year. These amounts are internal estimates until final determination is received from Ofgem in November 2016. We expect these favorable results to continue into the next regulatory year. Even with targets that get progressively tougher, we are increasing our guidance range from $75 million to $105 million in incentive revenues in calendar year 2018, to $85 million to $115 million. Overall, the first year of RIIO-ED1 is broadly in line with our published business plan as accepted by Ofgem. We are focused on delivering excellent customer service, achieving the outputs and incentives while delivering safe, reliable and sustainable network service. We’ve been also recognized by Ofgem for our innovative work on providing quicker and alternative network connections for solar, and we continue to hold stakeholder workshops reviewing our results from the first year of RIIO-ED1, while planning for the future by discussing long-term strategic priorities, such as reporting smart networks and affordability. Vince will now walk you through a more detailed look at segment earnings. Vince? Vincent Sorgi – Chief Financial Officer & Senior Vice President Thank you, Robert. And good morning, everyone. Let’s move to slide 10. Our first quarter regulated utility earnings from ongoing operations decreased from last year, driven primarily by expected lower U.K. Regulated segment earnings as a result of the April 1, 2015 price decrease, as we began our first year under the RIIO-ED1 framework and the effects of foreign currency, offset by an improvement in the Pennsylvania Regulated segment. While the Kentucky Regulated segment and Corporate and Other remained flat compared to a year ago. Let’s briefly discuss domestic weather for the first quarter compared to last year and compared to plan. Mild temperatures during the first quarter of 2016 had an unfavorable impact for our domestic segment, a total of $0.04 compared to the prior year, with $0.02 in Pennsylvania and $0.02 in Kentucky. Compared to our plan, weather had a negative $0.02 impact, with a $0.01 impact in each of the domestic segments. Heating degree days were about 11% lower than normal in the first quarter 2016 for both Kentucky and Pennsylvania. While weather in the U.K. was also unfavorable to plan and the prior year, with Q1 being the mildest winter in recorded history for the U.K., it was not a primary driver of our results for the U.K. segment. And as Bill mentioned in his remarks, despite this unfavorable weather for Q1, we remain confident that we will continue to meet our 2016 earnings guidance of $2.25 to $2.45 per share. Let’s move to a more detailed review of the first quarter segment earnings drivers, starting with the Pennsylvania results on slide 11. Our Pennsylvania Regulated segment earned $0.14 per share in the first quarter of 2016, a $0.01 increase compared to the same period last year. This increase was due to higher distribution margins as a result of the 2015 rate case that became effective January 1, 2016, and higher transmission margins due to additional capital investments, partially offset by lower volumes due to unfavorable weather. Higher margins were partially offset by higher O&M, primarily due to higher support costs and maintenance related work, mostly attributable to timing. Moving to slide 12. Our Kentucky Regulated segment earned $0.16 per share in the first quarter of 2016, flat compared to a year ago. This result was due to lower O&M, primarily due to the closure of the Cane Run and Green River coal stations in 2015, offset by higher financing costs due to higher debt balances to fund CapEx. Higher gross margins from higher base rates that went into effect July 1 of last year were offset by lower sales volumes, primarily due to the less favorable weather. Turning to slide 13. Our U.K. Regulated segment earned $0.39 per share in the first quarter 2016, an $0.11 decrease compared to last year, primarily driven by lower prices in RIIO-ED1 and the effects of foreign currency. In our plan, we had expected about a $0.10 decrease year-over-year for Q1, so the actual results are consistent with our expectations. I’ll provide additional details on the shape of our 2016 U.K. earnings forecast after I walk through the quarter compared to last quarter’s results. The quarter-on-quarter decrease was due to lower gross margins resulting from lower prices as we transitioned to RIIO-ED1 on April 1, 2015 of about $0.08 per share, and unfavorable effects of foreign currency of about $0.03 per share, which included some 2016 restrikes executed during the quarter to hedge 2018 earnings. The other variances for the U.K. were not significant and offset each other. So taking a closer look at our full year U.K. segment forecast. As noted on our year-end earnings call and the 2016 ongoing earnings update that Bill just provided, we are projecting a $0.01 decrease in U.K. segment earnings year-over-year. However, there is significant variability between the quarters with lower earnings in Q1 and Q2 and higher earnings in Q3 and Q4. We expect lower margins in the first half of the year as a result of the RIIO-ED1 revenue reset. That revenue reset occurred at the beginning of the regulatory year on April 1, 2015. And since we report WPD on a one-month lag, we will still see some effect of that revenue reset continue into the second quarter, an additional $0.02 per share above the $0.08 for Q1. This decrease is expected to be primarily offset by the price increase beginning April 1, 2016 and allowed revenues under the RIIO-ED1 framework, and from the recovery of prior customer rebates beginning April 1, 2016 through March 31, 2017, which will positively impact 2016 earnings by about $0.05. We also expect this revenue recovery to positively affect 2017 earnings by another $0.02 to $0.03. In addition, we are projecting lower O&M expenses in the back half of the year, primarily related to higher vegetation management in Q4 of last year and lower expected pension expense in 2016. All of these factors contribute to the shaping of our earnings for the U.K. this year compared to last year. Moving to slide 14. On this slide, we provide an update to our GBP hedging status for 2016, 2017 and 2018, including sensitivities for a $0.05, $0.10 and $0.15 downward movement in the exchange rate compared to our budgeted rate of $1.60 on open positions. First, we are 93% hedged for the remainder of 2016 at an average rate of $1.54. For 2017, we’re still hedged at 89% at an average rate of $1.58. And for 2018, we’ve continued to layer on hedges during the quarter and have increased our hedge percentage from 20% at year-end to 41% today, at an average rate of $1.56. You can see from the sensitivity table that there’s minimal exposure in 2016 and 2017, and about $0.03 of exposure in 2018 for every $0.05 below our budgeted rate of $1.60. As I mentioned during our year-end call, our business plan provided enough capacity to hedge about 50% of our 2018 U.K. earnings exposure through restrikes. However, at this point, we will refrain from adding additional 2018 hedges until after the U.K. referendum vote on June 23. Moving to slide 15. On this slide, we are providing an update on RPI. Now that 2015/2016 regulatory year has concluded, the final RPI rate was 1.1% and was based on the Office of National Statistics’ average RPI index from April 2015 through March 2016. If you recall, in the third quarter of 2015, we had incorporated a 1.3% RPI rate in our 2015/2016 planning assumptions, compared to the 2.6% included in our tariffs. That true-up will flow through allowed revenues in 2017 and 2018, and has already been incorporated in our earnings growth projections. The additional downside from our budgeted 1.3% rate will not have a material impact on earnings in either 2017 or 2018. Our planning assumptions for 2016/2017, 2017/2018 and 2018/2019 have not changed since our year-end update. And as you can see, the current forecast from the HM Treasury for all periods are in line with our current assumption. That concludes my prepared remarks, and I’ll turn the call back over to Bill for the question-and-answer period. William H. Spence – Chairman, President & Chief Executive Officer Great. Thank you, Vince. And thanks for everyone’s participation on today’s call. I’d like to first summarize by saying that we remain confident in where we’re headed. We’re solidly on track to deliver on our earnings forecast for 2016, and we expect to deliver compound annual EPS growth of 5% to 6% through 2018. We’re pleased the WPD team has had such a successful first year under RIIO-ED1, and have outperformed incentive expectations. As Robert mentioned earlier, we are raising our expectation for incentive revenues from $90 million to $110 million, to $115 million for 2017, and from $75 million to $105 million, to $85 million to $115 million for 2018. This level of performance is consistent with WPD’s long history of operational excellence. Across all of our businesses, we continue to invest in tomorrow’s energy infrastructure, the strength and the diversity of our generation fleet, and to drive continuous improvements aimed at exceeding customer expectations and delivering power safely, reliably and affordably. And as I stated in my recent message to shareowners in the annual report, I am convinced that our best days are ahead, and I’m very excited about our future. With that, operator, let’s open the call to questions, please. Question-and-Answer Session Operator Thank you. We will now begin the question-and-answer session. Our first question will come from Paul Zimbardo of UBS. Please go ahead. Paul A. Zimbardo – UBS Securities LLC Hi, good morning. William H. Spence – Chairman, President & Chief Executive Officer Good morning, Paul. Paul A. Zimbardo – UBS Securities LLC First, I just wanted to confirm that the U.K. environmental spending you discussed on the prepared remarks is included in the CapEx plan? William H. Spence – Chairman, President & Chief Executive Officer In the CapEx plan that we have for U.K., there’s very little that I would classify as environmental spending. You may be referring, perhaps, to the… Paul A. Zimbardo – UBS Securities LLC Sorry, that’s KU. Kentucky. William H. Spence – Chairman, President & Chief Executive Officer Yes. Oh, I’m sorry. Yeah. So, within Kentucky Utilities, yes. The environmental spending for the plans, as articulated, really deal with the match rule (22:25) and a lot of the combustion ash disposal costs that we need to incur. It does not include any Clean Power Plan CapEx spending, which would be incremental, should that come back into play. But with the stay at the Supreme Court level of the CPP, we’re not anticipating to update the capital at this time. Vincent Sorgi – Chief Financial Officer & Senior Vice President But the billion that we filed is in the plan. William H. Spence – Chairman, President & Chief Executive Officer Yes. Paul A. Zimbardo – UBS Securities LLC Okay. Great. And then, turning to Compass, could you give a brief update on kind of the initial segment? And then, with respect to future segments, should we expect the in-service on those is ahead of this one with 2023, or longer dated? William H. Spence – Chairman, President & Chief Executive Officer Okay. I’ll ask Greg Dudkin, President of our Electric Utilities Group in Pennsylvania to address that. Gregory N. Dudkin – President & Director, PPL Electric Utilities Corp. Yeah. So where we are in Compass, we put together an interconnection request for the New York ISO on the 95-mile segment, I guess we call it mini Compass. So what we’re waiting for is for the ISO to come back with an approval that all the specifications and reliability impact is positive and then we proceed with what’s called an Article 7 (23:46) which is a siding application, basically. So that’s where we are there. We’re still, for that portion, at 2021 to 2023 timeframe. We’re continuing to look at the other components of Compass. And at this point, it wouldn’t be before 2021 or 2023, it would be during that time or maybe a little after. Paul A. Zimbardo – UBS Securities LLC Okay, great. Thank you very much. William H. Spence – Chairman, President & Chief Executive Officer Thanks, Paul. Operator Our next question will come from Anthony Crowdell of Jefferies. Please go ahead. Mr. Crowdell? William H. Spence – Chairman, President & Chief Executive Officer Good morning, Anthony. Operator Your line is open, Mr. Crowdell. It may be muted. Mr. Crowdell, your line is open. William H. Spence – Chairman, President & Chief Executive Officer Okay, operator. We’ll move on if there are any other questions in the queue. Operator Okay, thank you. At this time, I am not showing any further questions in the queue. William H. Spence – Chairman, President & Chief Executive Officer Okay. We do have – as far as you can tell, operator, the lines are all open and available for questions, correct? Operator Yes. That is correct. William H. Spence – Chairman, President & Chief Executive Officer Okay. I just wanted to verify. Operator Okay. William H. Spence – Chairman, President & Chief Executive Officer Okay. Well, since there are no further questions, we’ll assume that everything was crystal clear, and that we look forward to the second quarter earnings call. So thanks for joining us today on the call. Thank you, operator. Operator Thank you. The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect your lines. 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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