UNS Energy's CEO Discusses Q2 2012 Results - Earnings Call Transcript

UNS Energy Corporation (UNS)

Q2 2012 Earnings Call

July 30, 2012 11:00 a.m. ET

Executives

Paul Bonavia - Chairman and CEO

Kevin Larson - SVP, CFO and Treasurer

Chris Norman - IR

Analysts

Kevin Cole - Credit Suisse

Brian Russo - Ladenburg Thalmann

Paul Fremont - Jefferies

Chris Ellinghaus - Williams Capital

Scott Senchak - Decade Capital

Michael Bates - D.A. Davidson

Presentation

Operator

Thank you and welcome to the UNS Energy second-quarter 2012 earnings conference call. Today’s call will be hosted by Paul J. Bonavia, UNS Energy’s chairman and chief executive officer. (Operator Instructions) Now I would like to turn the call over to Chris Norman, manager of investor relations.

Chris Norman

Thank you all for joining us this morning as we review UNS Energy’s financial results for the second quarter and our outlook for the remainder of 2012. Joining me today on the call are Paul Bonavia, UNS Energy’s chairman and CEO, and Kevin Larson, senior vice president and CFO.

Before I turn the call over to Paul and Kevin, I’d like to point out that our earnings release, supplemental materials and webcast slides are available on our website. Please refer to these materials for a reconciliation of non-GAAP measures. In addition, it is my responsibility to advise you that the forward-looking statements made on this call are based on current expectations and may contain risks and uncertainties.

Significant factors that could cause actual events and results to differ materially from expectations are described in our earnings release and in our 10-K and 10-Q filings. All forward-looking statements are made as of today based on the information available to us today and except as required by law, we assume no obligation to update any such statements. A replay of this call will be available on our website as well as by phone. At the end of Paul and Kevin's remarks, we will open up the call for Q&A.

Now I'd like to turn the call over to Paul.

Paul Bonavia

Good morning. Thanks Chris and thank you all for joining us today. This morning we reported the UNS Energy’s net income for the second quarter of 2012 was $26.3 million or $0.64 per share on a fully diluted basis. By contrast, in the second quarter of 2011, we reported net income of $28.6 million or $0.71 per share on a diluted basis.

Year-to-date, our 2012 diluted earnings per share were $0.81 compared with $1.07 last year. The deterioration in our year-over-year performance was anticipated as we are in the last full year of TEP’s base rate freeze. Our first half results are tracking our expectations, and we’re maintaining our earnings guidance range of $2.05 to $2.35 per diluted share. As you all know the level of TEP and UNS Electric sales during the remaining summer months will be the primary driver for our full year financial performance.

Turning to regulatory activity, TEP filed the rate case on July 2 with the Arizona Corporation Commission based on the 2011 test year. There are five central themes to TEP’s rate application. The first theme is cost recovery. The request for a non-fuel base rate increase of approximately $128 million is the result of a significant passage of time since TEP’s last non-fuel base rate increase in December 2008.

The drivers of the $128 million revenue deficiency are very straightforward. First, $70 million relates to a return on and of invested capital for rate base additions. Since 2006, the test year using TEP’s last rate case, TEP's original cost rate base increased by $500 million from $1 billion to $1.5 billion. Second, $29 million of the revenue deficiency relates to the increase in operations and maintenance expense between 2006 and 2011 and about $20 million relates to the adjustment to reflect the fair value rate base increment which is an aspect of rate making prescribed by the Arizona constitution. There are various other puts and takes to get to the final number but these are the primary contributors and again we emphasize this is a straightforward rate case.

I should note there could be an opportunity to mitigate the overall bill impact to customers. TEP’s purchase power and fuel adjustment cause or the PPFAC is adjusted each year on April 1. If the change in the PPFAC rate can be tied with the implementation as new base rate, the lower PPFAC rate could reduce the overall customer bill impact. Based on current estimates, we think the reduction could offset the non-fuel base rate increase by a range of 2% to 4%.

The second theme of the rate case is the need for rate reform to reflect the commission's policy on energy efficiency and distributed generation. What we proposed in this case is a long-term solution that will align rate making with policy making. TEP’s current rate design was adopted prior to the commission's energy efficiency policy. The rates do not reconcile the effects of that policy, which is mainly reduced kilowatt hour sales with the increasing demands for investment in infrastructure created by other policies at all levels of the government.

As a result, the current rate structure fails to consider the effect of escalating fixed costs on the company's financial condition. We’re therefore proposing a long-term solution through the lost fixed cost recovery mechanism or LFCR and the EE resource plan which I will discuss in just a minute.

The LFCR is assigned to allow TEP the ability to recover non-fuel costs related to loss sales attributed to energy efficiency or distributed generation. The LFCR is not a new concept for the commission as similar mechanisms were recently approved for UNS Gas and APS. In addition, the commission approved full decoupling for Southwest Gas late last year.

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