Pinnacle West Capital Corp (PNW) 2002 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Pinnacle West Capital earnings conference call. All participants will be in a listen only mode. Afterwards you'll be invited to participate in a question and answer session. As a reminder, this conference is being recorded Tuesday April 23, 2002. Now I would like to turn the conversation over to Rebecca Hickman. Please go ahead.

Thank you. And good morning. We especially appreciate your joining us at this early hour. The call is early because we're on the road as many of you know in Boston and we needed to get the call taken care of so we could start a meeting schedule for the day. Www.Pinnacle west.Com and a replay will be available until May 22nd. A replay of the conference call will be available through April 30th by dialing 800-633-8284 and entering access code 20476746. This morning I have with me Bill Post, our Chairman and CEO, Jack Davis, our President and also President of Energy Delivery and Sales for Arizona Public Service, and Bill Stuart, President of Generation and President of our unregulated energy subsidiary. Before I turn the call over to our speakers I need to cover a few details with you. The investor information section of our web site contains supplemental information on earnings and operating statistics for the year 1999-2000. The information was also filed with the FCC. To help you navigate this information on the web site, here are a few tips. To help you analyze the statistics that under lie our 1st quarter performance, comparisons of the statistics for the 3 month and 12 month period are contained in a summary tab. To help you with projections, statistics by quarter through the 1st quarter of 2002 are also available on the web site and in the 8-K. We believe that you'll find this information to be helpful in understanding our results. As a final preliminary, it's my responsible to advice you that this call will contain forward-looking statements based on current expectation and the company assumes no obligation to update these statements. Because actual results may differ materially from expectations, we caution you not to place undo [INAUDIBLE] on these statements. Please refer to the MD&A on Form 10-K which I was important factors which could cause actual results to differ materially from those contained in our forward-looking statements. Bill Post and Mike Palmeri will make prepared comments. Bill is going to give you a brief overview of our 1st quarter results. Then Mike will review the primary earnings variances for the quarter and the trailing 12 months. After which Bill will then update you on recent developments including our regulatory situation and generation expansion plan and he'll wrap up with our financial outlook.

Good morning, everybody and thank you for taking your time to join us early this morning. Our earnings for the first quarter were 63 cents a share compared with 73 cents a share a year ago. We're never be pleased with a down quarter. However I do believe that our results were solid in light of the significant drop of wholesale market prices in the West. Two major factors affected the decline. First, a decrease in the contribution from our power marketing and trading activity which was offset by the second and that's lower replacement power cost for power plant outages. Both were predicted and discussed during our call in January earlier this year. Wholesale prices are down 90% compared to a year ago, and we expect them to remain low throughout the year. On peak prices were $25 to $30 a megawatt hour compared with levels of over $200 a year ago. Today's prices are below marginal. However our working plan is predicated on today's forward curve. In face of these market conditions, our marketing and trading activity still contributed $40 million of pretax gross margin or 28 cents a share before operating expenses. This performance came through planning, creativity and execution within strict risk management parameters. As expected, these results are down compared with the $107 million a year ago because of lower market prices and volatility. Replacements power cost were down approximately $50 million before income taxes or 35 cents a share compared with a year ago due to lower market prices and a 35% decrease in outage plan. Our outlook for 2002 has not changed. Our working plan shows earnings compare able to last year's results. However, it will be a challenge due to the lower less Western wholesale prices, potential weather affect and retail price decreases. For the year 2000 who as a whole we continue to believe that improvement in our retail business primarily due to the absence of high rely built cost will offset reductions in the contribution from our power marketing and trading activities. At this point let me turn it over to Mike who is going to review the details with you and then I'll come back and talk about recent developments.

Thanks, Bill. As Bill indicated I will discuss the key area variances for the first quarter of 2002 compared with the 1st quarter of 2001. Any time I refer to per share, these amounts are after income taxes. Total net income was $53.8 million or 63 cents a share. This compares with $59.5 million or 70 cents a share for the 1st quarter of last year. The comparison is 63 cents a share this year versus 73 cents a share a year ago. Our pretax electric growth margin that's revenue net of purchase power and fuel costs was $359 million in the 1st quarter compared with $391 million in last year's 1st quarter. The major factors that have produced a decrease of $31 million pretax or 22 cents a share decrease of $67 million, 47 cents a share in contributions from our power marketing and trading activity which was substantially offset by a decrease of $50 million pretax or 35 cents a share in replacement power cost for planned outages due due to lower price outages. I will now explain the decrease in contributions for our power marketing and trading activities in a little more detail. These activities contributed about $40 million of pretax growth margin or 28 cents a share compared with $107 million, 76 cents a share a year ago. This in this year's 1st quarter almost 98% of the contribution was realized and the remaining 2% represented changes. The margin from sales of generation other than native low which I may also refer to as off system sales was $2 million before income taxes down some $46 million or 32 cents a share because of lower prices in the Western wholesale markets and lower sales volume. Our system sales volume totaled 376 gig water hours which was down 40% from the 2001 level. Our realized margin on trading, electricity and other commodities was $37 million pretax. This related a $38 million increase or 27 cents a share compared with the 1st quarter a year ago. Of this amount two-thirds or about $22 million pretax related to realization of prior period marketed gains as contributed volumes were delivered. We recorded market to market gains of 16 cents a share in the 1st quarter of 2002 compared with $47 million or 33 cents a share in the 1st quarter of 2001. This decrease related a 17 cents a share reduction in our earnings and was related to lower market price volatility. Here are other factors that decreased our electric margin in the quart to quarter comparison. Increased fuel cost related to higher natural gas and purchase power prices of $11 million pretax or 8 cents a share. Affects of milder weather on retail sales of $6 million pretax, 4 cents a share and our 1.5% price reduction that became affective in July of 2001 which attributed 4 cents a share. This negative affects were offset by the benefits of higher retail sales related to customer growth and higher average weather norm usage $4 million pretax, 3 cents a share. Our customer growth in the 1st quarter was 3.2% which is still above three times the national average. We do expect customer growth to begin a rebound in the second after of this year and expecting growth to be in the range of 3.5 to 4% in each of the next two years. We also benefited from lower fuel cost related to FAS-133 of $3 million, 2 cents a share. Pretax. For the quarter, our earnings also benefited from the following items. Operations and maintenance expenses were lower by $8 million pretax or 6 cents a share. These costs reductions related to lower operations and maintenance expenses related to our 2001 reliability program and plant outages of $7 million pretax, 5 cents a share. Also the absence of a credit reserve that we recorded in the first quarter of 2001 of $5 million pretax, 4 cents a share. Partially offset by increases for employee of benefits and miscellaneous cost. $4 million pretax, 3 cents a share. Depreciation and [INAUDIBLE] was lowered by $5 million pretax or 4 cents a share, because of lower regulatory asset amortization. As a note for the year 2002, our regulatory assets amortization will be $30 million pretax lower than in 2001. And this amount will be spread evenly over the year. Finally, miscellaneous items improved pretax items by a net amount of 2 cents a share. A comparison of our earnings for the 12 months ended March 31, 2002 shows that our consolidated income before an accounting change was $318.9 million or $3.76 per share on a diluted basis compared with $310.5 million a year earlier. Accounting change to which I'm referring is the adoption of FAS-133 during 2001. I will recap the significant factors that affected the increase. The contribution was up $32 million pretax. 23 cents a share. This amount is before the trading portion of charges we recorded in the 4th quarter of last year relating to exposure to Enron and it's affiliates. Replacements power cost for planned outages were lowered by 17 cents a share. Retail electricity sales were higher because customer growth and weather impacts and contributed an increase in electric growth margin of $20 million pretax or 13 cents a share. Other income was primarily higher because of the timing of recording market to market provisions. $33 million or 23 cents a share. The investments that cause the substantially all of the variances were sold during the 1st quarter of 2001. Net interest expense is down because of higher capitalized interrelated to our generation expansion program and lower interest rates partially offset by the effects of higher debt balances related to the generation expansion program. These factors resulted in a net benefit of $15 million pretax or 10 cents a share. Depreciation and amortization as lower due to the reduction of regulatory assets in accordance with our 1999 settlement agreement. $11 million pretax, 8 cents's share. [INAUDIBLE] was down $4 million or 2 cents a share. These positive factors were partially offset by several factors. Notedly operation and maintenance expenses were higher because of our 2001 reliability program. Up $57 million pretax or 40 cents per share. Our 1.5% retail or electricity decreases went into effect of July of 2001 and that related $27 million pretax or 19 cents a share. Charges we recorded in the 4th quarter of 2001 related to our exposure to Enron and it's affiliates of $21 million pretax or 15 cents a share. Changes in the mark to mark value for FAS-133 have [INAUDIBLE] natural gas increased cost by $9 million pretax or 6 cents per share. For further information and analysis details of earnings and variances for the three month and 12 month period ended March 31st, 2002 and 2001 are available on the web site with the other information. This information was also filed with the FCC in an 8-K yesterday. In conclusion, I will now turn the call back over to Bill so he can review with you recent developments affecting our company.

Thanks, Mike. Let me address an important component of our marketing activities. In order to give you as much information about these activities we have significantly expanded our disclosure of marketing and trading data it's available on our web site and we also filed it with the FCC. For the quarter of the $40 million margin I mentioned earlier, $39 million was realized. Our unrealized marketing gains totaled $139 million compared to $138 million at the end of 2001. About 98% of these gains have been hitched which we expect will be mitigate any potential earnings volatility from future market price changes. The schedule for the estimated realization can be found on our web site. As to the generation expansion plan we're on schedule for Redhawk units one and two. In time for our peak. Also unit five remains off target to be on-line in the summer of next year. These four plants are needed to meet the retail load growth and are included the in the regulatory plan we filed last fall. I'll give you an update shortly. Regarding the remainer of our expansion plant, the [INAUDIBLE] units were monitoring load growth, market prices and other alternatives. As I indicated in our 2001 able report, we delayed Redhawk units three on and four to late 2006 or early 2007 and we'll continue our evaluation of these projects and may or may not break ground on these projects in the future. As many of you know we filed a request with the Arizona Corporation Commission last October for a variance from the competitive bidding requirements of the competition rules and approve all of a punish power after agreement between APS and our marketing and trading group. It involves dedication of all of the existing generation in the four units identify mentioned to APS's retail customer load. The hearing on our request is scheduled to begin next Monday April 29th and we expect it to last between two and four weeks. In February, the Commission established a generic docket to determine if changed circumstances required the Arizona Corporation Commission to take another look at electric restructuring in Arizona. The generic docket has been consolidated with the docket for our request. However, they have different procedural tracts. To date, the Arizona Corporation Commission Commissioners have asked for and received input from interested parties on a number of questions about electric restructuring in the commission staff recently filed a report describing their position on several broad issues. The staff recommends continued wholesale and retail competition but with unspecified rule changes. The review in six differ areas. The staff has also filed testimony with resolution on some issues tied to the outcome of the generic docket however, no schedule exist for the generation docket. Therefore, last Friday we filed a motion requesting a procedural schedule. The motion is described in more detail in a form we filed. Due to the issues I discussed earlier, the ac needs to determine the policy choice whether to continue toward retail electric competition or to reverse course and to return to traditional cost to service regulation. We believe the commission needs to make this decision promptly and fairly so that the affected parties can take the appropriate steps necessary to implement the commission's decision whatever it is. We further believe the answer to the question on the policy choice must be in hand no later than September 1, 2002 if it is to be implemented by the end of the year. In this filing, we state that Aps intends to submit the 30-day notice regarding transfer of the existing generation assets to Pinnacle Energy on approximately August 1, 2002. We also outline alternative plans to implement competitive bidding on September 1st depending how the commission decides on our question and we recommended a properly plan for the commission to address the six issues raised by the staff. One of the ACC staff recommendation that we oppose is to stay the transfer of APS's generation assets until the outcome of the generic procedure. However, if the ACC reverses its position and stays the transfer of generation assets, it will be necessary to transfer Pinnacle West Energy's plants to APS and have them considered along with the other expenses incurred in the transition to competition in the company's next rate case. We remain convinced that reliability and price volatility are major issues with our customers. As well with regulators and other public officials. We believe the original plan we proposed six months ago is the best plan for providing cost effective reliable service while earning reasonable returns for our shareholders. I'd like to comment generally on our earnings picture beyond 2002 at least as we see it now. In January I outlined five factors. First, our 1999 settlement a [INAUDIBLE] extend through June of 2004 and provides a solid foundation for performance in our base business. However, the commission decides the competitive question and absent unforeseen regulatory developments. The earnings picture should remain predicated on this agreement through June of 2004. Second, in power marketing to the extent wholesale price rows remain low, we [INAUDIBLE] reduced opportunities for trading and fewer long-term structured sales contracts. Third, I believe that there will be some regulatory reaction to the Enron crisis that is will impact our future accounting methodology and some as of yet undetermined way. Fourth, although extension is probably. We believe their review and the associated issue in both California and Nevada will continue to add significant market uncertainty and it is possible that we will see a modification of both market structure and contracts in the future. And finally, we've been aggressive yet very disciplined in our approach to power marketing and we expect to continue to pursue market opportunities to produce results above the simple extrapolation of today's prices. Taking this together is premature. However when combined, by believe that our shareholders will continue to see a combined growth of earnings and dividends significantly above the industry average over long-term. That concludes our comments and we would now be happy to answer your questions.

Thank you, ladies and gentlemen. If you have a question, please press the one followed by the four on your telephone. You'll hear a three tone prompt acknowledging your question. If your question has been answered, you may press the one followed by the three. One moment please for the first question. Terry Shoe.

Hi, Bill. On your outlook beyond 2002 and 2003, you cited those various issues and I would assume that what you have described probably would have a dampening affect on earnings growth and I agree but that your prospects certainly are better than many other market participants other utilities. Am I correct in when you talk about these various factors that they introduce probably more volatility more uncertainty and possibly a dampening affect on earnings growth or am I not reading that correctly?

We are certainly at a point where we've got several issues that are facing competition in the West and we can talk more about as much as you like tomorrow or I'd be glad to talk about it this morning but one thing that's important is the settlement agreement that we put together back in 1999 puts together a platform that we can perform against regardless of where the commission goes here on this competition issue. As we look to the future and take a look at issues of composition, one of the things that we've felt strongly about is to deal with those early in the process as compared to the completion of that agreement in June of 2004. That's why we started it last year. So we think there is opportunity to give consideration of these issues while in the context of this settlement agreement through June of 2004. So really, absent some unexpected decisions on the part of the commission, I think the fundamental foundation is there.

Foundation in terms having I would say positive earnings growth from some base which is really last year and this year or it's just too uncertain too early to really even talk about the trajectory of earnings. I would assume that you would like to achieve earnings growth.

Certainly. But if you compare it against the base of last year and look at our base business, we do expected to see improvements there in large part because of the expenditures that we had in 2001 because of the reliability requirements that we had.

Thank you and we can again talk more about the environment and such at our meeting.

Thanks, Terry.

Thank you.

Our next question comes from Jeff [INAUDIBLE].

Good morning. I just wonder if you can update us -- I know there has been talk Palo Verde with the unit one and three possibly replacing the steam generators. When do you think we'll know for sure if that is going forward and can you provide a little more detail?

Sure. You want to deal with that, Bill?

Yes. Bill Stewart here. At this point in time we've order some long lead materials that would seven serve either Palo Verde one or three. But there is no immediate plans for a replacement. This is more long-range planning and it takes several years to get some of these components manufactured so we are just getting a start at this point in time but it's not on a radar screen to replace one or three. They really are still meeting the model that we inspect against so we're fairly comfortable at this point.

Okay but if it were to go ahead, there would be an up rate of the megawatts.

Likely we would do an up grade on one and three if those were to be replaced as we're doing on Palo Verde two.

How much would that be?

About 5%.

Okay. Thank you.

Our next question comes from Tom O'Neill with Lehman Brothers.

Good morning. I just had two quick questions. Curious at the earliest date that you would transfer the assets of APS into ATS. And could you provide an update on the El Paso pipeline issue?

Sure. The earliest date would be September 1st. In terms of the transfer of those assets as to the El Paso, and let me give a little background for those that might not be familiar with that. In 1996 we signed an agreement with El Paso for a full requirements contract, a 10-year full contract that. Has been contested and is before [INAUDIBLE] today and last week, hearings were held on that subject. We and many other parties testified including the Chairman of the Arizona Commission as well as parties from California. The issue deals with the full requirements piece and the proportion of gas as it goes through Arizona into California that is dedicated to Arizona and something that we feel very strong about and have argued aggressively that among other things in 1996, we paid for stranded cost as a component of that agreement and we believe the sanctity of that contract is important. It's real in the hands of FERC in terms of the decision and we'll have to continue to work with them and monitor that as they go through the decision process. One of the things that the Chairman of FERC basically asked for was the two States to get together both Arizona and California and to see if they could come up with some kind kind of resolution to that issue. As it stands right now, that remains an open point.

Great. Thank you.

If there are any additional questions, please press the one followed by the four at this time.

On the power marketing side, just wondering if you're still expecting a target of about 25% of earnings to come from power marketing for the year considering that power marketing was down for the first quarter. And second, in terms of the transfer assets I'm just wondering if there is going to be an interim decision that would come out before the ends of all of these hearings and if so, there is a possibility of having a waiver for the transfer capability? Thank you.

As to your first question, it's still in that ballpark but not specifically down to the last percentage point so the proportion and the issue that we talked about last quarter in January is still true and that we see a decline in power marketing a an increase in our base business. As to the issue concerning the transfer of the assets, we have add asked the commission for a properly schedule to deal with that prior to September 1st and our hope is the commission will put such schedule forward.

Thank you.

Our next question comes from Jason West. Please go ahead.

Just had a question on the allocation of earnings. You guys broke out the earnings per share by subsidiary on page two of the break out and just noticed that the parent company is like 20 cents in the quarter versus 5 cents a year ago. Wondering if some of the earnings are being allocated to the parents company.

Short answer is yes. Let me expand on that. It's not so much that they are being allocated. It is in the last 12 months, that function has been moved from APS into Pinnacle West. It's a change in organization that took place last year.

Is that the whole trading business towards that?

Yes. The whole trading business.

Okay. Thanks.

Once again, ladies and gentlemen if there are any additional questions, please press the pound key followed by the four. [PAUSE] I'm showing no further questions at this time.

Thank you very much and thank you everyone for joining us. Those you that we'll be seeing in Boston and New York, we're looking forward to seeing you. And if there is anything that you need, please let me know. Thank you.

Thank you.