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South Jersey Industries’ (SJI) CEO Michael Renna on Q2 2015 Results – Earnings Call Transcript

South Jersey Industries Inc. (NYSE: SJI ) Q2 2015 Results Earnings Conference Call August 7, 2015 11 AM ET Executives Ann Anthony – Treasurer Michael Renna – President & Chief Executive Officer Stephen Clark – Senior Vice President & Chief Financial Officer Jeffrey DuBois – Executive Vice President Marissa Travaline – Director Investor Relations Operator Good day, ladies and gentlemen, and welcome to the Q2 2015 South Jersey Industries Earnings Conference Call. My name is Scoda, and I’ll be your operator for today. At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to your host for today, Ann Anthony, Treasurer. Please proceed. Ann Anthony Thank you. Good morning and welcome to the conference call for SJI’s second quarter fiscal 2015 results. I’m Ann Anthony, Treasurer for South Jersey Industries. And I’m joined today by members of our senior management team, including Mike Renna, President and CEO of SJI; Steve Clark, our CFO; Jeff DuBois, President of South Jersey Gas; and Marissa Travaline, our Director, overseeing Investor Relations. As you may know, we issued a news release this morning announcing the results we will be discussing on the call today. That release includes an in-depth review of earnings on both a GAAP and non-GAAP basis using our non-GAAP measure of Economic Earnings. This measure eliminates all unrealized gains and losses on commodity and on the ineffective portion of interest rate derivative transactions. It also adjusts for realized gains and losses attributed to hedges on inventory transactions and for the impact of transactions or contractual arrangements where the true economic impact will be realized in a future period. The news release is currently available on our website at www.sjindustries.com, in the Newsroom section. Throughout today’s call, we will be making references to future expectations, plans and opportunities for South Jersey Industries. These remarks constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual future results may differ materially from those indicated by these statements as a result of various important factors, including those discussed in the company’s Form 10-K on file with the SEC. We assume no duty to update today’s statements should actual events differ from expectations. Also note that our 2014 numbers have been adjusted to reflect the impacts of the stock split that occurred on May 8. With that said, I’d like to turn the call over to our CFO, Steve Clark, to detail our year to date and second quarter 2015 results. Stephen Clark Thank you, Ann, good morning to everyone on the call and thanks for joining us. As we stated in the release, earnings were impacted by a write-down of our investment in cost associated with the central energy facility that previously served the former Revel property in Atlantic City. We’ve discussed on previous calls Revel’s bankruptcy and closing in mid-2014 in a long drawn-out sale process that was completed in April of this year. Since our central energy facility is the logical source of power for the Revel property, we anticipated that our contract provides heating, cooling and power to the facility would be renegotiated to some reduced level with the new owner. Unfortunately, the new owner has shown little to no interest in reopening Revel or striking a deal for energy services. While we remain ready to provide service to Revel, a lack of any recent and meaningful progress toward this new deal awarded the write down we took in the second quarter. This write down reflects our investment in central energy facility of Revel. It does not include the value of our cogeneration equipment located within the facility as we expect to be able to repurpose that equipment to serve better customers. Now, let’s review results. Year to date, economic earnings totaled $60.8 million. Excluding the year to date Revel related write down of $11.1 million, operating results would have reflected economic earnings of $71.9 million for the first half of 2015, as compared with $76.2 million for the first half of 2014.The remaining variance between These year over year periods largely reflects the significant contribution to economic earnings from our wholesale gas marketing business in the first quarter of 2014, which directly resulted from the Polar Vortex we experienced in the early part of the year. The variance also reflects a reduction in investment tax credits from solar development. First the second quarter, economic earnings totaled $1.9 million in 2015. Excluding the write down of $10.9 million for the quarter, operating results would have reflected economic earnings of $12.8 million as compared with $10 million in the second quarter of 2014. The biggest drivers of the quarterly improvement in operating results between 2014 and 2015 are contributions from our utility due to infrastructure investment and customer growth, as well as significantly improved performance from our wholesale commodity business. Actual economic earnings per share through June 30, 2015 were $0.89 as compared with $1.16 for the first six months of 2014. For the quarter, economic EPS totaled $0.03 as compared with $0.15 in the prior year period. Excluding the impact of the thermal facility write down, 2015 economic earnings per share would have totaled $0.19 for the year to date and $1.05 for the second quarter. Now, I will detail the results of specific areas of our business, noting those business lines or segments where the write down had a major impact on economic earnings. Within the utilities, South Jersey Gas’ net income for the first half of 2015 was up 15% at $47.8 million as compared with $41.5 million for the first half of 2014. For the quarter, utility net income was $5.2 million, significant increase over the second quarter of 2014 contribution of $3.8 million. This improvement reflects the benefits of last year’s rate case, our accelerated infrastructure programs and customer additions. Infrastructure investments under our accelerated programs totaled $28.7 million year-to-date and added an incremental $1.7 million of net income for the first half of 2015. With planned investments of nearly $65 million for 2015, our AIRP and SHARP programs will continue to reinforce our system for the replacement of bare steel and cast-iron gas main and the replacement of low pressure gas main with high pressure main along barrier islands. Also worth noting, we are moving forward again in our pipeline project to provide natural gas to the BL England electric generation station and enhance service reliability to customers in the southernmost portions of our operating territory. In May, South Jersey Gas filed an amendment to our 2013 project application still pending with the New Jersey Pinelands Commission. The amended application highlights the enhanced reliability and environmental benefits this project will provide customers across the region. We remain optimistic of the compelling benefits of this project to all residents in Southern New Jersey or ultimately result in its successful completion. Customer growth continues to be significant, up over 6,400 customers [or 1.8%] for the 12 month period ending June 30, 2015. On an annualized basis, these customers will be worth approximately $1.7 million of net income in future years. Our growth continues to benefit from strong conversion activity with nearly 2,800 new customers coming from conversions during the first half of 2015 and a target of 6,500 for the full year. I do want to point out that the collection of deferred gas cost from the winter of 2014 combined with the extremely cold winter this past year has resulted in high receivable balances as of the end of June, which in turn have resulted in higher receivable reserves of the utility. We boosted reserves by roughly $800,000 for the quarter or $500,000 after tax, reflect a situation that we will continue to monitor closely. Now, I’ll move over to the non-utility side of our business and discuss results from South Jersey Energy Services and South Jersey Energy Group. Energy Services largely reflects our energy production assets within Marina Energy and our energy project joint venture Energenic. Energy Group reflects our wholesale gas and retail gas and electric commodity business activities. The first six months of 2015, these non-utility businesses contributed a combined $13 million as compared with $34.7 million in 2014. Year over year variance stems from two major events, first being the previously noted write down of our central energy facility assets, second is the non-recurring benefit to our wholesale business realized from the Polar Vortex in the winter of 2014 that drove gas volatility and ultimately net income in the first quarter of that year. Reduction in solar ITC also played a smaller role in the year over year decline. In the second quarter of 2015, our non-utility businesses reflected a loss of $3.3 million as compared with economic earnings of $6.2 million in the prior year period. We will take a look at the other drivers of these results as I detail each of the business lines. Beginning with South Jersey Energy Services, this part of our business directly absorb the full write down noted previously. However, for the purpose of comparing operating results in the context of this discussion, I think it is more meaningful to [prevent] economic earnings that exclude the impacts of the write down, which amounted to $11.1 million for the first half of the year and $10.9 million for the second quarter. With this in mind, economic earnings for the first half of 2015 for South Jersey Energy Services, excluding the write down, were $15.7 million as compared with $20.8 million for the same period in 2014. For the quarter, results were $6.9 million as compared with $10.1 million for the second quarter of 2014. Lower levels of ITC recorded for both the 2015 year to date and second quarter periods accounted for the majority of the variance. First quarter 2014 Polar Vortex related performance in our wholesale gas marketing business and 2014 earnings from our energy facilities serving Revel were obviously not repeated. Excluding the impact of the write down, operating performance from our CHP business line reflected economic earnings of $2.6 million per year to date, as compared with economic earnings of $4.9 million in the first half of 2014. For the quarter, operating performance for this business produced economic earnings of $300,000 as compared with $1.5 million in the second quarter of 2014. In addition to legal costs incurred and income loss from operations at Revel, 2015 did not see a repeat of the benefits incurred from optimizing these assets, here I’m specifically talking about the energy production assets, around extreme gas price volatility that existed during the winter of 2014. Going forward, we expect our operating projects to be steady and positive contributors to economic earnings. Turning to renewables, our solar operating performance improved by nearly $400,000 year over year. This is reflected in our year to date solar economic earnings of $15.1 million, which included investment tax credits of $17.3 million as compared with the prior year economic earnings of $17.5 million, which contained ITC of $20.1 million. For the second quarter, solar contributed $7.2 million, including $7.1 million of ITC, as compared with $9.8 million that included $9.6 million of ITC in the prior year period. The increase in 2015 solar energy production, particularly in the second quarter, has not yet been fully recognized in earnings due to the timing of certification of renewable energy certificates, particularly as it relates to Massachusetts. That certification process can take up to six months. We expect to see those benefits in the second half of this year. We do expect to see improved operating performance through year end. We remain on track for full year SREC production of 135,000 SRECs. SREC values in New Jersey continue to strengthen, spot market price is now around $237. We also remain very active in the Massachusetts market, where SREC spot market values are closer to $465. For the first half of 2015, our landfills produced a loss totaling $2.3 million as compared with a loss of $2.2 million in the prior year period. However, the second quarter saw operating performance improve their reduced loss of $900,000 in 2015 as compared to a loss of $1.3 million for the second quarter of 2014. We remain optimistic that the operational initiatives implemented over the last two quarters will help drive continuing improvement for these projects. Turning to South Jersey Energy Group, the commodity segment of our business, the first half of the year reflected solid performance with economic earnings totaling $8.5 million as compared with $13.9 million for the first half of 2014. These results reflect a benefit price volatility associated with the 2014 Polar Vortex. As we told you to expect on previous calls, performance for this business improved significantly in the second quarter. This segment contributed $671,000 as compared to a loss of $4.3 million in the second quarter of 2014. With the declining drag from what’s profitable legacy marketing contracts that began rolling off at the end of March and the contributions from the two fuel management contracts that are currently active and with another pending to commence later this year, we expect continued improvements from this business throughout 2015. Finally, taking a look at the balance sheet, our equity-to-cap ratio was 43% at the end of the second quarter, as compared to 44% in the second quarter of 2014. We use our dividend reinvestment plan to issue equity and we’ll continue to do so in 2015 in support of our significant capital programs. We also [indiscernible] $300 million of deferred tax benefits related to our investments that we expect to realize between now and 2020 that will support our goal of delivering – delevering the balance sheet. At this time, I’ll turn the call over to Mike to discuss the forward view for our business. Michael Renna Thanks, Steve. Good morning. As Steve highlighted in his comments, the write down of our investment in the energy facilities serving Revel mitigated much of the positive performance for the quarter. I think most of the detail around that transaction is already been articulated here today, as well as within our earnings release and 10-Q filing. The one think I’d like to add is that we’re encouraged by what we see happening in Atlantic City, we look forward to the day when the former Revel property, part of the City’s broader success, but ultimately we decided that the best thing for our company is to look forward. Doing so will allow us to fully focus on strengthening the business lines that are the foundation of our growth. Businesses, that after backing out the impact of Revel, actually supported economic earnings per share growth 4% to 8% in 2015. In an emphasis on earnings quality, we look forward to continued strong performance in our utility, increase contributions from our commodity businesses, stable performance from our operating energy production assets. As we move forward, we do so with a model that emphasizes our regulated businesses and those areas of our non-regulated business. We have a demonstrated ability to compete and succeed. Most importantly, we will remain confident in our ability to deliver economic earnings of $150 million by 2020. I think focusing on earnings from operations provides a meaningful year over year comparison performance, while also highlighting the strong potential for our business overall. Year to date performance of our utility highlights the potential of South Jersey Gas, increase its contribution to SJI earnings from roughly 60% to 65% to upwards of 70% to 75% as we approach 2020. Significant customer growth fuelled by the compelling economics of natural gas as the heating fuel, we expect to add an incremental $11.8 million by 2020. Accelerated utility infrastructure investment is projected at nearly $350 million over the next five years, adding roughly $18 million in incremental net income by 2020. These initiatives combined with the benefits from new CNG infrastructure, the development of a reliability pipeline to serve BL England, construction of a liquefier at our Nat LNG storage site and a future rate case position our utility for an incremental net income contribution of roughly $13 million again by 2020. On the non-regulated side, strong margins in our commodity business, commencement of at least five new fuel management contracts and improving operating performance across our energy production assets support earnings contributions of $30 million to $40 million by 2020. Most importantly, this growth is targeted without reliance on investment tax credits from renewable projects, coming instead from expanded and improved performance across our core businesses. Finally, we expect our investment in the Penn East pipeline to contribute at least 10% of total net income by 2018. This fully subscribed pipeline is being driven by [climates] of more than 800,000 decatherms from regional utilities and utility affiliates, and is expected to be in service by late 2017. While there is certainly vocal opposition to some pipelines, including Penn East, we expect the overwhelming benefit will provide the region to ultimately overcome the opposition. Before we conclude, I’d like to highlight strategic priorities we shared during the second quarter’s AGA conference. As we work toward our goal of achieving $150 million in economic earnings by 2020, we’re committed to strengthening our balance sheet, maintaining a lot to moderate risk profile, perhaps most importantly improving quality of earnings to ensure that the foundation of our business is built on regulated, repeatable, and reliable income streams. Thank you. Now, I’ll turn the call back to the operator for Q&A.

American States’ (AWR) CEO Bob Sprowls on Q2 2015 Results – Earnings Call Transcript

American States Water Company (NYSE: AWR ) Q2 2015 Results Earnings Conference Call August 5, 2015 2:00 PM ET Executives Eva Tang – Chief Financial Officer Bob Sprowls – President and CEO Analysts Jonathan Reeder – Wells Fargo Operator Ladies and gentlemen, thank you for standing by. Welcome to the American States Water Company Conference Call discussing the company’s Second Quarter 2015 Results. This call is being recorded. If you would like to listen to the replay of this call, it will begin this afternoon at approximately 5 p.m. Eastern Time and run through August 12, 2015, on the company’s website, www.aswater.com. After today’s presentation, there will be an opportunity to ask question. [Operator Instructions] This call will be limited to an hour. As a reminder, certain matters discussed during these conference call maybe forward-looking statements intended to qualify for the Safe Harbor from liability established by the Private Securities Litigation Reform Act of 1995. Please review a description of the company’s risks and uncertainties in our most recent Form 10-K and Form 10-Q on file with the Securities and Exchange Commission. At this time, I will turn the call over to Eva Tang, Chief Financial Officer of American States Water Company. Eva Tang Welcome, everyone, and thank you for joining us today. On the call with me is our President and CEO, Bob Sprowls. I’ll start with our quarterly financial result. For the second quarter of 2015, diluted earnings were $0.41 per share, compared to $0.39 per share for the same period in 2014. While earnings at our Water segment remained flat for the quarter, earnings for the Electric segment decreased by $0.01, earnings at our Contracted Services segment increased by $0.02, and our parent company’s earnings increased by $0.01. I will now discuss major items impacting the comparability of the two periods. For the quarter Water revenue increased about $1.3 million to $87.6 million as compared to the same period in 2014. The increase is primarily due to the third year rate increases and increases generated from revenue recovery on capital projects approved through advice letter filings. These increases were partially offset by an $842,000 decrease in surcharges during the quarter to recover previously incurred costs approved by the California Public Utilities Commission or the CPUC. Most of these surcharges were implemented in 2013 and expired during 2014. The decrease in revenue from these surcharges is offset by a corresponding decrease in operating expenses, largely in administrative and general expense, resulting in no impact to pretax operating income. As a reminder, a change in build consumption, which decreased 13% during the second quarter as compared to Q2 last year, does not have a significant impact on the company’s revenues or Water gross margins due to the CPUC authorized Water Revenue Adjustment Mechanism or the WRAM. The WRAM mechanism is in place for all of our Water service areas, excluding the effect of surcharges our Water gross margin approximately authorized Water margin approved by the CPUC. We expect Water consumption to continue decreasing during the remainder of 2015 as compared to the same period last year, because of mandatory Water conservation and rationing, which Bob will discuss in more detail later. Again, any continued decrease in Water consumption will not impact our earnings significantly because of the WRAM. For the second quarter of 2015, revenues from Electric operations were $7.9 million as compared to $8.3 million for the same period in 2014. The decrease is primarily due to a change in the monthly allocation of the annual base revenue requirement as stipulated in the CPUC’s November 2014 final decision on our electric general rate case. Differences in the monthly allocation of the annual adopted revenue for 2015 versus 2014 are expected to reverse during the year. Revenues for our Contracted Services business, American States Utility Services, or ASUS, decreased $1.9 million to $19.1 million for the second quarter of 2015. This decrease was due to lower construction activities, as compared to the second quarter of 2014, due largely to the completion of several large capital projects during 2014, which did not recur in 2015. These decreases were partially offset by higher construction revenues during the second quarter of 2015 due to favorable changes in cost estimated for certain capital work in progress. These new capital upgrade projects and cost estimates are continuously evaluated and revised accordingly. Revenues for these projects are recognized based on the percentage of completion method of accounting. There was also increasing monthly operation and maintenance revenue due to successful price redeterminations in September 2014. Our water and electric supply costs were $27 million for the second quarter of 2015. Any changes in supply costs for both the water and electric segment as compared to the adopted supply costs are tracked in balancing account, which will be recovered from or refunded to our customer in the future. Administrative and general expenses for the second quarter of 2015 were $20.5 million, as compared to $19.4 million for the same period in 2014. Excluding surcharges which has no impact on earnings, A&G for our utility segment increased by $1.2 million during the quarter. The increase was due primarily to higher legal and other outside service costs related to condemnation and drought activities at our water segment. We will continue to incur legal costs to defend our water systems from condemnation actions. Furthermore in connection with our efforts to meet California Governor’s orders to use overall water usage by 25% as compared to 2013, Golden State Water has been authorized by the CPUC to track incremental drought-related costs incurred in a memorandum account for possible future recovery. Such incremental costs are being expensed until future recovery is approved by the CPUC. Despite higher A&G at water segment for the second quarter, on a year-to-date basis the aggregate A&G, other operations and maintenance expenses were lower in 2015 than for the same period in 2014 after excluding surcharges. In addition, A&G expenses for contracted services increased by $482,000 for the three months ended June 30, 2015 primarily due to a shift in labor and other indirect costs to A&G related activities in support of various functions for all military bases. This increase was largely offset by a decrease in such costs included in construction expenses as compared to the second quarter of 2014. ASUS construction expenses decreased by $3.4 million to $10.4 million during the second quarter of 2015, as compared to the same period in 2014, due primarily to the completion of large capital projects and programs in 2014, which did not recurred in 2015. In addition, as just discussed, there was a shift in labor and other indirect costs incurred as A&G activities. While in Q2 of last year, a higher year percentage was incurred for construction activities. Income tax expense decreased by $728,000 to $9.5 million as compared to the same period in 2014, driven by an overall decrease in the effective income tax rate. Although very effective tax rate at Golden State Water’s company was due to differences between book and taxable income that are treated as flow-through adjustments. The effective tax rate at ASUS was lower as a result of the state income taxes which vary among the jurisdictions in which it operate. There were also favorable permanent differences, not just the tax deduction related to the introduction and construction activities, which also impacted the effective tax rate this quarter. AWR’s consolidated effective tax rate was about 38% for three months ended at June 30, 2015 as compared to 40% for Q2 last year. Let’s moving on to — move on to the liquidity and capital resources. Net cash provided by operating activities decreased by $27.9 million to $63 million for the six months ended June 30, 2016. The decrease was primarily due to a decrease in cash generated by contracted services due to the timing of billing and cash receipts for construction work at military bases during the six months ended June 30, 2015 as compared to the same period in 2014. During the first six months of last year, significant cash payments were received at ASUS with completion of several large capital upgrade project that did not recur in 2015. Cash flow from construction activities may fluctuate due to timing differences of when the work is being performed or when the cash is received for payment of the work. There was also decrease in customer water usage resulting from conservation efforts, which lowered customer billings for Golden State Water. These decreases in the consolidated cash flow from operating activities were partially offset by lower income taxes payment made during 2015, due in large part to the implementation of the new tax repair regulation in the first quarter of 2014. In regards to Golden State Water’s capital expenditures, we spend $32.5 million in company funded capital expenditures during the six months ended June 30, 2015. We expect to invest $85 million to $90 million in capital project due in 2014. For additional details on our second quarter and year-to-date performance, please refer to our earnings release and Form 10-Q issued yesterday. With that, I will turn the call over to Bob. Bob Sprowls Thank you Eva. I appreciate everyone joining us today. The company delivered solid earnings in the second quarter. During the quarter, we implemented water conservation measures and through the month of July, all of our service areas are meeting the mandated reductions. In addition, we continue to support our positions in the general rate case application that we filed with the CPUC for the water segment of Golden State Water. We also recently received the CPUC’s approval to acquire all of the operating water assets of Rural Water Company. Let me address the drought situation in California. As you’re aware, on April, 1st of this year, the Governor of California issued an executive order, directing mandatory conservation measures to achieve a statewide 25% reduction in urban water use as compared to 2013 levels. State Water Resources Control Board adopted emergency regulations in early May of this year to meet the governor’s executive order. The State Board also set reductions, which vary by area, depending on the historical per capita water use for the area in order to achieve the 25% reduction goal. In June 2015, Golden State Water filed updated drought response actions with CPUC for each service area to meet the new mandates. In July, the CPUC approved the filings. As a result, all of our water service areas have implemented our mandatory water conservation and rationing plan, which outlines restrictions for outdoor irrigation for water customers. If these restrictions are deemed insufficient to achieve the water use reductions, water allocations and additional mandatory rationing maybe implemented. Through the month of July, each of our service areas are meeting the mandatory reductions. During the second quarter, billed water consumption decreased by 13% as compared to the same period in 2014, due to our customers’ conservation efforts. As Eva mentioned, a change in consumption does not have the significant impact on the company’s results due to the CPUC authorized water revenue adjustment mechanism in place for all of our water service areas. The commission has also authorized a drought memorandum account to track incremental costs incurred in promoting conservation and implementing restriction measures for possible future recovery. In other regulatory matters, we continued to work with the PUC on the pending general rate case for all of our water regions and the general office. The rate case will determine new rates for the years 2016, 2017 and 2018. Golden State Waters’ requested capital budgets in the application averaged approximately $90 million a year for the three year period. For 2016, water gross margin is expected to decrease as compared to the currently adopted levels, due in part to a decrease in annual depreciation expense, resulting from an updated depreciation study and other expenses. Hearings for the rate case were completed in June and settlements for certain items and legal briefs were filed in July. A final decision on this rate case is expected by the end of 2015, with new rates effective January 1, 2016. Now moving onto other regulated business. As you may recall sometime ago, Golden State Water entered into an asset purchase agreement to acquire all of the operating water asset of Rural Water Company. This transaction was subject to commission approval. In June of this year, the commission approved the acquisition, including recovery of the purchase price through customer rates. A confirmation of the transaction, contemplated by the purchase agreement is subject to customary conditions, including, among other things adjustments to the $1.7 million purchase price for changes in utility plant since entering into the agreement in 2013. On completion of this transaction, Golden State Water will serve approximately 960 customers in the City of Arroyo Grande in the county of San Luis Obispo, California, which is near Golden State Water, Santa Maria customer service area and Coastal California. Under the terms of the purchase agreement, Golden State Water will take over operations 30 days after remaining conditions to closing are satisfied. Turning to our contracted services business at American States Utility Services, or ASUS, we continue to work closely with the U.S. government on the remaining price redeterminations. Just last week we received final resolution on the third price redetermination for Andrews Air Force Base in Maryland. We expect the second price redetermination for Fort Jackson in South Carolina and the second and third price redeterminations for the military bases in Virginia to also be completed during the third quarter of 2015. Filings for these price redeterminations, requests for equitable adjustment, and contract modifications awarded for new projects provide ASUS with additional revenues and margin and the opportunity to consistently generate positive earnings. We also continue to work closely with the U.S. government for contract modifications relating to potential capital upgrade work as deemed necessary for improvement of the water and wastewater infrastructure at the military bases. In addition, we are actively engaged in new proposals and expect the U.S. government to release additional bases for bidding over the next several years. We remain optimistic about the future of our contracted services business. I would like to turn our attention to dividends. On Tuesday of last week, our Board of Directors approved a third quarter dividend of $0.224 per share on the common shares of company, a 5.2% increase. We are pleased with our Board’s decision to once again increase the dividend, which reflects their ongoing confidence in the company while balancing the need for continued investment in our systems for our customers. American States Water Company has paid dividends every year since 1931, increasing the dividend received by shareholders each calendar year for 61 years. Given American States current payout ratio compared to the companies that we compete with for capital and our high shareholders equity ratio as a percent of total capitalization, there is room to grow the dividend in the future. Additionally, pursuant to the first stock repurchase program approved by the Board in March 2014, we have completed the repurchase of 1.25 million shares of AWR stock on the open market. On May 19th, 2015, our board approved a new stock repurchase program, authorizing the repurchase of up to 1.2 million shares of our common stock from time to time. We have repurchased 387,000 common shares on the open market through June 30th under this program. The repurchase programs are intended to enable the company to achieve a consolidated shareholder’s equity ratio as a percentage of total capitalization that is more reflective of appropriate equity ratios for Golden State Water and ASUS. As of June 30, 2015, our current equity ratio is 59%. Before I close with my prepared remarks, I’d like to thank you for your interest in American States Water. And I’ll now turn the call over to the operator for questions. Question-and-Answer Session Operator [Operator Instructions] The first question comes from Jonathan Reeder from Wells Fargo. Please go ahead. Jonathan Reeder Good afternoon, Eva and Bob. With the WRAM in place to protect your margins at the utility, I was just wondering if you could give us a little bit of guidance how we should be thinking about the distribution of GSWC’s adopted gross margin throughout 2015? Such as maybe what percentages fall in each quarter? Eva Tang Jonathan, we usually just look back three to five years history to determine that allocation. So if you look through the quarterly sales in the past few years and average those out, that should give you pretty good allocations for the quarter. Jonathan Reeder Do you have any idea like roughly what percentage of the margin, I guess, remains for Q3 and Q4, is it 50% greater than that? Eva Tang We think more than 50% because the third quarter is our highest sales quarter in summer. First is the lowest usually and then… Bob Sprowls Third will be greater than the second, and fourth will be greater than first. So it’s more than 50% of the last half of the year. Eva Tang Half of the year, yes. Jonathan Reeder Okay. Fourth is greater than the first still. Okay. That’s helpful. And then have your expectation for ASUS increase the bid now for 2015 due to these favorable changes in the cost estimates for the projects, or are we still thinking about maybe $0.26 or so, I think that’s what you cited last, Bob, kind of for the full year expectation? Bob Sprowls Yeah. We think that $0.26 is still a pretty good number for the entire year. And you will recall we got to that $0.26 by taking last year’s $0.31 and backing out about a nickel fourth of sort of items that were not perspective but were impacted by prior year as well. But we had a retroactive price, re-determination for instance that contributed I believe $0.03. Jonathan Reeder Correct. Yeah. Okay. And then just kind of last question. On that front with the projects that I guess, you booked those favorable changes, were those like — at all those multi-year large projects, were they some of the projects that were awarded? I think it was at the end of September of last year. When did those projects kind of get completed just kind of wondering a little more detail on that? Eva Tang Jonathan, I think majority of our current projects are not multi-year projects. We finished quite a few multi-year projects last year. So most of the projects, we are currently working on is probably 12 to 18 months project I would say. Jonathan Reeder Okay. And then the next kind of update on, where you stand with the projects we should be thinking Q3, that’s when the government I guess kind does the budget. Bob Sprowls Yes. That’s usually in sort of that September — late September timeframe, early October, the amount of additional capital work that we can do, sort of through the next 12 months, next 12 to 15 months. Eva Tang And we usually work with them, what kind of projects and we can do on the base and September 30 is really when funding comes down that we would know which paths to go forward. Bob Sprowls Yeah. I mean that’s consistent with the government’s budget. I’m sure there is more dollars being asked more than we’re going to get but it’s usually a very sizable chunk. Last year, I think we got $27 million, yes. Jonathan Reeder Okay. And then are there any — I guess, kind of large multi-year project somewhere to the three that you recently completed that might be in the near future or nothing you are aware of at this point? Bob Sprowls Yeah. Nothing we are of at this point. There are a lot of small projects that we are working on and that should keep a good solid revenue stream. Jonathan Reeder Okay. Great. I appreciate the additional clarity. Thanks. Bob Sprowls Thank you, Jonathan. Eva Tang Thank you. Operator [Operator Instructions] This concludes the question-and-answer session. I’d now like to turn the conference back over to Bob Sprowls for closing remarks. Bob Sprowls Thank you, Danielle. Again, thank you all for your participation today and for your continued interest and investment in American States Water Company. Everyone have a good day. Eva Tang Thank you. Operator Thank you. This concludes today’s American States Water Company Conference Call.

Empire District Electric’s (EDE) CEO Brad Beecher on Q2 2015 Results – Earnings Call Transcript

Empire District Electric Company (NYSE: EDE ) Q2 2015 Earnings Conference Call July 31, 2015 01:00 pm ET Executives Dale Harrington – Corporate Secretary, Director, IR Brad Beecher – President and CEO Laurie Delano – VP, Finance and CFO Operator Good day and welcome to the Empire District Electric Company Second Quarter 2015 Results Conference Call. All participants will be in listen-only mode. [Operator Instructions]. Please note that this event is being recorded. I would now like to turn the conference over to Dale Harrington. Please go ahead. Dale Harrington Thank you, Cassia. And good afternoon everyone and welcome to the Empire District Electronic Company second quarter 2015 earnings conference call. Let me begin, by introducing Brad Beecher, our President and Chief Executive Officer and Laurie Delano, Vice President, Finance and Chief Financial Officer. Who in a few moments will be providing an overview of our 2015 second quarter year-to-date and 12-month ended June 30, 2015 results as well as highlights on other key matters? Our press release announcing second quarter 2015 results was issued yesterday afternoon. The press release and a live webcast of this call including our slide presentation are available on our website at www.empiredistrict.com and a replay of the call will be available on our website through October 31, 2015. Before we begin, I must remind you that our discussion today includes forward-looking statements in the use of non-GAAP financial measures. Slide 2 of our company’s slide deck and the disclosure in our SEC filings present a list of some of the risks and other factors that could cause future results to differ materially from our expectations. I will caution that these list are not exhaustive in the statements made in our discussion today are subject to risks and uncertainties that are difficult to predict. Our SEC filings are available upon request or may be obtained from our website or from the SEC. I would also direct you to our earnings press release for further information on why we believe the presentation of estimated earnings per share impact of individual items and the presentation of gross margin each of which our non-GAAP presentation is beneficial for investors in understanding our financial results. And with that I will now turn the call over to Brad Beecher. Brad Beecher Thank you, Dale. Good afternoon everyone and thank you for joining us. Today, we will discuss our financial results for the second quarter year-to-date and 12 months ended June 30, 2015 period. We will also provide an update on other recent company activities. During their meeting yesterday, the Board of Directors declared a quarterly dividend of $0.26 per share payable September 15, 2015 for shareholders of record as of September 1. On Slide 3 of our presentation, we provided highlights of the quarter year-to-date and 12 months ended periods. We’re going to discuss these more throughout the call. Yesterday, we reported consolidated second quarter 2015 earnings of $6.8 million or $0.16 per share, $0.15 per share on a diluted basis. This compares to the same period in 2014, when earnings were $11.2 million or $0.26 per share. Year-to-date earnings through June 30 are $21.4 million or $0.49 per share compared to $32.1 million or $0.74 per share in the 2014 year-to-date period. For the 12-month ended period ending June 30, 2015 earnings were $56.4 million or a $1.30 per share, $1.29 per share on a diluted basis compared to June 30, 2014 12 months ended earnings of $71.3 million or $1.66 per share. Also a $1.65 per share on a diluted basis. Laurie will provide more details on our financial results later in the discussion. On June 24, 2015 we received an order from the Missouri Public Service Commission granting new rates for Missouri customers. The order approved an annual increase in base revenues of about $17.1 million or 3.9% consistent with a non-unanimous stipulation and agreement filed April 8. You will recall the primary driver of this case with the Air Quality Control System or AQCS at our Asbury power plant. The AQCS was necessary to comply with new EPA standards. We believe the Commission order represent a fair decision that will allow us to recover the cost of this project. In addition to recovering the cost of our AQCS project, the case provides for the recovery of our updated base transmission charges. This order also allows us to track and recover a portion of future changes and transmission expenses. We estimate this recovery to be about 34% of the change in Southwest Power Pool transmission expenses above our base level. This order also grants approval to establish a tracking mechanism for expenses related to the recent Riverton 12 long-term maintenance contract and to continue tracking of pension and other post-employment benefit expenses. Tracking of operating and maintenance expenses for vegetation management. Iatan II, Iatan Common and Plum Point were discontinued. The order is also reflective of a net based fuel decrease of a $1.60 per megawatt hour realized through our participation in the SPP integrated marketplace. Rates became effective July 26, 2015. As a result of our 2015 earnings guidance of a $1.30 to $1.45 per share issued in February of this year remains unchanged. To begin recovering costs related to Asbury in Kansas and environmental rider took effect on June 1, 2015. The rider provides for an increase of approximately $780,000 in annual revenue. While we are pleased to begin recovery of our investment in Asbury, let me remind you results will continue to be impacted by the lag effect even into the third quarter. Given the July 26 affected date for the new Missouri rate. After filing a tariff with the Missouri Public Service Commission in early May. We began offering solar rebates to Missouri customers on May 16. You will recall the Missouri Supreme Court ruled our statutory exemption from the solar provisions of the Missouri Renewable Energy Standard invalid on April 2, 2015. As of June 30, we had processed 70 solar applications totaling about $1.1 million in solar rebate related cost. We have over 30 additional applications in process. These 100 plus applications represent about 1.3 megawatts of install solar generation. Rules relating to the Renewable Energy Standard provide for the recovery of costs associated with the solar revision through customer rates. These costs are currently being deferred on our balance sheet for recovery in a future rate case. Compliance measures are subject to a 1% rate cap. As you see on Slide 4, last Friday July 24, we filed a motion to withdraw our Missouri Energy Efficiency Investment Act filing or MEEIA. We will continue our current portfolio of energy efficiency programs with recovery true based rates. We will review the need for a future MEEIA filing in conjunction with our 20016 integrated resource plan. And just this morning we’ve filed a notice of Intended case filing with the Missouri Public Service Commission. This filing started a 60-day period after which we intend to file a Missouri rate case to recover our Riverton Unit 12 combined cycle investment. This is consistent in keeping with our comments on our last call to follow rate case in the fourth quarter of this year. Laurie will talk a little more in general about this filing in a few moments. I will now turn the call over to Laurie for a discussion of our financial details. Laurie Delano Thank you, Brad and good afternoon, everyone. Our second quarter results were on target with our 2015 earnings guidance. However, before I discuss the details of our second quarter results. I want to reiterate, what Brad a few moments ago about third quarter expectations. As he stated, our new customer rates went into effect July 26, which means we will still experience nearly a month of lag in the third quarter as we continue to depreciate the Asbury addition at about a 5% rate. This short period of lag in quarter three also includes the additional property tax costs associated with the Asbury project coming on line. The Riverton maintenance contract and possibly an increase at SPP transmission expenses. These items are always liked it and our guidance. Now turning back to our results. Again, our second quarter was for the most part, on target with our 2015 plan. As Slide 5, shows our basic earnings per share of $0.16 was lower than last year primarily due to increases in maintenance and depreciation expenses when compared to the same quarter last year. As a reminder the earnings per share numbers I will reference throughout the call are provided on an after tax estimated basis. Again, as shown on Slide 5, consolidated gross margin or revenues less fuel and purchased power expense was relatively flat. Increasing earnings by $0.01 per share quarter-over-quarter. Increased customer counts added slightly to margin but were upset by a slight decrease in margin resulting from weather and other volumetric factors. Lower rates due to fuel cost savings for our wholesale customers was the primary driver of a $1.2 million decrease in rate related revenues reducing margin an estimated $0.02 per share. Decreased fuel costs and changes and other fuel recovery components combined to add an estimated $0.03 per share to margin when compared to the second quarter 2014. As we experienced record low fuel costs during this quarter. A $4.2 million increase in maintenance expense was the largest negative driver of the quarter-over-quarter results, reducing earnings about $0.07 per share. Of this increase, approximately $3.1 million was related to a planned, major maintenance outage for our steam turban at our State Line combined cycle generating facility. The effect of this increased cost will be offset by lower maintenance expense throughout our system in the latter half of this year. Our new Riverton maintenance contract also added about $600,000 to the increase and maintenance expenses. We will continue to see that the added cost on a quarterly basis compared to last year. I’ll remind you that we will be recovering this contract in our new Missouri customer rates with any changes to the base amount being picked up in a new tracking mechanism. Other operating and maintenance expense changes were mostly offsetting. Continued on the Slide 5, increased depreciation and amortization expense was also a significant driver of lower results in the 2015 quarter compared to 2014 reducing earnings about $0.03 per share. Similar to last quarter, this increase in depreciation is driven primarily by the completion of our Asbury environmental project. It also reflects higher levels of plant and service since our last rate case. Increases in property and other taxes and higher interest expenses combined to reduce earnings another $0.02 per share. We will also begin recovering these higher expenses in our new majority customer rates. I want to briefly touch on our year-to-date results before moving on to our 12-month ended results. Our year-to-date or earnings are 40.49 per share on net income of $21.4 million. This was a decrease of $0.25 per share over the same period last year when we earned $0.74 per share. Again, these results are on target with our 2015 earnings guidance. As shown on Slide 6, weather and another volumetric impacts were the significant drivers of the $0.06 per share margin decrease on a year-over-year, year-to-date basis. Reflecting the colder 2014 winter weather. Gains resulting from changes in fuel cost and other fuel recovery items were largely offset by negative changes from customer rates, gas segment results and a FERC refund to our wholesale customers which we talked about on our last call. Production maintenance expenses again primarily related to the State Line combined cycle outage I just mentioned. Our new Riverton maintenance contract and an unplanned outage at our Asbury facility, drove an increase in O&M expenses that lowered earnings per share approximately $0.07 during the period. Again increased depreciation and amortization expenses reduced earnings approximately $0.04 per share. Again reflective of the completion of our Asbury project and higher levels of plant and service. Changes in property and other taxes, interest expense and AFUDC and other categories combined to reduce earnings about $0.06 per share during the year-to-date period. Turning to our 12-month ended result. Slide 7, provides a role forward of our earnings from the 12 months ended June, 2014 to the 12 months ended Jun, 2015. As Brad, indicated our net income decreased $14.8 million or $0.36 cents per share. Slide 7 details the breakdown of the various components of this year-over-year earnings per share decrease. Margin decreased $0.05 per share when comparing the two periods. Weather and other volumetric changes were the primary drivers of this decrease. Again reflecting the colder 2014 winter weather, which decreased electric margin an estimated $0.09 per share? Likewise our gas segment margin also increased an estimated $0.02 per share. These changes reflect a return to a more normal weather cycle in a 12-month ended June 2015 period. Our sales for the 12-month ended June, 2015 period were 4.97 million megawatt hours versus 5.04 million megawatt hours in the 12-month period ending June, 2014. Customer growth and rate changes added an estimated $0.04 to margin changes in fuel cost another refuel recovery items also added about $0.04 offsetting the impact of the FERC refund mentioned earlier. Slide 7 further illustrates, the details of increases in operating and maintenance expense, which decreased earnings per share by $0.17. Increased expense related to the maintenance outage at our State Line combined cycle facility, our new Riverton maintenance contract. Higher maintenance cost of our Asbury Energy Center generating facilities, higher operating costs at our jointly owned generating facilities, and increased SPP transmission expenses were the primary drivers of increased O&M expenses. Other O&M increases and decreases were largely offsetting. Higher depreciation and amortization expense is reduced earnings than estimated $0.08. Again reflecting the Asbury project completion and additional plant in service. Property and other taxes and interest expense reduce earnings per share approximately $0.02 and $0.03 per share respectively. Brad outlined the key points of the right order in our Missouri rate case in his remarks. Slide 8 provides some additional highlights of the rate of order. As indicated the $17.1 million dollar rate increase is net of a base fuel decrease of a $1.60 per megawatt hour corresponding with the savings in fuel cost realized through our participation in the SPP integrated marketplace. The order also provides for the continuation of our fuel adjustment mechanism. Therefore any changes in fuel costs from our base, will be recoverable in customer rates. The order also reflects the total company sales level of approximately 5 million megawatt hours which is consistent with our 12-month ending sales level and our previous comments regarding our sales expectations. In addition the rate recovery from the Riverton maintenance contract was reduced from our original filing. However a corresponding tracking mechanism for this expense item was added, which will allow us to recover changes above the base level allowed in our new rates. As previously indicated tracking mechanisms for vegetation management Iatan and Plum Point operation and maintenance expenses were discontinued. We will be managing those ongoing expenses through our base rates. Also as mentioned, the order not only provides for recovery of our base transmission charges. But also the tracking and recovery of approximately 34% of the future changes in SPP transmission expenses above our base level. As you’ll recall, we had asked for all future transmission changes to be included in the fuel recovery mechanism in our original filing. As indicated, we’ve made no changes to our full year 2015 weather normalized earnings guidance range of a $1.30 to $1.45 per share. Slide 9, illustrate the major drivers of our earnings through 2015 and into 2016. As we have previously disclosed, our guidance ranges assumed in August 1, effective date for the new Missouri customer rates. With the July 26 date now firmly established, we should begin to see earnings build back into our guidance range through the end of the year. As mentioned earlier, we expect maintenance costs to be lower than last year in the last six months of this year. Turning around the cost increase impact at the State Line combined cycle outage. However we will continue to see some higher maintenance costs were Riverton contract. As Brad mentioned earlier, we provided notice to the Missouri Public Service Commission that we intend to file a Missouri rate case on or after October 1, 2015 to recover our Riverton 12 combined cycle investment. This case should follow a similar timeline as the Asbury case that was just completed. We will file the case to include a true up period that will capture the Riverton 12 in-service date as we bring the Riverton project online, we will immediately begin depreciating the addition at approximately a 2% depreciation rate. Once online we will begin to see a lag effect, primarily for depreciation until we get new customer rates in place for the Riverton 12 project in the latter part of 2016. In 2017, we will have a full year of increased customer rates that capture both the Asbury and Riverton projects. On Slide 10, we have updated our trailing 12-month return on equity chart. At the end of the second quarter, our ROE was approximately 7.2%. This ROE is based on our 12-month net income of approximately $56.4 million and a common equity balance at quarter end of about $786 million. We are experiencing and ROE pattern similar to the one we saw in the period between the second quarter of 2009 and the second quarter, 2011 when we were completing our construction program surrounding our Iatan II and Plum Point additions. On our balance sheet, we have $89 million and retained earnings as of June 30. We had $97.3 million of short-term debt outstanding at the end of the quarter and we currently have about $94.5 million outstanding today. On June 11, we entered into a bond purchase agreement for the private placement of $60 million of 3.59% Series First Mortgage Bonds due 2030. The delayed settlement of these bonds is anticipated to occur on or about August 20. We expect to use the proceeds from the sale to refinance existing short-term debt and for general corporate purposes including our Riverton project. This financing combined with the addition of internal equity from our dividend reinvestment and stock purchase plans and our continue billed and retained earnings will keep us near our target 50-50 debt equity capital structure. Finally, if you’re participating on the call through our website. You may have noticed that we have enhanced our investor pages. Our new investor website accessible through www.empiredistrict.com includes the substantial amount of additional financial information, SEC filings, stock history and other analytical data. One of the most notable features is the ability for you to sign up to receive email alerts on our financial filings and press release. I hope you all take advantage of that feature and I hope you’ll be as pleased with the additional functionality and features that our new website as we are. Slide 11 provides a screenshot of this new website. I’ll now turn the discussion back over to Brad. Brad Beecher Thank you, Laurie. We continue to execute our compliance plan which is reflected in Slide 12. Steady progress is being made on the combined cycle addition at our Riverton Power Plant. The operational to provide an additional 100 megawatts of capacity with no additional natural gas fuel required. This results in the high efficient output and very low emissions. During the quarter, the new control room, stack and cooling tower were completed. We are preparing to hydro test the heat recovery steam generator and the start-up and commissioning team as mobilized through the site. Overall, 84% of construction is complete. Project cost through June, 2015 were approximately $135 million excluding AFUDC. We continue to expect the project to be complete in early to mid-2016 at a total cost between $165 million and $175 million. With the current Riverton Project schedule and as evidenced by our intent to file a rate case this morning. We anticipated fourth quarter rate filing in Missouri to begin the cost recovery process. As Laurie mentioned, the timeline of this filing will be similar to the most recent filing in terms of a true up period, operational of law date and procedural schedule. We will experience a period of lag between Riverton 12’s end service date, when we begin depreciating at about 2% rate. Until new customer rates are in place. This morning, we also filed a notice updating our most recent Integrated Resource Plant or IRP with the Missouri Public Service Commission. In the notice, we indicated that Riverton Unit 8 and 9 were retired on June 30, 2015. The unit were originally slated for retirement in 2016 upon completion of the combined cycle addition. However, [indiscernible] wasn’t in need of boiler and condenser repairs. Given the plant retirement the repair was not cost effective. Our notice also provides additional information on our MEEIA application withdrawal. In legislative news, an administrative role has been approved in Oklahoma allowing rate reciprocity to any electric company with less than 10% of its total customers within the state. The rule which is subject to Oklahoma Corporation Commission Oversight will reduce regulatory expenses for our Oklahoma customers. Pending final publication of the rule. It is our intent to file our 2015 Missouri rate pleading and final order with the Oklahoma Commission. In June, the Joplin City Council approve the plan to spend $97 million on additional tornado recovery project, primarily infrastructure improvements. The funding is provided by grants from the US Department of Housing and Urban Development. As a result in mid-September a groundbreaking will be held for a previously approved redevelopment project, a new 56,000 square foot Joplin Public Library. On the economic development front on July 10, after 14 months of discussions and hard work. Owens Corning now plans to open a new manufacturing operation in Joplin. Owens Corning will invest $90 million to establish their operation and a vacant [ph] manufacturing facility just West of Joplin. The plant will produce a type of mineral wool insulation use, most often in commercial buildings. The faculty is expected to employee at 100 workers and is slated to begin operation in June, 2016. After an initial ramp up period, full electric load is projected in the 5 to 6 megawatt range. I’ll now turn the call back to the operator for your questions.