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ALLETE’s (ALE) CEO Al Hodnik on Q3 2015 Results – Earnings Call Transcript

ALLETE, Inc. (NYSE: ALE ) Q3 2015 Results Earnings Conference Call November 3, 2015 10:00 AM ET Executives Al Hodnik – Chairman, President and CEO Steve DeVinck – SVP and CFO Analysts Chris Turnure – JP Morgan Paul Ridzon – KeyBanc Brian Russo – Ladenburg Thalmann Jay Dobson – Wunderlich Operator Good day ladies and gentlemen and welcome to the ALLETE Third Quarter 2015 Financial Results Call. Today’s call is being recorded. Certain statements contained in this conference call that are not descriptions of historical facts are forward-looking statements, such as terms defined in the Private Securities Litigation Reform Act of 1995. Because such statements can include risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. Factors that could cause results to differ materially from those expressed or implied by such forward-looking statements include, but are not limited to, those discussed in filings made by the company with the Securities and Exchange Commission. Many of the factors that will determine the company’s future results are beyond the ability of management to control or predict. Listeners should not place undue reliance on forward-looking statements, which reflect management’s views only as the date hereof. The company undertakes no obligation to revise or update any forward-looking statements or to make any other forward-looking statements whether as a result of new information, future events, or otherwise. For opening remarks and introduction, I’d now like to turn the conference over to ALLETE President and Chief Executive Officer, Alan R. Hodnik. Please go ahead, sir. Al Hodnik Good morning everyone. Joining me today is ALLETE’s Chief Financial Officer, Steve DeVinck. I am pleased to report that ALLETE earned $1.23 per share for the quarter on net income of $60.4 million, a 27% increase over the third quarter of 2014. Higher income at ALLETE Clean Energy and at Minnesota Power were primary drivers of the earnings increase for the period. Our strategy continues to gain traction, with regulated operations delivering well on the broad foundation of our financial results and the energy infrastructure and related services businesses providing solid complementary earnings in the quarter. Based on our earnings through the first nine months of the year, and our expectations for the fourth quarter, we are increasing our full year earnings per share to a new guidance range of $3.35 to $3.50 per share. Steve will walk you through the financials in just a moment. But before he does, I would like to update you on ALLETE’s progress on several fronts and also provide a few observations regarding ALLETE’s Clean Power plan relative positioning and on the status of Minnesota Power’s Taconite customers. We have been answering our nation’s call to bring about cleaner energy forms for several years now. While we do not have all the details of the recently released clean power plan fully sorted out, and knowing full well that next steps at various state levels will greatly influence final outcome, we believe ALLETE’s regulated businesses and our energy infrastructure and related services businesses are reasonably well positioned. ALLETE, as you know, sees its geographic positioning in mineral rich Minnesota and next to wind rich North Dakota and hydro rich Canada as most strategic. ALLETE Clean Energy, an established clean energy player, is already contributing to ALLETE’s bottom line, including the Thunder Spirit outcome this year. Minnesota Power, through its Bison investments owns and operates the largest wind farm in North Dakota and has the necessary landowner relations and transmission to expand it further. The Great Northern Transmission initiative effectively marries high quality North Dakota wind to run at River Canadian Hydro, all of it carbon free, and soon poised to be delivered on a new $300 million to $400 million 500-KV transmission line to Minnesota and the Upper Midwest. Minnesota Power is significantly less carbon intense than it was a few years back, and while there are much to do with the transition in details to work on through the clean power plan, including Minnesota’s framework for compliance, we believe it’s energy forward integrated resource plan positions it well relative to the CPP and relative to future growth for ALLETE. ALLETE Clean Energy is already well established with a significant portfolio of carbon free wind generation, all under contract, and is in the process of completing a large wind project in North Dakota, from Montana Dakota Utilities. The CPP may provide additional opportunities for ALLETE Clean Energy, as other energy companies seek solutions to reduce our carbon footprint through contracted renewable energy deliveries or the construction of renewable generation facilities. I am very excited about the potential for U.S. Water Services, which we acquired on February 10th of this year. U.S. Water has been successfully integrated into the ALLETE family, and provides integrated water solutions to industrial customers throughout the United States. When reflecting upon climate related issues such as water scarcity, water conservation and water reuse, we believe U.S. Water is well positioned and will continue to build on its demonstrated track record of customer growth, customer retention and reoccurring revenues. Minnesota Power is making significant progress on two large capital projects in support of their Energy Forward plan, namely the Boswell Unit for environmental retrofit and the Great Northern Transmission line. Relative to Boswell Unit 4, the generating unit is now up and online as planned, and the environmental upgrade project nearly complete. Minnesota Power is on schedule with approximately $207 million spent through the end of the third quarter, on a total project estimate of $260 million. We expect to complete the upgrade in the first quarter of 2016. Customer billing rates for the environmental improvement rider were approved by the Minnesota Public Utilities Commission in an order dated August 24th, 2015. Regarding the Great Northern Transmission line, the U.S. Department of Energy and the Minnesota Department of Commerce, recently issued the final environmental impact statement. The issuance of the FEIS clears the way for a route permit decision by the Minnesota Public Utilities Commission in early 2016. As part of the project, Manitoba Hydro must also obtain regulatory and governmental approval related to a new transmission line in Canada. In September, Manitoba Hydro submitted the final preferred route and EIS for their transmission line in Canada to Manitoba Conservation and water stewardship for regulatory approval. Upon receipt of all applicable permits and approvals, construction of the Great Northern Transmission line is expected to begin by 2017 and to be completed in 2020. On the large power customer front, Minnesota Power’s customer that serve the steelmaking industry, continue to be challenged by elevated levels of steel imports and low steel prices. In August of this year, Cliffs Natural Resources temporarily idled its United Taconite Plant in Eveleth, Minnesota, citing high levels of inventories, lower demand from its customers, and the high rate of imported steel. At that time, Cliffs indicated the idling provided an opportunity to start reworking the plant, to produce a fully fluxed taconite pellet. That new product will replace a flux pellet, now made at Cliffs Empire operation in Michigan, which is scheduled to shut down in late 2016 or early 2017. In the third quarter of 2015, United States Steel Corporation returned its Minntac plant to full production. Minntac is the largest pellet producing facility in Northeastern Minnesota. The smaller United States Steel Keetac plant, which has been idled all summer, remains idle. As disclosed last quarter, Minnesota Power’s large power customers, which include those customers I just referenced, nominated at approximately 80% of full demand level for September, and approximately 90% of full demand levels for the fourth quarter. These power demand levels are fully reflected in our updated earnings guidance. Minnesota Power also serves a large base of wholesale customers, and I am pleased to report that in September, Minnesota Power amended its wholesale electric contracts, with 14 wholesale municipal customers, extending the contract terms for those customers through December 31, 2024. I will have some additional comments after Steve walks you through the quarterly financial results. Steve? Steve DeVinck Thanks Al and good morning everyone. Before I begin, I encourage you to refer to the 10-Q we filed this morning, for more details on the quarter. I would like to point out, that we have updated our reportable segment presentation this quarter. We will now present three reportable segments, regulated operations, ALLETE Clean Energy and U.S. Water Services. For the third quarter of 2015, ALLETE reported earnings of $1.23 per share on net income of $60.4 million and operating revenue of $462.5 million. This compares with $0.97 per share on net income of $41.6 million and operating revenue of $288.9 million in 2014. This year’s quarterly results included acquisition transaction fees of $0.02 per share related to an acquisition at ALLETE Clean Energy. Earnings from ALLETE’s regulated operations segment, which includes Minnesota Power, Superior Water Light and Power and our investment in the American Transmission Company, were $43.8 million compared with $40.9 million in 2014, an increase of $2.9 million. This year’s results reflect increases in production tax credits and power marketing margins, partially offset by increased depreciation and interest expense. Operating revenue from this segment, decreased $5.6 million or 2% from 2014, primarily due to lower fuel adjustment cost recoveries, partially offset by higher power marketing prices. Fuel cost recoveries were down due to lower fuel and purchase power expenses, resulting from lower purchased power prices and fewer kilowatt hour sales. Despite a 1.1% decrease in kilowatt hour sales, electric sales revenue increased $5.4 million, due in part to higher contracted power marketing sales prices. In addition, revenue from industrial customers did not necessarily decline in proportion to the decline in kilowatt hour sales, as power nominations for the quarter were similar to the same period in 2014. On the expense side, transmission services expense increased $2 million or 17% from 2014, primarily due to higher MISO related expenses. Operating and maintenance expense decreased $1.4 million or 2% from the same quarter last year, primarily due to lower salary and wage expenses. Depreciation and amortization expense increased $5.1 million or 18% from 2014, primarily due to additional property, plant and equipment in service. Interest expense increased $1.1 million or 9% over the same quarter in 2014, primarily due to higher average long term debt balances. Income tax expense decreased $4.1 million or 31% from 2014, primarily due to increased production tax credits, as a result of the completion of the Bison 4 Wind Energy Center in December of 2014. Before I move on from the regulated businesses, I want to emphasize that we continue to focus on cost containment at Minnesota Power. Despite known operating and maintenance expense increases for the 200 megawatt Bison 4 Wind Facility, placed in service at the end of last year, insurance and healthcare costs, as well as interest rate driven defined benefit plan expense increases, I am pleased regulated operations, operating and maintenance expense is lower than 2014. We are reducing cost at Minnesota Power, to reduce rate increases per customers, improve our return on equity over time, and manage through the impact of temporary cyclicality facing our customers in taconite mining. I will now share a few highlights from our ALLETE Clean Energy segment. Net income from this segment increased $12.7 million over the same quarter of 2014. Net income in 2015 included $12.3 million after tax or $0.25 per share, due to the recognition of earnings from the development and construction of a wind facility, under the percentage of completion method of accounting. The development and construction of the wind facility is expected to be completed in December of 2015, and will be sold to Montana-Dakota utilities for approximately $200 million. The third quarter of 2015 also reflects an additional $1.3 million related to the operations of wind energy facilities acquired late last year and earlier this year. In 2015, net income also included $900,000 of after-tax expense or $0.02 per share for acquisition costs relating to the acquisition of Armenia Mountain in July of 2015. Operating revenue increased $144.3 million from 2014, primarily due to $135.9 million related to the MDU project. Acquisitions late in 2014 and earlier this year also contributed to the increase. As you will recall, ALLETE acquired U.S. Water Services on February 10th of this year. U.S. Water is a leader in integrated water management to a growing number of industrial and commercial customers throughout the United States. For the third quarter of 2015, U.S. Water had net income of $1 million on total revenues of $36.1 million. Net income included $600,000 of after-tax expense relating to purchase accounting for inventories and sales backlog. The total impact of this purchase accounting adjustment is $2.5 million after-tax and is expected to be fully recognized by the first quarter of 2016. The corporate and other segment, which includes results from BNI Coal, ALLETE Properties and other miscellaneous corporate income and expenses, reported a $2.2 million increase in net income from the same quarter in 2014, primarily due to lower state income tax expense. ALLETE’s effective tax rate in the third quarter of 2015 was 19.3% compared to 24.4% for the same period last year. The reduction is primarily due to increased production tax credits. We anticipate the effective rate for 2015 will be approximately 20%. ALLETE’s cash flow continues to be strong. Year-to-date we generated $254.6 million of cash from operating activities, and we carried a 47% debt-to-capital ratio at quarter end. As Al mentioned earlier, ALLETE’s full year’s earnings guidance has been increased to a range of between $3.35 to $3.50 per share, which reflects ALLETE Clean Energy’s stronger project management performance on the MDU Wind project, along with lower operating and maintenance expense at Minnesota Power. ALLETE’s full year earnings guidance includes the impact of lower power nominations for Minnesota Power’s large power customers. Our guidance excludes acquisition transaction costs and the impact, if any, of pending regulatory outcomes. Just to note, if we were to exclude the projected ALLETE Clean Energy fee for the MDU development project, we expect to be within our original guidance range of $3 to $3.20 per share. Al? Al Hodnik Thank you, Steve. I am quite pleased with our financial and operational performance year-to-date. Looking ahead at the remainder of 2015, we will report the results of our taconite customer nominations for the first four months of 2016, around December 1st. Consistent with the past several years, we will initiate our 2016 earnings guidance in mid-December. I will make a couple final comments on the new customer front, before we take your question. Essar Steel Minnesota continues to report progress on its construction activity, with recent statements of Essar indicating that more than 700 construction workers are on the site, along with another 125 permanent positions at Essar’s Nashwauk and Hibbing offices. Essar officials reiterated their commitment to completing construction of the facility and beginning production of taconite pellets by the end of 2016. As you know, Minnesota Power will provide electric service to the Nashwauk Public Utilities Commission for the 110 megawatts of new electric load under contract. PolyMet expects the release of the final environmental impact statement in the federal register and Minnesota Environmental Quality Board Monitor some time this month. Following publication, the final environmental impact statement requires an adequacy decision by the Minnesota Department of Natural Resources, as well as records of decision by various federal agencies, before final action could be taken on the required permits to construct and operate the mining operation. PolyMet has stated it could be online by early 2017, and Minnesota Power has a 10 year 50-megawatt contract in place to serve this mining operation. I am fully confident that ALLETE remains on-track to meet our long term earnings growth objective of 5%, which also supports a sustainable and growing dividend. I look forward to 2016, as we continue to execute our long term strategy. At this point, I will ask the operator to open up the lines for your questions. Question-and-Answer Session Operator Thank you. [Operator Instructions]. And the first question is from Chris Turnure with JP Morgan. Please go ahead. Chris Turnure Good morning guys. Al Hodnik Good morning, Chris. Chris Turnure I was wondering if you could give us a little sense of magnitude, and give us some perspective on the muni contracts that you recently re-signed until the middle of next decade. Just kind of how big are they, how much do they mean to you, and how do they work structurally? Are they fixed price deals that you guys are just going to lock down for how many years, or are they variable and you pass-through fuel expenses, etcetera? Steve DeVinck Yeah, this is Steve. So we are obviously pleased with that extension and our customers are as well. And it is slightly different. There is a fixed demand piece, which covers our fixed charges, which has a modest cap and floor [ph], and there is an energy piece that is variable, and the variability in that does provide some protection to the company for changes in fuel and purchase power prices. It also provides variability for changes in environmental regulation, that the company may have to comply with. So all-in, it’s a nice 10-year extension, we feel good about wrapping those customers up, and we feel good about the pricing that it’s good for them and good for us. Chris Turnure Okay. And do you have a sense of the percentage of total gross margin at the utility business, that it is [ph]? Steve DeVinck We have not historically disclosed customer gross margins by customer class. Chris Turnure Okay. And then, if we kind of strip out the impact of any changes to electric load, kind of into next year and into 2017 as well. Can you just give us your latest thoughts on rate based growth there and earned ROE? Steve DeVinck Yeah. So in terms of our ROE, we expect this year to be somewhere between 8% and 8.5%. Next year, excluding the impacts of a rate case, should we file a rate case, we would expect anywhere between 8% and 9%, depending on industrial load. With respect to our rate case, we have stated that our strategy is to improve Minnesota Power’s return on equity over time, through cost containment and more clarity on load growth. We remain committed to that plan. We are pleased with cost control efforts to-date, most of which will impact 2016 and 2017, even though we are beginning to see some of the benefits in 2015. Clarity on load, both existing and potential new customer, will evolve over the remainder of this year into early next year. Our current regulatory framework does not allow for recovery of temporary, short term reductions in industrial sales. Recovery of longer term or permanent loss of industrial sales can be pursued in a general rate case. Consistent with our Energy Forward strategy, we have a commitment to one-third coal based generation in our energy supply mix. With the completion of the Boswell Unit 4 environmental retrofit project, we will be seeking a life extension of the Boswell station, consistent with the remaining useful life of the environmental retrofit. We anticipate filing a depreciation life extension in the near future. The annual benefit is anticipated to be approximately $20 million in reduced annual depreciation expense. The ultimate outcome of depreciation related filings will have a significant impact on the timing of our next general rate case proceeding. We will also be filing a proposal to implement recent Minnesota legislation regarding competitive rates for large industrial customers. Decisions on this revenue neutral rate design change, will also impact the timing of our next rate case. Chris Turnure Okay. Can you just give a little bit more color on that depreciation item, and the potential timing of that, and when you are thinking you will hear a regulatory outcome? Steve DeVinck Yeah. So we intend to file that here relatively soon. I would expect that we will have a regulatory decision on that some time early next year. Chris Turnure Okay. And it would take effect to write away and hit your — or help your 2016 number potentially? Steve DeVinck That’s what we will be seeking. Chris Turnure Great. Thanks a lot guys. Al Hodnik Thanks Chris. Operator Your next question comes from Paul Ridzon with KeyBanc. Please go ahead. Paul Ridzon Just to follow-up on that depreciation; so you would keep that benefit until your next rate case? Steve DeVinck Hi Paul, it’s Steve. We would keep approximately two-thirds of that. Approximately one-third of that would result in customer rate reductions through our current cost recovery rider we have for the Boswell 4 environmental retrofit. Paul Ridzon Kind of switching gears, what are your latest thoughts on appetite for the Florida real estate, where does that stand? Steve DeVinck No material changes in activity at ALLETE Properties. We do expect we had a small sale in the third quarter. We had another small sale in October, and we expect to have some sales in the fourth quarter of this year. We do expect ALLETE Properties to have a modest loss this year, somewhere probably around $1 million or so. Paul Ridzon Any early look at what 2016 could look like? Steve DeVinck No. Other than — we are pleased with the progress we are making on our cost control efforts at Minnesota Power; I will say that, and of course we will be issuing guidance here in the middle of December, as we normally do. Paul Ridzon I did not see as one of the drivers of Minnesota Power current cost recovery. I’d imagine, there is probably some incremental capital at Boswell 4. Do you have much of that added to the quarter? Steve DeVinck I do. It was a significant driver year-to-date. It was just less material for the third quarter. And the reason for that is, as we ramp up capital expenditures, including as we ramped up during 2014, the difference year-over-year is more material earlier in the year than later in the year. So you will see in our 10-Q for our year-to-date results, current cost recovery rider revenue was more of a material increase. Paul Ridzon Did that goal extent into the fourth one, that phenomena? Steve DeVinck Yes. Paul Ridzon Okay. And then finally, was there — Essar should ramp up by the end of 2016, is that new language? Al Hodnik This is Al, Paul, good morning to you. I don’t think that’s new language. We are taking that rate from there, public statements, so they haven’t changed their views on where they are at with their construction schedule, they would be producing some pellets by late-late in the 2016 timeframe, off into early 2017. So that’s directly from them. Paul Ridzon Okay. Thank you for the update. Al Hodnik Thanks Paul. Operator And the next questioner is Brian Russo with Ladenburg Thalmann. Please go ahead. Brian Russo Hi, good morning. Al Hodnik Good morning Brian. Brian Russo The $0.12 sense increase in the midpoint of your upper end revised 2015 guidance; could you kind of break that down, as to what — maybe incremental margin on the wind project, versus your previous disclosures and reverse the O&M cost controls or anything else driving that $0.12 increase that might be sustainable versus kind of one time? Steve DeVinck Good morning Brian, this is Steve. Very roughly it’s about 50-50, equally split between those two components. Brian Russo Okay. So $0.06 on the wind farm and $0.06 on O&M? Steve DeVinck Very roughly, that’s in the ballpark. Brian Russo Okay, great. And then, correct if I am interpreting this wrong, but when you look at the 10-Q subsidiary disclosures for U.S. Water, for the nine months to $86 million in revenue, $1.5 million in net income, but then we could — I guess, theoretically add back $2.5 million of amortization of intangibles, which would be completed by the first quarter of 2016. So kind of a normalized starting run rate for net income for the nine months is more like $4 million? Steve DeVinck So your concept is right. The number is slightly up. The $2.5 million is for the entire amount, which will be amortized from the date of acquisition through the first quarter of next year. Year-to-date, the amount is in our 10-Q, and it was somewhere around $1.5 million. Brian Russo Okay. Got it. So nine months adjusted income, excluding the amortization is $3 million? Steve DeVinck Correct. Brian Russo Okay, great. And remind us, what’s the revenue growth rate on U.S. Water? Steve DeVinck Well, we do expect a good significant growth at U.S. Water, both organically and also through the ability to have some strategic tuck-in acquisitions periodically and over time, in the purchase price range of say $10 million to $50 million. So we are excited about it and expect good growth. Brian Russo Okay, great. So just to be clear, after the first quarter of 2016, we should start to see more meaningful earnings contribution from U.S. Water to the consolidate earnings stream, correct? Steve DeVinck So purchase accounting requires the identification of intangibles. Some intangibles have a very short amortization life; and what we are pointing out with the inventory and sales backlog are those intangibles that have a relatively short life, and you hit on that, that’s $2.5 million throughout the first year of our ownership. So that will go away. Brian Russo Okay. And would you be able to provide us with some sort of net operating income as a percent of revenues or some sort of financial ratio to help us model that going forward? Steve DeVinck Our disclosure will evolve over time, and I am sure you will appreciate one of the factors we have to take into consideration as competitive information and just the competition in total. So we will be evolving over time, but I am sure you can appreciate that we also have our eye on competitive information. Brian Russo Understood. Any update on the ACE project pipeline? Al Hodnik Well it continues to work off of a pretty healthy pipeline of opportunities. Some of that existing before, some that are likely to be generated, I think, as this CPP evolution continues in various states. Obviously, on the Upper Midwest has gotten slightly more challenged, with respect to CPP, in terms of what it has to do, and there are lots of things to play out, obviously, with the states and the way they do their implementation plans, and I suppose some litigation as well. But we think that the CPP overall is good for business for ALLETE Clean Energy over the long haul. And no specifics at this point in time to reveal on additional projects, but the pipeline is a reasonable pipeline of opportunities to sort out. Brian Russo Okay. And then just lastly, I think you mentioned a target ROE of between 8% and 9% in 2016. Is that before or after the depreciation study? Steve DeVinck That is before. Brian Russo Great. Thank you. Steve DeVinck Thanks Brian. Operator [Operator Instructions]. The next question is from Jay Dobson with Wunderlich. Jay Dobson Hey good morning Al, good morning Steve. Al Hodnik Good morning Jay. Jay Dobson Quick question to drill down a little into the cost savings at the utility. I recall you had sort of two distinct efforts going on sort of your ongoing — sort of shorter term efforts, and then a very specific longer term effort. Can you give us a little sense as to sort of the successes you have in there, and sort of what we are in the third quarter, is that more sort of the shorter term efforts, or is that the beginning of sort of the efforts or the fruits of the efforts that are going to bear in 2016 and beyond? Steve DeVinck Hi Jay. This is Steve. What we are beginning to see in 2015, is the beginning of our efforts, of which most of the benefit we will see in 2016 and 2017. We are driving efficiencies across the organization at Minnesota Power, without jeopardizing safety or reliability. We are getting efficiencies for example, in the use of our fleet. We are reducing headcount at Minnesota Power and seeing the related salary, benefit and employee expenses that come with that. And that’s so far in 2015, despite, and I mentioned this, known increases around some areas that were uncontrollable to us. So it’s a broad initiative covering the entire organization. I am pleased with where it’s at, and you will see more of an impact, as we move forward. Jay Dobson That’s great. Thanks very much for that clarity. And then to the tax rate that you saw? I mean, it sounded like that was all associated with PTCs and tax rates always move around, its actually moved up a little bit this year because of the Thunder Spirit game you have booked. But if we were to look out to 2016, appreciating, having given guidance, there is no reason to think without forecasting how the wind is going to blow, the PTCs or that benefit should cease in year end 2015? Steve DeVinck That’s correct. We expect to have very substantial production tax credits through the middle of the next decade. Jay Dobson That’s great. Thanks very much. I appreciate the clarity. Al Hodnik Thanks Jay. Operator Next, we have a follow-up from Paul Ridzon with KeyBanc. Please go ahead. Paul Ridzon First part, U.S. Water, you said that some of the depreciation of the intangibles would probably make it neutral for the first couple of years, but it sounds like that improves a little bit. Is that fair? Steve DeVinck Yeah. What we said is, it won’t have a material impact on 2015 earnings. But it’s probably in line with our expectations in terms of the intangibles. Paul Ridzon But once we have lapped to the first quarter, then we will start to see it get a little better? Steve DeVinck Yeah. And again it’s at $2.5 million, which will be fully amortized by the first quarter of next year. Paul Ridzon And have you set any O&M reduction targets that you can share? Steve DeVinck No. I can’t be that specific. Paul Ridzon Okay. Thanks again. Al Hodnik Thanks. Operator And I am showing no more questions in the queue. And we would like to turn the call back for any further remarks. Well, Steve and I want to thank you for your time this morning. We look forward to seeing many of you in the next week actually, at EEI Financial, and you know, on the road, when we come out to further share our story and success here at ALLETE. Thank you and have a good day. Operator Ladies and gentlemen, thank you for joining us today. This does conclude the program, and you may all disconnect. Everyone have a wonderful day.

VinaCapital Vietnam Opportunity Fund: Invest In Vietnam’s Growth At A 23% Discount

Summary Vietnam trades at a substantial discount compared to other countries in Asia, and has a flurry of advantages ahead of it; now is a strategic time to consider investment. Vietnam stands out as a positive outlier among the current emerging market turmoil, as it has lower FX risks and higher growth, compared to its Asian peers. The recent initiation of the TPP and Vietnam’s removal of the FOL will both serve as major economic catalysts for the country. U.S. investors should strongly consider VinaCapital’s Vietnam Opportunity Fund as an outlet to gain exposure to Vietnam’s growth. Vietnam is poised to be one of the top winners from the newly initiated TPP, yet I argue that Vietnam was already good value before this, and the country has a flurry of advantages ahead of it that will also serve as a catalyst for increased economic growth. Trading at a 30-40% discount to Asian peers such as Malaysia and Thailand, Vietnam is a superior location for value investors. Although the country’s P/E has long remained near 12, the country’s soon to be transition to an emerging market should result in higher valuation in the future. Furthermore, Vietnam’s benefit from the TPP invitation will result in the country’s GDP growth increasing to 11% by 2025 , according to Eurasia Group. This article will focus on the benefits of profiting from Vietnam’s upside by investing in the VinaCapital Vietnam Opportunity Fund ( OTCPK:VCVOF ). (click to enlarge) Source: LSE VinaCapital’s Vietnam Opportunity Fund has strongly outperformed the IT Country Specialists Asia Pacific, reflecting Vietnam’s superiority and the benefit of considering locally managed funds. The fund has had a NAV return of 33% over the past five years, compared to the VN Index gain of 7.7%. Most impressive is the fund’s extremely high discount, which has also been higher in the past. Lower FX Risk With currencies in Asia facing strong devaluations, Vietnam stands out as a positive outlier, as its currency was only devalued by 1% last month , and the VND has only had a 4.5% YTD depreciation against the USD. While much of emerging Asia is struggling with FX risks, Vietnam has been able to cope relatively well with FX risks, and I argue that the other benefits of investment in Vietnam drastically offset this risk. Inflation recently fell below 1% , a drastic improvement from the beginning of 2014, when inflation was near 5%. The VN index has had a YTD return of 5.79% , compared to the 6.06% decline of Malaysia’s KLCI index , and the 7.23% decline of the SET index . Furthermore, FDI inflow growth into Vietnam has been substantial, with a YTD increase of 30%. Mark Mobius recently announced his plan to invest $3 billion into Vietnam, which is a shockingly high amount for Vietnam. Franklin Templeton has invested a similar amount into Thailand, yet the stock market is 10 times larger in Thailand. Economic Growth and FOL Removal Economic growth will serve as a further catalyst for the country’s stock market, and is a strong complement to the country’s low valuation: Retail sales YoY growth has consistently been high ; 26.7% in July, 10.3% in August, and 5.2% in September. Consumer spending has been consistently and rapidly increasing. Annual GDP growth expanded to 6.8% during the 3rd quarter of 2015. Infrastructure spending has risen drastically, and the country’s new 5-year plan projects 300% growth in road building. The country’s decision to relax the foreign ownership limit, in certain industries, will serve as a catalyst for an increased flow of FDI, and was one of the last items on the checklist for Vietnam to move forward as an emerging market. A recent report prepared by Edmond de Rothschild made the following comment regarding the impact of the FOL removal on Vietnam’s low valuation relative to its peers in Asia: “A major effect of the implementation of the foreign ownership limitation decree will be to narrow this discount, allow a re-rating of the market, and to improve liquidity.” Investing in funds on the ground that have pre-positioned themselves is a crucial step to buy into shares of these companies early, as stock prices of these companies are bound to rise with the new relaxation of FOL and a new inflow of FDI that is ahead. The VOF fund already has a large holding of Vinamilk, a company foreigners typically pay a 20% premium to invest in. The VOF fund has been a long holder of Vinamilk, and was able to invest in this company prior to its listing. The government has recently authorized the SCIC to sell its 45.1% stake in Vinamilk . VinaCapital VOF The VinaCapital Vietnam Opportunity Fund is an excellent means for investors to access Vietnam’s future upside. The VOF is the largest and most liquid closed end fund in its peer group, and its London listing is impressively trading at an 23% discount . The fund currently trades on London’s AIM board, and is in the process of moving to main board of the London Stock Exchange ; the shares will be migrated from the Cayman Islands to Guernsey to achieve the same efficient tax structure, while being under a superior compliance and regulatory environment. The company’s EGM held on October the 27th confirmed that the process has been approved, and the migration is expected to take place in mid-November. Its U.S. OTC listing is a very feasible and liquid option for investors, as its 3-month trading volume is currently 13,849 . This fund has a unique approach of investing in listed equity, private equity deals, and investing in companies and eventually taking them to the stock market. The company has invested in key players like Vinamilk and Hoa Phat Group prior to its listing, companies that now have the dominant market share in their respective industries, and are highly sought after by foreign investors. Source: VOF August Report The fund’s diversified approach is as follows: 49% of the fund’s assets are invested in listed equity. 14.9% of the fund’s assets are invested in the real estate industry, and the VOF is currently emphasizing an increased shift to listed real estate equity for higher liquidity. 11.1% is invested in private equity. 10.7% of the fund’s assets are invested in hospitality projects. The fund utilizes a diverse sector approach: 20.4% of the fund’s assets are invested in the food and beverages industry, a strategic approach for Vietnam’s consumption growth story. 14.9% of the fund’s assets are invested in real estate projects, and 12.1% are invested in real estate equities. 10.2% of the fund’s assets are invested in the construction industry, which is poised for further growth due to the increasing demand for construction and building materials . 6.5% of the fund’s assets are invested in the financials services industry, which is an appropriate low level due to the issues of bad debt with banks. Exim Bank is a positive outlier in this industry, and a company fully held by foreign investors. The fund also has smaller holdings in agriculture, pharmaceuticals, and other industries. Top 10 Holdings Vinamilk : 11.5% of the fund’s assets are invested in Vinamilk, which is Vietnam’s leading dairy company, with dominant market share in Vietnam. Foreign investors typically pay a premium of up to 20% for shares of this company, yet investors can indirectly access Vinamilk shares at a substantial discount through the VOF. Source: Vietstock Sofitel Legend Metropole Hotel : 10.1% of the fund’s assets are invested in Sofitel Legend Metropole Hotel in Hanoi. Hoa Phat Group : 8.4% of the fund’s assets are invested in Hoa Phat Group, which has a 22% market share for steel production in Vietnam, and whose growth is being driven by the rapid growth of Vietnam’s real estate industry. Apart from this core business, the company also operates in real estate, furniture, and agriculture. Source: Vietstock Eximbank : 5.3% of the fund’s assets are invested in this company. The State Bank of Vietnam has set a target of reducing to bad debt in banks to 3% , and Exim Bank has responded by selling $68.2 million worth of its bad debt during the first half of this year. Source: Vietstock International Dairy Product : 5.3% of the fund’s assets are invested in this company, which is one of Vietnam’s top five dairy companies. Petrovietnam Technical Services : 3.4% of the fund’s assets are invested in this company. ROE has averaged near 20% since 2012, and the company has increased revenue and earnings since 2012. The company is a valuation gem , as its P/E is 5.3 and its P/B in 0.85. The company has historically proven its ability to cope amidst low oil prices, as both its earnings and revenue increased in 2009. Source: Vietstock PetroVietnam Drilling and Well Services : 3% of the fund’s assets are invested in this company. Like PetroVietnam Technical Services, the company’s share price has fallen drastically due to the low oil price environment, creating its extremely low valuation; its P/E is 5.74 and its P/B is 1.03. The company’s revenue did not fall in 2009, while its earnings fell slightly, indicating its ability to cope in a low oil price environment. Source: Vietstock Au Giang Pharmaceuticals : 2.9% of the fund’s assets are invested in Au Giang Pharmaceuticals, a very strategic move since Vietnam’s pharmaceutical industry is projected to have CAGR of 15.4% until 2020. Century 21 : 3.1% of the fund’s assets are invested in Century 21 , a real estate company that operates resorts, and also has operations in the tourism industry. Khang Dien House : 3.7% of the fund’s assets are invested in Khang Dien House, a real estate and development company. The diverse portfolio approach, coupled with the low valuation created from irrational sell-offs, both greatly attribute to the fund’s upside potential. The VOF is successfully prepositioned for the growth ahead of Vietnam, and it is very reasonable to conclude that the discount of both Vietnam and the VOF will not be long lived. Conclusion VinaCapital’s Vietnam Opportunity Fund is an excellent vehicle to access Vietnam’s growth, and I would further argue that Vietnam is a superior site for investment in Asia. Vietnam’s superiority has been displayed by its relatively strong performing currency this August, its low valuation, extremely high economic growth, high FDI, and the newly emerging benefits of the TPP and FOL removal. Furthermore, actively managed funds in Vietnam are certainly superior to the Market Vectors Vietnam ETF (NYSEARCA: VNM ), and there are substantial benefits associated with investment in funds that have long been on the ground in Vietnam. Investors can take advantage of Vietnam’s discount, as well as the discount of this fund, and leverage from the growth that is certainly ahead for Vietnam. Vietnam is a bright spot in emerging markets in Asia, and the selloff has created extremely low valuation. An approach to Vietnam should be a long-term hold, with the willingness to utilize bottom-cost averaging, as the market is extremely volatile. A long-term hold of Vietnam will certainly be fruitful, which is clearly displayed by the country’s discount and flurry of economic advantages that are ahead. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

California Water Service’s (CWT) CEO Martin Kropelnicki on Q3 2015 Results – Earnings Call Transcript

California Water Service Group (NYSE: CWT ) Q3 2015 Earnings Conference Call October 29, 2015 11:00 ET Executives Thomas Smegal – Vice President and Chief Financial Officer Martin Kropelnicki – President and Chief Executive Officer Analysts Jonathan Reeder – Wells Fargo Spencer Joyce – Hilliard Lyons Operator Good morning, ladies and gentlemen. Welcome to the California Water Service Group Third Quarter 2015 Earnings Results Teleconference. This call is being recorded. I would now like to turn the meeting over to Mr. Thomas Smegal, Vice President and Chief Financial Officer. Please go ahead, sir. Thomas Smegal Thank you, Dana. Welcome everyone to the third quarter earnings call for California Water Service Group. With me today is Martin Kropelnicki, our President and CEO. A replay of today’s proceedings will be available beginning today, October 29, 2015 through December 29, 2015 at 1-888-203-1112 or at 1-719-457-0820 with a replay pass code of 6725942. Before looking at this quarter’s results, we would like to take a few moments to cover forward-looking statements. During the course of the call, the company may make certain forward-looking statements. Because these statements deal with future events, they are subject to various risks and uncertainties, and actual results could differ materially from the company’s current expectations. Because of this, the company strongly advises all current shareholders as well as interested parties to carefully read and understand the company’s disclosures on risks and uncertainties found in our Form 10-K, 10-Q and other reports filed from time to time with the Securities and Exchange Commission. Now let’s look at our quarterly results. I am going to go through the income statement and some financial highlights and then turn it over to Marty for some other comments. For the third quarter, our net income was $25.1 million compared to net income of $33.7 million in the same period last year for a decrease of $8.6 million rather, earnings per share $0.52 on a fully diluted basis for the quarter as compared to earnings per share of $0.70 in the third quarter of ‘14. In the third quarter of ‘14, the company had received the benefit of the August Cal Water rate case decision by the CPUC. As part of that decision, the company had realized $6.8 million of net income related to interim rates that covered the period from January through June of 2014. Also in the third quarter 2014, the company realized a $2.3 million tax benefit. This tax benefit did not recur in 2015. These two items cover the bulk of the change in earnings for the quarter. Revenue accrual, which you will recall, was a drag on earnings in the second quarter rebounded to some extent, as I will discuss in a moment. Before proceeding to revenue and expense changes, I want to point out and highlight two financial items from the quarter. First, the company’s capital construction was $42.5 million for the quarter, bringing the total for the first nine months of 2015 to $118.3 million. Over the last four quarters, which includes the fourth quarter of ‘14, our construction spending has been over $160 million. We now expect capital construction on the high end of our annual estimate for 2015 and that estimate was $125 million to $145 million. Capital spending, as you will recall on our facilities, which are included in regulated revenue requirement, the primary growth driver for the company’s revenue and net income in the long-term. Second thing I would like to point out. The company’s decoupling balance called the net WRAM receivable shrank slightly to $42.5 million at the end of the quarter despite a 19% water sales decline. The account benefited from $23.6 million of drought surcharges on customers who exceeded their water budgets in the quarter. Since the WRAM balance is recovered through future collections from all customers, the drought surcharges on high users are benefiting the majority of customers who are conserving. Now, let me get back to revenue and expense details for the quarter. Our revenue was down, was $183.5 million, down 4% or $7.6 million. Again, this has to do in most part due to the rate case recognition in ‘14. $10.3 million of extra revenue had been recognized in the third quarter of ‘14. We had a $1 million decrease due to rate changes and balancing account entries. We did have $3.9 million increase in our estimate of unbilled accrued revenue. Average bills at the end of September, which include the effective drought surcharges, were higher than the average bills in June. So, we do see a little bit of a rebound in that factor. Our total operating expenses were $151.3 million for the third quarter, that’s up $0.9 million or 0.6%. Production costs were down 9.8%, or $6.5 million and that’s due to the fact that water production was down 19% in the third quarter with the drought conditions that we have. Our production mix didn’t change from the third quarter of 2014, 50% of total water production is purchased water, 47%, ground water, and 3% surface water. Other changes to operation and maintenance expenses, we had employee wages and benefits that were higher by $3 million. Our drought costs, $1.8 million in the quarter, up from $400,000 in the third quarter of 2014. Conservation program costs increased $1 million. Uninsured loss expense increased $1.4 million due to current assessment of ongoing claims. Maintenance costs were up $1.2 million due to more repairs of mains and services in the quarter. This maybe due to our heightened awareness of leaks in our water systems and the interest of our operators in fixing leaks on an expedited basis per the public perception of those leaks during the drought. Depreciation and amortization is $15.3 million for the quarter, an increase of 4.7% or $0.7 million as driven by higher utility plant. Our net other loss of $400,000 was an increase in the loss amount from $200,000 in the third quarter of 2014. And let’s go to year-to-date. So year-to-date, our financial results, net income of $36.5 million, that’s down 19.4% or $8.8 million. The earnings per share, $0.76 on a year-to-date basis, fully diluted, that’s a decrease of 20% or down $0.19 from the first nine months of 2014. On a year-to-date basis, the major factors of the change are tax benefits which occurred in 2014, representing $4.8 million or about $0.10 on an earnings per share basis, which did not recur in 2015; a shortfall in unbilled revenue that’s carrying forward from our second quarter discussion, on net basis, so far during the year, that’s $4.9 million or about $0.06 on a EPS basis, and increased drought costs, which can only be recovered after regulatory review, it’s $2.4 million more this year or about $0.03 on the EPS basis. So, our revenue for the year-to-date $449.9 million for the year, that’s down 2.2% or $10.2 million. Lower water production costs affect that as well as the unbilled revenue accrual amount. Operation and maintenance expense on a year-to-date basis, they were lower by $1.1 million, or 0.3%. Other changes – sorry, production costs were $158.7 million for the year-to-date, down 9% or $15.6 million. Total water production that decreased 17% on a year-to-date basis. Other factors in O&M and A&G and maintenance are wage and benefits expenses increased $10.6 million, primarily due to normal actuarial changes in pension and retiree health costs, which have been higher all year, offset by lower employee medical costs. Our drought expenses, again up $2.4 million more than in 2014. Regulatory expenses are higher by $0.5 million due to rate case filings in California and Hawaii. Maintenance expenses for the year are up $900,000, that’s due to that higher mains and service repairs. And going on to depreciation, $46.0 million for the year, a decrease of 1.7% or $800,000, driven by lower depreciation rates within the 2014 GRC decision, partially offset by higher utility plant. Our net other income is $200,000 for the year, a decrease of 64% or $400,000 from last year. Now, I would like to turn it over to Marty for some comments. Martin Kropelnicki Thanks, Tom. Good morning, everyone. Thank you for joining us today to review the third quarter of 2015. Three areas I want to cover today. One, I want to give some comments and color on the quarter. It’s a rather confusing quarter when you look at the comparables year-over-year and then you factor in the drought and the effects of drought accounting. So I want to take you through the major items and how I kind of dissected the income statement in doing my review. Second, I want to provide a status update on the drought and our progress towards meeting the mandated water reductions that are mandated by the State of California; and then three, provide an update on the 2015 General Rate Case that we filed earlier this year, in July and give you an update on where we are in the progress of getting that well on its way. First, talking about the quarter, as I said it’s a little confusing with a lot of moving parts, including the accounting for drought surcharges, which is the penalty rate or drought tariff rate for people who are exceeding their water budgets. Essentially, with the mandated compliance order or the Governor Brown’s emergency drought declaration, any household or business that goes over their budget is going to pay two time the highest tier rate and what’s called the drought tariff or what we call drought surcharge. That surcharge is not revenue. Those surcharge costs go to offset anything in the WRAM balance. Let’s take a quick look and as noted also in the press release and as Tom said, in the year-over-year comparables and the third quarter of 2014, we received approval to our authorization for our 2012 general rate case. Included in that approval was an authorization for us to collect our interim rates, this is the revenue the company would have received if the general rate case was concluded on-time and new tariffs going into effect on January 1, 2014. That amount was about $10.3 million of revenue or $6.8 million of net income associated with that authorization and the true-up. In addition, as in the press release and as Tom mentioned, we have that one-time tax credit, which is a non-recurring item of $2.3 million. So when you look at the non-recurring items for the quarter, you have about $0.19 associated with the GRC catch-up from the third quarter of last year and the tax credit that was booked in the third quarter of last year as well. So that’s going to throw the comparables on a year-over-year basis off. Now let’s continue on a little bit with the drought. We do have incremental expenses associated with the drought. The commission at the State of California, the public utilities commission, did authorize us to have a drought memorandum account. So a drought memorandum account is a little different than a balancing account. A drought memorandum account basically has us expense any of the incremental costs associated with the drought that were not anticipated in the rate case, so it flows through the income statement. It affects net income, but allows us to recover those costs at a later date, after we apply for recovery at the commission and they go through a prudency review. Clearly, with everything going on with the drought and we have tried to call out those numbers in the press release with the – and especially with the mandated compliance with the state, we have certainly been spending dollars to help our customers hit the required mandatory reductions. And for the third quarter of this year, we had $1.8 million or $0.02 a share of incremental drought expense. Again, these are expenses that were not anticipated in the rate case and directly associated with the drought response. In addition, as Tom mentioned maintenance is up 24%, that’s a lot. But we basically told the crews, any leaks you jump on them. It doesn’t matter what time of day it is. We don’t want to be on the television. We have seen this with some of our brother and sister municipalities, where they will have a main break and it takes them hours and hours to respond to it. So anytime there has been any type of main leak or main break, we have dispatched crews 24 hours a day with the idea of, just fix it don’t waste the water. So that adds another $0.02 of cost. And some of that cost will go to the drought memorandum account. We just have to go through it on a project-by-project basis and determine which were drought related and what was normal maintenance to pick those two apart. So essentially, there is about $0.04 there that we think is attributable to the drought. So you got the $0.19 of non-recurring items, plus the $0.04 of drought related items that will go through the memorandum account. And we did include in the rate case that we filed in July, we did request authorization to collect the drought memorandum account as that rate case gets approved including that into the rate case, which hopefully rates will go into effect January 1, 2017. As Tom mentioned, the company funded CapEx, we are really happy with that. We are starting to see the fruits of our labor going back to 2010 and 2011, when we started to take a more systematic and programmatic view of capital projects and multiyear capital planning. As Tom said, we are well on our way of being in the high end of our range or potentially exceeding our range for the year. And the trailing 12 months of $160 million is a new record for the company and we feel really, really good about that. As we announced last quarter, we do have a new VP of Engineering, Rob Kuta. We are in the process of reorganizing the engineering department, focusing on expedited capital delivery on scope, on schedule and on budget, so overall feeling good on the capital side and rate base growth side. Moving on a little bit to the drought, I think we are taking a little bit of a sigh of relief that we have gotten through the long, hot, dry summer months and we are well into fall in the State of California. As you may recall, part of our drought response was to take what we call the customer first approach. We opened up a call center in Southern California with dedicated drought staff. That runs 12 hours a day, 5 days a week. In addition, we put a number of conservation specialists out in the field in all of our large districts to work with our large commercial and heavy use customers. In total, we have about 38 full-time equivalents that are incremental, that are – have just been hired just to help respond to the drought. And that has a monthly burn rate of about $700,000 in incremental expenses. As we mentioned before, we think we are going to spend between $6 million to $8 million in drought response and based on the current run rate and burn rate of the team, we believe that is true. And we anticipate that these expenses will continue through February of 2016, which is when the Governor’s declaration is set to expire. Further on the drought, when you look at how we have been doing, I am very pleased to say that 16 of our districts have continued to exceed the budgeted mandatory reduction targets. And nine of them are missing that target, but most of them are within 1% or 2% of hitting the overall target. So if you compare our production from 2013 to 2015, our production is down about 29% total. So overall, we are making this thing happen. Water supplies have been – have held steady. So we have been monitoring water supplies on a daily basis and we have continued to be able to meet demand in all of our districts. In addition, we recently did polling that we got the results from on October 14. And we wanted to get the pulse of our customer. Again, this is the first time in the history of the State of California where you have had mandatory water reduction cuts. And those cuts ranged from 8% to as high as 36% in our service areas. And so we did a random poll throughout the state, statistically balloted using a polling firm and we got some interesting polling results. When we asked customers overall are they satisfied on a scale of one to five, one being the worst, five being the best, we received a 4.0. In terms of water quality, on a scale of one to five, we received a 4.1. In terms of service, on a scale of one to five, we received a 4.4. And on communications, on a scale of one to five, we received a 4.0. That’s the overall summary of the polling. Did – it did vary a little bit based on three regions: the southern part of the state, the middle part of the state and the northern part of the state. Not surprising, the Central Valley in the State of California, where we have the tightest water supply, we scored the worst. And in Southern California, where you – we are pretty constrained as well, but it’s very, very densely populated, we scored the best. So overall, I was very, very happy with the polling scores. And I think it shows the dedication of the company to work – in terms of working with the customers to help them achieve their goals. As noted in the press release, we did collect $23.6 million of surcharges from customers. Again, these are customers who are exceeding the required and mandatory water budgets, going over their authorized amounts and they are paying a surcharge. That is not incremental revenue of the company nor does the company keep any of those funds, those funds are directly applied to the WRAM balance. So from a rate design perspective, what does this mean, it means basically that customers that are hitting their requirements, and about 75% of all of our customers are hitting their mandatory reductions are doing a great job. They are not paying a drought surcharge. About 25% of our customers have continued to exceed their water budgets. And they are paying a direct surcharge with an authorized drought tariff of two times our highest rate. All the funds that are collected that drought surcharge are applied to the WRAM accounts and they lower the WRAM balances for all the customers in that service area. So from a rate design perspective and then from a pricing perspective, we are very happy with the rate design and that it is penalizing the people who are using the most water and it’s rewarding the people who are conserving the most water. So we believe the rate design is working. Further, we believe that the polling results show that the majority of our customers understand what our approach was when we took a customer-first approach and trying to work with them hand-in-hand to help them hit their budget requirements for their water budgets. In addition, I think it shows the dedication of the Cal Water staff, all of our district managers, all of our customer service managers, all of our people in the field. It’s been a long summer. It’s been a lot of extra hours, but overall we are making this thing happen. And the company and the staff have just done an outstanding job of getting us to where we are in terms of being in compliance with the governor’s orders. Moving on to the General Rate Case, two weeks ago, we finished all of our site tours in California. So, essentially, our rates team with help from all the different departments in Cal Water visited 23 districts and looking at all the capital requirements, doing site visits, reviewing projects. Overall, the feedback from the team is that we were very well prepared for these discussions with the Division of Ratepayer Advocates, or ORA as they are now known and we are moving into the next phase of the rate case. So, it was filed. We have done the site visits. Now, we are answering all the data requests. And the ORA will prepare their report, which we expect to get in the first quarter of 2016. Once we get that report in the first quarter of 2016, we will prepare our response and then we move into what’s called the public participation hearings. And we anticipate that we will have 18 to 20 of these hearings throughout the state with the administrative law judge, in the local districts that we support, taking comments from our customers about the General Rate Case. And once we get through that, we will be in settlement discussions. Probably, hopefully, if things go to plan, kind of the middle of the second quarter and then hopefully, we will proceed from there. We would like to have the rate case completed on schedule, which would be new rates taken in effect to January 1, 2017. So having said that, as I mentioned, we are glad it’s fall. We are looking forward to going into winter and we are making it happen. So, we are very happy with the results of our conservation efforts and really want to commend our customers and our employees for doing an outstanding job for getting our overall production down almost 30% from 2013. Tom, back to you. Thomas Smegal Thanks, Marty. Now, I would like to finish up with just a couple of highlights from the balance sheet. Our net utility plant grew to $1.66 billion as of September 30. Our work-in-progress balance increased to $149 million. As I mentioned earlier, capital investments were $118.3 million on a year-to-date basis. At the end of the quarter, company had $50.8 million in cash and $136.6 million outstanding on its revolving credit facilities. However, at financing activities, after the end of the quarter, subsequent event, on October 13, Cal Water, the regulated California operating subsidiary, sold $100 million in first mortgage bonds in a private placement. The proceeds are being used to pay down the operating company revolving credit facilities and for other corporate purposes. Cal Water has also agreed to sell an additional $50 million in first mortgage bonds on March 13, 2016 subject to customary closing conditions. So that’s the end of our presentation. Dana, we are now happy to take questions. Question-and-Answer Session Operator Thank you. [Operator Instructions] We will go first to Jonathan Reeder with Wells Fargo. Jonathan Reeder Hey, good morning Marty and Tom. First question, the unbilled revenue impacting Q3 that you guys kind of outlined, would you characterize that as fairly typical for the Q3 impact? Thomas Smegal So, we had a lot of discussion about this last quarter. And what we saw at the end of the last quarter was a substantial dip in the unbilled revenue accounts receivable and that affected second quarter earnings. So, what we are seeing for the third quarter, the accounts receivable balance is approximately normal and that has to do both with the billings and the drought surcharge. So, the drought surcharge is adding to that accrual. And so when you compare it to the low number in the second quarter, we did see a bump upward in it. And so we do have to keep in mind as we go forward, there is going to be some difficulty in estimating or guessing, if you will, what that factor is going to be at the end of the year, at the end of the fourth quarter. Three moving parts. First moving part is we expect we will still see conservation from our customers. We may or may not see a continuation of the current level of drought surcharges. And so we are monitoring that carefully, and that could change by the end of the year. The other is that California is experiencing an El Niño, and the question really is whether it’s a wet El Niño as everyone expects or not. And if it occurs by the time the end of the year rolls around, we could see a drop in sales simply because it’s raining a lot in California in the later part of December. So, we have to watch those things very carefully. That does have the potential to have a year-end impact on us if any of those three factors changes. Jonathan Reeder Okay. So, if it’s really wet, sales, I guess, fall off and then that unbilled… Thomas Smegal That will drop. Jonathan Reeder Yes, it will decrease a lot. Thomas Smegal Yes. Jonathan Reeder Okay. And then, go ahead. Thomas Smegal It’s a little hard to predict that obviously, because we aren’t going to know anything from looking at sales in October and November. It’s really going to be the end of December which affects that calculation. Remember that calculation looks at the last say 20, 21 days of the quarter. It’s really going to be dependent upon what happens during that exact period. Jonathan Reeder Right. But I guess, year-to-date, the only thing that was really unusual was the Q2 drop, which was attributable to the conservation, mandatory conservation, going into effect? Thomas Smegal Right. Jonathan Reeder At this point, okay. And then I think you said there is $0.04 of drought-related items that are going to go through the memorandum account, is that year-to-date so far? Thomas Smegal That’s year-to-date, yes. Martin Kropelnicki Yes, that’s right. Jonathan Reeder Okay. And then the full year expectation is still for about $0.08 or? Martin Kropelnicki Yes, I mean, we have ramped up pretty quick and we have had to add more resources, just depending on how each individual district is doing. We have moved resources around to respond to different needs based on the geographical regions. So, I think we were thinking between $0.06 and $0.08 a share and I think we will probably be on the high side of that about $0.07 to $0.08 a share would be my bet based on the current run rate. Jonathan Reeder Okay. So, then I guess year-to-date EPS, we are at $0.76. Last Q4, I think you earned $0.24. And I don’t think there was any noise in there like the GRC catch-up or the tax benefit from a comparable this year, so assuming you would earn something similar, it puts you right around $1 for the full year. And then had it not been for that Q2 decrease in the unbilled revenues, which I think was about $0.13, I guess it would have put you about $1.13. Is that roughly, I guess, in line with your expectations and the right way to be thinking about 2015 EPS power or should we also add like the $0.08 of the drought expense on top of that? How should we think about that? Thomas Smegal No, I think that’s about right in terms of the components of your analysis. Just keep in mind that the $0.13 in the second quarter, we did bite a little bit of that back here in the third quarter with an upward change in unbilled. So, a little bit of that came back, so you need to factor that in as well. Martin Kropelnicki Yes. And I think just for everyone on the call remember that the unbilled revenue it’s simply the GAAP revenue accrual at the end of the period. And it’s not included in the WRAM. So, it’s unbilled. It’s estimated. And as that – as it becomes billed consumption in the next billing cycle, it goes through the WRAM and it’s trued up or down based on our adopted numbers. Jonathan Reeder Okay. I mean, for a – I mean, is there a way to kind of characterize for a typical year like what the unbilled impact might be looking like? I mean, if I understand correctly, I mean, Q2 – well, go ahead, sorry. Thomas Smegal Yes, sorry, Jonathan. So, in a very typical year, you would see no change from December to the next December in unbilled. When you have a rate change as we did have the rate design change at the end of ‘14, you do tend to see a little bit higher unbilled just because bills are higher, if you think about it way. But generally the bump up in unbilled during the summer goes away by the end of the year. So typically, it’s not a real component of earnings. It should – it’s just a floating item. Unfortunately, for this year, it’s been kind of floating downward due to the fact that people have lower bills because the drought is on and they are using less water. Jonathan Reeder Okay. Yes, I got it. Alright, thank you guys. Martin Kropelnicki Thanks, Jonathan. Operator [Operator Instructions] We will go next to Spencer Joyce with Hilliard Lyons. Spencer Joyce Martin and Tom good morning. Martin Kropelnicki Hi Spencer, good morning. Spencer Joyce Just want to jump back to the tax items here for a moment and I know we saw a nice benefit in Q3 ’14, it gave us a bit of a tough comp this year, but I know pretty consistently over the past few years, we have seen some benefits throughout the year that, while maybe one-time, they seem to be somewhat recurring, can you give us a sense of maybe what the Q4 tax rate might look like or maybe what you are gauging for a full year ‘15 here, it looks like may be trending towards a higher rate than perhaps we have seen over the past few years? Thomas Smegal Spencer, I think you are correct there. Let’s talk a little bit about what’s been happening. Back in 2012, I think it was the first time we started incorporating the analysis of the repairs and maintenance deductions. And that 2012 started to look back at prior years, and there were adjustments from prior years. Those are the kind of what you would call non-recurring blips in this tax benefit. And so right now, we continue to have a repairs deduction, but it’s the current year repair deduction. So we are looking at for 2015, our tax rate being about 38%, whereas if you go back to ‘14, the tax was 34%. And so that is a factor. We are just on an ongoing basis now and maybe we have gotten over the hump of the analysis and reanalysis of what those past repairs and maintenance deductions were. Spencer Joyce Okay. So the potentially 38% here in ‘15 versus before in ‘14, is that strictly due to a differing call it CapEx or repair profile this year or were there still some catch-up items in ‘14 that depressed that level? Thomas Smegal So the ‘14 items were other items. They are pretty complicated and they were related to the rate case. It’s something called the South Georgia method of determining the difference between a regulatory item and a tax item, which I have some understanding of but our technical people have a lot better understanding of. So it was kind of the tax change as a result of the rate case, not really a repairs item. It’s a different item. Spencer Joyce Okay. So this year here in 2015 seems to be a fairly clean year than not any special stuff, but perhaps a decent level of repair activity that might be normal moving forward? Thomas Smegal Yes. One of the things, as we talk about the CapEx, a lot of that CapEx is mains. And a lot of those mains will likely qualify under the repair deduction, but that leads us to the tax rate that we have, the 38% rather than the higher statutory rate. So that’s kind of embedded in getting to that number. So again could it be 37%, 39% at the end of the year or probably not going to vary from 38% at this point. Spencer Joyce Okay, perfect, that’s really helpful. Just finally then, I apologize, I had to hop on a little bit late. The $1.4 million uninsured loss that you all noted in the release, can you give us a little color on that and I assume that we could almost adjust that out of earnings, I mean it’s strictly a one-time kind of unique situation? Thomas Smegal Yes. So the company has a self-insured retention level of about $0.5 million on claims. And so periodically, any utility company is going to have claims against it. Right now, our reserve required us to – we were required to increase our reserve by that amount based on a couple of relatively large claims in the quarter. That’s going to vary up and down. And I think if you go back and look, in the third quarter of ‘14 it was at a very low level. So I don’t want you to adjust it out entirely because I think that there is a normal course there. But what happened was just the difference between the third quarter of ‘14 and third quarter of ‘15 resulted in that big difference. We are always having those things. You hope that you don’t have as many. We have a couple this quarter that we had to reserve for. Martin Kropelnicki Yes. And things will happen in the ordinary course of business. Say we have 600 vehicles in our fleet, so there is – as much as we try to avoid accidents, there is always something that happens. There is always a main break that happens. And that self-insured retention, Tom has to look at that on a monthly and quarterly basis and true that up or down based on the new claims that are coming here. Spencer Joyce Yes, absolutely. Thanks for the color there. And I assume, even now we may be in a period of higher activity, if you will with some of the drought stuff. So that’s very helpful. Alright. Martin Kropelnicki Okay, thanks. Spencer Joyce Thank you. Operator [Operator Instructions] And it appears we have no further questions on the phone at this time. Thomas Smegal Okay. Dana, thank you. And I want to thank all of you for your continued interest in California Water Service Group. We look forward to talking with you again with our year end results. Thanks very much. Martin Kropelnicki Thanks everyone. Bye-bye. Operator Again, that does conclude today’s presentation. We thank you for your participation. Thank you for calling.