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Just Energy Group Q2 Earnings Review – No Slowdown In Sight

Summary Shares have appreciated substantially since July. Total revenue grew 18%, with the more profitable consumer segment growing 20%. The U.K. operation and the solar program will pave the way for future growth. After a poor performance in 2014 and trading flat in H1 2015, Just Energy (NYSE: JE ) is finally back on track. Since my last analysis on the company in July, shares have appreciated by 30% from $5.23 to $6.82 today. Let’s see how the company performed in Q2 (year end is in March). The company continued to deliver top-line growth. Increasing sales by a whopping 18% quarter on quarter from C$918 million to C$1.1 billion. This doesn’t surprise me one bit. With the exception of FY 2012, the company has always delivered consistent growth from year to year. (see below). Many consumers are aware of Just Energy’s incessant marketing, and the financials reflect that. Sales can be broken down into consumer sales and commercial sales. Quarter on quarter, consumer sales have grown by 20% and commercial sales by 16%. The growth from consumer sales are much more valuable because traditionally commercial customers simply paid less. In Q2, gross margin for the consumer division was 22%. In contrast, the commercial division only yielded 9%. After deducting various operating expenses, the consumer division is more than twice as profitable as the commercial division (C$27 million of operating profit vs. C$10 million of operating profit). We can also examine growth from by looking at how much money the company charges its customers, which would reflect more of an “organic growth” as opposed to revenue generated by acquiring new customers. For the consumer segment, margin per customer rose 24% from C$176/RCE in Q2 2015 to C$219/RCE in Q2 2016. Evidently, the company should be able to achieve sales growth even if customer acquisition slows. Despite these great results, the company still reported a loss. The main culprit is derivative losses. During the quarter, the company made a fair value adjustment of C$117 million due to declining commodity prices (i.e. the company would have to purchase commodities at higher prices than the market if contracts are settled now). These losses will eventually go away as the contracts expire (i.e. not recurring). Outlook I believe that the future is bright for Just Energy. The company is still rather small in the U.K. and has plenty of run way to expand. Just two quarters ago, U.K. contributed 202,000 RCEs. In Q3, this number has grown 36% to 275,000 RCEs. In addition, the company is also exploring non-traditional initiatives such as the partnership with Clean Power Finance to enter the residential solar market, which is all the rage right now. While the exact impact on the bottom line is not clear yet as results are still preliminary, I believe that this program will be a smash hit. Because the company is marketing to existing customers, I believe that the adoption rate should be fairly high. This means that the solar program should be able to generate incremental profit without the company spending too much money (as opposed to a new customer acquisition).

Duke Energy’s (DUK) Lynn Good on Q3 2015 Results – Earnings Call Transcript

Duke Energy Corporation (NYSE: DUK ) Q3 2015 Earnings Conference Call November 05, 2015 10:00 AM ET Executives Bill Currens – VP, IR Lynn Good – President and CEO Steve Young – EVP and CFO Analysts Shar Pourreza – Guggenheim Partners Dan Eggers – Credit Suisse Jonathan Arnold – Deutsche Bank Steve Fleishman – Wolfe Research Michael Lapides – Goldman Sachs Brian Chin – Bank of America/Merrill Lynch Jim Von Riesemann – Mizuho Securities Ali Agha – SunTrust Robinson Humphrey Paul Ridzon – KeyBanc Capital Markets Operator Good day, ladies and gentlemen and welcome to the Duke Energy Third Quarter Earnings Review and Business Update. At this time, all lines have been placed on a listen-only mode and the floor will be open for questions following the presentation. [Operator Instructions] It is now pleasure to introduce your host Bill Currens, Vice President of Investor Relations. Sir you may begin. Bill Currens Thank you, Jeff. Good morning, everyone, and welcome to Duke Energy’s third quarter 2015 earnings review and business update. Leading our call is Lynn Good, President and CEO, along with Steve Young, Executive Vice President and Chief Financial Officer. Today’s discussion will include forward-looking information and the use of non-GAAP financial measures. Slide 2 presents the Safe Harbor statement, which accompanies our presentation materials. A reconciliation of non-GAAP financial measures can be found on our Web site at duke-energy.com and in today’s materials. Please note that the appendix to today’s presentation includes supplemental information and additional disclosures to help you analyze the Company’s performance. As summarized on Slide 3, Lynn will cover our third quarter highlights and provide summary of our recent strategic and growth initiatives. Then Steve will provide an overview of our third quarter financial results and an update on our economic activities within our service territories, as well as an overview of our earnings growth prospects as we move into 2016 in the future. With that, I’ll turn the call over to Lynn. Lynn Good Good morning, and thanks for joining us. This morning reported third quarter 2015 adjusted EPS of $1.47 per share above the $1.40 per share in 2014, as favorable weather and growth in the regulating utilities supported our results. Our regulated businesses have performed well throughout 2015 delivering solid financial results. As we look to the fourth quarter, we are narrowing our guidance range to $4.55 to $4.65 per share. This range reflects mild October weather, as well as storm expenses, unfavorable foreign currency trends and the potential for extending bonus depreciation. The extension of bonus will modestly increase our effective tax for the year. Earlier this year, we increase the growth rate of the dividend to approximately 4%, reflecting our confidence in the strength of our core businesses. The growing dividend supports our commitment to deliver attractive long-term returns for shareholders. Our financial results are made possible by the efforts of our people who work every day to keep our plant safe, efficient and reliable, providing our customers with valuable services. Our regulated generation fleet continued to deliver for customers during the critical summer months. Our nuclear fleet achieved a 97% capacity factor during the quarter and our growing regulated gas fleet continued to deliver value for our customers, taking advantage of the low natural gas prices. In fact our utilities have burned more natural gas in the first nine months of 2015 than they did in either of the two prior full years. The Edwardsport IGCC plant continues to operate well, achieving a third quarter gasifier availability factor of around 80%, massing the first quarter’s record. Additionally in July, the facility achieved a record month of net generation. In early October, we experienced heavy rains and flooding in the Carolinas and 500,000 customer outages. We were well prepared and mobilized our crudes in advance, speeding the restoration of service. Like others in the industry we are making progress towards a safe, cost effective closure of our Ash Basins in the Carolinas. Basin closure is underway at six sites and we are working through the approval of closure plans at our remaining basins. I’m proud of the way the Duke team has responded to this important industry issue with excellence and leadership. We are systematically and strategically increasing our regulated business mix through a series of acquisitions and divestitures as highlighted on Slide 5. As well as the portfolio of investments I will discuss in a moment. Last week, we were very excited to announce the plan to acquire Piedmont Natural Gas, which will add a well established natural gas business and platforms in the Duke portfolio. From a strategic perspective, we see this acquisition as the foundation for establishing a broader gas infrastructure platform within Duke, building upon our recent gas pipeline investments and complementing our existing gas LBT business in the Midwest. We plan to leverage the scale Duke with Piedmont’s well regarded management team and excellent operational capabilities. Piedmont has long been recognized as a premier operator of low risk regulated gas infrastructure. We have partnered with them over many years, as they have built and operated the critical gas infrastructure that serves natural gas generation in this region. Piedmont is experiencing robust customer growth and is investing in projects that have constructive regulatory mechanisms providing a strong base to organic growth. These investments are expected to grow their rate base, by an average of around 9% over the coming years. This acquisition is expected to close by the end of 2016 and be accretive to our earnings in the first full year after close. This will increase our total regulated business mix to over 90%, firmly supporting our earnings and dividend growth objectives. We will keep you updated, as we progress through the approval process. Turning to Slide 6. We are also focused on creating long-term growth and value for our customers and shareholders, with investments that will modernize our system, both our generation and our growth for the benefit of our customers. We continue to introduce more diversity to our fleet through low cost natural gas. Construction has begun on a combined cycle natural gas plant at the lease site in South Carolina, while preconstruction activities will commence on the Citrus County combined-cycle plant later this year. Both projects represent a total of over 2 billion in investments and remain on-time and on-budget. Our Western Carolina modernization project also remains on track. You may recall that we decided to retire our coal unit in Asheville and replaced it with a combined-cycle gas plant and a new transmission line, to improve reliability and support growth in the Asheville area. After working through a comprehensive stakeholder engagement process over the course for the summer, we announced yesterday a modified set of resources to support this project, eliminating the need for a new transmission line. Rather than the 650 megawatt gas plant, we will build two 280 megawatt combined-cycle natural gas units with the option for 190 megawatt simple cycle unit by 2023. A total estimated investment of just over $1 billion. This modification allows us to maintain our 2024 retirement schedule, while reflecting important input from our customers and communities. Further, earlier this year we acquired the NCEMPA asset, a project that is a win-win for our customers in the Eastern region of North Carolina. Our two gas pipeline infrastructure project Atlantic Coast Pipeline and Sabal Trail will provide critical access to additional low cost natural gas in the Southeast, helping to meet growing demand for the fuel from our generation portfolio, as well as to serve our customers’ needs. These projects continue to move through the regulatory approval and siting processes. The formal FERC application for ACT was filed in September and we expect FERC approval in 2016. Once FERC approval is obtained, the project can begin construction activities with an expected COD in late 2018. At Sabal Trial FERC approval is expected in early 2015 with the pipeline operational in 2017. In Indiana, we are revising our grid modernization plan under state legislation and we plan to re-file our plan by the end of this year. We’re also making meaningful progress growing our renewable investments both in our regulated footprint and in the commercial business. On the regulated side, we’re on track to complete construction of 128 megawatts of utility scaled solar in North Carolina by the end of this year and our moving forward with investments in both South Carolina and Florida. Our commercial renewables portfolio also continues to grow with demand for wind and solar projects throughout the U.S. is supported by renewable portfolio standards and growing customer demand. We have a number of commercial wind and solar projects slated to come online later this year, which will increase this portfolio to over 2,700 megawatts of capacity. Overall, these growth investments total $20 billion through 2019 and provide the foundation for growth in the coming years. Steve will provide additional perspective on 2016 and beyond in his remarks. In conclusion, we continue to execute very well, providing safe, reliable and affordable power to our customers. Our growth prospects remain strong as we deploy significant capital and critical energy infrastructure investments. This establishes the foundation to provide clean modern energy to our customers and our communities for decades to come. Let me turn it over to Steve. Steve Young Thanks Lynn. Today, I’ll review our third quarter financial results and provide a brief look into 2016. I would also discuss the economic drivers in our regulated service territories and the low growth experienced in the third quarter. I’ll ramp up with the discussion of our financial objectives. Let’s start with the quarterly results as highlighted on Slide 7. For more detailed information on segment variances versus last year, please refer to the supporting materials that accompanied today’s press release. We achieved third quarter adjusted diluted earnings per share of $1.47, compared to $1.40 in last year’s third quarter. On a reported basis, 2015 third quarter earnings per share were $1.35, compared to $1.80 last year. As a reminder last year’s third quarter results included a $0.43 favorable adjustment for a change in the estimated value of the Mid-West generation business. A reconciliation of reported results to adjusted results is included in the supplemental materials to today’s presentation. Regulated utilities quarterly adjusted results increased by $0.07 per share, driven largely by warmer weather and strong margins in our wholesale business, including the new NCEMPA contract. As we expected, these positive drivers were partially offset by higher O&M related to the timing of outages, increased cost related to NCEMPA and higher storm costs. International’s quarterly earnings declined $0.02 over last year. Continued weakness in foreign exchange rates in Brazil and lower margins at National Methanol were partially offset by lower purchase power costs in Brazil. Additionally, we recognized an asset impairment in Ecuador during the quarter. Our commercial portfolio incurred $0.08 of lower adjusted earnings as a result of the absence of prior year Mid-West generation results due to lower wind resources this year earnings from our commercial renewable business are expected to be around 75 million for the full year versus our original expectation of 100 million. Commercial’s results will be favorable impacted in the fourth quarter by tax credits related to over 300 megawatts of wind in solar generation scheduled to come online. And finally other was up $0.06 due to favorable tax adjustments in the timing of tax levelization as a reminder due to income tax levelization other reflects projected benefits related to renewable tax credits ratably during the year. Once the projects become operational these benefits are reallocated to the commercial portfolio. Lastly our quarterly results benefited $0.04 from the accelerated stock repurchase completed earlier in the year. Moving on to Slide 8, I’ll now discuss our retail customer volume trends. Across our jurisdictions weather-normalized retail load growth has increased by 0.3%, over the rolling 12 months. Within the residential sector we are seeing some positive trends. We continue to add new customers at an annual rate of approximately 1.3%. And we’ve now experienced two consecutive quarters of relatively flat usage per customer. We also continue to see favorable key indicators for the residential sector including employment, personal incomes and spending, as well as household formations. The commercial sector continues to grow modestly benefiting from declining office vacancy rates and expansion in the restaurant and real estate sub-sectors. This growth was partially offset by lower governmental and retail store sales during the quarter. The industrial sector while strong for most of the year has recently slowed, we are continuing to see transportation and building materials gain momentum. In particular, residential construction activities remain strong in the Southeast. During the quarter, we began to experience some weakness in the metals and chemicals subsectors. This slowdown is due to a pause in industrial activity, driven by a deceleration of consumer, business and government spending, a reduction in inventories and the strong dollar which has reduced global demand for U.S. products. Our economic development teams remain active successfully helping to track new business investments into our service territories. So far this year these activities have led to the announcement of $2.4 billion in capital investments, which is expected to result in nearly 7,200 new jobs across our six states. With rolling 12 month weather-normalized load growth of 0.3% we expect to thin towards the low-end of our original 2015 expectation of 0.5% to 1%. Moving to Slide 9, let me layout our key earnings drivers, as we begin thinking about 2016. As has been our normal practice we will provide our 2016 guidance range and updated financial plans in February. For our regulated businesses, we plan for normal weather. We expect growth from rider recovery and AFUDC on major capital investments, along with a full year impact of the NCEMPA transaction and modest growth in retail load. With respect to our cost structure, we continue to build upon the success of our recent merger integration activities. Cost management is an ongoing effort. And we are finding ways to reduce O&M below current levels to match modest sales growth. We expect growth in the commercial portfolio, as we continue to add contracted renewable generation and expect the return of normal wind patterns. The loss of Midwest generation’s earnings contribution is a headwind but it is partially offset by the accelerated soft repurchase. We expect internationals’ earnings have stabilized in 2015 and have the opportunity for modest growth in 2016, largely driven by an expectation for improved high growth dispatch, over the past several months we begun to see higher water inflows and lower market power crises. Further, meteorologists are forecasting a strong Alminio weather pattern through early 2016, which could lead to increased rainfall in Southeastern Brazil. Currency exchange rates are expected to remain volatile but the inflationary provisions in our contracts in Brazil can help to mitigate some of the currency devaluation. We also expect Brent crude oil prices will stabilize in 2016. Now moving to Slide 10, I want to step back and discuss our overall earnings growth objectives. Since 2013, our regulated and commercial segments representing 90% of Duke Energy have delivered 5% earnings growth. As we look at 2016 and beyond. These segments are expected to continue to grow within our 4% to 6% growth objective as we deploy significant capital and critical gas and electric infrastructure investments, including the acquisition of Piedmont, as well as renewable investments in our commercial business. We will also see the potential for rate cases in the Carolinas in the coming years to provide timely cash recovery of these important investments. The remaining portion of the company, the international business has experienced a decline, contributing earnings of $0.67 per share in 2013 and 2014 to about half that in 2015. About half of this decline is due to the three year drought in Brazil while unfavorable exchange rates and lower crude oil prices comprise the remaining half. From this point forward we will believe that internationals’ earnings have stabilized and are positioned for modest growth, consistent with our past practice, we will provide more specific financial guidance in February. We plan to reset our base to 4% to 6% long-term earnings growth off of 2016. This reflects continued strong growth in our core businesses, as well as a more realistic based year for growth in our international business from 2016 forward. Moving on Slide 11 outlines our financial objectives for 2015 and beyond. For the reasons Lynn mentioned earlier, we are narrowing our guidance range for 2015, from $4.55 to $4.75 per share to $4.55 to $4.65 per share. We have made significant progress in advancing our strategic growth initiatives, both in our regulated and commercial businesses providing strong support for our long-term earnings growth objective. Our objective is to grow the dividend annually at a rate consistent with our long-term’s earnings growth objectives. In near-term, our payout ratio will trend slightly above 70%. We are comfortable with that higher range based on the strong growth in our core regulated and commercial businesses. And the cash flows we are repatriating from international. Our strong investment grade credit ratings are important to us, as they help us finance our growth in an efficient manner. I am pleased with our results for 2015. We have successfully executed on a number of key strategic initiatives and delivered strong financial and operating results. Helping to offset the weakness in international, we remain focused on finishing the year well. With that, let’s open the line for your questions. Question-and-Answer Session Operator Thank you, ladies and gentlemen. The floor is now open for questions. [Operator Instructions] Our first question is coming from Shar Pourreza of Guggenheim Partners. Shar Pourreza So this morning, you reiterated your 4% to 6% growth, but also higher yet to be determined 2016 base year and you did drop that footnote you had in the second quarter around DEI potentially being a swing factor in your outlook. Steve is this sort of like what you meant when you mentioned that Piedmont deal would enhance growth trajectory is it less concerns around DEI or sort of what’s driving this increased confidence? Steve Young Well, I think what I would refer you to Shar is the slide we discussed 10. Where we looked at our core businesses, when you isolate international with our core businesses they have grown consistently at 5% from 2013 through ’15 and we would expect that to continue. The international business has involved which moved from a $0.60 per year business to $0.30. And that’s been the challenge we’ve had to deal with in 2015, that’s difficult to overcome. So we billion rebasing in ’16 makes sense in light of what international has done. Shar Pourreza And it included Piedmont right? Lynn Good We expect to close Piedmont Shar towards the end of ’16 into ’17, you may recall from our announcement a week ago that we laid out a calendar. We will work as aggressively as we can to close it but I think a year is a good planning assumption. Shar Pourreza Okay, got it. And then just one last question on international, it’s good to see the currencies becoming a little bit less of an issue the hydrology is improving. We haven’t heard much on this lately. Is there any sort of incremental datapoints around the Brazilian government potentially looking at providing some sort of a retrieve to the hydro generators or is this sort of a kind of a dead movement? Steve Young There has been a lot of activity in this area Shar, recently there was a technical note that was issued by an arm of the government and that’s really just a document that summarizes discussions to-date, a number of discussions are occurring. The government is targeting issuing effectively an executive order this calendar it remains uncertain exactly when, but that’s their target. And what that order might say is not certain at this point either. So there is more work to be done here. I would say that in general the views of people and the government and the regulators have been constructive with regard to generators in our position. So there is more to come there in the meantime, the injunctions are still in effect and that has provided some relief to us. Operator Thank you. Our next question is coming from Dan Eggers of Credit Suisse. Dan Eggers Hi just taking up on the Slide 11, when you guys, you made the comment about the dividend trending higher than target payout ratio, but also you are wanting to keep with the long-term EPS growth rate. Can you just maybe translate what you’re trying to signal in those comments which seem to be a little bit in conflict? Lynn Good Dan, I would go back to the Steve’s comments on Slide 10 with the intent to rebase off of 2016 and move to 4% to 6% from that point forward. We see the dividend trending slightly above 70% in the very near-term. And so if I look at the strength of the dividend, the dividend is really driven by the underlying core business, which is growing quite well and given the investments we have put in place, we believe that it will continue. And so we have confidence in growing it at that rate and allowing payout ratio trend out modestly in the short-term we think it’s a smart decision. Dan Eggers Okay. And then on O&Ms you guys have done a good job as far as bringing down costs since the Progress acquisition. What kind of reductions do you see from here as you are a part of that ’16 drivers the idea of bringing cost out, is it a substantial reduction ’16 versus ’15 or is more just absorbing inflation at this point? Lynn Good We are still at work Dan on our plans and we’re targeting to absorb inflation plus and we think that’s going to be a combination of a number of things that we build a strong foundation on but we are going after productivity and efficiency and the company as you said has demonstrated a great ability to control cost and we see even more potential in to ’16. Dan Eggers Okay. And then I guess maybe the last one just on you kind of just calibrated the commercial business and not to get too far ahead on ’16 but commercial is now coming in below where you guys thought the normal baseline would be, do you still feel comfortable with $100 million as your run rate from residual commercial? Lynn Good This year we’ve been impacted by wind resources Dan and I think that’s a theme that you have seen with others that have significant renewable exposure. So we expect our restoration of that to more normal levels as part of our planning for ’16 and then we do intend to continue to deploy capital in a way that meets our return expectations, so we would expect to see some growth. I think over the long-term the cash spreads and other things will have to be evaluated, but we see ongoing momentum around renewables. Steve Young And we have committed projects for 2016 lined up as well to keep the growth going there and also in our commercial portfolio as you move forward we will start to see earnings from our pipeline investments kick in as well. Dan Eggers Okay. So just one last one on the load growth trends, you may have had a — you are below, at the bottom end or a little bit below where you thought you’d be even the customer growth seemed pretty good this year, are you having to reconsider kind of what that long-term growth rate is, is it 0% to 0.5% or do you think there is some discrete usage trends maybe around multi-family housing or something like that that is explaining why usage has been that much of a drag relative to customer growth? Lynn Good Dan, I think we’ve been working with a 0.5% to 1% for some time and I think a 0.5% seems to be the range that we’re in. And I think it’s all the things you talked about it is synergy efficiency, it is housing patterns and even volatility in industrial. We had strong industrial growth when you dial back in this quarter. So what we are focused on as we kind of link this discussion to our cost structure, is planning to cost structure that can absorb that variability and also be positioned for modest very low load growth if that’s the direction things continue to head. Operator Thank you. Our next question is from Jonathan Arnold of Deutsche Bank. Jonathan Arnold I just would like to understand a little better when you are talking about this rebase on 2016 and Steve, I’m not quite sure whether I have you right, are you saying you anticipate growing at the 4% to 6% through 2016 and then also off of 2016 or implicit within this concept to the rebase seems to be the idea that maybe you weren’t or you want to reposition the range a little bit, I just want to understand what you are saying on ’16, when you made that statement? Steve Young What we are looking at Jonathan is we will set a base year or anchor year off of 2016 and then you would see 4% to 6% growth from there. And we think we’ve got to do that given the changes in international we think it’s stabilized and it’s moved from again a $0.60 business to a $0.30ish business going forward. So where we base with ’16 as the anchor we see a 4% to 6% growth there, underlined by the strong core business growth in the track history that it shows and some potential modest growth in international from that new lower level. Lynn Good And so what I would add to that Jonathan, if you could look at the Slide 10, you see the regulated and commercial portfolio, the blue bar that’s the bar that’s growing at 4% to 6% and then you have an international business, which is about $0.30 in ’15 so it would add to that and grow modestly. So that’s the direction that we are trying to provide here with expectations for ’16 and then we think from that base, we are in a position to grow at 4% to 6% going forward. Jonathan Arnold Okay. Understood. Thank you. Could you maybe just — do you have an expectation currently on what — how pension will look as a driver for next year just specifically or is it a little early to tell? Steve Young It’s a little early to tell on pension you got to take a look at the discount rate right at year-end, and who knows where that will go, if the Fed raises rates or something that could have an impact on it, I don’t think it would be any huge change that we’re looking at in pension expense, at this point but again with it being so sensitive to the discount rate, we would — it’s a little early to say precisely. Operator Thank you. Our next question is coming from Steve Fleishman of Wolfe Research. Steve Fleishman So a couple of questions, I just, these international pressures are not new and in the past you talked about trying to work on a plan and things to offset the international pressures. It just sounds to me like, it just not — you just kind of changed to, they just are what they are, we’re just resetting the base and then growing off there, because these are just — became too much. Is that fair to say what happened? Lynn Good Steve I would say slightly differently. And in 2015, I think the team has done an extraordinary job of offsetting. What is happened in international, we started the year with an expectation, they would deliver 345 and they’re delivering just north of 200 million. And that’s an execution on strategic initiatives more timely and that’s been running the business slow and taking advantage of good weather and other things that have developed. As we look forward, we did not have an expectation earlier in the year of weather international with rebound, the depth of the currency issues, were difficult to forecast at that time, the economic implications. And so as we sit here, closing the year we see a rebound on water conditions in hydrology, but we continue to see headwinds on currency and economic growth. And so we think it’s appropriate in light of what we see today to establish a baseline of about $0.30 for ’15 on international. And then we do believe it’s stabilized and we see an opportunity for modest growth from there. I think what is important is that the 90% of the business regulated in core has demonstrated strong growth over the period of ’13 to ’15 and we think that will keep going. As a result of all the investments we have put in place and our ability to execute. Steve Fleishman And the updated guidance for the international you are now — are you using kind of current forwards for currency in oil and the like or? Lynn Good Yes. Steve Young Yes. Steve Fleishman And essentially are you — okay, great. And then just thinking about Piedmont and the context for the 4% to 6% of this 2016 base now just would that — you talked on the deal announcement of that enhancing the 4% to 6% so if there was no Piedmont, would you still be 4% to 6% or not. Could you just kind of clarify now that you have this new base? Lynn Good Yes. So the growth rate is not dependent on Piedmont. We believe the base business itself, the investments that we’ve outlined, the way the business is executing is capable of growing 4 to 6. So we see Piedmont as incremental to the growth rate. And… Steve Fleishman But still in the 4 to 6? Lynn Good Yes. Steve Fleishman Okay. And then just on the dividend growth and earnings growth comment. Because you’re saying, we’re going to grow the dividend in line with earnings but then we’re above the payout ratio. So kind of by definition you just switch to end up saying about the payout ratio. If that is what you actually do? So could you just kind of clarify your communication there? Steve Young Our dividend is growing about 4% now. I believe that we’ll move above the 70% target level for a while. But as we grow we believe we’ll return back to our target level. Operator Thank you. Our next question comes from Michael Lapides of Goldman Sachs & Company. Michael Lapides Real quick question, just when you think about the renewable business. You have had the earnings benefit in the last year or so. Can you quantify and Steve you touched on it, I want to make sure I understand it. Can you quantify the total EPS benefit of the tax credits? And then how you think about replacing that if solar development slows post 2016 and tax credit roll off or PTCs don’t actually get extended? Steve Young Michael right now, a lot of the net income bottom-line benefit from the renewables, the commercial renewables business comes from the tax benefits. There is some profitability on the non-tax side in the ongoing margin, but the bulk of the earnings comes from the tax benefits. So your question is when these tax benefits when and if they expire what happens there. I think based on what we have seen and heard now there will still be a market for renewable power as no states are backing off RPF standards and that’s a basis for a lot of the growth here is responding to RFPs to meet these requirements. The PPAs in the contracts may have to change with the absence of the tax benefits. And the pricing may have to change, but we will still structure this business to provide profitability here. I would also add that the cost for the renewables is going down and will help offset some of the tax benefits that exists. Michael Lapides Got it. And just how much were for those tax benefits as part of your 2015 guidance. Is that the full piece of commercial that $75 million or just some portion of it? Steve Young It’s the majority of the 75 million. Michael Lapides Got it, okay. The other thing can the O&M cost savings offset the $0.17 impact of positive weather this year? Lynn Good Michael, we are not getting that specific on how each of these drivers impact, so what I would direct you to is think about our O&M spend and we are at work to not only offset inflationary impact to drive those costs lower in ’16. So I think about weather and we always start by planning normal weather and then we’re building up with investment earnings as well as cost control. Operator Thank you. Our next question is from Bryan Chen of Bank of America/Merrill Lynch. Bryan Chen Hi my questions have been answered guys. Operator Our next question is coming from Jim Von Riesemann of Mizuho Securities. Jim Von Riesemann I got to put my dead head on for a second here. Can you just a talk little bit about how much cash flow is upstream from the regulated utilities to the parent level every year on an annualized basis? Lynn Good I think we will probably take that question offline. Jim, I’m not sure we’ve got a cash flow statement sitting in front of us here. Steve Young Right, I don’t have that with me, we’ll have to work on that a bit Jim. Operator Thank you. Our next question is coming from Ali Agha. Ali Agha Lynn and Steve just listening to your comments, just so that I’m clear, with normalized weather next year international being modest, some cost savings and then the rebasing, just directionally it appears that ’16 it is pretty much flat to maybe modestly down from ’15 and then so is that fair? Lynn Good I think we’ve given you the drivers, if you look at the slide, on Slide 10 to grow the base business at 4% to 6% add to it international with modest growth and so I think we’ve given you a pretty good sense of where we think it will be and of course we’ll give you more detail in February, as we finalize our business plans so that you can understand more specifically how much of it is coming from O&M and how much is coming from each of the business segments. Ali Agha Okay. And more near-term in 2015, when you locked of $0.10 from the higher end of the range, is that all because of commercial, is it international being worse, can you just kind of elaborate the change in ’15 guidance? Lynn Good So Ali, we have really been working throughout ’15 to offset weakness in international and have been successful in doing that through a variety of things including favorable weather, as well as early closings on the Eastern Power Agency and the stock buyback. As we look to the fourth quarter though we always plan for normal weather, we started out with October being mild, we have storm expense sitting in October, we have a slighter, weaker currency as a result of some of the movements that occurred in September and then we also talked about the extension of bonus depreciation. We don’t know for sure, but it feels to us like that will likely get extended and if it does, because of our cash position, it results in a modestly higher effective tax rate for the company. So all of those things considered, we think $4.55 to $4.65 is an appropriate range at this point. Ali Agha Steve and on the bonus depreciation front Lynn, I mean the talk is that if it gets extended, it’s a two year extension, I’m just curious of that’s how you guys are seeing it and if so can you just quantify, just a bonus depreciation and extension impact for Duke? Steve Young We’ve heard various guesses that how long it will be extended, we think there is a good likelihood of at least one year, two years is possible as well, and the impacts for 2015, for one year extension is in the range of $0.04 for us if you go beyond into a two year extension, it could be a similar number just depends on our overall tax positioning the issue for us is we’re toggling in and out of an NOL position and which makes us perhaps unique in the industry, if you are deeply within an NOL or outside of an NOL position. This extension doesn’t have an impact and it depends a bit on when we come out of that NOL position, which depends on other factors. So it’s a little hard to predict beyond ’15. Lynn Good And of course all the cash flow. Cash flow is positively impacted, if it is extended, so let see if this is giving you as earnings for certain. Ali Agha Absolutely. Last question Lynn, so on the international operations is the mind set now look, sort of hunker down and sort of work with the portfolio flat to modest growth, is that sort of the planning now and not really being more proactive and saying, hey does this really fit in the portfolio? Lynn Good Our focus has certainly been this year, Ali trying to run the business as efficiently as we can, we focused on cost, I think the international team has done an extraordinary job in a difficult market, we think it stabilized and hopefully, we’ll see a slightly better picture in ’16. I think the portfolio is always under review. The fact that we added Piedmont is consistent with our view that we wanted more natural gas in the portfolio. So that’s an ongoing review, in the meantime we’re also taking advantage of the international cash as you know. Operator [Operator Instructions] Our next question is comes from Paul Ridzon of KeyBanc Capital Markets. Paul Ridzon In your release you indicate that for the quarter weather was a $0.09 pick-up at the utility and then when I look at Slide 19 in the deck. I see that last year it was $0.06 below norm, but this year is basically short of normal. Just trying to reconcile that? Steve Young Yes. I think that your statements are correct there is some rounding in some of these schedules I believe is the difference in your sense. But we’ve returned to normal weather this quarter last year, it was mild weather. Lynn Good And Paul the other thing I would know the share count is going to have a difference between ’14 and ’15, because of the share buyback. Paul Ridzon Okay. And then kind of given the pending Piedmont acquisition, what’s going to happen to proceeds from securitization, should that just sit on the balance sheet when you use that cash when you close the deal? Lynn Good Yes. So we would expect securitization to move through the process in ’16 Paul. So we don’t come into the cash flow as a company and be used for investments or 4 billion debt in the short-term. But we do see at as the cash flow item that over a long-term basis could be used for long-term investments Piedmont being one of them. Paul Ridzon When do you expect that cash? Steve Young We would expect to be able to close the securitization in the first to second quarter of 2016. Paul Ridzon And then just lastly your latest thoughts around filing rate cases in your regulatory jurisdictions? Steve Young We’re looking at filing in I would say in the late teens it depends upon investment plans and other factors there that we’d look at jurisdiction by jurisdiction. But generally we’re looking at rate cases in the Carolinas in the late teens. Paul Ridzon And then lastly just a clarification on the payout ratio discussion, if you were to look at your ’15 payout ratio what would you use as the numerator and denominator. I guess 460 would be denominator? Steve Young I’m sorry, ask that again, I’m sorry I am not. [Multiple Speakers] Paul Ridzon I just want to make sure, how are you thinking about the payout ratio? What — is it the indicated dividend at year-end or is it the dividend paid during the year? Steve Young It’s the dividend paid during the year as it grows over the annual earnings. Paul Ridzon So it’s kind of a mix a blend of two years of dividends, because change at mid-year? Lynn Good So there is nothing fancy about this Paul. Whether you use an annualized number or whether you use what is paid out I think it’s all a matter of small rounding. I would calculate the payout ratio the way you typically do for every other utility. Operator Thank you. There appear to be no further questions in the queue at this time. I’d like to turn the call back to Lynn Good for any closing or final remarks. Lynn Good So thank you everyone for joining us today for your interest and investment in Duke Energy. Our fourth quarter earnings call which will also include our updated financial forecast will be held in February and we look forward to seeing many of you in the coming months and at the EEI Conference next week. Thank you. Operator Ladies and gentlemen, on behalf of Duke Energy we’d like to thank you for your participation. You may now disconnect and have a wonderful day.

American Water Works’ (AWK) CEO Susan Story on Q3 2015 Results – Earnings Call Transcript

American Water Works Company, Inc. (NYSE: AWK ) Q3 2015 Results Earnings Conference Call November 05, 2015, 09:00 AM ET Executives Greg Panagos – VP, IR Susan Story – President and CEO Walter Lynch – COO, President, Regulated Operations Linda Solomon – SVP, CFO Analysts Ryan Connors – Boenning & Scattergood Richard Verdi – Ladenburg Thalmann Michael Gaugler – Janney Montgomery Scott David Paz – Wolfe Research Operator Good morning and welcome to the American Water’s Third Quarter 2015 Earnings Conference Call. As a reminder, this call is being recorded and is also being webcast with an accompanying slide presentation through the Company’s Investor Relations Website. Following the earnings conference call, an audio archive of the call will be available through November 12, 2015, by dialing 412-317-0088 for U.S. and international callers. The access code for replay is 10074632. The online archive of the webcast will be available through December 7, 2015, by accessing the Investor Relations page of the Company’s website located at www.amwater.com. I would now like to introduce your host for today’s call, Greg Panagos, Vice President of Investor Relations. Mr. Panagos, you may begin. Greg Panagos Thank you, Frank and good morning, everyone. Thank you for joining us for today’s call. We’ll do our best to keep the call to about an hour. At the end of our prepared remarks, we’ll open the call up for your questions. As Gary said, my name is Greg Panagos, and I’m the new Vice President of Investor Relations for American Water. Before I read you our forward-looking statements, I would just like to say I’m happy to be here and excited about the opportunity with American Water. Before I read you our forward-looking statement I’d like to say I’m happy to be here and excited about the opportunity with American Water. During the course of this conference call, both in our prepared remarks and in answer to your questions, we may make statements related to future performance. Our statements represent reasonable estimates and assumptions. However, these statements deal with future events. They are subject to numerous risks, uncertainties and other factors that may cause the actual performance of American Water to be materially different from the performance indicated or implied by such statements. These matters are set forth in the company’s Form 10-K and in its other periodic SEC filings. I encourage you to read our Form 10-Q for this quarter, which is on file with the SEC for a more detailed analysis of our financials. Also reconciliation tables for non-GAAP financial information discussed on this conference call can be found in the appendix of the slide deck for the call, which is located at the Investor Relations page of the Company website. We’ll be happy to answer any questions or provide further clarification if needed during our question-and-answer session. All statements in this call related to earnings and earnings per share refer to diluted earnings and earnings per share from continuing operations. And now I would like to turn the call over to American Waters’ President and CEO, Susan Story. Susan Story Thanks, Greg. Good morning, everyone and thanks for joining us. With me today are Linda Sullivan, our CFO, who will go over the third quarter financial results and Walter Lynch, our COO and President of Regulated Operations, who will give key updates on our regulated business. Turning to Slide 5, we reported earnings of $0.96 per share for the third quarter, a 10.3% increase above the third quarter of 2014. Excluding the 2014 cost impact of the Freedom Industries’ chemical spill, third quarter year-to-date adjusted earnings increased 9.4% compared to the same period in 2014. Our employees continue to deliver strong operational and financial results reflected in our ongoing investment in our infrastructure, our improved operational efficiencies and the expansion of customers in our regulated and market based businesses. These results continue our progress toward achieving our long-term growth goal of 7% to 10% EPS through 2019. Based on our performance today, we’re narrowing our earnings guidance range to $2.60 to $2.65 per share. Slide 6 highlights the progress we’re making on our strategies across our businesses. We invested $970 million in capital year-to-date through September. The majority of this investment is in our regulated business, which is the core and foundation of our growth. These investments are mainly for infrastructure to continue providing safe, clean and reliable water services for our customers. Walter will talk further about our ongoing O&M efficiency efforts, which allow us to mitigate build increases to our customers despite this critically needed capital investment. In addition, we continue to invest in regulated acquisitions. Year-to-date, we closed seven acquisitions totaling or adding about 19,200 customers and we have 16 pending acquisitions, which when approved and closed will give us the opportunity to serve an additional 13,300 customers in several of our jurisdictions. We closed the Keystone Clearwater Solutions acquisition in the third quarter. Keystone, while a separate subsidiary is being reported as part of market-based businesses. Last month we were very pleased to be awarded a contract to serve the military community at Vandenberg Air Force Base in California. We now serve 12 military installations across the country. We consider it an honor to provide our service men and women and their families with reliable high quality water and wastewater services for the next five decades and beyond. Our Homeowner Services business continues to grow as well. Within the past couple of weeks, we received a Notice of Intent to award an exclusive contract with Georgetown County Water and Sewer District in South Carolina. Pending contract negotiations we should be able to offer programs to their 22,000 eligible homeowners. Looking forward, we remain confident in our ability to deliver on our long-term earnings per share growth goal of 7% to 10% through 2019. At the end of our prepared remarks, I’ll spend just a few minutes talking about our regulated business and how our investments and our positive financial performance demonstrate our customers and the communities we’re privileged to serve. And with that, Walter will now give an update on our regulated businesses. Walter Lynch Thanks Susan and good morning, everyone. As Susan mentioned, our regulated business have delivered strong results year-to-date. We continue to improve our owned and efficiency ratio as shown on Slide 8. We reached 35.8% for the 12 months ending September 2015. This is the result of a disciplined approach to cost management by our employees. We continue to make steady progress towards achieving our goal of 34% or less by 2020. Achieving sustainable O&M reductions is important to our strategy as it enables us to redeploy these cost savings in the capital investments in our water and wastewater infrastructure with minimal impact on our customer’s bills. A perfect example of our strategy and action as our recent New Jersey rate case order on Slide 9. During the third quarter, the New Jersey Board of Public Utilities approved the 3% or $22 million annualized increase in water and wastewater revenues that became effective on September 21. Since the last rate case in 2012, the company invested more than $775 million to replace and upgrade our water and wastewater infrastructure including approximately 160 miles of water mains and connection pipes. During the same time, New Jersey American lowered their operating expenses by more than $90 million. Those cost reductions supported more than $125 million of infrastructure investment with no impact on customer bills. Also last week in Virginia we filed a rate request for $8.7 million. The request seeks recovery of about $53 million in system investments made since our last rate case in 2012. Our operating expenses in Virginia have declined 2% since our last rate case reflecting our continued success in driving operating efficiencies. We use those cost savings to offset some of the revenue requirement requested for our capital improvement, which again minimizes rate impacts on our customers. We expect the decision in the next nine months. When we talk about owned and efficiency improvement, this is exactly what we mean, inventing to ensure reliable service while limiting the impact of when our customers pay. Moving to California, our team continues to display leadership in dealing with the draught and we’re certainly proud of all of their work to help our customers during this period. Overall five of our six districts are meeting the State Water Resources Control Board reduction targets. In venture accounting where customers are almost meeting their targets, we recently implemented Stage 3 conservation measures. These measures along with other customer outreach is helping us encourage conservation during this draught and we want to thank our customers in California who really stepped up to the challenge. I’ll give a quick update on our Monterey Peninsula Water Supply Project as well. Last month the California Coastal Commission approved an amendment to our permits to operate a test line well. This minor amendment allowed us to restart the well and continue to prove up the operational feasibility of subsurface intakes for this water supply project. The project is undergoing environmental and regulatory review by the California Public Utility Commission and we expect to start construction in the second quarter of 2017. Lastly let me discuss the weather impacts during the quarter. As we mentioned in our second quarter call, we experienced heavy rainfall in our central states during July. We saw this pattern continue in that region through August. Also in the quarter we experienced hot and dry conditions primarily in our northeast region. Due to our geographic diversity, these varying weather conditions largely offset each other in the third quarter, so there was no net material impact on our financials. Now I’ll turn the call over to Linda for more detail on our third quarter financial results. Linda Solomon Thank you, Walter and good morning, everyone. In the third quarter, we continue to deliver strong financial results. As shown on Slide 11, revenues were up 6% quarter-over-quarter and up 4% year-to-date. Earnings per share for the third quarter were $0.96, up 10% over the same period last year. Year-to-date earnings were $2.09 per share, which after adjusting for 2014 impact of the Freedom Industries chemical spill were up about 9% over the same period last year. In terms of business segment contribution, for the quarter the regulated businesses contributed earnings of $0.97 per share or an increase of about 10%. Our market base businesses contributed $0.07 per share, an increase of about 17%. Parent interest and other, which is primarily interest expense on parent debt was a negative $0.08 per share for the quarter, relatively flat to the prior year. As Susan mentioned because of the Keystone acquisition in the third quarter and the financial results of Keystone have been included in the market base business segment, the purchase price after purchase price adjustments was $133 million. As we’ve previously disclosed, we expect Keystone to be earnings neutral in 2015 and accretive to earnings in the first full year of operation. Now I’ll go over the different components of our third quarter earnings per share growth as shown on Slide 12. In the third quarter, we reported a $0.09 increase in earnings per share. Approximately, $0.05 of that increase was due to mild weather during the third quarter of 2014. As Walter mentioned, during the third quarter of this year, the financial impact of the varying weather conditions largely offset each other. As we had higher revenue of around $10 million from hot and dry conditions in the Northeast, which was offset by lower revenue of around the same amount from the wet weather experienced in our Central State. Next the regulated businesses benefited from higher revenues of $0.04 per share mainly from authorized rate increases, from infrastructure charges and rate cases in a number of our regulated states and additional revenue from acquisition growth, partially offset by lower demand in California. For the market-based businesses, earnings per share were up a penny due to additional construction projects under our military contracts and the addition of two new military bases in the second half of 2014. We also had contract growth in our Homeowner Services business. Partially offsetting these improvements were higher depreciation and other cost of about a $0.01 per share mainly due to growth associated with our infrastructure investment programs at the regulated businesses. Now let me cover the regulatory highlights on Slide 13. We currently have three general rate cases in process, West Virginia, Missouri and Virgina for a combined annualized rate request of approximately $69.5 million. For rates effective since October 1 of last year through today, we received a total of approximately $77.5 million in additional annualized revenue from general rate cases, step increases and infrastructure charges. We encourage you to review the footnotes in the appendix for more information. Slide 14 is a summary dashboard of our financial performance, which showed improvement across the Board. During the third quarter of 2015, we made investments of approximately $455 million, primarily for regulated infrastructure investments and the acquisition of Keystone Clear Water Solutions. Year-to-date we have invested a total of $970 million of which $793 million was for regulated infrastructure investments and $44 million was for regulated acquisitions. For the year, we expect to invest $1.3 billion to $1.4 billion with almost $1.2 billion to improve our regulated water and wastewater systems. Regulated infrastructure investments are projected to be about $100 million higher than we originally planned as we continue to optimize capital deployment under our infrastructure mechanisms. For the quarter our cash flow from operations increased approximately $48 million and year-to-date $15 million primarily from earnings growth and the timing of working capital item. Our adjusted return on equity for the past 12 months was 9.12%, an increase of approximately 48 basis points compared to the same period last year. We also paid a $0.34 quarterly cash dividend to our shareholders in September, which represented about a 10% increase compared to last year. And on October 30, the Board of Directors approved a $0.34 dividend per share to be paid on December 1 and as Susan explained, building on our strong financial performance year-to-date we’re narrowing our 2015 earnings guidance from continuing operations to be in the upper end of our prior range or $2.60 to $2.65 per share. And with that, I’ll turn it back over to Susan. Susan Story Thanks Linda. Before taking your questions, I’d like to spend a few minutes talking about how our investments and our strong performance benefit our customers and the communities we serve. As Linda mentioned we planned to invest up to $1.4 billion in 2015 with almost $1.2 billion of that total to improve our regulated water and wastewater systems. So what is investing more than a $1 billion a year mean to our customers and communities? It means we replace up to 350 miles of pipe every year. To give you an idea of the size of our water pipe network if you placed all the pipes we manage end to end, it would stretch over 48,000 miles nearly enough to go around the earth twice. It also means a strong water quality record. We are 20 times better than the industry average for meeting all drinking water requirements and we’ve earned more awards from the EPA partnership for safe water than any other water utility in the Nation. Why does this matter? Even though we serve about 15 million people across the country, we never forget that at the end of every pot line, there is a family depending on us to provide life’s most essential ingredient. Not only as investment in our water and wastewater system is critical to families, businesses, industry and fire protection, but that investment also provides jobs and economic benefit. According to the Water Research Foundation, $1 billion invested in water infrastructure creates approximately 16,000 jobs. So American Water’s regulated infrastructure investment through 2019 will result in more than 80,000 new jobs in the communities we serve. We know that we have to be sensitive to the impact of cost increases to our customers, even for something as necessary as infrastructure replacement. We also know as Walter mentioned that for every dollar we save, we can invest $6 of capital with no impact on our customer build. By combining effective cost controls with regulatory mechanisms that smooth cost out, we can make a big infrastructure impact without a big bill impact. In fact, we’ve invested almost $700 million nationally in our basic type programs in just 2013 and 2014 and all of that investment impacted customer build by just $1 almost on average. That’s less than the cost of a loaf of bread, a cord of milk and far less than what it cost you to get your own money from a general ATM machine, which is about $3 to $4 a transaction. Across our footprint, most of our customers still pay about a penny per gallon of water. Our average family pays a little over $2 a day for all of their water needs, which is literally a ton of water a day delivered directly to their sink, their showers and their washing machine. At the end of the day, we know that what we do in our customer’s long term best interest will also be in our investor’s long term interest and we never lose that focus. So with that, we’re happy to take your questions. Question-and-Answer Session Operator Thank you, ma’am. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Ryan Connors from Boenning & Scattergood. Please go ahead. Susan Story Good morning, Ryan. Ryan Connors Good morning, Susan. I had a question on the rate case in New Jersey. You’ve got $22 million in new rates there which is about — I guess about a third of the $66 million you requested. Obviously, that’s a very crude metric that I guess maybe gets too much attention sometimes. But that does seem to continue a trend where the gap between asked and received rates has been kind of growing. Can you just talk about why that’s happening and what the ramifications of that are for the business? Walter Lynch Yes Ryan, Walter here. Thanks for the question. Just to put a little clarification on it, the last time we filed a rate case in New Jersey, we didn’t have a disc mechanism. So in this case, the disc mechanism is included but you have to look to the revenue that was generated from it. If you do that and include the $22 million we came in, in excess of 50% of our filing. So that’s the difference. We invested as Susan said, a significant amount of money in New Jersey and in our infrastructure and when you include that, with the outcome of the rate case, again we’re in excess of 50%. So it’s right in line where we’ve been historically. Ryan Connors I see. So the national trend then would be a function of the fact that D6 are becoming more and more prevalent. Walter Lynch Absolutely. Ryan Connors Okay. Interesting. My other question was there were some fairly notable development yesterday with one of your peers California basically saying that they’re going to have to defer revenue recognition in the fourth quarter because WRAM balances are increasing. I know you’ve had your own issues having to extend the collection period on your own WRAM balance, can you talk about the situation in California related to the WRAM and the outlook and also maybe give us your take not only on how that impacts your business, but where you see the regulatory evolution going, whether the draught creates any change in the regulatory situation in California? Linda Solomon Ryan, this is Linda. Let me start and talk first about the accounting issues around revenue recognition. So the accounting rules require that if revenue is extended — collection of revenue is extended beyond two years that you need to defer the equity component or the equity return of that revenue. And so this is really an accounting timing issue versus a collection issue. We did experience something similar in the third quarter when we requested and filed our application with the CPC to defer recovery in Monterey over a 20-year period and including a return. We have recorded that impact in our third quarter results and it was about a $5 million pretax impact. Now in terms of the regulatory environment, I’ll start and ask Susan if she would like to add to it, but really decoupling mechanisms were put into place in California to deal with situations like the severe draught the California is going through now so that you can align the customer conservation with the goals of the company and so these decoupling mechanisms really align these goals and allow us to help our customers and serve in the long term. Susan Story Right, and I think Linda is exactly right. The only thing I would add is this is an extraordinary situation in California and we all know that and we believe — we know that the Utility Commission, the companies were all trying to work together to find a way forward that’s in the best interest of our customers and the companies and everyone involved. Ryan Connors And then while we’re on California, one last one if I might sneak it in is that on the terms of return on equity you’re at 9.99 in California. Most of you appears are at 9.47 because you stood at the automatic downward adjustment duty or credit rating situation there, but the credit standing continues to improve. So is there any chance that you could be re-trued up or trued down to that level and talk about how that mechanism works and the ROE outlook for California thanks. Susan Story Absolutely, we’re at 9.99 in that mechanism in its current formal extent through the end of 2016 and then we would go through the next profit capital process in California to reset rates going forward. Ryan Connors Got it. Okay. Thanks for your time. Operator And our next question comes from Richard Verdi from Ladenburg Thalmann. Please go ahead sir. Richard Verdi Good morning, everyone and nice quarter and thanks for taking my call here. Just a quick follow-up question to Ryan I enter my question. The Pence or the New Jersey rate case outcome in combination with the D6, Walter you had mentioned it’s in excess of 50%. We have that around 54.6%, does that sound about right? Walter Lynch Yes that sounds about right Rich. Pretty precise. Richard Verdi Okay, perfect. Okay and then Susan a quick question for you surrounding the acquisition strategy. Somewhat recently you were quoted saying American is going to ramp up its focus on the wastewater acquisition front. So can you just maybe talk a little bit about how you see this benefiting American Water? Susan Story Sure. I’ll start and then Walter may want to add something to it. So one of the things that’s interesting and I know the national numbers are about 84% of Waters provided by public entities and about 98% of wastewater is and what we find Rich is that of a 3.3 million metered customers we have that only about 150,000 of those are wastewater customers. So we know that we’ve got several communities around the country where we already serve water and someone else serves wastewater. So that’s one piece and then you add to that the fact that there is growing number of EPA consent decrees, you got an issue where a lot of the wastewater infrastructure is aging and needs investment and you have some community who would prioritize other needed critical investments above their wastewater. So far us the real value is in many of these places we already served water. So to serve wastewater we know the communities. They know us. There are efficiencies we can gain because we already have offices there even though you would have different people doing some of the work. So we think it’s just a natural progression. Then on top of that you add the fact that we just talked about California. When you look at water, it really is a single one-cycle for water and in the past, where we separated portable water with stormwater and wastewater, those days are — they’re starting to merge. So we believe that as the leading water utility in the country, we want to a leadership role in looking at water as one water from start to finish and especially given our strength in our research and development efforts that we got on the whole water cycle. Walter Lynch Yes, Walter here. Just to emphasize the operational synergies. We already have offices. We have relationships. We have employees that are proving service to our customers. To us it makes too much sense not to engage on a wastewater side and that’s what we’ve been doing and we’re getting really positive feedback in those communities where we do provide both services. Richard Verdi Excellent. Okay. And next, thinking about the Water Infrastructure Protection Act recently implemented in New Jersey, clearly that’s a great outcome for American and Americans performed well from that Act and now Chairman [indiscernible] in Pennsylvania implement something similar. So if Pennsylvania does when considering that both New Jersey and Pennsylvania in this situation will have attractive legislation, do you think that it may eventually result in the American Water middle region representing more than 50% of its current, where that currently or do you think you would try to exploit that Pennsylvania move, but then grow in other state to maintain that diversified geographic footprint? Susan Story I’ll start and Walter may want to add. So number one, we value very mach our geographical diversity and how we do look to grow in Pennsylvania and New Jersey, we’re also looking to grow in the Midwest for example where we have a significant presence. So we do think this legislation and Walter and his folks have been key at proving research and information for those policymakers who are looking at different options to improve the economy in their areas. We think that it’s important to have good legislation everywhere and we think it’s good for the citizens and the people who are consumers of water and wastewater. Walter Lynch Yes, with those definitely are huge plus to accelerate acquisitions in New Jersey. If we get that in Pennsylvania, it will provide the same benefit, but we also have enabling legislation in many of our other states including many Midwestern states and some of this was tailored after the legislation we had in our Midwest states. So it looks very, very favorable in the Northeast, but we have the same favorable regulation in the Midwest. Richard Verdi Okay. Great. Thank you for that color guys and last one for me, looking at the non-regulated side, in our view we see that Keystone acquisition is just a super move, that’s a great move from our view. Is there anything else like that in the pipeline or maybe better put, can you give us — just give us an update on the non-regulated position driven strategy there? Susan Story Sure. So first of all fundamentally there is two things I want to say is that when we go into the market based businesses, we ensure that it leverages the core competencies that we have as a company. We’re not going to be going at two and three steps beyond what our core competencies are, which is water, wastewater, stormwater, those type of efforts. So I just want to make sure people understand that clearly. The second thing is as we said in our last earnings call, the market based businesses, which include all of the American Water enterprises lines of business and Keystone, we will not — we don’t see that growing beyond 15% to 20% of earnings and only towards the high end of that if it’s regulated like in the military services. So I just want to say that’s it’s on. So in terms of opportunities, again we’re going to stick to our netting, stay close to our core competencies, where there are opportunities to number one leverage the expertise we have in water, wastewater, water treatment, infrastructure investment, those type of things we will look at, but we also look at the risk profile of anything we do because we are extremely cognizant and dedicated to let our core we’re a regulated utility and we want to ensure that any growth we have is smart growth. Richard Verdi Okay. Great. Thank you Susan. I appreciate the guys and great quarter once again. Susan Story Thank you. Operator [Operator Instructions] Next question comes from Michael Gaugler from Janney Montgomery Scott. Please go ahead. Michael Gaugler Good morning, everyone. Susan Story Good morning, Mike. Michael Gaugler Just a couple of things. I would appreciate an update on the potential headquarter move and the timing implications in terms of the tax breaks and then also your thought on Keystone Clear Water now that you’ve been in that business for a bit. Linda Solomon Mike, this is Linda. Let me start with the move to Camden. We’re currently in the site selection process and we’re continuing through that process. We’re working to make sure that we have all of the tax issues handled appropriately with the City of Camden and we are very excited to be part of the revitalization of Camden. On Keystone, so everyone of course on the call is aware that there are market conditions on oil and gas and of course from the negative side from the market is that, the activity in the capital spending has been reduced somewhat. The number of rigs are down and again in the Marcellus and Utica interestingly while we have the cheapest cost for natural gas drillers that also require more water we know that there is an issue for the supply actually to take away capacity. So from the market issues that everyone is familiar with, we also are tracking this. We’re tracking it with the business. We also are very encouraged and we’re following very closely the progression of the construction of the takeaway pipes because we believe that whenever the takeaway pipeline are completed, that that is where and I know that all of you know this, where we’ll see a resurgence in that particular area of the country for natural gas. And with that said, since we have bought Keystone and since we closed in July, there are some positives that are going on for us. Number one, it’s interesting that as several of the ENP are looking at the current situation, they’re also looking at water infrastructure that will be needed for the resurgence that is expected at the end of ’16 and into ’17. So we’re in conversations looking at future activity, because there is a time period that we need to develop water infrastructure, which is critical for most of these wells. Another thing that we see is that there are some near term opportunities with the ENPs continuing to prioritize their capital for their core business, there is more of an interest of us taking a role into water infrastructure and water pipeline including owning it which would be a little longer term in some of the contracts that currently have. Looking at construction ownership of storage and exchange facilities and not just pipeline and we’re seeing that there is a renewed interest as the ENPs have a goal of 100% water reuse and recycling. So we do the transports and we’re seeing really a pre-robust business on the transport to the recycling facilities to ensure extremely high levels of reuse and recycling. And then another positive that we’ve seen in the almost six months we’ve owned Keystone is that, they are increasing their customer base significantly with the addition of several new large customers and we’ve calculated that our market share of the water services in the Utica, Marcellus has increased from about 20% to 25%. So yes it’s a difficult environment as we know, but being a water focused subsidiary of ours looking at solutions for that area we’re seeing some bright spots for us and we continue to, we said earlier when we purchased Keystone, we expect it to be EPS neutral in 2015 and to be accretive next year as Linda mentioned. Michael Gaugler All right. Thanks Operator [Operator Instructions] Follow up question from Richard Verdi from Ladenburg Thalmann. Please go ahead. Richard Verdi Hi guys, thanks for letting me back in. Just a question on — just a follow-up to Michael’s inquiry surrounding Keystone, this might be a tough question right, I am just curious to see what the take is, when you look at the frac sand guys or the oilfield services players, it’s up in the air when that energy space is going to recover. Some say it’s going to be — we might see a bottom in Q1 and then improvement back into ’15. Some others say it won’t even be until ’17, whether its improvement. But it sound like what you just said you expect it to be accretive in ’15. So I am kind of wondering, one, what maybe your outlook is there for, what may be Keystone’s outlook is for energy space and maybe what you guys are doing differently to ensure that that’s one of the expense in 2016. Susan Story Rich, thank you for this and so on December the 15 at our Analyst Day the CEO of Keystone Ned Wehler who has been in the business for years, he is actually going to be part of our Investor day presentation and he is going to offer his insights that will give an additional month to see where everything is playing out. Again I think we can say some things now, but I think it would be better to wait till Investor Day and really talk to the expert. We’re looking at a lot of different options. We’re trying to be very practical and realistic, which is why in answer to Mike’s question, I wanted to give both the positives but also the things we’re very cautionary about. And so it will be interesting. We do have some thoughts at this time, but on December 15, we fully expect that question to be asked and from there to give his thoughts about that. Richard Verdi Okay. All right. Fair enough. Thank you, Susan. Operator And our next question comes from Ryan Connors from Boenning & Scattergood. Please go ahead. Ryan Connors Great. Thanks also for letting me in and again to figure out coming with one more I have since there is time, so rising interest rate environment that we’re likely to enter into here that’s starting to raise rates, obviously there are various commission look at benchmark rates as a proxy for risk free and there is interest in theory, that’s a positive tailwind for ROEs. How does that impact what you do when you’re asking — when you’re filing rate cases and what you’re asking for an ROE? Do you start to reflect that into higher requests for ROE as the Fed is getting ready to raise rates or talk to us about that dynamic? Linda Solomon Yes Ryan, this is Linda and generally what we have seen with regard to past trends is that as interest rate rise then over time that is correlated with increases in the return on equity and so I would expect that moving forward to the extent that interest rates improve that we would see similar trends. Ryan Connors Okay. But you used to say that goal to actually — where do you start building that into what you’re asking for? Is that coming later or is that something you’ve started to do right here as we’re sort of getting ready to enter into rising rate environment? Linda Solomon Right Ryan and really what we will do, typically most of our states have the cost of capital as part of the general rate case profit and so we would be looking across our states and determining the optimal time to go in for general rate case. We also have some states that have a separate cost of capital mechanism like California which has a set schedule, which we would be — which is set through 2016 and then we would be setting new rates for 2017. So it will depend on the jurisdiction and it will also depend on a multitude of factors that we look at in terms of the timing of our general rate case filings. Ryan Connors Interesting, well thanks for that. Linda Solomon Absolutely. Susan Story Thanks Ryan. Greg Panagos Operator, do we have any more questions? Operator, are you there? Linda Solomon Maybe he is experiencing some technical. Susan Story Yeah, we can’t hear anything. If you can hear us, we can’t hear you. Operator Pardon me, the next person to ask a question is David Paz of Wolfe Research. Susan Story Okay. Great, hi David. David Paz Good morning. Susan Story David, that’s quite a dramatic kind of intro to your question. David Paz Yeah, you can take credit for that one, but you may have actually just one of my questions on California, but just can you remind me when the cost of capital proceeding and where ended? Susan Story The cost of capital proceeding will be filed in the beginning of 2016, so about March of 2016. David Paz Okay. And if you — it was extended once before correct? Susan Story That’s correct and it’s extended through the end of 2016. We actually begin the filing in the first quarter of 2016 for cost of capital affected in 2017. David Paz Right and just remind me, were there any changes to the mechanism when you extended it this last time versus the original I guess agreement? Susan Story No, it was extended in its current forms. David Paz Okay. And is there any chance for you guys to extend that another year, given that not much has changed on the rate side? Susan Story We’re always looking at opportunities so that — and working with the Commission on these types of things as well as the other investor owned utilities in California. David Paz Okay. Separately this year have you announced any new large regulated projects like water treatment plants or the like that, that were incremental to the plan you gave last year? Walter Lynch This is Walter, no, no, it’s has been in line with what we’ve said last year. We just continue to upgrade our plants as part of our normal capital investment but no new plants in line. David Paz Okay. And you’ll give a 2016, 2020 capital plan in December. Walter Lynch That’s correct. David Paz Great. Thank you so much. Susan Story Thanks David. Operator And this concludes our question-and-answer session. I would now like to turn the conference back over to management for any closing remarks. Susan Story Thank you, Frank. We would like to thank everyone for participating in our call today. And as always if you have any questions, please call Greg or Durgesh and they’ll be happy to help. Before I let you go, I’ve mentioned it during the Q&A, I would like to remind you all that we’re hosting our Investor Day at the Western Times Square in New York on December the 15 from 9 AM until noon. We will have a light breakfast beforehand and lunch available for afterword. So it is not the program that attracts you, hopefully the food will. We will be discussing our plan for 2016 to 2020. We’ll have added color around 2016. You’ll hear updates and projections for our regulated business from Walter as he has already said. An update from Sharon Carmen on our plans for the American Water Enterprise’s lines of business, homeowner services, military services and contract services. And as I mentioned before, you’ll hear from the CEO of Keystone, Ned Wehler who is going to offer his insight into that business and the market, and of course Linda will provide updates on our financial plans. We hope all of you can attend. The session will be webcast and thanks again to everyone for listening and we’ll see you in December. Operator The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect the line.