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Ormat Technologies’ (ORA) CEO Isaac Angel on Q4 2015 Results – Earnings Call Transcript

Operator Good morning and welcome to the Ormat Technologies’ Fourth Quarter and Full-Year 2015 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Rob Fink of Hayden, IR. Please go ahead. Rob Fink Thank you, operator, and thank you everyone for joining us today. Hosting the call are Isaac Angel, Chief Executive Officer; Doron Blachar, Chief Financial Officer; and Smadar Lavi, Vice President of Corporate Finance and Investor Relations. Before beginning, we’d like to remind you that the information provided during this call may contain forward-looking statements relating to current expectations, estimates, forecasts and projections about future events that are forward-looking, as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements generally relate to the company’s plans, objectives, and expectations for future operations and are based on management’s current estimates and projections of future results or trends. Actual future results may differ materially from those projected as a result of certain risks and uncertainties. For a discussion of risks and uncertainties, please see Risk Factors as described in Ormat Technologies’ Annual Report on Form 10-K filed with the SEC. In addition, during the call, we will present non-GAAP financial measures such as EBITDA and adjusted EBITDA. Reconciliations to the most directly comparable GAAP measures and management reasons for presenting such information is set forth in the press release that was issued last night, as well as in the slides posted on our website. Because these measures are not calculated in accordance with U.S. GAAP, they should not be considered in isolation from the financial statements prepared in accordance with GAAP. Before I turn the call over to management, I would like to remind everyone that the slide presentation accompanying this call may be accessed on the company’s website at ormat.com, under the Events & Presentations link that’s found on the Investor Relations tab. With all that said, I’d now like to turn the call over to Isaac. Isaac, the call is yours. Isaac Angel Thank you very much, Rob, and good morning everyone. Thank you for joining us today for the presentation of our fourth quarter and full-year 2015 results and our outlook for 2016. Starting with Slide 4, this was a very strong conclusion to a very good year for Ormat. Our product segment outperformed our expectations, growing 23% for the year. Balancing headwinds related to the commodity prices with segment revenue in our Electricity segment. Our Electricity segment delivered 8.6% growth in generation that will support our future revenues growth. Despite challenges related to commodity prices, we maintained solid margin levels. This performance peaks to both our balanced business model and our methodical efforts to improve operational efficiency, improve profit margins, and diversify revenue. Our strong financial performance was only a small part of our achievements. In 2015, we took meaningful steps to increase shareholder value by completing the Northleaf and restructuring transactions, building our strategy, and starting to implement it. We continue to enhance all aspects of Ormat’s value chain to improve our performance as well as to progress with near and long-term strategic initiatives in our core geothermal business and in new activities to continue and provide long-term and sustainable growth. I will elaborate on the progress we have made and our plans for the future after Doron will review the financial results. Doron? Doron Blachar Thank you, Isaac, and good morning everyone. Let me start by providing an overview of our financial results for the full-year ended December 31, 2015. Starting with Slide 7, total revenues for 2015 were $594.6 million, up 6.3%, compared to $559.5 million in 2014. The increase was driven by increased revenues in our Product segment of 23.4% compared to 2014 and was partially offset by 1.7% decrease in our Electricity segment, which represented 63.2% of total revenues. In our Electricity segment, as you can see on Slide 8, revenues were $375.9 million in 2015 compared with $382.3 million last year. The decrease in this segment was mainly due to a $30 million reduction in the revenues generated in the power plants that are tied to oil and natural gas prices, as well as lower revenues in Puna power plant having lower generation as a result of last year [indiscernible]. The decrease was offset mainly by additional revenues generated by the second phase of McGinness Hills and Don Campbell power plant in Nevada, which commenced operation in February and September 2015 respectively. In the Product segment, on Slide 9, full-year revenues were $218.7 million, compared to $177.2 million in 2014, which represented 23.4% increase. This increase was primarily due to the increased backlog we had at the beginning of the year and commencing revenue recognition on the new contracts as we signed early in the year. Moving to Slide 10, the Company’s combined gross margins for 2015 was 36.7% compared to 36.4% in 2014. In the Product segment, gross margin was 38.8% compared to 38.4% in the prior year. The increase was driven primarily by a shift in product mix and different margin in the various sales contracts for 2015, and improvements made in our – at our Ormat Manufacturing Facility. In the Electricity segment, gross margin was 35.5%, similar to 2014. Despite, the $30 million decrease in our annual revenues, as a result of lower natural gas and oil prices, we were able to maintain the same margin due to the operational improvements we conducted in our power plant as well as the addition of the second phase power plant in McGinness Hills and Don Campbell that came online in 2015 and in which we benefited from the economical scale. In 2015, 40% of our electricity revenues were tied to oil and natural gas prices. In February, we held our exposure to natural gas for 2016. In the past, we use forward contracts to hedge our revenue and adjusted EBITDA. This year, in light of the low natural gas and oil prices, we decided to hedge on natural gas exposure by setting coal option. This hedging strategy together with a transition to a fixed price PPA for Heber 1 power plant significantly reduces our exposure and we believe revenue and adjusted EBITDA in 2016 will be less vulnerable than in 2015. Moving to Slide 11, 2015 full-year operating income was $164.1 million compared to $143.5 million in 2014. Operating income attributable to our Electricity segment for 2015 was $99.3 million compared to $90.4 million for 2014. Operating income attributable to our Product segment was $64.7 million compared to $53.1 million in 2014. Moving to Slide 12, interest expense net of capitalized interest for 2015 was $72.6 million compared to $84.7 million in 2014, a 14.3% decrease year-over-year. This decrease was primarily due to lower interest expense as a result of principal payment of long-term debt and the revolving credit line with bank, a decrease in interest related to the sale of tax benefits and a slight increase related to interest capitalized to project. The decrease was partially offsets by an increase in interest expense related to a loan received to finance the construction of the second phase of the McGinness Hills power plant. Moving to Slide 13, net income attributable to the Company’s stockholders for 2015 was $119.6 million, or $2.43 per diluted share, compared to $54.2 million, or $1.18 per diluted share for 2014. The net income includes approximately $48.7 million non-recurring and non-cash income tax benefit and related expenses recorded in the third quarter of 2015 relating to new tax law in Kenya, which extended the period of utilizing investment deductions from five years to ten years for our Olkaria 3 power plant in Kenya. Excluding the non-recurring income tax benefit and related expense, net income attributable to the company’s shareholders was $70.9 million, or $1.44 per diluted share, compared to $54.2 million, or $1.18 per diluted share, in the third quarter of 2014. Now, I’d like to go over a few quarterly financial highlights beginning with Slide 14. For the fourth quarter of 2015, total revenues increased 14.6% to $171.1 million, compared to $149.2 million in the fourth quarter of 2014. Revenues in the Electricity segment increased 4.8% to $97.8 million in the fourth quarter of 2015, up from $93.3 million in the fourth quarter of last year. Revenues in the Product segment was $73.3 million, an increase of 31%, compared to $56 million in the fourth quarter of last year. Now on Slide 15; operating income for the fourth quarter of 2015 increased to $49.1 million, compared to $34.8 million in the fourth quarter of 2014, representing 41.1% increase. Net income attributable to the company’s stockholders, for the fourth quarter of 2015, were $23 million, or $0.46 per diluted share, compared to $7 million, or $0.15 per diluted share, in the fourth quarter of 2014. Please turn to Slide 16 on adjusted EBITDA. Adjusted EBITDA for 2015 was $291.3 million, compared to $272.7 million in the same period last year, which represents a 6.8% increase. This increase was despite $22 million reduction in our annual adjusted EBITDA as a result of lower natural gas and oil prices. Adjusted EBITDA for the fourth quarter of 2015 was $79.1 million, compared to $68.3 million in the same quarter last year, which represents a 15.8% increase. Reconciliation of the EBITDA and adjusted EBITDA is described on the appendix slide. Turning to Slide 17, cash and cash equivalents, as of December 31, 2015, was $185.9 million. We generated $190 million in cash from operating activities, and invested $152.5 million in CapEx. The accompanying slide breaks down the use of cash during the year. Our long-term debt, as of December 31, 2015, and the payment schedules are presented in Slide 18 of the presentation. The average cost of debt for the company stands at 5.9%. I would also like to mention that Ormat’s equity passed for the first time the $1 billion mark [ph] in which $1.08 billion. On February 23, 2016, Ormat’s Board of Directors approved the payment of a quarterly dividend of $0.31 per share for the first quarter. The dividend will be paid on March 29, 2016 to shareholders of record as of the closing business on March 15, 2016. In addition, the Company expects to pay a quarterly dividend of $0.07 per share in the next three quarters. That concludes my financial overview. I would like now to turn the call to Isaac for an operational and business update. Isaac? Isaac Angel Thank you very much, Doron, starting with Slide 20 for an update on operations. As I mentioned in my opening remarks, this was a very good year for Ormat, and I would like to elaborate on some of the achievements being accomplished. We have discussed few times in 2015, the joint venture with Northleaf Partners through which we monetize the portion of our portfolio and provided the company with additional capital for expansion. The partnership has progressed exactly as we hoped it would and we expect to add the second phase of Don Campbell power plant with the joint venture in the first half of 2016. We also successfully completed the share exchange transaction with our former parent entity, Ormat Industries. The net result of this transaction increase the public float of our stock from approximately 40% to approximately 76% of our total shares outstanding, which helped to expand and improve our liquidity. This transaction also streamlined and simplified Ormat’s corporate structure. With these two milestones, serving as a foundation, we share with the market a new multi-year strategic plan for long-term sustainable growth at an Analyst Day in March in New York. This plan involved facility optimization to maximize profitability, geographic expansion, and market expansion involving Ormat transitioning from a leader in geothermal energy to a global leader in renewable energy. During the year, we have refined and started to implement a number of the elements of the new plant and pleased to report that we made significant steps to gain each of these components of our strategy. Moving to Slide 21; we made improvements in all aspects of our value chain with using manufacturing lead-time, improving management control and procurement. This process translates into a significant improvement in gross margin and adjusted EBITDA margin, if [indiscernible] on the Electricity segment on Slide 22, generation in 2015 was 4.8 million megawatt hour compared to 4.5 million megawatt hour in 2014, which represents 8.6% increase primarily as a result of the second phase of Don Campbell and McGinness power plants that commenced operation in 2015. We have made planned level adjustments, designed to optimize our electricity generation including the elimination of older or less efficient components with the goal of improving profitability. This progress is evident in the financial results we are reporting today. We see improvement in the adjusted EBITDA per megawatt with the similar levels in 2015 compared to 2014, despite commodity impact on revenues. We see a significant reduction in O&M cost and we see a reduction in CapEx per megawatt from a range of $4.5 million to $5 million per megawatt to a range of $4 million to $4.5 million per megawatt. We believe that new capacity that was recently added from Olkaria power plant in Kenya should further improve operation margins, which will in turn drive higher levels of adjusted EBITDA and profitability. Turning to Slide 23, we also made progress in our geographic expansion goals as evidenced by the recent announcement the signing of binding Memorandum of Understanding to acquire, gradually, 85% of geothermal power plant in the Island of Guadeloupe. As we stated at the Analyst Day, growth through M&A is a key part of our overall strategy. Our strong balance sheet positions Ormat well to execute additional strategic execution – acquisitions. As it relates to our goal of expanding our technological and geographical base in the geothermal market, we announced the milestone collaboration with Toshiba. For nearly five decades, Ormat is focused on and maintain a leadership position with low to medium to the geothermal projects. Toshiba is the recognized leader in the higher-end of the technology. Together, Ormat and Toshiba are well positioned to bid on and win product contracts as well as potential projects based on the combined technologies of these two leaders. Already we are seeing expansion of opportunities related to this collaboration. Finally, looking this market expansion to new activities, we are evaluating several solar PV projects outside the U.S., as well as storage projects in the U.S. Turning to Slide 24 to an operation update. Our current generation capacity increased to nearly 700 megawatts. We made a few adjustments to reflect the updated status of our generating capacity. We increased McGinness Hills and Don Campbell complexes generating capacity to 83 megawatts and 41 megawatts respectively to reflect the enhanced performance of these plants. The generation capacity of Ormesa complex was reduced to 42 megawatts mainly to a permanent shutdown of one of the steam turbines and some of the old OECs not that we optimized plant performance. Turning to Slide 25; we’ve continued to expand our portfolio of geothermal plants. In January, we’ll reach commercial operation of Plant 4 in Olkaria III complex in Kenya. This expansion increased the complex total generation capacity by 29 megawatts to 139 megawatts. Together with the McGinness Hills and Don Campbell second phase in the last 12 months, we commenced commercial operation of three new power plants in an aggregate capacity of over 90 megawatts. All three plants were constructed and start operation well ahead of planned schedule and will contribute to 2016 revenues. We will not have been achieved – we will not have been able to achieve this, if we don’t have an in-house products division. Again reinforcing the importance are vertically integrated and well balanced business model. Moving to Slide 26 for an update on projects under construction. We plan to add 160 megawatts to 190 megawatts by the end of 2018 by bringing new plants online, expanding existing plants as well as adding capacity from a recent acquisition. As part of this expansion plan, we recently announced the commencement of construction of the Platanares geothermal project in Honduras. In December 2015, we concluded the drilling activity as well as extensive tests that support our decision to construct a 35 megawatt project, which is larger than initially estimated. The project expects to reach commercial operation by the end of 2017. We also initiated development of efforts in two projects in Nevada: Tungsten Mountain and Dixie Meadows are each expected to generate 25 megawatts to 35 megawatts, once they come online in 2017 or 2018. We have drilled several exploration wells both sides. And while drilling activities ongoing, we are making progress towards securing PPAs. We believe that these projects may qualify for the production tax credit. In Sarulla, Indonesia, engineering and procurement for the first phase is completed, while in progress for the other two phases. The construction for the first phase is in progress. The infrastructure work has been substantially completed. The major equipment including Ormat’s OECs and Toshiba’s steam turbine for the first phase have arrived to the country, larger portion already at the site. The drilling of production injection wells is also in-progress for all three phases, but currently the project company is experiencing some delays mainly in the meeting some of the drilling milestones as well as few EPC milestones. It should also be noted that project is facing some cost overruns resulting mainly from drilling. The consortium members are examining the significance of these cost overruns and their potential implications for the project’s budgets as well as for the financing of the project since the cost overruns and drillings delays may impact the project’s ability to drove on the debt financing and force additional equity investment by the consortium members. All contracting milestones under Ormat supply agreement were achieved and the manufacturing work is currently progressing as planned. The first phase of operation is expected to commence towards the end of 2016. And the remaining two phases of operations are scheduled to commence within 18 months thereafter. We also expect to close the acquisition of Bouillante Geothermal Power Plant in Guadeloupe Island by May 2016, which will be immediately accretive to Ormat’s EPS. The projects are just described as well as additional projects including Menangai in Kenya are under various stages of development and expected to support our expansion by the end of 2018. Besides the investment in new projects, we are continuing our exploration and business development activities to support future growth. If you could please turn to Slide 27, you’d see that our CapEx requirement for 2016 is approximately $264 million. We plan to invest a total of approximately $83 million in capital expenditures, on new projects, under construction and enhancements and additionally approximately $101 million are budgeted for exploration activities. Development of new project is investment in new activities that reflects expenditure under the new strategic plan and maintenance CapEx for operating projects. In addition, $63 million will be required for debt repayment. Turning to Slide 28 for an update on our Product segment. Our backlog, as of February 23, 2016, stands approximately $256 million. Our backlog together with the new contract that we expect to sign will support our financials. Moving to Slide 29 for a regulatory update. Increasingly, government and private sectors are taking actions to fight climate change and move towards to low carbon resilient and sustainable future. We have seen this in the United States as key states set long-term goals, established minimum requirements and create incentives for the use of renewable energy. As we have previously noted, in October, California expended on its existing renewable portfolio standard or RPS policy. The new low requires that utilities procure 50% of their electricity from renewables by 2030, an increase of 33% required by 2020. Hawaii is an even more aggressive low requiring that 100% of its energy come from renewables by 2045. And in December, the United States Congress agreed to grant extension to the tax credit for geothermal energy as part of the broader production tax credit program. While these programs within the United States are encouraging, in December we also saw action on a global level. In December 2015, 195 countries signed a historic agreement at the Paris Climate Change Conference, held in Paris. For the first time, all countries committed to setting nationally climate targets and reporting on their progress. We believe that submission of national targets in five years cycles signal to investment within technology innovators that the world will demand increased use of renewable energy in the decades to come. This comes after a group of 20 countries including the U.S., U.K., France, China, and India pledged to double their budget for renewable energy technology over the next five years as part of a separate initiatives called mission innovation. World leaders are clearly increasing the focus on renewable energy. Geothermal is based on the energy is uniquely positioned to benefit from this trend and Ormat is focused on remaining a global leader in this space. Turning to Slide 30 for our 2016 guidance. In 2016, we expect total revenue to be between $620 million and $640 million. We expect revenue in our Electricity segment to be between $410 million and $420 million. The Electricity segment revenue guidance assumes current oil and natural gas crisis. For the Product segment, we expect revenues to be between $210 million and $220 million. We expect 2016 adjusted EBITDA from $300 million to $310 million. This estimate includes approximately $9 million of expected income related to tax equity transactions compared to $25 million in 2015. Excluding this demand, the expected increase in adjusted EBITDA should reflect an operational growth of between 9% to 13%. We expect annual adjusted EBITDA attributable to minority’s interest to be approximately $17 million. This amount assumes the inclusion of the second phase of Don Campbell power plant in the joint venture with Northleaf. In summary, 2015 was a very good year for Ormat and I’m excited about our future. The significant declines in the price of oil and natural gas have impacted many industries and we are not immune, while we cannot predict what will happen in the commodity markets during 2016. We can state with growing confidence that the demand for renewable energy is growing. Volatility of fossil fuels only contributes to this demand. This creates an environment where leaders, like Ormat, can grow and expand their market share. It is truly an exciting time to be a part of this great company, and I’m optimistic about the future of Ormat into geothermal industry in general. This concludes our remarks for today and I thank you very much for your ongoing and continued support. Operator? Question-and-Answer Session Operator Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Paul Coster of JP Morgan. Please go ahead. Mr. Coster, you may proceed. Paul Coster Sorry I had my mute on there. Thank you very much for taking my questions. Congratulations on concluding an excellent year. So looking forward, I wonder if perhaps you can take us through your sort of cash outlook for the year, it looks to me like you’ll be using in excess of $100 million of your cash balance, unless you tap into new sources of finance. So perhaps you can talk us through that please? Doron Blachar Hi, Paul, thank you. This is Doron. Basically, when we look, we do need – we do have an increased capital plan and increased gross plan. As the PTCs were extended, we are planning to do one or two tax equity transactions. And in addition to that some of the projects that we are constructing like in Honduras or one of the two projects in Nevada that we’re now finishing the exploration phase in Tungsten and Dixie, we will do project finance for them. So the construction will be financed with the specific loan program. Paul Coster Okay. So, you’re not going to be – you don’t anticipate tapping the debt or equity markets this year? Doron Blachar No, to the extent no – unless, we will increase our accelerated growth, which is expected. Paul Coster Right. Can you – you talked to us a little bit about the Toshiba partnership? You alluded to sort of benefiting you already. What is the nature of the benefit you’re seeing? Isaac Angel Hi, Paul. This is Isaac. I think it’s one of the best things happened during the last year. In the last six months, we have exposure to much more projects than we did in the past because of the fact that both companies are approaching a high-end, low-end and middle-end of the projects together. Actually, we have even a win, which I cannot speak about it as of now, but we will talk about it in the very near future. And I’m very, very optimistic that this collaboration will bring in 2016 more and more projects, specifically in other countries mainly in Europe and Southeast Asia. Paul Coster Okay. My last question is looking at your anticipated deployment activity, it looks to me like revenues and I assume EBITDA should accelerate a little bit in 2017, just eyeballing the megawatts that come online. Is that a reasonable assumption to make? Isaac Angel It was a short answer and unfortunately I have a long – it was a short question and I have a long answer. As you realize with the year passing through and we have $256 million contract in Sarulla, which will be ending in sometime during 2017. We have to accelerate our Product segment, but you realize that it will be difficult to staying the same growth in Product segments with this project ending. But on the other hand realizing that and we announced it on March in New York, the company is making tremendous efforts to accelerate the Electricity segment and we believe we will continue – we will sustain growth, but not necessarily it will be divided in the same percentage between products and electricity looking forward. On the other hand, I should say, we’re not giving any outlook for 2017 or 2018, and the only outlook that we’re giving is in 2016. But, in general, if you look within the next five years, we are expecting a step-up function in our Electricity segment, and the company is doing tremendous efforts and as part of the accelerated CapEx that you’re seeing to build more and more power plants internally and also externally. Paul Coster Very good, thank you very much. Isaac Angel Thank you. Operator Our next question comes from Dan Mannes of Avondale Partners. Please go ahead. Dan Mannes Good morning and also congratulations on a strong quarter and a strong year. Isaac Angel Thank you very much, Dan. Dan Mannes A couple of follow-ups. First, the acquisition in Guadeloupe – first, congratulations on getting an acquisition done. Can you give us a little bit more color maybe on the structure of the PPA, they’re number one. And number two, is this – the closing of this transaction included in your guidance for 2016 or not. Doron Blachar Hi, Dan. It’s Doron. For the second part, yes. The guidance includes the acquisition of Guadeloupe response. The first part basically, the PPA in Guadeloupe has a capacity payment and has an energy payment. We cannot – we still don’t own the assets at closing, haven’t happened. So we cannot discuss too much in details, because we still don’t own the power plant, but there is a capacity and an energy payment that grows up – goes up as the generation goes up. Dan Mannes Okay. And maybe could you walk through the structure of the purchase, does it face – you’re going to own all – 85% of all 15 megawatts this year or you own a piece of that and then it grow – then there are multiple payments to them? Could you maybe just walk us through how that works? Doron Blachar We’re going to own upon closing 80% of the facility, and then the investment – the acquisition and the investment structure says that in the next two years from the closing. Recently, Ormat will increase its capital investments to the company and by putting in more cash into the company; the percentages will go up and will reach once all the cash is invested to 85% ownership by Ormat. Since, we are going to have 80% on closing. We will consolidate obviously the company. We are the controlling shareholders. And our people actually have been there already and analyzing the projects to see how we can expand it sooner rather than later. Dan Mannes Got it. A real quick one on Tungsten and Dixie Meadows, it’s great to see you guys are finding some more drilling success. Can you talk at all about the PPA market for those plants, the last several Nevada plants, you’ve sold into California. Alternatively, is this an opportunity to perhaps get a commercial PPA? If you could talk to us about the PPA environment, that would be helpful? Doron Blachar Dan, do you know as I know that the PPA environment in the U.S. is a bit suffering in the last few years. On the other hand, Ormat was – we successfully achieved few PPAs in the last year or so. And even though I cannot talk on the details, but I’m optimistic that our future growth in the Electricity segment will come both from the U.S. and from the other countries. And I’m very optimistic that we will be able to gain PPAs for these two power plants and more in the U.S. Dan Mannes Okay. Doron Blachar But unfortunately, I’m not in a position to talk about terms, numbers and so on. I really hope that this will be an outline very soon. Dan Mannes Okay. Olkaria 3 with the completion of the most recent phase, can you maybe help us to understand the new agreement you have and your ability to expand this and also is this included in the some portion – is another leg of Olkaria 3 included in the 160 megawatts to 190 megawatts that that you’ve laid out through 2018? Doron Blachar Well, no – first of all, no doubt that Olkaria is one of our most successful prospects. And there is an opportunity to increase Olkaria to the third phase as we already have assigned PPA. I don’t know if we disclosed it, but it is 400 megawatts, which 29 of them are already consumed. And there is a possibility to increase it to Olkaria 5, but it is not in the numbers that mentioned in the 180 megawatts – sorry, 160 megawatts to 190 megawatts. Isaac Angel I would like maybe just to add a little bit color. In the 160 megawatts to 190 megawatts, obviously, we have projects that are not finalized or have final PPAs and finish exploration. These are projects that are in the process. And at the end of the day, we don’t know exactly all the projects that will come in. We have seen today, this next phase is not in the numbers, but exploration and resources tend to change over time. And so we might see that there is additional result and may be an addition to increase it or not, so it’s not in the initial estimate, but it can obviously come in, if that is something that will go out or whatever. Doron Blachar Dan, I will reiterate, what I just said to Paul before. We are working very, very diligently to make this step up function as I talked about it in our meeting last year and I think that this will fuel the growth of Ormat in the next upcoming five years or more. And it will come both from the U.S. as I said and elsewhere, specifically from African countries and Southeast Asia. Dan Mannes On that note, one of the major geothermal owners in Southeast Asia at least through some trade publications is reportedly considering selling and this will be a very major asset that could be a step change in terms of your output if you pursed it. Is that – without discussing a particular M&A opportunity, how serious are you on M&A at this point and would you consider kind of assets of that time – type of scope and scale? Isaac Angel Dan, it’s very, very premature way. We got the same teaser yesterday and we are looking into it. Don’t forget that we are talking about an asset of over maybe $2 billion. So, it’s something that we should certainly look into, but it’s very early to talk about it seriously. Dan Mannes Okay. And then my final question, as you look at the Product segment, we’ve been really impressed with the way you’ve been able to maintain margins last year, a lot of that you guys have done internally in terms of improving operations. Historically, you’ve kind of managed expectations as it relates to product margins, maybe a little bit lower than what you put up the last year. Can you maybe help us out a little bit in terms of how to think about sequential margins in the Product segment for 2016 and beyond? And secondarily, as you mentioned your backlog of 260, most of that’s going to go out the door in 2016. It sounds like you have pretty high confidence you’re about to bring in some more material backlog in the fairly near-term? Isaac Angel On the margin sides, we are confident that we will be able to keep somehow the margins on the levels that we are. It might deviate a bit depending on the product mix that in the countries that we are operating in. On the second thing, as I said before, it will be very difficult to maintain the same levels of product going forward when you lose or not lose – losing is not the right word, when you finish successfully a $256 million projects. On the other hand, we are bringing in new products – product constructs. But as I said before, I’m not really worried because our strategy that calls for increasing rapidly the growth in the electricity demand will basically fuel the growth of the Company as a total, and not necessarily we will be able to keep – to maintain the same ratio as we have today, which is pretty high as you have noticed in the last year. So I’m optimistic for the future, but not necessary in the same ratio in numbers. And to conclude I believe that the profitability is sustainable. Dan Mannes Sounds good. Thanks so much for all the color. Isaac Angel Thank you. Operator [Operator Instructions] Our next question comes from Ella Fried of Leumi. Please go ahead. Ella Fried Hey, I also like to congratulate you on the result. I have two questions. First is regarding the Toshiba Corporation, what do you say that it is already reflected in the Product segment or do you see it affecting the product segment beyond Sarulla? Isaac Angel Hi, Ella. Thanks for your congrats. And first of all, it’s not reflected in 2015 numbers, but it is reflected in 2016 and the backlog as it stands now, still not a very substantial number, but we expect that this number will grow looking forward. And to the second part, it’s pretty much the same answer as I gave to Dan and Paul before on the mix of Electricity and the products looking forward. Ella Fried Thank you. And the second question is regarding your hedge for the next year. Could you elaborate basically or maybe give some numbers regarding this hedge? Isaac Angel Basically, what we did – basically in light of the very low oil and natural gas prices and since we have exposure to this commodity and we’ve decided to sell a call option, basically it hedges Ormat on the downside, not 100% on the downside, but it hedges Ormat up to a certain point on the downside and generates additional EBITDA to the company. The main idea of this hedge is to hedge the budget, which is the basis for the guidance. So we can keep it. So it’s a bit of different structure than a simple forward and standard forward has a selling of a call and buying a put, so we actually exercised half of the forward selling at call only. Ella Fried So you had there like most of the cash flow of Puna? Isaac Angel Puna on the oil and on the gas Ormesa and the left part of Heber that is still on – on the gas part. Ella Fried Okay. Well, thank you and again very impressive results. Isaac Angel Thank you very much. Operator Our next question comes from [indiscernible]. Please go ahead. Unidentified Analyst Hi, good morning or good evening. Also congratulations on your great 2015 results. Two questions. First of all with 2015 ahead, are you planning any divestments of power plants like you did or joint ventures like you did with Northleaf. And the second question is what’s going to happen in 2018 when the contract for Ormesa has come to expire? Doron Blachar Okay, Daniel, for us it’s good morning as we are in Reno. And for the first part, we are happy with our partnership with Northleaf and we are pooling in the second part of Don Campbell to the joint venture. We don’t have current partnerships plan in any other power plants and if [indiscernible] obviously we will notify the market on that. And on Ormesa, 2018, I wouldn’t be worried about it. We are working on it since last year and I’m optimistic that we will be able to resign PPA, which will not be linked to the gas prices in Ormesa. Daniel Wasserman And how many CapEx would be necessary in order to keep the reserve or to keep it going? Doron Blachar There is no CapEx required at this stage. We made lots of modifications in Ormesa. Last year, we shutdown a steam turbine part of the older equipment, re-change the structure of the operations. And at the end of the day even though we decreased the output of the power plant, we increased seriously the profitability. And there is – at this stage, there is no serious CapEx – any serious CapEx requirement over there. And Ormesa will serve our growth 2018 and onwards. And again – it will again decrease our exposure to natural gas prices by another one-thirds. Daniel Wasserman Okay, thank you. Doron Blachar Thank you. Operator The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect your lines. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) 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Just Energy Group Inc. (JE) Q3 2016 Results – Earnings Call Transcript

Operator Good morning, ladies and gentlemen. Welcome to the Just Energy Group Inc. Earnings Conference Call to discuss the Third Quarter of Fiscal Year 2016 Results for the period ended December 31, 2015. At the end of today’s presentation, there will be a formal Q&A session. [Operator Instructions] I would now like to turn the meeting over to Ms. Deb Merril, Co-CEO, Just Energy Group. Please go ahead. Deborah Merril Good morning everyone. Thank you very much for joining us. My name is Deb Merril. I’m the Co-CEO of Just Energy and I would like to welcome you all to our fiscal 2016 third quarter conference call. I have with me this afternoon our Executive Chair, Rebecca MacDonald; my Co-CEO, James Lewis; as well as Pat McCullough, our CFO. Pat and I will discuss the results of the quarter as well as our expectations for the future. We will then open the call to questions. Before we begin, let me preface the call by telling you that our earnings release and potentially our answers to your questions will contain forward-looking financial information. This information may eventually prove to be inaccurate, so please read the disclaimer regarding such information at the bottom of our press release. We are extremely pleased with the results during the quarter. In fact, throughout the year we have been thrilled to see our strategies and operational initiatives yielding tangible results and what many might view as rather turbulent times. We will undoubtedly be asked about the negative adds we reported this quarter, but we are managing this business for the long term. At the beginning of this year we said we will only focus on high margin customers and the health of our balance sheet. We could have easily shown positive adds by chasing low margin business. We will not do that. If that yields short-term negative adds for the sake of long-term accretive cash we will pursue that every single quarter. However, we are planning growth and we have tremendous opportunity to achieve that goal. We will grow through additional products, markets, customers and partnerships that will deliver value to our customers and growth for our business. Once again this quarter our business continued to perform very well, delivering strong revenue, margin and earnings growth. The margin per customer improvement initiative is allowing us to convert solid top-line sales growth into consistent increases in Base EBITDA. This profitability is also driving significantly improved cash flow and increased Base Funds from continuing operations. I’d like to start by discussing the broader market dynamics. I think that will help highlight something we have been trying to articulate for some time now. Just Energy offers a diversified, differentiated and resilient business model that is less impacted by broader market trends. In short, today’s market challenges do not directly impact Just Energy. We feel this business model, [deleveraged] balance sheet, stable yield and earnings growth places Just Energy in a unique position to weather market turbulence. I think it is safe to say these are uncertain times, whether it be questions around the price and direction of oil, concerns about China demand, the European economy or even the weather quite honestly. With this backdrop of uncertainty, our results demonstrate that Just Energy is able to show financial strength despite volatile and uncertain economic times. For example, we have seen a dramatic drop in oil prices over the last several months. We are not directly affected as our core business is gas and electricity and in fact we are actually benefiting financially from the effects of low oil. The Canadian dollar is correlated to the price of oil. As the Canadian dollar weakens our largely US dominated profit translates to higher Canadian cash flows. Today Just Energy is concentrated in North America markets with little exposure to weakening international markets. Despite this weakness, we believe our high return on invested capital, low CapEx, organic growth model can still thrive in these markets. Weather volatility is an important variable that we invest a great deal of intellectual resources in managing our portfolio effectively. We have seen a very mild start to this winter season. I have frequently stated that we are best in class at managing weather volatility around our business. While consumption of natural gas is abnormally low right now, our ability to manage this effectively is demonstrated by our excellent profit results this quarter. The low and stable gas and electricity prices that we have experienced have resulted in less [attractive] customer shopping. This compares to a very volatile economic environment in the last few years when heightened levels of customer switching was greatly benefiting Just Energy’s ability to add net customers at an exceptional rate. As a result, during the quarter we did see a decline in year-over-year growth additions, as well as negative net additions… [Audio Gap] Performance-based growth. Let me clarify that same picture for the year-to-date results for the first nine months of the year. Base EBITDA of $140.3 million for the first nine months grew 25% even while absorbing $10.5 million of commercial prepaid commission expense. Excluding the impact of prepaid commission expense, we actually grew year-over-year Base EBITDA by $38.3 million or 34% during the quarter. In addition to the $10.5 million in commercial commission expense, year-to-date we also had a $12.9 million contribution from the weaker Canadian dollar and $25.4 million in performance based growth. In short, both the quarter and the year-to-date have demonstrated strong operational results. We continue to effectively manage overhead cost. General and administrative expenses declined year-over-year after taking into account the impact of the stronger dollar and US based cost. Selling and marketing expenses increased by over 27% from the same quarter last year. However, nearly all of the increase was driven by the stronger dollar and prepaid commission expense. Similar to general and administrative expenses our fixed sales and marketing costs were essentially flat year-over-year after that adjustment. Let me close with an update on our other key financial metrics and balance sheet items. The pay-out ratio from Base Funds from continuing operations was 70% for the three months ending December 31, 2015 compared to 88% reported in the same quarter of fiscal 2015. On a trailing 12 month basis, the pay-out ratio has now declined to 59%. We ended the quarter with $90.8 million in cash and cash equivalents, an increase of 115% from $42.3 million in the year ago period. We reported no debt outstanding on the credit facility at quarter end consistent with a year ago. The increase in cash balances and credit facility availability over the past year have resulted in $112 million of additional liquidity. At quarter end, long-term debt was $676.5 million, an increase of 5% year-over-year due to the foreign currency impact on the US denominated $150 million convertible euro bonds. Book value net debt was 2.9x the 12-month trailing Base EBITDA, significantly improved from 3.7 times just one year ago. During the quarter we also purchased $1 million of the $330 million convertible debentures under our NCIB program. Life to date, which is all in fiscal 2016, $5.5 million of the $330 million convertible debentures have been repurchased under this program. Turning now to the outlook, the business has delivered outstanding results in the first nine months of fiscal 2016. To reflect this progress we now believe that the company will achieve the high end of our previously provided fiscal 2016 Base EBITDA guidance range of $193 million to $203 million resulting in an expected double-digit percentage growth over the prior year. This includes approximately $20 million of incremental deductions in Base EBITDA related to the change to some commercial commission terms. As I previously outlined $10.5 million of this has already occurred in the first nine months of fiscal 2016. Therefore we expect roughly $10 million to hit our fourth quarter. When adjusted for the $20 million effect from the change in classification, year-over-year Base EBITDA is expected to increase 20% in fiscal 2016. In line with what we have demonstrated over the first nine months of fiscal 2016 we expect to offset this headwind with continued strong gross margin performance and foreign-exchange benefit. Looking further out in fiscal year 2017, we expect to achieve double-digit percentage Base EBITDA growth over fiscal 2016. Included in this expectation is deductions in base EBITDA of approximately $40 million for prepaid commercial commissions, which would previously have been included as amortization within selling and marketing expenses. This represents a $20 million increase over fiscal 2016 and reflects a go forward run rate for this incremental deduction in future years. With that I will turn it over to Deb for some concluding remarks. Deborah Merril Thank you, Pat. We are excited and confident about our path forward and our ability to drive continued growth as Pat just provided you in our outdated guidance. We are deploying our strategy to become a world class consumer enterprise. We will do this by delivering superior value to our customers through a range of energy management solutions and a multi-channel approach. Our growth plans center on geographic expansion, structuring superior product value propositions, and enhancing the portfolio of energy management offerings. The company’s geographic expansion is centered on Europe. Our UK business is thriving and we are successfully adding both consumers and commercial customers and the overall business is significantly profitable. We believe this early success validates our model and our ability to compete outside of North America taking the lessons learnt and evaluating new avenues for growth in new markets that will benefit from our innovative approach to energy management solutions. Given our greatly improved financial position, we are actively evaluating new market opportunities and we expect to expand our offering into two new European nations within the next 18 months. From a product innovation perspective we believe a large part of our ongoing success will be driven by our ability to provide innovative products that offer a superior value proposition to our customers. For example, our flat bill product is bringing more value to our customers than traditional industry products. This allows consumers ultimate predictability, removing the price and volume risk from customers’ bills by guaranteeing them the same price every month for their energy supply regardless of any volatility. We can demonstrate greater than average margins on the product as customers see the value in the predictability. We are finding innovative products are gaining more appeal and delivering more value. This in turn allows us to price our energy management solutions at more premium points while retaining customers for longer durations and driving sustainable profitability for the future. Included in this is Just Energy Solar. The initial solar pilot program remains on track and based on early success further expansion in California and the Northeast is underway. We are finding that the extension of the incentive tax credit for five years is unlocking new capital in the form of debt and equity financing, as well as providing for much-needed additional installation capacity. As a result of the available financing and unlocking of capacity constraints, we expect that solar will contribute approximately $10 million towards our fiscal 2017 results. We are operating from a greatly improved financial position and our strategy is proving our ability to consistently deliver throughout any cycle. Our improved profitability, cash flow generation and overall financial flexibility combined with our commitment to maintaining a capital light model supports our ability to pursue our growth strategy while remaining committed to future dividend distributions and balance sheet restructuring. We are confident in our ability to become a premier world-class consumer enterprise delivering superior customer value through a range of energy management solutions and a multi-channel approach. We would also like to take a few minutes to once again thank the employees of Just Energy for making these results possible. As a leadership team we are very fortunate to have a group of employees that deliver results and believe in the future of our company. Thank you for all you do for the business we operate, the customers we serve and the communities which we live in. With that, we’ll now open for questions. Question-and-Answer Session Operator Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question from CIBC we have Kevin Chiang. Please go ahead, sir. Kevin Chiang Hi, thanks for taking my question. Maybe just first on solar, I guess over the past week or so we are seeing some pressure on some solar names reflecting some concerns I guess over changes in state tax credits in the US, as well as maybe a slowing of the installed base there. Given this is a growth strategy for you I’m just wondering what you are seeing on the ground and if your strategy around solar has changed recently as a result of some of these maybe new hurdles? Deborah Merril Yes, Kevin, I think the markets that we are focusing on we are not seeing that happening. California and Northeast continue to be the areas of focus for us and our strategy has not changed at all and we are absolutely planning on looking at new markets, but we will be very careful about some of those volatile tax credits that you are talking about, but for now we are not seeing any impact for the areas we are focused on. Kevin Chiang Okay, that is helpful and just on the net adds, I guess maybe a two part question here, you have seen some – I guess some headwinds in some of your unit metrics, are you seeing any structural headwinds in your current markets that is driving your international expansion. And then, more broadly speaking I know you’re focusing on higher margin customers, but is there a point within the drag on that stress to have a negative impact on the overall operating leverage within your operation so that we saw aggregation cost move up because of that in this past quarter. Is there a point that you need to have a minimum level RCEs in order to generate the margins you want to generate within your overall consolidated results? Patrick McCullough Okay. Before I break the question apart on the RCE question there, when we look at it obviously we’ve to have customers in order to make money. But, what we’re seeing here and what we believe is that it makes sense for us to go after the customers that drive the high value for the appropriate level of risk versus trying to cut back the margin and take the same level risk there. And when that happens you see that the smaller players or even some of the larger players that leave the marketplace there. So, we’ve done a much better job here, I just want to tell you, what really drives value and customers behavior and develop products that address those needs. Rebecca MacDonald And Kevin you mentioned something about international expansion, that’s only going to add additional opportunity for us. So, we’ve seen, even – quite a fact that the U.K. was our first foray into the international expansion which is one of the most penetrated market – one of the most deregulated markets for the longest period of time. Whilst we’re still seeing some really positive results there. So, we’ll definitely focus on places that we truly believe will benefit from some of the innovative that will bring in the market. Deborah Merril Apparently Rebecca, I just do want to step into this, the management of JE what I called the Rockstar management of JE these days could have easily signed up a low margin on a commercial side business and that used to be down in old days. We’ve stepped away from it very, very consciously because it’s a mugs game and we don’t want to be in a mugs game. We want to be in a value creation with a healthy margin. And we’ll do that all day long, it’s not about putting on the books number of very small margin customers that can actually have a very negative impact to our margin and bottom-line. For us it is growing from the strength and growing from a margin strength and we’ll not change our approach whatsoever. James Lewis I might as well jump into since all three of them have this well. Do you think how passionate we’re about this topic? First of all, the idea around international growth is largely to do with leveraging our business model which is an advantage for us in those markets. It’s not some type of reaction to what’s happening in North America, in fact, we understand very well what’s happening in North America and those improved margin levels are more than offsetting that absorption issue you’re thinking about on a customer acquisition cost basis, hence the EBITDA growth outpacing gross margin when you start to pull apart prepay commissions etcetera. So, we’re very confident in what we’re doing and we just see an opportunity to grow for the accretive cash and profit basis not as a reaction to something that we see as a negative. Deborah Merril And just to add to that Kevin, we don’t want to manage business on quarter-to-quarter basis, we know we’re public company, we’ve to give you quarterly results. We’re managing business on a long term basis, our business plan is looking towards 2020 and we hope that shareholders that support us are looking at this business long term not quarter-to-quarter. Thanks. Kevin Chiang That’s all very helpful. I just have a follow-up. A question if I’m wrong here. I was under the impression so like a year or 18 months ago that there were number of smaller players that you competed with that were force to exit the business because of the impact of the polar vortex on the balance sheet. Given what you’re seeing in that ads would you call this maybe the overall pie is getting smaller because energy prices are little bit lower here, so there is less of an incentive for customers to switch to whatever the part excel there today or is the pie the same size or maybe actively choosing to not be as aggressive in the marketplace to maintain your market share? James Lewis Kevin, it’s the later so when you look at in some markets you have utilities that have over collected and so consumers are getting the credit now from the decline in gas pricing. And so, the pie is the same. We want to make sure that we are delivering customers things of value Pat and Deb both talked about the flat bill and we have thermostat and green so and we focus on the market where it makes sense and that’s what we will continue to do as Rebecca said it’s about making sure we deliver value for the long-term there and this phenomenal here of this credit is really a short-term item here from the over collections. Kevin Chiang Thank you very much. Deborah Merril Thanks Kevin. Operator And next in the line from FBR, we have Carter Driscoll, please go ahead sir. Carter Driscoll Good morning. Just maybe drawn down a little bit into from the expectations we saw over next year, are those specifically to the two pilots you were currently conducting, is there any expansion to other state built into that estimate and maybe talk about your margin for what expectations which is above below in line with what you were seeing in the early parts of the pilots and maybe the expectations that are built into that 2017 expectation and I have a couple of follow-ups to it? Deborah Merril Okay. So Carter, we absolutely will be expanding beyond for those initial two markets it will probably happen mid way through the year, but our plan is to be in I think there were three or four additional markets we’re actually looking at. So we will definitely see beyond the two initial ones and what was your follow-up question? Carter Driscoll Just in terms of what you are seeing on a margin per lot basis that you had an initial thoughts couple of quarters ago and just how that is potentially evolved as you have started to ramp up a number of customers maybe any differences between the two states and or expectations with the ones you are considering entering and then if you could provide any potential kind of blended number that goes into that $10 million EBITDA bump that you are expecting for next fiscal year would be appreciated? Patrick McCullough So Carter, let me give you the relative answer and then I think it goes without saying that as solar becomes material to us, we are going to have really break this down in detail and really segment out the major differences in profit and cash flow. We like the margin that we have seen as we mentioned a quarter ago publicly. We are aware that other third parties in the industry that have scale can hold as much as $1,500 origination income to the bottom-line. We are hoping to do as well of that if not better at scale. We haven’t proven that yet. New York as you know is tougher market economically for solar than California is, so California can have stronger margins for us on the bottom-line, New York will be a bit harder but still a very impressive return relative to what we have made historically. And then, as we get into each new state as Deb mentioned there is obviously a different economic equation but we are thinking about this as the industry does and I think we can hold at least what those third parties hold today. So, as we are thinking about that $10 million that’s the type of thinking we are applying to it. Carter Driscoll And then, not to be beat up on the question from what Kevin posed in terms of net adds, but are there any pockets of geographic weakness or maybe that’s surprised maybe I don’t know Texas let’s sort out there domestically. And then, is there I am sure you’ve internal forecast of what you are going to grow domestically or your targets domestically for net adds versus internationally maybe you can compare and contrast those two as you expand into those two new target markets. And is there any way you could identify those target markets internationally that you are talking about those target countries I should say? James Lewis Okay, I will take the first part of the question there. We look at it, so for example let’s say Alberta, Alberta gas price is like $1.96 or so — some points there and we look at the usage to our customer bill about $100 or $150 there for average customer the intent of that Pat talked about earlier just it is in there sometimes, but when you bundle those products together with electricity, with green, with the smart thermostat with another product there, customers do see the value. We get some short-term tailwinds from the low commodity prices and over collections we think that will go away and we think our approach to focusing on the markets that we can drive the best value is a better long-term strategy. On your question about state of Texas one of the things that you have seen in the Texas market here, you haven’t seen a lot of printing of prices over the last couple of summers and I think what happens in some people’s mind is that they might look at that and price it differently, we know from a overall risk management perspective that is not a great idea. We have a very strong and solid risk management strategy which allows us to weather the Polar Vortex to warm winter and the extreme summers. So I think when you think about long-term our approach is proven solid, we have been around for 19 years and we continue to think we are going to be around for another 19. Deborah Merril So Carter, on your international expansion question, right now we are actively pursuing licenses and partnerships and in about three to four markets right now. So we are looking at Ireland and we are looking at Continental Europe places like Germany, the Netherlands. We are also having an eye out for Japan, so we are pursuing some due diligence on those so we are still in the phase of really trying to find make sure that next one we point to and actively go into with the right one, but we have about five or six on our radar screen right now. Rebecca MacDonald Carter, its Rebecca. I just want to just go back around the customer add, you have to appreciate over the last 19 years our sector has fundamentally change a great deal. We’ve seen what I call good, bad and the ugly come in and leave the business. So, the future of the business is not about adding molecules, what I call molecules customers the future of the business is adding customers that are actually getting number of products from us and that really will be ongoing basis over the next ten years or so. Carter Driscoll Yes, I understand. I had those, there is different, I think they are just different perspectives within your competitors that there is a lot of low hanging fruits still remaining to take away from the utilities based business versus up selling with bundle products and I think there is a potentially mix between the two. And you guys I think currently have chosen the higher margin value side of it which is proving the right strategy for you right now. Deborah Merril We always are the opportunistic. Carter Driscoll Yes, I understand. I will get back in queue and take the rest in call. Thank you very much. Operator From RBC Capital Market we have Nelson Ng. Please go ahead sir. Nelson Ng Okay thanks. I had a quick question on the price 17 converts, can you provide an update in terms of your, in terms of progress on refinancing that tranche and I guess obviously the high yield markets are in a very difficult environment, so what options are still on the table for you guys? Patrick McCullough Yes, thanks Nelson. This is Pat. So yes, the debt market, high yield markets are not a pretty place today not compared to a year ago. But deals are still getting done. Our preference is to not go out with new instruments that have an equity hooked to them. We see the cost of capital associated with a convert or an equity issuance being very high relative to even a high yield type piece of debt. The 330 is maturing in July 2017, our credit facility has a spring back a few months ahead of that. Our goal is to get this completely accomplished in this calendar year, we would love to do it in the next quarter or two but if the debt markets aren’t there for us we will be patient. We have had unsolicited equity hook type offers made to the company that gives us a lot of confidence that we will get this done. There is an appetite for that out there which will allow us to completely restructure those 330s with the 100 or 125 million of available liquidity we have on our own balance sheet. So, we are confident that this gets done. We are utilizing many counter parties including our Canadian bank syndicate leaders to help us navigate that there is new parties that are pursuing our business, but we are trying to do this in a way that protects the equity shareholders so that as we deliver earnings and unlock a multiple, we get the amplification effect of not having future dilution out there for them. But we have said publicly we want to protect the dividend. We believe we can afford that provided we restructure this successfully. We want to make sure there is no new dilution put on the board and we will do our best to take any existing dilution risk off the board that remains the goal. There is no reason to give up on that yet. We are patient. We are prudent. But we are realistic too we will make sure we get this done in this calendar year ideally much sooner than that. Nelson Ng Okay. Thanks for that. My next question is just, I guess I can’t help but ask about the net customer adds. But on the commercial side you saw jump in non-renewals like were there any kind of large customers that didn’t renew or was there a general increase in non-renewals? James Lewis No, it across the board there, on the larger side there and but for us larger is probably smaller to some of the market competitors out there. We look at it let’s say the thousand and above RCE when we think about it. But as we talk about not chasing those customers if the margin targets are not there for us and that’s what we have chosen to do. And you are right, year-over-year you see a series of renew increase there but that’s by design on our part to make sure that we are only bringing in profitable customers. We have seen even I don’t have idea Nelson, a couple of competitors get out of the market and commercial arena and what they have done is gone after the low margin larger customers and they’ve realized after couple of years if they get to sell the business or the market changes that’s it’s not profitable. And we have seen two or three competitors of substantial size look to get out and sell their book of business. Nelson Ng I see. And then, I guess on that in terms of, I guess focusing on margin versus increase in the competitor landscape like what’s the mix how like how would you characterize those customers not renewing, is it like I know it’s very qualitative but how much of it is due to I guess your focus on margins versus just they are being more competition kind of chasing these customers? James Lewis Yes, not being more competition, our focus is our margin and then the way we manage risk. So Pat and Deb talked about earlier this December was extremely warm. And you can look at it two different ways you can look at somebody might have decide not to have weather hedge on and how did it impact from that and we chose to have one on and this summer time people can make an assumption that maybe weather won’t show up in Texas and take a risk but we’ve sort of seen over the last few years somebody may take a $50 million hit or a $100 million hit from those types of facts that’s just not the market that we are in, we don’t want to take those bets. Rebecca MacDonald Nelson, Rebecca, I would just like to add one more time, if we wanted to keep those customers at almost no margins we could have and we could have said okay, we are keeping them because they would look pretty on the books when we report. But what we are doing is much higher. We could have taken an easy road out and said no problem we will get all of these renewed at a razor thin margin that don’t even cover our cost and the world is a happy place. But, we went with a very high decision and we fundamentally will never change that decision. It’s hard to do the right thing but it’s the right thing to do the hard thing. And whoever wants those customers welcome to have them. Patrick McCullough Let’s just revisit our strategy for a second. Historically we have been openly critical of ourselves that we were too much of a commodity in the marketplace with less value differentiating us in our customers’ mind. So, as we are migrating towards looking for those customers that value more than a low commodity price there is going to be some turnover and some transition in our book that’s what we are managing every day, every week. But it’s an important thing that we are managing because there is cash flow coming off of those old commodity types of deals that we need to respect and enjoy and really invest in the future strategy here. But, we are targeting those customers that find value and other things than low price so there is got to be a turnover of our book to some extent managing that well, ensuring there is accretive margin bottom-line profit in cash is what management’s all about. That’s what we’re focused on. We think we’ve done a great job at that. We think we can do that next year too. We think we can deliver guidance even if we don’t put up 100s or 1000s of RCEs on the full-year basis. Nelson Ng Okay. So, thanks, Pat. So, just to clarify for fiscal ’17. In terms of the guidance of double digit growth. So, could that be achieved if there is like no net growth in RCEs? Patrick McCullough As you know, it depends on the margins that we can continue to pull and how fast we get full traction on the value oriented products that we have. And frankly how fast Solar in the international markets hit the bottom-line as well. So, we’re upselling more profit, more value, to North American and in traditional customers. We’re going into new markets with a superior product portfolio and not having to transition from the old we’re selling to the new. We have a lot of levers in play in fiscal ’17. We’re thinking about everything from incremental prepaid commission that we have to overcome, what OpEx going to do. Because that’s material to our results and then these growth initiatives. Today, we are confident to say we can overcome another 20 million of prepaid commissions. We can weather currency volatility and still deliver 10% earnings growth because of all these things. But we’ll obviously be monitoring this every month and every quarter and talking to you about it. But right now we have great confidence that we can do that. Nelson Ng Okay. Thanks, Pat. And then just one last question. In terms of the competitive landscape, like obviously there has been some consolidation in this space. But we’ve also seen say ATCO enter the space, enter the retail space in Alberta. Have you seen more competitors enter the space due to I guess the low energy prices? James Lewis I think it’s probably net neutral, if not shrinking. So, yes, ATCO enter, just recently we saw Senoko [ph] Energy buy a book of business two traditional utility. But then you saw a FirstEnergy get out a little while ago, and [indiscernible] part of their business. So, and you’ve seen a lot of smaller players get out and some new players get in. So, I think that each company evaluate their strategy. They’re trying to take advantage of opportunity, they’re getting out of places where they don’t think it’s the right return on their capital. So, probably net neutral too little bit of shrinking. Nelson Ng Okay. Thanks, Jay. Those are my questions. James Lewis You’re welcome. Operator From TD Securities, we have Damir Gunja. Please go ahead, Sir. Damir Gunja Thanks, good morning. Patrick McCullough Good morning. Damir Gunja Can you just touch on the effects assumed in your forward double-digit EBITDA guidance? Patrick McCullough Yes. So, as we’re looking towards the future, we are expecting to have some strengthening of the Canadian dollar. We’ve talked recently in the past about 10% movement on the CAD to the U.S. dollar, generally, is putting up about 2 million a quarter of EBITDA or $8 million annually. So, one of the assumptions that we built in our forward look is a little bit of Canadian dollar recovery and we think we can offset that with operational performance. Damir Gunja Just to be clear, you’re not forecasting a 10% lift in your guidance? Patrick McCullough We are forecasting a 10% base EBITDA improvement after factoring in pre-paid commissions thinking about our assumptions on effects which obviously we’re not going to be changing guidance for effects, we think we can manage that volatility. But picking up the growth, the performance based growth that we planned. Damir Gunja Okay. But not a 10% lift in the Canadian dollar, that’s not in your list? Patrick McCullough No. Damir Gunja Okay. Patrick McCullough All right. That’s now we said, I’m just trying to put it in perspective of for every 10 percentage point change, that’s where the 8 million. Damir Gunja Got it. Patrick McCullough On the basis of 220ish next year. Damir Gunja Okay. So, zero effects benefit in your guidance essentially. Patrick McCullough Correct. Damir Gunja On the existing book of business, I was just wondering if you can help us sort of understand. How would you characterize the existing book relative to the new bundle prior margin contracts that you’re bringing in? How much of the book would be even in rough percentage terms, would 80% of the book be materially below the current margins you’re brining on or is it flipped, is it only 20? Deb Merril I’d say the penetration for kind of the new initiatives that we tied up the last call it two year, 18 to 24 month. I always give the analogy we’re kind of in the bottom of the fourth inning of this game. So, we’re probably our existing portfolio is probably more like the 80/20 80 old, maybe 70/30 old and versus new. That’s just a rough. James Lewis I think one of the things when you think about the overall business here, what do you think that we’ve done a really good job of. We constantly have improved our risk management. We have a great team out there that does a wonderful job working for best in class world class ways of managing risk. Our suppliers as well have worked with us to make sure that we’re best in class in this are. So, we continue to look for ways to deliver more value out there. So, we think when it comes to an absolute cost basis, that there is nobody better than what we are on commodity cost there. The risk management in our margin requirements might be different. But our risk management group and traders out there are best in class. Damir Gunja Okay. Maybe a final one for me. Just I’m intrigued by the flat bill product. I guess, what percentage of new business that you’re bringing in is flat bill at the moment. Deb Merril We actually have the flat bill in six markets now, six states in provinces and in some markets that’s almost all what will bring in, other market say we have a lot of different products that are offered, so it might be a smaller percentage. But for instance Ontario, that is the 100% of what we felt. And Illinois, it’s a product, but it’s not a 100% of what we saw up overselling but it is in fixed market now. James Lewis The big issue or that holds this back or moving it out to a lot of other market is sometimes the utility on the other side. You can only hold out a new market where the utility billing sessions allow it. And so that’s why we can look for a way to drive innovation, because we believe in order to innovate, you got to have the improved customer experience. And in those markets where we’ve been allowed to do innovative things, we’ve seen better customer experience, a higher customer growth, all better customer satisfaction. And so, we’ll continue to push the leverage there as we move forward. Damir Gunja So, we’re sure to say that flat bill and maybe green products are sort of the two main drivers between the higher margins? James Lewis Flat bill, green products are [indiscernible]. We have some other items that like we’re looking at to continue to drive value, there. Deb Merril We have in some market we’re bundling LED light bulbs which help and be more efficient. So, it’s about not only increasing margin per customer, but reducing attrition as well. Damir Gunja Okay. And just a final one from me. Your solar guidance of about 10 million in EBITDA I guess backing in to the origination fees, am I correct in thinking that that’s about 6% and 1000 customers, roughly, per contract? Patrick McCullough It’s in the ballpark, yes, based on what we see third parties making. Damir Gunja Okay. Patrick McCullough Remember, our income in the future is going to be a result of find the contracts which are accepted by our fulfilment counter parties with a claw back reserve applied to that. So, when we’re thinking about $10 million, we’re thinking about signed deals. So, the point of signature really about a week after that not the pointed installation. So, we do get to recognize profit at the point that our activity finishes. But we’ll have to put a call back reserve for deals that get signed, get approved, and don’t actually get installed. That’s the nature of this industry. Damir Gunja Okay. That’s helpful. Thank you. Operator [Operator Instructions] And from Rodman & Renshaw, we have Aleem Dayle [ph]. Please go ahead, Sir. Unidentified Analyst Thank you. Most of my questions have been asked already. Just wanted to get a sense of our ability to maintain pricing and margins. Should we expect more competition for these higher margin customers or is our product differentiation sort of a moot around these customers, if you could add some color for this, on this please. Patrick McCullough So, maybe I can start. We really believe we’re one of the only players in the six markets with a flat bill product, which is a great differentiator especially if energy commodity volatility comes back to those markets. So, if you think about low stable energy prices, the motivation to switch or to lock in security with a flat bill product is not as high today as it was on the edge of the polar vortex or the hot summers in Texas that we’ve seen several years ago. So, we like the fact that we’re bringing a product like that, a product structure to market that others aren’t. When you think about solar or bundling other renewable solutions, there is a great advantage for retailers who can bring solar assets to their customers. And the biggest advantage there is, we understand the customers and we can serve them, they’re off peak power in deregulated markets. We can potentially bundle other things together to arbitrage the local economics associated with power. So, everything that we’re doing when you think about our product strategy, our bundling strategy, in getting broader with energy management solutions for our customers, is to do exactly what you’re asking about. Differentiate, have a superior value proposition and have fundamentally and economic mode versus all of our competitors. We think we’re ahead of the game. We think the strategy is right, but we have a lot of work to do to stay at. Unidentified Analyst Right. And on the gross margin side, should we be looking for further improvements potentially in the near term, driven by these product differentiation factors or is this the level we kind of should expect at least for next one of few quarters? Patrick McCullough Yes. The products that we can sell per customer are clearly going to go up. So, one of the things we have talked about in the past is this idea of gross margin per RCE that we report to that. Is very effective if you’re selling commodity alone. But we are looking to bundle more products per customer. So, your margin per customer will certainly go up. Your margin for RCE won’t even be understood in the future. So, it’s hard to answer your question because what you’ll see us doing over the next two years is transitioning away from the way that we showcase our profit per RCE and show you more profit per product profit per customer type of matrix. Unidentified Analyst Understood. Thank you, that’s all I have. Deb Merril Thank you. Operator We have no further questions at this time. Thank you, ladies and gentlemen. This concludes today’s conference. Thank you for your participation. You may now disconnect. Patrick McCullough Thank you. Operator Thank you. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) 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Black Hills’ (BKH) CEO David Emery on Q4 2015 Results – Earnings Call Transcript

Operator Good day, ladies and gentlemen, and welcome to the Black Hills Corporation Fourth Quarter and Full-Year 2015 Earning Conference Call. My name is Kat and I will be your coordinator for today. At this time, all participants are in a listen-only mode. Following the prepared remarks, there will be a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to Mr. Jerome Nichols, Director of Investor Relations of Black Hills Corporation. Please proceed, sir. Jerome Nichols Thank you, Kat. Good morning, everyone. Welcome to Black Hills Corporation’s fourth quarter and full-year 2015 earnings conference call. Leading our quarterly earnings discussion today are David Emery, Chairman and Chief Executive Officer; and Rich Kinzley, Senior Vice President and Chief Financial Officer. During our earnings discussion today, some of the comments we make may contain forward-looking statements as defined by the Securities and Exchange Commission and there are a number of uncertainties inherent in such comments. Although we believe that our expectations and beliefs are based on reasonable assumptions, actual results may differ materially. We direct you to our earnings release, Slide 2 of the investor presentation on our website and our most recent Form 10-K, Form 10-Q, and other documents filed with the Securities and Exchange Commission for a list of some of the factors that could cause future results to differ materially from our expectations. I will now turn the call over to David Emery. David Emery Thank you, Jerome, and good morning, everyone. Thanks for participating in the call this morning. I will be following along here on the webcast presentation deck for those of you who have it. Starting on Page 3, we will follow a similar agenda to previous quarters. I’ll give a quick update on highlights of the quarter. Rich Kinzley will cover the financial update, and then I’ll jump back in for forward strategy before we take questions from all of you. Moving on to Slide 5, fourth quarter highlights, we had a real solid fourth quarter despite the fact that we had mild weather for our gas utility territories and a continued decline in crude oil and natural gas prices, which affected our oil and gas results. During the quarter, we made great progress on several key growth initiatives, including our pending acquisition of SourceGas. Related to SourceGas, we received regulatory approvals now in three states; Arkansas, Nebraska, and Wyoming. And our closing will occur as soon as we receive approval in the state of Colorado. We still expect to close sometime during the first quarter. We’ve also recently completed our permanent financing on both the debt and the equity needed to close the transaction, so we’re ready from our finance standpoint. We still have several teams working on detailed integration activity. We expect to be fully integrated all systems and processes by year-end 2016, assuming we get closed by the end of the first quarter. Moving on to Slide 6, utility highlights for the quarter, Black Hills Power received final approval from the Wyoming Public Service Commission to begin construction on the first segment of our new 144-mile transmission line that will go from northeastern Wyoming to Rapid City, South Dakota. We expect to start construction in February and have that line completed ad in-service by year end. At Cheyenne Light in Wyoming, we recorded a new winter peak load of 202 megawatts on December 28, 5 megawatts higher than the previous winter peak set the year before. At our Colorado Electric subsidiary, we received approval in October to purchase the $109 million 60-megawatt Peak View Wind project. That project will be built by a third-party wind developer and we’ve executed a build transfer agreement with them, and we’ll take over as soon as the project is in-service, which is expected at year end. At Colorado Electric, we also continued construction on our new $65 million, 40-megawatt simple cycle gas turbine, which we’re adding to the Pueblo Airport Generating Station. We expect that turbine also be in service by year end. Moving on to Slide 7, Non-regulated Energy and corporate highlights for the quarter. On the Non-regulated Energy side, we initiated process during the quarter to explore the sale of a minority interest in our Colorado IPP 200-megawatt combined cycle units at the Pueblo Airport Generating Station. That process is ongoing, and we expect to make a decision related to that potential sale in the first quarter. We also completed our 2014, 2015 Mancos formation shale gas drilling program in the Southern Piceance Basin to prove up, the extent to that resource. We drilled, completed and tested and now have on production nine wells. We have four additional wells that we drilled and cased. We deferred the completion activities on those four wells, because we have a limited amount of gas processing capacity out of the area and we won’t need them probably call, at least, next year to fill the plant capacity. Overall, the results of the drilling program exceeded our expectation, so we’re quite pleased with the results there. On the corporate side, last week, our Board of Directors declared a quarterly dividend of $0.42 a share, that’s equivalent to an annual dividend rate of $1.68. The increase to $0.42 represents the 46th consecutive annual increase in dividends to shareholder. During the quarter, we also entered into $400 million of interest rate swaps to mitigate interest rate risk associated with the future debt refinancing activity, we expect in late 2016 and early 2017. Moving on to Slide 8, this just simply provides a reconciliation of fourth quarter income from continuing operations as adjusted, the fourth quarter 2014 results. Strong performance at our Electric Utilities and Power Generation segments nearly made up for the negative weather impacts at our gas utilities and the low crude oil and natural gas prices that are oil and gas subsidiary that I mentioned earlier. Slide 9 provides a similar reconciliation for full-year 2015 versus full-year 2014. Again, despite the challenges, we’re still able to post an increase in net income as adjusted. Now, I’ll turn it over to Rich Kinzley to talk about the financials for the quarter and the year. Rich? Richard Kinzley All right. Thanks, Dave, and good morning, everyone. We are encouraged to report another year of earnings growth in 2015, driven by strong results at the Electric Utilities, Power Generation, and Coal Mining businesses. As Dave mentioned, overall results were tempered by unfavorable weather and low crude and natural gas prices. Our gas utilities faced warmer than normal weather in the winter heating months in 2015, compared to colder than normal weather in 2014, which contributed to a decline in year-over-year performance, and low commodity prices impacted our oil and gas business. But despite those challenges, we again delivered earnings growth in 2015. On Slide 11, we reconciled GAAP earnings to earnings as adjusted, a non-GAAP measure. We do this to isolate special items and communicate earnings to better represent our ongoing performance. This slide displays the last five quarters, in each of the last two years. In each quarter of 2015, we incurred a non-cash ceiling test impairment charge at oil and gas business, due to the continued decline of crude oil and natural gas prices throughout 2015. In the second quarter of 2015, we also recorded a non-cash impairment of an equity investment at our oil and gas business, due to low commodity prices. In the fourth quarter, we divested this equity investment and realized the small gain above the impaired book value. We also incurred external acquisition-related expenses like financing and other third-party costs, in the second, third, and fourth quarters of 2015 associated with the pending SourceGas acquisition. These impairments in acquisition expenses are not reflective of our ongoing performance and accordingly we reflect them on an as adjusted basis. Our fourth quarter as adjusted EPS reflective of ongoing operations was $0.71 per share compared to $0.77 in the fourth quarter last year. Our full-year as adjusted EPS was $2.98 for 2015 compared to $2.93 for 2014. Fourth quarter and full-year EPS were diluted by approximately $0.04 each due to the 6.3 million share common stock offering we completed in November to partially fund the SourceGas acquisition. Slide 12 displays our fourth quarter revenue and operating income. On the left side of the slide, you’ll note the revenue was lower in 2015, due to reduced revenues at our gas utilities from lower pass-through gas costs during the year, given the low natural gas price environment in 2015. On the right side of the slide, you see strong performance in the fourth quarter at our Electric Utilities and Power Generation businesses more than offset decreased performance at our gas utility, coal mining, and oil and gas businesses, resulting in a 4% increase in consolidated operating income compared to the fourth quarter in 2014 Moving to the full-year on Slide 13, revenue decreased by $89 million, again, due to lower pass-through gas prices in 2015 at our gas utilities. Operating income improved at our Electric Utilities, Power Generation, and Coal Mining businesses in 2015. These improvements were partially offset by lower earnings at our gas utilities due to warmer winter weather and wider losses at our oil and gas business due to the lower natural gas and crude oil price environment. In total, year-over-year operating income increased by over 7%. And excluding our oil and gas business, our core utility and utility-like businesses’ operating income increased by 13%. I’ll touch on each business in more detail in the following slides. Slide 14 displays our fourth quarter and full-year income statements. Before asset impairment charges and acquisition-related expenses, we delivered operating income growth for both the fourth quarter and full-year despite the weather and commodity price challenges mentioned earlier. We implemented cost management efforts early in 2015 and I’m pleased with the way the organization responded. You can see our operating expenses decreased in the fourth quarter and increased only 1.5% for the full-year. Depreciation and interest expense increased, as we continue to grow our asset base. We’ve broken out the non-recurring impairments and external acquisition-related expenses, including the cost of the bridge financing we arranged for the pending SourceGas acquisition. For the full-year, as adjusted EPS grew nearly 2% year-over-year, while EBITDA increased by over 7%. Slide 15 displays our electric utilities gross margin and operating income. The electric utilities gross margin increased in the fourth quarter by $6 million over 2014 and by $49 million year-over-year. These gross margin increases resulted primarily from return on additional investments most notably the $222 million Cheyenne Prairie Generating Station, which went into service October 1, 2014. New rates associated with these investments went into effect at all three of our electric utilities in late 2014 and early 2015. Gross margin also benefited from industrial and commercial load growth in a variety of other factors, as detailed in our earnings press release distributed yesterday. Strong cost management throughout 2015 resulted in reduced O&M in the fourth quarter of 2015 compared to 2014, and a full-year increase of only 5% despite 12 months of the Cheyenne Prairie plant in operation during 2015 compared to three months in 2014. The combination of gross margin improvement and strong cost management resulted in operating income increasing by $7.3 million, or 19% during the fourth quarter compared to 2014, and $36.1 million, or 25% for the full-year 2015 over 2014. The electric utilities had an outstanding year driven by large capital investments to better serve our customers. Moving to Slide 16, our gas utilities gross margin as compared to 2014 decreased $3.6 million in the fourth quarter and $7.3 million for the full-year, driven by 14% fewer heating degree days in 2015 compared to 2014. Both heating seasons comprised of the first and fourth quarters were milder in 2015 than 2014. Strong cost management efforts at the utilities – at the gas utilities with decreases in O&M for both the quarter and full-year compared to 2014, partially offset the negative weather impact. Operating income declined $3 million in the fourth quarter compared to 2014 and by $4.9 million year-over-year. Compared to normal weather, our gas utilities gross margins were negatively impacted by an estimated $4.9 million in 2015. Also, in 2015, our electric utilities gross margins were negatively impacted by an estimated $3.9 million compared to normal weather. Combined these negative weather impacts compared to normal impacted our EPS by approximately $0.13 in 2015. On Slide 17, you see the power generation improved operating income by $3.2 million for the fourth quarter compared to 2014 and by $5.7 million year-over-year. The main drivers in the improved operating income were an increase in megawatts delivered in 2015 due to a Wygen I outage in 2014 and a Wygen I power purchase agreement annual price increases, as well as lower maintenance expenses and general cost management during 2015. For the full-year, as adjusted revenue was $3.5 million higher in 2015 and as adjusted O&M, including depreciation was $2.2 million lower. On Slide 18, our coal mining segment had a $1.2 million operating income decrease compared to the fourth quarter in 2014. For the quarter, revenue was $2.2 million lower as tons sold decreased by 7% compared to Q4 2014, due primarily to planned outages. Further, our regulator approved pass-through mechanism through which we sell approximately half our coal, yielded a lower price per ton in the fourth quarter due to lower mining costs. In Q4, O&M was $1 million lower in 2015 than 2014. For the full-year, coal mining operating income increased by $1.7 million, while tons sold were 4% lower in 2015, due to planned outages we’ve benefited from a significant revenue per ton increase in mid-2014 on a third-party coal contract as a result of a contractually scheduled price re-opener. This contract represents approximately 35% of our production and a higher price per ton increased our revenue in 2015 by $4 million. Keep in mind, the revenue increase from this price adjustment did not drop straight to operating income, as we pay revenue related royalties and taxes on the increase. On the cost side, we enjoyed continued mining efficiencies and lower fuel costs. We moved 31% more overburden in 2015, but at a decrease per cubic yard cost. O&M was flat from 2014 to 2015. Moving to oil and gas on Slide 19, we incurred an operating loss in the fourth quarter of $5.8 million, excluding a $71 million pre-tax ceiling test impairment charge compared to an operating loss of $4.5 million in 2014. Fourth quarter production increased 45% from 2014, driven by a 67% increase in natural gas sales volumes. From an average price received standpoint, including hedges, crude oil decreased by 22% and natural gas decreased by 38% comparing Q4 2015 to Q4 2014. For the full-year, we incurred an operating loss of $27.5 million, excluding pre-tax ceiling test impairment charges of $250 million compared to an operating loss of $11.8 million in 2014. 2015 production of 12.9 billion cubic feet equivalent represented a 29% increase over 2014, driven by a 41% increase in natural gas sales volume with a 10% increase in crude oil volume, and a 24% decrease in NGL sales volume. Comparing 2015 to 2014 average prices received for the full-year, including hedges, natural gas prices decreased by 39% and crude oil by 24%. While we are pleased with the outcome of the drilling program in the Piceance Basin over the last couple years from an operational standpoint, the low commodity price environment in 2015 severely impacted financial results at our oil and gas business. Regarding impairments taken in each quarter of 2015, Slide 20 shows the average trailing 12-month crude oil and natural gas prices, which continued to drop each quarter in 2015, driving the impairments. Given the continued low price environment for crude oil and natural gas, it’s likely we will have additional non-cash impairments to our oil and gas reserves in 2016, at least, in the first quarter. However, any impairments will be much smaller than those recorded in 2015, as our full cost pool is impaired down to approximately $94 million at the end of 2015, with an additional approximate $68 million in excluded costs, which is made up of a certain infrastructure, assets, and wells drilled, but not yet completed. Impairments taken in 2015 are driving down our depletion rate and our current guidance estimates the depletion rate of $0.80 to $1.20 per Mcfe in 2016. It’s worth noting here that we are managing our go-forward exposure in our oil and gas business by cutting CapEx, reducing the cost structure of the business, and beginning to divest non-core properties. You can see in our press release yesterday, the trend in the fourth quarter related to reduced O&M. And as I just noted, we expect a much reduced depletion rate in 2016, given the impairments. Dave will further address our strategy around oil and gas in a few minutes. Slide 21 shows our capitalization. At year end, our debt to cap ratio was 57% with a net debt to cap ratio of just over 50, excuse me, 57% with a net debt to cap ratio of just over 50% given cash on hand. In November, we received net proceeds of $536 million from the issuance of common stock and unit mandatory convertibles to partially fund the pending SourceGas acquisition, which increased our equity and debt. In January, we issued $550 million of long-term debt to nearly complete the permanent financing required for the acquisition. We will be assuming approximately $760 million of SourceGas debt when we closed the transaction. The remaining financing needs at closing expected to be in the range of $50 million to $100 million will be covered with our revolver. We will be more levered than normal on closing of the acquisition, but the strong cash flows and earnings from our businesses will assist us in delevering over the next couple of years. As you know, we continue to evaluate the potential sale of a minority interest in our Colorado IPP facility, which may yield proceeds allowing us to reduce debt. And to help fund our strong future utility focused capital program, we plan to put an at the market equity program in place in 2016. We will prudently issue equity through that program in 2016 and 2017. We are committed to maintaining our current solid investment grade credit ratings and our forward forecasted metrics support those ratings. Slide 22 demonstrates our track record of growing operating earnings and EPS. We look forward to closing the SourceGas acquisition and taking the next step forward in continuing to build upon our impressive track record of growing shareholder value, as we serve our utility customer safely and reliably. Our strong forward utility-based capital program will drive an above average growth profile compared to our utility peers, and the addition of SourceGas will enhance our growth prospects. Moving to Slide 23, yesterday, we updated our 2016 EPS guidance to be in the range of $2.40 to $2.60. This revision updates our previous 2016 earnings guidance issued on November 23, taking into account the additional interest expense associated with our recent $550 million debt issuance. It’s important to note the range does not include any earnings contribution from the SourceGas properties. When the SourceGas transaction closes, we will issue updated 2016, guidance and preliminary 2017 guidance with refreshed assumptions for all our forward-looking activities. 2016 will be a busy year as we effectively manage our businesses, integrate SourceGas and position ourselves for strong earnings growth in 2017 and beyond. I’ll turn it back to Dave now for strategy update. David Emery All right. Thank you, Rich. Moving on to Slide 25, we’ve shown you this slide for quite sometime now. But we group our strategic goals into four major categories and really with the overall objective of being an industry leader in all we do. Those four key objectives are profitable growth, valued service, better everyday, and great workplace. In the profitable growth area on Slide 26, strong capital spending drives our earnings growth. And we forecast total of more than $1.1 billion in capital spending for 2016 through 2018. That projected spending far exceeds our depreciation driving the earnings growth. It’s important to note that this table on Slide 26 does not include any capital related to the SourceGas acquisition. Once that acquisitions close, we’ll provide some revisions to the forecasted capital spending. On Slide 27, we continue to make great progress constructing our new turbine at the Pueblo Airport Generating Station at $65 million simple cycle gas turbine is on schedule and we expect it to be in service by year end 2016. To-date, we’ve spent about $35 million of a total $65 million budget were projected to come in at or under budget. Construction is about 27% complete and notably, we’ve had no safety incidents to-date. On Slide 28, as I mentioned earlier, we received approval from the Colorado PUC in October to purchase the new Peak View Wind Project for our Colorado electric utility. The third-party developer expects to commence construction in the first quarter and achieve commercial operations by year end at which time we’ll take over the project. We have made almost $12 million in progress payments as of December 31. Moving on to Slide 29, as Rich mentioned, our electric utility has demonstrated solid earnings growth in 2015, and a big part of that was our industrial load growth. We’ve had strong industrial load growth in all three of our electric utilities during 2015, for an overall increase in industrial load of almost 15%. That growth has been from several different industrial customers, but the datacenter load growth particularly in Cheyenne Wyoming is the most notable driver of that growth. Slide 30, another significant growth opportunity we’re pursuing very actively is the utility cost of service gas supply program. We’ve been talking about this for well over a year now. Under a cost of service gas program, our direct investment in natural gas reserves will provide long-term price stability for our customers, while also providing opportunities for increased investment and earnings for shareholders truly a win-win scenario. We submitted cost of service gas regulatory filing this fall in six separate states. Hearing dates have now been set in all six of those states. And we’re currently in the process of evaluating producing properties and drilling prospects for inclusion in the program that includes our Mancos Shale gas properties in the Piceance Basin in Colorado, which we’re evaluating now that we’ve finished up our test drilling program there. We hope to finalize our cost of service gas program sometime before year end 2016. Moving on to Slide 31, oil and gas strategy, Rich referred to this a little bit earlier. But we previously announced our plan to transition our oil and gas business to primarily support cost of service gas within our utilities. That program will provide stable price, low-cost fuel to our utility customers. As noted earlier, we completed our 2014/2015 Mancos Shale gas drilling program and essentially helped us prove up the magnitude of the resource we have in the Southern Piceance Basin. As Rich noted, we dramatically reduced our planned oil and gas capital spending for 2016 and 2017. Current product prices just simply don’t support additional capital investment in oil and gas. And our plan for capital going forward is essentially putting our capital investment into our cost of service drilling program. We’ve reduced our staff and cut cost in order to reduce our ongoing O&M. And our professional staff at our oil and gas subsidiary is busy applying their expertise and knowledge to assist our utilities with execution of cost of service gas. Moving on to Slide 32, this slide just simply provides a well by well details for our Mancos drilling program. It includes all the wells we’ve drilled now from 2013 through 2015. As I said earlier, overall we are very pleased with the results of the program little better than we expected. Moving on to Slide 33, I mentioned earlier, our dividend increase, we continue to be very proud of our dividend track record. And this is now being our 46th consecutive year of dividend increases for shareholders that’s one of the longest strings in the utility industry, and a record we’re very proud of. Slide 34, Rich talked earlier about our solid investment-grade credit metrics. We do have a solid balance sheet and good investment-grade credit ratings. Long-term, we expect the SourceGas acquisition to be credit positive, adding substantial low-risk, predictable cash flows to our credit metrics. On Slide 35, it illustrates the focus we place every day on operational excellence and on being a great workplace. During 2015, our safety record and our electric reliability performance were both near the top of the industry, that’s something we strive for an essentially all we do. On Slide 36, this is our scorecard, again, our way of holding ourselves accountable to you, our shareholders. Every year, we set forth our key strategic goals and initiatives and literally check the box on progress as we proceed throughout the year. Slide 36 is our 2015 goals and progress we’ve made towards those goals. Slide 37 is a preliminary scorecard for 2016. This includes the goal of completing the SourceGas transaction, but does not include any specific goals related to SourceGas. Once we require those properties, we will update the scorecard. That concludes our remarks. We would be happy to entertain any questions that anyone might have. Question-and-Answer Session Operator Ladies and gentlemen, we are ready to open the lines for your questions. [Operator Instructions] And your first question comes from the line of Insoo Kim with RBC Capital Markets. Please go ahead. Insoo Kim Hey, good morning, everyone. David Emery Hey, good morning, Insoo. Insoo Kim First question on the oil and gas strategy. I know you’ve talked about the low commodity price environment, and how the potential sale or divesting of the non – some of the assets would not result in the value that the asset that you don’t have. Just given the ongoing cost of service gas program, if that doesn’t go through, what are your thoughts regarding that business and the timing of such a strategic decision? David Emery Well, I think we have a pretty degree of confidence that we will have our cost of service gas program, the specifics of the size and which states choose to participate and at which levels, I think is the primary question in our mind, we think it’s a program that makes tremendous sense for customers and shareholders alike. And I think we’re uniquely positioned for that program because of our oil and gas expertise. Strategically, we’ve talked about divesting our non-core properties there. We’ve made the statement that we don’t intend a fire sale those if you will. But we are taking our time and making sure we can divest of those in a way that makes sense for us, and really focusing almost all of our attention on cost of service gas, whether that’s our Manco’s program and the shale gas resource we have in the southern Piceance Basin, or whether that would be reserves that we could potentially go out and purchase or a combination of the two, that’s really what we’re working on right now. We can’t finalize any of those plans or decisions until we know what size program we will have going forward, which of course is dependent on the regulatory process. Insoo Kim Got it. And sticking to cost of service gas, the CapEx estimates that you guys have through 2018 for that program. Is that still more of a placeholder for now, until you know what the details of the program are and the level of investments that you’ll be needing? David Emery Yes. Essentially, the way we came up with those numbers as we assume that we would commence a drilling program kind of late in 2016. We’ve talked about kind of our rough ongoing run rate for horizontal drilling program is around a $100 million for a rig running continuously for a full-year. And so that’s really where those numbers came from. We’ve got some wells, we have yet to complete in the Piceance and so the 2016 number is a little lower and then we basically assume a drilling rig year, if you will, for both 2017 and 2018, which I think is a pretty realistic assumption assuming we get the program off the ground. Insoo Kim Got it. And turning to the utilities business, for the legacy Black Hills utilities, ex-SourceGas, I guess beyond 2016 timeframe, what are some of the projects that you are looking for that could drive – further drive rate-based growth? David Emery Well, we’ve got several things we’re working on. In our slide deck, we do list a list – listing of kind of major utility projects. We break those out back in the appendix. And there’s several transmission projects, natural gas pipeline project, and other things that we’re actively pursuing right now. The other thing that we’ve talked about is, we’re short resources on the generation side and we talked about that in our Analyst Day back in October. We’re just getting started really on revisiting our resource planning for our electric utilities and fully expect that out of that, we’re going to need some additional resources to meet the load growth that we’re experiencing. Insoo Kim Got it. And just last question on – for the electric utility or I guess the electric or gas utility rate load growth, how much of your load growth is dependent on oil and gas customers? I’m assuming it’s relatively small, but – and what kind of impact have you seen, if at all, due to the low commodity price environment? David Emery Yes, essentially none of our load growth is dependent on oil and gas a very, very small percent. We don’t serve on the electric side direct oil and gas producing basins. So we get a small amount of kind of peripheral businesses that are located near the producing basins, but it really doesn’t drive a lot of growth a little bit and very light industrial and commercial load that we have – we do have one oil field that we serve at Black Hills Power had a little bit of load growth there it’s an enhanced oil recovery project. And I would say the prices there on a marginal cost basis are sufficient to keep producing. And so we really haven’t seen any cut backs in production, which would impact our load there. So a pretty minimal overall exposure to oil and gas prices on the electric utility side. Insoo Kim Got it. okay, thank you very much. David Emery You bet. Thank you. Operator Thank you. [Operator Instructions] Our next question comes from the line of Chris Ellinghaus with WillCap. Your line is open. Chris Ellinghaus Hey, guys, how are you? David Emery Good. Good morning, Chris. Chris Ellinghaus You quoted a $0.13 drag from weather for the year, I assume that’s versus 2014? David Emery No, that’s versus normal weather, Chris. Chris Ellinghaus Okay, great. David Emery And actually a little bigger than that compared to 2014, because 2014 was a little colder than normal. Chris Ellinghaus Okay. And can you give us any kind of characterization of how January went for the service areas? David Emery That are pretty close, but normal weather maybe slightly warmer than normal depending on the territory. Chris Ellinghaus Okay. And can you give us a little more detail on where the industrial strength is coming from? David Emery Yes, we’ve got several things, I mean, a lot of it is related to data center load growth in Cheyenne and Wyoming and then that’s the over warming portion of it. Colorado, some of our industrial businesses there have been growing at a steady clip, particularly gold mining has been real strong. There’s also an old munitions depot down in Pueblo, where they’ve ramped up load as they dispose of old weapons, and expect to keep that higher load for multiple years as they go through that process. Black Hills Power, we’ve just seen some of our industrial customers, whether that’s crude oil refining, I mentioned the oilfield earlier a combination of several of those things have helped expand load at Black Hills Power as well. Chris Ellinghaus Okay. And can you give us some ideas about when your next IRPs will get filed? David Emery Probably going to be late this year, or early next year. Chris Ellinghaus For all? David Emery Yes. Chris Ellinghaus Okay. David Emery We typically do our research planning for Cheyenne Light and Black Hills Power jointly. We manage that as essentially a single load, they’re interconnected systems, and we combine our resource planning efforts for those two. Colorado Electric, of course, we do separately. Chris Ellinghaus Okay. And do you have any planned major outages for this year or next year? David Emery We don’t have anything, I don’t think there’s any real lengthy outages. The ones we do have planned are incorporated into our earnings guidance. Chris Ellinghaus Okay. And do you have any updated thoughts on the Colorado SourceGas approval situation? David Emery No, I think we’re pretty well positioned there. We were successful in reaching a settlement. Colorado has a process, where your settlement is reviewed by an Administrative Law Judge and then the Commission requires a little time to review the recommendation of the ALJ and issue its order. We don’t foresee any real problems there. We are just kind of going through the motions, if you will, waiting for the process to play itself out. Chris Ellinghaus Okay. Thanks for the color, guys. David Emery You bet. Thank you. Operator Thank you. And our next question comes from the line of Andy Levi with Avon Capital Advisors. Your line is open. Andy Levi Hi. Good morning. David Emery Good morning. Andy Levi How are you? David Emery Great. Thanks. Andy Levi Just two questions, maybe three. But just the first one just on the IPP sale process. Can you just give us a little more color on that kind of I guess, it’s taking a little bit longer than you thought, so just kind of what’s going on there, and when we may hear something from you on that? David Emery Yes, I don’t know if it’s really taking a whole lot longer than we thought it would. We knew announcing kind of pre-holidays is not an ideal time to get things done expeditiously. The process is going well, obviously, we’ve engaged an investment banker. We’re going through the bidding process. We’ve had very strong indication of interest from multiple bidders. When you we are kind of working our way through the process. And I didn’t say earlier, we still expect to make a decision sometime before the end of the first quarter. Andy Levi Okay. And any reason to think that a sale wouldn’t happen, or that’s probably unlikely? David Emery Yes, I think it just really comes down to value. As I said, so far, indications have been pretty strong. But when you get down into negotiating real specifics and details and selecting final bids, you never know until you’re done. But we’re certainly encouraged by what we see so far. Andy Levi Okay. And then on the oil and gas segment, I just wanted to kind of understand what we got left on the books. I mean, I guess you showed $209 million of book value right at the end of December. Is that correct on page 20, I think it is? David Emery Correct. Andy Levi Okay. David Emery Yes, so… Andy Levi Can you give us a breakdown on the $209 million kind of… David Emery Sure. Andy Levi …how much is commodity related and how much is kind of, I don’t know hardware or kind of steel and the ground type stuff? Richard Kinzley Yes, as I pointed out in the comments earlier $94 million of that’s our full cost pool. So it’s the wells that are in our pool. $68 million is in unevaluated properties, which includes some infrastructure. And then wells – Dave mentioned that we drilled for wells in the Piceance, but didn’t complete them. So they are in that pool. And then you’ve got the balance, which is roughly $40 million which is the other assets of the business. Andy Levi Okay. So just to understand the commodity exposure piece is, what would you estimate? So if you kind of take out the pipeline stuff and trucks and things like that, what do you…? Richard Kinzley Say $150 million or $160 million is what’s left on the books, roughly exposed. Andy Levi Okay, okay. And then I know you commented on it, but I don’t think I was listening too closely. How much of that $150 million are you trying to get into rate-based gas? Or is that – is it not that defined? Richard Kinzley Really not defined at this point as Dave, mentioned a bit ago we’re evaluating whether a purchase of a third-party property or our existing gas assets make sense for that Cost Of Service Gas program, and working through that with regulators. Andy Levi Okay. What was the thing on the third-party? I’m sorry? Richard Kinzley Well one of the things we’ve evaluated in a way to potentially jumpstart our program if you will is assuming we get approval for Cost Of Service Gas if we could find a gas producing property perhaps with a distressed buyer or distressed seller. We might have an opportunity to buy a property in addition to looking at some of our properties primarily just the Mancos property is the one of our own really is a good viable long-term gas resource in at least the couple of trillion cubic foot resource potentially as much as 8 and that’s the one property. We have, we think would be a great fit for Cost Of Service Gas. But we’re also looking and if we can opportunistically purchase reserves from other parties we would like to do that to contribute to the program as well. Andy Levi Okay. And then – and I lied about the three questions. But in your guidance that you gave for 2016, the temporary guidance without SourceGas, what’s the – how much is oil and gas? What’s the drag? Richard Kinzley Well we haven’t broken out segment guidance like that yet when we get the SourceGas deal closed we intend to issue updated 2016 guidance and preliminary 2017 guidance and we may provide a little more color at that point around. Well certainly we’re going to provide updated assumptions on all our forward-looking activity including oil and gas, but we may provide a little more color at that time. Andy Levi I mean I guess the kind of way I looked at it is – and I think we’ve probably discussed this in the past – is that you have this really good story at the utility; the IPP is good and stable, you sell a portion of that. And the coal – mine math coal obviously is stable as well. So you have this really good kind of growth story at the utilities, especially with SourceGas. And then you have this distraction of this oil and gas business, which I understand you’re trying to get into rate base, for no better way to put it. But if, for some reason, a majority of those assets or the rate-basing of gas doesn’t materialize for whatever reason, what’s the longer-term strategy on this? Is it just to kind of sell it, or to kind of continue on? Again, this is assuming that commodity prices stay where they are, which I have no idea where they are going. But just kind of what your thinking is on that, because you have written down the majority of it, but it is a distraction and is a drag on earnings, and then ultimately valuation. So, without that drag, let’s just say it’s $0.25 to $0.40. You can kind of do the dumb math on a P/E basis, and you’ll come up with a higher valuation for the stock? Richard Kinzley Yes, I talked about this a little bit earlier, but I mean I think we fully expect to have a Cost Of Service Gas program going forward. The size of that and which states choose to participate at what level of production every year is really the question that we think it makes great sense to have a program. We think that we’ll be able to convince the regulators of the benefits to customer of having a program. There are tremendous benefits for customers in implementing a program, so we’re pretty confident we will have a program. And as we’ve said our strategy is to utilize that business to support Cost Of Service Gas. We’ve essentially eliminated any capital spending related to non-cost of service gas oil and gas investment. We’ve cut our staff, we’ve cut our ongoing operating expenses, we have the professional staff focused on Cost Of Service Gas. And as far as the other non-core properties we’ll continue to look for opportunities to divest those. We’re not just throwing our hands up and dumping them, but we’re going to sell them as prudent carefully review properties and sell them to people who it make sense to sell them to and gradually clean up the non-core properties, if you will. As far as ongoing earnings and the impact of ongoing earnings, when you look at the amount we impaired in 2015, the drag on earnings is going to be dramatically less than 2016 than it was in 2015. Just because we wrote off almost $250 million of our pool, and we’re not spending additional capital. So a depletion will be lower and then as we mentioned the cost structure is lower, so the drag will not be anywhere near what it was in 2015 and 2016. Andy Levi So on a clean basis, absent the write-downs, how much was the drag in 2015? Richard Kinzley Well, operating loss you can see in a press release was $27 million. Andy Levi Okay. So $27 million. We’ll use, I don’t know, 51 million shares to try and keep it kind of where it’s at. That was about $0.53 a share, or something like that on the new share count, absent the dilution from the converts, right? Is that right? So is there any type of guidance you can kind of give us? Richard Kinzley We’ll give updated guidance when we get the SourceGas deal closed. But basically 240 to 260 incorporates the assumptions we put out on November 23 guidance, incorporates the full drag of the equity, converts, and interest associated with the debt we just placed, and it doesn’t count any income contribution from SourceGas. So it’s a temporary number. Certainly, when we get SourceGas closed, I would expect 2016 to be higher than that, and then we’ll issue updated assumptions at that time. Operator Thank you. Our next question comes from the line of Tim Winter with Gabelli & Co. Your line is open. Tim Winter Good morning and thanks for taking my question. I wondered on the 2016 guidance, I have two questions. One is, what are you guys assuming for the IPP plant? Is there any earnings in there? And then the second part is, can you give us any updated metrics on SourceGas, maybe rate-based, ROE, earnings, anything like that that maybe just ballpark ranges? Richard Kinzley Repeat the first part again, Tim, on the IPP? You repeat the first question on IPP. Tim Winter What’s the assumption in the 2016 guidance for the…? Richard Kinzley Right now I assume that we own it for the full- year. Tim Winter Okay. Richard Kinzley And then on the metrics for SourceGas, again, we’ll put some color on that when we get the deal closed. Tim Winter Okay, okay. Thank you. Operator Thank you. Our next question comes from the line of Tom Nowak with Advent Capital. Your line is open. And I’m showing no further questions at this time. I’d like to turn the call back to David Emery for any closing remarks. David Emery All right. Well, thank you, everyone, for your participation this morning. We appreciate your continued interest in Black Hills. Have a great rest of your day. Operator Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. 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