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South Jersey Industries’ (SJI) CEO Mike Renna on Q3 2015 Results – Earnings Call Transcript

South Jersey Industries Incorporated (NYSE: SJI ) Q3 2015 Earnings Conference Call November 05, 2015 11:00 AM ET Executives Ann Anthony – Treasurer Mike Renna – President and CEO Steve Clark – SVP and CFO Jeff DuBois – EVP and President, South Jersey Gas Marissa Travaline – Director, IR Operator Good day, ladies and gentlemen, and welcome to the Quarter Three 2015 South Jersey Industries Earnings Conference Call. My name is Christie and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Ms. Ann Anthony, Treasurer for SJI. Please proceed ma’am. Ann Anthony [Indiscernible] SJI’s third quarter 2015 results and provide an update on our business. Joining me on our call today are Mike Renna, President and CEO of SJI; along with Steve Clark, our CFO; and Jeff DuBois, President of South Jersey Gas; as well as Marissa Travaline, our Director of Investor Relations. We also have several additional members of our senior management team available to help address questions following our prepared comments. Our third quarter earnings release was issued to the media this morning and is also available on our Web site at www.sjindustries.com. This release and the associated 10-Q provide an in-depth review of earnings on both a GAAP and non-GAAP basis using our non-GAAP measure of Economic Earnings. Reconciliations of Economic Earnings to the comparable GAAP measures are available in both documents. Let me remind you that throughout today’s call, we will be making references to future expectations, plans and opportunities for South Jersey Industries. Actual results may differ materially from those indicated by these statements as a result of various important factors, including those discussed in the company’s Form 10-K on file with the SEC. Also, as was the case in last quarter’s results, our 2014 per share numbers have been adjusted to reflect the impact of the stock split that occurred in May of this year. With that said, I’ll now turn the call over to our CFO, Steve Clark to review our year-to-date and third quarter results. Steve Clark Thanks, Ann. Good morning everyone. Thanks for joining us. Kicking off our discussion, year-to-date Economic Earnings totaled $55.8 million as compared with $72.8 million for the first nine months of 2014. As you would expect, the majority of the variance year-over-year is the result of a write-down of our investment in and the lack of operational contribution from the energy facility at Revel, which is responsible for approximately $11 million of this $17 million variance. Other significant contributors to the variance are an increase in reserves and write-offs of uncollectable accounts in our utility; increases in post retirement benefit costs and lower contributions from investment tax credits. The benefits realized in our commodity marketing business from the polar vortex that occurred in early 2014 also drove some of this variance. For the third quarter, Economic Earnings reflects a loss of $5 million in 2015 as compared with a loss of $3.4 million in the prior year period. Economic Earnings per share through September 30, 2015 were $0.81 as compared with $1.10 for the first nine months of 2014. For the quarter, Economic EPS reflected a loss of $0.07 as compared with a loss of $0.05 in the prior year period. Beyond the issues I just discussed, we still saw many positive contributors, including strong utility customer growth and much improved year-over-year contributions in our wholesale business and I’ll review that as I detail the results for the specific areas of our business. Starting with utility, South Jersey Gas’ net income through September 30, 2015 was up 4.6% at $44.4 million as compared with $42.4 million through September 30, 2014. For the quarter, utility net income reflected a loss of $3.4 million as compared with a net income contribution of $1 million in the third quarter of 2014. As I mentioned previously, these results were produced largely by the increased write-off of uncollectible accounts. The extreme conditions experienced in the last two winters produced significantly higher customer bills, higher than many customers were there for. As noted last quarter, this resulted in increased receivables, increased aging at those receivables and ultimately increased reserves and write-offs for those receivables. Compared to the prior year periods reserves and write-offs negatively impacted year-to-date and quarterly net income by $3 million and $1.8 million respectively. We continue to educate customers on ways to reduce usage through access programs for assistance and to take advantage of different bill repayment options we offer. Additionally, the quarter saw $700,000 impact to net income from increased cost associated with post-retirement benefits and a $1.1 million impact from higher depreciation and amortization. Infrastructure investments under our accelerated programs totaled $48.8 million year-to-date and added an incremental $1.3 million to net income for the first half of 2015. The planned investments are on target to reach roughly $70 million for 2015. Our AIRP and SHARP programs are expected to add $2.5 million in incremental income for 2015 while continuing to reinforce our system for the replacement of bare steel and cast iron gas main and a replacement of low pressure gas main with high pressure main along the barrier islands. Another major infrastructure reinforcement — infrastructure system reinforcement pending is the pipeline to provide natural gas to the former BL England electric generating station. Having received the certificate of filing from the Pinelands Commission’s staff in August, we now await final approval from the New Jersey Board of Public Utilities and acceptance of the BPUs determination by the Pineland Commission. We remain optimistic that we’ll obtain final approval of this project before year-end and that construction will commence in mid to late 2016 pending any appeals to the decision that may arise. Customer growth continues to be significant with our customers total up by nearly 6,900 or 1.9% for the 12-month period ending September 30, 2015. During the same time period, customer growth added $1.9 million incremental net income as compared with the prior year period. We continue to achieve this type of growth as a result of low natural gas prices and targeted marketing efforts that maximize the reach of our infrastructure to capitalize on customers additions from those on or near existing main. Shifting gears to the non-utility; our non-utility operations contributed a total of $11.5 million in Economic Earnings year-to-date through September 30, as compared with $30.4 million in the prior year period. In the third quarter of 2015, this segment produced a loss of $1.5 million as compared with a loss of $4.4 million in the third quarter of 2014. Our non-utility business is comprised of South Jersey Energy Services and South Jersey Energy Group. Within the South Jersey Energy Services, year-to-date results really reflect the impact of the write-down at Revel, with Economic Earnings of $5.4 million for the first nine months of 2015 as compared with $21.5 million for the same period in 2014. The Revel related impact was the largest contributor to the overall variance within this business line along with a reduction in the amount contributed by investment tax credits year-to-date. However, on a quarterly basis, Economic Earnings for Q3, 2015 match those of Q3 2014 at $800,000. These levels reflect the fact that neither the third quarter of 2014 nor the third quarter of 2015 saw noteworthy contributions from the Revel facility and both quarters also featured fairly moderate summer temperatures that requires less production from our portfolio of energy production facilities. With that in mind, our CHP portfolio reflected a loss of $8.6 million for the first nine months of 2015 as compared with Economic Earnings of $2.7 million for the first nine months of 2014. For the quarter, contributions from CHP reflect a loss of under $100,000 in 2015 as compared to a loss of $2.2 million in the third quarter of 2014. Moving over to our solar activities, net income was $16.6 million for the first nine months of 2015 as compared with $21.1 million for the first nine months of 2014. For the third quarter, solar contributed 1.5 million in 2015 as compared with 3.5 million in the third quarter of 2014. Lower levels of investment tax credits produce the variance. Although that variance is largely timing, as we expect to match 2014 solar investments by year-end based on the robust queue of solar projects we have in construction. We also remain on track for full year SREC production of 140,000 SRECs which will continue driving improved operating performance. To that end, the quarter reflected positive performance of approximately $200,000, a result that just not reflect the full value of our solar production in the second and third quarters of 2015 due to the timing of the certification of renewable energy certificates in Massachusetts which can take up to six months. We don’t recognize income from those SRECs until after the certification process is completed. We estimated that our 2015 Economic Earnings would have benefited by approximately $1 million, had all SRECs produced been certified as of 9/30. These earnings will be recognized over the next two quarters. For the first nine months of 2015. Our landfills produced a loss totaling $3.2 million as compared with a loss of $2.7 million in the prior year period. For the third quarter, these projects lost $800,000 in 2015 as compared with $400,000 in the same period in 2014. While we are just starting to see a slight uptick in performance from the sites, we are focused on improving. We also experienced some unrelated maintenance costs in the quarter. Addressing this issue is a high priority within SJI. Turning to South Jersey Energy Group, we remain very optimistic about the future of this business. Year-to-date, this area has added $6.1 million as compared to $8.8 million through September 30, of 2014. What’s important to note is that the current year’s performance was achieved without the benefit but the extreme volatility the region experienced throughout the first quarter of 2014. Volatility that drove the $18 million of Economic Earnings we experienced for the first quarter of 2014. In the current quarter, this area improved by nearly $3 million as compared with the third quarter of 2014 reducing its quarterly loss from $5.1 million to $2.3 million. This improvement was driven by the commencement of one fuel management contract in 2015 as well as improved performance of our marketing contracts. I also want to reaffirm our expectation that this business will exceed the $30 million of Economic Earnings that produced in 2014 or 2015. Finally, taking a look at the balance sheet, our equity-to-cap ratio was 41% at the end of the third quarter as compared to 43% in the third quarter of 2014. We’ve used our dividend reinvestment plan to issue equity totaling $9.7 million through September and we expect to further employ this resource during the fourth quarter of the year in support of our capital programs. We also maintain accumulated deferred tax benefits totaling $300 million related to our investments that we expect to realize between now and 2021 to help de-lever the balance sheet. At this time, I’ll turn the call over to Mike. Mike Renna Thanks, Steve. Good morning, everyone. With three quarters already under our belt, 2015 has so far presented our business with a few challenges. Certainly the write-down of our energy asset at the former Revel property had a significant impact on the current year. Now however, our focus is on moving SJI forward with a strategy that will create exceptional growth, improve the quality of our earnings and strengthen our balance sheet. From customer growth and infrastructure investment in our utility to a marked improvement in our commodity marketing and fuel management business lines to our investment in the pipeline to supply a repowered B.L. England generating facility and our stake in the vital PennEast pipeline, we are well positioned to deliver on our goal of achieving Economic Earnings of $150 million by 2020. Looking forward, steady contributions from recurring customer growth that far exceeds the industry average is expected to add nearly 12 million in Economic Earnings over the next five years as strong conversion effort continue to get a boost from access to an inexpensive and abundant supply of low cost natural gas. Infrastructure programs that support accelerated replacement of bare steel and cast iron mains as well as low pressure services also remain a key contributor year-over-year, driving incremental net income growth that is expected to top 18 million by 2020. In our non-utility businesses, our wholesale and retail commodity business lines are firmly positioned to drive low risk repeatable to income streams that are expected to contribute roughly 10% to 15% of Economic Earnings through 2020. Fuel supply management contract as additional plants come online will ultimately represent between 5% and 10% of our projected 150 million in 2020. And as we expand our organization to include a stake in PennEast, our 20% equity investment in this 105 million — 105 mile interstate transmission pipeline will be a boost to earnings as well as a significant benefit to our customers, as some of the nation’s lowest cost natural gas is delivered into our system. We also look forward to the possibility of constructing a new headquarters in Atlantic City to support organizational growth that has pushed us over 700 employees. We expect Atlantic City to remain a vital engine for economic development in Southern New Jersey and we look forward to being a central part of its resurgence. The agility and versatility of our business combined with the talent commitment of our workforce has enabled SJI to identify many opportunities that make up our strategic path forward. As a result, we expect to finish 2015 with earnings per share that meet our targeted range of $1.49 to $1.54. More importantly, we are confident in our ability to achieve our key strategic objectives, Economic Earnings of at least 150 million by 2020; strengthening our balance sheet; maintaining a low to moderate risk profile and perhaps most importantly, improving earnings quality to ensure that the foundation of our business is built on regulated, repeatable and reliable income streams. Now, I’ll turn the call back to the operator for Q&A. Question-and-Answer Session Operator Mike Renna Thank you. Before we conclude, as always, please feel free to contact Marissa Travaline, our Director overseeing Investor Relations or Ann Anthony, our Treasurer for any follow-up on the items we discussed today. Marissa can be reached at 609-561-9000 extension 4227 or by email at mtravaline@sjindustries.com. Ann can be reached at extension 4143 or by email at aanthony@sjindustries.com. Again thank you for joining us today. Operator Thank you for joining today’s conference, this concludes the presentation. You may now disconnect. Good day. Q – A – 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.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited. THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY’S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY’S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY’S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS. If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com . Thank you!

TECO Energy’s (TE) CEO John Ramil on Q3 2015 Results – Earnings Call Transcript

TECO Energy, Inc. (NYSE: TE ) Q3 2015 Earnings Conference Call November 5, 2015 9:00 AM ET Executives Mark Kane – Director of Investor Relations Sandra Callahan – Senior Vice President, Finance & Accounting and Chief Financial Officer John Ramil – President and Chief Executive Officer Analysts John Barter – KeyBanc Capital Markets Operator Good morning. My name is Brandi, and I will be your conference operator today. At this time, I would like to welcome everyone to the TECO Energy’s Third Quarter Results and 2015 Outdoor Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Mr. Mark Kane, you may begin your conference. Mark Kane Thank you, Brandi. Good morning, everyone, and welcome to the TECO Energy third quarter 2015 results conference call. Our results from continuing operations along with utilities statistical pages and the earnings release were released earlier this morning. This presentation is being webcast and our earnings release statistical summaries and slides are available on our website at tecoenergy.com. The presentation will be available for replay through the website approximately two hours after the conclusion of our presentation and will be available for 30 days. In the course of our remarks today, we will be making forward-looking statements about our expectations for 2015 results and preliminary business drivers for 2016. There are a number of factors that could cause actual results to differ materially from those that we will discuss today. For a more complete discussion of these factors, we refer you to the risk factor discussion on our Annual Report on Form 10-K for the period ended December 31, 2014, and as updated in subsequent SEC filings. In the course of today’s presentation, we will be using non-GAAP results. There is a reconciliation between these non-GAAP measures and the closest GAAP measure in the appendix to today’s presentation. The host for our call today is Sandy Callahan, TECO Energy’s Chief Financial Officer. Also with us today is John Ramil, TECO Energy’s CEO. Now, I’ll turn it over to Sandy. Sandra Callahan Thank you, Mark. Good morning, and thank you for joining us today. This morning I’ll cover the status of the various filings that we have made with Emera for approval of the acquisition, provide a normal quarterly update, and confirm our 2015 outlook. The appendix to the presentation contains the usual graph from the Florida and New Mexico economies and reconciliations of non-GAAP results. Since we announced the signing of the agreement with Emera in early September, we have been busy working with Emera to make the required filings in a timely manner. We filed with the FERC on October 6, and asked for approval by March. We filed with the New Mexico Commission on October 19. The commission assigned a hearing examiner yesterday and we are waiting for a final order on that and for a schedule to be established in the proceedings. We filed an initial proxy with the SEC on October 6, and subsequently filed our final proxy on October 22, with a record date of October 21. We’ve scheduled the special shareholder meeting to vote on the approval of the merger for December 3. And over the next several weeks, we expect to make the Hart-Scott-Rodino filing and the filing with the Committee on Foreign Investment in the U.S. In the third quarter, non-GAAP results from continuing operations were $77.3 million or $0.33 per share, compared with $0.32 last year. Net income from continuing operations was $64.9 million in 2015, and that includes $12.4 million of charges, primarily associated with the pending acquisition by Emera. We closed the sale of TECO Coal this quarter, so I’m not including a report on discontinued operations in my quarterly update. There is a report on discontinued operations included in our earnings release. For the first nine months of the year, non-GAAP results from continuing operations were $203.6 million or $0.87 per share, compared with $0.84 last year. Net income from continuing operations was $190.2 million, compared with $179 million last year. In addition to the cost this year associated with the Emera transaction, both years include costs associated with the New Mexico Gas acquisition, $1.2 million integration costs in 2015, and $5.7 million of acquisition costs in 2014. Tampa Electric reported higher net income in the third quarter. Customer growth was a strong 1.8%, while energy sales were slightly lower than last year, reflecting degree days that were fairly normal, but rainfall in July and August that was 60% above normal. Base revenues in the quarter benefited from the increase that became effective November 1 of last year per the 2013 regulatory stipulation. And AFUDC increased this quarter with higher investment balances in the Polk conversion project and other qualified projects. Peoples Gas saw another quarter of 2% customer growth, again with the strongest numbers in the southwest and northeast areas of the state. Both customer and economic growth contributed to higher firm sales to retail customers, as well as transported for power generation customers and off-system sales were higher also, reflecting more coal-to-gas switching, as well as new generating facilities coming online. The local economy continues to do very well. And it was helped in the first nine months of the year by a very strong tourist industry that benefited from Chamber of Commerce weather, the hockey finals, and new international flights at Tampa International Airport. As an indicator of that, hotel bed pack collections in the Tampa area set records in the fiscal year ended September 20, 2015, with numbers 13% higher than 2014, which also was a record year. New Mexico Gas Company recorded a seasonal loss in the third quarter, always the weakest revenue quarter, because of the absence of heating load. Again this quarter, we saw the positive impact on O&Million, both from integration synergies being realized and an overall focus on cost reduction. Customer growth was 0.8% in the quarter. And to provide some perspective on that, in the first full quarter that we owned New Mexico Gas, which was the fourth quarter of last year, customer growth was half that at 0.4%. The other net segment formerly known as Parent/Other had a net cost in the third quarter that was lower compared to last year, due to some unfavorable tax items that were in 2014. Results also reflect interest expense at New Mexico Gas Intermediate, the parent of New Mexico Gas Company. And we only had one month of that interest in the 2014 period. And finally, the lower interest expense from a refinancing earlier this year more than offset the impact of no longer allocating interest expense to TECO Coal. The Florida economy continues to be a good story. Statewide unemployment at the end of the third quarter was 5.2%, down from 5.8% a year ago. And over that period, the state has added more than 236,000 new jobs. Hillsborough County, Tampa Electric’s primary service territory once again outpaced the state and U.S. levels with unemployment down to 4.8%, a full percent below where it was a year ago. Over the past year, the Tampa-St. Petersburg area added more than 28,000 jobs. A nice development in the local employment picture is an increase in the number of higher paying science, technology, engineering and math, or STEM jobs in the Tampa Bay area. According to a Bloomberg study, Tampa has more than 64,000 STEM jobs, representing more than 5% of the workforce. And that is the highest number and percentage among Florida’s major metropolitan areas. Growth in construction-related jobs in Tampa is being driven by record numbers and record values for building permits. In the 2015 fiscal year that just ended, the City of Tampa issued more than 23,000 building permits. Single family, multi-family and commercial, both new construction and modification, with a value of $2.4 billion. Those numbers represent a 20% increase from 2014, which also was a record year. Aggressive economic development efforts have brought almost 12,000 new jobs to the area over the past three years, including a number of higher paying professional and high-tech jobs. In New Mexico, the unemployment rate never came close to the levels we saw in Florida, because of the large presence of the oil and gas industry and governmental facilities in the state. Improvement though, has been slower than what we have experienced in Florida. And in September, the unemployment rate ticked up, primarily due to a slowdown in construction employment. Net job growth in New Mexico was 6,400 over the past year, a number impacted by some job losses in the oil and gas industry as a result of the recent movements in energy prices. The largest gains came in the education and health services, leisure and hospitality, and professional and business service categories. The Albuquerque area, which constitutes almost 50% of the state’s non-farm payroll, led the state in job creation, adding 6,600 jobs over the year and offsetting net job losses in some of the less populace areas. On the housing front, the good story in the Tampa area continues, with more than 5,800 new single-family building permits issued over the past 12 months, and existing homes continuing to sell at a strong pace. The October Case-Shiller report shows that selling prices in the Tampa market increased 6.1% year over year. With the strong pace of resale, the housing inventory remains at a healthy level of less than four months. In Albuquerque, New Mexico’s largest metro area, existing home resales have trended up steadily over the past year. There was a very strong acceleration in recent months, including a 33% year-over-year increase in June, and 26% in September. Selling prices have also trended up, and the inventory of homes available for resale is just under five months. You can see all of these trends on the graphs in the appendix. Our assumptions around guidance that we provided previously remain unchanged. We are maintaining our previously provided guidance for 2015 earnings per share from continuing operations in a range of $1.08 to $1.11, excluding non-GAAP charges or gains. We still expect New Mexico Gas to be accretive to our full-year earnings, but it has been a challenge to overcome the very mild winter weather that started the year. We had great results on a cost side, and that is helping to offset the impact of disappointing first quarter weather. But we do need some normal cold winter weather to close out the year. Looking forward to next year, all indications are that we should continue to see strong customer growth at all three of the utilities. We expect the Florida utilities to earn towards the upper end of the respective return on equity ranges shown on the slide. Tampa Electric AFUDC earnings will grow next year, as the investment in the Polk conversion project reaches its peak. And in addition, a $5 million base revenue increase became effective November 1 of this year as a result of the 2013 settlement agreement. All of the utilities expect to record higher depreciation expense as a result of continued investment in equipment and facilities to serve customers. And of course, across the board, we will continue to be very focused on holding the line on cost. Our upcoming investor communication schedule includes being at EEI next week, where we will participate jointly with Emera in one-on-one meetings, and also we will be a part of Emera’s presentation at 10:30 on Tuesday morning. After the Emera acquisition announcement, we’ve been asked if we would continue to have quarterly conference calls. Because of the timing of EEI next week and our activities there, we decided to have a call this quarter. But future calls will be on an as-needed basis only. And now I’ll turn it over to the operator to open the line for your questions. Thank you. Question-and-Answer Session Operator [Operator Instructions] Your first question comes from the line of John Barter with KeyBanc. John Barter Hi, good morning, and thanks for taking my question. I guess looking in New Mexico, has the hearing examiner — do you have any expectation around when the hearing examiner will have a recommendation? Sandra Callahan The first thing that has to happen is, the hearing examiner will set a schedule for the proceeding. And we will then go through that process, and the hearing examiner recommendation really comes at the end of that process. Mark Kane One thing to remember, the New Mexico regulatory calendar, there is a PNM rate case, there is a Southwest Public Service rate case, and there is a whole PNM San Juan process also running concurrent with our process, so the commission has a very full calendar. John Barter All right, got it. And then I guess in Florida with the whole solar issue — is it Floridians for Solar Choice and then Consumers for Smart Solar — have either of those initiatives got the necessary amount of signatures to get on the 2016 ballot yet, or is that still progressing? John Ramil No. This a John Ramil. Neither one have gotten the signatures yet. They are both being acquired as we speak. John Barter Okay. Thank you. Operator [Operator Instructions] There are no further questions at this time. Mark Kane Okay. Brandi, thank you very much. Thank you all for joining us this morning. If there are no further questions, this concludes TECO Energy’s third quarter call. Thank you. Operator This concludes today’s conference call. You may now disconnect. 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.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited. THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY’S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY’S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY’S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS. If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com . Thank you!

How To Build A Strong Dollar Emerging Markets Equity Index

By Christopher Gannatti At WisdomTree, we have written extensively regarding how the movement of currencies can have the potential to impact equity investments. Within emerging markets, the approach of currency hedging, which has become quite popular within developed markets, is currently expensive. 1 That’s why we created a new approach, the WisdomTree Strong Dollar Emerging Markets Equity Index , which seeks to mitigate the potentially adverse impact of a strengthening U.S. dollar against emerging market currencies . Does a Stronger U.S. Dollar Impact All Emerging Market Equities Equally? Our answer is no-a strengthening U.S. dollar (and weakening emerging market currencies) does not create an equivalently negative impact across all emerging market stocks. Some important considerations could include: Geographic Revenue Distribution: Companies that derive more of their revenues from the United States actually see their goods and services become less expensive to U.S. consumers as the dollar strengthens. Commodity Sensitivity: Since many commodities are priced in USD, a strengthening U.S. dollar is usually accompanied by declining commodity prices. Certain emerging market companies are commodity sellers, thereby having the potential to see revenues increase as commodity prices rise. Of course, others are commodity buyers, so they have the potential to see their costs decrease as commodity prices fall. Debt Levels: For the most part, emerging market corporate debt issuance is in U.S. dollars. If the dollar is strengthening compared to a company’s home currency, and the majority of that company’s revenues are in that home currency, a scenario in which it is tougher for that company to continue to pay for its debt obligations can develop. These represent just some of the considerations to think about when looking at how companies within emerging markets may respond to a stronger U.S. dollar. Zeroing In on Strong Dollar Emerging Market Constituents The WisdomTree Strong Dollar Emerging Markets Equity Index steers around companies that may be the most at risk to respond negatively to a strengthening U.S. dollar by virtue of its annual screening process: Sectors Excluded at the Annual Screening 2 : Energy, Financials, Materials, Telecommunication Services and Utilities. We believe that the companies within these sectors, in aggregate, could be at greater risk of responding negatively to a strengthening U.S. dollar. Sectors Included at the Annual Screening: Consumer Discretionary, Consumer Staples, Health Care, Industrials and Information Technology. We believe that companies within these sectors-given that they also must derive a minimum of 15% of their revenue from the United States-could be at a lower risk to respond negatively to a strengthening U.S. dollar. In the chart below, we look to explore these premises, utilizing blends of MSCI Indexes to represent included sectors 3 and excluded sectors 4 . Within this chart, the U.S. dollar is measured by the U.S. Federal Reserve Trade-weighted Major Currency Index. Last Five Years: As U.S. Dollar Strengthened, Blend of Included Sectors Outperformed Blend of Excluded Sectors (click to enlarge) Overall Upward Trend of the U.S. Dollar: Over the five years ended September 30, 2015, the U.S. dollar strengthened 4.6% per year, creating a potential headwind for any unhedged exposure to emerging market equities. But we see that the ratio of the performance of the blend of the included sectors compared to the performance of the blend of the excluded sectors tended to increase. That means that the blend of included sectors outperformed that of the excluded sectors-showcasing our initial point that emerging market equities do not all respond equally to a stronger U.S. dollar. Positive Returns Even While Not Hedging: What we also find interesting is that over the three-year and five-year periods, the blend of included sectors exhibited positive returns. This occurred as the dollar was getting strong, AND it is important to note that this blend is NOT currency-hedged. The performance of the underlying equities was enough to more than offset the currency headwind during these periods. While there is no way to know if this performance will continue, if an investor believes that the U.S. dollar has the potential to continue to strengthen and that U.S. short-term interest rates will remain lower than the short-term interest rates seen within many emerging markets for a considerable time, WisdomTree’s Strong Dollar Emerging Markets Equity Index could be interesting to consider. References Bloomberg, as of 9/30/15. Subsequent to Index screening it is possible that a current constituent may spin off a subsidiary company that may be classified as a Consumer Staples, Health Care, Telecommunication Services or Utilities sector firm. Spin off firms that remain within the Index do not get removed between Index rebalances due to their sector classification. Blend of included sectors: Represents the eligible sectors of the WisdomTree Strong Dollar Emerging Markets Equity Index, while maintaining sensitivity to the country exposures of this Index as of 9/30/15. Includes the MSCI Taiwan Information Technology Index, 24.7%; MSCI Taiwan Consumer Discretionary Index, 12.0%; MSCI Taiwan Industrials Index, 9.5%; MSCI South Korea Information Technology Index, 15.2%; MSCI South Korea Consumer Discretionary Index, 13.9%; MSCI South Korea Industrials Index, 7.6%, MSCI South Korea Health Care Index, 6.3%; MSCI India Information Technology Index, 5.7%; and MSCI India Health Care Index, 5.1%. Blend of excluded sectors: Represents an equally weighted blend of the sectors excluded from eligibility for the WisdomTree Strong Dollar Emerging Markets Equity Index and includes the MSCI Emerging Markets Energy Index, the MSCI Emerging Markets Materials Index, the MSCI Emerging Markets Financials Index, the MSCI Telecommunications Services Index and the MSCI Emerging Markets Utilities Index. Important Risks Related to this Article Investments in emerging, offshore or frontier markets are generally less liquid and less efficient than investments in developed markets and are subject to additional risks, such as risks of adverse governmental regulation and intervention or political developments. Christopher Gannatti, Associate Director of Research Christopher Gannatti began at WisdomTree as a Research Analyst in December 2010, working directly with Jeremy Schwartz, CFA®, Director of Research. He is involved in creating and communicating WisdomTree’s thoughts on the markets, as well as analyzing existing strategies and developing new approaches. Christopher came to WisdomTree from Lord Abbett, where he worked for four and a half years as a Regional Consultant.