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Atmos Energy’s (ATO) CEO Kim Cocklin on Q3 2015 Results – Earnings Call Transcript

Atmos Energy Corporation (NYSE: ATO ) Q3 2015 Results Earnings Conference August 06, 2015, 10:00 PM ET Executives Susan Giles – VP of IR Kim Cocklin – CEO, President and Director Bret Eckert – CFO and SVP Analysts Brian Russo – Ladenburg Thalmann & Company Charles Fishman – Morningstar Research Spencer Joyce – Hilliard Lyons Operator Greetings, and welcome to the Atmos Energy Fiscal 2015 Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Susan Giles , Vice President of Investor Relations for Atmos Energy. Thank you Ms. Giles. You may begin. Susan Giles Good morning, everyone. Thank you for joining us. Our speakers this morning are Kim Cocklin, President and CEO; and Bret Eckert, Senior Vice President and CFO. There are other members of our leadership team here to assist with questions as needed. Our earnings release, conference call slide presentation and our Form 10-Q we filed last night are available on our website at atmosenergy.com. We will refer to just a few of the slides during this live call, but we’ll take questions on any of them at the end of our prepared remarks. As we review these financial results and discuss future expectations, please keep in mind that some of our discussion might contain forward-looking statements within the meaning of the Securities Act and the Securities Exchange Act. Please see Slide 21 for more information regarding the risks and uncertainties we consider in making these forward-looking statements and where to go to get more information on these risks and uncertainties. Now I would like to turn the call over to our President and CEO Mr. Kim Cocklin. Kim. Kim Cocklin Thank you very much, Susan, and good morning everyone. We certainly appreciate you joining us this morning and your continued interest in our company Atmos Energy. Yesterday as you are aware we reported consiolidated net income of about $56 million or $0.55 per diluted share. For the first nine months of fiscal 2015 the reported consolidated debt income was about $292 million or $2.86 per diluted share. Company’s performance during the quarter offers yet another confirmation at our long-term strategy to grow by investing in the safety and reliability of our regulated infrastructure continues to generate consistent operational and financial results. As a result we are pleased to increase our fiscal 2015 earnings guidance to a range between $3.10 from the previously announced ranges between $2.90 and $3.05 per diluted share. Bret will provide a little bit more color around that in his remarks. The execution of our strategy has also allowed us to strengthen our financial position and this was recognized was Fitch when they upgraded our long-term debt rating to A from A minus on July 1. Our debt capital ratio of June 30 was 45.5 % and all liquidity remained strong with over $1 billion of capacity available from our credit facilities. Yesterday our board declared our 127 consecutive quarterly cash dividend. The indicated annual dividend rate for fiscal 2015 is a $1.56 per share. I’m going to turn the call over to our CFO Bret Eckert for more detailed discussion of the results. Bret. Bret Eckert Thanks Kim, and good morning to everyone. Slides 2 and 3 detail reported net income an income excluding net unrealized margins to the three and nine month periods of fiscal year 2015 and 2014. Earnings excluding unrealized margins for the current three month were $55 million or $0.54 per diluted share versus $46 million $0.45 per diluted share in prior year quarter. Earnings excluding unrealized margins for the current nine months were $287 million or $2.81 per diluted share compared with $259 million or $2.69 per diluted share of last year. Remember last year’s nine months results included the favorable impact was significantly colder than normal weather. Slides 4and 5, provides financial highlights for our regulated operations. In the quarter rate increases lifted distribution gross profit by $16 million and about $62 million for the current nine-months. At APT approved GRIP filings in fiscal 2014 and 2015 listed margins by over $9 million in the quarter and $37 million for the nine-months. However, period-over-period results in our distribution segment were negatively impacted that by weather that was 31% warmer than the prior year quarter and 9% warmer than the prior year nine-months. This reduced gross profit by about $1 million for the quarter and $9 million for the nine-month period. On non regulated segment is detailed on Slide 15 and 16, delivered gas increased in both the quarter and year-to-date period driven by stronger per unit margin offset by a slight decrease in delivered gas volumes. Other margins decreased about $3 million in the quarter and $17 million in the current nine-month as less volatile market conditions created few opportunities to capture incremental gross profit compared to the same periods one year ago. Shifting now to the income statement O&M increase by about $7 million in the quarter and about $18 million for the current nine-months. As we expected both period of experience higher levels of pipeline maintenance writeaway expenses despite a very wet spring that impacted the amount of maintenance that could to be performed. We do anticipate the maintenance expenses to continue and accelerate fourth quarter as the whether rise out. In addition, the current quarter saw increased employee related costs associated with the timing of the recognition of higher variable incentive compensation expense as a result of increased operating results these increases will partially offset by lower legal expense. Interest charges decreased by $4 in the quarter and about $10 million for the nine-months primarily due to replacing the $500 million of 10 year debt with $500 million of debt at a lower rate back in October 2014. Details of capital spending represented on Slide 6, over 80% of our capital expenditures were associated with safety and reliability spending, as we activated CapEx increased by about $115 million current nine month period compared to one year ago. Moving now earnings guidance for fiscal 2015 and you may want to turn to Slide 18 where we’ve detailed revised contributions from our regulated and our non-regulated operations as well as selected expenses for the year. As Kim mentioned, we have tightened and slightly increased the earnings guidance range for fiscal 2015 with earnings per diluted share now expected to range from $3 to $3.10 excluding unrealized margin. We now project regulated operations generate net income in the range of $290 million and $305 million and non-regulated operations to generate net income in the range of $14 million to $18 million. The updated guidance primarily reflects stronger than anticipated consumption in our distributions segment. This increased consumption levels not only reflect the impact of colder than normal experienced during the winter heating season, but also higher than anticipated residential and commercial consumption level following the winter heating season. We also expect higher realized non-regulated gross profit as a result of the improved delivered gas performance. Consolidated O&M expense is now expected to range from $525 million to $535 million driven by increased regulated pipeline maintenance activities and higher employee related variable incentive compensation expense. Turning to Slide 28, we now anticipate the annual operating income impact for rate outcome implemented in fiscal 2015 to range from $85 million to $95 million. This is slightly different than our original projection largely due to increased customer consumption experienced in the prior fiscal year. As a result, test period revenues were higher which reduced the size of requested rate increases. Thank you for your time and now I’ll hand the call back over to Kim. Kim Cocklin Thank you very much for that report, Bret. Our performance again confirms that what we’re doing is working. We are experiencing very good results all around both operationally and financially as we strive to become the nation’s safest gas utility. We’ve fostered good relationship with our regulators who are tasked with balancing the needs to consumers and businesses like Atmos Energy and we’ve also built and established partnership with them as well as our customers, employees, in the cities we serve. Our regulated operations as Bret said continue to provide stable and predictable earnings for the enterprise. As of August 5, rate outcomes and incremental differals that provided annual operating increases of about $87 million thus far in fiscal 2015. Rate actions that are filed and pending total about another $9 million of requested annual operating increases. We expect to file another three to four cases this fiscal year that combined that would request anywhere from $15 million to $20 million of additional increases to operating income. As you are well aware safety is our number one priority and it does require significant investment both capital and expense. As gas prices remain low for the foreseeable future, the price dynamic continues to facilitate the investment we’re committed to making. This year we’ll spend from $900 million to $1 billion of capital to fortify our system. You’ve heard this bfore, we may sound like a broken record or you might think you are watching the movie Ground Hog Day, but we have been and will continue to delivery on our promises and commitment. Investing in the safety and reliability of our system is the highest and best use of our capital. These capital investments should grow rate base by 9% to 10% and earnings per share by 6% to 8% on an annual basis and provide a projected total return to shareholders of between 9% and 11%. In November, we’ll look forward to meeting with you and communicating our refreshed five year plan, which will provide projections through fiscal 2020. We certainly appreciate your time this morning and now we’ll take any questions that you have, Kevin. Question-and-Answer Session Operator Thank you. [Operator Instructions] Our first question comes from the line of Brian Russo with Ladenburg Thalmann. Please proceed with your question. Brian Russo Hi, good morning. Bret Eckert Good morning, Brian. Brian Russo Just in terms of the increased guidance, if you kind of back into the EPS for the reg or non-reg, it looks like it’s split fairly evenly $0.05 of EPS increase on reg another $0.05 on regulated side. Is that just sustainable or is it related to weather and it’s not – and it shouldn’t really re-occur when meeting is the base earnings power $0.10 higher now than it was previously? Bret Eckert Well as we had said last call Brian it’s few questions, we expect weather to weather consumption to contribute about $0.04 to $0.06 to earnings in fiscal 2015, we talked about the delivery gas business with the slight increase in our guidance that really is driven by the delivery gas business, we see per unit margins strengthened though in end of the year expecting margins in the $0.10 to $0.11 range you see in margins closer to the $0.11 to $0.12 range and that is really what is causing the lift in that business. So we’re only coming out with guidance for fiscal 2016 as we announce our full-year results in November but those are the main drivers of the increase in earnings this year. Brian Russo Now the increase in unit margins on the non-reg side, is that sustainable? Bret Eckert That’s a good question Brian. I mean we didn’t experience that same performance last year from them and this year was then the trend increase for their margins and we’re also seeing increased consumption in on the regulated side of the business. I think that there is some traction that is being gained nationwide by energy consumers that are recognized that natural gas is an extremely good purchase and it continues to lead the way. So we’re seeing that, they are seeing some of that in the industrial sector but and the other thing is that their delivered share gas focus is continuing to emphasize providing additional value to customers that are willing to recognize that value. So they’re being the non-regulated group of being a little bit more focused on the selection of who they’re serving and so they are high-grading their customer base which has translated at least this year into those better margins that we’re seeing. So we’re going to continue to have that strategy of emphasizing service to customers that are recognizing the additional value they bring to the table in terms of just all of the energy services that are available and then providing the premium product in the form of natural gas that they are getting. But so some folks are willing to pay up right now because of the competitive edge that gas brings to their product and their process. Brian Russo Got it okay and then just the it looks like you’ve got about 55% equity ratio, can you talk about maybe the trends you see there, is that kind of a good target trend lower as you raise that financial CapEx? Bret Eckert We continue today, we are committed to kind of growing this spending of $900 billion to $1.1 billion through 2018 in a balanced form. The 55% is the product to the equity issuance we did back in February of 2014. Brian Russo Okay. And then just lastly the upcoming regulated pipeline, GRC filing I think it is December 2016 any – can you just comment what are the major drivers there and I think we should be aware of that this time? Bret Eckert Generally there are no unusual drivers; it is going to be a typical rate case with the focus on cap structure, on return and on service levels and rights. But it won’t be anything unusual. Brian Russo Okay, great. Thank you very much. Bret Eckert Thank you, Brian. Operator Thank you. Our next question comes from the line of Spencer Joyce with Hilliard Lyons. Please proceed with your question. Bret Eckert Spencer? He dropped off, lost Spencer. Operator Our next question comes from the line of Charles Fishman with Morningstar. Please proceed with your question. Charles Fishman Good morning. The variance on O&M which were attributed to the employee incentive plan is that something you just recognize that in the third quarter that is not ongoing, we won’t see that next quarter, is that correct? Bret Eckert You recognize an incentive comp base on your initial targets and then with revision of the guidance upwards with only come in higher, on the quarter once you change that is when we catch up on the higher level of expense and so this time we got recorded in the third quarter. Charles Fishman Okay, got it. And then the second question was Bret you made the comment that you were experiencing higher consumptions following the heating season, I appreciate if you have add some color to that total whatever you can . Bret Eckert Yeah, we have seen, through the nine month period consumption higher than historical norms coming through and so we have always got consumption driven by weather and then you’ll just got a modest consumption consumer will use on a average degree day and we have seen that be higher than historical norms continue into the first nine months of this fiscal year. Charles Fishman Whats going on? Bret Eckert And it’s hard to highlight exactly what’s driving consumer consumption patterns, but we have seen higher consumption this year. Kim Cocklin Charles, I mean that’s kind of national, nationwide circumstance we flipped it some of the tests that are coming out we looked at AGA statistics that recently came out I think last week or two weeks ago and it indicated the better reversal of the trend for declining use of natural gas and for the last two years running there has been an increase in the consumption trend by residential customers. Again, I think, the traction associated with our industry getting out a little bit and promoting the competitiveness in the abundance and the environmental qualities of natural gas. Charles Fishman Okay. Bret Eckert Certainly in the competitive against other alternative fuel sources. Charles Fishman Okay, thank you for that. Kim Cocklin The industry and I think you know we are just experiencing because we were, one of the biggest R&D utilities on the planet. Charles Fishman Okay, thanks a lot. Operator Thank you. [Operator Instructions]. Our next question comes from the line of Spencer Joyce with Hilliard Lyons. Please proceed with your question. Spencer Joyce Let’s try out this again user error on my part. I apologize. Kim Cocklin Okay. Bret Eckert Well first mistake of the year for you. Spencer Joyce Yes, I got to say so keeping with the Bill Merry movies it is clear that the Cinderella story continues to execute here, nice quarter. Right, what becomes of the broken it is and another one when that comes to mind on if you are not in the stock by the four tops? What in the world applies with what is the sector doing? Kim Cocklin It is flattish, it is mostly interest rates on say, we are kind of drawn to tough comp of where lot of the stocks ended last year, but optimistic here is we look towards the back half. Spencer Joyce Yes. I guess to be long-term. In any case just want to kind of have question from me, we are inching kind of ever closer here to the endpoint of kind of standing 2018 guidance if you will, but I know we are still a couple of years out but can you talk about any clarity that maybe developing as we look maybe towards the tips of the decade here and potentially when we can see you all maybe roll that target out another year or two? Bret Eckert Great question, Spencer we do plan in November when we released earnings of fiscal 2015 to come out and extend that plan to four, five years through 2020, we have launched the plan updated the plan last in 2014 to 2018 we didn’t want to getting practice of rolling out another year, every year. So we kind of do it every two years but we will put out revised plan or updated plan if you will through 2020 we will put guidance out there, guidance range out there in 2020 and as we talked before imagine for 2018 we continue to see the ability to invest at these levels enhancing the safety into the liability for systems. So we expect that in our analyst meeting in November. Spencer Joyce Perfect, we will eagerly await that roll out there. Again good quarter and nice year, shaping out to be a good one. That is all I have. Kim Cocklin Thanks Spencer. End of Q&A Operator Thank you. There are no further questions at this time. I would like to turn the floor back over to management for closing comments. Susan Giles Thank you, Debin. I just want to remind you all recording of the call is available through November 4 and I am here if you have any additional questions. Thank you so much for joining us. Bye, bye. 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. 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Exelon (EXC) Christopher M. Crane on Q2 2015 Results – Earnings Call Transcript

Exelon Corp. (NYSE: EXC ) Q2 2015 Earnings Call July 29, 2015 11:00 am ET Executives Francis Idehen – Vice President-Investor Relations Christopher M. Crane – President, Chief Executive Officer & Director Joseph Nigro – Executive Vice President, Exelon; Chief Executive Officer, Constellation, Exelon Corp. Jonathan W. Thayer – Chief Financial Officer & Senior Executive VP Darryl M. Bradford – Executive Vice President & General Counsel Analysts Greg Gordon – Evercore ISI Steven Isaac Fleishman – Wolfe Research LLC Dan L. Eggers – Credit Suisse Securities (NYSE: USA ) LLC (Broker) Jonathan Philip Arnold – Deutsche Bank Securities, Inc. Julien Dumoulin-Smith – UBS Securities LLC Christopher J. Turnure – JPMorgan Securities LLC Operator Good morning. Thank you for standing by. At this time, I’d like to welcome everyone to the Exelon Corporation Quarter Two 2015 Earnings Conference Call. Your lines have been muted to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. Thank you. I’d now like to turn today’s conference over to Francis Idehen. Thank you, you may begin. Francis Idehen – Vice President-Investor Relations Thank you, Ali. Good morning, everyone, and thank you for joining for our second quarter 2015 earnings conference call. Leading the call today are Chris Crane, Exelon’s President and Chief Executive Officer; Joe Nigro, CEO of Constellation; and Jack Thayer, Chief Financial Officer. They are joined by other members of Exelon’s senior management team, who will be available to answer your questions following our prepared remarks. We issued our earnings release this morning along with the presentation, each of which can be found in the Investor Relations section of Exelon’s website. The earnings release and other matters which we discuss during today’s call contain forward-looking statements and estimates that are subject to various risks and uncertainties. Actual results could differ from our forward-looking statements based on factors and assumptions discussed in today’s material, comments made during this call, and in the risk factors section on the 10-K which we filed in February, as well as in the earnings release and the 10-Q, which we expect to file later today. Please refer to the 10-K, today’s 8-K and 10-Q, and Exelon’s other filings for a discussion of factors that may cause the results to differ from management’s projections, forecasts and expectations. Today’s presentation also includes references to adjusted operating earnings and other non-GAAP measures. Please refer to the information contained in the appendix of our presentation and our earnings release for a reconciliation between the non-GAAP measures to the nearest equivalent GAAP measures. We’ve scheduled 45 minutes for today’s call. I’ll now turn the call over to Chris Crane, Exelon’s CEO. Christopher M. Crane – President, Chief Executive Officer & Director Thanks, Francis, and good morning, everybody. Thanks for joining. We’re pleased to report another strong quarter with our earnings coming in at $0.59 per share, surpassing our guidance of $0.45 to $0.55 per share. You’ll hear more from Jack in a minute on the specifics, and Joe Nigro will also provide some color around the performance. We’ve seen a number of positive developments that affect various business this quarter. The two primary catalysts for us this year are the PHI acquisition and the capacity market auctions. We received approval from the merger since our last call in Maryland in May, and leaving D.C., Washington, D.C. as our only outstanding jurisdiction to close the merger, which we expect to hear from soon and we’re looking forward to a positive outcome there. Upon closing the merger, our focus will shift to the integration of PHI Utilities into the Exelon Utilities to align our operations to better serve the PHI customers base. Another major catalyst is the capacity performance revisions that have been made. While we continue to believe that FERC came to the right conclusion, putting reliability at the center of its planning process to ensure that customers in the region are well served, we always were aware that DR and Energy Efficiency were in the 2018-2019 auction. The most recent change that allows DR and Energy Efficiency to provide – to participate in the transition auctions, we believe to be non-material to the outcome. We are disappointed in the delay, but we think that we’ll be on the right track into recognize the value of our highly reliable fleet going forward. And we remain confident that the capacity construct is the best way to protect the grid as we await further clarification on the timing of these transition auctions. I think we’re getting that in the last days. So, by the September timeframe, we should have clarity on the value proposition, along with the reliability measures being enacted. In Illinois, the legislative session ended without a resolution on the market redesign for the Low Carbon standard, the Low Carbon Portfolio standard. We were disappointed that we were not able to get this outcome before the session ended, but understand where the state is focused right now on its budget priorities. The nuclear plants provide significant value to the state and its economy, and it’s mostly important to its consumers. Looking ahead, we have certain regulatory and operational triggers in September that require us to make some tough choices on the specific assets this fall, particularly in light of the continued pressure on the power markets. So we are continuing on with our disciplined plan on evaluating the assets and their likelihood to stay within the stack, and we’ll bring that to closure with our decision in September. Despite these market challenges, we continue to find ways to create value in our Constellation business, which Joe is going to talk about shortly. Part of our resilience to the power market weakness is driven by our ability to capitalize on our generation to load strategy. And this quarter, we showed the benefit from the lower cost to serve load. And the – increasing our utility business has been able to reduce the overall volatility at the enterprise level and deliver growth. You can expect that even more to be true over time. Not only is it shifting our business mix with the acquisition of PHI, but it also, with our infrastructure improvement investments, we’re investing $16 billion in our existing utilities over the next five years, which provides respectable growth rates, and roughly another $7 billion with the addition of PHI. I want to remind everybody that we can perform well even with a rising interest rate environment, which is typically a headwind in our industry. This is because our EPS is positively correlated to interest rates, due to both ComEd’s formula rate and ROE being tied to the 30-year Treasury rate, as well as the discount of our pension – discounting the rates of our pension liability. Overall, we are positive the company is able to provide more stable and durable earnings streams for our shareholders with our operational expertise in driving performance across the enterprise. With that, I’ll turn it over to Joe, who will discuss the markets. He’s followed by Jack on the financial performance. Joseph Nigro – Executive Vice President, Exelon; Chief Executive Officer, Constellation, Exelon Corp. Thank you, Chris. Good morning, everyone. The Constellation business has continued to perform well in 2015 as a result of our generation to load matching strategy. My comments today will address market events during the second quarter, and what they mean for our commercial business going forward, including our hedging strategy in our updated disclosures. Starting with slide four, the spot power markets in the second quarter have been defined by mild weather and lower natural gas prices, which drove the price in power considerably lower than in 2014 across all of PJM. The impact of low spot market conditions has carried through to the forward markets, with prices down approximately $0.45 per megawatt hour in 2016 and $1 per megawatt hour in 2017, at both PJM West Hub and NiHub since the end of the first quarter. The lack of liquidity in the forward markets has exacerbated the drops in power prices and heat rates, with the forward markets exhibiting volatile price moves on very little trading volumes for calendar 2017 and beyond, especially at NiHub. During the quarter, our hedging activities for 2016 to 2018 were executed through our retail and wholesale load businesses rather than on the over-the-counter market. Our fundamental view of power prices has not changed, but given the drop in market prices, there is a greater gap between the market and our fundamental view due to current natural gas prices, expected retirements, new generation resources, and load assumptions. Moving to slide five, I will discuss the forward market and its impacts on our hedging profile. During the second quarter we maintained our behind ratable strategy and increased our cross-commodity hedge position to increase exposure to power price upside. We have successfully used this behind ratable hedging strategy in the past when our view showed upside in the market. We are 4% to 5% behind ratable in 2016 and 2017, and 7% to 8% behind ratable if you will remove our cross-commodity hedges at NiHub. We are confident in our ability to adjust our hedging strategies to capitalize on our fundamental view. Turning to slide six, I will review our updated hedge disclosure and some key changes since the end of the first quarter. In 2015 we have a net $50 million increase to total gross margin since the end of the first quarter, driven primarily by strong performance and execution. We executed on $200 million of power new business and $50 million of non-power new business during the quarter. Based on 2015 performance to date and expectations for the full year, we have increased our power new business target by $50 million. Our generation to load strategy was successful last year during the extreme polar vortex conditions, and it’s serving us well this year under weaker load and price conditions. It is further augmented by strong performance from our portfolio optimization activities and our Integrys acquisition. For 2016, we saw prices decrease across most regions, decreasing around $0.45 per megawatt-hour in both the Mid-Atlantic and the Midwest. This resulted in a decrease in our open gross margin of approximately $200 million, which was offset by our hedging activities. During the quarter we executed $100 million of power new business and $50 million of non-power new business, and are raising our power new business targets by $50 million additional due to commercial opportunities, for a gross margin increase of $50 million in 2016. For 2017, prices decreased by approximately $1 per megawatt hour in both the Mid-Atlantic and Midwest. This resulted in a decrease of $300 million in our open gross margins. Despite the drop in prices, our total gross margin is only down $50 million due to our hedged position and an increase in our power new business target of $100 million in case we have line of sight into additional commercial opportunities. Since the beginning of the year, prices have fallen due to mild weather, lower gas prices, lower load demand in the Midwest, and a lack of liquidity in the markets. Prices have fallen more in 2017 and beyond than in 2016. Although this weakness in the spot market has impacted forward markets, we are confident in our fundamental view of the gas and power markets and are positioning our portfolio to take advantage of this. Now I’ll turn it over to Jack to review the full financial information for the quarter. Jonathan W. Thayer – Chief Financial Officer & Senior Executive VP Thank you, Joe, and good morning, everyone. We had another strong quarter. My remarks will cover our financial results for the quarter, third quarter guidance range, and our cash outlook. Starting with our second quarter results on slide seven, Exelon exceeded our guidance range and delivered earnings of $0.59 per share. This compares to $0.51 per share for the second quarter of 2014. Exelon’s Utilities delivered combined earnings of $0.25 per share and were flat to the second quarter of last year. During the quarter, we saw favorable weather at PECO and unfavorable weather at ComEd. Cooling degree days were up nearly 37% from the prior year and 47.4% above normal in Southeastern Pennsylvania, and down 34% from the prior year and 21.6% below normal in Northern Illinois. Distribution revenues at ComEd and BGE were higher quarter-over-quarter. In addition, BGE had a decrease in uncollectible accounts expense compared to the second quarter of 2014. Exelon Generation had another strong quarter, delivering earnings of $0.36 per share, $0.09 higher than the same period last year. As Joe mentioned, our generation to load matching strategy continues to prove effective. We benefited from a lower cost to serve both our retail and wholesale customers, and had strong performance from our portfolio management team. In addition, compared to the second quarter of 2014 we had fewer outage days at our nuclear plants, which had a positive contribution from the Integrys acquisition, higher realized nuclear decommissioning trust fund gains, and received additional benefits quarter-over-quarter from the cancellation of the DOE spent nuclear fee. These positive factors were partially offset by higher tax and interest expense. More detail on the quarter-over-quarter drivers for each operating company can be found on slides 18 and 19 in the appendix. For the third quarter, we are providing guidance of $0.65 to $0.75 per share. Accounting for the impact of the increased share count and the debt associated with the Pepco Holdings transaction, and assuming the transaction closes in the third quarter, we are narrowing our full-year guidance from $2.25 to $2.55 per share, to $2.35 to $2.55 per share. Our guidance does not assume that bonus depreciation is extended. Slide eight provides an update on our cash flow expectations for this year. We’ve simplified the format of our slide to provide a clearer view of our cash flow at each operating company, including explicitly showing free cash flow. We project cash from operations of $6.6 billion. We project free cash flow of $900 million at Generation in 2015. 80% of our total growth capital expenditures are being invested in our utilities over the next three years, which will provide stable earnings growth. In June we completed the debt portion of our financing for the Pepco transaction by issuing $4.2 billion in senior notes, with the majority of these proceeds being used to fund the transaction. Strong market demand allowed us to upsize the offering, enabling us to pull forward some future-planned corporate debt issuances. We issued across the tenor spectrum with an average maturity of approximately 14 years and an average weighted average coupon of 3.79%. Earlier this month we completed the settlement of the equity forward transaction. The combination of these financings allows us to close the merger quickly upon receiving approval from the D.C. Public Service Commission. Our balance sheet remains strong and gives us the ability to invest and grow our business. As a reminder, the appendix includes several schedules that will help you in your modeling efforts. Thank you, and we’ll now open the line for questions. Question-and-Answer Session Operator And our first question will come from the line of Greg Gordon with Evercore ISI. Greg Gordon – Evercore ISI Good morning. Christopher M. Crane – President, Chief Executive Officer & Director Hi, Greg. Greg Gordon – Evercore ISI Couple of questions. First, when you talk about commercial opportunities, in the context of your comfort level raising your guidance for power new business/to go, are we talking about sort of the inherent counter-cyclicality of the margins in that business in the low wholesale environment, i.e., are we moving closer off the $2 floor in margins and closer to the $4 sort of peak of the cycle margins that you see in that business historically, or is it simply new customers, more volumes than you had projected in either the gas or the electric business? Christopher M. Crane – President, Chief Executive Officer & Director Joe? Joseph Nigro – Executive Vice President, Exelon; Chief Executive Officer, Constellation, Exelon Corp. Yeah, Greg. In this specific instance, specifically for 2016 where we’re raising our power new business/to go by $50 million and 2017 by $100 million, it’s really – it’s not related to those load margins. It’s more specifically related to some proprietary structured commercial opportunities that we have really solid line of sight into on the wholesale side of the business, quite frankly. To your point though, I think it’s important to note we have raised our targets each – $50 million each quarter for 2015, for a total of $100 million so far year-to-date. And a lot of that has been driven by really three things. One is the monetization of loads that we sold at higher prices last year. So, we have seen increased value from that load-serving business, some of our optimization activities. And then we went in, as you saw from our disclosures last quarter, we went in with a short bias with a backstop of our own generation, and given the results of market prices in 2015 to date, that’s performed well. We would only look to raise those targets, the power/to go targets or non-power/to go targets, if we have good line of sight into specific opportunities. And in this case, we do. Greg Gordon – Evercore ISI Okay. Follow-up to that. If these are fairly chunky opportunities and you win them, will we get a sort of a discrete disclosure or would that just – would we get – would you just update it on a quarterly basis as per your usual, moving from to go to, into the hedges? Joseph Nigro – Executive Vice President, Exelon; Chief Executive Officer, Constellation, Exelon Corp. Yeah. Yeah. We’ll disclose that when the negotiations are complete. Christopher M. Crane – President, Chief Executive Officer & Director And Greg, it will be in the MD&A disclosure in our interview (19:24), when it occurs. Greg Gordon – Evercore ISI Okay, great. Second question. In light of economic conditions in Texas, most of your investors would probably rather see you pull the plug on this gas-fired project that you’re pursuing. What gives you the confidence that the through-the-cycle economics of that investment are still worth going forward in this environment? Christopher M. Crane – President, Chief Executive Officer & Director So as we said, we’ve got a very good deal on acquiring these assets on our brownfield site. Minimal infrastructure investment. They still have a double digit IRR with these market forwards. If you just projected we stay here for 10 years, and then plug the fundamentals in after, we’re still at a double-digit IRR. This is a solid investment. These are going to be dispatched first. They’re the highly efficient, air-cooled, and at the right price. Greg Gordon – Evercore ISI Concise answer. Thank you. Take care. Christopher M. Crane – President, Chief Executive Officer & Director All right. Operator And your next question will come from the line of Steve Fleishman, Wolfe Research. Steven Isaac Fleishman – Wolfe Research LLC Yeah. Hi, good morning. Christopher M. Crane – President, Chief Executive Officer & Director Good morning. Steven Isaac Fleishman – Wolfe Research LLC First to Jack, clarification. So in the updated 2015 guidance, are you including some amount of POM, both the business and the financing costs? And if so, is it positive or negative within the year? Jonathan W. Thayer – Chief Financial Officer & Senior Executive VP So Steve, we are including – we are including the equity and the debt associated with the PHI acquisition. So for share count purposes, that incorporates a weighted average share base of 892 million shares. It does assume the third quarter close of PHI. But there is a measure of dilution this year that’s related to the increased share count, the debt, and as we pursue rate cases on PHI, improve their revenues and earnings, we’ll see the accretion that we anticipate with that transaction in future periods. Steven Isaac Fleishman – Wolfe Research LLC Okay. So just to clarify, when you net for this short period into year-end, when you net POM revenue and the financing cost, it’s actually – your numbers would have been higher in this guidance if you hadn’t included that. Jonathan W. Thayer – Chief Financial Officer & Senior Executive VP Modestly, Steve. Steven Isaac Fleishman – Wolfe Research LLC Okay. But then we’ll get the… Jonathan W. Thayer – Chief Financial Officer & Senior Executive VP It (22:02), but not materially so. Steven Isaac Fleishman – Wolfe Research LLC But the future accretion guidance that you gave, I think, at the last quarter, or recent commentary, that’s still good for future years? Jonathan W. Thayer – Chief Financial Officer & Senior Executive VP The impact on rate cases and the deferral of those rate cases modestly impacts the accretion, but we’re still at the – as we disclosed at the last quarter, we’re still at the sort of bottom end of the range in 2017 that we gave. Christopher M. Crane – President, Chief Executive Officer & Director And so, it’s 2018 to get to that – more to that midpoint of the run rate that we talked about. Steven Isaac Fleishman – Wolfe Research LLC Right. But you said that – you clarified that, I think, the last call or so. That’s not new. Okay. Christopher M. Crane – President, Chief Executive Officer & Director Yes. So, $0.15 in 2017, and you’ll see us head to the upper end in 2018. Steven Isaac Fleishman – Wolfe Research LLC Okay. Second question is just with respect to the power views. I kind of feel like just, the last few calls you’ve been a little bit more mixed on your power views. You’re a lot more bullish right now, at least, I guess, with respect to NiHub. Is that mainly just a fact that you had to pull back as of Q2 end, and so you’re just more bullish because the starting price is lower, or are you more bullish even if the prices had stayed flat? Christopher M. Crane – President, Chief Executive Officer & Director It’s, the prices have gone lower. We’re more bullish, they’re non-sustainable at this level. Joseph Nigro – Executive Vice President, Exelon; Chief Executive Officer, Constellation, Exelon Corp. Yeah. And, Steve, what I would say is, our view of the absolute value of power price hasn’t changed quarter-over-quarter, and what’s changed is we saw a material drop in the back end of the power curve and I’m talking to NiHub, but it’s attributable to West Hub as well, but our upside is really baked at NiHub where we see material upside as you move out into that 2018, 2019 timeframe. We see upside as well in that 2016, 2017 period, and what’s changed is the market has fallen so much, quarter-over-quarter; our absolute view of power price hasn’t changed. So that spread has gone wider. And when we look at our fundamental models at NiHub, in particular, we see a lot of value that’s still to be derived, and that’s due to the changing dispatch stack and some of the other things that we’ve talked about previously. Christopher M. Crane – President, Chief Executive Officer & Director Talk about the lack of liquidity. Joseph Nigro – Executive Vice President, Exelon; Chief Executive Officer, Constellation, Exelon Corp. Yeah, the liquidity piece of it is a big part of it, Steve. We had a $0.40 – approximately $0.40 a megawatt-hour drop in PJM, in West Hub and NiHub in calendar 2016. That’s the most liquid period on the forward curve. When we’ve pulled data and we have access to and look at what’s going on in the out-years, 2018, 2019, 2020 where we saw a material drop in prices, there is absolutely nothing trading at NiHub. There had been some few sporadic trades at West Hub, and you see the market set prices off of those trades. And our view is through time, that spread relationship between the West Hub and NiHub is going to collapse because of the retirements on the western side, the new builds on the eastern side, and that’s why we think there is material upside. But our fundamental absolute view on power price hasn’t changed. It’s just the way the market reacted quarter-over-quarter. Steven Isaac Fleishman – Wolfe Research LLC Okay. Thank you very much. Operator And your next question will come from the line of Daniel Eggery (sic) [Daniel Eggers] (25:35) with Credit Suisse. Dan L. Eggers – Credit Suisse Securities ( USA ) LLC (Broker) Hey, good morning, guys. On Pepco, could we just talk about the process? So assuming that the D.C. decision comes soon, what is the process for closing from this point, and what bearing does the Maryland appeal have on your ability to close right now? Christopher M. Crane – President, Chief Executive Officer & Director I’m going to get Darryl Bradford to cover that. Darryl M. Bradford – Executive Vice President & General Counsel Hey, Steve. Christopher M. Crane – President, Chief Executive Officer & Director It’s Dan. Darryl M. Bradford – Executive Vice President & General Counsel I’m sorry. Dan, we expect to – assuming a acceptable order from the D.C. Commission, we expect to close promptly after that order. Our contract would indicate that that will take place within 48 hours of approval by the D.C. commission. And we don’t think that the Maryland motion should be any bar to us closing. We don’t believe that that motion has any merit whatsoever. As you know, the alleged conflict of interest of one of the commissioners having a preliminary interviewing discussion, which she stopped, with a non-party, isn’t a basis under Maryland law to question the independence of that decision, let alone to stay the proceedings. No court in Maryland and no commission in Maryland has ever suggested there’s a conflict with the commissioner of any agency having a conversation with a non-party. Particularly where, as here, Exelon is one of some 45 board members, 140 members in an agency that includes public interest groups like Public Citizen, which was a party below and was the first one to raise this conflict issue. So we don’t think that that motion has any merit. We filed a response yesterday with the court, and we plan to go ahead and close promptly after the D.C. commission issues an order, assuming that that order has acceptable conditions. And we have faith that the D.C. commission will do the right thing. We think we’ve put in a strong case with a lot of benefits for customers and protections for customers. And we look forward to a prompt closing. Dan L. Eggers – Credit Suisse Securities ( USA ) LLC (Broker) Okay. Got it. And then I guess just on the nuclear plants in Illinois with PJM, I guess, probably moving the closure date to October. That’s still probably before Illinois can act legislatively. With the drop in the forward curves, is there a practical way where you can look at those plants and think that they stay economic without some sort of legislation in Illinois? And does that force your hand come October? Christopher M. Crane – President, Chief Executive Officer & Director The capacity market fixes, focused on reliability, will not be enough to keep all the units economically viable. It does give us some support for the investments that we continue to make on the assets to maintain the reliability but it’s not totally there. We need a market fix in Illinois to stop the non-competitive nature of the market. And short of the legislation to fix that, we will have to make decisions on retiring assets that are not economically viable. As we talked about previously, we have requirements around notification to PJM of our intent to retire units. It’s an 18-month notification. We also have commitments around when we have to notify of our availability for the 2018-2019 auction in participation on that. And very importantly, we have to order and design cores that – fuel cores that take a while for us to – or 2019-2020 auction instead of 2018-2019, 2019-2020 auction, our participation there. And we have to order the cores, and there’s a long lead time there. Are we going to run for an additional year or are we going to run for a longer period of time? And that’s a very expensive decision to make. So, at least on the PJM (30:34) we’ll make the decision, the final decision, if we’re going to do that, in the September timeframe. We’ve been in consultation with the Board and we’ll continue to consult with the Board, and where management’s made their decision we’ll pass that to the Board for the final approval in that timeframe, and continue with the outreach to our stakeholders. Dan L. Eggers – Credit Suisse Securities ( USA ) LLC (Broker) Chris, just given the fact that you’re not going to have legislation realistically done before September, and you kind of laid out the other challenges, doesn’t it – what would cause you to not close the plants come September, based on the fact pattern you just laid out for us? Christopher M. Crane – President, Chief Executive Officer & Director If the units clear the 2018-2019 auction, that would show that they’re financially viable. That is a long shot in our opinion, just because of the cost structure and how the forwards have continued to collapse at the bus at a couple of these units. We’ve got the transmission constraints, we’ve got the overproduction and importation of wind that not only drops the spot but continues to collapse the forward curve. The disconnect between NiHub and the bus at some of these units is $6, $7. And we have worked very closely with all the stakeholders involved for over a year and a half on trying to come to resolution, and it is the time that we’ll have to make the decision after we see what happens with the capacity auctions. We don’t take the decision lightly. We understand the effect that we have on the communities and potential effect on employees, but this has been a long-term issue that we’ve been evaluating and trying to come to resolution, and we’re staying within the timeline. Actually, we extended our timeline last year to give more time to come up with the proper market fixes, and to be compensated adequately for operating these units versus subsidizing a low-cost market. Dan L. Eggers – Credit Suisse Securities ( USA ) LLC (Broker) And I don’t mean to beat this to death (32:49) for this, but would closing a Quad or a Clinton show up noticeably as accretive to you guys on 2017 numbers? Christopher M. Crane – President, Chief Executive Officer & Director We don’t – we have not looked at that, and don’t look at it. We analyze the plants as a standalone in their own economics, so it’s about a plant losing money. We have not evaluated; others have and others have talked about the impact to consumers on those units closing. The state itself did that assessment, and there is some material impact on the consumer, but we have not evaluated anything specific to Exelon. Dan L. Eggers – Credit Suisse Securities ( USA ) LLC (Broker) Okay, very good. Thank you. Operator Your next question will come from the line of Jonathan Arnold with Deutsche Bank. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. Good morning, guys. Christopher M. Crane – President, Chief Executive Officer & Director Hey. Jonathan W. Thayer – Chief Financial Officer & Senior Executive VP Good morning. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. One – just – given your comments about liquidity in the forward curve, is it fair to assume that you’ve probably not done much in the way of 2018 hedging yet? Because ordinarily you would have been a couple of quarters into it. Just curious if you could give us any insight? Joseph Nigro – Executive Vice President, Exelon; Chief Executive Officer, Constellation, Exelon Corp. Yeah, Jonathan. We are behind our ratable sales plan in 2018. As you know, we have a very big load-serving book of business, so we’ve captured opportunities, both in our retail and wholesale load-serving businesses to the extent possible, in 2018. And in addition, at times, as we’ve spoken about in other years, we used the gas market as well. But to sell straight OTC power in 2018, we’ve not done much, if any, of that at all. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. Okay. And then just to revisit the commercial opportunities comment. Can you give us any insight as to what kind of opportunities you’re talking about? And is it, are they the result of others pulling back from the market, or just successful discussions with potential clients I guess? Christopher M. Crane – President, Chief Executive Officer & Director It’s early on that one, Jonathan. We’ll do the full disclosure when we complete the negotiations. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. Okay. Sorry to re-ask that. And then, Chris, at the outset, you made the comment that you saw the inclusion of DR in the transition auctions as being, I think you said, nonmaterial to the outcome? Christopher M. Crane – President, Chief Executive Officer & Director Yes. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. Could you share a bit more of your kind of logic and thought process behind that statement? Christopher M. Crane – President, Chief Executive Officer & Director Yeah. Joe? Joseph Nigro – Executive Vice President, Exelon; Chief Executive Officer, Constellation, Exelon Corp. Jonathan, it’s Joe. First of all, we lost over $1 billion of market cap post the announcement of that, of the inclusion of DR in 2016-2017 and 2017-2018. And we really thought it was a little bit of an overreaction. As Chris mentioned, we’re disappointed in the delay, but we don’t believe there’s going to be a material impact to either of those transition auctions. As you’re aware, DR was already included in 2018-2019 and beyond. The reason why we don’t think it’s a material impact in the transition auctions is really related to how the auctions themselves cleared on the base residual, and the separation in price in 2016-2017 on one side, and then the amount of DR that clears in the 2017-2018 auction, and when we put that all into our models, it’s very similar to what we’ve read, quite frankly, from a lot of what’s been written by the equity community, that it’s going to be a limited impact. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. Okay. Thank you for that. Operator And your next question will come from the line of Julien Smith with UBS. Julien Dumoulin-Smith – UBS Securities LLC Hi. Good morning. Jonathan W. Thayer – Chief Financial Officer & Senior Executive VP Hey, Julien. Julien Dumoulin-Smith – UBS Securities LLC Hey. So, first quick question and it does kind of rehash a little bit here, but on the fundamental upside you’re talking about, just to be clear, what does that assume in terms of retirements, just to be clear? Your own retirements, particularly as you’re thinking about the life of your portfolio here in the back half of the year? Christopher M. Crane – President, Chief Executive Officer & Director Yeah. We have not evaluated the potential retirement of any our assets on market-forward prices. And, so this is just based off of fundamentals of what has been announced, and what we see for retirements, what we see for the economic viability of the existing fleet in what they would have to clear to stay viable going forward. So it’s not a sustainable market forward with the asset mix that’s currently in. It has nothing to do with any forward decision we would make. Julien Dumoulin-Smith – UBS Securities LLC Right. So just to be clear, nuclear retirements would be incremental to your fundamental upside? Christopher M. Crane – President, Chief Executive Officer & Director We don’t know that. We have not analyzed it and I wouldn’t want to project one way or the other. It’s, there are two different things. The nuclear asset retirement is based off of the economic viability of the asset on the stand-alone. And we have had losses and free cash flow losses in the trailing five years of some significance. And we project going forward with these market forwards, them to be even worse than they were a year ago, which is driving us to make that decision. It is not based off of any potential impact on the market forwards or the rest of the fleet’s viability. Julien Dumoulin-Smith – UBS Securities LLC Got it. And then two subsequent questions here. First, in terms of the FCF losses, what would you estimate those as being, both for the eastern portfolio and for the ComEd portfolio as it stands today? And then secondly, tied into that, as you evaluate the remaining life of some of these assets, would you imagine layering one announcement after another? So I suppose specifically, there’s a timing issue related to ordering new cores. I imagine certain units have to get those orders in before others. Could we see one nuclear retirement and then subsequently, depending on what happens in the legislative arena, et cetera, see further announcements later this year, in trying to reconcile the bigger issues around FCF deficit? Christopher M. Crane – President, Chief Executive Officer & Director Yeah. We’ve discussed fairly openly the units, the affected units. PJM’s rules require us an earlier notification than MISO’s rules. And so, we would be moving forward, if we have to, on PJM units before MISO units. We don’t project a MISO decision until beginning of next year, looking at the opportunities we have with that unit either through legislation or other mechanisms, to secure the required revenues that we need there. We’ve talked about New York units. We’re still working with our partners in our stakeholders in New York to look at, is there a viable way beyond – a reliability must-run situation to maintain economic viability there? And the final asset that’s been in discussion is Oyster Creek, which we’ve already had an agreed-upon early retirement date at the end of 2019. So, short of the – short of a, some type of failure that was a costly failure on the unit, we would run into that period to allow adequate transition, utilization of the fuel, and adequate transition of our employee base to other facilities. Julien Dumoulin-Smith – UBS Securities LLC Got it. But just to be clear about the MISO unit there, depending on the success this year in the legislative arena, would that drive that decision? Christopher M. Crane – President, Chief Executive Officer & Director It would have a – it would heavily weight our decision. Julien Dumoulin-Smith – UBS Securities LLC Great. Thank you. Operator And we have time for one final question. Your final question will come from the line of Chris Turnure with JPMorgan. Christopher J. Turnure – JPMorgan Securities LLC Good morning, guys. I wanted to get a little bit more color on the Pepco approval process here, and the court challenge, than what you’ve already talked about. Do you have any sense of the precedent, or a precedent, for actually staying a commission order? Obviously you disagree with the merit of this case. But you do you have any precedent there, and what would be the path forward if it was not stayed, and you got the decision out of D.C.? Darryl M. Bradford – Executive Vice President & General Counsel Thanks. It’s Darryl again. Yeah, the precedent on a stay is very clear in Maryland. It’s an extraordinary remedy. It is rarely granted. You have to show a likelihood of success on the merits. And the motion does not, on the merits of the underlying merger, raise any issues whatsoever. The only issue that raises is this specious purported conflict claim, which we think is very, very weak. So, we don’t think they’ve attempted to meet that. They would also have to show irreparable harm, which – they spend a paragraph trying to satisfy that. It’s really not very persuasive, in our view. They would have to show that a stay is in the public interest. And, of course, not only has the Maryland Commission, but the New Jersey Commission, the FERC, the Delaware Commission have all found that this merger is in the public interest. And they’d also have to show that the hardships favor them, and in our pleading we lay out why disrupting – the hardship of potentially disrupting a $7 billion merger outweighs any hardships that would occur from the grant of the stay. So we think it’s an extraordinary remedy. We don’t think that they’ve come close to meeting those standards in any respect. And the law is also very clear that in Maryland, it’s not a balancing. They have to satisfy each and every one of those elements, and in this case, in our view, they haven’t satisfied any of them. So, that leaves us in a position where, upon D.C. approval, and assuming that the court agrees with the pleading we filed yesterday and doesn’t grant a stay, that promptly upon the D.C. Commission joining the other commissions in finding that this is in the public interest, and assuming that any conditions it imposes are not unduly burdensome, that we would close promptly. Christopher J. Turnure – JPMorgan Securities LLC Okay. Great. That’s very helpful. And then, is there – or my understanding is that D.C. has to rule by the end of August. Is there any flexibility around that timing? Can they extend that again? Darryl M. Bradford – Executive Vice President & General Counsel Yeah. There is no clock in D.C., so they are not under any time constraint. Generally, the D.C. Commission has ruled within 90 days of something being fully briefed and submitted to them. This was fully briefed at the end of May. So that 90 days would end at the end of August. I think that’s where that date comes from. Obviously, we’re hopeful that sooner is better than later, but that will be up to the D.C. Commission, and they’ll rule when they have finished their work. They are, I think, acutely aware that a lot of people are looking for a decision from them, and they understand that. But they will take the time that they deem necessary in order to do their job right. Christopher J. Turnure – JPMorgan Securities LLC Okay. And then if I could, real quick, Joe, I just wanted to follow up, you’ve mentioned lack of liquidity in the forward markets a couple of times on the call here. Is this a lack of liquidity that exceeds just the general nature of these markets and what you’ve seen historically? Has that increased, and if that is the case, do you have an opinion as to why there might be so few trades going on out there? Joseph Nigro – Executive Vice President, Exelon; Chief Executive Officer, Constellation, Exelon Corp. Yeah, I think it’s probably worse than it has been historically. And I think some of it is, there is just no natural buyers out on, that far out on the forward curve, as I said. The back end of the forward curve was dropped much more than in like 2016, where there were more natural buyers, whether we talk about retail or speculators or other participants. So I think with some of the folks that used to participate in the markets not doing that, some on the banking side and others, I think it’s had a material impact. Christopher J. Turnure – JPMorgan Securities LLC Great. Thanks a lot. Operator Thank you. And that will conclude today’s conference call. We appreciate your participation. You may now disconnect.

Just Energy Group’s (JE) CEO Deb Merril on Q1 2015 Results – Earnings Call Transcript

Just Energy Group Inc (NYSE: JE ) Q1 2015 Earnings Conference Call May 14, 2015 02:00 PM ET Executives Deb Merril – President and Co-Chief Executive Officer Pat McCullough – Chief Financial Officer James Lewis – President and Co-Chief Executive Officer Rebecca MacDonald – Executive Chairman of the Board Analysts Damir Gunja – TD Securities Nelson Ng – RBC Capital Kevin Chiang – CIBC Operator Good afternoon, ladies and gentlemen. Welcome to the Just Energy Group Inc. Conference Call to discuss the Fourth Quarter 2015 Results for period ended March 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 President and Co-CEO, Ms. Deb Merril. Please go ahead, Ms. Merril. Deb Merril Thank you very much. Hi, my name is Deb Merril. I’m the Co-CEO of Just Energy and I would like to welcome you all to our fiscal 2015 fourth quarter and year-end conference call. I have with me this afternoon 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 and full year 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. 2015 was a remarkable year for Just Energy. Not only did we deliver outstanding financial results, we also made significant strides along many of the critical objectives we set out to accomplish. These are objectives that we feel provide the platform upon which to transform the company and execute the strategy effectively. A strategy that will position Just Energy to fully participate in what we do as a significant macro-trend and how individuals will consume energy and manage their energy needs in the future. I want to first address the headline in this morning’s AP Newswire, which was Just Energy reports fourth quarter loss compared to a profit a year earlier. For most of you on the call, it is obvious how misleading this is. In fact our fourth quarter generated tremendous results, particularly compared to fourth quarter of last year. Let me once again explain, the loss from continuing operations in the quarter, $65 million, and the year, $576 million is entirely due to the change in non-cash mark-to-market valuation of our future supply position. As this future supply has been sold to customer at fix prices, changes in the mark-to-market should have no impact on future margin and therefore company value. Management remains adamant that quarterly mark-to-market will have no true impact on current and future results. As with other energy retailers, Just Energy uses base EBITDA as a preferred measure of operating performance. As you will see, our base EBITDA grew significantly both for the quarter and the year. Before diving any deeper into the results, let me take a moment to reflect it a bit more on why fiscal 2015, was so important to Just Energy’s future. When JE had hit the range over one year ago, the polar vortex had just slipped the retail energy market on their heads, leading to financial losses and even bankruptcy among many small players, in addition to causing a shift in consumer behavior. All of these things benefitted Just Energy on a relative and absolute basis due to our leading position in this space. First, our world class risk management capabilities protect Just Energy against that kind of one-in-one hundred year type of event. We pride ourselves on the sophisticated risk management strategy that we’ve developed over the last several years, utilizing various instruments to minimize adverse impact to business from weather. It is also worth mentioning that our hedging practices have actually improved as a result of the lessons we learned during the polar vortex. Second, we saw consumers become more aware of their energy usage and bill and ultimately seek out better options than they have historically then presented. This time at Just Energy and our record 1.4 million gross customer additions and our 276,000 net customer additions for the year is just one example of that. In fact, fiscal 2015 marks the 18th consecutive year of net customer additions for Just Energy. We now serve over 2 million individual customers consuming the equivalent energy of 4.7 million residential customers. To put that into perspective Just Energy now provide nearly 2% of North American’s total energy consumption. What’s important about our continued ability to grow as large established base business is that the growth is also very profitable growth. We realized higher margin for customer in both the residential and commercial business during fiscal 2015. This is directly related to the ongoing commitment to the margin improvement initiatives that we have talked publicly about over the course of the past year. To add some color on how far we’ve come along already this year, we’re now signing consumer customers at $191 margin per RCE which compares to $166 one year ago. Additionally, commercial margins being added at $79 per RCE up from $67 one year ago. We were able to drive these improvements in margin because our innovative new products are gaining more appeal and presenting more value for customers. This is allowing us to price our energy management solutions at premium points without sacrificing customer satisfaction. I think when we have provided and specifically mentioned our great success in UK as well. We entered the UK commercial market just over two years ago. Over that period, our customer base has grown to 202,000 RCEs. Gross additions for the year were 148,000 up 90% from 78,000 a year ago. This market has grown to become 4% of our customer base. Not only has UK has fully repaid our investment in the region, but it now makes a contribution to the profit of the company. We launched our residential product offering in the UK as of last July. We believe this early success validates our model and our ability to compete outside of North America taking the lessons learned in evaluating new avenues for growth in new markets that will benefit from our innovative approach to energy management solutions. In addition to the strong financial results for the year, we also significantly improved our financial footing and flexibility by directly addressing the company’s debt level. At year end 2015 our book value net debt was 598 million, down 322 million, a 35% reduction from one year ago. We sold two non-core non strategic assets in November our National Home Services water heater unit and our Hudson Commercial solar business, and the proceeds from these sales drove the debt reduction. Pat will discuss with you in more detail next. Simultaneous to all we’ve discussed so far, we also reached a very unique strategic agreement with Clean Power Finance to enter the high growth residential solar market in a manner that leverages Just Energy’s core competencies and sales and marketing, tapping into our 2 million captive customers and the millions of doors our team knocked on annually. This partnership enables Just Energy to provide solar offerings to its customers in a way that positions us to benefit from the most profitable part of the solar value chain. We lost our solar pilot program in California in March and New York in May whilst it is still very early in the pilot phase of the business, the initial results and feedbacks have been positive. Our plan now is to continue to carefully expand our solar footprint to other states where it makes economic sense and to continue to push the industry forward to develop more customer friendly products that provide value to the homeowner. In summary, it has been an excellent year for our company and one we feel strongly directs us on the path forward to becoming the premier world class provider of energy management solutions. Now I’ll turn the call overt to Pat McCullough to talk about the financial details for the quarter and fiscal year and then I will finish with a discussion of future trends and the outlook in the market. Pat McCullough Thank you, Deb. I want to echo what Deb said and that we are really pleased with the progress we made in 2015, how we finished off the year from a financial perspective and the strong start we’re seeing here in fiscal 2016. Let me cover first some highlights of the fourth quarter and then I’ll take you through the fiscal year results. Fourth quarter sales were up 7% to $1.2 billion reflecting our year-over-year growth in customers. Gross margin of $194 million was up 41% from fiscal 2014 reflecting comparison to the polar vortex quarter last year as well as the higher U.S. dollar. Base EBITDA was 68 million up 20% reflecting the strong margin growth offset by unforeseen legal costs which drove administrative expense higher. Lower debt after the closing of the NHS sale had a very positive effect on FFO for the quarter as it reached $32 million up 84% from fiscal 2014. Overall an extremely strong quarter. Let me now cover the results for the fiscal year. Our sales for the year were up 10% to $3.9 billion reflecting our 6% increase in customers. The impact of the higher U.S. dollar on conversion of U.S. revenue as well as higher selling prices in fiscal 2015 compared to 2014. For the year the overall net impact of the higher U.S. dollar including impact on both revenues and expenses was approximately $8 million favorable. For the fiscal year margins were up 19% to $600 million driven by our customer growth the U.S. dollar higher volumes used for commercial customer and higher realized margins per customer. An important driver of profitability was higher new customer margins, we’re able to do this because of our innovative new products that achieved both value for the customer and provided better margins for Just Energy. As Deb mentioned, new commercial customers were signed at $79 per RCE annual margin, up from $67 a year ago. A higher commercial margin is a conscious decision to reduce low margin commercial business and focus on more profitable customer segments. We’ve also benefitted from the market exit of a number of smaller low price competitors who failed because of less sophisticated risk management processes during the polar vortex. New residential customers were signed at $191 for RCE annual margin, up from $166 a year ago. Improved margins per customer has been the focus here, higher margin on residential customers is a positive trend, as these customers are largely locked in some multi-year contract terms. Administrative costs were up $37 million or 32% year-over-year. We had anticipated double-digit growth to fund expansion of organic infrastructure but there were significant unforeseen impacts from the U.S. dollar and non-recurring charges of $14 million and legal costs related to law suits dropped during the year. We expect the administrative costs to return to normal in fiscal 2016. Selling and marketing expense during the year increased by $35 million or 19% year-over-year compared to the 5% increase in customer editions. Selling cost included amortization of past advances to commercial agents and residual payments to our online channel. These costs are not associated with customers added during the period. This trend of high growth in selling costs will continue until the shift to higher residual marketing channel stabilizes. Bad debt was at the low end of our target range at 2.4% of relevant revenue, up from 2.1%. This increase was attributable to higher defaults on very high polar vortex bills last year which became due in fiscal ’15. The proportion of revenue on which we bear credit risk will continue to increase as Texas in particular remains the fast growing market. Fiscal year 2015 EBITDA finished at $180 million, up $13 million or 8% from fiscal 2014. The company has provided guidance of $163 million to $173 million of base EBITDA for fiscal 2015 and updated that guidance to the upper end of that range following the third quarter results. Actual results succeeded the upper end of the range by $7 million based on strong fourth quarter performance despite higher than anticipated operating costs associated with the legal and regulatory expenses. For the year, funds from operations were $93 million, up from $89 million in fiscal 2014 consistent with our change in EBITDA. Our dividend payout ratio was 94% for the full year, down from 139% in fiscal 2014. Based on our current $0.50 per share dividend, that ratio would have been 81% for the last 12 months. We have a target of 65% payout ratio and we expect to make a significant step toward that number with our guidance for fiscal 2016. At fiscal year-end 2015, our book value net debt was 598 million or 3.3 times or our trailing 12 months base EBITDA. This is down from $919 million a reduction of 35% from one-year ago. During the year, Just Energy used the proceeds from the sale of NHS to repay the debt of approximately $260 million associated with that business as well as repay our credit facility. Debt reduction remains a clear priority for us at Just Energy, while much has been accomplished to improve the overall balance sheet and debt position management feels there is more that can be done. As such we have defined a logical, financially prudent approach to further reducing debt that also recognizes certain restrictions on our ability to prepay some maturities. This will involve our growth in cash flow to repurchase our debt in the market further reducing our debt to EBITDA going forward. Just Energy is in a strong position to execute the deleveraging plan and we believe the results will place the company in a stronger more financially flexible position. It’s important that we remain aligned with the corporate strategy of financial optimization through adherence to a capital like high return on investment capital business model. Overall the years surpassed our expectations and exceeded our guidance. Let me turn it back to Deb to talk about trends for the future. Deb Merril Thank you, Pat. As I alluded to earlier, the energy management solutions industry is bringing value added products to market that address the transformation in how energy will be consumed in the future. The retail energy industry has historically been viewed as offering only opaque financial instruments that yielded little value and which consumers didn’t fully understand. Today technology and innovative products make it a relevant industry adding real value to consumers and providing significant growth opportunities for companies with sales and marketing expertise that can provide exceptional customer service. Products like our Just Energy conversation program offer dual fuel flat built contact bundled with smart thermostat reflecting that innovation and technology. Just Energy has the longevity, size, independent and forward thinking solutions to capitalize on this emerging opportunity and to disrupt the traditional utility model. We believe the opportunities that come from this disruption are robust and global and we continually evaluate new market opportunities that offer strong demographics clear participation in industry trends and a favorable regulatory landscape. This reflects the future of continued growth. While our vision is long-term, we expect to see the benefits of our strategy and leading market positions in fiscal 2016 while it’s still early the solar strategy has launched and leverages our core competency to offer nearly immediate accretions and significant profitability enhancement streams as soon as the second half of fiscal 2016. In summary the organization is committed to measureable financial improvement that will serve as a springboard to capturing significant global opportunities. Through prudent fiscal management as well as a clear strategy for the future, we are in a very solid position heading into 2016. Our core business is healthy and growing. We’re generating record numbers of new customers while customer margins are improving. We have a leading market position in all our geographic territories and our sales and marketing expertise will allow us to step with the evolving needs of our target customers. As such, we are committed to delivering fiscal 2016 double-digit base EBITDA growth over a strong 2015 we just completed. I will be remised if I didn’t take a moment to thank our employees. We have 1,300 employees in three different countries that work tirelessly this past year to ensure these results for our shareholders. On behalf of Rebecca, Jay, Pat and I, we want to express our sincere appreciation for their efforts this past year and for their support in the future. We will 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 comes from Damir Gunja from TD Securities. Please go ahead. Damir Gunja Just with respect to your guidance, can you share what currency assumption for the Canada U.S. dollar you are using there? Pat McCullough We’re using 1.20. Damir Gunja And I guess you’ve got a few or at least one legal item outstanding. Can you share sort of what you think legal expenses might look like for the coming year? James Lewis Damir, I think what we’ve sort of set aside as you’d can imagine is unknown but we think we have the right amount of reserves as you saw there. We put 14.5 million for the year between legal reserves and AD settlement. We think that’s appropriate now I mean as we go forward we need to adjust as well. Damir Gunja Any other sort of one-time items we should think about as we head into the next fiscal year? Pat McCullough Damir the one thing that we tried to point out in the outlook was that we will become a federal cash tax payer in Canada in fiscal ’16, we expect to not become a federal cash tax payer in the U.S. until fiscal ’18 but we wanted to point that out so that will be a trend that impacts cash flow. Operator And our next question comes from Nelson Ng from RBC Capital. Please go ahead. Nelson Ng I have a few questions on the solar business, Deb you mentioned that the pilot projects have started in California and New York. How long does the pilot projects need to go on for before you decide in terms of whether you rollout more widely within the state or into other states? Deb Merril From our perspective the pilots are really to learn and kind of refine not only our sales process but our ability into manage those customers and work with those customers over time. It’s not really a should we move forward or not, it really is the ability for us to learn and to figure out the best way for us to utilize our skills, so that we can get the best results. So, we fully intend to continue to rollout through New York and California and other markets as well in fiscal ’16. And we’re trying to really take our very smart deliberate approach to making sure we learn in a very controlled environment before we really get big. Nelson Ng So you’re currently just targeting very specific markets in California and New York, right? Deb Merril Yes, kind of our key learning how to operate and one of the things we’re really trying to do Nelson is the solar industry if you look at conversion rates which from the time we get a customer, time the customer actually gets installed and a lot of customers that qualify are not following through and we think there are some things that we can do on the product side as well as how we interact with customers to make it easier for customers to be our solar customers. So we’re really looking at utilizing our knowledge of customer behavior and pushing that and listening forward from that perspective as well. Nelson Ng And then in relation to your fiscal ’16 guidance, do you have like what assumptions have you made in terms of the contributions from the solar business? Deb Merril So we’ve put a little bit in that solar, but we’re not — like I said until we really know what we think we have here in the productivity, we wanted to make sure that we’re a little bit — learn a little bit before we actually put the full effect in there. Nelson Ng In terms of — and then just kind of moving onto the next question, customer additions in fiscal fourth quarter was down quarter-over-quarter, I was just wondering whether any factors that caused the slowdown. I know in the past I think fiscal Q4, the winters didn’t really slow you down in the past I was wondering if there are other factors from this past quarter? James Lewis We have a commitment to margins, so from our perspective we think we’re going about it at the right way. So we want to make sure that we’re going out to the more profitable possible customer. Operator Thank you. And our next question comes from Carl [indiscernible] Please go ahead. Unidentified Analyst Just again I realize it’s early in the solar pilot, but in terms of maybe more specifics, do you — the early indications of what you think you can earn in terms of EBITDA contribution or what — install what — are those kind of meeting your early expectations and how quickly do you expect to ramp over the next say two to three quarters and then maybe two years out? And then maybe talk about some other market besides New York, California that you’re targeting? And I have a couple of follow-ups. Deb Merril Carl I think from our perspective what we’re trying to learn now is how much we can close per agents in the field, we’re really making sure that we can get a lot of productivity out of our sales force, which goes around training, sales pitch, product all of those things. So that’s really as we start to move through this that’s what we’re focusing on right now. Unidentified Analyst And then maybe outside New York, California, could you highlight a couple of other regions you think might be targets as fiscal ’16 unfolds? Deb Merril We’re looking at Massachusetts, we’re looking at Ontario and Texas they are not traditionally looked out right now for the hot solar markets. But we believe there is some opportunities there as well. So kind of we could say most of the space that you see people operating in where we have a customer base, that’s where we’re going to focus first. Unidentified Analyst And then maybe switching gears little bit, obviously you have lot of very strong success in the very short timeframe in the UK, can you talk if you’ve been able to realize it’s fairly early and targeting in the residential side. But there are things that you can learn from a commercial side and port it over to the residential side a very different markets within UK and then what do you see potential opportunity in either continental EU or other international markets do you think might be near-term targets? Deb Merril One of the things we’re really seeing and we’re excited about in UK is that the product that we have in North America with a bundle that we are doing, some of the flat build products and bundling smart thermostat, we’re not seeing while that happen in the UK. So we actually think that this year we’re going to try to bring some more innovative product over there that is on the ways that we’re doing on the residential side in U.S. So it’s really not a commercial learning to residential, it’s really residential in North America learning taking it over to residential UK. And we really believe that giving customers over their products that really has true value to them that they can really budget around that we’ll have a big impact. As far as direct in Europe, I think our success here has given us a little bit of confidence in our ability to do these things and have lot to do with people in the UK, we have a great team over there, but we’re always looking at additional opportunities in other markets where it makes sense. So I think that there some opportunities in the Netherlands and some other countries, even outside of Europe. Unidentified Analyst And I know you probably broken some in the past and maybe can share, but you talk about your margin per customer in the UK, these are either North America or U.S.? Deb Merril What we have said in the past, that we don’t break it out, but we have in the past is that our margins are slightly better over there than they are in North America what we’ve seen so far. Unidentified Analyst Pat maybe a couple of questions for you in terms of talking about re-utilizing a credit facility, is that — I am assuming that you’re not necessarily going to bring down the embedded as quickly due to last year for obvious reasons, but is credit facility looking — are you looking potentially there to bring down the high yield debt and swap it for a cheaper credit facility, is that one of the early goals? Pat McCullough Yes, I think what the company needs on a go forward basis is a strong credit facility, so we are working towards a renegotiation of the existing credit facility as it expires to the end of this calendar year. At that point we’ll be looking to restructure things like for the 330 and the 105, the coupon on the 105 is challenging for us but the size and the eminence of the 330 are also important to us. So that’s the priority list for us with the balance sheet. Unidentified Analyst And then you talked about returning more to a normal administrative expense run rate in fiscal ’15. Could you maybe qualify a little bit? Maybe however you we want to do so versus revenue or maybe even as well as the base EBITDA? Pat McCullough Our goal as management is to always drop through more gross margin and sales and more EBITDA than gross margin. So, as we look at this year we were really challenged with the legal reserves that we took so as we go forward and as we clarify things like our employment practices and defend ourselves vigorously we don’t expect to have that level of one timers impacting us on a go forward basis, so it’ll be much more of G&A investment associated with the infrastructure needed for our growth. Unidentified Analyst Last question is typically and maybe I’d missed it and didn’t get time to go through it full press release so you talked about percentage of Just Green and maybe the consumption of the energy of the supply from Just Green? James Lewis I mean — it is 31% there of our customers taking Green and of that Green, they’ll take the majority of the usage and Green — 84%, yes. Unidentified Analyst 84% okay, yes, I was wondering if it’s flattish but sounds it kicked up plenty bit. I’ll take my questions offline. Operator Thank you. And our next question comes from Kevin Chiang from CIBC. Kevin Chiang Just a couple of modeling questions from me. We’ve seen your, I guess your renewal rates over the next five years become much more front end loaded as you increase the number of commercial customers you have. I am just wondering as you rollout solar and as you kind of look at your international expansion, is there a thought process of maybe managing this renewal cycle to spread it out more to reduce kind of the upfront risk or is it going to continuously be kind of 50% of your renewal are due in the next two years and kind of look out over the next little while here? James Lewis I think with the renewals there on the commercial side, what you’ve sort of seen is commercial customers wants to lock in longer term when — with pricing low and some of those come in up run a year or two ago, we’re fighting where there is contingency cost we’re going to walk in a little longer-term. So they’ll probably ease itself out here over the next couple of quarters. Kevin Chiang And just the month-to-month customers I know aren’t included in that renewal table. But just generally how they’ve been trending, are they typically rolling over at the same paces you saw in previous years or months or have you seen any change in their customer behavior? James Lewis No material change it’s probably 1% change that falls into the attrition there, so when you look at the attrition number the month-to-month attrition there is 1% up which caused attrition rate for the commercial customers to be higher. Kevin Chiang And then just lastly from me, I know you’re moving forward or from independent contractors to employees which I think will be a positive cultural shift. But just trying to get a sense of how that impacts your P&L and your cash flow statement? I presume all of their wages now get booked into SG&A. And I know currently you have a component that goes through cash flow statement in terms of contract initiation costs. I am wondering that disappears if you move to 100% employee base and away from independent contractors and then net-net does that impact how you look at the dividend payout ratio longer term if I am right in those changes? James Lewis These are a couple of things there. So on an employee model there, it’s around the residential and it does go into SG&A as you mentioned there. While we’re seeing a slight pick-up there on some of the costs we haven’t seen a material change there. What we have seen is early indications that we are getting some better conversions on the employees that are sticking around. So we feel good about early indications there. Kevin Chiang And are you, when you look at the sales force overall, are you losing some of your top performers or in general people are the better sales agents sticking around as you would have hoped? James Lewis No, I think when you look at it, the sales agents themselves especially those top performers have stuck around that something hasn’t changed so we’re excited about that. It with more around more regulatory or legal requirement on the employee side but we do think we’ll get some benefit that we can leverage there as we look to bundle products, so we are bundling products out there that allows us to be more efficient and more effective and the sales force have been responsive to that. Operator Thank you. [Operator Instructions]. And at this time, I am showing no further questions. I will now turn the call over Ms. Deb Merril for closing remarks. Deb Merril Again, thanks everyone for joining us on the call. Like we said earlier, we couldn’t be happy with how the year saved us and we’re very much looking forward to fiscal 2016 and coming back next year and with another good year for all of our investors and shareholders. Everybody enjoy your day. Thank you. 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