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Atmos Energy’s (ATO) CEO Kim Cocklin on Q2 2016 Results – Earnings Call Transcript

Atmos Energy Corporation (NYSE: ATO ) Q2 2016 Earnings Conference Call May 5, 2016 10:00 ET Executives Susan Giles – Vice President, Investor Relations Kim Cocklin – Chief Executive Officer Mike Haefner – President and Chief Operating Officer Bret Eckert – Senior Vice President and Chief Financial Officer Analysts Chris Turner – JPMorgan Spencer Joyce – Hilliard Lyons Faisel Khan – Citigroup Charles Fishman – Morningstar Mark Levin – BB&T Operator Greetings and welcome to the Atmos Energy Second Quarter 2016 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mrs. Susan Giles. Thank you, Mrs. Giles. You may begin. Susan Giles Thank you, Selena and good morning everyone. Thank you all for joining us. This call is being webcast live on the internet. Our earnings release, conference call slide presentation and Form 10-Q are all available on our website at atmosenergy.com. 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. Our forward-looking statements and projections could differ materially from actual results. The factors that could cause such material differences are outlined on Slide 22 and more fully described in our SEC filings. Our first speaker is Bret Eckert, Senior Vice President and CFO of Atmos Energy. Bret? Bret Eckert Thank you, Susan and good morning everyone. We appreciate you joining us and your interest in Atmos Energy. If you would like to follow me on Slides 2 and 3 of the slide deck, you will see that realized net income for the quarter was $144 million or $1.40 per diluted share. For this current 6-month period realized net income was $240 million or $2.33 per diluted share. Positive rate outcomes in our regulated businesses drove our growth for the three and the six-month periods. Rate release for our regulated distribution and pipeline operations combined generated about $24 million of incremental margin in the quarter and about $48 million for the current six months. However, warmer than normal weather affected all segments of our business. For the quarter and six month periods, we experienced a 21% decrease in regulated distribution sales volumes due to weather that was 25% warmer quarter-over-quarter. However, our weather normalization mechanisms, which cover about 97% of utility margins, worked as designed during the warm heating season. As a result, gross profit decreased just $2.2 million for the quarter and $3.3 million for the six month period due to the warmer than normal weather. Additionally, although our regulated pipeline experience decreased through system volumes and lower storage and blending fees due to the warm weather in the current quarter, volumes are only down about 1% on a year-to-date basis. And in our non-regulated segment, we experienced higher settlement losses on long financial positions compared to both prior year periods. Focusing now on our spending, consolidated O&M was flat quarter-over-quarter but rose about $6 million in the current six months period primarily due to increased pipeline maintenance spending as well as the timing of spending period over period. Capital spending increased by $97 million in the first six months compared to one year ago primarily due to planned increases in spending in both of our regulated segments. About two-thirds of this increase was incurred in our regulated pipeline segment where we continue to enhance and fortify our Bethel and Tri-City storage fields to improve our ability to reliably deliver gas in the Mid-Tex division and APT’s other LDC customers. We remain on track to achieve our capital budget target of $1 billion to $1.1 billion for fiscal 2016 as you will see in the slide deck. Moving now to our earnings guidance for fiscal 2016, with the winter heating season coming to an end, we have tightened our projections and earnings per share range for fiscal 2016. As shown on Slide 12, we expect fiscal 2016 earnings per diluted share to range between $3.25 and $3.35 excluding unrealized margins at September 30, 2016. The expected contribution from our regulated operations as well as estimates for selected expenses for the year have been tightened from our original projections made last November. The expected contribution from our non-regulated operations remains unchanged. We expect the continued execution of our infrastructure investment strategy, coupled with constructive regulation will be the primary driver for this year’s results. Looking on Slide 13, we continue to anticipate annual operating income increases of between $100 million and $125 million from approved rate outcomes in the year. Thank you for your time. And I will now hand the call to our CEO, Kim Cocklin for closing remarks. Kim? Kim Cocklin Thank you, Bret very much and good morning everyone. Very good quarter. An excellent first half. As Bret said, we came through a warmer than normal winter in excellent shape. We are able to tighten guidance. And with the approval of the pipeline GRIP filing in Texas on May 3, we now have generated $71 million of revenues from rate outcomes, and as Bret said, are on target to achieve our target of $100 million to $125 million this year. We do have filings pending before agencies which seek a total of $56 million and we expect to file a few more cases before year end. These results very importantly mark our over five consecutive years of successfully executing our growth strategy that we began in 2011 and continues our journey in meeting the very important commitments of investing in our infrastructure to improve the safe operation of our system, to grow earnings at a level of 6% to 8% annually and to target a total shareholder return of 9% to 11%. We now will open it up for questions. Selena? Question-and-Answer Session Operator Thank you. [Operator Instructions] The first question is from Chris Turner from JPMorgan. Please go ahead. Chris Turner Good morning, guys. I wanted to check in on the pipeline rate case, I think you kind of last updated us by saying that you would file late this year early next year. What’s the latest on timing thoughts and cap structure kind of request versus your current? Kim Cocklin It’s pretty much on target is what we have been messaging you with. We intend to file it probably late this year, probably December. The cap structure we are targeting is still in the 57% to 58% equity component, which is what we anticipate having as we work through our financial plan for funding the capital budget this year. And really as we have talked about, we are going to file everything right down the middle of the fairway and not ask for anything outside that we don’t have in place right now. So, there really isn’t any change and we are on target to do everything that we have been talking to you about. If there is any changes we will have any updates at the AGA Financial Forum coming up in May, but we don’t anticipate having any. Chris Turner Okay. And then is it the right way to think about that case that you guys have recovered most of the capital return on and of already through the GRIP mechanism and most of the kind of wild card or uncertainty from our perspective that will flow through to your bottom line versus what you currently are getting is on the cost side? Kim Cocklin We will have an update to the rate base numbers obviously and we will have all our investment that we have made from the time of the GRIP filing this year through that end of that case and then we will be filing another GRIP filing after the case is filed. So, there will be additional increments to rate base in the case. Chris Turner Okay, great. And then can you remind us of when you expect to next be a cash taxpayer based on your current estimates and the changes with bonus depreciation late last year? And then also kind of maybe give an update on your expectations of using your ATM issuance mechanism that you recently launched in terms of timing this year and maybe next as well? Kim Cocklin First on the cash taxpayer, we don’t anticipate being a cash taxpayer in the current 5-year plan through 2020. So it will be after that, before we start to pay cash taxes. As far as the ATM Chris, the plans are consistent with what we disclosed at our November analyst day. We expect to do $300 million to $400 million over the 5-year plan and $50 million to $100 million on an annual basis. Chris Turner Okay. And would that be somewhat evenly spread throughout the year or would you do that kind of at certain points? Kim Cocklin I don’t – I think we are going to stick with the $50 million to $100 million as you go through that period. I will tell you that all of our financing plans have been contemplated and included in our tightened guidance range for fiscal ‘16, as well as our guidance that we have out there in 2020. Chris Turner Okay, great. Thanks guys. Kim Cocklin Thank you, Chris. Operator The next question is from Spencer Joyce with Hilliard Lyons. Please go ahead. Spencer Joyce Bret, Kim, Susan good morning. Kim Cocklin Good morning. Spencer, who is the Derby winner this year? Spencer Joyce Well, I am sorry, that’s why I had to chime in. I am on the favorite. I kind of like Nyquist this year. Kim Cocklin Nyquil [ph]…? Spencer Joyce Yes, almost Nyquist. But in any case, just one sort of broad big picture question from me, you all have been very clear about why you have avoided latching on to some of the major midstream projects that we have seen here out East a little bit and at least from my vantage point, it seems like the environmental contingent is becoming more organized and a bit more vocal and we have seen delays for Constitution, PennEast, I mean almost any named project we have seen delays at this point. I am wondering if you have seen any of that public sentiment shift into some of your smaller diameter, shorter-haul projects or is it really just business as usual as far as your pipe in the ground goes? Kim Cocklin No that has – none of that consternation is translated into any of the projects that we have got and the capital investment we are doing. I mean the regulators and our customers understand how important it is for us to continue to pursue that investment to make our system as safe as possible and continue to – our journey of becoming the nation’s safest utility. So, we are also not trying to clear new right away or go through areas that have not – that don’t have pipe in the ground right now. So, it makes a significant difference when you are trying to put those new systems in and trying to clear a path for them and that there is a great deal of opposition that goes along. And then you have got the size of the pipe itself, those things are talking 36 inch, 42 inch pipe and unfortunately you have got some stuff that’s been in the news here lately, Bethlehem Township in Pennsylvania with the Texas Eastern incident last week. So it’s pretty much elevated the opposition, but for us I mean we continue to operate in a – in kind of under the radar. And people see the need. And it’s a small pipe in most situations where we are dealing with it. So, no. Spencer Joyce Alright, that sounds great, good color there and glad to hear its business as usual. That’s all I had, we will see you in Naples. Kim Cocklin Okay. Spencer, look forward to it. Operator The next question is from Faisel Khan from Citigroup. Please go ahead. Faisel Khan Hi, good morning. It’s Faisel from Citigroup. Kim Cocklin Faisel, where have you – I thought you were doing the Geico commercials or something. We haven’t heard from you in years. Faisel Khan Yes, it has been several quarters, since I have asked a question, but and think of where the stock has gone too. So it’s probably a good thing, right. Kim Cocklin Yes. We have got a good run. Faisel Khan Yes. Just a couple of questions for you and I will get out of the queue. Just on the – with the amount of rate cases that you have going on and going forward, if you can just remind us sort of what the history is and sort of the ask versus the settled, so what percentage you usually get from the ask for these rate cases when you settle them? Bret Eckert Keep in mind, Faisal we have got annual mechanisms that cover about 93% of our filings, so. Kim Cocklin These are not traditional filings. Normally, in a general rate case, you handicap the filed form out versus – the request versus the achieved at about 50%, but so many of our filings right now, as Bret pointed out 93% are covered by annual mechanisms that really have – are very prescriptive and there is not a lot of controversy over the computation and the methodology that’s utilized to increase either the O&M or the rate base adjustments. And then you have plug and play ingredients normally associated with the cap structure that may or may not change and the return component is normally settled. The depreciation rate is also settled. So, I mean we don’t – we have got the $56 million of – that we are seeking right now that is the filed for request. I mean we are – the best target that you can have for your model I think is to look at the $100 million to $125 million that we targeted for fiscal ‘16 that we are at $71 million now and we are very confident and comfortable that we will reach the target that we have provided. I mean as we get closer through the next two quarters you will see those amounts will continue to materialize and as they become final we make them immediately available so you can get them into your model. Faisel Khan Got it, okay. It makes sense. Bret Eckert If you look at slide 27 you will see a detail of each of those mechanisms by state, by jurisdiction. Faisel Khan Yes. No, I see it. I was just wondering, are you in for like for example, I guess for the Mid-Tex cities sort of are they RRM, like is that $26.6 million, is that sort of part of this process you are talking about where it’s an automatic sort of…? Kim Cocklin That is not automatic, but it’s pretty prescriptive. So, there is normally adjustment in the ask for that type of filing and what we achieve because that does go through some negotiation process. Mike Haefner Faisel, this is Mike. The other thing that we will see in terms of the difference between an ask and an awarded amount relates to assumptions that are made and debated around things like employee costs, how pension costs are treated in that, that at the end of the day may affect the awarded amount, but does not affect us on a net income basis at the end of the day, so. Faisel Khan Okay. And then looking at the continued rate base growth of the company going from I guess $5.5 billion to $9 billion, is there anything that would sort of cause that growth rate to slow for any which reason, I just want to make sure also is the deferred taxes and the implementation of the new tax laws, is that baked into that number too? Bret Eckert It’s fully been contemplated in all of our numbers, yes. Kim Cocklin You will be the first to know, Faisel. I mean we take that commitment extremely seriously. We have advertised that we are going to grow rate base at 9% to 10% which we absolutely have to do to meet the commitment of growing earnings at 6% to 8% on average. So I mean we have built up what we hope is a lot of trust and credibility with our shareholder base and with the street and we take that as seriously as the dividends. So if there is ever any change to that and if there is any retraction or reduction to the growth rate that we see, which we don’t see for the next 5 years and we have got a very good financial strategy to back up the investment for the next 5 years and we will continue to increase that. So we are very confident and again, we can’t overemphasize the fact that we are not just advertising these rates at 6% to 8%, we are actually performing and throwing them off and we have got over a 5-year track record of meeting that commitment. So we fully expect to do it. And we understand how important it is to message any change as soon as it becomes available. So we are not going to hide the ball on anything like that. Faisel Khan It makes sense. Thanks guys for the time. I appreciate it. Kim Cocklin See you Monday. Faisel Khan We will do. Operator The next question is from Charles Fishman with Morningstar. Please proceed with your question. Charles Fishman Good morning. You lowered the – you narrowed your guidance, but you lowered the upper end of your guidance, $3.40 to $3.35, yet the upper end of regulated operations stayed the same, the upper end of non-regulated operations stayed the same, share count stayed the same, can you explain to me your thinking on that of how you go about doing – or why you did that, lowered the upper end too? Bret Eckert Well, when you tighten guidance, Charles right, I mean you have got to move the upper and the lower end. The midpoint of our guidance is still the $3.30 that remains unchanged, which is about an 8.2% growth rate over the $3.05 weather adjusted operations for fiscal ‘15, so it was just a matter of coming in six months into the year when 70% to 75% of your earnings are behind you and providing a bit tighter of a range of guidance for the street. Charles Fishman Okay. So you are not – I see what you are doing, you are focusing on the midpoint and then just assuming a variance from that. Got it, okay. That explains that… Kim Cocklin We are also trying to focus on trying to help you tighten up your model. Charles Fishman Thank you. That’s always appreciated. The next question follows up tightening up the model, effective tax rate went down – guidance on effective tax rate went down 100 basis points, can you provide a little more color on that? Kim Cocklin That was Trump hew was – because he is the Republican nomination. Charles Fishman Okay. Kim Cocklin It’s just – really just the ebbs and flows you see in a year plus there was a new stock compensation standard that was adopted and that impacted tax rate – effective tax rate a little bit. And you will see that disclosed in the 10-Q. Charles Fishman Got it, okay. Thank you very much. Good quarter. Operator [Operator Instructions] The next question is from Mr. Mark Levin from BB&T. Please go ahead. Mark Levin Hi guys. Hope you are doing well. Two very big picture questions, the first has to do with something that I am sure is not envisioned by many at this point with natural gas prices around $2.10, but is there a point at which – or is there a gas price at which you could point to or maybe theoretically come to whereby regulators would be less inclined to be as constructive as they are. Put another way, is there a natural gas price point where the customer starts to feel it in a more material way and the regulatory environment might not be quite as accommodative as it is today? Kim Cocklin I mean you can hypotheticate all you want on prices for sure Mark, but we haven’t picked a price point. We do anticipate with our 5-year plan of having an all-in – we have assumed an all-in gas price of $4.50, $4.50 to $5.50 through 2020, which if you look at the forward screen, I mean that is clearly within the realm of reasonableness and even conservative. So there are some other factors. The cost of money is another thing that’s helping the investment and along with gas prices, the customers are not expected to experience any increase in the bills that they have paid since 2007. So I mean we really haven’t run the what-if scenario on that. We pay obviously, very close attention to gas prices and are able to do some things as a result of working with the regulators to hedge positions so that we are usually 1 year or 2 years ahead of all the price changes. Mark Levin Sure. So to me it sounds like – even if it were I think we are – gas would have to do something monumental – have to be monumentally higher? Kim Cocklin It would have to be like $8 to $10 I think. Mark Levin Yes, right. So a completely different schematic. And then the second question, because you can’t get off an LDC call without asking the M&A question, but maybe I will approach it from a different way, are you seeing any opportunities – obviously, your equity has risen magnificently and for good reason, but you do have an equity currency, the cost of debt is relatively cheap – is very cheap actually. Are there opportunities out there as a buyer, now I realize going and trying to buy an LDC and finding a cheap LDC at this point might be challenging, but are there any other opportunities out there that you guys are considering or would consider given the strength of your equity and the cost of debt? Kim Cocklin We pretty – we have been very consistent in emphasizing the fact that we think multiples are extremely expensive, you never say never. But there is nothing on the block that we would be interested in paying over and above or even close to what’s going off the Board today, if you look at our investment of $1 billion to $1.1 billion of capital every year, that with the regulatory lag that we experience with 94% of that investment beginning to earn within six months at the end of the test period, that $1 billion to $1.1 billion that we are putting in the ground is helping us on this journey of becoming the nation’s safest utility, so it becomes immediately accretive. You don’t have the integration issues if you go out and overpay for an asset which you are doing right now. You have regulatory issues and complications of dealing with what you pay over book, how you deal with goodwill, how you integrate a culture, you do the systems. I mean there is a whole host of issues, social issues and financial and operational issues, when you buy an asset. I mean we did that, we have a wonderful asset – we have a wonderful portfolio. We are in jurisdictions where we want to be. We are extremely comfortable with who we are. We know who we want to be. We have got wonderful skill sets. And so we don’t really have to look across the landscape. And I think bet the future on trying to integrate an asset under the current market conditions. Mark Levin That makes perfect mix, absolutely perfect sense. And is your – just when you think about the industry as a whole and you put your sort of crystal ball on – head on and think about the next 6 months to 12 months, is your expectation that we will continue to see more deals or do you think that there will be a pause given the run in the equities? Kim Cocklin No pause. There is going to be more deals. I mean you have got people out there that supine gas is a very attractive story. They want to get it in their portfolio if they do not have it right now and natural gas. Obviously, it’s the future for energy in this country. I mean energy is a very fundamental food group of a healthy economy. Once we get past November and the elections I think with where gas prices are and where exploration efforts are in the country and the ability – it’s an affordable all-American product. So it makes all the sense in the world and there is good reason I mean I don’t think – I think the multiples are going to stay where they are at in this space as well, because I think interest rates will probably remain very low, but I think people are seeing a lot of value right now and continue to see value in natural gas. Mark Levin That all makes sense, congratulations on a great execution. Kim Cocklin Thank you, Mark. Operator There are no further questions at this time. I would like to turn the floor back over to Ms. Susan Giles for closing comments. Susan Giles Thank you, Selena. I just want to say thank you for calling. A recording of this call is available for replay on the website through August 3. And we hope to see many of you at the AGA Financial Forum in a couple of weeks. Thank you again for your interest in Atmos Energy. 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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DOL Opens The Door To SRI Investing In Retirement Plans

Sustainable, responsible, and impact (SRI) investing is a growing part of the investment landscape. Assets under management using SRI strategies now total $6.57 trillion, or $1 out of every $6 under professional management in the U.S., and these numbers are growing. 1 Between 2012 and 2014, SRI investing grew by more than 76%. 1 A recent survey indicates that the majority of millennials believe business can do more to address society’s challenges in the areas of climate change and resource scarcity. 2 This year Morningstar launched environmental, social, and governance (ESG) scores for global mutual and exchange-traded funds. 3 Despite the growing interest in SRI strategies, most retirement plans such as 401(k) plans were slow to incorporate ESG factors in the investment evaluation process. That may be about to change. Last fall the U.S. Department of Labor (DOL) published guidance that seems to open the door to greater use of SRI strategies in retirement plans. This guidance, in the form of an interpretive bulletin, steps back from prior DOL guidance that appeared to require plan fiduciaries to give economically targeted investments (ETIs) special scrutiny not required of other types of plan investments. While it is too early to tell whether the DOL bulletin will lead to increased adoption of SRI strategies by retirement plans, if you have clients or prospective retirement plan clients who have expressed an interest in SRI strategies, the new guidance provides an excellent vehicle for reexamining this issue. SRIs Defined A variety of terms in addition to “SRI” are used to describe an investment strategy that takes ESG factors into consideration to select investments that will have both competitive financial returns and a positive societal impact (e.g., socially responsible investing, sustainable investing). The DOL uses the term “economically targeted investments” (ETIs), which it defines as investments chosen because of “the economic benefits they create apart from their investment return to the employee benefit plan.” 4 Common types of investments include affordable housing, small business development, community services (child care, health care, education), job creation, expansion of existing businesses, and support of sustainable development initiatives. ETIs appear in a variety of forms including stocks, mutual funds, private equity, real estate, and fixed income. The “All Things Being Equal” Test The first formal position the DOL took on SRI investing, referred to by the DOL as ETIs, was in Interpretive Bulletin (IB) 94-1. In that bulletin, the DOL established the “all things being equal” test. This test had three prongs. A plan fiduciary can never subordinate the interests of plan participants and beneficiaries to a social purpose. The ETI must have an expected rate of return commensurate to rates of return of alternate investments “with similar risks available to the plan.” The ETI must otherwise be an appropriate investment considering the diversification of plan investments and the plan’s investment policy. As long as plan interests were not subordinated and the ETI could be expected to return a comparable rate of return as investments with similar risks, a plan fiduciary could offer ETI as an investment option. In effect, plan fiduciaries could use ESG factors to break a tie with an equivalent non-SRI option. Special Scrutiny Requirement Added in 2008 IB 94-1 remained the DOL’s principal guidance on the topic until it was replaced in 2008 by Interpretive Bulletin 2008-1. The 2008 pronouncement put SRI strategies in a much less favorable light as compared to the 1994 guidance. In the 2008 bulletin, the DOL said that consideration of non-economic, ESG factors Should be rare, and When an ETI is considered, the decision to invest should be documented in a manner that demonstrates compliance with ERISA’s rigorous standards. The 2008 bulletin seemed to require plan fiduciaries to give a level of attention and circumspection to SRIs not required for other plan investments. DOL Restores & Enhances the “All Things Being Equal” Test Recently, the DOL expressed its view that the 2008 bulletin was unduly discouraging plan fiduciaries from investing in ETIs or considering ESG factors, even when the investments were economically equivalent.5 To address these concerns, the DOL withdrew the 2008 bulletin and replaced it with IB 2015-01, guidance more aligned with the position it had communicated in 1994. In its Fact Sheet released with the 2015 bulletin, the DOL said that the “IB also acknowledges that in some cases ESG factors may have a direct relationship to the economic and financial value of the plan’s investment.” 5 The DOL went on to say that, “in such instances, the ESG issues are not merely collateral considerations or tie-breakers, but rather are proper components of the fiduciary’s primary analysis of the economic merits of competing investment choices.” 5 The effect of the DOL’s 2015 bulletin is significant. The three-prong test of IB 94-1 is restored. Plan fiduciaries do not have a “higher level” obligation to scrutinize and document ETIs than they do for other plan investments. ESG factors can be taken into account in determining the economic benefit of investments and to find superior investments. Challenges & Opportunities If you have retirement plan clients or prospective clients who are interested in SRI strategies, IB 2015-01 provides an excellent vehicle for discussing whether SRI strategies are a good fit for their retirement plan’s investment portfolio. Following are some possible discussion points to include in your SRI discussions. Discuss whether your client wants to incorporate ESG factors in their investment evaluation process . Do members of the plan’s investment committee believe that ESG factors will materially impact the financial performance of the plan’s investments? Are there demographic and diversity factors at play that will affect the decision to provide ESG-driven funds such as a high concentration of Millennials? Do members of the committee need additional education regarding SRI investing? Evaluate how an SRI strategy would impact the existing fund lineup . How many investment options are currently provided to participants? Where in the fund lineup would it make sense to add an SRI strategy? Consider how to integrate SRI beliefs and expectations into the existing investment policy statement (IPS) and investment due diligence process . Does the IPS need to be adjusted to incorporate ESG considerations? Will there need to be any changes in the process for selecting and monitoring the plan’s investment menu? Does the documentation retained by the investment committee need to be modified or expanded? These basic inquiries will be a good starting point for discussing SRI strategies with plan sponsors. As with all investment decisions, you play a critical role in helping your plan sponsor clients define and pursue investment objectives that are right for their plans. Clients that elect to adopt an SRI strategy will need your support to Define their investment objectives Develop or amend the IPS that sets out clear rules and metrics for evaluating investment return and risk equivalencies Identify and evaluate investment opportunities Review and evaluate SRI fund prospectuses Document the SRI decision-making process, as they do with other plan investments Educate plan participants about SRIs Footnotes US SIF Foundation, Report on US Sustainable, Responsible, and Impact Investing Trends 2014 Deloitte, The Deloitte Millennial Survey , January 2014 Morningstar, Inc. Press Release, “Morningstar Introduces Industry’s First Sustainability Rating for 20,000 Funds Globally, Giving Investors New Way to Evaluate Investments Based on Environmental, Social, and Governance (ESG) Factors,” March 1, 2016 Department of Labor, Interpretive Bulletin 2015-01, October 26, 2015 Department of Labor, Fact Sheet: “Economically Targeted Investments (ETIs) and Investment Strategies that Consider Environmental, Social and Governance (ESG) Factors,” October 22, 2015 FOR INVESTMENT PROFESSIONAL, BROKER-DEALER AND INSTITUTIONAL USE ONLY. NOT FOR USE BY OR DISTRIBUTION TO THE GENERAL PUBLIC. This material is for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice. Information is obtained from sources deemed reliable, but there is no representation or warranty as to its accuracy, completeness or reliability. All information is current as of the date of this material and is subject to change without notice. Neuberger Berman does not accept any responsibility to update any opinions or other information contained in this document. Any views or opinions expressed may not reflect those of the firm or the firm as a whole. This material is informational and educational in nature, is not individualized and is not intended to serve as the primary or sole basis for any investment or tax-planning decision. Investing entails risks, including possible loss of principal. The material includes copyrighted information of Integrated Retirement. ©2016 Integrated Retirement. Published by permission. All rights reserved. Neuberger Berman LLC is a registered Investment Advisor and Broker Dealer. Member FINRA/SIPC. The “Neuberger Berman” name and logo are registered service marks of Neuberger Berman Group LLC. All rights reserved. © 2009-2016 Neuberger Berman LLC. | All rights reserved) from the feed, and any images/charts as they appear on the original blog article

American States Water’s (AWR) CEO Robert Sprowls on Q1 2016 Results – Earnings Call Transcript

American States Water Co. (NYSE: AWR ) Q1 2016 Earnings Conference Call May 5, 2016 2:00 PM ET Executives Eva Tang – Senior Vice President, Finance, Chief Financial Officer, Corporate Secretary and Treasurer Robert Sprowls – President and Chief Executive Officer Analysts Jonathan Reeder – Wells Fargo Richard Verdi – Ladenburg Thalmann Operator Ladies and gentlemen, thank you for standing by. Welcome to the American States Water Company Conference Call, discussing the company’s First Quarter 2016 Results. This call is being recorded. If you would like to listen to the replay of this call, it will begin this afternoon at approximately 5 PM Eastern Time and run through Thursday, May 12, 2016 on the company’s website, www.aswater.com. Besides that the company will be referring to are also available on the website. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] This call will be limited to an hour. Presenting today from American States Water Company is Bob Sprowls, President and Chief Executive Officer; and Eva Tang, Chief Financial Officer. As a reminder, certain matters discussed during this conference call may be forward-looking statements intended to qualify for the Safe Harbor from liability established by the Private Securities Litigation Reform Act of 1995. Please review a description of the company’s risks and uncertainties in our most recent Form 10-K and Form 10-Q on file with the Securities and Exchange Commission. In addition, this conference call will include a discussion of certain measures that are not prepared in accordance with Generally Accepted Accounting Principles or GAAP in the United States and constitute non-GAAP financial measures under SEC rules. These non-GAAP financial measures are derived from consolidated financial information but are not presented in our financial statements that are prepared in accordance with GAAP. For more details, please refer to the press release. At this time, I will turn the call over to Eva Tang, Chief Financial Officer of American States Water Company. Eva Tang Thank you, Terry. Welcome, everyone, and thank you for joining us today. In today’s call, I’ll review the company’s financial results for the first quarter, and Bob will discuss the liquidity and capital resources. Golden State Water’s pending rate case, California drought-related matters, and our contracted services business segment at American States Utility Services or ASUS. I’ll begin with an overview of our financial results. For the first quarter, diluted earnings were $0.28 per share, compared to $0.32 per share for the same period in 2015. Of the $0.28 per share earnings for the first quarter, $0.22 was from our water segment and our electric and contracted services segment each contributed $0.03. Net income for the quarter was $10.2 million compared to $12.1 million for the first quarter last year. I’ll discuss major items that impacted our revenues and expenses for the quarter. In the first quarter of 2016, water revenues decreased by $5.2 million to $66.3 million, as compared to the same period in 2015. As of today, Golden State Water has now received a decision on its pending water general rate case, which will set new rates for 2016 through 2018. The revenue requirements for 2016, once the CPUC issues a final decision on the current GRC are expected to be lower than the 2015 adopted levels. Major items impact – impacting the decrease in revenue requirements for 2016, includes a significant increase in supply costs caused by lower consumption, much lower depreciation expense resulting from an updated depreciation study filed with the rate case, and decreases in other operating expenses, due to the company’s improvement in operating efficiency. As a result of anticipated reduction in the 2016 revenue level, we adjusted our water revenues downward by $5.8 million for the three months ended March 31, 2016, with corresponding decreases to supply cost, depreciation, and other operating expenses to reflect the sale of the position with with CPUC’s Office of Ratepayer Advocates. The adjustments to 2016 recorded while revenue also reflects Golden State Water’s position on litigate the capital budget and compensation-related issue in the pending GRC. These adjustment did not have a significant impact to pre-tax operating income for the first quarter of 2016. As the overall reduction in the water gross margin is mostly offset by the lower depreciation and other operating expenses, partially offsetting this decrease in water revenue, where rate increases generated by advice letter filing for capital projects approved by the CPUC in 2015. Revenue for electric operations for the quarter were $10.6 million as compared to $11 million for the same period in 2015. The decrease was primarily due to determination July 2015, of a supply surcharge to recover previously incurred energy costs. The decrease in revenues from this surcharge totaled approximately $700,000 for the quarter and was offset by corresponding decrease in supply costs, resulting a no impact to pre-tax operating income. The decrease in electric revenue were partially offset by CPUC approved fourth year rate increases for 2016, and the rate increases generated from advice letters for capital projects approved by the CPUC during 2015. Revenues for our contracted services business, ASUS decreased $1.8 million to $16.6 million for the quarter. The decrease in revenue was due to lower construction work in the first quarter of this year, driven largely by the timing of engineering and bidding activities. Construction activity is expected to increase in the remainder of 2016, as compared to the first quarter of 2016. The decrease in construction work was partially offset by increase in management fee revenues, as a result of successful resolutions on price redetermination received during the third quarter of 2015. As mentioned previously for the first quarter of 2016, the water segments gross margin was adjusted for both lower revenue and lower supply costs in articulated position in the pending water rate case. Our water and electric supply costs were $17.6 million, a decrease of $4.4 million for the first quarter of 2016. Any changes in supply costs for both the water and electric segments as compared to this office supply costs are tracked in balancing account, which will be recovered from always subject to our customers in the future. Other operating expenses increased by $806,000 for the first quarter of 2016, due primarily to outside service costs at electric segment, in response to power outages caused by severe winter storm experienced in January. In addition, there was an increase in conservation and drought-related costs and higher wages. Administrative and general expenses for the first quarter of 2016 were $20.8 million, as compared to $19.5 million for the same period in 2015. The increase was mainly due to higher legal and outside service costs at water segment incurred on the condemnation matters due to this first quarter. Depreciation and amortization expense decreased by $757,000, due primarily to the reduction in composite rate is related [ph] in the pending water GRC resulting from updated depreciation study. As discussed earlier, the lower depreciation had also been reflected in the lower water revenue. The decrease was partially offset by an increase at both the water and the electric segments due to additions to utility plant during 2015. Maintenance expense increased by $593,000, due to a higher level of maintenance performed in 2016 at a water segment. ASUS’s construction expense decreased by $1.3 million to $8.7 million during the first quarter of 2016, as compared to the same period in 2015, due primarily to a reduction in construction activity, as mentioned previously, again, we expect the construction activity will increase during the remainder of 2016 as compared to the first quarter of 2016. Interest expense increased to $5.6 million for the first quarter of 2016, as compared to the $5.2 million for the same period in 2015. This was due largely to capitalize the interest recorded at water segment during Q1 of 2015, resulting from the approval of an additional allowance for funds used during construction from advice letter filings. There was no similar filing during the first quarter of 2016. Income tax expense decreased by – $2.1 million to $5.8 million, driven by a decrease in pretax income, and lower overall effective income tax rate. This slide show the ETS bridge by business segment, comparing the first quarter of this year with the first quarter of 2015. For more details, please refer to the press release. With that, I’ll turn the call over to Bob. Robert Sprowls Thank you, Eva. I appreciate everyone joining us today. Moving on to Liquidity and Capital Resources, net cash provided by operating activities for the quarter, decreased by $10.9 million to $27.6 million as compared to the first quarter of 2015. The decrease in operating cash flow was primarily due to a reduction in cash generated by contracted services, due to the timing of billing and cash receipts for construction work at military basis during the three months ended March 31, 2016. There was also a decrease in customer water usage for Golden State Water, increasing the Water Revenue Adjustment Mechanism or WRAM regulatory assets. We implemented surcharges in March to recover our net WRAM balances for 2015. In addition, tax payments during the three months ended March 31, 2015 were lower, due enlarge part to the implementation of the tax repair regulation. In regard to Golden State Water’s capital expenditures, we are pleased with our first quarter spending of $29 million on company funded capital work. Our water and electric utilities continue to invest and maintain and improve the reliability of our systems. Our capital investment program in the critical factor in delivering consistent high quality services to our customers. We are on track to invest $85 million to $95 million in capital projects during 2016, which may change somewhat once the decision issued by the CPUC on the pending water rate case. In addition, Standard & Poor’s rating services recently affirmed an eight plus credit rating on both American States Water Company and Golden State Water Company. S&P also affirm the stable reading outlook on both companies. You were pleased with the affirmation as these ratings are some of the highest in the U.S. Water Utility Industry. While we continue to produce solid financial results in the first quarter performance was impacted by higher outside services and legal costs at our water segment, encouraged to defend ourselves against condemnation related actions and lower construction activity at our contracted services segment. However, we do expect construction activity at ASUS to increase during the next few quarters. In addition, we still wait to CPUC decision on our water rate case for years 2016 through 2018. As we discussed in previous quarters, we filed our general rate case in mid 2014 for all of our water regions and general office. The application will determine in rates charge to customers for the years 2016, 2017 and 2018. Golden State Water has settled with the CPUC’s Office of Ratepayer Advocates and nearly all of the company’s operating expenses, as well as the consumption levels used to calculate rates for 2016 through 2018, which reflect the State mandated in conservation targets. The primary litigated issues relate to our capital budget requests and compensation for managerial level employees. There are not certain win in 2016, the final decision will be issued. Once issued, rates will be retroactive to January 1, 2016. As Eva mentioned earlier, adopted revenues for 2016 are expected to be lower then the 2015 adopted levels. As you may know, a big part of the utilities revenue requirement is the recovery of projected expenses. By projected expenses for 2016 in the rate case were lower than the 2015 adopted expense levels. In particular, there was a decrease in supply costs, resulting from lower consumption projected, lower depreciation expense resulting from a new study and decreased in other operating expenses in 2016 through 2018 rate case cycle, due to our cost control efforts and improvement in operation efficiency. Because of the company’s efforts, we were able to propose significant increases in our capital investment with little to know effect on rates. As a reminder, we have also received approval by the CPUC to defer our electric general rate case and the cost of capital proceeding by one additional year. Both will now be filed in 2017. In regard to the drought situation in California, in February, the State Water Resources Control Board extended the governor of California’s executive order in possessing mandatory restrictions through October 31, 2016. In addition, the State Board amended the required reductions allowing limited allowances or warmer climate regions increased population growth as well as credit for certain drought resilient water supply investment. Currently all, but one of our water systems has met the revised conservation standards. Based on our drought response actions and customers conservation efforts to-date, we do not believe we will be subject to the State Board’s penalties for failure to implement a water shortage contingency plan. Golden State Water has been authorized by the CPUC to track incremental drought related costs, incurred in a memorandum account for possible future recovery. We are in the process of preparing to file for recovery of drought related items of $1.3 million incurred mostly in 2015. Incremental of drought related costs expensed until recovery is approved by the CPUC. Lastly as of April 26 of this year, the U.S. drought monitor estimate 70% – 74% of California in the rank of severe drought. This is down from 86% reported at the end of February. Increased rainfall and higher snow pack levels over the last few months that help the drought situation. Turning to our contracted services business that ASUS, construction activity in the first quarter, a year was lower due largely to the timing of engineering and bidding activity on both renewal and replacement and new capital upgrade work. We believe construction activity will pickup during the next few quarters. We are still projecting an EPS contribution from ASUS of $0.28 to $0.32 per share for 2016. As discussed with you during our year end call. We continue to work closely with U.S. government on outstanding price redeterminations. We expect the fourth quarter price redetermination for forklift to be finalize in the second quarter of 2016 and the third price redetermination for the brag to be finalized during the third quarter of 2016. Filings for these price redeterminations requests for equitable adjustment and contract modifications awarded for new projects provide ASUS with additional revenues and margin and the opportunity to consistently generate positive earnings. We also continue to work closely with the U.S. government or contract modifications we are waiting to potential capital upgrade work as deemed necessary for improvement of the water and waste water infrastructure at military basis. In additional we are actively engaged in new proposals and expect the U.S. government to release additional bases for bidding over the next several years. We’ve remain optimistic about the future of our contracted services business. Finally, I would like to turn our attention to dividends. On Monday of this week, our Board of Directors approved the second quarter dividend of $0.224 per share on the Common Shares of the company. Dividends on the Common Shares will be payable on June 1, to shareholders of record at the close of business on May 18. American States Water Company has paid dividends every year since 1931, increasing the dividends received by shareholders each calendar year for 61 consecutive years. We are among less than a handful of companies on the New York Stock Exchange that can both of such a level of dividend increase. For the five years ended December 31, 2015, our calendar year dividend has grown at a compound annual growth rate of about a 11%, given American States current low payout ratio compared to our peers and our earnings growth prospects, there is room to grow the dividend in the future. I’d like to thank you for your interest in American States Water, and we’ll now turn the call over to the operator for questions. Question-and-Answer Session Operator We will now take your questions. [Operator Instructions] We will begin with Jonathan Reeder with Wells Fargo. Please go ahead. Jonathan Reeder Hey, good morning, Bob and Eva. I guess, on the West Coast, it’s still the morning. But I know, Bob, in your prepared ASUS remarks, you didn’t seem to indicate that this is the case, however, your main competitor indicated, they expect the slowdown on construction projects during the remainder of the year, due to military budget constraints. Is this anything that you’re seeing or expecting? Robert Sprowls It is not. We – our projects are funded. The slowdown in the first quarter was largely due to the fact that we have to do the engineering and the bidding on the work that we have lined up. So, we’re expecting to really get the construction activity going here in the last three quarters of the year. Jonathan Reeder Okay. And I guess in the same vein you aren’t seen anything that would perhaps put downward pressure on the – the construction projects you would be awarded for the next one-year period in the fall this year? Robert Sprowls We haven’t seen that. I will tell you we have a lot of projects in front of the government for the upcoming year. We’ve done our – but I think there’s a really good job of scoping out a lot of projects and getting that in front of the decision-makers at the military. So far we haven’t got the indication that we’re going to see a slowdown. Jonathan Reeder Okay. And then, I think, previously you said final GRC decision was likely in Q2. Are you implying that it slips further into the year now or just not really sure? Robert Sprowls Yes, we’re just –we’re not really sure. We do know that the judge that’s on our case has a couple of cases ahead of this. And hopefully, you will get through those. I think is on the simper case and you probably know. Jonathan Reeder Okay. That’s fair enough. Robert Sprowls We’re confident on it, maybe, but our sense is that that may come out before ours does. And so, we don’t want to get everyone’s sort of hopes up. And so, I understand the ALJs are a bit understaffed at this point. And so, they’re being challenged to do a lot of decisions. So we’re trying to be patient with them. Jonathan Reeder Sure. Okay. And then I don’t know, if you can go into a little more detail, but what do you think Golden State Water and ORA weren’t able to see eye-to-eye on CapEx levels, because it kind of looks like, the request of about $90 million a year of annual spend wasn’t all that different from the amount that you’ve expanded over the 2013 to 2015 period? Robert Sprowls Yes, we were quite surprised that, particularly given the situation where we weren’t asking for, in fact, in many rate making areas, it was a revenue requirement – small revenue requirement decrease. As you know, that’s ORA’s role is to work hard to kind of reduce your request and that’s what they are doing in this case. So I understand other – some of our other colleagues at other companies are having similar issues though. So we are – we went to litigation on our entire capital budget and we think we put in a – put on a very good chase and hopefully the judge will recognize that. Jonathan Reeder Was there, I mean, were there any projects in there that were kind of unusual or different than the spend that you’ve been, I guess, undertaken in the past few years, or was it all similar type of spend? Robert Sprowls Yes, really there weren’t really any out of the ordinary type project. So I think our spend historically had been, I wanted to say, $70 million to $75 million range. And so, we came in and asked for 90 and thought that was a reasonable request, particularly given the need to do pipe replacement and reduce unaccounted for in the State, so we’re – the company’s decision was to take our risk with the ALJ and the commission. So it was quite surprising to us to be honest, because for a company to come in with a flat rate request and then to have ORA push back on it is substantially just a little bit of a head scratcher. But sometimes either a function of the analyst you get at ORA on your capital projects. Eva Tang It’s not unusual, I think the differences between the company and ORA’s position. Robert Sprowls Yes, sure. Eva Tang The rate case we experienced before. So we’ll say that we’ve made a good showing of the need for the project and provide the solid support, as Bob mentioned. So we will see hopefully judge will see that. Jonathan Reeder Okay. And then last question, I’ll hop out. What do you expect 2016 drought expenses will be in? Robert Sprowls Just for the calendar year 2016? Jonathan Reeder Yes. Yes, just trying to get an idea of, I mean, I think you said you’re going to be filing for a little over million dollars of recovery from previous expenses. And our understanding is those, I guess, get turned around pretty quickly, kind of, like a 90-day period. So how that would, if that’s going to offset whatever your drought expenses would be this year? Robert Sprowls I definitely expect it to offset whatever drought expenses we have this year. Jonathan Reeder Okay. Robert Sprowls These are – we are not adding to the account as much as we did in 2015, as we are getting our arms around the whole thing, so… Jonathan Reeder Okay. So the heavy lifting is kind of over on that and just stay in the course, I guess? Robert Sprowls Yes, I know we still have additional costs associated with notifying customers and making sure that everybody is completely up to speed. But I wouldn’t expect the expense to be – I would expect them to be less than they were in 2015. Eva Tang And, Jonathan, Bob mentioned that we are going to file about $1.3 million scholars job for all related costs for 2014 and 2015 pretty shortly. So once that got approved, for accounting we have a reason to book our drought-related costs to a balance sheet as a regulatory act on that point on. So not only will get recover reverse expense we booked before and also we will probably reverse what we booked to-date to the reg act, so that’s a point. Robert Sprowls Yes, good point, Eva. Eva Tang Yes. Robert Sprowls Once you’ve done it, once you’ve then can – you’ve convinced the accountants that it’s going to happen again. Eva Tang Yes, it’s a probable [Multiple Speakers] Robert Sprowls Programs recurring [ph.] Jonathan Reeder All right. Well, I appreciate the additional clarity. Robert Sprowls Yes, thank you, Jonathan. Operator Our next question comes from Richard Verdi of Ladenburg. Please go ahead. Richard Verdi Hi, Bob and Eva, how are you guys doing? Robert Sprowls We’re doing good. Eva Tang Good, good. Thank, Verdi. Richard Verdi Good, here you go. I just wanted to focus a real quick on ASUS here. At least in my view that $0.28 to $0.38 or $0.32 guidance is kind of wide. Bob, can you give me some sort of idea of what you see maybe swinging closer to the top versus to the bottom? And also, is there any chance that that figure could be outperformed on the outside? Robert Sprowls Sure. Yes, so the amount of construction that we do will dictate how well we do within that range. Additionally, we do have some price redetermination request and there is – though nothing like we’ve had in the past, there is some retroactivity to that, which could push us more to the upper end or slightly above the upper end. So it’s – that’s about as good – good a range as we can give at this point. I know you would like to see it a little tighter, but that that’s as good as we can do. Richard Verdi Okay, sure. And then on the proceeded new contracts, and I understand that for competition sake you need to keep the commentary somewhat limited, but we’ve been pursuing contracts here for a few years and of course there is going to be as you mentioned some new contracts or I should say new basis being option to you in the next few years? I’m wondering can you give us a sense of maybe how deep you are in negotiations on maybe some of these contracts that you’ve been pursuing for so many years. Robert Sprowls Well, I will tell you and it probably doesn’t completely speak to your question. But we view this business as a real important part of our business going forward. We’ve institutionalized our response to RFPs and we’re working through the process. But I will tell, Richard, there was one contract that – then I took five years. So it’s something you have to have a lot of patience for and our company does and so you got to hang in there until you can get it across the finish line. So we are at various stages I would say on some of the contracts. Richard Verdi Okay, that’s great color. It’s actually great, thank you. And then the last question is this, if you look at some of the legislation, it’s been past couple of years as I say, it’s been very favorable for the privatization movement and you guys obviously do a good job, managing the company there. Any thought about pursuing a growth acquisition strategy and really trying to move outside account one year. Robert Sprowls Are you talking about from the utilities – on the utility side… Richard Verdi Yes, for the water side. Yes, for the water side. Robert Sprowls Yes, sure. We look at that and of course the things that we look at is that a favorable regulatory environment and to the degree there are businesses for sale in those particular states, we of course will look at that. And I’ll tell you though when those things due come up for sales. There is lot of folks that like that business. So it becomes a pretty competitive process and we’re not afraid of that. It’s just – you’ve got a look at these situations and make sure there is enough scale to attract you. You recall, Rich and this may have been a little bit before your time we sold our business in Arizona. That was largely because of the commission in Arizona. And it didn’t make sense for us to continue to spend all the time that we had on a 13,000 customer business there. However, if there is other businesses for sales and other states that have fair regulatory environment, we’re definitely considered those. Richard Verdi Okay, that’s great. Okay. I guess that’s it for me, thank you. I appreciate the time guys. Robert Sprowls Thanks, Rich. Eva Tang Thank you. Operator And this concludes our question-and-answer session. I would now like to turn the conference back over to Bob Sprowls for any closing remarks. Robert Sprowls Yes, I just want to close today by thanking everyone for their continued interest in American States Water and wish you everybody a good. Operator This concludes today’s American States Water Company conference call. You may now disconnect your lines. Have a great day. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) 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