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American Water Works’ (AWK) CEO Susan Story on Q4 2015 Results – Earnings Conference Call Transcript

Operator Good morning and welcome to American Water’s Fourth Quarter and Year End 2015 Earnings Conference Call. As a reminder, this call is being recorded and is also being webcast with an accompanying slide presentation through the company’s Investor Relations website. Following the earnings conference call, an audio archive of the call will be available through March 3, 2016 by dialoging 412-317-0088 for U.S. and international callers. The access code for replay is 10079115. The online archive of the webcast will be available through March 25, 2016 by accessing the Investor Relations page of the company’s website located at www.amwater.com. [Operator Instructions] I would now like to introduce your host for today’s call, Greg Panagos, Vice President of Investor Relations. Mr. Panagos, please go ahead. Gregory Panagos Thank you, Kerry. Good morning, everyone. And thank you for joining us for today’s call. We will keep the call to about an hour. At the end of our prepared remarks, we will open the call up for your questions. During the course of this conference call, in both our prepared remarks and in answer to your questions, we may make forward-looking statements to represent our expectations regarding our future performance or other future events. These statements are predictions based upon our current expectations, estimates and assumptions. However, since these statements deal with future events, they are subject to numerous known and unknown risks, uncertainties and other factors that may cause actual results to be materially different from the results indicated or implied by such statements. Additional information regarding these risks, uncertainties and factors is provided in the earnings release and in our 2015 Form 10-K each as filed with the SEC. I encourage you to read our Form 10-K for a more detailed analysis of our financials and other important information. Also reconciliation tables for non-GAAP financial information discussed on this conference call including adjusted EPS and our O&M efficiency ratio can be found in the appendix of the slide deck for this call which is located at the investor relations page of the company website as well as our earnings release. We will be happy to answer any questions or provide further clarification if needed during our question-and-answer session. All statements in this call related to earnings and earnings per share refer to diluted earnings per share from continuing operations. Before I turn the call over to Susan, I would like to take this opportunity to introduce you all to Melissa Schwarzell. Our new Director of Investor Relations. Melissa has been a member of American Water’s finance team in Lexington, Kentucky since 2009. Her experience includes supporting rate cases, infrastructure filings and other regulatory matters in seven of American Waters regulated states. She has worked on most of the company’s cost components and she has tackled challenging recovery issues. She’s also provided rates related financing – excuse me, financial planning support throughout the American Water footprint. I know you will all find Melissa to be very helpful and a pleasure to work with. And now, I will turn the call over to American Water’s President and CEO, Susan Story. Susan Story Thanks, Greg. Good morning, everyone and thanks for joining us. With me today are Linda Sullivan, our CFO, who will go over the fourth quarter and full year financial results; and Walter Lynch, our COO, who will give key updates on our regulated business. On January, the 1st, Walter assumed additional responsibility for operational and safety best practices across our AWE market-based businesses. So periodically, he will give you an update on those efforts as well. The employees of American Water delivered strong results in 2015 for both the fourth quarter and the full year. We invested significant capital into needed upgrade for our system to provide reliable and safe water and wastewater services. We continued our focus on managing costs and deploying technology so that our services remain affordable for our customers and we treated and delivered water that consistently met and surpassed EPA drinking water standards. This includes the lead and copper rule, which has generated a lot of news recently, due to the crisis in Flint, Michigan. American Water samples for lead on a routine basis and our water systems continue to be incompliance with that rule. We expanded our regulated customer base in 2015 by nearly 42,000 metered customers; about 9,000 customers resulted from organic growth in our existing footprint. 24,000 customers joined our system from acquisitions that closed during the year, and additional 9,000 are from acquisitions, where we have written agreements in place and are just awaiting regulatory approval. We also continue to grow our market-based businesses through new contracts and new customers. As you can see on slide seven, we reported operating revenues of $783 million, a 7% increase above fourth quarter 2014. For the full year, operating revenues were nearly $3.2 billion, an increase of about 5% over 2014. Earnings from continuing operations were $0.55 per share for the fourth quarter, a 5.8% increase above fourth quarter 2014. Annual earnings were $2.64 per share, up 8.6% over 2014 adjusted EPS. The fourth quarter includes a $5 million contribution to the American Water Foundation whose work I will discuss briefly before our Q&A session. Turning now to slide eight; you can see that we delivered on our strategies in both the regulated and market-based businesses in 2015. We made about $1.4 billion in total annual investment, the highest in our company’s history. We invested $1.2 billion in our regulated system, which improved our long-term service reliability and water quality for our customers. We’re able to increase our investment at this level because of the expertise of our hardworking employees and our continuous improvement in both O&M and capital deployment efficiency. We’re proud of our ability to deliver on our growth goals and effectively manage every dollar to deliver excellent customer service while we keep our customer bills affordable. Even more importantly, we know that our customers need to be able to trust that the water we provide is clean and safe. So while consistently meeting and surpassing all EPA requirements in 2015, we continued our focus on further strengthening our critical assets. Let me give you a couple of examples. We upgraded two of our company’s largest water treatment plants, which serve over 300,000 customers in St. Louis County, Missouri. In Champaign, Illinois, we upgraded chemical treatment facilities nearing the end of their useful life with improvements that included replacing gas coring facilities with safer technology. In addition to these regulated system investments in 2015, we also grew our customer base organically and through regulated acquisitions. Our market-based businesses continue to grow as well. In December, our Contract Services Group was awarded a 10-year O&M contract in Camden, New Jersey with revenue of approximately $125 million. Our Military Services Group expanded to 12 bases with a successful 50-year contract bid for Vandenberg Air Force Base with revenue of approximately $300 million. Our Homeowner Services Group expanded to 1.6 million service warranty contracts and we grew our utility partnerships by adding Rialto, California and the Orlando Utilities Commission. As you know, we expanded our business through the acquisition of Keystone Clearwater Solutions. So, in summary, we produced excellent results for the year through our ongoing customer growth, highest annual capital investment in our history, and we continued our O&M and capital efficiency. This continues our progress toward achieving our goal of 7% to 10% EPS growth through 2020. Based on our performance, our board declared a cash dividend of $0.34 per share during the fourth quarter, and we are affirming our 2016 earnings guidance range of $2.75 per share to $2.85 per share. And with that, Walter will now give you his update. Walter Lynch Thanks Susan. Good morning, everyone. As Susan mentioned, our regulated businesses had a strong year all around with historic capital investment, smart and strategic acquisitions and continued O&M efficiency gains while balancing customer bill impacts. As you can see on slide 10, 2015 was a good year for growth. Through acquisitions and organic growth, we added in our pending regulatory approval, nearly 42,000 customers in our regulated businesses. In 2015, we completed 14 acquisitions adding nearly 24,000 customers to our existing footprint. Seven of these transactions closed in the fourth quarter including our purchase of the municipal wastewater system in Fairview Township, Pennsylvania. This newly acquired system provides wastewater service to approximately 4,000 customers including more than 200 businesses in commercial accounts, and it’s a perfect fit and as Pennsylvania American Water already owns the water system. This acquisition provides a long-term wastewater solution and a financial relief for the local community. According to the Township’s board of supervisors because of the sale, Township residential received a 50% reduction in real estate taxes in 2016. The proceeds of this sale will also help payoff approximately $21 million in sewer debt and avoid an anticipated $14 million in additional debt that would have been required to complete planned projects. Again this is a great example of how we can bring solution to municipalities struggling to finance the water and wastewater improvements while improving their service and keeping rates affordable for our customers. At the end of 2015, we have 12 pending acquisition agreements that were signed and waiting for regulatory approval. These acquisitions would add approximately 9,000 customers to our customer base if approved and completed. In 2016, we completed a purchase of four of these acquisitions, one of which was Environmental Disposal Corporation in New Jersey. This investor-owned wastewater utility provides service to more than 5,300 customers as well as bulk wastewater treatment services for several nearby communities. Additionally in December, Pennsylvania American Water signed a memorandum of understanding for the potential acquisition of the wastewater assets of the Scranton authority, which serves approximately 31,000 customers. This MOU commits the parties to negotiate in good faith toward executing a final purchase agreement. On the regulatory front, you can see a snapshot of our current activity on slide 11. Our Illinois and Kentucky subsidiaries fought rate request in the first month of 2016. In both space, we’re seeking to recover a significant amount of needed capital investment, offset by reduced or flat O&M expenses. In Illinois, we requested $40 million in additional revenues based on a projected total of $342 million of capital investment between October 2013, and the end of 2017. Our team in Illinois reduced their O&M expenses by about 3% since the last rate case in 2012, continuing the great work by our employees to keep those affordable for our customers. In Kentucky, we request $13.5 million in additional revenues, primarily driven by $79 million of capital investment while keeping operating expenses flat since 2012. Again, this focus on expenses allows us to make critical infrastructure investment continuing the trend of keeping bills affordable for our customers. In Missouri, our case is moving along to the process, and we expect the decision sometime before mid-year. In West Virginia, we have not yet received the rate order, so it will stay at a high level and base my comments from the press release sent out last night by the West Virginia Public Service Commission. The order provides an increase of $18.17 million in water rates and $151,000 in sewer rates. The Commission recognizes that the company reduced its O&M expenses from its last rate case, and the adjustment to base rate is driven primarily by the increased investment we made to ensure reliable water service for our customers. And consistent with our normal process, West Virginia American water will show a press release, once they’ve had a chance to review the order. Moving to California, on February 1st, we received approval from the California Public Utility Commission to extend our cost of capital filing by one year. This will keep our authorized return on equity at 9.99% through 2017 for our California subsidiary. Meanwhile, despite some rainfall from the effects of El Niño, the drought continues in California. Our team continues to demonstrate leadership in dealing with the drought and we’re certainly proud of all other efforts to help our customers during this time. We also continue to make progress on the Monterey Peninsula Water Supply Project. Our test plant well is operational and the results are positive. The project is undergoing environmental and regulatory review by the California Public Utility Commission, and this review is scheduled to be completed by the end of the year. Moving to slide 12; we ended the year with a 35.9% O&M efficiency ratio and we’re on track to meet our 34% target by 2020. I know, we’ve talked a lot about this, most recently, at our Investor Day in December, but I think it’s worth repeating, we’ve really made tremendous progress here. As you can see, the progress is evident by the amount of revenue requirement attributed to capital expenditures versus operating expenses. For the general rate cases, we filed last year, we reduced our O&M expenses by $10 million or 17%. This reduction allowed us to invest approximately $65 million into needed infrastructure upgrades without affecting our customers’ bills. Our employees are doing a great job in this area through leveraging best practices, improved efficiencies, technology and innovation, and this produces results for our customers as well as our company. So, with that, I’ll turn the call over to Linda for more detail on our financial performance. Linda Sullivan Thank you, Walter, and good morning, everyone. In the fourth quarter and for the full year of 2015, American Water continued to deliver strong financial results. As shown on slide 14, earnings per share from continuing operations for the fourth quarter was $0.55, up $0.03 or 5.8% over the same period last year. This slide shows the contribution by business line to our quarterly and annual results. Let me walk through the numbers then I’ll discuss the drivers of the key variances on the next few pages. For the quarter, the regulated businesses contributed $0.54 up $0.01, the market-based businesses contributed $0.06 flat to the fourth quarter of last year and the parent which is primarily interest expense on parent debt was $0.02 better than the fourth quarter of last year. For the full year 2015, earnings per share from continuing operations was $2.64 per share, an increase of $0.21 or 8.6% increase compared to adjusted 2014. The contribution from our regulated businesses was $2.63 per share, up $0.18 or 7.3% over adjusted 2014. The market-based businesses contribution was $0.24, up $0.02 or about 9% over last year. And the parent improved $0.01 per share. These annual increases are consistent with our long-term growth triangle. Turning to slide 15, let me walk through the components of our quarter-over-quarter increase in earnings per share. The primary driver was higher regulated revenue of $0.09 per share from infrastructure surcharges and other rate increases to support our regulated system investments. This was partially offset by higher O&M expense of $0.03 mainly from the timing of maintenance-related work as well as higher claims and pension-related costs. Depreciation, taxes and other increased $0.05 per share driven mainly by our investment growth. The improvement at the parent of $0.02 per share was mainly due to lower taxes from state tax proportionate benefit, partially offset by the $5 million contribution to the American Water Foundation that Susan mentioned. Also, please note that the market-based businesses were flat for the quarter as higher growth in our Military and Homeowner Services Groups was offset by a 2014 tax benefit. Turning to slide 16, let me walk through to the elements of our $0.21 increase in year-over-year adjusted earnings per share from continuing operations. The regulated businesses benefited from higher revenue of $0.18 per share from authorized rate increases to support investment growth as well as increases from acquisitions and organic growth. In addition, there was a $0.05 increase due to mild weather during 2014 and an improvement in O&M costs of $0.02 per share offsetting these improvements, with higher depreciation and taxes of $0.07 per share, driven by our investment growth. Overall, the regulated businesses increased $0.18 year-over-year. The market-based businesses were up $0.02, mainly due to additional construction projects under our military contracts and the addition of Hill Air Force Base and the Picatinny Arsenal in 2014, as well as geographic expansion and Homeowner Services. Parent and other was $0.01 better than 2014, due mainly the lower taxes from state tax proportionate benefits, partially offset by the Foundation donation. Now, let me cover the regulatory highlights on slide 17. As Walter mentioned, we should receive the rate order from the West Virginia rate case soon. And as such, we currently have four general rate cases in process: Missouri, Virginia, Illinois, and Kentucky for a combined annualized rate request of $87.4 million. For rates effective from January 1, 2015 through today and including the $18.3 million for West Virginia we received a total of $98.6 million in additional annualized revenue from general rate cases and infrastructure charges. We encourage you to review the footnotes in the appendix of this slide deck for more information. Slide 18 highlights our improved financial performance across the board. During the fourth quarter of 2015, we made total investments of $386 million primarily for regulated system investments. For the year, we invested a total of $1.4 billion. This includes $1.2 billion for regulated system investments, $64 million for regulated acquisitions and $133 million for the acquisition of Keystone. Excluding the Keystone acquisition, capital investment increased about 27% from 2014. Going forward, we expect to invest $6.4 billion over the next five years of which about $5.5 billion will be to improve water and wastewater systems for our customers, $600 million for regulated acquisitions and $280 million for strategic capital. For the full year, cash flow from operations increased $82 million or 7% to about $1.2 billion mainly due to the increase in net income and our adjusted return on equity for the past 12 months was 9.43%, an increase of 57 basis points compared to last year from continued execution of our strategies. We also announced in the fourth quarter of 2015, a $0.34 common stock cash dividend payable on March 1, 2016. On slide 19, as many of you will recall, during our Investor Day in New York, we gave 2016 earnings guidance of $2.75 to $2.85 per share. Today, we affirm that guidance range. There are certain important factors that could impact our 2016 results. And as we have done in the past, slide 19 outlines those factors that we have included in our earnings guidance range. Swings outside of these ranges could cause results to differ from guidance. Weather is generally the largest variable impacting our earnings. Our range of plus or minus $0.07 represents what we consider to be normal weather variation that we have included in our earnings guidance range. For our regulated businesses, we see variations of plus or minus $0.03 primarily from the timing and outcome of rate cases, the timing of completion of capital projects as well as variations in O&M and production costs. American Water Enterprises variability is driven mostly from the timing of future capital upgrades in Military Services and realization of our expected growth as well as claims costs in Homeowner Services. Variability for Keystone is primarily driven by natural gas prices and drilling activity in the Marcellus and Utica. I would also like to mention that our 2016 earnings guidance range includes estimated legal defense costs of about $0.03 per share related to the 2014 Freedom Industries’ chemical spill in West Virginia. As you may recall, we included $0.02 per share of legal costs in 2015. And lastly, I would like to address the expected impact from the five-year extension of bonus deprecation. From a cash perspective, we are in a federal tax net operating loss position. So, we do not receive a current cash benefit from bonus depreciation. We look at electing bonus depreciation on a state by state basis. In those cases, we’re adopting bonus depreciation would be in our customers’ best interest and where we expect to be able to utilize our NOL, we will do so. Assuming, we elect bonus depreciation in our regulated states, this would increase our NOLs and push out the expected timing of when we would become a cash tax payer by about one year to 2021. From an earnings perspective, while this would be expected to reduce rate base and earnings, we do not see a significant impact to our 2016 earnings guidance range, nor do we see a significant impact to our 7% to 10% compounded annual EPS growth rate for 2016 through 2020 because the rate base impact is largely offset by lower financing needs in 2020. We also have flexibility to mitigate some of the rate base impacts by redirecting a portion of our strategic capital already included in our five-year plan to our regulated businesses, as well as accelerating certain investments that continue to strengthen our critical assets for our customers. And with that, I’ll turn it back over to Susan. Susan Story Thanks, Linda. Before taking your questions, let’s review the American Water investment thesis we shared with you at our Investor Day and briefly discuss the American Water Foundation. On growth, we affirm our EPS growth goal of 7% to 10% for the next five years. We talked about our unprecedented 2015 capital investments, our continued O&M and capital efficiency and our plans for 2016. We know that reputation, operational excellence, reliability, and dependable water quality are critical to our growth. Where and how we expanded our customer base in 2015 leverages these strengths, growing through tuck-in, adding wastewater customers where we are ready to serve water and growing our market-based businesses. Our people have deep utility expertise and diversified experience and they are our biggest competitive advantage. They also care deeply about our customers in the communities in which they live and serve. This was clearly demonstrated about what our employees dealt with in both Missouri and Illinois during the last week in 2015. Record rainfall of up to 12-inches fell during a powerful three day storm across the Midwest, hitting the St. Louis area hard and causing record flooding. Homes and businesses were submerged, highways closed and water and sewer utilities faced extraordinary challenges. Missouri American has two plants on the Merrimack River, supplying water to about 20% of our customers in the St. Louis County area. Thanks to early planning and the construction of a system of temporary pipes and pumps. Our customers never loss service and we maintained excellent water quality throughout the event. Our wastewater teams also worked around the clock during the heavy rain to remove pumps and motors that otherwise would have been lost to flooding. But it’s not just what our Missouri team did for our own customers; it’s what they did for the surrounding communities in need. A local public water district had a flooded plant and lost the ability to serve its 20,000 customers. By opening a connection between the systems, Missouri American was able to help the district, serve many of those without water. Additionally, they worked with the National Guard to fill more than 500 tanker trucks that delivered our water outside of our service area, which brings me to the American Water Foundation funded by American Water’s parent company which keeps the communities we serve and have a better quality of life. One key Foundation partnership is with the Union Sportsmen Alliance, where we have worked with local union members to build walking trails, public access areas and fishing facilities for communities, including projects for special needs kids. The Foundation also has a partnership with a National Recreation and Parks Association in support of building better communities. Here, we focus on building or enhancing nature-based playgrounds for children and educating people on water and environmental stewardship practices. The Foundation also matches employee donations to qualified charitable organizations up to $1,000 per year per employee. Earlier this month, the Foundation made a $50,000 donation to the Flint Child Health & Development Fund to help the children of Flint, Michigan, get the resources they need to deal with the lead exposure many have experienced. These examples of doing good as we do well, demonstrate the dedication, expertise, strong character and the work ethic of the 6,700 people I get the privilege of working with every day. Certainly, our employees’ commitment translates into our strong financial performance, but it also let you know as our investors that we are a company, whose people believe not just in what we do, clean water for life, but also in how we do it. And we believe that it is critical for a company, who wants to be as successful in the coming decades as we are today. So, with that, we’re happy to take your questions. Question-and-Answer Session Operator We will begin the question-and-answer session. [Operator Instructions] Our first question comes from Richard Verdi of Ladenburg. Please go ahead. Richard Verdi Good morning, everyone, very nice quarter and thank you for taking my call here. Just a couple quick and easy questions; first, I guess Susan can you please speak to the strategy for capital raises the next few years to fund your program and how you think about raising the dividend versus buying back stock versus issuing equity? Susan Story Sure, Rich, and thanks for the question. I will start, and then Linda may want to jump in. So, when we look at all of the different uses of our capital in terms of growth, in terms of raising our dividend, in terms of regulated investment, all of those different things, we look at a balance in optimizing those and also where we get the biggest value from every dollar that we spend. So, we look at growth and the returns we get there. We look at regulated investment and let me be clear that in our investment plan, the first thing we do, is we invest whatever is needed in every one of our state to ensure that we provide safe clean water that meets all EPA standards. So, then beyond that is what we refer to as discretionary. But there is a base amount which is significant well over half of our capital that we spend to ensure that we provide those services. Then beyond that, we look at our dividend growth, which is, we have said, we want to keep consistent with our EPS growth. So, we want those to be correlated, so that’s the guidance we’ve given and we have a 50% to 60% payout ratio and currently we’re at the lower end of that range. So, there is room there. When we look at things like debt and I’ll let Linda talk about this more, the question we ask is what is best for our customers and our shareholders with the next dollar that we invest or whether we pay down debt or whether we’re able to provide dividend. So, as you know, to have a – to be in a strong financial position as we are, we have a lot of optionality and we’re always looking at how we optimize that optionality. Linda Sullivan And Rich, I would add to that that as we look and as we outlined in our Investor Day, when we look at the capital structure over the next five years, we continue to look at about 45%-55% equity to debt capital structure. Richard Verdi Okay, excellent. Thank you. And next on the O&M and efficiency ratio, clearly, this has been a great part of the story very successful, excuse me, couple of years back the stretch target was 35% for 2018, now the stretch target is 34% for 2020. Its 100 basis points lower in three years. I know a portion of these stretch targets were based on the ERP program a while back. Now they are predicated upon automation technology such as the Badger Meter contract recently announced. Without holding you to it, just trying to get a grasp on what lies beyond 2020, how possible is it that American reduces the O&M efficiency ratio by another 100 basis points by 2022 to 33%. And would automation and technology be the driver of that reaction or is there something underneath the American umbrella that could drive the third phase of O&M efficiency reduction? Walter Lynch Hey, Rich; Walter. I’ll take that question. Thanks for it. We’re not going to forecast beyond 2020 and a 34%, but I can tell you our teams are geared towards continuous improvement and that’s what’s driving this, and technology is going to be a big part of it. As you know, we are about 90% implemented with AMR. We’re also looking at AMI and the technology that we’re buying now is easily transitioned into AMI. So it’s a long-term solution. But I’d tell you looking at the people in our business understand the why and why we are reducing expenses. So we can invest in our infrastructure and provide excellent customer service. So it’s really throughout the business sharing best practices, leveraging our supply chain and reverse auctions and power and chemicals, so it’s a mindset and it’s a commitment by our employees that we’re going to get to where we need to go and they understand the why, and I think that is the key to this whole things, and that’s been the foundation for our success. Richard Verdi Okay. Great, thank you very much, and I appreciate it. And that’s it for me, I’m going to jump in queue, but I just want to say thank you very much for slide 36 and that’s very helpful. Susan Story Thanks, Rich. Operator [Operator Instructions] Seeing no further questions, this concludes our question-and-answer session. I would now like to turn the conference back over to Susan Story for any closing remarks. Susan Story Well, thank you, Kerry. And thank you all for participating in our call today. If you’ve got any questions, please call Greg and Melissa and they will be happy to help. I’d like to remind everyone that our 2016 first quarter earnings call will be on May, the 4, and our Annual Stockholders Meeting would take place on Friday, May, the 13. Thanks again for listening and we’ll talk to you in May if not before then. Thanks. Operator The conference is now concluded. Thank you for attending today’s presentation. 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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New Jersey Resources’ (NJR) CEO Larry Downes on Q1 2016 Results – Earnings Call Transcript

Operator Good morning and welcome to the New Jersey Resources Corporation First Quarter 2016 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Dennis Puma, Investor Relations. Please go ahead. Dennis Puma Thank you, Gary. Good morning, everyone. Welcome to New Jersey Resources’ first quarter fiscal 2016 conference call and webcast. I am joined here today by Larry Downes, our Chairman and CEO, Pat Migliaccio, our Chief Financial Officer, as well as other members of our senior management team. As you know, certain statements in today’s call contain estimates and other forward-looking statements within the Private Securities Litigation Reform Act of 1995. We wish to caution listeners of this call that the assumptions forming the basis for forward-looking statements include many factors that are beyond NJR’s ability to control or estimate precisely, which could cause results to materially differ from the company’s expectations. A list of these items can be found, but is not limited to items in the forward-looking statements section of today’s news release filed on Form 8-K and in our most recent 10-K filed with the SEC. Both of these items can be found at sec.gov. NJR does not, by including the statement, assume any obligation to review or revise any particular forward-looking statement referenced herein in light of future events. I would also like to point out that there are slides accompanying today’s discussion, which are available on our website and were also filed on our Form 8-K this morning. With that said, I would like to turn the call over to our Chairman and CEO, Larry Downes. Larry? Larry Downes Thanks, Dennis. Good morning, everyone and thank you for joining us. For those of you who have seen our release this morning, you know that our first fiscal quarter performance was solid. As we begin this morning I want to remind everyone that during my presentation I’ll be discussing our future and I’ll be making forward-looking statements. Our actual results will be affected by many risk factors, including those that are listed on slide two. The complete list is included in our 10-K and as always I would encourage you to please review them carefully. Also as noted on slide three, I will be referring to certain non-GAAP measures such as net financial earnings, or NFE as I am discuss our results. We believe that NFE provides more complete understanding of our financial performance. However, I want to stress that NFE is not intended to be a substitute for GAAP. Our non-GAAP measures that are discussed more fully in Item 7 of our 10-K and please take the time to review that disclosure carefully as well. Moving to slide four, you can see our financial and strategic highlights for the quarter. NFE for the quarter were $0.58 per share compared with $0.65 per share in the first fiscal quarter 2015. The difference is due primarily to lower results at NJR Energy Services. Our fundamentals at New Jersey Natural Gas remained strong. We added 2,046 customers during the first fiscal quarter of 2016 and remain on track to realize a 1.6% customer growth rate during this fiscal year. We filed the base rate case in November to recover investment and operating cost incurred to improve our system and support customer growth initiatives. We also reached another important milestone during the quarter when we retired the last section of cast iron main in our distribution system. We are now the only utility in New Jersey to have a cast iron free system. Our infrastructure investment programs continued as expected. In the quarter New Jersey natural gas spent about $44 million for customer growth and to improve the reliability and resiliency of our system. Our clean energy ventures completed their third onshore wind project in December this 50.7 megawatt Alexander Wind Farm is located in Rush County, Kansas. We now have three operating wind farms that are contributing to our earnings and as you know we announced the fourth project last night. Also congress extended investment tax credits for solar and production tax credit to wind in December. That has positive implications for our distributed power business and although lower than last year NJR Energy Services is performing well despite the warm weather and their results remain in line with our expectations. Moving to slide five, this morning we announced net financial earnings of $49.6 million or $0.58 per share during the first fiscal quarter of 2016. That compared with $55.1 million or $0.65 per share last year. New Jersey Natural Gas reported strong earnings as a result of higher gross margin from customer growth, our BGSS incentives and regulatory initiatives such as the SAVEGREEN project. Although, the quarter was about 35% warmer than normal our Conservation Incentive Program, which we referred to CIP mitigated the impact on earnings. Our midstream, excuse me moving to slide six, our long-term average annual NFE growth rate remains 5% to 9% and that assumes that fiscal 2013 is the base. Today, we reaffirmed our NFE guidance for fiscal 2016 in the range of $1.55 to $1.65 per share. First and foremost I want to emphasize that the guidance assumes that New Jersey Natural Gas will remain the primary driver of our strategy and our performance. New Jersey Natural Gas will provide the majority of our earnings, our assets, our people and our capital investments. Infrastructure projects and new customer additions will continue to drive our investments. Our midstream investments will also contribute to our regulated earnings combined with New Jersey Natural Gas our regulated businesses are expected to contribute between 65% and 80% of total net financial earnings in fiscal 2016 and beyond. As I mentioned earlier, NJR clean energy ventures provide renewable electricity from our solar and wind investments. We are focused on diversifying our earnings through this business as we continue to grow our portfolio of wind projects. Clean energy ventures is expected to provide between 10% and 20% of net financial earnings in fiscal 2016 and beyond. Now I think as many of you recall extreme volatility in fiscal 2014 and 2015 created market opportunities that led to outstanding performance for NJR Energy Services. This year warm weather conditions created by El Niño patterns have resulted in less volatility than we experienced in the previous two fiscal years. And so we expect that NJRES will contribute between 5% and 15% of net financial earnings in fiscal 2016 and that number is consistent with our expectations. At the same time, our annual dividend growth goal remains at 6% to 8% with the targeted payout ratio of 60% to 65%. Turning to slide seven, in December, Congress extended both the production tax and investment tax credits essentially the legislation extended the PTC and its existing value of $23 per megawatt for wind projects that begin construction through December of 2016. The value of the PTC will gradually decline to 2019 and thereafter will be eliminated. In addition, the investment tax credit was extended at its current level of 30% for solar projects that commence construction before December 2019. The credit reduces to 26% for projects started in 2020 and to 22% in 2021 provided that these projects are in service by December of 2023. Commercial solar projects started after 2021 are eligible for a 10% ITC. And now I think as many of you know over the past several years, our strategy reflected our expectation that Congress would not extend these credits. As a result, our plan was to reduce our solar capital spending and to diversify our portfolio, which as we indicated on our Investor Day in October we were on track to achieve that. The ITC and PTC expenses now provide us with options to invest in wind and solar over the next several years and we are currently reviewing how these changes will impact our future CEV investments. In the short-term you can expect us to focus on the build out of our BPU approved grid connected solar projects in New Jersey to continue our residential solar program and to add onshore wind projects to our portfolio, but I would again emphasize that we continue to expect that CEV will contribute 10% to 20% of our NFE and that remains unchanged from previous forecast. On slide eight, last evening we announced our fourth onshore wind project a 39.9 megawatt Ringer Hill Wind project, which is located in Somerset County, Pennsylvania, that is about 60 miles from Pittsburgh. We’ll invest about $84 million in this project and we expect that we’ll come online during first quarter of fiscal 2017. When the Ringer Hill is completed we will have four wind farms with total capacity approximately 120 megawatts of renewable electricity. And before I turn the call over to Pat to discuss our quarter results, I want to review slide nine which summarizes our capital expenditure program, in the chart you can see that the majority of our capital investments will continue to be allocated to our regulated utility New Jersey Natural Gas and our midstream businesses. And so I will turn the call over to Pat who will review our financial results, but I want to remind everyone that Pat officially became our Chief Financial Officer effective January 1st so this is his first opportunity to share our financial results with you. But Glenn is in the room and he’ll keep an eye on Pat so not to worry. Pat? Patrick Migliaccio Thanks, Larry and good morning, everyone. As you can see on slide 10 NJNG’s net financial earnings were $30.6 million compared to $28.2 million in the prior quarter. The improved financial performance was driven by a significant increase in gross margin from customer growth, our BGSS incentive programs, and SAVEGREEN our energy efficiency program. Since this inception the BGSS incentive programs have saved customers approximately $800 million and also provided share owners at an average of $0.05 of NFE per share annually. Turning to Slide 11, we added 2,046 new customers in the first quarter with approximately half of those customers coming from other fuels, primarily fuel oil. Combined these new and conversion customers are expect to contribute approximately $4.4 million annually to utility gross margin. Although additions are down in the first quarter due to the timing differences we’re on track for the year and expect to add 8,150 customers to our system in fiscal 2016. This will be about 4% increase over the prior year. Through our fiscal year 2018 we expect customer growth additions of 24,000 to 28,000, representing an annual new customer growth rate of about 1.6%. Most of you are familiar with the regulatory programs that we list on slide 12. I just mentioned the impact that our BGSS incentives have had in the results, our CIP which has been in place for about 10 years significantly mitigated the impact of warm weather and a resulting lower usage levels in our first quarter. This past November-December were among the warmest in our company history. Through SAVEGREEN we invested $8.6 million in the first quarter 2016 and our VP approval to invest $220 million through June of 2017. This program supports New Jersey’s energy efficiency goals by helping both customers and share owners. Also in the first quarter we invested $7.2 million in SAFE program. SAFE is $130 million four-year infrastructure program to replace 276 miles of unprotected steel and cast iron main to ensure safety and reliability. And finally we invested $5.1 million during the quarter in our NJ RISE program, which is $102.5 million five year program consisting of six capital projects designed to improve the resiliency of our system. As Larry has mentioned we filed our base rate case on November 13th as the BPU questioned when they approved our SAFE infrastructure program in 2012. The $147.6 million rate increase request will primarily allow us to recover cost incurred to improve our system and support customer growth. As you can see we have included the details of our forecasted rate base and cost of capital on the slide. We’re currently in a discovery phase. The BPU rate case process can take up to 12 months so we expect to have new rates in the first fiscal quarter of 2017. Moving to slide 14, midstream NFE totaled $2.3 million in the first quarter of 2016 compared with $2.1 million in the prior year. The increase reflects higher revenue from the Steckman Ridge storage facility. We also have a 20% interest in the PennEast Pipeline, which filed its 7C application with FERC in September and we’re currently working through the approval process. There is contribution from NJR Midstream in fiscal 2016 is expected to remain at 5% to 10%. Turning to slide 15, Larry mentioned earlier that NJRES reported lower NFE of $10 million in the first quarter of 2016, compared with $16.4 million last year. As expected their financial margin was lower than last year due primarily to narrow price spreads resulting from lower natural gas prices. And as Larry mentioned, we expect NJRES to contribute 5% to 15% NFE in fiscal 2016 and beyond. Moving to slide 16, first quarter 2016 NFE at NJR clean energy ventures totaled $7.5 million compared with $9 million last year. The decrease quarter-over-quarter was due primarily to lower investment tax credits. Our Sunlight Advantage program added 84 residential customers or 0.7 megawatts in the first quarter. This brings the total number of residential customers to more than 4,000 and our residential solar portfolio to more than 36 megawatts. Total capacity for all LCV solar projects is now just over 118 megawatts, which produces approximately 142,000 SRECs annually. Adding new three wind projects to that total, our distributed power portfolio is nearly 199 megawatts of which approximately 40% is wind. As shown on slide 17, we’ve been actively hedging our SREC sales. When considering our expected generation, we are 92% hedged for fiscal 2016 as you can see from the chart and we’ve been actively hedging future years. The red line represents the SRECs we expect to be generated from our existing portfolio. We believe that the increasing number of SRECs, the expectation of continued strength in SREC prices, the impact of our hedging program and expected earnings from our wind investments, support our forecast of 10% to 20% of our total NFE coming from CEV in fiscal 2016 and beyond. I will now turn the call back to Larry, for his closing comments. Larry Downes Thanks, Pat. I want to conclude our call today with a review of our path to future growth which includes a summary of our key initiatives for fiscal 2016, ‘17 and ‘18. I think many of you may recall that the format on slide 18 was originally introduced at our 2014 investor conference and really what it’s designed to do is to summarize the key initiatives each year that support our annual 5% to 9% NFE and 6% to 8% dividend growth target. And so when you look at the slide you will see details for fiscal 2016 and then as you move into fiscal ‘17 and ‘18 you will see it will be the initiatives from ‘16 plus the additional initiatives that you see in ‘17 and ‘18. So I just want to take a moment to summarize that. The growth plan through fiscal ‘18 is based upon strong customer growth, infrastructure investments, regulatory initiatives at New Jersey Natural Gas that will benefit both customers and share owners. We continue to work collaboratively with our regulators on our initiatives that benefit not only our share owners, but also our customers. We also expect to benefit from consistent revenues from our midstream investments; we’re focusing on diversifying CEVs distributed power portfolio combined with improvements in the SREC market fundamentals and the extension in both investment tax credits and production tax credits. And finally we will continue to take advantage of expected natural gas demand growth and price volatility at NJR Energy Services while at the same time providing producer an asset management services. When we look at our strategy, and we look at our fundamentals they remain strong and we think they provide the opportunities for future growth. But as always as I close I want to say thank you to our nearly 1,000 employees for their continued dedication and commitment to our company and our customers. Without their efforts we would not have achieved the excellent results we reported this morning, without everything that they do every day we would not have the strong fundamentals that we have for the future. Our employees are the foundation of our company and I am grateful for what they do every day. So, thank you for your time today and we are ready to take your questions and comments. Question-and-Answer Session Operator We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Mark Barnett with Morningstar. Please go ahead. Mark Barnett Hey, good morning everybody. Larry Downes Good morning, Mark. Mark Barnett Congratulations Pat and Glenn first of all get that out of the way. Patrick Migliaccio Thank you, Mark. Dennis Puma Thank you. Mark Barnett Just a couple of quick things here, one on the just the minor item on the rate case, but you had a number of ways to kind of generate incentive extra margin from the utility. Do you think that any of that is set to change following a new rate regime or should we generally be expecting about a steady performance there? Larry Downes Mark, we don’t expect any of that to change. Mark Sperduto was in the room. Do you want to add anything to that? Mark R. Sperduto No, I think what you might be referring to are the BGSS incentives as well as our CIP. Those two regulatory initiatives have been decided and they are continuing right through the right case without any change. There are recent decisions in both of those areas. Mark Barnett Right. I just kind of from a bigger picture just wanted to get your sense of how that would change with a new fixed rate. But that sounds like no problem there. Couple of quick questions on the Ringer Hill projects, you mentioned that it was hedged for 15 years with an industrial uptick or so two things, one, generally how fixed do you view the revenue contribution from that project? And then two, how do you view your own sort of cost of capital and hurdle rate with an industrial offtake or versus a utility offtake there? Larry Downes Mark can we ask Pat to respond to that and we also have with us Stan Kosierowski who heads up CEV. So they will take your question. Pat? Patrick Migliaccio Good morning, Mark. So we hedged the majority of the output on that project. The Ringer Hill project through that agreement. And so while we didn’t disclosed a specific number rest assured the majority of the power is hedged. In terms of the cost of capital assumptions relative to the industrial partner the counter party choose not to be named on our press release, industrial partner was as close as we could come to describing their line of business. But we don’t consider the credit quality of the counter party in our return calculations and there are credit protections in the agreements with the counter party. So the credit quality deteriorated. I don’t know if Stan has anything to add. Mark Barnett Okay. Just this is sort of a growing trend with some of the more distributed generations I was just curious to see your kind of framework for analyzing this kind of a project when your offtake was not sort of fully regulated utility. But appreciate that guys. Thanks. Operator The next question comes from Brian Russo with Ladenburg Thalmann. Please go ahead. Brian Russo Hi, good morning. Larry Downes Good morning, Brian. Brian Russo So just to clarify the wind farm announced last night that was assumed in your capital forecast, CapEx forecast, correct? Patrick Migliaccio Yeah, Brian. This is Pat Migliaccio. That’s correct. Brian Russo Okay. And with the PGC and ITC extension clearly there is upside opportunities and upside CapEx opportunity. How much incremental CapEx do you think you can handle without needing significant amount of equity to funding? Larry Downes Brian, this is Larry. I think at this point what we are doing is as you know just as I said we had really assumed that we would not have the ITC and the PTC and that with the CapEx numbers that we were putting out there in the forecast. Now that this is in place what we’ll be doing is a complete let’s see at the portfolio and the distribution between wind and solar. There may be some changes there, but what will not change is the 10% to 20%. Brian Russo Got you, okay. And the SREC hedges slide and average price it looks like the hedges percentage basis increased and so did the average prices maybe you could just talk a little bit more about what you are seeing in that market in terms of pricing et cetera? Patrick Migliaccio Sure Brian. This is Pat Migliaccio again. We’ve seen over the course of the last several weeks certainly strengthen in the SREC market reflecting the BGS auctions and the purchasing behavior that leads up to the BGS options in the state of New Jersey. So to put things in perspective energy years ‘16 and ‘17 are trading in a bid ask between say 285 and 295 over the course of the last several weeks. So as you might imagine we’ve been aggressively hedging given those market prices. Because they are near 90% of the SACP, which is the penalty rate the PLSCs pay if they don’t acquire those SRECs. Larry Downes Brian we also and we guided to this in a lot of detail at the October Investor Meeting. We spend a lot of time internally understanding the market and where it is relative to the renewable portfolio standards. So as we said our expectation was that there would be some improvement in the SREC market fundamentals and we’re seeing a little bit of that right now. But internally when we’re making our hedging decisions we’re not looking take an enormous [ph] amount of risk on the movement of SREC prices and you can see that reflected in some of the hedging strategies and decisions that we’ve made. Brian Russo Okay. And you mentioned PennEast the FERC filing is it still considered on schedule? Larry Downes Yeah as we’ve disclosed right now, we’re going through the FERC process and expecting to get the FERC certificate. So there is no change to the schedule right now. Brian Russo And then lastly with the decline in natural gas, what kind of offset do you think there is to the $147 million base rate increase, which on a percentage basis is fairly large? Larry Downes I’m going to ask Mark Sperduto to talk about that. Mark R. Sperduto Well the system that for gas cost each June and coming up in this June we’ll do a forecast of our gas cost. And that forecast will coincide approximately with the timing of our base rate case increase. So until that time, as mentioned gas prices have been historically low and those types of prices would be reflected contemporaneously with the change in our base rate case increase this coming October-November timeframe. Larry Downes So Brian I think at this point it’s impossible to really predict that with the specificity right now. Brian Russo Okay. And then lastly I noticed midstream first quarter ‘16 was up year-over-year, but yet you sold Iroquois. I think you mentioned Steckman Ridge growth. Maybe you could just add a little bit more color to that. Larry Downes Yeah Brian, Pat gave without – Steckman Ridge provided – more than offset the decline of revenue that we saw from the difference in dividend income on our Dominion Midstream units versus the income from Iroquois and principally the same fundamentals that we see that drive the solid performance of NJRS are driving the performance of Steckman Ridge. So you’ve got some spreads in the Marcellus area that are leading to higher hub services and storage revenue at least in the short-term in Steckman Ridge. Brian Russo Great, thank you. Larry Downes Yeah. Operator [Operator Instructions] As there are no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Dennis Puma for any closing remarks. Dennis Puma Thank you, Gary. I want to thank everyone for joining us again today. As a reminder, a recording of the call is available for replay on our website. Again we appreciate your interest and investment in New Jersey Resources. Thanks have a great day. Bye. Operator The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) 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EQT Corporation – Strong Position In A Growing Natural Gas Field

Summary EQT Corporation has watched its stock price drop by more than 50% since the start of the oil crash. For an oil company, the company’s dividend is negligible dividend. At the same time, the company’s natural gas production is growing rapidly bringing increasing earnings. Introduction EQT Corporation (NYSE: EQT ) is one of the largest natural gas producers in the Appalachian Basin. The company is headquartered in Pennsylvania and operates throughout the Appalachian mounts. The company has significant stakes in the natural gas fields there. EQT Corporation – RMUS Entry Media EQT Corporation has had a difficult time recently. The company has seen its stock price drop from $110 per share before the oil crash in mid-2014 down to recent lows of just over $50. At the same time, the company has a negligible dividend yield of 0.23% compared to a dividend yield almost 7 times that in 2012. Investment Highlight s Now that we have talked about the company, let us now talk some about the company’s investment highlights. The company has 10.7 trillion cubic feet of proven reserves amounting to 22 years of production at the current rate. At the same time the company has 42.8 trillion cubic feet of 3P reserves amounting to more than 87 years. On top of that, the company has a proven ability to increase its reserves with a > 25% forecasted production volume sales growth for the year of 2015. At the same time, the company has a 90% interest in EQGP (NYSE: EQGP ) which has a $4.8 billion market cap and has dropped almost 40% since the start of the crash. Lastly the company has a strong equity position. The company has $1.7 billion in cash along with a $1.5 billion undrawn credit revolver. The company’s cash position amounts to approximately $10.6 per share, impressive for a company in such difficult times. (click to enlarge) EQT Resources – EQT Investor Presentation The above image shows the company’s resources along with its impressive acreage and midstream assets. The company’s 9100 pipeline miles and 3.4 million acres leave significant room for the company to explore. These explorations could significant increase the company’s reserves. Production Growth Now that we have talked about the company’s investment highlights, it is time to talk about the company’s production growth. (click to enlarge) Marcellus Shale Production – EQT Investor Presentation The above image shows the company’s Marcellus Shale play which has impressive growth potential. The company began horizontal drilling on the area in 2008 and has seen 32% year over year growth since then. That has resulted in production growing from 200 million cubic feet a day from 2008 up to 1800 million cubic feet per day in 2015. (click to enlarge) EQT Proven Reserves – EQT Investor Presentation The company’s proven reserves have also impressive grown as a result of the company’s Marcellus shale assets. The company’s reserves in the Marcellus have grown from 2.879 billion cubic feet in 2010 to 8.284 billion feet in 2014. The company’s Marcellus assets also make up more than 50% of its 3P reserves. (click to enlarge) EQT Development Area – EQT Investor Presentation The company is currently focused on developing its core Marcellus assets with much if it focused in a core development area. This area contains 600,000 acres along with an impressive 23.3 trillion cubic feet or 3P reserves of 31 trillion cubic feet of total resource potential. At the same time the company drilled 138 wells in 2015 and plans on continue drilling additional wells. (click to enlarge) EQT Production Costs – EQT Investor Presentation At the same time, the Marcellus plays, the company’s largest assets have impressive fundamentals even after taxes. The company’s current margins after tax at $2.5 natural gas are 22%. With current natural gas prices at $2.05 the company should barely be breaking even. (click to enlarge) EQT Operating Expenses – EQT Investor Presentation However, the company has been maintaining noticeably lower operating costs compared to the rest of its peers. The company’s per-unit operating expenses are the lowest among its peers while the company’s 3-year F&D costs are the fourth rank among its peer group. Conclusion EQT Corporation has had a difficult time recently watching its stock price drop more than 50% since the start of the original stock market crash. At the same time, the company offers a negligible dividend of roughly 0.23% per year. As a result, I do not recommend investors get involved for the dividend. However, the company has an impressive Marcellus asset play with millions of acres and tens of trillions of cubic feet worth of reserves. The company drilled over 150 wells in 2015 and plans to continue drilling a large number of additional wells that could increase its reserves. For investors interested in averaging into a strong position at a low prices, EQT Corporation is a strong corporation with huge potential. Those who get into now and average down should see impressive long term gains.