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GreenHunter Resources’ (GRH) CEO Gary Evans on Q2 2015 Results – Earnings Call Transcript

GreenHunter Resources, Inc. (NYSEMKT: GRH ) Q2 2015 Earnings Conference Call August 14, 2015 10:00 AM ET Executives Gary Evans – Chairman and CEO Serene Prat – Head of IR Kirk Trosclair – EVP and COO Ronald McClung – CFO Analysts Operator Good morning. My name is Kamey and I will be your conference operator today. At this time, I would like to welcome everyone to the GreenHunter Resources Second Quarter 2015 Financial and Operating Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Mr. Gary Evans, you may begin your conference. Gary Evans Thank you, operator and thank all of you for dialing in today. My name is Gary Evans, I’m Chairman and CEO of GreenHunter Resources and Magnum Hunter and again with me here, Kirk Trosclair our Executive Vice President and Chief Operating Officer as well as Ron McClung, our Chief Financial Officer. And before we get into the meat of the discussion today to talk about our second quarter and six months ended June 30, 2015 financial operating results, we need to let our listeners have a little forward-looking statement. So Serene Prat our Head of Investor Relations, is going to read that for us. Serene? Serene Prat Thank you. Before we begin with the content of today’s call, I’d like to advice you that Safe Harbor include forward-looking statements within the meanings of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The following discussion provides information, which management believes is relevant to an assessment and understanding of our financial condition and results of operations. The discussion contains forward-looking statements that involve risk and uncertainties that may include statements regarding our expectation, beliefs and intentions, or strategies regarding the future. Actual events or results may differ materially from those indicated in such forward-looking statements. This discussion should be understood in conjunction with the financial statements accompanying notes and risk factors included in our SEC filings. The discussion should not be construed to imply that results contained herein will necessarily continue into the future or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment by our management. Actual events or results may differ materially from those indicated in such forward-looking statements. This disclaimer is an effect for the duration of this conference call. Gary Evans Thank you — that was outstanding. Let’s now get started with respect to the call today. We filed our quarterly financial statement press release earlier this morning. So, hopefully, you received that. And I thought before we got into the specifics about the company and its operations for the quarter, I might talk a little bit about the macro picture that we’re all experiencing in the energy industry today and how it affects or doesn’t affect GreenHunter. So, as many of you know that are involved in energy arena, we had a change with respect to OPEC’s decision to basically flood the world market with oil beginning around Thanksgiving and that we’ve experienced a precipitous decline in crude oil prices worldwide from around $100, $105 a barrel down to in the $42 a barrel day range today. The purpose of doing this is to regain market share that OPEC lost due to the significant success that independent oil and gas companies have had in the shale plays here in the United States over the last five years. And so, it’s had a dramatic effect in the entire energy industry has called the rig count to the cut significantly down to historically low levels and is creating a huge amount of layoffs and just basically a much reduced capital spending level by all energy independence. People are in a preservation of capital mode not knowing how long these lower prices will persist. It’s also had an affect with respect to natural gas prices which is really, we’re more involved with respect to the Marcellus and Utica plays that we typically handle most of our water with up in the Appalachian Basin. The gas prices are down about $1 to $1.50 from where they were a year ago and that has also created a slowdown in drilling activity in our region not as much as other parts of the country but it’s definitely impacted it. So, we continue to stay busy but not as busy as we want to be, that’s causes to have to work a who lot harder get new accounts, we feel real good about some new prospects that we’re working on and our ability to continue to keep our wells full and we believe that this part of the country being the Marcellus and Utica in the south, West Virginia, Southeast Ohio will continue to garner a significant amount of capital. So, there is any place in the country I would rather be its this area, there is no other play I want to be active in. We continue to have the best margins, we continue to have the lion’s share of the business. And we continue to add capacity to allow us to gather and inject greater volumes of water going forward. So we’re going giving you a lot more detail as to some of this today. One thing that’s very important for you to understand Magnum Hunter has announced as of about a week ago that we have entered into a letter of intent for $430 million drilling program over in Ohio which encompasses about 50 Utica wells, that program will began in October. And GreenHunter will have a 100% of the water business there. So, while we’re having a little slack here over the next last few months and we’re continuing to fill our wells, there’s going to be a whole slug of new activity and that activity will continue for about two years. So, because of the [sister] relationship between Magnum and Green that’s going to definitely benefit GreenHunter going forward and there is more details on that if you want to look at the filings that Magnum has made publically over the past week and many analyst research reports have been written about that as well. So, with that I’m going to turn the call over to Kirk — give you specific details of our activities during the second quarter and update you on what we are working on. Kirk? Kirk Trosclair Thanks, Gary. Before we going to the specifics, I do want to add a couple of comments on the numbers in Appalachian as it relates to volumes and trucking hours and things like that across our portfolio. First the rig count decline since 2014 in Appalachia has decreased 42% in Utica and 21% in the Marcellus. The keyword across all the presentations that we’re listening to from all the E&P companies is efficiencies and efficiencies translate to price reductions across the entire service industry as it relates to service providers in the oil and gas business. The effective lower total rig count, basically equals significant reductions in flow back volumes and a slightly less, lower production volumes across the board with the most being significant reductions from flow back. Secondly the E&P capital expenditures that Gary mentioned earlier were lowered again in the second quarter and companies were voluntarily asking service companies to help by reducing rates to match the falling commodity prices. We feel that these have now hit the bottom across our industry in the Appalachia region and we should be able to maintain from here on out. On appositive side, as he mention with the Magnum Hunter JV, GreenHunter has strategic alliances with certain operators in the Appalachian Basin that will help curtail some of the overall effects of the downturn in the industry and the increased flow back volumes just from that JV and the production volumes that will come from it will help the company tremendously going forward. We probably won’t realize those affect into the GreenHunter side from flow backs to the latter part of fourth quarter of this year but we’ll see significant increases starting in the first quarter of 2016. So, what does it mean for GreenHunter for the remainder 2015, we’ll continue to fight the fight, manage our expenses and start to gain additional market share, something we haven’t — have not had to do in the past. We’re having to go out and grab new market share, enhance some operating efficiencies and be the best service provider of Oilfield Fluid Management Solutions in the industry. Our team in Appalachia has done a great job through this downturn and they are to be commended for it. So to get you to the specifics of the second quarter, on July 27, you guys remember we sent out a press release and we turned on two new disposal wells at our Mills Hunter facility located in Southeastern Ohio. These wells were — we were pleasantly surprised at some of the increased rates we had once we turned the wells on, our initial injection rates told us we were going to 3,000 to 4,000 barrels per day and with the combined two wells, we think we can push the 8,000 barrels per day limit on these two wells. The increased injection capacity basically takes our overall capacity of the company and increase it by 50% and takes us to 21,000 barrel, so permitted injection capacity. Just recently, we added some additional trucks in the latter part of July, I think it was like the last day of July our self, we took the delivery of two new Peterbilts, we sent those to the shop in West Virginia to have the 407 tanks put on the trucks and we just recently as of two days ago received four additional trucks at the shop and those are being outfitted to haul condensate and water by having those sets to DOT 407 related trucks. We plan to have the two that were in the shop first out to the out on the street and actually hauling in the next couple of weeks and then the other four will probably be two to four weeks behind as they continue to come out the shop and then that will leave us with two remaining trucks from the user proceeds from our senior lenders. And those will hit sometime in October. Some of the things to point out that we continue to improve our operating margins on quarter by quarter basis, we’re getting a lot better at doing our business in the Appalachia region and we’ve increased those from 38% in the second quarter 2014 to 49% in the second quarter of 2015. The other thing that we need to point out and it’s really is our internal trucking, we mentioned this in our first quarter call, we learned a lot by hiring third party transporters and trying to grab volumes from additional trucking companies and running it through our own services but that was not beneficial to the company and we’ve learned to utilize our own internal trucking and those numbers have jumped dramatically from 18% of second quarter of last year to 40% in second quarter of this year. Now, of course some of that has to do with fuel pricing and things like that but our overall expenses in-house for the operations for these units has gone down. Also, at the unit in these times of tough commodity prices we’re cutting back, we’re running a lean shop here and we’ve decreased that by 1.6 million and total decrease of 21% and something that we’re very proud of, we’ve produced positive adjusted EBITDA for the first and the second quarter of 2015 and the second quarter at 316,000 of the positive EBITDA here in house. So, those are some of like the key highlights of what happened in the second quarter, obviously we have a lot of things that came out and we’ve been working on in the third quarter, we were delayed on a lot of this construction efforts for some new wells, you can see in the press release, we spoke about what contributed to those, some of it was the funding delay initially, then it was permitting and new processes and things like that that’s going on with the Ohio department of natural resources and on the West Virginia side with the [environmental] protection. It’s a new ballgame out there, which is not a bad thing for us, we’re complying with all the rules and rigs which we always have and we’re going to be a leader in that industry and learn from the past in how things transition to new rigs and responsibilities and we’ll get more efficient at that. The last couple of years — permitting of a new well would take us 45 to 50 days, now that’s gone up to about six months, we think we can get that timeframe down in the four to five month range but that will be the new norm from here going forward. So, that was some of the delays that we had at the mills Hunter facility, we’re nearing completion of that, we should have the third of the four wells additionally that we’re tuning on at mills here in next 30 to 45 days, we should begin injection into that well and then the final well which is the furthest well away from the pumping facility, will probably come online sometime in late October. I know you guys mentioned the Ritchie Hunter 2 which is the West Virginia well that we have ready to go. The well itself, the facility, the flow line everything is completed, we’re just waiting the final approval from the West Virginia Department of Environmental Protection and that’s impressive, we met with those guys at their office in Charleston two weeks ago and we should receive that final permit here in the next 30 to 45 days. So, that’s kind of the operational highlights of what’s been going in Appalachia, with that I’ll turn over to more details through Ron McClung on the financials. Ronald McClung Well, as both Gary and Kirk have said, it’s been a tough environment in the second quarter in terms of people have stopped drilling as much, flow back and so forth so, we’ve had a corresponding decrease in the revenues, a year ago our revenue in total was 6.8 million or second quarter in this year was 4.6 million. Our two main sources of revenue, water disposal revenue was down $434,000 and our trucking revenue was down $384,000, water disposal was down 13% in revenue and trucking was down 20% revenue, but also as Kirk said, we had not only corresponding decreases in our expenses for those two main lines of business but additional percentages of decrease in our expenses, so for example, where our water revenue was down 13%, our disposal expense for that related revenue was down 33%. So was that 20% more than revenue was and we so the same thing on the trucking side, where trucking was down 20% in revenue, we had a 41% decrease in trucking expense. And as Kirk said some of that was due to fuel cost being less than they were last year, but it’s also a consolidated effort on behalf of management to decrease cost and then we saw additionally as he pointed already a 20% decrease from last year in SG&A. Now what all that means to us is that we think we have a structure in place to — that’s ready for the growth that we think we’re about to experience and don’t expect any significant increases in those cost, of course there’ll be some, but we think we are setup to experience good margins on there as we’re able to put these new wells and trucks in service and not only that but because of the fact that our wells are 100% joined to current offload facilities, the incremental expense related to those will be minimal and so we expect to benefit from the savings that we’ve experienced from our cost cutting activities and benefit greatly from that as we put these new assets on loan. You’ll also note that for in the press release that our net loss per share from continuing operations was $0.08 this year compared to $0.13 last year and so we’re looking forward to seeing that even cut further and moving toward profitability because these new assets come online in the coming months. Kirk? Kirk Trosclair Thanks, Ron. So, I think we want to talk a few more about the things that we have coming and then I’ll turn the call back over to Gary and then I think we’ll take some questions. But as far as the project is concerned down at Mills, we only have two wells left to turn on there. We have the one well in West Virginia that we are just awaiting the final approval to turn on at this point. So, those are some things we can look forward to happening in the remainder of 2015, the third and fourth quarter. We received the additional trucks that are scheduled to come in, the last few in October and we’ll see those hitting the roads as well. The other thing I wanted to touch on I guess would be, we’ll have some questions later. We are making some progress with the Coast Guard efforts on the barging situation. We have not started construction of any of the docks at this point but we have had several meetings with the Coast Guard, the meetings are going very well, nothing is set in stone at this point, they haven’t approved anything, most things are still in the same status as far as the regulations go but we have made significant progress with their team on coming up to a common solution to let this happen sometime in the near future. With that I’ll turn the call back over to Gary. Gary Evans I just want to emphasize a few things that were mentioned to which I think are really, really important. Many of us here have been in this business a long time, I’ve been in it for over 30 years and we’ve recognized a downturn was coming early on back in January and so, your management here began taking the efforts to reduce our cost. We knew that to be able to survive through a down turn you got to have lower cost. So, those are reflected in the numbers that we reported today and so as we continue to add volumes which we’re doing on a weekly basis that’s going to really drive our EBITDA and while we all look for better times in the energy industry we’re counting on year, year and half down turn. So, we’re not building the business with the anticipation that all of the great things that were happening in the prior three years are going to happen now. So, by being a leaner meaner machine we will become much more competitive with our existing competition in the region. We will continue to add capacity because we know its coming and then we got these joint ventures with a number of companies that are going to continue to add new volume. So, I’m actually quite excited about our future and I’m very excited that the wells that we put on at the Mills Hunter facility have taken so much water and so that in itself drives margin because we don’t have to put as many wells on because the volume take away capacity is much greater. We do believe we’re getting close as Kirk mentioned on the Coast Guard resolution. We continue to have a number of meetings with the Coast Guard, just to get dialogue and we believe we have some actions that we can take in the near future to begin barging and we’re keeping those close to our best for competitive reasons but when we do begin barging you will hear about it. So, with that let’s turn over the call to our listeners and operator and we’ll take our first question. Question-and-Answer Session Operator Thank you. [Operator Instructions] Your first question is come from [Dan Murphy] with Shareholders. Unidentified Analyst Good morning, gentlemen. Question on your preferred stock, noticed you didn’t pay dividend in July, there was nothing in the press release. Can you update us on the status of when you plan to pay or what’s going on with the preferred shares? Gary Evans Yes. The management board decided to because this is accumulative preferred to delay dividends at this time and so, we do not have an answer for you as to when we will begin paying dividends obviously something that we’re going to address but at this point in time the dividends will accumulate and we do not plan on paying in for at least a month or two. Operator Your next question comes from [indiscernible] Securities. Unidentified Analyst Yes, Gary, what concerned me more about the suspension of the dividend is that you didn’t see fits [indiscernible] signing the dividend. I mean, that’s [our pay], why didn’t you do that? Gary Evans Send the letter? Unidentified Analyst You didn’t send the letter; we’ve called the Investor Relations, nothing. Gary Evans Well, there is a real big reason for that. We were in negotiations with our lender; we did not know what the outcome of those negotiations were going to be and those negotiations did not conclude till about 30 minutes ago, so that’s the reason. I can’t tell you something that I don’t know about. Unidentified Analyst Yes, but, so in other words, your lenders are preventing you from making the dividend payments? Gary Evans That is correct. Unidentified Analyst Okay, now as follows the [code’s part of] concern, I’ve been following you, I’ve been a shareholder from several years now, and it’s like the same story with the [cold start], encouraging next month, next week, next year and it keeps going on and on, what is the problem? Gary Evans Hey, there’s a lot of problems with it, we’re dealing with a governmental agency, things take time and it’s not just a straight forward process. Unidentified Analyst But did they give you a reason why or they just say we’re not ready to talk about it? Gary Evans We have several reason why and we’re working with the Coast Guard to establish a policy that will be regulated by the Coast Guard and that we will adhere to. The basic answer to your question is that the reason we are not barging water today like we thought we’d be doing two years ago is bureaucratic backlog and we’ve had many meetings, we’ve had U.S. senators, U.S. congressmen involved, we’ve gone to Washington, we had many-many meetings and if you want to blame anybody, you blame this administration, they’ve tried to everything they could do to interfere in our business. So, we’re taking all measures possible to resolve the situation, we think we have a path that will resolve it. The Coast Guard I believe realizes there are issues here and for competitive reasons we don’t believe it’s an appropriate for us to disclose this or other companies would like to be doing what we’re hopefully going to be doing soon, but it is a bureaucratic mess and we have been trying to clean up the mess for two years and we have spent an ordinate amount of time in resources, in capital and trying to fix it so, if you want to pick up the phone and call the U.S. Coast Guard or call your Congressmen, I welcome it. Unidentified Analyst Now, that’s a possible thought and a final question is just short time ago, you were announcing that you had more business than you could handle, I mean you didn’t have enough capacity of salt water disposal to get all the water into the ground, has the drought been that severe in the past month? Gary Evans It is, it’s actually been that severe in the past two months, yes, a lot of our business is handling flow back water and when there’s a lack of drilling there’s a lack of water, now we do as I said believe we can fill these wells up and we’re in the process of doing that, we have many contracts and negotiations to fill these wells up, so we believe this is a short term operation but at the same time that we turned on our new wells, the same time the business dropped. Unidentified Analyst And the final question is, in the last conference call you stated that the actual flow down was actually a benefit to your company and I don’t remember exactly why but you said because the company’s behalf it was differently, they would be doing things with the water and like I said I don’t recall exactly why, but you said, we’d be actually be getting better margins, what happened to that? Gary Evans So, let’s talk about that, when drilling stops, the water that’s reused, in other words, it might go into pit, it might go in to tanks, it’s being reused for additional fracking, that can only sit there for so long and then that water has to eventually be disposed of and so, we’re beginning to see that right now, that’s just beginning to happen is that this water is stored down these areas the local state governments, the DEP, the EPA, they’re not going to allow the companies to let that water sit there, so, they have to go dispose of it, because they are not reusing it for refrack, so that’s what we’re referring to and companies have been sitting on that water a lot longer than we anticipated but we do see a whole swell of that business coming. Operator Your next question comes from Kevin [Rineheart] with [Derivates] Capital. Unidentified Analyst I’m wondering at what point is this company sustainably profitable? Gary Evans As we get these wells filled up, I mean these existing disposal wells filled up, I don’t think you saw the EBITDA reported this quarter but we reported good positive EBITDA so we’re getting there, if you look at cutting the cost that we’ve done and now if we get the water we need, we’re getting very close so, closer than we’ve been in a long-long time, is that right Kirk? Kirk Trosclair That’s absolutely right, we’re positioning ourselves for when the market does take a turn to the north to have really tremendous results, especially as it relates to EBITDA. Gary Evans I can see it’s been profitable next year just in relation to the 430 million Magnum Hunter drilling program in Ohio, I mean it’s going to keep GreenHunter extremely busy. Unidentified Analyst Another couple of questions, what is the current plan on retaining $13 million debt and the possible uses of the $3 million credit facilities still available. Gary Evans Well the $13 million debt has its own amortization schedule, so that’s how the plan is that’s outlined in the 10-Q. Additional $3 million is for predominantly the terminals that we need with respect to the barging. So, Kirk, Kirk Trosclair I mean that’s inside the $13 million that we’ve already taken in but the additional $3 million is for future projects that we have a six month window that we can go to the lender and if approved by them we can move forward with those projects. We have a list of probably $10 million to $12 million worth of projects that we have on a wish list. So we’re preparing that now, we’re prioritizing it and we’ll present that to them prior to the deadline and determine at that point if it makes sense as a management team to move forward and take the additional $3 million or to suspend that and move away from it. Operator Your next question comes from [Michael Huntsman] with [indiscernible] Unidentified Analyst Hi, Gary and Kirk. Just clarify a couple of items. There is a fair amount of production still happening in Utica, Marcellus, and it’s a pretty high water cut. So, is that the share you’re going after is to capture more produced water in the absence of the drilling activities through the first half and second half of this year, ex what Magnum Hunter is talking about doing? Gary Evans Michael this is Gary. We’ll take any order, reduced water, pull back order, whatever it is, we’re not that choosy right now but the one thing that’s kind of hurt our area is that with oil prices down that’s caused NGL and condensate prices to be down. So, Marcellus wells which were very, very active in our neck of the woods are not being drilled today and that’s because the cost of processing that condensated NGLs is today it’s a cost rather than it benefit, we used to get a $1.50 in McF uplift for McF on gas because of the rich liquids that associated with the Marcellus. Today, because of those low prices it cost money, a producer has to pay the cryogenic processing plant to process those liquids. So, that is really hurt the economics of Marcellus wells and so that’s been a huge drop in the drilling activity. On the flip side, the Utica wells, the dry Utica wells which is what Magnum just announced they’re going to be doing are very profitable, at $3 gas with no processing, with the takeaway capacities we have today, rates of return in the 40% to 50% range. So, you’re seeing a whole swell of switching from Marcellus and Utica and that’s all happening now and so you’re going to see this drilling activity pick up towards the latter part of the year with a number, there is new permits, Ontario which is one of our largest customers just permitted three new wells, two in [indiscernible] county, one in Dodgers county. So, we’re beginning to see that switch over occur and we think, that activity will definitely help us, because we have always been so full, it’s been so easy for us from the standpoint to get business as we have people waiting in line. Now we’re actually having to go out and get the business and we’re taking business from others and that’s what’s occurring, now we have two sales people, working full time in conjunction with Kirk and his team and he’s negotiating contracts every day. So, we see this as a very short-term aberration of we’ve turned on two significant wells that are doing much better we thought and guess what? The volumes weren’t there but they’re coming and you might just elaborate a little bit on that Kirk. Kirk Trosclair Yes, I don’t want to mention any specific names of the operators we’re working with Michael but we have new contracted take or pay capacity agreements out to three major E&P companies in that area, which total excess of 12,000 barrels per day, a take-or-pay capacity and one of those looks like it will probably be signed here by September 1 and the other one should be shortly after. The negotiations have been going on for a couple of weeks. It’s really tough to go out and sell something, when you don’t actually have the product in inventory. So, injection volumes was our inventory until we actually had the wells on, once we turned the wells on then we can actually hit the streets, people won’t talk to you until you actually have the volumes because it’s a one of those things where what do you have for me today. Gary Evans Yes, decisions are made today no, okay, well you have volumes on month well [indiscernible] now we got the volumes they just been turned on, we’re able to go get the new business Unidentified Analyst Okay. And I’m not trying to ask this, where I stand critical, but I’m catching the sense that the change in drilling happened so fast that, you were full for so long and not really worrying about sourcing, that when it changed so fast, your reaction time to fill it, the combination means that’s why we got this gap until — Kirk Trosclair It is somewhat of the gap Michael and one of the things that is probably to our determent at some points, but it’s also is going to a help us in the long-term, is all of that flow-back volume 75% or so of our fluids are traditionally production volumes. The 25%, or so has been flow backs and the majority of that flow back was coming from Triad. So we were saving space for Triad because of the agreements we have with them in place and then once those volumes dropped off, they dropped off the face of the earth, I mean really, really quick, we saw it coming, but yet we were still trying to chase some additional flow backs from different customers but that also dried up at the same time and then we turned on to new wells with increased capacity, so that’s why you see the utilization numbers down because of the increased capacity and we think that’s going to be short lived, we’re trying to grab additional production volumes right now, but we also have to be cognizant of the fact that this new JV program with Triad will be sending a tremendous amount of flow back volumes starting at the latter part of this year. Unidentified Analyst And then, one other things you’ve believed in the past Gary about the river of transport barging, was that — you could in fact do this despite the Coast Guard, what’s changed in that regard? Kirk Trosclair There’s a regulation out there, on the [indiscernible] 787, it’s an older regulation that was an addition to the existing rig and we had an avenue that we thought we could use and we still remain confident that we could have done that. Now would that have been the best thing to do, probably not, that’s why we kind off pulled back our horses, hey let’s all get at the same table and come to a common agreement. And we started working more diligently with the Coast Guard, being involved in meetings with those guys in DC and formulating a new angle to see this thing finally come to fruition. The rate itself that they proposed were going to see some changes to the rate that they had sent out in the latter part of 2013, and so we’re privy to some of that information , we’re not going to let it out at this point, we are doing some sampling this week for those guys of some [indiscernible] fluids and we’ll see what those results comeback and it really looks good and promising for us. I can’t tell you the timeline because obviously we don’t know that with the government, but this will happen eventually. Gary Evans I think maybe to summarize this, we had kind of gotten in because we were so frustrated into a bit of an adversarial position with the Coast Guard on this and started butting heads pretty bad and then we got some congressmen involved and things started changing so, we have a local congressmen in the West Virginia Ohio area that are having calls with the Coast Guard to try to understand why this has become such a logjam and a big issue and I think it’s a combination of some poor regulations that were written initially that were not understood and of course the Coast Guard had to sent this to the OMB, now OMB looks at it, they do their mental review and it goes back to the Coast Guard so, when I say that we’ve been tied up into a regulatory logjam, that’s a mild understatement and we have kept the pressure on and we have been using congressmen to do that and we’ve been having much more fruitful meetings off lately then we’ve had in the past. And that we think we’ve got the right people involved now, they understand the issues and it’s being addressed so, we do have some ways that we could begin barging pretty quickly that we’re working with the Coast Guard on, we’re not disclosing that for competitive reasons but we think all this talk about the Coast Guard can be put to bed for too long. Unidentified Analyst Can we talk about the price per barrel of disposal trends at the well-head and then transportation pricing as well? Kirk Trosclair Yes, sure, in the immediate onset of the downturn, everything was pretty steady and then going into the second quarter we started feeling quite a bit of a pricing pressure on transportation, that’s always the first thing that hits Michael, across the board out of any [all field] service company is on the transportation side. We’ve seen rates decline in transportation from probably $10 per hour, some places in excess of $15 per hour depending pretty much steady across the board from depending on which type of the truck it is, those have been the rate reductions that we’ve seen. Those are holding pretty steady, I think we’ve finally pretty close to the bottom on that, I don’t know if anyone can really go much further. Gary Evans There’s been some trucking companies going out of business. Kirk Trosclair The number of units out on the road have gone down, the disposal pressure really didn’t show it’s faith, so we actually opened our own wells and all this flow back material went by the wayside and we’re out their chasing production volumes, you have to make some modifications but what we’ve done to combat that is to go to the large E&P companies and even the smaller guard and offer longer term contracts for reduction in rate. So, with that being said, we’ve kind off offset those declines in pricing pressure with longer term contracts which are much beneficial to us. We’ve been offering some discounts from month or two to get them in the door and that’s worked up pretty well. Right now, with again no drilling going on of any significance. There is some pressure. We see that change, there is a dramatic shift going to this dry Utica can emphasize that enough and we think this is a very short list situation. Unidentified Analyst So, we still over $3 a barrel? Gary Evans Yes Kirk Trosclair [Indiscernible] number right here to be — but if you look in the — we were actually $3.39 a barrel for average compared to $3.14 last year. That’s probably peaked, but we raised rates just on the count spot rate to $3.75 last fall and we’re still benefiting from that. Unidentified Company Representative So, you got to see things remain pretty close to around $3 range Gary Evans We’re not talking dramatic, Michael. Unidentified Analyst Okay, alright. And then I suspect that the lender for the $13 million is — you are not paying any cash out so I make sure you’re paying me, do you have to get back to that $1 million of EBITDA, before on a LTM basis, before they would let you do this seriously? Gary Evans No, we have an amendment that’s been executed this morning that gives us flexibility and yours truly will probably be the one putting some more capital in to get back to paying the dividend. So, our goal is to get back to paying those dividends sometime before the end of the year. Unidentified Analyst Okay. And how quickly can you catch up on the accumulated part? Gary Evans We can do it tomorrow, if we wanted to. Unidentified Analyst Okay. Gary Evans There is no — we make sure that the amendment that we just executed gave us lots of flexibility and we have that. Operator Your next question comes from the line of Gene [indiscernible]. Unidentified Analyst Just a couple of questions, I think we haven’t talked about for a while. First is the MLP, is that just the financing that you’ve gotten from your senior lender take that out of the question and what is the status with the IRS? Gary Evans Good question. We definitely believe this business is conducive for an MLP, you’re seeing more and more midstream companies put water business in their portfolios, so I’d midstream, gas gathering processing company and so we are still waiting for our revenue [indiscernible] letter, we’ve had our law firm working with IRS on that, we do believe that is a much cheaper form of financing for us in the future and that will likely not happen in 2015, it will be a 2016 event. Unidentified Analyst Okay. And is there any read through, obviously, you haven’t closed anything but you have — you make it in discussions, Magnum Hunter for the sales 45% [Eureka Hunter], is there any read through that you can get from there, in terms of what the MLP appetite is for these kind of assets, I mean, obviously it’s not exactly like [Eureka Hunter] but it’s not so Gary Evans The appetite for anything in this part of the country is exceptional, we’ll be announcing the eventual winner of the [Eureka Hunter] here over the next week to 10 days hopefully. It’s been a frothy exercise with tremendous amount of interest and we’ve had companies trying to circumvent the process whatever they could do to get the assets, so, we’re obviously trying to get the most value we can and we don’t see anything different with respect to the water business going forward. So, this part of the country is where every midstream guys wants to be because it has the highest growth potential because of the raw characteristics of the region. Unidentified Analyst And I guess along this lines another, I think that you talked about before was the pipeline, you have been working with nature pipeline obviously they couldn’t get the financing, is that still an option for the future and is that the sort of — were you far enough down the road there where you have rights of ways and things like that or is that more just an idea? Gary Evans We did buy any rights to way but we continue to talk to producers about consolidating their trucking operations in certain areas. So, that is still something that we are looking at and pursuing, it’s just the slowdown in activities caused everybody to kind of pull in their reigns a little bit and look at their base of business. So for us, our main focus is to get these wells filled and then we will be looking at these other opportunities. Operator And there are no further audio questions at this time. Gary Evans Thank you operator and thank all of you for listening in. It’s been a bumpy quarter but we did get lot accomplished and we look forward to reporting our ability to fill up our disposal wells going forward and other activities we have going on again. I think the new JV that Magnum is doing with these private equity partners are going to have a huge benefit for GreenHunter in late 2015, early ’16 actually goes for two years or 24 months, so we’re going to continue to keep our costs down, continue to cut them where we can, as Kirk mentioned these new 407 trucks are coming in, we’ll have them fully utilized as they hit the streets because of the type of vehicle they are and we’ll continue to look at adding additional capacities, so you think we’ll, gosh you haven’t filled up your existing wells, why are you looking for new capacity. We know what’s coming and we know we have to have additional capacity, so we’re working hard to do that. So, with that, feel free to call if you have any specific questions to our investor relations area and we’ll get back with you. And thank you for your time today. Operator Ladies and gentlemen, this does concludes today’s conference call and you may now disconnect.

American Water Works’ (AWK) CEO Susan Story on Q2 2015 Results – Earnings Call Transcript

American Water Works Company Incorporated (NYSE: AWK ) Q2 2015 Earnings Conference Call August 06, 2015 09:00 AM ET Executives Greg Panagos – VP, IR Susan Story – President and CEO Walter Lynch – COO, President, Regulated Operations Linda Solomon – SVP, CFO Analysts Daniel Eggers – Credit Suisse Ryan Connors – Boenning & Scattergood Michael Lapides – Goldman Sachs Spencer Joyce – Hilliard Lyons Jonathan Reeder – Wells Fargo Securities Brian Chin – Bank of America Merrill Lynch Barry Klein – Macquarie Funds Group David Paz – Wolfe Research Operator Good morning and welcome to American Water’s second-quarter 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 Web site. Following the earnings conference call, an audio archive of the call will be available through August 13, 2015, by dialling 412-317-0088 for U.S. and international callers. The access code for replay is 10068691. The online archive of the webcast will be available through September 8, 2015, by accessing the Investor Relations page of the Company’s Web site 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, you may begin. Greg Panagos Thank you, Gary. Good morning, everyone and thank you for joining us for today’s call. As Gary said, my name is Greg Panagos, and I’m the new Vice President of Investor Relations for American Water. Before I read you our forward-looking statements, I would just like to say I’m happy to be here and excited about the opportunity with American Water. Before I read you our forward-looking statement I’d like to say I’m happy to be here and excited about the opportunity with American Water. While I haven’t had the chance to meet most of you yet, I look forward to working with all of you. We’ll keep the call to about an hour and at the end of our prepared remarks, we’ll open it up for your questions. Before we begin, I would like to remind everyone that during the course of this conference call, both in our prepared remarks and in answer to your questions, we may make statements related to future performance. Our statements represent our most reasonable estimates. However, since these statements deal with future events, they are subject to numerous risks, uncertainties, and other factors that may cause the actual performance of American Water to be materially different from the performance indicated or implied by such statements. Such risk factors are set forth in the Company’s SEC filings. I encourage you to read our 10-Q on file with the SEC for a more details analysis of our financials. Also reconciliation tables for non-GAAP financial information discussed on this conference call can be found in the appendix of the slide deck located at the Investor Relations page of the Company Web site. We’ll 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 per share refer to diluted earnings per share from continuing operations. And now I would like to turn the call over to American Waters 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 second quarter financial results and Walter Lynch, our COO and President of Regulated Operations, who will give us key updates on our regulated business. I would also like to officially welcome Greg Panagos to our team as Vice President of Investor Relations. Greg has more than 20 years of corporate finance and investor relations experience, including several years in the energy industry. He has served in a number of senior investor relations and communication roles including Barrick Gold Corporation, Transocean, Nobel Energy, and Pennzoil. His knowledge and experience are a great fit for American Water and we’re happy to have him join our team. And now for the quarter, once again, our employees delivered solid operational and financial results. We continue to execute our strategies through ongoing investment into our infrastructure, a sharp focus on operational efficiency, and growth in our regulated and market-based customers. Turning to Slide 5, we reported earnings per share of $0.68 for the second quarter. Excluding the impact from the Freedom Industries chemical spill in 2014, this is about an 8% increase compared to second quarter 2014 and a 9% increase year-to-date through June. Based on our performance through the second quarter and also including our known July weather impacts, which Walter and Linda will discuss shortly, we are reaffirming our 2015 earnings guidance to be in the range of $2.55 to $2.65 per share. On Slide 6, you see that we continue to deliver on our strategies in both regulated and market-based segments for the quarter and year-to-date. The capital investments we make in our regulated segment continue to be the foundation of our consistent growth. So far in 2015, we’ve made about $474 million in infrastructure investments to ensure safe, clean and reliable water services for our customers. We plan to invest 1.2 billion to 1.3 billion in capital in 2015, with over a billion dollars of that to improve our water and waste water systems. About $200 million is allocated to regulated acquisitions and strategic investments. Through the second quarter, we invested $41 million in acquisitions, which does not include the Keystone Clear Water acquisition, which closed on July 9th. This is our last quarterly call. We’ve completed the purchase of water and wastewater systems in Haddonfield, New Jersey and Mishawaka, Indiana and in both Arnold and Redfield, Missouri officially adding 19,000 customers to our regulated segments. We also have 17 pending acquisitions which ones approved and closed will give us the opportunity to serve an additional 14,000 customers in several of our states. The largest of these acquisitions is the environmental disposal corporation, which serve 5,300 wastewater customers in Northern New Jersey. This acquisition is a great example of executing on our long-term strategy to focus on wastewater acquisition in areas where we already serve water. Our marketing base segment had a strong second quarter. Homeowner Services entered into an exclusive contract with the City of Rialto, California to offer service line protection programs to home owners. We’re also recently notified by Wilmington, Delaware of its intent to award an exclusive contract to offer our programs to its residential customers pending city council approval. If approved we expect both of these programs to launch by year end. As you know our long-term growth triangle includes a market based share component which we have shown could contribute from 0% to 2% of our long-term earnings growth. This is our last call we announced and closed on the acquisition of Keystone Clearwater Solution. Keystone is a water services provider to oil and gas companies in Appalachian Basin which includes the Marcellus and the Utica. Keystone’s leadership which we have left intact has over 30 years of experience in addressing water solutions for Appalachia’s oil and gas market. The tam of 350 employees has a strong reputation for meeting their customers need with a priority on safety and protecting the environment. These values are consistent with American Water’s value and they matter deeply to us and critically important. Keystone’s offering are aligned with America Water’s core competencies supplying, transmitting, pumping and storing water and developing the infrastructure that goes along with those services. Despite this fact that keeps on a relatively small part of our overall business portfolio we know it faces somewhat different risk than American Water’s traditional lines of business. As a result we set up legal structure to Keystone. For example we’ve established it under a holding company separate from our existing regulated segment and separate from our market based American Water Enterprises entity. As a reminder American Water Enterprises is the subsidiary that includes our military contract and homeowner services lines of businesses. We expect the shale market will continue to grow for many years given the critical role it plays in energy security and economic prosperity of the U.S. In addition we believe Keystone’s turnkey business model is repeatable in other areas of this industry creating opportunities for expansion in this sector. It’s important to note that over the past few years our non-regulated segment has averaged around 11% of our revenues and 9% of our earnings. We are not going to fundamentally change the risk profile of the company going forward and our long-term plan is that our non-regulated segment in total will not contribute more than 15% to 20% of earnings over the next five years. Additionally the upper part of that range will occur only if the meaningful part of the earnings is lower risk regulated like such as our military services business. Looking forward we remain confident in our ability to deliver on our long-term earnings per share growth of 7% to 10% through 2019 anchored from our 2013 earnings. Walter will now give an update on our regulated segment. Walter Lynch Thanks Susan. Good morning everyone. As Susan mentioned our regulated business has delivered positive results year-to-date and I’m especially proud of our progress on our efficiency ratio which I’ll talk about in a moment. Let me start by providing you with an update on California on Slide 8. California continues to experience the worst drive in the last 100 years. Based on an overall 25% state mandated reduction our California American Water customers have been asked to reduce water usage anywhere from 8% to 32% depending on their level of water use in 2013. One of our districts are exceeding those reduction goals. California American Water has launched ambitious conversation outreach programs to reduce water use. This includes mail, radio and social media and door to door efforts on programs such as Turf Rebate, replacement rebate, freely detection devices and water wide surveys. Our conversation stat is active at community events reaching after customers and equipping them with the tool they need to conserve water. As a reminder California American Water has rate decoupling so we do sale volumes do no result in reduced earnings. The other move in California is our water revenue adjustment mechanism or rent filing. As of June 30th we had an under collected rent receivable balance of about $50 million of which almost $45 million related to Monterey district. In order to assist with the impact on our customer bills in that area and to limited future accumulations we files the application with the California Public Utility Commission requesting recovery of the existing Monterey balance along with a return over a 20-year collection period. We also requested that the WRAM account be trued up annually going forward. We expect a decision on the Monterey WRAM Filing in mid to late 2016. As reminder, California American Water is approximately 8% of our total regulated revenue; however, we put a tremendous amount of focus there because issues the state faces offer us an opportunity to fully deploy our numerous water supply and service solution. Many of these, such as our AMI Customer Alert Pilot in Monterey, could apply in many other states where we operate. On July 31st Missouri American Water filed a request with the Missouri Public Service Commission for a general increase of about $51 million. This request includes about $25 million of new revenue and about $26 million of infrastructure surcharge revenue, known as ISRS in Missouri, which gets rolled into base rates at the end of the case. Consistent with our growth strategy, the filing includes $436 million in new infrastructure investments since 2012 to ensure reliable service to our customers. The Company’s last filing was more than four years ago, and since then the Company reduced its operations and maintenance expense by about $7 million, which means we’re able to invest over $40 million of capital with no impact on customer bills. We estimate that for every $1 of own and expense reduction allows a capital investment of about $6 with no impact on customer bills. I commend our team in Missouri for their disciplined approach to managing costs. The reprocess in Missouri takes approximately 11 months to complete, so we anticipate a decision in the second quarter of 2016. Lastly, in the second quarter we saw wet weather in the Midwest that was offset by dry weather in the northeast. However, we have seen above normal rainfall through much of our footprint in July, which resulted in modestly lower sales. Linda will talk about the known financial impact of this in a moment. Moving to Slide 9, we continue to make steady progress towards achieving our O&M efficiency ratio stretch goal of 34% or less by 2020. We achieved 35.9% for the last 12 months ended June 2015, which is a result of a disciplined approach to cost management by our employees. These efforts, of course, are driven by our focus on the customer and our commitment to clean, safe reliable and affordable water services. This is fundamental to our business. When we achieve smart O&M reductions, we can invest in our water and waste water systems, while mitigation the impact on our customer’s bills. Now, I’ll turn the call over to Linda for more detail on our second quarter financial results. Linda Solomon Thank you, Walter, and good morning everyone. In the second quarter we continue to deliver strong financial results. As shown on Slide 11, revenues were up almost 4% quarter-over-quarter and up 3% year-to-date. We reported earnings per share for the second quarter of $0.68, up about 8% over adjusted earnings for the same period last year. Year-to-date earnings were $1.13 per share, up about 9% over adjusted earnings in the same period last year. On the right side of the page, we show each business segment contribution to 2015 earnings per share. For the quarter, the regulated segment contributed earnings of $0.68 per share or an increase of about 6%. Our market-based segment contributed $0.06 per share in the second quarter, an increase of about 20%. Parent interest in other, which is primarily interest expense on parent debt, was a negative $0.06 per share for the quarter flat to the prior year. Now, I’ll go over the different components of our second quarter adjusted earnings per share growth on Slide 12. 2014 adjusted earnings were $0.63 per share. The second quarter of 2015 came in $0.05 above 2014 adjusted earnings at $0.68 per share. Reflecting increases in both our regulated and market-based segments. Our regulated segment benefited from both increased revenues and lower cost of $0.03 each. The higher regulated revenue was primarily from authorized rate increases and higher infrastructure charges. The lower operating and maintenance expense was mostly due to three factors. First, lower transportation expense as a result of lower fuel prices and leased vehicle costs. Second, lower uncollectible expense as we continue to bring collections back toward historical levels after implementation of our customer information system. And third, savings in employee related costs from lower wages, salaries and severance expense. For the market-based segment, earnings per share was up $0.01 due to additional construction projects under our military contracts and the addition of two new military bases in the second half of 2014. We also had contract growth and geographic expansion in our homeowner services business. Partially offsetting these improvements were higher depreciation, taxes and other costs of about $0.02 per share, mainly from growth associated with our capital investment programs at the regulated segment. In the appendix of this slide deck we have included our revenue and expense bridge slides to provide more detail to the variances I just discussed. Now let me cover regulatory highlights on Slide 13. We have three ongoing general rate cases in New Jersey, West Virginia and Missouri for a combined annualized rate request of $127 million. As Walter mentioned, these rate cases continue to reflect our disciplined approach to investing. For rates effective since July 1 of last year through today, we received a total of $55 million in additional annualized revenues from general rate cases, step increases and infrastructure charges. These are the highlights of these cases, and we encourage you review the footnotes in the appendix for more information. Slide 14 is a summary dashboard of our financial performance, which showed improvement across the board. During the second quarter of 2015, we made total investments of $348 million, primarily to improve infrastructure in our regulated segment and for regulated acquisitions. As Susan mentioned earlier, we expect to invest $1.2 billion to $1.3 billion for the full year of 2015. For the quarter, our cash flow from operations increased approximately $14 million, primarily from earnings growth. Our adjusted return on equity increased by approximately 40 basis points over the past 12 months compared to the prior year. We also paid a $0.34 quarterly cash dividend to our shareholders in June which represented about a 10% increase compared to last year, and on July 24, the board of directors approved a $0.34 per share dividend payable in September. As Walter mentioned in his comments related to the California Water Revenue Adjustment Mechanism or WRAM, we requested recovery of the Monterey WRAM balance over a 20-year period along with a return. Based on long-standing precedent in California, we expect to collect the entire WRAM balance; however, due to extending the recovery period, we will recognize a immaterial non-cash, timing-related adjustment to earnings in the third quarter. This adjustment has been factored into our reaffirmed 2015 earnings guidance. We have now closed the Keystone acquisition for a purchase price of about nine times the trailing 12 months EBITDA. Under our purchase agreement, we will have small purchase price adjustments for changes in working capital, capital investments, and the results of operations through the July 9th closing date. Once we record the acquisition in the third quarter, we will provide additional details. For segment reporting purposes, we will include the operating results of Keystone as part of our market-based business segment. The market-based segment will be comprised of American Water Enterprises and Keystone Clear Water Solutions. Keystone, as Susan noted, is a legally separate entity. Keystone has about 20 EMP and other large corporate customers in the Appalachian region. Today its business is relatively asset light. Its costs are largely variable, and we believe it will be able to capture synergies with American Water. We expect the acquisition to be earnings neutral in 2015 and accretive to earnings per share in 2016. We will provide you additional detail on Keystone during our Analyst Day presentation on December 15th. And, lastly, we mentioned earlier we experienced wet weather in July, which for the month is estimated to unfavourably impact net income by about $4 million. We will be updating you further on the third quarter earnings call. Building on our solid financial performance year-to-date and despite the wet weather in July, we are reaffirming our 2015 earnings guidance to be in the range of $2.55 to $2.65 per share, and with that I’ll turn it back over to Susan. Susan Story Thanks, Linda. Before taking your questions, I would like to take just a couple of minutes to highlight American Water’s sustainability leadership. Our Company treats and delivers over a billion gallons of water a day to our customers, and this is just a start of our environmental focus. We have some of the best people in the water industry, and they choose to work here because environmental leadership is a core value at American Water. When you marry great minds with a passion for innovation and sustainability, you can accomplish some pretty exciting results. Let me give you just a couple of examples. Reclaiming and reusing water is an imperative in the face of water supply and infrastructure challenges for future generations. And this isn’t just a California issue as some believe. In fact, 40 of 50 state water managers say they expect water shortages in some portion of their state in the next ten years. It will take bold strategies including public/private partnerships to address these challenges. This year Illinois American Water was selected by the Metropolitan Water Reclamation District of greater Chicago, or MWRD, to partner on a beneficial water reuse project. The agency is partnering with us to reclaim, treat and distribute waste water to large water users like manufacturing plants. Through this partnership, Illinois American will build the distribution infrastructure, very many the customer base, buy water from MWRD and resell the water. Once fully operational, this water reuse project will significantly reduce fresh water withdrawals from the Great Lakes. This project has already been recognized by the American Society of Civil Engineers as a game changer in its recent report regarding innovative infrastructure solutions. Let me giving you one other example where we’re using water in smarter ways. Geothermal heat pump technology is not new, but an innovative American Water R&D pilot could transform traditional geothermal HVAC systems and introduce a new application in renewable energy. American Water is piloting a geothermal innovation to heat and cool a 40,000-square-foot school on Long Island, New York. Our pilot geothermal system transfers ground temperature from a water main using a heat exchanger, allowing the same system to cool during the summer and heat during the winter. Once unable to have community events or classes during the summer months due to lack of air conditioning, this school has been fully utilized this year with a geothermal installation. This pilot project was actually highlighted at the NARUC Conference in New York City just last month. These exams are just two of our numerous sustainability efforts. We’re proud to note that we have already reduced our greenhouse gas emission by 17% since 2007, exceeding our initial target of 16% reduction by 2017, a full two years early. Additionally, our water pump efficiency efforts to date are expected to produce energy savings of 12 million kilowatt hours per year. These are just some of the reasons that American Water was ranked No. 24 of the almost 500 companies listed in Newsweek Magazine’s top green companies for 2015, one of only two utilities in the top 25 and the only water utility. We are proud of this recognition because we believe being green is not just good for the environment; it’s also good for the bottom line. We believe our company cannot only do well, but we can also do good and with that, we’re happy to take any questions you may have. Question-and-Answer Session Operator We will now begin the question-and-answer session. [Operator Instructions] And the first question comes from the Daniel Eggers with Credit Suisse. Please go ahead. Daniel Eggers Susan, you kind of talked about Keystone. Obviously, it’s an interesting opportunity but the trailing earnings contribution that you guys showed when you bought it wasn’t particularly all that large. Is that number of earnings contribution, has that changed since ’14 in some appreciable way? And then you kind of look out over forward, what’s going to drive that business, you know, with or without an improvement in drilling activity in the region? Susan Story We are going on December the 15th, at our Analyst Day, we’re going to be providing a deeper look forward in all parts of our growth triangle include Keystone and the shale area. Daniel Eggers Is that Southern for you’re not going to answer the question? Susan Story Yes, it is. Daniel Eggers On the growth triangle, you guys said that — you said non-reg is not going to be more than 15% to 20% of contribution from roughly 10ish % today. Is it that the correct messaging? Susan Story That’s correct. Currently, over the past three years, our earnings from the market-based business has been around 9%. So that puts it in context. In the past, Dan, we’ve talked mainly from revenue numbers, so we’ve actually added more transparency in talking about earnings from that segment as opposed to just revenues. Daniel Eggers Okay. I guess we didn’t really get into what all is going on with the core of that business these days, but just can you give an update on government contracting and the home businesses and kind of where you’re seeing the opportunities right now or where the action’s been this year so far? Susan Story Sure. You know, one thing because we won the two military bases last year, we’re starting to see the revenues as well as some of the working capital we’re putting into some of the projects on those bases. There are currently several outstanding RFPs, you know, as we’ve mentioned before, when they will be awarded is, you know, we never can predict with a tremendous amount of accuracy. There’s a chance maybe one could be awarded this year, maybe two to three next year that we’re involved with. But what’s important on military, and I think it’s important and you asked that in your question, on military, it’s not just the new bases but the continuing projects that are on the existing bases beyond just O & M contract that we have — the money we get paid each year for running the water and waste water systems. So I will tell you that we currently have on the books I believe another $200 million of backlog of existing projects to do on the bases that we already have. So for military services, we continue to ensure that we’re providing the best water and waste water services for those military men and women who serve our country. On the homeowner services, as we said, you know, we had mentioned about Orlando. We have launched it this year, so we’re starting to get customers signing up in Orlando. Orlando also presents for us the first place that we have a much deeper service offering beyond just water and sewer line but also HVAC and in-home plumbing. So that’s another opportunity there, and as I mentioned in my comment, we were awarded an exclusive contract that has been signed for Rialto, California, which is about 55,000 potential customers. And then we won the bid for exclusive contract with Wilmington, Delaware, but the City Council still needs to approve that. And we’re hoping to launch both of those by the end of the year. So in those two areas, that’s what we’re seeing from that market-based business. Daniel Eggers I guess just one last one too. When you think about moving into these new cities, is there a start-up cost associated with trying to recruit customers and acquisition-wise where you is more expense on the front end as you push into these towns as you get people and it pays off over time, or are you guys amortizing that expense over a longer period? Susan Story Dan, we love that you listen to us when you talk to us. Yes. The answer is yes. We have the upfront marketing expenses, and because we have to let people know that we’re there and one thing that’s important, we put a lot of emphasis on these exclusive partnerships. That’s important because in an exclusive partnership, our billing is typically on the city or the municipality or whatever the governmental entity or the entity is that’s on their water and/or waste water bill, so for us that tends to be a higher take rate. And that’s why those are so important for us as opposed to just we do have areas where we just generally market and we provide separate billing, but the exclusive contracts are really much more effective for us financially. Operator The next question comes from Ryan Connors with Boenning and Scattergood. Please go ahead. Ryan Connors A few questions this morning if I might, first, just on the guidance, it seemed like I noticed weather is still a $0.07 plus or minus swing point in the guidance, even here kind of midway through the third quarter I guess, so just wanted to get some color on that. That seemed like it was a little, you know, large in terms of a swing factor there at this point in the year, so I just want to get some flavor on why that’s such a large wild card at this point. Susan Story Ryan, the chart that we have in there shows the major variabilities as of February 26th, so that’s the full year variability. In terms of the impact of weather that we’ve seen thus far in July it’s about $4 million net income. And it’s due to wet weather across our system. Ryan Connors So it’s safe to say that that gap has closed then at this point and we’re largely — that gap has tightened up. Susan Story That’s right. And this variability chart is the one that we provided to you at the December 15th call. Ryan Connors Got it, okay. Susan Story One thing as we look at this too, you know, the reason we put multiple items up there is as we establish a range, we understand there’s going to be variability. Some of the variability offsets each other. So you don’t take each one in isolation, but as you remember, we started in 2013 saying, so why do we have a $0.10 range? Why do we have the range we do? Here are some factors, ups or downs, puts or takes. So it’s important to look at all in context [indiscernible]. Ryan Connors I wanted to talk a little bit just get some color on this WRAM application for the extension there. Now, you mentioned Walter, that the decision there is expected mid to late 2016. It seems like a pretty straightforward, filing and a pretty good deal for the rate payers. So I’m just wondering what the key points of debate are on that filing and where the push back is, if any, on the way that that’s structured. Walter Lynch Yes. Thanks for the question, Ryan. I think two things. One is the length of time over which we’re going to be able to recover it. And the other is the return that we’re asking for. It will take time to work through that and that’s why we say it will take to mid 2016 to get that decision. Ryan Connors And it’s my understanding that the application seeks to establish the WRAM balance itself as a regulatory asset. Is that correct? And if so, can you give us a very brief Cliff Notes version of how that works? Susan Story Yes, it’s essentially setting it up at an accounts receivable from the customer, which would be a regulatory asset. Ryan Connors And then, Susan, you mentioned that, you know, that the NARUC summer meetings, some of your sustainability initiatives were highlighted and that’s great. Good you also kind of give us any take-aways from those meeting in terms of what’s around the corner just looking ahead at the big regulatory developments, any big topics there about, you know, what might be next in terms of policy developments or regulatory, you know, evolution in the water space? Susan Story Sure, I’ll start it and then Walter may have a couple things since he was at the meetings also. One of the things that we’re very excited about that was launched at the summer NARUC meeting is a step forward in terms of not just water energy nexus but to look at — in most state utility commissions they look separately at electric, gas and water. One of the things that President Edgar rolled out was an effort at NARUC to start looking at where all utilities could come together on common items such as, for example, critical infrastructure, cyber security, looking at how we could work together, looking at the fact that now that things like the mechanisms for infrastructure replacement. There are a lot of issues at state utility commissions that really cross the boundaries of electricity, gas and water, and so there’s an effort to create this project or this task force at NARUC to look at what those are and where commissions can work with utilities in a state to find the areas that we can find some common ground and some common efforts. An example for us in California is the Monterey pilot, the AMI pilot that Walter mentioned. What that is, is that we actually partnered with specific gas and electric and we’re using some of their backbone to put the water meters there so we can send alerts to those customers they have a very steep tiered pricing structure for water in Monterey, so we can actually send, as part of the customers on the pilot, signals when they’re about to enter a new tier of pricing or they’ve set a budget and we can send them messages when they’re getting close to the budget. That’s just one an example. We’re very involved and actually American Water, we adopt the electric utility industry missed standards for cyber security. We’re very involved with the Department of Homeland Security and DOD in those things. So there’s a lot efforts like that, and we are very excited at NARUC where we’re looking at cross utility-type projects that can benefit all of us. Walter Lynch I think Susan did a great job recapping the meeting. I mean the four areas again that she mentioned, water energy nexus and opportunities for us to look for the electric and gases, cyber security in the same way, regulatory mechanisms that are going to be continued to incentivize us to invest and upgrade our water and waste water systems and where can we partner with electric and gases to drive better customer service. Those are the key themes that I saw coming out of NARUC. Operator The next question comes from Michael Lapides with Goldman Sachs. Please go ahead. Michael Lapides One question on the Clear Water acquisition, Keystone Claire Water acquisition, keeping in a separate legal structure, how do you think about the optionality that creates if this business continues to grow in terms of potential revisions to the corporate structure, in terms of whether this is a business that, and I don’t know if legally it could, is this a business that could eventually wind up in an MLP structure? And if you don’t mind addressing that first and then I may do one follow-up. Susan Story Okay, sure. We did look at that and I will tell you that just a little more color around the legal structure. So there’s separate holding company, that Water Solutions Holding, that actually is the holding company for Keystone Clear Water, and that holding company is 95% owned by American Industrial Water, which is also a separate LLC, and 5% from Sand Hills Management, which is the founding members, which includes the current CEO and President and COO. So we’re glad they not only are staying to run the business, they continue to have an equity ownership. So that’s how it’s structured legally. We did actually, Michael, get — we took a look at MLPs. A few things just to let you know, so we are constantly monitoring it, the EBITDA last year of Keystone Clear Water was around $15 million. Even some of the smaller MLPs are between $50 million and $70 million EBITDA, so scale-wise, it’s just not quite large enough. No. 2, you know, we’ve just purchased Keystone. You have to have a predictability of the cash distributions. We’re continually looking at that as we get into looking at this business. And, of course, the big thing you’ve got to have really pretty clear visibility into the future growth potential. You know, kind of people talk about the feed the beast issue. So in terms of the future, we’re always open to all options that make sense to our shareholder interest, and we are looking at those variety of things. At this point, it doesn’t make sense to do a MLP. Michael Lapides One follow-up, actually, on the core regulated business and really an M&A question. You all have been excellent over the years in terms of doing kind of small bolt-on acquisitions. What’s your thought process around, or what’s your market dynamic and opportunity set around, kind of more larger scale M&A. It’s, obviously, a far more fragmented business than the electric and gas, but just trying to curious when you look at the landscape of publicly traded or kind ever larger private or municipal owned ones. Susan Story I will start and then I want Walter to fill in because he and his team have done a lot of work on this. In terms of looking at other IOUs, you’re always looking at the marketplace, but the fact is it’s a pretty well valued space out there, but we’re always looking at all options. Where I think our sweet spot is, though, something that Walter and his team have put a priority on, so Walter, do you want to talk about kind of the focus going forward on the regulated [indiscernible]. Walter Lynch Yes. We still pursue the smaller acquisitions but our focus is really on the five to 25,000 customer systems, and we see a number of opportunities. I’ve been in this business many years, two decades, and this is the best environment for acquisitions that I’ve seen. I think because municipalities are looking for options, and we, as the largest water and waste water company in United States, have tremendous expertise that we can share with these municipalities. So the opportunities are huge. They’re also with some of the fiscal issues that they’re facing. It’s a tough environment for some of these municipalities. I think the other thing is we work very closely with the legislatures to provide enabling legislation that allows us to pay a fair market value and really reduce the bureaucracy and some of these acquisitions. So that’s our focus. We have great people out in our state that are focused primarily on growing the business, from the state leadership teams to the growth teams, and we’ve — I think we’ve been doing a very good job and more to come. Operator The next question comes from Spencer Joyce with Hilliard Lyons. Please go ahead. Spencer Joyce Just one real quick one here from me, I want to jump back to keystone. Correct me if I misheard, but I believe the purchase may have been qualified as asset light earlier in the call. And when we think about water service, I mean trucks, pipes, tanks asset light is not what comes to my mind. And then to kind of follow-up, if it really were an asset light business, why you would you all have looked an at MLP structure? Can you speak to any of those points? Linda Solomon Absolutely, Spencer, let me start and then I’ll ask Susan if she has anything to add. In terms of the asset light, you’re right. The things that are owned by Keystone are really the pumps, the pipes, the valves and a temporary storage tank. We also see vehicles as part of the assets as well. Susan Story And so the current model includes both permanent pipelines as well as temporary pipelines that are owned by Keystone. So that’s one element of it today. The assets are — or the business is very asset light. The audited financials were about $36 million in assets at the end of December. So that gives you a feel for the size of it. As Susan mentioned on the MLP structure, I mean this is one of the things that we look at is what are the future growth potential and can you continuously have a transparent pipeline for growth in the business. And that’s one of the key elements to look at from a MLP structure. And Spencer, to add to that when we talk about asset light, we do it in terms of our business overall, which we’re so capital intensive in utilities in some spaces that may not seem as capital light. For us it does. However, one of the things we are looking at is the potential remember that as part of [indiscernible] as a 60% owner, there were capital constraints. One of the things we are looking at strategically is the possibly or potential of actually deploying more capital to build longer-term pipelines as opposed to having the ENP fund them. What if we now have the capital, Keystone has the capital to actually fund some of those constructions and entertain things like take or pay contracts or those type things. So the good news is you’ve got Keystone, which is an outstanding company. And I will tell you just to add to this, I spent a day with those folks out there before we closed, and after we announced the acquisition, and, culturally, they are — it’s been such an easy transition. They are from Pennsylvania. They grew up there. The CEO actually has a background in water, environmental remediation compliance. It’s just an outstanding group of people, but they’ve had a certain suite of services that now with the purchase by American Water, we can maybe can broaden some of those suite of services, which could include more capital. Spencer Joyce Just to kind of recap here, so when we think kind of asset light in air quotes, you know, we’re maybe drawing a comparison versus the utility, which would be perhaps more capital intensive. And then also from the standpoint of the business maybe a little bit lighter on assets versus what it could be given some of the constraints that [Rex] had previously. Susan Story You know what? I could not have said it better myself. Operator The next question comes from Jonathan Reeder with Wells Fargo. Please go ahead. Jonathan Reeder I’ll start out with the an easy point of clarify question. The $4 million net income headwind from weather that you mentioned, does that include July’s impact as well? I might have missed that. Linda Solomon That is the impact in July and it’s across all of our regions. Susan Story Yes. Jonathan, one thing we try to do, typically, we don’t talk about the month outside the quarter. But because we were able to get the information, we wanted to go ahead and share that. That was not from the second quarter. Jonathan Reeder Okay. So for the I guess the first half of the year, what was the weather impact? Linda Solomon In the first half of the year, we had an increase in demand, or in the second quarter we in an increase in demand, of about $2.7 million. Over half of that was associated with an increase in our commercial customers, and then the remainder of it was weather related. And what we saw was on the residential side, we had hotter or dryer weather in the northeast, and given our geographic diversity, that was offset somewhat by the wet weather that was in the central region. Jonathan Reeder So, pretty much if we if through July, I mean you’re kind of at break even or so from a weather impact and everything, nothing too major? Linda Solomon So we are negative all the way through July from a weather standpoint because we had that $4 million approximate net income impact in July, the month of July. Susan Story But yes. But January through June you could say it was break even. Jonathan Reeder Yes. Okay. And then… Walter Lynch One can offset the other, right. Jonathan Reeder Yes. Okay. Then the military bases that you mentioned, you might get awards for this year that they might announce, are these just the ones that you’re involved with, or is that kind of encompassing the whole RFP space? Linda Solomon We’re only tracking the ones we’re involved with, Jonathan, and we only — the ones that we’re involved with typically are medium to larger size. We don’t get involved with the smaller ones. So there could be. Jonathan Reeder Okay. And then do you expect a pickup in the pace of RFP awards going forward, or, you know, maybe you can talk about how many are open right now that you’re actively bidding on? Linda Solomon There are numerous ones that are open. You know, pretty much probably high single-digits that are open. They’re in varying stages. We have best guesses, and they’re pretty spread out over the next two or three years, so but you know, you never know. It depends what’s going on in Washington, what they’re going through. I will tell you that we have this year seen more interest from the air force. In the past the army has been the service that has been most interested, and we still are seeing some RFPs from the army, but we’re really seeing a lot of interest in the air force. And Jonathan, what we have disclosed previously is that we are active in several RFPs today with a gross revenue value of $1.5 billion to the extent that we would be successful in all of them. Jonathan Reeder You said $1.5 billion gross revenue and that’s for the 50 years? Linda Solomon Correct. Jonathan Reeder Walter, I didn’t know if you could give any kind of update on the New Jersey and West Virginia rate cases, how they’re kind of progressing and how you would handicap the prospects for reaching settlements? Walter Lynch Let me start by saying they’re both progressing on schedule. So, typically, New Jersey, it’s 9 months to 12 month to get a rate order. We filed in early January. That’s going according to plan. In West Virginia, there’s a 11-month rate case process, and again it’s moving according to schedule so nothing to be concerned about for both of those. Jonathan Reeder Okay. How about on West Virginia? I mean it’s been a bit of a challenge, you know, your past few cases there. You know, you, obviously, had the challenges last year that, you know, weren’t necessarily your fault but you needed to respond to them. You know, how is the outlook there? It was a pretty large, you know, ask in part because you haven’t gotten what you’ve needed in the past. What’s kind of been the response in West Virginia? Walter Lynch Well, our team’s doing a great job working through, the rate case process and talking about the value that we provide to our customers. And, we’re confident that we’re going to continue to make that case and we’re hopeful to get a fair outcome. Jonathan Reeder Okay. And then what would be the timing on the outcome 11 months would put us into is it early 2016? Walter Lynch Around April 1st of 2016. Operator [Operator Instructions] The next question comes from Brian Chin with Bank of America Merrill Lynch. Please go ahead. Brian Chin Just piggybacking on the last question, I know it’s really early on here, but for the Missouri rate case, just thoughts on possibility of a settlement there. That would be great. Susan Story So this we have just filed a rate case in Missouri on July 31st, and so we are going to be working through the process as we normally do in this case. Walter Lynch Yes. And, typically, in Missouri it takes 11 months, and we are working through that process and, you know, it’s right on schedule even though we just filed. Brian Chin Can you remind me again, historically, have you guys gotten settlements in Missouri or not? Walter Lynch Yes, we have. Brian Chin Great, and roughly at what point in the process does most of the leg work on that settlement and an agreement typically get reached? Linda Solomon You know, it really depends on rate case by rate case, company by company. It’s really hard to predict that, you know, you go through the process and it can happen as we work together. Brian Chin And then one last question for me, because most of my other questions were asked and answered, any update on sort of the corporate headquarters move? I would love to get an update there. Susan Story We are in the beginning stages of that. The latest information is that we have received approval of the tax credit in New Jersey, which if we determine that we would move to the Camden location, we would be able to effectuate those tax credits. We are currently in the process of looking for location, and so we are working through that. And to the extent that we can find a location in the Camden area, we are very excited about seeing part of the revitalization in that city. Brian Chin Is there a sense of timing as to when you guys will make a decision on what you want to do there? Susan Story The credits are for a three year period where the clock started in June. And then we have the opportunity to have an extension of six months automatically and a request of an additional six months that would be due — that would be met with approval requirements, so a three to four year period. Operator The next question comes from Barry Klein with Macquarie. Please go ahead Barry Klein This might be a little bit in-depth, but in the pyramid that you always put onto the slides in the presentation, you added — it looks like you added a new area entitled Other. And I was just wondering if you could please explain what it meant for that portion of the period — the pyramid. Susan Story Well, Barry, that’s a great question. We have actually included Other in the past couple of years, but we have not — you are correct. We have not talked about it a lot. We put that in there because one of the things, one of the advantages we have at American Water with our size and scale, we have our own R&B group and we have 20 scientists. And most of their work is dedicated to finding better ways to do our business, bring efficiency, water quality. We work along with the EPA. We work with foundations, actually, all over the world including Israel as opposed to Europe on new technologies in the water industry. What happens when we do that while the focus of making our business more efficient, we also, at times of opportunity with partnering up with starter companies where out of our deployment in testing we’re able to get small interests in some of these businesses. So, you know, not a big thing, but it’s called our — and we have an innovation development process. We actually came up with the process called TNT Express that is used in wastewater plants that reduces the energy of aeration by 50%, and it — carbon edition by up to 100%. We actually did an international license agreement with Abengoa on that, which, you know, last year maybe was a $0.5 million, not a lot of money. But this other is almost a [holding] category for lots of smaller things like that, that may or may not be something down the road. There’s no, in the long-term triangle, we don’t assign any weight to it in terms of how much of the growth is going to provide, but we put it up there because there could be some things like that that come up. And, again, this is not big investment into things for the purpose of creating new business. It’s investment into opportunities that help our base business be better, but, potentially, could result in some income. Operator The next question comes from David Paz from Wolfe Research. Please go ahead. David Paz Just on the regulated acquisition strategy, I know there have been some companies [indiscernible] on to expand their water business, you know. And they are seeking to buy small water companies. Have you seen competition pick up, or noticeably picked up, for your regulated acquisition? Walter Lynch You know, we have — we operate in 16 states, so we have varying levels of competition in each of the states where we operate, but by far we are the biggest and we have the biggest footprint. It gives us an opportunity to expand out, get to know different municipal leaders, so I think we have a competitive advantage there. I think the other huge competitive advantage we have is that we worked on legislation that allows us to buy wastewater systems and share those costs with our water customers. And, for example, in New Jersey, we have 650,000 customers. When we buy a system, we can spread the cost across that huge customer base and minimize the impact on those customers that we just acquired. So we use that for our advantage. We use that for advanced of our customers and providing great customer service for them. Operator This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks. Susan Story Well, thank you so much, Gary, and thanks to everybody for joining us today. We had a good quarter, and I just want to remind you that, you know, all of this happens because of the 6700 employees that we have out there every day. We talk about the facts, you know. We talk about the numbers, but these are our employees out there serving one customer at a time every day. And I tell you we are very fortunate in our industry to have some of the best people anywhere, making sure that we are able to be up here today talking about the numbers that we were able to accomplish. So I want to give a shout out to them and thank them for all their hard work. And thank you for all of your questions and for supporting our company. Operator The conference is now concluded. Thank you for attending today’s presentation.

WGL Holdings’ (WGL) CEO Terry D. McCallister on Q3 2015 Results – Earnings Call Transcript

WGL Holdings (NYSE: WGL ) Q3 2015 Earnings Conference Call August 6, 2015, 10:30 AM ET Executives Douglas Bonawitz – Head of Investor Relations Terry D. McCallister – Chairman, Chief Executive Officer, Chairman of Executive Committee, Chairman of Washington Gas Light Company and Chief Executive Officer of Washington Gas Light Company Vincent L. Ammann – Chief Financial Officer, Senior Vice President, Chief Financial Officer of Washington Gas Light Company and Senior Vice President of Washington Gas Light Company Adrian P. Chapman – President, Chief Operating Officer, President of Washington Gas Light Company and Chief Operating Officer of Washington Gas Light Company Gautam Chandra – Senior Vice President of Strategy, Business Development and Non-Utility Operations Analysts Operator Good morning, and welcome to the WGL Holdings’ Third Quarter Fiscal Year 2015 Earnings Conference Call. At this time, I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode. We will open the conference call for questions and answers after the presentation. The call will be available for rebroadcast today at 1:00 p.m. Eastern Time, running through August 13, 2015. You may access the replay by dealing 1 (855) 859-2056 and entering pin number 91131626. I will now turn the conference over to Mr. Doug Bonawitz. Sir, you may begin. Douglas Bonawitz Good morning, everyone, and thank you for joining our call. Before we begin, I would like to point out that this conference call will include forward-looking statements under the federal securities laws. Forward-looking statements inherently involve risks and uncertainties that could cause our actual results to differ materially from those predicted in such forward-looking statements. Statements made on this conference call should be considered together with cautionary statements and other information contained in our most recent annual report on Form 10-K and other documents we have filed with or furnished to the SEC. Forward-looking statements speak only as of today and we assume no duty to update them. This morning’s comments will reference a slide presentation. Our earnings release and earnings presentation are available on our website. To access these materials, please visit wgl.com. The slide presentation highlights the results for our third quarter of fiscal year 2015 and the drivers of those results. On today’s call, we’ll make reference to certain non-GAAP financial measures, including operating earnings of WGL Holdings on a consolidated basis and adjusted EBIT of our operating segments. A reconciliation of these financial measures to the nearest comparable measures reported in accordance with Generally Accepted Accounting Principles or GAAP is provided as an attachment to our press release and is available in the Quarterly Results section of our website. This morning, Terry McCallister, our Chairman and Chief Executive Officer will provide some opening comments. Following that, Vince Ammann, Senior Vice President and Chief Financial Officer will review the quarterly results. Adrian Chapman, President and Chief Operating Officer, will discuss key issues affecting our business and the status of some of our principal initiatives. In addition, Gautam Chandra, Senior Vice President of Strategy, Business Development and Non-utility Operations, is also with us this morning to answer questions. With that, I’d like to turn the call over to Terry McCallister. Terry D. McCallister Thanks Doug, and good morning, everybody. I am pleased to be able to report to you that WGL is on track to deliver strong results and record earnings per share in fiscal year 2015. Our non-GAAP operating earnings for the first quarter is shown on Slide 3 in our presentation were $10.7 million or $0.22 per share compared to $0.8 million or $0.02 per share in the third quarter of 2014. On a non-GAAP basis, consolidated operating earnings for the first nine months were $159.8 million or $3.39 per share. This compares to $147.8 million in the prior year or $2.85 per share. The increase in operating earnings in the third quarter were driven primarily by strong results in our retail energy-marketing segment as shown on Slide 5. Our commercial energy systems and midstream energy services segments also reported improved results year-over-year. At the utility, our customer base continued to grow as average active customer meters increased by approximately 13,000 meters year-over-year for the third quarter representing a 1.2% growth rate. Regulated utility and its customers benefited from asset optimization results in the quarter. We also saw increased earnings in the segments from rate recovery related to our accelerated pipe replacement programs. On the utility regulatory front we received positive news regarding our recent filings to expand both our Maryland STRIDE and Virginia SAVE accelerated pipe replacement plan. We’re also excited about our announcement in May regarding an investment in gas reserves, serve our utility customers in Virginia. Adrian will talk more about these developments shortly. On the non-utility side of the business, as previously mentioned, our retail energy-marketing business performed well. With electric margins significantly higher than third quarter of last year. Here we have continued to execute plans that we’ve laid out on past call, we’re focused on large commercial and government accounts where longer term strategic relationships could provide additional value. Also, our pricing practices now include managing the risk of higher PJM cost. We forecasted at the end of 2014 that business has continued on the path back to historical levels of profitability. The result in this segment during fiscal year 2015 has exceeded our expectations and partly reflect specific market opportunities unique to this fiscal year. Over the long term, we’re still targeting adjusted EBIT for the retail marketing segment in the range of $50 million to $55 million per year. Given our results through the first nine months and our earnings outlook for the remainder of the year, we are raising our consolidated non-GAAP earnings guidance by $0.20 per share, to a range of $2.90, to $3.10 per share for fiscal year 2015. I’m now going to turn the call over to Vince, who will review our third quarter results by segment. Vincent L. Ammann Thank you, Terry. First, I would like to remind you that beginning with the first quarter of fiscal year 2015, we’ve made a change to our practice of discussing earning results at the segment level. While we continue to use operating earnings per share at a consolidated level, we are now using non-GAAP adjusted earnings before interest and taxes or adjusted EBIT to discuss results at the segment level. This change provides more clarity by allowing us to discuss the performance of each business unit, prior to the impact of interest expense, taxes and accretion and dilution. Turning first to our utility segment. Adjusted EBIT for the third quarter of fiscal year 2015 was $6.5 million, a decrease of $1.4 million compared to the same period last year. The drivers of this change are detailed on Slide 6. Higher results from our asset optimization program added $5.2 million in adjusted EBIT. Higher revenues from our accelerated pipe replacement programs added about $1.2 million in adjusted EBIT. The favorable effect of changes in natural gas consumption patterns in the District of Columbia added $1.5 million in adjusted EBIT. These items were offset by higher O&M expenses driven primarily by higher labour, marketing and employee incentives cost, partially mitigated by lower employee benefit cost. These impacts collectively reduced adjusted EBIT by $6 million. Higher appreciation expense also reduced adjusted EBIT by $1.9 million, reflecting growth in our investment and utility plan. Other miscellaneous items reduced adjusted EBIT by $1.9 million. Turning to the retail energy-marketing segment adjusted EBTI for the third quarter of fiscal year 2015 was $18.7 million, an increase of $13.7 million compared to the same period last year. On Slide 7, you will see that the increase was driven primarily by higher electric gross margins with higher natural gas gross margin also contributing. Electric margins increased by $9.9 million, mostly driven by lower capacity charges from the regional power grid operator PJM as well as slightly higher sales volumes. These positive benefits were slightly offset by increased PJM capacity costs that took effect in June 2015, which impacted the timing of margin recognition for fixed price retail contracts. Electric volumes increased 4% in the third quarter versus the prior year, primarily due to warmer weather and the recent growth in our large commercial market. As Terry discussed earlier, our retail energy marketing business, has increased its focus on large commercial and government account relationships. In the natural gas business, gross margins were $4.4 million higher, due to lower natural gas purchase cost and favorable gas supply and pricing opportunities. Natural gas volumes decreased 3% in the third quarter versus the prior year, primarily due to a decline in the mass market customers. This decline is also related to our increased focus on commercial and government account relationships. Next, I’ll move to the commercial energy systems segment. Adjusted EBIT for the third quarter of fiscal year 2015 was $7.8 million compared to $5.7 million in the same period last year. The increase reflects growth in distributed generation assets in service, partially offset by higher operating expenses. During the third quarter, our commercial distribution generation assets generated over 45,000 megawatt hours of clean electricity which was sold to customers through our purchase agreements. We remain on track to invest at least $150 million from commercial solar and other distributed generation projects during fiscal year 2015 with a potential to exceed that amount by 10% based on the timing of the projects in the pipeline. Next, I’ll move to the midstream energy services segment. Results for the third quarter of fiscal year 2015 reflect an adjusted EBIT loss of $1.4 million, compared to an adjusted EBIT loss of $4 million in the same period last year. The improvement is associated with storage transactions that occurred in this quarter. Results for our other non-utility activities reflecting adjusted EBIT loss of $1 million compared to a loss of $1.9 million, the same period of prior fiscal year. Improvement is primarily related to lower business development expenses in the current period. I’ll now move to discuss the interest expense on a consolidated basis to the third quarter. Interest expense increased to $13.1 million, during the third quarter compared to $9.5 million in the prior period. The increase was primarily driven by increased long term debt issued by both Washington Gas and WGL. As Terry stated earlier, we are increasing our consolidated non-GAAP operating earnings estimate as shown on Slide 8. We are forecasting non-GAAP earnings in the range of $2.90 to $3.10 per share. The increase is primarily due to strong performance at our utility and retail energy marketing businesses. Utility results are higher than expected, primarily due to asset optimization opportunities. On the non-utility side, we anticipate that excellent results on the retail energy marketing business will offset lower earnings from our midstream energy services business. I’ll now turn the call over to Adrian for his comments. Adrian P. Chapman Thank you, Vince and good morning, everyone. I’m pleased to provide you with an update on our operations and regulatory initiatives. In Maryland, we filed an application with the public service commission for approval of an amendment that expands our currently approved STRIDE plan. Washington Gas requested approval to add one additional program applicable to gas distribution system replacement and four additional programs applicable to transmission system replacements at an incremental investment of $31 million over the remaining four years of the STRIDE plan. This was our first inclusion of transmission pipe related replacement. On May 27, the chief public utility law judge issued a proposed order approving with modification the proposed amendment. Proposed order allowed accelerated recovery of cost related to transmission system replacements, located in Maryland, but excluded from the accelerated recovery program costs related to transmission system replacements, physically located outside of Maryland. This decision was contrary to how common transmission related costs have been recovered in rate case. Washington Gas appealed that portion of the decision to the full commission. On July 2nd, the PSC affirmed the proposed order, which approves an incremental capital expenditure of $18 million over the remaining four years of the plan. On July 30th, Washington Gas filed an appeal with the circuit court of Montgomery County to challenge the PSC decision to deny recovery through the surcharge mechanism of cost related to transmission system replacement projects located outside of Maryland. Notwithstanding the transmission related cost under appeal, we do have approval to spend an additional $4 million to $5 million per year on distribution and transmission replacements through 2018. In Virginia, we submitted an application to the state corporation commission in February, requesting approval to amend our current save plan to expand the scope of some existing programs to include new distribution facility replacement programs and to add new programs to replace transmission facilities similar to those proposed in Maryland. Washington Gas proposed investing an additional $75 million to replace, eligible infrastructure. The Company requested approval for the amended SAVE plan through December 31, 2017, which is the expiration date of the previously approved SAVE plan. On June 5th, the SEC approved the amended SAVE plan, however the commission excluded a small portion of the proposal to replace transmission facilities and the portion of the proposal to include new distribution facilities in the accelerated replacement program. The SEC in Virginia approved an incremental capital expenditure of $66 million through 2017, the new incremental billing factor which put in place on August 1st. Also in Virginia, a new law allows local distribution companies to recover a return of and a return on investments in physical gas reserves that benefit customers by reducing cost, price volatility or supply risk. On May 6th, Washington Gas entered into a 20-year agreement with Energy Corporation of America to acquire natural gas reserves through non-operating working interest in 25 producing wells located in Pennsylvania for $126 million. The purchase of the reserves is conditional upon approval by the Virginia SEC. Washington Gas filed an application with the SEC on May 12th for approval of the gas reserves purchase agreement, this part for the natural gas supply investment plan. Under the procedural schedule established to consider the application testimony from the Virginia SEC staff is due on August 26 and a public hearing is scheduled on September 30. Under the law, the SEC must issue a final decision of the application within 180 days or by November 8. Finally, I’m also pleased to announce that we’ve recently reached a new five-year collective bargaining agreement with the International Brotherhood of Teamsters, Local 96, that was effective June 1st and will continue through 2020. This contract, which covers approximately 520 employees strengthens our ability to work together with our unions to achieve excellence for our customers, investors and employees. I would like to now turn the call back to Terry for his closing comments. Terry D. McCallister Thank you, Adrian. I’d like to now highlight a few recent developments and provide an update over the status of our midstream and distributed generation investments. First, an update on our investments in the Constitution Pipeline project. We continue to wait for a permit from the New York State Department of Environmental Conservation. We remain optimistic that construction can begin in the next few months. As of June 6, WGL Midstream, had invested approximately $26 million on the Constitution Pipeline project. Next, I’ll turn to our investment in the Central Penn line. The Central Penn line is a greenfield pipeline segment of Transco’s Atlantic Sunrise Project. This project is on track and the development activities are proceeding as expected. The Central Penn line has a projected in service date in the second half of calendar year 2017. WGL Midstream will invest approximately $412 million in the Central Penn line project. As of June 30, our subsidiaries had invested approximately $22 million. Next I’ll provide an update on our investment in the Mountain Valley pipeline project. Mountain Valley pipeline is a 300 mile pipeline in West Virginia and Virginia, and will help meet the increasing demand for natural gas in the mid-Atlantic and Southeast markets. The project is on track and development activities are proceeding as expected. Mountain Valley pipeline has a projected in service date in the second half of calendar year 2018. WGL Midstream will investment between $230 million and $245 million on the Mountain Valley pipeline project. As of June 30, WGL Midstream has invested approximately $6 million. Finally, an update on additional opportunity to invest in infrastructure that we first announced last December. As we discussed with you previously, we have an option for a 30% interest in a $400 million plus gathering system in West Virginia. This gathering system will help move gas out of production field to West Virginia to an interstate pipeline system where transportation to the mid-Atlantic region. The anticipated in-service date is now late 2015 or early 2016. We continue to evaluate additional midstream opportunities similar to the projects announced to date as we pursue our strategy to provide infrastructure solutions to move gas from producing areas to consuming areas. Turning to our commercial energy systems business, we continue to add our portfolio of distributed generation assets. As of June 30, we have 115 megawatts of installed distributed generation. We also have an additional 40 megawatt currently under contract or in construction. In total, these projects represent over $520 million in capital investment and we continue to see a robust pipeline of future projects. I want to highlight one solar project in particular this quarter as it represents our first project in the State of Colorado. WGL Energy Systems recently signed an agreement to build and operate a 1 megawatt solar project in Fort Collins, Colorado. The project is expected to be in service by December 2015 and WGL Energy Systems will own and operate the solar project for 20 [ph] years as per our agreement. In July, Washington Gas celebrated the opening of the first of three plans public CNG fuelling stations for compressed natural gas vehicles. The new station located at Washington Gas facility in Frederick, Maryland will be operated and maintained by Trillium CNG. Later this summer Washington Gas and Trillium expect to open a second public fuelling station in Forestville, Maryland and a third station is being planned for the District of Columbia. We’re proud to add this service to the spectrum of energy answers we offer at WGL. In addition, WGL Energy Services, recently teamed up with SolarCity to offer our residential customers in Maryland, Delaware, Pennsylvania and the District of Columbia the opportunity to choose clean, renewable energy by installing a custom-designed solar energy system. Through this innovative marketing partnership our customers in these areas may now choose to install a SolarCity solar system at no upfront cost and pay less than traditional electric utility bills. This residential solar option will complement our existing operating business segment which includes wind power for electricity and carbon offsets matched to natural gas usage. We will provide detailed fiscal year 2016 guidance during our year-end conference call in November. However, based on the progress we’ve made in a number of important areas we feel confident and we’re on track to deliver the earnings growth goal in our long-range financial plan. That concludes the prepared remarks and we’ll now be happy to answer your questions. Question-and-Answer Session Operator And our first question comes from the line of Michael Gallagher. Michael Gallagher Congrats on the really strong quarter. I’ve only got two questions. First, the performance from retail marketing was impressive. Just wondering, how we should think about fiscal 2016. Are these results sustainable or are they a potential headwind next year? Vincent L. Ammann Michael this is Vince. We’ve provided some guidance there, that there were some market opportunities that we saw this year that allowed us to really exceed our expected results, probably even exceeding the long term goal of $50 million to $55 million certainly at the high end of that range. So, we’re probably looking at a 2016 that will be slightly less than what we’re able to achieve this year. Gautam, if you have anything more to add? Gautam Chandra Yeah Michael, I will just add, I think we’re still looking at what we initially kind of projected. And a couple of years ago, we’ll bring this headwind back to its historical level, the $50 million to $55 million, we still see that as very achievable, going into next year, but probably not. I wouldn’t forecast the additional margins we would realize this year into next year. Michael Gallagher Then on Central Penn, I’m wondering if you’ve determined yet where the interconnect is going to be in Southern Pennsylvania. Vincent L. Ammann I think we have a pretty good idea, but I don’t think the partners have announced that yet. Terry D. McCallister Yeah, I don’t think that’s public information yet. Michael Gallagher Okay, that’s all I had gentlemen. Thanks. Operator [Operator Instructions] Again, I would like to remind everyone that you can listen to a rebroadcast of this conference call at 1 p.m. Eastern Time today, running through August 13, 2015. You may access the replay by dealing 1 (855) 859-2056 and entering your pin number 91131626. Douglas Bonawitz Thanks everyone for joining us this morning. If you have any further questions, please don’t hesitate to call me. It’s Doug Bonawitz at (202) 624-6129. Have a great day.