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Spark Energy’s (SPKE) CEO Nathan Kroeker on Q1 2016 Results – Earnings Call Transcript

Spark Energy (NASDAQ: SPKE ) Q1 2016 Earnings Conference Call May 05, 2016 11:00 AM ET Executives Andy Davis – Head, Investor Relations Nathan Kroeker – President and Chief Executive Officer Georganne Hodges – Chief Financial Officer Analysts Mike Gyure – Janney Montgomery Scott Dan Fidell – U.S. Capital Advisors Operator Good morning, ladies and gentlemen. Welcome to the Spark Energy, Inc. First Quarter 2016 earnings conference call. My name is Andrew, and I will be your operator for today. As a reminder, this conference is being recorded for replay purposes, and this call will be posted on Spark Energy, Inc.’s website. I would now like to turn the conference over to Mr. Andy Davis, Head of Investor Relations for Spark Energy, Inc. Please go ahead. Andy Davis Good morning and welcome to Spark Energy, Inc.’s first quarter 2016 earnings call. This morning’s call is being broadcast live over the phone and via webcast, which can be located under events and presentations in the Investor Relations section of our website at www.sparkenergy.com. With us today from management is our President and CEO, Nathan Kroeker; our CFO, Georganne Hodges; and our Executive Vice President of Retail, Jason Garrett. Please note that today’s discussion may contain forward-looking statements, which are based on assumptions that we believe to be reasonable as of this date. Management may make forward-looking statements concerning future expectations, projections of our operations, economic performance, and financial condition. These statements are subject to risks and uncertainties that could cause actual results to differ materially from these statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we give no assurance that such expectations will be realized. We urge everyone to review the Safe Harbor statement provided in yesterday’s earnings release as well as the risk factors contained in our SEC filings. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law. During this morning’s call, we will refer to both GAAP and non-GAAP financial measures of the company’s operating and financial results. For information regarding our non-GAAP financial measures and reconciliations to the most directly comparable GAAP measures, please refer to yesterday’s earnings release. With that, I’ll now turn the call over to Nathan Kroeker, our President and Chief Executive Officer. Nathan Kroeker Thank you, Andy. I’d like to welcome our shareholders and analysts to Spark’s first quarter 2016 conference call. We’ve had a phenomenal quarter and we’ve got some exciting news on the M&A front I want to talk about. And then I will turn he call over to our CFO, Georganne Hodges, to provide some detail on those financial results. We will then conclude with questions from our analysts. Yesterday we announced two significant acquisitions that will nearly double the size of our business to approximately 750,000 RCE. Combined, these two deals will provide us with access to two new states and 24 new markets and approximately $30 million in annual adjusted EBITDA. I will discuss the two transactions in more detail after I talk about the first quarter, which was a record setting one. We earned $21 million in adjusted EBITDA and $40 million in retail gross margin as we continue to see expanded unit margins in both electricity and natural gas driven by the current soft commodity environment. In addition, we saw increased volumes in our electricity segment primarily as a result of CenStar and Oasis acquisition in July of last year. As we previously signaled, our RCE count for the quarter remain flat at 415,000. Our attrition improved to 4.3% for the quarter and continues to trend favorably as we are seeing the benefits of our focus on sales quality. This improvement in attrition combined with our higher quality customer adds allowed us to replenish our attrition at a significantly lower cost than in the past. As you saw last night, Spark announced the dropdown acquisition of Major Energy from our parent National Gas & Electric. Major Energy is a retail energy business with approximately 210,000 RCE serving electricity and natural gas customers in eight states. This acquisition adds 15 new utilities to Spark’s current footprint. Major has a very strong management team that has built a very efficient and profitable business and Spark look forward to working with them to share ideas and grow this business. The purchase price is estimated to be $75 million with $40 million payable to NG&E in Spark stock at closing, $5 million in assumed liabilities and an estimated $30 million in earn-outs that are subject to a variety of performance metrics over the next three years. This transaction is back-to-back with NG&E’s acquisition of Major, including the earn-out mechanism that de-risks the transaction by lowering the total purchase price and protecting the EBITDA multiple in the event certain performance metrics are not met. Also announced yesterday, Spark has entered into a purchase and sale agreement for the acquisition of all retail business operations of Provider Power LLC representing approximately 125,000 electricity RCEs in Maine and New Hampshire both of which are new states to Spark and include nine new utilities. The purchase price is $28 million plus a potential $4 million earn-out that is subject to performance metrics for the first year. While the Provider transaction was a direct purchase from the third-party sellers, Spark is working closely with its founder in financing the purchase price payable at closing through the issuance of 900,000 primary shares to Retail Co. LLC for a total of $18 million in cash. While our record first quarter results and anticipated midyear closing of two significant acquisitions, renders our earnings guidance somewhat outdated at this point. I will simply say that we are highly confident in achieving our initial 2016 guidance range of $44 million to $48 million. We are currently reevaluating our guidance to reflect the positive changes we’ve discussed. As previously announced, our first quarter dividend of $0.3625 per share will be paid on June 14. And as we’ve stated in the past, we expect to pay this quarterly dividend on a go-forward basis. Thanks for your attention. And with that, I will now turn the call over to Georganne for her financial review. Georganne? Georganne Hodges Thanks, Nathan, and good morning, everyone. The first quarter was indeed a record setting one for us. We are very proud of our results as well as the two M&A transactions that we signed during the quarter. Our adjusted EBITDA surpassed $21 million compared to $10 million last year, as both of our mid-2015 acquisitions continue to contribute above our expectation. Our gas and power unit margins expanded during the quarter, as we continue to optimize our supply cost in this low commodity price environment. And although the weather continue to be mild, our power volume increased of almost 60% year-over-year combined with the strong margins we just talked about lead to a record growth margin of $40 million for the first quarter. On the customer acquisition side, we maintained a flat customer portfolio of 415,000 RCEs on $2.3 million of spend. This optimized spend result was achieved through our declining attrition rate of 4.3% combined with our improved commission structure with our vendors, which is volume based. G&A expenses were up 2.7 year-over-year, increased customer billing and care cost on our 35% larger portfolio are the primary driver of that but we also had to increase our CenStar earn out due to CenStar’s strong performance. That earn out winds up at the end of June this year. The increased costs were offset by bad debt that has returned to normal levels of less than 1% of our revenue as well as the expected savings on our MSA with Retailco that we talked to you about last quarter. In April, our strong rental results allowed us to completely pay off our working capital loan and begin to build cash. In conjunction with the acquisition that we just announced, we are in the process of increasing the size of our working capital facility from $60 million to between $90 million to $100 million to accommodate those acquisitions and we’re hoping to have that rapped up by the end of the month. That is all that I have, so back to Nathan. Nathan Kroeker Thanks, Georganne. As you can see, we’ve had a great start to the year in terms of profitability, sales quality, and attrition improvement, and we are very pleased with the way CenStar and Oasis continue to perform. We do have our work cut out as we move towards closing and integrating our two new acquisitions in the third quarter and hopefully by this time next quarter, we will be giving you an early indication of how they are performing. With that, we’ll now open up the line for questions from our analysts. Operator? Question-and-Answer Session Operator [Operator Instructions] We have one question from the line of Mike Gyure from Janney. Your line is open. Mike Gyure Yes. Good morning. Can you guys talk a little about the metrics you’re using for the acquisitions? I guess big picture when I look at it looking at the purchase price I guess all-in if you include all the earn outs and everything and your EBITDA, it seems like a pretty low multiple which obviously is a good thing but I guess I’m surprised or am I missing anything when I’m taking a look at that? Georganne Hodges Mike, that’s a good question. And the way we look at it is, we are issuing 2 million shares for major 900,000 shares for provider. So 2.9 million shares call it $60 million and we’re buying $30 million of annual EBITDA. So upfront, we are only looking at a two multiple. When you add in the earn outs that are in both transactions, that total purchase price goes up to our estimated $107 million, so that gets you to about 3.5 multiple. In terms of other metrics of these businesses, I mean the earn outs are tied to EBITDA and customer count in the case of major and some gross margin target and customer count in the case of provider. So I feel like we’ve really projected ourselves around that EBITDA multiple range with the way we’ve structured the deal. Mike Gyure Great. And then maybe a quick follow-up. I guess when you look at the potential for $30 million of EBITDA, I guess what you’re thinking of using that EBITDA to do more acquisitions or what you’re thinking for? How you’re going to use that cash flow once these things close ultimately? Georganne Hodges So both transactions have earn-outs in final payments on them, indicates providers for a year in the case of major through three years. So we anticipate funding those additional payments out of the operating cash flows of those businesses. Any additional cash flow that is available will be used for either organic acquisitions or to fund future M&A transactions whether they would be direct purchases or dropdown transaction. Mike Gyure Great. Thanks very much. Georganne Hodges Thanks. Operator [Operator Instructions] We have a question from the line of Dan Fidell from U.S. Capital Advisors. Your line is open. Dan Fidell Good morning guys and congrats on couple of great acquisitions here it looks like and good prices paid certainly. Just one very quick question from me just on major energy, can you – I know they’re across eight states, can you give us some sense maybe not specifically but some sense on customer concentration across those eight states? Are they more lumpy in a few states rather than others? Nathan Kroeker They are all up in the northeast and their markets that we’re very familiar with all of their customers are in ISOs that we currently have operations in. So when we talk about adding 15 new markets, there are new utility service territories that directly overlap or are adjacent to utility and service territory that we already operate in. So we really look at it is being a great complement to our existing footprint. Dan Fidell Sure. Just wondering in terms of the eight states they are about evenly divided in terms of customers or – of all the states there are couple that are just in terms of concentration, are there a few that are lumpier than others just generally? Nathan Kroeker I would say there is not a big concentration in any one market. They are distributed across markets just like we are. Dan Fidell Very good. Okay. That’s all I have. Thanks very much and congrats again. Nathan Kroeker Thank you. Operator Thank you. [Operator Instructions] And it looks like no other questions that we have in the queue at this time. So I would like to turn the call back over to management for closing remarks. Nathan Kroeker Thanks again for participating in today’s call and we look forward to talking to many of you again soon. Operator Ladies and gentlemen, thank you again for your participation in today’s conference. This now concludes the program and you may all disconnect your telephone lines at this time. Everyone have a great day. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited. THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY’S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY’S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY’S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS. If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com . Thank you!

Star Gas’ (SGU) CEO Steven Goldman on Q2 2016 Results – Earnings Call Transcript

Star Gas Partners LP. (NYSE: SGU ) Q2 2016 Earnings Conference Call May 05, 2016 11:00 AM ET Executives Chris Witty – Darrow Associates, IR Steven J. Goldman – President and CEO Richard F. Ambury – CFO, EVP, Treasurer Analysts Andrew Elie Gadlin – Odeon Capital Group George Schultze – Schultze Asset Management Operator Hello, and welcome to the Star Gas Partners Fiscal Second Quarter Results Conference Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Steven J. Goldman, Star Gas Partners Chief Executive Officer. Please go ahead. Steven J. Goldman Thank you. Good morning, and thank you for joining us today. With me today is Star Gas’ Chief Financial Officer, Rich Ambury. After some brief remarks Rich will review the fiscal second quarter ended March 31, 2016. And we will then take your questions. But before we begin, Chris Witty of our Investor Relations firm, Darrow Associates, will read out the Safe Harbor Statement. Please go ahead, Chris. Chris Witty Thanks, Steve, and good morning. This conference call may include forward-looking statements that represent the Partnership’s expectations and beliefs concerning future events that involve risks and uncertainties that may cause the Partnership’s actual performance to be materially different from the performance indicated or implied by such statements. All statements other than statements of historical facts included in this conference call are forward-looking statements. Although the Partnership believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the Partnership’s expectations are disclosed in this conference call and in the Partnership’s quarterly reports and annual report on Form 10-K for the fiscal year ended September 30, 2015. All subsequent written and oral forward-looking statements attributable to the Partnership, or persons acting on its behalf, are expressly qualified in their entirety by the cautionary statements. Unless otherwise required by law, the Partnership undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this conference call. I’d now like to turn the call back over to Steve Goldman. Steve. Steven J. Goldman Thanks, Chris. First and foremost, I’d like to begin by mentioning how challenging this quarter was due to the extraordinarily warm weather. Last year we had the opportunity to show how well we can perform during very cold weather. Our organization then shined, and we posted record results. But every year, as you know, stands on its own. It should come as no surprise that at the start of each year, our greatest concern is that winter will not provide us the normal cold temperatures we expect and need to perform well. This year, given the circumstances, we needed to demonstrate strong control and the ability to perpetually adjust our plans, as each period of expected cold weather failed to materialize. Because there is always the possibility that temperatures can be rather abnormal, either way, we always plan to service our customer in the coldest as well as the warmest of environments. This past quarter was a period of intense focus and careful decision making designed to achieve the best customer satisfaction and operating results possible. And we really could not be prouder of how well our entire team managed through such challenging conditions. Star Gas continues to push forward to better itself as an organization. We used the past six months to sharpen elements of our strategy to attract and retain a broader customer base through our expanded footprint. We believe that the unusual weather and low oil price also indirectly impacted other aspects of our business. So lack of severely cold weather gave customers less of a reason to leave their current provider and seek higher levels of service we’re known for. And the lower cost of oil gave rise to many extra low price teaser offers in the marketplace, as many competitors became extremely aggressive to try to lure new customers. Under these circumstances, we retained our margin discipline, but attrition did suffer. That said, we continued to work on creating stronger, longer lasting relationships with our customers to help minimize results like this in the future. We are also redoubling our territory expansion efforts, both by organically growing our base, as well as pursuing attractive acquisitions. In addition, we continue to emphasize efforts to broaden the service related area of our business. We see the growth of such services as key to our future success in areas like plumbing, natural gas service, air conditioning, and home security. In the past, these were primarily relationship enhancements to our current fuel customers, but we now see them as revenue opportunities external to our existing account base. We are examining and testing various ways in which to ensure a more durable long-term relationship with homeowners; one that covers a broad spectrum of offerings from propane and home heating oil to these ancillary services, which at times are counter-seasonal to our main business. So while these past six months certainly caused us to adjust some plans for the remainder of this fiscal year, we will not abandon our efforts to enhance our customers’ experience and strengthen Star Gas’ overall performance. The warm weather, which had a negative impact on volume and revenue, drove home the importance of our plans to expand Star’s geographic footprint and the range of service offerings. We are more determined than ever to position our organization for better results going forward by focusing on ways to grow the customers we serve and the ways we serve them. Lastly, Star Gas recently announced that it raised the quarterly distribution to $0.1025 per unit. Based on our never-ending effort to strengthen the business and shareholder value, we believe this increase is part of a rational approach consistent with current and future cash flow expectations. With that, I’ll turn the call over to Rich Ambury to provide some comments on the second quarter results. Rich. Richard F. Ambury Thanks, Steve, and good morning, everyone. For the quarter, our home heating oil and propane volume decreased by 53 million gallons, or 25%, to 157 million gallons as the additional volume provided by acquisitions was more than offset by the impact of warmer weather, net customer attrition, and other factors. Temperatures in Star’s geographic areas of operations for the second quarter were 26% warmer than during the prior year and 12% warmer than normal. The warmer temperatures were a continuation of the weather patterns experienced during the first quarter of fiscal 2016. Also, as a reminder, the second quarter of fiscal 2015 was 19% colder than normal. Our product gross profit declined by $59 million, or 24%, due primarily to the decline in home heating oil and propane volume. Delivery and branch expenses decreased by $16 million, or 15%, as an acquisition-related increase of $3 million was more than offset by a reduction in the base business of nearly $19 million. In the second quarter of fiscal 2016, we recorded a non-cash credit of $14 million for our derivatives. In the prior-year’s comparable quarter, we recorded a similar credit of $13 million. Interest expense decreased $2 million, the result of refinancing $120 million of 8.875% debt with $100 million term loan that was at lower variable rates last year. We posted net income for the quarter of $55 million, or $21 million less than the prior-year period. Adjusted EBITDA decreased to $89 million, down $39.0 million, or 31%, as lower operating expenses were more than offset by the decline in volume driven by 26% warmer weather. For the first half of fiscal 2016, our home heating oil and propane volume decreased by 80 million gallons, or 25%, to 237 million gallons, again, as the additional volume provided by some acquisitions was more than offset by the impact of warmer weather, net customer attrition and other factors. Temperatures in our geographic areas of operation for the first half of fiscal 2016 were 27% warmer than last year’s comparable period and 20% warmer than normal. Our product gross profit declined by 22%, or $82 million, as higher home heating oil and propane margins were more than offset by the decline in home heating oil and propane volumes sold. The continued decline in home heating oil and propane product costs contributed to the expansion in our per-gallon margins. In delivery and branch expenses, we recorded a $12.5 million credit under our weather hedge contract. Outside of this, delivery and branch expenses rose $6 million due to acquisitions, but was reduced by $24 million in response to the warmer weather. Again, we recorded a non-cash credit of $9 million for derivatives. In the prior-year’s comparable period, we recorded a similar credit of $4 million. Interest expense decreased by $3.5 million, again, due to the result of the refinancing that I previously mentioned. We posted net income for the first half of fiscal 2016 of $67 million, or $24.0 million less than in the prior-year period. Adjusted EBITDA decreased to $125 million, down $48 million, or 28%, as the impact of higher home heating oil and propane per gallon margins and lower operating expenses, and the $12.5 million credit recorded under our weather hedge contract was more than offset by the decline in volume driven by 28% warmer weather. Now looking over at our balance sheet, at the end of the quarter, we had cash on hand of $147 million, zero borrowings under our revolving credit facility, and $97.5 million of long-term debt. While we were obviously disappointed with the warm weather, I would like to point out one interesting statistic. For the 12 months ending March 31, 2016, we generated $92.3 million in adjusted EBITDA during a period in which the winter temperatures were 20% warmer than normal. If this had been our year end, this would have been our third best year ever. And with that, I’d like to turn this over to Steve. Steven J. Goldman Thanks, Rich. At this time we’d be pleased to address any questions you may have. Operator, please open the phone lines for questions. Question-and-Answer Session Operator We will now begin the question-and-answer session. [Operator Instructions]. The first question is from Andrew Gadlin with Odeon Capital Group. Please go ahead. Andrew Elie Gadlin Hey, good morning gentlemen. Richard F. Ambury Good morning Andrew. Andrew Elie Gadlin I was wondering if you could talk about some of the acquisitions you announced in the release, that there are two small acquisitions. Richard F. Ambury Yes, those were the same acquisitions that we announced in the first quarter. One was primarily a heating oil business, and another one was in the — down on our southern area and was in the propane business. Andrew Elie Gadlin And could you talk a little bit about valuation? Richard F. Ambury We’ve always said that when we make acquisitions, we try that they’re between 3.5 to 4.5 to 5 times EBITDA. Andrew Elie Gadlin And it was in that range again? Richard F. Ambury Yes. Andrew Elie Gadlin Okay. Thank you very much, gentlemen. Richard F. Ambury Okay. Operator The next question is from Mr. George Schultze with Schultze Asset Management. Please go ahead. George Schultze Hello, gentlemen. How are you? Richard F. Ambury Good George, how are you? George Schultze Good. Thanks for taking my call. I was curious, just looking at your financials and your run rate, LTM run rate of revenues and EBITDA. And I was looking at the June and September quarters of your performance last year. Richard F. Ambury Right. George Schultze For June of 2015 and September. And as you know, those two quarters you had somewhat negative EBITDA. I guess it’s a pretty seasonal business. Do you expect a similar trend this year, or would you expect with the acquisition that you swallowed last year, towards the end of the year to have less negative EBITDA going forward during the off months? Richard F. Ambury Well, we’re not going to project what we anticipate for the next six months. But we are primarily currently a heating oil company. And we generate the majority of our EBITDA, and more than our annual EBITDA in the first six months. And the last six months have always been loss EBITDA, adjusted EBITDA for us. To a certain extent, if we make a heating oil acquisition and we grow the business, the summer losses actually could uptick a little bit as well. George Schultze So you would expect as the business gets larger, that you’ll have even more negative loss or negative EBITDA. Richard F. Ambury That’s — we’re not projecting that, but that’s something you could probably expect, yeah. George Schultze Okay. And in terms of guidance going forward, I know that you generally don’t provide that. I’m not sure why because most companies do these days. But through the end of this year, since we’re already near — it’s just a couple months now to finish the September year — would you expect a similar drop off versus what you’ve had versus last year so far? Or does some of that hedging contract that you had in place, do you expect that some of that will help offset the drop off that we’ve seen due to weather? Richard F. Ambury Well, during the six months, we recorded a $12.5 million credit under our weather hedge contract. We did receive the cash for that. And we don’t have any weather hedge for April through September. George Schultze Okay. So I guess the follow-up question to that then is there anything that can be done at the business to reduce costs even further during these off quarters, in light of how you’re running versus how you were running last year? Steven J. Goldman Well, first let’s start with the last year was an extraordinary unusually unexpected high profit based on the very cold weather, which is certainly not normal, and a declining oil price market, which is relatively not usual as well. So comparing to last year, our normal trends aren’t going to ever follow that unless we have successively very cold years in a row. We always look to counterbalance decreased profitability in the early part of the year, if we’re off where we expect to be internally, with looking at other additional expense cuts or other changes that could help offset that. We are certainly looking at those. How well will they translate into reductions in expense? Depends on a lot of circumstances. There is a weather component of the summer as well that we’re yet to understand how that will unfold. We do a lot of air conditioning service and installation work, and a very hot summer could be opportune for us, and could drive some expense, but some additional net profit. Or if it’s a milder summer, we may be cutting more expense and have less profit than we would hope to have during that period. But we will be working on controlling and reducing expense, certainly, to the foundation of your question. George Schultze Okay. Question about net customer attrition. How were those trends falling this quarter? I didn’t see them in the release from yesterday. Steven J. Goldman They are trending worse than last year for the same period. George Schultze What were the percentage changes? Richard F. Ambury Well, we lost 1.2% of the business this year in the second fiscal quarter. And in the second fiscal quarter of 2016, we lost a net 0.5%. George Schultze Okay. All right, thanks. And I just have one last question. Thanks for taking my questions. It looks like on the balance sheet you have almost $150 million of cash now, if I’m reading it correctly. What can be done with that cash to make it more productive for the benefit of shareholders? Steven J. Goldman We are — one thing that we are working on as always, we are in discussions with several acquisitions. And we are hoping at least some of them in the coming months we’ll be able to execute on. And that — to us, that’s one of the best uses of that cash, as we always say. Because not only do we try to buy stuff that’s accretive to the business that’ll give return, but it also strengthens the durability of the business for the long-term investor. We are also looking at some other smaller things that we can do. Rich. Richard F. Ambury And when you look at the cash we have about 37%, 38% of our customers are in a budget payment plan. And to a certain extent they really — they paid a little bit more into that plan this year because of the 20% warmer weather. In addition to that, we had significantly declining cost of product. And if cost of product went back from let’s say $1.20 to $3.25, there would be a significant need for the equity cash that we would have to supply for the increase in our receivables. So we’re enjoying — to a certain extent, we’re enjoying a benefit of abnormally low receivables due to one, warm weather; two, customer credit balances; and three, low prices. George Schultze Okay. Is the stockholder or the stock repurchase plan, is there any active stock repurchase plan, or has that expired or been fully expensed? Richard F. Ambury It’s still active. George Schultze I’m sorry. You said it’s still active. I forget what the size of it, if you could just clarify, and then I’ll be out of the queue. Thanks again for all the questions here. Richard F. Ambury Sure. The balance is — let me just look it up for you. We got about 2.2 million of share, or units, rather, that we can still repurchase. George Schultze Okay. Thank you. Steven J. Goldman You’re welcome. Operator [Operator Instructions]. There are no more questions. This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Goldman for any closing remarks. Steven J. Goldman Thank you. Again, thank you for taking the time joining us today and for your ongoing interest in Star Gas. We look forward to sharing our third-quarter 2016 results with you in August. Operator The conference has now concluded with this. Thank you for attending today’s presentation. You may now disconnect. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited. THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY’S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY’S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY’S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS. If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com . Thank you!

WGL Holdings’ (WGL) CEO Terry McCallister on Q2 2016 Results – Earnings Call Transcript

WGL Holdings, Inc. (NYSE: WGL ) Q2 2016 Earnings Conference Call May 5, 2016 10:30 ET Executives Doug Bonawitz – Investor Relations Terry McCallister – Chairman and Chief Executive Officer Vince Ammann – Senior Vice President and Chief Financial Officer Adrian Chapman – President and Chief Operating Officer Gautam Chandra – Senior Vice President, Strategy, Business Development and Nonutility Operations Analysts Mark Levin – BB&T Sarah Akers – Wells Fargo Operator Good morning and welcome to the WGL Holdings’ Second Quarter Fiscal Year 2016 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. [Operator Instructions] The call will be available for rebroadcast today at 1:00 p.m. Eastern Time running through May 12, 2016. You may access the replay by dialing 1-855-859-2056 and entering PIN number 97338125. I will now turn the conference over to Doug Bonawitz. Please go ahead. Doug 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 wglholdings.com. The slide presentation highlights the results for our second quarter of fiscal year 2016 and the drivers of those results. On today’s call, we will 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 second quarter results. Adrian Chapman, President and Chief Operating Officer will discuss key issues affecting our business and the status of some of our principal initiatives. And in addition, Gautam Chandra, Senior Vice President, Strategy, Business Development and Nonutility Operations is also with us this morning to answer your questions. And with that, I would like to turn the call over to Terry McCallister. Terry McCallister Thank you, Doug and good morning everyone. Our non-GAAP operating earnings for the second quarter is shown on Slide 3 in our presentation were $89.5 million or $1.78 per share compared to $101 million or $2.02 per share in the second quarter of 2015. On a non-GAAP basis, consolidated operating earnings for the first six months were $148.7 million or $2.96 per share. This compares to $159 million in the prior year or $3.18 per share. The decrease in operating earnings in the second quarter primarily driven by lower results on retail energy marketing and midstream operating segments partially offset by higher results at our regulated utility and commercial energy systems operating segments. At the utility, earnings were higher year-over-year primarily due to strong customer growth and rate recovery related to our accelerated pipeline replacement program. We added approximately 11,300 active average utility customer meters year-over-year, which represent an annual growth rate of approximately 1%. We also remain on track to equal last year’s record spend on accelerated replacement program of $113 million. These investments immediately impact earnings and have been a driver of improved results in the utility since the start of these programs in 2011. On the utility regulatory front, Washington Gas filed an application with Public Service Commission of the District of Columbia in February to increase base rates. Filing addresses rate relief necessary for the utility to recover its cost and earn its allowed rate of return. We also continue to anticipate the filing of a rate case in Virginia in the near future and Adrian will talk more about these developments shortly. On the non-utility side of business, as previously mentioned, our commercial energy systems business delivered improved results. We continue to seek earnings growth driven by the distributed generation assets that we own across the country. We remain on track to invest a record $200 million in this area in fiscal 2016. We have also seen more activity locally in our energy efficiency contracting business. Retail energy marketing segment delivered lower results compared to second quarter of 2015. This was expected given the unusually high asset optimization results in 2015 and our expectation of more normal levels in 2016. Midstream energy services also realized lower earnings in 2015 partially due to the effects of warmer weather on current market prices. Given our results in the first six months and our earnings outlook for the remainder of the year, we are affirming our consolidated non-GAAP earnings guidance in the range of $3 to $3.20 per share for fiscal year 2016. I am now going to turn the call over to Vince who will review our second quarter results by segments. Vince Ammann Thank you, Terry. Turning first to our Utility segment, adjusted EBIT for the second quarter of fiscal year 2016 was $153.9 million, an increase of $1.5 million compared to the same period last year. The drivers of this change are detailed on Slide 5. We continued to add new meters. The addition of 11,300 average active customer meters improved adjusted EBIT by $2.3 million. Higher revenues from our accelerated pipe replacement programs also added $3.1 million in adjusted EBIT. Lower operations and maintenance expense improved adjusted EBIT by $4.4 million. Offsetting these items, lower margins associated with our asset optimization program reduced adjusted EBIT by $2.7 million. The unfavorable effect of changes in natural gas consumption patterns in the District of Columbia reduced adjusted EBIT by $2.6 million. Reduced revenues related to the recovery of gas inventory carrying costs due to lower gas prices decreasing the value of our storage gas balances reduced adjusted EBIT by $600,000. Other miscellaneous items reduced adjusted EBIT by $2.4 million. Turning to the retail energy marketing segment, adjusted EBIT for the second quarter of fiscal year 2016 was $8.4 million, a decrease of $18.7 million compared to the same period last year. On Slide 6, you will see the primary driver of the decrease was lower natural gas gross margins. In the natural gas business, gross margins were $15.7 million lower driven by a decrease in portfolio optimization activity that returned to more historical levels during the quarter. The same quarter in the prior fiscal year showed outsized gains in this area that were not expected to recur in the current year. Electric margins decreased $1.1 million driven by higher capacity charges from the regional power grid operator, PJM that impacted the timing of margin recognition. These costs will decline in the latter half of the year. As stated previously, our retail energy marketing business has increased its focus on large commercial and government account relationships in both the electric and natural gas markets. As a result, the overall number of electric and natural gas accounts both declined this quarter 10% and 7% respectively compared to the prior year. However, indicative of our revised focus, electric volumes increased 7% versus the prior year and natural gas volumes were slightly higher versus the prior year. The increase in commercial load in both electric and natural gas continues to help offset the decline in mass-market customers on a volumetric basis. Operating expenses increased by $1.9 million primarily due to higher commercial broker fees. Next, I will move to the commercial energy systems segment. Adjusted EBIT for the second quarter of fiscal year 2016 was $2.3 million, an increase of $700,000 compared to the same period last year. The increase reflects growth in distributed generation assets in service, including higher income from state rebate programs and solar renewable energy credit sales as well as improved margins from the energy efficiency contracting business. We also saw improved results in our investment in solar businesses related to changes in the recognition of earnings from our solar partnership. These improvements were partially offset by higher operating and depreciation expenses due to additional in-service distributed generation assets and a $3 million impairment related to our investment in thermal solar project recorded during the three-month period. During the second quarter, our commercial distributed generation assets generated over 43,500 megawatt hours of electricity, which is sold to customers through power purchase agreements. This represents a 57% increase in megawatt hours compared to the second quarter of last year. As of March 31, the commercial energy systems segment has invested $449 million in distributed generation assets. Our alternative energy investments, which include ASP, Nextility, and SunEdison represent an additional $128 million of capital investments since inception. We now have approximately $577 million invested in total in this segment. Next, I will move to the midstream energy services segment. Results for the second quarter of fiscal year 2016 reflect an adjusted EBIT loss of $8.4 million compared to a loss of $3.1 million for the same quarter of the prior fiscal year. The decrease is primarily related to the recognition of losses associated with current market pricing. We anticipate these losses will reverse by fiscal year end as we realized the value of economic hedging transactions to be executed during the first two quarters and as certain contractual procedures approach resolution. Results for our other non-utility activities reflect an adjusted EBIT loss of $1.5 million compared to a loss of $800,000 for the same period for the prior fiscal year. Interest expense, primarily driven by long-term debt, was essentially unchanged at $13 million during the second quarter compared to $13.3 million in the prior period. As Terry stated earlier, we are affirming our consolidated non-GAAP operating earnings guidance in the range of $3 to $3.20 per share. This guidance does not include any potential impacts related to the decision in April by the New York Department of Environmental Conservation to deny the Section 401 certification for the Constitution Pipeline, except for the reduction in forecasted AFUDC related to the project. Our expectations for the regulated utility are modestly lower driven by higher O&M costs for system integration work and project expenses related to a new customer service system. On the non-utility side, we anticipate better than expected results in the midstream segment related to the impact of favorable spreads on storage earnings. These will be somewhat offset by lower results in the energy marketing segment as customer growth is expected to be lower than planned for the year. Please note that this earnings guidance includes dilution from the planned issuance of equity in fiscal year 2016. In November, WGL filed a registration statement and launched a program to sell common stock with aggregate proceeds of up to $150 million through an at-the-market or ATM program. WGL first sold shares under this program in February. During the second quarter, WGL issued approximately 466,000 shares of common stock under this ATM program for net proceeds of $31.5 million. I will now turn the call over to Adrian for his comments. Adrian Chapman Thank you, Vince and good morning everyone. I am pleased to provide you with an update on our utility operations and regulatory initiatives. In the District of Columbia, Washington Gas filed an application on February 26 with the Public Service Commission to increase its base rates for natural gas service, which would generate $17.4 million in additional annual revenue. The revenue increase includes $4.5 million associated with accelerated pipeline replacements previously approved by the commission and currently paid by customers through monthly surcharges. On April 27, the commission issued an order approving Washington Gas special contract with the U.S. Architect of the Capitol. This contract for natural gas service will generate annual firm revenues of $2.6 million and results in a reduction of the revenue deficiency in the pending rate case from $17.4 million to $14.8 million. As part of this rate case filing, we requested approval of the revenue normalization adjustment, or RNA. The District of Columbia is currently the only jurisdiction where we do not have revenue decoupling in place. In addition, the filing includes a new combined heat and power rate schedule, which sets forth the framework for the delivery of natural gas for CHP systems to provide flexibility for negotiated rates to better meet customer needs. Finally, in line with our initiatives in other jurisdictions, the filing also proposes new multifamily development incentives to help bring the benefits of natural gas to more residents in the District of Columbia. The application request authority to earn an 8.23% overall rate of return, including a return on equity of 10.25%. A procedural schedule was issued on April 26 by the PSC. Hearings are currently scheduled for October 2016 with the projected issuance of the commission final order in March 2017, which is consistent with their goal of issuing an order 90 days after the close of the evidentiary record. As a reminder, the last rate increase in the District of Columbia was approved in May 2013. In Virginia, we planned to file a new rate case with the Virginia State Corporation Commission on or before July 31. The filing seeks to allow us to rebalance our revenues, expenses and utility investment in the Commonwealth of Virginia and include in base rates the accelerated pipe replacement expenditures whose plant-related costs are currently being recovered in a surcharge. The anticipated filing would transfer approximately $19 million in accelerated pipeline replacement revenues from our current surcharge into base rates. Virginia has a 150-day suspension period, therefore placing new rates into effect for the winter of 2016-2017 subject to refund. Our last rate increase in Virginia was affected in October 2011. Also in Virginia, Virginia allows local distribution companies to recover a return of and return on investments in physical gas reserves that benefit customers by reducing cost, price volatility, or supply risk. Washington Gas entered into an agreement with the producer in May of last year to acquire natural gas reserves in Pennsylvania. However, the SCC of Virginia issued an order denying our gas reserve application. We are continuing our pursuit of a long-term reserve investment opportunity that will benefit our customers and address the issues that were raised by the SCC of Virginia in our previous filing. Once Washington Gas finalizes a new agreement with the producer, we will file a new application with the SCC of Virginia. I would like to now turn the call back to Terry for his closing comments. Terry McCallister Thanks, Adrian. I would now like to highlight a few recent developments and provide an update on the status of our midstream and our distributed generation investments. First, an update on WGL’s investment in the Constitution Pipeline project. On April 22, the New York State Department of Environmental Conservation denied the necessary water quality certification for the New York portion of the Constitution Pipeline. While we are disappointed, the partnership remains absolutely committed to the project and intends to challenge the legality and appropriateness of the New York decision. In light of the denial of the water certification and the anticipated action to challenge the decision, target in-service date has been revised to the second half of 2018, which assumes that the legal challenge is satisfactorily and promptly included. We are still evaluating any potential impacts to our financial forecast. As of March 31, WGL Midstream had an equity investment of approximately $40 million in the Constitution Pipeline project. Next, I will turn to our investment in the Central Penn line. Central Penn line is greenfield pipeline segment of Transco’s Atlantic Sunrise project. This project is on track and development activities are proceeding as expected. Central Penn line has projected in-service date to the second half of calendar 2017. WGL Midstream will invest approximately $411 million in the project. And as of March 31, WGL Midstream has invested approximately $51 million. Our third pipeline investment involves Mountain Valley pipeline project. The Mountain Valley pipeline is a proposed 300-mile transmission line through West Virginia and Virginia is designed to help meet the increasing demand for natural gas in the Mid-Atlantic and Southeast markets. Project is on track and development activities are proceeding as expected. Projected in-service date is December 2018. WGL Midstream plans to invest $228 million in the project. And as of March 31, WGL Midstream has invested approximately $13 million. In February of this year, WGL Midstream exercised an option for an $89 million equity investment in the Stonewall Gas Gathering system, representing a 35% ownership stake. WGL Midstream’s ownership interest is expected to decrease to 30% during fiscal year 2016, as certain other participants are expected to exercise the rights to invest in the project. The Stonewall system connects with Columbia Gas Transmission, an extensive interstate transmission line that reaches markets across the Mid Atlantic region. M3 Midstream serves as the majority owner and operates the Stonewall Gas Gathering system. The system initiated operations in November of 2015 and is currently gathering 1 billion cubic feet of natural gas daily from the Marcellus production region in West Virginia. Turning to our commercial energy systems business, our portfolio of distributed generation assets continued to grow this quarter. And as of March 31, we had over 134 megawatts of capacity in-service with an additional 63-megawatt contracted or under construction. WGL Energy recently received approval to build and operate over 15 megawatts of community solar gardens in Minnesota as part of the utility program mandates in that space. WGL Energy has secured subscribers for all of these community solar gardens under a – that are under contract and the target operational date is later in the fall of this year. This investment highlights WGL Energy’s continued strategy of growing its distributed generation assets portfolio by taking advantage of favorable legislation in states like Minnesota. Finally, we look forward to seeing many of you at the AGA Financial Forum in a couple weeks. And that concludes our prepared remarks and we will now be happy to answer your questions. Question-and-Answer Session Operator Thank you. The question-and-answer session will begin now. [Operator Instructions] We will take our first question from Mark Levin, BB&T. Please go ahead. Mark Levin Thank you, gentlemen. First question, as it relates to Constitution and maybe how to think about it, as it relates to your long-term guidance and what’s embedded in it, I realize you guys don’t want to quantify it quite yet, but maybe giving us some of the parameters at least to think about? Vince Ammann Yes. Mark, this is Vince. As it relates to our long-term guidance, we – at this point, wouldn’t expect to change that because we think the project is good and it’s worth going forward. So that’s the way we view it from a long-term perspective. What we have done in the short-term is, we have suspended the accrual of AFUDC and that’s just a prudent thing to do, as we are waiting to get this issue resolved. Mark Levin Got it, fair enough. And in your options with regard or the options with regard to Constitution and maybe the timeline as to how to think about how that would proceed? Terry McCallister Yes. This is Terry. I think it’s probably a little premature for us to know that. I think all the partners are looking at that and saying, what are the options, how would we go forward on that. And so I think we are probably just a little – you are probably just a little ahead of the curve for us to know exactly what that looks like, yes. Mark Levin Got it, fair enough. And then finally, just with regard to the gas reserve opportunity, is it reasonable to assume that you guys would be able to strike an agreement sometime this fiscal year. And then the second part to that would be, maybe some of the lessons that you learned from the first attempt? Adrian Chapman Mark, this is Adrian. I think as we have mentioned last quarter, where our target is still to get a filing out before the end of our third fiscal quarter. So I think we are still working towards that as an end result. And I think certainly the commission’s focus was looking at probably the length of the term of the reserve agreement. The 20-year term was a concern of theirs and just uncertainty about pricing in the future. They were – expressed some concern about the different perspectives on the reserves and the volumes in the reserves and what the depletion rates were. So there was some differences of opinion in the hearings about that and I think we just need to be able to give them some greater certainty as to what deliverability would look like, because for a given fixed investment, lower volumes would mean a higher price per dekatherm. So that was the primary concern that they had. So we are working to try to fill those issues, fill those gaps and give the commission comfort with some greater balance of risk associated with an investment. Mark Levin Got it, great. Thanks guys. I appreciate it. Operator And your next question comes from the line of Sarah Akers with Wells Fargo. Your line is open. Sarah Akers Thanks. Good morning. Terry McCallister Hi Sarah. Sarah Akers Can you go over again the reasons for the lower utility outlook this year and any sense of the magnitude of the change in expectations there? Vince Ammann I will take a stab at that Sarah, this is Vince. We haven’t – traditionally, throughout the quarter, we haven’t provided specific guidance for the operating segments by – as we go from quarter-to-quarter, just started giving out, as you know consolidated guidance. But the only issue that we are addressing here on the – and what we have discussed is a couple of factors. We continued to see some higher operating expenses in the field as it relates to just leak repairs and system integrity type works that we have been doing that was a little ahead of what we have planned for the current year. We also have seen some higher project expenses. We launched a new e-service portal this year and that’s sort of in advance of going live with our new billing system next year and we had some difficulties when we first launched that and we have spent some dollars to bring that system back to good working condition. So, those are some of the issues that we see that were pretty temporary just for this quarter. And as it relates to the initial guidance and where we saw things last quarter. So, those particular items shouldn’t continue significantly for the rest of the balance of the year. So it’s pretty much a second quarter phenomena that then just caused us to re-think where we were going to be for the rest of the year. So those are the items on the utility side. That’s all I can think of Adrian that is of significance. If you have anything else you want to add, I think. Adrian Chapman No, I think you covered it. Sarah Akers Great. Thank you. And then just one on the midstream, so it sounds like there is some unexpected strength there, do you view that more as one-time opportunistic margins or should that uplift sustain into future years? Gautam Chandra Sarah, this is Gautam. I would say that the up-tick that we saw in midstream is based on the market conditions that we saw in midstream this year that we were able to capitalize on. Now as we have mentioned before, our storage portfolio is a low cost portfolio. So we expected to have good returns in the long-term, but there are some up-ticks and downticks depending on the exact storage spreads in any given year. Vince Ammann Yes. I would only add Sarah, that as we have said – we saw in recent years, we certainly know we can make money on that storage portfolio when the weather is extremely cold and we have the opportunity to pull gas out of storage at real high margins. But what we saw this year is confirming our expectation, which is when the weather is warmer than normal. There is also opportunities to see the seasonal spreads get very significant. So we came out of this winter heating season with a significant amount of gas. As an industry, it’s still in storage and the production levels were still high. So essentially, we saw the front end of the curve come down quite substantially and then yet the pricing for next winter stayed pretty firm. So we saw some good spread opportunities, which is what we would expect when you have warmer than normal sort of winter. So yes, I think as the supply balances out with our country storage, we do see that this is a – the storage play continues to be a low-risk opportunity to create some margins from the value added by storage. Adrian Chapman Sarah, this Adrian. We also hedge forward to some level. When we see that opportunity, we will hedge forward. It’s kind of how big the opportunity, but a lot of it or some of it just lock in a fair amount of value and so when prices fell this last quarter and the forward value didn’t fall, we locked in some of that value. So that’s why we are projecting that pick up during the second half. Sarah Akers Okay, great. Thank you. Operator 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 May 12, 2016. You may access the replay by dialing 1-855-859-2056 and entering PIN number 97338125. There are no further questions at this time. And I will turn the call back to Mr. Bonawitz for any additional or closing remarks. Doug Bonawitz Well, thank you all for joining us this morning. And if you do have further questions, please don’t hesitate to call me at 202-624-6129. Thanks and have a great day. Operator This concludes our conference call for today. Thank you for participating. All parties may disconnect now. 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