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South Jersey Industries’ (SJI) CEO Michael Renna on Q2 2015 Results – Earnings Call Transcript

South Jersey Industries Inc. (NYSE: SJI ) Q2 2015 Results Earnings Conference Call August 7, 2015 11 AM ET Executives Ann Anthony – Treasurer Michael Renna – President & Chief Executive Officer Stephen Clark – Senior Vice President & Chief Financial Officer Jeffrey DuBois – Executive Vice President Marissa Travaline – Director Investor Relations Operator Good day, ladies and gentlemen, and welcome to the Q2 2015 South Jersey Industries Earnings Conference Call. My name is Scoda, and I’ll be your operator for today. At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to your host for today, Ann Anthony, Treasurer. Please proceed. Ann Anthony Thank you. Good morning and welcome to the conference call for SJI’s second quarter fiscal 2015 results. I’m Ann Anthony, Treasurer for South Jersey Industries. And I’m joined today by members of our senior management team, including Mike Renna, President and CEO of SJI; Steve Clark, our CFO; Jeff DuBois, President of South Jersey Gas; and Marissa Travaline, our Director, overseeing Investor Relations. As you may know, we issued a news release this morning announcing the results we will be discussing on the call today. That release includes an in-depth review of earnings on both a GAAP and non-GAAP basis using our non-GAAP measure of Economic Earnings. This measure eliminates all unrealized gains and losses on commodity and on the ineffective portion of interest rate derivative transactions. It also adjusts for realized gains and losses attributed to hedges on inventory transactions and for the impact of transactions or contractual arrangements where the true economic impact will be realized in a future period. The news release is currently available on our website at www.sjindustries.com, in the Newsroom section. Throughout today’s call, we will be making references to future expectations, plans and opportunities for South Jersey Industries. These remarks constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual future results may differ materially from those indicated by these statements as a result of various important factors, including those discussed in the company’s Form 10-K on file with the SEC. We assume no duty to update today’s statements should actual events differ from expectations. Also note that our 2014 numbers have been adjusted to reflect the impacts of the stock split that occurred on May 8. With that said, I’d like to turn the call over to our CFO, Steve Clark, to detail our year to date and second quarter 2015 results. Stephen Clark Thank you, Ann, good morning to everyone on the call and thanks for joining us. As we stated in the release, earnings were impacted by a write-down of our investment in cost associated with the central energy facility that previously served the former Revel property in Atlantic City. We’ve discussed on previous calls Revel’s bankruptcy and closing in mid-2014 in a long drawn-out sale process that was completed in April of this year. Since our central energy facility is the logical source of power for the Revel property, we anticipated that our contract provides heating, cooling and power to the facility would be renegotiated to some reduced level with the new owner. Unfortunately, the new owner has shown little to no interest in reopening Revel or striking a deal for energy services. While we remain ready to provide service to Revel, a lack of any recent and meaningful progress toward this new deal awarded the write down we took in the second quarter. This write down reflects our investment in central energy facility of Revel. It does not include the value of our cogeneration equipment located within the facility as we expect to be able to repurpose that equipment to serve better customers. Now, let’s review results. Year to date, economic earnings totaled $60.8 million. Excluding the year to date Revel related write down of $11.1 million, operating results would have reflected economic earnings of $71.9 million for the first half of 2015, as compared with $76.2 million for the first half of 2014.The remaining variance between These year over year periods largely reflects the significant contribution to economic earnings from our wholesale gas marketing business in the first quarter of 2014, which directly resulted from the Polar Vortex we experienced in the early part of the year. The variance also reflects a reduction in investment tax credits from solar development. First the second quarter, economic earnings totaled $1.9 million in 2015. Excluding the write down of $10.9 million for the quarter, operating results would have reflected economic earnings of $12.8 million as compared with $10 million in the second quarter of 2014. The biggest drivers of the quarterly improvement in operating results between 2014 and 2015 are contributions from our utility due to infrastructure investment and customer growth, as well as significantly improved performance from our wholesale commodity business. Actual economic earnings per share through June 30, 2015 were $0.89 as compared with $1.16 for the first six months of 2014. For the quarter, economic EPS totaled $0.03 as compared with $0.15 in the prior year period. Excluding the impact of the thermal facility write down, 2015 economic earnings per share would have totaled $0.19 for the year to date and $1.05 for the second quarter. Now, I will detail the results of specific areas of our business, noting those business lines or segments where the write down had a major impact on economic earnings. Within the utilities, South Jersey Gas’ net income for the first half of 2015 was up 15% at $47.8 million as compared with $41.5 million for the first half of 2014. For the quarter, utility net income was $5.2 million, significant increase over the second quarter of 2014 contribution of $3.8 million. This improvement reflects the benefits of last year’s rate case, our accelerated infrastructure programs and customer additions. Infrastructure investments under our accelerated programs totaled $28.7 million year-to-date and added an incremental $1.7 million of net income for the first half of 2015. With planned investments of nearly $65 million for 2015, our AIRP and SHARP programs will continue to reinforce our system for the replacement of bare steel and cast-iron gas main and the replacement of low pressure gas main with high pressure main along barrier islands. Also worth noting, we are moving forward again in our pipeline project to provide natural gas to the BL England electric generation station and enhance service reliability to customers in the southernmost portions of our operating territory. In May, South Jersey Gas filed an amendment to our 2013 project application still pending with the New Jersey Pinelands Commission. The amended application highlights the enhanced reliability and environmental benefits this project will provide customers across the region. We remain optimistic of the compelling benefits of this project to all residents in Southern New Jersey or ultimately result in its successful completion. Customer growth continues to be significant, up over 6,400 customers [or 1.8%] for the 12 month period ending June 30, 2015. On an annualized basis, these customers will be worth approximately $1.7 million of net income in future years. Our growth continues to benefit from strong conversion activity with nearly 2,800 new customers coming from conversions during the first half of 2015 and a target of 6,500 for the full year. I do want to point out that the collection of deferred gas cost from the winter of 2014 combined with the extremely cold winter this past year has resulted in high receivable balances as of the end of June, which in turn have resulted in higher receivable reserves of the utility. We boosted reserves by roughly $800,000 for the quarter or $500,000 after tax, reflect a situation that we will continue to monitor closely. Now, I’ll move over to the non-utility side of our business and discuss results from South Jersey Energy Services and South Jersey Energy Group. Energy Services largely reflects our energy production assets within Marina Energy and our energy project joint venture Energenic. Energy Group reflects our wholesale gas and retail gas and electric commodity business activities. The first six months of 2015, these non-utility businesses contributed a combined $13 million as compared with $34.7 million in 2014. Year over year variance stems from two major events, first being the previously noted write down of our central energy facility assets, second is the non-recurring benefit to our wholesale business realized from the Polar Vortex in the winter of 2014 that drove gas volatility and ultimately net income in the first quarter of that year. Reduction in solar ITC also played a smaller role in the year over year decline. In the second quarter of 2015, our non-utility businesses reflected a loss of $3.3 million as compared with economic earnings of $6.2 million in the prior year period. We will take a look at the other drivers of these results as I detail each of the business lines. Beginning with South Jersey Energy Services, this part of our business directly absorb the full write down noted previously. However, for the purpose of comparing operating results in the context of this discussion, I think it is more meaningful to [prevent] economic earnings that exclude the impacts of the write down, which amounted to $11.1 million for the first half of the year and $10.9 million for the second quarter. With this in mind, economic earnings for the first half of 2015 for South Jersey Energy Services, excluding the write down, were $15.7 million as compared with $20.8 million for the same period in 2014. For the quarter, results were $6.9 million as compared with $10.1 million for the second quarter of 2014. Lower levels of ITC recorded for both the 2015 year to date and second quarter periods accounted for the majority of the variance. First quarter 2014 Polar Vortex related performance in our wholesale gas marketing business and 2014 earnings from our energy facilities serving Revel were obviously not repeated. Excluding the impact of the write down, operating performance from our CHP business line reflected economic earnings of $2.6 million per year to date, as compared with economic earnings of $4.9 million in the first half of 2014. For the quarter, operating performance for this business produced economic earnings of $300,000 as compared with $1.5 million in the second quarter of 2014. In addition to legal costs incurred and income loss from operations at Revel, 2015 did not see a repeat of the benefits incurred from optimizing these assets, here I’m specifically talking about the energy production assets, around extreme gas price volatility that existed during the winter of 2014. Going forward, we expect our operating projects to be steady and positive contributors to economic earnings. Turning to renewables, our solar operating performance improved by nearly $400,000 year over year. This is reflected in our year to date solar economic earnings of $15.1 million, which included investment tax credits of $17.3 million as compared with the prior year economic earnings of $17.5 million, which contained ITC of $20.1 million. For the second quarter, solar contributed $7.2 million, including $7.1 million of ITC, as compared with $9.8 million that included $9.6 million of ITC in the prior year period. The increase in 2015 solar energy production, particularly in the second quarter, has not yet been fully recognized in earnings due to the timing of certification of renewable energy certificates, particularly as it relates to Massachusetts. That certification process can take up to six months. We expect to see those benefits in the second half of this year. We do expect to see improved operating performance through year end. We remain on track for full year SREC production of 135,000 SRECs. SREC values in New Jersey continue to strengthen, spot market price is now around $237. We also remain very active in the Massachusetts market, where SREC spot market values are closer to $465. For the first half of 2015, our landfills produced a loss totaling $2.3 million as compared with a loss of $2.2 million in the prior year period. However, the second quarter saw operating performance improve their reduced loss of $900,000 in 2015 as compared to a loss of $1.3 million for the second quarter of 2014. We remain optimistic that the operational initiatives implemented over the last two quarters will help drive continuing improvement for these projects. Turning to South Jersey Energy Group, the commodity segment of our business, the first half of the year reflected solid performance with economic earnings totaling $8.5 million as compared with $13.9 million for the first half of 2014. These results reflect a benefit price volatility associated with the 2014 Polar Vortex. As we told you to expect on previous calls, performance for this business improved significantly in the second quarter. This segment contributed $671,000 as compared to a loss of $4.3 million in the second quarter of 2014. With the declining drag from what’s profitable legacy marketing contracts that began rolling off at the end of March and the contributions from the two fuel management contracts that are currently active and with another pending to commence later this year, we expect continued improvements from this business throughout 2015. Finally, taking a look at the balance sheet, our equity-to-cap ratio was 43% at the end of the second quarter, as compared to 44% in the second quarter of 2014. We use our dividend reinvestment plan to issue equity and we’ll continue to do so in 2015 in support of our significant capital programs. We also [indiscernible] $300 million of deferred tax benefits related to our investments that we expect to realize between now and 2020 that will support our goal of delivering – delevering the balance sheet. At this time, I’ll turn the call over to Mike to discuss the forward view for our business. Michael Renna Thanks, Steve. Good morning. As Steve highlighted in his comments, the write down of our investment in the energy facilities serving Revel mitigated much of the positive performance for the quarter. I think most of the detail around that transaction is already been articulated here today, as well as within our earnings release and 10-Q filing. The one think I’d like to add is that we’re encouraged by what we see happening in Atlantic City, we look forward to the day when the former Revel property, part of the City’s broader success, but ultimately we decided that the best thing for our company is to look forward. Doing so will allow us to fully focus on strengthening the business lines that are the foundation of our growth. Businesses, that after backing out the impact of Revel, actually supported economic earnings per share growth 4% to 8% in 2015. In an emphasis on earnings quality, we look forward to continued strong performance in our utility, increase contributions from our commodity businesses, stable performance from our operating energy production assets. As we move forward, we do so with a model that emphasizes our regulated businesses and those areas of our non-regulated business. We have a demonstrated ability to compete and succeed. Most importantly, we will remain confident in our ability to deliver economic earnings of $150 million by 2020. I think focusing on earnings from operations provides a meaningful year over year comparison performance, while also highlighting the strong potential for our business overall. Year to date performance of our utility highlights the potential of South Jersey Gas, increase its contribution to SJI earnings from roughly 60% to 65% to upwards of 70% to 75% as we approach 2020. Significant customer growth fuelled by the compelling economics of natural gas as the heating fuel, we expect to add an incremental $11.8 million by 2020. Accelerated utility infrastructure investment is projected at nearly $350 million over the next five years, adding roughly $18 million in incremental net income by 2020. These initiatives combined with the benefits from new CNG infrastructure, the development of a reliability pipeline to serve BL England, construction of a liquefier at our Nat LNG storage site and a future rate case position our utility for an incremental net income contribution of roughly $13 million again by 2020. On the non-regulated side, strong margins in our commodity business, commencement of at least five new fuel management contracts and improving operating performance across our energy production assets support earnings contributions of $30 million to $40 million by 2020. Most importantly, this growth is targeted without reliance on investment tax credits from renewable projects, coming instead from expanded and improved performance across our core businesses. Finally, we expect our investment in the Penn East pipeline to contribute at least 10% of total net income by 2018. This fully subscribed pipeline is being driven by [climates] of more than 800,000 decatherms from regional utilities and utility affiliates, and is expected to be in service by late 2017. While there is certainly vocal opposition to some pipelines, including Penn East, we expect the overwhelming benefit will provide the region to ultimately overcome the opposition. Before we conclude, I’d like to highlight strategic priorities we shared during the second quarter’s AGA conference. As we work toward our goal of achieving $150 million in economic earnings by 2020, we’re committed to strengthening our balance sheet, maintaining a lot to moderate risk profile, perhaps most importantly improving quality of earnings to ensure that the foundation of our business is built on regulated, repeatable, and reliable income streams. Thank you. Now, I’ll turn the call back to the operator for Q&A.

Great Plains Energy’s (GXP) CEO Terry Bassham on Q2 2015 Results – Earnings Call Transcript

Great Plains Energy Inc. (NYSE: GXP ) Q2 2015 Earnings Conference Call August 7, 2015 9:00 a.m. ET Executives Lori Wright – VP of IR and Treasurer Terry Bassham – Chairman, President and CEO Jim Shay – SVP, Finance and CFO Analysts Ali Agha – SunTrust Paul Ridzon – KeyBanc Shar Pourreza – Guggenheim Partners Brian Russo – Ladenburg Thalmann David Paz – Wolfe Research Operator Good day, ladies and gentlemen, and welcome to the Great Plains Energy Second Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder, this conference may be recorded. I would now like to turn the conference over to our host for today’s conference, Ms. Lori Wright. You may begin. Lori Wright Thank you, operator, and good morning. Welcome to Great Plains Energy’s second quarter 2015 earnings conference call. Today, Terry Bassham, Chairman, President and Chief Executive Officer; and Jim Shay, Senior Vice President, Finance, and Chief Financial Officer will provide an overview of our second quarter results. Scott Heidtbrink, Executive Vice President and Chief Operating Officer of KCP&L and Darrin Ives, Vice President, Regulatory Affairs are also with us this morning, as our other members of our management team who will be available during the question-and-answer portion of today’s call. I must remind you of the inherent uncertainties in any forward-looking statements in our discussion this morning. Slide 2 and the disclosure in our SEC filings contain a list of some of the factors that could cause future results to differ materially from our expectations. I also want to remind everyone that we issued our earnings release and second quarter 2015 10-Q after the market closed yesterday. These items are available, along with today’s webcast slides, and supplemental financial information regarding the quarter on the main page of our website at greatplainsenergy.com. With that, I’ll now hand the call to Terry. Terry Bassham Thanks, Lori. And good morning everybody. As you saw in the 8-K that was filed yesterday, we are announcing a change in our officer team. Jim Shay will be leaving the company effective September 2 to take a new role as CFO at Hallmark Cards here in Kansas City. It’s truly been an honor and pleasure to work with Jim and we appreciate his leadership. Replacing Jim as Senior Vice President Finance, Strategy and Chief Financial Officer will be Kevin Bryant. Many of you know and have already worked with. Kevin is currently our Vice President, Strategy Planning and has been with Great Plains Energy for 12 years. His responsibilities at the company include Vice President of Investor Relations and Treasurer and Vice President of Energy Solutions. He is very eager to assume his new responsibilities and in particular working with each of you. I hope you’d join me to wishing Jim the best in his new opportunity and welcoming Kevin to his new role. On our call this morning, we will discuss our second quarter results and provide an update on KCP&L’s rate cases in Missouri and Kansas. We’ll also give an operations update and an overview of Transource’s new project in West Virginia. I will begin with Slide 4 in the presentation. Yesterday, we announced second quarter 2015 earnings of $44 million or $0.28 per share compared to $52 million or $0.34 per share in 2014. Drivers for the quarter included favorable operations and maintenance expense, positive weather normalized demand growth and milder weather with cooling degree days 15% below the second quarter 2014. We also reaffirmed our 2015 EPS guidance range of $1.35 to $1.60. Jim will discuss more details on the quarter in his comments. On the regulatory front, KCP&L’s rate cases are on schedule to be completed during the third quarter. In Missouri evidentiary hearings were completed in July and founder reply briefs were filed earlier this week. KCP&L’s initial request in revenue increase of $120.9 million was subsequently adjusted to $112.7 million as a result of updates to the case and negotiated partial stipulations and agreements. As a reminder, KCP&L’s request is based on a return of equity of 10.3%. Missouri Public Service Commission staffs recommended revenue increase ranges in the $76.8 million to $87.3 million predicated on our ROE range of 9.0% to 9.5%. The partial stipulations and agreements that have already been approved by MPSC resolved several issues in the case. The remaining unresolved items include ROE as well as the company’s ability to utilize a fuel clause and trackers for property taxes and critical infrastructure protection standards or CIPS cybersecurity expenses. In Kansas, evidentiary hearings concluded in June and reply briefs were filed earlier this week. KCP&L requested a revenue increase of $67.3 million based on a return of equity of 10.3. The Kansas Corporation Commission staff recommended a revenue increase of $44 million based on an ROE of 9.25. Turning to the Missouri case, we were able to resolve a majority of the issues in our Kansas case and partial stipulations and agreements were filed in June. The agreements include the ability for KCP&L to implement a transmission delivery charge rider and a CIPS cybersecurity tracker. Stipulations and agreements have yet to be approved by KCC. With most of these issues settled, ROE remains as one of the few unresolved items in the Kansas case. We anticipate new rates to be effective in both KCP&L’s jurisdictions by the beginning of the fourth quarter of the year. You can find summaries of the rate cases in the appendix of this presentation. We remain confident in our ability to deliver constructive regulatory outcomes in our current proceedings, reinforcing our commitment to deliver 4% to 6% earnings growth from 2014 to 2016. In addition, we remain on target to grow rate base to 6.5 billion by 2016. Turning to operations. Earlier this week, the Environmental Protection Agency issued the final standards for its Clean Power Plan. As we analyze the more than 1500 page document we are getting a better understanding of the plan and its potential impact. Although KCP&L and the electric power industry have spent more than a year working with EPA on a viable solution, the final version of the Clean Power Plan has significantly changed from the draft, we will continue evaluating the new rules. In recent months, our service territory has been impacted by the number of severe weather events, including a storm in late June that led to our largest customer outage since 2002. Storms uprooted or caused significant damage to over 50,000 trees, left over 150,000 customers without power. Our employees and our neighboring utilities worked diligently and safely to restore power to our customers, and I’d like to take this opportunity to thank everyone for their efforts and execution. I will wrap up with a few comments on transmission. We are pleased that Transource, our joint venture with AEP, was selected by PJM to develop the competitive portions of the thoroughfare area project in West Virginia. Construction on the 60 million 138 KV line is expected to begin in 2017 and to be in service in 2019. This win in the emerging competitive transmission market combined with its existing SPP projects reinforces our belief that Transource is well-positioned to successfully compete and deliver innovative solutions. I’ll now turn the call over to Jim to discuss our financial performance. Jim Shay Thank you, Terry and good morning everyone. I will begin with Slide 6 which presents a comparison of the second quarter and year-to-date earnings-per-share results for 2015 compared to 2014. As Terry indicated, our second quarter 2015 earnings was $0.28 per share compared to $0.34 per share last year. Lower operating and maintenance expense, positive weather normalized demand growth and new retail rates in Kansas were positive drivers that were more than offset by milder weather, decrease in AFUDC and increases in depreciation and amortization. For the year-to-date period, earnings were $0.40 per share compared to $0.49 per share last year. Through the first half of 2015, we’ve seen favorable O&M expense driven by diligent cost management and lower cost at Wolf Creek, related to the planned 2014 mid-cycle maintenance outage and lower refueling amortization. For the second half of 2015, we expect our O&M expenses to increase above the 2014 level. Consistent with our 2015 guidance, we expect overall O&M for the full year to increase 3% to 4% which include increases in regulatory amortizations and items which have direct revenue offsets. As a reminder, the O&M items with direct revenue offsets include our Missouri Energy Efficiency Investment Act programs. These investments allow us to invest in our customers by providing long-term energy solutions and ability to generate shareholder returns. We recover program costs and a throughput disincentive for these programs, which is included in our gross margin. Our projected O&M increase for the full-year 2015, exclusive of regulatory amortizations and items which have direct revenue offsets, is 1% to 2%. Turning to Slide 7. As we think about the third quarter compared to a year ago, we will be impacted by a decrease in AFUDC and increasing O&M. We will also expect continued lag from property taxes, transmission costs and depreciation until new rates are in effect. Lower natural gas prices are negatively impacting off-system sales, which have an earnings impact to KCP&L and Missouri, where we do not have a fuel clause. As Terry discussed, KCP&L’s ability to utilize a fuel clause is one of the remaining items to be determined by the commission in the Missouri rate case. A fuel clause would mitigate the exposure to off-system sales going forward. Finally, in the third quarter of 2014 we had unrecognized tax benefits that will have an unfavorable year-over-year comparison. As a result of these drivers, we expect third quarter 2015 earnings will be lower than the same period in 2014. Weather normalized demand, net of the impact of our energy efficiency programs, was up 1.2% for the quarter and up 0.6% year-to-date through June. The results are in line with our full year projection of flat to 1.5% net of energy efficiency. Year-to-date we’ve seen strong residential and commercial demand partially offset by lower industrial demand which has the lowest margin among the sectors. The Kansas City region has experienced 47 consecutive months of seasonally adjusted job growth and in June the unemployment rate of 5.3% was below the national rate of 5.5%. Construction is well underway at Cerner Corporation’s new Trails Campus in South Kansas City. The first two towers which will accommodate more than 3500 employees are under construction and a move-in date likely in early 2017. Over the next 10 years, a total of 16 new buildings containing 4.7 million square feet of office space supporting approximately 16,000 employees are planned, making it the largest economic development project in Missouri’s history. On the industrial front, we were impacted by a customer relocating to a more energy-efficiency facility within our service territory and a general decrease in usage from a handful of customers. Demand at Ford’s Kansas City assembly plant remains strong. Sales of Ford’s F-150 pickup truck had benefitted from gasoline prices that are near a five-year low. The Ford plant is operating with three shifts to keep up with demand for the F-150 America’s best-selling vehicle. On the capital markets front, we expect to issue long-term debt at KCP&L this year with no plans at this time to issue equity. We are reaffirming our 2015 earnings-per-share guidance range of $1.35 to $1.60. We are on plan to deliver on our financial objectives for the year and we remain confident in our ability to deliver 4% to 6% earnings growth from 2014 to 2016. Thanks for your time this morning. We would now be happy to answer any questions you may have. Question-and-Answer Session Operator [Operator Instructions] And our first question comes from Ali Agha of SunTrust. Ali Agha Terry or Jim, in the past, I had a call coming out of the last rate case cycle, you had mentioned that target earnings power for the company, should be between 50 to 100 basis point lag from the authorized ROE. Is that still a good rule to think about as we come out from this better [ph] rate cycle? Terry Bassham Yes, I think that’s what we’ve said all along, as the first year out of the case you should see that kind of range. Obviously what can affect your ability to deliver within that range, so it will be based on the outcomes of these cases. A few issues around riders and trackers and things like that. But certainly coming out as we did in the last cycle, the year after should be better matched to our historical test year. Ali Agha And then on the riders, trackers, fuel adjustment clause, any insights into how the commission may be looking at that, any sense of or conviction level in terms of the ability to get those this time around? Terry Bassham Well obviously we’re still awaiting an order, so probably little premature to have handicapped those. I would say that they remain very important to us. You can see some things that have happened in other cases that could indicate where they ruled on those before. But I will again remind you that we did get the CIPS tracker in Kansas and that’s a positive going forward for sure. We certainly – Commonwealth [ph] is expected to see those orders and rates implemented in this quarter. Ali Agha And assuming you do get those trackers and fuel adjustment clause, is it possible for you to hold on to that earned ROE in the following year like in ‘17 or is that just the natural lag in the way things work that you see some slippage as you go beyond the – on to the next year from the rate case? Terry Bassham Well obviously depend on which of the trackers, obviously we feel confident and think it important that we get the fuel factor itself in Missouri. There is a transmission piece and in the other asks we’ve made. Obviously if we’ve got all of the trackers, riders and asks we’ve made in that front makes it easier the second year, the extent you don’t get on this certainly makes it more difficult. What I would say to you is that if the — we don’t get those riders and trackers because they are considered general rate case type ask we will have to file rate cases on a much more frequent basis and we will do that. That was our response in this case with our prior asks and so what you’ll see from us if we are not allowed to deal with those in that manner is filing general rate cases much quicker. It’s just the nature of what we would assume is an indication from the commission. Ali Agha And lastly can you just remind us when you talked about the ’14 to ‘16 earnings growth outlook, can you just remind us what that base for ’14 is? Jim Shay It’s $1.60, off of the original guidance range. $1.60 was the bottom end of the original guidance range. Operator And our next question comes from Paul Ridzon of KeyBanc. Paul Ridzon Jim, congratulations on your new position and new role. I wish you the best of luck. It’s been a pleasure working with you over the years. Jim Shay Thank you. Paul Ridzon Quick question. How much of a headwind is not having the Missouri fuel clause? Terry Bassham Well, obviously it would be a disappointment and in the way we believe we’re entitled to it, it’d be a great disappointment candidly. In terms of actual financial effect, we already talked about the fact that we would have to file case again pretty quickly and at this point with off-system sales which are embedded in that being a very low level and an update on coal cost at the time it wouldn’t be a bigger drag as it historically has been. But it certainly would be one more challenge we’d have to face but we would again quickly file as appropriate ask for that in the next case. Paul Ridzon So just historically you had a fuel clause but you had to give it up as part of the deal. Is this how you treat, correct? Terry Bassham No, not really. Back in ‘04 when the original comprehensive energy plan was signed, there weren’t fuel clauses in Missouri. There was some discussed legislation that could create that. And so as we finalized the comprehensive energy plan and the deal, if you will, included gives and takes on both sides. It was agreed by the company not to ask for a fuel clause if and when legislation provided for that for our 10 year period. So that brings us to 2015 as our first opportunity to ask for it. Paul Ridzon And just on the transmission and property tax in Missouri, where does that stand as far as legislation or are you seeking more of a regulatory solution at this point? Terry Bassham Well again we’ve asked for both of those in the case. We will know again this quarter the result of that request from a commission standpoint, certainly if we’re not allowed to get those from the commission’s standpoint that would become part of our legislative agenda for the upcoming session. Operator And our next question comes from Brian Chen [ph] of Bank of America. Unidentified Analyst On the thoroughfare area project, can we get a sense of the spending pattern for that? Is there a ramp up as you sort of gear, should we think about even spending between now and ’19, just a little bit more color there would be great? Terry Bassham It will be about $60 million that will get spent from the period of from 2017 to 2019 would be the run rate. Unidentified Analyst And just as a clarification, the $60 million is the investment opportunity for Great Plains or is that the investment opportunity for the entirety of the project? Terry Bassham For the entire project. Great Plains will have 13.5% of that. Unidentified Analyst And Jim, hey congratulations on the new position. I’m just glad that I won’t have to potentially wear a Kansas Jayhawks tie again. Operator [Operator Instructions] Our next question comes from Shar Pourreza of Guggenheim Partners. Shar Pourreza Just one question, I am curious to get a refreshed viewpoint a little bit on sort of the requested ROE adjustment mechanism that Westar filed and obviously the staff recommended against it but also left it open for potential generic proceedings. I am curious to see if that’s something you would potentially look to go after with your Kansas utility? Terry Bassham Yes, I can mean, obviously each case presents its own issues and opportunities, that was a request from Westar that they left open, and certainly to the extent that there was a discussion on a more statewide level we would want to participate, work with both the commission and the staff and Westar to discuss that opportunity. Shar Pourreza Has conversations begun as far as the joint collaboration yet or is it too preliminary? Terry Bassham The cases they don’t file, settlement just happened. So we’ve been busy getting ready for this call. Operator And our last question comes from Brian Russo of Ladenburg Thalmann. Brian Russo Just curious if we could just talk some more about the lower gas prices and the sensitivity on the wholesale sales at the Missouri utilities. Could you just give us a sense of kind of like the total amount of wholesale sales in terms of megawatt hours, just kind of the mechanics of that, like what’s the base line that the sensitivity is based off of? Terry Bassham We don’t really have a lot of information in the public domain with respect to specifics but you recall in the last case we got offset of off-system sales established in rates and relative to over or under performance we will either get the benefit or give up an opportunity. And we have seen some pressure on gas prices this year which has been putting some pressure on off-system sales but in the upcoming rate case we will get a – we will get that trued up and hopefully a fuel clause and eliminate that volatility moving forward. But we really don’t have any numbers in terms of actual sensitivity in the public domain. And recall that the prices obviously were at lows, so I mean opportunity hopefully will be that they would tick up a little bit but – Operator I am showing a question from David Paz of Wolfe Research. David Paz I just wanted to clarify a statement I think I heard earlier. Can you remind me on the 4% to 6% growth target over the ’14-15 period? What is the base again? Terry Bassham It’s off of the original guidance for ’14 which is $1.60 to $1.75. So a pretty wide range using 4% to 6% growth rate off of that range. David Paz I thought I heard you say $1.60, I just want to make sure – Terry Bassham No, I was pointing to the bottom end of the range but the original – but the guidance target is off of the full range. End of Q&A Operator I am showing no further questions. I’d now like to turn the call back over to management for closing remarks. Terry Bassham Thank you, operator and thank you everybody for joining us this morning. We appreciate as always your participation in the call. Look forward to meeting with many of you in the weeks, months ahead. So thank you and have a good weekend. Operator Ladies and gentlemen this concludes today’s conference. Thank you for your participation and have a wonderful 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. 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Star Gas Partners’ (SGU) CEO Steven Goldman on Q2 2015 Results – Earnings Call Transcript

Star Gas Partners LP (NYSE: SGU ) Q2 2015 Earnings Conference Call August 04, 2015 11:00 AM ET Executives Steven Goldman – CEO Chris Witty – IR, Darrow Associates Richard Ambury – CFO Analysts Andrew Gadlin – Odeon Capital David Spier – Nitor Capital Michael Prouting – 10K Capital Operator Hello and welcome to the Star Gas Partners, Fiscal 2015 Third Quarter Results Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today’s presentation there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being record. I would now like to turn the conference over to Steve Goldman Star Gas Partners’ Chief Executive Officer. Please go ahead, sir. Steven Goldman Thank you, Chad. Good morning and thank you for joining us today. With me today is Star Gas Chief Financial Officer, Richard Ambury. After I provide some brief remarks about the quarter and first nine months of fiscal 2015 Rich will review the fiscal third quarter-ended June 30th, 2015 and year-to-date financial results. We will then take your questions. Before we begin Chris Witty of our Investor Relations firm Darrow Associates will read 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 and 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 its annual report and Form 10-K for the fiscal year ended September 30, 2014. 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 Goldman Thanks, Chris. We notice this has been an extraordinary fiscal year thus far as we’ve benefited greatly from falling oil prices and an incredibly cold period this winter unlike anything we have seen in recent memory and we are pleased that we’ve been able to retain much of the benefit of these factors despite an uneven year for weather. Our first quarter and third quarters were certainly an outlook we had planned for what we were counting on in terms of temperatures. Our first quarter you may recall was warmer than normal which challenged us in several ways. It caused equipment sales to be slower than expected and tempered our ramp up of staffing prior to the coldest part of the winter season due to the uncertainty as to how the rest of the winter will proceed. We also faced competitors who are much more aggressive on price to we believe to the lack of weather and related volume. The second quarter was starkly different whether it’s severe temperatures and numerous snowstorms such that we still increased expense related to service and maintenance for both of these during the second quarter and third quarter. I mention this because our third quarter results was somewhat mixed but given the temperatures and other factors impacting it from the quarter before we believe the partnership operated to the best of its ability. In terms of weather the third quarter was cooler during the beginning but that included higher temperatures during May and June. Warm day specifically over 90 degrees helped to drive air conditioning, equipment sales and service so despite the somewhat unusual weather patterns we believe we’ve still been able to deliver our solid results. Our EBITDA and attrition continue to support our belief in that by focusing on the customer and on efficient operations we’re making Star Gas a stronger business every day. One of the areas of improvement that I have spoken about in the past is training and I think it’s important to mention that we are now in the process of creating an internal culture of continuous improvement. We have put in place several new processes to improve the way our employees perform to both better please our customers as well strengthen the bottom line. While we are in the beginning phases of these initiatives our employees have reacted positively to everything we’ve implemented thus far. I mentioned earlier that we’re pleased with our attrition numbers this year but the third quarter’s net attrition was slightly worse than the same period last year and so our sales group has redoubled its efforts to replace these accounts by reaching farther out of our existing footprint for new customers. That said one area of our customer segment that does continue to grow very well has been and is propane and these operations certainly have room to expand even further. In that [way] I’d like to mention we just began operating in Eastern Tennessee this month. We continue to try new things to constantly improve our operating results, notably from a marketing perspective we expanded the use of social media and billboards as two examples to better spread the message about our ability to do more than just service heating equipment. As we all know acquisitions are always an important part of our measure of success, in this regard I’d like to mention that we are in the final negotiations and hopefully we will close soon on another great addition to Star Gas family of businesses and the deal where it’s approximately $20 million. If so when completed we will announce this acquisition. Beside from this acquisition we are also continuing to speak to several other large and small potential owners as usual. Before turning the call over to Rich who will be discussing our financial results I’d like to thank Kim and his team for the tremendous effort that we went through in closing our new credit agreement which allows us to redeem our high interest notes outstanding just to the great deal of time and we’ll strengthen our company financially. With that I’d like to turn the call over to Rich. Richard Ambury Thanks Steven. Good morning everyone. For the third quarter of fiscal 2015 our home heating oil and propane volume decreased by 6% versus last year of 2.6 million gallons to 45 million gallons. Heating degree days were 15% warmer than during the prior year as comparable to fiscal third quarter and 22% warmer than normal. Notes; that temperatures during this non-heating period are not as impactful to annual volume sales as during the heating season. Our heating oil and propane margins increased by over $0.07 year-over-year to approximately $1 per gallon. As a reminder, since the third quarter is a non-heating period with relatively low overall volumes, margins can be impacted quite easily. Total product gross profit was $52 million slightly lower than last year as home heating oil and propane margins were offset by the impact of lower volumes. Star’s net loss declined by $1 million to $8.4 million, largely due to a favorable non-cash change in the fair value of derivative instruments. The adjusted EBITDA loss for the quarter increased by $900,000 to $9.3 million as the impact of higher home heating oil and propane per gallon margins was more than offset by the decline in volume attributable to the warmer weather in a decrease in service and installation profitability. Now let’s review the nine months results. Home heating oil and propane volume rose by 7% as acquisitions primarily [directed] more than offset the impact of net customer attrition, conservations and other factors. In analyzing the results please keep in mind that the first and third quarters of fiscal 2015 were warmer than the first and third quarters of fiscal 2014 while the second quarter of fiscal 2015 was much colder than the second quarter of fiscal 2014. On balance the average temperatures over the nine months period were approximately equal to the average temperatures of the prior year’s comparable period and 5% colder than normal. Volume of other petroleum products rose 27% to 76 million gallons again reflecting significant motor fuel volume provided by Griffith. Total sales declined by 13% to $1.5 billion versus $1.7 billion in the prior year period as the additional sales provided by acquisitions were more than offset by lower selling prices in response to a decline in wholesale product cost of 32% per gallon. Year-to-date product gross profit rose 18% or $64 million to $421 million, due to the growth in sales volume as well as higher home heating oil and propane margins. The decline in home heating oil and propane costs contributed to the per-gallon margin expansion. However as we have mentioned on earlier calls the extreme cold temperatures during the second fiscal quarter of 2015 created additional service requirements. Service and installations gross profit declined by $4 million largely due to the impact of the colder temperatures in storms experience to the second quarter of fiscal 2015. Delivery and branch expenses rose by $23 million or 10%, reflecting the increase in total volume of 10%. These costs increased in the base business on a cents per gallon basis by approximately 3%. As previously mentioned this increase, as well as the higher service expense increased our per gallon margin gross profit requirement. Depreciation and amortization expense rose by $3.5 million, largely due to the Griffith acquisition and interest expense was lower by 19% reflecting lower bank borrowings. Net income increased by $21 million to $83 million due to the impact of higher home heating oil and propane margins, acquisitions and a favorable non-cash change in the fair value of derivative instruments. Adjusted EBITDA increased by $33 million or 26% to a $164 million as the impact of higher home heating oil and propane per gallon margins and acquisition more than offset high operating and service cost largely attributable to cold and temperatures and a numerous snow storms experience during the second quarter of fiscal 2015. Now let’s move over to the balance sheet for a second. We have recently announced that we actually it’s renew five year asset base revolving credit facility that provides the ability to borrow up to $300 million. $450 million during heating season for working capital purposes. The credit facility also provides for a 100 million five year senior secured term loan proceeds from a term loan along with cash on the balance sheet will be used to redeem our 785 senior notes due 2017. The term loan payments schedule is comprised of 10 million per year plus 25% of excess cash flow with the final payment and maturity. We expect to see lower interest expense going forward through this new debt structure. And with that I’d like to turn the call back to Steve. Steven Goldman Thanks, Rich. At this time we would be pleased to address any questions you may have. Chad please open the phone lines for questions. Question-and-Answer Session Operator Thank you. We will now begin the question-and-answer Session. [Operator Instructions] Our first question comes for the day from Andrew Gadlin with Odeon Capital. Andrew Gadlin You mentioned earlier in the call that there is an acquisition in the works for approximately 20 million in proceeds. Can you talk a little bit about geography or business mix? Richard Ambury So New York area company located on Long Island, it’s about somewhere around 19,000 customers it’s a business that more or less reflects our average retail heating oil type business in the area so a very strong competitor of ours so we think of it as a very brand, as I’ve mentioned in the past it’s one of these acquisitions that we’ve been speaking to on and off for years to try to get to this point, we are very excited about the opportunity because we believe it’s a very good addition to Start Gas. Andrew Gadlin And if the acquisition closes mid quarter would you guys put out a press release just to let us know that it’s been done? Steven Goldman We’d either file a press release or an 8-K. Andrew Gadlin Got it. Thanks. And then in terms of the term loan that you are taking out can you remind me what the interest rate on that term loan? Steven Goldman While it’s variable and there is a grid but the lowest grid is LIBOR plus 3 in a quarter. Andrew Gadlin Got it. Well 100 basis points floor? Steven Goldman There is no floor. Andrew Gadlin Okay. And in terms of that facility as you think about it priorities for cash-flow in the near-term would you say you want to pay that tax down as quickly as possible or balancing the opportunities and share buybacks and dividend increases etc. Steven Goldman Sure. We want to balance everything out. The way the excess cash flow covenants to repay anything back over the $10 million, it includes acquisition. So there is no hurry to pay back that loan. So it’s at the end of the term, there is a $60 million bullet which includes the $10 million final maturity, so be it. Richard Ambury We don’t believe that doing this offers our strategy from what we’ve been doing for the last several years, which is looking to make the best use of our earnings to better the business and strengthen the investment of those people that have believed in us up to now. Operator Next question comes from James [indiscernible] with Locust Wood Capital. Unidentified Analyst Hi. Just like to congratulate you guys on a strong third quarter and at Locust Wood we’re just wondering how you guys think about your dividend payout ratios? Richard Ambury We evaluate our dividend payout each and every year, it’s usually sometime in April the fiscal year, depending on what kind of year we’re having and what our opportunities for acquisitions or paying back this debt which is lower rate if not it’s very attractive to keep this outstanding and unit repurchases. Unidentified Analyst Rich, this is Steve also from Locust Wood. Great job you guys have done very well [for us] over the years, would you guys think about in the future reporting your results distributable cash flow basis I mean obviously we can figure it out but the type of people who are following your company it might be helpful to them, have you guys given any thought to that? Steven Goldman No we really haven’t give any thoughts to that, it’s just another non-GAAP SEC type term and I’m not so sure we want to really go down that road right now. Operator The next question comes from David Spier with Nitor Capital. David Spier I just wanted to — most of my questions have already answered, I want to clarify on the term loan, you mentioned about 10 million in annual payments you’re referring to the principal? Steven Goldman That is correct. David Spier Okay, so essentially its 10 million principal payments, and then the interest on that is LIBOR plus you said 375 basis points. Steven Goldman Well, there is a grid depending on our availability, yes. David Spier Okay. It makes a lot of sense. So essentially you’d be able to take down that debt which you’re previously paying about I’d say 11 million in interest payments so you can be able to take it down slowly overtime and then be up about 60 million in the final balloon payment. So that’s correct? Steven Goldman So we do have to set aside 25% of excess cash flow to pay that final maturity during the fiscal year. Operator [Operator Instructions] The next question comes from Michael Prouting with 10K Capital. Michael Prouting I apologize in advance of this background noise. I am at an airport this morning. Just by the way congratulations on the debt refinancing. So it sounds like the strategy really is to not pay that down any quicker than you have to and keep the firepower for any large acquisitions that might come along. Steven Goldman Yes, that’s pretty much it, yes. Michael Prouting Okay. That makes total sense. You talked about an acquisition that you are in the final stages of closing right now. Can you just give us a sense of how the acquisition pipeline looks at this point and also in particular any larger deals that might be out there in the horizon? Richard Ambury It looks probably like it’s been looking for the last several years, whom we’re speaking to four or five different people in different parts of our geography right now. We are always looking to get some others going at the same time. We don’t have anything extraordinarily large that’s imminent right now but again we continue to speak to all potential acquisitions down the road and as I mentioned before this took really several years to get this one done. So you really never know when the seller will be ready to go ahead and finalize the transition. So again it doesn’t look any better than it did before but it isn’t any worse and I think our opportunities are out there and we’re happy where we are with that. Michael Prouting Okay. I appreciate the color on that and I would assume also that as far as valuation is concerned that you’re still within your historical parameters in terms of what you’d be willing to pay. Steven Goldman That is correct. Michael Prouting Okay. And just one I guess somewhat random question, I know there has been discussion previously about collecting or getting rid of the limited partners structure. I’m just wondering if that’s something that’s on the front burner or something that’s going to consideration. Steven Goldman It’s shown on our front burner that doesn’t necessarily mean we won’t look at it from time to time. Operator Our next question comes from Gary [Indiscernible] Unidentified Analyst Okay Steve I believe it was you that said just a couple minutes ago concerning the cash flow, the 25% cash flow to pay back on the term loan. You used the phrase set aside I had read I thought that this had to be paid and not set aside. Steven Goldman I think you are right it is to be paid from 25% of the excess cash flow. Unidentified Analyst Okay at the end of the term or can you do it or is that a long way each should five years. Steven Goldman Yes. The way the term loan worked is we pay 10 million a year for each fiscal year and at the end of each fiscal year we basically see what the excess cash flow is as defined which is roughly EBITDA, less interest, less taxes, less fixed assets, less some pension payments as well as any acquisitions that we might make. Unidentified Analyst There is a cap on it is there are not? Steven Goldman Yes. The cap would be $15 million. That is correct. Unidentified Analyst Yes. Okay, alright so it’s not set aside necessarily it is to be paid. Okay. Steven Goldman That is correct. Unidentified Analyst Okay. That’s okay I just want to clarify. That’s all I have. Steven Goldman Okay. Operator Our next question comes from Gene Riley a Private Investor. Unidentified Analyst Hello. I just have a question about the unit repurchase program in the last two years you’ve been having record earnings and record cash flow but you seem to have ground to a halt on the repurchases when does that turnaround? Steven Goldman Again we look at all opportunities whether its acquisitions having cash on the balance sheet to take debt off the table that’s almost is 9% and we look at it all at various prices and analysis. Operator [Operator Instructions] At this time there are no further questions. So I’d like to turn the conference back over to Steve Goldman for any closing remarks. End of Q&A Steven Goldman Thank you for taking the time today and joining us and for your ongoing interest in Star Gas. We look forward to sharing our fourth quarter 2015 results with all of you in December. Operator The conference has now concluded. Thank you for attending today’s presentation. You may 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!