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Public Service Enterprise’s (PEG) CEO Ralph Izzo on Q1 2016 Results – Earnings Call Transcript

Public Service Enterprise Group Inc. (NYSE: PEG ) Q1 2016 Earnings Conference Call April 29, 2016 11:00 AM ET Executives Kathleen Lally – Investor Relations Ralph Izzo – Chairman, President and Chief Executive Officer Dan Cregg – Executive Vice President and Chief Financial Officer Analysts Neel Mitra – Tudor, Pickering Paul Patterson – Glenrock Associates Michael Weinstein – UBS Travis Miller – Morningstar Greg Gordon – Evercore ISI Jonathan Arnold – Deutsche Bank Gregg Orrill – Barclays Michael Lapides – Goldman Sachs Praful Mehta – Citigroup Ashar Khan – Visium Asset Management Shahr Pourreza – Guggenheim Partners Michael Goldenberg – Luminous Ben Budish – Jefferies Operator Ladies and gentlemen, thank you for standing by. My name is Brent, and I’m your event operator today. I would like to welcome everyone to today’s conference, Public Service Enterprise Group’s First Quarter 2016 Earnings Conference Call and Webcast. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session for members of the financial community. [Operator Instructions] As a reminder, this conference is being recorded today, Friday, April 29, 2016, and will be available for telephone replay beginning at 2 O’clock PM Eastern today until 11:30 PM Eastern on May 6, 2016. It will also be available as an audio webcast on PSEG’s corporate website at www.pseg.com. I would now like to turn the conference over to Kathleen Lally. Please go ahead. Kathleen Lally Thank you, Brent. Good morning, everyone. Thank you for participating in PSEG’s call this morning. As you are aware, we released our first quarter 2016 earnings statements earlier today. The release and attachment are posted on our website at www.pseg.com, under the Investors section. We also posted a series of slides that detail operating results by company for the quarter. Our 10-K for the period ended March 31, 2016, is expected to be filed shortly. Please read the full disclaimer statement and the comments we have on the difference between operating earnings and GAAP results. As you know the earnings release and other matters that we will discuss in today’s call contain forward-looking statements and estimates that are subject to various risks and uncertainties, and although we may elect to update forward-looking statements from time-to-time, we specifically disclaim any obligation to do so, even if our estimates change, unless of course we’re required do so. Our release also contains adjusted non-GAAP operating earnings as well as adjusted EBITDA for PSEG Power. Please refer to today’s 8-K for our other filings for a discussion of the factors that may cause results to differ from management’s projections, forecast and expectations and for a reconciliation of operating earnings and adjusted EBITDA to GAAP results. I would now like to turn the call over to Ralph Izzo, Chairman, President and Chief Executive Officer of Public Service Enterprise Group and joining Ralph on the call is Dan Cregg, Executive Vice President and Chief Financial Officer. At the conclusion of their remarks, there will be time for your questions. Thank you. Ralph Izzo Thank you, Kathleen, and good morning everyone and thank you for joining us today. PSEG delivered solid results for the first quarter in the face of rather mild winter temperatures and low prices for natural gas and energy. Earlier this morning, we’ve reported operating earnings for the first quarter of 2016 of $0.91 per share versus operating earnings of $1.04 per share in last year’s first quarter. Extreme temperature differences between the first quarter of this year and the first quarter of last year provides the backdrop for this quarter’s operating results. The first quarter of 2016 was 10% warmer than normal and the fifth warmest on record. The month of March in particular was extremely mild with heating degree days 25% lower than normal. Weather for the first quarter was also 27% warmer than the first quarter of 2015, but last year was the coldest on record. Our results were strong in the face of this headwind. PSE&G’s execution on its expanded capital investment program continues to provide a growing source of earnings. PSE&G is expected to invest $3 billion in 2016 as part of its five-year $12 billion capital program. Transmission is the largest part of PSE&G’s effort, representing 60% of planned spending. PSE&G’s investment program and a continued focus on controlling costs will help drive our forecast for double-digit growth in PSE&G’s 2016 operating earnings. PSE&G’s execution of our capital program is expected to yield best-in-class growth rate in rate base of 8% per year for the five-year period ending 2020. PSEG’s continues to develop a pipeline of investment opportunities that also meet New Jersey’s policy objectives and have customer support. Now as for PSEG Power, it has been focused on operating in an environment of low gas prices for years. The availability and low price of gas and the need to meet more stringent reliability requirements has added new urgency to the company’s efforts to improve its cost structure and efficiency. Power’s capital program also represents an important response to today’s market. Power’s $2 billion of investment in three new combined cycle gas turbine will add approximately 1,800 megawatts of clean, reliable and efficient capacity to its fleet. Construction of the KEC plant in Maryland and the Sewaren Unit in New Jersey are on schedule to meet their 2018 operating date. Bridgeport Harbor is expected to be available for 2019 commercial operation date. The addition of this new capacity will transform Power’s fleet. Power’s base load nuclear capacity will be complemented by a flexible low cost fleet of combined cycle gas units capable of responding to the market. The fleet’s carbon footprint is also expected to decline with the addition of the new clean gas fired capacity as nuclear generation continues to represent approximately 50% of the fleet’s output. As I said, we remain focused on operating efficiently and safely. PSEG Power has made judicious reductions in its nuclear workforce and is working closely with the industry to identify additional means of reducing its cost structure to assure the availability of this clean nuclear resource well into the future. Our goal is to capture these savings for the year to help offset the impact of low gas prices on earnings. Separately from operations, we were very pleased with some recent actions in defense of competitive markets. In particular, we were delighted with the U.S. Supreme Court’s unanimous decision affirming the Fourth Circuit decision in Hughes versus Maryland. Since that decision the U.S. Supreme Court also dismissed the New Jersey case allowing to stand the lower court ruling that the so called LCAP contracts are unconstitutional. A recent action at FERC is also constructive. I am referring to the orders issues by FERC earlier this week, granting the complaints filed by EPSA and others, which called into question some approvals, granted by the Public Utility Commission of Ohio. A separate complaint brought by a number of generating companies regarding the scope of the minimum offer price rule under RPM is till pending at FERC. While owners of existing assets without of market contracts will not be directly restricted in the upcoming base residual auction regarding how they can bid the affected units. The lack of certainty regarding FERC approval of such contracts should at least neutralize some if not all of the incentives under the contracts to bid without regard to the unit’s actual cost of operations. We believe that a competitive market is the best approach for ensuring that there is a supply of electric capacity to meet customer demand at the lowest cost. Our companywide efforts are focused on building an infrastructure that improves system reliability, reduces emissions and supports the needs of customers. Our strategy is working and it is made possible by the contribution from our dedicated employees, who support our efforts in countless ways. Their focus on the mission of providing safe and reliable energy has allowed us to meet the needs of customers and shareholders. We are maintaining our operating earnings guidance for the full year of $2.80 to $3 per share. Our guidance assumes normal weather for the remainder of the year. As we move forward, the weather and market conditions during the third quarter will be important for both PSEG Power and PSE&G. Current market conditions and the complete absence of a winter require that we maintain our relentless focus on identifying cost efficiencies and maintaining strong operating performance. With that I’ll turn the call over to Dan, who will discuss our financials in greater detail. Dan Cregg Thanks you, Ralph, and good morning everyone. As Ralph said, PSEG reported operating earnings for the first quarter of 2016 of $0.91 per share versus operating earnings of $1.04 per share in last year’s first quarter. On Side 4 we’ve provided you with a reconciliation of operating earnings to net income for the quarter and we’ve provided you with information on Slide 8 regarding the contribution to operating earnings by business for the quarter. Additionally, Slide 9 contains a waterfall chart that takes you through the net changes quarter-over-quarter and operating earnings by major business. And I’ll now walk through each company in more detail. For PSE&G, shown on slide 11, we reported operating earnings for the first quarter of 2016 of $0.52 per share compared with $0.47 per share for the first quarter of 2015. PSE&G’s first quarter results reflect the impact of revenue growth associated with an expansion of its capital investment program, which will more than offset the effect of unfavorable weather conditions on electric and gas demand. Returns on PSE&G’s expanded investment in transmission added $0.04 per share to earnings in the quarter and the first quarter also benefited from the recovery of revenue on PSE&G’s distribution investment under its Energy Strong program. This increase in revenue improved quarter-over-quarter earnings comparisons by a $0.01 a share As Ralph mentioned, weather in the first quarter was warmer than normal and significantly warmer than conditions experienced last year. The negative impact of the extreme differences in weather on gas demand in revenue quarter-over-quarter was largely offset by the gas weather normalization cost. A decline in our electric sales in revenue however as a result of the extreme differences in weather reduced quarterly earnings comparisons by $0.02 per share. Lower taxes more than offset an increase in O&M expense due to the absence of insurance recovery of storm costs received in the year ago quarter. These items together added $0.02 per share to quarter-over-quarter earnings. Economic indicators continue to improve. Employment in New Jersey has increased for 28 consecutive months as the unemployment rate has declined to 4.3% and the housing market has also experienced an improvement. However, this improvement in economic growth was outweighed during the quarter by a mild weather. The variability in quarterly data for weather normalized electric and gas sales has been high given the extreme weather conditions making it difficult to discern a trend in demand when analyzing just the quarterly data but data for the trailing 12 months indicates weather normalized electric sales were flat for the period ended March of 2016. And in terms of weather normalized gas demand a 0.3% decline in sales in the first quarter was led by 1.5% decline in heating demand from the residential sector which also is influenced by the large weather adjustment quarter-over-quarter. But on a trailing 12-month basis gas sales increased by 1.8% year-over-year. PSE&G capital program remains on schedule and PSE&G invested approximately $725 million in the first quarter as part of its planned $3 billion capital investment for 2016. Also as you may recall PSE&G implemented $146 million increase in annual transmission revenue under the company’s transmission formula rate filing which took effect this past January. This increase in revenue adjusted to reflect the impact of bonus depreciation and updates of spending in prior years will be reflected in PSE&G’s earnings throughout the year. We’re maintaining our forecast of PSE&G’s operating earnings for 2016 of $875 million to $925 million. Moving to Power, as shown on slide 18, PSEG Power reported operating earnings for the first quarter of $0.36 per share and adjusted EBITDA of $416 million compared with $0.55 per share and adjusted EBITDA of $626 million for the first quarter of 2015. Adjusted EBITDA excludes the same items as our operating earnings measure as well as income tax expense, interest expense, depreciation and amortization and major maintenance expense at Towers Fossil generating facilities. The earnings release and slide 19, provides you with a detailed analysis of the impact on Power’s operating earnings quarter-over-quarter. We’ve also provided you with more detail on generation for the quarter on slide 21. PSEG Power’s first quarter results were impacted by the extremely mild weather conditions experienced this year in comparison to the year ago period. A decline in capacity revenue associated with the June 2015 retirement of the HEDD or High Electric Demand Date peaking units in PJM reduced quarter-over-quarter earnings by $0.04 per share. Lower output due to the mild weather conditions coupled with lower average prices on energy hedges reduced quarter-over-quarter earnings by $0.09 per share. And a weather related decline in total gas send out to commercial and industrial customers and lower prices combined to reduce quarter-over-quarter earnings on gas sales by $0.12 per share. Lower O&M expense improved quarter-over-quarter earnings by $0.05 per share and a reduction in interest expense added $0.01 to earnings per share. Now let’s turn to Power’s operations. Output from Power’s fleet declined 9% in the quarter as a result of the reduced demand and lower wholesale market prices. Output from the coal fleet reduced during the first quarter a decline of 1 terawatt hour from 2.5 terawatt hours in the year ago quarter as low gas prices affected the dispatch of coal. Output from the combined cycle fleet declined 0.2 terawatt hours to 3.7 terawatt hours with the decline in demand. The nuclear fleet however experienced a 0.6 terawatt hour improvement in output to 8.4 terawatt hours for the quarter. The fleet operated at an average capacity factor of 99.7% in the quarter and the nuclear fleets performance benefited from an improvement in availability at Salem as well as an increasing capacity at Peach Bottom. You may recall that the extended power upgrade work was completed at Peach Bottom last year and this work added 130 megawatts to our share of the station’s capacity. Power’s gas fired combined cycle fleet has access to low cost gas which continues to provide it with an advantage relative to market prices. However, the lack of demand and a lack of volatility in the market given the mild weather in an excess supply of gas pressured spot spreads which were significantly lower compared to last year’s levels. Overall Power’s gross margin declined to $43.80 per megawatt hour from $47.32 in the year ago quarter. Power is revising its forecast of output for 2016 to 52 terawatt hours to 54 terawatt hours from its prior forecast of 54 to 56 terawatt hour. The updated range for output incorporates the impact of the abnormally warm weather in the first quarter. This range also incorporates an anticipated expansion of the Salem 1 refuelling outage. A visual inspection during the current refuelling at Salem 1 which began on April 14 revealed damage to a series of bulbs located inside the reactor vessel. The need to conduct further testing to repair and replace the bulbs is expected to expand the refuelling outage. To provide some context as a rule of thumb, a delay in Salem’s refuelling outage of 30 days would reduce generation by approximately 0.5 terawatt hour. And under this scenario nuclear fleets’ capacity factor for the year would be reduced by about 1.5% to 91% from the current forecasted capacity factor of 92.5% for the year and the actual outage duration will be determined after ongoing inspection work is completed. As shown on slide 24 approximately 70% to 75% of anticipated production for the April to December period of 40 terawatt hours is hedged at an average price of $49 per megawatt hour. Our open position for the reminder of 2016 is more than adequate to cover the potential for a decline in output at Salem from our original forecast. For 2017, Power’s hedged 50% to 55% of its forecast generation of 54 terawatt hours to 56 terawatt hours at an average price of $49 per megawatt hour. And for 2018, approximately 20% to 25% for the forecast generation of 59 terawatt hours to 61 terawatt hours is hedged at an average price of $49 per megawatt hour. The forecast increase in generation in 2018 reflects the commercial operation of the Keys and Sewaren combined cycle units. The hedge data for 2016 continues to assume PSEG’ hedges representing 11 terawatt hours to 12 terawatt hours. As we mentioned to your last quarter, there are items included in our average hedged price which influence Power’s revenue but not support Power’s gross margin. Our average hedge price for the remainder of 2016 reflects an increase in cost elements such as transmission and renewables associated with serving our full requirement hedge obligations. The increase year-over-year in these non-margin revenue items is approximately 1 megawatt hours to 2 megawatt hours. We continue to forecast operating earnings for Power in 2016, of $490 million to $540 million and the forecast for operating earnings represents adjusted EBITDA of $1.320 billion to $1.4 billion for the full year which compares to $1.563 billion of adjusted EBITDA in 2015. I’ll briefly address as well enterprise and others’ operating results and for the first quarter we reported operating earnings of $0.03 per share compared with operating earnings of $0.02 per share recorded last year in the first quarter. The increase in operating earnings quarter-over-quarter reflects contractual payments associated with the operation of PSEG Long Island and certain tax items that PSEG Energy Holdings and we continue to forecast full year operating earnings for 2016 from PSEG, Enterprise and Other of $60 million. And finally with respect to financings and other, PSEG closed the quarter with $592 million of cash on the balance sheet with debt at the end of March representing 44% of our consolidated capital. During the quarter, PSE&G issued $850 million of securities consisting of $300 million of five-year notes at 1.9% and $550 million of 30-year notes at 3.8% while redeeming a $171 million of long-term debt. And we remain in a position to finance our current capital program without the need for the issuance of equity. We continue to forecast operating earnings for the full year of $2.80 to $3 per share. That concludes my comments and I will now turn the call back over to the operator for your questions. Question-and-Answer Session Operator Ladies and gentlemen, we will now begin the question-and-answer session for the members of the financial community [Operator Instructions] Your first question comes from the line of Neel Mitra with Tudor, Pickering. Please go ahead. Neel Mitra Hi, good morning. Ralph Izzo Good morning, Neel. Neel Mitra I just had a quick question on the lower generation in the first quarter from the milder weather, is that actually a net negative or a positive because you could not wanted to lead and then procure the power at a lower cost to fulfill the financial hedges? Ralph Izzo So the hedges are supplied at a lower cost even though we’ve locked in the price, so that’s good news. But as you know, we’re naturally long, so whenever demand is down that creates a drag for Power, is a more modest drag on the utility, it has a whether normalization on the gas business, but no such thing on the electric business. So reduced demanded due to mild whether would create a slight drag there. Neel Mitra So the opened position on Power is hurt just because it’s not running as much is that the way to look at that? Ralph Izzo Yes. That’s right. So you have lower dispatch prices, we have lower, lesser amount of run time. Neel Mitra Okay. And second question, I know you have a small stake in the PennEast Pipeline. Can you remind us when you have that going into service and then there have been recent reports on possible delay, what your thoughts are on that? Ralph Izzo So we have 10% position and we are now forecasting late 2018. Neel Mitra And what were you forecasting earlier? Ralph Izzo Late 2017. Neel Mitra Okay, great. Thank you. Ralph Izzo You’re welcome, Neel. Operator Your next question comes from the line of Paul Patterson with Glenrock Associates. Please go ahead. Paul Patterson Good morning. Ralph Izzo Good morning, Paul. Paul Patterson On the Salem implant and I apologize I heard you talk about, but I just want to make sure I understood it. How long is the extended outage that you guys are now expecting? Ralph Izzo So we don’t know yet Paul. The outage started I think it was April 14 and that would have been a fairly standard refuelling outage. We normally don’t give dates on that for obvious reasons due to market sensitivity. But we are in the middle right now of doing some testing to see how many of the bolts are damaged. And so until we finish that we won’t know exact how long the outage is, but I should point out even when we know we typically don’t announce that to the marketplace. Paul Patterson Okay. And then with – and you are still looking at how many bolts or what percentage of bolts have problems. Ralph Izzo That’s right. Paul Patterson And is there any read through to any other units do you think or any other sort of sense for about this? Ralph Izzo Yes, I mean so clearly Salem 2, but we did inspect Salem 2 in 2015, because I mean this is an industry, problem it’s been around since I think 1998, so this is not something that is unique to us or unheard of before. But if Salem 2 pass visual inspection in 2015 and Salem 1 was scheduled to have the more intrusive inspection in 2019, but we’re couple of years ahead of schedule there. I just remind you Salem 2 is six years younger than Salem 1 to the extent that this is a degradation over time that should have an influence. Paul Patterson Okay, thanks so much. Ralph Izzo No problem, Paul. Operator Your next question comes from the line of Michael Weinstein with UBS. Please go ahead. Michael Weinstein Hi, Ralph, how are you doing? Ralph Izzo Good. Michael Weinstein Hey, recently we saw ConEd enter agreement to purchase gas storage and pipeline assets in Pennsylvania and New York and we’ve also seen other large utilities making large acquisitions of gas assets and utilities. And given the PennEast interest that you have already what is your view on the current market for gas related acquisitions and what’s your own interest in expanding further? Ralph Izzo Yes, I would say that our interest in expanding further is low to zero. In terms of our position in PennEast, high candidly every gas LDC in New Jersey has a position in that and we just thought that it was important to help participate and bringing those consumer benefits to our gas customers as you know PSE&G has almost two million gas customers. It’s a really different business, Michael. I serve on a board of the company that’s involved in the pipeline business and I just think we’re really good at the netting that we do and I would like to stick to that. So, I’m not second guessing others, please don’t misinterpret. I mean they have their own unique reasons for moving in that direction. But typically the corporate structure is different there, mostly MLPs, they have a fairly different financial proposition and they are not without their challenges nowadays as well. So that may be a great time to go in to buy in. There is a graph of those citing challenges associated with this, we are experiencing that in PennEast. That was a major pipeline. And I am sure you are aware of in New York state obviously had an unpleasant surprise. So it’s a very challenging business with fairly different DNA than what we have in our company and I like the DNA and the match that our company has with the operations that we are responsible for. Michael Weinstein Does the current PE’s and the gas utility space on the LDC space, does that also put you off in terms of future opportunities? Ralph Izzo Yes. So that’s a different subject, but the short answer to that is yes. I mean, I understand that debt is fairly inexpensive. Dan, hopefully impressed you with the numbers he reported for our utility. And you can make acquisitions accretive at very, very attractive premiums to the target. But the question really is that obvious just because money is relatively inexpensive what are the alternative uses for that and simply paying a very, very rich premium and still having accretion may not be your best choice and we’ve been very clear. Our priorities are number one organic growth and number two supporting the dividend and then number three will be share repurchase. As I have said to many people paying a 20 plus PE to someone seems to me to be a bad idea when I know a great company that’s treating at a 14 or 15 PE that has the ticker symbol PEG. So again hopefully [indiscernible] because it’s the second guessing critical above the decisions, but those are the ones I am comfortable for us. Michael Weinstein Okay. One last question, in terms of the partnership with Vectren for competitive transmission in MISO, do you see any other opportunities to part with other local utilities for similar type of partnerships? Ralph Izzo Yes. So I can’t disclose any of that we haven’t public disclosed. But there is an approach that we are eager to pursue. I think that there is lot of value to be had by combining forces with someone who understands the local transmission grid and system with our expertise now having put over $2 billion to work on annual basis for good number of years in terms of cost and schedule management on transmission construction. I am very proud of our team and the work that they have done, but we don’t know the system everywhere in the country, such to the extent that we combine our project management as skills in our construction management know how with people systems knowledge that’s a win-win for everyone. Operator Your next question comes from the line of Travis Miller with Morningstar. Please go ahead. Travis Miller Hi, thanks. Ralph Izzo Hi, Travis. Travis Miller I wanted to think a little bit more about the $0.12 on the lower gas send out and fixed cost recovery business. How much is that just pure volume and how much is there something else there, either margin contractions there or some other factor there that might not be directly weather related? Ralph Izzo I ask Dan if he knows the split between the two. I mean, my short answer is it’s a combination of both. Dan Creeg And that’s right. I mean, Travis, I guess the way that may be the best way to try to think about where we are from that $0.12 impact that we saw this quarter is if you were to look at each of the last couple of quarters, you would have seen last year and the year before, there was a $0.05 and a $0.04 benefit that we picked up additively over the last two quarters. So, it’s very much the absence of a winter which has impact both on pricing and on volumes. I think the volumes were down about a third and when you have that impact as well as a margin compression. We really also didn’t see much volatility which doesn’t help in that market. So they all were contributions to the delta that you saw for this quarter. Travis Miller Okay, great, that’s helpful. And then Ralph without too much a dissertation here, you guys have put a lot of eggs in the transmission baskets certainly, previously and for the next three to five years. What are your thoughts on storage and how that might disrupt the transmission plans or alternatively offer you guys investment opportunities that wouldn’t be in transmission but could be in storage? Ralph Izzo Sure, I am a still sort of smarting from your suggestions that I am a bit long way [indiscernible]. Travis Miller I am interested in the dissertation, just not this morning. Ralph Izzo [Indiscernible] There is a lot we’re having. I literally just came for a presentation two weeks ago by a director of Lawrence Berkeley Labs on storage. And his claim, don’t ask me his name because I don’t remember but he is easy to look up, is that at least factor of too away from grid connected storage that makes the economic sense and what he has found is that that translates into anywhere from a 10-year to 20-year timeframe. Of course when you are talking about material science research event it’s difficult to put up with precision but we are agnostic Travis about what hardware one puts in place to serve customers. So I don’t care if its copper wires, super conducting ceramic wire, lead acid batteries, lithium batteries, slow batteries, I am running out of technologies to stop lathering and I am starting to tread on dissertation time frames but we were more than happy to pursue things that have economic merits that provides the reliability our customers are demanding. Travis Miller Okay, good question our this [ph] version. Ralph Izzo Thanks. Travis Miller Thank you very much. Operator Your next question comes from the line of Greg Gordon with Evercore ISI. Please go ahead. Greg Gordon Thanks, my questions have been asked and answered, thank you. Ralph Izzo Thanks Greg. Operator Your next question comes from the line of Jonathan Arnold with Deutsche Bank. Please go ahead. Jonathan Arnold Thanks same here. Thank you. Operator Your next comes from the line of Gregg Orrill with Barclays. Please go ahead. Gregg Orrill Yes thank you. Just around the hedges at Power, you increased some of the hedges over the last quarter and just wondering where you stand with where you would normally be at this point. How you are thinking about that? Ralph Izzo So Gregg as you know we try not to outguess the forward market. We do, however, we’ve said in the past there was a tendency of the market to take a data point from 48 hours ago and a data point from 24 hours go and extrapolate it for the next three years and sometimes that emotional responses not as formed by fundamentals as we would like but we always stay with some certain guidelines. We allow our team to drift up little bit if we think the market is begin a bit bullish and we allow them to drift down if we think the market is begin overly bearish and you will recall in April 14 was the former where you said we can go ahead and hedge a little bit towards the upside since the market is being somewhat bullish and it’s pretty safe to conclude that right now we are drifting towards the bottom of our guide post just given the anomalously one winter we had and the bearish that crept into the market. Now having said that that bearing this is not, totally unjustified given the guess those levels are. And then just the other thing to think about too Gregg is that for the BGS auction to the extent that that’s a contribution across our hedge horizon. That auction usually takes place every year in February. So, you see a little bit of a pickup in that regard in the first quarter’s change. Gregg Orrill Fair point, okay, thanks. Ralph Izzo Thank you. Operator Your next question comes from the line of Michael Lapides with Goldman Sachs. Please go ahead. Michael Lapides Hey, Ralph thanks for taking my question and congrats on a good start to the year. Can you on the Salem issue, can you talk a little bit about other plants over the years kind of seen similar issues and whether any of those turned into any more major related items or is having issues with kind of baffle bolts are very standard, very common occurrence. I have to be very honest as a non-nuclear engineer that where baffle bolts is a little baffling to me? Ralph Izzo Thanks Michael for the question. I’m glad you asked this. So, to my knowledge DC Cook had an issue in 2010, Indian Point had an issue starting a month or so ago. There have been a handful, I think like six or eight European plants. These are not to my knowledge, these are not life threatening issues, they’re literally 800 bolts typically that secure these metal plates we call them baffles to the reactor vessel and they’re under pressure. There is a pressure grade in because of the hot high temperatures steam that flows through the holes of these baffles and you just get a mechanical stress, in our case I think we have 832 bolts. They are typical of pressurized water reactors, so that’s why I mentioned earlier it’s a false question that we would have to look at Salem 2 again it is extra refueling outage although it passed visual inspection in 2015. It would be an issue for Hope Creek because that’s a boiling water reactor. So, I don’t want to suggest anything other than we have to complete the inspection but none of the prior instances has this been an issue that has threatened the plants going forward integrity or anything of that nature. Michael Lapides Got it, and coming to your regulated side of the ENG, you know as you guys do most years at your Analyst Day, you lay out a CapEx forecast that obviously shows you know in year three through five somewhat of a decline from years one through two, can you talk about the things, your goals in 2016 in terms of actually, I don’t want to call it back filling but the types of projects that you could see showing up in the 2018 to 2020 timeframe that might keep CapEx at a more similar level to 16 and 17 or even at a higher level, what are the types of projects what you have to do from the regulatory construct process to get those approved? Ralph Izzo Sure, so there is a whole host to that Michael; there is ongoing renewable portfolio standard commitments that could result in some additional solar work. There are couple of special projects that we haven’t named publically on the distribution system that involve major customers that would benefit the entire customer base that we will be pursuing. There is always new and additional work that comes out of it PJM, RTEP [ph] and that’s the kind of stuff you will see us looking at and potentially announcing in 2016. However, the major backfill in the out years of the plan won’t be announced in 2016 because they are pretty new and that will be continuation of our gas system monetization plan and a continuation of Energy Strong. And reason why we won’t announce those in 2016 is because we are only a year and half since Energy Strong and we are only six months into GSMP and those were both three-year programs give or take a few months on some unique aspects. So you’re right to say that we have historically backfilled the years four and five. I think there is a very high probability we’ll do the same this time. But I think that’s in terms of the goals for 2016, it will be more some significant distribution projects that we have and potentially some solar work that to keep the state on its RPS targets, you’ll see as a percent in the near-term. Michael Lapides Got it. Thank you Ralph. Much appreciated. Ralph Izzo Sure. Operator Your next question comes from the line of Praful Mehta with Citigroup. Please go ahead. Praful Mehta Thanks you. Hi, guys. Ralph Izzo Hi, Praful. Praful Mehta So quickly on the storage point, I know it was an interesting debate and you’ve made a bunch of relevant points, so that was very thoughtful. I’m just wanted to understand you were mentioning storage more from a transmission perspective. But just take it back to storage more from a generation perspective. If you did have the 10 to 20 year window horizon as you talked about, how would you think of the implications for your gas lead and just generally for the markets in general? If you did think storage was coming, whenever, 10 years or 20 years down the road, how do you see the implications for the power generation for your fleet and just generally in the U.S.? Ralph Izzo Yes. I think there are three uses for storage. One is to the extent that one has some localized distribution reinforcement that can be more economically achieved for the storage rather than fluctuation enhancement. Second would be your classic arbitrage between peak and off-peak, however which has become less of an economic driver now days just given the abundance of natural gas. Third could be sort of a similarity that which is to offset the intermittency associated with renewables, but in terms of using batteries as speakers I mean I think that you just have to take a look again it’s a dollar per KW and my goodness yes I’m – keeping getting more and more efficient and storage seems to be losing in that race so its to keep up with them. So I think there are multiple applications I didn’t mean to suggest that we would only consider one what I was trying to point out is whether the application is a supply side or whether it’s a customer reliability side, whether its providing peaking services, other ancillary services. We don’t have a religious fervor around one technology or another we look at them all the time. Praful Mehta Fair enough that’s really helpful. And then secondly from a M&A perspective there is number of generation assets clearly in the market and potentially more coming and you’ve talked about at some point of separation as well. So how do you fit all that in are you looking to get to critical mark is there opportunity here to apply some asset critical mark there you think you can at some point separate how are you thinking about that opportunity right now? Ralph Izzo Yes I mean that’s pretty much what we’ve told the world right that we see three very changeable tactical reasons for remaining integrated its the financial synergies between powers, our cash generation and utilities cash needs. It’s the customer build synergies between the customer Power serves and the customers that PSEG’s serve and power prices were down PSEG’s distribution rates go up quite candidly. And the last but not least is the benefit of scale associated with the corporate support functions and as Power continues to pursue growth opportunities outside PJMEs the first two issues become less important right. You have more customers that are not PSE&G customers that we will be serving in the New England and the New York State. You have more need for Power’s funds from operations going to Power as opposed to going over to the utility and as both companies get bigger then the corporate supports synergies become less on a percentage basis. As the reason why I say outside of PJMEs is because we’re pretty much preemptive from making any acquisitions within PJMEs and given the slow growth in demand, we’re not big fans of Greenfield development in PJMEs it’s just you quickly run into an oversupply situation. Having said all of that, we have demonstrated that we’re pretty bad at acquiring assets. By that I mean we seem to have a more conservative view of where the market is going and are consistently outbid, Keys being the one exception to that which I believe was largely because of our confidence in our ability to manage construction risk that perhaps others did not posses and also some of the portfolio benefit going to us in terms of PJM West. So, we all the time at generation assets, we have an, I was not saying anti coal bias, that sounds very political and I didn’t mean it that way. But just given the direction of environmental regulation, you wouldn’t see us taking a look at any co expansions in terms of new assets. But we do look in our target markets which would be the rest of PJM, New England and New York State. We just have to get it at the right price and we’re going to remain disciplined in what that means for us. Praful Mehta Got it. That’s very helpful, Ralph, thank you so much. Operator Your next question comes from the line of Ashar Khan with Visium Asset Management. Please go ahead. Ashar Khan Good morning and good results. Can you just ask you one thing which [indiscernible] mentioned why their outage is lasting a little bit longer, is that they didn’t have the equipment on site and I didn’t know what that meant exactly, but I just wanted to ask you Ralph, are you guys do you have this stuff on site to replace everything so it won’t cause a longer outage? Ralph Izzo No it was so – hi Ashar. So the equipment is not routinely onsite, but we are in the process right now of securing that equipment while we do the ultrasonic testing. This is a highly radiated area. It’s inside the reactor vessel, but we are in conversations with at least two vendors who claim to be able to help us do the work and we’re confident we will be able to bring them on site. I mean this is – as I said there is at least 10 other reactors that had this issue in the past and. Ashar Khan No, I understand. And I was just trying to understand whether they were saying the delay was caused by equipment not begin on site? Ralph Izzo I think there is a robotic device that needs to go in and change out the bolts and replace those that fail the ultrasonic test. It’s not something you could send a person into the vessel. Ashar Khan Okay. Ralph Izzo From a clinical path perspective to the inspections that are ongoing now need to take place first so we have sometime of a critical task to be able to secure that kind of equipment. Ashar Khan Equipment, okay I appreciate it. Thank you. Operator Your next question comes from the line of Shahr Pourreza with Guggenheim Partners. Please go ahead. Shahr Pourreza Hi, questions were answered thanks. Ralph Izzo Thanks sure. Operator Your next question comes from the line of Michael Goldenberg with Luminous. Please go ahead. Ralph Izzo Hi, Mike. Michael Goldenberg Good morning. Ralph Izzo Good morning. Michael Goldenberg Hi just wanted to ask a question about your 2018 hedging. I wasn’t clear. If I just look at previous quarters and this quarter it seems like you hedge very little about 5% of your output, but if I did the math I get about $30 or $31 incremental hedging price. I’m not understanding if that’s the price or I’m doing something wrong there. Ralph Izzo And your comparison is what Michael. Michael Goldenberg Versus Q4, so in Q4 you were same percentage at $54 now you’re same percentage $49 so if I just do the simple math I get incremental hedging down at $31? Ralph Izzo We will have to go through the individual math which maybe we could follow up with you on but you also got a range of output where you’re within a higher low band. So, its going to vary, I know that some of that 2018 output is going to come from BGS which tends to have a higher price and then we run lower price environment as well, so it’s going to be some mix of that. Michael Goldenberg Got it. Thank you. Operator [Operator Instructions] . Your next question comes from the line of Ben Budish with Jefferies. Please go ahead. Ben Budish Hey, everybody good morning. Just I wondering if I’m maybe reading into your comments you made at the beginning of the call too much about kind of the importance of Q3, it seems like maybe you’re sort of guiding us to the low end of the range and I’m curious like strong Q3 might get us back to the midpoint or maybe we’re looking at sort of below the bottom end and a strong Q3 gets us back within, is there anymore color you can kind of give on that? Dan Creeg Yes so Ben, the range is the range and historically what we do is after Q1 we really don’t modify our numbers or push people up or down and just live with range. After Q2 sometimes we may move a nickel one way or another if we think that there is a definitive bias one way or another in terms of verbally guiding and then typically after Q3 is when we – if there is a need tighten the range one way or another. So we’re $2.80 to $3 it was a tough winter and we’ve got a lot of focus on our operations and cost efficiencies and the range always assumes that the rest of year is normal weather. We never assume that the weather is going to suddenly do something different than what the weather service predicts as anomaly. Ben Budish Okay great thank you. Operator Mr. Izzo and Mr. Cregg there no further questions at this time. Please continue with your presentation or any closing remarks. Ralph Izzo Sure thank you Brent. So thanks everyone for being on the call and the main message I hope you took away is my favorite message which is steady she goes. We have utility capital program that’s proceeding as planned, Power construction program with three combined cycle units is on schedule and on budget, our operations are strong throughout the enterprise and the balance sheet is as solid as ever. I know Kathleen and Dan have some travels coming in the next couple weeks and then the three of us have some travels coming up in the next couple of months. So hopefully we will get to you see you most if not all of you during those travels. Thanks a lot and we will talk soon. Operator Ladies and gentlemen, that does conclude your conference call for today. You may now disconnect. Thank you for participating. 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. 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Empire District Electric’s (EDE) CEO Brad Beecher on Q1 2016 Results – Earnings Call Transcript

Empire District Electric Co. (NYSE: EDE ) Q1 2016 Earnings Conference Call April 29, 2016, 1:00 pm ET Executives Dale Harrington – Secretary & Director, IR Brad Beecher – President & CEO Laurie Delano – VP, Finance & CFO Analysts Paul Ridzon – KeyBanc Brian Russo – Ladenburg Thalmann Michael Goldenberg – Luminus Management Operator Good day and welcome to the Empire District Electric Company First Quarter 2016 Earnings Conference Call and Webcast. All participants will be in a 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 recorded. I would now like to turn the conference over to Mr. Dale Harrington, Secretary and Director of Investor Relations. Please go ahead. Dale Harrington Thank you, Emily, and good afternoon everyone and welcome to the Empire District Electric Company’s first quarter 2016 earnings conference call. Our Press Release announcing first quarter and 12-months ended March 31, 2016 results was issued yesterday morning. The Press Release and a live webcast of this call, including our accompanying slide presentation are available on our website at www.empiredistrict.com. And a replay of the call will be available on our website through July 29 of 2016. Joining me today are Brad Beecher, President and Chief Executive Officer and Laurie Delano, Vice President, Finance and Chief Financial Officer. In a few moments, Brad and Laurie will be providing an overview of our first quarter and 12-month ended results as well as some highlights on other key matters. But before we begin, I’ll remind you that our discussion today includes forward-looking statements and the use of non-GAAP financial measures. Slide 2 of our slide deck and the disclosure in our SEC filings present a list of some of the risks and other factors that could cause further results to differ materially from our expectations. So let me caution you though that these lists are not exhaustive and the statements made in our discussion today are subject to risks and uncertainties that are difficult to predict. Our SEC filings are available upon request or may be obtained from our website or from the SEC. I would also direct you to our earnings Press Release for further information on why we believe the presentation of estimated earnings per share impact of individual items and the presentation of gross margin, each of which are non-GAAP presentations, is beneficial for investors in understanding our financial results. And with that, I’ll now turn the call over to our CEO, Brad Beecher. Brad Beecher Thank you, Dale. Good afternoon, everyone and thank you for joining us. Today we will discuss matters from the Board of Directors and Annual Shareholders Meetings, as well as our financial results for the first quarter and 12-months ended period March 31, 2016. We will also provide an update on the proposed merger and other recent company activities. During our annual meeting of shareholders held yesterday, three directors were reelected to serve three-year terms, Ross Hartley, Herb Schmidt, and Jim Sullivan. And other business shareholders ratified the appointment of PricewaterhouseCoopers LLP as Empire’s independent registered public accounting firm for the fiscal year ending December 31, 2016. Shareholders also approved a non-binding advisor proposal regarding compensation of our named executive officers. During the meeting yesterday, the board declared a quarterly dividend of $0.26 per share payable June 15, 2016, for shareholders of record as of June 1. On Slide 3, of our presentation, we provided some highlights of the quarter and 12-months ended period; we will discuss these more throughout the call. Yesterday we reported first quarter 2016 earnings of $14 million or $0.32 per share inclusive of merger-related costs. This compares to the same period in 2015 when the earnings were $14.6 million or $0.34 per share. For the 12-month ending period March 31, 2016, earnings were $56 million or $1.28 per share inclusive of merger costs. This compares to 12-months earnings of $60.8 million or $1.40 per share for the same period last year. As you can see from the slide it’s been a mild quarter for weather. In terms of heating degree days the 2015/2016 winter season was the warmest in the past 30 years, the first quarter ranks as the sixth warmest in the last 30 years, it was a great, it was great weather for enjoying the outdoors but not great for energy sales. During the quarter, we announced Empire had reached an agreement and planed a merger with Liberty Utilities, the U.S. subsidiary of Algonquin Power and Utilities Corporation. Algonquin Power and Utilities is a North American diversified generation transmission and distribution utility company, they are based in Oakville, Ontario, and their stock is traded on the Toronto Stock Exchange. Liberty Utilities is a growing utility operator that has been in business in the U.S. for over 15 years. They operate electric, natural gas, water, and waste water utilities across the broad geographic areas stretching from California to New Hampshire. Empire will be delivering Central’s region with Jolpin serving as the corporate headquarters. The Central region will include 340,000 customers in Missouri, Kansas, Arkansas, Oklahoma, Iowa, Illinois, and Texas. The transaction will provide greater scale, geographic diversity, and growth opportunities for both organizations. As a reminder, Empire shareholders will receive $34 for each share of stock owned at the close of the transaction. This represents a 50% premium over the unaffected price of $22.65 on December 10, 2015. On Slide 4, we provided a tentative timeline of the approval process and transaction closing. Merger applications were filed with state and federal regulatory agencies on March 16. We expect to receive an order from FERC approving the merger any day. In Oklahoma, the hearing was held on April 27 and Oklahoma Administrative Law Judge has recommended approval and order is expected within 60 days. Procedural schedules are being established in Missouri, Kansas, and Arkansas. We anticipate approvals in place for transaction close in the first quarter of 2017. Shareholder approval is also required for the transaction. We have set May 2, 2016, as the record date for determining eligibility to vote on their agreement and planned merger. We expect to hold a Special Shareholders Meeting on June 16, 2016, to conduct the vote. A final proxy and voting instructions will be mailed to shareholders next week. Last week, we began joint meetings at the senior management level to initiate the transition and integration planning process. As we work to fulfill the conditions to close the merger we remain focused on business as usual at Empire. Moving onto Slide 5, Riverton combined cycle is nearing completion of in-service testing. The project is on schedule and on budget. As of March 31, approximately $163.3 million has been spent on the project against a total budget of $165 million to $175 million. The Riverton project is the first large frame combined cycle generating unit in the State of Kansas and will be among the most efficient natural gas units in the country. This projects completes our multiyear compliance plan for the Mercury and air toxic standard. We continue to prosecute the Missouri rate case which is primarily related to the cost recovery of the Riverton project. Slide 6, is a reminder of the key aspects of this case filed October 16, 2015. The case seeks an increase in annual revenues of $33.4 million or about 7.3%. The procedural schedule provides for a true up of expenditures incurred through March 31, 2016, assuming a Riverton 12 combined cycle end service date of June 1, 2016. Evidentiary hearings are slated for May 31 in Jefferson City. As you can see from the projected timeline on Slide 7, we will experience a period of lag between the in-service state of the Riverton project and the time new customer rates are effective which we expect to be late September of this year. A corresponding rate filing has been made in our Oklahoma jurisdiction; we expect to file rate cases in Kansas by the end of the third quarter, and in Arkansas, no later than the end of the year. For 2016, we expect earnings to be within a weather-normalized range of a $1.26 to $1.44 including estimated merger transaction fees. We estimate total fees of $15 million to $17 million with approximately 50% of the fees payable in 2016 and included in the guidance range. As of April 1, 2016, we have received the applications for just over $10 million in rebates for private solar installations. As of the end of the quarter, we had processed 467 solar rebate applications and have recorded a regulatory asset of approximately $6.2 million on our books. These rebate costs will be collected from other Missouri electric customers and future charges. On the legislative front, we continue to support legislation in Missouri to update our century old regulatory framework. Senate Bill 1028 allows timely recovery of utilities prudently incurred operating cost while offering important consumer protection such as earnings caps, revenue caps, and performance standards. We believe that Senate Bill 1028 offers a balance long-term solution that will benefit both Empire customers and shareholders all while retaining the strong oversight of the Missouri Public Service Commission. We will continue to work to move this important legislation forward in the final two weeks of the Missouri legislative session. I will now turn the call to Laurie to provide additional details of our financials. Laurie Delano Thank you, Brad, and good afternoon everyone. As we review our first quarter 2016 earnings per share results, the financial affirmation I will discuss will supplement our press release that we issued yesterday, and as always our earnings per share numbers referenced throughout the call are provided on an after-tax estimated basis. As we noted in our press release yesterday the Missouri customer rate increase that went into effect in July 2015 was the primary driver of increased margin compared to the prior year quarter. The mild fourth quarter 2015 weather continued to spill over into the first quarter of 2016 driving the 7.5% decrease in our electric segment sales. This mild winter weather largely offset the impact of higher customer rates from an earnings per share standpoint. And as we also noted on our press release in the first quarter we paid approximately $4.2 million in merger-related costs which reduced earnings an estimated $0.06 per share minus the mild weather and the merger cost impacts, results were pretty much on track with our expectations. Slide 8, shows the detail of changes that impacted earnings per share quarter-over-quarter. Consolidated gross margin increased $1.8 million lifting earnings by $0.03 per share. Increased electric customer rates of about $7.7 million net of an estimated $1.9 million decrease in Missouri-based fuel recovery, increased revenue $5.8 million quarter-over-quarter this added an estimated $0.11 per share to margin. As mentioned previously, this increase was almost entirely offset by the impact of the mild winter weather and other volumetric factors which decreased revenue by about $10.5 million negatively impacting margin by about $0.10 per share when compared to the first quarter last year. Positive customer growth contributed about a penny to earnings per share and other items including the content and timing of our fuel deferral and recovery mechanisms combined to add another estimated $0.02 per share to margin when compared to the first quarter of 2015. Mild weather also impacted our gas segment retail sales quarter-over-quarter resulting in a decrease in gas segment margin of about a penny per share. We estimate the net impact of the mild winter weather reduced margin about $0.06 to $0.08 per share for the quarter when compared to normal weather. Continuing on with Slide 8, consolidated operating and maintenance expenses remained relatively flat compared to the 2015 quarter combining to raise earnings per share about a penny. And as mentioned previously, the most significant expense item during the period was the previously mentioned $4.2 million in merger cost which reduced earnings per share about $0.06. Exclusive of the $0.06 per share negative impact resulting from the merger cost, our first quarter earnings would have been $0.38 per share. Moving on to our 12-months ended results, Slide 9 provides a roll forward to our $1.28 per share earnings for the period ended March 2016. As Brad mentioned earlier, our net income decreased about $4.8 million or $0.12 per share compared to the year ago period. Slide 9 details the breakdown of the various components. Consolidated margin increased about $12.7 million or an estimated $0.18 per share when comparing the two periods. Electric rates were again the most significant positive margin driver during the period adding an estimated $0.26 per share. The impact of mild weather and other volumetric factors combined to reduce electric on-system sales about 2.7% decreasing margin an estimated $0.15 per share. Increases in customer growth added about $0.02 per share. Other items again including the content and timing of our various fuel deferral and recovery mechanism combined to add an estimated $0.08 per share to margin when compared to the 2015 period. The mild weather also continued to impact our gas segment reducing margin an estimated $0.03 per share period over period. Our total on-system electric sales for the 12-months ended March 2016 were 4.84 million megawatt hours versus 4.97 million megawatt hours in the 12-months period ending March 2015. This is near our weather-normalized annual expected sales level of approximately 5 million megawatt hours. Slide 9 also details the — shows the details of increases in operating and maintenance expense items which combined to decrease earnings per share by $0.05. A planned maintenance outage of our state line combined cycle plan, increases in production maintenance expense at a number of our other generation plants, and our previously discussed Riverton 12 maintenance contract which became effective January 1 of 2015, combined to decrease earnings around $0.05 per share. As you may recall, we did not begin recovering that Riverton maintenance contract and customer rates until our rate increase effective last year in July. Increased labor cost driven by increased executive stock-compensation valuations reduced earnings about $0.04 per share. Other smaller cost increases and decreases combined to add another $0.04 per share to earnings bringing the total O&M impact to the $0.05 per share reduction. Again the merger cost of approximately $4.5 million in that 12-month ending period reduced period over period earnings at an estimated $0.06. Increased depreciation and other taxes reduced earnings an estimated $0.08 and $0.03 per share respectively. Interest expense reduced earnings per share about $0.05 period over period due primarily to the $60 million privately placed first mortgage on financing that we did in August 2015. As Brad mentioned earlier, and as Slide 10 illustrates, our full-year 2016 weather-normalized earnings guidance range which we revised on February 2016 of this year remains unchanged at $1.26 to $1.44 per share. As a reminder, at the time we revised our guidance range we advised that we estimated full-year earnings to be $0.10 to $0.12 per share lower than our original full-year guidance range of $1.38 to $1.54 that we provided on February 4. We continue to expect to incur total merger costs of approximately $15 million to $17 million, half of which would be payable in ’16, with the other half in 2017, assuming a 2017 closing date. Now as I mentioned earlier we have already paid $4.2 million of those costs in 2016. On our balance sheet, we have $104 million in retained earnings and we had $19 million of short-term debt outstanding at the end of March. On Slide 11, we have updated our trailing 12-months return on equity charge. As you can see on the slide at the end of March our return on equity was approximately 6.9%. With that, I will now turn the call back over to Brad. Brad Beecher Thank you, Laurie. At Empire, we strive for continuous improvement and innovation, I’m proud to report our efforts were recently recognized by the Edison Electric Institute when they announced that we were among a small group of utilities chosen as the finalist for the Edison award. The award recognizes our work in developing an innovative modular transmission, structured design, and construction process. The design speeds construction, lowers cost, and reduces outage sign during coal replacement projects. With that, I will now turn the call back to the operator for your questions. Question-and-Answer Session Operator Thank you. We will now begin the question-and-answer session. [Operator Instructions]. Our first question is from Paul Ridzon of KeyBanc. Please go ahead. Paul Ridzon Good afternoon. How are you? Laurie Delano We’re fine Paul, thank you. How are you? Paul Ridzon Fine, thank you. Just hoping to get an update on where the proposed I think its Senate Bill 1028 stands? Brad Beecher Well that’s going to be the question of this day, Paul. There is only two weeks left in the session, but so we’ve got a lot of work to do and a short amount of time to do it. Senate Bill 1028 is currently on the informal Senate calendar which means it can be called up at any time. That said it’s going to be difficult for 1028 to move through the remaining process and house process in two weeks. So if Senate Bill 1028 is going to move forward or you will likely see it attach to another House Bill that might be moving through the Senate. As you probably heard we have had the third filibuster in the Senate here this week on voter ID and so it’s just going to be — so we are still working hard and we still think it’s got to shot but it’s going to be a difficult process. Paul Ridzon Thank you for that update. And Laurie, I had a question, when you talked about gross margin there was new rates net $5.8 million and then weather was $10.5 million headwind but net-net there was gross margin actually went up and you referenced in the release some fuel deferrals, is that where the delta is and is that a timing issue? Laurie Delano That’s where the delta is. So if you will recall in our last rate case fuel was rebased pretty significantly as part of the rate reduction and rates that were set. And so the way we think about that is our revenue reduction is net of that fuel rebate, but that fuel rebate doesn’t impact margin. So let me get to my notes here. So when we say that we had increased electric customer rates of $7.7 million for the quarter, net of the estimated $1.9 million decrease in Missouri-based fuel recovery that $1.9 million in Missouri-based fuel recovery is a loss to margin. So in our estimation the $7.7 million is really the impact of margins. Paul Ridzon Okay. Laurie Delano Does that make sense? Paul Ridzon So as we go through the year are there a few deferrals going to kind of reverse and may be make another quarter weaker? Laurie Delano No it’s a dollar for dollar increase in revenue and increase in fuel. So as we compare the two periods, period over period we’re identifying the new rates that came in at the gross amount which would be the $7.7 million and then we’re identifying how much of that fuel base recovery brought revenues and fuel both down together to get to our net revenue change. Paul Ridzon Of $5.8 million? Laurie Delano Yes, so again the $5.8 million reflects the increased cost less the fuel decrease. But that fuel decrease is not only decreasing revenues, it’s also decreasing fuel cost. Paul Ridzon Okay. Thank you very much. Laurie Delano Hope that made sense. Paul Ridzon Yes. Operator Our next question is from Brian Russo of Ladenburg Thalmann. Please go ahead. Brian Russo Yes hello. Laurie Delano Hi Brian. Brian Russo You mentioned the Missouri Legislature ends in two weeks, what’s the exact date that it concludes? Brad Beecher It’s Friday, May 13, I believe. Brian Russo Okay. And when does the legislature resume again I guess in 2017? Brad Beecher I don’t know that exact date but it’s again — it’s in 2017. Brian Russo Okay. And is there any sort of some statutory deadline in which Missouri would have to rule on the merger once procedural schedule is set? Brad Beecher We went through this a little bit Brian on our merger call. But the way it stands in Oklahoma once they have the hearing which they have, they have 60 days in order to issue an order, in Kansas they have 300 days from the time the merger application was filed, so 300 days from March 16, in Arkansas and Missouri, there is no prescribed statutory timeframe that they have to act. Brian Russo Okay, got it. And you mentioned that SB 1028 is on the informal calendar and it could be heard anytime. So if there is not, it’s not when it was put on the calendar prior along with a lot of other proposed legislation, so there is no particular order in which it will be heard, it can be heard at anytime? Brad Beecher As we said, right now, it can be heard at anytime. They have rolled — they have used the term roll to the calendar and anyway Senate Bill 1028 is on the informal calendar and either it or an energy-related House Bill could be that it’s passed through the House could be called up at anytime. Brian Russo Okay. And then I’m just curious the Riverton lag seems like it’s related to depreciation. Are there any O&M savings for the gas conversion that you guys will retain until you should include this rate case and new rates going to affect? Laurie Delano Nothing significant, Brian. Brian Russo Okay. Brad Beecher If we shift the coal units down really in ‘14 and ‘15 and so any reductions in O&M have already been in the rearview mirror. Operator Our next question is from Michael Goldenberg of Luminus Management. Please go ahead. Michael Goldenberg Hi I wanted to continue the discussion about the merger approvals. So as it stands right now which one do you think will be the most complicated or complex, which of the state will be the most involved? Brad Beecher As we said right now Missouri, Arkansas, and Kansas, are kind of all at the same stage we’re getting data request in all the states now, they all take you through a full process. So we have a few more interveners in Missouri than we do in the other states. If you think that’s going to add complexity but generally speaking all three of them are going to through the same type of process. Michael Goldenberg So you said Missouri, Kansas and I’m sorry. Brad Beecher Arkansas. Michael Goldenberg And what? Brad Beecher Arkansas were those three. Michael Goldenberg Arkansas, okay. Now in terms of in Kansas is the one with 300 days and Missouri has no statutory deadline right? Brad Beecher That is correct. Michael Goldenberg Do both Kansas and Missouri have a specific schedule of events posted somewhere? Brad Beecher So in Missouri we have field a proposed procedural schedule and Laurie can range you the dates here but the commission is not rolled on it. Laurie Delano So what the proposed schedule says is for technical conferences on May 16 and 17 and then June 1, with rebuttal testimony on July 6, serve rebuttal on July 22, and order witnesses, order cross examination on July 28, physician statements August 4, with the hearing occurring on August 15 to 17 and again that is just proposed that has not been approved yet. Michael Goldenberg But basically July, August will be the hard and heavy times of this, so to speak? Brad Beecher Right and I think that’s the way you need to think about Arkansas, Kansas and Missouri as we said here today it is the summer especially late summer is going to be full of hearings. And then hopefully that will give commissions about 90 days to make decisions and hopefully get us orders by December so that we can close in the first quarter. Michael Goldenberg When you think about interveners, is it the usual cash [indiscernible] consumer advocates comes out of that, oh, I want money, I want fixed rates stuff like that. Is it that kind of a millet that we see in every merger proceeding or is that something that we need? Brad Beecher So in Kansas and Arkansas the interveners are the typical AG consumer advocate or staff, in Missouri in addition to that we have some of our industrial consumers in the City of Jolpin which are typical interveners in our rate case and then we have a couple other folks that have groups that have intervened one of them being Empire’s retirees who have interest in retiree healthcare. Michael Goldenberg Okay. Is it too early to discuss strategy and kind of what you learned from recent merger proceedings? Brad Beecher We filed direct testimony, so a lot of the strategy is laid in that direct testimony. We filed joint testimony with Common Council with Liberty. And I think reflecting to 99 on why we didn’t get approval on 99 the big ticket items that have kind of been taken off the table as Algonquin is not asking for premium recovery, they are not asking for recovery of transition cost and they are not proposing any staff reductions and those are the big ticket items that have caused a lot of things in the past and so Algonquin took all of those off the table in their initial filings. Operator [Operator Instructions]. Showing no additional questions, this concludes our question-and-answer session. I would like to turn the conference back over to Brad Beecher for any closing remarks. Brad Beecher Thank you. Before we close, I will remind you that as we work diligently to achieve the conditions necessary to successfully close the merger with Liberty Utilities, our mantra will be business as usual. Rest assured we will continue to stay focused on the business at hand providing safe, reliable energy for our customers and attractive return for our shareholders and a rewarding environment for our employees. One last note, Laurie, Dale, and I will be at the AGA Financial Conference May 16 and 17 in Florida. We hope to see many of you there. Thank you for joining us today and have a great weekend. Operator The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) 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