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South Jersey Industries’ (SJI) CEO Mike Renna on Q1 2016 Results – Earnings Call Transcript

South Jersey Industries, Inc. (NYSE: SJI ) Q1 2016 Earnings Conference Call May 06, 2016 11:00 AM ET Executives Ann Anthony – Treasurer Marissa Travaline – IR Mike Renna – CEO Steve Clark – CFO Greg Nuzzo – SVP South Jersey Energy Solutions Analysts Michael Gaugler – Janney Montgomery Scott Dan Fidell – U.S. Capital Advisors Andrew Gay – Motion Group Chris Ellinghaus – Williams Capital Group Operator Good day, ladies and gentlemen, and welcome to the First Quarter 2016 South Jersey Industries Earnings Conference Call. My name is Sheila, and I will be your operator for today. At this time, all participants are in a listen only mode. We will conduct a question-and-answer session towards the end of this conference. [Operator Instructions] As a reminder, this call is being recorded. I would like to turn the conference over to Ann Anthony, Treasurer. Please proceed. Ann Anthony Thank you, Sheila. Good morning and thank you for joining us as we present South Jersey Industries’ first quarter results for fiscal year ‘16, as well as an update on our business. Joining me on the call today are Mike Renna, President and CEO of SJI, along with Steve Clark, our CFO, and Marissa Travaline, our Director of Investor Relations. We also have several additional members of our senior management team available to help address questions following our prepared comments. Our earnings release was issued to the media this morning and is also available on our Web site at www.SJindustries.com. The release and the associated 10-Q provide an in-depth review of earnings on both a GAAP and non-GAAP basis using our non-GAAP measure of economic earnings. Reconciliations of economic earnings to the comparable GAAP measures appear in both documents. Let me note that throughout today’s call we will be making references to future expectations, plans and opportunities for SJI. Actual 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 and 10-Q on file with the SEC. Also, as a reminder, our 2015 per share numbers have been adjusted to reflect the impacts of the stock split that occurred in May of 2015. With that said, I will now turn the call over to our CFO, Steve Clark, to present SJI’s first quarter 2016 results. Steve Clark Thank you, Ann, and good morning everyone. Thank you for joining us. To begin, our first quarter 2016, economic earnings totaled $57 million as compared with $58.9 million in 2015. Economic earnings per share for Q1 2016 were $0.80 as compared with $0.86 for the prior-year period. Strong utility growth, combined with a more than 50% jump in the contribution from our commodity businesses within South Jersey Energy Group, drove economic earnings for the quarter. And with the Revel and Energenic restructuring transactions behind us, the operational contributions from our energy services business has improved considerably. What is noteworthy about the recent quarter’s performance is the fact that it was achieved with nearly $8.5 million less in investment tax credits for ITCs than in the first quarter of 2015. This reduction is consistent with our strategy of substantially reducing investment in solar development, which we discussed on our year-end call in February. With that said, now I’ll review the performance of each of our business lines. South Jersey Gas’ net income of $44.4 million for the first quarter exceeded prior-year results of $42.6 million as a result of strong customer growth and the benefits from infrastructure investments made to reinforce system safety and reliability. There is no difference between SJG’s GAAP net income and economic earnings. In the first quarter, the efforts of our business development team added almost 1,800 new customers in our utility. This helped to bring our current customer count to 375,585 as of the end of the first quarter. For the 12 months ending 3/31/2016, our customer base grew by 1.8%. Conversions have driven the majority of that growth by a margin of roughly 2:1, but new construction has also picked up over the last year. We are encouraged by the signs of life in that market. We anticipate that relative energy prices, combined with our aggressive marketing efforts, will help fuel long-term customer growth. Regulated infrastructure investments made by SJG through two key programs, the accelerated infrastructure replacement and storm hardening and reliability programs, provided incremental net income of $1.9 million for the quarter. First quarter 2016 investments under these two programs totaled $21.3 million. The AIRP, which replaces aging bare steel and cast iron gas mains throughout our system, and the SHARP, which replaces low-pressure gas mains along the Barrier Islands with high-pressure mains, helped to reinforce and better protect our system. We anticipate infrastructure investments totaling $66 million for the full year in 2016. And we expect those investments to add $4.8 million in incremental net income for the year. Turning to another major infrastructure initiative, I don’t have much new to report on the proposed pipeline that provides natural gas to the former BL England electric generating station. As you may recall, we received final approval from the New Jersey Board of Public Utilities in December, allowing the project to proceed. Briefings are due on the appeals in June and oral arguments are scheduled for September. We remain optimistic that we will be able to move forward on this project late this year. In March, South Jersey Gas participated in the official ribbon cutting for a compressed natural gas station in Paulsboro, New Jersey represents a joint project with Wawa, a leading gas station and convenience store chain operating in six states spanning from Florida to Pennsylvania. With seven CNG stations currently open to the public in our service territory and five more planned by SJG in the next year, we look forward to helping mainstream this technology, allowing greater numbers of drivers to realize the cost and emission benefits this fuel alternative can provide. Turning to SJI midstream’s PennEast pipeline project, the Federal Energy Regulatory Commission released a notice of schedule for environmental review in March, which helped identify another milestone for the Partnership. This document establishes December 16, 2016 for the completion of the Commission’s environmental review of the project. Design, engineering and environmental assessments continue moving forward on the approximately 118-mile FERC-regulated pipeline, which is targeted to be placed in service during the second half of 2018. Now we will move to the non-utility side of our business, which is comprised of two business segments, South Jersey Energy Group and South Jersey Energy Services. For the first quarter our non-utility businesses generated a combined $12.6 million of economic earnings, as compared with $16.3 million in the first quarter of 2015. Once again, what is compelling here is the first-quarter 2016 results were only $3.7 million lower than first-quarter 2015, despite the fact that investment tax credits were $8.5 million lower than they were in the first quarter of 2015. Additionally, we achieved this performance during a quarter where the weather was considerably warmer than in the same period in the prior-year period. Looking at these businesses individually, our commodity, marketing and fuel management activities at South Jersey Energy Group contributed $12.2 million of economic earnings for the first quarter of 2016, as compared with $7.8 million in the first quarter of 2015. Optimization of storage and transportation assets produced significant year-over-year improvements, complement by the performance of three active fuel management contracts. The positives more than offset a $1 million decline in economic earnings from our retail commodity marketing activities due to the very mild winter we just experienced. We anticipate that the remainder of 2016 will benefit from two additional fuel management contracts coming online in the second quarter and from the contributions of several large new retail commodity contracts. Our other non-utility business, South Jersey Energy Services, contributed $500,000 to economic earnings in the first quarter of 2016, as compared with $8.6 million for the same period in 2015. Although the variance is very significant, 2005’s sic 2015 results reflect the benefit of $10.2 million of ITC, while the first-quarter 2016 results were achieved with $1.7 million of ITC. Improved year-over-year operating performance at our solar and landfill gas-to-electricity projects came despite lower locational margin pricing, was partially offset by the impact of a very warm winter on our CHP holdings. Disregarding the effect of investment tax credits, operations from this area of the business improved by over $400,000 for the quarter. And with that I’ll turn the call over to Mike. Mike Renna Thanks, Steve. Good morning, everyone. A year ago we introduced a set of four clear strategic objectives, the first of which, to grow economic earnings to at least 150 million by 2020, is the foundation of our plan. I want to emphasize that the 150 million represents earnings from our core business lines in other words, earnings without the benefit of investment tax credits. Effectively, we aim to double operating performance in five years, with 72% to 82% of our economic earnings coming from regulated opportunities, we anticipate, both within our utility and from FERC-regulated projects within our midstream business. We expect that strong customer growth will continue adding to this segment of our business, along with the benefits of infrastructure investment. The contributions Steve highlighted within South Jersey Energy Group from our commodity and fuel supply management business lines are expected to continue growing and replacing the earnings on the scale back of ITC, ultimately contributing close to 20% of economic earnings by 2020. Finally, improved operating performance within our recently reorganized energy production portfolio will provide a contribution of 2% to 4% as we approach 2020. The second tenet of our strategy is to improve the quality of our earnings. As we approach the end of the decade, as I mentioned, 72% of 82% of economic earnings will come from our regulated business lines, and the balance will be derived mainly from contracted assets that reflect a low-risk, fee-based multi-year approach to growth in our wholesale, retail and energy production businesses. This emphasis on regulated and contracted assets is intended to help drive a third key component of our strategy, which is reducing the risk across our portfolio to ensure that we provide not only high quality but also consistent and reliable earnings. And, finally, as we grow, we intend to do so with a stronger, less levered balance sheet. As our investment profile changes and aligns with increased opportunities, around both the utility and regulated projects, we expect to invest more than $600 million over the next two years in our regulated businesses. We plan to fund that growth through a mix of operating cash flow, debt, and equity that will help us maintain a flexible capital structure. We believe this flexibility will allow us to be agile in response to the many growth opportunities in front of us. I am very pleased with the progress we’ve made to date. In addition to strong growth in our utility, we again benefited from improved performance in our wholesale commodity business, improvements driven by the optimization of our storage and transportation assets, and our three active fuel management contracts. We expect to continue this momentum as we begin serving two additional merchant generation facilities in the second quarter and four additional projects, like our recently announced Lordstown Energy Center, lay the groundwork for future growth. The restructuring of our energy project portfolio within South Jersey Energy Services has led to improved operating performance, as we shed our ownership interest in non-core landfill gas to energy assets, while retaining four New Jersey facilities that serve Borgata hotel and casino property in Atlantic City with green electricity under a long term power purchase agreement. And, of course, the write down of our interest in the energy facility at the former Revel Casino last year has put the impacts of that project behind us and allowed us to focus on improving CHP assets, like the facility that has served the Borgata for more than a decade. Looking at the full year, we anticipate strong customer growth, contributions from our AIRP and SHARP programs, as well as our investment in a natural gas liquefier in McKee City, which, when combined with strong performance from our commodity marketing businesses and improved operating performance across our portfolio of energy production assets, will result in double digit growth in our core businesses, meaningful growth in the range of 15% to 18%, which nearly offsets the significant reduction in renewable project investment we’ve already highlighted. It’s important to note that nothing has changed with respect to our 2020 targets. And our plan, as we stated all along, focuses on core operations, in other words, our 2020 target of $150 million never contemplated any contribution from ITC. With the regulated investment opportunities in front of us, and the impact of the recent bonus depreciation extension, we are simply accelerating our plans to scale back investment in renewable projects to focus on executing on our strategy of growth through our core businesses. As we continue to execute on our strategy, and factoring in our intended plans for capital investment and reduced ITC, we are anticipating 2016 economic earnings per share between $1.29 and $1.35. Beyond 2016, as I said earlier, I’m very encouraged by the progress we’ve made to date, and I’m highly confident that we are well positioned to deliver on all four of our 2020 targets. At this time I will turn the call back to the operator for the Q&A portion of our call. Question-and-Answer Session Operator [Operator Instructions] And your first question comes from the line of Michael Gaugler of Janney Montgomery Scott. Please proceed Michael. Michael Gaugler I was wondering if you could provide an update on the potential move to Atlantic City for the headquarters. I know that’s a big chunk of tax credits that you’ve indicated could be available in the past. The reason I’m asking is, simply, in light of the challenges the city if facing right now, perhaps there’s even a better deal to be had. Mike Renna The better deal to be had is a Camden. And we’ve identified Atlantic City as the optimal place for us to expand our business. Quite frankly, not to drag this out, but our current corporate headquarters in Folsom is space constrained. And we happen to sit in an area where we’re both tyne land and deed restricted, so we do not have the ability to expand our footprint here, which is really the catalyst for why we were looking at potentially relocating a significant part of our business. Simply put, for me, I like the idea that, while everybody else is looking to flee the city, we are heading in. I think that with Stockton and South Jersey Gas as the anchors of the Gateway project, it sends a strong signal that Atlantic City’s future is bright. And its future is also, it’s necessary for a diversification of their economy. So, we’re very proud to be a part of it and, yes, there are very significant tax credits and we’ll be realizing them over 10 years. And, quite frankly, I don’t know that Atlantic City, or the state, for that matter, has the money to sweeten the deal at all. Michael Gaugler Okay. Is there a timeline on the move at this moment? Or just exploratory? Mike Renna I’m hoping to get it done before I retire. Things move a little bit slowly in Atlantic City, but we’re hoping to break ground this year, correct, Gina? And we would assume probably 18 to 24 months of construction. So somewhere late 2018. Michael Gaugler Okay. And then just one other I had. You had referenced Mike, midstream opportunities and investments there. And certainly you’ve got a nice one coming up in PennEast. How are you feeling near term about potentially putting a couple more in the portfolio? Are there projects on the drawing boards that look viable? And are you concerned at all about, what we’ve seen in the Northeast in terms of pushback against new midstream assets? Mike Renna A couple of questions. First, yes, we do have a business development group that reports up through Greg Nuzzo, so we’re evaluating different opportunities in the space. I think that there are opportunities for expansion of PennEast potentially down the road, as well. So I’m very bullish on the opportunities that we have in front of us. But again, we are in preliminary stages of development, so it’s a little bit premature to put anything out there other than the fact that yes we are actively looking at opportunities. As far as the Northeast, I think it’s something that’s relatively unique in the United States to this area of the country. Obviously the West Coast has very similar activism but– I’m very encouraged, or very confident, in the project simply because this is a unique project. It is really being driven by demand. Where a lot of the pipelines are being driven by the producers, this is being driven by the market. And the fact that it’s fully subscribe at the BCF, it’s fully subscribed, demonstrates that there is a real need for this product and for this project to go through. So, despite the fact that it’s in the Northeast, and despite the fact that there is a very small but vocal opposition to it, I am highly confident that it will be successful. Operator Your next question comes from the line of Dan Fidell of U.S. Capital Advisors. Please proceed. Daniel Fidell Just a couple of questions from me. First, more of just a clarification question, with the acceleration in the solar wind down, it looks like solar is 13 million or so for the year, targeting, versus 38 last year, how should we be thinking about contributions going forward? You had mentioned 2% to 4% coming from that bucket going forward, but should we assume zero in the next year? Mike Renna In 2017, yes, I would assume zero. I would not expect us, unless something changes dramatically in the market in terms of economics, that we would be making any further investment in renewable energy products. Could there be an opportunity for us to be involved in a CHP project if the conditions were right? Yes. And there’s an investment tax credit attached to CHP projects. But I think as you know, that’s a smaller percentage and that would really probably be the only place we would realize anything from ITC. Daniel Fidell Okay. Great. And just in terms of financing, you had mentioned as part of the 2016 guidance, I think, in the release talking about the finance, you talked about the need for equity and debt as part of the growth funding for the plan. Can you give us maybe a little bit more color of what you’re including in terms of expectations for equity financing into the 2016 guidance number? Mike Renna Dan, I think you’ll appreciate that we’ve got a lot of opportunity in front of us. And the opportunities are in our regulated business lines which is we have discussed before, that is really the foundation of our plan going forward, As I mentioned, we are going to get to 72% to 82% — not that I want to be precise — in terms of contribution from regulated assets. Right now we are just evaluating different financing strategies to support our growth opportunities and we intend on being opportunistic in the timing and the nature with which we meet those needs. Steve Clark And, Dan, this is Steve. When you step back and look at how we’ve laid out our expectations — and we’ve talked in the past about the things that we see in front of us is opportunities to invest in — what a lot of it entails is a lot of our front investment. We are going to put a lot of money in the ground before cash starts flowing from it, so we’ve got to be very cognizant of that as we implement those. Daniel Fidell Okay, great. And then the last question is more about growth opportunities you see in front of you in two tranches. First is, you talk about 600 million or so in investment opportunity,’16 and ’17, and then longer term the 150 million economic earnings per share number by 2020. I don’t know if you can address a sort of each of them maybe in some way sort of on the near term, the 600 million or so, without going into necessarily specifics, or as much as you can, can you kind of bucket that a little bit in terms of big chunks of where that’s — the $600 million will likely flow from? Steve Clark Dan, just to respond to that, as we look at our utility, as an example, I think we’ve got in our forecast about $220 million of CapEx just at South Jersey Gas Company. And I believe next year we’re at that same range or a little bit higher than that next year. So you’ve got $450 million targeted right there. We certainly are looking at, basically the rest of it would be opportunities with regard to our FERC-regulated midstream opportunities. As we look at the kinds of things that we’re doing at the utility, and you take them even out beyond 2017, obviously our focus is on continuing to improve the quality of our system. We’ve had a regulatory environment that has supported folks in New Jersey from making those good decisions to improve and enhance their systems. And that’s exactly what we’re looking to do. When we’re talking about these numbers, it’s really focused on the regulated businesses, and the vast majority of it falls on the utility. Mike Renna Just a follow up on Steve’s, there is no significant planned capital expenditures in our traditional non-utility businesses. And that, I think, echoed in the fact that we’re considerably — or whatever word you want to put on it — reducing our investment appetite in renewable projects this year, and not anticipating any next year. And, again, we don’t have any big development projects in front of us on the CHP side. So, all, if is not all the vast majority, of this spend is in regulated businesses. Daniel Fidell Last question for me and I’ll hop back in queue, just wondering if you’ve got — you mentioned the CapEx spend for ’16 or ’17 but do you have a spend through the 2020 period, a general level of total CapEx that we can peg to? Should we assume sort of a normalized rate that you are guiding here for, 300 million roughly or so annually through the period up to 2020? Steve Clark We’re probably a little heavier now through the middle of the phase, but we’re probably looking at as much as $1.5 billion through that 2020 period. Operator Your next question comes from the line of Andrew Gay of Motion Group. Please proceed Andrew. Andrew Gay In terms of what changed with the guidance from last quarter in terms of the percentages from each segment, did your expectation of overall earnings change, or was it just shifting between the segments? Just trying to understand what drove some of the shift, like the utilities a little less now as a percentage. Steve Clark Primarily just refining things. As we’ve moved forward, it’s just looking at how the winter played out. Obviously, it was a very warm winter so you move a couple things around there. But I don’t think there was anything really significant in the adjustment. Andrew Gay So, then, at the utility, did I hear you right that net income there is up year on year? Steve Clark Yes, that is correct. Andrew Gay And then in terms of the uncollectibles at the utility, you had highlighted them on the fourth quarter call that they were a drag in last year. Do you have any guidance on what that is looking like for this year, just like a year-on-year benefit? Steve Clark We did expect it to be conservatively better this year. We thought we had addressed a lot of the issues last year. We are expecting, and will obviously have to continue along a little bit further into the year, but we are expecting that we will also see benefit out of the fact that we had an extremely warm winter. And while that prevented some of our non-utility businesses from taking advantage of what are typically market opportunities in cold winter periods with a lot of cold weather volatility, within the utility the real benefit is it’s a lower bill for our customers to pay, and it makes it easier for them to pay. We think that’s a net positive to us so we’re expecting a significantly better situation from a receivable collection standpoint this year than we were last year. Andrew Gay Okay. And the 15% to 18% core business growth that you had mentioned, I apologize, I missed what you exactly said there, is that 15% to 18% expectation for this year? Steve Clark Yes. Andrew Gay Okay, for this year. And then, just lastly, I know that you want to be you want to be somewhat sensitive to discuss the amount of equity and timing, but just in terms of the 2020 goal, 150 million goal for net income, any sense of the share count that we should be assuming out there once you get the cash flows and the upfront CapEx and everything is all taken into account? Steve Clark I think probably the biggest issue there is going to be timing of cash flows. But our view on this is that there is going to be, from a significant investment there’s going to be a significant amount of cash that comes rolling in. Ultimately the issue is that you would have expected, as you look out at a 2020 program that we are talking about, and with a lot of the investment that we are talking about, any of the real capital needs and that would also fall in the category of equity capital you expect that to be much heavier at the beginning of the period than it would at the end. And clearly at the end we wouldn’t expect any real equity requirements at the end of that period. Andrew Gay Okay. And just lastly from me, has anything changed in terms of why you’re talking about equity upfront? Given the contracted regulated nature of a lot of the cash flows that will come online, there could have been a thought to let the credit metrics slip a little in the front years because you will get the benefit of those cash flows in the back years. Are you getting pressure from rating agencies? Or this was the plan all along and there hasn’t been a change? Just if you could give a little color on that thought process. Mike Renna It’s been the plan all along. A key component of our plan was to strengthen our balance sheet. We believe it’s the prudent thing to do. But, again, we’ve got tremendous amount of investment opportunity in front of us. As we look at all of these different opportunities, we’re making decisions — discrete decisions — on how best to finance these opportunities. And doing so mindful of — again, we talked about strengthening the balance sheet and minimal dilution, so those are all part of how we are factoring in our decisions. Operator The next question comes from the line of [Steven Ambrosi] (ph) of Castleton Investment Management. Please proceed Steve. Unidentified Analyst Most of my questions have been asked. Just quickly, do you guys have plans in the five-year look-forward to do another general rate case in New Jersey? And can you talk about timing on that and when that would be? Mike Renna We do have plans. When you experience the kind of CapEx that we’re planning on in the utility, it is certainly something that you make plans for. As far as timing goes, no, we have not refined the timing in New Jersey. There are a lot of factors that go into it, particularly off your gubernatorial cycle or election in New Jersey. So, we tend to look at everything from — obviously, business needs are paramount but at the same time we try to factor in some of the social type of impacts. Unidentified Analyst Okay. There was a lot going on before — the BL England comment, what was the comment you made on that in the script? Can you just talk about where that is, where the process is there? Steve Clark Sure. We got approved back in December. It went through a long process to go through the Pinelands. And the Pinelands had taken action to move forward on it, and it required a final approval, in essence, by the Board of Public Utilities. That happened back in December. There were a number of, in essence, appeals that were filed by different groups who were opposing the pipeline for a variety of different reasons. Those are being addressed right now. The expectation, I think I indicated that briefs were due in June, and that the expectation is that the arguments would be heard in September. So, the thought always was, once that got approved that we would have to go through the appeal process. We don’t think the appeals have any merit and we are expecting this thing to continue moving on. Hopefully we’ll be moving forward with it again by the end of the year. Unidentified Analyst What are they appealing on the basis of? Steve Clark There’s a variety of approaches they’re taking. [Audio gap] Some of it had to do with the fact that the BPU was approving it. It had to do with the way that thing was approved. There are certainly people who — well, let’s get right down to brass tacks — one of the processes here as we are dealing with all of the argument again fracking and against fossil fuels and the like, part of the plan is delay. If you can’t kill it, if you delay really, what the process here is, is that they’re going to throw a lot of stuff against the wall and if it creates a delay that’s great. Steven Ambrosi Okay. That’s all I had. Thanks very much, guys. Operator Your next question comes from the line of Chris Ellinghaus of Williams Capital Group. Please proceed. Chris Ellinghaus A couple of questions. One, can you give us some color on where variance in ITC recognition this year might come from? Stephen Clark Chris, when you say the variance, are you talking about the first-quarter variance? Chris Ellinghaus No, in terms of you said up to $13 million. What could make it be less? Mike Renna It’s a couple things. If we don’t have investment opportunities that meet our internal rates, certainly that would be one driver. We’re not going to invest in a sub optimal decision simply because we’ve got an ITC number out there. Second, if we have stronger than anticipated or expected performance in any one of our other business lines that would, again, be a more attractive use of our capital and generate a higher return on our capital. That would be, really, the other thing. Off the top of my head I can’t really think of anything else besides just better investment opportunities. Chris Ellinghaus Okay. Steve, can you give us any elaboration on what you did for equity in the first quarter? Stephen Clark We brought in $9 million, I believe it was, in equity in the first quarter. I’m sorry, I take that back. I’m sorry. It was $5.5 million, but through our DRIP, I think as of April 1, we got another $4 million. So, it was $9 million total as of April 1. What will show up in the quarter numbers is $5.5 million. Chris Ellinghaus Okay. And, Mike, as far as that 15% to 18% number that you quoted us for this year, how are you defining, just so I’m clear, what are you calling core? Is that simply ex ITCs or is that really a different definition? Mike Renna It is ex ITCs and ex any one-time events. So, it really is just the operating profits from Gas Company, Energy Group, and Energy Solutions Chris Ellinghaus Okay. Great. That’s clear. Steve, or anybody, can you just walk us through the supply management contracts and when you expect the un-operating ones to begin? Stephen Clark Sure. Let me introduce you to Greg Nuzzo. This is his maiden voyage on an earnings call. But he is best equipped to give you an update on our fuel supply business. Greg Nuzzo We have three operating contracts now currently contributing, and we have two more coming online this year. There will be five in total that will contribute to 2016. Chris Ellinghaus Both of those are Panda’s? Greg Nuzzo The two additional our Panda’s, Moxie and Liberty, yes. Chris Ellinghaus And the Ohio contract, when does that begin? Greg Nuzzo That’s the Lordstown deal that will begin in 2018. Chris Ellinghaus Is that the most detailed as far as timing goes that you have? Greg Nuzzo In terms of timing for that particular deal? I think in total we have nine that we have under contract. We have two more coming online in 2017, and two additional ones coming on in 2018. Chris Ellinghaus Okay. Great. Thanks for the color, guys. Operator [Operator Instructions] I would now like to turn the call over to Mike for closing remarks. Mike Renna Thanks. Before we wrap up, as always feel free to contact Marissa Travaline, our Director of Investor Relations, our Ann Anthony, our Treasurer, if any follow up questions arise. Marissa can be reached at 609-561-9000, extension 4227, or by email at mtravaline@sjindustries.com. Ann can be reached at extension 4143, or by email at aanthony@sjindustries.com. Again, thank you for joining us today and for your continued interest and investment in SJI. Operator Ladies and gentlemen, thank you for your participation in today’s conference. 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California Water Service’s (CWT) CEO Martin Kropelnicki on Q1 2016 Results – Earnings Call Transcript

California Water Service Group (NYSE: CWT ) Q1 2016 Results Earnings Conference Call April 08, 2016, 11:00 am ET Executives Dave Healey – Vice President, Corporate Controller Martin Kropelnicki – President, Chief Executive Officer, Director Thomas Smegal – Chief Financial Officer, Vice President, Treasurer Analysts Jonathan Reeder – Wells Fargo Operator Good morning, ladies and gentlemen. Welcome to the California Water Service Group first quarter earnings results teleconference. Today’s conference is being recorded. I would now like to turn the meeting over to Dave Healey. Please go ahead, sir. Dave Healey Thank you, Wes. Welcome everyone to the first quarter earnings results call for California Water Service Group. With me today is Martin Kropelnicki, our President and CEO and Thomas Smegal, our Vice President, Chief Financial Officer and Treasurer. A replay of today’s proceedings will be available beginning today, February 28, 2016 through April 28, 2016 at 1-888-203-1112 or at 1-719-457-0820 with a replay pass code of 9747630. As a reminder, before we begin the company has developed a slide deck to accompany the earnings call this quarter. The slide deck was furnished with an 8-K this morning and is also available at the company’s website at www.calwatergroup.com/docs/earningsslidesmarch2016.pdf Before looking at this quarter’s results, we would like to take a few moments to cover forward-looking statements. During the course of this call, the company may make certain forward-looking statements. Because these statements deal with future events, they are subject to various risks and uncertainties and actual results could differ materially from the company’s current expectations. Because of this, the company strongly advises all current shareholders as well as interested parties to carefully read and understand the company’s disclosures on risks and uncertainties found in our Form 10-Q and other reports filed from time to time with the Securities and Exchange Commission. Now let’s look at the first quarter 2016 results. I am going to pass it over Tom to begin. Thomas Smegal Thanks Dave. And just as an overview of what we are going to discuss today, we will go over our financial results, some of the highlights and changes there, talk about the drought in California and talk about our rate cases, give you an update on our CapEx program and balance in our WRAM decoupling mechanism, bridge the earnings and Marty will have some closing comments as well. So turning to financial results. Our operating revenue for the quarter was essentially flat compared to the operating revenue in the first quarter of 2015. A couple of competing things there related to water production costs. Sales are down, but the price for our purchase water is up. Those offset each other. Operating expenses or purchase water costs are down because of the volumes and that’s offset as we will discuss it in a moment by maintenance costs and drought related activity costs. Other highlights on slide five of our deck are that our interest cost is up. That is due to new long-term debt, both in October and in March, October of 2015 and March of 2016. So our net income is down $2.4 million and our EPS is down about $0.05 from the year ago period. So flipping to slide six of our deck on the financial highlights. We had incremental drought expenses of $2 million in the quarter. That is a little higher than our run rate for the previous six months, this last six months of last year and has to do with communications that we made to our customers about with the new drought tariffs and changes to the drought regime in 2016. So that is a bit higher than it’s been. Once again the drought costs are subject of an approved memorandum account of California Public Utilities Commission. That means that we record those costs and we are going to ask for recovery of those costs that has to go through a reasonableness review and we will expect a future increase in our revenue to cover that. But those are being passed through to expense right now. Our maintenance expenses were $1.6 million higher during the quarter and that has to do with again the drought. We believe this is a very similar run rate on maintenance expenses that we have had for the last two quarters. We believe a lot of that has to do with fixing leaks when they occur despite the magnitude of the leak. In a normal time, we would have prioritized leaks and addressed the much smaller leaks in due the time when we had a spare moment, Now, we are trying to fix every leak every day and that is driving up our cost for maintenance. And as I mentioned before, the interest expense due to the long term debt did increase our expense by $800,000. Two big highlights for us for the quarter. Our company and developer funded capital investments were $55.6 million. That is really on target for our $180 million to $210 million CapEx spend for the year. So we are very excited about that. That’s probably the highest amount of CapEx in the first quarter in the company’s history. The second really good news item is that our customer receivable for the WRAM decoupling mechanism declined to $33.6 million. That was in part due to $11 million of drought surcharges and the effect of new rates that were put in 2016 that lowered the expected sales and therefore bring us closer to recorded and adopted sales. And finally as we noted that we did complete our financing, our long term debt financing with $50 million and that was in March, previously announced. Now I am going to turn it over to Marty for some updates on the drought. Martin Kropelnicki Thanks Tom. Good morning everyone. I want to give you a quick update on the drought situation in the State of California, our performance and where we are in terms of our savings with our customers versus the emergency declared by the Governor last year in the State of California. First and foremost, we ended the quarter. So the savings for March, we were at 27.9%. So we are continuing well above the state 25% mandate. A couple of interesting stats to a share with everyone. If you look at the estimated savings for the state from June 1, 2015 through the end of February, the state saved 1.19 million acre feet of water through the conservation efforts that were declared in emergency declaration. During that period, Cal Water customers saved 74,000 acre feet, which is about 6.2% of the total savings for the State of California. So I think when you look at how robust our drought program has been and how well our customers have done in terms of hitting their targets, we have been very pleased with our contributions to the savings that they have put with State of California. As we put in the deck, Northern California, we are coming into the spring month now. Northern California had above normal rainfall and snowfall levels than Southern California. It was different. They were lower than normal. So just to share some numbers with everyone that I think are going to be very important, the snowpack reading that took place on April 1, which is a very important in the State of California, statewide the snowpack levels were at 85% of normal. But when you dissect North versus South, you will start to see how the picture changes a little bit. In Northern California, we were above 95% of normal, but when you go down to the snowpack range in Southern California, they are only 71% of normal. So again, most the snow and rain happened in northern parts of the state. Likewise, when you look at reservoir levels throughout the state, when you look at Northern California, most of our reservoirs are at 100% of capacity and 100% of their historical averages for this time of year. When you move to Central California, most of the reservoirs are between 40% and 80% of their historical averages, but only at about 40% to 50% of their total capacity. And then when you move to the reservoirs in Southern California, they are between 40% and 80% of normal in terms of the historical averages, but well above 50% of capacity. So despite the strong rain and snowpack in the North, you can still see why the drought has been extended through October 31 of this year. Having said that, clearly we have more water this year and as we have in the deck, the State Water Project bumped up their allocation to 60%. It’s the highest it’s been in five years. So that’s good news. That allows us to move more water from Northern California to Southern California. Likewise with the Federal Water Project, we have seen an increase in allocations as well. In 2015, the allocation for urban areas was 25% on the federal project, that’s been bumped up to 55%. And on the agriculture front, the allocation from the federal project was zero in 2015 and that’s been bumped up to 5% for 2016. So again, well, conditions have improved. They vary dramatically depending on where you are through the state. Northern California is in fairly good shape. But clearly Southern California is below average. What will happen next? The State Water Resources Control Board, we are expecting them to issue updated draft regulations any time during the next 10 days. They have a meeting scheduled to approve any changes on May 18. And then those changes will go into effect on 6/1. So in terms of where we are, I fully expect and this my personal opinion, that you will see some easing of the drought restrictions but clearly we are not going to see them go away. And again, you can just look at that the numbers I gave you, if you run them down, Northern California versus Southern California, we are still not where we need to be and frankly we are far from it, even with the strong rains in the North. So watch those new rates to come out shortly and we will be communicating on the second quarter earnings call what the changes are to the drought policies for the State of California and the impact on Cal Water. Likewise, one of the things we put on slide seven is that we have implemented in our drought program, I call it a dead band, the drought people call it a courtesy tier, given the fact that 80% of our customers are coming in at or below their conservation targets. Basically a band around the tear-off before they get a surcharge. So if they go one unit over their authorized amount, they are not hit with a penalty. So it gives customers a little bit more breathing room. We expect that will reduce the number of calls to the drought call center and ease some of the backlog that we have seen on applications for exceptions to their water allocation budget process. Tom, back to you for an update on the regulatory mechanisms. Thomas Smegal Yes. Just a reminder to everyone of the regulatory mechanisms in California that help us through the drought. Obviously, we has been decoupled since 2008 with WRAM and MCBA mechanisms and again what that does is it keep our revenue normalized even if the sales are declining. And then the drought costs, as I mentioned before, the $0.02 EPS impact in the quarter or the $2 million, we do expect to request approval for last year’s expenses in the second quarter. If you will remember, the expenses there were about $4.4 million for 2015. We are preparing that filing for the Commission and expect to file that within the next 90 days and that will go to the review process. The expenses for 2016 will be on our review schedule later on. Our customer surcharges, as I mentioned, it really positively impacted our WRAM balances. $11.4 million of drought surcharges recorded in the quarter and the WRAM balance again declining $6.9 million in the quarter and year-to-date. And the other thing that I have been mentioning on these calls is that we did have a mechanism called the sales reconciliation mechanism which allowed us to change or rates for customers in 2016 with a lower expectation of sales, so that when those sales do come in lower due to the drought, the potential WRAM balance is much smaller and so that improves for cash collections. And Marty, I am going to turn it back to you for a rate case update. Martin Kropelnicki Great. On slide nine, that’s the recap. I think you maybe have seen this before of what our rate case was for July 1 last year that we filed, July 1, 2015 that was filed with the California Public Utilities Commission. I am not going to go through the numbers here rather than on the last bullet point, we are about nine months through the 18 month process. And if you turn to the next page, on page 10, we will give you more of an update. So we did receive the Advocates’ report or the ORA report. Today, close of business today, we will be filing our rebuttal testimony. To give an idea of how many people have been working on this, we have got about 115 people throughout our company working on rebuttal and support for rebuttal testimony. So we have about 2,000 pages of testimony that will get filed at close of business today. Likewise, during the first quarter we have started our public participation hearing meetings. We will our sixth public participation hearing meetings tonight and those are progressing as scheduled. And we have our interveners lined up. In total, there are 17 intervening parties in the rate case. Most of what our cities and counties and we are going to the process of starting to meet with them. So in terms of next steps for the rate case, as we file the rebuttal testimony and then we will start settlement negotiations on or around approximately May 9. So things are right on track as of right now, but now is where the rubber meets the road, which is a settlement discussions or if we decide to litigate. And so we will have a much better sense of where we are with the Q2 call at the end of July and we will provide a detailed update then. If you go to page 11, as Tom said, this is the best first quarter in terms of CapEx spend. We spent 27% of our budget. If you remember our range was between $180 million and $210 million. I think it’s noteworthy that it is the highest number we have recorded in the first quarter in terms of capital investment. It’s also noteworthy that we accomplished this with so many people working on the general rate case rebuttal testimony and a lot of support has to come from engineering on the capital program for that rebuttal testimony. So overall very happy with the start of the year in terms of our capital program and the results and the productivity we are getting out of our engineering departments which you may recall, we reorganized in the fourth quarter of last year. So overall off to a very good start on our CapEx and look forward to seeing how that number progresses throughout the year, Tom? Thomas Smegal Sure. The next slide is a graphical representation of our WRAM and MCBA net balances. These are receivable balances from customers over the last five-and-a-half years. And what you will see here and what’s notable is that we have really made an impact with the drought surcharges on that WRAM balance. We have as low a balance as we have had since the very beginning of 2011 and that was really in a period back then when things were rising and things were off-kilter. We are getting back to a spot where we expect this to continue to decline. So really happy about that receivable balance. On the next page, just an earnings bridge from 2015 to 2016 for the first quarter and you will see there that the big impacts are obviously, as we talked about, the drought expenses and the increased maintenance expense. And all other items that impacted us about $0.01 and that includes the interest and other cost changes on us. And so that is it for the deck. I do want to pass to Marty for some closing comments. Martin Kropelnicki Great. Thanks Tom. Well, it’s nice to have Q1 behind us. For those of you who have been with us for a while, Q1 is always our leanest quarter of the year and that is especially true, the third year of the rate case cycle which is where we are in right now. It’s the year we have the least amount of rate relief and we start to see regulatory lag in certain costs. While we have a number of balancing accounts that cover major costs, things like labor, chemicals and filters, some of the operating lines are affected by a lack of charges that creep in during the third year. So nice to have the third year behind us. In terms of what the company is focused on during the second quarter obviously, as I mentioned earlier, the rebuttal testimony is key. We expect to file that today, close of business today and then start settlement discussions approximately a week, week-and-a-half later. The second thing and Tom mentioned this earlier as well, is filing for the recovery of drought cost from 2015. So the 2015 costs will be filed on a stand-alone basis and then 2016 cost will be recorded to the memorandum account for this year and then what happens with the drought. And so we will know a lot more about the drought. I fully expect some type of restrictions to continue throughout the year, but what that will be, we don’t know as of now and we expect to find that out in the next two weeks. And like I said, we will be communicating that once we know what those restrictions are. So overall kind of the quarter was what we thought it would be. If you back out the drought expenses, we were tracking right to where our internal budgets were. And then we will be focused on the drought and any change to be made in our capital spending for 2016 in the rate case. So Tom. Thomas Smegal Thanks. Wes, we are ready to take any questions that people have. Question-and-Answer Session Operator [Operator Instructions]. We will go first to Jonathan Reeder at Wells Fargo. Jonathan Reeder Hi. Good morning, Marty and Tom. Thanks again for slide deck. That’s helpful to follow along. First question, so including the drought costs, earnings were essentially flat in Q1. Were there any other items that you would single out as nonrecurring? Thomas Smegal I don’t think so. You can always pick your expenses apart and say, well that legal bill or that consultant bill is in this quarter and not in that quarter or anything like that. I don’t see that there is anything significant in any of those variations. Just normal stuff. Jonathan Reeder So were there any items in Q1 that were not in line with your expectations or plan for 2016? Or did the quarter, for the most part, go the way you were anticipating? Thomas Smegal I think it did go the way we were anticipating. We do have an internal budget obviously and we are tracking pretty close to that. I think just the drought costs are the big item there and the maintenance costs that are probably related to the drought as well. Martin Kropelnicki And one thing I would highlight on the drought costs, we did have a step-up in advertising in terms of related to the drought. And that’s because as we go into the winter months, it’s a lot harder to hit your conservation targets. In the spring and summer months, people have their lawns, you start watering, outdoor watering and that’s where we get a lot of the savings from during the summer months and fall months. But as you go into winter, people turn off their water. So we stepped up our advertising campaigns in the districts that weren’t hitting their targets. Thomas Smegal And Jonathan and everybody, I think the other thing to note is, with the uncertainty related to how much drought restriction we are going to have this year, there is a potential that the drought costs will start to come down a little bit over the second quarter, third and fourth quarter of the year. The $2 million, I wouldn’t characterize as a run rate every quarter for the company going forward. We have seen a slight decline in the number of calls to our drought call center. And so we are going to manage the staffing on the call center. We are going to be managing the staffing related to the outreach customer or direct outreach. And so if you see the state coming in with a major reduction in the drought requirements, we will also probably see a reduction in our costs on a go forward basis. Jonathan Reeder Okay. Do you think, is the state, would they distinguish between the North and the South in terms of restrictions? Or is it just going to be a blanket thing? Thomas Smegal We participated in a couple of calls talking about different ideas. One idea was that you basically put it at a groundwater adjudication level or at a regional level and allow each region to make the appropriate changes based on their water supply situation. But as you know, the groundwater adjudication bill which was signed a year-and-a-half ago, that’s not fully implemented yet. So we are not sure that’s probably going to work. So we are not sure of what they are going to do. But I think when you look at the numbers, if you look at the snowpack and reservoir levels, you get the clear sense of Northern California is great shape, Southern California is still really in a danger zone. And while we have water to move from the North to the South, on average the snowpack was not at average. It was still below average. And so this was supposed to be a big El Niño year. So I think there is a number of factors they have to work through and we just don’t have clarity we will get the orders from them here, like I said, expected within the next two weeks. Then we will know what to do once we see that. But I still think you will have drought restrictions statewide at some level. Jonathan Reeder Sure. And then did you specify when you are going to file for the 2015 drought cost recovery? Thomas Smegal They are working on that now. We think we will have it filed some time here during the second quarter and it has been a busy, busy, busy time for the rates team. There is core team of about 15 employees who work on the staff, the rate case is actually for the four states. So between the GRC and preparing to file for recovery of the drought costs, everyone has been really busy, but performing very well. Very happy with how everyone is performing. They were on schedule. So you will see it filed here in the second quarter, I believe. Jonathan Reeder And then potential to pickup would be by Q3? It’s pretty quick turnaround? Martin Kropelnicki Yes. It’s an advice letter process. So presuming that the Commission determines things are reasonable, I think it could move within 90 days of filing. That would be a best guess. But with the Commission, you can never tell. Jonathan Reeder Sure. Martin Kropelnicki It could get held up. Jonathan Reeder Okay. Any impact from unbilled revenues in Q1, like we have seen in the past few quarters? Thomas Smegal There was a slight positive this quarter when you get out the Q and look at that, it’s not a negative for the quarter this time. But remember that the big negative that we had in 2015 was the second quarter. And so we will be watching carefully to see how we are different in the second quarter from the second quarter of 2015. Jonathan Reeder Okay. And then any discussion for extending the water GRC to cover for you [indiscernible]? I know that some of that’s been kicked around a little on the electric side? Martin Kropelnicki I know that there has been a lot of interest in the water rate case plan among the different parties, the water companies and ORA have talked about this periodically over the years. But there is no formal effort to change it at this point of water side. And if we were going to change it, we will probably see some other things. I think some of the companies and ORA are sick of having the cost to capital as a separate item. And so if you change the schedule, you might also change that, embed that back into the rate case. So those changes, I don’t anticipate but we will follow the energy industry and see what changes there. Jonathan Reeder Okay. And then last question and I will hop off. Can you quickly sum ORA’s testimony in terms of the CapEx budget and the revenue increases and just how that compares to your request? I know you are filing a rebuttal. Thomas Smegal Yes. The easiest sum is, no. NO. Obviously in our rate case, we made a case for a major expansion of our CapEx and we think it’s with very good justification. We went into great amount of detail as far as we have talked to this community about the need for additional main replacements and how we have been following behind our main replacement program. The attitude of the Ratepayer Advocates seems to have been in opposition to that expansion. As I think Marty, did you mention the number of pages of rebuttal testimony? I think it was about 1,000 pages. Martin Kropelnicki 2,000 pages. Thomas Smegal 2,000 pages of rebuttal testimony. So we are going in fighting. It’s not unusual as a former regulatory person all the way down from the regulatory VP to a regulatory analyst, the worst day of my year has always the day I get the ORA or DRA report and then we just move on from there. Because remember that they are not the Commission. They are an advocate and they are taking a position and often it’s a very short term position as far as the immediate impact and looking at the long term effects on the system. So we have a lot of confidence that our arguments are good and that we will be able to reach a settlement or if we don’t get to settlement, that we are going to able to go through and litigate and have a favorable outcome. Jonathan Reeder I was going to say, based on those comments, if was a different kind of mindset between the short-term and long-term nature of the two sides. It seems like reaching a settlement could be a little more challenging this time around. Thomas Smegal I don’t mean to be too pessimistic about the settlement possibilities. I know that we have a very good relationship with the staff of ORA in terms of a working understanding of passing data back and forth. There is no intent on either side to hide information or couch arguments in terms of really expressed terms. So I think that we are expecting to have settlement. And I believe that ORA is expecting to have settlement. And that’s always encouraging. If we were to know, for instance, that they have no intention of settling and wanted to litigate everything, then I would be feeling a little bit differently. But I know for a fact that we have been trying to negotiate which subjects get settled at which time. And so there is a high likelihood that we will have a productive settlement discussion. Whether that leads to a full settlement or not, I don’t know. Martin Kropelnicki Yes. I think Jonathon, we have spent a lot of time preparing this rate case. And I think Tom and I have really been focused on getting the company to focus on the long-term planning around capital. So we have got a lot of people to work on the rate case. We put our best people on the rate case, including Tom is doing a big piece and I got a piece of it. We have three or four officers dedicated to working on it. So I think we are going in in a very good position and we just have to see where the process takes us. I think it’s fair to say, this is probably the best job we have done on our justifications in terms of making sure that we are well rounded, well thought out, well backed up with data and third-party data to validate the company’s positions. So their job is to say no and our job is to convince them why we need it and have good reasons and explanations for that. And that’s the next step of the process here. Jonathan Reeder Okay. Thanks so much for the insight and good luck over the next few months. It sounds like it’s going to be a pretty busy time. Thomas Smegal All right. Martin Kropelnicki Thanks Jonathon. Operator [Operator Instructions]. And we have no further phone questions at this time. Martin Kropelnicki Okay, Wes. Well, just to wrap up, I want to thank everybody for their continued interest in California Water Service Group. We look forward to giving you updates on all these subjects with our second quarter call. And have a good day, everybody. A -Thomas Smegal Thank you. Operator That concludes today’s conference. Thank you for your participation. 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. 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4 Mutual Funds Rookies To Outperform Older Peers

According to the research paper “Scale and Skill in Active Management” by professors Robert Stambaugh and Luke Taylor, younger actively managed mutual funds outperform the older ones in a defined time frame. The path-breaking study, published last year in the Journal of Financial Economics, also indicated that returns of funds decline as they grow older. The professors cited an increase in the size of active management industry and the entry of new competitors as the main reasons behind their findings. Taylor said, “If there are more people fishing in the same pond, that’s going to make it harder for any individual person to catch a fish.” Actively managed funds tend to invest in securities that are believed to be undervalued relative to their fundamentals and try to outperform broader indexes. In order to pursue this objective, asset management companies seek to employ active managers who utilize their forecasting power and judgement to decide on buying, selling or holding securities. As a result, portfolio compositions of these funds are believed to vary according to market conditions. This makes the study an interesting reference when the performance of the younger funds is compared to the older ones. It will be interesting to see which category helps investors to achieve their objectives. Younger Versus Older Funds Out of the mutual funds we studied, funds that were incepted on or after 2010 have been considered as younger funds and those incepted on or before 2005 have been categorized as the older ones. In order to analyze the performances of younger mutual funds compared to the older ones, we have selected the top 100 funds from each category on the basis of their performance since inception. While the load-adjusted average total return of 100 younger funds since their inceptions outpaced the same average of the top 100 older funds, the former also outperformed their older peers in recent years. Load-adjusted average total return since inception of the top younger funds came in at 18% against 13.5% of the top older funds. Moreover, the younger category registered an average total return of 17.7% in the last three-year period compared to 16.4% gain witnessed by the older ones. Last year too, when most of the mutual funds found it difficult to finish in the positive territory, the top younger funds managed to post an average gain of 4.4%, clearly outpacing the average return of only 2% registered by the top older ones. Before concluding that the younger funds may prove to be more profitable than the older funds, as the facts indicate above, let’s have a look at some of the arguments given by professors Robert Stambaugh and Luke Taylor in their paper. Arguments in Favor Both Stambaugh and Taylor identified younger managers’ improving skills and ability to use advanced technology for forecasting as the main reasons for the outperformance of younger active funds. They argued that with gaining popularity of mutual funds over the years, level and quality of training has increased over time. Betterment of training helped new fund managers to gain exposure to higher education, advanced technology and research tools, which in turn had a positive impact on the performance. To quote Taylor, “New funds entering the industry have more skill … possibly because of better education or a better grasp on technology.” Moreover, younger active funds that come with new strategies, never explored earlier, may attract more investor attention than the older funds. Separately, Taylor identified that the performance of a fund tends to decline with time as the industry size increases. With time, the number of competitors and size of individual funds are bound to grow. With increasing size, trading volume of the funds also tend to rise, which weighs on a fund’s performance. In order to improve performance, the fund manager needs to increase exposure to undervalued stocks. This involves identifying stocks which are incorrectly priced relative to their intrinsic value and picking potential sellers of the same. This will force the fund to offer a higher price for the stock if it is to be purchased immediately. Otherwise, the fund may wait for a longer period of time, which may result in the loss of some of the incentives of undervalued stocks. 4 Young Mutual Funds To Consider Based on these facts, we present four mutual funds that were incepted in 2010 or later and carry either a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy). We believe these funds will outperform their peers in the next few years. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify the potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but also on the likely future success of the fund. Along with impressive returns since their inceptions, these funds also have encouraging one- and three-year total returns (as of December 31, 2015). The minimum initial investment is within $5,000. These funds also have a low expense ratio and no sales load. Fidelity Series Real Estate Equity Fund (MUTF: FREDX ) seeks high income and capital appreciation. FREDX invests the majority of its assets in companies associated with the real estate industry across the world. The fund is expected to provide a higher return than that of the S&P 500 Index. FREDX was incepted in October 20, 2011. Since its inception, this Zacks Rank #1 (Strong Buy) fund has returned 12.7% and gained 3.6% and 12.7% over the past one- and three-year periods, respectively. FREDX has an annual expense ratio of 0.74%, significantly lower than the category average of 1.29%. It has no minimum initial investment. MFS International New Discovery Fund Retirement (MUTF: MIDLX ) invests in non-US equity securities, which also include equity securities of companies located in emerging nations. MIDLX invests in securities such as common stocks, preferred stocks and REITs. It invests in securities of companies that are believed to have impressive growth prospects. The fund may allocate a significant portion of its assets in a specific country or region. It was incepted in June 1, 2012. Since its inception, this Zacks Rank #1 fund has returned 9.2% and gained 2.9% and 6.3% over the past one- and three-year periods, respectively. MIDLX has an annual expense ratio of 0.95%, below the category average of 1.53%. It has no minimum initial investment. Thornburg International Value Fund Retirement (MUTF: TGIRX ) seeks growth of capital over the long run. It primarily focuses on acquiring securities of foreign companies and depository receipts. Though TGIRX invests in securities of companies located in both developed and developing nations, it invests a larger share of its assets in securities from developed markets compared to those from the developing markets. The fund was incepted in May 1, 2012. Since its inception, this Zacks Rank #2 (Buy) fund has returned 9% and gained 6.8% and 5.4% over the past one- and three-year periods, respectively. TGIRX has an annual expense ratio of 0.74%, lower than the category average of 1.34%. It has no minimum initial investment. Strategic Advisers Growth Fund (MUTF: FSGFX ) generally invests in Fidelity Funds and non-affiliated funds that take part in Fidelity’s FundsNetwork. FSGFX also invests in non-affiliated ETFs. It invests in large-cap companies having market capitalization within the universe of the Russell 1000 Growth Index. FSGFX was incepted in June 2, 2010. Since its inception, this Zacks Rank #2 fund has returned 16% and gained 5.1% and 16.7% over the past one- and three-year periods, respectively. FSGFX has an annual expense ratio of 0.31%, below the category average of 1.18%. It has no minimum initial investment. Original post