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E.ON SE’s (EONGY) Management Discusses on Q1 2016 Results – Earnings Call Transcript

E.ON SE ADR ( OTCQX:EONGY ) Q1 2016 Earnings Conference Call May 11, 2016 5:00 AM ET Executives Florian Flosmann – Head-Investor Relations Michael Sen – Chief Financial Officer Analysts Deepa Venkateswaran – Bernstein Peter Bisztyga – Bank of America Lueder Schumacher – Societe Generale Michel Debs – Citigroup Andreas Thielen – MainFirst Bank Ahmed Farman – Jefferies Bobby Chada – Morgan Stanley Ingo Becker – Kepler Cheuvreux Florian Flosmann Good morning everyone, and welcome to our First Quarter Call. Our financial information was published 7:30 this morning and the files can be downloaded from our website. I am joined in today’s call by our Chief Financial Officer, Michael Sen. The agenda is straightforward. Michael will lead you through our Q1 results, follow-up by a Q&A session. And with that, Michael, I would like to turn it over to you. Michael Sen Thank you, Florian. Good morning everybody and a warm welcome also from my side. And I would also like to welcome Florian onboard as the new Head of IR. We also like to thank Anke, who is now moving to an operational role, and there are high hopes from all of us when she is leading UK as the CFO. And I am very happy to have Florian in the team, who also has Investor Relations background. So good morning again to our Q1 earnings call. It was good to see all of you at the Capital Market Day in London two weeks ago. And believe me, I am fully aware that we made you digest a lot of information. At the same time I was very pleased to hear in investor meetings and to read in various reports that our message seems to have been pretty well understood by the market. As I repeatedly said, it’s all about focus, discipline and striving and exactly in that order. It implies a rigorous management of our operating costs, a strong focus on a healthy balance sheet, efficient CapEx budgets and stringent capital allocation, driven by a strong return and bottom line focus. Our new financial framework that was presented to you at our Capital Market Day will ensure this. And of course, transparency is key for us, as we want the market to be able to understand our thoughts and to measure our performance clearly. Having said this, I am looking forward to meet many more of our investors on the road in the following days and weeks. On the same day we hosted the Capital Market Day we also sent out the invitation to our AGM and the so-called spin-off report. With this we achieved a very important milestone on our way to a successful spin of Uniper. Just a day later, the so-called KFK, the commission as we call it, published its recommendation on the funding of nuclear waste liabilities. Naturally, this was the topic on our road shows and I will give more color on this in a few minutes. Before I do that let me summarize the key points of the Q1 results. As a reminder, we now have to mentally switch back to the old E.ON and the existing reporting structure. This will be the last time assuming a positive vote on the AGM. With Q2, we would then start reporting in the new structure as I laid out in London. EBITDA in Q1 fiscal 2016 came in at €3.1 billion, while underlying net income came in at €1.3 billion. Both figures were thus significantly above last year’s levels. However, both line items benefited significantly by the one-off effect in relation to the agreement reached with Gazprom which mask the effects of the ongoing challenges in our operating environment. Excluding this effect, EBITDA and underlying net income would have been below the levels of prior year. The quarter was in line with our updated full year guidance from March 29, hence it should not be a surprise that we confirm our outlook today. Please keep in mind what I have said in London, this outlook is valid for E.ON SE as it stands today. We have published an outlook for future E.ON at our Capital Markets Day which reflects the changed Company setup and the different scope of the portfolio. Post the AGM, the outlook for future E.ON will be applicable. In Q1 fiscal 2016, we have been able to reduce economic net debt by €1 billion over Q4 fiscal 2015, despite the €1.5 billion increase in pension provisions. This is obviously and predominantly driven by our strong operating cash flow with an exceptionally high cash conversion rate of 92%. In addition, seasonal effects such as the fact that we spend less than 20% of our full year CapEx budget in Q1 or the very fact that our dividend payment occurs later in the year contributed to the positive net debt development in the quarter. This trend should not necessarily be extrapolated for the remainder of the year. Before we look at Q1 in detail I want to spend a few minutes on the recently published KFK recommendations. The commission recommends a clear split of responsibility between the government and the operators, which we welcome. The operators should continue to be responsible for the decommissioning and dismantling of nuclear stations with all chances and risks. From our point of view, this is the process similar to a large investment project and is well controllable. Our clear aim is to industrialize the process, leveraging our knowhow from decommissioning two stations in the past and thus manage our resources in the most efficient possible way. On the other hand, the commission has recommended that the government will take over all operational and financial responsibility for the storage related issues. This includes intermediate as well as long-term storage. According to KFK, the operators need to provide the funding for the face value of the waste related provisions, which for the industry as a whole amount to €17 billion. In addition, the recommendation foresees a 35% risk premium for the industry. This is equivalent to a payment of €6 billion. With the payment of the risk premium, the waste related liabilities would be transferred to the government and thus the operators would be completely de-risked. Overall, we believe the recommendation has positive aspects, but also contains elements which represent a large challenge to us. Firstly, it is good to see a proposal that could once and for all get this topic off our table. Also, we see the scope of the recommendation as sensible. I also want to highlight the optionality which the commission is giving all of us. It is left to the operators to decide whether to pay the premium. This means we could opt not to pay the premium. However, only upon payment of the premium would be de-risked i.e., off the hook of what is otherwise and this is very important to remember, an uncapped liability over the next 100 to 150 years. However, there are also items in the proposal that we see as challenging. The premium of 35% is very high, especially considering the fact that German operators have the highest provisions for decommissioning and dismantling around the globe, a fact that was also confirmed by the stress test of the government and published in many reports, for example, from rating agencies. I also want to make you aware of the following. The industry-wide figure of €17 billion stems from the stress test report and is normalized across all companies. The equivalent for E.ON is a roughly €8 billion amount. In an initial assessment we expect that premium for us could be at around €2 billion. This of course puts a severe additional burden on E.ON and our balance sheet. During the Capital Market Day, I already presented this slide which clearly lays out what I call mental framework on how we intend to deal with the many uncertainties of our environment. As I have already outlined at the day, a sizeable premium would qualify for us as being in a special situation that could require capital measures. At the time we did not know how punitive the premium would be. Having more clarity now, I confirm my statement. Next to necessary OpEx and CapEx cuts, which will impact our growth perspectives, I cannot rule out an equity measure may be required going forward. However, and this is important, please do not expect us to act in an uncoordinated or overly hasty fashion. We need first of all to completely understand all the aspects of the KFK recommendation first and then discuss the details and open questions with the government. Only thereafter we would be in a position to thoroughly assess the impact on our financial in all details. We currently see three main aspects to consider. First, liquidity. With nearly €14 billion of cash and cash equivalents on our balance sheet at the end of Q1 we see cash as less of an immediate issue for us. On the other hand, the premium would go directly against our equity and further weaken our balance sheet. We also need to consider the impact on our credit metrics and our rating. So far the rating agencies apply a discount to our nuclear provisions, equivalent to roughly 30% when calculating the relevant credit metrics. If we were to agree to a solution with the government, there would be no reason left for a discount on the waste related provisions. How the discount for the remaining provisions would be treated is not clear at the moment and will have to be determined by the rating agencies. Of course, our remaining provisions remain pretty conservative, and will be funded only over a very longer period of time, that is taking duration and quite substantial duration into consideration. That being said, it is factually clear that the business profile of future E.ON is more stable, robust and has a significantly higher visibility compared to E.ON pre-spin. That together with the prudent financial policy should also be taken into consideration by the agencies. We have made our point very clear in the last couple of weeks and days vis-a-vis the agencies, it remains to be seen on how they decide on those factual issues. Lastly, there is another unknown in the nuclear equation. The outcome of our legal proceedings against the nuclear fuel tax, which has a value of roughly €3 billion pre-tax. The German constitutional court is expected to rule on this one over the course of this year. While there is not a direct link to the recommendation by the KFK, a positive outcome could of course be beneficial to our balance sheet and provide additional sources of funds. So we need to completely understand all aspects of the nuclear equation before deciding on the appropriate response. So when all facts are on the table, which will be later this year, we know exactly what to do. Although the magnitude of the premium would add significant financial strain on us, we are interested in finding a solution together with the government on the basis of the KFK recommendation. Moving to a chart that should be very familiar to all of you, you can see that at the Capital Markets Day on 26th of April we achieved another critical milestone in our spin-off process. On the same day we published the invitation to our AGM and the so-called spin-off report. With this we achieved yet again very important milestones on our way to the spin-off of a majority stake of Uniper. In June Uniper intends to start the prospectus filing procedure with the German financial regulator, BaFin. The next milestone obviously then is the AGM on June 8th. Assuming a positive vote from our shareholders, we expect Uniper’s listing for the second half of 2016. Thus the overall schedule stays unchanged and the spin-off preparation remains on track. Turning to Q1, now let me quickly run you through the core drivers behind the EBITDA development in Q1 2016. We anticipate that this will be the last time we report in this format as already being said at the beginning of the meeting. EBITDA Q1 came in at €3.1 billion, an increase of roughly €200 million over prior year, or 11%. I want to highlight again that our Q1 performance is largely dominated by the agreement with Gazprom, the resulting significant positive one-off is masking the challenging underlying business performance. Excluding this positive one-off effect, EBITDA would have been below prior year. The single biggest driver in Q1 was the global commodities business, which will ultimately belong to Uniper. Here EBITDA was up €600 million over Q1 2015 driven by the just mentioned positive one-off of roughly €400 million stemming from Gazprom. In addition, we saw a positive effect from improved gas optimization profitability and reduced losses from the hedging of transferred generation volumes. We have seen incremental earnings by adding new capacities, namely our offshore windfarms; Amrumbank and Humber. Together with the COD of Maasvlakte, they contributed a total of €100 million positive year-over-year. Overall, we had another €200 million positive contribution, summarized under other. Most prominent effect there is our other EU segment, which saw an increase of more than €100 million, driven by a mix of things. The start of new regulatory periods in Sweden and Czech in our distribution business, improved weather conditions in Sweden’s heat business, the absence of storm costs and in particular organic improvements across the sales businesses in various regions, all contributed to this increase. This effect amongst other factors was able to overcompensate the volume and price related decline in EBITDA from our Yuzhno Russkoje gas sales reported in the E&P segment. Remember that 2016 is a makeup year where we receive less gas than normal due to higher deliveries in the past. On the negative side, a large driver weighing on the EBITDA came from disposals with €300 million. This is mainly related to the disposal of our Norwegian E&P business, which we sold in Q4 as well as the conventional and renewable generation assets in Spain and Italy. As a side comment, you may have seen that we have also closed the sale of our UK E&P business at the end of April. EBITDA from our power portfolio declined by roughly €300 million as well. Prices account for roughly 70% of the decline as the achieved outright power prices for Central Europe and Nordic declined between €8 per megawatt hour to €9 per megawatt hour versus 2015. Lower volumes obviously also played a decisive role, especially within nuclear, we all know about the shutdown of Grafenrheinfeld mid – around the mid time of 2015. E.ON Russia recorded an EBITDA decline of €100 million during this quarter. This is due to a negative one-off effect in relation to the accident in our Beresovskaja III unit. As a result of the fire we had to reduce the carrying amount of the boiler value. We booked this charge in EBITDA to be consistent with the expected insurance payment which would then also be booked in EBITDA and offset the impairments if and when it comes. As you can see on page 6, the €200 million increase in EBITDA was amplified by lower depreciation charges and a lower tax rate in our underlying net income, which increased nearly €300 million over the prior year. Our depreciation line came down by almost €200 million, driven by previously mentioned disposals, on top of the sizeable impairments we had to book in 2015 also led to lower depreciation. Our tax rate was 23% in Q1 fiscal 2016, thus slightly lower than the 26% in Q1 2015. Net debt declined by €1 billion over year-end despite €1.5 billion increase in our pension provision, which I alluded to already in London, which is primarily driven by a decrease in interest rates over Q4 fiscal 2015. The seasonally driven strong operating cash flow of €2.8 billion was able to really more than offset the pension effects. The cash conversion rate in Q1 2016 was unusually strong with 92%. Operating cash flow came in at €2.8 billion, up €300 million vis-a-vis Q1 2015. Key drivers were the usual seasonality of the gas business in Q1 and in addition phasing effect from working capital. Overall, the effect was roughly €600 million. Having said this, we would expect a more normal cash conversion ratio for the remainder of the year. In particular, I want to remind all of us that the cash settlement of Gazprom is due in Q2. Actually, we already paid out the appropriate amount to Gazprom. It is also worthwhile to highlight CapEx spending, which is seasonally the lowest in Q1, with only €700 million, less than 20% of our full-year budget was spent in Q1, which supported the positive economic net debt development in that very quarter. This however means that 80% of our CapEx budget is yet to come in the remaining quarters, in addition to our dividend payment as well as the settlement with Gazprom, which is due in Q2. This will all have its weighing effects on the economic net debt as we move forward in fiscal 2016. Q1 results were in line with the guidance for fiscal 2016, which we updated in March 29 following the agreement with Gazprom. We confirmed this guidance for E.ON going concern today. However, please bear in mind that this is the guidance for E.ON in its current structure which we have reported in its current structure hopefully for the last time today. Assuming a positive vote at the AGM on 8 of June, we will report future E.ON for Q2 in its new setup. Thus the guidance confirmed today will no longer be applicable to the changed scope, but the guidance we have given for future E.ON at our Capital Markets Day will from then on apply. However, given the fact that the guidance for future E.ON reflects solely the change in scope of the business portfolio, it should be considered consistent with also guidance for E.ON as going concern. Thus we also confirm the guidance for future E.ON today. With that, I would like to hand it over to Florian and we open up the Q&A. Florian Flosmann Thank you very much, Michael. Let’s now start with the Q&A session. To give everybody a fair chance, I would like to ask you to limit yourselves to two questions each. Operator, let’s start with first questions please. Question-and-Answer Session Operator Thank you. Now we will begin our question-and-answer session [Operator Instructions] the first question is from the line of Deepa Venkateswaran of Bernstein. Please go ahead. Deepa Venkateswaran Thank you so much. Two questions. Firstly, just to clarify the number that you gave on what you would expect to transfer to the commission, the €10 billion number, which is €8 billion plus €2 billion premium. I was just wondering the €2 billion doesn’t exactly square to the 35%, so I’m wondering if I’m missing anything in the rounding? Secondly, on the sort of an equity raise, which you sort of talked about, I was wondering if the amount of equity raise that you might consider in the event that you don’t win the nuclear fuel tax, is it roughly equal to the amount of premium? And are you considering hybrids or any other asset sales as part of this package or would you jump directly to the last bucket in your priority of orders before kind of maybe tackling more easy things such as hybrids? Thank you. Michael Sen Hi, Deepa, warm welcome from my side. First of all, you’re absolutely right with your first question that it doesn’t square to the 35%. And this is important to understand. What the commission has published, are industry average numbers based on 2014 accounts. So now each and every company has to find out what it really means for the individual company itself. We are doing that exercise and that’s why I already shared with you the first sort of ballpark numbers. And the very reason why this does not, as you say, square to 35% is that we conservatively account for our accruals or provisions. If you remember that whole debate on the real interest rate we had a couple of months ago, European peers having 1.1%, 1.2% we are pretty conservative, here we had 0.9% and this is still conservative. We were even at that point in time 0.7% and that is the reason why it doesn’t square to 35%, right? But this is what needs to be done now, that you exactly find out what it means for you not only based of what the commission recommended, but if that process goes further along the line then it is obviously important what the government makes out of that because there are many parts which are still not clear yet. Only if they are cleared, then we know what the real number is. I just shared with you ballpark numbers. And on top of it, and Johannes mentioned that during the roadshow we not only want the government to make a law, we also want to have a contract because that gives more certainty for us going forward. On the equity, well, you had it right that we need to wait what are other sources of funds. We took the first step that we now know how punitive the premium is, and I think it is pretty punitive. That’s why we have to tap other sources. One source could be the nuclear fuel tax, but that is not in our hands so we have not baked that into our planning. And then capital measures would also include all measures, but I explicitly also didn’t want to rule out equity measures. What sort of – or the amount would then be highly dependent on what we see the final premium actually to be and then also how rating agencies are going to treat us because that also determines how much we would retrieve and that then determines whether you would go down a line to do an ABB or something like that. But we won’t do anything rushing in the next couple of months. As we have started the journey, I’ll be very transparent to you guys and update you regularly when we reach the next milestone so that you clearly know what we are doing. Hybrid is of course a topic, but it remains to be seen. As alluded to in London that the hybrid capacity and I think Deepa it was you who actually asked the question, might also be limited given the IFRS equity at least for one agency, which does not mean that you can go down that route. Obviously, I’m also currently penciling out what the capacity is on that issue. And we reached this stage of having a special situation and that’s why we were very transparent. And OpEx and CapEx relation and that’s why we were very transparent. And OpEx and CapEx is done anyway. Okay? Next? Deepa Venkateswaran Okay, thank you. Operator The next question is from the line of Peter Bisztyga of Bank of America. Peter Bisztyga Hi, good morning. So first question just on this 30% equity credit you get from the rating agencies, I guess that’s about €3 billion on the €8 billion of waste provisions. Is that – does that €3 billion fall into your sort of special situation bucket as well? So if we’re looking €3 billion loss of equity credit and €2 billion risk premium, are you basically saying that your capital shortfall is €5 billion? So that’s my sort of first question. Michael Sen Go ahead Peter. Peter Bisztyga Yes, and then, sorry, my second question is simply would you consider delaying the payments of your risk premium? Michael Sen Yes. Hi, Peter. First of all, I think it’s not advisable to add up the things. These are totally different levels, right? If an equity premium or the 30% is roughly a ballpark number, actually they’re very different methodologies how you get to the equity premium between the two agencies. Yet it is an issue and then that determines as to how much the gap would be. But it is not advisable to add up the two things. It is rather isolated topics, right? The discount will be gone for the part which we are going to transfer. Now the big question is, how are the agencies going to treat the remainder? If there was a credit or if there was to be a recognition of us having a prudent financial policy, being conservative there and doing the needful then there could be other ways. But I’ve made it very clear that the business profile from future E.ON is a totally different one, but we’ll see how the agencies will react and then I will comment. But don’t add up those things. I mean, this is not saying we’re going to go to €5 billion, €6 billion, €7 billion what have you gap. But a gap which you are alluding to is always referring to what is your target rating, which I’ve been handing out in London, and then at least it is more than the €2 billion which you see as the premium, right? There you are correct, but only adding them up is a little too easy. Then delaying, right, I think it is important to understand that we made two messages to the market, Johannes starting last night and then myself today. The first one is that there are a lot of positive elements in that recommendation because what in essence you see is that you can get that topic off your table for good. And that is a political risk, especially if you think about the final storage. Governments going forward could change their stance, their procedures on that one whenever they want. So in essence today we have an uncapped liability in our books there. Getting rid of that one for good, I’d say, would probably be a good argument then to pay even if it’s punitive a premium. Therefore, we are having this intense dialogue and I shared my thinking with you also on the roadshow saying how do you as shareholders view this if you get this big, big risk, which is hanging over you off the table. Yes, it’s punitive, but if it’s gone for good then I think it’s more prudent to pay it because other than that I don’t win anything. I transfer the liability, I transfer the appropriate – the respective liquidity and I’m still liable for that one. That’s basically an off-balance sheet liability. That’s the same as we have today, that’s even worse because I don’t have the liquidity anymore. Peter Bisztyga Thanks very much. Operator Your next question is from the line of Lueder Schumacher of Societe Generale. Please go ahead. Lueder Schumacher Hi, good morning. Well, on the subject of off-balance sheet and credit metrics, are you bit disappointed by the BBB minus rating you’re assigned by S&P for Uniper? It’s not really what I think most people would associate with a comfortable investment grade rating? That’s the first question. The second one is, I think that whole language on the nuclear provision debate seems to have changed from saying that if the premium is too punitive, we just won’t accept it because the stress test quite clearly show that the existing level is correct. It’s more premium that’s acceptable, but 35% certainly doesn’t really fit it. I think to read in between the lines that now a big premium has become acceptable and I wonder what exactly has changed there over the last few months. Michael Sen Yes. First of all, if you think taking about the Uniper rating, I mean, I think it is obvious and if you have listened to what we’ve been saying in the earlier calls during the course of the year, I think the tone also on the intended rating changed a little bit, that what you were referring to I think was the initial statement when we left the station in December 2014. So I’m actually not unsatisfied at all with the rating because BBB minus and stable outlook and the Uniper management actually presented a very, very stringent plan to the rating agencies, which they shared with you guys at the capital market Day where it’s all about execution on the restructuring front and asset disposals which should also give them the opportunity to climb up the ladder if and when they wanted and they needed. So from that point of view, I’m actually very satisfied with it because it was a science and an art to split our balance sheet into the two companies and giving everybody the appropriate capital structure. Now, coming to the commission and the language, I mean, I think it is obvious that during the whole process of negotiation you hold your cards to your chest and it is clear and it’s still clear that our accruals are conservative. That is one of the main reasons why it doesn’t triangulate to 35%. It is conservative and they are right and rightfully reflected in the books. Yet, view this as an M&A deal, an M&A transaction. If I were to tell you today – and I said that by the way on roadshow’s time and again, if I were to discuss with you, are you willing to take over my liability, which basically have a duration, they go more than a 100 years and have an unlimited liability risk on the political side, you would probably say give me a risk premium. Now, do we say the risk premium of 35% is too high. Yes, it is high. It is too high. But if it’s still the price to get it off for good, really for good and then have a clean, clean slate if you so wish, then I think it’s worth considering it and I’ll be on the road again and I’m getting investor feedback. The first feedback I’ve actually received from investors during the London roadshow was actually, just be open and transparent on what you do and then you take it from there. So from that point of view, this is why I mentioned capital measures are not being ruled out. Lueder Schumacher Okay, thank you. Operator The next question is from the line of Michel Debs with Citigroup. Please go ahead. Michel Debs Good morning, everyone. I have two questions please. The first one is on pensions. Now your pension liabilities are significant, I believe they stand at €5.8 billion. You are economically under pressure. Is it time for you to go back to the unions and try to renegotiate the commitments that you have made on previous pension plans to try to do liability management on that front as well? My second question, it comes back to that capital measure that you may have to do if you decided to opt-in into the premium for nuclear liability. Now in the event that you decided to pay the premium and in the event that you have to do capital measures to do so, would you limit yourself to do capital measures to pay the premium or would you seize the opportunity to say, you know what, we may need up to €2 billion, let’s do €4 billion or €5 billion to prop up the balance sheet once and for all. Would that be something you would do? Michael Sen Yes, I mean, first one, factually going by the numbers on the pension liabilities, you are correct. Second one, I think that is a little bit too overhasty. Believe me, we do everything on the asset liability management as such. In general, that’s why I told you we by the way bought Nord Stream 1 from Uniper to then ultimately put it into the CTA, the pension trust because it bears a nice sort of return profile going forward. But I would not deem that as one of the priority and biggest levers to go to the unions and negotiate that side of the liability. By the way, I also have to say with during the entire process of the spin, they have been very cooperative. Without them, we would not have gone that far. So our plan from the pension side are clear and we are not going into the old system where we promised people a fixed return. So defined benefit and defined contribution, I think it’s very clear on that one. Now, in the event we would do so, I think we need to – on the capital measures, we need to take one step at a time and then determine what is really needed and same with the hybrid by the way, what is the capacity which allows us to tap the market and what is the mix of measures because obviously people also expect that we do our homeworks on cost, on CapEx and the like. And therefore that one determines and currently I would rule out that currently that it goes into the ballpark you have been mentioning because therefore you need totally different preconditions going through the AGM again and then it gets also timing issue. Michel Debs Thank you, very much. Operator The next question is from the line of Andreas Thielen of MainFirst Bank. Please go ahead. Andreas Thielen Yes, good morning. One simple question again on the nuclear issues. You mentioned already that the nuclear fuel tax depending on the outcome could play a role in the overall considerations. On that one, do you have gained any new insights on a view of – on your view regarding the possibility, likelihood of a positive ruling? And secondly, how do the compensation for the nuclear exit come into play in the overall picture? Thank you. Michael Sen Yes, I can make that one short. Thanks. No, we don’t have no insight. The court said that they want to release something during this calendar year, probably from today’s point of view, more late summerish. But we don’t know more. And content-wise, there is no logical link between first of all the nuclear fuel tax but also other court cases and what the commission has recommended how to finance the waste-related liabilities. By the way, the commission also had no mandate on that one because they were only dealing with how to finance the waste-related liability. So, from that point of view, we are waiting and seeing what the court says on nuclear fuel tax. As I said, not baked into the plan. If it were to come, that obviously would then maybe limit capital measures. Andreas Thielen Thank you. Operator The next question is from the line of Ahmed Farman of Jefferies. Ahmed Farman Hi, good morning everyone. It’s two questions. First, can I just clarify if the final outcome of the nuclear deal is such that there is no premium, so you only have to transfer €8 billion. In that situation, can you rule out the need for a further capital measure? That’s my first question. Second, in the scenario where you do have to pay a €2 billion premium, how do we square that? Your ample liquidity, the point that it may have to be paid over several years, and that you are planning to repay €6 billion or so of debt. I mean in that scenario, would you not consider just refinancing that debt rather than repaying and using the liquidity to pay the premium? Thank you. Michael Sen Yes. First of all, your first question, from today’s point of view, from what we know today, again we all have to remind ourselves we just have a drafted proposal there. There is no law, there is no contract, there is nothing. It’s just a proposal. So, from where we started, we wait one further step in getting to a solution of that one. We do not deem it very prudent to say we’re going to transfer the €8 billion. With that one transfer, the corresponding liquidity and then maybe not pay the premium, because then has gained nothing, from a risk, from a rating, from what have you perspective, this is the same or even worse than having it today because the liquidity is gone. I’m still fully, fully liable for that one. So, only getting out of the liability can only be done by paying the premium. Therefore, we would rather go for the premium because let’s not forget you get it off the table for good then. That is one of the reasons why we want to have a contract next to a law. You get it off for good, which today is an unlimited liability. This is what you have to consider. If the government decided next year that they’re going to kick start the next process of finding a final destination for final storage and it costs another couple of billion, then we would have to carry that one. If it’s gone, it’s gone. Then you are out of it. That’s clear. The second question, yes, was on the bonds and everything. I mean, yes, I said in London that there is the possibility to make something out of the outstanding maturities in the next couple of years which would then drag EPS. But if I were to enhance it, I mean, that this is a matter of just shifting the balance sheet on the left-hand side from asset to liquidity, so that doesn’t help me any further. So, I need in order to cover for the €2 billion, I need fresh capital or sources of funds either by selling stuff or tapping markets. Ahmed Farman Okay. Thank you . Operator The next question is from the line of Bobby Chada of Morgan Stanley. Please go ahead. Bobby Chada Hi, thank you .Two questions. First of all, just to clarify, has the Nord Stream stake and the purchase price for that being transferred already in the first quarter or we only see that in the second or third quarter financials? And then the second question relates to nuclear, but from a different angle really. The KFK proposals talk about the government should simplify the process for decommissioning in order to allow savings. And speaking this morning with people from government, they clearly see significant opportunity for the industry to benefit if the process can be simplified. In your opening remarks, you talked about running as I said of as an investment project. What visibility do you have at this stage that you should be able to run the decommissioning at a cost which is below what you’ve provisioned for? I mean, how does one, how does anyone, the KFK, the government or you have visibility on that kind of topic? Michael Sen Yes. Hi Bobby. So, Nord Stream 1, since it was a transaction embedded into this whole [122] topic, and it was determined that the main reason was to provide Uniper with appropriate capital structure in order for them to then get the rating they got, right? So, it already took place. It already took place as in a transaction, by that Uniper received €1 billion, roughly €1 billion in liquidity and E.ON received the asset, right? And that was based on legal assessments and CPA assessments and so on and so forth. And then finally – and it will become visible in Q2 when we separate ourselves, right? Then you will see it and ultimately I said I want to put this one then into the CTA in order to then also close funding gaps over there because it has a nice return profile. Now to your second question, I mean it’s probably difficult at this stage to talk about visibility in terms of attaching a number, i.e., saying we have the provisions, the left provisions in the book. And now I’m attaching a – I don’t know what, 5% or 10% or what have you, percent efficiency rate to that one. That is probably not advisable because that is not known. Yet, you are absolutely right and this is what we said all along. This needs to be run like an industrial process, and this is what we can do. This is about engineering. This is about project controlling, this is about the learning curve, right? We have already done this two or three times. The more you do it, you get more knowledge. The team, it’s always the same team or not always the same, but the core of the team, it’s about knowledge transfer and then the clear aim obviously would to beat the provisions, right? The provisions as such have to be accounted probably in the right fashion according to accounting standards. And as I said, we are also conservative and the basis for that one, all the technical assessments and knowhow documents we have. This is when – how you come up with the provision. When you then go into real life, then obviously it is all about how can you beat them by ensuring safety and health? That’s important. But if you’ve done that a couple of times, our clear aim is to say do everything you can in order to ride the learning curve, get if you so wish, scale effect there, and beat the provisions. Bobby Chada Can I ask a follow-up? Michael Sen Yes. Bobby Chada Is it clear what you would like simplified in order to help you in this process? Michael Sen Yes. This – yes. Simplified, I mean there are few regulatory topics. Yes, now if you want to dismantle you have to apply, you have to hand in certain forms. There is lot of also next to that whole technical work, that’s why I said project management work, there is also administrative work embedded in there. And you – then you have – sometimes you have to go to municipality, then to the government, then to the federal and so on and so forth. And if there is any lever on that one, to get that one straight and simpler that obviously would help. Bobby Chada Great. Thank you. Operator The next question is from Ingo Becker of Kepler Cheuvreux. Please go ahead. Ingo Becker Thank you, good afternoon. You said, you promised to be transparent and of course, we can all make our – up our minds on how the ATG case, then NFT case would work out and how this can be offset or not against the premium. I’m not sure you can answer this Michael, but let me try. If you assume that the premium would be equal to winning the NFT case, so you take those two out. And let’s assume you leave the ATG case out as well, let’s say that takes many years and the government does not include that in any agreement now, would you in that situation premium equals NFT case outcome, so zero net payment and the ATG case is out of consideration, would you still consider E.ON to be in a special situation category as regards to capital need? Second question would be, if so, when would you time a capital increase? Would that be before or after the planned spin-off? And lastly, sorry if you answered that maybe already. The government direction to the commission recommendations, what’s the process now? By when can we maybe expect to hear something? What are the next steps here? Michael Sen Yes. Hi Ingo. Yes, I’m not quite sure whether I can answer everything, but I’ll try. Let’s first of all start with the offsetting yes, no and so on and so forth. I mean, I said it already, we are in the special situation. We are already in there because the report came out and there’s a premium and it’s punitive. And if – and we obviously also said that we want to further pursue the dialogue in order to get it off our table for good. So we are already in that one. Now it is too early, too premature then to say if this comes I’m going to do that and then I’m this. I want to just be transparent. If it comes, then I’ll let you know how we’re going to progress on that one. Obviously this is then an additional source of fund, which we today have not baked in and might lead us to take other measures or limit the size or not do anything or something like that, but that remains to be seen. This is also the main reason and that is your other question, why we will not jump to conclusions. Nothing will happen before the spin. Nothing will happen in the next couple of months or next one or two or what have you, quarters. We first of all have to get Uniper on the stock exchange. That is our – my primary goal that you guys value the asset appropriately and that the management team, which has successfully laid out their plans gets appreciated by the market and then everybody can run on their own. This is the main goal. Before that one, don’t expect us to do anything overnight. We will give you ample time if and when needed. And therefore, you see already by the timing, if the nuclear fuel tax, if it is decided late summer, if they again say it’s going to take us another year, then things are what they are. Then we have to deal with the uncertainty and then we may do it or not do it, we’ll see then. But if the timeline holds and then they come on late summer then I already know and as I said, up until then I wouldn’t rule out – I would rule out completely that we go out overnight and do something. That is clear. What was the other question? Ingo Becker On the government, maybe any progress there? Michael Sen The government, look the government it’s now in – it’s in their court. We – there’s a reason for us and Johannes giving the interview last night signaling to the public that we are open for the dialogue on the basis of the recommendation that already is a signal obviously that we want to start the talks, and I think all parties involved although it is a complicated process because many ministries have to be involved. You need to orchestrate many, many ministries. It’s economics, maybe the office of the chancellor, and then the environmental guys because many legal documents, laws actually have to be touched if you want to go down that route. By the same token, our feeling is that people also want to move on with that one, also want to get to a solution because remember election time, and you know it by heart, election time is also coming up soon in Germany and it would be ideal if you solve it until then at least get it as a draft for the cabinet. Ingo Becker Thank you. Florian Flosmann Okay, good. Thank you very much. And with that, I would like to close the call. If you have further questions, please don’t hesitate to give us a call at the IR team. So with that, thank you and see you soon. Michael Sen Bye-bye. Operator Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited. 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American States Water’s (AWR) CEO Robert Sprowls on Q1 2016 Results – Earnings Call Transcript

American States Water Co. (NYSE: AWR ) Q1 2016 Earnings Conference Call May 5, 2016 2:00 PM ET Executives Eva Tang – Senior Vice President, Finance, Chief Financial Officer, Corporate Secretary and Treasurer Robert Sprowls – President and Chief Executive Officer Analysts Jonathan Reeder – Wells Fargo Richard Verdi – Ladenburg Thalmann Operator Ladies and gentlemen, thank you for standing by. Welcome to the American States Water Company Conference Call, discussing the company’s First Quarter 2016 Results. This call is being recorded. If you would like to listen to the replay of this call, it will begin this afternoon at approximately 5 PM Eastern Time and run through Thursday, May 12, 2016 on the company’s website, www.aswater.com. Besides that the company will be referring to are also available on the website. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] This call will be limited to an hour. Presenting today from American States Water Company is Bob Sprowls, President and Chief Executive Officer; and Eva Tang, Chief Financial Officer. As a reminder, certain matters discussed during this conference call may be forward-looking statements intended to qualify for the Safe Harbor from liability established by the Private Securities Litigation Reform Act of 1995. Please review a description of the company’s risks and uncertainties in our most recent Form 10-K and Form 10-Q on file with the Securities and Exchange Commission. In addition, this conference call will include a discussion of certain measures that are not prepared in accordance with Generally Accepted Accounting Principles or GAAP in the United States and constitute non-GAAP financial measures under SEC rules. These non-GAAP financial measures are derived from consolidated financial information but are not presented in our financial statements that are prepared in accordance with GAAP. For more details, please refer to the press release. At this time, I will turn the call over to Eva Tang, Chief Financial Officer of American States Water Company. Eva Tang Thank you, Terry. Welcome, everyone, and thank you for joining us today. In today’s call, I’ll review the company’s financial results for the first quarter, and Bob will discuss the liquidity and capital resources. Golden State Water’s pending rate case, California drought-related matters, and our contracted services business segment at American States Utility Services or ASUS. I’ll begin with an overview of our financial results. For the first quarter, diluted earnings were $0.28 per share, compared to $0.32 per share for the same period in 2015. Of the $0.28 per share earnings for the first quarter, $0.22 was from our water segment and our electric and contracted services segment each contributed $0.03. Net income for the quarter was $10.2 million compared to $12.1 million for the first quarter last year. I’ll discuss major items that impacted our revenues and expenses for the quarter. In the first quarter of 2016, water revenues decreased by $5.2 million to $66.3 million, as compared to the same period in 2015. As of today, Golden State Water has now received a decision on its pending water general rate case, which will set new rates for 2016 through 2018. The revenue requirements for 2016, once the CPUC issues a final decision on the current GRC are expected to be lower than the 2015 adopted levels. Major items impact – impacting the decrease in revenue requirements for 2016, includes a significant increase in supply costs caused by lower consumption, much lower depreciation expense resulting from an updated depreciation study filed with the rate case, and decreases in other operating expenses, due to the company’s improvement in operating efficiency. As a result of anticipated reduction in the 2016 revenue level, we adjusted our water revenues downward by $5.8 million for the three months ended March 31, 2016, with corresponding decreases to supply cost, depreciation, and other operating expenses to reflect the sale of the position with with CPUC’s Office of Ratepayer Advocates. The adjustments to 2016 recorded while revenue also reflects Golden State Water’s position on litigate the capital budget and compensation-related issue in the pending GRC. These adjustment did not have a significant impact to pre-tax operating income for the first quarter of 2016. As the overall reduction in the water gross margin is mostly offset by the lower depreciation and other operating expenses, partially offsetting this decrease in water revenue, where rate increases generated by advice letter filing for capital projects approved by the CPUC in 2015. Revenue for electric operations for the quarter were $10.6 million as compared to $11 million for the same period in 2015. The decrease was primarily due to determination July 2015, of a supply surcharge to recover previously incurred energy costs. The decrease in revenues from this surcharge totaled approximately $700,000 for the quarter and was offset by corresponding decrease in supply costs, resulting a no impact to pre-tax operating income. The decrease in electric revenue were partially offset by CPUC approved fourth year rate increases for 2016, and the rate increases generated from advice letters for capital projects approved by the CPUC during 2015. Revenues for our contracted services business, ASUS decreased $1.8 million to $16.6 million for the quarter. The decrease in revenue was due to lower construction work in the first quarter of this year, driven largely by the timing of engineering and bidding activities. Construction activity is expected to increase in the remainder of 2016, as compared to the first quarter of 2016. The decrease in construction work was partially offset by increase in management fee revenues, as a result of successful resolutions on price redetermination received during the third quarter of 2015. As mentioned previously for the first quarter of 2016, the water segments gross margin was adjusted for both lower revenue and lower supply costs in articulated position in the pending water rate case. Our water and electric supply costs were $17.6 million, a decrease of $4.4 million for the first quarter of 2016. Any changes in supply costs for both the water and electric segments as compared to this office supply costs are tracked in balancing account, which will be recovered from always subject to our customers in the future. Other operating expenses increased by $806,000 for the first quarter of 2016, due primarily to outside service costs at electric segment, in response to power outages caused by severe winter storm experienced in January. In addition, there was an increase in conservation and drought-related costs and higher wages. Administrative and general expenses for the first quarter of 2016 were $20.8 million, as compared to $19.5 million for the same period in 2015. The increase was mainly due to higher legal and outside service costs at water segment incurred on the condemnation matters due to this first quarter. Depreciation and amortization expense decreased by $757,000, due primarily to the reduction in composite rate is related [ph] in the pending water GRC resulting from updated depreciation study. As discussed earlier, the lower depreciation had also been reflected in the lower water revenue. The decrease was partially offset by an increase at both the water and the electric segments due to additions to utility plant during 2015. Maintenance expense increased by $593,000, due to a higher level of maintenance performed in 2016 at a water segment. ASUS’s construction expense decreased by $1.3 million to $8.7 million during the first quarter of 2016, as compared to the same period in 2015, due primarily to a reduction in construction activity, as mentioned previously, again, we expect the construction activity will increase during the remainder of 2016 as compared to the first quarter of 2016. Interest expense increased to $5.6 million for the first quarter of 2016, as compared to the $5.2 million for the same period in 2015. This was due largely to capitalize the interest recorded at water segment during Q1 of 2015, resulting from the approval of an additional allowance for funds used during construction from advice letter filings. There was no similar filing during the first quarter of 2016. Income tax expense decreased by – $2.1 million to $5.8 million, driven by a decrease in pretax income, and lower overall effective income tax rate. This slide show the ETS bridge by business segment, comparing the first quarter of this year with the first quarter of 2015. For more details, please refer to the press release. With that, I’ll turn the call over to Bob. Robert Sprowls Thank you, Eva. I appreciate everyone joining us today. Moving on to Liquidity and Capital Resources, net cash provided by operating activities for the quarter, decreased by $10.9 million to $27.6 million as compared to the first quarter of 2015. The decrease in operating cash flow was primarily due to a reduction in cash generated by contracted services, due to the timing of billing and cash receipts for construction work at military basis during the three months ended March 31, 2016. There was also a decrease in customer water usage for Golden State Water, increasing the Water Revenue Adjustment Mechanism or WRAM regulatory assets. We implemented surcharges in March to recover our net WRAM balances for 2015. In addition, tax payments during the three months ended March 31, 2015 were lower, due enlarge part to the implementation of the tax repair regulation. In regard to Golden State Water’s capital expenditures, we are pleased with our first quarter spending of $29 million on company funded capital work. Our water and electric utilities continue to invest and maintain and improve the reliability of our systems. Our capital investment program in the critical factor in delivering consistent high quality services to our customers. We are on track to invest $85 million to $95 million in capital projects during 2016, which may change somewhat once the decision issued by the CPUC on the pending water rate case. In addition, Standard & Poor’s rating services recently affirmed an eight plus credit rating on both American States Water Company and Golden State Water Company. S&P also affirm the stable reading outlook on both companies. You were pleased with the affirmation as these ratings are some of the highest in the U.S. Water Utility Industry. While we continue to produce solid financial results in the first quarter performance was impacted by higher outside services and legal costs at our water segment, encouraged to defend ourselves against condemnation related actions and lower construction activity at our contracted services segment. However, we do expect construction activity at ASUS to increase during the next few quarters. In addition, we still wait to CPUC decision on our water rate case for years 2016 through 2018. As we discussed in previous quarters, we filed our general rate case in mid 2014 for all of our water regions and general office. The application will determine in rates charge to customers for the years 2016, 2017 and 2018. Golden State Water has settled with the CPUC’s Office of Ratepayer Advocates and nearly all of the company’s operating expenses, as well as the consumption levels used to calculate rates for 2016 through 2018, which reflect the State mandated in conservation targets. The primary litigated issues relate to our capital budget requests and compensation for managerial level employees. There are not certain win in 2016, the final decision will be issued. Once issued, rates will be retroactive to January 1, 2016. As Eva mentioned earlier, adopted revenues for 2016 are expected to be lower then the 2015 adopted levels. As you may know, a big part of the utilities revenue requirement is the recovery of projected expenses. By projected expenses for 2016 in the rate case were lower than the 2015 adopted expense levels. In particular, there was a decrease in supply costs, resulting from lower consumption projected, lower depreciation expense resulting from a new study and decreased in other operating expenses in 2016 through 2018 rate case cycle, due to our cost control efforts and improvement in operation efficiency. Because of the company’s efforts, we were able to propose significant increases in our capital investment with little to know effect on rates. As a reminder, we have also received approval by the CPUC to defer our electric general rate case and the cost of capital proceeding by one additional year. Both will now be filed in 2017. In regard to the drought situation in California, in February, the State Water Resources Control Board extended the governor of California’s executive order in possessing mandatory restrictions through October 31, 2016. In addition, the State Board amended the required reductions allowing limited allowances or warmer climate regions increased population growth as well as credit for certain drought resilient water supply investment. Currently all, but one of our water systems has met the revised conservation standards. Based on our drought response actions and customers conservation efforts to-date, we do not believe we will be subject to the State Board’s penalties for failure to implement a water shortage contingency plan. Golden State Water has been authorized by the CPUC to track incremental drought related costs, incurred in a memorandum account for possible future recovery. We are in the process of preparing to file for recovery of drought related items of $1.3 million incurred mostly in 2015. Incremental of drought related costs expensed until recovery is approved by the CPUC. Lastly as of April 26 of this year, the U.S. drought monitor estimate 70% – 74% of California in the rank of severe drought. This is down from 86% reported at the end of February. Increased rainfall and higher snow pack levels over the last few months that help the drought situation. Turning to our contracted services business that ASUS, construction activity in the first quarter, a year was lower due largely to the timing of engineering and bidding activity on both renewal and replacement and new capital upgrade work. We believe construction activity will pickup during the next few quarters. We are still projecting an EPS contribution from ASUS of $0.28 to $0.32 per share for 2016. As discussed with you during our year end call. We continue to work closely with U.S. government on outstanding price redeterminations. We expect the fourth quarter price redetermination for forklift to be finalize in the second quarter of 2016 and the third price redetermination for the brag to be finalized during the third quarter of 2016. Filings for these price redeterminations requests for equitable adjustment and contract modifications awarded for new projects provide ASUS with additional revenues and margin and the opportunity to consistently generate positive earnings. We also continue to work closely with the U.S. government or contract modifications we are waiting to potential capital upgrade work as deemed necessary for improvement of the water and waste water infrastructure at military basis. In additional we are actively engaged in new proposals and expect the U.S. government to release additional bases for bidding over the next several years. We’ve remain optimistic about the future of our contracted services business. Finally, I would like to turn our attention to dividends. On Monday of this week, our Board of Directors approved the second quarter dividend of $0.224 per share on the Common Shares of the company. Dividends on the Common Shares will be payable on June 1, to shareholders of record at the close of business on May 18. American States Water Company has paid dividends every year since 1931, increasing the dividends received by shareholders each calendar year for 61 consecutive years. We are among less than a handful of companies on the New York Stock Exchange that can both of such a level of dividend increase. For the five years ended December 31, 2015, our calendar year dividend has grown at a compound annual growth rate of about a 11%, given American States current low payout ratio compared to our peers and our earnings growth prospects, there is room to grow the dividend in the future. I’d like to thank you for your interest in American States Water, and we’ll now turn the call over to the operator for questions. Question-and-Answer Session Operator We will now take your questions. [Operator Instructions] We will begin with Jonathan Reeder with Wells Fargo. Please go ahead. Jonathan Reeder Hey, good morning, Bob and Eva. I guess, on the West Coast, it’s still the morning. But I know, Bob, in your prepared ASUS remarks, you didn’t seem to indicate that this is the case, however, your main competitor indicated, they expect the slowdown on construction projects during the remainder of the year, due to military budget constraints. Is this anything that you’re seeing or expecting? Robert Sprowls It is not. We – our projects are funded. The slowdown in the first quarter was largely due to the fact that we have to do the engineering and the bidding on the work that we have lined up. So, we’re expecting to really get the construction activity going here in the last three quarters of the year. Jonathan Reeder Okay. And I guess in the same vein you aren’t seen anything that would perhaps put downward pressure on the – the construction projects you would be awarded for the next one-year period in the fall this year? Robert Sprowls We haven’t seen that. I will tell you we have a lot of projects in front of the government for the upcoming year. We’ve done our – but I think there’s a really good job of scoping out a lot of projects and getting that in front of the decision-makers at the military. So far we haven’t got the indication that we’re going to see a slowdown. Jonathan Reeder Okay. And then, I think, previously you said final GRC decision was likely in Q2. Are you implying that it slips further into the year now or just not really sure? Robert Sprowls Yes, we’re just –we’re not really sure. We do know that the judge that’s on our case has a couple of cases ahead of this. And hopefully, you will get through those. I think is on the simper case and you probably know. Jonathan Reeder Okay. That’s fair enough. Robert Sprowls We’re confident on it, maybe, but our sense is that that may come out before ours does. And so, we don’t want to get everyone’s sort of hopes up. And so, I understand the ALJs are a bit understaffed at this point. And so, they’re being challenged to do a lot of decisions. So we’re trying to be patient with them. Jonathan Reeder Sure. Okay. And then I don’t know, if you can go into a little more detail, but what do you think Golden State Water and ORA weren’t able to see eye-to-eye on CapEx levels, because it kind of looks like, the request of about $90 million a year of annual spend wasn’t all that different from the amount that you’ve expanded over the 2013 to 2015 period? Robert Sprowls Yes, we were quite surprised that, particularly given the situation where we weren’t asking for, in fact, in many rate making areas, it was a revenue requirement – small revenue requirement decrease. As you know, that’s ORA’s role is to work hard to kind of reduce your request and that’s what they are doing in this case. So I understand other – some of our other colleagues at other companies are having similar issues though. So we are – we went to litigation on our entire capital budget and we think we put in a – put on a very good chase and hopefully the judge will recognize that. Jonathan Reeder Was there, I mean, were there any projects in there that were kind of unusual or different than the spend that you’ve been, I guess, undertaken in the past few years, or was it all similar type of spend? Robert Sprowls Yes, really there weren’t really any out of the ordinary type project. So I think our spend historically had been, I wanted to say, $70 million to $75 million range. And so, we came in and asked for 90 and thought that was a reasonable request, particularly given the need to do pipe replacement and reduce unaccounted for in the State, so we’re – the company’s decision was to take our risk with the ALJ and the commission. So it was quite surprising to us to be honest, because for a company to come in with a flat rate request and then to have ORA push back on it is substantially just a little bit of a head scratcher. But sometimes either a function of the analyst you get at ORA on your capital projects. Eva Tang It’s not unusual, I think the differences between the company and ORA’s position. Robert Sprowls Yes, sure. Eva Tang The rate case we experienced before. So we’ll say that we’ve made a good showing of the need for the project and provide the solid support, as Bob mentioned. So we will see hopefully judge will see that. Jonathan Reeder Okay. And then last question, I’ll hop out. What do you expect 2016 drought expenses will be in? Robert Sprowls Just for the calendar year 2016? Jonathan Reeder Yes. Yes, just trying to get an idea of, I mean, I think you said you’re going to be filing for a little over million dollars of recovery from previous expenses. And our understanding is those, I guess, get turned around pretty quickly, kind of, like a 90-day period. So how that would, if that’s going to offset whatever your drought expenses would be this year? Robert Sprowls I definitely expect it to offset whatever drought expenses we have this year. Jonathan Reeder Okay. Robert Sprowls These are – we are not adding to the account as much as we did in 2015, as we are getting our arms around the whole thing, so… Jonathan Reeder Okay. So the heavy lifting is kind of over on that and just stay in the course, I guess? Robert Sprowls Yes, I know we still have additional costs associated with notifying customers and making sure that everybody is completely up to speed. But I wouldn’t expect the expense to be – I would expect them to be less than they were in 2015. Eva Tang And, Jonathan, Bob mentioned that we are going to file about $1.3 million scholars job for all related costs for 2014 and 2015 pretty shortly. So once that got approved, for accounting we have a reason to book our drought-related costs to a balance sheet as a regulatory act on that point on. So not only will get recover reverse expense we booked before and also we will probably reverse what we booked to-date to the reg act, so that’s a point. Robert Sprowls Yes, good point, Eva. Eva Tang Yes. Robert Sprowls Once you’ve done it, once you’ve then can – you’ve convinced the accountants that it’s going to happen again. Eva Tang Yes, it’s a probable [Multiple Speakers] Robert Sprowls Programs recurring [ph.] Jonathan Reeder All right. Well, I appreciate the additional clarity. Robert Sprowls Yes, thank you, Jonathan. Operator Our next question comes from Richard Verdi of Ladenburg. Please go ahead. Richard Verdi Hi, Bob and Eva, how are you guys doing? Robert Sprowls We’re doing good. Eva Tang Good, good. Thank, Verdi. Richard Verdi Good, here you go. I just wanted to focus a real quick on ASUS here. At least in my view that $0.28 to $0.38 or $0.32 guidance is kind of wide. Bob, can you give me some sort of idea of what you see maybe swinging closer to the top versus to the bottom? And also, is there any chance that that figure could be outperformed on the outside? Robert Sprowls Sure. Yes, so the amount of construction that we do will dictate how well we do within that range. Additionally, we do have some price redetermination request and there is – though nothing like we’ve had in the past, there is some retroactivity to that, which could push us more to the upper end or slightly above the upper end. So it’s – that’s about as good – good a range as we can give at this point. I know you would like to see it a little tighter, but that that’s as good as we can do. Richard Verdi Okay, sure. And then on the proceeded new contracts, and I understand that for competition sake you need to keep the commentary somewhat limited, but we’ve been pursuing contracts here for a few years and of course there is going to be as you mentioned some new contracts or I should say new basis being option to you in the next few years? I’m wondering can you give us a sense of maybe how deep you are in negotiations on maybe some of these contracts that you’ve been pursuing for so many years. Robert Sprowls Well, I will tell you and it probably doesn’t completely speak to your question. But we view this business as a real important part of our business going forward. We’ve institutionalized our response to RFPs and we’re working through the process. But I will tell, Richard, there was one contract that – then I took five years. So it’s something you have to have a lot of patience for and our company does and so you got to hang in there until you can get it across the finish line. So we are at various stages I would say on some of the contracts. Richard Verdi Okay, that’s great color. It’s actually great, thank you. And then the last question is this, if you look at some of the legislation, it’s been past couple of years as I say, it’s been very favorable for the privatization movement and you guys obviously do a good job, managing the company there. Any thought about pursuing a growth acquisition strategy and really trying to move outside account one year. Robert Sprowls Are you talking about from the utilities – on the utility side… Richard Verdi Yes, for the water side. Yes, for the water side. Robert Sprowls Yes, sure. We look at that and of course the things that we look at is that a favorable regulatory environment and to the degree there are businesses for sale in those particular states, we of course will look at that. And I’ll tell you though when those things due come up for sales. There is lot of folks that like that business. So it becomes a pretty competitive process and we’re not afraid of that. It’s just – you’ve got a look at these situations and make sure there is enough scale to attract you. You recall, Rich and this may have been a little bit before your time we sold our business in Arizona. That was largely because of the commission in Arizona. And it didn’t make sense for us to continue to spend all the time that we had on a 13,000 customer business there. However, if there is other businesses for sales and other states that have fair regulatory environment, we’re definitely considered those. Richard Verdi Okay, that’s great. Okay. I guess that’s it for me, thank you. I appreciate the time guys. Robert Sprowls Thanks, Rich. Eva Tang Thank you. Operator And this concludes our question-and-answer session. I would now like to turn the conference back over to Bob Sprowls for any closing remarks. Robert Sprowls Yes, I just want to close today by thanking everyone for their continued interest in American States Water and wish you everybody a good. Operator This concludes today’s American States Water Company conference call. You may now disconnect your lines. Have a great day. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) 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