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Southwest Gas’ (SWX) CEO John Hester Discusses Q2 2015 Results – Earnings Call Transcript

Southwest Gas Corporation (NYSE: SWX ) Q2 2015 Earnings Conference Call August 6, 2015 13:00 ET Executives Ken Kenny – Vice President, Finance and Treasurer John Hester – President and Chief Executive Officer Roy Centrella – Senior Vice President and Chief Financial Officer Justin Brown – Vice President, Regulation and Public Affairs Analysts Matt Tucker – KeyBanc Capital John Hanson – Praesidis Operator Good day, ladies and gentlemen and welcome to the Southwest Gas 2015 Midyear Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, today’s conference is being recorded. I would like to turn today’s conference call to Mr. Ken Kenny, Vice President of Finance and Treasury. You may begin. Ken Kenny Thank you, Kevin. Welcome to Southwest Gas Corporation’s 2015 midyear conference call. As Kevin stated, my name is Ken Kenny and I am Vice President, Finance and Treasurer. Our conference call is being broadcast live over the Internet. For those of you who would like to access the webcast, please visit our website at www.swgas.com and click on the Conference Call link. We have slides on the Internet, which can be accessed to follow our presentation. Today, we have Mr. John P. Hester, Southwest President and Chief Executive Officer; Mr. Roy R. Centrella, Senior Vice President and Chief Financial Officer; and Mr. Justin L. Brown, Vice President, Regulation and Public Affairs and other members of senior management to provide a brief overview of the company’s operations and earnings ended June 30, 2015 and an outlook for the remainder of 2015. Our general practice is not to provide earnings projections. Therefore, no attempt will be made to project earnings for 2015. Rather, the company will address those factors that may impact the company’s year’s earnings. Further, our lawyers have asked me to remind you that some of the information that will be discussed contains forward-looking statements. These statements are based on management’s assumptions, which may or may not come true and you should refer to the language in the press release, Page 2 of our presentation, and also our SEC filings for a description of the factors that may cause actual results to differ from our forward-looking statements. All forward-looking statements are made as of today and we assume no obligation to update any such statements. With that said, I would like to turn the time over to John. John Hester Thanks, Ken. Moving to Slide 3, I would like to summarize some of the highlights of the second quarter. First of all, on the natural gas side of the business, we had 28,000 net new customers in the past year. As we have previously projected, this represents an annualized growth rate of approximately 1.5%. Last month, we commenced construction on our $35 million Paiute Pipeline lateral, which will interconnect with Ruby Pipeline. We expect these facilities to the completed and in service in November of this year. We also submitted a request to the Public Utilities Commission of Nevada for authority to replace $43.5 million of older vintage plastic and steel pipeline next year. All three of these developments are indicative of the positive growth that we are continuing to experience on the regulated utility side of our business. At our unregulated construction services business segment, our effort to fully integrate the Link-Line Group of Companies that we acquired in October of last year continues to progress. We experienced strong revenue growth both organically and from the acquired companies in the past quarter. As we have indicated in previous disclosures over the past year, we continue to believe that we are on pace to reach $950 million to $1 billion in construction services revenues by year end. And with our peak construction season ahead of us, we expect a strong third and fourth quarter that we think will culminate in the construction services group achieving its previously announced 2015 goals. We did increase our loss reserve associated with the Canadian industrial project this quarter by another $2 million and we are currently in negotiations with our customer over change orders. We believe that we are in a very strong position in the ongoing negotiations and that our efforts will result in a substantial mitigation of the current loss reserve. This particular project is essentially complete and we remain very enthusiastic about the construction services segment, including the businesses we acquired this past October. Turning to Slide 4, for today’s call, Roy Centrella will provide an overview on our consolidated earnings as well as separate detail for the regulated natural gas and Centuri Construction Group segments. Justin Brown will provide a recap on the activities that we have been undertaking on the regulatory front and I will wrap up with a report on customer growth, our capital expenditure expectations and an update on our outlook for 2015. With that, I will now turn the call over to Roy. Roy Centrella Thank you, John. As noted, I am going to spend some time reviewing second quarter and 12-month financial results of both the natural gas and construction services segments. I will also highlight some of the key factors impacting the changes between the related periods and potentially influencing full year 2015 results. We will start on Slide 5. Net income for the three months ended June 2015 was $4.9 million, or $0.11 per basic share, down from the $9.6 million, or $0.21 per share earned during last year second quarter. The contribution to net income from both operating segments was down modestly between periods. For the 12-month period ended June, we earned $138 million, or $2.95 per basic share, an improvement from prior period net income of $135 million, or $2.91 per share. Results for the gas segment were markedly better, while the construction segment experienced a slight decline. Let’s turn to second quarter results of the gas segment on Slide 6. A loss of $657,000 was experienced this quarter versus earnings of $1.8 million previously. Operating income declined due mainly to higher operating costs, but was offset by lower interest costs. So other income, which decreased by $2.5 million between periods due mainly to unfavorable returns on company-owned life insurance, or COLI policies, was the primary cause of the decline between periods. Slide 7 provides a breakdown of $4 million operating margin increase, half of which came from customer growth and half from rate relief and other factors. We added 28,000 net customers over the last 12 months consistent with expectations for about 1.5% growth rate. Overall, considering customer growth and rate release, operating margin remains on track to reach our estimated growth forecast of 2% for all of 2015. Moving to Slide 8, you will see that operating expenses increased $5.6 million or 3.5% between quarterly periods. Most of the increase was attributed to higher depreciation and property taxes, resulting from capital expenditures. The reduction in financing cost was attributable to strong cash flows, which allowed us to redeem long-term debt early. I will turn to Slide 9, which summarizes the activity in other income, which declined by $2.5 million between periods. This quarter, we recognized no income on the investments underlying our COLI policies, whereas last year’s earnings amounted to $2.3 million. Next, we will move to Slide 10 and 12-month gas segment results. Net income of nearly $121 million was up about $3.4 million from the $117 million earned in the previous 12-month period. Strong growth in operating margin and flat net operating expenses resulted in a $15 million increase in operating income. A $5.6 million reduction in other income, principally COLI returns, partially offset the improvement in operating income. The next couple of slides further breakdown these components starting with Slide 11 and operating margins. Operating margin grew by $15 million between periods driven by two primary factors. Customer growth contributed $8 million towards the increase, while combined rate relief in California and our Paiute operations kicked in $9 million. Slide 12, total operating expenses. Total operating expenses were flat between periods as increases in depreciation and general taxes were offset by a $14 million decline in O&M expenses. Within O&M, the most significant favorable factors were legal expenses, which fell $5.6 million due to a legal accrual in 2014, which did not recur and a $2 million reduction in rent expense resulting from the company’s purchase of a portion of its headquarters complex, which was previously leased. Slide 13 covers other income and deductions, which declined $11.2 million to $5.6 million. The primary takeaway on this slide is that COLI-related income for the prior period was extremely high due to strong investment returns on assets underlying the policies. On the other hand, in the current period, the $3.4 million return was in the more normal range of $3 million to $5 million. Also, we remind you that in any given period, losses are possible. Next, we will discuss Centuri’s operating results beginning on Slide 14. During the most recent quarter, the construction segment contribution to net income was $5.6 million, down $2.2 million from last year’s $7.8 million. Two factors which influenced this line. First, the loss reserve on the industrial construction project in Canada widened by $2 million. And second, the acquisition of Link-Line made the seasonal aspect of our construction segment more pronounced as it increased a proportionate size of our Northeastern operations and added more fixed cost. This, in no way, dampened our enthusiasm for the business. It’s just a recognition that due to the weather implications, a higher percentage of construction segment earnings are likely to occur during the second half of the year. During the 12-month periods, contribution to net income declined slightly from $17.5 million to $16.9 million. There were several significant factors, which influenced results for both periods, which I will touch on in a minute. Moving to Slide 15, you can see that revenue increased $70 million or 39% between the second quarter of 2014 and 2015. This reflected $32 million of incremental work at NPL and $38 million from the Link-Line acquisition. Construction expenses increased $68 million or 43% between periods with $30 million attributable to NPL and $38 million for the acquired companies. Depreciation expense increased $2.4 million due mainly to equipment purchases to support the higher revenue level, along with $1.4 million of amortizations on acquisition-related intangibles. Now regarding the industrial project, an additional $2 million was incurred beyond our initial reserve estimate to complete the project. The facility is operational and we no longer have employees on-site. We are actively negotiating change orders with the general contractor and believe we will mitigate this loss reserve during the second half of the year. Slide 16 summarizes 12-month construction services results. On the top line, current period revenues totaled $869 million and we are up $207 million between periods with $134 million coming from the acquired companies and $73 million from NPL. Construction expenses increased $189 million with $137 million applicable to the acquired companies and $52 million to the NPL. Depreciation expense increased $9 million, reflecting equipment purchases, Link-Line depreciation of $3.6 million and $4.3 million in amortization of finite live intangibles recognized from the acquisition. The net result of this activity was an increase in operating income of $9.4 million from $28.3 million in the prior periods to $37.7 million in the current 12-month period. Current period operating income reflects a $7.6 million loss reserve on the industrial construction project in Canada as well as $5 million of acquisition costs recorded during the second half of 2014. Prior period operating expenses included $4 million legal settlement recorded in late 2013. As we look ahead to the second half of the year, the construction services segment is well positioned to finish strongly. We are heading into the third quarter construction season peak. There is significant ongoing replacement work in both our U.S. and Canadian service territories. And we are cautiously optimistic that progress will be made on change orders actively being negotiated on the industrial project. I will now turn the time over to Justin Brown for a regulatory update. Justin Brown Thanks Roy. Turning to Slide 17, I would like to focus my comments on the regulatory initiatives that have undergone recent developments since our last earnings call. First, as we have discussed in previous calls, one of our key regulatory initiatives has been to establish infrastructure replacing mechanisms in each of our jurisdictions in order to timely recover capital expenditures associated with projects that enhance the safety, service and reliability to our customers. In Nevada, we recently made our second filing under the recently approved regulations wherein we requested the approval to replace $43.5 million of qualifying projects. These regulations were approved in January 2014 and they authorized Southwest Gas to make annual filings where we will propose the replacement of qualifying projects. We made our first filing in June of last year and subsequently received approval in October 2014 to replace $14.4 million of projects. We anticipate a final commission decision on this year’s application sometime in October. And Nevada regulation, also permit us to make a separate annual filing to implement a surcharge to recover the revenue requirement associated with the previously approved projects. In the fall of 2014, we submitted a rate application and we were authorized to institute a surcharge effective January of this year to collect $2.2 million annually. Similar to last year, we plan to make a proposal on October of this year to update the surcharge to reflect expenditures associated with previously approved projects that have now been completed. In May, the Arizona Corporation Commission approved our requests to update the customer owned yard line or COYL program surcharge to collect annual revenues of $2.5 million, up from the previously approved $1.5 million. The program was approved as part of our last Arizona rate case decision and was most recently expanded in 2014 to include a Phase 2 for the replacement of certain non-Link-Line customer lines. The updated surcharge reflects total capital expenditures of $16 million of which $6.3 million was incurred during 2014 for both Phase 1 and Phase 2. Turning our focus to the two expansion projects, we continue to make progress on the construction of our liquefied natural gas storage facility that was approved by the Arizona Commission. You may recall late last year, we received pre-approval from the Arizona Corporation Commission to construct a $55 million liquefied natural gas storage facility in southern Arizona. We are getting close to completing our due diligence on the land purchase and we recently entered into a contract for the engineering design of the facility. We are looking forward to completing construction of the facility by year end 2017. In Nevada, construction of the Elko County expansion project has officially begun. In June of 2014, our Paiute Pipeline subsidiary made a formal application with the Federal Energy Regulatory Commission requesting approval to build a 35-mile, $35 million lateral to interconnect Paiute with Ruby Pipeline and increase gas supply deliverability to Elko. In May, the FERC issued an order authorizing a certificate of public convenience and necessity to Paiute to construct and operate the project and subsequently provided a formal notice to proceed. Following receipt of the notice to proceed, work began on preparing the 35-mile pipeline corridor for construction. Pipe is also being delivered to the project site and pipeline segments are being welded together and installed. As John mentioned previously, we anticipate construction being completed by year end. Lastly on this slide, you may recall we received approval on California to increase margin by $2.5 million as part of the previously approved annual post test year attrition margin increase of 2.75% per year for calendar years 2015 to 2018. This increase became effective January of 2015. Also consistent with our statements in previous calls, we are still on target for filing an Arizona rate case next year. You may recall, one of the conditions of our last Arizona rate case settlement precludes a filing any sooner than April 30, 2016. Now turning to Slide 18, the purchase gas adjustment or PGA clauses that we have in each of our jurisdictions allow us to adjust rates either monthly or quarterly to timely respond to changing natural gas market conditions and to recover differences between the amount Southwest Gas pays for gas and the cost of gas being recovered from our customers, sometimes resulting in either over or under collections. The benefits of slightly lower and stabilizing natural gas prices combined with having effective PGA clauses in each of our jurisdictions is demonstrated on this slide as we were able to recover approximately $111 million over the first half of this year, moving from an under collected balance at December 31, 2014 to a slightly over collected balance at June 30, 2015. And with that, I will turn it back to John. John Hester Alright. Thanks Justin. Turning to Slide 19, as I mentioned at the outset of our call, Southwest Gas added 28,000 net new customers this past year, continuing the general customer growth trend we have seen across our service territories over the past few years. Moving to Slide 20, indicative data on unemployment rates and employment growth rates in our various service territories are presented in the table shown on this slide. As you can see, unemployment rates in each of our jurisdictions declined year-over-year, reflecting a continuing modest uptrend in general business activity. The trend is less clear, although generally, up in the accompanying employment growth rates displayed. Anecdotal observations seem to confirm a modest continuing upward trend in commerce with major new construction initiatives announced or underway in our major service territories. Moving to Slide 21, we summarized our perspective expectations regarding capital expenditures. We believe that we are on pace to invest $445 million across our service territories by year end. The pie chart on this slide shows a breakout of how those capital dollars will be spent. Looking further into the future, we anticipate that our capital expenditures continue to be in line with our previously disclosed $1.3 billion 3-year capital plan. Turning to our 2015 expectations for the construction services segment on Slide 22, we will continue our ongoing integration efforts to bring the Link-Line Group of Companies into the Centuri Construction Group. We believe we are on track to reach our construction services revenue goal of $950 million to $1 billion by year end. Our operating income for the segment should approximate 6% of revenues depending on the final resolution of our ongoing negotiations related to the Canadian industrial project for which we have recorded a loss reserve. Net interest deductions are expected to be between $7 million and $8 million. Our expectations are before consideration of non-controlling interest and remember that foreign exchange rates and interest rates can impact this segment’s results. Finally, turning to Slide 23 for our outlook for our natural gas utility operations, operating margin is estimated to increase nearly 2% this year. Margin from net new customer growth should be similar to 2014 with the balance of margin growth coming from a variety of rate mechanisms and regulatory decisions. Our operating costs are expected to increase by 3% to 4%. This assumption includes an $8 million pension expense increase to reflect updated actuarial tables. Net interest deductions for this year are expected to be $3 million to $5 million lower than the $68 million recorded in 2014. And finally, as I indicated earlier, our capital expenditures this year should total $445 million. With that, I will turn the call to Ken. Ken Kenny Thanks, John. That concludes our prepared presentation. For those of you who have access to our slides, we have also provided in the appendix with slides that includes other pertinent information about Southwest Gas and can be reviewed at your convenience. Our operator, Kevin, will now explain the process for asking questions. Question-and-Answer Session Operator [Operator Instructions] Our first question comes from Matt Tucker with KeyBanc Capital. Matt Tucker Hey, guys. Thanks for taking my question. First, just wanted to ask at Centuri about the problem project there, could you just give us some sense as to what caused the cost overruns, the nature of the dispute, if you can call it that. Is it more whose it fault or the amount that you are due to recover? And then just kind of what gives you optimism on your position and on the recovery of the cost? Roy Centrella Yes, hi Matt. This is Roy. Well, the project was we talked a little bit about this last time, but it was a relatively short duration project. There is supposed to be 2-month project that crossed over time periods. And when we established the work for this, we are working with the general contractor, there – it was critical that because of that short timeline, the project – the pieces that – the equipment that was needed all come in on a timely basis. And through – really through no fault of our own results, the equipment we needed wasn’t coming in timely and that had, as a result, we had a fair amount of downtime with a good size workforce of about 300 people outside. So, there were – those delays caused revenue – I mean the cost side of the equation to increase. And we finished the project, took probably an extra three days or so to finish and that’s where those extra costs came from. And we initiated negotiations with the general contractor to try to recover those excess cost and that’s where we are today. We believe our position is strong, because we were at the fault of the delay in the equipment coming in. It was a general contractor. And so we are working with them. We would love to settle this without moving to a legal status, but certainly that’s a possibility that we can’t come to the resolution directly. There are legal avenues at what we can pursue. Matt Tucker Thanks. That’s helpful. You kind of preempted part of my next question about kind of the nature of negotiation at this point, but I guess as a follow-up to that, is the general contractor in reasonably good financial condition to your knowledge? Roy Centrella Yes, the best we know. They are a good-sized contractor and have been doing work in the auto industry for a long time. So, we are hopeful that we can make good progress on this leadership. Matt Tucker Got it. Thanks. And then just looking at Centuri’s overall performance in the quarter, if I back out that the project loss, it looks like your operating margin was still about maybe 120 basis points lower year-over-year. If I understand correctly, your view that, that’s primarily attributed to the seasonality in the Link-Line business, is that correct or is there something else that could be going on there? Roy Centrella No, I think that’s the biggest factor. We have some additional fixed cost that come about because of that acquisition, rents and general and administrative costs, things of that nature. And they probably have a bigger summer peak at the Link-Line side of the business than we have at the NPL side. And so as a result of that, we will see more of the earnings shifted to the second part of the year. But right now both sides of the business, the U.S. side and the Canadian side are in their peak operations. Matt Tucker Okay, got it. And then just trying to understand the seasonality a little better, I guess little surprised that the second quarter Link-Line revenues should be lower than the first. Was that unusual, like unusually bad weather this year in the second quarter or is that something you would expect or attributable to something else? Roy Centrella Well, one thing that contract we talked about the industrial project that was all first quarter revenue. And so that’s been – there is no revenues that carried forward from that job into the second quarter. That’s probably the biggest factor. I mean that was $18 million of revenue in the first quarter associated with that job. Matt Tucker Got it. That makes sense. And then just last one, as you are getting further along with the integration of Centuri and getting closer to that $1 billion revenue threshold. You have talked in the past about potentially considering some strategic options for the business when you get there, maybe sometime starting next year? Just wondering if you could update on your current thinking with regard to that? John Hester Hey, Matt, this is John. I think that is our current thinking as we have talked before that we want to make sure that we have the opportunity to continue to grow those businesses and certainly to have a little bit more transparency with the amount of earnings that those businesses will create and I think that they are going to at least need a full calendar year to demonstrate that. And then we will continue to look at our options going forward. We think that certainly, there is a lot of great growth prospects of Centuri. And we think as we talked about a little bit earlier in today’s call that there are a lot of great growth prospects of the utility as well. So, we will continue to try to grow both of those parts of the businesses. And as we continue to go forward, see how the construction services growth rates is going compared to the utility growth rate and continues to look at what options we may have in the future. Matt Tucker Very helpful. Thanks, John. Thanks, Roy. I will back in the queue. John Hester Okay, thank you. Operator Our next question comes from John Hanson with Praesidis. John Hanson Hey, guys. John Hester Hey, John. John Hanson Matt asked most of my questions, but just one kind of follow-up on the construction. What’s your guys view now on more acquisitions in that area? John Hester It’s something that, this is John, John. It’s something that we will continue to look at. One of the things that we have done at Centuri is we have taken a pretty deep dive into what the various business prospects are across the country. We have taken a look at where we have a lot of activity currently being done by the Centuri Group and what kind of markets that we may want to move into. If we see opportunities to move into new markets, we can approach that two ways. We can either start that from the ground up or we can see if there are some smaller tuck-in type companies that may facilitate that growth in markets that we might want to get into. So we will continue to look for those prospects. And if we think it makes sense for our shareholders as an avenue to continue to grow the business profitably we will do that. John Hanson When you talk markets, are you talking more geography or customer type? John Hester Mostly geography, John. John Hanson Good, thank you. Operator [Operator Instructions] And I am not showing any questions at this time. Ken Kenny Okay. Thank you, Kevin. This concludes our conference call and we appreciate your participation and interest in Southwest Gas Corporation. Thank you for being on the call [ph]. Operator Ladies and gentlemen, this does conclude today’s presentation. You may now disconnect and have a wonderful day. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. 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Northwest Natural Gas Company’s (NWN) CEO Gregg Kantor on Q2 2015 Results – Earnings Call Transcript

Northwest Natural Gas Company (NYSE: NWN ) Q2 2015 Earnings Conference Call August 04, 2015 11:00 AM ET Executives Nikki Sparley – Investor Relations Gregg Kantor – Chief Executive Officer Greg Hazelton – Senior Vice President and Chief Financial Officer Analysts Spencer Joyce – Hilliard Lyons Operator Good morning, and welcome to the Northwest Natural Gas Company Second Quarter Earnings Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Nikki Sparley. Please go ahead. Nikki Sparley Thank you, Dow. Good morning, everyone, and welcome to our second quarter 2015 earnings call. This is Nikki Sparley, acting IR Director and filling in for Bob Hess who is out on medical leave. Please feel free to contact me going forward on all IR related matters. As a reminder, some of the things that will be said this morning contain forward-looking statements. They are based on management’s assumptions, which may or may not come true. You should refer to the language at the end of our press release for the appropriate cautionary statements and also our SEC filings for additional information. We expect to file our 10-Q later today. As mentioned, this teleconference is being recorded and will be available on our website following the call. Please note that these conference calls are designed for the financial community. If you are an investor and have questions, please contact me directly at 503-721-2530. Media may contact, Melissa Moore at 503-220-2436. Speaking this morning are Gregg Kantor, Chief Executive Officer and Greg Hazelton, Senior Vice President and Chief Financial Officer. Mr. Kantor and Mr. Hazelton have some opening remarks and then will be available to answer your questions. Also joining us today are other members of our executive team, who are available to help answer any questions you may have. With that, I will turn it over to Mr. Kantor for his opening remarks. Gregg Kantor Good morning, everyone and welcome to our second quarter earnings call. Before we begin today, I would like to take a few minutes to discuss some changes to our executive team. First, I’d like to introduce our new Chief Financial Officer, Greg Hazelton. As you know, after a long career with Northwest Natural, Steve Feltz retired in June. But we’re pleased to have Greg join us from Hawaii Electric where he was Treasurer and Controller. Greg started our his career here in Portland working on the electric side with Portland General Electric and then went on to work in the investment banking world for several years. He’s gotten impressive and diverse background and he’s already been a great addition to our team. I’m also pleased to announce David Anderson, who is promoted to President of the Company, effective August 1. Over the past 11 years, David has demonstrated exceptional leadership skills and help build a strong utility that leads the industry in a number of operational areas. David will also retain his role as Chief Operating Officer with responsibility for the bulk of the day-to-day operations and will continue to report directly to me. Now, moving on to the quarter, I’ll begin today with highlights from the period and then turn it over to the other Greg to cover the financial details. I’ll wrap up the call with brief comments about our priorities for the remainder of the year. In the period, we continued to work through our open dockets at the Oregon Public Utility Commission. As you know, in the first quarter, we received the commission’s decision on our environmental cost recovery proceeding and on how an earnings test would be applied to environmental expenditures we had incurred and will continue to incur in the future. As part of the decision, the OPUC required a compliance filing that describes how we would implement their order. We submitted that filing at the end of March and we’re currently working through the review process with OPUC staff and other parties. It will be subject to final commission approval which we expect by the end of the year. In addition, late yesterday, we received the OPUC’s decision on our pension docket, and you’ll recall, all of the investor owned utilities in Oregon requested that prepaid pension assets be included in rate base and allowed to earn a return. While we are continuing to evaluate the decision, which as I say we got yesterday afternoon, the commission’s order reaffirms the use of FAS 87 expense for recovery of pension costs but did not support the utilities request to include their prepaid pension assets and rate base. The decision is not what we had hoped for but the company still retains its pension balancing account which allows it to defer annual pension expenses above or below the amount set and rates. Recovery of these deferred amounts occurs over time as the balancing account fluctuates with higher and lower FAS 87 pension expense. Now shifting to the quarterly results, our performance was slightly better year-over-year; utility margin was up resulting largely from customer growth which increased to 1.5%. That growth rate translated into 10,000 new customers on a rolling 12-months basis and several economic factors suggest this uptick in activity should continue. For example, between the Portland area and Clark County, Washington, over 29,000 new jobs have been added year-over-year, which equates to about 3% increase. But the real headline for the quarter is the housing market. The homeowner vacancy rate was 1% and the rental vacancy rate was at 3.5% both in the Portland and Clark County creating a very tight housing market. For example, in June, a number of homes for sale represented less than two months’ worth of available inventory, well below the six to seven month timeframe you’d see in a more balanced housing market. The average sales price in June was up about 10% in the Portland area compared to a year-ago and up nearly 13% in Clark County. Compared to the second quarter of 2014, home sales in the period were up about 24% in Portland and up nearly 25% in Clark County. While Oregon’s single-family new construction activity is up over the past 12 months versus a year ago, it’s still not keeping pace with demand and while this imbalance may take some time to correct, we’re optimistic about the potential growth in new construction going forward. And with that, let me turn it over to Greg Hazelton to cover the financial details for the quarter. Greg Hazelton Thank you Gregg for the introduction, I’m very pleased to be part of the Northwest Natural team and on the earnings call with everyone this morning. Turning to our results, earnings for the second quarter of 2015 were $0.08 per share on net income of $2.2 million as compared to $0.04 per share and $1.1 million for the same period last year. Year-to-date earnings for the first six months of 2015 were $1.12 per share on net income of $30.7 million as compared to $1.43 and $39 million for the same period last year. As highlighted from our call last quarter, we recognized a $15 million pretax or $9.1 million after tax environmental regulatory disallowance in the first quarter. The charge to O&M was associated with the February 2015 OPUC Order on the recovery of past environmental cost deferrals. Excluding this charge, consolidated earnings for the first six months of 2015 were $1.45 per share or $39.8 million, which is slightly up from last year on higher utility earnings offset by lower gas storage results. Regarding our utility, we reported net income of $2.2 million in the second quarter of 2015, an increase of $40,000 from the prior year based on higher utility margins and decrease in interest expense offset by an increase in O&M. For the first six months, utility net income was $30.6 million or a decrease of $7.6 million from last year, mainly due to the $9.1 million environmental charge which was mitigated by improved utility results. Positive drivers included higher utility margins, an increase in other income, and lower interest expense partially offset by an increase in O&M expense. Utility margin for the quarter increased $920,000, driven by customer growth, rate base returns on tracked-in items, and gains from gas costs incentive sharing. Utility margins for the year-to-date period were impacted by record loan weather in our service territory during our peak, during our heating season in the first quarter, which continued into the second quarter. Overall, average temperatures for the first six months of 2015 were 18% warmer than year ago and 22% warmer than normal. Total gas deliveries decreased 12% and gross revenues were down 6% during this period. Although our utility margins are generally protected from weather, we do have about 11% of our customer base in Washington, which does not have a weather normalization mechanism and 7% of our Oregon customers elect out of weather normalization. In spite of the decline in volumes and gross revenues, net margins increased $1.2 million mainly due to continued customer growth, rate based returns on tracked-in items, and gains from gas cost incentive sharing. Moving to our gas storage segment, for the quarter, we reported a net loss of $90,000, reflecting $1.1 million improvement in results from a year ago. Drivers included $300,000 increase in operating revenues due to slightly higher contract prices for 2015-2016 gas storage year and $930,000 reduction in operating expenses. For the first six months, net income was $30,000 or a decrease in net income of $440,000 from the year prior. Results included $2.2 million decrease in operating revenues due to lower contract prices for the 2014-2015 gas storage year. This was offset by $1 million reduction in operating expenses. As we’ve mentioned in previous quarters, our Mist storage facility in Oregon continues to perform well due to limited storage capacity and growing demand in the Pacific Northwest. Our Gill Ranch facility in California continues to face headwinds as the oversupply of storage persist and demand for natural gas storage recovers slowly. We are seeing slightly higher pricing for the 2015-2016 gas storage year and we continue to remain optimistic on the value of gas storage in California over the long term. With regards to consolidated O&M, for the quarter, we reported an increase of $580,000 over last year. That increase primarily reflects utility cost increases for higher benefit in payroll costs. Offsetting the increase were lower repair and power costs at the Gill Ranch facility. For the first six months, excluding the disallowance, O&M increased $4.3 million over last year. Key drivers were increases at the utility for payroll and benefits, including higher wage rates under the union labor contract that was effective June 1, 2014, and increases in non-payroll costs primarily associated with ongoing growth initiatives and facility costs. These increases were offset by lower repair and power costs at our Gill Ranch facility. Meanwhile, other income for the quarter increased $870,000 compared to last year as we applied insurance proceeds under the environmental mechanism. Other income for the first six months increased $4.5 million compared to last year, primarily due to the recognition of $5.3 million of regulatory equity interest income on deferred environmental expense as was discussed on our first quarter call. This income was partially offset by higher interest expense on deferred regulatory balances. Regarding interest expense, over the last 12 months, the utilities – the utility has remedied $100 million of debentures without reissuance as a result of our using our environmental insurance proceeds to pay down debt. Consequently, interest expense decreased $1.2 million for the quarter and $2.3 million for the six months of the year. Cash flow from operating activities for the first six months of 2015 was $167 million as compared to $233 million a year ago. Last year’s cash flow was significantly enhanced by $91 million of insurance recoveries. This is partially offset by other working capital changes. As Gregg mentioned, we received the commission’s decision regarding the recovery of financing costs on our prepayment pension asset. As you may recall, the prepaid pension asset represents the timing difference between cash contributions made to the plans and the recognition of FAS 87 expense. Although we will not recover at these financing costs, there will be no financial impact to earnings from this order. We continued recovering our FAS 87 pension expense through current rates and our pension balancing account, which also earns our rate of return. Today, the company reaffirms its guidance for reported earnings in the range of $1.77 to $1.97 per share for 2015, which includes the $15 million pre-tax charge. Adjusting to exclude the charge, our guidance for 2015 remains unchanged at $2.10 to $2.30 per share. The company’s guidance assumes continued customer growth from our utility segment, average weather conditions going forward, slow recovery of the gas storage market and no significant changes in prevailing legislative and regulatory policies or outcomes. With that, I’ll turn it back over to Gregg for his concluding remarks. Gregg Kantor Thanks, Greg. At this point in the year, our focus is two-fold. First, we will be working hard to advance our growth initiatives and at the same time, we will be continuing our cost control efforts to help reduce the financial impact of a record warm winter. On our growth initiatives in July, we submitted our first carbon solutions program under Oregon’s greenhouse gas reduction legislation. As we’ve talked about before, Senate Bill 844 allows the OPUC to incent natural gas utilities to undertake projects that will reduce greenhouse gas emissions. Our first proposal is designed to further the use of combined heat and power in Oregon, a goal that the state has had for many years. Under our CHP proposal, industrial and commercial customers in the market could submit CHP projects for consideration. Our program will then provide incentive funding based on the verified carbon savings, making the project more financially feasible from a customer’s perspective. Over the last year, we’ve been collaborating on this proposal with other regional and state organizations interested in helping CHP gain more traction. In our view, this is an important effort that could provide a very significant carbon reduction benefit for our customers and for Oregon. The OPUC has set a schedule for review of our CHP filing that calls for a decision by the end of the year. In parallel with that effort, we’ve also been working on an oil to gas furnace replacement program to serve the residential market. We’ve completed the stakeholder review process and hope to file the program later this fall. As I said before, overall, we’ve been very pleased with the level of interest and engagement we’re getting from the OPUC staff, customer groups, state agencies, environmental groups across the state and we’re proud to be one of the first gas utilities in the country to attempt this kind of program and I would say, we’ve learned a great deal about carbon accounting, what opportunities exist for reductions and how to best structure programs going forward. We believe this knowledge will be a real asset in navigating an energy landscape increasingly shaped by climate change policies. Finally this morning, let me give you a quick update on the potential expansion project at our underground storage facility in Mist, Oregon. As you know, last December, we received approval from Portland General Electric to move forward with the permitting and land acquisition work required for the expansion project. Project would provide no notice storage services to PGE’s natural gas fired generating plants at Fort Westwood and would include a new reservoir, providing up to 2.5 billion cubic feet of available storage, an additional compressor station and a new pipeline. In April, we submitted an application to the Oregon Energy Facility Siting Council for an amendment to our existing Mist site certificate, a step required to support the expansion. In June, we received information requests about our application from the Oregon Department of Energy and in July, we submitted our responses. The next major step in the process will occur when the Department of Energy and the Siting Council publish a proposed order later this year. Between now and the issuance of that proposed order, we will continue to work with both organizations to address any questions about our filing. And our team also continues to work on obtaining other required permits and property rights. Assuming successful and timely completion of those items, the current estimated cost of the expansion is approximately $125 million with a potential in-service date in the 2018, 2019 winter season, again depending on the permitting process and the construction schedule. With that, thanks again for joining us this morning and now, I’d like to open it up for questions. Question-and-Answer Session Operator We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Spencer Joyce at Hilliard Lyons. Please go ahead. Spencer Joyce First things first Greg, welcome to the team and welcome back to the mainland here. I know they’ve got a good culture there at Northwest, I’m sure you’ll enjoy it. Greg Hazelton Thank you, yeah. It’s one I’m familiar with. I started my career in Portland, it feels like coming back home. Spencer Joyce Perfect, even better there and then Dave, also congratulations in order there for the incremental promotion there and an additional responsibility, I’m sure that’s exciting. David Anderson Thank you, Spencer. I appreciate it. Spencer Joyce Turning towards the quarter here a little bit, and Greg, you touched on it there towards the end of the call, it looks like the Mist expansion potentially online for the 2018, ‘19 heating season. Just refresh us that is still on par with the initial schedule, correct and then secondarily the $125 million investment, that’s also still largely unchanged? Greg Hazelton Correct. Nothing has changed at this point. Still on schedule, still approximately $125 million. Spencer Joyce Yeah. Perfect, good to hear. Separately, wanted to turn towards the other income line of the income statement. I know there had been a couple of special items here over the last year or so, the deferred environmental expense accrual there and then the insurance item that have caused that to jump up a little bit as far as income is concerned. Can you talk a little bit about how that particular line item might play out over the next year or two, I’m kind of assuming that could trend a little bit lower or we could see a little bit less income there as we kind of model out ‘16, ‘17? Gregg Kantor Well, we have a number of things that flow through that line item. Usually, that would include all the interest that we accrue on our deferred balances, so that would be impacted by accruals on the liability, the insurance liability that would be also impacted by equity earnings on regulatory assets as well. We did highlight that we received a fairly large recognition with the recent order in February in the receipt of insurance proceeds against our environmental liabilities, which made that equity income higher than I would expect it to be going forward, absent something similar. So I think if you normalize out that $5.3 million pre-tax number, the run rate may be slightly impacted by higher – by some of the interest costs that we have going through there on the deferred balances. Greg Hazelton And Spencer, we’ve gotten all of the insurance, I should say, there is a small amount that I think is still possible in the million dollar range, but we’ve essentially gotten the insurance proceeds that we’re going to get out of our insurers. Spencer Joyce Okay, perfect. So I guess from a modeling standpoint, I mean, we’re not going to totally fall off a cliff here, but I would expect some of those balances that we’re earning or some of those accrued balances that we’re earning a bit on to trend a little lower? Greg Hazelton That’s fair. Operator [Operator Instructions] Gregg Kantor Okay. It doesn’t look like we’ve got any other calls. So thanks again for joining us and have a great finish to the summer season everyone. Take care. Greg Hazelton Thank you. Operator The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

California Water Service Group’s (CWT) CEO Martin Kropelnicki on Q2 2015 Results – Earnings Call Transcript

California Water Service Group (NYSE: CWT ) Q2 2015 Earnings Conference Call July 30, 2015 07:30 ET Executives Thomas Smegal – VP & CFO Martin Kropelnicki – President & CEO Paul Townsley – VP, Regulatory Matters Analysts Spencer Joyce – Hilliard Lyons Jonathan Reeder – Wells Fargo Operator Welcome to the California Water Service Group Second Quarter 2015 Earnings Results Teleconference. Today call is being recorded. I would now like to turn the meeting over to Mr. Thomas Smegal, Vice President and Chief Financial Officer. Please go ahead, sir. Thomas Smegal Thank you, Kim. Welcome everyone to the second quarter earnings call for California Water Service Group. With me today is Martin Kropelnicki, our President and CEO and Paul Townsley, our Vice President of Regulatory Matters. A replay of today’s proceedings will be available beginning today July 30, 2015 through September 30, 2015, at 1-888-203-1112 or at 1-719-457-0820, with a replay passcode of 1770876. Before looking at this quarter’s results, we would like to take a few moments to cover forward-looking statements. During the course of the 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 advices 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-K, Form 10-Q and other reports filed from time-to-time with the Securities and Exchange Commission. Now, let’s look at the quarterly results. I’m going to go through the income statement and then turn it over to Paul for an update on our regulatory activity for the quarter. So for the second quarter our financial results, our revenue was a 144.4 million that’s down 8.8% or 14 million and that’s two things going on there, the MCBA, the modified cost balancing account which tracks our production cost that’s reflected an entry of 6.7 million and then unbuilt revenue adjustment which we will talk about in a little bit more detail later reduced revenue by 10 million and those both result really from decreased consumption in the quarter and at the end of the quarter. Our production cost for the quarter 53.0 million that’s down 14.4%, 8.9 million and again that water production volume is down 21% for the quarter. So we see that conservation is having effect on our production cost. Our production mix, well production within the quarter was 52% of total water production, while purchased water represented 45% and surface water accounted for the remaining 3%. In 2014 in the same quarter, 51% of water production was from wells, 46% from purchase sources and 3% was surface water. Our administrative and general expenses for the quarter were up 11.9% or 2.8 million and that’s really driven by pension expenses which were higher by 2.6 million. For our other operations expense, that was 17.5 million for the quarter up 9.4% or 1.5 million. Conservation expense increased to 0.5 million and expenses recorded to the drought memorandum account for future recovery was 0.9 million during the quarter and just as a reminder in our past calls we are confirming that the company still expects to spend $4 million to $6 million on drought response this year and Marty will talk more about our drought response. And maintenance, we got 5.3 million for the quarter up 6.8% or 0.3 million driven by maintenance in services maintenance within the quarter. Depreciation and amortization was 15.4 million, a decrease of 4.6% that’s driven as it was last quarter by lower depreciation rates that were adopted with the DRC [ph] decision late in 2014. Our net other income was a loss for the quarter of $15,000 that’s down about 800,000 from the second quarter of 2014 and the biggest driver there is a change in the value of the company’s non-qualified benefit plans which are mark to market each quarter. For income taxes during the quarter they decreased 2.1 million to 5.1 million and that’s due primarily to a decrease in pretax income and partially offset by changes in tax benefits. During the second quarter of 2014 the company has realized tax benefit of 2.5 million associated with implementation of the tangible property regulations. No similar benefit was achieved in the second quarter of 2015. Consequently the effective tax rate for 2015 is estimated to be 38%. So our net income for the quarter was 9.8 million, compared to net income of 17.2 million in the same period last year for a decrease of 7.3 million and talk about two main factors there of course is the unbuilt revenue and the tax benefit that we had received in the prior year. Earnings per share $0.21 and earnings per share on a fully diluted basis for the quarter is compared to earnings per share of $0.36 in the second quarter of 2014. Please go through the year-to-date results, revenue 266.4 million for the year down 1% or 2.5 m. Production costs are down 8.5% or 9.1 million over the first six months and that is reflecting of course decrease in volume. Our production mix was 51% for the first six months was well production as compared to 49% in the first six months of 2014 and purchased water decreased from 48% to 46%. This reflects a scarcity of surface water during the drought and more pumping from our groundwater wells. Our administrative and general expenses for the first six months of the year were up 11% or 5.4 million again that’s pension expense which was 5 million of 5.4 million. Other operations, 33.4 million for the year up 3% for 1 million and that’s to be driven primarily by wages. Maintenance expense is 9.8 million for the year to-date down 2.1% or 200,000. So there is a decrease in well and pumping equipment maintenance for the year-to-date. So net income for the first six months of the year 11.4 million, that’s down 2.3% or 300,000. The earnings per share is $0.24 on a fully diluted basis for 2015 and that’s the same $0.24 as we achieved in the first six months of 2014. So now I would like to turn it over Paul for an update on regulatory activity during the quarter. Paul Townsley Thank you, Tom. Good morning everybody. I would like to provide you with an update on our regulatory activity in both California and our subsidiaries. Let me start with Hawaii, our subsidiary Hawaii Water Service Company received three decisions from the Hawaii Public Utilities Commission during the second quarter of this year. These three decisions will provide the company with an additional revenue of $2 million annually. The three decisions conclude general rate cases for our Waikoloa Water Company, the Waikoloa Sewer Company and the [indiscernible] water Service Company, all of which are located on the Big Island of Hawaii. In addition to revenue increases to offset changes in operating expenses and to provide a return on our invested capital, these decisions also authorize the company to establish power cost pass through mechanisms so that energy cost are shown directly on customer’s bills and cost saves are pass through rather than eroding range [ph]. These three decisions conclude a series of Hawaii Water Service Company rate cases that is being working their way through the regulatory process since 2011 and 2012. Our net rate cases in Hawaii are for our Maui based, [indiscernible] service areas which we plan to file early next year. In California we filed our 2015 general rate case application in early July of this year. The application was covered of three year forward looking period request California Public Utility commission approval to increase revenue by $94.8 million in 2017, $23 million in 2018 and $22.6 million in 2019. The application also requests commission approval for Cal Water to invest $693 million in capital over the three year period of 2016 through 2018. The main driver for the requested revenue increase in this rate case application is investment and infrastructure. About 80% of the requested revenue increase in the rate case is attributable to capital investment and of the $693 million in requested capital investment over 40% or about $280 million of it is because of our stepping up of our pipeline replacement program. By stepping up our pipeline replacement program we can ensure that we’re replacing older pipeline in a systematic and timely manner which will reduce failure and leakage rates over the long term and the balance of the capital request that we have made to the commission is for other types of normal utility investments wells, pumps, tanks, treatment plants and water meters and service lines and technology, the usual bread and butter of our water utility investments. The rate case filing also reflects Cal Water’s aggressive cost control measures which include reduced benefit costs and increasing employee head count for all positions except for those that are required and make water supply improvements. We also want to point out some other important elements of the rate case application. In this case we’re proposing to consolidate a number of our service areas, our application details proposals to combine for rate making purposes 16 of our service areas in the five regions. We believe that proposed consolidation will help with a customer affordability concerns and also improve administrative efficiency. We have also requested that the commission continued the company’s sales reconciliation mechanism also known as SRM that was approved in our last rate case and to further enhance it to make it better reflect annual changes in customer sales. And finally we’re proposing to improve construction work and progress also known as [indiscernible] in rate base rather than including capitalized interest in our project announced. This last change will make Cal Water’s approach to construction accounting more consistent with other California Public Utility commission regulated water companies. The commission has not yet established a schedule for our rate case. However in accordance with the commissions established rate case plan new rates should go into effect on January 1, 2017. That’s my update, Tom. I will give it back to you. Thomas Smegal Thanks, Paul. Now I would like to cover some highlights on the balance sheet. So our plant balance at the end of the period net utility plant grew to 1.64 billion as of June 30 of 2015. The work in progress as Paul was talking about, construction work in progress increased to a 135 million. Our capital investments from both company funded and developer funded activities were 75.8 million on a year-to-date basis, it’s a 32% increase from the same time in 2014. This increase is primarily driven by increased activity on projects approved in the 2012 California General rate case application which went into effect last year. And as we have mentioned earlier the company expects to spend between a 125 million and a 145 million on company funded improvements in 2015, so we’re well on our way to meeting our target goals there. Cash on hand was 24.5 million. We did have a 126.6 million outstanding on our revolving credit facilities as of June 30th. I wanted to talk a little bit about our accrued unbilled accounts receivable what we call unbilled revenue and because that was the main driver of the change in earnings for the period. Unbilled revenue accrual represents water which has been used but not built for at the end of the period. The unbilled revenue is not reflected in the RAM decoupling mechanism which is recorded on a cash basis. Once built of course the revenue is recorded in the RAM and it flows through the normal decoupling process. The accrual we do this every quarter and it is very seasonally and very with REIT changes typically as in 2014 the accrual is higher at the end of the second quarter as compared to the end of first quarter. This year we asked our customers to conserve 25% to 30% state wide and they really came through as Marty will talk about in the discussion of the drought, our customers in June conserve 30% based upon their usage in 2013. With that consumption our unbilled revenue accrual is down as compared to 2014 and that’s what’s really driving the change in earnings this year. This has the seasonal effect, this is a transitory effect. We’re going to be doing this accrual every quarter and it’s just a natural part of us doing it. And of course the company cannot predict the future effects on net income due unbilled revenue accruals but we will see how it goes throughout the rest of the year. And just a final update from me on the balance sheet net RAM and MCBA balance actually decreased 0.3 million during the quarter to 47.9 million from 48.2 million at the end of the first quarter. The balance is up 2.7 million for the year from 45.2 million at the year-end. So now I’m going to turn it over to Marty for some comments on the drought and the quarter’s results. Martin Kropelnicki Thanks, Tom. Good morning everyone. If we sound like we’re a little off because Tom and I are in Boston after our board meeting yesterday we flew out east and we will be meeting with investors in Boston today to talk about the rate case we just filed. So it’s really early in the morning our time and we struggled to find Tom coffee this morning and me a cold diet coke but we got the first shot. I think we’re warming up here. So I want to cover really five things, one talk a little bit about the operating results for the quarter. Two, spend most of my time giving you kind of detailed drought update and what’s being going over the last really 60 days in the State of California. Three, give some thoughts on the GRC and highlight some of the things in what we’re doing that Paul talked about. Four, talk about the [indiscernible] workplace which we won for the fourth year in a row and then lastly talk about our plans as we move into the second half of the year what are our priorities as we move into the last part of the year and one of our goals for the company. So first and foremost, as Tom mentioned we saw significant decline in demand, our consumption laid in the quarter. So if you remember, Jerry Brown, Governor of California signed the executive order by extending the Emergency Drought Declaration in April that was ultimately put into place about May end of the first week in May and then we had to ramp up to be in compliance with that role start in June 1st. So it’s interesting that we did see the consumption prior that declaration being extended if you recall the medium wasn’t very good and in most places the consumption was down anywhere from 0% to 7% and that was really driven by the fact we had a very long dry winter. So people continue to use water. Once we did the public participation meetings, we communicated the drought plans. We sort of implemented our customer first approach. It shouldn’t be a surprise to anyone that we saw a significant decrease in consumption that really hit in the month of June and Tom kind of hit the bad news with that and it does affect the revenue accrual which is outside the regulatory accounting mechanism. That’s a good news in that and that most of our districts hitting or exceeding the conservation targets, what are the major step from where they were 60 days ago. So while that’s create a little bit of short term volatility the fact that is it’s step in the right direction for the company being able to hit it’s required targets as prescribed by that emergency declaration by the governor. Tom, you might want to take a quick minute if you can just to go through kind of the surcharge accounting and now that we’re into the penalty phase where people are charged a surcharged regarding their allocation how their accounting is going to work for that, because they will start showing us really in the Q3 numbers. Thomas Smegal Sure, Marty. The commission adopted our what’s called schedule 14.1 which is our drought plan and our drought water budget plan. In it there is two types of monetary penalties, one is a surcharge on excessive use over the budget that the customer has, each of our customers is given a specific budget that’s based upon their past usage in 2013 in the similar period. That surcharge money that comes is going to be put in the RAM of decoupling account, so that goes offset the deficit that might occur in the RAM with reduced sales. So that’s something that are going to be looking at very carefully to see where that goes. There are also penalties that would be associated with customers that misuse water or use water against the rules that have been established by ourselves, by the state and by local ordinances such as washing their car at an inappropriate time or watering at an inappropriate time or wasting water down the side walk. Those penalties, those fines really will be put into the drought memorandum account. That drought memorandum account I mentioned has we recorded 900,000 for the quarter and as we go forward that will be collected on a future basis so that’s drought memorandum account, it’s not something that we will recover immediately it will be something we recover probably in 2017. Martin Kropelnicki Right, so the end build revenue versus the ramp kind of creates a timing difference and the ramp balances for the quarter really went down actually slightly from where they were at the beginning of the year, so now you will start, we believe we believe you will start to see as the RAM balances start to grow as we move into the summer month and it’s kind of the change in consumption is being recorded now in June. It will start moving through the regulatory accounts going forward. As Tom we spent about a $1 million incrementally on our drought response and we’re still stand at the 4 million to 6 million is about the right amount. About 40 people dedicated full time in our drought centers working in each of our regions and through a dedicated call center to assist our customers and help high volume users in each of our districts. In addition on the numbers for the quarter, the 75.8 million and the capital program that the company has recorded that’s really good news. So we’re actually ahead of plan on a year-to-date basis, our goal is a 125 million to 145 million the significance in why I’m pushing this number and I want to highlight this number a little bit is because of the rate case numbers that Paul mentioned. We [indiscernible] $700 million of new capital and that is a significant increase what we asked for in the last rate case, the largest components of that being made and then pumps treatment, water supply, water [indiscernible] items. So this is kind of a transition here in terms of our ability to execute a $200 million year capital program. So we have been very focused internally looking at our capital processes and making sure we have the ability to implement a significantly larger capital program in the coming years and as we said before we don’t see the capital slowing down as Tom and I have mentioned before, you know our mains are getting older. We need to start changing out those mains. Obviously water supply and scarcity is playing in the California so we have a lot of projects to bring new water supply on board and also make sure as the water level has dropped in California while the quality issues become more difficult to deal with. So we’re dealing — we’re spending more money on purification for our programs. By the way we know that it’s very complicated on the RAM accounting and all everything gets involved in it. So when we look to our 10Q there will be a lot of disclosure around this and we try to highlight the changes in the MD&A so people can really follow in our 10Q that we plan to file shortly. Now moving on to the drought, so bad news is out of the way, the decline in consumption now let’s stick to the good news and that’s really the customers and our footprint within the State of California has done an outstanding job at the first month of required mandatory conservation. To give you an idea how our districts faired, we had six districts that achieved greater than a 40% reduction, and the water consumption we had 15 districts that achieved greater than 30% reduction and 19 out of our 24 districts were in compliance that means 80% of our districts were in compliance. The ones that were out of compliance most of them was the exception of one district which I will come back were a stone throw away from hitting the targets. So that’s first month of reporting that’s required and the penalties are rolling in, I’ve been very, very happy with the drought response and our customers’ ability to hit their conservation target. Call center volumes have leveled off from a higher 45,000 calls per week down to approximately 20,000 calls per week and in total we have received approximately 4000 customer applications for appeals are requesting changes to their water budget. If you put that into perspective of how many meters we have in the State of California that’s less than 1% of their customers are coming back saying they need a little bit more out of their water budget. So we have an approved approximately 1600 applications and adjusted water budget and those are remodeled or we just had twins or my in-laws has just moved in with me and so we go and we verify all that and we will adjust their water budgets based on the supporting documentation that’s put in. But nonetheless, it’s less than 1% of the customers coming and asking for a change in the water budget and to me it speaks the fact that the message of the drought in what we need to do is really clearly being understood by our customers. In addition towards the end of the quarter we did a few customer focused groups, and the feedback has been mainly positive. What we try to do is get customers in a room and ask them what’s working, what’s not working, what is it going to take them to help conserve and overall it’s been a very supportive environment with the customers and the communities that we serve. In addition to the focus groups about 82% of the media coverage in our service areas has been neutral to positive versus 18% which is negative and again we believe that’s reinforces, that’s the message is getting out and it fits nicely with decline that we have seen in consumption at our customers understand that we need to hit these targets. [Indiscernible] supply standpoint our water supply conditions have been steady and we’re in the process of launching five new conservation programs that will bring us upto 12 conservation programs that have been launched over the last 60 days, the new programs will drive our outreach and continued success, and allow us to continue to target high end users, high volume users and the water that they use. In addition, we started rolling out a new report. This new report was traded with an application called BEACON. We have partnered Badger Meter to design and build an application to produce easy to read graphical reports for customers to help them track and understand their water usage compared to people in their neighborhood so it doesn’t identify who your neighbors are but it’s basically a graphical report that we produced and give to the customers, that shows their trends and how they are trending compared to people in their neighborhood. And so that was a good project that we partnered with Badger Meter and we’re in the process that we’re rolling it out. We’re rolling it out to the high volume districts first and then we will roll out to the districts that aren’t as hard hit with the drought, what the idea that is being fully rolled out here during the third quarter. So overall I’m very pleased with the progress that we have made on the drought, I think we’re off to an outstanding start, it has been a lot of work for the team but all this indications are heading in the right way. Customer usage is down, customer understanding is up, media coverage has been good and we’re hitting our targets and I think that’s the most important story here. In addition as Paul mentioned you know the rate case, the rate case we’re moving into the next stage so it’s being filed. We start our tours with the regulators here in next month and we start notifying our customers. I believe this week with build notifications of the rate case process. We get what’s called an exception report from the — we file a prelim rate case and then give us a deficiency report and then we have to correct those deficiencies before make the final filing. Our deficiencies in this rate case were down about 65% from where they were with the last rate case, I think that speaks to the companies extra care and timing is put into preparing this rate case, in particular the capital work and the capital program across the state. So as we move into the rate case space here and continue to deal with the drought those are our two priorities as we go into the end of the year. Droughts number one, rate cases number two. Lastly I want to take a couple of minutes to talk about the award we announced a couple of weeks ago, the Bay Area Top 100 Workplace so this effects our employees in the Bay Area which is about — it’s about 25% to 35% of the company. For the fourth year in a row we have been named a Top 100 Workplace in the Bay Area and once again we’re the only utility to win this award and we take great pride in being an 89 year old water utility located in the heart of Silicon Valley competing with 1000 of tech companies that are around us. It’s nice to be a winner and I believe that the award shows the type of company that we’re, the type of employees that we have and I sincerely believe that happy employees help create good customer service and that good customer service also helps [indiscernible] response. So we’re very happy to have won that award for the fourth year in a row. We did take a small moment to have lunch with the employees to celebrate their success and it was back to our come back to dealing with the drought. So in closing while the drought is creating a little bit of volatility on the unbuild of revenue side which is outside the regulatory mechanism, the fact is there is a lot of great things are happening in Cal Water. We’re off to a great start with the drought and we’re hitting our targets and really because we’re in the emergency declaration, it’s about doing the right thing right now and dealing with the short term volatility and so I’m very pleased to where we ended the quarter in terms of the products with drought and think we’re off to a great start. So, Tom with that I will turn it back to you. Thomas Smegal Okay, great Marty and Kim that is the end of our presentation and we’re happy to take questions. Question-and-Answer Session Operator [Operator Instructions]. Our first question is from Spencer Joyce from Hilliard Lyons. Spencer Joyce Couple of quick ones for me here, first I think you briefly touched on, did you say the CapEx spend so far this year has been about 75 million? Thomas Smegal Yes 75.8 million so almost 76 million. Spencer Joyce Okay, so we’re over half way to kind of the full year goal here. Thomas Smegal Spencer that does include a little bit of developer contributions so that’s not all what we call company funded CapEx and when we’re targeting we’re targeting the company funded CapEx. So we’re right about half way there little bit better than half of our goal right now. Spencer Joyce In any case tracking well may be at least if we think about last year where we kind of undershot a little bit. Thomas Smegal I think Spencer, one think to look at is the company funded over the last 12 rolling last 12 months, half of last year we really accelerated and then this has continued that trend. So I think that shows a good track record of what we can spend in the future. Spencer Joyce Separately with the drought kind of dominating the conversations here over the last year or two, I want to ask about acquisition potential. Has the drought or any other external factors perhaps brought any potential targets kind of to the forefront or have any opportunities maybe percolated on that front? Martin Kropelnicki What’s the drought done, I think is really highlighted kind of some of the weakness in the State of California around the long term planning for water supply and Spencer you’re right, NAWC Financial forum I shared with the people of the financial forum what the population growth curve was for California versus kind of the water supply and the demand curve and the supply curve are growing apart right now, they are not going together which is highlighting a lot of need for a lot of capital infrastructure both for new water supply but also upgrading existing water supply and that’s start with the state and goes all the way through to companies like us. So [indiscernible] covers a lot of stones and when that babbling brook [ph] goes down you start to see the rocks that usually lie under the water. So we’ve seen some of the rocks, just some of the weakness in the system right now. Having said that, our water supply has been fine that we have a few cities that were trucking water to help get them through the summer months because they have just run-out of supply. I also mentioned at the conference that none of the investor-owned utilities have run out of water, it’s been more a small kind of undercapitalized city or meeting systems have been the ones that have been strained and run out of water. So it hasn’t popped into any type of M&A market, in California it’s hard to buy a muni system because it requires a vote of the local taxpayers to approve it but clearly you’re seeing the stress on the smaller systems and the inability to meet water quality standards or add adequate supply for their customers. So I think the jury is still out on that. I think part of it’s going to depend on what happens over the next 12 to 18 months, it’s drought, if it continues. I will say it’s fascinating to me that we are focused on California but Oregon declared a drought here in the month of June, Washington declared a drought in I believe it was late April, early May and I was recently talking to somebody who is from Vancouver, British Columbia who was telling me how horrible the drought conditions are in Vancouver. In fact their water restrictions are worse than ours. So the drought is really a whole west coast item right now and I think it’s going to be changing some behaviors and changing how capital is directed within the state and whether that leads more M&A I think the jury is still out on that. Spencer Joyce So it sounds like maybe nothing eminent but at least you guys are kind of keeping your ear to the ground there. One final, one from here. I know if we think back to last year Q3 was a pretty strong quarter, Q3 ’14 that is as we recouped a little bit of benefit via the rate case or the generate rate case that may have been otherwise earned during the first half of 2014. Correct me if I’m wrong there first off and then second if you could, what is roughly the kind of net revenue benefit that might come out of Q3 this year in order to maybe get a more fair comp looking at Q3. Thomas Smegal I would have to go back to our communications in Q3 of last year and unfortunately don’t have that open in front of me. We did recognize the benefit of the rate case and the interim rates associated with the rate case in the third quarter but I think that was fully disclosed in the press release so that number is pretty quantifiable. As far as on a go forward basis I think you would look to that adjustment to get to your comp. As far as the rate changes and the way to think about our the profitability of the company from last year to this year we have identified that we had step, what’s called the escalation step increases of about 5 million, a little less than 5 million. We did at the beginning of July, get approval from the CPUC on $5 million revenue requirement worth of these [indiscernible] letter capital projects that they have been approved in the prior rate cases, this all on an annual revenue basis and of course what’s going on in Hawaii we will start to see in August the revenue coming in from those rate changes that we got at the end of June. And so those are just some of the things that are going on and obviously the drought response is another factor that we have identified it could be a change as we go forward. Operator [Operator Instructions]. We will move on to Jonathan Reeder from Wells Fargo. Jonathan Reeder Couple of questions, first on the revenue, since this will essentially get captured by the RAM in Q3 it’s about $0.30 headwind for Q2, should we view that as something that’s just going to reverse and add $0.13 of incremental earnings in Q3? Thomas Smegal Jonathan, I think that this is the line on the balance sheet, you can go back and then anybody can pick this up out of the Qs and the Ks. We see a variability in the accrued revenue, from anywhere from 15 million to 30 million at the end of every quarter. Right now we are at — I think it’s 26 million, at the end of the year last year we were 23 million so this is a very small increment. If you follow that, it’s really — it’s kind of a sea level change or it’s the tide going in and out. If it happens that in the third quarter we get that popped in and what we mean by that not that it’s going to up higher but that is not going to fall like it fell in the third quarter in the prior year. So always going to vary, it varies a lot less the second quarter because of the conservation whether it comes back to a normal level at the end of year. I think it’s dependent upon a couple of factors both the customer conservation, the effect of the surcharges that will be calculated in the end bill and also the effect of the rate design that we have seen over the last couple of quarters where more service charge revenue less quantity charge revenue. So it will come back it’s a question of timing really, will it come back in the third quarter, fourth quarter when the droughts over-rise I can’t say at this point. Martin Kropelnicki Yes I think it was interesting to know Jonathan that typically in the second quarter we see a really big step in that number and in this quarter we see that down because of the consumption, that consumption really had in June and that’s what it relates on that calculation as the 21 day average of what people consumer. So it — when you flipping in the context of what the swing was that we typically see this time the year, it’s a pretty big swing. Jonathan Reeder And then on the mark to market life insurance in Q2, what was the absolute like benefit or loss, I mean you said it was 800,000 quarter to quarter. Thomas Smegal So the loss in that area was about 200,000 so that’s made the rest of that category includes benefits from other unregulated activities. Jonathan Reeder So anything else that we should be thinking about in terms of ongoing earnings number for you all in Q2? Thomas Smegal No just the things that we mention the drivers on the rate changes that are going to hit in Q3 from Hawaii and from the rate base offsets. Martin Kropelnicki Yes. And again when the Q comes out you will see in the rate section we have that identifying what those increases were both the escalation in steps and the Hawaii changes and for this quarter John it really comes down to those three items, the changes and the end build revenue, the non-recurring tax credit and now I’m blank on the third item because it’s early but it’s really the [indiscernible] that we talked about, those are called out in the press release and also in the Q that will be filed. Operator [Operator Instructions]. And it appears there are no further questions today. Gentlemen I will turn the conference back over to you. Thomas Smegal Great. Well I want to thank all of you for your continued interest in California water service group and we look forward to talking with you again after the third quarter. Thanks. Operator And that does conclude our conference today. Thank you all for your participation.