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Xcel Energy, Inc. (XEL) CEO Benjamin Fowke on Q4 2015 Results – Earnings Call Transcript

Operator Please standby, we are about to begin. Good day, everyone, and welcome to the Xcel Energy Fourth Quarter 2015 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Paul Johnson, Vice President of Investor Relations. Please go ahead, sir. Paul Johnson Good morning and welcome to Xcel Energy’s 2015 year-end earnings release conference call. Joining me today are Ben Fowke, Chairman, President and Chief Executive Officer; and Teresa Madden, Executive Vice President and Chief Financial Officer. In addition, we have other members of the management team in the room to answer questions as needed. This morning, we will review our 2015 results, and update you on recent business and regulatory developments. Slides that accompany today’s call are available on our website. In addition, we’ll post a brief video of Teresa summarizing financial results later this morning. In addition, we recently launched an IR, Investor Relations app, so you can download for free in the app store. The app allows you to uses the mobile devices conveniently access our Investor Relations material. As a reminder, some of the comments during today’s conference call may contain forward-looking information. Significant factors that could cause results to differ from those anticipated are described in our earnings release and our filings with the SEC. With that, I’ll turn it over to Ben. Benjamin Fowke Well, thank you, Paul, and good morning everyone. I’ll begin by reviewing some of the highlights from 2015. We had another successful year at Xcel Energy delivering an ongoing earnings of $2.09 per share despite some challenging weather, weak sales and some regulatory setbacks. We have now met or exceeded our earnings guidance for 11 consecutive years. We also increase the dividend 6.7%, and raise the dividend growth objective to 5% to 7%. And this marks to 12th consecutive annual dividend increase. Finally, we maintained our strong credit ratings and delivered a 3.8% total return in 2015, outperforming most of the utilities and moving to a premium valuation. We had a busy and overall successful regulatory calendar, resolving rate cases in Minnesota, Colorado, South Dakota, Wisconsin and Texas in addition to the Monticello prudence review. In 2015, we continued to pursue multi-year compacts, which support our strategic plan and provide certainty to the company, our customers and our shareholders. We were successful in implementing a second three-year plan in Colorado, and we followed a comprehensive multi-year plan in Minnesota. We were also encouraged by the legislation that was passed in Minnesota and Texas, which provides us with additional tools to reduce regulatory lag. In Minnesota, we filed a bold resource plan that will achieve a 60% carbon reduction by 2030. This plant advances the addition of renewables on our system, preserves the liability while ensuring customer benefits and affordability, creates ownership opportunities for us and positions us well to meet the requirements of the EPA’s Clean Power Plan. We are encouraged by the broad stakeholder support that we’ve received. In 2015, we continued to demonstrate strong operational performance, particularly in storm restoration. For example, in December, SPS experienced an horrific winter storm with sustained winds between 50 miles to 80 miles per hour, a low zero windshield, wide out conditions and inaccessible roads to the 6 foot to 10 foot snow drifts. Now, even with these challenging conditions, we were able to restore service to 84% of our customers within 12 hours and 98% of our customers within 24 hours. This remarkable fee was accomplished as a result of our proactive planning, which began days before the event, and of course our dedicated employees who sacrificed time with families during the holidays. Our industry leading storm response was recently recognized by EEI, which gave us their Emergency Recovery Award for our response to a severe weather in Minnesota that impacted 250,000 customers, just last summer. In 2015, our employees not only provided best in class storm response, but also achieved record levels of safety, resulting in an a eighth consecutive best year ever. Safety is a critical priority to Xcel Energy, and we’re committed to sending all employees home every day without an injury. Clearly, we believe there is a strong correlation between safety and employee engagement and productivity. We also had an excellent start to the construction of the 200 megawatt Courtenay wind project in North Dakota. We expect the wind farm to be in service by year-end ahead of schedule and on budget. Moving to 2016, earlier this week, the PSCO filed an application with the Colorado Commission to establish a framework for potential investments and natural gas reserves. This filing proposes a plan to take advantage of historically low natural gas prices, provides a long-term hedge against market fluctuations and offers predictable natural gas prices, with a long-term benefit of our customers. The Colorado Commission will have 240 days to reach with decision on the regulatory framework. If the commission approves the framework, we would then seek approval for a potential investment, assuming it is beneficial of our customers. It’s important to recognize that market conditions need to be conducive for an investment to be made. But having an established framework in place will allow us to be opportunistic. As a reminder, the potential investment per rate basing of natural gas reserves is not included in our base capital forecast and represents another growth initiative as part of our upside capital forecast. Finally, while Teresa will go into more detail, I wanted to address the high-level impact of the extenders’ bills. Based on our initial analysis, we find it to be a net positive, despite some reduction in the rate base growth and here is why. First, we don’t anticipate a material act or rather a material impact on EPS for the 2016 to 2018 timeframe. This is due to multi-year plans and the existing NOL tax positions at our major jurisdictions. Second, beyond the 2018 timeframe, the bill reduces revenue requirements and lowers bill increases for our customers. This reduces regulatory risk, which increases our ability to close the ROE gap. Frankly, I believe, it gives us an opportunity to go beyond the 50 basis points of ROE improvement. It also increases headroom for additional capital investments. Finally, we view the extensions of PTC and ITCs favorably, as it makes large scale renewables become even more affordable for our customers. As a result, we continue to be very confident and in our ability to deliver ongoing earnings consistent with our 4% to 6% EPS growth objective. So with that, I’ll turn the call over to Teresa to provide more detail on our financial results and outlook in addition to our regulatory update. Teresa? Teresa Madden Thanks, Ben, and good morning. My comments today will focus on full year 2015 results. We had another strong year and delivered 2015 ongoing earnings of $2.09 per share compared with $2.03 in 2014. The key takeaway is that we implemented significant cost initiatives and management actions to offset negative weather, sluggish sales and certain unfavorable regulatory outcomes, allowing us to deliver earnings within our guidance range. The following key drivers positively impacted earnings; electric rate increases in riders, a lower earnings test refund in Colorado, and reduce O&M expenses. These positive factors were partially offset by several items. We experienced unfavorable weather which reduced earnings by $0.07 per share, compared with last year and reduced earnings by $0.04 per share when compared to normal weather condition. In addition, we had higher depreciation, property taxes and interest expense, as well as lower AFUDC. Turning to sales, our weather-normalized electric sales were down 0.2% for the year. The decline was primarily attributable to the impact of lower oil and natural gas prices and lower use per customer. This was partially offset by strong customer additions of nearly 1%. The economies in our service territories remain healthy with average unemployment of 3.4% compared to the national rate of 5%. While sales declined slightly in 2015, we are expecting modest sales growth of 0.5% to 1% in 2016. Our projections are based on the following factors. 2016 is a leap year and the extra accounts for 0.3% of growth. In addition growth in the number of customers is projected to outpace the decline in use per customer, providing positive growth in residential sales. Finally, several large C&I customers experienced reduced load in 2015 that we expect to stabilize. We did see growth for other C&I customers, but at a slower rate. O&M expenses decreased $4.7 million or 0.002 in 2015, exceeding our guidance range of an increase of 0% to 2%. As I previously mentioned, we experienced some headwinds during the year and the management team refunded by reducing costs to deliver earnings consistent with investor expectations. These actions demonstrate our commitments depending the cost curve, and meeting our financial objective. Now, I’ll provide an update on several regulatory proceedings. Additional details are included in our earnings release. Yesterday, the Commission rules in our Colorado natural gas rate case, while a written order has yet to be issued and we haven’t had a chance to fully analyze the results. We wanted to give you a high level overview of the verbal decision. The Commission largely approved the ALJ recommended decisions with a couple of changes. Key decisions include a single year rate plan versus our request for a multi-year plan, a three year extension of the PSIA prior, and ROE of 9.5% and an equity ratio of 56.5%. We will file an 8-K with more details after we have signed fully analyzed the results. In our Texas electric rate case, the Commission ordered a rate decrease of $4 million, compared with our request for a rate increase of $42 million. The Commission decision was very disappointing and significantly lower than the ALJ recommendation. Key elements include rejection as SPS’s request for post test-year capital addition. This allow us of SPS’s proposed known and measureable adjustment for updated allocation factor between customer classes related to low reductions of a wholesale customer effective June 2015. This allowance of incentive compensation and a reduction in the equity ratio. We’ve been very upfront that the earned ROEs need to improve at SPS. And while we made improvements in the earned ROE, we are still not earning at an acceptable level. As you know, it is a high priority for us to close the ROE gap. We have filed [indiscernible] hearing and plan to file a new rate case this quarter that will incorporate provisions at the recently passed legislation designed to reduce regulatory lag. As a reminder, this new legislation provides for a inclusion of post-test year capital additions, timelier implementation of the new rates, and enhanced recovery for new natural gas plant investments. We believe this will help us achieve a more constructive outcomes in the upcoming case. In November, we filed a multiyear rate case in Minnesota that provides for various implementation alternatives. In December, the commission approved our 2016 interim rate request of approximately $164 million. The commission approved the decision on our proposed 2017 interim rates and indicated NSP Minnesota could resubmit its interim request in the third quarter for consideration. The procedure schedule has been established which provides for a final decision in June of 2017. However, as part of the schedule, we had outlined the path for meaningful settlement discussion, which may shorten the timeline to reach the resolution in the case. Next, I’d like to discuss the impact of the recently passed five-year extension of bonus depreciation. At our Analyst Meeting in December, we provided our updated five-year base capital forecast of $15.2 billion. The extension of bonus depreciation will reduce the rate case CAGR by approximately 70 basis points to 80 basis points resulting in the rate base growth of about 3.7% for our base capital plan. While bonus depreciation reduces rate-based growth, it also reduces the impact on the customer bill and creates more headroom for potential investments. At our Analyst Meeting, we also presented an upside scenario to our capital forecast, which included incremental investment for renewables related to the Minnesota resource plan, distribution grid modernization and natural gas reserves in Colorado. In addition, earlier this week, we announced our energy future plan in Colorado, which creates some further investment opportunities. As a result, we have increased our upside capital forecast to $2.5 billion. This forecast reflects potential investments having a reasonable probability of coming fruition over the next five years. The upside capital forecast of $17.7 billion over the five year of timeframe results in an annual rate base growth of approximately 5.5% including the impact of bonus deprecation. As a result of our robust capital investment opportunity and our actions to improve our ROE, we remain very confident in our ability to deliver on our 4% to 6% earnings growth objective, even with the impact of the bonus depreciation extension. In summary, 2015 was another excellent year for Xcel Energy. We delivered earnings within our guidance range for the 11th consecutive year, we increased our dividend for the 12th straight year, we initiated cost management actions, which resulted in a decline in O&M expenses, new legislation was passed in Minnesota and Texas, which will provide more tools to reduce regulatory risk, we resolved regulatory proceedings in numerous jurisdictions. We filed a resource plan in Minnesota with significant carbon reduction, we are reaffirming our 2016 ongoing earnings guidance of $2.12 to $2.27 per share. Finally, we are well positioned to deliver on our value proposition, which includes earnings growth of 4% to 6% annually and dividend growth of 5% to 7% annually with the payout target of 60% to 70%. Operator, we’ll now take questions. Question-and-Answer Session Operator Thank you. [Operator Instructions] Our first question comes from Ali Agha with SunTrust. Ali Agha Thank you. Good morning. Benjamin Fowke Good morning, Ali. Ali Agha Good morning, Ben, Teresa. As you mentioned in 2015 on an ongoing basis, the OpCo, are we weather normalized 9.07%. Can you just remind us what the weighted average authorized ROE is just to get a sense of what is the lag as we’ve exited 2015? And then what’s baked into earned ROE in your 2016 guidance? Teresa Madden Well, we’ll start with the weighted average, in terms of authorized ROEs, it’s about 9.8%. And when we look to 2016, we see three of our utilities earning right around the 9%, low 9% and some of them little stronger than that. I will say we have some lag in Texas, our Texas or the SD company, somewhat related to – what came out of that case. But you know we’re filing a new case. And so, we do still see – think we’re on target to achieve our 50-basis point closure by 2018, Ali. Ali Agha Yeah. But in general though, is 2016 earned ROE on average similar to 2015, when you put it altogether? Teresa Madden And we would expect to see some improvement in it. Ali Agha Okay. And then separately just for 2016, as you mentioned the Texas case was disappointing, looks like Colorado guess if they followed the ALJ to the large extent seem to below, what should been asking for. What kind of headwinds does that create for us for 2016? And at this point, is that put us more in the lower half of the range, or how should we be thinking about the implications? Teresa Madden I mean, Ali, we were pretty pragmatic when it comes to handicapping, what we put out on the forecast. So, I don’t – it doesn’t have much of an impact at all. Ali Agha Okay. And last question, when at the earliest should we start to see some of the growth CapEx and rate base implications start to move into your current base case plans? Teresa Madden Ali, we filed the energy – we’re going to file a resource plan later in the year in Colorado and that’s where you’ll start to see the energy future plans, but I mean they will probably be most eminent – probably be in the backend of our capital forecast. But Ali, let me just reiterate, you’ve got solid transparency for the first three years. Bonus depreciation is not having an impact on us in the first three years and we explained the reasons why for that. You look at years, four and five, and what I see and why I’m bullish on what happened with the extender’s pillars. I see reduced regulatory risk, which I think gives us upside to exceed our GAAP closure on ROE of 50 basis points. I see more portable customer bills, I think that plays well to our multi-year plan discussions here in Minnesota. But then as an environmental leader that we’ve been and with the amount of the renewables that are now been made so much more portable by the ITC and PTC extension. I think, we’re being conservative, but I think we can capture with creditability that capital upside. I mean there is a lot of renewables they’re going to built in our jurisdiction and if we follow good policy mandates and do it with large scale renewables on mine, it’s going to be very affordable and you’re basically going to trade off natural gas expense for renewable. And we’re really – we’re excited about it and I think – I think it’s going to – it’s done a lot for us. And so, I guess you know, we would have first, I think the first utility to talk about the impacts of bonus depreciation and we’ve been thinking about how we would turn that into an upside for us, and I’m really confident in our plans. Ali Agha Thank you. Operator The next question will come from Julien Dumoulin-Smith with UBS. Benjamin Fowke Hey, Julien. Teresa Madden Hi, Julien. Julien Dumoulin-Smith Hey, good morning, guys. Well actually let’s kick it off just going back to that last question a little bit. Just kind of definitively in terms of timing there for the growth CapEx. Is there kind of a year in which you would frame this, I mean – perhaps let me frame it this way NOLs obviously in the near-term limit you might be impact the bonus depreciation. Do you need a wait for the cash tax benefit extend hours within in the five-year period or how are you thinking about the timing of that growth CapEx, given the cash tax position? Benjamin Fowke I’m Julian, and in terms of – we don’t think that this is dependent on the cash tax position by any means, and we do think the CapEx probably would start in the middle of, I would say, the 2018 timeframe, so -e and we think we’ll be well positioned. We have some time to – because of the NOL situation and the multi-year has been described. So we think that we have a lot of opportunity and that’s probably when it would start. Julien Dumoulin-Smith And just to be clear, if I hear you right, it would also be dependent upon getting approvals in specifically in Colorado? Benjamin Fowke Well, yeah, I mean it’s… Julien Dumoulin-Smith The upside CapEx. Benjamin Fowke I mean, well, it’s not only in Colorado, I mean it’s also in Minnesota. And then remember, we talked about how we would pursue a capital upside forecast at our Analyst Day. And what we’ve done is with the filing of the Colorado Energy plan have updated that capital forecast, because we didn’t have renewables from Colorado in that Analyst Day presentation, and we should and I’m confident that you’re going to see more renewable, because of the ITC, PTC has been extended. And in fact, if you think about, the PTC is – it does face down quicker than the ITC. So if you were staging it, you’d probably focus on more wind initially. And you know, you don’t – you’ve got to look at the NOLs too, as I think Teresa was talking about at the OpCo level, specifically then it rolls up to the Holdco. I think what you’re referring to Julian is maybe some – you know, if you don’t have a tax appetite, some of those things get – put on the balance sheet for a period of time, and they do. But that’s okay. I mean, it turns around and we’re very much prepared to wait for that turnaround, because these opportunities I think are extremely compelling, realistic and they’re right in front of us, and they are in our backyard and it’s organic growth. Teresa Madden Maybe just to supplement that in terms of your question about the regulatory process and if you just – just related to Minnesota. When we went through the last resource planning process of the four wind farms, I mean we’re owning three of those for wind farm, so we think they are very supportive. In terms of ownership in Minnesota, and Colorado more to come, but we’re very confident. Julien Dumoulin-Smith Yeah. Great Teresa. Teresa Madden And actually just to get a little clarity on the renewable spend, are you feeling confident about your ability to continue to own solar rate base projects, as you proposed back of the [indiscernible]? Benjamin Fowke Yeah. I mean again I think these things are affordable and we always pursue things with the impact on the consumer. And even with low natural gas prices, what we’re seeing with wind and now with the extension of PTC says, a) it’s a good deal for consumers. Same with solar, I mean, as you know, large scale solar is a better deal for all customers than as rooftop, but – and I think there is an appetite for that. Julien Dumoulin-Smith Got it. But even relative to PPA option. Benjamin Fowke Well, a PPA in my mind, drilling is kind of like the decision between whether you own a car or lease a car, right. And typically, you can [indiscernible] the PPAs, so it’s the cost of ownerships lower in the early years, but as that lease expires and then you got to re-up it and it becomes more expensive. So, when you do a total revenue requirements over the expected life of the asset, it’s typically more beneficial to own the asset. And I think our commissions recognize that and I think they incur – are supportive to Teresa’s point of us owning more renewables. Julien Dumoulin-Smith Thank you. Operator And the next question will come from Greg Gordon with Evercore ISI. Benjamin Fowke Hey, Greg. Teresa Madden Hey. Greg Gordon Hey, good morning. All my questions have been asked. Just getting a little bit more into the [indiscernible] of how bonus impacts you. Can you repeat what your – what’s your authorized return is in your electric deal in Colorado and how much regulatory lag you’re currently experiencing there? Teresa Madden Our overall authorized return in Colorado is 983 and remember we have the band of about 65 basis points. Up to this point, we have been and through 2015, we have been in a refund position, but we will be entering our second year of the three year and we do think there’s some headroom there. So, anyway, that’s where we’re at. Greg Gordon Okay. So, in that – in Colorado in particular, bonus depreciation would – wouldn’t necessarily – would only hurt you if it puts you into a refund position vis-à-vis having a lower rate base number, right? Benjamin Fowke Well, it’s – I don’t – I don’t think that’s really entirely true, Greg, because we’ve been in a refund position. As Teresa mentioned, we just entered our second three year approach, our plan and that plan required us to do some work to earn that ROE and bonus depreciation on the multi-year will help us earn that authorized ROE more readily. And then of course… Greg Gordon No, that’s exactly my – that’s exactly my point. That it’s not necessarily going to hurt you, if you were… Benjamin Fowke Oh, I thought, you said it was [indiscernible] I’m sorry I miss heard you right. Teresa Madden I miss heard you too. So yeah, exactly. Greg Gordon Okay. Benjamin Fowke In that view, it’s tougher to get to the – into a sharing position now, because the plan is a little more difficult, because you’ve got more spending. So, it only puts you back into a refund position, if you over earn, which is less likely under this plan. And therefore, you might not have as intangible impact in Colorado, as it wouldn’t necessarily in Minnesota, where you’re – whatever the new rate plans are going to be, it’ll be in there, right. Teresa Madden Yeah. So said in another way. We think it makes – the bonus appreciation in Colorado makes it easier for us to achieve our valve ROEs in Colorado. In Minnesota, you have an – you’re in an NOL position for the next few years. And then years four and five, you start to come out of that, and Grey, what that says to me is, I think it makes the five year multi-plan even more attractive today, than it was prior to that extension. And so, we’ll see where that goes. But I mean, it’s – again, that’s why we think, this gives us a positive versus a negative. Greg Gordon Yeah. All right. Thanks and good luck in the Super Bowl. Teresa Madden Thanks Greg. Benjamin Fowke Yeah, go brought some, where do you brought that up Greg, and I’m sorry about your New York Jeff. Operator And the next question will come from Steve Fleishman with Wolfe Research. Steve Fleishman Yeah, hi. Good morning. Benjamin Fowke Good morning. Steve Fleishman Good morning. So the $900 million for the – I think, that’s for the Colorado that you added. Can you give us maybe a little thought on what you’re assuming in there, in terms of 2,000 megawatt, is it mainly for the 1,000 megawatts of wind or you assuming like you win half of it or how are you getting to that? Benjamin Fowke Yes. You got it and you take… Steve Fleishman Okay. Benjamin Fowke …entire spend of the 1,000 megawatts, which I think is 600 wind, 400 solar. And we assume we get a half of it. Teresa Madden That’s exactly right. Yep. Steve Fleishman Okay. That’s easy enough. Second question is just and an apologize to beat this that horse to Paul, but I know you’re talk about the benefits after 18 of the kind of the bonus and rate headroom and all those things, but just to make sure understand, if the NOL benefit is gone then the bonus impact is actually bigger out test 2018? So obviously, you have more rate headroom, but it also impacts rate base more. Or if I’m not right. Teresa Madden Yes. Benjamin Fowke Well. I mean, I think that’s – go ahead, Teresa. Teresa Madden No. I mean I think you’re right. I mean in terms of as we tailor down, I mean in the latter part, but that I mean two things and I think Ben described it, since we’re in the NOL and we’re going to be in the NOL and Minnesota for the first couple of years, we have time to work through some of these things and we have opportunity potentially for investments, upside investments which we’ve talked about in terms of our resources. Steve Fleishman Right. Teresa Madden With modernization you talked about that at the Analyst Day. So yeah, we think… Steve Fleishman Then you have the – so you’re right. Obviously you’re point is that you’ve got line of site on project opportunities and then it fits well within your rate headroom kind of limitations and all that stuff to fill that in do things that you want to do, so okay. Teresa Madden Yeah. I think that’s exactly right. And it goes beyond 2018, frankly beyond 2020 you just look at what we’re doing here in Minnesota. There’s a tremendous amount of renewables, grid modernization, there’s a lot of work that to be done and Steve I think the limiter has always been what are — what is the pace of rate increases. And so, we have always had more capital opportunities than we’ve executed on, because we’re mindful of what happens when you – you are in front of the regulator asking for more than a modest rate increase. So I think this actually is very, very much facilitates our strategic plans and keeps that affordability equation where it needs to be. So, that’s why we think it’s positive. Benjamin Fowke Exactly. Steve Fleishman Okay. And then on the Minnesota rate case, could you maybe just give a little more color on how likely you see chances for settling that, given I know there are lot of involvement in getting the legislation done to begin with it. Benjamin Fowke What’s the begin – it always takes two to settle, right. I mean so and we do had time scheduled over the summer for that. I think that’s a good sign. I think that if you look at the case, it’s about a straight forward issue you can get. So, you know I’m cautiously optimistic that we can get something done. It would make sense to get something done, and got Marvin McDaniel, Chris Clark if you want to add anything to that, you’re on the front lines. Teresa Madden That is to [indiscernible] I think you’re right. I think we have a great opportunity and we look forward to working with parties to see what we can accomplish. Benjamin Fowke Yeah, you said you agree with it. Teresa Madden I agree with you [Inaudible]. Steve Fleishman Okay. Last question just on I know you talked about the investment opportunities potentially in gas reserves. We’re seeing more and more comp – electric utilities also invested in gas, midstream assets. I’m wondering if you’re seeing anything in there as well that might fit? Benjamin Fowke Well, Steven, I think for us – when I think of midstream, I think of pipeline type assets, ideally PERC regulated and not so much gathering and processing and only that fits in our risk profile. So, I think for us the thing to do is twofold, one, there is anticipated to be a lot of shake out the current oil and gas prices remain and maybe that will create some opportunities for us at reasonable cost, reasonable cost being underscored out there. And we’ll also continuing to look for organic type – pipeline type growth opportunities in our own regions in part due to the clean power plant and the need for more gas redundancy. But don’t look for us to jump into what I would – I think you would consider classic midstream assets. I’d also tell you, as when I mentioned on the call that while we’re interested in get rate base in gas reserves, in today’s very low natural gas environment, it’s difficult to find those opportunities that makes sense from a consumer standpoint. But our thought is, as you know, things cycle, commodity prices change and you got to have a framework in place, so you can execute on it quickly opportunistically, and that’s what we’re seeking to accomplish initially in Colorado. Steve Fleishman Great. Thank you. Benjamin Fowke You’re welcome. Operator The next question comes from Paul Freeman with Nexus. Benjamin Fowke Hi, Paul. Paul Freeman Thanks. How are you? And I guess I’m a little – still a little confused sort of on the first three years, because you’re showing about $600 million of less rate base in your base case, and the tax position, would have been the same either way, in terms of whether you’re not paying taxes, because of bonus or not paying taxes, because of the NOL. You’re essentially in the same position of not paying tax. So, is – if you could just help explain the offset to the lower rate base, and the tax position sort of being the same. Is it because, you’re taking stretch spending and moving it forward. And that’s what’s offsetting the lower rate base or is there something I’m missing? Teresa Madden No, it’s – Teresa, you correct me, if I’m wrong. Paul Freeman Sure. Teresa Madden In public service Colorado, we’re in a three year plan. So to the extent, you see rate base reductions, which we do, you’ve got a fixed revenue stream, and you’re earning on a lower rate base. So, your earnings doesn’t change, but the base that you’re earning on it does. In Minnesota, and again, you have to look at where, you have to look at each operating utility in addition to where we are on a consolidated basis. And in Minnesota at NSP, you’ve got, they have an NOL position, that is for the next few years is parked on the balance sheet. So we are earning on that. And then, when it starts to roll off, it reduces your – the amount of revenue requirements you need. So that’s basically, why it doesn’t have an impact on us in the first three years. Does that make sense? Paul Freeman Thanks, sir. Yes. Teresa Madden Yeah, I think you answered it fine. Operator And the next question will come from Gale Muse [ph] with Aviva Investors. Benjamin Fowke Thank you. Teresa Madden Hi, Gale. Unidentified Analyst Hello. Good afternoon. I’m calling from the [indiscernible] Investors, the asset management at the UK insurance company We focus on materially short and long-term risks, facing investee companies. And you know policy at action associated to controlling climate change is already underway such as the Clean Air Act. And if you, and following the global agreement in Paris, the climate change, we were wondering what additional step, Xcel Energy was taking to ensure the business is resilient to this cause and constrain global outlook. Teresa Madden Well, that’s a great question Gale, and I appreciate that, and I think if you – when you get more familiar with Xcel Energy, you seem not only have we been an environmental leader for more than a decade and have reduced our carbon emissions in addition to many other emissions, but our carbon emissions specifically by more than 20% of our 2005 baseline we’ll reduce them by 30% by 2030, but we’re going to be on that. As a leader on renewables, leader in converting aging coal plants and natural gas. If you take a look at what we’re doing right here in the upper mid west with our plan, we’ll have reduced carbon emissions by 2030 by 60%. That will exceed the Clean Power Plan targets. So, we recognized what you’re talking about and what we believe, as it can be done, but you need to do it pragmatically and with affordability and reliability in line and when you have a long-term plan under a good policy framework, you can accomplish that. So, thank you for your question, and look forward some good things from Xcel Energy. Operator And the final question will come from Paul Patterson, Glenrock Associates. Paul Patterson Good morning. How are you? Benjamin Fowke Hey Paul. Teresa Madden Good morning, Paul. Paul Patterson Just you’ve been over it, and I apologize I wasn’t quick enough. You went over the sales growth forecast, I think with 50 basis points and was that right that included leap year… Teresa Madden Yes. Paul Patterson …or exclude? It did include leap year. And what were the other things that we’re driving it as well? Teresa Madden Well, let me start with, yeah, our guidance is 0.5% of 1%. The leap year is 0.3% and we are seeing customer growth of about 1% across our system. And we are seeing – if we look at the last two quarters, well, on the annual basis in terms of use per customers particularly in our residential class, we are showing a decline in our larger jurisdictions. The last two quarters, we have actually seen that plateau. And so, we don’t expect to see this continue. I mean two quarters is not necessarily a trend, but we do expect that to levelize. So, we are expecting to see some improvement. And then, specifically to some of our large C&Is where we do see some decline, we see that’s going forward that we don’t expect that to continue. We see some stabilization with where they will be at in 2016 as well. Paul Patterson Okay. Most of my questions have been answered. Thanks so much. Teresa Madden All right. Thank you. Benjamin Fowke Thanks, Paul. Operator And that concludes the question-and-answer session. At this time, I would like to turn the conference over to Ms. Teresa Madden for any additional or closing remarks. Teresa Madden Well, thank you all for participating in our earnings call this morning. Please contact Paul Johnson and the IR team with any follow-up questions, and thanks very much. Benjamin Fowke And go Bronco. Teresa Madden Go Bronco. Yeah. Benjamin Fowke Thanks everyone. Bye-bye. Teresa Madden Thank you. Operator Thank you. Teresa Madden Thanks. Operator That does conclude today’s conference. Thank you for your participation and you may now disconnect. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited. THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY’S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY’S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY’S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS. If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com . Thank you!

PNM Resources Eyes A Strategic Shift Amid Growing Renewables Use

Summary Southwestern electric utility PNM Resources reported yet another earnings beat in Q3 in the face of underwhelming revenue numbers as it benefited from a hot summer and cheap energy. The company reported continued weak demand in its service area in response to a shifting energy landscape that is increasingly focused on renewables. Its strategy for achieving future earnings growth by investing in its transmission and Texas operations is compelling based on the constraints faced by the region’s renewable generators. There is a good likelihood that the company’s earnings next year will be hurt by El Nino and investors are advised to wait for a better buying opportunity. Southwestern electric utility PNM Resources (NYSE: PNM ) reported yet another earnings beat on underwhelming revenues in Q3 last month as warm late summer temperatures in its service area pushed demand higher. This marked the third such combination of strong earnings amidst disappointing revenues this year, demonstrating the unique position that energy utilities are finding themselves in as energy prices are pushing for new lows. The company’s share price has moved solidly higher in response, most recently setting a 6-month high. Last June, I wrote an article on the company that highlighted the risks of slowing economic growth in its Texas and New Mexico service areas, concluding that the shares were attractively undervalued but not enough so to merit initiating a long position. While the prospect of weakening Southwestern economies in the face of low energy prices remains a concern, PNM Resources’ management discussed an important strategic realignment during the Q3 earnings call that will have important implications for earnings over the next several years. In the short term, meanwhile, the weather could provide the company with a new headwind by reducing demand for electricity in its service area. Q3 earnings report PNM Resources reported Q3 revenue of $417.4 million, up by 0.8% YoY but missing the consensus analyst estimate by $36.1 million. The annual increase was primarily the result of warm late summer temperatures in the company’s New Mexico and Texas service areas, which reported a combined 14% increase to cooling degree-days YoY and a 6% increase compared to the long-term average. Rate relief from renewables (reported by subsidiary PNM ) and transmission (reported by subsidiary TNMP ) also supported the revenue number. This result was partially offset, however, by the presence of a reduced load in PNM’s service area and generation facility outages over the course of the quarter. The number of customers increased by 0.8%, indicating that cheap energy has yet to result in a severe slowdown to the area economies. The company’s cost of revenue number fell to $124.3 million from $132.5 million YoY despite the improved revenue result due to the presence of sharply lower energy prices compared to a year ago. This allowed operating income to improve to $121.5 million from $116.8 million a year ago. Likewise, consolidated net income rose to $61 million from $55.7 million YoY, resulting in a diluted EPS result of $0.76 compared to $0.69 in the same quarter of 2014. PNM continued to be the primary contributor to consolidated earnings, and the subsidiary reported an increase to diluted EPS from $0.56 to $0.61 YoY. TNMP also increased, however, from $0.15 to $0.17 over the same period. In both cases, PNM Resources attributed the majority of the earnings increases to the presence of warm temperature during the quarter compared to the previous year, although lower expenses also contributed. Finally, the company increased its quarterly dividend by 8% to $0.20, resulting in a 2.8% forward yield. Outlook The company’s management narrowed its FY 2015 EPS guidance range from $1.50-$1.62 to $1.56-$1.61 on the basis of its consecutive earnings beats in the year. The midpoint of the new range, $1.58, is very close to the analyst consensus EPS estimate for FY 2015 of $1.59, the latter of which has increased from $1.56 over the last 90 days due to the hot summer temperatures in the company’s service area. Either result would result in YoY earnings growth of 7-8%, well within the company’s target of 7-9% through 2019. A shifting energy landscape in the U.S. has threatened in the past to derail the ability of PNM Resources to meet this targeted growth. Federal regulations on greenhouse gas emissions from power plants have caused the company to begin to phase out many of its coal-fired facilities. While the presence of cheap natural gas in the U.S. has caused many of its peers to replace its coal-fired units with gas-fired units, the abundance of solar and, to a lesser extent, wind in its service area has prompted PNM Resources to invest in renewable electricity capacity. With the exception of hydropower, however, renewables are intermittent in the sense that the capacity is not always achieving a high load when demand is also high. Furthermore, the cost of rooftop solar PV has finally fallen to the point that it is competitive on a subsidized basis with fossil fuels in sun-drenched areas such as the U.S. Southwest, causing many residential and commercial customers to become independent generators themselves rather than just consumers. Many utilities are reporting lower electricity sales volumes despite customer growth. PNM Resources has been no exception to this trend, with its subsidiary PNM reporting a YoY sales reduction of 1.7% in Q3 despite the presence of hotter temperatures on the same basis. While TNMP did report higher sales, the company expects PNM to report flat-to-negative growth which, given its outsized contribution to consolidated earnings, is important. Management’s response to this changing landscape has been to shift its planned future capex away from new generating capacity, which is no longer as essential (and therefore less likely to be part of a compelling rate case increase argument), in favor of new transmission capacity. Contrary to conventional wisdom, new solar and wind capacity in the Southwest can only be sited in limited areas due to constraints such as ecological protection, resource availability, and proximity to high-demand areas. This latter in particular is a major constraint since renewables built away from high-demand areas must be connected via lengthy transmission lines. The recently-announced Clean Power Plan, which requires utilities to reduce the carbon intensity (greenhouse gas emissions per kWh of electricity generated) of their power facility fleets over the next decade, provides a strong incentive to replace existing fossil fuel units that are located near population centers with renewable units that can be several hundred miles away, further raising demand for transmission capacity. PNM Resources stated in its Q3 earnings call that it has already signed 400 MW of transmission agreements that will send electricity generated at wind farms in New Mexico to California, which has very ambitious renewable electricity targets. The company’s transmission lines have an impressive allowed ROE of 10% and it has established a goal of increasing its transmission rate base by 53% between 2016 and 2019; by comparison, the company expects to increase its PNM retail rate base by only 4% over the same period. While ambitious, I believe that the former target is very likely to be met given the increased demand for transmission capacity that will result from the Clean Power Plan. This will more than offset a lack of retail growth, allowing PNM Resources to achieve steady earnings growth over the next several years despite reduced retail sales. While the company’s long-term outlook is attractive, its short-term outlook has weakened over the last six months as one of the strongest El Nino events on record has appeared over the U.S. Past El Ninos have caused the northern half of the country to experience warmer-than-usual winters even as the southern half experiences more cold than normal. While this winter appears set to continue this trend, PNM Resources doesn’t receive much benefit from cold winters, having sold its natural gas subsidiary utility several years ago. As an electric utility, it is very sensitive to summer temperatures, however, given the heavy reliance on air conditioning in its service areas. Texas and New Mexico are expected to experience fewer cooling degree-days in Q2, with colder-than-normal conditions lasting through June. Q2 is historically one of the company’s strongest quarters from an earnings perspective, only being surpassed by Q3 in terms of diluted EPS and often equaling the combined EPS of Q4 and Q1. A cold early summer in the company’s service areas is likely to have a sizeable impact on its earnings as a result. While PNM Resources has released a rather broad EPS guidance range for FY 2016, allowing some flexibility as temperature data comes in, the consensus analyst estimate of $1.65 has not changed over the last 90 days and is significantly higher than the lower end of the company’s range. Based on a share price at the time of writing of $28.84, the company’s shares are trading at a forward P/E ratio of 17.5x, in the top half of their historical range. If the company’s bottom guidance value of $1.50 is achieved, on the other hand, which the current weather forecast suggests is very possible, then the company’s shares are trading at the still-higher valuation of 19.2x. The company’s share valuation has tended to be quite responsive to weather conditions in the past despite their historical nature, suggesting that the share price will decline in the first half of next year if El Nino’s impact on the service area is similar to its historical impacts. Conclusion PNM Resources continued its recent streak of beating on earnings despite missing on revenues in Q3 as hot temperatures and continued customer growth more than offset lower retail sales volumes. The company’s management recently outlined its strategy to prevent falling demand in the service area of its primary subsidiary PNM by focusing instead on TNMP, where demand remains strong, and its transmission operations. I believe that this latter focus in particular will allow the company to secure several years’ worth of earnings growth since the Southwest’s focus on renewable electricity will encounter siting issues, thereby increasing demand for transmission capacity and delivery agreements. While its path forward looks secure, the market appears to be underestimating the impact that this year’s strong El Nino event will have on the number of cooling degree-days in the company’s service areas in Q2 of next year. Shares of PNM Resources are overvalued if El Nino’s past weather impacts in the Southwest occur again during the current event. Based on this, then, I encourage investors to wait for its share price to fall below $24, or 16x the lower end of management’s FY 2016 guidance, before initiating a long position. A compelling earnings growth case should not prevent investors from being in an even stronger buying position in the first half of next year.

Northwest Natural Gas’ (NWN) CEO Gregg Kantor on Q3 2015 Results – Earnings Call Transcript

Northwest Natural Gas Company (NYSE: NWN ) Q3 2015 Earnings Conference Call November 3, 2015, 11:00 am ET Executives Nikki Sparley – IR Gregg Kantor – CEO Greg Hazelton – SVP & CFO Analysts Spencer Joyce – Hilliard Lyons Operator Good day and welcome to the Northwest Natural Gas Third Quarter Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note that this event is being recorded. I would now like to turn the conference over to Nikki Sparley. Please go ahead. Nikki Sparley Thank you, Kasia. Good morning, everyone, and welcome to our third quarter 2015 earnings call. As a reminder some of the things that will be said this morning contains 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 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 Thanks, Nikki. Good morning, everyone and welcome to our third quarter earnings call. I’ll start today with highlights from the period and then turn it over to Greg Hazelton to cover the financial details. Finally, I will wrap up the call with a brief update on our regulatory proceedings and our priorities for the remainder of the year. Let me begin with the quarterly financial results. We had a solid performance with higher utility margin and lower expenses in the period. Margin gains were largely from customer growth which increased to 1.5% from 1.3% last year. This growth rate translated into an additional 10,500 new customers on a rolling 12-month basis. On the expense front, we reduced O&M levels by almost $1 million on a quarter-over-quarter basis and I’m proud of the work we have done this year to control costs after the negative financial impacts of a record warm winter and a significant regulatory disallowance. As we look forward, there are several factors that suggest our local economy continues to experience solid growth. For example, in Portland Metro area about 40,000 new jobs have been added year-over-year which equates to over a 3% increase. And Oregon’s average wage today is the highest it has been relative to the national average in at least a generation according to the Oregon Office of Economic Analysis. Another metric of economic growth obviously is the unemployment rate which in September fell to 5.2% in the Portland Metro area from 5.9% last year. Also in the period home sales were up about 25% in Portland and average home prices increased by almost 6% compared to the third quarter of 2014. In Vancouver, Washington, home sales were up about 13% in the quarter compared to last year and average home prices were up just over 8%. All of these factors are signs that our local economy continues to move in the right direction. Due to following natural gas prices over the past year, we filed and received approval for a 7% rate reduction for Oregon residential customers, and a 14% reduction for Washington residential customers during the quarter. This decrease means our customers will be paying less for their natural gas this winter than they have in the past 15 years. Currently natural gas has up to a 60% price advantage over electricity and oil for home heating in our service territory. And this price advantage coupled with the environmental benefits of natural gas continue to boost our competitive position. Let me comment now on two other developments during the quarter. First, in September the Oregon commission adopted an all party settlement that determines how we would recover cost associated with seven wells we drilled under our amended gas reserves agreement. This $10 million additional investment, like our original investment with Encana, provides a long-term price protection for Oregon utility customers. Under the order, this investment will be recovered at a rate of about $0.47 per therm. We are pleased with this collaborative settlement and the positive conclusion to the dock. Going forward, we are working with the commission and other gas utilities in Oregon on a policy docket that will explore commodity hedging, including what world gas reserve should play. Finally this morning, I’m proud to report in September we learned that for that sixth time in nine years, we ranked first in the Annual J.D. Power Residential Customer Satisfaction Study for natural gas utilities in the west. In addition, we have strengths among the top two highest scoring utilities in the nation eight out of the last 10 years. These results reflect our continued commitment to operate reliably, safely, and with high quality customer service in the communities we serve. With that, let me turn it over to Greg to cover the financial details. Greg Hazelton Thank you, Gregg, and good morning everyone. Turning to our results for the third quarter we reported improved performance with a consolidated net loss of $6.7 million or $0.24 per share versus a loss of $8.7 million or $0.32 per share for the same period last year. As a reminder, a majority of our business was seasonal in nature. And the third quarter typically realized the loss due to decreased heating requirements impacting customer usage. Year-to-date earnings through September were $0.88 per share on net income of $24 million compared to $1.11 per share in net income of $30.2 million for the same period last year. As previously discussed in the first quarter, the company recorded a $15 million pretax or $9.1 million after tax environmental disallowance related to the February OPUC Order. This charge is included in O&M expense. Excluding the charge, year-to-date consolidated earnings were $1.21 per share or $33.1 million. This reflects a $2.9 million increase in net income from last year primarily driven by higher utility margins and an increase in other income. At our utility, we reported a net loss of $7.5 million for the quarter, an improvement of $1.3 million from the prior year. Results were driven by higher utility margin, lower O&M expense, and decreased interest expense. For the nine months period, utility net income was $23.1 million or a decrease of $6.4 million from last year, mainly due to the environmental charge. Excluding the disallowance, utility net income increased $2.7 million year-over-year. Positive year-to-date drivers included higher utility margins and increase in other income, lower interest expense; these were partially offset by an increase in O&M expense. Utility margin for the quarter increased $1.5 million driven by customer growth and gains from gas cost incentive sharing. And as you may recall, utility margin for the year-to-date period was impacted by warm weather in our service territory during our peak heating season in the first quarter. Overall average temperatures for the first nine months of the year were 15% warmer than 2014, and 22% warmer than normal. Total gas deliveries decreased almost 10% and gross revenues were down 4% during the year-to-date period. Although our utility margin is generally protected from the weather, we do have about 11% of our customers in Washington who do not have weather normalization, and 7% of our Oregon customers are left out of the weather normalization program. In spite of the weather driven decline in volumes and gross revenues, net margins increased $2.7 million mainly due to continued customer growth and gains from gas cost, incentive sharing mechanism, as we took the advantage of lower gas prices to achieve savings for our customers. Moving to our gas storage segment, net income for the quarter increased approximately $800,000 compared to the prior year. The increase was driven by higher operating revenues from slightly higher contract prices for the 2015/2016 gas storage year and a reduction in operating expenses at our Gill Ranch facility. For the first nine months, net income for gas storage was over $800,000, an increase of nearly $400,000 from the prior year. Results included a reduction in operating expenses and interest expense, partially offset by a decrease in operating revenues due to lower contract prices during the first quarter of 2015 at Gill Ranch. As Gregg mentioned earlier with regards to consolidated O&M, as a result of our cost control initiatives undertaken to partially offset the environmental write-off and record warm weather, we achieved a decrease of over $900,000 in O&M expense versus last year. For the nine months period, however excluding the regulatory disallowance, O&M expense increased $3.4 million. The increase was primarily due to utility payroll and benefit increases which included a new Union labor contract that was effective June 1, 2014. Partially offsetting the increase in payroll costs were lower repair and power cost at our Gill Ranch facility. For the first nine months, other income increased $4.9 million compared to last year, primarily due to the recognition of $5.3 million of equity earnings on deferred environmental expenditures as a result of the February environmental order. Over the last 12 months, the utility redeemed $40 million of debentures without reissuance using environmental insurance proceeds to pay down the maturing long-term debt balances and defer new issuances of long-term debt. Consequently interest expense decreased nearly $700,000 for the quarter and $3 million for the first nine months of the year. Cash flow from operating activities for the first nine months of 2015 was $173 million compared to $215 million a year ago. Last year’s cash flow was significantly enhanced by $102 million of insurance recoveries partially offset by other working capital changes. Finally, today the company has reaffirmed its 2015 guidance for reported earnings in the range of $1.77 to $1.97 per share which includes the $15 million pretax charge. Our adjusted guidance for 2015 excluding the charge remains unchanged at $2.10 per share 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 will 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 moving toward a decision on our open environmental compliance proceedings. And at the same time, we will continue to work necessary to advance our growth initiatives. As you know, in the first quarter, we received the Commission’s decision on our environmental cost recovery mechanism and the application of an earnings test to environmental expenditures. As part of the decision, the OPUC required a compliance filing that describes how we would implement their order. We submitted a revised compliance filing at the end of September and we’re currently working through the review process with OPUC staff and other parties. We believe the two main issues in question are whether the company is required to forego recovery of interest on the original regulatory disallowance and on how certain costs are allocated between Oregon and Washington. The filing will be subject to final commission approval which we expect early in 2016. On our growth initiatives, we’ve been working with the Oregon Commission and parties on a Carbon Solutions Program under Oregon’s greenhouse gas reduction legislation. As we’ve discussed before, Senate Bill 844 allows the OPUC to incent natural gas utilities to undertake projects that will reduce greenhouse gas emissions. Our first proposal was submitted in June and is designed to further the use of combined heat and power in Oregon, a goal that the state has had for a number of years. Under our CHP proposal, industrial and commercial customers in the market could submit CHP projects for consideration. In our view, this is an important effort that could provide a 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 early in 2016. And we’re currently working with parties on a number of items including the proper level of incentives and how to measure the carbon emissions. Now let me give you a quick update on the potential expansion projects 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. The project would require no notice storage services to PGE’s — I’m sorry to provide no notice storage service to PGE’s natural gas fired generating plants at Fort Westwood. It would include a new reservoir, providing up to 25 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. And in early October, we held a public open house with the local community near the expansion site and received positive feedback from attendees. The next step in the process will occur when the Department of Energy and 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. I will end my comments today by noting that in quarter, our Board approved a dividend increase making this the 60th consecutive year of increasing dividends paid. It is a record of which we are very proud. And with that thanks for joining us this morning and now I will 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 of Hilliard Lyons. Please go ahead. Spencer Joyce Hi good morning guys. Great quarter here. Gregg Kantor Thank you. Thank you, good morning Spencer. Spencer Joyce Just a couple of real quick ones from me. First want to go back and talk about the $13 million of environmental cost that we’re going to be able to start recovering in Oregon, I guess beginning just a couple of days ago on November 1. I guess first question is this going to be strictly a cash flow statement item or will we see this flow also through the income statement part one there. And then part two, I guess this recovery subject to a final review. Are we pretty comfortable with the $13 million or can you kind of put odds on the likelihood we see some change to that number? Greg Hazelton Spencer, this is Greg Hazelton. I will take those questions in order. First of all the recovery of the $13 million, we will see an increase in revenue for that amount and you’ll see an offsetting increase in expense or amortization. As we have reported as an operating expense as we amortize the deferred balance. So the net-net would be it will be a positive cash flow perspective but net zero from an income or net income perspective. Spencer Joyce Okay, perfect. That’s what somewhat what I assume there. Greg Hazelton Sure. Now we’re collecting the $13 million which has been authorized this is not something that’s subject to refund, this is something that we’re collecting amortizing those balances any adjustments to collections on a — of deferred balances would be done on a perspective basis as we go through each calendar year. Gregg Kantor And once it gets put into the PGA, we’re collecting it has — those are dollars that have been approved for collection by the commission and there is no second look at it, right. Spencer Joyce Okay, perfect. I guess totally separately jumping up to the O&M lines, a real nice quarter here sounds like you’ve got a couple of cost tailwinds there. I would expect some of those to perhaps show up in Q4 and may be into early next year as well any color there, I know it’s somewhat baked into guidance. But I know previous quarters, we have talked a little bit about some increased cost or maintenance cost or some of the storage facilities, it seems like that may be unwinding a bit, but just any additional color to help us model that O&M over the next few quarters? Greg Hazelton Yes I think may be a couple of things would be helpful here. Gill Ranch, we had about $1.8 million recorded last year on the storage segment which increased Gill Ranch’s O&M which we wouldn’t expect to be repeated this year or something that would be recurring. As we think about O&M or generally, we have implemented cost controls to try to offset some of the impact for weather and the write-off, frankly coming off ’14, which was actually a pretty, we had a pretty low level of O&M expense that year based on FTEs and so forth. So we’re coming off a pretty low base. From a budgeting perspective, we actually expect it to be up fairly significantly year-over-year in the 7% area. In fact that we’ve held it to relatively close to flat year-over-year is acknowledgement of the effort that we’ve taken this year which are probably not sustainable next year. At some point, we have to have — we have to adjust staffing, we have to reflect increases in cost that are baked into third-party expenditures and other things. So I would say if you look at our — if you look year-over-year, if you think our O&M of $121 million which is reported year-to-date and we adjust out of that the about $16 million in write-off, environmental write-off and other adjustments. And then, if we look at some of the baked in increases that we had to offset which included bargaining unit labor increases and compensation increases. Again we’ve kept that flat relative to last year. So that in total that gets you somewhere in the $4 million plus area in terms of savings that we’ve been able to achieve which are baked into our forecast numbers. Spencer Joyce Okay, perfect, great color there. That’s all I had. Thanks guys. Operator [Operator Instructions]. Gregg Kantor Okay, doesn’t seem to be any additional questions. I want to end by thanking you all again for joining us this morning and for your interest in our company. We appreciate it. Take care. Greg Hazelton Thank you. Operator The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited. THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY’S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY’S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY’S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS. If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com . Thank you!