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Vectren’s (VVC) CEO Carl Chapman on Q4 2014 Results – Earnings Call Transcript

Vectren Corp (NYSE: VVC ) Q4 2014 Earnings Conference Call February 17 2015, 02:00 PM ET Executives Robert Goocher – Vice President of Investor Relations and Treasurer Carl Chapman – Chairman, Chief Executive Officer and President Susan Hardwick – Chief Financial Officer and Senior Vice President Ron Christian – Executive Vice President and Chief Legal and External Affairs Officer Analysts Matt Tucker – KeyBanc Capital Markets Paul Patterson – Glenrock Associates Sarah Akers – Wells Fargo Operator Good afternoon and thank you all for joining us on today’s call. This call is being Webcast and shortly following its conclusion a replay will be available on our website at Vectren.com. Yesterday we released our 2014 results and this morning we filed our Form 10-K with the SEC. Under the investor’s link on our website, you can find copies of the Earnings Release, today’s slide presentation and the 10-K. As further described on Slide two, I would like to remind you that many of the statements we make on this call are forward-looking statements. Actual results may differ materially from those discussed in this presentation. Carl Chapman, Vectren’s Chairman, President and CEO, will provide opening remarks on 2014 results, and review our 2015 earnings guidance. He will then turn it over to Susan Hardwick, Senior Vice President and CFO, who will walk through our expectations for 2015. Also, joining us on today’s call is Ron Christian, Executive Vice President and Chief Legal and External Affairs Officer. Following our prepared remarks, we will be glad to answer any questions you might have. With that, I’ll turn it over to Carl. Carl Chapman Thanks, Robert. And I’d also like to welcome everyone to today’s call. And thank you for your interest in Vectren. Let me start by taking a moment to recognize Robert’s recent announcement of his intention to retire this summer after 40 years in the utility industry. Robert has been an important part of Vectren’s leadership team in his 13 years as treasurer and the last four and a half years as our VP of Investor Relations. All of us at Vectren very much appreciate Robert’s contributions to the company and his role in elevating the treasury and investor relation functions during his time with us. Now lets’ turn to slide four and five as we begin our review of 2014 results, I’d like to remind everyone we’ve excluded Coal Mining results in 2014 and ProLiance results in 2013, the year of disposition for each entity. We believe excluding results or the year of disposition provides the most useful comparison of the results of ongoing operations. You will find a reconciliation of GAAP to non-GAAP measures in the appendix. 2014 consolidated earnings were $2.28 per share in line with guidance and up 7.5% compared to $2.12 per share in 2013. This continues our consistent earnings growth trend that began back in 2010 and continues to be supported by our strong utility results. The Utility Group achieved earnings of $1.08 per share and increased to 4.7% over 2013 earnings of $1.72 per share, drivers of the improved utility results were higher returns from Ohio infrastructure replacement programs and increased margins from residential and commercial customer growth. The weather impact on utility results for the year was minimal as higher electric margins related to increased usage were offset by additional weather related maintenance cost in our GAAP system in the first quarter of 2014. For the year, our Utility Group once again earned near our allowed return. Also, I’m very proud that Vectren’s Electric Utility was the recipient of the 2014 ReliabilityOne Award for top ranked Midsize Utility presented by PA Consulting Group which recognizes Electric Utilities for outage prevention and reduction performance. A lot of effort by our electric employees over the last several years has gone into making our electric systems safe and reliable and when outages do occur they have demonstrated their ability to respond quickly and efficiently to restore service. Congratulations and heartfelt thanks to all of our utility employees for their efforts to meet our customers’ needs every day. Moving on to the Nonutility segment. 2014 earnings were $39.1 million compared to 2013 earnings of $33.0 million. Infrastructure Services continues to experience strong demand for its construction services even though harsh winter weather negatively affected early season construction operations well into the second quarter. This put crews in catch up mode the rest of the year including in the fourth quarter when we also were hampered by weather as the year ended. Because of this weather, overall results for the year for infrastructure services fell short of initial expectations although demand remained strong throughout the year. On April 1st Energy Systems Group acquired the federal sector energy, energy services unit of Chevron Energy Solutions, greatly enhancing our ability to compete for federal energy efficiency projects. We continue to believe 2015 will be a turnaround year for energy services including a return to profitability. And finally on the Nonutility side, Vectren completed the exit of commodity based businesses with the sale of our coal mining segment in August. We are confident that our efforts to narrow our Nonutility business focus over the last few years will continue to lead to consistent and higher quality earnings growth for Vectren shareholders. In conjunction with our simpler, higher quality business mix, back in November we were pleased to provide increased long term growth targets which I’ll discuss more in a few minutes. We are particularly proud of our annualized dividend increase of $0.08 per share or 5.6% in December. This was the largest dividend increase for Vectren or its predecessor since the early 1990s and extended our streak to 55 consecutive years of increasing the dividends paid. Moving onto slide six, I’d like to cover some of the regulatory highlights that will be important to our utility operations and earnings growth for the foreseeable future. Over the last several years, we have worked collaboratively with regulators, legislators and the other utilities in Indiana and Ohio to establish the regulatory framework for the long term cost recovery of our gas infrastructural placement programs that will enhance the reliability and safety of our gas systems. In early 2014, we received approval from the Ohio Commission to recover such costs and in August we received an order from the Indiana Commission under Senate Bills 560 and 251 approving our plans and related recovery. In addition to these orders supporting our gas investment in January 2015 we received an order from the Indiana Commission approving Vectren’s request to upgrade existing emissions control equipment on our coal fired electric generation and approving Vectren’s requested framework for long term cost recovery of the planned investments. This includes equipment required to meet EPA regulations for mercury and air toxic standards or MATS. We expect the total investment to be between $80 million and $90 million. Also in early 2015, Vectren reached an agreement in principle with the Indiana consumers’ advocate to extend gas decoupling until 2020. The final settlement will be filed with the Indiana Commission by March 1st with an order expected well before the December 31 exploration date. As you can see at the bottom of slide six, great strides have been made in creating a regulatory structure that balances the needs of our customers with those of our shareholders. In addition to the various infrastructure recovery mechanisms I discussed, Vectren has also worked collaboratively with our regulators to obtain a number of other regulatory mechanisms to protect margins and recover costs that position Vectren well to earn our allowed return. We believe this outcome is a best-in-class result amongst our peers in the industry. Turning to slide seven as reported yesterday, we are affirming our 2015 consolidated EPS guidance provided in November of $2.40 to $2.55 per share. For several years now, Vectren has demonstrated a record of consistent earnings growth. We expect this record to continue as evidenced by our recently increased long term earnings growth target of 5% to 7%. Our dividend growth will be aligned with earnings growth in our 60% payout target. Our anchor for growth is still our premier utility franchise, which has demonstrated the ability to consistently earn allowed returns. Going forward, we expect utility earnings growth of 4% to 6%, growth will be driven by timely recovery of significant gas infrastructure investments coupled with a continued focus on operating cost control from our culture of performance management. And then as I said earlier, we believe our Nonutility portfolio is now positioned to provide a higher quality earnings mix and more consistent earnings growth driven in the near term by infrastructure services. We are very proud of the consistent earnings growth Vectren has been able to achieve for our shareholders. With earnings growth of 8 plus percent over the past several years as a foundation, we are confident we can achieve our growth targets in the years to come. And with that, I’ll turn it over to Susan who will provide the 2015 outlook for out Utility and Nonutility businesses before opening the discussion up for questions. Susan? Susan Hardwick Thanks, Carl. Turning to slide number eight, we’ll begin with our utility outlook with the 2015 EPS guidance midpoint is affirmed that the $1.90 per share up 5.6% from 2014. As you see in the graph at the bottom, Vectren has consistently grown utility earnings in 2011, the year of our last – gas base rate case order. We expect growth over the next several years to be driven by our return on investment in new gas infrastructure. Before I go on too much further, I should note recent headlines concerning the significant drop in oil prices. Our utility results have not yet been impacted but we recognize that some of our customers are sensitive to low oil prices, some unfavorably and some favorably. We will remain in dialogue with our customers and actively monitor this situation. Now back to the 2105 outlook. As I mentioned the key long term utility growth driver relates to investment in our gas infrastructure system where we expect to invest about $1.3 billion of our total $1.9 billion utility CapEx spend over the next five years. As planned these investments will significantly shift our utility earnings contribution from about 45% gas to approximately 65% gas over the next five years, which we believe should improve the evaluation of our utility business as a more gas weighted operation. Moving onto slide number nine in our infrastructure services business. The key takeaways for VISCO are simply these. Number one, our outlook on 2015 is unchanged, and two, the significant majority of VISCOs work is safety and integrity driven infrastructure repair and replacement while the work directly related to gas or oil gas and oil exploration and production activities represents only about 15% of 2015 expected revenues. Again in reference to the currently low oil prices and relatively low natural gas prices we have seen no decrease in backlog and no significant impact to construction operations to date. As shown in the graph on this slide a large majority of VISCOs projected 2015 revenue will come from pipeline integrity or safety related work just as it did in 2014. New E&P share related construction work will mainly focus on projects that must be completed in the near term such as those needed to eliminate gas flaring or connecting already completed wells. We expect that any potential impact of low oil and natural gas prices on demand for new share related pipeline and related construction work will lag eight to twelve months since many projects have already begun or have near term start dates. And because VISCO targets smaller diameter pipe construction projects we don’t expect that an extended period of low oil prices would impact us to the same degree as others in the industry that derive a larger portion of their business from large diameter pipe projects. While we recognize some risk exists in 2016 if oil prices don’t rebound, we believe the nature of the work VISCO predominantly performs gives the business significant installation from oil price related risk. Over the long term, we expect demand for pipeline maintenance and replacement work to remain very strong throughout 2015 and beyond as utilities continue pursue sizeable pipeline replacement programs and as gas and oil transmission pipeline, integrity and replacement work remain a top priority for our customers. Now, on the slide 10, energy services finished 2014 strong with a record $189 million of new contract signed in the year which resulted in a strong year-end backlog. With project construction averaging about 12 months to 18 months, the current backlog sets the great foundation for 2015 earnings. Also the sales funnel is at record levels with federal sector demonstrating exceptionally strong demand and as a result we continue to expect VESCO to return to profitability in 2015. Slide 11 continues our energy services discussion with the federal market update and key long term growth drivers for VESCO. I want to first highlight our emphasis on growing the sustainable infrastructure segment by leveraging our project management expertise in this area. The types of projects and industry targeted in this market segment are very broad. A few examples include things like combined heat & power plants at industrial food processors, CNG fueling stations for municipal transit systems and waste authorities, and the conversion of coal-fired steam systems for natural gas for universities. It is our view that the demand for such projects and others like these will continue to grow as efficiency and environmental solutions are solved by customers with significant infrastructure challenges. As it relates to the federal sector, overall federal market activity and demand is still very high. But as I mentioned the amount of time it takes for customers to close on contracts, remains the key issues. To combat this issue, VESCO is working cooperatively with individual federal agencies, the U.S. Department of Energy and collectively with several trade organizations to identify way to reduce or eliminate the process bottleneck to improve the sales cycle time. All these works to speed up the federal sector sales cycle will be ongoing. In the interim we expect a number of customers who were delayed in 2014 to sign contracts in the first half of 2015. Related to our federal sector acquisition, a failure to meet certain earn out thresholds at December 31, 2014 triggered the reversal of the contingent consideration liability resulting in an after tax gain of about $8.9 million in 2014. Vectren chose to offset these non-recurring earnings by making a contribution of about $9.1 million after tax to Vectren’s charitable foundation, which is now funded for the next four to five years. The bottom-line is that we continue to expect to drive great value from the acquisition and from the federal market as a whole in 2015 and beyond. To wrap things up let’s turn to the best slide in the deck, slide number 12, you can see that our track record for consistent earnings and dividend growth is expected to continue and further improve over the long term. We have executed on our key strategies to get us where we are today and we believe Vectren has a great business mix and solid regulatory foundation in place that will enable us to continue to deliver excellent returns to our shareholders for many years to come. And with that, operator, we are now ready for questions. Question-and-Answer Session Operator Thank you. [Operator Instructions] Your first question is from Matt Tucker with KeyBanc Capital Markets. Your line is open. Matt Tucker Hi, good afternoon and congrats on a nice year. Carl Chapman Thanks, Matt. Matt Tucker Just couple of question on the non-utility segments, I guess first, at energy services, could you just talk little bit about, I mean, given the expected steep decline in gross margin that you’re guiding to, how you get to a swing to profitability this year. I assume you’re expecting to hold operating expenses relatively flat or maybe there’s even opportunity to lower them, if you could just add little color there, please? Carl Chapman Sure. The real driver is the increase in revenue and that increase in revenue is driven by larger projects. The larger projects have a lower gross margin typically and of course it also just mix of project, where some of the sustainable infrastructure may have a lower gross margin and some federal will also potentially have lower gross margin. We’ll keep a close watch on the expenses for sure as we always do. But it really will be driven by greater revenue even though the margin percentage will go down. Matt Tucker Got it. Thanks. And it sounds like you been a little bit disappointed with the pace of bookings on the federal side, but can you maybe talk about how the non-federal activity has been shaping up relative to expectations? Carl Chapman Yes. The public sector was really quite strong in 2014 in terms of contract signings, and we still have a very good funnel there as well. So the issue of course in this business is that you have resell projects every year, but you can see that we start with a strong backlog. We indicated how much of that was federal on the slide, but you can see the total backlog is basically double from this time last year. So the public sector we’re shaping up nicely and of course in that backlog is also sustainable infrastructure where we had some success in 2014 also. Matt Tucker Thank you. And then infrastructure services I understand your backlog and kind of what you’re seeing today gave you the confidence to maintain the guidance there which is great. But with respect to kind of eight months to 12 months lag in activity versus energy prices and the potential slowdown maybe next year. Just curious if you’ve already start to see any change in bidding activity or bidding margins on that shale-related work? Carl Chapman Yes. At this point of course we’ve indicated that the E&P related or shale related is relatively smaller percentage. But I would say across all of our business and infrastructure services we really are seeing a lot of bidding activity and more than we might even have expected. So the bidding activity is good. We have no reason to believe that any real change in the margin at this point. You can see that we have in the appendix our midpoint guidance on margin is really the same as we achieved in 2013 and 2014 and we’ve seen nothing to change our perspective on that at this point. Matt Tucker Got it. Thanks. And then just one on the electric side, I believe it was early at least in the first half of 2014, you announced potential loss of a large industrial electric customer, I believe next year. I was just curious if there is any update on that and the expected potential impact of that loss of the customer? Carl Chapman Yes. There is no update to that. I think we disclosed that and we continue to work with them as to exactly what date that will be that they’ll move to cogeneration. But we are working very hard to replace that margin, already we’ve had some success and we continue to work on a number of economic development activities looking to try to replace that. Matt Tucker Great. Thanks a lot. Carl Chapman Thank you. Operator [Operator Instructions] Your next question is from Paul Patterson with Glenrock Associates. Your line is open. Paul Patterson Good afternoon. Carl Chapman Hi, Paul. Paul Patterson Just on slide nine, when we look at that pie chart about the revenue split for E&P, is the margin is similar number? Is the profitability a similar number to that or is it different? Carl Chapman Well, there would be some difference, always going to be as the mix unfolds during the year. This gives you a pretty good sense on the revenue side. There would be some difference in margins, but as you know we have not disclose margin percentages just for competitive reasons between transmission and distribution, and of course for the same reason we’d not be able to share between E&P related and other kinds of business. Paul Patterson Okay. But can you tell it it’s larger or smaller? Carl Chapman Well, I think we have shared before that the transmission business is a higher margin than distribution, but that’s really all we’ve shared in the past and I think we’d be prepare to share today. Paul Patterson Right. I was actually talking about the E&P element? Carl Chapman Well, E&P is going to be transmission related just because of the – where the business is and the workers that do that work. So we have shared before the transmission margin percentages are higher than distribution and certainly E&P directly related would fall under transmission. Paul Patterson Okay. And then, you guys mentioned in the release and you obviously went over in the call that you were talking to your customers and sort of monitoring what the impact would potentially be in 2016 if prices don’t rebound. So could you just share with us a little bit more about what your customers are sort of indicating or what we might have to think about 2016 if prices don’t rebound? Carl Chapman Well, I think Susan said, she was talk about the utility and we do have customers just depending on obviously which industry they’re in. Some are helped. Some are hurt by low oil prices. But at this point we’re not seeing any significant impact to our earnings from that, and that’s we’ve affirmed guidance today. So there clearly will be some impacts, but we’re not seeing anything that causes us to feel differently about the utility earnings and then we shared also with the lag on the infrastructure side and then I just shared while ago with the bidding activity we see, we’re not seeing any big impact at this point in infrastructure services either. Paul Patterson Right. But when I read the release, I got the impression that you guys said well, the drop in oil prices could have a greater impact to 2016, the long term outlook or trends looks good, but I just wondering, if the prices don’t, could you elaborate little bit more about 2016 if oil prices don’t rebound? Carl Chapman Sure. Yes, and again keep in mind we’ve just said that based on what we’ve seen in the utility for 2015 with pluses and minuses we’re not anticipating any real impacts that change our thoughts in 2015. We have no reason to think anything differently in 2016, obviously time will tell and we’ll know a lot more as we move along for the utility. And then when you move over to infrastructure, keep in mind that we’ve said 15% as E&P directly related, and at this point bidding activity is still strong and we’ll just have to see how prices unfold. Paul Patterson Okay. Maybe just move on the federal market in energy services, if you could elaborate just a little bit further on the comments that you made about working to get the contract delays to be in a more efficiently addressed or to move a little bit further along, Susan talked about, I just wondering if you could elaborate a little bit on what you see actually potentially happening and whether that impacts 2015 or when you see the impact actually showing up? Carl Chapman Well, I think that we obviously will continue to work on that. It’s been the disappointment in the federal side as we’ve shared for few months, but what we try to layout here is we really got a number of activities part of which you’re seeing is that the various federal agencies are not use to handling this much work. As you know President Obama increased the better building initiatives. There is lot of different approaches on renewables and efficiency that some of the agencies are looking at. So we’re really working with specific agencies on how we can assist them in moving approvals through the process. And then we’re also working through the trade agencies or the trade groups associated with energy services to see how the approval processes can be shorten. And it’s really that’s what you get into is just the time frame that it takes to get the actual approvals to the various levels of the federal government. Paul Patterson Right. Thanks. But I just wondering is there any improvement that you guys have in your guidance or is there quantifiable amount or is this is something that you’re working on and you hope that its works out sometime in the future, but you don’t’ – I guess I’m just trying to get a sense as to what you think the impact might be financially when these approval processes are improved? Carl Chapman Yes. Well, obviously for 2015 we have affirmed guidance today, so that it give you a good sense of our expectations for 2015 and I think beyond that we certainly would expect improvements in 2016. We would expect federal projects to move quicker based on our activities, but obviously we’re not giving any 2016 guidance today. But we would believe that we would start to see it’s a show-up in backlog in late 2015 and in 2016, but obviously no real change to any outlook for right now. Operator Your next question is from Sarah Akers with Wells Fargo. Your line is open. Sarah Akers Hey, good afternoon. Carl Chapman Hi, Sarah. Sarah Akers Just one question on 2015 guidance, original guidance included $0.03 corporate drag and I believe most of that related to the charitable donations. So with the pre-funding that you did I believe in Q4 is that drag eliminated for the next four to five years or do we need to consider any offset there? Susan Hardwick Well, as we indicated Sarah, that funding of the foundation that amount does take care of funding for the next four to five years. And as you indicated we’ve had $0.03 that was in our initial guidance. We did reaffirm the consolidated guidance, so no change to that. And I think we’ve identified a number of things over the course of the call today that we’re keeping our eye on relative to oil prices and other things. So, in total we are continuing to maintain that overall guidance expectation for 2015. And as we said, it does impact the out years in terms of the expected funding of the foundation in those out years. Sarah Akers Great. Thanks for the clarifications. Carl Chapman Thank you. Operator And there are no further questions at this time. I’ll turn the call back over to Mr. Goocher for any closing remarks. Robert Goocher Well, we’d like thank you everyone for joining us on our call today. On behalf of our entire team, we appreciate your continued interest in Vectren and look forward to seeing many of you at our Investor Day in New York on March, the 16 where other key members of Vectren’s management team including the presidents of our utility, infrastructure services and energy services would join us and sharing further insights into those businesses and plans. And if you can join in the person the event will be webcast start at 10 AM Eastern. With that, we’ll conclude our call for today. Thanks again for your participation. Operator Ladies and gentlemen, this concludes today’s conference call. You may now disconnect. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) 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ALLETE’s (ALE) CEO Al Hodnik on Q4 2014 Results – Earnings Call Transcript

ALLETE Inc. (NYSE: ALE ) Q4 2014 Earnings Conference Call February 17, 2015 10:00 AM ET Executives Al Hodnik – Chairman, President and Chief Executive Officer Steve DeVinck – Senior Vice President and Chief Financial Officer Analysts Paul Ridzon – KeyBanc Brian Russo – Ladenburg Thalmann Chris Ellinghaus – Williams Capital Operator Good day and welcome to the ALLETE Fourth Quarter 2014 Financial Results Conference Call. Today’s call is being recorded. Certain statements contained in this conference call that are not descriptions of historical facts are forward-looking statements, and the terms defined in the Private Securities Litigation Reform Act of 1995. Because such statements can include risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. Factors that could cause results to differ materially from those expressed or implied by such forward-looking statements include, but are not limited to, those discussed in the filings made by the company with the Securities and Exchange Commission. Many of the company’s factors that will determine the company’s future results are beyond the ability of management to control or predict. Listeners should not place undue reliance on forward-looking statements, which reflect the management’s views only as of the date hereof. The company undertakes no obligation to revise or update any forward-looking statements or to make any other forward-looking statements whether as a result of new information, future events, or otherwise. For opening remarks and introductions, I would now like to turn the call over to ALLETE’s President and Chief Executive Officer, Al Hodnik. Please go ahead. Al Hodnik Good morning everyone and thank you for joining us. With me is ALLETE’s Chief Financial Officer, Steve DeVinck. Today, we reported our year-end financial results, which capped off an active and productive 2014 for ALLETE. Our reported earnings per share were $2.90 including two one-time items equaling $0.09 per share, which we have talked about during the year: one related to transaction cost relative to an ALLETE Clean Energy acquisition and the other for an EPA settlement. Our fourth quarter results were stronger than we had initially anticipated. Therefore, we slightly exceeded our previous earnings guidance of the upper half of a range between $2.75 to $2.95 a share excluding the two items previously discussed. I’ll ask Steve to provide the financial details in a few moments, but I would like to say that I’m well pleased that we were able to deliver another year of solid earnings growth to our investors. Before Steve goes to the earnings results, I want to review a few significant accomplishments from 2014. These events help to position ALLETE for a continued growth through the end of the decade and beyond. Minnesota Power made significant progress during the year in executing its EnergyForward strategy. Construction was completed at the 205 megawatt Bison 4 wind generating facility in North Dakota and Minnesota Power now owns and operates approximately 520 megawatts of wind generating capacity also construction continued on the mercury emissions reduction project at Boswell Unit 4. So far 145 million has been spent on the estimated $250 million project, which will be completed by 2016. Both of these construction projects qualified for current cost recovery treatment. There were also advancements during the year with the Great Northern Transmission Line, the proposed 220 mile 500 kV line that will deliver hydroelectricity generated from Manitoba to Minnesota Power. During 2014, the Minnesota Public Utilities Commission determined our Certificate of Need and route permit applications were complete. Manitoba Hydro commenced construction of its new hydroelectric generation facility during the third quarter of 2014 and we expect to begin construction of the transmission line in 2016. As you know, the line is scheduled to be completed by 2020. After over two years of restoration and repair work, the Thomson Hydro generating station returned to partial generation in the fourth quarter of 2014 and should return to full generation early this year. Total project cost are expected to be approximately $90 million, net of insurance, and a couple of weeks ago the Minnesota Public Utilities Commission approved cost recovery treatment to a renewable resource writer for this project. On the industrial front, Minnesota Power’s Taconite customers had a strong year, producing approximately 39 million tons of Taconite. On December 1, their power nominations indicated that they expect to operate at or near full capacity for the first four months of 2015 and we expect another strong production year overall. Construction was competed during the fourth quarter on Magnetation’s new iron ore concentrate facility. Minnesota Power expects to supply approximately 20 megawatts of power to this new facility. And during 2014, the Minnesota Public Utilities Commission approved a new 10-year electric service agreement that will be effective to at least December 31, 2025. I will have some additional comments on other new potential customers later on. ALLETE Clean Energy significantly wrapped up its presence during 2014. ACE began the year by acquiring 231 megawatts of wind generating capability at three facilities in January. Then in December, they acquired the 108 megawatts Storm Lake 1 wind generating facility. On December 31, ACE signed a purchase agreement to acquire another 97.5 megawatts of wind generating capacity in Southern Minnesota and of course they have the option to acquire the 101 megawatt Armenia Mountain wind energy facility in Pennsylvania. If the Southern Minnesota and Armenia Mountain transactions closed, ACE could own and operate approximately 540 megawatts of wind generating capability by mid-year 2015. In addition to that, in November, ACE acquired the rights to develop and construct 107 megawatt wind facility for Montana-Dakota Utilities, or MDU, which is expected to be completed and sold by the end of 2015 for approximately $200 million. All in all, it has been a tremendously busy and important year as ALLETE Clean Energy has established itself. Financially and operationally ALLETE had a very successful year. All of our businesses posted improved financial results and we made significant strides in executing our strategic plans. I will make some comments about our outlook for 2015 and beyond, but first I will ask Steve to go through the financial details. Steve? Steve DeVinck Thanks Al and good morning everyone. I would like to remind you that we filed our 10-K this morning and I encourage you to refer to it for more details on our 2014 results. For the year, ALLETE earned $2.90 per share on net income of $124.8 million versus $2.63 per share on net income of $104.7 million in 2013, an increase of 10%. Included in 2014 results were $1.4 million after-tax or $0.03 per share of cost related to ALLETE Clean Energy acquisition and a non-recurring $2.5 million after-tax or $0.06 per share charge associated with an EPA settlement. 2014 results also include dilution of $0.23 per share from common stock we’ve issued in support of our capital investments. Annual consolidated revenue increased to $1.1 billion, a 12% increase over the last year, primarily due to higher cost recovery rider revenue, increased kilowatt-hour sales and contribution from ALLETE Clean Energy’s wind facilities. The fourth quarter of 2014 marked the tenth consecutive quarter of consolidated revenue growth. Earnings from ALLETE’s regulated operation segment, which includes Minnesota Power, Superior Water Light and Power, and our investment in the American Transmission Company, were $124.4 million, compared to $104.9 million in 2013, an increase of $19.5 million. Net income for 2014 reflected the $2.5 million after-tax expense to reflect a liability associated with the EPA settlement. The increase in net income was primarily attributable to higher cost recovery rider revenue, production tax credits, and kilowatt-hour sales. These increases were partially offset by higher operating and maintenance, depreciation and interest expenses. Operating revenue from this segment rose $78 million or 8% over 2013, mostly due to a 5% increase in kilowatt-hour sales and higher cost recovery rider revenue. Revenue from kilowatt-hour sales increased $30.5 million, primarily due to the commencement of the Minnkota Power sales agreement in June of this year. Industrial sales were also strong and increased 2% from last year driven in part by increased sales to pipeline customers. Sales to municipal customers were lower due to a wholesale customer contract that expired at the end of 2013. Cost recovery rider revenue increased $29.4 million, primarily due to higher capital expenditures for our Bison Wind Energy Center and the Boswell Unit 4 environmental upgrade. Total operating expenses at our regulated operation segment increased $52.3 million or 7% and included increased fuel, purchase power, operating and maintenance and depreciation expenses. Fuel and purchase power expense increased $21.3 million, due to higher kilowatt-hour sales and wholesale power prices. Operating and maintenance expense increased $23.2 million and included $4.2 million pre-tax expense in 2014 to reflect the liability for environmental mitigation projects required as part of the EPA settlement mentioned earlier. The increase was also attributable to higher transmission, purchase gaps and property tax expense. Deprecation expense increased $7.8 million or 7% from 2013, directly attributable to the capital investment program. Interest expense rose by $4.8 million or 11% from 2013, primarily due to higher average long-term debt balances. Other income increased $3.1 million due to higher AFUDC-Equity. Income tax expense increased $3.8 million, due to higher pre-tax income, partially offset by higher federal production tax credits in 2014. The investments in other segment which includes results from BNI Coal, ALLETE Clean Energy and ALLETE Properties as well as Other Miscellaneous Corporate Income and Expenses reported $400,000 of net income for the year, compared to a net loss of $200,000 in 2013. ALLETE Clean Energy posted net income of $3.3 million as a result of its newly acquired wind energy facilities in Minnesota, Iowa and Oregon. BNI Coal recorded net income of $6.1 million and ALLETE Properties recorded a net loss of $2.3 million. Revenue from this segment increased $40.4 million or 43% compared to the same period last year, primarily due to revenue generated by ALLETE Clean Energy’s new wind facilities, which were acquired in the first quarter of this year. Operating expenses rose $31.4 million or 32% from 2013, primarily due to higher operating and depreciation expenses at ALLETE Clean Energy. Our consolidated effective tax rate in 2014 was 22.6% compared to 21.5% in 2013. We anticipate the effective tax rate for 2015 will be approximately 15%. ALLETE’s cash flow continues to be strong. In 2014, we generated $269.8 million of cash from operating activities and we carried a 46% debt-to-capital ratio at quarter end. Al? Al Hodnik Thank you for the financial update Steve. ALLETE is a growing energy company that provides sustainable energy solutions to initiatives at our regulated utility businesses and at our complementary energy infrastructure and related services businesses. Let me now detail for you some of our expectations for 2015. Minnesota Power will continue to execute its EnergyForward initiatives, pursue customer growth opportunities, and cost recover rider approval for qualifying investments as well as working with regulators to earn a fair rate of returns. The EnergyForward initiative is Minnesota Power’s strategic plan as you know for assuring reliability, protecting affordability and further improving environmental performance. Significant elements of the EnergyForward plan includes wind investments that we’ve made in North Dakota, the Boswell 4 environmental project to reduce emissions and planning for the proposed Great Northern Transmission Line to deliver hydroelectric power from Northern Manitoba by 2020. In 2015, we expect cost recover rider revenue will increase due to a full year impact from the recently completed Bison 4 Wind Energy project and from the continuation of the Boswell 4 environmental retrofit project in which we expect to spend about $90 million this year. Bison 4 will also generate increased production tax credits in 2015. On the sales side, we anticipate continued strong sales to our existing industrial customers. As I mentioned earlier, our Taconite customers nominated at near full capacity levels for the first four months of this year and their nominations will be due in March and for the May to August time period and again in August for the final four months of 2015. In addition, Magnetation’s recently completed facility will consume approximately 20 megawatts of electric load as it moves toward full production levels. We also project minimal sales in 2015 to the Nashwauk Public Utilities Commission for electric service to Essar Steel Minnesota’s new taconite mine and processing facility. Essar has indicated it plans to begin operations during the second half of 2015. As you will recall the Essar facility will result in approximately 110 megawatts of new load once it reached its full production levels. PolyMet will soon reach an important date with respect to its proposed new copper-nickel and precious metal mining operation. The Minnesota Department of Natural Resources has estimated that the Supplemental Draft Environmental Impact Statement or SDEIS process could be completed during the first half of 2015. Upon receipt of the applicable permits, construction could commence and Minnesota Power could begin to supply between 45 megawatts and 50 megawatts of new load through a ten-year power supply contract that would begin upon start-up of the mining operations as early as 2017. We also expect a full year’s impact of higher power marketing sales under the Minnkota Power sales agreement, which commenced on June 1 of last year. Under this agreement, Minnesota Power’s sold a portion of its output from Square Butte to Minnkota Power. Along with Minnesota Power’s revenue growth, we’ll be increase depreciation, interest, operating and maintenance expenses related to recent asset addition. Construction of the new Great Northern Transmission Line is slated to begin next year in 2016. In our new five year capital expenditure table within the 10-K, you can see that the new estimate is now $315 million on a project we expect to complete by 2019. In October, we indicated that two pending current cost recovery rider request, our 2015 integrated resource plan and potential new industrial customer loads were important factors in the timing of Minnesota Power’s next rate case. Since then, the Minnesota Public Utilities Commission has issued final decisions on our two rider requests and granted current cost recovery for our $90 million investment to restore and repair our hydroelectric facilities. While the commission approved our transmission billing factor filing, they did not allow inclusion of other transmission investments we were seeking. We indicated in October that we estimated Minnesota Power’s return on equity would be approximately 9% in 2015, if both requests were approved. We now estimate that Minnesota Power’s return on equity will be approximately 8.5% in 2015. Minnesota Power is making efforts to improve its return on equity over time and that will include cost efficiencies and more clarity on potential industrial load growth. Potential return on equity improvement and our 2015 integrated resource plan will be important factors in the timing of Minnesota Power’s next rate case. ALLETE Clean Energy is positioned for earnings growth in 2015 as a result of the wind energy facilities that acquired during 2014. ACE will make a decision within the next couple of months on its option to acquire the Armenia Mountain wind energy facility and we’ll continue to pursue other similar opportunities. During 2015, ACE will also develop and construct the North Dakota wind energy facilities for MDU. Last week, we finalized our acquisition with U.S. Water services, which was announced last month. U.S. Water is an integrated industrial water management company, headquartered in St. Michael, Minnesota. ALLETE initially purchased 87% of U.S. Water for $168 million and we’ll purchase the remaining the 13% in the future for an amount that will be based on its future earnings. Water and energy are intricately linked and attention to that nexus is increasing. We believe regulation and social expectations will increasingly drive water conservation and that those macro factors along with opportunities for improved profitability will drive a growing emphasis on the efficient use of both water and energy. U.S. Water recorded approximately $120 million of revenue in 2014 and we expect revenue growth of between 10% to 15% annually. This acquisition is consistent with our strategy of investing in energy infrastructure and related services businesses to complement core regulated operations, balance our exposure to business cycles and changing demand, and provide long-term earnings growth. U.S. Water is an attractive size investment for ALLETE and it has demonstrated a recurring and predictable revenue stream as evidenced by its customer retention rate of over 90%. Its cash flows will be supportive. This acquisition completes ALLETE’s search for complementary energy centric businesses. ALLETE’s focus in this particular area going forward will be to strengthen and grow U.S. Water and ALLETE Clean Energy. Our earnings guidance for 2015 remains at a range of between $3 to $3.20 per share and excludes transaction cost associated with the U.S. Water acquisition. Our guidance includes the expectations I have spoken about, but be mindful it does not include at this point the ACE MDU project, which is not received regulatory approval yet. Included in our guidance is between $0.20 and $0.25 of expected dilution from equity we have issued since the beginning of 2014. All of us at ALLETE are excited about our prospects going forward and we look forward to delivering another year of earnings growth. Our board is confident in our direction as well and recently voted to increase the dividend on our common stock. Thank you for your confidence and your investment with us. And at this time, I’ll ask the operator to open up the line for your questions. Question-and-Answer Session Operator Thank you. [Operator Instructions] Our first question comes from Paul Ridzon with KeyBanc. Your line is open. Paul Ridzon Good morning. How are you? Steve DeVinck Good morning, Paul. Al Hodnik Good morning. Paul Ridzon ATC was down in the quarter. What drove that? Steve DeVinck Yes, ATC in the fourth quarter took a reserve with respect to a compliant that has been filed on their return on equity, their current allowed return on equity is 12.2%, and they’re in a complete proceeding with respect to that. So they took a reserve and we took [indiscernible] flow through of that. Paul Ridzon And that reserve goes back to the initial date of complaint? Steve DeVinck It does. Paul Ridzon Okay. Steve DeVinck Yes. Paul Ridzon What was the – at the midpoint of guidance, what is your assumed ROE at the regulated businesses? Steve DeVinck Approximately 8.5%. Paul Ridzon And when you issued guidance, did you contemplate – what was your assumption regarding Thomson? Steve DeVinck Our guidance range contemplated the host of outcomes on those pending regulatory riders. So the midpoint would probably reflect Thomson and then some of our [indiscernible] investments out. Paul Ridzon So that was in the $0.20 window? Okay. Steve DeVinck Yes. Paul Ridzon Thank you very much. Al Hodnik Thanks Paul. Operator Our next question comes from Brian Russo with Ladenburg Thalmann. Your line is open. Brian Russo Hi, good morning. Al Hodnik Good morning, Brian. Steve DeVinck Good morning, Brian. Brian Russo Just the general rate case strategy, you seem comfortable with an earned ROE of 8.5% in 2015. Is kind of the strategy to see how some of these industrial projects ramp up, which could help your overall regulated return prior to pursuing any rate case filing? Steve DeVinck Our rate case strategy, as Al articulated it, we’re working on two fronts. One front is more clarity on the potential industrial load growth, so yes. The other front, we’re taking a very hard look at cost efficiencies here at Minnesota Power to improve our ROE over time. So we’re coming at this on two fronts. Brian Russo Okay, so no filing is I guess imminent or – it’s something you guys are going to manage going forward? Steve DeVinck Well, the timing of our rate case will be dictated by how we do on ROE improvement, our 2015 integrated resource plan. So we as we move later into this year, how those two things come together will determine the timing of our rate case. If we’re successful on a lot of these fronts including new potential load growth and some reasonable cost efficiencies, it’s possible that may push out the timing of our rate case. Brian Russo Okay. And what were the drivers of the fourth quarter coming in ahead of expectations? And is that kind of upside sustainable into 2015? Steve DeVinck I would say there’s a couple of things that led to a very good fourth quarter. One of which is we had very strong industrial sales, driven to a large part by our taconite customers which were to some extent catching up from the first quarter. We had a very cold first quarter of 2014 here which impacted shipping on the Great Lakes, so to some extent they were catching up, so sales were a reason. Another reason was our operating expenses during the quarter were slightly more favorable than we had projected. And then another reason was around the shares outstanding. As you may recall, we did a secondary offering in 2014 and we had taken half of the shares earlier in the year. And we had projected we would take the remaining half in the fourth quarter. Well, our needs were such that we didn’t take the second half of that secondary until early February of this year. Brian Russo Okay. And remind us what your total diluted share count will be once this is settled for a full year? Steve DeVinck Our earnings guidance for this year has $0.20 to $0.25 of EPS dilution. Brian Russo Okay. And other than the Armenia option, is there anything in the ACE pipeline that you would like to talk about? Steve DeVinck Well, ACE continues to look at various opportunities out there Brian and continues to work also in North Dakota on energy corridor concepts with folks out that way. So I would just say there is plenty of deal flow, plenty of things to take a look at. I think ACE has really grown in stature in this space through the last year and half and credibility with those that have understood the business and come calling. So there are plenty of opportunities to shift. I can’t elaborate at this point in time on what the next ones might be specifically. Brian Russo Okay, thank you very much. Steve DeVinck Thank you. Al Hodnik You’re welcome. Operator [Operator Instruction] Our next question comes from Chris Ellinghaus with Williams Capital. Your line is open. Chris Ellinghaus Hey, guys. How are you? Al Hodnik Good morning, Chris. Steve DeVinck Good. Chris Ellinghaus Can you give us a little detail on U.S. Water and when you expect accretion from that acquisition? And maybe give us a little thought on any accounting issues related to it? Steve DeVinck Well, first of all we’re excited about the acquisition of U.S. Water as Al had articulated. We have stated that the U.S. Water acquisition is expected to provide long-term earnings growth and diversity and have no material impact on 2015 earnings per share. I’ll say this purchase accounting as you probably know requires us to identify intangible assets, things like non-compete agreements, contract backlog, customer relationships, et cetera and amortize them over the appropriate useful life. Some of these intangibles have short life, two years or less. And therefore, it will impact the earnings at U.S. Water here in the near term. So we again think that earnings at U.S. Water are not going to be material to our operations here in 2015, given some extent by some of the amortization of intangibles required by purchase accounting. We do expect that U.S. Water will be required to be a reportable segment either later this year or early next year and at such time you’ll begin to see some more detail on U.S. Water. Chris Ellinghaus Okay. So would it be fair to say without the intangibles it probably would be more accretive on the short-term? Steve DeVinck Well, definitely yes, that’s fair to say. Chris Ellinghaus Okay, thanks. I appreciate the detail. Steve DeVinck Thanks, Chris. Operator I’m showing no further questions. I’ll now turn the call back over to Al Hodnik for closing remarks. Al Hodnik Well, thank you again everyone for your time this morning and for your investment and interest in ALLETE. Steve and I and others will be out on the road here in a short while to visit with each of you and we look forward to further conversation. Thanks again and have a good day. Operator Thank you, ladies and gentlemen. That does conclude today’s conference. You may all disconnect and everyone have a great day. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. 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Norsk Hydro’s (NHYDY) Q4 2014 Results – Earnings Call Transcript

Executives Pal Kildemo – Head of IR Eivind Kallevik – EVP & CFO Analysts Christian Kopfer – Nordea Markets Jason Fairclough – BofA Merrill Lynch James Gurry – Credit Suisse Jatinder Goel – Citi Amit Pansari – Societe Generale Eugene King – Goldman Sachs Hjalmar Ahlberg – Kepler Cheuvreux Rob Clifford – Deutsche Bank Jeff Largey – Macquarie Danielle Chigumira – UBS Eirik Melle – Danske Norsk Hydro ASA ADR ( OTCQX:NHYDY ) Q4 2014 Earnings Conference Call February 11, 2015 3:30 AM ET Pal Kildemo Thank you. Good afternoon and welcome to Hydro’s fourth quarter 2014 conference call. I’m sorry to inform you that our President and CEO, Svein Richard Brandtzaeg, will not be able to attend as he needs to attend his father, who is terminally ill. We will start with a short introduction by CFO, Eivind Kallevik, followed by a Q&A session. For those that did not see this this morning’s webcast of the results presentation, this is available on hydro.com. And that with that, I leave the word to you Eivind Eivind Kallevik Thank you Pal, good afternoon everyone. It is with great pleasure that we today could announce a Q4 result of 2014, which are the highest results that we reported since we became a pure play aluminum company in 2007. The underlying EBIT for the quarter was NOK2.9 billion, roughly two times the NOK1.4 billion from Q3 and up six times compared to the fourth quarter last year. The increase from the third quarter was primarily driven by an increase in all metal price, lifting the results for the primary smelters as prices increased by some 13% measured in NOK. In addition the increase in LME price list the realized alumina price through LME in the contracts, which still account for 75% of the contract portfolio for 2014. We also saw an increase in the Platts Alumina Index price, which also contributed positively. For the second quarter in the row we do see big improvements in operating cost in Alunorte, Paragominas in Brazil as well as increased production levels. The improvement efforts are continuing to come through on the bottom line and here — also here supported by the positive currency developments. I’m also happy to announce that on January 4, ESA, the European Surveillance Authority approved Enova’s NOK1.5 billion support to our Karmoy technology pilot. And provided that we are able to secure power agreements at competitive and sustainable prices this plant will be built. And it will be a vital part of our long-term agenda of reducing energy consumption. The pilot plant will be the world’s most efficient cell with the industry’s lowest CO2 footprint. Also the Board of Directors in Hydro proposed a dividend of NOK1 per share for 2014 and this is for the Annual General Meeting to decide in May. Furthermore, we have also revised the dividend policy for 30% to 40% of net income over the cycle, both measures reflecting the commitment to return cash to shareholders in addition to reflecting the strong balance sheet and positive earnings outlook going forward. If we then end up by summing up 2014, we continued to see a tightening fiscal markets as demand in the world outside China has exceeded production. It’s started to eat into the large inventories that we have seen. This has clearly been reflected in an increased all-in price and is especially enhanced when you convert and translate into Norwegian kroner. As we said at the same time last year, we would stabilize Alunorte production and we have stabilized and lifted both the Alunorte and Paragominas plants and at the same time reduced the cost basis. We have updated on the improvement programs at Capital Markets Day and all of them are now at/or ahead of the plan delivering significant contributions to the bottom line. Now if you look into 2015, we will obviously continue to work on the improvement efforts , both on the commercial and the operational side. As earnings outlook has improved, now is the time for us to really show the strength of the improvement culture, delivering when you have to deliver is one thing, but the true culture is really reflected when deliveries are done in improved times. We will also continue the strong focus on capital discipline going forward in these times of improved earnings. We will continue to high-grade ad perform selective growth in areas such as body-in-white? And recycling as well as smaller scale power operations. And as I mentioned, we will increase our technological lead through the Karmoy technology pilot as another example. The technology pilot will also affect the last point which is to lower our energy consumption and footprint to strengthen our future competitive climate [indiscernible]. And that is of course to be carbon neutral by 2020. Pal Kildemo Thank you Eivind. And operator with that we are ready for questions. Question-and-Answer Session Operator Thank you. [Operator Instructions] We now take our first question from Christian Kopfer from Nordea Markets. Please go ahead. Christian Kopfer Thanks operator and good afternoon. And my first question relates to premiums we have seen premiums coming off, I would not say dramatically, but they have still come off in Europe. So first question relates — or relates to what you see here regarding market sentiment in Europe on the premium side. Eivind Kallevik And you’re right. There is a small softening in the premium market the way we see this in Europe, but remember that the premium situation both in the US and in South East Asia remains relatively strong. And I think you also have to reflect on the fact that the premiums have been going up significantly from during all of 2014 and partly also in 2013. So even though it’s down slightly, it’s still at very high levels from a historical perspective. Now we did see — I think the market and industry saw a significant customer a destocking towards tail end of 2014 and I think it’s really — it is a little bit uncertain at the moment. We will see now when customers come back to the market and start to price metal in Q1 and Q2 as to the significance of this softening. So it’s a little bit too early to say, but it’s still at fairly high levels the way we see this. Christian Kopfer And also on your products, I guess you have already mentioned that the premium on more value added products hold up significantly better. Is that fair still to assume? Eivind Kallevik Yes, I think you shouldn’t expect over time if there is softening of the standard ingot premiums. It’s not unnatural that will have also an impact on the value added products over time. What we’ve guided upon however is that as we get into Q1, with the booking profile that we do have and the bookings that we have done for at first quarter which is roughly 80% to 90% of the production, we expect an increase in our realized premiums of another $60 in Q1 compared to fourth quarter. Christian Kopfer Thanks. And also if you look at it, the difference between the premiums on the European market and in the US, I guess is there any reason why this difference should really remain. I mean I don’t ask for a forecast on premiums but the difference is quite abnormally high at this point, right? Eivind Kallevik What we’ve seen in the past is that these things tend to balance out. I mean you saw the same thing if you go back to fourth quarter of 2013, right? When the premiums in the US started to pick up sharply and European premiums were a little bit lower and then Europe picked up shortly thereafter. So I think you will find that premiums overtime will balance out. Christian Kopfer Thanks. My final question on the Karmoy, the plant that you’re building. Just so I understand correctly, after the — or the net CapEx to Hydro is that the NOK3.9 billion? Eivind Kallevik Well the NOK3.9 billion is the gross figure and then we have rest from Enova of NOK1.5 billion. Operator We will now take our next question from Jason Fairclough from BOA. Please go ahead. Jason Fairclough I guess good afternoon. Thanks for the opportunity to ask questions. Just a couple more questions on your new toy on Karmoy. Just wondering how do you think about this? Is this an ongoing R&D drag on the business or is this a proper asset that will generate its own return on capital? Eivind Kallevik Hi Jason. Well I don’t think it is a toy to be honest, if I can reflect up on that first. It is a proper investment. First and foremost of course it is to demonstrate and verify the technology lead that we believe that we do have in this market. And that plant when operated will also yield returns. In addition of course there will be technological spinoffs from the Karmoy pilot that can be implemented in the other operating plant that we have overtime. So it is a proper investment, but it is to verify the most climate friendly and an energy effective aluminum production in the world. Jason Fairclough If you don’t mind, could I just maybe push you a little bit on how to think about this. So you said first production in 2017, how long do you think before a plant like this would be covering it cost of capital? And I guess in terms of power costs, is it appropriate to think about the power prices that we see in a Nord pool at the moment? Eivind Kallevik I think we haven’t — I mean this is one of the outstanding issues not to return our cost of capital but the power, right. So we made the investment decision basically to move ahead with the project mature it even further, but it’s still pending on what we call sustainable power supply, which certainly has to do with the power prices. And the important part for us is of course to ensure that we have a competitive power source that is sustainable and competitive in a global context where this point will compete. Jason Fairclough Okay, what about the return on capital? Eivind Kallevik This plant will ramp up and when we get there to full production, it should be able to earn its cost of capital the way we see this. And then 2017 is the earliest, right. We expect to do if everything goes according to plan in terms of power source we have a build decision in 2016, early 2016 at the earliest. 2017 is really the earliest when we will see metal out of the plant. Jason Fairclough So last question for me, is this something we should put in our models today or do we really need to wait until we get a final build decision? Eivind Kallevik I think there is no — we haven’t made a build decision. That will not be made until first quarter 2016. But I think your constructive model is from 2017 and onwards. Operator We know take our next question from James Gurry from Credit Suisse. Please go ahead. James Gurry Thanks very much guys, congratulations on a pretty good result today. Just quickly again on that same smelter proposal. So the — I think you’ve got growth CapEx this year of just under NOK1 billion. Is that — is your decision today going to affect that number at all or is it more likely to fall into next year? Eivind Kallevik There will be some growth CapEx in 2015, more to the tune of $100 million to $300 million. James Gurry So you’ll be spending above the NOK6.5 billion? Eivind Kallevik It’s also what we’ve guided on so far. James Gurry Okay, okay. And just quickly on the dividend policy, what’s the relevance of the 40% payout ratio given that your balance sheet meant that you were able to payout a lot higher than the previous 30% payout ratio. So it wasn’t really a relevant measure. Should we think about it as a — you’ve got a minimum dividend policy and perhaps you’ll aim at 40% if you ever get to a sort of steady state consistent earnings basis. Eivind Kallevik I think you have to read this two ways. I think first and foremost — at least for me, it’s important seeing that if we lift the absolute level to NOK1 per share for 2014, and of course we will work hard to maintain a stable dividend also going forward. The lift from 30% to 40% is also a signal that trying to proving that the commitment to serve the shareholders is very strong and the Company will remain also stronger going forward with cash returns. Operator We now take our next question from Jatinder Goel from Citi. Please go ahead. Jatinder Goel Hi good afternoon gents. Just two questions. And apart from seasonality, any additional comments you can make on the weakness of rolled products division for the fourth quarter and how do you see it going forward in to first quarter and rest of 2015? That’s one. And secondly just on the dividend and capital return side you said share buybacks and extraordinary dividends in the period of strong financials, anything you can share on the quantitative side how will you define that strong financials and will that be considered only at the yearend or would you look at returning excess cash by either way in the interims as well? Thank you. Eivind Kallevik Thanks Jatinder. If you look at the rolled product side, first, clearly the — I think the volume in fourth quarter is probably somewhat lower than what the market expected driven not only by seasonality but I think also by customer destocking towards the end of the year, probably to a larger extent than what we’ve seen in the past. The way we read this is this is probably also driven by some customer uncertainty, in particular in Europe as to the strength of the economy going into 2015. We do expect volumes to come back up in the first quarter of the year as normal seasonality kicks in. But remember that we’re starting from a somewhat lower volume quite first quarter 2015 compared to first quarter 2014. So probably slightly lower volumes this quarter compared to same quarter last year. On the dividend side, when it comes to share buybacks, that is something to do — have to be approved by the annual general meeting in May and if that was up for decision, it is a fair assumption that would have been commented upon in today’s presentation. So don’t think you should expect to see that for this year. Operator And we now take our next question from Amit Pansari from Societe Generale. Please go ahead. Amit Pansari Hi. Thanks for taking my questions and couple of it. First is, could you please guide us on what is the net debt levels at Sapa and Qatalum? Second question would be, what kind of interest expense on pension liability do you see in 2015 given that your pension liability has increased. And lastly on the market, what do you read from the inventory declines? What percent of it do you think is going to the market for consumption and what is going to the off market stores. Those would be my questions. Thanks. Eivind Kallevik Yes, if we start with the inventory, which I guess was your last question, Amit. Amit Pansari Yes. Eivind Kallevik We continue to see a decline in the reported inventories. We continued to see that throughout 2014 and we believe that we also see that so far into 2015. The question of course, the big question is where did that metal go. Does now go into the physical market or is it just being rolled into unreported inventories. And it’s probably a little bit of mix of that, but certainly parts of it goes into the physical market, then filling the gap of between production and demand. Besides for 2014, that the gap supply demand or production demand in the western world, world outside China was roughly [1 million] tons. And then in the same speed that we see in 2015. When it comes to the debt level, in Qatalum and Sapa, the aggregated amount is some NOK7.3 billion. And Sapa in isolation is roughly NOK1.6 billion — NOK1 billion for power share, yes. Sorry, NOK1 billion of our share in Sapa. Amit Pansari Right and on interest expense and pension liabilities, do you see any kind of an increase in 2015 compared to 2014 levels? Eivind Kallevik Not very significant change Amit. Amit Pansari Okay. And lastly just a follow up on — in the investment there is substantial increase in primary metal and rolled products in Q4 compared to previous quarter. So what was driving that if you can throw some light on that? Eivind Kallevik That is also partly due to seasonality in fourth quarter and rolled products you basically partly shutdown parts of the plant for maintenance and that’s also when you do a bigger investment upgrades. And typically also do — I think historically you will see that we also do more investments and maintenance investments in the primary smelters in fourth quarter compared to other quarters of the year. Operator We now take our next question from Eugene King from Goldman Sachs. Eugene King Hi all. A couple of questions. Just on Paragominas run rate in Q4 is about nameplate. Can we model above that or would we be safer at nameplate across the full year? Eivind Kallevik Hi Eugene. We’ve guided into Q1 on stable volumes. So I think you should — at least we plan to see the 10’s figure also for the first quarter. And then whether that is 10 even, 10.1, or 10.2 remains to be seen, but at nameplate or slightly above. Eugene King Okay. And then just a second question, just again on duties. The gross payout at the NOK1 a share is about NOK2 billion, but your cash generation is probably spotish. Everything is probably about 8 to 9, which will leave you with a really big net cash position at the end of the year. At what kind of level do you think about introducing a buyback or utilizing that cash balance? Eivind Kallevik I think it’s still early days I think, of this very positive cash generation. We do have a positive earnings outlook, as you know, for the — also in Hydro for the year of 2015. And I think we will have to come back with the cash usage and hope to spend that at the end of the year. But it’s quite clear, even with a NOK2 billion dividend payout, we will very soon be into the positive net cash balance. But we will watch that carefully and spend it wisely. Operator We now take our next question from Hjalmar Ahlberg from Kepler Cheuvreux. Hjalmar Ahlberg Thanks. First a question on Paragominas payment. How much of this payment did you do in Q4 and how much remains? Eivind Kallevik Hi, Hjalmar. We had two charges for the acquisition of the Paragominas shares. Each tranche was roughly 200 — or not roughly. It was $200 million, so $400 million in aggregate. If you do — if you look at what we actually paid for the first tranche, it’s probably — it’s not probably. It’s closer to $50 million, as we had some guarantees from Vale on those — on that asset. So that’s roughly $50 million for the first tranche. Hjalmar Ahlberg Okay. So [indiscernible] remaining or so. Eivind Kallevik So roughly 200 — not roughly. $200 million remaining for the second tranche. The first one cost $50 million instead of $200 million. Hjalmar Ahlberg Okay. Thank you. And looking at the realized alumina price, you were expecting raw material prices in primary metal [indiscernible] to go up. Would that also imply a higher realized alumina price in the bauxite and alumina division? Eivind Kallevik Yes, that is fair to assume. As you know, we sell roughly 50% of our production internally. So as you see, higher earnings and higher prices realized in bauxite alumina, that also will have a negative — positive impact in DNA and negative impact in primary metal. We also expect a somewhat higher ratio of PAX price volumes in 2015, compared to 2014, where roughly 30% will be based on the PAX again existing data, earnings and DNA, and slightly higher costs in the primary metal. Hjalmar Ahlberg Okay. And a question on depreciation. It was up a bit, in both bauxite alumina and primary metals in Q4 versus Q3. Was that due to something special? And would this level remain or would go lower or higher in the next quarter? Eivind Kallevik Well the changes you see in depreciation, Hjalmar, is very much to do with the currency development, and then let’s you translate the BRL depreciation into NOK. It has gone higher, per constant currency development. Hjalmar Ahlberg Okay. Thanks. And just one last on alumina cash cost. You expect it to go up a bit in Q1. Will it go up to those levels in Q1 to Q3, or will it still remain lower than those levels? Eivind Kallevik I think we said it will go up somewhat, compared to the Q4 results, which is not back to the Q3 results, somewhere in between. Operator We now take our next question from Rob Clifford from Deutsche Bank. Rob Clifford Yes, good afternoon. Two questions, one on strategy and one on the market. The market question, you benefited from FX but so do others. Do you think Russia will hold the line and keep production offline, and keep the market tight? And the question on strategy, Karmoy. It’s clearly a commercialization of a technology. How secret is this? Is this something that you’re looking to go on and sell? Is it something you want to use yourself? Why haven’t you gone to Qatar with this technology, given that there is power available there? Is it part of keeping the technology in house, to yourself, or is it a CapEx decision there? So just some comments around the strategy for your smelting technology. Eivind Kallevik If we start with the Russian situation, clearly the Russian production, given the — basically the collapse in the ruble has made that much more competitive, if you like. And it’s hard for us to sit on the [inside of resolve], if not impossible. And we don’t do that, of course, on the Russians’ decisions. But I think they’ve made some fairly clear comments themselves, in terms that they will not ramp up old curtailed capacity, given today’s market or given today’s prices or the market balance in the world, as it is today. So that is what we have to base it on. When it comes to Karmoy, we believe — and the way we see the power prices in Norway at the moment is that it is actually globally competitive. And as such, Karmoy is a very good place to build it, both from a logistical and competence perspective. When it comes to selling the technology, one of the pre-conditions in the approval from the European Surveillance Authority is that we have to license this technology within Europe or within the EU, should other parties want to license the technology. And that of course we would do, if that happened. But it’s only within the EU region. Rob Clifford And so that would be licensed to others. What about use for yourself, looking beyond this is a small pipeline, basically? How else would you use it, if it’s successful? Eivind Kallevik Well it is also to verify when the time is right to build a new smelter, whether that’s a full expansion of Karmoy in due time or whether that is building qatalum 2 or something else. This is the verification of the technology that we’ll be — if successful, be using at the new smelter site. But that’s a long time into the future. Operator We now take our next question from Jeff Largey from Macquarie. Please go ahead. Jeff Largey Yes, hi. Good afternoon. I just have two questions, I guess both focused on bauxite and alumina. The first is just looking at the improvement program there, from B to A, it seems to be, as you say, progressing ahead of schedule. Is there scope that — is there upside scope to this NOK1 billion program or is it just simply that you may be delivering the savings ahead of the end of next — or this year, I should say, 2015? Eivind Kallevik Good afternoon, Jeff. I think, as you say, we are ahead of plan. Original target for 2014 was 600. We have communicated that we delivered 700 at the end of the year, meaning that there is an additional 300 to be delivered for the rest of 2015. Whether there is upside potential above that is not something that we communicated so far. But from experience, it is often so that when you run these programs, you get the mentality change in how to look for improvements and sustainable improvements. And typically, you find something more. If and when we get those quantified, we will of course communicate that to the market, but not as of yet. Jeff Largey Okay. That’s helpful. The second question is just on — back to bauxite and alumina, and on ICMS. As you put in the presentation, the dialogue continues, and this — these ICMS are going to be revisited in July. Can you kind of — I guess can you shed some light on the nature of the dialogue? Is it something that’s a very active dialogue or is it something that really is — you really will kind of revisit in July and will have a decision at some point then? Eivind Kallevik No, it is clearly a situation where we have continuous dialogue. It’s not something that there’s no dialogue today and then we’ll sit down in July. As you know, the election ended not too long ago. The governor is in place. And there are several meeting places, with both the governor, as well as his people on these topics, as we speak. So it’s an ongoing and active dialogue in Brazil. Jeff Largey Is there any sense whether you think you have a case for some relief against these ICMS, or too early to say? Eivind Kallevik I think it is too early to be conclusive. I think both parties understand the importance of this topic. But we don’t — in Brazil and other places, nothing is concluded until it is concluded, in a way. So it’s too early to guide on the specific outcome. Operator We will now take our next question from Danielle Chigumira from UBS. Please go ahead. Danielle Chigumira Hi there, and thanks for the call. A couple of questions, and firstly on the market. You said that you expect a deficit, excluding China. Given the semis export data we’ve seen, as China continues to ramp up, how concerned are that that finds its way into the rest of the market and upsets the positive fundamentals that we’re seeing outside of China? And perhaps to ask the balance sheet question in a slightly different way. All else being equal, if we’re here in a year’s time and spot has prevailed, you would have a substantial cash pile on your balance sheet. Unless something else material comes up, can you see yourselves, in a year’s time, recommending a material buyback to shareholders? Eivind Kallevik Yes, on the China question first. As you know, we did see quite a big increase in semis and fabricated exports out of China, towards the tail end of the fourth quarter. And of course, it has an impact on the deficit in the Western world. The question, how sustainable is these exports? And that has very much to do with the difference or the metal advantage that the Chinese players have at the moment. We have had these situations in the past, and they’ve tended to normalize over time. But it’s a little bit too early to say, in the year, as to how this is going to play out. But obviously it is one of the concerns that we do have. Danielle Chigumira Okay. Eivind Kallevik On the balance sheet side, if we sit here with — in a year’s time with a big pile of cash. We will have the discussions on how to spend that. And it is as we talked about in the past. There is a limit to how much cash, I think, even as [indiscernible] on the balance sheet being non-productive. Whether that will point its way in buybacks or extraordinary dividends as the case, that is still too early to say. That debate we will have to take next year. Danielle Chigumira Okay. Can you give any further color on what that — the limit of that net cash would be, is it NOK2 billion, or NOK5 billion, or NOK10 billion? Eivind Kallevik Not as of today, Danielle. I think we will have to cross that bridge when we get there. Operator We now take our next question from Amit Pansari from Societe Generale. Amit Pansari Hi. I just have one last question on the CapEx plan made for Karmoy. So suppose you find the power solution. Then how do you see that ramp up CapEx? Is it 2016, 2017, 2015, 2016, 2017? So how do you see the split in CapEx? Thanks. Eivind Kallevik We said for this year that roughly 100 to 300 for 2015. Then the major part of the remaining share will obviously come in 2016, partly into 2017, as we ramp up production. But most of that would come in 2016. Operator We now take our next question from Eirik Melle from Danske Market. Eirik Melle Hi. Congratulations on the very solid results today. I was just wondering if you could just comment a little bit on the Chinese export of semis. It’s been quite vast volumes lately, and I was just wondering if you have changed any view on it. Eivind Kallevik Thanks, Eirik. Again, I believe we’ve said in the past, when it comes to primary, we believe China will be balanced on the primary side. And we will say the risk is probably higher on the semis side. And that’s partly what we’ve seen, towards the tail end of fourth quarter. I think it is too early to judge whether this will stay at these levels or increase during 2015. I think we will have to wait until we pass Q1, pass Chinese New Year, and get a little bit into Q2, before we see if this is sustainable or not. At the end of the day, I think it’s going to come back down to the price differential or the metal advantage, between the Chinese metal cost and the Western world price. That’s going to determine the level of exports. Operator [Operator Instructions]. We now take a follow-up question James Gurry from Credit Suisse. James Gurry Thanks again. I just wanted to follow up with the situation in Brazil, the potential power rationing and the higher power costs obviously impacting many, many companies. Can you give us a bit of a scenario on how much you think the cost might go up in each of those situations, just on higher power input cost? Or, if you had to restrict your activities because you couldn’t get power at all, how might that impact the earnings? Eivind Kallevik If you look at the smelter side, remember that we have a power contract with a price agreement, until 2024. So the impact from the smelter is, in a way, purely going to come if there is a curtailment or if there is a rationing of power and we don’t get the power that we are entitled to, in which case we’ll be — probably have to take down capacity somewhat. We don’t know the extent of this, if any, that this will have in the northern parts of Brazil. It’s still so that the northern parts of Brazil is in a better situation when it comes to hydrological balance, than certain other parts of Brazil, which is much more challenged. When I referred to higher power costs in Brazil, that relates more to the Paragominas, the bauxite mine, where we had the power contract that has ended at the end of the year, 2014. And they have to go to the market, to source the energy needed for the year. James Gurry Have you provided previously on what the power expense is for Paragominas? Eivind Kallevik Yes, we’ve — if you look at the power side, we expect that the impact is roughly NOK50 million for Paragominas. Operator We now take our next question from Eugene King from Goldman Sachs. Please go ahead. Eugene King Sorry, guys. Just forgot a couple of things. Just sticking with Brazil, just wondering, am I right in assuming that you’re off the real hedge now and you’re fully exposed to spot real? And then secondly, in terms of excess bauxite, given Paragominas is running slightly above nameplate, is that predominantly spot sales into China? And what kind of price are you achieving on that? Eivind Kallevik When it comes to the currency hedge, which has been in place partly for 2013 and all of 2014, that is now completely out of the books, meaning that we’re fully exposed to the exchange rates for 2015 and onwards. So there’s no new hedge in place. When it comes to bauxite sales, we do have some bauxite sales out of Brazil. We’ve had for quite some time. We haven’t been very specific, in terms of what kind of profits we have on that, but it is — in terms of EBITDA margins and other metrics, it’s a very good business at the moment. And just to be specific on it, it is not Paragominas bauxite that we can sell to the external world because that comes as a slurry to Alunorte. So it’s not allowed to ship it in that state out of the country, due to shipping regulations. So it’s really bauxite out of the mine in MRN that we would sell outside Brazil. Operator As there are no further questions in the queue, I would like to turn the call back to the presenter for any further remarks. Eivind Kallevik Okay. I want to thank you, everyone, for taking the time and speaking to us today. Thank you very much and have a nice evening. Operator This will conclude today’s conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.