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Enersis’ (ENI) Q3 2015 Results – Earnings Call Transcript

Enersis S.A. (NYSE: ENI ) Q3 2015 Earnings Conference Call November 03, 2015 10:00 AM ET Executives Javier Galan – Chief Financial Officer Analysts Cosma Panzacchi – Bernstein Research Javier Suarez – Mediobanca Antra Murra – Santander Nicolas Schild – Santander Carmen Concha – Moneda Ezequiel Fernandez – Scotiabank Operator Good day, ladies and gentlemen, and welcome to the nine month results 2015 Enersis Earnings Conference Call. My name is Sonia, and I will be your operator for today. During this conference call, we may make statements that constitute forward-looking statements within the meaning of the private securities litigation reform act of 1995. These statements could include statements regarding the intent, belief, or current expectations of Enersis and its management with respect to, among other things, Enersis’ business plans, Enersis’ cost reduction plans, trends affecting Enersis’ financial condition, or result of operations, including market trends, electricity sector in Chile or elsewhere, supervision and regulation of the electricity sector in Chile or elsewhere, and the future effects of any changes in the laws and regulations applicable to Enersis or its affiliations. Such forward-looking statements reflect only our current expectations and not guarantees of future performance, and involve risks and uncertainties. Actual results may differ materially from those anticipated in the forward-looking statements as a result of various factors. These factors include a decline in the equity and capital markets of the United States or Chile, an increase in the market rate of interest in the United States or elsewhere, adverse decisions by government regulators in Chile or elsewhere, and other factors described in Enersis’ Annual Report on Form 20-F included under Risk Factors. You may access our 20-F on the SEC’s website, www.sec.gov. Readers are cautioned not to place undue reliance on those forward-looking statements, which speak only as of their date. Enersis undertakes no obligation to update these forward-looking statements or to disclose any deployment as a result of which these forward-looking statements become inaccurate. I would now like to turn our presentation over to Javier Galan, Enersis’ CFO. Please proceed. Javier Galan Good morning, and welcome to our nine months conference call results presentation. I am Javier Galan, CFO of the Company, and with me today is Pedro Canamero, our Investors Relation Director. Please, let me remind you that the presentation will follow the slides that have been already uploaded in our website. Also, as always, we will have the usual question-and-answer session at the end of this presentation. First, on slide number two, I will start by outlining the main updates of the period. During the first nine months of the year, EBITDA recorded $2.6 billion, increasing by 8% compared with the same period of last year. This was mainly due to the positive performance during the third quarter in generation business in Chile and the positive results in distribution business in Argentina due to resolution number 32. This was partially offset by a negative exchange rate effect in Brazil and Colombia. Net income attributable to Enersis shareholders increased by 49%, reaching $653 million due to an adequate operational performance and better financial results compared to the same period of last year. As a result of this, earnings per share for the first nine months of the year was CLP8.3 per share compared to CLP5.5 last year. In October 6, our Colombian generation subsidiary, Emquesa, announced the initial generation tests for the 400 megawatt new hydro plant, El Quimbo. It is expected to enter into a commercial mode for mid-November. Let me just remind you that the energy production of this investment on a yearly basis should be approximately 2.2 terawatt hours, with an implied load factor of 63%. Finally, I would like to highlight the outlook improvement in Chile due to range rated El Nino phenomenon. During September, our hydro capacity increased by 17% versus the previous month. Year-to-date, the total hydro capacity of our plant in Chile grew by 20%. Let me now focus your attention on the macro scenario for this year in slide number three. Despite the global macro trends related to commodities, US dollar interest rate expectations and currencies, GDP growth of the countries where we operate, with the exception of Brazil, continue to increase at more than 2% annually. This is reflected in our electricity demand growth evolution of the first nine months of the year compared with 2014. On this respect] let me highlight the resilience of countries like Colombia and Peru, which shows a demand growth that continued to stay at the same level, or even higher compared with last year. This compensate the lower activity in Chile and Brazil being Ampla, our distribution company in Rio de Janeiro, the most effective company due to its exposure to a lower demand growth and higher electricity losses. Regarding spot prices in Chile, we’re down 44.2% compared with the same period of last year, mainly due to a rainier season that continued to show a similar trend in October. However, in Chile, we have not achieved an average hydro year yet. Let’s now take a look to our main operational highlights under the scenario on slide number four. The installed capacity of Enersis Group increased by 3.6%, or 555 megawatt due to El Quimbo hydro plant in Colombia for 400 megawatts, the restart of the gas plant TG7 in Peru for 157 megawatts, and the last unit of the Salaco Chain hydro plant for 18 million megawatts in Colombia. Net production of the Group remained flat in the first nine months of the year. Here, the lower hydro production in Brazil was partially compensated by higher thermal generation in Chile. Finally, distributed electricity increased by 2% due to higher energy sense in all the countries where we operate. On this respect, the most important areas of growth were Peru and Argentina, which increased by 4%. The number of clients at the end of September amounted to 15.1 million clients, 449,000 clients higher compared to the same period of 2014. In slide number five, let me explain the main regulatory items for the period. In Colombia, as you know, the worst tax for the full year recorded in January impacted EBITDA by $23 million. This tax will last until 2017. And regarding the new regulatory cycle, we are expecting to have the final work definition during the fourth quarter of 2015. In Peru, since September 24 and following decree law number 1,221, the recent modification to the distribution tariff calculation for the next regulatory period 2017-2021 regarding from a sector model base to a real value-added distribution base on each company. We do not expect changes in the final tariff as the current model company is very similar to us in terms of efficiencies. In Brazil, the distribution company Ampla sent a request to ANEEL asking for an extraordinary tariff review recognition based on the CVAs already accumulated during the year, an increase of uncollectables recognized in the tariff, and an improvement of the regulatory index related with [indiscernible] losses. Now, on slide six, we will analyze the financial highlights for the period. Revenues increased by 9%, and EBITDA by 8%. This is mainly explained by the 4.1 recovery of the EBITDA in the generation business, which produced $669 million in the last quarter, together with the stable distribution business, which recorded $388 million in the same period. The overall company EBITDA during the third quarter was almost $1 billion. Net income attributable to Enersis shareholders increased by 49%, recording $653 million in the first nine months of the year due to the combination of better operational results, the positive effect of additional minorities interest acquired during 2013 in [indiscernible], and GasAtacama, and a better financial result, which improved by 54% during the period, which will be explained later on. Net debt increased by $240 million mainly due to higher investments. Let me analyze the EBITDA and the net income evolution in more detail in the following slides. On a country-by-country basis, and comparing with the same period of last year, overall EBITDA increased by $181 million, or 8% despite the negative impact of translation effect rate in Brazil and Colombia. In Chile, EBITDA increased by 36%, amounting to $678 million in the first nine months of the year. During the third quarter of 2015, Chile EBITDA reached $344 million, increasing more than 30% compared to last year. This was possible due to our lower spot market prices related to a better hydrology in the country, (inaudible) generation, and the effective thermo plant energy management, which more than compensate the perimeter effect of non-corrective we saw last year in particular in Milan and Enel. In Brazil, EBITDA decreased by 22%, or $132 million as of September this year, mainly related to the exchange rate impact of 17.5%. The remaining negative impact of 4.7% is related to higher energy purchase costs, inflation, and fixed costs in Ampla. This was partially offset by the good results in Coelce, which is on the fourth regulatory cycle with an increasing demand growing at the rate of 2.4%. In Colombia, the business was also impacted by a negative exchange rate effect of 16%. Net of this effect, results were flat compared to last year. Let me remind you that this year’s results contain a wealth tax of $23 million recorded at EBITDA level during the first quarter of 2015. In Peru, the business continues to grow at a solid rate mainly due to the good performance of the distribution business showing a 15% increase in EBITDA in the first nine months of the year, reaching $166 million. This is the result of higher accumulated electricity demand, which grew at the range of 4.7%. Finally, in Argentina, the EBITDA increased by $257 million during the period, mainly due to the distribution business as a result of the already-mentioned resolution number 23. On next slide, you will find a brief overview of the EBITDA breakdown by country and by business. Colombia remains as the main EBITDA contributor, generating one-third of the accumulated EBITDA in the first nine months of the year. Together with Peru, these two countries amount for $1.3 billion of EBITDA, or 49% of the total figure, amounting $2.6 billion. Chile also increased its EBITDA contribution since last year, moving from 21% to 26% as explained in the previous slides. In terms of business activity, generation represents 58% of the consolidated EBITDA, 2% higher than last year. Let’s now have a look at the main factors determining the Group net income on slide number nine. In addition to EBITDA and EBIT growing 8% and 10% respectively during the first nine months of the year, we have had a relevant positive impact of financial results, which decreased by 54% or $260 million compared to the same period of last year, recording $223 million. This was mainly due to the following factors. On the one hand, a higher financial income of $180 million related to 2015 IFRIC 12 remuneration and CPA indexation in our Brazilian assets. Secondly, in the other hand, lower financial expenses for $105 million in part related to the exchange rate effect on lower debt in Argentina. Finally, the effective tax rate during the period was 38.5% if compared to the 41% registered in the same period of 2014. As a result of all this, total Enersis net income increased by about 32%, reaching almost $1.1 billion and net income attributable to Enersis shareholders, which determined the earning per shares and the dividend, increased by 49% to $623 million. Let me now focus your attention on the capital expenditure structure on slide number 10. During the first nine months of the year, growth investments increased 36% compared with last year, mainly due to El Quimbo, which explains 47% of this variation. Overall, net investments amounted to $1.2 billion, increasing 5% if compared to last year. 55% of this CapEx was destinated to generation activities, and 45% to distribution activities. With all these elements, let’s analyze the cash flow on the net debt evolution during the first nine months of the year in the following slides. During the first nine months of the year, funds from operations amounted to $1.6 billion after tax payments and financial expenses. This amount covered both maintaining and growth CapEx. Re-concentration of dividends distributed during the first half of the year to Enersis shareholders, including minorities, for a total amount of $110 million was the main factor explaining the negative cash flow that equaled to $674 million. We expect an actual recovery of this trend during the final part of the year. Now taking into account this free cash flow evolution, let me explain you the net debt evolution in next slides. During the first nine months of the year, net debt increased by $240 million from $3.1 billion to $3.3 billion, mainly due to the cash flow evolution already mentioned and the positive impact of our debt mainly denominated in local currency following the natural debt allocation, which tends to be in the same currency of the flows of the Company — that the Company receives. Finally, let me give you an overview of the gross debt and maturity profiles in slide number 13. As of September 2015, gross debt amounted $5 billion, 18% lower compared to December 2014 as a result of the exchange rate effects and some loans repayments. The average cost of debt remains stable at 8.4%. Total liquidity amounted to $2.9 billion, allowing us to easily service our debt through 2017. This liquidity position includes committed and uncommitted credit lines for $1.2 billion and cash and cash equivalents of $1.6 billion, of which $1.2 billion are related to capital increase. Our short-term maturities are $180 million for 2015, and $849 million for 2016. Thank you very much, and now let me hand over to the operator for the Q&A session. Please, Operator? Question-and-Answer Session Operator [Operator Instructions] Our first question comes from Cosma Panzacchi of Bernstein. Your line is now open. Cosma Panzacchi Hi, thank you for taking my call and my questions. I have three brief questions. The first one is industrial. So, I’ve seen that there has been a general increase in losses in your distribution business across several countries. Could you actually explain what is driving this trend, and what plan do you have in place to actually optimize the losses again? The second question regards the impact of El Nino, especially given your exposure to Colombia. I wonder if this will create a potential headwind, going forward, or not. And then, the third question regards guidance. If I remember correctly from the H1 call, you were positive about your possibility of achieving the end of year targets or guidance, if you want. Do you still maintain that optimistic approach, or that positive approach? And looking forward to 2016, if I remember correctly from also the numbers that Enel has shown in the past, Enersis is expected to grow the EBITDA by approximately 20% in the generation business. Do you still think that that’s achievable, given the evolution of the macro? Thank you for taking my questions. Javier Galan Thank you very much for your question. I’ll try to address on the same order that you did them. On the industrial side, yes, we have had a general increase in losses in different distribution companies. I would say the DB Ampla, the one that is being more affected during [indiscernible] due to a higher distribution — costs on distribution, and higher losses due to theft in specific areas in Brazil, and related also to the current scenario on the country. In the second question you made related to El Nino exposure, I may say that currently in Colombia, we are expecting this situation to remain mainly at the half of next year. And currently, we are in a very good, sound position on the reserves, or both El Guavio and Betania, with 19% and 17% approximately of capacity higher than the system capacity, and along with higher prices on the region, we think we are well set up on what position in this scenario. And the third question, as you know, we do not give guidance. We have had a very good third quarter, as you saw, with $1 billion generation of EBITDA, and we are optimistic on the fourth quarter relating to specifically Chile potential generation capacity. Operator Our next question comes from Javier Suarez of Mediobanca. Your line is open. Javier Suarez Hi, good afternoon, Javier, Javier Suarez of Mediobanca. Thank you for taking my questions. I have three of them. The first one is on the debt structure of the Company. In the slide number 12, you are reporting an increase in the net debt from $3.1 billion to $3.3 billion. In terms of financial in hard currencies there, so local currency, can you break down for us by the different countries which is the [indiscernible] of your financing that is in local currencies versus hard currencies, I guess, in US dollar terms? That is the first question. The second question is on your EBITDA. Can you give us an idea on the percentage of your EBITDA on which the revenues stream is effectively in US dollar, i.e. in hard currency? I’m trying to make up my mind in the matching between your revenues stream and then the service of the debt. And the third question that I have is can you guide us through why the Company is suffering a decrease on the financial expenses when the Company has [indiscernible] on increasing the net debt position by 8%, and also the average cost of debt is also slightly increasing? Many thanks. Javier Galan Okay. Related to the debt structure shown on slide number 12, I will say that, related to the structure of this debt, we finance basically the distribution businesses and companies with local currency due to the fact that we do not have any indexation to dollars or — to dollars. And in the generation, we are basically — in generation in Chile and generation in Peru, we are financed in dollar terms due to the correlation on the dollar, on the way the tariff is determined. And the others are mainly on local currency. In terms of EBITDA, as I said before, we have revenues mainly in generation in Chile and Peru related to US dollars, so that’s the amount you should try to make up in terms of how much are we saving or how much are we indexed to dollars in this regard. In reference to your last question about the financial expenses, I made an explanation of why we had this reduction of financial expenses. That is mainly due, as I said before, so compensation on IFRIC 12, both on distribution businesses in Ampla and Coelce, which will have this year a positive effect, and last year we had a negative effect. So, we are (inaudible) is a relevant amount. Also, we have some cancellation of financial expenses in Argentina related to CAMMESA debt. And yes, we have had a slight increase in costs in financial expenses, both in Colombia and Brazil, not relevant at this moment. And we also had less income related to — as we have had less cash due to the fact of the investments we made in the first half of the year, the cash related to the capital increase. So, that is the general effect on our financial expenses. Javier Suarez So, to be 100% clear, none of your distribution activities in Latin America are financed in hard currencies, and only the generation in Brazil and Peru are financed in US dollar terms, correct? Javier Galan Yes, distribution companies, that’s right. In generation, it’s Chile and Peru are financed in dollars. Javier Suarez Chile and Peru, okay. Many thanks. Operator Our next question comes from Antra Murra of Santander. Your line is open. Antra Murra Javier, thanks for taking my question. My question is about the tariff provision in Codensa. When it’s supposed to be — what’s your BOO this revision? Javier Galan See, we expect the revision to take place in the last part of the fourth quarter of this year. And as you know, there will be a reduction on the WAC. Today we have our WAC currently in 13.9%. We expect a reduction of 1%, 1.5% reduction, which is still — will be a very important remuneration for our asset base. Antra Murra Thanks. That’s it. Operator Our next question comes from Nicolas Schild of Santander. Your line is open. Nicolas Schild Hi, thank you for taking my question. You have said in the past that one of the reason for restructuring all the LatAm assets is the holding discount that is really high on Enersis, and is lower in the case of Endesa. So, that would imply, at least in my opinion, that one megawatt, for example, [indiscernible] of Enersis should be values, or should have a less — a lower value than one megawatts in the hands of Endesa. Do you think that the valuations are going to consider this when you do the transaction to calculate the terms of exchange? Javier Galan Thanks for your question. No, I think that it’s not now the moment about commenting on different valuations which are being done in the different companies which are looking at this potential reorganization. Nicolas Schild Okay, thank you. And my second question is regarding the future growth in Chile, because in July there was a — you sent a press release disclosing that you’re going to have three terawatts of product in the pipeline of Chile, of which more than two terawatt would be constructed in the next five years. However, today there is an interview to the industry and analysis in newspaper where he said that the growth is going to be on Chilectra, because the generation opportunities — or they would do it in the generation business [indiscernible] time. When do you plan to clarify this? It’s going to be before having the shareholders meeting, or where do you see the growth in the future for this company, in both business in Chile? Javier Galan Thank you for your question. I think we have a very flexible and different optionalities in our pipeline, and we still have a very wide optionality portfolio of doing and growing in Chile. And we will develop this potential pipeline depending on the demand and depending on the prices on the country. And now, I’m trying to achieve a reasonable return for our shareholders. Regarding what you said about distribution and generation, I think that this company is in distribution business, such as the one which is in Chile. I think it’s very evolved business with a very high standard of consumption. I think that what Mr. Daniel Fernandez was trying to say is that there’s an opportunity to grow in giving more value to clients in Chile, and he was not talking more about the investment plan. Nicolas Schild All right, thank you. And my last question is regarding Ampla. Can you remind us what would be the regulatory EBITDA of that operation, and why is there the big difference between them [indiscernible], or also you are, for example, increasing expenses to lower that safe, or if you can do — if you give us a breakdown or where you’re losing that difference? Unidentified Company Representative Nicholas, about the regulatory, let’s say, review of Ampla, it’s still to be seen, which is going to be the final quantity that the DML is going to be recognized. And as we said in slide number five on October 29, on October 29 we asked for this RTP that should come in the next month. So, we have to see which of these three points has been commented are going to be taken to [indiscernible] by the regulator in order to anticipate this kind of [indiscernible] to Ampla. Nicolas Schild Okay, thank you. Operator Our next question comes from Carmen Concha of Moneda. Your line is open. Carmen Concha Hi, good afternoon. Which are the companies paying management fees in Peru and in Brazil? Can you tell us a little about the services that are provided by Enel related to these charges? Javier Galan Could you repeat your question? Carmen Concha We saw that the companies paying management fees in Brazil and Peru, so we would like to know a little about the services that Enel is providing related to these charges. Javier Galan I would say that there are two companies in Brazil, and Peru have signed a general service contract agreement with Enel. This general service is a framework contract which provides potential technical services or procurement, or other support activities being provided on markets like this by Enel on a customary basis on a one-by-one — on a specific basis, no? I think that the idea is to generate this framework contract in order to be able to take advantage of this type of potential services. So far, services have not been yet paid, and they are [indiscernible] contracted on a standalone by each of the companies on this framework contract. Carmen Concha Well, in the case of Peru? Javier Galan Both cases, in Peru and in Brazil. Carmen Concha So, the management fee is paid only when the services are provided, not now? Javier Galan Yes. Carmen Concha Okay, thank you. Operator [Operator Instructions] Our next question comes from Ezequiel Fernandez of F-O-T-I-A. Ezequiel Fernandez Yes, hi, guys, thank you for taking my question. I have three questions. I’d like to go one-by-one, and sorry if I repeat myself, because I got disconnected from the call. First is regarding the CapEx levels at Codensa and Edelnor, which went up materially for historical standards during this year. Any particular project or reason behind this? Should we expect lower CapEx in both operations maybe in the next one or two years? Javier Galan Okay. I think no, we are not expecting a reduction on the CapEx in Codensa or Edelnor. We are basically investing in quality, and in higher quality connections. And we aren’t expecting lower CapEx. Ezequiel Fernandez Okay, great. And my second question is also related to Ampla. If DNL does not grant an anticipated tariff update like you recently requested, would you need to do a capital injection from Endesa Brazil into Ampla maybe in upcoming months, or do you think it’s not that serious yet? Javier Galan We are studying the situation of Ampla. And as you mentioned, we have asked this tariff review. We are expecting to know from the ANEEL when are we going to have some feedback. I think that the situation of the Company is we need to monitor the situation, and we are studying different opportunities together with the financial community right now. Ezequiel Fernandez Okay, great. And I want to ask you a question about — finally about Edelnor, the Lima distribution unit. The results have been previewed lately, and I’m not very knowledgeable about how exactly the tariff update mechanism takes place. But, I do remember something. It seems that Edelnor tariff might have a higher pass-through to the US dollar than the regular — I mean, the rest of the distribution units. Would you agree with that, or maybe that the results are — especially in profitability, on profit per megawatt hour are related to other stuff? Thank you. Javier Galan No. In Edelnor, there’s no indexation to US dollars, if that was your question. (Inaudible) that there is a new system, and instead of being a system related to a standard company’s going to be on a company basis. No, our comment was that the standard has been used. As of today is very similar to the one we currently have, so we do not expect changes on this regard. Ezequiel Fernandez Okay. Anyway, I was speaking about the profitability increase that we have seen in the last two years in Edelnor, but maybe I can take that question with Pedro and his team after the call. So, thanks a lot, very clear. Operator And I am showing no further questions at this time. I would like to turn the call back to Management for any further remarks. Javier Galan Thanks. Well, seeing as there are no more questions, I would like to thank you for your time and your attention. Remember that our Investor Relations team will be glad to assist you in any further questions you may have. Have a nice day. Thank you. Good bye. Operator Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone have a great day.

Wisconsin Energy- Let’s Look At It After The Acquisition Of Integrys

Summary Half a year a go I wrote an article about WEC as a dividend growth investor. The latest Q3 report will allow me to understand whether the growth prospects are present. If the acquisition is successful, WEC will have plenty of room to grow. The post merger WEC might offer a 3.5% yield, 6% EPS and dividend growth, and all that in a business that is a regulated monopoly. Introduction Six months ago I wrote an article about Wisconsin Energy (NYSE: WEC ) as a dividend growth stock. At the time, the company was just before the acquisition of Integrys (NYSE: TEG ). Another great article in June also gave investors information about the sealed deal to acquire Integrys. On November 4th, WEC published its Q3 results. The results were great as WEC has beaten the EPS consensus by 3.5% and revenue consensus by 15%. This report and the information given by the company allow me to take a first glance at the new Wisconsin Energy company. Many dividend growth investors such a myself, divide their portfolio by sectors. I don’t like the utilities sector too much, but I am willing to allocate 2.5% of my portfolio to it. In addition, dividend investors also divide the portfolio by “types” of dividend growth stocks. We have stocks with low yields with high growth, medium yield and medium growth and high yield with low growth. It shouldn’t surprise fellow investors that as a 25 years old investor, I prefer the first and second group. However, I also buy shares from the third group for current income as well as diversification. I think that Wisconsin Energy has the potential to be a great investment, as it might offer great starting yield with robust growth especially for a utility company. All that comes as WEC is a regulated company with ROE of over 12%. The outcome of the merger The new Wisconsin Energy is the leading electric and natural gas utility in the Midwest. It has acquired a new growth platform, and it will allow it to access many more clients in the Midwest. Currently, it serves 4.4 million customers which get electricity and gas from the company. It also owns gas and electric infrastructure in several states. The merger has increased the long term debt of the company significantly over the past year. The debt was issued in order to pay for the cash part of the acquisition. However, WEC prioritize to minimize the effects of the additional debt and interest on its free cash flow. It has bought TEG for a relatively low premium when compared to others, and the additional debt didn’t decrease its credit rating. The merger allowed the 8% dividend increase in June, and raised the EPS growth guidance. At the same time, credit rating is intact and the company is managing its debt wisely. The synergies between the companies will allow additional cost savings and higher profit margins. The chairman and the CEO is very happy with the merger result: Since the close of the acquisition at the end of the second quarter, we have made significant progress in focusing our six operating utilities on world-class reliability, customer satisfaction, and financial discipline. I’m very pleased with our post-acquisition work, and we remain highly confident that the merger will deliver tangible benefits to our customers, to the communities we serve, and to the stockholders who count on us to create value. The great management is confident with the merger, and the metrics support their confidence. Revenue, EPS and dividend are up, and margins are regulated by the regulator, but still reach double digits. All this happens in a large utility company that doesn’t receive enough credit from investors. Fundamentals I have discussed the historical fundamentals lengthy in my previous article. I will briefly write the main metrics, and then show the future fundamentals estimates that make me so comfortable with Wisconsin Energy. Revenue growth is irrelevant due to the huge acquisition that resulted in massive growth of the revenue and the amount of shares outstanding. EPS grew over the past decade at a CAGR of over 7%, while dividend grew at a CAGR of over 14%, both figures are impressive. The dividend and EPS are forecasted to grow at around 7% in 2016, and 6% late on. The company is willing to maintain its 67% payout ratio, and is sure in its ability to grow EPS at a CAGR of 6% for the long run. The management is committed to its dividend which is great, and it know it has to manage the debt. Currently, the company enjoys good credit rating. The company has now many more shares due to the merger, and I believe that after some deleveraging, it will use some of its excess FCF to repurchase its shares. Buyback is not something that WEC hasn’t tried already. It used $300 million to buyback its own shares back in 2014. Opportunities Wisconsin Energy is spread across several states and therefore have exposure to several regulators. Indeed, it has the largest exposure to Wisconsin’s legislatures, but the larger spread is an advantage. Moreover, the regulator is acting in stable and fair way towards the company. It allows fair ROE, and doesn’t require too many harsh and expensive measures. The declining price of natural gas is a great opportunity. Wisconsin Energy is pretty green company that uses mostly natural gas and not coal. The whole electric infrastructure is going now towards natural gas which is much cleaner. The lower price will help the company to save money, and the fact that it uses natural gas already will reduce capex that related to transforming coal power plants to gas power plants. On top of that, Wisconsin Energy is a monopoly that enjoys a promises stream of revenues. Indeed, there is tight regulation that comes with it, but still, the company proved that they know how to deal with the regulation and show high ROE and growing revenue, EPS and dividends. Risk The larger amount of debt that the company carries is a risk. Especially now after the probability for raising interest rates is higher. In a higher interest rate environment, the interest expenses will be higher. Yet, the management is aware of that, and is willing to manage the debt carefully until they lower the debt levels. Moreover, the regulation is favorable toward Wisconsin Energy now, but it might change in the future. Expensive laws can forced upon the company, and tighter regulation might demand lower ROE from Wisconsin Energy. Both these measures can harm EPS substantially. Another important point is the lower return on equity. Since the acquisition the return on equity is lower than it used to be. This is due to the acquisition itself, and management will have to take care of it as soon as possible as the decline was pretty sharp. Valuation Valuation may seem a little bit high to some investors, but I disagree. The valuation is fair, and after today’s 4% decline in the stock price it is even more fair. I find the price today reasonable for initiating a new position. WEC PE Ratio (NYSE: TTM ) data by YCharts The forward P/E on this year is 18.15 and for next year it is less than 17. I find it to be reasonable, because you actually buy value with your money. I always like to buy value for cheap, but I don’t mind paying fair price for value as well. Conclusion I will start with a quote and a graph from the latest presentation: WEC is the only company in the S&P Electric Index, S&P Utilities Index, Philadelphia Utility Index and Dow Jones Utilities Average that has grown earnings per share and dividends per share every year for the past 12 years. If you buy Wisconsin Energy now, you buy some real value especially for a utility company. You buy 3.7% dividend yield that will grow at around 6% every year for the medium term, and you get it from a monopoly that knows how to deal with the regulation, deliver good product and satisfy both its customers and its shareholders.

South Jersey Industries’ (SJI) CEO Mike Renna on Q3 2015 Results – Earnings Call Transcript

South Jersey Industries Incorporated (NYSE: SJI ) Q3 2015 Earnings Conference Call November 05, 2015 11:00 AM ET Executives Ann Anthony – Treasurer Mike Renna – President and CEO Steve Clark – SVP and CFO Jeff DuBois – EVP and President, South Jersey Gas Marissa Travaline – Director, IR Operator Good day, ladies and gentlemen, and welcome to the Quarter Three 2015 South Jersey Industries Earnings Conference Call. My name is Christie and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Ms. Ann Anthony, Treasurer for SJI. Please proceed ma’am. Ann Anthony [Indiscernible] SJI’s third quarter 2015 results and provide an update on our business. Joining me on our call today are Mike Renna, President and CEO of SJI; along with Steve Clark, our CFO; and Jeff DuBois, President of South Jersey Gas; as well as Marissa Travaline, our Director of Investor Relations. We also have several additional members of our senior management team available to help address questions following our prepared comments. Our third quarter earnings release was issued to the media this morning and is also available on our Web site at www.sjindustries.com. This release and the associated 10-Q provide an in-depth review of earnings on both a GAAP and non-GAAP basis using our non-GAAP measure of Economic Earnings. Reconciliations of Economic Earnings to the comparable GAAP measures are available in both documents. Let me remind you that throughout today’s call, we will be making references to future expectations, plans and opportunities for South Jersey Industries. Actual results may differ materially from those indicated by these statements as a result of various important factors, including those discussed in the company’s Form 10-K on file with the SEC. Also, as was the case in last quarter’s results, our 2014 per share numbers have been adjusted to reflect the impact of the stock split that occurred in May of this year. With that said, I’ll now turn the call over to our CFO, Steve Clark to review our year-to-date and third quarter results. Steve Clark Thanks, Ann. Good morning everyone. Thanks for joining us. Kicking off our discussion, year-to-date Economic Earnings totaled $55.8 million as compared with $72.8 million for the first nine months of 2014. As you would expect, the majority of the variance year-over-year is the result of a write-down of our investment in and the lack of operational contribution from the energy facility at Revel, which is responsible for approximately $11 million of this $17 million variance. Other significant contributors to the variance are an increase in reserves and write-offs of uncollectable accounts in our utility; increases in post retirement benefit costs and lower contributions from investment tax credits. The benefits realized in our commodity marketing business from the polar vortex that occurred in early 2014 also drove some of this variance. For the third quarter, Economic Earnings reflects a loss of $5 million in 2015 as compared with a loss of $3.4 million in the prior year period. Economic Earnings per share through September 30, 2015 were $0.81 as compared with $1.10 for the first nine months of 2014. For the quarter, Economic EPS reflected a loss of $0.07 as compared with a loss of $0.05 in the prior year period. Beyond the issues I just discussed, we still saw many positive contributors, including strong utility customer growth and much improved year-over-year contributions in our wholesale business and I’ll review that as I detail the results for the specific areas of our business. Starting with utility, South Jersey Gas’ net income through September 30, 2015 was up 4.6% at $44.4 million as compared with $42.4 million through September 30, 2014. For the quarter, utility net income reflected a loss of $3.4 million as compared with a net income contribution of $1 million in the third quarter of 2014. As I mentioned previously, these results were produced largely by the increased write-off of uncollectible accounts. The extreme conditions experienced in the last two winters produced significantly higher customer bills, higher than many customers were there for. As noted last quarter, this resulted in increased receivables, increased aging at those receivables and ultimately increased reserves and write-offs for those receivables. Compared to the prior year periods reserves and write-offs negatively impacted year-to-date and quarterly net income by $3 million and $1.8 million respectively. We continue to educate customers on ways to reduce usage through access programs for assistance and to take advantage of different bill repayment options we offer. Additionally, the quarter saw $700,000 impact to net income from increased cost associated with post-retirement benefits and a $1.1 million impact from higher depreciation and amortization. Infrastructure investments under our accelerated programs totaled $48.8 million year-to-date and added an incremental $1.3 million to net income for the first half of 2015. The planned investments are on target to reach roughly $70 million for 2015. Our AIRP and SHARP programs are expected to add $2.5 million in incremental income for 2015 while continuing to reinforce our system for the replacement of bare steel and cast iron gas main and a replacement of low pressure gas main with high pressure main along the barrier islands. Another major infrastructure reinforcement — infrastructure system reinforcement pending is the pipeline to provide natural gas to the former BL England electric generating station. Having received the certificate of filing from the Pinelands Commission’s staff in August, we now await final approval from the New Jersey Board of Public Utilities and acceptance of the BPUs determination by the Pineland Commission. We remain optimistic that we’ll obtain final approval of this project before year-end and that construction will commence in mid to late 2016 pending any appeals to the decision that may arise. Customer growth continues to be significant with our customers total up by nearly 6,900 or 1.9% for the 12-month period ending September 30, 2015. During the same time period, customer growth added $1.9 million incremental net income as compared with the prior year period. We continue to achieve this type of growth as a result of low natural gas prices and targeted marketing efforts that maximize the reach of our infrastructure to capitalize on customers additions from those on or near existing main. Shifting gears to the non-utility; our non-utility operations contributed a total of $11.5 million in Economic Earnings year-to-date through September 30, as compared with $30.4 million in the prior year period. In the third quarter of 2015, this segment produced a loss of $1.5 million as compared with a loss of $4.4 million in the third quarter of 2014. Our non-utility business is comprised of South Jersey Energy Services and South Jersey Energy Group. Within the South Jersey Energy Services, year-to-date results really reflect the impact of the write-down at Revel, with Economic Earnings of $5.4 million for the first nine months of 2015 as compared with $21.5 million for the same period in 2014. The Revel related impact was the largest contributor to the overall variance within this business line along with a reduction in the amount contributed by investment tax credits year-to-date. However, on a quarterly basis, Economic Earnings for Q3, 2015 match those of Q3 2014 at $800,000. These levels reflect the fact that neither the third quarter of 2014 nor the third quarter of 2015 saw noteworthy contributions from the Revel facility and both quarters also featured fairly moderate summer temperatures that requires less production from our portfolio of energy production facilities. With that in mind, our CHP portfolio reflected a loss of $8.6 million for the first nine months of 2015 as compared with Economic Earnings of $2.7 million for the first nine months of 2014. For the quarter, contributions from CHP reflect a loss of under $100,000 in 2015 as compared to a loss of $2.2 million in the third quarter of 2014. Moving over to our solar activities, net income was $16.6 million for the first nine months of 2015 as compared with $21.1 million for the first nine months of 2014. For the third quarter, solar contributed 1.5 million in 2015 as compared with 3.5 million in the third quarter of 2014. Lower levels of investment tax credits produce the variance. Although that variance is largely timing, as we expect to match 2014 solar investments by year-end based on the robust queue of solar projects we have in construction. We also remain on track for full year SREC production of 140,000 SRECs which will continue driving improved operating performance. To that end, the quarter reflected positive performance of approximately $200,000, a result that just not reflect the full value of our solar production in the second and third quarters of 2015 due to the timing of the certification of renewable energy certificates in Massachusetts which can take up to six months. We don’t recognize income from those SRECs until after the certification process is completed. We estimated that our 2015 Economic Earnings would have benefited by approximately $1 million, had all SRECs produced been certified as of 9/30. These earnings will be recognized over the next two quarters. For the first nine months of 2015. Our landfills produced a loss totaling $3.2 million as compared with a loss of $2.7 million in the prior year period. For the third quarter, these projects lost $800,000 in 2015 as compared with $400,000 in the same period in 2014. While we are just starting to see a slight uptick in performance from the sites, we are focused on improving. We also experienced some unrelated maintenance costs in the quarter. Addressing this issue is a high priority within SJI. Turning to South Jersey Energy Group, we remain very optimistic about the future of this business. Year-to-date, this area has added $6.1 million as compared to $8.8 million through September 30, of 2014. What’s important to note is that the current year’s performance was achieved without the benefit but the extreme volatility the region experienced throughout the first quarter of 2014. Volatility that drove the $18 million of Economic Earnings we experienced for the first quarter of 2014. In the current quarter, this area improved by nearly $3 million as compared with the third quarter of 2014 reducing its quarterly loss from $5.1 million to $2.3 million. This improvement was driven by the commencement of one fuel management contract in 2015 as well as improved performance of our marketing contracts. I also want to reaffirm our expectation that this business will exceed the $30 million of Economic Earnings that produced in 2014 or 2015. Finally, taking a look at the balance sheet, our equity-to-cap ratio was 41% at the end of the third quarter as compared to 43% in the third quarter of 2014. We’ve used our dividend reinvestment plan to issue equity totaling $9.7 million through September and we expect to further employ this resource during the fourth quarter of the year in support of our capital programs. We also maintain accumulated deferred tax benefits totaling $300 million related to our investments that we expect to realize between now and 2021 to help de-lever the balance sheet. At this time, I’ll turn the call over to Mike. Mike Renna Thanks, Steve. Good morning, everyone. With three quarters already under our belt, 2015 has so far presented our business with a few challenges. Certainly the write-down of our energy asset at the former Revel property had a significant impact on the current year. Now however, our focus is on moving SJI forward with a strategy that will create exceptional growth, improve the quality of our earnings and strengthen our balance sheet. From customer growth and infrastructure investment in our utility to a marked improvement in our commodity marketing and fuel management business lines to our investment in the pipeline to supply a repowered B.L. England generating facility and our stake in the vital PennEast pipeline, we are well positioned to deliver on our goal of achieving Economic Earnings of $150 million by 2020. Looking forward, steady contributions from recurring customer growth that far exceeds the industry average is expected to add nearly 12 million in Economic Earnings over the next five years as strong conversion effort continue to get a boost from access to an inexpensive and abundant supply of low cost natural gas. Infrastructure programs that support accelerated replacement of bare steel and cast iron mains as well as low pressure services also remain a key contributor year-over-year, driving incremental net income growth that is expected to top 18 million by 2020. In our non-utility businesses, our wholesale and retail commodity business lines are firmly positioned to drive low risk repeatable to income streams that are expected to contribute roughly 10% to 15% of Economic Earnings through 2020. Fuel supply management contract as additional plants come online will ultimately represent between 5% and 10% of our projected 150 million in 2020. And as we expand our organization to include a stake in PennEast, our 20% equity investment in this 105 million — 105 mile interstate transmission pipeline will be a boost to earnings as well as a significant benefit to our customers, as some of the nation’s lowest cost natural gas is delivered into our system. We also look forward to the possibility of constructing a new headquarters in Atlantic City to support organizational growth that has pushed us over 700 employees. We expect Atlantic City to remain a vital engine for economic development in Southern New Jersey and we look forward to being a central part of its resurgence. The agility and versatility of our business combined with the talent commitment of our workforce has enabled SJI to identify many opportunities that make up our strategic path forward. As a result, we expect to finish 2015 with earnings per share that meet our targeted range of $1.49 to $1.54. More importantly, we are confident in our ability to achieve our key strategic objectives, Economic Earnings of at least 150 million by 2020; strengthening our balance sheet; maintaining a low to moderate risk profile and perhaps most importantly, improving earnings quality to ensure that the foundation of our business is built on regulated, repeatable and reliable income streams. Now, I’ll turn the call back to the operator for Q&A. Question-and-Answer Session Operator Mike Renna Thank you. Before we conclude, as always, please feel free to contact Marissa Travaline, our Director overseeing Investor Relations or Ann Anthony, our Treasurer for any follow-up on the items we discussed today. Marissa can be reached at 609-561-9000 extension 4227 or by email at mtravaline@sjindustries.com. Ann can be reached at extension 4143 or by email at aanthony@sjindustries.com. Again thank you for joining us today. Operator Thank you for joining today’s conference, this concludes the presentation. 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