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American DG Energy’s (ADGE) CEO John Hatsopoulos on Q2 2015 Results – Earnings Call Transcript

American DG Energy Inc. (NYSEMKT: ADGE ) Q2 2015 Earnings Conference Call August 12, 2015 11:00 AM ET Executives John Hatsopoulos – Chief Executive Officer Gabriel Parmese – Chief Financial Officer Ben Locke – Co-Chief Executive Officer Analysts Walter Schenker – MAZ Partners Ralph Wanger – RW Investments Roger Liddell – Clear Harbor Asset Management Michael Epstein – Northeast Securities Operator Good afternoon, and welcome to the American DG Energy Second Quarter 2015 Financial Earnings Conference Call. All participants will be in a listen-only mode. There will be an opportunity for you to ask questions at the end of today’s presentation. [Operator Instructions] For your information, this conference is being recorded. As a reminder, a recording of this conference call will be available approximately one hour after the conference call by phone until Thursday, August 20, 2015. Individuals can access the recording by dialing 1-877-344-7529 toll free or 1-412-317-0088 and entering the replay conference number 10070265 followed by the pound sign. Now, I would like to introduce Gabriel Parmese, Chief Financial Officer. Please go ahead. Gabriel Parmese Hi, everyone. This is Gabriel and thank you for attending our second quarter 2015 financial conference call. Safe Harbor provision. Various remarks that we may make about the company’s future expectations, plans and prospects constitute forward-looking statements for the purpose of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. We may make forward-looking statements about our future financial performance that involves risks and uncertainties. These risks and uncertainties could cause our results to differ materially from our current expectations. We encourage you to look at the company’s filings with the SEC to get a more complete picture of our business including the risks and uncertainties just mentioned. Also during this call, we will be referring to certain financial measures not prepared in accordance with generally accepted accounting principles or GAAP. A reconciliation of the non-GAAP financial measures used on this call to the most directly comparable GAAP measures is available in our press release and in the accompanying tables that we released. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our estimates change and therefore, you should not rely on these forward-looking statements as representing our views as of any date subsequent to today. And with that, I’d like to turn the call over to John Hatsopoulos. John, are you at mute? Ben Locke Yes, John, we can hear you fine. Gabriel Parmese Go ahead, John. Ben Locke Well, maybe what we’ll do operator is, I will go ahead and start the call and then we will have John join us for some remarks at the conclusion of my discussion. So as Gabriel said, welcome all of you to our second-quarter earnings call. Before I go into a review of our second quarter, I just want to do a quick reminder for those of you who may not be familiar with our call [ph] of our business. ADG and Eurosite Power are in the business of selling energy in the form of electricity, heat and cooling to customers who wish to save money spent on traditional sources of energy. We own the assets that produce energy on-site and earn revenue as the customer pays ADG at discounted rate for electricity and heat or cooling. This model called On-Site Utility or OSU is quite common and practical with energy technologies such as wind, solar and cogeneration systems. The OSU model is an essential part of any distributed generation infrastructure since not every customer has the capital or financial flexibility to own the asset outright. I’d like to also reiterate to our investors what the main focus of the company has been over the past two quarters and how it relates to our plans for growing company in the future. My main focus for the company since becoming co-CEO has been to improve the operations of our existing fleet in order to increase productivity by optimizing our margins. As our results confirmed, we are seeing solid improvements in our margins. I believe demonstrating robust and consistent margins for ADG is the most important metric to guide our business forward since it’s the basis from which we can resume building the business, confident that each new project will return margins that will lead us to profitability as quickly as possible. With this theme in mind, while our second-quarter revenues were essentially flat as compared to Q2 2014, our overall gross margin without depreciation improved 34.5%, a solid improvement over our gross margin of 28.3% last year. Our efforts to improve fleet performance are even more demonstrated by the improved margin of the ADG North American operations which increased to a little over 38% in the second quarter. And as our press release indicated the company achieved positive non-GAAP cash flow from operations as a result of tax incentives received by EuroSite. Excluding this UK tax incentive, ADG still showed improved EBITDA cash flow as compared to 2014. In terms of sales development in the second quarter, we announced the sale and installation of 2 Ilios heat pump systems in Hawaii this quarter. These heat pumps offer tremendous savings as compared to traditional heating systems and Hawaii is turning out to be an emerging market for ADG sales efforts. We also announced yesterday a contract for the design and construction services of the 2 Times Square hotels. This contract leverages our experience with boiler room construction projects and is expected to lead to more projects with this hotel chain. And lastly, EuroSite continued showing good growth in the quarter by announcing two contracts for systems in the UK. For those of you that listened to the EuroSite call earlier this morning, Paul Hamblyn is making great progress, with revenues increasing 30% and operating expenses decreasing 26% compared to the Q2 2014. And as mentioned, the cash inflows from the UK energy tax incentives resulted in overall non-GAAP cash flow positive for the quarter. Before going into detail about how our fleet performance has improved, I’d like to remind investors that our fleet consists of three segments. ADG owned and service sites, EuroSite owned and service sites and sites jointly owned and serviced with our LLC partner. As I described in a conference call we held on June 23 as well as our annual meeting call, in the second quarter we formalized a reallocation of the LLC sites resulting in ADG adding 8 sites consisting of 13 units to the ADG controlled fleet and 7 sites consisting of 9 units being dispatched to our LLC partner. The remaining 5 sites consisting of 16 units will remain in the LLC but ADG will assume operational control over these systems. Now that this reallocation is complete, ADG has complete control over the added sites, allowing us to determine each site’s potential for improved productivity and profitability, possible extension of the OSU agreements and in some cases expanding the OSU to include new systems on the site. We’re now in the process of making improvements to a number of former LLC sites. Some of these improvements are minor resulting in minimal downtime. Other improvements require more effort resulting in longer downtime. We fully expect to have a small dip in revenues in the third quarter as a result of this work but the long-term benefits of the improvements far outweigh any short-term revenue reduction, and as I already mentioned, we are approaching certain former LLC sites with new OSU propositions that will improve the customer savings and secure long-term profitable revenue for ADG. With this reallocation now complete, our fleet now consists of 119 systems, consisting of 76 ADG controlled systems, the 16 systems still in the LLC and 27 systems in the UK with EuroSite. So turning to the ADG North American fleet. We saw an increased productivity of 12.5% as compared to Q2 of 2014. When including July numbers, which also increased 12.3% from last July, this marks nine straight months of increase productivity for our North American fleet. While our revenues do not always track linearly with these productivity increases due to variations in gas and electric prices, it is a solid trend that we expect to continue. As described on the EuroSite earnings call, EuroSite total energy production increased 44% from Q2 2014 and EuroSite added 2 systems into their fleet in the second quarter, also reaching an agreement for an additional two systems to be installed later this year. So turning back to sales for our North American operations. We have several strong sales prospects that we expect to close in the third quarter. As I mentioned on previous calls, we have instituted a new layer of project evaluation and analysis prior to accepting any new OSU arrangements. It is essential for our future growth that ADG only accepts projects that will assuredly deliver the promised revenue and margins that our analysis projects. In many cases, we are now requiring that M&V or measurement and verification be conducted prior to closing OSU agreement. This step adds time to the closing of the OSU project but ensures that the actual electric and thermal load profiles match our economic analysis and therefore validates our ROI projections. Many OSU projects look good on paper but only through M&V and construction cost verification will these projects return the ROIs expected by ADG. With that said, the backlog of projects we are seeking to close, all meet the stringent criteria for success. I am working very closely with the sales team to make sure that we only accept jobs that will meet our projections since these will be the projects that materially contribute to our revenue and profitability goals. So in summary, I strongly believe that ADG’s business model is vibrant. The fundamental economic drivers for our OSU model remain strong. Electric rates continue to rise, natural gas remains affordable and customers continue to value the resiliency to grid outages that fatigue co-gen equipment provides. We have made excellent progress improving the performance of our North American fleet, the upgrades of former LLC sites for optimum result and higher revenue with good margins. And EuroSite is making tremendous progress in the UK and we expect more project announcements in the coming quarter. All in all, I believe 2015 will demonstrate that ADG business is strong and the goal of reaching cash flow positive operations by 2016 is achievable. With that, I’d like to turn it over to John for a few comments before we take questions. John Hatsopoulos Ben, thank you very much. The phone kept coming on and off, I don’t know what happened but anyway, ladies and gentlemen I wanted to thank Ben for the fantastic job he has done in straightening up and solving some of – most of our problems that we have at ADG. We obviously think very highly of the prospects of ADG and some of you might not know that we have been buying our stock and we have bought in excess of 800,000 shares in the open market and probably we need to talk to our board, we will probably continue to do something like this for a while, as long as our stock is trading at a discount to our cash plus the value of the shares of EuroSite that we have. As you know, we have a little over 28 million shares of EuroSite which represent about 48% of our assets. With that, again, I want to thank all of you for being on the call. Ben, I don’t know if Gabriel needs to say something. But again, thank you. Ben Locke Operator, I think we are ready to take questions. Question-and-Answer Session Operator [Operator Instructions] Our first question comes from Walter Schenker of MAZ Partners. Walter Schenker To what extent can ADG ex-EuroSite become cash flow positive through improving the current operations or to what extent do you have to add additional units to get you to that point, and if so, roughly how many additional units might it take to get you there? John Hatsopoulos Go ahead, this is your question. Ben Locke Yes, Walter, I can answer the question. This is Ben. So we have looked at that exact case very precisely what it’s going to take for ADG absent EuroSite to reach cash flow positive operations. And it’s going to be a – I mean this effort that we’ve undergone to improve our margin and increase productivity, of course, it’s very important to get the most out of our fleet but to me I really needed to demonstrate that any projects we get on board are actually going to return good margins of 35% or so. And I am convinced of that now. And so with that in mind, we do have a backlog of projects and unfortunately I can’t tell you the exact size of the systems and how many it is but it’s enough systems that we can install in a few quarters time that will indeed get us to cash flow positive operations in 2016. So what we have to do right now is we have to close those deals and as I mentioned, we are doing M&V on them right now. We need to close those deals, we need to get them installed, we have sufficient capital right now to install those systems, we don’t need to raise additional money to install those systems that we need to get there, and get them up and running in the next few quarters. I will give you a ballpark figure, under 10 systems that we’re going to need – we have identified in our backlog to get installed and get us to cash flow positive even without EuroSite. John Hatsopoulos Again, maybe Gabriel should say what was the operating loss of American DG US without EuroSite, because it was a very small amount. Gabriel Parmese Yes, hang on, give me one second. For the quarter, right? Ben Locke Yes and while Gabriel is looking that up, Walter, I mean a part and parcel of this plan is also looking at our expenses. Gabriel Parmese 149,572 – 149,000, this is a bogey [ph] that we have to reach for North American. Ben Locke And I think that’s very achievable. Operator Our next question comes from Ralph Wanger of RW Investments. Ralph Wanger What is the size of our sales force now and is it sufficient to handle – or we have to add more sales — Ben Locke Yes, Ralph, I can answer that for you. Our sales force consists of a couple of different elements. Of course, we have a direct sales team on staff at EuroSite and it’s a very senior salesperson and then an associate working with him. Supplementing that and in fact the way these sales work a lot of time is some of the engineers that we have end up doing – since they do a lot of interaction with the customers, they end up doing little bit of sales. But the real supplement to the sales team where we have these sales agents so that we’ve anointed, I guess, for lack of a better word, who find projects for us, help negotiate and close them, and they get a commission. So again for ADG sales team, it’s a senior person plus an associate, with some assistants from the engineering team and myself for that matter, and then a network of over dozen of sales agents helping us. Ralph Wanger And is that sufficient to bring in enough business to — Ben Locke I think it is. The problem is not getting enough leads. We get plenty of leads, our sales team is very effective with all the traditional methods of conferences and outreach and all that, and getting plenty of leads, the trick is to find those really good projects, that are going to get the margins that I am expecting. I absolutely do not want to be accepting projects and orders just for the sake of announcing we have projects and orders when in fact they’re not going to give the margins that we are going to need to be successful. So maybe much to the dismay of our sales team, being very diligent about only accepting the orders that are good. So I think our sales team is doing fine coming up with the leads and coming up with proposals, we’ve just got a much tighter filter right now to make sure that we don’t take on any poor projects. Operator Our next question comes from Roger Liddell of Clear Harbor Asset Management. Roger Liddell Good morning. I wanted to follow up just one definitional thing. We expect to be cash flow positive by 2016 was the comment [indiscernible] definition. So can we talk in terms of meeting by the exit rate of fourth quarter of ’16 or is the whole year likely based on what you can now say? Gabriel Parmese For EuroSite, we want to accomplish that by – sometime around the second or third quarter of next year. And we are hoping for the fourth quarter this year, so the timing is uncertain but rates plan of this – I think for ADG we are hoping for – we are shooting for the start of the process in the first quarter of next year, the second quarter the latest. Ben Locke The reason that timing is a little shaky, Roger, just to be totally honest with you, is once we close the project, as you know there is a construction phase, and a whole lot of separate topic is how I am looking at doing construction going forward, the ADG is trying to get that to be quicker. Once – ex the timing of the construction when they get up and running and when those revenues start coming in. So again building up the comments I made earlier, we know the projects right now that we need to close and install. We don’t have some placeholder project X or something, we know the exact projects, the exact sites that we need to install in the next months or so to get up and running to get us cash flow positive. John Hatsopoulos We are not talking about the end of 2016. Roger Liddell Second thing, there have been encouraging wins over the Tecogen site with school districts, and school systems, and I am wondering whether there is a thesis for school districts looking at the ADGE model relative to just take at the straight heads up financing of the conversion projects or the upgradings, so can you just give some discussions and texture – doesn’t have to be school districts but municipal opportunities which importantly include school districts? Ben Locke I can answer that a little bit, Roger. There are large ASCOs that come in to play for these projects and the acronym is must be the way, municipalities, university, schools and hospitals, and you will hear that acronym a lot when you look at Johnson Controls and Siemens and Honeywell’s ASCO businesses and the reason is that they have the capability and the might to really tackle those projects from the shoot to nut [ph] standpoint, window replacement, insulation, solar, wind and again CHP ends up being a part of it. So ADG really can’t compete with the Honeywell or Siemens that come in and will do an entire school system not to mention the fact that the name power of those large ASCOs basically carries the municipalities. But with that said, it is – you are exactly right that it is very encouraging that these ASCOs as Tecogen indicated are including CHP and there are efficiency measures because it’s really validating that CHP is a big contributor to all these efficiency measures. I think even though ADG, I don’t think it is going to be able to go into a school district and do K through 12 enhancements of the entire district. It does validate that we can find some sites, some projects that might be schools or might be smaller hospitals that will be willing to look at the ADG proposition for CHP. Roger Liddell And Hawaii, my understanding of the electric rates out there, it’s a tremendous opportunity, I do not know that the demand churns characteristics of Hawaii E but only two units so far and I would be surprised if there weren’t a major opportunity there, granted the support of Hawaii E business may be a gating factor, so could you touch on both of those? Ben Locke Sure. Hawaii E is really a great market opportunity, not just for American DG but obviously Tecogen. And in fact, ADG and Tecogen strategy is very well aligned here with our approach to Hawaii, which is – it’s a very dangerous proposition to go to a remote location like Hawaii and immediately start putting co-generation systems down, in fact, Hawaii went through a phase about 20 years ago where as a company dropped the bunch of co-gen units down or maybe more than 20 years ago. A company dropped a bunch of cogen units down and left, never service them, they ended up running, they ended up all getting disconnected and left a bad taste of cogen in the mouths of Hawaii Electric and lots of consumers there. It’s very important that when you go proceed with a cogen in a place like a remote place like Hawaii that you have a factory service presence there, to make sure you maintain these systems. So the way you get there and this is where ADG and Tecogen are aligned. As you start off with a product that can be managed — relatively manageable in terms of a service interval and Ilios is a perfect example. The Ilios doesn’t require a tremendous amount of service intervals. You can typically find people on the ground who know engines and know HVAC and refrigerants and things like that. And so you can outsource the maintenance of that very easily and start to build up of fleet to the point where you get to a fleet, my goal is to get to an Ilios fleet of maybe 8 or 10 units, where you can now see of having a factory service person on the ground there. Once you’ve got that factory service, now you can contemplate, in fact, the next step would be chillers, like Tecochills which have just as promising economics as cogen, where it uses your resilience, your reliance on the grids as much as cogen does. And then build up to the point where you get cogen on the ground. So for a long way of answering your question, Roger, that you are absolutely right. Hawaii is a perfect market for Ilios, for Tecochills and for cogen. We just have to be careful about how we deploy putting these systems on the ground whether Tecogen sells them or ADG does the whole issue, to make sure that we can support them. Operator Our next question comes from Michael Epstein of Northeast Securities. Michael Epstein Ben and Gabriel, I thank you, I see that we have an elevated management team that we might have had a few years ago. I guess I am looking that we hear the commitment from management that next year’s annual meeting will be at the office in Boston, so shareholders can participate and give ideas and have some interactions and meet management. Can I get that commitment from the management? John Hatsopoulos No, Michael, look, we will have our annual meeting – number one, all management is available to talk to you and every investor any time you wish. We have to do whatever is best for the long term of the company. As of right now, our plan is to do it in Boston. But we cannot give you a guarantee right now that some countries for example, two weeks ago I was in Canada with the largest producer of paper, if something develops there, we might end up doing it in Montreal but as of right now we will do it in Boston but we will not guarantee to you. Michael Epstein Next one of my question is it’s so natural for the gas utilities to give us leads so they can sell gas, we can install the unit and get a fee on how we pursue that as a source of potential clients. John Hatsopoulos We are talking to one partner who is part of the utility who has a separate division who wants to sell electricity to some of our customers, and also wants to edge our gas, and then I think we have a good fit but it’s in the lead stages right now. So we are talking to folks right that. Ben Locke In addition, we also have through Tecogen very good relationships with SoCalGas in California. They are constantly developing leads for Tecogen and if it turns into an OSU agreement, those leads right go to the ADG sales teams. So you are absolutely right, Michael, working with the gas company as – to define projects as an excellent way to go. Michael Epstein Certainly a filter for getting potential leads. I guess my next question is about this Time Square hotel, where are you just selling them and installing equipment that we sell them a long term contract to – for services, or for using gas. So we make a spread on that, or just as this – just the contraction project. Ben Locke We are doing the construction, engineering and construction management phenomenon, we don’t have a long term services but I will tell you, Michael, why we are doing this because you maybe say what the heck do you think for? It is a very high prophet hotel chains. I would say tell management copy, you wouldn’t – the name wouldn’t make any sensitive but it’s a hotel management company that has several hotels that we’d like to get OSU agreements into and a way of building confidence with this management company, we are doing this project and it’s very pretty good, it’s good margins, and it’s good use of our engineering efforts and it’s pretty good margin – it’s good margins, it’s good use of our engineering efforts and I think they are pretty hard with what we have done so far. But the real goal here is to get a relationship with this hotel management company that will eventually lead to more OSUs. Michael Epstein We have such a bit image in the close stock market, why don’t we change our name to on-site utilities, and try and get a different image possibly and reserve in split, do some investor relations PR, so people understand that the model that recovering assets of now – potentially it seems to be lost along way when the stock decline precipitously decline, we lost all our following. What is the management’s thoughts on that? John Hatsopoulos Uptil now we have tried to avoid hiring and IR team in our company.IR firms, I have found as you know, our at turbo electron as the CFO for over 45 years. And I drew the conclusion that IR did not have an IR. You need to have build employees the bob and we understand into upsurge, a lot of failures in the thermal electron, we ended up getting people like [indiscernible] who is right now running the IR electron. We have Gabriel, I am doing interviews so right now people that we will put as employees of our company to help us who they are. Now as far as the name, it’s very interesting and I am going to bring it up to the next board meeting, lot of our best investors are great, so I don’t mean to share anything bad about anybody else. It suggests that we removed the name and energy from American DG and I am going to bring it up to our board meeting for a very simple reason, he thought is that people think of us as an oil company or a gas company and the oil energy is a negative. One of our people, employees of ADG remain with Christine and we received around various interviews, Christine check and maybe ADG, without the name energy is available. When we start as a company, owned by somebody and we recoup those – that’s why we added the word energy. So we are – I am going to propose or suggest that we have a discussion with our board about removing the word energy. I am not going to tell you who suggested that to me but it’s one of the people that are on the question and answer session today. Michael Epstein Few questions. One, you have Gabriel and Ben, they seem articulated and they would actively give a very good image of the company if we use them on certain basis for investor relationships and investor relationships. Just taking the name energy out, doesn’t really transform you that much. On-site utilities is more descriptive, it’s a great image and it really tells when you’re working, what you really do, you’re putting a facility – you’re putting on equipment on their facility and savings are savings. It seems to be that we can’t seem to close deals. I haven’t heard of any real significant deals closed when your prior president was where you had like how you just proposed and how many are out for contract. We don’t seem to have that anymore. Why is that? Ben Locke Again, Michael, this is Ben. My overall team in turning the company around is to demonstrate performance, demonstrate the fast units margins that we expect to make demonstrates that the model work, and only then start replicating that accepting new projects. As I mentioned before, I can close 10 deals tomorrow if I wanted to. I could sign 10 OSUs tomorrow if I wanted. But I know they are not going to be really good margin, solid projects, I am holding out for the few handful of projects which as I mentioned before, I know the names, we are about to close them, and they are the ones that are going to be cash flow positive. Those are the ones that are going to have good margins and revenues and we’re going to build the business on. And I just want to mention one more thing to you that I didn’t mention earlier. EuroSite actually does have a relationship with Dong [ph] Energy in terms of natural gas, so that’s certainly a high up on the radar of Paul Hamblyn from the EuroSite side. John Hatsopoulos Mike, having said all this, on our board meeting, I have mentioned a suggestion, we have a powerful group of directors and Charles Maxwell is one of them who is our Chairman, the other one is John Rowe and so forth, so the other one is Dr. Samaras and so forth, we will have a discussion on it and he has agreed and I will give you both. Operator And our next question comes from Thomas Orr, a private investor. Unidentified Analyst My first question was kind of asked by the last caller, it had to do with the contract you announced yesterday. It wasn’t an evaluation but I was curious if you can talk about what the rough value to ADG would be of that contract if you can, can you do that or no? Ben Locke Tom, unfortunately our agreement with this hotel management chain precludes us from mentioning the actual contract value and as I said these are people who are really trying to get good gracious with. So we are abiding by their wishes. Unidentified Analyst I understand the value to doing that is, is the level of profitability to gross margin on a turnkey piece of business like this equivalent to the overall operating margins the 34%, 35% that you just saw for last quarter, is it less than that? Ben Locke Yes, I think it’s safe to say yes, it is possibly even a little bit higher. Unidentified Analyst Next question, I just want to make sure I understand on the cash flow positive scenario that you mentioned. You said you had the 10 roughly – 10 orders or potential orders identified that – so can you fill those out of existing backlog or are you incorporating into that projection of 10 prospects that you have that aren’t quite signage orders but that you believe you are going to sign those orders in the near future? Ben Locke In addition to fulfilling our backlog, these are projects that we will be signing new OSUs with that you will hopefully be hearing about soon. Those are the projects. Unidentified Analyst So they are projects that you think you are close to closing, so effectively you have those 10 identified, part backlog, part new orders. So you have to say that your visibility – I mean the time could be plus or minus a quarter two but effectively you are very highly confident then once you get those 10 in place and operating, you are cash flow positive and you think we stay cash flow positive then or more or less after that, and just build on it, is that – Ben Locke Absolutely, once we get cash flow positive, I mean these OSU agreements are going to keep going and as I mentioned earlier in the call is as some of our OSU agreements are ending, we are rebooting them, and approaching the customer and say look, the OSU agreement is over, but we could do the following work and get it going, get more savings for you. So absolutely, once we get cleared that hurdle, the revenues are going to be recurring. And I just want to mention one more thing, again these projects that I know of that we are hopefully going to be closing, as I can reiterate enough, we are spending a lot of time doing M&V making sure that they are solid, and also validating our construction estimates, making sure that we already have bids from contractors so that we absolutely know what the cost is going to be, to get these projects going and assure Gabriel here that we have enough money in the bank right now to pay for them. So we don’t need to go for more funds to get these projects going. Unidentified Analyst One last question, on the last call I believe there was some discussion about borrowing and lines of credit and some other thing, Elias mentioned on the EuroSite call, prior to this, the fact that EuroSite was possibly in a better position now to tap that market or some other financing mechanisms that were cash flow positive. Have we moved that any further along and are we closer to actually signing a letter of credit or having a credit facility formally in place going forward now? Ben Locke Well, I will start to answer the question and then I will pass it on to Gabriel or John for more color. But my initial answer to that is my goal is first to get cash flow positive because you are getting it in much better terms in any type of debt facility when you are profitable and showing money. So I am trying to avoid that right now. But once we clear that hurdle, any number of opportunities open up to us in terms of looking at credit financing. Gabriel? Gabriel Parmese That’s correct. I mean we’ve had two term offers, they weren’t good enough. Our gross margin is rising, so the risk premiums coming out of the future deals, so we want to continue to drive that initially, in the end we get the best deal. And we could get financing today but I think it’s best to wait. The other end is, we want to get really good at design, engineering and getting these things up quick and then we will make more money and we want to be able to borrow the money for the least period of time and pay the lender off quickly. So all this has got to come together, we are working on it hard, and when it comes together, these projects, the turnover will be quicker and then the profitability will come sooner. Unidentified Analyst So we are comfortable then as a company waiting say two or three or possibly four more quarters maybe into the second, even third quarter of next year before we actually – John Hatsopoulos John Hatsopoulos, we have started [ph] doing that up everybody. I am in London right now. We have just finished talking to two banks that they have approached us at very reasonable rates for loaning money – lines of credit to EuroSite of a substantial amount of money, at less than 7% interest. I can’t give you numbers because we are negotiating and talking about. So if we do that with EuroSite, it’s obvious to me that we will be able to do the same thing with American DG. But it’s amazing they are calling us rather than us calling them. That’s why I am in London right now. Unidentified Analyst Look, to me I see significant operational improvements, stronger management, much more cogen indication, might be this concern, it isn’t just always liquidity, do we have to go back and borrow, I just want to make sure, so we are comfortable then John, you feel we have more than ample cash now to carry us forward, what, over the next year before we have to borrow any money or easily a year, six quarters? John Hatsopoulos First, let me tell you, that EuroSite as you know I loaned them some money at a very low – the only interest they pay me is what I pay the IRS. And we should get over the next – before the end of the year a line of credit which is better than money because line of credit you don’t pay interest, if we use the money, for EuroSite and I can tell you that we have enough money till the end of next year for a very simple reason, if Ben gets most of the jobs that he has, then we will need some money but by then if we can get it in for EuroSite, we should be able to get from the same banks, which also have branches in the United States, same or better terms and it pushed them to some, I am there too. So and as you know, raising money has not been a problem, we just raised $5 million for Tecogen with no bank, I did it myself, I am bragging, and I apologize, we gave no warrants, and it’s a group, it’s a family group that I know that they were willing to give us more, and we only took $5 million for Tecogen. That is public information. So I am not giving you any inside information. I am here in Europe with the same family member that gave us the $5 million because they are also very intrigued with everything else we are doing. End of Q&A Operator And this concludes our question and answer session. I would like to turn the call back over to management for closing remarks. Ben Locke Well, this is Ben Locke again. Thank you all again for joining us for the call. As always, as John indicated, we are happy to answer any more questions if you want to reach out to myself, or John or Gabriel for that matter. Thank you again. Operator The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.

Hawaiian Electric Industries’ (HE) CEO Constance Lau on Q2 2015 Results – Earnings Call Transcript

Hawaiian Electric Industries’ (NYSE: HE ) Q2 2015 Earnings Conference Call August 10, 2015, 1:00 PM ET Executives Clifford Chen – Manager, Investor Relations Constance Lau – President and Chief Executive Officer James Ajello – Executive Vice President and Chief Financial Officer Alan Oshima – President and Chief Executive Officer Tayne Sekimura – Senior Vice President and Chief Financial Officer Analysts Paul Patterson – Glenrock Associates Charles Fishman – Morningstar Michael Weinstein – UBS Nick Yuelys – Gabelli & Company Andy Levi – Avon Capital Sachin Shah – Albert Fried Operator Good day, ladies and gentlemen, and welcome to the Hawaiian Electric Industries, Incorporated Q2 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] I would now like to introduce your host for the conference call Mr. Cliff Chen. You may begin. Clifford Chen Thank you, and welcome everyone to Hawaiian Electric Industries second quarter 2015 earnings conference call. Joining me this morning are Connie Lau, HEI President and Chief Executive Officer; Jim Ajello, HEI Executive Vice President and Chief Financial Officer; Alan Oshima, Hawaiian Electric Company President and Chief Executive Officer as well as other members of senior management. Connie will provide an overview of followed by James, who will update you on Hawaii’s economy, our results for the quarter and outlook for the remainder of the year. Then we will conclude with questions-and-answers. In today’s presentation, management will be using non-GAAP financial measures to describe the company’s operating performance. Our press release and webcast presentation materials, which are posted on HEI’s Investor Relations website, contain additional disclosures regarding these non-GAAP measures, including reconciliations of those measures to the equivalent GAAP measures. Forward-looking statements will also be made on today’s call. Actual results could differ materially from what is described in those statements. Please refer to the forward-looking statements disclosure accompanying the webcast slides, which provides additional information on important factors that could cause results to differ. The company undertakes no obligation to publicly update or revise any forward-looking statements, including EPS guidance, whether as a result of new information, future events or otherwise. I’ll now turn the call over to our CEO, Connie Lau. Constance Lau Thank you, Cliff and aloha to everyone. Turning to our results announced earlier today, both our utility and bank are on track to meet our 2015 earnings guidance. At the utility, we have been working hard to advance the energy transformation plans that we filed with our commission last August, which would triple distributed generation including rooftop solar in Hawaii by 2030. Increased renewable energy to 65% by 2030 and also position us to achieve Hawaii’s new goal of 100% renewable energy by 2045. At the bank, we are working hard to deliver stable, profitable performance. Year-to-date deposit growth was strong and credit quality remained sound. On June 10, we achieved an important milestone for our pending banks spin and utility merger with HEI shareholders approving the merger with NextEra Energy with a 90% mandate from shares voted. In addition the process to obtain Hawaii’s Public Utilities Commission approvals and other approvals is underway. As many of you know the governor of Hawaii made public statements regarding the proposed merger following testimony that was filed on July 20 by interveners to the merger. In a press conference, the governor said the state is taking the position of opposing the merger as proposed. Later today, the consumer advocate is expected to file his position with the Public Utilities Commission that will complete filings by all parties and we and NextEra Energy will file our rebuttal to those positions on August 31. We believe that as we and NextEra Energy, provide more information and engage in additional discussions, the commission and others will conclude that our merger will provide significant benefits for our customers and the entire state and will further underscore Hawaii’s global leadership in clean energy. The governor also stressed the importance of having a partner who shares the vision of having 100% renewables for Hawaii, a new law, which is signed on June 8. Both Hawaiian Electric and NextEra Energy each have made clear that we are fully committed to achieving Hawaii’s new goal of 100% renewable energy by 2045. NextEra Energy has made it clear that it is committed to Hawaii and will bring a combination of renewable energy expertise, strong technological and operational knowledge, financial strength and access to capital necessary to support Hawaiian Electric’s plans. For our part, we believe NextEra Energy is the right partner for Hawaiian Electric to help us accelerate the achievement of the Hawaii’s clean energy goals. Given all the attention that has been placed on our utility transaction, I would be remiss in not mentioning our other major operating company, our bank American Savings Bank. American Savings Bank has been diligently preparing for their cross conditional spin off in parallel with our utilities – Public Utilities Commission approval process. Just as we firmly believe in the positive impact our utility merger will have on Hawaii the addition of American Savings Bank to the ranks of independent publicly traded companies based here in Hawaii will also provide significant benefits for our Hawaii customers and communities as well as for our shareholders. Back on our utility merger, last week the Hawaii Public Utilities Commission issued an order establishing the remaining timeline for the review of the merger transaction. We are currently in the discovery or information request phase of the PUC process. As I mentioned earlier, our consumer advocate is expected to file his testimony later today and we and NextEra will file our reply on August 31. All parties may then ask each other any final questions with all discovery scheduled to conclude by the end of September. Thereafter, the Public Utilities Commission will host a series of public listening session throughout the Hawaiian Islands starting in September and continuing through October 2015 to provide the public the opportunity to address the commission concerning the proposed transaction. Evidentiary hearings are scheduled to begin on November 30 and continue through December 16, 2015. Following the evidentiary hearing, the parties will file closing briefs and thereafter the commission is expected to issue its decision. Turning to slide four, in addition to the Hawaii Public Utilities Commission approval, the major items remaining for the merger with NextEra Energy and the spin off for our bank to shareholders are the following conditions. The receipt of all other required regulatory approvals from among others the Federal Communications Commission, the Federal Reserve Board related to the bank spin and expiration of the Hart-Scott-Rodino Act Antitrust period, which we filed just last Friday. I would now like to highlight the status of key utility developments. On June 29, our utility submitted their final statement of position in the distributed energy resources proceeding, which included new customer options and programs to support continued growth of rooftop photovoltaic systems in Hawaii. Recommendations included nation leading technical standard for advanced inverters, which will improve the integration of high levels of rooftop PV. New options for customers including battery equipped with rooftop PV systems, a pilot time of used rate to offer customers, the opportunity to save money by shifting their energy use to different times of the day, particularly when PV panels are most productive, as well as, a new pricing structure for new rooftop PV systems that more fairly distribute costs for operating and maintaining the electric grid. Hawaiian Electric continues to lead the nation in the integration of customer cited solar with 13% of residential customers having with rooftop solar year-to-date through June 30. Our customer adoption of solar energy in Hawaii is 20 times the national average. The utility proposals would provide greater access to rooftop PV, while helping ensure the longevity of programs in a way that protects reliability, safety and fairness for all customers. Ultimately, the Public Utility Commission will determine how and when any changes impact customers. Back in October 2014, Hawaiian Electric committed to clear a backlog of about 2,800 then pending net energy metering or NEM applications of which we have only 15 remaining. Since then, more than 15,000 additional applications have been approved to install or interconnect. As of July 15, a total of approximately 70,000 rooftop solar NEM applications have been approved by Hawaiian Electric, Maui Electric and Hawaii Electric Light Company for the five islands we serve. For our main islands of Oahu, this has resulted in close to a 30% of the single-family homes on a Oahu approved for solar PV, a very high penetration rate. On July 15, Hawaiian Electric Company proposed a community solar pilot program. If the PUC approves the pilot about 50 Oahu utility customers who don’t currently have access to rooftop solar will be able to enjoy the economic benefits of rooftop PV. Lessons learned from this pilot will help with the design of expanded programs under a community-based renewable energy tariff to be filed in October. On July 31, the PUC approved four major solar energy projects on Oahu, totaling approximately 137 megawatts, in time to meet the federal 30% tax credit, currently set to expire on December 31, 2016. The PUCs approval of these projects will provide all our customers by the end of next year with the lowest price of any solar electric city on Oahu. More than 30% lower than previous solar projects. On August 5 Maui Electric filed contracts subject to the Public Utilities Commission review and approval to purchase up to 5.7 megawatts of solar power at $11.06 per kilowatt hour. More than 30% of the electricity used in Maui County currently comes from renewable sources. So these contracts will take that percentage up even higher. Moving on to the demand response docket on the next slide. On July 28, the PUC issued an order advancing our Integrated Demand Response Portfolio Plan or IDRPP, appointing a special advisor to help with further development of the plans. The commission observed that the overall strategic and conceptual direction of the IDRPP is positive and notes that there are many welcome aspects to the proposed process and methodology. In other developments on May 28, the PUC issued an order related to our utilities revised annual decoupling filings. As a result the utilities filed revised 2015 annual incremental RAM revenues of $11.1 million. The tariff rates are effective from June 8, 2015 to May 31, 2016. In addition in the Public Utilities Commission, March 31, D&O on decoupling, the PUC also indicated that the utilities may apply for recovery of revenues for major projects, including baseline project grouped together for consideration as major projects above the RAM cap. The utilities are currently reviewing different projects and maybe submitting some for approval for recovery above the RAM cap. Finally under the required schedule for decoupling, we gave notice of our intent to file the Hawaii Electric Light Company 2016 test year rate case by December 31, 2016. Normally a general rate case using a calendar 2016 test year would be filed in the second half of 2015. However in light of the pending merger application Hawaii Electric Light has requested an extension of the date by which it must file its rate case to December 30, 2016. I’ll now ask Jim to cover Hawaii’s economy and then our financial results and outlook for the economy. Jim? James Ajello Thanks, Connie. I’ll begin by briefly commenting on Hawaii’s economy. June 2015 visitor arrivals on expenditures were up 6% and 4.4%, respectively from the same month last year and still robust after many years of strong growth. Year-to-date June 2015 visitor arrivals reached 4.3 million with total spending at $7.6 billion. Tourism is on a record trajectory in 2015. Statewide unemployment edged downward to 4% in June 2015, compared to 4.4% a year ago and still significantly below the national unemployment rate of 5.2% as of June. Recent Hawaii real estate activity remained strong during July 2015 with the median sales price for single-family homes on Oahu at $710,000, up 4% from last year and up 2.3% year-to-date July. This year through July, the pace home sales on Oahu is up 4.8%. Year-to-date May 2015 construction activity was reflective of value private building permits increased 41% compared to year-to-date May 2014. This increase is reflected by the increase in new residential, commercial and industrial projects. Overall, Hawaii’s year-to-date economic performances is being sustained by continuing strong activity in the construction and tourism industry and the University of Hawaii forecasters expect state GDP to grow 3.8% this year. As shown on slide eight second quarter 2015 GAAP earnings per share were $0.33. Core earnings per share which excluded merger expenses were $0.39 compared to $0.41 in the second quarter of 2014. Consolidated core net income was $0.9 billion higher than the prior year, but EPS was $0.02 lower due to the increased number of shares settled due to equity forward agreement. On slide nine, utility earnings were $32.8 million in the second quarter of 2015 compared to $34.2 million in the second quarter 2014, the detailed variances are shown on the slide and I’ll just highlight a few. Depreciation expense was $2 million higher, due to increasing investments for the integration of energy, improved customer reliability and greater system efficiency. Operations and maintenance expense was $1 million, higher compared to the prior year, largely due to higher consulting costs for our energy transformation plans, higher transmission and distribution costs and higher benefits expense. These partially offset by lower overhaul and smart grid costs in the second quarter of 2015. At the bank, net income for the second quarter of 2015 was $12.9 million, $0.6 million lower than the linked quarter, primarily due to $1 million in higher interest income, primarily driven by higher interest earning assets and fees, related to the early payoff of commercial loans. This was offset by $1 billion higher provision for loan losses and $1 million in higher non-interest expense, primarily to higher medical expense and the timing of professional fees and a reserve for unfunded commercial commitment. Compared to the second quarter of 2014, net income at the bank was $1.3 million higher primarily due to $1 million higher net interest income, due to higher average loan balances, $2 million in higher noninterest income, primarily from higher mortgage banking and fees on deposit products, these were partially offset by $1 million and higher noninterest expense in the second quarter of 2015, due primarily to higher pension and benefit expense. As shown on slide 10, HEI’s quarter ROE for the last 12 months was 9%, ROE contributions of 7.7% from utility and 9.6% from the bank. Slide 11, shows the utilities actual ROEs for the last 12 months, and consolidated core utility ROE of 7.7%, declined from 9% in June of 2014, primarily due to higher O&M and depreciation expense, partially offset by the RAM increase. On slide 12, you could see that American continues to deliver solid profitability metrics generally in line with targets. We have maintained a competitive return on assets of 93 basis points through the first half of the year. Year-to-date annual loan growth was 1%, and currently lower than our mid-single-digit loan growth target, mainly due to the timing of loan closures expected in the second half of the year. We continue to expect to achieve our target of mid-single-digit loan growth for the year. In the second quarter, loan growth was driven primarily by higher commercial market and residential loans and home equity lines of credit, offset by payoffs in the commercial real estate and consumer portfolios. Year-to-date net interest margin remains in line with expectations, benefiting from interest and fees related to prepays and payoff of commercial real estate and commercial and industrial loans. Year-to-date credit cost remain low, as our solid asset quality and strong risk management, resulted in year-to-date net charge-off ratio of 8 basis points, still very attractive relative to peers. Overall, the bank continues to maintain its low risk profile, strong balance sheet and straightforward community business banking model. On slide 13, our net interest margin was 3.52% in the second quarter of 2015, consistent with the linked quarter. Our interest earning asset yield declined by 1 basis point. Our liability cost of 22 basis points remained unchanged from the linked quarter. On slide 14, we show an improving trend in year-to-date 2015 noninterest income, which was primarily driven by higher mortgage banking income, as we have made a conscious decision to sell a larger portion of our low rate mortgage loan originations, increasing fee income on deposit liabilities, due to deposit related initiatives and increasing fee income on other financial products. Credit quality continues to be strong, reflecting prudent credit risk management and the healthy local economy. Second quarter of 2015 net charge-off ratio was 11 basis points, compared to 4 basis points in the linked quarter. The increase in that charge-off ratio was due to the charge-off of two commercial loans and higher charge-offs associated with growth in the consumer portfolio. Provision for loan losses was higher than the linked quarter and prior year quarter mainly due to the downgrade of one large commercial lending relationship and higher charge-offs. The allowance for loan losses was 1.04% of outstanding loans at $46.4 million at quarter end compared to 1.03% at the end of the linked quarter and 0.99% of the prior year end. On slide 16 nonperforming assets ratio was 70 basis points, 10 basis points lower compared to the end of the first quarter and lower than the 1.05% at the end of the second quarter last year. This is consistent with our solid credit quality and effective credit management. Slide 17, illustrates Americans continue to do attractive asset and funding mix relative to our peer banks. Americans June 30, 2015 balance sheet is stacked against the last accretive billable data sets for our peers, which is as of March 15. 99% of our loan portfolio is funded with low cost core deposits versus the aggregate of our peers at 88%. Year-to-date total deposits increased $180 million or 7.8% annualized, while maintaining a very low cost of funds of 22 basis points. 18 basis points lower than the median of our peers. American remains well-capitalized at June 30, with a leverage ratio of 8.8%, tangible common equity to total assets ratio of 8.2% and total capital ratio of 13.5%. In the second quarter, American paid $7.5 million in dividends to HEI, while maintaining healthy capital levels. Now I’ll address HEIs outlook for 2015. Utilities updated three year capital expenditures consisting of both foundational and transformational investments is forecast to be $0.8 billion to $1.7 billion. Our foundational investments represent core investments needed to continue to in deliver safe, reliable and efficient service to our customers. They include projects to replace aging infrastructure, to improve reliability, making or upgrading customer connections and improving our internal structure, to be more efficient and effective. Many of our major transformational initiatives depend on external factors, which could impact our ability to execute. Our applications for approval of The Schofield Generating Station is at the PUC and we expect to file applications for battery storage, LNG and smart grid later in 2015. For 2015, we expect rate base growth to be in the range of 1.5% to 3%. On our 2014 ending rate base balance of $2.7 billion. We would note that our long-term rate-base growth forecast is subject to PUC approval of our major capital expenditures. We are reaffirming HEI’s earnings guidance of $1.64 to $1.74 per share, excluding any expenses relating to the pending merger and spin off transactions. Last quarter we guided towards the low end of the range as a result of the early equity forward settlement of 4.7 million shares in March of 2015. The March 31 PUC decision and order on the Schedule B decoupling mechanism issues. The 2015 impact of the dilution in the early equity forward settlement is approximately $0.04 a share. At utility, there is no change to the EPS guidance. Guidance range that we are guiding towards the lower end of that range to offset the impact of the PUCs May 28 decoupling order, we are carefully managing expenses and we are revising our O&M guidance to approximately, a 2% decline compared to 2014 levels, instead of prior guidance of a 2% increase. As we have mentioned in the first quarter 2015 in our earnings release, we lowered the 2015 CapEx to $250 million from $420 million. And correspondingly revised our three year forecast range of $0.8 billion to $1.7 billion. In 2015 rate-based growth is now expected to be 1.5% to 3%. At the bank, there are no changes to the EPS guidance range and key assumptions. Connie, now I will turn the call back to you. Constance Lau Thanks, Jim. In summary, our utility is leading the industry and integrating renewables and distributed generation and continues to be focused on expanding customer options and lowering customer bills. Our bank continues to be a solid performer and will continue to focus on its core banking business targeting mid-single-digit loan growth and strong credit quality. Last Friday our board maintained our quarterly dividend of $0.31 per share. The dividend yield continues to be attractive at 4% as of Friday’s market close and we have paid our dividend uninterrupted since 1901. Finally, we firmly believe that as the Hawaii Public Utilities Commission merger review process continues that we NextEra Energy have the opportunity to provide more information and engage in additional discussions with the PUC, the commission and others, should conclude that this merger can and will provide significant benefits for our customers and can help accelerate achievement of the clean energy future that we all want for Hawaii. And with that, we look forward to hearing your questions. Question-and-Answer Session Operator [Operator Instructions] Our first question comes from Paul Patterson with Glenrock Associates. Paul Patterson Aloha. Constance Lau Hi, Paul. How are you? Paul Patterson All right. How is it going? Constance Lau Good. Paul Patterson On the merger, and the governor’s comments and everything, what is the outlook for the potential for settlement versus a fully litigated case? Could you just give us a little bit of a flavor for that? Constance Lau I’m not sure I can really an answer that question Paul, because we’re still in that discovery phase and so there’s quite a bit of discussion that still needs to occur. I think as the Public Utilities Commission order that came out establishing the remainder of the process, it shows that a lot of that will occur this fall. I think as we go forward, we will probably get greater clarity in that question. Later today, CA needs to file, so we still need to see his testimony as well. Paul Patterson Sure. Okay, but I mean, so should we think, maybe after discovery processes completed that that might be a more likely time that settlement discussions could take place. Does that make sense? Constance Lau As you know settlement discussions can occur any time along the way, but certainly we would think that you we would at least want to see the initial positions of all the parties. Paul Patterson Okay. And then on the RAM order, in the PSIP. I guess, the changes that they made, my understanding was that that was pending the outcome of the PUCs review of the PSIP. I’m wondering what the schedule looks like regarding that and what we might see if you have gossip out there? Constance Lau Sure. And actually I think Alan is with us and perhaps I can turn that question over to him on the PSIPs. Alan Oshima Yeah, Paul, good morning. Paul Patterson Good morning. Alan Oshima Actually the RAM decoupling and the PSIPs, we don’t believe are connected at all. I think the PSIP will go on its separate track. It’s more of a technical discussion as to our power supply moving forward. The RAM is more financial based and operational, so I think it’s a transition year this year, it’s a first year that we’re having to comply with some of the new changes to the decoupling and we’re doing that, as we speak. Paul Patterson Okay. So I mean, my understanding that the RAM was being amended on interim basis, pending the outcome of PUCs review PSIP plans. I mean, I believe I read that in the order, I guess. I guess, so I’m wondering is is how do you think the – I mean, are you saying they’re not connected. I mean, that’s what I’m sort of a little bit confused on. James Ajello Capital expenditures are always connected and how the RAM decoupling will operate. Of course, will be somewhat affected by what PSIPs come up with. But they’re separate dockets and they’re not directly connected. Paul Patterson Okay. Just one final one here, a couple of things. You guys have pushed back the LNG stuff and oil prices are down. I’m wondering one of the reasons why you wanted to do the LNG was that you thought it would have environmental, but also substantial cost benefits for the ratepayers and that was an issue that I think the PUC was concerned about. How should we think about the pushback in the LNG importation? The lower price of oil in terms of what we’re seeing in terms of customer’s rates and stuff right now. Constance Lau So Paul, I think as with any major project and this would be quite a major project for Hawaii to be bringing another fuel source. You only have to take into account the changing conditions and as you pointed out there was a pretty significant change in some of the basic assumptions with the shift in the oil prices. So I think the way you want to look at it is that we are continuing forward, but we’ve got to make sure that bringing LNG into Hawaii still makes sense because at the end of the day, our ultimate goal is to bring it into lower cost for our customers. I think as you know, you know the commodity price with LNG is only a very small portion of the total cost to customers. A lot of it really is in building what I call the virtual pipeline across the water and it’s really the logistics that are most important in designing this project. So there’s been quite a bit of work that’s been going on in that regard in advancing the ideas on the most economical and efficient way to bring the liquefied natural gas into the state, while still assuring reliability of supply. So we are proceeding forward. I think we still believe that there is benefit for our customers, but we need to work through all of the changing analysis. I’ll ask Alan, if he’d like to add anything to that. Alan Oshima No. That’s totally correct. I mean, we’re looking at all the environmental benefits as well. I mean, it’s not a one-sided view of this, we have to look at it from all sides. Paul Patterson Sure. Any timeframe in terms of when might hear about what your revised analysis or any key date we should be thinking about? Alan Oshima Yeah, we’ll be I think making some decisions later this year and then probably moving forward. Depending on those decisions in early 2016. Paul Patterson Okay. Great. I’ll let people ask questions. Thanks a lot. Operator Our next question comes from Charles Fishman with Morningstar. Charles Fishman Thank you. If you’d give me some help here I think my notes on your status of the Public Service Commissioners might be out of date. Were all three commissioners, the current reserve appointed by the former governor? Constance Lau No, the Chair is new and was appointed by our new governor earlier this year. Charles Fishman And previous governor was Democrat as well, Connie. Wasn’t he? Constance Lau Yes, correct. Charles Fishman Okay. And then is Champley is still on and his term is up next year. Constance Lau Yes. Commissioner Champley is still on and also Commissioner Akiba. Charles Fishman Okay. Well, thanks for updating me. Just one other comment. I was at my church yesterday, an electrical engineer came up to me and said that the local utility in St. Louis had a meeting last week among electrical engineers and the integration of solar going on in Hawaii was a big topic of discussion. So you can pass on to your operation people that what they’re doing has some very far reaching input to other places. Constance Lau Thanks, Charles. As I mentioned in my comments, particularly on the use of the advanced inverters, we really are setting a tone for the nation and better use of that technology to help in the integration of rooftop PV. Charles Fishman Good luck on the merger. Constance Lau Thank you. Operator Our next question comes from Michael Weinstein with UBS. Michael Weinstein Hi, Connie, how are you doing. Constance Lau Hi, Michael, how are you? Michael Weinstein Good. My question, I don’t want to prejudice the merger outcome or anything like that. But I was just curious how separate is the spin of ASB from the merger process with NextEra? Is it possible that, for instance, and just really hypothetical of the Commissioner rejected, the merger would you still want to spin ASB in, could that still happen, given the tax implications? Constance Lau That we would go back to the analysis that we normally have had with respect to the separation of the two companies and we’d have to analyze it at that point in time. But at the moment the spin of the bank is cross conditional with the merger application, so that that would only occur if the merger goes forward. As you know a real key piece of the agreement with NextEra is that they will be paying the tax on the spin for our shareholders, so that our shareholders can receive the shares tax free, plus there is a great benefit to the bank in the step up of the tax basis. So it’s very positive transaction when it is combined with the merger with NextEra. If there is no merger, we’d have to analyze it as a standalone transaction. Michael Weinstein Got you. Okay, thank you so much. Constance Lau Sure. Operator Our next question comes from Nick Yuelys with Gabelli & Company. Nick Yuelys Congratulations on a good quarter. Constance Lau Thanks, Nick. Nick Yuelys I was just wondering following up on that last question, if all the regulatory approvals necessary for the bank spin off weren’t completed by the time the PUC approves the merger. What would happen? Constance Lau So let me just address that basic proposition because we really haven’t talked much about all the preparations going on at the bank for the spin. We are not expecting that the bank will not be prepared for a spin. As you know, we’ve got a very, very good team in at the bank. Many of whom have been with publicly traded companies previously. So we feel that there are quite well prepared to handle the bank when it spins off. And they have been having ongoing discussions with their regulators, the office of the Comptroller of the Currency and Jim Ajello has been having similar discussions with the Federal Reserve Board on behalf of the holding company. So we’re expecting that the bank will be quite well prepared for the spin. There may be some timing issues with respect to closing of quarters and years and that. But otherwise we believe the bank will be quite well prepared. Nick Yuelys Okay. Great. Then my guess is, do you need to make a filing with the FCC or how will that approval process work? Constance Lau On the FCC, the utility has some licenses with respect to communications that need to be transferred. So that one is while we mentioned that it’s one of a lot of little approvals that need to occur, but it’s not a major one at all. Nick Yuelys Okay. Great. Then my last one on the four solar project that the PUC approved at the end of July. Are those included in the CapEx numbers or are those some a little bit of upside to that? Constance Lau So those are actually by IPPs. Remember we had that so-called waiver group of projects where we went out for an RFP and so those are all by independent developers. Nick Yuelys Okay. Good, that’s all I have. Thank you very much. Operator Our next question comes from Andy Levi with Avon Capital. Andy Levi Hi, good morning. Constance Lau Hi, Andy. Andy Levi Just two quick questions, if as we look at your CapEx numbers and you included the transformational piece as well in ’16 and ’17, which CapEx in the $700 million range. What would and again, assuming standalone. What would the equity needs of the company be? Constance Lau So Andy, let me ask Jim to address that because we’ve looked at that, not with respect to the transformational capital, but the overall picture. So, Jim? James Ajello Thanks, Connie, and hi, Andy. So we haven’t yet sketched out the capital needs entirely yet. We’ll make sure that the utilities, regulatory ratio is about 58% equity, and 42%, 43% debt will be observed. I will tell you in general, I think there will be well under $200 million, but we haven’t put a fine point on that as yet. Andy Levi And that would be for both years or …? James Ajello I’m just talking about prompt year 2016. Andy Levi Okay. And then just on the RAM, could you just explain to us kind of what was changed in the order, the preliminary order relative to how the RAM worked before. Constance Lau Sure. Jim, I don’t know if, Tayne, is there, she’s probably the best to go into those details. Tayne S. Y. Sekimura I’m here. So basically the change in the RAM, what the commission did was, it focused on a target level of revenues and was based on what was included in the last rate cases and the last RAMs, and basically escalated it for inflation and that served as the cap for the RAM. And that’s a lot different from the previous RAM that was in effect, which actually went through a series of looking at, what was included in the rate case with escalated by the components of O&M, rate base and depreciation. So what commission did in the revised RAM was not make any differentiation between the RAM component, but just calculated based on a level of revenue. Constance Lau So, Andy, I don’t know, if you remember under the capital RAM they were looking at both the major projects and in the so-called baseline projects. The baseline projects went in at a historical five-year average. What they did was they just and talked about CapEx in total with as James said an inflationary adjustment similar to the inflator on the O&M side. Then said, we want to take a look at all the projects over that and review and that’s where we’re now looking at any projects that would be above that cap and reviewing whether to submit additional filings. They actually left the door open to design additional processes to process those amounts that are over the cap. Andy Levi And so with that being the case, the $11 million increase that you talk about in your handout, was that under the new method or the old method? Constance Lau That was the $11 million is under the new method. Andy Levi Okay and what was the increase the year before, I’m just curious, if you remember, I don’t if you have that number, but. So under the old method. James Ajello So, Andy, we’ll follow-up with you after the call. Andy Levi Yeah, that’s fine. And then just one last question, and I’ll let somebody else go. So under the new method, I guess, if I’m not mistaken the way you describe and having read a little bit about it, that would I guess, lead to more frequent rate filings, is that how we should view it, so you could recover your capital cost on more timely basis? Constance Lau No. Not necessarily. The RAM mechanism still provides for the triennial review, but what it may mean is that we may be processing some of the CapEx under mechanisms that are supplemental to the RAM. Andy Levi And that’s I guess, what they’re working on now? Constance Lau Correct. Andy Levi Perfect. Thank you very much. Constance Lau Yeah, that’s part of that transitional issue that Alan alluded to. Andy Levi I understand now. Thank you. Operator Our next question comes from Sachin Shah with Albert Fried. Sachin Shah Hi, good morning. Thanks for taking call. Just to understand the governor’s recommendation. From past precedence, is there any past precedence of the governor making such a recommendation and the PUC going along with the governor or going against the governor? I know that you’re going to make a compelling case, the companies are going to make compelling case against that recommendation and other opposition. But just trying to understand you know how much influence does the governor’s recommendation subjectively have on the PUC? Constance Lau Yeah, so this is a very new process within our Commission because while there has been some utility mergers throughout Hawaii’s history. They really have been much smaller than this proposed transaction. And particularly for this governor, this governor just came in this year, so everybody is really looking very carefully, but I’d say with new eyes at this particular transaction because they really haven’t been a lot of other transactions that one can point to. Sachin Shah Okay. So this is just new process, new ground for everybody and so the contentions as that we may be seeing are opposition comes along with the territory of this new process I guess. Constance Lau Yes, yeah. It’s part of the process and as the governor also said, it’s early in the process and he’s sure that there will be lots more discussion and that we haven’t heard the last on it yet. Sachin Shah Okay. Fair enough. Thank you. Alan Oshima Hi, Connie, this is Alan, it’s not a new process per sequential, it’s a process in this case, but there are regulatory frameworks for this from past transactions, that I think the electrical regulatory process will continue as they have described that in the filings. Constance Lau Yeah, thanks Alan. Operator And this is company operator; I’m actually showing no further questions at this time. Clifford Chen Thank you, Kevin. If there are no further questions, I would like to thank everyone for their participation today and have a good week. Bye-bye. Operator Well, ladies and gentlemen, this does conclude today’s presentation. You may now disconnect and have a wonderful day.