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Black Hills Corporation’s (BKH) CEO David Emery on Q1 2016 Results – Earnings Call Transcript

Black Hills Corporation (NYSE: BKH ) Q1 2016 Earnings Conference Call May 04, 2016 11:00 AM ET Executives Jerome Nichols – Director, IR David Emery – Chairman and CEO Rich Kinzley – SVP and CFO Analysts Insoo Kim – RBC Chris Ellinghaus – The Williams Capital Group Lasan Johong – Auvila Research Consulting Operator Good day ladies and gentlemen, and welcome to the Black Hills Corporation’s First Quarter 2016 Earnings Conference Call. My name is Andrew, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. Following the prepared remarks, there will be a question-and-answer session. [Operator Instructions]. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to Mr. Jerome Nichols, Director of Investor Relations of Black Hills Corporation. Please go ahead sir. Jerome Nichols Thank you, Andrew. Good morning everyone. Welcome to Black Hills Corporation’s first quarter 2016 earnings conference call. Leading our quarterly earnings discussion today are David Emery, Chairman and Chief Executive Officer, and Rich Kinzley, Senior Vice President and Chief Financial Officer. Before we begin today, I would like to note that Black Hills will be attending the American Gas Association Financial Forum next week in Naples, Florida. Our presentation materials and webcast information will be posted on our website at www.blackhillscorp.com under the investor relations heading. During our earnings discussion today, some of the comments we make may contain forward-looking statements as defined by the Securities and Exchange Commission, and there are a number of uncertainties inherent in such comments. Although we believe that our expectations and beliefs are based on reasonable assumptions, actual results may differ materially. We direct you to our earnings release; slide two of the investor presentation on our website and our most recent Form 10-Q and Form 10-K filed with the Securities and Exchange Commission, for a list of some of the factors that could cause future results to differ materially from our expectations. I will now turn the call over to David Emery. David Emery Thank you, Jerome. Good morning, everyone. Thanks for being with us this morning. For those of you following along on the webcast slide deck, I will be starting on slide 3. We will follow a similar agenda to what we’ve done in previous quarters. I will give a quick overview of the quarter. Rich Kinzley, our CFO will cover the financial highlights for the quarter. I will visit briefly about strategic forward issues and then we will take questions. Moving to slide 4, with the closing of the SourceGas acquisition we’ve largely completed our nearly 12 year transition to a pure-play utility company. We now serve more than 1.2 million customers in eight states, and our utility operations account for the large majority of our earnings, assets and employees. In addition, all of our non-utility businesses either support directly or are being transitioned to provide support directly to our own utility business. As a result and effective this quarter, we made some changes to the way we will now report operating and financial results going forward. Those changes have also been made to previous periods to allow for direct comparisons. Most notably we won’t continue to report by our two major business groups, Utilities and Non-Regulated Energy. Rather we’ll simply have five reporting segments, those are the Electric Utilities, Gas Utilities, Power Generation, Mining and Oil and Gas. We’ll also report Cheyenne Light’s gas distribution results within our Gas Utilities business segment. They were previously reported within the Electric Utilities segment. And then finally, we recently rebranded all of our utilities under the name Black Hills Energy. That’s a name we’ve used since 2008 for many of our utility properties, and we’ve just finished that process with SourceGas and then our two legacy utilities, Cheyenne Light and Black Hills Power. All have been renamed Black Hills Energy. We included a table in both the earnings press release and in the appendix of the webcast presentation that outlines our various utility, subsidiaries, their legal names, and then how we intend to refer to those in our investor materials going forward. So with that, I will move onto slide 6, first quarter highlights. We had a strong first quarter, especially when you consider the mild winter weather that we had, and continued weak oil and gas prices and of course the massive effort that’s has gone into closing and integrating SourceGas. Talking about highlights for the utilities, obviously the most notable one is the fact that we closed the purchase of SourceGas on February 12. That acquisition for $1.89 billion added about 429,000 utility customers in Arkansas, Colorado, Nebraska and Wyoming. Three of those states we already do business in, and of course Arkansas is a new state for our utility operations. Given the February 12 close, obviously financial results have been included for SourceGas from February 12 through March 31, so about half of the quarter. During the quarter, we continued construction on our $65 million, 40 megawatt national gas turbine at the Pueblo Airport Generating Station. That project is on schedule to be completed and placed in service before year end. We filed a request yesterday with the Colorado PUC to increase annual revenue to recover our investments and expenses associated with the new turbine. Construction also commenced during the quarter on the new $109 million, 60 megawatt, Peak View Wind Project also for Colorado Electric, and also expected to be in service by year end. Our South Dakota Electric Utility subsidiary commenced construction on the first segment of a new 144 mile $54 million electric transmission line that will go from Northeast Wyoming to Rapid City, South Dakota. We expect that line to be in service in the third quarter, and then our cost [facility] gas hearings are underway actually this week in the state of Nebraska, and they are set for Iowa, Kansas, South Dakota and Wyoming over the course of the next few months. On April 27, the Colorado PUC dismissed our cost of service gas filing in Colorado without prejudice. In order to provide a little clarity around that decision, I think it’s important to understand that when we filed our regulatory applications for cost of service gas in all six of our states, we proposed that approvals be done in two separate phases. Phase 1 would establish the basic regulatory construct for the program, and phase 2 would provide approval of specific gas reserve properties for inclusion in the program and the associated impact on customers’ cost of gas. Specific to Colorado, although we have not yet received a written order, the Commissioner seemed to indicate a preference for combining the two phases into a single proceeding. So just to be clear, a phase 1 approval will not impact customer rates. It will simply establish the financial and other criteria we need to select properties for inclusion in the program. The phase 2 process will provide approval to include specific gas properties and the associated customer impacts. Now in Colorado, once we receive the Commission’s written order, we will evaluate our options and determine how best to proceed. That may include re-filing with a specific property for Colorado PUC approval and inclusion in the program. Moving on to slide 7, the first quarter highlights continued, our Power Generation segment closed the sale on April 14 of a minority interest in Colorado IPP’s 200 megawatt power plant for $215 million. The proceeds were used to reduce debt. Our Oil and Gas financial results were negatively impacted by continued low oil and natural gas prices during the quarter. On the Corporate front, we reached an agreement with IRS appeals regarding disputed items for prior tax years going all of the way back to 2007, resulting in about $5.1 million of tax benefits. And I will let Rich explain those in a little more detail, when he goes over the financial statements. We declared a quarterly dividend of $0.42 per share, and in March we implemented an at-the-market equity program to sell shares of common stock. On slide eight, the SourceGas integration is going very well. We expect to largely complete all of that activity by the end of the year. Now that’s a very aggressive but also a very achievable goal and we are making great progress. A lot of activity has already been completed or is well underway. The most notable item is, we’ve completed the conversion of our human resources and payroll systems, completed the conversion of our financial systems, a lot of our rebranding activity at least associated with vehicles and uniforms and things have been completed, and we’ve also made a lot of organizational and staffing decisions related to the integration and that’s all well underway. Key items remaining in the year, the largest of which is our customer information system conversion; we expect that to be done in the fall and along with that then we would integrate our bill, print and payment processing along with the change in customer information system. On slide 9, we have a graphical representation of integration progress through April 15. It’s broken into five major categories as well as an overall progress report. As you can see, we are making excellent progress on all fronts there. Slide 10; provide highlights regarding our sale of the minority interest in our Black Hills Colorado IPP assets. As I said earlier, we did close that transaction on April 14, generating about $215 million in proceeds. We will continue as the majority owner of that facility and will continue to operate it. There will be no impact to the customers as a result of the transaction. The market conditions related to the sale of this asset really provided a unique opportunity for us to capture tremendous value for shareholders. Slide 11 just provides a reconciliation of our first quarter income from continuing operations as adjusted, compared to the first quarter of last year in 2015. As you can see, we showed some great improvement across many of our business segments with gas utilities demonstrating the largest increase of course due to the addition of the SourceGas property in mid-quarter. That concludes my comments for now. I will turn it over to Rich to cover the financial highlights. Rich? Rich Kinzley Thanks, Dave. Good morning everyone. As Dave indicated, it was a busy first quarter. We’re pleased we closed the SourceGas acquisition on February 12, ahead of expected timing, which allowed us to pick up part of the heating season from those gas utilities. Integration activities around the SourceGas acquisition are progressing as planned as Dave noted, and despite mild weather in the first quarter, we are pleased with our operating results. On slide 13, we reconcile GAAP earnings to earnings as adjusted, a non-GAAP measure. We do this to isolate special items and communicate earnings that better represent our ongoing operating performance. This slide displays the last five quarters and trailing 12 month as of March 31 for each 2016 and 2015. During each of the past four quarters, we incurred significant acquisition expenses related to SourceGas such as advisory fees and financing and other third party costs. We also incurred non-cash ceiling test impairment charges at our Oil and Gas business in each of the past five quarters, due to continued low crude oil and natural gas prices. The acquisition expenses and impairments are not indicative of our ongoing performance, and accordingly we reflect them on and as adjusted basis. Our first quarter as adjusted EPS was $1.23 per share compared to $1.08 per share in the first quarter last year. Comparing Q1 2016 to Q1 2015 at a high level result in 2016 benefited from a partial quarter ownership of the SourceGas Utilities and corporate tax benefits. These positive items were partially offset by increased share count from our November equity issuance, higher interest expense from higher debt balances and milder weather. I’ll detail these items in the following slides. Trailing 12 months as adjusted EPS increased by 7.5% to $3.14 per share. Slide 14 displays our first quarter revenue and operating income. On the left side of the slide, you will note that revenue was only slightly higher in 2016, despite the addition of SourceGas. This is due to reduced revenues at our Gas Utilities from lower pass-through gas costs during the period, given the low natural gas price environment and milder winter weather. On the right side of the slide, you see a 21% increase in total operating income, driven by a $22 million increase at our gas utilities. $21 million of this increase came from 49 days ownership of SourceGas. Power Generation delivered strong performance in the quarter, while our Electric Utilities and Mining segments were flat year-over-year. Despite lower revenue due to lower received crude oil and natural gas prices, Oil and Gas’s operating loss was lower in 2016 driven by lower G&A and lower depletion. The Corporate segment operating loss of $5.4 million was driven by internal labor costs, which supported our SourceGas integration efforts. Excluding the positive impact of the SourceGas acquisition, consolidated operating income in the first quarter of 2016 was essentially flat, compared to 2015 mainly due to milder weather in 2016. Side 15 displays our first quarter income statement. Gross margin, operating expenses and DD&A all increased comparing 2016 to 2015, as a result of the SourceGas acquisition. As I noted on the previous slide, operating income before special items increased by 21% year-over-year. Special items included the Oil and Gas ceiling test impairment and acquisition related costs including bridge financing costs through February 12, when we closed the acquisition. These items amount to $39 million pretax in 2016 or $0.46 per share. Interest expense increased year-over-year related to increased debt associated with the acquisition. You will note we had a very low effective tax rate for the quarter in 2016. This is due to two items; first, during the quarter, we reached agreement with the IRS on disputed items for the tax years 2007 through 2009, resulting in tax benefits of $5.1 million. Second, we changed our methodology for tax depletion at our Oil and Gas subsidiary, during the quarter resulting in a tax benefit of $5.8 million at the Oil and Gas segment. This includes benefits for the years 2007 through 2014 for this change an estimate. Together these tax items amounted to approximately $0.20 of EPS. We did not characterize these items as special adjustments since we accrued tax related to each of them in as adjusted earnings in previous years. Finally, you’ll see the 7.2 million diluted share outstanding increase from the previous year resulting primarily from our equity end unit mandatory issuances in November of last year related to the acquisition. We issued 6.3 million common shares in November and the application of the treasury stock method related to the unit mandatories added approximately 720,000 shares in the quarter. Additionally, we sold 261,000 shares through our at-the-market program as Dave mentioned. That was done the last few days of March; 140,000 of those shares had settled at March 31. For the quarter, as adjusted EPS grew 14% year-over-year, while as adjusted EBITDA increased by nearly 20%. The left side of slide 16 displays our Electric Utilities gross margin and operating income. Comparing 2016 to 2015, gross margin decreased by $1.2 million and operating income decreased by $300,000. Gross margin decreased primarily due to a Q1 2015 $2.1 million one-time settlement with the Colorado PUC on the renewable energy standard adjustment related to our Busch Ranch Wind Farm. This was partially offset by increased writer CapEx related revenue in 2016 and the benefit of an additional day of margin in 2016 due to Leap Year. Weather had a nominal impact on gross margin year-over-year at the Electric Utilities. O&M at the Electric Utilities was $1.9 million lower in the first quarter of 2016 compared to 2015, driven by the increased allocation of central service cost to corporate in 2016 related to SourceGas integration activities. Comparing 2016 to 2015 at our Gas Utilities on the right side of slide 16, gross margin increased by $45 million and operating income increased by $22 million. The gross margin increase was driven by the partial quarter ownership of the SourceGas Utilities, which added 46 million. Gross margin in 2016 also benefited by 1.8 million from our prior year Wyoming acquisitions. Unfavorable weather decreased gross margin at our legacy Black Hills Gas Utilities by 2.8 million, with 23% fewer heating degree days in Q1 2016 compared to Q1 2015. O&M at the Gas Utilities increased by 14.5 million year-over-year, 18 million of this increase is attributable to the addition of SourceGas. The increase in O&M was partially offset by the increased allocation of central service costs to corporate in 2016 related to SourceGas integration activities. Depreciation at the Gas Utilities increased 8.2 million in 2016, primarily due to the addition of the SourceGas assets, which added 7.1 million. Quantifying the impact of weather on our results in Q1 2016 compared to normal, heating degree days at our Gas Utilities including the partial quarter ownership of SourceGas were 11% below normal, negatively impacting gross margins by an estimated $4.6 million. Also, heating degree days at our Electric Utilities were 12% below normal, negatively impacting gross margins by an estimated 1.5 million. Combined, the mild weather compared to normal negatively impacted our EPS by approximately $0.08 in Q1 2016. On slide 17, you will see that Power Gen improved operating income by $900,000 for the first quarter compared to 2015. The main driver in improved operating income was annual increases in power purchase price agreements. O&M and depreciation were comparable to the prior year. Moving to the right, our Mining segment had $100,000 operating income decrease compared to the first quarter of 2015. Year-over-year revenue was $400,000 higher and O&M was $500,000 higher. O&M increased due to our move into higher overburdened areas of this mine. Our cost plus contracts on 50% of our production allowed us to recoup part of the higher mining costs, explaining the bulk of the revenue increase. Moving to Oil and Gas on slide 18, we incurred an operating loss in Q1 2016 of 4.8 million excluding a $14 million pretax ceiling test impairment charge, compared to an operating loss of 7.2 million in Q1 2015 excluding a 22 million pretax ceiling test impairment charge. First quarter production increased 6% from 2015, driven by a 21% increase in oil sales volume, which resulted from wells drilled in late 2014, early 2015. From an average price received standpoint including hedges, crude oil decreased by 28% and natural gas decreased by 41%, comparing Q1 2016 to Q1 2015. These lower received prices resulted in a revenue decrease of 2.9 million year-over-year. O&M decreased by 1.9 million in Q1 2016, as we’ve diligently managed our cost structure at Oil and Gas. The impairments taken in 2015 and 2016 have driven down our depletion rate lowering DD&A by 3.4 million comparing Q1 2016 to Q1 2015. We are actively transitioning our Oil and Gas business to support our utility cost of service gas initiative, and we are opportunistically evaluating divestitures of properties that do not support that initiative. On slide 19, you see a review of how we paid for the SourceGas acquisition. As I mentioned earlier, last November we issued 6.3 million shares of common stock for net proceeds of $246 million and concurrently we did a unit mandatory issuance for $290 million of net proceeds. In January, we completed a $550 million debt offering ahead of the closing of the acquisition on February 12. At closing on February 12, we assumed 760 million of SourceGas debt, and drew on our revolver for the remaining needed proceeds to cover the $1.89 billion purchase price. This mix of debt and equity to fund the acquisition levered our balance sheet, which brings me to slide 20. At the end of Q1, our net debt-to-capitalization ratio was 69.2%. This is higher than normal and resulted from three things. First, the SourceGas acquisition was funded mostly with debt as I just explained. Second, the $299 million of unit mandatories are reflected as debt on our balance sheet until they convert to equity in 2018. And third, the after tax non-cash ceiling test impairments we’ve taken over the past five quarters have reduced equity by over $170 million. We are focused on de-levering the balance sheet over the next couple of years. We began the process in March by issuing shares through our new at-the-market equity offering program, which we expect to continue through 2016 and into 2017. As Dave mentioned in April, we completed the sale of a minority interest in our Colorado IPP facility and received $215 million, a large portion of which were used to reduce debt in the second quarter. Looking ahead at the strong cash flows and earnings from our businesses, combined with the at-the-market equity program will support our dividend and strong utility focused capital deployment program, while assisting us with de-levering over the next couple of years. We are committed to maintaining our solid investment grade credit ratings and our forward forecasted metrics to support those ratings. All three rating agencies affirmed their ratings of Black Hills in February following the closure of the SourceGas acquisition. Slide 21 lays out our planned near term treasury activity, and slide 22 shows our debt maturity schedule. We are evaluating upsizing our $500 million revolver and initiating a related commercial paper program. We will continue to prudently utilize the at-the-market equity program in 2016 and 2017, and we have nearly 1 billion of debt coming due by mid-2017. The blue bars on slide 22 represent the SourceGas debt we assumed at closing, and provide us with an opportunity to improve on the associated terms given our higher credit ratings compared to SourceGas before the acquisition. We are evaluating refinancing alternatives and plan to refinance much or all of the upcoming maturities later in 2016 or early in 2017. Slide 23 demonstrates our strong track record of growing operating income and EPS. We are making excellent progress integrating SourceGas, and will have the majority of that work done by the end of 2016. We look forward to continuing to build upon our impressive track record of growing shareholder value as we serve our utility customers safely and reliably. Looking ahead, the synergistic qualities of the SourceGas acquisition and our strong utility based capital program will continue to drive an above average growth profile, compared to our utility peers. On slide 24, we are reaffirming our 2016 as adjusted EPS guidance of 2.90 to 3.10 per share. In addition, we are maintaining our preliminary as adjusted EPS guidance for 2017 of $3.35 to $3.65 per share. In 2016, we are focused on effectively managing our businesses, integrating SourceGas, and positioning ourselves for strong earnings growth in 2017 and beyond. I will turn it back to Dave now for our strategy update. David Emery Thank you, Rich. Moving on to slide 26, consistent with our past practice for the last couple of years, we group our strategic goals into four major categories, with the overall objective of being an industry leader in everything we do. Moving on to slide 27, our profitable growth objective; our strong capital spending drives our earnings growth. We forecast a total of more than $1.2 billion of investment from the 2016 through 2018 period, positioning us very well to continue our track record of strong earnings growth. It is important to note that we have not included results from our Cost of Service Gas Program in our earnings guidance or our [cap] expenditure forecasts. While we fully expect to implement a Cost of Service Gas Program, the timing and the specific amount of capital expenditures are difficult to forecast currently. Hopefully, we can provide some updates to that forecast after we get through the regulatory process by the end of the year. Moving on to slide 28, as I mentioned earlier, we continue to make excellent progress, constructing our new $65 million, 40-megawatt gas turbine for Colorado Electric. And as I mentioned earlier, we filed [8-K] yesterday to recover both the investment and the expenses for that turbine. Construction is about one-third complete and progressing very well. Slide 29 related to the $109 million, 60-megawatt Peak View Wind project, which will serve our Colorado Electric Utility customers, construction commenced in February, we expect commercial operation by the end of the year. Again as a reminder, that project is being constructed by a third party, and we will assume ownership upon commercial operation. Slide 30, we continue to actively pursue our utility Cost of Service Gas Program, which if approved by our regulators will provide a long-term stable price for gas for our customers, and also a reasonable expectation of lower long-term gas cost for our customers, while providing opportunities for increased earnings for shareholders. As we’ve said before, it is truly a win-win situation. A lot of detail here on this slide about where we are in the various states related to our activity on Cost of Service Gas. As I said earlier, we hope to finalize our Cost of Service Gas Program approvals and then some details related to our forward program prior to the end of the year. On slide 31, we continue to be very proud of our dividend track record. We’ve increased our annual dividend to shareholders for 46 consecutive years and that trend is one we’re re pretty proud of. Slide 32 talks about our credit ratings. Rich already mentioned this, but as he said, all three agencies affirmed our credit ratings following closing of the SourceGas transaction. We are working hard to maintain those ratings. Slide 33 it really illustrates the focus we place every day on operational excellence and on being a great workplace. We made tremendous progress in several categories; I think safety being one that’s very notable. We are very focused on improving our safety performance. As you can see, we’ve made excellent progress over the last several years. Also now this being the first quarter where we are combined with SourceGas, I would like to take the opportunity to thank our employee team, which is now nearly 3000 people strong for the tremendous effort they have exhibited so far in the successful to-date integration of SourceGas and Black Hills. While there is certainly more work to be done, an absolutely incredible amount has already been accomplished in a very short period of time, so thanks to all of the employees for that. It’s an exciting time to work it Black Hills. Moving on to slide 34, this is our scorecard, this is something we’ve done for several years, it’s our way of holding ourselves accountable to you, our shareholders literally setting forth our goals for the year, at the beginning of the year, and marking our progress as the year progresses. That concludes my remarks. We’d be happy to take questions. Question-and-Answer Session Operator [Operator Instructions] our first question comes from the line of Insoo Kim from RBC. Your line is open. Insoo Kim Just starting off at Cost of Service Gas, in Colorado specifically other than the procedural reason for potentially dismissing the original filing, do you have any color as to your conversations with them on some issues I raised regarding the program? David Emery No, not really. I think the biggest single issue for us so far Insoo is that we have not yet received the written order, so we don’t know specifically if there is any additional issue. Until we see that, it’s kind of hard to speculate. We did certainly get the impression that there might be a preference on the part of the commissioners to consider the two phases in a single proceeding. But other than that, it’s pretty hard to provide any color without reading the written order. Insoo Kim Understood. And could you remind us again for this program to be beneficial to customers around what gas level is needed on a longer-term basis? David Emery You mean percent of gas in the program or –? Insoo Kim No, just the natural gas price level needed for the program to be more beneficial to customers to enter in to this type of program? David Emery I think it’s hard to say exactly, because no one knows exactly what gas prices are going to do. But our interpretation as you know you are at a time now where gas prices are probably certainly at a low compared to any recent history, and likely to stay there for at least a period of time, maybe a year or so, maybe a little longer, and we expect them to stay relatively low. If you can lock in gas prices for customers in $3 to $4 dollar range, I think that’s a tremendous long-term result for customers. When you are locking in for the life of the property that’s a tremendous benefit, and now is an opportune time to do that, perhaps one of the best times in the last decade or more to implement a program. So we are optimistic about that. It’s hard to say exactly what the price will be again, not knowing what the forward strip is going to look like at any given point in time and really emphasizing this is about long-term customer cost of gas, not about beating the market in any individual time period. Insoo Kim Understood, and in the Oil and Gas segment given the recent bounce in oil prices from $30 levels, do you expect to be a little more active in trying to make some non-core asset divestitures near-term? David Emery I don’t know if that in and of itself is going to drive our timing on anything. I would say we are already looking pretty aggressively at especially our smaller properties and non-operated interests. We’re working pretty hard at looking at those and we are trying to divest the ones that really don’t make sense for us to hold onto. I don’t think the little bit of bump in oil price affects our timing much. It certainly would be incrementally positive, but the reality of it is, if we divest all those properties it’s not going to be terribly meaningful from a balance sheet perspective anyway. Insoo Kim Got it, and then just last for me for now, in terms of focusing on de-levering the balance sheet beyond 2017, does that imply that you could potentially see continuing a similar level off on the ATM program? David Emery At this point in to our plan it’s just to utilize that through the end of 2017. In 2018, the unit mandatory converts, we think by then we’re going to be back to pretty close to where we like to be, which is 55% debt-to-total cap range, so we’ll see where we are at, at that point. But right now our intent is to utilize the program through the end of 2017. You can see what we’ve included in our guidance relative to that program, and that’s probably as far as we’d go with it at this point barring some other major acquisition or new activity. Operator Our next question comes from the line of Chris Ellinghaus from Williams Capital. Your line is open. Chris Ellinghaus A couple of questions; Rich, have you got the details on what the bridge financing costs were in the first quarter? Rich Kinzley Yes, it’s on the income statement, you can see it there. It’s lined out on that slide as 1.1 million and that ended when we closed on February 12. That was the end of that. Chris Ellinghaus Right, and I’m curious, obviously there were a lot of different moving parts (inaudible) of what I would call unusual items. I am just curious why, as far as the internal labor cost for the merger, why you don’t exclude that as well? Rich Kinzley That’s just our policy, and I think GAAP or internal labor should not be classified as one-time in nature, that’s cost that we will incur next year. They will be redeployed to other activity. Chris Ellinghaus All right, and on page 4, I’m a little bit confused, you mentioned on page 3 in the corporate section the 5.1 million tax benefit that you also referenced in your remarks. But in the footnote on page 4 for corporate, it says tax benefits of 4.4 million. What’s the difference between those two? Rich Kinzley The $5.1 million is made up of two things, Chris, the $4.4 million, the bulk of it was a life time exchange transaction we did back in 2008 when we sold a bunch of power plants and recognized a big gain but deferred that into the Aquila properties. So that was the main item of contention with the IRS that we settled in the first quarter. The additional 00,000 relates to R&D credits that were also in dispute that we’ve settled, and those are scattered across the business units. Operator Our next question comes from the line of Lasan Johong from Auvila Research. Your line is open. Lasan Johong I’m kind of a little confused here, or maybe I’m not doing the math right. But did somebody actually pay you double the construction cost of your Colorado IPP $2150 per KW? Rich Kinzley Well we constructed that plant for $260 million and placed it in service in 2012, and sold 49.9% of it for $215 million this year. Lasan Johong Okay, so close to your double your construction costs. So somebody actually did pay you that. That’s not a mathematical error or anything? Rich Kinzley No, and you did your math right. Lasan Johong Okay, any more details on those (inaudible)? Seriously, I mean if somebody is willing to pay you that kind of money, why not sell the whole portfolio? Rich Kinzley We don’t really have much left Lasan; you know that that one made sense. We’d received several inbound inquiries about that plant, because it’s contracted and it’s in a great location and it’s very clean, and it’s state-of-the-art, a lot of great attributes to that property and in a great market (inaudible) center, everything else. It’s very important for us to continue to own and operate a chunk of that because it’s in the middle of our plant complex that we operate and serve our customers at Colorado Electric, and we thought it was critical for us to maintain control there. But it made sense especially in the context of the SourceGas transaction to sell a minority interest. Lasan Johong Okay, so you think this plant is fundamental to the operations of your (inaudible)? Rich Kinzley Absolutely. Yeah, we’ve got several units on that complex and our wind is interconnected with it. We use it to firm our wind resource in Colorado. It’s very critical to our operation and we prefer to maintain control. It’s best for our customers I think that we do maintain control of that facility. Lasan Johong On the other hand you could build a plant almost double the size for free. But anyway, that’s another story at another time. Getting back on the Oil and Gas situation, look, I hate to put Jerry on the spot here, but he is painting this (inaudible) shale play as something that is kind of akin to a general giga-normous whale, if you want to put it in terms of in those terms. And it kind of makes the Marcellus look like child’s play with three-times the pay zone, good porosity or reasonable porosity and permeability for a shale play. So there are several ways that you could pursue the development. One is to just do a straight development program like you would normally do in oil and gas program. And the alternative is that if you do your Cost of Service Gas Program, which seems like it’s going to move forward, you could make it part of that program, and I’m kind of wondering which way you’re leaning towards; number one, and number two, I think you and I can agree that right now putting together a Cost of Service Cash Program it’s a slam dunk. It is a no-brainer, right, because gas prices being where they are, fundamentals being where they are, it’s an easy decision. But I think we can both agree that initial setup on the program isn’t where you are going to find problems going forward. It’s when you have to buy reserves at a certain point in time down the road that you’re going to get a lot of pushback in this and that and (inaudible) gas prices happen to be higher that you would want to pursue this. So if that’s the case, then the second part of the question is, if you’re pursuing the Cost of Service Gas Program with the (inaudible) shale play in mind, would it not be prudent to use that asset as kind of a drop-down asset to your Cost of Service Gas Program as opposed to just going on developing the Mancos Shale, as if it were a normal oil and gas play where you would (inaudible) in the open market, and this way you can protect your back-door problem with the Cost of Service Gas. So I’m kind of thinking about how you would play the Mancos Shale over a longer period of time. If you could address some of those issues, that would be great. David Emery Sure. I can try to add a little color there. Obviously Lasan one of the things that we are working on is getting through this phase 1 approval process. With that we’ll establish some criteria with the various commissions on what are the properties, the features of a gas property that they would like included in the program and that is step one. I firmly believe that a long term drilling program is a better solution for customers long-term than trying to buy reserves opportunistically. As you know, if you buy reserves in the ground at any given day, the price of those reserves is going to be directly proportional to the forward strip price for natural gas. So right now that’s a good price, and it may make sense for us to buy some properties to kick start if you will the Cost of Service Gas Program. Long-term, we would like to include properties that are similar to the Mancos whether it is the specific Mancos or not but properties like that where you have a good gas resource, very low if almost zero risk of dry holes, very economical, more gas manufacturing if you will, those types of properties are great long-term properties to add for cost of service gas. You can drill them for years; continue to have customers benefit from that program regardless of what the spot price of gas is doing. You are not dependent on the spot price of gas to buy properties to put in the program in any given year. So we like that, we like that feature a lot. Now that being said, the Mancos as a play is not near as mature as the Marcellus. So the production rates, the costs, things like that have not been proven as definitively as the Marcellus. Certainly at the current time the Mancos economics are not as good as the Marcellus so that is part of what we are contemplating is how and when do we propose gradually including the Mancos in a Cost of Service Gas Program if that is what makes sense based on the feedback we get from the commissions going through the process. I do think the Mancos or properties similar to the Mancos make the best long-term sense for customers and that is the direction we prefer to head. We just have to work our way through the regulatory process and get some feedback from the regulators before we make any definitive decision there. Lasan Johong A little curious, because the way it was described to me, the Mancos has 1000 foot pay zone versus the Marcellus, the thickest portion is about 300 feet. Second, your recover reserves per well, I thought was in the 8 to 9 Bcf range versus the Marcellus at a 3 to 5 Bcf range. How is your economics not as good as your Marcellus plays? David Emery Well, there are several things there. The pay thickness isn’t necessarily indicative of how many reserves you’re going to recover, because you can only drain certain vertical area anyway. It may provide an opportunity to vertically stack horizontal wells, because of the pay thickness which isn’t true in the Marcellus. But the Marcellus, some of the initial production rates there and reserve numbers are substantially higher than what we’ve seen in some of our Mancos. Lasan Johong (inaudible) right? David Emery Yeah, and again, it’s a timing thing. There’s only been probably 30, 40 wells drilled in the Mancos in our general area at that depth, and the infrastructure and things aren’t completely built out yet, to where you can really get the economies of scale that they are realizing in the Marcellus right now. I do think a lot of that will come in time, but it is a way off still. Lasan Johong Okay. So it isn’t out of the question that you could use Mancos if developed properly, kind of your solution to longer term replenishment of your Cost of Service Gas reserves? David Emery Yes, it would be a fantastic property for Cost of Service Gas. It’s just a timing issue I think. Lasan Johong Okay, so you’re not thinking of the necessary development of the Mancos as an independent oil and gas play? David Emery No. Operator [Operator Instructions] David Emery Alright, hearing no additional questions, I want to say thanks to everyone for your attendance today. We certainly appreciate your continued interest in Black Hills. We’re excited about what the future holds for us here at Black Hills. We’ve got a lot of great work going on, tremendous growth projects, and a lot of integration activity so stay tuned. We’ve got an exciting year in store. Have a great day. Operator Ladies and gentlemen, thank you again for your participation in today’s conference. This now concludes the program, and you may all (inaudible) your telephone lines at this time. Everyone have a great day. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited. 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Pakistan Likely To Enter MSCI Emerging Markets Index

MSCI is considering reclassifying the Pakistani equity market from frontier to emerging market status on June 14th, 2016. MSCI – a leading provider of research-based indexes and analytics – announced that it will release on June 14, 2016, shortly after 11:00 p.m. Central European Summer Time (CEST), the results of the 2016 Annual Market Classification Review. As a reminder, three MSCI Country Indexes are currently included on the review list of the 2016 Annual Market Classification Review: MSCI China A and MSCI Pakistan Indexes for a potential reclassification to Emerging Markets and MSCI Peru Index for a potential reclassification to Frontier Markets. It is important to note that MSCI is not the only index provider that classifies markets but is considered the reference benchmark for many markets. MSCI and other index providers base their market classification on a number of quantitative measurable and comparative criteria while aiming to avoid qualitative and/or subjective criteria. PAKISTAN: ECONOMY IN FOCUS Pakistan is a country with a population of 190 million people. Pakistan’s GDP stands at USD 250 billion (Year 2015). Pakistan’s economy continued to pick up in the fiscal year 2015 as economic reform progressed and security improved. Inflation markedly declined, and the current deficit narrowed with favorable prices for oil and other commodities. Despite global headwinds, the outlook is for continued moderate growth as structural and macroeconomic reforms deepen. Selected economic indicators (%) – Pakistan 2015 2016 Forecast 2017 Forecast GDP Growth 4.2 4.5 4.8 Inflation 4.5 3.2 4.5 Current Account Balance (share of GDP) -1.0 -1.0 -1.2 Source : Asian Development Bank CPEC : THE GAME CHANGER FOR PAKISTAN China Pakistan Economic Corridor (CPEC) is a mega project of USD 46+ billion, taking the bilateral relationship between Pakistan and China to new heights. The project is the beginning of a journey of prosperity for Pakistan and China’s Xinjiang. The economic corridor is about 3,000 kilometers long consisting of highways, railways and pipelines that will connect China’s Xinjiang province to the rest of the world through Pakistan’s Gwador port. The investment on the corridor will transform Pakistan into a regional economic hub. The corridor will be a confidence booster for investors and attract investment not only from China but other parts of the world as well. Other than transportation infrastructure, the economic corridor will provide Pakistan with the telecommunications and energy infrastructure. MSCI INDICES AND PAKISTAN – A QUICK RECAP It is important to mention that between 1994-2008, Pakistan was part of the MSCI Emerging Markets Index. After the Balance of Payment crisis in 2008, KSE was shut down for 4 months after which the country was kicked out of the Emerging Markets Index. In May 2009, Pakistan was added back in the MSCI Index, but this time it was added in the Frontier Markets Index. In June last year, MSCI put Pakistan up for official review regarding inclusion into the Emerging Markets Index. Now, as per today’s press release, MSCI will make its decision whether to upgrade or not on 14th of June. RECAP: THE MSCI PAKISTAN INDEX Click to enlarge Click to enlarge Click to enlarge Click Here for MSCI Fact Sheet INDEX METHODOLOGY The index is based on the MSCI Global Investable Indexes (GIMI) Methodology – a comprehensive and consistent approach to index construction that allows for meaningful global views and cross regional comparisons across all market capitalization size, sector and style segments and combinations. This methodology aims to provide exhaustive coverage of the relevant investment opportunity set with a strong emphasis on index liquidity, investability and replicability. The index is reviewed quarterly – in February, May, August and November – with the objective of reflecting change in the underlying equity markets in a timely manner while limiting undue index turnover. During the May and November semi-annual index reviews, the index is rebalanced and the large and mid capitalization cutoff points are recalculated. SOME IMPORTANT NUMBERS/STATS Click to enlarge WHAT TO LOOK FOR IF PAKISTAN ENTERS MSCI EMERGING MARKETS INDEX? If the decision is positive, emerging markets funds with 40-50 times the capital of frontier funds will be forced to have a look at Pakistan. In our view, this is an opportunity with a risk-reward skewed heavily towards the positive side. PSX – Pakistan Stock Exchange – currently trades at 9.0x earnings; companies have grown faster than their regional peers in USD over the last ten years. Should Pakistan enter MSCI Emerging Markets, it does so at more than 40% P/E discounts to its Asian EM peers. We don’t believe this is sustainable, hence calls for a positive re-rating of the valuations. ETFs IN FOCUS: Several ETFs and mutual funds invest in emerging markets; on the other hand, a small number of ETFs focus on frontier markets. For comparison purpose, we are taking BlackRock Capital ETFs. BlackRock Capital offers the iShares MSCI Emerging Markets ETF (NYSEARCA: EEM ), asset base of which is approx USD 25 billion when compared to BlackRock Capital’s iShares MSCI Frontier 100 Index ETF (NYSEARCA: FM ), asset base of which is merely USD 420 million. It is important to note that the fund size of most of the frontier markets ETFs are very small when compared with emerging markets ETFs. Hence, we don’t see any major selling pressure from the liquidation of frontier market funds which are invested in Pakistan, as that selling will be absorbed easily by the emerging market funds. In fact, emerging markets funds will bring in more liquidity in the market, hence, providing frontier market funds an easy exit. OUR STANCE We are of the view that it is likely that Pakistan will be given a green signal for entering MSCI Emerging Markets on June 14th, 2016. We caution against the notion that reclassification is a panacea for market ills or underperformance. Typically, reclassification (both upgrades and downgrades) have followed or been accompanied by economic and financial policy reforms, including improvements in market infrastructure. It is these more fundamental and structural reforms that attract and retain international investors and boost the confidence of domestic investors. Reclassifications are best viewed as signaling a confirmation of policy reforms and changes in market conditions. Hence, an identification problem may arise whereby improved market conditions are attributed to market reclassification decisions, whereas they are due to policy actions and reforms which lead to a reclassification. Similarly, we note that reclassification may have perverse effects if there is an ‘overshooting’ effect whereby speculation leads to higher prices in advance of a reclassification, over and above what would be justified by market/ economic fundamentals. Prices then adjust on the actual reclassification event. As highlighted in the article, Average Annual Revenue and Net Profit Growth of companies listed in Pakistan have been phenomenal between 2005-2015. Moving forward with CPEC in place, Pakistan’s inclusion in the MSCI Emerging Markets Index will be beneficial for both local as well as global investors. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Atmos Energy’s (ATO) CEO Kim Cocklin on Q2 2016 Results – Earnings Call Transcript

Atmos Energy Corporation (NYSE: ATO ) Q2 2016 Earnings Conference Call May 5, 2016 10:00 ET Executives Susan Giles – Vice President, Investor Relations Kim Cocklin – Chief Executive Officer Mike Haefner – President and Chief Operating Officer Bret Eckert – Senior Vice President and Chief Financial Officer Analysts Chris Turner – JPMorgan Spencer Joyce – Hilliard Lyons Faisel Khan – Citigroup Charles Fishman – Morningstar Mark Levin – BB&T Operator Greetings and welcome to the Atmos Energy Second Quarter 2016 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mrs. Susan Giles. Thank you, Mrs. Giles. You may begin. Susan Giles Thank you, Selena and good morning everyone. Thank you all for joining us. This call is being webcast live on the internet. Our earnings release, conference call slide presentation and Form 10-Q are all available on our website at atmosenergy.com. As we review these financial results and discuss future expectations, please keep in mind that some of our discussion might contain forward-looking statements within the meaning of the Securities Act and the Securities Exchange Act. Our forward-looking statements and projections could differ materially from actual results. The factors that could cause such material differences are outlined on Slide 22 and more fully described in our SEC filings. Our first speaker is Bret Eckert, Senior Vice President and CFO of Atmos Energy. Bret? Bret Eckert Thank you, Susan and good morning everyone. We appreciate you joining us and your interest in Atmos Energy. If you would like to follow me on Slides 2 and 3 of the slide deck, you will see that realized net income for the quarter was $144 million or $1.40 per diluted share. For this current 6-month period realized net income was $240 million or $2.33 per diluted share. Positive rate outcomes in our regulated businesses drove our growth for the three and the six-month periods. Rate release for our regulated distribution and pipeline operations combined generated about $24 million of incremental margin in the quarter and about $48 million for the current six months. However, warmer than normal weather affected all segments of our business. For the quarter and six month periods, we experienced a 21% decrease in regulated distribution sales volumes due to weather that was 25% warmer quarter-over-quarter. However, our weather normalization mechanisms, which cover about 97% of utility margins, worked as designed during the warm heating season. As a result, gross profit decreased just $2.2 million for the quarter and $3.3 million for the six month period due to the warmer than normal weather. Additionally, although our regulated pipeline experience decreased through system volumes and lower storage and blending fees due to the warm weather in the current quarter, volumes are only down about 1% on a year-to-date basis. And in our non-regulated segment, we experienced higher settlement losses on long financial positions compared to both prior year periods. Focusing now on our spending, consolidated O&M was flat quarter-over-quarter but rose about $6 million in the current six months period primarily due to increased pipeline maintenance spending as well as the timing of spending period over period. Capital spending increased by $97 million in the first six months compared to one year ago primarily due to planned increases in spending in both of our regulated segments. About two-thirds of this increase was incurred in our regulated pipeline segment where we continue to enhance and fortify our Bethel and Tri-City storage fields to improve our ability to reliably deliver gas in the Mid-Tex division and APT’s other LDC customers. We remain on track to achieve our capital budget target of $1 billion to $1.1 billion for fiscal 2016 as you will see in the slide deck. Moving now to our earnings guidance for fiscal 2016, with the winter heating season coming to an end, we have tightened our projections and earnings per share range for fiscal 2016. As shown on Slide 12, we expect fiscal 2016 earnings per diluted share to range between $3.25 and $3.35 excluding unrealized margins at September 30, 2016. The expected contribution from our regulated operations as well as estimates for selected expenses for the year have been tightened from our original projections made last November. The expected contribution from our non-regulated operations remains unchanged. We expect the continued execution of our infrastructure investment strategy, coupled with constructive regulation will be the primary driver for this year’s results. Looking on Slide 13, we continue to anticipate annual operating income increases of between $100 million and $125 million from approved rate outcomes in the year. Thank you for your time. And I will now hand the call to our CEO, Kim Cocklin for closing remarks. Kim? Kim Cocklin Thank you, Bret very much and good morning everyone. Very good quarter. An excellent first half. As Bret said, we came through a warmer than normal winter in excellent shape. We are able to tighten guidance. And with the approval of the pipeline GRIP filing in Texas on May 3, we now have generated $71 million of revenues from rate outcomes, and as Bret said, are on target to achieve our target of $100 million to $125 million this year. We do have filings pending before agencies which seek a total of $56 million and we expect to file a few more cases before year end. These results very importantly mark our over five consecutive years of successfully executing our growth strategy that we began in 2011 and continues our journey in meeting the very important commitments of investing in our infrastructure to improve the safe operation of our system, to grow earnings at a level of 6% to 8% annually and to target a total shareholder return of 9% to 11%. We now will open it up for questions. Selena? Question-and-Answer Session Operator Thank you. [Operator Instructions] The first question is from Chris Turner from JPMorgan. Please go ahead. Chris Turner Good morning, guys. I wanted to check in on the pipeline rate case, I think you kind of last updated us by saying that you would file late this year early next year. What’s the latest on timing thoughts and cap structure kind of request versus your current? Kim Cocklin It’s pretty much on target is what we have been messaging you with. We intend to file it probably late this year, probably December. The cap structure we are targeting is still in the 57% to 58% equity component, which is what we anticipate having as we work through our financial plan for funding the capital budget this year. And really as we have talked about, we are going to file everything right down the middle of the fairway and not ask for anything outside that we don’t have in place right now. So, there really isn’t any change and we are on target to do everything that we have been talking to you about. If there is any changes we will have any updates at the AGA Financial Forum coming up in May, but we don’t anticipate having any. Chris Turner Okay. And then is it the right way to think about that case that you guys have recovered most of the capital return on and of already through the GRIP mechanism and most of the kind of wild card or uncertainty from our perspective that will flow through to your bottom line versus what you currently are getting is on the cost side? Kim Cocklin We will have an update to the rate base numbers obviously and we will have all our investment that we have made from the time of the GRIP filing this year through that end of that case and then we will be filing another GRIP filing after the case is filed. So, there will be additional increments to rate base in the case. Chris Turner Okay, great. And then can you remind us of when you expect to next be a cash taxpayer based on your current estimates and the changes with bonus depreciation late last year? And then also kind of maybe give an update on your expectations of using your ATM issuance mechanism that you recently launched in terms of timing this year and maybe next as well? Kim Cocklin First on the cash taxpayer, we don’t anticipate being a cash taxpayer in the current 5-year plan through 2020. So it will be after that, before we start to pay cash taxes. As far as the ATM Chris, the plans are consistent with what we disclosed at our November analyst day. We expect to do $300 million to $400 million over the 5-year plan and $50 million to $100 million on an annual basis. Chris Turner Okay. And would that be somewhat evenly spread throughout the year or would you do that kind of at certain points? Kim Cocklin I don’t – I think we are going to stick with the $50 million to $100 million as you go through that period. I will tell you that all of our financing plans have been contemplated and included in our tightened guidance range for fiscal ‘16, as well as our guidance that we have out there in 2020. Chris Turner Okay, great. Thanks guys. Kim Cocklin Thank you, Chris. Operator The next question is from Spencer Joyce with Hilliard Lyons. Please go ahead. Spencer Joyce Bret, Kim, Susan good morning. Kim Cocklin Good morning. Spencer, who is the Derby winner this year? Spencer Joyce Well, I am sorry, that’s why I had to chime in. I am on the favorite. I kind of like Nyquist this year. Kim Cocklin Nyquil [ph]…? Spencer Joyce Yes, almost Nyquist. But in any case, just one sort of broad big picture question from me, you all have been very clear about why you have avoided latching on to some of the major midstream projects that we have seen here out East a little bit and at least from my vantage point, it seems like the environmental contingent is becoming more organized and a bit more vocal and we have seen delays for Constitution, PennEast, I mean almost any named project we have seen delays at this point. I am wondering if you have seen any of that public sentiment shift into some of your smaller diameter, shorter-haul projects or is it really just business as usual as far as your pipe in the ground goes? Kim Cocklin No that has – none of that consternation is translated into any of the projects that we have got and the capital investment we are doing. I mean the regulators and our customers understand how important it is for us to continue to pursue that investment to make our system as safe as possible and continue to – our journey of becoming the nation’s safest utility. So, we are also not trying to clear new right away or go through areas that have not – that don’t have pipe in the ground right now. So, it makes a significant difference when you are trying to put those new systems in and trying to clear a path for them and that there is a great deal of opposition that goes along. And then you have got the size of the pipe itself, those things are talking 36 inch, 42 inch pipe and unfortunately you have got some stuff that’s been in the news here lately, Bethlehem Township in Pennsylvania with the Texas Eastern incident last week. So it’s pretty much elevated the opposition, but for us I mean we continue to operate in a – in kind of under the radar. And people see the need. And it’s a small pipe in most situations where we are dealing with it. So, no. Spencer Joyce Alright, that sounds great, good color there and glad to hear its business as usual. That’s all I had, we will see you in Naples. Kim Cocklin Okay. Spencer, look forward to it. Operator The next question is from Faisel Khan from Citigroup. Please go ahead. Faisel Khan Hi, good morning. It’s Faisel from Citigroup. Kim Cocklin Faisel, where have you – I thought you were doing the Geico commercials or something. We haven’t heard from you in years. Faisel Khan Yes, it has been several quarters, since I have asked a question, but and think of where the stock has gone too. So it’s probably a good thing, right. Kim Cocklin Yes. We have got a good run. Faisel Khan Yes. Just a couple of questions for you and I will get out of the queue. Just on the – with the amount of rate cases that you have going on and going forward, if you can just remind us sort of what the history is and sort of the ask versus the settled, so what percentage you usually get from the ask for these rate cases when you settle them? Bret Eckert Keep in mind, Faisal we have got annual mechanisms that cover about 93% of our filings, so. Kim Cocklin These are not traditional filings. Normally, in a general rate case, you handicap the filed form out versus – the request versus the achieved at about 50%, but so many of our filings right now, as Bret pointed out 93% are covered by annual mechanisms that really have – are very prescriptive and there is not a lot of controversy over the computation and the methodology that’s utilized to increase either the O&M or the rate base adjustments. And then you have plug and play ingredients normally associated with the cap structure that may or may not change and the return component is normally settled. The depreciation rate is also settled. So, I mean we don’t – we have got the $56 million of – that we are seeking right now that is the filed for request. I mean we are – the best target that you can have for your model I think is to look at the $100 million to $125 million that we targeted for fiscal ‘16 that we are at $71 million now and we are very confident and comfortable that we will reach the target that we have provided. I mean as we get closer through the next two quarters you will see those amounts will continue to materialize and as they become final we make them immediately available so you can get them into your model. Faisel Khan Got it, okay. It makes sense. Bret Eckert If you look at slide 27 you will see a detail of each of those mechanisms by state, by jurisdiction. Faisel Khan Yes. No, I see it. I was just wondering, are you in for like for example, I guess for the Mid-Tex cities sort of are they RRM, like is that $26.6 million, is that sort of part of this process you are talking about where it’s an automatic sort of…? Kim Cocklin That is not automatic, but it’s pretty prescriptive. So, there is normally adjustment in the ask for that type of filing and what we achieve because that does go through some negotiation process. Mike Haefner Faisel, this is Mike. The other thing that we will see in terms of the difference between an ask and an awarded amount relates to assumptions that are made and debated around things like employee costs, how pension costs are treated in that, that at the end of the day may affect the awarded amount, but does not affect us on a net income basis at the end of the day, so. Faisel Khan Okay. And then looking at the continued rate base growth of the company going from I guess $5.5 billion to $9 billion, is there anything that would sort of cause that growth rate to slow for any which reason, I just want to make sure also is the deferred taxes and the implementation of the new tax laws, is that baked into that number too? Bret Eckert It’s fully been contemplated in all of our numbers, yes. Kim Cocklin You will be the first to know, Faisel. I mean we take that commitment extremely seriously. We have advertised that we are going to grow rate base at 9% to 10% which we absolutely have to do to meet the commitment of growing earnings at 6% to 8% on average. So I mean we have built up what we hope is a lot of trust and credibility with our shareholder base and with the street and we take that as seriously as the dividends. So if there is ever any change to that and if there is any retraction or reduction to the growth rate that we see, which we don’t see for the next 5 years and we have got a very good financial strategy to back up the investment for the next 5 years and we will continue to increase that. So we are very confident and again, we can’t overemphasize the fact that we are not just advertising these rates at 6% to 8%, we are actually performing and throwing them off and we have got over a 5-year track record of meeting that commitment. So we fully expect to do it. And we understand how important it is to message any change as soon as it becomes available. So we are not going to hide the ball on anything like that. Faisel Khan It makes sense. Thanks guys for the time. I appreciate it. Kim Cocklin See you Monday. Faisel Khan We will do. Operator The next question is from Charles Fishman with Morningstar. Please proceed with your question. Charles Fishman Good morning. You lowered the – you narrowed your guidance, but you lowered the upper end of your guidance, $3.40 to $3.35, yet the upper end of regulated operations stayed the same, the upper end of non-regulated operations stayed the same, share count stayed the same, can you explain to me your thinking on that of how you go about doing – or why you did that, lowered the upper end too? Bret Eckert Well, when you tighten guidance, Charles right, I mean you have got to move the upper and the lower end. The midpoint of our guidance is still the $3.30 that remains unchanged, which is about an 8.2% growth rate over the $3.05 weather adjusted operations for fiscal ‘15, so it was just a matter of coming in six months into the year when 70% to 75% of your earnings are behind you and providing a bit tighter of a range of guidance for the street. Charles Fishman Okay. So you are not – I see what you are doing, you are focusing on the midpoint and then just assuming a variance from that. Got it, okay. That explains that… Kim Cocklin We are also trying to focus on trying to help you tighten up your model. Charles Fishman Thank you. That’s always appreciated. The next question follows up tightening up the model, effective tax rate went down – guidance on effective tax rate went down 100 basis points, can you provide a little more color on that? Kim Cocklin That was Trump hew was – because he is the Republican nomination. Charles Fishman Okay. Kim Cocklin It’s just – really just the ebbs and flows you see in a year plus there was a new stock compensation standard that was adopted and that impacted tax rate – effective tax rate a little bit. And you will see that disclosed in the 10-Q. Charles Fishman Got it, okay. Thank you very much. Good quarter. Operator [Operator Instructions] The next question is from Mr. Mark Levin from BB&T. Please go ahead. Mark Levin Hi guys. Hope you are doing well. Two very big picture questions, the first has to do with something that I am sure is not envisioned by many at this point with natural gas prices around $2.10, but is there a point at which – or is there a gas price at which you could point to or maybe theoretically come to whereby regulators would be less inclined to be as constructive as they are. Put another way, is there a natural gas price point where the customer starts to feel it in a more material way and the regulatory environment might not be quite as accommodative as it is today? Kim Cocklin I mean you can hypotheticate all you want on prices for sure Mark, but we haven’t picked a price point. We do anticipate with our 5-year plan of having an all-in – we have assumed an all-in gas price of $4.50, $4.50 to $5.50 through 2020, which if you look at the forward screen, I mean that is clearly within the realm of reasonableness and even conservative. So there are some other factors. The cost of money is another thing that’s helping the investment and along with gas prices, the customers are not expected to experience any increase in the bills that they have paid since 2007. So I mean we really haven’t run the what-if scenario on that. We pay obviously, very close attention to gas prices and are able to do some things as a result of working with the regulators to hedge positions so that we are usually 1 year or 2 years ahead of all the price changes. Mark Levin Sure. So to me it sounds like – even if it were I think we are – gas would have to do something monumental – have to be monumentally higher? Kim Cocklin It would have to be like $8 to $10 I think. Mark Levin Yes, right. So a completely different schematic. And then the second question, because you can’t get off an LDC call without asking the M&A question, but maybe I will approach it from a different way, are you seeing any opportunities – obviously, your equity has risen magnificently and for good reason, but you do have an equity currency, the cost of debt is relatively cheap – is very cheap actually. Are there opportunities out there as a buyer, now I realize going and trying to buy an LDC and finding a cheap LDC at this point might be challenging, but are there any other opportunities out there that you guys are considering or would consider given the strength of your equity and the cost of debt? Kim Cocklin We pretty – we have been very consistent in emphasizing the fact that we think multiples are extremely expensive, you never say never. But there is nothing on the block that we would be interested in paying over and above or even close to what’s going off the Board today, if you look at our investment of $1 billion to $1.1 billion of capital every year, that with the regulatory lag that we experience with 94% of that investment beginning to earn within six months at the end of the test period, that $1 billion to $1.1 billion that we are putting in the ground is helping us on this journey of becoming the nation’s safest utility, so it becomes immediately accretive. You don’t have the integration issues if you go out and overpay for an asset which you are doing right now. You have regulatory issues and complications of dealing with what you pay over book, how you deal with goodwill, how you integrate a culture, you do the systems. I mean there is a whole host of issues, social issues and financial and operational issues, when you buy an asset. I mean we did that, we have a wonderful asset – we have a wonderful portfolio. We are in jurisdictions where we want to be. We are extremely comfortable with who we are. We know who we want to be. We have got wonderful skill sets. And so we don’t really have to look across the landscape. And I think bet the future on trying to integrate an asset under the current market conditions. Mark Levin That makes perfect mix, absolutely perfect sense. And is your – just when you think about the industry as a whole and you put your sort of crystal ball on – head on and think about the next 6 months to 12 months, is your expectation that we will continue to see more deals or do you think that there will be a pause given the run in the equities? Kim Cocklin No pause. There is going to be more deals. I mean you have got people out there that supine gas is a very attractive story. They want to get it in their portfolio if they do not have it right now and natural gas. Obviously, it’s the future for energy in this country. I mean energy is a very fundamental food group of a healthy economy. Once we get past November and the elections I think with where gas prices are and where exploration efforts are in the country and the ability – it’s an affordable all-American product. So it makes all the sense in the world and there is good reason I mean I don’t think – I think the multiples are going to stay where they are at in this space as well, because I think interest rates will probably remain very low, but I think people are seeing a lot of value right now and continue to see value in natural gas. Mark Levin That all makes sense, congratulations on a great execution. Kim Cocklin Thank you, Mark. Operator There are no further questions at this time. I would like to turn the floor back over to Ms. Susan Giles for closing comments. Susan Giles Thank you, Selena. I just want to say thank you for calling. A recording of this call is available for replay on the website through August 3. And we hope to see many of you at the AGA Financial Forum in a couple of weeks. Thank you again for your interest in Atmos Energy. Bye-bye. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited. 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