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Clean Energy Fuels’ (CLNE) CEO Andrew Littlefair on Q1 2016 Results – Earnings Call Transcript

Clean Energy Fuels Corp. (NASDAQ: CLNE ) Q1 2016 Results Earnings Conference Call May 5, 2016, 04:30 PM ET Executives Tony Kritzer – Director of Investor Communications Andrew Littlefair – President and Chief Executive Officer Robert Vreeland – Chief Financial Officer Analysts Eric Stine – Craig-Hallum Rob Brown – Lake Street Partners Pavel Molchanov – Raymond James Operator Greetings and welcome to the Clean Energy Fuels first quarter 2016 earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Tony Kritzer, Director of Investor Relations. Please go ahead. Tony Kritzer Thank you, operator. Earlier this afternoon, Clean Energy released financial results for the first quarter ending March 31, 2016. If you do not receive the release, it is available on the Investor Relations section of the company’s Web site at www.cleanenergyfuels.com where the call is also being webcast. There will be a replay available on the Web site for 30 days. Before we begin, we’d like to remind you that some of the information contained in the news release and on this conference call contains forward-looking statements that involve risks, uncertainties and assumptions that are difficult to predict. Words of expression reflecting optimism, satisfaction with current prospects, as well as words such as believe, intend, expect, plan, should, anticipate and similar variations identify forward-looking statements, but their absence does not mean that the statement is not forward-looking. Such forward-looking statements are not a guarantee of performance and the company’s actual results could differ materially from those contained in such statements. Several factors that could cause or contribute to such differences are described in detail in the Risk Factors section of the Clean Energy’s Form 10-Q filed May 5, 2016. These forward-looking statements speak only as of the date of this release. The company undertakes no obligation to publicly update any forward-looking statements or supply new information regarding the circumstances after the date of this release. The company’s non-GAAP EPS and adjusted EBITDA will be reviewed on this call and exclude certain expenses that the company’s management does not believe are indicative of the company’s core operating business results. Non-GAAP financial measures should be considered in addition to results prepared in accordance with GAAP and should not be considered as a substitute for, or superior to, GAAP results. The directly comparable GAAP information, reasons why management uses non-GAAP information, a definition of non-GAAP EPS and adjusted EBITDA, and a reconciliation between these non-GAAP and GAAP figures is provided in the company’s press release, which has been furnished to the SEC on Form 8-K today. Participating on today’s call from the company is President and Chief Executive Officer, Andrew Littlefair, and Chief Financial Officer, Bob Vreeland. And with that, I will turn the call over to Andrew. Andrew Littlefair Thank you, Tony. Good afternoon, everyone, and thank you for joining us. I’m going to keep my remarks focused on the most important takeaways from what we feel was a strong first quarter. We reported first quarter revenue of $95.8 million, which is a 12% increase over the first quarter of last year. Additionally, we reported $29.8 million of adjusted EBITDA versus negative $5.6 million in Q1 of 2015. The first quarter of 2016 included $6.4 million of VETC and a gain of $15.9 million from buying back some of our converts at a discount. However, even when these real benefits are backed out, our adjusted EBITDA was still positive at $7.5 million, an improvement of over $13 million from the first quarter of 2015. We delivered 77.5 million gallons to our customers. This is a 3% increase over the 75 million gallons we delivered during the first quarter of 2015. On the year-end earnings call, I told you that a primary focus for 2016 would be to conserve cash and de-leverage the balance sheet. To that end, we repaid $60 million of the $145 million convertible notes due in August 2016. In addition, given favorable pricing, we have been opportunistically repurchasing our 2018 convertible debt in the open market through privately negotiated transactions. In the first quarter, we repurchased $32.5 million; and so far in the second quarter, we have repurchased an additional $31.5 million. All told, we have repurchased $64 million of our 2018 convertible notes, leaving $186 million due in October 2018. Our total convertible debt reduction is $124 million. Also to date, in 2016, we have raised $32.4 million of proceeds from public stock sales. At quarter-end, we had $163 million of cash and investments on our balance sheet. Additionally, we reduced our SG&A by 15% year-over-year, while growing our volume and revenues. We are on track with our reduced CapEx budget of $25 million for 2016, which is 50% less than last year, so we are executing on our plan to conserve cash and reduce our debt. From an industry perspective, the pressure for companies to become more sustainable continues to grow. We see natural gas fueling as an economic and realistic solution that a company can utilize to achieve greater sustainability. And we are working with a variety of fleets and shippers like Kroger and Unilever as well as trucking companies, waste companies and municipalities. Fleets continue to look to fuel with natural gas. Here is a noteworthy example. The United States Postal Service is pursuing an initiative to reduce their carbon footprint by 20% by 2020 and have concluded that natural gas is the alternative fuel of choice for their third-party contracted carriers. These carrier carriers are responsible for the majority of all USPS transportation emissions. As part of their contract renewals, the Postal Service is starting to require its outside carriers to use natural gas where it is cost-effective. We are currently working with five other major carriers, who combined have 75 natural gas tractors fueling at several of our highway stations. Additionally, the USPS is considering replacing some of their own Class A tractors and straight trucks with natural gas. Turning now to our renewable fuel business, we continue to see increased interest in demand for our renewable fuel offering. Through our robust network of stations, we have established a pathway to Redeem, our renewable green gas, into vehicles. This is the best way to realize the full value of renewable fuel, which contributed $11 million of revenue in the first quarter. I want to emphasize that our expanding infrastructure has enabled us to benefit from this rapidly growing renewable market and differentiates us from our competitors. Companies like UPS, Ryder, Republic Services and many transit agencies use Redeem and understand its significance. Another important industry innovation, the Cummins Westport low NOx engine has already captured a lot of interest, and these engines are available to order. As a reminder, this low NOx engine reduces NOx 90%. And when combined with our Redeem renewable fuel, it has 90% less carbon. It is cleaner than running an electric vehicle that is plugged into the grid. In the industry, this new introduction is referred to as game changer. Turning now to our station construction, we benefited, during the first quarter, from an increase in full station projects. Currently, we have over 60 projects under contract and in the pipeline. We continue to believe our robust construction pipeline is a solid indicator that our customers continue to make investments in expanding their fleets and remain committed to their sustainability goals. Our virtual pipeline subsidiary, NG Advantage, showed impressive growth, delivering close to 8.6 million gallons to their customers. I’m also pleased to report that we recently signed a follow-on supply deal with Hawaii Gas, which is contracted to purchase over 14 million LNG gallons over the next five years. All told, it was a strong quarter. And I believe it is a testament to our diverse product offering and recurring revenue base. Our largest customers continue to buy new trucks and invest in their natural gas operation and we continue to gain new customers across our markets of transit, refuse and trucking. Our adjusted EBITDA continues to trend positively and we are taking strategic actions to de-leverage our balance sheet and we’re being disciplined with our capital. And with that, I’ll turn the call over to Bob. Robert Vreeland Thank you, Andrew. Good afternoon to everyone. As Andrew mentioned, we have a strong quarter with continued volume growth, a 12% increase in revenue, and adjusted EBITDA of $29.8 million. Starting with volume of 77.5 million gallons, a 3% growth rate over the first quarter of 2015, impacting this growth rate was a decline in RNG volume of 3.5 million gallons. Most of that decline is the result of no longer owning and operating our former Dallas bio-methane plant, which we sold and then operated through mid-April of 2015. Exclusive of those gallons, our volume growth was 8% year-over-year. As Andrew mentioned, NG Advantage had strong year-over-year growth as did our refuse sector, while the other sectors were level with a year ago. LNG volume was down 2.9 million gallons, principally from lower bulk LNG sales. Bulk LNG sales can be uneven throughout the year as LNG demand is influenced by various external factors, such as, more recently, the slowdown in E&P industry, the variable demand of large industrial customers, and weather. We remain active and compete well in the bulk LNG marketplace as evidenced by our new deal with Hawaii Gas. Our Redeem gallons, which are included in our CNG and LNG fuel gallons, increased 70% year-over-year to 15.2 million gallons for the quarter. Our 12% increase in revenue in the first quarter was driven by a better effective price per gallon on higher volume, increased construction project revenue, and the alternative fuel tax credit referred to as VETC. Our Compression sales were down year-over-year as we remain in this challenging global oil environment together with a strong US dollar, although the related gross margin contribution from our Compression business was better than a year ago despite the lower revenue. Our adjusted EBITDA of $29.8 million was driven by a strong gross profit margin, continued reductions in SG&A spending, and a gain from our opportunistic convertible debt repurchase. Our strong gross profit margin was driven substantially by the impacts of selling our Redeem fuel and the associated environmental credits, which helped take our gross profit margin per gasoline gallon equivalent to $0.36 per gallon compared to $0.28 for the first quarter of 2015. Both quarters include the state and federal environmental credits, the LCFS and RINs. The combined credits amounted to $11 million in the first quarter of 2016 compared to $3.2 million in 2015. The economic benefits from the environmental attributes of both natural gas and Redeem remain strong and have more than offset the pressure on retail fuel margins from this low oil and diesel price environment. And finally, on gross margin, we benefited from our increased station construction project sales and the VETC revenue. Our 15% reduction in SG&A to $25.6 million was $4.6 million lower than a year ago and $1 million or 4% lower than the recent fourth quarter. This has been a continuing trend and is the result of the actions we’ve taken given the low oil price environment. And as Andrew mentioned, we recorded a $15.9 million gain on the repurchase of $32.5 million of our 2018 convertible debt. The higher revenues and gross profit margin and lower SG&A, along with the gain on debt repurchase, led to GAAP net income of $2.8 million in the first quarter of 2016 compared to a net loss of $31 million a year ago. And it also lead to an improvement of $35.4 million in adjusted EBITDA from a year ago. Looking forward, we anticipate our Redeem sales to benefit our results, VETC will be recorded each quarter in 2016 relative to volume, and we continue to expect positive quarterly adjusted EBITDA for the balance of 2016. And with that, operator, we’ll open the call to questions. Question-and-Answer Session Operator Thank you. [Operator Instructions] Your first question comes from Eric Stine with Craig-Hallum. Please go ahead. Eric Stine Hi, everyone. Nice quarter. Andrew Littlefair Thank you, Eric. Robert Vreeland Thanks, Eric. Eric Stine I want to start with Redeem, especially given the impact that had in this quarter. How do you think about that long-term – limiting factors to growing volumes there? I know part of it is that, right now, what, California and Oregon that have LCFS, have the standards where you can participate. But do you see other states going down the road of California? And ultimately, where do you think that those Redeem volumes can go? Andrew Littlefair Thanks. I think the short answer, Eric, is the – we’ve had tremendous growth in the Redeem business, and so it won’t be easy to keep up on that growth. But it will continue to develop, and so I think you should count on what we’re doing. So what you saw in the first quarter should continue. I really think that in terms of renewable fuel, we’re really at a beginning point as we’ve got a few different – I know you attended the ACT Conference out here. I really believe that the transportation industry, passenger car, and also those in goods movement, I think this being sustainable fuels and sustainable technologies, I think we’re just at the beginning of what’s going to be a very long move toward cleaner fuels and cleaner innovation, cleaner technology. So I think, over time, you’ll see us continue to grow Redeem. Washington State is now looking at Low Carbon Fuel Standards. We’re selling Redeem in Texas now. The Northeast has kind of come in and out of something that feels a little bit like Low Carbon Fuel Standards. Some states will be more progressive than others. But I think you’re going to continue over time to see more and more regulations that incent and begin to put more values on carbon. And so, I think the good news is for our industry and for our company is that we have this renewable fuel, we have the network to be able to dispense it and the pathway to be able to get it into vehicles. That gives us a huge leg up compared to some of the others in this business. And I think that having the technology, the new Cummins Westport engine which I know was highlighted at this big conference out here just this week, it’s a low NOx engine which is very important for tailpipe emissions, but it also – when it’s combined, as I said in my remarks, with Redeem, it’s really cleaner than the grid which is a big deal. So I think we are well-positioned and I think it will be important, Eric, as we go forward. Eric Stine That’s volumes. But in terms of pricing, what I’m looking at or reading, it seems like the thought is that the pricing, the carbon price per ton, that trend, while there may be some near-term volatility, the trend there is higher too. Andrew Littlefair Yes, Eric. And that’s right. So there’s two – there’s definitely two components to that. There’s the volume and then there’s the pricing of the environmental credits. And that environment has been strong and continues to be strong at the moment. Now, like you said, there’s always the chance of some volatility. But just the way – with the standards that have been set and the obligated parties and all of that, it’s making that kind of a strong market. Eric Stine Yeah, okay. Maybe just thinking about your fleet activity, yesterday, at ACT, clear impression that people thinking that the market is probably flat this year, maybe down a little bit, but just curious, are you seeing any movement in your pipelining other than maybe the timing getting pushed out a little bit? Have any fleets dropped out of that pipeline? What are you seeing right now? Andrew Littlefair Eric, when you look at our customer base, the refuse market continues to be strong. It’ll be as big a year as we’ve had. And we’ve been a host of an industry event, which is called the Garbageman’s Invitational. It’s worth 300 refuse industry executives come here a couple weeks ago. And to a company, they’re all fueling natural gas trucks. And so, that’s a really important segment for us. We see the same thing expanding in transit. Now, when we talk about kind of flat year-over-year, the trucking industry hasn’t been as involved. It doesn’t have quite the maturity in terms of putting vehicles in their fleet like the refuse and transit guys who have been at this now for a decade. So it was a newer segment for us. And I would say, Eric, those that – we’re still seeing new fleets come, often in more of a testing mode with handfuls or dozens of vehicles rather than large purchases. But even in that segment, which I think you’re correct, that it will be similar this year to what it was last year, which I would consider to be important that we’re not backsliding. UPS continues to show the way as other big fleets like them. They haven’t turned back and we haven’t really seen any existing customers that have been in this, especially in the trucking, go back. Those that were on the fence when we entered this downturn in the oil price, they continue to review it. But I would say their attitude – and I’ve even probably met some out there at the conference. The attitude is not opposed to natural gas. In fact, I find it refreshing, in that they’re interested in moving forward. But they’re mindful of the fact that they’ve gotten very low diesel price right now. So I think that when that subsides you’re going to see an uptick in the adoption of natural gas for heavy duty trucking. Eric Stine Right. I guess this is kind of tough to quantify, but I’ll ask anyways. Is there an oil price that you look at and say, okay, at that level, then that’s when trucking really pick back up again? Andrew Littlefair It’s hard to pin me down there. But I know this is that, we’ve had some customers begin to model out oil at $40 a barrel, right? And in some cases, that sort of is difficult to make the natural gas equation work as well as it once did. I think, Eric, when you see $50, $55, $60 a barrel, it really gets – it really begins to move up the price of diesel. Look, diesel price has gone up nationally $0.10 in the last two weeks. It’s gone up every week for the last four weeks. And so, we don’t need to see $100 oil. You need to see the price of – we need to get off of people thinking that we’re going to have $40 oil forever. And I think once they see that there’s volatility, again, in their oil price and it comes back up to $50, $55, $60, I think that’s going to be the signal to have people begin to then – natural gas is still – let’s not forget, that’s our big commodity that we use here and it’s low. It’s very low. And so, the economics begin to sing again when you get back up to that oil price. Eric Stine Okay, thanks a lot. That’s it for me. Andrew Littlefair Yeah. Operator Your next question comes from Rob Brown with Lake Street Capital Markets. Please go ahead. Andrew Littlefair Hi, Rob. Good afternoon. Rob Brown Congratulations on the EBITDA improvement. I think you said you had 60 stations in your pipeline. Could you give us a sense of – is that all to be delivered this year? And then maybe a sense of the gallon volume that those projects sort of generate ongoing? Andrew Littlefair I don’t know that I have the volume for you, Rob. But most of those stations that we’re talking about in the pipeline will be delivered this year. Rob Brown And then the mix of those, is it refuse mostly or maybe what is the mix there? Andrew Littlefair Big piece of those, refuse that are under contract, some are for our own account, some are for long contracted volumes from anchored tenants for stations that we’re building. Majority of those, though, are for customers – that we’re selling customers. And I hedged just a bit when we use the number over 60 and stuff like that because we get toward the end of the year and some of these – they will be under construction. But you never know if you’re going to get them all – four or five of them, we got it in December and this and that. But it looks to me like the station count should be very similar this year as it was last year, which are some of our biggest years that we’ve had. Rob Brown Okay, great. And then the Hawaiian Gas contract, I assume you’re supplying that out of Boron, but could you give us a sense of, again, what the gallon volume is there and sort of how that works? Andrew Littlefair Well, it starts out slow. And then my friends at Hawaii Gas have been – they’ve been wanting us to be careful about how much we’re saying. But it starts out – as you know, Rob, we’ve sold them some LNG already really more of in a test mode. And we had pieces of this contract done, gosh, maybe as long as a year ago and we were awaiting PUC approval, which came here a little bit ago. They’re now in the process of beginning to go out to bid to receive the containers that will be used for that shipping. Those will be – that’s underway now. Those containers will be delivered throughout this year and I imagine a big slug of those in the back end of this year. So we’ll begin to ramp up. And I think it begins to amount to around 3 million, 3.5 million gallons a year. And there’s a chance we’d do better than that. But it’s a nice additional load. And I hope the experience will be well because even with – you can imagine, all this entailed, we’re still able to bring them a very clean fuel that beats the otherwise imported fuel that they use for the islands. So we’re excited about it. They’re excited about it. And I hope that we can increase that from the number that I gave you in my remarks. Rob Brown Great, thank you. I’ll turn it over. Operator Your next question comes from Pavel Molchanov with Raymond James. Please go ahead. Pavel Molchanov Thanks for taking the question, guys. One of the things that’s really helped you get into positive EBITDA is the reduction in SG&A. So you went from $30 million a year ago to $26 million this quarter. Is there any further room to cut that even more? Robert Vreeland Yes, there is room. And so, we’ve been feeling the effects of actions that we’ve taken as we’ve been going along. So it’s been kind of coming down each quarter. Certainly, on a year-over-year basis, it’s a bigger number. As we go sequentially, it’s coming down. But at some point, it’ll flatten a little bit. Pavel Molchanov Okay, pretty close to where we are right now? Andrew Littlefair I think, Pavel, there’s a little room still left in it. We’re continuing to eye different things to try to bring it down some more. I think there’s still some room left. You’ll see it maybe improve, continue this year. But all the while we’re still growing. And so, there’ll be a limit to how low we can bring it. Robert Vreeland Yeah. So it’s pretty close. Pavel Molchanov Just a housekeeping question, in Q1, you got the VETC catchup cash inflow, how much was that? Robert Vreeland Correct. So we collected all of the VETC that related to 2015. Pavel Molchanov How much is that? Robert Vreeland Yeah, so it was a little bit in excess of about $30 million. Pavel Molchanov $30 million. Thank you, guys. Robert Vreeland Yeah. North of that. Little bit north of that. Andrew Littlefair $32 million. Robert Vreeland Yeah. So it’s a little bit… Andrew Littlefair $32 million, yeah. Robert Vreeland Exactly. Andrew Littlefair Thanks, Pavel. Operator Thank you. There are no further questions at this time. I’d now like to turn the floor back over to Mr. Littlefair for closing remarks. Andrew Littlefair Good. Well, thank you, operator. Thank you, everyone. I want to thank you for listening and – listening in on the call this afternoon. We look forward to updating you on our progress next quarter. Operator That does conclude our conference for today. Thank you for participating. You may now disconnect your lines. 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American DG Energy’s (ADGE) CEO John Hatsopoulos on Q3 2015 Results – Earnings Call Transcript

Call Start: 11:00 Call End: 11:48 American DG Energy, Inc. (NYSEMKT: ADGE ) Q3 2015 Earnings Conference Call November 11, 2015 11:00 A.M. ET Executives Bonnie Brown – CFO John N. Hatsopoulos – Co-CEO Benjamin Locke – Co-CEO Elias Samaras – CEO, EuroSite Power Analysts Ralph Wanger – RW Investments Unidentified Analyst – Oppenheimer Unidentified Analyst – Private Investor Operator Good morning and welcome to the American DG Energy Third 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 for playback approximately one hour after the end of the call and will remain available until Thursday, November 19, 2015. Individuals may access the recording by dialing 877-344-7529 from inside the U.S., 855-669-9658 from Canada, or 412-317-0088 from outside the U.S. Enter the replay conference number of 10075343 followed by the pound sign. Now, I would like to introduce Bonnie Brown, American DG Energy, Chief Financial Officer. Please go ahead. Bonnie Brown Thank you Rocco and good day and thank you all for joining us on Veterans Day for our third quarter earnings call. I am Bonnie Brown, American DG’s Chief Financial Officer. On the call with me today are John Hatsopoulos and Ben Locke our Co-CEOs. Also joining us is John Brooke [ph], our VP of Finance. Before we begin I would like to read our Safe Harbor statement. Various remarks that we may make about the company’s future expectations, plans and prospects constitute forward-looking statements for purposes 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 involve 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 tables accompanying that release. 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 I would now turn it over to John Hatsopoulos for some opening remarks. John? John N. Hatsopoulos Ladies and gentlemen thank you very much for joining us. I would like to remind most of you that we are lucky to have Bonnie Brown back on the team. She worked for ten years at Tecogen and then for a short period of time she left us and then she missed us and came back and became CFO of American DG Energy and EuroSite. This is an exciting period for us even though the numbers are a little misleading. We had made a commitment that by 2016, the American operations of American DG will be cash flow positive and we are almost there. We lost only $51,000 for the quarter and even though the number of consolidated was 300,000 or so, 390,000 if I remember correctly, the bulk of it was because of a transition period of EuroSite which some of you might be investors and aware of the EuroSite numbers. It is our belief and goal that 2016 we will be cash flow positive in the United States and as I mentioned earlier, for the EuroSite, EuroSite believes they will be cash flow positive for the year 2016. And most probably we will be cash flow positive for the current quarter consolidated with EuroSite because they will be cash flow positive and will be either cash flow positive in the U.S. or almost there. With that I’d like to ask Ben Locke, who’s really running ADG and -– Ben? Benjamin Locke Thanks, John. So before I go into review of our third quarter, I’d like to provide a quick review of our business for those who maybe new to the call. 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 to produce the energy onsite and earn revenue as the customer pays ADG a discounted rate for electricity and heat or cooling. This model called an On-Site utility or OSU is quite calm and practical with energy technologies such as wind, solar and co-generation systems. The OSU model is an essential part of any distributed generation infrastructure, since not every customer has the capital or the financial flexibility to own an asset outright. I’d like to reiterate to our investors what the main focus of the company has been recently and how it relates to our plans for growing the company in the future. Our main focus, since the beginning of the year, has been to improve the operations of our existing fleet, in order to increase productivity while optimizing our margins and improving our cash flows. As our results confirm over the past three quarters, we’re 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 is the basis from which we can resume growing the business, confident that each new project will return margins that will lead us to profitability as quickly as possible. With that I’d like to review the results for the quarter. Our third quarter revenues of $1.96 million were a bit of an improvement as compared to $1.89 million in Q3 of 2014. But we are very happy with this result given the reallocation of ADG assets that occurred late in the second quarter of this year, which I will review in a moment. Our overall gross margin without depreciation improved a 37.5% as compared to 35.3% in 2014. Our efforts to improve the U.S. fleet performance are even more demonstrated by the strong margins of the ADG North American operations, which were 45.4% for the quarter without depreciation. These margins show that the underlying business model for ADG is solid and will be the basis for growing the business in the future. As Bonnie will describe in more detail in just a few minutes, we’ve also taken many other steps with our expenses with the goal of achieving EBITDA cash flow positive operations in 2016. Before I give a review of our operations, I’d like to remind investors that our fleet consists of three segments; ADG owned and service sites in the U.S., EuroSite owned and service sites in the U.K., and sites jointly owned and serviced with our LLC partner. As discussed in our last conference call, in June we announced an agreement with our LLC partner to reallocate most of the LLC sites, based on tighter geographical footprint and customer relationships. The results gave 100% control and ownership over eight sites consisting of 13 units to American DG Energy, allowing us the ability to make improvements to these sites, to maximize performance and efficiency, as well as maintain the sites with our service partner Tecogen. The reallocation gave 100% control and ownership of seven sites consisting of nine units to the LLC partner. 5 sites consisting of 17 units will remain in the LLC for the time being, but will be under the operation and control of American DG. These changes essentially went into effect in the third quarter. Over the past four months we’ve been evaluating the LLC sites, now under ADG control to determine the best way to improve the operation. In some cases, minor repairs resulting in minimal downtime were made. In other cases more complex improvements were needed resulting in prolonged system downtime. I mentioned in the second quarter call that we anticipated a dip in revenues in the third quarter. As a result of the seven sites moving to LLC control and the downtime of the acquired LLC sites due to upgrade work, fully knowing that the long-term benefits of the changes far outweighed any short-term revenue reduction. As we saw with our revenue numbers, we do not see this dip as expected, rather we saw a bit of an increase in revenues. This is a good indication that even with the reduction due to the LLC reallocation, the improvements made to existing sites more than covered the shortfall. We will continue our efforts to review the LLC in the fourth quarter. In some cases we are expecting sites with new OSU propositions that will improve the customer savings and secure long-term profitable revenue for ADG. If new OSU’s are signed with these sites we will make more substantial improvements to the system which again may result in some revenue loss in the fourth quarter but eventually will result in long-term revenues with strong margins. Turning to our EuroSite fleet, as Paul Hamblyn described in the earnings call earlier today, EuroSite continues to show good results with revenues increasing 20.4% over the third quarter of 2014. EuroSite added one new system to their fleet in the third quarter with a second system added just after the quarter closed. If you are not able to participate in the EuroSite call, their earnings press release gives the instructions for listening to the replay. With the LLC reallocation now complete and with the addition of the system to the EuroSite fleet, as of September 30th ADG’s overall fleet consisted of 120 systems consisting of 76 ADG controlled systems, 16 systems in the LLC, and 28 systems in the UK. Turning back to the North American fleet, as I mentioned earlier, our efforts to improve productivity and operations of the fleet, resulted in the gross margin before depreciation of 45.4%. This is a direct result of our continued efforts to improve site performance. We are continuing to systematically go through existing sites for ways to improve operation with the goal of maximizing the assets potential. In some cases this involves a more detailed engineering view of the system design of the operation. Logically we are focused on larger installations for the smart in depth review as we apply cost benefit analysis to drive our decisions whether or not to proceed with upgrades and how these upgrades are prioritized. We will continue this effort in the fourth quarter and I fully expect a good pay back for this effort as site revenues increased and margins improve. Moving to sales, we are continuing to apply a new level of diligence in evaluating new sales opportunities. In some cases potential sales opportunities that were in the advanced stages of closing have been deferred as result of a more detailed level of analysis, measurement and verification, and construction estimation. It is essential for our future growth that ADG only accepts projects that will assure the deliverer the promised revenue and margins that our analysis projects. 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 project that materially contribute to our revenue and profitability goals. Our goal is to close at least one of these new projects in the fourth quarter. With that I would like to turn it over to Bonnie for a little more a discussion of the financials. John N. Hatsopoulos Before Bonnie gets on, I would like to add that our Board has been very excited about the success that Ben has had. And they contributed to group of money to buy shares because we felt that the shares were thoroughly undervalued and to the best of my knowledge we have already, the Board has already bought 600,000 plus shares in the open market and they are continuing to do so. Bonnie, sorry I wanted to add this. Bonnie Brown That is okay. I wanted to add a little detail from some of the highlights that Ben discussed earlier. First, our operating expenses for the quarter have decreased by $102,000 or 8.3%. Of particular note is the decrease in general and administrative expenses which decreased 28.4% or $222,000. Management has made a focused effort to improve efficiencies in tearing down of our operating expenses is evidence of that efforts. We will continue with these efforts into the coming year. Second, we are quite excited that our non-GAAP EBITDA cash outflows for American DG in North America have decreased to $51,000. We see this financial metric as a sign that we are moving in the right direction towards the goal of being in an EBITDA cash flow positive position in the not too distant future. As John said, our goal would be to reach a positive position at some point in 2016. And with that I will turn it back to Ben to discuss the next few months. Benjamin Locke Thanks, Bonnie. So looking forward to fourth quarter and beyond, I’m very confident that our efforts to improve margins on our existing fleet combined with a very selective addition of new projects, and the continued improvement of operational expenses, that Bonnie mentioned, will result in EBITDA-positive cash flow operation in 2016. Once we achieve this goal, we will be in a much better position to add new projects to the fleet and resume growth of the company knowing that the fleet is maximizing productivity and profitability. EuroSite continues to make tremendous progress in the U.K. and we expect more project announcements in the coming quarters. In summary, I believe the ADG’s business model is strong. The fundamental economic drivers for an OSU model remain favorable and customers continue to value the resiliency of the grid outages that the Tecogen’s equipment provides. With that I’d like to turn it over to the operator for any questions. Question-and-Answer Session Operator Thank you. [Operator Instructions]. And our first question comes from Ralph Wanger of RW Investments. Please go ahead. Benjamin Locke Hi there, Ralph. Ralph Wanger Hi guys. Looking at the fleet, at this point we’ve been running a very static number of systems, is that correct? Benjamin Locke Yes, that’s correct, Ralph. Ralph Wanger Yes, so and at some point over the – in – I gather some point in the next year we’ll be resuming sales efforts and try to increase the size of the fleet? Benjamin Locke Yes, yes. The plan is we have a couple of sites that are under construction now, in the back log. Of course we’re finishing those up, that’s going to add to the fleet. And then we have, as I mentioned, we’re being very, very diligent about only selecting a couple of new projects in this near-term with the cash that we have available to make sure that they’re the best returning projects we can do in the near-term. And then when we reach this cash flow positive operation, which again, we really feel strongly it’s going to be in 2016, our cash balance is going to start going up instead of down. That will really be the enabler to us to accept a lot more projects going forward. So what you can expect then Ralph, in the few quarter is we’re going to have a few more systems coming online, because they’re under construction now. We’re going to announce a couple of more projects that were very selectively chosen, and then we’re going to see the cash flow positive operation as a result in 2016. Benjamin Locke Ralph, this is John Hatsopoulos. Charlie Maxwell who is listening right now felt very strongly and so did we, but he was the leader, he’s also our Chairman. That don’t try and grow the company till you start making some money and we all agreed with him and that is the strategy we are following. Benjamin Locke I mean we’re making a lot of extra money now without even having booked new projects. That’s – and that’s very positive. Ralph Wanger Yes. Well that’s great. But then you’re going to have to crank up a marketing effort which I presume has gotten extended, now sales force tends to get pretty rusty if they’re not closing, if they’re not out getting deals? Benjamin Locke Yes, yes. Ralph Wanger And what -– so how are you going to go about rebuilding a marketing effort? Benjamin Locke Yes, well the sales team has been very fortunate to be working very closely with Tecogen and that you probably imagine how this goes Ralph, if a sales prospect wants to buy a system, Tecogen does it and if Tecogen salesman finds a project that wants to be an OSU, it goes down the hall to American DG. So the sales structure is always going to be there for our OSUs and we also have, what we call these, customer agents, these company agents, sales agents that are always looking for prospects. So I don’t think there’s ever going to be a dearth of opportunities for us when we start resuming sales in earnest next year. Ralph Wanger Are those -– yes, is that like an outside distributor that you’re talking about? Benjamin Locke Yes, well no they’re some -– they’re kind of really like, some are small ESCO’s or engineering companies that are always kind if scouting out opportunities. We pay the commission if something closes and they are on the prowl for us. It is a pretty common model. Ralph Wanger Alright, well obviously there is a transition that you have to go through to get the world understanding that you are back in business? John N. Hatsopoulos That is what we are doing Ralph right now and I will tell you, I am very excited about what Ben and actually the whole team has done in bringing us cash flow positive. I feel very strongly that even the consolidation of the fourth quarter of change. Also EuroSite is going through this transition. The fourth quarter, the quarter we are in right now we should be cash flow positive consolidated and we are lucky that the British government has also a law that gives us subsidies for green energy and that is what we are I guess. And the law exists till 2018. So we are going to see a lot of exciting things happening over the next few quarters and frankly this is the reason I think that our Board felt comfortable to put in money in purchasing our stock which have gone close to zero. And we have the bulk of our Board including Deanna Petersen and Elias — Dr. Samaras are all listening in. So if any of you have any thing and of course Charlie, if any of you have anything different to say put your name on the list and we will ask them. Ralph Wanger Okay, now when you do this — now when you start trying to get new systems do you have a balance sheet bind or how are you going to finance it? John N. Hatsopoulos Well, this is where the excitement comes in Ralph. Dr. Samaras who is the CEO and also on the Board of ADG and CEO of EuroSite has two banks that are, actually it was three banks and we are leaving it temporarily at least the third one, that they want to give us capital for facilities starting in Europe. But I visited them accidentally because they have a different name in the United States. It is an Australian Bank, one of them and in Europe they call themselves something else and in the United States something else. And I caught Holy Hell for visiting them. I didn’t even know they were the same ones and they are begging us to take their money. So, we don’t need to sell shares. The moment we sign, we will first sign the Europe which should happen within the next quarter or so maybe sooner and then we will start — when we are cash flow positive in the States we can do it right now. But we can get a hell of lot better terms if we are cash flow positive then we cannot. Then we are almost there. So, capital is not going to be an issue. I have no interest and none of our Board has any interest to sell shares at this level. As a matter of fact they are buying rather than selling. Ralph Wanger I understand that. But even on leasing dues eventually don’t you have to have some capital involved? John N. Hatsopoulos We have enough capital right now for all our operations and these that we already have. Benjamin Locke Yes, the projects that were under construction now and again the handful of projects that we hopefully will be closing soon. We have enough cash to see those through the construction and commissioning stage. That is why we don’t want to add five more projects today. We will add a couple. So, our cash balance can be used for those very worthwhile projects and then again the cash flow will start to be positive next year and for all the reasons John just mentioned give us more options for expanding further. John N. Hatsopoulos But there is also a little secret that we don’t mention only because nobody will believe us. We have a large amount of inventory of units that are not on our cash balance sheet, but if we get orders we’ll ask Tecogen to bring them up, to upgrade them, for some facilities that we have for some reason or another abandoned. So we have another few, I don’t know if it’s a couple of million dollars or $2 million or $3 million order of equipment in inventory that we can be using for other facilities. So we’re in a hell of a lot better shape than we show. Ralph Wanger Okay. Well it sounds -– if you’re going to really be a fast growing business you have to or you’re going to need, sounds like you need capital and you need a lot of marketing effort. John N. Hatsopoulos Well the marketing is Ben’s responsibility. Dr. Samaras and I – our responsibility is for the capital. And as I said, I was amazed at the line-up of banks that want to give us money. Their –- instead of us begging them they’re begging us. And originally they said, “How much money you want?” And I threw a number – I picked up a number from the sky of $10 million and they said, “Can you make it a little bigger?” I don’t know if Dr. Samaras, who is next to me, would like to say something. Elias Samaras Yes, actually they wanted -– they were talking about $13 million, $14 million, $15 million and we said we go slowly. We may need shouldn’t but for the time being we’re picking off $10 million. John N. Hatsopoulos Yes. So I -– we are in a heck of a lot better shape that one would believe by looking at our stock Ralph. But the market is the market, so that is one thing that unfortunately we cannot control. We tried but we can’t. Operator Thank you, sir. Our next question comes from Michael Zook [ph] of Oppenheimer. Please go ahead. Unidentified Analyst Good morning, everybody. Benjamin Locke Congratulations on your royals. John N. Hatsopoulos Congratulations. You and I talked about the baseball team. And you told me not to count on it. Unidentified Analyst Well, thank you. Well, we came through. Just one question regarding the balance sheet, I noticed that the outstanding amount of the convertible debentures went up compared with December 30th to September 30th by almost $1 million. I think the convertibles are due in 2018, is that correct? John N. Hatsopoulos I don’t know why they would go up, unless it’s the consolidation with EuroSite. Because American DG here in the United States has not borrowed $1 more than what we had… Bonnie Brown From December… John N. Hatsopoulos Three or four years ago and we still have another three years, May – in May to pay it off. And as a matter of fact we have prepaid all the interest for the next two and half years. And I was just… Bonnie Brown When did that happen? John N. Hatsopoulos That happened about eight months ago, 10 months ago, Joan? Bonnie Brown During 2013. John N. Hatsopoulos Anyway I did it so I should remember. And I was very annoyed at the accounting process, where even though we prepaid it, it goes on the P&L, even though we don’t pay it anymore because we’ve paid it. So we have no interest to pay for the $20 million, part of which by the way is to me, $2.5 million is mine. And we’ve gotten the share, the interest till the end of the convertible. But I don’t know why it should have gone up. Bonnie is the accountant. Bonnie Brown Yes, I — go ahead. Benjamin Locke No, I was just going to say, we’ll figure it out and give you a call back, Mike. Bonnie Brown Right. I have a… Unidentified Analyst That’s fine going forward. The next question is what is the status with ADGE and any marketing effort with the Ilios type units. Is ADGE a marketing arm for Ilios units or exactly what’s the relationship there? And is there a substantial opportunity to grow that part of the business? John N. Hatsopoulos There is -– they are -– they have a right to do marketing in Europe. As a matter of fact we have an agreement with them that even if our distributors and we have a good distributor in Ireland, that if he ever sells anything in their territory and territory I mean making energy for the facility, Tecogen will pay fee to EuroSite. But up to now the big effort obviously of EuroSite has been on a combined unit power. But they have a right to sell equipments. Benjamin Locke And it’s worth mentioning Mike that Tecogen’s working pretty closely with ADG on Ilios in some specific geographies. You might remember we had a press release last quarter of two Ilios units going to -– destined for Hawaii, they haven’t actually been delivered yet. But Hawaii is a perfect market for Ilios, whether it’s selling which ADG would do or just selling the product, of course which Tecogen would do. So there is joint marketing going on in some other geographies like Hawaii, because you’re absolutely right, it’s a perfect product for those areas. Unidentified Analyst Well, I’m looking forward. I think that we should develop a program to expand the effort with Ilios because I think it’s a heck of a product and we’ve got an advantage because we have the technology. And I would encourage the company to again, expand that effort because I think it could add significant incremental revenue and more importantly get our name out into areas where right now we are not functioning or not selling. I think we should go for it. Benjamin Locke You’re absolutely right. In fact one of our guy is in Hawaii right now. One of ADG salesman is in Hawaii right now trying to accomplish that. John N. Hatsopoulos Mike, we have a problem, and I have to be very honest with you. As you know I have a house in the Caribbean, in Nassau to be exact, and I was talking to a group there. And the first answer is, question is. “Aren’t you violating the second law of thermodynamics by creating twice the energy that you put in?” And as a matter of fact in some cases in a new product we have we’re producing three times the energy that we put in. What we need and we -– Ben is doing right now is installing units in various areas of the world so we can demonstrate that we are not violating any laws of thermodynamics. We’re not creating any energy, we’re taking the energy from the atmosphere and that’s what we’re using. But people don’t understand it. You’d be surprised at — I talk to investors. I don’t talk to engineers because I’m not an engineer. But their first question is that maybe you guys are crooks, and you’re telling us that you’re creating something out of nothing. So what Ben is doing is installing units in various parts of the world and tells them, go look at it and asked these customers to verify what we’re saying. But it takes time. It’s not like a magician. When you have a new drug to cure some disease that couldn’t be cured, overnight you have a multi-billion dollar market. In engineering products the users are very hesitant in changing technology. And I shouldn’t be wasting everybody’s time but I will. In 1970s Thermo Electron had developed a furnace that saved well over 40% of the energy for heat treating and hardening and making parts for aerospace and none of you would touch it. Because they thought that this was something crazy. You don’t save 40% of the natural gas. Then we got lucky. There was a shortage of natural gas, most of you are too young to remember the 70s, I’m at a certain age that I remember these things. And we went from 5 million in revenues for furnaces to 300 million or 400 million or 500 million, I forget the exact in less than five years. But in the beginning they wouldn’t touch it because they were scared that we had something that was some kind of a fraud. And this is the way production engineering is addressing new technologies. And again, it’s very difficult to understand, unless you are in the business. Any way maybe I answered your question Mike. Unidentified Analyst Well I appreciate that and I think we should -– you’ve got a lot of smart guys back there and I’m sure we can figure out a way to get the story out and to start booking some sales, because I know the technology works, I’m convinced of that. And now it’s just a matter of getting people on board. So my encouragement is let’s go for it. Appreciate the comments this morning and look forward to improvements in 2016. Benjamin Locke Thanks, Mike. Operator [Operator Instructions]. Our next question comes from Thomas Ore [ph], a private investor. Please go ahead. Unidentified Analyst Hey good morning, guys, how are you? Ralph Wanger really asked all the questions that I had written down with respect to growth. I mean, look, I understand what we’re doing. We stabilized our operations. I think the expense control is excellent. SG&A down is really good. I like the discipline in the new products. But I also heard Elias this morning on the EuroSite call talking about how we can pretty much get any project financed in Europe now. John, you’ve mentioned in -– that we have companies almost throwing money at us. I guess my sense is aren’t we being a little too conservative? I mean, I think what I’d like to see as an investor is maybe a little better balance of operational discipline with some sales growth, as a – I see what we’re doing, the market clearly doesn’t see it, but it will eventually. But I think until we get to a point where we can announce five or six or seven or eight orders per quarter, the stock’s just mired here with sellers. I mean we operate a 119 systems at the end of the Q2, then 121 and that’s just kind of in the trend for so long now and I know we’re closer to seeing better sales growth, but I would suggest perhaps since cash is available, we have cash on our balance sheet, it looks like we’re in good shape in Europe that we could flick the switch on maybe a little stronger on the sales growth side. So I would just put that out there as maybe something to rethink a little bit now, ratchet that up a bit as we move into the latter part of this year? John N. Hatsopoulos Tom, I think this year is over. I mean its November already. But I think by sometime the middle of next year, you’re going to see, get what you desire, at least that’s our goal. But and again, especially in the United States, being cash flow positive here is a difference between 5% interest rate versus 8% to 10% interest rate. And we’d like to be able to negotiate. As I said, I personally went to the bank and they begged me to give me money. So, but -– and they were very frank about it that the difference of cash flow positive versus not is almost double. And if you borrow money then you don’t borrow it for overnight, you borrow it for a long period of time. Interestingly enough, the company -– the bank that wants to loan us money is also trading natural gas and they have -– we have already signed with them at a huge discount at least in for Europe for natural gas prices which would increase dramatically. I know this is not a EuroSite call, but will be increased dramatically the returns of EuroSite because that’s our primary cost out our kind of service. Elias Samaras Tom this is Elias, I just want to add to what John said from our experience in Europe, before we became cash flow positive the banks wouldn’t even consider talking to us or if they were talking they were talking about double-digit interest rates. Now that the situation has changed, the banks not only are talking to us but they are giving in rates that we will announce probably for this quarter as well, that are fantastic rates, that we wouldn’t imagine. Therefore what John said, he’s right, turning to cash flow positive and that eventually would certainly open the door for the banks talking to ADG also. Unidentified Analyst Well since we’re basically there with cash – if we’re cash flow positive effectively now or in fourth quarter or next year and we’re saying that on the call and you can say that to a lending institution why would we defer any new deals there? Why wouldn’t we just get on the sales thing and go with growth right now? I mean, I don’t understand why we have to wait a couple of more quarters and kind of slug along as we get our locked and – why do we have to protect our cash then? If we have access to all this cash then and Ben said earlier, well we want to conserve our cash to make sure we get all our installations in, why do we have to be conservative at this point? Can’t we be more aggressive? Benjamin Locke Yes, well, the main thing, I’m not sure it came across in my remarks is we don’t want to take any bad deals. Unidentified Analyst Okay. That I get, I understand that. Benjamin Locke Yes, and… Unidentified Analyst It sounds like you have other, you probably could take and you are just holding off until another couple of quarters? Benjamin Locke Well, no, I think what happens is when you start to enter in a phase of M&V, doing the measurement and verification, and then doing much more construction. It prolongs the deal closure time, becomes a lot more – a lot longer of the closure process to go through all those steps. And believe me the sales men, it drives our sales men crazy that I come in there and I say, “Well, you got to do this and you got to do this,” and they’ll say “Come on, I just want to close the deal,” and but, no, we can’t just close the deal unless we do these steps. That’s what kind of -– I think some of our projects didn’t go those steps before and I want to make sure we don’t repeat those mistakes. So believe me Tom, when we do announce deals and if I were to have four deals come up and I don’t have the cash in the bank to do them but they’re really, really good deals, because they passed every hurdle that I put in front it, as John said we’ll get the money and we’ll do it. We won’t turn those deals down. Unidentified Analyst Okay. That’s good to know. Now Ben, out of our backlog of 19 systems, are those all solid from your perspective in terms of their profitability and their viability are those all good? Benjamin Locke Yes. Most of them are. I know that there’s one large site that has six units that are in construction now. One of them is close to being completed. Some of the others, and I don’t have the exact breakup in front me, I can give you a call offline Tom, but I know that some of the other ones in backlog are at this one particular university that we have many systems running. And when you work with the university, one minute they want it and the next minute the building has a data center or something and then it’s on hold. So some of them are delayed in time, but I’d say the majority of them are in fact in construction and will be running quite soon, especially that one larger one which is Luna Park, I know we’ve mentioned before. Unidentified Analyst Got it, one more quick and then I’ll jump off. I listened the EuroSite call this morning was excellent. I think, the company seems to have gone through a lot different iterations of how it reports its press releases. Sometimes its standalone with EuroSite in there, sometimes it is blended. I would say that for me it’s a little hard still to kind of sort through now and understand the operations of both in this single press release. And I’d love to hear something and see something more standalone from the company EuroSite related to the Corona Energy deal and some other stuff. I mean there were some excellent points in there that Elias touched on, and John, that aren’t as clear in the American DG press release so – I don’t know if I’m just not getting something else or if something’s to come, but I just throw that out there maybe as…? John N. Hatsopoulos Tom, again, we’ll try and give a little more details and especially for Europe. Because this quarter that we’re in its going to be a great quarter for EuroSite. Again, it is imposed so I don’t want people to think… Unidentified Analyst Those four colors alike Elias were fantastic. I just love to kind of see those be more highlighted. If you are not, if you weren’t on the call this morning you probably aren’t going to be able to see those. They are not visible in the ADG press release. I just think, it was — they were so strong and so compelling, I just love to see those maybe out a little more visible to investors, that’s all? Benjamin Locke Yes, it is a fair point and we always try to strike a balance at how much we want to repeat versus EuroSite. But I think John we are looking at each other nodding our heads that we will make sure we do a little bit more of that next time around. Unidentified Analyst Alright guys, great expense control, great operational turnaround and look forward to the growth. Nice to hear, see that Zooks [ph] Royals won the World Series and we will move on. Thanks very much. John N. Hatsopoulos You should congratulate Charlie because he is the one that pushed us on what we are doing right now. It was his thoughts and suggestions as our Chairman who has been a very active Chairman in spite of his youth. Unidentified Analyst Listen we are very fortunate to have Charlie. I have worked with him for 15 years. He is one of the most brilliant guys I have ever worked with and I will say also that I am very impressed with the new Board additions with Joan and Elias and everyone else and everyone’s efforts. So, I think we have made a remarkable turnaround for the company over the last 12 months. So, good job by you guys. Thank you. John N. Hatsopoulos Thank you. Thank you everybody. Operator Thank you. Seeing there is no further questions, I would like to thank everyone for participating today. This concludes today’s event. John N. Hatsopoulos Well, I think we should — again thank you all very much. It is an exciting period for us and again it was exciting when we started, then we went into trouble, and we are right back where we should have been for a long time. Thank you very much. Operator And thank you all for attending today’s event. You may now disconnect your lines.

NextEra Energy Still Not Worth Buying, More Questions Emerge In Hawaii

Summary Hawaii Electric looks less likely to close by the end of the year than in our previous analysis. NextEra still doesn’t appear worth more than the mid-$90s. NextEra is doing really well in Florida and profits are higher than expected. Today, we will to take a refreshed look at NextEra Energy (NYSE: NEE ). We first looked at the company in late February and followed that with an update in June . When we started our analysis in February, we argued for some correction. We then reiterated that valuation was too rich in June. YTD, the company is now down 5% and has not shown much ability to add more value. We noted we would be interested at the 90-level. Our main thesis was that, while the company’s health and catalysts were strong, valuations were pricing in a best-case scenario of 6% revenue growth and 22% operating margins consistently moving forward. In the June update, we continued to be worried about margin compression from the Hawaii Energy (NYSE: HE ) deal. Today, we want to revisit our catalysts in the wake of the last set of earnings as well as other developments that have occurred. Additionally, we will take another look at our pricing model to update that given this analysis. 2015 Catalysts Revisited Economic Moat Strength For me, the key strength for NEE has always been its economic moat that exists from non-competitive agreements that the company has with many municipalities. Non-comp agreements exist in many of the relationships the company has where it negotiates a “fair price” deal with a town/city/county that limits competition but keeps prices in check for citizens. As we noted before, NEE is very attractive because about 80% of its business is in the regulated arena, where profitability is strongest. This image from Market Realist tells the tale: (click to enlarge) (click to enlarge) The company benefits strongly from these regulated industries as it can establish infrastructure, keep consistent revenue/earnings flowing, and doesn’t have to worry about competition. As long as the company can maintain this strong mix, it will be attractive for income, long-term investors. To me, the real catalyst, though, is the company’s ability to have success in Hawaii. Hawaii – Another Regulated Market to Add Shareholder Value In 2014, NextEra bought Hawaiian Electric ( HE ) for north of $4B. The move was a chance to come into a new market that was in need of cost savings and be able to combine a regulated market with the company’s practice of making efficient utility deliveries. Further, NEE wanted to be able to bring its ability and knowledge of scaling renewable energy in an area that is burdened by extreme energy costs. Between the company’s initiatives in solar energy and knowledge of other sources, NEE stands to be able to generate a very strong value proposition for Hawaii while also continuing to promote its economic moat. So, how have things been moving since the last time we looked at the company… The last time we looked at the HE/NEE deal, the main aspect of the deal was just to get it done and approved. In April, HE’s CEO came out saying he was confident that the deal would be completed within a year, and the Hawaiian House of Representatives put a resolution in place to complete the deal by June 2016. Given the market is regulated, it is a major decision for Hawaii, consumers, etc. In the company’s latest earnings, here was the company’s comments on the HE deal: Steven Fleishman – Wolfe Research Yes, hi good morning and congrats. The couple things that I guess you didn’t mentioned, first is any kind of thoughts on the Hawaiian deal and just, there does seem to opposition in your ability to get that done? James L. Robo – Chairman and Chief Executive Officer Steve this is Jim, obviously the state filed a testimony ten days ago saying that they opposed the deal in its current form and the Governor held a press release where he, press conference where he said he opposed the deal in its current form. I think the key, the keywords there in its current form, they also, the state also listed several conditions that would be, I think just positive for them to think about changing their view. And we are in the process of responding to that testimony and we think we have a very strong case to put forward to the Commission around the benefits to customers, the benefits to customers were actually pretty compelling and I think we’re going be able to make that case as we go forward. So, this was not necessarily a surprise to me that the state filed a kind of testimony that they did and we are going to continued to move forward on laying out our arguments and we look forward to the hearings we’re going to have in December to make our case. As we can see, things aren’t progressing as well as the company has hoped. In the last report, the company had noted that they expected the deal to be done by the end of the year. Now, the company is not quite as positive. Waiting till December to answer testimony is much different than getting approval then. The state of Hawaii published testimony in July, and the Governor came out against the deal: Gov. David Ige said Tuesday he doesn’t support the sale of Hawaiian Electric to Florida-based NextEra Energy. The sale was approved by Hawaiian Electric’s shareholders in June but still needs approval from the state Public Utilities Commission. Ige said he supports capital investment in Hawaii, but he joined critics saying he’s concerned that NextEra may not be able to fulfill Hawaii’s goal that its utilities use 100 percent renewable energy by 2045. This news was not exactly the type of “positive” news that the company had hoped for. Since that comment in July, the Governor has said the process was still very early, and that he is looking forward to the company’s responses to testimony it presented. While we all expected some snags, the process continues to move quite slow and questions the long-term prospects of being able to have this deal work well for all parties. Overall, though, we believe this deal is very important to NextEra Energy. As we noted previously: The company brings the expertise of how to apply a mix of renewable energy and create consistent returns. With the prices that Hawaii is used to paying, the company should reduce costs for Hawaiians yet also make a strong profit. The company’s mix, though, of more green energy plays has not been as profitable. The company still makes its bread and butter in Florida where it uses a majority natural gas. So, the question will be if they can return the type of 20% operating margin in Hawaii? The nice thing that is baked into the cake for them is that Hawaiians are used to paying more than most Americans, so they will be able to invest more easily. We will continue to monitor this situation, but for now, the company is starting to look like they are getting off track. Current Pricing Next, we want to update our current pricing model for NextEra. The latest earnings for NEE were pretty solid in the latest quarter. EPS came in at 1.56 versus 1.50 expectations as well as a beat for revenue as well. The company’s strength continues to be seen in Florida, where revenues/earnings continue to rise. The company’s results were helped by an improving Florida economy that led to more additions as well as a lot of strength in NextEra Energy Resources, which saw a 21% increase in revenue. The NEER division is the renewable contracted part of the business, and that type of growth shows just how in demand renewable energy is becoming. In this section, we will want to take a look at our last pricing analysis, update it, and determine what we believe is a fair value price for NEE. In order to price the company, we need to make certain assumptions. In our last two articles, we modeled revenue growth to continue at a clip of 4-5% per year, and we believe that level will maintain for the next several years. The gains we noted in our last article were not sustainable in NEER, and the results have already seen a 50% reduction QoQ. Most analysts are only modeling for 1% growth still for this year, but we are using an annualized figure. Utility revenue is fairly consistent. The key to the company is definitely margins. Operating margins are key to our DCF analysis. The coming has forecast that they will come in at the 22-23% in 2015, but I imagine this number will dip some with the onslaught of Hawaiian Electric when it is approved. In Q2, the company’s operating margins came in strong at 26% after 28% in Q1. For 2015, we believe 22-23% is a bit light, and we will increase our expectation to 25%. As for the HE deal, it should add roughly $4.5B in sales in 2016, but the company operates with a 10% operating margin. The deal is really essentially to take what is a tough market for making money, revolutionize it, and improve it. This plan, though, will take several years. Therefore, margins will drop in 2016 but gradually improve again through 2020. Taxes have averaged roughly 25% for the past five years, and it’s likely this will stay around 28%-30% over the next several years. We may see it jump even a bit more beyond 2016 when more solar credits are expected to expire. Depreciation will continue to grow at about the same rate as revenue growth. Capex should come down in 2015 to around $6B and again in 2016 to $4B.The $4B rate, though, is pretty standard for the company. Our WACC rate is 5% for discounting. When we use this math in our five-year DCF analysis, we were looking at a low-90s number. We have made some positive adjustments, and here is our projections:   PROJECTIONS   1 2 3 4 5   2015 2016 2017 2018 2019 Income from Operations 4350 3654 3990 4347.2 4726.73 Income Taxes 1218 1023.1 1117.2 1217.2 1323.48 Net Op. Profit After Taxes 3132 2630.9 2872.8 3130 3403.25             Plus: Depreciation 2600 2700 2800 2900 3000 Less: Capex -3600 -3900 -4000 -4100 -4200 Less: Increase in W/C -100 -100 -100 -100 -100 Available Cash Flow 2,232 1,531 1,773 2,030 2,303 We don’t see any major change from our last model, so we are keeping our price target at $96. Margin drops in HE and getting regulations approved are key to this model. Additionally, if Florida and NEER stay very strong, the company could outperform our expectation for the current FY. Conclusion NextEra has interesting catalysts to 2015, but after a tremendous run in 2014, the company looks like its upside may be limited in the near-term. Recent issues in Hawaii Electric ( HE ) make me nervous, but the rest of the company’s business is extremely intriguing and strong, which neutralizes my fears there. Yet, we still don’t see the reason to buy when we are at sitting at 2.5+ times sales and the company has question marks outstanding.