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Cleco’s (CNL) CEO Bruce Williamson on Q3 2015 Results – Earnings Call Transcript

Cleco Corporation (NYSE: CNL ) Q3 2015 Earnings Conference Call October 29, 2015 8:30 AM ET Executives Sybil Montegut – Senior Investor Relations Analyst Bruce Williamson – Chairman, President and Chief Executive Officer Tom Miller – Senior Vice President and Chief Financial Officer Darren Olagues – President-Cleco Power Analysts Paul Ridzon – Keybanc Tom Shuwet – RBC Operator Welcome to the Cleco Corporation 2015 Third-Quarter Earnings Call. My name is Sylvia, and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Sybil Montegut, Senior Investor Relations Analyst. Sybil, you may begin. Sybil Montegut Good morning, and welcome to Cleco Corporation’s 2015 third quarter earnings call. You can access this call and slide presentation live via the Internet from Cleco’s website at www Telephone and Internet replays can be accessed through our website. The dial-in number for the telephone replay is 888-843-7419 if in the U.S., or 630-652-3042 if outside the U.S. The conference ID is 38458260. With me on the call today is Bruce Williamson, Chairman, President, and Chief Executive Officer of Cleco Corporation; and Tom Miller, Senior Vice President, Chief Financial Officer, and Treasurer; along with other members of Cleco management. Before we begin, please keep in mind that during this conference call we will make some forward-looking statements. These statements are subject to many risks and uncertainties. Actual results may differ materially from those contemplated in our forward-looking statements. Please refer to our cautionary note regarding forward-looking statements and risk factors in various reports filed with the U.S. Securities and Exchange Commission, or SEC, including our 2014 annual report on Form 10-K; our 2015 quarterly reports, Form 10-Q current reports on Form 8-K; and other reports filed with the SEC. In addition, please note that the date of this conference call is October 29, 2015, and any forward-looking statements that we make today are based on assumptions as of this date. With that, I will turn the call over to Bruce. Bruce Williamson Thanks, Sybil. Good morning and thank you for joining us. Let’s start with the agenda for today’s call, which is on slide 3 of the presentation, for those of you following along via the webcast. This morning, we’ll begin the call with a summary of third quarter earnings, followed by an update on the merger transaction. Tom will then provide an overview of third quarter and year-to-date financial results, and we’ll move to Q&A. Please turn with me to slide 4. Even though we had somewhat warmer summer weather for the quarter, our year-over-year results were negatively affected by the loss of a wholesale customer late last year and the third-quarter 2014 favorable multiyear tax settlement. With that said, we are maintaining the 2015consolidated operational earnings guidance range of $2.28 to $2.38 per diluted share. As a reminder, this earnings guidance is based on normal weather over the remainder of 2015, reflects a full year of operations under the formula rate plan extension, assumes an effective tax rate of approximately 36%, and excludes adjustments related to life insurance policies and merger-transaction costs. Regarding the merger, we continue to work with our state’s regulatory process to gain approval for our strategic transaction, led by Macquarie Infrastructure and Real Assets and British Columbia Investment Management Corporation. Earlier this month, we distributed a press release that announced the filing of our response addressing the Louisiana Public Service Commission, or LPSC, staff advisors testimony. LPSC staff advisors filed testimony in July in response to the original commitments that the new owners made late last year, when we announced the transaction. This filing was our first opportunity to understand the thought process of the staff advisors regarding the commitments. In our recently filed testimony, we believe that together with the new owner group, we’ve addressed all 77 commitments stated in the staff advisors testimony. Specifically, the enhanced commitments now offer substantial rate credits to retail customers; ensure continued service and power-quality delivery; provide financial stability; and significantly extend protections for employees, retirees, and communities. The transaction is a good deal that is now even stronger for these stakeholder groups because of the regulatory process. The next step in the regulatory process is a hearing with the Administrative Law Judge, or ALJ, that is scheduled to begin on November 9. As previously stated, we expect the transaction to close in the first quarter of 2016. And with that, I will turn call over to Tom to discuss third quarter and year-to-date financial results Tom Miller Thank you, Bruce, and good morning, everyone. Please turn to slide 5 for a review of our third-quarter financial results. GAAP earnings for the quarter were $0.90 per diluted share, $0.27 lower than the third quarter of last year. Third quarter operational earnings were $0.92 per share or $0.25 lower than the third quarter of 2014, 2015 operational guidance in our operational earnings for the quarter exclude $0.02 per share of losses on life insurance policy, $0.02 per share of merger transaction costs, and $0.02 per share of tax-levelization benefit. Looking from left to right on the chart, Power’s non-fuel revenue was up $0.05 per share from this period last year. Higher revenues from warmer summer weather increased earnings by $0.09 per share. The annual adjustment to the formula rate plan increased earnings by $0.06 per share and lower sights specific refunds increased earnings by $0.01. These increases were partially offset by lower sales to wholesale customer, including the expiration of a wholesale contract – decreased earnings by $0.11 per share. Other revenue increased earnings by $0.01 per share, primarily related to higher transmission and distribution revenue. Other expenses decreased earnings by $0.10 per share, primarily due to $0.06 per share of higher taxes other than income, related to the absence of the 2014 favorable tax settlements; $0.03 per share of higher pension expense due to lower discount rates and the adoption of a new mortality table; and $0.01, related to higher depreciation and amortization expense. Higher interest expense decreased earnings by $0.06 per share related to the absence of favorable tax settlements. And finally, higher income taxes decreased earnings by $0.15 per share, primarily due to $0.10 per share related to the absence of our 2014 favorable tax settlements, $0.02 per share related to lower tax credits, $0.02 per share of tax returns filed, and $0.01 related to other miscellaneous items. Now please turn to slide 6 for a review of the year-to-date results. GAAP earnings were $1.84 per diluted share for the first 9 months of 2015, a decrease of $0.36 per share compared to the same period last year. Operational earnings were $1.92 per diluted share for the first 9 months of 2015, a decrease of $0.26 per share. Year-to-date operational earnings exclude $0.06 of merger-transaction costs, $0.02 of losses of life insurance policies. Looking from left to right on the earnings waterfall chart, Cleco Power’s non-fuel base revenue was up $0.01 from this time last year. This increase was the result of the absence of the 2014 formula rate plan customer refund that increased earnings by $0.22 per share. Higher revenues from warmer summer weather and higher usage increased earnings by $0.10 per share and lower specific refunds increased earnings by $0.02 per share. These increases were partially offset by lower net sales to wholesale customers, including the expiration of a wholesale contract, which decreased earnings by $0.25 per share. The FRP annual adjustment decreased revenue by $0.04 per share and provisions for customer credits related to the energy efficiency program and the FERC review of transmission return on equity decreased earnings by $0.04 per share. Other revenue increased earnings by $0.05 per share primarily related to higher transmission and distribution revenue. Higher expenses decreased earnings by $0.01 per share, primarily due to $0.09 per share of higher pension expenses due to lower discount rates and the adoption of a new mortality table, $0.06 per share of higher taxes other than income, related to the absence of the 2014 favorable tax settlements, $0.05 per share related to higher non-recoverable fuel expense, related to MISO transmission expenses. As a result, of a new wholesale customer and higher administrative fees, $0.04 per share from the absence of the recovery of capacity expense, related to the Coughlin tolling agreement and $0.01 per share of higher miscellaneous expenses. These decreases were partially offset by $0.20 per share related to fewer planned outages at our generation facilities and $0.04 per share related to lower depreciation and amortization. Higher interest expenses decreased earnings by $0.04 per share, primarily due to $0.07 per share related to the absence of 2014 favorable tax settlements. This decrease was partially offset by $0.02 per share related to the absence of a customer surcredit and $0.01 per share related to retirement of long-term debt. AFUDC decreased earnings by $0.04, primarily due to completion of our MATS projects. And finally, higher income tax decreased earnings by $0.23 per share, primarily due to $0.16 per share, related to the absence of 2014 favorable tax settlements, $0.02 per share related to lower tax credits, $0.02 per share of tax returns filed, $0.02 per share of lower permanent items; and $0.01 per share, related to miscellaneous tax items. Operator, at this time, we’ll open the call for questions. Question-and-Answer Session Operator [Operator Instructions] And our first question comes from Paul Ridzon from Keybanc. Paul Ridzon Good mornings guys, how are you? Bruce Williamson Good morning, Paul. Paul Ridzon Just a quick question, I don’t see much in the press, but any commentary on the tone locally regarding the transaction? Anybody making any noise? Bruce Williamson Darren is on the call on a speaker line. I’ll let Darren comment, if he’d like to. Paul Ridzon Yes. Darren Olagues Paul, we have – ever since we announced – provided our rebuttal testimony, where we essentially agreed to the recommendations of the roadmap that was put in the staff testimony, we have been out in the communities, meeting with politicians, community leaders, our employees, making sure they understand the breadth and depth of commitments that have been made as part of the transaction. And the support has been great. And that support is funneling its way back to the commissioners to make sure that it’s clear that we have widespread support from the community and our employees for the transaction. Paul Ridzon Sounds good, thank you very much. Darren Olagues Okay. Operator Questions comes from Tom Shuwet from RBC Tom Shuwet Hi, good mornings guys. Darren Olagues Good morning. Bruce Williamson Good morning. Tom Shuwet Just speaking of the rebuttal that you folks filed – and it does seem – as you mentioned earlier, you met probably all the requests of the staff, and I’m curious as to why, or if there’s any reason why there wasn’t a stipulation agreement with staff. Because it seems like you folks are both on the same page at this point. Bruce Williamson Well, there are other interveners, and I think there are other interveners, and I think we’ve mentioned this before, that the Commission – look, this is a big deal, and the Commission wants to make sure that there’s – the full process has gone through, including an ALJ hearing. But that doesn’t mean that our goal isn’t to be as aligned as we can with the Public Service Commission staff as we walk into the hearing. Tom Shuwet Okay, thanks. Operator We have no further question at this time. A – Paul Ridzon Okay, then this concludes the question-and-answer portion of the call, and I’d just like to close by thanking you for your continued interest in Cleco. Operator Thank you, ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) 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. THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY’S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY’S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY’S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS. If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com . Thank you!

SJW’s (SJW) CEO Richard Roth on Q3 2015 Results – Earnings Call Transcript

SJW Corp. (NYSE: SJW ) Q3 2015 Earnings Conference Call October 29, 2015 01:00 PM ET Executives Suzy Papazian – General Counsel Richard Roth – Chairman, President and CEO James Lynch – CFO Analysts Operator Good day, ladies and gentlemen and welcome to the SJW Corp. Third Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call may be recorded. I would now like to turn the conference over to Suzy Papazian, General Counsel. You may begin. Suzy Papazian Thank you, operator. Welcome to the third quarter 2015 financial results conference call for SJW Corp. Presenting today are Richard Roth, Chairman of the Board, President and Chief Executive Officer; and James Lynch, Chief Financial Officer. Before we begin today’s presentation, I would like to remind you that this presentation and related materials posted on our website may contain forward-looking statements. These statements are based on estimates and assumptions made by the company in light of its experience, historical trends, current conditions and expected future developments as well as other factors that the company believes are appropriate under the circumstances. Many factors could cause the company’s actual results and performance to differ materially from those expressed or implied by the forward-looking statements. For a description of some of the factors that could cause actual results to be different from statements in this presentation, we refer you to the press release and to our most recent Forms 10-K and 10-Q filed with the Securities and Exchange Commission, copies of which may be obtained at www.sjwcorp.com. All forward-looking statements are made as of today, and SJW Corp. disclaims any duty to update or revise such statements. You will have the opportunity to ask questions at the end of the presentation. As a reminder, this webcast is being recorded and an archive of the webcast will be available until January 25, 2016. You can access the press release and the webcast at our corporate website. I will now turn the call over to Rich. Richard Roth Thank you, Suzy. Welcome everyone and thank you for joining us. On the call with me today are Jim Lynch, our Chief Financial Officer and Palle Jensen, our Senior Vice President of Regulatory Affairs. For the first time today, we are incorporating the use of slides in our call for those who would like to follow along. Please visit our website at www.sjwcorp.com to view them. SJW’s third quarter results reflect lower usage and the regulatory delay associated with recovery of 2014 and 2015 loss sales. Despite the regulatory delay that has impacted earnings, the fundamental elements that drive our business and lead to sustain profitability remain strong. As evidence of SJW’s strong fundamentals, SJWC’s and SJWTX’s capital expenditure programs including the Montevina Water Treatment plant upgrade project are on track to add $108 million of capital improvements in 2015. To help put San Jose Water Company’s capital expenditure programs into perspective, please note that the company’s rate base has grown at a compound annual growth rate of over 8% since 2010. Looking ahead, San Jose Water Company is seeking regulatory approval in its pending general rate case to invest approximately $230 million in 2016 and 2017. SJW’s meticulous plan and capably executing capital program is essential in ensuring that our customers continue to receive high quality and reliable water service. Specifically, the renovation of the Montevina Water Treatment plant will markedly improve SJW’s ability to meet the region’s growing water supply challenges by treating a much broader spectrum of source water. While regulatory lag seems to have become the norm, the California and Texas regulatory environments remain generally constructive as evidenced by their support of rates and regulatory mechanisms that balance the need for continued investments with the need for conservation and affordability. An important example of California’s supporting regulatory regime is the California Public Utility Commission’s authorization for San Jose Water Company to record in memorandum accounts the difference between authorized and actual revenue, net of variable production costs as long as water use restrictions remain in effect. We were also encouraged that California regulators appear to be adopting sales forecasts that reflect and support our customers’ conservation efforts, thus reducing the need for additional charges to recover the difference between authorized and actual customer usage. SJWTX, Inc., our Texas Water and Waste Water Utility continues to experience robust growth in connections and revenue. Additional, SJWTX’s regional business model helps ensure that we’re able to provide high quality sustainable and reasonably priced water service as we sensibly expand our operations. I would now turn the call over to Jim, who will provide you with a detailed review and analysis of the third quarter results and other financial commentary. After Jim’s remarks, I will provide additional information on our regulatory filings, water supplies and other key operational and business matters. Jim? James Lynch Thank you, Rich. Net income for the quarter was $9.5 million or $0.46 per diluted share. This compares to $38.4 million or $1.88 per diluted share for the third quarter of 2014. Year-to-date, net income was $21.7 million or $1.06 per diluted share, compared with $46.1 million or $2.26 per diluted share for the same period in 2014. Third quarter revenue was $83 million, a 34% decrease over the third quarter of 2014. And year-to-date, 2015 revenue was $217.5 million, a 13% decrease over the first nine months of 2014. A significant portion of the change in our operating results was attributable to the decision in our 2012 general rate case decision in California that occurred in the third quarter of 2014. Recall that we recognized $46.5 million of revenue at the time the decision was received. This included true-up revenue, a revenue related to prior periods of approximately $37.7 million or $1.09 per diluted share recognized in the third quarter of 2014. Year-to-date, true up revenue and diluted per share earnings related to prior periods that were recorded in 2014 was approximately $21.9 million and $0.68 per diluted share respectively. Our 2015 quarterly and year-to-date results reflect the impact of rate increases that contributed approximately $12.4 million in new revenue or $0.38 per diluted share and $33.2 million in revenue or $1.02 per diluted share respectively. Results also reflect the impact of lower usage in our California service area due to the drought and related water conservation activities. In response to the drought, the Santa Clara Valley Water District set its 2015 water usage target at 30% below 2013 usage levels. This was followed by the CPUC’s authorization in June of 2015 to activate San Jose Water Company’s water shortage contingency plan that includes mandatory water usage reductions and the imposition of drought surcharges. As a result, we experienced a decline in customer usage of 12% in the third quarter, resulting in a $15.3 million reduction in revenue compared to the third quarter of 2014 or $0.47 per diluted share. Year-to-date, customer usage declined 11%, resulting in a $28.4 million revenue reduction or $0.87 per diluted share compared to the same period in the prior year. The revenue impact of lower usage due to water conservation is being tracked for future recovery in the company’s Mandatory Conservation Revenue Adjustment Memorandum Account or MCRAMA. During the 2015 third quarter the balance in the MCRAMA increased approximately $15.7 million to $25.6 million. In March of 2015, the company submitted a filing with the CPUC for recovery of approximately $9.6 million of the balance related to the period from April 1, 2014 to December 31, 2014. The company will recognize amounts approved by the CPUC under this filing net of any previously recognized supply balancing amounts once approval is received. We currently anticipate this will occur in the 2015 fourth quarter. Amounts accumulated in the MCRAMA for 2015 and beyond will be recognized once recovery is determined to be probable and other revenue recognition criteria have been met. We began collecting drought surcharges under our Water Shortage Contingency Plan in June of 2015. Through the third quarter of 2015 collections were $6.3 million. The collected surcharge amounts are not recorded as revenue rather they are recorded as regulatory liabilities. Once we begin recognizing the 2015 MCRAMA revenue, we will offset amounts due from customer surcharges with amounts collected in the drought surcharge liability account. In the meantime, drought surcharge collections provide the company with additional operating cash flows. The company is also tracking drought-related operational and administrative costs for future recovery in a Mandatory Conservation Memorandum Account or in MCMA. As of September 30, 2015, $5,500 was accumulated in the MCMA. The drought surcharge account, MCRAMA and MCMA will remain in effect until state water drought water restrictions are lifted. Lastly, in 2015 our year-to-date results include $1.9 million in revenue or $0.12 per diluted share related to the CPUC’s decision in the first quarter on our limited rehearing request on the effective date of our 2014 rates. Turning to water production, the lower usage we’ve experienced in both our California and Texas service areas and California due to water conservation and in Texas due to higher than normal rainfall has resulted in lower cost production. For the quarter, usage declines reduced production costs by $9.5 million or $0.29 per diluted share and year-to-date by $18.4 million or $0.57 per diluted share. This cost reduction was partially offset by the impact of increases in purchased water expenses and ground water production charges of $5.5 million or $0.17 per diluted share for the quarter and $9.3 million or $0.28 per diluted share year-to-date. Also recall that through the first nine months of 2015 we used 1.5 billion gallons of surface water compared to 230 million gallons in the same period of 2014. The use of surface water in the third quarter was not significant. However, year-to-date surface water use resulted in a $3.1 million or $0.10 per diluted share reduction in water production expenses. We do not anticipate any meaningful benefit from surface water supplies through the remainder of 2015. Non-production operating expenses included a $1.1 million increase or $0.03 per diluted share for the quarter and $2.7 million increase or $0.08 per diluted share year-to-date in pension expenses. The increase was primarily driven by changes in the underlying assumptions used to calculate periodic pension costs. In addition both the quarter and year-to-date include higher cost incurred in connection with our 2015 California general rate case and conservation activities in our California service area. Other expense and income in the third quarter of 2015 included the sale of multiple non-utility real estate properties for a gain of approximately $1.9 million or $0.06 per diluted share. Other expense and income in 2014 included a gain on the sale of California Water Service Company stock in the second quarter of $2 million or $0.06 per diluted share and sales of real estate investment properties in Texas and California in the second and third quarter respectively of approximately $300,000 each or $0.02 per diluted share. Another point of note, in the third quarter of 2014, the company recorded an income tax benefit of $4.8 million or $0.23 per diluted share related to the adoption of the Department of Treasury and Internal Revenue Service tangible property regulations. This was for the years 2013 and previous. Year-to-date the company also recorded a benefit of $880,000 or $0.04 per diluted share on the recognition of enterprise zone tax credits in 2014; similar amounts were recorded in 2015. Turning to our capital expenditure program, we added approximately $25 million in utility plant during the third quarter bringing our 2015 total to $63 million or approximately 58% of our 2015 planned utility plant capital expenditures. We anticipate completing approximately 90% of our planned utility plant capital budget amount in 2015. In addition, we have revised the timing of our planned capital expenditures on our Montevina plant retrofit project putting more of the budgeted cost in 2016 and 2017 as a result of design revisions and contract finalization. Including the Montevina plant retrofit project, we are on target to add approximately $108 million in utility plant in 2015 growing rate base in both our California and Texas service areas. From a liquidity perspective, year-to-date cash flows from operations increased by approximately $26 million or 58% due in large part to higher income and the collection of a $6 million income tax receivable that was generated at the end of 2014. In addition, we experienced a $10.6 million benefit from the collection of revenue in connection with the 2012 California rate case decision. Recall that the $46.5 million we received in the decision is being collected over a 36-month period that commenced in October 2014. At the end of the quarter we had $75.8 million available under our bank lines of credit for the short-term financing of utility planned additions and operating activities. The borrowing rate on credit line advances during the year averaged 1.3%. With that, I will stop and turn the call back over to Rich. Richard Roth Thank you Jim. In a testament to the efficacy of San Jose Water Company’s stout management plan, customers exceeded the conservation target set by the State Water Resources Control Board and the Santa Clara Valley Water District, our wholesale water supply. As a result, water levels in our local groundwater basins have rebounded, thus minimizing the existential threat of subsidence. It’s worth noting and plotting the tremendous response from our customers to the conservation mandate, their response has been enormously important in protecting the regions critical underground storage basin. San Jose Water Company’s ability to respond quickly and effectively to the vagaries of California’s water supply requires a comprehensive communications program to engage and inform customers and stakeholders. We have taken important steps to establish and maintain a web-based communication program that is the cornerstone of our efforts to effectively deliver timely and relevant customer information. Now let’s turn our attention to regulatory affairs, where San Jose Water Company’s 2015 general rate case is being processed by the California Public Utilities Commission. We anticipate the CPUC’s final decision by the end of 2015 for new rates for the years 2016, ’17, and ’18. In the event a final decision is not reached by the end of this year, San Jose Water Company will file for interim rates effective January 1st 2016. The interim rate filing is very important because it ensures that regardless of regulatory delay, new rates will be effective retroactive to January 1st 2016. San Jose Water Company’s Mandatory Conservation Revenue Adjustment Memorandum Account or MCRAMA established on March 26, 2014 allows the company to track revenue shortfalls net of production costs associated with reduced sales resulting from government mandated water restrictions. On March 26, 2015, the company filed for collection of $9.6 million associated with sales lost during the period April 1, 2014 through December 31, 2014. A decision on that filing is expected in late 2015. On September 20, San Jose Water Company received authorization to increase its revenue requirement by $274,721 via a rate base offset for planned additions related to the Montevina Water Treatment Plant upgrade project. More importantly, Montevina project will allow San Jose Water Company to maximize the use of our low-cost high-quality surface water supply for the benefit of our customers. Construction began in late September this year and the project is expected to be substantially complete by the end of 2017. When complete, the project will add a total of $62 million in utility plants and service in addition to the capital additions contained in San Jose Water Company’s general rate case proceeding. Despite the many instances of regulatory lacks, San Jose Water Company continues to constructively engage with regulators and to ensure that all filings are diligently processed. With the aforementioned strong fundamentals in place, San Jose Water Company and SJW Corp. continue to refine our business processes and strategies to effectively respond to the vicissitudes in weather, regulatory rulings, and economic conditions. Over the long haul, we remain confident in our ability to deliver sustained growth and profitability, earnings and dividends. With that I will turn the call back to the operator for questions. Question-and-Answer Session Operator James Lynch Okay, thank you operator. Before we end the call, I’d like to pull up one more slide, our earnings bridge for the quarter. The earnings bridge starts with our reported 2014 Q3 quarterly diluted earnings per share and then it reconciles the impact of activity reported quarter over quarter to get to our Q3 2015 quarterly earnings per share. We thought that that would assist you following along on the website with understanding the different components that went into driving our Q3 2015 revenue. With that Rich? Richard Roth Thank you everyone for joining us, we look forward to talking to you with our year-end results. Operator Ladies and gentlemen, thank you for participating in today’s conference. That does conclude today’s call. You may all disconnect. Have a great day everyone. 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. THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY’S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY’S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY’S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS. If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com . Thank you!

What’s Ailing Biotech?

Summary Concerns about profitability and valuations had already infected US biotechnology stock prices in September. Increased political and media attention on rising drug costs sent the sector deeper into a decline. Evan McCulloch shares his insights on the drug-cost debate, presidential candidate Hillary Clinton’s proposal, and the fallout on the biotech sector at large. Evan McCulloch Senior Vice President, Director of Research Franklin Equity Group® Portfolio Manager, Franklin Biotechnology Discovery Fund (MUTF: FBDIX ) ________________________________________________________ We have seen some turmoil in the biotech sector over the last few weeks. What’s been driving this volatility? There’s been some volatility in the equity market at large, which has resulted in investor skittishness overall and a hypersensitivity to potential fundamental concerns. Specifically for the biotechnology sector, however, the threat of heightened scrutiny of drug prices has reared its head again. It started with an article in The New York Times on September 20 about a small private company called Turing Pharmaceuticals 1 that raised the price of an anti-toxoplasmosis drug it had acquired by 5,000%. This is very unusual for an older drug, so it was a case the media latched on to. The article was followed by a tweet from Democratic presidential candidate Hillary Clinton, indicating she thought some drug prices were excessive and that she had a plan to reduce prescription drug costs. Clinton subsequently announced her plan, which proposed that Medicare leverage its buying power to negotiate directly with drug companies. After that, other politicians jumped on the bandwagon and railed against high drug prices. The House Committee on Oversight and Reform already had been seeking to subpoena documents relating to Valeant Pharmaceuticals’ 2 price increases earlier this year on a pair of cardiovascular drugs, and it then asked to subpoena Turing Pharmaceuticals about the price increase on its drug, which treats parasitic infections. It’s interesting to note that the pricing noise has been around for a while; there have been a series of press articles on the subject going back to July. President Obama has made periodic comments about high drug prices, and Senator Bernie Sanders, who also is vying for the Democratic presidential nomination, released a plan focused on pricing which generated renewed attention. So while this is an issue that bears watching, I think it’s a culmination of sector-specific concerns about drug pricing on top of some broader market issues that has caused recent volatility in share prices. So where could this all be going? Might it result in a reduction in drug prices, in your opinion? For better or for worse, in my view the answer is no. All Clinton did was articulate a plan; it is not legislation. The price of prescription drugs is a popular topic because most people in the United States think drug prices are high, and it’s an issue that resonates well with voters. Again, this is not legislation, and if it were, it would not likely be approved by a Republican-majority Congress. Given that the Republicans seem likely to retain their majority in the House of Representatives after the 2016 election, I don’t believe any legislation can pass until 2018 at the earliest. Even if Clinton’s plan, as we currently understand it, did ultimately pass, in my view the impact would be very manageable for the sector. Most notably, according to our estimates, any cut to drug prices inside the Medicare program would be far less than the recent 15%-20% stock correction in the sector might imply. However, we do expect more market-based reforms. This public shaming process that politicians are employing will likely cause companies to moderate price increases going forward and also empower insurance companies to drive toward higher rebates and more substitution of cheaper drugs. So, we do expect some growth moderation at the margin, but it will probably be imperceptible at a sector level. In the fund, we focus on investing in companies with drugs that deliver strong clinical value and have limited competition, which seeks to mitigate the impact of some of these initiatives. Moving on to the topic of patent protection, do you have any concerns about the exclusivity provisions offered in the Trans-Pacific Partnership ( TPP ), the proposed trade agreement between 12 Pacific Rim countries? No, I don’t have any concerns about it. The TPP proposes that drugs sold outside the United States get eight years of exclusivity. Patents currently don’t protect US drugs overseas. So, granted, eight years is lower than the current 12 years of exclusivity in the United States, but eight years should be compared to virtually no exclusivity right now, as many of the countries covered in that partnership do not honor intellectual property rights. So, this provision would protect pharmaceutical companies for eight years, which would actually be a positive for the sector, in our opinion. What do you think the media is either not covering or may be misreporting about the biotech sector that you think investors should know? The media has focused on gross price increases on drugs, and that is very different from actual price increases or net price increases. In most cases, price increases are moderated through rebates to the payers, but since that’s a negotiated price, the actual price being paid by insurance plans to the drug companies is not transparent to investors or the media. In most cases, when we see a price increase, we know only about one-third to two-thirds of that price increase is realized, so the actual price increases are much lower than what is being reported in the press right now. What is your current outlook for the biotechnology space? I think fundamentals in the biotechnology sector are as strong as ever. In our view, the sector’s new-product pipeline is full, and important new treatments are advancing for cancer, Alzheimer’s dementia, and a whole range of rare genetic diseases. In cancer treatment, interest is very high in using drugs that harness the immune system to fight tumors. A number of new drug discovery technologies, like gene therapy, RNAi (RNA interference) and antisense, allow companies to target rare genetic diseases that were previously untreatable with more traditional drug approaches. For drugs that make it through the clinical trials process, the US Food and Drug Administration is working cooperatively with the sector to bring new drugs to patients, and in most situations has approved drugs that have strong value propositions for patients. Until recently, investor concern was generally constrained to stock valuations, not fundamentals. Although concerns about drug pricing power have arisen, I don’t expect any major change. And with more attractive valuations following this recent correction, we think the outlook for the sector is very positive. To get insights from Franklin Templeton Investments delivered to your inbox, subscribe to the Beyond Bulls & Bears blog. For timely investing tidbits, follow us on Twitter @FTI_US and on LinkedIn . This information is intended for US residents only. Evan McCulloch’s comments, opinions and analyses are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. Because market and economic conditions are subject to rapid change, comments, opinions and analyses are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy. What Are the Risks? F ranklin Biotechnology Discovery Fund All investments involve risks, including possible loss of principal. The fund is a non-diversified fund that concentrates in a single sector, which involves risks such as patent considerations, product liability, government regulatory requirements, and regulatory approval for new drugs and medical products. Biotechnology companies often are small and/or relatively new. Smaller companies can be particularly sensitive to changes in economic conditions and have less certain growth prospects than larger, more established companies and can be volatile, especially over the short term. The fund may also invest in foreign companies, which involve special risks, including currency fluctuations and political uncertainty. These and other risks are described more fully in the fund’s prospectus. Investors should carefully consider a fund’s investment goals, risks, sales charges and expenses before investing. To obtain a summary prospectus and/or prospectus, which contains this and other information, talk to your financial advisor, call us at (800) DIAL BEN®/342-5236 or visit franklintempleton.com. Please carefully read a prospectus before you invest or send money. _________________________________________________________________ 1. As of 9/30/2015, Turing Pharmaceuticals was not a holding of Franklin Biotechnology Discovery Fund. Holdings are subject to change without notice. 2. As of 9/30/2015, Valeant Pharmaceuticals was not a holding of Franklin Biotechnology Discovery Fund. Holdings are subject to change without notice.