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Clean Energy Fuels (CLNE) Andrew Littlefair on Q2 2015 Results – Earnings Call Transcript

Clean Energy Fuels Corp. (NASDAQ: CLNE ) Q2 2015 Earnings Conference Call August 5, 2015 04:30 PM ET Executives Tony Kritzer – Director, IR Andrew Littlefair – President, CEO & Director Bob Vreeland – Senior VP, CFO & Accounting Officer Analysts Rob Brown – Lake Street Capital Laurence Alexander – Jefferies & Company, Inc. Aaron Spychalla – Craig Hallum Capital Group Operator Greetings, and welcome to the Second Quarter 2015 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. I’d now like to turn the conference over to your host Mr. Tony Kritzer, Director of Investor Relations. Thank you. You may begin. Tony Kritzer Thank you, operator. Earlier this afternoon, Clean Energy released financial results for the second quarter ending June 30, 2015. If you did 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 Clean Energy’s Form 10-Q, filed August 5, 2015. 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 business operating 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’ll turn the call over to Andrew. Andrew Littlefair Thank you, Tony. Good afternoon, everyone. And thank you for joining us. I’m pleased to review our second quarter 2015 operating results with you today. We delivered 74.4 million gallons this quarter, up 15% from 16.8 million gallons we delivered in the second quarter of 2014. Revenue was $86.9 million in the second quarter versus $98.1 million a year-ago. Revenue decreased primarily due to three factors. Our overall effective price, which is primarily driven by lower natural gas commodity prices drop by $0.10 per gallon compared to the second quarter of last year. A simple way to think about this is when applied a 74 million gallons, this affected our revenue by close to $7.5 million. And as I told you last quarter we had $9.1 million in construction projects that were essentially complete at the end of the first quarter, but we’re still unable to recognize about $6.4 million of the revenue. This particular construction projects is part of a larger facility. Our portion is complete and we’ve been paid, but we’re waiting for the completion of the remainder of the facility to be able to recognize the revenue which we anticipate in the third quarter. And lastly our Clean Energy Compression subsidiary was somewhat challenged due to the global decline in oil prices, the strength of the U.S dollar and a slowdown in China, all of which contributed to softened international sales. However, they improved their gross margin over last quarter by almost $1 million and continue to make progress on their product standardization. The first of their standardized units are in production now. The impact of these three factors affected our top line by roughly $19 million. Fortunately, because of our volume growth, we had incremental revenues from fuel sales of $8 million, which help offset that impact. In spite of lower oil prices, which have been challenging our recurring revenue model — let me back up, in spite of lower oil prices which have been challenging, our recurring revenue model continue to show growth. Our margins remain relatively intact to $0.27 and fuel volumes grew 15% year-over-year. For many of our customers, volatility is much an issue as fuel price and we still offer an economic value proposition with a cleaner fuel. Along these lines with economic and clean fuel benefits, adoption continues and we see significant investments across the entire natural gas vehicle industry and in our sectors. New vehicles and platforms are coming to market and being developed including the new commenced Westport 6.7 liter engine and the CWI 9 liter near zero NOx engine. Additionally, Quantum Fuel Systems just launched a high capacity CNG fuel module last week. We’ve also seen the incremental cost of natural gas trucks continue to come down, partly due to our tank programs with agility and chart. In trucking, in the first half of the year, we’ve began fuel 700 new trucks and open 15 truck friendly stations in 11 states and we plan to open 10 more by year-end. In total, we now have 208 truck friendly stations open across 31 states in British Columbia. These include Corridors, the I-5 and Highway 99 between northern and southern California. On the I-40 from LA to Oklahoma City, the I-10 from LA to Jacksonville, the I-20 from LA Birmingham going through Dallas and on the I-95 from Jacksonville to Richmond and CNG tractors can now go from Washington DC through Philadelphia, New York, and Boston. We now fuel close to 3,000 Class-8 heavy-duty trucks nationally. We recently our demo truck programs where we lend new CNG or LNG trucks and box trucks to potential customers. Our goal is to provide as many fleets as possible with the opportunity to test drive these natural gas trucks, if they have a positive driving experience on top of enjoying the benefits of a cheaper and cleaner fuel. The demand for these trucks has been strong and there are currently 93 fleets on the waiting list to demo the trucks in both our core and trucking segments. In our refuse market, the momentum continues. We have completed 17 station projects to date and we anticipate we will complete 36 refuse station projects by the end of the year. We’ve added nine new contracted projects to our refuse pipeline in last month alone. It become almost a requirement for refuse companies to convert at least part of their fleets to natural gas in order to stay economically and environmentally competitive. We currently fuel over 9,000 refuse trucks daily. In our transit market, in the second quarter, our customers ordered or added 224 buses to their fleets. This equates to over 3 million gallons annually. We announced the Big Blue Bus of Santa Monica has become one of the country’s first municipal transit authorities to convert its entire fleet to our Redeemed branded renewable natural gas that is 90% cleaner than diesel and is the cleanest transportation fuel commercially available. In addition, to Big Blue Bus, UPS previously committed to fueling which Redeem for a portion of its heavy duty fleet as part of their plan to drive one billion miles using alternative fuel by the end of 2017. We comment Big Blue Bus and UPS for their commitment to using cleaner fuel and we look forward to working with other major companies and fleets who value that same commitment to sustainability. For the first six months of the year, we saw a 21 million gallons of Redeem and we’re on track to double what we delivered in 2014. Across all our markets, we’re working with over 950 fleet customers representing close to 42,000 vehicles that we fuel on a daily basis. On NG Advantage, we’re pleased with the volume growth, having delivered over 10 million gallons in the first two quarters. We are expanding our station in Milton, Vermont to add 30% more contracted capacity. This is the second significant upgrade of that station in the past year to meet demand of contracted volumes. On the policy front last week, the Highway Trust Fund Legislation was passed by both houses of Congress and was signed by the President. Within the bill is a provision to equalize the federal tax in LNG to an energy equivalent basis with diesel and gasoline. The result will lower the tax in LNG by $0.17 per diesel gallon equivalent effective January 1, 2016. Additionally, 26 state legislatures have already taken similar action to equalize transportation fuel taxes. Across the country we’re seeing the development of robust grant programs to support fleets to dock natural gas. Here in California, Prop 1B funding will provide $65,000 per truck for fleets to qualify. The Prop 1B funds totaled over $260 million, which will become available later this year and will be allocated throughout 2016. So far this year, we’ve received $40 million in grant funding for 17 stations and 546 natural gas vehicles in 25 states. Regarding our balance sheet, at the end of the second quarter, we had a $182 million of cash and investments and we’re on track with reduced CapEx program of $59 million. We are focused on the 2016 convertible notes which are due at the end of August of next year. We have flexibility with different options including cash, stock, or a combination of both and we’re in regular communication with the noteholders. We plan to file a universal shelf registration statement of $500 million in the coming days to replace our expired shelf. We don’t have any immediate plans to use the shelf, but we think this is good corporate practice and gives us the tools and flexibility should we needed. And with that, I’ll turn the call over to Bob. Bob Vreeland Thank you, Andrew, and good afternoon to everyone. It’s my pleasure to go over our financial results for the second quarter ended June 30, 2015. Overall, we made progress in the second quarter, mainly our adjusted EBITDA improved by $3 million from negative $5.6 million in the first quarter of 2015 to negative $2.6 million in the second quarter of 2015, and slightly less volume in the second quarter. And we improved our adjusted EBITDA by $2 million over the second quarter of 2014, despite lower revenues in 2015 compared to 2014. Now I’ll go over some specifics for the second quarter of 2015. Starting with volume, compared to the second quarter of 2014, as we reported, volumes grew by 9.5 million gallons or 15% over the second quarter of 2014. Refused increased 27%, trucking increased 19%, together transit and fleet services increased around 5% and our industrial sector more than doubled to a little over 6 million gallons. When compared to the first quarter of 2015, I want to point out that volumes were down in the second quarter of 2015 by a net 2.7 million gallons as a result of fully finishing our involvement with our former biomethane plant in Dallas, effective mid April of 2015. On a year-to-date basis, through June 30, our volumes are up 20% or 25.4 million gallons over 2014. Our revenues of $86.9 million or $11.2 million last — then a year-ago which is principally a function of lower fuel prices driven by lower commodity costs, the timing of station sales and our compressor business. Lower fuel prices represented about $5.6 million of the decline in revenue. Fewer stations completed and recognized represented about $5.2 million of the decline. As Andrew mentioned, we still have one large station being deferred to the third quarter from the first quarter. Lower revenue at Clean Energy Compression Corp of about $8.1 million, reflects the general softness in the international marketplace as previously mentioned. These declines in revenue were partially offset by 7.9 million in higher revenues from the 9.5 million incremental gallons in 2015 over 2014. It’s important to note that our effective price per gallon declined $0.10 per gallon from a year-ago, while our effective costs per gallon declined $0.08 for a net impact of $0.02 on margin per gallon. So this has a fairly significant impact on revenues at $0.10 a gallon and less of an impact to our margin. Now moving on to margin, our gross margin per gasoline gallon equivalent was $0.27 in the second quarter of 2015 compared to $0.29 in the second quarter of 2014, and $0.28 in the first quarter of 2015. The decline of $0.02 from 2014 was attributed to a volume mix, a higher concentration of incentive programs that are tied to fuel deals in 2015 and some pricing squeeze from today’s low price environment. Offsetting these margin pressure was another solid quarter of our RIN credits at $2.9 million associated with our sales of Redeem, our renewal natural gas. All in all, we’re holding steady on our gross margin per gallon and are rather fluid pricing environment. As Andrew mentioned, we saw gross margin improvement of around $1 million from our Compression Corp in the second quarter when compared to the first quarter of 2015. This was mainly from cost controls and a focus on selling core products versus larger custom build projects. However, the challenge remains due to a soft demand internationally as we’ve mentioned. Our SG&A spending remain under control at approximately $29 million for the quarter, a decline of 16% from a year-ago and a 4% decline from our most recent quarter. Our cash investments totaled $182 million at June 30, 2015. We continue to control capital expenditures as planned. We spent $26 million on CapEx in the first six months of 2015 compared to $62 million spent on CapEx for the first six months in 2014. NG Advantage is about $10 million of the $26 million spent in 2015. So on a comparative basis; you’re really comparing $16 million to $62 million or a $46 million reduction while volumes are growing. As I mentioned, our adjusted EBITDA for the second quarter of 2015 was negative $2.6 million. The improvement of $3 million over our first quarter of 2015 was primarily from improved margins at the Compression Corp, station sales and lower SG&A spending. We improved by $2.1 million compared to 2014, despite a $11.2 million less in revenue in the second quarter of 2015 versus 2014. In comparing to the second quarter of 2014, our adjusted EBITDA was negatively impacted by lower station sales and Compression Corp revenue in 2015 that positively impacted by our increased volumes between the periods as well as our reduced spending on SG&A. Now we’ve seen improvement in our quarterly adjusted EBITDA and we expect to continue to leverage our station and cost infrastructure and grow volume such that we expect these improvements to adjusted EBITDA to continue. It is unlikely we will get a positive adjusted EBITDA for the full-year, but it is still possible. However, we anticipate getting to positive quarterly adjusted EBITDA by the end of this year as we make steady progress, growing volumes, and leverage the infrastructure of our business. And with that, operator, we will open the call to questions. Question-and-Answer Session Operator At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Rob Brown from Lake Street Capital Markets. Please go ahead with your question. Rob Brown Good afternoon. Andrew Littlefair Hi, Rob. Bob Vreeland Hi, Rob. Rob Brown Could you just give us little more color on the pipeline of sort of new fleets or just in fleets expanding to natural gas? I know a number have been testing it, but where is that at with oil, it’s obviously slowed down but has — are people still moving forward, are they evaluating it? Where are things at with the lower oil price in the pipeline? Andrew Littlefair Yes, Rob I’m glad you asked that question, because we haven’t had any current customers leave the program or turn back the keys with their natural gas truck. Let’s face it, lower, lower diesel price and oil prices, those customers that are on the fence has given them even more to think about. However there is still lots of new fleets coming to the program. We just this last week, we — and I can’t go through all their names with you right now, but we’ve had about eight or nine new fleets, field more trucks. I think our demo truck program where we got really 90 some odd fleets in the queue to test those vehicles. I think it’s very encouraging. So we have seen good examples of our current customers UPS and Waste Managements and others continue to order vehicles and that really hasn’t slowed. We just have to put more in the pipeline and get more people exposed. We still have, I think it’s important to remember, we still have an economic offering. And in this last nine months or so since the oil has done what’s its done, the incremental cost has come down significantly on these trucks, as I mentioned in my remarks. But we’ve seen concrete examples of the incremental cost on the 12 liter truck going from somewhere around $40,000 somewhat to $22,000 to $25,000 and so that’s been very helpful. So we’re still able to save customers and we’re between $0.75 to over $1 a gallon. So the economic proposition is still there. We’re still getting new people to sign up. Rob Brown Okay, good. And then it sounds like refuse has become sort of the standard to having natural gas. What’s sort of the thinking on when that can happen in trucking, is that — I know its hard to predict, but are you still in a path to having that ultimately be the case in trucking where everybody [multiple speakers]? Andrew Littlefair Yes, I haven’t lost any optimism for what I think is going to happen. To me it’s impressive that UPS hasn’t bought a diesel truck in two years. I mean look, this is the one world leader in terms of logistics and has one of the largest fleets, and haven’t bought a diesel truck in two years. So to me that’s very telling. We’re still having some of our big shipper friends, Unilever, MillerCoors, Procter & Gamble and others requiring their contracted carriers to move to natural gas. This year you’ll probably feel about as many new heavy duty Class A trucks on natural gas as you will refuse trucks, and so — but it’s a much larger market. And so I still remain very optimistic that we’ll get on a much higher penetration rate, of course having fuel at higher price is the delta one, the delta increases, it will make it that much more compelling for fleets. But I don’t know, I can’t give you a time Rob, but we’re still saving these guys money and its still pretty impressive. As I mentioned in my remarks there’s still a lot happening in the business, there’s new models coming to market, there’s new engines coming to market. I quickly went over it, but the Cummins 9 liter and next year sometime the 12 liter of low NOx engine, I think that’s a game changer. Now you’re talking about an engine that’s almost 10 times cleaner now and the future of the low NOx has occurred. And so that really makes us competitive when we put it that with the renewable fuel. Its one of the cleanest vehicles on the road in the world. And so investments continue to be made, our customers are building stations and ordering vehicles. Rob Brown Excellent. That was a great review. Thank you. Andrew Littlefair Thank you. Operator Our next question comes from the line of Laurence Alexander from Jefferies. Please proceed with your question. Laurence Alexander Good afternoon. Could you help with a couple of things. First, I think was a quarter or two ago you mentioned that seeing some competitors likely being forced to shut capacity or slowdown their project build out. Have you actually seen that play out, and how are you seeing the competitor dynamics right now? Andrew Littlefair Well, as we talked I think before Laurence, well there is a lot of people that are in “fueling business” as we’ve reviewed before some of them are regional, some of them are partnerships with utilities, some of them are relatively small compared to us. Yes, I mean we’ve seen just recently in the last couple of weeks, we’ve seen few different smaller competitors either out searching funds or being put up for sale. Look, this is a difficult business and if you only have four fueling stations at light duty convenient stores, this is tough. Because now you’re going up against really small fleets and light duty gasoline vehicles, so it’s difficult. So I would say yes, we’re seeing a consolidation. You go back with me Laurence and think, I don’t know six months ago, boy there was a lot of companies talking about building — getting ready to launch 100 stations and those kind of thing, but you don’t hear anything about that anymore. So there are some larger competitors that are still proceeding that we will. We’ll build more station projects this year than we did last year close to 70 and some of our other larger competitors [indiscernible] gain and a few of these others, they’re continuing. But I think for some of the smaller companies this is a difficult environment. Laurence Alexander And then with the tax changes that have been passed and also the draw up in the truck premium back with the envelop it looks as if the truckers are getting about one and half year payback. Andrew Littlefair I think that’s fair. Laurence Alexander Are you hearing that from your customers as well? Andrew Littlefair Yes, I think that’s fair. I mean it depends on exactly the price that they’re paying. But there was a time we’re even a little bit better than that. Of course it all depends on how much fuel. I was kind of figured you’re using a 20,000 gallon annual truck. We have some customers right now, one that’s taking delivery of 12 trucks as we speak; they use 37,000 gallons annually — a year per truck. But if you use that 20,000 one, we’re still able to save these guys close to $1 a gallon, and so you’re somewhere around a year and a half. That depends on the tank pack as you’re putting in place, but we’ve seen significant reductions in the price of these trucks. So anywhere in the less than two years, year and a half area, I think this still makes a lot of economic sense. Laurence Alexander And then just one last one if I may, if you had 100% conversion of your pipeline, do you have any sense for what the gallon opportunity is that’s embedded in your existing target? Andrew Littlefair Wow, it would be a big number, right? So I don’t know that you want me to quote that. But I mean its — well… Laurence Alexander Yes, actually I just got a sense for, without changing anymore minds if you just change the … Andrew Littlefair Yes, well if we just got the 200 or so fleets that we’re working with and that began to really kind of do what the refuse guys have done over time and go from 10 to 100. I mean you’re talking about 10s of 1000s of trucks. So we’re working with very large customers and they have the ability to take big numbers of vehicles. That’s why I like, when I mentioned these 950 fleets and that business sound like a very big number, but that 950 fleets, I’m just kind of guessing on top of my head, that probably deals with — that probably would get you into a million or couple of million vehicles at that 950 fleets. So we’re dealing with the right people and it’s just the matter of getting them comfortable with the experience, matching that up with the infrastructure and that’s happening. I went through that in my remarks, when you begin to look and we have these maps and if you ever want to have those, you can let us know. But we have these maps that show coverage across the country and its pretty impressive now that the coverage you get 300 miles away from our stations these are overlapping umbrellas if you will and you’ve covered most of the country. So you’re able now to deal with lots of corridors, lots of trucking where there’s an off a lot of regional trucking that happens in the country that go from Houston to Dallas and places like that, and so we’ve got that infrastructure in place today. Laurence Alexander Okay. Thank you. Andrew Littlefair Yes, you bet. Operator Our next question comes from the line of Eric Stine from Craig Hallum. Please proceed with your question. Aaron Spychalla Hi. Good afternoon, it’s Aaron Spychalla. Thanks for taking the questions. Andrew Littlefair Sure. Aaron Spychalla Maybe first on Mansfield, can you give us an update there and the JV for bulk fuel hauling. How many stations do you guys have inside the fence now and what does the pipeline look like there? Andrew Littlefair Okay, well now you know that our Mansfield joint venture ride is the bulk fuel hauling joint venture. So that’s really targeted at people that are — the trucks that are going in and out of terminals. So we just got started with that. Our first station opened in Doraville, Georgia in November and I’m pleased to report its now doing 40,000 gallons a month which is a nice start. We’ve got two other locations that we can’t — I can’t mention the names right now but two other locations where we’re just finishing up the contracts with other fleets where they’ve committed to go. Now I will say this, that particular segment bulk fuel hauling. Now as you’re dealing with people that are hauling gasoline and diesel and in some places in the country, diesel has dropped significantly. So we’re having to work very hard and being very aggressive on pricing to make sure that those still will happen. But I think what we’ve seen is we proved out the model, it’s a good segment for us, we’re with the best in the business which is Mansfield and those — we’ve always figured that we would build a few more this year and I hope that we get those things launched too shortly — those new stations. Aaron Spychalla Right. Thanks. And then, could you maybe provide some color on the AB 857 legislation and what that might mean for your business if we continue to see that move forward? Andrew Littlefair Right. Well for those on the phone, it’s the piece of California legislation. So when it gets tied into the cap and trade funds, there’s a big part of money now in California and its getting to be I mean large, I mean we’re now talking as much as a couple of billion dollars, AB 857 would, starting in 2018 to 2023 would make available $100 million a year for natural gas heavy duty trucks. So it’s significant for us. We like — we’re working hard on that now. We’ve got very good support in legislature. We get up to $100,000 of grant money per truck when we have that low NOx truck, that’s why I’m so excited about the potential of what Cummins Westport is doing on that low NOx truck that really puts us way ahead of what diesel can do and other fuels can do. So we’re excited about it. It’s not done yet, but it’s significant. That does bring me to just highlight that Prop 1B, I mean the Prop 1B money is slopping around right now. Its $260 million, it gets [indiscernible] out to the air districts in California, San Joaquin, the Bay Area, the South Coast. We have our sales people working with fleets right now. That money was being coordinated by their resources board and I think maybe the California Energy Commission, that money will get distributed out to the air districts and then the fleets submit for it, and that is underway and it’s significant for us. Aaron Spychalla Good. Thanks for taking the questions. Andrew Littlefair Okay. Thank you Operator Mr. Littlefair, there are no further questions at this time. Would you like to have any closing remarks? Andrew Littlefair Sure, operator and everybody on the call, thank you for dialing in this afternoon. We look forward to updating you on our progress in the next quarter. Thank you. Operator This concludes today’s teleconference. Thank you for your participation. You may disconnect your lines at this time.

Star Gas Partners’ (SGU) CEO Steven Goldman on Q2 2015 Results – Earnings Call Transcript

Star Gas Partners LP (NYSE: SGU ) Q2 2015 Earnings Conference Call August 04, 2015 11:00 AM ET Executives Steven Goldman – CEO Chris Witty – IR, Darrow Associates Richard Ambury – CFO Analysts Andrew Gadlin – Odeon Capital David Spier – Nitor Capital Michael Prouting – 10K Capital Operator Hello and welcome to the Star Gas Partners, Fiscal 2015 Third Quarter Results Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today’s presentation there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being record. I would now like to turn the conference over to Steve Goldman Star Gas Partners’ Chief Executive Officer. Please go ahead, sir. Steven Goldman Thank you, Chad. Good morning and thank you for joining us today. With me today is Star Gas Chief Financial Officer, Richard Ambury. After I provide some brief remarks about the quarter and first nine months of fiscal 2015 Rich will review the fiscal third quarter-ended June 30th, 2015 and year-to-date financial results. We will then take your questions. Before we begin Chris Witty of our Investor Relations firm Darrow Associates will read the Safe Harbor Statement. Please go ahead, Chris. Chris Witty Thanks, Steve, and good morning. This conference call may include forward-looking statements that represent the partnership’s expectations and beliefs concerning future events that involve risks and uncertainties and may cause the partnership’s actual performance to be materially different from the performance indicated or implied by such statements. All statements, other than statements of historical facts included in this conference call, are forward-looking statements. Although the partnership believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the partnership’s expectations are disclosed in this conference call and in the partnership’s quarterly reports and its annual report and Form 10-K for the fiscal year ended September 30, 2014. All subsequent written and oral forward-looking statements attributable to the partnership or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements. Unless otherwise required by law, the partnership undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this conference call. I’d now like to turn the call back over to Steve Goldman. Steve? Steven Goldman Thanks, Chris. We notice this has been an extraordinary fiscal year thus far as we’ve benefited greatly from falling oil prices and an incredibly cold period this winter unlike anything we have seen in recent memory and we are pleased that we’ve been able to retain much of the benefit of these factors despite an uneven year for weather. Our first quarter and third quarters were certainly an outlook we had planned for what we were counting on in terms of temperatures. Our first quarter you may recall was warmer than normal which challenged us in several ways. It caused equipment sales to be slower than expected and tempered our ramp up of staffing prior to the coldest part of the winter season due to the uncertainty as to how the rest of the winter will proceed. We also faced competitors who are much more aggressive on price to we believe to the lack of weather and related volume. The second quarter was starkly different whether it’s severe temperatures and numerous snowstorms such that we still increased expense related to service and maintenance for both of these during the second quarter and third quarter. I mention this because our third quarter results was somewhat mixed but given the temperatures and other factors impacting it from the quarter before we believe the partnership operated to the best of its ability. In terms of weather the third quarter was cooler during the beginning but that included higher temperatures during May and June. Warm day specifically over 90 degrees helped to drive air conditioning, equipment sales and service so despite the somewhat unusual weather patterns we believe we’ve still been able to deliver our solid results. Our EBITDA and attrition continue to support our belief in that by focusing on the customer and on efficient operations we’re making Star Gas a stronger business every day. One of the areas of improvement that I have spoken about in the past is training and I think it’s important to mention that we are now in the process of creating an internal culture of continuous improvement. We have put in place several new processes to improve the way our employees perform to both better please our customers as well strengthen the bottom line. While we are in the beginning phases of these initiatives our employees have reacted positively to everything we’ve implemented thus far. I mentioned earlier that we’re pleased with our attrition numbers this year but the third quarter’s net attrition was slightly worse than the same period last year and so our sales group has redoubled its efforts to replace these accounts by reaching farther out of our existing footprint for new customers. That said one area of our customer segment that does continue to grow very well has been and is propane and these operations certainly have room to expand even further. In that [way] I’d like to mention we just began operating in Eastern Tennessee this month. We continue to try new things to constantly improve our operating results, notably from a marketing perspective we expanded the use of social media and billboards as two examples to better spread the message about our ability to do more than just service heating equipment. As we all know acquisitions are always an important part of our measure of success, in this regard I’d like to mention that we are in the final negotiations and hopefully we will close soon on another great addition to Star Gas family of businesses and the deal where it’s approximately $20 million. If so when completed we will announce this acquisition. Beside from this acquisition we are also continuing to speak to several other large and small potential owners as usual. Before turning the call over to Rich who will be discussing our financial results I’d like to thank Kim and his team for the tremendous effort that we went through in closing our new credit agreement which allows us to redeem our high interest notes outstanding just to the great deal of time and we’ll strengthen our company financially. With that I’d like to turn the call over to Rich. Richard Ambury Thanks Steven. Good morning everyone. For the third quarter of fiscal 2015 our home heating oil and propane volume decreased by 6% versus last year of 2.6 million gallons to 45 million gallons. Heating degree days were 15% warmer than during the prior year as comparable to fiscal third quarter and 22% warmer than normal. Notes; that temperatures during this non-heating period are not as impactful to annual volume sales as during the heating season. Our heating oil and propane margins increased by over $0.07 year-over-year to approximately $1 per gallon. As a reminder, since the third quarter is a non-heating period with relatively low overall volumes, margins can be impacted quite easily. Total product gross profit was $52 million slightly lower than last year as home heating oil and propane margins were offset by the impact of lower volumes. Star’s net loss declined by $1 million to $8.4 million, largely due to a favorable non-cash change in the fair value of derivative instruments. The adjusted EBITDA loss for the quarter increased by $900,000 to $9.3 million as the impact of higher home heating oil and propane per gallon margins was more than offset by the decline in volume attributable to the warmer weather in a decrease in service and installation profitability. Now let’s review the nine months results. Home heating oil and propane volume rose by 7% as acquisitions primarily [directed] more than offset the impact of net customer attrition, conservations and other factors. In analyzing the results please keep in mind that the first and third quarters of fiscal 2015 were warmer than the first and third quarters of fiscal 2014 while the second quarter of fiscal 2015 was much colder than the second quarter of fiscal 2014. On balance the average temperatures over the nine months period were approximately equal to the average temperatures of the prior year’s comparable period and 5% colder than normal. Volume of other petroleum products rose 27% to 76 million gallons again reflecting significant motor fuel volume provided by Griffith. Total sales declined by 13% to $1.5 billion versus $1.7 billion in the prior year period as the additional sales provided by acquisitions were more than offset by lower selling prices in response to a decline in wholesale product cost of 32% per gallon. Year-to-date product gross profit rose 18% or $64 million to $421 million, due to the growth in sales volume as well as higher home heating oil and propane margins. The decline in home heating oil and propane costs contributed to the per-gallon margin expansion. However as we have mentioned on earlier calls the extreme cold temperatures during the second fiscal quarter of 2015 created additional service requirements. Service and installations gross profit declined by $4 million largely due to the impact of the colder temperatures in storms experience to the second quarter of fiscal 2015. Delivery and branch expenses rose by $23 million or 10%, reflecting the increase in total volume of 10%. These costs increased in the base business on a cents per gallon basis by approximately 3%. As previously mentioned this increase, as well as the higher service expense increased our per gallon margin gross profit requirement. Depreciation and amortization expense rose by $3.5 million, largely due to the Griffith acquisition and interest expense was lower by 19% reflecting lower bank borrowings. Net income increased by $21 million to $83 million due to the impact of higher home heating oil and propane margins, acquisitions and a favorable non-cash change in the fair value of derivative instruments. Adjusted EBITDA increased by $33 million or 26% to a $164 million as the impact of higher home heating oil and propane per gallon margins and acquisition more than offset high operating and service cost largely attributable to cold and temperatures and a numerous snow storms experience during the second quarter of fiscal 2015. Now let’s move over to the balance sheet for a second. We have recently announced that we actually it’s renew five year asset base revolving credit facility that provides the ability to borrow up to $300 million. $450 million during heating season for working capital purposes. The credit facility also provides for a 100 million five year senior secured term loan proceeds from a term loan along with cash on the balance sheet will be used to redeem our 785 senior notes due 2017. The term loan payments schedule is comprised of 10 million per year plus 25% of excess cash flow with the final payment and maturity. We expect to see lower interest expense going forward through this new debt structure. And with that I’d like to turn the call back to Steve. Steven Goldman Thanks, Rich. At this time we would be pleased to address any questions you may have. Chad please open the phone lines for questions. Question-and-Answer Session Operator Thank you. We will now begin the question-and-answer Session. [Operator Instructions] Our first question comes for the day from Andrew Gadlin with Odeon Capital. Andrew Gadlin You mentioned earlier in the call that there is an acquisition in the works for approximately 20 million in proceeds. Can you talk a little bit about geography or business mix? Richard Ambury So New York area company located on Long Island, it’s about somewhere around 19,000 customers it’s a business that more or less reflects our average retail heating oil type business in the area so a very strong competitor of ours so we think of it as a very brand, as I’ve mentioned in the past it’s one of these acquisitions that we’ve been speaking to on and off for years to try to get to this point, we are very excited about the opportunity because we believe it’s a very good addition to Start Gas. Andrew Gadlin And if the acquisition closes mid quarter would you guys put out a press release just to let us know that it’s been done? Steven Goldman We’d either file a press release or an 8-K. Andrew Gadlin Got it. Thanks. And then in terms of the term loan that you are taking out can you remind me what the interest rate on that term loan? Steven Goldman While it’s variable and there is a grid but the lowest grid is LIBOR plus 3 in a quarter. Andrew Gadlin Got it. Well 100 basis points floor? Steven Goldman There is no floor. Andrew Gadlin Okay. And in terms of that facility as you think about it priorities for cash-flow in the near-term would you say you want to pay that tax down as quickly as possible or balancing the opportunities and share buybacks and dividend increases etc. Steven Goldman Sure. We want to balance everything out. The way the excess cash flow covenants to repay anything back over the $10 million, it includes acquisition. So there is no hurry to pay back that loan. So it’s at the end of the term, there is a $60 million bullet which includes the $10 million final maturity, so be it. Richard Ambury We don’t believe that doing this offers our strategy from what we’ve been doing for the last several years, which is looking to make the best use of our earnings to better the business and strengthen the investment of those people that have believed in us up to now. Operator Next question comes from James [indiscernible] with Locust Wood Capital. Unidentified Analyst Hi. Just like to congratulate you guys on a strong third quarter and at Locust Wood we’re just wondering how you guys think about your dividend payout ratios? Richard Ambury We evaluate our dividend payout each and every year, it’s usually sometime in April the fiscal year, depending on what kind of year we’re having and what our opportunities for acquisitions or paying back this debt which is lower rate if not it’s very attractive to keep this outstanding and unit repurchases. Unidentified Analyst Rich, this is Steve also from Locust Wood. Great job you guys have done very well [for us] over the years, would you guys think about in the future reporting your results distributable cash flow basis I mean obviously we can figure it out but the type of people who are following your company it might be helpful to them, have you guys given any thought to that? Steven Goldman No we really haven’t give any thoughts to that, it’s just another non-GAAP SEC type term and I’m not so sure we want to really go down that road right now. Operator The next question comes from David Spier with Nitor Capital. David Spier I just wanted to — most of my questions have already answered, I want to clarify on the term loan, you mentioned about 10 million in annual payments you’re referring to the principal? Steven Goldman That is correct. David Spier Okay, so essentially its 10 million principal payments, and then the interest on that is LIBOR plus you said 375 basis points. Steven Goldman Well, there is a grid depending on our availability, yes. David Spier Okay. It makes a lot of sense. So essentially you’d be able to take down that debt which you’re previously paying about I’d say 11 million in interest payments so you can be able to take it down slowly overtime and then be up about 60 million in the final balloon payment. So that’s correct? Steven Goldman So we do have to set aside 25% of excess cash flow to pay that final maturity during the fiscal year. Operator [Operator Instructions] The next question comes from Michael Prouting with 10K Capital. Michael Prouting I apologize in advance of this background noise. I am at an airport this morning. Just by the way congratulations on the debt refinancing. So it sounds like the strategy really is to not pay that down any quicker than you have to and keep the firepower for any large acquisitions that might come along. Steven Goldman Yes, that’s pretty much it, yes. Michael Prouting Okay. That makes total sense. You talked about an acquisition that you are in the final stages of closing right now. Can you just give us a sense of how the acquisition pipeline looks at this point and also in particular any larger deals that might be out there in the horizon? Richard Ambury It looks probably like it’s been looking for the last several years, whom we’re speaking to four or five different people in different parts of our geography right now. We are always looking to get some others going at the same time. We don’t have anything extraordinarily large that’s imminent right now but again we continue to speak to all potential acquisitions down the road and as I mentioned before this took really several years to get this one done. So you really never know when the seller will be ready to go ahead and finalize the transition. So again it doesn’t look any better than it did before but it isn’t any worse and I think our opportunities are out there and we’re happy where we are with that. Michael Prouting Okay. I appreciate the color on that and I would assume also that as far as valuation is concerned that you’re still within your historical parameters in terms of what you’d be willing to pay. Steven Goldman That is correct. Michael Prouting Okay. And just one I guess somewhat random question, I know there has been discussion previously about collecting or getting rid of the limited partners structure. I’m just wondering if that’s something that’s on the front burner or something that’s going to consideration. Steven Goldman It’s shown on our front burner that doesn’t necessarily mean we won’t look at it from time to time. Operator Our next question comes from Gary [Indiscernible] Unidentified Analyst Okay Steve I believe it was you that said just a couple minutes ago concerning the cash flow, the 25% cash flow to pay back on the term loan. You used the phrase set aside I had read I thought that this had to be paid and not set aside. Steven Goldman I think you are right it is to be paid from 25% of the excess cash flow. Unidentified Analyst Okay at the end of the term or can you do it or is that a long way each should five years. Steven Goldman Yes. The way the term loan worked is we pay 10 million a year for each fiscal year and at the end of each fiscal year we basically see what the excess cash flow is as defined which is roughly EBITDA, less interest, less taxes, less fixed assets, less some pension payments as well as any acquisitions that we might make. Unidentified Analyst There is a cap on it is there are not? Steven Goldman Yes. The cap would be $15 million. That is correct. Unidentified Analyst Yes. Okay, alright so it’s not set aside necessarily it is to be paid. Okay. Steven Goldman That is correct. Unidentified Analyst Okay. That’s okay I just want to clarify. That’s all I have. Steven Goldman Okay. Operator Our next question comes from Gene Riley a Private Investor. Unidentified Analyst Hello. I just have a question about the unit repurchase program in the last two years you’ve been having record earnings and record cash flow but you seem to have ground to a halt on the repurchases when does that turnaround? Steven Goldman Again we look at all opportunities whether its acquisitions having cash on the balance sheet to take debt off the table that’s almost is 9% and we look at it all at various prices and analysis. Operator [Operator Instructions] At this time there are no further questions. So I’d like to turn the conference back over to Steve Goldman for any closing remarks. End of Q&A Steven Goldman Thank you for taking the time today and joining us and for your ongoing interest in Star Gas. We look forward to sharing our fourth quarter 2015 results with all of you in December. Operator The conference has now concluded. Thank you for attending today’s presentation. You may 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. 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IDACORP’s (IDA) CEO Darrel Anderson on Q2 2015 Results – Earnings Call Transcript

IDACORP, Inc. (NYSE: IDA ) Q2 2015 Earnings Conference Call July 30, 2015 4:30 pm ET Executives Lawrence Spencer – Director of Investor Relations Darrel Anderson – President and Chief Executive Officer Steve Keen – Senior Vice President, Chief Financial Officer and Treasurer Analysts Paul Ridzon – KeyBanc Ashar Khan – Visium Asset Management Brian Russo – Ladenburg Thalmann Operator Welcome to IDACORP’s Second Quarter 2015 Conference Call. Today’s call is being recorded and webcast live. A complete replay will be available from the end of the day for a period of 12 months on the company’s website at www.idacorpinc.com. [Operator Instructions] At this time, I’d like to turn the call over to IDACORP’s Director of Investor Relations, Mr. Lawrence Spencer. Please go ahead. Lawrence Spencer Thank you, Liz, and good afternoon everyone. As you’ve probably seen, we issued our earnings release and Form 10-Q before the markets opened today. They’re both posted to the IDACORP website. We will be using a few slides to supplement today’s call, and you can also find those on our website. We’ll refer to those slides as we work our way through today’s presentation. On today’s call we have Darrel Anderson, IDACORP’s President and Chief Executive Officer, and Steve Keen, IDACORP’s Senior Vice President, Chief Financial Officer and Treasurer. We also have other individuals available to help answer your questions during the Q&A period. Before turning the presentation over to Steve, I’ll cover our Safe Harbor statement on Slide 3. Our presentation today will include forward-looking statements. While these forward-looking statements represent the current judgment or opinion of what the future holds, these statements are subject to risks and uncertainties that may cause actual results to differ materially from statements made today. So we caution you against placing undue reliance on these forward-looking statements. Some of the factors and events that could cause future results to differ materially from those included in forward-looking statements are listed on Slide 3 and included in our filings with the Securities and Exchange Commission, which we encourage you to review. On Slide 4, we present our quarterly and year-to-date financial results. IDACORP’s second quarter 2015 earnings per diluted share were $1.31, an increase of $0.42 per share from last year’s second quarter. For the first six months of 2015, earnings per diluted share were $1.78, $0.35 greater than the same period in 2014. I’ll now turn it over to Steve to discuss the results in greater detail and review our 2015 key operating metrics. Steve Keen Thanks, Larry, and good afternoon everyone. On Slide 5 we show a reconciliation of earnings from second quarter 2014 to second quarter 2015. As you can see, net income over the period increased $21.6 million. This was largely due to improved retail sales volumes, the impact of the fixed cost adjusted or FCA methodology change and the tax benefit of an income tax deductible make-whole premium from Idaho Power’s recent first mortgage bond redemption. The heat wave in our service territory this June combined with dry spring weather resulted in recorded second quarter energy sales. The hot temperatures increased loads for air conditioning and the dry weather increased irrigation pump usage. As a result, operating income increased by $7.8 million. Changes to the FCA mechanism which were approved by the Idaho Public Utilities Commission in the second quarter were retroactive to January 01, 2015. Idaho Power recorded a $7.4 million benefit in the second quarter for the retroactive application of the FCA mechanism change to the first quarter. The calculations under the revised mechanism use sales associated with actual weather conditions as opposed to normalized weather condition under the prior mechanism. During this year’s second quarter, normal temperatures grow greater sales resulting in a $1.7 million decrease in FCA revenues compared to 2014. To help you understand the operation and potential future impact of the revised FCA mechanism which is now sensitive to weather conditions, we have included a discussion in the MD&A section of the 10-Q that we filed today. Customer growth increased revenues by $2.9 million as our customer account grew by 1.7%, also the $7.2 million decrease in income tax expense benefited this quarter’s earnings. As stated on our first quarter earnings release conference call, this resulted from the flow through tax benefit of the make-whole premium Idaho Power paid for the early redemption of first mortgage bonds originally due in 2018 but redeemed this quarter. The combination of these items resulted in a strong second quarter financial results we believe that positions the company well going into the second half of 2015. Moving now to slide 6, we show IDACORP’s operating cash flows for the first six months of 2015 and the comparable period in 2014 along with the liquidity positions at June 30. Cash flow from operations for this year’s first six months was $171 million, an increase of $8 million over the same period last year. Cash flows increased as a result of an $18 million increase in net income as well as from increased coal sales of Bridger coal company for the first six months of 2015, which resulted in a $6 million increase in distributed cash. Decreases in cash flow of $3 million occurred due to changes in deferred taxes and changes in taxes accrued and receivable and the remaining $10 million reduction in cash flows resulted from changes in working capital items such as unbilled revenues and prepaid expenses. IDACORP and Idaho Power currently have in place credit facilities of $125 million and $300 million respectively to meet short term liquidity and operating requirements. The liquidity available under the credit facilities is shown on the bottom of slide 6. Also, there are 3 million IDACORP common shares available for issuance under IDACORP’s continuous equity program. No shares were issued during the second quarter and we do not expect to issue new equity during the remainder of 2015 except for modest amounts relating to employee compensation plan. Turning now to slide 7, we continue to estimate 2015 O&M between $340 million and $350 million and we do not expect to amortize any additional accumulated deferred investment tax credits this year under the Idaho settlement stipulation. The 2015 capital expenditure range for Idaho Power remains between $300 million and $310 million. With the recent rainfall, we are tightening upward our projected hydro electric generation range from 5 million to 7 million megawatt hours up to a range of 6 million to 7 million megawatt hours. Finally, we are increasing our 2015 IDACORP earnings per share guidance range from $3.65 to $3.80 per diluted share up to the range of $3.75 to $3.90 per diluted share primarily to reflect the earnings drivers I mentioned earlier. The upper end of our guidance range is slightly above the 10% Idaho return on year end equity threshold and reflects the potential that Idaho Power could once again share benefits with Idaho customers under the current Idaho regulatory settlement stipulation, gets that level as it takes. I’ll now turn the presentation over to Darrel. Darrel Anderson Thanks, Steve, and good afternoon. I want to start today by acknowledging the passing of Idaho Public Utilities Commissioner, Mack Redford. As some of you may know, commissioner Redford passed away on June 30 unexpectedly. The Public Utilities Commission and the State of Idaho have lost an outstanding public servant. Commissioner Redford had served on the commission since 2007 and he was a skilled, fair and thoughtful arbiter from the bench. The Governor of Idaho C. L. Butch Otter announced today that Marsha Smith, a long-time Commissioner for the IPUC, will be re-appointed on an interim basis. In his announcement, he noted that her appointment will be effective immediately and will expire on January 15, 2016. At that time, a new commissioner will be appointed to replace her, pending Idaho Senate confirmation. Marsha Smith served as a Commissioner for 24 years before retiring last February. The two sitting commissioners both have a long history with the Idaho Commission and a deep background in utility issues. Commissioner Paul Kjellander has been a Commissioner since 2011 and previously was Commissioner from 1999 until 2007. Commissioner Kristine Raper served seven years as a Deputy Attorney General at the IPUC before her recent appointment. Now I’d like to move on to a discussion of topics related to the quarter. Last month, Idaho Power filed its 2015 Integrated Resource Plan, also known as the IRP. The preferred portfolio continues to include the addition of the 500 kilovolt Boardman to Hemingway or B to H transmission line which is proposed to run from the Hemingway substation near Melba, Idaho to Boardman, Oregon. The IRP provides for completion of B to H by 2025 which is a date based on a number of assumptions we include in the IRP prospects. We continue to advocate for and work towards an earlier in-service date for this critical resource as an earlier date has a number of benefits that might be lessened if the in-service date is delayed to 2025. Those benefits include increased reliability, mitigation of transmission constraint, environmental benefits from the import and export of renewable energy and lower permitting and construction costs and risk. Because of these benefits we are working for an in-service date as early as we can achieve. Additional components of the potential plan for 2025 and beyond are shown on slide eight, and include the possible early retirement of the North Valmy power plant in collaboration with the plant’s co-owner. Demand response programs, ice-based thermal energy storage and a new combined cycle natural gas plant. The IRP also considers the impact of anticipated power purchases from new solar projects. It is also fair to note that the IRP is a long-term planning tool completed every two years and near-term deviations from the assumptions in the plan could result in modifications to our resource needs. As you’ll see on slide nine, June’s very warm weather led us to near record fee customer demand. On June 30, Idaho Power System load reached 3,402 megawatts which is 5 megawatts short of the all-time record of 3,407 megawatts set in July 2013. It is interesting to note that the 2013 record was set at a time when we did not have any active demand response programs. This year, we had two demand response programs that were deployed on the peak demand day for a total of 67 megawatts. Without the programs deployed, we would have exceeded our all-time peak load level. Idaho Power continues to expect strong customer growth in the service area in the near-term and remains supportive of economic development initiatives aimed at sustainable levels of growth. During the first six months of 2015, Idaho Power’s customer count grew by over 4,500 customers and for the 12-month ended June 30, 2015 the customer growth rate was 1.7%. This is shown on slide 10. According to preliminary Idaho Department of Labor data for June 2015, total employment in the service area was more than 474,000 compared with around 460,000 at the end of last year, an increase of over 3% in the last six months. The unemployment rate for our service area was 3.9% compared to the June 2015 U.S. unemployment rate of 5.3% according to U.S. Department of Labor data. Another key economic indicator is expected growth in gross area product. Moody’s Analytics has stated that as of June 2015, the anticipated growth in gross area product for Idaho Power service area for 2015 and 2016 is 4.6% and 5.4% respectively. These are up from this year’s first quarter estimate of 3.2% and 3.8% of 2015 and 2016 respectively, representing an increase of over 40% in the estimated growth rate. Further evidence of our economic development potential is found in a six county region known as the Magic Valley located in the South Central Park of our Idaho service area. This area was selected as a top 12 U.S. manufacturing community under the investing and manufacturing communities partnership initiative sponsored by the U.S. Commerce Department. As a result of this federal designation, a number of significant benefits may be available to Southern Idaho including support from 11 federal agencies and more than $1 billion available in federal economic development assistance. Also this month, Idaho is recognized by Kiplinger as number three on the list of 10 states with the fastest job growth in 2015. We view all of these to be positive economic indicators in our service area that we expect will help drive load growth. Finally, I will touch on our weather outlook heading into fall as reflected on slide 11. For August through October, according to Nova, we are looking at a 33% to 40% chance of above normal precipitation and a 40% to 50% chance of above normal temperatures in much of our service area. And with that, I and others on the call will be happy to take your questions. Question-and-Answer Session Operator Thank you. Ladies and gentlemen, we will begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of Paul Ridzon with KeyBanc. Your line is now open. Please go ahead. Paul Ridzon Good afternoon, congratulations on the quarter. Darrel Anderson Thanks, Paul. Steve Keen Thanks, Paul. Darrel Anderson Appreciate that. Paul Ridzon Have you booked any provisions for refunds at this point or do you need to get through the quarter behind you? Steve Keen Paul, at this point, we have not booked any provision for sharing that’s what you mean as the sharing component and as we looked at it, as I said at the upper end of our range incorporate that possibility but it’s not sure enough that we booked anything. Looking at this quarter, weather certainly helped and with half the year left, we kind of need to see where that goes. Paul Ridzon How is still our weather? Steve Keen July has not been strong like June. I haven’t seen any reports on where it’s stacked up against normal but certainly it’s not a record month like June was. Darrel Anderson Paul, it’s been a bit of a roller coaster. We started out warm, we got cool and now it’s warm again. So cool, cool relatively speaking but we’re – I think we’re headed into triple digits here in the next couple of days, so we’re headed back into warming trend it looks like so — Paul Ridzon And always kind of surprised to see a little bit of a disparity between kind of the impact of the new FCA mechanism. You had a nice pickup from the first quarter but the impact on the second quarter wasn’t that meaningful relative, is it something symmetry or? Darrel Anderson Right. I would say that compulsive [ph] it was a little surprising to me at first. I asked the same question but as you look at it, first quarter there was much more impacts on the residential component of our revenues, second quarter affected residential again although obviously not as much as it did downward in the first quarter but some of our pickup came out of the irrigation side and irrigation is excluded from the FCA. It’s not included as a component and so that the upside there was not – didn’t get offset with any sort of an FCA reversal. Paul Ridzon Okay. That makes sense. Is this FCA mechanism applicable to commercial and industrial as well? Darrel Anderson No. It’s our commercial, it’s our residential on small commercial, so it applies to both. Paul Ridzon Okay. Thank you very much. Darrel Anderson Thanks, Bob. Operator Our next question comes from the line of Ashar Khan with Visium Asset Management. Your line is now open. Ashar Khan Good afternoon and congratulations on good quarter. Darrel Anderson Thanks, Ashar. Steve Keen Hi, Ashar. Ashar Khan Hi, how are you guys doing? Could you see minus as we getting to that part of the year on the dividend policy if you can just remind us what is the rate of change that you have indicated as we enter into that season? Darrel Anderson Sure. Thanks, Ashar. Thanks for that question. This is Darrel. So as we have stated previously, our target payout ratio is 50% to 60% of sustainable earnings. And so we will be taking out up with the board at the September meeting and what we have stated publicly is that we anticipate an increase of at least 5% from where we are at today. And so we will be taking this discussion up with the board in September with the expectation that we will update all of you once we have a decision on that. And I think what’s important there is we continuing to take a look at the 50% to 60% of sustainable earnings, and that we will look at when we review with the board. Obviously we are having a good year this year, we had some one-off items incorporated into this year. This year, I think you know how our mechanisms work with respect to the ADITC. Those numbers are all based on year end equity and so as our equity grows, which it’s growing as earnings grow then that potentially has an impact for future years. So we will take all of that into consideration when we look at what that dividend recommendation will be in September. Ashar Khan Okay. And can I just ask you this dividend, do you look at I’m assuming the way you described it. You will be looking at like ‘16 earnings? Is that right because the dividend increases like three quarters for next year and then the one quarter this year, is that a fair way to look at it? Darrel Anderson We will look at where we are at this year. We will also take a look at looking forward as to what earnings look like going forward combining with what cash flows would like. So all of that will be taken into consideration in coming up with the recommendation to the board. Ashar Khan Okay. Okay. I haven’t seen your Q, so I apologize but any change in CapEx for ’16 or ’17? Steve Keen There is no change at this point. We are in the middle of reviewing future CapEx right now. We don’t have any update provided externally but that’s what we do this time of the year as we roll through ’15. We are taking a hard look at ’16 and beyond. Ashar Khan Okay. Okay. Thank you so much. Darrel Anderson Thanks, Ashar. Steve Keen Thank you. Operator Our next question comes from the line of Brian Russo with Ladenburg Thalmann. Your line is now open. Brian Russo Good morning, I’m sorry, good afternoon. Darrel Anderson Hi, Brian. It’s probably a busy day for you, so it might still be morning. Brian Russo Just wanted to understand the increased guidance versus the original guidance. Obviously weather wasn’t the strong weather in the second quarter, it wasn’t included in the original guidance and I’m assuming that the make-whole redemption impact on tax, that was included in the guidance but was the FCA adjustment included in the original guidance. Darrel Anderson Brian, in the original guidance, it was not. We knew that there was potential for a change, but we didn’t know what that change would be or when it would be have implication. So it was not there. Brian Russo Okay. Darrel Anderson We are aware of things going on with it but it wasn’t final. They didn’t become final until second quarter. Brian Russo Right. And so was that just weather and the FCA combined, it seems like your guidance – you are increasing guidance, it should have been greater than what it was. But then I guess it’s probably because you then run into the sharing bands and then kind of caps the upside, is that the way to look at it? Darrel Anderson Yeah. The upper end, remember, our sharing mechanism this year is operating from the first dollar. 25% of the company retained, 75% goes back to customers. So it’s a pretty steep hill. We have to earn to keep one once you hit that threshold. And on the FCA, I do want to correct this. There was an FCA competition included but it was basically the old methodology. We did know if there would be a new methodology and if there was what it would be at that point of time. Brian Russo Right. Okay. And can you maybe talk about the scenarios or the mechanics of the FCA in the upcoming third quarter. Could it potentially have a meaningful impact? Steve Keen At the very highest level, what’s it going to tend to do is take a quarter where you have much higher usage and it’s going to moderate that a bit, pull you back down because it will look at that weather impact and give some of that back to customers. Quarter like the first quarter, if it’s very mild, you are not going to see all of what we used to see in terms of a negative impact. You will get the moderation back as the FCA fills that back in. What it’s doing is looking and saying, did you really get the amount of sales that were expected in order to get you that increment of fixed cost or the partner recovery that isn’t purely an energy sale then you would have otherwise been entitled to and it moderates. You could also look at it and say you got too much. You got a big quarter, lot of sales that you didn’t anticipate, it will take a little bit out. So it is really a moderating factor the way it’s designed right now. Darrel Anderson And Brian, just as a reminder in the classes that it covers which is residential and small commercial, and so variations in those classes will have an impact versus the industrials and the irrigation customer type. They will not have an impact. But as we go into third quarter obviously depending on the makeup of our sales between those classes also have an impact on what FCA might look like. Steve Keen Right. And just to add to Darrel’s comment, those two – the items that were excluded, the industrial and irrigation, they weren’t included in the old FCA either. It’s never been applied to them. That’s not new. Brian Russo Okay, good. And then just to understand the base case and the RFP, it seems like you can bridge the gap between now and when board men [ph] align, it is commercially available with energy efficiency and demand response. There is no need for new capacity or new generation. Steve Keen That’s right, Brian. I mean that’s the way this last round of the IRP set up is. We are sufficient and we don’t have a need really until 2025. Brian, you have to factor in and Darrel mentioned it in his comments that there are assumptions that go into that including the growth assumption. And if those deviate, then the plan will move away from what the IRP is projecting. One thing I know we’ve talked about with you before is our IRP used to include a large load component and add for potential large load, where current IRP does not. And those kind of factors if those things change, you just have to be ready to be nimble around what the IRP says. It’s designed as a document to lay the foundation and as you move past your point of projection into actual, you have to moderate based on what we really experience. So what happens in our service territory over the next couple of years could change what the next IRP might project. Darrel Anderson And Brian, I’m going to add, there is still also the wildcard of 111D. We don’t know – we think that’s coming out soon. We will have to assess that and how that impacts. What’s in our current IRP and so while we don’t have a lot of near term action plans with respect to what’s in the IRP, we will have a chance as we put a new plan together over the next two years to digest all of those variables and see kind of where we land. But as you know, there is a lot of moving pieces right now especially with 111D might not end up, so that could have an impact also. Brian Russo And just it looked like according to the Q, the tax rate was 15% in the second quarter. What’s the assumption built into your EPS guidance? Steve Keen Brian, if you pull the impact of the redemption, it’s isolated in this quarter. So if you go to note 2 and pull that number out, you will see that the effective rate jumps up back above 20% which is kind of where it was last quarter. It’s actually in and around that, so for the full year it’s going to be a number closer to that range. Brian Russo Okay. And then lastly, are there any other tax studies or triggers for gains or losses for the remainder of the year that we should be aware of? Steve Keen Right now, Brian, I don’t believe we have anything. I’m looking at [indiscernible]. We do have our normal – there is an annual process of filing returns, getting our – and we are very current in how we get reviewed by the IRS. There is typically – once you get your returns done, we will look at that and there could be some impact out of that in the third quarter but there is no change in direction or new type of deduction or loss of deduction that we are anticipating right now. It would just be the fact that what actually happen might be slightly different than what got filed in the return as you get a reconcile with the IRS, but that’s the only thing I am aware of, now typically third quarter. Brian Russo Alright. Thank you very much. Steve Keen Thanks, Brian. Operator [Operator Instructions] That concludes the question-and-answer session for today. Mr. Anderson, I’ll turn the conference back to you. Darrel Anderson We know that you all had a fairly busy day. I think there is a lot of you had stacked up calls, so we appreciate you guys taking the time, participating in our call this afternoon. We appreciate your continued interest in our company and look forward to talk to you guys in the future. Thanks a lot. Operator That concludes today’s conference. Thank you for your participation. 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.) 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