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American Water Works’ (AWK) CEO Susan Story on Q3 2015 Results – Earnings Call Transcript

American Water Works Company, Inc. (NYSE: AWK ) Q3 2015 Results Earnings Conference Call November 05, 2015, 09:00 AM ET Executives Greg Panagos – VP, IR Susan Story – President and CEO Walter Lynch – COO, President, Regulated Operations Linda Solomon – SVP, CFO Analysts Ryan Connors – Boenning & Scattergood Richard Verdi – Ladenburg Thalmann Michael Gaugler – Janney Montgomery Scott David Paz – Wolfe Research Operator Good morning and welcome to the American Water’s Third Quarter 2015 Earnings Conference Call. As a reminder, this call is being recorded and is also being webcast with an accompanying slide presentation through the Company’s Investor Relations Website. Following the earnings conference call, an audio archive of the call will be available through November 12, 2015, by dialing 412-317-0088 for U.S. and international callers. The access code for replay is 10074632. The online archive of the webcast will be available through December 7, 2015, by accessing the Investor Relations page of the Company’s website located at www.amwater.com. I would now like to introduce your host for today’s call, Greg Panagos, Vice President of Investor Relations. Mr. Panagos, you may begin. Greg Panagos Thank you, Frank and good morning, everyone. Thank you for joining us for today’s call. We’ll do our best to keep the call to about an hour. At the end of our prepared remarks, we’ll open the call up for your questions. As Gary said, my name is Greg Panagos, and I’m the new Vice President of Investor Relations for American Water. Before I read you our forward-looking statements, I would just like to say I’m happy to be here and excited about the opportunity with American Water. Before I read you our forward-looking statement I’d like to say I’m happy to be here and excited about the opportunity with American Water. During the course of this conference call, both in our prepared remarks and in answer to your questions, we may make statements related to future performance. Our statements represent reasonable estimates and assumptions. However, these statements deal with future events. They are subject to numerous risks, uncertainties and other factors that may cause the actual performance of American Water to be materially different from the performance indicated or implied by such statements. These matters are set forth in the company’s Form 10-K and in its other periodic SEC filings. I encourage you to read our Form 10-Q for this quarter, which is on file with the SEC for a more detailed analysis of our financials. Also reconciliation tables for non-GAAP financial information discussed on this conference call can be found in the appendix of the slide deck for the call, which is located at the Investor Relations page of the Company website. We’ll be happy to answer any questions or provide further clarification if needed during our question-and-answer session. All statements in this call related to earnings and earnings per share refer to diluted earnings and earnings per share from continuing operations. And now I would like to turn the call over to American Waters’ President and CEO, Susan Story. Susan Story Thanks, Greg. Good morning, everyone and thanks for joining us. With me today are Linda Sullivan, our CFO, who will go over the third quarter financial results and Walter Lynch, our COO and President of Regulated Operations, who will give key updates on our regulated business. Turning to Slide 5, we reported earnings of $0.96 per share for the third quarter, a 10.3% increase above the third quarter of 2014. Excluding the 2014 cost impact of the Freedom Industries’ chemical spill, third quarter year-to-date adjusted earnings increased 9.4% compared to the same period in 2014. Our employees continue to deliver strong operational and financial results reflected in our ongoing investment in our infrastructure, our improved operational efficiencies and the expansion of customers in our regulated and market based businesses. These results continue our progress toward achieving our long-term growth goal of 7% to 10% EPS through 2019. Based on our performance today, we’re narrowing our earnings guidance range to $2.60 to $2.65 per share. Slide 6 highlights the progress we’re making on our strategies across our businesses. We invested $970 million in capital year-to-date through September. The majority of this investment is in our regulated business, which is the core and foundation of our growth. These investments are mainly for infrastructure to continue providing safe, clean and reliable water services for our customers. Walter will talk further about our ongoing O&M efficiency efforts, which allow us to mitigate build increases to our customers despite this critically needed capital investment. In addition, we continue to invest in regulated acquisitions. Year-to-date, we closed seven acquisitions totaling or adding about 19,200 customers and we have 16 pending acquisitions, which when approved and closed will give us the opportunity to serve an additional 13,300 customers in several of our jurisdictions. We closed the Keystone Clearwater Solutions acquisition in the third quarter. Keystone, while a separate subsidiary is being reported as part of market-based businesses. Last month we were very pleased to be awarded a contract to serve the military community at Vandenberg Air Force Base in California. We now serve 12 military installations across the country. We consider it an honor to provide our service men and women and their families with reliable high quality water and wastewater services for the next five decades and beyond. Our Homeowner Services business continues to grow as well. Within the past couple of weeks, we received a Notice of Intent to award an exclusive contract with Georgetown County Water and Sewer District in South Carolina. Pending contract negotiations we should be able to offer programs to their 22,000 eligible homeowners. Looking forward, we remain confident in our ability to deliver on our long-term earnings per share growth goal of 7% to 10% through 2019. At the end of our prepared remarks, I’ll spend just a few minutes talking about our regulated business and how our investments and our positive financial performance demonstrate our customers and the communities we’re privileged to serve. And with that, Walter will now give an update on our regulated businesses. Walter Lynch Thanks Susan and good morning, everyone. As Susan mentioned, our regulated business have delivered strong results year-to-date. We continue to improve our owned and efficiency ratio as shown on Slide 8. We reached 35.8% for the 12 months ending September 2015. This is the result of a disciplined approach to cost management by our employees. We continue to make steady progress towards achieving our goal of 34% or less by 2020. Achieving sustainable O&M reductions is important to our strategy as it enables us to redeploy these cost savings in the capital investments in our water and wastewater infrastructure with minimal impact on our customer’s bills. A perfect example of our strategy and action as our recent New Jersey rate case order on Slide 9. During the third quarter, the New Jersey Board of Public Utilities approved the 3% or $22 million annualized increase in water and wastewater revenues that became effective on September 21. Since the last rate case in 2012, the company invested more than $775 million to replace and upgrade our water and wastewater infrastructure including approximately 160 miles of water mains and connection pipes. During the same time, New Jersey American lowered their operating expenses by more than $90 million. Those cost reductions supported more than $125 million of infrastructure investment with no impact on customer bills. Also last week in Virginia we filed a rate request for $8.7 million. The request seeks recovery of about $53 million in system investments made since our last rate case in 2012. Our operating expenses in Virginia have declined 2% since our last rate case reflecting our continued success in driving operating efficiencies. We use those cost savings to offset some of the revenue requirement requested for our capital improvement, which again minimizes rate impacts on our customers. We expect the decision in the next nine months. When we talk about owned and efficiency improvement, this is exactly what we mean, inventing to ensure reliable service while limiting the impact of when our customers pay. Moving to California, our team continues to display leadership in dealing with the draught and we’re certainly proud of all of their work to help our customers during this period. Overall five of our six districts are meeting the State Water Resources Control Board reduction targets. In venture accounting where customers are almost meeting their targets, we recently implemented Stage 3 conservation measures. These measures along with other customer outreach is helping us encourage conservation during this draught and we want to thank our customers in California who really stepped up to the challenge. I’ll give a quick update on our Monterey Peninsula Water Supply Project as well. Last month the California Coastal Commission approved an amendment to our permits to operate a test line well. This minor amendment allowed us to restart the well and continue to prove up the operational feasibility of subsurface intakes for this water supply project. The project is undergoing environmental and regulatory review by the California Public Utility Commission and we expect to start construction in the second quarter of 2017. Lastly let me discuss the weather impacts during the quarter. As we mentioned in our second quarter call, we experienced heavy rainfall in our central states during July. We saw this pattern continue in that region through August. Also in the quarter we experienced hot and dry conditions primarily in our northeast region. Due to our geographic diversity, these varying weather conditions largely offset each other in the third quarter, so there was no net material impact on our financials. Now I’ll turn the call over to Linda for more detail on our third quarter financial results. Linda Solomon Thank you, Walter and good morning, everyone. In the third quarter, we continue to deliver strong financial results. As shown on Slide 11, revenues were up 6% quarter-over-quarter and up 4% year-to-date. Earnings per share for the third quarter were $0.96, up 10% over the same period last year. Year-to-date earnings were $2.09 per share, which after adjusting for 2014 impact of the Freedom Industries chemical spill were up about 9% over the same period last year. In terms of business segment contribution, for the quarter the regulated businesses contributed earnings of $0.97 per share or an increase of about 10%. Our market base businesses contributed $0.07 per share, an increase of about 17%. Parent interest and other, which is primarily interest expense on parent debt was a negative $0.08 per share for the quarter, relatively flat to the prior year. As Susan mentioned because of the Keystone acquisition in the third quarter and the financial results of Keystone have been included in the market base business segment, the purchase price after purchase price adjustments was $133 million. As we’ve previously disclosed, we expect Keystone to be earnings neutral in 2015 and accretive to earnings in the first full year of operation. Now I’ll go over the different components of our third quarter earnings per share growth as shown on Slide 12. In the third quarter, we reported a $0.09 increase in earnings per share. Approximately, $0.05 of that increase was due to mild weather during the third quarter of 2014. As Walter mentioned, during the third quarter of this year, the financial impact of the varying weather conditions largely offset each other. As we had higher revenue of around $10 million from hot and dry conditions in the Northeast, which was offset by lower revenue of around the same amount from the wet weather experienced in our Central State. Next the regulated businesses benefited from higher revenues of $0.04 per share mainly from authorized rate increases, from infrastructure charges and rate cases in a number of our regulated states and additional revenue from acquisition growth, partially offset by lower demand in California. For the market-based businesses, earnings per share were up a penny due to additional construction projects under our military contracts and the addition of two new military bases in the second half of 2014. We also had contract growth in our Homeowner Services business. Partially offsetting these improvements were higher depreciation and other cost of about a $0.01 per share mainly due to growth associated with our infrastructure investment programs at the regulated businesses. Now let me cover the regulatory highlights on Slide 13. We currently have three general rate cases in process, West Virginia, Missouri and Virgina for a combined annualized rate request of approximately $69.5 million. For rates effective since October 1 of last year through today, we received a total of approximately $77.5 million in additional annualized revenue from general rate cases, step increases and infrastructure charges. We encourage you to review the footnotes in the appendix for more information. Slide 14 is a summary dashboard of our financial performance, which showed improvement across the Board. During the third quarter of 2015, we made investments of approximately $455 million, primarily for regulated infrastructure investments and the acquisition of Keystone Clear Water Solutions. Year-to-date we have invested a total of $970 million of which $793 million was for regulated infrastructure investments and $44 million was for regulated acquisitions. For the year, we expect to invest $1.3 billion to $1.4 billion with almost $1.2 billion to improve our regulated water and wastewater systems. Regulated infrastructure investments are projected to be about $100 million higher than we originally planned as we continue to optimize capital deployment under our infrastructure mechanisms. For the quarter our cash flow from operations increased approximately $48 million and year-to-date $15 million primarily from earnings growth and the timing of working capital item. Our adjusted return on equity for the past 12 months was 9.12%, an increase of approximately 48 basis points compared to the same period last year. We also paid a $0.34 quarterly cash dividend to our shareholders in September, which represented about a 10% increase compared to last year. And on October 30, the Board of Directors approved a $0.34 dividend per share to be paid on December 1 and as Susan explained, building on our strong financial performance year-to-date we’re narrowing our 2015 earnings guidance from continuing operations to be in the upper end of our prior range or $2.60 to $2.65 per share. And with that, I’ll turn it back over to Susan. Susan Story Thanks Linda. Before taking your questions, I’d like to spend a few minutes talking about how our investments and our strong performance benefit our customers and the communities we serve. As Linda mentioned we planned to invest up to $1.4 billion in 2015 with almost $1.2 billion of that total to improve our regulated water and wastewater systems. So what is investing more than a $1 billion a year mean to our customers and communities? It means we replace up to 350 miles of pipe every year. To give you an idea of the size of our water pipe network if you placed all the pipes we manage end to end, it would stretch over 48,000 miles nearly enough to go around the earth twice. It also means a strong water quality record. We are 20 times better than the industry average for meeting all drinking water requirements and we’ve earned more awards from the EPA partnership for safe water than any other water utility in the Nation. Why does this matter? Even though we serve about 15 million people across the country, we never forget that at the end of every pot line, there is a family depending on us to provide life’s most essential ingredient. Not only as investment in our water and wastewater system is critical to families, businesses, industry and fire protection, but that investment also provides jobs and economic benefit. According to the Water Research Foundation, $1 billion invested in water infrastructure creates approximately 16,000 jobs. So American Water’s regulated infrastructure investment through 2019 will result in more than 80,000 new jobs in the communities we serve. We know that we have to be sensitive to the impact of cost increases to our customers, even for something as necessary as infrastructure replacement. We also know as Walter mentioned that for every dollar we save, we can invest $6 of capital with no impact on our customer build. By combining effective cost controls with regulatory mechanisms that smooth cost out, we can make a big infrastructure impact without a big bill impact. In fact, we’ve invested almost $700 million nationally in our basic type programs in just 2013 and 2014 and all of that investment impacted customer build by just $1 almost on average. That’s less than the cost of a loaf of bread, a cord of milk and far less than what it cost you to get your own money from a general ATM machine, which is about $3 to $4 a transaction. Across our footprint, most of our customers still pay about a penny per gallon of water. Our average family pays a little over $2 a day for all of their water needs, which is literally a ton of water a day delivered directly to their sink, their showers and their washing machine. At the end of the day, we know that what we do in our customer’s long term best interest will also be in our investor’s long term interest and we never lose that focus. So with that, we’re happy to take your questions. Question-and-Answer Session Operator Thank you, ma’am. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Ryan Connors from Boenning & Scattergood. Please go ahead. Susan Story Good morning, Ryan. Ryan Connors Good morning, Susan. I had a question on the rate case in New Jersey. You’ve got $22 million in new rates there which is about — I guess about a third of the $66 million you requested. Obviously, that’s a very crude metric that I guess maybe gets too much attention sometimes. But that does seem to continue a trend where the gap between asked and received rates has been kind of growing. Can you just talk about why that’s happening and what the ramifications of that are for the business? Walter Lynch Yes Ryan, Walter here. Thanks for the question. Just to put a little clarification on it, the last time we filed a rate case in New Jersey, we didn’t have a disc mechanism. So in this case, the disc mechanism is included but you have to look to the revenue that was generated from it. If you do that and include the $22 million we came in, in excess of 50% of our filing. So that’s the difference. We invested as Susan said, a significant amount of money in New Jersey and in our infrastructure and when you include that, with the outcome of the rate case, again we’re in excess of 50%. So it’s right in line where we’ve been historically. Ryan Connors I see. So the national trend then would be a function of the fact that D6 are becoming more and more prevalent. Walter Lynch Absolutely. Ryan Connors Okay. Interesting. My other question was there were some fairly notable development yesterday with one of your peers California basically saying that they’re going to have to defer revenue recognition in the fourth quarter because WRAM balances are increasing. I know you’ve had your own issues having to extend the collection period on your own WRAM balance, can you talk about the situation in California related to the WRAM and the outlook and also maybe give us your take not only on how that impacts your business, but where you see the regulatory evolution going, whether the draught creates any change in the regulatory situation in California? Linda Solomon Ryan, this is Linda. Let me start and talk first about the accounting issues around revenue recognition. So the accounting rules require that if revenue is extended — collection of revenue is extended beyond two years that you need to defer the equity component or the equity return of that revenue. And so this is really an accounting timing issue versus a collection issue. We did experience something similar in the third quarter when we requested and filed our application with the CPC to defer recovery in Monterey over a 20-year period and including a return. We have recorded that impact in our third quarter results and it was about a $5 million pretax impact. Now in terms of the regulatory environment, I’ll start and ask Susan if she would like to add to it, but really decoupling mechanisms were put into place in California to deal with situations like the severe draught the California is going through now so that you can align the customer conservation with the goals of the company and so these decoupling mechanisms really align these goals and allow us to help our customers and serve in the long term. Susan Story Right, and I think Linda is exactly right. The only thing I would add is this is an extraordinary situation in California and we all know that and we believe — we know that the Utility Commission, the companies were all trying to work together to find a way forward that’s in the best interest of our customers and the companies and everyone involved. Ryan Connors And then while we’re on California, one last one if I might sneak it in is that on the terms of return on equity you’re at 9.99 in California. Most of you appears are at 9.47 because you stood at the automatic downward adjustment duty or credit rating situation there, but the credit standing continues to improve. So is there any chance that you could be re-trued up or trued down to that level and talk about how that mechanism works and the ROE outlook for California thanks. Susan Story Absolutely, we’re at 9.99 in that mechanism in its current formal extent through the end of 2016 and then we would go through the next profit capital process in California to reset rates going forward. Ryan Connors Got it. Okay. Thanks for your time. Operator And our next question comes from Richard Verdi from Ladenburg Thalmann. Please go ahead sir. Richard Verdi Good morning, everyone and nice quarter and thanks for taking my call here. Just a quick follow-up question to Ryan I enter my question. The Pence or the New Jersey rate case outcome in combination with the D6, Walter you had mentioned it’s in excess of 50%. We have that around 54.6%, does that sound about right? Walter Lynch Yes that sounds about right Rich. Pretty precise. Richard Verdi Okay, perfect. Okay and then Susan a quick question for you surrounding the acquisition strategy. Somewhat recently you were quoted saying American is going to ramp up its focus on the wastewater acquisition front. So can you just maybe talk a little bit about how you see this benefiting American Water? Susan Story Sure. I’ll start and then Walter may want to add something to it. So one of the things that’s interesting and I know the national numbers are about 84% of Waters provided by public entities and about 98% of wastewater is and what we find Rich is that of a 3.3 million metered customers we have that only about 150,000 of those are wastewater customers. So we know that we’ve got several communities around the country where we already serve water and someone else serves wastewater. So that’s one piece and then you add to that the fact that there is growing number of EPA consent decrees, you got an issue where a lot of the wastewater infrastructure is aging and needs investment and you have some community who would prioritize other needed critical investments above their wastewater. So far us the real value is in many of these places we already served water. So to serve wastewater we know the communities. They know us. There are efficiencies we can gain because we already have offices there even though you would have different people doing some of the work. So we think it’s just a natural progression. Then on top of that you add the fact that we just talked about California. When you look at water, it really is a single one-cycle for water and in the past, where we separated portable water with stormwater and wastewater, those days are — they’re starting to merge. So we believe that as the leading water utility in the country, we want to a leadership role in looking at water as one water from start to finish and especially given our strength in our research and development efforts that we got on the whole water cycle. Walter Lynch Yes, Walter here. Just to emphasize the operational synergies. We already have offices. We have relationships. We have employees that are proving service to our customers. To us it makes too much sense not to engage on a wastewater side and that’s what we’ve been doing and we’re getting really positive feedback in those communities where we do provide both services. Richard Verdi Excellent. Okay. And next, thinking about the Water Infrastructure Protection Act recently implemented in New Jersey, clearly that’s a great outcome for American and Americans performed well from that Act and now Chairman [indiscernible] in Pennsylvania implement something similar. So if Pennsylvania does when considering that both New Jersey and Pennsylvania in this situation will have attractive legislation, do you think that it may eventually result in the American Water middle region representing more than 50% of its current, where that currently or do you think you would try to exploit that Pennsylvania move, but then grow in other state to maintain that diversified geographic footprint? Susan Story I’ll start and Walter may want to add. So number one, we value very mach our geographical diversity and how we do look to grow in Pennsylvania and New Jersey, we’re also looking to grow in the Midwest for example where we have a significant presence. So we do think this legislation and Walter and his folks have been key at proving research and information for those policymakers who are looking at different options to improve the economy in their areas. We think that it’s important to have good legislation everywhere and we think it’s good for the citizens and the people who are consumers of water and wastewater. Walter Lynch Yes, with those definitely are huge plus to accelerate acquisitions in New Jersey. If we get that in Pennsylvania, it will provide the same benefit, but we also have enabling legislation in many of our other states including many Midwestern states and some of this was tailored after the legislation we had in our Midwest states. So it looks very, very favorable in the Northeast, but we have the same favorable regulation in the Midwest. Richard Verdi Okay. Great. Thank you for that color guys and last one for me, looking at the non-regulated side, in our view we see that Keystone acquisition is just a super move, that’s a great move from our view. Is there anything else like that in the pipeline or maybe better put, can you give us — just give us an update on the non-regulated position driven strategy there? Susan Story Sure. So first of all fundamentally there is two things I want to say is that when we go into the market based businesses, we ensure that it leverages the core competencies that we have as a company. We’re not going to be going at two and three steps beyond what our core competencies are, which is water, wastewater, stormwater, those type of efforts. So I just want to make sure people understand that clearly. The second thing is as we said in our last earnings call, the market based businesses, which include all of the American Water enterprises lines of business and Keystone, we will not — we don’t see that growing beyond 15% to 20% of earnings and only towards the high end of that if it’s regulated like in the military services. So I just want to say that’s it’s on. So in terms of opportunities, again we’re going to stick to our netting, stay close to our core competencies, where there are opportunities to number one leverage the expertise we have in water, wastewater, water treatment, infrastructure investment, those type of things we will look at, but we also look at the risk profile of anything we do because we are extremely cognizant and dedicated to let our core we’re a regulated utility and we want to ensure that any growth we have is smart growth. Richard Verdi Okay. Great. Thank you Susan. I appreciate the guys and great quarter once again. Susan Story Thank you. Operator [Operator Instructions] Next question comes from Michael Gaugler from Janney Montgomery Scott. Please go ahead. Michael Gaugler Good morning, everyone. Susan Story Good morning, Mike. Michael Gaugler Just a couple of things. I would appreciate an update on the potential headquarter move and the timing implications in terms of the tax breaks and then also your thought on Keystone Clear Water now that you’ve been in that business for a bit. Linda Solomon Mike, this is Linda. Let me start with the move to Camden. We’re currently in the site selection process and we’re continuing through that process. We’re working to make sure that we have all of the tax issues handled appropriately with the City of Camden and we are very excited to be part of the revitalization of Camden. On Keystone, so everyone of course on the call is aware that there are market conditions on oil and gas and of course from the negative side from the market is that, the activity in the capital spending has been reduced somewhat. The number of rigs are down and again in the Marcellus and Utica interestingly while we have the cheapest cost for natural gas drillers that also require more water we know that there is an issue for the supply actually to take away capacity. So from the market issues that everyone is familiar with, we also are tracking this. We’re tracking it with the business. We also are very encouraged and we’re following very closely the progression of the construction of the takeaway pipes because we believe that whenever the takeaway pipeline are completed, that that is where and I know that all of you know this, where we’ll see a resurgence in that particular area of the country for natural gas. And with that said, since we have bought Keystone and since we closed in July, there are some positives that are going on for us. Number one, it’s interesting that as several of the ENP are looking at the current situation, they’re also looking at water infrastructure that will be needed for the resurgence that is expected at the end of ’16 and into ’17. So we’re in conversations looking at future activity, because there is a time period that we need to develop water infrastructure, which is critical for most of these wells. Another thing that we see is that there are some near term opportunities with the ENPs continuing to prioritize their capital for their core business, there is more of an interest of us taking a role into water infrastructure and water pipeline including owning it which would be a little longer term in some of the contracts that currently have. Looking at construction ownership of storage and exchange facilities and not just pipeline and we’re seeing that there is a renewed interest as the ENPs have a goal of 100% water reuse and recycling. So we do the transports and we’re seeing really a pre-robust business on the transport to the recycling facilities to ensure extremely high levels of reuse and recycling. And then another positive that we’ve seen in the almost six months we’ve owned Keystone is that, they are increasing their customer base significantly with the addition of several new large customers and we’ve calculated that our market share of the water services in the Utica, Marcellus has increased from about 20% to 25%. So yes it’s a difficult environment as we know, but being a water focused subsidiary of ours looking at solutions for that area we’re seeing some bright spots for us and we continue to, we said earlier when we purchased Keystone, we expect it to be EPS neutral in 2015 and to be accretive next year as Linda mentioned. Michael Gaugler All right. Thanks Operator [Operator Instructions] Follow up question from Richard Verdi from Ladenburg Thalmann. Please go ahead. Richard Verdi Hi guys, thanks for letting me back in. Just a question on — just a follow-up to Michael’s inquiry surrounding Keystone, this might be a tough question right, I am just curious to see what the take is, when you look at the frac sand guys or the oilfield services players, it’s up in the air when that energy space is going to recover. Some say it’s going to be — we might see a bottom in Q1 and then improvement back into ’15. Some others say it won’t even be until ’17, whether its improvement. But it sound like what you just said you expect it to be accretive in ’15. So I am kind of wondering, one, what maybe your outlook is there for, what may be Keystone’s outlook is for energy space and maybe what you guys are doing differently to ensure that that’s one of the expense in 2016. Susan Story Rich, thank you for this and so on December the 15 at our Analyst Day the CEO of Keystone Ned Wehler who has been in the business for years, he is actually going to be part of our Investor day presentation and he is going to offer his insights that will give an additional month to see where everything is playing out. Again I think we can say some things now, but I think it would be better to wait till Investor Day and really talk to the expert. We’re looking at a lot of different options. We’re trying to be very practical and realistic, which is why in answer to Mike’s question, I wanted to give both the positives but also the things we’re very cautionary about. And so it will be interesting. We do have some thoughts at this time, but on December 15, we fully expect that question to be asked and from there to give his thoughts about that. Richard Verdi Okay. All right. Fair enough. Thank you, Susan. Operator And our next question comes from Ryan Connors from Boenning & Scattergood. Please go ahead. Ryan Connors Great. Thanks also for letting me in and again to figure out coming with one more I have since there is time, so rising interest rate environment that we’re likely to enter into here that’s starting to raise rates, obviously there are various commission look at benchmark rates as a proxy for risk free and there is interest in theory, that’s a positive tailwind for ROEs. How does that impact what you do when you’re asking — when you’re filing rate cases and what you’re asking for an ROE? Do you start to reflect that into higher requests for ROE as the Fed is getting ready to raise rates or talk to us about that dynamic? Linda Solomon Yes Ryan, this is Linda and generally what we have seen with regard to past trends is that as interest rate rise then over time that is correlated with increases in the return on equity and so I would expect that moving forward to the extent that interest rates improve that we would see similar trends. Ryan Connors Okay. But you used to say that goal to actually — where do you start building that into what you’re asking for? Is that coming later or is that something you’ve started to do right here as we’re sort of getting ready to enter into rising rate environment? Linda Solomon Right Ryan and really what we will do, typically most of our states have the cost of capital as part of the general rate case profit and so we would be looking across our states and determining the optimal time to go in for general rate case. We also have some states that have a separate cost of capital mechanism like California which has a set schedule, which we would be — which is set through 2016 and then we would be setting new rates for 2017. So it will depend on the jurisdiction and it will also depend on a multitude of factors that we look at in terms of the timing of our general rate case filings. Ryan Connors Interesting, well thanks for that. Linda Solomon Absolutely. Susan Story Thanks Ryan. Greg Panagos Operator, do we have any more questions? Operator, are you there? Linda Solomon Maybe he is experiencing some technical. Susan Story Yeah, we can’t hear anything. If you can hear us, we can’t hear you. Operator Pardon me, the next person to ask a question is David Paz of Wolfe Research. Susan Story Okay. Great, hi David. David Paz Good morning. Susan Story David, that’s quite a dramatic kind of intro to your question. David Paz Yeah, you can take credit for that one, but you may have actually just one of my questions on California, but just can you remind me when the cost of capital proceeding and where ended? Susan Story The cost of capital proceeding will be filed in the beginning of 2016, so about March of 2016. David Paz Okay. And if you — it was extended once before correct? Susan Story That’s correct and it’s extended through the end of 2016. We actually begin the filing in the first quarter of 2016 for cost of capital affected in 2017. David Paz Right and just remind me, were there any changes to the mechanism when you extended it this last time versus the original I guess agreement? Susan Story No, it was extended in its current forms. David Paz Okay. And is there any chance for you guys to extend that another year, given that not much has changed on the rate side? Susan Story We’re always looking at opportunities so that — and working with the Commission on these types of things as well as the other investor owned utilities in California. David Paz Okay. Separately this year have you announced any new large regulated projects like water treatment plants or the like that, that were incremental to the plan you gave last year? Walter Lynch This is Walter, no, no, it’s has been in line with what we’ve said last year. We just continue to upgrade our plants as part of our normal capital investment but no new plants in line. David Paz Okay. And you’ll give a 2016, 2020 capital plan in December. Walter Lynch That’s correct. David Paz Great. Thank you so much. Susan Story Thanks David. Operator And this concludes our question-and-answer session. I would now like to turn the conference back over to management for any closing remarks. Susan Story Thank you, Frank. We would like to thank everyone for participating in our call today. And as always if you have any questions, please call Greg or Durgesh and they’ll be happy to help. Before I let you go, I’ve mentioned it during the Q&A, I would like to remind you all that we’re hosting our Investor Day at the Western Times Square in New York on December the 15 from 9 AM until noon. We will have a light breakfast beforehand and lunch available for afterword. So it is not the program that attracts you, hopefully the food will. We will be discussing our plan for 2016 to 2020. We’ll have added color around 2016. You’ll hear updates and projections for our regulated business from Walter as he has already said. An update from Sharon Carmen on our plans for the American Water Enterprise’s lines of business, homeowner services, military services and contract services. And as I mentioned before, you’ll hear from the CEO of Keystone, Ned Wehler who is going to offer his insight into that business and the market, and of course Linda will provide updates on our financial plans. We hope all of you can attend. The session will be webcast and thanks again to everyone for listening and we’ll see you in December. Operator The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect the line.

Black Hills’ (BKH) CEO David Emery on Q3 2015 Results – Earnings Call Transcript

Black Hills Corporation (NYSE: BKH ) Q3 2015 Earnings Conference Call November 04, 2015 11:00 AM ET Executives Jerome Nichols – Director, IR David Emery – Chairman, President and CEO Rich Kinzley – SVP and CFO Analysts Dan Eggers – Credit Suisse Insoo Kim – RBC Capital Markets Operator Good day, ladies and gentlemen and welcome to the Black Hills Corporation Third Quarter 2015 Earning Conference Call. My name is Malerie and I’ll be your coordinator for today. At this time, all participants are in a listen-only mode. Following the prepared remarks, there will be a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to Mr. Jerome Nichols, Director of Investor Relations of Black Hills Corporation. Please proceed, sir. Jerome Nichols Thank you, Malerie. Good morning, everyone. Welcome to Black Hills Corporation’s third quarter 2015 earnings conference call. Leading our quarterly earnings discussion today are David Emery, Chairman, President and Chief Executive Officer and Rich Kinzley, Senior Vice President and Chief Financial Officer. Before we begin today, I would like to note that Black Hills will be attending the EEI Financial Conference next week in Hollywood, Florida. You’ll find our presentation materials and webcast information on our Web site at www.blackhillscorp.com, under the Investor Relations heading. During our earnings discussion today, some of the comments we make may contain forward-looking statements as defined by the Securities and Exchange Commission and there are a number of uncertainties inherent in such comments. Although we believe that our expectations and beliefs are based on reasonable assumptions, actual results may differ materially. We direct you to our earnings release, Slide 2 of the investor presentation on our Web site and our most recent Form 10-K, Form 10-Q another document filed with the Securities and Exchange Commission for a list of some of the factors that could cause future results to differ materially from our expectations. I will now turn the call over to David Emery. David Emery Thank you, Jerome and good morning everyone. I will be starting on Slide 3 of the webcast deck and then we will be following a format similar to that of previous quarterly calls. I’ll give an overview of the quarter and some highlights. Rich Kinzley will go over the financials from the quarter and then I’ll talk a little bit about forward strategy and then we’ll answer questions. Moving to Slide 5, the third quarter was another strong quarter for Black Hills Corporation. We posted solid earnings and made great progress on our growth goals for our existing businesses and we also made excellent progress towards our pending acquisition of SourceGas. Related to SourceGas on August 10th, which was less than 30 days after the deal was announced we filed joint applications for acquisition approvals in all four states. A week later, just a little over a week later, we received our Hart-Scott-Rodino antitrust clearance, we now have procedural schedules established in three of the states with the fourth state pending. The discovery process is ongoing and we still remain on track to close on the first half of 2016. Also, on the acquisition front we did close on July 1st, on our $17 million acquisition of about little less than 7,000 customers in Northwest Wyoming and notably related to that acquisition they were 100% integrated on to all of our systems and process on day 1 after close. From a business environment perspective, during the quarter we had warmer than average weather in our utility service territories, a slight positive for the electric utilities and a negative for the gas utilities and then energy commodity prices particularly oil and gas remained at very low levels. Moving on to Slide 6, utility highlights for the quarter, Black Hills Power is preparing to commence construction later this quarter on 144-mile, $54 million electric transmission line routed from Northeast Wyoming to Rapid City, South Dakota. Cheyenne Light recorded a new all time peak load of 212 megawatts on July 27th, that’s the third new peak for Cheyenne Light this summer, highlighting the strong growth in the Cheyenne area service territory. On October 21st, Colorado Electric received approval from the Colorado PUC to acquire the planned 60 megawatt Peak View Wind project which will help our utility meet the Colorado renewable energy standards. A third-party wind developer will build the project, we executed a build transfer agreement with that developer and we’ll take ownership upon commercial operations in the fourth quarter of 2016. Total cost of the project will be approximately $109 million. Our capital investment and a return on that capital and all expenses will be recovered through customer adjustment clauses and a base rate increase won’t be required for the first 10 years of the project. Moving on the Slide 7, a continuation of our utility highlights, we continued construction on our $65 million, 40 megawatt gas combustion turbine at our Pueblo Airport Generating Station, that’s being built for our Colorado Electric subsidiary and is expected to be in service in the fourth quarter of 2016. We also completed here just in a last couple of weeks our field service optimization project. We rolled it out to all of our utility techs in all of our states. Really that project is a deployment of tablet and GPS technology to automate and improve the efficiency of the lot of our field processes, including dispatching. We’re excited about the benefits of that project. On the non-regulated side or non-utility side we initiated a process to evaluate the possible sale of a minority interest in our Colorado IPP generating assets and we drilled the last of 13 horizontal Mancos Shale gas wells for our 2014 and ’15 drilling program in the Southern Piceance Basin in Colorado. We have six wells on production and we just started to flow back operations for the final three wells. We expect to have the test results on those three wells by year-end. And our results for the program continued to meet or exceed our expectations. Slide 8, which is corporate highlights for the quarter, the Board last week declared the quarterly dividend of $0.405 continuing the level we’ve been at for this year equivalent to an annual rate of $1.62 per share. During the quarter, we entered into the $250 million of interest rates swaps, really to mitigate any future interest rate risk associated with some of our future debt issuances, primarily related to the SourceGas transaction. And we continued our cost containment efforts which we started earlier this year to really help mitigate the impacts of low oil and gas prices and the moderate weather that we had earlier in the year. Moving on to Slide 9, financial highlights for the third quarter we earned $0.64 per share as adjusted from continuing operations during the quarter about a 5% increase compared to the same quarter last year, a really good result considering the negative impacts of our oil and gas business. Slide 10 provides a reconciliation of our third quarter 2015 income from continuing ops as adjusted against our 2014 results for the third quarter. Strong performance in nearly all of our businesses more than made up for poor performance in our oil and gas subsidiary. With that I’ll turn it over to Rich for the financial update. Rich? Rich Kinzley All right, thanks Dave. As Dave mentioned our core utility and utility like businesses continue to demonstrate strong performance. In the third quarter each of these businesses improved operating income compared to the third quarter of 2014, in particular our electric utilities posted strong year-over-year operating results. Our oil and gas business continued to manage through a challenging commodity price environment. Despite that challenge we posted a strong quarter. On Slide 12, we reconcile GAAP earnings to earnings as adjusted on non-GAAP measure. We do this to isolate special items and communicate earnings to better indicate our ongoing performance. In each of the first three quarters of 2015, we’ve incurred non-cash ceiling test impairments at our oil and gas business and in the second quarter of 2015 we also impaired in an equity investment at our oil and gas business. These impairments are due to low natural gas and crude oil prices and our non-cash charges that are not reflective of ongoing operational results. We also incurred external acquisition related cost in the second and third quarters of 2015 associated with the SourceGas acquisitions, such as financing and other third-party costs which were non-recurring in nature. Our third quarter as adjusted EPS reflective of ongoing operations was $0.64 per share compared to $0.61 per share in the third quarter last year and our trailing 12 months as adjusted EPS was $3.05. Slide 13 displays our third quarter revenue and operating income, on the left side of the slide you’ll note that revenue was flat in 2015 due to the lower gas utility revenues from the lower pass-through gas cost in 2015 and lower revenue from the oil and gas business due to lower receipt prices. These revenue reductions were offset by strong revenue growth at our electric utilities. On the right side of the slide you can see that strong performance in the third quarter at our core utilities, coal mine and Power Gen businesses more than offset decreased performance at oil and gas, resulting in a more than 10% increase in consolidated operating income as adjusted year-over-year. I will elaborate on each business unit in the following slides. Slide 14 displays our third quarter income statement comparing third quarter 2015 to third quarter 2014 gross margin increased 7% driven by strong electric utility results. Operating expenses increased 6% due largely to margin additive activities at our electric utilities. DD&A and interest expense increased primarily from added plant in-service and borrowings associated with our October 1, 2014 in-service of the $222 million Cheyenne Prairie Generating Station. The DD&A increase was partially mitigated by lower ongoing depletion at our oil and gas business, which I’ll explain in a few slides, as adjusted EPS grew 5% year-over-year and EBITDA increased by 8%. Moving to our business unit results, Slide 15 displays electric and gas utilities’ gross margin and operating income. In 2015 we changed from discussing revenue to gross margin for our utilities, as we feel gross margin is more relevant to understanding ongoing results, since revenue includes fuel cost pass throughs. On the left side of the slide you’ll see our electric utilities’ third quarter 2015 gross margin increased by 14 million from 2014. 9.5 million of this increase was driven by additional return from investments in our generation facilities with completed rate cases in late 2014 and early 2015 in Colorado, South Dakota and Wyoming. Gross margin also benefitted by nearly 3 million from the combination of higher commercial and industrial demand and the addition of two small Wyoming natural gas utility acquisitions in 2015 that Dave mentioned. These small utilities our subsidiaries of Cheyenne Light and we report their results in the electric utilities segment. Residential usage was favorable across our electric service territories and totaled up 4.6% comparing third quarter 2015 to 2014. Cooling degree days in our electric utility service territories for the quarter were 36% above 2014 adding 3.3 million to margin year-over-year. Overall weather impacts at our electric utilities were $300,000 favorable compared to normal. Operating income during the third quarter for our electric utilities improved by 8 million or 19% year-over-year, as a result of increased gross margin and solid cost management. Operating expenses including depreciation increased only 6 million year-over-year despite the addition of Cheyenne Prairie and the two small Wyoming acquisitions, the combination of which accounted for approximately half of the $6 million expense increase. Looking at the right side of Slide 15, our gas utilities gross margin increased slightly in 2015 compared to 2014. Increased margins from a rate case completed in Kansas in late 2014 and higher transport and industrial volumes were offset by unfavorable weather impacts. While weather isn’t a large driver for our gas utilities in the third quarter, it’s worth noting 2015 heating degree days in our gas utility service territories were 61% below 2014 and 57% below normal for the period, resulting in a 400,000 negative impact to margins in the third quarter compared to the prior year and compared to normal. So, if you take the electric and gas utilities combined weather was really flat compared to normal and total for the third quarter. Third quarter 2015 operating income at the gas utilities increased 800,000 compared to 2014 thanks to strong cost management which reduced operating expenses 600,000 year-over-year. On Slide 16, you’ll see Power Gen’s operating income improved by 1.4 million compared to last year’s performance. Power generation benefited from annual power purchase agreement price increases partially offset by decreased capacity payments since we sold the 40-megawatt CT2 to the City of Gillette in the third quarter of 2014. These last revenues were partially mitigated by the cost sharing benefits we enjoy as we operate this facility for the city. Cost management efforts at Power Gen have allowed us to reduce operating cost by 300,000 year-over-year. On the right side of Slide 16 our coal mining segment saw improved operating income in the quarter by $400,000 from 2014. While tonnes sold were slightly down year-over-year, our average overall coal price received increased 13% comparing Q3 2015 to Q3 2014. And strong cost management contributed to another solid quarter at the coal mine. Power Gen and coal mining continue to deliver solid results. Moving to oil and gas on Slide 17, you’ll see we sustained and as adjusted $7.2 million operating loss for the quarter. Commodity prices negatively impacted results in the third quarter of 2015 as our average received prices inclusive of hedges were down 27% for crude oil and 37% for natural gas compared to the third quarter of 2014. Overall, third quarter production increased 17% comparing the same period in 2014, driven by increases in both natural gas and crude oil production. On the cost side, our Q3 operating expenses increased slightly comparing 2015 to 2014 due primarily to employee severance cost as we reduced staff in the third quarter, which will reduce future period’s operating costs. Despite increased production volumes, DD&A decreased by $0.5 million in the third quarter compared to 2014 due to a substantially lower depletion rate. The reduction in the depletion rate resulted from a lower-cost pool due to the ceiling test impairments we incurred in the first and second quarters of 2015. In the third quarter we incurred a $62 million pretax ceiling test impairment charge related to our oil and gas holdings, in addition to the impairments we incurred in the first and second quarters. The ceiling test utilizes rolling 12 month average prices for crude oil and natural gas, prices for these commodities began to fall in the fourth quarter of 2014 and have remained low throughout 2015 compared to 2014. Consequently the average prices used in our ceiling test impairment evaluations have continued to drop each quarter in 2015. We are likely to incur an additional impairment charge in the fourth quarter, if crude oil and natural gas prices remain at current depressed levels. Also as a result of the third quarter ceiling test impairment we expect and a lower depletion rate again in the fourth quarter. Despite the challenges presented by the low commodity price environment we continue to be pleased with the momentum we have improving up our Piceance Mancos Shale play. We expect to substantially complete our drilling, completion and testing program as we finish out 2015. The play is well-positioned to potentially serve our cost of service gas model we filed in six states for regulatory approval and for additional upside value capture when commodity prices improve. We have right sized our cost structure in the oil and gas segment and expect a much lower depletion rate in 2016. We’ve also substantially reduced our expected capital spending in our oil and gas segment for 2016 and 2017. Dave is going to talk a little more about that in a couple of slides. Slide 18 shows our current plans for the SourceGas financing as well as other financing activities in the 2016-2017 horizon. We completed syndication of a bridge facility to give us flexibility with the timing and structuring for the permanent financings for the SourceGas acquisition. As previously disclosed we will be assuming 700 million of existing SourceGas debt and financing the remainder of the acquisition through potential asset sales and new debt and equity issuances. At our recent Analyst Day we discussed our financing plans for the SourceGas acquisition and indicated we will finance the acquisition in a manner that will support our strong investment grade ratings. We are currently reviewing our options for financing the recently announced $109 million Peak View Wind project and our other strong utility growth oriented capital activities in 2016 and beyond. To support an ongoing CapEx associated with our continued growth for SourceGas acquisition closing, we are considering the implementation of an at-the-market equity program in 2016. Slide 19 shows our current capitalization, at quarter end net debt to cap was 56.7%, an increase from June 30th that was primarily driven by the third quarter non-cash impairment charge in our oil and gas segment. Given expected cash flows from operations for the remainder of the year in our revolver capacity, we have ample funding available for planned CapEx and dividends in the fourth quarter. Slide 20 demonstrates our strong earnings growth performance over the last six years. Our third quarter results demonstrate the continuing strong operational performance and growth characteristics of our core businesses. While low crude oil and natural gas prices impacted our oil and gas segment in 2015 and tempered 2015 earnings growth, we expect to grow earnings again in 2016, which brings us to Slide 21. In our press release on October 7th, we increased our 2015 earnings guidance range to $2.90 to $3.10 per share as adjusted which we reaffirmed with our press release yesterday. We also yesterday issued our initial earnings guidance for 2016 to be in the range of $3.15 to $3.35 per share as adjusted. The assumptions for this guidance are listed on Slide 21. Most notably the assumptions exclude the SourceGas acquisition any material asset sales and any significant new debt or equity issuances. If any of these items occur we will issue updated guidance. As we previously disclosed, we believe the SourceGas acquisition if closed in the first-half of 2016 as planned will be meaningfully accretive to 2017 earnings per share. And with those comments I’ll turn it back to Dave. David Emery Thank you, Rich. Moving onto Slide 21 forward strategy, we group our strategic goals in to four major categories and we’ve done this for a couple of years. The overall objective being an industry leader in all that we do. Those four major goals are profitable growth, valued service, better every day in a great workplace. On Slide 24, I noted this earlier but we’re making excellent progress on our acquisition of SourceGas, we’re on track for closing in the first-half of 2016 as I said earlier and we have a very experienced leadership team guiding our integration effort. Our goal on the integration is to be fully integrated by the end of the year 2016. Moving on to Slide 25, strong capital spending drives our earnings growth and we forecast the total of 1.25 billion of investment for 2015 through 2017. Our projected capital spending far exceeds depreciation driving earnings growth. It’s important to note that this table on Slide 25 does not include any capital related to either the SourceGas acquisition or capital spent in the SourceGas territories post acquisition. On Slide 26 as I said earlier, we’re continuing to make great progress constructing a new turbine at the Pueblo Airport Generating Station. We commenced construction in June, we’ve spent about 27 million to-date out of the projected total of 65, construction is a little over 20% completed and we have no safety incidents to-date. On Slide 27, Monday of this week we announced that we received the necessary approvals and executed the necessary agreements to purchase 109 million 60 megawatt Peak View Wind Project in Colorado. I mentioned this earlier it will help us meet the renewable energy standard in Colorado for our Colorado electric customers. We expect construction to commence in the second quarter of ’16 and be completed by year-end. Slide 28, our electric utilities have demonstrated solid earnings growth year-to-date in 2015 and Rich covered that earlier. One aspect of that has been strong industrial growth in all three of our electric utilities. The overall growth rate has been 16% year-to-date. That growth has come from several different industrial customers and industry segments with the data center load growth particularly in Cheyenne Wyoming being the most notable. On Slide 29 a significant growth opportunity that we are pursuing is this utility cost to service gas supply program that we’ve been talking about for a well over a year now. Under cost of service gas program our direct investment in natural gas reserves would provide long-term price stability for customers while providing increased earnings for shareholders, an excellent win-win situation. We submitted cost of service gas regulatory applications now in a total of six dates, we hope to pursue and receive approvals on those programs in 2016. We’re continuing to evaluate producing properties and growing prospects for inclusion in that program and that certainly includes our Mancos Shale gas properties in the Piceance Basin in Colorado. On Slide 30 and we discussed this in quite a bit of detail on our Analyst Day, but in light of continued low oil and gas prices, our oil and gas strategy is really focused on providing cost to service gas cost effectively to our utilities. We’re working to finish up our 2014 and 2015 Mancos drilling program and then focusing on minimizing other capital expenditures and operating costs. On Slide 31, there’s an illustration of the impact that low crude oil and natural gas prices have had on our quarterly forecast ceiling test that Rich mentioned earlier. We do expect another impairment in the fourth quarter as Rich stated earlier if product prices remain at current levels. Slide 32, provides a well by well detail for our Mancos drilling program, it includes all wells drilled from 2013 through 2015. The top-six wells on the page have all been placed on production in 2015. We have good test results on those wells. We just started flowing back the three final wells that we intend to produce this year, that are in the Whittaker Flats area and should be tested and on production prior to year-end. On Slide 33, we continue to be very proud of our dividend track record, having increased our annual dividend to shareholders for 45 consecutive years. On Slide 34, we do have a strong balance sheet, strong cash flows and solid investment grade credit ratings and as we’ve discussed last quarter all three agencies reacted favorably as we expected to our SourceGas announcement. Slide 35, illustrates the continuing focus we place every day on operational excellence and on being a great workplace. Our safety performance year-to-date has been outstanding, our total case incident rate for the year of 0.7 is the lowest ever for Black Hills Corporation. Finally, on Slide 36, is our scorecard, this is our way of holding ourselves accountable to you our shareholders, we’ve done this for quite a few years now, we lay out our goals at the beginning of the year and literally keep you informed as to our progress throughout the year as we make progress towards those goals. Now, that concludes all of our remarks. We’d be happy to take questions. Question-and-Answer Session Operator Ladies and gentlemen, we are ready to open the line for questions. [Operator Instructions] Our first question comes from the line of Dan Eggers with Credit Suisse. Your line is now open. Dan Eggers I guess, if we step back and kind of think about the priorities around the earnings outlook, the commodity price assumptions in the E&P business are above the street, can you just explain how you kind of got to those numbers, or the sense to at least slog and kind of why you guys have settled, decided to settle above the curve right now? David Emery The curve changes every day and typically what we do Dan is we take a basket of multiple forecasts and try to use that to come up with a reasonable estimate for the future year. I mean, literally the curve changes every day and if we revise our forward look every time the curve changes, that’s all we do. So, we try to look at several forecasts, and bank forecasts the strip and other things, obviously weighted a little more heavily probably towards the strip and some of the other things and set a forecast at the beginning of the year that we think we can live with regardless of whether that price fluctuates up and down a little bit throughout the year. Dan Eggers And then, did I hear you currently say that on the Wind acquisition that there is no base rate increase for the first 10 years? David Emery Correct, yes, the way that we are going to get recovery for that is it’s basically going to flow through three different cost adjustment clauses that we have and we’ll earn the same amount basically but it’s going to go through the adjustment clauses, and then it’s going to be up to us to decide whether we want to continue that or go in for a base rate case in year 10, I think the commissions preference at least at this point would probably be that we do a base rate case in year 10. Dan Eggers Now we’re going to see a distortion in your tax build because the DTC is being generated will bring your tax expenses down, so a part of the return is going to come on that asset through the tax line effectively? David Emery That’s correct, Dan. Dan Eggers And then how much will that effect the tax rate for the next year or the year after if we want to try and bear any expectations? David Emery It won’t affect ’16 obviously because it’s going to go into service late in ’16 but in ’17 I don’t even want to guess. Dan Eggers I am sorry maybe I should ask what’s the right utilization rate you guys are expecting off the project? David Emery Yes, high-30s, low-40s right in there for our capacity effects. Operator [Operator Instructions] Our next question comes from the line of Insoo Kim with RBC Capital Markets. Your line is now open. Insoo Kim Just back to SourceGas, are you able to give any more guidance on potential timing of the equity issuance whether it’d be before the end of the year or after? David Emery Basically what we wanted to do is get our third quarter financials out and then essentially we’re going to watch the market conditions and be prepared to go to the market. There is obviously some holiday and things in there, but we’re looking at anytime basically between a couple of weeks from now and closing would be our idea of timing. And we’re just going to evaluate market conditions and make a decision on timing as things evolve. Insoo Kim And regarding the financing of the deal, are you currently actively looking for buyers of your non-core E&P assets to help with the funding or is there not really a good market right now given the lower oil and gas prices? Rich Kinzley Yes the non-core assets in E&P aren’t going to generate I would say a material amount into that the Colorado IPP is the big thing there obviously. So we’ll opportunistically look for opportunities on the non-core E&P but it’s not going to be a huge number. David Emery Yes, it’s more just cleaning up the portfolio on the labor involved in managing it all than it is about big dollars on the capital side. Rich Kinzley Right. Insoo Kim And finally if the deal does close on time in the first-half of ’16, I know in ’17 you do expect some material earnings accretion, but in ’16 do you still expect some neutral to slightly accretive scenario for the ’16? David Emery It really depends on timing Insoo and if you think about SourceGas is no different than most gas utilities that makes a huge portion of its income in the first quarter. And so if you called after the first quarter as already you have relatively small piece of the income remaining and a relatively large piece of the expenses remaining for the year. So it’s going to depend on timing if we close right after winter for example we’re going to have three quarters of a year of expenses and roughly and half a year in income. Insoo Kim And then just one more question if I may, at the utilities with the strong industrial growth there that you’re seeing for the year is there any re-through to forecast for 2016 and potentially beyond? David Emery Well, I think we’ve accounted for that growth in our guidance if that’s what you’re asking. Insoo Kim Yes, I was just wondering if, I mean it’s pretty 16% industrial growth you say that is very strong and just wondering modeling out for ’16 kind of what levels we should be expecting? David Emery Well we’ve talked a little bit — the biggest piece that will be continuing is really the Microsoft piece and there is quite a few public disclosures around Microsoft they have made some announcements in Cheyenne related to their plans and they are continuing with additional expansions of datacenters there in Cheyenne. So we expect that to continue for a while. Operator Thank you. [Operator Instructions] I am showing no further questions. I’ll turn the call back to David Emery for final remarks. David Emery All right, well thank you everyone for attending the call this morning. We certainly appreciate your continued interest in Black Hills and for those of you who are going to be at EEI we look forward to seeing you next week. Thanks and have a great day. 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