El Paso Electric Co. Q3 2009 Earnings Call Transcript

| About: El Paso (EE)

El Paso Electric Co. (NYSE:EE)

Q3 2009 Earnings Call

October 29, 2009; 10:30 am ET


David Stephens - Chief Executive Officer

David Carpenter - Chief Financial Officer

Steven Busser - Vice President, Treasurer & Chief Risk Officer

George Williams - Senior Vice President & Chief Operating Officer

Scott Wilson - Chief Financial & Administrative Officer


Brian Russo - Ladenburg Thalmann

Robert Howard - Prospector Partners

Michael Lapides - Goldman Sachs


Good day ladies and gentlemen and welcome to the El Paso Electric Company third quarter earnings conference call. I would now like to introduce your host for today’s presentation Mr. Steve Busser. Sir, you may begin.

Steven Busser

Thank you, Howard. Good morning, everyone. Thank you for tuning in, to the El Paso Electric Company’s third quarter 2009 earnings conference call. Also on the call with me today are our CEO, David Stephens, our CFO, David Carpener and our new Chief Operating Officer, George Williams.

Today, we will provide an update on our Third quarter 2009 financial performance, including a discussion of our pertinent earnings drivers. We will also discuss the updates to our 2009 earnings guidance and assumptions. Our recently filed stipulations, settlement agreement in our New Mexico rate case, and we’ll also discuss our regulatory calendar.

I would first like to cover some items that will be pertinent to our call today before we get started. You should have a copy of our press release and if you do not, you can obtain one from our website at www.epelectric.com on the investor relations page.

We currently anticipate that our third quarter 2009 Form 10-Q will be filed with the SEC by November 9th, 2009. As for our upcoming IR events, we will be in Florida next week, November 1st to the 3rd at the EEI Financial Conference and we’ll be also sending out invitations in the next couple of weeks for those of you who wish to attend our analyst day that we plan on holding in New York City on December 9th, 2009 to discuss our Texas rate case filing that what planned to make early in December.

We will provide further updates on our IR events and future conference calls. Please call our IR department if you have any inquiries or require further information. A replay of today’s call will be available shortly after the call ends, and we’ll run through November 12th. The details as it relates to the replay are disclosed in the press release.

I’ll now cover the Safe Harbor provisions before I turn the call over to David Stephens. On page two of our presentation, you’ll see our Safe Harbor statement. In summary, our comments and answers to your questions may include forward-looking statements made pursuant to the Safe Harbor provisions of the Private securities Litigation Reform Act of 1995.

Such forward-looking statements involve known and unknown risks and other factors, which may cause the company’s actual results in future periods to differ materially from those expressed here. Any such statement as qualified by reference to the risks and factors discussed in our SEC filings our 10-K and other SEC filings contain forward-looking statements and also lay out the risk factors that should be considered.

These filings may be obtained from us either by request of us on our website or from the SEC. We caution that the risk factors discussed in these filings are not exclusive and we do not undertake to update any forward-looking statement that may be made from time to time by or on behalf of the company. Those statements, especially those made during the Q&A section of the call are subject to risks and uncertainties that are difficult to predict. I would now like to turn the call over to David Stephens.

David Stephens

Thank you Steve. Good morning and thanks everybody for joining our call. This is David Stephens, the CEO of El Paso Electric. First, I’m going to briefly discuss some of our third quarter highlights and David Carpenter, our CFO will provide a brief update on our third quarter and year-to-date earnings and the key drivers associated with those, also are going to provide some information on our New Mexico rate case as well as upcoming rate in associated filings.

Our share repurchase program, our liquidity position in our revised 2009 earnings guidance and then finally, I’m going to wrap it up with some discussions about plans for 2010. Before we begin however, though I want to ask George Williams, our new Senior Vice President and Chief Operating Officer to share a few words with us, as you know George has over 25 years of electric utility industry experience with a strong operational background including, nuclear operations.

Previously, George worked as Senior Vice President of operations at Common wealth Edison. Prior to this position he held several high level positions at several other utilities. In his new position at El Paso Electric, George will be overseeing the generation as well as the transmission and distribution operations of our company.

He is going to be a valuable asset to us as the company prepares for the future and plans for its long-term growth. George will be replacing Frank Bates who will be retiring in March of 2010 after 37 years of service to our company. I would like to personally thank Frank for his dedication, and we are very pleased of the fact that he has agreed to stay on and assist George Williams for the next few months during this transition period. I would now like to turn it over to George.

George Williams

Thank you David, I’m very excited to be here at El Paso Electric, and I believe that my vast electric utility experience in transmission and distribution, nuclear operations, fossil operations, utility construction and corporate planning will be extremely beneficial to El Paso Electric and it plans for the expected growth in its service territory, and as it embraces the challenges that lie ahead in the future.

Going forward, I will be closely analyzing all aspects of our operations business and will be looking for opportunities to streamline our processes and maximize the efficiency of the company. I’m very proud to be part of the El Paso Electric team, and I look forward to meeting with all of the analyst at the upcoming EI financial conference in Hollywood, Florida next week. I would now turn the call back over to David.

David Stephens

Thanks George, I know we are all excited have you joining the team. Now let’s go over our third quarter 2009 highlights, first I’m very pleased with our strong quarterly earnings performance of $0.76 for basic share for the third quarter of 2009 and the increase in a non-fuel retail revenues that we achieved this quarter. We feel our third quarter performance not only reflect the hotter summer weather in 2009, but it is also indicative of the fundamental strength in our core business due to our expanding customer base and the resilience of our local economy.

I’m also pleased to announce that we resumed the repurchase of our stock with the repurchase of approximately 751,000 shares during the third quarter.

We currently have 771,000 shares remaining under our existing $2 million share repurchase program. We are firmly committed to our share repurchase program and we remain focused on enhancing value to our shareholders.

Another significant accomplishment we attained during the quarter was the completion of the settlement and stipulation agreement in our New Mexico rate case. After several negotiations with the staff of the New Mexico public regulatory commission and the other interveners, we were able to successfully reach an agreement among all parties that settled all issues relating to this case.

Later in the call, David Carpenter is going to discuss the specific highlights of this and our share repurchase program as we go forward. I would now like to update you on the progress that we have made in several key areas in 2009.

Starting out the year, we identified several key initiatives that we needed to accomplish and we called it our report cards. A credible milestone that was attained in March was the removal of Palo Verde from the NRC restrictive oversight, we refinanced our auction rate, pollution control bonds in March, completed phase one of Newman 5, went into commercial operations in May of 2009.

And I’m also pleased to report that phase two, the addition of the heat recovery steam generator which will allow Newman 5 to operate in combined cycle mode remains on budget and on track for completion before the summer of 2011.

We filed our New Mexico rate case, we obtained a settlement that was fair to all parties involved in the case and we still anticipate filing our Texas rate case by on or around December 4th of 2009, it can been seen here, the resolution related to our Las Cruces franchise has been differed until 2010.

Overall, we are extremely pleased with the significant accomplishments that we have achieved during 2009. Now I would personally thank the entire team of El Paso Electric employees for their hard work, significant contributions they have made toward attaining our goals in achieving both our third quarter and our year-to-date earnings results.

Now, I’m going to turn the call over to David Carpenter, our CFO to provide a financial review, regulatory update, and an update on the stock repurchase program, he is also going to discuss liquidity and our 2009 earnings guidance.

And then finally, I will discuss our plans for 2010. David.

David Carpenter

Thank you David. For the third quarter of 2009, we reported net income of $33.9 million of $0.76 per basic share. Compared to our third quarter of 2008 earnings of $33.1 million, or $0.74 per basic share, the increase in earnings per share was primarily a result of higher retail non-fuel based revenues, which increased $10.9 million or 8.1% and on an after tax basis contributed $0.15 per share to earnings.

The increase in our non-fuel based revenues was primarily driven by a 13.6% increase in kilowatt-hour sales, to our residential customers and a 6.1% increase in sales to our public authority customers. The increase in retail kilowatt-hours sales was primarily due to hotter summer weather in 2009. As reflected by the 40% increase in cooling degree-days over the same period in 2008.

During the third quarter of 2009, we had 20 days with temperatures over 100 degrees, compared to the third quarter of 2008, when we had no days with over 100 degree temperatures. Another contributing factor to the increased kilowatt-hour sale was 1.8% growth in the average number of residential customers served. It is also important to note that the increase in kilowatt-hour sales in the public authority segment reflect increased sales to both Fort Bliss and White Sands missile range during the quarter.

Offsetting the increase in retail revenues in the third quarter of 2009 were decreased retain margins from off-system sales as a significant decline in natural gas prices since last year, has resulted in lower market practice for power. In addition, we had decreased revenues from the deregulated portion of our Palo Verde unit three, due to lower market proxy prices, which were also impacted by the decrease in natural gas prices.

The decreased margins on off-system sales and lower retail revenues from Palo Verde unit three each resulted in decreased earnings per share of $0.04 after taxes. For the nine months ended September 30 of 2009, our net income was $59 million or $1.31 per basic share compared to 2008 earnings for the same period of $66.8 million or $1.49 for basic shares.

The strong retail sales in the third quarter resulted in a year to date increase of $9.8 million or 2.7% in retail revenues and an after tax increase of $0.14 per share. During the first nine months of 2009, our kilowatt-hour sales to residential customers rose by 5.8%, while our kilowatt-hours sales to other public authorities customers increased by 2.5%.

The hot summer weather experienced in the third quarter of 2009 was the primary driver of the increasing kilowatt-hour sales. In addition, we had 1.7% growth in the average number of residential customer served install continuing increases in kilowatt-hour sales to both Fort Bliss and White Sands missile range.

The increase in retail revenue was more than offset in retain margins on off-system sales, which resulted in a decrease in earnings per share after tax of $0.14 per share, and a decrease in deregulated Palo Verde units three revenues which resulted in a decrease in earnings per share after tax of $0.10 per share. An increase in the interest on long term debt due to the issuance of $150 million of 7.5% senior notes in June 2008, and higher interest rates owned auction rate pollution control bonds resulted in an additional $0.07 decreased in earnings per share after tax.

As in the third quarter, the lower retain margin from off-system sales reflected lower market prices for power. The lower revenues from the deregulated portion of our Palo Verde unit three not only reflected lower proxy market prices, but also reflected a decrease in sales as the unit was down for a plant refueling outage during April and May of this year.

Overall, we are very pleased with our earnings performance, because it reflects solid organic growth in our service territory as we continue to see growth in the number of customer served, which is a key indicator of the strength of our local economy.

Now, I would like to provide you with a summary of the key points of our New Mexico stipulation and settlement agreement that was filed with the New Mexico Public Regulation Commission on October 8, 2009, and that resolved all issues in the case. The stipulation is a black box settlement, which provides El Paso Electric with an annual non fuel based rate increase of $5.5 million.

No return on equity or capital structure is specified in the settlement. Other provisions which will affect ongoing earnings include a reduction in Palo Verde depreciation rates to reflect a 20 year light extension for Palo Verde units one and two. This provision assumes that the Nuclear Regulatory Commission grants our application for a license extension.

Other depreciation rights were reduced approximately $1.1 million annually. The stipulation also recognized that Newman 5 phase one is being included in rate base. Other key provisions in the settlement include the continuation of the company’s fuel and purchase power cost adjustment clause without conditions or variance and a final reconciliation of fuel and purchase power cost through December 31st, 2008.

The settlement continued the agreement in our last New Mexico rate case to increase customer share of off-system sales margins from 25% to 90% in July 2010. Another key provision of the settlement is the agreement by El Paso Electric to continue to sell deregulated Palo Verde units repower to New Mexico retail customers at a proxy market price.

Palo Verde unit three is deregulated and excluded from rate base in New Mexico. The proxy market price includes both the capacity and energy component based upon an existing purchase power contract with Credit Suisse Energy. A hearing on the settlement is scheduled for November 4, 2009 and a final order from the commission could be received before year-end but no later than the first quarter of 2010.

Given the significance of the upcoming regulatory events on our company, I would now like to go over the timeline for the Texas rate case and the New Mexico rate case to reflect Newman 5 phase two in rate. In reference to our Texas jurisdiction, our current rate freeze agreements with the City of El Paso and other parties expire on June 30, 2010.

Currently, we anticipate a Texas rate case filing on December 4, 2009 to reflect Newman 5 phase one in rates and to reflect other changes in plan investment and cost in our Texas rates. We are seeking to have new rates in Texas going to affect our owners shortly after the expiration date of our rate freeze. In reference to our upcoming Texas rate case filing, it will be our first rate increase request in Texas in over 15 years. We intend to work closely with the City of El Paso, the Public Utility Commission of Texas staff and other interveners in the case by providing them with a comprehensive loan of information so that they can effectively evaluate our rate request.

In terms of our next rate case filing in New Mexico, we anticipate filing that case by June 1st, 2010 using a future test year. That reflects Newman 5 phase two in rate base. The timing of the filing is such that the new rates could be approved near the time that Newman 5 is phase two is completed in the second quarter of 2011.

With regards to our Texas jurisdiction, our second Texas rate case filing for Newman 5 phase two is currently anticipated to be filed in mid 2011 based upon a December 31st, 2010 historical test year. Turing now to our stock repurchase program, as David stated earlier, El Paso Electric purchased approximately 751,000 shares at a total cost of $12.9 million in the third quarter of 2009. As of September 2009, approximately 770,000 shares remain available to be repurchased under our current authorization.

Previously our board of directors had authorized a two million share repurchase program in November of 2007. Since the beginning of the repurchase program back in 1999, EE has repurchased 20.5 million shares at a total cost of $292 million, which equates to average annual stock repurchases of over 3% of the outstanding shares. We remain committed to our share repurchase program in our near term buy back activity will be dependent on the following criteria.

Maintaining adequate liquidity to fund capital expenditures, maintaining an appropriate equity ratio for financial and regulatory purposes, and ensuring that cash generated from operations is consistent with. From a liquidity perspective we had a cash balance of $121.5 million as of September 30th, 2009. Our better than expected retail sales in the third quarter contributed to our strong cash positions, our liquidity position is supplemented by a $200 million revolving credit facility that we have available to finance mutual refuel in working capital needs.

Our credit facility has about $87 million of unused borrowing capacity as of September 30th, 2009. Looking forward, we do not anticipate the need for external funds to finance capital requirements prior to the second half of 2010. In anticipation of the need for additional funds, EE has obtained FERC approval to enter into an additional $100 million unsecured 364 day credit facility within the next two years.

We will continue to look at various options to provide liquidity beyond 2009, and we will provide additional information on those decisions on future calls.

Turning now to 2009 earnings guidance. We are revising our existing guidance range from to $1 to $1.50 per share to a range of $1.35 to $1.55 per share. The revision in earnings guidance reflects the impact of third quarter results on earnings.

Historically, we generate a significant portion of our earnings in the third quarter in 2009 with no exception. The primary factors that will impact earnings for the reminder of the year are generally the same factors that have impacted year-to-date earnings through September including growth in retail revenues, off-system sales margins and revenues from the deregulated Palo Verde unit three in New Mexico.

Our earnings guidance for 2009 reflects continued growth and residential customers with a range of weather impacts, lower margins on off-system sales, which reflect current market prices for power, and lower proxy market prices for deregulated Palo Verde unit three sales in New Mexico.

Now I would like to turn to a discussion of the release of our 2010 earnings guidance. Historically, we have announced our next year guidance on our third quarter earnings call. However, with the upcoming rate case filing in Texas in December 2009, and with us waiting approval for the New Mexico rate stipulation we believe it would be more prudent to provide 2010 earnings guidance on our fourth quarter earnings call that will be held in February 2010. Even then, we will likely exclude the Texas rate case from guidance.

I would now like to turn the call back over to David Stephens, who will cover our last piece of information and take us to the question and answer session.

David Stephens

Thanks David. The last item I want to discuss with you now our expected goals for 2010. Going forward, we are going to continue to work towards the completion of phase two of Newman 5 before the summer of 2011. We are going to manage our Texas rate case with the goal of obtaining a reasonable return on our investments.

We are going to complete the reengineering our customer care and billing process, what we call project Genesis, by the first quarter of 2010. We will follow a second quarter I mean, a second New Mexico rate case by June of 2010 using the December 31, 2009 test year and a future test year likely to be April of 2011 through March 2012 to more timely recover our investment Newman 5 phase two. In addition, we will continue to ensure that we have a sufficient liquidity to fund our capital expenditures program, remain diligent in our oversight of Palo Verde operations.

At this point I would like to turn the call back over to the operator to open up the question and answer portion, Steve Busser is not the only one with the tongue tied today, answer portion of the call, thank you.

Question-And-Answer Session


(Operator Instructions) Your first question comes from Brian Russo - Ladenburg Thalmann.

Brian Russo - Ladenburg Thalmann

Just curious the 6.1% kilowatt-hour sales growth at the public authority customer segment, I mean how much was that weather driven versus is there way to kind of guesstimate what kind of the normalized growth was for that in the third quarter?

David Carpenter

Yes, this is David Carpenter, it’s hard to say how much of it was weather driven, but when we look at the, I just want to check here Yes, when you look at the third quarter sales to public authority, probably of the $24 million kilowatt-hour increase in sales, most of that was to White Sands and to Fort Bliss, Fort Bliss really accounted for, really almost 100% of that increase in the third quarter.

So I think you would have to say that really our sales to public authority in the third quarter were primarily driven by the military basis.

Brian Russo - Ladenburg Thalmann

Right, but I would imagine that the usage was also driven not only by the growth of the base but by weather, correct?

David Carpenter

Yes, we had some and excuse me, I was looking that year to-date, third quarter you still had at least 40% of that increase in sales was the military basis, and so maybe 60% of it was weather.

Brian Russo - Ladenburg Thalmann

Okay, and then just to touch base again on the timeline of your upcoming rate filings. We have the New Mexico step and then I think you have that nice slide that shows when you are going file. Again, when did you see new rates would be effective after the second New Mexico rate case filing to include Newman phase two?

David Carpenter

We can't say specifically when new rates would be effective, but if we file the future test year we would expect new rates to be in effect in the second quarter of 2011.

Brian Russo - Ladenburg Thalmann

Okay and then you’ve laid out the first or the upcoming Texas rate case filing new rates would likely go into effect in mid 2010, which will be after the Texas rate freeze, you will then file a second Texas rate case by year end 2010.

David Stephens

That Brian I think on that slide that the historical test year end that we would use for the second Texas rate.

David Carpenter

Right our expectation would probably be that we would file the second Texas rate case in the second quarter of 2011.

Brian Russo - Ladenburg Thalmann

Okay. So when would you think the new rates would be in effect in Texas following that 2Q ‘11 filing?

David Carpenter

If we use the December 2010 historical test year, and say we filed the case by May 30 of 2011. Then we would hope that we could have new rates into effect by the first quarter of 2012.

Brian Russo - Ladenburg Thalmann

So, as you migrate towards a more traditional regulated utility model and earnings power. I mean, it appears given the rate case cycles that you will still experience some meaningful regulatory lag through 2011 and that 2012 should be viewed more as a kind of cleaner year where you are able to earn more traditional allowed returns on your rate base?

David Carpenter

I think that’s a fair statement.

Brian Russo - Ladenburg Thalmann

Can you just give us a sense of your CapEx spend looks like over the next several years, and how that may impact your liquidity and then the thoughts on the share buy backs?

David Stephens

Yes Brian, we haven’t updated the numbers in our 10-K since we actually filed that 10-K earlier this year for the 2008 year end, but I think it's - you could suffice it to say that over the course of 2009 and 2010 we probably expect about a $100 million reduction from what you see in those numbers, from where we sit today obviously, those numbers aren’t finalized because we haven’t given that guidance yet.

But relative to where we are at I think as a management team, we probably expect CapEx on run rate basis for the next several years to be in the 200 maybe $225 million range as we go forward.


(Operator instructions) Your next question comes from Robert Howard – Prospector.

Robert Howard - Prospector Partners

You bought stock back, I want to say for once I am excited about that and how do you see that kind of continuing. I guess, how long do we expect this because we still do have even though Steve is saying maybe the CapEx is going down, there is still lot of cash commitments you guys have going forward.

Do you think you are going to be able to kind of keep this level up or is this just maybe a little bit higher, you were taking advantage of some lower prices and how do you kind of look at that going forward?

David Stephens

Well Rob, kind of as we said and we have been hopefully pretty consistent about this all along is that, when the opportunity exist and we find ourselves in a situation that we think, I guess, I am going to call it all the stars align, then we want to be back in the market and the stock price in our view was under priced, we thought it was good time to buy.

At the same time, we had a very good quarter, the capital markets had improved and we still have to balance our capital structure and so when we, as we put out in our presentation here, we have certain criteria we are going to use.

I would tell you that the way I look at it at least is, if you look at the history and that was one of the things David Carpenter mentioned a minute ago is we have averaged over the last, since we started the stock buy back program, almost actually it’s like 3.4%, 3.45% of our outstanding stock.

We are committed to continue to try to do that, but we are not committed to do that. So I know that’s kind of a wishy-washy answer but everything does have to align for us, for us to be able to do it because to your point we do have large capital expenditures going forward and we have to maintain all the ratings that we need to keep our debt cost as low as possible.

Robert Howard - Prospector Partners

Has it been, just trying to think back, has it been over a year since you’ve brought back stock or how long has it been?

David Stephens

I believe its yes, it's been about 18 months I think it was first quarter of 2008, was it not, I believe is the correct amount.

Robert Howard - Prospector Partners

Then just with the - just thinking of this the New Mexico rate, the stipulation, in essence this is really kind of a short term, since you are going to be planning to go into New Mexico for new rate case anyway, did that maybe kind of greased the wheels a little bit to get an agreement since everybody knew going in this is really going to be only for a short period of time, does that sort of helped to get a settlement reach between all the parties?

David Carpenter

I am not sure that had a significant impact on the other party’s agreement to the settlement, but certainly we recognized in our settlement negotiations that these rates probably wouldn’t in effect for utmost 18 months and so certainly we felt it was important to try to settle the rates and move on, but we also think that we reached a deal that we were certainly happy with in order to do that.


Your final question comes from Michael Lapides - Goldman Sachs.

Michael Lapides - Goldman Sachs

Congrats on a really good quarter in first nine months of the year. $120 plus million of cash and if I do the math right, if I took your stock price today and exercised all of the 770,000 shares, I mean, I’m not talking about a sizeable chunk of that $121 million of cash.

Can you talk about how you expect to deploy that cash over the next six to 12 months and at what point would the board of directors kind of and what proceedings would the board of directors can consider implementation of another buy back authorization?

Steven Busser

I’ll take the first piece Michael, this is Steve. I’ll take the CapEx piece and I will let David Stephens take his thoughts on the buyback relative to the cash balance and how we interact with the board there.

From a CapEx perspective, we have had some decreases in our CapEx assumption this year driven by a number of factors we intentionally delayed the start of the second phase of Newman 5 just because we had some logistical issues out at the site and we wanted to make sure we were doing things safely and efficiently and so that’s kind of delayed some of the CapEx that we are planning to have already spend this year.

So there is just some pretty significant expenditures related to the Newman 5 plant that will be taken care of in the next couple of months and there are some other expenditures on the CapEx side that kind of fall in that same category.

So, there is probably an artificially high if you will, cash balance, not to say that the numbers are wrong, but it’s probably higher than what we had planned just given the changes and the timing of our construction program and so that kind of discusses why we have such a high cash balance and how we are looking at that, I don’t know, David if you want to address the other piece there.

David Stephens

Yes, sure. Michael, I guess, a couple of tender points to your second question or second phase of your question there is, relative to the board, we do have, now that we’ve purchased the stock, we purchased in the third quarter we are down to approximately 770,000 shares outstanding in the current authorization.

Obviously, I can’t speak for the board, nor would I ever attempt to, but I would tell you that I do know that the board remains committed to a share buyback plan. So I would anticipate some point in the future that we would have another authorization of share repurchases.

I just can’t predict the time of that, but it is something that we will be discussing with the board, so that we have a larger quantity, because 770,000 shares is something to your point that we could theoretically buy fairly quickly, as you have noticed we virtually purchased that in the third quarter once we got back into the market. So, I do think it’s a commitment for us going forward, it’s something that we still stay committed to and the board remains committed with.


(Operator Instructions) I’m showing no additional audio questions at this time.

David Stephens

All right, thanks everybody for joining the call today. We look forward to seeing those of you who will be at the EEI financial presentations next week, getting opportunity to introduce the George Williams, our new COO to each of you and for those of you who have met all of us; it will be a fun time. So, we are looking forward to it. We are excited about the quarter, we are excited about year-to-date and we are excited about our future. Thanks for the call.


Ladies and Gentlemen, thank you for participating in today’s conference. This concludes the program. You may now disconnect. Everyone have a wonderful day.

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