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The MFS "Active Advantage"… Really?

For those of you who like to peruse CNBC every once in a while, there is a very high chance that you have seen commercials from an outfit called MFS Investment Management. They are very well scripted and highlight some of the typical selling points active managers like to make when speaking to investors about topics such as risk management, downside protection, alpha, and a globally informed perspective through a network of analysts that have boots on the ground at different locations around the world. It is a very compelling story that speaks to a lot of the fears investors have when broaching the topic of investing for the future. The biggest selling point and overall message from these commercials is the fact that MFS Investments are being active in the sense they are not just sitting back and letting things happen. This is often one of the issues we have as advisors when talking about the difference between an active and passive approach to investing in that passive insinuates this idea of not taking action and letting things like large market swings or problems in China just happen. In other words, we are not being proactive in controlling the outcomes these events have on the wealth of our clients. And it is completely understandable. How many times in our daily life do we just sit back idly and wait? It is not the American way or the American spirit. We are supposed to take control of our day and our future. Our outcomes at work and other personal goals such as fitness or relationships are a direct reflection of the actions we take or do not take. Therefore, the same should apply when it comes to investment outcomes, right? This is the unfortunate paradox that traps many investors into believing that the same active approach we take in other areas of our life also applies to that of the financial markets. The reality is that an individual investor has very little control over the day-to-day fluctuations of the market. Furthermore, nobody has enough foresight to know what is going to happen to the markets that somebody else doesn’t already know; at least not with a high degree of certainty. What an investor does have control over is the long-term growth of wealth, which is dependent upon their individual savings rate and amount of risk taken within their portfolio. Legendary investor and mentor to Warren Buffett, Benjamin Graham, famously stated in Security Analysis , “in the short run the stock market is a voting machine, but in the long run it is a weighing machine.” Now, even though we have laid out a line of thinking that seems reasonable, it still wouldn’t be a robust argument without empirical support. Let’s take a look at the individual claims that MFS Investment Management makes in their commercial and the corresponding peer-reviewed academic support for their statements. This is not intended to highlight the merits of MFS Investment Management individually since their claims are very common amongst the active investment community. Claim #1: Active management tends to perform well during market transitions, particularly more difficult markets, providing value in risk management and reducing downside volatility. This is a classic argument active management proponents like to use. It assumes that based on current information they know exactly where we are at in a market cycle. In terms of the academic literature, there has been no conclusive evidence that demonstrates that this claim is true. Active management tends to perform similarly during down markets and up markets. We have already written articles before on the topic of active management providing protection during down markets here . We referenced a paper from the Fall 2012 edition of the Journal of Investing called Modern Fool’s Gold: Alpha in Recessions , which concluded that there is very weak persistence in a manager’s ability to provide superior outperformance during subsequent recessions or expansions. So while it sounds very comforting to say we reduce downside volatility but fully embrace upside volatility, managers usually do not know when each is going to occur, and by the time they act on their premonitions, the market has already moved on. Claim #2: Focus on security selection is such that no systematic component of risk drives performance and offsets everything we are trying to do. Let’s dissect this sentence since there is a lot of fluff. No systematic component of risk refers to either overall market risk, size risk, or relative-price risk. These are more formally known as the different dimensions of risk, which were comprehensively introduced in 1992 in Eugene Fama and Ken French’s seminal paper, The Cross Section of Expected Returns . So if we don’t want one single component of these risk factors driving the performance of the overall strategy, then what we are really saying is that we want to be very well diversified. We want large stocks, small stocks, growth stocks, and value stocks across all different sectors and regions. The problem with this approach is the more and more diversified you get, the more and more you look like the overall market (i.e., index fund). As we will show later, this seems to be an issue MFS Investment Management is running into with a lot of their seasoned strategies. From a security selection standpoint, most active managers have a really tough time distinguishing the next winners from the next losers. In Fama and French’s paper, Luck versus Skill in the Cross-Section of Mutual Fund Returns , they looked at the performance of 819 different mutual funds over the 22 years ending in 2006. They found that the vast majority (97%) didn’t beat their respective benchmark (produce positive alpha), and the small amount that did is indistinguishable from just choosing stocks at random. Click to enlarge Claim #3: From a philosophical standpoint we look to take risk where we think we will be compensated and budget risk for where we have the most skill and ability to consistently deliver alpha. This claim is very similar to that of Claim #2. We already know where investors should be expected to earn a return for risk taken; that would be in stocks that are smaller in size and value-oriented. Anything beyond these factors is assuming the pricing mechanism inherent in the market is not functioning properly. In other words, current stock prices do not properly reflect future expectations of a particular company, which is just complete nonsense. To look at a price and say it is currently mispriced means that your ability to estimate the fundamentals of a particular company or your ability to predict the future are superior to that of the other few million professionals in the world. It’s their collective estimate of a company versus yours. That is quite a claim to say you know something they do not. And the law of large numbers is stacking the odds against you. We can once again cite the paper by Eugene Fama and Ken French on Luck versus Skill . The vast majority cannot consistently deliver alpha across multiple asset classes and time horizons. What is so special about MFS Investment Management that they believe they can deliver it? To say they have a global operation that believes in collaboration and sharing of information is nothing special. Most of the big asset managers have global operations and are promoting the exact same thing. Claim #4: We like to tell clients to arbitrage the time horizon and have a long-term view. This is just fancy speak for staying diversified and having a long-term focus, which is something we also promote. Because nobody can accurately predict what is going to happen in the future, it is best to “arbitrage the time horizon” by buying low-cost index funds and rebalancing when necessary. The market, not one particular individual, knows best. Cold, Hard Facts Let’s look at the cold, hard facts. We examined the performance of all 87 different mutual funds that MFS Investment manages to see if their integrated research platform around the world that promotes the sharing of information, protecting investors from downside volatility, taking risk where they expect to be compensated, and budgeting risk for where they think they can provide alpha has worked out well for them. We first looked at all of their US-based strategies that had at least 10 years of performance history to see if they were able to deliver outperformance over a medium time horizon. Of the 14 funds that were US-based strategies and had at least 10 years of data, not a single one produced a positive alpha that was statistically significant to a high degree of certainty (95% confidence level) once we adjusted for the known dimensions of expected return using the Fama/French 3 Factor Model . See chart below. Click to enlarge As you can see, most of the funds hug the dashed line that represents zero annualized alpha. This is what we would expect to see not only in an efficient market , but also for someone who is tracking the overall market, which is the point we made under Claim #2. The second thing we looked at was the performance of all 87 mutual funds against their Morningstar assigned benchmark, since inception, to see if there were any funds that produced a statistically significant alpha. Here is what we found: 53 (61% of all funds) displayed a NEGATIVE alpha compared to their Morningstar assigned benchmark since inception Only 1 fund (1.15% of all funds) displayed a POSITIVE alpha that was statistically significant at the 95% confidence level compared to its Morningstar assigned benchmark 27 (31%) displayed a POSITIVE alpha compared to their Morningstar assigned benchmark 7 (8%) of the funds had no alpha to report since they had been around for less than 1 year. It is important to note that these performance figures do not take into account the front-load fees that are associated with these funds. The average maximum front load-fee as of 10/31/2015 across all MFS Investment strategies is 5.16%. These fees may or may not be paid by investors based on broker recommendation or custodial and/or broker platforms. The table below lists the fees for all MFS funds. Readers can find a more in-depth analysis and illustration of the costs associated with strategies from MFS Global Management here . So the vast majority (61%) of their funds displayed negative alpha and only 1 strategy had a positive alpha that was statistically significant at the 95% confidence level . Which was the only fund whose performance may have been attributable to skill? It is the MFS International New Discovery A (MUTF: MIDAX ) coming in with an annualized alpha of 4.96% and a t-statistic of 2.02. Below is its alpha chart showing the performance comparison against the MSCI All Country World ex US Index. Click to enlarge Does this necessarily mean that we would concede that investors should reliably expect to be better off investing in MIDAX versus a comparable index fund or mix of index funds? Absolutely not! There are key reasons why, although MIDAX has historically produced a statistically significant alpha, that investors should still stick with a passively managed index fund instead: First has to do with the Morningstar assigned benchmark, which happens to be the MSCI All Country World ex US Index. The Index has a 99% developed and 1% emerging market makeup, while MIDAX has consistently had 10-15% allocated to emerging markets, which we know has experienced a higher historical return than that of its developed counterpart. We cannot control for the overall size and value tilts in this particular strategy like we can with US-based companies since we do not have independent size and value factors for a global ex US portfolio of stocks. As we showed with the 14 US-based strategies, the alpha is diminished down to nothing once we have controlled for known dimensions of expected return. A lot of the alpha seems to have happened during the first 4 years (very tall green bars) of the fund’s history, but since then, results have been mixed. This means the statistical significance might be subject to in-sample bias. As we have mentioned before in this article , the best way to control for in-sample bias is to look at two independent time periods to see if the statistically significant alpha persists. Although the alpha for the strategy is statistically significant at the 95% confidence level, there is still a 5% chance that the outperformance was due to random luck. Our opinion that it’s random luck is bolstered by the very weak performance for the remaining 79 funds in the MFS Investment lineup. The policies, procedures, and systems in place in terms of hiring professional staff, gathering and analyzing information, and implementing investment strategies would seem consistent across the business. Unfortunately, this has not translated into an overwhelming success story across all of their strategies. Unless they applied a process, which was unique to MIDAX, it may seem reasonable to believe that just by random chance 1 out of their 87 strategies would have success. There is nothing distinguishing about MFS Investment Management’s process that would give us confidence they could deliver future outperformance. As we have said before in other articles that examine the performance of major mutual fund lineups (see Fidelity Funds Part 1 , and Part 2 , American Funds , Lord Abbett Funds , JP Morgan Funds , Hedge Funds , Olstein All-Cap ), this in no way is supposed to critique the level of intelligence and competence of the individuals in these organizations. They are the very brightest and most knowledgeable in our industry. Their reason for their lackluster performance has to do with the environment in which they operate. The free market that allows for the continuous sharing of information and exchanges that have the ability to aggregate that information are the ultimate culprits for the existence of the manager who can consistently deliver “alpha.” No single individual is more powerful than the overall market and no single individual will ever have all the information at their finger-tips about a particular company and its future earnings potential. All individuals are subject to estimation error when it comes to analyzing financial information and future growth prospects, and the aggregating of these estimation errors by the markets allows the price to be the single best estimation at any given time. Some active managers may be right at times at the expense of other active managers, but that is what we would expect. Unfortunately, the persistence of any manager’s outperformance comes down to either better estimation faculties, quicker access to information, or illegal insider information. In today’s overwhelmingly competitive markets, the latter or blind luck seems to be the biggest reason why most managers have experienced long-term success. Below are a few examples of the alpha charts we do in our analysis based on Morningstar assigned benchmarks. Click to enlarge Click to enlarge Click to enlarge You can find alpha comparisons across all 87 MFS strategies in the original article here . Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Hedge Funds – Misunderstood, But Still Not Worth It

Cliff Asness has a wonderful new piece on Bloomberg View discussing hedge funds. He basically argues that: Hedge fund criticism has been unfair largely due to false benchmarking. Hedge funds should hedge more. Hedge funds should charge lower fees. These are fair and balanced statements. And they’re worth exploring a bit more. The first point is dead on. The media loves to compare everything to the S&P 500, which is ridiculous. The S&P 500 is a domestic slice of 500 companies in a global sea of millions of companies. It neither represents “the stock market”, the “global stock market” nor anything remotely close to “the financial markets”. I have pleaded with people at times to stop comparing everything to the S&P 500. But no one listens to me, so it’s not surprising that this continues. 1 Hedge funds are treated particularly unfairly here, because, as Cliff notes, they’re not even net long stocks on average. The average hedge fund is only about 40% net long stocks. The portfolio is also comprised of bonds and alternatives, making classification difficult to average out. But the point is that the S&P 500 is absolutely not a good comparison. 2 I would argue that the proper benchmark for all active managers is the Global Financial Asset Portfolio , which is the true benchmark for anyone who actively deviates from global cap weighting (which is everyone, by the way). The second point is also clearly true, as hedge funds have become increasingly correlated to the S&P 500 over time. Differentiation is what makes alternative asset classes valuable. Unfortunately, you don’t get much differentiation in hedge funds, and I don’t think this can reasonably change as the industry grows, because, as assets under management grow, the managers will inevitably start to look similar, since there are only so many assets that can be held at the same time. The paradox of active management is that the more active everyone becomes, the more all this activity starts to look like the same thing (minus taxes and fees). The last one is my major point of contention. A globally allocated 40/60 stock/bond portfolio earned about 7.5% per year over the last 40 years. And this was in an era when that 60% bond piece averaged about 6.3% per year. Those days are long gone. I think it’s safe to assume that balanced portfolios will generate lower returns simply due to the fact that the bonds cannot generate the same returns in a 0% interest rate environment. Either that, or the stock piece will probably expose the portfolio to more risk, resulting in similar but riskier returns, on average. I’ve discussed this in some detail, and we even have some historical precedent for this when bonds generated about 2.5% returns from 1940-1980 during a period of low and rising rates. So, the question becomes: In a world of low returns, how can hedge funds justify charging something like 2 & 20, which cuts the total return by almost 50% assuming benchmark returns? Hedge funds have a huge hurdle to overcome on the fee side, and the arithmetic of the markets shows us that they can’t all do it. That arithmetic is clearly coming into play in an environment where aggregate returns have been fairly weak. At the same time, many people clearly benefit from having an investment manager. Vanguard has shown that a good advisor/manager can be worth as much as 3% per year (which I suspect is high), and the average investor has been shown to do far worse than they do when someone like an advisor consistently slaps their hand away from making persistent changes. The value-add of a manager is largely subjective and always personal, but I have a hard time believing people should pay more for an asset manager than they do for doctors, accountants, lawyers, etc. In my mind, portfolio managers and advisors are more like personal trainers – they’re a luxury for people who know they’re not knowledgeable or disciplined enough to build and maintain a proper plan. But personal trainers shouldn’t cost you an arm and a leg. I like Cliff’s points, and there’s some good takeaways in there. But I still think point three is really difficult to overcome. Hedge funds simply charge too much. In a world where you can now mimic a hedge fund index for the cost of 0.75% , it’s very hard to imagine that there’s any rationale for fees being higher than that, on average. And I suspect that, like most high-fee active managers, these sorts of funds won’t benefit investors in the long run anyhow. 3 1 – This is not an entirely true statement. My wife listens to me on rare occasion, but has good reason to ignore most of what I say, since it mostly involves rants about things like quantitative easing and other things almost no one cares about. My dog listens to me roughly 90% of the time, though she selectively ignores me, such as late last night when she got sprayed in the face by a skunk because she did not properly respond to my commands. My chickens do not listen to me at all. I am not sure if it’s because they are geniuses or idiots. Probably geniuses, as they’ve clearly evolved to be unable to hear the Cullen Roche voice. By the way, if you’re still reading this, you should probably be questioning your own evolutionary development. 2 – Part of what’s exacerbated this problem is that Warren Buffett made a public bet with some hedge fund managers who decided it was smart to benchmark their performance to the S&P 500 on a nominal basis. I can only assume that Buffett drugged them before getting them to agree to this deal, since only someone on drugs would benchmark hedge funds to the nominal return of the S&P 500. 3 – Yes, I know this is not a perfect hedge fund replicator, but it’s close enough.

Atmos Energy’s (ATO) CEO Kim Cocklin on Q2 2016 Results – Earnings Call Transcript

Atmos Energy Corporation (NYSE: ATO ) Q2 2016 Earnings Conference Call May 5, 2016 10:00 ET Executives Susan Giles – Vice President, Investor Relations Kim Cocklin – Chief Executive Officer Mike Haefner – President and Chief Operating Officer Bret Eckert – Senior Vice President and Chief Financial Officer Analysts Chris Turner – JPMorgan Spencer Joyce – Hilliard Lyons Faisel Khan – Citigroup Charles Fishman – Morningstar Mark Levin – BB&T Operator Greetings and welcome to the Atmos Energy Second Quarter 2016 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mrs. Susan Giles. Thank you, Mrs. Giles. You may begin. Susan Giles Thank you, Selena and good morning everyone. Thank you all for joining us. This call is being webcast live on the internet. Our earnings release, conference call slide presentation and Form 10-Q are all available on our website at atmosenergy.com. As we review these financial results and discuss future expectations, please keep in mind that some of our discussion might contain forward-looking statements within the meaning of the Securities Act and the Securities Exchange Act. Our forward-looking statements and projections could differ materially from actual results. The factors that could cause such material differences are outlined on Slide 22 and more fully described in our SEC filings. Our first speaker is Bret Eckert, Senior Vice President and CFO of Atmos Energy. Bret? Bret Eckert Thank you, Susan and good morning everyone. We appreciate you joining us and your interest in Atmos Energy. If you would like to follow me on Slides 2 and 3 of the slide deck, you will see that realized net income for the quarter was $144 million or $1.40 per diluted share. For this current 6-month period realized net income was $240 million or $2.33 per diluted share. Positive rate outcomes in our regulated businesses drove our growth for the three and the six-month periods. Rate release for our regulated distribution and pipeline operations combined generated about $24 million of incremental margin in the quarter and about $48 million for the current six months. However, warmer than normal weather affected all segments of our business. For the quarter and six month periods, we experienced a 21% decrease in regulated distribution sales volumes due to weather that was 25% warmer quarter-over-quarter. However, our weather normalization mechanisms, which cover about 97% of utility margins, worked as designed during the warm heating season. As a result, gross profit decreased just $2.2 million for the quarter and $3.3 million for the six month period due to the warmer than normal weather. Additionally, although our regulated pipeline experience decreased through system volumes and lower storage and blending fees due to the warm weather in the current quarter, volumes are only down about 1% on a year-to-date basis. And in our non-regulated segment, we experienced higher settlement losses on long financial positions compared to both prior year periods. Focusing now on our spending, consolidated O&M was flat quarter-over-quarter but rose about $6 million in the current six months period primarily due to increased pipeline maintenance spending as well as the timing of spending period over period. Capital spending increased by $97 million in the first six months compared to one year ago primarily due to planned increases in spending in both of our regulated segments. About two-thirds of this increase was incurred in our regulated pipeline segment where we continue to enhance and fortify our Bethel and Tri-City storage fields to improve our ability to reliably deliver gas in the Mid-Tex division and APT’s other LDC customers. We remain on track to achieve our capital budget target of $1 billion to $1.1 billion for fiscal 2016 as you will see in the slide deck. Moving now to our earnings guidance for fiscal 2016, with the winter heating season coming to an end, we have tightened our projections and earnings per share range for fiscal 2016. As shown on Slide 12, we expect fiscal 2016 earnings per diluted share to range between $3.25 and $3.35 excluding unrealized margins at September 30, 2016. The expected contribution from our regulated operations as well as estimates for selected expenses for the year have been tightened from our original projections made last November. The expected contribution from our non-regulated operations remains unchanged. We expect the continued execution of our infrastructure investment strategy, coupled with constructive regulation will be the primary driver for this year’s results. Looking on Slide 13, we continue to anticipate annual operating income increases of between $100 million and $125 million from approved rate outcomes in the year. Thank you for your time. And I will now hand the call to our CEO, Kim Cocklin for closing remarks. Kim? Kim Cocklin Thank you, Bret very much and good morning everyone. Very good quarter. An excellent first half. As Bret said, we came through a warmer than normal winter in excellent shape. We are able to tighten guidance. And with the approval of the pipeline GRIP filing in Texas on May 3, we now have generated $71 million of revenues from rate outcomes, and as Bret said, are on target to achieve our target of $100 million to $125 million this year. We do have filings pending before agencies which seek a total of $56 million and we expect to file a few more cases before year end. These results very importantly mark our over five consecutive years of successfully executing our growth strategy that we began in 2011 and continues our journey in meeting the very important commitments of investing in our infrastructure to improve the safe operation of our system, to grow earnings at a level of 6% to 8% annually and to target a total shareholder return of 9% to 11%. We now will open it up for questions. Selena? Question-and-Answer Session Operator Thank you. [Operator Instructions] The first question is from Chris Turner from JPMorgan. Please go ahead. Chris Turner Good morning, guys. I wanted to check in on the pipeline rate case, I think you kind of last updated us by saying that you would file late this year early next year. What’s the latest on timing thoughts and cap structure kind of request versus your current? Kim Cocklin It’s pretty much on target is what we have been messaging you with. We intend to file it probably late this year, probably December. The cap structure we are targeting is still in the 57% to 58% equity component, which is what we anticipate having as we work through our financial plan for funding the capital budget this year. And really as we have talked about, we are going to file everything right down the middle of the fairway and not ask for anything outside that we don’t have in place right now. So, there really isn’t any change and we are on target to do everything that we have been talking to you about. If there is any changes we will have any updates at the AGA Financial Forum coming up in May, but we don’t anticipate having any. Chris Turner Okay. And then is it the right way to think about that case that you guys have recovered most of the capital return on and of already through the GRIP mechanism and most of the kind of wild card or uncertainty from our perspective that will flow through to your bottom line versus what you currently are getting is on the cost side? Kim Cocklin We will have an update to the rate base numbers obviously and we will have all our investment that we have made from the time of the GRIP filing this year through that end of that case and then we will be filing another GRIP filing after the case is filed. So, there will be additional increments to rate base in the case. Chris Turner Okay, great. And then can you remind us of when you expect to next be a cash taxpayer based on your current estimates and the changes with bonus depreciation late last year? And then also kind of maybe give an update on your expectations of using your ATM issuance mechanism that you recently launched in terms of timing this year and maybe next as well? Kim Cocklin First on the cash taxpayer, we don’t anticipate being a cash taxpayer in the current 5-year plan through 2020. So it will be after that, before we start to pay cash taxes. As far as the ATM Chris, the plans are consistent with what we disclosed at our November analyst day. We expect to do $300 million to $400 million over the 5-year plan and $50 million to $100 million on an annual basis. Chris Turner Okay. And would that be somewhat evenly spread throughout the year or would you do that kind of at certain points? Kim Cocklin I don’t – I think we are going to stick with the $50 million to $100 million as you go through that period. I will tell you that all of our financing plans have been contemplated and included in our tightened guidance range for fiscal ‘16, as well as our guidance that we have out there in 2020. Chris Turner Okay, great. Thanks guys. Kim Cocklin Thank you, Chris. Operator The next question is from Spencer Joyce with Hilliard Lyons. Please go ahead. Spencer Joyce Bret, Kim, Susan good morning. Kim Cocklin Good morning. Spencer, who is the Derby winner this year? Spencer Joyce Well, I am sorry, that’s why I had to chime in. I am on the favorite. I kind of like Nyquist this year. Kim Cocklin Nyquil [ph]…? Spencer Joyce Yes, almost Nyquist. But in any case, just one sort of broad big picture question from me, you all have been very clear about why you have avoided latching on to some of the major midstream projects that we have seen here out East a little bit and at least from my vantage point, it seems like the environmental contingent is becoming more organized and a bit more vocal and we have seen delays for Constitution, PennEast, I mean almost any named project we have seen delays at this point. I am wondering if you have seen any of that public sentiment shift into some of your smaller diameter, shorter-haul projects or is it really just business as usual as far as your pipe in the ground goes? Kim Cocklin No that has – none of that consternation is translated into any of the projects that we have got and the capital investment we are doing. I mean the regulators and our customers understand how important it is for us to continue to pursue that investment to make our system as safe as possible and continue to – our journey of becoming the nation’s safest utility. So, we are also not trying to clear new right away or go through areas that have not – that don’t have pipe in the ground right now. So, it makes a significant difference when you are trying to put those new systems in and trying to clear a path for them and that there is a great deal of opposition that goes along. And then you have got the size of the pipe itself, those things are talking 36 inch, 42 inch pipe and unfortunately you have got some stuff that’s been in the news here lately, Bethlehem Township in Pennsylvania with the Texas Eastern incident last week. So it’s pretty much elevated the opposition, but for us I mean we continue to operate in a – in kind of under the radar. And people see the need. And it’s a small pipe in most situations where we are dealing with it. So, no. Spencer Joyce Alright, that sounds great, good color there and glad to hear its business as usual. That’s all I had, we will see you in Naples. Kim Cocklin Okay. Spencer, look forward to it. Operator The next question is from Faisel Khan from Citigroup. Please go ahead. Faisel Khan Hi, good morning. It’s Faisel from Citigroup. Kim Cocklin Faisel, where have you – I thought you were doing the Geico commercials or something. We haven’t heard from you in years. Faisel Khan Yes, it has been several quarters, since I have asked a question, but and think of where the stock has gone too. So it’s probably a good thing, right. Kim Cocklin Yes. We have got a good run. Faisel Khan Yes. Just a couple of questions for you and I will get out of the queue. Just on the – with the amount of rate cases that you have going on and going forward, if you can just remind us sort of what the history is and sort of the ask versus the settled, so what percentage you usually get from the ask for these rate cases when you settle them? Bret Eckert Keep in mind, Faisal we have got annual mechanisms that cover about 93% of our filings, so. Kim Cocklin These are not traditional filings. Normally, in a general rate case, you handicap the filed form out versus – the request versus the achieved at about 50%, but so many of our filings right now, as Bret pointed out 93% are covered by annual mechanisms that really have – are very prescriptive and there is not a lot of controversy over the computation and the methodology that’s utilized to increase either the O&M or the rate base adjustments. And then you have plug and play ingredients normally associated with the cap structure that may or may not change and the return component is normally settled. The depreciation rate is also settled. So, I mean we don’t – we have got the $56 million of – that we are seeking right now that is the filed for request. I mean we are – the best target that you can have for your model I think is to look at the $100 million to $125 million that we targeted for fiscal ‘16 that we are at $71 million now and we are very confident and comfortable that we will reach the target that we have provided. I mean as we get closer through the next two quarters you will see those amounts will continue to materialize and as they become final we make them immediately available so you can get them into your model. Faisel Khan Got it, okay. It makes sense. Bret Eckert If you look at slide 27 you will see a detail of each of those mechanisms by state, by jurisdiction. Faisel Khan Yes. No, I see it. I was just wondering, are you in for like for example, I guess for the Mid-Tex cities sort of are they RRM, like is that $26.6 million, is that sort of part of this process you are talking about where it’s an automatic sort of…? Kim Cocklin That is not automatic, but it’s pretty prescriptive. So, there is normally adjustment in the ask for that type of filing and what we achieve because that does go through some negotiation process. Mike Haefner Faisel, this is Mike. The other thing that we will see in terms of the difference between an ask and an awarded amount relates to assumptions that are made and debated around things like employee costs, how pension costs are treated in that, that at the end of the day may affect the awarded amount, but does not affect us on a net income basis at the end of the day, so. Faisel Khan Okay. And then looking at the continued rate base growth of the company going from I guess $5.5 billion to $9 billion, is there anything that would sort of cause that growth rate to slow for any which reason, I just want to make sure also is the deferred taxes and the implementation of the new tax laws, is that baked into that number too? Bret Eckert It’s fully been contemplated in all of our numbers, yes. Kim Cocklin You will be the first to know, Faisel. I mean we take that commitment extremely seriously. We have advertised that we are going to grow rate base at 9% to 10% which we absolutely have to do to meet the commitment of growing earnings at 6% to 8% on average. So I mean we have built up what we hope is a lot of trust and credibility with our shareholder base and with the street and we take that as seriously as the dividends. So if there is ever any change to that and if there is any retraction or reduction to the growth rate that we see, which we don’t see for the next 5 years and we have got a very good financial strategy to back up the investment for the next 5 years and we will continue to increase that. So we are very confident and again, we can’t overemphasize the fact that we are not just advertising these rates at 6% to 8%, we are actually performing and throwing them off and we have got over a 5-year track record of meeting that commitment. So we fully expect to do it. And we understand how important it is to message any change as soon as it becomes available. So we are not going to hide the ball on anything like that. Faisel Khan It makes sense. Thanks guys for the time. I appreciate it. Kim Cocklin See you Monday. Faisel Khan We will do. Operator The next question is from Charles Fishman with Morningstar. Please proceed with your question. Charles Fishman Good morning. You lowered the – you narrowed your guidance, but you lowered the upper end of your guidance, $3.40 to $3.35, yet the upper end of regulated operations stayed the same, the upper end of non-regulated operations stayed the same, share count stayed the same, can you explain to me your thinking on that of how you go about doing – or why you did that, lowered the upper end too? Bret Eckert Well, when you tighten guidance, Charles right, I mean you have got to move the upper and the lower end. The midpoint of our guidance is still the $3.30 that remains unchanged, which is about an 8.2% growth rate over the $3.05 weather adjusted operations for fiscal ‘15, so it was just a matter of coming in six months into the year when 70% to 75% of your earnings are behind you and providing a bit tighter of a range of guidance for the street. Charles Fishman Okay. So you are not – I see what you are doing, you are focusing on the midpoint and then just assuming a variance from that. Got it, okay. That explains that… Kim Cocklin We are also trying to focus on trying to help you tighten up your model. Charles Fishman Thank you. That’s always appreciated. The next question follows up tightening up the model, effective tax rate went down – guidance on effective tax rate went down 100 basis points, can you provide a little more color on that? Kim Cocklin That was Trump hew was – because he is the Republican nomination. Charles Fishman Okay. Kim Cocklin It’s just – really just the ebbs and flows you see in a year plus there was a new stock compensation standard that was adopted and that impacted tax rate – effective tax rate a little bit. And you will see that disclosed in the 10-Q. Charles Fishman Got it, okay. Thank you very much. Good quarter. Operator [Operator Instructions] The next question is from Mr. Mark Levin from BB&T. Please go ahead. Mark Levin Hi guys. Hope you are doing well. Two very big picture questions, the first has to do with something that I am sure is not envisioned by many at this point with natural gas prices around $2.10, but is there a point at which – or is there a gas price at which you could point to or maybe theoretically come to whereby regulators would be less inclined to be as constructive as they are. Put another way, is there a natural gas price point where the customer starts to feel it in a more material way and the regulatory environment might not be quite as accommodative as it is today? Kim Cocklin I mean you can hypotheticate all you want on prices for sure Mark, but we haven’t picked a price point. We do anticipate with our 5-year plan of having an all-in – we have assumed an all-in gas price of $4.50, $4.50 to $5.50 through 2020, which if you look at the forward screen, I mean that is clearly within the realm of reasonableness and even conservative. So there are some other factors. The cost of money is another thing that’s helping the investment and along with gas prices, the customers are not expected to experience any increase in the bills that they have paid since 2007. So I mean we really haven’t run the what-if scenario on that. We pay obviously, very close attention to gas prices and are able to do some things as a result of working with the regulators to hedge positions so that we are usually 1 year or 2 years ahead of all the price changes. Mark Levin Sure. So to me it sounds like – even if it were I think we are – gas would have to do something monumental – have to be monumentally higher? Kim Cocklin It would have to be like $8 to $10 I think. Mark Levin Yes, right. So a completely different schematic. And then the second question, because you can’t get off an LDC call without asking the M&A question, but maybe I will approach it from a different way, are you seeing any opportunities – obviously, your equity has risen magnificently and for good reason, but you do have an equity currency, the cost of debt is relatively cheap – is very cheap actually. Are there opportunities out there as a buyer, now I realize going and trying to buy an LDC and finding a cheap LDC at this point might be challenging, but are there any other opportunities out there that you guys are considering or would consider given the strength of your equity and the cost of debt? Kim Cocklin We pretty – we have been very consistent in emphasizing the fact that we think multiples are extremely expensive, you never say never. But there is nothing on the block that we would be interested in paying over and above or even close to what’s going off the Board today, if you look at our investment of $1 billion to $1.1 billion of capital every year, that with the regulatory lag that we experience with 94% of that investment beginning to earn within six months at the end of the test period, that $1 billion to $1.1 billion that we are putting in the ground is helping us on this journey of becoming the nation’s safest utility, so it becomes immediately accretive. You don’t have the integration issues if you go out and overpay for an asset which you are doing right now. You have regulatory issues and complications of dealing with what you pay over book, how you deal with goodwill, how you integrate a culture, you do the systems. I mean there is a whole host of issues, social issues and financial and operational issues, when you buy an asset. I mean we did that, we have a wonderful asset – we have a wonderful portfolio. We are in jurisdictions where we want to be. We are extremely comfortable with who we are. We know who we want to be. We have got wonderful skill sets. And so we don’t really have to look across the landscape. And I think bet the future on trying to integrate an asset under the current market conditions. Mark Levin That makes perfect mix, absolutely perfect sense. And is your – just when you think about the industry as a whole and you put your sort of crystal ball on – head on and think about the next 6 months to 12 months, is your expectation that we will continue to see more deals or do you think that there will be a pause given the run in the equities? Kim Cocklin No pause. There is going to be more deals. I mean you have got people out there that supine gas is a very attractive story. They want to get it in their portfolio if they do not have it right now and natural gas. Obviously, it’s the future for energy in this country. I mean energy is a very fundamental food group of a healthy economy. Once we get past November and the elections I think with where gas prices are and where exploration efforts are in the country and the ability – it’s an affordable all-American product. So it makes all the sense in the world and there is good reason I mean I don’t think – I think the multiples are going to stay where they are at in this space as well, because I think interest rates will probably remain very low, but I think people are seeing a lot of value right now and continue to see value in natural gas. Mark Levin That all makes sense, congratulations on a great execution. Kim Cocklin Thank you, Mark. Operator There are no further questions at this time. I would like to turn the floor back over to Ms. Susan Giles for closing comments. Susan Giles Thank you, Selena. I just want to say thank you for calling. A recording of this call is available for replay on the website through August 3. And we hope to see many of you at the AGA Financial Forum in a couple of weeks. Thank you again for your interest in Atmos Energy. Bye-bye. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited. 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