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Are Stocks Cheap Now? Get GAAP If You Want To Get Real

The times they are a changin’. In the ’80s as well as the ’90s, corporations reported quarterly results that corresponded to generally accepted accounting principles (GAAP). These days, the vast majority of companies report “pro-forma” earnings that adjust for unusual, special or one-time circumstances. Take a look at the dramatic rise in the percentage of companies serving up adjusted profits per share rather than GAAP-based results. In June of 2010, 70% provided adjusted earnings. However, as the pressure to engineer gains in bottom-line profitability has mounted, more and more corporations have resorted to non-GAAP reporting. Roughly 90% of companies felt the need to manipulate their presentations to the public by June of 2015. Not a big deal, you say? The S&P 500 SPDR Trust ETF (NYSEARCA: SPY ) trading at 193.75 represents a price-to-earnings (P/E) ratio of roughly 16.5 only if you incorporate pro-forma earnings. If you are inclined to employ GAAP earnings – the less manipulated version of reported earnings – the P/E moves up to approximately 21.5. In other words, even with the S&P 500 close to 200 points below its high-water mark, stocks are not exactly the cellar-dwelling bargain that a value investor craves. In truth, S&P 500 earnings peaked in 2014. You wouldn’t know it from a year-by-year presentation of pro forma/adjusted results alone. You might have believed that S&P 500 earnings rose form $60 per share in 2009 to $120 per share in 2014, and that they merely took a breather in 2015 by holding steady near $120 per share. Unfortunately, you’d have been misinformed. A side-by-side visual comparison with GAAP S&P 500 earnings demonstrates how earnings hit their pinnacle near $100 per share in 2014; meanwhile, there has been a 12.7% erosion to nearly $90 per share in 2015. Earnings per share haven’t fallen that hard since the systemic financial collapse year of 2008. And that’s not all. There is always a discrepancy between GAAP and adjusted pro forma where adjusted results are going to look better than GAAP. And if the discrepancy is not so egregious, maybe one might be willing to overlook it. In fact, studies conducted with chief financial officers will tell you that the magnitude of chicanery is in the realm of 10% of earnings per share. That is about the average spread across the five year period between 2009 and 2013. In 2014, it’s closer to 20%. In 2015? GAAP is now about 25% lower than adjusted pro forma results. That 25% differential is the widest discrepancy since… well, you guessed it… 2008 . The earnings contraction that began in the 3rd quarter of 2014 is unlikely to turn around quickly. One question that an investor who is allocating his assets in the current environment – economic, fundamental, technical, interest rate policy – is whether or not lower interest rates alone justify paying exorbitant stock premiums. Since earnings peaked on 9/30/2014, the low yielding iShares 7-10 Year Treasury Bond ETF (NYSEARCA: IEF ) has outperformed SPY. The deterioration in earnings has coincided with the relative strength of IEF over SPY. And at present, IEF is in a technical uptrend whereas SPY is in a technical downtrend. Earnings contraction, then, is dovetailing with technical price movement – price movement that has not supported the notion of acquiring expensive stocks on the basis of low rates alone. Perhaps an extremely bullish stock advocate should look for a tailwind from economic data. Sadly, he/she is unlikely to find it. Wednesday’s reading for February’s U.S. service sector came it at its lowest level in two-and-a-half years. In fact, the flash PMI services index came it at 49.8; a reading below 50 represents is indicative of contraction, not expansion. What we may be seeing, then, is the high probability that U.S. consumption is not immune to the domestic manufacturing recession or economic woes the world over. In spite of gasoline and energy price savings, Americans have been bolstering their rainy day funds with higher U.S. savings rates. And that rarely fits the narrative for hearty personal consumption expenditures. In fact, the simplistic notion that cheap energy is a net positive for the consumer-driven U.S. economy has been turned upside down. The primary tailwind for stocks at the present moment are higher oil prices, not lower ones, where the correlation between oil and stocks hovers near 90%. Oil up, stocks up. Oil down, stocks down… and sometimes violently. In sum, the fundamental picture may not matter much in the near-term when risk taking is indiscriminate. It matters more, however, when there is less demand for a wide range of individual securities, industries, yield-producers and debt instruments of varying credit quality. The latter is what has been transpiring since the spring of 2015. Not so ironically, the bear market rally that began February 11 has not been accompanied by a diminished demand for “risk-off” assets like the SPDR Gold Trust ETF (NYSEARCA: GLD ), the iShares 20+ Year Treasury Bond ETF (NYSEARCA: TLT ) and the CurrencyShares Japanese Yen Trust ETF (NYSEARCA: FXY ). These risk-off asset types have essentially held up, even with 5.5% upturn for SPY since 2/11. The fact that shelter-seekers still like precious metals, long-term treasuries and carry trade reversal currencies implies that the worst is not in the rear-view mirror. (Note: Many of these asset types are present in the FTSE Multi-Asset Stock Hedge Index .) Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.

California Water Service Group’s (CWT) CEO Martin Kropelnicki on Q4 2015 Results – Earnings Call Transcript

Operator Welcome to the California Water Service Group Fourth Quarter and Year-End 2015 Earnings Results Teleconference. Today’s conference is being recorded. I would now like to turn the meeting over to Shannon Dean, Vice President, Corporate Communications. Please go ahead. Shannon Dean Thank you, Nova. Welcome everyone to the fourth quarter and year-end earnings results call for California Water Service Group. With me today is Martin Kropelnicki, our President and CEO, and Tom Smegal. A replay of today’s proceedings will be available beginning today, February 25, 2016 through April 25th, 2016 at 1-888-203-1112 or at 1-719-457-0820 with a replay pass code of 4899398. As a reminder before we begin today the company has developed a slide deck to accompany the earnings call this quarter. The slide deck was furnished with an 8K this morning and is also available at the company’s website at www.calwatergroup.com/docks/earningsslidesfebruary2016.pdf Before looking at this quarter’s results, we would like to take a few moments to cover forward-looking statements. During the course of the call, the company may make certain forward-looking statements. Because these statements deal with future events, they are subject to various risks and uncertainties and actual results could differ materially from the company’s current expectations. Because of this, the company strongly advises all current shareholders and interested parties to carefully read and understand the company’s disclosures on risks and uncertainties found in our Form 10-K, Form 10-Q and other reports filed with the Securities and Exchange Commission. Now let’s look at the 2015 results. I will pass it over Tom. Tom Smegal Thanks, Shannon. Good morning everyone. Martin and I will be going through our presentation today a little bit differently than in the past and we will be walking through the slide deck that we distributed. So we’ll refer to page numbers as we go through to follow along on where we are on the slides and I will be and just to summarize we’ll talk about the financial highlights for the year. We’ll talk about the drought of course. Our regulatory update whether California GRC, some slides that we’ve developed relating to our adopted rate base and return on equity and lastly to talk about what we expect some of the things we expect for 2016. So very briefly turning to slide 5, our financial results, our operating revenue was down just a little bit that has to do with the unbilled revenue that we will discuss in a moment. Our operations expense was relatively flat, that is lower purchase water cost offset by higher costs in other areas particularly pension costs. All of those things are subject to balancing account protection in California, our main service area. I will highlight that our net income is down 11.7 million or 20.7% and the EPS is down $0.25 of that same 20.7%. Turning to slide 6 for a little bit of explanation and just as a reminder we talked about this for a number of calls in a row here but our unbilled revenue has been a factor for us all year and just to give an update on the accounting, unbilled revenue is excluded from our revenue decoupling mechanisms. The WRAM and the MCBA track, the actual bills that are sent out to customers and so as a water utility that does billing on an everyday, every workday cycle. We will have a period of time at the end of every accounting period where there are customers who have used water and are owing us money but have not been billed for that yet. So that’s excluded from the ramp. We just show how that’s calculated and the variance there really has to do with customer demand, rate design, weather and the number of days since the number of days left in the year from the end of the billing cycle. So it can vary from year to year and we did have a dramatic variance for 2015 versus 2014. In 2014 we had a revenue increase of 6.8 million that is comparing December of 2014’s accrual to December 2013’s accrual. The effect there is warm dry December 2014 as well as higher service charges that were adopted in the 2014 GRC decision. In 2015 we saw a revenue decrease by 0.5 million due to a cool wet December of 2015. The net difference there is 7.3 million when you take the tax effect of that, that’s the 4.9 million difference in net income. Our tax benefit we talked about in the third quarter 4.8 million received in 2014 that did not recur in 2015. Our incremental drought expenses for the year ended at 4.4 million and that reduces net income by 2.8 million. Again that expense is tracked in a memorandum account. We don’t get immediate recovery but we have to apply for recovery at the commission and once we do that we can book — we can collect that revenue. Finally the last item is maintenance costs and those increased 1.6 million for the year, again pretty much drought related we believe has to do with mains and service repairers, a lot of overtime was spent this year working weeks that we wanted to fix the day that they were discovered. That’s a policy change that we made in the drought to make sure that we’re doing the right thing and we’re out there in front of any water wasting that goes on. On slide 7 it’s just a graphical representation of what I mention that shows you the bridge from a $1.19 in 2014 down to the $0.94 in 2015. I won’t go over that in any detail. On page 8, I will highlight some important positive developments from a financial standpoint and this we’re really proud of the first item is that we spend a 177 million on capital improvements this year. If you recall I think our target was 125 million to 145 million. We’re anticipating the ramp up as we go into the 2015 general rate case cycle and if you’ll recall the 693 million of capital that we’ve asked for there, our engineering group did a really excellent job in our districts putting in all the capital improvements this year really exceeded our budget expectation really dramatically. That’s going to drive our rate base growth in the future and the rate base growth as we’ll talk about later does drive earnings growth in the future. The other big item which is important for us is that our WRAM decoupling balance which has been a problem issue for us really since the beginning of the decoupling era in 2008 that actually as a result of the drought surcharges that declined to 40.6 million. So the receivable balance is 40.6 million. It was in the range of 45 million at the end of last year that is a really positive development considering all of the drought savings that we had. As you also know we completed a successful debt offering in the fourth quarter and that was a 100 million debt offering long term debt and as well as 50 million that we expect to receive as a delayed draw in March of 2016 and we also re-upped our line of credit so we have 450 million on the credit lines we did that earlier in the year. So company is on very good footing financially, lots of liquidity the ability to do the CapEx that we’re going to discuss in the deck. And we did just get a reaffirmation from S&P of our A plus stable, AA minus for our first mortgage bonds. The next thing I wanted to point out is of a little bit of a difference in how we look at return on equity versus how you would look at it just from a from 10k and income statement balance sheet review. Our California adopted return on equity which is the bulk of our business remember 94% of our businesses in California. The adopted return on equity is 9/43% and just as an addendum there we did get a delay in the cost of capital proceedings so that will be our adopted return on equity for 2016 as well for the entire year. Our GAAP ROE if you calculated from the 10-K that will be filed later today is 7.1%. In California we are not including construction work in progress actually none of the states we include construction work in progress in our rate base. So by deducting the equity equip we value our return on equity really at this 8.45%. Now that’s not at the adopted level and so we’re certainly not jumping up and down over that but we wanted to make you aware that there is a difference between what you see straight from the balance sheet and what we’re allowed to earn based on the regulation. Right now with the regulation we’re booking the interest during construction or the AFUDC, on all of our planned projects into the ending values of the plant. So we do collect that money over time later but we don’t have a return on construction work in progress. The last item on that table, is just a demonstration of what would the ROE under this scenario have been if we didn’t have the drought cost and that’s almost 9% really relatively close to the authorized ROE. Now I’m going to turn it over to Marty. Martin Kropelnicki Thanks, Tom. Good morning everyone I want to give everyone a update on what’s happening in California with the drought. Starting off talking about kind of where we are and what it shaping up to be for ’16 and then on slide 11 I’ll talk about some of our results of our efforts for 2015 to save water. First and foremost California is entering potentially the 5th straight year of a record drought. So far we have had good — our precipitation up and down the state but it has warmed up pretty quick from a water supply standpoint if you look at the major reservoirs where they are today versus where they were a year ago. They’re mostly about the same, there hasn’t been a big change in reservoir conditions year over year. The thing that has changed is the snow back and act as earlier this week as of 23rd February our snow pack for the state was 93% of normal. If you go back to the end of January, the snow pack was 124% normal and that will give you an idea how much it’s warmed up over the last 30 days in the state. So it’s good to see the snow pack is at 93% that’s certainly better than last year, but we like to see that snow pack a little higher and not have the warm weather that we’ve been having throughout the state. So the snow pack is good but really what’s going to happen they’ll do a snow pack measurement in April and that will determine kind of our next steps with the drought. Having said that the state has extended the drought emergency through October 31 as I mentioned the final allocations and targets will be set at the snowpack reading later this spring. In the updated provisions that the State Water Resources Control Board has published, it’s basically the same kind of program but they did add three provisions to the calculations. One there’s a provision for growth. So when you look at a city like Visalia for us for example, Visalia growth 3% or 4% a year. So when you locked in the drought targets based on the 2013 consumption there was no modification of those targets for growth and population connections and so that’s very difficult to deal when you have a growing city to try to hit those targets. They have added a provision for the growth modifier. They added a climate adjustment modifier. So you if you think about the drought in the state of California whether if you were coastal, you had an allocation that was potentially the same as someone who is inland where it’s much harder. So they’ve added a climate adjustment mechanism and then they added a third piece a modifier which is a drought what they call a drought resilient supply modifier. Though as you bring in recycled water projects or desalinization that will allow you to adjust your targets within a given geographical area. So as of right now applying these provisions looking at what the potential targets might be for 2016. We anticipate approximately a 2% to 4% adjustment in many of our districts depending on whether located throughout the state to be finalized after that final snow pack reading in the spring. So the drought is going to continue, it’s going to continue to be a challenge for us. We will keep our drought team fully intact. We will be making some modifications as we move forward as those rules are finalized with the State Water Resources Control Board. Having said that we do believe we have positioned well and manage well during 2015, if you go to slide 11 our customers achieved a net reduction of 28.6% exceeding the state’s requirement of reduction target of 25%. To just put that into perspective of how much water that is that 68,000 acre feet or 22 billion gallons of water say by Cal Water customers to take it one step farther that’s 46,000 gallons per connection and that’s enough water to provide everyone in California 580 gallons of water. So that’s a real big savings and we were very, very happy with the results of our drought outreach and our drought team that has done a fantastic job. Having said that to give an idea what it took to achieve those targets I just pulled some statistics from the team throughout the seven month drought period in 2015 we ran over a 1000 radio ads. We designed and we ran 23,000 plus cable TV ads, we designed and we ran in movie theaters over 73,000 radio ads. We distributed and helped install over 10,000 low flow toilets. We had processed over 50,000 of rebates for water efficient appliances and we processed and issued over 190,000 rebates for turf replacement projects. So when we talk about our drought cost you could see where a lot of the money was spent it was clearly spent on outreach and trying to work with the customer with our customer first approach to help all of our customers set their targets. As Tom mentioned that the decoupling mechanism we believe worked well and we believe it’s the right rate design, if you think about the way the rate design is working. There were a few analysts reports that were published that was worried about that the WRAM account ballooning. The way we designed the rate design was for people who were hitting their targets. They had no change in their rates. But people who went above their targets when they hit first unit above their budgeted amount was two times their highest rate. And any drought surcharge that the company received was then used to offset the WRAM balance. So people who are abusers of water were panned on the WRAM balance to the people who were doing the right thing. So we continue to believe that it’s the right rate design and we believe it’s worked well. The incremental cost associated with the drought as Tom mentioned that’s a $0.06 impact for the year that was recorded in an incremental cost memorandum account, those costs are everything I just talked about in terms of the outreach we have a full time team of 39 employees that have been working on the drought nonstop. We believe those costs are recoverable and we will have them — we will be filing for recovery later this spring and they are subject to a prudent sea review and [indiscernible] review by the CPU but we do believe they will be fully recovered. On the customer surcharges in the WRAM balances, it gave us an extra cash flow of $36.9 million and ultimately when we apply that and the changes to revenue that go through the WRAM when it all nets out we had a net reduction in our WRAM balance of 4.6 million or 10.2%. So very happy with the rate design, very happy with how the WRAM has worked in 2015 with the drought. In addition as you may recall we recently adopted a sales reconciliation mechanism and due to the conservation and the significant drop in consumption the sales reconciliation mechanism will be filed and most of our districts will have a reset on the rates that we will file for here shortly as well. So that’s another mechanism that will keep the WRAM balance from growing and keep the adopted numbers closer to what actual [indiscernible]. So it’s a nice tool to have to keep the WRAM balances minimal and keeping rates close to what the actual costs are. Moving ahead to the next slide, as Tom talked about you know we had a great year in engineering. We got a lot of capital done as you may recall we spent a good part of 2015 reorganizing our engineering division, our engineering department including a new Vice President that we hired from outside the company. We did that because of what we were anticipating in the rate case, we did file the rate case in early July seeking about $95 million in 2017 and then 23 million in steps for ’18 and ’19, 80% of that rate increase of that 95 million is capital related and so in addition we made a commitment its rate case to keep expense headcount flat. So where we really been focused on capital, what’s embedded in the rate case is a proposed capital budget of $693 million over three years. So we’re well into the process now, we are scheduled to get the advocates or the ORA report next week. We will have about 30 days to respond to it and then we move into the next phase of the GRC process which is a settlement process. So there will be more to come and more to talk about on the first quarter earnings call. Looking at one of the big drivers of capital for us on page 13, as we’ve talked about and we’ve had in our investor slides we own and operate over 600,000 miles of main and I always like to tell people that’s equivalent from flying to San Francisco to New York J.F.K and then fly back and add 500, 600 miles and you will get that’s the amount of mains that we operate. We were on a 300 year main replacement cycle which is too long and with the drought as Tom mentioned we’ve put a program in place to fix leaks same day. So it’s 24/7 if we had a leak we wanted to fix it but ultimately those main should be should be changed out every 100, 150 years and if you look at the American Water Works Association they recommend a 100 year main replacement cycle. So in this rate case we have proposed going from a 300 years cycle to a 200 year cycle. Most of our peer companies in the state of California are already at a 100 to 150 year replacement cycle. So we think we’re on the right approach with the main replacement program and look forward to working through that with the commission. In addition we have in the rate case we’re very focused on water supply reliability, more tanks, more wells doing a brackish desalinization study for here in the Bay Area. So there is a lot of capital projects, there’s one large project but most of these projects are kind of the routine kind of capital maintenance capital improvement and it’s what’s going to drive our rate base growth going forward. In addition, we had one policy change, Tom do you want to take them to the policy change we applied for? Tom Smegal Thanks, Marty. This is an item I talked earlier about the construction work in progress and it’s exclusion from rate base. We did have comments in the last rate case cycle from the rate advocate actually suggesting that it would be better for us from their perspective to move to construction work in progress instead of accumulating interest in construction into project costs. So we did make that request in the rate case. We think it will be adopted based upon the earlier motivation of or [indiscernible] and just remember that there would have an immediate effect on our adopted rate base in the rate case we’ve asked for 80 million which represents a long term average of construction work in progress and 80 million would be added to rate base on an annual basis and that roughly translates to 4 million of net income or $0.08 on a per share basis if that is adopted. Turning to slide 14, just to give you a graphical representation of our CapEx and how well we did this last year. What you can see with the yellow bars is that we have increased over the last eight years from a capital expense of 76 million, 100 million moving up, 177 million. The blue bars for ’16, ’17 and ’18 represents what we filed for in the general rate case the 205s that I showed there in 2016 that represents what we filed in California plus what we expect to spend in the other states. And we have given a range in our 10-K that we expect to spend between 180 million and 210 million in 2016. So we will forward already working on the CapEx for this year as you would expect and we look forward to that level of CapEx continuing into the future based upon the main replacement program moving to a more normal level of a 200 year cycle. Flipping to page 15, again this is a graphic representation of the company’s authorized rate base. If it’s application in California were adopted as proposed. So a lot of caution particularly on ’17 and ’18. These are the numbers we proposed to the commission there’s always changes to the rate case process but just to give you an idea that our authorized rate base in California and all the other subsidiaries about 977 million in 2014, 1 billion of [indiscernible] in 2015 and a little bit more in ’16 so there’s not much incremental rate base in ’16 but a tremendous increment in ’17 and ’18 based on the rate case CapEx as well as the inclusion of the construction work in progress. And again just to reiterate these are projections that are based upon the regulatory filing and certainly will change based upon the outcome of that proceeding. Flipping to slide 16, just to get everyone in the mind set of what that means for the company and for its earnings potential. As we’ve talked throughout the call and over the quarters since 2008 we have adopted a decoupling of revenue from earnings and that means that there’s a very — it’s very unlikely for us in our regulated arena to earn more than our authorized rate of return. So the table on slide 16 shows that based on the rate base that we have authorized and the capital equity structure that we have with the debt equity ratio there’s a maximum allowable regulated earnings and you see that for ’14, ’15 and ’16. Remember that that does not include such things as regulatory lag, any cost that we’re not recovering through the process. Other income and expense is outside the regulation area and regulatory tax differences. The point of this slide is to get us in the ballpark of where we would expect our earnings to be in ’14, ’15 and ’16 and then for ’17 and ’18 it’s really going to be dependent and the earnings of the company are really dependent upon the rate base that’s authorized particularly in California as well as by the other state regulators and the numbers that are reflected on the right hand side of the table again are the rate basis for ’17 and ’18 assuming that the application in California were granted in full and we do know that that isn’t typically the case. So now I’m going to turn it back to Marty for slide 17. Martin Kropelnicki Great. So let’s talk about 2016 and what to expect. First and foremost as I mentioned earlier, continued drought conditions and mandatory restrictions in the State of California. We don’t see that going away now until the end of October and this will be a standing kind of agenda item that will update everyone on the quarterly calls. Based on current conditions we expect drought expenses to reduce earnings per share between $0.05 and $0.10 a share and again those costs will even though they are expensed in the period they will be recorded in a drought memorandum account that’s already been authorized and we apply or recovery of that at a later date. It’s the third year of rate case cycle. So you we know limited rate relief, we had $5 million in escalation plus a miscellaneous advice letter filings. It’s the greatest period of regulatory lag. One of the questions people ask me is well you have a year round balance in account which covers your revenue, you got your production costs balancing account you’ve got a health care balancing account, you’ve got a pension balance account, well what else is there well? Well there’s labor and as Tom mentioned with the leaks we told our team across the state you fix leaks 24/7, you don’t let water run. Any incremental costs like that are going to hit the labor line. You’ve chemicals, you have filters, as water conditions change throughout the state change. It can become more challenging from a water quality perspective. So those cost of treating water are not covered by any type of balancing account, those are forecasted into the rate case and any significant changes in water supply that we have to change treatment we have to absorb those cost and try to get them back in the next rate case. So it’s the greatest period of regulatory lag. So we’ll be very, very tight with our operating budgets this year. We did put in the slide deck here the 2015 tax rate which is 36% and we anticipate a tax rate of 38% in 2016. We did noticed and some of the questions we got from our investors is that they were missing some of the tax estimates or they would take a one-time tax adjustment and take it out in perpetuity. And when you have things like the maintenance repairs, deduction and currently congress is extended bonus depreciation that will cause the tax rate to move around but for us in terms of 2016 we’re anticipating a 38% tax rate. In addition we have a capital range which is a new all-time high for the company of $180 million to $210 million subject to the adjustments of the pending rate case that’s a big capital program for us and that’s why the reengineering or engineering was really important to us. So we did reorganize the department to focus on expedited capital delivery and getting all the projects done on scope, on schedule, on budget. A couple things to mention as well to keep on everyone’s radar screen we do have two commissioners in the State of California that will term out at the end of 2016 so we’ll be watching that and see who will become two of the commissioners, one of them is Commissioner Sandoval who has been our water commissioner. So that will be worth watching in the state to see how that plays out. In addition we announced in the fourth quarter we have a new board member that I believe is very significant. We hired Greg Aliff we invited him to join our Board, Greg has 38 years with Deloitte & Touche. He has a CPA. He recently retired as Vice Chairman and Senior Partner of Deloitte and Head of their U.S. Energy and Natural Resources. In his career he’s done a lot of things most of it’s centered around utilities including heading their sustainability practice. He also served on the Board of the Deloitte U.S. practice. So Greg truly is a utility expert and another financial expert. He’s our third financial expert that we have on the Board that really has a grasp of the regulatory mechanisms and processes and how they work and so are very, very honored to have Greg on our Board and look forward to working with them. So what are our focal points for 2016? First and foremost the drought, continue what we’ve been doing to help our customers hit their mandatory conservation targets. We don’t see that changing anytime soon. Second thing is the GRC, the GRC is a big deal. A lot of resources get burnt up and used up in the process but it’s going to be a focal point of the company and our goal is to try to drive up the GRC to conclusion before the end of the year on schedule. And the third thing is one of the capital program. Make sure that we are getting that capital on the ground, that we’re getting it closed and that we’re getting it embedded in rates and that will be our 2016 which will be a blink of an eye and I’ll be a year later we will be here talking about what we achieved in 2016. So with that operator we would like to open it up for questions please. Question-and-Answer Session Operator [Operator Instructions]. And we will take our first question from Spencer Joyce with Hilliard Lyons. Spencer Joyce Just a couple of quick ones from me, first off I know you mentioned the drought memoranda account had grown to about 4.4 million and I was hoping you could refresh us on the time table for making a recovery filing. I guess correct me if I’m wrong, at some point we will work that even as somewhat of an addition to the general rate case. Is that correct? Martin Kropelnicki Well it’ll be incremental to the rate case so essentially we will file an advice letter later most like an advice letter later this spring and then once that’s approved we will book that revenue. It used to be before we decoupled when we had memoranda accounts we would book the revenue as it was billed. So as that account balances worked out it was incorporated in rates and that’s when we recognized the revenue. Now that we have decoupled the balance in accounts it will happen as once the commission completes it’s prudency review and they authorize the collection of that memorandum account we will book all that revenue at once as it’s collectible. Spencer Joyce Okay. So if we file this spring would — is it correct to assume that we would only be filing for amounts accrued to that point so say if we file May 1st, we may go kind of May 1 through December and not accrue that additional expense? Martin Kropelnicki Yes. That’s right there’s going to be a delay for the 2016 expenses because the memorandum account deals with incremental expenses, there’s a proving to the commission that these expenses are actually incremental that you know we backfill the positions that we’re assigned to this drought task and all that. So we’re really looking at the 2015 costs and the small amount that was in 2014. Those costs are what we would file for in 2016. Any costs that are incurred in 2016 are likely to be filed in 2017. Spencer Joyce So those costs that we file for in 2016 that would likely be a net income benefit at some point in 2017? Well it depends on the length of time of the commission review. This is an informal review not a application filing. So I would anticipate that the review would take 90 to 120 days. So we’re talking about most likely what would that be? Probably a third quarter type event but it could be early or it could be later. I would hope that we would get recovery of that within 2016. Operator [Operator Instructions]. We will take our next question from Jonathan Reeder with Wells Fargo. Jonathan Reeder So I might have missed it in your remarks Marty, the 2% to 4% adjustment you said in the conservation goals kind of across the district that you expect this spring. Is that like allow more usage or would it just increase the level that they have to conserve? I miss which direction it’s going? Martin Kropelnicki It would allow for more usage. So essentially if you look at the comments of the State Board right now they’re anticipating — we had a 25% kind of total target for the state last year in 2015, they are talking about an approximate 20% target for ’16 but again that’s subject to the final snow pack reading here in April. So it’ll allow customers to use a little bit more water essentially and it’ll vary by region by region which is nice. The other thing I’ll tell you from a rate design perspective that we’re looking 70% to 80% of our customers are doing a great job and hitting their targets and we have that 20% that are going over their numbers. We’re looking at trying to incorporate in our rate design to call the dead band, you know that’s not a technical rate making term. But for example if Tom has a water budget of 10 units and he uses 11, on that 11th unit Tom will pay two times the highest rate and if you assume Tom hit his target all year [indiscernible] pretty mad when he gets that one unit at the super high rate. So a dead band essentially would put a little bit of a buffer in there before the surcharges kick in and again we have been very happy with our customer responses across the Board and we serve a very diverse slice of California from low income areas to very, very high income areas and overall just 70% to 80% of our customers have just done a fantastic job at hitting those targets. Jonathan Reeder Okay. So if you implement that dead band and that might I guess impact how quickly you I guess recover — under recovered WRAM balance, is that right how you made some headway there because of the surcharges? Martin Kropelnicki That would reduce the surcharges, remember also that Marty mentioned the sales reconciliation mechanism. So the extent that we had a 28% drop in our sales in ’15. We’ve adjusted our sales targets within the rate design by 10% to 15% across the Board. So they were actually collecting more cash throughout the year in base rates. So that is going to have the opposite effect and hopefully the combination that you won’t change the pace of recovery of the WRAM balance. Tom Smegal I think the other thing too, Jonathan again the surcharges are being paid by 20% to 25% of our customers who go well above their targets, their authorized water budget. So that dead band will basically give the customers who are been doing the right thing a little bit of breathing room. But the ones who really you know basically where we have collected the majority of the surcharges, I think they’re going to continue to go away over their budgets and those are people who tend to be less price sensitive and they just continue to write the check. So it’ll be interesting to see a year from now how that plays out. Jonathan Reeder Okay. So that’s good there and then I guess the other part the you mentioned the higher usage. If it does move to 20% that should hopefully help the unbilled revenue issue in ’16 where that’s actually may be a tailwind turnings, is that accurate? Martin Kropelnicki Again it’s very hard to say because it’s so dependent upon really the usage in December and so month the month it may have an impact really comes down for the annual basis it really comes down to December of ’15 versus December of ’16. And remember we’re incorporating – we’re as good as we are based upon the surcharges because we’re incorporating the unbilled surcharges as well, the drought surcharges into that number. If we get to October and that drops off we could still have a problem of unbilled in ’16 and expected to normalize later. Tom Smegal Yes I think Jonathan , a lot of times I think people get — the unbilled can be complicated but it’s just a revenue accrual at the end of the quarter. So if consumption is going down your revenue accrual is going to go down, if consumption starts going up at the end of the accounting period your revenue accrual is going to go up. So it’ll follow that and then it’s just subject to you know weather conditions and where we have seen more of the violent swings in the unbilled balance or the revenue accruals is been where we’ve had significant shifts in weather. So as Tom mentioned a warm dry December it was a $6 million pick up and now this year we had a really a wet December, a lot of rain in December and it ram back the other way. Jonathan Reeder Unfortunately unbilled not going through WRAM and just been kind of a timing issue, it creates a noises for the quarter, for the year and for the investors that maybe aren’t paying as close of attention. Martin Kropelnicki Right. And really that’s kind of why we’re pointing in those last few slides of the deck to sort of what’s the core earnings potential of the company just to get focused on that. It is noise related to that unbilled issue and it does float up and down and try to kind of pass through that and say what should we really expect this company to earn. Jonathan Reeder Right. So turning to the rate base forecast. What you showed does that included the 80 million pick up from the [indiscernible] or would that be incremental to your forecast? Martin Kropelnicki That does include that. The 1.3 billion – 4 billion estimate for ’17 is California GRC as filed which includes [indiscernible]. Jonathan Reeder Okay. And then why wasn’t there much of an increment to rate base in 2016 given you know the high level of CapEx in ’15? Martin Kropelnicki Remember this is the authorized, this is not the actual rate base that we went in and calculated what’s there on the balance sheet as far as the rate base goes. This is what ended up being additional authorized rate base. Two things drive that, one is that if you look at our CapEx, the 177 million about 60 million of that, 65 million of that is still in SEWIP and so it’s not earning a regulated return. There was an increase to the SEWIP balance from ’14 to ’15. So that’s part of it. There’s also timing issues associated with the rate case, they’re looking at an weighted average plant and a lot of our CapEx was at the end of the year so we’re looking at 177 million through the end of the year. A lot of it is necessarily going to get incorporated into ’15 whereas it would get incorporated for the following year. Jonathan Reeder Okay. And so the projections you’re showing are they average rate base or are they year end balances? Martin Kropelnicki Those are average rate base, so that is the weighted average rate base that we’ve applied for with the commission for ’17 and ’18 plus what we in the other states. Jonathan Reeder Okay. So that’s the total company rate base not just California? Martin Kropelnicki That’s right. That’s the total company rate, yes. Jonathan Reeder And then I guess last question and then I will let some other people get in there but the higher level of CapEx that you’re doing so does require that advice letter recovery for the portion that was above the authorized amount in the last GRC and I guess there is like a little bit of a lag involved there, is that how to kind of think about those higher amounts? Martin Kropelnicki Yes. I think there’s two things, remember in the GRC process. The last year GRC was filed in mid-2012 and so to forecast out what we’re going to spend and what we’re authorized to spend in 2015 is a little bit of a stretch from that vantage point from the vantage point of when you initially file. So part of the CapEx for ’15 is anticipating the recovery in the 2017 test year. So we do have potentially a lag between what the actual rate base and what’s the adopted rate base for ’16. That kind of what you’re talking about there. Some of these projects are advice letter projects and we will be filing for recovery of some of the advice letter projects throughout the year. The difficulty in predicting those into our earnings for ’16 is really the timing of the commission’s authorization for recovery as we go through the year as you get later, later in the year you get less and less of a recovery within the year. So we do have a number of advice letter capital projects that we expect to file but that the amount of revenue that we can expect from that is fairly limited based upon when we think we’re able to file that during the year. Jonathan Reeder So last thing to understand, you were talking about kind of the headwinds against achieving that maximum regulate earnings should we also think I guess [indiscernible] on SEWIP is I guess offsetting a portion of that? Martin Kropelnicki Well I mean those are it’s really timing differences, so when we say the AFUDC on the SEWIP what we’re talking about is including those costs and we have for the last 15 years included those costs in our rate base figures as the products are completed and recognized in rate base and so that adds whatever it adds 2% to 5% of the project cost based upon how much interest happened during the period that the project was under construction. So what you’ll see is an initial bump based on the SEWIP and the trend will be that for each project going forward there will be no capitalized interest included in the project cost of the trajectory of CapEx would decline somewhat over what it would have been including interest during construction. Jonathan Reeder Right, but until that potential change like for 2016 when we look at what you said the maximum allowable regulated earnings I guess why you’re still accruing AFUDC that potentially offset some of the cost recovery and regulatory lag those kind of headwinds. Martin Kropelnicki It does but you don’t see it right away, I think that’s what I’m getting at. That gets capitalized and incorporated into the plant that’s built in 2016. Operator [Operator Instructions]. It appears we have no further questions in the queue at this time. Martin Kropelnicki Okay. Well thanks everybody for joining us and we look forward to discussing our first quarter results at the end of April. Thanks very much. Tom Smegal Thanks everyone. Operator And that does conclude today’s conference. Thank you for your participation. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. 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Great Plains Energy’s (GXP) CEO Terry Bassham on Q4 2015 Results – Earnings Call Transcript

Operator Good day, ladies and gentlemen, and welcome to the Great Plains Energy Incorporated Fourth Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would like to introduce your host for today’s conference, Ms. Lori Wright, Vice President of Investor Relations and Treasurer. Ma’am, you may begin. Lori Wright Thank you, operator and good morning. Welcome to Great Plains Energy’s Yearend 2015 earnings conference call. On our call today will be Terry Bassham, Chairman, President and Chief Executive Officer and Kevin Bryant, Senior Vice President, Finance and Strategy and Chief Financial Officer. Scott Heidtbrink, Executive Vice President and Chief Operating Officer of KCP&L is also with us this morning as our other members of our management team who will be available during the question-and-answer portion of today’s call. I must remind you of the inherent uncertainties in any forward-looking statements in our discussion this morning. Slide 2 and the disclosure in our SEC filings contain a list of some of the factors that could cause future results to differ materially from our expectations. I also want to remind everyone that we issued our earnings release and 2015 10-K after market closed yesterday. These items are available, along with today’s webcast slides and supplemental financial information regarding the fourth quarter and full year 2015 on the main page of our website at greatplainsenergy.com. Summarized on Slide 3 are the topics that will be covered in today’s presentation. Terry will provide a financial overview and an update of our legislative and regulatory priorities followed by a discussion of our strategic plan. Kevin will discuss our financial results as well as our long-term target. With that, I will now hand the call to Terry. Terry Bassham Thanks Lori, and good morning, everybody. I’ll start on Slide 5. Yesterday we announced fourth quarter and full year 2015 results, earnings for the quarter were up $0.15 per share compared to $0.12 per share in 2014. Full year earnings per share were $1.37 compared to $1.57 a year ago. Our results were within our communicated guidance range of $1.35 to $1.45. Our 2015 results reflect continued disciplined management of our business of solving the regulatory lag typical of our Missouri electric utility prior to new retail rates going into effect. Also weather when compared to normal negatively impacted earnings were approximately $0.09 for the year. During the quarter, we saw the impact of the recently concluded KCP&L Missouri and Kansas rate cases. We also put in place several new riders and trackers including a fuel recovery mechanism in Missouri, and both the transmission delivery charge rider and a CIPS/Cybersecurity tracker in Kansas. Kevin will discuss quarter and yearend-to-date drivers in his remarks Looking forward we’re introducing our 2016 earnings guidance range of $1.65 to $1.80 per share in our long-term expectations and commitment to drive continued dependable shareholder returns through a combination of earnings and dividend growth. As reflected in our press release last night, we’re targeting annualized earnings growth of 4.5% through 2020 of the year’s guidance range. This growth will be consistent with our regulatory frameworks and will be driven by targeted investment in customer and grid operations, continued environmental compliance and disciplined cost management. In addition, continued investment in national transmission and in a growing regional economy support our earnings growth rate. For the decade long investment cycle behind us, increased investment flexibility and improving cash flows, we’re in a stronger position to grow our dividend moving forward. This confidence is reflected in an increased long-term annualized dividend growth target of 5% to 7% through 2020 and a narrowed dividend payout ratio target of 60% to 70%. Turning now to Slide 6, as we reflect on 2015, there is no doubt the outcomes resulting from the traditional elements of our 2015 Missouri and Kansas KCP&L rate proceedings were constructive with virtually no disallowances and allowed returned consistent with regional presence. However, we continue to be disappointed by the inability to gain traction on some of the more responsive and commonly accepted regulatory reforms we’ve pursued in our Missouri case to better respond to the current environment in which we operate. Bottom line, there is also no doubt, the current regulatory construct that has been in place for the last century is in need of a refresh. As a result, we’re working with others to bring about comprehensive, performance-based statewide energy legislation in Missouri that will enable us [supporting] energy infrastructure investments and evolve our regulatory construct the one that meets the needs of all stakeholders. These reforms will provide robust customer protections, support modernization of the grid to address aging infrastructure, improve reliability enhance infrastructure security and facilitate the transition to a cleaner, more diverse mix of energy resources. We believe those common sense reforms will create and help retain thousands of jobs and will completely position Missouri for economic growth. Effectuating this topic of regulatory reform requires hard work, significant stakeholder education and rigorous coalition building. We continue to work with other Missouri utilities, our customers and other stakeholders to advocate for energy and policy advancements in order to bring longer term solutions that benefit customers and shareholders. We’ll keep you posted of these efforts in advance throughout the year. While we’re encouraged by the prospects for real regulatory reform, we continue to also plan to invest consistent with our regulatory frameworks and make active general rate case filings until such changes materialize. To that end, two days ago, we filed a general rate case at our GMO jurisdiction, requesting an increase of $59.3 million on a rate base of approximately $1.9 billion, using a return on equity of 9.9%. The primary drivers of this requested increase includes new infrastructure investments and continued increases in transmission cost and property taxes. New rates are anticipated to be effective early 2017 and summary of the key components of the case can be found in the appendix. We are also in the planning stages for the next round of rate cases at KCP&L. In Kansas we’re required to file an abbreviated rate case by November 2016 to true up our cost for the La Cygne environmental project. In Missouri, we’re evaluating the timing of our next case, which will likely be during the second half of 2016. As a reminder, the rate case process in Missouri is 11 months, while Kansas is approximately eight months. Finally as you know recently the U.S. Supreme Court granted a stay of the clean power plant pending judicial review of the rule. The stay will remain in effect pending Supreme Court review till such review is solved. While we’ve previously worked to improve the emission profile of our generation with nearly 75% of our co-fleet scrubbed, we continue to evaluate the implications of the recent court action. Investments we’ve made over the last several years have afforded us flexibility, response or combination of strategies, including optimization of the operation of our existing generation fleet and investments in new renewable resources and the shutdown of our older less efficient unit. We will continue to monitor these developments and we’ll balance the need to transition to a cleaner energy portfolio with managing the cost impact to our customers. Slide 7 highlights our simple and clear strategy as predicated and closely managing our existing business, promoting economic growth and improving our customer experience. We remain focused on operational excellence and meeting the changing needs of our customers. For the past several years we’ve implemented information technology projects that include an automated leader infrastructure upgrade, leader data management installation and an outage management system replacement. All are part of our broader strategic focus of providing top tier customer satisfaction and operational excellence. We recently initiated a project to replace our customer information system that will further enhance our interactions with our customers. The installation and operation of our Clean Charge Network one of the nation’s first major electric vehicle charging networks has made Kansas City one of the best places to own an electric vehicle and as you’ll hear from Kevin, economic activity in our region continues to improve. With that, I’ll now turn the call over to Kevin. Kevin Bryant Thank you, Terry and good morning, everyone. I’ll begin with an overview of our financial performance on Slide 9. As you can see, earnings for the fourth quarter were $0.15 per share compared with $0.12 a year ago. Full year earnings were $1.37 per share compared to $1.57 per share last year. As detailed on the slide the $0.03 increase for the quarter was driven by new KCP&L retail rates in Kansas and Missouri and an increase in other margins resulting from a change in customer mix, lower fuel and purchase power expenses that do not go through a fuel recovery mechanism and an increase in transmission cost recovered through a transmission recovery mechanism. An increase in weather normalized demand also contributed to the increase. These impacts were partially offset by milder weather, increased O&M, depreciation and amortization expense and lower AFUDC. For the full year, the $0.20 decrease was driven by mild weather, lower AFUDC, higher depreciation and amortization expense and a tax benefit impacting 2014 that did not reoccur in 2015. The decline in wholesale margins due to lower gas prices in KCP&L Missouri were a fuel cost recovery mechanism was implemented late in the year also contributed to the decline. However, we were pleased to implement the fuel recovery mechanism in the quarter as it minimizes margin risk moving forward. These negative impacts were partially offset by new retail rates and increase in weather normalized demand, lower fuel and purchase power cost and higher other margins. We continue our laser focus on managing cost. For the year O&M exclusive of items with direct revenue offset, declined approximately 1%. Over the last five years as a result of our continued commitment to cost management, annualized O&M growth exclusive of those same items increased less than 1% despite increased pressure from emerging regulatory grid security requirements such as CIPS and cyber security. Demand growth also remains a key focus area. 2015 weather normalized demand growth grew 0.4% net of our energy efficiency program, marking our third consecutive year of demand growth. We plan active role in supporting this growth through competitive retail rates, providing customers with Tier one service and by partnering with our communities to offer tools that promote the economic strength of the region. More globally we continue to be encouraged by the broader economic climate in the Kansas City region. Year-to-date December 2015, the unemployment rate in Kansas City was 3.8%, well below the national average of 4.8%. The residential real estate market remained strong. The number of single family residential real estate permit issued in 2015 increased 10% over 2014. Including multifamily permits, the total for 2015 increased 7% over the same year — same prior year period. Turning to Slide 10 as Terry mentioned, we are introducing our 2016 EPS guidance range of $1.65 to $1.08. The primary drivers of this range include a full year of new retail rates in our KCP&L Missouri and Kansas jurisdictions; weather normalized demand growth, consistent with recent trends of flat to 0.5% net of the estimated impact of our energy efficiency programs and continued discipline cost and capital management. While we will likely see a bit of an increase in O&M for the year due to our strong actions and performance in 2015, we continue our laser focus on managing our business in the current environment. And on the weather front, the year is off to a bit of a mild start, but we have the rest of the year ahead of us and are confident in our ability to manage the year. In the capital markets area supported by our strong NOL position, we have no activity planned in 2016 and have no equity needs for the foreseeable future. Turning to Slide 11, we are excited about our long term opportunity to grow our business while meeting the increasing needs of our customers. As we look forward, we’re targeting annualized earnings growth of 4% to 5% through 2020 off of this year’s guidance range of $1.65 to $1.08. This earnings growth will be driven by annualized rate base growth of 2% to 3% resulting from more targeted investment to empower customers and optimize our grid. I won’t belabor the point, but we will remain disciplined in our cost and capital management. As we look at our O&M profile over the next five years, we’ll be working hard to manage our annualized growth rates to be in line with or below the historical rate of inflation. And as evidenced by our modest ate base growth plan, we will be intentionally focusing our investment consistent with our regulatory frameworks for regulatory lag in the material ongoing challenge. In addition we will continue to develop our national transmission business and our regional economy is healthy and supports our earnings growth profile. At a higher level and as you can likely go in from our comments this morning, our focus remains on minimizing regulatory lag. As Terry mentioned, we are actively working with a broad stakeholder group towards regulatory policy change in Missouri and are committed to evolving the regulatory construct. That said, change is not always easy and we are proactively responding to the existing regulatory construct by filing more frequent rate case. Bottom line is that our team is actively working to eliminate the dips in earnings we have historically experienced and believe this is our current best tool along with tightly managing our investment activities to minimize lag. However there are limits to this strategy as Missouri is based on a historical test year and 11 month rate case process. So given our plans for more frequent and sometimes staggered rate cases over the next few years, we do not expect the smooth upward earnings trajectory through 2020 as a material regulatory reform, but we’ll continue to see material revenue steps when new rates in the various jurisdiction become effective, offsetting the lag from jurisdictions for new rate have not gone into effect. Slide 12 contains a list of considerations for 2017 through 2020 much of which we’ve covered in our presentation today. I’d also like to highlight one additional item. The expansion of bonus depreciation while dampening our rate base growth rate did increase future income tax benefits to nearly $1 billion at yearend 2015. As a result we do not anticipate paying significant cash income taxes through approximately 2024 that eliminates the need for additional equity in the foreseeable future. The details of our NOLs and tax credits can be found in the appendix. And again our expectations for demand growth moving forward are consistent with the recent trends and we will continue our focus on operational excellence and tight cost management that separates again and active management of the rate case calendar to minimize lag. As we wrap up on Slide 13 I’d note that with a decade long investment cycle behind us and increasing cash flexibility, we are in a much stronger position for the next decade. Our confidence drives our increased long-term annualized dividend growth target of 5% to 7% with emphasis towards the top side of the range. This strong dividend growth target will lead to a dividend payout ratio of 60% to 70% with the flexibility for potential share repurchases in the later years of the target window. We’re excited to deliver the opportunities in front of us and have a clear commitment to strengthen our utility infrastructure and regulatory frameworks to promote regional growth and in fact — and exceed customer expectations while delivering dependable shareholder returns. Thanks for your time this morning. We’re now happy to answer any questions you might have. Question-and-Answer Session Operator [Operator Instructions] And our first question comes from the line of Charles Fishman of Morningstar. Your line is now open please go ahead. Charles Fishman Thank you. Terry the partnering that you’re talking about doing with other stakeholders in Missouri, is that the [10.28 house 24.95]? Terry Bassham Yeah. That’s what I was talking about. Charles Fishman And then I’m sorry are you getting the feedback like I am on my phone? Terry Bassham I’m not, but you’re a little fuzzy but… Charles Fishman Okay/ I’m on a headset, but let me keep trying. All right, just one other question I guess, we had this bankrupt — there was that aluminum smelter in the Southern part of the state and my impression was they never saw a rate increase or a tracker, they never saw one they liked and they always voted against or at least had their legislative representative vote against it and they were pretty influential. With their bankruptcy, does that — it’s unfortunate certainly for the employees, for the region, but does that give this thing, the new legislation a higher profitability than we’ve seen in the past? Terry Bassham Yes, certainly. You’re talking about Noranda, which happen to be the largest user of electricity in the State of Missouri and is an Ameren customer and certainly that has been one of our challenges in the past and with — I would just say that with the current process, we’re working through, we’re partnering with them as well. They were Ameren obviously, but yeah I would say that they are with us in terms of a final solution that would help solve several issues and that is one of the things that’s different about this session than has been probably in the last four or five sessions. Charles Fishman So my impression is after a — they were very little ensuring if they’re out of the process, that sort of sucks the oxygen out of opposition? Terry Bassham And it more than out of the process, they’re actually in the process in support of what we’re trying to do here. So it is a definite change to what’s been happening in the past. Charles Fishman Okay. Thank you very much. That was it. Terry Bassham Thank you. Operator Thank you. And our next question comes from the line of Brian Russo of Ladenburg Thalmann. Your line is now open. Please go ahead. Brian Russo Hi good morning. Terry Bassham Good morning. Brian Russo Just on slide 11, you noticed rate case, long term growth rate in 2% to 3% but an EPS growth rate of 4% to 5%. How do you try to capture the incremental EPS growth versus the rate base growth? Kevin Bryant Yeah so Brian that comes in a couple of forms. One is continued cost management, but more importantly as you look at us towards the end of an investment cycle, our equity ratios for regulated purposes have dipped a bit. We expect for our cash position to create an opportunity for us to improve our equity ratios as we come out of that side of the build cycle and so that combination with solid management and little growth we think leads to a solid 4% to 5% earnings growth trajectory. Brian Russo Okay. Got it and just the midpoint of your 2016 guidance, it looks like it’s kind of in line below 8% earned ROE, is that accurate? Kevin Bryant Yeah, it’s about a 150 basis points of regulatory lag. Brian Russo Okay. And you mentioned potential share repurchase flexibility in the future, maybe you could just elaborate on that a little bit? Kevin Bryant Yeah that’s something we wanted to just to put out there publicly. As we get to the end of a five-year cycle with an improving cash flow and a moderating CapEx profile consistent with our regulatory construct, we think we’ll have cash flexibility and so amongst other things not only improving our equity ratio, but we think that there may be potential for share repurchases in the latter edge of that timeframe. So it’s something we’re going to make sure we talk to focus about. Obviously several years away, but something that could be utilization of cash. Brian Russo Okay. And then just lastly what’s next kind of on the legislative calendar that we should be looking out for on these senate bills and the house bill line of utility regulations? Terry Bassham Yeah this is Terry the next step would be senate hearings. So that will happen in the coming weeks and it will probably work through that process before the house picks up and does anything, but we would expect senate to have hearings in the coming weeks. Brian Russo Okay. Great, thank you. Terry Bassham Thank you. Operator Thank you. And our next question comes from the line of Gregg Orrill of Barclays. Your line is now open please go ahead. Gregg Orrill Yeah. Thank you. Do you have year-end rate base numbers for KCP&L jurisdictions? Kevin Bryant I don’t think we have that broken out in this presentation. It would still be consistent with what we were talking about in the third and fourth quarter as we finalized our cases last year that totaled to the $6.6 billion of rate base in total. Gregg Orrill Got it. Thank you. Operator Thank you. And our next question comes from the line of Paul Ridzon of Keybanc. Your line is now open please go ahead. Paul Ridzon Thanks. My questions have been answered. So I stood out. Thanks. Terry Bassham Thanks Paul. Operator Thank you. And our next question comes from the line of Chris Turnure of JPMorgan. Your line is now open. Please go ahead. Chris Turnure Okay. Good morning Terry and Kevin. I just wanted to get some color on the later years of your CapEx forecast. There is a lot of environmental spend in there and a couple other drivers that kind of increased it in the later years. How can we think about that plan changing at all in response to success in that legislative arena or failure there pardon me, and kind of the same question on the ability for you guys to do a little bit better or get more constructed outcomes in our current rate cases, rate case now and the one later this year? Terry Bassham Yeah. So this is Terry and I’ll let Kevin jump in here as well. The focus for us on this legislation is first and foremost earning our allowed return on our current investments and being able to fully earn the ROEs the commission awards. Certainly if we had more certainty around a process, we would be able to invest additional dollars on certain things, but that would be based on need and potentially additional other legislation in case issues. The CPP from that perspective remember doesn’t have any specific dollars in our CapEx yet and so we wouldn’t remove anything based on that ruling, but it could be additive if in fact we got a specific ruling. So there’s opportunities there as well. Kevin Bryant Yes and the only other thing I might add is that towards the back end of this CapEx disclosure and we’ve extended it out obviously an additional year, what you see in that environmental line it includes investment to comply with the Clean Water Act. So potentially for equipment associated with some of our river plants. Obviously we think we have a little bit of flexibility that CapEx has shifted out in the ’18, ’19, ’20 timeframe, but that forms the basis of the majority of the environmental CapEx in that timeframe. Chris Turnure Got you. And then on the dividend as we look towards November of this year it could potentially be in two rate cases at that time in Missouri depending on your strategy going forward. How can we think about your comfort level during an increase at the same level that you did last year and kind of keeping up within the payout ratio guidance if you are in fact fully speed to regulatory activity at that time? Kevin Bryant Yeah I think we’ve been clear and in fact have done year after year now for many years we’ve taken the position that a healthy utility with growing dividend is important for our state shareholders and all stakeholders and we’re not bothered by the fact that we might have a dividend increase fall within the time period. We’re also considering a rate case and we’ve had good response. Nobody has suggested that that’s not appropriate. So our guidance here obviously around the dividend recognizes the fact you just mentioned and when time comes, we’ll evaluate that with the Board, but the rate case wouldn’t stop us from doing the right thing. Chris Turnure Okay. Good to hear. Thanks. Kevin Bryant Thank you. Terry Bassham And if I might real quick, I think Gregg from Barclays your question I got my act together and got the answer. It’s about $4.7 billion of rate base at year end for KCP&L and Missouri. Hopefully, that answers the previous question. Operator [Operator Instructions] And our next question comes from the line of Andy Levi of Avon Capital. Your line is now open. Please go ahead. Andy Levi Hey, good morning, gentlemen. Terry Bassham Hey Andy. Kevin Bryant Hey Andy. Andy Levi Hey, just quick questions. There is a big background, look at that. So on the growth rate did you say if I heard correctly, that it’s not liner, that it is choppy or… Kevin Bryant That’s right Andy. We’re trying to remind folks that with historical test years and 11-month process, you’re still going to see dips in regulatory lag, which creates the need for rate cases. What our current plan contemplates is more frequent rate cases to smooth out those grips. But again, it’s not just going to be a smooth 4% to 5% growth from this point through 2020. We’re still going to have to manage that current regulatory process unless we get a change in the regulatory mechanism as Terry discussed. Andy Levi So how should we think about this, oh, I am sorry, were you going to say something Terri? Terry Bassham No. Andy Levi Oh, I am sorry, this background thing is… Terry Bassham Sorry about this. Go ahead. Andy Levi So just trying to understand, so we take your 2016 $1.73 I guess that has been deployed and then we grow that 4% to 5% off the $1.73 through 2020, which gives you another not sure which are accompanied and that’s where you plan to get, but in between that it could be choppy, but it could ultimately by 2020 that’s the number we should focus on that you’re trying to say? Kevin Bryant That’s right. And I wouldn’t say choppy, it just won’t be a straight line because for example now we’ve got our GMO case that we’re getting ready to file. We’ve got four years of lag built up at the GMO jurisdiction. So when those new rates come into effect next year we’ll see those new rates, but remember we will have ongoing lag from KCP&L Missouri primarily due to transmission expense and property tax. In the interim and as Terry mentioned, we’ll file a case likely targeting the second half of this year and then those new rates will come in sometime after that case is filed. So we’re trying to eliminate that choppy thing, but it’s not going to be a smooth straight line through 2020. Andy Levi Got it. Okay. Thank you guys. Kevin Bryant All right Andy. Thank you. Operator Thank you. And I am showing no further questions at this time. I would now like to turn the call over to Terry Bassham for closing remarks. Terry Bassham All right. Well thank you, everybody for joining the call. Thank you for your questions and obviously we’ll keep you updated along the way as things progress. Have a good day. Operator Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone, have a great day. 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. 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