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California Water Service’s (CWT) CEO Martin Kropelnicki on Q1 2016 Results – Earnings Call Transcript

California Water Service Group (NYSE: CWT ) Q1 2016 Results Earnings Conference Call April 08, 2016, 11:00 am ET Executives Dave Healey – Vice President, Corporate Controller Martin Kropelnicki – President, Chief Executive Officer, Director Thomas Smegal – Chief Financial Officer, Vice President, Treasurer Analysts Jonathan Reeder – Wells Fargo Operator Good morning, ladies and gentlemen. Welcome to the California Water Service Group first quarter earnings results teleconference. Today’s conference is being recorded. I would now like to turn the meeting over to Dave Healey. Please go ahead, sir. Dave Healey Thank you, Wes. Welcome everyone to the first quarter earnings results call for California Water Service Group. With me today is Martin Kropelnicki, our President and CEO and Thomas Smegal, our Vice President, Chief Financial Officer and Treasurer. A replay of today’s proceedings will be available beginning today, February 28, 2016 through April 28, 2016 at 1-888-203-1112 or at 1-719-457-0820 with a replay pass code of 9747630. As a reminder, before we begin the company has developed a slide deck to accompany the earnings call this quarter. The slide deck was furnished with an 8-K this morning and is also available at the company’s website at www.calwatergroup.com/docs/earningsslidesmarch2016.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 this 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 as well as interested parties to carefully read and understand the company’s disclosures on risks and uncertainties found in our Form 10-Q and other reports filed from time to time with the Securities and Exchange Commission. Now let’s look at the first quarter 2016 results. I am going to pass it over Tom to begin. Thomas Smegal Thanks Dave. And just as an overview of what we are going to discuss today, we will go over our financial results, some of the highlights and changes there, talk about the drought in California and talk about our rate cases, give you an update on our CapEx program and balance in our WRAM decoupling mechanism, bridge the earnings and Marty will have some closing comments as well. So turning to financial results. Our operating revenue for the quarter was essentially flat compared to the operating revenue in the first quarter of 2015. A couple of competing things there related to water production costs. Sales are down, but the price for our purchase water is up. Those offset each other. Operating expenses or purchase water costs are down because of the volumes and that’s offset as we will discuss it in a moment by maintenance costs and drought related activity costs. Other highlights on slide five of our deck are that our interest cost is up. That is due to new long-term debt, both in October and in March, October of 2015 and March of 2016. So our net income is down $2.4 million and our EPS is down about $0.05 from the year ago period. So flipping to slide six of our deck on the financial highlights. We had incremental drought expenses of $2 million in the quarter. That is a little higher than our run rate for the previous six months, this last six months of last year and has to do with communications that we made to our customers about with the new drought tariffs and changes to the drought regime in 2016. So that is a bit higher than it’s been. Once again the drought costs are subject of an approved memorandum account of California Public Utilities Commission. That means that we record those costs and we are going to ask for recovery of those costs that has to go through a reasonableness review and we will expect a future increase in our revenue to cover that. But those are being passed through to expense right now. Our maintenance expenses were $1.6 million higher during the quarter and that has to do with again the drought. We believe this is a very similar run rate on maintenance expenses that we have had for the last two quarters. We believe a lot of that has to do with fixing leaks when they occur despite the magnitude of the leak. In a normal time, we would have prioritized leaks and addressed the much smaller leaks in due the time when we had a spare moment, Now, we are trying to fix every leak every day and that is driving up our cost for maintenance. And as I mentioned before, the interest expense due to the long term debt did increase our expense by $800,000. Two big highlights for us for the quarter. Our company and developer funded capital investments were $55.6 million. That is really on target for our $180 million to $210 million CapEx spend for the year. So we are very excited about that. That’s probably the highest amount of CapEx in the first quarter in the company’s history. The second really good news item is that our customer receivable for the WRAM decoupling mechanism declined to $33.6 million. That was in part due to $11 million of drought surcharges and the effect of new rates that were put in 2016 that lowered the expected sales and therefore bring us closer to recorded and adopted sales. And finally as we noted that we did complete our financing, our long term debt financing with $50 million and that was in March, previously announced. Now I am going to turn it over to Marty for some updates on the drought. Martin Kropelnicki Thanks Tom. Good morning everyone. I want to give you a quick update on the drought situation in the State of California, our performance and where we are in terms of our savings with our customers versus the emergency declared by the Governor last year in the State of California. First and foremost, we ended the quarter. So the savings for March, we were at 27.9%. So we are continuing well above the state 25% mandate. A couple of interesting stats to a share with everyone. If you look at the estimated savings for the state from June 1, 2015 through the end of February, the state saved 1.19 million acre feet of water through the conservation efforts that were declared in emergency declaration. During that period, Cal Water customers saved 74,000 acre feet, which is about 6.2% of the total savings for the State of California. So I think when you look at how robust our drought program has been and how well our customers have done in terms of hitting their targets, we have been very pleased with our contributions to the savings that they have put with State of California. As we put in the deck, Northern California, we are coming into the spring month now. Northern California had above normal rainfall and snowfall levels than Southern California. It was different. They were lower than normal. So just to share some numbers with everyone that I think are going to be very important, the snowpack reading that took place on April 1, which is a very important in the State of California, statewide the snowpack levels were at 85% of normal. But when you dissect North versus South, you will start to see how the picture changes a little bit. In Northern California, we were above 95% of normal, but when you go down to the snowpack range in Southern California, they are only 71% of normal. So again, most the snow and rain happened in northern parts of the state. Likewise, when you look at reservoir levels throughout the state, when you look at Northern California, most of our reservoirs are at 100% of capacity and 100% of their historical averages for this time of year. When you move to Central California, most of the reservoirs are between 40% and 80% of their historical averages, but only at about 40% to 50% of their total capacity. And then when you move to the reservoirs in Southern California, they are between 40% and 80% of normal in terms of the historical averages, but well above 50% of capacity. So despite the strong rain and snowpack in the North, you can still see why the drought has been extended through October 31 of this year. Having said that, clearly we have more water this year and as we have in the deck, the State Water Project bumped up their allocation to 60%. It’s the highest it’s been in five years. So that’s good news. That allows us to move more water from Northern California to Southern California. Likewise with the Federal Water Project, we have seen an increase in allocations as well. In 2015, the allocation for urban areas was 25% on the federal project, that’s been bumped up to 55%. And on the agriculture front, the allocation from the federal project was zero in 2015 and that’s been bumped up to 5% for 2016. So again, well, conditions have improved. They vary dramatically depending on where you are through the state. Northern California is in fairly good shape. But clearly Southern California is below average. What will happen next? The State Water Resources Control Board, we are expecting them to issue updated draft regulations any time during the next 10 days. They have a meeting scheduled to approve any changes on May 18. And then those changes will go into effect on 6/1. So in terms of where we are, I fully expect and this my personal opinion, that you will see some easing of the drought restrictions but clearly we are not going to see them go away. And again, you can just look at that the numbers I gave you, if you run them down, Northern California versus Southern California, we are still not where we need to be and frankly we are far from it, even with the strong rains in the North. So watch those new rates to come out shortly and we will be communicating on the second quarter earnings call what the changes are to the drought policies for the State of California and the impact on Cal Water. Likewise, one of the things we put on slide seven is that we have implemented in our drought program, I call it a dead band, the drought people call it a courtesy tier, given the fact that 80% of our customers are coming in at or below their conservation targets. Basically a band around the tear-off before they get a surcharge. So if they go one unit over their authorized amount, they are not hit with a penalty. So it gives customers a little bit more breathing room. We expect that will reduce the number of calls to the drought call center and ease some of the backlog that we have seen on applications for exceptions to their water allocation budget process. Tom, back to you for an update on the regulatory mechanisms. Thomas Smegal Yes. Just a reminder to everyone of the regulatory mechanisms in California that help us through the drought. Obviously, we has been decoupled since 2008 with WRAM and MCBA mechanisms and again what that does is it keep our revenue normalized even if the sales are declining. And then the drought costs, as I mentioned before, the $0.02 EPS impact in the quarter or the $2 million, we do expect to request approval for last year’s expenses in the second quarter. If you will remember, the expenses there were about $4.4 million for 2015. We are preparing that filing for the Commission and expect to file that within the next 90 days and that will go to the review process. The expenses for 2016 will be on our review schedule later on. Our customer surcharges, as I mentioned, it really positively impacted our WRAM balances. $11.4 million of drought surcharges recorded in the quarter and the WRAM balance again declining $6.9 million in the quarter and year-to-date. And the other thing that I have been mentioning on these calls is that we did have a mechanism called the sales reconciliation mechanism which allowed us to change or rates for customers in 2016 with a lower expectation of sales, so that when those sales do come in lower due to the drought, the potential WRAM balance is much smaller and so that improves for cash collections. And Marty, I am going to turn it back to you for a rate case update. Martin Kropelnicki Great. On slide nine, that’s the recap. I think you maybe have seen this before of what our rate case was for July 1 last year that we filed, July 1, 2015 that was filed with the California Public Utilities Commission. I am not going to go through the numbers here rather than on the last bullet point, we are about nine months through the 18 month process. And if you turn to the next page, on page 10, we will give you more of an update. So we did receive the Advocates’ report or the ORA report. Today, close of business today, we will be filing our rebuttal testimony. To give an idea of how many people have been working on this, we have got about 115 people throughout our company working on rebuttal and support for rebuttal testimony. So we have about 2,000 pages of testimony that will get filed at close of business today. Likewise, during the first quarter we have started our public participation hearing meetings. We will our sixth public participation hearing meetings tonight and those are progressing as scheduled. And we have our interveners lined up. In total, there are 17 intervening parties in the rate case. Most of what our cities and counties and we are going to the process of starting to meet with them. So in terms of next steps for the rate case, as we file the rebuttal testimony and then we will start settlement negotiations on or around approximately May 9. So things are right on track as of right now, but now is where the rubber meets the road, which is a settlement discussions or if we decide to litigate. And so we will have a much better sense of where we are with the Q2 call at the end of July and we will provide a detailed update then. If you go to page 11, as Tom said, this is the best first quarter in terms of CapEx spend. We spent 27% of our budget. If you remember our range was between $180 million and $210 million. I think it’s noteworthy that it is the highest number we have recorded in the first quarter in terms of capital investment. It’s also noteworthy that we accomplished this with so many people working on the general rate case rebuttal testimony and a lot of support has to come from engineering on the capital program for that rebuttal testimony. So overall very happy with the start of the year in terms of our capital program and the results and the productivity we are getting out of our engineering departments which you may recall, we reorganized in the fourth quarter of last year. So overall off to a very good start on our CapEx and look forward to seeing how that number progresses throughout the year, Tom? Thomas Smegal Sure. The next slide is a graphical representation of our WRAM and MCBA net balances. These are receivable balances from customers over the last five-and-a-half years. And what you will see here and what’s notable is that we have really made an impact with the drought surcharges on that WRAM balance. We have as low a balance as we have had since the very beginning of 2011 and that was really in a period back then when things were rising and things were off-kilter. We are getting back to a spot where we expect this to continue to decline. So really happy about that receivable balance. On the next page, just an earnings bridge from 2015 to 2016 for the first quarter and you will see there that the big impacts are obviously, as we talked about, the drought expenses and the increased maintenance expense. And all other items that impacted us about $0.01 and that includes the interest and other cost changes on us. And so that is it for the deck. I do want to pass to Marty for some closing comments. Martin Kropelnicki Great. Thanks Tom. Well, it’s nice to have Q1 behind us. For those of you who have been with us for a while, Q1 is always our leanest quarter of the year and that is especially true, the third year of the rate case cycle which is where we are in right now. It’s the year we have the least amount of rate relief and we start to see regulatory lag in certain costs. While we have a number of balancing accounts that cover major costs, things like labor, chemicals and filters, some of the operating lines are affected by a lack of charges that creep in during the third year. So nice to have the third year behind us. In terms of what the company is focused on during the second quarter obviously, as I mentioned earlier, the rebuttal testimony is key. We expect to file that today, close of business today and then start settlement discussions approximately a week, week-and-a-half later. The second thing and Tom mentioned this earlier as well, is filing for the recovery of drought cost from 2015. So the 2015 costs will be filed on a stand-alone basis and then 2016 cost will be recorded to the memorandum account for this year and then what happens with the drought. And so we will know a lot more about the drought. I fully expect some type of restrictions to continue throughout the year, but what that will be, we don’t know as of now and we expect to find that out in the next two weeks. And like I said, we will be communicating that once we know what those restrictions are. So overall kind of the quarter was what we thought it would be. If you back out the drought expenses, we were tracking right to where our internal budgets were. And then we will be focused on the drought and any change to be made in our capital spending for 2016 in the rate case. So Tom. Thomas Smegal Thanks. Wes, we are ready to take any questions that people have. Question-and-Answer Session Operator [Operator Instructions]. We will go first to Jonathan Reeder at Wells Fargo. Jonathan Reeder Hi. Good morning, Marty and Tom. Thanks again for slide deck. That’s helpful to follow along. First question, so including the drought costs, earnings were essentially flat in Q1. Were there any other items that you would single out as nonrecurring? Thomas Smegal I don’t think so. You can always pick your expenses apart and say, well that legal bill or that consultant bill is in this quarter and not in that quarter or anything like that. I don’t see that there is anything significant in any of those variations. Just normal stuff. Jonathan Reeder So were there any items in Q1 that were not in line with your expectations or plan for 2016? Or did the quarter, for the most part, go the way you were anticipating? Thomas Smegal I think it did go the way we were anticipating. We do have an internal budget obviously and we are tracking pretty close to that. I think just the drought costs are the big item there and the maintenance costs that are probably related to the drought as well. Martin Kropelnicki And one thing I would highlight on the drought costs, we did have a step-up in advertising in terms of related to the drought. And that’s because as we go into the winter months, it’s a lot harder to hit your conservation targets. In the spring and summer months, people have their lawns, you start watering, outdoor watering and that’s where we get a lot of the savings from during the summer months and fall months. But as you go into winter, people turn off their water. So we stepped up our advertising campaigns in the districts that weren’t hitting their targets. Thomas Smegal And Jonathan and everybody, I think the other thing to note is, with the uncertainty related to how much drought restriction we are going to have this year, there is a potential that the drought costs will start to come down a little bit over the second quarter, third and fourth quarter of the year. The $2 million, I wouldn’t characterize as a run rate every quarter for the company going forward. We have seen a slight decline in the number of calls to our drought call center. And so we are going to manage the staffing on the call center. We are going to be managing the staffing related to the outreach customer or direct outreach. And so if you see the state coming in with a major reduction in the drought requirements, we will also probably see a reduction in our costs on a go forward basis. Jonathan Reeder Okay. Do you think, is the state, would they distinguish between the North and the South in terms of restrictions? Or is it just going to be a blanket thing? Thomas Smegal We participated in a couple of calls talking about different ideas. One idea was that you basically put it at a groundwater adjudication level or at a regional level and allow each region to make the appropriate changes based on their water supply situation. But as you know, the groundwater adjudication bill which was signed a year-and-a-half ago, that’s not fully implemented yet. So we are not sure that’s probably going to work. So we are not sure of what they are going to do. But I think when you look at the numbers, if you look at the snowpack and reservoir levels, you get the clear sense of Northern California is great shape, Southern California is still really in a danger zone. And while we have water to move from the North to the South, on average the snowpack was not at average. It was still below average. And so this was supposed to be a big El Niño year. So I think there is a number of factors they have to work through and we just don’t have clarity we will get the orders from them here, like I said, expected within the next two weeks. Then we will know what to do once we see that. But I still think you will have drought restrictions statewide at some level. Jonathan Reeder Sure. And then did you specify when you are going to file for the 2015 drought cost recovery? Thomas Smegal They are working on that now. We think we will have it filed some time here during the second quarter and it has been a busy, busy, busy time for the rates team. There is core team of about 15 employees who work on the staff, the rate case is actually for the four states. So between the GRC and preparing to file for recovery of the drought costs, everyone has been really busy, but performing very well. Very happy with how everyone is performing. They were on schedule. So you will see it filed here in the second quarter, I believe. Jonathan Reeder And then potential to pickup would be by Q3? It’s pretty quick turnaround? Martin Kropelnicki Yes. It’s an advice letter process. So presuming that the Commission determines things are reasonable, I think it could move within 90 days of filing. That would be a best guess. But with the Commission, you can never tell. Jonathan Reeder Sure. Martin Kropelnicki It could get held up. Jonathan Reeder Okay. Any impact from unbilled revenues in Q1, like we have seen in the past few quarters? Thomas Smegal There was a slight positive this quarter when you get out the Q and look at that, it’s not a negative for the quarter this time. But remember that the big negative that we had in 2015 was the second quarter. And so we will be watching carefully to see how we are different in the second quarter from the second quarter of 2015. Jonathan Reeder Okay. And then any discussion for extending the water GRC to cover for you [indiscernible]? I know that some of that’s been kicked around a little on the electric side? Martin Kropelnicki I know that there has been a lot of interest in the water rate case plan among the different parties, the water companies and ORA have talked about this periodically over the years. But there is no formal effort to change it at this point of water side. And if we were going to change it, we will probably see some other things. I think some of the companies and ORA are sick of having the cost to capital as a separate item. And so if you change the schedule, you might also change that, embed that back into the rate case. So those changes, I don’t anticipate but we will follow the energy industry and see what changes there. Jonathan Reeder Okay. And then last question and I will hop off. Can you quickly sum ORA’s testimony in terms of the CapEx budget and the revenue increases and just how that compares to your request? I know you are filing a rebuttal. Thomas Smegal Yes. The easiest sum is, no. NO. Obviously in our rate case, we made a case for a major expansion of our CapEx and we think it’s with very good justification. We went into great amount of detail as far as we have talked to this community about the need for additional main replacements and how we have been following behind our main replacement program. The attitude of the Ratepayer Advocates seems to have been in opposition to that expansion. As I think Marty, did you mention the number of pages of rebuttal testimony? I think it was about 1,000 pages. Martin Kropelnicki 2,000 pages. Thomas Smegal 2,000 pages of rebuttal testimony. So we are going in fighting. It’s not unusual as a former regulatory person all the way down from the regulatory VP to a regulatory analyst, the worst day of my year has always the day I get the ORA or DRA report and then we just move on from there. Because remember that they are not the Commission. They are an advocate and they are taking a position and often it’s a very short term position as far as the immediate impact and looking at the long term effects on the system. So we have a lot of confidence that our arguments are good and that we will be able to reach a settlement or if we don’t get to settlement, that we are going to able to go through and litigate and have a favorable outcome. Jonathan Reeder I was going to say, based on those comments, if was a different kind of mindset between the short-term and long-term nature of the two sides. It seems like reaching a settlement could be a little more challenging this time around. Thomas Smegal I don’t mean to be too pessimistic about the settlement possibilities. I know that we have a very good relationship with the staff of ORA in terms of a working understanding of passing data back and forth. There is no intent on either side to hide information or couch arguments in terms of really expressed terms. So I think that we are expecting to have settlement. And I believe that ORA is expecting to have settlement. And that’s always encouraging. If we were to know, for instance, that they have no intention of settling and wanted to litigate everything, then I would be feeling a little bit differently. But I know for a fact that we have been trying to negotiate which subjects get settled at which time. And so there is a high likelihood that we will have a productive settlement discussion. Whether that leads to a full settlement or not, I don’t know. Martin Kropelnicki Yes. I think Jonathon, we have spent a lot of time preparing this rate case. And I think Tom and I have really been focused on getting the company to focus on the long-term planning around capital. So we have got a lot of people to work on the rate case. We put our best people on the rate case, including Tom is doing a big piece and I got a piece of it. We have three or four officers dedicated to working on it. So I think we are going in in a very good position and we just have to see where the process takes us. I think it’s fair to say, this is probably the best job we have done on our justifications in terms of making sure that we are well rounded, well thought out, well backed up with data and third-party data to validate the company’s positions. So their job is to say no and our job is to convince them why we need it and have good reasons and explanations for that. And that’s the next step of the process here. Jonathan Reeder Okay. Thanks so much for the insight and good luck over the next few months. It sounds like it’s going to be a pretty busy time. Thomas Smegal All right. Martin Kropelnicki Thanks Jonathon. Operator [Operator Instructions]. And we have no further phone questions at this time. Martin Kropelnicki Okay, Wes. Well, just to wrap up, I want to thank everybody for their continued interest in California Water Service Group. We look forward to giving you updates on all these subjects with our second quarter call. And have a good day, everybody. A -Thomas Smegal Thank you. Operator That concludes today’s conference. Thank you for your participation. You may now disconnect. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. 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Innergex Renewable Energy’s (INGXF) CEO Michel Letellier on Q4 2015 Results – Earnings Call Transcript

Innergex Renewable Energy Inc. ( OTC:INGXF ) Q4 2015 Earnings Conference Call February 25, 2016 10:00 AM ET Operator Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Innergex Renewable Energy’s Conference Call and Webcast for its 2015 Year End Results and 2016 Objectives. [Operator Instructions] I would like to remind everyone that this conference call and webcast is being recorded today, Thursday, February 25, 2016 at 10 a.m. Eastern Time. I will now turn the conference over to Martine Benmouyal, Senior Advisor, Communications. Please go ahead. Martine Benmouyal Good morning, ladies and gentlemen. If you haven’t done so already and would like to access the webcast, please go to our website at www.innergex.com. I am here today with Mr. Michel Letellier, President and CEO of Innergex, and Mr. Jean Perron, Chief Financial Officer. Please note that the presentations will be in English. However, you are welcome to address your questions either in French or in English. I would also like to point out that journalists are invited to call us afterwards if they wish to further address any question. In a minute, Mr. Perron will provide some details on our financial results for the year ended December 31, 2015. Mr. Letellier will then provide an overview of our operating activities in 2015 and our objectives for 2016. We will then open the Q&A session with both senior executives. The financial statements and the MD&A have been filed on SEDAR and are readily available via the Internet. You may also access the press release, financial statements and the MD&A on the Innergex website in the Investor section. During this presentation we will refer to financial measures such as adjusted EBITDA, free cash flow and payout ratios that are not recognized measures according to International Financial Reporting Standards, the IFRS, as they do not have a standardized meaning. Please be advised that this conference call and webcast will contain forward-looking information that reflects the corporation’s expectations with respect to future results or developments. For explanation concerning the principle assumptions used by the corporation to derive this forward-looking information and the principle risks and uncertainties that could cause actual results to differ materially from those anticipated, I invite you to consult the first pages of the webcast presentation, as well as Innergex’s Annual Information Form. I now turn the conference to Mr. Perron. Jean Perron Thank you, Martine. Good morning. The quarterly results for Q4 2015 show production of 94% of long-term average due mainly to below average water flows and wind resources. Production for the year stands at 98% of the long-term average. Revenues for the quarter were $12 million lower than in 2014 mainly due to last year where the production was under 20% of long-term average. Revenues for the year were $5.1 million higher than last year. The increase is attributable mainly to the full year contribution of the SM-1 hydroelectric facility acquired in June 2014 and to the higher wind regimes in Québec, partially offset by lower water flows in British Columbia. Adjusted EBITDA for the quarter was $9.9 million lower compared to Q4 2014 for the reasons explained above. Adjusted EBITDA for the year was $4.2 million higher than in 2014. The increase is mainly due to the higher revenues. Finance costs for the quarter were slightly lower than in Q4 2014, while for the year they are down $3.4 million compared to last year mainly due to the lower inflation compensation interest. During the quarter $51.7 million impairment was recognized on the prospective projects acquired from Cloudworks in 2011. This impairment is due to the lack of visibility on the future RFP following the construction of sites and the decrease in demand that was expected from the construction of new LNGs planned that have been postponed. Innergex servicing the ownership of the license and may eventually develop them in the future. During the year, a total of $1.1 billion of financing was completed and we do not need any additional liquidity to complete the construction of the forward projects, an amount of $180 million remains unused and available on our revolving corporate credit margin of $425 million. During the quarter, we bought back 400,000 shares and for the year a total of 1,190,000 shares at an average price of $10.36. During the year, we also issued a new $100 million convertible debenture at the 4.25% interest rate and convertibles at $15 per share, which is less dilutive than the former convertible debenture that was bearing interest rate of 5.75% and convertible at $10.65 per share and that was partially redeemed from the proceeds of the new debenture. Overall, the slightly below average quarter combined with a very strong first quarter allowed us to be very close to production in various targets for the year, while our operating expenses were lower than expected. As a result, free cash flow for the year reached $74.4 million, compared to $67.7 million in 2014 and our payout ratio improved to 86% from 88% last year. Since the beginning of 2016, our production has been above the long-term average mainly at our hydroelectric facilities in British Columbia. We remain confident in our ability to reach our long-term average production figures year-over-year. This concludes my review of the results. I will be happy to answer your questions later on during the call. And I will turn it back to Michel? Michel Letellier Thank you, Jean. Good morning, everybody. As a little bit of a tradition that we have established in the last two years, this presentation we would like to come back to what we have said in report cards for 2015 and give you what we have actually accomplished give you a little bit of a perspective on our objectives of 2016, give you our run-rate of 2017, and give you a little bit of an overview on our strategy for the next few years. And then we will have the question period. So, if we come back a little bit on what we said in 2015, we said that we wanted to increase the production and revenue by approximately 3% to 5%. We did manage to increase the revenue by 2%, even if the long-term average was a little bit weaker, as Jean mentioned. We did a little bit better on the EBITDA. We have increased 2% our EBITDA. And we have managed to keep our payout ratio at 86%, so, so far, so good. Objectives on the development, that’s where we had a big year in 2017. As you remember, we have the project of Upper Lillooet, Boulder, Big Silver and Tretheway under construction in BC. And we wanted to start the construction on Mesgi’g Ugju’s’n, the 150 megawatt wind farm in Québec. So, I am happy to report and we have a tab in the next page to give you the more – a little bit of more detail. But in a nutshell, we have managed to put the Tretheway on COD a little bit in advance and under budget by $8 million. We have started the construction on Mesgi’g Ugju’s’n project and we have overall facility reduced the construction budget by $28 million. So, if you include the $8 million saving in Tretheway, we are down to $36 million savings over a little bit over $1 billion of projects. I am pretty proud of the team there. So, if you flip on the next page, you see the project, the actual cost now forecast for the COD. And we have moved the COD a little bit in Boulder, in Upper Lillooet due mainly on the last summer fire. We have lost a few months there in the peak of the summer. So, we are managing to have Upper Lillooet and Boulder now moved a little bit further in 2017 instead of the last quarter of 2016. Mind you that Boulder and Upper Lillooet are in a remote area, where the intakes are fairly high in altitude. So, winter revenue for these projects are not big. So, our goal is to make sure that we will be in COD for the spring time, where we get the majority of the revenue. In terms of more specific costs, Boulder and Upper Lillooet have been a little bit more of a challenge, given the tunnel. So we have increased the budget and we think it’s fairly conservative by $17 million. On the other hand, Big Silver has proven to be, I would guess – I would say a very – I wouldn’t say easy project, but we didn’t have any issue with the tunnel. And most of the civil work has been done already. So we are forecasting a reduction in cost by $10 million. And Mesgi’g Ugju’s’n have – we have finalized all the construction. We have also finalized the financing. So we are now very comfortable with a reduction of $35 million. So again, all-in-all I think that I am very proud of the team to have managed a $1 billion of construction and being able to have a reduction of $36 million on their budget, so very happy on that. Financing was also a big year, if you remember last year. We had a project finance I guess portfolio of about $1 billion to be done in 2017. We managed to do all of those with at least favorable – a little bit more favorable terms, conditions. The team has been also very creative in their ability to negotiate with long-term lender to structure the reimbursement of the amortization, so very interesting financing there. We also have issue the convertible debenture of $100 million to replace the old one with more favorable terms. So that’s another plus. We did also the refinancing on Umbata Falls. So all-in-all, we managed to do a little bit more than $1 billion worth of project finance in 2015. So right now as mentioned by Jean, we don’t have any more financing to do. So every project under construction has now the equity and the financing in place with fixed term and fully amortized over the initial terms of the EPA, so quite a good achievement there too. Now, if we are talking about the growth opportunity, we said that we wanted to participate in the Ontario market. We have managed to deposit or to supply – not supply but to file two projects in the RFP with 100% of the points. I don’t know if you are familiar with the Ontario RFP. But there is a possibility of discount in your price submitted to the authority by about 40% if you have 100% of the points that the – and its social acceptance and the advancements of the project. So I am happy to report that we managed to have 100% of the points on both projects that we have submitted. So we will know a little bit later on in March if we are a winner there or not. And we also have signed a Memorandum of Understanding with the Federal Electricity Commission of Mexico, which is the equivalent of Hydro- Québec and/or BC Hydro in Mexico, to develop in cooperation a small hydro opportunity. So we are starting to initiate this meeting and opportunity. So I am quite positive on that outcome as well. Also we said that we wanted to expand internationally or to look outside Canada and to consolidate our leadership in Canada. So I am happy to report that we did another acquisition in BC. We acquired Walden North electricity facility. It’s a 16-megawatt facility, not far from our own portfolio. So we are quite happy to have been able to achieve that. And we are pursuing acquisition opportunities in France and Mexico. We are making very good progress over there. Both teams are very present in France and in Mexico. And we are still very positive on our possibility over there. Now, what we are hoping to do in 2016, we want to grow our production by 6% or 8%, grow our revenue by 9% or 11% and grow our EBITDA between 7% and 9% and obviously trying to maintain our payout ratio below 100%. We want to make sure that we also advance our construction of the three hydro facilities in BC. We want to put Big Silver and Mesgi’g Ugju’s’n project in service by the end of the year. And obviously we want to make sure that we keep on track on Boulder and Upper Lillooet construction. We also want to finalize the negotiation with Hydro-Québec regarding Saint-Paulin and Windsor PPA. And in terms of growth opportunity, we want to make sure that we are still present in Canada when there is opportunity in Canada. We reaffirm our willingness to work in Mexico and France. We want to realize at least one acquisition in one of those two markets. And we are looking into other markets, mainly the U.S. and possibly the Peru market for small hydro. We are maintaining our run rate for 2017. That run rate doesn’t include any acquisition or future development that we could have, except from the projects that we are under construction right now. So our free cash flow, we are maintaining $105 million free cash flow for 2017 and the growth of the installed capacity will go from 708, our net capacity, to about 895. That doesn’t include the acquisition of Walden or any other facilities. So I am very confident about those numbers to 2017. Now the overview of our strategy for 2016 in the next few years, we would like to again reaffirm our commitment to remain exclusively in renewable energy. We want to maintain a very healthy diversification of energy sources. We want to consolidate our leadership position in Canada. So that means that if there is opportunity in Canada, we will be there. We want to develop an international presence in target markets, as we mentioned Mexico, France and possibly the U.S. and Peru markets are still under our focus. Still again, you know us. We want to focus on high quality assets. We want to maintain a low risk business model, maintain a long-term outlook. This is very important for us. We want to focus on partnership, especially with First Nation in Canada. I think that has been a very good tool for us to develop. Maintain our discipline of acquisition that means that we want to make acquisitions that are accretive to cash flow. So in summary, I am very proud of the evolution of Innergex, from the transition following the merger of the Income Fund and the company. We have as a team, being able and patient, focused on delivering both the growth and overcoming our high payout ratio, which was the heritage of the Income Fund. We have managed to build a very strong, long-term cash flow that are based on a great diversified portfolio of assets, all under long-term PPA. With a majority of these projects being project financed with long-term and fixed rate and that are fully amortized over the first life of the EPA. We have secured the sustainability of our dividend. And finally, we will have a significant amount of free cash flow in 2017. We now have the tools to focus on growing for the future. In a nutshell, we are willing and able to deliver on our strategy. So thank you. And we will take the questions. Martine Benmouyal This concludes our presentation. We now invite you to ask your questions. Question-and-Answer Session Operator Thank you. Ladies and gentlemen, we will now conduct the question-and-answer session. [Operator Instructions] And your first question comes from Nelson Ng with RBC Capital Markets. Your line is now open. Nelson Ng Great, thanks. Good morning, everyone. Michel Letellier Hey, good morning, Nelson. Nelson Ng A quick question on the delay in the timing of construction for Upper Lillooet and Boulder Creek like was it entirely due to the forest fires last summer or did the incidents in Upper Lillooet in November contribute to the delay as well? Michel Letellier The incident that you are mentioning very unfortunate incident had delayed about 10 days as well. So, it’s a little bit of a both. We had managed to have a force majeure by BC Hydro for 95 days – 90 days, which is basically the main – if you add up those 10 days, which is mainly the delay. Also the consequences of the fire having burned all the trees and the brushes along the slope had increased also some avalanche risk. So, we have lost a few days on that aspect as well. So, it’s all related to the fire mainly and also the very sad incident, that we had last fall, yes. Nelson Ng I see. So, in terms of the cost increase, was any of like the roughly $17 million cost increase, was any of that related to the delay or was that purely just on technical items? Michel Letellier It’s a little bit of mix. Mind you that it’s still – I think it’s still conservative. What we are doing is that we have kept the risk of the geology on the tunnel. So that means that we have fixed prices for the type of rock that we encounter during the construction, but it depends on a mix of quality of the rocks. We have basically four classes, 1, 2, 3 and 4. And depending on the quality of the rocks, we get to have a different pricing. So, I think that we have been a little bit conservative and rightly so, because we don’t know what’s in front of us in the tunnel, but I think that it’s basically the tunnels that are driving the cost, the overruns. Nelson Ng Okay. So, pushing out construction doesn’t really cause much of an increase? And I guess kind of related to that and if there are any cost increases, would that be recoverable through insurance? Michel Letellier Yes. Well, the delays are bringing some cost, but we are thinking – and we are discussing with the insurance. And hence, the insurance are basically covering all of those delay costs. So, that’s why we are not – and I was not referring to the $17 million being related to delays, because we think it’s – basically it’s a flow-through in terms of cost with the insurance. Nelson Ng I see. Okay. So there would be some costs, but like you said, it’s a flow-through. So, it’s not included in the increase? Michel Letellier No. Nelson Ng Okay. And then kind of more big picture in terms of I guess opportunities and project developments. So, like is it fair to say that like in the absence of an acquisition, was it fair to say that there won’t be – given the kind of lead time to procure projects, there probably won’t be any kind of new projects commissioned either in the second half of 2017 or even 2018 and potentially even early 2019? Would there be a period where there will be like no new projects contributing new revenues? Michel Letellier Well, Greenfield project, because in acquisition we can acquire existing facility or facilities that are just ready for construction. If it’s wind or solar, you can take sometimes only 1 year to build a wind or a solar facility, so that’s also part of our strategy. As I mentioned, always in the past we love to have a good balance between existing facility, facility under construction, facilities that are just at the very late stage of development and permitting are almost ready to build. So, that’s what we are looking into when we are looking into acquisition or a little platform or partner with existing developers, both in France or in Mexico. So, those are the targets. And Nelson, we may see some other projects coming in, in late 2017 or ‘18. Obviously, those would have to be acquisition of projects that are already under development. Nelson Ng I see. Okay. Just one last question, like obviously I think in the past you mentioned that you guys are looking at French wind acquisition as probably one of your priorities, but I guess given that Alberta and Saskatchewan now want to go green and the U.S. extended their renewable tax credits like what are your priorities and also geographies? Michel Letellier Well, obviously Canada is always top priority when there is opportunity. We have been very successful over the years in Canada. Canada is our own turf. There is no exchange rate issue. So, Canada is definitely a place that we want to be present. Alberta is a little bit more complicated. We don’t know exactly what will be the way that they are going to pay for the electricity. So, it’s still a little bit of an unknown. Saskatchewan is definitely of interest for us. There is New Brunswick as well who is having a small call. And Ontario has reaffirmed their willingness to extend the LRP II. So, we will be focusing on Canada. The U.S. is maybe a little bit more, I would say, not necessarily open in terms that there is always competition in the U.S., so in other market, but the yield co has been definitely been challenged in their business models. So, suddenly there is maybe a little bit more room for the Canadian company to participate in the U.S. market. Nelson Ng I see. Thanks. Thanks, Michel. Those are all my questions. Michel Letellier Thank you. Operator Your next question comes from Sean Steuart with TD Securities. Please go ahead. Sean Steuart Thanks. Good morning, everyone. Few questions. There was mention in the MD&A of a 200 megawatt block, wind block, given to the Innu First Nation and I gather you are exploring options to potentially partner with them. Can you give any context on developments there? Michel Letellier Yes, it’s like I said, I mean, I have been very careful to talk about active RFPs in development. So yes, we are interested definitely in the 200 megawatt Innu RFP or development, but it’s competitive. It’s under development right now. So, I won’t comment more, but definitely we are interested. Sean Steuart Okay. And with respect to the MOU in Mexico, wondering if you can give any insight on how everything is progressing there, where you are in terms of specific project development, any more detail you can provide in Mexico? Michel Letellier Yes. We are very, very active in Mexico. We have been meeting with CFE. Right now, the focus on both CFE and ourselves is the first RFP in Mexico. The prequalification for RFP have been happening. So, we are there. We hope to participate in that RFP. So, I guess that CFE is also focused on that first RFP. The date is sometimes late March to deposit the projects. So everybody, I guess the industry is really focused on that right now in Mexico. But we have been meeting with CFE on small hydro development. CFE has the ability to do its own project and not necessarily take all the supply from future RFPs. So, the small hydro project that we would like to do are on that basis is direct negotiation with CFE under potential partnership to build small hydro that will be used for supplying CFE-owned electricity. Sean Steuart Okay, thanks for that detail. And then lastly, any insight you can give on I guess potential resolution around the Québec PPA arbitration process from your perspective? Michel Letellier Alright. It’s tough to call. It’s – the arbitration is ongoing right now. I think that the arbitration – some arbitration are actually happening. I think that the conclusion should be somewhere late fall this year. So we are still hopeful that the arbitration conclusion on a few projects will bring value to the price of electricity. I think that we have a good case, the industry has a good case to come back to the avoided costs. Those projects – what we call the [indiscernible], the pricing was based on the avoided costs of electricity by Hydro- Québec. So we are hopeful that that notion will be retained by the arbitrator. Sean Steuart Okay, that’s all I had. Thanks Michel. Michel Letellier It’s my pleasure. Operator Your next question comes from Rupert Merer with National Bank. Your line is now open. Rupert Merer Hi, good morning everyone. Michel Letellier Hi Rupert. Rupert Merer So we had a dividend increase this quarter and some share buybacks, can you talk a little about how you are thinking about capital allocation, how regularly are you going to review the dividend and how you are going to look at share buybacks going forward? Michel Letellier Well, I think that again that policy or declaring a dividend is the responsibility of the Board. But as we discussed that strategy yesterday, I think that what we want to establish is the sustainability of the dividend and the foreseeable growth of the dividend. We are cautious, as I guess you gather from our development and the type of project that we are doing. So I think that what is important for us is to be able to say that our dividend is sustainable and we want to grow it sustainably. We are going to generate more cash flow in 2017. We will have a payout ratio that is going to be a lot lower than where we are experiencing right now. So again, always the decision between increasing the dividend and making that cash flow to work. We are very confident on what we are seeing abroad and eventually to Canada, to be able to make good investment and good use of that free cash flow. So whenever we are going to have some ability to invest and create value for the company, I think that will be the priority. But I think that the investors have to be rewarded on their patience with us. And creating – increasing the dividend slowly, but surely is probably what we are going to do. Rupert Merer Okay, great. Thanks for that. And then quickly then what was your outlook for Q1, can you talk about how it’s shaping up, given what you can see so far in the quarter? Michel Letellier Well, BC is probably doing the best of the best. It’s raining in lower elevation and we are capturing the rain. And it’s – there is a ton of snow in higher evolutions. So in BC we are well above 100% right now of our long-term average for the year-to-date on all our facilities. The wind in Québec is okay, a little bit over in February, but it was a little bit lower in January. So we are very close to our long-term average in the wind. And the hydro in Québec is also very good and in Ontario as well. So only the solar doesn’t have the full radiation right now. But that’s not so bad. But it’s still very close also to [indiscernible]. So far, the first quarter looks very, very strong. Rupert Merer Okay, excellent. Thank you very much. Michel Letellier It’s my pleasure. Operator [Operator Instructions] Your next question comes from Ben Pham with BMO Capital Markets. Please go ahead. Ben Pham Thank you. There wasn’t any commentary in the MD&A or even in your prepared remarks on Alberta, where do you guys stand on Alberta with renewables? Michel Letellier Well, I would say that for a change Alberta is now focusing on renewable energy. And I don’t want to go politics on that. It’s just that I think and I said in places in public speeches that especially in Canada, coal cannot produce electricity in Canada anymore. There is no way our country should support coal to produce electricity. And Alberta has close to 5,000 megawatts to 6,000 megawatts of installed capacity in coal. So we are hoping to see that market evolving towards future RFP. Alberta is very lucky to have very good wind resources and to some degree very good solar radiation as well. So I think that Alberta, if they have the willingness, they certainly could see a very dynamic IPP sector to produce renewable energy in Alberta. So if there is a good market and if there is some fair market for us to play, we will definitely love to be present in Alberta. Ben Pham Okay. But you don’t – you are more watching in the background now, rather than setting up offices? Michel Letellier We are yet to see how it’s going to evolve in Alberta. What we – why we haven’t been very active in Alberta is that Alberta never really had a long-term PPA that makes sense for us. So depending on what they are going to put forward, we will be aggressive or not in Alberta. Ben Pham Okay. Michel Letellier So we are – basically we are looking for long-term PPA opportunity, so if the renewable energy is again focused on merchant and some green credit, it will be difficult for us to be very aggressive there. Ben Pham Okay. And my second question, I was just wondering perhaps your thoughts about the benefits of scale as you think about 2020, what are you thinking in terms of your asset base and the growth opportunities beyond then, because it seems like most of your peers, and within the sector outside are touting scale and building scale to position for the next wave, I am just wondering your thoughts on that whole situation? Michel Letellier I think that scale is important, yes. I think that our ability to be creative is also very important and flexible and also is to be present in, I would say some good markets. Especially, I would say that we like Mexico, because Mexico is a growing market. They are growing their electricity consumption. In many other markets like the U.S., the electricity consumption is not going higher. It’s just that they are changing the way they are producing electricity. So hence, it’s making a good opportunity for renewable energy. But Mexico has both. You see the growth and you also see a change towards renewable energy and target portfolio to increase their percentage of renewable energy up to about 35% of their total generation capacity. So I see those markets as being very, very interesting for us. Peru has also some long-term contracts for small hydro. And I think we have good expertise there. So we are interested in Peru, although it’s not a big market. It’s a market where I think our expertise can be put to work. And obviously, Europe is interesting. Is Europe going to be as interesting as Mexico on the long-term, maybe not, because they are not growing that much their electricity consumption base. But to come back to the scale, I think that we can certainly have the ability to make a partnership. We have done and we have proved to be able to be a very good partner, a creative partner that has the ability to bring the win-win situation where we bring sometimes the capital. Sometimes we bring the capacity, the knowledge. So I am not so concerned about the scale, because we will never be big enough. I mean, there is always a bigger guy, a bigger fish in the pond. So, what I am focused more on is our ability, our creativity, to create value for our shareholders. That being said, we are not afraid of growing. We are not afraid of making acquisitions. And I think that one of the strategies to grow in foreign markets is to have maybe a local partner and to partner with maybe pension funds. And we have shown that our ability to do that, I think that we can be a good partner for infrastructure funds or a pension fund to acquire existing assets or to grow development projects. Again, the type of partnership that we have signed with CFE in Mexico is a very good example. I think that we are willing to partner with a big, a very big entity in Mexico that somehow has lost the ability to be nimble to develop smaller hydro. Hence, I think this is a win-win situation where we can bring the knowledge and they can bring the long-term PPA. So, those are the places where I feel we can create more value for our shareholders. Just getting bigger and bigger for the sake of getting big, I don’t think is the solution. Ben Pham Okay, that’s helpful. And maybe just a last cleanup question one of your recent projects you put in is the CPA adjustment and trimming the EBITDA down. Does that impact some of your future projects or is it already in the numbers? Are you going to revisit that in ‘17 timeframe? Michel Letellier Which one, I am sorry, Ben, what you are mentioning, you mean the Québec-based contract or? Ben Pham I think it’s on – it was in the contract that’s the Tretheway, the inflation mechanisms lower than your initial expectations. So, is that incorporated in your future backlog too or are you going to revisit it later? Michel Letellier No. Now, it’s already included in our long-term forecast, but the difference was basically what we had forecast during the construction. During the construction in BC, you have 100% of the CPI during the period of the construction or the development of the project. After that, it’s depending. It’s up to 50%. In some cases, we have 30%. Some places we have 50%. But in this case, I think we had forecasted in the construction about 2.2% of inflation and we had 1.5% or 1.6%. So it’s not a big gap though. Ben Pham Okay, alright. That’s helpful. Thank you very much. Michel Letellier My pleasure. Operator Your next question comes from Jeremy Rosenfield with Industrial Alliance. Please go ahead. Jeremy Rosenfield Thanks. Good morning. Just maybe one cleanup question related to the refinancing of the Stardale debt that I think you announced earlier this week. It looks like you are pulling out some equity from that project and you are also lowering your interest expense, so kind of a win-win. But can you just comment more broadly on what I would call capital recycling or raising debt or refinancing projects and taking out equity potentially using that to finance future acquisitions or future projects as you go forward. What’s your outlook there? Michel Letellier Well, Stardale was not done on a long-term basis with life insurance. So, we had the ability to refinance it with the same Japanese Bank. And at the time, solar and the market was not known and basically the spread also on the credit risk for solar was a little bit higher. And well, we just basically take advantage of now the bank – and especially that Stardale has been performing very well as well. So, the lenders were willing to reduce the spread and make more room for a bigger amount. So, I guess that whenever I can put my hand on long-term financing in a range of less than 5% in the range of 4%, why not? So, whenever we would have the ability to do that, we certainly would rather do that than issuing stock and diluting our shareholders. So, I think that this is probably the cheapest type of capital we can get, especially after-tax when you take into account the deductibility of the interest rate. So, do we have a lot of those possibilities? Not necessarily with the new one, because obviously we have put project finance – brand new project finance, with most of the projects are done with life co. So, there is not a lot of flexibility there. But we still have about 14 unconvert facilities and maybe with Walden, it will be 15. So, there is a little bit of room there definitely to – especially after renewing the existing PPA. So, there is maybe a case to put a portfolio together and issue a long-term bond on those, instead of having the corporate loan. So, that might bring also some more liquidity on that aspect. Jeremy Rosenfield Okay. But you don’t have a specific target in terms of the amount that you could resurface, let’s say? Michel Letellier No, we are trying to stay opportunistic. The long-term bonds are very, very attractive. It keeps amazing me to see the 30-year bond below 2%. So, obviously that makes very cheap long-term money when you have a good project to finance, especially in Canada, but no, Jeremy, we don’t have a specific number. I think we are trying to be just opportunistic. For the time being, we don’t need necessarily a lot of equity. As we mentioned, everything is being fully financed. It’s only acquisitions that would require us to have a little bit more equity. I don’t have a fixed target, Jeremy. Jeremy Rosenfield Okay. And thinking about the acquisitions that you are looking at or the potential acquisitions that you are looking at in terms of financing and expected returns on those acquisitions, do you see yourself being able to earn similar spreads in terms of the return versus the cost of capital on the projects that you are looking at or on the potential acquisitions that you are looking at? Michel Letellier It’s a good question. It’s always paramount and it’s difficult to know where the market is going, right? When the 30 years bond are below 2%, one could wonder what type of return is acceptable or not, but I always said that we look at a portfolio a little bit like any equity investor, you have risk reward formula that we are trying to follow, obviously an existing facility with already financing and long-term PPA are worth more and obviously would generate a little bit less return than a Greenfield project. So, we want to make sure that we keep our global return north of 10%. That’s our perceived cost of capital for our equity. But there is reality, there is competition out there, and we want to make sure that we stay competitive in acquiring a facility. We have looked at a lot of opportunity. We have passed on. We have bid. And I think we will be successful in the near future. One thing that we are willing to use as a tool to increase our return is to partner with pension fund, as we did with SM-1 project, where we had increased the internal rate of return for Innergex by using a little bit of debenture and using a little bit of premium to manage the asset. So, that’s one tool that we have to increase a little bit the internal rate of return for our shareholders at the end of the day and manage more portfolio and being I would say active on the M&A market as well. So, that’s definitely one aspect of the capital structure that we are willing to take in order to make a decent return at the end of the day. Jeremy Rosenfield That makes sense. And maybe since you just mentioned it, in terms of opportunities that you have passed on or that you haven’t closed, is there anything specific that you can point to as reasons why you felt either it wasn’t a good fit for Innergex or why you weren’t successful with those deals? Michel Letellier Well, it’s hard. You know, when you know your business, it means that you know how much it costs to manage it. And sometimes we wonder, because there is maybe people that have a more optimistic view on long-term forecasts. We want to make sure that whenever we are taking risk is that – or risk or we are making an acquisition is that we will not be hearing on the too optimistic side on the long-term forecast. So, I rather accept a lower return, but making sure that we are going to make that return. Another way to say it, one can imagine that they can buy an existing facility at 13% internal rate of return, but it depends on the assumption that one can use. So for us, I don’t want to promise my board or lead my investor to think that we would be able to do a bigger return on a very secure asset. Usually, you could do it in a small acquisition here and there, but usually the market is fairly efficient. And I just want to make sure that we stay focused on being a conservative long-term manager and that whenever we are accepting as a return, it will materialize over time. So that means also that whenever we are going outside, we will want to make sure that we hedge and we would not put the company at risk with the foreign exchange rate. One thing that Innergex doesn’t have right now is foreign exchange exposure. And that sometimes people might underestimate the variability of foreign exchange. We take that very seriously in our analysis. And this is one of the challenges we have whenever we are looking into acquiring something in the States or in France or in Mexico. So again, we are taking our time, but whenever we are doing something, I think that we can sleep well at night. You know that I like to sleep well at night. Jeremy Rosenfield Yes, okay. Thanks, Michel. Excellent. Michel Letellier My pleasure. Operator Mrs. Benmouyal, there are no further questions at this time. Martine Benmouyal We have one more question actually from Mr. Jay Ferguson of Ferguson, Andrews Investment Advisers and it goes as follows. With the dislocation of the yield co market in the U.S., are you looking to buy assets from them such as NYLD, NRG Yield, and SUNE? Michel Letellier That’s a very good question. And I was amazed to see how quick the market realized that yield co promises were hard to deliver and we will stay opportunistic. If there is some good opportunity, definitely the U.S. market is on our radar screen. And I agree that the market seems to have evolved from being a little bit crazy to now being more reasonable in yields. Martine Benmouyal Thank you. Alright, if there are no more questions, I will thank everyone for attending this conference. We appreciate the opportunity to provide an update about our company. Please do not hesitate to contact us if you have any other questions. Operator Ladies and gentlemen, that concludes our conference call and webcast. Please note that a replay of the conference call and webcast will be available on the Innergex website. The press release, financial statements and Management’s Discussion and Analysis are also available on the Innergex website at www.innergex.com in the Investors section. Thank you. You may now disconnect your lines. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. 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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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