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Otter Tail’s (OTTR) CEO Chuck MacFarlane on Q1 2016 Results – Earnings Call Transcript

Otter Tail Corporation (NASDAQ: OTTR ) Q1 2016 Earnings Conference Call May 3, 2016 11:00 AM ET Executives Loren Hanson – Investor Relations Chuck MacFarlane – President and CEO Kevin Moug – Senior Vice President and Chief Financial Officer Analysts Paul Ridzon – KeyBanc Operator Good morning. Welcome to Otter Tail Corporation’s First Quarter 2016 Earnings Conference Call. This call is being recorded and there will be a question-and-answer session after the prepared remarks. Loren Hanson Good morning, everyone and welcome to our call. My name is Loren Hanson and I manage the Investor Relations area at Otter Tail. Last night, we announced our first quarter 2016 results. Our complete earnings release and slides accompanying this earnings call are available on our website at www.ottertail.com. A replay of the call will be available on our website later today. With me on the call today is Chuck MacFarlane, Otter Tail Corporation’s President and CEO and Kevin Moug, Otter Tail Corporation’s Senior Vice President and Chief Financial Officer, who by the way is also celebrating his birthday today. Before we begin, I’d like to remind you that during the course of this call, we will be making forward-looking statements. These forward-looking statements are covered under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and include statements regarding Otter Tail Corporation’s future financial and operating results, or other statements that are not historical facts. Please be advised that actual results could differ materially from those stated or implied by our forward-looking statements due to certain risks and uncertainties, including those described in our most recent Form 10-K and subsequent quarterly reports on Form 10-Q. Otter Tail Corp revise our forward-looking statements as a result of new information, future developments, events, or otherwise. For opening remarks, I would now like to turn the call over to Otter Tail Corporation’s President and CEO, Mr. Chuck MacFarlane. Chuck? Chuck MacFarlane Thanks, Loren. Good morning and thanks for joining our call. For the quarter net income was $14.5 million or $0.38 per share. This is in line with our expectations with the exception of warmer than normal weather. The warm weather impacted Otter Tail Powers first-quarter earnings per share by $0.04 compared to the normal. But this was partially mitigated by improved margins in our manufacturing platform. Our business model continues to combine a strong regulated electric utility for the portfolio manufacturing businesses intended to enhance long-term returns. A key component of these two platform strategies are planned to grow the utility business. My remarks today will focus on our strategy to grow rate base and a recently filed rate case. I will also update you on efforts within our manufacturing platform to improve our competitive position. Slide 5, shows our utility rate base expansion, which will drive earnings per share growth for the next five years. We plan to invest 858 million in Otter Tail Power during this time frame. This will result a compound average annual growth rate in rate base of more than 8% from 2016 to 2020 – natural gas generation and renewable generation projects will account for the majority of this rate base expansion. With most eligible for construction cost recovery during construction, this is noted on the bottom of the Slide 6, which shows our regulatory framework. As we’ve discussed on prior calls, we’re investing in two 345-kv transmission line within Otter Tail Power services area that the mid-continent independent system operator has deemed multi-value projects. The cost of these projects will be allocated across all customers in my source 12 state upper mid-west footprint. One line will run from Brookings, South Dakota, 70 miles north to a new substation near Big Stone Plant. It’s the next leg of a recently completed CapX2020 line from the twin cities to Brookings. Slide 7, shows how they are connected. We are 50% owner in the transmission line portion of this project with the Xcel energy, our investment is $97 million, and we’ve all required easements and permits. Xcel started construction late last year and has the line on schedule to be service in 2017. The other line will run from the new substation near the plant, 170 miles North-West to Ellendale, North Dakota and is schedule to be in service in 2019. Otter Tail Power manages the project and is a 50% owner with MDU. Our investment is $153 million, construction will begin this summer, landowners have signed more than 325 of the 350 needed easements, we are finalizing contract with construction vendors and the steel tower vendor has begun producing transmission structures. We also expect to invest in new generation. Utility management has identified options within our service territory, for natural gas plant to replace capacity from the Hoot Lake Coal Plant which we plan to retire in 2021. We have identified three sites each with good access to transmission and natural gas supply. We expect to announce our site selection later this year. Otter Tail Power management is also determining the most beneficial timing and location for additional renewable energy. The company already has 250 MW of cost-effective wind generation that’s 19% of the company’s retail energy sales. Fuel utilities in the nation have a higher percentage of wind energy. We anticipated adding up to 200 MW of additional wind energy before 2021, which would put the company wind resources near 30%. We also planned to add enough solar to power 1.5% of our Minnesota electric retail sales by 2020. This equates to approximately 30 MW of new solar. Otter Tail Power will file an updated resource plan in Minnesota on June 1. Rate base investment is important to the health of our company, also important is the successful outcome to the request Otter Tail Power filed in February with the Minnesota Public Utilities Commission for permission to increase rates by approximately $19.3 million on – 9.8%. This reflects the 10.4% return on equity and a 52.5% equity ratio. The company’s current rates were established in 2011 based on 2009 costs. The portfolio has increased reflecting investments in new environmental technologies, a strength in delivery system, expiration of integrated transmission agreements and overall rising cost. On March 24, the PUC granted a 9.56% rate increase on an interim basis while it considers the overall request. The interim rates went into effect on April 16, and we expect final decision on the rate case in 2017. We intend to keep delivering affordable energy and expect Otter Tail Powers rates to remain among the lowest in the nation and region, even with the increase. I’d like to mention three other projects of Otter Tail Power. One is a10 week schedule maintenance over at Coyote Station. The largest projects are replacing the lower boiler wall, installing a separated over fire air system to reduce NOX emissions and tying into the new mine coal conveyor system. Crews have completed six of the ten weeks, so far everything is on schedule, we’ve encountered no surprises and boiler make availability has been good. This is a $35 million project and Otter Tail shares 35% or $12 million. Second project I want to mention is implementation of a new customer information system. The new system will be able to integrate new rate design, geographic information in average management system. Otter Tail Power has dedicated a strong team to this $15 million project. Attention to detail and tracing requirements, validating business processes, testing deliverables, and managing change will ensure a successful final implementation. The third project I want to mention is relicensing the five small hydroelectric plants we own on the Otter Tail River in near Fergus falls. Hydroelectric power is being part of our energy mix since 1907. It was the origin of Otter Tail Power’s name, these five small plants are combined under one folkway [ph] since it must be relicensed by 2021. We begin the relicensing effort which takes 4 to 5 years. Before turning to our manufacturing platform, I should also mention – with this clean power plant to limit CO2 emissions from existing power plants. When we held our earnings call in February, the U.S. Supreme Court had not yet issued its stay on the rule pending a lower court’s review. We expect the outcome from this review later this year followed by a review at the Supreme Court. You may recall the changes from the draft rule to the final rule were positive for Big Stone Plant in South Dakota, but created new concerns for Coyote Station in North Dakota. We don’t have an immediate compliance concern in Minnesota because we intend to retire Hoot Lake Plant in 2021. We’re continuing to meet with stakeholders in all three states as each state determines whether we’ll continue implementation planning during the stay. Now turning to our manufacturing platform, as reported out in our earnings release net income was up quarter-over-quarter, that said, our manufacturing company is continuing to be impacted by economic challenges in agriculture, energy and recreation vehicle end markets, leaving the lower sales quarter-over-quarter excluding skip sales from BTD Georgia which was acquired in September last year. Our Plastics Companies continued to be impacted by tightening margins on PVC pipe. The presence of these companies continued to guide improvement in each of their businesses as they work through the current economic challenges in the markets they serve. We look for much of our future growth in the manufacturing segment to come from BTD, a metal fabricator. In the past year we expand of the size and capabilities of our Minnesota facilities and made a strategic acquisition of $30 million annual revenue in metal fabricator near Atlanta. BTD has nearly $33 million in spending commitments to expand its facilities in Detroit Lakes and Lakeville, Minnesota. The goal is to increase capabilities, reduce logistics cost, enhance margins. The Detroit Lakes portion of the plan is complete. A new state-of-the-art paint line is operational in the expanded Lakeville facility and previously outsourced work is now painted in-house. BDT will finish consolidating the fabrication facility in Lakeville in May. We are beginning to realize productivity improvements associated with these products. The integration of BTD, Georgia has gone smoothly. We began implementing IT production systems or began integrating IT production systems this summer. At T.O. Plastics, net income was slightly ahead of first quarter in 2015, again on slightly lower revenues. The company continues to focus on horticulture containers, which is its primary market. At the PVC pipe companies Northern Pipe Products and Vinyltech, volume was stronger in the quarter, which offset a reduction in margins. Our resin suppliers announced additional resin pricing increases for the second quarter. Both of these customer companies are efficient, low-cost operators. They are in a good position and are working to ensure the pricing policies appropriate. Now, I’ll turn it over to Kevin for the financial perspective. Kevin Moug Good morning. Please refer to Slide 10, as I discuss our first quarter results. The utility net earnings decreased $640,000 quarter-over-quarter. The decline is due to; one, milder weather in first quarter of 2016 compared to the first quarter last year. Heating degree days were down by 16%. As a result weather negatively impacted earnings per share by approximately $0.04 quarter-over-quarter and compared to normal; two, higher operating and maintaining expenses; and three, higher depreciation expense due to increased rate based investments. These items were offset in part by increased environmental and transmission cost recovery writers and increased sales by client customers. Our manufacturing segment earnings increased $669,000 quarter-over-quarter primarily due to the BTDs performance. Revenues increased quarter-over-quarter for BTD by $3.9 million. The components of this increase are as follows, our Minnesota locations revenues were down $5.6 million due to softening demand from the agriculture, oil and gas and recreational vehicle end markets. Our Illinois location had an increase in revenues of $1.7 million driven by strong demand for wind tower components. And our Georgia facility accounted for $7.8 million in new revenues. We acquired the Georgia facility in September 2015. The higher net income at BTD is due to improved productivity relating to lower cost and expedited trade, manufacturing consumables, cost and quality and lower labor and benefit cost. Our plastic segment revenues increased between the quarters as a result of 18.5% increase in the amount of pounds sold, despite 13.3% decrease in the price per pound sold. Increased sales came primarily from the South-West and Central regions in the United States where construction activities remained strong. And our earnings were basically flat between the quarters due to margin compression that occurred with large drop in PVC pipe selling prices. And our corporate expenses decreased $648,000 quarter-over-quarter primarily due to a reduction in employee headcount and lower benefit cost. We are reaffirming our consolidated earnings per share guidance of $1.50 to $1.65 as shown on Slide 12. Our 2016 guidance is dependent on the business and economic challenges our platforms are facing. As part of this we are updating our segment guidance to reflect current conditions being experienced by our operating companies. We are maintaining our guidance range for the electric segment. We expect 2016 electric segment net income to be slightly higher than 2015 net income based on the reasons listed in the press release. We are increasing the expected earnings per share range for the manufacturing segment by $0.01 on both ends of the range. We are able to do this through aggressive cost management and improved productivity to address challenges for softening end markets at BTD manufacturing. We are reducing the expected range of earnings per share for our plastic segment to $0.28 from $0.26 to $0.30. We are expecting operating margins to tighten for the rest of 2016 as announced resin price increases are not expected to be fully passed on to sales prices due to current competitive market conditions. And we are improving the range of our corporate cost by obtaining a share on both ends of the range due to continued cost reduction efforts. 2016 continues to be dependent on the following items; the constructive outcome of our Minnesota rate case that was filed in February of 2016, BTDs successful growth and sales from its new paint line along with continued focus on operational improvements needed to improve our return on sales as well as full integration of BTD Georgia to better serve our customers in the South-East. These initiatives are especially important in light of the continued market softness and the agriculture, oil, gas and recreational vehicle end markets that BTD serves and continued strong earnings, cash flows and returns on invested capital from our plastic segment. We are pleased with our first quarter results, we also like our position, a strong balance sheet reflective of our current equity to total capitalization ratio of 51%. Investment grade senior unsecured credit ratings, solid regulatory environments and rate based growth in our electric segment. And we are well-positioned for a rebound in end markets served by BTD with the strategic investments we have made over the last two years. This ongoing effort positions us to meet our long-term goal of 4% to 7% compounded growth rate in earnings per share, using 2013’s $1.50 share as adjusted for the base year. We are now ready to take your questions and after the Q&A, Chuck will return with a few closing remarks. Question-and-Answer Session Operator Thank you. [Operator Instructions] Our first question or comment comes from the line of Paul Ridzon with KeyBanc. Your line is now open. Paul Ridzon Good morning. How are you? Chuck MacFarlane Good Paul and you? Paul Ridzon Well, thank you. Just one quick question, you mentioned a ten-week outage, was that cost to be capitalized or will soon that hit O&M? Chuck MacFarlane Paul, that the majority of those are capitalized. I believe the entire project has approximately $2 million in operating costs and the remainder is capital. Paul Ridzon Thank you very much. Operator [Operator Instructions] And at this time I’m showing no further questions or comments. So with that I would like to turn the conference back over to President and CEO, Mr. Chuck MacFarlane for closing remarks. Chuck MacFarlane Thank you. To summarize net earnings increased quarter-over-quarter from continued operations. Our manufacturing segment has improving performance including increased margins associated with improved operations. Otter Tail Power filed the first rate increase request in Minnesota in five years and received approval for interim rates which began in April. And we reaffirmed our 2016 earnings guidance of $1.50 to $1.65 per share. Thank you for joining our call and for your interest in Otter Tail Corporation. We look forward to speaking with you next quarter. Operator Ladies and gentlemen, thank you for participating in today’s conference. This concludes the program, you may now disconnect. Everyone, have a wonderful day. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited. 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ITC Holdings’ (ITC) CEO Joseph Welch on Q1 2016 Results – Earnings Call Transcript

ITC Holdings Corp. (NYSE: ITC ) Q1 2016 Earnings Conference Call April 28, 2016 10:00 ET Executives Stephanie Amaimo – Director, IR Joseph Welch – Chairman, President & CEO Rejji Hayes – SVP & CFO Analysts Julien Dumoulin-Smith – UBS Caroline Bone – Deutsche Bank Praful Mehta – Citigroup Operator Good day, ladies and gentlemen, and welcome to the ITC Holdings Corp First Quarter Conference Call and Webcast. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today’s conference, Ms. Stephanie Amaimo. Ma’am, you may begin. Stephanie Amaimo Good morning, everyone and thank you for joining us for ITC’s 2016 first quarter earnings conference call. Joining me on today’s call are Joseph Welch, Chairman, President and CEO of ITC; and Rejji Hayes, our Senior Vice President and CFO. This morning we issued a press release summarizing our results for the first quarter ended March 31, 2016. We expect to file our Form 10-Q with the Securities and Exchange Commission today. Before we begin, I would like to make everyone aware of the cautionary language contained in the Safe Harbor statement. Certain statements made during today’s call that are not historical facts such as those regarding our future plans, objectives, and expected performance reflect forward-looking statements under federal securities laws. While we believe these statements are reasonable, they are subject to various risks and uncertainties and actual results may differ materially from our projections and expectations. These risks and uncertainties are disclosed in our reports filed with the SEC such as our periodic reports on forms 10-K and 10-Q and our other SEC filings. You should consider these risk factors when evaluating our forward-looking statements. Our forward-looking statements represent our outlook only as of today and we disclaim any obligation to update these statements except as may be required by law. A reconciliation of the non-GAAP financial measures discussed on today’s call is available on the Investor Relations page of our website. I will now turn the call over to Joe Welch. Joseph Welch Thank you, Stephanie and good morning everyone. I’m pleased to report that we’re off to a solid start in 2016. We continue to deliver operational excellence to our customers and superior growth to our shareholders while concurrently focusing on the Fortis acquisition of ITC. On the operational front, system performance for the first quarter of 2016 aligned with our historical track record with good performance across the operating companies and minimal impacts to the system despite several spring storms in March. In addition, our capital projects and maintenance programs were off to a good start for the year. Many reliability, system capacity and customer interconnection projects are in process across all of our operating companies and progressing on schedule. One notable project in Detroit that we work to complete it in February is our portion of the new Temple substation which will support the load requirements for the new Red Wings Stadium. With respect to our development efforts, we continue to advance the new Covert project, which is scheduled to go into service later this year along with preparations and certifications to operate in PJM. We are also continuing to negotiate bilateral contracts with shippers on the Lake Erie Connector project. As we highlighted on our last call, the MISO Transmission owners filed their updated testimony on January 29, in the second base ROE complaint and have since held various hearings and briefings during the last several months as part of their most recent procedural schedule. And initial decision in the second base ROE complaint is expected from the Administrative Law Judge by the end of June. While final decisions from the FERC Commission aren’t expected until late 2016 and the first half of 2017 for the first and second complaints respectively, we remain confident that FERC will continue to support their historical policies given the significant investment requirements necessary to modernize the electrical infrastructure in the U.S. As for other regulatory matters, on March 11, FERC issued two orders concerning ITC Midwest. In summary, in its orders on the final and the formal challenge of ITC Midwest 2015 formula rates in its orders conditionally accepting the Bent Tree facility service agreement, FERC concluded that ITC Midwest’s decision to elect out of bonus depreciation wasn’t prudent. As a result, FERC has required ITC Midwest to simulate the effects of bonus depreciation that is to calculate generally applicable transmission rates and its charges under a specific agreement as though the company actually had taken bonus depreciation for facilities placed into service in 2015. In response to FERC’s order, on April 11, ITC Midwest filed request for rehearing on both orders, essentially asking FERC to reconsider and reverse its decisions. To the extent that FERC decided not to reverse its orders on the formal challenge, ITC Midwest also asked FERC to modify the date for implementation of the order on the formal challenge so that ITC Midwest is able to maintain compliance with the new tax law requirements. As we wait FERC’s response to our request for rehearing, we’ve taken steps to comply with these orders and have recorded the applicable bonus depreciation impacts during the first quarter as well as the necessary compliance filings on the Bent Tree facility service agreement. Subsequently, we’ve since received a similar challenges at METC from CMS, and are in the process of evaluating the next steps. That said, although we expect these proceedings to take some time to be resolved, we plan to elect bonus depreciation across all our companies for the 2015 and 2016 tax years. With respect to the Fortis transaction, Fortis and ITC have worked diligently to advance the transaction. The most material news since our last call – last week’s announcement of Fortis entering into a definitive agreement with GIC to acquire 19.9% equity interest in ITC for over $1.2 billion in cash upon closing the transaction. Needless to say, we are delighted with this outcome, as well as a well-respected long-term investor with over $100 billion in assets under management and strong track record of investing in North America infrastructure, GIC will be a great investment partner for Fortis and co-owners of ITC. With the minority investor secured, we can now proceed with other key milestones in the transaction, including the remaining State and Federal regulatory filings and the shareholder votes for both Fortis at ITC. Overall, the transaction continues to progress as planned, and we expect to close in the late 2016. Although it’s been a busy start to the year, we look forward to another strong year both operationally to the benefits of our customers, and financially by creating long-term value for the shareholders. I will now turn the call over to Rejji to elaborate on our first quarter 2016 financial results. Rejji Hayes Thank you, Joe, and good morning, everyone. For the three months ended March 31, 2016, ITC reported net income of $64.2 million or $0.42 per diluted share as compared to reported net income of $67.1 million or $0.43 per diluted share for the first quarter of 2015. Operating earnings for the first quarter of 2016 were $84.5 million or $0.55 per diluted share compared to $73.1 million or $0.47 per diluted share for the first quarter of 2015. Operating earnings are reported on a basis consistent with how we have provided our guidance for the year and exclude the following items. First, they exclude regulatory charges of approximately $1.1 million or $0.01 per share for the first quarter of 2015. The 2015 charges relate to management’s decision to write-off abandoned costs associated with a project of ITC Transmission. Second, operating earnings exclude the estimated refund liability associated with the MISO base ROE, which totaled $11.5 million or $0.07 per diluted share for the first quarter of 2016 and $4.8 million or $0.03 per diluted share for the first quarter of 2015. It is possible that upon the ultimate resolution of this matter we may be required to pay refunds beyond what has been record to-date. We will continue to assess this matter and we’ll provide updates as necessary. Lastly, they exclude after tax expenses associated with the Fortis transaction of approximately $8.7 million or $0.06 per diluted share for the first quarter 2016. Operating earnings for the three months ended March 31, 2016 increased by approximately $11.4 million or $0.08 per diluted share of the comparable period in 2015, primarily due to higher income associated with increased rate base at our operating companies coupled with lower non-recoverable bonus payments associated with the V-Plan project in the first quarter of 2016 compared to the same period in 2015. These beneficial factors are partially offset by the impact of electing bonus depreciation, as Joe highlighted, at all of our operating subsidiaries. For the three months ended March 31, 2016, we invested $176.6 million in capital projects at our operating companies, including $41.1 million at ITC Transmission, $47 million of METC, $74.8 million at ITC Midwest and $13.7 million at ITC Great Plains. With respect to our financing liquidity initiatives on April 26, 2016, we executed a 30-year debt issuance at METC, the $200 million of senior secured notes were priced at 3.9% and the proceeds will be used to refinance an unsecured three-year term loan at METC. As we’ve underscored in the past, management remains committed to sustaining our strong financial position and solid investment grade credit ratings. As such, we are pleased to report that on April 15, Moody’s affirmed the issue ratings in outlook of ITC and its regulated operating subsidiaries. From a liquidity perspective, as of March 31, 2016, we have readily available liquidity of approximately $775 million, which consists of roughly $8 million of cash on hand and $767 million of net undrawn capacity on our revolving credit facilities. For the three months ended March 31, 2016, we reported operating cash flows of approximately $88 million, which reflects an increase of approximately $21 million from the first quarter 2015. It’s also worth noting that on April 7, 2016, we successfully amended all of our revolving credit facilities with unanimous support from our syndicate of lenders to allow for consummation of the transactions. As a result, we will be able to maintain the revolving credit facilities and the amounts under the revolving credit facilities close. In closing, we are well positioned to execute on our plans in 2016, including the Fortis acquisition of ITC, to benefit the customers and shareholders. Our continued solid performance in the first quarter serves as an important foundation for these efforts. At this time, we’d like to open the call to address questions from the investment community. Question-and-Answer Session Operator [Operator Instructions] And our first question comes from Julien Dumoulin-Smith from UBS. Your line is now open. Julien Dumoulin-Smith Hi, good morning. Joseph Welch Good morning, Julien. Julien Dumoulin-Smith So quick question here on the independent side. Obviously, we’ve got the GIC involved now as a JV partner. Would you expect to be able to keep that on a prospective basis here? Joseph Welch I think that’s a question you ought to ask GIC. The thing is that, as far as we’re concerned, this is – Fortis’ and GIC’s filing and you ITC and its shareholders were held harmless to that decision. Julien Dumoulin-Smith Got it. And then subsequently, you’ve commented in the past on FERC Order 1000, I’d be curious to get your latest thoughts on the SPP process. Obviously that had certain issues about allocations of points on the technical basis. I’d be curious to get your reaction and any broader implication? Joseph Welch No, I think that the SPP’s decision probably fits into the same line as the decisions that’s taken place in PJM, for instance that they awarded the points, I find it interesting that – from my standpoint, they’ve eliminated a lot of people based on conductor size and conductor design and we feel strongly, in our case, that our conductor sizing and design was 110% appropriate. But I could tell you this that on the whole process of a line that size and the amount of magnitude from an investment perspective, there was more money spent on bidding on it and more money spent on evaluating it than the whole line was worth. Julien Dumoulin-Smith Intriguing data point itself. And lastly, just turning back to bonus depreciation with the CMS complaint out there, I’d be curious how do you intend to treat results for this year given METC and actually potentially for the balance of the portfolio? Rejji Hayes Yes, Julien this is Rejji. Joe and I highlighted, we have assumed the election of bonus depreciation, both for the 2015 tax year as well as the 2016 tax year. And so as our Q is filed later today, you’ll see the details around that. It is flowing through the financials you see in the earnings release that hit the tape this morning and the estimate on a pre-tax basis for Q1 is about $5.4 million after-tax, about $3.2 million. And you can assume over the course of 2016, you’re probably just under $10 million and that’s for the full estimate for 2016 across all of the operating companies. So we are erring on the side of conservatism in our financials, but needless to say, we obviously requested a rehearing with the FERC on the IP&L matter. So we’ll see where we go from there. Julien Dumoulin-Smith Okay, great. Thank you. Rejji Hayes Thank you. Operator And our next question comes from Caroline Bone from Deutsche Bank. Your line is now open. Caroline Bone Good morning. Just a follow-up on that bonus depreciation question. Thank you so much for the details on the impacts for the quarter and the full year, but I was just wondering if you could comment a little bit about how this might impact your more long-term growth expectations? Joseph Welch It really, when I look at growth, I don’t look at growth quite the same way you do, we’re going to be growing at the same rate that we’ve always grown, when you look at the earnings and the bonus depreciation, but the fact of the matter is that the bonus depreciation, if you elect it and generates a lot of cash and that gives us the ability to start to invest in other areas. Rejji Hayes Yes, exactly right. The only thing I would add to that, Caroline, is it clearly you’re going to have a financial impact on your net earnings, we talked of the 2016 impact and as I’m sure you well know and which the election works, it flows through our tariff as an increase in deferred tax liabilities that reduces rate base and you basically have to wear that financial impact for about 15 years. And so you do work for some time, but as Joe highlighted, clearly we’re still going to be investing in the system and trying to obviously improve the system to the benefit of customers. Caroline Bone All right. So I guess, I mean in terms of the cash benefit that you guys will see from bonus depreciation, did you get a lot of that in Q1 or should there be kind of a similar level of – just looking at the line, the deferred taxes line, in terms of the benefit for the rest of the quarters? Joseph Welch Yes. So technically, we have not received the cash benefit. So you probably noticed the income tax receivable in current assets of about $140 million, technically we’d be receiving that when we file our tax return for the 2015 tax year around mid-year. I think that’s the earliest time we can get that done. So we’re expecting that true cash inflow around mid-year, it is approximately $140 million for 2016. Caroline Bone All right, thanks so much. Joseph Welch Thank you. Operator [Operator Instructions] Our next question comes from Praful Mehta from Citigroup. Your line is now open. Praful Mehta Thank you. Hi guys, just quickly on that bonus depreciation again and I truly appreciate the point on the cash that you have now freed up. I guess if you do have this cash freed up in the long-term, as long as you can reinvest that cash at an accretive way in terms accretive asset or bid it out of CapEx, would that support – is that your thesis on why the growth rates remain the same? And secondly, does that change, now that you’re part of Fortis, if they could use that excess cash to grow some other part of the, I guess the combined platform, does that kind of change your perspective on how you think about bonus depreciation longer term, I guess? Joseph Welch It doesn’t change our perspective on how we view that at all. Rejji Hayes Yes, I think, Praful, the only thing I would add to that is from a capital deployment perspective, we’ll see what the options are at the time we receive the cash and clearly, assuming we get the transaction of the finish line post-closing, it will be discussion we have with the owners of the business, both Fortis and GIC as to what the most efficient use of that cash is, but needless to say it’s not going to be sitting in a money market account, earning 5 basis points. Praful Mehta And then just in terms of FERC 1000 and growth and development CapEx and the projects there, can you just briefly give us an update on how that is going and do you see any updates in terms of the growth projects more longer-term? Joseph Welch With regards to Order 1000? I think you could regard Order 1000 as a complete failure for the whole marketplace. In our case and you must not have been listening when we had some of our earnings calls in the past because I’ve directly highlighted that we’re not very focused on Order 1000 for the facts that I’ve just outlined. We have of Lake Erie Connector that we’re really focused on, we’ve announced that we’re doing work in Puerto Rico and Mexico. We continue to stay involved in Order 1000, but I think it’s a tree that doesn’t bear much fruit for anyone. Rejji Hayes And then Praful, this is Rejji, so the non-traditional development side, as we highlighted in our initial comments, we continue to make progress in the new Covert line which we should have in service this year and clearly the other opportunities, Lake Erie and some of the other non-traditional development opportunities as they continue to progress and we should have visibility on Lake Erie project in the latter half of this year. So continuing to push forward on that as well. Praful Mehta And I do pay attention, I do listen guys, it’s always just good to get a refresh, although I appreciate it. Joseph Welch You just wanted it refreshed? Praful Mehta Yes, always good to get your perspective again on FERC 1000, I guess. Joseph Welch Okay. Praful Mehta Thank you. Operator I’m showing no further questions. I will now like to turn the call back to Stephanie Amaimo for any further remarks. Stephanie Amaimo This concludes our call. Anyone wishing to hear the conference call, replay available through May 3, can access it by dialing 855-859-2056 toll free or 404-537-3406, passcode 83086632. This webcast to this event will also be archived on ITC website at itc-holdings.com. Thank you, everyone and have a great day. Operator Ladies and gentlemen, thank you for participating in today’s conference. You may all disconnect. Everyone, have a great day. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited. THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY’S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY’S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY’S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS. 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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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