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NiSource (NI) Joseph J. Hamrock on Q3 2015 Results – Earnings Call Transcript

NiSource, Inc. (NYSE: NI ) Q3 2015 Earnings Call November 03, 2015 9:00 am ET Executives Randy G. Hulen – Vice President-Investor Relations Joseph J. Hamrock – President, Chief Executive Officer & Director Donald E. Brown – Executive Vice President, Chief Financial Officer & Treasurer Analysts Paul T. Ridzon – KeyBanc Capital Markets, Inc. Andrew Levi – Avon Capital Charles J. Fishman – Morningstar Research Steven Isaac Fleishman – Wolfe Research LLC Operator Good day ladies and gentlemen and welcome to the NiSource Third Quarter 2015 Earnings Conference Call. As a reminder, today’s conference call is being recorded. I would now like to turn the call over to your first speaker for today, Randy Hulen. You have the floor, sir. Randy G. Hulen – Vice President-Investor Relations Thank you, Andrew, and good morning. On behalf of everyone at NiSource, welcome to our quarterly analyst call. Joining me on the call this morning is Joe Hamrock, Chief Executive Officer and Donald Brown, Chief Financial Officer. As you know, the focus of today’s call is to review NiSource’s financial performance for the third quarter of 2015 as well as to provide an overall business update on the utility operations and our growth drivers. We will then open the call up to your questions. As a reminder, we will be referring to our supplemental slides that are available on the NiSource website. Before getting into the key takeaways for the quarter, I wanted to remind everyone that we successfully completed the separation of Columbia Pipeline Group, July 1. Results for CPG are now classified as discontinued operations. And finally, before turning the call over to Joe, I’d like to remind all of you that some of the statements made on this call will be forward looking. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in the statements. Information concerning such risks and uncertainties is included in the MD&A and Risk Factors sections of our periodic SEC filings. Having covered all those reminders, I’d like to turn the call over to Joe. Joseph J. Hamrock – President, Chief Executive Officer & Director Thanks, Randy. Good morning everyone and thank you for joining us. Today, we’ll briefly cover our third quarter 2015 results and earnings drivers before discussing specific highlights for several of our utilities. We’ll close with the review of our investment proposition and long-range business plan. And we’ll leave plenty of time for your questions. As you’ll hear throughout today’s call, our results and our look ahead reinforced the strength of our 100% regulated utility business model. During the quarter, we continued our disciplined execution of infrastructure and environmental investments complemented by regulatory initiatives which are providing long-term safety, reliability and environment benefits for our customers and the communities we are privileged to serve. Let’s first highlight a few key takeaways for the quarter on slide 3. Our results were solidly in line with our expectations. The NiSource team delivered net operating earnings of $0.06 per share in the recently completed quarter versus a loss of $0.03 per share in the same period in 2014. In addition to the successful separation of Columbia Pipeline Group, the NiSource team sustained execution of our well-established plan during the quarter. For example on the regulatory front, in Massachusetts, we received a final order from the DPU approving our base rate case settlement. The approved settlement supports our effort to modernize and replace aging pipeline infrastructure to ensure continued safe and reliable service. In addition, we reached a settlement agreement with parties in our Pennsylvania base rate case filed earlier this year and also received final commission approval of a settlement in our Virginia base rate case as well as approval of a five-year extension of our infrastructure modernization program in Virginia. And in Indiana, we filed our first electric base rate case in five years. I’ll provide additional details on these regulatory developments later in today’s call. On the capital investment front across all of our companies, we remain on track with our planned total capital spend of approximately $1.3 billion in 2015. Before turning the call over to Donald to highlight our financial results in more detail, I want to reinforce our 2016 guidance and long-term outlook. As previously announced, we expect to deliver non-GAAP net earnings per share of $1 to $1.10 in 2016 with planned infrastructure enhancement investments of approximately $1.4 billion. And in the years ahead, we remain committed to our annual projected dividend and earnings growth range of 4% to 6%. Now, let me turn the call over to Donald to review our financial results in more detail which are highlighted on page 4 of our supplemental slides. Donald E. Brown – Executive Vice President, Chief Financial Officer & Treasurer Good morning everyone. As Joe mentioned, we delivered non-GAAP net operating earnings of about $19 million or $0.06 per share which compares to a loss of about $9 million or $0.03 per share in the third quarter of 2014. On an operating earnings basis, NiSource was up about $31 million. As a reminder, these results no longer include the CPG reportable segment financials which are classified as discontinued operations. The continued solid financial performance you see today is driven exclusively by our utility businesses. On a GAAP comparison, our income from continuing operations was about $15 million for the third quarter versus a loss of about $17 million for the same period in 2014. Now, let’s take a closer look at the third quarter operating earnings performance at our two business segments. Our Gas Distribution segment came in at about $22 million compared with $1 million for 2014. Net revenues excluding the impact of trackers were up nearly $19 million, primarily to increases in regulatory and service programs in Ohio, Virginia and Pennsylvania. Operating expenses excluding the impact of trackers decreased about $2 million. Our Electric operations delivered nearly $102 million in operating earnings compared to about $90 million for the prior year period. Net revenues excluding trackers were relatively flat due to increased infrastructure investment revenues offset by lower industrial load. Operating expenses excluding the impact of trackers decreased by about $12 million, primarily due to lower employee and administrative costs. As Joe mentioned, these results are solidly in line with our expectations. Full details of our results are available in our earnings release issued and posted online this morning. Now turning to slide 5, I’d like to briefly touch on our debt and credit profile. Our debt level as of September 30 was about $6.7 billion with a weighted average maturity of approximately 14 years and an interest rate of 5.86%. On the liquidity front, our $1.5 billion revolving credit facility went into effect at separation. And at the end of the third quarter, we maintained net available liquidity of about $1.6 billion. Our credit ratings at the three major agencies are solidly investment grade, something we remain committed to as we continue to execute on our $30 billion in infrastructure investment opportunities. As you can see, the financial foundation for our continued growth as a pure play utility is strong, on track and consistent with our investment proposition. Now, I’ll turn the call back to Joe to discuss a few customer, infrastructure and regulatory highlights across our utilities. Joseph J. Hamrock – President, Chief Executive Officer & Director Thanks, Donald. As noted, our teams remain on track with our utility investments. These investments further improve reliability and safety, enhance customer service and reduce emissions, all while generating sustainable long-term shareholder value. Let’s turn to a few highlights from our Gas operations on slide 6. As I mentioned at the start of the call, in early October, the Massachusetts Department of Public Utilities approved the settlement that Columbia Gas of Massachusetts reached with parties in its 2015 base rate case. Rates went into effect on November 1 and the approved settlement provides for an annual revenue increase of approximately $33 million, with an additional $3.6 million annual increase expected in November 2016. In August, Columbia Gas of Pennsylvania reached a settlement in its base rate case pending before the Pennsylvania Public Utility Commission. The settlement provides for a $28 million increase in annual revenues and notably also includes mechanisms to support the expansion of natural gas service into unserved areas. A commission decision is expected to authorize new rates by the end of this year. Also in August, Columbia Gas of Virginia received final approval of its 2014 base rate case. The Virginia Commission reaffirmed the $25 million annual revenue increase that went into effect in October 2014. The difference between the settled amount and as filed rates is now being refunded to customers following the final order. The order supports continued capital investments by CVA to modernize its system and accommodate customer growth as well as initiatives to enhance safety and reliability. More recently, the Virginia Commission approved a five-year extension of our SAVE program, with our proposed 20% increase in annual investments. As a reminder, the SAVE program is our infrastructure modernization plan in the state. One item worth noting on CVAs modernization plan, in the past few weeks, the team completed all planned cast iron pipe replacement in the state. At NIPSCO Gas, we filed our semi-annual tracker update in August, which provides support for the remaining five years of our seven-year $817 million natural gas system modernization program. This program involves enhancing existing gas infrastructure and extending gas service to rural areas. Before moving on from gas operations, I’d like to say how encouraged we are by our strong performance across the board on the recent J.D. Power natural gas customer satisfaction surveys. In fact, Columbia Gas of Pennsylvania is a J.D. Power award winner for the second year in a row. And Columbia Gas of Virginia was recognized as one of the most improved brands in the nation. They also ranked as a top brand nationally in communications. This strong performance is a demonstration that our ongoing infrastructure programs are designed to benefit customers and that our team of approximately 7,500 employees is focused on the right things, and that’s serving our customers safely and reliably each day. Now, let’s turn to our Electric Operations on slide 7. Consistent with the May 26 settlement NIPSCO reached with the Indiana Office of Utility Consumer Counselor and NIPSCO’s largest industrial customers, the company filed a base rate case on October 1 and is expected to file a new seven-year electric infrastructure modernization plan with the Indiana Utility Regulatory Commission or IURC by early 2016. NIPSCO’s first electric rate case in five years seeks to recover the current costs of generating and distributing power plus ongoing investments which are delivering substantial benefits to customers, including a 40% reduction in the duration of power outages. The request also seeks to create a bill payment assistance program for low income electric customers during the summer cooling season. A decision by the IURC is expected in the third quarter of 2016. NIPSCO’s flue gas desulfurization unit at its Michigan City generating facility is set to be placed in service by the end of the year on schedule and on budget. The approximately $255 million project, supported with cost recovery, improves air quality and helps to ensure NIPSCO’s generation fleet remains in compliance with current environmental regulations. It also helps ensure that NIPSCO can continue offering low-cost reliable and efficient generating capacity for its customers. Progress also continued on two major electric transmission projects designed to enhance region-wide system flexibility and reliability. Right of way acquisition, permitting and substation construction are underway for both projects. These projects involve an investment of approximately $500 million for NIPSCO and are anticipated to be in service by the end of 2018. We believe our investments are paying off for our customers in Northern Indiana, and we saw evidence of that in the recent J.D. Power residential electric customer survey. NIPSCO’s electric overall customer satisfaction index score increased 30 points over 2014 and was among the most improved electric utilities in the Midwest. So as you can see, our teams continue to execute on our well established infrastructure, environmental, customer and regulatory plans. Before turning to your questions, I’d like to reaffirm the value proposition that we believe differentiates NiSource. Following the separation of Columbia Pipeline Group, we are well aligned with our aspiration to be a premier regulated utility company. Our plan represents a best-in-class risk-adjusted total return proposition with continued progress on our $30 billion of long-term 100% regulated utility infrastructure investment opportunities with significant scale across seven states, transparent earnings drivers and constructive regulatory environments. To that end, we’re focused on leading in the areas that matter most in our industry, enhancing value to our customers and communities, stewarding our assets to ensure safe, reliable, affordable and efficient service, engaging and investing in the communities we serve, and ensuring through disciplined execution that we deliver on our financial and other stakeholder commitments. This transparent, sustainable growth is expected to drive enhanced shareholder value well into the future. Thank you all for participating today and for your ongoing interest in and support of NiSource. We look forward to sharing continued updates on our progress. Now, let’s open the call to questions. Andrew? Question-and-Answer Session Operator We’ll begin with a first question from Paul Ridzon from KeyBanc. Your line is open. Paul T. Ridzon – KeyBanc Capital Markets, Inc. Good morning. How are you? Joseph J. Hamrock – President, Chief Executive Officer & Director Good morning, Paul. How are you? Paul T. Ridzon – KeyBanc Capital Markets, Inc. Fine, thank you. You had a pretty nice swing at the LDC operations. I know it’s on (16:46) new rates, but was there any rate design in there and maybe more fixed cost recovery? Joseph J. Hamrock – President, Chief Executive Officer & Director No, nothing substantial in terms of the shift in the rate design on the LDC side of the business; just continued execution of the investment plan and regulatory cadence across really all of the states with the mix of base rate case outcomes and tracker mechanisms contributing to the revenue side of the equation. And I would add disciplined expense control across the business as well. Paul T. Ridzon – KeyBanc Capital Markets, Inc. Thank you. And what are you seeing as far as demand from your steel customers and kind of what’s the outlook there for the next 12, 18 months? Joseph J. Hamrock – President, Chief Executive Officer & Director Yeah, those are as you know very important customers to us, a critical part of the Northwest Indiana economy. And we’ve been very tuned in to the pressure they’ve been under from international trade and have seen signs of moderation in that this year, but still a very flat load profile on the industrial particularly the steel side. It’s important to note that 2014 was a bit of an anomaly in terms of the load from that sector with them depending more on our generation than their own internal generation in that year due to weather conditions and operating conditions. But nonetheless, on a moderate to mid-term basis, we’re off by probably 7% or so on a year-to-date basis on the steel load in Northwest Indiana and we’d expect slow recovery, slow and steady recovery. The other side of that though, Paul, is we’re seeing really strong signs of economic development in other parts of the Northwest Indiana economy that while not completely offsetting the steel issues, certainly provides some stability for us. Paul T. Ridzon – KeyBanc Capital Markets, Inc. Can you give us a sense of the difference in margin between selling to a steel customer and just selling on the open market? Donald E. Brown – Executive Vice President, Chief Financial Officer & Treasurer Well the open market these days is pretty flat in the MISO region. So in the short-term view, I’d say that’s not a very favorable equation in general. But I couldn’t give you offhand a difference in the margin between the two and it’s certainly part of the electric rate case that’s filed that’s in front of us for next year. Paul T. Ridzon – KeyBanc Capital Markets, Inc. Thank you very much. Joseph J. Hamrock – President, Chief Executive Officer & Director Thank you, Paul. Have a good day. Paul T. Ridzon – KeyBanc Capital Markets, Inc. You too. Operator Our next question comes from the line of Andy Levi from Avon Capital. Your line is open. Andrew Levi – Avon Capital Hi. Good morning guys. Joseph J. Hamrock – President, Chief Executive Officer & Director Good morning Andy. Andrew Levi – Avon Capital I may be the last one, because I just dialed in. So let’s see. Joseph J. Hamrock – President, Chief Executive Officer & Director You’re welcome. Andrew Levi – Avon Capital But just on the (19:35), you mentioned that last year was abnormally high. Was that what, like some co-gen units down or something like that or? Joseph J. Hamrock – President, Chief Executive Officer & Director Yeah, that’s exactly right. Last winter was the harsh operating conditions in the weather. Some of the industrials were not able to run internal generation, so we served that load and that contributed to an uptick in the 2014 industrial load profile relative to what I would call normal in the prior couple of years. So if you looked at 2015 over versus maybe a three to five year strip of the prior of years, it’s pretty consistent with the prior years in general but off of 2014 because of that. Andrew Levi – Avon Capital So really I guess for that sensitivity, what you’re saying is go back to 2013? Joseph J. Hamrock – President, Chief Executive Officer & Director Yeah, that’s a good, probably a good representative indicator of what we might see in a quote/unquote normal year. Andrew Levi – Avon Capital So on a – again, I won’t hold you to the exact number but maybe you can give us a ballpark. On normalized basis, any idea where you think industrial sales are down, because of steel or just in general? Joseph J. Hamrock – President, Chief Executive Officer & Director Yeah, I’d call it relatively flat on a normalized basis right now, and the outlook will be continued relatively flat load from that sector. Andrew Levi – Avon Capital Okay, that’s good to hear. And then as far as, so when you file this rate case in Indiana, I guess there won’t be any reason to incorporate in your rate case a lower sales level for industrial or will that be a component of it? Joseph J. Hamrock – President, Chief Executive Officer & Director It’s always a part of any rate case and just in terms of revenue allocation across different customer groups. Keep in mind the test year goes through end of March of this year, 2015, so that’s the load profile. That’s the starting point for the rate case and reflects a little bit of that but doesn’t give you a full picture of the outlook for industrial. So you’ll see a little bit of that in the rate case. A little bit of adjustment for that. Andrew Levi – Avon Capital Okay. And then my last question is, obviously since your last call, there have been two acquisitions within the sector that had some unbelievable premiums paid, which was what your stock – basically, if you kind of took the PE ratio, it was almost double, so maybe not quite. But the point being is, just what are your thoughts on that and does that change the dynamics of your thinking going forward? Joseph J. Hamrock – President, Chief Executive Officer & Director Yeah, yeah. I haven’t seen anything that would double, but that would be interesting. I won’t speculate on M&A, Andy. Certainly we’re watching with interest the recent announcements in our space. But we remain very focused on our plan, which delivers sustained growth through the clearly identified $30 billion of regulated infrastructure investments. And as you know, that’s well supported by our stakeholders. And we’re well capitalized with significant scale to continue to execute on that. So that’s what we’re focused on and we’ll remain focused on that. Andrew Levi – Avon Capital Okay, and one more question. Just, you had thrown out a growth rate – or earnings estimates I should say, and a growth rate, when you came off the spin. Any way to categorize kind of how you’re doing relative to plan, just specifically on the rate cases? Joseph J. Hamrock – President, Chief Executive Officer & Director Yeah, I’d say we’re on plan as we speak, as we look at the 2015 performance year to date. We’re on plan. Lots of puts and takes within the plan, but certainly right about where we would expect to be. Our outlook remains confident around the range we’ve provided for next year as well as the long-term growth rate of 4% to 6% EPS and dividend growth. Andrew Levi – Avon Capital Thank you very much. Thank you, guys. Joseph J. Hamrock – President, Chief Executive Officer & Director Thank you. Have a good day. Operator Thank you. Our next question comes from the line of Charles Fishman from Morningstar. Your line is open. Charles J. Fishman – Morningstar Research Good morning. Joseph J. Hamrock – President, Chief Executive Officer & Director Good morning, Charles. Charles J. Fishman – Morningstar Research I realize you’re not giving any CapEx forecast beyond 2016, but just in sort of a big picture look – electric, you got Schahfer, Michigan City, will be winding down if not done by 2017. Will the modernization plan you think kick off by then that you’ll still maintain a CapEx spend on the electric side of about $400 million plus per year? Joseph J. Hamrock – President, Chief Executive Officer & Director Yeah, Charles, that’s a good way to describe it. We’ve always portrayed the electric (24:32) ramping up over time. In the original filing, the original plan, that’s what it reflected. As you know, we’ll file a new plan starting with 2016 investments by the beginning of next year. And you would expect to see that same kind of a ramp rate in that plan as we go forward. We remain very committed to those investments. We think they’re essential. And it will basically fill in, if you think about NIPSCO’s total CapEx profile, it will basically fill in over time as the generation investments ramp down and ramp off. Charles J. Fishman – Morningstar Research Yeah, and is that your plan to give like a two-year forecast going out on CapEx so you’ll roll this sometime next year or early next year? Joseph J. Hamrock – President, Chief Executive Officer & Director Yeah, we haven’t stated that. We haven’t indicated that we’ve put a specific two-year plan in place. But I would say the $1.4 billion that we’ve committed to for 2016 is a good indicator of where we expect to be over the long run with a modest general upward bias to that number. Charles J. Fishman – Morningstar Research And just, I just opened my model and I have rate base growth of around 8% on the Electric side, but I think that’s pre-separation. Is that still a decent number or close number? Joseph J. Hamrock – President, Chief Executive Officer & Director Yeah. Charles J. Fishman – Morningstar Research Or do you update that? Joseph J. Hamrock – President, Chief Executive Officer & Director In general – you said on the electric side. In general across NiSource, we’re going to run 6% to 8% rate base growth over the long run. And that’ll move a little bit between Electric and Gas. But it’s a good range for both segments. Charles J. Fishman – Morningstar Research Okay. I tell you what, I got a couple more but I’ll save them for EEI. Joseph J. Hamrock – President, Chief Executive Officer & Director All right. Look forward to seeing you. Charles J. Fishman – Morningstar Research Thank you. Operator Thank you. Our next question comes from the line of Steve Fleishman from Wolfe Research. Your line is open. Steven Isaac Fleishman – Wolfe Research LLC Yeah, hi. Good morning. Joseph J. Hamrock – President, Chief Executive Officer & Director Good morning, Steve. Steven Isaac Fleishman – Wolfe Research LLC Hi. So just on the guidance for 2016, just any color where you think you might be tracking within that range looking ahead? And just, I guess the industrial – Indiana maybe a little pressure. The gas utility is doing really well. Just maybe any high level thoughts on how you’re tracking for looking into next year? Joseph J. Hamrock – President, Chief Executive Officer & Director Yeah, that’s a fair question. We’re not yet ready to narrow or revise guidance for next year. So, certainly not in that position yet. And I think you’ve fairly characterized some of the major drivers. If you look at really any given year in our planning horizon, regulatory outcomes are the likely swing factors within the guidance. And so as we look at the electric case at NIPSCO, certainly one of the factors that could move the needle a bit within guidance. But we’re confident in that range and very confident in the kind of the middle of that range. Steven Isaac Fleishman – Wolfe Research LLC Okay. And then going forward, I’m just curious, will you continue to give kind of a one-year forward or two-year forward guidance or it was just kind of because it was the first year of the breakup, i.e., in early 2016 are you going to give a view for 2017 as well? Joseph J. Hamrock – President, Chief Executive Officer & Director We have not decided that yet. We certainly guided early for 2016 because of the separation, and we thought it was appropriate to come out as we separated NiSource and CPG for both sides to give a good look at the first full year of operations. Whether we’ll look that far out in the future is yet to be determined. Steven Isaac Fleishman – Wolfe Research LLC Okay. Thank you. Joseph J. Hamrock – President, Chief Executive Officer & Director Thank you. Have a good day. Operator Thank you. I’m not seeing any other questioners in the queue at this time, so I’d like to turn the call back over to management for closing remarks. Joseph J. Hamrock – President, Chief Executive Officer & Director All right, Andrew, thank you very much. And thank you all again for participating today and for your ongoing interest in NiSource. We certainly look forward to sharing continued updates on our progress, and meeting with you, many of you at EEI next week. So have a great day. Take care. Operator Ladies and gentlemen, thank you again for your participation in today’s conference. This now concludes the program and you may all disconnect your telephone lines at this time. Everyone have a great day.

The European Local Recovery: Introducing A New Index

By Jeremy Schwartz Earlier, we discussed how positive trends in the European economy showing domestic growth are leading the eurozone , while global trade has been one of the weak points. 1 We also discussed how our favorite leading indicators of the economy-both M1 growth and the European Commission’s Economic Sentiment Indicator-were showing positive signs that bode well for future trends in the local economy. 2 What could be a good way to position toward this local economic recovery? Creating an Index to Respond Strongly as Economic Conditions Improve At WisdomTree, we build innovative equity Indexes that offer the opportunity to express certain characteristics or have greater potential to respond to different economic trends. If an economic recovery in Europe is truly taking hold, we wanted to create an Index that best reflects these local economic conditions. WisdomTree thus created the WisdomTree Europe Local Recovery Index to reflect attributes of an improving domestic economy that is less reliant on the global export markets. Especially over the past five years, certain more defensive sectors of the MSCI EMU Index have exhibited lower correlation to changes in the economy and the leading indicator of activity, the European Commission’s Economic Sentiment Indicator. These defensive sectors thus may not offer the most representative exposures to improving economic conditions within the eurozone. Over the past five years, those same defensive sectors have exhibited lower betas when measured against the returns of the MSCI EMU Index. In times of turmoil or uncertainty, this could be a potentially positive attribute, but if an investor truly believes in the prospects for a eurozone economic recovery, these lower-beta defensive sectors are likely to be least responsive to a more positive growth environment. Defensive Sectors Less Correlated to Changes in Economic Activity and Sentiment (click to enlarge) Positioning in Cyclicals: No Defensives In positioning for local economy recovery, these data points lead us toward a preference for cyclical sectors over defensive sectors. Within the WisdomTree Europe Local Recovery Index, the Consumer Staples, Health Care, Telecommunication Services and Utilities sectors are not eligible for inclusion. Two important factors are driving allocations in the WisdomTree Europe Local Recovery Index: Stock Selection: In addition to the aforementioned sector screens, there is also a geographic revenue requirement to ensure a domestic European focus: constituents must derive more than 50% of their revenue from inside Europe, giving focus to what is happening within Europe and less sensitivity to the global growth outlook. Weighting: We also employ a weighting methodology to maximize sensitivity to improving economic conditions. This process tilts the weight toward stocks whose returns have been most correlated to changes in economic conditions, defined by the European Commission’s Economic Sentiment Indicator discussed above. This unique weighting methodology ranks stocks by their correlation to the Economic Sentiment Indicator and, using a smoothed weighting process, tilts weight from the traditional benchmark market capitalization weights toward stocks that are more responsive to changes in economic sentiment and activity. Formally, the weights are set by two factors: 25% according to their market capitalization percentages, and 75% according to how correlated each stock is to economic activity over the last five years (based on each stock’s returns and its relationship to the European Commission’s Economic Sentiment Indicator). Bottom Line 3 : Local Focus: WisdomTree Europe Local Recovery Index has nearly 70% of its weighted average revenue coming from within Europe. Opposite of WisdomTree Europe Hedged Equity Index: This is a distinctly complementary approach to that employed by the WisdomTree Europe Hedged Equity Index, which requires constituents to derive more than 50% of their revenue from outside Europe. The weighted average revenue exposure from Europe in that Index is only 30%. Unhedged Local Exposure Complements Hedged Exporters: There has been a huge amount of interest in currency-hedged eurozone exporters in 2015. The unhedged local recovery basket provides a nice complement both from its unhedged nature and the distinctly different profile of stocks represented in the local recovery Index. Based on the macroeconomic trends discussed in our blog post ” A Recovering Eurozone Economy: Where Should You Position? ,” this local recovery index should also be a focal point for traditional unhedged replacements, as the local economy is showing relative strength within the European economy. Sources Bloomberg, Eurostat and WisdomTree, with data as of 6/30/15. Bloomberg, European Commission, European Central Bank and WisdomTree, with data as of 9/30/15. Bloomberg, FactSet, with data as of 9/30/15. Important Risks Related to this Article Investments focused in Europe increase the impact of events and developments associated with the region, which can adversely affect performance. Jeremy Schwartz, Director of Research As WisdomTree’s Director of Research, Jeremy Schwartz offers timely ideas and timeless wisdom on a bi-monthly basis. Prior to joining WisdomTree, Jeremy was Professor Jeremy Siegel’s head research assistant and helped with the research and writing of Stocks for the Long Run and The Future for Investors. He is also the co-author of the Financial Analysts Journal paper “What Happened to the Original Stocks in the S&P 500?” and the Wall Street Journal article “The Great American Bond Bubble.”

Pinnacle West Capital’s (PNW) CEO Don Brandt on Q3 2015 Results – Earnings Call Transcript

Pinnacle West Capital Corporation (NYSE: PNW ) Q3 2015 Earnings Conference Call October 30, 2015 12:00 PM ET Executives Paul Mountain – Director, IR Don Brandt – Chairman, President and CEO Jim Hatfield – EVP and CFO Jeff Guldner – SVP, Public Policy, APS Mark Schiavoni – EVP and COO, APS Analysts Dan Eggers – Credit Suisse Greg Gordon – Evercore Ali Agha – SunTrust Robinson Humphrey Michael Weinstein – UBS Brian Chin – Bank of America/Merrill Lynch Charles Fishman – Morningstar Paul Ridzon – KeyBanc Capital Markets Michael Lapides – Goldman Sachs Paul Patterson – Glenrock Associates Operator Greetings, and welcome to the Pinnacle West Capital Corporation 2015 Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Paul Mountain, Director of Investor Relations. Thank you sir, you may begin. Paul Mountain Thank you, Christine. I would like to thank everyone for participating in this conference call and Webcast to review our third quarter 2015 earnings, recent developments, and operating performance. Our speakers today will be our Chairman and CEO, Don Brandt, and our CFO, Jim Hatfield. Jeff Guldner, APS’s Senior Vice President of Public Policy and Mark Schiavoni, APS’s Chief Operating Officer, are also here with us. First, I need to cover a few details with you. The slides that we will using are available on our Investor Relations Web site, along with our earnings release and related information. Note that the slides contain reconciliations of certain non-GAAP financial information. Today’s comments and our slides contain forward-looking statements based on current expectations and the Company assumes no obligation to update these statements. Because actual results may differ materially from expectations, we caution you not to place undue reliance on these statements. Our third quarter Form 10-Q was filed this morning. Please refer to that document for forward-looking statements, cautionary language, as well as the risk factors and MD&A sections which identify risks and uncertainties that could cause actual results to differ materially from those contained in our disclosures. A replay of this call will be available shortly on our Web site for the next 30 days. It will also be available by telephone through November 6th. I’ll now turn the call over to Don. Don Brandt Thank you, Paul and thank you all for joining us today. Pinnacle West delivered a solid quarter with several financial and operational highlights keeping us on pace with our guidance for the year and setting us up well for next year. The Board also approved the 5% dividend increase last week effective with the December dividend payment, continuing the predictable return of capital to our shareholders. Jim will discuss the financial results and guidance. Our operations team did an excellent job maintaining the fleet and the electrical grid again this summer. The Palo Verde Nuclear Generation Station performed well. Unit 2 entered its planned refilling outage on October 10th this outage marks an important milestone. It represents the completion of flex equipment installation at all three units. Flex addresses one of the main safety challenges at Fukushima the loss of cooling capability and electrical power resulting from a severe event. Flex short for diverse and flexible mitigation strategies is an industry wide initiative with site specific applicability, it relies on portable equipment to protect against even the most unlikely scenarios. The transmission distribution and customer service teams also performed well. Similar to last year we had a series of monsoon storms over the last few months 50,000 customers were without power during the worse storm. The vast majority were back on within 24 hours. Due to the storm damage our crones replaced 485 pools nearly twice a number from the 2014 storm season. August was particularly hot this year. We hit our 2015 load peak on Saturday August 15th after temperatures hit over 114 degrees for three consecutive days. This is the first time in modern era with air-conditioning that our peak has been on a Saturday. One data point worth noting is that when our customers were using the most energy at around 5 pm that day rooftop solar on our system was producing only 38% of its capacity, supplying 75 megawatts of the 7,031 megawatt load, since rooftop solar peaks around noon. However in stark contrast utility scale solar was producing 80% of its capacity supplying 140 megawatts of the load, because most utilities scaled panels are on trackers that move with the sun. Just a couple of hours later when our system load was still high rooftop solar production was at zero and the only solar production was coming from Solana our concentrated solar facility with thermal storage capabilities. This scenario was not unique to our peak lower day and highlights the importance of the electric grid at all hours of the day. Along with a robust and modern grid modernizing the rate structure is a necessary priority for which we have been advocating. Let me provide some perspective on how our recent regulatory fillings have evolved. Our priority remains clear we want to continue the dialogue on rate design with the objective of thoughtfully evaluating these policy issues ahead of the rate case application we plan to file in June of next year. The grid access towards filling we made on April 2nd was designed to take another step in this rate transition by increasing the fixed charge to $3 per KW or about $21 per month per solar customer. In August the Arizona Corporation Commission ordered to move forward with an evidentiary hearing on the issue the exact scope and timing of that process was to be determined they has another meeting. Subsequent to that decision we saw an unprecedented display of political theatre and character attacks by the rooftop solar lobby aimed at paralyzing the commission. Given the backdrop we offered an alternative to the commission in September to forgo of the request to increase the grid access charge and exchange for a more narrow hearing on the cost to serve customers with and without solar. In connection with this alternative we filed a summary of a recently concluded cost to service study on October 8th. This study used a methodology that has been tried, tested and validated in utility proceeding across the country using actual verifiable data. It concluded that each month APS incurs $67 to serve solar customers that those customers do not pay. This analysis credit solar customers for the measurable cost that APS avoids when a customer installs rooftop solar primarily reduce fuel costs. The commission discussed how to proceed at the open meeting last week. In the end they wanted to move forward with a single generic docket that will investigate a both the cost to service issue raised by APS and the value of solar. The procedural calendar would be determined soon by the commission staff. Although there has been a lot of noise around this issue we believe moving forward is critical and we will continue to work with the commission and key stakeholders in this proceeding. In addition to the regulatory proceedings we are also learning about the customer and grid impacts through our solar partner rooftop solar program. Our understanding in this area will better inform our efforts to create a modernized rate structure tailored to our customers’ energy needs. We’ve had a lot of interest in the process of signing up customers and installing rooftop systems. Let me know provide an update on a few other items related to our generation portfolio. Our utility scale program AZ Sun has two 10-megawatt projects in the Phoenix metro area come on line in September bringing the total program total to 170 megawatts. We will access a need for more utility scale solar through our resource planning process. We also retired Cholla unit 2 one of our core units as of October 1st in line with our announcement a year ago as part of a broader environmental plan for the Cholla site. Let me conclude by saying that we remain focused on delivering on our financial and operational commitments. We have a busy calendar over the next couple of years while the state addresses rate design modernization and we prepare for our rate case filling. We will remain steadfast to find solutions that benefit all of our customers. I’ll now turn the call over to Jim. Jim Hatfield Thank you, Don and welcome everybody. We had a solid third quarter as we benefitted from our continued cost management efforts and improvement in our customer sales. Today I’ll discuss the details of our third quarter financial results provide an update on the Arizona economy and review our financial outlook including introducing 2016 guidance. Slide 3 summarizes our GAAP net income and ongoing earnings. For the third quarter of 2015, we reported consolidated ongoing earnings of $357 million, or $2.30 per share, compared with ongoing earnings of $244 million, or $2.20 per share for the third quarter of 2014. Slide 4 outlines the variances in our quarterly ongoing earnings per share. I’ll highlight two primary drivers. Higher gross margin increased earnings by $0.28 per share. I’ll cover the drivers of our gross margin variance on the next slide. Going the other way higher depreciation and amortization expenses decreased earnings by $0.12 per share. Similar to the first half of this year the variance includes the absence of the 2014 Four Corners cost deferrals and related 2015 amortization of the deferrals and cost associated with the acquisition. D&A expenses were also higher due to additional plant service. Turning to Slide 5, I will cover a few of the key components of the net increase of $0.28 in gross margin. Higher usage by APS customers compared to the third quarter a year ago contributed $0.08 per share. Weather normalized retail kilowatt hour sales after the effects of energy efficiency, customer conservation and distributed generation increased 2.1% in the third quarter of 2015 versus 2014. Collectively the adjustment mechanism is continuing to add incremental growth to our gross margin as designed, contributing $0.17 per share primarily the Four Corners adjuster that went into effect on January 1. Offsetting Four Corners’ expenses are included in the other drivers, primarily D&A, which I mentioned earlier. The effect of weather variations increased earnings by $0.04 per share. This year’s third quarter was warmer or more favorable than normal, while the third quarter of 2014 was milder, or less favorable compared to normal conditions. As Don mentioned, August was particularly hot this year or for the first time since we added in Arkansas — we hit our peak on a weekend. As a reminder, both the O&M and gross margin variances exclude expenses related to the renewable energy standard, energy efficiency and similar regulatory programs, all of which are offset by comparable revenue amounts under adjustment mechanism. Slide 6 presents a look at the Arizona economy, and our fundamental growth outlook. Arizona’s economy continues to grow, much like it has in the past several quarters. Job growth in the third quarter in the Phoenix Metro area remained above the national average, as they have for the past 17 quarters. As seen in the upper panel of Slide 6, Metro Phoenix added jobs at a 2.8% year-over-year rate. This job growth is broad-based with the construction, healthcare, tourism, financial activity, business services and consumer service sectors, each adding jobs at a rate above 3%. Growth in consumer spending remains robust and expectations are improving for the housing market. Our expectation for the Metro Phoenix housing permits could be seen in the lower panel on Slide 6. The housing market is on track to record its best year since 2007 for both total permits and the single-family sector by itself. Total permits are up more than 12% this year and notably single family permit activity is up over 40%. Permit activity in the third quarter was the highest we’ve seen since the middle of 2007 and homeowners continue to report strong traffic in their sales offices. In summary, Metro Phoenix economy did grow fairly and is positioned for stronger growth in the next couple of years as it will act on the overbilled real estate market receipts into the past. As I have mentioned before, Arizona and Metro Phoenix remain attractive places to live and do business, especially as it is situated relative to the high-cost California market. 2015 is turning out to be better than 2014 in terms of job growth, income growth, consumer spending, and new construction. And we expect 2016 to be better than 2015. Reflecting the steady improvement in the economic conditions, APS’s retail customer base grew 1.3% compared with the third quarter of last year. We expect that this growth rate will gradually accelerate in response to economic growth trends I just discussed. Importantly, the long-term fundamentals supporting future population, job growth and economic development in Arizona appear to be in place. Finally, I will review our earnings guidance and financial outlook. We continue to expect Pinnacle West’s consolidated ongoing earnings for 2015 will be in the lower half of the range of $3.75 to $3.95 per share, based on the negative effects of weather through September. Year-to-date unfavorable weather through September has impacted earnings by approximately $0.08 per share versus normal conditions. We adjusted our 2015 customer growth down slightly to 1% to 2% from 1.5% to 2.5%, although our sales outlook hasn’t changed. We are introducing 2016 ongoing guidance of $3.90 to $4.10 per share which assumes the normal weather. The adjustment mechanics particularly transmission and LFCR along with modest sales growth are the key growth margin drivers. O&M is above trend in 2016 however, non-outage O&M spending remains flat in 2016 compared to 2015 with planned possible outages representing the increase year-over-year. This includes major planned outages at Four Corners and Cholla which occur roughly over six years. Separately the new lease terms related to the Palo Verde waste plant at Unit 2 that take effect January 1, 2015 offset plan and service impact and key depreciation and amortization relatively flat year-over-year. A complete list of the factors and assumptions underlying our guidance is included in our slides. Our rate based growth outlook remains 6% to 7% through 2018. We’ve included our updated rate based slide in the appendix. These estimates include bonus depreciation which we’re assuming will be extended for 2015 and 2016. And we continue to forecast that we will not need additional equity until 2017 at the early. Lastly as Don discussed the Board of Directors increased the indicated annual dividend last week by $0.12 per share or approximately 5% to $2.50 per share effective with the December payment. This concludes our prepared remarks. Operator we’ll now take questions. Question-and-Answer Session Operator Thank you. We’ll now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Dan Eggers from Credit Suisse. Please proceed with your question. Dan Eggers If we get to see an end of the 2016 guidance a little bit. I guess first question is you go back from the 1.5% to 2.5% customer growth number, given that reduction in inventory and revenue mix. Is there enough things now are coming online for next year that you can actually hit that numbers you guys look out and see what’s getting built? Jim Hatfield We do Dan. We see as we talk about home permits were up 78% in the August from the same month a year-ago. We’re seeing sales up 32% in [indiscernible] so we’re seeing a lot of activity in that housing market. Don Brandt And this is Don, I refer you if you do a search on azcentral.com Web site for the Arizona Republic and just a story that appeared on the 21st of October I just take a selective quote out of that but over the past two years approximately 11,000 building permits for single-family new homes have been issued annually and he said the expectation is that the number will reach 16,000 by year’s end. Dan Eggers And then on the O&M cost side for next year. The cost should be flat excluding the maintenance I guess what you said if we thought about what ’17 looks like how much of that extra maintenance gives us a way to just try and normalize that? Don Brandt Well don’t think ’17 will be as big as ’16 and when we look for rate case purposes we use a average of five years or so, so that all get blended out in the rate case. Dan Eggers The rate case will reflect that moving that with the ’17 numbers? Don Brandt Yes I mean we’ll get all of it because this is a sort of peak but we’ll get an average over several years as typically how they do it. Dan Eggers And then on the rate base forecast it includes another non depreciation act in the 18 rate case numbers now have a $400 million, what you guys do with the bonus depreciation cash and the activation company and the equity? Don Brandt Easy to fund CapEx, we’ll still be net negative cash from our fixed income securities to fund the CapEx but it does reduce our need. Jim Hatfield It will reduce our need for debt financing. Don Brandt Yes and we take bonus depreciations will be 70% of that reduction in CapEx the rest is really moving Ocotillo out to ’19 from ’18. Operator Our next question comes from the line of Greg Gordon with Evercore. Please proceed with your question. Greg Gordon My math shows that — I think my math shows that on the updated rate case forecast that 390 to 410 basically should more or less reflect the 9.5% to 10% ROE band on parent equity in 2016? Don Brandt That’s correct, right. Greg Gordon So yes that’s consistent with the way you thought about in the past? Don Brandt Correct. Greg Gordon So to the extend we lined up with the low-end or to high-end of that range thinking about the drivers on Page 10. Obviously this year we’re more towards the lower half because weather was mild. Is it fair to assume that the midpoint of your gross margin guidance range just assumes just a normal weather? Don Brandt Yes it includes normal weather as well as we’ve those adjuster mechanisms two things you — the other thing you’ll see from the gross margin perspective we’ve the negative transmission adjuster in 2015 which will have a positive next year. So we get the cumulative effect of that as well. Greg Gordon I guess I’ll step back and then ask higher level more open ended question. What are the key two or three factors that would cause you to end up at 410 versus that would cause you to end up at 390 i.e. high end of the range versus low end as you think about managing risk in ’16? Don Brandt I’ll take the higher end of the guidance to reflect a little higher sales growth and we’re currently planning. That would be the big driver. Greg Gordon Okay. And you file a rate case when and how and when is the — what’s the statutory time limit for a decision? Don Brandt We will file June 1 of 2016 typically there was a 30 days efficiency and there is the last case we did in 10.5 we expect probably it will last goal longer with the rate design in there it’s the statutory four month timeline but and Christmas around as you get days of the hearings and so on. Greg Gordon So the goal would be to have rates in place for the summer of ’17 but that could slip? Jim Hatfield Yes. And the perfect word we will have it at July 1 what the issue in the case on rate design changes and so on that would be an optimistic scenario I think. Greg Gordon But isn’t that the reason why you are trying to get a lot of that discussion down now and the context of these proceedings that Don just discussed. Jim Hatfield Exactly Greg. Operator Our next question comes from the line of Ali Agha with SunTrust. Please proceed with your question. Ali Agha Don so do you want that the commission decided to have these hearings on the generic basis and I know you guys have pushed for them to be more specific and focused on the cost of service side and is there a concern that while they go through the generic process and then when the rate case comes you’ve got to go through this once again but with more specific numbers so at the end of the day how much realistically do you think this moves the ball forward given the generic measure of this discussion? Jim Hatfield I think it’s a new advanced the ball will be dealing with the not just generic number but our numbers specifically as will be other participants and Jeff Guldner sitting here next to me I think can explain on that far a little bit. Jeff Guldner Sure. And I remember this they said their value has sold the dockets which was up there with obviously would be a new port on a generic the cost of service study that we did is specific with us and so one of the things you would get in the generic proceeding is still some discussion of how do you apply cost allocation factors how do you sort it out cost to service issue and result those and move forward in the rate case with the given the commissioners policy options that are available to cost from the value side and the more of that we can work through ahead of the rate case the more productive that’s going to be when you get into the rate case process. Ali Agha And then secondly as strong was good to see the growth in weather normalized sales pick up this quarter at 2.1%. With customer growth at that 1.3% level was there anything specific to this quarter would the weather normalization not have worked perfectly the sense that your sales growth is actually greater than customer growth this quarter and normally as you said does that 50 to 100 basis point differential but you see so anything to explain why sales growth was strong than customer growth this quarter? Jeff Guldner I think the biggest thing Ali is sort of a weak comparison last year in the third quarter overall we have 1% sales growth year-to-date which would reflect the kind of customer growth we’re seeing currently. I think a lot of that two part of our we look at the we have top solar and EDE and a lot of this been confident it’s new and I think you are seeing a little more cost that consumer and those in the Phoenix marketplace. Ali Agha I see, okay. And then on a sort of the LTM basis based on the way you guys calculate ROE and I know that’s all book value when you talk about your targets. Can you tell us what is that ROE that you want over the LTM basis? Jeff Guldner I haven’t calculated that I’ll have to look at that. Ali Agha Okay. But to be clear on the ’16 outlook the range reflects at the lower end 9.5% again based on the book value calculation? Jeff Guldner Yes. Ali Agha And the high-end would be 10. Is that right? Jeff Guldner Yes. Ali Agha Thank you. Jeff Guldner Next question? Operator, next question? Christine? We have lost connection from the host just one moment please. Operator Ladies and gentlemen, I am sorry for the delay. Our next question will come from the line of Michael Weinstein with UBS. Please proceed with your question. Michael Weinstein Hi guys. Can you hear me okay? Hello? Oh! Boy. Operator Ladies and gentlemen, please stand by your conference will resume momentarily. Michael Weinstein Oh! Boy. Operator Ladies and gentlemen, again please stand by your conference will resume momentarily. Once again please stand by your conference will resume momentarily. Gentlemen, you are reconnected. And your next question comes from the line of Michael Weinstein. Please proceed with your question. Michael Weinstein Hi, guys. Can you hear me okay? Hello? I am not hearing anybody, operator. Operator Gentlemen you are connected. Michael Weinstein Yes, can you guys hear me okay? Don Brandt Yes. Michael Weinstein Oh! There we go. All right. Don Brandt Okay. Michael Weinstein So my question has to do with the guidance for 2015. Just looking at you’ve reduced the retail customer growth a little bit by 0.5% but the sales volume is remaining the same. So that would sort of indicate that there has been an improvement in terms of energy efficiency effects, I guess less of an energy efficiency effect that you see in 2015. However, when you go forward to 2016 guidance, you have an increase in the customer growth rate but still the same sales rate, so that indicates the opposite. Just wondering what’s going on with energy efficiencies and asset management side? Don Brandt I Michael would caution you to look at any quarter and try to extract anything out of quarters, a quarter. I think we are pleasantly surprised by the sales growth year-to-date. I don’t think we necessarily expect laying that into ’16 guidance. Michael Weinstein Okay. And also just in terms of the rate cases filing. Is it true you guys are going to have to file or you are going to have to make purchases of new generating assets before you file the case. Is that right? Don Brandt We have no plans to purchase generation assets other than what we are billing at occupancy or which is a self built. Michael Weinstein Okay, so there is no potential for anything else, fairly probably you can see now? Don Brandt No we have some PPAs and other things rolling off and we will go out next year for sort of all resources RFP for sometime later this — probably later this decade, then we will see what where get at that point but we’re ways off from new generation at this point. Operator Our next question comes from the line of Brian Chin with Bank of America/Merrill Lynch. Please proceed with your question. Brian Chin So with the revised rate base numbers including bonus depreciation, can you quantify out the impact of the bonus depreciation or give us some sense of how big that is relative to the prior forecast? Don Brandt Yes, bonus depreciation we expect to be over the two years about $250 million. We just think about that as ratably over those two years. Brian Chin Okay, excellent. And then with regards to the revised bonus depreciation numbers, can you give us an update on any potential needs for equity, I would assume that it reduces that since you are able to take the bonus depreciation and use that for further deployment of capital. But just revise us on what the equity financing needs are if any as we go to the next year? Don Brandt Yes, well, certainly the cash and bonus depreciation would minimize the need, if we need anything, we won’t do anything until after we get that outcome and next rate case. Brian Chin Okay, great. And then lastly, just what risk do you think there could be under the more narrowly tailored generic proceeding. Is it possible that any delays or extension of that proceeding could bleed into the timing of when you file the rate case? Is there a risk of the two issues kind of melting together? I guess it’s a little bit of a springboard question on earlier question I think that Ali asked? Jeff Guldner Brian it’s Jeff I don’t think it would affect the timing of the filing of the rate case. One of the issues that came up in the discussion a little while ago was we’ve requested that the information push to get that aside us in the April timeframe was ahead in the case. But the procedural conference is still coming out, if that leaves over that wouldn’t affect the filing, once you file the case you’ve got a fairly lengthy litigation process. Operator Our next question comes from the line of Charles Fishman with Morningstar. Pleas proceed with your question. Charles Fishman If I could go back to the rate base growth once again 2018, the 400 million decline in generation and distribution that was bonus depreciation and the delay of Ocotillo the $200 million decline in transmission is that all bonus depreciation or there a project is been delayed or canceled that I have forgotten about? Don Brandt No we’re constantly on ongoing basis moving capital from year-to-year so there is nothing substantial in terms of delay in big projects or anything like that. Operator Our next question comes from the line of Paul Ridzon with KeyBanc Capital Markets. Please proceed with your question. Paul Ridzon Very quickly, you said you had 2.1% sales growth and that is after the impact of efficiency correct? Don Brandt Yes, and distributors and origin. Paul Ridzon What was the gross number? Don Brandt Little over three. Operator Our next question comes from the line of Michael Lapides with Goldman Sachs. Please proceed with your question. Michael Lapides Sorry to beat a little bit of a dead horse just want to make sure I understand though. Can you walk us through from your prior disclosures to today’s flight deck, the change in total expected rate basis for the forecast period and just two or three biggest drivers for that? There has been a lot 1C 2Cs and I want make sure I understand what’s going on here? Don Brandt Well about 70% of the change roughly is the impact of bonus depreciation, and significant amount of the other is just moving Ocotillo from our end service date of ’18 to 2019. Michael Lapides And the total change is $400 million or greater number? Don Brandt About $4 million. Michael Lapides Second when we think about 2017 O&M should we assume that it kind of gets back down in that year to something closer what you’ve guided to for 2015 or does it kind of stay at that elevated level that you’re going to see next year but that you recovering you’re expecting to get more recovery of that in rates? Don Brandt We’ve really not talked about any aspect of 2017 guidance Michael. Michael Lapides Is the 2016 increase in O&M viewed more as one time or viewed as recurring? Don Brandt Well I think it is — I would call it one time, and we do generation outage every year where it is based with significant overall at both quarters at 28 in the same year I could say that that number is elevated based on what we wouldn’t call it one time in any view. Michael Lapides And the case are going to filed in mid-’16 will that use a full year ’15 test year and what large if any known and measurables would be in there? Don Brandt We’ll try to let’s see what we had on the past which is the 2015 test year and any planned service 15-18 months then post patch your plan and there will be some things that are still under construction that won’t be done like the SCRs or Ocotillo allows them to recover some other mechanism. Michael Lapides Meaning you’re expecting to potentially get Ocotillo recovered in this even though Ocotillo is now not due online until 2019? Don Brandt No, we would not get Ocotillo in this rate case. Michael Lapides So this rate case is more about just managing lag and getting the FBRs in? Don Brandt I think this rate case is also a lot about the rate design issue which is how we align our 70% of fixed cost with only 10% of fixed revenue and try to get more alignment between cost and revenue. Operator Our next question comes from our Paul Patterson with Glenrock Associates. Please proceed with your question. Paul Patterson There was a court case in the Arizona Court of Appeal which overturned from the Arizona Corporate Commissions it was the case that didn’t involve you but in theory I guess there is some that are arguing that the solar access being out of the rate case could be — would it comply with the court of appeal ruling if you follow me. I am sure you guys are familiar with the case but whether — is this a new point that you have withdrawn your request or is there any risk if this I know the ACC is probably going to appeal it but if this decision were upheld is there any risk to you guys would respect to what would be the impact to you guys if it was upheld let me just ask it that way? Jeff Guldner So Paul this is Jeff Guldner. If you are referring that water company case involving infrastructure adjustor the commission have appealed that and if so court of appeals case they start review with the Arizona supreme court and with the case that what’s there was how the commission makes fair value findings which is somewhat unique that Arizona regulation how it makes their value findings in the context of adjustor mechanisms and things like that so we get them in rate cases we do typically fair value findings and provisions and almost everything that we do and so what I think folks are looking for right now is clarify some of the things that were in the court has appeals decision but it’s I don’t think that the supreme court is not yet excited whether to grant review and if they do I’m sure they will see mostly intelligence of state participating in that litigation. Paul Patterson Okay, right. But I guess what I’m wondering is if they grant review and I mean this ultimately is upheld where there would be any impact on what you guys have collected in riders or what have you with this access do you mean what would be — let me just ask you this way with reviewing impact on you guys when you look at the Arizona court of appeal’s decision what do you think the impact would be if we were up held? Jeff Guldner The part of the review on how you that to make fair value findings and those proceedings and I think most folks would expect the release to be prospective and so would be in highly to move forward with a different proceeding in terms of making fair value findings to which support whatever the court ultimately came out lift. We’ve had filed adjustors and one of the things that was mention that decision is a fuel adjustor which tracks expenses up and down fuel adjustors have been common in Arizona for decades and that opinion recognize with types of adjustors fine and as you get into different styles or different models for adjustor gets little more complicated and you guys figure out how you put the fair value piece it up. [Multiple Speakers] Paul Patterson So you guys have been fine with fuel adjustment that wanted to be something that would be impacted but would there be any other potential riders as something that we should think about as being potentially impacted or is it would you feel basically that you guys have the one that impacts that much. Is that what I’m getting at? Jeff Guldner Yes. We also look at all the riders and we look at how the fair value provisions and how we handle fair value in each of those cases and that litigated or implemented the rate cases and then if we have to make adjustments for the next rate case then we would. Operator We have no further questions at this time. I would now like to turn the floor back over to management for closing comments. Don Brandt Thank you, Christine. Thanks for joining us today. We apologize for the connection issues we had on the call. And we look forward to seeing most of you at EVI here in a couple of weeks. Thank you. Operator Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.