Great Plains Energy Incorporated (NYSE: GXP ) Q4 2014 Earnings Call February 26, 2015 9:00 am ET Executives Lori A. Wright – Vice President of Investor Relations and Treasurer Terry D. Bassham – Chairman, Chief Executive Officer, President, Chairman of Executive Committee, Chairman of GMO, Chairman of KCP&L, Chief Executive Officer of GMO, Chief Executive Officer of KCP&L, President of GMO and President of KCP&L James C. Shay – Chief Financial Officer and Senior Vice President of Finance Analysts Andrew Levi Michael Goldenberg – Luminus Management, LLC Michael J. Lapides – Goldman Sachs Group Inc., Research Division David A. Paz – Wolfe Research, LLC Charles J. Fishman – Morningstar Inc., Research Division Paul T. Ridzon – KeyBanc Capital Markets Inc., Research Division Operator Good day, ladies and gentlemen, and welcome to the Great Plains Energy Fourth Quarter Year-End 2014 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today’s conference, Lori Wright, Vice President, Investor Relations and Treasurer. Please go ahead. Lori A. Wright Thank you, Danielle, and good morning. Welcome to Great Plains Energy’s Year-End 2014 Earnings Conference Call. Let me begin by introducing Terry Bassham, Chairman, President and Chief Executive Officer; and Jim Shay, Senior Vice President, Finance, and Chief Financial Officer, who will provide an overview of our 2014 results and 2015 earnings guidance. Scott Heidtbrink, Executive Vice President and Chief Operating Officer of KCP&L, is also with us this morning, as our other members of our management team who will be available during the question-and-answer portion of today’s call. I must remind you of the inherent uncertainties in any forward-looking statements in our discussion this morning. Slide 2 and the disclosure in our SEC filings contain a list of some of the factors that could cause future results to differ materially from our expectations. I also want to remind everyone that we issued our earnings release and 2014 10-K after the market close yesterday. These items are available, along with today’s webcast, slides and supplemental financial information regarding the fourth quarter and full year 2014, on the main page of our website at greatplainsenergy.com. With that, I’ll now hand the call to Terry. Terry D. Bassham Thanks, Lori, and good morning, everyone. Appreciate you joining us here. On our call this morning, we’ll discuss our 2014 earnings results and give an update on our environmental upgrade at La Cygne and KCP&L’s rate cases at Kansas and Missouri. We’ll also discuss our 2015 earnings per share guidance range and drivers for 2016 and 2017. I’ll ask you now to turn to Slide 4 of the presentation. We entered 2014 focused on our company’s long-term success. We completed major construction on our La Cygne environmental upgrade, expanded energy efficiency programs to all our Missouri customers and aggressively managed operations and maintenance expense while continuing to provide affordable and reliable service. In fact, for the eighth year in a row, we were recognized in the Plains region for providing the most reliable service to our customers. We also strengthened our credit profile with ratings upgrades at both Standard & Poor’s and Moody’s Investors Service. We increased our common stock dividends for the fourth consecutive year and raised it by more than 6% in 2014. This increase contributed to a total shareholder return of 21%. Earnings for the year were $1.57 per share. Although we did see positive demand growth for the second consecutive year, our earnings continued to be impacted by regulatory lag from property taxes and transmission costs in our Missouri jurisdictions. Our efforts to mitigate this lag through legislative and regulatory processes were unsuccessful. As a result, we accelerated the filing of KCP&L’s general rate case in Missouri. Turning to Slide 5. Our 2015 earnings per share guidance range is $1.35 to $1.60. While our service territory is strong and we have worked aggressively to manage costs, we continue to be adversely impacted by increasing lag. The impact from property taxes and transmission lag was more than $50 million in our Missouri jurisdictions in 2014 and will continue to grow until new rates are in effect. We will also be impacted by increasing depreciation expense from capital investments in 2015. As reflected in our KCP&L rate cases prior to our true-up dates, we will place into service more than $1.1 billion of environmental upgrades and infrastructure investments to ensure reliability, security and dependable service to our customers. To mitigate lag going forward, KCP&L has requested a fuel adjustment clause inclusive of transmission costs similar to other utilities in Missouri and a property tax tracker. You can find summaries of the rate cases in the appendix of this presentation. Straightforward composition of our rate cases and our track record of achieving constructive regulatory outcomes gives us confidence in our current proceedings and reinforces our commitment to deliver 4% to 6% earnings growth from 2014 to 2016. Dividend growth also remains a key component of our total shareholder return value proposition. Our dividend has grown at an annual rate of nearly 5% since 2011, and we continue to target compound annual growth of 4% to 6% through 2016. We expect increasing cash flow flexibility post-2016 and remain committed to a longer-term dividend payout ratio of 60% to 70%. A key operational priority for the year is the completion of the La Cygne upgrade that is on schedule for completion before June and within budget. Upon completion, more than 70% of our coal fleet will have emission-reducing scrubbers installed, and all of our large-baseload coal-fired units will be in compliance with existing environmental rules and regulations. Since 2005, we’ve invested more than $1.5 billion in our generation fleet and have reduced sulfur and nitrogen oxide emissions by 66% and 68%, respectively. These investments have us well positioned to make longer-term decisions about our generation fleet. As you may have seen last month, we announced plans to cease burning coal in the coming years at 3 of our smaller older power plants. In the coming years, we will operate Lake Road using natural gas and make final decisions on the Montrose and Sibley units regarding whether to retire or convert them to an alternative fuel source. This decision furthers our commitment to a sustainable energy future and balanced energy portfolio and, for these units, represents the most cost-effective means to comply with environmental regulations, including Environmental Protection Agency’s Clean Power Plan. I’ll wrap up with a few comments on Transource. Both Transource Missouri transmission projects are progressing well, with significant milestones met. Iatan-Nashua line is expected to be in service this year with the Sibley to Nebraska City line expected to be in service in 2017. While the market is emerging and immature, we believe our joint venture with AEP is well positioned to compete in the competitive transmission market. Transource’s success with the 2 Missouri projects demonstrates the capabilities of the combined Great Plains Energy-AEP partnership. Bids have been submitted on a number of competitive projects, and we believe Transource is positioned for long-term success. I’ll now turn the call over to Jim to discuss our 2014 financial performance and earnings guidance for 2015 and considerations for 2016 and 2017. James C. Shay Thank you, Terry, and good morning, everyone. I’ll begin with Slide 7, which provides a comparison of 2014 to 2013. As Terry indicated, our full year earnings were $1.57 per share compared to $1.62 last year. For the fourth quarter 2014, earnings were $0.12 per share compared to $0.11 last year. Earnings for 2014 were favorably impacted by new retail rates, the release of uncertain tax positions and lower interest expense. These factors were more than offset by increases in depreciation expense driven by capital additions and operations and maintenance expense, including Wolf Creek. O&M for the year was in line with our plan as we continue to aggressively manage cost. Our plan included reducing O&M in the second half of the year, exclusive of energy efficiency expenses that have direct revenue offsets, by $15 million compared to the same period in 2013. We overdelivered on this target by reducing O&M approximately $20 million during this period. Through cost control measures that we’ve undertaken over the past several years, O&M expense, exclusive of regulatory amortizations and items that have direct revenue offsets, has increased by approximately 1% since 2011, which is less than the rate of inflation over the same period. We begin 2015 with the same diligent approach to managing costs. Driven by our industrial segment, actual demand in 2014 was up 0.4%. The industrial segment increased 2.3% 2014, primarily driven by Ford Motor Company’s Kansas City Assembly Plant, which produces the F-150 and Transit van. The F-150 production line was recently retooled to build the new trucks using military-grade aluminum alloy. Combined with the General Motors plant near our service territory and auto suppliers moving into our region, Kansas City is the largest auto manufacturing center in the United States outside of Detroit. The residential segment was up 0.2%, and the commercial segment was flat for the year. During 2014, we experienced an increase in the number of customers in both residential and commercial segments. However, the use per customer declined partially due to the impact of our energy efficiency programs for which we recover a throughput disincentive. The housing recovery in our region remains strong, with single and multifamily permits up approximately 17% compared to 2013 and are at their highest level since 2006. Through December, the region’s unemployment rate was 5% compared to the national rate of 5.4%. Turning to Slide 8. As Terry mentioned, our 2015 earnings per share guidance range is $1.35 to $1.60, and we remain confident in our 4% to 6% earnings growth target through 2016. As you can see by the summary of our request on the slide, we have significant earnings power in the rate cases. With a combined rate base increase of $750 million since the conclusion of KCP&L’s most recent cases, we are on track to deliver our $6.5 billion rate base target in 2016. We continue to be impacted by significant lag from property taxes, transmission expense and depreciation. And we are requesting increases associated with these items totaling approximately $75 million. Slide 9 reflects drivers and assumptions for 2015, including weather-normalized sales growth of flat to 0.5%, which includes the estimated impacts from our Missouri Energy Efficiency Act programs that were expanded to all Missouri customers in 2014. These investments, the impacts of which we recovered through a throughput disincentive, allow us to invest in our customers by providing long-term energy solutions and the ability to generate shareholders’ return. We project demand growth before the impact of energy efficiency programs at 0.5% to 1%. We will have approximately 7 months of new retail rates from the Kansas abbreviated rate case that became effective in July 2014 and new KCP&L retail rates expected to be effective in October 2015. AFUDC, that was 17% — $0.17 per share in 2014, will decrease with La Cygne and other projects included in the rate cases, moving from CWIP to in-service. We will be impacted by increasing property tax and transmission costs in our Missouri jurisdictions. The lag from these items was $0.21 per share in 2014, and we expect this to continue increasing in 2015. Depreciation expense driven by capital additions will also increase in 2015. Net plant in service increased over $350 million in 2014, resulting in $0.10 per share of lag. This lag will increase in 2015 as we will place additional plants in service prior to the rate case true-up dates. As a reminder, our cost structure, including property tax, transmission cost and depreciation, will be trued up in the case — in KCP&L’s current cases. In addition, as Terry mentioned earlier, we requested a fuel adjustment clause that includes recovery of transmission costs and a property tax tracker to defer tax property expense between rate cases. We expect to request similar rate treatment for these items and GMO’s next general rate case. Finally, we will continue to aggressively manage O&M. The Missouri Public Service Commission authorized construction accounting treatment for La Cygne that will allow for the deferral of depreciation expense and procuring cost treatments between the time the environmental upgrade goes into service and the effective date of new rates. In Kansas, we will defer depreciation expense on La Cygne between the time the upgrade goes into service and when new rates are effective. On the financing front, we expect to issue long-term debt at KCP&L in the second half of 2015 with no plans to issue equity. On Slide 10, we have provided considerations for 2016 and 2017. From an earnings trajectory standpoint, in 2016, we will have a full year of new retail rates at KCP&L. We are on track to deliver earnings per share growth of 4% to 6% from 2014 to 2016 off our initial 2014 guidance range of $1.60 to $1.75 per share. We are assuming weather-normalized sales growth of flat to 0.5% net of energy efficiency. We will maintain our focus on cost management and plan to continue aggressively managing O&M. We expect lag from transmission costs and property tax will continue at GMO, with certain transmission costs not recovered through its fuel adjustment clause and the lack of a property tax tracker. We anticipate to have new retail rates effective at GMO in 2017. Our projected 5-year CapEx schedule has been updated and is in the appendix of this presentation. And on the financing front, we have no plans to issue equity. And in 2017, we expect to refinance some long-term debt. We have a strengthening credit profile with increasing cash flow flexibility post-2016. I’ll now turn it back to Terry for some final thoughts. Terry D. Bassham Thanks, Jim. As you can see, our strategy for long-term consistent shareholder returns is very straightforward. After several years of large complicated construction projects, our generation fleet is positioned to produce low-cost, reliable power to our customers while meeting the demands of the EPA and other regulatory requirements. This positioning of the generation fleet and completion of our current rate cases also allow for increased cash flow available for ongoing investment and dividend growth. The implementation of a fuel factor in KCP&L Missouri and ongoing recovery of transmission expenses through the factor serve to reduce the risk and volatility of our ongoing returns. Thanks for your time this morning. Scott, Jim and I are now happy to answer questions if you have any. Question-and-Answer Session Operator [Operator Instructions] And your first question comes from Andy Levi from Avon Capital. Andrew Levi Okay. So what gets you to the high end and the low end of your guidance for 2015? Terry D. Bassham Well, we’re not talking necessarily about a particular element. I would say the factors that would drive us up and down the range are obviously our ability to get the rate cases completed on time. Again, we talked about having the rate cases in place in October, and that’s the statutory deadline, but case is dependent on finalizing the La Cygne work. So that would be a downside driver, if you will. We’ve talked about before that 2015 has less upside than downside simply because of the drag of the different pieces. So up and down that risk would be our ability to manage our business, which is something we’ve done very well, and manage our costs, which was also done very well. Growth obviously would be another piece in our service territory. We’ve given kind of our growth estimates around that. Higher growth would push us up. Lower growth would push us down. Those are a few of the elements. Andrew Levi Yes. I’m just more interested on the low end. The high end, the $1.50, $1.60, I guess, is no surprise to me. It’s — and again, I guess you kind of did this on the — in the third quarter, too, where you gave an extreme low end. So can we just talk about the low end, I mean, the $1.35? How do you get that low? Terry D. Bassham Well, again, a couple of things could happen. We could have a rate case which extended a little bit longer because of tower work on La Cygne, which causes rates to be effective on a lesser time frame. We could have lower growth in the service territory. We could have other growth within our territory that’s less than we expect. And I would say I think we’re conservative on the range. Obviously, it’s a little wider than we traditionally provide. Andrew Levi So is this — the $1.35, $1.40, I guess it’s similar to a call I was on yesterday for El Paso. Is that kind of more the perfect storm-type number? Is that kind of the way to look at it? And then if we can kind of go forward. Terry D. Bassham Andy, I wouldn’t — yes, I don’t know that I’d characterize it one way or another. I mean, again, as the year goes on, we’ve done a good job of managing our costs, and we’ve had things go negative on us. We’ve managed our costs to a greater extent. In a year where we’ve got rate cases going on, we’ve managed our costs very low. There’s less flexibility there. So things could affect that more dramatically than it has in the past. But certainly, it’s a number that we would work hard to be at the midpoint and above, as we always do. Andrew Levi All right. Then on the 3% to 4% O&M growth for this year, why is it so high? James C. Shay Andy, embedded within the 3% to 4% is we have our O&M level that is exclusive of the regulatory amortizations and items like energy efficiency that we have direct revenue offsets. So that core O&M growth is only going to be 1% to 2%, which is consistent with our past trend. We’ll have a full year of our energy efficiency program for Kansas City Power & Light Missouri, for which we recover a throughput disincentive. So when you add those items for which we have direct revenue offsets, that’s what drives the total O&M increase to that 3% to 4% level. Andrew Levi I understand. So it’s 1% to 2% on non-tracker type stuff. Is that correct? James C. Shay Correct, that is correct. Andrew Levi Okay. So to move on from this year, so just to understand what you’re saying about ’16, you’re taking your midpoint of original ’14 guidance, which would be, what, like $1.65 or something like that? James C. Shay No. What we’re doing, Andy, is we’re taking that $1.40 to $1.60 — that original $1.60 to $1.75 range and growing 4% to 6% off that range. It was… Andrew Levi Right, right, right. So that’s a $1.67, excuse me, okay. So you take the $1.67 is what you’re saying, right? And even though it’s not going to happen this year, you multiply that by the midpoint, which is 5% for 2 years. Is that what you’re saying? James C. Shay Yes. What you would do is actually you take the $1.60 and compound that at 4% for 2 years. And then you take the top end and compound that at the higher end of the range. That creates your range. Andrew Levi Okay. So if you take the $1.60 x 1.04 — excuse me, 1.04, so the low end of your range, again, I know you haven’t given guidance — would be in the $1.70-ish type range. And then on the high end, so $1.70 to $1.90, with a $1.80 midpoint, which is kind of where I was thinking. So that’s kind of what you’re saying, just to understand, for ’16? James C. Shay That’s the math. Andrew Levi Right. Okay, got it. And this is the last question, and you can answer it anyway you want. But you see several deals being made over the last year. Most companies that have had difficulty kind of growing. And I understand you are going to grow in ’16. But whether it’s Hawaiian, UNS, now UIL and Potomac, all had issues as far as under-earning and then combined with other companies or create shareholder value that way by kind of raising their hand and saying, “We’re ready.” I guess you’re in a similar situation where you perennially under-earn, no fault of yours. And so I just kind of — was just kind of — I don’t want to say new landscape but the landscape that we’re in, kind of what your thinking is there. Terry D. Bassham Well, I wouldn’t argue that we perennially under-earn. I would argue that it’s a bit more up and down given the need to file rate cases. Obviously, in ’13, we had an outstanding year based on post-rate case performance, which is the same kind of thing we’re talking about in ’16. M&A in general, which everybody gets this question in the industry, I mean, we are very confident and excited about our growth opportunities as a stand-alone basis. But I think through our partnership with AEP and our purchase of Aquila when it was opportunistic, we’ve shown our ability to strategically be aware of opportunities, as well. And as we move out of the rate cases, we’ll continue to do the same thing moving forward. Andrew Levi Okay. And your interest in M&A? I guess that was the main question. Terry D. Bassham I think I answered that. But yes, I mean, we’ll look at all strategic opportunities as we always do. And we’ve shown our ability to execute on those when we do. But we’re very confident in our ability to grow the business independently as well. Operator And your next question comes from Michael Goldenberg from Luminus Management. Michael Goldenberg – Luminus Management, LLC I wanted to continue with Andy’s discussion about guidance from ’14 to ’16. And I want to run through some math, and tell me if I’m wrong somewhere. So the midpoint of ’14 was $1.60 to $1.75, which is $1.68. The midpoint of this guidance is — actually before we get to that, so $1.68. If we grow that at midpoint of 4% to 6% at 5%, that means you expect roughly midpoint of $1.85 in ’16? 2015 midpoint is $1.48, of which assumes, I guess, some or probably no rate case. When I look at that in terms of net income, I’m seeing $284 million that corresponds to $1.85 and $227 million that corresponds to $1.48. That’s a difference of $57 million in net income, which in pretax revenue is like $90 million. Is that basically the math that you need to get in net revenue increase in your rate cases to get to where you want to be, if we base it on net revenue that doesn’t just cover the expenses that are going up? James C. Shay Yes. We’ll continue to aggressively manage cost. In my talking points, I talked about the $75 million worth of recovery tied to property taxes, transmission and depreciation lag. So just the true-up of those costs will — that combined with the $750 billion of rate ask, should create some significant earnings power for us. Terry D. Bassham Yes. Michael, I think your math is right. And if you look at what we’ve produced in terms of our rate case filings, that math, that discussion and that filing match up. Michael Goldenberg – Luminus Management, LLC What about from ’15 to ’16? Do you expect overall COGS? If I take all depreciation and some transmission and, well, fuel — let’s leave fuel aside, O&M, ’15 to ’16, is that roughly flat? Terry D. Bassham Is it roughly what? Michael Goldenberg – Luminus Management, LLC Would that roughly be flat? Would you expect growth from ’15 to ’16 in all your costs of goods sold? Terry D. Bassham So we would expect that the cost associated with those numbers we’ve talked about to be recovered in rates, and we would expect the first year out of a rate case to have some lag. We had about 50 bps of a lag in ’13 after the rate case. But it’s manageable, and everything would be trued up at that point. Does that answer your question? Michael Goldenberg – Luminus Management, LLC Not entirely because the math that I’m running, it seems that for you to get to where you want to be in ’16, you need to get $88 million of pretax revenue increase, assuming nothing changes in cost from ’15 to ’16, plus recover all of your cost increases from ’15 to ’16 in the rate case to get to where you want to be in ’16, midpoint? That’s why — so if your COGS go up $10, then you need to get $98 million rate increase. If they go up $15, then you need to get $103 million rate increase. Terry D. Bassham Well, your math on the front end in the ’14 to ’15 is absolutely right, and that’s included in the rate case. Increases that would be in ’15 and not included in the rate case, although we do true up the rate case for many items, would cause some lag, and it would be our job to manage those costs, exclusive of transmission, I would say, because remember, transmission increases get included in the fuel factor we’re asking for. Property tax increases that might occur post-test year, post-rate case, whether it be late ’15 or ’16, would be part of an overall cost structure we would have to manage going forward. Michael Goldenberg – Luminus Management, LLC But fuel costs or no fuel costs, at the end of the day, when Missouri Commission sits down and says — and Kansas Commission sit down and say, how much will customer rates go up? They have to go up by this amount of $90 million plus, whatever expenses, and they have to sign off on that size of rate increase. Terry D. Bassham Yes, yes, and again, these are the kinds of increases based upon both expenses and assets that are traditionally recovered. It’s not as if we’re asking for unusual adjustments. These are things that we’ve under-earned on a couple of years and should be trued up. Operator And your next question comes from Michael Lapides from Goldman Sachs. Michael J. Lapides – Goldman Sachs Group Inc., Research Division Couple of questions. I think you’ve had a bunch of the guidance ones, so I’ll actually take a little bit of a step back. I want to focus on something else. Your capital spending guidance changes a good bit, meaning the numbers are higher versus the last disclosure. And they are higher on things given that you don’t have a whole lot of trackers in transmission as a small part of the business. They are higher on things that traditionally create regulatory lag for you. So I guess my question is, a, what drove those — the CapEx change? B, how kind of set in stone or rate case-dependent are those CapEx changes? And c, does that impact the time line for a potential follow-on KCP&L rate case after this one? James C. Shay Yes. Michael, you’re referring to about $145 million increase. And what’s really driving that is we’ve got some growth CapEx in T&D. We’ve got some hardening of the system, some other investments. We’ve got some investments in IT that we’re looking to make, and these will certainly be factors and follow on, on rate cases. Michael J. Lapides – Goldman Sachs Group Inc., Research Division Do you anticipate filing a follow-on rate case in Missouri or Kansas for KCP&L in the next year or 2 after this one? Terry D. Bassham The current — this is Terry. The current plan isn’t to follow within 1 year or 2 yet. I would say that we will be responsive to this case’s outcome and regulatory lag. So we’ll be managing that from both sides. We’ll be managing our CapEx based on how we see the response, if you will, in these cases, number one, and the effect it has on customers and growth. And then number two, we’ll be looking at our ability to process a case, and we prefer not to be within 1 year or 2. But if the lag is created and that’s what’s required, we will certainly file it. Michael J. Lapides – Goldman Sachs Group Inc., Research Division Got it. The other thing is one of the other Missouri utilities made a comment this week regarding a potential kind of another effort to get legislation done in the state in terms of trying to reduce the lag, whether it’s ISRS or something like that. Can you give an update on that, whether it’s a coordinated effort, what you guys are seeking and how you think about it from a time line and process standpoint? Terry D. Bassham Yes. I mean, from a coordination perspective, I think we’re very well coordinated. We work well with our other utilities in the state, and we do believe that over time, our education efforts so far will lead to some changes in Missouri that allow for a reduction in lag for things that create jobs, provide additional reliability on the system and things that we all know that customers need and want. Time line’s pretty hard to predict. I’d say this year, the environment looks a lot like last year. I don’t know that I’ve got an ability this early in the session to predict outcomes this year. But long term, I think we have had a receptive Jefferson City to those kinds of conversations. And I think we still feel hopeful over time we’ll be able to achieve that — some of that. Operator And your next question comes from David Paz from Wolfe Research. David A. Paz – Wolfe Research, LLC Just going back to the rate base, you — I believe you said the $6.5 billion rate base for 2016 is still intact. Now I was just curious, where there no impacts from the extension of bonus depreciation or any other tax items? Were you be able to backfill any impact? James C. Shay Yes, though we did take some bonus depreciation in 2014. But with our current tax position, we had some tax offsets. So it was a manageable impact on our overall rate base, so we feel good about the $6.5 billion. David A. Paz – Wolfe Research, LLC Got it, okay. And this is similar to Michael’s question earlier, but just which items will contribute to lag post your rate cases? Can you just itemize those and, to the extent possible, kind of give a rough basis point for lags for each of those items? James C. Shay Yes. We will be truing up the lag for property tax and transmission costs for KCP&L. We won’t have those trued up for GMO until we have new rates in effect. But we also have growth in GMO, which is helping to offset that and help manage the impact to the lag. But of the $0.20, a little bit more than 1/2 is GMO-related, and that’ll continue to grow. And consistent with KCP&L, we’ll be looking to get the transmission piece addressed in the fuel factor as part of that follow-on rate case. Terry D. Bassham And recall that we do have a property tax rider, and we do collect fuel and transmission in Kansas. So this is a KCP&L MO-specific piece to that. And so post-rate case, post-true-up, post-test year, if you will, true-up, some degree of lag traditionally happens as our system spin continues into ’16. And again, I would — I’d refer you, in general, to ranges, to what we saw in ’13, first year out of the rate case, which at the year-end turned out to be about 50 basis points in total. David A. Paz – Wolfe Research, LLC I see. So 50 basis points of structural lag, it’s kind of safe to model for the year after the rate case. But after that, it will be a factor — it will be a function of property taxes if you don’t — if you’re not successful with the tracker proposal in Missouri. And I guess, that’s the big one, I guess. Correct? Terry D. Bassham Yes. We — what we’ve talked about all along is that we believe 50 to 100 basis points is kind of typical for a healthy growing utility in between cases. First year out ought to be even tighter. But as we continue to spend the capital we’ve been talking about, that will generate depreciation that’s not collected and will generate some lag there. Back in ’13, we were able to do all of that and deliver on about 50. Fifty to 100’s pretty typical from a structural perspective given, in Missouri and Kansas, the timing of test years and filings that we go through. David A. Paz – Wolfe Research, LLC Got it, okay. And then this is a just technical question. But just so I understand, the rate cases generally have a set timeframe in each, Missouri and Kansas, I believe. But I think in your prepared remarks, you mentioned completing the rate cases on time as a variable. This may have been a response to a question, but is that — that’s a variable for guidance? Just can you explain why the rate cases wouldn’t be completed on time? Terry D. Bassham So first of all, we absolutely expect them to be completed given the legal time line. So if we don’t do anything, we would expect for everything to be completed and rates effective in October. This case, like some prior cases, does include the completion of construction on La Cygne, back ends testing and in service of those units. And so if for some reason that testing doesn’t finish on time, we might want to push back the completion of the true-up a little bit to make sure that ’16 is a complete year. So that’s why I was referencing. We’ve not had issues like that in the past. Construction is on time and on budget. We don’t expect them here, but certainly, in — rates effective in October versus rates effective in December would have an impact if that kind of extension was needed. David A. Paz – Wolfe Research, LLC Okay. Actually, then just one last thing. Is construction — the completion of La Cygne a gating factor in any — like potential settlement discussions in the state for — in other words, does that have to be completed for any settlement to be reached in either Missouri or Kansas? Terry D. Bassham No. I mean, certainly, I could see that if we wanted to extend the time or if we wanted to accelerate a settlement that those units can’t go into service until they’ve completed all their testing criteria. Other than that, we are on schedule, and we are below budget at this point. And remember, even in Kansas, we have a predetermination on those units. So there is really not any — if you’re talking about settlement around a potential disallowance, there is nothing like that, that would be in play here. We expect to fully recover the cost of the work. Does that answer your question? David A. Paz – Wolfe Research, LLC Yes. I mean, like just in the past, there have been some settlements in Kansas in particular, and obviously, there have been some discussions in rate cases in Missouri. So I was just curious whether La Cygne had any kind of — the completion of La Cygne had any kind of an impact on settlement discussion. Terry D. Bassham I don’t — other than what I just discussed, I don’t believe so. Operator [Operator Instructions] And your next question comes from Charles Fishman from Morningstar. Charles J. Fishman – Morningstar Inc., Research Division Based on your comments on the regulatory lag on a previous question, as an analyst, and I look at the KCP&L Missouri rate case, just want to focus on the right things. If you get a decent decision on the ROE, you — and I’m going to assume you get the fuel cost adjustment. You get the property tax tracker. You get the CIPS tracker. You get the vegetation tracker. It seems to me then at that point, you’d be at the upper end of your 4% to 6% EPS growth target for ’16 — or for — yes, for ’16 and ’17. Would be that be a good way of looking at it or a correct way of looking at it? Terry D. Bassham Well, let me sure and break it out. I would suggest that if we’ve got a good result on our ROE, we recovered all those costs that were all trued up, and we didn’t have a lot of lag in those areas you talked about, yes, that’s a fair way to look at that. I want to — the reason I’d say that is our range, though, going forward is not dependent on trackers. We’ve asked for those things you mentioned, and that would certainly help to prevent additional lag growing. But if we didn’t get the vegetation tracker, the CIPS tracker or the property tax tracker, all those costs would, though, be currently trued up. And so it would, in that first year, create a little additional lag, and trackers would help prevent that, going forward. Charles J. Fishman – Morningstar Inc., Research Division Okay. So what the tracker would do — I’m sorry. Terry D. Bassham But we didn’t have those kind of trackers in ’13 when we delivered. And that’s my only point. Charles J. Fishman – Morningstar Inc., Research Division Okay. So maybe the way I correctly look at it is, you’re okay for, let’s say, ’16 and — ’16. But as we go forward, if you don’t get the trackers, then we could start — it would be tougher to fall in the higher end of that 4% to 6%? Terry D. Bassham Yes. I mean, well, yes, that’s the straight answer. Obviously, we don’t manage those costs individually. We manage all our costs together, and so there might be things that move back and forth there. Taken as individual elements, without trackers, if those costs continue to grow as they have in the past few years, that would cause us then to have to file another rate case, which would be based on some lag we’re beginning to see if that occurred. Operator And your next question comes from Paul Ridzon from KeyBanc. Paul T. Ridzon – KeyBanc Capital Markets Inc., Research Division Your load has kind of been a little volatile. What drives that volatility? And can you give us an EPS sensitivity to 100 basis points of load swing? James C. Shay Yes. We kind of think about our demand — kind of think about our percent of demand depending on the time of the year kind of having a $0.05 to $0.10 total year impact. And the 0.4% that we delivered for the year is really in line with what we were expecting. We had the impact of our Missouri energy efficiency programs kick in a little bit. The quarter-to-quarter movements that you see, you’ve got the weather normalization process, which has some level of variability to it, and we had some decent growth in the fourth quarter of last year that we were matching up to. So all of those drivers, when you kind of put them all together, we feel pretty good about our flat to 0.5% moving into next year exclusive of energy efficiency. But the weather normalization process and year-over-year comparisons on a quarter basis can create a little bit of volatility. Paul T. Ridzon – KeyBanc Capital Markets Inc., Research Division The 4Q ’13 was abnormally strong. James C. Shay Yes, it was. We had some growth. We had some nice growth we were comparing to. Operator And you have a follow-up from Michael Lapides from Goldman Sachs. Michael J. Lapides – Goldman Sachs Group Inc., Research Division Want to focus on cash flow a little bit, kind of more follow-up from the capital spending question, but this may be a little more focused on 2015. How do you — do you expect to — on a — just a — cash from ops minus the cash from investing activities, do you expect to be cash flow-positive this year? James C. Shay Not in ’15. Michael J. Lapides – Goldman Sachs Group Inc., Research Division But you expect that to turn in 2016 once new rates go into effect? James C. Shay Yes, ’16 and beyond. We get closer to cash flow-positive, kind of plus or minus, depending on the timing of individual CapEx, but we’re going to have a lot more flexibility ’16 and beyond. Michael J. Lapides – Goldman Sachs Group Inc., Research Division Okay. And how much should we think about the — what’s the best way to think about how much the NOL cash benefit is in a year like 2015? And maybe even given some of the — the guidance ranges you’ve put out there for 2016, how we should think about what the cash contribution of that is annually. James C. Shay Yes. It’ll — we will not be a cash taxpayer so you really get the full benefit of those deferred taxes rolling through your cash flow model. Michael J. Lapides – Goldman Sachs Group Inc., Research Division Meaning so for the next — at least 2015, ’16, ’17, your cash tag, your deferred income tax line on the cash flow statement is basically equal to kind of what your statutory GAAP taxes would be on the income statement. James C. Shay Correct. And we’ve — actually, in the appendix, we note that’ll go beyond 2020. So we’ve got significant NOLs and deferred tax assets that will provide quite a bit of value for us for the years to come. Michael J. Lapides – Goldman Sachs Group Inc., Research Division Got it. And so when I think about what happens post-rate case, cash from ops, cash from — minus new cash from investing activities, kind of largely in line with each other, up or minus a little bit here and there, but then you can issue first mortgage bonds or senior secured-type debt, and that provides a lot of cash flow flexibility. And in the meantime, you’re maintaining your capital structure. James C. Shay Exactly. Operator And you have a follow-up from Andy Levi from Avon Capital. Andrew Levi I just want to push this. It’s more, I guess, just a strong thought that I have. Basically, if you’re going to continue to run into the — again, absent getting any of these trackers, this continued regulatory lag post-’16, it seems to me that you’d be much better off in a bigger entity that can, in a sense, allow you to cut costs and — as a larger entity and be able to earn a better return considering the lag. So I mean — and again, what would be the aversion of doing something like that? Terry D. Bassham Well, first of all, I didn’t suggest there was any aversion. But secondly, cutting costs ultimately flows back to rate payers. So there’s a benefit there potentially for customers, but ultimately, those costs go back, and the lag is structural. Our focus will be on through the rate case ask and through legislation and other places, finding ways, number one, to collect those costs on an ongoing basis and, other than that, manage those costs. And we believe we’ve got ability to do that on a stand-alone business. So we’ll continue to be strategic in our thinking. But in the meantime, we’ve gotten very good outcomes on our rate cases, and we think we’ll continue to get that in both our jurisdictions, and we feel good about our growth profile. Operator You have a follow-up from Michael Goldenberg from Luminus Management. Michael Goldenberg – Luminus Management, LLC I just want to follow up on Michael Lapides’ call about — question about deferred taxes. So you pay no cash taxes through 2020. I — the 2 things that I just want to confirm. One, that benefit reduces rate base; and two, because you’re getting this cash and rate base is smaller, this reduces the lag. Are both of those statements correct? Terry D. Bassham Well, first of all, NOLs don’t reduce rate base. Michael Goldenberg – Luminus Management, LLC When you collect, when you collect the taxes, when you pay out less in cash taxes, does that impact the rate base or not? Terry D. Bassham No. These things are… Michael Goldenberg – Luminus Management, LLC Okay, got it. Terry D. Bassham Remember, the NOLs came from the Aquila acquisition, which were non-regulatory. Michael Goldenberg – Luminus Management, LLC Okay. So it’s all collected at the parent? Terry D. Bassham On NOLs. Michael Goldenberg – Luminus Management, LLC Got it, okay. And then what about the lag? Does it reduce the lag collecting those? Terry D. Bassham Does collecting the cash taxes reduce lag on other costs? Michael Goldenberg – Luminus Management, LLC Right. Terry D. Bassham Well, it helps cash flow, but other than that, no. Michael Goldenberg – Luminus Management, LLC Okay, Got it. I guess, yes, I was thinking about it being collected on the — at the utility level, not at the parent. I got it. Terry D. Bassham No, it’s a non-reg asset. Operator I’m not showing any further questions at this time. I would now like to turn the call back to Terry Bassham for any further remarks. Terry D. Bassham Thank you, everybody. We appreciate you being on the call. I appreciate your questions, and we look forward to talking to you moving forward as the year goes on. Thank you, and have a good day. Operator Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program. You may all disconnect. Everyone, have a great day.