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Resilient Consumer? Not During The Manufacturing Retreat And Corporate Revenue Recession

Is the 70% consumer so resilient that he/she can overcome a global slowdown, a stagnant domestic manufacturing segment and a domestic revenue recession. Six of the regional Fed surveys – New York (Empire), Philadelphia, Kansas City, Dallas, Chicago and Philly – show economic contraction in manufacturing. The expected revenue for the S&P 500 for the third quarter is headed for a third straight quarterly decline at 3.3%; the 4th quarter should show a 1.4% decline to make it four in a row. Concerned investors started punishing foreign stocks and emerging market equities in May. The primary reason? Many feared the adverse effects of declining economic growth around the globe as well as the related declines in world trade. By June, risk-averse investors began selling U.S. high yield bonds as well as U.S. small cap assets. A significant shift away from lower quality debt issuers troubled yield seekers, particularly in the energy arena. Meanwhile, the overvaluation of smaller companies in the iShares Russell 2000 ETF (NYSEARCA: IWM ) prompted tactical asset allocators to lower their risk exposure. All four of the canaries (i.e., commodities, high yield bonds, small cap U.S. stocks, foreign equities) in the investment mines had stopped singing by the time the financial markets reached July and early August. I discussed the risk-off phenomenon in August 13th’s ” The Four Canaries Have Stopped Serenading.” What had largely gone unnoticed by market watchers, however? The declines were accelerating. And in some cases, such as commodities in the PowerShares DB Commodity Index Tracking ETF (NYSEARCA: DBC ), investors were witnessing an across-the-board collapse. The cut vocal chords for the canaries notwithstanding, there have been scores of warning signs for the present downtrend in popular U.S benchmarks like the S&P 500 and Dow Jones Industrials. Key credit spreads were widening, such as those between intermediate-term treasury bonds and riskier corporate bonds in funds like the iShares Baa-Ba Rated Corporate Bond ETF (BATS: QLTB ) or the SPDR Barclays Capital High Yield Bond ETF (NYSEARCA: JNK ). Stock market internals were weakening considerably. In fact, the percentage of S&P 500 stocks in a technical uptrend had fallen below 50% and the NYSE Advance-Decline Line (A/D) had dropped below a 200-day moving average for the first time since the euro-zone’s July 2011 crisis. (See Remember July 2011? The Stock Market’s Advance-Decline Line (A/D) Remembers. ) Equally compelling, any reasonable consideration of fundamental valuation pointed to an eventual reversion to the mean; that is, when earnings or sales at corporations are rising, one might be willing to pay an extraordinary premium for growth. On the other hand, when revenue is drying up and profits per share fall flat – or when a global economy is stagnating or trending toward contraction – investors should anticipate prices to fall back toward historical norms. Indeed, this is why 10-year projections for total returns on benchmarks like the S&P 500 have been noticeably grim. Anticipating the August-September volatility – initial freefall, “dead feline bounce” and present retest of the correction lows – has been the easy part. When fundamental valuations are hitting extremes, technicals are deteriorating, sales are contracting and economic hardships are mounting, sensible risk managers reduce some of their vulnerability to loss. It is the reason for my compilation of warning indicators (prior to the downturn) in Market Top? 15 Warning Signs . Anticipating what the Federal Reserve will do next is a different story entirely. The remarkably low cost of capital as provided by central banks worldwide is what caused the investing community to dismiss ridiculous valuations and dismal market internals up until the recent correction. Now Fed chairwoman Yellen has explicitly acknowledged that the U.S. is not an island unto itself. The fact that half of the developed world in Europe, Asia, Canada, Australia are staring down recessions – the reality that many important emerging market nations are already there – has not slipped by members of the Federal Reserve Open Market Committee (FOMC). Unfortunately, the Fed’s problem with respect to raising or not raising borrowing costs does not end with economic weakness abroad. With 0.3% year-over-year inflation in July, the Fed’s 2% inflation target has been pushed off until 2018. With 0.2% year over year wage growth (or lack thereof), the Fed’s hope that consumer spending can save the day looks like wishful thinking. For that matter, as I demonstrated in 13 Economic Charts That Wall Street Doesn’t Want You To See , consumer spending has dropped on a year-over-year basis for 4 consecutive months as well as six of the last eight. Perhaps ironically, I continue to receive messages and notes from those who insist that the U.S. consumer is in fine shape. Even if he/she is stumbling around at the moment, he/she is consistently resilient, they’ve argued. I would counter that three-and-a-half decades of U.S. consumer resilience is directly related to lower and lower borrowing costs. Without the almighty 10-year yield moving lower and lower, families that have been hampered by declining median household income depend entirely on lower interest rates for their future well-being. Even with lower rates, perma-bulls and economic apologists will tell you that housing is in great shape. With homeownership rates now back to 1967? They’ll tell you that autos are in great shape. On the back of subprime auto loans with auto assemblies at a four-and-a-half year low? Wealthy people and foreign buyers have bought second properties, which have priced out first-time homebuyers. More renters than ever have seen their discretionary income slide alongside rocketing rents. And the only thing we’re going to hang our U.S. hat on is unqualified borrowers who cannot get into a house, but can get into a Jetta? (Yes, I intended the Volkswagen reference.) I am little stunned when I see people ignoring year-over-year declines in retail sales as well as the lowest consumer confidence readings in a year to proclaim that “everything is awesome.” If everything were great, the U.S. economy would not have required $3.75 trillion in QE or $7.5 trillion in deficit spending since the end of the recession. The Fed would not have needed 6-months to prepare investors for tapering of QE3 and another 10 months to end it; they would not have needed yet another year to get to the point where they’re still not comfortable with a token quarter point hike. The U.S. consumer requires ultra-low rates to get by, and that’s a sad reality with multi-faceted consequences. In my mind, it gets worse. Those who commonly fall back on the notion that 70% of the economy is driven by consumer activity seem to ignore the other 30% entirely. Manufacturing is falling apart. Year-over-year durable goods new orders? Down for seven consecutive months. Worse yet, six of the regional Fed surveys – New York (Empire), Philadelphia, Kansas City, Dallas, Chicago and Philly – show economic contraction in manufacturing. Does the 30% of our economy that represents the beleaguered manufacturing segment no longer matter? Is the 70% consumer so resilient that he/she can overcome a global slowdown, a stagnant domestic manufacturing segment and a domestic revenue recession? Investors who do not want to pay attention to the technical, fundamental or macro-economic warning signs may wish to pay attention the micro-economic, corporate sales erosion. As Peter Griffin of the Family Guy Sitcom might say, “Oh, did you not hear the word?” Simply stated, the expected revenue for the S&P 500 for the third quarter is headed for a third straight quarterly decline at 3.3%; the 4th quarter should show a 1.4% decline to make it four in a row. The Dow Industrials? They’ve experienced lower sales for even more consecutive quarters. Beware, perma-bulls would like to blame this all on the energy sector. Should we then ignore the ongoing declines in industrials, materials, utilities, info tech ex Apple? If we strip out energy, do we get to strip out the over-sized contribution of revenue gains by the health care sector? There’s an old saying that goes, “You can’t making chicken salad out of chicken caca.” Here’s the bottom line. Moderate growth/income investors who have been emulating my tactical asset allocation at Pacific Park Financial, Inc., understand why we will continue to maintain our lower risk profile of 50% equity (mostly large-cap domestic), 25% bond (mostly investment grade) and 25% cash/cash equivalents. We are leaving in place the lower-than-typical profile for moderates that we put in place during the June-July period. When market internals improve alongside fundamentals, we would look to return to the target allocation for moderate growth/income of 65%-70% stock (e.g., large, small, foreign, domestic) and 30% income (e.g., investment grade, high yield, short, long, etc.). For now, though, we are comfortable with lower risk equity holdings. Some of those holdings include the Consumer Staples Select Sector SPDR ETF (NYSEARCA: XLP ), the iShares MSCI USA Minimum Volatility ETF (NYSEARCA: USMV ) , the iShares Russell Mid-Cap Value ETF (NYSEARCA: IWS ) and the Vanguard High Dividend Yield ETF (NYSEARCA: VYM ).

Westar Energy: Why I’m Buying This Midwest Utility

Summary Westar Energy is a solid utility company with an 11-year history of increasing its dividend. Kansas economy grows despite tax problems initiated by its state governor. Westar stock sports a 3.89% yield. I’ve been watching Westar Energy (NYSE: WR ) since 1999. As a journalist, I covered the rise and fall of David Wittig, former Westar Energy CEO, who ran the utility like a hedge fund, making a big bets on various businesses unrelated to electricity generation. Westar Energy was for many years a natural gas and utility business. Because of Wittig’s mismanagement, the company was forced to sell natural gas assets to pay down debt. The debt reduction and subsequent CEOs’ focus on improving Westar’s utility business helped the company’s bonds become investment grade by the rating agencies. The company is way more attractive today as an investment than 16 years ago when I started covering it. I have met every CEO of this company since 1999. Toward the end of his reign Wittig was trying to dismantle the company by selling off assets, it was sad to watch. Investors who bought the stock at $9 per share during the crisis in the early 2000s have done quite well, but at the time, there was a very dark cloud over the company. I believe Wittig should have been running a hedge fund, not a regulated utility. Wittig resigned in November 2002 amid a scandal that involved a local banker in a real estate deal. Wittig’s cloud hung over the company until the two parties settled for $36 million payout to Wittig in 2011. Under CEO Jim Haines, Westar streamlined into a pure-play utility company. Bill Moore continued this mission while embracing wind power and cheap natural gas generation. Current President and CEO Mark Ruelle has picked up momentum by investing in wind generation and transmission projects while upgrading coal fired power plants to meet stringent emission standards. Westar spent over $1 billion in air quality investments in the past five years. The company is winding down expenses in air quality, from upwards of $200 million annually to less than $100 million this year and less than $30 million 2016. A June 2, 2015, presentation says Westar has seen “dramatic improvements in air quality.” Wind Renaissance Meanwhile, Westar Energy has really increased its use of renewable energy, especially wind. Renewable energy is currently 9% of generation mix — more than uranium at 8%. Renewable energy will grow to 16% in 2015. This is huge. And coal is declining. Westar uses cheap natural gas to generate electricity. Natural gas is easier to use than coal. Coal plants take some time to start up and shut down. Natural gas generators are quick to turn on and off. So natural gas assets are timely when the wind isn’t blowing, although the wind blows mightily in western Kansas most of the time. (click to enlarge) A year ago, Prairie Wind Transmission, LLC, a joint venture between Westar Energy and Electric Transmission America, celebrated completion of its 108-mile, 345-kilovolt high-capacity electrical transmission line in south-central Kansas. The double-circuit line will serve as an electric energy super highway between eastern and western Kansas, promoting growth of renewable energy in Kansas, providing greater access to lower-cost electricity and improved reliability in the region. Electric Transmission America is a joint venture between subsidiaries of American Electric Power (NYSE: AEP ) and Berkshire Hathaway Energy (NYSE: BRK.B ) to build and own electric transmission assets. “With our current wind resources and those we’ve already committed to next year, we’ll have enough renewable energy to power half our residential customers,” Ruelle said in a recent call with investors. Ruelle said Gov. Sam Brownback has favored renewables. “It’s just pragmatic Kansas politics,” Ruelle said . “He has been a big sponsor of renewables and supported renewables for what it means for rural Kansas. But as you also know there are folks that don’t like the concept of subsidize the energy period and Kansas has made a lot of progress in renewables and everybody has sort of been doing it…We have been doing it because that makes sense economically. And basically Kansas got to a place where we didn’t think a mandate was probably needed to step it up. We’re doing it not because of the mandate, we’re doing it because it’s relatively inexpensive and it’s a good way to navigate the environmental rates.” Westar Energy is the largest electric energy provider in Kansas, providing generation, transmission and distribution to approximately 687,000 customers in east and east-central Kansas. The company is headquartered in Topeka, and employs about 2,400 people in Kansas. Its energy centers in 11 Kansas communities generate more than 7,000 megawatts of electricity, Westar operates and coordinates 34,000 miles of transmission and distribution lines. The Economy The Kansas economy has grown slowly and steadily since the Great Recession of 2008-09, but lags the robust growth of Nebraska or Colorado. Kansas Gov. Sam Brownback is business friendly, but his tax policy has drained state reserves and forced cuts to education and welfare. The political situation here is backward to say the least. Growth occurs in places like Wichita because it is more entrepreneurial than Topeka, it’s not surprising that Pizza Hut started in Wichita. You will find more entrepreneurs in western Kansas than in the statehouse of Topeka. Kansas’ Gross State Product has grown from $121 billion in 2009 to $144 billion in 2013. In a recent conference call, Ruelle said, industrial sales were mixed to down. “The biggest negatives are from our largest chemical manufacturer and pipelines reflecting the impact of lower oil prices,” Ruelle said. “On the positive side, the refineries were operating at capacity and commercial aerospace remains strong. Other good news is that the large candy maker (Mars) who just came to our service territory a couple of years ago has already announced a big expansion and that will add a few more megawatt to our sales.” Rate case Westar Energy asked regulators for a $152 million rate increase but the Kansas Corporation Commission staff recommended $55 million based on a 9.25% Return on Equity (ROE). “If adopted that would be among the lowest authorized ROEs in the nation,” Ruelle said on the investor conference call. I believe the KCC’s proposed 9.25% ROE is lower than the historically 10% to 11% ROE built into previous rate cases. The KCC’s decision on the rate case is expected by Oct. 28 with implementation of new rates in November. I predict a negotiated settlement somewhere around $75 million. That would add $0.53 cents per share in revenue or about $0.06 cents per share in profit. EPS for the trailing 12 months was $2.25 per share, while the company is predicting 2015 earnings guidance at $2.18 to $2.33 per share. An additional $0.06 cents from the rate case would increase EPS by 2.6%. With large air quality projects finishing in 2015, the company’s need to raise capital has diminished. The company has a decent balance sheet, plenty of liquidity and no need for new equity. As a result, I expect the company to continue its trend of increasing its dividend. Growth and income investors will like this: The company has increased its dividend every year for 11 years. Payout ratio is reasonable at Westar Energy. Company pays out 60% to 75% of earnings in dividends. The current $0.36 cent per share quarterly dividend is a yield of 3.89%. I like the stock at $36.00. I believe the stock is fully valued at $40 per share. WR was trading at $39 per share in mid August before the recent stock market correction. Risks It is likely the Federal Reserve will start raising interest rates. This may or may not happen in 2015, but I do expect rates to go up by fall 2016. The cost of debt will go up for all utilities, including Westar Energy. However, I believe we will see relatively low interest rates for many years, perhaps the next decade. Economic growth is sluggish in Kansas. Gov. Sam Brownback eliminated income taxes for most small businesses, with the hope the owners would re-invest the tax savings into job creation. But business owners, farmers and ranchers did not need additional employees, so they never went on a hiring spree as Brownback had hoped. With a reduction in state revenue, local school boards will likely raise property taxes to fund the education gap. Weather has been mild all year, reducing the need for a boost in generation that is typical in summer months. Conclusion Westar Energy is a solid company with good management. A year ago I had purchased Westar stock at $36 per share and sold it at $40 per share. I recently bought shares at $37.07, and may add shares at lower prices. The stock market is going through substantial volatility. I can sleep at night owning this stock. People need electricity. Westar rates are among the most affordable in the country. I believe a rate increase will happen this fall and the company will be able to raise its dividend in 2016. Disclosure: I am/we are long BRK.B, WR. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Empire District Electric’s (EDE) CEO Brad Beecher on Q4 2014 Results – Earnings Call Transcript

Empire District Electric Co (NYSE: EDE ) Q4 2014 Earnings Conference Call February 6, 2015 13:00 ET Executives Dale Harrington – Director, IR Brad Beecher – President & CEO Laurie Delano – VP, Finance & CFO Analysts Brian Russo – Ladenburg Thalmann Paul Zimbardo – UBS Michael Goldenberg – Luminus Management Tim Winter – Gabelli & Company Operator Welcome to the Empire District Electric Company Fourth Quarter 2014 Results Conference Call and Webcast. [Operator Instructions]. I would now like to turn the conference over to Dale Harrington. Please go ahead, sir. Dale Harrington Thank you, Dan and good afternoon, everyone. I would like to welcome you to our year-end 2014 earnings conference call but let me begin by introducing Brad Beecher, President and Chief Executive Officer and Laurie Delano, Vice President Finance and Chief Financial Officer who in a few moments will be providing an overview of our 2014 results and our 2015 expectations as well as some highlights on other key matters. Our press release announcing 2014 results was issued yesterday afternoon. The press release and a live webcast of this call including our slide presentation are available on our website at www.empiredistrict.com. A replay of the call will be available on our website through May 6th of this year. Before we begin I must remind you that our discussion today includes forward-looking statements and the use of non-GAAP financial measures. Slide 2 of our accompanying slide deck and the disclosures in our SEC filings present a list of some of the risks and factors that could cause future results to differ materially from our expectation. I will caution that these lists are not exhaustive and the statements made in our discussion today are subject to risks and uncertainties that are difficult to predict. Our SEC filings are also available upon request or maybe obtained from our website or from the SEC. I would also direct you to our earnings press release for further information on why we believe the presentation of estimated earnings per share impact of individual items and the presentation of gross margin each of which are non-GAAP presentations is beneficial for investors in understanding our financial results. And with that I will now turn the call over to Brad Beecher. Brad Beecher Thank you, Dale. Good afternoon everyone and thank you for joining us. 2014 was a good year for Empire shareholders. The one year total shareholder return was about 35.6%, record earnings record high stock prices, a strong balance sheet with improved retained earnings and a sustainable growing dividend that increased by 2% in the fourth quarter were highlights for the year. Today we will discuss further our financial results for the fourth quarter and 12 months ended December 31, 2014 period, recent activities impacting the company and our outlook for 2015. As shown on slide 3, yesterday we reported consolidated earnings for the fourth quarter of 2014 of 11.1 million or $0.26 per share compared to the same quarter in 2013 when earnings were 15.2 million or $0.35 per share. Earnings for the 12 months ended December 31, 2014 period were 67.1 million or a $1.55 per share. 12 months ended 2013 earnings were 63.4 million or a $1.48 per share. During their meeting yesterday the Board of Directors declared a quarterly dividend of $0.26 per share payable March 16, 2015 for shareholders of record as of March 2nd. In December we completed in-service testing for the Asbury Air Quality Control System. The Missouri Public Service Commission staff determined that as of December 15, 2014 the Asbury AQCS equipment hadn’t met the in-service criteria. The determination by the staff that the in-service criteria have been met is a vital step for the rate case we filed in Missouri on August 29th of last year. As you may recall in order for the commission staff to allow a December 31 true-up date it was required that that Asbury be in service prior to February 1, 2015. Recovery of costs associated with the Asbury AQCS is the primary component of the Missouri Case. I will remind you that we’re seeking the increased electric rates by about $24.3 million annually or about 5.5%. Missouri Commission staff has indicated in testimony filed January 29th that the true-up period for this case will in [ph] December 31, 2014. Local public hearings for this case have been scheduled for February 19 in Joplin and February 20th in Reeds Spring. The Missouri Commission has scheduled an evidentiary hearing at its offices in Jefferson City, the weeks of April 6 through 10 and April 13 through 17. In the interim the Missouri Commission staff will be conducting a construction audit and prudence review on the Asbury Project. True-up direct testimony is scheduled to be filed on April 30th and a true-up evidentiary hearing occur in May 13th. New customer rates as a result of this case will be effective no later than July 26, 2015. Initially we provided a cost estimate for the Asbury AQCS project without AFUDC of between a $112 million and a $130 million. We later updated investors that we expected to be in the bottom half of the range. Today as a result of solid project management I’m proud to report we expect cost to be around a 112 million without AFUDC and around a 120 million including AFUDC. In December we filed a request with the Kansas Corporation Commission for an environmental cost recovery rider, rates from our Kansas request will be effective no later than August 3, 2015. Additionally we plan to file a request for an environmental cost recovery rider in Arkansas later this month. In Oklahoma we filed a request on January 9th to amend our Southwest Power Pool Transmission Tariff. Our proposed amendment request the removal of a requirement to file a base rate case by July 2015. The SPP tariff was established in January 2012 to allow recovery of our Oklahoma share of transmission charges assessed by the Southwest Power Pool. A requirement of that tariff was that Empire must file a base rate case by July 2015 because of the Asbury Air Quality Control System completion in early ’15 and the Riverton 12 combined cycle [ph] conversion projects scheduled for 2016 and Oklahoma filing in 2015 would necessitate a second rate case filing in 2016. Since rate cases are costly for customers we are asking for this Oklahoma requirement to be removed. If our request is approved we would plan to file a single rate case in 2016 to capture costs from both the Asbury and Riverton projects. We announced yesterday that our 2015 earnings guidance falls within the weather normalized range of a $1.30 to a $1.45 per share down from our 2014 results of a $1.55 per share. The lower range reflects the full year of high expense primarily related to the Asbury AQCS upgrade and a new maintenance contract for the Riverton facility offset with only a partial year of new Missouri rates to recover their Asbury investment and other increased cost. I will now turn the call over to Laurie to provide additional details of our financials. Laurie Delano Thank you, Brad. Good afternoon everyone. I’m very pleased to be reviewing such positive financial results with you today, the information I would discuss today will supplement the press release we issued late yesterday and as always the earnings per share numbers referenced throughout the call are provided on an after-tax estimated basis. I will briefly touch on our 2014 fourth quarter results before I discuss our annual results. Our fourth quarter earnings of $0.26 per share reflect a more normal quarter of winter weather when compared to the previous year’s fourth quarter. They also reflect increases in operating and maintenance expenses when compared to last year. Slide 4, shows the quarter-over-quarter changes that impacted our earnings. Gross margins for revenues less fuel and purchase power expense decreased $1.5 million decreasing earnings by $0.02 per share quarter-over-quarter. We estimate the impact of the warmer weather and other volume metric factors compared to last year decreased revenue by about $3.2 million, decreasing margin by about $0.03 per share. This decrease was driven primarily by an 8.1% decrease in sales for our residential customers. Commercial sales were only down about 1%, the weather impact on commercial sales was mitigated in part of increased sales throughout our territory as well as increased sales at the New Mercy Hospital as it prepares to open in March. Increases in operating and maintenance expenses, decreased earnings about $0.06 per share driven by increased transmission operation and production maintenance expenses. Small changes in depreciation, AFUDC and other income and expense rounded out the remaining $0.01 per share decrease in earnings for the fourth quarter. Turning to our annual rates, as Brad mentioned earlier, our net income increased $3.7 million or $0.07 per share. Slide 5, provides a breakdown of the various components that resulted in this year-over-year per share increase. Consolidated gross margin increased $17.1 million over 2013 adding an estimated $0.25 per share. As shown on in the callout box on slide 5, we estimate that increased customer rates from our Missouri rate case effective in April 1 of 2013 added about $12.5 million to revenue or about $0.16 per share to margin. We estimate weather and other volume metric increases on the electric side of the business added an estimate $4.6 million to revenue year-over-year or about $0.05 per share to margin. The weather effect from the gas segment added about a penny per share. The volume metric change was driven by a combination of weather and higher commercial sales again including positive impacts from the construction of the New Mercy hospital. Increased customer accounts added an estimate $1.5 million year-over-year increasing margin about a penny per share. Changes in other miscellaneous revenues primarily related to SPP transmission revenues and non-volume fuel related items netted together rounded out the remaining increase in electric segment, revenues adding a combined net impact of $0.02 per share to margin. Increases in our consolidated operating and maintenance expense offset the positive margin impact decreasing earnings about $0.17 per share. The callout box on slide 5 provides a breakdown of this impact. As we’ve discussed on previous calls the largest individual O&M increase was for transmission operation expenses primarily related to SPP charges. This added expense reduced earnings about $0.08 per share. Increases in distribution and production maintenance along with general LIBOR cost combined to reduced earnings about $0.11 per share, other smaller cost increases reduced earnings to a total of $0.02 per share. These increases were offset by the effect of lower healthcare cost about $0.02 per share as well as the $0.02 per share positive effect of the regulatory reversal of a gain on sale of the assets that we recorded in 2013. And as you all will recall we also recorded a similar entry in 2013 for our planned disallowance. This 2013 write-off also has the impact of increasing earnings year-over-year by $0.03 per share. Continuing on with slide 5, depreciation and amortization expenses decreased earnings per share $0.05 driven by higher levels of plant and service and increased depreciation rates resulting from our April 2013 Missouri case. Increases in property taxes brought earnings down another $0.02 per share. Increased allowance for funds used during construction or AFUDC added about $0.06 per share to earnings reflecting our Asbury and Riverton construction projects. Small changes in other income and deductions in the effects of additional stock issued under our various stock plans round out the remaining $0.03 decrease in earnings per share. On our balance sheet we have $90.3 million in retained earnings as of December 31, 2014. We had $44 million of short term debt outstanding at the end of 2014 and we currently have $68 million outstanding. We received the proceeds from our $60 million private placement of first mortgage bonds on December 1. As Brad said we announced in our press release yesterday that we expect our full year 2015 weather normalized earnings to be within the range of a $1.30 to a $1.45 per share. Before I talk about the drivers for our new guidance I would like to review our actual 2014 results as compared to our original 2014 guidance. Slide 6 provides this information, in developing our 2014 guidance we assumed 30 year average weather, modest growth as Joplin continued the three building projects and the extra quarter of Missouri rates from our 2013 rate case and revenues from our 2013 Arkansas rate case filing. This was offset with a corresponding effect of increased O&M expenses. Our actual 2014 results of a $1.55 were higher than the midpoint of our original guidance range primarily due to one higher than expected electric and gas sales and two lower than expected operating and depreciation expenses. Higher sales added about $0.03 to our earnings per share on the electric side of the business, and about a penny to our gas segment results. Favorable weather and higher commercial sales again inclusive of the New Mercy hospital were the primary drivers. Decreased cost totaling $0.06 per share were driven by lower than expected generating plant operating expenses and lower than expected SPP charges. Also depreciation was lower due to the timing of various in-service dates of our construction projects. On slide 7 we highlight the drivers of our decrease in earnings expectations in 2015. First as in the past our estimates are based on normal weather with a modest positive sales growth as we have previously disclosed we still expect this growth to be at a level of less than 1% per year over the next several years. We’re also assuming our Missouri rate case will be effective as filed. We also assume our Arkansas and Kansas rate case filings will go into effect as filed. Operating and maintenance expenses will be higher primarily due to a new maintenance contract for our Riverton facility. Depreciation expense will increase reflecting the Asbury AQCS project in service for a full year and an estimated 20 year life rate and we will also see increased depreciation for assets placed in service since our last case. The impact on depreciation from the Asbury AQCS project alone is approximately $0.09 on an earnings per share basis. We will also see increases in property tax and interest expense. The higher interest expense reflects our December 2014 debt issuance and expected issuance in 2015. Our AFUDC impact will be lower in 2015 now that as Asbury is complete and in service. Other factors considered in our range are variations in customer growth and usage as well as variations in operating and maintenance expense. Again our range does not take into account any changes to our Missouri rate case filing or reflect any December 31, 2014 true-up numbers. As a reminder we have summarized the components of our Missouri rate case as currently filed on slide 8. On slide 9, we provide the historical and projected capital expenditures and net plant in-service numbers that reflect our current capital expenditure plan. No changes have been made since the update we provided last quarter. The 2015 expenditures reflect our ongoing cost for the Riverton combined cycle project. On this slide w also present our net plant levels less deferred taxes to approximate our estimated rate base. To finance these projects we expect to issue some debt financing in the middle of 2015. Right now we believe the debt offering will be in the range of $60 million but could be subject to change based on expenditure timing and other factors. This financing combined with the addition of internal equity from our dividend reinvestment and stock purchase plans and our combined build of retained earnings will help keep us near our target 50:50 debt equity capital structure. I will now turn the discussion back over to Brad. Brad Beecher Thank you, Laurie. As Laurie referenced and as shown in slide 10, in addition to the work completed in Asbury we’re moving ahead with construction at our Riverton power plant. The foundation work is complete and most of the major equipment is on-site for the Riverton Unit 12 conversion. As of December 31, our total cost of this project is 88.5 million. As a reminder we estimate our total cost of completion to be between a 165 million to a 175 million. We continue to successful execute our growth strategy to build rate base infrastructure to serve our customers and meet environmental regulations. The completion of the Asbury AQCS and on-going Riverton 12 combined cycle projects are the largest additions to these plan. Empire remains a high quality, pure play, regulated electric and natural gas utility. We’re focused on our vision of making lives better every day with reliable energy and service. We’re committed to meeting today’s energy challenges with least cost resources while ensuring reliable energy for our customers and attractive return for our shareholders and a rewarding environment for our employees. I will now turn the call back to the operator for your questions. Question-and-Answer Session Operator [Operator Instructions]. And our first question comes from Brian Russo of Ladenburg Thalmann. Please go ahead. Brian Russo When I look at kind of the midpoint of your 2015 guidance, kind of implies about an 8% earned ROE which is quite a meaningful amount of regulatory lag versus you know kind of 9-8 current allowed ROE. I just want to maybe drill deeper into the lag. I think you quantified the impact for the Asbury depreciation. Could we quantify the O&M impact as well and then kind of differentiate what structural lag versus what’s just timing lag related to your base rate cases. Laurie Delano We don’t really anticipate a huge O&M impact from the Asbury project, we will see an increase in our consumables, limestone, activated carbon and those sorts of things. However we actually recovered those back through our fuel adjustment. Obviously we will see an increase in property taxes from the Asbury project and if you look at the slide where our rate case summarization takes place you will see that we have asked for about $2.9 million in property taxes associated with that case. So that kind of gives you a feel for what that directionally might be. Brian Russo Okay, can you remind us of the lag that you experience on transmission cost and property taxes each year? Brad Beecher Today neither property taxes or transmission expenses are recovered in trackers and so they go through a normal procedure. So in this case what we’re recovering in our rates is reflective of the rates that we received in April of 2013. So, we have asked for in this current case the transmission expenses to be included in our fuel adjustment cost to help reduce that lag in the future. But that’s something that will have to be taken in account in this current case. Your other question, you had asked earlier relating to structural lag versus lag on timing of the cases. I have a hard time differentiating that, in Missouri we have a 11 month process and using this case is a good example for illustration is any – we have filed the case at the end of August of last year. We will expect rates by about July, we’re going to get a true-up through the end of the year and so that’s about as tight as we can cut it as it relates to the biggest CapEx expenditure. So we have 6 or 7 months lag on those big CapEx after they go in service before we get recovery in rates. And so that’s what we experienced on Asbury and we’re seeing today and it’s the kind of representative of the kind of lag we will see on Riverton 12 as well. Brian Russo Okay. In your last Missouri rate case you guys actually settled and rates went into effect in April. Was that several months earlier than the 11 month process or was the filing date different than this go around [ph]? Brad Beecher Brian, my memory is the rates went into effect a little bit early and when you get into settlement sometimes that’s one of the variables that we consider when we’re deciding whether to sell or not, it’s where the rates can go in a little bit early. I don’t recall the exact dates on the last case we will have to – we can dig that out later. Brian Russo Okay, so I guess if you did settled rates went into effect earlier obviously there would be less lag in ’15? Brad Beecher If that were to happen, that’s true. Brian Russo And then just back to your comment, the lag experience with Asbury this year and then the lag associated with Riverton upgrade next year. Is it kind of implied that you’re going to be experiencing similar regulatory lag in ’16 and ’15 and 2017 should be the year where we see improved returns? Brad Beecher What I was trying to get across is we’re going to have similar lag on Riverton 12 as we have on Asbury AQCS so that would say we’re going to have lag in 2016 and you can look at our CapEx forecast for ’16, ’17 and ’18 and we do drop off after Riverton 12 and that should give our shareholders a little bit of a better change to recover their allowed rate of return. Operator Our next question comes from Julien Dumoulin-Smith of UBS. Please go ahead. Paul Zimbardo It’s actually Paul Zimbardo. First question, on the estimated rate base slides, it looks like there is a little bit of a change from the last quarter, is that just bonus depreciation or something of alike? Laurie Delano For the rate base slides, yes, that would be correct. Paul Zimbardo And does that impact the rate case filing at all? Brad Beecher So, when we made the rate case filing bonus depreciation had not yet been extended and so our filing did not reflect that and same way when we put this slide together last quarter it had not yet being extended. So that accelerated depreciation will be reflected as one of the many true-ups that will happen at the end of the December 31 true-up. And as you pointed out bonus depreciation is a reduction or offset to rate base. Paul Zimbardo So a follow-up on the last question about quantifying some of those 2015 earnings driver, I apologize if I missed it, did you say what the impact of the new maintenance contract was– Laurie Delano I didn’t say but on the slide that summarizes our rate case filing assumptions, we call that out at $3.9 million. Operator [Operator Instructions]. Our next question comes from Michael Goldenberg of Luminus Management. Please go ahead. Michael Goldenberg So I want to go back to 2016, I understand 2015 is a big down year but I was under the assumption – I think we have discussed on a several occasion, you kind of always seem to point investors to when you think about long term, when you think about 2016, do rate base times equity times ROE and all these little changes in O&M are long haul, they even out and then structural lag probably should be more than let’s say a 100 bps that was kind of the impression that I think over the years have got. Is it fair to say that that may no longer be the best way to think about the company structurally? Brad Beecher If you look at the last several years for EDE we have been closer to 200 basis points regulatory lag and we have been looking at about 8% ROE in something that’s in that 10% kind of ROE range as people think about our allowed ROEs and so we have had closer to 200 basis points of lag historically. For 2014 we were at about 8.75% I think actually ROE, so we got down to about a 150 basis point to lag [inaudible]. In the big CapEx years we’re going to struggle a little bit more but as growth has come down in our industry and I’m really talking about our sales growth, it really tends to exacerbate regulatory lag when you don’t have any new kilowatt hour sales to help pay for increased expenses. Michael Goldenberg So help me understand this then, generally the way the rate cases work even with in stage with structural lag in your first year of rate case, let’s say it’s a three year cycle. Your drag is generally the lowest right when you get the rates and then I agree that if you have a lot of CapEx then by the end of year three that structural lag increases and that’s generally the way it works so. I kind of thought or was working on the assumption that if you take the period of July ’15 through June ’16, structure, that should be the time of your least drag. Is that not the right way or is the drag actually going to then get even worse? Brad Beecher I think you’re thinking about it correctly. Once our rates go into effect in ’15 until such time as we start big depreciation expense on Riverton 12 going into service, that will be the time of least regulatory lag in that kind of window, that year after you get rates and before you start depreciation and O&M on the new assets coming into service. Michael Goldenberg Okay and just to be precise, Riverton depreciation starts when? Laurie Delano Well we’re assuming that Riverton will come online in mid-2016 and so you would assume that deprecation would start immediately after it comes online Michael Goldenberg So then we would see drags of even more than 200 bps? Laurie Delano Well we haven’t really quantified that but – I mean it’s – you’re going to see the same, a little bit the same scenario again depending on what the depreciation amount is for Riverton and the other thing you see is AFUDC benefit dropping off when that plant comes into service, you know that’s happening on the Asbury project also. Brad Beecher And then as we’ve talked about earlier when the new plants come online we have got property taxes that get assessed [ph] and we have lag on property taxes as well. Michael Goldenberg But yes you get the revenue step up to make up for all of that and give you as much to the bottom-line as AFUDC used to, isn’t that the general concept, that when a plant goes into service. If everything is done ideally then revenue just increases for the amount that the expenses are and the net income stays roughly the same for a $1 off CapEx whether it’s AFUDC or cash. Laurie Delano Yes, when your rates go into effect that’s true but in those intervening months until they go into effect the time that plant comes online that’s where you’re going to drag. Michael Goldenberg And then just finally, conceptually thinking, yes it’s very good ’14 right? You made $1.55 and that’s before rate case, now you actually are going to get new rates and you do know how to CapEx and yet your earnings are going down and just judging by the structure of going into ’16 and then more depreciation. It’s hard to see how structurally putting in all this CapEx is actually – instead given the situation Missouri, does it actually incentivize investment where the company actually financially hurts from putting in more and more CapEx? Brad Beecher Well in the end our business model in Missouri is we earn a return on assets that we build to serve our customers. We’re going through structural pain and this is a perfect example, Asbury went into service. It’s been used to service customers, we’re depreciating it today and expensing it in early ’15. We’re paying property taxes, we’re paying O&M and we’re getting no recovery from customers until rates go into effect no later than July 26th and that is Missouri structural lag and it is a disincentive but it is the world that we live in. We’ve worked very, very hard in the Missouri legislature last couple of years trying to get some relief on plan in-service, trying to get relief on property taxes and we have so far being unsuccessful. Operator [Operator Instructions]. And another question just came in from Tim Winter of Gabelli & Company. Please go ahead. Tim Winter I just had one follow-up, Brad. Where is the legislation stand right now in Missouri to give property taxes and transmission expenses [ph] and whatever else included. Brad Beecher At the current time Tim to my knowledge there is not any legislation filed related to plant in-service and/or property taxes. We have got a lot of uncertainty in the state right now as the governor is got a statewide energy plan underway, I don’t know if you participated but there has been input meetings across the state and we would expect a statewide energy plan to come out sometime May kind of timeframe. We have got 111(d) and how that’s going to get finalized. So right now we’re still – I’m expecting a pretty quiet year in Jeff City, not saying that something can’t get done but I’m expecting a pretty quiet year in Jeff City, not saying that something can’t get done but I’m expecting a pretty quiet year in Jeff City as it relates to this topic. Tim Winter The statewide energy plan include something about – would address this issue? Because you’re not the only utility in the state that has this issue. Brad Beecher We’re absolutely not the only utility in the state with this issue. The statewide energy plan is comprehensive, it’s everything that you can think about from solar to distributed generation to responses and emergencies to what we need to build assets just about everything has been talked about in one work group or another. So, it’s a work in progress, it’s being led by a member of the governor staff and so we will have to see where it goes. But we certainly brought up this concern. Operator And this concludes our question and answer session. I would like to turn the conference back over to Brad Beecher for any closing remarks. Brad Beecher Thank you. Before we close I remind you that Laurie and I will be at the UBS Analyst Day in Boston on March 3rd and 4th and Laurie and Dale will be the AJA Mini-Forum in Dallas on March 17th and 18th. Also we will be saying goodbye to Jen Watson at the end of April as she has decided to retire. Jen has served Empire in the Secretary and Treasurer positions since 1995. We thank Jen for her service and wish her the best. The Board has named Dale Harrington to replace Jen as Secretary beginning May 1, 2015. Dale will also continue in this role of Director of Investor Relations. Thank you for joining us today and have a great weekend. Operator The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited. 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