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Shock And Horror: Passive Hedge Funds

An academic article entitled “Passive Hedge Funds” has recently attracted quite a lot of comment in the Financial Times, Bloomberg, and on a variety of websites. Those whose ambition in life seems to be to discredit hedge funds and their managers at every turn have, of course, latched onto it. But the paper’s title is tendentious, its argument familiar and in some places flawed, and its conclusions really quite anodyne. Investors seeking hedge fund-like exposure through liquid alternatives will find that some products are similar to those described in that article; they should examine them very carefully before investing. The purported humor of math jokes often depends on the technical use of a term that has other, more familiar meanings. Thus, my college roommate’s knee-slapper about how every integer is interesting relied on a definition of ‘interesting’ as ‘having a unique property.’ The joke took the form of a mathematical induction: 1 is the multiplicative identity, 2 is the only even prime, 3 is the lowest true prime, 4 is the lowest perfect square… so if there is an uninteresting integer, it is interesting, because it is the lowest one. Maybe you had to be there. I am reminded of this moment of boundless mirth by a paper entitled ” Passive Hedge Funds ,” by Mikhail Tupitsyn and Paul Lajbcygier. This title has, inevitably, attracted comment, including headlines such as “Study: Hedge Funds Don’t Do S**t, Suck” (gawker.com) or, with less sophistication and élan, “New Study Argues Hedge Funds are an Even Worse Scam than We Thought” (vox.com) and even more prosaically, “The Case Against Hedge Fund Managers” (ai-cio.com). With the apparent exception of the latter, these commentators were so enamored by their deeply considered wisdom that they clearly felt no need to read the paper. Because its authors are quite explicit about their idiosyncratic use of the term ‘passive.’ They even put scare-quotes around it. The commentators just missed the punchline. It is hard to dispute Humpty Dumpty: “When I use a word, it means just what I choose it to mean ─ neither more nor less.” Since they take pains to explain what they mean by it, I have no argument with the authors’ use of ‘passive.’ They might have used ‘hippopotamus,’ which is more euphonious, but lacking poetic souls, they chose ‘passive,’ and missed the opportunity for a great title. The sense in which the authors use ‘passive’ to describe hedge fund return patterns is that they have linear correlation to hedge fund β. The crux of their argument is that “A manager with genuine investment skill should not only have “passive” linear risk exposures to alternative risk factors ( i.e ., alternative beta) but should also produce enhanced returns through nonlinear ‘active risk exposures.'” This is contentious, as will be seen below, but it is simply posited as a truth rather than justified. Was their choice of ‘passive’ tendentious and self-promoting? Of course: how else would a postdoc and an associate prof at Melbourne’s #2 university get noticed in the Financial Times or Bloomberg, let alone a temple to the Muses such as gawker.com? Was it helpful? Our commentators’ complete failure to understand the authors’ intent makes it rather obvious that it was not. The Tupitsyn and Lajbcygier article is, as their review of the literature makes clear, one of a long line of academic studies that propose models for hedge fund returns. Even critics more competent than our commentators tend to latch onto these studies as “proof” that hedge funds offer little value-added. But anything can be modeled ─ conventional mutual funds, sunspot frequencies, even (allegedly) the earth’s climate. Problems arise when, as Emanuel Derman and others have noted, the models are mistaken for reality. And hedge fund β ─ against which the authors argue hedge fund managers fail to add value ─ is, at best, a very peculiar concept, and arguably a spurious one. On consideration, the authors’ argument begins to look strangely circular: hedge funds fail to add value relative to metrics that derive from their own returns. This is something like arguing that I am a lousy swimmer because I am unable to swim faster than myself. I may well be a lousy swimmer, but comparison with my own performance will not establish that. A good portion of Tupitsyn’s and Lajbcygier’s analysis is devoted to returns on hedge fund indices. In choosing these as a database, they, like many before them, commit the fallacy of composition. The fact that you can calculate a mean return from a pile of reports does not indicate that there is such a thing as an average hedge fund: it is not only possible, but likely that none of the funds analyzed exhibited the mean return. Further, there is no reason to expect continuity from one time period to another: a fund whose return was close to the center of the distribution in one period may be an outlier in the next. Hedge fund returns are widely dispersed both synchronically and over time, so that the value of hedge fund indices is pretty much restricted to service as performance metrics for specific time periods. The standard error of the mean = s/√n, where ‘s’ is the σ of the population and ‘n’ is its size. Obviously, the error is significantly higher and thus the epistemic value of the mean significantly less, the more dispersed the population is. Given the wide dispersion of hedge fund returns, the value of their average is largely restricted to the bragging rights it gives to marketers fortunate enough to work for funds that have outperformed it. The authors are aware of these limitations, and devote some analysis to the returns of individual, real world funds. They find that most funds have strong linear exposures to familiar factor influences on investment returns. They conclude that “The nonlinear risk is more pronounced in arbitrage styles and styles following multiple strategies, and it is weaker in directional styles.” This should hardly be surprising ─ arbitrage is inherently non-linear ─ and it is not at all clear why the presence of linear risk in other sorts of strategies should somehow suggest dereliction of duty on the part of their managers. If, for example, a dedicated short fund carried no (negative) equity exposure, its investors would certainly have reason to object! Admittedly, fewer long/short funds make use of their ability to add value by adjusting their net exposure than might be expected, and with relatively stable long/short ratios, their exposure to equity risk factors would, of course, be linear. The same would be true of any long-only equity fund, and would certainly not attract criticism. In fact, long/short funds have increasingly tended to pursue a trading-oriented (“risk on/risk off”) response to changes in their risk perceptions in place of making changes to their short positions. As a group, hedge funds provide us with ample reasons to criticize them. Despite declining over the last few years, fees are in most cases still too high for the service provided. Lack of transparency inhibits rational analysis and portfolio construction, while providing a breeding ground for a wide range of abuses and sharp practice. The artificial mystique that this opacity fosters is repulsively reminiscent of Ozma of Oz. However, neither an adolescent potty-mouth nor accusations of fraud are not needed to make these points forcefully and to draw the appropriate conclusions for investors. Nor are “discoveries” that hedge fund α is not a matter of otherworldly powers to bend the laws of economics to the manager’s will ─ that their skills might be very similar in both nature and quantity to the skills that conventional portfolio managers exhibit. Tupitsyn and Lajbcygier have made a small contribution to the growing literature on hedge fund replication ─ nothing less, but certainly nothing more. Theirs is only one approach to hedge fund replication, and to my mind a less than satisfactory one. Factor replication is an inherently backward-looking approach to modeling, and when applied to the return streams from hedge funds, likely to result in some rather peculiar portfolios. A technique that I suspect has much more promise is the creation of robo-managers ─ algorithmic trading techniques that mimic the trading strategies hedge funds are known to pursue. Many hedge funds, particularly CTAs, are already effectively automated. While it is illegal to steal their code, it is possible to imitate it based on an analysis of their returns. In considering an investment in liquid alternative funds, many of which are “quantitatively-driven” in ways that are rarely specified explicitly and require research to understand, the nature of the security selection technique should be given careful consideration. Approaches similar to that of Tupitsyn and Lajbcygier are worth a look, but may not deliver all that they promise; the source of the factor exposures they purport to imitate must be investigated. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (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.

Want To Invest In Gold? Here Are The Best Funds

Summary Bullion funds have offered better risk-adjusted returns than mining stock funds and bullion has also been less volatile. Silver has been significantly more volatile than gold in both bull and bear markets. ETFs have generally provided better risk-adjusted performance than CEFs. Precious metal funds have provided excellent diversification for an equity portfolio that mimics the S&P 500. I am primarily an income investor but I have a contrarian streak and believe in the wisdom of Warren Buffett when he opined: “Be greedy when others are fearful.” In a previous article , I applied this advice to energy funds but it is also true for gold and precious metal funds. Gold has been in a sustained bear market since 2011 and prices have plummeted from over $1900 an ounce to less than $1100 an ounce. This has driven down precious metal funds to what I consider bargain basement levels. The rapid fall of gold is illustrated in Figure 1, which plots the price of the SPDR Gold Trust ETF (NYSEARCA: GLD ) . This fund was launched in 2004 and is the oldest and one of the most liquid precious metal ETFs (average volume over 6 million shares per day). One share represents a tenth of an ounce of gold. The gold backing this ETF is held in vaults in London. Gains from this ETF are taxed like you owned the physical gold directly (taxed at collectibles rate if you hold for more than a year). It has an expense ratio of 0.4% and does not provide any yield. The plot shows that GLD has fallen over 37% since peaking in September, 2011. (click to enlarge) Figure 1: Plot of GLD since 2007 I am not clairvoyant and have no idea how long it will take the precious metal sector to recover. However, I am confident that over the long run, gold will again return to its glory days. This is based on past history coupled with the likely fall of fiat currencies due to rampant deficit spending. So personally, I have begun accumulating beaten-down precious metal funds. This article will analyze the risk versus reward of these funds to answer several questions: Is it better to invest in bullion or mining stocks? Is it better to invest in ETFs or Closed End Funds ? Is it better to invest in gold or silver? Do precious metals offer diversification for an equity portfolio? There are many ways to define “better”. Some investors may use total return as a metric, but as a retiree, risk in as important to me as return. Therefore, I define “better” as the fund that provides the most reward for a given level of risk and I measure risk by the volatility. Please note that I am not advocating that this is the way everyone should define “better”. I am just saying that this is the definition that works for me. There are a number of ETFs and CEFs that focus on gold and silver. For this analysis, I chose representatives that have at least a history that includes October, 2007 (the start of the equity bear market) and were reasonably liquid. These selections are summarized below. Exchange Traded Funds GLD. This ETF has already been described. Note that the iShares Gold Trust ETF (NYSEARCA: IAU ) and the PowerShares DB Gold ETF (NYSEARCA: DGL ) are highly correlated (over 99%) with GLD and will not be included in the analysis. iShares Silver Trust ETF (NYSEARCA: SLV ). One share of this ETF tracks the price of one ounce of silver bullion. The shares are backed by silver held in banks in London and New York. Silver is more volatile than gold, primarily because it is sensitive to industrial demand in addition to being a “safe haven” asset. This is not all bad since the industrial uses may serve to support prices if the desire for silver wanes among investors. This fund is very liquid (average 7 million shares per day) and has an expense ratio of 0.5%. It does not have any yield. Like GLD, gains from SLV are taxed as collectibles. PowerShares DB Precious Metals ETF (NYSEARCA: DBP ). Rather than holding physical bullion, this ETF is rule based and invests in both gold (80%) and silver (20%) future contracts. With the focus on gold, it is highly correlated (97%) with GLD. The fund has an expense ratio of 0.75% and does not have any yield. Market Vectors Gold Miners ETF (NYSEARCA: GDX ). This ETF holds 43 cap-weighted precious metal mining companies (mostly gold miners but a few silver miners). About 56% of the assets are Canadian companies with the rest primarily in the U.S., South Africa, and Australia. It is extremely liquid (over 45 million shares per day) and has a reasonable expense ratio of 0.53%. It has a small yield of 0.9%. Closed End Funds Central Gold Trust (NYSEMKT: GTU ). This CEF seeks to replicate the performance of gold bullion. It holds gold bullion at the Canadian Imperial Bank of Commerce and does not lease out gold. One of the main differences between GTU and GLD is that GTU is a CEF that can sell at a premium or discount. Currently, this fund is selling at a 6 discount! During past bull markets, this fund has sold for a 10% premium so the price of the fund fluctuates more than GLD, but there also is the potential of higher returns. This fund does not use leverage and has an expense ratio of 0.4%. It does not pay any distribution. Central Fund of Canada (NYSEMKT: CEF ). This is a closed-end fund that holds roughly 50% gold bullion and 50% silver bullion. As a closed-end fund, it can sell at a premium or discount to Net Asset Value (NAV). During the heyday of the precious metal frenzy, the fund sold at a 15% premium. It currently sells at a 10.9% discount, which is historically low. Over the past 5 years, the average discount has been only 0.6%. This fund does not use leverage and has a low expense ratio of 0.3%. It is relatively liquid for a closed-end fund, trading about 700,000 shares per day. For tax purposes, this fund is a passive foreign investment company so you should consult your tax advisor relative to the treatment of gains and losses. Note that the symbol for this fund is the same as the abbreviation used to indicate closed-end funds, but the context should make the meaning clear. ASA Gold and Precious Metal (NYSE: ASA ). This CEF sells at a 1.4% discount, which is lower than the 5 year average discount of 7.6%. The portfolio consists of 40 miners, with 47% from Canada, 20% from the United States, 10% from the Channel Islands, and 9% from South Africa. About 77% of the portfolio are mining companies with the rest royalty and development companies. The fund does not use leverage and has an expense ratio of 0.8%. The distribution is 0.5%. GAMCO Global Gold, Natural Resources and Income Trust (NYSEMKT: GGN ). This is a closed-end fund that writes options on gold and natural resources stocks. It uses a small amount of leverage (10%) and has an expense ratio of 1.3%. However, it currently is distributing a huge 15.1%, but most has come from return of capital (ROC). The Undistributed Net Investment Income (UNII) is near zero, which is not bad. It is selling at a 14.3% discount, which is unusual since over the past 5 years it has sold at an average premium of 0.8%. It has 112 holdings, primarily precious metal companies, but some oil and other resource stocks. Essentially all of the holdings are from North American firms. To analyze risks and return associated with these funds, I used a look-back period form October 12, 2007 (the stock market high before the 2008 bear market) to the August 12, 2015. This provides a view of how these funds fared over the bear-bull cycle of the stock market. The results are shown in Figure 2, which provides the rate of return in excess of the risk free rate of return (called Excess Mu on the charts) plotted against the historical volatility. The risk-free rate was assumed to be 1%. (click to enlarge) Figure 2. Risk versus reward since October, 2007 As is evident from the figure, there was a relatively large range of returns and volatilities. For example, SLV had a high rate of return but also had high volatility. Was the increased return worth the increased volatility? To answer this question, I calculated the Sharpe Ratio. The Sharpe Ratio is a metric developed by Nobel laureate William Sharpe that measures risk-adjusted performance. It is calculated as the ratio of the excess return over the volatility. This reward-to-risk ratio (assuming that risk is measured by volatility) is a good way to compare peers to assess if higher returns are due to superior investment performance or from taking additional risk. In Figure 2, I plotted a red line that represents the Sharpe Ratio associated with GLD. If an asset is above the line, it has a higher Sharpe Ratio than GLD. Conversely, if an asset is below the line, the reward-to-risk is worse than GLD. Some interesting observations are evident from the figure. Bullion funds easily outperformed mining stock funds. The mining stock funds had negative returns over the observation period and were also very volatile. Not a good combination. Gold bullion had the lowest volatility. The combination of relatively good return and low volatility resulted in GLD having the best risk-adjusted performance. GTU had higher volatility than GLD but also higher absolute return. As previously discussed, this is likely due to the nature of closed-end funds. However, on a risk-adjusted basis, the performance of GTU slightly lagged GLD. SLV was significantly more volatile than gold funds and the volatility was not offset by higher return. Hence, the risk-adjusted performance of silver lagged gold. Generally, CEFs were more volatile than ETFs. One of the worst performers was ASA. It had a negative return coupled with a relatively high volatility. One of the reasons many pundits recommend that people allocate a portion of their portfolio to precious metal is because they are a “diversifier”. To be “diversified,” you want to choose assets such that when some assets are down, others are up. In mathematical terms, you want to select assets that are uncorrelated (or at least not highly correlated) with each other. To check out if these funds do, in fact, provide diversification, I calculated the correlation matrix. I also included the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) for reference. The results are shown in Figure 3 for over the past 3 years. As you would expect, the funds are moderately to highly correlated with one another but were virtually uncorrelated with SPY. So if you have an equity portfolio that mimics the S&P 500, using precious metal funds does provide excellent diversification. (click to enlarge) Figure 3. Correlation matrix since October, 2007. Figure 2 showed how these funds have performed in the past. However, the real question is how they will perform in the future when the bull market in precious metal returns. Of course, no one knows what will happen but we can obtain some insight by looking at the most recent bull market period from October, 2007 to September 2011. As shown in Figure 1, this was a great period for gold. Figure 4 plots the risk versus reward for the funds over this bull market time frame. (click to enlarge) Figure 4. Risk versus reward during a bull market This plot shows: Bullion funds performed much better than the mining stock funds in both absolute and risk-adjusted return. This was surprising since mining stocks are often touted as being the best investment during a bull market. GLD continued to be the best performer on a risk-adjusted basis. It also had the lowest volatility. SLV excelled on absolute basis but also had higher volatility than GLD. Thus, silver lagged on a risk-adjusted basis. For the mining stocks, GDX outperformed both ASA and GGN. GBP and GTU booked performance that was close to GLD. The last year of the gold bull market had some spectacular gains and enticed fund companies to launch several new precious metal funds. Some of the new ETFs that were launched between 2009 and 2010 are summarized below. ETFS Physical Platinum Shares ETF (NYSEARCA: PPLT ). Platinum is used primarily in industrial applications and jewelry, rather than being held as a hedge against fiat currency. It is rarer than gold and the price is usually, but not always, higher than gold. A primary use of platinum is in automobile catalytic converters, but it also has a wide demand in jewelry, especially when the price falls below gold. One share of PPLT represents about a tenth of an ounce of platinum. It is not nearly as liquid as other precious metal ETFs (trading only about 35,000 shares per day). The ETF holds bullion in banks in London and Zurich. Like the other precious metal ETFs, gains are taxed as collectibles. The fund has an expense ratio of 0.60%. ETFS Physical Palladium Shares ETF (NYSEARCA: PALL ). Palladium is a lesser known precious metal that can be used instead of platinum in catalytic converters and in jewelry. It has many of the same properties as other precious metals in that it is malleable, easy to polish and remains tarnish free. In Europe, 15% palladium is typically alloyed with gold to produce “white gold”. Palladium is used primarily for industrial applications and is generally not considered a “safe haven” asset. Each share of PALL represents about a tenth of an ounce of Palladium. The ETF trades an average of 40,000 shares per day so it is relatively liquid. The bullion associated with the ETF is stored in vaults in London and Zurich. The fund has an expense ratio of 0.6%. Like gold and silver, it is taxed like collectibles. Global X Silver Miners ETF (NYSEARCA: SIL ). This ETF holds 25 cap-weighted silver mining companies. Almost 60% of the constituents are based in Canada and the rest are spread primarily among the United States, Europe, and Latin America. It is relatively liquid (trading about 250,000 shares per day) and has an expense ratio of 0.65%. The fund has a small yield of 0.1%. Market Vectors Junior Gold Miners ETF (NYSEARCA: GDXJ ). This ETF focuses on the junior gold and silver miners. The fund holds 63 miners, some of which have not yet begun to generate revenue. The coupling of small-cap with miners creates a very volatile fund that has the potential for large losses as well as large gains. This is a popular ETF, trading over 9 million shares per day on average. The expense ratio is 0.55% and yield 0.9%. The Risk-Reward plot for the last 17 months of the bull market (April, 2010 to September, 2011) is shown in Figure 5. This is a relatively short period of time so caution is advised when drawing longer term conclusions. However, overall this plot is similar to Figure 2 but also provides a relative assessment of the new ETFs. GLD still leads the pack with DBP, GTU, and SLV close behind. PPLT and GGN did not perform well and barely eked out a positive return. For the most part, bullion outperformed the miners but GDXJ generated a good return but also had very high volatility. (click to enlarge) Figure 5. Risk versus reward for last 17 months of bull market Bottom Line From being the darling of the investment world to one of the most hated asset classes, precious metals have come a full circle… There are no guarantees, but based on the amount of money being printed and the trouble spots around the globe, I think investors will migrate back to gold as a safe haven and an (eventual) inflation hedge. Whether or not you have precious metals in your portfolio is a personal decision. However, if you decide to allocate some of your resources to this asset class, then based on past data here are answers to the questions I posed at the beginning of the article. Is it better to invest in bullion or mining stocks? Bullion has consistently outperformed mining stocks. I know that many investors are wary of GLD but it has been a consistent outperformer on a risk-adjusted basis so it is one of my recommendations. Is it better to invest in ETFs or CEFs ? ETFs have outperformed CEFs. However, for gold, GTU has close to the same performance as GLD. If you want to add mining stocks, GDX appears to be the best choice. Is it better to invest in gold or silver? It depends on your risk tolerance and investment objectives. Silver typically has high returns but much higher volatility than gold. On a risk-adjusted basis, gold is the winner. Do precious metals offer diversification for an equity portfolio? Definitely yes. Precious metals are not highly correlated with equities. Even mining stocks offer significant diversification with respect to other types of equities. Disclosure: I am/we are long GTU,GLD,CEF,GDX,GDXJ, SIL. (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.

Great Plains Energy’s (GXP) CEO Terry Bassham on Q2 2015 Results – Earnings Call Transcript

Great Plains Energy Inc. (NYSE: GXP ) Q2 2015 Earnings Conference Call August 7, 2015 9:00 a.m. ET Executives Lori Wright – VP of IR and Treasurer Terry Bassham – Chairman, President and CEO Jim Shay – SVP, Finance and CFO Analysts Ali Agha – SunTrust Paul Ridzon – KeyBanc Shar Pourreza – Guggenheim Partners Brian Russo – Ladenburg Thalmann David Paz – Wolfe Research Operator Good day, ladies and gentlemen, and welcome to the Great Plains Energy Second Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder, this conference may be recorded. I would now like to turn the conference over to our host for today’s conference, Ms. Lori Wright. You may begin. Lori Wright Thank you, operator, and good morning. Welcome to Great Plains Energy’s second quarter 2015 earnings conference call. Today, Terry Bassham, Chairman, President and Chief Executive Officer; and Jim Shay, Senior Vice President, Finance, and Chief Financial Officer will provide an overview of our second quarter results. Scott Heidtbrink, Executive Vice President and Chief Operating Officer of KCP&L and Darrin Ives, Vice President, Regulatory Affairs are 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 second quarter 2015 10-Q after the market closed yesterday. These items are available, along with today’s webcast slides, and supplemental financial information regarding the quarter on the main page of our website at greatplainsenergy.com. With that, I’ll now hand the call to Terry. Terry Bassham Thanks, Lori. And good morning everybody. As you saw in the 8-K that was filed yesterday, we are announcing a change in our officer team. Jim Shay will be leaving the company effective September 2 to take a new role as CFO at Hallmark Cards here in Kansas City. It’s truly been an honor and pleasure to work with Jim and we appreciate his leadership. Replacing Jim as Senior Vice President Finance, Strategy and Chief Financial Officer will be Kevin Bryant. Many of you know and have already worked with. Kevin is currently our Vice President, Strategy Planning and has been with Great Plains Energy for 12 years. His responsibilities at the company include Vice President of Investor Relations and Treasurer and Vice President of Energy Solutions. He is very eager to assume his new responsibilities and in particular working with each of you. I hope you’d join me to wishing Jim the best in his new opportunity and welcoming Kevin to his new role. On our call this morning, we will discuss our second quarter results and provide an update on KCP&L’s rate cases in Missouri and Kansas. We’ll also give an operations update and an overview of Transource’s new project in West Virginia. I will begin with Slide 4 in the presentation. Yesterday, we announced second quarter 2015 earnings of $44 million or $0.28 per share compared to $52 million or $0.34 per share in 2014. Drivers for the quarter included favorable operations and maintenance expense, positive weather normalized demand growth and milder weather with cooling degree days 15% below the second quarter 2014. We also reaffirmed our 2015 EPS guidance range of $1.35 to $1.60. Jim will discuss more details on the quarter in his comments. On the regulatory front, KCP&L’s rate cases are on schedule to be completed during the third quarter. In Missouri evidentiary hearings were completed in July and founder reply briefs were filed earlier this week. KCP&L’s initial request in revenue increase of $120.9 million was subsequently adjusted to $112.7 million as a result of updates to the case and negotiated partial stipulations and agreements. As a reminder, KCP&L’s request is based on a return of equity of 10.3%. Missouri Public Service Commission staffs recommended revenue increase ranges in the $76.8 million to $87.3 million predicated on our ROE range of 9.0% to 9.5%. The partial stipulations and agreements that have already been approved by MPSC resolved several issues in the case. The remaining unresolved items include ROE as well as the company’s ability to utilize a fuel clause and trackers for property taxes and critical infrastructure protection standards or CIPS cybersecurity expenses. In Kansas, evidentiary hearings concluded in June and reply briefs were filed earlier this week. KCP&L requested a revenue increase of $67.3 million based on a return of equity of 10.3. The Kansas Corporation Commission staff recommended a revenue increase of $44 million based on an ROE of 9.25. Turning to the Missouri case, we were able to resolve a majority of the issues in our Kansas case and partial stipulations and agreements were filed in June. The agreements include the ability for KCP&L to implement a transmission delivery charge rider and a CIPS cybersecurity tracker. Stipulations and agreements have yet to be approved by KCC. With most of these issues settled, ROE remains as one of the few unresolved items in the Kansas case. We anticipate new rates to be effective in both KCP&L’s jurisdictions by the beginning of the fourth quarter of the year. You can find summaries of the rate cases in the appendix of this presentation. We remain confident in our ability to deliver constructive regulatory outcomes in our current proceedings, reinforcing our commitment to deliver 4% to 6% earnings growth from 2014 to 2016. In addition, we remain on target to grow rate base to 6.5 billion by 2016. Turning to operations. Earlier this week, the Environmental Protection Agency issued the final standards for its Clean Power Plan. As we analyze the more than 1500 page document we are getting a better understanding of the plan and its potential impact. Although KCP&L and the electric power industry have spent more than a year working with EPA on a viable solution, the final version of the Clean Power Plan has significantly changed from the draft, we will continue evaluating the new rules. In recent months, our service territory has been impacted by the number of severe weather events, including a storm in late June that led to our largest customer outage since 2002. Storms uprooted or caused significant damage to over 50,000 trees, left over 150,000 customers without power. Our employees and our neighboring utilities worked diligently and safely to restore power to our customers, and I’d like to take this opportunity to thank everyone for their efforts and execution. I will wrap up with a few comments on transmission. We are pleased that Transource, our joint venture with AEP, was selected by PJM to develop the competitive portions of the thoroughfare area project in West Virginia. Construction on the 60 million 138 KV line is expected to begin in 2017 and to be in service in 2019. This win in the emerging competitive transmission market combined with its existing SPP projects reinforces our belief that Transource is well-positioned to successfully compete and deliver innovative solutions. I’ll now turn the call over to Jim to discuss our financial performance. Jim Shay Thank you, Terry and good morning everyone. I will begin with Slide 6 which presents a comparison of the second quarter and year-to-date earnings-per-share results for 2015 compared to 2014. As Terry indicated, our second quarter 2015 earnings was $0.28 per share compared to $0.34 per share last year. Lower operating and maintenance expense, positive weather normalized demand growth and new retail rates in Kansas were positive drivers that were more than offset by milder weather, decrease in AFUDC and increases in depreciation and amortization. For the year-to-date period, earnings were $0.40 per share compared to $0.49 per share last year. Through the first half of 2015, we’ve seen favorable O&M expense driven by diligent cost management and lower cost at Wolf Creek, related to the planned 2014 mid-cycle maintenance outage and lower refueling amortization. For the second half of 2015, we expect our O&M expenses to increase above the 2014 level. Consistent with our 2015 guidance, we expect overall O&M for the full year to increase 3% to 4% which include increases in regulatory amortizations and items which have direct revenue offsets. As a reminder, the O&M items with direct revenue offsets include our Missouri Energy Efficiency Investment Act programs. These investments allow us to invest in our customers by providing long-term energy solutions and ability to generate shareholder returns. We recover program costs and a throughput disincentive for these programs, which is included in our gross margin. Our projected O&M increase for the full-year 2015, exclusive of regulatory amortizations and items which have direct revenue offsets, is 1% to 2%. Turning to Slide 7. As we think about the third quarter compared to a year ago, we will be impacted by a decrease in AFUDC and increasing O&M. We will also expect continued lag from property taxes, transmission costs and depreciation until new rates are in effect. Lower natural gas prices are negatively impacting off-system sales, which have an earnings impact to KCP&L and Missouri, where we do not have a fuel clause. As Terry discussed, KCP&L’s ability to utilize a fuel clause is one of the remaining items to be determined by the commission in the Missouri rate case. A fuel clause would mitigate the exposure to off-system sales going forward. Finally, in the third quarter of 2014 we had unrecognized tax benefits that will have an unfavorable year-over-year comparison. As a result of these drivers, we expect third quarter 2015 earnings will be lower than the same period in 2014. Weather normalized demand, net of the impact of our energy efficiency programs, was up 1.2% for the quarter and up 0.6% year-to-date through June. The results are in line with our full year projection of flat to 1.5% net of energy efficiency. Year-to-date we’ve seen strong residential and commercial demand partially offset by lower industrial demand which has the lowest margin among the sectors. The Kansas City region has experienced 47 consecutive months of seasonally adjusted job growth and in June the unemployment rate of 5.3% was below the national rate of 5.5%. Construction is well underway at Cerner Corporation’s new Trails Campus in South Kansas City. The first two towers which will accommodate more than 3500 employees are under construction and a move-in date likely in early 2017. Over the next 10 years, a total of 16 new buildings containing 4.7 million square feet of office space supporting approximately 16,000 employees are planned, making it the largest economic development project in Missouri’s history. On the industrial front, we were impacted by a customer relocating to a more energy-efficiency facility within our service territory and a general decrease in usage from a handful of customers. Demand at Ford’s Kansas City assembly plant remains strong. Sales of Ford’s F-150 pickup truck had benefitted from gasoline prices that are near a five-year low. The Ford plant is operating with three shifts to keep up with demand for the F-150 America’s best-selling vehicle. On the capital markets front, we expect to issue long-term debt at KCP&L this year with no plans at this time to issue equity. We are reaffirming our 2015 earnings-per-share guidance range of $1.35 to $1.60. We are on plan to deliver on our financial objectives for the year and we remain confident in our ability to deliver 4% to 6% earnings growth from 2014 to 2016. Thanks for your time this morning. We would now be happy to answer any questions you may have. Question-and-Answer Session Operator [Operator Instructions] And our first question comes from Ali Agha of SunTrust. Ali Agha Terry or Jim, in the past, I had a call coming out of the last rate case cycle, you had mentioned that target earnings power for the company, should be between 50 to 100 basis point lag from the authorized ROE. Is that still a good rule to think about as we come out from this better [ph] rate cycle? Terry Bassham Yes, I think that’s what we’ve said all along, as the first year out of the case you should see that kind of range. Obviously what can affect your ability to deliver within that range, so it will be based on the outcomes of these cases. A few issues around riders and trackers and things like that. But certainly coming out as we did in the last cycle, the year after should be better matched to our historical test year. Ali Agha And then on the riders, trackers, fuel adjustment clause, any insights into how the commission may be looking at that, any sense of or conviction level in terms of the ability to get those this time around? Terry Bassham Well obviously we’re still awaiting an order, so probably little premature to have handicapped those. I would say that they remain very important to us. You can see some things that have happened in other cases that could indicate where they ruled on those before. But I will again remind you that we did get the CIPS tracker in Kansas and that’s a positive going forward for sure. We certainly – Commonwealth [ph] is expected to see those orders and rates implemented in this quarter. Ali Agha And assuming you do get those trackers and fuel adjustment clause, is it possible for you to hold on to that earned ROE in the following year like in ‘17 or is that just the natural lag in the way things work that you see some slippage as you go beyond the – on to the next year from the rate case? Terry Bassham Well obviously depend on which of the trackers, obviously we feel confident and think it important that we get the fuel factor itself in Missouri. There is a transmission piece and in the other asks we’ve made. Obviously if we’ve got all of the trackers, riders and asks we’ve made in that front makes it easier the second year, the extent you don’t get on this certainly makes it more difficult. What I would say to you is that if the — we don’t get those riders and trackers because they are considered general rate case type ask we will have to file rate cases on a much more frequent basis and we will do that. That was our response in this case with our prior asks and so what you’ll see from us if we are not allowed to deal with those in that manner is filing general rate cases much quicker. It’s just the nature of what we would assume is an indication from the commission. Ali Agha And lastly can you just remind us when you talked about the ’14 to ‘16 earnings growth outlook, can you just remind us what that base for ’14 is? Jim Shay It’s $1.60, off of the original guidance range. $1.60 was the bottom end of the original guidance range. Operator And our next question comes from Paul Ridzon of KeyBanc. Paul Ridzon Jim, congratulations on your new position and new role. I wish you the best of luck. It’s been a pleasure working with you over the years. Jim Shay Thank you. Paul Ridzon Quick question. How much of a headwind is not having the Missouri fuel clause? Terry Bassham Well, obviously it would be a disappointment and in the way we believe we’re entitled to it, it’d be a great disappointment candidly. In terms of actual financial effect, we already talked about the fact that we would have to file case again pretty quickly and at this point with off-system sales which are embedded in that being a very low level and an update on coal cost at the time it wouldn’t be a bigger drag as it historically has been. But it certainly would be one more challenge we’d have to face but we would again quickly file as appropriate ask for that in the next case. Paul Ridzon So just historically you had a fuel clause but you had to give it up as part of the deal. Is this how you treat, correct? Terry Bassham No, not really. Back in ‘04 when the original comprehensive energy plan was signed, there weren’t fuel clauses in Missouri. There was some discussed legislation that could create that. And so as we finalized the comprehensive energy plan and the deal, if you will, included gives and takes on both sides. It was agreed by the company not to ask for a fuel clause if and when legislation provided for that for our 10 year period. So that brings us to 2015 as our first opportunity to ask for it. Paul Ridzon And just on the transmission and property tax in Missouri, where does that stand as far as legislation or are you seeking more of a regulatory solution at this point? Terry Bassham Well again we’ve asked for both of those in the case. We will know again this quarter the result of that request from a commission standpoint, certainly if we’re not allowed to get those from the commission’s standpoint that would become part of our legislative agenda for the upcoming session. Operator And our next question comes from Brian Chen [ph] of Bank of America. Unidentified Analyst On the thoroughfare area project, can we get a sense of the spending pattern for that? Is there a ramp up as you sort of gear, should we think about even spending between now and ’19, just a little bit more color there would be great? Terry Bassham It will be about $60 million that will get spent from the period of from 2017 to 2019 would be the run rate. Unidentified Analyst And just as a clarification, the $60 million is the investment opportunity for Great Plains or is that the investment opportunity for the entirety of the project? Terry Bassham For the entire project. Great Plains will have 13.5% of that. Unidentified Analyst And Jim, hey congratulations on the new position. I’m just glad that I won’t have to potentially wear a Kansas Jayhawks tie again. Operator [Operator Instructions] Our next question comes from Shar Pourreza of Guggenheim Partners. Shar Pourreza Just one question, I am curious to get a refreshed viewpoint a little bit on sort of the requested ROE adjustment mechanism that Westar filed and obviously the staff recommended against it but also left it open for potential generic proceedings. I am curious to see if that’s something you would potentially look to go after with your Kansas utility? Terry Bassham Yes, I can mean, obviously each case presents its own issues and opportunities, that was a request from Westar that they left open, and certainly to the extent that there was a discussion on a more statewide level we would want to participate, work with both the commission and the staff and Westar to discuss that opportunity. Shar Pourreza Has conversations begun as far as the joint collaboration yet or is it too preliminary? Terry Bassham The cases they don’t file, settlement just happened. So we’ve been busy getting ready for this call. Operator And our last question comes from Brian Russo of Ladenburg Thalmann. Brian Russo Just curious if we could just talk some more about the lower gas prices and the sensitivity on the wholesale sales at the Missouri utilities. Could you just give us a sense of kind of like the total amount of wholesale sales in terms of megawatt hours, just kind of the mechanics of that, like what’s the base line that the sensitivity is based off of? Terry Bassham We don’t really have a lot of information in the public domain with respect to specifics but you recall in the last case we got offset of off-system sales established in rates and relative to over or under performance we will either get the benefit or give up an opportunity. And we have seen some pressure on gas prices this year which has been putting some pressure on off-system sales but in the upcoming rate case we will get a – we will get that trued up and hopefully a fuel clause and eliminate that volatility moving forward. But we really don’t have any numbers in terms of actual sensitivity in the public domain. And recall that the prices obviously were at lows, so I mean opportunity hopefully will be that they would tick up a little bit but – Operator I am showing a question from David Paz of Wolfe Research. David Paz I just wanted to clarify a statement I think I heard earlier. Can you remind me on the 4% to 6% growth target over the ’14-15 period? What is the base again? Terry Bassham It’s off of the original guidance for ’14 which is $1.60 to $1.75. So a pretty wide range using 4% to 6% growth rate off of that range. David Paz I thought I heard you say $1.60, I just want to make sure – Terry Bassham No, I was pointing to the bottom end of the range but the original – but the guidance target is off of the full range. End of Q&A Operator I am showing no further questions. I’d now like to turn the call back over to management for closing remarks. Terry Bassham Thank you, operator and thank you everybody for joining us this morning. We appreciate as always your participation in the call. Look forward to meeting with many of you in the weeks, months ahead. So thank you and have a good weekend. Operator Ladies and gentlemen this concludes today’s conference. Thank you for your participation and have a wonderful day. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. 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