Wisconsin Energy Corporation (NYSE:WEC)
Goldman Sachs 11th Annual Power and Utility Conference
August 14, 2012 8:15 AM ET
George Liparidis – President and CEO, Sempra International
Rick Kuester – EVP and CFO
Martin Lyons - SVP & CFO, Ameren
Caroline Dorsa - EVP & CFO, Public Sector Enterprise Group
Michael Lapides – Goldman Sachs
Ray Leung – Goldman Sachs
Good morning everyone. Let’s start with basic introductions and then we'll kind of dive right into some of the panel topics. First of all I want to thank everybody for participating. I'll obviously start with my left, with George Liparidis, who runs Sempra's International businesses, then Martin Lyons from Ameren, the Chief Financial Officer as well his counter parts of both Public Service Enterprise Group; Caroline Dorsa and Rick Kuester from Wisconsin Energy. And then finally my colleague on the fixed income side, Ray Leung (ph) down on the other end and Ray, I'll actually give you the first question to quick us off.
It's actually an interesting period of time right now. With a topic of a capital allocation, we see a pretty low interest environment. Can you talk about how you guys are may each company is taking advantage of or strategies or how you're thinking about capital allocation with the low interest rate environment and what kind of opportunities you're seeing on that front with 30 year treasury at all-time lows. Maybe we'll start of over with George over at Sempra and how you guys are thinking about the low interest rate environment.
Well, I'll speak on the international side. What we've seen is in the countries that we've invested outside of the US are very competitive environment for asset acquisitions or greenfield projects that get bid by government entities. So it’s a constant battle to get new investments going in these countries because its competitive. But at the same time, we are finding a lot of opportunities given the environment that we're operating in. so relative to the US, there is a lot more projects that can be developed or structured with limited competition. So it allows us to have very good returns on those projects regardless of what the interest rate or the cost are for funds.
May be Rick, can you talk a little bit about what Wisconsin, like you've gone through a large capital program now you have all this cash potentially from that but are there things that you can do on capital structure that you sort of look through in this interest rate environment?
Well, Ray, basically as you said, we're coming through a large, we just finished a large construction program and just as white background we are basically primarily a regulated utility with basically all of our investments in the US. So our first priority is to meet cost per needs by reinvesting in the business and earning a competitive return within the context of regulation. And reinvesting in the business by define our core business as our regulated utilities where we earn 10.4%. our investment in American transmission company where we earn 12.2% and then from time to time we have incremental investment needs in our power to future units where we earn 12.7%. so that's our first priority in terms of how we allocate our capital. We've also recently at the beginning of the year increased our dividend by 15% and the board has looked at our policy around dividend payout and has indicated that we are going to move our payout ratio to 60% which we think is competitive within the industry and we are going to do that by 2013 and that would imply double digit increases over the next couple years.
We also have initiated a share buyback program and basically the board authorized us to repurchase up to $300 million worth of stock by 2013. Last year we repurchased $100 million of worth of that. We are also looking for investments that don't change the fundamental risk profile of the company and which would be outside the regulated business or could be outside the regulated business and I think an example of that is the state of Wisconsin has expressed a potential interest in privatizing some combined heat and power plants that provide heating and power for central government facilities we would be interested in doing that again within the context of not changing the fundamental risk profile of the company.
And in terms of capital structure we may look at basically retire some debt at the holding company at some point. Right now we don't see that as an economic choice.
Marty how do you think through given the fact that your company really has two separate businesses, the regulated utilities and Illinois and Missouri as well as the non-regulated merchant generation primarily coal fired business also in Illinois. How do you think through where the best place to allocate capital with both in terms of managing short-term meaning two to three years earnings goals and long-term kind of your view of the market, your view of what is potential value creating over a five, 10 year cycle.
Sure. Yes, I think that when we think about it, if you look at our capital expenditure plan going forward next five years. You say about that over the next three but we typically look at three to five years and if you look at our five year capital expenditure plan and where we're allocating our capital, it's about $7.5 billion and its 95% regulated. So very much a regulated focus and certainly when we look to allocate capital, I think we take two approaches Michael. One sort of top down approach and one is a bottoms up kind of approach. So a top down approach, we're certainly looking for the investment opportunities that we have across the enterprise and trying to focus the capital investment on those areas where we feel like we get I'll call the best risk adjusted return.
Right now for example $7.5 billion plan, we've got about 22% of that going towards FIRC regulated transmission investment where we've got formula rates, we've got the opportunity to earn 12.38% return. And when you break that down its about 900 million of that is going towards, I would say, rebuilding ageing infrastructure and the utilities that we have primarily in the (inaudible) utilities that we own where we feel like we can deploy that capital really improve reliability in our service territory and earn a good return on that investment.
When you take that top down approach, were also looking for opportunities to maybe do some different things. So we've got $700 million in that plan going towards multi-value transmission projects that are new projects for instance span the state of Illinois. Again have formulated grades, the opportunity to earn that 12.38% return. So we're looking for those kinds of opportunities.
I talked about the bottoms up approach. Obviously we're primarily rate regulated and we're looking for those opportunities. First, get the fund mandatory projects. Those things that we think are really critical to providing safe and reliable service. It's clearly a focus of our regulated utilities. And then we have discretionary projects and we really look at those projects that provide us, given the regulatory framework that we have around that capital given the timing of rate cases, the timing of those capital expenditures going to service, looking for those projects that again, provide us the best opportunity to earn a fair return. And in the context of doing that sort of bottoms up approach, we're certainly looking at our regulatory framework and trying to improve those. So in Illinois we got senate billion 1652 for the electric business which gives us formulated rates. We use forecasted test years for gas in Illinois that again helps with getting the rates time with the capital expenditures going into service. And in Missouri in this context of the current rate case looking for something we got with respect to our shoe scrubbers we put in place last year, they call it construction accounting that's basically post construction accounting deferrals, the ability to defer depreciation and carrying cost and get full recovery of those.
So you know Michael, its top down looking at allocating capital where we can get the best overall returns and then bottoms up making sure we fund mandatory expenditures and all those discretionary projects really working to make sure we got the right regulatory framework to get a good return.
Feel like I've been talking for a while but on the merchant business, really given the power purchase environment that were in, really looking to just on rally mandatory projects, we certainly want to have safe operations, we got to run things safely and to the extent that there are discretionary projects looking for very fast payback on those discretionary expenditures.
You worry about missing longer on the non-regulated side. Missing longer term opportunities where you're co-plans are basically in a market where there are going to be a lot of co-plans shut down. And someone's going to win the last man standing award. And the question is who. Do you worry about missing that longer term opportunity or is there simply not enough visibility and the size and scale of that opportunity to more increased investment in that business?
Well I think some of them like all it, prior to the downturn in power prices that we had we invested a lot in this plants. And so we go through the cycle, we do feel like the low level of capital expenditures that we're making, we're really looking for that segment to fund its own cash needs. Our availability of those power plant has remained strong. We feel like we're benefiting from prior investments that have been made. So I don't know we're really by cutting the capital expenditures to the level we have, that we're really giving up optionality associated with those plants.
Carolyn your company among the integrator,, the diversified utility that your company probably has the best or one of the best balance sheets out there. How do you think about the deployments of the balance sheet? How do you go to the decision making process of so I'm going to put capital into the regulated business, to I want to put capital in the non-regulated business. Do I think about changes to my debt levels do I think about buybacks, the right dividend policy. Can you kind of walk us through the policy, PSCG pace when kind of running through all five of those capital allocation options?
Sure. Thanks Michael. We take a very long, term fundamental view because at the end of the day, our long term fund makes fundamental economics will always be what drive shareholder values. So when we do that we are looking at what is the opportunity in the unregulated business and what is the right cost of capital and the right capital structure for the long term in the unregulated business. We then look separately at the regulated business, so then of course we have our authorized return and then we look at what are the opportunities in each of those businesses relative to those fertile rates for over the long term. So things like near-term current low interest rates are excellent relative to financing opportunities in the power markets but we always take a long term interest rate view in setting an appropriate long-term cost of capital since our projects return to cost of capital over many, many years in the unregulated business. So with those as fundamentals we then look at what does the opportunity say and then how does the balance sheet support the choices between those opportunities based on shareholder return. Having a very strong balance sheet which we do now gives us the opportunity to take that list, to prioritize it by shareholder return opportunity and doability and feasibility and all the rest and then make the choices that we're making. So right now what choices are we making around that? The regulated utility has nice opportunities for investment. Our $6.5 billion investment program over three year is actually more than half. Regulated utility transmission investments with formula rates. So 11.7 to as high as 12.9 on an ROE basis. So that's a good place to deploy capital for nice levels of risk adjusted shareholder return and because a number of those larger projects have equipment rate base, to sort of refueling the pool if you will of balance sheet opportunity.
We then have other contemporaneous return opportunities in the regulated utility incremental rate making for things that support the safe energy master plan like the solar projects we just filed for up to 883 million of additional investments, earning additional 10.3. so in a regulated business, nice opportunities to grow internally and organically like we have done over the past few years at good rates of returns for shareholders.
On the power side, absolutely with the market's being challenged. It's been difficult to make investments that we think clear the right hurdle rates for our shareholders. The good news of that story is, we made be environmental investments already almost entirely in the fleet. So power is generating incremental net cash flow that supports the ability to look at more things in the utility without really precluding the ability to look at things that power but they have to hit the hurdles and that's been challenging right now.
That cash flow then supports our shareholder dividend which is why we changed our policy earlier this year to be less formulaic and more reflective of the balance sheet strength that we have and so the priorities are we'll for the operating investments and the utility and power take that long term fundamental view relative to returning a hurdle rate. Of course opportunistically finance given the low rates that we have but keep a long term cost of capital in mind so you don't get yourself caught up in using low rates and all of sudden accepting projects at lower hurdles than you really should for the long term shareholder value.
Keep the dividend at a healthy and competitive payout which at the midpoint of our guidance this year would be about 60% and we recognize the importance of that for shareholders in the total return proposition and then share buyback is on the list but at the last point on the list I think. Not because it isn't important. It is important but when we look at what the opportunities are for deploying the balance sheet, we see lots of opportunities beyond what we've already filed at the utility. There is more we can do in multi-year programs and gas infrastructure which New Jersey is very interested in and maybe more in energy efficiency continue to look at power assets because long-term we do want to grow the power business and we have over the past few years put things like new peakers in place. Keep that healthy dividend which the balance sheet absolutely can support and then share buyback if there are an opportunities and if there is a need to do that to ensure we have the right balance sheet structure and cost of capital.
So the process is pretty rigorous, very fundamental, very long term oriented and very oriented towards where is the best place that shareholders can see total return over the long term because our investments are long term in nature.
Okay Carolyn just a quick follow up on that. Can you talk a little bit about given the power markets in that business you’ve clearly kept a pretty conservative balance sheet. How does maintaining adequate liquidity sort of play into your thought process in your capital allocation plan because it seems like they won't happening to keep a little bit more of a dry powder to sort of protect the business during this fairly challenging power market.
So it’s a good question Ray. We know that the power markets are challenged, no question about it. We see the forward curves obviously looking at potentially going up in the future but we've seen that before and then it's been pushed out a little bit. Absolutely, maintaining liquidity is important, certainly maintaining strong credit facility is important for the trading business. What we do on a hedging program, where we layer in overtime our base load hedging over a three year cycle. So we put a bit of predictability in a good portion of the power results.
I think given the balance sheet that we have and given the strength of that, where we look at incremental deployment of our capital structure has never pressured our liquidity. So, when we're making utility investments for example because they are all incremental rate making they have contemporaneous or near contemporaneous returns. We model internally. Our long term profile beyond the three years obviously that we talk about externally for capital, we're modeling things over a three, four, five year cycle. We're always looking at ensuring that we preserve a balance sheet so we don't get ourselves into a challenge given different scenarios but preserving the flexibility and preserving the liquidity given where we are and given the constructs we have in New Jersey on the regulatory side has never caused us to say, gee that would be a good return opportunity but we can't do that. Because we've sold so many of our international assets in the last few years at very good prices, credit to my predecessor in the role. We had a good opportunity to then take advantage of what we see without ever having to say gee, we can't do that. Now we look at some things where we say, gee we're not sure of over time, that's a different question, but can we do it? The balance sheet gives us the opportunity to do that.
George, your company probably has the most diverse mix or diverse set of businesses of anybody at this conference. When I think about the businesses that you run within Sempra and then the discussion with Debbie, with Joe, the CEO and CFO of Sempra about the return metrics or the return of hurdles that projects or growth opportunities that come out of your businesses must mean. In competition maybe for internal capital, between whether it’s the regulated subsidiaries in California or some of the others. Are there different return metrics that the non-US businesses must hit? How do you go through the evaluation process when trying to think about from a corporate point of view the allocation of capital or cost of diverse businesses both from Sempra corporate into your business and then even within your business, do I invest more in the South American distribution, do I invest more in Mexico projects? Can you just kind of walk us through that?
We'll let me point out there are a couple of things that we do. The types of businesses that we are in Latin America are identical or very familiar to what we do in the US. The risk profile or the beta of those businesses is similar to what we do in the US, regulated utilities, contract their long term assets. So there is not a big difference in risk on that. The primary factor that causes a risk premium for those investments is our location of the assets and the political risk associated with being in Peru, Mexico and Chile and we price that into our investment decision and it's very easy to price that right. You can look at typically what investors want as a hot air premium because you're operating in Mexico and not operating in South California even though sometimes the risk is not any higher in Mexico, its perceived to be higher.
I think the other thing that we view in this allocation process when making decisions about any international investments, we tend to focus on things that had worked for us in the past and our CEO and our CFO are very familiar with how those deals have been structured and how well they have worked out in the past. There's always sort of an intangible when you're bringing in new frontiers as opposed to stuff that you delivered in the past. I would point out to a couple of things that we're doing internationally. We have a joint venture with Pemex in Mexico where we do in a sense construct midstream assets for the benefit of Pemex. And we can sit across the table and structure a deal where they are the sole off taker, they are the operator and they are also our 50% investor in what we're doing and we've done that several times and we can do investments like that with a lot more predictability on the outcome of the investment.
Another example is Peru, we are doing a $1500 KW hydro project in Peru and where can you find generation projects for $1500 to start with very little fuel costs. So that experience and if you’ve ever been in Peru, Peru is full of rivers and mountains. So the mandate in Peru is to go out and do more of those deals albeit the market to sell that power is not the same as it is here but we are able to get like 10 year contracts with large customers for these projects, very low cost projects. So there is an emphasis on doing stuff that we know, stuff that has worked for us in the past. And sort of like an intangible premium that's put into new ideas and things that are kind of off the impact.
So that the direction that we get from the company and the other direction that we get from the company is we must pay a certain amount of dividend from our international operations back to the holding company as a given. So before we look at our investments full year, we've got to make sure we meet that hurdle first. So our guidelines are what we can do very well structured by history.
And how do you think about structuring? Meaning in terms of when project opportunities come up, whether it's some of the work you're doing with Pemex or some of the generation projects in Peru, in terms of leverage the local level, meaning are you willing to run a little more levered at the local level with or without recourse related debt and parent guarantees. How do you think about just the structuring of some of the projects and the management of risk around those structures?
Well we have enough scale in every one of the countries that we operate, that we really don't need to look back at Mother Sempra for raising capital, guarantees etcetera. We are I would say, very underleveraged in all of these countries that we operate and we're looking to move into a more optimal capital structure. So we are working on that, but the way we price our investments is on an unlevered after tax basis. So we really don't look at the levered equity returns when we make these decisions. We look at the pure economics and the tax regime that's in place. And then once we do the projects, we're looking at the very highest level, at the country level, what the optimal capital structure should be but again, we haven't been able to get to what I would call a utility capital structure in these companies yet and we're still striving to do that. That's something we still are going to work on.
Rick when you think about those dividend policy, share buybacks, the balance sheet and really the debt side of the capital structure, and the current interest rate environment as well as the current dividend tax regulations, and how those latter two items may change over the coming year or so. How do you put all those into a basket and come out with this is the policy that our company is going to implement over the next year or so in terms of returning capital as well as in terms of managing debt issuance, debt meets going forward.
I'll start with the tax issue. When we set dividend policy, we really set in for the long term and as I said earlier, the board basically set a policy where we're going to strive to get to a 60% payout ratio by 2014. We have decided not to try to react to what tact changes might be this year in the short term. Really we set it for the long term, when we talk to our investors they say don't worry about our tax rate. Just work your plan. So basically we set our plan outlook, we're going to get to a 60% payout. That said, if we see tax rates at basically, our punitive tax rates for dividends, we would step back and look at it. I think right now we're expecting that link between capital against tax and dividend taxes is going to remain somewhat in place. But if it doesn’t remain, obviously we with everybody else will step back but what our goal would be to be competitive in the industry space in terms of our dividend payout ratio.
In terms of our capital structure, really we're about where we want to be at utility. We have to fund our ongoing $3.5 billion budget over the next five years. We have a number of serious deficiencies over the next few years. At our holding company where we're really at a point where we'd like to bring the debt levels down and as opportunities exist when its economic to do that and its more economic than say a share buyback we'll take a look at that. But right now our view is that the first party's reinvestment in the business, grow the dividend to the extent we can find opportunities outside the business they don't change the risk profile, invest in those and do share buy backs and the debt retirement would probably would rank up today.
As a follow on maybe for more for Martin and then maybe Carolyn afterwards. As you think about the tax policy potential change, you both have a fairly large CapEx program at the utility. How do you sort of think about or balance the two in terms of equity issuance and does it sort of make sense to sort of take advantage of it now, to have a decent equity issuance now versus waiting for potential tax flow changes that which would potentially affect your equity valuations. How do you think about that when you're balancing the capital deployment of that balancing your external financing needs.
You know with us, when you look at where we're right now, we have been frankly cash flow positive the past couple of years. This year, we're about 190 million or so cash flow negative for the year at the utilities and which can all be frankly debt financed. We're comfortable with the overall capital structure we have right now is, as I think you’ve heard from other panelist. We think about that capital structure in sort of a long term kind of way and it’s at where we want to keep these capital structure for long term. And we feel like it is at the both the parent holding company as well as at regulated subsidiary. So there really hasn’t been, I would say the need for capital issuance. We actually used to have a drip program where we issued some shares, we're actually not doing that currently. Again, we really don't need the cash to be able to fund the investment program. We can reinvest retained earnings that we have, the cash flows that we have from our regulated business use an incremental leverage and keep the cap structure where it's at. So we're mindful of I'd say balancing our cost to capital or credit ratings, our capital structure for the long term and at this point, taking advantage of maybe what's perceived as healthy valuation isn't something we're looking at doing. We're really looking at deploying our capital in the way I just described.
Similar for us, definitely healthy market in general but our long term view is regardless of market per say, the issuance of equity is of course is dilutive to your existing shareholder. So our capital program and everything that we are looking at and everything that we are talking about in the regulated utility as well as with power given the strength of our balance sheet and as I said, we do long term forecast on a variety of scenarios none of those scenarios of equity issuance. So while we are very conscious of the tax issues and just to reinforce what was said earlier, I do think the most important issue on the table on Washington for our industry is parity, parity of capital gains and dividends is absolutely critical so that there isn’t a governmental overlay that’s targeting one segment versus another picking winners and losers, that’s really important tonight. I have spent time in Washington, I am sure many others on the panel has as well to make that point to staff and legislators related to parity. But where we are, and where our balance sheet and where opportunity set is we can finance all that with our internally generated cash flow, we don’t have any debt at the parent of long term nature it's all short term issuance CP everything that’s long term is right at the operating companies and those companies can afford from their cash flow and the utilities normal capital structure, both what we have already done, what we have announced that we filed and the incremental things that we see opportunities for in the future.
So we like that positioning right now.
I have a question really for almost everybody on the panel maybe even for Ray as well, I will be curious if his (inaudible) as well. A couple of weeks ago, I am out with another one of the companies that we cover, a larger cap U.S. based utility. And the Chief Financial Officer from this company looks at an investor when talking about financing needs and makes the comment on the debt side of the balance sheet, I have no interest rate risk for the next 18 to 24 months meaning anything they are going and when integrator detail that anything they are going to issue they already know the coupon where the rate or have done interest rate hedges or locks. For anything they will issue, they are going to issue multi-billion dollars between now and late 2013 or early 2014 timeframe. Whether it's for international projects, whether it's for domestic projects within the regulated utility or domestic projects within the non-regulated utility or domestic projects within the non-regulated side.
What’s the counter argument to doing that given 10 year treasuries, at 16-17, being able to issue first mortgage bonds or senior secured in the 3.5% to 4.5% range and even non-regulated debt from product finance it but contracted projects at really low levels. What’s the argument for not taking advantage of that.
George maybe we will start with you because the different business mixes and the different geographies but I would love to hear from several of you all on that one.
I will take you up on that Marty it's yours.
I think that in the current interest rate environment and certainly we are looking to take advantage of that where possible as it relates refinancing obligations we have or issuing new debt. I think when you think about most of our debt it really is and what’s coming due in the coming years is regulated debt and I think if you look back, I will give you couple of reasons counter arguments. I think for the past few years it seems like a lot of folks had though well interest rates are going to trend up and they haven’t they have continued to trend down. So I think if you are thinking about hedging that can go for you or against you in terms of where things go, right now we are in a low interest rate environment that certainly could last for a little while longer. You want to think about that and then when you get to your regulated debt to you certainly want to think about the regulatory repercussions if you will of hedging and what the regulators perception of the prudence of that hedging would be.
I agree for us, if we think about the program going forward and where the debt issuance will occur, will be at the regulated utility on a net basis and of course we hit our target capital structure and really look to keep that on a long term basis and you would have the prudence argument you did something else, I also generally feel that it's pretty hard for anyone to call to this is the perfect moment and so if you take advantage of things when they are in front of you, if you look at your debt and you continue to keep it lighter so that you really are looking at that overtime. You end up over the long term with the best profile. If we have had this conversation probably 18 months ago we would have said now is a great time, why don’t we lock in and here we are today and it is better so I think you really do have take that long term view because the differential that you might have certainly for us from the regulated balance sheet was not much more we would do because we keep within our regulated capital structure, so how much more do you get relative to the prudence, the arguments that you may have versus taking that long term view, laddering out, we did a 30 year issuance this year because the markets were just so good, so why not. That’s where I think we make all the choices what the tenure that reflects the best long term award for us.
We are in the same place, regulated utility really just need to issue debt to fund our ongoing capital program in the context of regulation following rate cases every two years, trying to decide that this is the right time.
George you brought it up in terms of the right capitalization for your Latin American businesses, how does the current interest rate environment impact, how you think through what the right capitalization is especially if you can do later dated debt on it and then the ability to repay the cash.
I think the latter is driver for us, the reason that we have the capital structure that we had in these countries is we are trying to optimize the cash going back to the U.S. and getting the right return for the cash, the driver is creation and I think the low interest rate environment is helping in creating new business opportunities in these countries but everybody has that, everybody is dealing with that situation so we are not like the only company that has to deal with that. I think our capital structure is primarily driven by U.S. taxes and how we want to penetrate our money back to the U.S.
Having said that I think they are great opportunities to invest more capital in these countries because of what the cost of money is these days. It's become a lot more affordable to projects for some of these governments because of what the debt cost and the equity cost is for these projects, so it's creating a churn of business opportunities, but we will get there by creating more investment opportunities rather than recapitalizing the company in South America.
Our plan is really to create investment opportunities that we fund primarily with debt in South America because we do have that capability in our balance sheets and like in Mexico, we have zero debt or 100% equity company and we have over $2 billion invested in Mexico.
Do you every quantify how much capital Sempra could repatriate out of its Latin American businesses back up to the holding company.
Well what we are doing right now we said like this, there is somewhere north of $200 million of dividends that we are bringing back over the next five or six years primarily from Mexico and Peru because that’s the efficient amount of money to take out of these countries supported by the earnings that we have and that’s what we are going to do. Anything more than would have to be driven by changes in tax law really or changes in the cash needs or the long term Sempra but right now we have a plan in next five years to do that.
I want to ask you this question, since you are in a really good cash flow position and you have the ability to either grow renewables or invest in ATC, how do you think about making that incremental investment into ATC or buying a bigger percentage ownership that’s possible or even if you take it to the next step, how this industry consolidation playing to your thought process given that you do have that strong cash and multiple to sort of possibly lever off of.
Well we are a 26.2% owner of ATC and it's far coagulated 12 to return. To the extent, ATC opportunities to invest in ATC or they are in a joint venture the ATC joint venture exists, obviously that’s going to be high on our list in terms of deploying capital given those returns. Terms of M&A space, we have been pretty clear that we would consider M&A but it would have meet three criteria and it would have to be basically accretive in year one, it have to be credit neutral and we would have to have a growth rate the same as we would as standalone utility, that said you really got to have the opportunities out there and it's not really on the top of our list, we really think we can grow our business at 4% to 6% and that’s really where our focus is right now.
Maybe Martin and Carolyn real quick on your thoughts on M&A given as you deploy capital does it make sense for you guys to look else or is there enough in your home utilities versus deploying capital elsewhere.
Let’s say for us certainly there is plenty in the home utility given what we have and what opportunities we think we still beyond what we recently filed. On the M&A front I would say on the power side, the generation side, we are always looking at asset opportunities that come up but again the long term ability to hit the hurdle that’s positive NTV, just hit positive NTV that’s what we always strive for with reasonable long term assumptions neither overly depressed or overly exuberant in terms of any return to gas prices that’s where we really see to hit the hurdle in terms of the regulated side obviously the valuations are full right now I guess I would say but that doesn’t stop us from looking but I think we have plenty to do in the home front if you will plus the fact that we are going to be taking over the lip business LIPA business in Long Island and we can look near in our region it's not just New Jersey, PJM is really where we are focused, we have assets in Connecticut, one in New York and some in Pennsylvania. So when we look it's not that we are solely wedded to one state but again we have to take that long term fundamental view and see those opportunities and look at them relative to the internal, so it's not about we have to do something external and something internal it's everybody competes for capital what the external opportunities look like, what do the internal opportunities look like and then internally between the businesses, everybody is going to sort of compete if you go on the same footing.
Martin any parameters that you look at when you…
I was going to say that I think our focus its earlier very much on regulated growth, we feel like that $7.5 billion capital expenditure plan we have got over the next five years which should translate into about 6% rate base growth a good use of the capital and your acquiring rate base dollar for dollar. So when you think about the regulating growth and you think about M&A, as a company we have been opportunistic in the past, Amron’s grown through a merger and a couple of acquisitions, so what we would consider that kind of activity share but as you think about regulated growth as we all know in our industry it's been challenged overtime to find the right combinations that makes sense and so we are very much focused on that regulated growth plan as I said before, you are growing the rate base with the heavy focus on regulated transmission.
I have one last question, we will use this as the rap up, if you had to think of what is the most important metric your company uses in terms of evaluating whether to deploy or not deploy capital non-levered IRR, free cash accretion, earnings accretion total NPV of a project which of those do you think are the biggest drivers of capital making decisions within your company?
NPV and non-levered IRR they are like the metric that you can compare everybody and it really becomes when there is competition for capital, promoters of the different projects want to talk about their high NPV, IRR project so that really, that’s an important one for sure.
We actually look at three but I would say certainly we look at the IRR and we look at the earning, we look at the cash flow, we look at all three of those and so but I would see these days the IRRs is the big focus internally.
Even from the regulated side of the business?
On the regulated side of the business, again you still like I said before when you get the fund the mandatory projects but when you get to the discretionary you do have to be mindful of what your regulatory framework is, are you what kind of return does that produce, what is the timing of when you are going to place that asset into service, are you going to get recovery quickly or are you going to get recovery of your they said before Missouri, your deferred depreciation interest cost. I mean you got to be mindful of the regulatory framework before you deploy the capital and if you look at the IRR and project a lot of times that will tell you how you are managing that project and the regulatory framework.
NPV absolutely for the unregulated business and for the regulated business NPV and IRR can be good metrics when the measurement is really about what’s happening on the regulated business in terms of regulatory lives because then you would see that show up in the NPV. So NPV first and the ability to earn the regulated ROE and whether you have any lags, but number one for me is value NPV.
Most of our investments are in the regulated space, most of our regulated investments are really driven by infrastructure renewal so basically we look at EPS impact. We are not really adding unregulated space looking at IRR comparing projects, we are really more regulated so to extent we can invest in the higher returns and ATC or ETF we like to do that but I don’t think we look at our EPS growth as we make these investments.
Got it, George, Marty, Carolyn and Rick. Thank you for participating in this panel. Look forward to talking with you later in the day and I appreciate you taking the time. If we can do the panel change out, I think the audio digital guys can help hook up everyone up we can go from there.
[No Q&A session for this event]
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