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ONEOK’s (OKE) CEO Terry Spencer on Q1 2016 Results – Earnings Call Transcript

ONEOK, Inc. (NYSE: OKE ) Q1 2016 Results Earnings Conference Call May 04, 2016, 11:00 AM ET Executives T.D. Eureste – Investor Relations Terry Spencer – President and Chief Executive Officer Walt Hulse – Executive Vice President of Strategic Planning and Corporate Affairs Derek Reiners – Chief Financial Officer Wes Christensen – Senior Vice President, Operations Sheridan Swords – Senior Vice President, Natural Gas Liquids Kevin Burdick – Senior Vice President, Natural Gas Gathering and Processing Phillip May – Senior Vice President, Natural Gas Pipelines Analysts Eric Genco – Citi Brian Gamble – Simmons and Company Danilo Juvane – BMO Capital Markets Christine Cho – Barclays Craig Shere – Tuohy Brothers Becca Followill – US Capital Advisors Shneur Gershuni – UBS Jeremy Tonet – JPMorgan John Edwards – Credit Suisse Operator Please stand-by, we are about to begin. Good day, ladies and gentlemen, and welcome to the First Quarter 2016 ONEOK and ONEOK Partners Earnings Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to today’s host Mr. T.D. Eureste. Please go ahead, sir. T.D. Eureste Thank you, and welcome to ONEOK and ONEOK Partners’ first quarter 2016 earnings conference call. A reminder that statements made during this call that might include ONEOK or ONEOK Partners’ expectations or predictions should be considered forward-looking statements and are covered by the Safe Harbor provisions of the Securities Acts of 1933 and 1934. Actual results could differ materially from those projected in any forward-looking statements. For a discussion of factors that could cause actual results to differ, please refer to our SEC filings. Our first speaker is Terry Spencer, President and CEO of ONEOK and ONEOK Partners. Terry? Terry Spencer Thank you, T.D. Good morning, and thank you for joining today. As always, we appreciate your continued interest and investment in ONEOK and ONEOK Partners. On this conference call is Walt Hulse, Executive Vice President of Strategic Planning and Corporate Affairs; Derek Reiners, Chief Financial Officer; and Senior Vice Presidents, Wes Christensen, Operations; Sheridan Swords, Natural Gas Liquids; Kevin Burdick, Natural Gas Gathering and Processing; and Phil May, Natural Gas Pipelines. I’ll begin with a few opening remarks, then Derek will give a brief financial update and then I will wrap up with highlights of the first quarter, our outlook for the remainder of the year and our ethane opportunity. To begin, first quarter 2016 performance was a result of the progress made last year by continuing to focus on increasing our fee-based earnings, reducing commodity price risks in our businesses, project execution and making prudent financial decisions all while continuing to operate safely and responsibly. In this challenging market conditions, we have relied on our strengths, which for ONEOK Partners are predominantly fee-based earnings, our uniquely positioned assets and our dedicated employees. Our competitive advantage is our integrated network of assets that fit and work well together. Our 37,000-mile network of pipelines, processing plants and fractionators are well positioned to withstand the cyclical nature of the industry. Our assets in the Williston Basin have served us well, and we continue to benefit from the basin’s large natural gas reserve base and inventory of flared NGL-rich natural gas. Our Natural Gas Pipeline segment remained well positioned to expand its fee-based natural gas export capabilities, particularly to Mexico where we have key relationships through our joint venture Roadrunner Gas Transmission Pipeline and our extensive Natural Gas Liquids business maintains a growing position in the Rockies, Texas and emerging STACK and SCOOP plays in Oklahoma, providing us a large and diversified base with which to serve our end-use customers. The partnership’s distribution coverage increased to 1.06 times in the first quarter, up from 1.03 times in the fourth quarter 2015 and significantly higher compared to the beginning of 2015 which is a reflection of our increasing stable cash flow as we now have a significant amount of infrastructure completed and are able to harvest earnings, particularly in the Gathering and Processing and Natural Gas Liquids businesses. ONEOK Partners first quarter 2016 adjusted EBITDA of approximately $445 million represents a nearly 40% increase compared with the first quarter 2015. Executing on our growth projects, contract restructuring, capital and cost savings and consistent operations were key drivers to delivering the greatly improved results from a year ago, even in the face of deteriorating industry fundamental throughout 2015. From an operating perspective, volume growth across our businesses, increased fee-based earnings, and ongoing cost reduction efforts across ONEOK Partners business segments have all contributed to a solid first quarter and positive outlook for the remainder of 2016. In the midst of some of the industry’s most challenging conditions, our employees once again performed exceptionally well by successfully executing on our strategies to mitigate risk, reduce capital spending and operating costs, and manage our balance sheet. It is through their hard work and determination that our company delivered impressive results quarter after quarter in 2015, and we remain as committed as ever to delivering even better results in 2016. Through our key strategies and well managed and operated assets, our employees have, with a high sense of urgency, met the challenge, just as they have many times in the past. I’d like to thank them for their hard work and commitment to deliver value to the bottom line safely and reliably. We’ll cover each of the segments in more detail later in the call, but first I’d like to have Derek give us some brief financial update. Derek? Derek Reiners Thanks, Terry. Both ONEOK and ONEOK Partners ended the first quarter in a strong financial position with healthy balance sheets and ample financial flexibility. As Terry mentioned, ONEOK Partners first quarter distribution coverage was 1.06 times. ONEOK’s first quarter dividend coverage was 1.31 times, which together with cash on hand entering the year maintains ONEOK flexibility to provide financial support to the partnership if needed. In yesterday’s earnings news releases, we maintained our 2016 financial guidance expectations for both ONEOK and ONEOK Partners. Our proactive financial actions in 2015 and early 2016 and enhanced earnings from the partnership has allowed the partnership to deliver on distribution coverage, while also reducing leverage. The partnership’s capital expenditure guidance remains $600 million, including $140 million of maintenance capital for 2016, as the reliability and integrity of our assets is the foundation of our success. However, we are seeing aggressive bidding from our vendors on maintenance projects and the timing associated with our maintenance activities can vary significantly from quarter to quarter due to seasonal impacts in varying maintenance cycles across our ever-changing asset base. Typically our maintenance capital spending is lower in the first quarter. Sequentially maintenance capital decreased $8 million in the first quarter, primarily due to our maintenance project plan for the quarter having fewer projects compared to the fourth quarter, which is not unusual when compared to our historical spending profile. We are on plan for our scheduled maintenance projects for 2016. Similarly, as it relates to operating cost, we continue to see competitive, lower pricing and rates from service providers and we have significantly reduced contract labor across all of our segments. In the first quarter we realized $15 million sequential decrease in operating cost. And as Terry mentioned, we continue to focus on internal operating cost reduction efforts company-wide. We expect these cost savings to continue throughout the year. In January, ONEOK Partners entered into $1 billion three-year unsecured term loan, effectively refinancing our 2016 debt maturities and enhancing financial flexibility. With approximately $1.9 billion of capacity available on the ONEOK Partners credit facility at the end of the first quarter, the reduction of more than $2.2 billion in capital growth projects in two years and higher earnings, the partnership does not need to access public debt or equity markets well into 2017. The partnership continues to progress towards deleveraging as our trailing 12 months’ GAAP debt to EBITDA improved to 4.5 times at March 31st. And we continue to expect annual GAAP debt to EBITDA ratio of 4.2 times for the full year 2016 as a result of prudent financial, operating and commercial execution. As always, we remain committed to the partnership’s investment grade credit ratings. On a standalone basis, ONEOK ended the first quarter with nearly $130 million of cash and expects to have approximately $250 million of cash by year-end 2016 and an undrawn $300 million credit facility, allowing us financial flexibility as we continue to navigate a challenging market environment. In February, we provided detailed information on our counterparty credit risk. We’ve included similar information again this year in our Form 10-Q but there haven’t been any substantial changes. We have a very high quality customer base and no material counterparty credit concerns. The majority of our top customers are large petrochemical and integrated oil companies, which have a higher tolerance for volatility and commodity prices. Our track record of prudent and proactive financial decisions during uncertain times resulted in ample liquidity, too strong balance sheets, and a strong customer base. ONEOK and ONEOK Partners remain well positioned to withstand a volatile commodity and financial market environment. Terry, that concludes my remarks. Terry Spencer Thank you, Derek. Let’s take a closer look at each of our business segments. In the Natural Gas Liquids segment, volumes continued to increase year-over-year with first quarter 2016 volumes gathered up 6% and volumes fractionated up 16% compared with the first quarter of 2015. Compared with the fourth quarter 2015, volumes gathered and fractionated were lower primarily due to decreased spot volumes, higher ethane rejection and seasonal impacts. We continue to expect NGL volumes to be weighted toward the second half of the year as incremental volumes from new natural gas processing plant connections continue to ramp up. In the first quarter, we connected three additional third-party plants to our NGL system and we continue to see volumes ramp at the eight plants we connected in 2015. We expect to connect one additional third-party plant this year in addition to completing and connecting our 80 million cubic feet per day Bear Creek plant in the Williston Basin where additional flared natural gas remains ready to come online. Williston Basin NGL volumes, our highest margin NGL volumes with bundled rates more than three times of those in other regions, remained strong in the first quarter. The average volume gathered on our Bakken NGL Pipeline increased nearly 12% compared with the fourth quarter 2015, driven by the completion of the Lonesome Creek plant in November 2015 and compression project. I’ll also talk about ethane and provide an update on our ethane opportunity outlook in just a moment. As it relates to the West Texas LPG system, in July 2015, we increased rates on this system to be more in line with market rates. In March, the Texas Railroad Commission suspended the rate increase until it is determined by the Commission if the rates are in line with the market. We are confident that our increased rates are just in reasonable and in line with the market. However, regardless of the outcome of the pending case, our current 2016 financial guidance remains as indicated. As you all can appreciate, due to the legal process now underway with the railroad commission, it will not be prudent at this time for us to discuss this case in any more detail. We will provide future updates or commentary when and if it is appropriate. In the Natural Gas Gathering and Processing segment, Williston Basin volumes were a key driver to our first quarter performance. Our Natural Gas volumes processed reached 810 million cubic feet per day as we captured previously flared gas and connected new wells to our system. Average natural gas volumes processed in the Williston increased 44% in the first quarter 2016 compared with the first quarter last year, and increased 6% compared with the fourth quarter 2015. Our producer customers continue to drive improvements in initial production rates through enhanced completion techniques, and combined with the higher natural-gas-to-oil ratios in the core areas where virtually all of our new wells are being connected, have helped offset the reduction in drilling and completion activity. We will continue to benefit from more than 820 wells connected in 2015 and the 115 wells connected to our system in the first quarter 2016. The vast majority of these high performing wells are in the most productive areas of Williams, McKenzie, and Dunn counties in North Dakota where we have more than a million acres dedicated to us and an extensive network of interconnected gathering lines, compression, and processing plants. There are currently 900 drilled but uncompleted wells in the basin, with nearly 400 on our acreage. We saw a decline in the drilling rig count across the Williston Basin during the first quarter and currently have approximately 15 rigs operating on our acreage under dedication. Flared natural gas in North Dakota was reported at approximately 185 million cubic feet per day for the state in February, with approximately 70 to 80 million cubic feet per day on our system. This continues to present an opportunity for us as we add processing capacity to our system in the third quarter 2016 with the completion of our Bear Creek natural gas processing plant. In the Mid-Continent, first quarter 2016 processed volumes increased 8% compared with fourth quarter 2015 volumes. Similar to the Williston, our producer customers continue to drive significant increases in initial production rates through enhanced completion techniques, especially in the STACK, Cana-Woodford and SCOOP plays. Procedure delays on completions of some large multi-well pads are expected to impact our volumes over the next several months and potentially through the remainder of 2016. However with the recent improvement in commodity prices and breakevens in the STACK competing favourably with the best plays in the country, we could see acceleration of the delayed completions. Contract restructuring in the Natural Gas Gathering and Processing segment has significantly decreased the segment’s commodity price sensitivity and was another major contributor to the partnership’s first quarter results. The segments average fee rate increased to $0.68 per MMBtu, compared with $0.35 in the same period last year and $0.55 in the fourth quarter 2015. We expect the segment’s earnings to increase to more than 75% fee-based this year, driven by this contract restructuring efforts. Moving on to the Natural Gas Pipeline segment, first quarter results remained steady as the segment continued to provide the partnership with stable, predominantly fee-based earnings. The segment completed two capital growth projects in March, the first phase of the Roadrunner Gas Transmission pipeline project and a compressor station expansion project on our Midwestern Gas Transmission pipeline which will add an additional 170 million cubic feet per day of capacity to the pipeline. The Roadrunner project is fully subscribed under 25-year firm fee-based commitment and the second phase of the Roadrunner is expected to be complete in the first quarter 2017. Additionally, the Midwestern Gas Transmission expansion is also fully subscribed under 15-year firm fee-based commitments. Our Natural Gas Pipelines segment is primarily market connected, meaning we are directly connected with large stable customers who provide services to end users. These customers such as large utility companies, electric generation facilities and industrials have specific volume needs that don’t fluctuate based on commodity prices. Additionally, we work closely with these customers to design our systems to fit their specific needs. Unlike basis-driven pipelines, there is minimal financial risk associated with our Natural Gas Pipelines or our customers. We like the stability of our Natural Gas Pipelines business and the customers we serve, and we’ll continue to develop additional fee-based and market-driven long-term growth and export opportunities in and around our asset footprint. I’d like to close by providing an update on our ethane opportunity outlook. For the past three years our industry has experienced an unprecedented period of heavy and prolonged ethane rejection. The partnership continued even in the face of sustained ethane rejection to increase our Natural Gas Liquids volumes gathered and fractionated. We are starting to see ethane prices improve in relation to Natural Gas as a result of improving NGL prices and weakened natural gas, increases in NGL exports and expected incremental ethane demand from new world scale petrochemical crackers. Since last quarter, we’ve seen ethane recovery economics improve. Some natural gas processing plants on our system have intermittently started to recover ethane, which we expect to continue throughout 2016. We continue to expect a meaningful amount of processing plants to move into full recovery in early 2017. We average 175,000 barrels per day of ethane rejection on our system in the first quarter, and we expect anywhere from 175,000 to 200,000 barrels per day of ethane rejection on our system as new natural gas plants, we are connected to, continue to ramp up, and as we see the impacts of increased volumes in the Williston, STACK and SCOOP plays throughout 2016. We are well positioned to benefit from this ethane opportunity and have more than enough infrastructure to bring these incremental barrels or approximately $200 million in annual earnings to our system with no additional capital requirements. We also have the opportunity to utilize our assets to capture pricing differentials if any dislocations in pricing occur between the Conway, Kansas and Mont Belvieu, Texas market centres as a result of increasing ethane demand. Ethane recovery presents a major opportunity for ONEOK and ONEOK Partners, but it certainly isn’t our only opportunity. We remain focussed on additional fee-based growth opportunities for our businesses, cost effective ways to enhance our assets, and employee retention efforts. So we are fully prepared when market conditions improve. Congratulations to our employees on a solid first quarter. We continue to face headwinds from challenging industry conditions, but we’ve shown once again that we’re uniquely positioned to handle these challenges and deliver on the financial results we’ve laid out for ourselves and our investors. Thank you to all of our stakeholders for your continued support of ONEOK and ONEOK Partners. Operator, we’re now ready for questions. Question-and-Answer Session Operator Thank you sir. [Operator Instructions]. We’ll pause for just a moment to allow everyone an opportunity to signal for questions. And we will take our first question from Eric Genco with Citi. Eric Genco Hey, good morning. I have a couple of follow-up questions on ethane. Just wanted to kind of go over. I think you mentioned it basically, but in moving to 175,000 to 200,000 barrels a day of ethane opportunity in ’16 versus the 150,000 to 180,000 last quarter being rejected, is that basically — that’s basically third-party plant and a shift towards more liquid rich drilling overtime, is that what’s accounting for that increase? Terry Spencer Yes, Eric I think, yes, most of that is a result of the new plants that we’ve connected here fairly recently. And, of course, the growth that we’re seeing behind those facilities that we indicated in my remarks, so, yes, most of that is from the new plants. Sheridan, anything? Sheridan Swords No, that’s it. Eric Genco All right. And I guess the other thing I was kind of curious about is we’ve been sort of talking about this little bit more, just trying to get a better handle on some of the ethane recoveries that are likely to come out of the Bakken eventually. And so I think I understand based on bundled costs and how that works economically, and you guys have said that basically that Bakken would theoretically be one of the later basins to be culled. But I’m also curious too because I know — you know, you’ve referred to some of your services being non-discretionary in the past and it’s not like ethane economics specifically is going to drive drilling in the Bakken. So I’m curious is there a way to look at or think about pipeline stacks in the Bakken and sort of — you know, as things come back, just sort of push ethane recovery and how that might impact you. Is there any way to sort of numerically think about that or is that still something that will just have to kind of wait beyond? Terry Spencer You know, Eric, broadly as you think about where we deliver ethane across our systems, we really don’t have any quality issues or any concerns really on a large scale. We may periodically in certain specific locations dependent upon the location of those pipes to end-user, we sometimes do have some issues with respect to quality specs, but I don’t see quality specs being a big driver for ethane emerging from the Bakken, nor really anywhere else for that matter. And when we talk about these non-discretionary services, we talk about producers have to have the process and they got to have the liquids extracted from the gas in order to meet quality specs. Ethane tends to be one of those — is one of those NGLs that can be — can easily go into the gas train and be diluted without causing much of a problem, unless you’ve got industrial customers or commercial customers right near — located in pretty close proximity to the processing plant, okay? That helped you? Eric Genco Yes, it does. Thank you very much. I appreciate your time. Operator And we will go next to Brian Gamble with Simmons and Company. Brian Gamble Good morning, everybody. Terry Spencer Good morning, Brian. Brian Gamble On the Natural Gas Gathering and Processing segment, that fee rates increase obviously excellent year-over-year and even quarter-over-quarter. I know that we’d talked about some of those new contracts hitting in January and that creates a bump. Maybe you could walk us through how we should think about that rate moving through the year. I think there is some contract that come up mid-year, maybe some Mid-Con things. But if I remember correctly, there was a pretty healthy chunk of the Williston that they got repriced? And just want to make sure, being realistic about how I’m thinking about that rate for the rest of the year. Terry Spencer Yes, I’ll just make a couple of general comments and I’ll turn it over to Kevin. You know, as far as our contract restructuring effort, the lion share of the contracts or the bulk of what we set out to do in the Williston Basin, that’s done. And so don’t expect a whole lot more to occur. There’s still some work in progress, but don’t expect a whole lot more impact from that. The Mid-Continent is just going to continue to be work-in-progress. We have a much larger producer base of, that is, we have a lot more procedures that have much smaller volumes and consequently it takes — it’s a lot more involved in the Mid-Continent than in the Williston, just because of the sheer number of contracts that we’re talking about. So that’s caught from in a broad sense. Kevin, you’ve got anything else to add to that. Kevin Burdick No, I think that’s right on. Brian Gamble That works. And then as far as the connections in the Williston, you mentioned 115 wells, I believe, you said in Q1. You mentioned the flared gas that’s still on the system as well as the potential duct completions that would go in. But as far as well count adds that you’re anticipating for the rest of the year, are there wells that are completed that are sitting there that now the system can handle that we’re working on, or are we waiting for ducts for the majority of the opportunity to, I guess, incrementally add new wells to the system more for this year? Kevin Burdick Brian, this is Kevin. Yes, that will come from — the way we think about connecting the wells, it will come from a couple of — from both of those places. I mean as rigs continue to work the basin as those wells that are being drilled or completed, we’ll connect those up. But there is also the backlog of ducts that are on our acreage that as we communicate with producers and realign the schedules, we’ll connect those as well. So our future — our 2016 connections will come from the combination of both of those. And we still expect we’ll be in that 250 to 350 range for total connects for the year. Brian Gamble That delta between what we’ve done so far and that midpoint of the range, so call it 185, how should I think about that as far as the buckets are concerned. Just I mean broadly speaking, can you give me a percentage breakdown between the two? Kevin Burdick Broadly speaking, it might be half and half. Brian Gamble Great, that’s helpful. I think that’s it for me. Appreciate it you guys. Terry Spencer Thanks Brian. Operator And we will take our next question from Danilo Juvane with BMO Capital Markets. Danilo Juvane Good morning. Terry Spencer Good morning. Danilo Juvane You guys obviously seeing sort of an increase in your fee-based gathering margins here for the rest of the year. So as you think about guidance for 2016, is the sort of pending issue with the rates in West Texas LPG the only downside risk that you see to this year’s guidance? Terry Spencer You know, as far as West Texas, as I said in my comments, I’m not going to go there for obvious reasons. But you know, as we think about our fee-based activities, we have certainly taken out a lot of risks, okay? And so — and as far as renegotiation of contracts, we’ve been successful at increasing our rates across the board, okay, not just in the NGL space but in the gathering and processing space in particular. So, you know, as we move forward we really don’t see any — we don’t see from a rate standpoint backing up anywhere. Okay? Danilo Juvane Got you. Over the last couple of months, we’ve seen sort of more bullish NGL sentiment in general. How do you guys think about continuing to reach special contracts given that some of the part exposure that you’ve had before sort of is rebounding right now. Is there a percentage that you’re targeting of fee-based versus commodity? Terry Spencer I’ll make a general comment. You know, we don’t have a specific target for any of our businesses in terms of, this is how much fee-based margin we want to have. Obviously, we want to have as much fee-based margin as we can possibly get. And obviously we’re continuing to push on that re-contract and negotiate everywhere we can, certainly bringing new assets and new businesses to the table or new opportunities to the table that are fee-based. When we think about the reduction of risk, we think about it more from a coverage standpoint, okay? What do we need in this business, what do we need in this business segment in order to maintain an appropriate coverage level for each one, and certainly an appropriate coverage level for the entire entity. So that’s kind of how we think about it. Sheridan, do you have anything you want to say about our contracts in NGLs? Sheridan Swords Well, I think the thing that comes out is even in NGL’s we’re continuing to change our optimization exposure into fee-based, and we will continue to do that even in widening the spreads. When we say widening spreads, we think that’s even a better opportunity to start locking in margins. So as you said, we always want to go to more fee-based and take our commodity exposure out. Danilo Juvane Got you. Last question for me. You mentioned coverage being a big reason as how you’re managing some of these contract restructures. Is there a target coverage ratio that you’re looking at long term? Terry Spencer Well, certainly, as we’ve said in the past, you know, at the partnership, 1.1 to 1.15 longer term is a coverage that you know, it could make some sense for us, potentially higher. But certainly as we’ve driven the risk out these businesses, we don’t have to maintain this quite as big a coverage. But that’s kind of how we think about it. Danilo Juvane If you take that statement and sort of think about what you’re thinking about sort of your debt metrics, where do you see yourself being more comfortable starting to bump distributions? Terry Spencer Well, certainly we’ve told you 4.2 times debt to EBITDA ratio is what we’re targeting, but we really would like to be sub-4. I mean, ideally that’s where we’d like to be. And that’s the longer term plan. Danilo Juvane Okay. Thank you. That’s it for me. Thanks. Terry Spencer You bet. Thank you. Operator And we will take our next question from Christine Cho with Barclays. Christine Cho Hi, everyone, congrats on the quarter. Terry Spencer Thank you. Christine Cho When I look at how much ethane is being rejected on your system, the capacity of your NGL pipes and the utilization on those pipes, I have that your pipes are going to be full once all of the ethane behind your system is extracted. Can you talk about the expansion opportunities on the Sterling and Arbuckle line compression or looping? Would you charge a similar rate as you are now? And is it safe to assume that the economics of an expansion, if through compression, is going to be better than the 5 to 7 times multiple you usually give out? Terry Spencer Christine, what I would say is that we feel that we have enough capacity on our existing pipelines to handle the ethane that’s being rejected, but it will push the utilization of those pipelines to pretty high rates. If we get to the opportunity to expand our pipelines, the cheapest expansion is sitting on Sterling 3 and we had said we can take that up 60,000 to 70,000 barrels a day with relatively inexpensive pump stations on there, which would be at a very high multiple to add that kind of space for a very little capital. The other pipelines Arbuckle and the other two Sterling pipelines are fairly expanded with cheap expansion. It would be inter-looping, so it still would be much cheaper than laying a new line but it would be more expensive than what Sterling 3 has. But we think right now we can handle all the ethane that could potentially come out of our system. Christine Cho Okay, and then just piggyback on that, I mean, I have that ethane demand that’s going to be 800,000 barrels per day if we include the ethane export projects along with the cracker additions. Obviously, we’ve been thinking that in the near- and medium-term ethane price is going to go up to equate methane equivalent plus CNF. But do you think over the longer term, we could be short ethane, this would imply that ethane price could approach naptha prices? Terry Spencer Christine, I think what would happen is that first thing if ethane prices increase, you’re going to run into the other LPGs that can be cracked, especially in the existing cracker. So you’re going to hit into propane, butane, and natural gasoline before you get to naptha. So I don’t think we’ll see in the long term ethane prices approach naptha prices. I think propane and other ones will put a lid on the price of ethane. Christine Cho Okay. And then last one for me, very helpful, thank you. What’s the average contract life on the NGL pipelines? And you’ve kind of mentioned this before, but I’m assuming that you have less optimization capacity than you did kind of at the peak, but as these contracts with customers come due, how should we think about how you guys decide whether or not to extend the contracts versus not renew it and maybe retain some capacity for optimization opportunities? Are you kind of happy with the levels that you have now or you want to decrease it, increase it? Terry Spencer Christine, what I would say is that these contracts that you’re referring are contracts that we have with the processing plants. So it’s a bundled service for not just transporting product to Belvieu but also for fractionating it as well. So what we would want to do is always continue to extend those contracts. And if we can get the right prices to take them into Belvieu, we would rather put them on a fee-based business than be open up to the spread between Conway and Belvieu. So if we could, we would contract the whole pipe if we could get it at good rates. Christine Cho Would you say that the bundled rate probably has room to come up then? Terry Spencer Potentially yes. Christine Cho Okay, and one more… Terry Spencer We would… Christine Cho Go on, sorry. Terry Spencer Any time we look at the rates when we go out and look at a plant, we look at what the competition is, we look at how are our services that we provide and all that and try to price our services accordingly. So as prices continue improving going into Belvieu, I think there is some opportunity to increase our rates into Belvieu. Christine Cho And what’s the average contract life? Terry Spencer Most of our contracts, substantial amount of our contracts do not expire until we get into the 2020’s. We do have a little bit that expires between now and then, but most of it is in the 2020’s. Christine Cho Okay, great. Thank you. Terry Spencer Thank you. Operator [Operator Instructions] We will take our next question from Craig Shere with Tuohy Brothers. Please proceed. Craig Shere Good morning. Congratulations on another good quarter. Terry Spencer Thanks, Craig. Craig Shere So I think you said 115 well hook-ups in the quarter, Terry. But guidance I think is still only 250 to 350 for the full year. And if I’m not mistaken one of your major customers has just added a frac crew on a farm to work done, that’s duct inventory. Given all this, is your reiterated guidance for well hook-ups perhaps conservative? Kevin Burdick Craig, this is Kevin. I don’t know if I’d use the word conservative but yes, we’ve had a strong showing out of it for the first quarter. But then again, rigs have dropped off quite a bit as well during that same timeframe. So we continue to talk with our customers daily and understand as commodity price moves around, kind of their sentiment towards either adding frac crews or adding rigs changes a little bit. But right now, we feel good about that 250 to 350. If we have some more movement with producers that are going to accelerate completions in the Williston and then yes, that number could go up. Craig Shere And on the remaining 70 million to 80 million a day of flaring on your Bakken footprint, any thoughts on maybe a run rate as we exit the year? Obviously, new well hook-ups will contribute to potentially some incremental flaring. So this isn’t going to go down to zero. Any thoughts on where we could exit the year? And also over time, are we perhaps seeing the actual amount of flaring that’s reported perhaps be on the conservative side so that you could get most likely higher uplift? Terry Spencer So, a couple of things there. One is as we look at our flaring, keep in mind, there is probably 30 to 40 million behind Bear Creek, so when we bring Bear Creek online, we expect that a chunk, approximately half of that will get put out with that — as that plant comes up. As for the other, yes, there will always be some level of flaring that occurs, but we do have quite a bit and we’ve got some head room from both our field infrastructure and processing plants. So as new wells come online, I don’t know that that would contribute much to the flaring. So I do think we expect that number will go down significantly as we move into the back half of the year once the Bear Creek is up. And yes, when you look at the numbers over the last few months, it does appear that some of the reporting has been conservative for overall — for total kind of state-wide flaring. Craig Shere Great. And on the ethane question, in terms of specs, I think I forgot when, it’s some quarters ago, you had a 20,000 barrels a day of recovery to mid downstream Y-grade requirements. At the time I think you mentioned the possibility of that going away with the downstream solution, obviously still plotting margin for you. Could you see that margin opportunity expanding over time as the Y-grade growth out of the region continues? Sheridan Swords Craig, this is Sheridan. The ethane coming out of the Bakken is for purely products specifications that we have downstream. And right now with the ethane we have coming out there now, we are able to manage that situation. As we continue to look forward, we are trying to find the most economical way to extract, to solve this solution in another way, but we’re still looking at that. It’s capital intensive. So we’re still trying to work on with the right solution for that is. In terms of getting more ethane out of the Bakken for uplift there, we see the opportunity is there as increasing ethane prices with the new petrochemical facilities come online is where we think the most opportunity is. Craig Shere Okay, great. And just a little more color around the NGL segment headwinds, including the $10 million decrease in exchange services and $5.6 million in marketing would be helpful. Maybe just more of a discussion about specific spot and about some volumes and about summarization and trends there. Terry Spencer Craig, the marketing was down mainly because we had a warm winter and also we had less volume from our marketing department going into refineries. We have already seen that tick back up as we move into the second quarter. The extreme services were down, it’s because we had spot volume in the fourth quarter, we had a little bit more ethane rejection in the first quarter, and we had a little seasonal or weather effects also in the first quarter. Volumes that have already rebounded as we move into the second quarter and today our volumes on our gathering systems are at or a little bit above 800,000. Craig Shere Great. And last question. Derek, on the favourable comments you had about favourable bidding for your maintenance CapEx and the falling OpEx cost, how much opportunity is there for further improvement in ’16 and could you see these benefits continuing in the ’17 or is it very kind of variable quarter to quarter? Derek Reiners Hey Craig, I’m going to turn it over to Wes Christensen to answer that question. Wes Christensen Yes, Craig. We continue to have contact with our contractors and find as they are looking for work to keep their crews busy, that there’s opportunity there to improve it. We have already captured quite a bit from them through ’15 and ’16 and expect it to continue in the current environment. Craig Shere Great. Thank you very much and congratulations again. Terry Spencer Thanks Craig. Operator And we will take our next question from Becca Followill with US Capital Advisors. Becca Followill Good morning, guys. Terry Spencer Hi Becca. Becca Followill Hi. On processing, guidance for the year is 1.9 to 2 for the year, but the quarter you were more like 1.95, and you talked about volumes being back-end loaded. Is that back-end loaded for NGLs? And you also have new processing coming on in a year or so, help me out with guidance relative to Q1. Terry Spencer So, yes, it is. We do have some back-end loading, in particular in gathering and processing because the Bear Creek plant coming on in the third quarter is going to fetch you there. And you’re going to see some back-end loading a bit on the NGL side as well. Sheridan, you got anything to add. Sheridan Swords Yes, I mean we do have plants coming online, the Bear Creek plant will add more to the NGL gathering. We have another plant in the Mid-Continent that’s coming on. We just had a plant yesterday, start delivering — a new plant start delivering into the West Texas pipeline asset. So here we are still little bit. We should see growth from here forth. Becca Followill But you’re already at the mid point of the guidance? That’s where I’m coming from. Terry Spencer Becca, could you kind of clarify when you say the — we’re at the mid point of the guidance, which? Becca Followill I’m looking at gas process, it was 1.948, I think your guidance was 1.9 to 2. Terry Spencer Okay. So that’s — again, we had a strong Williston volumes and that’s in — you’re referring to the MMBtus and so that’s driving that. The gas being much richer coming out of the Williston, so that’s what you’re seeing there. Our volume profile just at a high level in the Williston is going to be more flattish for the year. So that’s the reason you’re seeing that. Becca Followill But you’re also adding Bear Creek in Q3? Terry Spencer Right and that will open another — again, that’s 40 million a day in cubic feet. So when you’re talking about the total, it’s not going to move — it’ll move it some. But again, volumes between now and then are going to be flattish and then you’ll see a little uptick. And if thing don’t — depending on completions at the end of the year, you could possibly see a minor decline post Bear Creek. Becca Followill Okay. Thank you. Operator And we will go next to Shneur Gershuni with UBS. Shneur Gershuni Hi, good morning, guys. Most of my questions have been asked and answered several times, but I just wanted to just clarify a couple of things and I think you’ve sort of answered it with Becca’s question before. But the results this quarter with respect to volumes, was that what you expected the first quarter to be, is it better or worse? Does it sort of change because you didn’t change your guidance, does that mean that you still think that you’re within your guidance or are you more towards the upper end now versus the lower end? I was just wondering if you can sort of give us some color as to 1Q performance relative to your official plan. Terry Spencer Yes, we came in pretty much as expected. I mean, as you would expect, you got some areas that performed a little better than expected and others that weren’t quite as good. But overall, this first quarter performance is not a surprise to us and it’s certainly consistent with our guidance we provided for the year. Just a bit more specific, in the Williston Basin, we continue to perform extremely well. In the Mid-Continent, we’ve not performed quite as well but when you look at it on the overall basis, particularly for a G&P segment, we are right on plan, right on our guidance. Shneur Gershuni Okay, perfect. A couple more follow-ups. You stated in the past, I think I saw it written as well too, that OKE stands in support of OKS. Do you expect to have to execute on that this year, or it’s just more of a statement at this point in case if needed? Maybe you can sort of discuss that in context with any discussions you’ve had with rating agencies recently and so forth. Derek Reiners Shneur, this is Derek. The OKE cash balances there, really just is a prudency matter. We like having that flexibility. But as we’ve stated before, we don’t have any plans really to issue equity at this point. So we’ll continue to watch it, but no plans at this point. And in terms of rating agencies, I mentioned in my remarks certainly at the partnership we’re committed to the investment-grade credit rating and that allows us some additional comfort should things not turn out exactly the way we would expect. Shneur Gershuni Okay. And then one last question just technical in nature, Roadrunner, what’s the expected ramp this year? Terry Spencer I’ll turn that question over to Phil. Phillip May Could you — did you say ramp? Shneur Gershuni Yes. Phillip May Okay. Yes, it’s first phase is in service as of March, so it is flowing 170 million a day. Second phase is due in service in the second quarter of ’17 and that will ramp up to 570. And then third quarter will follow in 2019 and that’s another 70 million a day. So total 640 million a day. Shneur Gershuni Okay, perfect. All right. Thank you very much guys. Terry Spencer You bet. Thank you. Operator And we will go next to Jeremy Tonet with JPMorgan. Jeremy Tonet Good morning. Terry Spencer Good morning Jeremy. Jeremy Tonet I was just wondering for the NGL gathering, if you could help us think through kind of what leads to the cadence of the ramp over the year. Is that kind of new plants ramping up or is it more on the connection side, or is it more ethane recovery or if you could just help us with that a little bit, that will be great. Terry Spencer Sheridan. Sheridan Swords I think to know that coming out of the first quarter, we always see a little bit of a downturn on our existing plant because of the seasonality in the first quarter. So we ramp up through the year, some of it will be that. But most of it will be from the ramping up of the plants that we connected last year and the new plants that we’re connecting this year. We really don’t expect any incremental — any substantial incremental increase in ethane recovery in 2016 in our guidance numbers. So mainly, it’s going to be from new plant connections. Jeremy Tonet Okay. That’s great. That’s it for me. Thank you. Terry Spencer Thanks, Jeremy. Operator [Operator Instructions] We will go next to John Edwards with Credit Suisse. John Edwards Yes, good morning everybody. Just I wanted to kind of come back to the incremental ethane opportunity little bit, is the basic cadence of realizing the $200 million, is it more or less in line with what you’ve laid out on your slide eight of the deck you provided with the release where you’re showing the expected incremental petrochemical ethane demand? Or is it going to be some other trajectory? Is it more kind of rateably each year the next few years? Help me understand that a little bit better. Sheridan Swords John this is Sheridan. I think the best way to explain it is currently today we supply about a third of the ethane demand in the United States. And as you see that demand increase, as you see on page eight, I think that ratio will stay the same. So of that increased demand, we’ll be able to see about a third of it on our system. John Edwards Okay. So is it proportionate then to the timing that you’ve laid out there or is it some other pace? Sheridan Swords No, I think it’s about proportionate to that timing. John Edwards Okay. That’s really helpful. And then as far as you had made some reference to the potential for improvement to optimization margins, I think your guidance is $0.02. I mean what are the prospects you think for that number actually improving this year and perhaps next year? Terry Spencer Well, I think the spread between Conway and Belvieu will be — move around quite a bit this year, but I don’t think we’ll see any material substantial increase in that spread until you see the ethane come online which will fill up the pipes between Conway and Belvieu and give you an opportunity for wider spread. So probably more better opportunity in ’17. John Edwards Okay, great. My other questions have been answered. Thank you. Operator Okay. Ladies and gentlemen, that concludes today’s question and answer session and also concludes today’s conference. We’d like to thank everyone for their participation. 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. THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY’S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY’S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY’S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS. If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com . Thank you!

Otter Tail’s (OTTR) CEO Chuck MacFarlane on Q1 2016 Results – Earnings Call Transcript

Otter Tail Corporation (NASDAQ: OTTR ) Q1 2016 Earnings Conference Call May 3, 2016 11:00 AM ET Executives Loren Hanson – Investor Relations Chuck MacFarlane – President and CEO Kevin Moug – Senior Vice President and Chief Financial Officer Analysts Paul Ridzon – KeyBanc Operator Good morning. Welcome to Otter Tail Corporation’s First Quarter 2016 Earnings Conference Call. This call is being recorded and there will be a question-and-answer session after the prepared remarks. Loren Hanson Good morning, everyone and welcome to our call. My name is Loren Hanson and I manage the Investor Relations area at Otter Tail. Last night, we announced our first quarter 2016 results. Our complete earnings release and slides accompanying this earnings call are available on our website at www.ottertail.com. A replay of the call will be available on our website later today. With me on the call today is Chuck MacFarlane, Otter Tail Corporation’s President and CEO and Kevin Moug, Otter Tail Corporation’s Senior Vice President and Chief Financial Officer, who by the way is also celebrating his birthday today. Before we begin, I’d like to remind you that during the course of this call, we will be making forward-looking statements. These forward-looking statements are covered under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and include statements regarding Otter Tail Corporation’s future financial and operating results, or other statements that are not historical facts. Please be advised that actual results could differ materially from those stated or implied by our forward-looking statements due to certain risks and uncertainties, including those described in our most recent Form 10-K and subsequent quarterly reports on Form 10-Q. Otter Tail Corp revise our forward-looking statements as a result of new information, future developments, events, or otherwise. For opening remarks, I would now like to turn the call over to Otter Tail Corporation’s President and CEO, Mr. Chuck MacFarlane. Chuck? Chuck MacFarlane Thanks, Loren. Good morning and thanks for joining our call. For the quarter net income was $14.5 million or $0.38 per share. This is in line with our expectations with the exception of warmer than normal weather. The warm weather impacted Otter Tail Powers first-quarter earnings per share by $0.04 compared to the normal. But this was partially mitigated by improved margins in our manufacturing platform. Our business model continues to combine a strong regulated electric utility for the portfolio manufacturing businesses intended to enhance long-term returns. A key component of these two platform strategies are planned to grow the utility business. My remarks today will focus on our strategy to grow rate base and a recently filed rate case. I will also update you on efforts within our manufacturing platform to improve our competitive position. Slide 5, shows our utility rate base expansion, which will drive earnings per share growth for the next five years. We plan to invest 858 million in Otter Tail Power during this time frame. This will result a compound average annual growth rate in rate base of more than 8% from 2016 to 2020 – natural gas generation and renewable generation projects will account for the majority of this rate base expansion. With most eligible for construction cost recovery during construction, this is noted on the bottom of the Slide 6, which shows our regulatory framework. As we’ve discussed on prior calls, we’re investing in two 345-kv transmission line within Otter Tail Power services area that the mid-continent independent system operator has deemed multi-value projects. The cost of these projects will be allocated across all customers in my source 12 state upper mid-west footprint. One line will run from Brookings, South Dakota, 70 miles north to a new substation near Big Stone Plant. It’s the next leg of a recently completed CapX2020 line from the twin cities to Brookings. Slide 7, shows how they are connected. We are 50% owner in the transmission line portion of this project with the Xcel energy, our investment is $97 million, and we’ve all required easements and permits. Xcel started construction late last year and has the line on schedule to be service in 2017. The other line will run from the new substation near the plant, 170 miles North-West to Ellendale, North Dakota and is schedule to be in service in 2019. Otter Tail Power manages the project and is a 50% owner with MDU. Our investment is $153 million, construction will begin this summer, landowners have signed more than 325 of the 350 needed easements, we are finalizing contract with construction vendors and the steel tower vendor has begun producing transmission structures. We also expect to invest in new generation. Utility management has identified options within our service territory, for natural gas plant to replace capacity from the Hoot Lake Coal Plant which we plan to retire in 2021. We have identified three sites each with good access to transmission and natural gas supply. We expect to announce our site selection later this year. Otter Tail Power management is also determining the most beneficial timing and location for additional renewable energy. The company already has 250 MW of cost-effective wind generation that’s 19% of the company’s retail energy sales. Fuel utilities in the nation have a higher percentage of wind energy. We anticipated adding up to 200 MW of additional wind energy before 2021, which would put the company wind resources near 30%. We also planned to add enough solar to power 1.5% of our Minnesota electric retail sales by 2020. This equates to approximately 30 MW of new solar. Otter Tail Power will file an updated resource plan in Minnesota on June 1. Rate base investment is important to the health of our company, also important is the successful outcome to the request Otter Tail Power filed in February with the Minnesota Public Utilities Commission for permission to increase rates by approximately $19.3 million on – 9.8%. This reflects the 10.4% return on equity and a 52.5% equity ratio. The company’s current rates were established in 2011 based on 2009 costs. The portfolio has increased reflecting investments in new environmental technologies, a strength in delivery system, expiration of integrated transmission agreements and overall rising cost. On March 24, the PUC granted a 9.56% rate increase on an interim basis while it considers the overall request. The interim rates went into effect on April 16, and we expect final decision on the rate case in 2017. We intend to keep delivering affordable energy and expect Otter Tail Powers rates to remain among the lowest in the nation and region, even with the increase. I’d like to mention three other projects of Otter Tail Power. One is a10 week schedule maintenance over at Coyote Station. The largest projects are replacing the lower boiler wall, installing a separated over fire air system to reduce NOX emissions and tying into the new mine coal conveyor system. Crews have completed six of the ten weeks, so far everything is on schedule, we’ve encountered no surprises and boiler make availability has been good. This is a $35 million project and Otter Tail shares 35% or $12 million. Second project I want to mention is implementation of a new customer information system. The new system will be able to integrate new rate design, geographic information in average management system. Otter Tail Power has dedicated a strong team to this $15 million project. Attention to detail and tracing requirements, validating business processes, testing deliverables, and managing change will ensure a successful final implementation. The third project I want to mention is relicensing the five small hydroelectric plants we own on the Otter Tail River in near Fergus falls. Hydroelectric power is being part of our energy mix since 1907. It was the origin of Otter Tail Power’s name, these five small plants are combined under one folkway [ph] since it must be relicensed by 2021. We begin the relicensing effort which takes 4 to 5 years. Before turning to our manufacturing platform, I should also mention – with this clean power plant to limit CO2 emissions from existing power plants. When we held our earnings call in February, the U.S. Supreme Court had not yet issued its stay on the rule pending a lower court’s review. We expect the outcome from this review later this year followed by a review at the Supreme Court. You may recall the changes from the draft rule to the final rule were positive for Big Stone Plant in South Dakota, but created new concerns for Coyote Station in North Dakota. We don’t have an immediate compliance concern in Minnesota because we intend to retire Hoot Lake Plant in 2021. We’re continuing to meet with stakeholders in all three states as each state determines whether we’ll continue implementation planning during the stay. Now turning to our manufacturing platform, as reported out in our earnings release net income was up quarter-over-quarter, that said, our manufacturing company is continuing to be impacted by economic challenges in agriculture, energy and recreation vehicle end markets, leaving the lower sales quarter-over-quarter excluding skip sales from BTD Georgia which was acquired in September last year. Our Plastics Companies continued to be impacted by tightening margins on PVC pipe. The presence of these companies continued to guide improvement in each of their businesses as they work through the current economic challenges in the markets they serve. We look for much of our future growth in the manufacturing segment to come from BTD, a metal fabricator. In the past year we expand of the size and capabilities of our Minnesota facilities and made a strategic acquisition of $30 million annual revenue in metal fabricator near Atlanta. BTD has nearly $33 million in spending commitments to expand its facilities in Detroit Lakes and Lakeville, Minnesota. The goal is to increase capabilities, reduce logistics cost, enhance margins. The Detroit Lakes portion of the plan is complete. A new state-of-the-art paint line is operational in the expanded Lakeville facility and previously outsourced work is now painted in-house. BDT will finish consolidating the fabrication facility in Lakeville in May. We are beginning to realize productivity improvements associated with these products. The integration of BTD, Georgia has gone smoothly. We began implementing IT production systems or began integrating IT production systems this summer. At T.O. Plastics, net income was slightly ahead of first quarter in 2015, again on slightly lower revenues. The company continues to focus on horticulture containers, which is its primary market. At the PVC pipe companies Northern Pipe Products and Vinyltech, volume was stronger in the quarter, which offset a reduction in margins. Our resin suppliers announced additional resin pricing increases for the second quarter. Both of these customer companies are efficient, low-cost operators. They are in a good position and are working to ensure the pricing policies appropriate. Now, I’ll turn it over to Kevin for the financial perspective. Kevin Moug Good morning. Please refer to Slide 10, as I discuss our first quarter results. The utility net earnings decreased $640,000 quarter-over-quarter. The decline is due to; one, milder weather in first quarter of 2016 compared to the first quarter last year. Heating degree days were down by 16%. As a result weather negatively impacted earnings per share by approximately $0.04 quarter-over-quarter and compared to normal; two, higher operating and maintaining expenses; and three, higher depreciation expense due to increased rate based investments. These items were offset in part by increased environmental and transmission cost recovery writers and increased sales by client customers. Our manufacturing segment earnings increased $669,000 quarter-over-quarter primarily due to the BTDs performance. Revenues increased quarter-over-quarter for BTD by $3.9 million. The components of this increase are as follows, our Minnesota locations revenues were down $5.6 million due to softening demand from the agriculture, oil and gas and recreational vehicle end markets. Our Illinois location had an increase in revenues of $1.7 million driven by strong demand for wind tower components. And our Georgia facility accounted for $7.8 million in new revenues. We acquired the Georgia facility in September 2015. The higher net income at BTD is due to improved productivity relating to lower cost and expedited trade, manufacturing consumables, cost and quality and lower labor and benefit cost. Our plastic segment revenues increased between the quarters as a result of 18.5% increase in the amount of pounds sold, despite 13.3% decrease in the price per pound sold. Increased sales came primarily from the South-West and Central regions in the United States where construction activities remained strong. And our earnings were basically flat between the quarters due to margin compression that occurred with large drop in PVC pipe selling prices. And our corporate expenses decreased $648,000 quarter-over-quarter primarily due to a reduction in employee headcount and lower benefit cost. We are reaffirming our consolidated earnings per share guidance of $1.50 to $1.65 as shown on Slide 12. Our 2016 guidance is dependent on the business and economic challenges our platforms are facing. As part of this we are updating our segment guidance to reflect current conditions being experienced by our operating companies. We are maintaining our guidance range for the electric segment. We expect 2016 electric segment net income to be slightly higher than 2015 net income based on the reasons listed in the press release. We are increasing the expected earnings per share range for the manufacturing segment by $0.01 on both ends of the range. We are able to do this through aggressive cost management and improved productivity to address challenges for softening end markets at BTD manufacturing. We are reducing the expected range of earnings per share for our plastic segment to $0.28 from $0.26 to $0.30. We are expecting operating margins to tighten for the rest of 2016 as announced resin price increases are not expected to be fully passed on to sales prices due to current competitive market conditions. And we are improving the range of our corporate cost by obtaining a share on both ends of the range due to continued cost reduction efforts. 2016 continues to be dependent on the following items; the constructive outcome of our Minnesota rate case that was filed in February of 2016, BTDs successful growth and sales from its new paint line along with continued focus on operational improvements needed to improve our return on sales as well as full integration of BTD Georgia to better serve our customers in the South-East. These initiatives are especially important in light of the continued market softness and the agriculture, oil, gas and recreational vehicle end markets that BTD serves and continued strong earnings, cash flows and returns on invested capital from our plastic segment. We are pleased with our first quarter results, we also like our position, a strong balance sheet reflective of our current equity to total capitalization ratio of 51%. Investment grade senior unsecured credit ratings, solid regulatory environments and rate based growth in our electric segment. And we are well-positioned for a rebound in end markets served by BTD with the strategic investments we have made over the last two years. This ongoing effort positions us to meet our long-term goal of 4% to 7% compounded growth rate in earnings per share, using 2013’s $1.50 share as adjusted for the base year. We are now ready to take your questions and after the Q&A, Chuck will return with a few closing remarks. Question-and-Answer Session Operator Thank you. [Operator Instructions] Our first question or comment comes from the line of Paul Ridzon with KeyBanc. Your line is now open. Paul Ridzon Good morning. How are you? Chuck MacFarlane Good Paul and you? Paul Ridzon Well, thank you. Just one quick question, you mentioned a ten-week outage, was that cost to be capitalized or will soon that hit O&M? Chuck MacFarlane Paul, that the majority of those are capitalized. I believe the entire project has approximately $2 million in operating costs and the remainder is capital. Paul Ridzon Thank you very much. Operator [Operator Instructions] And at this time I’m showing no further questions or comments. So with that I would like to turn the conference back over to President and CEO, Mr. Chuck MacFarlane for closing remarks. Chuck MacFarlane Thank you. To summarize net earnings increased quarter-over-quarter from continued operations. Our manufacturing segment has improving performance including increased margins associated with improved operations. Otter Tail Power filed the first rate increase request in Minnesota in five years and received approval for interim rates which began in April. And we reaffirmed our 2016 earnings guidance of $1.50 to $1.65 per share. Thank you for joining our call and for your interest in Otter Tail Corporation. We look forward to speaking with you next quarter. Operator Ladies and gentlemen, thank you for participating in today’s conference. This concludes the program, you may now disconnect. Everyone, 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. (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. THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY’S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY’S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY’S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS. If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com . Thank you!

Duke Energy (DUK) Lynn J. Good on Q1 2016 Results – Earnings Call Transcript

Duke Energy Corp. (NYSE: DUK ) Q1 2016 Earnings Call May 03, 2016 10:00 am ET Executives Bill Currens – Vice President-Investor Relations Lynn J. Good – Chairman, President & Chief Executive Officer Steven K. Young – Chief Financial Officer & Executive Vice President Analysts Greg Gordon – Evercore Group LLC Jonathan Philip Arnold – Deutsche Bank Securities, Inc. Steve Fleishman – Wolfe Research LLC Julien Dumoulin-Smith – UBS Securities LLC Christopher J. Turnure – JPMorgan Securities LLC Michael Lapides – Goldman Sachs & Co. James von Riesemann – Mizuho Securities USA, Inc. Praful Mehta – Citigroup Global Markets, Inc. (Broker) Ali Agha – SunTrust Robinson Humphrey, Inc. Paul Patterson – Glenrock Associates LLC Andrew Levi – Avon Capital/Millennium Partners Operator Good day, and welcome to the Duke Energy First Quarter Earnings Call. Today’s conference is being recorded. And at this time, I would like to turn the conference over to Bill Currens. Please go ahead, sir. Bill Currens – Vice President-Investor Relations Thank you, Yolanda. Good morning everyone, and welcome to Duke Energy’s first quarter 2016 earnings review and business update. Leading our call today is Lynn Good, Chairman, President and CEO along with Steve Young, Executive Vice President and Chief Financial Officer. Today’s discussion will include forward-looking information and the use of non-GAAP financial measures. Slide two presents the Safe Harbor statement, which accompanies our presentation materials. A reconciliation of non-GAAP financial measures can be found on duke-energy.com and in today’s materials. Please note that the appendix to today’s presentation includes supplemental information and additional disclosures. As summarized on slide three, Lynn will cover our first quarter financial and operational highlights and provide an update of our recent strategic and growth initiatives. Then Steve will provide an overview of our first quarter financial results, an, update on economic activities within our service territories and close with our key investor considerations. With that, I’ll turn the call over to Lynn. Lynn J. Good – Chairman, President & Chief Executive Officer Good morning, and thank you for joining us. I’m very pleased with our solid first quarter financial results, our continued focus on operational performance and the progress we’ve made on our strategic portfolio transition and important growth initiatives. I’ll provide an update on our progress on these initiatives in just a moment. First, let me begin with a few financial and operational highlights of the first quarter as summarized on slide four. This morning we announced first quarter 2016 adjusted earnings per share of $1.13. Results for our regulated utilities were modestly below our internal plan as a result of significant storm costs in the Carolinas, milder weather and weaker than expected customer volumes. We continue to see strong customer growth and our 12-month rolling average volumes continue to track consistently with our expectations. Operating results for our international business were in line with our expectations as hydrology began to return to more normal levels in Brazil. We also recognized tax adjustments at international during the quarter, which Steve will review in a movement. As we’ve looked at the balance of the year, we are affirming our full year 2016 guidance range of $4.50 to $4.70 per share. Daily operational excellence continues to underpin our commitment to our customers, communities and investors. That commitment starts with our focus on safety. For 2015, Duke Energy’s employees safety record received the top rank among large utilities as recognize by EEI. Our generation fleet also performed well during the quarter. Our nuclear fleet achieved a 95% capacity factor, building on its record breaking performance in 2015. In Indiana, our Edwardsport IGCC facility continues to improve its operational performance. In February the gasifiers achieved 100% availability, our best month ever. Our growing natural gas fleet is also benefiting customers and the environment, taking advantage of low natural gas prices. In March of this year, our gas-fired plant set a record for monthly natural gas consumption, surpassing the record set last June. This is indicative of the strategic coal-to-gas shift in our generation portfolio, which has enabled us to reduce carbon emissions by 28% since 2005. Our organization responded well to weather challenges in the first quarter. In January, Winter Storm Jonas struck the Carolinas causing approximately 600,000 customer outages. There were also ice and wind storms in February, impacting more than 500,000 customers in the Carolinas. Our teams performed admirably during these events, continuing to provide customers with the level of service they’ve come to expect. Next let me update you on our coal ash basin closure activities in the Carolinas. We continue to make outstanding progress with closure activities underway at six sites. For each of our basins, the North Carolina Department of Environmental Quality is required by statue to recommend risk classifications. Preliminary classifications were released at the end of January followed by a public comment period. We expect DEQ to finalize their classifications shortly. The risk classifications will impact basin closure methods, timing and costs. Based on our comprehensive engineering analysis of our basins, we believe the majority of the remaining unclassified basins meet the requirements for a low classification, allowing 15 years and closure methods which include storing the ash in place. W are committed to safe basin closure in a way that protects our communities and the environment, while minimizing cost to customers. We will keep you informed as the regulatory review process continues to advance. Turning to slide five. I’ll highlight several recent milestones in our important growth initiatives. Our five-year capital plan through 2020 includes a deployment of between $25 billion and $30 billion in growth capital in new natural gas-fired generation, grid investment, commercial and regulated renewables and gas pipeline infrastructure. These investments are directed at improving customer service, modernizing our generation fleet and the electric grid, as well as investing in natural gas infrastructure that is complementary to our system. These investments support our transition toward businesses that provide stable, long-term growth in earnings and the dividend. During the quarter, we received approval from the North Carolina Utilities Commission for our $1 billion Western Carolinas modernization project in Ashville. This allows us to move forward with retiring the Asheville Coal Plant by 2020 and replacing it with two highly efficient natural gas combined cycle units. In South Carolina, construction of our $700 million W.S. Lee Natural Gas Combined Cycle Plant is well underway. The project is on budget and on target for a November 2017 in-service date. We also broke ground on our $1.5 billion natural gas-fired Citrus County Combined Cycle Plant in Florida, staying on track for a 2018 in-service date. We’re building on our success and growing our commercial and regulated renewable assets. In our commercial portfolio, our two 200-megawatt wind projects, Los Vientos IV and Frontier are on target to come online later this year. Since the beginning of the year, we’ve announced the acquisition of nine new solar projects including eight in North Carolina. In our regulated utilities, we’ve announced 100 megawatts of planned solar installations for 2016 in the Carolinas, Florida, and Indiana. That’s already about 75% of what we achieved in 2015, which was a very strong year for solar investment. In fact, Duke Energy progress was ranked third among all utilities in 2015 for bringing new solar capacity online. Additionally, as pictured on this slide, we recently completed an iconic solar farm to serve the power needs of Walt Disney World Resort in Orlando. In the first quarter, we also made good progress in our grid modernization efforts. In March, we announced a settlement agreement with nearly all interveners including key consumer groups on our seven-year Indiana T&D infrastructure investment program. The $1.4 billion plan will provide much needed technology and infrastructure upgrades that will benefit customers, providing improved reliability and safety, fewer and shorter power outages, better information, and overall energy savings. In addition, the settlement allows us to continue evaluating the installation of smart meters in our Indiana service territory, which would be eligible for recovery in a future rate case. The grid modernization hearings with the Indiana Utility Regulatory Commission began yesterday, and we expect a decision around mid-year. Our two commercial natural gas pipeline infrastructure projects, Atlantic Coast Pipeline and Sabal Trail, continue moving forward. Sabal Trail received FERC approval in February, and the pipeline is on target to begin construction in the second quarter and be in operation in 2017. Atlantic Coast Pipeline is also progressing and has adopted several alternate routes, increasing the lengths of the pipeline from about 550 miles to just under 600 miles. The project partners recently submitted updated information related to these alternative routes as well as responses to all of FERC’s outstanding environmental information requests. We’re confident that FERC will soon be able to issue its draft environmental impact statement, the next important project milestone. And in fact, I believe that statement was issued this morning. The project partners have devoted significant time and resources to ensure that the environmental issues have been fully addressed. And as a result, we’ve adjusted our expectation for receipt of the FERC certificate to mid-2017. We are still planning for a late 2018 in-service date for the project. Turning to slide six, I will address recent activities around the strategic transition of our overall business portfolio toward regulated and contracted electric and gas infrastructure businesses. The two strategic transactions highlighted on this slide will complete the realignment of our portfolio to focus entirely on domestic businesses that drive more stable earnings and cash flows. Let’s start with our pending acquisition of Piedmont Natural Gas. In March, we received approval from the Tennessee Regulatory Authority for a change in control upon acquisition by Duke Energy. The final remaining approval is with the North Carolina Utilities Commission, which has scheduled hearing for July 18. We remain confident of closing the transaction before the end of this year. Additionally, at the end of February, we successfully priced a common stock offering to fund the equity portion of the Piedmont acquisition. The $766 million offering was well received by our investors. As a reminder, the shares were offered in a forward structure. This means we will not issue the shares until the forward is settled at the time the Piedmont transaction closes. We are also progressing on the planned exit of our Latin American generation business. We’ve begun initial steps in marketing the assets including signing nondisclosure agreements and providing information to interested parties. This business includes high quality assets, which we believe will attract significant interest for potential buyers. We will keep you updated on this important strategic transition. In conclusion, I’m pleased with our financial results for the quarter and our progress in advancing our growth investments. We’re also maintaining a sharp focus on operational excellence, which includes our commitment to safety and cost efficiency. Our business portfolio transition positions Duke as an industry-leading domestic infrastructure business with stable, transparent earnings and cash flows. We’re looking forward to continuing our progress on this transition throughout 2016. Now, let me turn it over to Steve. Steven K. Young – Chief Financial Officer & Executive Vice President Thanks, Lynn. Before I begin, I’d like to take a moment to thank Bill Currens for his seven years as a leader with the Investor Relations team. Bill’s tireless commitment to delivering accurate, transparent information to our analysts and investors has been outstanding. I will look forward to continuing to work with him in his new role as our Senior Vice President, Chief Accounting Officer & Controller. As many of you know, Mike Callahan is succeeding Bill as Vice President of Investor Relations. Currently Mike serves as Director of Regulated Utilities Forecasting. He has also had extensive experience in treasury, financial planning and analysis, and investor relations. We’re delighted he’s returning to IR to lead the team, where he will continue our efforts to serve our shareholders and investors. Today, I’ll focus on four primary areas. First, I’ll discuss the major drivers of our first quarter results and provide an update to our full-year adjusted EPS guidance range for 2016. I’ll discuss our retail volume trends and the economic conditions within our service territories. I’ll spend a few moments on the continued cost management efforts underway, and then I will close with a review of our key investor considerations. Let’s start with the quarterly results. I will cover the highlights on slide seven. For more detailed information on segment variances versus last year, please refer to the supporting materials that accompany today’s press release. First quarter adjusted diluted earnings were $1.13 per share compared to $1.24 in the first quarter of 2015. The lower results in the current year reflect milder winter weather in 2016 and the absence of Midwest generation results due to the successful sale of the business in April 2015. Additionally in 2016, we incurred significant winter storm costs and somewhat softer retail volumes, which were offset by a tax adjustment at international. On a reported basis, 2016 first quarter earnings per share were $1.01 compared to $1.22 last year. Let me briefly review key quarterly earnings drivers at each of our business segments. On an adjusted basis, regulated utilities results declined by $0.11 per share, principally driven by the milder weather in the Carolinas and Midwest. Higher revenues from pricing and riders in the Carolinas and Ohio were mostly offset by higher depreciation and amortization expense due to additional plant in service, including the acquisition of the NCEMPA assets in July 2015. Additionally, we incurred higher O&M expense during the quarter as a result of winter storm cost in the Carolinas, which were higher than our planning assumptions by $0.05. Offsetting emergent storm expenses were lower outage costs and increased cost efficiencies throughout the organization. As expected, our commercial portfolio declined by $0.11 per share in the first quarter of 2016, primarily due to the absence of the Midwest generation business, which was sold in April of 2015. Our commercial renewables benefited from improved levels of wind production this quarter and growth from new renewable projects. Other was down $0.06 per share, primarily due to prior year tax adjustments and higher interest expense in the quarter. Moving to international operational performance, in particular in Brazil, strengthened during the quarter. Hydrology in Brazil has improved significantly during the recent rainy season. Reservoir levels in southeast Brazil are approximately 60%, compared to around 30% this time last year. This improvement has resulted in increased hydro production throughout Brazil and lower purchased power costs to meet our contractual commitments. We also had $0.11 of favorable tax related items associated with the international segment during the quarter, which represents the impact of several events. You will recall in the fourth quarter of 2014, we declared a $2.7 billion dividend at international in order to efficiently bring funds back to the US. In early 2016, we announced our intent to exit the international business. This decision, combined with the extension of bonus depreciation by Congress in late 2015, allows us to more efficiently utilize foreign tax credits and reduce our US income taxes. As a result of our intent to exit the international business, we will recognize additional US income taxes for international up until the point of sale. Overall, and with our first quarter results, we remain on track to achieve our 2016 guidance range of between $4.50 to $4.70 per share. Moving onto slide eight, I’ll now discuss our retail customer volume trends. On a rolling 12-month basis, weather-normalized retail load growth was 0.7% through the first quarter. For the first quarter, our retail load growth trends were soft. Within the residential sector, we continued to experience strong growth in the number of new customers, approximately 1.3% over the recent 12 months. However, after moderating for most of 2015, residential customer usage trends have declined during the quarter due to the slow economic recovery and adoption of energy efficiency initiatives. Employment and wage growth trends continue to be favorable for the residential sector, along with the improving housing sector. The commercial and industrial classes continue to grow, to show growth of 0.2% and 1.1% respectively over the rolling 12 months. The commercial sector continues to be supported by office vacancy rate declines and job creation remains strong. Offsetting this growth is the governmental sector, as many agencies face tighter budgets, elimination of jobs and adoption of energy efficiency measures. As for the industrial sector, construction, automotives and textiles continue to show strength in the Carolinas and Midwest. Other industrial companies continue to reduce production as they work through unusually high inventory levels accumulated in 2015. However, the softer global economies and the stronger dollar is still impacting companies that compete globally, such as steel and metals. Our 12-month trends continue to track to our planning assumptions, despite a weak first quarter. We will continue to closely monitor customer usage patterns as we progress through the year. Moving to slide nine, as we continue to position our company for a low load growth environment, I’d like to spend just a moment discussing the progress that we made in managing costs across the organization. So far this year, absent the emerging storm costs, O&M is tracking favorable to the prior year, which is consistent with our expectations. We are focused on standardization of our operational processes and systems to manage our business much more efficiently. We also continued to take advantage of the flexibility and cost savings associated with the transition of our generation portfolio from coal to natural gas. Also within our nuclear and fossil generation fleets, we’re making changes in how we plan and execute our plant outages and how we utilize resources across our fleet. Although the Nuclear Promise is an industry-wide approach to controlling costs, activities are already underway within our nuclear fleet to drive out cost and place more discipline on capital allocation. In our transmission and distribution businesses, we continue to pursue technology that not only provides greater reliability and information for our customers, but also helps control work volumes, metering costs and contractor needs. I’ll close with slide 10, which summarizes our key investor considerations. Duke Energy has tremendous scale, offering an attractive investor value proposition, which includes balanced growth in earnings and dividends over time. As Lynn mentioned, we are making excellent progress on the acquisition of Piedmont and the exit of the international business. After the completion of this strategic transition, we will operate a portfolio that provides lower risk and higher quality earnings and cash flows to support growth in both earnings and the dividend. Our strong capital plan includes the transition toward a lower carbon future as we retire coal and build new efficient combined cycle natural gas and renewable resources. We’re excited about the growth opportunities for natural gas infrastructure across our service territories, particularly in the Southeast. Our electric grid investments allow us to deliver higher levels of reliability and offer new innovative products and services to our customers. Our dividend is very important to us. We continue to target annual growth in the dividend consistent with our long-term 4% to 6% earnings growth objective. Strong cash flows from our core businesses support our dividend. We are only one quarter into the year, but remain on track to achieve the $4.50 to $4.70 adjusted earnings per share guidance range for 2016. With that, let’s open the line for your questions. Question-and-Answer Session Bill Currens – Vice President-Investor Relations Okay. Greg, I think we’ve got you first in the queue. We’ll go to Greg Gordon. Greg? Operator, if you can hear us, we’ll go ahead and take Q&A now. Lynn J. Good – Chairman, President & Chief Executive Officer We appear that we having some technical difficulty. So, we’ll wait for a few minutes to see if we can establish the line for questions. Bill Currens – Vice President-Investor Relations If everyone could just bear with us for one second. They had a fire alarm over at the operator’s location. So just bear with us for a second here. Operator We’ll take our first question from Greg Gordon with Evercore ISI. Please go ahead. Greg Gordon – Evercore Group LLC Hey. Thanks. Bill, first of all I wanted to say congratulations. You’ve run a fantastic IR program. You’re leaving it in great hands as well. Bill Currens – Vice President-Investor Relations Great. Thank you for that comment Greg. Lynn J. Good – Chairman, President & Chief Executive Officer Good morning, Greg. Greg Gordon – Evercore Group LLC Yes. Good morning. How are you? So, couple of questions on tax. So you’re ahead of the game on tax and international. I was a little bit distracted when you were going through that part of your script, so can you rehash what’s going on there? And does that effectively put you ahead of target for the year for that segment, since you’re already more than halfway there in the first quarter on your targeted guidance assumptions? Or is the tax drag year-over-year from other parts of the business offsetting it? And finally, you’re at a 26% effective tax rate year-to-date. Are you still expecting it to be 32%, 33% levelized over the course of the year, or is that also trending better? Lynn J. Good – Chairman, President & Chief Executive Officer So Greg, let me start with a little explanation on the tax adjustment, then I’ll turn it to Steve on specifics around effective tax rate. So coming into this year, we had the extension of bonus depreciation and then the planned announcement of the exit of international, put us in a position where we could relook at the tax consequences of the sale of the business and we are going to be in a position to utilize more of our foreign tax credits, which is real economic benefit from the combination of the extension of bonus and the decision to exit. And so that economic benefit is being reflecting in the first quarter. It does put us ahead of our first quarter plan on international as a result of that. But also as we indicated in the script, we will begin recognizing tax expense, because we will no longer be making the assertion that the proceeds do not come onshore and that tax expense will be reflected over the balance of the year. So, ahead of plan through the first quarter, good economic benefit from the tax planning that the team has accomplished here, and I’ll turn it to Steve to talk about effective tax rate. Steven K. Young – Chief Financial Officer & Executive Vice President Yes, we had expected and forecasted an effective tax rate for the year of about 32% to 33%. I think it will be lower than that. You might lower it by 1% on that range, as a result of the tax strategies we put forth related to international. Greg Gordon – Evercore Group LLC Okay. So some portion of that $0.11 will flow back, but there will be a net benefit when we look back at the end of the fiscal year. Is that a fair summary? Lynn J. Good – Chairman, President & Chief Executive Officer That’s correct. Steven K. Young – Chief Financial Officer & Executive Vice President Yes, that’s true. Lynn J. Good – Chairman, President & Chief Executive Officer That’s correct. A modest amount will turn, Greg. Greg Gordon – Evercore Group LLC Okay. I think I understand. Thank you, guys. I’ll cede to the next question. Lynn J. Good – Chairman, President & Chief Executive Officer Okay. Thanks so much. Operator We’ll take our next question from Jonathan Arnold with Deutsche Bank. Please go ahead. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. Thank you, guys. That was actually going to be my first question. So, I’ll ask my second one which was on the international sale. Can you give any insight at this stage whether you feel it’s more likely the assets get sold in one block or in packages or some other structure? Lynn J. Good – Chairman, President & Chief Executive Officer Jonathan, we’re pleased with where we are on the process. There’s been good market interest in the assets. We’re still in preliminary phases. So, I can’t speak to whether or not the transaction will be a single transaction or a combination. Our objective will be to optimize the value of the portfolio. And as the year progresses, we’ll keep you informed on timing and expectations. But I would say we’re off to a solid start on the process. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. Are you committed to exiting everything, or is it possible that there would be a partial sale if that was the better value outcome? Lynn J. Good – Chairman, President & Chief Executive Officer We’ve made a decision to exit, and are certainly in that process today, Jonathan, and as we move through it we’ll have a better sense of timing and approach. So, I think that’s a question that we’ll be prepared to give more specifics on as the year progresses. But again, we’re off to a good start with the degree of market interest we’re seeing in the assets. Bill Currens – Vice President-Investor Relations Thank you. And thank you to you as well Bill. And good luck. Bill Currens – Vice President-Investor Relations Thank you, Jonathan. Lynn J. Good – Chairman, President & Chief Executive Officer Thanks, Jonathan. Operator We’ll go next to Steve Fleishman with Wolfe Research. Please go ahead. Steve Fleishman – Wolfe Research LLC Yeah. Hi. Good morning. Steven K. Young – Chief Financial Officer & Executive Vice President Good morning. Steve Fleishman – Wolfe Research LLC Thanks for that peaceful moment there earlier. Steven K. Young – Chief Financial Officer & Executive Vice President We didn’t know what was going on for awhile. Lynn J. Good – Chairman, President & Chief Executive Officer I know, when we figured out it was a fire alarm, it has to be one of the first ever. Mr. Currens (32:20) on his final call. Steve Fleishman – Wolfe Research LLC Yes. So, we’ll always remember your final call, Bill. So, just one other clarification on the international. There were Bloomberg Radio story headlines this morning that seemed to imply there was a comment from that saying that the dilution from the sale would be less than you had thought going forward. That’s not what you said though here in this call. So, could you just clarify, did you say something about that or is there anything to add there? Lynn J. Good – Chairman, President & Chief Executive Officer Steve, thanks for that question. So it’s kind of all a part of this discussion around economic value from this tax adjustment. So, we still intend, believe the transaction will be dilutive. We’ll give more visibility on valuation as the process continues. But the fact that we’ve had a tax planning strategy here that has provided an economic value reflected in the first quarter is significant. It’s a combination of bonus and the decision to sell. So that was the point I was making. But we’ll know more on the valuation of the entire transaction as the year progresses. Steve Fleishman – Wolfe Research LLC Okay. But there just to, I’m sorry to clarify again. So you were referring to the benefit that you got in this first quarter. There is not some other tax benefits that occur post sale that we weren’t. Lynn J. Good – Chairman, President & Chief Executive Officer That’s correct. Steve Fleishman – Wolfe Research LLC Okay. Great. And then, just maybe on the clarifying kind of going back to last call. So you had said before, the 4% to 6% growth rate and it’s going to be kind of maybe kind of lower toward the beginning of the period, then rising toward the end of the period. Is that still kind of the way you look at it? Lynn J. Good – Chairman, President & Chief Executive Officer That’s correct, Steve. Steve Fleishman – Wolfe Research LLC Okay. Lynn J. Good – Chairman, President & Chief Executive Officer We don’t expect linear, just given the timing of our capital deployment, the approach we take toward rate cases and resetting our prices. But over the five-year period, we believe we have the capital investments, the growth initiatives that will drive growth within our 4% to 6% targeted range. Steve Fleishman – Wolfe Research LLC Okay. And then lastly, I think Piedmont has a stake in the Constitution Pipeline. I mean, I’m sure that’s not a huge part of the company, but just does that affect much at all your kind of expectations there, the delay? Lynn J. Good – Chairman, President & Chief Executive Officer So, we’ve been following that closely. Steve, and of course are disappointed in the ruling in the State of New York. I think the partners in the projects have been very clear on where they are and the fact that they are reviewing a number of options to go forward. At this point, we’re planning for a delay in the project. But as these options are pursued, some of which could include resubmission or appeal through the courts, we’ll have a better sense of timing and outcome, so more to come on that. Steve Fleishman – Wolfe Research LLC And their stake is like $250 million, is that the right number? Lynn J. Good – Chairman, President & Chief Executive Officer Around $200 million. Around $200 million, Steve. Steve Fleishman – Wolfe Research LLC Okay. Okay. Thank you. Lynn J. Good – Chairman, President & Chief Executive Officer Thank you. Operator We’ll move next to Julien Dumoulin-Smith with UBS. Please go ahead. Julien Dumoulin-Smith – UBS Securities LLC Hey. Good morning. Lynn J. Good – Chairman, President & Chief Executive Officer Good morning, Julien. Steven K. Young – Chief Financial Officer & Executive Vice President Good morning. Julien Dumoulin-Smith – UBS Securities LLC Get it started. So, a few clarifying questions here. Following up on Steve’s last question, how do you think about hitting the bottom end of the range through at least the near-term period? Just to kind of clarify that. Do you expect to be able to hit that 4% in the subsequent years, especially given the year-to-date start and where the sales process is et cetera? Lynn J. Good – Chairman, President & Chief Executive Officer You know, Julien, I think our guidance on that is as it was at the end of the year. We have reaffirmed our range of $4.50 to $4.70 for this year. We’re in the midst of portfolio transition with the sale of international and the acquisition of Piedmont, both of which we expect to make substantial progress on in 2016. That will have bearing on 2017 and forward, so we’ll give you a better sense of 2017 as we get close. We’re confident in the range. We believe it will be nonlinear, as we’ve talked about, but don’t have anything further to say on that at this point. But we’re working hard on all elements of both growth initiatives, capital deployment, pursuing rate cases at the right time, and moving aggressively through the transition in the portfolio. Julien Dumoulin-Smith – UBS Securities LLC And then a quick follow-up on pension accounting here. We’ve seen some companies in the sector pursue some new policies on discount rates. I’d be curious, is that something you all are reviewing? Steven K. Young – Chief Financial Officer & Executive Vice President We keep abreast of the various accounting rules and options available to us and those are things that we look at with a regular basis and we’re keeping an eye on those things. We’re aware of the different methods of selecting discount rates, yield curves, bond methods, spot methods, so we’re keeping an eye on that. Lynn J. Good – Chairman, President & Chief Executive Officer Just no decisions at this point. Julien. Those decisions will be finalized in connection with our year-end planning process. Julien Dumoulin-Smith – UBS Securities LLC So, would that still affect potentially this year? Lynn J. Good – Chairman, President & Chief Executive Officer No, no decisions have been made at this point. Steven K. Young – Chief Financial Officer & Executive Vice President No decisions, and typically a decision like that would impact prospective years. Julien Dumoulin-Smith – UBS Securities LLC Okay. Thank you. And then, more strategic question here. As you think about the gas expansion that you are undertaking by the acquisition of Piedmont, how are you thinking about future expansions or exposures on the gas side of the equation? And specifically here, either more gas utilities or more importantly, I suppose the more direct midstream pipeline exposure. I’d be curious. Lynn J. Good – Chairman, President & Chief Executive Officer Julien, we’re excited about what the potential of the Piedmont acquisition represents for Duke and our focus here in 2016 is on closing the transaction and also progressing Atlantic Coast Pipeline and Sabal Trail. We also see growth within the Piedmont franchise, both with customer additions as well as infrastructure that would support gas generation here in the Carolinas. So, we expect to continue to build on that platform in particular. We’ll look at assets that make sense for Duke, whether they’re midstream or local distribution companies, but don’t have anything more specific to share with you at this point. We’re focused on closing the transaction and integrating it in a successful way. Julien Dumoulin-Smith – UBS Securities LLC Got it. Thank you. Lynn J. Good – Chairman, President & Chief Executive Officer Thank you. Operator We’ll take our next question from Chris Turnure with JPMorgan. Please go ahead. Lynn J. Good – Chairman, President & Chief Executive Officer Good morning, Chris. Christopher J. Turnure – JPMorgan Securities LLC Good morning. I had a more specific question on timing for the international sale. I do respect that it’s still relatively early in the process, but it’s my understanding that you really got the ball rolling back in January, so it’s been a couple months now. At least you do have those I guess confidentiality agreements in place, and you are in discussions. Maybe it would be helpful to hear a best case scenario here knowing what you know, in terms of timing for the ultimate close of the transaction. Lynn J. Good – Chairman, President & Chief Executive Officer Sure. And you know, Chris, the ball was rolling in January and February on planning. The ball began rolling into the market with discussions with counterparties on non-disclosure agreements and interest more in the late March, April timeframe. And so we are two months into that process. The data room, the data book is in the hands of prospective buyers, and over the next couple of months, we’ll be learning more about degree of interest, number of parties that intend to stay in the process, and we’ll have more to update in the second quarter. I just you know, given where we are, I don’t have any more specifics to share with you. Jonathan I believe or someone asked earlier about, is it one transaction or multiple. That of course would impact timing. Our objective is to optimize the value of the portfolio, and we’re going to move through this in a thoughtful way to accomplish exactly that. And we’ll give you more specifics when we are further into the process. Christopher J. Turnure – JPMorgan Securities LLC Great. And then my second question is on Atlantic Coast Pipeline. We did have the delay in the start of construction I guess that you gave some color on in your prepared remarks, but the overall cost and completion date remains unchanged. Is there any more information that you can give us there in terms of the drivers of that delay and start of construction and maybe moving pieces within the lack of change of completion date and lack of change of total costs that might have kind of netted to no effect there, I guess. Lynn J. Good – Chairman, President & Chief Executive Officer Chris, there has been a very active engagement on the part of the partners throughout this process and the delay in receipt of FERC approval has really been the result of pursuing alternate routes and addressing environmental and stakeholder concerns along the way. So the schedule, as originally developed, had contingency timing in it which we’ve continued to work actively with our partners, including you know the way we’re engaging with contractors. And at this point believe that we are on target for a mid-2017 approval from FERC, which should give us an ability to continue to target late 2018 for in-service. So, a lot of good work has been going on to look at a variety of alternatives and to work with the contingency that was within the original project plan. Christopher J. Turnure – JPMorgan Securities LLC Okay, that makes sense. Thank you. Lynn J. Good – Chairman, President & Chief Executive Officer Thank you. Operator Our next question will come from Michael Lapides with Goldman Sachs. Please go ahead. Michael Lapides – Goldman Sachs & Co. Hey, guys. Lynn J. Good – Chairman, President & Chief Executive Officer Hi, Michael. Michael Lapides – Goldman Sachs & Co. Couple of easy ones. Can you all talk about how much utility O&M was down year-over-year in the quarter excluding the impact of storms? Steven K. Young – Chief Financial Officer & Executive Vice President Yes, Michael. The O&M, the non-recoverable types O&M was down $0.04 year-over-year in the quarter. And again, we had about $0.05 of storms delta quarter-over-quarter offsetting that. But we had the $0.04 benefit. Michael Lapides – Goldman Sachs & Co. Okay. And then CapEx in the quarter came in, like if I just annualize that number, that would imply a year-end number several billion below kind of what you highlighted for 2016 levels. Should we just assume CapEx is very back-end loaded in the course of this year or is there a kind of downside potential to that CapEx number? Steven K. Young – Chief Financial Officer & Executive Vice President I think our original capital plans for the years are still intact. I think it’s just a shaping during the year. Lynn J. Good – Chairman, President & Chief Executive Officer And Michael, if you look back even at 2015, we spent about 20% of capital last year. We’re kind of in that range this year in the first quarter, and then it picks up over the course of the year. So the pattern looks similar to what we’ve experienced in previous years. Michael Lapides – Goldman Sachs & Co. Got it. And then finally, can you just remind us what are your thoughts or plans around rate case timing across the various utilities or across your system? Steven K. Young – Chief Financial Officer & Executive Vice President Yes, Michael. As we had mentioned in the February call, we’re looking at the majority of these cases to be back loaded in the five-year timeframe. But that’s always subject to scrutiny of costs and events that are going on at the time. And in fact, we are looking at accelerating a rate case. We may file a notice this year for our filing for Duke Energy Progress South Carolina jurisdiction. So we’re always looking at what’s the appropriate time to go in, what’s our cost structure look like and the investment timing related to that. I’d still say that the majority of the cases are in the back end of the five-year timeframe. But the South Carolina is an example of an opportunity we have that we need to move on perhaps earlier. Michael Lapides – Goldman Sachs & Co. Got it. Yeah. I asked that question only because if I look at the quarterly demand rather than the rolling 12 months, while it’s really strong in the Carolinas, Florida has been a little bit weaker and Indiana and Ohio especially in this quarter were significantly weak on a weather normalized basis. Lynn J. Good – Chairman, President & Chief Executive Officer Michael, the rate case timing in Florida, you may recall, we have the GBRAs in place in connection with the building of the plants and that along with that, has a stay-out through 2018, I believe. And then in Indiana, we’ve been pursuing the T-disc, the grid investment, which will give us an ability to track and that will in hearing hopeful to get approval in Indiana, which will give us an opportunity to reset prices for those investments. And we’ll continue to monitor whether load trends and other things would change our timing in Indiana, but we believe the tracker that we’re pursuing is the highest priority rate activity in that jurisdiction. Michael Lapides – Goldman Sachs & Co. Got it. Thank you, guys. Much appreciated. Lynn J. Good – Chairman, President & Chief Executive Officer Thank you. Steven K. Young – Chief Financial Officer & Executive Vice President Thank you. Operator Our next question will come from Jim von Riesemann with Mizuho. Please go ahead. James von Riesemann – Mizuho Securities USA, Inc. I am all set. Thank you. Lynn J. Good – Chairman, President & Chief Executive Officer Thanks, Jim. Steven K. Young – Chief Financial Officer & Executive Vice President Thanks, Jim. Operator We’ll move to our next caller then, Praful Mehta with Citi. Praful Mehta – Citigroup Global Markets, Inc. (Broker) Hi, guys. Lynn J. Good – Chairman, President & Chief Executive Officer Hello. Steven K. Young – Chief Financial Officer & Executive Vice President Hello. Praful Mehta – Citigroup Global Markets, Inc. (Broker) So, my quick question was, you mentioned on growth on the gas side that you might look at other gas assets. So just to clarify, are you talking about building on your platform for gas with acquisitions or are you looking for organic growth to build on your gas platform? Lynn J. Good – Chairman, President & Chief Executive Officer The first objective is to close the sale, or close the purchase of Piedmont Natural Gas. And we believe that we’ll have organic growth opportunities within that platform not only for new customer additions but expansion of the interstate pipeline system in the Carolinas as we continue our strategic move from coal to gas. And then beyond that, for midstream or LDCs, there was a question earlier that address our interest in that. We will consider those types of additions to the portfolio that make sense, complement what we’re trying to do. But our primary objective is closing the transaction, focusing our attention on integration, focusing our attention on growth organically as I outlined, and then other opportunities we’ll evaluate as they arise. Praful Mehta – Citigroup Global Markets, Inc. (Broker) Got you. Thank you, guys. That’s all I have. Lynn J. Good – Chairman, President & Chief Executive Officer Thank you. Operator Our next question will come from Ali Agha with SunTrust. Please go ahead. Ali Agha – SunTrust Robinson Humphrey, Inc. Thank you. Good morning. Lynn J. Good – Chairman, President & Chief Executive Officer Hello. Good morning. Steven K. Young – Chief Financial Officer & Executive Vice President Hello Ali. Bill Currens – Vice President-Investor Relations Good morning. Ali Agha – SunTrust Robinson Humphrey, Inc. Good morning. Can you remind us for this year, the commercial power earnings that you’ve budgeted, how much of that is essentially coming from recognition of tax credits? Is it almost all of it? Lynn J. Good – Chairman, President & Chief Executive Officer If you look in the slide deck, Ali, on slide 13, it gives you the full year assumption for commercial, and that business is commercial wind and solar, which as you know have tax credits as an important part of their economics. So, that gives you a range or a perspective on the magnitude of that contribution. Ali Agha – SunTrust Robinson Humphrey, Inc. And Lynn, what is the mix between ITC and PTC recognition there? Lynn J. Good – Chairman, President & Chief Executive Officer More heavily PTC, just because of the nature of our portfolio, Ali. Ali Agha – SunTrust Robinson Humphrey, Inc. Okay. And what’s current the average life of contracts on the PTC side? Steven K. Young – Chief Financial Officer & Executive Vice President On the PTC side, we look at PPAs that are in the range of typically 15 to 25 years, in that type of range. Lynn J. Good – Chairman, President & Chief Executive Officer And the PTC benefit, Ali, as you know is a 10-year benefit. Ali Agha – SunTrust Robinson Humphrey, Inc. Yes. Lynn J. Good – Chairman, President & Chief Executive Officer Yeah. Ali Agha – SunTrust Robinson Humphrey, Inc. And you are relatively early in that recognition, right, for most of the portfolio? Lynn J. Good – Chairman, President & Chief Executive Officer You know, certainly, we’ve been in the business, started modestly in 2007 and then you can look at our kind of capital contribution in growth 2012, 2013, 2014, so I would say early in that PTC period generally. Ali Agha – SunTrust Robinson Humphrey, Inc. Yeah. And lastly, Lynn, I know when you provide us full-year guidance, you lay out what you’re expecting adjusted ROEs to be across the portfolio as well. And in general, I mean would you say is there much in terms of, because looking at those numbers, it doesn’t seem to be, but is there much in terms of regulatory lag that you would say exists in your portfolio that perhaps can be captured in future years or are you thinking generally speaking the ROEs will move when you file those rate cases in the back end of the five-year forecast? Lynn J. Good – Chairman, President & Chief Executive Officer Let me make a comment and then Steve can continue. Steve commented a moment ago, Ali, that we see the potential for rate cases in South Carolina in 2016 that’s consistent with capital spending and cost structure and earned returns. And so we do have rate case potential in South Carolina in the very near term. And then later in the five-year period in North Carolina, that will be the result of regulatory lag showing up on capital investment that is occurring now and will occur into the future. I commented on trackers in Indiana and Florida, but at some point, we’ll address updating those rates as well. So, I think regulatory lag for any jurisdiction where we have historic test periods or the need to use base rate increases to achieve prices is going to have some regulatory lag associated with it. And that’s the careful analysis that we closely watch in determining the timing for filing. Steven K. Young – Chief Financial Officer & Executive Vice President And I would add, as we said in February, we had a slide on our five-year growth and we showed the lag was about 3% negative. And that’s an average number over the five-year period. It will vary year per year. And it is as Lynn said related to the jurisdictions where you’ve got gaps between rate cases and you build up investments during those gap periods. So, we’re working on that and planning around those events. Ali Agha – SunTrust Robinson Humphrey, Inc. Thank you. Lynn J. Good – Chairman, President & Chief Executive Officer Thanks, Ali. Operator We’ll take our next question from Paul Patterson with Glenrock Associates. Please go ahead. Paul Patterson – Glenrock Associates LLC Good morning. Lynn J. Good – Chairman, President & Chief Executive Officer Good morning, Paul. Paul Patterson – Glenrock Associates LLC Congratulations again, Bill. Bill Currens – Vice President-Investor Relations Thanks, Paul. Paul Patterson – Glenrock Associates LLC I wanted to just sort of touch base on the storms. Is there a normal number for storm costs that we should be thinking about in this quarter? Steven K. Young – Chief Financial Officer & Executive Vice President It is hard to predict storms obviously. The past three years we’ve seen winter storms that have hit us in the range of $50 million or $60 million a year, but whether that’s normal or not, I would hesitate to say. We try to impute an amount that we think about in our budgeting, but you’ll have during the summer season the potentials for hurricanes in the Southeast and then in the winter storms across our jurisdictions other than Florida, typically there’s the potential. there. Hard to predict, but we’ve seen winter storms the past three years in the neighborhood of $50 million or $60 million. Paul Patterson – Glenrock Associates LLC Okay. On slide 19, it looks like you guys are indicating that for the utilities, only about $0.01 was impacted by unfavorable weather. And I mean, is that solely because of it seems – it’s a little surprisingly, it seems a little low. Does that take into account storm outages that might lower customer usage or, because when we look at slide eight, it looks like non-weather adjusted sales were down 4%, and I think that does not include leap year, correct? Steven K. Young – Chief Financial Officer & Executive Vice President That’s correct. Yes. Let me give a little color on this. But typically, outages from storms do not affect volumes very significantly, as one point to make there, when you’re looking at the whole breadth of things. I would say that the, I always want to say this, when you’re looking at a quarter in particular, short periods of time, you have to be careful about weather normalized data. I think the first quarter of 2016 was mild, particularly March, and I don’t know whether we pulled all of the weather impacts out appropriately in the first quarter of 2016. Correspondingly, the first quarter of 2015 was very, very cold. And I don’t know whether all of the weather was pulled out of that quarter as well. So you’re comparing these two weather normalized periods, and it shows that the weather impact may not have been that significant. I suspect that it may have been more mild than what we showed in the first quarter here, but I don’t try to guess at what that could be. So we just roll with the data. I like to look at the 12 months rolling more critically there. We did as we acknowledged it, it was a bit of a soft quarter, but I think the 12-month rolling numbers are in line with what we’ve been forecasting. And I would want to emphasize that in response to a relatively weak load, we have aggressively pursued our cost structure to offset that. That’s part of our long-term plans. Paul Patterson – Glenrock Associates LLC Okay. Great. Lynn J. Good – Chairman, President & Chief Executive Officer You know Paul, the only thing I would add to it is, we have standard methods of identifying what is weather related and non-weather related. And what Steve is commenting on is those standard methods can be impacted in periods where there is extreme temperature. So extreme cold or extreme warm weather that we experienced in March. So that all leads us to look at longer time periods, so that we don’t have those anomalies that could exist in any quarter. And that is really what has led us to this 12-month rolling average discussion on load because we think that is more indicative of trends we’re experiencing. And as you can imagine, we watch this really closely and manage the business for a low load growth environment. Paul Patterson – Glenrock Associates LLC Excellent. Thanks a lot. Lynn J. Good – Chairman, President & Chief Executive Officer Thank you. Operator And our final question will come from Andy Levi with Avon Capital. Please go ahead. Andrew Levi – Avon Capital/Millennium Partners Hi. Good morning. Lynn J. Good – Chairman, President & Chief Executive Officer Hi, Andy. Steven K. Young – Chief Financial Officer & Executive Vice President Hey, Andy. Andrew Levi – Avon Capital/Millennium Partners How you guys doing? Lynn J. Good – Chairman, President & Chief Executive Officer Good. Steven K. Young – Chief Financial Officer & Executive Vice President Well. Bill Currens – Vice President-Investor Relations Yes, sir. Andrew Levi – Avon Capital/Millennium Partners You’re one of the best ever, even though you never won that award, okay. I just want to say that. I would have given you that award. Bill Currens – Vice President-Investor Relations You just gave it to us, so thank you. Andrew Levi – Avon Capital/Millennium Partners Okay. But maybe next year Michael will win it, so. Actually I think most of my questions have been answered, but just back on the sales. So leap year is what, about 30 basis points on an annual basis, is that? Steven K. Young – Chief Financial Officer & Executive Vice President That’s roughly right, Andy. Andrew Levi – Avon Capital/Millennium Partners Right, so I guess for the quarter, you times up by four or something like that, or is that not the right math? Steven K. Young – Chief Financial Officer & Executive Vice President Yeah I think you could get in the ballpark there, and it’s a little, that’s a rough way to do it. Andrew Levi – Avon Capital/Millennium Partners Right. Steven K. Young – Chief Financial Officer & Executive Vice President But again, I think getting weather normalized data is as much art as science and when you get an extreme period like we had in March and comparing it to an extreme period like a prior year, I think you can get fluctuations that make that comparison a little distorted. We think our customer growth and volumes are in line with our broad prediction levels and we’ll keep an eye on it. Andrew Levi – Avon Capital/Millennium Partners What do you guys think, I mean just in general, because it’s not just you who are seeing like decent customer growth or weak sales trends and it’s not just this quarter. Is it still energy efficiency or what else could it be? Lynn J. Good – Chairman, President & Chief Executive Officer The other thing that we look at, Andy, is multifamily housing versus single family homes. We’re starting to see some positive trends in the Carolinas where there are more single family home construction opportunities. But coming out of the economic downturn, a lot of the growth was in multifamily units, which by their footprint use less energy than a home. So, I think we’re closely monitoring this and the call to the action for us is to ensure that our cost structure and the way we manage our investments and assets are consistent with the trends we’re seeing at the top line. And we believe we have a demonstrated track record in managing our business that way. Andrew Levi – Avon Capital/Millennium Partners Yeah. And then, just in general I guess, international is doing better than expected. Part of that is the tax benefit; part of that is hydro and then I would assume for the second half of the year, you’ll have some tailwind from currency if things kind of stay where they are. So that’s a positive for this year. But it also seems that the utility itself, because of the sales trends and I guess lack of rate increases, seems to be towards the low end of your range at this point. Again, it’s early in the year, but is that a fair statement? Lynn J. Good – Chairman, President & Chief Executive Officer Andy, we’re on target for the range of $450 million to $470 million that we talked to you about. This is the first quarter. I think to give you any more specifics on placement within the guidance range is just premature. As you know, the third quarter is our most significant quarter, and we’re managing the business with identifying rate increase opportunities. Steve talked about South Carolina of course watching costs as part of that. And we’d like to see a longer trend on the sales growth to continue to monitor where that is progressing. So on track to achieve what we set out to achieve at the beginning of the year. Andrew Levi – Avon Capital/Millennium Partners Okay. Thank you very much, and Bill, again congratulations. I think you’ll be a great Controller and keep everyone in the straight and narrow, because I guess that’s what a Controller does, and I’m sure your kids will be happy to spend more time with you than they have for the last few years. Bill Currens – Vice President-Investor Relations All right. Lynn J. Good – Chairman, President & Chief Executive Officer Thanks, Andy. Bill Currens – Vice President-Investor Relations Thank you, Andy. Andrew Levi – Avon Capital/Millennium Partners Yes. Lynn J. Good – Chairman, President & Chief Executive Officer Okay. Operator With that being our last question, I’ll turn the call back to Lynn Good for closing comments. Lynn J. Good – Chairman, President & Chief Executive Officer Okay, Yolanda, thank you. And thanks everyone for hanging in with our fire alarm and our farewell to Bill Currens and welcome to Mike Callahan today. And most of all, thank you for your interest and investment in Duke. We look forward to meeting with many of you over the next several weeks and months and look forward to continue discussions. So, thanks again. Operator That will conclude today’s conference. Thank you all once again for your participation. 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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