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NiSource (NI) Joseph J. Hamrock on Q1 2016 Results – Earnings Call Transcript

NiSource, Inc. (NYSE: NI ) Q1 2016 Earnings Call May 03, 2016 9:00 am ET Executives Randy G. Hulen – Vice President-Investor Relations Joseph J. Hamrock – President, Chief Executive Officer & Director Donald E. Brown – Executive Vice President, Chief Financial Officer & Treasurer Analysts Greg Gordon – Evercore Group LLC Charles Fishman – Morningstar Research Paul T. Ridzon – KeyBanc Capital Markets, Inc. Operator Good day, ladies and gentlemen, and welcome to the First Quarter 2016 NiSource Earnings Conference Call. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded. I would now like to introduce your host for today’s conference, Mr. Randy Hulen. Sir, you may begin. Randy G. Hulen – Vice President-Investor Relations Thank you, and good morning. On behalf of everyone at NiSource, I’d like welcome you to our quarterly analyst call. Joining me this morning are Joe Hamrock, Chief Executive Officer; and Donald Brown, Chief Financial Officer. The purpose of today’s call is to review the NiSource financial performance for the first quarter of 2016, as well as provide an overall business update on our utility operations and growth drivers. We’ll then open up the call to your questions. Just as a reminder, we will be referring to supplemental earnings slides that are available on our website. Before turning the call over to Joe, just a quick reminder that some statements made on this conference call will be forward-looking. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in the statements. Information concerning such risks and uncertainties is included in the MD&A and Risk Factors sections of our periodic SEC filings. With all that covered, I’d like to now turn the call over to Joe. Joseph J. Hamrock – President, Chief Executive Officer & Director Thanks, Randy. Good morning, everyone, and thanks for joining us. As we’ll detail on today’s call, NiSource is off to a great start in 2016. Our first quarter results reflect the strength of our regulated business strategy and sustained track record of delivering improved service for our customers through our utility investment programs. We continue to execute on our infrastructure investment strategy, which is designed to improve safety, reliability and environmental performance for our customers and communities. NiSource also made significant progress on several regulatory initiatives supporting these investments, as well as enhanced employee training and customer programs. Today, we’ll briefly cover our first quarter 2016 results before discussing specific operational and regulatory highlights. We’ll also touch on how we’re positioning NiSource for continued growth before opening the call for your questions. Turning to slide three of our supplemental deck, let’s now highlight a few key takeaways for the quarter. The NiSource team delivered non-GAAP net operating earnings of $0.60 per share in the first quarter compared to $0.57 in the same period in 2015. We are well positioned to deliver non-GAAP net operating earnings within our 2016 guidance range of $1 to $1.10 per share. And with a strong start to the construction season, we’re on track to execute on more than $1.4 billion in utility infrastructure investments planned for the year. Violet Sistovaris and our NIPSCO team reached settlement agreements with key stakeholders in both its electric base rate case, and its long-term electric infrastructure modernization plan. And our Columbia Gas teams led by Carl Levander filed base rate cases in Maryland, Pennsylvania and Virginia. And we received regulatory approval of gas system modernization plan updates in Indiana, Massachusetts and Ohio. On the organizational front, we announced changes aimed at further advancing our growth plan and enhancing performance. Pablo Vegas joined NiSource today as President of our Columbia Gas group. He will oversee the six Columbia Gas companies, including leadership of state regulatory, customer, and stakeholder performance, as well as customer service, billing and new business platforms for all seven NiSource companies. Pablo most recently served as President and Chief Operating Officer of AEP Ohio. With Pablo’s appointment and the planned retirement of our Human Resources Leader, Rob Campbell, Chief Regulatory Officer, Carl Levander, assumes the role of Executive Vice President, Regulatory Policy and Corporate Affairs, which includes responsibility for Policy, Corporate Communications, Federal Government Affairs, Regulatory Strategy and Human Resources at NiSource. I’ll talk more about the significant progress across all our businesses later in the call, but first I’d like to turn the call over to Donald to review our financial results in more detail, which are highlighted on page four of our supplemental slides. Donald? Donald E. Brown – Executive Vice President, Chief Financial Officer & Treasurer Thanks, Joe. And good morning, everyone. As Joe mentioned, we delivered non-GAAP net operating earnings of about $191 million or $0.60 per share in the quarter compared with about $179 million or $0.57 per share in the first quarter of 2015. On an operating earnings basis, NiSource reported about $399 million for the quarter, which is an increase of about $35 million over the first quarter of 2015. On a GAAP basis, our income from continuing operations was about $180 million for the quarter versus about $193 million in the first quarter of 2015. Now, let’s take a closer look at the operating earnings performance of our two utility business segments for the first quarter of 2016. Our gas distribution operation segment delivered about $330 million compared with about $306 million in 2015. Net revenues excluding the impact of trackers were up by nearly $35 million, primarily attributable to increases in regulatory and service program, including the impact of new rates in Massachusetts and Pennsylvania, as well as the implementation of new rates under Columbia Gas of Ohio’s approved infrastructure replacement program. Operating expenses excluding the impact of trackers increased by $10.3 million, primarily due to increased outside service costs and higher depreciation. Our electric operations reported about $72 million compared with about $67 million for 2015. Net revenues excluding the impact of trackers were essentially flat. Operating expenses excluding the impact of trackers were essentially flat. Operating expenses excluding the impact of trackers decreased by $4.8 million, primarily due to lower generation expenses, decreased employee and administrative costs and lower environmental expenses. These decreases were partially offset by higher outside service costs. As Joe mentioned, our first quarter results position NiSource well to deliver net operating earnings within our guidance range of $1 to $1.10 per share for the year. Full details of our results are available in our earnings release issued and posted online this morning. Now turning to slide five, I’d like to briefly touch on our debt and credit profile. Our debt level as of March 31 was about $7 billion, with a weighted average maturity on long-term debt of approximately 14 years and a weighted average interest rate of approximately 5.72%, down from 5.88% at the end of 2015. On March 31, we executed a three-year, $500 million term loan agreement with pricing of LIBOR plus 95 basis points. In utilizing the delay draw feature, we have until the end of September to borrow the full $500 million. At the end of the first quarter, we maintained net available liquidity of more than $1 billion, consisting of cash and available capacity under our credit facilities. And our credit ratings at the three major agencies remained solidly investment grade, something we remain committed to as we continue to execute on our $30 billion and 100% regulated infrastructure investment opportunities. Going forward, our financial foundation is strong employees for continued execution and growth. Now, I’ll turn the call back to Joe to discuss a few customer, infrastructure and regulatory highlights across our utilities. Joseph J. Hamrock – President, Chief Executive Officer & Director Thanks, Donald. We began 2016 by building upon the positive momentum that we’ve gained in recent years in maintaining our sharp focus on serving our customers and communities. For instance, in March, we became a founding member of the U.S. EPA’s Natural Gas STAR Methane Challenge Program. Through our five-year program commitment, NiSource will continue to replace cast iron and bare steel pipelines remaining in our natural gas system. Since 2005, we’ve reduced our greenhouse gas emissions by 23%. As part of our planned investments, we expect to further reduce methane emissions by more than 300 million cubic feet, a reduction of 10% compared to 2015. In addition to helping reduce emissions, our well-established infrastructure modernization programs are producing other meaningful benefits and adding value for our customers. For example, we have reduced gas leaks on our mains by 9%, and by 14% on our service lines over the past five years. This builds on the safety and reliability of our system. And we have continued to receive recognition for doing business the right way. In March, NiSource was named for the fifth consecutive year as one of the World’s Most Ethical Companies by the Ethisphere institute. Ethisphere honors companies for leading and promoting ethical business standards in key categories, which include ethics and compliance programs. This designation demonstrates our commitment to serving our customers with integrity and the highest of ethical business standards. Now, let’s turn to a few recent highlights in our gas operations on slide six. On March 18, Columbia Gas of Pennsylvania filed a request with the Pennsylvania Public Utility Commission to adjust its base rates in support of the company’s continued upgrades and replacement of infrastructure, and other programs to enhance pipeline safety. If approved as filed, the case would result in $55 million annual revenue increase. An order is expected by the end of 2016. On April 20, the Public Utilities Commission of Ohio approved Columbia Gas of Ohio’s annual infrastructure replacement rider. The rider provides for continued support of the company’s well-established pipeline replacement program investments. This order authorizes an increase of about $21 million in annual revenue related to 2015 infrastructure investments of about $185 million. At NIPSCO gas, the team continues to execute on its seven-year, approximately $800 million long-term gas system modernization program to further improve system reliability and safety. On March 30th, the Indiana utility regulatory commission or IURC approved the semi-annual tracker update that was filed in August 2015 with additional revenues of $7.6 million, which covered approximately $74 million of investments through mid-2015. NIPSCO filed its latest semi-annual tracker update on February 29th, which remains pending with the IURC. On April 29, Columbia Gas of Virginia filed a request with the Virginia State Corporation Commission to adjust its base rates to recover investments and other costs associated with the company’s ongoing initiatives to improve the overall safety and reliability of its distribution system and to accommodate increasing demand for service. If approved as filed, the case would result in an annual revenue increase of $37 million. A commission decision is expected by early 2017. A decision on Columbia Gas of Massachusetts’ 2016 Gas System Enhancement Plan was issued by the Massachusetts’ Department of Public Utilities on April 29th. This approval allows for a recovery of investments through 2016 and will increase annual revenues by approximately $8.2 million beginning May 1st. On April 15th, Columbia Gas of Maryland filed a request with the Maryland Public Service Commission to adjust its base rates so it can support the continued replacement of aging pipe, as well as adopt pipeline safety upgrades. If approved as filed, the case would result in an annual revenue increase of approximately $6.5 million. A commission order is expected by the end of 2016. And finally, Columbia Gas of Kentucky, on April 27th, filed notice with the Kentucky Public Service Commission that it intends to file a request to adjust its base rates to support continued infrastructure investments. Now, let’s turn to our electric operations on slide seven. On March 24th, NIPSCO reached a settlement agreement with the Indiana Office of Utility Consumer Counselor, industrial customers, the La Porte County Board of Commissioners and the Indiana Municipal Utility Group on the company’s seven-year electric infrastructure modernization plan. This plan includes more than $1.2 billion of transmission and distribution investments designed to improve system safety and reliability. An IURC order on the settlement is anticipated in the third quarter of 2016. NIPSCO also reached an agreement in its electric base rate case currently pending before the IURC. The February 19 settlement provides a platform for NIPSCO’s continued investments in service improvements for customers. The proposed settlement agreement would increase annual revenues by $72.5 million. An IURC order is anticipated early in the third quarter of 2016. NIPSCO’s two major electric transmission projects remain on schedule with anticipated in-service dates in the second half of 2018. The 100-mile 345KV and 65-mile 765KV projects are designed to enhance region-wide system flexibility and reliability. Right-of-way acquisition, permitting and engineering are well underway on both projects. NIPSCO expects to provide updated project cost estimates prior to the commencement of line construction later this year. Before opening the call to your questions, I’d like to touch on our financial and growth commitments as well as how we’re positioning NiSource for continued growth. NiSource remains on track for sustained execution on the more than $30 billion of long-term regulated utility investments the company outlined in 2014. As we’ve outlined previously, we expect to deliver net operating earnings per share of $1 to $1.10, and to make more than $1.4 billion in planned infrastructure investments in 2016. This 2016 earnings and investment guidance provides the starting point for NiSource’s long-term annual earnings per share and dividend growth projections of 4 to 6%, which we first announced a year ago in anticipation of the separation of Columbia Pipeline Group. As we execute on our well established plans, we’re aligning our organization to capitalize on all of our strategic opportunities, including our infrastructure investment plans, while at the same time looking at enhancements to our plan such as growing our customer base, improving service to our customers and driving enhanced performance through the increased use of common platforms. These emerging elements of our plan are expected to enhance our existing best-in-class risk-adjusted total return proposition. Thank you all for participating today and for your ongoing interest and support of NiSource. We look forward to sharing continued updates on our progress. Now let’s open the call to your questions. Skyler? Question-and-Answer Session Operator Thank you. And our first question comes from the line of Greg Gordon from Evercore. Your line is now open. Greg Gordon – Evercore Group LLC Thank you. Joseph J. Hamrock – President, Chief Executive Officer & Director Good morning, Greg. Greg Gordon – Evercore Group LLC Yeah. Good morning, guys. Happy to finally be covering the stock. Joseph J. Hamrock – President, Chief Executive Officer & Director Yeah. Welcome to the fold. Greg Gordon – Evercore Group LLC I wish I had been quicker on the uptake and got all the outperformance the last couple of years, but so be it. So I’ve asked you this question before and I just wanted to ask it again. Obviously, the performance in the quarter was great and you’ve got $1.4 billion in capital still in the budget – vast majority of it covered by riders. And you’ve got this sort of 4% to 6% long-term earnings guidance drive out there, but the rate base growth guidance range is 6% to 8%. Obviously, that’s very enticing because there seems like there’s a lot of cushion in there. But you first gave that well before the bonus depreciation rules were extended for five years, so can you tell us about how that may have moved things around inside the guidance range? It still seems like you’re well positioned to, at the minimum, hit the high end of the earnings guidance range. But maybe the rate base growth is less robust because of bonus D (18:59) and what you might do to offset that? Joseph J. Hamrock – President, Chief Executive Officer & Director Yeah. Thanks, Greg. And it’s a fairly common question, as you noted. I’ll ask Donald to touch on the bonus and the relative impact on rate base and how we’re navigating through that. But let me take this, sort of, the higher level question about the relationship between our outlook, our guidance and our business plan. We think and firmly believe that one of the strengths of the NiSource story is the long-term visibility, the sustained investment platform we have that we outlined as we noted a couple of years ago with the $30 billion in investment. As we look through the future and the strong support we have across all seven states for those kind of investments, that’s a great engine for driving growth, the visibility. And I wanted to be sure that we’ve put out a fairly long-term look at earnings guidance in that 4% to 6% annual growth range. We remain committed to that. As we’ve noted before, the relationship between investments in rate base that are tracked, the ongoing support for those investments, is offset in some ways and a couple of ways by regulatory lag, continued O&M growth that gets picked up in rate cases that don’t have quite the same effect as the trackers have. A bit of conservatism in our outlook. And then over the long-term, the need to finance that in a balanced way. That story remains the same today. I will ask Donald to touch on the effect of bonus. As we’ve noted, our guidance remains the same for the year, and our growth guidance remains the same. A little bit of insight about the relationship of bonus depreciation would be helpful. Donald E. Brown – Executive Vice President, Chief Financial Officer & Treasurer Yeah. And so think about the bonus depreciation on our rate base. It certainly has a detrimental impact over our plan years, and we typically look out four to five years. And so what we’ve done to offset that is to increase our capital spend a little bit over the next couple of years to offset the impact of the rate base. But then when you look at it over a four- or five-year period, we actually do have positive cash flows through the period. If you’ll remember, we’ve got NOLs that before this extension of bonus depreciation went out through 2018. With this extension of bonus depreciation, our NOL will now go out to the end of 2022. So from a cash standpoint is the detriment early with the bonus depreciation because of the NOL position. But on the back end of the years, we do have a cash pickup. And so with the cash, we’ll spend in the next couple of years to offset the rate base degradation, we’ll come out slightly ahead over kind of a five- or six-year period. So I think all in all, we’re looking at staying within that range. It doesn’t challenge our earnings growth story. And at the same time, I think as Joe talked a little bit about conservatism, we understand we’re in multiple rate cases at any time. There’s certainly some risk from amount realized, as well as just the timing of when rates go into effect. And so trying to balance out the understanding of the risks of both the kind of regulatory mechanisms, as well as kind of O&M, which doesn’t go into the trackers. We feel confident we’ll certainly be in the range, but obviously have some opportunities, if everything goes the right way to be at the higher end of the range. Greg Gordon – Evercore Group LLC Fantastic. Thanks, guys. Take care. Joseph J. Hamrock – President, Chief Executive Officer & Director Thanks, Greg. Operator Our next question comes from the line of Larry Louie (23:15) from JPMorgan. Your line is now open. Unknown Speaker Hey, good morning, guys. Thanks for taking my question. I just wanted to walk through the decision process on the term loan. Was it more economically driven or was it more so of a flexibility decision when it comes to kind of call provisions on term loans? Joseph J. Hamrock – President, Chief Executive Officer & Director I’d say it’s both. When we’re looking at the need for this year and looking at what are our different options, really did want to take advantage of the low interest rate environment and the interest savings that provided, as well as making sure we’ve got kind of a full toolkit for financing our company going forward. So I’d say it’s a little bit of both. And I think, going forward, we’ll look at both the bond market, as well as taking advantage of the bank market in term loans. Unknown Speaker Got you. And can you just remind us what are your financing needs? I know I think you paid down the rest of your 10% handle that remained outstanding. Joseph J. Hamrock – President, Chief Executive Officer & Director Yeah. So this year I would expect that we wouldn’t have any significant financing needs. This term loan, which we took out. We haven’t actually tapped into yet and won’t tap into until later this year. But I don’t expect anything significant this year. But certainly, we’re always looking at our portfolio. We do have some higher cost debt in the portfolio and still looking for opportunities to bring down our overall cost of debt. If the market and the timing makes sense, we would do that as well. Okay, thank you. Joseph J. Hamrock – President, Chief Executive Officer & Director Thanks, Larry. Operator Our next question comes from the line of Charles Fishman from Morningstar. Your line is now open. Charles Fishman – Morningstar Research Thank you. Just to follow up on that bonus depreciation question. I noticed, Joe, in your introductory comments, I believe you said CapEx for 2016 more than $1.4 billion, where I believe last quarter it was approximately $1.4 billion. Is that consistent with Donald’s comments about the accelerating CapEx because of the cash flow benefit from bonus depreciation? Joseph J. Hamrock – President, Chief Executive Officer & Director Yeah. Thanks, Charles, and good morning. That’s very perceptive. It’s entirely consistent. There’s not a big shift in the 2016 – Donald’s comments related to the near-term years of the plan to offset the NOL issues and to help with the outer years of the plan on an earnings standpoint. But it’s all around the $1.4 billion, as we’ve navigated through the 2016 planning cycle. Charles Fishman – Morningstar Research Okay. And then my next question is on the case or the settlement on the electric modernization program. Does that – are we done? Does that pretty much eliminate any of the excitement that we’ve seen – regulatory and legal? I mean, are you pretty confident we’re on the… Joseph J. Hamrock – President, Chief Executive Officer & Director We’re confident that – yes, I’m sorry. I like your term excitement. But we’re confident that we’ve got a framework vis-à-vis the settlement that we’ve filed. We are still in the regulatory process. So we still have the remaining steps through the regulatory process that we would expect to resolve early in the third quarter this year, but feel very good about the position we’re in and we’ve remained committed to making those investments. So that’s all part of the framework that we’ve set up. Charles Fishman – Morningstar Research Okay, thank you. That was all I had. Joseph J. Hamrock – President, Chief Executive Officer & Director Thanks, Charles. Have a great day. Operator Our next question comes from the line of Paul Ridzon from KeyBanc. Your line is now open. Paul T. Ridzon – KeyBanc Capital Markets, Inc. Good morning. Congratulations on another solid quarter. Joseph J. Hamrock – President, Chief Executive Officer & Director Good morning, Paul. Thank you. Paul T. Ridzon – KeyBanc Capital Markets, Inc. Just with bonus depreciation, what’s your current view on when you may need to come back for some equity? Joseph J. Hamrock – President, Chief Executive Officer & Director We don’t see any real shift at this point in our outlook relative to bonus. We continue to not see a need for equity in the near term of the plan. And as you would guess with bonus, that didn’t change at all. We continue to look at our total plan, including CapEx, dividend policy and the ultimate need for equity. But at this point, not ready to change our outlook on any of those factors. Paul T. Ridzon – KeyBanc Capital Markets, Inc. And then strategically, it seems like a lot of large cap electrics kind of want to get some gas exposure. How are you thinking about the opportunity there? Joseph J. Hamrock – President, Chief Executive Officer & Director Well, we remain committed to our plan. As we’ve watched that play out, we look at our plan and don’t really need M&A to drive our opportunities going forward. Very focused on, as we’ve talked about at length today, the capital investments and the regulatory cadence that we’ve set up in our plan, and certainly don’t see M&A as a part of that strategy. That said, with anything that would be compelling being introduced into the mix, we’d certainly take a look at that. Paul T. Ridzon – KeyBanc Capital Markets, Inc. Certainly you don’t need the growth opportunity, but maybe there’s some players out there who could use your opportunities. Joseph J. Hamrock – President, Chief Executive Officer & Director I’m sure that’s fine. Paul T. Ridzon – KeyBanc Capital Markets, Inc. All right. Thank you very much. Joseph J. Hamrock – President, Chief Executive Officer & Director Thanks, Paul. Operator And our next question comes from the line of Greg Gordon from Evercore. Your line is now open. Greg Gordon – Evercore Group LLC Yeah, guys, I had a follow-up question. It’s on a completely different subject. I’m looking at the NEXUS pipeline project that’s being jointly built by Spectra and DTE. And in their first quarter slide deck, slide 25, they show the path of that pipeline going through your service territory in Ohio and sort of a massive amount of interest – interconnect agreements of up to 1.75 Bcf a day. And some of the names of your gas utilities are very prominent on that list. Can you talk about your needs for incremental gas supply and how likely it is that you’d be taking gas off the NEXUS pipeline and in what amounts? Joseph J. Hamrock – President, Chief Executive Officer & Director Yeah, Greg, that’s something we keep an eye on but not something that we’re actively interested in and involved in at this point, and a good position on capacity in the Midwest. More of our focus these days is in New England and Massachusetts. As you know, we have a position in the northeast direct pipeline project. So a lot of focus there on how to ensure that we have what we need up there. We, though, will continue to keep an eye on the Midwest. And if we see an opportunity, we’ll certainly participate. Greg Gordon – Evercore Group LLC Okay. So you’re definitely interested in capacity on the pipes going into New England. And this is more of a wait-and-see situation? Joseph J. Hamrock – President, Chief Executive Officer & Director Yeah, a more – that’s a good way to characterize it. Again, if we see an opportunity there that makes sense, we’ll certainly take advantage of that. Greg Gordon – Evercore Group LLC Okay. And what’s the time line that you would normally seriously consider a formal interconnect agreement on a new pipe? You would wait for that pipe to be sort of firmly under construction before you would have a serious conversation with them? I’m not that familiar with the process there. Joseph J. Hamrock – President, Chief Executive Officer & Director Yeah, typically there’s an open season upfront. We participate in that, express interest. That usually precedes any actual construction. So we’d be ahead of that curve to help underpin the fundamentals for the project itself. But that’s not always the case. Sometimes there’s opportunistic second pass, third pass opportunities to take advantage of a new project. So it really varies depending on our supply/demand balance, our existing contracts and the growth opportunities in that region. So I don’t think there’s a precise recipe that applies in all cases. Greg Gordon – Evercore Group LLC Well yeah, this would be a second or third pass-type deal because they did their open season, they’re 65%, 66% contracted, 50% with LDCs up a bit top end of the pipe, the other 50% of that is producers. And then they’ve been talking about the potential for incremental interconnect agreements along the length of the pipe. So am I right to say that that would be a second or third pass-type of deal? Joseph J. Hamrock – President, Chief Executive Officer & Director Yeah, I want to be careful that my general comment there is not characterizing a specific project or specific interest. This is an area we continue to look at. But on that specific project, I’m not providing any specific outlook on our participation at this point. Greg Gordon – Evercore Group LLC Okay, thanks. Joseph J. Hamrock – President, Chief Executive Officer & Director Thanks, Greg. Greg Gordon – Evercore Group LLC Can’t hurt to try. Thank you. Bye. Operator At this time, I’m showing no further questions. I would like to turn the call back over to Joe Hamrock for any closing remarks. Joseph J. Hamrock – President, Chief Executive Officer & Director Thank you, Skyler. And let me, again, express our appreciation for your participation and interest today, and ongoing interest in the NiSource story. Please have a great day. Thank you very much. Operator Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program. You may now disconnect. Everyone have a great 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.) 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ITC Holdings’ (ITC) CEO Joseph Welch on Q1 2016 Results – Earnings Call Transcript

ITC Holdings Corp. (NYSE: ITC ) Q1 2016 Earnings Conference Call April 28, 2016 10:00 ET Executives Stephanie Amaimo – Director, IR Joseph Welch – Chairman, President & CEO Rejji Hayes – SVP & CFO Analysts Julien Dumoulin-Smith – UBS Caroline Bone – Deutsche Bank Praful Mehta – Citigroup Operator Good day, ladies and gentlemen, and welcome to the ITC Holdings Corp First Quarter Conference Call and Webcast. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today’s conference, Ms. Stephanie Amaimo. Ma’am, you may begin. Stephanie Amaimo Good morning, everyone and thank you for joining us for ITC’s 2016 first quarter earnings conference call. Joining me on today’s call are Joseph Welch, Chairman, President and CEO of ITC; and Rejji Hayes, our Senior Vice President and CFO. This morning we issued a press release summarizing our results for the first quarter ended March 31, 2016. We expect to file our Form 10-Q with the Securities and Exchange Commission today. Before we begin, I would like to make everyone aware of the cautionary language contained in the Safe Harbor statement. Certain statements made during today’s call that are not historical facts such as those regarding our future plans, objectives, and expected performance reflect forward-looking statements under federal securities laws. While we believe these statements are reasonable, they are subject to various risks and uncertainties and actual results may differ materially from our projections and expectations. These risks and uncertainties are disclosed in our reports filed with the SEC such as our periodic reports on forms 10-K and 10-Q and our other SEC filings. You should consider these risk factors when evaluating our forward-looking statements. Our forward-looking statements represent our outlook only as of today and we disclaim any obligation to update these statements except as may be required by law. A reconciliation of the non-GAAP financial measures discussed on today’s call is available on the Investor Relations page of our website. I will now turn the call over to Joe Welch. Joseph Welch Thank you, Stephanie and good morning everyone. I’m pleased to report that we’re off to a solid start in 2016. We continue to deliver operational excellence to our customers and superior growth to our shareholders while concurrently focusing on the Fortis acquisition of ITC. On the operational front, system performance for the first quarter of 2016 aligned with our historical track record with good performance across the operating companies and minimal impacts to the system despite several spring storms in March. In addition, our capital projects and maintenance programs were off to a good start for the year. Many reliability, system capacity and customer interconnection projects are in process across all of our operating companies and progressing on schedule. One notable project in Detroit that we work to complete it in February is our portion of the new Temple substation which will support the load requirements for the new Red Wings Stadium. With respect to our development efforts, we continue to advance the new Covert project, which is scheduled to go into service later this year along with preparations and certifications to operate in PJM. We are also continuing to negotiate bilateral contracts with shippers on the Lake Erie Connector project. As we highlighted on our last call, the MISO Transmission owners filed their updated testimony on January 29, in the second base ROE complaint and have since held various hearings and briefings during the last several months as part of their most recent procedural schedule. And initial decision in the second base ROE complaint is expected from the Administrative Law Judge by the end of June. While final decisions from the FERC Commission aren’t expected until late 2016 and the first half of 2017 for the first and second complaints respectively, we remain confident that FERC will continue to support their historical policies given the significant investment requirements necessary to modernize the electrical infrastructure in the U.S. As for other regulatory matters, on March 11, FERC issued two orders concerning ITC Midwest. In summary, in its orders on the final and the formal challenge of ITC Midwest 2015 formula rates in its orders conditionally accepting the Bent Tree facility service agreement, FERC concluded that ITC Midwest’s decision to elect out of bonus depreciation wasn’t prudent. As a result, FERC has required ITC Midwest to simulate the effects of bonus depreciation that is to calculate generally applicable transmission rates and its charges under a specific agreement as though the company actually had taken bonus depreciation for facilities placed into service in 2015. In response to FERC’s order, on April 11, ITC Midwest filed request for rehearing on both orders, essentially asking FERC to reconsider and reverse its decisions. To the extent that FERC decided not to reverse its orders on the formal challenge, ITC Midwest also asked FERC to modify the date for implementation of the order on the formal challenge so that ITC Midwest is able to maintain compliance with the new tax law requirements. As we wait FERC’s response to our request for rehearing, we’ve taken steps to comply with these orders and have recorded the applicable bonus depreciation impacts during the first quarter as well as the necessary compliance filings on the Bent Tree facility service agreement. Subsequently, we’ve since received a similar challenges at METC from CMS, and are in the process of evaluating the next steps. That said, although we expect these proceedings to take some time to be resolved, we plan to elect bonus depreciation across all our companies for the 2015 and 2016 tax years. With respect to the Fortis transaction, Fortis and ITC have worked diligently to advance the transaction. The most material news since our last call – last week’s announcement of Fortis entering into a definitive agreement with GIC to acquire 19.9% equity interest in ITC for over $1.2 billion in cash upon closing the transaction. Needless to say, we are delighted with this outcome, as well as a well-respected long-term investor with over $100 billion in assets under management and strong track record of investing in North America infrastructure, GIC will be a great investment partner for Fortis and co-owners of ITC. With the minority investor secured, we can now proceed with other key milestones in the transaction, including the remaining State and Federal regulatory filings and the shareholder votes for both Fortis at ITC. Overall, the transaction continues to progress as planned, and we expect to close in the late 2016. Although it’s been a busy start to the year, we look forward to another strong year both operationally to the benefits of our customers, and financially by creating long-term value for the shareholders. I will now turn the call over to Rejji to elaborate on our first quarter 2016 financial results. Rejji Hayes Thank you, Joe, and good morning, everyone. For the three months ended March 31, 2016, ITC reported net income of $64.2 million or $0.42 per diluted share as compared to reported net income of $67.1 million or $0.43 per diluted share for the first quarter of 2015. Operating earnings for the first quarter of 2016 were $84.5 million or $0.55 per diluted share compared to $73.1 million or $0.47 per diluted share for the first quarter of 2015. Operating earnings are reported on a basis consistent with how we have provided our guidance for the year and exclude the following items. First, they exclude regulatory charges of approximately $1.1 million or $0.01 per share for the first quarter of 2015. The 2015 charges relate to management’s decision to write-off abandoned costs associated with a project of ITC Transmission. Second, operating earnings exclude the estimated refund liability associated with the MISO base ROE, which totaled $11.5 million or $0.07 per diluted share for the first quarter of 2016 and $4.8 million or $0.03 per diluted share for the first quarter of 2015. It is possible that upon the ultimate resolution of this matter we may be required to pay refunds beyond what has been record to-date. We will continue to assess this matter and we’ll provide updates as necessary. Lastly, they exclude after tax expenses associated with the Fortis transaction of approximately $8.7 million or $0.06 per diluted share for the first quarter 2016. Operating earnings for the three months ended March 31, 2016 increased by approximately $11.4 million or $0.08 per diluted share of the comparable period in 2015, primarily due to higher income associated with increased rate base at our operating companies coupled with lower non-recoverable bonus payments associated with the V-Plan project in the first quarter of 2016 compared to the same period in 2015. These beneficial factors are partially offset by the impact of electing bonus depreciation, as Joe highlighted, at all of our operating subsidiaries. For the three months ended March 31, 2016, we invested $176.6 million in capital projects at our operating companies, including $41.1 million at ITC Transmission, $47 million of METC, $74.8 million at ITC Midwest and $13.7 million at ITC Great Plains. With respect to our financing liquidity initiatives on April 26, 2016, we executed a 30-year debt issuance at METC, the $200 million of senior secured notes were priced at 3.9% and the proceeds will be used to refinance an unsecured three-year term loan at METC. As we’ve underscored in the past, management remains committed to sustaining our strong financial position and solid investment grade credit ratings. As such, we are pleased to report that on April 15, Moody’s affirmed the issue ratings in outlook of ITC and its regulated operating subsidiaries. From a liquidity perspective, as of March 31, 2016, we have readily available liquidity of approximately $775 million, which consists of roughly $8 million of cash on hand and $767 million of net undrawn capacity on our revolving credit facilities. For the three months ended March 31, 2016, we reported operating cash flows of approximately $88 million, which reflects an increase of approximately $21 million from the first quarter 2015. It’s also worth noting that on April 7, 2016, we successfully amended all of our revolving credit facilities with unanimous support from our syndicate of lenders to allow for consummation of the transactions. As a result, we will be able to maintain the revolving credit facilities and the amounts under the revolving credit facilities close. In closing, we are well positioned to execute on our plans in 2016, including the Fortis acquisition of ITC, to benefit the customers and shareholders. Our continued solid performance in the first quarter serves as an important foundation for these efforts. At this time, we’d like to open the call to address questions from the investment community. Question-and-Answer Session Operator [Operator Instructions] And our first question comes from Julien Dumoulin-Smith from UBS. Your line is now open. Julien Dumoulin-Smith Hi, good morning. Joseph Welch Good morning, Julien. Julien Dumoulin-Smith So quick question here on the independent side. Obviously, we’ve got the GIC involved now as a JV partner. Would you expect to be able to keep that on a prospective basis here? Joseph Welch I think that’s a question you ought to ask GIC. The thing is that, as far as we’re concerned, this is – Fortis’ and GIC’s filing and you ITC and its shareholders were held harmless to that decision. Julien Dumoulin-Smith Got it. And then subsequently, you’ve commented in the past on FERC Order 1000, I’d be curious to get your latest thoughts on the SPP process. Obviously that had certain issues about allocations of points on the technical basis. I’d be curious to get your reaction and any broader implication? Joseph Welch No, I think that the SPP’s decision probably fits into the same line as the decisions that’s taken place in PJM, for instance that they awarded the points, I find it interesting that – from my standpoint, they’ve eliminated a lot of people based on conductor size and conductor design and we feel strongly, in our case, that our conductor sizing and design was 110% appropriate. But I could tell you this that on the whole process of a line that size and the amount of magnitude from an investment perspective, there was more money spent on bidding on it and more money spent on evaluating it than the whole line was worth. Julien Dumoulin-Smith Intriguing data point itself. And lastly, just turning back to bonus depreciation with the CMS complaint out there, I’d be curious how do you intend to treat results for this year given METC and actually potentially for the balance of the portfolio? Rejji Hayes Yes, Julien this is Rejji. Joe and I highlighted, we have assumed the election of bonus depreciation, both for the 2015 tax year as well as the 2016 tax year. And so as our Q is filed later today, you’ll see the details around that. It is flowing through the financials you see in the earnings release that hit the tape this morning and the estimate on a pre-tax basis for Q1 is about $5.4 million after-tax, about $3.2 million. And you can assume over the course of 2016, you’re probably just under $10 million and that’s for the full estimate for 2016 across all of the operating companies. So we are erring on the side of conservatism in our financials, but needless to say, we obviously requested a rehearing with the FERC on the IP&L matter. So we’ll see where we go from there. Julien Dumoulin-Smith Okay, great. Thank you. Rejji Hayes Thank you. Operator And our next question comes from Caroline Bone from Deutsche Bank. Your line is now open. Caroline Bone Good morning. Just a follow-up on that bonus depreciation question. Thank you so much for the details on the impacts for the quarter and the full year, but I was just wondering if you could comment a little bit about how this might impact your more long-term growth expectations? Joseph Welch It really, when I look at growth, I don’t look at growth quite the same way you do, we’re going to be growing at the same rate that we’ve always grown, when you look at the earnings and the bonus depreciation, but the fact of the matter is that the bonus depreciation, if you elect it and generates a lot of cash and that gives us the ability to start to invest in other areas. Rejji Hayes Yes, exactly right. The only thing I would add to that, Caroline, is it clearly you’re going to have a financial impact on your net earnings, we talked of the 2016 impact and as I’m sure you well know and which the election works, it flows through our tariff as an increase in deferred tax liabilities that reduces rate base and you basically have to wear that financial impact for about 15 years. And so you do work for some time, but as Joe highlighted, clearly we’re still going to be investing in the system and trying to obviously improve the system to the benefit of customers. Caroline Bone All right. So I guess, I mean in terms of the cash benefit that you guys will see from bonus depreciation, did you get a lot of that in Q1 or should there be kind of a similar level of – just looking at the line, the deferred taxes line, in terms of the benefit for the rest of the quarters? Joseph Welch Yes. So technically, we have not received the cash benefit. So you probably noticed the income tax receivable in current assets of about $140 million, technically we’d be receiving that when we file our tax return for the 2015 tax year around mid-year. I think that’s the earliest time we can get that done. So we’re expecting that true cash inflow around mid-year, it is approximately $140 million for 2016. Caroline Bone All right, thanks so much. Joseph Welch Thank you. Operator [Operator Instructions] Our next question comes from Praful Mehta from Citigroup. Your line is now open. Praful Mehta Thank you. Hi guys, just quickly on that bonus depreciation again and I truly appreciate the point on the cash that you have now freed up. I guess if you do have this cash freed up in the long-term, as long as you can reinvest that cash at an accretive way in terms accretive asset or bid it out of CapEx, would that support – is that your thesis on why the growth rates remain the same? And secondly, does that change, now that you’re part of Fortis, if they could use that excess cash to grow some other part of the, I guess the combined platform, does that kind of change your perspective on how you think about bonus depreciation longer term, I guess? Joseph Welch It doesn’t change our perspective on how we view that at all. Rejji Hayes Yes, I think, Praful, the only thing I would add to that is from a capital deployment perspective, we’ll see what the options are at the time we receive the cash and clearly, assuming we get the transaction of the finish line post-closing, it will be discussion we have with the owners of the business, both Fortis and GIC as to what the most efficient use of that cash is, but needless to say it’s not going to be sitting in a money market account, earning 5 basis points. Praful Mehta And then just in terms of FERC 1000 and growth and development CapEx and the projects there, can you just briefly give us an update on how that is going and do you see any updates in terms of the growth projects more longer-term? Joseph Welch With regards to Order 1000? I think you could regard Order 1000 as a complete failure for the whole marketplace. In our case and you must not have been listening when we had some of our earnings calls in the past because I’ve directly highlighted that we’re not very focused on Order 1000 for the facts that I’ve just outlined. We have of Lake Erie Connector that we’re really focused on, we’ve announced that we’re doing work in Puerto Rico and Mexico. We continue to stay involved in Order 1000, but I think it’s a tree that doesn’t bear much fruit for anyone. Rejji Hayes And then Praful, this is Rejji, so the non-traditional development side, as we highlighted in our initial comments, we continue to make progress in the new Covert line which we should have in service this year and clearly the other opportunities, Lake Erie and some of the other non-traditional development opportunities as they continue to progress and we should have visibility on Lake Erie project in the latter half of this year. So continuing to push forward on that as well. Praful Mehta And I do pay attention, I do listen guys, it’s always just good to get a refresh, although I appreciate it. Joseph Welch You just wanted it refreshed? Praful Mehta Yes, always good to get your perspective again on FERC 1000, I guess. Joseph Welch Okay. Praful Mehta Thank you. Operator I’m showing no further questions. I will now like to turn the call back to Stephanie Amaimo for any further remarks. Stephanie Amaimo This concludes our call. Anyone wishing to hear the conference call, replay available through May 3, can access it by dialing 855-859-2056 toll free or 404-537-3406, passcode 83086632. This webcast to this event will also be archived on ITC website at itc-holdings.com. Thank you, everyone and have a great day. Operator Ladies and gentlemen, thank you for participating in today’s conference. You may all disconnect. Everyone, have a great 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.) 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Empire District Electric’s (EDE) CEO Brad Beecher on Q1 2016 Results – Earnings Call Transcript

Empire District Electric Co. (NYSE: EDE ) Q1 2016 Earnings Conference Call April 29, 2016, 1:00 pm ET Executives Dale Harrington – Secretary & Director, IR Brad Beecher – President & CEO Laurie Delano – VP, Finance & CFO Analysts Paul Ridzon – KeyBanc Brian Russo – Ladenburg Thalmann Michael Goldenberg – Luminus Management Operator Good day and welcome to the Empire District Electric Company First Quarter 2016 Earnings Conference Call and Webcast. All participants will be in a listen-only mode. [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Mr. Dale Harrington, Secretary and Director of Investor Relations. Please go ahead. Dale Harrington Thank you, Emily, and good afternoon everyone and welcome to the Empire District Electric Company’s first quarter 2016 earnings conference call. Our Press Release announcing first quarter and 12-months ended March 31, 2016 results was issued yesterday morning. The Press Release and a live webcast of this call, including our accompanying slide presentation are available on our website at www.empiredistrict.com. And a replay of the call will be available on our website through July 29 of 2016. Joining me today are Brad Beecher, President and Chief Executive Officer and Laurie Delano, Vice President, Finance and Chief Financial Officer. In a few moments, Brad and Laurie will be providing an overview of our first quarter and 12-month ended results as well as some highlights on other key matters. But before we begin, I’ll remind you that our discussion today includes forward-looking statements and the use of non-GAAP financial measures. Slide 2 of our slide deck and the disclosure in our SEC filings present a list of some of the risks and other factors that could cause further results to differ materially from our expectations. So let me caution you though that these lists are not exhaustive and the statements made in our discussion today are subject to risks and uncertainties that are difficult to predict. Our SEC filings are available upon request or may be obtained from our website or from the SEC. I would also direct you to our earnings Press Release for further information on why we believe the presentation of estimated earnings per share impact of individual items and the presentation of gross margin, each of which are non-GAAP presentations, is beneficial for investors in understanding our financial results. And with that, I’ll now turn the call over to our CEO, Brad Beecher. Brad Beecher Thank you, Dale. Good afternoon, everyone and thank you for joining us. Today we will discuss matters from the Board of Directors and Annual Shareholders Meetings, as well as our financial results for the first quarter and 12-months ended period March 31, 2016. We will also provide an update on the proposed merger and other recent company activities. During our annual meeting of shareholders held yesterday, three directors were reelected to serve three-year terms, Ross Hartley, Herb Schmidt, and Jim Sullivan. And other business shareholders ratified the appointment of PricewaterhouseCoopers LLP as Empire’s independent registered public accounting firm for the fiscal year ending December 31, 2016. Shareholders also approved a non-binding advisor proposal regarding compensation of our named executive officers. During the meeting yesterday, the board declared a quarterly dividend of $0.26 per share payable June 15, 2016, for shareholders of record as of June 1. On Slide 3, of our presentation, we provided some highlights of the quarter and 12-months ended period; we will discuss these more throughout the call. Yesterday we reported first quarter 2016 earnings of $14 million or $0.32 per share inclusive of merger-related costs. This compares to the same period in 2015 when the earnings were $14.6 million or $0.34 per share. For the 12-month ending period March 31, 2016, earnings were $56 million or $1.28 per share inclusive of merger costs. This compares to 12-months earnings of $60.8 million or $1.40 per share for the same period last year. As you can see from the slide it’s been a mild quarter for weather. In terms of heating degree days the 2015/2016 winter season was the warmest in the past 30 years, the first quarter ranks as the sixth warmest in the last 30 years, it was a great, it was great weather for enjoying the outdoors but not great for energy sales. During the quarter, we announced Empire had reached an agreement and planed a merger with Liberty Utilities, the U.S. subsidiary of Algonquin Power and Utilities Corporation. Algonquin Power and Utilities is a North American diversified generation transmission and distribution utility company, they are based in Oakville, Ontario, and their stock is traded on the Toronto Stock Exchange. Liberty Utilities is a growing utility operator that has been in business in the U.S. for over 15 years. They operate electric, natural gas, water, and waste water utilities across the broad geographic areas stretching from California to New Hampshire. Empire will be delivering Central’s region with Jolpin serving as the corporate headquarters. The Central region will include 340,000 customers in Missouri, Kansas, Arkansas, Oklahoma, Iowa, Illinois, and Texas. The transaction will provide greater scale, geographic diversity, and growth opportunities for both organizations. As a reminder, Empire shareholders will receive $34 for each share of stock owned at the close of the transaction. This represents a 50% premium over the unaffected price of $22.65 on December 10, 2015. On Slide 4, we provided a tentative timeline of the approval process and transaction closing. Merger applications were filed with state and federal regulatory agencies on March 16. We expect to receive an order from FERC approving the merger any day. In Oklahoma, the hearing was held on April 27 and Oklahoma Administrative Law Judge has recommended approval and order is expected within 60 days. Procedural schedules are being established in Missouri, Kansas, and Arkansas. We anticipate approvals in place for transaction close in the first quarter of 2017. Shareholder approval is also required for the transaction. We have set May 2, 2016, as the record date for determining eligibility to vote on their agreement and planned merger. We expect to hold a Special Shareholders Meeting on June 16, 2016, to conduct the vote. A final proxy and voting instructions will be mailed to shareholders next week. Last week, we began joint meetings at the senior management level to initiate the transition and integration planning process. As we work to fulfill the conditions to close the merger we remain focused on business as usual at Empire. Moving onto Slide 5, Riverton combined cycle is nearing completion of in-service testing. The project is on schedule and on budget. As of March 31, approximately $163.3 million has been spent on the project against a total budget of $165 million to $175 million. The Riverton project is the first large frame combined cycle generating unit in the State of Kansas and will be among the most efficient natural gas units in the country. This projects completes our multiyear compliance plan for the Mercury and air toxic standard. We continue to prosecute the Missouri rate case which is primarily related to the cost recovery of the Riverton project. Slide 6, is a reminder of the key aspects of this case filed October 16, 2015. The case seeks an increase in annual revenues of $33.4 million or about 7.3%. The procedural schedule provides for a true up of expenditures incurred through March 31, 2016, assuming a Riverton 12 combined cycle end service date of June 1, 2016. Evidentiary hearings are slated for May 31 in Jefferson City. As you can see from the projected timeline on Slide 7, we will experience a period of lag between the in-service state of the Riverton project and the time new customer rates are effective which we expect to be late September of this year. A corresponding rate filing has been made in our Oklahoma jurisdiction; we expect to file rate cases in Kansas by the end of the third quarter, and in Arkansas, no later than the end of the year. For 2016, we expect earnings to be within a weather-normalized range of a $1.26 to $1.44 including estimated merger transaction fees. We estimate total fees of $15 million to $17 million with approximately 50% of the fees payable in 2016 and included in the guidance range. As of April 1, 2016, we have received the applications for just over $10 million in rebates for private solar installations. As of the end of the quarter, we had processed 467 solar rebate applications and have recorded a regulatory asset of approximately $6.2 million on our books. These rebate costs will be collected from other Missouri electric customers and future charges. On the legislative front, we continue to support legislation in Missouri to update our century old regulatory framework. Senate Bill 1028 allows timely recovery of utilities prudently incurred operating cost while offering important consumer protection such as earnings caps, revenue caps, and performance standards. We believe that Senate Bill 1028 offers a balance long-term solution that will benefit both Empire customers and shareholders all while retaining the strong oversight of the Missouri Public Service Commission. We will continue to work to move this important legislation forward in the final two weeks of the Missouri legislative session. I will now turn the call to Laurie to provide additional details of our financials. Laurie Delano Thank you, Brad, and good afternoon everyone. As we review our first quarter 2016 earnings per share results, the financial affirmation I will discuss will supplement our press release that we issued yesterday, and as always our earnings per share numbers referenced throughout the call are provided on an after-tax estimated basis. As we noted in our press release yesterday the Missouri customer rate increase that went into effect in July 2015 was the primary driver of increased margin compared to the prior year quarter. The mild fourth quarter 2015 weather continued to spill over into the first quarter of 2016 driving the 7.5% decrease in our electric segment sales. This mild winter weather largely offset the impact of higher customer rates from an earnings per share standpoint. And as we also noted on our press release in the first quarter we paid approximately $4.2 million in merger-related costs which reduced earnings an estimated $0.06 per share minus the mild weather and the merger cost impacts, results were pretty much on track with our expectations. Slide 8, shows the detail of changes that impacted earnings per share quarter-over-quarter. Consolidated gross margin increased $1.8 million lifting earnings by $0.03 per share. Increased electric customer rates of about $7.7 million net of an estimated $1.9 million decrease in Missouri-based fuel recovery, increased revenue $5.8 million quarter-over-quarter this added an estimated $0.11 per share to margin. As mentioned previously, this increase was almost entirely offset by the impact of the mild winter weather and other volumetric factors which decreased revenue by about $10.5 million negatively impacting margin by about $0.10 per share when compared to the first quarter last year. Positive customer growth contributed about a penny to earnings per share and other items including the content and timing of our fuel deferral and recovery mechanisms combined to add another estimated $0.02 per share to margin when compared to the first quarter of 2015. Mild weather also impacted our gas segment retail sales quarter-over-quarter resulting in a decrease in gas segment margin of about a penny per share. We estimate the net impact of the mild winter weather reduced margin about $0.06 to $0.08 per share for the quarter when compared to normal weather. Continuing on with Slide 8, consolidated operating and maintenance expenses remained relatively flat compared to the 2015 quarter combining to raise earnings per share about a penny. And as mentioned previously, the most significant expense item during the period was the previously mentioned $4.2 million in merger cost which reduced earnings per share about $0.06. Exclusive of the $0.06 per share negative impact resulting from the merger cost, our first quarter earnings would have been $0.38 per share. Moving on to our 12-months ended results, Slide 9 provides a roll forward to our $1.28 per share earnings for the period ended March 2016. As Brad mentioned earlier, our net income decreased about $4.8 million or $0.12 per share compared to the year ago period. Slide 9 details the breakdown of the various components. Consolidated margin increased about $12.7 million or an estimated $0.18 per share when comparing the two periods. Electric rates were again the most significant positive margin driver during the period adding an estimated $0.26 per share. The impact of mild weather and other volumetric factors combined to reduce electric on-system sales about 2.7% decreasing margin an estimated $0.15 per share. Increases in customer growth added about $0.02 per share. Other items again including the content and timing of our various fuel deferral and recovery mechanism combined to add an estimated $0.08 per share to margin when compared to the 2015 period. The mild weather also continued to impact our gas segment reducing margin an estimated $0.03 per share period over period. Our total on-system electric sales for the 12-months ended March 2016 were 4.84 million megawatt hours versus 4.97 million megawatt hours in the 12-months period ending March 2015. This is near our weather-normalized annual expected sales level of approximately 5 million megawatt hours. Slide 9 also details the — shows the details of increases in operating and maintenance expense items which combined to decrease earnings per share by $0.05. A planned maintenance outage of our state line combined cycle plan, increases in production maintenance expense at a number of our other generation plants, and our previously discussed Riverton 12 maintenance contract which became effective January 1 of 2015, combined to decrease earnings around $0.05 per share. As you may recall, we did not begin recovering that Riverton maintenance contract and customer rates until our rate increase effective last year in July. Increased labor cost driven by increased executive stock-compensation valuations reduced earnings about $0.04 per share. Other smaller cost increases and decreases combined to add another $0.04 per share to earnings bringing the total O&M impact to the $0.05 per share reduction. Again the merger cost of approximately $4.5 million in that 12-month ending period reduced period over period earnings at an estimated $0.06. Increased depreciation and other taxes reduced earnings an estimated $0.08 and $0.03 per share respectively. Interest expense reduced earnings per share about $0.05 period over period due primarily to the $60 million privately placed first mortgage on financing that we did in August 2015. As Brad mentioned earlier, and as Slide 10 illustrates, our full-year 2016 weather-normalized earnings guidance range which we revised on February 2016 of this year remains unchanged at $1.26 to $1.44 per share. As a reminder, at the time we revised our guidance range we advised that we estimated full-year earnings to be $0.10 to $0.12 per share lower than our original full-year guidance range of $1.38 to $1.54 that we provided on February 4. We continue to expect to incur total merger costs of approximately $15 million to $17 million, half of which would be payable in ’16, with the other half in 2017, assuming a 2017 closing date. Now as I mentioned earlier we have already paid $4.2 million of those costs in 2016. On our balance sheet, we have $104 million in retained earnings and we had $19 million of short-term debt outstanding at the end of March. On Slide 11, we have updated our trailing 12-months return on equity charge. As you can see on the slide at the end of March our return on equity was approximately 6.9%. With that, I will now turn the call back over to Brad. Brad Beecher Thank you, Laurie. At Empire, we strive for continuous improvement and innovation, I’m proud to report our efforts were recently recognized by the Edison Electric Institute when they announced that we were among a small group of utilities chosen as the finalist for the Edison award. The award recognizes our work in developing an innovative modular transmission, structured design, and construction process. The design speeds construction, lowers cost, and reduces outage sign during coal replacement projects. With that, I will now turn the call back to the operator for your questions. Question-and-Answer Session Operator Thank you. We will now begin the question-and-answer session. [Operator Instructions]. Our first question is from Paul Ridzon of KeyBanc. Please go ahead. Paul Ridzon Good afternoon. How are you? Laurie Delano We’re fine Paul, thank you. How are you? Paul Ridzon Fine, thank you. Just hoping to get an update on where the proposed I think its Senate Bill 1028 stands? Brad Beecher Well that’s going to be the question of this day, Paul. There is only two weeks left in the session, but so we’ve got a lot of work to do and a short amount of time to do it. Senate Bill 1028 is currently on the informal Senate calendar which means it can be called up at any time. That said it’s going to be difficult for 1028 to move through the remaining process and house process in two weeks. So if Senate Bill 1028 is going to move forward or you will likely see it attach to another House Bill that might be moving through the Senate. As you probably heard we have had the third filibuster in the Senate here this week on voter ID and so it’s just going to be — so we are still working hard and we still think it’s got to shot but it’s going to be a difficult process. Paul Ridzon Thank you for that update. And Laurie, I had a question, when you talked about gross margin there was new rates net $5.8 million and then weather was $10.5 million headwind but net-net there was gross margin actually went up and you referenced in the release some fuel deferrals, is that where the delta is and is that a timing issue? Laurie Delano That’s where the delta is. So if you will recall in our last rate case fuel was rebased pretty significantly as part of the rate reduction and rates that were set. And so the way we think about that is our revenue reduction is net of that fuel rebate, but that fuel rebate doesn’t impact margin. So let me get to my notes here. So when we say that we had increased electric customer rates of $7.7 million for the quarter, net of the estimated $1.9 million decrease in Missouri-based fuel recovery that $1.9 million in Missouri-based fuel recovery is a loss to margin. So in our estimation the $7.7 million is really the impact of margins. Paul Ridzon Okay. Laurie Delano Does that make sense? Paul Ridzon So as we go through the year are there a few deferrals going to kind of reverse and may be make another quarter weaker? Laurie Delano No it’s a dollar for dollar increase in revenue and increase in fuel. So as we compare the two periods, period over period we’re identifying the new rates that came in at the gross amount which would be the $7.7 million and then we’re identifying how much of that fuel base recovery brought revenues and fuel both down together to get to our net revenue change. Paul Ridzon Of $5.8 million? Laurie Delano Yes, so again the $5.8 million reflects the increased cost less the fuel decrease. But that fuel decrease is not only decreasing revenues, it’s also decreasing fuel cost. Paul Ridzon Okay. Thank you very much. Laurie Delano Hope that made sense. Paul Ridzon Yes. Operator Our next question is from Brian Russo of Ladenburg Thalmann. Please go ahead. Brian Russo Yes hello. Laurie Delano Hi Brian. Brian Russo You mentioned the Missouri Legislature ends in two weeks, what’s the exact date that it concludes? Brad Beecher It’s Friday, May 13, I believe. Brian Russo Okay. And when does the legislature resume again I guess in 2017? Brad Beecher I don’t know that exact date but it’s again — it’s in 2017. Brian Russo Okay. And is there any sort of some statutory deadline in which Missouri would have to rule on the merger once procedural schedule is set? Brad Beecher We went through this a little bit Brian on our merger call. But the way it stands in Oklahoma once they have the hearing which they have, they have 60 days in order to issue an order, in Kansas they have 300 days from the time the merger application was filed, so 300 days from March 16, in Arkansas and Missouri, there is no prescribed statutory timeframe that they have to act. Brian Russo Okay, got it. And you mentioned that SB 1028 is on the informal calendar and it could be heard anytime. So if there is not, it’s not when it was put on the calendar prior along with a lot of other proposed legislation, so there is no particular order in which it will be heard, it can be heard at anytime? Brad Beecher As we said, right now, it can be heard at anytime. They have rolled — they have used the term roll to the calendar and anyway Senate Bill 1028 is on the informal calendar and either it or an energy-related House Bill could be that it’s passed through the House could be called up at anytime. Brian Russo Okay. And then I’m just curious the Riverton lag seems like it’s related to depreciation. Are there any O&M savings for the gas conversion that you guys will retain until you should include this rate case and new rates going to affect? Laurie Delano Nothing significant, Brian. Brian Russo Okay. Brad Beecher If we shift the coal units down really in ‘14 and ‘15 and so any reductions in O&M have already been in the rearview mirror. Operator Our next question is from Michael Goldenberg of Luminus Management. Please go ahead. Michael Goldenberg Hi I wanted to continue the discussion about the merger approvals. So as it stands right now which one do you think will be the most complicated or complex, which of the state will be the most involved? Brad Beecher As we said right now Missouri, Arkansas, and Kansas, are kind of all at the same stage we’re getting data request in all the states now, they all take you through a full process. So we have a few more interveners in Missouri than we do in the other states. If you think that’s going to add complexity but generally speaking all three of them are going to through the same type of process. Michael Goldenberg So you said Missouri, Kansas and I’m sorry. Brad Beecher Arkansas. Michael Goldenberg And what? Brad Beecher Arkansas were those three. Michael Goldenberg Arkansas, okay. Now in terms of in Kansas is the one with 300 days and Missouri has no statutory deadline right? Brad Beecher That is correct. Michael Goldenberg Do both Kansas and Missouri have a specific schedule of events posted somewhere? Brad Beecher So in Missouri we have field a proposed procedural schedule and Laurie can range you the dates here but the commission is not rolled on it. Laurie Delano So what the proposed schedule says is for technical conferences on May 16 and 17 and then June 1, with rebuttal testimony on July 6, serve rebuttal on July 22, and order witnesses, order cross examination on July 28, physician statements August 4, with the hearing occurring on August 15 to 17 and again that is just proposed that has not been approved yet. Michael Goldenberg But basically July, August will be the hard and heavy times of this, so to speak? Brad Beecher Right and I think that’s the way you need to think about Arkansas, Kansas and Missouri as we said here today it is the summer especially late summer is going to be full of hearings. And then hopefully that will give commissions about 90 days to make decisions and hopefully get us orders by December so that we can close in the first quarter. Michael Goldenberg When you think about interveners, is it the usual cash [indiscernible] consumer advocates comes out of that, oh, I want money, I want fixed rates stuff like that. Is it that kind of a millet that we see in every merger proceeding or is that something that we need? Brad Beecher So in Kansas and Arkansas the interveners are the typical AG consumer advocate or staff, in Missouri in addition to that we have some of our industrial consumers in the City of Jolpin which are typical interveners in our rate case and then we have a couple other folks that have groups that have intervened one of them being Empire’s retirees who have interest in retiree healthcare. Michael Goldenberg Okay. Is it too early to discuss strategy and kind of what you learned from recent merger proceedings? Brad Beecher We filed direct testimony, so a lot of the strategy is laid in that direct testimony. We filed joint testimony with Common Council with Liberty. And I think reflecting to 99 on why we didn’t get approval on 99 the big ticket items that have kind of been taken off the table as Algonquin is not asking for premium recovery, they are not asking for recovery of transition cost and they are not proposing any staff reductions and those are the big ticket items that have caused a lot of things in the past and so Algonquin took all of those off the table in their initial filings. Operator [Operator Instructions]. Showing no additional questions, this concludes our question-and-answer session. I would like to turn the conference back over to Brad Beecher for any closing remarks. Brad Beecher Thank you. Before we close, I will remind you that as we work diligently to achieve the conditions necessary to successfully close the merger with Liberty Utilities, our mantra will be business as usual. Rest assured we will continue to stay focused on the business at hand providing safe, reliable energy for our customers and attractive return for our shareholders and a rewarding environment for our employees. One last note, Laurie, Dale, and I will be at the AGA Financial Conference May 16 and 17 in Florida. We hope to see many of you there. Thank you for joining us today and have a great weekend. Operator The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) 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