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Innergex Renewable Energy’s (INGXF) CEO Michel Letellier on Q4 2015 Results – Earnings Call Transcript

Innergex Renewable Energy Inc. ( OTC:INGXF ) Q4 2015 Earnings Conference Call February 25, 2016 10:00 AM ET Operator Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Innergex Renewable Energy’s Conference Call and Webcast for its 2015 Year End Results and 2016 Objectives. [Operator Instructions] I would like to remind everyone that this conference call and webcast is being recorded today, Thursday, February 25, 2016 at 10 a.m. Eastern Time. I will now turn the conference over to Martine Benmouyal, Senior Advisor, Communications. Please go ahead. Martine Benmouyal Good morning, ladies and gentlemen. If you haven’t done so already and would like to access the webcast, please go to our website at www.innergex.com. I am here today with Mr. Michel Letellier, President and CEO of Innergex, and Mr. Jean Perron, Chief Financial Officer. Please note that the presentations will be in English. However, you are welcome to address your questions either in French or in English. I would also like to point out that journalists are invited to call us afterwards if they wish to further address any question. In a minute, Mr. Perron will provide some details on our financial results for the year ended December 31, 2015. Mr. Letellier will then provide an overview of our operating activities in 2015 and our objectives for 2016. We will then open the Q&A session with both senior executives. The financial statements and the MD&A have been filed on SEDAR and are readily available via the Internet. You may also access the press release, financial statements and the MD&A on the Innergex website in the Investor section. During this presentation we will refer to financial measures such as adjusted EBITDA, free cash flow and payout ratios that are not recognized measures according to International Financial Reporting Standards, the IFRS, as they do not have a standardized meaning. Please be advised that this conference call and webcast will contain forward-looking information that reflects the corporation’s expectations with respect to future results or developments. For explanation concerning the principle assumptions used by the corporation to derive this forward-looking information and the principle risks and uncertainties that could cause actual results to differ materially from those anticipated, I invite you to consult the first pages of the webcast presentation, as well as Innergex’s Annual Information Form. I now turn the conference to Mr. Perron. Jean Perron Thank you, Martine. Good morning. The quarterly results for Q4 2015 show production of 94% of long-term average due mainly to below average water flows and wind resources. Production for the year stands at 98% of the long-term average. Revenues for the quarter were $12 million lower than in 2014 mainly due to last year where the production was under 20% of long-term average. Revenues for the year were $5.1 million higher than last year. The increase is attributable mainly to the full year contribution of the SM-1 hydroelectric facility acquired in June 2014 and to the higher wind regimes in Québec, partially offset by lower water flows in British Columbia. Adjusted EBITDA for the quarter was $9.9 million lower compared to Q4 2014 for the reasons explained above. Adjusted EBITDA for the year was $4.2 million higher than in 2014. The increase is mainly due to the higher revenues. Finance costs for the quarter were slightly lower than in Q4 2014, while for the year they are down $3.4 million compared to last year mainly due to the lower inflation compensation interest. During the quarter $51.7 million impairment was recognized on the prospective projects acquired from Cloudworks in 2011. This impairment is due to the lack of visibility on the future RFP following the construction of sites and the decrease in demand that was expected from the construction of new LNGs planned that have been postponed. Innergex servicing the ownership of the license and may eventually develop them in the future. During the year, a total of $1.1 billion of financing was completed and we do not need any additional liquidity to complete the construction of the forward projects, an amount of $180 million remains unused and available on our revolving corporate credit margin of $425 million. During the quarter, we bought back 400,000 shares and for the year a total of 1,190,000 shares at an average price of $10.36. During the year, we also issued a new $100 million convertible debenture at the 4.25% interest rate and convertibles at $15 per share, which is less dilutive than the former convertible debenture that was bearing interest rate of 5.75% and convertible at $10.65 per share and that was partially redeemed from the proceeds of the new debenture. Overall, the slightly below average quarter combined with a very strong first quarter allowed us to be very close to production in various targets for the year, while our operating expenses were lower than expected. As a result, free cash flow for the year reached $74.4 million, compared to $67.7 million in 2014 and our payout ratio improved to 86% from 88% last year. Since the beginning of 2016, our production has been above the long-term average mainly at our hydroelectric facilities in British Columbia. We remain confident in our ability to reach our long-term average production figures year-over-year. This concludes my review of the results. I will be happy to answer your questions later on during the call. And I will turn it back to Michel? Michel Letellier Thank you, Jean. Good morning, everybody. As a little bit of a tradition that we have established in the last two years, this presentation we would like to come back to what we have said in report cards for 2015 and give you what we have actually accomplished give you a little bit of a perspective on our objectives of 2016, give you our run-rate of 2017, and give you a little bit of an overview on our strategy for the next few years. And then we will have the question period. So, if we come back a little bit on what we said in 2015, we said that we wanted to increase the production and revenue by approximately 3% to 5%. We did manage to increase the revenue by 2%, even if the long-term average was a little bit weaker, as Jean mentioned. We did a little bit better on the EBITDA. We have increased 2% our EBITDA. And we have managed to keep our payout ratio at 86%, so, so far, so good. Objectives on the development, that’s where we had a big year in 2017. As you remember, we have the project of Upper Lillooet, Boulder, Big Silver and Tretheway under construction in BC. And we wanted to start the construction on Mesgi’g Ugju’s’n, the 150 megawatt wind farm in Québec. So, I am happy to report and we have a tab in the next page to give you the more – a little bit of more detail. But in a nutshell, we have managed to put the Tretheway on COD a little bit in advance and under budget by $8 million. We have started the construction on Mesgi’g Ugju’s’n project and we have overall facility reduced the construction budget by $28 million. So, if you include the $8 million saving in Tretheway, we are down to $36 million savings over a little bit over $1 billion of projects. I am pretty proud of the team there. So, if you flip on the next page, you see the project, the actual cost now forecast for the COD. And we have moved the COD a little bit in Boulder, in Upper Lillooet due mainly on the last summer fire. We have lost a few months there in the peak of the summer. So, we are managing to have Upper Lillooet and Boulder now moved a little bit further in 2017 instead of the last quarter of 2016. Mind you that Boulder and Upper Lillooet are in a remote area, where the intakes are fairly high in altitude. So, winter revenue for these projects are not big. So, our goal is to make sure that we will be in COD for the spring time, where we get the majority of the revenue. In terms of more specific costs, Boulder and Upper Lillooet have been a little bit more of a challenge, given the tunnel. So we have increased the budget and we think it’s fairly conservative by $17 million. On the other hand, Big Silver has proven to be, I would guess – I would say a very – I wouldn’t say easy project, but we didn’t have any issue with the tunnel. And most of the civil work has been done already. So we are forecasting a reduction in cost by $10 million. And Mesgi’g Ugju’s’n have – we have finalized all the construction. We have also finalized the financing. So we are now very comfortable with a reduction of $35 million. So again, all-in-all I think that I am very proud of the team to have managed a $1 billion of construction and being able to have a reduction of $36 million on their budget, so very happy on that. Financing was also a big year, if you remember last year. We had a project finance I guess portfolio of about $1 billion to be done in 2017. We managed to do all of those with at least favorable – a little bit more favorable terms, conditions. The team has been also very creative in their ability to negotiate with long-term lender to structure the reimbursement of the amortization, so very interesting financing there. We also have issue the convertible debenture of $100 million to replace the old one with more favorable terms. So that’s another plus. We did also the refinancing on Umbata Falls. So all-in-all, we managed to do a little bit more than $1 billion worth of project finance in 2015. So right now as mentioned by Jean, we don’t have any more financing to do. So every project under construction has now the equity and the financing in place with fixed term and fully amortized over the initial terms of the EPA, so quite a good achievement there too. Now, if we are talking about the growth opportunity, we said that we wanted to participate in the Ontario market. We have managed to deposit or to supply – not supply but to file two projects in the RFP with 100% of the points. I don’t know if you are familiar with the Ontario RFP. But there is a possibility of discount in your price submitted to the authority by about 40% if you have 100% of the points that the – and its social acceptance and the advancements of the project. So I am happy to report that we managed to have 100% of the points on both projects that we have submitted. So we will know a little bit later on in March if we are a winner there or not. And we also have signed a Memorandum of Understanding with the Federal Electricity Commission of Mexico, which is the equivalent of Hydro- Québec and/or BC Hydro in Mexico, to develop in cooperation a small hydro opportunity. So we are starting to initiate this meeting and opportunity. So I am quite positive on that outcome as well. Also we said that we wanted to expand internationally or to look outside Canada and to consolidate our leadership in Canada. So I am happy to report that we did another acquisition in BC. We acquired Walden North electricity facility. It’s a 16-megawatt facility, not far from our own portfolio. So we are quite happy to have been able to achieve that. And we are pursuing acquisition opportunities in France and Mexico. We are making very good progress over there. Both teams are very present in France and in Mexico. And we are still very positive on our possibility over there. Now, what we are hoping to do in 2016, we want to grow our production by 6% or 8%, grow our revenue by 9% or 11% and grow our EBITDA between 7% and 9% and obviously trying to maintain our payout ratio below 100%. We want to make sure that we also advance our construction of the three hydro facilities in BC. We want to put Big Silver and Mesgi’g Ugju’s’n project in service by the end of the year. And obviously we want to make sure that we keep on track on Boulder and Upper Lillooet construction. We also want to finalize the negotiation with Hydro-Québec regarding Saint-Paulin and Windsor PPA. And in terms of growth opportunity, we want to make sure that we are still present in Canada when there is opportunity in Canada. We reaffirm our willingness to work in Mexico and France. We want to realize at least one acquisition in one of those two markets. And we are looking into other markets, mainly the U.S. and possibly the Peru market for small hydro. We are maintaining our run rate for 2017. That run rate doesn’t include any acquisition or future development that we could have, except from the projects that we are under construction right now. So our free cash flow, we are maintaining $105 million free cash flow for 2017 and the growth of the installed capacity will go from 708, our net capacity, to about 895. That doesn’t include the acquisition of Walden or any other facilities. So I am very confident about those numbers to 2017. Now the overview of our strategy for 2016 in the next few years, we would like to again reaffirm our commitment to remain exclusively in renewable energy. We want to maintain a very healthy diversification of energy sources. We want to consolidate our leadership position in Canada. So that means that if there is opportunity in Canada, we will be there. We want to develop an international presence in target markets, as we mentioned Mexico, France and possibly the U.S. and Peru markets are still under our focus. Still again, you know us. We want to focus on high quality assets. We want to maintain a low risk business model, maintain a long-term outlook. This is very important for us. We want to focus on partnership, especially with First Nation in Canada. I think that has been a very good tool for us to develop. Maintain our discipline of acquisition that means that we want to make acquisitions that are accretive to cash flow. So in summary, I am very proud of the evolution of Innergex, from the transition following the merger of the Income Fund and the company. We have as a team, being able and patient, focused on delivering both the growth and overcoming our high payout ratio, which was the heritage of the Income Fund. We have managed to build a very strong, long-term cash flow that are based on a great diversified portfolio of assets, all under long-term PPA. With a majority of these projects being project financed with long-term and fixed rate and that are fully amortized over the first life of the EPA. We have secured the sustainability of our dividend. And finally, we will have a significant amount of free cash flow in 2017. We now have the tools to focus on growing for the future. In a nutshell, we are willing and able to deliver on our strategy. So thank you. And we will take the questions. Martine Benmouyal This concludes our presentation. We now invite you to ask your questions. Question-and-Answer Session Operator Thank you. Ladies and gentlemen, we will now conduct the question-and-answer session. [Operator Instructions] And your first question comes from Nelson Ng with RBC Capital Markets. Your line is now open. Nelson Ng Great, thanks. Good morning, everyone. Michel Letellier Hey, good morning, Nelson. Nelson Ng A quick question on the delay in the timing of construction for Upper Lillooet and Boulder Creek like was it entirely due to the forest fires last summer or did the incidents in Upper Lillooet in November contribute to the delay as well? Michel Letellier The incident that you are mentioning very unfortunate incident had delayed about 10 days as well. So, it’s a little bit of a both. We had managed to have a force majeure by BC Hydro for 95 days – 90 days, which is basically the main – if you add up those 10 days, which is mainly the delay. Also the consequences of the fire having burned all the trees and the brushes along the slope had increased also some avalanche risk. So, we have lost a few days on that aspect as well. So, it’s all related to the fire mainly and also the very sad incident, that we had last fall, yes. Nelson Ng I see. So, in terms of the cost increase, was any of like the roughly $17 million cost increase, was any of that related to the delay or was that purely just on technical items? Michel Letellier It’s a little bit of mix. Mind you that it’s still – I think it’s still conservative. What we are doing is that we have kept the risk of the geology on the tunnel. So that means that we have fixed prices for the type of rock that we encounter during the construction, but it depends on a mix of quality of the rocks. We have basically four classes, 1, 2, 3 and 4. And depending on the quality of the rocks, we get to have a different pricing. So, I think that we have been a little bit conservative and rightly so, because we don’t know what’s in front of us in the tunnel, but I think that it’s basically the tunnels that are driving the cost, the overruns. Nelson Ng Okay. So, pushing out construction doesn’t really cause much of an increase? And I guess kind of related to that and if there are any cost increases, would that be recoverable through insurance? Michel Letellier Yes. Well, the delays are bringing some cost, but we are thinking – and we are discussing with the insurance. And hence, the insurance are basically covering all of those delay costs. So, that’s why we are not – and I was not referring to the $17 million being related to delays, because we think it’s – basically it’s a flow-through in terms of cost with the insurance. Nelson Ng I see. Okay. So there would be some costs, but like you said, it’s a flow-through. So, it’s not included in the increase? Michel Letellier No. Nelson Ng Okay. And then kind of more big picture in terms of I guess opportunities and project developments. So, like is it fair to say that like in the absence of an acquisition, was it fair to say that there won’t be – given the kind of lead time to procure projects, there probably won’t be any kind of new projects commissioned either in the second half of 2017 or even 2018 and potentially even early 2019? Would there be a period where there will be like no new projects contributing new revenues? Michel Letellier Well, Greenfield project, because in acquisition we can acquire existing facility or facilities that are just ready for construction. If it’s wind or solar, you can take sometimes only 1 year to build a wind or a solar facility, so that’s also part of our strategy. As I mentioned, always in the past we love to have a good balance between existing facility, facility under construction, facilities that are just at the very late stage of development and permitting are almost ready to build. So, that’s what we are looking into when we are looking into acquisition or a little platform or partner with existing developers, both in France or in Mexico. So, those are the targets. And Nelson, we may see some other projects coming in, in late 2017 or ‘18. Obviously, those would have to be acquisition of projects that are already under development. Nelson Ng I see. Okay. Just one last question, like obviously I think in the past you mentioned that you guys are looking at French wind acquisition as probably one of your priorities, but I guess given that Alberta and Saskatchewan now want to go green and the U.S. extended their renewable tax credits like what are your priorities and also geographies? Michel Letellier Well, obviously Canada is always top priority when there is opportunity. We have been very successful over the years in Canada. Canada is our own turf. There is no exchange rate issue. So, Canada is definitely a place that we want to be present. Alberta is a little bit more complicated. We don’t know exactly what will be the way that they are going to pay for the electricity. So, it’s still a little bit of an unknown. Saskatchewan is definitely of interest for us. There is New Brunswick as well who is having a small call. And Ontario has reaffirmed their willingness to extend the LRP II. So, we will be focusing on Canada. The U.S. is maybe a little bit more, I would say, not necessarily open in terms that there is always competition in the U.S., so in other market, but the yield co has been definitely been challenged in their business models. So, suddenly there is maybe a little bit more room for the Canadian company to participate in the U.S. market. Nelson Ng I see. Thanks. Thanks, Michel. Those are all my questions. Michel Letellier Thank you. Operator Your next question comes from Sean Steuart with TD Securities. Please go ahead. Sean Steuart Thanks. Good morning, everyone. Few questions. There was mention in the MD&A of a 200 megawatt block, wind block, given to the Innu First Nation and I gather you are exploring options to potentially partner with them. Can you give any context on developments there? Michel Letellier Yes, it’s like I said, I mean, I have been very careful to talk about active RFPs in development. So yes, we are interested definitely in the 200 megawatt Innu RFP or development, but it’s competitive. It’s under development right now. So, I won’t comment more, but definitely we are interested. Sean Steuart Okay. And with respect to the MOU in Mexico, wondering if you can give any insight on how everything is progressing there, where you are in terms of specific project development, any more detail you can provide in Mexico? Michel Letellier Yes. We are very, very active in Mexico. We have been meeting with CFE. Right now, the focus on both CFE and ourselves is the first RFP in Mexico. The prequalification for RFP have been happening. So, we are there. We hope to participate in that RFP. So, I guess that CFE is also focused on that first RFP. The date is sometimes late March to deposit the projects. So everybody, I guess the industry is really focused on that right now in Mexico. But we have been meeting with CFE on small hydro development. CFE has the ability to do its own project and not necessarily take all the supply from future RFPs. So, the small hydro project that we would like to do are on that basis is direct negotiation with CFE under potential partnership to build small hydro that will be used for supplying CFE-owned electricity. Sean Steuart Okay, thanks for that detail. And then lastly, any insight you can give on I guess potential resolution around the Québec PPA arbitration process from your perspective? Michel Letellier Alright. It’s tough to call. It’s – the arbitration is ongoing right now. I think that the arbitration – some arbitration are actually happening. I think that the conclusion should be somewhere late fall this year. So we are still hopeful that the arbitration conclusion on a few projects will bring value to the price of electricity. I think that we have a good case, the industry has a good case to come back to the avoided costs. Those projects – what we call the [indiscernible], the pricing was based on the avoided costs of electricity by Hydro- Québec. So we are hopeful that that notion will be retained by the arbitrator. Sean Steuart Okay, that’s all I had. Thanks Michel. Michel Letellier It’s my pleasure. Operator Your next question comes from Rupert Merer with National Bank. Your line is now open. Rupert Merer Hi, good morning everyone. Michel Letellier Hi Rupert. Rupert Merer So we had a dividend increase this quarter and some share buybacks, can you talk a little about how you are thinking about capital allocation, how regularly are you going to review the dividend and how you are going to look at share buybacks going forward? Michel Letellier Well, I think that again that policy or declaring a dividend is the responsibility of the Board. But as we discussed that strategy yesterday, I think that what we want to establish is the sustainability of the dividend and the foreseeable growth of the dividend. We are cautious, as I guess you gather from our development and the type of project that we are doing. So I think that what is important for us is to be able to say that our dividend is sustainable and we want to grow it sustainably. We are going to generate more cash flow in 2017. We will have a payout ratio that is going to be a lot lower than where we are experiencing right now. So again, always the decision between increasing the dividend and making that cash flow to work. We are very confident on what we are seeing abroad and eventually to Canada, to be able to make good investment and good use of that free cash flow. So whenever we are going to have some ability to invest and create value for the company, I think that will be the priority. But I think that the investors have to be rewarded on their patience with us. And creating – increasing the dividend slowly, but surely is probably what we are going to do. Rupert Merer Okay, great. Thanks for that. And then quickly then what was your outlook for Q1, can you talk about how it’s shaping up, given what you can see so far in the quarter? Michel Letellier Well, BC is probably doing the best of the best. It’s raining in lower elevation and we are capturing the rain. And it’s – there is a ton of snow in higher evolutions. So in BC we are well above 100% right now of our long-term average for the year-to-date on all our facilities. The wind in Québec is okay, a little bit over in February, but it was a little bit lower in January. So we are very close to our long-term average in the wind. And the hydro in Québec is also very good and in Ontario as well. So only the solar doesn’t have the full radiation right now. But that’s not so bad. But it’s still very close also to [indiscernible]. So far, the first quarter looks very, very strong. Rupert Merer Okay, excellent. Thank you very much. Michel Letellier It’s my pleasure. Operator [Operator Instructions] Your next question comes from Ben Pham with BMO Capital Markets. Please go ahead. Ben Pham Thank you. There wasn’t any commentary in the MD&A or even in your prepared remarks on Alberta, where do you guys stand on Alberta with renewables? Michel Letellier Well, I would say that for a change Alberta is now focusing on renewable energy. And I don’t want to go politics on that. It’s just that I think and I said in places in public speeches that especially in Canada, coal cannot produce electricity in Canada anymore. There is no way our country should support coal to produce electricity. And Alberta has close to 5,000 megawatts to 6,000 megawatts of installed capacity in coal. So we are hoping to see that market evolving towards future RFP. Alberta is very lucky to have very good wind resources and to some degree very good solar radiation as well. So I think that Alberta, if they have the willingness, they certainly could see a very dynamic IPP sector to produce renewable energy in Alberta. So if there is a good market and if there is some fair market for us to play, we will definitely love to be present in Alberta. Ben Pham Okay. But you don’t – you are more watching in the background now, rather than setting up offices? Michel Letellier We are yet to see how it’s going to evolve in Alberta. What we – why we haven’t been very active in Alberta is that Alberta never really had a long-term PPA that makes sense for us. So depending on what they are going to put forward, we will be aggressive or not in Alberta. Ben Pham Okay. Michel Letellier So we are – basically we are looking for long-term PPA opportunity, so if the renewable energy is again focused on merchant and some green credit, it will be difficult for us to be very aggressive there. Ben Pham Okay. And my second question, I was just wondering perhaps your thoughts about the benefits of scale as you think about 2020, what are you thinking in terms of your asset base and the growth opportunities beyond then, because it seems like most of your peers, and within the sector outside are touting scale and building scale to position for the next wave, I am just wondering your thoughts on that whole situation? Michel Letellier I think that scale is important, yes. I think that our ability to be creative is also very important and flexible and also is to be present in, I would say some good markets. Especially, I would say that we like Mexico, because Mexico is a growing market. They are growing their electricity consumption. In many other markets like the U.S., the electricity consumption is not going higher. It’s just that they are changing the way they are producing electricity. So hence, it’s making a good opportunity for renewable energy. But Mexico has both. You see the growth and you also see a change towards renewable energy and target portfolio to increase their percentage of renewable energy up to about 35% of their total generation capacity. So I see those markets as being very, very interesting for us. Peru has also some long-term contracts for small hydro. And I think we have good expertise there. So we are interested in Peru, although it’s not a big market. It’s a market where I think our expertise can be put to work. And obviously, Europe is interesting. Is Europe going to be as interesting as Mexico on the long-term, maybe not, because they are not growing that much their electricity consumption base. But to come back to the scale, I think that we can certainly have the ability to make a partnership. We have done and we have proved to be able to be a very good partner, a creative partner that has the ability to bring the win-win situation where we bring sometimes the capital. Sometimes we bring the capacity, the knowledge. So I am not so concerned about the scale, because we will never be big enough. I mean, there is always a bigger guy, a bigger fish in the pond. So, what I am focused more on is our ability, our creativity, to create value for our shareholders. That being said, we are not afraid of growing. We are not afraid of making acquisitions. And I think that one of the strategies to grow in foreign markets is to have maybe a local partner and to partner with maybe pension funds. And we have shown that our ability to do that, I think that we can be a good partner for infrastructure funds or a pension fund to acquire existing assets or to grow development projects. Again, the type of partnership that we have signed with CFE in Mexico is a very good example. I think that we are willing to partner with a big, a very big entity in Mexico that somehow has lost the ability to be nimble to develop smaller hydro. Hence, I think this is a win-win situation where we can bring the knowledge and they can bring the long-term PPA. So, those are the places where I feel we can create more value for our shareholders. Just getting bigger and bigger for the sake of getting big, I don’t think is the solution. Ben Pham Okay, that’s helpful. And maybe just a last cleanup question one of your recent projects you put in is the CPA adjustment and trimming the EBITDA down. Does that impact some of your future projects or is it already in the numbers? Are you going to revisit that in ‘17 timeframe? Michel Letellier Which one, I am sorry, Ben, what you are mentioning, you mean the Québec-based contract or? Ben Pham I think it’s on – it was in the contract that’s the Tretheway, the inflation mechanisms lower than your initial expectations. So, is that incorporated in your future backlog too or are you going to revisit it later? Michel Letellier No. Now, it’s already included in our long-term forecast, but the difference was basically what we had forecast during the construction. During the construction in BC, you have 100% of the CPI during the period of the construction or the development of the project. After that, it’s depending. It’s up to 50%. In some cases, we have 30%. Some places we have 50%. But in this case, I think we had forecasted in the construction about 2.2% of inflation and we had 1.5% or 1.6%. So it’s not a big gap though. Ben Pham Okay, alright. That’s helpful. Thank you very much. Michel Letellier My pleasure. Operator Your next question comes from Jeremy Rosenfield with Industrial Alliance. Please go ahead. Jeremy Rosenfield Thanks. Good morning. Just maybe one cleanup question related to the refinancing of the Stardale debt that I think you announced earlier this week. It looks like you are pulling out some equity from that project and you are also lowering your interest expense, so kind of a win-win. But can you just comment more broadly on what I would call capital recycling or raising debt or refinancing projects and taking out equity potentially using that to finance future acquisitions or future projects as you go forward. What’s your outlook there? Michel Letellier Well, Stardale was not done on a long-term basis with life insurance. So, we had the ability to refinance it with the same Japanese Bank. And at the time, solar and the market was not known and basically the spread also on the credit risk for solar was a little bit higher. And well, we just basically take advantage of now the bank – and especially that Stardale has been performing very well as well. So, the lenders were willing to reduce the spread and make more room for a bigger amount. So, I guess that whenever I can put my hand on long-term financing in a range of less than 5% in the range of 4%, why not? So, whenever we would have the ability to do that, we certainly would rather do that than issuing stock and diluting our shareholders. So, I think that this is probably the cheapest type of capital we can get, especially after-tax when you take into account the deductibility of the interest rate. So, do we have a lot of those possibilities? Not necessarily with the new one, because obviously we have put project finance – brand new project finance, with most of the projects are done with life co. So, there is not a lot of flexibility there. But we still have about 14 unconvert facilities and maybe with Walden, it will be 15. So, there is a little bit of room there definitely to – especially after renewing the existing PPA. So, there is maybe a case to put a portfolio together and issue a long-term bond on those, instead of having the corporate loan. So, that might bring also some more liquidity on that aspect. Jeremy Rosenfield Okay. But you don’t have a specific target in terms of the amount that you could resurface, let’s say? Michel Letellier No, we are trying to stay opportunistic. The long-term bonds are very, very attractive. It keeps amazing me to see the 30-year bond below 2%. So, obviously that makes very cheap long-term money when you have a good project to finance, especially in Canada, but no, Jeremy, we don’t have a specific number. I think we are trying to be just opportunistic. For the time being, we don’t need necessarily a lot of equity. As we mentioned, everything is being fully financed. It’s only acquisitions that would require us to have a little bit more equity. I don’t have a fixed target, Jeremy. Jeremy Rosenfield Okay. And thinking about the acquisitions that you are looking at or the potential acquisitions that you are looking at in terms of financing and expected returns on those acquisitions, do you see yourself being able to earn similar spreads in terms of the return versus the cost of capital on the projects that you are looking at or on the potential acquisitions that you are looking at? Michel Letellier It’s a good question. It’s always paramount and it’s difficult to know where the market is going, right? When the 30 years bond are below 2%, one could wonder what type of return is acceptable or not, but I always said that we look at a portfolio a little bit like any equity investor, you have risk reward formula that we are trying to follow, obviously an existing facility with already financing and long-term PPA are worth more and obviously would generate a little bit less return than a Greenfield project. So, we want to make sure that we keep our global return north of 10%. That’s our perceived cost of capital for our equity. But there is reality, there is competition out there, and we want to make sure that we stay competitive in acquiring a facility. We have looked at a lot of opportunity. We have passed on. We have bid. And I think we will be successful in the near future. One thing that we are willing to use as a tool to increase our return is to partner with pension fund, as we did with SM-1 project, where we had increased the internal rate of return for Innergex by using a little bit of debenture and using a little bit of premium to manage the asset. So, that’s one tool that we have to increase a little bit the internal rate of return for our shareholders at the end of the day and manage more portfolio and being I would say active on the M&A market as well. So, that’s definitely one aspect of the capital structure that we are willing to take in order to make a decent return at the end of the day. Jeremy Rosenfield That makes sense. And maybe since you just mentioned it, in terms of opportunities that you have passed on or that you haven’t closed, is there anything specific that you can point to as reasons why you felt either it wasn’t a good fit for Innergex or why you weren’t successful with those deals? Michel Letellier Well, it’s hard. You know, when you know your business, it means that you know how much it costs to manage it. And sometimes we wonder, because there is maybe people that have a more optimistic view on long-term forecasts. We want to make sure that whenever we are taking risk is that – or risk or we are making an acquisition is that we will not be hearing on the too optimistic side on the long-term forecast. So, I rather accept a lower return, but making sure that we are going to make that return. Another way to say it, one can imagine that they can buy an existing facility at 13% internal rate of return, but it depends on the assumption that one can use. So for us, I don’t want to promise my board or lead my investor to think that we would be able to do a bigger return on a very secure asset. Usually, you could do it in a small acquisition here and there, but usually the market is fairly efficient. And I just want to make sure that we stay focused on being a conservative long-term manager and that whenever we are accepting as a return, it will materialize over time. So that means also that whenever we are going outside, we will want to make sure that we hedge and we would not put the company at risk with the foreign exchange rate. One thing that Innergex doesn’t have right now is foreign exchange exposure. And that sometimes people might underestimate the variability of foreign exchange. We take that very seriously in our analysis. And this is one of the challenges we have whenever we are looking into acquiring something in the States or in France or in Mexico. So again, we are taking our time, but whenever we are doing something, I think that we can sleep well at night. You know that I like to sleep well at night. Jeremy Rosenfield Yes, okay. Thanks, Michel. Excellent. Michel Letellier My pleasure. Operator Mrs. Benmouyal, there are no further questions at this time. Martine Benmouyal We have one more question actually from Mr. Jay Ferguson of Ferguson, Andrews Investment Advisers and it goes as follows. With the dislocation of the yield co market in the U.S., are you looking to buy assets from them such as NYLD, NRG Yield, and SUNE? Michel Letellier That’s a very good question. And I was amazed to see how quick the market realized that yield co promises were hard to deliver and we will stay opportunistic. If there is some good opportunity, definitely the U.S. market is on our radar screen. And I agree that the market seems to have evolved from being a little bit crazy to now being more reasonable in yields. Martine Benmouyal Thank you. Alright, if there are no more questions, I will thank everyone for attending this conference. We appreciate the opportunity to provide an update about our company. Please do not hesitate to contact us if you have any other questions. Operator Ladies and gentlemen, that concludes our conference call and webcast. Please note that a replay of the conference call and webcast will be available on the Innergex website. The press release, financial statements and Management’s Discussion and Analysis are also available on the Innergex website at www.innergex.com in the Investors section. Thank you. You may now disconnect your lines. 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. 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Chesapeake Utilities’ (CPK) CEO Mike McMasters on Q4 2015 Results – Earnings Call Transcript

Operator Good morning. My name is Nicole and I will be your conference operator today. At this time, I would like to welcome everyone to the Chesapeake Utilities 2015 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Beth Cooper, Senior Vice President and Chief Financial Officer, you may begin your conference. Beth Cooper Thank you, Nicole, and good morning, everyone. We appreciate you joining us today to review our fourth quarter and 2015 annual results. Joining me on the call today is Mike McMasters, President and CEO. In addition to Mike, we also have several members of our management team here with us to answer questions. The presentation to accompany our discussion can be accessed on our website under the Investor section and Events and Webcasts subsection or via our IR app. Moving to Slide 2, before we begin, let me remind you that matters discussed in this conference call may include forward-looking statements that involve risks and uncertainties. These forward-looking statements and projections could differ materially from our actual results. The safe harbor for forward-looking statements section of the company’s 2015 Annual Report on Form 10-K will provide further information on the factors that could cause of such statements to differ from our actual results. I would like to begin today’s presentation by highlighting the company’s record performance. As shown on Slide 3, the year 2015 culminated in the ninth consecutive year of record earnings generated by the company, both in terms of net income and earnings per share. In addition, as the slide highlights, Chesapeake has generated very strong returns on equity ranging from 11% to 12.2% over this nine-year period. These results have been driven by our successful capital investments in organic growth opportunities and acquisitions like FPU, Sandpiper Energy, and Aspire Energy of Ohio. The returns that we have generated on these investments have resulted in a compound annual growth rate of 9.8% in earnings-per-share over the nine-year period. Moving to Slide 4, yesterday, we reported results for both the year and the fourth quarter ended December 31, 2015. Net income for the year was $41.1 million, or $2.72 per share, which represents an increase of $5 million, or $0.25 per share, compared to 2014. Year-over-year earnings per share grew by 10.1%. For the fourth quarter of 2015, the company reported net income of $8.6 million, or $0.56 per share. This represents a decrease of $1.5 million, or $0.13 per share, compared to the same quarter in 2014. The decline in the quarter-over-quarter results was caused by lower energy consumption due to warmer temperatures that reduced earnings by $2.5 million, or $0.17 per share. The fourth quarter of 2015 was the warmest fourth quarter in the past 30 years in our operating territories. As you know, gas consumption is impacted by the variability in heating degree days in the winter months. I will now highlight the accomplishments and results for the two business segments for the year. Detailed discussions of our results for the quarter and year ended December 31, 2015 are provided in our press release, which was filed yesterday and will be included in our Annual Report on Form 10-K, which will be filed Monday. Turning to Slide 5, Chesapeake’s regulated energy businesses, which include our natural gas distribution and transmission and electric distribution operations generated operating income of $61 million in 2015, compared to $50.5 million for 2014. The increase in regulated energy operating income was generated from strong growth in the regulated energy businesses. The impact of several nonrecurring items also enhanced 2015’s results. Gross margin increased by $13.2 million as a result of service expansions, the Florida Gas Reliability Infrastructure Program, or GRIP, as we refer to it, natural gas customer growth and the Florida electric rate case. The higher gross margin was partially offset by lower margin as a result of warmer weather and an increase in other operating expenses reflecting the incremental cost of service, ultimately resulting in an increase of $2.6 million in 2015 operating income. The nonrecurring items included non-cash pretax impairment charges recorded in 2014 in the aggregate amount of $6.4 million and a gain from a customer billing system settlement of $1.5 million recorded in 2015. The impact of these nonrecurring items resulted in additional operating income of $7.9 million in 2015, compared to 2014. As shown on Slide 6, the unregulated energy segment reported operating income of $16.4 million, compared to $11.7 million for 2014. Operating income excluding a $432,000 nonrecurring charge in 2014 increased by $4.2 million. Higher retail propane margins and margin generated by Aspire Energy were the largest drivers of the $12.4 million increase in gross margin generated by the segment. The increased gross margin was partially offset by the warmer weather, lower results for Xeron, operating expenses from the addition of Aspire Energy and additional expenses as a result of the year’s strong performance. The key variances in terms of net income and earnings per share contribution between 2015 and 2014 are highlighted on Slide 7. This table is a summarized version of what is included in our filings and provided in the appendix. For 2015, as mentioned previously, earnings per share increased $0.25, or 10.1%, to $2.72 per share. Gross margin increased $0.95 per share, higher operating expenses largely to support growth offset the gross margin increase by $0.48 per share. Unusual items resulted in a $0.13 decrease in earnings per share for 2015, the largest component of which was the warmer weather in 2015, compared to 2014. While approximating normal weather, 2015 was significantly warmer than 2014, which impacted results year-over-year by $0.18 per share. In our regulated energy segment, an increase in gross margin of $0.65 per share was generated from natural gas customer growth, service expansions in the natural gas transmission businesses, continued investment in the Florida GRIP to enhance infrastructure reliability and safety and the full-year impact of the 2014 electric rate case. In the unregulated energy segment, gross margin increased $0.30 per share largely due to higher retail propane margins, which added $0.37 per share partially offset by lower contribution from propane wholesale marketing and sales. The inclusion of nine months for Aspire Energy lowered Chesapeake’s earnings per share by $0.06, including the impact of issuing approximately 593,000 shares for the acquisition. Finally, interest and other changes reduced year-to-date net earnings per share by $0.03. Slide 8 shows our history of capital expenditures as a percentage of total capitalization. For 2015, we invested 28.3% of total capitalization, 20.7% of which came from organic growth capital investments and 7.6%, which related to the purchase of Aspire Energy. Since 2011, we have made capital investments of $545 million, including acquisitions, which equates to an average 21% of capital expenditures to total capitalization annually. In terms of the dollars invested during 2015, we invested $142.7 million in our existing businesses, including $98 million in our regulated energy segment. Adding in the Gatherco acquisition that was completed in 2015 for $52.5 million, this increases our total capital expenditures for the year to a record of $195.2 million. The execution of our strategic plan continues to generate significant opportunities for profitable capital investment. The current capital budget for 2016 projects investments of $179 million to support and grow our existing businesses. We are pursuing several other projects, which could further increase our level of capital spending. Of the total capital budget for 2016, approximately $30 million represents capital expenditures that are in early project development stage. We are excited about these investments, but recognize that the review and approval process by the regulatory bodies may take longer then we experienced in our previous applications. Slide 10 highlights the company’s commitment to maintaining a strong balance sheet, which should facilitate access to competitively priced capital to fund our growth initiatives. Our equity to permanent capitalization and equity to total capitalization, including short-term borrowings, was 70.6%, and 51.9%, respectively, as of December 31, 2015. We target to maintain a ratio of equity to total capitalization, including short-term borrowings of 50% to 60%. As of December 31, 2015, our short-term debt, including the current portion of long-term debt, was $183 million, which also includes $35 million borrowed under our $150 million revolving credit agreement. Available for five years, we can utilize this facility to bridge financing to long-term debt. Given the level of capital expenditures in 2015 along with the 2016 capital budget, we anticipate securing longer-term permanent capital to maintain our targeted equity to total capitalization ratio and will seek to align such financing with the earnings generated from the larger projects. In this regard, on Slide 10, we have highlighted one possible means of securing new long-term debt capital, a Shelf Facility with executed with Prudential Investment Management in late 2015 also for $150 million. In May of 2015, the Board of Directors increased our annualized dividend by $0.07, or 6.5%, to result in an annualized dividend of $1.15 per share as shown on slide 11. We are firmly committed to dividend growth supported by earnings growth. Chesapeake Utilities has paid a dividend continuously for 55 years. Our Board of Directors will be revisiting the dividend level again in May 2016. Given broad market uncertainty and investors current expectations for income and security, we understand the desire for reliable dividends. We expect a significant growth potential in our businesses to continue to provide potential for superior dividend growth in the future, just as it has in the past. Before I dig into the details regarding the gross margin growth we achieved in 2015 as well as our estimates for future margin growth, I would like to spend just a few moments highlighting the overall key financial accomplishments for the year. We have highlighted many of these accomplishments on Slide 12. First, as we mentioned earlier, we increased earnings per share by 10.1%, achieving record earnings for the ninth consecutive year. Our capital expenditures, including the Gatherco acquisition, were $195.2 million, the largest level of annual capital expenditures in our history. This level of investment fostered growth in our overall asset base, which surpassed $1 billion for the first time in 2015. Achieving record earnings enabled us to generate a solid return on equity of 12.1%. We are proud of the growth in our businesses and the returns we have generated for shareholders, which Mike will elaborate on later including a 16.7% total shareholder return for 2015 that included a 6.5% dividend increase. Finally, at year-end, our market capitalization had grown to approximately $867 million. As recently as yesterday, this had escalated further as we closed at a market capitalization of approximately $975 million. Slide 13 shows a snapshot of the consolidated gross margin impact of major projects and initiatives completed since 2014, as well as major projects and initiatives announced and underway. As you can see, these projects and initiatives add a gross margin of $18.2 million in 2015 and are expected to add incremental gross margins of $19.1 million in 2016 and $10.3 million in 2017. We have included a slide in the appendix that provides the detail for the completed projects and their margin contribution for 2014, to 2017. We have a number of other projects and initiatives in place to expand margins in 2017 and beyond and as their timing related to in service is solidify, we will update our projections accordingly. Slide 14 provides detail on projects and initiatives underway as referenced on the previous slide. These investments will be completed over the next year and are expected to produce gross margin of approximately $7.2 million, in 2016 and $18.2 million, in 2017. As our results over the past nine years demonstrate, our team is relentless in identifying and pursuing opportunities to enhance our growth and further increase our gross margin. As always, thank you for your support and interest in our growing company. These continue to be very exciting times for Chesapeake Utilities, as exemplified through our strong financial results. Now I will turn the call over to Mike, who will expand on our strategic growth initiatives, long-term performance results and commitment to continued growth for shareholders. Mike McMasters Thanks, Beth. Good morning everyone. Slide 15 illustrates how we approach achieving sustainable growth. Chesapeake Utilities’ success story starts with engaged, dedicated, and capable employees who are committed to expanding our infrastructure, to meet the energy needs of our customers and communities. Our employees continually seek opportunities to further engagement with the local communities. They construct and operate safe, reliable energy delivery systems whether they are pipelines, wires or trucks. Our employees do a remarkable job of identifying, developing, and transforming opportunities into profitable earnings growth. Finally, we employ a disciplined capital allocation process to produce superior returns to shareholders. Turning to Slide 16, our success in delivering returns is due to the hard work of our employees, our strategic planning process, and discipline in executing our strategic plan. Strategic planning is a continuous process for our company. We update our strategic plan every year and we ask our business unit leaders and our strategic business develop team, to take a new look at market conditions and the new opportunities are evolving in the market. Then we challenge our teams to identify ways to grow at rates faster than they could if they simply continue doing what they are doing today. This keeps our thinking fresh and our focus on generating sustainable long-term growth. Turning to Slide 17, the performance quadrant is one of the ways that we monitor the results of our strategic plan and its execution. We believe that one of the keys to our success is our ability to deploy significant amounts of capital with attractive returns on investment. Chesapeake continues to rank in the upper quartile of gas distribution, electric, and combination utility companies in terms of capital invested and return on capital over the past three years. Our ability to achieve higher than industry average returns, while investing higher levels of capital relative to our size is result of our ability to identify and develop profitable growth opportunities, maintain our disciplined capital investment decision-making process, execute on our growth opportunities and achieve our targeted financial results. Turning to Slide 18, the environmental and economic advantages of natural gas and propane provide opportunities for expanded use in our service territories and across the United States. Natural gas is abundant, clean, efficient, domestic and affordable. The abundance of clean natural gas in the United States continues to provide security of supply, energy reliability, and stable prices to Americans every day. As shown on Slide 18, natural gas and propane continue to have price stability, compared to oil and are expected to maintain this advantage for the foreseeable future. This price stability creates opportunities to satisfy new customer demand at affordable prices. And has helped to create opportunities that our team has developed to drive growth in margins, earnings, and ultimately dividends. Turning to Slide 19, one such opportunity is the White Oak expansion project to increase mainline capacity to serve Calpine’s new power plant in Dover, Delaware. Eastern Shore plans to invest between $32 million and $35 million, which could be used to build 7.2 miles of pipeline looping an additional compression facilities to provide natural gas to the power plant. The estimated annual gross margin resulting from this project, under the 20 year service agreement will be approximately $5.8 million. In 2016, we expect to generate approximately $5 million of incremental margin. As part of our ongoing commitment and efforts to provide reliable service to our customers, Eastern Shore has proposed a $32 million reliability project that is highlighted on Slide 20. The project includes the installation of one compressor and 10.1 miles of 16-inch pipeline looping. These facilities are necessary to provide optimal system reliability and design. FERC issued a scheduling notice to establish a deadline of April, 2016 for the environmental assessment and July 2016 for all other federal agency decisions. The project will be included in the Eastern Shore’s upcoming 2017 rate chase filing. Once the cost is included in our rates, the estimated annual margin associated with this project will be approximately $4.5 million. As a company, we are committed to offering our customers supply, diversification opportunities and access to the lowest cost of natural gas. One such example is highlighted on Slide 21. Eastern Shore is moving forward with making certain modifications to its interconnect with Texas Eastern transmission, TETCO, that will increase the availability of natural gas at the interconnect point by 53,000 dekatherms a day. FERC’s approval to move forward with these modifications was granted in December 2015. These modifications, which are scheduled to be completed and in service during March 2016, will allow customers to have access to additional TETCO supply and the opportunity to secure lower cost natural gas. This 53,000 dekatherms equates to $2.8 million, in incremental annual margin for Eastern Shore. Turning to Slide 22, safety is a top priority for our company. Our Florida GRIP pipeline replacement program is an example of one of our initiatives designed to increase service reliability and operation safety for the communities we serve. The GRIP program enables the company to accelerate the replacement of cast-iron and bare steel mains, and service lines. GRIP also authorizes a company to accelerate the recovery of pipeline replacement investments including a return on those investments, as well as the recovery of certain program related costs. Our GRIP investments totaled $32.8 million, in 2015, and are approaching $80 million, since the program’s inception. To date, we have replaced 162 miles of pipeline and over 4,300 service lines. The gross margin generated from these investments was $7.5 million at 2015 and is projected to be $11.4 million, in 2016. Turning to Slide 23, our Eight Flags Energy subsidiary is constructing a combined heat and power plant located in our electric and natural gas distribution territory on Amelia Island, Florida. The plant will produce approximately 20 megawatts of base load power to be sold to our electric distribution system on the island. Steam from the plant will be sold to Rayonier’s Advanced Materials paper mill. The combined heat and power plant and the related facilities will cost approximately $40 million to construct. Site construction is moving forward on schedule. In terms of timing, the project is expected to be online in the third quarter of 2016. In addition to generating approximately $7.3 million in incremental annual gross margin, the electric output from the plant is excited to generate savings for our electric customers of approximately $3 million to $4 million annually. As shown on slide 24, the Eight Flags project is an example of the diverse capabilities that we have to provide value-added service to our customers and the communities we serve. In this case, our financial pipeline company transports the natural gas to FPU’s natural gas distribution system. FPU in turn delivers that gas to the Eight Flags CHP plant. Eight Flags then generates the power for delivery to FPU’s electric distribution system and the steam for delivery to Rayonier Advanced Materials plans. When all of this is said and done, we save Rayonier Advanced Materials money, save our electric customers on the island money and returns on capital for investors. Slide 25 illustrates the aspired energy of Ohio business model, which operates over 2500 miles of pipelines pipeline in the areas in and around the Utica Shale, and Eastern and Central Ohio. We operate 16 gathering systems for conventional producers in the area. Over 80% of Aspire’s margin is derived from the sale of natural gas, to two local distribution companies that are connected to our gathering system and serve more than 20,000 end use customers. The addition of new producers to our system presents an opportunity for increased reliability for our local distribution customers and increased margins for the company. Finally, we also own rights-of-way that we expect will present additional opportunities for growth over the long-term. Over the last 10 months, since April 1, there has been a significant progress and success with integrating Aspire Energy into the Chesapeake family of companies. Our management team lead with focus and drive to strategically develop, Aspire Energy organization and align the business with the vision, strategies and cultural of our parent company. The team has maintained the momentum of operating the existing business and customer needs, while also focusing on the future growth of the business. Our Aspire Energy employees are actively engaged in developing a strategic growth plan and have already begun to successfully identify and develop new growth opportunities. As a result of our team’s efforts, Aspire energy generated $6.3 million in gross margins since April 1 and is expected to generate approximately $13 million in gross margin in 2016. We continue to be excited about the opportunities presented by the latest addition to the Chesapeake family and continue to expect the Aspire Energy to be accretive to earnings in the first full year of operations. Turning to Slide 26, in 2014, we found a rate increase for our electric operations in Florida which increased rates by approximately $3.7 million annually. As the rate case was approved last year, 2015’s results include a full-year impact of the new rates. On December 1, 2015, we found a rate increase application for $1 million, to increase our Sandpiper subsidiaries operating – returns in Worcester County, Maryland. The following was required as part of the Maryland PSC’s approval of the Sandpiper acquisition and regulatory plan. A decision on the application is expected during the second quarter of this year. We found a $4.7 million rate case in Delaware in December 21, 2015 included in our application, our new service offerings to promote growth and a revenue decoupling mechanism for residential and small commercial customers. The decision on the application is expected during the third quarter of 2016. Pending the decision, the Delaware division implemented an interim rate increase of $2.5 million, on February 19, 2016. Our last rate case in Delaware dates back to 2007. Finally, our Eastern Shore natural gas subsidiary will follow a rate case with the FERC new rates effective February 1, 2017. The filing is required as part of a settlement of our last rate case. Our application will be submitted by the end of 2016. As the chart on Slide 27 shows, Chesapeake provide a total shareholder return of 17%, for 2015. For each of the five periods shown, Chesapeake shareholders have earned more than 14% returns on a compound annual basis. In addition, before the five periods shown, the Chesapeake’s performance exceeded the 75th percentile of the peer group. Slide 28 shows our financial performance of the past one, three, and five years. I am proud to say that our employees have delivered top quartile performance in 18 of the 20 categories. Further, our 10 and 20 year compound annual total shareholder returns of 14.4% and 14% respectively, ranked first amongst our peers. In fact, when you compare our the shareholder returns to the broader market, you could evaluate our performance relative to this larger group. As Slide 29 shows, when you compare us to more than 2,200 companies listed on the New York Stock Exchange, our performance exceeds 84th percentile. Similarly, as shown on Slide 30, when we compare performance to the company’s comprising S&P 500, for all periods shown, our returns range from the 703rd, to the 81st percentile. We are very pleased with our strong performance after the broad market as measured by either of these two larger groups. In closing, our employees’ determination for excellence and consistently high performance, enables us to deliver clean, liable, low-cost energy solutions to our customers while achieving strong growth and earnings and return to shareholders equity, and therefore delivering superior shareholder value. We will now be happy to take questions. Question-and-Answer Session Operator Mike McMasters Well I just want to thank everyone for joining us on our call today and for your interest in Chesapeake Utilities. We’re proud of what our team has accomplished for shareholders in the past and remain committed to working hard to deliver superior shareholder returns in the future. Thank you. Operator This concludes today’s conference. 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!

ITC Holdings (ITC) Joseph L. Welch on Q4 2015 Results – Earnings Call Transcript

Operator Good day, ladies and gentlemen, and welcome to ITC Holdings Corporation Fourth Quarter Conference Call and Webcast. At this time, all participants are in a listen-only mode. Later, we will have a question-and-answer session and instructions will be given at that time. As a reminder, this conference call is being recorded. I would now like to turn the call over to your host for today’s conference, Ms. Stephanie Amaimo. Ma’am, you may begin. Stephanie Amaimo – Director-Investor Relations Thank you. Good morning, everyone, and thank you for joining us for ITC’s 2015 fourth quarter and year-end 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 fourth quarter and for the year ended December 31, 2015. We expect to file our Form 10-K 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 discussed 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 L. Welch – Chairman, President & Chief Executive Officer Thank you, Stephanie, and good morning, everyone. I’m pleased to report another year of strong operational and financial performance at ITC, which adds to our remarkable track record of consistently delivering on our commitments to customers and investors. On the operational side, our systems continue to perform at top tier levels. Our METC system had the lowest outage count in its history, while both ITCTransmission and ITC Midwest had the second lowest outage counts in their respective histories. This stellar operational performance shows that the longer ITC owns a system and implements its best-in-class operations and maintenance plans, the better the systems perform. It’s also worth noting that we executed our operational maintenance program under budget to the benefit of customers without compromising quality of service or safety as evidence by another solid safety record, 2015. Since ITC’s inception, we have invested over $5.8 billion in our operating systems to modernize the grid. In 2015, these capital investments totaled $771 million. Most notably, in 2015, we placed the Thumb Loop project at ITCTransmission in-service during the first half of 2015. As mentioned on our second quarter 2015 call, the Thumb Loop is the largest project in ITC’s history and services the backbone of the system of design to meet the maximum energy potential of Michigan’s Thumb region. It’s a prime example of the effectiveness of ITC’s planning process which identify the transmission needs to facilitate Michigan’s renewable energy goals while also strengthening the regional transmission grid. This project increases transmission system capacity and reliability, while providing more efficient transmission of renewable energy. With an estimated direct impact of $366 million to the Michigan economy, the Thumb Loop project created jobs and will continue to have a meaningful near-term and long-term impact on the economy of the region and the entire state. Similar to the Thumb Loop project, our Multi-Value Projects or MVPs at ITC Midwest, which remain on track, highlight the value of forward thinking and collaborative planning between the state, the region and key stakeholders, while concurrently positioning ITC for future success. From a financial perspective, we had another strong year with 2015 operating earnings of $2.08 per diluted share which was well within our guidance range and marks the ninth consecutive year of double-digit annual operating earnings growth. To that end, we continue to see double-digit earnings growth in the years to come as evidenced by our revised capital investment forecast through 2018 at our regulated operating companies which Rejji will elaborate on in his prepared remarks. On the value return front, we continue to honor our commitments to shareholders by increasing the dividend by approximately 15% in August of 2015 and including our $115 million accelerated share repurchase program in November, effectively using the remaining capacity of board authorized share repurchases. Together, these efforts highlight the operational and financial strength of the business which we believe will continue to yield long-term benefits for our customers and investors. Turning to regulatory matters. In the initial MISO base ROE complaint, the administrative law judge issued an initial decision in late December 2015. The ALJ recommended a base ROE of 10.32% with the high end of the zone of reasonableness of 11.35%. While we view this outcome as constructive, a final order isn’t expected from FERC until later this year. In the second ROE complaint, the MISO transmission owners filed their initial testimony on January 29. And we do not expect an initial decision from the ALJ until late June. As we have said in the past, we remain confident that FERC will continue to support their historic policies given the significant investment requirements necessary to modernize the electrical infrastructure of the United States. With respect to development activities, we continue to advance Lake Erie Connector project. In late January, we filed a joint permit application with the Pennsylvania Department of Environmental Protection and the U.S. Army Corps of Engineers in support of the project. Additionally, we continued to negotiate transmission service agreements with prospective shippers. As we’ve discussed in the past, upon executing transmission service agreements under acceptable terms and conditions, we would then anticipate receiving federal, state and provincial permits by the second quarter of 2017, commencing construction around that time with commercial operation expected in 2019. Lastly, in late November, ITC’s board of directors announced a review of strategic alternatives which concluded with our announcement of Fortis acquisition of ITC on February 9. I’ll let Rejji go through the transaction details. But, needless to say, we’re excited about this outcome for our shareholders, customers and employees. We view Fortis as an ideal partner that will enable ITC to continue our objectives of long-term investments in the electrical infrastructure in North America. Overall, we are pleased with the fourth quarter and full year 2015 results and look forward to working with Fortis to close the transaction to become a diversified infrastructure company with a stronger platform going forward. Since ITC’s inception, we have been focused on creating meaningful value for our stakeholders by becoming the leading electric transmission company in the United States. Fortis is an outstanding company with a proven track record of successfully acquiring and managing U.S.-based utilities in a decentralized manner. This transaction accomplishes our objectives by better positioning the company to have a higher level of focus on pursuing our long-term strategy of investing in transmission opportunities to improve reliability, expand access to power markets and allow new generating resources to interconnect to transmission systems and lower the overall cost of delivered energy for our customers. I am forever grateful for the hard work of the ITC employees in building this great company and look forward to a bright future of continued operational excellence supported by the Fortis platform. We also very much appreciate the longstanding support of our investors who will receive an attractive premium for their investment and will also benefit from the opportunity to participate in the upside of the ITC joining with Fortis, including future value creation and a growing dividend program. I will now turn the call over to Rejji to elaborate on our 2015 financial results and the Fortis transaction. Rejji P. Hayes – Chief Financial Officer & Senior Vice President Thank you, Joe, and good morning, everyone. For the fourth quarter of 2015, we reported operating earnings of $87.6 million or $0.57 per diluted share, an increase of approximately 19% or $0.09 per diluted share over the same period in 2014. Reported net income for the quarter was $37.4 million or $0.24 per diluted share, a decrease of $9.4 million or $0.06 per diluted share compared to the fourth quarter in 2014. For the year ended December 31, 2015, we reported operating earnings of $323.8 million or $2.08 per diluted share, an increase of 12% or $0.23 per diluted share over the same period in 2014. As highlighted in our prior calls, absent the Kansas V-Plan Project bonus payment expenses booked in the first quarter 2015, our year-over-year growth would have been approximately 15%. Reported net income for the year ended December 31, 2015, was $242.4 million or $1.56 per diluted share, resulting in a decrease of $1.7 million for reported net income, an increase of $0.02 per diluted share compared to the same period in 2014. 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 $0.6 million for the fourth quarter 2015. These expenses totaled $7.3 million or $0.04 per diluted share for the year ended December 31, 2015, and $0.1 million for the year ended December 31, 2014. 2015 charges relate to management’s decision to write-off abandoned costs associated with the project at ITCTransmission and a refund liability attributable to contributions in aid of construction. A 2014 charge relates to certain acquisition accounting adjustments for ITC Midwest, ITCTransmission, and METC, resulting from the FERC audit order on ITC Midwest issued in May of 2012. Second, operating earnings exclude after-tax expenses associated with the cash tender offer and consent solicitation transaction for select bonds at ITC Holdings that we completed in the second quarter of 2014. The impact of this item totaled $0.2 million for the fourth quarter of 2014 and $18.2 million or $0.12 per diluted share for the year ended December 31, 2014. Third, operating earnings exclude the estimated refund liability associated with the MISO base ROE, which totaled $48.6 million or $0.32 per diluted share for the fourth quarter 2015 and $73.2 million or $0.47 per diluted share for the year ended December 31, 2015. Of the $48.6 million estimated refund liability charge in the fourth quarter 2015, $36.8 million or $0.24 per diluted common share relates to revisions to the estimated liability for the periods prior to October 1, 2015, and of the $73.2 million estimated refund liability charge for the year ended December 31, 2015, $28.4 million or $0.18 per diluted common share. And those relate to revisions to the estimated liability for the periods prior to January 1, 2015. ROE refund liability expenses totaled $28.9 million or $0.18 per diluted share for the fourth quarter year ended December 31, 2014. It is possible that upon the ultimate resolution of this matter, we may be required to pay refunds beyond what has been recorded to-date. We will continue to assess this matter and we’ll provide updates as necessary. Lastly, to exclude after-tax expenses associated with the 2015 review of strategic alternatives of approximately $1 million or a $0.01 per diluted share for the fourth quarter and year ended December 31, 2015, as well as Entergy transaction expenses of approximately $0.1 million and $0.7 million or a $0.01 per diluted share for the fourth quarter and year ended December 31, 2014. For the year ended December 31, 2015, we reported total capital investments of $771.4 million which was in excess of our revised capital guidance levels in Q3 of 2015 of $715 million to $765 million. Our 2015 capital investments included $189.6 million at ITCTransmission, $174.8 million at METC, $388.4 million at ITC Midwest, $14.4 million at ITC Great Plains and $4.2 million of development related investments in the New Covert project. As Joe highlighted, ITC’s commitment to long-term infrastructure investment continues as evidenced by the fact that we’re revising our regulated operating company capital investment forecast upward for the period of 2016 to 2018 to reflect approximately $2.1 billion of aggregate capital investments over this period which compares favorably to our prior plan estimates of $1.9 billion. The capital included in this forecast is comprised of highly probable capital investments in our current footprint which are not subject to competition or future energy policies. The resulting capital investment plan is projected to increase ITC’s average rate base plus construction work in progress balances from approximately $5.3 billion in 2015 to approximately $6.6 billion in 2018. These investment levels are expected to drive a compound annual growth in operating earnings per share greater than 10% which also compares favorably to our prior plan estimates of approximately 10%. With respect to balance sheet related activities, in December, we completed the accelerated share repurchase program or ASR that we initiated on September 30, 2015. Under the ASR, ITC received an initial delivery of 2.8 million shares on October 1, 2015, with a fair market value of $92 million. The ASR was settled on November 5, 2015, and ITC received an additional 0.8 million shares as determined by the volume weighted average share price during the term of the ASR less an agreed upon discount and adjustment for the initial share delivery. In total, we repurchased approximately 3.6 million shares at a volume weighted average price of $32.57 per share which is inclusive of any agreed upon discounts. This last trade concludes our board-authorized share repurchase program which we initiated in June of 2014. All-in, ITC successfully repurchased $245 million worth of shares or 7.2 million shares from 2014 to 2015 in aggregate at a volume weighted average price of $34.57, which compares favorably to ITC’s recent stock performance. From a liquidity perspective, as of December 31, 2015, we had total liquidity position of approximately $694 million, which consists of approximately $14 million of cash-on-hand and approximately $680 million of net undrawn revolver capacity. For the year ended December 31, 2015, we reported operating cash flows of approximately $556 million, which represented an increase of approximately $54 million or 11% year-over-year. Shifting gears to the Fortis acquisition of ITC, the transaction translated into an offer price of $44.90 in U.S. dollars per common share at announcement on February 9. The offer price consists of US$22.57 in cash per share and 0.752 of a Fortis common share, which equates to an equity purchase price all-in of US$6.9 billion or US$11.3 billion in enterprise value, including assumed indebted announcement. Upon closing, approximately 27% of Fortis common shares will be held by ITC’s investors. As Joe mentioned, the transaction enables ITC to continue to make needed investments in the grid, while maintaining operational excellence with no expected impact to transmission rates. We expect that the transaction will close in late 2016 upon receiving the required regulatory approvals, including FERC, the Department of Justice, the Committee on Foreign Investment in the U.S. or CFIUS and the state of Illinois, Kansas, Missouri, Oklahoma and Wisconsin. In closing, 2015 was another successful year which demonstrates our commitment to investing in necessary transmission infrastructure for the benefit of customers while also providing an attractive total shareholder return to our investors. Moreover, we managed to meet our operational and financial objectives while concurrently conducting the strategic review and sale process for the better part of 2015 which again speaks volumes to the focus and dedication of our employees. At this time, we’d like to open up the call to answer questions from the investment community. Question-and-Answer Session Operator Thank you. Our first question is from Charles Fishman with Morningstar. Your line is open. Charles Fishman – Morningstar Research I just have one question. Rejji, the 7.5% CAGR on your base rate – rate base growth, that is now your methodology as well as that number is consistent with Fortis. Am I correct? Rejji P. Hayes – Chief Financial Officer & Senior Vice President Yes. That aligns with the materials that were shared by Fortis and ITC jointly when we announced the transaction on February 9. And so, again, that’s average rate base from 2015 to 2018. And, as highlighted in our comments, that will yield over 10% operating EPS growth over that timeframe. Charles Fishman – Morningstar Research Got it. That was my only question. Thank you. Joseph L. Welch – Chairman, President & Chief Executive Officer Okay. Operator Thank you. Our next question is from Jay Dobson with Wunderlich. Your line is open. Jay L. Dobson – Wunderlich Securities, Inc. Hey. Good morning, Joe. I was hoping if you could just give a little inside into what the capital budget changes were, about 10% or $200 million. Does that sort of fit ratably across the franchises or was there a particular area that that sort of was associated with? Rejji P. Hayes – Chief Financial Officer & Senior Vice President Jay, hi. It’s Rejji. I can take that. Yeah. We should look at that in a couple of ways. So if you recall when we had our prior plan that extended from 2014 to 2018, we talked a lot about the $3.4 billion of regulated opco spend. And within that mix, about two-thirds of that was base capital spend and about a third of that was regional projects that were already awarded to ITC. The spend mix has evolved in this latest vintage and I’d say quite favorably where of the $2.1 billion that we’re offering from 2016 to 2018 which again overlaps with the prior public plan, three-quarters of that is base capital spend. And that’s, again, spend on our existing systems. So you’ve got asset renewals, system capacity, performance upgrades, reliability standard type spend. And so all stuff which is clearly things we have a strong track record of getting done on-time and on-budget and also you’re not replying upon co-constructors like we are for some of the regional projects. And so the mix is about 75% base capital spend, about 25% regional spend. And then within the opcos, the mix there is – it’s more weighted towards the Michigan entities. Again, if you compare this current plan relative to the prior public plans, you’ve got a little pick up in spend of the Michigan entities related to reliability type spend and again things of that nature. And you’ve got a little bit of decrease in expected spend at Midwest and Great Plains. Is that helpful? Jay L. Dobson – Wunderlich Securities, Inc. Very, very helpful. I definitely appreciate that. And then on the ROE, I’m sure you don’t want to get into specifically what you’re assuming there. But I assume it’s fair to assume you’re in line with where the ALJ came out and that drove the sort of incremental reserve? Rejji P. Hayes – Chief Financial Officer & Senior Vice President Jay, happy to take that. This is Rejji again. So, as we’ve highlighted in the past, every quarter, we’re going to evaluate the latest data points that have been publicized. And, clearly, there was an ALJ decision in late December. We also had testimony filed from our experts. And we also are clearly mindful of what the trial staff provided – I believe October. And so we’ve looked at all of that and we’ve taken into account again those data points. And I’d say we’re directionally aligned with where the ALJ has come out, but I will not say that we’re precisely on top of the ALJ. I think we have a different perspective on where FERC will end up, but it’s directionally not too far afield from where the ALJ came out. Jay L. Dobson – Wunderlich Securities, Inc. Perfect. And then, lastly, on Lake Erie, just sort of an update on sort of when we’ll have a thumbs-up or thumbs-down. Understand that you continue to pursue permits, so you must feel good about it, but when we’ll have sort of a go, no-go decision based on sort of customer response? Rejji P. Hayes – Chief Financial Officer & Senior Vice President Right. So the development team continues to work very hard on executing transmission service agreements with prospective shippers. So, initially, we thought we may have visibility on that by mid-year. We haven’t written that off yet. But at this point, we think it could be either mid-year 2016 or in the back half of 2016. So we continue to work on that. We obviously had a filing a few weeks ago in Pennsylvania that Joe noted in his opening remarks. And so we continue to push along the regulatory process as well as the negotiation with the prospective shippers. So I suspect back half of this year we’ll have visibility on that. Jay L. Dobson – Wunderlich Securities, Inc. That’s great. Thanks so much. Rejji P. Hayes – Chief Financial Officer & Senior Vice President Thank you. Joseph L. Welch – Chairman, President & Chief Executive Officer Thank you. Operator Thank you. Our next question is from Caroline Bone with Deutsche Bank. Your line is open. Caroline V. Bone – Deutsche Bank Securities, Inc. Hey, guys, I was just wondering if you guys could provide some updated thoughts on when you might be able to start making the necessary regulatory approval filings related to the Fortis deal? Joseph L. Welch – Chairman, President & Chief Executive Officer We’ve planned to do that in the not-too-distant future. The process that we use is, of course, I’m sure you understand is that once you make a filing, you’re no longer able to talk to any of the regulators or meet with any of the people associated with the case. So our first objective is to have those meetings that are necessary, so that our regulators get a good chance to meet the Fortis team and also get a good chance to delve into, if you will, the intricacies of the transaction, with the Fortis team there in present. And then once we complete that process, I believe, we’re scheduled in about a month to make those filings. Rejji P. Hayes – Chief Financial Officer & Senior Vice President Yeah. That’s exactly right. Caroline, this is Rejji. The only thing I would add is that, clearly, I think, the Fortis team is quite focused on identifying and structuring a deal with a third-party equity investor who would take a direct stake in ITC. And I think they’ll want to know and have visibility on that third-party before we file. So that’s, I’d say, one gating item. But we’re working hard with the Fortis team to get that done. And I think they’ve been forecasting for some time that they’d try to get that done within the next 90 days or so. Caroline V. Bone – Deutsche Bank Securities, Inc. Okay. Thanks very much on that. And then just one last one on just kind of the standalone outlook. I was wondering if you could quantify the level of parent company debt you’d expect to see through 2018, assuming this new plan. Rejji P. Hayes – Chief Financial Officer & Senior Vice President Yeah. So, historically, Caroline, we haven’t offered that level of granularity around projected debt. I think where we sit at this point, the holding company represents about 50% of the consolidated debt portfolio which, as announced on February 9 and when we announced the transaction, was just under $4.5 billion. So I think what you can assume, if nothing else, is that as we continue to fund capital investments, we’ll continue to do so in a manner comparable with how we’ve done in the past where we’ll fund a portion of the capital requirements with debt issued at the holding company at ITC. And so we’ll probably try to have credit metrics on a consolidated basis at ITC that are in line with where we’ve been historically. Caroline V. Bone – Deutsche Bank Securities, Inc. All right. Thanks, guys. That’s it from me. Rejji P. Hayes – Chief Financial Officer & Senior Vice President Thank you. Operator Our next question is from Greg Gordon with Evercore ISI. Your line is open. Greg Gordon – Evercore ISI Thanks. Good morning. Rejji P. Hayes – Chief Financial Officer & Senior Vice President Good morning. Greg Gordon – Evercore ISI I just wanted to be clear on the operating EPS, CAGR, the greater than 10%. That’s all things equal stable ROE, right? So if we normalize for the ROE through the planning period whether it’s at the ultimate level of the refund or whether it’s stable at the current level, you would be growing at that rate. But any change that happen to the ROE impacts the growth rate in actuality over that period. Rejji P. Hayes – Chief Financial Officer & Senior Vice President Yeah, Greg. This is Rejji. Let me take a stab at that. I think, first and foremost, we actually have layered in a level of ROE degradation into the forecast. And that’s something that we did provide to prospective buyers as part of the sale process. So these forecasts we’re giving you in the greater than 10% CAGR for operating EPS from 2015 to 2018 does presuppose some level of degradation. But what I think is important to note is, clearly, there is some uncertainty as to where the ROE will be, to say the least. Is that because of the nature of the refund, which essentially will be established at some point by FERC either in the end of 2016 or at some point in 2017, its retrospective, as you know. So it goes all the way back to November of 2013 when the complaint was initially filed. So 2015, the base year of your growth, will be fully exposed to the ROE degradation in which case I would submit that you have to adjust your base year 2015 and then that should be consistent with all of your subsequent years. And so no matter what ROE you utilize in 2015, whether you think it’s going to be 12%, 11%, 10%, 9%, whatever your expectation is, you’ll see that the capital investment over that timeframe drives the growth. And so whatever ROE you presuppose, you’re going to still see double-digit growth. Greg Gordon – Evercore ISI That’s exactly what I thought. I just wanted to be clear. Thanks. I still owe you that picture with the Patriots jersey. I’ll get that to you soon (28:59). Joseph L. Welch – Chairman, President & Chief Executive Officer Looking forward to it. Greg Gordon – Evercore ISI Bye, bye. Joseph L. Welch – Chairman, President & Chief Executive Officer Bye. Operator Our next question is from Julien Dumoulin-Smith with UBS. Your line is open. Julien Dumoulin-Smith – UBS Securities LLC Hey. Good morning, everyone. Rejji P. Hayes – Chief Financial Officer & Senior Vice President Morning. Joseph L. Welch – Chairman, President & Chief Executive Officer Morning, Julien. Julien Dumoulin-Smith – UBS Securities LLC So, just as far as quick clarification, what’s the assumption on bonus deprecation of late in the forecast? Just wanted to be clear about that. Rejji P. Hayes – Chief Financial Officer & Senior Vice President Julien, this is Rejji. As you know, we’ve not elected bonus depreciation for some time and we’re currently not assuming any election of bonus depreciation over the forecasted period. Julien Dumoulin-Smith – UBS Securities LLC Great. Excellent. And then I know you were just talking about the Lake Erie project. How are the conversations going? And I suppose specifically here directionality, given the nuclear extensions in Canada, is this more of a conversation of imports into the U.S.? Just kind of curious how are you thinking about the project at this point and potential counterparties, et cetera? Joseph L. Welch – Chairman, President & Chief Executive Officer Actually, I think that if you look at the project that there is a capacity value that’s associated with the line, as you aptly pointed out that there is the nuclear power plants in Canada. But, however, they will be shut – they won’t be shut down but they will be retrofitted and refueled. That causes flows to go in the other direction. We’ve seen interest pretty much in both directions depending on how you see certain things playing out with the now in limbo Clean Power Plan. And so what’s really starting to happen is you’re seeing people who want to hedge on both sides of the border with this line because there is no – it shouldn’t shock anyone a lot of uncertainty in the ability to plan your power plant expansion and which power plants are going to be on. I think the uncertainty is just driving the market and everyone crazy. So simple answers, both bidirectional. Julien Dumoulin-Smith – UBS Securities LLC Got it. And perhaps just on the margin, I’d be curios. The puts and takes here on the outlook, given CPP stay as you kind of kind of alluded to already with that Lake Erie project, but more broadly in terms of the planning processes at OSVP (31:28) and your own as well as any implications from the latest PTC extension. Are you seeing any kind of incremental generator connects or wider projects that could come out of that that may or may not be reflected in your current outlook? Rejji P. Hayes – Chief Financial Officer & Senior Vice President Yeah. Julien, certainly, I think, first and foremost, to your very last comment, the forecast and the updated capital investment forecast that we provided from 2015 to 2018 or 2016 to 2018 rather does not presuppose, what I’ll call, any sort of third-party-driven spend. So energy policies that may serve as the catalyst for incremental spend are forecasted, solely predicated on the stuff that we can view as quite concrete and tangible, so base spend and regional projects already awarded to us, none of which is subject to competition. So we certainly at some point will – we at least would assume that there will be incremental transmission investment opportunities attributable to whether it’s the Clean Power Plan or some derivation thereof. Certainly, there’ll be opportunities there. We’ve already talked about in the past the fact that there probably will be opportunities related to physical and potentially cyber security standards promulgated by NERC over time. And then on our last call, in Q3, we also mentioned the fact that we foresee increased spend in the distribution system in Michigan from DTE and CMS which has positive spiller effects for transmission owners. So all of those things as we see it are catalysts that could drive incremental growth above and beyond this plan, but we’re not at this stage ready to say that equates to X to Y billion dollars or whatever it may be. Julien Dumoulin-Smith – UBS Securities LLC Got it. And then, lastly, FERC 1000 talk about reform at kind of at the FERC level, et cetera. Just be curious to get your perspectives on how that ultimately manifest itself. What you all would be keen to see if that was indeed the case? Joseph L. Welch – Chairman, President & Chief Executive Officer Oh. With regards to Order 1000, I think, that internal to FERC is that they have this belief that they need to tune Order 1000 up. I don’t think that it’s safe to say that they are getting the results that they had expected. And so I think that they are going to start to hold technical conferences to try to figure out what they could tune up to make it work a little bit better. But, honestly, I don’t think that – this is my personal opinion – that Order 1000 needs a tune up. It needs to be taken off the books. It’s not working. It’s just fundamentally not working and it’s put more hindrances in expanding the transmission grid, something that it wasn’t intended or designed to do. But I think that we’ll go incrementally to try to fix it long before we get to the point where we say it’s just not working. Julien Dumoulin-Smith – UBS Securities LLC Great. Thanks for the clarity, guys. Congrats again, Rejji P. Hayes – Chief Financial Officer & Senior Vice President Thank you. Operator Thank you. And our next question is from Praful Mehta with Citigroup. Your line is open. Praful Mehta – Citigroup Global Markets, Inc. (Broker) Hi. Thanks, guys. Rejji P. Hayes – Chief Financial Officer & Senior Vice President Thank you. Praful Mehta – Citigroup Global Markets, Inc. (Broker) Hi. Sorry. My question is on the sale, the 15% to 19% sale. And, clearly, given that impacts the Fortis stock, it is important for you guys because ultimately ITC shareholders become Fortis shareholders. So I guess it really comes back to trying to understand how you see that they are going. What you see your role in it? And, finally, given most of the buyers would probably have already participated in the auction, how do you expect the value outcome of that given the fact that they’ve already participated in the auction and Fortis kind of came out on top? So would love to get some color on that. Thank you. Rejji P. Hayes – Chief Financial Officer & Senior Vice President Yeah. Praful, it’s a very good question. This is Rejji. I think I’d point you to the Fortis team and Barry and Karl for their perspective on their expectations around what they would like to structure for that third-party equity sale. But I can tell you that we’ve been involved in the process certainly in marketing the ITC story. And we’re working hand in hand with the Fortis team to help them raise that capital. I’ve heard Barry say this in several discussions and I said it publicly in the February 9 call, but I suspect he’ll want to have a partner who is willing to come in at a value that’s comparable to the price at which Fortis is entering ITC stock and they’ll look to do something comparable of that. So that the economics – or it doesn’t impact materially their EPS accretion estimates. And I suspect they’ll want a party that also is patient, is liquid and is amenable to exit mechanisms. But, again, I would suggest that you should talk to Barry, Karl and team about that, because it’s clearly driven by them. Joseph L. Welch – Chairman, President & Chief Executive Officer And I think what I’d like to add to what Rejji had to say which is exactly correct is that a lot of the people which you would hypothesize were in the transaction would be the same people that are looking at this. That may be true, but actually this transaction was quite large. And a lot of people who would like to tap a piece of ITC weren’t large enough to buy ITC. And so they’ve had just an immense amount of interest and again Barry has said this publicly. They have had an immense amount of interest in the people who would like to participate in having a partial ownership of ITC, hand in hand with Fortis. Praful Mehta – Citigroup Global Markets, Inc. (Broker) Got you. That’s good color. And I do appreciate this smaller acquisition fees in this case, so that makes sense. And the second thought, I guess, from a timing perspective, would these more safe, I guess, infrastructure type buyers be looking for clarity post a FERC decision to come in or do you expect this transaction to take place before a FERC final decision? Rejji P. Hayes – Chief Financial Officer & Senior Vice President Yeah. The Fortis team has been quite transparent about the fact that ideally they’d like to have this wrapped up within the next – I think they said a couple weeks ago 90 days is in a perfect world you’ll want to have the buyer in its full form presented to regulators as part of the filing. So I think if there is an unforeseen party who is still out there that regulator is unaware of that probably impacts your filing process. So I think they want to have that wrapped up first before we commence the filing. Praful Mehta – Citigroup Global Markets, Inc. (Broker) Fair enough. Thanks a lot for the color. Rejji P. Hayes – Chief Financial Officer & Senior Vice President Thank you. Operator I’m not showing any further questions in the queue. So I’ll turn the call back over to Stephanie Amaimo for closing remarks. Stephanie Amaimo – Director-Investor Relations Thank you. This concludes our call. Anyone wishing to hear the conference call replay available through March 1 can access it by dialing 855-859-2056 toll-free or 404-537-3406, pass code 35330470. The webcast of this event will also be archived on the 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. This does conclude the program and 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. 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