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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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Paladin Energy’s (PALAF) CEO Alex Molyneux on Q2 2016 Results – Earnings Call Transcript

Paladin Energy Ltd. ( OTCPK:PALAF ) Q2 2016 Earnings Conference Call February 16, 2016 6:30 PM ET Operator Ladies and gentlemen, thank you for standing by and welcome to the December Quarterly Conference Call and Investor Update. [Operator Instructions] I must advise you that this conference is being recorded today, Wednesday, February 17, 2016. I would now like to hand the conference over to your speaker today, Mr. Alex Molyneux. Thank you. Please go ahead. Alex Molyneux Thank you and welcome to the December 2015 half year and quarterly results conference call for Paladin. I am Alex Molyneux, the CEO. With me in the room today, I have Craig Barnes, our Chief Financial Officer and I have Andrew Mirco, our GM Corporate Development and Investor Relations. So we are going to step into the presentation. There is a disclaimer which we would draw your attention to. And then moving on to Slide 2, we have repeated this message a number of times and it doesn’t really get old for us at the [indiscernible]. I think we can show from our results and how they are evolving in a low uranium price environment that we have the asset base and skill set with optionality to survive difficult markets. We are absolutely positioned for margin and margin expansion when these markets turn around. We are a global uranium leader and we are the largest investable pure-play uranium miner. We have fully built capacity that includes our Kayelekera mine on care and maintenance which when restarted would immediately increase our production by 40%. And our global resource inventory is almost 400 pounds, which gives us a substantial pool of assets on which to draw future growth from in addition to our current operating Langer Heinrich mine. Langer Heinrich is undisputedly a world class asset. We have said it many times. And this is in terms of its key features, scale, mine life and production cost. Cost at the moment is where this mine is coming to its own. It’s moving well into the first quartile of global cash costs. And with that introduction, I will hand over to Craig who will go through some of our results. Craig Barnes Thanks, Alex. Good morning, ladies and gentlemen. Slide 5 and 6 provides some highlights of the December quarter. Uranium production for the quarter decreased by 9% compared to the December 2014 quarter primarily as a result of lower processed grade, which decreased to 714 ppm from 773 ppm a year ago. The company’s 12-month moving average lost time injury frequency rate was 2.10 compared to 1.39 last quarter and 4.14 for the quarter ended 31 December, 2014. The realized uranium sales price for the quarter was $37.90 a pound, a 5% premium to the TradeTech average weekly spot price for the quarter of $36.03 a pound. However, for the 6 months to 31 December, 2015, the realized uranium sales price was $40.54 a pound versus the average weekly spot price for the 6 months of $36.26 per pound which is a $4.28 per pound premium. Record low C1 cash costs of $25.38 per pound for the quarter decreased by 11% from $28.58 per pound in the December 2014 quarter. And we are at the lower end of our December quarter guidance of $25 to $27 per pound. The decrease in costs was largely driven by a reduction in reagent costs resulting from the bicarb recovery plant as well as a weakening of the Namibian dollar against the U.S. dollar. The trend of reducing costs is continuing in the March quarter and we achieved C1 cash costs of $24.36 per pound in January. The reduction in costs from last year resulted in the operation achieving a 396% increase in gross profit to $12.4 million from $2.5 million in 2014. Cash and cash equivalents at 31 December, 2015 of $136.8 million was within our previous pro forma guidance of between $122.5 million and $132.5 million. Sales revenue for the quarter decreased by 7% to $64.4 million in the December quarter, as a result of 11% decrease in sales volume, which was partially offset by a 4% increase in realized sales price. Underlying EBITDA for the December quarter of $10.6 million was a $17.2 million turnaround from the negative underlying EBITDA of $6.6 million in 2014. In the quarter, we repurchased an additional 17 million of the 2017 convertible bonds for approximately $15.5 million reducing the outstanding amount owing on these convertible bonds to $237 million. On Slide 7, this waterfall chart provides a breakdown of the change in cash and cash equivalents for the December quarter. Our cash and cash equivalents increased by $28.4 million during the quarter and were made up of the following major cash flow movements. Langer Heinrich generated free cash flow for the quarter of $62.7 million assisted by the timing of cash received from the September quarter sales as well as a reduction in costs. Cash utilized for Kayelekera care and maintenance and corporate and exploration expenditure amounted to approximately $4.8 million for the quarter, a significant drop from the $8.7 million cash utilized in the previous quarter. This drop was expected and is as a result of the various cost reduction initiatives which took place in the September quarter. In the December quarter, we paid $9.2 million interest on the convertible bonds and also on the Langer Heinrich project finance. In addition, we repurchased 17 million of the 2017 CBs for $15.4 million which excluded accrued interest and repaid $4.5 million on the Langer Heinrich project finance. Slide 8 has two waterfall charts which provide a variance analysis of EBITDA comparing the December 2015 quarter to both the previous September 2015 quarter and last year’s December 2014 quarter. Firstly, comparing to the previous quarter, the chart on the left shows that our EBITDA increased by 66% from $6.4 million in the September quarter to $10.6 million in the December quarter. In the graph, you can see the large variances caused by the increase in sales volumes from 800,000 pounds in the September quarter to 1.7 million pounds in the December quarter. Due to the size of certain sales and also the timing, these large sales volume variances will continue from quarter to quarter. You can also see the positive sales volume variance of $34.1 million was partially offset by the $6.6 million negative sales price variance. As a result of the higher sales volume, cost of sales was also higher and partially offset by lower unit costs. Exploration, admin and unallocated fixed overheads were all lower than the previous quarter by $1.4 million in total. Comparing to the previous years, December 2014 quarter, the chart on the right shows that the increase in EBITDA was even more pronounced increasing by $17.2 million from a negative $6.6 million in the December 2014 quarter to $10.6 million in the December 2015 quarter. The impact of 11% decrease in sales volume was more than offset by the positive variance in both the sales price and cost of sales performance of $2.8 million and $11.8 million respectively. In addition, exploration, admin and Kayelekera care and maintenance costs were $3.7 million lower than in the December 2014 quarter. Slide 9 illustrates how all-in cash expenditures reduced from $48.91 per pound in the December 2014 quarter to $39.58 a pound in the December 2015 quarter. This is a reduction of $9.33 per pound year-on-year. All-in cash expenditure includes all spending, including financing costs and the principle repayments of Langer Heinrich project finance. The reduction in all-in cash expenditure has exceeded our expectations and we have therefore lowered our guidance for the full year. The graph on the left compares all-in cash expenditures for the last six quarters and shows that the trend of decreasing expenditure with the December quarter is $39.58 per pound, significantly below the FY ‘15 average of $50.75 per pound. This is also the first time that all-in cash expenditures dropped below $40 a pound and the downward trend is continuing in the March quarter. The all-in cash expenditure is trending towards the $38 to $40 per pound revised guidance range provided for the full year FY 2016. The waterfall chart on the right provides an analysis of the movement in all-in cash expenditures from the previous year’s December 2014 quarter. The biggest movements have been the reduction in reagent costs resulting from the bicarbonate recovery plant of $6.99 per pound and the weakening of the Nam dollar against the U.S. dollar of $3.39 per pound. Additionally, the reduction in mining costs, CapEx, Kayelekera care and maintenance costs and corporate and exploration costs resulted in $3.71 per pound decrease in all-in cash expenditure. The table on Slide 10 provides a breakdown of the Paladin’s debt at the face value amounting to $443 million at 31 December, 2015. Since June 2012, Paladin’s debt has been reduced by approximately $471 million. The $17 million repurchase of the 2017 convertible bonds and the $5 million repayment of Langer Heinrich project finance in the December quarter were the most recent debt reductions. The next debt maturity is the $237 million convertible bond due in April 2017. Strategic initiatives are currently being advanced with a view to refinance or repay the April 2017 convertible bond. Based on Paladin being cash flow neutral, we now see the funding gap required to pay the 2017 convertible bonds reduced to $140 million to $165 million. I will hand you back to Alex to complete the presentation. Thank you. Alex Molyneux Thanks Craig. So we are now on to Slide 11. We can say that, so during the last quarter, we reconfigured the highly successful Bicarbonate Recovery Plant at Langer Heinrich Mine. The result is we are now seeing at full $6 per pound of cash savings on what we would say and call an apples-for-apples basis in terms of taking us back to before the Bicarbonate Recovery Plant was introduced. Frankly, this kind of innovation is a key element of our strategy in a weak uranium price environment. When we talk about all-in costs, it’s the team that delivered this success that’s already working on initiatives for FY 2017 and beyond. When we go to Slide 12, we originally published a chart that looks like this in August of last year and this is the first time since we published that chart that we have updated it. It actually reflects updated guidance which is for lower all-in costs. We are now expecting $38 to $40 a pound on a full year average basis i.e., $1 a pound lower than what we are expecting at the start of the year. You can see, if you were to compare this chart to the previous one, it’s a little bit of a story of swings and roundabouts. We had a better than previously expected impact of currency. Previously, we were aiming for currency to help us reduce our all-in costs by about $1 per pound. And now, it’s helping us by about $2.72 per pound. In terms of volume and grade, we always had a reduced grade. But our volumes are slightly lower than was our original guidance. And that’s also being presented to you in our revised production guidance. So that’s gone from a $0.71 positive impact to a $0.37 negative impact. Efficiency from mining is close to what we have previously been expecting. Efficiency from processing is actually higher than – or it’s not higher, but the cost saving we are projecting is better than we had projected at the start of the year. And then, we are pretty much on track with the remaining items in terms of capital expenditure, care and maintenance, exploration, corporate and debt servicing. So we are revising this guidance lower. And the two key items that are driving that lower guidance are more efficient processing costs and the impact of the worsening Namibian dollar versus the U.S. dollar. I think what’s important on this point is, I often get asked, what happens in financial year 2017, how will you keep the all-in cost structure ahead of uranium price if uranium price does not go up? And here is our answer. This $38 to $40 a pound is a full year range. To get there, it means our second half FY ‘16, will already be down at a running rate of $35 to $37 a pound. Next year, we will have a big debt reduction which will reduce our total funding cost and then that in itself will have a pass through to our all-in cash cost with respect to the debt servicing element of it. We are quite confident that at current currency assumptions, we are looking towards a range of $34 to $36 a pound for the financial year 2017. It will also include more optimization and direct cost saving initiatives. This is something that we will talk a lot more about in our next results as we refine out budget for financial year 2017. Moving on to talk a little bit more about the uranium market and the fact that Paladin is uniquely leveraged to the expected upside in the uranium market. Here, we have a chart that shows us uranium versus oil and other commodities. We are not seeing much upside in uranium in the most recent few months, but it seems to be the best performing major commodity out there. There is definitely something to say here because we are not seeing uranium drag down in the correlation low-up with oil prices or other energy commodities. Uranium is really poised to benefit from the fact that its supply side is in a much more disciplined position than for other commodities, given we have had the adjustment of the Fukushima event in the past. It’s all so that we don’t anticipate the same correlation between uranium and other energy commodities going forward because we now have a regulatory environment which promotes the use of nuclear energy versus carbon dioxide emitting energies. Slide 14, we show something that we are quite focused on at the moment, which is uranium market liquidity. We don’t really think our market is normal per se until we see transaction volumes move at a regular level and more in line with annual consumption. The graph on the top left shows long-term uranium contracting volumes. And in the commentary, we talk a little bit about what’s happening in the volumes in the spot market. 2013 was the lowest liquidity year for uranium because it came after the Japanese reactors actually shut in 2012 and there was so much uncertainty in that year regarding the future for nuclear and whether there would be a large volume of material release into the market associated with the – a permanent shutdown in Japan. That didn’t come to fruition and now Japan is starting. Since 2013, liquidity has improved in the market every year. But it’s still well below normal. Long-term contracting volumes in 2015 were 81 million pounds and there were 49 million pounds in the spot market, i.e. 130 million pounds total transaction market for uranium. Now we anticipate that we will have a larger transacted uranium market in 2016. We currently view that it’s likely we see 150 million to 160 million pounds of material transacted this year and that prices will rise to reflect the slow normalization of the market. A normal market will actually come when we have annual volumes of around about 180 million to 200 million pounds a year, which are volumes that are required to replace the uranium that is actually used in nuclear power generation globally. Next slide presents our strategy and this hasn’t changed since our last presentation, quarterly presentation. Our strategy is very simple. Number one, it’s to maximize Langer Heinrich operating cash flows through optimization initiatives while preserving the integrity of the long-term mine plan. Number two, we continue to maintain Kayelekera and our exploration business on a minimal expenditure care and maintenance basis. And in fact, we are always looking to drive those costs even further lower. Number three, we are minimizing corporate and administrative costs. And number four, we are making progress with respect to strategic initiatives and partnerships that may result in strategic investment funding and corporate transactions for the company as a way to resolve the – our funding needs for our maturity coming up in April 2017. On the last slide, we are representing our guidance for the financial year 2016. Our production guidance is 5 million pounds to 5.2 million pounds. That was something that we flagged in our last quarterly activities report around a month ago and it’s a revision from our previously stated 5.0 million to 5.4 million pounds. We still expect, on a full year average basis, an average selling price premium of around $4 per pound for our received uranium price. Our Langer Heinrich full year C1 cash cost guidance is now $24 to $26 a pound and that is a revision downwards from $25 to $27 a pound. We have not changed guidance for the absolute expenditure on corporate cost, Kayelekera care and maintenance and exploration, which we expect to be $19 million, which is $14 million lower than the number for financial year 2015. With these elements of our full year guidance, we continue to expect to be cash flow neutral through 2016 – for financial year 2016. And with that, the second half of the financial year 2016, in aggregate, will be cash flow positive. The March quarter, we expect sales of 450,000 to 650,000 pounds. Langer Heinrich C1 cash costs of $23 to $25 a pound. The cash balance will reduce to $100 million to $110 million, but this is in line with our overall cash generation for the second half in aggregate. What you can see there is it’s one of those quarters where we have lower sales than normal and that is primarily because we will be building material in advance of a very large, almost 700,000 pound delivery to China that will take place in April 2016, i.e., the following quarter. And so our cash balance will swing somewhat with the timing of sales and sales receipts. So that finishes the presentation component of what we wanted to do today and I think we can throw to the operator for any questions that people might have on these results in the presentation. Thanks. Question-and-Answer Session Operator Thank you. [Operator Instructions] And the first question comes from Mr. Glyn from UBS. Please ask your question. Glyn Lawcock Alex, good morning. Couple of questions if I may. Firstly, interesting move, dropping down into the CEO role full time, I am just wondering if you could talk through a little bit about the logic behind that, what happens now given your role back at Azarga, etcetera. And I note your fairly interesting incentive scheme, how you directly get a strategic deal done, just wondering if you can talk through potential timing of that? And then the second question, I think is really just around the cost. Clearly, you are really benefiting from FX, which is great, but it tends to also lead to higher inflation. Just wondering if you could talk a little bit about what you are seeing on the ground in terms of inflation, your labor agreement, how long that’s good for, when does it come up for renegotiation, etcetera, because I would have thought, you are probably going to get hurt at the back end from the – from the good exchange rate today? Thanks. Alex Molyneux Okay, thanks, Glyn. Now, so, on the first topic, I know that you didn’t congratulate me by the way. But I will say that… Glyn Lawcock Congratulations. Alex Molyneux Thanks. Okay, I think Paladin is obviously – there is a lot going on. I think there is two elements to disappointment is that number one, I think, I guess the board has become somewhat more, let’s say – we have – let’s say we have grown together in terms of the board being comfortable, I can’t remember the exact language that was used in the press release, but let’s say that the board is broadly comfortable that I have got the skill set at the moment to do what needs to be done at Paladin. And let’s say the position might not be that – I don’t think it’s changed radically, it may not be that – so it’s more about specifically what the company is doing at the moment. You can see that it’s reflected. What’s important to the company is to ensure that it’s best positioned to deal with its funding GAAP and to hopefully achieve the best outcome for a transaction that results in best value capital to deal with that funding GAAP. And I think that the board obviously has insight into things that are going on that may not be baked enough to obviously be able to discuss publicly, but people are reading that into the nature of my remuneration structure. And I don’t think – I think that’s, let’s say, that’s a correct – that’s broadly a correct assumption, but there is nothing we can actually say. We don’t have any timing on the transaction. We can say we have made significant progress. We have a number of things that we are working on, but we – if we had certainty over a transaction and the timing of it, we would actually be making that announcement. So, I hope that answers that question. With respect to Azarga, I am on a leave of absence from any Azarga Uranium specifically and I will continue to be on a leave of absence from an executive role at Azarga Uranium. With respect to costs, in terms of inflation, I am going to ask Craig to answer that and specifically on the labor agreement as well. Craig Barnes Okay. Yes, just on the cost, Glyn, you mentioned obviously we have had the benefit of the weakening Nam dollar against the U.S. dollar. But I think the biggest benefit for our cost has been the drop in processing costs due to the savings on reagents. And then with regard to inflation, the inflation assumption currently in Namibia is 7% and that’s in line with our current wage agreement and the average increase that we expect in costs in Nam dollars if that answers your question. Glyn Lawcock Yes, it does. And just quickly then, so that’s in your current agreement, when does that agreement expire, because I would imagine perhaps with the way the exchange rates going, you might end up being pushed to increase that? Craig Barnes Yes. I think we recently negotiated new ways and I believe it’s a 2-year wage agreement. Alex Molyneux Well, it’s a 3-year wage agreement that we have got to run. Yes. Glyn Lawcock Okay, wonderful. Thanks so much. Operator Mr. Matthew Keane, your line is open to ask a question. Please go ahead. Matthew Keane Yes. Hi everyone. Just a couple of very quick questions, first one on sales, you have given a bit of forecast say where you see the market is going. First one, have you accounted for Chinese inventories and where they might stay and also Japanese inventories, is that in your number, were you expecting that increase from the number you said there, 150, 160 we transacted in the year. And the second half of that question there is, are you seeing those tens out there at present and if so, where about they are coming from, which part of the world? Alex Molyneux Okay. So in terms of – so in the long-term, the market has to be 180 million to 200 million pounds because that’s what the world uses every year. And so eventually, the inventory situation has to neutralize. In the short-term, in terms of – as we proceed to that, we believe specifically on China – so we believe inventories and this is the biggest thing that the market misunderstands about our commodity. Inventories will be a source of net buying between now and the end of the decade, not meant selling, okay. So we have Japan is, let’s say Japan is – has got enough inventory so that they may not be in the buying mode. But we have – China will likely need to build their inventory and probably double the size of it between now and the end of the decade to achieve the strategic – the level of strategic inventory that’s in line with Chinese policy, okay. So it might look like they have about 9 years worth last year’s usage. But their usage is growing so quickly that if they can meet the 7-year target, they are going to had to roughly double their inventory by 2020 to hold 7 years strategic inventory. And then we have got inventory build from India which is announced – it’s building an inventory in the order of 50 million pounds or so initially. And frankly, we can see that being reflected in an early stage in market inquiry. We then have the IAEA global inventory, which is a new initiative and we currently estimate that’s likely to be about 40 million pounds. We don’t know over what period they will try and establish that inventory, but that’s a new global inventory facility for smaller countries and customers that’s being setup in Kazakhstan and its being setup and funded and that’s another inventory build that will take place. So, of course Japan has an excess of inventory, but frankly the rest of the world – and inventories are towards the low end of their traditional bands in Europe and North America. So inventories other than Japan, generally low and in certain situations require substantial additional buying. So this is why we believe the market will normalize to that 180 million, 200 million pound level over the next couple of years. In terms of specific contracting, it’s been a little bit quiet in contracting in say, let’s say January, December. We can see some tenders that need to come up. There is one very, very big tender in the market which is an interesting one at the moment. There is an Asian utility that has a more than 10 million pound tender in the market, which by the way is a re-tender of a tender that was put out twice last year and obviously hadn’t been anywhere near fully supplied. So what’s interesting in the market right now is we are starting to see some tenders coming and we were aware of some others that will have to come down the pipe during the year. But it’s also interesting to see some of the bigger tenders really failing to achieve supply and coming back into the market as re-tenders during that period where uranium prices being low. So at some point, the market has to keep you up. Now in the very short-term, there is a bit of I think gravity on short-term spot price for uranium and that’s the currencies of production which have all come down quite significantly with the U.S. dollar strength over the second half of last year. And that, if you like – if you are talking about month-to-month spot prices, that can create I think a little bit of downwards pressure or a bit of a ceiling on spot prices. But if we are talking about quarter-to-quarter, half year to half year and this year to next year, I think we are really waiting to see that transaction activity and liquidity pick up and it needs higher prices for suppliers to be willing to close out almost high demand volumes. Matthew Keane Sure, okay. The second question I had there, sorry for the lengthy questions and answers. But it was around – your report today required cash – the cash balance or the cash gap required for the 2017 CB maturity, definitely taken into account the amount you require in balance sheet for normal operations, what would that be over and above the obviously, the repayment of the CB, so basically just working capital required to maintain the business? Craig Barnes It’s somewhere in the region of $50 million to $60 million, that’s what our current assumption is. There is a lot of moving parts around that as well. And I think over time, it might be that we have the ability to bring that down as well if we can look at ways to smooth our sales and things like that. But our assumption is around $50 million to $60 million. These numbers may actually factor in something more like about $65 million. Matthew Keane Okay. So just to confirm that $140 million, $165 million gap, that it does include cash required on the balance sheet to run the business? Craig Barnes It does. Matthew Keane Okay, that’s all for me. Operator Thank you. And our next question comes from Stefan Hansen from Morgan Stanley. Please ask your question. Stefan Hansen Good morning. Actually, my question on the funding gap I think was just answered. I mean you have got your next – your bond is $237 million and you have got $137 million in cash with $100 million the difference but – and expectation of being cash flow neutral from now on, but you are looking at a funding gap of $140 million to $165 million, so that difference is I guess timing of sales and that sort of thing, is that…? Alex Molyneux Well, hang on. I think we made the point that our expectation to be cash flow neutral on a full year basis. We actually are cash flow positive at the moment and expect to be cash flow positive for the second half. So our – in our numbers, using fairly conservative assumptions, we would have a higher June 30 balance being forecasted internally than was reported for our December 31 balance. So – and by the way, it’s not using commodity price assumptions for that above market. So for that kind of forecasting, we are using real current market assumptions. So that’s then – there is obviously, as we said, there is some leakage or there is some cash that’s not accessible to us because it has to be held back for capital purposes and whatnot. And then our external estimated funding gap is $140 million to $165 million. That’s really what we are talking about that we really would need to be provided from outside the company. Stefan Hansen Okay. I mean I guess as you are cash flow positive from now on, meaning you are going to I guess, be more than $137 million cash covered as of the April CB then the working capital amount that you are talking about could actually be more than $65 million? I mean, it’s quite large. Alex Molyneux Well, look, I mean, well, even if you took the – it’s not really – I mean, we have got $237 million repayment, deduct $150 million from that and the numbers kind of give or take $10 million, they will work out for you, right, so with the $65 million holdback for holding cash balance. Stefan Hansen Alright. No worries. The next question I mean we talked about the change in material influence part of your engagement agreement. What’s yourself and the board mostly focused on, I mean, just looking for a deal that can get you over the near-term funding GAAP or is there an actual change in control, something that the board is focused on? Alex Molyneux The board is focused on looking at all deal structures and picking something that is – that provides the best value for investors and has got other elements to it, de-risk in terms of what’s the risk of the transaction, what’s the likelihood of it succeeding blah, blah, blah. So, there is no – what’s happening is we have engaged with a number of parties of different natures to discuss what options and interests there are in Paladin and we are obviously receiving a number of different ideas back in return to that in terms of how they would perceive they would like to work with us. So, frankly, we are getting a lot of ideas in-bounded and they are all quite different structurally and we are working through them in a diligent manner and I can’t say whether any outcome would be. There is no preference for a change of control or non-change of control or anything like that. It’s just that we are working with third-parties. And to some extent, we have to – we are sort of working with what we are provided as well. Stefan Hansen Alright. And just one final one on this timing of sales over the next couple of quarters, it looks like you are building inventory for another large sale to CNNC in the fourth quarter and we saw that in the first half that you had a greater premium when you would sold lower volume basically the CNNC agreement seems to be closer to spot. Is that how we should think about the price premiums that we will see in the third and fourth quarter? Alex Molyneux I think when we look at the third and fourth quarter, when we look at the fourth quarter, we do – we have some fixed term in that fourth quarter as well and we have a very large number in total sales for the fourth quarter. So, we are building a lot of material for that CNNC contract, but it could actually be less than half our total sales for that quarter. So, I think when we look at the impact on price and we – the margin moves sales between quarters a little bit. I think we – our current expectation is we will have a premium to spot in both quarters. And frankly, the premium looks like it will be higher in the fourth quarter than it will in the third. Stefan Hansen Okay, great. Thanks very much. That’s it for me. Cheers. Operator Thank you. The next question comes from Mr. Simon Tonkin from Patersons. Please ask your question, Simon. Simon Tonkin Yes, good morning, Alex. Congratulations on your appointment. I have just got a couple of questions. First one is capital, is there any large capital items you expect at Langer Heinrich in FY ‘17 such as tailings or stripping etcetera? Alex Molyneux The largest capital – so, our biggest upcoming capital item is that we do have in our plan to do a move of the TSF 1 at Langer Heinrich and the total capital number for that, Craig, if you can remind me. Craig Barnes I think it’s $7 million to $8 million in total, that’s moving the TSF 1 and then also building TSF 5 construction. Alex Molyneux Okay. I think it’s actually a bit more than that. Yes, I think it’s closer to $10 million. So, we are still – we are basically still looking at our numbers. But the question is, for us, right now is whether any of that will be spent in 2017, we are not sure, but the biggest year of that TSF move in a spending sense will probably be ‘18 regardless. But we are just trying to work out the exact timing of it maybe that there is a couple of million dollars of that comes in to FY ‘17. Simon Tonkin Okay. And the other question just on grade, obviously we are seeing it trend downwards, how can we think of grade in 2017? Alex Molyneux 2017 feed grade will be – so what we have said is for the next 5 years or so of mine life, we will be within the current zone of feed grade which is around 650 to 700 parts per million. So we are still finalizing – I mean basically, we won’t finalize our 2017 mine schedule until around May. And – but we had a relatively meaningful drop off in grade from FY ‘15 to FY ’16. And then we have said that we are broadly in the same grade zone for the next few years, but it’s in May that we will work that out. We will finalize our schedule and we will be able to provide some guidance on – within a much smaller level of tolerance around the grade. Simon Tonkin Okay. Thanks a lot. Operator Thank you. There are no more further questions. Please continue further with your presentation. Thank you. Alex Molyneux So no further questions? Operator There are no more further questions. Alex Molyneux Okay. So thanks everybody for joining our conference call. And if you do have any further questions, then feel free to contact Andrew and he can coordinate all of us to respond and thanks for your time this morning. Operator Ladies and gentlemen, that does conclude our conference today. Thank you for all participating. You may all 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. 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Are Fund Awards Only Showtime For Mutual Funds?

By Detlef Glow Not only the film industry has glamorous events such as the Academy Awards (better known as the “Oscars”) and the “Golden Globe Awards,” where juries select and reward the best movies from their point of view. The mutual fund industry also celebrates its best performing funds with fund awards ceremonies at the beginning of the year. As with movies, these fund awards are determined by a jury (a qualitative screening) or with a quantitative screening on a global basis by the likes of Morningstar and Thomson Reuters Lipper, who use a similar quantitative methodology for their awards all around the world. Or the funds are selected by local players, who award funds only in a single country or region according to their definition of the best funds. Are awards useful tools for fund selection? Fund awards reward the past performance achieved by a portfolio manager. Since past performance is the only way to evaluate the achievement potential of a fund manager, fund awards-like fund ratings-can be used as a tool to support a quantitative fund selection process. Opposite to fund ratings, where normally a group of funds gets the highest score, there is only one winner in each peer group for a fund award. In this regard, one can assume that an award can be used as guidance for fund selectors. But this is only true if the methodology on which the award is calculated suits the expectations and requirements of the investor, especially with regard to risk-adjusted returns. It is key for investors who want to use awards as tools in their fund selection process to know the methodology and/or selection process employed in the determination of the award winners. Unfortunately, the majority of funds are not able to maintain their top position for the succeeding year. Even though some observers see this as a big disadvantage of fund awards, it is the nature of the beast; not all investment approaches such as value or growth work well in any given market environment. But, unlike for movies, there are funds/fund managers that are able to win the categories year after year, and these might be the funds an investor should examine more closely. Fund flows as an indicator of future performance Another issue that can’t be neglected is the impact of high inflows and outflows on a mutual fund. As shown in the study “The Kiss of Death” by Matthew R. Morey , a good rating can have a massive impact on the flows into a fund, which can at some point have negative impacts on its performance. Even though the author analyzed only the impacts from one rating and the negative effects do not apply to every fund, investors need to monitor the flows of all funds in their portfolio regularly, so they can act appropriately if a fund becomes too small or too large. Summary Fund awards, like fund ratings, are an additional tool that can be used by investors to support their fund selection process, as long as the criteria used to nominate the award winners suit the needs of the investors. It can be concluded that fund awards ceremonies, which are typically held over the first quarter of any year, are not only a show event where the employees of the mutual funds industry enjoy a glamorous evening and the organizers do their marketing bit; the funds also get a lot media attention at these ceremonies. But a fund award can’t replace a full fund analysis process; investors still need to invest a lot of work in their fund selection process even if they may use awards as guidance. At the end of the day, as it is for the movies, not everybody likes all the winners; everyone is looking for different funds that may be the winners the next year. The views expressed are the views of the author, not necessarily those of Thomson Reuters