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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. 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American States Water’s (AWR) CEO Robert Sprowls on Q4 2015 Results – Earnings Call Transcript

Operator Ladies and gentlemen, thank you for standing by. Welcome to the American States Water Company Conference Call, discussing the company’s Fourth Quarter and Full-Year 2015 Results. The call is being recorded. If you would like to listen to the replay of this call, it will begin this afternoon at approximately 5 o’clock PM Eastern Time and run through Thursday, March 3, 2016 on the company’s website, www.aswater.com. After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] This call will be limited to an hour. As a reminder, certain matters discussed during this conference call may be forward-looking statements intended to qualify for the Safe Harbor from liability established by the Private Securities Litigation Reform Act of 1995. Please review a description of the company’s risks and uncertainties in our most recent Form 10-K on file with the Securities and Exchange Commission. At this time, I would like to turn the call over to Eva Tang, Chief Financial Officer of American States Water Company. Eva Tang Thank you, Carrie. Good afternoon and welcome, everyone. Thank you for joining us today. On the call with me today is our President and CEO, Bob Sprowls. I’ll start by reviewing our financial results. Diluted earnings for the year ended 2015 were $1.60 per share, which is $0.03 per share increase as compared to $1.57 in 2014. For the fourth quarter of 2015, diluted earnings were $0.31 per share, compared to $0.35 per share for the same period in 2014. I’ll first discuss the key items that affected our fourth quarter results. For the quarter, revenue at our Water segment decreased $830,000, due mainly to a delay in recognizing $1.4 million of Water Revenue Adjustment Mechanism or the WRAM revenue, partially offset by rate increases approved by the California Public Utilities Commission. As we discussed in our third quarter earnings call, under the accounting guidance for alternative revenue programs, we can only recognize WRAM revenue for amounts collectable within 24 months following the year in which they are recorded. Please note that the accounting guidance affects the timing of when we can recognize the WRAM revenue, but not the collectability of the WRAMs. We have just filed that with the CPUC for recovery of the 2015 WRAM balances, including the $1.4 million. Under the current CPUC amortization guidelines, we expect to collect the balances between 12 to 36 months. The $1.4 million will be recognized as revenue when it becomes collectable within 24 months. At this time, we estimate the majority of the $1.4 million will be recognized as revenue in 2016. As part of our pending water general rate case, the forecasted consumption used to set rates for 2016 through 2018 reflects state-mandated consumption levels. Therefore, we do not expect the WRAM balances during the next rate case cycle to continue growing at the same rate as in 2015. First quarter revenue for electric operations were – was $9.2 million as compared to $7 million for the same period in 2014. The increase in revenue resulted from CPUC-approved rate increases effective January 1, 2015, and additional revenue increases January from advice letter filings. In addition, we recorded a cumulative reduction revenue in the fourth quarter of 2014, along with a accumulative reduction in depreciation expense and other expenses. As a result of the delayed decision issued by the CPUC in November of 2014, which was retroactive to January 2013. You may recall that the impact of the retroactive effects on the new rates to the electric segments 2014 net earnings was not significant. Revenue from contracted services was $28.7 million for Q4 2015, compared to $29.9 million for the same period in 2014. Higher revenue in the prior year was due in large part to the recording of construction revenues as a result of the closeout of a large pipeline replacement capital project, which did not recur in 2015. Our water and electric supply cost were $23.1 million or about 26% of consolidated operating expenses for the quarter. Any changes in supply cost for both the water and electric segments as compared to adopted level are tracked in balancing accounts, which will be recovered from or refunded to our customers in the future. Other operation expenses increased by $553,000 for the quarter, compared to Q4 2014 the increase was due to increases in drought related expenses at our water segment and higher operation related labor cost in our contract into service segment. The CPUC has authorized Golden State Water to track incremental drought related cost, in a memorandum account for possible future recovery. We incurred about $343,000 of drought related cost for Q4 2015 and $937,000 for the year. Administrative and general expenses for the fourth quarter of 2015 were $20.6 million as compared to $18.5 million for the same period in 2014. The increase was due to higher legal costs incurred to the same condemnation related activity in our water segment and higher costs associated with energy efficiency and solar initiative programs approved by the CPUC in our electric segment. In addition there was a shift in labor and other indirect cost to A&G related activities from construction related activities in support of various functions at ASUS. Maintenance expense increased by $924,000 for the quarter due to increase in both planned and unplanned level of maintenance activities in 2015; although the expense increased significantly during the quarter, it was $793,000 higher for the full year 2015 as compared to 2014. Depreciation and amortization expense increased by $968,000 to $10.4 million for the fourth of 2015 resulting from additions to utility plant at the water segment during 2014. Total other expenses net of interest income increased by $454,000 to $4.4 million for the fourth quarter of 2015 primarily due to additional interest income collected certain outstanding balances owed to Golden State Water during 2014, there was no similar items in 2015. Let me briefly discuss our 2015 full-year results. First of all as part of the 2014 and 2015 stock repurchase program authorized by our Board of Directors, we have repurchased approximately 2.45 million shares of AWR common stock, driving reduction in weighted average shares outstanding on a diluted basis, which positively benefited earning per share in 2015 and in 2014. Both stock repurchase programs were completed in 2015. Diluted earnings per share for 2015 were $1.60 compared to $1.57 for 2014. This increase was largely attributable to $0.03 per share increasing our water segment resulting from third year rate increases and advice letter filing for completion of certain capital projects not previously included in rate. The increase was partially offset by $1.4 million of 2015 WRAM revenue not recorded as previously discussed and higher operating expenses due primarily to increases in maintenance and depreciation expenses. Our contracted services segment also contributed to the increase in earnings by $0.01 per share, resulting from a successful resolution of various price redeterminations received during the third quarter of 2015. This increase was partially offset by higher operating expenses, due to an increase in labor, insurance and other outside services costs, and a decrease in construction activity due to significant work on several large projects being substantially completed during 2014. Diluted earnings from AWR parent decreased $0.01 per share for 2015, as compared to 2014 due primarily to higher state income taxes. Net cash provided by operating activities decreased by $68.1 million to $95.1 million for 2015. The decrease in operating cash flow during 2015 was due to large part to a decrease in customer water usage resulting from conservation efforts, which lowered the customer billings at the Golden State Water and increased the WRAM regulatory assets. There was also a decrease in cash generated by ASUS. During 2014 cash payments at ASUS were received for completion of several large capital upgrade projects that did not recurred in 2015. These decreases were partially offset by lower income tax payments made during 2015 mainly due to the implementation of new repair, new tax repair regulation during the fourth quarter of 2014. For additional details on our fourth quarter and year-to-date performance, please refer to our earnings release and Form 10-K issued yesterday. With that, I’ll turn the call over to Bob. Robert Sprowls Thank you, Eva. Hello, everyone. I appreciate everyone joining us today. American States Water produced another year of solid financial performance in 2015, as we earned $1.60 per share. Achieved a consolidated return on equity for the year of 12.4%, increased our dividend yet again, and achieved above market returns on our common stock. Our consolidated performance reflects excellent financial results by our two first year subsidiaries Golden State Water Company, which is our regulated water and electric utility, and American States Utility Services, our contracted services business. Let me discuss some of the highlights for 2015 by business segment. Our water and electric utilities continue to invest to maintain an improved reliability of our systems. During 2015 Golden State Water invested $91 million in infrastructure; well above the $61 million we spent in 2014, a year where we experienced project delays. Of the $91 million in company funded capital expenditures, fair value electric service accounted for approximately $8 million, reflecting our electric divisions work on two large projects. We anticipate capital investments in 2016 to be approximately $85 million to $95 million, which may change once a decision is issued by the California public utility commission on our pending water rate case. While we continue to make prudent investments to maintain and improve the reliability of our systems, Golden State Water also remains very focused on cost control and this was further evidenced in 2015. Excluding depreciation expenses and supply cost, operating expenses for 2015 were relatively unchanged compared to 2014. In fact the overall staffing level at Golden State Water has declined by approximately 8% since 2011. Lastly, in October 2015 we completed an asset purchase agreement and acquired all of the operating water assets of Rural Water Company and began serving 960 new customers. Our contracted services business, American States Utility Services continued to make significant contribution to the company’s earnings. ASUS accounted for 20.5% of the company’s consolidated revenues in 2015. During 2015, ASUS successfully completed several filings with the U.S. government for price redeterminations and asset transfers, which positively affected its earnings. ASUS’s contribution helped the consolidated company earn its 12.4% return on equity for 2015. It’s been a solid year for American States Water and its subsidiaries, and we’re looking forward to continued strength and progress in 2016. With that I’d like to discuss a few regulatory matters pertaining to Golden State Water in the California drought. As we discussed in previous quarters, Golden State Water filed a general rate case in 2014 for all of its water regions and the general office. The application will determine the rates charged to customers for the years 2016, 2017, and 2018. Our requested capital budgets in the application average approximately $90 million a year for the three-year period. The 2016 water gross margin is expected to decrease as compared to the currently adopted levels due, in part, to a decrease in annual depreciation expense resulting from an updated depreciation study. As Eva mentioned earlier, the consumption level is used to calculate rates for 2016 through 2018 and incorporated into the settlement with the PUC’s Office of Ratepayer Advocates reflect the state-mandated conservation targets for each ratemaking area. The decision on this rate case is expected by the end of the second quarter of 2016 with new rates retroactive to January 1, 2016. We are scheduled to file our next cost-of-capital application in March – we were scheduled to file our next cost of capital application in March 2016, based on an extension previously granted. In December of 2015, Golden State Water along with three other Class A California water utilities filed a request with the PUC for a further extension. On February 1st of this year, the PUC approved a one-year extension until March 31, 2017, by which date each of the four Class A utilities must file their next cost-of-capital application. As part of the extension agreement, the four water utilities agreed to forgo any adjustments that would be triggered by the water cost of capital adjustment mechanism for one year. Golden State Water’s current authorized return on equity at 9.43% will continue in effect through December 31, 2017. Based on the current economic environment, we don’t believe interest rates will increase enough by September 30 to trigger the water cost of capital adjustment mechanism if it were in place. Our Electric segment was originally scheduled to file its next general rate case application by January 31, 2016. In November of last year, we filed a petition with the PUC, requesting to defer the rate case filing by one year to January 31, 2017, due to our effective cost control measures. The Administrative Law Judge issued a proposed decision granting Golden State Water’s request to defer to general rate case to January 31, 2017. The PUC is expected to vote on the proposed decision in the first quarter. I’ll now turn to water conservation and the drought situation in California. In February earlier this month, the State Water Resources Control Board extended the Governor of California’s executive order imposing mandatory restrictions through October 31, 2016. Golden State Water intends to implement Stage II or higher of our staged mandatory conservation and rationing plan in those areas, which have not met their cumulative targets. Once the final allocations are determined based on the amended regulations. Stage II and hire include penalties for customers that use water in excess of their allotments. In connection with conservation, the commission has authorized us to track incremental costs incurred in promoting conservation and implementing restriction measures in drought memorandum accounts for possible future recovery. Through the end of 2015, we have incurred approximately $1.1 million of drought-related costs. We’d now like to discuss our contracted services business at American States Utility Services or ASUS. During 2015, ASUS has made significant progress on the resolution of outstanding price redeterminations with the U.S. government. Specifically, ASUS resolved its price redeterminations at Fort Jackson, joint Base Andrews and the military bases we serve in Virginia and an asset transfer at two of the Virginia bases during the third quarter, resulting in contract modifications, which include retroactive operation and maintenance management fees. As a result, ASUS recorded approximately $3.5 million of retroactive revenues and pretax operating income during the third quarter of which $3 million was for periods prior to 2015. We expect the fourth price redetermination for Fort Bliss to be finalized in the first quarter of 2016. Filings for these price redeterminations requests for equitable adjustment and contract modifications awarded for new projects provide ASUS with additional revenues and margin and the opportunity to consistently generate positive earnings. We also continue to work closely with the U.S. government for contract modifications relating to potential capital upgrade work as deemed necessary for improvement of the water and wastewater infrastructure at the military bases. In addition, we continue to actively engage in new proposals and expect the U.S. government to release additional basis for bidding over the next several years. We remain very optimistic about the future of our contracted service business. Lastly I’d like turn your attention to dividends. 2015 marks the 61st consecutive year of increases in our annual dividend, placing us in an exclusive group of companies on the New York Stock Exchange who had achieved that result. In 2015, we increased the quarterly dividend by 5.2%. Given American States current low payout ratio compared to the companies we compete with for capital, our high shareholders equity ratio as a percent of total capitalization and our earnings growth prospects, there is room to grow the dividend in the future. Before I close from my prepared remarks, I’d like to thank you for your interest in American States Water, and we’ll now turn the call over to the operator for questions. Question-and-Answer Session Operator We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Richard Verdi of Ladenburg. Please go ahead. Richard Verdi Hey, Bob and Eva, good quarter and thank you for taking my call. Eva Tang Thank you, Richard. Robert Sprowls Thanks, Richard. Richard Verdi I just have one very quick question Bob. On the past few calls and specifically you know on the last call, you had provided some framework surrounding the ASUS group, and I should say at this way, last year on the 4Q call, you had stated that ASUS would look similar to the prior year and maybe down a little bit? Here we are and ASUS came out flat year-over-year, and on the last call you had indicated that maybe it could be down a little bit, this year versus last year. So given that it ended up being flat this year-over-year I mean could that be the case again in 2016 or could we see a modest drop in earnings in from ASUS unit this year? Robert Sprowls Well Richard, I’ll start with some of the earning for 2015. We achieved $0.32 per share. We had included in that $0.32 million to $0.5 million sense of retroactive O&M fees for prior years, so that would lead sort of one to believe that we may go down a little bit from 2015 to 2016. However, as you know, and I think many of the folks on the call know in September, we received $50 million in government funding for new capital work at the basis we serve, which will largely be performed in 2016. So this should allow us to increase our construction revenues in 2016 from the level we achieved in 2015. We do have the $0.05 retroactive that sort of going away, but I think we can make some of that back through the construction – additional construction revenues. So we’re projecting an EPS contribution from ASUS of $0.28 to $0.32 per share for 2016. Richard Verdi Okay. That’s very helpful. Thank you for that. I guess, I’d say thank you, guys. Good quarter. I appreciate it. Robert Sprowls Thank you, Rich. Eva Tang Thank you. Operator [Operator Instructions] Our next question comes from Jonathan Reeder of Wells Fargo. Please go ahead. Jonathan Reeder Hey, good afternoon or good morning, I guess for you guys, Bob and Eva. Thanks for the guidance. First off Bob on ASUS that’s always helpful. Did I miss in your remarks that you said you had a settlement in water general rate case, is that accurate, or do I hear wrong? Robert Sprowls That’s correct. We had settled a number of our operating expenses. The outstanding items that we have remaining in the case that we went to hearings on was the entire capital budget and management compensation. So it’s largely a capital related item. Jonathan Reeder Did you settle though the capital budget and compensation issues, or those are still kind of litigated? Robert Sprowls Yes, we litigated that during the summer and we’re – that’s now been turned over to the Administrative Law Judge to decide the outcome for those two items. Jonathan Reeder Okay. Sorry, I was confused if you had said you had gotten a comprehensive settlement now at this point. But – okay, so we’re expecting an outcome you said in Q2, is that right? Robert Sprowls We believe so, yes. Jonathan Reeder Okay. And so with the new rates affective at the water utility, do you expect like your full-year 2016, if it has to be higher, lower, about the same as the $1.19 and $1.15 given your operating efficiencies or I think allowing the sub to earn above the allowed ROE in 2015? Robert Sprowls Yes, that’s a difficult question to answer without completely knowing what the rate case is going to come out with. We, as you know put it on our forecasted operating expenses and really without knowing where the decision comes out It’s difficult to project whether it will be higher or slightly lower than 2015. Jonathan Reeder Okay. But it might be kind of similar, it sounds like more than likely. Robert Sprowls Yes, it could be similar. It’s – we’ve done just a great job in controlling expenses and the folks at this company- what I’ve learned in my tenure as CEO was, you have to do is ask these folks to do things and they go and do it. And I couldn’t be more impressed with what our organization has done over the last four or five years, so… Jonathan Reeder You make it sound so easy, Bob. Robert Sprowls You’re welcome. Jonathan Reeder I’m sure it’s not that easy. But… Robert Sprowls It’s easier for me than it is for them, I guess. Jonathan Reeder Right. Do you think there’s opportunities and realize additional efficiencies over this next GRC cycle? Robert Sprowls I believe there are, yes. I mean as you know, it gets a little tougher each time. But we’ve got some very innovative people at this company and they really have done a great job. Eva Tang The other thing that I think as Bob mentioned are 2015 for Golden State Water or 2015 operating expenses excluding the depreciation in supply cost. This is basically not changed much from last year. So we’ll continue to try to do our best to control our cost, I think that’s where the efficiency comes from. Robert Sprowls Ultimately, when we do a great job controlling costs, it does, in fact, ultimately go back to our customers in the form of lower rate increases and that’s really important to us too. So, I mean, that’s – we’re very focused on making sure our water rates are affordable. Jonathan Reeder Right. And would you expect the GRC filing, does it kind of contemplate those flat costs in 2015, or is that how you’re kind of saying this depends on where the expense levels shakeout given how you ended the year? Robert Sprowls Well, it does depend on where these expense levels shakeout in terms of whether we can do better than that. I mean, it’s a – it will be a challenge, but, again, we have a lot of capability at the company to take on those challenges. Jonathan Reeder All right. And then my last question, Eva, do you have what your authorized weighted average rate base was for 2015? And then what the GRC requests for 2016 is? Eva Tang We – for the 2016, as what we currently have stipulated, it was $725 million for 2016. That’s filed with the PUC as our position right now. But as Bob mentioned, we are contesting on – the OIA is contesting the capital expenditure. So the $725 million rate base is our position at this point. Jonathan Reeder Is that just for water, or does that include that electric portion too? Eva Tang Just water. Jonathan Reeder Okay. Robert Sprowls We filed the rate case that had virtually no increase in rate. Jonathan Reeder Right. Robert Sprowls All we want to do here is maintain the system and well hopefully that will play with the Administrative Law Judge. We’re not sure whether it will or it well ORA. We’re always apart with ORA on the CapEx budget. So it was little hard to me that they weren’t a little easier to deal with on that, but particularly given that we have basically a flat rate. Jonathan Reeder Okay. And then what was your authorized 2015 water rate base? How is that compared to the 7.25 you have requested? Eva Tang Not sure, I have that number. I think the 2015 authorized rate base is about 700 range. I can get you that number from our position, Jonathan. Jonathan Reeder Okay. All right, great. That would be appreciated. And that’s all I have today. Thanks so much for the time. Robert Sprowls Thank you, Jonathan. Operator [Operator Instructions] Seeing no further questions. This concludes our question-and-answer session. I’d now like to turn the conference back over to Bob Sprowls for any closing remarks. Robert Sprowls Thank you, Carrie. I just want to wrap up today by thanking all of you for your participation on the call today and your continued interest and investment in American States Water Company. So, thank you very much. Operator This conclude today’s American States Water Company conference call. Thank you for attending today’s presentation. You may now disconnect your lines. Have a great day. 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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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