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Suburban Propane Partners’ (SPH) CEO Mike Stivala on Q2 2016 Results – Earnings Call Transcript

Suburban Propane Partners LP (NYSE: SPH ) Q2 2016 Earnings Conference Call May 05, 2016, 09:00 ET Executives Davin D’Ambrosio – VP & Treasurer Mike Stivala – President & CEO Mike Kuglin – CFO & CAO Analysts Brian Brungardt – Stifel Operator Welcome to the Suburban Propane Second Quarter 2016 Financial Results Conference Call. [Operator Instructions]. And ladies and gentlemen, this conference call contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended relating to the Partnership’s future business expectations and predictions and financial condition and results of operations. These forward-looking statements involve certain risks and uncertainties. The Partnership has listed some of the important factors that could cause actual results to differ materially from those discussed in such forward-looking statements. These are referred to as cautionary statements in its earnings press release which can be viewed on the Company’s website. All subsequent written and oral forward-looking statements attributable to the Partnership or persons acting on its behalf are expressly qualified in their entirety by such cautionary statements. With that being said, I’ll turn the conference over to the Vice President and Treasurer, Mr. Davin D’Ambrosio. Please go ahead, sir. Davin D’Ambrosio Thank you, John and good morning, everyone. Welcome to Suburban’s Fiscal 2016 Second Quarter Earnings Conference Call. Joining me this morning is Mike Stivala, President and Chief Executive Officer; Mike Kuglin, Chief Financial Officer and Chief Accounting Officer; Mark Wienberg, Chief Development Officer; and Steve Boyd, our Senior Vice President of Operations. Purpose of today’s call is to review our second quarter financial results, along with our current outlook for the business. As usual, once we’ve concluded our prepared remarks, we will open the session to questions. However, before getting started, I would like to briefly reemphasize what the operator has just explained about forward-looking statements. Additional information about factors that could cause actual results to differ materially from those discussed in forward-looking statements is contained in the Partnership’s SEC filings, including its Form 10-K for the fiscal year ended September 26, 2015 and its Form 10-Q for the period ended March 26, 2016 which will be filed by the end of business today. Copies of these filings may be obtained by contacting the Partnership or the SEC. Certain non-GAAP measures will be discussed on this call. We have provided a description of those measures, as well as a discussion of why we believe this information to be useful in our Form 8-K furnished to the SEC this morning. Form 8-K can be accessed through a link on our website at suburbanpropane.com. At this time, I’d like to turn the call over to Mike Stivala for some opening remarks. Mike? Mike Stivala Thanks, Davin. Good morning, everyone. Thanks for joining us today. The record warm temperatures reported for our first fiscal quarter persisted into the second quarter making the 2015, 2016 heating season the warmest on record. In fact according to NOAA, heating degree days for this year’s heating season were reported at 82% of normal. Our volumes were obviously impacted by the lack of customer demand for heating needs. However, we rely on our flexible cost structure and the strength of our balance sheet to help mitigate some of the short-term weather-driven earnings shortfall. The fundamentals of our business remained strong and as has always been our philosophy, our balance sheet and our business model provide us with the support to withstand the effects of this kind of dramatic weather event. We came into this fiscal year with more than $150 million of cash on hand. Despite the lower earnings, we continued to fund all of our working capital and capital expenditure requirements without the need to borrow under our revolving credit facility throughout this year’s heating season. We also funded the $42 million acquisition of Propane U.S.A at the end of our first fiscal quarter and we ended the second fiscal quarter with approximately $59 million of cash on the balance sheet. Additionally, during the quarter, we took steps to further strengthen our liquidity position, with the opportunistic refinancing of our revolving credit facility which was scheduled to mature in January 2017. We received excellent support from our bank group as the syndication was well over subscribed, despite the challenging conditions in the credit markets. The new facility increases our available borrowing capacity from $400 million to $500 million in support of our long-term growth initiatives. It reduces our interest requirements from improved pricing and relaxes several of the covenant requirements. With the heating season now behind us, our employees are well-positioned to focus on the things they can control, fine-tuning our operating model to drive further efficiencies, continuing to execute on our customer base management initiatives and seeking opportunities to expand in strategic markets. In a moment, I’ll provide some closing remarks including some comments on our outlook for the remainder of the fiscal year. However, at this point, I’d like to turn the call over to Mike Kuglin to discuss our second quarter results in more detail. Mike? Mike Kuglin Thanks, Mike and good morning, everyone. To be consistent with previous reporting, as I discuss our second quarter results, I am excluding the impact of unrealized non-cash mark-to-market adjustments on derivative instruments used in risk management activities which resulted in an unrealized loss of $739,000 in the second quarter of fiscal 2016 compared to an unrealized loss of $7.4 million in the prior year second quarter. Additionally, net income and EBITDA in the second quarter of fiscal 2016 include a loss on debt extinguishment of $292,000 associated with refinancing of our revolving credit facility. Net income and EBITDA for the second quarter of fiscal 2015 include a loss on debt extinguishment of $15.1 million associated with refinancing of our 2020 senior notes and $2.1 million of expenses related to integration of Inergy Propane. Therefore, excluding these items, net income for the second quarter of fiscal 2016 would have amounted to $93 million or $1.53 per common unit compared to net income of $161.2 million or $2.66 per common unit for the prior year’s second quarter. Adjusted EBITDA for the second quarter of fiscal 2016 amounted to $145.1 million compared to $214.3 million in the prior year second quarter. As Mike indicated, record warm weather for this year’s heating season was really the story for both the first and second quarters of 2016. As a result, retail propane gallons sold in the second quarter of fiscal 2016 of 199.7 million gallons decreased 38.1 million gallons or 19.1% compared to the prior year. Sales of fuel oil and other refined fuels in the second quarter of fiscal 2016 of 13.3 million gallons decreased 6.6 million gallons compared to the prior year. Similar to the first quarter, the unseasonably warm weather was persistent as temperatures were warmer than normal and the prior year for nearly all 13 weeks of the second quarter. The only market that experienced favorable weather compared to the prior year was California where volumes responded strongly compared to the prior year. Overall, average temperatures across all of our service territories for the second quarter of fiscal 2016 was 13% warmer than normal and 20% warmer than the prior year second quarter. In our northeast service territories, average temperatures for the second quarter were 30% warmer than the prior year second quarter. In the commodity markets, propane prices at the beginning of the quarter continued to descend lower from the first quarter. However, prices by mid-February then rallied for much of the remainder of the quarter. Despite the recent increase, commodity prices remained lower relative to historical price levels. Overall, average posted prices for propane, basis Mont Bellevue, for the second quarter of fiscal 2016 were $0.39 per gallon or 27% lower than the prior year second quarter. Average fuel oil prices of $1.08 per gallon for the second quarter of fiscal 2016 were 40.2% lower than the prior year second quarter. Total gross margins of $267.9 million for the second quarter of fiscal 2016 were $85.3 million or 24.1% lower than the prior year primarily due to lower volumes sold. Unit margins for the second quarter were slightly lower than the prior year second quarter as a result of lower mix of fee-related volumes. Combined operating and G&A expenses of $122.8 million were $16.1 million or 11.6% lower than the prior year second quarter as we leveraged our flexible cost structure to reduce expenses. Savings were primarily due to lower volume-related variable costs including lower over time and vehicle fuel costs, lower variable compensation associated with lower earnings, as well as lower insurance costs and continued operating efficiencies resulting in reduced headcount and vehicle count. Net interest expense of $18.9 million for the second quarter of fiscal 2016 decreased by approximately $800,000 primarily due to savings through the refinancing of the Partnership’s previous 7.375% senior notes due 2020 with new 5.75% senior notes due 2025 which is completed in the second quarter of fiscal 2015. Total capital spending for the second quarter of fiscal 2016 amounted to $11.8 million including $5.8 million of maintenance capital compared to total CapEx of $12 million in the prior year second quarter. Turning to our balance sheet, we now move through our historically high period of seasonal working capital needs and during the second quarter, we funded all our working capital and capital expenditures cash on hand and internally generated cash. With more than $353 million of capacity under our revolver and $58.7 million of cash on hand at the end of the second quarter, we have ample liquidity to fund our working capital requirements and our projected capital needs for the remainder of the fiscal year. As Mike mentioned, we completed the refinancing of our senior secured credit facility during the second quarter. The new five-year revolving credit facility amended and restated previous revolving credit facility dated January 5, 2012. We’re very pleased with the outcome of this opportunistic refinancing and the support of our bank group. Back to you Mike. Mike Stivala Thanks, Mike. As announced in our April 21 press release, our Board of Supervisors declared our quarterly distribution of $0.8875 per common unit. In respect of our second quarter of fiscal 2016, that equates to an annualized rate of $3.55 per common unit. The quarterly distribution will be paid on May 10 to our unitholders of record as of May 3. While this past winter season provided a challenging operating environment due to significantly lower customer demand, the temporary earnings shortfall does not affect the overall fundamentals of our business, nor the financial strength that has been a hallmark of our conservative approach towards managing the business. We continue to maintain our focus on executing our strategic growth initiatives, seeking opportunities both within the propane space and through diversification into businesses that meet our strategic criteria and that can supplement or complement our propane business. We remain patient and disciplined in our approach, yet believe we’re well positioned to be opportunistic. In closing, I would like to thank all of our dedicated employees for continuing to remain focused on providing exceptional service to our customer base, while driving operating efficiencies and managing our cost structure. Our operations personnel have done an outstanding job delivering on our customer base growth and retention initiatives throughout the first half of fiscal 2016, continuing to build on our post integration momentum. And as always, we appreciate your support and attention this morning. I would now like to open the call up for questions. John, can you help us with that please? Question-and-Answer Session Operator [Operator Instructions]. And first we will go to the line of Brian Brungardt with Stifel. Please go ahead. Brian Brungardt Just curious if you have any updates regarding the potential pool of acquisition targets, given number of energy companies are now at least appear to be willing to sell non-core assets? Mike Stivala I think the M&A market is going to really develop over the next 12 to 18 months as the effects of lower for longer commodity environment continued to take shape. Obviously, the credit markets, the equity markets have been a challenge for those that need to raise capital. So as you’re seeing, Brian, as well as we do a lot of companies are beginning to seek alternatives to raise capital and we think that bodes well for us as opportunities can come out of that process. So I think there are opportunities ahead, the next 12 to 18 months will tell us a lot. Brian Brungardt Lastly, as it relates to distribution and I appreciate the longer-term viewpoint taken by you guys, but how should we think about the sustainability of the current distribution, given seasonality of cash flows and the impact on the — with your credit facility covenants? Mike Stivala I think look, Brian, I said it in my remarks, this is a short-term weather-driven event, okay? If you look back just six months ago, we ended the fiscal year of 2015 with leverage around 3.7 times and very strong coverage. So we’re only six months removed from that and that was in line with our leverage following our leverage targets, following the integration of Inergy Propane. So, yes, when you look at our trailing 12 of March, our leverage appears elevated relative to a more normal scenario as of the end of 2015. But I think that as we said, it’s all of a short-term weather-driven scenario which we can point to. So as we get out of the heating season now, the back half of the year becomes a little bit more predictable and as we enter the first quarter of next year, all you need is a little bit of improvement in weather and you’ll see an improvement in those metrics. So for us, we’ve been through these scenarios before 2012, it was the previous record warm. The business is built for these types of environments where we can flex our expense base as needed, as well as to ensure that we have adequate liquidity to provide the kind of protection to the sustainability of the distribution. So I think, as evidenced by the fact that we haven’t even needed to borrow under our working capital line to help fund this year’s heating season should give the comfort of the strength of our liquidity and financial position to continue to withstand this kind of an environment and as weather normalizes, we’ll get back to the type of metrics that we were able to see in 2015. Operator [Operator Instructions]. And allowing a few moments, no further questions coming in. Mike Stivala All right, great. John, thank you for your help and thank you all for joining us today and we’ll see you at the end of our third quarter. Operator Ladies and gentlemen, this conference is available for replay. It starts today at 11:00 AM Eastern Time and will be going until tomorrow at midnight May 6. You can access the replay at any time by dialing 800-475-6701 and the access code 391794. That number again, 1-800-475-6701 with the access code 391794. That does conclude your conference for today. Thank you for your participation. You may now disconnect. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) 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ONEOK’s (OKE) CEO Terry Spencer on Q1 2016 Results – Earnings Call Transcript

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

WEC Energy Group, Inc. (NYSE: WEC ) Q1 2016 Earnings Call May 03, 2016 2:00 pm ET Executives Allen L. Leverett – President and Chief Executive Officer Scott J. Lauber – Executive Vice President and Chief Financial Officer Analysts Greg Gordon – Evercore Group LLC Steve Fleishman – Wolfe Research LLC Jonathan Philip Arnold – Deutsche Bank Securities, Inc. Michael Lapides – Goldman Sachs & Co. Paul Patterson – Glenrock Associates LLC Julien Dumoulin-Smith – UBS Securities LLC James von Riesemann – Mizuho Securities USA, Inc. Vedula Murti – CDP Capital US, Inc. Operator Good afternoon, and welcome to WEC Energy Group’s Conference Call for First Quarter 2016 Results. This call is being recorded for rebroadcast, and all participants are in a listen-only mode at this time. Before the conference call begins, I remind you that all statements in this presentation, other than historical facts, are forward-looking statements that involve risks and uncertainties, which are subject to change at any time. Such statements are based on management’s expectations at the time they are made. In addition to the assumptions and other factors referred to in connection with the statements, factors described in WEC Energy Group’s latest Form 10-K and subsequent reports filed with the Securities and Exchange Commission could cause actual results to differ materially from those contemplated. During the discussions, referenced earnings per share will be based on diluted earnings per share unless otherwise noted. After the presentation, the conference will be open to analysts for questions and answers. In conjunction with this call, WEC has posted on its website a package of detailed financial information at wecenergygroup.com. A replay of our remarks will be available approximately two hours after the conclusion of this call. And now, it’s my pleasure to introduce Allen Leverett, President and Chief Executive Officer of WEC Energy Group. Allen L. Leverett – President and Chief Executive Officer Thank you, Charlene. Good afternoon, everyone, and thank you for joining us today as we review our results for the first quarter of the year. But before I do that, I want to introduce the members of our team who are here with me today. I’m pleased to welcome Scott Lauber as our new Chief Financial Officer. Many of you know Scott from his previous role as our Treasurer, but before that he had a number of other roles in our accounting and finance organization. Now Scott is taking over from Pat Keyes. Pat is now responsible for our operations in Michigan and Minnesota, as well as supply chain, information technology and strategy for WEC Energy Group as a whole. I also welcome Jim Schubilske as our new Treasurer. Like Scott, Jim has held numerous positions in our accounting and finance organization and he was most recently responsible for our State Regulatory area. Susan Martin, our General Counsel; Bill Guc, our Controller; and Beth Straka, who is Senior Vice President, leads our Corporate Communications and Investor Relations Groups are also here with me. So with that, let me now turn to our first quarter 2016 results. WEC Energy Group was formed in conjunction with the closing of our acquisition of Integrys in June of last year. Until now, we have focused our discussion on Legacy Wisconsin Energy standalone results. Starting today, our focus shifts to the entire company’s results. We reported first quarter earnings of $1.09 a share that compares with adjusted earnings of $0.90 a share in the first quarter of 2015. Scott will be reviewing the most significant drivers for the quarter with you in a moment. Now taking a look at the state of the economy for our largest segment, Wisconsin’s unemployment rate stands at 4.5%, which is well below the national average. The state’s labor force participation rate also rose to 68.7%, which is more than 5 points above the national rate. Also worthy of note, Wisconsin led the nation in adding manufacturing jobs in March. Electricity used by our large commercial and industrial customers moderated a bit. Our electric utility’s large customers, excluding the iron ore mines consumed approximately 0.8% less electricity in the first quarter compared to 2015. However, we continue to see improvement in several important sectors of the state’s economy including plastics, food processing and paper production. In addition, we are continuing to see customer growth across our system. At the end of March, our Wisconsin utilities were serving approximately 8,000 more electric customers, and nearly 11,000 more natural gas customers compared to a year ago. Our natural gas utilities in Illinois, Michigan and Minnesota added nearly 16,000 customers in the past year. This increase includes the acquisition of approximately 10,000 natural gas customers in Minnesota from Alliant Energy in April of 2015. We are achieving the results we expected from the Integrys acquisition. Our focus on cost controls and the tangible benefits from the acquisition have allowed us to freeze base rates for customers of We Energies and Wisconsin Public Service through 2017. Subject to Public Service Commission of Wisconsin action, which is not expected, we will not file 2017 test year base rate cases this year for our Wisconsin utilities. As we have discussed on previous calls, our long-term goal is to grow earnings per share at a compound annual growth rate of 5% to 7% of a base of $2.72 per share in 2015. Here of course to delivering this growth is executing our capital investment plan and addressing the impact of bonus tax depreciation. I want to give you a brief update on where we stand with our capital plan. Last December, Congress passed a tax bill that extends and modifies bonus depreciation for property placed in service from 2015 to 2019. At this point, we estimate that we will receive approximately $1 billion in cash tax benefits from the bonus depreciation extension, about two-thirds of this benefit will occur this year and in 2017. Although, we do not expect bonus depreciation to have any significant impact on earnings in 2016, we are taking steps to modify our capital plan to minimize any impacts in 2017 and following years. We have advanced a number of beneficial projects into 2016 and 2017. The estimated investment associated with these projects is $500 million, which includes the $100 million that we previously identified in the February call. As a result, we now forecast our 2016 and 2017 capital budgets at $1.55 billion and $1.9 billion respectively. I expect that we will continue to identify projects that can be advanced into our current five-year forecast. We plan to provide a complete update to our five-year capital forecast no later than the November EEI Financial Conference. Turning now to our operations in Illinois, we’re moving forward on the Accelerated Main Replacement Program or AMRP at Peoples Gas, one of the largest natural gas infrastructure projects in the country. The program calls for replacement of approximately 2,000 miles of Chicago’s aging natural gas infrastructure. Over the past nine months, we’ve improved management and execution of the project, which is approximately 18% complete. We filed a plan with the Illinois Commerce Commission or ICC late last year that describes our top priorities for the next three years. The plan’s key components include removal and replacement of more than 250 miles of aging cast-iron pipes in the neighborhoods most at risk, projected investment of $250 million to $280 million a year, and regular updates to the ICC and other stakeholders to keep them informed of our progress. While the engineering, fieldwork, and cost recovery of AMRP continued, the ICC held six workshops to assess our plan. These recently concluded workshops brought together key stakeholders to review the planned scope, schedule and long-term cost with a focus on safety and reliability. We expect that the ICC staff will issue its report late in May and that the ICC will reach its conclusions by the end of the year. However, in the interim, the AMRP work will continue. Next, a brief reminder on our dividend. On January 21, our board declared a quarterly cash dividend of $0.495 a share, an increase of 8.2% over the previous quarterly dividend. Our annual dividend rate stands at $1.98 a share and our yield is now at approximately the industry average. We continue to target a payout ratio of 65% to 70% of earnings, and we expect our dividend growth to be in line with our earnings per share growth. Before I ask Scott to review the details of our first quarter earnings, I want to cover one last item. I met with quite a number of investors and analysts, and including many of you over the last few months after our management transition was announced. Quite often I’ve been asked, Allen what will be different when you are a CEO. Now it’s really easier for me to tell all of you what will be the same. Our company will continue to focus on the fundamentals, safety, customer satisfaction, reliability and financial discipline. I believe this focus has served us well since I joined the company in 2003, and will continue to do so. So, now for more details on our first quarter results, here’s our Chief Financial Officer, Scott Lauber. Scott J. Lauber – Executive Vice President and Chief Financial Officer Thank you, Allen. Our 2016 first quarter GAAP earnings were $1.09 a share compared with $0.86 a share in the first quarter of 2015. First quarter results in 2016 included the positive impact of the Integrys acquisition. Excluding $0.04 of acquisition cost in 2015, our adjusted earnings per share increased by $0.19 a share from $0.90 in the first quarter of 2015 to $1.09 a share in the first quarter of 2016. The earnings packet placed on our website this morning includes the results of the Integrys companies and has a full GAAP to adjusted reconciliation. First, I’ll focus on operating income by segment and then discuss other income, interest expense and income taxes. Our consolidated operating income for the first quarter was $589.3 million as compared to an adjusted $367.6 million in 2015, an increase of $221.7 million. Starting with Wisconsin, operating income in the first quarter totaled $327.5 million for 2016, an increase of $50 million from the adjusted first quarter of 2015. On the favorable side, we realized $76.9 million contribution from Wisconsin Public Service. This was offset by lower operating income from Wisconsin Electric and Wisconsin Gas related to the mild winter temperatures. We estimate that electric and gas margins of these two utilities decreased by $29 million because of the warmer weather. In the first quarter of 2016, our Illinois segment added $137 million of operating income and our other state segment added $31.8 million of operating income. We did not have operations in these segments until our acquisition of Integrys. Operating income in the We Power segment was up $800,000 when compared to 2015. This increase reflects additional investments at our Power the Future plants. Our Corporate and other segment showed an operating loss of $300,000 this quarter as compared to an adjusted operating loss of $2.4 million in the first quarter of 2015. Taking the changes for these segments together, we arrive at the $221.7 million increase in operating income on an adjusted basis. During the first quarter of 2016, earnings from our investment in American Transmission Company totaled $38.5 million, an increase of $22.4 million from the same period last year. This increase is directly related to the increase on our ownership interest from about 26% to just over 60% as a result of the acquisition of Integrys. Our other net increased $29.7 million, largely due to repurchase of $155 million of Integrys’ 6.11% Junior Subordinated Notes at a discount in February 2016, as well as higher AFUDC due to the inclusion of the AFUDC from the Integrys companies. Our net interest expense increased $41.5 million, driven by $34.8 million of interest expense from Integrys companies in 2016. In addition, we incurred about $8 million of interest expense related to the $1.5 billion of debt issued in June 2015 to complete the Integrys acquisition. Earnings from the Integrys company drove an increase in our consolidated income tax expense of $90.2 million. There were no significant changes in our effective income tax rate. We expect our annual effective tax rate for 2016 to be between 37.5% and 38.5%. Combining all of these items brings us to $346.2 million of net income for the first quarter of 2016 or earnings of $1.09 per share. Net cash provided by operating activities increased $365.9 million in the first quarter of 2016. This increase was driven by $307.8 million of net cash flow from operating activities of Integrys during the first quarter of 2016. The remaining difference was driven by a decrease in contributions to employee benefit plans partially offset by changes in working capital. You may recall that we contributed a $100 million to our qualified pension trust in 2015, and we did not make a contribution in 2016. Our capital expenditures totaled $312 million in the first quarter, a $158.8 million increase compared to 2015. The largest increase was related to the Integrys companies. Our adjusted debt to capital ratio was 50.4% at the end of March. Our calculation treats half of the hybrid securities as common equity, which is consistent with past presentations. We’re using cash to satisfy any shares required for our 401(k) plans, options and other programs. Going forward, we do not expect to issue any additional shares. We also paid $156.2 million in common dividends in the first quarter of 2016, an increase of $60.9 billion over the first quarter last year. This is driven by the increase in shares with the Integrys acquisition, and a 17.2% increase in the dividend rate compared to the first quarter in 2015. For comparative purposes, the electric sales information I’ll discuss next reflects for both Wisconsin Electric and Wisconsin Public Service in the first quarter. Weather-normalized sales are adjusted for the effects of weather and factoring out the effect of leap year. On a weather-normalized basis, retail sales of electricity, excluding the iron ore mines, were down slightly by 0.2% compared to the first quarter of 2015. Actual first quarter deliveries fell by 1.6%. Now looking at the individual customer segments. Weather-normalized residential deliveries dropped 0.3% while actual residential deliveries fell 4.2%. Across our small and commercial industrial group, weather-normalized quarterly deliveries increased 1.5%, actual deliveries decreased 0.2%. In the large commercial and industrial segment, deliveries for the first quarter of 2016 decreased 0.9%. Excluding the iron ore mines, large commercial and industrial deliveries decreased 0.8%. Now an update on our natural gas deliveries. As you recall, our Illinois segment has a decoupling mechanism and our margins are less affected by weather. Looking at Wisconsin, our largest segment, first quarter weather-normalized retail gas deliveries, excluding gas used for power generation, decreased 1% compared to the same period in 2015. Actual gas deliveries, again excluding gas for power generation, were down 10.7% compared to gas sales in last year’s first quarter due to warmer weather. On a weather-normalized basis, our overall results for gas and electric sales in the first quarter were slightly below our expectations. Turning now to our earnings forecasts. We are reaffirming our 2016 earnings guidance of $2.88 a share to $2.94 a share, which represents 6% to 8% growth. This projection assumes normal weather and excludes any potential remaining acquisition-related cost. We are off to a strong start, but still have nine months of weather ahead of us. Again, we are reaffirming our 2016 earnings guidance of $2.88 a share to $2.94 a share. Finally, let’s look at the outlook for quarterly earnings for the remainder of the year. If we take a step back, we see new a quarterly pattern to earnings per share. The Integrys acquisition brings a larger gas component to the combined company. This means we expect to see relatively higher earnings per share in the first and fourth quarter due to gas heating margins and relatively lower earnings per share in the second and third quarter when compared to past years. This brings us to our second quarter earnings per share guidance. Taking into account this new quarterly earnings pattern and April being a little cooler than last year, we expect our second quarter 2016 earnings per share to be in the range of $0.51 to $0.55. That assumes normal weather for the rest of the quarter and excludes any remaining acquisition-related cost. Again, the second quarter earnings guidance is $0.51 to $0.55 per share. With that, I will turn things back to Allen. Allen L. Leverett – President and Chief Executive Officer Thank you, Scott. I think, overall, we’re solidly on track and focused on delivering value for our customers and our stockholders. Question-and-Answer Session Operator Your first question comes from the line of Greg Gordon with Evercore ISI. Please go ahead. Allen L. Leverett – President and Chief Executive Officer Hello, Greg. Greg Gordon – Evercore Group LLC Hey, guys. Congratulations, Allen. Allen L. Leverett – President and Chief Executive Officer Thank you, Greg. Greg Gordon – Evercore Group LLC So thanks for the update on the CapEx. I’m looking at slide 14 from your April business update. Allen L. Leverett – President and Chief Executive Officer Yes. Greg Gordon – Evercore Group LLC And so you’ve taken your CapEx for 2016 to $1.55 billion versus $1.499 billion and you’ve taken your 2017 CapEx to $1.9 billion from $1.553 billion. Can you just review again what capital projects you’ve brought forward and if we should assume that that capital comes out of the 2018 to 2020 budget? Or are you also reevaluating customer beneficial projects that you could put in, move forward such that those would stay relatively level? Allen L. Leverett – President and Chief Executive Officer Okay. Greg, so, if I could, let me answer your second question, and then Scott, I’m going to ask you maybe to give Greg a little bit of color about the types of projects that we’re advancing. So, Greg, on your second question, you should not assume that the increases that we’re making in the 2016 and 2017 spending would result in a corresponding decrease in the later years, because we’re also revaluating those later years. So, Scott, if you could, maybe just give Greg a little more background about some of the things that we’re advancing. Scott J. Lauber – Executive Vice President and Chief Financial Officer Sure. Just to give you a few examples, over these last couple of months, we looked across the enterprise. And for example, we are looking and we are going to implement a neat – updating our ERP system, the general ledger, consolidations, so that part of the general ledger and that could be up to $100 million. Another example is, we looked at Wisconsin, the gas and electric distribution system, and we’re increasing that about $150 million on value-added customer projects. And then, another area when we look at, in Illinois, we have a large gas storage facility, underground storage in Illinois, and we’re going to spend about $35 million over the next couple of years, looking at safety reliability within that storage field. So, basically across the enterprise found some good projects to bring up and move forward into this period. Greg Gordon – Evercore Group LLC Great. And because of the impact of bonus depreciation, that doesn’t really have a net – it’s a net-neutral impact on what the customer would otherwise see in terms of bill impacts, correct? Allen L. Leverett – President and Chief Executive Officer That’s correct. Greg Gordon – Evercore Group LLC The capital costs? Allen L. Leverett – President and Chief Executive Officer That’s correct. Greg Gordon – Evercore Group LLC Fantastic. And can you give us what a comparable pro forma theoretical quarterly earnings number would have been last year in the second quarter had you owned Integrys, so we could compare the $0.51 to $0.55 to that? Scott J. Lauber – Executive Vice President and Chief Financial Officer We looked at this at a very, very high level trying to take out all the acquisition adjustments and adjusting really just for the shares outstanding. It was about $0.53 – $0.52, $0.53. Greg Gordon – Evercore Group LLC Okay. So it’s going to be a little bit difficult for us as we roll through the year to get our minds around the new base of earnings. But would it be fair to say that as you stand today, if you were to assume normal weather and you were spot on your load growth forecast for the year that you are at the high end, low end, above, below your current guidance range for the year? Allen L. Leverett – President and Chief Executive Officer Well, I would say at this point, I mean, if you take it sort of – if you look at what happened with the hybrids in the first quarter, that was in our annual plan. It was just uncertain as to when in the year it would occur. So that certainly would not represent a pickup versus the financial plan. I think another significant driver, Scott, was related to fuel recoveries in Wisconsin where we had positive fuel recoveries in the first quarter. But our assumption for the year, Greg, would be that we would just be fully recovered. So I think given those two things, I would say that we’re sort of more at the middle of our range. And as I look at it, we’re sort of neutral against our financial plan. If you adjust for the items in the first quarter that I either expect would reverse in the case of the fuel recoveries or I had already included in the annual plan, it was just an uncertainty about the timing. Greg Gordon – Evercore Group LLC Fantastic. Thank you, gentlemen. Operator Your next question comes from the line of Steve Fleishman with Wolfe Research. Please go ahead. Allen L. Leverett – President and Chief Executive Officer Good afternoon, Steve. Steve Fleishman – Wolfe Research LLC Hey, Allen. Congrats again. So just on the rate case delay, can you give us a sense of whether kind of staff is supportive of that, if other parties have had a view, and when will we know when the commission is kind of okay with it? Allen L. Leverett – President and Chief Executive Officer Well, I think it in terms of the Public Service Commission of Wisconsin staff, they’re okay with it, and they’ve indicated that to us in writing that they’re in agreement with it. So, at this point, Steve, the commission itself, they don’t have to take any action at all for there not to be a rate case. So, my expectation at this point, as I was saying in the prepared remarks, my expectation would be, we wouldn’t file a case for base rates in 2017 – for 2017. However, I would expect, Steve, that in August, we would do a fuel filing for 2017 rates, and say more likely than not we might see a slight reduction in the fuel rate, but we’ll have to look at our numbers when we file in August. Steve Fleishman – Wolfe Research LLC Okay. I thought you said in your prepared remarks not file 2017 subject to PSC approval. Allen L. Leverett – President and Chief Executive Officer No. I didn’t say subject to approval. I said subject to any PSC action. And so, just to be clear, they don’t have to take any affirmative action here. So, if they do nothing, which would be my expectation, they wouldn’t take an action, we wouldn’t have a rate case. Steve Fleishman – Wolfe Research LLC Okay. And I assume what you are doing is utilizing merger synergies to help mitigate what would have been the rate needs. Allen L. Leverett – President and Chief Executive Officer Right. So, when we went through the process with the merger approval, we talked about the ability to get what we felt would be reasonably significant cost savings and we’re seeing those materialize. And so that allows us to freeze base rates, which we think is a benefit to customers. Steve Fleishman – Wolfe Research LLC Okay. Great. Thank you. Operator Your next question comes from the line of Jonathan Arnold with Deutsche Bank. Please go ahead. Allen L. Leverett – President and Chief Executive Officer Hi, Jonathan. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. Good afternoon, guys. Could I just ask you to give us a little bit of a bridge between the $130-odd-million that Integrys booked in the first quarter of last year and the $160-odd-million that you have this quarter? Just what were the moving pieces? Allen L. Leverett – President and Chief Executive Officer So, Scott, I think I’ll let you, maybe based on the earnings package just give Jonathan a little bit of background. But I will say this, Jonathan, if you look across the Integrys companies, I think we really have these companies on track to all earn their allowed rates of return. So that’s part of the difference that you saw as compared to the first quarter of 2015. Scott J. Lauber – Executive Vice President and Chief Financial Officer Yeah. Allen L. Leverett – President and Chief Executive Officer Scott, do you want to fill in a little bit on that? Scott J. Lauber – Executive Vice President and Chief Financial Officer So, also when we look at it, we had a full-year rate case at PGL. So, at our Illinois utility, there was a rate case that was effective I think in February of last year. So, we had a full rate earnings in there. We also had a rate case at Wisconsin Public Service, so that was also an increase. And remember, there’s two pieces to the Wisconsin Public Service there was an overall it looked flat, but one of that was a fuel, but there was a base rate increase, so that came through. Once again, Allen talked about the fuel – the positive recovery in fuel and some of that was in the Wisconsin Public Service area too compared to prior year. We also had rate cases that were implemented at our smaller gas utilities in Michigan and Minnesota, both of those had rate increases this last year. So, basically getting the rate increases in, getting the cost control in, and getting on a path to get to the full return at all the utilities. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. Okay. Great, thank you. And then just on – I think that when you gave the second quarter guidance, I think I heard you right, you said that April had been a little cooler than normal in the context of the new gas year business mix. So is that a help or a hurt versus normal? Scott J. Lauber – Executive Vice President and Chief Financial Officer That’s a great question. April is a transition month and so, in April, we’re not really getting a lot of gas sales. It does help the gas a little bit. But on the electric side, April is a month when you get that commercial industrial buildings that actually uses some air conditioning. So, having a mile month here, we really don’t – we see that little more of a down on our earnings more from the electric side not picking in yet than the gas side picking up the offset. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. I mean, you called it out, but I’m guessing it’s not that significant given it’s April. Scott J. Lauber – Executive Vice President and Chief Financial Officer Yeah. No, it’s $2 million to $3 million, maybe. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. Okay. Great. Thank you. Scott J. Lauber – Executive Vice President and Chief Financial Officer Thank you, Jon. Operator Your next question comes from the line of Michael Lapides with Goldman Sachs. Please go ahead. Allen L. Leverett – President and Chief Executive Officer Hi, Michael. Michael Lapides – Goldman Sachs & Co. Hey, guys. Hey, Allen. Couple of things. First of all, on a cents-per-share basis, the increase in other income related to the early pay-down at a discount of some of the Integrys debt, that’s worth, what, roughly $0.05 to $0.06 in EPS? Allen L. Leverett – President and Chief Executive Officer Well, let me maybe talk about it in two pieces, Michael. Of course, we bought the securities I think at approximately 83% of par, so that resulted in a $0.04 per share impact in the first quarter. And they were repurchased, say, mid February, so there was a tiny bit of interest savings, Michael, in the first quarter, but very little, probably less than a tenth of a cent, but if you look forward to the rest of the year, we would expect to see another $0.01 per share benefit because of the – of the reduction in interest expense. So about $0.04 in the first quarter from the being below par, and then $0.01 in the remainder of the year for interest. And Scott, anything to add to that? Scott J. Lauber – Executive Vice President and Chief Financial Officer No, that’s it. That’s right on. Michael Lapides – Goldman Sachs & Co. Got it. And can you talk about if you were to look at just the Integrys O&M in first quarter of 2015, and WEC – Legacy WEC O&M in that same period, and then combined, what was the O&M decline rate or O&M savings that you’ve realized so far year-to-date in 2016? And what do you – what’s embedded in guidance? Scott J. Lauber – Executive Vice President and Chief Financial Officer So, as we look at that in the O&M, and remember when you look at the O&M line, there’s a lot more than just the O&M that’s in the – what I would say, into the operations, there is O&M as it relates to regulatory amortizations, O&M that’s related to the different riders. So, overall when we look at the O&M, we did have the savings that we had forecasted in with our – with the acquisition. When you look at – break back the different pieces, I would say on Wisconsin Electric, the O&M was up just a tad as it relates to a couple of storms we had in the area, and we accelerate a little bit of our forestry program because of the mild temperatures. We haven’t specifically said what our O&M guidance is in the acquisition savings but overall when you look at it, it’s probably O&M when you factored all the different stuff about 2% to 3% less than if you look at the combined adding up the simple O&M from the prior companies… Michael Lapides – Goldman Sachs & Co. Got it. And do you think you are in the early innings of realizing O&M savings or do you think you’re at a pretty good run rate, meaning, do you still think, you have significant opportunity to takeout significantly more cost around the consolidated system from here? Allen L. Leverett – President and Chief Executive Officer Well, I guess, you used the baseball analogy. So, I’d say we are probably in the third inning, and I think there is a fair amount of additional work that we can do. Michael Lapides – Goldman Sachs & Co. Got it. Thank you Allen, much appreciate it. Operator Your next question comes from the line of Paul Patterson with Glenrock Associates. Please go ahead. Allen L. Leverett – President and Chief Executive Officer Hi, Paul. Paul Patterson – Glenrock Associates LLC Hi. How you doing? Allen L. Leverett – President and Chief Executive Officer I’m good. How are you? Paul Patterson – Glenrock Associates LLC All right. Just on the rate freeze letter that came out last week, what – how was that triggered? I mean, was that just basically – was this related to the merger or what sort of triggered the – I guess, it seemed like maybe the staff, it wasn’t clear to me the letter, what actually was causing the review by the staff? Allen L. Leverett – President and Chief Executive Officer Well, typically the cycle in Wisconsin every two years, of course you do a case for the next – for the next year, and then known and significant (33:24) for the year after that. So this was our year typically to bring the companies in, and we’ve had – we had discussions with the staff. And we said look, we believe because of the benefits we’re seeing from the merger that we’re just going to freeze rates. And if we have increased cost in other areas, we’re going to offset that with the benefits of the merge and we’re just going to freeze base rates. So the – basically the avenue for the discussions was this very regular cycle to file rate cases. And so, we work through that avenue and talk with the staff and it’s something that they were agreeable. And it’s kind of interesting, Paul, as a part of when we’re doing the merger proceedings, many people talked about as a proposal doing a rate freeze. So, now we’re actually seeing the base rate freeze for 2017 in Wisconsin. Paul Patterson – Glenrock Associates LLC Okay. Great. And then there was, as I recall, some sort of accounting treatment that was part of it. Could you elaborate a little bit more this? Allen L. Leverett – President and Chief Executive Officer Sure, and let me sort of start and then I’ll let Scott or Jim fill in any detail. So I think what you’re referring to Paul is, at Wisconsin Public Service related to the ReACT project, and when Wisconsin Public Service went through their last rate case, so this was the rate case that was decided late last – late 2015 or 2016 rates. So they included in rates I believe at a $275 million level, the cost of the ReACT project. And so, we expect that the final cost of that project will be in a range of $335 million to $345 million. So, essentially what they would allow us to do with this accounting order is to differ in effect the impacts of the return off and on for that additional investment above $275 million. So, Scott.. Paul Patterson – Glenrock Associates LLC Okay. Scott J. Lauber – Executive Vice President and Chief Financial Officer Yeah. That’s correct. There’s – I think as a total, there is three of them. The ReACT is the main one. The other two were some deferrals that specifically in the order they ended in December of 2016 and we said well, if we’re going to be out for a year we just need the same accounting treatment in 2016 and in 2017, just to extend them into 2017. Paul Patterson – Glenrock Associates LLC Okay, great. And then, just finally – I’m sorry you were talking kind of quickly on the weather-adjusted sales. Did that include leap year? That wasn’t clear to me. Or I mean, was it adjusted for leap year or…? Scott J. Lauber – Executive Vice President and Chief Financial Officer Yeah… Paul Patterson – Glenrock Associates LLC Was leap year sort of left in there? Scott J. Lauber – Executive Vice President and Chief Financial Officer Yeah. We factored out leap year. Paul Patterson – Glenrock Associates LLC Okay. Scott J. Lauber – Executive Vice President and Chief Financial Officer So we adjusted as if – we adjusted it down as if leap year did not happen. Allen L. Leverett – President and Chief Executive Officer So February 29 was out. Scott J. Lauber – Executive Vice President and Chief Financial Officer It’s factored out. Correct. Paul Patterson – Glenrock Associates LLC Okay. And that was minus 0.2% for retail sales in general, right? Scott J. Lauber – Executive Vice President and Chief Financial Officer Correct. Paul Patterson – Glenrock Associates LLC Okay. Excellent. Thanks so much. Operator Your next question comes from the line of Julien Dumoulin-Smith with UBS. Please go ahead. Allen L. Leverett – President and Chief Executive Officer Hi, Julien. Julien Dumoulin-Smith – UBS Securities LLC Hey. Good afternoon. Allen L. Leverett – President and Chief Executive Officer How are you? Julien Dumoulin-Smith – UBS Securities LLC Good. Thank you very much. I wanted to follow up a little bit on some of the first questions on the CapEx, perhaps just to kick it off. Can you elaborate a little bit on the next leg of the evaluation you kind of described by the EEI timeframe this fall you’ll have the next round. What are the next layers of evaluation that you’re looking at? Is there any kind of sense as to what genre of projects or at least magnitude of capital you could potentially be looking at in maybe these baseball analogies? How deep in terms of innings are you in terms of finding those acceleration opportunities? Allen L. Leverett – President and Chief Executive Officer Right. Well, you know as I mentioned earlier, about two-thirds of the impact is the bonus depreciation. So about two-thirds of the $1 billion is in 2016 and 2017. So, other than the second order effects associated with getting bonus depreciation on this additional property, I guess, we’ve identified $500 million of roughly $670 million. So I guess that’s pretty late innings in terms of identifying offsets in 2016 and 2017. So I would say that Julien that the majority of our focus as we work through the rest of the year, up to when we have the November Finance Conference, the majority of our focus is going to be in the later years. And, Scott, I don’t know if there is any other detail. Scott J. Lauber – Executive Vice President and Chief Financial Officer Yeah. So, exactly the majority will be in the later years. We also are working on making sure we have all the resources and efficiently for 2017 spending, get everything lined up to put due to spending in. So, we will be working on those later years this summer. Allen L. Leverett – President and Chief Executive Officer Yeah. And I think one thing Julien that maybe to give you a sense for how broadly we are looking, let’s just take, for example, and this is not included in any of 2016 or 2017 numbers that we talked about, but one of the things we talked about a lot, although in Illinois and in Michigan, our gas utilities there actually own some gas storage, in Wisconsin, our gas utilities to my knowledge have never owned gas storage. They’ve always leased it. And, we think that it would make more sense to have a mix of owned storage as well as the leased storage. So I think that would be a nice opportunity – investment opportunity for the company. But we think it would also be beneficial for customers. So, we’re trying to think broadly about what those capital opportunities might be, Julien. I hope that helps. Julien Dumoulin-Smith – UBS Securities LLC Absolutely. And does that also add into the decision to push out the rate case timing, recovery of the accelerated spend in 2016 and 2017 with the slightly delayed rate case. Is that kind of aligned with the thinking as well? Allen L. Leverett – President and Chief Executive Officer Well, it certainly contributes, but I think far and away the reason why we can freeze rates is because of the cost savings that we’re seeing from the combination of the companies. But, you’re right, I mean the accelerated depreciation impact acts as a bit of an uplift if you will also. Julien Dumoulin-Smith – UBS Securities LLC Right. Great. And actually just turning back to what you just alluded to there, how much in terms of lease expense or just if you can give us a sense of how much of that PPA needs potentially acquired via any Wisconsin Gas storage opportunities? I know it’s early days there, but I figured I’d ask. Allen L. Leverett – President and Chief Executive Officer Julien, in all candor, it’s just a little early for me to throw those numbers out. Julien Dumoulin-Smith – UBS Securities LLC No worries at all. We can leave it there. Allen L. Leverett – President and Chief Executive Officer Yeah. As we know more, I mean, that’s certainly something we can chat about either on the call or a future call or at EEI. Julien Dumoulin-Smith – UBS Securities LLC Great. Thank you very much. Operator Your next question comes from the line of Jim von Riesemann with Mizuho. Please go ahead. Allen L. Leverett – President and Chief Executive Officer Hi, Jim. James von Riesemann – Mizuho Securities USA, Inc. Hey, Allen. How are you? Allen L. Leverett – President and Chief Executive Officer I am good. How about you? James von Riesemann – Mizuho Securities USA, Inc. Pretty good. Switching topics, could we just talk about the transmission opportunities out there, specifically as it relates to Alaska? Are there any updates that we need to be aware of? Allen L. Leverett – President and Chief Executive Officer No, Jim. There really aren’t any updates at this point beyond what we talked about on our call, I guess, back in February. So nothing new there in terms of updates. Scott, anything you have to add on that? Scott J. Lauber – Executive Vice President and Chief Financial Officer No. Allen L. Leverett – President and Chief Executive Officer I’m not aware of anything. Scott J. Lauber – Executive Vice President and Chief Financial Officer No. Nothing. James von Riesemann – Mizuho Securities USA, Inc. I guess, the question is, is transmission opportunities in the state of Alaska a function of the price of oil and the Alaska fiscal health? Allen L. Leverett – President and Chief Executive Officer Well, in terms of the briefing that I received from Mike Rowe who is the CEO out at ATC, what he has told me is, basically if you look at the local economy, integrating the operations of the utilities is a benefit regardless of what the price of oil is, regardless of how low or how high. There is a benefit of integrating those utilities because they’re certainly not integrated at all at the level that you would see in the continental United States. So there are big benefits with that regardless of the price of oil. And sort of, I guess, ironically, the low oil prices actually mean that the companies in Alaska might actually look a little more to ATC to provide the capital for the transmission projects. So I would say, worst case, the oil prices are sort of a neutral and although it sounds a little strange, the lower prices might actually mean that marginally ATC might be called on to make a bit more of the investment that’s required. James von Riesemann – Mizuho Securities USA, Inc. Okay. I appreciate the help. Thank you. Allen L. Leverett – President and Chief Executive Officer Thanks, Jim. Operator And your last question comes from the line of Vedula Murti with CDP. Please go ahead. Allen L. Leverett – President and Chief Executive Officer Hi, Vedula. Vedula Murti – CDP Capital US, Inc. Hey, Allen. How are you? Congratulations, and nice to hear from you. Allen L. Leverett – President and Chief Executive Officer Yeah. No, I haven’t talked to you in a long time. Glad you’re doing well. Vedula Murti – CDP Capital US, Inc. Anyways, you touched on these things kind of around the edges, but when you came in 2003 and your mission was fairly clear. You had Power the Future that had been improved, but it simply was a matter of execution and getting that done and the non-regulated businesses that you had to cleanup. So the focus was fairly clear and that gave you – that was basically a runway of about eight years from, say, 2003 until 2010, 2011, whatever. So I’m wondering today – it’s like we’re sitting here in 2016. You have the merger done and you have the big pipeline replacement program in Illinois and everything like that. I’m wondering just if you can kind of give a sense of how much runway you think you have here. And just, even if it’s not necessarily as large or as dramatic as what was sitting in front of you in 2003, can you just put it in context the way you’re thinking about it going forward over the next few years? Allen L. Leverett – President and Chief Executive Officer Right. Well, I think as you look at — of course, Power the Future, I guess, you could think of it, if you just looked at the new generation that was being built. I mean, that was sort of, as it turned out, a roughly seven to eight-year program. So, as you say, that’s in the past. As we look at sort of what’s coming up, we’ve got some programs like the AMRP program in Illinois, which we’re probably looking at decades long. I mean, you’re looking at programs that are ongoing for 20 to 25 years at least. So we’ve got some programs that we think will be around a lot longer, even longer than Power the Future. We’ve got others that were kind of shorter in nature, and we talk some about the ERP project in Wisconsin. But I would say overall, Vedula, I mean, I think we easily have a runway of 10 or more years of capital investment that we think will benefit customers, in the case of Chicago, like a huge upgrade in safety. So I would say it’s at least 10 years. But now it’s really multiple programs in multiple states as opposed to being a single program and one and only in one state. I hope that helps. Vedula Murti – CDP Capital US, Inc. Yeah. No, just to clear also I think you’ve also touched on this in terms of you talked a lot about load growth and just conservation, efficiencies, and everything like that. When you look back to 2003 or whatever, I mean, we were still seeing fairly strong growth in terms of usage and everything like that. Going forward, that’s not necessarily going to be the case. But I’m just – in terms of supporting kind of the ability to continue to grow whatever in terms of your earnings or whatever, I’m just wondering whether the things you referenced should be enough, even without any real net load growth. And also the one other thing I wanted to ask you is, in the past, you used to talk about having a couple hundred million dollars of free cash flow, net of CapEx and dividends. Can you just kind of refresh us in terms of where that kind of stands going forward as well? Allen L. Leverett – President and Chief Executive Officer Yeah. And maybe, Scott, why don’t you cover the cash flow question? But I would say, Vedula, I mean, clearly the situation with volume growth, be it electric or natural gas, it’s going to be a bit of a headwind, which is why I think having the merger is beneficial to us, because we can generate some more cost savings to help deal with those headwinds. But Scott, why don’t you give Vedula some background on the cash. Scott J. Lauber – Executive Vice President and Chief Financial Officer Yeah. In looking at our cash and remember we said in our prepared remarks and just lately, we said in our prepared remarks, we are not issuing any equity. Part of the acquisition reasons were to invest in good utility projects. So we are investing in utility projects that are very needed for the infrastructure. When you look at 2016 and 2017, we are not cash flow positive, but we also look at our consolidated debt to capital ratio and our consolidated holding company debt. And the holding company debt as a percent of total debt is about 28%, consistent with our projections, and we see that continuing to be there. So we are not cash flow positive, but we are not issuing any equity, and that’s for the 2016 and 2017 timeframe, and we’ll look at our projections as we go forward as we look at our capital plans in the future. Vedula Murti – CDP Capital US, Inc. Thank you very much. Allen L. Leverett – President and Chief Executive Officer Thanks, Vedula. Allen L. Leverett – President and Chief Executive Officer All right. Well, that concludes our conference call today. Thank you for participating. If you have any more questions, please contact Beth Straka or Colleen Henderson in our Investor Relations office. Operator Thank you. That concludes today’s conference call. You may now disconnect. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. 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