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FirstEnergy (FE) Charles E. Jones on Q1 2016 Results – Earnings Call Transcript

FirstEnergy Corp. (NYSE: FE ) Q1 2016 Earnings Call April 27, 2016 9:00 am ET Executives Meghan Geiger Beringer – Director-Investor Relations Charles E. Jones – President, Chief Executive Officer & Director James F. Pearson – Executive Vice President & Chief Financial Officer Leila L. Vespoli – Executive Vice President, Markets & Chief Legal Officer Donald R. Schneider – President, FirstEnergy Solutions (NASDAQ: FES ), FirstEnergy Solutions Corp. Analysts Jonathan Philip Arnold – Deutsche Bank Securities, Inc. Paul Patterson – Glenrock Associates LLC Shahriar Pourreza – Guggenheim Securities LLC Neel Mitra – Tudor, Pickering, Holt & Co. Securities, Inc. Brian J. Chin – Merrill Lynch, Pierce, Fenner & Smith, Inc. Julien Dumoulin-Smith – UBS Securities LLC Kevin Prior – Evercore Group LLC Christopher J. Turnure – JPMorgan Securities LLC Stephen Calder Byrd – Morgan Stanley & Co. LLC Ashar Hasan Khan – Visium Asset Management LP Angie Storozynski – Macquarie Capital (NYSE: USA ), Inc. Anthony C. Crowdell – Jefferies LLC Michael Lapides – Goldman Sachs & Co. Praful Mehta – Citigroup Global Markets, Inc. (Broker) Operator Greetings, and welcome to the FirstEnergy Corp.’s First Quarter 2016 Earnings Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Meghan Beringer, Director, Investor Relations for FirstEnergy Corp. Thank you. You may begin. Meghan Geiger Beringer – Director-Investor Relations Thank you, Donna, and good morning. Welcome to FirstEnergy’s first quarter earnings call. Today, we will make various forward-looking statements regarding revenues, earnings, performance, strategies and prospects. These statements are based on current expectations and are subject to risks and uncertainties. Factors that could cause actual results to differ materially from those indicated by such statements can be found on the Investors section of our website under the Earnings Information link and in our SEC filings. We will also discuss certain non-GAAP financial measures. Reconciliations between GAAP and non-GAAP financial measures are also available on the website. Please note that we have also provided a slide presentation that will follow this morning’s discussions. If you are currently on the Investor page of our website or plan to visit at a later time, you’ll notice that we have redesigned the site to provide a more user-friendly experience, particularly on mobile devices. Also based on your feedback, we created an Investor Materials section located on the Investor menu for easier access to information that you must frequently use. As for today’s call, those who are participating include Chuck Jones, President and Chief Executive Officer; Jim Pearson, Executive Vice President and Chief Financial Officer; Leila Vespoli, Executive Vice President, Markets and Chief Legal Officer; Donny Schneider, President of FirstEnergy Solutions; Jon Taylor, Vice President, Controller and Chief Accounting Officer; Steve Staub, Vice President and Treasurer; and Irene Prezelj, Vice President, Investor Relations. Now I’d like to turn the call over to Chuck Jones. Charles E. Jones – President, Chief Executive Officer & Director Thanks, Meghan. Good morning everyone. Thanks for joining us. We’re off to a strong start in 2016 and I’m pleased to share this update with you today. Yesterday afternoon, we reported solid operating earnings of $0.80 per share, which is at the midpoint of our first quarter guidance. On a GAAP basis, earnings were $0.78 per share. While Jim will review our financial results in more detail, I want to quickly mention that we produced quality results and met our operating earnings guidance, despite the impact of an unseasonably mild winter and low power prices. The successful implementation of our economic dispatch strategy was key to that outcome because the fuel savings that resulted from idling some units when market prices did not support them, helped to offset the other impacts of mild temperatures across the company, particularly in our Distribution business. In addition to meeting our financial commitments to you, we continue to implement our regulated growth strategies. We have several positive developments on that front, and we will provide more detail today on our next steps to ensure continued service reliability for our customers with appropriate recovery of our investments. Let’s start in Ohio, where the Public Utilities Commission completed a comprehensive nearly two-year review of our Powering Ohio’s Progress Electric Security Plan and unanimously approved the plan with certain modifications. The PUCO concluded that the approved plan promotes rate stability and retail competition and adds value for Ohio customers, communities and the environment. I would both like to compliment and thank our Public Utilities Commissioners and staff for their leadership and handling a very complex regulatory matter. I am proud of this ESP and of the entire team that worked on it. The plan helped to safeguard customers against rising energy prices in future years while preserving key power plants that serve Ohio customers ensuring fuel diversity and maintaining Ohio jobs. In addition, it outlined steps to support low income customers, reinstate energy efficiency programs, evaluate smart grid technologies, and includes a goal to reduce carbon dioxide emissions. It truly fulfills the principles that the Ohio legislature outlined for the Electric Security Plans when they moved the state toward retail competition. Currently, it’s been a long and conscientious process to get to this point and while PUCO approval is a critical milestone, there are still challenges at FERC. Our opponents have also expressed their intent to bring court challenges. I will quickly review our position on these issues and Leila can address your additional questions during the Q&A. First, we believe FERC should affirm the waiver that is already in place. You’ll recall that FES was granted authorization from FERC to conduct certain transactions with our Ohio utilities in 2008. Our Purchase Power Agreement is one of those transactions. It was carefully constructed from the beginning to comply with existing FERC rules that promote customer shopping for retail energy supply and it will not hinder the PJM markets ability to function and foster competition. A separate complaint asked FERC to impose a price for on the PPA units for the May 2016 PJM, RPM capacity auction. We don’t believe there’s any reason for our PPA units to be treated differently than any of the other regulated generation in PJM. It’s no secret that a significant amount of generation, both regulated and merchant has been offered into prior PJM options with price taking behavior. Some of these complaints are likely in that group of suppliers. What they are asking FERC to do is essentially have FirstEnergy protect them from themselves. We have filed a strong answer demonstrating that a price floor is not needed and challenging the economic theory behind the opposition’s price floor methodology. And we do not expect that FERC will impose a price floor on the PPA units for the upcoming auction. With regards to the other potential challenges, we believe that the PUCOs decision is well within the Commission’s authority and we expect it will withstand subsequent challenges. Furthermore, the notion of non-bypassable charges on Ohio utility bills is not new, as charges for programs such as energy efficiency, economic development and low income support, as well as cost to support the bulk Transmission System have been in place for years. Given that FERC could make an announcement on the issues before them very soon, we are holding off on providing a second quarter operating earnings guidance. Once we do have additional clarity from FERC, we expect to have a better picture of our full-year 2016 outlook, and we will offer you further details and guidance. I know this decision may seem inconsistent with our stated objective to improve transparency and disclosures. We remain committed to giving you the information you need to evaluate our company when we know it. DSP is simply too significant to speculate on its outcome. While we do anticipate filing for a rehearing on the ESP IV by May 2, to address a few items of clarification, we’re moving forward to implement the PPA that was entered into on April 1. As you know, our Regulated Generation Group has experienced selling the output for Mon Powers regulated units at Fort Martin and Harrison into PJM. They’re using that experience and have retained a leading industry consultant to help prepare strategies and offer formation for the Davis-Besse and Sammis Plants in advance of the May, PJM capacity auction. The regulated team plans to sell the output from Davis-Besse and Sammis into PJM as of June 1. We’re also laying the groundwork to meet the provisions outlined in the terms of the ESP IV. In late February, we submitted our grid modernization business plan, which outlined the menu of options for the PUCO. We also filed our Energy Efficiency Plan with the Commission earlier this month and by November 1, we will file a carbon reduction report that outlines our fuel diversification and carbon reduction strategies. In the ESP, we proposed a CO2 reduction goal of at least 90% below 2005 levels by 2045, building on the 25% reduction in CO2 emissions already achieved across our footprint. This goal represents a potential reduction of more than 80 million tons of CO2 emissions and is among the most aggressive targets in the utility industry. In support of our commitment to a cleaner energy future, we launched a branding campaign in February called The Switch is On. This campaign highlights our environmental achievements, transition to a cleaner energy sources, and our Green electricity options. Earlier this month, we entered into a unique Green energy pact with the Cleveland Indians to provide Progressive Field with 100% Green-e certified wind energy from FirstEnergy Solutions. We also introduced an Earth Day promotion inviting Ohio and Pennsylvania residents to sign up for 100% wind energy at the same price as the standard energy offer. Turning to other regulatory matters, our proposed Mid-Atlantic Interstate Transmission subsidiary known as MAIT, received FERC approval in late February. As we have discussed, this subsidiary would hold the transmission assets of Met-Ed, Penelec and JCP&L, and facilitate new investments that can improve service reliability for these customers. Earlier this month, the Pennsylvania ALJs issued an initial decision approving a settlement filed by the parties resolving all issues in this case. We anticipate final approval from the Pennsylvania PUC by mid-year. And last week, we made a supplemental filing in New Jersey seeking to transfer certain JCP&L distribution assets into MAIT, which we believe should satisfy the concerns regarding public utility status that were addressed by the BPU in February. We will continue to work with the BPU because we believe transferring these assets to MAIT is the right thing to do for our New Jersey customers. As we mentioned in February, we have passed the halfway point of the first phase of our Energizing the Future transmission investment program with $2.4 billion invested through 2015 on projects designed to make our system more robust, secure, and resistant to extreme weather events. This program remains on track, and we continue to view the Transmission business as our primary growth platform for many years to come. Over the past two years, we have been focused on removing regulatory uncertainty and positioning our regulated businesses for growth. Tomorrow, we plan to file rate cases for JCP&L and our four Pennsylvania utilities that are consistent with our goals of enhancing customer service and reliability, strengthening the distribution system, improving security, and adding resiliency and operating flexibility to our infrastructure, while providing stability and growth for the company. In Pennsylvania, our four utilities will file rate plans with the Public Utilities Commission aimed at extending the service reliability improvement efforts that have yielded significant results for more than 2 million customers. Since 2011, the number of power outage impacting our Pennsylvania customers has decreased by an average of about 27%, while restoration times have improved by an average of about 14% in that same period. In total, our request would result in an expected revenue increase totaling $430 million across four Pennsylvania utilities, and we’ve broken down the impact by operating company in the Appendix of our slide presentation. These changes would bring the average monthly bills in line with the typical residential bills for the other three major electric utilities in the state, while benefiting customers by modernizing the grid with smart technologies, increased vegetation management activities and continuing customer service enhancements. Pending PUC approval, we anticipate that the new rates will take effect in January of 2017. The new base rates at the Pennsylvania utilities would also include recovery of costs associated with our long term infrastructure improvement plans, which include a projected increase in capital investments of $245 million over five years to help strengthen, upgrade and modernize our Pennsylvania distribution systems. We expect to begin recovering the cost of those programs in July through the distribution system improvement charges that are currently pending Pennsylvania PUC approval. We also plan to file a rate plan with the New Jersey BPU that supports and builds on the significant service reliability improvements made by JCP&L in recent years. The planned $142-million rate request seeks to improve service and benefit customers by supporting equipment maintenance, vegetation management and inspections of lines, poles and substations, while also compensating for other business and operating expenses. The JCP&L plan is designed to extend the service reliability improvements and helped the utility achieve its best service reliability record in more than a decade last year. While JCP&L’s rates have remained stable and even declined over the past decade, our operating expenses have continued to increase. Since July 2012, JCP&L has invested $612 million in service-related enhancement projects. And even with the proposed 6% overall rate increase for the average residential customer, JCP&L would continue to offer the lowest residential electric rates among the four regulated electric distribution companies in New Jersey. You will remember that our last rate case in New Jersey, which was based on a 2011 test year, was complicated due to storm recovery expense issues and other items. In the upcoming proceeding, which satisfies the BPU requirement that we file a new rate case by April of 2017, we hope for a reasonable timeline in recognition of the significant investments we have made. Allowing for a thorough review of our filing, we will request the new rates to go into effect in January of 2017. We remain focused on continuing to position our company for growth and success to best serve our customers, communities, investors and employees. Now, I would turn the call over to Jim for his review of the quarter. And as always, we will have plenty of time for your questions at the end of his remarks. James F. Pearson – Executive Vice President & Chief Financial Officer Thanks, Chuck, and good morning, everyone. I will remind you that detailed information about the quarter can be found in the consolidated report that was posted to our website yesterday evening. And as always, we welcome your questions during the Q&A or following the call. I’m sure you have also noticed that we did not publish a full FactBook this quarter. We hope to have greater clarity to regarding the PPA shortly, which would hopefully allow us to have an analyst meeting and provide full guidance for 2016. In place of the FactBook, we have included an Appendix to the slides for today’s call with certain regulatory and financial updates we would normally publish each quarter. Our first-quarter operating earnings of $0.80 per share compares to $0.62 per share in the first quarter of 2015. On a GAAP basis, we recorded earnings of $0.78 per share for the first quarter of 2016, compared to $0.53 per basic share during the same period last year. 2016 first quarter GAAP results include special items totaling $0.02 per share, which includes regulatory charges primarily related to economic development and energy efficiency programs associated with the Ohio ESP commitments, offset by mark-to-market gains on commodity contracts. A full listing of the special items can be found on page two of the consolidated report. In our Distribution business, results were impacted primarily by mild temperatures on distribution deliveries and lower rates in New Jersey that went into effect in 2015, partially offset by the benefit of Pennsylvania rates that were also implemented last year. Total distribution deliveries decreased 7.8% compared to the first quarter of 2015 with a 13.4% decrease in residential sales and a 5.1% decrease in commercial sales, reflecting heating degree days that were 25% below last year and 11% below normal. On a weather adjusted basis, residential deliveries were essentially flat while commercial deliveries decreased 1.6%. Sales to industrial customers decreased 2.8%. We do continue to see growth in shale gas sector but the rate has slowed dramatically in the past two years and is not enough to offset lower usage from steel and coal mining activity. First-quarter Industrial load was off nearly 110 gigawatt hours as a result of reduced operations at Republic Steel, which then announced an indefinite shutdown on April 1 and a permanent closure of Warren Steel. Overall, our sales are following the national trend that was noted by the Energy Information Association earlier this year. Whether-adjusted residential and commercial sales are each down more than 1% over the past four quarters while industrial load is down 3% in that timeframe. Drivers include the impact of more efficient lighting, appliances and equipment and slowing and shifting economic growth. In our Transmission business, operating earnings increased as a result of the higher rate base at ATSI, partially offset by the lower return on equity that was part of ATSI’s comprehensive settlement approved by FERC last fall. In our Competitive business, strong first quarter earnings reflect an increase in commodity margin, which primarily benefited from higher capacity revenues driven by increased capacity prices, as well as lower purchased power expense, higher wholesale sales and lower fossil fuel expense. These factors offset lower contract sales volume, which decreased in line with our hedging strategy. The decrease in fossil fuel expense relates to lower fuel rigs, and as Chuck indicated earlier, it also reflects the benefits for our economic dispatch strategy, which kept the Bruce Mansfield Plant offline for part of February and March. This strategy is the right approach at this time and we will continue to deploy it if markets don’t support plant operations. Clearly, this remains a very challenging business environment for our competitive units as prices continue to drop. Although we’re not updating our CES adjusted EBITDA guidance at this time. We know that a reduction of about $3 per megawatt-hour in the round-the-clock prices since the beginning of this year translates into a reduction of more than $50 million in wholesale revenue. Our committed sales are about 62 million megawatt-hours for 2016 with an additional 12 million megawatt-hours as part of the Ohio PPA. In 2017, we have 42 million megawatt-hours committed with an additional 20 million megawatt-hours for the Ohio PPA. We are reaffirming our expectations that the Competitive business will be cash flow positive each year through at least 2018. And finally, in Corporate, a higher consolidated income tax rate and other expenses reduced operating earnings by $0.02 per share compared to the first quarter of 2015. As Chuck said, we’re off to a very solid start in 2016, and we’re encouraged by the developments in Ohio and remain committed to providing customer-focused growth and creating long-term value for our shareholders. Now, I’d like to open the call up for your questions. Question-and-Answer Session Operator Thank you. The floor is now open for questions. Our first question is coming from Jonathan Arnold of Deutsche Bank. Please proceed with your question. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. Good morning guys. Charles E. Jones – President, Chief Executive Officer & Director Good morning. James F. Pearson – Executive Vice President & Chief Financial Officer Good morning. Leila L. Vespoli – Executive Vice President, Markets & Chief Legal Officer Good morning. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. Could you give us a sense of what the drivers for the rate increase – the rate request in Pennsylvania and New Jersey are? I hear the comment that your rates are going to be – and it’ll bring rates up to the average. But just what the big drivers are? And then maybe a sense of where the ROEs are tracking in the – to its various jurisdictions as you make these filings? James F. Pearson – Executive Vice President & Chief Financial Officer Jonathan, this is Jim. Let me take a shot at it and then I’ll let Leila get into more detail if we need. First off, we’re going to have an increase in our rate base. So, that will be part of it. We also have increased depreciation expense associated with our investments. We’re also rolling in the DISC rider as part of this increase. We have smart meters and also there has been a decrease in sales, so that’s going to be part of the driver there. So, those are primarily the major drivers. As I would say that there was not a defined ROE last year in the Pennsylvania case. So, it’s hard to say if we’re tracking to that. But, overall, I’d say our earnings in Pennsylvania are doing well, but because of these significant investments as well as the decrease in sales and the DISC rider, that is leading to the increase. And Leila, I don’t know if you have anything to add to that? Leila L. Vespoli – Executive Vice President, Markets & Chief Legal Officer Just one further point of clarification with respect to the – on the depreciation comment, and we’re actually proposing a changed methodology in depreciation that’s just driving some of that change. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. Is that just in Pennsylvania or in both? Leila L. Vespoli – Executive Vice President, Markets & Chief Legal Officer Correct. Correct. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. Okay. Is that a meaningful piece of it or just one of many? Leila L. Vespoli – Executive Vice President, Markets & Chief Legal Officer With regard to depreciation, it’s roughly $31 million of the change. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. Okay. All right. Thanks. So it sounds like, in general, this is not about returns. It’s more about investments and the other things you listed. James F. Pearson – Executive Vice President & Chief Financial Officer That’s correct, Jonathan. Okay. Charles E. Jones – President, Chief Executive Officer & Director And Jonathan I have said all along that as we continue to move this company more towards a regulated model and we prepare for growth in our T&D operations, you’re going to see more and more rate increases or rate cases in order to accommodate that growth. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. So fair enough. I think I had a 6% number mentioned for New Jersey. Did you provide a percentage on the Pennsylvania jurisdictions? James F. Pearson – Executive Vice President & Chief Financial Officer It’s – I think that’s included in the Appendix Jonathan and when we break down all four of the Pennsylvania companies you have that rate increase. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. Right, we’ll see that, and thank you. And then one final thing, you commented that you’re going to wait until you have clarity from FERC on giving Q2 guidance. But more broadly if, let’s say, FERC doesn’t act ahead of the upcoming auction and maybe there’s a longer delay there, how should we think about this in the context of when you might have an Analyst Day and a broader update to the outlook? Charles E. Jones – President, Chief Executive Officer & Director Well, I think that our game plan is to wait and see what FERC does. If it drags on too long, then my expectation is we’ll give you a guidance for 2016 without the ESP baked into it. That would be our plan. I don’t expect that this is going to drag on a long time. There’s a lot of speculation out there that they’ll make a decision before the May RPM. That doesn’t bother me so much if they don’t because a lot of the opponent’s cases suggesting that we’re going to do something inappropriate in how we bid these units. And once they see how we bid these units, then I think that would diffuse a lot of that argument. So if it waits until after the RPM, that wouldn’t bother me too much. But beyond that, I think if it continues to go on and we are going to give you guidance for 2016 without the ESP. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. So we should probably anticipate by early summer, you’ll be doing that then in any event? Charles E. Jones – President, Chief Executive Officer & Director Yes. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. Okay, great. Thank you, guys. Operator Thank you. Our next question is coming from Paul Patterson of Glenrock Associates. Please proceed with your question. Paul Patterson – Glenrock Associates LLC Good morning, guys. Charles E. Jones – President, Chief Executive Officer & Director Hi, Paul. James F. Pearson – Executive Vice President & Chief Financial Officer Good morning. Paul Patterson – Glenrock Associates LLC Just a sort of follow-up on Jonathan’s question and your answer, should we – it seems to suggest that perhaps your bidding behavior would be the same with or without the PPA. Is that an accurate or that there wouldn’t be that big of a difference, how should we think about that? Charles E. Jones – President, Chief Executive Officer & Director Well, we’re not going to talk about our bidding behavior. But I think it is something that FERC can look at. If they just look at how we bid our West Virginia plants in the last RFP or actually in – since capacity performance, they could see a very good indication of how we bid units on the regulated side. We haven’t disclosed that bidding behavior and we don’t plan to. But my point is this. I don’t think that – I think there’s a lot of rhetoric going on about how these PPAs might affect the capacity market. It’s nothing, but rhetoric. This PPA has no impact on the PJM market whatsoever. Paul Patterson – Glenrock Associates LLC Okay. And then, in terms of your expectation that they will probably take action before the auction, which is coming right up, is that with respect to all three cases or – excuse me – to the both cases for you, or one in particular? Leila L. Vespoli – Executive Vice President, Markets & Chief Legal Officer Hi, Paul, this is Leila. Given the high profile, I guess my view on this would be that they would be looking at both these cases before the Base Residual Auction. Just to give clarity, from the way I view the world, if you think about the affiliate waiver case, if I’m the chairman, he looks at things from a legalistic standpoint. I kind of view things that same way. And so I have a case in front of me where there’s strong precedence not to look behind the screen if you were to what the states are doing. He has – in the initial 2008 waiver, there was a claim by Nopak that non-bypassable charges should be looked at and should cause him to say that there’re not – not all the customers – that there are captive customers. They chose not to make that finding. So to go against this and grant the complaint, he would have to go against legal precedent. I don’t see him doing that and I think he would want to get that out of the way and that’s tied to Mon Power complaint because fundamentally they’re kind of looking to address, call it the same issue. And if you look at the Mon Power complaint, there are a lot of parties with – that wait in with a lot of different potential remedies. And I don’t think they’re going to fall prey to the hyperbole, especially out there by Dynegy that there is a burning platform that there is imminent danger. If they’re going to want to act and give clarity and take their time and look at this. So from my standpoint, I think they’re going to want to act on the waiver, I think they are going to deny the complaint because I think it’s – to do otherwise would be inconsistent with past precedent. They can take care of the issues supposedly involved in that complaint, in the Mon Power complaint, but they can do so in a very thoughtful way by addressing it through the stakeholder process what they are used to dealing with it and taking care of it in the next – for the next BRA auction in 2017. Paul Patterson – Glenrock Associates LLC Okay. Great. Leila L. Vespoli – Executive Vice President, Markets & Chief Legal Officer I just wanted to give clarity to the market in that regard. Paul Patterson – Glenrock Associates LLC That makes sense. And then just finally, I apologize if I missed this. The $0.09 charge – regarding the regulatory charge, what was that associated with? James F. Pearson – Executive Vice President & Chief Financial Officer The regulatory charge, that was primarily the commitment we made under the ESP, and that’s associated with some energy efficiency commitments, as well as some low income and some economic development. Paul Patterson – Glenrock Associates LLC And it’s a one-timer? James F. Pearson – Executive Vice President & Chief Financial Officer It’s a one-timer. Since we committed to make those payments, so we’re required to recognize that at the time of the commitment. It is a liability to us. Paul Patterson – Glenrock Associates LLC Thanks so much. Thank you. Operator Thank you. Our next question is coming from Shahriar Pourreza of Guggenheim Partners. Please proceed with your question Shahriar Pourreza – Guggenheim Securities LLC Good morning. Charles E. Jones – President, Chief Executive Officer & Director Hi, Shahriar. Shahriar Pourreza – Guggenheim Securities LLC Could we just write-off just a couple of policy questions, here? Can we touch on what we’re hearing a little bit on Chairman Porter’s potential resignation? The timing is a little bit suspect and it’s a crucial period. Could we get some clarity there? Charles E. Jones – President, Chief Executive Officer & Director Well, I will give you my comments. I think that Chairman Porter showed outstanding leadership during the time he was at the Commission. You know, he got a very important docket moved forward. Hate to see him go, but as you know how it goes. When job opportunities present themselves, you don’t get to pick the timing of them. So he called me the other day and we had a good conversation, and I don’t think you should read anything into it other than what was said. Shahriar Pourreza – Guggenheim Securities LLC Got it. Okay, that’s helpful. And then maybe a question directed to Leila. So the Supreme Court ruling in Maryland obviously net-net most saw it as a negative, but obviously some of the Justices gave some guidance around what would be from a legal standpoint possible. They clearly drew some distinctions between Maryland and New Jersey versus what you’re proposing in Ohio. So I’d like to get maybe your opinion here on what you thought of the Supreme Court ruling. Leila L. Vespoli – Executive Vice President, Markets & Chief Legal Officer So net-net, I actually think it’s quite positive. So you may recall the Maryland case was out there when we first constructed the PPA. So we knew we were kind of threading the needle with regard to that, and I think that the Supreme Court’s decision confirms that we did a good job of that. The decision in and of itself does not negatively impact it. In fact, if you look at one of the footnotes, they go into a long detailed description of the traditional bilateral contract, which mirrors directly our PPA. So from a structure standpoint, if you think about it, through that footnote, they signaled that the structure of the PPA is something that is out there in the market and that they feel comfortable with. So structurally, I think it meets the test. And then if you go back to the EPSA case, albeit (33:57) they made a statement that insulating retail customers from price fluctuations is something that fell under state authority. So if what the Commission’s purpose was was appropriate per EPSA and the structure is appropriate per the Hughes decision, I think again those two together present us a very strong case with regard to any Federal District Court case that might be brought our way. Shahriar Pourreza – Guggenheim Securities LLC Got it. So it’s just fair to say that if something if you get a negative outcome at FERC and this does gets taken up by the Supreme Court, it’s a pretty good standing. Leila L. Vespoli – Executive Vice President, Markets & Chief Legal Officer I think it’s an excellent standing. Thank you. Shahriar Pourreza – Guggenheim Securities LLC Excellent. Okay good. And just one last question, Chuck, on, sort of, having had an update on the equity. But if FERC decides to take up this case, and this, sort of, gets drawn out a little bit, how should we, sort of, think about your equity needs? Charles E. Jones – President, Chief Executive Officer & Director I think you should think about it the way I have been answering it for the last year-and-a-half. And that is we can’t make a determination until we have all of these answers, and I don’t expect that it’s going to be a lengthy FERC process. So – and my position from the beginning has been – it’s our obligation to structure this company and operate it in a way where we could get our credit issues behind us without having to use equity to do that. We’re talking to you about a lot of growth opportunities on the regulated distribution and transmission side. Assuming we get successfully done with MAIT, that opens up more transmission investment. And I’m not going to be embarrassed to tell you we want to use equity to help grow this company going forward. But the amount and the timing – I’m not ready to discuss. Shahriar Pourreza – Guggenheim Securities LLC Excellent. Thanks so much. Operator Thank you. Our next question is coming from Neel Mitra of Tudor, Pickering. Please proceed with your question. Neel Mitra – Tudor, Pickering, Holt & Co. Securities, Inc. Hi. Good morning. Charles E. Jones – President, Chief Executive Officer & Director Good morning. Neel Mitra – Tudor, Pickering, Holt & Co. Securities, Inc. I had a general question on the distribution strategy going forward. With lower sales growth, is the strategy to continue to file regular rate cases to compensate you for the increased spend or, in some jurisdictions are you looking to implement some sort of formula rate plans like you are with the DISC mechanism in Pennsylvania? Charles E. Jones – President, Chief Executive Officer & Director Well, I would answer that we have five different distribution strategies. We serve in five states. They all have different regulatory treatments. Under the Ohio ESP, we have an extension of the DCR through the term. We also have a new treatment for smart grid and smart meter type investments. So there is a different regulatory strategy in Ohio than in Pennsylvania. In Pennsylvania, we’ve got the LTIP and the DISC. And, obviously, we’re filing for rate cases there and in New Jersey. In West Virginia, we had a case last year where, if we get to a position where we need another case, we’ll file it. And in Maryland, quite frankly, the growth in load has been commensurate with our investments. And there has been no need to file a case there. So I think it’s five different strategies. Overall, though, I would tell you the strategy is to start making the investments needed to improve the service to our customers beyond where we’re at, to provide more security to the distribution network, and, basically, make investments to serve our customers better, and then do them in a way where we can communicate to you how we’re going to get the returns. Neel Mitra – Tudor, Pickering, Holt & Co. Securities, Inc. Got it. And then my second question was on the competitive generation side and the sensitivity to the open position. Can you remind us roughly how many terawatt hours or what percentage of your expected generation that you plan to keep open in any given year? Donald R. Schneider – President, FirstEnergy Solutions ( FES ), FirstEnergy Solutions Corp. Yeah. This is Donny, Neel. Without the PPA, we have – our FactBook would show we have about 17 terawatt-hours open for 2016. I think Jim talked about the fact that a $3 move on that 17 terawatt-hours would be about a $50-million impact. With the PPA, if the PPA goes forward, we actually chew up some of that open position, as we look through the end of 2016. Neel Mitra – Tudor, Pickering, Holt & Co. Securities, Inc. Okay. Okay. Got it. And then just last point of clarification on Pennsylvania. You say you’re going to implement the DISC structure with this rate case. Would that help basically lengthen out the period between rate cases? Or is that just for a small portion of the distribution spend going forward? Charles E. Jones – President, Chief Executive Officer & Director Actually the DISC – we have filed for the DISC effective July 1 to start treating the first investments in our Long Term Infrastructure Plan. And under this rate case, any DISC expenditures after that point would be rolled into the base rates, and then we have the option going forward to then use the DISC in real-time to recover investments in the Long Term Infrastructure Plan in the outyears. So, we file to invest $245 million over the next five years. So, we’re going to use both. Neel Mitra – Tudor, Pickering, Holt & Co. Securities, Inc. Got it. Thank you. Operator Thank you. Our next question is coming from Brian Chin of Merrill Lynch. Please proceed with your question. Brian J. Chin – Merrill Lynch, Pierce, Fenner & Smith, Inc. Good morning. Charles E. Jones – President, Chief Executive Officer & Director Good morning. Leila L. Vespoli – Executive Vice President, Markets & Chief Legal Officer Hey, Brian. Good morning. Charles E. Jones – President, Chief Executive Officer & Director Good morning. Brian how are you doing? Brian J. Chin – Merrill Lynch, Pierce, Fenner & Smith, Inc. Very good. Very good. I just wanted to follow-up on the early equity issuance question just in a little bit more specific way. Can you provide your latest thoughts on timing or amount with regards to equity issuance just for Transmission purposes? And particularly if FERC is going to be delaying its response to the PPA question, does it make sense to potentially separate your equity issuance for transmission and not make that contingent on timing for FERC? Charles E. Jones – President, Chief Executive Officer & Director Well, so I’ve talked about in my comments the fact that we’re halfway through energizing the future; we’ve invested $2.4 billion in our Transmission over the last two years with no equity. And during a time that we were working to kind of strengthen our cash flows in order to improve our credit metrics. We’ve got two more years of that program at about $1 billion a year. I don’t see any equity needed to fund that Transmission growth. Going forward, if we plan to expand our Transmission investment program or expand significantly what we’re doing in the distribution, then any equity needs would be associated with increased investment in T&D. So, I answered the same way we’re not prepared to say what that amount is, but I don’t think you need to be worried about energizing the future being taken off-track in any case. Brian J. Chin – Merrill Lynch, Pierce, Fenner & Smith, Inc. Very good. Thanks. That’s all I’ve got. Operator Thank you. Our next question is coming from Julien Dumoulin-Smith of UBS. Please proceed with your question. Julien Dumoulin-Smith – UBS Securities LLC Hi. Good morning. Charles E. Jones – President, Chief Executive Officer & Director Hey, Julien. Leila L. Vespoli – Executive Vice President, Markets & Chief Legal Officer Good morning. Julien Dumoulin-Smith – UBS Securities LLC Hey. So, following up perhaps where we started on the rate cases, can you remind us where we stand on earned ROEs in kind of a trailing basis for 2015? Just I suppose speaking to the rate case filing itself for whatever you have out there, both New Jersey and Pennsylvania. And perhaps on a prospective basis, the purpose for the case, at least New Jersey, seems to be recovering O&M, and then separately Pennsylvania seems principally driven by the implementation of the DISC and spending investments there, is that kind of good (42:21) them respectively? James F. Pearson – Executive Vice President & Chief Financial Officer Julien, this is Jim. I would say that in Pennsylvania, it’s primarily driven by somewhat the decrease in the load. It’s part of the DISC filing that we have. There’s also additional investments that we’ve made there. We’ve got a very large smart meter implementation program going on over there. So that’s primarily what’s driving that in Pennsylvania. You’re also able to file on the forward-looking test year. When I look at New Jersey, it’s primarily driven by a significant amount of investment that we’ve made since the last test year in New Jersey, and that was 2011. And as we said in our remarks since July of 2012, we’ve had a significant amount of capital investment. And why we say partway through 2012, because in the test year New Jersey you’re allowed to claim in-service amounts for six months after the in-service date. So we’ve had a significant amount of investment in New Jersey, so that’s what’s driving that. Again, as far as our overall return on equity within each of the states, I would say that we’re probably tracking right around where we should, based on the last rate proceedings. However, as you know, in Pennsylvania, they did not publish what the ROE was in the settlement. Leila L. Vespoli – Executive Vice President, Markets & Chief Legal Officer Julien, this is Leila. The only thing that I would add when you’re thinking about Pennsylvania, think about aggressive energy efficiency measures and no lost distribution recovery. So when Jim was talking about the lower revenue, those factors play into that. Julien Dumoulin-Smith – UBS Securities LLC Got it. And then, turning to the equity piece of the equation, just to be clear on setting expectations, we shouldn’t expect to hear from you on equity until you get a definitive decision to either reject or accept the waiver – well, not the waiver, but the decision outright from FERC, and no action from the credit rating agencies correspondingly until that’s well (44:46). Charles E. Jones – President, Chief Executive Officer & Director Correct. I would say, yes. Julien Dumoulin-Smith – UBS Securities LLC Okay, great. Thank you, guys. Operator Thank you. Our next question is coming from Greg Gordon of Evercore ISI. Please proceed with your question. Kevin Prior – Evercore Group LLC Hi. This is actually Kevin. Other than the PPA, are there any other uncertainties or hurdles that would prevent you from giving guidance in the early summer? Charles E. Jones – President, Chief Executive Officer & Director No. Kevin Prior – Evercore Group LLC Okay. And if the FERC was to uphold the contracts, but it ended up going to the Ohio Supreme Court, would you still plan to implement the contracts on June 1, or would it then be delayed? Charles E. Jones – President, Chief Executive Officer & Director We plan to implement them on June 1. Kevin Prior – Evercore Group LLC No matter what challenges there. Okay. That’s all I have. Thanks. Operator Thank you. Our next question is coming from the Chris Turnure of JPMorgan. Please proceed with your question. Christopher J. Turnure – JPMorgan Securities LLC Good morning. I was wondering if we could talk a little bit about the supply side of the business. And ex the PPA, if you just look at the performance over the past couple of quarters, I think specifically, excluding the change in capacity prices and excluding the change in the volume. You’ve had a pretty noticeable improvement there, despite decline in commodity prices. Maybe you could just flush that out a little bit more and give us a color there. Charles E. Jones – President, Chief Executive Officer & Director So, I’ll start and then I’ll let Donny add to it. During 2015, we talked with you about our cash flow improvement program. Much of that was focused on the Competitive business. And much of that was focused on getting our Competitive business to the point where it continues to be cash flow positive and it has no need for any cash from the parent through 2018 at current energy prices as we know them. So part of that was also targeted at the FFO from the Generation business. So we reduced O&M expenditures, which contributed to some of what you’re seeing there. So that’s kind of from an operational perspective, the thing that Jim Lash and his Generation team have done to improve the competitiveness of that business. I will let Donny talk a little bit about the Commodity side. Donald R. Schneider – President, FirstEnergy Solutions ( FES ), FirstEnergy Solutions Corp. Yes, I’d just add, obviously we have taken a position starting after the polar vortex in 2014 to derisk the business and to move away from weather sensitive load. You’ll recall in the first quarter of 2015 we had what’s been referred to as the Siberian Express and while it was not nearly as significant of an impact to FES as the polar vortex, it’s still have some impact. I’m happy to report this past quarter, although we had very mild weather, the fact that we have much less weather sensitive load, are results were pretty much in line with our expectations from a sales perspective. Charles E. Jones – President, Chief Executive Officer & Director Donny and his team are doing a fantastic job running the business too. Back in February when we had Mansfield off for two weeks, the entire plant off, there were several seller side notes that suggested that, meant that load was down and we’re going to have a bad quarter. In reality, that’s part of how we’re dispatching is those units differently. So we don’t run them when we can’t make money with them. So I talked in my remarks about that save this fuel. So Donny is doing a great job at looking at every day, every hour, how do we maximize that business under some very difficult economic times. Christopher J. Turnure – JPMorgan Securities LLC Okay. I mean, to that point is there anything that we should think about historically that’s forced you to run units that were uneconomic, such as mandatory take-or-pay coal contracts or something of that nature that would be rolling off this year or in the future, to kind of provided a tailwind for your numbers all else equal or I might barking up the wrong tree there? Charles E. Jones – President, Chief Executive Officer & Director Go ahead Donny. Donald R. Schneider – President, FirstEnergy Solutions ( FES ), FirstEnergy Solutions Corp. Yeah. I mean, we’ve had coal contracts in place for a lot of years. It gives us significant flexibility. This isn’t really something new for us. I think the degree is much greater now, but you’ll recall back in – I believe it was 2012 – around August 2012, we took the entire Sammis Plant down and kept it offline through December. So it’s not really new. I think the difference is with the weak – incredibly weak forward day ahead market that we are seeing, it calls in more economic dispatch than perhaps what we had seen in the past. Christopher J. Turnure – JPMorgan Securities LLC Okay, great. And then shifting gears to transmission again, the rejection by New Jersey of your utility status for that MAIT request would seem on the surface to be a significant setback. But your comments have indicated that you’re going to continue to push forward, and you think it’s very important. Could you maybe characterize how important the New Jersey part of MAIT program is to the overall transmission spend kind of levels going forward and growth going forward, and the timing now that you have had this setback, if it’s been adjusted at all in New Jersey (50:18)? Charles E. Jones – President, Chief Executive Officer & Director Yes. So, first I would say, I think MAIT is very important to our customers in New Jersey. And we have to do a better job of helping the BPU understand why it is important. We’ve done that in our latest filing and will continue to work with them to get it across the finish line. If we don’t, then we’ll look at options to implement MAIT in Pennsylvania potentially. But as far as your real question in terms of how does it affect or transmission investment strategy, we’ve got two more years of energizing the future. We’ve got projects beyond that inside ATSI and TrAILCo that we can continue to move forward with. I don’t see MAIT been crucial at all to our transmission investment strategy. I see it as a way to implement that transmission investment strategy in a way where we can lower the cost of capital and do it in a way that’s better for customers and create more transparency for our investors. That’s how I see it. Christopher J. Turnure – JPMorgan Securities LLC Great. Thanks, Chuck. Operator Thank you. Our next question is coming from Stephen Byrd of Morgan Stanley. Please proceed with your question. Stephen Calder Byrd – Morgan Stanley & Co. LLC Hi. Good morning. Charles E. Jones – President, Chief Executive Officer & Director Good morning, Stephen. Stephen Calder Byrd – Morgan Stanley & Co. LLC Most of my questions have been addressed. I just wanted to focus on the Pennsylvania revenue request. When I look at the Appendix, it looks like the customer bill impacts can be relatively significant. I think one of the jurisdictions, it’s about 18%, if I’m reading the page correctly. Is there a way to phase that out in order to otherwise lessen the overall bill impact, and are there other precedents we can look to in Pennsylvania in terms of just how to think about that, that it looks like a fairly sizeable rate impact? James F. Pearson – Executive Vice President & Chief Financial Officer Stephen, this is Jim. I would say that, as we said earlier in our comments and Chuck said, it is that this will bring the average residential bill in Pennsylvania up to – about what’s average within the state. You’ll recall we went a number of years without increasing our rates in the State of Pennsylvania. It’s also being offset by a – from a customer perspective, it’s being offset by a reduction in their overall energy component of the bill. So, I don’t view this as something it’s going to be what would be described as a rate shock issue. As far as your earlier request, no I don’t – we don’t see any mechanism out there where we would phase this in. This is just a normal type of request that we would have. And again as Leila pointed out earlier, there is very stringent energy efficiency requirements in the State of Pennsylvania, which is decreasing the usage. So we’re required to go in and file for these rates. So that’s the way we’re looking at it. Stephen Calder Byrd – Morgan Stanley & Co. LLC Understood. And in terms of the magnitude of the benefit from lower energy costs, is there a way for us to get a sense for the magnitude of that benefit? Charles E. Jones – President, Chief Executive Officer & Director I think you could probably look at where wholesale power prices have gone over the last few years. And as Donny mentioned, wholesale power prices have fallen $3.00 already this year. So I think there was a period of time when around-the-clock power prices were in the $50-plus range, and if you look at the forwards out there right now, over the next three years, they’re probably closer to the $30 range. Stephen Calder Byrd – Morgan Stanley & Co. LLC Understood. Great, thank you very much. Operator Thank you. Our next question is coming from Ashar Khan of Visium. Please proceed with your question. Ashar Hasan Khan – Visium Asset Management LP Good morning, and congrats. One thing I was just wanted to help in terms of trying to measure these rate cases in terms of earnings potential. Is there some way you could give us what the increase in kind of rate base would be from kind of like what you have in your numbers this year versus – because it’s a forward test year next year, could you signify the increase in rate base for the two jurisdictions? Charles E. Jones – President, Chief Executive Officer & Director I will answer it at a high level, and if you want details, then I’ll let Leila and Jim fill in. But as filed, in effect January of next year, the JCP&L case is about $0.20 a share and the Pennsylvania cases combined are about $0.40 a share. Ashar Hasan Khan – Visium Asset Management LP Okay. That’s very helpful. And that was my question. Thank you so much. Charles E. Jones – President, Chief Executive Officer & Director Okay. Thanks Ashar. Operator Thank you. Our next question is coming from Angie Storozynski of Macquarie. Please proceed with your questions. Angie Storozynski – Macquarie Capital ( USA ), Inc. Thank you. I have only one question. So when I look at the plans covered by the PPA, say, in 2016, can you tell us if the assets the plans have a positive EPS contribution without the PPA? Donald R. Schneider – President, FirstEnergy Solutions ( FES ), FirstEnergy Solutions Corp. Angie, this is Donny. Let me make sure I understand your question. So you’re asking if Sammis and Davis-Besse have a positive earnings contribution without the PPA? Angie Storozynski – Macquarie Capital ( USA ), Inc. Yeah. So basically, when you showed us the EBITDA and then a bridge to net income or EPS, for SES – or CES without the PPAs, can you tell us the assets of those three plans or two plans that are covered by PPAs, so without the PPA would they have a positive EPS impact? Donald R. Schneider – President, FirstEnergy Solutions ( FES ), FirstEnergy Solutions Corp. Yes. For 2016, Sammis and Davis-Besse would definitely both have positive earnings per share impact. Angie Storozynski – Macquarie Capital ( USA ), Inc. How about 2017 or 2018 based on the current forwards on capacity payments? Donald R. Schneider – President, FirstEnergy Solutions ( FES ), FirstEnergy Solutions Corp. I don’t think we’re giving any guidance on forward years, Angie. Angie Storozynski – Macquarie Capital ( USA ), Inc. Because I mean, we are all struggling I think with the impact of your PPAs on your bottom line because we just don’t know what’s the offset from the current earnings power of these assets. That’s why I am asking? Charles E. Jones – President, Chief Executive Officer & Director I understand you are struggling with it, and I understand that the estimates are all over the board for what this ESP means. And believe me, as soon as we can give you clarification, we plan to do that. Once we have an answer from FERC, we will tell you what the value of this company is going forward with the ESP. If we don’t have an answer, then we’re going to give you 2016 guidance without the ESP. And I apologize that we’re leaving you hanging out there, but it’s just too big a moving part for us to speculate on the outcome. Angie Storozynski – Macquarie Capital ( USA ), Inc. Okay. I understand. Thank you. Operator Thank you. Our next question is coming from Anthony Crowdell of Jefferies. Please proceed with your question. Anthony C. Crowdell – Jefferies LLC Hey, good morning. Just – most of my questions have been answered. Just want to follow-up as the company is looking to transition more to a regulated utility, thoughts on maybe rate basing or getting some type of cost of severance return on Pleasants, on other power plants, particularly Pleasants or Mansfield? Charles E. Jones – President, Chief Executive Officer & Director Well, first of all, we are a regulated utility. 90%-plus of our earnings today come from our regulated operations. What we’re talking about is growth and investment inside that regulated utility. We filed our integrated resource plan with West Virginia. I think later this year, they’ll start taking a look at it seriously, and it’s up to the West Virginia Commission to decide would Pleasants be the appropriate solution. Obviously, we have a model in place already with Harrison, and we think that is something they ought to look at. Anthony C. Crowdell – Jefferies LLC In Pennsylvania, is there a similar filing or similar thought process, or just West Virginia? Charles E. Jones – President, Chief Executive Officer & Director Just West Virginia. Anthony C. Crowdell – Jefferies LLC Great. Thank you. Operator Thank you. Our next question is coming from Michael Lapides of Goldman Sachs. Please proceed with your question. Michael Lapides – Goldman Sachs & Co. Hey, guys. Real quick, do you ever put or can you discuss what you think the scale of the MAIT investment could be over a multi-year time? I mean, should we think about it similar to the size and scale of what ATSI and TrAIL have been? Now, I know lots of TrAIL was just one big project, but ATSI was a series of projects. Is it something that could be significantly smaller or significantly bigger? Just trying to get arms around how you’re – I don’t know how you are thinking about the size, scale and scope of MAIT could be? Charles E. Jones – President, Chief Executive Officer & Director So, first of all, let me clarify again. We’ve told you we have over $15 billion of Transmission projects that our teams already identified on our existing 24,000 miles of Transmission System. Those projects can be executed with or without MAIT. MAIT is a vehicle to improve the recovery mechanism from a transparency perspective for investors and lower the cost of capital to make those investments more efficient for customers. That’s all MAIT is. It doesn’t stop us from moving forward with the transmission investment program. As far as the scale of the program, we’ll talk to you about that once we know the base of the company that we’re operating on after we get a resolution on this ESP, because it’s more driven by our capability of raising the cash and likely some equity to fund it. So we’ll tell you about that once we know those answers. Michael Lapides – Goldman Sachs & Co. Got it. Okay. I was just trying to get my arms around MAIT. The transmission in the Eastern part of your service territories seems like a huge opportunity in terms of the rate base growth there. And just trying to get my arms around kind of the magnitude of the impact over time. One other question for you. O&M, where do you see the greatest opportunities across your businesses to manage O&M further down and you’ve done a really good job over the last year or so in doing so. Where do you see the incremental opportunities and where potentially are their headwinds? Charles E. Jones – President, Chief Executive Officer & Director Well, I don’t think of it necessarily as managing O&M down. I think about it as spending the appropriate amount of O&M to serve our customers the right way. And as we invest in new equipment, O&M is going to trend down. In the Transmission System, we’re replacing 60-year and 70-year old equipment with brand new equipment, that as I’ve shared before we’re basically buying with 30-year warranties from the manufacturer – full warranties where we don’t have to do any O&M on them. So we’re going to spend the appropriate O&M as long as we’re having rate cases and we’re having timely recovery of our expenses, I think the shareholders are immune to how much O&M is involved. And so when you think about it, it’s more about where do we spend it, how is it being recovered and is this the right amount for customers. Michael Lapides – Goldman Sachs & Co. Got it. Thanks Chuck. Much appreciated. Charles E. Jones – President, Chief Executive Officer & Director Okay. Take care Michael. Operator Thank you. We’re showing time for one additional question today. Our last question will be coming from Praful Mehta of Citigroup. Please proceed with your questions. Praful Mehta – Citigroup Global Markets, Inc. (Broker) Hi, Thank you. Most of… Charles E. Jones – President, Chief Executive Officer & Director Good morning. Praful Mehta – Citigroup Global Markets, Inc. (Broker) …my questions have been answered. Just quickly on strategic direction in M&A, I guess if the Ohio PPA goes one way or the other, does that change your view around how you think about M&A in general? There’s clearly a lot of M&A that happened last year, it continues to be top of M&A this year. So, if you could just broadly – now that you’re going more towards the regulated platform and clearly as you said, you are a regulated utility, how are you thinking about strategic direction in M&A in that context? Charles E. Jones – President, Chief Executive Officer & Director Of all the things I’ve been thinking about a CEO the last 16 months, M&A is not high on that priority. That’s how I would answer that. We’re trying to strengthen the company that we know. We’re a big company; we have 6 million customers to serve. We’re going to do that the right way. Praful Mehta – Citigroup Global Markets, Inc. (Broker) Fair enough. Thank you. Charles E. Jones – President, Chief Executive Officer & Director Okay. Before we leave, I have one final announcement that I’d like to make. Many of you know Rey Jimenez, Rey has been part of our IR team at FirstEnergy since 1997, and he has decided that he would rather spend his time in retirement than talking to all of you in the future. So, he is going to be retiring after 39 years with the company. He will be in the office until early June and I’d encourage you – I know many of you have worked with him, to get a chance to wish him the best as we will for a healthy and happy retirement. So, just wanted to make that announcement. Thank you all again for your support and confidence, and we’ll be talking to you again as soon as we have an answer from FERC. Operator Ladies and gentlemen, thank you for your participation. This concludes today’s teleconference. You may disconnect your lines at this time. And have a wonderful day. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited. THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY’S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. 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Avangrid’s (AGR) CEO Jim Torgerson on Q1 2016 Results – Earnings Call Transcript

Avangrid, Inc. (NYSE: AGR ) Q1 2016 Results Earnings Conference Call April 26, 2016, 10:00 AM ET Executives Patricia Cosgel – VP IR Jim Torgerson – CEO Rich Nicholas – SVP & CFO Bob Kump – CEO of Avangrid Network Frank Burkhartsmeyer – CEO of Avangrid Renewable Analysts Andy Levi – Avon Capital Advisors Christopher Turnure – JPMorgan Paul Patterson – Glenrock Associates Joe Zhou – Avon Capital Operator Good morning. My name is Kissie. I would like to welcome everyone to the Avangrid First Quarter 2016 Earnings Conference Call. I would like to turn the call over to Ms. Patricia Cosgel. Patricia Cosgel Thank you, Kissie and good morning to everyone. Thank you for joining us to discuss Avangrid’s first quarter 2016 earnings results. I’m Patricia Cosgel, Vice President of Investor and Shareholder relations. Presenting on the call today are Jim Torgerson our Chief Executive Officer and Rich Nicholas our Chief Financial Officer; Bob Kump, our Chief Executive Officer for Avangrid Network and Frank Burkhartsmeyer, and our Chief Executive Officer of Avangrid Renewables will also be participating on the call. If you do not have a copy of our press release or presentation for today’s call, they’re on our website at www.avangrid.com. During today’s call we will make various forward-looking statements within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Significant factors that could cause results to differ from those anticipated are described in our earning release and filings with the SEC. With that said, I’d turn the call over to Jim Torgerson. Jim Torgerson Thanks Patricia and good morning, everyone and thanks for attending our earnings conference call. We had an excellent first quarter at Avangrid and we had strong performance from all of our businesses. As you can see from our press release, the net income and earnings per share were up 24% to $212 million of net income and $0.69 per share. Now that’s up on a adjusted basis including UIL from 2015. So adjusted EBITDA grew 8% to $575 million and earnings growth in all of our business and we had very strong cash flow. Now this was a result of improvement in operating expense and the revenue decoupling we have at most of the utilities offset some of the milled winter weather. We did have some impacted at Berkshire Gas and Southern Connecticut Gas where the heating degree days were like 10.6% warmer than normal our fewer heating degree days than where would be normal. We did have higher wind production. It was up 13% over 2015, still down a little bit from what we would consider a normal wind production year, but it did help to increase our gross margin by 2.4% over the 2015 first quarter. The other thing we did was we extended the useful lives of our renewable assets and this was looking at component by component. It was down on a worldwide basis by Iberdrola. Based on Iberdrola’s experience and looking at the engineering analysis that we did, so each component we looked at and determine that we were really not depreciating it on an appropriate life and it really needed to be extended and we’ll get into that a little bit. So the first quarterly AVANGRID dividend was $43.2 a share. It was paid on April 1 of this year. And the second quarterly dividend of the same amount was declared by the Board on April 20 and payable July 1. And as a result of what we’re looking in for the rest of this year and into the future now, we expect our payout ratio to be declining a little faster clip and you can see that as of yesterday our dividend yield was 4.5%. 2016 earnings per share outlook now, we’re increasing it to the range of $2.10 to $2.20. Now looking at the first quarter and I’m on Page 7 of the presentation, which is on our website, the first quarter 2016 results were on target. Net income you can see, we had $212 million looking at some of the non-recurring items and we had a non-recurring item by the sale of the Iroquois Gas pipeline, which generated net income about $19 million, but taking that aside we were up 14%, but including that we were up 24% over the previous year’s first quarter. Earnings per share were up again the same amounts, earnings of $0.69 versus $0.56 in the previous year. So some of the things that impacted us obviously the higher wind production and then the extension of renewable asset useful life going from roughly 25 to 30 years and we’ll talk about that in a minute and then the non-recurring sale of the Iroquois pipeline. On the next page, we look at the key earnings and cash drivers, and we pay rigorous attention to the integration that’s been going on identifying planning for best practices in 2016. We’ve been making very good progress. The planning has been completed and it was done on-schedule. We had planned on getting that done by the end of the first quarter, which we did. And then we look at the results for that year. The net income was actually up 7% and weather did have an impact since we don’t have decoupling at Berkshire and Southern Connecticut Gas, but the good thing is those will be put in place since they are required to be implemented in our next rate case. And we have a continuous focus on our operating expenses and minimizing those to the extent we can and are possible. So renewal business, wind production was up 13%, energy prices on merchant projects, it was pretty flat actually down about a 1% and this includes directs along with the prices for energy. The PPA contracts were up about 3% over the previous year’s first quarter and we have included some information on the pricing and actually the roll off of some of these contracts. And when we look at our financial position, we’re in a great financial position with our very strong balance sheet. We’ve low leverage, which we can translate in the low interest cost and our consolidated credit facilities we executed a $1.5 billion credit facility, which is now in place giving us great liquidity on a short term basis that we can use it as we need. Now talking about the extension of the useful life of certain renewable assets, as I said we looked at a component by component basis and we determine that the towers from the transmission equipment that’s in place there, the depreciable life was really in excess of the 25 years. So on average we’ve moved up to about 30-year life for the wind farms that we have and again we have best-in-class technology, operational management and we have the world-wide experience of Iberdrola and based on that experience. We looked at the life of assets, particularly the ones that Iberdrola has in Scotland and recognize that they were useful life was going much beyond the 25 years that we’ve been using. In fact they’ve been in place for over 20 years already and have seen no deterioration. So with this worldwide experience and taking the worldwide view that the assets needed to be extended, Iberdrola across the Board has extended the useful life for renewable assets to about 30 years on average. And so which we also think is consistent with what some others in the industry are doing. Moving on to the merger integration summary, we’re making great progress on that. We launched it last October and that was focused really on day one implementation and in the merger integration planning. The first thing I want to do is to make sure we could operate effectively once the merger was completed, which we did do and did it successfully. The next step in Phase 1 was really to identify the plans and what we needed to do and then get our teams together, we had a dozen teams working on it with over 240 people — 270 people. We had 120 different projects that we looked at and so now we completed that phase and we’re moved into Phase 2. The next steps there are really the project teams are transitioning to implement the integration plans now. That will happen over the next 12 to 18 months as we put these in place, things can be faster, obviously we will do quicker, but a lot of it depends on software changes and integrating different computer software. And then also the thing we’re identifying and executing on operational best practices and aligning outline grid with the global business model where we can and where it makes sense and I think in many areas particularly purchasing, IT, other areas make a great deal of sense in aligning that on a global basis. Day One Readiness as I said was achieved and all the integration projects were on track. For our projections for the planning period, when we had the Investor Day back in February, we talked about a five-year plan. I kind of like to go over some of the aspects of our five-year strategic outlook and the progress we’re making. When you look at the projections, 70% of our investments will be in regulated activity and the other roughly 30% will be related to our renewal business. Adjusted EBITDA in the 2020 year about 26% will come from renewables and about 73% from our networks business. So when you look at EBITDA, 73% are coming from regulated activities, which is very stable and predictable for us. When you look at on Page 12 for Avangrid Networks, when we take a look at the regulatory to legislative and the FERC update we want to go through, the New York trends that was made up of initial three projects. We received FERC approval on March 17. Had a total ROE of 10% and that’s a combination of being an RTO and also having a base ROE. Equity ratio is at 53% and our initial investment is $44 million. We’re implementing settlement right and obtaining an asset transfer order from the New York Public Service Commission. The projects are on track, We expect to have rates in effect on June 1 of this year. The New York Rev, the final track one guidance has been released. The distributed system implementation plan and the benefit cost analysis is going to be filed by each of the utilities at the end of June of this year. And our New York rate case, which involves both our RG&E and NYSEG for both gas and electric rich company, the hearings have been completed. As we said before, we had a settlement that’s now in place. We expect the commission to decide this on May 19 and then the rates to go into place on June 1. For Connect New York, this is a new project that we’re going to be making a filing by the end of this month. It’s a 1,000 megawatt DC underground transmission line that we’re going to be making a filing to a pursue that. The New England RFP we bitter selection process, we’re expecting it to be by the end of July and as you know we have two projects in Maine, two proposals regarding transmission. One another project which is we would be providing the wind resources from our renewable businesses in New York on another transmission line have been proposed by Eversource. So we have three projects in this RFP and we’re very hopeful and confident that we should be successful on those. And then the FERC ROE compliant in the New England, the ALJ issued an order on March 22 which recommended a base ROE for the 15 month refund period in complain number two of an ROE of 9.59 and the cap of 10.2 for that 15 month period. Then for the Complaint 3 and going prospectively, his recommendation was for a base ROE of 10.9 with a cap of 12.19 for the 15 months refund period and then going forward. FERC is expected to make their final decision later this year, early in 2017 and if adopted as final the ALJ mid it’s decision, that would require a net increase in our reserve for complaints two and three of about $10.2 million net of tax based on what we know today from those proceeding. Moving on to some of the projects we have going on and keep in mind we’re focusing on improving our resiliency, replacing the aging infrastructure and automating our system. One of the great ones we have at the Cooper Mill Static Synchronous Compensator, which is being put in place into Maine and this was after a quest of ISO New England to make this investment to support the regional bulk electric system and really relates to upgrades in the Boston area that are being done by a Eversource and National Grid. Now it does require a substation expansion within the 200 MVAr STATCOM, which is the static synchronize compensator. The investment there is going to be over between 2016 to 2018 and an about $52 million. Also at Maine and also for about $52 million is our Customer Smart Care Data System upgrade and this is going to enhance our customer service and flexibility, allowing from more innovative rate design, allowing for dynamic pricing and then it’s also going to help us to optimize our AMI capabilities. And as you recall, we put in AMR entirely in CMP service territory. In Connecticut for our transmission projects we have the metro north railroad corridor where we’re replacing the transmission lines along the metro north corridor and keep in mind our transmission lines are on the catenary that provide the electricity to allow the trains to run. So if catenary is over 100 years old and are deteriorating, so we have concluded along with ISO England that we need to replace those. We’re putting along monopoles along the corridor and that investment in this five-year timeframe is going to total about a $150 million. Then in New York, we have the Guinea Retirement Transmission alternative and this is going to provide a 345 KV connections to the New York power grid, help ensure reliable service to the Rochester area and then also allow the ultimate retirement of the local generation plants. That investment again is $140 million. It’s started, its already spending money there and we started last year. It should be in operation by the end of ’17. Turning to our renewables business and looking at our projections for the next two years, we have currently 5.7 gigawatts in operation and another 744 megawatts are under construction. I will spend a minute going over which one of those projects are. If you keep in mind that the first one in North Carolina will be operational by the end of this year and that’s a 208 megawatt project, $375 million in capital spending, that’s a 13 year PPA with Amazon and it’s under construction as we speak. El Cabo is almost a 300 megawatt project in New Mexico that will be supplying power to California IRU and our people did a great job in piecing together the transmission that would be needed to move that power from New Mexico into California. This project is about $515 million. It will be completed by the end of 2017 and that has a 20-year PPA with the California IOU. Tulare is 132 megawatt project in California. Again that will be completed by the end of 2017. We’ll spend about $235 million on that and that has a 15 year PPA with the California IOU and we’re currently finalizing the off-take agreements, but that should be operational in that timeframe. We also have a smaller project in Vermont of 30 megawatts, $75 million in capital spending. Little more expensive in the Northeast to build these projects, but it has a 25-year PPA with an IOU and there we’re just waiting for the agency to give us the pre construction ruling, pretty much everything is in place. And then a 76 megawatt project in Colorado, again completed in the end of 2017. We’ll spend about $120 million there with a 25-year PPA with an IOU and we’re finalizing activity there. Now in total we’re going to spend about $1.3 billion in investments between 2016 and 2017 and that will increase our installed capacity to 6.5 gigawatts by end of 2017. On Page 16 we have a map that shows potential projects and these of the 6.1 gigawatts pipeline we have, we have about 2250 megawatts of wind and solar that we believe would be the ones that will provide the next opportunities in the 2018 to 2020 timeframe. These are the ones that are probably closest to coming in the final development either because we know there RFPs are going to be coming out amd we have more assets in place. We have the engineering done and so forth. But these are the ones we would say are most likely to be developed to supply the next 650 or so megawatts that we have planned for the 2018 to 2020 timeframe. Now I’m not going to go into detail, but you can see they’re spread out throughout the country giving us great diversity and there is a mix of both solar and wind that we have and so you can see this. These are real projects that can easily get developed. So let me highlight a couple of things. One, we had great performance in the first quarter. It gives a lot of visibility for the remainder of the year. Our strategic plan for the next five years through 2020 is clearly on track and we’re performing rather well to get that done. The integration and execution of our plan is in progress to integrate the UI oil in the old Iberdrola USA. We’ve extended the use of life of renewal of assets based on sound engineering and experience we have from Iberdrola worldwide and our 2016 earnings per share outlook we’ve increased it to 210 to 220 per share based on a lot of these factors. And so with that I’m going to turn it to Rich Nicholas, who is going to spend some time on the financial activities. Rich Nicholas Thank you, Jim. Good morning, everyone. Thanks for joining us today. As Jim said a very strong quarter for Avangrid and I am Slide 19, little more details are on the operating segments, while net income grew 24% quarter-over-quarter including UIL and the adjusted 2015 numbers. As you can see networks, was up 7.3% and renewables had a very strong quarter up 64% 2016 over 2015. The corporate and other segment does include gas as well as corporate and you can see positive results there. As a historical contract that was out of market that we rolled off and we see the benefit of that and positive earnings in the corporate segment. Moving to Slide 20, some of the key drivers in addition to the ones Jim had mentioned, we did benefit from decoupling in most of our companies. Southern Connecticut does not have decoupling but will in its next rate case per state statue and Berkshire Gas does not as well. However, the impact of those relatively small in the overall scheme of things from the warm weather, we do see the increase in cost related to the Reliability Support Agreement, but those are also offset in revenue and we did see lower employee related cost quarter-over-quarter. Turning to renewables, 13% improvement in wind production and that’s made up of both better wind quarter-over-quarter as well as additional capacity. Last year we did add roughly 200 megawatts with the back of wind form in Texas and the extension of renewable asset lives to new estimates there were positive by $13 million of net income for the quarter. In the other segment sale of the interest Iroquois that Jim mentioned for an after tax gain of $19 million and we did see some higher gas spreads for the contracted gas storage business. Moving to Slide 21, little more details geographically on the renewable load factor where we saw an increase from 28% last year to 31% this year and this is why being geographically diverse really helps. As you can see different results so in the West we were up to a 20% load factor versus what we would have been 16.6 last year. So a 3.4% percentage point increase. Slightly less wind in midcontinent and in Texas you can see there the big increase in part was driven to the additional capacity that I mention as well better wind. On Slide 22 looking at that 13% increase in wind production, that’s where you really see in the South Texas area, now 47% increase reflecting the additional wind farm in Texas spread pretty well across the geographic U.S. Turning to Slide 23 when we look at pricing in the renewable business this year versus last year, in total about a 1% increase and that was made up of about 3% better pricing on the PPA side, slightly lower pricing on the merchant side including the renewable energy certificates. Again slightly different results across the continent and when we look at overall, about 67% of our megawatts or PPAs 33% are in merchant and we also hedge some of our merchant where we can and so total about 80% is in PPA or hedges and about 20% in merchant. Turning to Slide 24, looking at our gross margin growth of 7% quarter-over-quarter. Again here we’ve provided some additional detail by both geography and wind versus solar, versus our thermal plant in Oregon. And you can see the effects of the various drivers on gross margin, better production increased by $26 million. We did have some PTCs that expired and the market-to-market of negative 9 is actually we still have positive mark-to-market in 2016 just less positive than we had in 2015. So overall a 7% growth, primarily driven by the production that we’ve been discussing. Turning to Slide 25 adjusted EBITDA, growing 8%. Again strong performance in renewables, renewables makes up about 25% of the EBITDA, but grew by 18% driven by the production and that works a good solid showing increase of 3% really helped by the lower employee cost and revenue decoupling.. As Jim mentioned, we have very strong cash flow for the quarter. On Slide 26, our free cash flow of Avangrid consolidated was about $175 million more than our CapEx requirements and CapEx as you know is very seasonal especially in the Northeast and the networks business as you come out of the winter so strong cash flow networks, but we would expect to see CapEx pick up. And on renewables, total cash from operations up $120 million and free cash flow of $50 million puts us in very good position moving into the rest of 2016. So when we look on Slide 27, our leverage is really primarily is the network segment of our business, UIL Holding company did have a $450 million note that continues and then little over $200 million of tax equity investments that we will be amortizing and expect to be fully amortized by 2019. We’ve got very manageable debt maturities over the next several years again at the networks business. So moving to Slide 28, that strong balance sheet results in net leverage of just under 24% in the first quarter of 2016 and net debt to adjusted EBITDA of 2.4 times. We don’t expect or there were no, excuse me, there were no new debt issuances in the first quarter and through the planning period through 2020, while we do expect net leverage to increase modestly into the low 30% range, we would also expect that net debt to EBITDA would remain relatively flat as we grow the earnings of business. In addition, AVANGRID was recently updated within the last several days by S&P and Fitch from BBB flat to BBB plus recognizing our strong financial position. As a result of first quarter results and the new estimates around useful lives, we did update our outlook for 2016 and increased it from $2 a share to a range of $2.10 to $2.20, primarily driven by the new estimates around the renewables business depreciable lines. So very strong performance to start the year and we look forward to your questions-and-answers I also look forward to seeing many of you at the AGA Conference in the next few weeks. So with that, I will hand it back to our operator Kissie for question-and-answer session. Thank you. Question-and-Answer Session Operator [Operator Instructions] Our first question comes from the line of Andy Levi with Avon Capital Advisors. Andy Levi Hi good morning. How are you? It was a really good rundown guys. Jim Torgerson Thanks Andy. How are you doing? Andy Levi I’m doing pretty well actually. [Done have someway]. Okay. So just a couple I guess easy questions. So just on the asset life to change on the renewals, so the $13 million is that we annualize at times by four or is that it — was there like a little bit of catch-up? I’m just trying to figure out on an annual basis how much we should add to earnings going forward? Jim Torgerson Yes the quarter would be annualized. Rich Nicholas Probably looking in $0.14, $0.15 annual earnings per share benefit. Andy Levi Okay. And that such $0.14 to $0.15 and that will go into next year. So we add that to next year and that was not contemplated I guess when you gave your Analyst Day, is that correct? Rich Nicholas Correct. Andy Levi Okay. That is additive. And then just as far as the because you gave more information on the renewable kind of drop off as far as contracts and things like that, I want to know really contract, but more kind of your hedge book. How should we think about pricing going forward and as far as because obviously when you re-contract the price will be lower and I think your average price I am guessing is around $55, so what is the timing of when the contracts drop off and having to re-contract those, that I don’t — right, you didn’t really give? Jim Torgerson Well we have on Page 34 you can see we have as the TPA expire and you can see it’s a graph I understand and what we’ll be doing when the contracts drop off its trying to re-contract in the first place, but other than that, they will be migrating to merchant and I would expect as the prices will be whatever the market will be at that point in time. Now it could be that obviously we’re going to sign a long term or a longer term PPA or an extension of some contract that would be at a higher price than the current market spot price, but we’ll have to see where the market is at different points in time. Andy Levi But do you give anywhere where you show the amount of megawatts and the hedge prices drop off or that’s I guess we have to figure that out ourselves. Jim Torgerson Yeah, we thought we would leave some of that work left to you guys and we didn’t do it Andy. Andy Levi Okay. Okay. So could you have this one benefit and then I’m just trying to figure out when these PPA will drop off and then what the earnings change would be. Okay, and then I’m sorry if I missed this, just what was the wind condition versus normal? Did you give that? Jim Torgerson No, but I think Frank can probably give you some idea what it was in the first quarter. Andy Levi Thank you. Jim Torgerson Frank you got. Frank Burkhartsmeyer Yeah Andy. The first quarter was still a bit below the long term average and around and it varies course by region, but somewhere around 5% below average still in the first quarter. January was very — was I think and we mentioned this when we were out January was quite down and then its normalized quite a bit since then but it’s still behind year-to-date. It’s hard though to just look at a three month slice. It’s — if you look long term that numbers moves around quite a bit by quarter. So, was …. Andy Levi Were there certain regions that were different as far as like where it was Texas above normal? Jim Torgerson I think West, I’d say the West is still behind where we were expecting — where we expect it long term. Andy Levi Okay. And what was Texas to you now? Jim Torgerson Texas was closure to long term, but I’m sorry I don’t know off the cuff here. Andy Levi Yeah, I am just being selfish. I am trying to figure out with some of the other guys out there so, other companies I should say. Okay. So just to summarize, so you increased the guidance by $0.10 to $0.20 and the change in accounting is $0.14 to $0.15 of that, is that what you’re saying? Jim Torgerson Right, so if you look at the midpoint of the guidance up $0.15 it’s really the effect of the new estimated useful lives. Andy Levi Great. And I guess that could be an industry-wide thing right. So like next era or something like that may end up benefiting from that as well. Jim Torgerson We believe next era is already at that. Andy Levi Are they, are they okay. It’s great. Jim Torgerson I think we’re catching up. Andy Levi Yeah, catching up okay. Thank you very much. That was a really great run down. Jim Torgerson Thanks Andy. Operator Our next question comes from the line of Christopher Turnure with JPMorgan. Christopher, your line is live. Christopher Turnure Good morning guys. Thanks for the extra details today, they’re very helpful. I wanted to may be understand some of the drivers that have changed for you over the past two months or so since the Analyst Day and the impact potentially on your long term earnings CAGR that you gave at the Analyst Day. And maybe you could give you color on the depreciation expense going down obviously that’s a help the AIJ decision from FERC prospectively may be assuming that in fact is the final decision and then even know it’s a small slice to your ownership stake in Northeast Energy Direct did have optionality for you guys to increase that and I was wondering if that has a material impact on your longer term guidance as well? Jim Torgerson Yeah, I think going forward we were — we’re on track with our strategic plan, I think for both this year and the longer term. The thing that changed on the earnings was really the depreciation modification that we did and it was really based on what Iberdrola was saying worldwide and their experience with wind farms in Scotland that they had for over 20 years. And then we did a lot of engineering analysis. So that was really the basis for the change. Everything else has pretty much been on track and I can’t say that there have been anything dramatically changed from what you heard at least from a long-term strategic standpoint and even for this year on from what you heard at Investor Day in February. As far as the FERC ROE, that’s got our ways to go yet. If it ends up being what the ALJ recommended prospectively, I think that would be plus because then we were looking at an ROE that would be slightly higher than the 10.57 and 11.74 cap that we currently have in place right now based on the FERC order from complaint number 1. So if they take complaint number 3 that will have a charge, we’ll have to set up a reserve for the complaint 2 basically and then moving forward though it would be positive for us. And on Northeast Energy Direct, we took really an immaterial charge and what we see is that it wasn’t going to be anything that was going to be in before 2019 at the earliest and so it really has a very minimal impact to our longer and short test. If anything at all, we’re still very comfortable with our 8% to 10% growth in net income over the five year period. And so I don’t see anything changing dramatically from that. And that is — we’ll see what happens going forward, but we were going to invest about $80 million over the five year horizon and so it really wasn’t going to impact us that much. Christopher Turnure Okay. So net, net really no change to that range that you gave and the optionality of that pipeline to go up to I think there was maybe a 12% ownership stake or something in that vicinity all kind of net backed to no change? Rich Nicholas Yes we could have got, it would have been up to 15%, but we never really — we didn’t factor that in because that was just the contract and depending on a lot of things happening with the RFPs and the EVC proposal that would have had to been consummated in New England for us to even get higher percentage. So net, net, we don’t see a change and we’re very comfortable with the 8% to 10% range. Christopher Turnure Okay. Great. And then maybe you could give us more detail on the Connect New York project. It’s I guess a 1,000 megawatts TC, but how long is it going to be? Could you give us any kind of CapEx numbers there and even though I guess it’s early stage and then maybe some information on how you’re thinking about timing and whether or not that’s in your current plan as well? Rich Nicholas Yes Bob Kump can fill in on that one. Bob Kump Yeah Chris, hi it’s Bob. So I think we spoke at our Investor Day back in February that this was not a project that at this point we had in our numbers, but one we were developed. As Jim mentioned in his remarks today, we are making a filing of that as part of a proceeding going on a public policy proceeding, a spin-off of the AC proceeding that’s been going on in New York. So that will be filed by the end of this month, in fact later this week. The details of the project itself in terms of cost and timing are to be determined, will not be made public as part of the instant proceeding, but we continue to move forward. The first phase of this would be let’s call an Article 7 filing to do that later this year. So everything remains on track with that. We’re having a lot of discussions with third parties about it. We continue to believe very strongly that this has a great fit given the situation as it exist currently in New York and that is insufficient transmission capabilities that stay, tremendous efforts by environmentalists to avoid anything overhead, excess capacity upstate and the threat of nuclear plants closing, which the Governor doesn’t want to see and so we really see this project solving a key issue facing New York State from a transmission standpoint. Christopher Turnure Great. Thank you very much. Rich Nicholas Thanks Chris. Operator Our next question comes from the line of [Felix Curman]. Unidentified Analyst Hi guys. Congratulations on a great quarter. Rich Nicholas Thanks. Unidentified Analyst Jim, I think you’ve touched on this in the last question, but you are still comfortable right with the 8% to 10% CAGR? Jim Torgerson Yes. Unidentified Analyst And then just mathematically speaking right, if we pick up $0.15, it’s roughly about 7.5% above your original ’16 guidance. If one were to just mathematically spread that out over the year 2014 through 2020 CAGR, can we pick up 1% on the CAGR over the term or no? Jim Torgerson What I’d say is we are looking at the 8% to 10% and we feel pretty comfortable with that. If you take 2014 where we were working off before and if you’re adding 7.5% at least in this year then we would probably say that its moving up a little bit, but we’re still 8% to 10% sounds pretty good right now. Unidentified Analyst Okay. Great, great and then just one quick question on the merchant PPA prices, can you just circle back and tell us how this price that you put here relates to the number you gave you in the Analyst Day and how you are thinking about that number going forward in your guidance. Jim Torgerson Well what we said in the Analyst Day is we were looking at something in the $27, $28 range. that was without the wrecks. So when you look at the merchant price you got to add the wrecks into that and the wrecks they vary in price from $5 and right now they were looking in the first quarter they were quite a bit higher. They were probably closer to $8 or $9 now across but they vary by region. I don’t know Frank do you want anything to do that? Frank Burkhartsmeyer No, that’s just in Jim we had that, you nailed it. Unidentified Analyst Okay. So this $30, $35 price here is higher than what you had expected at the Analyst Day? Frank Burkhartsmeyer No, no sorry, that’s consistent. Unidentified Analyst That’s consistent. And are you guys are assuming this phase flat through the period. Jim Torgerson Yes. Unidentified Analyst Okay. Okay. Thank you. Operator Our next question comes from the line of Paul Patterson. Paul your line is live. Paul Patterson Good morning. Jim Torgerson Hi Paul. Paul Patterson Just a few quick questions number one on the depreciable life change, was there any specific component or technology or one specific issue or couple of issues that led to that. Jim Torgerson The biggest thing was the dollars, they were laughing a lot longer than we would have expected, but then also you look at the transmission equipment that’s part of the wind farm whether they had transformers and sub stations and those type of things. Their average life was much longer and the towers were on the pads that we put in to support the towers were all of — would have a longer life. So basically the civil work and the transmission activity were the ones that we were looking not so much the turbine and the blades. Paul Patterson Okay. And was there anything that caused it to be revaluated specifically in the first quarter or just is that how it happens sort of coincidentally? Jim Torgerson Yes, it was more how it happens and how Iberdrola was looking at across the globe and all of their wind farms being what 15,000 megawatts that are operating and looking at their experience across the world and then doing the engineering analysis, so just so happened and came in the first quarter and we then applied it to what we have here in the U.S. and found it to be consistent and made sense to apply that change. Paul Patterson Okay. There was also another FERC ALJ ruling we expect to the California power crises that mentioned Iberdrola and Shell. Have you guys — does that have any impact on you guys and is there any reserve that’s been there before not that you could talk about? Jim Torgerson Paul, if there would have been a reserve, we really would have called it out. Certainly it has an impact from the stand but we’re going to have spend more of legal fees in order to keep pursuing this, but the fact of the matter is we believe our positions were well founded and we still believe that and FERC’s staff actually supported letting us out of that whole activity with the California. So we feel pretty strong with our position is sound and the ALJ came up with a recommendation we did not find that there was any market manipulation on our part and it was just a difference between what he felt was a contact price and what some stock prices were. That was the difference he was sitting and he felt that was high. So we believe in the end for the FERC Commission will find correctly and turn this around when the FERC, the whole Commission actually has the chance to look at it. Paul Patterson Okay. But if they did it, just because we do an ALJ ruling out there, how would — would it just be a one timer or something that you guys will have to deal with if they were to go with the ALJ rack or would that be an ongoing impact? Rich Nicholas It would be one time since we’re looking at the termination of what the — from the complaint what might have to be refunded and that’s something that hasn’t even been determined set. The ALJ didn’t even make that determination yet. There is no determination on that whatsoever. Paul Patterson Okay. Got it. Rich Nicholas Okay. Paul Patterson And then on the Guinea transmission retirement thing, if Guinea does not as you know New York is talking about keeping some of the new stuff and what have you, if Guinea was supported, would that impact Guinea retirement project at all? Bob Kump No this is Bob, that project as Jim mentioned is under construction as we speak and will be completed by the end of the first quarter of next year. There in the event that the plant closes, obviously our goal as an organization is to try to help the situation through things like Connect New York and improve transmission such that those plants can continue to operate have access to higher price markets. Paul Patterson And then just finally, the credit rating, what is the credit rating goal you guys have for the company? Jim Torgerson Well you just saw that we were upgraded from BBB flat to BBB plus. Our goal is to maintain a strong balance sheet and strong credit metrics. I wouldn’t say that we have an absolute target on any given agency or given rating. Paul Patterson Okay. But you want to expect it to change, you don’t have a substantially lower one or in general we should think that it’s general area that you’re now is pretty much where you want to be or is that safe to say or I don’t want to put words in your mouth? Rich Nicholas Well I think it reflects our financial position. Jim Torgerson We’re happy with where it is and obviously we could always see it go higher, but that’s what the rating agencies will determine but as Rich said we want to make sure we maintain a strong investment grade rating and that we can do finance all the projects we want to do. That’s the reason behind it. Paul Patterson Absolutely. Thanks so much. Operator Our next question comes from the line of [Andrew]. UnidentifiedAnalyst Thank you. Good morning guys. First a question on, you already talked a bit about the MED pipeline from an equity perspective what about for your LVT customers? Do you need to off-take agreements somewhere else now? Jim Torgerson Well the problem we have Andrew is that in Berkshire that the only pipeline that serves Berkshire. So we have a moratorium in place in Eastern division of our Massachusetts operation there and it’s small. But still we can’t add anymore customers up in Massachusetts in that Eastern division because we don’t have any more capacity. For the other utilities and the LDCs we have, we’re actually in very good shape and in Connecticut we have three pipelines starting on the New York, we’re in good shape. So we don’t really have that same issue. Where it’s going to be more significant is that the pipeline was thought to be more to be supplying for electric generation particularly in the winter when I think the capacity is all taken by the LDCs in New England. So that’s where we’re going to see some more problems potentially in the future. Our LDCs are in okay shape. We had all the supply we need to serve our existing customers. We’re not going to be able to grow as much in that one Eastern division of Massachusetts at this point because we don’t have additional capacity. We’ll be looking at alternatives, but some of them are going to clearly be higher price. If we have to put in more LNG or propane air, it’s going to cost more and is that something we should be doing to be able to serve additional customer, new customers and that’s I want to work out with the Massachusetts DPU. But for the other jurisdictions we’re in good shape. It’s just that we saw this pipeline is helping solve the problems in New England with electric generation. UnidentifiedAnalyst All right. Great. The next question is on integration. In the slides you mentioned Phase 1 and Phase 2, I know it’s early, but how many phases are there and do you have any sense how many years until you consider the two companies fully integrated? Jim Torgerson There is two phases, we’re in the Phase 2 now. I would expect that Phase 2 is going to vary, but I think we should be done with Phase 2 in let’s say 12 to 24 months timeframe and some of it are going to be significant software changes where we like our SAP system. We got to look at the configuration and the modules that are being utilized by each of the different companies and bring those together. They were all working off the same systems, modules and configurations. Now that’s going to take a little time and then the resources we have to build to do that along with all the other projects we have going on. So, I think the software activities will take a little longer, I think just integrating people, integrating processes and procedures, we’ll get that done this year. I would be pretty confident of that. Paul Patterson Great, next question we had asked at the Analyst Day about any guidance for effective tax rates, you had a chance to kindly go through that and give us a ballpark number a range what we can expect? Rich Nicholas When the 10-Q comes out for the quarter we’ll have an update on the effective tax rate for the quarter. Obviously the PTCs have an impact as you move forward in time but we haven’t put any specific effective tax rate guidance out there… Paul Patterson So that can be considered doing? James Torgerson We’ll take a look at it. Paul Patterson Okay. Fair enough. The last question, Jim I don’t mean to get personal here, but I know this has been new employment concept had some changes to the wording and particularly around change in control and severance plan. Is there anything that we should be reading into in terms of Avangrid either as a buyer or seller in this M&A market? Jim Torgerson Absolutely nothing to right in there. That’s just that the philosophy Avangrid has related to change in control and this is nothing new, nothing to read in. Paul Patterson Okay. Great. Thank you guys. And I was want to echo the comments, I appreciate the increased disclosure particularly around wind in the slide deck there. Jim Torgerson Thanks. Operator Our next question comes from the line of [Julian]. Unidentified Analyst Hi good morning. Jim Torgerson Hi, Julian, how are you doing? Unidentified Analyst Good, thank you for taking the time. So wanted to follow up on your connect line here, can you elaborate a little bit on the status of the project just vis-à-vis routing that’s been obtained the sliding etcetera. Then also I know you want to talk about cost per say, but elaborate at least on timing and it’s procedure to get this project approved. I suppose as part of the AC transmission our proposals do better. Jim Torgerson Correct, correct Julian. So yeah let me give a little more color. Obviously familiar with the base projects, it’s a 1,000 megawatt DC line eminating from essentially the Utica area utilizing the rights of oil along the true way down past the two congestion points into the New York City area, right that’s the general concept, it’s about 170, 180 miles roughly is the length of the project. Our view is as I mentioned we’ll submit as part of this AC proceeding on public policy, we will be working and filing the primary permitting application with the New York PSC 7 later this year. Everything went perfectly and how things are with the transmission projects, I would say the best you could hope for may be construction in the 18 and on timeframe. Unidentified Analyst Great. Excellent. And then can you elaborate a little bit on Upstate New York opportunities around the RPS expansion and what that means? I suppose obviously you were talking about New York Connect project today, but more holistically we’ve talked about nuclear earlier, but we’ve chipped in a little bit more on the emphasis on the eventual RPS and long term PPA opportunities in this that is forthcoming in the state. Jim Torgerson Yeah, I guess I’ll say beyond Connect New York we’ve mentioned the New York Transco. We’re working with other utilities on AC type transmission projects, again largely focused on system reliability as well as these congestion points from Upstate to Downstate. We’re working with the New York power authority on a project in the Western New York that would better enable hydro electricity access to the downstate region. So those are kind of transmission areas of focus. The other quite frankly is in addition to the nuclear looking for better markets. You have tremendous opportunities in around the park for wind and I will let Frank speak to that more, but we have a couple of operating farms already in that area and several I think were listed on the slide in this presentation in that area as well as potential opportunities for greater wind and as you correctly mention high on the radar screen of the government. So we’re tracking it from both ends. I don’t know Frank if you want to add anything else. Frank Burkhartsmeyer Well, just I’ll just affirm that we very actively maintained development opportunities in the New York area. We have to see how the rules play out in terms of the ability to do long-term contracts, which will make that more attractive to us. As we stated we’re only going to build where we can guarantee that we have long-term off take certainty. But we like the market obviously and we’ve got some really good development opportunities there that we’ve laid out on Slide 16. So we will stay tuned in and see how the policy changes there, but right now there is not a long-term energy market for renewables there but we’ll have to see how that evolves. Jim Torgerson And I guess the last thing I will then add is when you look at in particular our Connect New York project that emanates as I said. Unidentified Analyst You need something by 12. Jim Torgerson I am sorry. That project emanates in the Utica area and when you look at not only most of the nuclear facilities that are currently looking for better pricing, you’ve got up in Neymar 1 and 2, Fitzpatrick and then when you look at the projects that Frank has mentioned that are all off the Eastern edge of Ontario, I think again our project Connect New York fits well with where a lot of that potential generation both renewable and nuclear would reside. Rich Nicholas If you look at the renewable projects, as Frank mentioned we have almost, we have four projects potentially with almost 400 megawatts in the New York area that could add to the development of that. So as Frank said, we’re pursuing this pretty aggressively. Unidentified Analyst But any sense on timing for that PPA or an RFP in the state direction? Jim Torgerson I don’t think we’ve seen anything on RFP, at this point no. I think the key is going to be providing transmission access. And the other thing to keep in mind is the New York does have a renewable portfolio of standard now of 50% by 2030. So they’re going to be needing additional renewable resources and having those in state will be a plus and also them having the transmission to get it done in the marketplace in the New York City is going to be a plus. So I think all those factors are positive for us. Bob Kump And the Governor as you know has a keen interest in keeping those nuclear plants running and it’s proposal and the commission’s proposal around that specifically for the nuclear to support them, but we’re really looking at what’s the longer term option again for providing access to better priced markets for upstate generation. Unidentified Analyst All right, thank you. Jim Torgerson Thanks. Operator Our next question comes from the line of Andy Levi, Andy your line is on. Joe Zhou Hi this is Joe Zhou from Avon Capital. How are you? Jim Torgerson Good. Joe Zhou Just a follow up for the New York on the rent, is this a project that competing against the Compass project? Jim Torgerson I’m sorry which project? Joe Zhou Compass which developed by PBL? Jim Torgerson9 I guess to the extent that any project is looking to provide greater access for power to the New York City area, you could call it competing. Obviously that line my understanding of it, I don’t know lot about it but it is bringing power from PJM, not helping the market in Upstate, New York which is what the Governor is focused on. So from that perspective they’re very different project. But they’re all intending to provide greater access power. Obviously we are also focused on renewable energy and clean energy as part of this. Joe Zhou Okay. Great. Thank you. Jim Torgerson Okay. Operator There are no further questions in queue at this time. Jim Torgerson Okay. Well thank you everybody for participating to the extent you have other questions please don’t hesitate to contact our Investor Relations people, Patricia, Michelle, Carlotta would be very happy to answer your questions and thank you for participating today. Operator That concludes this morning’s teleconference. You may now disconnect your lines. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited. 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DTE Energy’s (DTE) CEO Gerry Anderson on Q1 2016 Results – Earnings Call Transcript

DTE Energy Company (NYSE: DTE ) Q1 2016 Earnings Conference Call April 26, 2016 9:00 AM ET Executives Barb Tuckfield – Director-Investor Relations Gerry Anderson – Chief Executive Officer Peter Oleksiak – Senior Vice President and Chief Financial Officer Jerry Norcia – President and Chief Operating Officer Analysts Jonathon Arnold – Deutsche Bank Gregg Orrill – Barclays Julien Dumoulin-Smith – UBS Shar Pourreza – Goginham Partners Greg Gordon – Evercore ISI Paul Ridzon – KeyBanc Andrew Weisel – Macquarie Capital Operator Good day and welcome to the DTE Energy First Quarter 2016 Earnings Release Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Barb Tuckfield. Please go ahead. Barb Tuckfield Thank you, Cynthia, and good morning everyone. Welcome to our 2016 first quarter earnings call. Before we get started, I’d like to remind you to read the Safe Harbor statement on Page 2 of the presentation, including the reference to forward-looking statements. Our presentation also includes references to operating earnings, which is the non-GAAP financial measure. Please refer to the reconciliation of GAAP reported earnings to operating earnings provided in the appendix of today’s presentation. With us today are Gerry Anderson, our Chairman and CEO; Peter Oleksiak, our Senior Vice President and CFO; and Jerry Norcia, our President and COO. We also have members of the management team to call on during the Q&A session. I’ll now turn it over to Gerry. Gerry Anderson Well, thank you, Barb, and thanks to all of you for joining us here this morning. I should take just a minute and recognize that this is Jerry Norcia’s first time on this call as President and COO. Jerry was promoted into that position early in April. I think many of you know Jerry or met him on visits, but Jerry, just a brief history, came in as President of our Gas Storage and Pipelines business, really helped to build that business then took over as President of our Gas Utility along with his role at GSP. Most recently was President of our Electric Operations and then as I mentioned moved into his role as President and COO just about a month ago. Well, I’m going to start the discussion today with an overview of our results in the first quarter as well as number of key developments at the company. And then I’ll turn things over to Peter to give you a financial update and then we will wrap up and take your questions. So moving on to Slide 5, we continue to make good progress on a number of fronts. With one quarter behind us in 2016, I feel very good about our year-to-date financial results and our ability to deliver or exceed our full-year guidance. Energy legislation continues to move forward at Lansing. In fact, this is a key week as it turns out and I will describe that in a minute. And our NEXUS gas pipeline project continued to move forward toward its 2017 end service date and I will give you an update on progress on that front in a few minutes as well. So concerning our financial performance, moving on to Slide 6, as I mentioned, we’re off to a very good start. We delivered first quarter operating earnings of $1.52, which I feel great about relative to our plan for the year. We came into 2016, expecting a warm winter. We’re talking about that prior to the call. We started last July planning for El Nino, so we came into the year with a plan expecting a standard deviation or more warmer this winter and it came, but we came out of the first quarter in great shape, so that all worked out fine. And given that we’re on track to deliver our earnings guidance and another year of earnings growth. And assuming that we do that, 2016 will be our 10th consecutive year of meeting or beating our earnings targets. As you know, we’ve also been growing our dividend in parallel with earnings and we have every intention to continue that and our balance sheet continues to be in great shape, in fact Fitch, back in February, upgraded us. So bottom line as we head into the second quarter, I feel great about our financial position. Moving on to Slide 7. As I said earlier, energy legislation continues to progress in Lansing. The current regulatory construct in Michigan was established by legislation passed back in 2008. And the key provisions of that legislation and our current construct are laid out at the top of the slide. And those provisions have and continued to serve the State of Michigan very well. But in preparation for a significant investment in new generation assets in our state as we retire older assets, we’ve been working on an update to the 2008 legislation over the past year. And this week, Senator Mike Nofs, who is Chairman of the Senate Energy and Technology Committee, will introduce his substitute bills and take testimony from a range of key stakeholders. In fact, I’m going to be up in Lansing on Thursday testifying. The legislation that Senator Nofs has fashioned has a number of key features. So, it establishes firm capacity requirements for all electricity providers in Michigan, but in particular establishes requirements for the first time for the retail open access suppliers or choice suppliers. That’s a key reliability provision as the state moves into retiring and rebuilding generation that 10% of the market needs to be planned for and that’s what the legislation is targeting. The legislation also sets up an IRP, or integrated resource planning process, that will enable long-term resource planning and will establish a process for investment preapproval. And then finally, the legislation establishes incentives for energy efficiency investment and it enables decoupling related to energy efficiency and it makes it possible for utilities to apply for broader decoupling to the Public Service Commission as well. So Senator Nofs expects to work these bills hard this week and the following week and then we’ll move them out of committee for a vote on the Senate floor when he feels the time is right for that. And then we expect that this legislation will become – will move over to the House and become the basis for discussions and action there. So, we also continue to make progress on our NEXUS Pipeline project, and Slide 8 provides a summary update of that activity. As the left hand side of the Slide shows, NEXUS originates in arguably the best dry gas geology in the country, in the Utica shale. And it then runs north and west across Northern Ohio where there are numerous opportunities to interconnect with LDC, power plant, and industrial loads. And then the pipe heads north to interconnect with the Vector pipeline in Michigan, which ties it to a very large gas storage complex in Michigan and in Ontario. And Vector also enables it to serve LDCs in Ontario, Michigan, Illinois, Wisconsin and other mid-west states. The NEXUS remains on track to be placed in service in the fourth quarter of 2017. A couple of noteworthy first quarter accomplishments for NEXUS are listed on the right hand side of the Slide. As I mentioned, the pipe runs across Northern Ohio. And during the first quarter, we increased our interconnect agreements along that stretch from 1.4 Bcf per day to 1.75 Bcf per day. And these interconnect agreements represent great future market opportunities for NEXUS which has 1.5 Bcf designed pipe. We also ordered compressors for the pipe in the first quarter, so both the steel the pipe, and the compression for the project are on order. And finally, we continue to advance our work with the FERC and that’s going well. And we continue to expect our FERC notice of schedule here during the second quarter. So before I hand things over to Peter for a financial update, I want to summarize on Slide 9. So we have, for years, talked to investors about delivering 5% to 6% annual earnings per share growth with high reliability and consistency and pairing that with healthy dividend growth. And on the right side of the Slide in the ovals, you can see that our actual EPS growth in recent years has been 6.5% and we have grown the dividend at just above 5.5%. And given our start to 2016 in the first quarter, as I said earlier, I feel really good about our ability to continue that pattern over the course of this year. So with that said, Peter over to you. Peter Oleksiak Thanks, Gerry, and good morning to everyone. I’ll just start on Slide 11. And as Gerry mentioned, DTE Energy’s operating earnings for the first quarter were $1.52 per share, and for reference the reported earnings were $1.37 per share. For a detailed breakdown of EPS by segment, including a reconciliation to GAAP reported earnings, please refer to Slide 29 of the appendix. This Slide shows our quarter-over-quarter operating earnings by segment, I’ll start at the top of the page with our two utilities. It is important to remember that the first quarter last year was one of the coldest on record. In fact, February of 2015 was the coldest February in the last 50 years. The first quarter of 2016 was actually one of the warmest on record. So, primarily driven by weather, earnings for both electric and gas utilities were down quarter-over-quarter. DTE Electric’s earnings were $127 million for the first quarter of this year compared to $136 million last year. Along with weather, DTE Electric’s earnings were lower due to the absence of the revenue decoupling mechanism amortization in 2016. This revenue decoupling amortization was part of our strategy that extended the timeframe in between rate cases by four years. The amortization was offset by the implementation of new rates last July. A further breakdown of DTE Electric’s quarter-over-quarter results can be found in the appendix on Slide 21. For DTE Gas, earnings for the quarter were $87 million compared to $111 million last year. As stated earlier, the significant change in weather was the primary driver of this variance. Gas Storage and Pipeline earnings were $30 million for the quarter. Earnings for the quarter were up $3 million over last year due to higher pipeline and gathering earnings from production that came online after the first quarter of 2015. Storage earnings were also higher than last year due to lower maintenance expenses. Moving down the slide, earnings for our powered industrial projects for $21 million for the quarter, down $12 million for the first quarter last year. This decrease is primarily driven by lower earnings in the steel sector. There’s seasonal variability related to the REF volumes and for the balance of the year the REFs will help offset the steel sector decline. Earnings for corporate and other were a negative $7 million for this first quarter of 2016, $18 million favorable over last year due to our first quarter 2015 effective tax rate adjustment which unwound during the rest of that year. The earnings for our growth segments for the first quarter were $258 million or $1.43 per share compared to $282 million or $0.58 per share from last year. To round out our operating earnings, we include the results of our energy trading business. At energy trading, the first quarter operating earnings were $16 million, up $4 million from the first quarter last year driven by stronger realized gas portfolio performance. I trading company is off to another good start. Trading’s economic contribution for the first quarter 2016 was $18 million. Slide 28 of the appendix contains our standard energy trading reconciliation showing both economic and accounting performance. We typically wait until the mid-year earnings call to assess the trading company’s range of accounting income contribution for the year. At that point we have a good sense of how much accounting income will be flowing through to cover current year operating expenses. I’d like to move now to Slide 12. Slide 12 provides a quick overview of our capital expenditures through the first quarter of the year. Capital spending was lower than last year primarily due to the purchasing of a peaking generating asset in 2015. Our CapEx guidance range remains at $2.5 billion to $2.7 billion for 2016. I’ll go into more detail on some of our utility capital plans on the next two slides. I’d just like to turn now to Slide 13 and our electric utility. I want to highlight one of the key areas of focus for our electric utilities segment, which is improving customer related distribution reliability. We are making significant investments in our distribution infrastructure to improve reliability and address growth in certain areas of our service territory. Over the next 10 years we’ll spend $6.5 billion replacing aging infrastructure and overloaded substations, as well as consolidating existing substations and adding technology and automation to provide greater visibility in to the system for outage prevention and detection. As we said in the past this 10 year investment of $6.5 billion in distribution infrastructure can increase up to an additional $4 billion in reliability investments. Customer affordability is at the forefront of our planning and will guide and determine how much total distribution or reliability investment we will do in this time frame. Now at slide 14, this slide highlights a large component of our investment at DTE Gas expanded main renewal program. We will invest $600 million over the next five years upgrading the gas system. Our plan to replace 4,000 miles of cast iron and unprotected main steel was accelerated to cut the completion time in half from 50 years to 25 years. The MPSC approved the acceleration of the infrastructure recovery mechanism at the end of last year. Upgrading the gas main system benefits our customers by reducing costly leaks and assuring the basic gas infrastructure has service territory is there for future generations. As you can see from the previous two slides, our CapEx plan will address the needs of our customers and the aging infrastructure while being mindful of customer affordability. We’ve been consistent in our messaging over the years that maintaining a strong balance sheet is a priority. So on slide 15 provides a key balance sheet metrics we target and monitor. FFO to debt and leverage. This slide shows the projected level for each metric. Our near term equity issuance plans are $200 million to $300 million over the next three years, and we continue to evaluate our equity needs for this year. As we discussed on our year-end call, the extension of bonus depreciation provides $300 million to $400 million of favorable cash flow over the next five years, which help reduce our equity needs in the near term. The strength of our balance sheet sets us up nicely as we enter a period of incremental infrastructure improvements, and we’re confident that our plans allow us to maintain this balance sheet strength. Let me wrap up on slide 17 and we can move to Q&A. This strong first quarter, even with a good amount of unfavorable weather, we are confident that we will achieve our operating earnings guidance of $4.80 to $5.05 per share, which will extend our streak to 10 consecutive years of meeting or exceeding our initial EPS guidance. We are making significant utilities infrastructure improvements that will continue to provide affordable and reliable service to our customers. We have meaningful investment opportunities at our gas pipeline segment with our investments in Millennium, Bluestone and the NEXUS pipeline. In our Power and Industrial Segment we have opportunities with building on site co-generation projects. Going forward, we continue to target operating EPS of 5% to 6% for our growth segments and part of our shareholder value equation is to continue to grow our dividends in line with these earnings. We maintain our commitment to a strong balance sheet, which can provide future growth opportunities. Before I open up to Q&A, I know many of you on the call have been waiting for my Detroit Tiger update. So I have to give a quick update of my hometown Detroit Tigers because no DTE earnings call would be complete without it. This year definitely started out well for the Tigers, but recently they’ve been having some problems with their pitching. The weather for this year’s home opener game in Detroit was definitely favorable for our gas utility as it was one of the coldest home openers ever played in Comerica Park. Our fans braved the weather and packed Comerica Park to watch us beat the Yankees which was our 8th consecutive home opening win. It is always a good day when we beat the Yankees. With that I’d like to thank everyone for joining us this morning. So, Cynthia, we can open up the lines for questions. Question-and-Answer Session Operator Thank you [Operator Instructions] Our first question comes from Jonathon Arnold from Deutsche Bank. Jonathon Arnold Good morning, guys. Gerry Anderson Good morning, Jonathon. Jonathon Arnold Couple of quick questions. I think I understood that the delta in the tax rate on the quarter was primarily due to a higher-than-normal rate in Q1 last year. But I’m just curious if the 26% that we see on the GAAP income statement is what you consider to be normal here or whether there was also a benefit in Q1 kind of versus the run rate? Peter Oleksiak No, it is normal, and our effective tax rate is close to that 26%. So it will time out throughout the year. Last year just because of reported earnings being higher, we had higher tax expense that quarter which normalized throughout that year. Jonathon Arnold Great, okay. And then I was just curious – Gerry, in your opening remarks, you talked about having prepped for the El Nino winter and come out of it okay. You obviously had a big quarter in the trading business. I’m wondering if – was that part of the positioning for the winter? You set yourselves up there, or was it expense management? Just give us a little more flavor of what you were alluding to terms of the offset. Gerry Anderson When I said we came out of the quarter the way we wanted, I was really talking about our growth segments. The trading I would – it’s really a separate discussion. So no, we weren’t talking about positioning our trading company. What we really did is just look at the odds the way the El Nino was setting up last summer that we would have a warm winter, and the odds are very high when you look across past statistical data. So we all looked at ourselves and said, look, if the odds are this high, we’re just going to take it as a given and plan for it. So we did go into our expenses, we went after additional productivity in the business. So we always look for productivity improvements but we went for more than normal and that was hard work to put the plan together but it paid off. And we don’t publish our plan, or make public our plan but I do feel really good about the way we exited the quarter in our growth businesses relative to the plan we had for the year and that’s why you’re hearing a confident tone on our ability to play out and meet or exceed our guidance for the year. Trading just is coming on, I mean they had a really good first quarter as Peter said, we usually wait until mid-year to kind of give you a better sense. So we’ll probably at our mid-year call update you on those earnings and then give you probably a conservative forecast for where we think trading will land for the year. Jonathon Arnold Can you give any insight into how – what was the main driver of their performance in a risk context, perhaps? Gerry Anderson We’ve been migrating that business more and more physical. So for example, the gas business is a very active business in moving gas both in the Marcellus and beginning to play in the Utica area to take gas to market. So that’s been a growing and profitable segment. We also are a supplier to other utilities in some other full requirements services businesses. And that segment did very well for us this quarter. So it’s kind of lining up supply for the utilities who are in markets that have restructured but still have a responsibility to supply their retail customers. We provide them wholesale to do that. Jonathon Arnold Great. Thank you very much guys. Gerry Anderson Great. Thanks Operator [Operator Instructions] Our next question comes from Gregg Orrill from Barclays. Gerry Anderson Hey Greg. Gregg Orrill Yes, thank you. Hi. Could you talk a little bit more about the legislation and your thoughts around the prospects there and the timeline? Gerry Anderson So I’ve been saying for a while that Mike Nofs is a good guy to be steering this. Mike was one of two principal architects of the 2008 legislation so he’s the most knowledgeable guy in the Michigan legislature on this whole topic. Mike has been working this is a very systematic way since early this year and he’s now moved it to a point where he feels like he’s ready to take the bills, there are two bills – out into the open and take commentary this week and next and he’ll then evaluate, look do I feel like things are right for a vote. I think his intention is to come through that discussion period and bring it to a vote here some time in May, probably the first half of May ideally. And then that legislation will be pushed back over to the House. Then the question in the House is how quickly can it move there? Will they be in a position to move it before the summer recess, or like in 2008 will it come back after the summer recess and be acted on then. In 2008, just having been part of that, I spent kind of a year of my life involved in that one. The way it played out is actually in that case, the House finished the action just prior to the summer recess and then the Senate came back and acted right after the recess. So we’ll wait and see, but I think the hope would be that we’ll get out of the Senate and act on it in the House as well prior to the recess, but if that didn’t happen, it could play out like 2008 did. Gregg Orrill Okay. Thanks. Gerry Anderson You bet. Operator And our next question comes from Julien Dumoulin-Smith from UBS. Julien Dumoulin-Smith Hi. Good morning. Gerry Anderson Good morning. Peter Oleksiak Good morning. Julien Dumoulin-Smith So just coming back to the NEXUS project, don’t want to belabor this one too much this go-around. But just curious a little bit on the nature of the contracts signed, and specifically, if you could elaborate on future opportunities for further contracts, whether they are generators or utilities. And then ultimately, as you think about moving forward on the project, where do you stand under contracts today from an ROE perspective on the project? Taking it as a given that you are going to move forward, how does it compare versus what you are targeting ultimately in terms of the ROE range you’ve kind of alluded to? Gerry Anderson I think I’m going to turn this one over to Jerry Norcia. So Jerry, why don’t you respond to those… Jerry Norcia Sure. Great. So the nature of the contracts we have on NEXUS today, about half the capacity is committed to by LDCs in Michigan as well as Ontario. And then we have three producers that are also anchor tenants. So I would say about half is LDCs and half is producers. In terms of incremental markets, I think it will come from both classes of customers. We’re pursuing both LDCs in Ohio, Michigan, Ontario and the mid-west for incremental volumes, as well as other producers that are interested in moving gas for these markets. I think we are well positioned for that. So those discussions are underway. In terms of returns, we’re happy to proceed with the returns that we have based on the contractual commitments that we have today. And as we’ve said before, I think we’ve got about two thirds of our total commitment signed with long term contracts today. Gerry Anderson So just to add on to that, I think we’ve said in discussions with investors previously, we typically move ahead with these projects at about 80% subscription level. We’re a bit below that, obviously because the market took a pause while we were in process, but the combination of the geology here and those interconnect agreements, I mean those 1.75 BCF of interconnect agreements which really are a substantial part of our subscriptions right now, I mean that represents more capacity than the pipe itself has. So we think that’ll be a significant source of future demand, not to mention markets in Illinois, Wisconsin, et cetera. So the combination of the quality of the geology and so forth is what’s given us the confidence to move forward. I would say that you really create the hot value out of pipeline projects as you get full subscription and then expand. So I’d say we’re kind of down in the willing to proceed but not in the hot zone with the level that we’re at. And so we are looking to add capacity over time. Jerry Norcia I’m sorry, go for it. Gerry Anderson No, I said add capacity. I really meant add new customers over time to first fill and then expand. Julien Dumoulin-Smith Got it, all right. But no specific ROE expectations given the two-thirds, though? Gerry Anderson I would just characterize it as kind of meeting our threshold requirements. But we’re looking to move it from meeting our kind of threshold requirements to taking it up to what really makes a pipeline project sing, which is getting into the full and then expansion zone. So we’re happy to proceed given where we stand now. Julien Dumoulin-Smith Got it. And then if I can ask you to elaborate a little bit on the P&I side of the equation. You commented on softness in the first quarter and specifically comment that REF would help offset it through the balance of the year. Can you elaborate a little bit more on specifically how those numbers are turning out? And then with regards to the P&I more broadly, how are you thinking about this business and the optimization of the overall portfolio businesses you have in the context of the pipe? Peter Oleksiak Yes we anticipated the softness in the steel sector, so we put that into our guidance as you look at the first quarter results that was anticipated when we published the guidance for the year. For the REF segment, that’s tied to coal production. There is seasonality. Most of the coal production occurs in the third quarter. So we’ll see those REF earnings helping to offset the steel sector. We also had some projects come in late last year on the REF segment. So you’ll start seeing those materialize as well coming into at the second half of this year as well. So there is seasonality with the REF we do. And we overall are confident with the segment guidance that we put out there for P&I. Julien Dumoulin-Smith And with regards to the future P&I? Gerry Anderson I think on the future a couple thoughts. So REF will continue to be a good business and so is cash flow. Steel as well as things where we’ve been through this before. So we contract with our steel customers. But contracts rollover and we had one of the contracts roll over at a soft point in the steel cycle. But our typical experience is a couple years after the soft point you’re often in a point of recovery and not long after that a hot point in the steel market. So I think we’ll have the opportunity to see that part of the P&I business return. That’s certainly been our experience over the years in past ups and downs in steel. The most active area for investment, I think Peter mentioned, is cogeneration projects. We have a number of those that are under serious discussion with counter parties. So we’d expect that to be the place where we could put quality capital to work. And we continue to be focused as we kind of laid out in our five-year plan on understanding that the REF earnings roll off in the early 2020s that we would back fill those earnings with quality investments like the cogeneration. And that’s the plan for the company in terms of producing the 5% to 6% earnings through 2020 and beyond. So we’ve done a 10-year plan, we are counting on P&I growing in absolute terms, kind of holding its own as REF rolls out while the segments continue to grow. Julien Dumoulin-Smith Got it but then for this year, kind of flattish as one offsets the other. Gerry Anderson Yes, I think that’s right, we’re still feeling flattish. As Peter said steel was known and we knew that last September when we had analysts into Detroit. But REF is both cyclical and was a bit soft in the first quarter just because of a warm winter and substitution of gas for coal and those sorts of things. So it was down somewhat. But as we assess the prospects for the balance of the year, we still feel good about the guidance we have out there for the segment. Julien Dumoulin-Smith Thanks. Operator And our next question comes from Shar Pourreza from Goginham Partners. Shar Pourreza Good morning. Gerry Anderson Good morning. Peter Oleksiak Morning, Shar. Shar Pourreza Could we just get a quick update on Bluestone and then sort of if you could just elaborate on any contingencies you have in place? If sort of that production schedule with the producers remains kind of weak? Peter Oleksiak Go ahead, Gerry. Gerry Anderson Yes, I think right now we’re feeling very good about the guidance we issued for the midstream segment. Production that’s flowing is in line with what we had estimated. And actually we also feel good about the future there. I think the prospect for Southwestern drilling in that area as commodity prices continue to strengthen become more positive as time goes on. So we feel real good about where we are in 2016. Peter Oleksiak Southwestern was out publically talking recently and I would say that what we are seeing in our exposure to Southwestern is very consistent with their comments publicly, and consistent with the plan that we have out. So when Gerry says we feel good, I think we’d say that it’s consistent with what we expected and is playing out in a way that supports the plan. And then, you know, you look down the road you’re beginning to see gas prices for early next year strengthen. I think they were $3-ish when we were talking about them yesterday. And you know, people keep concluding that the drilling’s pulled back, but gas declined at 15% in the United States, and you can only allow a 15% decline before – only allow that for so long before you need to being to backfill it. And the most obvious place is for Southwestern and other people to begin drilling again is in the Northeast Marcellus and in the Utica I think the well quality there is still high. So our expectation is, is we’ve pushed up gas supplies in the country awfully hard in 2015. People are on a pause, but they’re going to need to step back into it when they do, we expect it to be in the areas we have exposure to. Shar Pourreza Got it, that’s helpful. And then could you just maybe elaborate on where you are at as far as any potential midstream acquisitions to fill any gaps? Or are we still kind of far off? Gerry Anderson We’ve been in the process of looking at many assets, or at least a handful of that we’re very interested in. One of the things that we’re finding is that these assets are still trading at premium values. Some recent transactions have illustrated that. We’re – we still have a handful that we’re looking at actively pursuing. I think in addition to that we are also looking at greenfield opportunities where we’ve had most of our success in the last 12 or 14 years in this space. So we’ve got both in motion to secure incremental growth for the business. Shar Pourreza Okay, got it. And just lastly on your capital outlook, I mean obviously you guys have more capital than you can afford. And I think historically, sort of the rate impact to the customer has been that sea link [ph]. What – is there any sort of guidance you could provide as far as what rate inflation you target when it comes to your spending outlook? Gerry Anderson If you look at our recent performance there, rates have been negative, so if you go back to 2012 and compare them to today we’re down, and even after the current rate case plays out we’ll be flat to down to 2012, so we’ve been able to work our way through a very heavy capital investment period with rates down. And I’m talking about base rates. The future – we’ve consistently say that we’re trying to keep rate increases in the range of inflation, so around 3% as you work your way through one of these intense capital investment cycles. And that’s going to require us to both measure the pace of capital investment but also keep the focus on productivity and continuous improvement that we’ve had in order to do that. So you know what the blend of capital and O&M is. We’ve got to keep the O&M. Our O&M in recent years, the increase has been zero. And when you can blend a zero with the increases that come from capital, you can hold it at something reasonable. Now we can’t commit to zero in the future. But we’ve worked in the past very, very hard to keep it there. The future is, that’s unlikely, you can’t continue that forever. But we’ll work hard on C&I and we will continue to measure the pace of investment. I think we’ve said that, for example in our distribution business, there’s a lot of demand for investment. But we’re going to have to high grade those projects and do the most important ones, we’re really doing that from a customer affordability perspective. Shar Pourreza Terrific. Thanks so much. Gerry Anderson Thank you. Operator Next question comes from Greg Gordon from Evercore ISI. Greg Gordon Thanks. Good morning guys. Gerry Anderson Hi Greg. Greg Gordon I think you gave us a good framework for how you’re thinking about power and industrials in terms of what you have to achieve to hit your guidance. But frankly, I think the stock is – has underperformed year to-date. Not because people are worried about your utility businesses, but because they are worried about that business and they are worried about the gas pipeline and storage business. And the hurdles to hit the guidance you’ve laid out. So focusing back on the pipeline business, NEXUS is two-thirds contracted, but these interconnect agreements are pretty substantial. Should we assume that shorter hauls for those interconnects at a certain percentage of those interconnect commitments could get you well into the range of an acceptable ROE on the pipe? Or do you need to get fully contracted for delivery to dawn at a higher percentage in order to hit your return hurdles or some combination of both? Peter Oleksiak So I think both will happen. So I think what these interconnect agreements that we have really provide pipeline with a lot of diversity and supply opportunity. So our shippers, long-term shippers on the pipe as well as new shippers that we expect to come on the pipe will use these interconnects as ways to deliver the various markets up and down the pipe, especially in Ohio. And the way I expect that those will turn into real opportunities and real commitments, absolutely. I think that’s a given that that will happen. I think in terms of more long haul, we are in discussions with several parties to sign them for more long hauls. So I think what you’ll see here as the pipeline build, you’ll start to see those interconnects become very active market points for us, and provide what I’d call a lot of optionality to future shippers on a pipe. And I think that’ll make it a very attractive pipeline that will allow us to get both short haul and long haul commitments. So I expect both to happen. Greg Gordon Okay. In terms of permitting, we just saw obviously a big negative surprise out of New York last week on a different pipeline project. What are the remaining permits you need, beyond just the FERC approval, to get this pipe into the ground? Peter Oleksiak I think the big one we’re waiting for right now is a FERC notice of schedule, which we expect to happen during the second quarter. And I think we’re in really good shape with that. We’re getting very good feedback from the FERC in terms of the quality of our filings. I think a lot of our issues we’re managing quite well – routing issues. We’re well underway with our right-of-way acquisition process. And I think in terms of other permits, there are some large customary permits that come with a FERC-regulated pipeline, like the U.S. Army Corps of Engineers and other various permits. But those are the big ones – I think the FERC order which we expect by the end of this year, and also the other large customary permits, I think they’re proceeding very well at this point in time. Greg Gordon Okay. And then when I look at – go back and look at your year-end analyst deck, you said you – your aspiration is to grow operating earnings from $110 million at the midpoint in 2016 from this segment to $170 million in 2020. If Bluestone were to sort of flatline from here in terms of its earnings contribution and you didn’t achieve any bolt-on acquisition, what would that number be? Would it be significantly lower? Would it be only modestly lower? Because really just the crux of the issue on people’s problem with valuing the stock is concerns over the growth in this business. Gerry Anderson Yes, so I’d say the prospects of Bluestone flatlining are – I wouldn’t frame it that way. We’re expanding Bluestone, and we’re expanding Millennium. And I think the prospects we see are from more of that. So there’s – you were mentioning cancellation of a pipeline. What we’re seeing in the Northeast is a continued pull for gas. They have to have gas for power generation, and the oil to gas conversions continue. So the demand for gas continues to be very, very strong, but there’s real resistance in New York and other areas of the Northeast to new pipeline. I think that’s what that’s likely to do in fact, New York called this out explicitly is bias toward expansions of existing pipes. So I think the likelihood of some of this resistance you’re seeing is that owners of existing position, including Millennium and Bluestone, will see people coming to them as the most credible and doable paths and expansion path to market. So I just start by saying – I think what we’re seeing evolving in the market is a positive for the asset position you have there. Bluestone and Millennium are attached to really good geology and there’s resistance in the market of creating new outlet, altogether new outlets for that geology, which means the existing ones are going to have to expand. And then the long-term growth in our NEXUS is an important part of that growth, but when look out five years and ask, what is the current dynamic in 2016 really mean for 2020? Not much. The gas demand in 2020 is going to be what it’s going to be, and power generation conversions are going to be underway, and so the geology is going to have to deliver, the pipes are going to have to deliver. Now I think that you could say in the short-term did production get out in front of itself a bit with, a lot of excitement in the market. The answer to that is obviously yes, so there’s an adjustment in the near-term, and it’s changed the path to get to 2020, but the ultimate point that the market needs to achieve in 2020 hasn’t changed for either production or delivery through pipes to meet demand. So we really don’t see a lot of impact long-term, although the path to get there has changed from what it might have been. Greg Gordon Okay, thanks a lot, guys. Have a good day. Gerry Anderson You too, Greg. Operator And our next question comes from Paul Ridzon from KeyBanc. Paul Ridzon Good morning. Can you hear me? Peter Oleksiak Yes, Paul. Good morning. Gerry Anderson Good morning, Paul. Paul Ridzon So with Senator Nofs prepared to move the bill this week, what do we read into that as far as any progress that may have been made with the schools and with the Chamber of Commerce? Gerry Anderson Senator Nofs has been in active discussion with the Chamber, and I think I will – I’m not going to put words in the Senator’s mouth. The coalition he’s put together I think would be better for him to play that out, but he has been in active discussion with the Chamber. I think he’s also put some provisions in the bill that broaden its interest to his Democratic colleagues, so if you look at the energy efficiency provisions, that’s positive in terms of broadening the appeal. He also does have the 30% goal. It’s not a mandate, but it’s a goal, by 2025 for renewables and energy efficiency. That’s something the administration has advocated for as we have democrats in the house. So I do think what you see is Senator Nofs listening very, very carefully to a whole range of participants trying to broaden the coalition to the point where he can be successful. Paul Ridzon And it’s my understanding that the bill, when we see it, will have a provision where shoppers who leave actually have the opportunity to come back. How are you thinking about that? Gerry Anderson Right. So, they do today and they will in the future. We never thought there would be or should be a prohibition on retail open access customers coming back. But the – I think what you’ll see when you look at the legislation is that there’s a lot more integrity now in terms of the reliability provisions related to this. So the suppliers to the retail open access market need to carry their fair share of local resources that needs to be real. Need to have ties to real local resources for reliability. Customers who leave the queue, if somebody should come out from under the cap and somebody goes in, we’ll be paying a demand charge, so there’s a series of provisions. So, without me going into all the details, that really do shore up the reliability for that – the reliability provisions related to that 10% of the market. Paul Ridzon Thank you very much. Gerry Anderson Thank you. Operator And our next question comes from Andrew Weisel from Macquarie Capital. Andrew Weisel Thanks. Good morning everyone. Jerry Norcia Good morning, Andrew. Andrew Weisel Quick question first on the distribution reliability. You are showing the $6.5 billion 10-year plan here. You’ve previously talked about potential for that to be over $10 billion even. Remind us: is that give it potential to add some of the extra stuff there? Does that depend on your ability to cut costs or the state energy law? Or what might be some of the swing factors of getting that into the plan? And when might those decisions be made? Jerry Norcia So, I think what we’ve said on that one is that there’s a lot of demand on our distribution system. It’s an aging infrastructure system as we evaluate the need, a need currently outstrips what we think customer affordability will enable. So in order for us to do more of that and kind of work our way into that backlog, it would depend on us finding productivity opportunities. Or if there were things, for example, that evolved on the generation side that were – required less capital, we could conceivably push some of this needed investment in. But we are kind of calibrating how much of that we do based upon affordability, because we’ve consistently said that companies that don’t pay careful attention to that when they’re going through a big investment cycle end up losing. You just need to go through these cycles in a way where your customers feel their affordability is workable. So that’s really what determines how much of the $10.5 billion we would spend versus the $6.5 billion. And you’re right, we can find either capital offsets or productivity offsets, those are the things that would enable us to do more of that needed investment. Andrew Weisel Okay, great. Next question is related to Millennium in New York. It’s something I already made reference to the — a different pipeline basically getting shut down because of it because of regulators not supporting pipeline expansion there. Do you see any risk to the plans for Millennium specifically? Jerry Norcia The way I’ll answer that is that with our pipeline investments that we’ve been able to secure through the FERC as well as with New York regulators, for example, we’ve been able to secure an expansion of Bluestone most recently through the New York regulators, and that’s actually a pipeline regulated by New York in New York. And then, secondly, we secured the last two compressor expansions for Millennium through FERC as well as working with New York regulators. So I think what we’re – as Gerry described earlier, I think the regulators are pointing towards existing assets as ways to expand into a growing market. So, as you know, we’ve got a Millennium pipeline expansion where we’ve made a FERC pre-filing. That’s going well. We are in active conversations with regulators in Albany on that expansion, and we feel that those conversations are going well. So we – at this point, we feel pretty confident that we’ll secure our expansion approvals for Millennium. Gerry Anderson So Bluestone runs both in Pennsylvania and New York, so you need approvals out of both states. But our recent expansion of Bluestone – our conversations were very productive. And as Jerry mentioned, same is true for Millennium. So our experience has been that, when the need is clear and you’re dealing with an existing asset with I guess you’d say more modest implications. You can have a productive conversation and work your way through it, and that’s what our last two rounds of discussion in Albany have produced. Andrew Weisel Very good. Last question. You added a comment there about continuing to evaluate current-year equity needs. You previously talked about targeting $100 million of equity in 2016. Which direction are you thinking? Are you trying to find ways to maybe reduce that number? Or is that more an implication that if you were to make an acquisition, for example in the midstream business, maybe you would issue some equity? Peter Oleksiak Yes. We always go into the year – we have a big focus on cash in the company, and so we did indicate that over the three-year period, it’s a $200 million to $300 million and then we potentially can do up to $100 million this year. We’re assessing that. Our goal would be if we can to make that zero. It’s probably too early to say that. We’re going to see how the year plays out and the cash flows of the company plays out. I’ll still say that $200 million to $300 million over the three-year period, it’s still a good number and we’re assessing how much do we actually need to do of that $200 million to $300 million this year. Andrew Weisel So it’s more a timing? Peter Oleksiak Yes. Gerry Anderson Well I’d say I think what Peter is indicating is that I think our Q says up to $100 million, which implies that the bias would be down given everything we know, but your comment was also right. If we found a great opportunity for investment that we thought create a lot of value that could be the thing that pushes you up toward the high end of equity. So those are really the two balances, as Peter said, we’re always working cash and cash flow. And we’re off to a good start. So our hope would be to be playing out in the up-to zone, not the add $100 million, and the one potential offset is if we found a great investment. Andrew Weisel And will the equity needs have an impact on the dividend decision, which you typically announce in June, and have a relatively low payout ratio? Gerry Anderson No. We typically will grow the dividend in line with the earnings versus the amount. So the amount of equity we’re issuing is not going to have an impact on our dividend decision. Andrew Weisel Okay. Thank you very much guys. Gerry Anderson Thank you. Operator It appears there are no further questions at this time, I would like to turn our conference back over to today’s speakers for any additional or closing remarks. Gerry Anderson Well, I will just wrap up by again thanking everybody for joining the call this morning. As I said at the outset, one quarter into the year, we feel very good about how things are progressing versus planned both with respect to earnings and relative to a number of our key priorities. Look forward to giving you all updates. We’ll be down at AGA and a number of other conferences before we’re back on a call like this for the mid-year. So thanks for joining. Look forward to talking to you soon. Operator This concludes today’s call. Thank you for your participation. You may now disconnect. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. 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