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ALLETE’s (ALE) CEO Al Hodnik on Q4 2015 Results – Earnings Call Transcript

Operator Good day and welcome to the ALLETE Fourth Quarter 2015 Financial Results Call. Today’s call is being recorded. Certain statements contained in this conference call that are not descriptions of historical facts are forward-looking statements, such as terms defined in the Private Securities Litigation Reform Act of 1995. Because such statements can include risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. Factors that could cause results to differ materially from those expressed or implied by such forward-looking statements include, but are not limited to, those discussed in filings made by the company with Securities and Exchange Commission. Many other factors that will determine the company’s future results are beyond the ability of management to control or predict. Listeners should not place undue reliance on forward-looking statements, which reflect management’s views only as the date hereof. The company undertakes no obligation to revise or update any forward-looking statements or to make any other forward-looking statements whether as a result of new information, future events, or otherwise. For opening remarks or introduction, I’d like to now turn the conference over to ALLETE President and Chief Executive Officer, Alan R. Hodnik. Sir, please go ahead. Al Hodnik Good morning everybody and thank you for joining us today. With me is ALLETE’s Chief Financial Officer, Steve DeVinck. Before I began with my remarks, I would like Steve to briefly cover the 8-K we issued last week relating to a non-cash impairment charge at ALLETE Properties. Steve? Steve DeVinck Thank you, Al. Last week we announced that 2015 results were reflected $22.3 million after-tax or $0.46 per share non-cash impairment charge at ALLETE Properties on legacy Florida real estate investment. In response to market conditions and recent transaction activity, we have revaluated our strategy for ALLETE properties to include the possibility of a bulk sale of the entire portfolio which have consummated would likely be below book value. We will also continue to pursue sales of individual parcels overtime. Established in 1991, ALLETE Properties has been a successful business and contributed meaningfully to both earnings and cash flow through 2007. We have not made an acquisition of ALLETE Properties since 2002 and our strategy in recent years has been to thoughtfully exit over time as opportunities arose. Our objective is to unlock capital as we close out this historically successful legacy business and deploy proceeds into our strategy initiative. Al? Al Hodnik Thanks Steve. Earlier this morning we reported our 2015 financial results which reflect many successes for ALLETE during the year despite challenges on several fronts. Our reported earnings per share were $2.92 per share which includes profit from ALLETE Clean Energy’s construction and sale of a wind energy facility, the non-cash impairment charge at ALLETE Properties and acquisition transaction fees related to ALLETE’s energy infrastructure and related services businesses. Our full year results from our operating segments were as expected and Steve will go through the financial details in a moment. ALLETE’s value proposition remains intact and our 2015 results are a good example of how our operating businesses support ALLETE’s mission and how management deals with economic challenges and delivers on shareholder value. Our earnings guidance for 2016 remains at a range of between $3.10 to $3.40 per share and among other things reflects strong cost control efforts and increased cost recovery rider revenue in Minnesota Power, as well as growth at both ALLETE Clean Energy and U.S. Water. Before Steve goes through the earnings results, I would like to highlight several accomplishments from 2015. I believe the tremendous progress we have made on our strategy is clearly positioning ALLETE for continued growth through the end of the decade and beyond. ALLETE’s unique family of businesses is committed to service and reliability as we thoughtfully expand our significant renewable energy platform for answering the nation’s call to transform its energy and water sectors. ALLETE is well positioned to capitalize on an emerging environmental landscape that will not only require cleaner energy sources, but will also plays even greater emphasis on energy and water conservation to meet changing societal expectation. First, I’ll highlight several accomplishments from our regulated operations and additional efforts towards positioning our energy services businesses for the future. If you recall back in 2012, a severe rainstorm caused significant damage to Thomson Hydro, Minnesota Power’s largest hydro generation station. We are pleased that the Thomson Hydro Generating Station came back to full production in the fourth quarter of 2015, after more than 3 years and $90 million of restoration in repair work. This facility provides approximately 70 megawatts of carbon-free generation to our system. Minnesota Power recently completed the mercury emissions reduction project at Boswell Unit 4 which completes the compliance at our largest generating unit. There were also significant advancements during the year with the great northern transmission line, the proposed 220 mile, 500 kV line that will deliver hydro-electric generated electricity from Manitoba to Minnesota Power. During 2015, the Minnesota Public Utilities Commission determined the certificate of need and the route permit application were complete. Minnesota Power anticipates final route in presidential permit approval this spring. Great Northern Transmission Line construction is expected to begin in [Ernest] [ph] in 2017, with completion scheduled for 2020. We recently received commission approval to proceed with a 10 megawatts solar installation which will be built at Camp Ripley, Minnesota’s primary national-guard base near Little Falls on the southwestern edge of Minnesota Power’s service territory. The $30 million project will help Minnesota Power to achieve about one-third of its requirements under the state’s solar energy standard. Construction of the solar array is expected to begin in May, and continue to December with the goal to be producing solar power by November of this year. This creative partnership is a latest example of how Minnesota Power is achieving and advancing its Energy Forward strategy. Energy Forward balances stewardship, reliability, and affordability while maintaining fuel diversity within a generation portfolio that by the early 2020s will be comprised of one-third renewable, one-third natural gas, and one-third coal. All of these construction projects I just mentioned qualify for current cost recovery treatment which has provided as rate recovery outside of a general rate case proceeding. Related to our regulated businesses, on the industrial customer front, Minnesota Power’s taconite customers had a year of challenges to say the least. While there is no lack of domestic steel demand, challenges continue due to high levels of steel dumping into the United States. Minnesota Power’s customers nominated at approximately 80% of their capacity for the first four months of 2016. We continue to work closely with these customers on this and other issues, while we monitor developments with their production levels as we move forward into 2016. As you know, Minnesota Power also serves over a dozen wholesale customers. In September, we reported that electric contracts with 14 municipal customers were successfully amended to extend contract terms through December 31 2024. ALLETE Clean Energy expanded its renewable energy footprint in presence in 2015. During 2015 ACE acquired the 97.5 megawatt Chanarambie-Viking wind generation facility in Southern Minnesota, and they also acquired the 101 megawatt Armenia Mountain wind energy facility in Pennsylvania. ACE currently owns and operates approximately 535 megawatts of wind generating capability across the United States. In addition to owning and operating renewable energy facilities, in late 2014, we announced that ACE obtained the rights to develop and construct a 107 megawatt wind facility for Montana-Dakota Utilities. Earlier this year, we reported that Thunder Spirit was completed as planned at the end of 2015. We are proud of ALLETE Clean Energy’s accomplishments including adding this build-owned-transfer capability to its playbook. And we are excited about its prospects to leverage the cleaner energy future before us. Last but certainly not least, ALLETE acquired U.S. Water Services in early 2015. U.S. Water is a leader in integrated water management to growing number of industrial customers throughout the United States. With societal expectations rising around water quality, conservation, scarcity and reuse, we believe U.S. Water is well positioned to grow while addressing these interests. Financially and operationally, ALLETE had a very successful year even with the headwinds coming at some of our nation’s largest industries. ALLETE’s businesses posted financial result as expected and we made significant strides in executing our strategic plans. I will make some comments about our outlook for 2016 and beyond, but I will first ask Steve to go through the financial details. Steve? Steve DeVinck Thanks Al. For the year, ALLETE reported earnings of $2.92 per share on net income of $141.1 million versus earnings of $2.90 per share on net income of $124.8 million in 2014. Included in 2015 results are $20.4 million or $0.42 per share profit on the construction and sale of the Wind Energy facility by ALLETE Clean Energy, a $22.3 million or $0.46 per share non-cash impairment charge at ALLETE Properties; and $4.8 million or $0.10 per share of acquisition transaction fees related to ALLETE’s energy infrastructure and related services businesses. Earnings in 2014 included $1.4 million or $0.03 per share in acquisition transaction fees and a $2.5 million or $0.06 per share charge associated with an environmental protection agency settlement. ALLETE’s results are within its November 2015 earnings guidance range of $3.35 to $3.50 per share, which did not include impacts of the impairment charge or acquisition transaction fees. ALLETE also met its original December 2014 guidance of $3 to $3.20 per share, which did not include the impacts of the impairment charge, acquisition transaction fees or profit on the construction sale of the Wind Energy facility. Earnings from ALLETE’s regulated operation segment, which includes Minnesota Power, Superior Water Light and Power and the company’s investment in the American Transmission Company recorded net income of $131.6 million, an increase of $8.6 million over 2014. Earnings increased primarily due to higher cost recovery rider revenue, production tax credits, and power marketing sales, as well as lower operating and maintenance expenses. These increases were partially offset by lower industrial sales and higher depreciation interest and property tax expense. In addition, Minnesota Power recorded a reserve in 2015 for estimated refunds of $1.6 million after tax related to MISO return on equity compliance of which $900,000 was attributable to prior years. Our equity earnings in ATC in 2015 also reflected a $3 million after tax charge for reserves related to the same complaint of which $1.4 million after tax was attributable to prior years. Operating revenue from the regulated operation segment decreased $12.3 million or 1% from 2014 primarily due to lower field cost recoveries and gas sales, partially offset by higher cost recovery rider revenue, total kilowatt hour sales, as well as FERC pro forma based rate increases. Fuel cost recoveries decreased $37.1 million due to lower fuel and purchase power cost attributable to our retail and municipal customers. Revenue from gas sales at Superior Water Light and Power decreased $11 million as a result of the unseasonably cold weather in 2014 and warmer than average 2015. Heating degree were approximately 16% lower in 2015 compared to 2014. Cost recovery rider revenue increased $17.8 million primarily due to the completion of our 205 megawatt addition to our Bison Wind Energy Centre and CapEx 2020 projects, as well as higher capital investment balances for the Boswell Unit 4 environmental upgrade. Revenue increased $14.7 million due to a 3.1% increase in total kilowatt-hour sales. Sales to other power suppliers increased 48.4% mostly due to the commencement of the Minnkota Power sales agreement in June of 2014. Sales to our residential and municipal customers were lower due to the decline in heating degree days previously mentioned, and sales to our industrial customers decreased 11.4% primarily due to reduced taconite production. Revenue from our regulated customers increased $6.9 million primarily due to additional renewable, environmental, and other investments. On the expense side, transmission services increased $8.5 million or 19% from 2014, primarily due to higher MISO related expenses. Cost of sales decreased $9.4 million from 2014 due to the previously mentioned lower gas sales at Superior Water Light and Power. Operating and maintenance expense decreased $11.2 million or 5% from 2014, due to cost reduction efforts and $4.2 million charge in 2014, related to the EPA consent decree settlement. Cost reduction efforts resulted in lower wage, vehicle fleet, and miscellaneous employee expenses. These reductions were partially offset by no increases for the operation and maintenance of the 205 megawatt addition at our Bison Wind Energy Center that went into service at the end of last year. Depreciation and amortization expense increased $17.1 million or 14% from 2014, primarily due to additional property, plant and equipment and service. Taxes other than income taxes increased $4.3 million or 10% from 2014, primarily due to higher property tax expenses resulting from higher taxable plant and rates. Interest expense increased $4.7 million or 10% primarily due to higher average long term debt balances. Our equity earnings in ATC decreased $3.3 million or 17% from 2014. As we previously mentioned, our equity earnings in ATC were impacted by a $5.2 million charge, $3 million after-tax, the reserves related to the MISO return on equity compliance. Other income decreased $4.4 million from 2014, primarily due to lower AFUDC-Equity. Income tax expense decreased $14.6 million or 37% from 2014, primarily due to increased production tax credits as a result of the previously mentioned 205 megawatt addition to our Bison Wind Energy Center. Before I move on from the regulated businesses, I want to emphasize that we remain committed to cost containment at Minnesota Power. Despite known operating and maintenance expense increases for the 205 megawatt addition at our Bison facility, I am pleased that regulated operations, operating and maintenance expense is lower than 2014. We are reducing cost at Minnesota Power to reduce rate increases for our customers, improve our return on equity overtime, and manage through the impact of temporary cyclicality facing our customers in taconite mine. ALLETE’s energy infrastructure and related services businesses which include ALLETE Clean Energy, and U.S. Water Services, recorded net income of $29.9 million and $900,000 respectively. Earnings at ALLETE Clean Energy, increased $26.6 million over the last year due to higher earnings from its growing portfolio of Wind Energy facilities and a $24.4 million in profit earned on the construction and sale of the Wind Energy Facility. Operating revenue increased $228.9 million from 2014, with $197.7 million coming from the sale of the wind facility. Acquisitions in late 2014 and during 2015 also contributed to the year-over-year increase. U.S. Water acquired by ALLETE on February 10th of last year, is a leader in integrated water management to a growing number of industrial and commercial customers throughout the United States. U.S. Water Services had net income of $900,000 on revenue of a $119.8 million for the period February 10, 2015, through December 31, 2015. Earnings included $2.2 million of after-tax expense related to purchase accounting for inventories and sales backlog. The total impact of this purchase accounting adjustment is $2.5 million after-tax and is expected to be fully recognized by the first quarter of 2016. The corporate and other segment which includes BNI Energy, ALLETE Properties, and other miscellaneous corporate income and expense, posted a net loss of $21.3 million compared to a net loss of $1.5 million in 2014. The net loss for 2015,included the $22.3 million after-tax impairment charge at ALLETE Properties, and the $3 million after-tax expense for acquisition cost for the acquisition of U.S. Water Services. Earnings per share for 2015,were diluted by $0.36 due to an increase in weighted average shares outstanding. Our effective tax rate in 2015,was 15.2% compared to 22.6% in 2014. The decrease was mostly due to increased production tax credits resulting from the addition at our Bison Wind facility. We anticipate the effective tax rate for 2016, will be approximately 20%. ALLETE’s financial position continues to be solid, driven primarily by higher net income in non-cash expense. Cash from operating activities increased $70.3 million in 2015, to a total of $340.1 million. Our debt-to-capital ratio at year end was 47%. As Al, mentioned, ALLETE’s 2016 earnings guidance initiated last December includes a range of $3.10 to $3.40 per share. I would direct you to the 8-K filed last December for more details and key assumptions as part of our earnings guidance. Al? Al Hodnik Thank you for the financial update, Steve. ALLETE is a growing energy company that provides sustainable energy solutions through initiatives that are regulated utility businesses and at our complimentary energy infrastructure and related services businesses. I will highlight several areas for you along with some of our expectations for 2016, at our regulated businesses, Minnesota Power, will continue to execute its energy forward initiatives and pursue customer growth opportunities. Construction on the Great Northern Transmission line is ready to begin next year, and will provided investment and growth opportunities through the end of the decade. We feel that our energy forward actions have positioned us very well for the CPP, and other regulations. But like many other utilities, we harbor some concerns about ensuring we receive credit for early action taken to the benefit of all stakeholders. As well as the consequential nature of this regulation as it relates to reliability and affordability. While the CPP was stayed last week in a decision by the U.S. Supreme Court, we continue to work with stakeholders in shaping Minnesota’s CPP state implementation plan, continue to monitor its legal status and are taking necessary and prudent action to protect the value of our investments. We worked hard to reduce cost at Minnesota Power, and we have made significant progress. We have thoughtfully made workforce reductions with the elimination of approximately 100 position or 8% in 2015. We are pleased that the overwhelming majority of these reductions are made through coal fleet and other forms of attrition. We have also recently filed a proposal to implement Minnesota’s Energy-Intensive Trade-Exposed or EITE legislation signed into law by Governor Dayton. The EITE by design would allow for more competitive rates for large industrial customers. Last week the Minnesota Public Utilities Commission gave the EITE a fair hearing but rejected the petition without prejudice. The commission in taking the action they did, indicated they require more cost benefit information before they could make a final determination. Minnesota Power intends to meet once again with all stakeholders before determining next steps with EITE. In addition, Minnesota Power filed a depreciation life extension request, fully consistent with the environmental upgrades completed at our Boswell generating facility. If approved, this request would share some of the benefits immediately with customers. As I mentioned earlier, our Taconite customers nominated 80% capacity level for the first four months of the year. Nominations will occur in March, for the May to August time period, and in August, for the final four months of 2016. I should say that some of the idling reflected in these lower production levels could provide opportunities that have long, positive effects on taconite production here in northeastern Minnesota. To be specific, Cliffs Natural Resources has publicly shared its plan to retool its United Taconite plant in to produce Eveleth, to produce a fully fluxed taconite pellet. That new product will replace a flux pellet now made at Cliffs Empire operation in Michigan, which is scheduled to shutdown at the end of 2016. On the new customer scene, Essar’s last public update indicated it will achieve full production capability in 2016. As you will recall, the Essar facility will result in approximately 110 megawatts of new load for Minnesota Power, once it reaches full production levels. So the project has had its share of financing and market challenges since it was announced several years ago. We believe this opportunity for additional new load remains intact and operational startup is simply a matter of “when” and not “if”. To date, Essar has invested in excess of $1 billion in this facility which sits on the substantial, and very high quality ore body in Northeastern Minnesota. We do not anticipate any meaningful sales related to the Essar facility in 2016. PolyMet is anticipating the record of decision on its environmental impact state adequacy from the State of Minnesota in February, and action on applicable permits will follow. Construction could commence late this year, and Minnesota Power could begin to supply between 45 and 50 megawatts of new load to a 10year power supply contract that would begin upon start up of mining operation. ALLETE Clean Energy is positioned for earnings growth in 2016, as a result of the wind energy facilities it acquired during 2015. ACE will continue to target acquisitions of existing facilities which have long term power sales agreements in place. U.S. Water will further compliment our core regulated operation, balance exposure to our Utilities industrial customers, and provide potential long term earnings growth. 2015 marked a productive year of post-acquisition integration efforts, as well as a tuck-in acquisition in the southeastern United States. This, as U.S. Water continues its growth strategy, now, as part of the ALLETE family of businesses. Water and energy are intricately linked and attention to this nexus is increasing. Just like energy, we believe regulation and societal expectation will increasingly drive water conservation and that those macro factors along with opportunities for improved profitability will drive a growing emphasis on the efficient use of both water and energy. All of us at ALLETE are excited about our prospects going forward and we look forward to delivering another year of earnings growth. Our Board is confident in our direction, and recently voted to increase the dividend on our common stock. This is the sixth consecutive year we have had raised our dividend, and ALLETE has paid dividends without interruption since 1948. Thank you for your confidence and your investment with us. At this time, I’ll ask the Operator to open up the line for your questions. Question-and-Answer Session Operator [Operator Instructions] And our first question comes from the line of Paul Ridzon from KeyBanc. Your line is open. Paul Ridzon As you talked to your customers with steel exposure, kind of what’s their tone, are we bouncing on the bottom, are we starting to see some potential upside here, or is it just all in the hands of trade commission? Al Hodnik No, I think the sense is that, we’re bouncing off the bottom, at this point in time there are some green shoots beginning to appear, the ITC and some of the trade action that’s already been taken certainly back in Q4 of last year the sort of fuel consumption, some sort of imports within that 35% range, they’re trending down now and heading hopefully below 30% or heading in the right direction outlaid. There’s certainly more work to be done on some of these ITC sort of proceedings that are going on. We expect to hear more about that. I was also pleased to see that Governor Dayton from Minnesota has stepped up with other Governors, the Governors conference, and a dozen or so of the Governors have had conversation about spending more time with President Obama, on sort of additional levels of protection that might be able to be put into place. As you recall President Reagan and President Bush, impose section 201 of the 1974 Trade Agreement, and shutdown steel dumping altogether. And so we continue to push for that Chief of Staff, McDonough, President Obama, Chief of Staff was in Minnesota in December. I participated in that as there are number of steel company executives to express our concerns about steel dumping and so. Overall, I’m feeling more confident Paul, that we’re making progress on the steel dumping side, and that production here in the U.S. on the iron ore side can then follow. There’s certainly no lack of steel demand in the Great Lakes, as you know auto production is strong at this point in time, other durable goods production is pretty strong as well too. So, U.S. domestic production of steel was strong and we just need to end the steel dumping, and I think its heading in the right direction. Paul Ridzon Thank you. And Steve, can you review your commentary on O&M at Minnesota Power? Steve DeVinck Sure, Paul. I will. We remain committed to cost containment at Minnesota Power, to reduce rate increases for our customers, improve our return on equity overtime, and manage the impact of temporary cyclicality facing our customers on the taconite mining. With our 2016 guidance, we projected 2016 regulated operation and maintenance expense to be approximately 5% to 10%, less than 2014. This despite no increases for the operation and maintenance of these addition to our Bison Wind Energy facility. With respect to 2015, it is approximately $5 million to $11 million or 5% less than 2014, approximately $4 million of that is the charge that we had in 2014 for the settlement of an EPA. Paul Ridzon Okay, that’s the part I missed, that’s the part I missed, Steve, thanks. And given how successful you’ve been and how aggressive you continue to be, what’s your outlook on potential for Rate Cases or Rate Case? Steve DeVinck Yeah, our strategy Paul, as you know has been to improve Minnesota Power’s return on equity overtime through expense reductions and more clarity on load growth. Certainly, we made progress on the expense reductions including the workforce reduction Al, previously discussed. Of course, as we talked about consistent with our energy forward strategy, we’re seeking use for life extension at our Boswell facility, consistent with the remaining use for life of the extensive environmental upgrades that we have completed. This annual benefit is anticipated to be approximately $20 million, and reduced depreciation expense of which approximately one third would be returned to customers through the environmental cost recovery rider. We are evaluating the six months extension requested by the Department of Commerce, yesterday. We are also monitoring developments with our industrial customers to better understand future operation expectations. Nominations from our larger power customers are due March 1, as Al, mentioned, for May through August, and we expect to have more information on our talks about general Rate Case when we release earnings for the first quarter of 2016. Paul Ridzon Okay, thank you very much and I guess I’ll see you in a couple weeks. Al Hodnik Thanks, Paul. See you in New York. Paul Ridzon Thank you. Operator Thank you. Our next call comes from Brian Russo from Ladenburg Thalmann. Your line is open. Brian Russo Hi, good morning. Just what is the updated net book value — depreciated book value on the floor properties following the impairment? Steve DeVinck Approximately, $50 million. Brian Russo Okay. And what changed from a year ago? What triggered the impairment and is there something pending in terms of a bulk sale, which triggered this impairment? Al Hodnik The impairment was really due to in response to market conditions and other recent transaction activity, where we reevaluate our strategy. This revised strategy incorporates the possibility of a bulk sale for the entire portfolio which if consummated market indicators point to us with that will likely be in sales proceeds below book value. And we’ll continue to pursue sales of individual properties of course overtime. At this time we do not have affirmed sale of ALLETE properties. We expect that as we adjust our selling prices to better reflect market, the sales activity could pick up. As we stated, our objective is to unlock capital as we close out this successful legacy business and deploy the proceeds and our strategic initiatives. Brian Russo Okay, understood. And on the Boswell depreciation study, did I hear you correctly, the Department of Commerce requested a six month extension? Al Hodnik Yes, they did that yesterday. It was requested and granted. Brian Russo Okay. So, requested and granted, got it. Okay, so one of the six months on that. Just remind us what’s assumed in your guidance in terms of demand nominations to the 8% through the first four months or 80% for the entire year? Steve DeVinck So the midpoint of our guidance range, our guidance range is 310 to 340, assumes about 35 million tons of taconite production. And remember that in Northern Minnesota there is at capacities about 41 million tons. Brian Russo Okay, got it. And then you mentioned earlier Essar has publically stated that they assume full operation at 2016, however you guys have assumed no sales to Essar in 2016, are you just being conservative or there is something else that we should be aware of? Al Hodnik We’re just being conservative at this point. The — as I said to you many times and others that the start up of large taconite facilities are — it’s not sort of turn the switch on, and it’s110 megawatts in this case. So there’s a start up period, obviously they’ve had some construction fits and starts too as well. So we just decided to be conservative in 2016 with it and they said they’ve got a $1 billion investment at this stage of the game, and in my mind in our minds at least it’s not a matter of “if” it’s a matter of “when”. Brian Russo Okay. And then lastly, given the challenges that the solar industry is facing now, do you see ALLETE Clean Energy as becoming even more opportunistic as you were in 2015 in pursuing acquisitions? Al Hodnik Well, ALLETE Clean Energy is not going to continue to pursue acquisitions that make sense along all forms of the renewable space, the wind, and solar, and hydro, even clean sort of natural gas projects that come up. We still think cleaner energy forms are involved, the CPP even if it stay, certainly its base is really as cleaner energy forms as well. And so, we’re going to continue to look, they’re going to continue to look. They certainly have a deal flow and a pipeline of opportunities. But we’re going to be very disciplined as we have been and look for those that really provides best opportunities for shareholder value for ALLETE, those that come complete with PPAs, with off takers and credit worthy partners. Brian Russo Okay, thank you. Operator Thank you. Our next question comes from the line of Jay Dobson from Wunderlich. Your line is open. Jay Dobson Steve, earned ROE for 2015 at the regulated operations was? Steve DeVinck Minnesota Power’s total regulated return activity was approximately 8.5% in 2015. We estimate that with full taconite production return on equity would have been approximately 9%. I mean you might be interested about our views on 2016. The midpoint of our 2016 earnings guidance range we estimate Minnesota Power’s ROE would be in the mid-to-high 8% range. We estimate that with full taconite production return on equity would have been approximately 9%. And just a reminder, this does not include any impact from Essar or PolyMet. Jay Dobson Got you. That’s great. And then to the O&M, just for clarity, you said 5% to 10% when you gave guidance lower than 2014, but you got 5% in 2015. So the math isn’t going to be perfect. Is it fair to assume 2016 now relative to 2015, this sort of zeroed 4% to 5% reduction. Steve DeVinck Yes. That is fair. We did better in 2015 than we originally anticipated. So we are happy about that, but your math is probably fairly correct. Jay Dobson Great. And Steve was the real estate drag in 2015 and excluding of course the impairment. Steve DeVinck Yes, thank you. Excluding the impairment ALLETE Properties lost about $1 million. Jay Dobson Great. And then two sort of detailed questions. The purchase accounting impact that U.S Water you sighted is $2.5 million. That was the full impact in 2015. I am stating as the statement, but it’s a question and that’s a pre-tax number? Al Hodnik That is an after tax number and that’s the impact for the full year? Jay Dobson That is. So there will be that little stub period from January 01, 2016 to February 09, 2016 and then it will be exhausted. Al Hodnik Correct. Jay Dobson Great. And then the tax rate 15% roughly in 2015, 20% in ’16. What PTCs are you assuming in the 20% and I only ask that because you said the ’15 was sort of lower than expected, because you had a higher than expected PTCs. Al Hodnik No. I don’t know that it was lower than expected. We had higher PTCs from last year, production tax credits. 20%, it will go up to about 20% in 2016, primarily just due to higher pretax – a higher assumption of higher pretax income. Production tax credits in 2016 and 2015 are probably going to comparable since we had all of our Bison Wind facility in service at the end of 2014. Jay Dobson And then last one. As you think about sort of the acquisitions for U.S. Water and for ALLETE Clean Energy, maybe just talk about sort of what you expect out of acquisitions. Sort of vis-à-vis, I’m just measuring it sort of brutally if you will versus the U.S. Water, which was sort of a big addition, but not a lot of earnings. Steve DeVinck Well, we haven’t really changed our view on size of transaction at ACE. So our size of transaction is $50 million to $150 million plus or minus in that range, but we’d continue to try to pursue it. We had some smaller acquisitions at ACE of course but that’s kind of our focus and as I expressed earlier these broad range of renewable’s are still on the table, so we are not signally looking at Wind in that case. With respect to the U.S. Water tuck-ins if you will, those are likely to be smaller in nature sort of in the $5 million to $50 million range. As we think about our strategic acquisition there, there is a number of factors that come into the strategy in terms of geography and where we want U.S. Water to play and then those opportunities might present themselves. So that’s kind of the range. Both companies have a decent sort of deal flow with strategy to acquire. We also hope on the U.S. Water side accordance, we’d expect organic growth as you know. I think in excess of energy and water, it’s very important and in growing the final expectations are growing and so we just see greater demand for that also. And so organic growth is the part of U.S. Waters go forward strategy as well. Jay Dobson No, that’s great. And then actually just one last question on the Boswell proceeding. The delay for initial comments to August 16, what’s behind that? I mean I recall there was a January date which was extended to February, actually to today and then late yesterday, they extend to August 16. Is it work flow? What sort of driving that? Steve DeVinck Well, we haven’t had any direct conversation with the Department of Commerce regarding that, but I suspect there is a workflow and demand on resources issue down there with the Public Utilities Commission and also with the Department of Commerce. So there is of course a lot of work going on in a number of utilities with projects and with the filings. As you know with regards to Minnesota and what Minnesota is up to on energy policy. So I think it’s largely around sort of demands and resources basically and that would be the basis for their extension. Jay Dobson Got you. And we sort of put that together with EITE and rejecting – although rejected without prejudice and now this delay understanding in response to an earlier question, you indicated you will have more commentary and update on sort of outlook for rate case in 2016 this year – on the first quarter call. How do you think about those two? Obviously, both could be considered context of a broader rate case and at least as an outsider, it looks like on both issues for workflow or whatever the commission sort of kick in the can down the road. Al Hodnik Well, as I said with respect to EITE in the legislation that the legislature passed and the governor signed, we felt we got a fair hearing from the Minnesota Public Utilities Commission, almost an 8-hour in length hearings. One of longer hearings that I recall they were very deliberative. There were many good questions that were raised around the EITE. And in the last analysis, since sort of rejecting that petition unanimously, but without prejudice. That’s an important distinction. They more or less want us to go back and identify additional cost benefit relative to the EITE. They provided many good examples of areas of interest of theirs at least. And so we are going to go back with our stakeholders and work with them on that and draw some conclusions as to how we want to approach the EITE on going forward. Could EITE and depreciation and all that end up in the rate case? I suppose it could, but as Steve said earlier, we have a strategy rate now that really depends on cost reduction in ROE improvement in the near term. It also sort of expecting load growth to materialize and we are watching that very closely because lastly taconite nominations and so all of that kind of rules together. But to the extent, could it all fold in together? It certainly could. Is that what the commission and the DoC are necessarily driving towards? I don’t know that I could say that. Jay Dobson That’s great, Al. Thanks for the insight, Steve. Thank you. Operator Thank you. Our next question comes from the line of Paul Ridzon from KeyBanc. Your line is open. Paul Ridzon Just a follow up. You are beginning of the call you talked about some gives and takes and came back with around 306 ongoing number, wasn’t it about $0.05 of FERC’s reserves that you took out of period? Steve DeVinck Yes, from prior year. That’s probably about what it was probably about a nickel related to prior years. Paul Ridzon So 311 is probably another way at looking at ongoing earnings? Steve DeVinck That’d be another way of looking at it. Yes. Paul Ridzon Okay. Thanks to clarify. Thank you. Operator Thank you. And there is no further questions in queue. I’d like to turn the conference back over to management for any closing remarks. Al Hodnik Well, thank you everyone for being with us and thanks for your confidence and investment with us again. Steve and I look forward to seeing many of you in March 3, in New York. And I certainly will be on the road throughout the year here sharing the ALLETE story. Thanks for spending time with us this morning. Operator Ladies and gentlemen, thank you for participating in today’s conference. This concludes the program. You may now disconnect. Everyone have a great day. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited. THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY’S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY’S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY’S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS. If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com . Thank you!

Fortis’ (FRTSF) CEO Barry Perry on Q4 2015 Results – Earnings Call Transcript

Fortis, Inc. ( OTCPK:FRTSF ) Q4 2015 Earnings Conference Call February 18, 2016 9:00 AM ET Operator Welcome to the Fortis Year-End 2015 Conference Call and Webcast. [Operator Instructions]. At this time I would like to turn the conference over to Ms. Janet Craig, Vice President Investor Relations, Fortis, Inc. Please go ahead, Ms. Craig. Janet Craig Thanks, Jonathan and good morning, everyone. And welcome to Fortis’ fourth quarter and year-end 2015 results conference call. I am joined by Barry Perry, President and CEO; and Karl Smith, Executive VP and CFO; as well as other members of the senior Management team. Before we begin today’s call, I want to remind you that the discussion will include forward-looking information which is subject to the forward-looking statement contained in the supporting slide show. All non-GAAP financial measures referenced in our prepared remarks are reconciled to the related U.S. GAAP financial measures in the MD&A. Also, unless otherwise specified, all financial information referenced is in Canadian dollars. With that, I will turn the call over to Barry. Barry Perry Good morning, everyone. I know it’s a very busy day for you and it has obviously been a very busy couple of months for Fortis. Last week we announced the acquisition of ITC Holdings Corporation and as a result we have a great deal of new interest in the Fortis story, particularly current ITC shareholders. So I wanted to give you some quick facts about Fortis. Fortis is a Canadian-based infrastructure Company with CAD29 billion in assets today, virtually all regulated. 42% of our assets and 43% of our adjusted earnings come from our U.S. utilities, UNS Energy in Arizona and Central Hudson Gas and Electric in New York state. Our remaining seven companies are located in Canada and the Caribbean, including FortisBC and FortisAlberta. Our 2015 mid-year rate base was CAD16.4 billion. We currently serve about 3.2 million customers, 2 million electric and 1.2 million gas customers and have over 7,700 employees. We trade on the Toronto Stock Exchange and are a member of the TSX/S&P60 and the Composite Index. Moving on to slide 7. Focusing on our year-end results, 2015 was a tremendous year for Fortis. We sharpened our focus on our core utility business with the divestiture of the properties business and the sale of small non-regulated hydro assets. Our 10-year total shareholder return outperformed both the TSX and the U.S. utility indices. We introduced dividend guidance and increased our dividend twice. We had our largest capital expenditure program to date, with CAD2.2 billion invested in 2015. We continued to pursue incremental investment opportunities, including LNG and in keeping with our strategy of finding incremental investment opportunities within our service territories, we announced the acquisition of Aitken Creek Gas Storage in British Columbia for $266 million. Our performance in 2015 underscores the strength of our strategy. Karl will walk you through this in a bit more detail, but our results illustrate our proven ability to acquire and integrate regulated utilities. The strong results at our U.S. utilities, particularly UNS Energy, combined with our diversified asset base and strength of our other utilities, resulted in significant earnings growth this year. Our record capital spend in 2015 including significant investments at UNS Energy for Springerville and the Pinal Transmission Project, as well as in BC with the Tilbury LNG Expansion. We also completed our largest capital project to date, the CAD900 million 335-megawatt Waneta Expansion hydroelectric generating facility on time and on budget. Looking at 2016, we expect to invest CAD1.9 billion, including investments in significant projects like the UNS residential solar program, the Central Hudson gas main replacement, the Tilbury LNG Expansion and the Generation Expansion Project at Caribbean Utilities, among others. Our capital program is highly executable and is comprised of many small projects. Only five projects in the five-year capital plan are greater than CAD100 million. Our total CapEx spend for the five years through 2020 is expected to be just over CAD9 billion, with the average being CAD1.8 billion annually. The most important take away from slide 10 is our CAD9 billion capital program supports strong rate base growth. We see our rate base growing at an average CAGR of 5% per year through 2020, with the growth being distributed across our businesses. By 2020 we’re projecting our rate base to be approximately CAD21 billion and this excludes ITC. In 2016 we expect the mid-year rate base to be approximately CAD17.8 billion. Fortis expects long term sustainable growth in rate base, assets and earnings resulting from investment in its existing utility operations. We’re also committed to identifying and executing on opportunities for incremental rate base and earnings growth through additional investments in existing service territories, as well as investment in new franchise areas as evidenced by our announcement of the acquisition of ITC Holdings Corp. last week which I will speak to a bit later. In existing service territories, I’m challenging each of our business presidents to find and capitalize on incremental investment opportunities. The most recent example of this is the announced acquisition of Aitken Creek. Aitken Creek is the largest gas storage facility in British Columbia, with a total working gas capacity of 77 billion cubic feet and it is an integral part of Western Canada’s natural gas transmission network. The dividend guidance we initiated in September of 2015 reflects our base capital plan of CAD9 billion through 2020. It is our confidence in this plan that allowed us to target 6% average annual dividend growth through the same time frame. The conviction we have in our underlying business, the strength of our Management team, as well as the successful integration of both UNS Energy and Central Hudson, made us more than ready to take on the next big step in our evolution and transformation, the acquisition of ITC Holdings Corp. The acquisition of ITC serves to further support our annual dividend growth commitment. To take you through our financial results, I will turn things over to Karl. I will then wrap things up by reviewing the acquisition of ITC and why we’re so excited about it. Karl Smith Thank you, Barry. Good morning, everyone. As Barry mentioned, our quarter 4 and annual 2015 financial results were strong. Compared to last year, our adjusted earnings per common share were higher by 13% at CAD0.51 for the quarter and up approximately 20% to CAD2.11 for the year. Cash flow from operations for the year was approximately CAD1.7 billion, an increase of 70%. Our regulated utilities raised CAD1 billion of debt in 2015 at attractive rates. Our unused credit facilities at December 31 were approximately CAD2.4 billion, providing us ample liquidity. And we successfully completed our record CAD2.2 billion capital expenditure program. Let me now take you through our earnings per share in a bit more detail. As you can see from the waterfall chart for quarter four, earnings-per-share growth for the quarter reflects the favorable impact of foreign exchange, new customer rates at Central Hudson, contribution from the Waneta Expansion, strong results at FortisBC Energy and FortisAlberta and regulatory timing differences at FortisBC. Growth was tempered by lower earnings contribution as a result of the sale of non-core assets, higher corporate expenses and an increase in the weighted average number of shares outstanding in the fourth quarter of 2015. For the year, our earnings per share growth reflects these same key drivers, as well as a full year of contribution from UNS Energy. Specifically, at FortisAlberta the resolution of capital tracker matters and customer growth was a driver of better performance. At FortisBC Energy, higher allowance for funds used during construction and operational efficiencies led to improved performance. We also saw strong contributions from all of our other regulated utilities in 2015. Our strong financial metrics, including increasing earnings and cash flow, support our improved financial capacity and solid investment-grade credit ratings. We have a light near term debt maturity profile with almost 90% of our long term debt, other than credit facility borrowings, having maturities beyond five years. Along with significant unused credit facilities and a strong balance sheet, we’re well positioned to fund investment opportunities. Following the announcement of our acquisition of ITC, S&P affirmed our long term corporate credit rating at A minus, revised its unsecured debt credit rating to BBB plus and changed its outlook to negative from stable. DBRS placed the Corporation’s credit rating under review with negative implications. Having credit ratings put under review with a transaction of this size is fairly common. We have had extensive discussions with the rating agencies and structured the ITC acquisition financing to maintain a solid investment-grade credit rating. Turning now to regulatory matters, we continued to focus on maintaining constructive regulatory relationships and outcomes across all our utilities. As you can see from the list of significant filings and applications, our regulatory calendar remains very active. Most significantly, in November Tucson Electric Power filed a general rate application requesting new retail rates to be effective January 1, 2017. Since its last rate order in 2013 which was based on a 2011 historical test year, TEP’s rate base has increased by $600 million and its common equity thickness has increased by 650 basis points. Taking a look at the chart on screen right now, you can see the elements of the application. We’re seeking a return on equity of 10.35% on a 50% equity thickness, with an original cost rate base of $2.1 billion. This is obviously an important application that will position Tucson Electric Power to earn its allowed return in 2017. That concludes my remarks and I will now turn the call back to Barry. Barry Perry Thanks, Karl. Before we close, I wanted to spend a few minutes reiterating some key information about the recently announced acquisition of ITC Holdings. Over the past decade, we have a proven track record of acquisitions that have delivered more than the projected accretion as well as added to our geographic, regulatory and economic diversity. We expect the acquisition of ITC will be an extension of this track record. ITC not only further strengthens and diversifies our business, but it also accelerates our growth. The equity purchase price of ITC totals about $6.9 billion, with total enterprise value of $11.3 billion, including assumed debt. In addition to the TSX, Fortis will list on the New York Stock Exchange and ITC shareholders will own about 27% of Fortis’ common shares once we close the transaction. ITC will maintain its headquarters and operations control located in Novi, Michigan. ITC’s Management team will remain in place and all ITC employees will be retained. There are a number of required regulatory approvals, including FERC and certain other federal and state approvals. We expect the transaction to close by the end of 2016. Fortis is very deliberate in our approach to acquisitions. We have an acquisition rationale that we diligently follow, including growth prospects, being accretive to EPS, proven Management team, supportive regulatory construct and a favorable economy. ITC is well aligned with this criteria. Turning to the strategic rationale for the acquisition, ITC is a premier pure play electric transmission utility. It’s fully regulated. It owns about 16,000 miles or 25,000 kilometers of transmission. It is a massive amount of infrastructure. We expect this acquisition to be accretive to EPS and I will speak to this in more detail in a moment. The acquisition dramatically increases our diversification. Pro forma, about 40% of our earnings will be FERC regulated. For Fortis in total, we will be virtually 100%, regulated with approximately 60% of our assets and earnings in the United States. ITC is 100% FERC regulated. FERC is a supportive regulator with a predictable regulatory construct that has returns greater than 11% on an equity thickness of 60%. In terms of rate base growth prospects, this transaction will be accretive to Fortis’ growth with a CAGR on ITC’s rate base growth through 2018 of 7.5%, consistent with ITC’s previous public disclosure. It’s important to add, however, that with ITC’s capital structure, this rate base growth translates into earnings growth that is significantly higher. The management team at ITC is excellent. When you are working on an acquisition it is easy to speak to the cultural fit and alignment. However, let me just say that we’ve spent every waking hour with the executive management team last week, as we met with over 160 investors and I also had a chance to meet and address the full team in Novi, Michigan. The team is really top notch and the cultural fit is bang on. ITC has done a tremendous job in building this business over the years. Their earnings grew by approximately 16% annually on average over the last 10 years, their shareholder returns are more than double the S&P 500 Utilities Sector Index since their IPO in 2005 and they are recognized as being the best in class in the United States in terms of safety. This transaction achieves scale and EPS accretion for Fortis. Following the acquisition, we will be a top 15 North American public utility when ranked by enterprise value. Using conservative assumptions, we’re expecting 5% accretion in the first year following close. Our U.S. to Canadian foreign exchange assumption is consistent with the current spot rate. Fortis’ exposure to the dollar is not significantly changing as a result of the transaction as we will be financing a portion of the transaction with U.S. dollar debt. Currently, our sensitivity is for every CAD0.05 change in the Canadian dollar, it has a CAD0.04 impact on EPS on an annual basis. This transaction will not change the sensitivity only slightly. In our investor meetings last week, there were some common themes and questions and we thought it would be useful to discuss them on this call. Number one, first there were some questions around our assumptions on ITC’s capital expenditures and rate base. Fortis is buying a platform that can capitalize upon trends including historical under investment in infrastructure, reliability enhancements and clean energy initiatives. We reviewed the ITC capital program in detail and the rate base growth of 7.5% through 2018 we presented last week is consistent with ITC’s public disclosure. We were also asked to provide more detail around the regulatory approvals and when we expect the transaction to close. As I indicated earlier, there are a number of regulatory approvals including FERC and certain other federal and state approvals. We expect the transaction to close by the end of 2016. None of the states where approval is required have rate jurisdiction and there’s no rate increase being proposed as part of the FERC approval process. The transaction is structured to have no negative impacts to employees, the tax base in each state or facility locations. This acquisition is a natural strategic fit, enabling the ongoing long term investment in the grid that customers need and regulators expect, while providing a platform for ITC to continue its operational excellence and track record of service and reliability. We also had questions on the minority investment in the operating Company. To be clear, we have financing commitments in place for the entirety of the cash portion of this transaction. As you know, as part of the acquisition financing we announced we would be seeking up to a 19.9% investment at the operating company level. We have received a great deal of inbound interest following our announcement and have now launched this process. We expect that we will secure investors within 90 days. This process is not unusual. We viewed the minority infrastructure investment in ITC as one of several capital alternatives available to us. In light of the size and known appetite for this kind of stake, we chose to access this market post-signing in the same way we will access the debt market. On our planned New York Stock Exchange listing, Fortis will be listing its common shares on the NYSE and we expect this process to be completed mid-year. As is customary with dual-listed stocks on the TSX and NYSE, the common shares will freely trade between both exchanges. To wrap up, 2015 has positioned us well for sustained growth. Our business is in good shape, is low risk and diversified. Excluding ITC, our five-year CAD9 billion capital expenditure plan positions us to have rate base growth of almost — well, rate base of CAD21 billion by 2020. We have the financial strength and flexibility to maintain predictable dividend growth and to take advantage of opportunities in the market for additional infrastructure investment. We look forward to accelerated growth as we welcome ITC into the Fortis fold. That concludes my prepared remarks and I’ll now turn things back to Janet. Janet Craig Thanks, Barry. Jonathan, we’re now ready to take questions. Question-and-Answer Session Operator [Operator Instructions]. Our first question comes from the line of Linda Ezergailis with TD Securities. Please proceed with your question. Linda Ezergailis Just wondering long term, your business mix obviously increasing with the sale of your real estate assets and the pending ITC transaction. But I’m wondering with respect to the opportunities that you’re seeing in your regions or you’re starting to hear back from your local business heads on the regions, how many more Aitken Creeks do you think you could generate over the next five years? And how might you think of a minimum/maximum unregulated part of your business that we could see in five years? Barry Perry Linda, clearly what we’re looking for is energy investment opportunities that are very much aligned in terms of risk to our regulated business. But overall, these will never represent a lot of the Company’s balance sheet. I would think not more than 10% of the Company over the long term would be in that category. I look at for example in Arizona, I would love to do utility-scale solar with long term PPAs. And I’m challenging Mr. Hutchens at UNS to find some of those opportunities. Those are the kind of things I’m looking for, very much consistent with the risk profile of the regulated business. I can tell you if we don’t have two or three more of those over the five-year period, I’m going to be pretty disappointed. I really think that the pipeline there will provide us with some of those opportunities. Linda Ezergailis And would you put large scale DC competitive transmission in that unregulated part of your mix or is that regulated? Would you consider that — Barry Perry Transmission, ITC will be our leader in this area, obviously and we’re just gaining a tremendous platform now with ITC. I would say that we will be very much competitive on transmission across North America. But the opportunities have to really closely track the risk profile of the regulated business. We’re not going to be looking at merchant transmission. We will have to have reputable counterparties, long term contractual arrangements, those kinds of characteristics. We’re not getting in the merchant business. Linda Ezergailis And just a clean-up question on the quarter. British Columbia utilities are benefiting a lot from efficiencies. Should we expect to see that continue in 2016? Karl Smith Linda this is Karl. Yes. I probably wouldn’t have used the word tremendously, but they continue to make progress on O&M cost and their incented to do so, as you know. So our expectation is that they will continue to get more productive throughout the term of the PBR regime there. Operator Our next question comes from Robert Kwan with RBC Capital Markets. Please proceed with your question. Robert Kwan Just on the minority financing for ITC, how broadly are you looking at bringing parties very specifically — do have some restrictions on the type of entities that you would like to partner with and also the domicile for those funds? Barry Perry Robert, clearly we don’t want to get into our groupings of our targets on that. But let me just say we’re focused on making sure that the — our partner will not affect in any way the status of ITC in relation to FERC and its ROE. So that’s a very important factor, the independent status of the organization. Clearly we will be — we have to make sure that the partner we bring in does not affect the regulatory approval process that we have to go through. Other than that, I would probably leave it to let us work on getting this done over the next 90 days. Robert Kwan Fair enough. Related to that, when you were considering the different financing options, did you consider selling a minority interest instead in one of the Canadian assets, given the better return you get for every dollar invested in the U.S. including ITC going forward versus the comparatively lower returns in Canada where the regulators don’t seem to be particularly concerned with the GAAP? Barry Perry No. We did not consider that, Robert. We want to own all our utilities, frankly, 100%. The ITC approach here, clearly the size of the deal required us to structure our transaction to be efficient and to be able to execute well here. So we did go this way. I would say my desire long term is to own 100%, but we’ll work with our partners here so we can work out an effective transaction. Robert Kwan Okay and if I could just ask one last question about the quarter. On Central Hudson, it was a very nice quarter here, it was up bit sequentially from the third quarter. And Q4 didn’t seem to be a great weather demand quarter. I’m just wondering if there was something specific going on there? Barry Perry Let me jump in. I will let Jim Laurito make a comment here, he’s on the phone. Jim runs our New York business. We’re obviously benefiting now from the three-year rate settlement that we entered into in New York after the two-year rate freeze. And we’re frankly very pleased with the performance of Central Hudson. It really has vindicated all of our strategy in New York to now be set up for the next three years. Jim, any comment? Jim Laurito Yes, Barry. Robert, I would just say that there were a couple of adjustments at year end that were favorable. One was related to our gas safety code compliance. There was a big adjustment favorable there. And then we had a prior-period tax adjustment. So those two things increased or goosed the Q4 earnings nicely. Robert Kwan Are you able to quantify what the impact of both of those together were? Jim Laurito I think they were probably around the $1.5 million range, net of tax, U.S. Operator Our next question comes from Ben Pham with BMO Capital Markets. Please proceed with your question. Ben Pham I wanted to keep on a Central Hudson theme. And I’m wondering when you considered the results and the rate case filing that is benefiting the numbers there within Central Hudson, has that utility — the earnings profile for 2015, is that getting towards what you expected with the acquisition when you came into it? And can you talk about the ROEs realized for this year? Barry Perry Karl, do you have the ROEs realized for — there are still some way below the sort of I call the — Karl Smith It is approaching 8%, Ben. Ben Pham Okay. So you’re not up to where you think it could get to eventually? Karl Smith Bear in mind, Ben, that the new rates only kicked in July 1. So we would expect in 2016 that we will get closer and close to the allowed return. Barry Perry 2016 is really the first full year with the rate settlement in place. So that becomes almost a benchmark year for CH. And I would say, Ben, that we’re very much where we’re with CH now is where we were expecting we would be when we announced the acquisition. Frankly, we did have to work through the settlement terms; it took probably a little longer but now we’re there. Ben Pham Okay. And then on your commentary around ITC accelerating growth, it looks like there’s rate based growth going to accelerate. Can you comment about the earnings-per-share side of things? Is that similar — going to be benefited the next few years? Because it doesn’t seem like you’re applying to move your dividend growth guidance at least for now and so I’m just wondering is that just more your payout ratio declining and you’re going to fund the CapEx? Or just maybe a little bit more color on that. Barry Perry I’m glad you made those observations, Ben. Clearly we’re very confident in the story with ITC. A lot of debate around do you move guidance now, do you wait until after closing and have that discussion? Consistent with Fortis’ conservative nature, we’re waiting to have that discussion until we get through the transaction, get the deal closed, get our planning together with ITC and then we will come out and have a conversation about that. I will tell you the Company looks a lot better with ITC going forward. Operator Our next question comes from Paul Lechem with CIBC. Please proceed with your question. Paul Lechem I realize you have been busy with ITC, but just wondering in Ontario, given the tax holiday and the impetus of drive consolidation of the LDCs, what is the level of interest from the municipalities in selling? Can you give us some discussion around how their thinking is — is this moving in a positive direction? Barry Perry I would say it is, Paul. We have been there a long time trying to achieve this obviously. And with the tax holiday approach we’re optimistic that we will find a few opportunities. We have a good business in Ontario. It’s making money. We have a team on the ground there that continues to have a lot of dialogue with various municipal utilities. So I would expect we will make progress there. But it’s a competitive environment. We’ve got to compete with now especially Hydro One, who you saw just recently purchased the transmission from Brookfield. So that’s a player that obviously we’re competing with. But we’re still there and we’re focused on it and our team is optimistic that we can have some success over the next few years. Paul Lechem Just a minor question on Belize. Just wondering now that things seem to have settled there, did that contribute at all to earnings in the quarter? Barry Perry I think it was a small amount. Immaterial overall, Paul. Not significant. Operator [Operator Instructions]. Our next question comes from Andrew Kuske with Credit Suisse. Please proceed with your question. Andrew Kuske I guess the question is for Barry and how do you think about the balancing act of Fortis at a holdco level versus the underlying operating companies? And how many of these opcos can you effectively manage from a capital allocation basis? I guess it’s really this delicate balancing point of diversity versus concentration. Barry Perry Clearly our focus is not on adding other businesses right now. Our focus is on getting this deal done and making sure that we integrate ITC well within the Fortis group. So I’m not going to be looking back to the acquisition market for some time. I will tell you Andrew, that we do have the model in North America for consolidating utilities. Management teams like the Fortis approach, regulators like the Fortis approach. And Fortis has evolved over the last few years in terms of how we do this. We added some more resources corporately; we’re up to 45 people at head office at this point. Maybe five years ago we were at 25 people. So we’ve added a few resources there. We’re highly confident we can continue to execute, but let me be clear, we’re not rushing out to do other acquisitions. This is a large transaction, it’s going to add a tremendous amount of value to Fortis in both the existing business and the development projects that ITC is working on. There’s not a need to look to other transactions or anything at this point in time. Andrew Kuske And then just culturally, how are you effectively incenting or just promoting a culture of some knowledge transfer among the utilities? Let’s just say for example there some interesting transmission opportunities that might exist in British Columbia that you could participate in. And once you close up ITC you obviously have a lot more knowledge in that space. How do you think about just knowledge transfer across the utilities and really promoting that to get maybe a multiplier effect on capital allocation in the future? Barry Perry We’re obviously right on top of that andrew. We’re encouraging all of our senior teams to work together. They don’t have to come through corporate, they deal with each other. We get together annually. We have our Fortis day where we bring all our teams together in different locations around North America. We encourage networking, whether it be in finance or HR or operations or IT. They all have form networks throughout the group. It’s not bureaucratic or anything like that. But they’re meeting once or twice a year sharing best practices. And the CEOs of all the subsidiaries, the large subsidiaries also serve on other boards within the Company. So there’s a lot of sharing there as well. That is how we achieve it, it works really well. But we’re not ever going to go to shared services or a big head office. That is not with the Fortis model. We will keep our operations very local and encourage that interaction between the teams on an informal basis. Andrew Kuske One final question if I may to Karl on bonus depreciation for your U.S. utilities and then prospectively looking at ITC. How do you think about electing on bonus depreciation and that balance of rate-based growth versus more immediate cash back given the bonus depreciation? Karl Smith Andrew, like most things we do we don’t look at things in isolation. So consistent with our model that Barry espouses, decisions are made at the local utility level with all things considered; regulatory, customers, et cetera. We don’t have a policy position per se Andrew. We leave those important decisions up to the local management teams to make the best choices in their respective jurisdictions. Operator And as there are no further questions, I would like to turn the call back over to Mr. Perry for any closing remarks. Barry Perry Just want to say thanks, everyone, for the interest. Obviously very exciting few weeks for Fortis. We’re looking forward to a strong 2016 and integrating the ITC acquisition into the Fortis group. Thank you very much. Operator Thank you for participating, ladies and gentlemen. This concludes today’s conference call. You may now disconnect. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited. 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Anti-Ruination Triggers

After the implosion of a couple of leveraged MLP exchange-traded notes (“ETNs”) last month, I noticed that many investors are not aware of the anti-ruination triggers that are embedded in many leveraged products. When the first leveraged mutual funds and ETFs arrived on the scene, they all reset their leverage exposure on a daily basis. As a result, the long-term performance of a 2X product did not equal 200% of an unleveraged fund tracking the same index. Whenever leverage is reset, the longer-term performance becomes path-dependent . This became much clearer during the financial crisis, when many banking and financial stocks lost money, the 2X financial ETFs lost money, and even the 2X inverse financial ETFs lost money. To be sure, there were many weeks and months when the inverse funds produced hefty gains, but they lost money over the long term due to the daily reset. Many investors complained about this without fully comprehending the safety features that daily reset provides. For example, let’s use a hypothetical index with a starting value of 100 that loses 20 points a day for the next three days. The index, and an unleveraged ETF tracking it, would see their values drop by 60%, going from 100, to 80, to 60, to 40. A 2X ETF tracking that same index that does not reset its leverage would see its value drop by 40 points per day, going from 100, to 60, to 20, to -20, which is an impossibility. An investor who bought an unleveraged ETF using margin would be in the hole and be forced to make up the difference. However, going negative with ETFs is not practical, and therefore daily reset became the norm. Instead of having double the “point” change, ETFs with daily reset double the “percentage” change. Using our same example, the index that loses 20 points a day lost 20% the first day, 25% the second day, and 33.3% the third day. Therefore, the 2X ETF with daily reset lost 40% the first day, then 50%, and 66.6% the last day. If its starting value was 100, then its subsequent values were 60, 30, and 10. The 90% drop from 100 to 10 is certainly devastating, but it is orders of magnitude better than -20. Additionally, with daily reset, the 2X ETF could survive another three days of the hypothetical index dropping 20 points a day. In this case, the 2X ETF would lose another 90%, dropping from 10 to 1, but the index itself would be theoretically negative, and an unleveraged ETF tracking it would be bankrupt. Some ETF and ETN sponsors tried to appeal to investor demand for leveraged products with long-term performance that more closely tracked a multiple of the underlying index. They introduced products that did not reset their leverage and products that reset monthly instead of daily. Because there is increased probability that the underlying index could decline more than 50% between resets, these products need special termination triggers to prevent their complete ruination (going to zero or below). Barclays introduced two no-reset products in 2009 that eventually triggered early termination and closure. Last month, two MLP-based ETNs with monthly resets triggered early terminations. The UBS ETRACS 2xMonthly Leveraged Alerian MLP Infrastructure Index ETN (NYSEARCA: MLPL ) triggered a mandatory redemption on January 20 when the underlying index dropped by more than 30% (60% for the ETN) from its most recent monthly closing value. The UBS ETRACS 2xMonthly Leveraged S&P MLP Index ETN (NYSEARCA: MLPV ) triggered a mandatory redemption the same day when its intraday value dropped below $5.00 per unit. To prevent leveraged ETFs and ETNs from going to zero, they must have anti-ruination triggers that will shut them down while they still have some money to distribute to shareholders. In January, amid the rout in MLPs, that is exactly what happened. One was triggered when it fell 60% between resets (before it could fall 100% or more). The other was triggered when its value dropped below $5.00 after originally being offered at $25.00 per unit. Owners lost money, but they did not have to cough up more money like investors receiving margin calls. Disclosure: Author has no positions in any of the securities mentioned and no positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) is received from, or on behalf of, any of the companies or ETF sponsors mentioned.