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ITC Holdings (ITC) Joseph L. Welch on Q3 2015 Results – Earnings Call Transcript

ITC Holdings Corp. (NYSE: ITC ) Q3 2015 Earnings Call November 05, 2015 11:00 am ET Executives Stephanie Amaimo – Director-Investor Relations Joseph L. Welch – Chairman, President & Chief Executive Officer Rejji P. Hayes – Chief Financial Officer, Treasurer & Senior VP Analysts Jonathan Philip Arnold – Deutsche Bank Securities, Inc. Jay L. Dobson – Wunderlich Securities, Inc. Daniel L. Eggers – Credit Suisse Securities (NYSE: USA ) LLC (Broker) Charles Fishman – Morningstar Research Steve Fleishman – Wolfe Research LLC Julien Dumoulin-Smith – UBS Securities LLC Operator Good day, ladies and gentlemen, and welcome to the ITC Holdings Corporation Third Quarter Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, this call is being recorded. I would now like to introduce your host for today’s conference, Stephanie Amaimo. Please go ahead, ma’am. Stephanie Amaimo – Director-Investor Relations Good morning, everyone, and thank you for joining us for ITC’s 2015 third quarter conference call. Joining me on today’s call are Joseph Welch, Chairman, President, and CEO of ITC; and Rejji Hayes, our Senior Vice President, CFO, and Treasurer. This morning, we issued a press release summarizing our results for the third quarter. We expect to file our Form 10-Q with the Securities and Exchange Commission today. Before we begin, I would like to make everyone aware of the cautionary language contained in the Safe Harbor statement. Certain statements made during today’s call that are not historical facts such as those regarding our future plans, objectives, and expected performance reflect forward-looking statements under federal securities laws. While we believe these statements are reasonable, they are subject to various risks and uncertainties and actual results may differ materially from our projections and expectations. These risks and uncertainties are discussed in our reports filed with the SEC such as our periodic reports on Forms 10-K and 10-Q and our other SEC filings. You should consider these risk factors when evaluating our forward-looking statements. Our forward-looking statements represent our outlook only as of today and we disclaim any obligation to update these statements except as may be required by law. A reconciliation of the non-GAAP financial measures discussed on today’s call is available on the Investor Relations page of our website. I will now turn the call over to Joe Welch. Joseph L. Welch – Chairman, President & Chief Executive Officer Thank you, Stephanie, and good morning, everyone. I’m pleased to report that the company achieved solid results in the third quarter. This should set the stage for another strong year of overall performance in delivering on expectations. On the operational front, as a testament to our model of operational excellence, our system once again performed well during the summer months when we served higher loads. Overall, we remain focused on completing our base, regional development projects in a timely and cost-effective fashion to the benefit of customers and investors, as we always have. In addition to solid operational execution, we continued to honor our commitments around value return to investors driven by our capital allocation strategy. In August, we increased our dividend by approximately 15% year-to-year. This marks the 10th straight year that we have increased our dividend. Also, in early October, we commenced an accelerated share repurchase program of $115 million which will be concluded in December, effectively using the remaining capacity of board-authorized share repurchases. These actions underscore the financial health of the business while highlighting our ability to manage our balance sheet effectively to ensure that we have ample liquidity for both capital investments and value return as appropriate. Shifting gears to regulatory matters, the initial MISO base ROE complaint procedural schedule continues to advance with hearings and briefings occurring over the past several months. The administrative law judge is scheduled to issue an initial decision containing a recommendation for the base ROE for the period covered by the initial complaint by the end of November. An order is expected from FERC in September of 2016, however, there’s no stipulated period for that action. With regards to the second complaint, the MISO transmission owners filed their initial testimony on October 20 with hearings scheduled for February of 2016. An initial decision from the ALJ is scheduled for late June of 2016. We currently expect a FERC order on the second complaint in the second quarter of 2017 but, again, there’s no stipulated period. As discussed previously, while the resolution around this matter is expected to be protracted, we do expect FERC to continue to support its historical policies of promoting ROEs and other incentives that will drive electricity transmission investment. Turning to development. We continue to source and evaluate opportunities in our contracted transmission portfolio while pursuing regulated Order 1000-related projects. In the third quarter, we completed the non-binding open solicitation for the Lake Erie Connector project and are pleased with the preliminary expressions of interest. We are now in bilateral negotiations with prospective counterparties. Assuming we are successful in executing favorable transmission service agreements over the course of the next several months, we would then anticipate receiving federal, state, and provincial permits by the second quarter of 2017. We would commence construction around that time with commercial operation expected in 2019. As previously noted, we remain cautiously optimistic about the prospects of this project and we are keenly focused at this point on the quality of the bilateral contracts with the counterparties in the associated terms and conditions. Regarding the opportunity in Puerto Rico, we continue our due diligence activities alongside NRG Energy and York Capital. We have participated in a formal expression of interest process with the Puerto Rico Electric Power Authority. We continue to believe that our joint proposal offers superior economic benefits for the citizens of Puerto Rico and other key stakeholders. To conclude my remarks I’ll note an important milestone in the third quarter which marked our 10th anniversary as a public company. As I reflect on our roles as pioneers in modernizing electrical infrastructure in the U.S. and serving as the sole steward of FERC’s historical transmission policies for a considerable period, I’m extremely proud of our results. Since our inception in 2003, ITC has invested over $5 billion of capital into the grid to improve reliability, expand access to power markets, and allow generating resources to interconnect to the grid, thereby lowering the overall cost of delivered energy to our customers. Given the inherent risk in transmission investment, our ability to execute large capital programs in a timely and cost-efficient manner while minimizing our cost of capital is no small feat. This capability is noteworthy because we are providing value to customers while concurrently meeting the expectations of the investment community. These past achievements serve as the foundation for our future success. As we look ahead to the fourth quarter and beyond, we remain highly confident that we will continue on the path of operational excellence, industry-leading growth and balance sheet management to the benefits of our constituents. I will now turn the call over to Rejji for an update on our financial results and outlook. Rejji P. Hayes – Chief Financial Officer, Treasurer & Senior VP Thank you, Joe, and good morning, everyone. For the third quarter of 2015, we reported operating earnings at $82.3 million or $0.53 per diluted share, an increase of 12% or $0.06 per diluted share over the same period in 2014. Reported net income for the quarter was $65.6 million or $0.42 per diluted share, a decrease of $8.3 million or $0.05 per diluted share compared to the third quarter in 2014. For the nine months ended September 30, 2015, we reported operating earnings of $236.2 million or $1.51 per diluted share, an increase of 11% or $0.15 per diluted share over the same period in 2014. As highlighted in our prior calls, absent the Kansas V-Plan Project bonus payment expenses booked in the first quarter 2015, our year-over-year growth would have been approximately 14%. Reported net income for the nine months ended September 30, 2015 was $205 million or $1.31 per diluted share, an increase of $7.7 million or $0.06 per diluted share compared to the same period in 2014. Operating earnings are reported on a basis consistent with how we have provided our guidance for the year and exclude the following items. First, they exclude after-tax impacts associated with the Entergy transaction of approximately $0.1 million for the third quarter of 2014. These expenses total $0.6 million for the nine months ended September 30, 2014. Second, they exclude regulatory charges of approximately $5.5 million, or $0.4 per diluted share for the third quarter 2015. These expenses total $6.6 million, or $0.4 per diluted share for the nine months ended September 30, 2015 and $0.1 million for the nine months ended September 30, 2014. The 2015 charges relate to management’s decision to write off abandoned costs associated with a project at ITCTransmission and a refund liability attributable to contributions in aid of construction. The 2014 charge relates to certain acquisition accounting adjustments for ITC Midwest, ITCTransmission and METC resulting from the FERC audit order on ITC Midwest issued in May of 2012. Third, operating earnings exclude after-tax expenses associated with the cash tender offer and consent solicitation transaction for select bonds at ITC Holdings that we completed in the second quarter of 2014. The impact of this item totaled $0.1 million for the third quarter of 2014 and $18 million or $0.11 per diluted share for the year-to-date period ended September 30, 2014. Lastly operating earnings exclude the estimated refund liability associated with the MISO base ROE, which totaled $11.2 million or $0.7 per diluted share for the third quarter of 2015, and $24.5 million or $0.16 per diluted share for the nine months ended September 30, 2015. It is possible that upon the ultimate resolution of this matter, we may be required to pay refunds beyond what has been recorded to-date. We will continue to assess this matter and will provide updates as necessary. For the nine months ended September 30, 2015, we reported total capital investments of $501.4 million, which includes $120.2 million at ITCTransmission, $91.6 million at METC, $273.9 million at ITC Midwest, $11.6 million at ITC Great Plains, and $4.1 million of Development-related investments in the New Covert project. We remain on track to be well within our range of guidance for 2015. Moving on to balance sheet-related activities. As Joe noted, in September, we executed effectively the remaining portion of the $250 million board-authorized share repurchase program. On October 1, we announced $115 million accelerated share repurchase program with an initial delivery of 2.8 million shares with a market value of $92 million, or approximately $33.34 per share prior to any discounts applied under the program. The remaining portion of shares will be repurchased at the agent’s discretion, but prior to the end of the year. The overall effective share price to repurchase will be determined by the volume-weighted average price of ITC stock during the term of the transaction, less an agreed upon discount and adjusted for the initial share delivery. As Joe noted, this transaction further demonstrates our commitment to providing attractive total shareholder returns without compromising our solid investment grade profile and ability to cost efficiently fund our capital investment program. To that last point, I would be remiss if I did not mention that we felt comfortable moving forward with share repurchase in Q3 given the expected timing of our contracted transmission opportunities, which remain heavily backend-weighted in the context of the 2014 to 2018 capital plan. To elaborate on our liquidity, which continues to be strong, as of September 30, 2015, we had a total liquidity position of approximately $855 million, which is largely comprised $831 million of net undrawn revolver capacity. For the nine months ended September 30, 2015, we reported operating cash flows of approximately $386 million, which represented an increase of approximately $25 million period-over-period. As we look ahead to the fourth quarter, our 2015 operating EPS guidance of $2 to $2.15 per share remains unchanged and we are revising our aggregate capital investment guidance for the year to $715 million to $765 million. The new capital guidance range includes capital investments of $180 million to $190 million at ITCTransmission, $155 million to $170 million at METC, $370 million to $385 million at ITC Midwest, $10 million to $15 million at ITC Great Plains, and up to $5 million for ITC Development. In closing, all of the initiatives and efforts that we have embarked on over the course of the year have positioned ITC to deliver on our commitments to customers and investors. At this time, we’d like to open up the call to answer questions from investment community. Question-and-Answer Session Operator Our first question comes from the line of Jonathan Arnold with Deutsche Bank. Your line is now open. Please go ahead. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. Good morning, guys. Rejji P. Hayes – Chief Financial Officer, Treasurer & Senior VP Morning. Joseph L. Welch – Chairman, President & Chief Executive Officer Morning, Jonathan. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. A quick one on the – Rejji, could you – the slight change to the 2015 CapEx guidance, can you give us a little insight into what moved I guess the higher end down a bit? And is this just spend that’s going to drift into 2016? Or is it things that you thought would happen that may not happen? Rejji P. Hayes – Chief Financial Officer, Treasurer & Senior VP Yeah. Happy to answer that, Jonathan. I think the quick answer is we have fallen slightly behind on a couple of projects at ITCTransmission and ITC Midwest. And so, what we still think will be well within the initial range of $710 million to $810 million, based on the visibility we had at the end of Q3, we thought it made sense to revise downward the upward end of the range. And the projects that were a little behind on at those two entities, as we see it, will likely be spent in 2016. So well within our initial estimates, but we wanted to offer a little more prescription at this time of year. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. So the projects are still happening, they’re just taking a little longer. Rejji P. Hayes – Chief Financial Officer, Treasurer & Senior VP Yeah. As we see it at this point, yes. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. Okay. And then which ones in particular? Can you share? Rejji P. Hayes – Chief Financial Officer, Treasurer & Senior VP Really immaterial projects. Not, I would say, any of the major projects and again it’s not the most material amount, particularly if you compare the midpoints of the initial guidance versus the midpoint of where we are today or implied midpoint. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. Okay. And then, if I may, on second one, do you have any updated thoughts as to when you might consider updating your five-year plan? Whether you might consider presenting your base business and the contracted opportunities kind of in a dual track or something like that. Is that something we should look for early next year? Or is it something that you’ll wait till the FERC’s resolved? I’m just curious what your current thinking is on that. Rejji P. Hayes – Chief Financial Officer, Treasurer & Senior VP Yeah. Jonathan, at this point, clearly we have not announced the release of a new plan, but we’re clearly contemplating providing a new vintage given that we’re almost halfway done with the current plan and a number of the underlying assumptions have changed. But clearly that’s something we’ll have to talk about internally, noodle on, and as we get more visibility both on capital projects as well as clearly where the FERC is thinking at that point, we will decide when it makes sense to offer new vintage. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. So when you say you’re contemplating it, does that mean it’s sort of a live discussion in this planning cycle or still not something as much? Should we be holding our breath at all, I guess is… Joseph L. Welch – Chairman, President & Chief Executive Officer I don’t think you should hold your breath, but I would anticipate that given where we’re at, we’ll clearly do something in the first half of next year with our new forecast. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. Okay. I’ll leave it at that. Thank you very much, Joe. Joseph L. Welch – Chairman, President & Chief Executive Officer Thank you. Operator And our next question comes from the line of Jay Dobson with Wunderlich Securities. Your line is now open. Jay L. Dobson – Wunderlich Securities, Inc. Hey, good morning. Rejji P. Hayes – Chief Financial Officer, Treasurer & Senior VP Morning, Jay. Jay L. Dobson – Wunderlich Securities, Inc. Rejji, as far as the ROE reserve, it looks pretty similar to second quarter. Any change in the methodology? I know you had done a change in the second quarter from the first quarter, so just want to sort of make sure we’re still on the same track there. Rejji P. Hayes – Chief Financial Officer, Treasurer & Senior VP Yeah. I guess not to get too cute with the response with respect to methodology, we’re still clearly evaluating what our third-party expert witnesses are providing as part of testimony and our assumptions essentially align with those estimates and we’re clearly noteful or we’re clearly mindful, rather, of what other data points have been offered up at this point over the course of this year. And we continue on a quarterly basis to look at how the ROE and DCF tests are trending and we have revised estimates from time to time. And so, we’re going to try to make sure that our latest reserve reflects where we think the market will go and where we think rather the FERC will go. And so there have been modest revisions to the math to-date, but not material changes. Jay L. Dobson – Wunderlich Securities, Inc. Great. That’s really helpful. And, Joe, talking about Lake Erie, just what do you see as sort of the gating items? Understanding you’re sort of in negotiations so you probably can’t sit here and tell us chapter and verse of where exactly things are, but how would you envision this playing out? Would we hear something sort of early next year as far as, yeah, we’re thumbs up and green-lighted? Or is this something that will be somewhat more iterative as we sort of move through a time continuum? Joseph L. Welch – Chairman, President & Chief Executive Officer Well, as I said in my opening comments, we’re now at that stage where we’re starting to start to negotiate with the parties on this line. And as a result of that negotiation, of course that’s really the critical link. I mean, first was did the line make sense? Did we see the financial economics there? Was there enough interest? We have done all of the work to see how we would construct a line, meaning the path we would take through the lake, getting it out of the lake into the two major stations where it’s going to interconnect. We had the preliminary solicitation or the non-binding solicitation where we’ve generated the interest and now, we’re at the point where we need to see if that interest is real. And we file for all of our permits, and with that, if the solicitation is – or the interest is real and the financials are there, then we’ll proceed with the permits. And so, I don’t want to call it iterative, but it’s definitely linear. And there’s many gating items, but this one is a pretty critical one. So, there’ll be a lot of clarity by mid-year on this. Jay L. Dobson – Wunderlich Securities, Inc. Got you. Nope, that’s great. And then I guess, Joe and Rejji, how is the board thinking about share repurchases? Obviously, you’ve got the one in the marketplace, so technically you’re not complete with the current authorization. But as we look out into 2016 and, Rejji, you sort of playing off your comment that some of your projects have gotten pushed off further into the decade. Is it likely the board will re-up a share repurchase program? Rejji P. Hayes – Chief Financial Officer, Treasurer & Senior VP Well, it’s always dangerous to front run the board, Jay. But I think at this point, given the one that we’re currently executing, the $115 million, obviously our leverage ratios have come up a little bit above our targeted threshold and so we’ll need to restore leverage capacity before we offer up another batch of repurchases. But I think as part of the continuing dialogue we have with the board and internally with the management team around capital allocation strategy and value return, we still view repurchases as really effective and – tax-effective vehicle of providing value back to shareholders and so we’ll continue to look at that as a vehicle going forward, but I clearly don’t want to front run the board on that. Jay L. Dobson – Wunderlich Securities, Inc. Great. And then last question just – and I apologize for not being familiar, what is this contributions in aid of construction charge? I don’t think I’m familiar with it. Rejji P. Hayes – Chief Financial Officer, Treasurer & Senior VP Yeah. I’ll shed some light on that, Jay. So we have for the past several months been evaluating potential modifications to our formula rate template and as part of that assessment, we identified an issue that led to excess cost recovery attributable to deferred tax assets, how they’re imputed into the formula rate template and they’re associated with contributions in aid of construction or CIACs. Upon identifying this, we quantified the refund to customers equated to about just under $9.5 million pre-tax, $5.5 million after-tax and made it part of our 205 filing with the FERC in addition to other flaws that we found in the template. We have had a discussion with the FERC on this matter, brought its attention to their staff before we made the filing and we think it’s clearly the right thing to do in the case of excess recovery to the benefit of customers. So we have done so and we obviously carved it out because we viewed it as a non-recurring charge. So that’s really the gist of it. Jay L. Dobson – Wunderlich Securities, Inc. Got you. No, that’s really helpful. And the $5.5 million obviously relates to prior periods. How should we think of that in the current period? Or if FERC approves the change, how would that impact the current formula rates? Rejji P. Hayes – Chief Financial Officer, Treasurer & Senior VP Yeah. So what it would essentially do is correct for the way in which the deferred tax asset is running through the formula rate template. Based on our proposal, clearly it’s subject to FERC’s reaction and approval of our requested modification, but this would not be a perspective or recurring issue as we see it. So once we have made this refund to the tune of $9.5 million pre-tax, $5.5 million after tax, that should be the end of it. And we’ve obviously imputed interest expense associated with those charges over time. So we try to retroactively look at how much we owed customers over that period since we’ve been using the formula rate template at that time and we think once we paid a refund, that should call it a day. It would be effective as of January 1, 2016 per request but obviously subject to FERC’s approval. Jay L. Dobson – Wunderlich Securities, Inc. Great. Thank you very much. Really appreciate the clarity. Operator Our next question comes from the line of Dan Eggers of Credit Suisse. Your line is now open. Daniel L. Eggers – Credit Suisse Securities ( USA ) LLC (Broker) Hey. Good morning, guys. Rejji P. Hayes – Chief Financial Officer, Treasurer & Senior VP Morning. Joseph L. Welch – Chairman, President & Chief Executive Officer Hey. Good morning, Dan. Daniel L. Eggers – Credit Suisse Securities ( USA ) LLC (Broker) Hey. Just want to follow up on the Lake Erie conversation. Now that you guys have made some progress as far as getting the intent from some potential partners. Can you talk a little bit about the nature of the people who are looking to be involved and maybe more important from kind of a credit perspective or from a durability to be either over the life of the asset to make sure you’re able to get your economic return on the project? Joseph L. Welch – Chairman, President & Chief Executive Officer Well, I think that it’s a tough thing. We just need to talk about the character of the people there. But look, I mean, let me start at a very high level and then if you want to ask more, I’ll go to that. But the people that have approached us have been showing interest, you would recognize them all. They are all pretty solid corporations. A lot of them absolutely deal in that area. They are on one side or the other of that line and they have seen the value of this line for some time, they – but now that we are out there. And so, they are all credit quality people and, of course, what we’d like to have is those contracts that are as rock solid as possible that we go back into the corporate guarantees on that. I mean, this is not a small investment and beyond that, we want to make sure that our shareholders are going to recover their investment. So we’re being very diligent with it. Rejji P. Hayes – Chief Financial Officer, Treasurer & Senior VP Dan, this is Rejji. The only thing I would add to that is that, clearly, as we negotiate contracts with the perspective shippers, we’re going to be acutely focused on tenor of the contract, the underlying economics and the creditworthiness of the counterparties. And we want to be as impartial as possible. So obviously creditworthy differs from counterparty-to-counterparty. In any event the creditworthy is sub-optimal, we would like to give them an opportunity to put mechanisms in place and I think you’re well-versed on what those risk mitigation mechanisms could be, but put mechanisms in place to make sure that that’s not a material risk going forward because, clearly, the quality of the contracts at the end of the day will dictate whether or not it makes sense to move forward on this. Daniel L. Eggers – Credit Suisse Securities ( USA ) LLC (Broker) So we haven’t done a lot of these kind of long-run merchant-ish transmission lines. Are people willing to do 20-plus-year contracts going into the deregulated Pennsylvania power market? Rejji P. Hayes – Chief Financial Officer, Treasurer & Senior VP So, Dan, I think at this point, we prefer to not get into specifics of any of the contracts that we’re negotiating at this point but directionally, of course, we’d like to extend tenors much as we can. But we’re not going to speculate or offer any transparency around where the contracts are headed. Daniel L. Eggers – Credit Suisse Securities ( USA ) LLC (Broker) Okay. And I guess just given the fact that if you’re talking about investment-grade parties who are known entities, are they doing like the pipeline deals have done where they’re saying, yeah, we’ll sign up for a piece of the line, but we’d also like to own a piece of the line? And what’s your interest in selling down the equity position you guys have developed there? Rejji P. Hayes – Chief Financial Officer, Treasurer & Senior VP Yeah. Again, we would prefer not to get into specifics of the, I’d say, tailored negotiations we’re having with each party, but clearly fiduciaries, as always, will have our minds open on all different types of ways in which we could execute on this. Daniel L. Eggers – Credit Suisse Securities ( USA ) LLC (Broker) Okay. And then on Puerto Rico, what is the process there? Is there any kind of steps or time lines we should be thinking about to see if this advances? Or do we have to resolve the bankruptcy/no bankruptcy thing for the territory before your project can even have a real conversation? Joseph L. Welch – Chairman, President & Chief Executive Officer I think that – in fact, there was just a recent – I don’t know what to – they came out today where the Governor of Puerto Rico has made an announcement as to how he sees the energy policy moving forward in Puerto Rico. But clearly, they are looking to, number one, the bond holders to have a little bit of pain, meaning they’re going to have to take a hit. But he really wants to start to move forward in Puerto Rico to get the infrastructure redeveloped, improve reliability, stabilize rates for the customers in Puerto Rico and, of course, our project is one of the hallmark projects that will allow that to happen. So we remain optimistic that by mid-year of 2016, we’re going to have a lot of clarity on how to move forward in Puerto Rico. These kind of projects, especially when they involve bankruptcies, they’re time-consuming and there’s a lot of political things that have to take place, but I’d remain guardedly optimistic that by the mid-year 2016, we’re going to be in a good shape to know go/no-go on the project or at least we’re going to be in a place where we can evaluate next steps. And I think that from this recent statement by the governor, I’m probably on board on that. Rejji P. Hayes – Chief Financial Officer, Treasurer & Senior VP And Dan, this is Rejji. Just for reference, the bill or legislation that Joe was referring to is the PREPA Revitalization Act which hit the tape I believe earlier today. And as Joe highlighted, we are encouraged with the government of Puerto Rico and how seriously they’re taking this matter. And we think that obviously the proposed solution that we’ve offered up, alongside NRG Energy and York is the superior solution that has been offered up to date. So, we are encouraged but cautiously optimistic. Daniel L. Eggers – Credit Suisse Securities ( USA ) LLC (Broker) And just one last one. Kind of as we’re looking outside of the U.S., do you guys see opportunities into Mexico? I’m thinking about all the renewables that are being developed south of the border and kind of the interflow of energy back and forth. Is that another market where you guys could do something? Joseph L. Welch – Chairman, President & Chief Executive Officer As always, we look everywhere but consistent with what I’ve started to tell everybody is where we’re going and what we’re doing now, especially on the development front. We’re probably going to stay pretty guarded on because their reward for announcing what you’re doing is to get more competition, but we’re well aware of what’s happening in Mexico and all other countries for that matter and we’ll stay watchful. And if there’s an opportunity that we think is in the best interests of our shareholders, we’ll start pursue it. Daniel L. Eggers – Credit Suisse Securities ( USA ) LLC (Broker) Great. Thank you, guys. Joseph L. Welch – Chairman, President & Chief Executive Officer Thank you. Operator Our next question comes from the line of Charles Fishman with Morningstar. Your line is now open. Charles Fishman – Morningstar Research Thank you. The only question I had left was on Puerto Rico. Remind me, your – the team’s proposal was a preemptive thing. It wasn’t in response to a RFP, correct? Joseph L. Welch – Chairman, President & Chief Executive Officer Correct. That is correct. Charles Fishman – Morningstar Research And then subsequent to that, has there been any competition that’s surfaced or competing proposals? Rejji P. Hayes – Chief Financial Officer, Treasurer & Senior VP There was prior to us submitting our proposal and you’re correct, it was done before any formal process was put in place. There was a – I think the initial proposal was offered up by a select group of creditors which, as we see it, was inferior to what we initially proposed. And so, there have been I think one or two other alternative or competing proposals offered up but again, as we see it and it’s obviously a bias view, we think ours is superior to anything we’ve heard publicly to-date. Joseph L. Welch – Chairman, President & Chief Executive Officer Let me add to what Rejji said that in conversations with the officials in Puerto Rico, ours is the only one that started to add for infrastructure investment in Puerto Rico, which if you again read the legislation and the statements by the governor, it’s the infrastructure that is really weak and they need reliability improvement well beyond just getting generation that’s environmentally suited. So echoing off what Rejji said earlier, ours is a superior and I’m no bias, but ours is a superior solution and viewed by them as a superior solution. Charles Fishman – Morningstar Research Okay. That’s the only question I had. Thank you. Joseph L. Welch – Chairman, President & Chief Executive Officer Sure. Operator Our next question comes from the line of Steve Fleishman with Wolfe Research. Your line is now open. Steve Fleishman – Wolfe Research LLC Yeah. Hi. Good morning. Joseph L. Welch – Chairman, President & Chief Executive Officer Hi, Steve. Steve Fleishman – Wolfe Research LLC Hi. I just wanted to check – I know on the last call, you kind of talked about some of the way to look at the capital plan, particularly the development being more Lake Erie and Puerto Rico than necessarily traditional regulated projects, so I assume that’s still the case. But just maybe the base part of the capital plan, is that still kind of roughly the right ballpark of CapEx on the base part of the plan? Rejji P. Hayes – Chief Financial Officer, Treasurer & Senior VP Steve, yeah. This is Rejji. We feel very good about the operating capital investment guidance we offered up as part of the five-year plan. So just for reference, we said an aggregate from 2014 to 2018, it would be $3.4 billion; $2.2 of which should be attributable to base capital spend. The balance of $1.2 for regional projects. We are right on trend as we see it and on course and we feel very good about the operating capital-related investments in this plan. Steve Fleishman – Wolfe Research LLC Great. And then one other question on Lake Erie. Just in terms of the logistics on terms of sighting and construction and just, once you have a commitment, just getting it done on time. Could you maybe just talk about how hard or easy that process might be relative to, let’s say, other new lines? Joseph L. Welch – Chairman, President & Chief Executive Officer Well, sighting is always somewhat difficult. But having said that, we have obtained options on the property on the route that we’ve taken. We’ve been in negotiations concurrently with other parties on the route. So right now today, we feel like we’re in a good spot, especially on the sighting proposals. We know where the terminals are, we’ve gained the easements and right of ways, or the options on the property along that route. We have a couple more small things that we have to do in Canada. And on that piece of the front, I think we’ve got it all pretty much all buttoned up. I think that once you get your permits, and of course, if you have the executable contracts, the easiest part for us is the construction because that’s what we do and that’s what we do really well. But there’s always a time line on – between point A and point B, but I think this one here we got on top of the easement and right of way issue early on, and I think we’re in really good position right now. Steve Fleishman – Wolfe Research LLC Great. Thank you. Rejji P. Hayes – Chief Financial Officer, Treasurer & Senior VP Thank you. Operator Our next questions comes from the line of Julien Dumoulin-Smith with UBS. Your line is now open. Julien Dumoulin-Smith – UBS Securities LLC Hey. Good morning, everyone. Rejji P. Hayes – Chief Financial Officer, Treasurer & Senior VP Hey. Good morning, Julien. Julien Dumoulin-Smith – UBS Securities LLC Hey. So just coming back from the balance sheet question just real quickly, I want to be very clear about it. What are your leverage metrics when you’re thinking about it? So as we’re trying to calibrate ourselves here, how much deleveraging are we talking about before we get to a place or concurrent with a place in which we can see further buybacks? Just trying to get a sense of the magnitude there. Rejji P. Hayes – Chief Financial Officer, Treasurer & Senior VP Sure. Fair enough. So when we executed on the repurchase at the end of the quarter, the way these accelerated share repurchases work is that you pay the agent the full amount up front. So that was the $115 million and then clearly, they executed on a portion of that or $92 million at jump and they’re going to go do another $23 million or so. And we did actually repurchase or we get credit for about $92 million in reduction of equity when that happened. And so, that obviously has a significant impact on your debt-to-capitalization metrics, as you know, because the numerator – the debt balance goes up but the denominator essentially stays flat because the increase in debt is offset by the reduction in equity. And so, we’re north of our targeted levels of 70%, and so we’re just around 72%. We were right at that level in June of last year when we did the first slug of repurchases. And so, given the cash flow generative nature of the business, we expect to delever soon. But clearly, we’d like to get closer to our target levels before moving forward on any subsequent repurchases. And we’ve obviously exhausted the existing authority, so we would need to get more authorization from the board to move forward on any of the repos. But needless to say, I mean we don’t want to say we have to be at exactly this percentage because if the stock continues to be at attractive levels, then we think that our credit metrics and our credit risk profile can be preserved. We’ll look to be opportunistic where we can, but the first step is obviously to get additional authorization and then, obviously, we’d like to restore some leverage capacity from where we are today. Is that helpful? Julien Dumoulin-Smith – UBS Securities LLC Absolutely. And then perhaps a bigger picture question, if you will. As you look out and obviously, you haven’t rolled forward your CapEx budget, et cetera, but as you think about the transmission spend trajectory, I’d be curious, how are you seeing them shape up in, call it, like the 2018 through 2020 period as best you can tell it right now? And I’m thinking specifically here towards finally seeing some of the FERC 1000 processes play out and, well, – and CPP as well. So I’d be curious, if you see an inflection in the transmission spending cycle and why or what would be driving that. Rejji P. Hayes – Chief Financial Officer, Treasurer & Senior VP Yeah. So, clearly, we don’t want to offer up any information around capital prospects or capital investment prospects beyond our public plan, but I think you’ve highlighted a lot of the key catalysts that would lead to additional transmission capital investments. So, while we don’t have specificity around the impact of the Clean Power Plan, we know that when you have those types of ambitions, it’s going to lead to a rebalancing of the generation fleet. And if you have significant coal plant retirements and the introduction of renewable sources, which are intermittent, you’re going to need a lot of transmission investment to proceed those activities or those events and so, clearly, that’s going to be a catalyst for growth. You’ve got NERC – or likely or looming NERC standards around physical and cyber security and on a daily basis, there seems to be increasing reliability standards that will be a catalyst for growth and we’re seeing addition distribution activity, not just current, but forecasted in our service territories and, again, those are catalysts for transmission investments. So we can’t give any prescription beyond the planned period, but we think there’s a lot of tailwinds in place for incremental transmission investment in the current period and also beyond. So we’re very bullish on transmission investing, as we always have been, and we think in addition to the restoration or modernization of the systems we own, we think there’s a lot of catalyst for growth around whether it’s Order 1000, whether it’s a lot of the looming policies, as well as just power market dynamics. Again, we think the future looks quite good for incremental transmission investment, not just in this period but beyond. Julien Dumoulin-Smith – UBS Securities LLC Got it. And just to be clear about that, when you’re thinking about the opportunities here for generator interconnection ties, et cetera, is that within your core organic footprint or are you thinking that still to follow the mantra of looking via competitor processes and sort of outside the service territory to continue that growth? I mean, how is the organic footprint looking in sort of the longer term look, initially? Rejji P. Hayes – Chief Financial Officer, Treasurer & Senior VP Yeah. So, we… Joseph L. Welch – Chairman, President & Chief Executive Officer I’ll go ahead. I would say that the organic footprint is actually looking very good. I think Rejji said that pretty clearly that he said a lot of the utilities that are serviced by our transmission system are now in a phase where they’re making significant investments in their distribution systems to upgrade their service quality and reliability. And so, based on that, they are looking to us to, of course, to upgrade our services to them because they’re upgrading their services and actually asking for additional transmission service. So I think that we, in the organic side, though, that’s probably the cheeriest or the most optimistic thing that we have going on right now. Rejji P. Hayes – Chief Financial Officer, Treasurer & Senior VP And Julien, at the end of the day, this is Rejji, we’re still in seven states and own three very large systems. So, clearly, as you see changes in the generation fleet and other policy-related initiatives that are going to impact transmission spend, we’re going to clearly have exposure to those types of initiatives to the upside. So I think both organically as well as Order 1000 opportunities, we’re well positioned to do well in either front. Julien Dumoulin-Smith – UBS Securities LLC Great. Thanks for the time, guys. Joseph L. Welch – Chairman, President & Chief Executive Officer Thank you. Rejji P. Hayes – Chief Financial Officer, Treasurer & Senior VP Thank you. Operator Thank you. And I’m showing a follow-up question from the line of Jay Dobson with Wunderlich. Your line is now open. Jay L. Dobson – Wunderlich Securities, Inc. Hey, Joe. Not the perfect forum for this, but just was wondering on succession planning, how are you thinking about this? Sort of (42:11) fully understanding you haven’t announced anything, so you don’t have anything specific to say. But how are you thinking about succession planning, particularly given the 10-year anniversary of ITC as a public company? You’re ready for another 10 years? Joseph L. Welch – Chairman, President & Chief Executive Officer Well, that might be a stretch. No, I’m not ready for another 10 years. Look, I mean I’ve talked about this. I’ll try to be as candid as I can be that our board has been engaged in a active succession plan and development plan for the senior management of the company for some time now, in fact, in excess of two years. And so, we continue to work forward as – to make sure that we not only have succession planning for me, which is always a question about me, but we are looking multiple layers down in the corporation to make sure that we have the depth of bench that we absolutely need to have that good succession plan, not only for my retirement, but for unforeseen events that happen from time to time. So just to be pointed, I mean, we had – you all knew Cameron when he was here as our CFO and Cameron decided that he would take an opportunity somewhere else. But when that came, we already started to make those plans and not that we try to usher Cameron out, but knew that that could be a possibility. And so we had Rejji ready, willing, and able to go and further down in the bench, we had Gretchen Holloway in a position where we could move Gretchen up. And so, we have been actively doing this. I started off with a really young management team and we still have a young management team and so I’m happy about that. For myself, the board, is – we’ve been working together as to what makes sense and when’s the right time. And when we do it, I’ll announce it. But the fact of the matter is I’m still pretty passionate about the business. I hope I’m not disappointing you guys. Jay L. Dobson – Wunderlich Securities, Inc. Nope. Not at all. Thanks for the candor. I really appreciate it. Joseph L. Welch – Chairman, President & Chief Executive Officer Oh, you’re more than welcome. Don’t you guys want to ask 10 more questions? Operator Thank you. At this time, I’m showing no further questions. I’d like to turn the call back to Stephanie Amaimo for any further remarks. Stephanie Amaimo – Director-Investor Relations This concludes our call. Anyone wishing to hear the conference call replay available through November 10 can access it by dialing 855-859-2056 toll-free or 404-537-3406, pass code 51993117. The webcast of this event will also be archived on the ITC website at itc-holdings.com. Thank you, everyone, and have a great day. Operator Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone have a great day.

Duke Energy’s (DUK) Lynn Good on Q3 2015 Results – Earnings Call Transcript

Duke Energy Corporation (NYSE: DUK ) Q3 2015 Earnings Conference Call November 05, 2015 10:00 AM ET Executives Bill Currens – VP, IR Lynn Good – President and CEO Steve Young – EVP and CFO Analysts Shar Pourreza – Guggenheim Partners Dan Eggers – Credit Suisse Jonathan Arnold – Deutsche Bank Steve Fleishman – Wolfe Research Michael Lapides – Goldman Sachs Brian Chin – Bank of America/Merrill Lynch Jim Von Riesemann – Mizuho Securities Ali Agha – SunTrust Robinson Humphrey Paul Ridzon – KeyBanc Capital Markets Operator Good day, ladies and gentlemen and welcome to the Duke Energy Third Quarter Earnings Review and Business Update. At this time, all lines have been placed on a listen-only mode and the floor will be open for questions following the presentation. [Operator Instructions] It is now pleasure to introduce your host Bill Currens, Vice President of Investor Relations. Sir you may begin. Bill Currens Thank you, Jeff. Good morning, everyone, and welcome to Duke Energy’s third quarter 2015 earnings review and business update. Leading our call is Lynn Good, President and CEO, along with Steve Young, Executive Vice President and Chief Financial Officer. Today’s discussion will include forward-looking information and the use of non-GAAP financial measures. Slide 2 presents the Safe Harbor statement, which accompanies our presentation materials. A reconciliation of non-GAAP financial measures can be found on our Web site at duke-energy.com and in today’s materials. Please note that the appendix to today’s presentation includes supplemental information and additional disclosures to help you analyze the Company’s performance. As summarized on Slide 3, Lynn will cover our third quarter highlights and provide summary of our recent strategic and growth initiatives. Then Steve will provide an overview of our third quarter financial results and an update on our economic activities within our service territories, as well as an overview of our earnings growth prospects as we move into 2016 in the future. With that, I’ll turn the call over to Lynn. Lynn Good Good morning, and thanks for joining us. This morning reported third quarter 2015 adjusted EPS of $1.47 per share above the $1.40 per share in 2014, as favorable weather and growth in the regulating utilities supported our results. Our regulated businesses have performed well throughout 2015 delivering solid financial results. As we look to the fourth quarter, we are narrowing our guidance range to $4.55 to $4.65 per share. This range reflects mild October weather, as well as storm expenses, unfavorable foreign currency trends and the potential for extending bonus depreciation. The extension of bonus will modestly increase our effective tax for the year. Earlier this year, we increase the growth rate of the dividend to approximately 4%, reflecting our confidence in the strength of our core businesses. The growing dividend supports our commitment to deliver attractive long-term returns for shareholders. Our financial results are made possible by the efforts of our people who work every day to keep our plant safe, efficient and reliable, providing our customers with valuable services. Our regulated generation fleet continued to deliver for customers during the critical summer months. Our nuclear fleet achieved a 97% capacity factor during the quarter and our growing regulated gas fleet continued to deliver value for our customers, taking advantage of the low natural gas prices. In fact our utilities have burned more natural gas in the first nine months of 2015 than they did in either of the two prior full years. The Edwardsport IGCC plant continues to operate well, achieving a third quarter gasifier availability factor of around 80%, massing the first quarter’s record. Additionally in July, the facility achieved a record month of net generation. In early October, we experienced heavy rains and flooding in the Carolinas and 500,000 customer outages. We were well prepared and mobilized our crudes in advance, speeding the restoration of service. Like others in the industry we are making progress towards a safe, cost effective closure of our Ash Basins in the Carolinas. Basin closure is underway at six sites and we are working through the approval of closure plans at our remaining basins. I’m proud of the way the Duke team has responded to this important industry issue with excellence and leadership. We are systematically and strategically increasing our regulated business mix through a series of acquisitions and divestitures as highlighted on Slide 5. As well as the portfolio of investments I will discuss in a moment. Last week, we were very excited to announce the plan to acquire Piedmont Natural Gas, which will add a well established natural gas business and platforms in the Duke portfolio. From a strategic perspective, we see this acquisition as the foundation for establishing a broader gas infrastructure platform within Duke, building upon our recent gas pipeline investments and complementing our existing gas LBT business in the Midwest. We plan to leverage the scale Duke with Piedmont’s well regarded management team and excellent operational capabilities. Piedmont has long been recognized as a premier operator of low risk regulated gas infrastructure. We have partnered with them over many years, as they have built and operated the critical gas infrastructure that serves natural gas generation in this region. Piedmont is experiencing robust customer growth and is investing in projects that have constructive regulatory mechanisms providing a strong base to organic growth. These investments are expected to grow their rate base, by an average of around 9% over the coming years. This acquisition is expected to close by the end of 2016 and be accretive to our earnings in the first full year after close. This will increase our total regulated business mix to over 90%, firmly supporting our earnings and dividend growth objectives. We will keep you updated, as we progress through the approval process. Turning to Slide 6. We are also focused on creating long-term growth and value for our customers and shareholders, with investments that will modernize our system, both our generation and our growth for the benefit of our customers. We continue to introduce more diversity to our fleet through low cost natural gas. Construction has begun on a combined cycle natural gas plant at the lease site in South Carolina, while preconstruction activities will commence on the Citrus County combined-cycle plant later this year. Both projects represent a total of over 2 billion in investments and remain on-time and on-budget. Our Western Carolina modernization project also remains on track. You may recall that we decided to retire our coal unit in Asheville and replaced it with a combined-cycle gas plant and a new transmission line, to improve reliability and support growth in the Asheville area. After working through a comprehensive stakeholder engagement process over the course for the summer, we announced yesterday a modified set of resources to support this project, eliminating the need for a new transmission line. Rather than the 650 megawatt gas plant, we will build two 280 megawatt combined-cycle natural gas units with the option for 190 megawatt simple cycle unit by 2023. A total estimated investment of just over $1 billion. This modification allows us to maintain our 2024 retirement schedule, while reflecting important input from our customers and communities. Further, earlier this year we acquired the NCEMPA asset, a project that is a win-win for our customers in the Eastern region of North Carolina. Our two gas pipeline infrastructure project Atlantic Coast Pipeline and Sabal Trail will provide critical access to additional low cost natural gas in the Southeast, helping to meet growing demand for the fuel from our generation portfolio, as well as to serve our customers’ needs. These projects continue to move through the regulatory approval and siting processes. The formal FERC application for ACT was filed in September and we expect FERC approval in 2016. Once FERC approval is obtained, the project can begin construction activities with an expected COD in late 2018. At Sabal Trial FERC approval is expected in early 2015 with the pipeline operational in 2017. In Indiana, we are revising our grid modernization plan under state legislation and we plan to re-file our plan by the end of this year. We’re also making meaningful progress growing our renewable investments both in our regulated footprint and in the commercial business. On the regulated side, we’re on track to complete construction of 128 megawatts of utility scaled solar in North Carolina by the end of this year and our moving forward with investments in both South Carolina and Florida. Our commercial renewables portfolio also continues to grow with demand for wind and solar projects throughout the U.S. is supported by renewable portfolio standards and growing customer demand. We have a number of commercial wind and solar projects slated to come online later this year, which will increase this portfolio to over 2,700 megawatts of capacity. Overall, these growth investments total $20 billion through 2019 and provide the foundation for growth in the coming years. Steve will provide additional perspective on 2016 and beyond in his remarks. In conclusion, we continue to execute very well, providing safe, reliable and affordable power to our customers. Our growth prospects remain strong as we deploy significant capital and critical energy infrastructure investments. This establishes the foundation to provide clean modern energy to our customers and our communities for decades to come. Let me turn it over to Steve. Steve Young Thanks Lynn. Today, I’ll review our third quarter financial results and provide a brief look into 2016. I would also discuss the economic drivers in our regulated service territories and the low growth experienced in the third quarter. I’ll ramp up with the discussion of our financial objectives. Let’s start with the quarterly results as highlighted on Slide 7. For more detailed information on segment variances versus last year, please refer to the supporting materials that accompanied today’s press release. We achieved third quarter adjusted diluted earnings per share of $1.47, compared to $1.40 in last year’s third quarter. On a reported basis, 2015 third quarter earnings per share were $1.35, compared to $1.80 last year. As a reminder last year’s third quarter results included a $0.43 favorable adjustment for a change in the estimated value of the Mid-West generation business. A reconciliation of reported results to adjusted results is included in the supplemental materials to today’s presentation. Regulated utilities quarterly adjusted results increased by $0.07 per share, driven largely by warmer weather and strong margins in our wholesale business, including the new NCEMPA contract. As we expected, these positive drivers were partially offset by higher O&M related to the timing of outages, increased cost related to NCEMPA and higher storm costs. International’s quarterly earnings declined $0.02 over last year. Continued weakness in foreign exchange rates in Brazil and lower margins at National Methanol were partially offset by lower purchase power costs in Brazil. Additionally, we recognized an asset impairment in Ecuador during the quarter. Our commercial portfolio incurred $0.08 of lower adjusted earnings as a result of the absence of prior year Mid-West generation results due to lower wind resources this year earnings from our commercial renewable business are expected to be around 75 million for the full year versus our original expectation of 100 million. Commercial’s results will be favorable impacted in the fourth quarter by tax credits related to over 300 megawatts of wind in solar generation scheduled to come online. And finally other was up $0.06 due to favorable tax adjustments in the timing of tax levelization as a reminder due to income tax levelization other reflects projected benefits related to renewable tax credits ratably during the year. Once the projects become operational these benefits are reallocated to the commercial portfolio. Lastly our quarterly results benefited $0.04 from the accelerated stock repurchase completed earlier in the year. Moving on to Slide 8, I’ll now discuss our retail customer volume trends. Across our jurisdictions weather-normalized retail load growth has increased by 0.3%, over the rolling 12 months. Within the residential sector we are seeing some positive trends. We continue to add new customers at an annual rate of approximately 1.3%. And we’ve now experienced two consecutive quarters of relatively flat usage per customer. We also continue to see favorable key indicators for the residential sector including employment, personal incomes and spending, as well as household formations. The commercial sector continues to grow modestly benefiting from declining office vacancy rates and expansion in the restaurant and real estate sub-sectors. This growth was partially offset by lower governmental and retail store sales during the quarter. The industrial sector while strong for most of the year has recently slowed, we are continuing to see transportation and building materials gain momentum. In particular, residential construction activities remain strong in the Southeast. During the quarter, we began to experience some weakness in the metals and chemicals subsectors. This slowdown is due to a pause in industrial activity, driven by a deceleration of consumer, business and government spending, a reduction in inventories and the strong dollar which has reduced global demand for U.S. products. Our economic development teams remain active successfully helping to track new business investments into our service territories. So far this year these activities have led to the announcement of $2.4 billion in capital investments, which is expected to result in nearly 7,200 new jobs across our six states. With rolling 12 month weather-normalized load growth of 0.3% we expect to thin towards the low-end of our original 2015 expectation of 0.5% to 1%. Moving to Slide 9, let me layout our key earnings drivers, as we begin thinking about 2016. As has been our normal practice we will provide our 2016 guidance range and updated financial plans in February. For our regulated businesses, we plan for normal weather. We expect growth from rider recovery and AFUDC on major capital investments, along with a full year impact of the NCEMPA transaction and modest growth in retail load. With respect to our cost structure, we continue to build upon the success of our recent merger integration activities. Cost management is an ongoing effort. And we are finding ways to reduce O&M below current levels to match modest sales growth. We expect growth in the commercial portfolio, as we continue to add contracted renewable generation and expect the return of normal wind patterns. The loss of Midwest generation’s earnings contribution is a headwind but it is partially offset by the accelerated soft repurchase. We expect internationals’ earnings have stabilized in 2015 and have the opportunity for modest growth in 2016, largely driven by an expectation for improved high growth dispatch, over the past several months we begun to see higher water inflows and lower market power crises. Further, meteorologists are forecasting a strong Alminio weather pattern through early 2016, which could lead to increased rainfall in Southeastern Brazil. Currency exchange rates are expected to remain volatile but the inflationary provisions in our contracts in Brazil can help to mitigate some of the currency devaluation. We also expect Brent crude oil prices will stabilize in 2016. Now moving to Slide 10, I want to step back and discuss our overall earnings growth objectives. Since 2013, our regulated and commercial segments representing 90% of Duke Energy have delivered 5% earnings growth. As we look at 2016 and beyond. These segments are expected to continue to grow within our 4% to 6% growth objective as we deploy significant capital and critical gas and electric infrastructure investments, including the acquisition of Piedmont, as well as renewable investments in our commercial business. We will also see the potential for rate cases in the Carolinas in the coming years to provide timely cash recovery of these important investments. The remaining portion of the company, the international business has experienced a decline, contributing earnings of $0.67 per share in 2013 and 2014 to about half that in 2015. About half of this decline is due to the three year drought in Brazil while unfavorable exchange rates and lower crude oil prices comprise the remaining half. From this point forward we will believe that internationals’ earnings have stabilized and are positioned for modest growth, consistent with our past practice, we will provide more specific financial guidance in February. We plan to reset our base to 4% to 6% long-term earnings growth off of 2016. This reflects continued strong growth in our core businesses, as well as a more realistic based year for growth in our international business from 2016 forward. Moving on Slide 11 outlines our financial objectives for 2015 and beyond. For the reasons Lynn mentioned earlier, we are narrowing our guidance range for 2015, from $4.55 to $4.75 per share to $4.55 to $4.65 per share. We have made significant progress in advancing our strategic growth initiatives, both in our regulated and commercial businesses providing strong support for our long-term earnings growth objective. Our objective is to grow the dividend annually at a rate consistent with our long-term’s earnings growth objectives. In near-term, our payout ratio will trend slightly above 70%. We are comfortable with that higher range based on the strong growth in our core regulated and commercial businesses. And the cash flows we are repatriating from international. Our strong investment grade credit ratings are important to us, as they help us finance our growth in an efficient manner. I am pleased with our results for 2015. We have successfully executed on a number of key strategic initiatives and delivered strong financial and operating results. Helping to offset the weakness in international, we remain focused on finishing the year well. With that, let’s open the line for your questions. Question-and-Answer Session Operator Thank you, ladies and gentlemen. The floor is now open for questions. [Operator Instructions] Our first question is coming from Shar Pourreza of Guggenheim Partners. Shar Pourreza So this morning, you reiterated your 4% to 6% growth, but also higher yet to be determined 2016 base year and you did drop that footnote you had in the second quarter around DEI potentially being a swing factor in your outlook. Steve is this sort of like what you meant when you mentioned that Piedmont deal would enhance growth trajectory is it less concerns around DEI or sort of what’s driving this increased confidence? Steve Young Well, I think what I would refer you to Shar is the slide we discussed 10. Where we looked at our core businesses, when you isolate international with our core businesses they have grown consistently at 5% from 2013 through ’15 and we would expect that to continue. The international business has involved which moved from a $0.60 per year business to $0.30. And that’s been the challenge we’ve had to deal with in 2015, that’s difficult to overcome. So we billion rebasing in ’16 makes sense in light of what international has done. Shar Pourreza And it included Piedmont right? Lynn Good We expect to close Piedmont Shar towards the end of ’16 into ’17, you may recall from our announcement a week ago that we laid out a calendar. We will work as aggressively as we can to close it but I think a year is a good planning assumption. Shar Pourreza Okay, got it. And then just one last question on international, it’s good to see the currencies becoming a little bit less of an issue the hydrology is improving. We haven’t heard much on this lately. Is there any sort of incremental datapoints around the Brazilian government potentially looking at providing some sort of a retrieve to the hydro generators or is this sort of a kind of a dead movement? Steve Young There has been a lot of activity in this area Shar, recently there was a technical note that was issued by an arm of the government and that’s really just a document that summarizes discussions to-date, a number of discussions are occurring. The government is targeting issuing effectively an executive order this calendar it remains uncertain exactly when, but that’s their target. And what that order might say is not certain at this point either. So there is more work to be done here. I would say that in general the views of people and the government and the regulators have been constructive with regard to generators in our position. So there is more to come there in the meantime, the injunctions are still in effect and that has provided some relief to us. Operator Thank you. Our next question is coming from Dan Eggers of Credit Suisse. Dan Eggers Hi just taking up on the Slide 11, when you guys, you made the comment about the dividend trending higher than target payout ratio, but also you are wanting to keep with the long-term EPS growth rate. Can you just maybe translate what you’re trying to signal in those comments which seem to be a little bit in conflict? Lynn Good Dan, I would go back to the Steve’s comments on Slide 10 with the intent to rebase off of 2016 and move to 4% to 6% from that point forward. We see the dividend trending slightly above 70% in the very near-term. And so if I look at the strength of the dividend, the dividend is really driven by the underlying core business, which is growing quite well and given the investments we have put in place, we believe that it will continue. And so we have confidence in growing it at that rate and allowing payout ratio trend out modestly in the short-term we think it’s a smart decision. Dan Eggers Okay. And then on O&Ms you guys have done a good job as far as bringing down costs since the Progress acquisition. What kind of reductions do you see from here as you are a part of that ’16 drivers the idea of bringing cost out, is it a substantial reduction ’16 versus ’15 or is more just absorbing inflation at this point? Lynn Good We are still at work Dan on our plans and we’re targeting to absorb inflation plus and we think that’s going to be a combination of a number of things that we build a strong foundation on but we are going after productivity and efficiency and the company as you said has demonstrated a great ability to control cost and we see even more potential in to ’16. Dan Eggers Okay. And then I guess maybe the last one just on you kind of just calibrated the commercial business and not to get too far ahead on ’16 but commercial is now coming in below where you guys thought the normal baseline would be, do you still feel comfortable with $100 million as your run rate from residual commercial? Lynn Good This year we’ve been impacted by wind resources Dan and I think that’s a theme that you have seen with others that have significant renewable exposure. So we expect our restoration of that to more normal levels as part of our planning for ’16 and then we do intend to continue to deploy capital in a way that meets our return expectations, so we would expect to see some growth. I think over the long-term the cash spreads and other things will have to be evaluated, but we see ongoing momentum around renewables. Steve Young And we have committed projects for 2016 lined up as well to keep the growth going there and also in our commercial portfolio as you move forward we will start to see earnings from our pipeline investments kick in as well. Dan Eggers Okay. So just one last one on the load growth trends, you may have had a — you are below, at the bottom end or a little bit below where you thought you’d be even the customer growth seemed pretty good this year, are you having to reconsider kind of what that long-term growth rate is, is it 0% to 0.5% or do you think there is some discrete usage trends maybe around multi-family housing or something like that that is explaining why usage has been that much of a drag relative to customer growth? Lynn Good Dan, I think we’ve been working with a 0.5% to 1% for some time and I think a 0.5% seems to be the range that we’re in. And I think it’s all the things you talked about it is synergy efficiency, it is housing patterns and even volatility in industrial. We had strong industrial growth when you dial back in this quarter. So what we are focused on as we kind of link this discussion to our cost structure, is planning to cost structure that can absorb that variability and also be positioned for modest very low load growth if that’s the direction things continue to head. Operator Thank you. Our next question is from Jonathan Arnold of Deutsche Bank. Jonathan Arnold I just would like to understand a little better when you are talking about this rebase on 2016 and Steve, I’m not quite sure whether I have you right, are you saying you anticipate growing at the 4% to 6% through 2016 and then also off of 2016 or implicit within this concept to the rebase seems to be the idea that maybe you weren’t or you want to reposition the range a little bit, I just want to understand what you are saying on ’16, when you made that statement? Steve Young What we are looking at Jonathan is we will set a base year or anchor year off of 2016 and then you would see 4% to 6% growth from there. And we think we’ve got to do that given the changes in international we think it’s stabilized and it’s moved from again a $0.60 business to a $0.30ish business going forward. So where we base with ’16 as the anchor we see a 4% to 6% growth there, underlined by the strong core business growth in the track history that it shows and some potential modest growth in international from that new lower level. Lynn Good And so what I would add to that Jonathan, if you could look at the Slide 10, you see the regulated and commercial portfolio, the blue bar that’s the bar that’s growing at 4% to 6% and then you have an international business, which is about $0.30 in ’15 so it would add to that and grow modestly. So that’s the direction that we are trying to provide here with expectations for ’16 and then we think from that base, we are in a position to grow at 4% to 6% going forward. Jonathan Arnold Okay. Understood. Thank you. Could you maybe just — do you have an expectation currently on what — how pension will look as a driver for next year just specifically or is it a little early to tell? Steve Young It’s a little early to tell on pension you got to take a look at the discount rate right at year-end, and who knows where that will go, if the Fed raises rates or something that could have an impact on it, I don’t think it would be any huge change that we’re looking at in pension expense, at this point but again with it being so sensitive to the discount rate, we would — it’s a little early to say precisely. Operator Thank you. Our next question is coming from Steve Fleishman of Wolfe Research. Steve Fleishman So a couple of questions, I just, these international pressures are not new and in the past you talked about trying to work on a plan and things to offset the international pressures. It just sounds to me like, it just not — you just kind of changed to, they just are what they are, we’re just resetting the base and then growing off there, because these are just — became too much. Is that fair to say what happened? Lynn Good Steve I would say slightly differently. And in 2015, I think the team has done an extraordinary job of offsetting. What is happened in international, we started the year with an expectation, they would deliver 345 and they’re delivering just north of 200 million. And that’s an execution on strategic initiatives more timely and that’s been running the business slow and taking advantage of good weather and other things that have developed. As we look forward, we did not have an expectation earlier in the year of weather international with rebound, the depth of the currency issues, were difficult to forecast at that time, the economic implications. And so as we sit here, closing the year we see a rebound on water conditions in hydrology, but we continue to see headwinds on currency and economic growth. And so we think it’s appropriate in light of what we see today to establish a baseline of about $0.30 for ’15 on international. And then we do believe it’s stabilized and we see an opportunity for modest growth from there. I think what is important is that the 90% of the business regulated in core has demonstrated strong growth over the period of ’13 to ’15 and we think that will keep going. As a result of all the investments we have put in place and our ability to execute. Steve Fleishman And the updated guidance for the international you are now — are you using kind of current forwards for currency in oil and the like or? Lynn Good Yes. Steve Young Yes. Steve Fleishman And essentially are you — okay, great. And then just thinking about Piedmont and the context for the 4% to 6% of this 2016 base now just would that — you talked on the deal announcement of that enhancing the 4% to 6% so if there was no Piedmont, would you still be 4% to 6% or not. Could you just kind of clarify now that you have this new base? Lynn Good Yes. So the growth rate is not dependent on Piedmont. We believe the base business itself, the investments that we’ve outlined, the way the business is executing is capable of growing 4 to 6. So we see Piedmont as incremental to the growth rate. And… Steve Fleishman But still in the 4 to 6? Lynn Good Yes. Steve Fleishman Okay. And then just on the dividend growth and earnings growth comment. Because you’re saying, we’re going to grow the dividend in line with earnings but then we’re above the payout ratio. So kind of by definition you just switch to end up saying about the payout ratio. If that is what you actually do? So could you just kind of clarify your communication there? Steve Young Our dividend is growing about 4% now. I believe that we’ll move above the 70% target level for a while. But as we grow we believe we’ll return back to our target level. Operator Thank you. Our next question comes from Michael Lapides of Goldman Sachs & Company. Michael Lapides Real quick question, just when you think about the renewable business. You have had the earnings benefit in the last year or so. Can you quantify and Steve you touched on it, I want to make sure I understand it. Can you quantify the total EPS benefit of the tax credits? And then how you think about replacing that if solar development slows post 2016 and tax credit roll off or PTCs don’t actually get extended? Steve Young Michael right now, a lot of the net income bottom-line benefit from the renewables, the commercial renewables business comes from the tax benefits. There is some profitability on the non-tax side in the ongoing margin, but the bulk of the earnings comes from the tax benefits. So your question is when these tax benefits when and if they expire what happens there. I think based on what we have seen and heard now there will still be a market for renewable power as no states are backing off RPF standards and that’s a basis for a lot of the growth here is responding to RFPs to meet these requirements. The PPAs in the contracts may have to change with the absence of the tax benefits. And the pricing may have to change, but we will still structure this business to provide profitability here. I would also add that the cost for the renewables is going down and will help offset some of the tax benefits that exists. Michael Lapides Got it. And just how much were for those tax benefits as part of your 2015 guidance. Is that the full piece of commercial that $75 million or just some portion of it? Steve Young It’s the majority of the 75 million. Michael Lapides Got it, okay. The other thing can the O&M cost savings offset the $0.17 impact of positive weather this year? Lynn Good Michael, we are not getting that specific on how each of these drivers impact, so what I would direct you to is think about our O&M spend and we are at work to not only offset inflationary impact to drive those costs lower in ’16. So I think about weather and we always start by planning normal weather and then we’re building up with investment earnings as well as cost control. Operator Thank you. Our next question is from Bryan Chen of Bank of America/Merrill Lynch. Bryan Chen Hi my questions have been answered guys. Operator Our next question is coming from Jim Von Riesemann of Mizuho Securities. Jim Von Riesemann I got to put my dead head on for a second here. Can you just a talk little bit about how much cash flow is upstream from the regulated utilities to the parent level every year on an annualized basis? Lynn Good I think we will probably take that question offline. Jim, I’m not sure we’ve got a cash flow statement sitting in front of us here. Steve Young Right, I don’t have that with me, we’ll have to work on that a bit Jim. Operator Thank you. Our next question is coming from Ali Agha. Ali Agha Lynn and Steve just listening to your comments, just so that I’m clear, with normalized weather next year international being modest, some cost savings and then the rebasing, just directionally it appears that ’16 it is pretty much flat to maybe modestly down from ’15 and then so is that fair? Lynn Good I think we’ve given you the drivers, if you look at the slide, on Slide 10 to grow the base business at 4% to 6% add to it international with modest growth and so I think we’ve given you a pretty good sense of where we think it will be and of course we’ll give you more detail in February, as we finalize our business plans so that you can understand more specifically how much of it is coming from O&M and how much is coming from each of the business segments. Ali Agha Okay. And more near-term in 2015, when you locked of $0.10 from the higher end of the range, is that all because of commercial, is it international being worse, can you just kind of elaborate the change in ’15 guidance? Lynn Good So Ali, we have really been working throughout ’15 to offset weakness in international and have been successful in doing that through a variety of things including favorable weather, as well as early closings on the Eastern Power Agency and the stock buyback. As we look to the fourth quarter though we always plan for normal weather, we started out with October being mild, we have storm expense sitting in October, we have a slighter, weaker currency as a result of some of the movements that occurred in September and then we also talked about the extension of bonus depreciation. We don’t know for sure, but it feels to us like that will likely get extended and if it does, because of our cash position, it results in a modestly higher effective tax rate for the company. So all of those things considered, we think $4.55 to $4.65 is an appropriate range at this point. Ali Agha Steve and on the bonus depreciation front Lynn, I mean the talk is that if it gets extended, it’s a two year extension, I’m just curious of that’s how you guys are seeing it and if so can you just quantify, just a bonus depreciation and extension impact for Duke? Steve Young We’ve heard various guesses that how long it will be extended, we think there is a good likelihood of at least one year, two years is possible as well, and the impacts for 2015, for one year extension is in the range of $0.04 for us if you go beyond into a two year extension, it could be a similar number just depends on our overall tax positioning the issue for us is we’re toggling in and out of an NOL position and which makes us perhaps unique in the industry, if you are deeply within an NOL or outside of an NOL position. This extension doesn’t have an impact and it depends a bit on when we come out of that NOL position, which depends on other factors. So it’s a little hard to predict beyond ’15. Lynn Good And of course all the cash flow. Cash flow is positively impacted, if it is extended, so let see if this is giving you as earnings for certain. Ali Agha Absolutely. Last question Lynn, so on the international operations is the mind set now look, sort of hunker down and sort of work with the portfolio flat to modest growth, is that sort of the planning now and not really being more proactive and saying, hey does this really fit in the portfolio? Lynn Good Our focus has certainly been this year, Ali trying to run the business as efficiently as we can, we focused on cost, I think the international team has done an extraordinary job in a difficult market, we think it stabilized and hopefully, we’ll see a slightly better picture in ’16. I think the portfolio is always under review. The fact that we added Piedmont is consistent with our view that we wanted more natural gas in the portfolio. So that’s an ongoing review, in the meantime we’re also taking advantage of the international cash as you know. Operator [Operator Instructions] Our next question is comes from Paul Ridzon of KeyBanc Capital Markets. Paul Ridzon In your release you indicate that for the quarter weather was a $0.09 pick-up at the utility and then when I look at Slide 19 in the deck. I see that last year it was $0.06 below norm, but this year is basically short of normal. Just trying to reconcile that? Steve Young Yes. I think that your statements are correct there is some rounding in some of these schedules I believe is the difference in your sense. But we’ve returned to normal weather this quarter last year, it was mild weather. Lynn Good And Paul the other thing I would know the share count is going to have a difference between ’14 and ’15, because of the share buyback. Paul Ridzon Okay. And then kind of given the pending Piedmont acquisition, what’s going to happen to proceeds from securitization, should that just sit on the balance sheet when you use that cash when you close the deal? Lynn Good Yes. So we would expect securitization to move through the process in ’16 Paul. So we don’t come into the cash flow as a company and be used for investments or 4 billion debt in the short-term. But we do see at as the cash flow item that over a long-term basis could be used for long-term investments Piedmont being one of them. Paul Ridzon When do you expect that cash? Steve Young We would expect to be able to close the securitization in the first to second quarter of 2016. Paul Ridzon And then just lastly your latest thoughts around filing rate cases in your regulatory jurisdictions? Steve Young We’re looking at filing in I would say in the late teens it depends upon investment plans and other factors there that we’d look at jurisdiction by jurisdiction. But generally we’re looking at rate cases in the Carolinas in the late teens. Paul Ridzon And then lastly just a clarification on the payout ratio discussion, if you were to look at your ’15 payout ratio what would you use as the numerator and denominator. I guess 460 would be denominator? Steve Young I’m sorry, ask that again, I’m sorry I am not. [Multiple Speakers] Paul Ridzon I just want to make sure, how are you thinking about the payout ratio? What — is it the indicated dividend at year-end or is it the dividend paid during the year? Steve Young It’s the dividend paid during the year as it grows over the annual earnings. Paul Ridzon So it’s kind of a mix a blend of two years of dividends, because change at mid-year? Lynn Good So there is nothing fancy about this Paul. Whether you use an annualized number or whether you use what is paid out I think it’s all a matter of small rounding. I would calculate the payout ratio the way you typically do for every other utility. Operator Thank you. There appear to be no further questions in the queue at this time. I’d like to turn the call back to Lynn Good for any closing or final remarks. Lynn Good So thank you everyone for joining us today for your interest and investment in Duke Energy. Our fourth quarter earnings call which will also include our updated financial forecast will be held in February and we look forward to seeing many of you in the coming months and at the EEI Conference next week. Thank you. Operator Ladies and gentlemen, on behalf of Duke Energy we’d like to thank you for your participation. You may now disconnect and have a wonderful day.

Quant Investing: Improving The Value Of Shareholder Yield

Part of quant investing is always being on the look out for better metrics and systems that enhance performance. Today I want to look at a simple improvement to the value metric shareholder yield. I’ll look at this in the context of the quant index replication strategy I posted on here . First, lets look at shareholder yield in more detail. Recently there has been some interesting discussion on the level of buybacks, as a percentage of market cap, and how strong a conviction by management that represents. The idea being that the higher percentage of shares a company is buying back, the more conviction management has on the value of the company, and thus leading to better stock performance. The best analysis of the topic is here . The analysis going back to 1987 shows two key things; the largest buybacks (greater than 5% of market cap) are done at cheaper valuations and this leads to better performance over the following year. The large stock shareholder yield quant value strategy is a big improvement on the traditional indices. But maybe we can do better armed with this new information on the level of buybacks. I’ll take the original large stock SHY value strategy and compare it to a new version which only buys the large cap stocks sorted by SHY if the buyback yield is greater than 5%. We’ll go back to Jan 1999 and run the backtest through yesterday’s market close. First, the performance for the original large stock SHY strategy. Pretty darn good, 16.44% per year since 1999 with a Sharpe of 0.75 and Sortino of 1.06. Now lets add the filter that only buys stocks with a buyback yield greater than 5%. Even better as the research suggested. 17.59% per year since 1999 with a Sharpe of 0.80 and a Sortino of 1.17. That a 1.1% per year return enhancement with an improvement in risk adjusted returns as well for a very simple addition to an already powerful strategy. In short, screening for high conviction buybacks is a powerful addition to a large cap shareholder yield value strategy.