ITC Holdings Corp. Q1 2010 Earnings Call Transcript

Executives

Pat Wenzel – IR

Joseph Welch – Chairman, President and CEO

Cameron Bready – SVP, Treasurer and CFO

Analysts

Kevin Cole – Credit Suisse

Neil Kalton – Wells Fargo

ITC Holdings Corp. (ITC) Q1 2010 Earnings Call Transcript April 29, 2010 11:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the ITC Holdings Corp. first quarter earnings 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. (Operator instructions) As a reminder, this conference cal is being recorded.

I would now like to introduce your host for today’s cash flow, Miss. Pat Wenzel, Director of Investor Relations and Trainer. Ma'am, you may begin.

Pat Wenzel

Good morning and thank you for joining us for ITC's 2010 first quarter earnings conference call. Joining me on today's call are Joseph Welch, Chairman, President and CEO of ITC; and Cameron Bready, our Senior Vice President, Treasurer and CFO.

Last night, we issued a press release summarizing our results for the first quarter of 2010. We expect to file our Form 10-Q with the Securities and Exchange Commission today.

Before I begin, I would like to remind everyone of the cautionary language contained in the following 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 are forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. These forward-looking statements represent our outlook only as of today.

While we believe that these statements and their underlying assumptions are reasonable, investors should know that actual results may differ from our projections and expectations because they are based on current facts and are subject to risks and uncertainties. A discussion of the risks inherent in our business that could cause these differences may be found in certain documents filed with the SEC such as our Form 10-Q expected to be filed today; our other periodic reports filed on Forms 10-Q and 10-K as well as our other SEC filings. You should consider these risk factors when evaluating our forward-looking statements. We disclaim any obligations to update or alter our forward-looking statements except as required by law.

At this time, I’d like to turn the call over to Joe Welch.

Joseph Welch

Thanks, Pat. We are very pleased to being 2010 with another strong financial – with another quarter of strong financial results. Importantly, we are also off to a very solid start in this the first year of our five-year, $3 billion capital investment program, and we believe that we remain on track to deliver on our commitments we have made that will benefit our customers, and shareholders.

Our investments in transmission infrastructure benefit our customers by improving energy delivery, reliability, and efficiencies, and interconnecting new renewable resources, and our key objectives and our strategic vision of leading the industry of a 21^st century transmission system in the United States.

During the first quarter, we continued to make progress on advancing our investment plans, which include investing in our base operating companies, developing regional transmission projects, and investing in interconnections of new generating resources, including renewables. As you may recall, last year the Michigan Wind Energy Resource’s own board completed its work and issued a final report identifying four potential wind zones with potential wind capacity of 3400 to over 6000 megawatt. At the end of November, we submitted transmission plans to Michigan Public Service Communication to support the wind zones identified in the study.

In January of this year, the MPSC issued an order designating two wind zones out of the four zones that have been identified by the Wind Zone Resource Board. Region IV, which is known as the Thumb region of Michigan was designated the primary zone. This zone was determined to have realistic wind generation development potential of approximately 2300 to 4200 megawatts. The MPSC also designated region I as a wind zone.

Since the MPSC issued this order, we have been working with them and the other stakeholders to identify the optimal transmission solution to support the long term need for delivering wind resources in the Thumb region. On April 14, we submitted our transmission plan to the Midwest Independent System Operator, or MISO, for study and ultimate approval that recommends a 345 kV transmission solution in order to support the maximum wind potential identified by the Wind Resources Board study for region IV as required by the statute that approved the wind zone development.

The solution we submitted to MISO was selected in close consultation with the MPSC staff and other stakeholders. As detailed in the transmission plan we submitted to the MPSC late last year, the preliminary cost estimate for the recommended 345 kV transmission plan is approximately $510 million. As a reminder, this estimate represents only the cost associated with the backbone transmission necessary to better interconnect with the Thumb region to support the wind zone projects, and does not include any other potential cost associated with interconnecting the wind generation projects themselves.

It is premature to estimate those costs as they will largely depend on the size and the location of the specific projects that are ultimately developed in this region. We requested that MISO complete out an out-of-cycle review for the 345 kV transmission plan to interconnect the Thumb region and ask for MISO’s board approval at its August board meeting. Upon receipt of MISO approval, we will begin routing, and siting activities in Michigan for the projects. Under the legislation passed in 2008, these projects will be eligible for an expedited siting process.

Our regional transmission development project at ITC Great Plains continue to advance well. In April, we were very pleased when the Southwest Power Pool or SPP board approved its new highway/byway cost allocation methodology and filed the tariff for approval with the Federal Energy Regulatory Communication. The methodology allocates 100% of the cost of regional transmission projects at 300 kV and above broadly across the SPP region. Projects above3 100 kV and below 300 kV are allocated one-third regionally and two-thirds to the local zone and projects 100 kV and below are allocated 100% to the local zone.

As we have previously discussed, we view SPP as a very capable regional transmission organization and believe its actions are paving the way for the advancements of much-needed high voltage transmission in the region. Having a constructive cost allocation policy like the highway/byway model in place in SPP is critical to progressing the development of robust and reliable transmission system.

The highway/byway cost allocation approved by SPP is also an important milestone for our V-Plan projects in Kansas. Additionally, we were successful in achieving another significant milestone for the V-Plan project when on April 27^th, the SPP approved the V-Plan project as one of the priority projects. As expected, the V-Plan project was approved for construction as a double-circuit 345kV project as opposed to the originally proposed 765 kV configuration.

SPP has indicated that it will continue to study the benefits of the 765 kV as part of its integrated transmission planning process, which could result in the V-Plan project being approved for construction at the higher voltage level. The results of this process will not likely be known until early 2011. However, regardless of which voltage is ultimately approved, we will build the project as directed by SPP as we consistently stated.

In addition to the V-Plan project, our KETA and Hugo to Valiant projects continue to move forward as planned. Both projects have begun pre-construction activities. Phase I of the KETA project remains on schedule and is progressing as expected. On March 2^nd, we filed the siting application for Phase II of the KETA project. We expect a decision from the KCC or the Kansas Corporation Communication by June 30^th.

In February, ITC Great Plains completed route selection for its Hugo to Valiant high voltage electric transmission line project in Oklahoma.

On the legislating front, comprehensive climate and MG legislation is stalled and it remains unclear as to when and in what form legislation may be advanced.

Although there continues to be strong consensus of the need to expand the transmission grid as part of these federal reform efforts, I am skeptical that we will have comprehensive energy legislation by the end of this year. The good news is that the key policy reforms are also being considered in other forms. We have long contended that the Federal Energy Regulatory Commission already has authority to address [ph] cost allocation and has recently indicated that it plans to move forward with a rule-making on cost allocation and is also expected to act on transmission planning issues through a generic rule-making.

In addition to the Federal Energy Regulatory Communication’s stated plans to address both cost allocation and transmission planning, another effort to advance transmission reforms came through the creation of the bi-partisan Governors’ Wind Energy Coalition, a coalition representing governors of 29 states, which released a report urging the federal government to take steps to boost wind energy. Their report endorses developing new infrastructure for electricity transmission to provide access to renewable energy resource.

Likewise, the Department of Energy is now overseeing implementation of interconnection-wide transmission planning, a process in which ITC is actively participating. We remain optimistic that these efforts will help accelerate the development of regional high-voltage transmission projects to enable access to renewable and other types of power generation. But as we have seen with our efforts to build transmission in the Great Plain region, this process is lengthy, and will be evolutionary, not revolutionary. Despite this, ITC remains well-positioned to play an important role in these opportunities.

With the progress we have made during the first quarter of 2010 we believe we are well-positioned to continue to deliver an attractive total return to our shareholders. Our five-year plan key goals include best-in-class operation, and executing on our $3 billion capital expenditure plan by investing in both our core operations and our development projects. We remain confident in our ability to meet our commitment and deliver the results we have indicated, consistent with our performance over the last seven years of our company’s history.

At this time, I will turn the call over to Cameron to provide an update on our financial results and outlook.

Cameron Bready

Thanks, Joe, and good morning. Turning our attention to our financial performance in the first quarter of 2010, ITC reported net income of $34.2 million, or $0.67 per diluted share. This compares with net income of $28.7 million, or $0.57 per diluted share in the first quarter of 2009, and represents a year-over-year increase in earnings per share of nearly 18%.

The key drivers that contributed to the increases in net income and earnings per share in the first quarter results compared to the corresponding period in 2009 include an increase in net income for the quarter due to higher rate base and AFUDC at all of our operating companies. Net income was also higher in the quarter due to lower nonrecoverable expenses compared to the first quarter of last year. These increases in net income for the first quarter were partially offset by higher interest expense associated with our recently completed long term financing for ITC Holdings.

As Joe mentioned, we remain on track in this first year of our five-year capital plan to deliver on the commitments that we have made. For the three months ended March 31st, 2010, ITC invested $99.5 million in capital projects at its operating companies, including $14.2 million, $31.2 million, $52.5 million, and $1.6 million at ITC Transmission, METC, ITC Midwest, and ITC Great Plains, respectively.

As a result of the progress we have made during the first quarter of 2010, we are again reaffirming our 2010 capital expenditure and diluted earnings per share guidance. 2010 capital expenditure for ITC Transmission, METC, ITC Midwest, and ITC Great Plains are still expected to be approximately $50 million to $60 million, $140 million to $155 million, $205 million to $225 million, and $10 million to $20 million, respectively. Our consolidated capital expenditure guidance is therefore $405 million to $460 million.

We are also today reaffirming our 2010 diluted earnings per share guidance in the range of $2.60 to $2.70.

As we mentioned on previous calls, the economic environment over the last 18 months has been challenging, especially in Michigan. However, we have performed exceedingly well during these times, largely due to our resilient business model and our proactive efforts to address the impact of reduced load. Importantly, our regulatory construct also requires us to reset transmission rates each year, which allows for the timely recognition of the implications of the current environment in rates. This aspect of our rate-making model is an important differentiating factor and a key component of our value proposition.

We believe that the economic environment in the areas served by our operating companies has largely stabilized and through March actual weather normalized (inaudible) at each of ITC Transmission, METC, and ITC Midwest are tracking very closely to the projections that underlie our transmission rates for 2010. Consequently, we are not currently anticipating the need to again mitigate the risk of a significant true-up resulting from deteriorating economic conditions.

However, we continue to monitor the economic environment and load trends very close as we remain committed to being good stewards of our rate-making model and want to ensure that we continue to deliver quality earnings.

I would like now to turn to our 2010 financing requirements and liquidity position, which was further enhanced at the end of 2009 with the successful long term financings we completed at ITC Holdings and for ITC Midwest. With the close of these two financings, which I would add were well received in the financial markets, we have largely completed our financing calendar for 2010. We have one remaining long term financing to execute this year for METC, and expect to do so during the second quarter.

As for our current liquidity position at March 31^st, we had $67.1 million of cash on hand and $222.6 million of net undrawn revolver capacity bringing our total liquidity position to approximately $289.7 million. Our revolving credit facilities have a total consolidated capacity of $340 million. Of this total, as of March 31^st, we had undrawn capacity of $277.6 million, $55 million of which is held by Lehman Brothers Bank. We do not expect any future draws on the outstanding Lehman commitment, which reduces our undrawn capacity down to $222.6 million.

We continue to believe that we are well-capitalized and have the appropriate access to capital in order to effectively fund our capital investment plans for the remainder of 2010 and the believe of our five-year forecast.

I am also pleased to report that the credit profile of the business remains quite strong, which was further evidenced on April 16^th, when Moody’s Investor Service upgraded all of our credits ratings. Moody’s upgraded ITC Holdings Corp. senior unsecured rating to Baa2 from Baa3 and our three operating subsidiaries secured rating to A1 from A2. In its press release, Moody’s noted the improvements in the cash flow credit metrics of ITC and its subsidiaries, which it believes will be sustainable going forward due to our attachment of regulatory treatment.

Moody’s also acknowledged that our results in 2009 reflect the proactive steps taken by management to reduce expenses and minimize revenue deferrals in light of significantly reduced load, which helped to improve our credit metrics.

Lastly, I would like to address our capital expenditure plans as a result of some of the recent events discussed by Joe regarding the Michigan wind zones and the V-Plan project in Kansas. Given the recent developments surrounding the Michigan wind zone investment opportunity, in particular the support for and our advancement of the 345 kV transmission solution, we see potential upside to our five-year plan relative to what we disclosed last September, should the 345 kV plan be approved by MISO.

As Joe mentioned, the recommended 345 kV plan has a preliminary cost estimate of $510 million. Based on this, if the project is approved as recommended the potential upside to our previously disclosed five-year plan could be approximately $225 million to $275 million depend – in addition, as we have previously noted, our five-year plan assumes that the Kansas V-Plan project will be constructed at 765 kV at an expected cost of slightly more than $400 million.

As a result of the recent events surrounding this project, including it being approved by the SPP board as a priority project as a double-circuit 345 kV configuration, there is a possibility that we will not build this project as 765 kV as originally proposed. Should we ultimately construct the project as double-circuit 345 kV, our preliminary cost estimate for this configuration is approximately $300 million. As Joe noted, SPP plans to continue to study the appropriateness of 765 for the V-Plan project, but the results of this work are not expected until early next year.

The total capital expenditures on our original five-year plan for the ITC Great Plains development projects, including Hugo to Valiant, the KETA project and the Kansas V-Plan were approximately $640 million. Should we ultimately construct the V-Plan project at 345 kV and after taking into consideration some other small expected cost adjustments for the KETA and Hugo to Valiant projects, we would expect the aggregate ITC Great Plains capital expenditures to be approximately $100 million lower or approximately $540 million.

If we are successful in advancing the Michigan Wind zone backbone transmission project at 345 kV, and if the V-Plan project is also ultimately constructed at 34 kV rather than 765 kV, the net increase to our five-year capital investment plan is expected to be approximately $125 million to $175 million. We will continue to regularly update you on the status of the approvals for these projects and the resulting implications to our capital plans.

In the interim, as Joe discussed, we remain keenly focused on delivering on our five-year, $3 billion capital plan and delivering the value promised in it.

With that, I would like to turn the call over to answer questions (inaudible). Operator?

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from Dan Eggers.