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Executives

Pat Wenzel – IR

Edward Rahill – SVP and CFO

Joseph Welch – President & CEO

Analysts

Dan Eggers – Credit Suisse

Eric Beaumont – Copia Capital

Sarah Akers – Wachovia

Steven Gambuzza – Longbow Capital

Renee Reynolds – Gilder Gagnon and Howe

ITC Holdings Corp. (ITC) Q2 2008 Earnings Call Transcript August 7, 2008 11:00 AM ET

Operator

Please stand by. We’re about to begin. Good day, everyone. Welcome to the ITC Holdings Corporation second quarter 2008 financial results conference call and webcast. Today’s call is being recorded. At this time, I’d like to turn the conference over to Pat Wenzel. Please go ahead.

Pat Wenzel

Good morning, and thank you for joining us for ITC’s 2008 second quarter earnings conference call. Joining me on today’s call are Joseph Welch, Chairman, President, CEO of ITC, and Edward Rahill, our Senior Vice President and CFO.

Last night we issued a press release summarizing our second quarter results. We expect to file our Form 10-Q with the Securities and Exchange Commission today. Before we begin, I would like to remind everyone of the cautionary language contained in the following Safe Harbor statements.

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 would like to turn the call over to Ed Rahill to discuss our second quarter financial results.

Edward Rahill

Thanks, Pat. We are very pleased with our 2008 second quarter financial results, of which demonstrate the continued success of our growth strategy. Our year-over-year improvement was mainly driven by the ITC Midwest acquisition of Interstate Power and Light Company or IPL’s electric transmission assets, and growth and rate base at ITC Transmission and METC.

In the second quarter of 2008, ITC reported net income of $28.7 million or $0.57 per fully diluted share. This compares with a net income of $20 million or $0.46 per diluted share in the second quarter of 2007.

Operating revenues increased $54.3 million to $160.6 million for the second quarter over a comparable period in 2007. Network revenues increased by $32.5 million due to our acquisition of the IPL transmission assets.

METC and ITC Transmission also recognize additional network revenues of $8.9 million and $5.8 million, respectively due to the higher net revenue requirement as a result of higher rate base, operating expenses, and taxes. Point-to-point scheduling and control dispatch revenues also increased for the second quarter in 2008, compared to the second quarter of 2007.

In the second quarter, operation and maintenance or O&M expenses of $32.9 million were $11.4 million higher than the same period in 2007. Increases in O&M expenses in the second quarter were mainly driven by expenses incurred by the ITC Midwest that were not included in our results of operations for three months ending in June 30th of 2007.

General and administrative expenses or G&A expenses increased by $9.2 million compared to 2007. G&A expenses increased primarily due to personnel additions and higher business expenses, all of which include incremental costs incurred by ITC Midwest. These increases are due to the continued growth of ITC.

Depreciation and amortization expenses increased $6.7 million in the three months ended June 30th of 2008. These compared with the same period of 2007. ITC Midwest incurred depreciation expenses of $4.4 million for the three months ended June 30th of 2008. Depreciation and amortization also included ITC Transmission and METC primarily due to higher depreciable asset basis resulting from property plant and equipment admissions.

Taxes other than income taxes in the second quarter of 2008 primarily increased due to the property tax expenses at ITC Midwest of $1.6 million for the quarter. For three months ending June 30th, 2008 compared to three months ending June 30th, 2007, interest expenses increased primarily as a result of higher borrowing levels to finance our capital expenditures and to finance the ITC Midwest acquisition.

Now, I’d like to discuss the results for the first six months of this year. ITC Holdings reported net income of $54.2 million or $1.10 per fully diluted share. This compares with net income of $36.9 million or $0.85 per diluted share same period in 2007.

Operating revenues of $302.5 million for the six months ending June 30th, 2008 increased by $95 million over the comparable period in 2007. Network revenues build increased by $60.7 million as a result of the December 2007 asset acquisition of IPL’s transmission assets. METC and ITC Transmission recognized additional network revenues of $12.9 million and $7.8 million, respectively due to the higher net revenue requirements as a result of a higher rate base, operating expenses, and taxes. Point-to-point scheduling control and dispatch revenues increased primarily due to the addition of $3.4 million of ITC Midwest revenues.

O&M expenses increased $14.3 million to $54.4 million in the first six months of ’08, compared to the same period of 2007. O&M expenses again increased primarily due to the amounts incurred by ITC Midwest. No such amounts were included in our results of operations for six months ended June 30th, 2007.

G&A expenses of $39.3 million were $12.1 million higher than the same period of 2007. G&A increased by $10.2 million primarily due to personnel additions and higher business expenses, again, mainly as a result of the acquisition of IPL’s transmission assets. Additionally, G&A expenses increased by $1.1 million and ITC Grid Development and ITC Great Plains subsidiaries and salaries, benefits, and incurred – and expenses incurred in the six months of June 30th, 2008. That is an after tax number.

Depreciation and amortization expenses increased by $12.9 million in the first six months of 2008 compared to the same period in 2007. ITC Midwest recognized depreciation expenses of $8.5 million for the six months ended June 30th, 2008. Depreciation and amortization also increased at ITC Transmission and METC primarily because of higher depreciable assets resulting from property plant and equipment additions.

In the first six months of 2008, taxes other than income taxes increased by $4.4 million primarily due to property tax expenses at ITC Midwest for that period. For six months ended June 30th, 2008, interest expenses increased compared to the same period of ’07 primarily due to the higher borrowing levels to finance our capital expenditures and to finance, again, the ITC Midwest acquisition.

For more details on the variances of the three and six months ended June 30th of 2008, please refer to our second quarter 2008 Form 10-Q, which we expect to file today. Now, I’d like to focus on our capital expenditures and earnings guidance.

For ITC Transmission, ITC Transmission invested $72.3 million, METC invested $54.1 million, and ITC Midwest invested $49.6 million in the respective transmission systems for the six months ending June 30th of 2008.

As we previously disclosed, we expect 2008 capital expenditures of approximately $95 million to $110 million for ITC Transmission, $105 million to $130 million for METC, and $85 million to $100 million for ITC Midwest by the end of the year.

For the full year 2008 earnings per diluted share, we are now expected to be in a range of $2 to $2.05. The increase compares to our prior EPS guidance of $1.90 to $2 primarily due to higher protective rate base, higher load dispatch, and ancillary revenues, and the gain of sale or permanent easement in the second quarter of 2008.

Now, I’d like to turn the call over to Joe.

Joseph Welch

Thanks, Ed. Our main focus for the first half of 2008 was to deliver on our earnings commitment and on integrating and improving our operations. Our robust year-to-date results demonstrate our continued ability to deliver on our financial commitments as we continue to focus on the best-in-class transmission operations, and completing the integration of the IPL transmission assets into our operation. The integration is on track and going very well. Many core functions such as engineering, planning, and finance have been transitioned, and we are right on track with efforts in other departments.

Construction of three of our five warehouse locations is complete, and the remaining two locations are scheduled to be completed by the end of September. Our field operations and maintenance contractor has established the needed union contracts, and has hired experienced field personnel with direct knowledge of the system. Approximately 52 field crew have been already hired and training is underway. Likewise, our capital construction contractors are staffing up and getting ready to assume responsibility for constructing the needed improvements to the transmission system in the ITC Midwest service territory. We are on track for transition to the full operation control of the 69kV and higher transmission assets by December 31st.

These efforts demonstrate the huge commitment of management, employees, and resources that we have made at ITC Midwest. Our experience in the last two acquisitions and integration efforts is really paying off as we apply lessons learned from the transition from Detroit Edison and Consumers Energy.

As many of you probably are aware, during the week of June 14th, the Cedar River crested to 19 feet above flood stage flooding hundreds of city blocks in and around Downtown Cedar Rapids, the location of our Iowa headquarters for ITC Midwest. Employees evacuated our office and have been effectively managing our flood response from temporary facilities. ITC Midwest suffered approximately $2 million in losses of protective relaying and monitoring equipment at two substations. The majority of the damage is expected to be covered by insurance after a $1 million deductible.

As a result of the progress we have made on the integration, ITC Midwest was able to quickly respond and support ITC and alliance restoration efforts subsequent to the flooding. Additionally, ITC sent an additional 20 field personnel from Michigan to help manually monitor stations due to the loss of the station’s communications.

Michigan also experiences severe summer weather in June and July. A series of storms resulted in nearly 1 million distribution customers at Detroit Edison and Consumers Energy without power sometime during the two weeks. ITC sent crews to perform distribution restoration for AEP, Detroit Edison and Consumers Energy. METC systems had five sustained outages during the storms, and our field crews’ response was excellent. ITC Transmission only had two momentary outages. This solid performance reinforces our approach on maintenance vegetation management and infrastructure improvement.

At the beginning of the second quarter, we completed our movement to our new headquarters and the construction of our operation control center with full backup to ensure that we were prepared to deal with emergency conditions. Our success was confirmed in April when the North American Electric and Reliability Corporation, or NAERC, completed our operational readiness evaluation of ITC. The evaluation team found that ITC has adequate facilities, processes, and procedures to operate reliably; and, our operations support staff and management are knowledgeable and confident. In addition, ITC was commended for providing outstanding physical security for our new headquarters building and adjacent operations center.

With the first half of 2008 successfully behind us, we are starting to shift focus from the current results and operations towards implementing our regional transmission vision. We are putting together teams to start to move forward. We are at the crossroads of an enormous landscape change in the industry infrastructure of this country. Demand for electricity is expected to increase by 30% by the year 2030.

The aging infrastructure and lack of historical transmission investment has led to mounting reliability issues, congestion, and inefficiencies. The blackout of 2003 clearly demonstrated the reliability challenges we are facing as a nation. Additionally, from 1970 to 2001, distribution losses grew from 5% to 9.5%. This increase in losses due to the heavier utilization of transmission and distribution systems coupled with increased congestion.

There is significantly increased attention to global warming, our carbon footprint, and pending energy policy. This is helping to push the industry to develop new technologies such as wind, solar, biofuels, ethanol demand response strategies, mine-mouth coal, and other energy.

Whatever response the country takes, transmission is the common denominator that enables all these options. And regional transmission is the key that makes it all work. We firmly believe that robust National Interstate grid is paramount to move the country forward to provide energy options, national security, and access to clean energy. We need to focus on the steps to make the regional transmission a reality, and that’s what – where ITC is focusing its attention.

We are obviously pleased, with our results for the first half of 2008. For the remainder of the year ,we will persist in our efforts to set the stage for our growth behind our existing footprint by pursuing our regional transmission vision.

At this time, I’d like to open the call to answer any questions that any of you may have.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) And we will go first to Dan Eggers with Credit Suisse.

Dan Eggers – Credit Suisse

Hey, good Morning. Joe, could you just talk a little bit about the thinking as far as timing on updating CapEx plans with kind of (inaudible) some of the original estimates under (inaudible) player basis.

Joseph Welch

Our current plans, Dan, are to do that in September when we have our financial analyst meeting.

Dan Eggers – Credit Suisse

To again, ITC and METC then. Are we going to get Midwest or is that going to be – is it going to take a little more time?

Joseph Welch

I think Midwest is going to take us a little more time. I’m not complaining, but the flood did kind of burrow a hitch in our plans.

Dan Eggers – Credit Suisse

Okay. But on the equipment side, with the running commodity prices, is there any kind of update as far as how much cost inflation you’re seeing on equipment today, say, versus 12 months ago or so?

Joseph Welch

When we started the business, and I think I’ve talked to you all about this a while back, we actually entered into a long term agreement with our suppliers, which really mitigated a lot of the commodity increases. I mean we still are seeing increases, but ours are not nearly what the average is for the industry.

Dan Eggers – Credit Suisse

If you were to, vary is a generator term, but market-to-market there was cost. How far below market do you think your contracts are? Take it equipment versus what if you’re just going to go off the shelf to buy today?

Joseph Welch

Oh, I don’t really know. I haven’t asked that question based on that. I can follow up on that one for you.

Dan Eggers – Credit Suisse

Okay. And I guess just one last one with the Michigan legislations, certainly seeming to head toward a renewable standard, and would it be being the size more than anything else. I guess that there was over $100 million in CapEx you saw that could come with renewables in the state. Any thoughts on what that opportunity looks like or anything you want to hazard against to?

Edward Rahill

I think we’re still in that range of – I think we’re probably north of $100 million, but the fact is that the legislation is one of the things that we’re working on to try to help you people focused on is to get the legislation to actually focus on doing this with the minimum amount of infrastructure build rather than the current way. I think the current way that we interconnect wind or any generators is pretty inefficient. And we need to really look at this to minimize the impact both on the environment and on rate. But not withstanding that, if you just look at the standard wind maps you’re going to come out to the belief that we’re going to have to build somewhere between $100 million and $200 million worth of transmission. But the way the rules work, if we were to streamline them, we could bring that in at the lower number not the higher number.

Dan Eggers – Credit Suisse

With the attachment (inaudible), does that mean you would look to try and build standard transmission lines into a windy region and less tentacles go out versus building a line to each project and have them on higher scale.

Joseph Welch

That would be our wish. It’s a lot more efficient. Everyone complains about siting [ph]. And siting certainly is an issue, but it is a heck of a lot easier to site one major line rather than siting five dozen lines. And it’s a lot easier to coordinate it if we could get people to start to focus on – we want to develop regions for wind much like they were doing in Texas rather than we’re just going to let it haphazardly be sited.

Dan Eggers – Credit Suisse

Do you have momentum to get in that to happen? Is that coming up in all the language?

Edward Rahill

I would want to say that we have momentum. I think that the reality is that everybody wants to pass legislation to feel good about the renewables, and they don’t want to do anything to hold it up. And so, we’ve certainly made that issue known and hope that the legislator legislates or listens. But a lot of people think they should try to do this to run, rush out over siting, and that’s not the case. There’s never been anything that we’ve proposed other than to shorten the timing on the hearing process and deciding, but to let everything take place as it would under the law.

Dan Eggers – Credit Suisse

Okay. Thank you.

Operator

(Operator instructions) We’ll go next to Eric Beaumont with Copia Capital.

Eric Beaumont – Copia Capital

Guys, congratulations on a good quarter.

Edward Rahill

Thank you.

Eric Beaumont – Copia Capital

One thing I want to ask about is the regional cost sharing revenues. Obviously, it’s been a nice uptake for the year. How do we think about those kinds of (inaudible)? We think about those – being more kind of levelized based on what we’ve seen in the first two quarters or can you get some color there?

Joseph Welch

Ed, do you want to take that?

Edward Rahill

Yes. I think we’re looking at, probably, about $7 million. And you’re going to see as projects, in myself, continue to start getting cost sharing under the tariff if you’re going to see an increase. But I think you’ll see from its contribution, vis-a-vis our overall revenue requirement is really minimal at this time. I could just say over time, in talking to our planning folks and our management folks is that we do see that the bill – but we are not, at this time, putting it into our forecast as they significant – additional revenue item. Ideally if the regional projects are going to be built, that could change.

Eric Beaumont – Copia Capital

Okay. And when I think of this quarter per point-to-point, obviously, we knew there were – because of floods and some other things for (inaudible) transmission outages, how much of the point-to-point things and scheduling revenues were driven by some of the other transmission outages versus just standard business as usual?

Joseph Welch

I can answer that. Right now we’re seeing point-to-point of becoming even a lot – it’s a less significant revenue item for us. Back when we started the company in ’03, ’04, ’05, it was significant. But as more and more of the load isn’t moved to network load that we really are at the point where point-to-point is not – does not have a meaningful impact on our financials.

Eric Beaumont – Copia Capital

Okay. And I guess finally in this May, obviously be deferred until next month, but is there anything with regard to either the JV with APM, the 765 line, or Kansas that you can speak of at this point?

Joseph Welch

I think you know the things that we’ve said with regard to the JV is we’re still in the process working on it. We have been a little bit preoccupied with making sure that we got the service restored in Iowa. And it really took a Herculean effort to get everything done in Iowa. But we still are moving forward with the plant in Kansas. We are in the hearing process. I mean there’s not much more we can wait – not much more we can do other than wait for the KCC to make their ruling. And of course, same thing goes in Oklahoma, we’re waiting for their ruling there from the Oklahoma PC also.

Eric Beaumont – Copia Capital

SPP is the apparent preference release 765 overlay and OGE going with a PM 765 change, anything with regard to either Kansas or Oklahoma? Or just shift the opportunities (inaudible)?

Joseph Welch

I mean let’s take them one at a time. There’s a lot of what I consider to be confusion about what happened and what’s going on. Clearly, what you have is – taking place is there’s, and this is a good thing for customers, competition. The joint venture with AP, MidAm [ph] and Westar in Kansas, is the end product is that there is a joint venture LLC out there by the name of Prairie Wind Transmission. Prairie Wind Transmission doesn’t have as much utility status as ITC Great Plains have. It’s a different company. While it is made up of utilities, it has no more utility status in that state than anyone else has. And they have to go through the process, and that’s what they haven’t done.

So to that extent, it adds competition and maybe a little confusion. But they have got a lot of process to go through and we’re probably a year, a year and a half ahead of them. As far as the 765-kV overlay is concerned, the original SPP plan was, and I’ll speak to the Kansas V plan, was to build that at 345-kV. If you look at our filing and our responses to all of that is that we’ve said that if SPP wanted to direct it at 765-kV, we would build it at 765-kV. So there’s nothing new that they brought to the table other than someone else to put a proposal on the table.

Eric Beaumont – Copia Capital

Very kind. I appreciate the color. Thanks, for that head.

Operator

We’ll take our next question from Sarah Akers with Wachovia.

Sarah Akers – Wachovia

Most of my questions have been answered. But a quick follow-up on Kansas. Where do you see the opportunity in Kansas beyond the sphere beyond the line and the plant as well. How big do you think the opportunity is beyond those two projects?

Edward Rahill

I felt early on, and what I’ve told everyone – God, I don’t even remember. Probably, when we opened up the business in ITC Great Plains that I thought at that time that we had an opportunity to build a company somewhere that would be in the size range of what ITC Transmission was. At that time, it was about $500 million to $550 million rate base company. And I still think that that’s probably a good number to shoot for.

Sarah Akers – Wachovia

Great. Thank you.

Operator

(Operator instructions) We’ll go next to Steven Gambuzza with Longbow Capital.

Steven Gambuzza – Longbow Capital

Good morning.

Edward Rahill

Steve, good morning.

Steven Gambuzza – Longbow Capital

Could you provide just some time of what the expected timing would be on the decisions in Kansas and Oklahoma, Kansas regarding the line and Oklahoma regarding utility status?

Edward Rahill

Well first thing I could tell you is when I predict responses to regulatory filings on timing, I’m usually wrong. But we expect to get orders by the end of the year.

Steven Gambuzza – Longbow Capital

Okay. And the conversation earlier in the call regarding a potential renewal portfolio standard in Michigan and that driving incremental transmission investment, I just wanted to make sure I understood it. Is that – that wouldn’t be – that would be an addition to things you already talked about, is that correct?

Edward Rahill

That’s correct.

Steven Gambuzza – Longbow Capital

And would you mind repeating what you’ve thought. You mentioned that –

Edward Rahill

We think that on one end of the scale, depending on how the legislation goes and how the rules start to play out, you’re probably at about $100 million of additional investment, and maybe high as $200 million if the rules don’t play out as well. And when I say don’t play out as well is we don’t utilize our abilities effectively because the legislation keeps the ineffective nature of how we’re doing things in place.

Steven Gambuzza – Longbow Capital

That be a cross both to METC and ITC for (inaudible)?

Edward Rahill

That’s correct.

Steven Gambuzza – Longbow Capital

Okay. And what is the kind of the legislative status of the RPS? Do you have any sense of the one that might actually get voted on or –?

Edward Rahill

Well, I’m expecting sometime probably after September 1st. It appears, from everything that I read on a daily basis, both in political publications and what our lobbyists are telling us, it has a lot of momentum. I think there’s a lot of behind the scenes negotiations going on because it is an election year. And so people get distracted with elections. But I think it will happen before the election.

Steven Gambuzza – Longbow Capital

Thank you very much.

Operator

We’ll take our next question from Renee Reynolds with Gilder Gagnon and Howe.

Renee Reynolds – Gilder Gagnon and Howe

Hi. Good morning. Ed, can you comment on where you are with additional development expenses? I think on previous calls you said the whole thing to have some additional expense in the second half. So I’m wondering if the updated guidance reflects, I guess, less optimism about your development plan or if –?

Edward Rahill

No. I don’t think that’s the case really. Year-to- date we spent about $1.9 million, and we expect that we will spend more for the remainder of the year. But we really can’t comment on the amounts since we are on the process on working on several development activities that don’t want to play our cards on this. If the opportunity arises, we will spend development (inaudible) as needed to quickly move forward on these opportunities.

I think it’s just – rest assured, we have ample resources to be able to continue to pursue development activities as they arise and still meet our guidance – our revised guidance for 2008. So I don’t want you to think that we’re not putting an effort in. I just want you to understand, as Joe said at the beginning of this, is that we are really not going to comment on anything until it’s really been locked up and complete. And so I really – sorry if I’m a little vague, but that’s where we’re at.

Renee Reynolds – Gilder Gagnon and Howe

No. That’s fine. I’m just glad to hear that you’re outlook is still positive. Thank you.

Edward Rahill

Thank you.

Operator

It appears we have no further questions at this time. I’d like to turn the call back to our speakers for any additional or closing remarks.

Pat Wenzel

This concludes the question-and-answer portion of our call. Before I end the call, I’d like to thank everyone who participated today. Anyone wishing to hear the conference call replay available through August 14th, 2008, should dial toll free 888-203-1112 domestic or 719-457-0820 International. The pass code is 1924427. The webcast of this event will also be archived on the ITC Holding’s Web site at http://investor.itc-holdings.com. Good bye, and have a great day.

Operator

Once again that does conclude today’s call. We do appreciate your participation. You may disconnect at this time.

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