ITC Holdings' (ITC) CEO Joseph Welch on Q2 2014 Results - Earnings Call Transcript

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ITC Holdings Corporation (ITC) Q2 2014 Earnings Conference Call August 6, 2014 11:00 AM ET


Gretchen Holloway – Director, IR

Joseph Welch – Chairman, President and CEO

Rejji Hayes – VP, Treasurer, Interim CFO


Julien Dumoulin-Smith – UBS Investment Research

Jonathan Arnold – Deutsche Bank

Daniel Eggers – Credit Suisse


Good day, ladies and gentlemen, and welcome to the ITC Holdings Corp Second Quarter Conference Call and Webcast. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator instructions) As a reminder, this conference call may be recorded.

I would now like to introduce your host for today’s conference, Gretchen Holloway. Please proceed.

Gretchen Holloway

Good morning, everyone, and thank you for joining us for ITC’s 2014 second quarter earnings conference call. Joining me on today’s call is Joseph Welch, Chairman, President and CEO of ITC and Rejji Hayes, Vice President, Treasurer and Interim CFO.

This morning, we issued a press release summarizing our results for the second 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 reflects 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-Q and 10-K 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 Welch

Thank you, Gretchen, and good morning, everyone. For the second quarter, we continued to build on our strong execution early in the year, delivering solid operational and financial performance.

As it pertains to our operations, our ability to manage and operate our existing systems as well as and execute on our robust portfolio projects remains quite strong. As we enter the summer months, operational challenges are often centered around serving higher loads and system restoration given the severe storm activity that is commonly experienced in the Midwest.

So far, this summer appears to be no exception. While all of our systems have demonstrated resiliency in inclement or severe weather, the storms witnessed in Iowa this summer have proven to be especially severe, causing damage to our RTC Midwest system in late June. As always, we responded quickly and restored our systems in an efficient and cost-effective manner, thereby minimizing outages. As a result, most of our customers had their power restored within a couple of hours.

The continued strong performance of our system in severe weather conditions highlights the benefits of the investments that we have made to improve overall system hardening and redundancy. It is also worth noting that ITC released crews through our mutual assistance program to assist other utilities in Iowa and Michigan as they worked to restore power for their customers.

I would like to turn to update on the regulatory front, both around Order 1000, the long-awaited FERC decision on the ISO New England base ROE complaint. In mid May, FERC granted rehearings in the three separate orders around Order 1000 regarding consideration of both state and local laws and regulations including implications on the existing right of ways for competitively bid projects.

In reaction to various parties petitioning certain tariff provisions in FERC Order 1000, FERC indicated that it will now allow regional transmission organizations to consider the [indiscernible] state and local laws at the onset of the solicitation process instead of considering these factors after a project has been competitively bid in order to avoid inefficiencies and delays for new transmission projects.

FERC recognized that prior to this modification, its current tariff provisions could result in a regional transmission planning process that fails to account for state or local laws that affect deciding, permitting and construction of transmission facilities in an efficient manner. The commission also acknowledged that the regions would have to spend time and resources to evaluate potential transmission developers for transmission projects that ultimately must be assigned to the incumbent developer based on state law.

As a result, FERC will permit the regions to modify their competitive process to consider state laws and regulations early in the process rather than after developer selection. FERC’s action on this front reflect the challenges of implementing Order 1000 in the inevitable role that the state’s incumbent utilities claim to building large regional transmission infrastructure. FERC’s action may also assist in gaining greater support from states which until its modification had little clarity on how states and local laws would be factored into the process.

FERC has previously demonstrated a commitment to be an effective solicitation process by eliminating unqualified bidders upfront prior to any solicitation. As you can tell by some of my commentary on this, we do not find these developments to be a significant departure from FERC’s initial Order 1000 principles, nor do we find these developments terribly surprising.

While ITC has embraced FERC’s commitment to facilitate the construction of regional transmission projects and we are actively seeking expansion opportunities by way of Order 1000, we have always contended that the incumbent utility generally have inherent competitive advantages and that there are practical challenges in competitively bidding on transmission projects. Incumbent utility advantages include potential economies of scale given existing infrastructure as well as entrenched state and local regulatory relationships and a better engrained knowledge of the system and its needs and how it operates.

While these advantages may provide challenges in competitively entering new service territories [ph], they also convey strategic advantages for ITC and our existing footprint. For this reason, we prioritize our development strategy in the current environment around our existing regions. As a result, these new developments around Order 1000 do not have any impact on our strategy.

I would now like to turn to recent developments around ROEs. On June 19th, FERC issued its order on the ISO New England base ROE complaint and also issued several other orders on outstanding base ROE complaints, none of which involved ITC. In issuing its order on the ISO New England complaint, FERC highlighted several key changes as to how the commission will calculate transmission ROEs going forward while also offering some perspective on the larger issues of recurrence and needed transmission investments.

First and perhaps most importantly, FERC reiterated its continued support to promote policies that will facilitate transmission investments. Specifically, the commission concluded that the transmission ROEs should be greater than the state granted ROEs for generation and distribution projects in order to increase investment levels and attract cost-effective capital to the transmission sector.

FERC also announced certain changes on how they would set base ROEs, including moving to a two-step discounted cash flow methodology effectively mimicking a process used on the gas pipeline side and indicated that if it warranted by the circumstances of a particular case, they would evaluate the appropriate point to set the base ROE within a zone of reasonableness using the 75th percentile in the ISO New England matter.

This new approach takes into account both short term and long term growth rates and provides latitude for the commission to recognize economic conditions and other factors that may lead to unreasonable formulistic outcomes. FERC also reiterated its policy of capping overall ROEs including incentives at the high end of the zone of reasonableness produced by the two-step DCF process.

While we view FERC’s action as constructive and consistent with the commitment to facilitate transmission investment, these changes do not fully remedy the uncertainty that remains since FERC has retained flexibility in where it sets base ROEs within a zone of reasonableness. We would caution that given the unique facts and circumstances associated with each complaint, the ISO New England order does not provide complete clarity as to how FERC will address the base ROE challenges in the MISO complaint.

Most notably, it is important to consider a couple of factors, namely the timing of when the day is calculated and the companies included in the proxy group, both of which will likely from the fact pattern established in the New England ISO case. The results of the data in the ISO New England order reflects inputs from nearly – early 2013 which were recalculated to reflect the two-step DCF methodology.

These results also reflect a proxy group that met certain screens at that time. Both of these factors change over time on important considerations and arriving to the overall zone of reasonableness. While the key policies articulated by FERC in evaluating ROEs are expected to apply to the MISO complaint, the resulting zone of reasonableness will likely be different due to these factors among others.

It’s also worth reiterating that the complaints in the MISO case have also sought to cap the equity component of the capital structure for MISO transmission owners at 50% and have challenged certain ROE adders utilized by ITC Transmission and METC. We continue to believe there’s sufficient basis for FERC to dismiss these elements of the complaint out right.

As a reminder, the MISO complaint remains pending at FERC for action. And there is no stipulated period for FERC to act on the complaint.

Switching gears, as for overall strategy, we remain focused on existing – on executing our five-year plan which reflects capital investment in critical transmission infrastructure of approximately $4.5 billion from 2014 through 2018. We are also continuing to pursue potential new regions and potentially non-traditional transmission investment projects.

Based on the level of capital investment identified in our plan, we expect compound annual growth in the operating earnings per share in the range of 11% to 13% and we forecast the plan would generate approximately $1 billion of excess funding capacity.

Our balanced approach to our capital allocations strategy and the potential utilization of the excess funding capacity looks to optimize value to our investors through capital investment and our value return while also maintaining a strong balance sheet.

At the time we rolled out this plan, we also announced that we had received board approval of repurchase of up to $250 million through the end of 2015 which would utilize a portion of the excess funding capacity generated by the plan. To this end, in June we utilized a portion of our excess funding capacity with the announcement of an accelerated share repurchase program of up to $150 million.

This marks an important step in the implementation of our five-year plan and further signifies our commitment to optimizing investor returns in a disciplined fashion absent incremental near-term investment opportunities over our base plans. Rejji will provide additional detail on this transaction.

I would like to conclude my comments today by reiterating that we remain committed to delivering on all of our commitments to our customers and our investors. We believe that we have delivered on this commitment in our performance not only year-to-date but also since ITC’s inception and have laid the groundwork that will enable us to meet all of our long-term objective.

I’ll turn this call over to Rejji for a financial update.

Rejji Hayes

Thank you, Joe. For the second quarter of 2014, ITC reported net income of $54.3 million or $0.34 per diluted share as compared to reported net income of $47.4 million or $0.30 per diluted share for the second quarter of 2013.

Reported net income for the six months ended June 30, 2014 was $123.5 million or $0.78 per diluted share compared to $97.6 million or $0.62 per diluted share for the same period last year.

Operating earnings for the second quarter of 2014 were $72.7 million or $0.46 per diluted share compared to $63.3 million or $0.40 per diluted share for the second quarter of 2013. Operating earnings for the six months ended June 30, 2014 was $142.5 million or $0.90 per diluted share compared to $122.1 million or $0.77 per diluted share for the same period last year.

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 expenses associated with the Entergy transaction of approximately $0.2 million for the second quarter of 2014 and $15.9 million or $0.10 per diluted share for the second quarter of 2014. These expenses totaled $0.7 million for the six months ended June 30, 2014 and $24.4 million or $0.15 per share for the six months ended June 30, 2013.

Expenses associated with the Entergy transaction in 2014 are based on small one-off charges that lingered into 2014 transaction termination in late 2013 and we do not expect any significant additional charges for the remainder of 2014.

Second, operating earnings exclude after tax expenses associated with certain acquisition accounting adjustments for ITC Midwest, ITC transmission and METC that resulted from the FERC audit order on ITC Midwest in May, 2012. The impact of this item totaled approximately $0.1 million for both the second quarter 2014 and 2013 and approximately $0.1 million for both the 2014 and 2013 year-to-date period.

Lastly, operating earnings exclude after tax expenses associated with the recent cash tender offer, consent solicitation transaction for select bonds at ITC Holdings that we completed in the second quarter. The impact of this item totaled $18.1 million or $0.12 per share for both the second quarter of 2014 and for the year-to-date period ended June 30, 2014.

Our financial performance for the quarter and year-to-date period is once again largely a reflection of being on track in progressing our capital investment objectives.

For the six months ended June 30, 2014, capital investments totaled $430.1 million which includes $140.8 million at ITC Transmission, $73.9 million at METC, $118.6 million at ITC Midwest and $95.8 million at ITC Great Plains.

Based on our performance in the first half of the year, we remain very much on track to achieve our full year capital investment plans for 2014. It is also worth noting that while our capital investments drive the liability improvements in our systems, they also result in improved deficiencies in operating and maintaining our system which translates into lower operating maintenance or O&M costs. The recent year-over-year reductions that we have achieved for O&M costs are clear example of these benefits.

Moving on to a discussion of our financing liquidity initiatives, we are pleased to report that we are also in track with our financing plan for 2014. The financings that we have executed thus far are designed to meet our capital requirements, enhance our overall liquidity and maintain our strong overall credit quality, all of which position us well to execute on our five-year plan and compete for regional projects.

With respect to financing activities in ITC Holdings, in May we commenced a concurrent cash tender offer and consent solicitation for our 5 7/8s and 6 3/8 coupon bonds maturing in 2016 and 2036 respectively.

The rationale for the transaction was threefold – to capitalize on the attractive interest rate environment by refinancing higher coupon bonds, to extend maturities in the case of the 2016 bonds and to conform the key terms and conditions in the underlying indentures of the aforementioned bonds to our most recent indentures established in April 2013.

The transaction was highly successful with approximately 88% of bond holders across the two tranches of debt agreeing to either tender their bonds with exit consent or simply consent to the requested covenant amendment.

As for the cash tender portion, we tendered approximately $170 million of the 5 7/8s and 6 3/8s couponed bonds with net proceeds from a new $400 million 10-year bond issuance at ITC Holdings priced at 3.65% which is the lowest coupon ever achieved by the parent company and the second lowest coupon in our consolidated bond portfolio.

The refinancing will yield estimated annual interest savings of approximately $3 million which is inclusive of the $30 million of incremental debt raised to funded tender premium and associated fees. The balance of the $400 million raised at ITC Holdings was used for general corporate purchases including the repayment of existing debt.

Needless to say, we were very satisfied with the results of this transaction and will continue to look for other opportunities to capitalize on current market conditions and fortify the balance sheet.

As for other financing activities, in June, we executed a $100 million 30-year first mortgage bond for ITC Transmission at a coupon rate of 4.27% of the reference treasury plus 89 basis points, which to our knowledge reflects the lowest credit spread for a 30-year new issue in the private placement market across all sectors to date in 2014.

The transaction includes a delayed draw feature on a portion of the notional amount which we expect to complete in the third quarter. The net proceeds from the bond offering were used to repay existing indebtedness, fund capital expenditures and for general corporate purposes.

Before concluding the summary on our Q2 financings, I’d be remiss if I didn’t mention that the record-breaking bond issuances at ITC Holdings and ITC Transmission in Q2 underscore the continued improvement of our credit quality and the clear direct benefits of FERC’s supportive rate construct.

Moving on to other balance sheet related activities, as Joe noted, in June we executed on a portion of the $250 million board authorized share repurchase program. This program is premised on optimizing investor returns through the utilization of excess funding capacity generated by our five-year plan.

To this end, we announced an accelerated share repurchase program for up to $150 million on June 20th with an initial delivery of 2.9 million shares at a price of $35.80 per share prior to any discounts applied under the program. As of June 30, 2014, we had repurchased approximately 2.9 million shares. This program calls for minimum repurchase of $130 million of shares and up to a maximum of $150 million of shares at the agent’s discretion in the event ITC stock price declines over a specific time period.

The overall effective share price of the repurchase will be determined by the volume weighted average share price of ITC stock during the term of the transaction which is expected to be completed by year end. This initial usage of excess funding capacity in a disciplined manner demonstrates our commitment to achieve attractive total shareholder returns without compromising our solid investment grade profile.

On the liquidity front, as of June 30, 2014, we held about $9 million of cash on hand and approximately $710 million of net undrawn revolver capacity, bringing our total liquidity position to approximately $719 million. For the six months ended June 30, 2014, we reported operating cash flow of approximately $196 million which represented an increase of approximately $11 million year-over-year.

We remain committed to sustaining our strong financial position and solid investment grade credit ratings. As such, we are pleased to report that Moody’s upgraded ITC Great Plains outlook to positive from stable on May 5th, subsequent to its annual evaluation of ITC’s credit ratings and outlooks which it undertook in April.

Turning to our outlook for the remainder of 2014, we are today reaffirming our 2014 operating earnings guidance in a range of $1.83 to $1.90 per share and our aggregate capital investment guidance for the year of $730 million to $840 million. This range includes $250 million to $285 million for ITC transmission, $130 million to $150 million for METC, $255 million to $290 million for ITC Midwest and $95 million to $115 million for ITC Great Plains.

As Joe noted, we remain focused on executing our five-year plan which is premised on capital investments of approximately $4.5 billion over the 2014 through 2018 time period. We continue to make progress on the larger regional infrastructure projects that support this plan, including the Thumb Loop and Kansas V-Plan and ITC’s portion of the four MVP projects.

On the Thumb Loop, construction continues on the final section of the project with the first two phases now in service. The last phase remains on track to go into service in 2015 and the project is coming in on budget.

On the Kansas V-Plan, we completed construction on a key substation in June, energized a portion of that station along with lines towards Wichita. Work on the remainder of the project is progressing nicely and we are on track to energize the entire project in the late 2014 as planned.

ITC’s portion of the four MVP projects are also largely on track. With respect to projects three and four, we have made good progress through the regulatory approval processes. For MVP project number three, we currently expect the final ruling in the fall from the Minnesota Public Utilities Commission for the portion of the project that resides within Minnesota. Upon receiving a final order, we can begin designing easement acquisition activities for that segment of the project and anticipate beginning construction on the Minnesota portion of the project in late 2015.

In Iowa, MVP three is in the final stages of easement acquisition and is expected to be completed by mid 2017. For MVP project number four, we have received regulatory approvals from the Iowa Utilities Board to construct certain segments of the line and are now focused on bidding out work on these segments. We expect to start construction in the fourth quarter of this year with 2015 expected in-service dates for both segments.

We are also in the process of advancing the regulatory approvals necessary to begin construction for the remaining segments of the project and expect additional segments of the project to be placed into service from 2015 through 2018.

For MVP projects numbers five and seven, we continue discussions with our project partners and pre-application activities for our portions of the projects. For MVP project number five, ITC will be constructing approximately half the lines from Dubuque, Iowa to Madison, Wisconsin in coordination with ATC. We have now received the necessary approvals for utility status in Wisconsin for ITC Midwest and holding company status for ITC Holdings.

MVP project number five is expected to be in service in 2020. For MVP project number seven, we continue to work with our neighboring utilities around ownership specifics. However, I would note that ITC’s ownership share in the project is much less than the other three MVP projects that involve ITC Midwest. The anticipated in-service date for MVP project number seven is currently 2020.

All the activities that we have undertaken in the second quarter are positioned around delivering value for customers and investors. Our financial performance for the quarter is representative of our efforts to meet our capital investment objectives, execute on cost-effective financings and manage our business in an efficient and cost-disciplined manner. We believe that our performance for the second quarter and for the six months of 2014 provides a solid start to the overall execution of our long term plans.

At this time, I would like to open up the call to answer questions from the investment community.

Question-and-Answer Session


(Operator instructions) Our first question comes from the line of Julien Dumoulin-Smith from UBS. Your line is now open.

Julien Dumoulin-Smith – UBS Investment Research

Hi, good morning.

Joseph Welch

Good morning.

Rejji Hayes

Good morning.

Julien Dumoulin-Smith – UBS Investment Research

So first quick question, if you will, on the CFO search, can you comment where you stand on that right now and what the timeline is?

Joseph Welch

Well, the thing is is that if you go back to when we had the change of our CFO, it was exactly at the board meeting. And so I believe that in the near future right after we have our next board meeting we’ll conclude all of our thoughts around our CFO search and make that public.

Julien Dumoulin-Smith – UBS Investment Research

Great. And just to be specific, when is that?

Joseph Welch

Our board meeting is next week.

Julien Dumoulin-Smith – UBS Investment Research

Great, excellent. So it sounds near term. Secondly, you talked about excess cash and the ability to deploy it through the forecast period, when and how are you thinking about deploying the cash beyond the current buyback?

Rejji Hayes

Julien, this is Rejji. I was just returning to the room after your initial question. So just to correct you, I would refer to it more as excess funding capacity. So to be clear, this isn’t excess or incremental free cash flow that’s generated. As we’ve discussed in the past, it really is just incremental debt financing capacity that is generated by our five-year plan. And more specifically, it represents a difference between what our projected credit metrics are versus our credit metric guidelines that have been established by management. So it really is external debt financing capacity.

But to specifically answer your question, I would say we have said this since April 15th when we announced the excess funding capacity and our position on this remains the same. We’re going to evaluate cash or capital deployment alternatives and opportunities on a case by case basis and we’re going to look at where our credit metrics are after we utilize each portion of our excess funding capacity.

So we just executed the ASR. It could be anywhere from $130 million to $150 million. As we highlighted on our April 15th investor day call, that has a little bit of an impact on our credit metrics. So we’re going to have to look at how quickly we delever and restore that capacity. And the billion dollars really represents an average excess funding capacity over the 2014 through 2018 period.

So as we think about how we’ll deploy the capital going forward, it’s really going to be a function of the regulatory environment, the opportunities before us, either on the Greenfield side, M&A side, what have you. And if those balance sheet optimization initiatives as evidenced by our tender financing – and if those opportunities run dry, we will look at value return as another alternative.

Julien Dumoulin-Smith – UBS Investment Research

Great. And then lastly, turning into more policy-oriented issues. As far as the New England on the ROE, two specific questions, first, with regards to peer group differences or how you would read the application of that decision to your own in the context of the MISO 206.

And then separately, do you anticipate filing a separate 205 to ask for the adders specifically the independent adder and the RTO participation adder preemptively or prior to a final decision on the 206?

Joseph Welch

The answer to the latter question in all sincerity, we haven’t really found our way through that whether we’re going to do it preemptively or not. I believe that we’re going to work through the MISO filings.

And I think that one thing that became clear in the New England case and I’ve said this in my prepared remarks that FERC has continued to go down the path to try to continue the incentive development of transmission. They’re going to leave themselves as much flexibility as they can. But remember, they still have a mandate from Congress to put rules in place that are going to incentive to development of transmission.

And also that they’ve made it very clear in there that they’re going to look at the need for the money and the growth rates of these utilities. And clearly ITC in the transmission space is one of the fastest growing and continues to be one of the fastest growing utilities in the country.

So I think that we’re well-positioned in that case. And I’m going to give FERC all the deference to continue to incent the development of transmission. I don’t know where they’re going to come out with on the incentives, but they did give you some guidance that that incentives will be kept at the highest end of zone of reasonableness in the ROE range. So I think that what they said is that there is a limit of this number of adders that you can add and continue to put on. They’re going to put a zone of reasonableness on it and from my standpoint, that seems to be reasonable.

Julien Dumoulin-Smith – UBS Investment Research

But then on the second point, just in terms of applying it in the case of MISO, any specific differences? I suppose national peer group et cetera wouldn’t lead to too much of a difference in the calculation.

Joseph Welch

Actually, the peer groups do make differences. And we’ve seen that repeatedly as we have done business across the country that in the areas where there’s more growth and you’re going to see a lot of that coming out of MISO that those peer groups from an ROE perspective are a little better.

As you get out into the western part of the United States where there hasn’t been as much investment put into the transmission, the peer groups don’t quite stack up the same.

However, now you’ve got the forecasted group. And one of the interesting things is that when they developed the peer groups, for some reason they always took ITC out, which was bothersome to us in the first place because they said that our growth wasn’t sustainable and we have sustained it over a long period. So I think that this was actually a very positive quarter.

Julien Dumoulin-Smith – UBS Investment Research

Excellent. Well, thank you very much.

Rejji Hayes

Thank you.


Thank you. Our next question comes from the line of Jonathan Arnold from Deutsche Bank. Your line is now open.

Jonathan Arnold – Deutsche Bank

Good morning guys.

Joseph Welch

Good morning.

Rejji Hayes

Good morning, Jonathan.

Jonathan Arnold – Deutsche Bank

Quick one on to the G&A line this quarter, the $8 million increase you mentioned, the things including personnel. Can you clarify a bit more of what drove that and then also how is this going to be a recurring step up or was this more a onetime in the second quarter?

Joseph Welch

This is Joe speaking first and then I’ll let Rejji follow up on this. But first of all, the increase in G&A comes from a couple of items that as you know and if you followed ITC, we have continued to grow almost about as fast as you can in the utility space.

And what we’ve always been faced with is lagging, being able to catch from a personnel standpoint inside the company. In addition to that, what you have is that you have basically a large mature operating company now. And we need to get that fully staffed. In addition to that, as you look across all the operating groups and in different levels of management it’s very important and the board has been very focused on this that we put those methods in place where we have adequate succession planning in place so that when you lose key people in areas of the company that you have the ability to come from your own bench and you have people trained and ready to step into those jobs for whatever reason. And so the combination of those two things have been the driver.

Looking forward, I still see jobs that need to be filled in positions that we want to do. But I don’t see it all happening as aggressively as what we’ve been doing in the last two years. But I’ll let Rejji follow up on that.

Rejji Hayes

Yes, I think Joe laid it out pretty well. As we highlighted in the earnings release, it’s really combination of an increase in staffing. And so I think right now we sit at approximately 560 employees and the year-ago prior, we were significantly lower than that. It’s probably to the tune of somewhere between 510 to 520 employees. So we’ve added a significant number of employees which obviously impacts your compensation and benefit spend.

And we’ve also spent more money on advisory services given a variety of business development initiatives that we’re looking at. And so we need third party support for that. And the cost associated there would exceed those costs from the prior years. And so I think Joe laid it out well. And I just wanted to add some additional specifics on top of that.

Jonathan Arnold – Deutsche Bank

So is the second quarter rate a good run rate going forward?

Rejji Hayes

Yes, to address that question, Jonathan, I mean I think if you look at it on adjusted basis where you carve out the interest you spend in 2013, I mean the implied growth is about 24% on a year-to-date basis and I think we’ve been higher 30% year-over-year if you look at quarter-over-quarter.

And that I think is not necessarily a run rate in perpetuity. I think you expect that this is going to be pretty lumpy. And if you look at our historical G&A on an adjusted basis, it’s kind of all over the map. And so you’ll have some periods where you have significant spend to staff up and then have other periods where you see a similar trend. And so I would not sit here and represent that’s going to be a run rate for the long-term.

Jonathan Arnold – Deutsche Bank

Okay. Thank you. And then I guess – can I ask you guys for your current thoughts on the potential for transmission to be reformulated into a REIT structure. Just in general, given whatever developments would be on that right around the industry?

Joseph Welch

I’ll give you some of my thoughts on this first and then again, I’ll let Rejji follow up. As we’ve stated on all of our calls when kind of faced with this question is that we are always looking at ways to deliver the best value to both customers and our investors. And clearly there has been a lot of discussion put forth around the REIT.

It’s not 100% clear to us yet that there is a clear window where we think ITC should be part of that. But let me – not to sound negative on this and say that we are going to evaluate this and we’re going to keep evaluating it. And if it makes sense for this company and for the future growth of this company, then we’ll take that path. And if we don’t feel it does, then we won’t. Rejji, you can follow up on that if you want.

Rejji Hayes

Yes, no, I think I’d echo those comments. I mean, Jonathan, you and I have talked about this. And I know Cameron certainly commented on this in the past. But specifically, it’s going to be a function of the regulatory environment in which we live. It’s going to be a function of how the rating agencies view that type of security or corporate structure at the time.

I think the latest news from Moody’s and S&P on their just general announcement on REITs have been somewhat negative depending on the circumstances. And it will also be a function of the preservation of tax treatment for non-traditional REITs. I mean Windstream’s public announcement which I’m sure you saw was obviously encouraging to see that the IRS is amendable to non-traditional structures, but that may not last in perpetuity and obviously Camp Tax Reform is out there which is certainly questioning whether or not there should be non-traditional restructures or non-traditional assets in REIT structures.

And the other thing too is as you know, if you utilize that structure with a growing business, it requires serial equity issuances. And obviously we view ourselves as a growing business. And so for us to decide whether or not we want to move down that path, we’re going to take into account all the things that Joe and I mentioned as well as the sustainability of the equity market for the foreseeable future.

And if we think that that’s going to be declining or too volatile, then we’ll have to think long and hard about whether or not it makes sense to go down that path.

Jonathan Arnold – Deutsche Bank

Is this something you’re just evaluating on a continual ongoing basis or is there some kind of timeframe that you’re actually considering coming to a yes or no type conclusion?

Joseph Welch

I believe it’s hard to say that we’re evaluating it on a continual basis. We continue to look at where we’re at, as Rejji laid out, where the credit markets and the equity markets are both at and the regulatory framework in where we’re positioned in that.

And when we put all of those together and we also look out into the future as to where we’re going to be as a company, then we continually try to make that decision. But it has been evaluated and it will continually be evaluated.

Jonathan Arnold – Deutsche Bank

Okay. Thank you very much for your time, guys.

Rejji Hayes

Thank you.

Joseph Welch

Thank you.


Thank you. (Operator instructions) Our next question comes from the line of Dan Eggers from Credit Suisse. Your line is now open.

Daniel Eggers – Credit Suisse

Thank you, good morning. Just as a follow up maybe to Jonathan’s question last – on the tax treatment side, have you guys gone to the IRS to look for a private letter ruling at this point in time or are you not that far long in the process?

Rejji Hayes

Dan, what I’ll say about how we might go about evaluating a REIT structure is that we would view that process as analogous to any other transaction, be it M&A or an equity issuance or debt issuance, in which case we would not disclose publicly the steps associated with going down that path. And so whether or not we’ve filed a request for PLR at this point, we don’t feel like we’re at liberty to comment on that.

Daniel Eggers – Credit Suisse

Okay, fair enough. And then I guess just on the Order 1000, Joe, what are your thoughts, A, around how PJM kind of awarded Artificial Island and then reeled it back a little bit, is there anything telling when you think about future Order 1000 projects they relate to you guys?

Joseph Welch

Right now I can honestly tell you that with that award that – first of all, let me say this about the PJM process. Of the RTOs that are out there today, I actually think that PJM’s process that they put in place mirrors what FERC’s intent really was that, one, that they wanted – and I am going to make this clear that what PJM has done is it said bring us your ideas to solve this problem and then based on that, we’ll start to look at the bidding process.

And I think that they looked at multiple proposals. They then evaluated it on cost. And it’s really important that process that they ask for someone to bring them the best mousetrap that each one could conceive and then they started to look at cost. But I think it highlights the fact that there are these areas where we have been well established and well documented that we say that incumbent utilities have a strategic advantage.

And this one came down to in the end that they could rely on using some of the existing right of way and that gave them a strategic advantage in that. And so the outcome of this did not bother me at all, the process didn’t bother me and I’d be remiss to tell you if it happens 500 times in a row, then you would think something’s wrong. But to date and based on everything that I’ve seen, I think it was pretty much the right answer.

And so I’m not particularly bothered by it. I think if you go back to the comments that I was making about Order 1000, there are these issues that exist. And Order 1000 didn’t solve those issues. And so that means for companies like ITC where we are now looking at doing some work in PJM that we have to be diligent on where we put our time and effort to make sure that those strategic advantages don’t absolutely ace us out every time because if those strategic advantages are going to ace you out, you’re just wasting your money putting your proposal in.

Daniel Eggers – Credit Suisse

I mean, Joe, do you think about the money at risk – I don’t have a better word for it, but the kind of dollars you guys are willing to allocate each year to look into developing projects in some of these markets under Order 1000 in a competitive framework before you say that’s enough?

Joseph Welch

Well, we do budget it and we do allocate the money. And the way that I look at it and this is probably not the best way to articulate it, but we allocate the money and say that’s what we’re allocating. Then we look at the success ratio and then when we come back next year, we’re going to start to look at how we feel the success is.

Now the problem with some of that is that some of this stuff takes a couple years before you get any clarity. So you don’t want to start to not feed the animal before you can get clarity on whether it’s going to grow or not.

But we have been very disciplined about not trying to throw any stupid money out there to go after everything. I think that if you watch our track record in the past in development, we were very diligent on it. If you look at the history, especially for us in Kansas, we were the first to go out in this development world. A lot of people, as I term them, behind closed doors wannabes have followed us.

But the fact of the matter is is we led the pack but we didn’t throw money at this. We’ve put a lot of hard work and effort behind it. And I think we understand the process. Now, clearly the rules under Order 1000 are being created and all of the RTOs are creating them differently. That’s not necessarily good or bad. It just means that development staff has got to be aware of what’s going on RTO by RTO basis.

But we are engaged. We do budget it. We will not go over that budget unless we see a big opportunity there. And beyond that, we will be evaluating it downstream for our success ratio and where did we misevaluate. Because our intent is is when we play, we intend to be successful.

Daniel Eggers – Credit Suisse

And I guess one last question. Just you’ve heard MISO, DV, CMS all talk about the shortfall of capacity in Lower Michigan. Do you guys see some transmission opportunities that aren’t in plan right now to help facilitate?

Joseph Welch

I really don’t want to talk about that. I mean, but the fact of the matter is is that we have talked about this repeatedly and I talked about this with other people years ago that the Lower Peninsula and the Upper Peninsula of Michigan, they are peninsulas. And so that connectivity is really critical. And this would probably shock anyone is that the utilities aren’t necessarily supporting building transmission to make things more connective because then that eliminates some other opportunities to build generation in the state.

We don’t look at that as a negative. It’s just the fact of life. And of course we are trying to look at alternatives. The thing that really is frustrating for people like myself is that all of the cost benefit studies that exist today are contrived cost benefit studies. We have failed to start to do long term transmission planning. And that’s not just in Michigan, that’s across the country.

So everything we look at has to have some benefit today. When you do transmission planning, these assets are 40-, 50-, 60-year lived assets at minimum. I haven’t seen any be taken out of service. And the fact of the matter is that we have to do long term planning to start to provide for optionality for things like generation because I will tell you that my 40 plus years of history in this business is simply you make a fuel source bet, I will guarantee within 10 years you will be wrong.

And I can talk to you about any fuel source you want to talk to me about and we can go back in history and see where everybody made the bet and it was wrong. And when you make that bet, you’re going to be wrong. And so the fact is that if you don’t want to build the transmission system to give yourself optionality, you’ll find yourself at some point capacity short.

Daniel Eggers – Credit Suisse

Very good. Thank you for the time.

Joseph Welch

Thank you.


Thank you. And at this time, I’m not showing any further questions. I would now like to turn the call back over to Gretchen Holloway for any closing remarks.

Gretchen Holloway

This concludes the question-and-answer portion of our call. Anyone wishing to hear the conference call replay available through August 10th can access it by dialing 855-859-2056 or 404-537-3406 with the passcode 768-75-639. The webcast to this event will also be archived on the ITC website at

Thanks, everyone, and have a great day.


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.

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