Fortis Inc. (FTS) Q1 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the ITC Holdings Corp. First 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, today’s conference is being recorded. I would now like to introduce your host for today’s conference, Ms. Gretchen Holloway. You may begin ma’am.

Good morning, everyone, and thank you for joining us for ITC’s 2015 first quarter conference call. Joining me on today’s call are Joseph Welch, Chairman, President and CEO of ITC; and Rejji Hayes, our Senior Vice President, CFO and Treasurer. This morning, we issued a press release summarizing our results for the first quarter ended March 31, 2015. 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. We believe these statements are reasonable, they are subject to various risks and uncertainties and actual results may differ materially from our projections and expectations. These risks and uncertainties are discussed in our reports filed with the SEC such as our periodic reports on Forms 10-K and 10-Q and our other SEC filings. You should consider these risk factors when evaluating our forward-looking statements. Our forward-looking statements represent our outlook only as of today and we disclaim any obligation to update these statements, except as may be required by law. A reconciliation of the non-GAAP financial measures discussed on today’s call is available on the Investor Relations page of our website. I’ll now turn the call over to Joe Welch.

Thank you, Gretchen, and good morning, everyone. Before I being, I want to note that our review will be relatively brief today. As only a couple of months have passed since our comprehensive update on our 2014 year ending call. For the first quarter 2015, we once again delivered solid operational and financial results. These results support ITC's long-standing track record of delivering superior benefits to both our customers and shareholders. The first quarter of 2015 proved to be quiet on the operational front with our systems performing well despite another bitterly cold winter. Our capital investment and maintenance plans remain on track to meet our objectives for the full year. Furthermore, our larger regional infrastructure projects such as the Thumb-Loop and MVP projects remain on track. While on the topic of the key projects, I am proud to announce that after nine years of working to establish ITC Great Plains and secure new development projects at that entity, we were finally able to award substantially all our employees with bonuses associated with the completion of the V-Plan project, which we placed in service in December 2014. The process to create a utility from scratch and then secure and construct over $500 million in projects has been a long journey and has resulted in direct benefits for our customers and shareholders and now for our employees who made it happen. The V-Plan bonus related expenses for the first quarter were anticipated in our annual guidance and we remain on target to achieve our financial objectives for the year. As discussed many times, these green field projects when compared to acquisitions are extremely beneficial and cost-effective for shareholders as no Goodwill premium is required. The V-Plan project bonus was conceptually established in 2006 upon the creation of ITC Great Plains to recognize a considerable effort required to of our employees to run our core operations, while also contributing to our development efforts. Broadly speaking, incentive-based compensation remains an important aspect of our entrepreneurial culture and a key to our success as we pursue development opportunities in the future. Switching gears to regulatory matters with respect to the MISO base ROE hearing, the MISO transmission owners filed testimony in the early April. The testimony was focused on our transmission owners recommended ROE for the 15-month period refund from November 12, 2013 through February 12, 2015 associated with the initial complaint. The testimony demonstrated that the existing base ROE in MISO of 12.38 continues to be just and reasonable. However, in the event that FERC elects to change the base ROE, the transmission owners’ expert witness recommended a new regional base ROE rate of 11.39% for the initial refund period. Given that the initial complaint period has now lapsed and a second complaint was filed in February 2015, we are uncertain of the timing as to when FERC will determine the perspective or run rate ROEs for our MISO-based operating companies. Needless to say we remain very focused on this matter and expect a constructive outcome from FERC. As for the other regulatory matters, in late March FERC granted ITC Midwest, the authority to utilize a 50 basis point ROE added for independence subject to the overall ROE being capped at the high end of the zone of recent owners in the context of the base ROE complaint. Consistent with what was previously granted at ITC Transmission METC and ITC Great Plains, ITC Midwest has requested 100 basis point ROE added for independence. However, FERC ultimately granted 50 basis point adder. Though we are disappointed with the outcome, it is important to highlight that within our order FERC continue to recognize the benefits associated with the independence model. We should also note that this decision does not preclude the commission from awarding up to 100 basis points in the future. Shifting gears to development. We continue to advance in Lake Erie Connector project and have made significant progress in our efforts related to siting and permitting. From a timing standpoint, we expect to commence the non-binding solicitation process closer to middle of the year as a result should we have better visibility on the economic viability of the project towards the back half of this year. Overall, we are very pleased with the progress we've made on all fronts in the first quarter 2015 and are focused on positioning the company to meet our near and long-term commitments. I will now turn the call over to Rejji for an update on our financial results and outlook.

Thank you Joe and good morning everyone. I will begin today by providing a brief summary of our financial results for the first quarter of 2015. The three months ended March 31, 2015 reported our GAAP net income was $67.1 million or $0.43 per diluted share, as compared to reported net income of $69.1 million or $0.43 per diluted share for the first quarter of 2014. Operating or non-GAAP earnings, which we believe are more indicative of for core operations for the first quarter of 2015 were $73.1 million or $0.47 per diluted share, compared to $69.8 million or $0.44 per diluted share for the first quarter of 2014. Operating earnings are reported on a basis consistent with how we provided our guidance for the year and exclude the following items listed on an after tax basis. First they exclude lingering expenses from the Entergy transaction totaling $0.6 million or a $0.01 per diluted share for the first quarter of 2014. Second, they exclude regulatory charges of approximately $1.1 million or $0.01 for the first quarter of 2015 and $0.1 million for the same period in 2014. The 2015 charge relates to management's decision to write-off abandoned cost associated with a select project at ITC Transmission. The 2014 charge relates to certain acquisition accounting adjustments for ITC Midwest, ITC Transmission and METC resulting from the FERC audit order on ITC Midwest issued in May of 2012. Lastly, operating earnings exclude the estimated refund liability associated with the MISO base ROE, which totaled $4.8 million or $0.03 per diluted share for the three months ended March 31, 2015. It is possible that upon the ultimate resolution of this matter we may be required to pay refunds beyond what has been recorded to the today. We will continue to assess this matter and will provide updates as necessary. Operating earnings for 2015 increased approximately 7% or $0.03 per share over the prior year, primarily due to higher income associated with increased rate base at our operating companies, partially offset by the aforementioned non-recoverable bonus payments in the first quarter associated with the V-Plan project. It is worth noting that absent the project bonus payments, year-over-year growth for the first quarter of 2015 versus the prior year would have been more consistent with historical trends at approximately 15%. Turning to capital investments for the three months ended March 31, 2015, we invested a $168.7 billion in capital projects in aggregate including $36.8 million at ITCTransmission, $30 million at METC, $95 million at ITC Midwest, $5.8 million at ITC Great Plains and $1.1 million of Development associated with the new government project. With respect to our financing and liquidity initiatives on April 7, 2015, we executed a 40 year debt issuance at ITC Midwest, which is the longest loan maturity issued in ITC’s history. A $225 million of First Mortgage Bonds at ITC Midwest were priced at 3.83%. The proceeds of which were used for general corporate purposes, including the repayment of borrowings under the ITC Midwest's revolving credit facility. It is our understanding that the bonds interest rate was lowest ever recorded in the 40 year bond market, which directly benefits our customers and yet again highlights the benefits of FERC policies. From a liquidity perspective as of March 31, 2015, we have total liquidity of approximately $569 million which consist of roughly $9 million of cash on hand and $560 million of net undrawn capacity on our revolving credit facilities. For the three months ended March 31, 2015, we reported operating cash flows of approximately $67 million which reflects an increase of approximately $21 million or 46% year over year. The increase in operating cash flows is primarily due to an increase in cash received from operating revenues compared to the same period in 2014 partially offset by higher income taxes paid. As highlighted in the past management remains committed to sustaining our strong financial position and solid investment grade credit ratings. As such, we are pleased to report on April 15, Moody’s affirmed the current ratings and outlook of ITC and its regulated operating subsidiaries. Turning now to our outlook for the remainder of 2015, we remain on to deliver on our financial commitments for the full year. As a result, we are reaffirming our operating EPS guidance of $2.00 to $2.15 and our aggregate capital investment guidance for the year of $710 million to $810 million which includes $170 million to $200 million for ITC Transmission, $150 million to $170 million for METC, $380 million to $405 million for ITC Midwest, $10 million to $25 million for ITC Great Plains and up $10 million of Development. In closing, we remain focused on the execution of our plans for 2015 for the benefit of customers and shareholders are also positioning the company to deliver superior long-term growth. Our performance in the first quarter serves as an important foundation for these efforts. At this time, we would like to open the call to address questions from the investment community.

[Operator Instructions] Our first question comes from Julien Dumoulin-Smith with UBS.

Hi, good morning.

Morning, Julien.

Good morning.

So quick question here and I know its early days, but can you elaborate on the responsiveness thus far in the non-binding open season for the project. What kinds of parties are you talking to perhaps just any player there?

Yeah, Julien. Good morning. This is Rejji. As we disclosed in the fourth quarter, we commenced the marketing process to essentially began to promote the project and its benefit to prospective shippers in the Ontario IESO. We have not commenced the open solicitation process as of yet. We plan to do that as Joe highlighted closely to the end of Q2. The reality is we are still working on the permitting and application process into add legitimacy, the project will not commenced the open solicitation until we have completed those initial steps. So at this point, the receptivity has been quite good and we will have more visibility over the course of this year.

Got it. And if you are to kind of frame it this way, with respect to your billion dollars development project, how do you feel in terms of being able to achieve that with and without Lake Erie as you moved through the course of this year, you’ve seen the various profit at SPP and MISO play out and we are evaluating alternatives. I am just be curious if you could elaborate on other development activity to fill that bucket perhaps within U.S. or its territories or the internally was alluded to in the last call just how the various development efforts are ongoing.

Sure. As we discussed in the fourth quarter, Julien, we have obviously have tried to expand and diversify the development portfolio to meet our objectives and eventually hit the $1 billion that we forecasted in the 2014 to 2018 plan that we rolled out in April of last year. And so we have in addition to order 1,000, we’ve obviously started to look at Lake Erie as well as new cover projects and other opportunities like that to fill out the portfolio. At this point, we still feel very good about the $1 billion and we have started to as mentioned evaluate additional generator tie lines like project and RE getting in-bound increase related to opportunities like that and move or progress the Lake Erie project along again to try to fill out that $1 billion. So that’s all we can offer at this point. Again we are spending a lot of time on all of our development efforts as evidenced by the reorgan February of this year. We have certainly dedicated sources to help Terry Harvill and his team fulfill these objectives and we are spending a lot of time on making sure we hit our numbers.

Got it. But just to be clear, you still feel good about the $1 billion development budget with and more importantly without the Lake Erie project.

Until we have further visibility on whether or not like Erie happens, and at this point again we feel good about $1 billion. What I will say is I’ve said before in the absence of $1.5 billion, just to be clear if we executive on the $3.4 billion of capital in the $4.5 billion plan, which from our perspective, we feel highly confident that we will be able to hit that and do that as relatively low data spend, that drives 10% EPS growth which I think you’ll agree as quite differentiated relative to other utility. So we feel very good about the $1 million today, which is why we are sticking to it. We are very active on all fronts to see that we fell out that plan and again we are not in a position right now to say whether it will happen or not, but if it doesn’t we still feel very good about the EPS growth that we will offer in the absence of that.

Great. And then just to clarify the delta between the ‘10 versus the ‘11 to ‘13. Basically our assumption is if you don’t execute on the development CapEx, the [indiscernible] would be share buy backs or some other return of capital, de minimis the dilution, is that the way to think about it.

Yes, to date our messaging – I think its directionally correct. I mean the reality is we were very conservative in our forecast of the $1.1 billion. And so in the absence of spending those development dollars if you think about the way in which you finance the business, it gives us incremental dry powder or balance sheet capacity or excess funding capacity whatever you want to call it to look to value return to enhance our total shareholder return proposition. So in the absence of development or M&A or other opportunities which we think are more value accretive, we will look to value return as an alternative and share repurchases currently are earmarked as the best alternative or tool for that value return but we will continue to evaluate that on a quarterly basis.

Great. Excellent. And then in terms of return on equity and sort of the reconversation just come back to that if you will, is there a minimum level that you would be evaluating if you were to get a certain real. I know it’s a tricky subject but you could rehash that just in light of where the mark-to-market seems to be going on the existing FERC methodology.

So Julien if I understand your question, you are saying is there a threshold level of RV degradation that would…

Yeah. How would you frame out…

Yes. So as we’ve said before, there are a variety of factors that we would need to contemplate before going down a path like that. Obviously RV degradation is one of them and just general rate construct deterioration risk is another data point as well beyond ROE. So in addition to that we also – as we said in the past several times would have to look at the credit quality implications, sustainability of tax benefits, financing strategy, strategic constrains, these are all things that you have to contemplate if you are going to down the path to one of these tax advantage structure specifically at reach. So a lot of stars would need to align, obviously it’s for new shares. We evaluate all different types of structures that can add value for shareholders and bring benefits to customers, and at this point we can’t say there is a specific threshold of ROE degradation that would dictate us going down that path.

Alright, great. Well, thank you very much for the time.

Thank you, Julien.

Our next question comes from Daniel Eggers of Credit Suisse.

Hey, good morning, guys.

Good morning, Dan.

Good morning.

I appreciate you haven’t gone out and spoken explicitly about Lake Erie, but just on a conceptual perspective, the folks who have interest in it looking at it from a purely economic arbitrage where they can produce power more cheaply or can’t sell it for as good of a price in Ontario, it shows that PJM is more compelling. Are you having people look at this as kind of a reliability issue to address some of the Lake Erie loop flow problems that were part of the great blackout a number of years ago?

I think it’s fair to say that the vast majority of the people that are looking at it are looking at it from an economic arbitrage standard. There is substantially different types of resources on both sides of the lake. And so, this has been a project that has kind of a natural fit to arbitrage are crossed. And as a matter of fact, as things continue to move forward with the uncertainty of the new EPA rules and everything else, those numbers have actually opened up. So, I would venture a guess that – I haven’t talked to Terry lately about it, but the people that are very interested in and probably are close to in excess of 95%, just purely financial arbitrage.

Got it. I was just kind of curious given the history of that area. Joe, on the 50 basis points of independence, I mean how do you guys think about that for the core of the business? It seems like FERC has decided not to address it for the rest of your operations. Do you have any anxiety that them derating that benefit of independence comes back to get you elsewhere?

Actually, the 50 basis points didn’t cause me any anxiety, I hate to say that so careful early. Look, I mean, realistically, you are in a market and the whole overhang, if you will, from the ROE issue is just out there. And Rejji reports back that we signed a long-term bond agreement at record historic low levels. And you just have to have the realization that FERC is sitting there and they have pressure on them to do what they need to do. I think that as it continues to go forward, I certainly believe that FERC has thought that these interest rates would turn around and they wouldn’t have to address this issue. But I really think that they are going to have to address it. I wish they would address it because I get tired of answering questions about it every quarter. But the fact of the matter is, is that, the interest rates are at record low levels and continue to deteriorate, and FERC is going to have to face the fact. And so they’ve set an upper balance that you can’t go outside of their zone of reasonableness. I was more disappointed with that finding months ago than I am with anything they do after that because then it says that the benefits of all your incentives has a cap. And so, what they are really saying now is, if you remember some of the other things that you’re going to have benefits on were things where you started to deploy new technologies. But if they are going to start to put a cap on it, they are really starting to put a risk profile on really taking people that would invest in new technologies to enhance grid performance and kind of make them then shy away from it because the standard in the utility business is I don’t never want to be the first guy to put something in, I would rather be the last guy to put it in because you get beat up regulatory on things that are not well proven and you put them in service early. So, I was more disappointed with that. The 50 basis points, the thing that you guys are going to look at when it’s all said and done is what’s the overall ROE we are getting and how we get there is probably not going to be that much different.

Fair enough. And then, I guess, just on the Order 1000 stuff, Artificial Island kind of are first test mark out there. They reconsidered and split the project up from the original plan. What do you think that means as you guys look at Order 1000 projects both in the sense of the organization of the operators getting projects awarded? And does it put more risk in pursuing projects given the fact that you could spend a lot of money on development just to get these pulled away from you at the end even after you’ve gotten the awarded ones?

Well, I think that that’s one way to look at it. I think the other way to look at it is we got a pretty big footprint and we are pretty diverse in that footprint, meaning, that we are spanning from Kansas to Michigan, East to West. And so, in our footprint, I guess, as everybody – as the rules start to roll out, the reason we started to look West was, when you start to look West, there is more of the projects that are going to be built for a whole host of economic reasons or resource reasons. As you start to look East, most of those projects usually wind up with a high degree of reliability because it’s a more mature system. So, I haven’t really put a lot of effort into looking at those things and worried about that too much. I’m more worried about us being able to execute in the footprints of where we have. And if you have a home-court advantage, it’s our home-court advantage and I will take it. So to answer your question more specifically, we tried to put more of our focus on where we have a home-court advantage because that’s where the success ratio is the highest.

Great. Thank you, guys.

Thank you.

Our next question comes from Jay Dobson with Wunderlich Securities.

Good morning, Joe. Good morning, Rejji.

Good morning, Jay. How are you?

Great, thank you. Hey, Joe, I was hoping you could clarify a little on sort of the international comment that you have made last quarter, in February, and then reiterated today. Just I think folks have had a hard time swallowing sort of exactly what you’re talking about, are we talking something very broad and sort of faraway from where we are or are we talking something North America, outside the confines of the U.S.? And with that in mind, help us understand this view that Order 1000 delays sort of dragged on and hence the opportunity set in the U.S. is not as good as you once thought and hence we head international or is it something sort of broader than that?

Well, look, the reason I said the international is, first of all, Lake Erie is an international project and it’s our first one going across the broader. But even if you go back further into our history, while people don’t realize it, we sit on a broader with international interconnections and that’s with Ontario. And we have coordinated projects across that broader for a lot of years in history. Having said that, we also know that there are areas where transmission investment seems to make sense and those are outside the confines of the United States. But I don’t think that – I will just put some breath on this and not to be kind of a smart guy about it, but I doubt that you are going to find us going to the Middle East to try to build transmission and probably you won’t find us in Venezuela trying to build transmission. But clearly in those areas, where we think that there is the stability that I guess is the financial footing. We are going to try to probably look at those little more extensively than we would in the past. Rejji has laid out for you that we’ve got a pretty robust growth proposition, still low-double digits, looking out over our forecasted period. But even with that forecast, we have excess capacity to do things and we can either buy shares back or do dividend or we can continue to invest, but we only want to invest in those areas where it’s going to make sense for you as a shareholder. So, North America clearly would be your preference. And you can look elsewhere, I haven’t – I don’t have anything on my horizon that says it would be something different than that. But I’ve left the options open because our guys are in the development area and the first thing I don’t want to tell the people that are in the development area is you can’t look at anything other than what I tell you to look at. I think the best way to do that is to let them look at what they want to look at and then let’s do the hard-core financial elevation on it to see if it really does make sense and it’s a fit for the company. I think our history has been and my leadership style has been, I don’t like to get too far out of the kitchen where I’m comfortable cooking. So I watched too many diversification efforts by my friends in the utility business to which I wholeheartedly have said all failed and I don’t want to be in that group. So I’m not probably going to play too risky.

Yeah, the only thing I would add to that, Jay, I think Joe summed it up really well. As we look at the development and I’d submit M&A opportunities going forward, we are not going to do anything that materially changes the risk profile of this business. And so, as you start looking at development relative to domestic opportunities in the U.S. be it a merchant or regulated, we are going to have to refer an international opportunity to move up to the front burner, give priority over those. We would need to see a significant capital investment opportunity coupled with limited political risk, limited currency, and all those other risks that you face when you go internationally and we’d also need to see for Joe's comments a very attractive economic construct where there is not a lot of risk of having stranded assets in spending a lot of money that you don't get a return often on that capital. So, absent that, international I would say sort of a distant third of fourth relative to your domestic initiatives if that’s helpful?

No, no that is very helpful and it is good to hear that it is [indiscernible] North America though, not limited I’d encourage risk as well as the assessment of sustainable competitive advantages, because clearly you have those here, but the further you go SKU it would seem to be in question. And then two other quick questions Rejji, any change in the assumptions regarding the ROE refund, as far as the actual calculation of what you did?

No, at the moment we are continuing the pre-existing assumptions we had when we booked the liability in Q4. Obviously, due to litigation purposes we are not going to disclose what the underlying ROE is, but we are very consistent in our calibration front. Q4 like to date is essentially starting in November 2013 and then rolling into Q1 of 2015.

Got you. And then last question is share repurchases, you still have 120 million I think of the repurchase authorization at least two March 31 as I read you didn't perform any repurchases, I guess where is your mindset on that and looking forward is it still your anticipation you would complete that by year-end 2015?

Yes, it is a great question Jay. As I highlighted in Q4, we will look to be opportunistic in 2015 with respect to share repurchases. The reality is, given the timing of when we rolled out our Q4 earnings in late February and then how quickly Q1 was upon us, we've only really had roughly a month of non-black out periods to execute on those repurchases and so we've essentially been handcuffed for the first four months of the year or three of the first four months of the year, which has obviously precluded us from executing on that, but we will be very mindful of looking to capitalize on that going forward and given where the stock price is today, I know it is certainly at levels which may be interesting.

Great, thanks very much for the clarifications.

Our next question comes from Michael Dandurand with Goldman Sachs.

Hi guys, actually most of my questions have been addressed. The only thing I wanted to follow-up on real quick is the five-year growth plan and I realized we’re only a year into it, but just at what point will you revisit that, is it kind of link to Lake Erie progress and to the extent that’s linked to development plan or maybe something else, I just wanted to get a little bit more color on that?

With regards to doing the five-year forecast, I’m not, we don't have a specific timetable where we even plan to update it. We are really focused on getting what we've already committed to write. I mean candidly all you are going to do is add a year or year and a half to the tail end of what we have out there and I think that you have plenty of knowledge bases on what is out there. In the minute that we do that everyone would come back and want to know what's the inherent ROE that we've embedded in that calculation and a whole host of other items. So, doing these five-year forecasts, which are great for us to have a discussion on, they usually require a lot of work and then a lot of back up work to go with it and right now we’re really focused on getting the company directionally going where we see the market changing right now and to deliver on the commitments we've already made. So, I would say it is often the distance. I would doubt that we would update that at all this year.

Okay it makes full of sense and then just following up on your comments about home court advantage and some of the opportunities you may or may not see there has anything changed as far as, I realize it’s only been a couple of months since the last call, but as far as what you are seeing in MISO and SPP?

Yes, I think where we sit today, the MTEP was at 15 came out and I think it was December 2014 and then we had the SPP, ITP10 or ITP near term that was called out in January of 2015 and collectively I'd say the offerings were pretty light. I think there was potentially one project coming out of SPP and zero out of the MTEP process, so in the near term our expectations are around or to 1000 opportunities are pretty tempered. Now that said, as Joe highlighted before we’ve got dedicated resources that are scaring the planet for opportunities associated with order 1000, not the planet, excuse me the walls of the U.S., and so we are obviously very focused on seeing if there are opportunities either within our existing RTO’s or outside of our RTO’s. As we highlighted before, we are certainly very active within the PJM competitive process, but for now I think - and on the home front it has been relatively light.

Got it. I understand that. And then just a follow-up as far as - when do you think you might see you kind of pivot as you look at transmission planning in both regions, is there something we can kind of look to for additional opportunities, is it like environmental issues or just development, is there - I'm just trying to think a bit more longer term there?

Well I think first off, I mean if you go back into some of the comments that Rejji made earlier that we have already done things definitely, you need to start to talk about the generator interconnection projects like the New Covert project and what have you? So, we clearly are focused on trying to get those things that are outside the order 1000 domain to start to fill in all the pieces of the puzzle that we have and we feel pretty good about that. Going forward of course you would probably are well aware of all the EPA regs and everything that are taking place and commensurate with that there has been several studies now produced where it starts to highlight the fact that there is not millions, but billions of dollars of transmission that needs to be built to support what they have in mind. Beyond that regarding the grid, as we continue to go down the road of more available resources, we are going to have to start to look at non-traditional transmission investments to help us both control the system, regulate the system and also we are going to need to build more transmission beyond what's been anticipated to help make sure that we can keep the grid interconnected because the resources that we have one are variable and two do not have a lot of what we call spinning and nurture to help us during times of critical operating conditions. So just having said that we see a lot of opportunities coming as we need the definition around it and we have whole group dedicated to working through that. So there are just more to come on that, but the opportunities are really big.

Okay great that's a great color, thank you for the time.

Our next question comes from Charles Fishman with Morningstar.

Good morning. Joe, if I could follow-up on your comments about the way the customers, your view of how customers look at the Lake Erie project, would you say if it’s driven by financial arbitrage we’ve obviously had a significant change in the commodities landscape since you started this project, would you say that's pretty much offset by the expectations of what’s going to be required to fulfill the clean power plan, is that a fair assessment?

Well I think it, you know that's one of the things that's happening, I mean, if you have units and look I mean a lot of the coal base units in the United States if you open up their history they are old units and they are not efficient and they are not as environmentally pleasant as a newer unit would be, and as they put the pressure on those there is the whole need to fulfill it, to fulfill the void that’s going to be created by that and of course you just don't get to fulfill it with anything else and so you have a lot of wind resources on the Ontario side, you have a lot of hydro resources on the Ontario side; and so I would say that the expectations and I venture to say that the financial [indiscernible] that exists has actually opened up and the capacity markets will start to pick that up and of course anyone that wants to sell into that market with a renewable resource predominantly will be in very good shape. So I foresee that for some time.

Okay, thank you for the additional color that was helpful.

Our next question comes from Steven Fleishman of Wolfe Research.

Hi, just had a question going back to the base capital plan, I guess it's been a while since your Analyst Day and just wanted to confirm the 3.4 billion base capital that that's pretty much all has no real siting risk nor any risk of kind of competition for the capital that’s just locked up kind of additions to your current network.

That’s a good question Steve. So to be clear of the $3.4 billion which is a combination of base capital investments in our existing operating existing operating system, so that’s $2.2 billion and then $1.2 billion of regional projects. So the MVP projects at ITC Midwest is a significant portion of that and then there are some hot projects and great plans at also Midwest which close out the gap between the two. So of the $3.4 billion of aggregate, I think we view them as relatively lower data and at end of the [indiscernible] execution risk, you still need to do all that right way of acquisition, you need to do permitting citing, and then you have to build lines of miles. So we don’t want to sound too arrogant about our ability to achieve on it, but if you look at our track record we have a very good one of getting things done on time and on budget. So we feel good about that certainly relative to the development portfolio and to your earlier question, it’s not subject to competition at all. And so we feel quite good about our ability to execute on that and we do that, that alone drives 10% EPS growth.

Okay. Great. Thank you.

Thank you.

Thank you.

Our next question comes from Greg Gordon with Evercore ISI.

Thanks. Good morning.

Good morning, Greg.

At the end of March, Blackstone seeded a new company called GridLiance which their strategy is to try to work with more municipal corps, non-publicly traded entities and assisting with them with their transmission needs. Does that – are they a direct competitor to you now or they selling a market that’s outside the scope of your growth CapEx aspirations?

Well, I think that they specifically said in one of their press releases, they weren’t competing with us but it would be hard for me to imagine that there are any different than anybody else who has been in Kansas that there is going to be more competition. I mean the fact of the matter is that, they are going to be out there and they are going to try to bring some projects to fruition. And everyone knows or if they don’t know, they should know that everyone that’s working for that group is the next employee of ITC. So I guess plagiarism is the best form of flattery, but I also don’t want to underestimate what they do, but they have no operating skills there. And this – while everybody looks at this as a financial play for transmission that we just put some wire up in the air and put a couple of stations on the end of some transformers. The vast majority of the people that work here do a whole heck of lot of different things. Other than that, we have few people working in development and a lot of people working in operations, and there is the big difference. So I think they’ll be out there and they will try to get something done and got lot for doing it. But the fact of the matter is that we’ve got a really good presence in Kansas, we also have a good track record in Kansas being a responsible operator. So when you go through the process, we’ll see how it works.

Great. I appreciate the answer. I guess I was asking a multifaceted question that the – when I look at your total CapEx aspiration and you break it down into different avenues of attached rates, just how big is that small piece of the puzzle. If they were to take share in that small area, or how big of an area is that relative to your total aspiration. Is it like a big chunk of [indiscernible] small piece of that.

Actually I don’t think it is even included in our aspirations for that region of the country and let me explain to you why. That currently all of those municipals are served by a transmission owning entity and for the most part, it’s Westar where there are municipals. And if you notice where our focus was that, we were on the western side of the state which is all were the vast majority of the cooperatives area and that’s where we build our strategic partnership. So I think that there is going to be an issue on the table at some point as to whether Westar should serve the customers who are conserving for years to come. And it’s hard for me to believe that those municipals are having a rough time getting service from Westar given the fact that Westar has been actively engaged and trying to build transmission to.

Greg, this is Rejji.

Thank you very much. Sorry, go ahead Rejji.

I may have stopped there.

No, the only thing I would add to that is, I read the press release when I hit the tape on gridlines, formation and so they are very focused on partnering with coops. In the event, they also look for opportunities with respect to Order 1000 obviously we may be potentially competing there. As we’ve discussed in the past, we did assume that would be some Order 1000 opportunities in our Billion one but the reality is we’ve obviously expanded and diversified. Our capital plan on the development side over the past several months. Yes, we may compete with them a little bit in Order 1000 as your ambitions extend to that. But the reality is to Joe’s system, we don’t see ourselves going head-to-head with them all that often.

Awesome. Thank you guys.

Thank you.

Our next question comes from Neil Kalton with Wells Fargo Securities.

Good morning everyone.

Good morning, Neil.

Joe, I just want to follow-up on the comment you made on the future of the grid and where things are heading. And it seems to be – maybe I am reading this wrong. You seem to you are alluding to opportunities in storage. A) is that correct and B) If so what would you need to see happen that invest in storage forward.

Well, I think the thing is that, there is clearly some people that have outlined that they want to do storage. For the most part of the storage that we are using here in the United States is pretty much a distribution system type of storage mechanism. If you look at the batteries that we have and the capabilities of what the technology that we are employing here, that technology takes up a lot of space for very few megawatt. However, having said that, it is becoming well documented that in Germany where we they a large of win generation, they also are doing out the grid and employing a different technology type of battery. And of course you would like to get involved in that because as you may or may not know, in Iowa where we have one of the largest win or operations in the whole county and I don’t mean we won the win, but the amount of wind generation in Iowa is getting vast and it continues to grow. And do of course for those of us operating the grid Shat shortage capability becomes very critical to us. So I would personally like to start to employ some of that technology but it is in a risk fee deal. And of course because is defined the life of these batters because no one owned them long zero to do that and no one can define from me how to store them and I am still because of my relative senior status, still string to figure out what happened to the nuclear powered builds business with my science book recognized in the third quarter and try to figure out how we handle all of the things that come down straying from these technologies that are just too great for us not to one employee. So but those are the areas where we’d like to look. I mean storage is a transmission technology. We would just because of the kind of company we are, we like to stay on the cutting edge of the technology and we’ve got the right engineers here to employ that technology. So I was disappointed with that for put out there because it very well may, aged people out from one thing to really try the new technologies. We are going to need to have those technologies and if we were going to continue to grow to a more carbon free society.

Al right. Thank you.

Our next question comes from John Alli of Castleton Investment Management.

Something [indiscernible] broader strategy. The reserve you guys took against the – or the charge against the 206 filing. I think it was $0.03 this quarter. It was larger in 4Q. Just what was the difference there and how said you kept the methodologies the same.

Right. So to be clear, the fourth quarter refund liability or the recognition – fourth quarter refund liability that reflected life to date from November of 2013 when the complaint was initially filed to the end of calendar 2014, so all the way out to December.

So if I annualize this, it would be apples-to-apples?

Yeah, I’d be. It’d get you pretty close.

Prefect. And then, secondly, in terms of the development CapEx, it seems to me like Lake Erie is a pretty significant portion of that development potential. Is that like going to be a bright-line task, if that project is a no-go, you guys start buying back shares immediately, or is there ways that that project might be downsized or altered slightly or anything like that?

I think first and foremost it’s too premature to tell what the ultimate size of that project will be from a capital investment standpoint and, more importantly, whether the project is economically feasible or not. And so, we have not, as I mentioned before, commenced a non-binding open solicitation process and until we do that, it’s going to be sometime before start spending real dollars. So from a sizing perspective, we are not sure how big it will be. But, let’s say, we determine at the end of this year that the project is not going to work out and we turn off the spigot. At that point, we will reevaluate where we are; at that point, we will look at the Order 1000 landscape, we will look at some of the generator Thailand opportunities, all the other development related initiatives, we are looking at right now.

Just not necessarily a bright-line task between doing this project and then buying back shares, do you have…?

Yeah, I wouldn’t say it’s binary. We have to look at the entire portfolio of development opportunities and if we think that basket is light, we will reconsider value return and whether or not it makes sense to increase our ambitions there.

Great. Thanks very much.

Thank you.

Our next question comes from Andy Levi with Avon Capital.

Actually, I think most of my questions were asked. Maybe we can talk about Venezuela a little bit more. Seriously though. So just to follow-up on John’s question, so the $0.03 I guess we annualized in a case where, let’s say, theoretically, your assessment is correct, it ends up being about $0.12 annual reduction in earnings power I guess, was that kind of…?

Yeah, I don’t want to – to be clear, I mean, I think, it’s directionally, but I don’t want to lead you too much. I think the best metric that you probably could use if you are trying to incorporate it into your model is, we offered a sensitivity in our 10-Q, which will be forthcoming that we’ve had in the past and essentially we’ve got aggregate equity at the operating companies that are within MISO of $2.7 billion.

Okay.

And every 10 basis points of ROE degradation equates to $2.7 million of net income dilution. And so, I think that’s probably a better sensitivity to use if you are trying to prognostic as to what the potential ROE degradation could be and how it may impact the economics. And so, let me point you to that as opposed to trying to take the $0.03 multiplied by four and trying to figure out sort of, okay, well, how do we haircut their forward earnings. So we’ve offered a lot of disclosure around the cost implications of the refund liability in the Q. which you will see I think later today.

Okay.

And so that should give you enough raw materials to run the math.

And it probably also allows us to almost kind of figure out where you marked everything, I guess. No better way to put that.

You won’t hear that from me but…

Right, right. We will probably have a pretty good fall apart.

Yeah, this is the only business we are in, so it’s probably not too hard to triangulate into what the underlying assumption is.

Yeah, got it and how they add, subtract, divided, and multiple, that’s, you know, what we do. And then second question and I don’t know if you guys have taken a look at it yet, I just – I know it came up in the beginning of April and whether it even relates to you or not. So I guess there was this ruling coming out of FERC related to the New York Transco and there was an interview that had a protest about the 60% common equity that it was – and then I guess FERC enrolled that it was excessive to use that on – again this is a new Transco that is being created. So again just talking about a higher common equity ratio, does that relate to you at all, or is that kind of just exclusive to the New York Transco?

I think the quick answer is that facts and circumstances associated with that order and that case are specific to New York Transco. As you may know, there was also another decision by FERC in early April, around Transource where the 60% equity 40% debt hypothetical capital structure was granted. So I think FERC looks at all of these situations FAC specific and if the FAC’s necessitate a more equitized capital structure, they allow it, they have done for us for several years.

Okay.

And I think to follow up on that, if you recall in the ROE compliant field with MISO they also went after the capital structure, specifically to ITC and FERC rejected it.

Very good. So, I will look forward on the second quarter call on the Middle East investments.

Our next question comes from Jay Dobson with Wunderlich Securities.

Hey Rejji just a quick follow-up, what was the pre-tax cost or sort of entry for the bonus compensation for V-Plan?

Sure, $9.5 million, approximately.

Got you. And what was the project that we wrote off, the project development cost?

Yes that was a project at ITC Transmission by the name of this Bismarck-Troy. It was a project that we were – had begun to construct or spend a little bit of money on around mid-odds after it was approved as part of the MTEP, MISO Transmission Expansion Plan in 2006, upon trying to request a certificate of public convenience and necessity, the MPSC ultimately decided a few hours years later that there wasn’t requisite load or demand growth to move forward on the project. And as a result of that, at that point we decided to contemplate writing it off. We took a portion of the write-off in 2009 and then took the balance of it in this quarter again because it’s essentially stranded asset at this point.

Perfect, thank you so much.

Thank you Jay.

Our next question comes from Julien Dumoulin-Smith from UBS.

Hey, sorry to ask a follow-up here, but I just wanted to ask on the legislation in Michigan, if you can elaborate, expose there something pending that could provide you something of a [indiscernible], but perhaps you can elaborate on what it relates to specifically?

Well I think, the pending legislation in Michigan is basically surrounded about giving stability to the utilities doing business in the state of Michigan and so that Michigan can start to move forward, basically to build the generation that they need to serve the customer load, Michigan is one of those many states that has been affected by the EPA standards. The other thing that I think that they are looking at in legislation, but I’m not really on top of that, is that they are still trying to get more secure service to the Upper Peninsula of Michigan because there has been just, it’s kind of like a chicken and egg argument in the upper peninsula Michigan that can get economic growth because they don't have the infrastructure to support it. They can't get the infrastructure to support a bill because it won’t pass the RTO’s cost benefit analysis because there is no load there. So, they are kind of caught in a position where they never get any, they can’t get anything done up there because they don't have the infrastructure and they can't justify the infrastructure because there’s nothing there. And so, I think this Governor has really started to focus on what it takes to generate economic development and give all portions of Michigan the same rights. So, I don't know if anything will materially come out of that for us, but certainly we have been actively involved in supporting it because we would like to basically see all in Michigan serve properly.

Great, but I mean specifically and perhaps you were addressing this, with the Senate bill 282, from April 21 just about the regulation of siting and construction of electric transmission mines in Michigan, I don't know if you can speak here or want to frankly?

Frankly I don't want to. I'd just be polite.

Okay no worries. Thank you

Thank you.

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

This concludes the question-and-answer portion of our call. Anyone wishing to hear the conference call replay available through March 5, 2015 can access the call by dialing 855-859-2056 toll free or 404-537-3406 with a passcode of 17824916. The webcast of this event will also be archived on the ITC website at itc-holdings.com. Thank you everyone for joining our call today.