Avangrid Inc (AGR) 2016 Q1 法說會逐字稿

Good morning. My name is Kizzee. I would like to welcome everyone to the Avangrid first-quarter 2016 earnings conference call. I would like to turn the call over to Miss Patricia Cosgel.

Thank you, Kizzee, and good morning to everyone. Thank you for joining us to discuss Avangrid's first quarter 2016 earnings results. I am Patricia Cosgel, Vice President of Investor and Shareholder Relations.

Presenting on the call today are Jim Torgerson, our Chief Executive Officer, and Rich Nicholas, our Chief Financial Officer. Bob Kump, our Chief Executive Officer for Avangrid Networks, and Frank Burkhartsmeyer, our Chief Executive Officer of Avangrid Renewables will also be participating on the call. If you do not have a copy of our press release or presentation for today's call, they're on our website at www.AVANGRID.com.

During today's call, we will make various forward-looking statements within the meaning of the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995. Significant factors that could cause results to differ from those anticipated are described in our earnings release and filings with the SEC.

With that said, I turn the call over to Jim Torgerson.

Thanks, Patricia. And good morning, everyone, and thanks for attending our earnings conference call.

We had an excellent first quarter at Avangrid, and we had a strong performance from all of our businesses. As you can see from our press release, the net income and earnings per share were up 24% to $212 million of net income and $0.69 per share. That's up on a adjusted basis including UIL from 2015.

So adjusted EBITDA grew 8% to $575 million, and earnings growth in all of our businesses and we had very strong cash flow. This was a result of improvement in operating expense. And the revenue decoupling we have at most of the utilities offset some of the mild winter weather. We did have some impact at Berkshire Gas and Southern Connecticut Gas where the heating degree days were 10.6% warmer than normal, or fewer heating degree days than what would be normal.

We did have higher wind production, it was up 13% over 2015. Still down a little bit from what we would consider a normal wind production year, but it did help to increase our gross margin by 2.4% over the 2015 first quarter.

The other thing we did was we extended the useful lives of our renewable assets, and this was looking at component by component. It was done on a worldwide basis by Iberdrola. Based on Iberdrola's experience and looking at the engineering analysis that we did, so each component we looked at and determined that we were really not depreciating it on an appropriate life and it really needed to be extended, and we'll get into that a little bit.

So the first quarterly Avangrid dividend was $0.432 per share. It was paid on April 1 of this year. And the second quarterly dividend of the same amount was declared by the Board on April 20 and payable July 1. And as a result of what we're looking at for the rest of this year and into the future now, we expect our payout ratio to be [climbing] at a little faster clip and you can see that as of yesterday our dividend yield was 4.5%. 2016 earnings-per-share outlook now, we're increasing it to the range of $2.10 to $2.20.

Now, looking at the first quarter, and I'm on page 7 of the presentation, which is on our website. The first quarter of 2016 results were on target. Net income, you can see we had $212 million, looking at some of the nonrecurring items, and we had a nonrecurring item by the sale of the Iroquois Gas pipeline, which generated net income about $19 million. But taking that aside, we were up 14%, including that, we were up 24% over the previous year's first quarter.

Earnings per share, we were up again the same amount, earnings of $0.69 versus $0.56 in the previous year. Some of the things that impacted us, obviously the higher wind production and then the extension of the renewable assets useful lives going from roughly 25 to 30 years, and we'll talk about that in a minute, and then the nonrecurring sale of the Iroquois pipeline.

On the next page, we look at the key earnings and cash drivers. And we pay rigorous attention to the integration that's been going on, identifying planning for best practices in 2016, we've been making very good progress. The planning has been completed, and it was done on schedule. We had planned on getting that done by the end of the first quarter, which we did.

And then we look at the results for the year, the networks. Net income was actually up 7%. And weather did have an impact, wince we don't have decoupling at Berkshire and Southern Connecticut Gas, but the good thing is those will be put in place since they are required to be implemented in our next rate case. And we have a continuous focus on our operating expenses, and minimizing those to the extent we can and are possible.

The renewable business, wind production was up 13%. Energy prices on merchant projects, it was pretty flat, it's actually down about a 1%, and this includes [wrecks] along with the prices for energy. The PPA contracts were up about 3% over the previous year's first quarter, and we have included some information on the pricing and actually the rolloffs of some of these contracts.

When we look at our financial position, we're in a great financial position with our very strong balance sheet. We have low leverage, which again translates into low interest costs. And our consolidated credit facilities, we executed a $1.5 billion credit facility which is now in place, giving us great liquidity on a short-term basis that we can use it as we need.

Talking about the extension of a useful life of certain renewable assets. As I said, we looked at a component-by-component basis, and we determined that the towers from the transmission equipment that's in place there, the depreciable life was really in excess of the 25 years. So on average, we have moved up to about a 30-year life for the wind farms that we have.

And again, we have best-in-class technology, operational management. And we have the worldwide experience of Iberdrola, and based on that experience, we looked at the life of assets particularly the ones that Iberdrola has is Scotland, and recognized that they were -- the useful life was going much beyond the 25 years that we've been using. In fact, they've been in place for over 20 years already and have seen no deterioration.

So with this worldwide experience and taking the worldwide view that the assets needed to be extended, Iberdrola across the board has extended the useful life for renewable assets to about 30 years on average. And so -- which we also think is consistent with what some others in the industry are doing.

Moving on to the merger integration summary. We are making great progress on that. We launched it last October, and that was focused really on day-one implementation and then the merger integration planning. The first thing we want to do was to make sure we could operate effectively once the merger was completed, which we did do and did it successfully. The next step in phase I was really to identify the plans, and what we needed to do and then get our teams together. We had a dozen teams working on it with over 240 people -- 270 people, we had 120 different projects that we looked at.

And so now we completed that phase and we are moved into phase II. The next steps there are really the project teams are transitioning to implement the integration plans now. That will happen over the next 12 to 18 months as we put these in place. The things we can do faster, obviously we will do it quicker, but a lot of it depends on software changes and integrating different computer software.

And then also the thing we're identifying and executing on operational best practices and aligning Avangrid with the global business model where we can and where it makes sense. And I think in many areas, particularly purchasing, IT, other areas, make a great deal of sense of aligning that on a global basis. And the day one readiness, as I said, was achieved, and all the integration projects were on track.

Our projections for the planning period, when we had the investor day back in February, we talked about a five-year plan. I would like to go over some of the aspects of our five-year strategic outlook and the progress we are making. When look at the projections, 70% of our investments will be in regulated activities and the other roughly 30% will be related to our renewable business. Adjusted EBITDA in the 2020 year, about 26% will come from renewables and about 73% from our networks business. So when you look at EBITDA, 73% are coming from regulated activities which is very stable and predictable for us.

When we look at on page 12, for Avangrid networks, when we take a look at the regulatory, the legislative and the FERC update we want to through. The New York Transco, that was made up of the initial three projects. We received FERC approval on March 17, it has a total ROE of 10%, and that is a combination of being in an RTO and also having base ROE. Equity ratio is at 53%, and our initial investment is $44 million.

We are implementing a settlement right now and obtaining an asset transfer order from the New York Public Service Commission. The projects are on track, and we expect to have rates in effect on June 1 of this year. For the New York REV, the final track one guidance that's been released, the distributed system implementation plan and benefit cost analysis is going to be filed by each of the utilities at the end of June of this year.

In our New York rate case, which involves both RG&E and NYSEG for both gas and electric for each company, the hearings have been completed. As we said before, we had a settlement that is now in place. We expect the Commission to decide this on May 19, and then the rates to go into place on June 1.

For Connect New York, this is a new project that we are going to be making a filing by the end of this month. It's a 1,000 megawatt DC underground transmission line that we're going to be making a filing to pursue that.

The New England RFP, the bidder selection process, we are expecting to be by the end of July. And as you know, we have two projects in Maine, two proposals, regarding transmission. One -- another project which is we would be providing the wind resources from our renewable businesses in New York on another transmission line that's being proposed by Eversource. So we have three projects in this RFP, and we are very hopeful and confident that we should be successful in this.

And then the FERC ROE complaint in New England, the ALJ issued an order on March 22. Which recommended a base ROE for the 15-month refund period in Complaint II of an ROE of 9.59% and a cap of 10.42% for that 15-month period. Then for the Complaint III and going prospectively, his recommendation was for a base ROE of 10.9% with a cap of 12.19% for the 15-month refund period and then going forward. FERC is expected to make their final decision, later this year or early in 2017. If adopted as final, the ALJs decision, that would require a net increase in our reserve for Complaints II and III of about $10.2 million net of tax based on what we know today from those proceedings.

Moving on to some of the projects we have going on, and keep in mind, we are focusing on improving our resiliency, replacing aging infrastructure and automating our systems. One of the big ones we have is the Cooper Mills static synchronous compensator, which is being put in place into Maine. And this was at the request of ISO New England who make these investments to support the regional bulk electric system, and it really relates to upgrades in the Boston area that are being done by Eversource and National Grid. Now it require substation expansions and 200 MVAR STATCOM, which is the static synchronous compensator. The investment there is going to be over between 2016 and 2018 and at about $52 million.

Also in Maine and also for about $52 million is our Customer Smart Care Data System upgrade. And this is going to enhance our customer service and flexibility, allowing for more innovative rate design, allowing for dynamic pricing, and then it's also going to help us to optimize our AMI capabilities. And as you recall, we put in AMR entirely in CMP service territory.

In Connecticut for transmission projects, we have the Metro-North Railroad Corridor, where we are replacing the transmission lines along the Metro-North corridor. Keep in mind, our transmission lines are on the catenaries that provided the electricity to allow the trains to run. Those catenaries are over 100 years old and are deteriorating, so we have concluded along with ISO New England we need to replace those. We're putting them on monopoles along the corridor, and that investment in this five-year timeframe is going to total about $150 million.

Then in New York, we have the Ginna retirement transmission alternative. And this is going to provide a 345 kV connection to the New York power grid to help ensure reliable service to the Rochester area, and then it will also allow the ultimate retirement of the local generation plants. That investment again is $140 million, it's started, it's already been spending money there and we started last year; it should be in operation by the end of 2017.

Turning to our renewables business and looking at our projections for the next two years, we have currently 5.7 gigawatts in operation and another 744 megawatts are under construction. I will spend a minute going over which one of those projects are. If you keep in mind that the first one in North Carolina will be operational by the end of this year, and that is a 208 megawatt project, $375 million in capital spending. It's a 13-year PPA with Amazon, and it is under construction as we speak.

El Cabo is almost a 300 megawatt project in New Mexico that will be supplying power to a California IOU, and our people did a great job in piecing together the transmission that would be needed to move that power from New Mexico into California. This project is about $515 million, it will be completed by the end of 2017 and that has a 20-year PPA with a California IOU.

Tule is a 132 megawatt project in California, again, that will completed by the end of 2017. We'll spend about $235 million on that, and that has a 15-year PPA with a California IOU, and we're currently finalizing the offtake agreements but that should be operational in that timeframe.

We also have a smaller project in Vermont of 30 megawatts. $75 million in capital spending, a little more expensive in the Northeast to build these projects, but it has a 25-year PPA with an IOU. And there, we're just waiting for the agency to give us the preconstruction ruling, and pretty much everything is in place.

And then a 76 megawatt project in Colorado, again, completed in the end of 2017. We will spend about $120 million there, with a 25-year PPA with an IOU, and we're finalizing activities there. In total, we're going to spend about $1.3 billion in investments between 2016 and 2017, and that will increase our installed capacity to 6.5 gigawatts by the end of 2017.

On page 16, we got a map that shows potential projects. And these, of the 6.1 gigawatt pipeline we have, we have about 2,250 megawatts of wind and solar that we believe with the ones that will provide the next opportunities in the 2018 to 2020 timeframe. These are the ones that are probably closest to coming into final development, either because we know there is RFPs that are going to be coming out, we have more assets in place, we have the engineering done, and so forth. But these are the ones we would say are most likely to be developed to supply the next 650 megawatts or so that we have planned for the 2018 to 2020 timeframe. I'm not going to go into detail, but you can see they're spread out throughout the country, it gives us great diversity and there's a mix of both solar and wind that we have. And so you can see that these are real projects that can easily get developed.

So let me highlight a couple things. One, we had a great performance in the first quarter, it gives a lot of visibility for the remainder of the year. Our strategic plan for the next five years through 2020 is clearly on track, and we are performing rather well to get that done. The integration and execution of our plan is in progress to integrate the UIL and the old Iberdrola USA. We've extended the useful life of renewable assets based on sound engineering and experience we have from Iberdrola worldwide. And our 2016 earnings-per-share outlook, we've increased it to $2.10 to $2.20 per share based on a lot of these factors.

With that, I'm going to turn it over to Rich Nicholas who's going to spend some time on the financial activities.

Thank you, Jim. Good morning, everyone. Thanks for joining us today.

As Jim said, a very strong quarter for Avangrid, and I'm on slide 19. A little more details around the operating segments. While net income grew 24% quarter over quarter, including UIL in the adjusted 2015 numbers, as you can see, networks was up 7.3% and renewables had a very strong quarter, up 64% 2016 over 2015. The Corporate and other segment does include gas as well as Corporate, then you can see positive results there as a historical contract that was out of market has rolled off, and we see the benefit of that in positive earnings in the Corporate segment.

Moving to slide 20, some of the key drivers, in addition to the ones Jim had mentioned, we did benefit from decoupling in most of our Companies. Southern Connecticut does not have decoupling, but will in its next rate case per state statute, and Berkshire Gas does not as well. However, the impact of those relatively small in the overall scheme of things from the warm weather. We do see the increase in costs related to the Ginna reliability support agreement, but those are also offset in revenue and we did see lower employee related costs quarter over quarter.

Turning to renewables, a 13% improvement in wind production. And that is made up of both better wind quarter over quarter, as well as additional capacity. Last year we did add roughly 200 megawatts with the [Backum] wind farm in Texas, and the extension of the renewable asset lives to new estimates were positive by $13 million of net income from the quarter.

In the other segment, the sale of the interest in Iroquois that Jim mentioned for an after-tax gain of $19 million, and we did see some higher gas spreads for the contracted gas storage business.

Moving to slide 21, a little more details geographically on the renewables load factor. Where we saw an increase from 28% last year to 31% this year, and this is why being geographically diverse really helps as you can see different results. So in the West, we are up to a 20% load factor versus what would have been 16.6% last year, so a 3.4 percentage point increase. Slightly less wind in Mid Continent. And in Texas, you can see there, the big increase in part was driven to the additional capacity, as I mentioned as well as better wind.

On slide 22, looking at that 13% increase in wind production, that is where you really see in the South Texas area, a 47% increase reflecting the additional wind farm in Texas. Spread pretty well across the geographic US.

Turning to slide 23, we are looking at the pricing in the renewables business this year versus last year. In total, about a 1% increase, and that was made up of about 3% better pricing on the PPA side, slightly lower pricing on the merchant side including the renewable energy certificates. Again, slightly different results across the continent. And when we look at overall, about 67% of our megawatts are at PPAs, 33% are in merchant, and we also hedge some of our merchant where we can. And so total, about 80% is in PPA or hedges, and about 20% in merchant.

Turning to slide 24, looking at our gross margin growth of 7% quarter over quarter. Again here, we have provided some additional detail by both geography and wind versus solar versus our thermal plant in Oregon. And you can see the effects of the various drivers on gross margin. Better production, increased by $26 million, we did have some PPCs that expired and the mark to market of negative 9% is actually -- we still have positive mark to market in 2016, just less positive than we had in 2015. So overall, a 7% growth, primarily driven by the production that we have been discussing.

Turning to slide 25. Adjusted EBITDA growing 8%. Again, the strong performance in renewables; renewables makes up about 25% of the EBITDA, but grew by 18% driven by the production. And networks, a good solid showing increase of 3%, really helped by the lower employee costs and revenue decoupling.

As Jim mentioned, we had very strong cash flow for the quarter. On slide 26, our free cash flow Avangrid consolidated was about $175 million more than our CapEx requirements. And CapEx, as you know, is very seasonal, especially in the Northeast on the networks business as you come out of the winter. Some strong cash flow at networks, but we would expect to see CapEx pick up. And on renewables, total cash from operations of $120 million, and free cash flow of $50 million. Puts us in a very good position moving into the rest of 2016.

So when we look on slide 27, our leverage is really primarily at the network segment of our business. UIL Holding Company did have a $450 million note that continues, and then a little over $200 million of tax equity investments that will be amortizing, and expect to be fully amortized by 2019. We've got very manageable debt maturities over the next several years, again, at the networks business.

So moving to slide 28, that strong balance sheet results in net leverage of just under 24% in the first quarter of 2016, and net debt to adjusted EBITDA of 2.4 times. There were no new debt issuances in the first quarter, and through the planning period through 2020, while we do expect net leverage to increase modestly into the low 30% range, we would also expect that net debt to EBITDA would remain relatively flat as we grow the earnings of the business.

In addition, Avangrid was recently updated within the last several days by S&P and Fitch, from to BBB flat to BBB+ recognizing our strong financial position. As a result of first-quarter results and the new estimates around useful lives, we did update our outlook for 2016, and increased it from $2 a share to range of $2.10 to $2.20 primarily driven by the new estimates around the renewables business depreciable lives.

So a very strong performance to start of the year, and we look forward to your questions and answers. And I also look forward to seeing many of you at the AGA conference in the next few weeks.

So with that, I will hand it back to our operator, Kizzee, for the question-and-answer session. Thank you.

(Operator Instructions)

Andy Levi, Avon Capital Advisor.

Good morning, how are you? Thought a really good rundown, guys.

Thanks, Andy. How are you doing?

I'm doing pretty well actually. Somehow, someway. Okay, so just a couple I guess easy questions.

So just on the asset life, the change in the renewables. So the $13 million, is that -- do we annualize that, times it by four, or was there a little bit of a catch up? I'm just trying to figure out on an annual basis how much we should add to earnings going forward.

Yes. The quarter would be annualized.

Probably looking in the $0.14, $0.15 annual earnings-per-share benefit.

Okay. So that is $0.14 to $0.15, and that will go into next year, so we add that to next year.

Sure.

And that was not contemplated, I guess when you gave your Analyst Day. Is that correct?

Correct.

Okay. That's all additive. And then just as far as the -- because you gave more information on the renewable drop offs as far as contracts and things like that. Well, not really contracts, but more your hedge book.

How should we think about pricing going forward, and as far as the -- because obviously, when you recontract the price will be lower and I think your average price, I'm guessing is around $55. So what is the timing of when the contracts drop off and having to recontract those? Because that I don't -- right, you didn't really give.

Well, we have on page 34, you can see where we have as the PPAs expire and you can see it's a graph, I understand. And what we will be doing when the contracts drop off is trying to recontract in the first place, but other than that they would be migrating to merchant. And I would expect as the prices will be whatever the market will be at that point in time.

Now it could be that, obviously we're going to sign a longer-term PPA or an extension of some contract, it would be at a higher price than the currently market spot price. So we will have to see where the market is at different points in time.

But do you give anywhere where you show them out of megawatts, and the hedge price that drops off? Or I guess, we have to figure that out ourselves?

Yes. We thought we would leave it to some of that work left to you guys. We didn't do it, Andy.

Okay. Because you have this one benefit, and then I am just trying to figure out when these PPAs would drop off and then what the earnings change would be. Okay. And then I am sorry if I missed this, just what was the wind condition versus normal? Did you give that?

No, but I think Frank can probably give you some ideas of what was in the first quarter.

Thank you.

Frank, you got it?

Yes, Andy, the first quarter was still a bit below the long-term average, and around -- and it varies of course by region, but somewhere around 5% below average still in the first quarter. January was a very -- was I think -- and we mentioned this when we were out. January was quite down, and then it's normalized quite a bit since then but it is still behind year to date.

It is hard though to just look at a three-month slice. If you look long term, the number moves around quite a bit by quarter.

Were there certain regions that were different as far as where it was -- Texas above normal?

I would say the West is still behind where we expected long term.

Okay. And what was Texas? Do you know?

Texas was closer to long term, but I am sorry, I don't know off the cuff here.

I'm just being selfish and trying to figure out for some of the other guys out there. So other companies, I should say. Okay, so just to summarize, so you increased the guidance by $0.10 to $0.20, and the change in accounting is $0.14 to $0.15 of that. Is that what you are saying?

Right. So if you look at the midpoint of the guidance, up $0.15, it is really the effect of the new estimated useful lives.

Great. And I guess that could be an industrywide thing, so NextEra or someone like that may end up benefiting from that as well.

We believe NextEra is already at that --

Are they? Okay, great.

I think we are catching up.

You're catching up, okay. Thank you very much. I thought is was a really great rundown.

Thanks, Andy.

Christopher Turner, JPMorgan.

Good morning, guys. Thanks for the extra details today, they are very helpful.

I wanted to maybe understand some of the drivers that have changed for you over the past two months or so since the Analyst Day, and the impact potentially on your long-term earnings CAGR that you gave at the Analyst Day. And maybe you could give us color on the depreciation expense going down, obviously that's a help.

The ALJ decision from FERC prospectively, maybe assuming that that in fact is the final decision, and then even though it's a small slice, your ownership stake in Northeast Energy Direct did have optionality for you guys to increase that. And I was wondering if that has a material impact on your longer-term guidance as well.

Yes, I think going forward, we are on track with our strategic plan, I think for both this year and the longer term. The thing that changed on the earnings was really the depreciation modification that we did. And it was really based on what Iberdrola was saying worldwide and their experience with windfarms in Scotland that they've had for over 20 years; then when we did a lot of engineering analysis.

That was really the basis for the change. Everything else has pretty much been on track, and I cannot say that there's been anything dramatically changed from what you have heard, at least from a long-term strategic standpoint, and even for this year from what you heard at investor day in February.

As far as the FERC ROE, that has got a ways to go yet. If it ends up being what the ALJ recommended prospectively, I think that would be a plus because then we are looking at an ROE that would be slightly higher than the 10.57[%] and the 11.74[%] cap that we currently have in place right now based on the FERC order from complaint number one. So if they take complaint number three, yes we'll have a charge and we'll have to set up a reserve for the complaint two basically, and then moving forward though it would be positive for us.

And on Northeast Energy Direct, we took a -- really an immaterial charge. And what we see is that it wasn't going to be anything that was going to be in before 2019 at the earliest, and so it really has a very minimal impact to our long-range forecast. If anything at all.

We are still very comfortable with our 8% to 10% growth in net income over the five-year period, and so I don't see anything changing dramatically from that. We will see what happens going forward, but we were going to invest about $80 million over the five year horizon and so it really wasn't going to impact us that much.

Okay. So net-net, really no change to that range that you gave and the optionality of that pipeline to go up to, I think it was maybe, a 12% ownership stake or something in that vicinity -- all kind of nets back to no change.

Right. Yes, it would've been up to 15%, but we never really -- we didn't factor that in because that was just the contract and it depended on a lot of things happening with the RFPs and the EVC proposal that would have had to been consummated in New England for us to even get a higher percentage. So net-net, we don't see a change and we are very comfortable with the 8% to 10% range.

Okay. Great. And then maybe you could give us more detail on the connect New York project; I guess it is 1,000 megawatts DC. But how long is it going to be? Could you give us any CapEx numbers there, even though it is at early-stage, and then maybe some information on how you're thinking about timing and whether or not that is in your current plan as well?

Yes, Bob Kump can fill you in on that one.

Chris, hello, it's Bob. So I think we spoke at our investor day back in February that this was not a project that at this point we had in our number, but one we were developing. As Jim mentioned in his remarks today, we are making a filing of that as a part of a proceeding going on, the public policy proceeding a spin off of the AC proceeding that's been going on in New York. So that will be filed by the end of this month, in fact, might be later this week.

The details of the project itself in terms of cost and timing are to be determined. Will not be made public as a part of the [infant] proceeding, but we continue to move forward. The first phase of this would be what's called an Article 7 filing to do that later this year. So everything remains on track with that. We are having a lot of discussions with third parties about it.

We continue to believe very strongly that this has a great fit given the situation as it exists currently in New York, and that is: insufficient transmission capability of the down state, tremendous efforts by environmentalists to avoid anything overhead, excess capacity upstate and the threat of nuclear plants closing which the governor doesn't want to see. So we really see this project solving a key issue facing New York State from a transmission standpoint.

Great. Thank you very much.

Thanks, Chris.

Felix Carmen, (multiple speakers).

Hi Guys, congratulations on a great quarter.

Thanks.

Jim, I think you have touched on this in the last question, but you are still comfortable, right, with the 8% to 10% CAGR?

Yes.

And then just mathematically speaking, if we pick up $0.15, to roughly about 7.5% above your original 2016 guidance, if one were to just mathematically spread that out over your 2014 through 2020 CAGR, can we pick up 1% on the CAGR over the term, or no?

What I would say is, we are looking at the 8% to 10% and we feel pretty comfortable with that. If you take 2014 where we were working off of before and if you are adding 7.5% at least in this year, that would probably say that it's moving up a little bit. But we are still -- 8% to 10% sounds pretty good right now.

Okay. Great. And then just one quick question on the merchant PPA prices. Can you just circle back and tell us how this price that you put here relates to the number you gave in the Analyst Day, and how you're thinking about that number going forward in your guidance?

What we said in the Analyst Day is that we were looking at something in the $27, $28 range, that was without the RECs. So when you look at the merchant price, you have got to add the RECs into that. And the RECs, they vary in price from $5, and right now -- they were looking in the first quarter -- they were quite a bit higher. They were probably closer to $8 or $9 but they vary by region. I don't know, Frank, you want to add anything to that?

No, that's consistent Jim. We had that -- you nailed it.

So this $35 price here is higher than what you had expected at the Analyst Day?

No, I'm sorry, that is consistent.

That is consistent?

Yes.

And are you guys assuming this stays flat through the period?

Yes.

Okay. Thank you.

Paul Patterson, Glenrock Associates.

Good morning.

Hello, Paul.

Just a few quick questions. Number one, on the depreciable life change. Was there any specific component or technology or one specific issue or a couple issues that led to that?

The biggest thing were the towers. They were lasting a lot longer than we would have expected. But then, also you look at the transmission equipment that is part of a windfarm, where they have transformers and substations, those type of things.

Their average life was much longer, and the towers were -- and the pads that we put in to support the towers were all of -- would have a longer life. So basically, the civil work and the transmission activity were the ones that we were looking at, not so much the turban and the blades.

Okay. And was there anything that caused it to be reevaluated specifically in the first quarter? Or just is that how it happened coincidently?

It was more how it happened, and how Iberdrola was looking at it across the globe in all of their wind farms, the 15,000 megawatts they're operating and looking at their experience across the world, and then doing the engineering analysis. So it just so happened it came in the first quarter. And we then applied it to what we have here in the US and found it to be consistent and it made sense to apply that change.

Okay. There was also another FERC ALJ ruling with respect to the California power crisis that mentioned Iberdrola and Shell. Have you guys -- does that have any impact on you guys and is there any reserve that has been there before or not, that you could talk about?

Well, if there would have been a reserve, we would have called it out. Certainly it has an impact from the standpoint where we're going to have to spend more with legal fees in order to keep pursuing this. But the fact of the matter is, we believe our positions were well-founded and we still believe that and FERC's staff actually supported letting us out of that whole activity with the California.

So, we feel pretty strongly that our position is sound, and that the ALJ came up with a recommendation. He did not find that there was any market manipulation on our part, and it was just a difference between what he felt were the contract price and what some spot prices were; that was the difference he was citing and he felt that was higher. So we believe in the end for the FERC commission will find correctly, and turn this around when the FERC, the whole commission, actually has a chance to look at it.

Okay. But if they did it, just because we do have an ALJ ruling out there, how would it -- would it just be a one timer or something that you guys would have to deal with if they were to go with the ALJ REC or would that have an ongoing impact?

It would be one time, since you are looking at a determination of what -- from the complaint might have to be refunded and that is something that hasn't even been determined or set. The ALJ didn't even make that determination yet. There's no determination on that whatsoever.

I got you.

Okay?

And then on the Ginna transmission retirement thing. If Ginna does not, as you know, New York is talking about keeping some of the nukes open and what have you. If Ginna was supported, would that impact that Ginna Retirement project at all?

No, this is Bob. That project, as Jim mentioned, is under construction as we speak, and will be completed by the end of the first quarter of next year. There in the event the plant closes, obviously our goal as an organization is to try to help the situation through things like Connect New York, and improve transmission such that those plants can continue to operate and have access to higher-priced markets.

And then just finally, the credit rating, what is the credit rating goal that you guys have for the Company?

Well, you just saw that we were upgraded from BBB flat to BBB+. Our goal is to maintain a strong balance sheet and strong credit metrics. I wouldn't say that we have an absolute target on any given agency or given rating.

Okay. But you don't expect it to change -- you don't have a substantially lower one or -- in general, we should think that the general area that you are now is pretty much where you want to be? Is that safe to say? I don't want to put words in your mouth.

Well, I think it reflects our financial position.

We're happy with where it is and obviously, we could always see it go higher. But that is what the rating agencies will determine. But as Rich said, we want to make sure we maintain a strong investment-grade rating so that we can do -- finance all the projects we want to do. That is the reason behind it.

Absolutely, thanks so much.

[Andrew How].

Thank you. Good morning, guys. First a question, you've already talked a bit about the MED pipeline going more from the equity perspective.

What about for your LDC customers? Do you need offtake agreements somewhere else now?

Well, the problem we have, Andrew, is that the in Berkshire, that's the only pipeline that serviced Berkshire. So we have a moratorium in place in the Eastern division of our Massachusetts operation there, and it is small. But still, we cannot add any more customers up in Massachusetts in that Eastern division because we don't have any more capacity.

For the other utilities and that LDCs we have, we're actually in very good shape. In Connecticut, we have three pipelines starting up in New York, we're in good shape; so we don't really have that same issue. Where it is going to be more significant is that the pipeline was thought to be more to be supplying for electric generation, particularly in the winter, when the capacity is all taken by the LDCs in New England.

So that is where you are going to see some more problems potentially in the future. Our LDCs are in okay shape. We've got all the supply we need to serve our existing customers. We're not going to be able to grow as much in that one Eastern division of Massachusetts at this point because we don't have additional capacity. We will be looking at alternatives, but some of them are going to clearly be higher priced.

If we have to put in more LNG or propane air, it's going to cost more. And is that something we should be doing to be able to serve additional customers -- new customers, and that is something we will have to work out with the Massachusetts DPU. But for the other jurisdictions, we're in good shape. It's just that we saw this pipeline as helping solve the problems in New England with electric generation.

All right. Great. The next question is on integration.

In the slides, you mentioned phase I and a phase II. I know it is early, but how many phases are there? And do you have any sense how many years until you'd consider the two companies fully integrated?

There is two phases. We are in the phase II now. I would expect that phase II is going to vary, but I think we should be done with phase II in, let's say, 12 to 24 months timeframe.

Some of it are going to be significant software changes were we -- like our SAP system, we've got to look at the configuration and the modules that are being utilized by each of the different companies and bring those together, so we're all working off the same systems, modules, and configurations. And that's going to take a little time, and then the resources we have to be able to do that, along with all the other projects we have going on.

So I think the software activities will take a little longer. I think just integrating people, integrating processes and procedures, we will get that done this year. I would be pretty confident of that.

Great. Next question, we'd asked at the Analyst Day about any guidance for effective tax rates. Have you had a chance to go through that and give us a ballpark number or range of what we can expect?

When the 10-Q comes out for the quarter, we'll have an update on the effective tax rate for the quarter. Obviously, the PTCs have an impact as you move forward in time, but we haven't put any specific effective tax rate guidance out there.

Is that something you would consider doing?

We will take a look at it.

Okay. Fair enough. Then last question, Jim, I don't mean to get personal here but I know there has new employment contracts, had some changes to the wording, and particularly around changing control of severance plans. Is there anything that we should be reading into, in terms of Avangrid either as a buyer or a seller, in this hot M&A market?

Absolutely nothing to be read in there. It's just that the philosophy Avangrid had related to changing control. Nothing new and nothing to read in.

Okay. Great. Thank you guys, and I just want to echo the comments, I appreciate the increased disclosures especially around wind in the slide deck here.

Thanks.

Julien Dumoulin-Smith, UBS.

Good morning.

Hello, Julien. How are you doing?

Good, thank you for taking the time. So wanted to follow up on your Connect line here. Can you elaborate a little bit on the data for the project, just vis-a-vis, routing that has been obtained, [exciting], et cetera?

And then also, I know you don't want to talk about cost per se, but elaborate at least on timing and then procedure to get this project approved. I suppose part of the AC transmission proposal is due later this week?

Correct, Julien. So, let me give a little more color. Obviously you are familiar with the base project, it's 1,000 megawatt DC line emanating from essentially the Utica area, utilizing rights of way along the throughway, down past the two congestion points into the New York City area.

That the general concept. It's that 170, 180 miles roughly is the length of the project. Our view is, as I mentioned, we will submit it as part of this AC proceeding on public policy.

We will be working and filing the primary permitting application with the New York PSC, called Article 7, later this year. If everything went perfectly, and you know how things are with transmission projects, I would say the best you could hope for is maybe construction in the 2018 and on timeframe.

Great. Excellent. And then can you elaborate a little bit on upstate New York opportunities around the RPS expansion and what that means? I suppose obviously you were talking about the New York Connect project today, but more holistically, we've talked nuclear earlier, but we've [tipped] over a little bit more on the emphasis on the eventual RPS and long-term PPA opportunities. Are these forthcoming in the state?

Yes, I guess I'll say beyond Connect New York, we have mentioned the New York Transco, where we're working with the other utilities on AC type transmission projects. Again, largely focused on system reliability as well as these congestion points from upstate to down state. We are working with the New York Power Authority on a project in Western New York that would be better to enable Niagara Hydroelectricity access to the down-state region.

So those are kind of transmission areas of focus. The other, quite frankly, is in addition to the nuclears looking for better markets, you have tremendous opportunities in the Adirondack Park for wind. And I will let Frank speak to that more, but we have a couple of operating farms already in that area and several I think were listed on the slide in this presentation in that area, as well as potential opportunities for greater wind; and as you correctly mentioned, high on the radar screen of the governor.

So we are tackling it from both ends. I don't know, Frank, if you want to add anything else.

Well, I'd just affirm that we very actively maintain development opportunities in the New York area. We have to see how the rules play out in terms of the ability to do long-term contracts, which will make that more attractive to us, as we've stated. We're only going to build where we can guarantee that we have long-term offtake certainties.

But we like the market obviously, and we've got some really good development opportunities there that we've laid out on slide 16. So we will stay tuned in, and see how the policy changes there. But right now, there is not a long-term energy market for renewables there and we will have to see how that involves.

And I guess the last thing I'll then add is when you look at in particular our Connect to New York project, that emanates, as I said -- (multiple speakers). I'm sorry?

That project emanates in the Utica area. And when you look at, not only most of the nuclear facilities that are currently looking for better pricing, you have got up [in Aswego], we go nine mile one and two Fitzpatrick. And then when you look at the projects that Frank just mentioned that are all off the eastern edge of Ontario, I think again, our project Connect New York fits well with where a lot of that potential generation, both renewable and nuclear, would reside.

If you look at the renewable projects, as Frank mentioned, we have four projects potentially with almost 400 megawatts in the New York area that could add to the development up there. So as Frank said, we are pursuing this pretty aggressively.

But any sense on timing for that PPA or an RFP in the state and direction?

I don't think we have seen anything on it --

At this point, no. I think the key is going to be providing transmission access.

And the other to keep in mind is New York does have renewable portfolio standard now of 50% by 2030. So they are going to be needing additional renewable resources, and having those in state will be a plus and also then having the transmission to get it down to the marketplace in New York City is going to be a plus. So, I think all of those factors are positive for us.

And then the governor, as you now, has a key interest in keeping those nuclear plants running, hence his proposal and the commissions proposal around [ZEX] specifically for the nuclear to support them. But we are really looking at what's a longer-term option again for providing access to better priced markets for upstate generation.

Thank you.

Andy Levi.

Hello, this is Joseph of Avon Capital. How are you?

Good.

Just a follow up for the New York underground line. Is this a project that is competing against the [Compass] project?

I'm sorry, which project?

Compass, which is developed by DBL?

I guess to the extent that any project is looking to provide greater access for power to the New York City area, you could call it competing. Obviously, that line, my understanding of it, I don't know a lot about it, but it is bringing power from PJM, not helping the markets in upstate New York, which is what the governor is focused on.

So from that perspective, they are very different projects. But they are all intending to provide greater access of power, obviously, we're also focused on renewable energy and clean energy as a part of this.

Okay. Great. Thank you.

There are no further questions in queue at this time.

Okay. Well thank you everybody for participating. To the extent that you have other questions, please don't hesitate to contact our Investor Relations people. Patricia, Michelle, Carlotta would be very happy to answer your questions, and thank you for participating today.

That concludes this morning's teleconference. You may now disconnect your lines.