Avangrid Inc (AGR) 2017 Q1 法說會逐字稿

Hello, and welcome to the AVANGRID First Quarter 2017 Earnings Conference Call.

(Operator Instructions) I will now turn the call over to Patricia Cosgel.

Thank you, Tammy, and good morning to everyone.

Thank you for joining us to discuss AVANGRID's first quarter 2017 earning results.

Presenting on the call today are Jim Torgerson, our Chief Executive Officer; and Rich Nicholas, our Chief Financial Officer.

A team of AVANGRID officers will also be participating on the call to answer your questions.

If you do not have a copy of our press release or presentation for today's call, they are available 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 U.S. Private Securities Litigation Reform Act of 1995 based on current expectations and assumptions which are subject to risks and uncertainties.

Actual results could differ materially from our forward-looking statements if any of our key assumptions are incorrect or because of other factors discussed in AVANGRID's earnings news release in the comments made during this conference call in the Risk Factors section of the accompanying presentation or in our latest reports and filings with the Securities and Exchange Commission, each of which can be found on our website, avangrid.com.

We do not undertake any duty to update any forward-looking statements.

Today's presentation also includes references to non-GAAP financial measures.

You should refer to the information contained in the slides accompanying today's presentation for definitional information and reconciliations of non-GAAP financial measures to the closest GAAP financial measures.

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

Thanks, Patricia, and welcome, everybody, to the first quarterly call.

AVANGRID really had an excellent first quarter and we're on track now to meet our target, not only for 2017 but also for our 8% to 10% compound annual growth rate in earnings through 2020.

With us today, beside Rich and Patricia and our IR team are Bob Kump, who heads up our Networks business; Frank Burkhartsmeyer, who have been heading up our Renewables business and Frank is going to be leaving us next month.

We really want to thank him for his contribution to AVANGRID and the Renewable business over many, many years.

And Frank has just done a wonderful job.

We wish him very well with great success at his new role at Northwest Natural Gas.

The good thing is we have an excellent succession plan.

And part of our succession plan is to identify people who can step in and take over in the event someone decides to make a change.

And with it, Laura [ Bean ] has been named as the new President and CEO of AVANGRID Renewables.

Many of you may remember Laura, she participated in the Renewables workshop we had in our recent Investor Day.

And Laura's background is she was -- she is until today, Vice President of operations and management services for AVANGRID Renewables, which is really responsible for all the critical services that support our 6,000 megawatt fleet of renewable energy resources.

Before that, Laura was actually Director of Market Structure and Policy at AVANGRID Renewables, and she's been with AVANGRID for about 10 years now, since 2007.

Before that, she spent 10 years at PacifiCorp, which happens to be another affiliate of AVANGRID or IBERDROLA.

So Laura is well known to us.

We're really enthused about her abilities and we see her taking the company in a great direction and adding more PPAs to what we have.

So we're happy to have a great succession plan, and Frank has just done a tremendous job and we're sorry to see him go, but we really do wish him well.

So back on to the quarterly highlights.

The first quarter net income was $239 million, or $0.77 a share.

That was up 13% over the first quarter of '16.

And the adjusted net income was $227 million, or $0.73 a share, which is up 11% over the adjusted numbers for the first quarter of 2016.

We are executing on our strategic plan.

We had capital spending of about $370 million in the first quarter, which is on track for our year.

The first quarter does reflect the implementation of rate plans in both New York and Connecticut.

And we have executed on 281 megawatts of PPAs and initiated 22 megawatts of repowering.

Now of the 281-megawatt, 201 megawatts were once we have previously announced.

We now can identify that the customer is Apple and for the Montague project we have in Oregon.

And we've also had 80-megawatts, our Barton facility in Iowa, which will be sold to Power.

This was previously a merchant plant in which we now have a PPA of 80 megawatts.

The [ Genet ] transmission project in New York was completed on time and within the budget.

So we're happy that, that is now up and running.

Our Forward 2020 initiative is well underway.

We're consolidating our corporate headquarters in Connecticut.

We have about 150 people have already been hired or relocated to Connecticut since the merger, and that was actually one of the requirements in Connecticut, to have 150 people hired and brought to Connecticut, so we pretty much already accomplished that.

The board declared our first quarter dividend of -- one was paid April 3 of $0.432 a share.

The second quarter dividend was declared by the board last week, and that's payable as of July 30, 2017.

I think the stock price is actually up about 15% already year-to-date.

Going to the next page, the first quarter net income, $239 million, up 13%.

That really is a result of a couple of things.

One, Networks was up 5% to $0.56 a share.

That also included -- we took a charge of $10 million to reflect sharing in New York.

That's 11 months of the sharing, so we are just going to show that we are actually doing what we said and getting into the sharing range, which is our target.

And so we've had improved results in New York and Connecticut due to new rates and new rate plans put into effect.

The renewable production is also up, mainly because of the Amazon Wind Farm U.S. East, which came online in January, or actually the end of December and early January, with 208 megawatts.

And so our production's been up.

Although still, we're seeing wind resources below what we consider average in the first quarter.

We've had some positive mark-to-market.

We had a lower effective tax rate in Renewables.

Renewables was actually up though, 63% to $0.23 a share.

And we have a lower, much lower effective tax rate.

And this we see for the year now, which net offsets some decreases in average prices.

We had a roll off of a PPA, some lower merchant energy prices but we had higher to [ offset ] the lower merchant prices.

Gas storage was actually positive at $2 million versus a loss of $10 million, mainly on mark-to-market.

And we've continued with our cost management implementing our best practices.

So looking at the adjusted earnings results, and this is really reflective of our core business.

And the first quarter adjusted EPS, and this is on Page 7, increased 11% to $0.73 a share.

The things that we adjust for is the Renewables mark-to-market, and you can see that was $11 million or $0.03 in the first quarter.

Gas storage, business which we not consider to be core, and that's $2 million -- actually made $2 million or $0.01 a share.

And then in 2016, we had the same 2 items, but also the sale of the -- our equity interests in the Iroquois pipeline, and then the impairment that we took in the Northeast Energy direct pipeline.

Moving to Page 8, you can see we did sign the new PPAs and we're still on track for the 1.8 gigawatts we get from renewables between 2017 and '20, they're on target for that.

We have 802 megawatts secured at this point.

We still look at 400 megawatts as highly likely and 600 megawatts as likely to meet that 1.8 gigawatt target.

The 201-megawatt PPA at Montague, which was -- we had identified earlier at our Investor Day and now we're just able to say that Apple is the customer there.

So we have a long-term PPA with Apple.

The commercial operation date is estimated to be the end of 2018.

And the project will produce over 560 million kilowatt hours of clean renewable energy per year.

We also have the 80-megawatt PPA at Barton Wind Farm in Iowa.

That's an existing wind farm that's in operation today, and the new PPA reduces our current merchant exposure.

We have a repowering for 22 megawatts at Mountain View in California, and this is a full repower retrofit targeted for 2019 and they use Vestas turbines at that site.

The construction plan is on track at our 208 megawatts of wind farm U.S. East, began delivering power in December and reached full commercial operations in February.

We have 600 megawatts under construction with the idea that those will be in operation by the end of this year.

Now Avangrid Renewables has an offshore strategy.

We were -- we won the Bureau of Ocean Energy Management Offshore Wind lease auctioned in North Carolina.

That's 122,000 acres off the coast of Kitty Hawk, North Carolina, which is about 24 nautical miles from the shore.

The lease area has the potential, and this was identified at the National Renewable Energy Lab, of about 1.5 gigawatts.

And this is going to be well beyond 2020 before anything occurs.

Most of you will recognize that projects like this take 8, 10, 12 years to be -- come to fruition, so this is a long-term view for us.

And to why we got into this, we're taking the long-term view that things -- technology changes, states want renewable energy, they want offshore wind, so we'll be looking at opportunities to develop that.

And we're also going to be looking at our growth opportunities in Massachusetts with strong potential.

I mean, Massachusetts plans to solicit up to 1,600 megawatts of Offshore Wind.

And with our majority shareholder, IBERDROLA, who has currently about 1.3 gigawatts of Offshore Wind in construction and operation, we have the ability to leverage that experience for our own entity.

So we'll be looking at participating in that.

And on the next page, a little more detail in the Massachusetts RFP that they're looking for clean energy.

We will be participating in the clean energy RFP issued by the distribution companies and the DER in Massachusetts.

The RFP actually went out March 31 for about 9.5 terawatt hours of clean energy per year.

The long-term contracts will be in place by 2022.

They're really encouraging proposals that would include generation able to commit to deliveries by the end of 2020.

Now the eligible bid categories would include incremental hydropower on a firm basis, new Class I renewables, whether it's wind and solar, and eligible generation resources with the contract, or could be any combination of them, including transmission projects under a FERC tariff.

So they're looking to perhaps marry hydropower with other renewables to backstop that and have a more firm power resource.

The bidders conference is tomorrow, and then the notice of bid -- intent to bid is due early May.

Proposals are due at the end of July, and then the selection is probably at the end of January in 2018, negotiate contracts by the end of the first quarter of 2018, and approval in April of 2018 by the DPU.

With Avangrid Renewables, on Page 11, the AMI, the settlement process is continuing at a slower pace, and this is due to the required storm investigation.

We had some storms in New York, mainly in the Rochester area in early March.

So now we anticipate an order, it will probably be in early by 2018 because the staff has to focus on the storm outage as well.

The net metering, the tariffs implementing, this transition from net energy metering to the value of distribution energy resources, we're going to be filing those later this week.

The earnings adjustment mechanism, we are having collaborative meetings with the staff and others on that already.

And the [ Genet ] retirement transmission alternative, which I mentioned earlier, it's $145 million project that went in operation in the first quarter, that includes 2 substations, which allows

345 to 115 kV connections to the grid, that is now in operations.

And as I said, it was on time and on budget.

In Maine, we have no expectations of filing a rate case in 2017, nor do we for our Connecticut Natural Gas.

We are planning on filing a rate case Southern Connecticut Gas midyear this year, really to get or put in a request for decoupling and also for the infrastructure tracker, which will be the same as we have for CNG today.

On the FERC ROE complaint, the DC Court of Approval -- Board of Appeals vacated the 2014 ROE order and remanded it, the case, to FERC for further proceedings.

Really, they were to determine -- to determine if the original base ROE of 11.14% was unjust and unreasonable prior to determining the 10.57% ROE was reasonable.

Now really what they're looking at is, was it unjust and unreasonable at the time.

We all know that the 11.14% was in the range of reasonableness that FERC has set out.

So we're waiting to see what FERC will decide to do.

Then if they get over that, then we'll have to determine if setting the base ROE at the midpoint of the upper half of the range of reasonableness is just reasonable in and of itself.

So the court ordered them to determine the reasonableness of that as well, assuming they get over the first hurdle.

Complaints 2 and 3, the decisions are pending.

And Complaint 4, really had a settlement conference set up for May 3, but I have to believe that they're going to wait and see what FERC does on Complaint 1 and where that really goes.

So turning to Page 12, our strategic plan is on track, we're very happy with the performance.

We have strong performance in the first quarter.

We are committed to deliver the 8% to 10% growth rate through 2020.

And we are implementing best practices right now in our Forward 2020 project.

We're consolidating corporate headquarters.

We have about 50 other facilities that we looking at for potential consolidation.

We're looking at fleet optimization, looking to reduce our fleet by about 10% to be around 400 vehicles.

And we're also focused on other best practice areas, so we're executing on that as we speak.

And executing opportunities in our core business.

With the new PPAs in Renewables and investments in Networks, everything is coming in line with our expectation.

And we're positioned for additional long-term growth.

And when we talk about long-term, we're looking at offshore renewables that would be in the 8- to 10- to 12-year category.

But also this Massachusetts Clean Energy RFP, and you'll hear more from Rich and others, and probably Bob, on the projects we have that we will be bidding on RFP.

We have a couple of projects in Maine, we have 1 project in Renewables that will be coming out of New York.

So we have a number of projects that we're going to bid into this Massachusetts Clean Energy RFP.

And also at this time, we're affirming our 2017 adjusted earnings per share guidance outlook of $2.10 to $2.35 a share.

So with that, I'm going to turn it over to Rich Nicholas, who's going to get into the financials for the quarter.

Thanks, Jim, and good morning, everyone.

Thanks for joining us today.

Now on Slide 14 of the presentation, where we have the breakout of the business segment, earnings results, both on a GAAP basis and on an adjusted EPS basis.

As you could see in the pie chart, on the right-hand side there, our adjusted earnings for the quarter, of about 26% from renewables and 77% from Networks and a little bit of a drag at Corporate, minus 3%.

On an adjusted normalized basis, 11% growth overall; 3% in Networks, 41% in Renewables and minus 18% in Corporate.

Recall that adjusted EPS reflects the impact of excluding the Gas Storage business, any mark-to-market changes and also the impacts of sale of the Iroquois pipeline investment and the impairment of the Northeast direct investment last year.

So let's move to Slide 15 and review some of the details.

On the Networks business, first quarter of '17 versus first quarter of '16, total adjusted net income of $172 million or $5 million greater than last year, Jim mentioned, really driven by new rate plans in both New York and Connecticut.

So we have a full year now of the New York plan and Connecticut as well for UI distribution.

The first quarter does inflect -- does reflect the impact of estimated sharing, we're 11 months into the sharing year in New York.

With just 1 month to go, it's probable that we will be into that sharing band, and so that was about a $0.02 drag on the quarter to actually accrue that sharing.

Also in Networks, last year at this time, we have the UIL holding company debt within Networks.

As you recall, that was moved up to AVANGRID, and so there's about a $0.01 benefit in the quarter on the Networks piece, offset by a $0.01 in Corporate.

On the Renewables side, adjusted net income up $59 million, or at $59 million, up $17 million from the quarter last year, really due to the combination of higher production driven by the new capacity at the Amazon wind farm in North Carolina, and also by a little better wind in the first quarter of '17 versus the first quarter of 2016, benefit from a lower effective tax rate and offset somewhat by lower average prices when you take into account both expiring PPAs and PTCs, new PTCs.

And we did see the value of [ Rex ] go up a little bit in the quarter.

It does -- on an adjusted basis, exclude $11 million from Renewables mark-to-market or about $0.03 a share.

Looking at the Corporate segment, as I mentioned, it does now include the prior UIL holding company debt of about $0.01 a share.

And compared to last year, it excludes the sale of the equity interest in the Iroquois pipeline.

Gas storage, not part of our adjusted net income, but it was up quarter-over-quarter, primarily due to mark-to-market changes.

So moving to Slide 17, a little more detail on the Renewables results.

As you can see on the left-hand side, the pie chart there, we have a very diversified portfolio across geographies, as well as at our thermal plant in Plymouth, Oregon.

So when you look at the changes in gross margin quarter-over-quarter, wind production, up about $6 million in gross margin, primarily again due to the Amazon wind farm.

And then the wind price, that's net of PPAs that expired, new PPAs coming on and offset by the price, as I mentioned earlier.

And then on PTCs, that is a net of expiring PTCs and new PTCs, so no net impact there.

And in the category we call Other, that's primarily changes in cost of sales at Plymouth thermal plant and some small transmission wheeling, and so that is timing of recognition as well.

So moving to Slide 18, continue to have very strong cash flow from operations, it increased 11% quarter-over-quarter.

We're looking at cash, CapEx of $519 million, that does include payments in the first quarter of '17 for some items accrued at the end of 2016.

If you look at the first quarter, CapEx on an accrual basis, as noted in footnote 2, it was $367 million.

So very strong cash flow, both from Networks and Renewables.

CapEx, up somewhat Renewables with the major projects under construction due to common service later this year.

So looking at Slide 19 now.

As a result of the strong cash flow, good earnings results.

We're maintaining our financial strength.

Very strong credit metrics, with net leverage at 26%, net debt to total cap and net debt to adjusted EBITDA of 2.7x.

Total net debt at this point is now $5.4 billion.

So looking at the rest of the year on Slide 20.

As Jim mentioned, we affirmed our consolidated overall adjusted EPS guidance of $2.10 to $2.35.

We're also maintaining our adjusted EPS guidance by business segment.

And this reflects a full year of the New York and Connecticut UI distribution rate case results, normal wind for the rest of the year, ongoing integration work that Jim discussed earlier with our Forward 2020 project.

That does exclude any mark-to-market impacts in the Gas Storage business.

So with many of you at the upcoming AGA Financial forum in May.

And now, I will hand it back to our operator, Tammy, for the question-and-answer session.

(Operator Instructions) We do have several questions in queue.

Our first question comes from Julien Dumoulin-Smith with UBS.

So a couple of questions, if you don't mind.

First, can you elaborate a little bit more on the situation in New York vis-à-vis the investigation?

What exactly is the scope of it and time line?

And how exactly does it interface with the AMI or any earnings adjustment mechanism in terms of meeting those targets, just given what happened with the storm?

So I think first off, with AMI, it's just because of the staff requirements and the staffing they have, they can't do everything at once, so it's kind of getting pushed back.

And the storm review is coming from (inaudible) of the AMI is going to take kind of second seat, I guess, is the best way to look at it.

It's just going to take a little more time.

So Bob can comment on what's going on with the storm review.

Yes.

Let me -- thanks, Julian.

Let me just give you maybe a little bit background here.

So the storm that occurred, it was March 8, as Jim mentioned earlier, was mostly contained within Rochester.

We did had some issues in the very western part of New York, but it was mostly Rochester.

And the difference between I would say this storm and typically, let's say Sandy as an example.

Sandy, you had 3, 4 days in advance to prepare.

This one, the forecast, right up until the day of the event, we're not dignifying anything of any significance.

So we had wind gust -- 4 wind gust that all were on the top 10 ever recorded wind gust in Rochester.

The amount of lines down, the amount of broken poles approach very closely to what we experienced in Sandy.

So it was a very, very significant event.

Having said that, one of the requirements post-Sandy's is that any storm that takes over 72 hours requires that the utility file several different reports, one called a scorecard, another one is a more detailed filing, the scorecard was already filed, that was due 30 days after the storm.

The second will be due 60 days after the storm.

And then a complete review.

So we knew all along that this was going to get reviewed anyway.

And obviously, with the governor statement, there's a lot of scrutiny around this.

We're working very closely with staff.

We have, as a process, we always go back and look at our performance in a storm to see what could we have done differently.

But this was a very significant storm and one we're putting now a lot of attention to, to say what have we learned from it and what can we do better going forward.

So that's where we are in that process.

A couple of maybe other things that I'll just mention, because I think a couple of our goals by, I think one was put up (inaudible) I think maybe Julien you had mentioned an article, too.

Two things just to clarify.

So one, in February, prior to these storms, Mark was the president of New York came to me and announced that he wanted to retire by the end of June.

Now Mark has done a tremendous job for us over the years.

Anyone that remembers him covered us back in the days of Energy East knows that we had a pretty horrible relationship with regulators, and Mark was really instrumental in his time here, improving that to where I think now we have very, very good relationships with regulators and politicians in New York.

So if there's any implication or anything you've read that makes it sound like the 2 of them are linked, i.e.

the storm and Mark's retirement, it's absolutely incorrect, and Mark's decision was made well in advance of that storm.

The other issue is on the management audit that is just starting and was just announced at the commission session last week.

This is a typical management audit that the commission requires, one that gets done every 5 years.

And we had one 5 years ago, and Con Ed just got finished with theirs.

I think Central Hudson is wrapping up their's and it's our turn again.

So again, this management audit has nothing to do with the storm investigation or anything else.

It's just it was our time to go through the 5-year cycle.

So we'll continue to work very closely with staff.

It is though, with so many different dockets going on, if you think all the dockets associated with REV, all the dockets associated with management audits and the like, there, quite frankly, is tremendous pressure on staff with a lot of things.

And so AMI has gotten slowed down.

But we still expect that to -- as Jim mentioned, to be concluded probably end of this year and the commission decision on that sometime early next year.

Got it.

And just can you clarify under the rate cases, the slight delays that you think?

Is that basically a signal of confidence that you can continue earning or improve your ROEs on your own, what's the context there, if you can?

I'm sorry, the delay on the rate case?

The timing.

We don't need to file in Maine because we're earning at or above our allowed ROE, and the same with Connecticut Natural Gas, there is just isn't a need to file right now.

One of the things I think have mentioned before, our goals is to avoid rate increases where possible.

There's a lot of investment that needs to get done but we want to avoid that getting put on the backs of our customers, hence our Forward 2020 project and other initiatives where we're looking to be more efficient utilizing best practices.

So as Jim correctly says, what we do is we look each year for those companies that are not in a multi-year agreement and say, "do we need to file?" And we believe that both for CMP on the distribution side and CNG, that we can stay out and not file.

SCG, as much as an anything, they've been out the longer of the 2 gas companies in Connecticut, but they don't have RDM yet and we think it's very important to get that in place.

So we are going to file, as Jim mentioned, this year for SDG.

And then, just turning to the Renewables side quickly.

First off, congratulations, Frank.

But second off, just wanted to make sure that to affirm here, your prospects on the C&I side in particular, but overall with respect to Renewables, do you feel confident just as you did at the time of the Analyst Day about executing those targets despite the (inaudible)?

Yes.

I think we fully feel confident that our targets are appropriate.

We're going to meet them, and we're seeing a lot of opportunities, not just in C&I but also with the traditional utility customers.

But if you look at what we have under construction now, besides the Amazon wind farm in Montague, all the others are with traditional utilities.

So we have over 500-megawatt -- 536 megawatts that are -- I think are going to utilities.

So it's a combination of the 2, but we're seeing increasing demand with the commercial and industrial.

I don't know, Frank or Laura, if you want to comment further on that.

No.

I would just affirm that, Jim -- and thank you for the compliment, I appreciate that.

No, we've had very good -- we're making very good progress on the pipeline with both traditional and commercial and industrial customers.

So I would certainly affirm what we said at the Investor Day.

Our next question comes from Greg Gordon with Evercore.

Just I think you clarified this in your opening comments, I just wanted to be clear, the 200 megawatts where you identified the -- that Apple is the off-taker, that was into existing 803 megawatts already secured?

Yes, that's correct, Greg.

But the 80 megawatts PPA at Barton, that's essentially moved over from the merchant bucket to the PPA bucket?

Correct.

That's exactly right.

Our next question comes from Chris Turnure with JPMorgan.

I want to get a sense of the quarter-to-quarter kind of unfolding of renewable guidance over the course of the year.

Maybe kind of starting with that and with the first quarter in particular, the adjusted gross margin, I think went up maybe $5 million.

And that includes a gross-up of BTC as you guys highlighted in that particular slide there.

But then net income went up by $17 million.

So for the first quarter, at least, what was behind the bigger step up in adjusted net income?

Was it cost cuts, what is a tax benefit outside of the change in PTCs, et cetera?

Chris, it's Rich.

So we did see a reduction in the effective tax rate.

We're looking now for the year at about 30% effective tax rate, so there's a benefit from that.

Also, small benefit from cost reductions, especially as I mentioned, in claim it affected the gross margin as well as the bottom line.

But our Forward 2020 project is across all the business, not just Networks, and so we're looking to manage cost where we can.

Okay.

And I think about the next 3 quarters of the year here for 2017, are there any other one-time or is there anything that was in the 2016 numbers that would not repeat or other tax benefits that you'll think you'll be able to achieve there?

Well, we're maintaining our guidance for the Renewables segment so we're confident in our ability to hit that.

Okay.

And then switching gears to the Renewables -- or the Network side of the business.

You mentioned that you did have a headwind in the first quarter from the sharing charge in New York.

But if I heard you correctly, it sounded like there was, I guess, a retroactive element of that.

So what was booked in the first quarter didn't sound like it applied to actual first quarter performance in and of itself.

How do we think about that, and how do we think about the rest of the year and what's baked into guidance?

Sure.

The rate plan, as you may recall, runs from May 1 to April 30, and so the sharing is calculated at the end of April, so we're 11 months into the 12 months.

And when you get to the point where there's a high probability that we're going to be there then we need to book something, and so we did that at the end of the first quarter for 11 of the 12 months.

And we'll see where it comes out with April results, but we expect to be in [ the sharing then. ]

Okay.

So then guidance for all of 2017 would reflect you, let's say, earning roughly your authorized ROE or something about that minus a onetime retroactive hit for the 7 or 8 months of 2016 that was booked already in the first quarter?

I wouldn't characterize it as a retroactive adjustment.

You've got to look at the sharing as you go through the plan.

When you're 1 month into it, you don't have any idea even sometimes at 6 months in, it's very hard to tell.

And so we've reached a point at the end of the first quarter where it was probable and, therefore, we booked it.

So again, I wouldn't characterize it as retroactive, it's kind of the normal process with the sharing calculation.

And I think when you look at our guidance, it does reflect that a continuation of earning at or above the allowed return.

And as we said, we target to get into the sharing band [ been. ]

Our next question comes from Joe Zhou with Avon Capital Advisors.

It's Andy Levi.

I think my question was answered, but just back on the 30% tax rate.

What was the reason for the lower tax rate?

Well, we've got effective PTCs, one was some adjustments as true up to your return under EPB 28 you expect for the year.

I think last year, at this time, it was about 33%, so we're down to 30%.

Okay.

So the first part, just on the wind side, so that was just, what, higher production -- slightly higher production, is that the reason why?

Right.

Primarily, yes, Andy.

And then the second thing, I'm not familiar with.

Well you look at the whole year as to where you think your taxes are going to come out, make an estimate, you true that estimate up every month.

So on a consolidated basis, it reflects everything from Networks, Renewables, Corporate.

Any changes like in New York last year, there were some things that were flow-through that went to normalize, and so if we of those adjustments flow in, you estimate where you think your effective tax rate will be and you start to book to it as you go through the year.

So the second piece, you call it AB something.

APB 28, that's the accounting guidance on how to book taxes.

Okay, so is that a New York State thing?

No, that's a U.S. GAAP thing.

U.S. GAAP thing, so the reason that was lower is kind of a hodge-podge of things or is it because of wind again?

No, it's all of the above.

All of the above.

Okay.

And then I assume that was part of your guidance or not?

Did you assume 30% because you're saying 30% for the year?

The difference was enough that we stay within the ranges.

Difference is enough...

Yes, we didn't exactly -- we have new information now at 30%.

It's actually a little better than where we thought it will be for the year.

Still within the range of the guidance that we have so no reason to change.

Right, did you add on a member -- I have a bad memory.

Did you guys give us tax rate guidance or not?

It was 35%, wasn't it?

Was the reason 35...

Yes, it was higher, certainly, than the 30% that we're booking through now.

Right, I think it was 35%.

So are you guys trending towards the high end of your guidance at this point, or is it too early to know that?

Too early to...

with 1 quarter of the year gone, we'll know more come the second quarter.

But the lower tax rate should be quite a big headwind, right?

Should be a benefit.

Absolutely.

Our next question comes from Paul Patterson with Glenrock Associates.

I wanted to ask you about -- just on the ROE case, has that changed -- the DC circuit remand -- has that changed your assumptions at all with respect to the earnings or anything, given the ruling?

No.

Not really because we really don't know what FERC's going to do, so it puts it back to FERC and now FERC's going to decide do they demonstrate that the rates that they choose were just and reasonable.

And that's really what the court told them to do, to look at -- to justify why the original rates were unjust and unreasonable.

And if they could, then to justify why they chose the range -- the top end of the range, halfway between the midpoint and the top end of the range as the midpoint.

So it really goes back in the FERC's camp.

And so we haven't changed anything as far as our forecast, our guidance due to that.

Okay, so the ROE, I think it was the -- what they gave in the first complaint is what you guys am I correct about that?

Yes.

We were using that 10.57 and we're still there.

Okay.

And just a follow-up on Julien's question on the smart meters, and I understand sort of there are other things going on and they've got a busy schedule.

But given REV and given ConEd already having smart meters approved and what have you, I'm just wondering what the big issue is with you guys?

I mean what's the most significant item that's being negotiated?

I mean, could you elaborate a little more on that?

I wouldn't say there's an issue per se other than one of public resources and timing.

We've had several collaborative discussions on it.

There's a couple of things you're looking at it.

we've been -- you have to put forth this benefit cost to ratio, we've done that.

We did that with the original filing and that looks good, we've been refining that.

We're also, I think as I mentioned, in February, we're putting in as a part of our Energy Smart Community project in Ithaca 20,000 meters there, so we're looking at to see what we're going from that.

But other than that, it's really just a resource and timing constraint.

You've had a shortage to -- remember, just this week, the governor announced who the new chair would be -- we've been without a chair, and 2 other commissioners, there's only 2 out of 5 seats right now as we speak filled, and so there's just a host of things that's causing a backlog, if you will.

I saw the thing about the nice sort of [ guy ] (inaudible).

Is there any -- have there been other appointments or...

That's the only one that's been announced.

So technically, you still have 2 more vacancies beyond coming on as Chair.

Okay.

And then, there've been some -- the Maine Governor has talked about industrial competitiveness in electric rate, and we've seen some rather significant numbers on the arrearage with some of the utility customers on this utility [ all years ] in Connecticut.

Just trying to get a sense, are -- do you see this as a typical stuff that's coming out, or are you seeing increased concerns regarding affordability or competitiveness versus the Maine governor was talking about it being more of an issue potentially in New England?

I'm not seeing any increase from what we've experienced in the past.

In fact, the fact that the last 2 years, the weather in the winters have been very mild has, quite frankly, been a huge benefit to consumers.

And so from an arrearage standpoint, one that we have not seen any kind of issue there at all either.

In Maine, it's typically we have a very close relationship with the governor there.

And he, from day 1, when he took on the role, his focus has been on how we can lower the energy cost in the state.

And so as we think about the Massachusetts RFP and the projects that we have submitted in the previous RFP and now looking at this one, we're looking at projects that we think not only will obviously benefit Massachusetts and help them reap some of their renewables targets, but also projects that could help consumers in Maine by lowering energy prices in Maine.

So we think we have a number of ideas in that regard, and as Jim mentioned, we plan on submitting those as part of the RFP in Massachusetts.

Okay, great.

And finally, I know it's not directly associated with you, it's energy-related and it is in Connecticut.

The nuclear millstone centered legislation, do you have any sense about the outlook for that or I know you guys are involved in all sorts of issues, does that have some customer issues that are associated with that they consider I'm just wondering if you had any outlook on that.

Well, it's still in the Legislature right now.

I mean, it would put more cost back onto the customer.

I mean, I think Dominion would say it would lower the cost.

I think it actually raises it a little somewhat -- in the legislature is debating it right now.

I know it went through the committee.

But I think people are looking at it and with the -- and what the governor -- Secretary Perry just issued the letter to his Chief of Staff looking at a review for base load generation, I think that may color things a little bit.

And you have to wonder if the federal government is looking at this then maybe the state legislature may want to slow down a little bit and figure out where that ends up because that's a 60-day review.

The session, I believe, ends shortly.

It's close short.

I'm not sure.

Anyway, it ends latest will be June.

So the timing is getting critical right now.

But I'm not really sure where it's going to end up at this point.

I think there's just a lot of things in play, and there's a lot of people saying, wait a minute, are they making money or not and that's really what people are wondering.

I think that's the issue that I've seen that probably the difference, for example, from what we've experienced in New York, when we had to sign a support agreement to keep running until we got our transmission project completed.

In that instance, there was complete disclosure with regards to the cost structure and negotiations of the plant so that we could negotiate a rate and agreement that balanced the interest of keeping the plant running from reliable perspective in that region with minimizing the cost implications to consumers.

My understanding in this instance here in Connecticut, at this point, there's been really no detailed information provided to be able to make a determination as to whether that plant truly needs to get a subsidy or not to continue to run and what kind of profitability it has.

I think that's the biggest rub right now that's going on with Millstone in Connecticut.

Our next question comes from Steve with Wolfe Research.

I just want to follow up on the FERC remand.

This case may take a long time before FERC could kind of make a decision.

We don't even obviously have a FERC, really.

So I just want to clarify, while we're waiting, you're just going to continue to book the 10.57 even though the order is vacated?

Yes, at this point.

Steve, at this point, we don't have any better information to say we should do anything differently.

Because they do have the order, which was vacated, but there's no other information we would have to say it's going to -- where it's going to go.

I don't know, I'll let -- accounting folks decide it, but right now I can't see it being anything different.

And so file based on the 10.57.

And just when you -- I'm just curious, kind of your reaction to that court order in terms of -- the one hand, you could interpret it as maybe none of these reviews should have occurred if the 11.17 was is the just and reasonable.

On the other hand, you could interpret it as is there a risk of using above the midpoint.

Just, how did you interpret the court order and implications for the future FERC?

Yes.

I think the way I looked at it, Steve, was that first off, it was within the range of reasonableness that FERC had.

So and they -- what the court was saying is they never demonstrated that it was unjust and unreasonable to keep the rates where they were.

So from that, I kind of look at it as positive.

Now on the other hand, as you say, if they come back and proved that it was truly unjust and unreasonable, then they go to the next phase which would be looking at what is the right rate and did they -- and they change precedent by going into the upper end of the range, how do they demonstrate that, that's just and reasonable.

So we kind of look at with mixed reaction.

I mean, the first part seemed positive, and then second part, not so much.

And we're not sure where they end up and I would -- You know you go back to what [ Phil Mohler ] said when he was in the commission that they never should have gone with the first one to begin with.

That's probably how most of us felt, but --

I guess, your point, Steve, maybe that the hope would be that maybe as we get 3 new commissioners there as well like in New York, that maybe they revisit the whole process and see if they can find a process whereby you avoid this pancaking where we now have 4 different complaints on the same issue.

And we have another question from Joe Zhou's line with Avon Capital.

I am with Avon Capital.

Just a quick question, follow-up.

Just back on the tax rate, so I was just going through kind of stuff from the Analyst Day.

So basically, you had guided to like a 35% tax rate actually and at the same time...

(inaudible) for the federal.

Right.

And now you're saying it's going to be 30%.

And also, you've got it to I think a higher PPA price?

Well, the price assumption was flat -- excuse me, now it seems a little down in the first quarter, so I'm just trying to reconcile in my head kind of where we're at.

I mean, obviously, you have the lower tax rate.

How much of a benefit, on an annual basis, is lower tax rate for 2017, having it a 5% lower rate?

I don't have it in my fingertips, Andy, but we can get that out.

I mean, I assume it's fairly significant, I mean I guess I can figure it out too.

But I guess my point is that without that lower tax rate, you would actually be trending lower end of your guidance, right?

I'm just trying to interpret the lower tax rate because it seems that the 5% is a significant number.

And I'm not -- and then going forward, I mean, should we -- again, I know you haven't given guidance beyond '17.

But in your growth rate of 8% to 10%, does that assume a 35% tax rate, a 30% tax rate?

I'm just trying to understand because a percent here, a percent there, I don't really care about, but 5% is significant.

They may change year-to-year, Andy, depending on the various deductions and what have you.

And so we did have 35% baked into the long-term plan.

And we haven't changed that assumption at this point.

Probably the bigger issue will be what happens with tax reform, but that's a whole other conversation.

Yes.

We'll find that out tomorrow.

Yes.

But I guess, on this 5% for this year, that's a big number and I guess, without that, the number would have been significantly lower this quarter, and I'm not sure what to think about the year.

But I guess, we'll wait for the second and third quarter to come out for how to judge there.

One other thing to consider, too, is we did have -- the wind resources was also down in the first quarter, and so this helped to offset that a little bit.

It's' running about 6% below the normal and in our guidance, I'd assume normal wind.

So with all the pluses and the minuses, we're comfortable maintaining our guidance without changing it.

Yes.

That explains it because I saw when the earnings came out, I know there was something and I knew you had that a comment about the tax but the tax didn't kind of explain why the number was kind of high and why it was a good quarter beyond obviously the operations being very good as well.

I have no further questions in queue at this time.

Okay.

Well, we want to thank you, all, for participating today.

And again, we had a great quarter.

We want to thank everybody.

And we want to thank Frank again for his contributions, and we're looking from great things from Laura.

And hopefully, if you have any other questions, obviously, please call our IR team and I'm sure they'll be very helpful.

So thanks, again.

This concludes today's teleconference.

You may now disconnect your lines.