Algonquin Power & Utilities Corp (AQNU) 2013 Q1 法說會逐字稿

Welcome to the Algonquin Power and Utilities Corp Q1 2013 analyst conference call. At this time all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session and instructions will be given at that time.

(Operator Instructions)

I would like to remind everyone that this conference call is being recorded today, Friday, May 10, 2013 at 10.00 AM Eastern Time. I will now turn the conference over to Mr. Chris Jarratt, Vice Chair.

Good morning everyone. Thanks for joining us on our 2013 first quarter conference call.

With me on the call today are Ian Robertson, our Chief Executive Officer, David Bronicheski, our Chief Financial Officer, and Kelly Castledine, our Director of Investor Relations. For your reference, additional information on the results is available for download on our website at algonquinpowerandutilities.com.

I'd like to note that in this call we will provide some forward -- some information that relates to future events and expected financial positions that should be considered forward-looking. Kelly Castledine will be back at the end of this call to provide some further details. This morning, Ian will discuss the highlights of the quarter and David will follow with a review of the financial results, and then we'll open up the lines for questions. And as usual, I just ask that you restrict your questions to two and re-queue if you have any additional questions.

And with that, I will hand it over to Ian.

Thanks Chris.

Good morning everyone, and thanks for taking the time to join us on the call today. As we look back on Q1 and its financial results, I believe we are now seeing the full impact of our 2012 growth initiatives in both our regulated and non-regulated utilities businesses. Within our non-regulated Electric Generation business, Q1 2013 showed the first full quarter impact of the acquisition of 460 megawatts worth of wind generation in Texas and Illinois.

On the regulated side of the business, I believe the quarter's financial results illustrated the true value proposition of our New Hampshire and Midwest gas utilities acquired mid last year. Following the successful completion of the regulatory approval process, we were pleased that the quarter saw the commencement of the process of integrating the Arkansas- and Georgia-based utility assets, customers and employees into the Liberty Utilities family.

The successful closing of all of these transactions marks a significant milestone in the continued growth of our Company. And we believe they will strongly contribute to our strategy of providing attractive total shareholder return. Continuing on to growth front, in February of this year we entered into an agreement to purchase the assets of New England Gas Company, a natural gas distribution utility serving over 53,000 customers in Massachusetts. The completion of this CAD74 million acquisition is subject to the customary regulatory approvals, and is expected to close in the second half of this year.

With these activities, we are almost halfway to our stated goal of 1 million regulated utility customers, with Liberty's total customer count expected to close in on 500,000 in 2013. Additionally, we are already surpassed our goal of 1 million kilowatts of installed capacity, with APCo's interest in non-regulated power assets surpassing the 1,100 meg watt mark.

Before I hand things over to David, I'd like to take a moment to touch on our announcement yesterday regarding the Board of Director's decision to increase APUC's annual dividend by CAD0.03 to CAD0.34 annually. The recently completed acquisition of several power and utility assets that will contribute significantly to earnings and cash flows affirms our continuing growth trajectory. As such, the Board believes that, in the context of the profile of earnings in cash flow contributions from these new assets, an increase in the dividend was appropriate.

We are pleased to have been able to deliver on these growth initiatives, and believe that the dividend increase is consistent with our strategy of providing total shareholder return comprised of attractive dividend yield in capital appreciation.

I would now like to hand things over to David to speak to the financial results.

Thanks Ian, and good morning everyone.

As you can clearly see from our results in the first quarter of 2013, we have shown significant year-over-year growth. Overall, we ended the first quarter with adjusted EBITDA of CAD61 million, an increase of nearly CAD38 million over the same period a year ago. The increase is primarily a result of the positive impact of our growth plans, including acquisitions and development projects that have been completed in the last 12 months.

As far as specific details, we ended the quarter with revenue of CAD196.7 million, and that compares to CAD63.4 million in 2012. Our EBITDA was CAD61 million compared to CAD23 million a year ago, and net earnings of CAD17.8 million compared to CAD5.5 million a year ago.

Now, a little bit more detail by division. In our renewable energy division, in the first quarter net energy sales were CAD37.3 million, compared to CAD19.9 in the same period a year ago. If we adjust for the effect of the unplanned outage at our Long Sault generating station during the first quarter, our hydro facilities experienced production equal to 110% of long term average resources. Our wind facilities generated electricity equal to approximately 91% of long term averages, for a combined 94% of long term projected average wind and hydrology. Our renewable energy division's operating profit totaled CAD34.5 million as compared to CAD15.3 million during the same period a year ago.

Looking at our thermal energy division, we essentially broke even during the quarter, and it's largely due to less peaking opportunities at our Windsor Locks generating facility and the lower time of the year for our Sanger facility. Also with lower EBITDA coming from our EFW facility as we continue to transition to a more variable waste stream than we previously had when we were on contract with processing solid municipal waste.

Looking ahead for the second quarter of 2013, our renewable energy division is expected to perform based on long term average resource conditions for wind and hydrology. And our Long Sault facility experienced an unplanned outage late last year, but is expected to be brought back to full production levels in the second quarter of 2013, with one unit already returned to service in April.

In the interim, we expect the lost revenue to be made up through our business interruption insurance. As an added note, we are expecting additional revenue in the second quarter of 2013 compared to last year, from the results of our acquisitions of four new wind farm assets in the US, including Shady Oaks, which we closed on January 1. For our thermal energy division, we have no planned outages in 2013, and our Sanger facility is expected to perform at comparable levels to historical results.

Moving on to Liberty Utilities, in the first quarter of 2013 Liberty Utilities reported an operating profit of CAD31.9 million compared to CAD8.3 million a year ago. The increase in operating profit is obviously due to the contributions from our recently-acquired utility businesses. For Liberty Utilities West, during the first quarter water distribution and wastewater treatment revenue was CAD4.5 million, which is in line with the same period a year ago. And net electricity revenue was CAD20.9 million compared to CAD19.4 million a year ago.

The increase was primarily due to the fact that, you might recall, last year we experienced lower than normal customer electricity consumptions. And this year, we have now implemented the CalPeco rate case, in which there is a decoupling mechanism which smooths out the revenues from quarter to quarter, as we are no longer taking volumetric risk in the utility.

In our central division, the region's water distribution and wastewater treatment revenue was CAD3.6 million, and it was higher than the US CAD2.1 million a year ago due to the addition of the Pine Bluff Water System. Also during Q1, our Liberty utility central net revenue from the midwest gas utilities was CAD10.2 million, and that's as a result of our acquisition of our gas utilities halfway through last year. Moving onto Liberty Utilities East, net utilities sales for the East totaled CAD28 million, and obviously there were no comparable results for that in the prior year. Looking ahead to the next quarter for Liberty Utilities, we are expecting more of the same.

That is continued modest customer growth in 2013 throughout our service territories, an increase in EBITDA of approximately CAD7.1 million in the West, in a large part as a result of the rate case for which the utility was approved back in late 2012. And the obvious contributions from our gas and electric utilities which will continue to wind its way through our income statement as the year progresses. I would like to take a moment now to review some recent financing activities.

Early in the quarter, we completed the redemption of the outstanding Series 3 Debentures by issuing and delivering 13.3 million APUC common shares. And as a result, we no longer have convertible debentures in our capital structure. In March, we completed a small US private placement of CAD15 million off of our Liberty Utilities master debt platform. That's a ten-year note issued at 4.1%.

And we are currently in the US long term debt private placement market to raise approximately CAD100 million again for our utilities, and we hope to have commitments on that financing before the end of May. Overall in the quarter, we issued about 15.2 million shares for a total of CAD90 million, bringing Emera's ownership of Algonquin to 24.5%.

I will now hand it back to Ian.

Thanks, David.

Just before we open the lines up for questions, I would like to provide a brief update on some of our growth and development initiatives. On the APCo side of the business, we received the renewable energy approval on January 15 for our Cornwall solar project, and recently received the notice to proceed. Construction is set to begin in the second quarter with commercial operation in late 2013, adding an additional expected 13.4 gigawatt hours of production to the Business.

We did complete final open house for the Amherst Island Wind Project during the quarter, and subsequently submitted the renewable energy approval application in April of this year. The application approval process typically takes about eight months, and if and when approved, construction will commence shortly thereafter, with an expected time frame of 12 to 18 months.

As I have asserted on previous calls, I believe effective growth management is not just about buying new assets, but also about reviewing the portfolio to determine whether it's competition remains optimal. In this vein, we were pleased to have entered into an agreement last quarter for the sale of 11 smaller non-strategic hydroelectric generating assets for CAD27 million, a transaction we expect to close mid this year. You will also note our MDNA confirms that we are undertaking a review of our strategic options with respect to our Branson-based energy from waste facility.

Turning to Liberty Utilities, we are focused on the seamless integration of our recently acquired Arkansas water utility and Georgia gas utility, and gearing up for closing of the New England gas distribution utility in the second half of this year. Our regulatory affairs teams will diligently prosecute the several significant rate cases previously mentioned by David.

Lastly, as the value of our net utility asset tops CAD1.2 billion, I believe there are significant investment opportunities to effectively and organically grow our rate base. As we look forward to the balance of 2013, our focus continues to be on the smooth integration and operation of our growing fleet of assets and building on the momentum we have experienced over the past few years. We will continue to find value-creating developments and acquisitions for our business in order to grow cash flow and further strengthen our stable base of earnings.

With that, Operator, I would like to open the lines up for our question-and-answer session.

(Operator Instructions)

Juan Plessis, Canaccord Genuity.

Congratulations on a good quarter. With respect to the strategic review process initiated on the EFW facility, can you provide us with a time frame around that process and when you might expect to conclude that?

I think it really has started on the basis of, and I think I've mentioned on previous calls and you and I have certainly talked about it, that when you look at the EFW asset, it does look a little bit different from the rest of the assets in the portfolio. And so I think that's really what's motivated us to be more formal about looking at our options. I don't think we've concluded, by any stretch, that the asset needs to go. And in fact, I observe that it does look different, not necessarily bad.

I think what we're going to be undertaking, just to be responsive to your question, probably over the next quarter, an internal review of whether -- what the asset might be worth to other people. I think we've mentioned in the past it is ideally situated from permitting and infrastructure perspective within the GTA. And so anybody who is interested in pursuing the EFW business would be keenly interested in this asset.

But there are also possibilities of strategic partnerships with organizations for whom the technology and markets are core competencies. And then lastly, we may decide to stay the course. So I think we'll have more color for you this time next quarter, Juan, and I don't think we have landed on anything, if you will, in terms of exactly how this unfolds.

Okay. As a follow up, you had a couple of changes in your development projects, the Morris Wind Project is now expecting to be in service in 2015. I think it was 2014 previously. Just wondering what's going on there. And as well, it looks like there are some cost refinements at Saint-Damase. I think it's down a few million dollars. Just wondering what's driving that.

Specifically with respect to Morris, really the development schedule is largely driven by Sass Power's interconnection commitments, and so we have to be, I will say, mindful. Obviously, we can't build a generating station before Sass Power is ready to accept the power. I don't think you should perceive anything nefarious in terms of those delays. I think Sass Power, to my knowledge, remained as committed to the project as they were before, and internally we are moving quickly towards that construction process.

And so, with respect to Saint-Damase, it's gearing up for a start of construction late this fall, with the preponderance of the work being done next summer. And so if you see the refinement, it's only because guys are going through the work. We're finalizing construction contracts for turbine supply and BOP, and so I think you are really just starting to see -- it's the results of the continued development work. We are obviously trying to keep the disclosure up to date with the best available information. But Juan, I don't think that you should read anything into it other than it's just normal course.

Rupert Merer, National Bank.

You mentioned this rate case applications and the credit state. You are seeking an interim rate increase of CAD9.2 million of possible implementation in Q3. What's the time line for hearings on the rate case, and how soon would we know about approval on the interim rate?

There is actually a hearing scheduled in June of this year, so next month, on the interim rates. This is a very standard regulatory protocol within the New Hampshire environment. Obviously, we're very supportive of these mechanisms that reduce regulatory lag. The way it works in New Hampshire, if one comes in for -- files the complete rate case, then makes an application for interim rates 90 or 120 days after the initial application is filed, and in this case it's June. So we actually expect that interim hearing to take place. As I said, procedurally it's docketed for June, so we are hoping that you will see the impact of those rates starting in Q3.

The final rate case takes a little bit longer, but in some respects the sting is taken out of that delay by virtue of the implementation of these interim rates. And so you shouldn't expect to see a final determination until Q1 of next year, I think is the timing. Maybe late Q1, I think the procedural schedule calls for.

Is -- I hope -- is that what you're looking for, Rupert?

Yes, that's great. Secondly, you talked about CAD100 million long term debt facility you are looking at in the US. When that closes, how does your pro forma debt to capital look going into the end of this year, and how does that compare to your targets?

Rupert, we're always targeting, I think -- I'll describe it. Overall on a consolidated basis, we are looking at trying to target 50/50 debt to total cap. I think we've consistently said on the utilities side, we're managing towards a debt to total cap in the 50% to 55% range. And on the APCo side, debt to total cap in that 45% to 50% range. And so overall, about 50/50. And so I think our internal forecaster showing we'll end the year basically within those ranges. There is certainly not going to be any surprise, I think, to anybody on the capital structure that we have within our group.

Okay, and you can get there without any additional equity?

Sorry, Rupert?

You can get to that target structure without any additional equity?

Yes, and I will say the existing CAD100 million that we are raising is simply replacing short term debt for long term debt.

Okay, great.

Nelson Ng, RBC Capital Markets.

Regarding your hydro divestments, how many facilities have you sold to date, and how many additional facilities are you looking to divest?

We have a single transaction which we announced last quarter for 11 facilities representing 32 megawatts in, I want to say, three states in -- across the US. Certainly two, New Hampshire and New Jersey. And previous to that, we had disposed of some really small facilities, and I think there were four, if I am not mistaken historically.

But I think, really, what you see is about it from the hydro perspective as we look at the portfolio. So, I don't think you should see future sales of the hydro assets soon. We mentioned when we talked about selling these assets, it was really about economies of scale, as the organization tops CAD3 billion in assets. A 250 kilowatt hydro facility, which we have to manage with the same prudent safe approach to safety and environmental as we would even if it was a 20 megawatt facility, just didn't make much sense for us. But I think, Nelson, you have seen us about the end of the hydro disposition.

Okay. And then in terms of the Cornwall solar facility, how much of your CAD45 million total project cost, how much of that is locked in? Do you have fixed price, fixed EPC contract, and have you fixed the price or secured the panels yet?

Yes and yes to both of your questions. We are in the very short strokes, if you will, of signing up the EPC contract for the racking, the foundations, the assembly, and are highly confident in the price point that we've -- that's set out in the MDNA. And yes to the panels. We had actually previously executed a commitment for those panels, and so the price of that is already fixed.

Okay. I'll get back in the queue. Operator. Ian Tharp, CIBC World Markets.

Just going back to Amherst Island, it sounds like you filed your REA in April, and it's an 8-month process. Ian, are there any issues that you expect to contend with as the government goes through their assessment process on the REA? Or any other curve balls you could be thrown to either delay or imperil the project?

Just to be clear, the approval process going forward really is in two steps. The first step is to determine administrative sufficiency of the REA application, and that's -- there really isn't a fixed clock on that one. The government typically says we take about 60 to 90 days. And so if I am hedging the time frame, it's only because they don't make a specific commitment to that. And that's where about -- I don't know, say a month or a little bit less, three weeks into that process so far. We have met with the government, obviously, to try to make sure that we are responsive to issues they raise.

The second part of the process, for which there is a six month block, once administrative sufficiency is determined, while they conduct their formal review. I guess the plus and minus about Ontario process is that very -- it's very significantly front end loaded. And so when one prepares a REA application, I am sure you -- it doesn't surprise you, if you stack the binders on the table, it would be probably the better part of three feet tall.

The good news is, you try to hit most of the issues right up front, and so hopefully there isn't too many curve balls that come up in terms of the REA application. Having said that, we all appreciate this is a highly political process. I think we find ourselves in an environment where the government of the day has even themselves their support for green power. I think you can appreciate it's somewhat waned.

And so I don't want to hazard a guess as to what the future might hold from an approval perspective. I will say that we are following the rules in, I like to think, both in letter and spirit. And so we've done our job. It's now up to the government do theirs. And so I'm cautiously optimistic that we -- that our REA application is exhaustive, in terms of the issues that it's need to hit, and nothing has shown up in our REA application that will cause us to be concerned about the project.

Okay. Helpful. And then moving on, and maybe if you can give us some of your thoughts on acquisitions on the power side. Certainly you've been active in the US, so maybe outlining some of the opportunities you're seeing there now, and also stage of development. And then also in Canada, if you are seeing any opportunities to either partner or acquire projects here in Canada.

Sure. I think I mentioned at our annual general meeting last month that one of the things that I am most proud of this organization in terms of the skill set that it's built to be able to understand and participate in the US market to which you make reference. It is fundamentally different from an IPP perspective than Canada is.

And so, yes, in that we are continuing to scour the landscape down there. Lots is happening, I think, with the extension of the PTCs. I think some projects that were dead before are back on, and so we're spending time looking at a number of projects on the wind side, not surprisingly. But also in addition on the solar space within -- so yes, we are continuing to hunt those projects. I think we're obviously being prudent in terms of the -- how we look at those assets. It is a different proposition than a Canadian-based project, which is under a long term PPA.

With that -- with respect to that, as you know, we've got 450 megawatts worth of Canadian PPA projects that fill that hopper over the next few years. But in addition, we're preparing for the Quebec RFP, which we understand is -- a rumors is that today is the day for an announcement, so we would like to think we're going to be competitive in that.

And so it's a little bit of a different hunt in Canada than in the US. As to your specific question about stage of project, you know we have -- we like to believe that development, almost from Greenfield to completion, is a core competency, and so we're comfortable really getting in almost at any stage. As we look at some of the projects in the US, I think the opportunity is to get in after the missionary work's been done, but before serious development decisions are made. And I think that's where we can add the most value.

Okay. Great. And then one final one, if I may, for David. There was a disclosure of CAD5 million worth of something referred to as HLBV, a new acronym for us all, due to tax credits on your US wind assets, I'd expect. So do you expect this amount to continue, or the payment, and is there any way to put these to use through monetization, or are you able do it within APCo US?

Yes, the HLBV income that you see there. The way you should think of it is -- really, it's a monetization of the production tax credits associated with the wind that's generated at the US wind farm. And that's the amount. And the production tax credits, think of them as being shared between the tax equity investors in the structure and us. And so the CAD5 million that you see really is the net amount of the production tax credits that come to us in that.

And so the amount that you're going to see there will vary according to the production, because production tax credits are basically direct drive to the energy that's produced. So I will say that, if we were to produce exactly the same level of energy next quarter as we did this quarter, you'd see pretty much exactly the same number in HLBV. There is a few other adjustments in the calculation, so I don't want to be quite as exact as that, but broadly speaking that's the way to think of it.

Okay, great. Helpful detail. Those are my questions.

Matt Gowing, Mackie Research Capital.

Congratulations on the quarter and the dividend increase. Ian, you mentioned you seeing investment opportunities to grow the rate base on the Liberty Utilities side. Just wondering if you can paint a broad brush as to where you think the most exciting opportunities are to do that?

Sure. I think they are broad across the organization. I think to put it in context, and we certainly haven't made a commitment across the organization to this capital, but we're seeing upwards of CAD100 million, CAD120 million of near term rate-based investment opportunities, and they are pretty broadly distributed across the portfolio. We obviously focus on those in which near term recovery is assured.

And you think of -- and I think I've mentioned in the past that the regulatory regime in Georgia is quite supportive for providing that. But there are certainly other opportunities that -- in other states that we are pursuing. One of the ones that we're -- or some of the ones that we're excited about, is participating potentially in transmission, electro-transmission opportunities in California. Expanding gas service within New Hampshire to incent customers to make what is a very economically compelling conversion to natural gas. Expanding service down in Georgia to new areas.

In fact, there's a -- even before -- I think we mentioned even before we bought the Georgia utility, we were approached by the commission to say, would we be supportive of putting CAD6 million or CAD7 million into a pipeline to a new chicken processing plant. And while it doesn't sound -- I don't want to give up my day job to work at the chicken processing plant, there are 1,400 jobs associated with that. So it both has great investment opportunity for us, but economic implications for the area.

And lastly, the area that I think it really has picked up a lot of steam, is the whole idea of how natural gas plays a role in the American economy, not just in terms of as a heating and power fuel, but CNG and LNG. It's an area that we're seeing great investment opportunities for going forward. So, I think -- and I know it's a long answer to a short question, Matt, but we really see these investment opportunities quite broadly diversified across that portfolio within our Liberty Utilities group.

That is helpful. And my second question. Let's say you do actually sell the EFW facility by end of this year and you close on all of these ten hydro facilities that you sell, you monetize CAD27 million. In the near term, what would you look to do with that capital?

Lord knows, as I mentioned, we've got lots of things on the go. The New England gas acquisition is slated for second half of this year. Cornwall solar is being funded, as David had mentioned, perhaps to a previous question, is that what we're (inaudible) in the debt market fulfilling that CAD100 million Liberty Utilities acquisition.

We believe we have credit facilities able to finance all of our capital needs, but wouldn't it be nice if we can just put some -- deploy some capital from perhaps less core assets into what we would consider strategic? And so it's just going to go into the big pool. Keep in mind that, as you mention, CAD27 million for an organization which is CAD3 billion in size isn't really going to move the meter one way or the other.

Right.

Sean Steuart, TD Securities.

A couple questions. Ian, last call I think you went through a number of the public statements with respect to bigger companies looking to divest mid to small size US utility assets, and you guys are obviously active in that market. I am just wondering if you can speak to increased competition that you're seeing for those sorts of assets, how the market is evolved over the last three to six months? Is that potentially compromising some of the returns you'd look at for those type of acquisitions?

I think, and at risk of repeating my comments from last quarter, I think our focus on enterprise value of CAD100 million to CAD250 million is motivated by a couple of things. But I think a little bit -- one of them, most notably, is to get out of the froppy competition that does exist for those larger assets. And so maybe that's a backwards way of saying is -- we haven't really seen the price points that have shown up in the larger acquisitions that I think you're making reference, specifically to Laclede's acquisition of NGE probably being the latest one. We haven't see those price points show up in the zone in which we're hunting.

Having said that, obviously we are always having our conversation with the buyers. And they see those price points, and whether that CAD100 million utility should qualify for those prices is a different issue, but it certainly makes for a conversation. But so far, you haven't seen us announce that 1.5 times multiple for CAD100 million assets, and I'm hopeful that we'll be able to continue to fulfill our growth obligations -- our growth commitments, which have been about 15% CAGR in assets at a price point which is more consistent with what we have been able to do historically by staying down in that lower end, Sean.

Okay. Thanks for the context on that. And then, just with respect to, I guess, a pending RFPEF for wind in Quebec. Do you guys have anything beyond -- I think you talked before about the two separate 106 megawatt expansions at Saint-Damase and Val-Eo. Is there anything in your pipeline beyond that? And can you speak to -- you obviously have good community relations, but any first nations relationships you're developing on that front?

Those are the two primary candidates which we see to be bid into the RFP. I think having said that, we are fielding inbound calls from developers to potentially partner up with them on their sites. The reason being is -- I am sure this doesn't come as a surprise to you at all. This is the cost of capital gain. The spoils go to the company who has the ability to procure equipment at a low cost and, frankly, finance it at a low cost.

And I'm gratified to see that the capital markets have put us into the same leagues as the best in cost from cost to capital perspective. And so I think we have lots to offer to those developers from an inbound perspective. Nothing to speak of right now, but obviously once that RFP gets announced, and to the extent that we bid some other things in there and struck some other partnerships, happy to talk about them.

Okay. That's all I had.

John Safrance, Cantor Fitzgerald Canada.

A follow-up on Matt's question on rate base. I think in the last quarter, management commentary was a target range for growth on an annualized basis of around 10% to 15%. And of course, I guess you could probably achieve 2% or 3% on just the growing customer base. But what do you see in terms of opportunities now that you've reached a pretty decent critical mass in size with respect to growing that rate base organically above and beyond just the natural growth in your customers? And where that would leave you on the M&A side as well?

I think that's what I mentioned earlier. That I don't say line of sight. We have some relatively pretty serious clarity to call it CAD100 million, CAD120 million worth of near term investments in the Liberty Utilities portfolio. So that would -- to your question, John, go directly to the bottom line from a rate-based perspective.

Additionally, and we should keep in mind, though, that against that there is regulatory depreciation, which has to be replenished. And so, I think that's where that, if you look at the net growth comes from. But that's really the basis of it, which is those near term acquisition opportunities. I will point out that very little of that CAD120 million of near term investment opportunities from rate base focus on a participation of this organization in the CNG and LNG front, and anything that we do in that regard. Or frankly, the transmission fronts in California. Anything we do in that regard would be over and atop -- over and above that.

Okay. And just looking at your Granite State customer numbers on the commercial side, you were sequentially lower. Is there any seasonality involved in that? And would you expect the number to come back up (multiple speakers) year?

We have a (inaudible). We were having a big fight around the boardroom table here before the call started. Should we be reporting these numbers on a trailing 12-month basis, on an average basis, because they do fluctuate with seasonality. They fluctuate with people moving in and out, just normal churn, if you will, in the customers. Probably more so in the residential up-front than on the commercial and industrial. And so I would hope that people don't read (inaudible) we are. To be fair, we are continuing to report. It is a snapshot in time.

And so when you see those customer counts, they are literally the counts as of the day of the financial statement. And so -- but I would ask -- you probably shouldn't read too much into that there is a trend. In general, we are seeing continuous modest growth, perhaps maybe even more than modest in California. I think arguably that the housing market is coming back. We saw 3% or so growth year-over-year. And so, don't read too much into the monthly numbers, John, and certainly nothing untoward has happened in Granite State from a customer or load perspective that warrants discussion.

Okay.

Jeremy Rosenfield, Desjardins Capital Markets.

One question. I wanted to be absolutely clear. You talked about the tax credits for the US wind facilities, and I just want to make sure that I understood. So when production goes up, the tax credit that you're going to book is going up also. I am just curious if there is a cap to that in a specific quarter, or in a specific year? Or does it continue to rise fairly linearly?

It rises exactly linearly, Jeremy. We have, for all intents and purposes, well within tax equity. There is a cap -- an annual cap on the number of tax credits that they're prepared to purchase from us. The cap is established sufficiently high that we'll never bump into it practically, on a year-by-year basis.

But having said that, just so we're clear, we generate an infinite number of tax credits as determined by the IRS. And so even if Morgan Stanley and JPMorgan, who are tax equity partners. If for some fortuitous reason we ever hit their cap, then those tax credits would just accrue to our benefit. So no cap on the actual production. A cap on what JPMorgan and Morgan Stanley are prepared to buy, but I think it's sufficiently high that we shouldn't concern ourselves with it from a practical perspective.

Okay. Perfect. That's exactly what I was looking for. Just from a higher level perspective. In terms of the growth projects -- the contracted growth projects on the power side of the business. To what extent you think that you might look to take advantage of capital market conditions and try to pre-fund some of the capital requirements associated with that growth, both on the debt and on the equity side? Verses waiting until you're through all the permitting, closer to construction and completion of those projects?

It's an interesting comment that you raise. As you move through the development project -- through the process with respect to the project, it's all about managing risks and trying to take the bigger ones off the table sooner rather than later, but managing your exposure. The possibility of going to the capital markets to pre-fund the equity, that would arise. And if we decided that that was the right next risk to take off the table because of a perception that maybe the capital markets might -- may or may not be receptive. I think we're probably hesitant to do that. I think this organization has -- I think we are delivering on a proposition of growth, but we're doing it because we're prudently going to the capital markets.

Having said that, there is lots of investment to be done between now and the end of that pipeline of contracted portfolio, to the extent that we go them all out -- we will be coming to market. But I think you do raise the question, which is, it's all about timing. Right now, we don't see the capital markets threatening as a risk to those projects. And so I guess it's not high on our list of the risks that we need to take off the table from a development perspective as we think about the economics and permitting issues, et cetera in all of those projects.

Okay, and maybe just one follow-up on that. In terms of how you would look to finance equity requirements over the next, let's say, five years as you grow this pipeline. To what extent do you think preferred shares would fit into the capital structure relative to, obviously, common equity?

Sure. I think, just -- if you think of the hierarchy of capital needs -- or hierarchy of capital sources as we think about supplying our needs. First and foremost, we obviously want to bring a cash generated from our operations to bear. And as this organization, as I mentioned, crests CAD3 billion, it's not an inconsequential amount of annual cash flow that can be brought to satisfy those needs.

Second of all, you -- we obviously have the relationship with Emera, which has been important. Your specific question about pref shares is a good one. The -- with CDs out of our market -- or out of our capital structure, pref shares have stepped in their stead as a bridge between debt and equity, and they are an efficient way to finance things on a non-dilutive basis. And so -- but having said that, you have got to -- everything in the appropriate quantum.

The rating agencies look at pref shares not as 100% equity, and we are very fastidious about maintaining our investment-grade credit ratings. And so, I think David could answer more. But right now we think there is probably room for perhaps another CAD100 million of pref shares in the current capital structure, without pushing any boundaries that would cause S&P or DBRS to be concerned.

So I think that -- I'll answer it by saying is, I like to think that we have a high level of flexibility to manage our growth going forward, without getting ourselves out over our skis in terms of having to come to market from an equity perspective. That's clearly the last thing anybody on this call wants to hear, that we've got ourselves in a position that we have to do an equity offering, because that's not a very value-creating circumstance.

Excellent. That pretty much wraps it up.

(Operator Instructions)

Nelson Ng, RBC Capital Markets.

Just a quick follow up on the Granite State rate case filing. What was the actual ROE earned, and what ROE are you looking to get approval on?

Actual ROE earned, as you know, historically it's been a massive under-earner, and it's been the subject of a five-year stay-out. I think the application that we filed is based on the historic precedent of 9.67% ROE, which has been something that you've seen in a number of rate cases historically in New Hampshire.

I will say that cost of capital is an element of a rate case proceeding, and so we'll clearly hire our experts, and the staff will take a position on that as well. So it's hard to determine how that part of the rate case sorts itself out. But our ask is 9.67%, Nelson, if that's -- to be specifically responsive to your question.

Yes. And then in terms of what you actually earned over the last year or two? What?

We knew it was brutal. That utility is just a bit of a horrendous under-earner. And that was totally understood by everyone, ourselves, national grid. And frankly, it was the subject of a discussion that I had with Chairman Ignatius at the time of the approval application. Everybody understood that we needed to come in for a rate filing, and the last time it was in for a rate case was 1997, so if I hazard a guess, I don't know. 0.5%? 1%? It's basically nothing. The ask of -- the rate case ask of CAD14.2 million is really to try to start to even just to get it up to a full earner.

Okay. That's good to know. And then just one last question on your -- that Gamesa wind portfolio. When will there be non-controlling interest or distributions to Gamesa? Will that be paid quarterly, or annually? How would you -- what's your expectation?

That's -- basically we share it as we go. It's not like all of the cash comes to us, and then we hold it and then give it to them. When the cash comes in from the facilities, it's distributed out to the B unit holders, and we got our 60% and they get their 40%.

What a great idea, Nelson. I think we're going to hold onto their 40% from now on. Thanks for bringing that up. (laughter)

I was just thinking, do you fully consolidate the results? And then would you have to back out the distributions or non-controlling interest?

Yes. So -- and it depends on if you're referring to where everything shows up in the GAAP line on the financial statements. It is down at the non-controlling interest section of the income statement. That number is, I'll say, a bit complicated, because there is actually two non-controlling interests that are there. There is obviously the tax equity non-controlling interest, and then there is the Gamesa as the other class B unit holder there. So the non-controlling interest that you see on the income statement is really the class A, and the class B units that we don't own.

Okay. Got it.

And actually Nelson, I looked down at my notes, and I just want to make sure I actually correct a statement. With respect to, actually the filed ROE in New Hampshire. It was -- it's actually filed at 10.5%, not 9.67%

Okay. So 10.5%.

Correct.

The 9.67%, that was just --?

That's historically what has been a bit of a precedent. We obviously do our own cap M model and come up with our own belief as to what an appropriate ROE would be. And that's what 10.5% was.

Okay. Great.

Ian Tharp, CIBC World Markets.

Just one final follow up, if I may, on the tax credit issue. Ian, I understand that it increases linearly up to what would be a very high cap with the tax equity providers. Is it the same thing on the way down? And what I mean by that is, I would assume that they have first access to the tax credits that would come. And for example, in a lower wind period, they would probably capture all of the tax benefits in, say, a poor wind quarter. So is that fair to say around the structure for that credit?

Yes. Just to be specific -- let me start by saying yes, Ian, I think you've got it. When the project was initially financed, Morgan Stanley and JPMorgan put in certain capital that went to the acquisition of these assets. And in return for that, they had a threshold number of tax credits for which they had, if you will, should have booked on and banked on getting. And those go to them in the first instance. And then nice round numbers, that's about -- I don't know -- 70%, maybe a little bit less than that, of the expected wind production. So it would be surprising that they didn't get that, and we obviously would meet that threshold.

Every tax credit above that, as I said, up to the cap, they've committed to buy from us. And they'll just pay us for it on an as-you-go basis, if you will. And so yes, linearly up and linearly down, right down to the point where we get down to the minimum threshold. And that's been a commitment to which they're owed. And obviously to the extent that they don't get it, we in fact owe them back for those, because we -- in fact, the money's already been taken for that threshold, but it's pretty low. It would have to be a very extraordinary event that saw us not meet that minimum threshold.

Okay. And we might see that come through in a very poor wind quarter, where there may be a negative number against this amount? Is that --?

No, because the commitment to them has been made based on our expectations on a quarterly seasonality. So it's not like we owe them that -- any -- and we don't owe them, if there is 100 tax credits, it's not 25 a quarter. It's basically shaped with the expectation of the wind production. So everybody understands the seasonality, but -- so you won't see a negative.

Okay. I understand it crystal clear now.

There are no further questions at this time. Please continue.

Great. Thanks, everyone, for joining us this morning and, as always, please stand the line for the riveting disclaimer from Kelly in terms of forward-looking statements.

Certain written and oral statements contained in this call are forward-looking (inaudible) of certain securities laws and reflect the views of Algonquin Power & Utilities Corp with respect to future events, cased upon assumptions relating to, among others, the promise to the Company's assets and the business, financial and regulatory climates in which it operates. These forward-looking statements include, among others, statements with respect to the expected performance of the Company, its future plans and its dividends to shareholders. Since forward-looking statements relate to future events, by their very nature they require us to make assumptions and involve inherit risks and uncertainties.

We caution that although we believe our assumptions are reasonable under the circumstances, these risks and uncertainties give rise to the possibility that our actual results may differ materially from the expectations set out in the forward-looking statements. Material risk factors include those presented in the Company's most recent annual financial results, the annual information form, and most recently quarterly management discussion and analysis. Given these risks, undue reliance should not be placed on forward-looking statements, which apply only as of their date. Except as required by law, the Company does not intend to update or revise any forward-looking statements, whether as a result of new information, future developments or otherwise.

Ladies and gentlemen, this concludes the conference call for today. Thanks for participating. You may now disconnect your lines.