新世紀能源 (NEE) 2013 Q1 法說會逐字稿

Good day, everyone, and welcome to the NextEra Energy first quarter 2013 earnings conference call.

Today's conference is being recorded.

At this time for opening remarks, I would like to turn the call over to Ms. Julie Holmes, Director of Investor Relations.

Please go ahead.

Thank you, Leslie.

Good morning, everyone, and welcome to our first quarter 2013 earnings conference call.

With me this morning are Jim Robo, President and Chief Executive Officer of NextEra Energy, Moray Dewhurst, Vice Chairman and Chief Financial Officer of NextEra Energy, Armando Pimentel, President and Chief Executive Officer of NextEra Energy Resources, and Eric Silagy, President of Florida Power & Light Company.

Moray will provide an overview our results, following which our executive team will be available to answer your questions.

We will be making statements during this call that are forward-looking.

These statements are based on current expectations and assumptions that 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 today's earnings news release, and the comments made during this conference call in the risk factors section of the Company presentation, or in our latest reports and filings with the Securities and Exchange Commission, each of which can be found in the Investor Relations section of our website, NextEraEnergy.com.

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

Please also note that today's presentation includes references to adjusted earnings and adjusted EBITDA which are non-GAAP measures -- financial measures.

You should refer to the information contained in the slides accompanying this presentation for definitional information and reconciliation of the non-GAAP measure to the closest GAAP financial measure.

With that, I will turn the call over to Moray.

Thank you, Julie, and good morning, everyone.

NextEra Energy delivered strong results during first quarter of 2013 and both Florida Power & Light and Energy Resources are executing well on the objectives we discussed with you last quarter, and during our investor conference.

At FPL, we maintained a regulatory level ROE of 11%, while we continue to invest heavily in the business in ways that enhance what we believe is already the best customer value proposition in the state.

Average regulatory capital employed grew roughly 14% over the same quarter last year, and was the main driver of our net income growth of about 20%.

I am pleased to report that three of FPL's major capital projects are now complete.

The successful repowering at Turkey Point Unit 4 earlier this month marked the completion of our extended nuclear power uprate program.

We also finished installing 4.5 million smart meters across our service territory to serve our customers better.

Finally, our first modernization project at Cape Canaveral entered service last week, more than a month earlier than originally expected.

And our Riviera Beach and Port Everglades modernizations remain on track.

At Energy Resources, adjusted earnings were down slightly compared to the prior year comparable quarter, primarily from lower wind generation.

This quarter's adjusted results excludes three unusual items, the gain on the sale of our Maine Hydro assets, a charge associated with our decision to sell off the merchant fossil assets in Maine, and charges associated with an impairment on our Spain solar project.

I will discuss each of these items in more detail later in the call.

Our renewables backlog remains on track, and we continue to make good progress on our incremental growth opportunities.

Since our investor conference in March, we signed long-term power purchase agreements for an incremental 150 megawatts of new US wind projects, and 40 megawatts of new solar projects.

On the transmission front, we successfully energized our Lone Star Transmission line in Texas on time and under budget.

We continue to pursue a number of other transmission opportunities in North America as we discussed at our investor conference in March.

Looking beyond this quarter, we are focused on driving long-term growth across our primary businesses that is profitable and creates value.

Central to this is a continued search for ways to improve our productivity and relative cost position sustainably.

As we mentioned during our recent investor conference, we have initiated a comprehensive company-wide internal review to identify opportunities to continue to improve our businesses through revenue enhancement and O&M savings.

Even though our overall relative cost position is excellent, we believe we have room for further improvement.

We are fairly early in our review process, but we are pleased with our progress and we will provide updates on this initiative throughout the year.

I want to take a brief moment to elaborate on the growth plan we laid out for you at our conference.

If we simply complete the projects that were in our backlog in March, which are outlined on the left side of the accompanying slide, we believe we can grow adjusted EPS at a compound annual growth rate of roughly 5% through 2016 off a 2012 base.

At FPL, this includes successfully bringing our remaining two modernization projects online, on time, and on budget.

It also includes our completed nuclear uprate program which I mentioned in my opening remarks.

At Energy Resources, it includes 175 megawatts of US wind expected to enter service in 2013, roughly 600 megawatts of Canadian wind to enter service through 2015, and approximately 900 megawatts of solar to enter service through 2016.

Also included in our March backlog is our Lone Star Transmission project in Texas, which as I noted earlier, is now fully operational.

We must stay focused on completing the remaining projects in our backlog, while we pursue and execute on new incremental opportunities across our core businesses.

Our ability to grow beyond 5% through 2016 will depend in large part on how successful we are in identifying and implementing productivity improvements, and on how successful we are in developing new capital employment opportunities.

The internal review I mentioned earlier began this month, and we are working hard to identify opportunities to improve our businesses through O&M savings.

At FPL, every dollar we can extract in productivity and O&M savings creates headroom to allow us to invest incremental capital in the business without driving up customer bills.

We have already identified $75 million in potential savings through a number of initiatives, and we fully expect to find more.

We have also identified $4 billion to $5 billion of incremental capital deployment opportunities at FPL that appear to have strong customer benefits, although more analysis is required before we are ready to commit to all of them.

One of these opportunities is accelerated storm hardening that will build on the program we started some time ago, to improve our system's resiliency and reliability.

We will be filing updated plans for this additional infrastructure investment with Florida PSC tomorrow.

While some of the potential incremental investments will be recovered through clauses or on a AFUDC return, others such as storm hardening will be absorbed through productivity improvements and the O&M savings we are able to generate.

We have set a stretch goal for ourselves to keep base O&M roughly flat in nominal terms for 2016 at Florida Power & Light.

Additional growth at Energy Resources beyond our March backlog will come from new wind and solar projects.

As I noted earlier, since the March investor conference, we have signed PPAs for an additional 150 megawatts of new US wind and 40 megawatts of new US solar projects.

We have a strong pipeline of additional projects and continue to expect to develop between 500 and 1,500 megawatts of new contracted US wind, and up to 300 megawatts of new contracted solar projects over the four years, equating into an incremental capital investment of somewhere between $1 billion and $4 billion.

Based on the opportunities we see over the next four years at both FPL and Energy Resources, we continue to expect that our portfolio mix and earnings profile will shift towards a more regulated and long-term contracted business.

Maintaining a balanced portfolio is important for our risk profile and our credit position.

In 2016, we expect adjusted EBITDA from our regulated and long-term contracted operations to reach roughly 84% of the total.

Let me now walk through our results for the first quarter of 2013.

We will begin with results at FPL, before moving onto Energy Resources, and then the consolidated numbers.

For the first quarter of 2013, FPL reported net income of $288 million or $0.68 per share, up $0.10 per share year-over-year.

The regulatory return on equity during the quarter remained unchanged at 11%.

However, the quality of earnings improved as cash recovery associated with the base rate increase reduced the utilization of reserve amortization as compared to the same quarter last year.

We invested roughly $700 million in the quarter, and expect to invest approximately $2.8 billion for the full-year.

Regulatory capital employed growth of roughly 14% over the second quarter last year, was the main driver of growth in net income of approximately 20%.

The remaining difference was a function of number of smaller items, including improvement in the non-retail portion of the business.

We would expect to see our growth in net income generally track our growth in regulatory capital employed, though there may be differences on a quarter to quarter basis.

Weather during the quarter was both mild and unusual in nature.

The number of heating degree days in January and February was well below normal, and in March we experienced an abnormally low number of cooling degree days.

We estimate that for the quarter base revenues were roughly $40 million less than we expected, primarily as a result of the weather.

We utilized $137 million of surplus depreciation during the quarter, and we remain comfortable that we can achieve our financial expectations this year and still retain sufficient reserve amortization for future years.

Looking back over the past two years, we have utilized a larger proportion of surplus depreciation in the first half of the year, and we do not expect this year to be any different.

As many of you recall, we have been expecting 2013 to require the utilization of more surplus than in subsequent years, and this remains true.

2014 and later years will benefit from the growth of our existing wholesale contracts, and thus require less reserve amortization to meet our targeted regulatory ROE.

All of our major initiatives that we laid out for you in prior quarters remain on track.

Turkey Point Unit 4 nuclear uprate I mentioned earlier completes the extended power uprate program at FPL Today the plant is running at approximately 50%, and when it ramps up to full power in a few more weeks, our uprate program will have added a total of more than 500 megawatts of emissions-free generation to our fleet.

I also noted earlier that our Cape Canaveral modernization project is now operational after entering service more than a month ahead of schedule.

The project also came in under budget, and we are very pleased by the success of our development and construction effort.

The 1,210 megawatts of highly efficient combined cycle gas generation from the plant will save customers money on fuel, reduce air emissions and start to provide shareholders with a cash return on their substantial investments.

Construction continues at our Riviera Beach plant modernization, which is now 53% complete, and the project remains on budget and on schedule to enter service in June 2014.

We are also moving ahead with the Port Everglades modernization project with demolition of the current plant scheduled for July of this year, and construction set to begin next spring.

Our Port Everglades plant is expected to enter service in June 2016.

All in all, our three modernization projects will add approximately 3,700 megawatts of efficient clean combined cycle generation to our fleet, and are expected to provide roughly $1.2 billion in customer benefits over the lives of plants.

Other developments at FPL during the quarter include progress on our proposed acquisition the Vero Beach Municipal Electric Utility system.

On March 12 of this year residents voted in favor of the transition and we expect the transaction to close in 2014.

On our pipeline project, we received a number of bids in response to the RFP, and we are in the process of evaluating them now.

We expect to make a decision sometime in July, and hope to have additional information to provide by our second quarter earnings release.

The Florida economy continues to improve slowly.

Florida's seasonally-adjusted unemployment rate in March dropped 1.4 percentage points from the prior year to 7.5%, outpacing the improvement in the national unemployment rate of only 0.6% over the same period.

This is the first time since January 2008 that the Florida unemployment rate is lower than the national rate.

We are seeing the improving employment picture reflected in retail activity, which has increased markedly since the trough in mid 2009, and now is above prerecession levels.

At the same time, Florida consumer confidence is well above the low points reached in recent years, and seems to be reasonably stable even after federal budget sequestration and the expiration of the payroll tax holiday.

The Florida housing market also continues to recover.

The backlog of homes in foreclosure is gradually declining, and Florida has improved from having the second-highest mortgage delinquency rates in the country to having the ninth highest rates.

The [case] show a seasonally-adjusted index for south Florida home prices continues to increase at a double-digit pace, and is now at the highest level since early 2009.

Florida building permits, a leading indicator of residential new service accounts nearly doubled on an annual basis, and remain the second highest in the nation.

These generally encouraging developments are reflected in the internal indicators that we follow at FPL.

During the first quarter, we had approximately 33,000 more customers than in the comparable quarter in 2012, representing an increase of 0.7%.

This growth rate has been fairly consistent for the last 12 quarters.

Total retail sales declined 3.5%, as January and February were unusually mild, while March was much cooler than normal.

Comparisons with last year are also affected by the leap year impact.

Underlying usage was roughly flat for the quarter.

The number of inactive meters declined to the lowest number that we have seen in five years, and it is now approaching its long-term average.

On the other hand, the improvement in low usage accounts seems to have stalled.

It may be that partially-occupied premises have increased more or less permanently, due to an increase in investor-owned and internationally-owned properties.

New service accounts are on track for the strongest year since 2009, and we continue to see growth in our industrial accounts, which as a reminder are primarily tied to the construction industry in our service territory.

We remain encouraged by these overall positive data.

Let me turn now to Energy Resources, which reported first quarter 2013 GAAP earnings of negative $40 million or negative $0.09 per share.

Adjusted earnings for the first quarter were $177 million or $0.42 per share.

Adjusted earnings exclude the effect of the mark on nonqualifying hedges and net other than temporary impairments on certain investments or OTTI.

In addition, we have excluded three other items from adjusted earnings this quarter.

These are the gain on the sale of our Maine Hydro assets, a charge associated with the decision to sell our merchant fossil assets in Maine, and charges associated with an impairment on our Spain solar project.

I will provide more details on these items in just a moment.

Energy Resources adjusted EPS contribution was slightly negative compared to the same quarter last year, decreasing $0.02.

The primary drivers for the quarter were lower wind generation of $0.06, and PTC rolloff of $0.01, partially offset by the absence of the Seabrook [D] rate we experienced in 2012 of $0.02.

Our customer supply and trading businesses contributed a positive $0.04 due to favorable market conditions.

New wind and solar investments increased $0.03 over the prior year comparable quarter.

Contributions from gas infrastructure declined $0.03, as last year's comparable quarter included a gain associated with hedge close outs.

All other effects were minor, as reflected on the accompanying slide.

For the full-year, we expect to elect CITCs on roughly 300 megawatts for our Mountain View solar project and portions of Genesis and Desert Sunlight solar projects that are expected to enter service in 2013.

This equates to roughly $80 million in adjusted earnings, up from $53 million in 2012 on 457 megawatts of wind projects.

While there are fewer megawatts of CITC elections in 2013, the capital costs for solar are higher than capital costs for wind, which results in an increase in earnings for the year-over-year comparison.

As I mentioned we have excluded three items from adjusted earnings this quarter due to their unusual nature, in order to make period to period comparisons more meaningful, however it is important to understand their impact.

The sale of the Maine Hydro assets closed during the quarter.

And as we have previously indicated, the transaction resulted in a significant GAAP gain of $216 million.

The sale had a small positive cash impact.

Based on changes we have made to our merchant portfolio in the Northeast and our commitment to continuously evaluate the role of all our assets, we have concluded that our Maine Fossil assets no longer strategically make sense for the business.

We have therefore made the decision to sell our 796 megawatts of merchant oil-fired assets in Maine.

Based on the estimated fair value, we have recognized a charge of $41 million with no current cash impact.

Our Spain project is nearing completion, however, the project is facing financial challenges, as a result of recent tariff changes that fundamentally impact the project's economics.

After extensive analysis, and in accordance with accounting rules, we concluded that the value of our assets should be written down by $300 million.

After accounting for certain income tax valuation allowances which have no impact on cash, the total after-tax impact to GAAP net income is $342 million.

However, the economic effect is as we have previously discussed, and we continue to believe that our economic exposure is limited to our equity commitment of somewhat less than $300 million.

As a reminder, we have removed from our financial expectations all contributions to operating earnings and cash flow from this project.

We continue to make good progress in developing our backlog of renewables projects.

Our solar and Canadian wind programs are on track to meet their respective commitments of roughly 600 megawatts of contracted wind capacity in Canada through 2015, and roughly 900 megawatts of contracted solar capacity through 2016.

As I mentioned earlier, we are pleased that our 2013 to 2014 wind program is on track, with 325 megawatts of projects with signed long-term PPAs.

With the economics of wind improving as a result of better turbine technology and lower turbine prices, wind PPA contracts are very attractively priced.

As a result, buyers are clearly interested in taking advantage of these prices and the production tax credit extension.

Recently the IRS clarified the start of construction language necessary to qualify for the PTC.

A facility qualifies as significant physical work begins at the site or certain safe harbor provisions are met.

We view this language as positive.

Our solar development pipeline remains on track, with the potential to build up to 300 megawatts of incremental projects, in addition to the March backlog.

As I indicated earlier, we recently secured to two 20 megawatt PPAs, and are actively working on additional opportunities in our pipeline.

We are pleased with our progress in our development pipeline, and remain comfortable with the ranges we have discussed.

As a reminder, we indicated in March that we have the potential to employ $1 billion to $3 billion in incremental capital and add between 500 and 1,500 megawatts of US wind capacity in 2013 and 2014.

And we see opportunities for further, up to $1 billion of incremental capital investment to support our target of up to 300 megawatts of new solar projects through 2016.

We will update you each quarter on our progress, as we secure PPAs and continue to work our development pipeline.

Looking at the Company on a consolidated basis, for the first quarter of 2013 NextEra Energy's GAAP income was $272 million or $0.64 per share.

NextEra Energy's 2013 first quarter adjusted earnings and adjusted EPS were $475 million and $1.12, respectively.

Adjusted earnings from the corporate and other segment were up $0.02 compared to the first quarter of 2012, primarily due to consolidating income tax adjustments and our Lone Star Transmission project.

As we noted last quarter, we expect the full-year contributions to earnings from this segment to improve slightly relative to 2012.

On our last earnings call, we laid out for you a list of critical success factors for 2013.

These remain a priority for us.

At FPL, we will continue to strive to deliver the best value in the state to our customers.

The FPL team had a great year in 2012, and we will focus on ways to make our customer value proposition even better.

We will continue to develop the Riviera Beach and Port Everglades modernization projects, with a focus on coming in on-time and on budget.

And finally, we have made a good start in our efforts to identify additional ways to improve productivity, so we can invest capital in projects that will continue to improve the value we deliver to our customers.

At Energy Resources, we must maintain our focus on excellence in day to day operations.

We must continue the successful development of our Canadian wind and our solar portfolios.

And we will continue working hard to develop a strong portfolio of profitable contracted solar projects, along with our 2013/2014 US wind program.

We expect to finance any incremental investment in a way that supports our targeted credit metrics.

And finally, in our transmission business, our focus will be on successfully operating our newly commissioned Lone Star Transmission project, and looking for additional transmission opportunities in North America.

Based on what we see at this time, we continue to expect adjusted earnings per share for 2013 to be in the range of $4.70 and $5.00.

And we see nothing that would change the ranges of the expectations we provided you in March for 2014 through 2016.

We continue to see adjusted EPS growth at a compound annual growth rate of 5% to 7% through 2016 off a 2012 base.

As always, our expectations are subject to the usual caveats we provide, including normal weather and operating conditions.

And with that, we will now open the lines to questions.

Thank you.

(Operator Instructions)

And we will take our first question from Dan Eggers with Credit Suisse.

Good morning.

Good morning, Dan.

Just turning to the wind conversation a little bit, with the range now there of 500 to 1,500 megawatt for the next two years.

Is that 1,500 megawatt top end number, is that a reflection of the kind of logistical limitations of you building that much wind in a short amount of time?

Or do you think there is the ability at some point to maybe surpass that, given the compelling economics of wind with the tax credits still sitting out there?

Well, Dan, I would say that the whole range is based on our total assessment of what is realistic over this period, including both the customer dimension and the supply chain dimension.

So while I would never say never, I think that based on what we see today 1,500 megawatts is a good upper end for the US wind program.

And then have you thought about kind of the way -- the IRS interpretation, I mean it looks like maybe there is maybe some ability to maybe even go beyond 2014 from a development perspective.

Do you see a window where this could expand into 2015?

I think that right answer to that, is just to say that we are very focused on our 2013/2014 program.

Okay.

And then on solar, you obviously, you kind of rescaled the [Blythe] project which was expected, but when do you think we could start to see movement on some PPAs being announced on the solar front?

Is that a 2013 announcement prospect, and what should we be watching to maybe see some of these projects move forward?

I guess I would just divide the solar pipeline into the two parts.

I think -- we obviously are just announcing two small projects here.

I think there could be several more of those.

We have previously noted, that there is probably not more, than one more large-scale project to come.

That could -- certainly, we could have success on that in this year or not.

So I mean, it is a little difficult to say exactly when it is going to happen.

Armando, do you want -- have any other comments.

Armando is shaking his head so.

Okay.

And I guess, just -- just a last one.

Again, I guess it looks like we had a light performance from a wind utilization perspective.

A, how far off were you versus normal [trends] in the slides?

And then b, is there a time when we need to evaluate kind of the growth rate or base line expectations, given the fact that there seems to be a fairly regular underperformance from wind relative to the model?

Well, I guess there is two parts to the answer to that question.

First, on the wind resource, just numerically, in the first quarter we were about 97%.

The -- it is quite clear looking at the data over the last few years that the wind resource available to the portfolio in aggregate, has been on average below the longer-term averages.

So I don't think there is any question about that.

The second part of the answer, however, is that we are right in the midst of -- essentially recalibrating all of our wind models.

And the reason that I pulled the wind resource slide from the release this time is -- that while we have a new set of numbers, they are not directly comparable to the ones that we have been presenting.

So I was little concerned that people would compare one with the other, and come to a misleading conclusion.

So we will be putting those back out, once we have a better basis for comparisons on there.

So we are doing some recalibration.

But I would just estimate -- underline that the wind resource like any other sort of climate-related variable can go through quite significant cycles.

So we could have several years in a row where you are below average, and that is statistically perfectly normal.

Okay.

Thank you.

And we will take our next question from Paul Ridzon with KeyBanc.

Good morning.

Can you hear me?

Good morning.

Moray, I had to jump off for a second, but did you say that you expect [Vero] to be near slightly improved versus '12?

Yes, I think you may have been picking up a reference to corporate and other.

Okay.

We had previously said for '13, we expect it to be a little bit up over 2012.

We certainly expect Energy Resources to be up, as well in '13.

And I think you filed with Florida that you expected to earn 11.25%, is that still reasonable?

The forecasted surveillance report for the remainder of the year is -- I think it comes in about roughly 11.25%.

So, yes, that is roughly what we are thinking at the moment based on what we see.

And then lastly, have you initiated discussions in Spain?

And what is the outlook for resolution here, aside from walking away?

I think as a practical matter it is going to take some time to resolve the situation.

We are in active discussions with our bank group.

But for commercial reasons, I don't it would be appropriate for me to say more.

And then, I guess from our current position and the way you have characterized Spain, there is nothing but upside from here?

Is that fair?

I can't absolutely say that there is nothing but upside.

But as I said in the prepared remarks, we continue to believe that our exposure is limited to the equity contribution, which is roughly $270 million based on today's exchange rate.

Thank you very much.

Thanks.

We will take our next question comes from Stephen Fleishman.

Yes, hi.

Good morning, Moray.

Good morning, Steve.

Just a couple of questions.

The 2013, '14 EBITDA's were down about $100 million to $140 million in -- for Resources.

Is that mainly just taking Spain out, or is there any other changes in there?

There is a few minor changes, but by far the biggest change was removing Spain.

Okay.

And then you mentioned the good kind of market conditions for the supply trading.

Could you give us maybe a little bit more color on that?

Which business within that benefited?

Yes, it was really spread all across the board.

The full requirements piece of it was roughly half the $0.04.

And even within that, it was a variety of different deals in.

And as I recall, it was mostly concentrated in the PJM deals more than [Nepal], but most everything was a little bit better.

And then a little bit in just the regular general marketing and trading.

So nothing specific that you can really point to, but each element of that portfolio did a little bit better than we expected.

And then retail was --

(Multiple Speakers).

Yes, flat where we expected it too be.

Okay.

One other question, just the -- there is -- I guess the proposed legislation on renewable MLP has been -- has come back out again.

Could you just give us your latest thoughts on that proposal, what are the good thing/bad things?

And how that ties into whether we can get another PTC extension?

Sure, let me ask Jim to comment on that one.

So, Steve, I think the important thing to understand about the MLP proposal with -- of adding renewables, to be able to be MLP-able if you will is that, it is not really a replacement for the PTC.

And that is because this bill does not fix the -- doesn't address the passive loss limitations that exist as a result of the 1986 tax changes.

And so, new wind projects have significant losses that would not be -- not be allocable to the investors.

And so, it is a terrific vehicle for old wind assets coming off of a 10 year -- coming off of a10 year PTC window.

And that is terrific, and we think as the largest owner of those kind of assets, that it would be -- it would be helpful to us if it passed.

But it is not a replacement for the PTC is the bottom line, and would not really impact new builds as a result of that.

Okay.

Thank you very much.

Thanks, Steve.

We will take our next question from Michael Lapides of Goldman Sachs.

Hi.

On the utility, you mentioned this storm hardening program in that you would make a filing tomorrow.

But that -- and I want to make sure I understood this, that you wouldn't be seeking full recovery via a rider.

Can you give more granularity about what is recovered via rider?

What you would kind of utilize AFUDC earnings to capture for the next few years.

And then, when would you put those into cash rates?

Sure, let me try and see if I can take those pieces.

First of all, we have a requirement for an annual filing with the Commission on our storm hardening plans, and that is I believe this week.

We will be indicating -- based on the work that we have done to date, we can see very significant benefits from the hardening activities that we have already undertaken.

And so, we would like if we can, to accelerate our rate of progress on that.

And we believe that we will be able to do that, and that will be the effect of the filing tomorrow.

For recovery purposes, given the fixed rate agreement, the -- that has to be absorbed within the fixed rate that we can see out through 2016.

In terms of terms of ultimate cash recovery it would be then, obviously part of the rate base that would go into whatever we end up doing for 2017.

Let's say hypothetically, we had a rate case in 2017, it would be in the rate base on which the revenue requirement would be assessed.

Broadly speaking, what we typically call our base infrastructure type investments, so that is the basic investment that we have to do in the transmission distribution infrastructure, all the sort of basic outside of major generation projects, would typically have to be absorbed within the fixed rate agreement that we have in place.

If there are specific, large projects that are approved by the Commission within this period, they would become eligible for AFUDC.

So you would have an earnings impact, but a non-cash impact potentially within this period.

But we would have to wait for cash recovery beyond.

So the projects that clearly get cash recovery through increases in rates in the period of the rate agreement are the three modernization projects.

Then there are some projects that might be recovered through clauses.

So if there were a capital investment that was associated with environmental upgrades that were authorized for recovery through the environmental clause, for example, those would get cash recovery through that mechanism.

So there is a whole variety of things.

But I think the bottom line way to think about this is, the reason that we are so very focused on the productivity is, that the more progress we can make on the productivity side, not only do we make the better business better in and of itself.

But we also create what I call, the head room to enable us to do additional capital activities that are good for customer, and will provide long-term value creation potential for the shareholder.

Got it.

Thank you for that.

One other piece, just on O&M at the utility, year-over-year O&M was down a good bit.

Just I don't know there were one-timer items in the 2012 quarter, or just could you give a little detail there?

Yes, as always with O&M, there are some significant variations from quarter to quarter, so some of that effect is timing.

But some of it is related to planned outages which vary from year-to-year.

But having said that, as I have said before we are very focused on the broader O&M picture.

We have this company-wide initiative underway.

And we feel pretty good about where we are on that long-term stretch goal of keeping O&M flat in nominal terms over the period of the rate agreement.

Got it.

Thank you, Moray.

Much appreciated.

Thanks.

We will take our next question from Paul Patterson with Glenrock Associates.

Good morning, can you hear me?

Good morning, Paul.

Most of my questions have been asked and answered, but I wanted to follow-up on one question from Dan on this April 15 IRS -- I guess, I am not sure -- I am not sure what the official term is, but the IRS letter or whatever in terms of the PTC's and the ITC's.

I think they are focused on this year and next.

But could you give us a little bit of flavor as to your reading of the IRS language, and what that might mean for the industry in terms of 2015, in terms of new wind potential for the industry?

Frankly, we have not focused much thought or time on what the implications for 2015.

I think -- at least the way we see it, we have a great window of opportunity to build another portfolio of US wind in 2013 and 2014, and the sooner that we can get projects underway, the sooner we can get them completed, deliver benefits to our customers, and value to our shareholders.

So we really, at this stage have not been focused at 2015.

Okay.

Thanks a lot.

Thanks.

We will take our next question from Stephen Byrd with Morgan Stanley.

Good morning.

Good morning, Stephen.

Most of my questions have also been asked and answered, but one just on customer load growth.

In the first quarter, it looks like the change in underlying usage was basically flat.

And last year I think it was up a little over 1%, and in your Analyst Day, you have laid out some expectations there.

Can you talk a little bit more about the drivers for the first quarter, how you look at that versus your expectations?

We don't attach a great deal of significance to anyone quarter's change in the underlying usage per customer.

Last year, we were, I think pleasantly surprised.

We had several quarters where we thought it was higher than sustainable.

So this one is kind of a little bit lower than we would expect for the medium-term outlook, but I cannot put my finger on any particular drivers in there.

It does fluctuate a fair amount from quarter to quarter.

So in going forward, I still think we are going to see small positive increases in average usage per customer over the next few years.

But in any quarter, we could be up by 1%, or flat to slightly down as we were this quarter.

Okay, good.

So it sounds like within customer classes, different classes, you didn't see anyone class that really stuck out to you as being different than expectations?

No, nothing that is not within the normal bands of noise for these data series.

Great, that's all I had.

Thank you.

Thanks.

We will take our next question from Greg Gordon with ISI Group.

Thanks.

Just a couple of things, in the projection that you will earn around 11.25% ROE on a regulatory basis for the year.

Does that projection take into account the expectation that you will in fact achieve zero base O&M growth for the fiscal year?

I think the short answer is, yes.

It certainly, reflects our current expectation on O&M for the year.

I am having trouble recalling exactly what that is for this year.

But clearly, the range that is in the forecasted surveillance report includes our current thinking about O&M for this year.

And that certainly will be significantly off from last year.

Awesome.

And so just to recap what you said, with regard to the ability to earn on the storm hardening portion of your opportunity set, in terms of incremental opportunities for between now and '16.

By definition, you see the ability to hold O&M flat, as creating the head room for sort of that tranche of potential opportunities should the Commission accept them?

Absolutely, yes, Now recognize that most of that head room needs to be created in future years, because most of that spending will ramp up this year, and the higher levels will be attained next year, but absolutely, yes.

Okay.

And then in the next rate cycle, all of that would get rolled into the next rate proceeding?

That is correct.

Okay, great.

The last question -- you talked about how the surplus depreciation in the quarter was $137 million.

You talked about using more in the first half than the second half.

And you said that surplus depreciation use would decline in subsequent years, but the impact of that would be mitigated off -- and/or offset -- and I don't remember the exact language -- by increases in wholesale revenues from contracts coming on?

Can you talk about the size and duration of those contracts?

I don't think I can say anything very specific about the duration.

We did have some discussion in the March investor conference.

There is a slide that I don't recall exact numbers right now, but does show you the magnitude of the impact in 2014.

But we have a significant pickup in 2014 associated with one large contract.

I will circle back off-line.

Thank you.

Okay.

We will take our next question from Jonathan Arnold with Deutsche Bank.

Good morning, Moray.

Good morning.

Just curious on the wind resource update that you talked about.

And I think you mentioned a number of 97%.

Is that on the new basis, so therefore not comparable with -- I think it was 101[%] in Q1 last year or is that --?

Yes.

Thank you, Jonathan, I should have pointed that out.

Yes, that is our best thinking about what the actual wind resources relative to long-term normal trends, so not directly comparable to the prior materials.

Is that was the only number we have so far on the new series basically?

Yes, it is just going to take is a little bit longer.

We have had -- some of the same people who have been involved in certain quarter closing activities which have set us behind where I hoped we would be on that.

But we will get that out soon.

Could you give us any sort of sense -- like I guess on the old basis, like a year 2012 was 6% below normal or 94%?

Is the new normal similar to 2012, or is it less significant than that?

No, the fundamental difference in the recalibration is So there is just kind of a little tweak going on there.

And in short, we think looking back we have actually been over attributing shortfalls to wind resource.

So operating -- the reliability has been slightly less good I guess?

Yes.

And let me give you -- there are lots of instances here, but let me give you one, a little one, but it turns out to be significant.

Each of these turbines has to be aligned to the average wind direction, and the alignment of the turbine instantaneously to the average wind direction has an impact on the power extraction.

So in order to do that, you have to have a vane essentially on the turbine, that allows the control system to figure out where the wind is coming from, to allow the control system to align the turbine optimally with the wind.

If those vanes are slightly out of alignment, and they do have a tendency to get out of alignment over time for various reasons, then you will have the control system not optimally extracting the wind.

So we have had a recent program, where we have been going through and realigning some of these little vanes.

So that may sound like a small item, but being off by couple of degrees, which you wouldn't know notice off of a normal visual inspection, can make a difference.

So there are whole series of things like that.

And we will have more for you on that.

But I felt we couldn't deal with that within the context of the earnings release.

Great.

Thank you very much, Moray.

Thanks.

We will take our next question from Julien Dumoulin-Smith with UBS.

Hi, good morning.

Good morning.

So, first question, you spent a lot of time at the Analyst Day, or at least the presentation on transmission opportunities.

I would be very curious to get your thoughts on FERC 1000, how the compliance filings are working out?

And as of today, what the opportunity set before you by region is?

Sure, I can ask Armando to comment more.

But generally speaking, we are getting actually more encouraged, that more transmission opportunities may be opening up to competition, which we think will give us some opportunities.

But Armando?

And that would have been my first remark, which is FERC Order 1000 is work -- it may work a bit slow, and it may work a bit different by the regions.

But it is clearly working.

I mean, we have seen opportunities come up this year in California, opportunities come up in ISO New England.

We are excited about some things we are looking at in SPP.

And it, so it is one of those things where I look at where we have -- we look at we have the pipeline today, compared to where was a couple of years ago, and it is pretty exciting.

But as we talked about it at the Analyst day, it is not just the US opportunities, or the 48 -- the 48 states.

We have got several opportunities up in Canada that we are pursuing, a bid that we put in earlier this year that we expect to hear back in the third quarter.

Hawaii looks like it might have some opportunities, if those -- that RFP comes out in the second or third quarter of this your.

So as you might imagine, the incumbent utilities have a significant interest in what happens in their home territory, and would like to build the transmission themselves.

But we see continued opportunities.

And in some regions, and states, none of which I will mention at this time, it actually looks like even the state regulators are pushing the traditional utilities to be a bit more open, and either seek partners, or to open up the opportunity entirely to new incumbents.

So that is pretty exciting for us also.

And just putting pen to pen here, when do you think we would hear more definitive or concrete plans around the transmission opportunities outside of Texas?

Well, Jon, I was just going to say, just to put all this in context, as a reminder what we have said is that transmission opportunities that we are working on, are the projects that are likely to come into service in the 2017, 2018 kind of timeframe.

So these are long-term projects.

In addition, I have certainly indicated to a number of people that my -- I personally would be delighted if we could sometime in the course of the next 12 months find that we have succeeded on one of the half dozen or so realistic opportunities that we have.

So I think we have the possibility that sometime in the next 12 months we would have a project to announce.

But even if we do, it will be a project that won't have an earnings impact until well out until the later half of the decade.

But that is fine, because we feel very good about find where we are through the middle of the decade.

Great.

And then, bringing a little bit more near term here.

Looking at New England in the quarter, obviously, you have some assets up there, I suppose a fossil asset you are looking to get rid of, to what extent did that operate?

How did that impact your results, and how do you think about the uplift we have seen at Algonquin of late?

The answer to how much it is operated is very, very little for a long time.

Recognize that these are oil-fired assets, so they are essentially oil-fired peakers in today's environment.

And obviously, with the gas/oil spread being where it is, that has meant that they have just not operated at great deal.

So their impact on operating earnings and cash flow is really immaterial.

But the more fundamental thing is, now in light of the structure, the remaining assets in New England which is really fundamentally have been reduced to our merchant position at Seabrook, and one minor other asset, they are really -- they didn't fit into -- they did not play a role in the portfolio.

So that was the reason for making the decision to discontinue operations there, and seek a purchaser.

Great.

Thank you.

Thanks.

We will take our next question from Hugh Wynne with Sanford Bernstein.

Hi, you had mentioned that you expected a continued positive trend in weather-normalized use per customer.

And I think in your Analyst Day presentation that was forecast at about 0.3% to 0.7% CAGR.

What in your view are the drivers of the positive trend, as opposed to a negative trend in response to the phase-out of traditional incandescent bulbs, and a tendency towards greater efficiency in climate controls and commercial buildings, sort of residential and commercial customers comprising the bulk of your load?

Hugh, I guess, there a couple of things.

First, you have got, I would say cyclical factors.

We are still coming back from a period where average usage per customer was actually down relative to long-term averages.

Second, you have got long-term secular factors which tend to drive modest increases, and then -- I will come back to those in a moment.

And third, those are offset by the factors you mentioned, the efficiency thing.

So we have an explicit view of the impact of efficiency standards, which are primarily in the HVAC and lighting areas.

But that middle category, the sort of long-term drivers of growth, it is fundamentally the long-term economic development.

For long period of time, we have seen that as people get more money, they tend to end up with larger houses, more electronic devices.

They tend to feel a little more free to turn the thermostat down to be comfortable, all of those kinds of things.

And for certainly as long as we have been looking at the statistics, Florida has exceeded the US average, in terms of long run growth in usage per customer.

So I guess the bottom line answer is, we are not expecting to go back to the levels of growth that we saw in the last decade, because we do believe that those efficiency, appliance efficiency standards will have more of an impact.

But when you couple some underlying long-term growth, with the little bit still of recovery from the depressed consumption associated with the recession, we think somewhere in that 0.5% a year over several years is realistic.

Great.

Thank you.

And if I could quickly on the stretch target of achieving basically flat O&M expense per megawatt hour over the '13, '14, '15, '16 period, that implies a very substantial cut in real O&M per megawatt hour.

Is that something that is made possible by the rollout of your automated metering system, or are there other more important drivers that make you think that is feasible?

Well, I would say -- I certainly wouldn't exclude that.

We are definitely seeing all kinds of opportunities from -- arising from the investment that we have made in the so-called smart grid, but that is only one of many things.

If, look, if you go back and look at the long-term trend, we have consistently up through the middle of the last decade driven real O&M per kilowatt hour down substantially.

That trend has started to reverse a little bit or flatten out in the middle of the last decade, and then it reversed a bit with the -- as we went through the recession in the last few years.

So really what we are saying to ourselves, is we ought to be able to get back on the track of long-term real improvement in O&M per kilowatt hour over a multi-year period.

And now that we have the resources, many of which were freed up from the completion of the rate case last year, to focus on the analytical work that is necessary to get us there.

And the ideas that are coming up through this initiative that I referred to, we feel pretty good that we can get back to where we think we should be.

Excellent.

Thank you very much.

Thank you.

And we will take our final question from Ashar Khan with Visium.

Good morning, and congrats.

Moray, can you give us what -- on the slide where you showed what the first quarter rate base was?

Is there a number that you can provide us, that it would be for the end of 2013?

I can certainly get back to you on that.

We have a rough number on where we expect to be, given the CapEx plans, I don't have it off the top of my head.

But, yes, I can get back to you on that.

Okay.

Thank you so much.

Okay.

Thank you very much.

This concludes today's conference.

We thank you for your participation.