NextEra Energy Management Discusses Q1 2013 Results - Earnings Call Transcript

Apr.30.13 | About: NextEra Energy, (NEE)

NextEra Energy (NYSE:NEE)

Q1 2013 Earnings Call

April 30, 2013 9:00 am ET

Executives

Julie Holmes

Moray P. Dewhurst - Vice Chairman, Chief Financial Officer and Executive Vice President - Finance

James L. Robo - Chief Executive Officer, President, Chief Operating Officer, Director and Member of Executive Committee

Armando Pimentel - Chief Executive Officer and President

Analysts

Dan Eggers - Crédit Suisse AG, Research Division

Paul T. Ridzon - KeyBanc Capital Markets Inc., Research Division

Steven Fleishman

Michael J. Lapides - Goldman Sachs Group Inc., Research Division

Paul Patterson - Glenrock Associates LLC

Stephen Byrd - Morgan Stanley, Research Division

Greg Gordon - ISI Group Inc., Research Division

Jonathan P. Arnold - Deutsche Bank AG, Research Division

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

Hugh Wynne - Sanford C. Bernstein & Co., LLC., Research Division

Ashar Khan

Operator

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.

Julie Holmes

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 of 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, in the comments made during this conference call, in the Risk Factors section of the accompanying presentation or in our latest reports and filings with the Securities and Exchange Commission, each of which can be found 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 reconciliations of the non-GAAP measure to the closest GAAP financial measure. With that, I will turn the call over to Moray.

Moray P. Dewhurst

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

At FPL, we maintained a regulatory ROE of 11%, while we continued 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 3 of FPL's major capital projects are now complete. The successful repowering of 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 3 unusual items: the gain on the sale of our Maine hydro assets, a charge associated with our decision to sell our 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 U.S. 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 2 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 U.S. 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 Lonestar 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 deployment 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 systems' 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 an 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 through 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 U.S. wind and 40 megawatts of new U.S. solar projects. We have a strong pipeline of additional projects and continue to expect to develop between 500 megawatts and 1,500 megawatts of new contracted U.S. wind and up to 300 megawatts of new contracted solar projects over the next 4 years, equating to an incremental capital investment of somewhere between $1 billion and $4 billion.

Based on the opportunities we see over the next 4 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 on to 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 same quarter last year was the main driver of growth in net income of approximately 20%. The remaining difference was a function of a 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 deployed, 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 2 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 investment.

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 3 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 the plants.

Other developments at FPL during the quarter include progress on our proposed acquisition of 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 is now 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-Shiller 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 remained 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 5 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 non-qualifying hedges and net other than temporary impairments on certain investments, or OTTI.

In addition, we have excluded 3 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'll provide more details on these items in just a moment.

Energy Resources' adjusted EPS contribution was slightly negative compared to the same quarter of last year, decreasing $0.02. The primary drivers for the quarter were lower wind generation of $0.06 and PTC roll-off of $0.01, partially offset by the absence of the Seabrook derate 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 closeouts. 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 3 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 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, 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 if 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 2 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 deploy $1 billion to $3 billion in incremental capital and add between 500 and 1,500 megawatts of U.S. wind capacity in 2013 and 2014, and we see opportunities for a further up to $1 billion of incremental capital investment to support our target of up to 300 megawatts of new solar projects through to 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 net 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 in 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'll 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've made a good start in our effort 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 U.S. 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 to $5, and we see nothing that would change the ranges of earnings 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 for questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Dan Eggers with Crédit Suisse.

Dan Eggers - Crédit Suisse AG, Research Division

Just turning to the wind conversation a little bit with the range now out there of 500 to 1,500 for the next 2 years. Is that 1,500 megawatt, the top end number, is that a reflection of kind of the logistical limitations of you guys building that much wind in a short amount of time? Or do you think there's the ability, at some point, to maybe surpass that given the compelling economics of wind with the tax credit still sitting out there?

Moray P. Dewhurst

Well, Dan, I would say that the whole range is based on our total assessment of what's 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 is a good upper end for the U.S. wind program.

Dan Eggers - Crédit Suisse AG, Research Division

And then have you thought about kind of the way the IRS interpretation? I mean, it looks like there's maybe some ability to even go beyond 2014 from a development perspective. Do you guys see a window where this could expand into 2015?

Moray P. Dewhurst

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

Dan Eggers - Crédit Suisse AG, Research Division

Okay. And then on solar, obviously, you guys kind of rescaled on 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 maybe to see some of these projects move forward?

Moray P. Dewhurst

I guess I would just divide the solar pipeline into the 2 parts. I think obviously, with just announcing 2 small projects here, I think there could be several more of those. We've previously noted that there's probably not more than one more large scale project to come that could -- would -- certainly we could have success on that in this year, or not. So I mean it's a little difficult to say exactly when it's going to happen. Armando, do you want -- do you have any other comments? Armando is shaking his head, so that's all we've got.

Dan Eggers - Crédit Suisse AG, Research Division

Okay. And I guess just the last one. Again, I guess, it looks like we had a light performance from a wind utilization perspective. A, how far off were you guys versus normal? Because I didn't see it in the slides. And then b, is there a time when we need to reevaluate 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?

Moray P. Dewhurst

Well, I guess, there's 2 parts to the answer to that question. First, on the wind resource, just numerically, in the first quarter we're about 97%. It's 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's any question about that. The second part of the answer, however, is that we are right in the midst of essentially recalibrating all our wind models. And the reason that I pulled the wind resource slide from the release this time is that we -- while we have a new set of numbers, they are not directly comparable to the ones that we have been presenting. So I was a little concerned that people would compare one with the other and come to misleading conclusions. So we will be putting those back out once we have a better basis for comparisons on that. 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 can have several years in a row where you are below average, and that is statistically perfectly normal.

Operator

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

Paul T. Ridzon - KeyBanc Capital Markets Inc., Research Division

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

Moray P. Dewhurst

I think you may have been picking up the reference to corporate and other. As we've 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.

Paul T. Ridzon - KeyBanc Capital Markets Inc., Research Division

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

Moray P. Dewhurst

The forecasted surveillance report for the remainder of the year is -- comes in at about 11.25%. So yes, that's roughly what we're thinking at the moment based on what we see.

Paul T. Ridzon - KeyBanc Capital Markets Inc., Research Division

And then lastly, have you initiated discussions in Spain? And what's the outlook for resolution here aside from walking away?

Moray P. Dewhurst

I think as a practical matter it's going to take some time to resolve the situation. We are in active discussion with our bank group. But for commercial reasons, I don't think it would be appropriate for me to say more.

Paul T. Ridzon - KeyBanc Capital Markets Inc., Research Division

And I guess, from our current position, the way you've characterized Spain, there's nothing but upside from here. Is that fair?

Moray P. Dewhurst

I can't absolutely say that there's 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.

Operator

We'll take our next question from Steven Fleishman.

Steven Fleishman

Just a couple questions. The 2013, '14 EBITDAs 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?

Moray P. Dewhurst

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

Steven Fleishman

Okay. And then you mentioned the good kind of market conditions for the supply trading. Could you give us maybe a little more color on that? Which business within that benefited?

Moray P. Dewhurst

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. As I recall, it was mostly concentrated in the PJM deals, more than NEPOOL. 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.

Steven Fleishman

And then retail was fine?

Moray P. Dewhurst

Retail was -- yes. Flat where we expected it to be.

Steven Fleishman

Okay. One other question, just the -- there's, 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 things, bad things and how that ties into whether we can get another PTC extension?

Moray P. Dewhurst

Sure. Let me ask Jim to comment on that one.

James L. Robo

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's not really a replacement for the PTC. And that's because this bill doesn't 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 allocable to the investors. And so it's a terrific vehicle for old wind assets coming off of a 10-year -- coming off of their 10-year PTC window, and that's terrific. And we think as the largest owner of those kind of assets, that 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.

Operator

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

Michael J. Lapides - Goldman Sachs Group Inc., Research Division

On the utility, you mentioned the storm hardening program and that you would make a filing tomorrow. But that -- and I wanted to make sure I understood this, that you wouldn't be seeking full recovery via a rider. Could you just give a little more granularity about what's recovered via rider? What you would kind of utilize AFUDC earnings to capture for the next few years. And then when would you put this into cash rates?

Moray P. Dewhurst

Sure. Let me try and see if I can take those. 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 indicate -- based on the work that we've done to date, we can see very significant benefits from the hardening activities that we've 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 rates that we can see out through 2016. In 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's 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 noncash impact, potentially, within this period, but we'd 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 3 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's 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 productivity is that the more progress we can make on the productivity side, not only do we make the business better in and of itself, but we also create what I call the headroom to enable us to do additional capital activities that are good for customer and will provide long-term value creation potential for the shareholder.

Michael J. Lapides - Goldman Sachs Group Inc., Research Division

Got it. One other piece, just on O&M at the utility. Year-over-year O&M was down a good bit. Just I didn't know if there were onetimey items -- onetimer items in the 2012 quarter? Or just could you give a little detail there?

Moray P. Dewhurst

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 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.

Operator

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

Paul Patterson - Glenrock Associates LLC

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'm not sure what the official term is, but the IRS letter or whatever, in terms of the PTCs and the ITCs. I know you guys are focused on this year and next, but could you just 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?

Moray P. Dewhurst

Frankly, we haven't focused much thought or time on what the implication is for 2015. I think -- at least the way we see it, we have a great window of opportunity to build another portfolio of U.S. 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, haven't been focused on 2015.

Operator

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

Stephen Byrd - Morgan Stanley, Research Division

Most of my questions have also been asked and answered, but one on just 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 had 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?

Moray P. Dewhurst

We don't attach a great deal of significance to any one 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 can't put my finger on any particular drivers in there. It does fluctuate a fair amount from quarter-to-quarter. So going forward, I still think we're 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 a 1% or flat to slightly down as we were this quarter.

Stephen Byrd - Morgan Stanley, Research Division

Okay, because -- so it sounds like within customer classes, different class, so you didn't see any one class that really stuck out to you as being different than expectations.

Moray P. Dewhurst

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

Operator

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

Greg Gordon - ISI Group Inc., Research Division

Just a couple things. In the projection that you'll earn the -- 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 0 base O&M growth for the fiscal year?

Moray P. Dewhurst

I think the short answer is yes. It certainly reflects our current expectation on O&M for the year. I'm having trouble recalling exactly what that is for this year. But clearly, the range that's in this forecasted surveillance report includes our current thinking about O&M for this year, and that certainly won't be significantly off from last year.

Greg Gordon - ISI Group Inc., Research Division

Awesome. And so just to recap what you said with regard to the ability to sort of earn on the storm hardening portion of sort 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 is creating the headroom for sort of that tranche of potential opportunities should the commission accept them?

Moray P. Dewhurst

Absolutely, yes. Now recognize that most of that, the headroom, 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.

Greg Gordon - ISI Group Inc., Research Division

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

Moray P. Dewhurst

That's correct.

Greg Gordon - ISI Group Inc., Research Division

Okay, great. 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. Then you said that surplus depreciation use would decline in subsequent years but the impact of that would be mitigated and/or offset, 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?

Moray P. Dewhurst

I don't think I can say anything very specific about the duration. We did have some discussion, in the March investor conference there's 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.

Operator

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

Jonathan P. Arnold - Deutsche Bank AG, Research Division

Just curious on the wind resource update that you talked about. And I think you had mentioned a number of 97%. Is that on the new basis, so therefore not comparable with, I think, it was 101 [ph] in Q1 last year? Or is that given all...

Moray P. Dewhurst

Yes. Thank you, Jonathan. I should have pointed that out. Yes, that is the current best thinking about what the actual wind resources relative to long-term normal trends. So not directly comparable to the prior materials.

Jonathan P. Arnold - Deutsche Bank AG, Research Division

So that's the only number we have so far on the new series basically?

Moray P. Dewhurst

Yes. It's just going to take us a little bit longer. We've had -- some of the same people have been involved in certain quarter closing activities, which have set us behind where I had hoped we would be on that, but we will get that out soon.

Jonathan P. Arnold - Deutsche Bank AG, Research Division

And could you give us any sort of sense, I guess, on the old basis, like the year 2012 was 6% below normal or 94%. Is the new normal similar to 2012? Or is it less significant than that?

Moray P. Dewhurst

No. The fundamental difference in the recalibration is -- the simple way to think about it is we are recalibrating how much of the output we really think is driven by variability in wind resource as opposed to variation in other factors, including asset availability, curtailments and a variety of other things. There was just kind of a little tweak going on there. And in short, we think, looking back, we've actually been over-attributing shortfalls to wind resource.

Jonathan P. Arnold - Deutsche Bank AG, Research Division

So operating, the reliability has been slightly less good, I guess.

Moray P. Dewhurst

Yes. And let me give you -- there are lots of instances here, but let me give you one 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 vein, 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 veins 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've had a recent program where we have been going through and realigning some of these little veins. So that may sound like a small item, but being off by a couple degrees, which you wouldn't notice off a regular visional inspection, can make a difference. So there's a whole series of things like that. And we'll have more for you on that, but I felt we couldn't deal with that within the context of the earnings release.

Operator

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

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

So first question. You spent a lot of time at the Analyst Day or at least the presentation on transmission opportunities. I'd 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.

Moray P. Dewhurst

Sure, I'd ask Armando to comment more. But generally speaking, we're getting actually more encouraged that more transmission opportunities may be opening up to competition, which we think will give us some opportunities. But Armando?

Armando Pimentel

And that would have been my first remark, which is FERC Order 1000 is working. It may work a bit slow and it may work a bit different by the regions, but it's clearly working. I mean, we've seen opportunities come up this year in California. Opportunities come up in ISO New England. We're excited about some things that we're looking at in SPP. And it's -- so it's one of those things where I look at where we have -- we look at -- we have the pipeline today compared to where it was a couple years ago, and it's pretty exciting. But as we talked about at the Analyst Day, it's not just the U.S. opportunities or the 48 states. We've got several opportunities up in Canada that we're 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 year. 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'll 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's pretty exciting for us also.

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

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

Moray P. Dewhurst

Well, Julien, I was just going to say, just to put all this in context, as a reminder, what we have said is the transmission opportunities that we're working are the projects that are likely to come into service in the 2017, 2018 kind of time frame. 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 a 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 would be a project that won't have an earnings impact until well out into the latter half of the decade. But that's fine, because we feel very good about where we are through the middle of the decade.

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

Great. And then bringing it a little bit nearer term here. Looking at New England in the quarter, obviously, you have some assets up there, I suppose a fossil asset that you're 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've seen at Algonquin of late?

Moray P. Dewhurst

The answer to how much is operated is very, very little for a long time. Recognize, 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 they have just not operated a great deal. So their impact on operating earnings and cash flow really immaterial. But the more fundamental thing is now in light of the structure of the remaining assets in New England, which has really fundamentally been reduced to a merchant position at Seabrook and one minor other asset, they really -- they didn't fit into -- they didn't play a role in the portfolio. So that was the reason for making the decision to discontinue operations there and seek a purchaser.

Operator

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

Hugh Wynne - Sanford C. Bernstein & Co., LLC., Research Division

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 forecasted about 0.3% to 0.7% CAGR. What, in your view, are the drivers of a 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 in commercial buildings, residential and commercial customers comprising the bulk of your load?

Moray P. Dewhurst

Hugh, I guess there are couple of things. First, you've 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've got long-term secular factors, which tend to drive modest increases, and then -- and I'll come back to those in the moment. And then third, you've got -- 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's fundamentally the long-term economic development. For a 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've been looking at the statistics, Florida has exceeded the U.S. average in terms of long-run growth in usage per customer. So I guess the bottom line answer is we're 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 a 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.

Hugh Wynne - Sanford C. Bernstein & Co., LLC., Research Division

Great. 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 fairly substantial cut in real O&M per megawatt hour. Is that something that's made possible by the rollout of your automated metering system? Or are there other more important drivers that make you think that, that's feasible?

Moray P. Dewhurst

Well, I would say I would -- I certainly wouldn't exclude that. We are definitely seeing all kinds of opportunities from -- arising from the investment that we've made in the so-called smart grid. But that's only one of many things. 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 started to reverse a little bit or flattened 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're 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 multiyear 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's 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.

Operator

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

Ashar Khan

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 would be for the end of 2013?

Moray P. Dewhurst

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 very much.

Operator

This concludes today's conference. We thank you for your participation.

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