NextEra Energy, Inc. Q2 2010 Earnings Call Transcript

Aug. 2.10 | About: NextEra Energy, (NEE)

NextEra Energy, Inc. (NYSE:NEE)

Q2 2010 Earnings Call

July 23, 2010 9:00 am ET


Rebecca Kujawa - IR

Lew Hay - CEO

Armando Pimentel - CFO

Jim Robo - President and COO

Armando Olivera - President and CEO, Florida Power & Light Company

Mitch Davidson - President and CEO, NextEra Energy Resources


Dan Eggers - Credit Suisse

Paul Patterson - Glenrock Associates

Jonathan Arnold - Deutsche Bank

Steve Fleishman - Bank of America

Greg Gordon - Morgan Stanley

Brian Chin - Citi

Jay Dobson - Wunderlich Securities

Angie Storozynski - Macquarie


Good day, everyone, and welcome to the NextEra Energy second quarter 2010 earnings release conference call. At this time for opening remarks, I would like to turn the conference over to Mr. Rebecca Kujawa.

Rebecca Kujawa

Good morning, everyone, and welcome to our second quarter 2010 earnings conference call. Lew Hay, NextEra Energy's Chairman and Chief Executive Officer, will provide an overview of NextEra Energy's performance and recent accomplishments. Lew will be followed by Armando Pimentel, our Chief Financial Officer, who will discuss the specifics of our financial results.

Also joining us this morning are Jim Robo, President and Chief Operating Officer of NextEra Energy; Armando Olivera, President and Chief Executive Officer of Florida Power & Light Company; and Mitch Davidson, President and Chief Executive Officer of NextEra Energy Resources, which we will refer to as Energy Resources during this presentation. Following our prepared remarks, our senior management team will be available to take 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 Investors section of our website, We do not undertake any duty to update any forward-looking statements.

Please also note that today's presentation includes references to adjusted earnings, which is a non-GAAP financial measure. 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 Lew Hay.

Lew Hay

Thank you, Rebecca, and good morning everyone. I'm pleased to report that NextEra Energy grew adjusted earnings per share by 12% over the prior-year quarter from $0.99 to $1.11.

Now, it's important to note that some of this growth is due to the positive effects of weather on our portfolio. The wind resource at Energy Resources was 96% of normal, and we experienced record warm temperatures in Florida. In fact, as measured by cooling degree hours, June was the third hottest month in 60 years in Florida Power & Light's service territory.

However, beyond favorable weather, our strategy of investing in clean, renewable and efficient generation continued to bear fruit. In fact, on a weather-normalized basis, we have achieved a 7% year-to-date increase in adjusted earnings per share compared to the period last year. One example of this strategy at work is our West County Energy Center in Palm Beach County where our new Units 1 and 2 helped second quarter earnings while delivering lower fuel costs and cleaner air for customers.

We have similarly compelling investment opportunities as we look to the future. For example, we announced our decision to invest approximately $2 billion on the modernizations of our Cape Canaveral and Riviera power plants. We estimate these new units will save customers $850 million to $950 million over the life of the plants compared with keeping the existing facilities in the fleet. And they will improve air quality by reducing particulate emissions by an estimated 88% at these sites and improve the plants' carbon dioxide emission rates by roughly 50%.

At Energy Resources, we have approximately 540 megawatts of new wind already in service or under construction and likely to be commissioned in 2010.

In addition to building new wind projects, we continued to make progress in the quarter on signing long-term power purchase agreements for our existing wind projects, which we expect will continue to improve our earnings risk profile in this part of the business. We also announced that we would invest in 100 megawatts of solar thermal generation in Spain. In a few minutes, Armando will bring you up to speed regarding some of the positive recent developments on this project.

As some of you know, I had the privilege of being at the New York Stock Exchange last month to mark the change of our stock ticker symbol to NEE. That was the final step in the process of changing our name from FPL Group to NextEra Energy, which better reflects our scope as one of the largest and cleanest power companies in the industry.

On the national front, the Environmental Protection Agency's proposed new rule governing the emissions of sulfur dioxide and nitrogen oxides has the potential to reshape our sector over the next several years. Those of you who have been listening to these calls for any length of time have heard me say that NextEra Energy is very well positioned for a world where carbon is priced. What sometimes gets lost is that we are also very well positioned for a world where carbon is not priced.

With or without legislation to address climate change, the EPA is moving to strengthen environmental protections in multiple ways that will have a significant impact on the electric power sector. This extends well beyond the agency's recently issued replacement for the Clean Air Interstate Rule. It includes new rules regulating hazardous air pollutants such as mercury, tighter controls on coal ash and of course the EPA's own efforts to regulate carbon emissions.

At NextEra Energy, we are not completely immune to potential adverse effects of these proposed changes, but with roughly 4% of our electricity production fueled by coal and only 3% by oil, we believe our long-term strategy of building a clean generation fleet will prove to be the right one, for the environment and our shareholders alike.

With that, I will now turn the call over to Armando Pimentel before returning for some final comments at the end.

Armando Pimentel

Thank you, Lew, and good morning everyone. I'd like to share a couple of additional accomplishments before getting into the financial details of the quarter.

In April, Energy Resources completed a differential membership transaction designed to support the continued growth of our wind business. This was the second differential membership transaction for Energy Resources and the first since 2007. Our transaction follows the common structure of tax equity partnership deals.

The transaction consisted of a sale of roughly $190 million membership interest in approximately 170 megawatts of wind energy projects in North Dakota. Including some project-level debt issued in a separate transaction, we have recovered approximately 82% of the total capital invested during development of these projects.

The differential membership transaction will allow us to more efficiently utilize the value of tax incentives such as production tax credits by managing the amount of deferred Production Tax Credits on our balance sheet.

We are pleased that the market for differential membership opportunities appears to be opening back up and is a viable option to support the growth plans at Energy Resources at only slightly higher rates than those available before the economic downturn. Including the debt associated with the differential membership transaction, we have completed $638 million in project level finance transactions year-to-date.

Also during the quarter, FPL Group Capital sold $250 million of principal amount of its debentures. Finally, as we highlighted at the Investor Conference in May, Florida Power & Light closed its Global Credit Facility. This new facility is a $500 million, three-year bank revolving credit agreement and is incremental to the existing $2.5 billion credit facility available to FPL. And it is truly global. Only European and Asian banks are participating in the facility.

Let me take a moment to discuss the Dodd-Frank Wall Street Reform and Consumer Protection Act, also known as the Reform Act, which President Obama signed into law this week. The Reform Act grants the CFTC broad authority in determining what entities will be subject to the new rules governing over-the-counter commodity transactions.

While the details of the legislation will become clearer as the regulations are drafted, recent comments from key legislative supporters, including Senators Dodd and Lincoln, indicated that their intent behind the language of the Reform Act was to exclude companies using swaps to hedge or manage commercial risk from many of the new rules. We will continue to closely monitor the regulations, assessing the potential impact on both Florida Power & Light and Energy Resources.

In the second quarter of 2010, NextEra Energy's GAAP net income was $417 million or $1.01 per share compared to $370 million or $0.91 per share during the 2009 second quarter. NextEra Energy's adjusted 2010 second quarter net income and EPS were $457 million and $1.11 per share respectively compared with $401 million or $0.99 per share in 2009.

The difference between the GAAP results and the adjusted results is the exclusion of the mark in our non-qualifying hedge category and the exclusion of net other than temporary impairments on certain investments, or OTTI.

Weather had a positive effect on this quarter's comparable earnings. Compared to normal weather, there were offsetting effects across our portfolio due to the diversity of our company's operations in terms of geography, fuel and other factors.

This slide shows the impact of weather during the second quarter, both against the prior year and against normal. Relative to prior year, weather had a positive impact on both Florida Power & Light and Energy Resources, resulting in a positive $0.07 impact to adjusted earnings per share at NextEra Energy.

At Energy Resources, the wind resource was approximately 96% relative to the long-term expected average, a significant improvement from the prior two quarters and up from the approximately 89% of normal in the second quarter last year. So far in July, the wind resource has been close to normal. Year-to-date, NextEra Energy's consolidated adjusted earnings have been reduced by $0.01 per share relative to normal weather.

For the second quarter, Florida Power & Light reported net income of $265 million compared with $213 million in last year's second quarter. The corresponding contributions to EPS were $0.64 this year compared to $0.52 last year.

The table shown here summarizes the earnings drivers for Florida Power & Light for the just completed quarter. In total, earnings increased by $0.12 per share, driven primarily by weather and the increase in base revenues related to West County Energy Center Units 1 and 2, and the impact of our base rate increase. These results were partially offset by higher O&M costs and lower AFUDC, which are due primarily to the commissioning of these West County Energy Center units.

Included in O&M is $0.03 in costs associated with our workforce reductions, which were implemented during the quarter. Although we are including these costs as part of our adjusted earnings, it is important that we point out that these will obviously not be normally recurring costs.

We are continuing to see some improvement as it relates to our customer metrics. The table in the upper left shows a change in retail kilowatt-hour sales versus last year's comparable period. Overall, retail kilowatt-hour sales grew by 3%, an improvement due primarily to higher weather-related usage. Non-weather-related, or underlying, usage growth, mix and all other, was lower by 0.5%

The graph in the upper right-hand corner indicates a sequential increase in customer accounts. As of June 30, 2010, we had approximately 24,000 more customers than we did at the end of June 2009. As we have discussed on the last two earnings calls, we have been cautiously optimistic that our customer growth has been returning over the last couple of quarters and we are encouraged that it appears that this trend has held up after the end of the winter season.

We consider this customer increase to be a positive development, reversing the negative trend that we were seeing last year.

The graph on the bottom left of the page shows inactive and low usage customers, which we believe depicts the level of empty homes in our service territory. Since the fourth quarter of last year, we have been experiencing improvements in both inactive and low usage customers.

Although inactive accounts rose modestly in the second quarter, the increases were smaller than what we have seen in the past associated with normal seasonal patterns. Low usage accounts have improved modestly since the end of the first quarter.

The chart on the bottom right depicts the level of new housing starts for single family homes in FPL's service territory. Housing starts are a fairly good leading indicator of certain additions to our customer base roughly a year out. Although it appears that housing starts are no longer declining, we have yet to see clear signs that housing starts are significantly improving.

This chart, coupled with the inactive and low usage chart, tells us that our new customers appear to be primarily coming from formerly empty homes. We would expect this trend to continue in the short-term.

And let me just take this opportunity to briefly address the gulf oil spill. While we currently don't see any imminent threat to FPL's coastal plants that are using cooling water from the Gulf or Atlantic Ocean, events of this kind are difficult to predict and we cannot guarantee that we won't experience adverse effects. Although the well appears to be capped, we continue to monitor the effects of the spill around the clock to ensure we are ready to take protective measures should they become necessary.

During the second quarter, several events occurred that will affect the Florida Public Service Commission. In April, the Florida Senate voted not to confirm Commissioners Stephens and Klement. Last week, Governor Crist appointed Ron Brisé and Arthur Graham to fill these vacant positions. These new commissioners will need to be confirmed by the Florida Senate next spring.

Separately, in the next couple of months the Nominating Council will provide additional nominations to Governor Crist, who will then make two new appointments to the commission when the new term begins on January 2, 2011. Ultimately, these new appointments also need to be confirmed by the Florida Senate during the spring.

Yesterday the staff of the Public Service Commission issued their recommendation on the issues outlined in our Motion for Reconsideration on our rate case. The agenda conference is scheduled for August 3. We expect to communicate more after there is resolution on this matter.

Let me now turn to Energy Resources. Since the first quarter of 2009 we have added approximately 1,460 megawatts of new wind and continue to be the nation's leading producer of wind power. We have continued to make progress on our solar development pipeline, which includes more than 500 megawatts of projects expected to be in service by the end of 2014.

To date, we have received $525 million in cash from convertible investment tax credits, or CITCs, including $470 million related to our 2009 wind projects, and $55 million from our 2010 wind development. As we mentioned in the first quarter earnings release, we believe we will elect to take CITCs on roughly 600 megawatts of new wind projects we expect to complete during 2010.

In May, Energy Resources entered into a joint venture agreement with PetroQuest Energy to produce shale gas, primarily in the Woodford region. As we highlighted at our investor conference, we are making relatively modest investments in gas infrastructure, including shale gas production, over the next 5 years, and this transaction is consistent with that strategy.

We believe these investments should offer our shareholders attractive returns with manageable risks. We are already a significant player in the natural gas business due to our position as the largest consumer of natural gas in the power sector, and we think this investment will complement our existing assets and enhance our market knowledge.

For 2010, we are well-hedged against the impacts of natural gas price movements, and very significantly hedged against other price movements, including spark spreads. The appendix to this presentation contains both the typical information we provide to you regarding our hedging status, as well as updates to the incremental information we provided at our investor conference and on our website.

We would like to highlight two changes that we have made to the slides. The first change is to consolidate the gross margin contributions from gas infrastructure investments into one line item. Previously we had new gas infrastructure investments included in the "New Investment" line item, and now new gas infrastructure investments are included with existing gas infrastructure investments in the "Gas Infrastructure" line.

The second change is to the percentage hedged calculation for contracted wind assets. Previously we had assumed that assets that we expected to be contracted in the near term were 100% hedged. The percentage of gross margin hedged now reflects only those PPA's that have actually been executed.

Energy Resources' reported second quarter 2010 GAAP earnings of $154 million, or $0.38 per share compared with $163 million, or $0.40 per share in the prior period. Adjusted earnings for the same periods, which exclude the effect of non-qualifying hedges and net OTTI, were $195 million compared to $194 million. The equivalent adjusted earnings per share contributions were $0.48 in both periods.

As we mentioned in the first quarter, we have changed the methodology for allocating interest and shared cost to affiliates, and the historical figures have been adjusted to reflect the change.

As I just mentioned, Energy Resources' second quarter adjusted EPS was flat relative to last year's comparable quarter.

New wind investments contributed $0.03 per share.

In aggregate, the existing asset portfolio contributed $0.01 relative to the prior year. Our existing wind assets contributed $0.02 driven by better wind resource and lower curtailments in Texas, offset by several factors, none of which are particularly noteworthy.

Contributions from the NEPOOL portfolio improved by $0.02 a share, owing primarily to higher-priced hedges at our Seabrook nuclear facility, which was offset by a negative $0.01 performance from our Texas gas fired facilities as a result of market conditions. The remaining drivers from the existing merchant fleet amounted to negative $0.02, but there is nothing notable in any one category worth calling out.

Wholesale marketing and trading activities were flat relative to the prior year.

Asset sales contributed $0.01, which represents the gain we realized associated with the sale of our 44 megawatt Port of Stockton coal facility that was completed during the quarter.

All other factors were a negative $0.05, primarily due to higher interest expense. It is worth noting that although weather effects compared to normal were better this quarter than the last several quarters, Energy Resources' current quarterly results were lower by roughly $0.04 due to weather versus normal.

I would like to provide a brief update on our wind development plans for the remainder of 2010. Since the fall of 2008, our new construction plans have concentrated on developing wind plants where we believe there is a high likelihood that we would sell the plant's power under long term power purchase agreements.

Although we continue to experience difficult market conditions for power purchase agreements, we have signed 784 megawatts of new PPAs year-to-date, including 247 megawatts on projects expected to be placed in service in 2011.

During the first quarter earnings conference call, I stated that our wind build additions were expected to be between 600 and 850 megawatts in 2010. We currently have approximately 540 megawatts of new wind already in service, or in construction and likely to be commissioned in 2010.

Based on our current state of our development pipeline, we continue to believe that we will add between 600 and 850 megawatts of wind in 2010. For 2011, we continue to plan to add 700 to 1000 megawatts of wind generation. Longer-term, we continue to be optimistic about developing and owning wind and solar energy plants.

I would also like to provide a quick update regarding our concentrated solar development project in Spain that we highlighted at our investor conference. In July, the Spanish government proposed several changes to the solar thermal tariff, the net of which we believe would be roughly neutral for our project.

Regarding the tariff, the government has proposed an ongoing annual cap on the number of hours during which a project can earn the premium tariff and has proposed a fixed rate tariff during the first year of production. We do not believe that either of those proposed changes should significantly alter the economics of our project.

We believe changes to the tariff will be finalized over the course of the next several months, and we are actively working with government officials, banks and other parties involved in renewables development in Spain to support our interests.

To summarize, the 2010 second quarter, on an adjusted basis, FPL contributed $0.64 per share, Energy Resources contributed $0.48 per share and Corporate and Other contributed a negative $0.01 per share. That is a total of $1.11 compared to $0.99 per share in the 2009 second quarter, or about a 12% increase year-over-year.

For 2010, we continue to believe that adjusted EPS expectations within a range of $4.25 and $4.65 are reasonable. In addition, we also believe that 2011 adjusted EPS will fall roughly in the same range.

With that, I'll turn the call over to Lew for some concluding remarks.

Lew Hay

Thanks, Armando. I would like to close with the observation that NextEra Energy remains one of the most compelling growth stories in the electric power sector. At a time when many electric power companies will be experiencing flat or declining earnings, we feel very good about our ability to continue to deliver significant adjusted earnings per share growth.

This is not to say that we don't face some challenges. At Energy Resources in particular, low power prices will create earnings headwinds, and our ability to grow the renewables business will be somewhat constrained as long we have to rely solely on state renewable portfolio standards to stimulate demand.

Even so, the company as a whole continues to enjoy strong growth prospects. At Florida Power & Light, our capital investments are paying off for both customers and shareholders, and we have additional investment opportunities in the form of nuclear uprates and power plant modernizations. Our customer growth has turned positive again, and we see the long-term national demographic trends as fundamentally favorable for Florida and FPL.

At Energy Resources, despite a challenging market for renewables, we still believe we can add 3,500 megawatts to 5,000 megawatts of wind through 2014 and another 400 megawatts to 600 megawatts of solar. Add to that the approximately $800 million we expect to invest in new transmission at Lone Star Transmission, and you'll understand why we are hard-pressed to think of another company in the sector with stronger growth prospects.

This is especially notable in an industry not known for growth. Consider: The average EPS growth rate for our industry as a whole over the last 10 years has been approximately zero. At NextEra Energy, we've grown adjusted EPS on average by 7.7% over that same period. We feel good about our ability to generate average adjusted earnings per share growth of 5% to 7% through 2014 from a 2009 base.

Thank you for listening, and with that, I'll turn the call over for questions.

Question-and-Answer Session


(Operator Instructions) Our first question will come from Dan Eggers with Credit Suisse.

Dan Eggers - Credit Suisse

I was wondering if you guys could share a little more thoughts on the negative usage trends of the utility in the quarter, and what you think is kind of underlying that and the outlook for maybe some improvement?

Armando Pimentel

Yes, Dan, I said it was a 0.5% reduction in non-weather usage. There's a lot of numbers that go into that, and we've been actually looking at that over the last month or so. What I would say is that, and I've said this before, clearly that we are down on weather normalized usage since the very top of what I would call the economic curve back in 2006 or so, and we have talked about that.

Since then, it does look to have flattened out some, I would say in the last year or so. But there are a lot of factors that go into that, including the price of natural gas, which as you know, has been pretty volatile during the last 18 to 24 months. So I wouldn't draw a lot of conclusions from my comment that it's 0.5% down year over year. I think that's more of a trend that we need to see, and I'm not sure that we can actually say that everything in Florida is back to normal, certainly not back to where it was in 2006.

So we are going to have to keep watching that I think over the next several quarters, and maybe even the next year, to figure out how much of a energy efficiency has taken out of that, and how much of that will come back just with normal economic conditions.

Dan Eggers - Credit Suisse

Okay. Thanks. And then I guess, you were effectively in the tax equity market again. How is pricing and the depth of that market? Is there a chance to start monetizing the legacy PTC balance at some point in time as the markets improve?

Armando Pimentel

Yes, I think you can say that I was actually surprised with the depth of the market; and I have said this before, which is overall the demand for paper that's backed by renewable projects, we could call it fixed income paper, we can even call it equity paper, seems to be pretty strong. You know, we got a number of project level debt transactions done this year, and others did too, and it was very clear to us that the demand was strong, because the economics that we were seeing in those transactions was much better than what we were seeing 12 to 18 months ago.

Specifically on the tax equity market, the yields that we were seeing, just last year were double digit after tax yields to the investors. Those are down, and I would say those are down considerably. They are certainly not back to the yields that we were seeing when we did our first transaction back in 2007. But I could say that we are pretty pleased. And I don't think we have formally said what those yields are publicly, but I can tell you that they are pretty far from the double digit number that we were seeing last year that made us feel comfortable to get into the market.

I think the depth is there. The depth will continue to be there. As I said last year, for each one of our projects we actually take a look at weather, taking the convertible ITC or actually taking the production tax credits makes the most sense; and in those situations where the production tax credits makes more sense, it would be very likely at this point because of our tax position for us to go out to the differential membership transaction of the tax equity market.

So we are pretty comfortable with that market, and it might be something that you would see us tap again this year.


Thank you, our next question will come from Paul Patterson with Glenrock Associates.

Paul Patterson - Glenrock Associates

Last time when the staff was going to be filing a recommendation in the rehearing case, you guys and I think the OPC indicated in a letter that you wanted them to delay it, and there have been some press reports indicating that there was a potential for a settlement. This time yesterday the staff came out with a recommendation, and they didn't see any such letter. I guess what I'm sort of wondering is, how should we think about the potential of you guys having a long-term settlement similar to what we saw Progress get a month or so ago?

Armando Pimentel

Let me make a couple of comments and then Armando Olivera may have something to add.

I think that, you know, obviously as a technical matter, any one of the rate regulated entities in Florida can reach a settlement on a longer term settlement on their rates really at any time. And whether you have something in front of the commission or not, you can have discussions with the interveners and other interested parties, and put something in front of the commission.

I have said before that our situation is a little different than what Progress's was, because we do need rate relief, some sort of revenue recovery on West County energy center number three, which is coming into operations in the summer of next year. I think it's certainly a positive development that Progress was able to reach a settlement that presumably they are comfortable with.

And just last week or earlier this week Tampa Electric was able to do the same thing. But we don't comment, we have never commented and we won't comment today, on any discussions that we are having with other parties on this matter.

Armando, I don't know whether you have something to add to that?

Armando Olivera

Paul, as you know, we have not made any decisions on whether to appeal to the Supreme Court of the rate case decision. What we're going to do with cost recovery for West County three, whether we're going to go in for a limited scope hearing and when we may file for a rate case.

So we think now on all those decisions that we have to make, there is always room for negotiations.

Paul Patterson - Glenrock Associates

Armando, is it possible just, I mean, theoretically or historically for you guys to actually still come up with a global settlement for multi-years with all of those issues being resolved? You mentioned a bunch of them. Should we think of that as basically being sort of a really large hurdle that's unlikely to be? I think they did it with (Heinz) and stuff. I guess what I'm trying to say is how should we think about, when you mention all of those items that are happening, is it still possible that those all could be wrapped up sort of together though?

Armando Olivera

Paul, I don't want to go beyond this, the statement that I said. But just to tell you that we have all of these decisions to make in each one of these points. We would always be open to settlement discussions.

Paul Patterson - Glenrock Associates

And then on the appendix in the 2011 portfolio hedging activity and expected gross margin, earlier in the year you guys had expected that the power and gas trading and the power supply businesses, it looks like there's been a bit of a change in those. It looks like power and gas trading is a little bit lower, and it looks like you guys have I think a considerable increase in the supply business. Could you just review what's leading to that outlook change?

Armando Pimentel

Sure, Paul. I think I heard you say 2011 and you may have meant 2010, but the 2011 numbers and the two lines that you just mentioned were roughly negative $10 million in power and gas, and a positive $10 million in power supply. I don't really consider those to be very significant in businesses that in 2011 have less than 50% of that margin locked up.

If you look at 2010, you will see that there is a roughly $45 million reduction in gross margin for power and gas trading, and roughly a $35 million increase in power supply, and that's just what we are seeing this year. Not only are we seeing some significant opportunities come up in the power supply business, the full requirements business, but we have done okay in that business, more okay than we believe that we were going to do in the first quarter.

And on the power and gas trading side of the business, as I think I've mentioned in just about every quarter, I don't think I mentioned it this quarter. And it's really difficult on a quarter-to-quarter basis to predict what's going to happen there. We take advantage of the market opportunities that exist, sometimes they do exist and we do okay in that space, and sometimes they don't exist and we don't do as well as what we expected at the beginning of the year, so that's just a reflection on what we are seeing currently and what we would expect to see for the rest of the year.

Paul Patterson - Glenrock Associates

Okay. I'm sorry. What I'm looking at is, I'm looking at the backlog, and it looks to me like it says power and gas trading 180 to 280, and before I have it at 200 to 310. And I'm looking at the full requirements, when you add them up it's around 185 on the top side, 135 on the lower side for gross margin, and now it looks like the supply business comes out to 170 to 210.

Armando Pimentel

The numbers I just gave you are the midpoints of those gross margin numbers as opposed to taking them at the bottom or the top of the range. That's how I look at it.


We'll hear next from Jonathan Arnold with Deutsche Bank.

Jonathan Arnold - Deutsche Bank

Thank you for the disclosure on PPAs and the wind. I think if I heard it right, you said you had signed 784 megawatts of new ones in calendar year 2010, and the 247 had been for 2011. Can you give us extra granularity, how much of the 784 was on 2009 projects and where are you on the 2009 portfolio now? And maybe some commentary around the AEP transaction of a month or so ago?

Armando Pimentel

We roughly have 400 megawatts or so of projects from 2010 or before 2010 that are uncontracted, Jonathan. And so some of those are from this year and some of those are from prior years. So I think we are having, by all accounts, a pretty good year in signing long-term power purchase agreements based on what we and others are seeing in the market.

That transaction that you just mentioned, that AEP transaction, that is not included in the 784 megawatts. We're selling that power today; we were selling that power before out into the market. We've identified several RFPs in the area where that project would be in good standing to actually fulfill that requirement, but we're not counting that as a signed contract at this point.

We went back and we looked at our information since we have been doing this. We couldn't find another contract that had not been approved by a regulator. We've continued to believe that that's a good project, good location, and it would have made a lot of sense for the customer. But we have to move on; we have to seek the next opportunity in the area, and we feel pretty confident that we will be able to sign a long-term PPA in the near future.

Jonathan Arnold - Deutsche Bank

You said you've got 400 megawatts of pre-2010 that's uncontracted, but you're not saying how much of the contracts are on this year and how much are on pre-2010?

Armando Pimentel

We're not breaking that out, and I don't have the numbers with me. And that's not the way I look at it; I look at it as a big pot. We need contracts for most of that, and so take a look at the 784, as, you know, that's our inventory. It's a pretty good sign-off rate at this point.

Jonathan Arnold - Deutsche Bank

Agreed. If I might, just on another topic, you talked about the financial reform legislation briefly, and the intent being to exclude companies that use swaps to hedge. Do you have any feeling at this point about potential implications for your trading and/or the retail business?

Armando Pimentel

I don't. It's been an extremely interesting process, and I don't say that lightly. I mean, we have a law now, law of the land, but we've got a heck of a lot of rules that need to be written, particularly by the CFTC. And they've got a deadline to write some of those rules within three months, six months, and some of those rules within a year.

The definitions of swap dealers, the definitions of commercial end users, the definitions of really what derivatives are, are going to be very important in the final interpretations. I can tell you that the letter from Senators Dodd and Lincoln seems to have made a big difference.

I think most folks that believe that they are just hedging for commercial purposes, and they take physical delivery of the product, are feeling like, well, this rule is not necessarily going to affect me. And I use 'affect' pretty narrowly. In other words, it's not going to affect me because I may not have to clear it through an exchange, and therefore provide mark-to-market margin.

But even for those folks, it's unclear whether there are going to be changes in the marketplace, i.e. with derivative counterparties that will actually flow back and change how they do business. But at least I feel much better on that side of the business.

The other side, or I'll call it the middle side of the business, and those folks, many folks like us that are dynamic hedgers, I mean, we clearly are hedging our assets longer-term, but in some cases we put on a hedge, and we take off a hedge and we put on another hedge for economic purposes, clearly a strategy that most people in the country do.

That pot's in the middle. I'd say that you should fall under the exception for commercial end users and you should be okay, but we are going to have to see that in the rules. The rest of the business, I just don't know. Clearly, we and others have a lot of interest. EEI has a lot of interest in how the rules are going to be written by the CFTC, but at this point I just don't see a giant change to anything that we do.

Jonathan Arnold - Deutsche Bank

And is that including within the pure trading operation?

Armando Pimentel

Yes, I mean, a lot of the stuff in what I call the pure trading operation is already on exchanges. So I mean there might be changes, but where I sit today, I just don't see any giant changes in what we do.


We'll hear next from Bank of America's Steve Fleishman.

Steve Fleishman - Bank of America

I guess two questions, first on the regulatory side. My recollection is, when you gave this 2011 flat guidance, you assumed that West County 3 was not recovered. Is that correct, in 2011?

Armando Pimentel

Yes, that is correct.

Steve Fleishman - Bank of America

Do you feel any better with some of the changes made, that you'll be able to find a solution to recover that on a timely basis? And if so, what would that do to the guidance range, or within the guidance range?

Armando Pimentel

Steve, I think it's a little earlier for me and for us to say that we feel any better or any worse about the recovery of West County 3. I mean, clearly we feel that longer term, we're going to get recovery, and feel pretty good about the return that we would get longer-term for putting that asset in service.

As it relates to 2011, though, I think Armando Olivera was pretty clear that there's just a number of items that we have in front of us that we have to get through. And it's just really too early for us to say what, if any, effects would be different from what we gave you back in 2011.

One of the things that I want to make sure that we say, and Lew talked about it at the beginning as it dealt with the modernizations, Cape Canaveral and Riviera, but there are significant customer savings associated with us bringing these plants online; very, very significant. At this point when you go back to where we are at right now, these are great plants for us to bring online, and for our customers to be getting power from.

So that's why I feel comfortable that longer-term, the recovery and the return for our shareholders will be there. But as it relates to 2011, it's just too early for us to say what's going to happen.

Steve Fleishman - Bank of America

And then on a separate topic, just maybe if you guys could give us some update on what you're seeing in federal legislation. It looks like we're not going to have an energy bill with carbon or renewable standards. Any update on those issues, but also any update on the renewable tax credit issues?

Armando Pimentel

Well, that's a great question. Obviously there's been a lot of press in the last couple of days as to the Senate, and not moving forward on a comprehensive energy bill.

A little disappointing from our side. I'll actually go a little further than that, very disappointing from our side, because we continue to believe that lopping together something on longer-term pricing for carbon, a bill that would also include some incentives for renewable generation, potentially transmission, would not only be good for the economic side of what we are facing right now in the US, but would be tremendous benefit to the public at large.

And as Lew has mentioned before, that if we don't get on with it, that other countries in the world certainly aren't going to hold back, and eventually we will lose the small head start that we have in overall renewable technology here in the U.S. So as far as the future, I don't know. I mean, certainly none of us can predict the future.

It doesn't look like the current Congress has any appetite to try to tackle it before the elections. I doubt seriously that it would be tackled between the elections and when the next Congress gets sworn in. So it's probably something that we will be looking at in 2011. Beyond that, there's really nothing else.

I think Lew has something to say.

Lew Hay

Yes, the only thing I want to add to that is, even though the Congress isn't taking it up, EPA is not stopping. They are moving forward on a whole host of regulations, some of which are directly dealing with carbon, but others will indirectly deal with carbon. And whether it's mercury, coal, ash, the (haps) or just what they are doing on carbon directly, there's still a lot of changes that are going to be impacting our industry, and frankly going to make certain plants in the country uneconomic.

So there's effectively going to be a price on carbon, and you might even argue it's a differential price by region, by plant, whatever, and there's clearly a lot more uncertainty. It's not where we would like things to be, and I don't think it's where most people in our industry would like things to be.

So there's still going to be pressure to do something, because this is clearly not the optimal way to be regulating emissions in our industry.


Our next question will come from Greg Gordon with Morgan Stanley.

Greg Gordon - Morgan Stanley

Most of my questions frankly, have been answered quite thoroughly. But could you delve a little bit further into what's going on, both in the pure sort of gas and power markets vis-à-vis the drop in opportunities? Is that really because of sort of a diminishing liquidity as everyone kind of steps back to try to figure out these rules? And so sort of post-CFTC getting on with putting the details in front of us, should we see an increase in liquidity, and then an increase in profit-making opportunity in that business? That's my first question. Or am I making a false correlation there?

Second question is, on the retail side of the business in terms of the increase you've seen in opportunities, is that really just because of the spread between retail pricing and wholesale pricing? Is that because customers are becoming less sticky? Is there any particular market in which you've made inroads? So that's just two questions but I guess in 27 parts.

Armando Pimentel

Greg, let me make sure I understand your first question that dealt with the power and gas markets. Are you talking about project development opportunities?

Greg Gordon - Morgan Stanley

The pure trading activity, has it diminished because of the uncertainty around the rules, and is that part of the reason why the margin opportunity is diminished?

Armando Pimentel

I guess what we hear and what you'll hear, you should certainly hear from others is, and it's no different in our space than it would be in the financial space; but when there's a limit on volatility in prices, that tends to dampen down on the opportunities that are available in the market.

Folks that are in this business every day, and are buying and selling the commodity, not necessarily for physical delivery, love to see volatility in the markets, whether it's volatility on the way up or volatility on the way down. When you start limiting the amount of volatility, especially in the short-term, that tends to drive down the number of opportunities.

At least at this point, I don't think that it's uncertainty over the financial regulatory reform. Although some of our larger counterparties, which would be the banks, are clearly very concerned as to what this is going to mean from a capital allocation standpoint. But that might be something that plays out in the future, but at least what we've seen in the past, it's really just a lack of volatility in the commodity market, at least in the gas and power market.

Your second point about, because I did mention we are doing a little bit better on the full requirements front than what we expected to do at the beginning of the year, I don't know that you can attribute it to any one factor. I think the factors certainly that you pointed out, which have to deal with retail pricing and the spread there is one, but I think it's also the number of people that are in the market.

You know, we're seeing, especially in some of what I would call the larger transactions, we're not seeing as many people in the market as we were seeing before. That doesn't necessarily mean that there won't be. One of the larger players that, I won't mention who that is, but one of the larger players that seemed to have pulled out of the market last year is now back in very aggressively. So I think it changes, maybe as management focus changes as they perceive opportunities.

But at least for the rest of this year, we feel relatively comfortable that the small piece of business that we do there will continue to come to us.

Greg Gordon - Morgan Stanley

So you're seeing more wins in the big sort of wholesale load serving options, not necessarily a big increase in penetration in competitive retail?

Armando Pimentel

Yes. I mean, it's certainly growing; your latter comment. But I wouldn't say it's a significant increase in penetration and new markets.


We'll go next to Citi's Brian Chin.

Brian Chin - Citi

You had made a comment earlier on the Motion for Reconsideration that the agenda conference is scheduled for August 3 and you expect to communicate more after there's a resolution on the matter. Should I take from your comment that you expect resolution of the matter to occur on August 3, or am I reading too much into that comment?

Armando Pimentel

Well, you're reading a little too much into the comment. I actually didn't say much in my prepared remarks. I think it was three sentences, and they were factual sentences. And that sentence was meant to deal with the fact that the agenda conference is scheduled for August 3. So it was really just a factual kind of matter.

I wouldn't read anything more into my comments. Armando Olivera made some very good points as to what's in front of us and what the opportunities might be for something else to happen. And beyond that, we really just can't comment on it.


We'll hear next from Jay Dobson with Wunderlich Securities.

Jay Dobson - Wunderlich Securities

Armando, I was wondering if you could just help me get a little more clarity around the contracting environment for wind. You said in your prepared comments it remains difficult, which I think we have heard from many. But I'm wondering if you can just try and compare Q1 to Q2, because obviously you're having a reasonable amount of success contracting 784 in what is otherwise a difficult environment.

So I guess if we sort of drill down there a little bit, is it fair to say we are seeing some glimmers of hope and it's getting a little easier, or is it just still equally as difficult as it was in the first quarter, and you all are just having successes for a myriad of reasons? Just help me understand that.

Armando Pimentel

I'm not being critical, Jay. I don't know that I'd use the word 'easy' in any comment that I would make regarding the contracting market. I think I would say, and we've said before, that all other things held constant, as load picks up because the economy picks up, folks feel better; and by folks, I mean our potential customers. The large utilities feel better about taking on longer-term contracts to meet their own obligations, which is, as load decreased over the last couple of years that the amount of power that they were getting from renewable sources, hence increased. And as the economy gets better, as folks start feeling better, I do believe that the opportunities will continue to pick up for us.

The environment clearly is not as difficult as it was last year. But as I mentioned, both in the fourth quarter last year and in the first quarter this year, it's a number of factors; it's not just the reduction in load, it's really the uncertainty as to what's going on a Federal level regarding energy legislation. It's also the fact that production tax credits do not expire at the end of this year. I mean, it's a number of factors.

And so, although as a team we feel very good about having signed 784 megawatts of wind this year, and feel very good about 247 of that being for next year, we recognize that wind build across the U.S. is down. I don't think AWI has come out with their second quarter numbers yet, but I would expect that when they do come out, they are not going to be numbers that we can all kind of jump on the table and cheer about.

But in that environment, we continue to do I think very well; 600 to 850 this year, 700 to 1,000 next year, 784 signed this year. We feel better about what we are doing, we feel better about our development opportunities, but it's a really, really far cry as to what we were seeing back in 2007. I don't know that I can add any more color to that, Jay.

Jay Dobson - Wunderlich Securities

That's very helpful. I guess the only thing I would ask is, is again, you're saying it's better than '09, and I'm just wondering, it sounds like it's just the same as Q1. So in any sequential change, you would say there's none relative to that environment, and fully understand it's a myriad of elements.

Armando Pimentel

I just don't think there's enough of talking difference between the first and second quarter really for me to kind of paint a line in the sand and say its better or it's the same.

Jay Dobson - Wunderlich Securities

That's very fair. And then on the acquisition environment, you all didn't address that, and I know it's always things you look at, so maybe there's nothing to say, but wind acquisitions as it applies to 2010?

Armando Pimentel

Sometimes I feel like a yo-yo on this, right? I felt good about potential acquisitions fourth quarter of last year as to what we had going forward. I think in the first quarter I made comments that I wasn't as positive that something might be able to get done by the end of this year on the asset front as I had felt last year. Sitting here today, I feel a little better than the comments that I made in the fourth quarter last year. But it takes two to tango, if you will.

There's been a number of transactions, as you know, that have been pulled from the market this year because folks didn't like the price that us and others kind of put on the table. Whether that changes or not, the rest of the year remains to be seen. We continue to be active, looking at a number of projects, but the price that we are willing to pay is a price that gives us a good return for our shareholders, and this is not the market that it was in 2006 and 2007, even 2008, when some of these folks first got into these projects, first started getting permits, first started getting their wind turbines ordered at a pretty high price.

So everybody has got to get comfortable with the ultimate transaction price. But the final thought that I would leave you with. is we are looking at a number of opportunities that we think would be great opportunities if they come to fruition.


Will take our next question from Angie Storozynski with Macquarie.

Angie Storozynski - Macquarie

Just wanted to continue the wind questions. Given where natural gas prices are, and if not for the heat, one could speculate if the forward curve wouldn't be lower as of today. How can you be convinced about your growth prospects beyond, say, 2011? You're hoping to exceed the 700 to 1,000 megawatts per annum growth expectations. We are not seeing any extension, at least for now for cash grants. There is no settled renewable energy standards in the works anymore. So what's the basis for the enthusiasm?

Jim Robo

First of all, even though the short-term power prices are well right now, and I think all of us agree, the fact that load is down and short-term power prices are low, it takes away an incentive for customers to sign long-term agreements right now. When you look at it, the value of the long-term wind contract, relative to our customers' site plans or our customers' integrated resource plans, the value of wind remains very compelling on a long-term basis.

And so we feel very comfortable from that standpoint. There continues to be demand from a state RPS standpoint. We would all love to have a federal RPS. And none of us have given up on the fact that we may get one sometime in the future. But in the meantime, there remain significant pockets of demand. And to give you a sense, our view this year, I think we said at the earnings conference that this would be a 4000 to 6000 megawatt year build. I think some of us would say it's probably closer to 4000 or 5000 megawatt build in the U.S. this year. That's still what the build was in I think '06 or '07, and we did 1000 megawatts in '06 and '07.

So fundamentally, I continue to feel in the long term very bullish about wind, and particularly because it remains a tremendous value to our customers in the long term.

Angie Storozynski - Macquarie

And one more question about the reclassification of hedge disclosure. So why would you classify wind farms that are likely to get contracted? Is that your perception of the market appetite for those wind farms? And that means that those new contracts are really going to happen within the next quarter, and that you classify them as contracted?

Jim Robo

Really, two parts to that. The first part is, we had historically included those wind projects that we did not consider hedged. So a lot of the construction that we did in Texas in '05, '06 and '07, we never expected those to be long-term contracted. And we expected those to be hedged on a long-term basis. And so we have historically treated those separately as hedged wind in our disclosure.

But really everywhere else in the U.S., we always expected those to be long-term contracted. And I have talked before about the fact that some of our wind don't have long term contracts, but we continue to include them in contracted. What we did this quarter was just to change that a bit; we continue to put them in contracted because again that's our expectation that we will have long term contracts or wouldn't have built the projects in the first place.

But we changed the percentage hedged so that we no longer include in the gross margin hedged; we no longer include that margin that is not contracted. So I consider it a small change. We continue to feel comfortable. We have 7600 megawatts of wind, roughly 400 of that is uncontracted; roughly 16 to 1700 of that is hedged. So the 400 is a very small number in the overall scheme of things.

I just wanted to make the change in the gross margin table because I just kind of felt better about it actually.


And that is all the time we have for questions. So I would like to turn the call back to our speakers for any closing remarks.

Rebecca Kujawa

Thank you everyone for joining us today, and we look forward to speak with you again soon.


That does conclude today's presentation. We thank you for your participation.

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Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to All other use is prohibited.


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