Avangrid, Inc. (NYSE:AGR) Q1 2016 Results Earnings Conference Call April 26, 2016 10:00 AM ET
Patricia Cosgel - VP IR
Jim Torgerson - CEO
Rich Nicholas - SVP & CFO
Bob Kump - CEO of Avangrid Network
Frank Burkhartsmeyer - CEO of Avangrid Renewable
Andy Levi - Avon Capital Advisors
Christopher Turnure - JPMorgan
Paul Patterson - Glenrock Associates
Joe Zhou - Avon Capital
Good morning. My name is Kissie. I would like to welcome everyone to the Avangrid First Quarter 2016 Earnings Conference Call.
I would like to turn the call over to Ms. Patricia Cosgel.
Thank you, Kissie and good morning to everyone. Thank you for joining us to discuss Avangrid’s first quarter 2016 earnings results. I’m Patricia Cosgel, Vice President of Investor and Shareholder relations.
Presenting on the call today are Jim Torgerson our Chief Executive Officer and Rich Nicholas our Chief Financial Officer; Bob Kump, our Chief Executive Officer for Avangrid Network and Frank Burkhartsmeyer, and our Chief Executive Officer of Avangrid Renewables will also be participating on the call.
If you do not have a copy of our press release or presentation for today’s call, they're on our website at www.avangrid.com. During today’s call we will make various forward-looking statements within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Significant factors that could cause results to differ from those anticipated are described in our earning release and filings with the SEC.
With that said, I’d turn the call over to Jim Torgerson.
Thanks Patricia and good morning, everyone and thanks for attending our earnings conference call.
We had an excellent first quarter at Avangrid and we had strong performance from all of our businesses. As you can see from our press release, the net income and earnings per share were up 24% to $212 million of net income and $0.69 per share. Now that’s up on a adjusted basis including UIL from 2015.
So adjusted EBITDA grew 8% to $575 million and earnings growth in all of our business and we had very strong cash flow. Now this was a result of improvement in operating expense and the revenue decoupling we have at most of the utilities offset some of the milled winter weather.
We did have some impacted at Berkshire Gas and Southern Connecticut Gas where the heating degree days were like 10.6% warmer than normal our fewer heating degree days than where would be normal.
We did have higher wind production. It was up 13% over 2015, still down a little bit from what we would consider a normal wind production year, but it did help to increase our gross margin by 2.4% over the 2015 first quarter.
The other thing we did was we extended the useful lives of our renewable assets and this was looking at component by component. It was down on a worldwide basis by Iberdrola.
Based on Iberdrola's experience and looking at the engineering analysis that we did, so each component we looked at and determine that we were really not depreciating it on an appropriate life and it really needed to be extended and we'll get into that a little bit.
So the first quarterly AVANGRID dividend was $43.2 a share. It was paid on April 1 of this year. And the second quarterly dividend of the same amount was declared by the Board on April 20 and payable July 1.
And as a result of what we're looking in for the rest of this year and into the future now, we expect our payout ratio to be declining a little faster clip and you can see that as of yesterday our dividend yield was 4.5%. 2016 earnings per share outlook now, we're increasing it to the range of $2.10 to $2.20.
Now looking at the first quarter and I’m on Page 7 of the presentation, which is on our website, the first quarter 2016 results were on target. Net income you can see, we had $212 million looking at some of the non-recurring items and we had a non-recurring item by the sale of the Iroquois Gas pipeline, which generated net income about $19 million, but taking that aside we were up 14%, but including that we were up 24% over the previous year’s first quarter.
Earnings per share were up again the same amounts, earnings of $0.69 versus $0.56 in the previous year. So some of the things that impacted us obviously the higher wind production and then the extension of renewable asset useful life going from roughly 25 to 30 years and we'll talk about that in a minute and then the non-recurring sale of the Iroquois pipeline.
On the next page, we look at the key earnings and cash drivers, and we pay rigorous attention to the integration that's been going on identifying planning for best practices in 2016. We've been making very good progress.
The planning has been completed and it was done on-schedule. We had planned on getting that done by the end of the first quarter, which we did. And then we look at the results for that year.
The net income was actually up 7% and weather did have an impact since we don’t have decoupling at Berkshire and Southern Connecticut Gas, but the good thing is those will be put in place since they are required to be implemented in our next rate case.
And we have a continuous focus on our operating expenses and minimizing those to the extent we can and are possible. So renewal business, wind production was up 13%, energy prices on merchant projects, it was pretty flat actually down about a 1% and this includes directs along with the prices for energy.
The PPA contracts were up about 3% over the previous year’s first quarter and we have included some information on the pricing and actually the roll off of some of these contracts.
And when we look at our financial position, we're in a great financial position with our very strong balance sheet. We've low leverage, which we can translate in the low interest cost and our consolidated credit facilities we executed a $1.5 billion credit facility, which is now in place giving us great liquidity on a short term basis that we can use it as we need.
Now talking about the extension of the useful life of certain renewable assets, as I said we looked at a component by component basis and we determine that the towers from the transmission equipment that's in place there, the depreciable life was really in excess of the 25 years.
So on average we've moved up to about 30-year life for the wind farms that we have and again we have best-in-class technology, operational management and we have the world-wide experience of Iberdrola and based on that experience.
We looked at the life of assets, particularly the ones that Iberdrola has in Scotland and recognize that they were useful life was going much beyond the 25 years that we've been using. In fact they've been in place for over 20 years already and have seen no deterioration.
So with this worldwide experience and taking the worldwide view that the assets needed to be extended, Iberdrola across the Board has extended the useful life for renewable assets to about 30 years on average. And so which we also think is consistent with what some others in the industry are doing.
Moving on to the merger integration summary, we’re making great progress on that. We launched it last October and that was focused really on day one implementation and in the merger integration planning.
The first thing I want to do is to make sure we could operate effectively once the merger was completed, which we did do and did it successfully. The next step in Phase 1 was really to identify the plans and what we needed to do and then get our teams together, we had a dozen teams working on it with over 240 people -- 270 people.
We had 120 different projects that we looked at and so now we completed that phase and we're moved into Phase 2. The next steps there are really the project teams are transitioning to implement the integration plans now. That will happen over the next 12 to 18 months as we put these in place, things can be faster, obviously we will do quicker, but a lot of it depends on software changes and integrating different computer software.
And then also the thing we're identifying and executing on operational best practices and aligning outline grid with the global business model where we can and where it makes sense and I think in many areas particularly purchasing, IT, other areas make a great deal of sense in aligning that on a global basis.
Day One Readiness as I said was achieved and all the integration projects were on track. For our projections for the planning period, when we had the Investor Day back in February, we talked about a five-year plan. I kind of like to go over some of the aspects of our five-year strategic outlook and the progress we’re making.
When you look at the projections, 70% of our investments will be in regulated activity and the other roughly 30% will be related to our renewal business. Adjusted EBITDA in the 2020 year about 26% will come from renewables and about 73% from our networks business.
So when you look at EBITDA, 73% are coming from regulated activities, which is very stable and predictable for us. When you look at on Page 12 for Avangrid Networks, when we take a look at the regulatory to legislative and the FERC update we want to go through, the New York trends that was made up of initial three projects.
We received FERC approval on March 17. Had a total ROE of 10% and that’s a combination of being an RTO and also having a base ROE. Equity ratio is at 53% and our initial investment is $44 million.
We’re implementing settlement right and obtaining an asset transfer order from the New York Public Service Commission. The projects are on track, We expect to have rates in effect on June 1 of this year.
The New York Rev, the final track one guidance has been released. The distributed system implementation plan and the benefit cost analysis is going to be filed by each of the utilities at the end of June of this year.
And our New York rate case, which involves both our RG&E and NYSEG for both gas and electric rich company, the hearings have been completed. As we said before, we had a settlement that’s now in place. We expect the commission to decide this on May 19 and then the rates to go into place on June 1.
For Connect New York, this is a new project that we're going to be making a filing by the end of this month. It’s a 1,000 megawatt DC underground transmission line that we're going to be making a filing to a pursue that.
The New England RFP we bitter selection process, we're expecting it to be by the end of July and as you know we have two projects in Maine, two proposals regarding transmission.
One another project which is we would be providing the wind resources from our renewable businesses in New York on another transmission line have been proposed by Eversource. So we have three projects in this RFP and we're very hopeful and confident that we should be successful on those.
And then the FERC ROE compliant in the New England, the ALJ issued an order on March 22 which recommended a base ROE for the 15 month refund period in complain number two of an ROE of 9.59 and the cap of 10.2 for that 15 month period.
Then for the Complaint 3 and going prospectively, his recommendation was for a base ROE of 10.9 with a cap of 12.19 for the 15 months refund period and then going forward.
FERC is expected to make their final decision later this year, early in 2017 and if adopted as final the ALJ mid it's decision, that would require a net increase in our reserve for complaints two and three of about $10.2 million net of tax based on what we know today from those proceeding.
Moving on to some of the projects we have going on and keep in mind we're focusing on improving our resiliency, replacing the aging infrastructure and automating our system.
One of the great ones we have at the Cooper Mill Static Synchronous Compensator, which is being put in place into Maine and this was after a quest of ISO New England to make this investment to support the regional bulk electric system and really relates to upgrades in the Boston area that are being done by a Eversource and National Grid.
Now it does require a substation expansion within the 200 MVAr STATCOM, which is the static synchronize compensator. The investment there is going to be over between 2016 to 2018 and an about $52 million.
Also at Maine and also for about $52 million is our Customer Smart Care Data System upgrade and this is going to enhance our customer service and flexibility, allowing from more innovative rate design, allowing for dynamic pricing and then it’s also going to help us to optimize our AMI capabilities. And as you recall, we put in AMR entirely in CMP service territory.
In Connecticut for our transmission projects we have the metro north railroad corridor where we're replacing the transmission lines along the metro north corridor and keep in mind our transmission lines are on the catenary that provide the electricity to allow the trains to run.
So if catenary is over 100 years old and are deteriorating, so we have concluded along with ISO England that we need to replace those. We're putting along monopoles along the corridor and that investment in this five-year timeframe is going to total about a $150 million.
Then in New York, we have the Guinea Retirement Transmission alternative and this is going to provide a 345 KV connections to the New York power grid, help ensure reliable service to the Rochester area and then also allow the ultimate retirement of the local generation plants.
That investment again is $140 million. It's started, its already spending money there and we started last year. It should be in operation by the end of '17.
Turning to our renewables business and looking at our projections for the next two years, we have currently 5.7 gigawatts in operation and another 744 megawatts are under construction.
I will spend a minute going over which one of those projects are. If you keep in mind that the first one in North Carolina will be operational by the end of this year and that’s a 208 megawatt project, $375 million in capital spending, that's a 13 year PPA with Amazon and it’s under construction as we speak.
El Cabo is almost a 300 megawatt project in New Mexico that will be supplying power to California IRU and our people did a great job in piecing together the transmission that would be needed to move that power from New Mexico into California.
This project is about $515 million. It will be completed by the end of 2017 and that has a 20-year PPA with the California IOU. Tulare is 132 megawatt project in California. Again that will be completed by the end of 2017. We'll spend about $235 million on that and that has a 15 year PPA with the California IOU and we're currently finalizing the off-take agreements, but that should be operational in that timeframe.
We also have a smaller project in Vermont of 30 megawatts, $75 million in capital spending. Little more expensive in the Northeast to build these projects, but it has a 25-year PPA with an IOU and there we’re just waiting for the agency to give us the pre construction ruling, pretty much everything is in place.
And then a 76 megawatt project in Colorado, again completed in the end of 2017. We'll spend about $120 million there with a 25-year PPA with an IOU and we're finalizing activity there.
Now in total we're going to spend about $1.3 billion in investments between 2016 and 2017 and that will increase our installed capacity to 6.5 gigawatts by end of 2017.
On Page 16 we have a map that shows potential projects and these of the 6.1 gigawatts pipeline we have, we have about 2250 megawatts of wind and solar that we believe would be the ones that will provide the next opportunities in the 2018 to 2020 timeframe.
These are the ones that are probably closest to coming in the final development either because we know there RFPs are going to be coming out amd we have more assets in place. We have the engineering done and so forth. But these are the ones we would say are most likely to be developed to supply the next 650 or so megawatts that we have planned for the 2018 to 2020 timeframe.
Now I’m not going to go into detail, but you can see they're spread out throughout the country giving us great diversity and there is a mix of both solar and wind that we have and so you can see this. These are real projects that can easily get developed.
So let me highlight a couple of things. One, we had great performance in the first quarter. It gives a lot of visibility for the remainder of the year. Our strategic plan for the next five years through 2020 is clearly on track and we’re performing rather well to get that done.
The integration and execution of our plan is in progress to integrate the UI oil in the old Iberdrola USA. We’ve extended the use of life of renewal of assets based on sound engineering and experience we have from Iberdrola worldwide and our 2016 earnings per share outlook we've increased it to 210 to 220 per share based on a lot of these factors.
And so with that I’m going to turn it to Rich Nicholas, who is going to spend some time on the financial activities.
Thank you, Jim. Good morning, everyone. Thanks for joining us today.
As Jim said a very strong quarter for Avangrid and I am Slide 19, little more details are on the operating segments, while net income grew 24% quarter-over-quarter including UIL and the adjusted 2015 numbers. As you can see networks, was up 7.3% and renewables had a very strong quarter up 64% 2016 over 2015.
The corporate and other segment does include gas as well as corporate and you can see positive results there. As a historical contract that was out of market that we rolled off and we see the benefit of that and positive earnings in the corporate segment.
Moving to Slide 20, some of the key drivers in addition to the ones Jim had mentioned, we did benefit from decoupling in most of our companies. Southern Connecticut does not have decoupling but will in its next rate case per state statue and Berkshire Gas does not as well.
However, the impact of those relatively small in the overall scheme of things from the warm weather, we do see the increase in cost related to the Reliability Support Agreement, but those are also offset in revenue and we did see lower employee related cost quarter-over-quarter.
Turning to renewables, 13% improvement in wind production and that’s made up of both better wind quarter-over-quarter as well as additional capacity. Last year we did add roughly 200 megawatts with the back of wind form in Texas and the extension of renewable asset lives to new estimates there were positive by $13 million of net income for the quarter.
In the other segment sale of the interest Iroquois that Jim mentioned for an after tax gain of $19 million and we did see some higher gas spreads for the contracted gas storage business.
Moving to Slide 21, little more details geographically on the renewable load factor where we saw an increase from 28% last year to 31% this year and this is why being geographically diverse really helps. As you can see different results so in the West we were up to a 20% load factor versus what we would have been 16.6 last year. So a 3.4% percentage point increase.
Slightly less wind in midcontinent and in Texas you can see there the big increase in part was driven to the additional capacity that I mention as well better wind.
On Slide 22 looking at that 13% increase in wind production, that’s where you really see in the South Texas area, now 47% increase reflecting the additional wind farm in Texas spread pretty well across the geographic U.S.
Turning to Slide 23 when we look at pricing in the renewable business this year versus last year, in total about a 1% increase and that was made up of about 3% better pricing on the PPA side, slightly lower pricing on the merchant side including the renewable energy certificates.
Again slightly different results across the continent and when we look at overall, about 67% of our megawatts or PPAs 33% are in merchant and we also hedge some of our merchant where we can and so total about 80% is in PPA or hedges and about 20% in merchant.
Turning to Slide 24, looking at our gross margin growth of 7% quarter-over-quarter. Again here we've provided some additional detail by both geography and wind versus solar, versus our thermal plant in Oregon.
And you can see the effects of the various drivers on gross margin, better production increased by $26 million. We did have some PTCs that expired and the market-to-market of negative 9 is actually we still have positive mark-to-market in 2016 just less positive than we had in 2015. So overall a 7% growth, primarily driven by the production that we've been discussing.
Turning to Slide 25 adjusted EBITDA, growing 8%. Again strong performance in renewables, renewables makes up about 25% of the EBITDA, but grew by 18% driven by the production and that works a good solid showing increase of 3% really helped by the lower employee cost and revenue decoupling..
As Jim mentioned, we have very strong cash flow for the quarter. On Slide 26, our free cash flow of Avangrid consolidated was about $175 million more than our CapEx requirements and CapEx as you know is very seasonal especially in the Northeast and the networks business as you come out of the winter so strong cash flow networks, but we would expect to see CapEx pick up.
And on renewables, total cash from operations up $120 million and free cash flow of $50 million puts us in very good position moving into the rest of 2016.
So when we look on Slide 27, our leverage is really primarily is the network segment of our business, UIL Holding company did have a $450 million note that continues and then little over $200 million of tax equity investments that we will be amortizing and expect to be fully amortized by 2019. We’ve got very manageable debt maturities over the next several years again at the networks business.
So moving to Slide 28, that strong balance sheet results in net leverage of just under 24% in the first quarter of 2016 and net debt to adjusted EBITDA of 2.4 times.
We don’t expect or there were no, excuse me, there were no new debt issuances in the first quarter and through the planning period through 2020, while we do expect net leverage to increase modestly into the low 30% range, we would also expect that net debt to EBITDA would remain relatively flat as we grow the earnings of business.
In addition, AVANGRID was recently updated within the last several days by S&P and Fitch from BBB flat to BBB plus recognizing our strong financial position.
As a result of first quarter results and the new estimates around useful lives, we did update our outlook for 2016 and increased it from $2 a share to a range of $2.10 to $2.20, primarily driven by the new estimates around the renewables business depreciable lines.
So very strong performance to start the year and we look forward to your questions-and-answers I also look forward to seeing many of you at the AGA Conference in the next few weeks.
So with that, I will hand it back to our operator Kissie for question-and-answer session. Thank you.
[Operator Instructions] Our first question comes from the line of Andy Levi with Avon Capital Advisors.
Hi good morning. How are you? It was a really good rundown guys.
Thanks Andy. How are you doing?
I’m doing pretty well actually. [Done have someway]. Okay. So just a couple I guess easy questions. So just on the asset life to change on the renewals, so the $13 million is that we annualize at times by four or is that it -- was there like a little bit of catch-up? I’m just trying to figure out on an annual basis how much we should add to earnings going forward?
Yes the quarter would be annualized.
Probably looking in $0.14, $0.15 annual earnings per share benefit.
Okay. And that such $0.14 to $0.15 and that will go into next year. So we add that to next year and that was not contemplated I guess when you gave your Analyst Day, is that correct?
Okay. That is additive. And then just as far as the because you gave more information on the renewable kind of drop off as far as contracts and things like that, I want to know really contract, but more kind of your hedge book.
How should we think about pricing going forward and as far as because obviously when you re-contract the price will be lower and I think your average price I am guessing is around $55, so what is the timing of when the contracts drop off and having to re-contract those, that I don't -- right, you didn’t really give?
Well we have on Page 34 you can see we have as the TPA expire and you can see it’s a graph I understand and what we'll be doing when the contracts drop off its trying to re-contract in the first place, but other than that, they will be migrating to merchant and I would expect as the prices will be whatever the market will be at that point in time.
Now it could be that obviously we’re going to sign a long term or a longer term PPA or an extension of some contract that would be at a higher price than the current market spot price, but we’ll have to see where the market is at different points in time.
But do you give anywhere where you show the amount of megawatts and the hedge prices drop off or that’s I guess we have to figure that out ourselves.
Yeah, we thought we would leave some of that work left to you guys and we didn’t do it Andy.
Okay. Okay. So could you have this one benefit and then I’m just trying to figure out when these PPA will drop off and then what the earnings change would be. Okay, and then I’m sorry if I missed this, just what was the wind condition versus normal? Did you give that?
No, but I think Frank can probably give you some idea what it was in the first quarter.
Frank you got.
Yeah Andy. The first quarter was still a bit below the long term average and around and it varies course by region, but somewhere around 5% below average still in the first quarter. January was very -- was I think and we mentioned this when we were out January was quite down and then its normalized quite a bit since then but it's still behind year-to-date.
It's hard though to just look at a three month slice. It’s -- if you look long term that numbers moves around quite a bit by quarter. So, was ….
Were there certain regions that were different as far as like where it was Texas above normal?
I think West, I’d say the West is still behind where we were expecting -- where we expect it long term.
Okay. And what was Texas to you now?
Texas was closure to long term, but I’m sorry I don’t know off the cuff here.
Yeah, I am just being selfish. I am trying to figure out with some of the other guys out there so, other companies I should say. Okay. So just to summarize, so you increased the guidance by $0.10 to $0.20 and the change in accounting is $0.14 to $0.15 of that, is that what you're saying?
Right, so if you look at the midpoint of the guidance up $0.15 it's really the effect of the new estimated useful lives.
Great. And I guess that could be an industry-wide thing right. So like next era or something like that may end up benefiting from that as well.
We believe next era is already at that.
Are they, are they okay. It's great.
I think we're catching up.
Yeah, catching up okay. Thank you very much. That was a really great run down.
Our next question comes from the line of Christopher Turnure with JPMorgan. Christopher, your line is live.
Good morning guys. Thanks for the extra details today, they're very helpful. I wanted to may be understand some of the drivers that have changed for you over the past two months or so since the Analyst Day and the impact potentially on your long term earnings CAGR that you gave at the Analyst Day.
And maybe you could give you color on the depreciation expense going down obviously that’s a help the AIJ decision from FERC prospectively may be assuming that in fact is the final decision and then even know it’s a small slice to your ownership stake in Northeast Energy Direct did have optionality for you guys to increase that and I was wondering if that has a material impact on your longer term guidance as well?
Yeah, I think going forward we were -- we’re on track with our strategic plan, I think for both this year and the longer term. The thing that changed on the earnings was really the depreciation modification that we did and it was really based on what Iberdrola was saying worldwide and their experience with wind farms in Scotland that they had for over 20 years.
And then we did a lot of engineering analysis. So that was really the basis for the change. Everything else has pretty much been on track and I can’t say that there have been anything dramatically changed from what you heard at least from a long-term strategic standpoint and even for this year on from what you heard at Investor Day in February.
As far as the FERC ROE, that's got our ways to go yet. If it ends up being what the ALJ recommended prospectively, I think that would be plus because then we were looking at an ROE that would be slightly higher than the 10.57 and 11.74 cap that we currently have in place right now based on the FERC order from complaint number 1.
So if they take complaint number 3 that will have a charge, we'll have to set up a reserve for the complaint 2 basically and then moving forward though it would be positive for us.
And on Northeast Energy Direct, we took really an immaterial charge and what we see is that it wasn’t going to be anything that was going to be in before 2019 at the earliest and so it really has a very minimal impact to our longer and short test. If anything at all, we’re still very comfortable with our 8% to 10% growth in net income over the five year period.
And so I don’t see anything changing dramatically from that. And that is -- we'll see what happens going forward, but we were going to invest about $80 million over the five year horizon and so it really wasn’t going to impact us that much.
Okay. So net, net really no change to that range that you gave and the optionality of that pipeline to go up to I think there was maybe a 12% ownership stake or something in that vicinity all kind of net backed to no change?
Yes we could have got, it would have been up to 15%, but we never really -- we didn’t factor that in because that was just the contract and depending on a lot of things happening with the RFPs and the EVC proposal that would have had to been consummated in New England for us to even get higher percentage. So net, net, we don’t see a change and we’re very comfortable with the 8% to 10% range.
Okay. Great. And then maybe you could give us more detail on the Connect New York project. It's I guess a 1,000 megawatts TC, but how long is it going to be? Could you give us any kind of CapEx numbers there and even though I guess it’s early stage and then maybe some information on how you’re thinking about timing and whether or not that's in your current plan as well?
Yes Bob Kump can fill in on that one.
Yeah Chris, hi it’s Bob. So I think we spoke at our Investor Day back in February that this was not a project that at this point we had in our numbers, but one we were developed.
As Jim mentioned in his remarks today, we are making a filing of that as part of a proceeding going on a public policy proceeding, a spin-off of the AC proceeding that's been going on in New York. So that will be filed by the end of this month, in fact later this week.
The details of the project itself in terms of cost and timing are to be determined, will not be made public as part of the instant proceeding, but we continue to move forward. The first phase of this would be let’s call an Article 7 filing to do that later this year.
So everything remains on track with that. We're having a lot of discussions with third parties about it. We continue to believe very strongly that this has a great fit given the situation as it exist currently in New York and that is insufficient transmission capabilities that stay, tremendous efforts by environmentalists to avoid anything overhead, excess capacity upstate and the threat of nuclear plants closing, which the Governor doesn’t want to see and so we really see this project solving a key issue facing New York State from a transmission standpoint.
Great. Thank you very much.
Our next question comes from the line of [Felix Curman].
Hi guys. Congratulations on a great quarter.
Jim, I think you've touched on this in the last question, but you are still comfortable right with the 8% to 10% CAGR?
And then just mathematically speaking right, if we pick up $0.15, it's roughly about 7.5% above your original '16 guidance. If one were to just mathematically spread that out over the year 2014 through 2020 CAGR, can we pick up 1% on the CAGR over the term or no?
What I’d say is we are looking at the 8% to 10% and we feel pretty comfortable with that. If you take 2014 where we were working off before and if you're adding 7.5% at least in this year then we would probably say that its moving up a little bit, but we’re still 8% to 10% sounds pretty good right now.
Okay. Great, great and then just one quick question on the merchant PPA prices, can you just circle back and tell us how this price that you put here relates to the number you gave you in the Analyst Day and how you are thinking about that number going forward in your guidance.
Well what we said in the Analyst Day is we were looking at something in the $27, $28 range. that was without the wrecks. So when you look at the merchant price you got to add the wrecks into that and the wrecks they vary in price from $5 and right now they were looking in the first quarter they were quite a bit higher. They were probably closer to $8 or $9 now across but they vary by region. I don't know Frank do you want anything to do that?
No, that’s just in Jim we had that, you nailed it.
Okay. So this $30, $35 price here is higher than what you had expected at the Analyst Day?
No, no sorry, that’s consistent.
That’s consistent. And are you guys are assuming this phase flat through the period.
Okay. Okay. Thank you.
Our next question comes from the line of Paul Patterson. Paul your line is live.
Just a few quick questions number one on the depreciable life change, was there any specific component or technology or one specific issue or couple of issues that led to that.
The biggest thing was the dollars, they were laughing a lot longer than we would have expected, but then also you look at the transmission equipment that’s part of the wind farm whether they had transformers and sub stations and those type of things.
Their average life was much longer and the towers were on the pads that we put in to support the towers were all of -- would have a longer life. So basically the civil work and the transmission activity were the ones that we were looking not so much the turbine and the blades.
Okay. And was there anything that caused it to be revaluated specifically in the first quarter or just is that how it happens sort of coincidentally?
Yes, it was more how it happens and how Iberdrola was looking at across the globe and all of their wind farms being what 15,000 megawatts that are operating and looking at their experience across the world and then doing the engineering analysis, so just so happened and came in the first quarter and we then applied it to what we have here in the U.S. and found it to be consistent and made sense to apply that change.
Okay. There was also another FERC ALJ ruling we expect to the California power crises that mentioned Iberdrola and Shell. Have you guys -- does that have any impact on you guys and is there any reserve that’s been there before not that you could talk about?
Paul, if there would have been a reserve, we really would have called it out. Certainly it has an impact from the stand but we’re going to have spend more of legal fees in order to keep pursuing this, but the fact of the matter is we believe our positions were well founded and we still believe that and FERC's staff actually supported letting us out of that whole activity with the California.
So we feel pretty strong with our position is sound and the ALJ came up with a recommendation we did not find that there was any market manipulation on our part and it was just a difference between what he felt was a contact price and what some stock prices were.
That was the difference he was sitting and he felt that was high. So we believe in the end for the FERC Commission will find correctly and turn this around when the FERC, the whole Commission actually has the chance to look at it.
Okay. But if they did it, just because we do an ALJ ruling out there, how would -- would it just be a one timer or something that you guys will have to deal with if they were to go with the ALJ rack or would that be an ongoing impact?
It would be one time since we’re looking at the termination of what the -- from the complaint what might have to be refunded and that's something that hasn’t even been determined set. The ALJ didn’t even make that determination yet. There is no determination on that whatsoever.
Okay. Got it.
And then on the Guinea transmission retirement thing, if Guinea does not as you know New York is talking about keeping some of the new stuff and what have you, if Guinea was supported, would that impact Guinea retirement project at all?
No this is Bob, that project as Jim mentioned is under construction as we speak and will be completed by the end of the first quarter of next year. There in the event that the plant closes, obviously our goal as an organization is to try to help the situation through things like Connect New York and improve transmission such that those plants can continue to operate have access to higher price markets.
And then just finally, the credit rating, what is the credit rating goal you guys have for the company?
Well you just saw that we were upgraded from BBB flat to BBB plus. Our goal is to maintain a strong balance sheet and strong credit metrics. I wouldn’t say that we have an absolute target on any given agency or given rating.
Okay. But you want to expect it to change, you don’t have a substantially lower one or in general we should think that it's general area that you’re now is pretty much where you want to be or is that safe to say or I don't want to put words in your mouth?
Well I think it reflects our financial position.
We're happy with where it is and obviously we could always see it go higher, but that's what the rating agencies will determine but as Rich said we want to make sure we maintain a strong investment grade rating and that we can do finance all the projects we want to do. That's the reason behind it.
Absolutely. Thanks so much.
Our next question comes from the line of [Andrew].
Thank you. Good morning guys. First a question on, you already talked a bit about the MED pipeline from an equity perspective what about for your LVT customers? Do you need to off-take agreements somewhere else now?
Well the problem we have Andrew is that in Berkshire that the only pipeline that serves Berkshire. So we have a moratorium in place in Eastern division of our Massachusetts operation there and it’s small.
But still we can’t add anymore customers up in Massachusetts in that Eastern division because we don’t have any more capacity. For the other utilities and the LDCs we have, we’re actually in very good shape and in Connecticut we have three pipelines starting on the New York, we're in good shape. So we don’t really have that same issue.
Where it's going to be more significant is that the pipeline was thought to be more to be supplying for electric generation particularly in the winter when I think the capacity is all taken by the LDCs in New England. So that's where we're going to see some more problems potentially in the future.
Our LDCs are in okay shape. We had all the supply we need to serve our existing customers. We're not going to be able to grow as much in that one Eastern division of Massachusetts at this point because we don’t have additional capacity.
We'll be looking at alternatives, but some of them are going to clearly be higher price. If we have to put in more LNG or propane air, it's going to cost more and is that something we should be doing to be able to serve additional customer, new customers and that's I want to work out with the Massachusetts DPU.
But for the other jurisdictions we're in good shape. It’s just that we saw this pipeline is helping solve the problems in New England with electric generation.
All right. Great. The next question is on integration. In the slides you mentioned Phase 1 and Phase 2, I know it's early, but how many phases are there and do you have any sense how many years until you consider the two companies fully integrated?
There is two phases, we’re in the Phase 2 now. I would expect that Phase 2 is going to vary, but I think we should be done with Phase 2 in let's say 12 to 24 months timeframe and some of it are going to be significant software changes where we like our SAP system.
We got to look at the configuration and the modules that are being utilized by each of the different companies and bring those together. They were all working off the same systems, modules and configurations.
Now that's going to take a little time and then the resources we have to build to do that along with all the other projects we have going on. So, I think the software activities will take a little longer, I think just integrating people, integrating processes and procedures, we'll get that done this year. I would be pretty confident of that.
Great, next question we had asked at the Analyst Day about any guidance for effective tax rates, you had a chance to kindly go through that and give us a ballpark number a range what we can expect?
When the 10-Q comes out for the quarter we'll have an update on the effective tax rate for the quarter. Obviously the PTCs have an impact as you move forward in time but we haven’t put any specific effective tax rate guidance out there…
So that can be considered doing?
We’ll take a look at it.
Okay. Fair enough. The last question, Jim I don’t mean to get personal here, but I know this has been new employment concept had some changes to the wording and particularly around change in control and severance plan.
Is there anything that we should be reading into in terms of Avangrid either as a buyer or seller in this M&A market?
Absolutely nothing to right in there. That's just that the philosophy Avangrid has related to change in control and this is nothing new, nothing to read in.
Okay. Great. Thank you guys. And I was want to echo the comments, I appreciate the increased disclosure particularly around wind in the slide deck there.
Our next question comes from the line of [Julian].
Hi good morning.
Hi, Julian, how are you doing?
Good, thank you for taking the time. So wanted to follow up on your connect line here, can you elaborate a little bit on the status of the project just vis-à-vis routing that’s been obtained the sliding etcetera.
Then also I know you want to talk about cost per say, but elaborate at least on timing and it's procedure to get this project approved. I suppose as part of the AC transmission our proposals do better.
Correct, correct Julian. So yeah let me give a little more color. Obviously familiar with the base projects, it's a 1,000 megawatt DC line eminating from essentially the Utica area utilizing the rights of oil along the true way down past the two congestion points into the New York City area, right that’s the general concept, it's about 170, 180 miles roughly is the length of the project.
Our view is as I mentioned we'll submit as part of this AC proceeding on public policy, we will be working and filing the primary permitting application with the New York PSC 7 later this year. Everything went perfectly and how things are with the transmission projects, I would say the best you could hope for may be construction in the 18 and on timeframe.
Great. Excellent. And then can you elaborate a little bit on Upstate New York opportunities around the RPS expansion and what that means? I suppose obviously you were talking about New York Connect project today, but more holistically we've talked about nuclear earlier, but we've chipped in a little bit more on the emphasis on the eventual RPS and long term PPA opportunities in this that is forthcoming in the state.
Yeah, I guess I’ll say beyond Connect New York we've mentioned the New York Transco. We're working with other utilities on AC type transmission projects, again largely focused on system reliability as well as these congestion points from Upstate to Downstate.
We're working with the New York power authority on a project in the Western New York that would better enable hydro electricity access to the downstate region. So those are kind of transmission areas of focus.
The other quite frankly is in addition to the nuclear looking for better markets. You have tremendous opportunities in around the park for wind and I will let Frank speak to that more, but we have a couple of operating farms already in that area and several I think were listed on the slide in this presentation in that area as well as potential opportunities for greater wind and as you correctly mention high on the radar screen of the government. So we're tracking it from both ends. I don’t know Frank if you want to add anything else.
Well, just I'll just affirm that we very actively maintained development opportunities in the New York area. We have to see how the rules play out in terms of the ability to do long-term contracts, which will make that more attractive to us.
As we stated we're only going to build where we can guarantee that we have long-term off take certainty. But we like the market obviously and we've got some really good development opportunities there that we've laid out on Slide 16.
So we will stay tuned in and see how the policy changes there, but right now there is not a long-term energy market for renewables there but we'll have to see how that evolves.
And I guess the last thing I will then add is when you look at in particular our Connect New York project that emanates as I said.
You need something by 12.
I am sorry. That project emanates in the Utica area and when you look at not only most of the nuclear facilities that are currently looking for better pricing, you've got up in Neymar 1 and 2, Fitzpatrick and then when you look at the projects that Frank has mentioned that are all off the Eastern edge of Ontario, I think again our project Connect New York fits well with where a lot of that potential generation both renewable and nuclear would reside.
If you look at the renewable projects, as Frank mentioned we have almost, we have four projects potentially with almost 400 megawatts in the New York area that could add to the development of that. So as Frank said, we’re pursuing this pretty aggressively.
But any sense on timing for that PPA or an RFP in the state direction?
I don’t think we've seen anything on RFP, at this point no. I think the key is going to be providing transmission access. And the other thing to keep in mind is the New York does have a renewable portfolio of standard now of 50% by 2030.
So they're going to be needing additional renewable resources and having those in state will be a plus and also them having the transmission to get it done in the marketplace in the New York City is going to be a plus. So I think all those factors are positive for us.
And the Governor as you know has a keen interest in keeping those nuclear plants running and it's proposal and the commission’s proposal around that specifically for the nuclear to support them, but we're really looking at what's the longer term option again for providing access to better priced markets for upstate generation.
All right, thank you.
Our next question comes from the line of Andy Levi, Andy your line is on.
Hi this is Joe Zhou from Avon Capital. How are you?
Just a follow up for the New York on the rent, is this a project that competing against the Compass project?
I’m sorry which project?
Compass which developed by PBL?
I guess to the extent that any project is looking to provide greater access for power to the New York City area, you could call it competing. Obviously that line my understanding of it, I don’t know lot about it but it is bringing power from PJM, not helping the market in Upstate, New York which is what the Governor is focused on.
So from that perspective they're very different project. But they're all intending to provide greater access power. Obviously we are also focused on renewable energy and clean energy as part of this.
Okay. Great. Thank you.
There are no further questions in queue at this time.
Okay. Well thank you everybody for participating to the extent you have other questions please don’t hesitate to contact our Investor Relations people, Patricia, Michelle, Carlotta would be very happy to answer your questions and thank you for participating today.
That concludes this morning’s teleconference. You may now disconnect your lines.
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