NextEra Energy, Inc. (NEE) Q2 2012 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the NextEra Energy 2012 Second Quarter Earnings Release Conference Call. Today's conference is being recorded. At this time, for opening remarks, I would like to turn the call over to Ms. Julie Holmes, Director of Investor Relations for NextEra Energy Inc. Please go ahead.

Thank you, Audra. Good morning, everyone, and welcome to our Second Quarter 2012 Earnings Conference Call. Joining us this morning are Jim Robo, President and Chief Operating Officer of NextEra Energy; Moray Dewhurst, Vice Chairman and Chief Financial Officer of NextEra Energy; Armando Pimentel, President and Chief Executive Officer of NextEra Energy Resources, LLC; and Eric Silagy, President of Florida Power & Light Company. Moray will provide an overview of our results, following which, Jim will touch on our strategy for future growth. We will be making statements during this call that are forward looking. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially from our forward-looking statements if any of our key assumptions are incorrect or because of other factors discussed in today's earnings news release, in the comments made during this conference call, in the Risk Factors section of the accompanying presentation or in our latest reports and filings with the Securities and Exchange Commission, each of which can be found in the Investor Relations section of our website, nexteraenergy.com. We do not undertake any duty to update any forward-looking statements. Please also note that today's presentation includes references to adjusted earnings, 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 Moray.

Thank you, Julie. Good morning, everyone. NextEra Energy delivered solid results during the second quarter of 2012 and built on the progress made in the first quarter. The company remains on track to achieve the goals we outlined for this year, and we believe we are well positioned to attain our longer-range expectations. At FPL, we continue to invest in the business at a record rate to deliver even more value to our customers. Regulatory capital employed grew $3.7 billion or 17.5% versus the second quarter of 2011, and we recorded a regulatory ROE of 11%, consistent with the 2010 settlement agreement. As a result, our net income increased $52 million compared with the same quarter last year. Energy Resources' contribution to adjusted earnings in the second quarter increased $0.04 compared with the same quarter last year. Contributions from new investments helped offset declines from our existing assets, which stemmed primarily from below-average wind resource this quarter versus above-average wind resource in the second quarter of 2011. Overall, we continue development on the renewables projects in our backlog and remain on track for the goals we laid out at the beginning of the year. In Florida, the early signs of economic recovery we witnessed in prior quarters appear to have slowed. After significant employment growth in late 2011, Florida's pace of job creation has slowed. The Florida unemployment rate in June was flat compared to May, but has dropped more than 2% since this time last year. Consumer confidence in Florida increased in June relative to last year, but declined versus the prior month. We saw an uptick in tourism taxable sales, which are now trending above the levels seen prior to the recession, and the housing market continues to show signs of modest improvement. Notwithstanding the somewhat hesitant recovery,…

Thanks, Moray, and good morning, everyone. It gives me great pleasure to talk to you in my new role. Moray has given you an overview of another solid quarter for our company, and I won't repeat his comments. Instead, I want to say a few words about our future. I know a number of you have asked whether you should expect any changes in strategy under a new CEO, and I'm sure all of you will appreciate any insight I can give you into our plans for the future. The short answer to the question about strategy is that I expect our strategy to be consistent, but our implementation will need to adapt, as it has repeatedly in the past, to changes in the outside world. At Florida Power & Light, the core of our strategy has been, for many years, to strive constantly to improve the value we deliver to our customers. Today, FPL offers its residential customers a bill that is 25% below the national average and the lowest typical bill of all 55 utilities in the state of Florida, coupled with top quartile reliability, award-winning customer service and a very clean emissions profile. We are investing heavily in the business to ensure our value delivery gets even better over time. We expect that our investments in new generation will save customers fuel costs and improve our emissions profile, that investments in our transmission and distribution infrastructure will increase our systems resiliency and reliability and that investments in advanced meters will offer customers more feedback in control of their electricity usage, as well as make our internal procedures more efficient. If we receive fair and balanced treatment through the regulatory process, our investors will benefit along with our customers. At Energy Resources, our strategy is not as easy…

[Operator Instructions] We'll go first to Dan Eggers at Credit Suisse. Dan Eggers - Crédit Suisse AG, Research Division: To ask my first question is, there wasn't any changes to the backlog for wind and solar in the quarter. But could you just share a little color on opportunities you may be seeing and where the conversations are going, as far as maybe adding more solar projects over the remainder of this year into the backlog?

Sure. Let me ask Armando to address that.

Great. Dan, we're certainly seeing some opportunities in the market, both on a short-term basis and on a longer-term basis. I'm not ready to talk about specifics of what those might be on the short term. But on the longer-term basis, during the quarter, you did see us close on a $10 million purchase of 1,000 megawatt area out in California, which supports 4 250-megawatt sites. There's no power purchase agreement associated with those sites, but those sites do bring some very favorable transmission and resource adequacy to our portfolio. We're out looking for power purchase agreement at this point, and we're hopeful that we would have something to talk about at some point next year. In the near term, I will say that the uncertainty over production tax credits moving forward in 2013 and 2014 is creating some opportunities, both here in the U.S. and Canada, that we are taking a look at closely. Dan Eggers - Crédit Suisse AG, Research Division: Armando, does that mean that there's people looking to sell, develop their in-process projects, or just that you're seeing people actually willing to assign contracts on things for '13 and '14?

Actually, we're -- both. We're seeing a few opportunities of folks, some developers that have projects that have taken pretty far into the development process, but their uncertainty regarding production tax credits in 2013 and 2014 is making them seek some additional capital outside of what they have. But we're also seeing not as much, and we -- and Moray has talked about this before. We and others are building a significant amount of renewables in the U.S. in 2012. It should be a record year for the industry and a record year for us. That has certainly sapped some of the 2013 demand, even if there is an extension of the production tax credit. But we are seeing some of our customers ask for quotes and bids on 2013 and 2014 both on a contingent PTC basis and on a noncontingent PTC basis. Dan Eggers - Crédit Suisse AG, Research Division: I guess, Moray, just one question on tax equity. You guys said you're going to be -- start being a cash tax payer in '14. Does that mean you guys are done in the tax equity market for the time being, given the fact you have visibility now to kind of get into the excess backlog?

No, that continues to be the balance that we've talked about before that we need to strike between, essentially, the incremental cost that you pay through a differential partnership deal versus the present value benefit of pulling forward in time when you would otherwise realize tax credits. So that trade-off exists almost regardless of when you expect that cash tax position to flip around. Obviously, the closer in it is, the less valuable the tax equity power will be. But you should not assume that, that means that we won't be doing more transactions.

And next, we'll move to Michael Lapides at Goldman Sachs.

Two things. One, just kind of a little bit of a housekeeping in Florida and then the other Spain. In Florida, did the storms that occur, I think it was late last month, have an impact on O&M? And if so, could you quantify kind of -- did it increase -- how much did it increase O&M versus kind of expectation? And then second, you made a comment, Moray, about the waiting to hear about the Spanish government regarding the project there. Can you just give a little more detail?

Yes. On the FPL O&M, not material. On Spain, as I think many of you are aware, there have been a whole variety of proposals, is probably too strong a word, but possibilities floated around trial balloons. Some of which we believe had some basis in fact, some of which we're not sure have any basis in fact. But certainly, there are discussions about the potential for taxing the energy sector, either in aggregate or, differentially, by technology. And clearly, to the extent that our project was subject to an excise tax or something of that nature, that would affect the economics. We just don't have enough insight at this stage to know which way the government is going to go or how significant those might be. It seems pretty clear that if the impact was limited to what it needed to address the tariff deficit within the electricity sector, that could be achieved with, should we say, levels of pain that are tolerable. If the government seeks to -- really to try and attack a portion of the broader fiscal deficit on the backs of the energy sector, then that could have a different impact. So as I say, we're sort of monitoring the thing. We're staying close to it. Obviously, we are articulating our viewpoint, as is everybody else there, and we just have to wait and see.

Do you have the ability to pull back on the project if the -- I would say, the operating or the government environment for renewables there turns against you?

In principle, we always have that ability, but we're well along in construction. We still like the project. We think it's going to be a good project. So I think it would have to be a fairly extreme situation for us to sort of completely reverse course. I think what we're talking about is what is the impact on the economics, and more broadly, what's -- what is the impact on our view of Spain as a place to do business and invest for the capital in the future.

Well, next is Stephen Byrd at Morgan Stanley Smith Barney.

I wonder if you could just talk to the appetite for the development of a regional natural gas transmission pipeline. I know that's been a potential topic of discussion in the past. Just curious, in your conversations, how that's progressing.

Well, as we've discussed several times before, we continue to believe that there is need for-- a good case to be made for a third pipeline into Florida. I don't really have a lot to update you on. We've said before that we are optimistic that we'll be able to be in a position to come forward later in the year with more specifics. We're continuing to evaluate a bunch of different possible scenarios on that, I think getting closer to what we think makes the most sense. But I think timing is still, hopefully, later in the year for us to be more explicit about that.

Understood. And just shifting the Texas. In your conversations in the state and with ERCOT, could you give us a sense for the degree of appetite that you see for consideration of a capacity-like mechanism to ensure that the market isn't -- is adequately incenting folks to build new plants in the state?

Well, I'm not sure we want to mention the capacity word, but some reliability supplementary payment mechanism may be appropriate. Let me ask Armando to comment on that.

Yes, there's been a ton of discussion obviously, and there's proposals on the table at ERCOT that folks are responding to. My sense is that the word capacity -- let's take the word out. The mechanisms that would allow payments to be made to generators, hopefully to support the generation and to bring new generation into the area, which is clearly needed in 2014, both by ERCOT's estimates and by ours estimates, that it's moving along more favorably, I'll say, than it was over the last 6 months. That doesn't mean that there's going to be a capacity market. But as Moray pointed out, we are hopeful that there will be some mechanism that recognizes that generators need an incentive in order to build new generation. So I'm hopeful that there will be changes. But in the near term, for 2013 and 2014, ERCOT is, frankly, short of capacity.

And, Stephen, let me just supplement that with -- noting that without that supplementary reliability payment, you get a market that is either very flat, as it has been so far this summer, because there really hasn't been much tightness, or a market which peaks out and induces a lot of stress for a short period of time with consequent trouble for suppliers and customers alike. We don't think that that's a very functional structure. So getting some more supplementary capacity into the market clearly would be a good thing long term for customers.

Next, we'll go to Jonathan Arnold at Deutsche Bank.

Just curious on the Resources results, you called out an $8 -- it's an $0.08 -- the absence of the $0.08 impairment charge from last year is one of the drivers, I believe, in the $0.09 interest G&A and other. There seems to be like a $57 million gain on disposals in the quarter. Can you -- as well. Could you shed any light on was that one specific item or a number of items, and what's the right tax rate we should be using on that?

Yes, sure. It's a number of items. We did have a small gain, a few million dollars on the sale of a project. But the bulk of it is associated with the decommissioning funds and, actually, more than half of it, this may get a little technical, but is effectively not included in our adjusted earnings because it's an offset to OTTI that we previously took out of adjusted earnings in prior periods. In other words, we -- in a prior period, we, for GAAP purposes, marked down certain securities in the nuclear decommissioning trusts, because we didn't have substantive evidence that they would recover. But in fact, they have recovered. We have sold them now at a gain in the course of the regular management of the NDTs. And so we can't, in fairness, take a -- that gain into adjusted earnings when we took the negative, but it's now offsetting out of adjusted earnings. So more than half of that actually is netted out and is in -- is a reversal in the OTTI piece. There is a little piece that's real gains on just the normal transactions in the decommissioning trust. That's what's going on there.

So where does that reversal show up? Sorry, Moray, I'm not following that.

It shows up in the reconciliation between GAAP earnings and adjusted earnings, down below in the OTTI piece. So the OTTI adjustment has a different sign than it typically has. We can follow up, take you through the numbers later on, if you like.

We'll go next to Hugh Wynne at Sanford Bernstein. Hugh Wynne - Sanford C. Bernstein & Co., LLC., Research Division: I had just 2 quick questions on the Florida Power & Light side of the business. In your estimates of the base rate impact of the rate request that you put to the commission. You estimate also the savings to the customers from lower fuel cost. Can you share the expected sensitivity of customer bills to a $1 move in the price of natural gas?

I don't have that off the top of my head. We'd be happy to follow up and take a rough crack at it. I mean, it's a little hard to see because it filters through. It depends on your assumptions about the dispatch of a fleet. So typically, when we come up with these estimates, we're making up -- we're hypothetically dispatching the fleet against the forward curve, so we don't have that sort of sensitivity ready to hand. But we'll follow up with you on that. Hugh Wynne - Sanford C. Bernstein & Co., LLC., Research Division: Okay. And then the second question, regarding the target higher dividend payout ratio, which you point out is associated with a shift to a greater earnings contribution from your regulated and contracted businesses. Ordinarily there, the payout ratio, I think, is also a decision that's taken in light of the capital requirements of those businesses and the growth in their asset base. Based on '14 rate base growth, it would seem to me that longer term, there's an expectation of something like 3.5% growth in FPL rate base. But I wanted to ask you what was the assumption that you factored into that 55% dividend payout decision.

Well, the board feel comfortable with targeting the 55% in 2014, based fundamentally on the mix shift and a view of a range of possibilities for where we might be going beyond that. So you mentioned the 3.5% number. I don't think we have enough insight today to really know what the growth in rate base might be beyond 2014. But we felt that 55% was sufficiently conservative. That under most of the likely scenarios, we would still be able to fund the growth without having to resort too much to sort of just coming to the capital markets in order to raise capital, in order to pay the dividend, if you see what I mean. So I don't have a specific expectation going out. But I think if you look at how we derived, in essence, the 55% number, it was a function of saying, okay, what do fully regulated businesses typically pay out in terms of payout ratio, what's the range there. What sort of payout ratio is supportable by a business that is fundamentally around long-term contracts, that's obviously a lower amount, and then what's the payout ratio for a business that has merchant assets, which is essentially 0, and we then weight average those. So in a sense, it's what should be a sustainable payout ratio based on the portfolio mix as it will be in 2014. So going beyond that, if that mix itself changes radically beyond 2014, that might cause us to rethink that for future years.

We'll go next to Steven Fleishman at Bank of America Merrill Lynch.

Just, Moray, you mentioned in your prepared remarks that you might go above the high end on the equity units offering for the year. Could you just give some sense on what -- if so, what would be driving that? Is that a function of more investment opportunities that you're seeing? Is that a function of the stock price? Just...

It's more a function of the sort of tactical issues around where we're likely to come out on cash flow, making sure that we have enough liquidity through the end of the year, making sure that the cash balances are roughly where we want to be. A couple of things I would note, as we've often discussed, on the project finance side, we really like to have our projects as far along and complete and clean as they can be when we go to the project finance market, because that's how we get the best deal out of those. So given that the build here is concentrated heavily late in the year, we actually may not get to execution on some of the project finance transactions, that really are associated with the CapEx for this year, until next year. So that means we got to come up with cash in the meantime. And as I've said before, we're going to watch the 2012 metrics as well. So that's one thing. Another thing is that we have some opportunities I don't want to -- for commercial reasons, I don't want to go into details. But we have some opportunities to accelerate some capital expenditures in the year in exchange for commercial advantages, but obviously, we have to have the cash to come up with that. So that all that gets factored into the liquidity analysis and says how much cash do you need, and then obviously, you got to have a balanced mix of financing. So right now, my thinking is that we may well do another issue of comparable size to the one that we did earlier in the year. But as I said in the prepared remarks, we haven't settled on a final amount yet.

Okay. And then just any kind of updates on what you're seeing on -- in Washington on the PTC and I guess some of the other renewables-related legislation that has popped up?

Yes. I don't really have a lot new to report there. There continues to be a lot of discussion. I think at the margin, the discussion is proceeding in a favorable direction, by which I mean that more people are coming to recognize that it doesn't make good economic sense to cut the PTC off 100% instantly. At the same time, as I've also said many times before, we do see a strong political view to the effect that there have to be a definite end in sight for this kind of support, and that's a concept that we have indicated publicly that we can accept. Obviously, the devil is in the details. So I think we're making progress on the discussion. But we continue to believe that we're not likely to see anything really happen until after the election, and that this is just one small part of a much broader set of discussions and compromises that, again, have to be worked out after the election, so not a lot new.

We'll go next to Paul Patterson in Glenrock Associates.

Just back to Jonathan's question, just to make sure that I understand this. The $57 million of dispositions is not an adjusted earnings for the most part. Is that correct?

Yes. I would say roughly a little over half is out of adjusted earnings and a little less than half is in.

Okay. And then on the tax equity market, any thoughts we should have with respect to the tax equity market and the fiscal cliff, so to speak, for all these sort of tax adjustments that might potentially occur? Just -- could you give us any feeling for what's happening in that market, and what the outlook is there?

Well, there continues to be an active market. I can't say that the prospect of comprehensive tax reform, at least, to date, has had significant impact on the market, although that doesn't mean it couldn't in the future. So really, they're kind of separate questions at the moment. I think there's a high degree of skepticism about whether comprehensive tax reform really will occur, or if so, on what timeframe. And so at least at the moment, it hasn't had a real impact on the tax equity market.

Okay. And then finally, the situation in Spain, just to sort of put it in perspective. What is there the total exposure? I mean, I don't mean to be cataclysmic or anything. But when you read what you're hearing coming out of what the situation is in Spain, just for investors, how much is the total exposure-- if the situation were to get untenable? Just how much exposure do you have in Spain as an investor there?

Well, our equity commitment to the project is roughly EUR 300 million, but the rest has been borrowed on a nonrecourse basis against the project in euros. So ultimately, our equity commitment is of that order of magnitude. And you can figure out, obviously, by applying whatever reasonable ROE you want to that, what the potential range of earnings impact is. But that's what we're talking about.

And then no guarantee.

I want to emphasize, at least, on everything we're hearing to date, we don't think the project is fundamentally threatened. We think the issue is around what are ultimately going to be the returns on the project.

Sure. I just wanted to get sort of sense as to -- just to put it in perspective.

We'll move next to Jay Dobson at Wunderlich Securities.

Most of my questions have been answered, but Moray, just following up on the Spain question. If I recall, there were some carve-outs in the financing that's sort of handed or pushed a little of this political risk, to sort of broadly calling it that, to the debt side of the equation. And I don't remember exactly how it works, but if you could remind us how that works. And then just with your best view, I know this is moving around a little bit, sort of how that might play into something that didn't, as you point out, fundamentally sort of eliminate the project but more challenge the economics.

Sure. I don't want to play amateur lawyer here, so I'm going to sort of simplify things pretty significantly. But the financing is -- protects us against change in tariff risk, simply put. So if there's fundamentally a change in the tariff, then the banks share in that risk. To the extent that what the government ends up talking about or imposing is simply a tax that's kind of consistent with what's already on the books or is an adjustment to an existing tax that would presumably not be a complete change in the tariff. To the extent that it was extreme, you might well argue that it was a change in tariff. So I think that's what we're talking about. Again, I think the -- realistically, we're trying to figure out what level of tax there is going to be, and hence, what the impact on the returns from the project would be. And again, I would just emphasize that, at least, our take on the numbers is that the government can solve the problem that they have with the electricity sector tariff deficit through the imposition, broadly, on the energy sector of taxes that would not have a materially negative impact on ours or many other projects in which people have committed billions of euros. But to the extent that they want to try and use this as an opportunity to help address the broader fiscal deficit that they're dealing with, then that's a different matter.

Okay, that's helpful. And how much of the EUR 300 million of your equity has been committed to date or actually funded?

I think we're -- I mean, 75%, 80%. I mean, we're well along in construction. Construction's proceeding very well. We're on target for delivering those units next year.

[Operator Instructions] We'll go next to Andy Bischof at Morningstar Financial Services.

Most of my questions have been answered, but I do have one follow-up question to the solar development in California that you purchased. Given an optimistic scenario of if you sign a PPA in 2013, could you put a possible timeframe on when you expect that development to be operational? I'm just trying to get a handle of the CapEx and when you would be spending that amount.

Realistically, it wouldn't be before 2016, and it probably could slip beyond 2016 under some scenarios. And total CapEx would be somewhere in the neighborhood of $800 million to $900 million for one 250-megawatt project. And in the near term, I'd say that the better likelihood for modeling purposes would be one 250-megawatt project. Certainly, we would love to build out that entire 1,000-megawatt facility. But right now, I wouldn't plan on anything other than 250 in the models.

And we'll go to Ashar Khan at Visium Asset Management.

Can I just ask what's happening on the Seabrook? If -- I guess if I read today, even just running at 85%, when do you expect that to come back to 100%?

Yes. No update on Seabrook. It continues to run a little bit below full output because of the derate associated with general cooling limits. It will continue to do so through the next outage, which is scheduled for some time in the third quarter. I think it's September. So that -- I think we previously discussed the full year impact of that being reflected in the numbers. There's really been no change.

Okay. And then, Moray, can I just ask, based on the results year-to-date, it seems like you're running at least ahead of -- at least towards the top end of the range. Is that a fair thing to say that you're running a little bit ahead of, I guess, where plan would be or to indicating to a top end of the range for the year?

No, I wish that were the case. But I think right now, we're sort of right in the middle of -- it was very consistent with where we expected to be. Obviously, there's always puts and takes that'll just go one way or another. But as I say, I don't see any reason to change the range for the year, and we could end up in a variety of places in that range. We still feel pretty good about the year. But I will say that it's a very, very tough environment for the Energy Resources folks, any asset or piece of the business that's exposed to competitive market. It's just a tough market environment. So having to work very hard, as I say, scratch and claw every penny that they can get from the businesses, it's not a great market environment. But despite that, we're doing pretty well. So we're certainly pleased with where we are at this stage.

And that does conclude today's question-and-answer session. At this time, I'll turn the conference back over to management for any closing remarks.

No, thank you for being with us this morning. We look forward to addressing follow-up questions.

And that does conclude today's conference. Again, thank you for your participation.