NextEra Energy, Inc. (NEE) Q3 2012 Earnings Report, Transcript and Summary

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

Thank you, Roxane [ph]. Good morning, everyone, and welcome to our third quarter 2012 earnings conference call. Joining us this morning are Jim Robo, President and Chief Executive Officer of NextEra Energy; Moray Dewhurst, Vice Chairman and Chief Financial Officer of NextEra Energy; Armando Pimentel, President and Chief Executive Officer of NextEra Energy Resources; and Eric Silagy, President of Florida Power & Light Company. Moray will provide an overview of our results. Following which, our executive team will be available to answer your questions. We will be making statements during this call that are forward-looking. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially from our forward-looking statements if any of our key assumptions are incorrect or because of other factors discussed in today's earnings news release, in the comments made during this conference call, in the Risk Factors section of the accompanying presentation or in our latest reports and filings with the Securities and Exchange Commission, each of which can be found in the Investor Relations section of our website, nexteraenergy.com. We do not undertake any duty to update any forward-looking statements. Please also note that today's presentation includes references to adjusted earnings and adjusted EBITDA, which are non-GAAP financial measures. You should refer to the information contained in the slides accompanying this presentation for definitional information and reconciliations of the non-GAAP measure to the closest GAAP financial measure. With that, I will turn the call over to Moray.

Thank you, Julie. Good morning, everyone. NextEra Energy delivered solid third quarter results despite challenging market conditions in Energy Resources' major markets, and we remain well-positioned to achieve our overall objectives both for this year and for the longer term. We have previously indicated that our focus this year is on executing against plans that are expected to drive growth for the company across both its principal businesses through the middle of the decade, and I'm pleased to be able to report that all our major initiatives continue on track. At Florida Power & Light, we continue to deliver superior value to our customers, which is the foundation of our strategy and is demonstrated by providing the lowest typical residential bills in the state combined with superior reliability, award-winning customer service and a clean emission profile. We continue to invest capital at a record rate in major projects that will improve this value proposition over time, including our nuclear uprates and fossil modernization initiatives, all of which made good progress this quarter. The rapid growth in our regulatory capital employed, combined with a consistent earned ROE enabled by the current rate settlement agreement, naturally resulted in strong earnings growth at FPL. We completed the technical hearing for FPL's base rate case and entered into a proposed settlement agreement with 3 major interveners. Although this proposed agreement is opposed by the Office of Public Counsel, the Florida Public Service Commission has scheduled evidentiary hearings in November and will fully consider it at that time with a decision likely by the end of the year. At Energy Resources, our financial performance was hampered by the continuing impact of the down power at Seabrook and by disappointingly mild market conditions in Texas, but in other respects, remained solid. I will provide more detail…

[Operator Instructions] We'll go first to Stephen Byrd with Morgan Stanley.

As you look at the evolution of the Texas market, there now are essentially 2 different regulatory models that the router [ph] group recently proposed. As you think about those different constructs, could you talk at high level in terms of the impacts to your business over time?

Sure, let me ask Armando to pick that one up.

Stephen, we're going to know a lot more, obviously, after tomorrow's meeting in Texas, which is an important meeting. I think it's a bit early for us to talk about what the ultimate and potential impacts are of either one. As a general rule, any mechanism that provides both current and future generators with some mechanism to be able to keep their plants open, to be economic and to potentially build future plants is a positive not only for the folks in Texas and the Texas market but also for the generators. So I don't want to speculate on what either plan might do for us. We have filed comments though with the PUCT. We certainly do prefer and support the capacity market out in ERCOT. We think that's the best way to be able to not only support current generators but future generators. And I don't know whether you've seen on our comments or not, but we also believe that the reserve requirement should be a requirement, the reserve margin, as opposed to something that they just shoot for.

Understood. And then just as follow-up, as you look at renewables growth opportunities, we've seen some activity there. Do you see the PTC question of expiration or extension driving that very much? Or could you just talk more broadly about as you see opportunities on the M&A side to acquire assets, what's your general take on the ability to grow via M&A?

I think there's -- I've made comments before where I've been pretty optimistic about projects that we might be able to pick up on the M&A front, and those have -- the reality has not proved to be true. But we, even if that's the case, we have picked up at least one asset or so every year for the last couple of years, and we've done that again in the third quarter, an asset that we hope to close in the fourth quarter. I will tell you that there is a lot of activity out there. There's a lot of projects that -- single projects that we're looking at and multiple projects that we're looking at both on the existing projects, those in construction and those in development. A lot of that I think will depend on what happens with the PTC extension at the end of the year and what equity holders believe they've got to sell. I would be disappointed if at some point during the next 12 to 15 months, we don't pick up at least 1 or 2 other significant projects like we just picked up in the third quarter of this year. On the PTC front and what that means for new development for us, obviously, there's going to be a big difference in 2013 compared to 2012. If there is no PTC in 2013, but even if there is a PTC in 2013, there's obviously a significant amount of activity in 2012 that's taking place. So even with the PTC, I think the overall activity will be down. We're still fairly optimistic that there will be an extension for 1, at least for 1 year and maybe for a couple of years. We're just going to have to wait and see what happens from now through the end of the year. But even without a PTC, we think there will be some opportunities in certain states to develop wind in 2013. And as we showed during the quarter, when we signed a 100-megawatt PPA, there may be a few more of those out there.

Just to add one comment on that. I do think that there's a little bit of an interaction between the state of the asset acquisition market and the prospects for PTC extension. So everybody obviously is waiting to see what happens with the PTC extension, and that clearly is going to affect different folks thinking about assets that they may hold. So I think if we get a PTC then you may see -- well, you will obviously see us with more greenfield development, you may see others, too. If you don't see a PTC extension, then I think there will be relatively more activity on the asset M&A front.

We'll take our next question from Daniel Eggers with Crédit Suisse. Dan Eggers - Crédit Suisse AG, Research Division: On the utility side, I guess just kind of given how wide the parties are between agreeing to the settlement and not agreeing to the settlement, should we assume that this is going to have to go through the full hearing process to make a decision on the settlement? Or do you guys have any sense of maybe a deal can get done without having to go through the full process?

Well, as we said in the prepared remarks, we are right now actively getting ourselves ready for live testimony, cross-examination on November 19 through 21. So we are certainly expecting that we will be there, and we will have a thorough hearing on the additional aspects that are in the settlement agreement that were not covered in the technical hearing in August for the underlying case. As we also indicated, there's an agenda conference currently scheduled for December 13. So we would certainly expect to have a resolution on that before the end of the year. Dan Eggers - Crédit Suisse AG, Research Division: Okay. And then on usage trends of the utility, it looked like there's some nicely positive underlying demand trends kind of popping up better than we've seen recently. Is there any more color you can kind of share on where that extra usage is coming from as you guys look at what the customers are doing?

There's not a lot of additional detail I can give you. I guess we've had some good news on the usage front for the last several quarters. We're a little bit reluctant to declare that a trend, just in case it might go away on us. But it's certainly encouraging, but not a lot of detail on where it's coming from. So it's more than you would expect from ongoing underlying usage growth. So I think there's sort of some recovery factor in there. But as I said, we are back to the old phrase, cautiously optimistic that we'll see some underlying usage growth continue. But probably not at the levels that we've seen the last couple of quarters.

We'll take our next question from Steve Fleishman with Bank of America.

Just, Moray, a couple of questions on the forward hedging slides. It looks like the gas infrastructure line moved up meaningfully in '13, '14. Could you give us a little more color on what's going on in that business?

Well, fundamentally, growth in the business, as we continue with seeing additional opportunities and reflecting that in our expectations. So what we are learning from our existing production activities is encouraging. So just greater volumes overall is what's driving that.

Okay. And is there any reason why you used a September 7 date for these, since that was pretty much probably the bottom in the power market?

Sheer bad luck, that happened to be the date of the roll-up that we based this set of views on. But you are right that it was an interesting inflection point, so we've seen a pretty strong increase in pricing since then. But that was just coincidence.

This is Jim. Just 1 comment. Remember, we're pretty well-hedged in '13 and '14, so those -- that volatility is really more relevant for our out-year earnings than it is for the near term.

Okay. And then one last question, just more to confirm your comments for this year that basically to get to the midpoint of your guidance this year, you just need 2.2% up fourth quarter.

That's correct.

Okay. And that doesn't seem to be a stretch to achieve?

No. I mean, if you think about the sort of drivers for Energy Resources, we're going to see some growth from new assets, and the gas producing activity should grow a little bit. The existing portfolio should be very roughly flat. I'm sure there'll be some puts and takes as usual. We've got a refueling outage coming up at Duane Arnold, but that's offset by the fact that we should have a shorter outage at Point Beach because last year, we had the big outage for the uprate. So fundamentally, we should see some continued good growth from the new assets, and so we feel pretty good about where that is subject to all the usual caveats. There's a lot of time to go, and there's always ups and downs in that business. Also, the fourth quarter, there's typically less uncertainty around the variability of just market conditions. Obviously, the third quarter is your big quarter. It was, as I said in the prepared remarks, a little disappointing in Texas. But you usually have greater visibility on the fourth quarter. And then on the other side of the house, it's the same story, maintaining a consistent ROE but continuing to invest the capital in the major projects. And we should see a continued trend of earnings growth there. So we feel pretty good about that. And again as I indicated, we certainly hope we'll do better than the midpoint of the range. But I just provided the 2.2% to give some perspective on it. It doesn't seem that unreasonable.

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

I just wanted to follow-up on Steve's question on the gas business. I wasn't clear, I'm sorry if I'm just a little slow there. It does seem like a big jump in that infrastructure business, and you said it was because of volumes, is that right? Could you just help me out a little bit more, drill a little bit deeper for me?

Yes. Let me ask you, which numbers are you referring to specifically, so I'm [indiscernible]?

If we look at the EBITDA numbers for -- in the portfolio financial information, those hedge numbers, if you look at 2013 and 2014, the numbers look like they've substantially increased for EBITDA in the range for the gas infrastructure business, and...

Okay, that's fine. You're looking at the comparison 2013 to 2014.

Right, and 2013, you're right, just from last quarter to this quarter.

Right, yes. Recognize that, that's a fairly -- if you think of the difference between gross margin and EBITDA, that's a fairly leveraged business. So there's a certain level of sort of a "fixed cost" but -- organizational infrastructure cost that you need to drive that business, but that doesn't scale lineally with the scale of production. So as your production ramps up, you should get some profitability leverage. And I think that's what you're seeing there. So you've got a volume growth being leveraged by cost structure because the operating expenses are not growing as rapidly as the underlying gross margin.

And that volume growth is being -- I mean, the outlook for that volume growth has increased because of anything in particular? Or just, I mean, how do we think about that? And I guess is it -- can I go back down or I mean...

I think you should think about this as simply growth in the business, more activities, more wells producing. Recognize that these shale gas wells, so they have a typical decline curve, the shale gas production does. So a lot of your activity is really driven by your drilling activity ultimately. So it's a business that you can modulate. And as we've seen good opportunities, we just scaled up the level of activity.

Okay, great. And then just on the production tax credit, sort of the mechanics of that maybe getting extended. There's some talk about the fiscal cliff and how they might just sort of keep -- sort of agree to sort of kick it down the road to be addressed with more of a major tax reform kind of a situation to be developed a few months down the road, if you follow me. And I'm just wondering if that would probably keep the production tax credit where it is, or whether or not it would -- and if that were to happen, if they were to say simply like, "we'll keep things sort of status quo for the next 6 months as we try to iron something out", would that mean the production tax credit would be in effect? And if it were, how would that impact you guys or how would you -- or would it be enough time to help you get more projects in. Do you follow what I'm sort of saying?

Yes. One comment first. Let me ask Jim to comment also. I mean obviously, any response to that question has to be speculation, because how they might resolve, "kicking the can down the road" scenario remains to be seen. But with that caveat, Jim you want to...

Yes. I think 2 things, Paul. One is that when you look at the history of how the PTC has been extended as it's expired, historically, what happened is that it's been brought up as part of a package. There's something like 61 or 62, I'm probably getting that number wrong, but it's correct in order of magnitude, expiring tax credits at the end of this year. The PTC is obviously one of those. And historically, what's happened is that the lawmakers have simply scratched out the 2012 and written in 2013 in the bill and kicked the can down the road. I think that there's certainly some odds that, that will happen. I think the important thing to remember about 2013 though, and Armando already said it, is regardless of whether there is a PTC extension or not, 2013 is not going to be a very big wind installation year in the country. Folks are not going long equipment in order to bet on whether the PTC will get extended. Suppliers are not building inventory. And so there is a -- even if the PTC is extended in December, it will be very hard for folks to get projects in place in 2013. So it's going to be not a large year whether the PTC is extended or not.

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

Real quick, just on the utility side, I mean obviously, whatever rate increase comes out of the rate case would be a tailwind for the business. But how do you think about cost pressures next year and beyond at FP&L?

Well, I guess, the short-term outlook is not really inconsistent with what we've seen over the last few years, i.e. continued modest pressure on O&M but nothing out of the ordinary. I guess in the spirit of full disclosure, I should point out that under the settlement agreement with a fixed term, our exposure, our income exposure to unexpected increases in inflation or interest rates obviously is higher. So that's an aspect of the overall agreement. So right now, we don't see anything on the horizon that's causing us great concern. Just continued slow pressure on nominal O&M offset by our normal, continued incremental productivity from year-to-year.

I guess, when you think about O&M at the utility, do you think about -- I mean, is your goal -- is your normal trend kind of inflationary plus whatever the cost of any new assets that you bring online in a given year, has it been higher than inflationary? And if so, what are the drivers? Kind of what do you think the biggest puts and takes could be?

Well, for the last few years, the net O&M growth has been slightly positive in real terms, but that's really been driven by a couple of major things, benefits and insurance costs. If you factor those out, everything else has been going down maybe a percentage point a year in real terms. So we've -- over the last decade, we've gone from a period where we were still able to drive costs out in nominal terms to a period where we were driving them out in real terms but were kind of flat-to-rising nominal. For the last few years, it's been slightly up in real terms, but as I say, primarily due to the benefits and insurance. Insurance is obviously kind of a cyclical phenomena. I don't see that continuing at the same pace for future years.

Okay, and last item. Just pension and OPEB, as you're kind of getting closer to the year end of 2012, how do you think about that in terms of cost pressures for beyond 2012?

There is an impact in 2013 from the pension. You've got the effect of losses sustained during the down period a few years back that rolled through. It's not huge. The OPEB is a minor factor.

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

So the vast majority of my questions have been answered. I just wanted to ask you to dig down a little bit more into Texas in the quarter. There were a lot of puts and takes at Energy Resources, one of them was $0.09 favorable from less extreme weather, better supply and trading in Texas. But you also indicated that, that wasn't as much of a rebound as you had otherwise hoped for given that the weather kind of flip-flopped the other way and was maybe more mild than people had hoped. Can you dive a little bit more in the components of that $0.09 and then sort of going into next year and beyond, sort of are you more or less at a stable platform? Or are there other adjustments we should expect to get back to sort of what you think a stable margin is in Texas?

Yes. Let me make a couple of general comments, and then ask Armando also to add his thoughts. A couple of different things going on. Recall that last year's third quarter really was some pretty extreme conditions in Texas. And as we indicated back then, the good performance that we had on our gas-fired assets was more than accounted for by weakness in the Retail business and the fact that wind happened not to blow during the worst of the spiking prices. So all of that, in a sense, reversed itself. And we got back to kind of a normal situation from that perspective. But relative to a typical summer year, we just didn't see the number of days of strong prices. I'm not talking about the 1000-plus megawatt hour periods but just regular strong days. So for example, there were -- in the entire quarter, I believe there were only 3 days where the average price in ERCOT was above $100 a megawatt hour, even in what we call the needle peak of 2:00 to 6:00 hours. So it was just a very flat pricing environment. And so that is below what we would normally expect of a typical summer. In a typical summer, you're going to get more short-term periods of volatility than that. So it's sort of -- it came back from the extreme but it didn't come back to what you would typically think off as a normal level. So with that -- those general comments, let me see if Armando wants to add anything.

Yes, Greg, the only thing I'll add is we set ourselves up for the ERCOT summer this year to be long and to take advantage of what we believe would be decent market prices. That didn't happen. We're now trying to figure out what to do for 2013 and 2014, but it's very likely that we're going to be in a very similar position in Texas. And that is hoping that our assets take advantage of higher prices during the summer. If that does not happen, then you are obviously going to give up some of the upside that you would have otherwise been able to get because you're going to leave some assets open, hoping for those prices. And when they don't come in, you're going to get lower margins. I think, most of -- if I remember correctly, there were a lot of days in ERCOT this year where real-time prices cleared with a three handle. And that not a 300-handle, that was a 30-handle, which is certainly not what we were expecting.

And one of the consequences is that there are fewer opportunities available for what we call our asset optimization activity. So I feel very good about the way we structured the portfolio to protect against the extreme conditions and the balance that we struck there. So that was fine. But if you don't have just the regular short-term periods of volatility, there's less you can do with the assets. And I don't know, roughly to scale it, maybe with all of that -- if it had been a more normal summer, we will have like $0.04 or $0.05 perhaps probably more of income from the Texas segment. I don't know if that helps you.

No, that helps a lot. So it sounds like you'd be positioned next summer very similarly to the way you were positioned this summer. So if you have a mild summer again next year, we wouldn't see a big pullback in profitability on the put side. If we saw a tight summer, you'd have some upside?

I think that's fair, very fair.

We'll go next to Michael Worms with BMO Capital Markets.

With regard to all of the equity units done this year, will there be any need for equity in 2013?

Not based on the backlog-only scenario, the capital plans that we have today. Obviously, to the extent that we are successful in adding significantly to the capital profile going forward, we have to make sure that we have the balance sheet strength to support that. But based on what we see today, which is, of course, the capital program that supports the earnings expectations out through 2014, we're in good shape on the equity front, the balance sheet.

Great. And one other question, if I can follow up. Can you give us an update of what's going on in Spain with your project?

Sure. Let me ask Armando. He's much closer to that than I am.

In Spain, over the last 6 weeks or so, there's been a proposed regulation/law that would really affect all of the energy providers in Spain, not just the project that we're interested in, obviously, which is a CSP solar project that we hope to get half of it in operations in the first quarter of '13 and the second half, no later than the third quarter of '13. The 2 pieces of the legislation that affect us are 6% essentially revenue tax, and that really affects all energy providers in Spain. The second piece is a reduction in the amount of natural gas that we would be able to burn at the plant, which is really one of the key items that helped us with the investment decision and help others with their investment decisions over in Spain when they were dealing with solar thermal plants. But a reduction in the amount of gas that could be used, a pretty significant reduction. If you look at both of those and if you assume for a second that there are no changes to that legislation before it becomes final later this year or earlier this year, that's a reduction in our expectations of -- I mean, it's a significant reduction for the project of roughly $0.03 to $0.04 on an EPS basis, which is not that significant obviously to the overall corporation. But we continue to be very aggressive in what we do in Spain on both the political and regulatory front and we're certainly hoping that there is a better outcome. But if there is not a better outcome, that's essentially the effect that we would see going forward.

We'll go next to Jay Dobson with Wunderlich Securities.

Armando, continuing on Spain, I remember the project financing there left the lenders with some exposure. I assume the 6% revenue tax and the limit on natural gas would not trigger that. So essentially, all of those changes would be for next year's account?

That's correct. The best way to think about it, these projects -- we were very well-protected and certainly love the financing that we did, but we are very close now to COD on these projects. So the net result, if all of this, the proposed law gets to final, it might be that we have to put a little bit more equity into the project. And by a little bit, I do mean a little bit. Maybe in the neighborhood of $40 million to $50 million or so, certainly not significant. But the reality is that we will likely, with this proposed law, finish our projects, own the projects and very likely get to the perm part of that mini perm loan sometime later next year or early 2014.

Got you. And so simply, just realizing lower profitability than you might have expected otherwise?

Correct.

Perfect. Moray, I was hoping to go back to Texas just briefly and follow-up on the earlier question. When you look at the results from 2011 third quarter, I think you spent the better part of a couple of months evaluating your policies there. And then sometime in the fourth quarter suggested you were changing them to go into the third quarter of '12 much longer. As a result of what you experienced in the third quarter, would you anticipate any changes in the policy? Or pursuant to the question you answered earlier, is there's simply no change and we should anticipate you would go into the third quarter of '13 with the same policy, again being sort of longer than you might otherwise have been in '11.

Yes. Let me try to explain that. There were a couple of things that really changed coming out of -- lessons learned from last year. One was really, I'll say strictly internal coordination, and we've now got a, I think, a much tighter approach to the tactical management of the aggregate position in Texas on a weekly and daily basis. So that's been a good thing, that's worked very well for us this year. The second thing that we did was that we shifted the mix a little bit more. We left a little more open on the gas plants and protected ourselves against some extreme conditions. So on that side, what you might call the policy side, obviously, we will review that as we prepare for the next summer season then tweak it, I'm sure somewhat. But that basic structure, I think, served well. And so that's not the reason that we were a little disappointed in the outcome in Texas. So that structurally did what it was intended to do. The reason we were a little disappointed in the outcome is simply that there wasn't enough volatility and pricing movement to get what we would normally have expected primarily out of the gas assets. So from a policies perspective, we'll revise and tweak, but won't fundamentally change it.

Okay, great. That's really helpful. And then can you remind us the revised cost of the nuclear uprates at P&L?

About 3.1 is where we are right now.

Got you. And that's reflective of the revised megawatts you referenced in your prepared comments.

That's correct.

Thank you for your participation. That does conclude today's conference.