NextEra Energy, Inc. (NEE) Q1 2013 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the NextEra Energy First Quarter 2013 Earnings Conference Call. Today's conference is being recorded. At this time, for opening remarks, I would like to turn the call over to Ms. Julie Holmes, Director of Investor Relations. Please go ahead.

Thank you, Leslie. Good morning, everyone, and welcome to our First Quarter 2013 Earnings Conference Call. With me this morning are Jim Robo, President and Chief Executive Officer of NextEra Energy; Moray Dewhurst, Vice Chairman and Chief Financial Officer of NextEra Energy; Armando Pimentel, President and Chief Executive Officer of NextEra Energy Resources; and Eric Silagy, President of Florida Power & Light Company. Moray will provide an overview of our results, following which, our executive team will be available to answer your questions. We will be making statements during this call that are forward-looking. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially from our forward-looking statements if any of our key assumptions are incorrect or because of other factors discussed in today's earnings news release, in the comments made during this conference call, in the Risk Factors section of the accompanying presentation or in our latest reports and filings with the Securities and Exchange Commission, each of which can be found in the Investor Relations section of our website, nexteraenergy.com. We do not undertake any duty to update any forward-looking statements. Please also note that today's presentation includes references to adjusted earnings and adjusted EBITDA, which are non-GAAP measures -- financial measures. You should refer to the information contained in the slides accompanying this presentation for definitional information and reconciliations of the non-GAAP measure to the closest GAAP financial measure. With that, I will turn the call over to Moray.

Thank you, Julie, and good morning, everyone. NextEra Energy delivered strong results during the first quarter of 2013, and both Florida Power & Light and Energy Resources are executing well on the objectives we've discussed with you last quarter and during our investor conference. At FPL, we maintained a regulatory ROE of 11%, while we continued to invest heavily in the business in ways that enhance what we believe is already the best customer value proposition in the state. Average regulatory capital employed grew roughly 14% over the same quarter last year and was the main driver of our net income growth of about 20%. I am pleased to report that 3 of FPL's major capital projects are now complete. The successful repowering of Turkey Point Unit 4 earlier this month marked the completion of our extended nuclear power uprate program. We also finished installing 4.5 million smart meters across our service territory to serve our customers better. Finally, our first modernization project at Cape Canaveral entered service last week, more than a month earlier than originally expected. And our Riviera Beach and Port Everglades modernizations remain on track. At Energy Resources, adjusted earnings were down slightly compared to the prior year comparable quarter, primarily from lower wind generation. This quarter's adjusted results excludes 3 unusual items: the gain on the sale of our Maine hydro assets, a charge associated with our decision to sell our merchant fossil assets in Maine and charges associated with an impairment on our Spain solar project. I will discuss each of these items in more detail later in the call. Our renewables backlog remains on track, and we continue to make good progress on our incremental growth opportunities. Since our investor conference in March, we signed long-term power purchase agreements for an incremental 150…

[Operator Instructions] We'll take our first question from Dan Eggers with Crédit Suisse. Dan Eggers - Crédit Suisse AG, Research Division: Just turning to the wind conversation a little bit with the range now out there of 500 to 1,500 for the next 2 years. Is that 1,500 megawatt, the top end number, is that a reflection of kind of the logistical limitations of you guys building that much wind in a short amount of time? Or do you think there's the ability, at some point, to maybe surpass that given the compelling economics of wind with the tax credit still sitting out there?

Well, Dan, I would say that the whole range is based on our total assessment of what's realistic over this period, including both the customer dimension and the supply-chain dimension. So while I would never say never, I think that based on what we see today, 1,500 is a good upper end for the U.S. wind program. Dan Eggers - Crédit Suisse AG, Research Division: And then have you thought about kind of the way the IRS interpretation? I mean, it looks like there's maybe some ability to even go beyond 2014 from a development perspective. Do you guys see a window where this could expand into 2015?

I think that right answer to that is just to say that we are very focused on our 2013-2014 program. Dan Eggers - Crédit Suisse AG, Research Division: Okay. And then on solar, obviously, you guys kind of rescaled on the Blythe project, which was expected. But when do you think we could start to see movement on some PPAs being announced on the solar front? Is that a 2013 announcement prospect? And what should we be watching maybe to see some of these projects move forward?

I guess I would just divide the solar pipeline into the 2 parts. I think obviously, with just announcing 2 small projects here, I think there could be several more of those. We've previously noted that there's probably not more than one more large scale project to come that could -- would -- certainly we could have success on that in this year, or not. So I mean it's a little difficult to say exactly when it's going to happen. Armando, do you want -- do you have any other comments? Armando is shaking his head, so that's all we've got. Dan Eggers - Crédit Suisse AG, Research Division: Okay. And I guess just the last one. Again, I guess, it looks like we had a light performance from a wind utilization perspective. A, how far off were you guys versus normal? Because I didn't see it in the slides. And then b, is there a time when we need to reevaluate kind of the growth rate or base line expectations, given the fact that there seems to be a fairly regular underperformance from wind relative to the model?

Well, I guess, there's 2 parts to the answer to that question. First, on the wind resource, just numerically, in the first quarter we're about 97%. It's quite clear looking at the data over the last few years that the wind resource available to the portfolio in aggregate has been, on average, below the longer-term averages. So I don't think there's any question about that. The second part of the answer, however, is that we are right in the midst of essentially recalibrating all our wind models. And the reason that I pulled the wind resource slide from the release this time is that we -- while we have a new set of numbers, they are not directly comparable to the ones that we have been presenting. So I was a little concerned that people would compare one with the other and come to misleading conclusions. So we will be putting those back out once we have a better basis for comparisons on that. So we are doing some recalibration. But I would just estimate -- underline that the wind resource, like any other sort of climate-related variable, can go through quite significant cycles. So we can have several years in a row where you are below average, and that is statistically perfectly normal.

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

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

I think you may have been picking up the reference to corporate and other. As we've previously said, for '13, we expect it to be a little bit up over 2012. We certainly expect Energy Resources to be up as well in '13.

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

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

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

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

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

I can't absolutely say that there's nothing but upside. But as I said in the prepared remarks, we continue to believe that our exposure is limited to the equity contribution, which is roughly $270 million based on today's exchange rate.

We'll take our next question from Steven Fleishman.

Just a couple questions. The 2013, '14 EBITDAs were down about $100 million to $140 million in -- for Resources. Is that mainly just taking Spain out? Or is there any other changes in there?

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

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

It was really spread all across the board. The full requirements piece of it was roughly half the $0.04. And even within that, it was a variety of different deals. As I recall, it was mostly concentrated in the PJM deals, more than NEPOOL. But most everything was a little bit better. And then a little bit in just the regular general marketing and trading. So nothing specific that you can really point to, but each element of that portfolio did a little bit better than we expected.

And then retail was fine?

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

Okay. One other question, just the -- there's, I guess, the proposed legislation on renewable MLP has been -- has come back out again. Could you just give us your latest thoughts on that proposal? What are the good things, bad things and how that ties into whether we can get another PTC extension?

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

So Steve, I think the important thing to understand about the MLP proposal with -- of adding renewables to be able to be MLP-able, if you will, is that it's not really a replacement for the PTC. And that's because this bill doesn't fix the -- doesn't address the passive loss limitations that exist as a result of the 1986 tax changes. And so new wind projects have significant losses that would not be allocable to the investors. And so it's a terrific vehicle for old wind assets coming off of a 10-year -- coming off of their 10-year PTC window, and that's terrific. And we think as the largest owner of those kind of assets, that it would be helpful to us if it passed. But it is not a replacement for the PTC, is the bottom line, and would not really impact new builds as a result of that.

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

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

Sure. Let me try and see if I can take those. First of all, we have a requirement for an annual filing with the commission on our storm hardening plans, and that is, I believe, this week. We will be indicate -- based on the work that we've done to date, we can see very significant benefits from the hardening activities that we've already undertaken. And so we would like, if we can, to accelerate our rate of progress on that, and we believe that we will be able to do that and that will be the effect of the filing tomorrow. For recovery purposes, given the fixed rate agreement, the -- that has to be absorbed within the fixed rates that we can see out through 2016. In terms of ultimate cash recovery, it would be then obviously part of the rate base that would go into whatever we end up doing for 2017. Let's say, hypothetically, we had a rate case in 2017, it would be in the rate base on which the revenue requirement would be assessed. Broadly speaking, what we typically call our base infrastructure-type investments, so that's the basic investment that we have to do in the transmission/distribution infrastructure. All the sort of basic, outside of major generation projects, would typically have to be absorbed within the fixed rate agreement that we have in place. If there are specific large projects that are approved by the commission within this period, they would become eligible for AFUDC, so you would have an earnings impact but a noncash impact, potentially, within this period, but we'd have to wait for cash recovery beyond. So the projects that clearly get cash recovery through increases in rates in the period of the rate agreement are the 3 modernization projects. Then there are some projects that might be recovered through clauses. So if there were a capital investment that was associated with environmental upgrades that were authorized for recovery through the environmental clause, for example, those would get cash recovery through that mechanism. So there's a whole variety of things. But I think the bottom line way to think about this is the reason that we are so very focused on productivity is that the more progress we can make on the productivity side, not only do we make the business better in and of itself, but we also create what I call the headroom to enable us to do additional capital activities that are good for customer and will provide long-term value creation potential for the shareholder.

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

Yes. As always, with O&M, there are some significant variations from quarter-to-quarter. So some of that effect is timing. But some of it is related to planned outages, which vary from year to year. But having said that, as I said before, we are very focused on the broader O&M picture. We have this company-wide initiative underway, and we feel pretty good about where we are on that long-term stretch goal of keeping O&M flat in nominal terms over the period of the rate agreement.

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

Most of my questions have been asked and answered. But I wanted to follow up on one question from Dan on this April 15 IRS -- I guess, I'm not sure what the official term is, but the IRS letter or whatever, in terms of the PTCs and the ITCs. I know you guys are focused on this year and next, but could you just give us a little bit of flavor as to your reading of the IRS language and what that might mean for the industry in terms of 2015 in terms of new wind potential for the industry?

Frankly, we haven't focused much thought or time on what the implication is for 2015. I think -- at least the way we see it, we have a great window of opportunity to build another portfolio of U.S. wind in 2013 and 2014. And the sooner that we can get projects underway, the sooner we can get them completed, deliver benefits to our customers and value to our shareholders. So we really, at this stage, haven't been focused on 2015.

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

Most of my questions have also been asked and answered, but one on just customer load growth. In the first quarter, it looks like the change in underlying usage was basically flat. And last year, I think it was up a little over 1%. And in your Analyst Day, you had laid out some expectations there. Can you talk a little bit more about the drivers for the first quarter, how you look at that versus your expectations?

We don't attach a great deal of significance to any one quarter's change in the underlying usage per customer. Last year, we were, I think, pleasantly surprised. We had several quarters where we thought it was higher than sustainable. So this one is kind of a little bit lower than we would expect for the medium-term outlook. But I can't put my finger on any particular drivers in there. It does fluctuate a fair amount from quarter-to-quarter. So going forward, I still think we're going to see small positive increases in average usage per customer over the next few years. But in any quarter, we could be up by a 1% or flat to slightly down as we were this quarter.

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

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

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

Just a couple things. In the projection that you'll earn the -- around 11.25% ROE on a regulatory basis for the year, does that projection take into account the expectation that you will in fact achieve 0 base O&M growth for the fiscal year?

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

Awesome. And so just to recap what you said with regard to the ability to sort of earn on the storm hardening portion of sort of your opportunity set in terms of incremental opportunities for between now and '16. By definition, you see the ability to hold O&M flat is creating the headroom for sort of that tranche of potential opportunities should the commission accept them?

Absolutely, yes. Now recognize that most of that, the headroom, needs to be created in future years because most of that spending will ramp up this year and the higher levels will be attained next year. But absolutely, yes.

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

That's correct.

Okay, great. Last question, you talked about how the surplus depreciation in the quarter was $137 million. You talked about using more in the first half than the second half. Then you said that surplus depreciation use would decline in subsequent years but the impact of that would be mitigated and/or offset, I don't remember the exact language, by increases in wholesale revenues from contracts coming on. Can you talk about the size and duration of those contracts?

I don't think I can say anything very specific about the duration. We did have some discussion, in the March investor conference there's a slide that, I don't recall exact numbers right now, but does show you the magnitude of the impact in 2014. But we have a significant pickup in 2014 associated with one large contract.

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

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

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

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

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

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

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

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

Yes. And let me give you -- there are lots of instances here, but let me give you one little one, but it turns out to be significant. Each of these turbines has to be aligned to the average wind direction, and the alignment of the turbine instantaneously to the average wind direction has an impact on the power extraction. So in order to do that, you have to have a vein, essentially, on the turbine that allows the control system to figure out where the wind is coming from, to allow the control system to align the turbine optimally with the wind. If those veins are slightly out of alignment, and they do have a tendency to get out of alignment over time for various reasons, then you will have the control system not optimally extracting the wind. So we've had a recent program where we have been going through and realigning some of these little veins. So that may sound like a small item, but being off by a couple degrees, which you wouldn't notice off a regular visional inspection, can make a difference. So there's a whole series of things like that. And we'll have more for you on that, but I felt we couldn't deal with that within the context of the earnings release.

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

So first question. You spent a lot of time at the Analyst Day or at least the presentation on transmission opportunities. I'd be very curious to get your thoughts on FERC 1000, how the compliance filings are working out and, as of today, what the opportunity set before you by region is.

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

And that would have been my first remark, which is FERC Order 1000 is working. It may work a bit slow and it may work a bit different by the regions, but it's clearly working. I mean, we've seen opportunities come up this year in California. Opportunities come up in ISO New England. We're excited about some things that we're looking at in SPP. And it's -- so it's one of those things where I look at where we have -- we look at -- we have the pipeline today compared to where it was a couple years ago, and it's pretty exciting. But as we talked about at the Analyst Day, it's not just the U.S. opportunities or the 48 states. We've got several opportunities up in Canada that we're pursuing, a bid that we put in earlier this year that we expect to hear back in the third quarter. Hawaii looks like it might have some opportunities if those -- that RFP comes out in the second or third quarter of this year. So as you might imagine, the incumbent utilities have a significant interest in what happens in their home territory and would like to build the transmission themselves, but we see continued opportunities. And in some regions and states, none of which I'll mention at this time, it actually looks like even the state regulators are pushing the traditional utilities to be a bit more open and either seek partners or to open up the opportunity entirely to new incumbents. So that's pretty exciting for us also.

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

Well, Julien, I was just going to say, just to put all this in context, as a reminder, what we have said is the transmission opportunities that we're working are the projects that are likely to come into service in the 2017, 2018 kind of time frame. So these are long-term projects. In addition, I have certainly indicated to a number of people that my -- I personally would be delighted if we could, sometime in the course of the next 12 months, find that we have succeeded on one of a half dozen or so realistic opportunities that we have. So I think we have the possibility that sometime in the next 12 months, we would have a project to announce. But even if we do, it would be a project that won't have an earnings impact until well out into the latter half of the decade. But that's fine, because we feel very good about where we are through the middle of the decade.

Great. And then bringing it a little bit nearer term here. Looking at New England in the quarter, obviously, you have some assets up there, I suppose a fossil asset that you're looking to get rid of. To what extent did that operate? How did that impact your results? And how do you think about the uplift we've seen at Algonquin of late?

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

We'll take our next question from Hugh Wynne with Sanford Bernstein. Hugh Wynne - Sanford C. Bernstein & Co., LLC., Research Division: You had mentioned that you expected a continued positive trend in weather-normalized use per customer. And I think in your Analyst Day presentation, that was forecasted about 0.3% to 0.7% CAGR. What, in your view, are the drivers of a positive trend as opposed to a negative trend in response to the phase-out of traditional incandescent bulbs and a tendency towards greater efficiency in climate controls in commercial buildings, residential and commercial customers comprising the bulk of your load?

Hugh, I guess there are couple of things. First, you've got, I would say, cyclical factors. We are still coming back from a period where average usage per customer was actually down relative to long-term averages. Second, you've got long-term secular factors, which tend to drive modest increases, and then -- and I'll come back to those in the moment. And then third, you've got -- those are offset by the factors you mentioned, the efficiency thing. So we have an explicit view of the impact of efficiency standards, which are primarily in the HVAC and lighting areas. But that middle category, the sort of long-term drivers of growth, it's fundamentally the long-term economic development. For a long period of time, we have seen that as people get more money, they tend to end up with larger houses, more electronic devices, they tend to feel a little more free to turn the thermostat down to be comfortable, all of those kinds of things. And for certainly as long as we've been looking at the statistics, Florida has exceeded the U.S. average in terms of long-run growth in usage per customer. So I guess the bottom line answer is we're not expecting to go back to the levels of growth that we saw in the last decade because we do believe that those efficiency, appliance efficiency standards will have more of an impact. But when you couple some underlying long-term growth with a little bit still of recovery from the depressed consumption associated with the recession, we think somewhere in that 0.5% a year over several years is realistic. Hugh Wynne - Sanford C. Bernstein & Co., LLC., Research Division: Great. And if I could quickly, on the stretch target of achieving basically flat O&M expense per megawatt hour over the '13, '14, '15, '16 period, that implies a fairly substantial cut in real O&M per megawatt hour. Is that something that's made possible by the rollout of your automated metering system? Or are there other more important drivers that make you think that, that's feasible?

Well, I would say I would -- I certainly wouldn't exclude that. We are definitely seeing all kinds of opportunities from -- arising from the investment that we've made in the so-called smart grid. But that's only one of many things. Look, if you go back and look at the long-term trend, we have consistently, up through the middle of the last decade, driven real O&M per kilowatt hour down substantially. That trend started to reverse a little bit or flattened out in the middle of the last decade, and then it reversed a bit with the -- as we went through the recession in the last few years. So really what we're saying to ourselves is we ought to be able to get back on the track of long-term, real improvement in O&M per kilowatt hour over a multiyear period. And now that we have the resources, many of which were freed up from the completion of the rate case last year, to focus on the analytical work that's necessary to get us there and the ideas that are coming up through this initiative that I referred to, we feel pretty good that we can get back to where we think we should be.

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

Moray, can you give us what -- on the slide where you showed what the first quarter rate base was, is there a number that you can provide us that would be for the end of 2013?

I can certainly get back to you on that. We have a rough number on where we expect to be given the CapEx plans. I don't have it off the top of my head. But yes, I can get back to you on that. Okay, thank you very much.

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