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NextEra Energy (NYSE:NEE)

Q4 2012 Earnings Call

January 29, 2013 9:00 am ET

Executives

Julie Holmes

Moray P. Dewhurst - Chief Financial Officer, Executive Vice President - Finance and Vice Chairman

James L. Robo - Chief Executive Officer, President, Chief Operating Officer and Director

Armando Pimentel - Chief Executive Officer and President

Analysts

Dan Eggers - Crédit Suisse AG, Research Division

Stephen Byrd - Morgan Stanley, Research Division

Paul Patterson - Glenrock Associates LLC

William Appicelli

Michael J. Lapides - Goldman Sachs Group Inc., Research Division

Hugh Wynne - Sanford C. Bernstein & Co., LLC., Research Division

James L. Dobson - Wunderlich Securities Inc., Research Division

Operator

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

Julie Holmes

Thank you, Anne. Good morning, everyone, and welcome to our fourth quarter and full year 2012 earnings conference call. With me this morning are Jim Robo, President and Chief Executive Officer of NextEra Energy; Moray Dewhurst, NextEra Energy's Vice Chairman and Chief Financial Officer; Armando Pimentel, President and Chief Executive Officer of NextEra Energy Resources; and Eric Silagy, President of Florida Power and Light. Moray will provide an overview of our results, following which, our executive team will be available to answer your questions.

We will be making forward-looking statements during today's call. These statements are based on our 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 factor 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-financial GAAP 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.

Moray P. Dewhurst

Thank you, Julie, and good morning, everyone. NextEra Energy delivered solid financial results in 2012, and both principal businesses executed on the objectives we set for ourselves and shared with you in 2011.

The progress we made across both major businesses this past year reinforces our growth prospects through the middle of the decade. We also began to devote significant effort to projects that will drive our growth in the second half of the decade.

Throughout the year, we indicated that we were focused on execution, and I'm pleased to note that we met all our principal execution objectives. At FPL, we continued to deliver the best customer value in the state, our major capital projects all progressed well and we successfully resolved our base rate case. At Energy Resources, we completed our record backlog of U.S. wind projects and met our milestones for the development of our Canadian wind portfolio and our solar portfolio. We also had good execution in our day-to-day operations with a strong finish to the year. And finally, construction of our Lone Star Transmission line continued, and we remain on track for the start of operations later this quarter. All in all, it was a very strong year that positions us well for the future.

Before discussing the financial results, I'd like to take a few minutes to highlight what we accomplished in 2012.

At FPL, our strategy is founded upon offering the best customer value in the state and on finding ways to improve our value delivery over time. 2012 was an excellent year in this respect. We maintained our position as a service provider offering the lowest typical residential bills among all 55 utilities in Florida and a bill that is 26% below the national average. We had our best year ever in terms of overall transmission and distribution reliability. And for the ninth year in a row, FPL received the prestigious ServiceOne award for outstanding customer service.

FPL also improved its national ranking in the ongoing J.D. Power & Associates Residential Customer Satisfaction Survey and retained its top ranking in Florida.

In terms of reliability, we continued to rank in the top quartile nationally, and our 5-year average for the System Average Interruption Duration Index or SAIDI was the lowest among all Florida investor-owned utilities for the period 2007 to 2011. Looking forward, we believe we can improve our performance further.

In 2012, we continued to improve the electric grid through our Energy Smart Florida program, including the installation of another 1.5 million smart meters throughout the state, bringing the cumulative total today to approximately 4.3 million. The project is now 96% complete and will serve as the platform for future reliability and customer service enhancements.

Through realtime access to data at the meter, FPL can now better detect and prevent outages and restore service faster when outages do occur. Data is also available to customers through an energy dashboard available online and via mobile device, which is designed to help them monitor energy consumption and make more informed decisions about their usage.

Making our service the most affordable in the state depends fundamentally on our cost position. For many years, we have been a top decile performer in terms of non-fuel O&M, and we estimate, based on benchmarking data, that every year, our customers save roughly $1.6 billion as a consequence of our low-cost position compared with typical utility performance. That translates to an annual savings for a typical residential customer of about $200.

While we have been very successful over the last several years in keeping the real escalation rate of O&M down, we have seen some upward pressure on nominal O&M per kilowatt hour, as shown in the upper right chart. With the 4-year horizon of the new rate agreement in place, we will, of course, be very focused on finding ways to improve the cost trend. Consistent with our strategy, we will be searching, not only for additional ways to improve productivity, but also possibilities for deploying capital that lead to cost savings that will benefit our customers and help keep rates low for the long term.

Our focus on cost includes more than just O&M, of course, and for the past several years, we have been making major strides in improving the overall efficiency of our generation fleet. In 2012, FPL's fossil fuel fleet reached a record level of efficiency, bringing our systemwide heat rate down to 7,669 British thermal units per kilowatt hour or roughly 24% better than the industry average of 10,040 BTUs per kilowatt hour for 2011, the most recent year for which data is available.

Since 2001, FPL's heat rate has improved by 20%. And in 2012 alone, that translated into customer savings of more than $400 million in fuel costs, as we generate more power while using less fossil fuel.

In 2012, we invested more than $4 billion at FPL, with more than $830 million of this associated with our 3 modernizations. Our Cape Canaveral project is now 96% complete and is currently on schedule and under our original budget, with an expected in-service date of June 2013. The Riviera Beach modernization is 35% complete and is running on time and on budget, with an expected in-service date of June 2014. We continue to expect to bring the modernized Port Everglades plant into service in June 2016, with demolition of the existing plant currently planned for the second quarter of this year. Together, the 3 modernized plants provide significant customer benefits of more than $1 billion over their operational lifetimes.

Turning to our nuclear portfolio. We have now completed 3 of our 4 plant extended power upgrades, investing roughly $3 billion to date and adding approximately 395 megawatts of clean, emissions-free energy to our fleet. The final uprate at Turkey Point Unit 4 is expected to come online in spring 2013 and add roughly 120 megawatts of capacity.

Our third major execution imperative for 2012 at FPL was to achieve a satisfactory outcome of our base rate case. Following lengthy negotiations between FPL and key intervener groups and an extensive evidentiary process on the resulting settlement, in December, the commission approved a modified version of our proposed base rate settlement agreement that we believe is fair and reasonable for both customers and shareholders. The agreement is effective through December 2016 and provides for a retail base revenue increase of $350 million and an allowed regulatory ROE at 10.5% with 100 basis point band. The agreement also includes the ability to amortize over the 4 year term up to a combined $400 million of the remaining surplus depreciation credit and a portion of the fossil dismantlement reserve.

An important aspect of the agreement provides the base rate increases to recover the capital and operating costs of the modernizations at Cape Canaveral, Riviera Beach and Port Everglades once these plants enter service. This generation base rate adjustment or GBRA mechanism provides an appreciable amount of certainty to both customers and shareholders and removes the expense and risk associated with multiple regulatory proceedings and regulatory lag.

Overall, the agreement is designed to help FPL continue to provide customers with exceptional reliability, award-winning customer service and the lowest electric bills in the state for at least 4 more years.

On January 2, the retail base rate increase went into effect, and yet bills for the typical FPL residential customer decreased $0.37 per month. This is primarily due to a reduction in the customer fuel charge, which is a function, not only of lower fuel prices, but also of our efforts to reduce fuel consumption through improved efficiencies.

The Office of Public Counsel opposed the settlement even with the revisions suggested by the PSC and may appeal their decision. However, we believe the PSC's decision was well reasoned and that the Commission was well within its proper authority to consider and vote to approve the agreement.

Turning now to Energy Resources. As we told you last year, we expected headwinds from above market, hedge roll-offs and PTC roll-offs to negatively impact 2012 results. Yet in spite of these challenges, we grew our adjusted earnings over the prior year and laid the groundwork for more pronounced growth in the years to come.

We set an aggressive goal for additions to our U.S. wind portfolio in 2012, and through the diligence and hard work of the entire wind team, we exceeded it. We commissioned roughly 1,500 megawatts of wind in the U.S., something no other company has ever achieved. In the fourth quarter alone, we brought online 1,263 megawatts of wind projects.

We celebrated the commissioning of Energy Resources' 10,000th megawatt of wind in December, a fleet size which is comparable to the generation capacity at a top 15 utility.

We are on track to add approximately 600 megawatts of new Canadian wind by the end of 2015. The majority of which will come into service in 2014, with a total capital commitment of roughly $1.8 billion. And we continue to expect to add nearly 900 megawatts of contracted solar capacity primarily in the U.S. between now and the end of 2016.

As we look ahead to the balance of this year and next for Energy Resources, we are evaluating the growth prospects for our wind business following the extension of the production tax credit. While we must now wait for the exact rules that will define "start of construction," the shift from the prior in-service by the end of the year requirement is clearly positive.

As we have previously indicated, 2013 will be a down year for new wind compared to 2012 as it will take time for the wind supply chain to gear up, but we are optimistic that we can complete some additional megawatts, and we look forward to a stronger 2014 for new installations. We will continue to work with other supporters on a longer-term approach to the policy framework guiding new renewables development.

Before leaving the highlights for Energy Resources, I'd like to draw your attention to Slide 8, which highlights the shifting mix in the earnings profile of the business. Our focus in recent years has been on expansion of our investment in assets with long-term contracts, and more than 80% of our growth capital in the last 5 years has been allocated to these investments. In addition, we have refocused our portfolio in response to changing market conditions, reducing our merchant and short-term contracted assets. The result is a very substantial shift in mix.

In 2014, we expect 65% of Energy Resources adjusted EBITDA to come from long-term contracted assets, up from 49% in 2009. Over the same time period, the contribution from the merchant segment is expected to decline from 40% to 20%, while the contribution from all our other businesses, which includes all our customer supply and training activities, as well as our gas infrastructure operations, is expected to remain roughly flat as a proportion of the total at about 10% to 15%.

Let me now walk through our results for the quarter and the full year. We will begin with results at FPL, and then discuss Energy Resources in the consolidated numbers.

For the fourth quarter of 2012, FPL reported net income of $256 million or $0.61 per share, up $0.10 per share year-over-year. For the full year, FPL reported net income of $1.2 billion or $2.96 per share, up $0.41 per share versus 2011.

Throughout 2012, we continued to invest heavily in infrastructure projects to improve overall customer value. As I noted earlier, FPL's capital expenditures exceeded $4 billion, the highest level of annual investment ever. As a direct result, our regulatory capital employed grew 16.4% year-over-year, and this translated to net income growth of 16.1%.

During the quarter, we amortized $117 million of surplus depreciation, enabling us to maintain a regulatory return on equity of 11%. For the full year, we amortized $480 million. As a result, at the end of 2012, there remained $224 million of the original $895 million, and we will be able to amortize this over the 4-year term of our base rate settlement agreement. In addition, we will be able to use a maximum of $176 million of the fossil dismantlement reserve during the settlement period.

As you may recall, under the terms of the 2010 settlement, the ability to amortize surplus depreciation was central to our ability to maintain our regulatory ROE at the top of the range over the term of the agreement. As we begin operating under the current settlement agreement, the situation is a bit different. In order to earn above the midpoint under the settlement agreement, we will have to work hard to find ways to improve productivity and efficiency. As we've demonstrated in the past, we are committed to doing this.

Despite some bumps along the way, we saw continued progress in Florida's economic recovery over the year. Florida's seasonally-adjusted unemployment rate in December was down slightly versus the prior month and was 1.9 percentage points lower than December 2011. The gap between the Florida and U.S. unemployment rates has narrowed significantly since this time last year, from 1.4% in December 2011 to 0.2% in December 2012, with Florida adding roughly 55,000 jobs since December 2011.

We also continued to see the housing market in Florida recover some ground lost during the recession. Mortgage delinquency rates have declined substantially from their recession peak, although they remain high by historical standards. And the inventory of existing homes continues to decline.

The number of building permits in Florida continued to increase throughout the year and is well above the prior year's level. The Case-Shiller Index for South Florida shows home prices up 8.5% from the prior year, the largest increase since September 2006.

All in all, the Florida economy is clearly recovering, though it is not yet as strong as we would all hope for.

As we discussed throughout the year, we are seeing most of our customer metrics at FPL gradually improve. Underlying usage per customer decreased 0.5% compared to the same quarter last year. But as we have indicated on previous earnings calls, this metric can be somewhat volatile on a quarterly basis, so we do not attach too much significance to this quarter's slight decline. For the full year, underlying usage per customer grew 1.2% compared to 2011.

During the quarter, the percentage of low usage customers declined to the lowest level in 4 years. The number of inactive accounts also continued to decline.

In December, new service accounts increased year-over-year, and we saw the highest levels of growth since early 2007 in our industrial accounts, which in our service territory are primarily tied to the construction industry. We view this as a strong indication that the rebound in new construction is gaining traction that will lead to further increases in new service accounts in future quarters.

During the fourth quarter, we also saw the largest increase of customer since early 2008, with approximately 34,000 more customers than in the comparable quarter of 2011, representing an increase of 0.8%.

Overall, we are seeing moderate improvement in our customer data and continue to believe that Florida will experience above-average growth over the long term.

As customer demand grows and fleets across the state shift to more natural gas-fired generation, Florida's natural gas needs will increase significantly. We recognize that this means that there will be a corresponding increase in the need for more natural gas infrastructure to support the increased consumption. Since the current infrastructure does not provide the necessary redundancy and reliability to support growing natural gas requirements, in December, we issued an RFP for a third major natural gas pipeline to serve Florida. The RFP requests 400,000 MMBtu per day of natural gas capacity for Florida beginning in 2017 and an additional 200,000 MMBtu per day beginning in May 2020.

The pipeline will consist of 2 segments. The first or upstream portion will run from Western Alabama to a new hub in Central Florida that will interconnect with all major existing Florida pipelines. This portion will access the abundant onshore natural gas resources, helping reduce reliance on offshore resources, which can be disrupted by tropical weather. The second or downstream segment will run from the Central Florida hub to connect with FPL's Martin County plant.

Total capital expenditures have not yet been determined, and the specific routes will be selected and proposed by companies submitting bids. As part of the process, NextEra Energy expects to offer a self-build option for the downstream portion of the project and is prepared to consider investing in support of the selected upstream option to facilitate timely construction. We expect to begin evaluating proposals during the second quarter of this year, with construction expected to be completed in 2017.

Before moving on to our discussion of results at Energy Resources, I'd like to take a moment to review the 2012 hurricane season. Every year, FPL service territory is at risk of damage and severe service interruptions associated with tropical weather, and 2012 was no exception. We experienced the effects of 4 tropical systems this season, Beryl, Debbie, Isaac and Sandy. In each case, we restored power to more than 90% of affected customers within 24 hours. In addition, our crew spent significant time out of state assisting with power restoration in other parts of the country, including along the Eastern seaboard for those affected by Sandy. Roughly 1,000 of our employees and contractors supported the Sandy restoration effort for several weeks.

We are grateful for the support that others have given us over the years, and we were fortunate to be in a position to assist other utilities this past year.

Let me now turn to Energy Resources, which reported fourth quarter 2012 GAAP earnings of $171 million or $0.41 per share. Adjusted earnings for the fourth quarter were $175 million or $0.42 per share. Adjusted earnings exclude the effect of the mark on non-qualifying hedges and net other than temporary impairments on certain investments, or OTTI, and for 2011, the after-tax loss on the sale of the natural gas-fired generating assets.

For the full year 2012, Energy Resources reported GAAP earnings of $687 million or $1.64 per share. Adjusted earnings were $693 million or $1.66 per share, up $0.04 from the prior year.

We are pleased to see this growth given the difficult environment in 2012. We expect to see more substantial growth in 2013 as some of the headwinds experienced in 2012 begin to subside and our new investments begin to contribute meaningfully to earnings.

Energy Resources' contribution to adjusted earnings in the fourth quarter improved $0.12 from last year, primarily due to contributions from new investments of $0.06. Gas infrastructure contributed $0.04 from increased investment, and asset sales and restructuring contributed $0.03 over the same period last year. All other effects were minor.

As we've indicated in the past, we continually evaluate our assets and the value each contributes to our portfolio compared with the value the market assigns, and 2012 was no different. We had a few small transactions which contributed $0.03, as I just mentioned.

Late in the year, we announced a more significant transaction, the sale of our main hydro assets, which is expected to close later in the first quarter. These assets were financed in 2007, at which time, we recovered the capital invested in them, with the result of their book base was significantly reduced. We would, therefore, expect to record a significant GAAP gain in net income when the transaction closes. But the transaction is not expected to have a material impact on 2013 and ongoing adjusted earnings.

The sale of these assets is consistent with our focus on shifting the Energy Resources portfolio mix towards more contracted assets.

For the full year 2012, the $0.04 increase in adjusted EPS was driven by several factors. Contributions from our new investments increased $0.22, with $0.04 coming from an increase in CITCs. We elected CITCs for roughly 455 megawatts of wind projects in 2012 compared to approximately 275 megawatts in 2011. The contribution from our customer supply and trading businesses increased $0.11 over the prior year, as both businesses recovered from a difficult 2011. The absence of impairment charges that negatively affected 2011 results added $0.08 to our full year comparisons. And for the full year, gas infrastructure's contribution to adjusted EPS increased $0.06, primarily as a result of additional investment.

These positives were largely offset by lower contributions from existing investment in 2012. More than half is related to above market hedge roll-offs and PTC roll-offs that we first discussed with you back in the third quarter of 2011. We expect the impact from both of these factors to decrease in 2013 and 2014. Wind resource, well below the long term average, negatively affected the comparison to last year by $0.08.

And finally, reflected in the chart here is a negative comparison of $0.03 associated with the assets sold late in 2011. However, I should note that this presentation does not reflect the full impact of the asset sales, which also had an indirect effect through adjustment of our capital structure. Including the full impact, we estimate that the net effect of the asset sales is several cents accretive for 2012 and beyond.

Interest, G&A and all other items totaled a negative $0.12 impact, primarily reflecting continued growth in the business.

Looking forward, we expect to elect CITCs on roughly 300 megawatts of new solar generation in 2013. And as we did last year, we have included a summary in the appendix to the presentation that compares our realized equivalent EBITDA to the ranges we provided in the third quarter of 2011.

As I mentioned earlier, we achieved an important milestone at our company and across the industry by placing our 10,000th megawatt of wind into service during the fourth quarter of 2012. We also reached production levels of almost 26 million megawatt hours during 2012, the highest level in company history. Although for the year, the wind resource was below normal at 94%, our capacity factor was just slightly below what we reported in 2011 when wind resource was near the long term average.

We continued to use more modern, higher efficiency turbines on our new projects in order to improve our wind fleet's performance over time. In 2013 and 2014, we're expecting the average capacity factor to increase as we see the full year benefits from new 2012 wind turbines enhance fleet performance.

Over the roughly 26 million megawatt hours of production, approximately 61% were eligible for PTCs. The remainder represents our -- primarily from projects on which we elected CITCs or from projects that have passed their 10-year window of eligibility for PTCs.

Approximately 41% of the PTCs generated were allocated to investors under the differential membership interest or tax equity partnerships we have entered into that allow us to monetize the tax benefits from our renewables projects more efficiently. As shown on this slide, the percentage of PTCs allocated to investors grew in 2012, and we expect that proportion to continue to grow to between 45% and 50% in 2013 as we see the full year impact of our 2012 tax equity partnerships flow through.

Before I move to the consolidated results, let me note a couple of disclosure items. In our year end 2012 GAAP financial statements, we've made certain reclassifications of benefits and costs associated with differential membership interests which provide more transparency around the accounting for these transactions. You will see changes in the line items where these types of transactions flow through our financial statements in an updated presentation entitled Accounting for Differential Membership Interests. We will be happy to follow up with anyone who has questions after reviewing. Additionally, we recently began posting monthly updates to our Wind Resource Index. Both documents can be found in the Earnings & Supplements section of our Investor Relations website under Business Updates.

Looking at the company on a consolidated basis. For the fourth quarter of 2012, NextEra Energy's GAAP net income was $429 million or $1.02 per share. NextEra Energy's 2012 fourth quarter adjusted earnings and adjusted EPS were $433 million and $1.03, respectively. For the full year 2012, the company's GAAP net income was $1.9 billion or $4.56 per share, adjusted earnings were approximately $1.9 billion or $4.57 per share.

As we noted last year, the corporate and other segment benefited from a gain in consolidated income tax adjustments in 2011, which we did not expect to recur. For the full year 2012, on an adjusted basis, the corporate and other segment was down $0.27 from 2011. Looking ahead, we expect annual contributions to earnings from this segment to improve slightly relative to 2012 as earnings from our Lone Star business increase, but are offset by residual interest and taxes. The Lone Star construction program in Texas is progressing as planned, and we continue to expect to bring the line into full service in the spring of 2013.

2012 marked NextEra Energy's biggest year of capital investment ever for both FPL and Energy Resources, far exceeding our internally generated cash flows. Including amounts needed to meet debt maturities, our treasury team executed on more than $7 billion worth of financing transactions across a wide range of capital sources. These were designed to meet our capital needs while also supporting our balance sheet and credit strength, which are central to our business strategies.

In addition to a variety of conventional debt issuances, we continued to make use of project debt to support growth at Energy Resources, and we also sold additional differential membership interests to efficiently utilize tax credits generated by new wind projects.

We also issued $1.25 billion of equity units to ensure we have the equity support needed during this transitional period of high capital expenditures. These will convert to straight common equity in 2015, at which time they will be integrated into our ongoing financing program.

We have previously indicated that we expected 2012 to be the peak year of strain on our balance sheet and we continued to expect a significant shift in our cash flow profile to commence this year. Depending on our success in finding additional investment opportunities and their associated capital needs, we expect our free cash flow deficit in 2013, net of dividend payments, to be on the order of $1 billion or so compared with approximately $6 billion in 2012. We continue to expect our 2014 operating cash flow position to improve further.

Based on our continuing shift towards a more regulated and contracted portfolio mix, we continue to believe a dividend payout ratio of 55% in 2014 makes sense, which implies an annual growth rate of approximately 10% over the next 2 years. Of course, all dividend decisions are the responsibility of the board.

In light of the results achieved year-to-date and the progress made against our execution objectives, we continue to be comfortable with the 2014 adjusted EPS expectations we shared with you last fall of $5.05 to $5.65 per share.

With FPL's rate case settlement case in place, we are now able to provide initial expectations for 2013. As we discussed last quarter, at Energy Resources, we expect 2013 adjusted earnings to be in the range of $740 million to $780 million. Together with FPL's contribution, we expect NextEra Energy adjusted earnings for the full year to be in the range of $4.70 to $5 per share. While the quarterly profile of our earnings will, of course, vary from year to year, looking back over the last decade, the first and fourth quarters have generally each accounted for 18% to 20% or so of the annual total, with the second and third together generally accounting for 55% to 60%. At this early point in the year, we do not see any obvious driver of an unusual pattern for this year. As always, our expectations are subject to the usual caveats we provide, including normal weather and operating conditions.

Before taking your questions, let me conclude with a summary of our key areas of focus for 2013. At FPL, we continue to strive to deliver the best value in the state to our customers. The FPL team had a great year in 2012, and we will focus on ways to make our customer value proposition even better. We will continue to focus on our portfolio of large construction projects, with the last of the 4 nuclear uprates due to complete in the spring and the commercial operations at Cape Canaveral slated for the middle of the year. And third, we have already started the process of seeking to identify additional ways we can invest capital in projects that improve the value we deliver to our customers. We have generated a number of ideas already, and we look forward to sharing with you more of our thoughts at our March investor conference.

At Energy Resources, we must maintain our focus on excellence in day-to-day operations. We must continue the successful development of our Canadian wind and our solar portfolios. And third, with the short-term extension of the PTC program, we will be working hard to develop a strong portfolio of profitable contracted U.S. wind projects for 2013 and 2014. Any incremental investment will be financed in a way that supports our strong credit position.

And finally, at Lone Star Transmission, our focus will be on successfully transitioning from construction to operations.

With that, we will now open the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Dan Eggers with Credit Suisse.

Dan Eggers - Crédit Suisse AG, Research Division

Moray, can you just talk a little more about some of the '13 drivers to the point you guys are in a place to talk about them versus at the Analyst Day, just kind of some of the big pieces that will affect things? Obviously, normalization of wind asset performance is a pretty big driver year-on-year, the resource additions, but what else would we be thinking about?

Moray P. Dewhurst

Well, I think we laid out the kind of the details on the Energy Resources side in the third quarter call. So there's a stair step chart in there, and I'd have to try and recall all the specifics. But the -- I guess, the main differences in the dynamics between '12 and '13 are that we do not expect to have the same degree of either hedge roll-off or PTC roll-off, so we don't have that drag. We will see, relatively speaking, more of a contribution from the growth in new assets, obviously, with over 1,200 megawatts of wind going in, in the fourth quarter that didn't have much of an impact on 2012 results, but will -- they'll -- those assets will have a full year for 2013. Certainly, we anticipate, as we always do, a return to kind of normal weather and operating conditions, so those should be net positive relative to this year. And the rest of the pieces on the resources side, I think should be relatively small, there'll be a little bit of an increase from CITC. We've got 300 megawatts of solar that we'll expect to be electing CITC on, but that's not a huge amount. So that's the Energy Resources side. And then on the FPL side, really, it's a continuation of where we have been for the last couple of years. We continued to invest very heavily, albeit, not at the same rate as the $4 billion in 2012. But growth in capital employed, assuming that we can manage our cost structure effectively, which we're certainly committed to doing, should translate into strong growth in earnings.

Dan Eggers - Crédit Suisse AG, Research Division

And you're assuming you're going to earn the midpoint of your ROE at the utility?

Moray P. Dewhurst

We certainly hope we're going to be able to do better than that. But as I indicated in the prepared remarks, that's going to take a lot of work on our part. We are busily gemming up ideas, and I think we'll be in a position to share more of our ideas at the March conference, so I don't have any specific I can share with you. But we're very proud of our long-term cost track record, our O&M cents per kilowatt hour. But again, as I indicated in the prepared remarks, we have seen some upward pressures in nominal terms, so we are definitely going to be taking a fresh look at really all aspects that drive productivity and efficiency. Obviously, the structure of a 4-year agreement, one of the values of these agreements -- this agreement, as in past agreements, that it provides an appropriate set of incentives, so benefits that we can create can be of value to shareholders but also future value to customers. So we're going to be working very hard on that.

Dan Eggers - Crédit Suisse AG, Research Division

Okay. I have just one last one, just either for Armando or Jim If one of them could talk about how the process will work for identifying wind for '13/'14 to get built, and kind of where the customer interest is on moving projects forward. Now it looks like there's another year or 2 of life back in the PTC program.

James L. Robo

Another year to a life, I like that. Dan, the process is actually going to be very similar to what we've done in the past. We've -- the beginning of the year or certainly the beginning of the last couple of years, we go out and we meet with customers. It's -- we need to make sure that there is customer demand, and there's no better indication of that than customers that are willing to sign long-term power purchase agreements. So we're in the process of doing that. We have fielded several inbound calls, so it's not just the -- us or the other developers that -- they're clearly -- are excited about the passage of PTC legislation. We've got a number of customers that were waiting for something to happen, and now it's happened, and they are busily making calls. So I would say, over the next 2 to 3 months, it's a lot of customer visits. It's a lot of additional development on some projects that we put on hold last year. But I think as we said before, as an industry, we certainly expect 2013 to be a down year. This PTC extension, well received by us, but very late in the game. And therefore, a number of customers, our customers and other customers, bought wind last year in anticipation of potentially not having a PTC extension in '13 or '14. But also, there was a bunch of developers, obviously, that brought projects in earlier. So it's going to be a down year. But I think after the first quarter and certainly after the first 4 months of the year, we'll be in a much better position to understand what begin of construction means and what we might be able to do for 2013 and '14.

Moray P. Dewhurst

Dan, again, hopefully we can share more of our thoughts at the investor conference.

Operator

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

Stephen Byrd - Morgan Stanley, Research Division

On Slide 25, you lay out the performance of resources by business unit relative to the 2011 expectations. One, on the high-end of the performance was the new investment category at $200 million, could you just touch a little bit on what was the driver for the strong performance on new investments?

Moray P. Dewhurst

Stephen, I don't know that there was anything in particular. I think we were at the top end of where we expected to be. Things came in on time, on the early side. I guess I should turn the question over to Armando. He's probably more familiar with it.

Armando Pimentel

Stephen, a couple of things. One of them was we did have an acquisition last year that we weren't -- we certainly don't plan for acquisitions. We are always working on asset acquisitions. But we had a nice 160-, 165-megawatt acquisition, roughly $300 million or so. That was the Cimarron acquisition that we talked about. But in addition, there were some power purchase agreements that came to fruition, a -- very late in 2011, I actually think maybe 1 or 2 in January or February of 2012 that we did not expect when we first put the information together. So that's it really, it's the acquisition, a couple more wind projects, that got us that additional gross margin.

Stephen Byrd - Morgan Stanley, Research Division

And just looking at the performance for 2012, there were some income from gains on disposal of assets. Does that have any relevance going forward? Or can you provide a little more color on that?

Moray P. Dewhurst

Yes. Steve, I'm not sure which piece you're referring to, so let me give you the whole story. If you look at the GAAP income statement, you'll see a fairly substantial number. There's really 3 pieces in that number. There's a small amount, which is actually associated with disposal of a couple of small physical assets, that's the $0.03 that we discussed in the drivers. So that's pretty small. Virtually, all the rest is associated with gains on the Energy Resources decommissioning trusts. And that, in turn, is divided into 2 roughly equal parts. Roughly 1/2 of that, actually slightly more than 1/2 of it, close to $70 million pretax is simply associated with the reversal of OTTI losses that we previously excluded from adjusted income. So those are -- the gains there are also excluded from adjusted income. So the remainder, which is about $60 million pretax is just the gains associated with the normal management of the Energy Resources decommissioning trusts. So it's important to recognize that those trusts have grown significantly over the years. At the end of the year, they were worth about $1.3 billion. And obviously, 2012 was a good investment performance year. I think the actual return on the portfolio was something in the order of 12%. So as that -- as those investment returns move up or down, we will see some variability in the Energy Resources' income. I think, if I recall correctly, about -- a swing of about 4% in the realized return would correspond to about $0.01 of EPS.

Stephen Byrd - Morgan Stanley, Research Division

Okay, I understood. So that does have an impact going forward just depending on the level of performance of that fund?

Moray P. Dewhurst

That's correct.

Operator

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

Paul Patterson - Glenrock Associates LLC

Just want to check a few things. One was -- it sounds to me like the wind outlook obviously has improved with the PTC extension, yet the 2014 forecast doesn't seem to have changed yet, although it sounds like there might be some upside there. Do I understand that correctly? Is there upside to the 2014 guidance because of wind but you guys haven't sort of baked it in yet because of the rules and the customer discussions, what have you?

Moray P. Dewhurst

Yes, that's fundamentally correct. We have -- the 2014 range that we shared today is the same as we've had out there. That just reflects our current backlog. So to the extent that we are able to add additional projects, which we certainly hope and expect we will now be able to do, that will be incremental to that. We're just not at a stage yet where we have a good sense of how much that may be.

Paul Patterson - Glenrock Associates LLC

You figure the next few months you might?

Moray P. Dewhurst

Well, as I said, we hope to have more to share with you in the March investor conference, where -- whether we'll be at the stage, then where we can really translate it into specific EPS accretion, I'm not sure. As Armando said, it's going to depend a lot on customer interest. You've got to have a customer who has a need or desire for the renewable energy. And I'm just not sure how far along we'll be at that point.

James L. Robo

And Paul, just -- this is Jim. Just one other point on that. It depends a lot on the start of construction language that -- as it gets finalized. And the other thing I would say is even if we do put in a significant amount of new wind in 2014, that's primarily a 2015 earnings impact, not a 2014 earnings impact just because of timing and in service dates in the year. So I would expect that more to be a driver of post '14 earnings than of '14 earnings.

Paul Patterson - Glenrock Associates LLC

Okay, great. And then just to clarify on Dan's question with the ROE, the midpoint ROE that's in your guidance, is that sort of how we should think about the midpoint of the guidance as being the midpoint of the utility ROE sort of?

Moray P. Dewhurst

I think you need to make your own inferences there.

Paul Patterson - Glenrock Associates LLC

Okay. And then the 2014 -- last quarter, you guys saw yourselves as free cash flow positive. Is that still the case?

Moray P. Dewhurst

Well, again it comes back to the question of incremental investment. So really, nothing has changed to what I'll call our backlog only outlook that we've been discussing with you for quite some time. So to the extent that we are successful in generating new wind projects that have CapEx needs, obviously that's going to affect our cash flow requirements in 2014. But as I tried to indicate in the prepared remarks, we're going to finance those things in a way that supports our overall credit metrics. And anything that we do will necessarily be EPS accretive over the multiyear period.

Paul Patterson - Glenrock Associates LLC

Okay. And then just finally, CO2. Because there's some statements by the President at his Inauguration, there's been some speculation that there might be an EPA push for administratively as opposed to legislatively for a decrease in carbon. Have you guys heard about any specific -- have you heard anything about this? Can you -- I mean, I know you guys are sort of plugged-in there. Any sense as to whether or not there's -- there may be new efforts to reduce existing power plant CO2 emissions administratively from EPA?

Moray P. Dewhurst

Well, I'm not sure whether you call it new or not. But EPA has -- is required to issue rules affecting CO2 for both new units and existing units performance standards, as well as for other sources outside our industry. So I think we, along with everybody else in the industry, has been anticipating that those rules will be coming out at some point. What the timing is in each case is not always clear. So I don't know that there's anything new in that. I mean, obviously, you can draw any conclusions you like about whether they will be more aggressive or less aggressive in that, but I think we've all been expecting that to occur. But as we've always said, implementing carbon controls through rules is going to be a long and slow process and certainly would be inferior to a market-based approach, but that's what the law requires.

Operator

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

William Appicelli

It's actually Bill Appicelli. Just -- I had a question about the underlying usage in customer growth. So for 2013 guidance, I mean, what is embedded in that in terms of weather-normal sales growth?

Moray P. Dewhurst

I think it's about 0.5%. We're not expecting a lot of growth in usage per customer. We were frankly pleasantly surprised by the strength of the growth this year. As we often said, quarter-to-quarter basis, it can be quite volatile, and it actually declined a little bit in the fourth quarter. So I think it's about 0.5% for the full year for next year.

William Appicelli

Okay. So then some of the commentary you had about some -- the construction activity improving, you guys are not really embedding any of that into your guidance sort of in the '13, '14 outlook as of right now. Is that -- I would...

Moray P. Dewhurst

Well, I think on the customer account -- customer count side, we're looking for essentially a little bit stronger continuation of this year, so sort of 0.7% or 0.8% growth in total customer count.

Operator

We'll go next to Michael Lapides with Goldman Sachs.

Michael J. Lapides - Goldman Sachs Group Inc., Research Division

Also on the utility, just 2 questions, one on capital spending. I noticed that in the slide deck, you didn't include an update to CapEx projections. Just wanted a sanity check, do you -- when you think about CapEx at the utility going forward post the rate deal, outside of the big projects, the modernization projects, when you look at load growth and other factors in the state, do you see more kind of upside or downside to those CapEx levels, especially on kind of core distribution projects?

Moray P. Dewhurst

Well, I think relative to the numbers that are embedded in all the forward-looking statements that we've shared so far, we would certainly hope that there would be additional CapEx. As I tried to indicate in the prepared remarks, one of the things that we are, right now, looking very closely at is are there additional ways that we can deploy capital to improve the customer value equation. So we've been very successful in finding ways, essentially to substitute capital for fuel. That's really what those modernization projects are. But we think that there are some other opportunities within the business to substitute capital for other elements of the cost structure. I think that's how we're going to get some of our -- the productivity improvements that we'll be looking for. So again, we don't -- we're not far enough along where we have anything very specific to share with you. But that's really the -- what we're going through right now. So I think relative to the numbers that are already out there, if anything, I think we're going to have more. And then obviously, there are additional major project opportunities, the biggest single one obviously would be if we have any participation in the pipeline.

Michael J. Lapides - Goldman Sachs Group Inc., Research Division

Got it. And on the O&M side, we've had a number of other companies in the sector talk about above inflationary growth rates in nuclear-related O&M. Some of the folks are starting to talk about pension cost impacting O&M labor contracts with the kind of inflationary or even greater than inflation. Can you talk about just high-level headwinds and tailwinds on O&M at the utility?

Moray P. Dewhurst

Well, let me take some of those in turn. On the nuclear side, we certainly have seen over the past years significant growth in the O&M on the nuclear side. I'm actually optimistic that in our particular case we're going to be heading into a period where those escalation rates start to come down. Obviously, with the completion of the uprates at the 4 Florida nuclear units, we've got a lot of good fresh equipment so that hopefully we'll have implications for ongoing cost. In the other operating units, I don't see at this stage any major adverse drivers. So I think really the challenge for us is can we find ways to improve real productivity to offset just the inflation rate trend. And I think the same is really true on the staff side. Unlike many companies, we don't have issue with the pension fund, so we are very well-funded. So I don't anticipate any major negative comparisons in future years on the pension side. So I think our situation is a little different. But having said that, we are already one of the most efficient performers in the industry. When we do our benchmarks, we see ourselves as a top decile cost position. So the challenge for us is to find real ways to improve the productivity of a very well performing business, and we're committed to try to do that.

Michael J. Lapides - Goldman Sachs Group Inc., Research Division

Understood. Last item, on Slide 19, that bullet point about expecting to access a diverse array of financing instruments this year. Can you just give a little more detail or granularity on what that -- what you mean by that?

Moray P. Dewhurst

That's shorthand for we will continue with the same basic financing strategy that we've had for a long time, which includes starting with on the Energy Resources side where we have new projects with long-term contracts, against them, we will look first to the project finance and tax equity markets. We think that's a very powerful market test of the quality of our projects and it also produces a good economic result. We will finance the -- let me flip over to the FPL side. We've continued to maintain a balance capital structure consistent with where we've been, at roughly 59% equity ratio. So that will mean additional first mortgage bond issuances. And then the residual at the group capital -- or capital holdings, excuse me, level will be financed with a mixture of products that ensure that we maintain our target credit metrics, particularly for 2014. So this year, 2012, that meant a combination of what we call is hybrids, these deeply subordinated 60-year debentures, as well as the equity units. At this stage, we don't see any need for additional common equity this year. But that, again, would be subject to where we come out in our conclusions about incremental investment.

Operator

We'll take our next question from Hugh Wynne with Sanford Bernstein.

Hugh Wynne - Sanford C. Bernstein & Co., LLC., Research Division

My question was on the earnings waterfall at Energy Resources, Page 16. For the year as a whole, you show lower pricing as a $0.14 drag on Energy Resources' earnings, the PTC roll-off is a $0.09 drag. On the prior page, Page 15, where you look at the -- your quarter-over-quarter results, you don't mention either of those 2 items. What accounts for their absence in the fourth quarter? And what does their absence in the fourth quarter imply for the year ahead?

Moray P. Dewhurst

Well, the main reason for the absence is that -- the fourth quarter is a small quarter, and the bulk of the hedge value, in a sense, was concentrated in the middle of the year, so that's just the way the pattern works out for the year. But in terms of sort of implications for the future, as I indicated, the bulk of the negative impact of the hedge roll-offs was concentrated in 2012, so we don't expect that to be a major drag one way or the -- well, maybe a fact of one way or the other in 2013. I think some assets have a little uptick and some have a little down for 2013. And the PTC roll-off is largely a function of the -- as you can tell, of the pattern of projects that went into service 10 years ago. Those should not be a big negative drag in 2013.

Hugh Wynne - Sanford C. Bernstein & Co., LLC., Research Division

Good. And then one other quick question, referring now to Page 19. How important a contribution to cash from operations in 2012 was bonus depreciation? And do you expect that to continue at a similar level next year?

Moray P. Dewhurst

That's a tough one. I don't have the answer to that one. I don't -- I haven't sorted out the impact on -- in 2012 of bonus depreciation. If you'll let me -- we'll get back to you on that.

Operator

And we'll go next to Jay Dobson with Wunderlich Securities.

James L. Dobson - Wunderlich Securities Inc., Research Division

Maybe if we could have Armando give an update on Spain solar and sort of what's happening there?

Moray P. Dewhurst

[indiscernible]

Armando Pimentel

Well, the Spain solar, the legislation, the proposed legislation that we've been talking about now for I think a couple of quarters was finally signed in early January. The results of that are about a $0.03 to $0.04 negative to the forecast that we had in our plans earlier in the 2012 timeframe. But the $0.03 to $0.04 obviously has been put in our forecast, and the numbers that Moray has given you for 2013 and 2014 incorporate that in it. Right now, we don't see any other attempts to change what was just approved in Spain, to either change the ad valorem tax or to change the way that natural gas prices -- or natural gas can be used in the generation. We're still working through some small issues related to our financing. But we're -- honestly, we're very close to getting those projects COD-ed. Unit 1 is running through all its tests right now. We expect Unit 1 to be COD in March. And Unit 2 is actually pretty close behind Unit 1. So I'm pushing the team pretty aggressively to get Unit 2 in earlier in the second quarter rather than later. So from a construction -- from an operational standpoint, obviously, we've run a lot of test. The plant is working very nicely. From a legislative regulatory point of view, we wished it would've worked out a bit better than what it did, and we're not done trying to figure out whether we can better what was signed into law. But the $0.03 to $0.04 bad guy is in our forecast, and I'm actually looking forward to be getting over there and having a nice ribbon-cutting and thanking all of the employees that have spent the better part of 3 years bringing that project to fruition.

James L. Dobson - Wunderlich Securities Inc., Research Division

That's great. That's a super update, Armando. Moray, maybe just turning then to pension impacts for 2013, I think in the prior question, you addressed the utility side of it. Just across the entire organization on a consolidated basis, your outlook for pension cost impact in 2013?

Moray P. Dewhurst

It's the same. It's a single pension fund, and it's well-funded. So historically, we've actually had a slight credit to income through pension accounting, and we expect that to continue, but it's not material. We don't expect any changes.

James L. Dobson - Wunderlich Securities Inc., Research Division

Perfect. And then last one for Jim if I can, and I'm sure you'll have more on this at the March Analyst Meeting. But if I recall, you've historically talked about sort of a 5% to 7% growth rate. And as I look out and you're in the unusual position of having 2 years of guidance out here, so thanks for that, but if I look at the midpoint of 2013 and move that the 2014, I've got a rather wide range of 4% to 16% growth. Although I'm not asking for you to comment on or help me find the place in 2014, I would love if you could comment on that longer-term growth rate and sort of how that's fitting in amongst the various possibilities that you're sort of looking at for 2014 and beyond.

James L. Robo

Jay, I think what we've said and we said it last quarter and I think Moray said it in the prepared remarks this quarter is that the drivers of our growth that we've seen through 2014 continue post-2014 as well, and we will have more to say about our future growth prospects in that March investor conference. Frankly, that's a big reason why we are going to have the half-day session is to lay out some thoughts on our future growth drivers.

Operator

And that does conclude the question-and-answer session, as well as today's conference call. We thank you for your participation.

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