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NextEra Energy (NYSE:NEE)

Q2 2013 Earnings Call

July 30, 2013 9:00 am ET

Executives

Julie Holmes

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

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

Armando Pimentel - Chief Executive Officer and President

Analysts

Dan Eggers - Crédit Suisse AG, Research Division

Stephen Byrd - Morgan Stanley, Research Division

Paul T. Ridzon - KeyBanc Capital Markets Inc., Research Division

Paul Patterson - Glenrock Associates LLC

Steven I. Fleishman - Wolfe Research, LLC

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

Angie Storozynski - Macquarie Research

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

Operator

Good day, everyone, and welcome to the NextEra Energy Second Quarter 2013 Earnings Release Conference Call. Today's conference is being recorded. And 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.

Julie Holmes

Thank you, Josh. Good morning, everyone, and welcome to our second 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-financial GAAP -- 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.

Moray P. Dewhurst

Thank you, Julie, and good morning, everyone. NextEra Energy had a very successful second quarter. Our financial results were good, driven by new contracted renewable assets at Energy Resources and strong operating performance across the portfolio, and put us a little ahead of where we had expected to be at this point in the year. All of our major existing capital projects progressed satisfactorily, most notably with the Cape Canaveral modernization coming into service ahead of schedule and under budget.

In addition, we made excellent progress in firming up some of the additional investment opportunities we have previously discussed and in developing initiatives, which we expect will allow us to maintain our strong competitive cost position. As a consequence, our expectations for this year have improved slightly, while our longer term financial expectations now have additional support. All in all, it was a very good quarter.

At FPL, we maintained a regulatory ROE of 11%, while continuing to invest capital in ways that improve the value that we deliver to our customer. Average regulatory capital employed grew roughly 11.5% over the same quarter last year, and was the main driver of our net income growth of about 11%.

The FPL team continues to execute well on our major capital projects. The new units at Cape Canaveral ended service in April, under budget and more than a month ahead of schedule. Their fuel efficiency is roughly 30% better than the old units they replaced, and our customers began benefiting from their fuel savings earlier than anticipated. The roughly $1.3 billion Riviera Beach modernization project remains on schedule to enter service in June of 2014, and our third modernization project at Port Everglades reached a major milestone earlier this month, with the demolition of the old 1960s-era plant. Construction of the new plant is slated to begin next spring.

FPL also made good progress in pursuing additional initiatives that we have previously mentioned. During the quarter, we filed petitions with the Florida Public Service Commission to accelerate our storm hardening program and upgrade our peaking capacity systems. And we concluded our analysis on the most cost-effective alternative for additional natural gas transportation capacity into Florida. We will discuss these initiatives in greater detail later in the call.

At Energy Resources, contribution to adjusted earnings per share was up $0.15 or 37% over the prior year comparable quarter, primarily as a result of new contracted assets added to the portfolio, as well as strong operating performance from our existing assets. We continue to make good progress on our backlog of contracted renewables projects, our Canadian wind program is progressing satisfactorily with approximately 125 megawatts expected to enter service this year, while the remaining roughly 475 megawatts are targeted to come online in 2014 and 2015. We continue to expect roughly 300 megawatts of new contracted solar capacity to enter service in the U.S. this year. The remaining approximately 500 megawatts of the solar backlog, with which we started the year, are expected to come online by the end of 2016. In addition, we will have at least another 40 megawatts, as I will detail later.

Turning to the U.S. wind business. Since our last quarterly call, Energy Resources signed contracts for nearly 650 megawatts of new capacity, bringing the total to date for the 2013 to '14 program to roughly 975 megawatts, of which 250 megawatts are expected to enter service this year. This places us firmly in the middle of the range of 500 to 1,500 megawatts that we discussed at our Investor Conference in March, and we are currently in discussions with customers that could bring the total higher.

The progress we made during the second quarter continues to support our long-term expectations for EPS growth, and we continue to see a range of growth in adjusted earnings per share of 5% to 7% off the 2012 base. While the baseline capital deployment program we discussed in March continues to support the lower end of this range and while we are pleased with the developments of the last 3 months, we should also note that 2016 is a long way in the future, and there are still many sources of uncertainty that could push us towards either the higher or the lower end of the range.

Let me now walk through our results for the second quarter of 2013. I will begin with the results at FPL before moving on to Energy Resources and then the consolidated numbers.

For the second quarter of 2013, FPL reported net income of $391 million or $0.92 per share, up $0.07 per share year-over-year. The principal driver of FPL's earnings growth in the quarter was continued investment in the business. We invested roughly $700 million in the quarter and expect to invest approximately $2.9 billion for the full year. Regulatory capital employed growth of roughly 11.5% over the same quarter last year was the main driver of growth in net income of approximately 11%. We utilized $82 million of reserve amortization during the quarter, enabling us to maintain a regulatory ROE of 11%, and we remain comfortable with the balance, which we expect to be roughly $180 million at the end of the year, will be adequate through 2016. Recall that over the past 2 years, we have utilized a larger proportion of reserve amortization during the first half of the year, and we do not expect this year to be any different. We also had expected 2013 to require a higher reserve amortization than in subsequent years, and this remains true. For 2013, we believe that achieving an 11% to 11.25% ROE is reasonable.

Economic indicators in Florida continued trending positively during the second quarter, particularly those associated with the recovery of the housing market. Housing inventory levels continue to decline, spurring new construction and price increases across the state. Housing starts in Florida are up 67% year-to-date compared to 28% nationally. Florida building permits, a leading indicator of residential new service accounts, are now at levels not seen since 2007 and have outpaced the nation's quarterly growth by 41%. South Florida home prices are up nearly 13% for the year, which is the highest annual growth we have seen since 2006 and above the Case-Shiller Composite Index.

The broader economic outlook in Florida also remains positive. Florida's seasonally adjusted unemployment rate in June dropped 1.7 percentage points from the prior year to 7.1%, outpacing the improvement in the national unemployment rate of 0.6% over the same period. Other positive economic data across the state include improvement in taxable sales, which recently surpassed the prerecession peak, as well as the consumer confidence index, which has also recovered to prerecession levels.

As Florida's economy continues to recover, it also continues to diversify. According to a recent IT industry report, Florida ranked third in the number of high-tech establishments and fifth in high-tech employment in the U.S. International trade is growing as well, as Florida now ranks second in the number of exporting companies behind only California. Encouraging economic data in Florida continues to be generally reflected in the internal indicators that we follow at FPL.

During the second quarter, we averaged approximately 35,000 more customers than in the comparable quarter in 2012, representing an increase of 0.8%. This general level of increase has now been consistent for more than 2 years, and we are optimistic that it will increase modestly in the years ahead. Total retail sales increased 1.0% during the quarter, as customer growth and increased underlying usage offset much cooler than normal temperatures we experienced in May.

The number of inactive meters declined 8.5% year-over-year in June, the strongest annual decline in over a decade. We have typically seen seasonal increases in inactive meters between May and June, as many retirees leave for the summer. This year was unusual, as we saw inactive meters actually fall 2.8% between May and June, indicating either less seasonality or a true tightening of the housing market. On the other hand, the proportion of low usage accounts has remained relatively static and appears to reflect a semipermanent increase in the proportion of investor-owned and internationally owned properties.

New service accounts are on track to total between 35,000 and 40,000 for the year, and as was the case last quarter, we continued to see growth in our industrial accounts, which are generally tied to the construction industry in our service territory. Overall, we remain encouraged by the positive economic trends and customer metrics in our service territory.

As many of you will recall, FPL issued a request for proposal in December 2012 for new natural gas transportation capacity that will help ensure Florida's continued access to clean, affordable U.S.-produced fuel necessary to meet the state's growing needs. Only 2 major pipeline system serve Central and Southern Florida today. A third new pipeline system will increase the diversity and reliability of gas supply for Florida's residents and will bring substantial direct and indirect economic benefits to the state.

During the quarter, we completed an extensive analysis of all bids and determined that the best solution for meeting customers' needs economically is a combination of the Sabal Trail Transmission proposal advanced by Spectra Energy for a new northern pipeline originating in Southwestern Alabama and terminating at the new Central Florida hub; and the proposal submitted by Florida Southeast Connection, which is a wholly-owned subsidiary of NextEra Energy, for a second southern pipeline to connect the Central Florida hub to FPL's Martin plant. This combination was substantially more economical than any other combination of bids and promises to deliver excellent value to FPL's customers decades to come.

Late last week, FPL filed with the PSC for prudence review of the necessary contractual arrangements for both Sabal Trail and Florida Southeast Connection, and we are seeking regulatory approval by the end of 2013.

Consistent with what we have stated previously about NextEra Energy's willingness to invest in the northern pipeline to ensure that FPL has the necessary natural gas transportation capacity when it is needed, we have agreed to invest approximately 1/3 of the capital needed to complete the Sabal Trail pipeline, which is expected to total roughly $3 billion. The NextEra Energy investment in Florida Southeast Connection is expected to total approximately $550 million.

Let me now turn to Energy Resources, which reported second quarter 2013 GAAP earnings of $229 million or $0.54 per share. Adjusted earnings for the second quarter were $238 million or $0.56 per share. Adjusted earnings exclude the mark-to-market effects of non-qualifying hedges, which beginning in the second quarter 2013, include interest rate hedges related to the Spain solar project, as well as the net effect of other than temporary impairments, or OTTI, on certain investments.

Energy Resources had a strong quarter, with contributions to adjusted EPS increasing $0.15 year-over-year. Contributions from new investments placed into service since the second quarter of 2012 increased $0.12. We are targeting approximately 300 megawatts of solar this year for CITC election, equating to roughly $75 million in full year adjusted earnings. Adjusted earnings per share from our existing assets increased $0.04 over the second quarter last year due to favorable wind generation, the absence of a power derated Seabrook and the absence of outages at our 2 Texas combined cycle plants. Our gas infrastructure business increased $0.02 from additional production, while the customer supply and trading businesses were down $0.03. All other effects were minor.

Energy Resources had a successful quarter in the capital markets. We completed $170 million differential membership interest or tax equity transaction on approximately 160 megawatts of contracted wind projects. We continue to expect the proportion of PTCs allocated to investors to grow to nearly 50% in 2013, up from approximately 41% in 2012.

We also completed the company's largest project financing in our history, a $1.15 billion term loan on our natural gas plants in Texas, which significantly exceeds the book value of the assets. The success of this financing positions our Texas portfolio well, and is indicative of our continued ability to access different segments of the capital markets at attractive rates. We will continue to pursue suitable tax equity and project finance structures to support our overall corporate credit position, and our cash flow growth year-to-date is consistent with our projections for credit metric improvement that we discussed at our Investor Conference in March.

I want to take a moment to address a number of recent inquiries from investors about our interest in forming a so-called Yield Co. for a segment of Energy Resources contracted assets. While we have made no decisions yet and do not feel any great urgency to undertake a major structural change that might prove difficult or costly to reverse, we are actively examining this and other alternatives that might highlight the value of our contracted renewable asset portfolio or might enable us to access a pool of capital with different risk return requirements. As we examine these alternatives, we are very focused on the question of whether and how they might create long-term, sustainable value for our shareholders. And we are sensitive to the fact that our situation is unique and therefore, blindly copying a solution that is suitable for another company may not be the best for our shareholders.

Looking at the company on a consolidated basis. For the second quarter of 2013, NextEra Energy's GAAP net income was $610 million or $1.44 per share. NextEra Energy's 2013 second quarter adjusted earnings and adjusted EPS was $620 million and $1.46, respectively. The Corporate & Other segment was down slightly from the same quarter last year, but we continue to expect the full year contributions from this segment to improve modestly relative to 2012.

Before taking your questions, let me turn the call over to Jim Robo for some closing remarks.

James L. Robo

Thanks, Moray. At our Investor Conference in March, we laid out a series of potential incremental investment opportunities at both our major businesses that we indicated could take us beyond the growth profile implied by the backlog of projects that we enjoyed at that time. I would like to take a moment to summarize where we stand on those opportunities.

Starting with FPL, we indicated that we saw the potential for investing additional dollars in storm hardening and reliability programs, depending upon progress in improving our already strong O&M performance. We've now filed with the PSC a proposed storm hardening plan that will effectively accelerate roughly $400 million of capital spending into the 2013 through '16 time period, and we've also increased our expectations for general infrastructure capital expenditures for the same period by roughly $700 million. All these initiatives are designed to improve our T&D service reliability or to otherwise improve customer service. We are confident our cost position will allow us to absorb these expenditures under the rate agreement, while still earning an adequate return for our shareholders.

In June, we completed our analysis on the most economical way to upgrade our peaking capacity, and on June 28, we filed with the PSC a plan for upgrade that will cost approximately $820 million and will be completed by the end of 2016. We believe this proposed program should be eligible for recovery under the environmental cost recovery clause. A hearing is scheduled to be held in November, and a decision is expected later that month.

As Moray mentioned earlier, our capital commitment to support the development and construction of the new third gas pipeline could total roughly $1.6 billion, and we hope to have a PSC decision on this project by the end of the year. We continue to look for opportunities to bring more solar generation to Florida and have 500 megawatts of sites more or less ready to move forward. However, we think the most likely timeframe for this initiative will be in 2015 or '16.

And finally, we continue to pursue opportunities to serve others within the state, either at retail or through wholesale contracts, and we hope to close the Vero Beach acquisition in 2014.

At Energy Resources, our U.S. wind program for 2013 and '14 now stands at close to 1,000 megawatts or roughly $1.7 billion worth of capital expenditures, with potential to grow up to 1,500 megawatts. We are making progress on our initiative to add up to 300 megawatts of incremental U.S. solar by pursuing both greenfield development and acquisition opportunities. We have already signed contracts on 40 megawatts of U.S. solar earlier this year, and we see the possibility of 1 additional large-scale project being finalized within the next few months

Underpinning all of our new investment and growth initiatives is our continued commitment to enhancing our already strong, competitive cost position. We have undertaken a company-wide initiative aimed at rethinking our approach to all aspects of how we do business, and I'm very pleased with the many thoughtful and creative ideas that our employees have put forth. While we are only just beginning to move into the implementation, we believe that the entire portfolio of ideas will enable us to attain our goal of keeping total, non-fuel O&M flat and nominal terms at FPL through 2016, and at the same time, support Energy Resources' growth objectives. This company-wide initiative has also helped identify a number of areas where we expect to improve margins and grow revenue at Energy Resources.

At our March Conference, we indicated that the capital associated with all of our incremental opportunities might total as much as $9 billion. To date, we have firmed up roughly $5 billion of incremental growth capital that we expect to deploy through 2016. While we still have a long way to go to bring the project shown on this slide to fruition, I'm pleased with the progress we have made.

Although the exact proportions will vary, at this point, we continue to see roughly 60% of our capital expenditures going towards FPL and other rate-regulated opportunities, while nearly all our growth capital and energy resources is going into long-term contracted assets. Consequently, we continue to expect our portfolio mix and earnings profile to shift towards a more regulated and long-term contracted business. Adjusted EBITDA coming from our regulated and long-term contracted operations is expected to reach roughly 84% of the total in 2016.

Turning to the financial outlook. We are not anticipating that the second half of the year will be quite as strong as the first half. But based on our performance year-to-date, we think it is reasonable to expect our full year adjusted EPS to be in the upper half of the $4.70 to $5 range that we had previously communicated. For the longer-term outlook, we continue to see adjusted EPS growing at a compound annual growth rate of 5% to 7% through 2016 off a 2012 base. The positive developments of this quarter clearly provide additional support for this growth range. As always, our expectations are subject to the usual caveats we provide, including normal weather and operating conditions.

As we continue to invest to build and grow our businesses, we expect to maintain our strong credit position. Our cash flow profile is improving, which by itself, will help our credit metrics return to historical levels. In addition, as we've discussed at the Investor Conference in March, we currently expect to issue incremental equity to the extent our capital program requires it.

There has been no major change in our thinking here, with the potential for up to $1.5 billion of incremental equity if we were to be at the top end of our range of capital investment. Given the likely timelines for various regulatory proceedings, we expect we will have a firmer sense of our requirements early in 2014.

Before turning the call back to Moray for questions, let me close by, again, summarizing our focus for the remainder of 2013. First, as always, we must maintain our focus on excellence in day-to-day operations. We can never afford to lose sight of the fact that our long-term success is built on delivering outstanding value for our customers at FPL and on operating efficiently and reliably across the portfolio. Second, we will be very focused on moving the large portfolio of ideas we have developed for improving productivity and day-to-day operations from the idea stage to practical reality. We have much implementation planning and, of course, execution ahead of us to ensure that customers and shareholders ultimately realize the value of the good work that has been done so far.

At FPL, we have 2 modernization projects underway that we are committed to bringing into service on schedule and on budget. We will also be working on a larger portfolio of reliability investments, primarily in the T&D system, which we are committed to completing as soon as we practically can. And third, we have some important new initiatives, particularly the peaker upgrades and the new gas pipeline that will require development, regulatory and, ultimately, large-scale construction activities to bring to fruition. The FPL team will have much on their plate.

At Energy Resources, in addition to a focus on excellence in daily operations, we must continue to push forward with development and construction on the large backlog of contracted renewable projects that we have, which today totals more than 2,400 megawatts, while also seeking additional opportunities to add to that backlog the Energy Resources team will have much on their plate as well.

Of course, this is not the sum total of our challenges, but if we are successful with these, we will have a strong future ahead of us. With that, we will now open the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we will first go to the side of Dan Eggers with Crédit Suisse.

Dan Eggers - Crédit Suisse AG, Research Division

Just kind of on this Yield Co. conversation. I know you guys are still on the evaluation mode, but a number of years ago when the wind IPO was a very popular idea, I know you guys took a look at that also. Can you just maybe share your thoughts on what you guys learned looking into the process of separation, and what kind of bearing that can have as you think about the institutional impact of if you guys were to go forward or something at this point?

Moray P. Dewhurst

Sure, I'll give that a try. Just reflecting back on where we were back in 2006, 2007, one of the things that we observed then, and it would certainly apply in the current case, is that there are some incremental costs associated with setting up a separate structure. So we should -- they're not massive, but we shouldn't underestimate them either. So for us, that suggests that we really need to try and understand whether there is a reasonably long-term sustainable opportunity here, or whether we're just seeing a sort of transient divergence in capital market prices. So I think if you reflect on the renewable spin-off phase, at least a couple of those looked very strong initially, but the performance was not sustained. And I think reflecting on where we are now, we wouldn't want to be in a situation where we've incurred all the incremental costs and only a short time later, we find ourselves effectively looking for a way to reverse that. So having said that, to the extent that there's really a pool of capital here that prices certain risk characteristics differently than the main capital markets, that is something that we would certainly want to try and take advantage of. I should point out, however, that it isn't necessarily simply a public pool of capital, there may be other ways of accessing investors who have the same sort of risk return profile. So one of the other things that I've talked about with at least some of you before that we have in the mix is also whether there are individual large investors who would be interested in a portion -- taking a position in a portion of the portfolio. So there's a variety of structural ways that we might go about accessing that sort of capital. So those are some of the things we're looking at right now.

Dan Eggers - Crédit Suisse AG, Research Division

Okay. And I guess just on the wind additions were quite strong in the quarter and interesting. For the Colorado projects, they were done because the economics were good, not because they were trying to meet renewable standards. I didn't know if Armando or Mike or somebody want to talk about kind of the bigger landscape for projects that you guys are looking at for customers and what is the prospects? And how long is the timetable do you think to sign contracts between now and year end to qualify for PTCs?

Moray P. Dewhurst

Yes. Let me ask Armando to address that. But first, just generally, I don't think there's been a great deal of change in what we're seeing. Obviously, customers, as well as we, are aware of what the situation is with the PTC program right now. So there's a strong incentive to the extent that you either have a renewable portfolio obligation in the near term, or to the extent that the economics in your particular area look attractive to negotiate and sign if you can. But Armando, you want to comment further?

Armando Pimentel

Dan, what we're seeing right now is there was certainly a good slew of RFP opportunities, I'd say starting late first quarter, really progressing through the second quarter this year. As Moray just indicated though, everyone is keenly aware of the PTC expiration. Once again, the words are a bit different this time around than they have been in the past. What we're seeing right now is a slew of additional RFP opportunities out there, whether all of those opportunities, whether all of those RFPs come to fruition in real projects remains to be seen. I'd say that the majority of the opportunities that we're seeing are still RPS-related, but there's a good portion of the opportunities that were either the states or the individual customers have met their RPS requirements and are really looking to buy what we call economic wind. So I'd say there's another 2 to 3 months probably this year where we will -- we and others will have the opportunity to sign up projects for 2013 and 2014. And I think after that, it will slow down a bit.

Moray P. Dewhurst

Yes. I think, if we're -- as I've said before, if we're not kind of buttoned down by the fall, then it's probably not going to happen, unless there's some change in the PTC program. So there is a clear sense of urgency.

Operator

Our next question comes from the side of Stephen Byrd with Morgan Stanley.

Stephen Byrd - Morgan Stanley, Research Division

Moray, I wanted to go to the point you mentioned about thinking about long-term sustainable value of the Yield Co. as the pros and cons. One of the dynamics that I looked at a lot is the earnings profile for the business relative to free cash flow, and currently resources has very good earnings, but the free cash flow is far greater than the earnings, and that's often a profile you see for renewables assets. Is that a dynamic that you all think about in the context of the Yield Co.?

Moray P. Dewhurst

It's certainly in the mix. I wouldn't say that it's, at least at this stage, one of the principal drivers that we're seeing. And by that, I mean that the cash flow to earnings profile will naturally change over time. And as we've discussed at the Investor Conference, in the next couple of years, we're going to see that strong cash flow generation at Energy Resources much more manifest in the overall corporate numbers, just the way the dynamics of the portfolio are moving. So I think that's going to become more obvious anyway. I think on the fundamentals of the Yield Co., it seems to me, more around whether there's a systematic difference in the way certain investors value different combinations of essentially risk and growth. I mean, obviously, what you're doing in a Yield Co. format is you're creating something that has very visible yield, very visible income and also the potential for essentially a certain degree of controllable growth or pre-specified growth, I guess a better way of putting it. Well, that kind of structure, it seems to me in today's environment, should be very attractive to investors. So that's not in question. The question is whether the valuation of that cash flow stream in a separate format did in fact any higher than is implicit in the overall corporate format, and that's a question that is a little tougher to sort out. So one of the things that we certainly want to do is take advantage of the fact that we're not under any time pressure here to see how some of the existing vehicles that are now out there trade. I think that's going to give us a lot more insight.

Stephen Byrd - Morgan Stanley, Research Division

That's very helpful. And just as a follow-up. If you think about the M&A environment for renewables assets, I know in the past, you've been targeting double-digit unlevered returns, and that would put the levered equity returns, in our view at least, above 20%. These days, from what we see at least, the target return levels continue to come down. It's a competitive environment, more into the sort of low double-digit equity returns. As you think about a Yield Co. as a currency relative to, say, NextEra, which is many investors think on a sort of EPS accretion basis, how do you see a Yield Co. as a -- in the context of M&A and growth?

Moray P. Dewhurst

Well, I guess, to me, it comes back to the point that I was discussing earlier, which is whether there's fundamentally a different pool of investors with different -- that place different value on certain risk and growth combinations. To the extent there is, then it seems to me you want to take advantage of that source of capital regardless. To the extent that it's not, then I think a Yield Co. -- so-called Yield Co. currency could end up simply misleading you as to the appropriate prices. In other words, I would hate for to be in a situation where having such a vehicle puts pressure on you to lower the underlying returns that you're targeting in the things that you're going after, because those things really should be based on the investors' risk-adjusted opportunity costs. So I'm a little bit leery of it in that respect. But again, I want to emphasize that to me, it really comes down to the question of whether there's a distinct pool of investors who fundamentally value different cash flow streams with different risk and growth characteristics differently.

Operator

Our next question comes from the side of Paul Ridzon with KeyBanc.

Paul T. Ridzon - KeyBanc Capital Markets Inc., Research Division

I guess we've beat the Yield Co. question to death, so I won't go there. Can you just -- what was the wind resource last quarter? I know you revamped your algorithm.

Moray P. Dewhurst

It's -- there's a new chart in the back of the release, which we've recalibrated and frankly simplified our calculation of the wind resource, so we have reintroduced it. I just want to caution people that these new numbers are not comparable to the old numbers that we had. Off-line, we can talk all about the gory details of that. But the bottom line is that, in the first quarter, it was slightly below. I think it was like 97%.

Paul T. Ridzon - KeyBanc Capital Markets Inc., Research Division

I'm sorry, let me clarify my question. What was it in the second quarter of 2012?

Moray P. Dewhurst

The short answer is, I don't know on the current basis exactly because we haven't gone back and redone everything in history, but it was certainly below average. So there's no question that the average wind resource shifted around from the low long-term averages to above long-term averages.

Paul T. Ridzon - KeyBanc Capital Markets Inc., Research Division

Okay. And then just 2 short questions. You talked about second half might be a little more challenging. Could you outline some of those challenges, and then just an update on where things are in Spain?

Moray P. Dewhurst

Sure. On the second half -- I guess 2 points on the second half. First of all, the comment was meant to say that some of the things that have been good in the first half are just things that were good in the first half, and we have no necessary reason to believe that they're going to perpetuate into the second half. And then secondly and separately, there are some things that we see ahead in the second half, primarily for Energy Resources, that we expect to be a little more of a challenge. The main one, 2 principal ones, certain sort of timing matters on the O&M front, so I think we're just a little bit ahead of where we expect it to be in the first half. Some of that will reverse. But the bigger thing is the -- so far, at least, we haven't had much summer weather in Texas. So I think the opportunity is open for what we call asset optimization activities in the Texas portfolio again to be a little less than we would either expect for a normal year or relative to last year. And the second question on Spain, forgive me, I've talked to so many people about different developments in Spain and so many things have happened over the course of the past few months. So relative to where we were last quarter, the principal thing that has happened is the Spanish government has come out with yet another round of changes to the tariff regime for renewables. The current -- what they're talking about is a regime that in general terms would offer investors, at least as they've stated it, a set margin, pretax margin over Spanish government bond yields. However, there's a lot of details that need to be worked out before anybody could understand what that would actually mean for economics. As a practical matter, if it's as they stated it, a 300 basis point pretax spread over Spanish government bond yields, that clearly doesn't help project economics even compared with the confiscatory changes they had made before. So as a practical matter, we continue to believe that we are in the same situation, which is that our economic exposure is limited to the remaining equity contribution, which is not material now. And operationally, the plants are up and running very well. So a disappointing irony here is on the operation side doing better than we expected, but as a practical matter, economically there doesn't appear to be much future for us in it. So again, just to remind everybody, we have taken out from our financial expectations all earnings and cash flow contributions from the Spanish assets.

Operator

Our next question comes from the side of Paul Patterson with Glenrock Associates.

Paul Patterson - Glenrock Associates LLC

I wanted to just -- and I'm sorry if I missed this, the Sabal pipeline and the gas pipeline, in terms of the earnings, how should we think of the -- is there any impact before it comes on? Yes, I know there's some variability in what you guys might actually invest. But is there any earnings before the pipeline actually comes online that like an AFUDC kind of thing that might happen, or can you just elaborate a little bit on that?

Moray P. Dewhurst

Yes. Both portions, both the upstream and the downstream portion would receive AFUDC accounting because they're both regulated pipelines, so it'll be a contribution that way. The Sabal Trail portion, the upstream portion, would be accounted for by us on the equity method, so we would just carry up a portion of whatever Spectra is recording there. But yes, there will be an earnings impact -- a cash earnings impact through the construction period. After that, after it goes into service, I think folks should recognize that the long-term economic prospects of the upstream portion look very good, but they are fundamentally tied to the continued growth and development of the state. Initially, the pipeline will not be fully subscribed, as you would expect. You clearly build these things with room for growth. And so the short-term economics will not be representative of the long-term economics. The reality is that FPL customers are getting a great deal in here, and the economics -- the long-term economics of the upstream portion of the pipeline are fundamentally dependent upon incremental volume and growth in the FPL volumes in future years. So we are obviously very optimistic about that, but that piece, the growth piece remains to be seen.

Paul Patterson - Glenrock Associates LLC

Sounds like a great project. Let me just ask you, in terms of the solar opportunities in Florida that Jim was mentioning, is there any legislation that's contemplated or needed? Or can you do it right now with what you have in place in Florida?

Moray P. Dewhurst

There's no guiding legislation either in place or currently contemplated, so that's the first part. As to the second part, could we do it right now? I think that the best way to answer that is to say not really. The reality is that the commission fundamentally is required to look at the lowest cost -- look at and approve the lowest cost resource part. Now they do have some flexibility within that to consider what may happen down the road. But I think at this stage, given -- particularly given all the other things we've got going on, it would be a little bit of a challenge to add that on top. So that's why in the prepared remarks, Jim made the comment. I think the realistic time to moving forward on that is probably 2015, 2016.

Paul Patterson - Glenrock Associates LLC

Okay. And then just in terms of the Yield Co. and all that stuff, it sounds like you guys are taking, obviously, very cautious approach in terms of anything you may do. Should we think of this as probably something that we probably won't hear anything before the end of the year, or -- I hate to put you on the spot on that, but I mean, just sort of in terms of timing and stuff, that sounds like it's going to be some time before you make a decision. Does that make sense? And also does the incremental, the tax equity stuff, does that have any impact on the any of this? The potential of you doing it, do you follow me?

Moray P. Dewhurst

Okay, let me hold the second part of that question. But first, on the timing, I can't say exactly end of year, but I think certainly several months is realistic. We'll certainly give you an update on where we are. I'm sure somebody will ask a question on the third quarter, so we'll certainly give you an update. But yes, I would certainly hope to be in a position to understand a lot more where we might want to be by the end of the year. We won't necessarily be in a position to execute even if we do have something that we ultimately want to execute. On the question, the tax equity transactions, in a sense, yes, there is an interaction here. And since it goes back to the fundamentals that we were talking about earlier, which is different investors' appetite for different combinations of current income and future cash flow growth and risk. In a sense, things like tax equity and project finance even are already examples for slightly different forms of vehicle that the Yield Co. represent. So you can sort of put them on a spectrum, if you like, with project finance being at one end of the spectrum, where you are carving off a discrete portion of the cash flow stream of, in this case, the renewable portfolio and packaging it in a particular way that's appealing to certain class of investors. Tax equity transactions do exactly the same thing. Now they don't do it quite the same way that the Yield Co. format does. It's a different combination of current income, cash flow growth and risk. But in my mind, you can place them all on a spectrum. So that's a long-winded way of saying yes, they are -- they do relate. And specifically, when you put these assets into a tax equity transaction, you are effectively precluding them from being in a Yield Co. vehicle in the short term. However, that's not a problem because the Yield Co. format is not well-adapted to accepting assets that are currently in their PTC earning phase. So as a practical matter, it doesn't have a great deal with interaction. But conceptually, yes.

Operator

Our next question comes from the side of Steven Fleishman with Wolfe Research.

Steven I. Fleishman - Wolfe Research, LLC

Just first on the Florida pipeline, the intrastate piece. Would that have a more timely return relative to the interstate piece that you mentioned before? i.e. is it fully running from the get-go?

Moray P. Dewhurst

No. It will have a -- as I think about it, a slightly more favorable, because fundamentally, as I've said many times to many folks, FPL is the principal customer for the downstream portion, whereas the upstream portion has the potential to serve many other customers over time and it's that growth to serve the other volumes that ultimately should provide the economic leverage that will ensure that the lifetime returns of the upstream portion are attractive. So because the downstream portion is much more heavily likely to be dedicated to FPL, the profile is a little better. But it still has the same thing because what FPL required was a step-up, specified growth in volumes and options on future volumes. So obviously, everybody who competed for the downstream portion had to size the thing for the long term, and so the upfront returns will not be as strong as the lifetime returns.

Steven I. Fleishman - Wolfe Research, LLC

Okay. And one other question, just back to the hot topic. Back 3 or 4 years ago, when we had the pure-play renewables storage, you never went through a process like this of evaluating options and the like. So this does seem to be somewhat different than then and seems to be more serious review than 3 or 4 years ago. So is that fair to read that there is more validity to either this structure or something like it than necessarily what you saw when we went through this with the pure-play renewables?

Moray P. Dewhurst

No. I don't think that's a total -- fair, Steve. We may not have been so transparent about it at the time, but we spent an awful lot of time back in 2006, 2007, on various structures at that time, so there was a great deal of work. The key thing then at that time was we could not get ourselves convinced that there really was a -- I'll call it a capital market mispricing opportunity. We thought that there was an unsustainable bubble, if you like. And our conclusion at that time -- again, this is now ancient history, but our conclusion at that time was it didn't justify going through all the distraction and the incremental costs of the establishment of the structure for something that wasn't going to allow us long term to access a different pool of capital. So it's the same fundamental reading we did spend a lot of time on. We may not have been as explicit as we have on this one.

Operator

Next, we will go to the side of Michael Lapides with Goldman Sachs.

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

On the pipeline, really more of a longer-term strategic question. How should we think about your decision to invest over $1.5 billion of capital into a pipeline? Is this the -- is this a one-off because of the opportunity into the FP&L service territory and into the state of Florida? Or is this more of a strategic move where you could see other incremental pipeline investments down the road, whether stand-alone or via joint ventures with other companies. That's the first part. The second is once the pipeline is online and in service, how do you think about the corporate structuring, meaning the potential for either other JVs or potential master limited partnership opportunities? We're now talking about a sizable investment in midstream assets. So just trying to think through how you're envisioning kind of the 5 to 10-year path?

Moray P. Dewhurst

Well, Michael, I think you're perhaps a little ahead of us here. A fundamental motivation here, this is a Florida project. We are interested in figuring out, as we always have been, how we continue to improve value delivery to our FPL customers here in Florida, and this, we think, is an absolutely critical project, it's a great project, as I said earlier, I think FPL customers are getting a great deal off this, and we want to make sure that we are a part of seeing that, that things happen. That's our fundamental motivation. We are certainly comfortable committing a large amount of capital to this project with these kinds of economics given the overall regulatory environment, but it's fundamentally about serving our FPL customers. Having said that, there is no question that assuming that we are successful in bringing this project to completion, it will provide us with other possibilities. And where that may take us, we're going to have to see. But all of that is off in the future. We're talking right now about -- just as a reminder, a pipeline is going to come into service in 2017 and there's a lot of work to be done to get it to that point, and obviously, the whole set of projects is subject to regulatory approval. So again, it's all about serving our customers in Florida better.

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

Okay. And I guess just a quick follow-up. How do you -- how should investors think about the targeted return on capital for the new pipeline project, and will it differ much from the northern leg to the southern leg?

Moray P. Dewhurst

Well, I'm not going to get into the numerical details because obviously, I think my remarks earlier should have suggested there's uncertainty about what certainly the short-term economics are going to be. I think the best way to think about this is you can look at other major pipeline projects across the country and get an idea of the range of economics that are reasonable. As I've said, the long-term economics here, particularly for the upstream portion, are based on continued growth in Florida and the need for natural gas transportation capacity by folks other than just FPL. So we are fundamentally making a positive statement about our belief in the long-term growth of Florida here.

Operator

Next, we will go to the side of Angie Storozynski with Macquarie.

Angie Storozynski - Macquarie Research

My first question is about the dividend growth. Given that you have already locked about $5 billion of the additional CapEx, and that will require some additional equity funding, how should we think about growth in dividends? Is there an expectation that some of that growth -- significant pickup in dividends will be delayed because of additional CapEx?

Moray P. Dewhurst

Well, first of all, although it's perhaps an admission against interest, I can't -- I have to dispute your characterization as having things locked in. There are lots of steps that have to be gone through before any of these incremental projects are really in service, so including regulatory approvals for the development steps. So let's not get ahead of ourselves here. Having said that, on the dividend growth front, I'd just go back to what we, I believe, talked about in the March Investor Conference and certainly have talked about subsequently, which is the current target is 55% payout ratio in 2014. Where we go beyond that will clearly depend upon the CapEx profile, and where I'd characterized it before is to suggest that beyond '14, we will hope to see dividend growth at least in line with earnings growth. And by that, I mean that if we're at the higher end of the earnings growth, we will need all the cash flow and we will be in the market for incremental equity as we've discussed, and therefore, we'll probably more likely see dividend growth in line with EPS growth. If we were at the lower end of the CapEx range, then we would clearly have free cash flow available, and that might suggest increasing the payout ratio further, which obviously would imply dividend growth slightly higher than earnings growth. So I still think that framework for thinking about it is reasonable. If we were at the upper end of the CapEx range, the upper end of the EPS growth, then I think dividend growth in line with EPS growth is a reasonable expectation.

Angie Storozynski - Macquarie Research

Okay. And completely separately on the new wind projects, we're seeing those prices of wind power in low $20s. Could you briefly talk through what actually offsets the reduction of pricing of electricity versus the returns that you can realize on those projects? I mean, is this that the net capacity factor went up so much? And if so, what is the average Mcf that you are realizing on those new projects? Or is it the cost of new build that has dropped significantly? Basically, I cannot somehow make the numbers work.

Moray P. Dewhurst

Sure. Well, the single biggest driver of the improvement in the economics of the wind projects has clearly been the increase in capacity factors. So to get a PPA in the $20 range and still yield acceptable returns, you have to be in a part of the country that has very strong wind resource and with modern technology turbines, you can expect to see capacity factors as high as 50%, where a decade ago in the same area, we might have been looking at 33%. So that change, when you run it through the numbers, is huge. Secondly, but much lower in importance, it is true that we've seen some relief on the cost side of the turbines, but that I think was more a function of a retreat from very high prices at a time when the turbine supply market was very tight. So I think that is more a cyclical thing. But the long term, the biggest single trend is improvement in technology and improving the capacity factors.

Angie Storozynski - Macquarie Research

But the cost of new build is roughly -- is it roughly $1,000 per kilowatt, or is it just slightly above that level?

Moray P. Dewhurst

No, I think if you look at the numbers that we've discussed in the script, I think the average we're looking at is about $1,700 a kW. Obviously, it varies depending upon where you are.

Angie Storozynski - Macquarie Research

Okay. And you are still accepting similar levels of returns as you did a couple of years ago?

Moray P. Dewhurst

Yes, the -- over a long period of time, we really haven't seen we've been able to maintain decent, modest spreads over risk-adjusted cost of capital. So obviously, the overall cost of capital has come down over the course of last decade just because real interest rates have come down. But the spreads have been generally in the same kind of range.

I think we have time for one more.

Operator

Our last question will come from the side of Hugh Wynne with Sanford Bernstein.

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

My question goes to the reserve amortization and its impact on regulatory ROEs. My recollection was that you had the option to reverse about $400 million over the '13 to '16 time frame. Did I hear you correctly in saying that of that, $180 million would be left at year end '13?

Moray P. Dewhurst

That's correct.

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

Yes, okay. Implying $220 million to be amortized in '13.

Moray P. Dewhurst

Correct, yes. We had always -- just the way that the dynamics of the business work, we have always been aware that 2013 was going to require a lot more surplus amortization to maintain a given level of ROE. In 2014, among other things, we have a significant pickup on the wholesale side, which we were obviously aware of, so that, that was baked into our thinking about the spread of the $400 million over the course of the period. So I just -- that may perhaps be worth emphasizing that with $180 million leftover at the end of this year, we still feel very comfortable based on where we see our cost structure going, that we are going to be able to maintain healthy ROEs for shareholders for the remainder of the rate agreement period out through 2016. So we feel good about where we are on that.

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

But basically, the ability to maintain, let's say, an 11% ROE is contingent on, one, the growth of the wholesale sales; and then two, your flat O&M cost forecast? Is that what I heard you just say, or...

Moray P. Dewhurst

Well, I think going forward, it's -- we -- clearly, not so much the wholesale growth because at least the piece I'm talking about is a contract that we've signed some years ago, so we know we're going to be on that. If you look at areas of uncertainty, it would be on retail growth, so customer growth and usage growth, for which our expectations are continued growth on the customer side in the 35,000 to 40,000 a year; and on the usage side of maybe a half to a little bit more percent per year; and then the cost control, which you referred to. So to the extent that there's uncertainty or risk about those 2 elements, and that's reflected in our thinking about where we can be over the course of the rate period. But again, as I said, we feel pretty good about it based on what we see right now.

Thank you, everybody.

Julie Holmes

Thank you. For those who didn't get a chance to get their questions answered, please follow up with Investor Relations. Thank you for joining our second quarter call.

Operator

This does conclude today's program. Thank you for your participation. You may now disconnect.

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