NextEra Energy Partners, LP (NYSEMKT:NEP)
Q4 2015 Earnings Conference Call
January 28, 2016 09:00 AM ET
Amanda Finnis - Director, IR
John Ketchum - SVP
Eric Silagy - President and CEO, Florida Power & Light Company
Jim Robo - Chairman and CEO
Stephen Byrd - Morgan Stanley
Dan Eggers - Credit Suisse
Julien Dumoulin-Smith - UBS
Steve Dutchman - Wolfe Research
Good day, everyone. And welcome to the NextEra Energy and NextEra Energy Partners Earnings Conference Call. Today's conference is being recorded.
At this time, for opening remarks, I would like to turn the call over to Amanda Finnis. Please go ahead.
Thank you Zac. Good morning everyone and thank you for joining our fourth quarter and full year 2015 combined earnings conference call for NextEra Energy and NextEra Energy Partners.
With me this morning are Jim Robo, Chairman and Chief Executive Officer of NextEra Energy; Moray Dewhurst, Executive Vice President and Chief Financial Officer, Armando Pimentel, President and Chief Executive Officer of NextEra Energy Resources; and Mark Hickson, Senior Vice President of NextEra Energy, all of whom are also officers of NextEra Energy Partners; as well as Eric Silagy, President and Chief Executive Officer of Florida Power & Light Company; and John Ketchum, Senior Vice President of NextEra Energy. John will provide an overview of our results and our executive team will then be available to answer your questions.
We will be making forward-looking statements during this call based on current expectations and assumptions, which 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 on our websites, www.nexteraenergy.com and www.nexteraenergypartners.com. We do not undertake any duty to update any forward-looking statements.
Today's presentation also includes references to non-GAAP financial measures. You should refer to the information contained in the slides accompanying today's presentation for definitional information and reconciliations of certain non-GAAP measure to the closest GAAP financial measure.
With that, I will turn the call over to John.
Thank you Amanda and good morning everyone.
Both NextEra Energy and NextEra Energy Partners enjoyed strong fourth quarter and ended 2015 with excellent results. NextEra Energy achieved full year adjusted earnings per share of $5.71 which was a penny higher than the upper end of the range we discussed going into the year and up 8% from 2014. We also experienced double digit growth in operating cash flow and continue to maintain our strong financial position in credit profile. NextEra Energy Partners successfully executed the acceleration of its growth plan despite the challenges of difficult capital market conditions in the second half of the year and grew its fourth quarter distribution per unit by 58% versus comparable prior year quarter with the distribution of $0.3075 or a $1.23 on an annualized basis.
Before taking you through the detailed results, let me begin by summarizing some additional highlights. At Florida Power & Light, we continue to invest in the business in 2015 with the focus on delivering value to customers and all of our major capital initiatives remain on track. Since the last call, we've received Florida PAC approval of the 29 team need for a plant Okeechobee clean energy center. We expect this project to further advance our focus on clean reliable and cost effective energy for our customers consistent with our long-term strategy.
We continue to work hard at FPL to further enhance where we consider to be and already outstanding customer value proposition. Our customers enjoy an electric service that is cleaner and more reliable than ever before while our typical residential customer bill is the lowest among reporting utilities in the State of Florida and is approximately 14% lower than it was a decade ago.
Despite a challenging summer lighting season, FPL delivered its best ever full year period of service reliability in 2015 and was recognized is mean the most reliable other electric utility in the nation. This was accomplished as we continue to invest to make the grid stronger, smarter and more responsive and resilient to outage conditions. Our performance is the direct result of our focus on operational cost effectiveness, productivity and the long-term investments we made to improve the quality, reliability and efficiency of everything we do. And 2015 was an excellent period of execution by the FPL team.
At Energy Resources, 2015 was an outstanding period of performance for our contracted renewable development program. New renewable project additions drove financial results while origination results for new projects to be placed the service by the end of 2016 exceeded the expectations that we discussed at our March Investor Conference. The longer term outlook beyond 2016 also continue to develop favorably.
The team signed contracts for a total of approximately 2100 megawatts of new renewable projects over the last year making us our second best year ever for renewable origination performance. We continue to believe that Energy Resources is well positioned to capitalize on one of the best environments for renewable development one recent history.
We now have greater certainty regarding federal tax incentives for renewable as congress took action in December to extend the 2014 wind PTC and the 2016 solar ITC programs over a five year phase down period. We expect that the IRS will provide start to construction guidance with the tier safe harbor period for wind and solar some more informed what was put in place for the 2014 PTC.
The certainty regarding tax incentives will provide planning stability which we think in turn will serve as a bridge to further equipment cost declines and efficiency improvements that will enable renewables to compete on a levelized cost of energy basis with combined cycle technology when tax incentives are phase down. In the meantime with tax incentives both wind and solar will be very competitive and in addition of the favorable impact of tax policy we expect the carbon reduction requirements under the EPA's clean power plan to significantly drive demand for new renewables as we move into the next decade.
Finally, we expect low natural gas prices to continue to force call the gas and call to renewable switching with new renewable supported by the factors I just mentioned. Driven in large part by enthusiasm about a renewables growth prospects. In the middle of last year we increased our expectation for NextEra energies compound annual growth rate and adjusted earnings per share to 6% to 8% through 2018 up to 2014 base. These increased expectations well in turn effect our capital expenditure plans for renewables development program which we will update on the first quarter earnings call in April.
Across the portfolio both Energy Resources and FPL continue to deliver excellent operating performance. The fossil nuclear and renewable generation fleets had one of their best periods ever with E4 or the equivalent forced outage rate that less than 1.5% for the full year. Similar to NextEra energy, NEP also delivered on all its financial expectations. NEP growth for full year through the acquisition of economic interest in over 1,000 megawatt of contracted renewables project from Energy Resources with total ownership increasing by over 1,200 megawatts and established its presence in the long term contract with natural gas pipelines phase with the acquisition of 7 natural gas pipelines in Texas.
This acquisition is expected to reduce the impact resource variability as on the portfolio in extend to any piece runway or potential drop down assets. All of the same factors that favor growth and new renewables for Energy Resources likewise should benefit NEP. The strong renewables origination performance in Energy Resources continues to expand the pipeline of generating in other assets potentially available for sale to NextEra energy partners now and in the future.
In contrast to many other YieldCos NEP does not have the same dependence on third party acquisitions to grow? But rather can reasonably expect to acquire projects that have been organically developed by its best in class sponsor. We continue to believe that the strength of its sponsor and the ability to demonstrate a strong and highly visible runway for future growth is a core strength of the NEP value proposition which is the one of many factors that distinguished it from other YieldCos.
As we had in the 2016 both NextEra energy and NEP remained well positioned to deliver on their financial expectations. Subject to the usual drivers of variability including in particular renewable resource variability. FPL benefits from the surplus amortization balance of 263 million which is expected to position at the upper half of its ROE range while it continues to execute on its capital investment initiatives for the benefit of customers.
In addition the right case will obviously be a core focus area for FPL in 2016. At Energy Resources, the business plan is built around the contribution from new investments and executing on the development and construction of roughly 2,500 megawatts of new renewables scheduled to go commercial by the end of the year. Meanwhile NEP enters 2016 with a solid run rate and the flexibility necessary to execute its growth plans.
In summary, we are very optimistic about our prospects for another strong year. Now let’s look at our results for the fourth quarter and full year. For the fourth quarter of 2015 FPL reported net income of $365 million or $0.79 per share up $0.14 per share year-over-year. For the full year 2015 FPL reported net income of $1.6 billion or $3.63 per share up $0.18 per share versus 2014. Regulatory capital employed grew 6.8% for 2015 which translated to net income growth of 8.6% for the full year with fourth quarter performance leading the way.
Regulatory capital employee continues to grow through the year. In addition of the first four quarters since the closing of the Cedar Bay transaction in September fourth quarter results were also impacted by timing effects in a number of smaller items including outstanding performance under our asset optimization program.
As a reminder, FPL’s current rate agreement provides incentive mechanism for sharing with customers gain that we achieved in excess of a threshold demand for gas and power optimization activities. In 2014, these activities produced roughly $67 million of incremental value. Others amount $54 million worth for the benefit for customers. Under the sharing mechanism which only applies once customer savings exceed $46 million FPL was permitted to record approximately $13 million of pretax income in the fourth quarter of 2015.
Consistent with the expectations that we shared with you previously our reported ROE for regulatory purposes will be approximately 11.5% for the 12 months ended December 2015. As a reminder, under the current rate agreement we record reserve amortization entries to achieve a predetermined regulatory ROE for each trailing 12 months period.
During the fourth quarter, aided by the impact of unusually warm weather we utilized only $67 million of reserve amortization. This brings our cumulative utilization of reserve amortization since 2013 to $107 million leaving us a balance of $263 million which can be utilized in 2016.
In 2016, we expect to use the balance of the reserve amortization to offset growing revenue requirements due to increased investments. We expect the reserve amortization balance along with our current sales, CapEx and O&M expectations to support regulatory ROE and the upper half of the allowed band of 9.5% to 11.5% in 2016. As always our expectations assume among other things normal weather and operating conditions.
Fourth quarter retail sales increased 11.7% from the prior year comparable period and we estimate that approximately 9.6% of this amount can be attributed to weather related usage per customer. On a weather normalized basis fourth quarter sales increased 2.1% comprised of continued customer growth of approximately 1.4% and increased weather normalized usage per customer of approximately 0.7%.
As a reminder, our estimates of weather normalized usage per customer are subject to greater uncertainty and periods with relatively strong weather comparisons like we have seen throughout 2015.
For the full year 2015, retail sales increased 5.6% compared to 2014. After adjusting for the effects of weather full year 2015 retail sales increased 1.2%. Weather normalized underlying usage for the year decreased 0.3% and looking ahead we continue to expect year-over-year weather normalized usage per customer to be between flat and negative 0.5% for the year.
The economy in Florida continue to grow at a healthy rate with strong jobs growth reflected in consistently low rates to seasonally adjust an unemployment around levels last seen in early 2008 and over 1 million jobs have been added from the low in December 2009 so the pace of jobs growth is beginning to slow. With the indicators in the real estate sector continue to reflect a strong Florida Housing market in the December leading the Florida’s consumer sentiment remain close to post recession highs.
Let me now turn to Energy Resources, beginning with the reporting change. We have reevaluated our operating segments and made a change to reflect the overall scale of our natural gas pipeline investments and the management of these projects within our gas infrastructure activities at Energy Resources.
As you may recall our upstream gas infrastructure activities have not only better informed our hedging decisions but have also led to opportunities in gas reserves to benefit for the customers and the acquisition development and construction of natural gas pipelines.
Our reporting for Energy Resources now includes the results of our natural gas pipeline projects formally reported in the corporate and other segment. While our 2014 results have been adjusted accordingly for a comparison purposes the effects are minimal due to the prior and material contributions from these projects to early stages of development. Contributions from the Texas pipeline acquired by NEP in October are also included in the Energy Resources results for 2015. Energy Resources reported fourth quarter 2015 GAAP earnings of a $156 million or $0.34 per share. Adjusted earnings for the fourth quarter were $185 million or $0.40 per share.
Energy Resources contribution to adjusted earnings per share in the fourth quarter was flat against the prior year comparable period which primarily reflects contributions from new investments being offset by higher corporate G&A and interest expenses.
For the full year 2015, Energy Resources reported a GAAP earnings of $1.1 billion or $2.41 per share. Adjusted earnings were $926 million or $2.04 per share. Energy Resources full year adjusted EPS increased $0.14 per share despite a significant head win associated with poor wind resource versus 2014 which was largely offset by strong results in our customer supply and trading business. These improved customer supply and trading results reflect in part, a return to more normal levels of profitability in the first quarter following the adverse effects of polar vortex conditions in 2014.
While wind resource was approximately 96% of long term average in 2015, other factors including in particular ICN in the fourth quarter and other production losses reduced production by another 2%.
New investments added $0.31 per share consistent with a reporting change that I just mentioned this includes $0.04 per share of contribution from our gas pipeline projects. Reflecting the addition of the Texas pipeline acquired by NEP to the portfolio as well as continued development work on the Florida pipelines on Mountain Valley Project.
New renewables investments added $0.27 per share reflecting continued strong growth in our portfolio, a contract of wind and solar projects. In 2015 alone we commissioned approximately 1200 megawatts of new wind projects in approximately 285 megawatts of new solar projects. Contributions from our upstream gas infrastructure activities which declined by $0.02 per share were negatively impacted by increased depreciation expenses as a result of higher depletion rates.
Based on market conditions we elected not to invest capital in growing certain wells which resulted in earlier recognition of incomes to the value of the hedges we had in place. Although this helped mitigate other negative effects in 2015 including higher depletion rate, below commodity price environment presents a challenge for these activities going forward.
Partially offsetting the growth in the business was a negative impact of $0.22 per share reflecting higher interesting corporate expenses including increased development activity in light of what we consider to be a very positive landscape for the renewables business. Results also were impacted by negative $0.06 per share or share dilution while benefiting from the absence of charges associated with the 2014 launch of NEP. Additional details for our results are shown in the accompanying slide.
Energy Resources full year adjusted EBITDA increased to approximately 9%. Cash flow from operations excluding the impact of working capital increased approximately 14%. As we did last year we have included a summary in the appendix of the presentation that compares Energy Resources adjusted EBITDA by asset category to the ranges we provided in the third quarter of 2014.
As I mentioned earlier 2015 was an outstanding period performance for new wind and solar origination. Since our last earnings call, we have signed contracts for an additional 206 megawatts of wind projects for 2016 delivery. With these additions we have exceeded the expectations we shared at our March 2015 investor conference for 2015-2016 development programs. The accompanied chart updates information where each of our programs now stand. We have also signed contracts in California and Ontario for storage projects inner service in the next couple of years. Although it is early in the technology life cycle we are successfully originating storage projects to support our expectations to invest up to $100 million per year in order to maintain our competitive position with regard to this important emerging technology.
For all the reasons, I mentioned earlier we continue to believe that the fundamental outlook for renewables business has never been stronger. And we are working on an update to our capital expenditure expectations for 2017 to 2018 development programs. It is important to keep in mind that because these projects drive growth upon entering commercial operations. The greatest potential benefits are to 2019 and beyond. For 2016 we believe that our development program is largely complete other than one or two additional opportunities that we are pursuing.
Turning now to the development activities for natural gas pipeline projects that are now reported in the Energy Resources segment. The Florida pipelines remain on track and we expect to be in a position to receive FERC approval early this year to support construction beginning the mid-2016 and an expected in service date in mid-2017. As a reminder, NextEra Energy's investments and stable trail transmission and Florida South East connection are expected to be approximately $1 billion and $550 million respectively and FPL is the anchored ship for our both pipelines.
The Mountain Valley pipeline has continued to progress through the FERC progress and filed its formal application in October 2015. We continue to see market interest in the pipeline and we're pleased to announce earlier this month the addition of Consolidated Edison as ship around the line as well as the addition of Con Edison gas midstream as a partner. We continue to expect approximately 2 Bcf per day a 20 year firm capacity commitments to achieve commercial operations by year end 2018. With the addition of Con Edison, our ownership share in this project now stands at approximately 31% and our expected investment is roughly $1 billion.
Let me now review the highlights for NEP. Fourth quarter adjusted EBITDA was approximately $135 million and cash available for distribution was $75 million. During the quarter the assets in the NEP portfolio operated well, overall renewable resources were generally in line with our long-term expectations and the acquisitions of a Texas Pipeline and Jurica I far more completed as planned.
Overall, 2015 was a successful year of execution against our growth objectives. Consistent with our decision to accelerate the growth of NEP, the portfolio grew throughout the year to support a fourth quarter distribution of $0.3075 per common unit or $1.23 per common unit on an annualized basis, up 58% against the 2014 comparable fourth quarter distribution. Also consistent with the range of expectations that we have shared, full year adjusted EBITDA was approximately $404 million and cash available from distribution was $126 million.
Clearly 2015 had challenges as well. Changes in market conditions not only affected our financing plan in 2015 but also led us to pursue additional options to be more flexible and opportunistic as to how and when we access the equity markets going forward.
On the last call, we announced and at the market equity issuance retrieval program for up to $150 million at NEP. At the same time, NextEra Energy also announced a program to purchase from time-to-time based on market conditions and other considerations up to $150 million of NEP's outstanding common units. During the quarter, NEP completed the sale of over 887,000 common units raising approximately $26 million under the ATM Program.
Turning now the consolidated results for NextEra Energy for the fourth quarter of 2015, GAAP net income attributable to NextEra Energy was $507 million or $1.10 per share. NextEra Energy's 2015 fourth quarter adjusted earnings and adjusted EPS were $530 million and a $1.17 per share respectively. For the full year of 2015, GAAP net income attributable to NextEra Energy was $2.8 billion or $6.06 per share.
Adjusted earnings were roughly $2.6 billion or $5.71 per share. Our earnings per share results for the year account for dilution associated with the settlement of our forward agreements of 6.6 million shares that occurred in December of 2014 and the June and September settlements totaling approximately 16 million shares associated with the equity units issued in 2012. The impact of dilution on full year results was approximately $0.17 per share. The issuance of additional shares is consistent both with our strategy of maintaining a strong financial position and with our ability to grow adjusted EPS of 6% to 8% per year over a multi-year period.
Adjusted earnings from the corporate and another segment increased $0.09 per share compared to 2014 primarily due to investment gains and the absence of debt retirement losses incurred in 2014. NextEra Energy's operating cash flow adjusted for the potential impacts of certain FPL clause recoveries and the Cedar Bay acquisition grew by 16% in 2015 and as expected we maintained our strong credit position which remains an important competitive advantage in a capital intensive industry.
At FPL, we will continue to focus on excellent execution and delivering outstanding value to our customers. In addition, the rate case proceeding will be a core area of focus that is likely to occupy much of 2016 and I will discuss this more in just a moment. With regard to delivering on our customer value proposition and executing on our major capital initiatives at FPL, we will focus on completing our generation modernization project to Port Everglades constructing our Peaker upgrades Waterdale and Fort Myers and delivering the three new large scale solar projects and our other additional investments to maintain and upgrade our infrastructure.
At Energy Resources growth will continue to come from merely through the addition of new renewables and continue construction of our gas pipeline projects which we expect the more than offset PTC roll off of approximately $37 million. We feel better than ever about the quality of our renewables development pipeline and as we said in the last call over the next few years we expect to as much as double the development resources committed to our wind and solar origination and development capabilities in order to see and even larger for the growing North American renewables market.
Headwinds could come from the potential impact of El Nino wind resource in the first half of the year in currently commodity price environment. With regard to weak commodity prices we evaluated our generation portfolio from markets where we expect low prices for sustained periods of time. As a result of that exercise we took steps at the end of last year to reduce approximately 40% of our merchant generation capacity by entering into a contract to sell or more [inaudible] natural gas fire generating assets located in Ergot [ph].
Once closed the sale is expected to be slightly accretive to our EPS and credit profiles and will generate $450 million in net cash proceeds that will be recycled into our long term contract of renewables business. We remained well hedge through 2018 and we'll continue to evaluate our other merchant generating assets for potential capital recycling opportunities.
With regard to our upstream gas infrastructure business sustain weak commodity prices of course means fewer new drilling opportunities other things they go and we've reduced our expectation of future growth from this part of the portfolio. When we elect to drill we hedge most of our expected gas and oil production for up to seven years. In cases where we've elected not to drill we have as we did in the fourth quarter liquidated the hedges that we put in place which generally allows us to recover a portion of our original investment on those wells that we had planned to drill.
At the corporate level we don't expect our financing plan in 2016 to require equity and if there would be a need we would expected to be modest. Similar to previous year as we work to maintain a strong balance sheet with the flexible and opportunistic financing plan and a focus on capital recycling opportunities. Also as I just mentioned we plan to evaluate capital recycling opportunities within our merchant generation portfolio as we continue to execute on our strategy to become more long term contract than in a way it regulated.
Earlier this month, we filed the test year letter with Florida PSE to initiate a new rate proceeding for rates beginning in January 2017 following the expiration of our current settlement agreement. FPL was finalizing a base rate adjustment proposal that would cover the next 4 years 2017 through 2020. While the details of the number that still being finalized we expect the proposal to include base rate adjustments of approximately $860 million starting in January 2017, $265 million starting in January 2018 and $200 million of non-commission at the Okeechobee clean energy center in mid-2019 with no base rate adjustment in 2020.
Based on these adjustments combined with current projections for fuel and other costs. We believe that FPL's current typical build for January 2016 will grow at about 2.8% roughly the expected rate of inflation through the end of 2020. When thinking about the rate case there are four key points to keep in mind.
First, we are proposing a four year rate plan which provides customers a higher degree of predictability with regard to the future cost of electricity.
Second, for the period of 2014 through the end of 2017 FPL was planning to invest the total of nearly $16 billion with additional significant investments expected in 2018 and beyond to meet the growing needs of Florida's economy and continue delivering outstanding value for Florida customers by keeping our liability high and fuel and other cost low. While the benefits of building a stronger and smarter grid and a cleaner more efficient generation fleet or passed along rigorously to customer through higher service reliability and lower bills. We must periodically seek recovery for these long term investment supported by base rates.
Third, you may recall that FPL is required to file a comprehensive depreciation study as part of the rate case. Their appreciation study to be filed with this rate case reflects the investments at FPL has made since the last study in 2009. Based on the change in mix of assets and the recoverable life spans, the resulting impact of the study is roughly $200 million increase in annual depreciation expense.
Fourth, we expect to request to performance adder of 0.5% as part of FPL’s allowed regulatory ROE. Compared with peer utilities in the Southeastern Coastal U.S. FPL has the cleanest carbon emissions rate, the most cost efficient operations, the highest reliability and the lowest customer builds but in allowed ROE midpoint that is below the average of those peer utilities.
We believe that the proposal for a performance adder presents an opportunity to reflect FPL’s current superior value proposition and encourage continued strong performance. The estimated impact of the three base rate adjustments phased in during the four year period with total approximately $13 per month or $0.43 per day on the base course of a typical residential bill. FPL is where target delivered service that is ranked among the cleanest and most reliable to the lowest cost and has made the decision to secretly only after the thoroughly review of its financial projections.
Since 2001 FPL’s investments and high efficiency natural gas energy have saved customers more than $8 million on fuel while preventing 95 million tons of carbon emissions. In addition while the cost of many materials and products that the company must purchase in order to provide affordable, reliable power have increased and the energy demand afforded customers are growing with the projected addition of nearly 220,000 new service accounts during the period 2014 through the end of 2017, FPL’s focus on efficiency and productivity is significantly less in the billings act.
Compared with the average utilities O&M cost FPL’s innovative practices and processes saved customers nearly $2 billion a year or approximately $17 per month for the average customer. So let’s focus on a cost reduction, FPL ranks best in class among major U.S. utilities who’re having the lowest operating and maintenance expenses measured on a cost per kilowatt hour of retail sales. In addition while other utilities around the country are facing potentially higher cost to comply with the EPA’s cleaning power plant, FPL is already well positioned to comply with the targets in Florida.
Today, FPL’s typical residential bills about 20% lower than the state average and about 30% lower than the national average and we expect it will continue to be among the lowest and lower than it was 10 years ago in 2006, even with our requested base rate increases. We look forward to the opportunity to present the details of our case and expect to make our formal filing with testimony and required detailed data in March. The timeline for the proceeding will ultimately be determined by the commission but we currently expect that we will have hearings in the third quarter with the final commission decision in the fourth quarter and time for new rates to go into effect in January 2017.
As always we’re open to the possibility of resolving our rate request rate fare settlement. Over a period of last 17 years, FPL has entered into five multiyear settlement agreements that have provided customers with the degree of rate stability and certainty. Our core focus will be to pursue a fair and objective review of our case that supports continued execution of our successful strategy for customers and we will continue to provide updates throughout the process.
Turing now to expectations, for 2016 we expect adjusted earnings per share to be in the range of $5.85 to $6.35 and in the range of $6.60 to $7.10 for 2018 complying the compound annual growth rate after 2014 base of 68%. We continue to expect to grow our dividends per share 12% to 14% per year through at least 2018 after 2015 base of dividends per share of $3.08. As always our expectations are subject to the usual caveats including but not limited to normal weather and operating conditions.
Before moving on let me take a moment to discuss the expected impacts on the business of the recent phase down expansion of bonus depreciation. Let me start by saying that we had already assumed the extension of bonus depreciation in our 2016 financial expectations. In addition, after analyzing the recent extension we do not expect bonus depreciation to impact NextEra Energy’s earnings per share expectations through 2018.
At NEP, as I mentioned earlier, yesterday the Board declared a fourth quarter distribution of $30.75 per common unit or $1.23 per common unit on an annualized basis, representing the 58% increase over the comparable distribution a year earlier. From this phase we continue to see 12% to 15% per year growth in LP distribution has been being a reasonable range of expectations through 2020 subject to our usual caveats.
As a result we expect the annualized rate for the fourth quarter of 2016 distribution to be in a range of a $1.38 to $1.41 per common unit. The December 31, 2015 run rate expectations for adjusted EBITDA of 540 million to 580 million and CAFD of $190 million to $220 million reflect calendar year 2016 expectations for the portfolio at year end December 31, 2015.
The December 31, 2016 run rate expectations for adjusted EBITDA of $640 million to $760 million and CAFD of $210 million to $290 million reflect calendar year 2017 expectations for the forecast of portfolio at year end December 31, 2016. Our expectations are subject to our normal caveats and our net of expected IDR fees, as we expect these fees to be treated as an operating expense.
As we have said before in the long run in order for NEP to service the tender purpose we need to be able to access the equity markets at reasonable prices. For 2016 beyond the ATM program we continue to plan to issue a modest demand of NEP public equity to finance our growth included in our December 31, 2016 annual run rate. And we will be smart, flexible and opportunistic as the how and when we access the equity markets. If the equity markets are not accessible on reasonable prices we expect to have sufficient debt capacity at NEP that together with proceeds rates for aftermarket dribble program should be sufficient to finance currently planned 2016 transactions.
Where conditions are appropriate one alternative will be to raise equity privately prefunding drops before they are publicly announced, however this is just one option that we are considering and we may access the equity markets in other ways when market conditions permit. In addition we expect the drops to be smaller in magnitude in order to manage the capital required to finance acquisitions.
As I mentioned earlier the aftermarket dribble program is proven to be successful as NEP raised approximately $26 million of equity during the fourth quarter and we will continue to seek opportunities to use this program to help finance the potential future acquisitions.
We continue to believe it is important that we remain focused on the fundamentals and given the strength of NEP sponsor in the prospects for future renewables development the NEP value proposition which relies on projects organically developed by Energy Resources rather than third party acquisitions for growth is the best in the space. We plan to continue to be patient with NEP and have taken necessary steps to provide time for recovery of the equity markets.
NEP benefits from the strong sponsor derisk the long term contract in cash flows with an average contract life of 19 years strong counterparty credits, and projects that in many cases have been financed predominantly through mortgage style financing that provides long term protection against inter-trade volatility. We remain optimistic that the NEP financing model can and will work going forward.
In summary we have excellent prospects for growth. The environment for new renewables development has never been stronger and FPL, Energy Resources in NEP each have an outstanding set of opportunities across the board. The progress we made in 2015 reinforces our longer term growth prospects and while we have a lot to execute in 2016 we believe that we have the building blocks in place for another excellent year.
With that we will now open the lines for questions.
Thank you. [Operator Instructions]
Who’s first up?
And we’ll take our first question from Stephen Byrd with Morgan Stanley. Please go ahead.
Hi good morning.
Wanted to just check in on the solar valid initiative it looks like the consumers grew for smart solar which you supported has gotten the votes necessary could you just speak to the process for getting this on the ballet and just what we should be looking at going forward there?
Sure hi Stephen good morning it’s Eric Silagy so the necessary votes or secured signatures has been verified and it’s two tests there’s a number of votes or signatures I should say and then also the number of congressional districts that see - half of congressional districts those two tests have been met so the next step right now is of this language because it [inaudible] language has to be verified by the Supreme Court as being ballot to be on the constitutional ballot. That has to take place by April the 1st, briefs have been filed by number of groups in front of the court. Oral arguments have not being scheduled, they are not required actually, so the court could possibly rule without the oral arguments or they will settle oral arguments being heard and then by April 1st at the latest the court will rule. If the court approves the language it will go on the ballot for November elections.
That’s very clear. Thank you and then shifting over to resources, I was very happy about the extension of the ITC and PTC. I wanted to get your sense of the state of the tax equity market given continued growth in renewable we had heard some reports that the market is some of the players maybe exiting and overtime there could be a bit of a squeeze in terms of who actually is able to secure tax equity. Would you mind start talking at a high level in terms of your take on the health currently the tax equity market where you see that and whether or not that might be an advantage for you all given your position versus say smaller competitors?
Sure Stephen. Actually we see the opposite we see the tax equity market actually strengthening. And one of the benefits of having a global banking network as we have given us the ability to access different tax equity providers and one of the things that we do at the beginning of each fiscal year and we just completed this process and work on our tax equity allocations going forward.
So we feel very good and to the extent that others that maybe having poor financial performance and don’t have the same prospects for future growth may not have the same access to tax equity going forward that we do given the strength of our renewable pipelines and our track record which speaks for itself.
Very helpful. Thank you very much.
And we will go next to Dan Eggers with Credit Suisse. Please go ahead.
Hey good morning guys. Just John going back to the depreciation comment - not really affecting any of your funding or growth expectations. Can you just walk us through where you guys expect to be from a tax cash pay-out perspective in how far in that future does that take you with the bonus depreciation?
That much of a deferral of our deferred tax asset balance.
It doesn’t affect FPL, why?
Well if you walk through the impacts on the business at FPL what you would expect to see is lower amount of equity required to be put in the business because you have a lower tax liability. Energy Resources, you know we use the tax equity financing, but on a consolidated basis at NextEra Energy the lower tax liability we have at NextEra Energy results in higher FPPO to debt which gives us additional flexibility in terms of having to issue less equity and so have to issue less equity really offsets any impacts that we have at FPL and that’s the reason why on a consolidated basis net-net bonus depreciation really is not expected to impact our financial expectations going forward.
Okay. And I guess a little early on the idea of what’s going to happen the pipeline for renewable development that past conversations suggest there are lot of folks trying to jam in projects in 2016 to catch the solar ITC are you guys having discussions right now about you are shifting the timing and magnitude for the sake of when the projects really get done given the fact that your customers have more flexibility now?
No, not the way our contracts are structured.
Okay, very good. Thank you.
And we will go next to Julien Dumoulin-Smith with UBS.
Hi, good morning and congratulations.
So, first just on the capital markets and balance sheet needs, just to be very clear about this in terms of equity expectations for this current year I think I heard you say you don’t really expect any of the corporate level, can you just expand upon the assumptions baked there in and specifically discuss capital recycling. I presume that no equity does not presume further capital recycling and how you think about more specifically what that recycling might look like obviously in light of the Texas decision, is there more merchant divestment coming as what I'd ask is kind of the follow up.
Yeah we in terms of our equities in 2015, our base case is that we have recycling opportunities available in our merchant generation portfolio that we will continue to explore similar to what we did with [inaudible] transaction back in 2015. We also have some renewable assets that maybe rolling off of contract that could be good opportunities as well. And then we have some renewable assets on the balance sheet that we have not previously put debt financing up against that could provide additional sources for capital for 2016 offsetting what would otherwise be a modest equity needs in 2015 for NextEra Energy.
Got it but just to be clear on equity here, are you assuming further assets held be on demand for you need to make sure to hit that no equity needs.
Julien, this is Jim, I think the way you should think about it is everything we have is always for sales. And if there is an opportunity to sale something it's accretive to our earnings going forward and make sense from a strategic standpoint we're going to sale it. But we are also not betting that we're going to have to sale and order not to have to issue equity this year. the how much equity content we need in any given year is always driven by how much capital we're going to deploy what the opportunities are how we doing against all of our financing activities. And we have a whole host of things that we will host the leverage that are disposals that we go to.
And obviously issuing equity is very and the team knows and this is very well and very well in my waste of kind of things we want to do to finance the plan and obviously the foot side of that is as we need a strong balance sheet and we're committed the strong ratios to maintain the strong balance sheet. So what we said is I think is I think very clear in the script. We said we don't believe we're going to have an equity need this year and if there is and if there is one that's going to be very modest.
Great very clear. And then just lastly on natural gas and obviously the depth we see here. Is that impact at all your rate based gas efforts in Florida or your solar efforts in Florida?
Well on the one hand, you could see as it creates more opportunities given the distress nature of that space and potential assets coming up for sale. On the other hand, it does provide somewhat of a limitation and that you have to be able to identify producer operators that are willing to sale in today's lower natural gas price environment and that will price that make sense for Florida customers. But we're working hard to identify those opportunities through the FPL origination efforts.
Julien, this is Eric I'll just add that on the three solar projects that has no impact those are underway and remembers those are advantage sites that we had because we have the property the transmission was there and so we're moving forward with those they provide customer benefits for the product.
Great, thank you very much guys.
And we'll go next to Steve Dutchman with Wolfe Research. Please go ahead.
Yeah hi good morning. So first just on the kind of renewable backlog opportunity. I know you mentioned we'll have more specifics on the Q1 call. But just could you just give a little bit and I might have missed it in the commentary and just a little bit of a high level color on how you're looking at the extensions in CPP kind a moving the needle on these things. I think you said like maybe more or like after big push after 19 was that. I just want to make sure I understood the high level color you gave.
So Steve. I think the first thing we look at is if you go back over the last several years as you probably had a renewable market in the U.S. of 8 to 9 gigawatts, it’s as lumpy though as you know. When we look at 17 through 20, we see a market that's probably much closer to 13 to 15 gigawatts and there are some out there that would say that towards the later part of the decade that that market could get up to 18 to 20 gigawatt.
So when we look at it we say well - as we've gotten our fair share in the past and so our expectation is to continue to get our fair share in the future. If you look at wind on a tone and by the way it's often very difficult to separate how much of that is going to be wind and how much of it's going to be solar although I'll tell you that solar is more and more competitive the longer you go out. But if you look at the near term if you look at '17 and '18 on the wind side certainly the expectations are that there is going to be a lot of windmill.
Especially if the IRS comes through which what we think they are going to come through the same interpretation of in construction as they have had before you are going to likely get a 100% PTC's for COD's on wind all the way through the end of 2018, 2017 remain to be same whether that will be a banner year for wind or not. But I think combined '17 and '18 will be pretty good on the wind side then you look at wind the little further out. Obviously you've got CPP, we another have provided comments the EPA on CPP one of those comments that EPAS for what do we do with the clean energy incentive program.
So right now states have to have a state implementation plan that could go in as late as the fall of 2018. Before that plan goes in, you can't really get under the incentive plan for renewables. So that's probably a 20 to 21 build that you see there we're hoping that comes up a little bit. We do see CPP making a difference for wind, probably starting in '19. But certainly no later than 2020.
On the solar side the way that it's been structured you could potentially get 30% ITC on solar all the way through 2020. I've said this over and over again in the past we continue to be surprised by the demand for solar out there it's certainly more competitive. But there is a lot of demand for solar. So we see fairly steady solar growth from '18 through '20. I think it was Dan that asked the question before about '16 maybe go to '17, which I don't.... I agree with what John said but the point there also on solar is you may actually see a smaller '17 because so much is getting built in '16. So is that good?
Yeah, that's helpful. And just the reason that you are going to do the updated end of Q1 versus now versus later as you just have better visibility on the backlog at the end of Q1.
It will have, I mean I know the lot of people read the CPP. We've read it 100 times. It's complicated. We want to make sure that we understand what we think is going to happen in the market. But in addition we are out talking to all of our customers. So make sure that we understand what their plans are for the next couple of years.
Okay. One other question on the gas pipeline business. Jim I guess, how are you thinking about how are the projects on time are you seeing any counter party risk and maybe more importantly given the rest in the business just do you feel that as kind of acquisition opportunities or stay away to be careful, just how are you looking and what's going on in that space?
We are making good progress in terms of timing on the projects and so I feel good about.... on the pipeline project I feel good about that, there is always pressure on timing and certainly focus has been a little slower in terms of pipeline permitting and it's been historically. But we are feeling good about that. In terms of counter party risk obviously we feel good with our portfolio projects that the vast, vast, vast majority of the counter parties that we have on all the pipelines across both the forward pipelines mountain valley pipeline and the Texas pipelines are all very strong credit worth of entities and so we don't have that counter party risk that some of the other folks in pipeline business do and our average contract length is quite long. It's probably close to 20 years.
So given where the market stand obviously there is a lot of distress in this market right now. We would have interest only in pipelines with strong credit counterparties and long-term contracts and so if there are those that if there are those that come available and there are maybe some of those that come available given some of the things going on in the industry we will be interested in that and obviously we'll be disciplined as we always are these are the acquisitions but it would be something that we would look at. But I have no interest in adding anything with commodity exposure and short contracts.
And we'll go next to Michael PS [ph] with Goldman Sachs. Please go ahead.
Hey guys congrats on a good quarter two questions one FPL related one near at FPL. How much of the rate increase request is related to the total change in deprecation. Meaning you mentioned the D&A study and the incremental 200 mill. But we've also got the roll off the reg amortization. Is that part of that $200 million is that incremental to it. And then on the if you wouldn't mind, can you just talk about what the PTC roll off is not just in '16 but kind of does that accelerate in '17 does it decelerate or kind a stay at a constant level over the next couple of years.
Okay Michael this is John I'll take the first one and I'll turn it over to - for the second on. On the depreciation question about $200 million. And the surplus amortization balance I think to 263 that I mentioned earlier for '16 rolls off by the end of the year is part of our settlement agreement that expires.
And Michael we're going to have to get back to everybody and it's obviously it's 37 in the next year which John mentioned in the call. I don't recall what it is in the following year.
Okay. And just on the FP&L question, the $200 million from the D&A study that drives part of the rate increase for class. But then you had multiple years of accumulated regulatory amortization. Should we assume that all of that kind of flows back in and not just the amount for 2015 but the multiple years into depreciation in 2017 and beyond at FP&L.
Hey Michael this is Jim. I think the way you should think about the impacts the - amortization first of all we do depreciation study. Everything gets washed out in the study, right. And so it's you're looking at things fresh you looking at the current what we currently depreciate in terms of our ongoing depreciation expense and we do a new study and we come up with the new revenue requirement from that study. And do a lot of puts and takes in it and the fact that we have some surplus amortization over the last several years has led to rate base being a little bit higher than it otherwise would have been. Had we not have the surplus amortization? But actually doesn't have the giant impact on the ongoing depreciation expense in the study.
Got it, last one Jim. Just curious any thoughts on the by parts in the energy build that kind a leaving its way to the U.S. center right now. You mentioned there was some commentary earlier in the call about some of the investments in storage and I think there was some terms in that legislation if it were to make its way through that would have a pretty big impact on storage on the grid.
So Michael I give the sponsors a lot of credit for working to try to get something done in this environment that in this environment wash in. that's at I think it's highly high and likely than anything gets done this year.
Got it. Thank you. Much appreciated guys.
And we are out of time for questions here. Thanks everyone for joining the program. You may disconnect and have a wonderful day.
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