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NextEra Energy (NYSE:NEE)

Q2 2012 Earnings Call

July 26, 2012 9:00 am ET

Executives

Julie Holmes

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

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

Armando Pimentel - Chief Executive Officer and President

Analysts

Dan Eggers - Crédit Suisse AG, Research Division

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

Stephen Byrd - Morgan Stanley, Research Division

Jonathan P. Arnold - Deutsche Bank AG, Research Division

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

Steven I. Fleishman - BofA Merrill Lynch, Research Division

Paul Patterson - Glenrock Associates LLC

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

Andrew Bischof - Morningstar Inc., Research Division

Ashar Khan

Operator

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

Julie Holmes

Thank you, Audra. Good morning, everyone, and welcome to our Second Quarter 2012 Earnings Conference Call. Joining us this morning are Jim Robo, President and Chief Operating 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, LLC; and Eric Silagy, President of Florida Power & Light Company. Moray will provide an overview of our results, following which, Jim will touch on our strategy for future growth.

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, which is a non-GAAP financial measure. 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. Good morning, everyone. NextEra Energy delivered solid results during the second quarter of 2012 and built on the progress made in the first quarter. The company remains on track to achieve the goals we outlined for this year, and we believe we are well positioned to attain our longer-range expectations.

At FPL, we continue to invest in the business at a record rate to deliver even more value to our customers. Regulatory capital employed grew $3.7 billion or 17.5% versus the second quarter of 2011, and we recorded a regulatory ROE of 11%, consistent with the 2010 settlement agreement. As a result, our net income increased $52 million compared with the same quarter last year.

Energy Resources' contribution to adjusted earnings in the second quarter increased $0.04 compared with the same quarter last year. Contributions from new investments helped offset declines from our existing assets, which stemmed primarily from below-average wind resource this quarter versus above-average wind resource in the second quarter of 2011. Overall, we continue development on the renewables projects in our backlog and remain on track for the goals we laid out at the beginning of the year.

In Florida, the early signs of economic recovery we witnessed in prior quarters appear to have slowed. After significant employment growth in late 2011, Florida's pace of job creation has slowed. The Florida unemployment rate in June was flat compared to May, but has dropped more than 2% since this time last year. Consumer confidence in Florida increased in June relative to last year, but declined versus the prior month. We saw an uptick in tourism taxable sales, which are now trending above the levels seen prior to the recession, and the housing market continues to show signs of modest improvement.

Notwithstanding the somewhat hesitant recovery, we continue to invest in the business to provide greater value for our customers and to keep our overall bills low. We are making major investments to modernize our generation fleet and increase our nuclear generation output to be more efficient, to reduce emissions and to drive down fuel costs for customers. Over the lives of these projects, we expect that fuel and other savings will more than offset the capital and operating costs of these projects.

At Energy Resources, our focus has been on executing the plans for our record backlog of renewables projects. All of our projects continue to proceed with no significant changes in the execution timeline.

As a result of the progress we have made in the first half of the year, our overall financial expectations remain about the same as we previously discussed. For 2012, we expect adjusted earnings per share to be in the range of $4.35 to $4.65, and for 2014, we continue to see a range of $5.05 to $5.65, subject to all the usual caveats we provide, including normal weather and operating conditions.

Let's now look at our results for the second quarter of 2012. I'll start with the results at FPL before moving on to Energy Resources and then the consolidated numbers. For the second quarter of 2012, FPL reported net income of $353 million or $0.85 per share, up $0.13 per share year-over-year. The principal driver of FPL's earnings growth was continued investment in the business. During the quarter, we invested roughly $1.1 billion of the approximately $4.1 billion that we expect to invest in the business in 2012, and regulatory capital employed, that is capital on which we are able to earn a return, grew 17.5% over the same quarter last year.

During the quarter, we amortized $165 million of surplus depreciation, enabling us to maintain a regulatory ROE of 11%. For the full year, we expect to amortize approximately $500 million of surplus depreciation, after which, there will remain roughly $200 million to be amortized. As we stated last quarter, utilization of $190 million of the surplus in 2013 is built into our rate case filing.

As we've discussed on previous calls, FPL is in the midst of the largest capital deployment phase in its history. In the second quarter, we received approval from the Nuclear Regulatory Commission, or NRC, for power uprates on Turkey Point units 3 and 4, and earlier this month, we received NRC approval for the uprate at Unit 1 of our St. Lucie nuclear facility. St. Lucie Unit 2 is currently moving through the approval process, and we expect to receive NRC approval in the third quarter of this year. In total, these 4 projects are expected to contribute approximately 490 megawatts of additional clean generation capacity, which, in turn, will drive down customer's fuel cost.

The modernizations at our Cape Canaveral and Riviera Beach facilities are progressing as planned. The projects are anticipated to come into service in mid-2013 and 2014, respectively, and are expected to provide $850 million to $950 million in total present value cost savings to our customers over the lives of the plants.

We experienced the first storms of the season in the second quarter, with our service territory being affected by Tropical Storms Beryl and Debby. Tropical Storm Debby drenched the west coast of Florida for days before passing through the state. And through the hard work of our employees, power was restored to 99% of the impacted customers within 24 hours.

In Florida, most economic indicators we follow have improved significantly from the trough of the recession. However, we are seeing symptoms that the recovery is slowing here in Florida, just as it seems to be for the nation as a whole. As we've repeatedly noted, we do not believe Florida will see a full recovery until the rest of the country sees more consistent signs of growth.

Many of the metrics we focus on have recently flattened, creating a level of uncertainty around what we had hoped was evidence of a sustained economic recovery. In June, the Florida unemployment rate was 8.6%, unchanged from the prior month. On a positive note, the gap between the unemployment rate in Florida and the U.S. has narrowed, and Florida is now just 0.4% worse than the national rate. Looking to job creation, in June, 70,900 new jobs were reported in Florida compared to the same month in 2011.

While the improvement in the job market has slowed recently, almost all residential housing statistics point to a continued recovery in Florida. Mortgage delinquencies continue to drop and are at their lowest level since 2008. The inventory of existing homes for sale reported by Florida realtors is at its lowest point in more than 4 years. As Florida reduces the inventory of existing homes, more room is made for the addition of new homes, and we are seeing that trend manifest in the housing permit data. In May, housing permits increased 58% year-over-year, the largest annual increase in roughly 2 years, although, of course, on a very low base.

While the mortgage and housing data are encouraging, continued employment gains, declining unemployment rates and improvement in the national economy are important to the sustainability of housing market improvements. We will monitor these and other data points, but we continue to believe Florida will provide above-average growth opportunities over the long term.

Our customer metrics at FPL are naturally tied to the pace of economic recovery, both in Florida and nationally. With the recent lull in recovery, our customer metrics appear to have stabilized for the moment. During the second quarter, we had approximately 27,000 more customers than in the comparable quarter of 2011, representing an increase of 0.6%. This growth rate has been fairly consistent for the last 9 quarters. And while we are encouraged by continued customer growth, we, of course, would like to see the pace of that growth improve over time.

Underlying usage increased for the third consecutive quarter, up 1.7% over the same quarter last year. We are particularly encouraged by increases in underlying usage in the residential sector. The commercial sector, however, seems to be lagging a bit. We still hesitate to extrapolate underlying usage growth to a broader context as usage over time can be volatile.

The number of inactive meters and the percentage of low-usage customers, which are indicative of the number of empty homes, declined in June versus the same period last year, but were relatively flat compared to May. Overall, our key customer metrics continue to improve, albeit more slowly than we would like.

As you recall in the first quarter, we formally filed a request for base rate increase and submitted testimony, along with extensive supporting documentation, for FPL's 2012 base rate case. We requested a base revenue increase of $516.5 million, effective the beginning of January 2013, with an additional step increase of $173.9 million when the Canaveral modernization comes into service in June 2013. Included in these amounts is our request to reset the allowed ROE to 11.25%, plus a 25-basis-point performance adder, designed to recognize FPL's excellent overall customer value, but to be maintained only so long as FPL's typical bill remains the lowest in the state.

The quality of service hearings will conclude in August, and intervenor and staff testimony have been filed. We will be submitting rebuttal testimony next week. The technical hearing will begin in late August, and we expect a staff recommendation and commission ruling on revenue requirements and rates in the fourth quarter.

The rate case, thus far, is proceeding much as we expected, with intervenor testimony and consumer sentiment in line with what we had anticipated. As we have previously stated, at its core, the rate case boils down to 3 issues: recovering the capital and operating costs for Cape Canaveral, a plant that we expect will more than pay for itself over its lifetime through fuel savings; addressing the impact of the accelerated amortization of surplus depreciation ordered by the prior commission and implemented under the 2010 rate agreement; and resetting the allowed ROE to a more reasonable level than the current 10%.

We remain open to the possibility of resolving the issues addressed in the rate case through settlement, but our focus is on preparing for the technical hearing in August. We continue to believe our superior customer value, demonstrated by award-winning customer service, high reliability and the lowest average residential bill in the state provides strong support for our request. If our request is granted, our typical residential bill is expected to remain the lowest in the state, emphasizing the affordability of our service.

In April, we updated our expected total bill impact to reflect revised estimated fuel prices, costs for ongoing construction of upgrades at our Florida nuclear facilities and adjusted data related to the requested base rate increase. Based on the April data, the base portion of a typical residential customer's bill is expected to increase by $7.09 per month or roughly $0.23 per day, while the total bill impact would be just $1.41 per month or $0.05 per day, which is lower than we initially projected. Some commercial customers are likely to see their total bills go down.

We will continue to monitor the changing bill impact throughout the rate case process if fuel prices fluctuate. Regardless of the level of fuel prices, our investments in high-efficiency generation will mean fuel savings for our customers.

Let me now turn to Energy Resources, which reported second quarter 2012 GAAP earnings of $251 million or $0.60 per share. Adjusted earnings for the second quarter were $173 million or $0.41 per share. Adjusted earnings exclude the effect of the mark on non-qualifying hedges and net other than temporary impairments on certain investments, or OTTI.

Overall, Energy Resources' contribution to adjusted EPS increased $0.04 year-over-year, driven primarily by contributions from new additions. Earnings from existing assets declined $0.09 versus the second quarter last year, due in large part to less favorable wind resource when compared to the same quarter last year. This decrease was offset by the fact that last year's second quarter results were reduced by $0.08 from asset impairment charges. All other effects were minor, as shown in the accompanying slide.

We continue to execute on our backlog of renewables projects, with the remainder of our 1,300 megawatts of U.S. wind on track to come into service in the latter portion of the year. Our solar projects continue to make good progress with no significant changes to our expected in-service dates. In Spain, we are closely following the actions of the government but have no official word yet on a course of action.

Looking at the company on a consolidated basis. For the second quarter of 2012, NextEra Energy's GAAP net income was $607 million or $1.45 per share. NextEra Energy's 2012 second quarter adjusted earnings and adjusted EPS were $527 million and $1.26, respectively.

The Corporate & Other segment was down $0.09 from the same quarter last year when we experienced an uplift, primarily due to consolidated income tax adjustments related to state tax law changes. Separately, our Lone Star transmission project remains on track, and we continue to expect to bring the line into full service in the spring of 2013.

As we evaluate our growth for the balance of the year and into 2013, we remain focused on maintaining solid credit metrics. As we have previously discussed, we consider our credit rating important and a competitive advantage in this market. We are committed to a strong cash position and to sourcing the right mix of financial products in order to maintain our rating.

We presented the principles underlying our approach to managing our balance sheet and credit position at our Fixed Income investor conference in May, the presentations from which are posted on our website. As stated there, both Energy Resources and FPL are in the largest investment phase either have seen in recent history, and this places stress on our balance sheet and credit metrics. We expect to continue accessing a diverse group of financial instruments to support our growth plans and maintain our balance sheet strength.

As we've noted, we expect our credit metrics to improve as we move into 2013 and 2014, but it is important to maintain our strength in 2012 as well. We expect to issue another round of equity units later in the year, although at this point, we have not determined what the aggregate amount should be. We may go above the upper end of the range of $500 million to $1 billion that we have previously disclosed. However, whatever amount we choose to issue is not expected to have a material impact on the EPS expectations that we have shared with you for 2012 and 2014.

Our development team continues to look for growth opportunities in the market, but absent additional investment, we continue to expect to be free cash flow positive in 2014. As we stated earlier this year, we are targeting a 55% dividend payout ratio in 2014 as a consequence of the mix of our portfolio continuing to shift towards more regulated and long-term contracted assets. This translates into a compound annual growth rate for dividends of approximately 10% using a 2011 base.

Separately, we have received a number of questions on differential membership interest transactions, also known as tax equity. In an effort to provide more detail around how these structures work, the benefits they provide to us and the impact on our financial statements, we have posted a presentation on our Investor Relations website. We encourage you to examine this and follow up with additional questions.

In light of the results achieved year-to-date and the progress made against our execution objectives, we see no reason to change our EPS expectations for this year or for the longer term. We continue to expect adjusted EPS to be in the range of $4.35 to $4.65 for 2012, and for 2014, we currently see a range of $5.05 to $5.65. As always, our expectations are subject to the usual caveats we provide, including normal weather and operating conditions. While we have not looked as deeply at the numbers beyond 2014, we also expect to maintain our growth momentum into 2015 with continued contributions from new assets expected to come into service at both FPL and Energy Resources.

From a commodity perspective, we're highly hedged in 2015 as well. Note that our financial expectations take into account current market conditions, and we are not depending on or anticipating any great strengthening in the natural gas market. As we do each quarter, we have updated our 2012 and 2013 equivalent hedged gross margin slides for Energy Resources, and they can be found in the appendix to the presentation. There were no significant changes compared to the first quarter earnings release.

To reiterate what we've said in the past, our financial expectations do not include any additional U.S. wind build beyond 2012 due to the uncertainties surrounding the extension of the production tax credit after the end of this year. We continue to be optimistic that the PTC will reemerge in some form, following this year's election, and should that be the case, any investment in U.S. wind beyond 2012 would contribute upside to our current expectations.

Before taking your questions, I'd like to turn the call over to Jim Robo. As you know, Jim assumed the CEO role at the beginning of the month, having served as Chief Operating Officer for nearly 6 years and having led Energy Resources for 4 years before that. Jim?

James L. Robo

Thanks, Moray, and good morning, everyone. It gives me great pleasure to talk to you in my new role. Moray has given you an overview of another solid quarter for our company, and I won't repeat his comments. Instead, I want to say a few words about our future.

I know a number of you have asked whether you should expect any changes in strategy under a new CEO, and I'm sure all of you will appreciate any insight I can give you into our plans for the future. The short answer to the question about strategy is that I expect our strategy to be consistent, but our implementation will need to adapt, as it has repeatedly in the past, to changes in the outside world.

At Florida Power & Light, the core of our strategy has been, for many years, to strive constantly to improve the value we deliver to our customers. Today, FPL offers its residential customers a bill that is 25% below the national average and the lowest typical bill of all 55 utilities in the state of Florida, coupled with top quartile reliability, award-winning customer service and a very clean emissions profile.

We are investing heavily in the business to ensure our value delivery gets even better over time. We expect that our investments in new generation will save customers fuel costs and improve our emissions profile, that investments in our transmission and distribution infrastructure will increase our systems resiliency and reliability and that investments in advanced meters will offer customers more feedback in control of their electricity usage, as well as make our internal procedures more efficient. If we receive fair and balanced treatment through the regulatory process, our investors will benefit along with our customers.

At Energy Resources, our strategy is not as easy to capture in a few words, but it has always reflected a balance between a steady view of a long-term vision, captured succinctly by loose terms, scale, skills, scale and scope and a pragmatic recognition that every goal in the competitive power space must be pursued opportunistically.

A decade and more of sustained effort has led to the creation of a business that is not only the largest renewable energy producer in the country but one that also contains many other business capabilities, all linked together by a strong economic logic. We will seek ways to continue to build the business, subject to the opportunity set that the external world offers us. Across both businesses, I expect us to maintain our focus on clean energy, on being low cost and on maintaining our track record of excellent execution.

In addition, underpinning our success in both our major businesses has been an important competitive weapon, our balance sheet. We have long been believers in the need for financial strength in this capital-intensive cyclical business, and I do not expect that to change.

We have also combined our financial strength with a culture of financial discipline and a commitment to strong risk management. That, too, will not change. I do not claim that we have never made mistakes nor that we never will in the future. But I do believe our discipline and risk management have served us well in the past and will continue to serve us well going forward.

As a new CEO, I consider myself very fortunate. I have been an integral part of all the major decisions of the past decade that got us to where we are today, so I understand the situation I'm presented with. Our business, overall, is in great shape, and I can concentrate immediately on 2 things: continued execution against the practical objectives listed on this slide that will see us grow out through the middle of this decade and putting in place the building blocks for new initiatives that will help us carry that growth into and through the second half of the decade.

This is not the occasion for a detailed discussion of our plans for 2016 and beyond, other than to say that we feel comfortable that the company has an attractive set of growth opportunities going forward. I look forward to the opportunity to speak with you in more depth on this subject at the various conferences that some of you will be hosting in the fall and at our next investor conference, which we are tentatively scheduling for late in the year.

To close, I'd like to remind you of our track record over the last decade under Lew's leadership. During that period, we have significantly outperformed the relevant industry benchmarks, as well as the S&P 500 index and, in the process have added more than $24 billion in value, $18 billion through price appreciation and more than $6 billion through dividends. That value creation is a tribute to Lew's leadership and to the hard work of all our NextEra Energy employees.

Not the least of Lew's achievements has been the development of the team that has been responsible for delivering these results. I am fortunate to have that team with me today, ready to meet the challenges of the next decade. We are all fully committed to seeing that we continue our long-term track record of outperformance.

Thank you for your continued support of our company, and Moray and I now look forward to taking your questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll go first to Dan Eggers at Credit Suisse.

Dan Eggers - Crédit Suisse AG, Research Division

To ask my first question is, there wasn't any changes to the backlog for wind and solar in the quarter. But could you just share a little color on opportunities you may be seeing and where the conversations are going, as far as maybe adding more solar projects over the remainder of this year into the backlog?

Moray P. Dewhurst

Sure. Let me ask Armando to address that.

Armando Pimentel

Great. Dan, we're certainly seeing some opportunities in the market, both on a short-term basis and on a longer-term basis. I'm not ready to talk about specifics of what those might be on the short term. But on the longer-term basis, during the quarter, you did see us close on a $10 million purchase of 1,000 megawatt area out in California, which supports 4 250-megawatt sites. There's no power purchase agreement associated with those sites, but those sites do bring some very favorable transmission and resource adequacy to our portfolio. We're out looking for power purchase agreement at this point, and we're hopeful that we would have something to talk about at some point next year. In the near term, I will say that the uncertainty over production tax credits moving forward in 2013 and 2014 is creating some opportunities, both here in the U.S. and Canada, that we are taking a look at closely.

Dan Eggers - Crédit Suisse AG, Research Division

Armando, does that mean that there's people looking to sell, develop their in-process projects, or just that you're seeing people actually willing to assign contracts on things for '13 and '14?

Armando Pimentel

Actually, we're -- both. We're seeing a few opportunities of folks, some developers that have projects that have taken pretty far into the development process, but their uncertainty regarding production tax credits in 2013 and 2014 is making them seek some additional capital outside of what they have. But we're also seeing not as much, and we -- and Moray has talked about this before. We and others are building a significant amount of renewables in the U.S. in 2012. It should be a record year for the industry and a record year for us. That has certainly sapped some of the 2013 demand, even if there is an extension of the production tax credit. But we are seeing some of our customers ask for quotes and bids on 2013 and 2014 both on a contingent PTC basis and on a noncontingent PTC basis.

Dan Eggers - Crédit Suisse AG, Research Division

I guess, Moray, just one question on tax equity. You guys said you're going to be -- start being a cash tax payer in '14. Does that mean you guys are done in the tax equity market for the time being, given the fact you have visibility now to kind of get into the excess backlog?

Moray P. Dewhurst

No, that continues to be the balance that we've talked about before that we need to strike between, essentially, the incremental cost that you pay through a differential partnership deal versus the present value benefit of pulling forward in time when you would otherwise realize tax credits. So that trade-off exists almost regardless of when you expect that cash tax position to flip around. Obviously, the closer in it is, the less valuable the tax equity power will be. But you should not assume that, that means that we won't be doing more transactions.

Operator

And next, we'll move to Michael Lapides at Goldman Sachs.

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

Two things. One, just kind of a little bit of a housekeeping in Florida and then the other Spain. In Florida, did the storms that occur, I think it was late last month, have an impact on O&M? And if so, could you quantify kind of -- did it increase -- how much did it increase O&M versus kind of expectation? And then second, you made a comment, Moray, about the waiting to hear about the Spanish government regarding the project there. Can you just give a little more detail?

Moray P. Dewhurst

Yes. On the FPL O&M, not material. On Spain, as I think many of you are aware, there have been a whole variety of proposals, is probably too strong a word, but possibilities floated around trial balloons. Some of which we believe had some basis in fact, some of which we're not sure have any basis in fact. But certainly, there are discussions about the potential for taxing the energy sector, either in aggregate or, differentially, by technology. And clearly, to the extent that our project was subject to an excise tax or something of that nature, that would affect the economics. We just don't have enough insight at this stage to know which way the government is going to go or how significant those might be. It seems pretty clear that if the impact was limited to what it needed to address the tariff deficit within the electricity sector, that could be achieved with, should we say, levels of pain that are tolerable. If the government seeks to -- really to try and attack a portion of the broader fiscal deficit on the backs of the energy sector, then that could have a different impact. So as I say, we're sort of monitoring the thing. We're staying close to it. Obviously, we are articulating our viewpoint, as is everybody else there, and we just have to wait and see.

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

Do you have the ability to pull back on the project if the -- I would say, the operating or the government environment for renewables there turns against you?

Moray P. Dewhurst

In principle, we always have that ability, but we're well along in construction. We still like the project. We think it's going to be a good project. So I think it would have to be a fairly extreme situation for us to sort of completely reverse course. I think what we're talking about is what is the impact on the economics, and more broadly, what's -- what is the impact on our view of Spain as a place to do business and invest for the capital in the future.

Operator

Well, next is Stephen Byrd at Morgan Stanley Smith Barney.

Stephen Byrd - Morgan Stanley, Research Division

I wonder if you could just talk to the appetite for the development of a regional natural gas transmission pipeline. I know that's been a potential topic of discussion in the past. Just curious, in your conversations, how that's progressing.

Moray P. Dewhurst

Well, as we've discussed several times before, we continue to believe that there is need for-- a good case to be made for a third pipeline into Florida. I don't really have a lot to update you on. We've said before that we are optimistic that we'll be able to be in a position to come forward later in the year with more specifics. We're continuing to evaluate a bunch of different possible scenarios on that, I think getting closer to what we think makes the most sense. But I think timing is still, hopefully, later in the year for us to be more explicit about that.

Stephen Byrd - Morgan Stanley, Research Division

Understood. And just shifting the Texas. In your conversations in the state and with ERCOT, could you give us a sense for the degree of appetite that you see for consideration of a capacity-like mechanism to ensure that the market isn't -- is adequately incenting folks to build new plants in the state?

Moray P. Dewhurst

Well, I'm not sure we want to mention the capacity word, but some reliability supplementary payment mechanism may be appropriate. Let me ask Armando to comment on that.

Armando Pimentel

Yes, there's been a ton of discussion obviously, and there's proposals on the table at ERCOT that folks are responding to. My sense is that the word capacity -- let's take the word out. The mechanisms that would allow payments to be made to generators, hopefully to support the generation and to bring new generation into the area, which is clearly needed in 2014, both by ERCOT's estimates and by ours estimates, that it's moving along more favorably, I'll say, than it was over the last 6 months. That doesn't mean that there's going to be a capacity market. But as Moray pointed out, we are hopeful that there will be some mechanism that recognizes that generators need an incentive in order to build new generation. So I'm hopeful that there will be changes. But in the near term, for 2013 and 2014, ERCOT is, frankly, short of capacity.

Moray P. Dewhurst

And, Stephen, let me just supplement that with -- noting that without that supplementary reliability payment, you get a market that is either very flat, as it has been so far this summer, because there really hasn't been much tightness, or a market which peaks out and induces a lot of stress for a short period of time with consequent trouble for suppliers and customers alike. We don't think that that's a very functional structure. So getting some more supplementary capacity into the market clearly would be a good thing long term for customers.

Operator

Next, we'll go to Jonathan Arnold at Deutsche Bank.

Jonathan P. Arnold - Deutsche Bank AG, Research Division

Just curious on the Resources results, you called out an $8 -- it's an $0.08 -- the absence of the $0.08 impairment charge from last year is one of the drivers, I believe, in the $0.09 interest G&A and other. There seems to be like a $57 million gain on disposals in the quarter. Can you -- as well. Could you shed any light on was that one specific item or a number of items, and what's the right tax rate we should be using on that?

Moray P. Dewhurst

Yes, sure. It's a number of items. We did have a small gain, a few million dollars on the sale of a project. But the bulk of it is associated with the decommissioning funds and, actually, more than half of it, this may get a little technical, but is effectively not included in our adjusted earnings because it's an offset to OTTI that we previously took out of adjusted earnings in prior periods. In other words, we -- in a prior period, we, for GAAP purposes, marked down certain securities in the nuclear decommissioning trusts, because we didn't have substantive evidence that they would recover. But in fact, they have recovered. We have sold them now at a gain in the course of the regular management of the NDTs. And so we can't, in fairness, take a -- that gain into adjusted earnings when we took the negative, but it's now offsetting out of adjusted earnings. So more than half of that actually is netted out and is in -- is a reversal in the OTTI piece. There is a little piece that's real gains on just the normal transactions in the decommissioning trust. That's what's going on there.

Jonathan P. Arnold - Deutsche Bank AG, Research Division

So where does that reversal show up? Sorry, Moray, I'm not following that.

Moray P. Dewhurst

It shows up in the reconciliation between GAAP earnings and adjusted earnings, down below in the OTTI piece. So the OTTI adjustment has a different sign than it typically has. We can follow up, take you through the numbers later on, if you like.

Operator

We'll go next to Hugh Wynne at Sanford Bernstein.

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

I had just 2 quick questions on the Florida Power & Light side of the business. In your estimates of the base rate impact of the rate request that you put to the commission. You estimate also the savings to the customers from lower fuel cost. Can you share the expected sensitivity of customer bills to a $1 move in the price of natural gas?

Moray P. Dewhurst

I don't have that off the top of my head. We'd be happy to follow up and take a rough crack at it. I mean, it's a little hard to see because it filters through. It depends on your assumptions about the dispatch of a fleet. So typically, when we come up with these estimates, we're making up -- we're hypothetically dispatching the fleet against the forward curve, so we don't have that sort of sensitivity ready to hand. But we'll follow up with you on that.

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

Okay. And then the second question, regarding the target higher dividend payout ratio, which you point out is associated with a shift to a greater earnings contribution from your regulated and contracted businesses. Ordinarily there, the payout ratio, I think, is also a decision that's taken in light of the capital requirements of those businesses and the growth in their asset base. Based on '14 rate base growth, it would seem to me that longer term, there's an expectation of something like 3.5% growth in FPL rate base. But I wanted to ask you what was the assumption that you factored into that 55% dividend payout decision.

Moray P. Dewhurst

Well, the board feel comfortable with targeting the 55% in 2014, based fundamentally on the mix shift and a view of a range of possibilities for where we might be going beyond that. So you mentioned the 3.5% number. I don't think we have enough insight today to really know what the growth in rate base might be beyond 2014. But we felt that 55% was sufficiently conservative. That under most of the likely scenarios, we would still be able to fund the growth without having to resort too much to sort of just coming to the capital markets in order to raise capital, in order to pay the dividend, if you see what I mean. So I don't have a specific expectation going out. But I think if you look at how we derived, in essence, the 55% number, it was a function of saying, okay, what do fully regulated businesses typically pay out in terms of payout ratio, what's the range there. What sort of payout ratio is supportable by a business that is fundamentally around long-term contracts, that's obviously a lower amount, and then what's the payout ratio for a business that has merchant assets, which is essentially 0, and we then weight average those. So in a sense, it's what should be a sustainable payout ratio based on the portfolio mix as it will be in 2014. So going beyond that, if that mix itself changes radically beyond 2014, that might cause us to rethink that for future years.

Operator

We'll go next to Steven Fleishman at Bank of America Merrill Lynch.

Steven I. Fleishman - BofA Merrill Lynch, Research Division

Just, Moray, you mentioned in your prepared remarks that you might go above the high end on the equity units offering for the year. Could you just give some sense on what -- if so, what would be driving that? Is that a function of more investment opportunities that you're seeing? Is that a function of the stock price? Just...

Moray P. Dewhurst

It's more a function of the sort of tactical issues around where we're likely to come out on cash flow, making sure that we have enough liquidity through the end of the year, making sure that the cash balances are roughly where we want to be. A couple of things I would note, as we've often discussed, on the project finance side, we really like to have our projects as far along and complete and clean as they can be when we go to the project finance market, because that's how we get the best deal out of those. So given that the build here is concentrated heavily late in the year, we actually may not get to execution on some of the project finance transactions, that really are associated with the CapEx for this year, until next year. So that means we got to come up with cash in the meantime. And as I've said before, we're going to watch the 2012 metrics as well. So that's one thing. Another thing is that we have some opportunities I don't want to -- for commercial reasons, I don't want to go into details. But we have some opportunities to accelerate some capital expenditures in the year in exchange for commercial advantages, but obviously, we have to have the cash to come up with that. So that all that gets factored into the liquidity analysis and says how much cash do you need, and then obviously, you got to have a balanced mix of financing. So right now, my thinking is that we may well do another issue of comparable size to the one that we did earlier in the year. But as I said in the prepared remarks, we haven't settled on a final amount yet.

Steven I. Fleishman - BofA Merrill Lynch, Research Division

Okay. And then just any kind of updates on what you're seeing on -- in Washington on the PTC and I guess some of the other renewables-related legislation that has popped up?

Moray P. Dewhurst

Yes. I don't really have a lot new to report there. There continues to be a lot of discussion. I think at the margin, the discussion is proceeding in a favorable direction, by which I mean that more people are coming to recognize that it doesn't make good economic sense to cut the PTC off 100% instantly. At the same time, as I've also said many times before, we do see a strong political view to the effect that there have to be a definite end in sight for this kind of support, and that's a concept that we have indicated publicly that we can accept. Obviously, the devil is in the details. So I think we're making progress on the discussion. But we continue to believe that we're not likely to see anything really happen until after the election, and that this is just one small part of a much broader set of discussions and compromises that, again, have to be worked out after the election, so not a lot new.

Operator

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

Paul Patterson - Glenrock Associates LLC

Just back to Jonathan's question, just to make sure that I understand this. The $57 million of dispositions is not an adjusted earnings for the most part. Is that correct?

Moray P. Dewhurst

Yes. I would say roughly a little over half is out of adjusted earnings and a little less than half is in.

Paul Patterson - Glenrock Associates LLC

Okay. And then on the tax equity market, any thoughts we should have with respect to the tax equity market and the fiscal cliff, so to speak, for all these sort of tax adjustments that might potentially occur? Just -- could you give us any feeling for what's happening in that market, and what the outlook is there?

Moray P. Dewhurst

Well, there continues to be an active market. I can't say that the prospect of comprehensive tax reform, at least, to date, has had significant impact on the market, although that doesn't mean it couldn't in the future. So really, they're kind of separate questions at the moment. I think there's a high degree of skepticism about whether comprehensive tax reform really will occur, or if so, on what timeframe. And so at least at the moment, it hasn't had a real impact on the tax equity market.

Paul Patterson - Glenrock Associates LLC

Okay. And then finally, the situation in Spain, just to sort of put it in perspective. What is there the total exposure? I mean, I don't mean to be cataclysmic or anything. But when you read what you're hearing coming out of what the situation is in Spain, just for investors, how much is the total exposure-- if the situation were to get untenable? Just how much exposure do you have in Spain as an investor there?

Moray P. Dewhurst

Well, our equity commitment to the project is roughly EUR 300 million, but the rest has been borrowed on a nonrecourse basis against the project in euros. So ultimately, our equity commitment is of that order of magnitude. And you can figure out, obviously, by applying whatever reasonable ROE you want to that, what the potential range of earnings impact is. But that's what we're talking about.

Paul Patterson - Glenrock Associates LLC

And then no guarantee.

Moray P. Dewhurst

I want to emphasize, at least, on everything we're hearing to date, we don't think the project is fundamentally threatened. We think the issue is around what are ultimately going to be the returns on the project.

Paul Patterson - Glenrock Associates LLC

Sure. I just wanted to get sort of sense as to -- just to put it in perspective.

Operator

We'll move next to Jay Dobson at Wunderlich Securities.

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

Most of my questions have been answered, but Moray, just following up on the Spain question. If I recall, there were some carve-outs in the financing that's sort of handed or pushed a little of this political risk, to sort of broadly calling it that, to the debt side of the equation. And I don't remember exactly how it works, but if you could remind us how that works. And then just with your best view, I know this is moving around a little bit, sort of how that might play into something that didn't, as you point out, fundamentally sort of eliminate the project but more challenge the economics.

Moray P. Dewhurst

Sure. I don't want to play amateur lawyer here, so I'm going to sort of simplify things pretty significantly. But the financing is -- protects us against change in tariff risk, simply put. So if there's fundamentally a change in the tariff, then the banks share in that risk. To the extent that what the government ends up talking about or imposing is simply a tax that's kind of consistent with what's already on the books or is an adjustment to an existing tax that would presumably not be a complete change in the tariff. To the extent that it was extreme, you might well argue that it was a change in tariff. So I think that's what we're talking about. Again, I think the -- realistically, we're trying to figure out what level of tax there is going to be, and hence, what the impact on the returns from the project would be. And again, I would just emphasize that, at least, our take on the numbers is that the government can solve the problem that they have with the electricity sector tariff deficit through the imposition, broadly, on the energy sector of taxes that would not have a materially negative impact on ours or many other projects in which people have committed billions of euros. But to the extent that they want to try and use this as an opportunity to help address the broader fiscal deficit that they're dealing with, then that's a different matter.

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

Okay, that's helpful. And how much of the EUR 300 million of your equity has been committed to date or actually funded?

Moray P. Dewhurst

I think we're -- I mean, 75%, 80%. I mean, we're well along in construction. Construction's proceeding very well. We're on target for delivering those units next year.

Operator

[Operator Instructions] We'll go next to Andy Bischof at Morningstar Financial Services.

Andrew Bischof - Morningstar Inc., Research Division

Most of my questions have been answered, but I do have one follow-up question to the solar development in California that you purchased. Given an optimistic scenario of if you sign a PPA in 2013, could you put a possible timeframe on when you expect that development to be operational? I'm just trying to get a handle of the CapEx and when you would be spending that amount.

Armando Pimentel

Realistically, it wouldn't be before 2016, and it probably could slip beyond 2016 under some scenarios. And total CapEx would be somewhere in the neighborhood of $800 million to $900 million for one 250-megawatt project. And in the near term, I'd say that the better likelihood for modeling purposes would be one 250-megawatt project. Certainly, we would love to build out that entire 1,000-megawatt facility. But right now, I wouldn't plan on anything other than 250 in the models.

Operator

And we'll go to Ashar Khan at Visium Asset Management.

Ashar Khan

Can I just ask what's happening on the Seabrook? If -- I guess if I read today, even just running at 85%, when do you expect that to come back to 100%?

Moray P. Dewhurst

Yes. No update on Seabrook. It continues to run a little bit below full output because of the derate associated with general cooling limits. It will continue to do so through the next outage, which is scheduled for some time in the third quarter. I think it's September. So that -- I think we previously discussed the full year impact of that being reflected in the numbers. There's really been no change.

Ashar Khan

Okay. And then, Moray, can I just ask, based on the results year-to-date, it seems like you're running at least ahead of -- at least towards the top end of the range. Is that a fair thing to say that you're running a little bit ahead of, I guess, where plan would be or to indicating to a top end of the range for the year?

Moray P. Dewhurst

No, I wish that were the case. But I think right now, we're sort of right in the middle of -- it was very consistent with where we expected to be. Obviously, there's always puts and takes that'll just go one way or another. But as I say, I don't see any reason to change the range for the year, and we could end up in a variety of places in that range. We still feel pretty good about the year. But I will say that it's a very, very tough environment for the Energy Resources folks, any asset or piece of the business that's exposed to competitive market. It's just a tough market environment. So having to work very hard, as I say, scratch and claw every penny that they can get from the businesses, it's not a great market environment. But despite that, we're doing pretty well. So we're certainly pleased with where we are at this stage.

Operator

And that does conclude today's question-and-answer session. At this time, I'll turn the conference back over to management for any closing remarks.

Moray P. Dewhurst

No, thank you for being with us this morning. We look forward to addressing follow-up questions.

Operator

And that does conclude today's conference. Again, thank you for your participation.

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