NextEra Energy, Inc. (NYSE:NEE) Q4 2015 Earnings Conference Call January 28, 2016 9:00 AM ET
Amanda Finnis - IR
Jim Robo - CEO NextEra Energy
Moray Dewhurst - CFO NextEra Energy
Mark Hickson - EVP NextEra Energy
John Ketchum - SVP NextEra Energy
Armando Pimentel - CEO NextEra Energy Resources
Eric Silagy - Florida Power & Light Company
Steven Bird - Morgan Stanley
Dan Eggers - Credit Suisse
Julien Dumoulin-Smith - UBS
Steve Fleishman - Wolfe Research
Michael Lapides - Goldman Sachs
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, Zach. 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, Vice Chairman and Chief Financial Officer of NextEra Energy; 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 measures 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 quarters 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 and 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 the comparable prior year quarter with a distribution of $0.3075 or a $1.23 on an annualized basis.
Before taking you through the detailed result let me begin by summarizing some additional highlights. At Florida Power and Light we continue to invest in the business in 2015 with a focus on delivering value to customers. And all of our major capital initiatives remain on track. Since the last call we received Florida PSE approval of the 2019 need for a planned Okeechobee Clean Energy Center. We expect this project to further advance our focus on providing 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 what we consider to be an already outstanding customer value proposition. Our customers enjoy 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 lightning season FPL delivered its best ever full year period of service reliability in 2015 and was recognized as being the most reliable electric utility in the nation. This was accomplished as we continued to invest to make the grids 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’ve 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 renewables development program. New renewables project additions drove financial results while origination results for new projects to be placed into service by the end of 2016 exceeded the expectations that we discussed at our March Investor Conference. The longer term outlook beyond 2016 also continued to develop favorably. The team signed contracts for a total of approximately 2,100 megawatts of new renewables projects over the last year making this our second best year ever for renewables origination performance.
We continue to believe that Energy Resources is well positioned to capitalize on one of the best environments for renewables development in our recent history. We now have greater certainty regarding federal tax incentives for renewables, 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 starter construction guidance with the two year Safe Harbor period for wind and solar similar in form to 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 decline and efficiency improvements that will enable renewables to compete on a levelized cost of energy basis with combined cycle technology when tax incentives are phased down.
In the meantime with tax incentives both wind and solar will be very competitive and in addition to 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 coal-to-gas and coal-to-renewables switching, with new renewables supported by the factors I just mentioned.
Driven in large part by our enthusiasm about our renewables growth prospects in the middle of last year we increased our expectation for NextEra Energy's compound annual growth rate and adjusted earnings per share to 6% to 8% through 2018 off a 2014 base. These increased expectations will in turn affect 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 renewables generation fleets had one of their best periods ever with E4 or the equivalent forced outage rate at less than 1.5% for the full year.
Similar to NextEra Energy NEP also delivered on all of its financial expectations, NEP grew its portfolio through the acquisition of economic interest in over 1,000 megawatts of contracted renewables projects from Energy Resources with total ownership increasing by over 1,200 megawatts and established its presence in the long term contracted natural gas pipeline space with the acquisition of seven natural gas pipelines in Texas. This acquisition is expected to reduce the impact resource variability as in the portfolio and extend NEP's runway of potential dropdown assets.
All of the same factors that favor growth in new renewables for Energy Resources likewise should benefit NEP. The strong renewables origination performance at Energy Resources continues to expand the pipeline of generating and other assets potentially available for sale to NextEra Energy Partners now and in the future.
In contrast to many other U-cos [ph], NEP does not have the same dependence on third party acquisitions to grow but rather can reasonable 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 but one of many factors that distinguish it from other U-cos.
As we head into 2016 both NextEra Energy and NEP remain well positioned to deliver on their financial expectations subject to the usual drivers of variability including in particular renewable resource variability. FPL benefits from a surplus amortization balance of $263 million which is expected to position it to earn 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 rate 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 entered 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 in the way. Regulatory capital employed continued to growth through the year. In additionally to being the first full quarters since the closing of the Cedar Bay transaction in September, fourth quarter results were also impacted by timing effect and a number of smaller items, including outstanding performance under our asset optimization program.
As a reminder, FPL's current rate agreement provides an incentive mechanism for sharing with customers gains that we achieve in excess of threshold amount for our gas and power optimization activities. In 2014, these activities produced roughly $67 million of incremental value, of this amount $54 million was for the benefit for Florida customers. Under the sharing mechanism which only applies once customer saving exceed $46 million, FPL was permitted to record approximately $13 million of pre-tax 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-month period.
During the fourth quarter, aided by the impact of usually warm weather we utilized only $67 million of reserve amortization. This brings our accumulative 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 to reserve amortization balance along with our current sales CapEx and O&M expectations to support regulatory ROE in 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 for customer. On weather normalized basis, fourth quarter sales increased 2.1% comprised of continued customer growth of approximately 1.4% and increased weather normalize 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 adjusted 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% per year.
The economy in Florida continues to grow on a healthy rate with strong jobs growth reflected in consistently low rates of seasonally adjusted unemployment around levels last seen in early 2008. And over a 1 million jobs have been added from the low in December 2009, though the pace of jobs growth is beginning to slow. Leading indicators in the real estate sector continue to reflect the strong Florida housing market and the December rating of Florida's consumer sentiment remained 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 has not only better informed our hedging decisions but have also led the opportunities in gas reserves to benefit Florida 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 comparison purposes, the effects are minimal due to the prior immaterial contribution from these projects during early stages of development.
Contributions from the Texas pipelines acquired by NEP in October are also included in the Energy Resources results for 2015. Energy Resources reported fourth quarter 2015 GAAP earnings of $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 the contributions from new investments being offset by higher corporate G&A and interest expenses.
For the full year 2015, Energy Resources reported 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 headwind 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 returns in more normal levels of profitability in the first quarter following the adverse effects of the polar vortex conditions in 2014. While wind resource was approximately 96% of the long-term average in 2015, other factors including and particular icing in the fourth quarter and other production losses, reduced production by another 2%.
New investments added $0.31 per share, consistent with a reported change that I've just mentioned, this includes $0.04 per share of contributions 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 in Mountain Valley project. New renewable investments added $0.27 per share, reflecting continued strong growth in our portfolio of contracted wind and solar projects. In 2015 alone we commissioned approximately 1,200 megawatts of new wind projects and 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 expense as a result of higher depletion rates. Based on market conditions we elected not to invest capital and drilling certain wells, which resulted in our earlier recognition of income through the value of the hedges we had in place, although this helped mitigate other negative effects in 2015, including higher depletion rates, 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 interest in corporate expenses, including increased development activity in light of what we consider to be a very positive landscape for the renewable business. Results also were impacted by negative $0.06 per share of share dilution, while benefiting from the absence of charges associated with the 2014 launch of NEP. Additional details for our results are shown on the accompanying slide.
Energy Resources full year adjusted EBITDA increased 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 of 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 2015 delivery. With these additions we have exceeded the expectations we shared at our March 2015 Investor Conference for our 2015 to 2016 development program. The accompanying chart updates information on each of our programs now stand. We have also signed contracts in California and Ontario for storage projects to enter service in the next couple of years. Although it is early in the technology life cycle, we are successfully originating source projects that 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've mentioned earlier, we continue to believe that the fundamental outlook for our renewable business has never been stronger and we are working on an update to our capital expenditure expectations for our 2017 to 2018 development program. It is important to keep in mind that because these projects drive growth upon entering commercial operation, 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're pursuing.
Turning now to the development activities for our 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 state in mid-2017. As a reminder, NextEra Energy's investments in Sabal Trail Transmission and Florida Southeast Connection are expected to be approximately $1 billion and $550 million respectively. And FPL is the anchor shipper on both pipelines.
The Mountain Valley's pipeline has continued to progress through the FERC process than filed its formal application in October 2015. We continue to see market interest in the pipeline and we'll pleased to announce earlier this month the addition of Consolidated Edison as a shipper on the line as well as the addition of Con Edison Gas Midstream as a partner. We continue to expect approximately 2 bcf per day, 20 year firm capacity commitment 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 resource was generally in line with our long-term expectations and the acquisitions of the Texas pipeline in Jericho were 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 our 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 for distribution was $126 million. Clearly 2015 had its 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 an after-market equity issuance or dribble 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 to the consolidated results for NextEra Energy, for the fourth quarter of 2015, GAAP net income attributable to NextEra Energy was $507 million or a $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 agreement 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 at 6% to 8% per year over a multiyear period. Adjusted earnings from the corporate and other segments increased $0.09 per share compared to 2014, primarily due to investment gains and the absence of debt returning to 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 right case we're seeing will be a core area 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 of FPL we will focus on completing our generation modernization project at Fort Everglades, constructing our peaker upgrades at Lauderdale 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 primarily through the addition of new renewables and continued construction of our gas pipeline projects which we expect to 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 seize an even larger share of a growing North American renewables market.
Headwinds could come from the potential impact of El Nino on wind resource in the first half of the year and current weak commodity price environment. With regard to weak commodity prices we evaluated our generation portfolio for 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 our [indiscernible] natural gas fired generating assets located in ERCOT.
Once closed the sale is expected to be slightly accretive to our EPS and credit profile and will generate $450 million in net cash proceeds that will be recycled into a long term contract renewables business. We remain well hedged through 2018 and will continue to evaluate our other merchant generating assets for potential capital recycling opportunities.
With regard to our upstream gas infrastructure business sustained weak commodity prices of course means fewer new drilling opportunities, other things equal and we have reduced our expectations 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 have elected not to drill we have as we did in the fourth quarter liquidated the hedges that were 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 expect it to be modest. Similar to previous years we will work to maintain a strong balance sheet with a 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 in rate regulated.
Earlier this month, we filed a test year letter with the Florida PEC to initiate a new rate proceeding for rates beginning in January 2017, following the expiration of our current settlement agreement. FPL was finalized in base rate adjustment proposal that would cover the next four years through 2017 through 2020, while the details of the number are still being finalized. We expect a proposal to include base rate adjustments of approximately $860 million started in January 2017, $265 million started in January 2018, and $200 million upon commission of 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 cost we believe that FPLs current typical bill 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're proposing a four year rate plan which provides customers' a higher degree of predictability with regard to the future cost of electricity. Second, from the period 2014 through the end of 2017, FPL is planning to invest a total of nearly $16 billion with additional significant investment expected in 2018 and beyond to meet the growing needs of Florida’s economy and continue delivering outstanding value for Florida customers by keeping reliability high and fuel and other cost flow, while the benefits of building a stronger, smarter grade and a cleaner more efficient generation fleet are passed along regularly to customers through higher service reliability and lower bill, you must periodically seek recovery for these long-term investments supported by base rates.
Third, you may recall that FPL is required to file the comprehensive depreciation study as part of the rate case, the appreciation study to be filed with this rate case reflects the investment that FPL has made since the last study in 2009. Based on the changing mix of assets and the recoverable life span, the resulted impact of the study is roughly a $200 million increase in annual depreciation expense. Fourth, we expect to request a performance adder of 0.5% as part of FPLs allowed regulatory ROE, compared with peer utilities in the southeast and coastal U.S. FPL has the cleanest carbon emission rate, the most cost efficient operations, the highest reliability and the lowest customer bills. But an allowed ROE midpoint is below the average of those pure utilities. We believe that the proposal for a performance adder presents an opportunity to reflect FPLs current superior value proposition and encouraged continued strong performance.
The estimated impact of the three base rate adjustments phased in during the four year period would total of approximately $13 per month or $0.43 per day on the base portion of a typical residential bill. FPL has worked hard to deliver service that is ranked amongst the cleanest and most reliable to the lowest cost and has made the decision to seek relief only after a thorough review of the financial projections. Since 2001, FPLs investments in high efficiency natural gas synergy have saved customers more than $8 billion 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 of Florida customers are growing with the projected addition of nearly 220,000 new service accounts during the period 2014 through the end of 2017, FPLs focused on efficiency and productivity that significantly lessened the bill impact.
Compared with the average utilities O&M cost FPLs innovative practices and processes save customers nearly $2 billion a year or approximately $17 per month for the average customer. Through its focus on cost reduction FPL ranks best in class among major U.S. utilities or having the lowest operating and maintenance expenses measured on a cost per kilowatt hour of retail sales. In additional, while other utilities around the country are facing potentially higher cost to comply with the EPAs going power plant, FPL is already well positioned and comply with the targets in Florida.
Today, FPLs typical residential bill was about 20% lower than the stated 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 ten 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 determine by the commission, but we currently expect that we'll have hearings in the third quarter with the final commission decision in the fourth quarter in time for new rates to go into effect in January 2017.
As always we are open to the possibility of resolving our rate request through a fair settlement. Over a period in the last 17 years FPL has entered into five multi-year settlement agreement that have provide a customer with a 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'll continue to provide update throughout the process.
Turning 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, applying a compound annual growth rate of a 2014 base of 6% to 8% we continue to expect to grow our dividends per share 12 to 14% per year through at least 2018 of a 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 phased down extension 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 in NextEra Energy's earnings per share expectations through 2018.
At NEP as I mentioned earlier, yesterday the board declared a fourth quarter distribution of $0.3075 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 base we continue to see 12 to 15% per year growth in LP distributions as being a reasonable range of expectations through 2020 subject to our usual caveats. As a result we expect the annualized rate of the fourth quarter 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 cap fee of $190 million to $220 million reflect calendar year 2016 expectations for the portfolio at yearend December 31, 2015. The December 31, 2016 run rate expectations for adjusted EBITDA of $640 million to $760 million and cap fee of $210 million to $290 million reflect calendar year 2017 expectations for the forecasted portfolio at yearend December 31, 2016.
Our expectations are subject to our normal caveats and our net of expected IDRPs 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 serve its intended 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 amount of NEP public equity to finance the growth included in our December 31, 2016 annual run rate. However we will be smart, flexible and opportunistic as to how and when we access the equity markets.
If the equity markets are not accessible at reasonable prices we expect to have sufficient debt capacity at NEP that together with proceeds rates or at the market dribble program should be sufficient to finance currently planned 2016 transaction. Where conditions are appropriate one alternative would be to raise equity privately, prefunding drops before they are publicly announced. However this is just one option that we're considering and we may access the equity markets in other ways when market conditions permit. In addition we expect our drops to be smaller in magnitude in order to manage the capital required to finance the acquisitions.
As I mentioned earlier the at the market dribble program has 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 potential future acquisitions. We continue to believe it is important that we remained focused on the fundamentals and given the strength of NEP's sponsor and 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 the necessary steps to provide time for recovery at the equity markets. NEP benefits from a strong sponsor, de-risked and long term contracted cash flows with an average contract life of 19 years, strong counterparty credit and projects that in many cases have been financed predominantly through mortgage style financing that provides long term protection against interest rate volatility. We remain optimistic that the NEP's 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 and 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 line for questions.
[Operator Instructions] And we'll take our first question from Steven Bird with Morgan Stanley, please go ahead.
Wanted to just check in on the solar valid initiative, it looks like consumers for smart solar which you had supported has gotten the votes necessary. Could you just speak to the process for getting this on the ballot and just what we should be looking at going forward there?
Sure, hi Steven good morning its Eric Silagy, so the necessary votes were secured signatures, those have been verified and it’s just two tests, there is a number of votes or signature I should say and then also a number of congressional districts that seek at least half of the congressional districts, those two tests have been met.
So the next step right now is at this language, consumer referred solar amendment language has to be verified by the Supreme Court as being valid to be on the constitutional ballot, that has to take place by April 1, briefs have been filed by number of groups in front of the Court. Oral arguments have not been scheduled, they’re not required actually. So the Court could possibly rule without the oral arguments, where they’ll set oral arguments being heard and then by April 1, at the latest the Court will. If the Court approves the language, it will onto the ballot for November elections.
Okay. That's very clear. Thank you and then shifting over to resources. We're obviously very happy about the expansion of the ITC and PTC. 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 is actually able to secure tax equity. Would you mind talking at a high level, in terms of your take on the health currently of the tax equity market and where you see that and whether or not that might be an advantage for you all given your position versus say smaller competitors?
Sure Steven. Actually we see the opposite, we see the tax equity market actually strengthening. One of the benefits of having a global banking network that as we have, gives 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, is 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 pipeline and our track record which speaks for itself.
Very helpful. Thank you very much.
And we'll go next to Dan Eggers with Credit Suisse. Please go ahead.
Just John, going back to the bonus depreciation comment, in fact that is not early affecting any of your funding or growth expectations, can you walk us through where you guys expected to be from a tax cash payout respective and then how far into the future does that take you with the bonus depreciation to the extent [indiscernible]?
Yes, we don't expect bonus depreciation really to have much of an impact as to when we become a cash tax payer and the reason for that is that at Energy Resources we use tax equity financing because we used tax equity financing it really doesn't result in that much of a deferral of our deferred tax asset balance.
And it doesn’t affect the FPL, why?
Well, if you walk through the impacts on the business, at FPL what you would expect to see is, a lower amount of equity required to be put in the business because you have a lower tax liability, Energy Resources, we used the tax equity financing but on a consolidated basis at NextEra Energy the lower tax liability we have at NextEra Energy result in higher FFO to debt which gives us additional flexibility in terms of having to issue less equity and so having 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 then we’re early on the idea of what's going to happen to the pipeline for a renewable development that in your past conversations suggest there is a lot of focus trying to jam in projects in '16 to catch the solar ITC. Are you guys having discussions right now about your shifting the timing and magnitude of the shape of when the [indiscernible] get done and given the fact that the customers have more flexibility in than?
No, not the way our contractual structure.
Okay, great, thank you.
And we'll go next to Julien Dumoulin-Smith with UBS. Please go ahead.
So, first just on the capital markets and balance sheet needs, just to be very clear about just in terms of equity expectations for this current year, I think, I heard you say, you don't really expect any at the corporate level, can you just explain upon the assumptions baked there in and specifically discuss capital recycling, I presume that 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 is what I’ve asked just kind of the follow up.
In terms of our equities needs for 2016, our base case is that we're recycling opportunities available in our merchant generation portfolio that we'll continue to explore somewhere to what we do with the Lamar-Forney transaction back in 2015. We also have some renewable assets that may be rolling off of contracts 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 of capital for 2016 offsetting what would otherwise be a modest equity needs in 2016 for NextEra Energy.
Got it, but just to be clear on equity here are you assuming further asset sales beyond the Lamar and Forney to make sure -- to hit that in your equity?
Julian this is Jim, you know I think the way you should think about it is, everything we have is always for sale and if there is an opportunity to sell something that's accretive to the creeds or earnings going forward and makes sense from a strategic standpoint we're going to sell it. But we're also not betting that we're going to have to sell in order not to have to issue equity this year. You know, 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're doing against all of our financing activities and we have a whole host of things that we, a whole host of levers at our disposal that we go to, and obviously issuing equity is very -- and the team knows this is a very low on my list of the kind of things that we want to do, to do finance the plan.
Now obviously the flip side of that is we need a strong balance sheet and we're committed to strong ratios to maintain a strong balance sheet, so you know what we said 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 one, it's going to be very modest.
Great, very clear and then just lastly on natural gas and obviously the dip we see here, does that impact at all your rate based gas effort in Florida or your solar efforts in Florida?
Well on the one hand you could say it should create 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 in that you have to able to identify producer operators that are willing to sell, in today's lower natural gas price environment at a price that makes sense for Florida customers, but we're working hard to identify those opportunities through the FPL origination efforts.
Julian, this is Eric, I'll just add that on the three solar projects it has no impact, those are underway and remember those were advantage sites that we had because we had the property, the transmission was there and so we're moving forward with those that provide customer benefits right up front.
Great, thank you very much guys.
And we'll go next to Steve Fleishman with Wolfe Research, please go ahead.
Hi, good morning, so first just on the current 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, just a little bit of a high level color on how you're looking at the extensions to the CPP kind of moving the needle on these things. I think you said like maybe more like after a big push, after '19 was that, just want to make sure I understand what you -- the high level color you gave.
So Steve, I think the first thing we looked at is, if you go back over the last several years you probably had a renewable market in the US of 8 gigawatts to 9 gigawatts, it's lumpy though as you know. When we look at '17 through '20 we see a market that's probably much closer to 13 gigawatts to 15 gigawatts and there are some out there that would say that towards the latter part of the decade that that market could get up to 18 gigawatts to 20 gigawatts. So when we look at it we say well, you know gee whiz 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 its own 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 will 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's going to be an awful lot of wind built, right, especially if the IRS comes through with what we think they're going to come through, the same interpretation of in construction as they've had before you're going to likely get a 100% PTCs for CODs on wind all the way through the end of 2018. 2017 remains to be seen whether that will be a banner year for wind or not but I think combined '17 and '18 we'll be pretty good on the wind side.
Then you look at wind a little further out obviously you got CPP, we and others have provided comments to EPA on CPP, one of those comments that EPA asked for was what do we do with the clean energy incentive program right. 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 billed 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 '20.
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'd say 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 lot of demand for solar. So we see fairly steady solar growth from '18 through '20. I think it was Dan 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 still much is getting build in '16. So, is that good?
Yes, that's helpful and just the reason you’re going to do the updated into Q1 versus now, versus later as you just have better visibility on the backlog, again to Q1?
It will have -- I know that a lot of people read the CPP, we've read at 100 times, it's complicated. We want to make sure that we understand what we think it's going to happen in the market but in addition, we're talking to all of our customers and 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 -- are the projects on time, are you seeing any counterparty risk and maybe more importantly given the rest on the business just, do you see that as acquisition opportunities or stay away, to be careful, just how are you looking at what's going on in that space?
We're making good progress, in terms of timing on the projects and so I feel good about on the pipeline projects, I feel good about that. There is always pressure on timing and certainly FERC has been little slower in terms of pipeline permitting and it's been historically, but we're feeling good about that. In terms of counterparty risk, obviously we feel good with our portfolio projects that vast majority of the counterparties that we have on all the pipelines across both the Florida pipelines, Mountain Valley pipeline and the Texas pipelines, they all are very strong credit worthy entities and so we don't have that counterparty risk that some of the other folks in the pipeline business do and our average contract length is quite long, it's probably close to 20 years.
So, given where the market’s at, obviously there is a lot of distress in this market, we'd have interest only in pipeline with strong credit counterparties and long-term contracts. And so, if there are those that become available and there maybe some of those become available given some of the things going on the industry, we'll be interested in that, obviously we'll be disciplined as we always are vis-à-vis acquisition but it would be something that we'll look at. But I have no interest in adding anything with commodity exposure and short contracts
And we'll go next to Michael Lapides with Goldman Sachs. Please go ahead.
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 depreciation meaning, you mentioned the D&A study and then the incremental 200 million, but we've also got the roll off of the RAG [ph] amortization, is that part of that 200 million, is that incremental to it. And then Armando if you won't mind, can you just talk about what the PTC roll off is not just in '16, but -- does that accelerate in '17m does it decelerate or stay at a constant level over the next couple of years?
Okay, Michael. This is John, I will take the first one then turn it over to Armando for the second one. On the depreciation question about 200 million and the surplus amortization balance, I think the 263 that I've mentioned earlier for '16 rolls off by the end of the year as part of our settlement agreement that expires.
And Michael, we again have to get back to everybody, 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 request, but then you had multiple years of accumulated regulatory amortization, should we assume that all of that flows back in and not just the amount for 2015 but the multiple years into depreciation at -- in 2017 and beyond at FP&L?
I think the way you should think about the impacts of -- was there amortization, first of all when you do depreciation study, everything gets washed out in the study, so you're looking at things fresh, 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 a new revenue requirement from that study. And there are a lot of puts and takes in it and you know the fact that we had some surplus amortization over the last several years has led to our rate base being a little bit higher than it otherwise would have been had we not had the surplus amortization, but actually doesn't have a giant impact on the ongoing depreciation expense in the study.
Got it, last one Jim, just curious, any thoughts on the bipartisan energy bill that's kind of weaving its way to the U.S. Senate right now? You mentioned, there were was some commentary earlier in the call about some of the investments in storage and I think there is 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 of Washington, that said I think it’s highly-highly unlikely that anything gets done this year.
Got it, thank you, much appreciated guys.
And we're out of time for questions here, thanks everyone for joining the program today, you may disconnect and have a wonderful day.
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