NextEra Energy, Inc. (NEE) Q4 2012 Earnings Report, Transcript and Summary

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

Thank you, Anne. Good morning, everyone, and welcome to our fourth quarter and full year 2012 earnings conference call. With me this morning are Jim Robo, President and Chief Executive Officer of NextEra Energy; Moray Dewhurst, NextEra Energy's Vice Chairman and Chief Financial Officer; Armando Pimentel, President and Chief Executive Officer of NextEra Energy Resources; and Eric Silagy, President of Florida Power and Light. Moray will provide an overview of our results, following which, our executive team will be available to answer your questions. We will be making forward-looking statements during today's call. These statements are based on our current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially from our forward-looking statements if any of our key assumptions are incorrect or because of other factors discussed in today's earnings news release, in the comments made during this conference call, in the risk factor section of the accompanying presentation or in our latest reports and filings with the Securities and Exchange Commission, each of which can be found in the Investor Relations section of our website, nexteraenergy.com. We do not undertake any duty to update any forward-looking statements. Please also note that today's presentation includes references to adjusted earnings and adjusted EBITDA, which are non-financial GAAP measures. You should refer to the information contained in the slides accompanying this presentation for definitional information and reconciliations of the non-GAAP measure to the closest GAAP financial measure. With that, I will turn the call over to Moray.

Thank you, Julie, and good morning, everyone. NextEra Energy delivered solid financial results in 2012, and both principal businesses executed on the objectives we set for ourselves and shared with you in 2011. The progress we made across both major businesses this past year reinforces our growth prospects through the middle of the decade. We also began to devote significant effort to projects that will drive our growth in the second half of the decade. Throughout the year, we indicated that we were focused on execution, and I'm pleased to note that we met all our principal execution objectives. At FPL, we continued to deliver the best customer value in the state, our major capital projects all progressed well and we successfully resolved our base rate case. At Energy Resources, we completed our record backlog of U.S. wind projects and met our milestones for the development of our Canadian wind portfolio and our solar portfolio. We also had good execution in our day-to-day operations with a strong finish to the year. And finally, construction of our Lone Star Transmission line continued, and we remain on track for the start of operations later this quarter. All in all, it was a very strong year that positions us well for the future. Before discussing the financial results, I'd like to take a few minutes to highlight what we accomplished in 2012. At FPL, our strategy is founded upon offering the best customer value in the state and on finding ways to improve our value delivery over time. 2012 was an excellent year in this respect. We maintained our position as a service provider offering the lowest typical residential bills among all 55 utilities in Florida and a bill that is 26% below the national average. We had our best year ever in…

[Operator Instructions] We'll take our first question from Dan Eggers with Credit Suisse. Dan Eggers - Crédit Suisse AG, Research Division: Moray, can you just talk a little more about some of the '13 drivers to the point you guys are in a place to talk about them versus at the Analyst Day, just kind of some of the big pieces that will affect things? Obviously, normalization of wind asset performance is a pretty big driver year-on-year, the resource additions, but what else would we be thinking about?

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

We certainly hope we're going to be able to do better than that. But as I indicated in the prepared remarks, that's going to take a lot of work on our part. We are busily gemming up ideas, and I think we'll be in a position to share more of our ideas at the March conference, so I don't have any specific I can share with you. But we're very proud of our long-term cost track record, our O&M cents per kilowatt hour. But again, as I indicated in the prepared remarks, we have seen some upward pressures in nominal terms, so we are definitely going to be taking a fresh look at really all aspects that drive productivity and efficiency. Obviously, the structure of a 4-year agreement, one of the values of these agreements -- this agreement, as in past agreements, that it provides an appropriate set of incentives, so benefits that we can create can be of value to shareholders but also future value to customers. So we're going to be working very hard on that. Dan Eggers - Crédit Suisse AG, Research Division: Okay. I have just one last one, just either for Armando or Jim If one of them could talk about how the process will work for identifying wind for '13/'14 to get built, and kind of where the customer interest is on moving projects forward. Now it looks like there's another year or 2 of life back in the PTC program.

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

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

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

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

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

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

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

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

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

That's correct.

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

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

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

You figure the next few months you might?

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

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

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

I think you need to make your own inferences there.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

We'll take our next question from Hugh Wynne with Sanford Bernstein. Hugh Wynne - Sanford C. Bernstein & Co., LLC., Research Division: My question was on the earnings waterfall at Energy Resources, Page 16. For the year as a whole, you show lower pricing as a $0.14 drag on Energy Resources' earnings, the PTC roll-off is a $0.09 drag. On the prior page, Page 15, where you look at the -- your quarter-over-quarter results, you don't mention either of those 2 items. What accounts for their absence in the fourth quarter? And what does their absence in the fourth quarter imply for the year ahead?

Well, the main reason for the absence is that -- the fourth quarter is a small quarter, and the bulk of the hedge value, in a sense, was concentrated in the middle of the year, so that's just the way the pattern works out for the year. But in terms of sort of implications for the future, as I indicated, the bulk of the negative impact of the hedge roll-offs was concentrated in 2012, so we don't expect that to be a major drag one way or the -- well, maybe a fact of one way or the other in 2013. I think some assets have a little uptick and some have a little down for 2013. And the PTC roll-off is largely a function of the -- as you can tell, of the pattern of projects that went into service 10 years ago. Those should not be a big negative drag in 2013. Hugh Wynne - Sanford C. Bernstein & Co., LLC., Research Division: Good. And then one other quick question, referring now to Page 19. How important a contribution to cash from operations in 2012 was bonus depreciation? And do you expect that to continue at a similar level next year?

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

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

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

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

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

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

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

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

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