新世紀能源 (NEE) 2012 Q1 法說會逐字稿

Good day, everyone, and welcome to the NextEra Energy 2012 first 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 Incorporated.

Please go ahead, ma'am.

Thank you, Celia.

Good morning, everyone, and welcome to our first quarter 2012 earnings conference call.

Joining us this morning are Lew Hay, NextEra Energy's Chairman and Chief Executive Officer, Jim Robo, President and Chief Operating Officer of NextEra Energy, Moray Dewhurst, Vice Chairman and Chief Financial Officer of NextEra Energy, Eric Szilagyi, President of Florida Power and Light Company, and Armando Pimentel, President and Chief Executive Officer of NextEra Energy Resources LLC.

Moray will provide an overview of our results, following which our senior management team will be available to take your questions.

We will be making statements during this call that are forward-looking.

These statements are based on current expectations and assumptions that are subject to risks and uncertainties.

Actual results could differ materially from our forward-looking statements, if any of our key assumptions are incorrect or because other factors discussed in today's earnings news release and 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, www.NextEraEnergy.com.

We do not undertake any duty to update any forward-looking statements.

Please also note that today's presentation include 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.

Thank you, Julie.

Good morning, everyone.

NextEra Energy delivered solid results during the first quarter of 2012 and is off to a good start in meeting the objectives that we have set out for ourselves and discussed with you on our last earnings call.

At FPL, we maintained a regulatory ROE of approximately 11%, consistent with the 2010 settlement agreement; and average regulatory capital employed grew $3.2 billion, or roughly 15.6% over the same quarter last year, reflecting our continuing commitment of new capital to the business, which is designed to enhance what we believe is already the best customer value proposition in the state.

As a consequence, net income grew $34 million, or 16.6%.

At Energy Resources, the adjusted earnings contribution compared to the prior year comparable quarter was close to flat, as contributions from new business roughly offset declines from the existing asset portfolio.

Given the head winds facing this business that we have previously discussed, we are satisfied with this performance.

More broadly, we made good progress on the various execution objectives we discussed on our last earnings call and we remain on track to meet our goals for 2012 and beyond.

In Florida, the economy continued to improve, although it is still weaker than we would all desire.

Virtually every significant indicator that we track is now appreciably improved from the trough of 2009, and this quarter showed a continuation of the general upward trend.

While we continue to believe that full recovery depends in part on recovery elsewhere in the US, we are optimistic that Florida will, in time, revert to its longer term pattern of greater strength than the national average.

Within a slowly improving economic environment, FPL continued to deliver what we firmly believe is the best customer value proposition in the state.

Our typical bills remain the lowest of the 55 utilities in the state, and about 25% below the national average.

Our service reliability ranks in the top quartile on a national basis.

We provide our customers with award-winning service, and we have a very clean emissions profile, which reduces risk from a customer perspective.

We continue to be one of the most efficient utilities in the nation, with our non fuel O&M per kilowatt hour ranking us among the top 10% in operating efficiency in the nation.

Our major projects at FPL, which are aimed at improving on this value proposition, all progressed well during the quarter and we made our formal filing for rate relief.

Outside of Florida, the Energy Resources portfolio generally performed well, with the exception of the continued down power at Seabrook associated with generator cooling limits, which will continue through the next regularly scheduled outage in the fall of 2012.

While gas and power markets continue to weaken, our high degree of hedging protected us against significant impacts in first quarter and should continue to do so for many quarters to come.

We made excellent progress in developing our record backlog of renewable projects and remain on track for all major commitments.

At Lone Star Transmission, we continue to make good progress with construction and results in minor issues associated with the rate case in Texas.

Looking forward, as a result of our progress in the first quarter, we continue to believe we are well positioned to meet the earnings expectations we have 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 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 first quarter of 2012.

I will start with the results at FPL, before moving on to Energy Resources and then the consolidated numbers.

For the first quarter of 2012, FPL reported net income of $239 million, or $0.58 per share, up $0.09 per share year-over-year.

The principal driver of FPL's earnings growth was continued investment in the business.

During quarter, we invested roughly $1.3 billion of the approximately $4.1 billion we expect to invest in the business in 2012, and regulatory capital employed, that is capital in which we are able to earn a return, grew 15.6% over the same quarter last year.

Given the projects currently approved by the Florida Public Service Commission and our normal path of investment in the business, we expect to invest roughly $15 billion over the five-year period 2010 through 2014, or approximately $3 billion per year.

This is the largest investment wave in the Company's history and is, of course, only made possible by the prospect of earning a fair rate of return on that investment.

These investments collectively produce significant customer benefits in the form of lower fuel costs, better reliability and cleaner air, and they are key to our ability to keep our customers' electric bills the lowest in the state over the long haul.

All our major projects continued to make good progress during the quarter.

The extended power upgrade projects at our St.

Lucie and Turkey Point nuclear facilities continue to move ahead.

Upgrades at three of the units are anticipated to be completed in 2012, and the upgrade at the remaining unit is expected to be completed in 2013.

In total, the nuclear power upgrade projects are expected to add an incremental 490 megawatts of generation capacity.

Construction at the Cape Canaveral and Riviera Beach modernizations is well underway and remains on schedule and on budget.

In addition, the Florida Public Service Commission approved our petition of need for the modernization of our Port Everglades facility, and we expect that project to come into service in 2016, with a total capital investment of approximately $1.2 billion.

During the quarter, we amortized $165 million of surplus depreciation, enabling us to maintain a regulatory ROE of approximately 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.

Utilization of $190 million of this in 2013 is built into our rate case filing.

One of the important issues in the rate case will be the need to increase rates to offset the loss of the temporary surplus depreciation amortization credit.

As I mentioned earlier, the Florida economy continues to improve.

Unemployment in March dropped to 9%, still higher than the national average but well down from the peak of 11.4% in early 2010, and lower than at any time since January, 2009.

Perhaps more important, Florida has now experienced positive year-over-year job creation for the last 20 months.

The tourism sector has improved markedly since its trough in January of 2010.

As of January 2012, the 12-month moving sum of total taxable sales from tourism stands higher than at any point over the last five years.

At the same time, Florida consumer confidence has improved from its low in the summer of 2008, although it is still well below the levels we experienced in 2005 through 2007.

The Florida housing market continues to recover, although progress is uneven around the state.

The large pipeline of homes in foreclosure remains a drag on the market, and the judicial process used in Florida to process foreclosures is one of the lengthiest in the country.

Nevertheless, the backlog of homes in foreclosure is gradually declining and the rate of mortgage delinquencies has fallen to its lowest level since 2008.

Florida has improved from having the second highest mortgage delinquency rate in the country to having the seventh highest rate.

As painful as the housing market adjustment has been and continues to be, the significant declines in housing prices have resulted in Florida regaining much of the position it had lost in terms of relative housing affordability.

In markets where this adjustment has progressed rapidly, such as Miami/Dade, housing market activity has now recovered significantly and many buildings that we had thought would be unoccupied, perhaps for years, are now being occupied.

Prices in this market have seen a slight uptick recently.

On the negative side, construction activity, not surprisingly, continues at a very low level and we do not expect this to change for many months.

Yet even here there are signs of improvement, and we have seen a slight uptick in permit applications for new construction.

These generally encouraging developments are reflected in the internal indicators that we follow at FPL.

During the first 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 seven quarters.

Total retail sales increased 3.8%, driven largely by an extra day of sales due to leap year and an increase in underlying usage.

This is the second quarter in a row with a positive year-over-year increase in underlying usage.

Positive economic factors, including increased employment in Florida and a steady drop in the number of empty homes, seem to be contributing to the increase.

The number of inactive meters and low usage customers, which are indicative of the number of empty homes, continue to improve and have now fallen to levels not seen since 2008.

However, as we've often pointed out, changes in usage can be volatile from quarter to quarter and we would not extrapolate from this quarter's strong growth.

Over the coming months, we continue to expect modest and gradually improving growth, but there are likely to be more bumps along the way.

On March 19, we submitted testimony and extensive supporting data for FPL's 2012 base rate case.

The overall numbers are substantially consistent with what we had indicated in the test year letter.

We are requesting a base revenue increase of $517 million effective January 2, 2013, with an additional step increase of $174 million when the Canaveral modernization comes into service in June of 2013.

Included in these amounts is our request to reset the allowed ROE at 11.25%, plus a 25 basis point performance premium 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 Commission has established a definitive schedule for this proceeding, which includes quality of service hearings in June, intervener, staff and FPL rebuttal testimony in July, and technical hearings in late August.

The staff recommendation and Commission rulings on revenue requirements and rates are expected in the fourth quarter.

In our March filing with the Commission, we indicated that, if granted in full, our base rate request would result in an increase in the base portion of the typical residential customer's bill of $6.97 per month, or roughly $0.23 per day; however, the impact on total bills would be substantially less.

Based on February fuel curves at the time of our filing, we estimated that the typical bill would increase by only $2.48 per month, or $0.08 per day, and we noted that some commercial customers would likely see their total bills go down.

We are currently in the process of updating our bill impact analysis, which we expect to result in a further decrease in the total bill impact.

We will continue to monitor the changing bill impact throughout the rate case process, as fuel prices fluctuate.

The interrelationship between the base rate request and the customer's total bill is an important one that is sometimes misunderstood.

While fluctuations in natural gas prices will certainly be reflected in corresponding fluctuations in our customers' total bills, as consequence of our focus on substituting capital for fuel, our customers stand to benefit, whatever the level of fuel prices, and the value of the investments we are making would only increase still further if natural gas prices were to increase again.

The nearly 10,000 employees of FPL have worked hard and thoughtfully for many years, following a consistent strategy that has led to FPL's current combination of low bills, high reliability and excellent customer service.

While we are far from perfect and must continue to seek ways to improve, we look forward to presenting our case to the Florida Public Service Commission.

Let me now turn to Energy Resources, which reported first quarter 2012 GAAP earnings of $221 million, or $0.53 per share.

Adjusted earnings for the first quarter were $182 million, or $0.44 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 was close to flat with last year, with adjusted EPS decreasing $0.02.

While the quarter saw the typical collection of puts and takes, there are only a few items worth drawing your attention to.

New wind investments added to the portfolio since the first quarter of last year contributed $0.07, reflecting both higher convertible investment tax credit, or CITC, elections, as well as ongoing operating earnings.

We continue to expect to elect CITCs on roughly 450 megawatts of new projects that are expected to be placed into service in 2012.

The Company's gas infrastructure business also added $0.07 of adjusted EPS, $0.06 of which is from gains associated with closing out hedges on certain planned wells that we no longer intend to pursue.

These positive results were offset by lower adjusted EPS from the Company's existing assets of $0.11.

Existing wind assets decreased $0.07 relative to last year's comparable quarter, due to a combination of favorable state tax credits recorded last year, as well as lower federal production tax credits, lower energy prices and higher operating expenses.

These items were partially offset by favorable wind energy production.

Net wind energy generation increased by 545,000 megawatt hours compared to last year's comparable quarter, and the wind resource was about equal to the long term average.

At our Seabrook nuclear facility, lower availability and lower gains from decommissioning funds negatively impacted adjusts EPS by $0.04.

All other remaining items contributed a negative $0.05, and reflect lower contributions from the Company's customer supplier and proprietary trading business and higher costs associated with the growth of the business.

Given the challenging market environment for Energy Resources, we were satisfied with the overall performance.

Nevertheless, the bulk of the year is still ahead of us and much more work remains to be done.

We continue to make good progress in developing our record backlog of renewable projects.

During the quarter, we brought into service 177 megawatts of wind capacity and completed the acquisition of 40 megawatts of solar capacity in Canada.

We currently expect to add approximately 1,300 megawatts of US wind capacity this year, roughly 600 megawatts of contracted wind capacity in Canada in 2012 through 2015, and roughly 900 megawatts of contracted solar capacity between 2012 and 2016.

All our major projects are on track to meet their respective commitments.

Looking at the Company on a consolidated basis, for the first quarter of 2012, NextEra Energy's GAAP net income was $461 million, or $1.11 per share.

NextEra Energy's 2012 first quarter adjusted earnings and adjusted EPS were $422 million and $1.02, respectively.

The corporate and other segment was essentially flat with last year.

As I noted earlier, we are on track with Lone Star transmission and continue to expect to bring the line into full service in the spring of 2013.

As I indicated earlier, with the progress we have made in the first quarter, we continue to be comfortable with the earnings expectations we discussed on our last call.

For 2012, we currently expected adjusts EPS to be in the range of $4.35 to $4.65, while 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 20 14, we also expect to maintain our growth momentum into 2015, with continued contributions from new assets coming into service at both FPL and Energy Resources.

From a commodity perspective, we are highly hedged in 2015 as well.

As always, 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 a reminder, our expectations assume only the projects that we already have in our backlog.

While we continue to be optimistic the federal policy support for renewable development will be maintained, at least to some degree, beyond the expiration of the production tax credit at the end of the year, we are not counting on that.

We hope to be able to add additional projects to our backlog in due course.

But if we do not, we would expect to be in a position to return some cash to investors in 2014.

Under any realistic scenario, we currently expect our portfolio mix to continue to shift toward a higher percentage of cash flow and earnings coming from regulated and long-term contracted assets.

On our last earnings call, we laid out for you a short list of critical success factors for 2012, and told you we were intensely focused on successful execution.

That remains true today.

At Florida Power and Light, our customer value proposition continues to be strong.

Our major capital projects are on track, and we have taken the first necessary steps in seeking rate relief.

At Energy Resources, our first quarter execution was satisfactory and we have made good progress with all our renewable projects.

However, the environment for the non contracted portions of the Energy Resources portfolio continues to be very difficult.

At Lone Star Transmission, our construction program is on track and we are in the midst of our rate case in Texas.

If we continue to execute successfully, as we have in the first quarter, we believe we will be well positioned to deliver on our 2012 and 2014 expectations.

Before closing, I'd like to turn the call over to Lew for a few comments.

As you are all aware, last month we announced a plan for transition of the senior leadership of the firm.

Lew will be stepping down as CEO as of the middle of the year and assuming the role of Executive Chairman, with an expected retirement at the end of 2013.

Jim Robo, currently President and Chief Operating Officer, will become CEO as of the middle of this year.

While the substance of the transition was widely anticipated, a few of you have expressed some degree of surprise at the timing, and Lew would like to explain the logic behind his decision.

Lew?

Thanks, Moray, and good morning, everyone.

I think it's more appropriately said that Moray would like for me to explain the logic behind my decision, as opposed to me wanting to explain it.

But nonetheless, hopefully this will be the last time I have to discuss this.

I've long thought that the transition of the CEO role from one individual to the next is one of the critical events in the evolution of a company.

I believe it should be a clear, thoughtful and measured progression, if that's at all possible.

And mostly prompted by me, our Board has had numerous discussions over the years covering a range of various possibilities.

In the end, however, I think it really should come down to three things.

First, the right point in a company's development.

Second, the readiness of a successor.

And third, a clear decision on the part of the incumbent.

For us, I believe this is the right time.

Our company is in an excellent position.

Jim is clearly ready for the CEO role.

And for me, it's really time for me to move on to a new phase of my life.

From the outset of my tenure as CEO, I have consistently believed, as I think Jim and Moray and many others can attest, that a decade or so is generally about the right length of tenure for a CEO.

Over that period, there is time to have a real impact on a large organization, to move it in new directions and also to mold its culture and values.

I also believe that during that kind of a time frame a person can remain fresh and vigorous and not default to the same set of ideas for a want of new ones.

Now some leaders can remain fresh and creative for a much longer period.

But we've all seen leaders who hang on too long.

I'm determined not to be one of those.

I'm proud of what our team has accomplished over the last 11 years.

I had the good fortune to inherit from Jim Broadhead a strong, capable organization.

But that organization is today much stronger, more diverse and more capable.

I think you also agree that we've succeeded in our fundamental objective of creating value for our shareholders.

I have all the confidence in the world that our organization will continue to improve and create even more value for all of our stakeholders under Jim Robo's leadership.

Now for the year and a half after I step down as CEO, I'm going to be committed to making sure this transition goes as smoothly as possible.

I expect to continue to support and mentor Jim as he grows into his new role.

I am going to maintain a number of executive functions for the transition period, in order to leverage Jim's growth and his time.

Beyond that, I have a number of personal goals that really can't be met on the schedule of a CEO.

I'm looking forward to having the time and the flexibility to pursue those interests that, frankly, I've had to defer so far.

But be assured, my heart will never stray far from the Company and its people that I have had the privilege to lead over the past 11 years.

And now, we will turn the call over to the conference moderator for questions.

Thank you.

(Operator Instructions)

Daniel Eggers, Credit Suisse.

Good morning.

Just on the hedge unwind on the EMP business and kind of responding to the natural gas market, are you -- can you share a little more thoughts on what else you are doing in the business as far as responding, both to Cap Ex and investment strategies in a low gas tape?

Good morning, Dan.

Maybe I should first just explain what the hedge closeout is, because they are a little different than the way some people approach this business.

Typically when we commit to a drilling program, we will hedge the expected output for several years, which reduces the overall risk profile of the project, or set of projects.

That also creates an option that's somewhat akin to selling forward against the power plant, so that if gas prices decline significantly, you always have the option of reversing the hedge position and not drilling the wells, so not committing the capital.

And that's what we have done in a few instances.

So it depends on the specific economics, prospective economics of the particular group of wells, and obviously, what happens in the marketplace.

In terms of the overall implications of a lower gas environment for that business, clearly it means that some opportunities become marginal or no longer worth pursuing.

At this stage, though, because of the very small scale on which we are participating in that business, we are still seeing plenty of attractive opportunities.

And recall that a key motivation for us to undertake these activities is to have active participation, and hence visibility, into the evolution of the gas market in a variety of different regions around the country.

So we are still finding that we can meet that objective and do so with attractive expected profitability.

But we will obviously continue to look at individual groups of wells, and if it makes sense to take the money from sweeping the hedges and saving the capital, then we will do so.

So I just take this as a little bit of a portfolio reallocation more than anything else?

Yes, I think that's a good way of characterizing it.

Okay.

And then on commercial demand at the utility, you are particularly good in the quarter on a year-on-year basis.

Is there -- can you give a little more color on what you are seeing at the customer class which has typically been the laggard out of this recession?

Like everything else we're seeing, it's a little bit up and down.

Stronger among small commercial customers.

We have seen some drop off among the large medium and larger commercial customers.

I can't say that there is any pattern that we have been able to observe there.

It's sort of, again, different regions around the state are progressing at different rates.

But not a lot of color that I can really add.

I mean, it's all coming back slowly and a little bit in fits and starts.

But definitely the last few months have been more encouraging.

Okay.

I guess one last one, just on the rate impact that you guys show on slide nine.

The total bill impact, is that effectively marking the entire fuel bill to the forward curve for gas right now?

So gas prices go up, that savings, that rate of increase will go up a little bit?

Or is there still some timing difference between the market and where you guys are inputting fuel in that assumption?

There is always a little bit of a timing difference.

But conceptually, you are correct.

It's a little bit more complicated than saying that we are just marking it to the current forward curve, because we have the impact of the existing hedge program, how that rolls through.

But directionally, if gas prices come down as they have since we made the formal filing, then we would expect to see a further reduction in the total bill impact.

And if subsequently they were to go back up, we would expect to see a slight increase in the total bill impact.

Conceptually, you are right.

Thanks.

And Lew, Jim, congratulations.

Good luck in the transition.

Thanks.

Steven Fleishman, Bank of America-Merrill Lynch.

Hello.

Good morning.

Lew, first congratulations.

And I just remember when you first started ten years ago, everyone was telling you to sell the wind business because it cost too much Cap Ex.

And I'm happy you decided not to.

Moving on to -- I'm sure you remember that.

Absolutely.

Moving on to a couple questions.

First, on the gross margin and EBITDA slides, Moray, it seems like particularly in '12 the numbers have come up pretty good.

Could you maybe go through a little bit what's driving that?

Is it mainly better Texas power pricing on the little bit that's open?

Any other main drivers?

Okay.

Thanks for asking the question, Steve.

Actually, the principal driver of the change in the numbers on those two charts is what I would call a technical one in the way that we have presented the economics of the tax equity project.

To be blunt, the way we had been doing it really was understating our equivalent gross margin.

And without sort of sitting down with a piece of paper and explaining the debits and credits, it's difficult to go further than that.

Effectively, we have now recast these gross margin charts to be a little closer to the concept that we were trying to get at originally of equivalent gross margin for a wind project that has tax equity against it.

That's the principal reason that the numbers have changed.

Substantive changes in the period, both for 2012 and 2013, were pretty minor.

Some small additional hedges.

But because we are so hedged for those two years, these numbers don't move around a great deal.

The hedging activity that we undertook and executed in this period was mostly related to '14, '15 and '16.

So we took advantage of some of the strengthening in the Texas spot spreads, in particular, to reduce our exposure in some of the out years.

But not a lot changed in 2012 and '13.

Okay.

And then I think, Moray, you had talked about potentially doing a convertible or other financings this year.

Is there any update on financing plans?

We continue to expect to access the equity markets in one form or another, most likely in the form of an equity unit or units.

Timing remains to be seen.

It will get worked into our overall financing plan, and obviously will depend on specific market conditions.

But it's definitely baked into our expectations for the year and beyond, and it just remains to be seen when the right time to execute is.

Okay.

And then just lastly, maybe you can give an update with some of the kind of economic issues in Spain.

Any update of any issues we should be worried about there for your project?

Well, we continue to, obviously to monitor closely what the new government is thinking about doing, from the perspective of energy policy.

It's a little difficult for us to tell exactly how that's going to come out.

They have clearly been very sensitive to the fact that many parties, including international investors, have committed significant amounts of capital, and the expectation of a certain regulatory and contractual and pricing environment.

And they clearly don't want to go back on that.

At the same time, they have a number of kind of conflicting pressures.

They have still their commitment to meet their renewable portfolio obligations under Kyoto and its successors.

But they also have to worry about retail rate pressure.

Not a lot to say substantively about how that will all come out.

We are still optimistic that the economics of the project will be preserved.

But obviously, there can be no guarantee on that.

Okay.

Thank you.

Thanks, Steve.

Michael Lapides, Goldman Sachs.

Hello, guys.

Congrats on a good start of the year, and obviously to Jim, Lew, the congrats on the changes upcoming.

One or two questions on energy resources.

Just want to make sure I understand one or two items.

When you guys think longer term about the several gigawatts of combined cycle capacity you still have at Energy Resources, do you view this as core to the business still, and -- or are these, meaning do you need, especially the Texas assets, to help in terms of the hedging or providing a backstop for your retail presence?

That's kind of question one about the gas plans.

Question two is, I'm a little surprised there is not a bigger uptick in expected output levels from these plants, both the Texas one and the ones in PJM, just given where gas and coal prices are and the fact that we have seen a lot of other folks with combined cycle talk about witnessing a significant uptick in output going forward.

Okay.

On the first question, sort of whether -- how core the gas plants are, I guess the right way to think about that is we continue to like very much our portfolios in New England and Texas.

They, respectively within those geographies, they work well together, along with our books of business in those regions.

So I think those we still see as core.

But I would say that nothing in our portfolio is absolute, and we will clearly respond to changes in the marketplace and if it makes sense for us to consider divesting assets, we will consider divesting assets.

I think we've demonstrated that over the years.

So we still like the pieces that we have.

But that's in part a function of where markets are today and where we expect them to be in the future.

So it's not an absolute.

Specifically in terms of Texas, I think it's important to recognize that the gas plants are much more significant, just in terms of impact to the portfolio, than is the competitive retail business.

On the second question, I'm not quite sure where you are picking up what our expected output would be.

If it's from the hedging slides, just recognize that that's on a dollar basis.

And so we have hedged a very significant portion of all those assets.

In general, we would expect to see some advantage from what you are talking about.

The market changes flowing through what we call asset optimization.

So generally as those markets strengthen, prospectively it would give us more opportunities for optimizing around the hedge positions that we've taken.

Just as an add-on to that.

This quarter, because the weather was so mild and markets were relatively flat, provided very few opportunities for that kind of asset optimization.

So I think that's more where we would see the benefit coming in the future.

Okay.

And one other question, just -- I want to make sure I have my arms around how much, or if there is a way you can quantify what the delta between GAAP and cash taxes will likely be over the next couple of years.

The short answer is not off the top of my head.

Let me think about that some, Michael, and I will follow up with you.

Got it.

You can look at the deferred tax balances, kind of the asset liability on the balance sheet and recognize this could be a significant source of cash for both Energy Resources and the parent, obviously depending what happens with bonus D&A.

Just trying to get my arms -- trying to quantify that a little bit.

Happy to follow up off-line.

Okay, I see where you are going.

At that level, based on current tax law we would expect to again be a cash taxpayer in 2014.

And once we are back in that mode, then we start to draw down the deferred balances very rapidly.

So you are absolutely right, in terms of the direction and sort of the trend there.

But that is also, as you point out, dependent on tax law.

And the biggest single factor that has caused us to be -- not to be a cash taxpayer for several years, as well as many other people in the industry, is bonus depreciation.

So if bonus gets extended at 100%, then that clearly just pushes out the time at which we flip back to being a cash taxpayer.

I will follow up with you offline to talk about more of the details of that.

Okay.

And last question.

From an accounting perspective, why leave the $0.06 at Energy Resources tied to the unwind of the hedges?

Why leave that in adjusted EPS?

Basically because the position has been resolved, so the mark on those hedges that we would otherwise have kept in NQH against an unmarked asset is now sort of out in the open and clean.

One way to think about it is, effectively we have drawn forward in time earnings that we otherwise would have expected to have realized over time.

Okay.

Thanks, guys.

I'll follow up offline.

Okay.

Thank you, Michael.

Brian Chin, Citi.

Hello.

Good morning.

Good morning.

Just a quick question on Seabrook.

The year-over-year effect of $0.04, is that primarily driven by just simply lower hedge prices and energy sales prices per megawatt hour?

Or is there more of a terrawatt hour effect from running the plant at a lower capacity level?

There are two effects.

There is the hedge prices.

There's a lower hedge price impact.

But the bigger impact is just the lower output from the plant.

And should we assume that that lower output level will persist until we get to the next outage in October of this year?

Is that the right way to think about that?

Yes.

Exactly.

We are constrained because of the limits on our ability to cool certain parts of the generator to lower output.

And that will be resolved once we get to the refueling outage in the fall.

Great.

Thank you.

Jay Dobson, Wunderlich Securities.

Thanks.

And let me join the parade.

Congratulations, Lew and Jim.

Moray, would love to also talk about the upstream gas.

Can you talk about the other side of the equation, which is what is the current investment in that upstream gas business and sort of what prevents you from having to write down some of those investments, sort of while you are realizing the benefit in the hedges from the lower gas prices?

And then a tag on to that, just sort of now with a look forward where we are in gas prices, sort of what's your commitment to the upstream gas business?

In terms of the answer to the first, about $600 million has been invested in the business.

On the second part of your question, let me make sure that -- I may not have been clear.

This is basically closing out hedges against wells that we don't intend to commit capital to.

So there is no investment against them.

We entered into the hedges against expected output.

And now we are not going to pursue them, so we simply close out the hedge which is in the money.

Effectively, you've got an option when you do that.

If prices move up or down a little bit, you go ahead with the drilling program and you have your expected margin on the wells.

If prices drop significantly at some point, they drop enough that it becomes -- the in the money value of the hedges exceeds the margin that you expect to make on the wells, in which case you don't drill the wells and you just close out the hedges.

So that's what we've done in a few instances.

So as we were discussing earlier, I think with Dan, the way to think about that is it's a capital reallocation opportunity.

It means that future capital that we thought would go into one set of wells is now potentially available to go into other sets of wells.

So the result, there is not any issue of impairment.

Wells that we have committed to, obviously will be subject to standard accounting impairment tests.

But that's really not an issue right now.

And then in the course of answering the first two parts, I lost track of the third part of your question.

No, no, understand.

And fully understand the accounting here.

I'm trying to get at maybe the best way is the last question which is, you're realizing benefits from closing out hedges in wells you decided not to drill, but it obviously says something about the future prospects of that business, if nothing else on the wells you decided not to drill.

Talk a little bit about sort of your commitment to that business on an ongoing basis.

Okay.

I see where you are going.

I think certain parts -- the weaker lower expected output dry gas plays are a lot less attractive in a low gas environment.

So you see capital moving away from those kinds of plays.

At least what we are seeing is there are still plenty of good opportunities out there.

But I guess I just go back to things that I've spoken to many folks about over the last few weeks.

In the end, natural gas is a market like any other that's subject to both supply and demand effects.

So as you see strong downward pressure on prices going forward, you are going to see both demand side reactions and supply side reactions.

On the supply side, you are clearly going to see a combination of capital moving away from more marginal areas and concentrating on the most productive ones.

You will, over time, see a reduction in the aggregate capital being deployed relative to what it would otherwise been.

To me, it's just the normal workings of supply and demand.

The critical questions are what time frame, over what time frame is that all going to work out?

And I think what we have seen really the last year or so is a general revision in market expectations that while there will be a reaction, both on the supply side and the demand side, it's probably going to take longer than people were thinking a year or so ago.

We would certainly concur with that.

I would also underline that there are both short term effects and longer term effects.

And short term can be quite different, obviously because physical constraints on storage, you can get into situations as we've had this year where there is really no place for the gas to go.

And that puts very strong downward pressure on the front end of the curve.

Absolutely.

No.

That helps a lot.

We still like our small participation in the business.

And I'd just emphasize again that we have developed a tremendous amount of information value out of participating in this.

It has significantly affected our hedging decisions over the last few years.

And clearly, our participation there has been responsible for a lot of the in the money value that we now have in our existing power and gas hedges.

Great.

On a sort of related question, I was hoping, Moray, you could talk a bit about Gexa the Texas retail.

Obviously, a year ago we were seeing the negative impacts of the Texas freeze.

And just sort of how that business performed in the first quarter.

Gexa had a good first quarter.

I don't know that there is much special to report on there.

Obviously, the interest is all focused on the summer months.

I'm sure you have been following what's been happening to forward spots for Texas over the summer.

We have made some changes to the way that we are approaching the management and the execution of the Texas portfolio that should leave us in a better position for a tight summer.

But I will also reemphasize what I've said before, which is a competitive supply business like Gexa is going to be hurt in extreme market conditions.

So we'd look to offset that in other parts of the portfolio.

No.

That's perfect.

And then last question, just sort of give me an idea of the current status of your recontracting efforts around Dwayne Arnold.

Alliant has been somewhat vocal about not going forward with the recontracting when the contract expires in February of '14.

And just sort of what you view as your side of it, and then what your alternatives are.

Sure.

We are pursuing a number of different possibilities there.

There are lots of customers in that part of the country, and we have had a number of discussions and expressions of interest.

I think it's still early in that whole process.

Clearly, the market is different from what it was when we entered into the original contract, and we understand that and we have that reflected in our expectations.

But I'm confident that we will have an appropriate mix of recontracting when the time comes.

Got you.

But you similarly don't expect it to be with Alliant as the off taker.

I'm not going to get into individual names.

No, that's fair.

Moray, thank you so much.

And again, congratulations, Lew.

Thanks, Jay.

Paul Patterson, Glenrock Associates.

Good morning.

Good morning, Paul.

And congratulations, again.

Just wanted to touch base with you guys on the production tax credit versus the CITCs.

Could you just tell us what they were for the quarter?

Bear with me one second, while I find the right sheet.

It was 450 megawatts that we expect to take this year.

Amounts to about $50 million of CITC over the course of the year.

The first quarter was heavily loaded with about 20 of that, because we had one project that went into service in the quarter.

So it gets all of its CITC then.

Okay.

And then the production tax credit?

PGCs will be on the remaining 850 megawatts or so.

Whatever that amounts to.

I haven't got --

Okay.

That's cool.

That's fine.

But recognize that most of those projects come in in the third and fourth quarter.

So they are not going to have a great deal of impact on 2012.

Okay.

Great.

And then the O&M, I noticed, of course, your wind production has increased as well.

Is that pretty much the reason why, or is there anything else we should be thinking about?

No, there was only about $0.01 all together from O&M and other operating -- nothing significant there.

Okay.

And then just finally on Seabrook, just to understand this, just to follow up on Brian's question.

The majority of the $0.04 is because of this cooling issue which should be resolved in the fall.

Is that correct?

So we should basically be thinking of that not being an issue, I guess, in 2000 -- next year, correct?

I think it's about $0.02 or $0.03 of that.

A quarter?

Of the $0.04, about $0.02 or $0.03 is associated with the down power.

Okay.

So we should see that over the next couple of quarters, but then that will be gone going forward after the changes that are made.

Yes, I think that's roughly right.

I don't know.

Depending on the shape of the pricing of the hedges, I don't know.

But roughly that, yes.

Okay.

Great.

Thanks a lot.

All my questions were answered.

Just to follow up on that, I have just been passed a slip of paper telling me the total impact of the down power for the full year is about $25 million, $0.06.

Great.

Thank you.

Paul Ridzon, KeyBanc.

Just to clarify your comments about hitting your 2014 aspiration, regardless of what happens in Congress.

Can we imply that if Washington can get its act together and we do get a PTC extension, there is upside to that forecast?

Yes, absolutely.

We tried to present the expectations on this basis, because there was certainly at one time a fair amount of confusion about what we had built into the numbers and what we didn't.

So what's here is only the projects that we have in backlog.

So to the extent that the policy support is continued in some form or another and we are able to translate that into additional projects that can get done in the '13, '14 time frame, that would clearly be upside.

So just to repeat, we have no US wind in the expectations at this stage beyond 2012.

And since your forecast assumes no tax credit extension, do you have built into that forecast a share repurchase?

Certainly in terms of the numbers that we put out, how we get there is with the expectation of some share repurchase out in 2014.

Again, I want to emphasize that that's by no means a commitment and it does depend, as we've repeatedly said, on whether or not we are able to find additional good, attractive investment opportunities.

But if we are not, we would definitely be in a position to contemplate returning cash to shareholders in 2014.

And what's your preferred method of returning cash?

Would it be dividend or actual return of capital through share repurchase?

I think it would clearly depend on the circumstances at the time.

And I guess two scenarios that I would throw out to think about, depending on how we saw the future going forward from 2014.

To the extent that we saw the free cash flow positive balance as being sustained over a multi year period, then I think other things equal, we would be more inclined to go the dividend route.

To the extent that we saw it as a temporary phenomenon with investment opportunities coming back a year or two later, I think we'd be more inclined to contemplate the repurchase route.

That's just kind of thinking out loud.

And obviously, it would depend on the actual facts and circumstances at the time.

Fortunately, we have time to think about that.

And obviously, we have a lot of work to do to get out to 2014.

Thank you very much, Moray.

And congratulations, Lew and Jim.

Thanks.

Ashar Khan, Visium Asset Management.

Good morning, and congrats.

Moray, can I just going to slide five, which shows the impact of regulated earnings on FPL year-over-year.

And if I'm right, you mentioned the $0.07 came from the increase in rate base.

And if one was to make the assumption, because you mentioned you are going to be adding rate base for the year and 25% is in the first quarter, and I guess.

Can we expect this $0.07 to repeat every quarter, because of the spending going forward in the year?

I haven't looked at the exact profile of capital spending.

So I could not say for sure that we are going to be that level consistently.

But I kind of doubt we will be.

I suspect this is a fairly intensive quarter of growth, just thinking about the overall growth in capital employed.

I wouldn't extrapolate from that.

Okay.

And then just on the clause, was that clause just I guess the nuclear upgrade expenditures and ongoing thing?

It was a solar like -- is that also ongoing or is that again front-end loaded in the quarter?

Really, the entire clause impact is coming from the material is coming from the nuclear upgrades.

Okay.

So that expenditure, if I'm right, continues on the whole year.

Correct.

Okay.

Thank you so much.

Okay.

I think we have time for one more question.

And we will take our final question from Kamal Patel with Wells Fargo.

Good morning.

Most of my questions were asked and answered, so I will go to a default question.

What has been the generic feedback on the Florida rate case filing?

Although last time around you tried to focus on the base rate aspect of it and deemphasize the fuel.

Just wondering what the uptick has been to date.

I don't know that I can say there has been a lot of reaction.

I think the basic elements of the rate case were understood when we made the test year letter filing.

I'm not sure that there's been a great deal of reaction so far.

I think that in addition, the basic drivers of the need for rate relief are well understood.

We are beginning to get into the process of discovery, in which the interveners ask for all kinds of documents and all kinds of responses to questions.

And I don't think there is anything out of the ordinary there.

Thank you.

Okay.

Thank you.

And that concludes today's conference.

We thank you for your participation.