新世紀能源 (NEE) 2012 Q3 法說會逐字稿

Good day, everyone, and welcome to the NextEra Energy 2012 third-quarter earnings conference call.

Today's conference is being recorded.

At this time, for opening remarks, I would like to turn the conference over to Ms. Julie Holmes, Director of Investor Relations.

Please go ahead.

Thank you, Roxanne.

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

Joining us this morning are Jim Robo, President & Chief Executive Officer of NextEra Energy; Moray Dewhurst, Vice Chairman and Chief Financial Officer of NextEra Energy; Armando Pimentel, President & Chief Executive Officer of NextEra Energy Resources; and Eric Silagy, President of Florida Power & Light Company.

Moray will provide an overview of our results, following which our executive team will be available to answer 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 of other factors discussed in today's earnings news release, in the comments made during this conference call, in the risk factors section of the accompanying presentation, or in our latest reports and filings with the Securities and Exchange Commission.

Each of which can be found in the Investor Relations section of our website, NextEraEnergy.com.

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

Please also note that today's presentation includes references to adjusted earnings and adjusted EBITDA, which are non-GAAP financial 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.

Good morning, everyone.

NextEra Energy delivered solid third-quarter results, despite challenging market conditions in Energy Resources major markets.

And we remain well-positioned to achieve our overall objectives both for this year and for the longer-term.

We have previously indicated that our focus this year is on executing against plans that are expected to drive growth for the Company across both its principal businesses through the middle of the decade.

And I'm pleased to be able to report that all our major initiatives continue on track.

At Florida Power & Light, we continue to deliver superior value to our customers, which is the foundation of our strategy and is demonstrated by providing the lowest typical residential bills in the state, combined with superior reliability, award-winning customer service, and a clean emission profile.

We continue to invest capital at a record rate in major products that will include this value proposition over time, including our nuclear upgrades and fossil modernization initiatives, all of which made good progress this quarter.

The rapid growth in our regulatory capital employed, combined with a consistent earned ROE enabled by the current rate settlement agreement, naturally resulted in strong earnings growth at FPL.

We completed the technical hearing for FPL's base rate case and entered into a proposed settlement agreement with three major interveners.

Although this proposed agreement is opposed by the Office of Public Counsel, the Florida Public Service Commission has scheduled evidentiary hearings in November and will fully consider it at that time, with the decision likely by the end of the year.

At Energy Resources, our financial performance was hampered by the continuing impact of the downed power at Seabrook and by disappointingly mild market conditions in Texas, but in other respects remain solid.

I will provide more detail later in the call.

We continue to make good progress on our record backlog of renewables projects, all of which remain on track.

We expect to bring into service more than 1,200 megawatts of new US wind capacity in the fourth quarter.

Included in this amount is the expected acquisition of a 165-megawatt project that is additive to the numbers we have discussed in prior earnings releases.

In addition, we disclosed during the quarter that we signed our first PPA for a 2013 US wind project, a project that is not dependent upon extension of the PDC program which, as you know, is currently scheduled to lapse at the end of this year.

While this additional PPA by itself is not large enough to change the range of our financial expectations, we see it as supportive of the view we have publicly expressed that there will continue to be a wind development business in the US post-2012, even if the PDC program is not extended.

Because of the continued progress we have made against our execution objectives, there have been no significant changes to our expectations either for this year or for the longer-term.

We continue to believe that the major investments we are making at both of our primary businesses will drive our growth in 2013 and beyond, and allow us to obtain our longer-range expectations.

Our expectations include a satisfactory degree of rate relief at FPL, either through approval of the proposed settlement agreement or through a fair and balanced order on the underlying base rate case.

As a reminder, we expect adjusted earnings per share for 2012 to be in the range of $4.35 to $4.65, and for 2014 we continue to see a range of $5.05 to $5.65.

Subject to all the usual caveats we provide, including normal weather and operating conditions.

Let's now walk through our results for the quarter.

We will begin with results at FPL and then discuss Energy Resources and the consolidated numbers.

For the third quarter of 2012, FPL reported net income of $392 million or $0.93 per share, up $0.10 per share year-over-year.

As in the first half of the year, FPL's results this quarter were driven by continued investment in the business to improve overall customer value.

During the quarter, we invested roughly $900 million of the approximately $4.3 billion we expect to invest in FPL in 2012.

And regulatory capital employed -- that is capital on which we are able to earn a return -- grew 18% over the same quarter last year.

This capital investment program is central to our strategy of delivering the best customer-value proposition in the state.

Although the increase in capital requires a degree of base rate relief, the life cycle benefits for customers are very significant.

Even with slight upward pressure on rates in the short-term, we expect our typical residential bills to continue to be the lowest in the state.

And the value delivery to customers improves with each passing year, owing to the use of straight-line depreciation for rate-making progresses.

During the quarter, we amortized approximately $33 million of surplus depreciation, enabling us to maintain a regulatory ROE of 11%, consistent with the 2010 rate settlement agreement.

For the full-year, we continue to expect to recognize roughly $500 million of surplus depreciation amortization.

Utilization of approximately $190 million of the remaining surplus in 2013 is built into our rate case filing.

As we said on a number of occasions, FPL is in the midst of the largest capital deployment phase in it's history.

During the quarter, we continued construction of both our Cape Canaveral and Riviera Beach modernization projects.

Cape Canaveral is now 86% complete, and is currently on schedule and on budget, with than expected in-service date in mid-2013.

The Riviera Beach modernization is also moving ahead, with 22% of construction complete, and it too is running on time and on budget.

Our third modernization project, Port Everglades, is well into its development cycle and we continue to expect to bring that plant into service in mid-2016.

Execution on our nuclear uprate program at FPL is also well along, with final completion anticipated for the spring of next year.

Two of the of the four Florida units have completed their uprate work and are now operational.

During the quarter, St.

Lucie Unit 2 received to its required license amendment from the Nuclear Regulatory Commission to operate at higher power levels, and is expected to return to service by the end of the year.

And the fourth unit, Turkey Point Unit 4, will begin its uprate in the fourth quarter, with completion expected in the spring of 2013.

While the final capital investment will be greater than originally estimated, the incremental output will also be greater.

The uprates are now expected to provide at least an additional 526 megawatts of clean, emissions-free energy for our customers, roughly the equivalent of a medium-size nuclear plant.

Combined with the improvement in the material condition of the plants, this extra capacity will serve our customers well for many years to come.

The gas plant modernizations and nuclear uprates are expected to provide significant benefits to our customers over the lives of the plants, and also to provide the platform for earnings growth in the business.

When discussing these projects in an earnings release or in the hearing room, it is easy to take for granted be enormous effort required to execute them successfully.

So I would like to take a moment to recognize the hard work, dedication and coordination of thousands of employees and contractors, and to thank them for their commitment to excellence in meeting the many project milestones thus far.

We look forward to the final completion of all these projects and to delivering improved value to our customers through lower fuel costs, enhanced reliability and cleaner air.

Before moving on to discuss the Florida economy, I'd like to note two other developments, both indicative of our commitment to customer service.

First, while Florida has been very fortunate so far this hurricane season, we must always be prepared.

In August, our service territory was affected by Tropical Storm Isaac, which resulted in heavy rains, severe flooding and localized wind damage.

Altogether, more than 400,000 customers experienced outages.

But thanks to good preparation and the hard work of employees, contractors and our mutual aid partners, FPL was able to restore power to nearly 60% of effected customers within four hours, and more than 95% within 24 hours.

Second, and just this month, J.D. Power and Associates released results of the first wave of their residential customer satisfaction survey for 2013.

FPL retained its top ranking in Florida, its second-place rank among large-segment utilities in the South region, and improved its national ranking to 17 from 25 among all 126 US utilities.

This is a testament to the hard work and customer focus of FPL's 10,000 employees.

In Florida, most economic indicators we follow continue to improve modestly.

Tourism taxable sales have grown steadily over the past two years and are now well above sales levels seen prior to the recession.

Consumer confidence is trending in a positive direction and the September figure is the highest reported since 2007.

Although Florida has experienced positive year-over-year job growth for more than two years, there were signs earlier this year that job growth was slowing.

Recent data have been a bit more encouraging, with job growth stabilizing in recent months.

Employment gains have been particularly strong in business and professional services, healthcare, retail trade and leisure and hospitality.

Job losses in the construction and government sectors continue to limit the overall pace of job creation in Florida.

The unemployment rate mirrors national trends, with rates remaining stubbornly high by historical standards.

The seasonally adjusted unemployment rate in Florida was down slightly in September to 8.7%, which is 1.7% lower than September 2011.

There was also a significant increase in the state's labor force during this period.

Florida's relative position has also improved.

It now ranks 37th in the US in terms of the unemployment rate, with states such as Georgia, South Carolina and Connecticut having higher unemployment rates.

All in all, while we are not where we would like to be, the Florida outlook is clearly improving.

Turning now to the Florida housing market.

Here, too, we continue to see signs of improvement.

As shown on the accompanying slide, although there was a slight uptick in the delinquency rate in the second quarter, the inventory of existing homes continues to decline, which in turn is helping to spur new construction growth and drive increases in home prices.

In August, the number of housing permits in Florida reached its highest level in more than four years, although it is still well-below the pre-recession peak.

According to the Case-Shiller Index, Florida home prices continue to increase year-over-year, with the most recent data showing the largest annual increase since 2006.

On the whole, housing indicators are trending in a positive direction and we are encouraged by the data.

Most of our customer metrics at FPL also continue to improve gradually.

During the third quarter, we had approximately 30,000 more customers than in the comparable quarter of 2011, representing an increase of 0.7%.

We have now seen fairly consistent growth for the last 10 quarters, and we remain encouraged by this trend.

Underlying usage also increased for the fourth consecutive quarter, up 1.6% over the same quarter last year.

On the other hand, the improvement in inactive and low-usage accounts seems to have stalled.

In September, the number of inactive meters decreased, but the percentage of low-usage customers remained roughly flat compared to the same period last year.

As you will recall, we filed a request for a base rate increase in the first quarter this year.

In mid-August, just prior to commencing the technical hearing in the case, we reached agreement on all key issues with three of the major interveners representing customer groups, including the Florida Industrial Power Users Group, South Florida Hospital and Healthcare Association, and Federal Executive Agencies.

A fourth intervener, Algernon Biofuels, has indicated support for the proposed settlement agreement as well.

However, the Office of Public Counsel, which by statute is supposed to represent all Florida customers, has opposed the settlement.

Major terms of the settlement include a four-year term, a $378 million retail base revenue increase effective January 2013, an allowed regulatory return on equity of 10.7% with 100 basis point band.

Generation base rate adjustments, or GBA, upon commercial operations of our Cape Canaveral, Riviera Beach and Port Everglades modernizations, based on the capital costs for Cape Canaveral as filed in the rate case and the capital cost for Riviera Beach and Port Everglades that were approved during their respective need hearings.

And finally, flexibility over the four-year term to amortize up to $400 million of the remaining surplus depreciation credit, plus a portion of the fossil dismantlement reserve.

We believe the settlement as a whole is fair to both shareholders and customers.

While we continue to believe our initial base rate request is warranted, parties must compromise in order to reach a settlement.

In this case, we have given up a portion of allowed return on equity in exchange for longer-term certainty around the investments in our modernization projects and infrastructure that, in turn, are expected to enable FPL to continue providing low bills and superior performance.

The settlement offers investors the prospect of a reasonable return and a reasonable degree of risk, while at the same time providing customers greater certainty around long-term bill-affordability.

Since base rates comprise roughly half of the typical residential bill, the settlement offers customers confidence that their bills will remain among the lowest in the state for at least the term of the agreement.

In August, the Florida Public Service Commission held a technical hearing on the initial base rate request.

We are very comfortable with the totality of the evidence submitted to the Commission during these two weeks, and continue to believe that we have the prospect of a fair and balanced outcome should the Commission choose to approve the proposed settlement agreement, or instead rule on the merits of the underlying base request.

However, the Commission has laid out a schedule to hear additional evidence specifically related to the proposed settlement agreement, and we are now preparing for a hearing on that evidence, which is scheduled to take place November 19th through November 21st.

A special agenda conference has been scheduled for December 13th to consider the settlement agreement.

As we have noted previously, we continue to expect to have the lowest typical residential bill in the state whether the commission rules in favor of the settlement agreement or issues a determination on the fully litigated case.

Under the proposed settlement, the increase in FPL's typical residential customer bills in 2013 would be roughly $1.50 a month, or $0.05 a day.

We strongly believe this settlement, which would help secure low rates for our customers through the end of 2016 while supporting our continued ability to provide safe, highly reliable, low-cost service, is very much in the public interest.

Let me now turn to Energy Resources, which reported third-quarter 2012 GAAP earnings of $44 million, or $0.10 per share.

Adjusted earnings for the third quarter were $162 million, or $0.38 per share.

Adjusted earnings exclude the effect of the mark on nonqualifying hedges and net, other than temporary impairments on certain investments, or OTTI.

And for 2011, the after-tax loss on natural gas for our generating assets held for sale.

Energy Resources' contribution to adjusted earnings in the third quarter was below last year's by $0.11, but only a few cents below where we had hoped to be, primarily due to lower-than-normal wind resource.

On this chart, we have shared the drivers of the changes from last year's third quarter in the standard format we commonly use.

However, because several of the elements on this chart are interrelated and there are more than the usual number of puts and takes, let me try and put the overall results in perspective.

Last year's third quarter benefited from two factors that are not present this quarter.

First, we had operating contributions from the gas-fired assets that were sold late last year, and obviously these are not present this year.

Net of the associated savings in interest, this amounts to about $0.05.

Overall, the sale of EPS accretive, given the pattern of earnings, there is a negative comparison in the third quarter.

Second, last year's third quarter included gains on the closeout of some hedges in the gas infrastructure area, which amounted to about $0.08.

Since they are an ongoing part of the business, these hedge closeouts should not be thought of as one-time gains, though they will tend to be lumpy.

If we factor out these two effects, this year's third quarter would have been up by about $0.02.

This difference in turn is a function of some ups and downs.

You may recall that last year's third quarter was challenged by extreme conditions in Texas.

This year, we were much better protected against extreme conditions, but the summer turned out to be very mild, and flat from a pricing standpoint.

Last year, our customer supply and trading activity struggled in a difficult environment.

This year, they bounced back, albeit two levels still below those of 2009 and 2010.

The net of all of these was roughly a positive $0.09.

We also benefited from growth in the business, with new assets contributing about $0.05 net of their associated interest.

On the other hand, we gave up about $0.04 because of the downed power at Seabrook and the refueling outage that began in September.

And the existing wind portfolio was down $0.02 due to PDC rolloffs.

As I mentioned earlier, the wind resource was below normal, but it was comparable to last year's third quarter.

All other effects, which includes slight declines in other operating assets, slight increases in O&M and G&A and share dilution, amount to a negative $0.06.

Many of these effects we could reasonably anticipate or are typical of the variability in the business.

Relative to our expectations at this time last year, the major differences were primarily below average wind resource, as well as the Seabrook downed power and disappointing mild conditions in Texas.

Nevertheless, we are satisfied with the financial performance and continue to feel comfortable with the outlook for the full year.

At Energy Resources, we continue to focus on executing on our largest-ever backlog of renewables projects.

In the third quarter, we brought an additional 80 megawatts of US wind online, and year-to-date we have added approximately 250 megawatts of wind to our portfolio.

We expect to bring more than 1,200 megawatts of US wind projects into service in the fourth quarter this year, and are therefore on track to add approximately 1,500 megawatts of US wind in 2012, including the 165-megawatt project mentioned earlier in this call.

This will be the biggest wind program ever completed in this country in a single year and will push our total wind portfolio over the 10,000-megawatt mark.

Looking at growth beyond 2012, roughly 600 megawatts of Canadian wind projects in our backlog are on schedule to meet their expected timeline for completion through 2015, with the majority expected to come online in 2013 and 2014.

Also as we mentioned earlier in the call, we added a new US wind project to our backlog in 2013 that is not dependent on any extension of production tax credits.

We are moving ahead with our plans to add roughly 900 megawatts of solar generation through 2016.

In July, our McCoy solar project received approval from the California Public Utility Commission for its 250-megawatt, 20-year PPA with Southern California Edison.

Overall, we are pleased with at the progress we have made in meeting our execution objectives.

Looking at the Company on a consolidated basis, for the third quarter 2012, NextEraEnergy's GAAP net income was $415 million, or $0.98 per share.

NextEra Energy's 2012 third-quarter adjusted earnings and adjusted EPS were $532 million and $1.26, respectively.

Year-to-date through the third quarter, the Company's adjusted earnings were approximately $1.5 billion, or $3.55 per share, compared to approximately $1.4 billion, or $3.44 per share, for the same period last year.

On an adjusted basis, the Corporate and Other segment was down $0.04 from the same quarter last year, primarily due to the $0.03 impairment charge on an early-stage technology investment.

Earlier this month, the Public Utility Commission of Texas voted on aspects of our Lone Star Transmission project.

While the results were disappointing, the impact of the overall project is not material to our Corporate outlook.

We remain on track with our construction program, and expect to bring the line into full service in the spring of 2013.

In the third quarter, we issued a second round of equity units, bringing the total to $1.25 billion for the year.

This completes our near-term equity needs based on the projects currently in our backlog, and ensures we have the balance sheet strength we need for the immediate future.

We continue to expect to be free cash-flow positive in 2014.

As we stated earlier this year, we are targeting a 55% dividend payout ratio in 2014 as a consequence of the mix of our portfolio continuing to shift towards more regulated and long-term contracted assets.

This translates into a compound annual growth rate for dividends of approximately 10% using a 2011 base.

In light of the results achieved year-to-date and the progress made against our execution objectives, we continue to be comfortable with the 2012 and 2014 adjusted EPS expectations that we shared with you last fall.

As we indicated earlier in the call, we expect adjusted EPS in 2012 to be in the range of $4.35 to $4.65, and for 2014 we continue to see a range of $5.05 to $5.65.

As always, our expectations are subject to the usual caveats we provide, including normal weather and operating conditions.

We recognize that our third-quarter results are below where many analysts had projected we would be this quarter.

As you may recall, we have often indicated that we do not provide quarterly financial expectations, since we believe the timing of earnings may shift throughout the year, and our focus should be on achieving our annual objectives.

At this point in the year, we are comfortable with our current performance.

To provide some perspective, it may be worth noting that year-to-date through the third quarter, NextEra Energy has posted adjusted earnings of $3.55 per share.

Achieving the midpoint of our full-year earnings expectations implies fourth quarter adjusted earnings growth of just 2.2% above the prior year.

We believe this is reasonably achievable, and certainly hope to do better.

At this point in the year, we would normally seek to provide you our thoughts on earnings expectations for the year ahead.

However, given the schedule of events for FPL's base rate proceeding, we are not yet in a position to do so.

We had also indicated that we hoped to be in a position to hold an investor conference late in the year.

But we think it makes sense to defer this until we have greater clarity around FPL's outlook for next year.

While visibility around FPL's potential financial performance in 2013 will remain limited until a rate case decision is issued, we have provided FPL's expected regulatory capital employed for 2013 in the appendix to this presentation.

For the full year, we expect average regulatory capital employed to be in the range of $27 billion to $28 billion.

Separately, we can offer a few thoughts about Energy Resources.

The most important observation is that after two very challenging years driven by adverse market conditions, we expect Energy Resources to return to growth in 2013.

We have previously discussed the headwinds associated with declining power prices and hedge rolloffs.

While there is some continuing effect in 2013, the biggest impact is in 2012.

With the large 2012 US wind program beginning to have an impact in 2013, we believe the business is well-positioned to pick up again.

In 2013, we expect adjusted earnings at Energy Resources to grow approximately 10% to 15% above 2012, to a range of $740 million to $780 million, subject to all the usual caveats we provide, including normal weather and operating conditions.

As we do each year in the third quarter, we have updated our equivalent gross margin hedge slides and included an additional year forward.

The portfolio financial information for 2013 and 2014 can be found in the appendix to the presentation.

For 2013, all projects which are expected to be in service by the end of 2012 have been moved to their respective categories, which in this case, is predominantly contracted wind.

For 2014, projects expected to come into service in both 2013 and 2014 are included in the new investment slide.

In aggregate, our existing asset portfolio is roughly 95% hedged against primary commodity price movements in 2013, and 93% hedged in 2014.

On a comparable basis, the equivalent figures for 2015 and 2016 are 88% and 84%, respectively.

We are also providing some additional portfolio information on our Investor Relations website in the quarterly business update section.

For Energy Resources wind assets, we have identified each project's tax credit election, either PDC or ITC.

And for all Energy Resources assets, we have included the financing structure, either project debt or differential membership interests, otherwise known as tax equity.

And we hope you find the additional information helpful.

To close, let me bring you back to our summary list of critical success factors for 2012.

This list hasn't changed, and we continue to be very focused on excellence in execution.

We are pleased with our progress so far in 2012, but recognize that we have more that we need to accomplish before the end of the year.

And with that, we will now be happy to take your questions.

Thank you.

(Operator Instructions)

Stephen Byrd with Morgan Stanley.

Good morning.

As you look at the evolution of the Texas market, there now are essentially two different regulatory models that the [the Brada Group] recently proposed.

As you think about those different constructs, could you talk at high-level in terms of the impacts to your business over time?

Sure, let me ask Armando to pick that one up.

Good morning, Stephen.

We are going to know a lot more obviously after tomorrow's meeting in Texas, which is an important meeting.

I think it's a bit early for us to talk about what the ultimate and potential impacts are of either one.

As the general rule, any mechanism that provides both current and future generators with some mechanism to be able to keep their plants open, to be economic, and to potentially build future plants, is a positive not only for the folks in Texas and the Texas market, but also for the generators.

So I don't want to speculate on what either plan might do for us.

We have filed comments, though, with the PUCT.

We certainly do prefer and support the capacity market out in ERCOT.

We think that is the best way to be able to not only support current generators but future generators.

And I don't know whether you've seen our comments or not, but we also believe that the reserve requirement should be a requirement.

The reserve margin, as opposed to something that they just shoot for.

Understood, thank you.

And then, just as a follow-up, as you look at renewables growth opportunities, we've seen some activity there.

Do you see the PTC question of expiration or extension driving that very much?

Or could you just talk more broadly about as you see opportunities on the M&A side to acquire assets, what is your general take on the ability to grow via M&A?

I think there is -- I've made comments before where I've been pretty optimistic about projects that we might be able to pick up on the M&A front and those have -- the reality has not proved to be true.

But even if that is the case, we have picked up at least one asset or so every year for the last couple of years, and we have done that again in the third quarter.

An asset that we hope to close in the fourth quarter.

I will tell you that there is a lot of activity out there.

There's a lot of projects that -- single projects that we are looking at, and multiple projects that we are looking at.

Both on the existing projects, those in construction and those in development.

A lot of that I think will depend on what happens with the PTC extension at the end of the year and what equity holders believe they've got to sell.

I would be disappointed if at some point during the next 12 to 15 months we don't pick up at least one or two other significant projects like we just picked up in the third quarter of this year.

On the PTC front and what that means for new development for us, obviously there's going to be a big difference in 2013 compared to 2012.

If there is no PTC in 2013 -- but even if there is a PTC in 2013 -- there's obviously a significant amount of activity in 2012 that is taking place.

So even with a PTC, I think the overall activity will be down.

We are still fairly optimistic that there will be an extension for one -- at least for one year, and maybe for a couple of years.

We're just going to have to wait and see what happens from now through the end of the year.

But even without a PTC, we think there will be some opportunities in certain states to develop wind in 2013.

And as we showed during the quarter, where we signed a 100-megawatt PPA, there may be a few more of those out there.

Just to add one comment on that.

I do think that there's a little bit of an interaction between the state of the asset acquisition market and the prospects, the PTC extension.

So, everybody obviously is waiting to see what happens with the PTC extension, and that clearly is going to affect different folks thinking about assets they may hold.

So I think if we get a PTC, then you may see -- well, you will obviously see us with more greenfield development, you may see others, too.

If you don't see a PTC extension, then I think there will be relatively more activity on the asset M&A front.

Thank you very much.

Daniel Eggers with Credit Suisse.

Good morning, guys.

On the utility side, given how wide the parties are between agreeing to the settlement and not agreeing to the settlement, should we assume that this is going to have to go through the full hearing process to make a decision on the settlement?

Or do you guys have any sense that maybe a deal can get done without having to go through the full process?

Well, as we've said in the prepared remarks, we are now actively getting ourselves ready for live testimony cross examination November 19th through 21st.

So we are certainly expecting that we will be there and we will have a [Fara] hearing on the additional aspects that are in the settlement agreement but were not covered in the technical hearing in August for the underlying case.

As we also indicated, there is an agenda conference currently scheduled for December 13th.

So we would certainly expect to have a resolution on that before the end of the year.

Okay.

And then on usage transit, the utility, it looks like there was some nicely positive underlying demand trends that -- kind of popping up better than we seen recently.

Is there any more color you can share on where that extra usage is coming from as you guys look at what the customers are doing?

There is not a lot of additional detail I can give you.

I guess we are -- we've had some good news on the usage front for the last several quarters.

We are little bit reluctant to declare that a trend, just in case it might go away on us.

But it's certainly encouraging.

But not a lot of detail on where it's coming from.

It's more than you would expect from ongoing, underlying usage growth.

So I think there is sort of some recovery factor in there.

But I would say we are, back to the old phrase, cautiously optimistic that we will see some underlying usage growth continue.

But probably not at the levels that we have seen for the last couple of quarters.

Okay, thank you, guys.

Steve Fleishman with Bank of America.

Hi everyone, how are you?

Moray, just a couple of questions on the forward hedging slides.

It looks like the gas infrastructure line moved up meaningfully in '13-'14.

Could you give us a little more color what's going on in that business?

We're fundamentally growth in the business as we continue with seeing additional opportunities, and reflecting that in our expectations.

What we're learning from our existing production activities is encouraging.

So, just greater volumes overall is what is driving that.

Okay.

And is there any reason why you used a September 7th date for these, since that was pretty much probably the bottom in the power market?

Shear bad luck.

That happened to be the date of the roll up that we based this set of views on.

But you are right that it was an interesting inflection point.

We have seen a pretty strong increase in pricing since then.

But that was just coincidence.

Okay.

And one last question --

Steve, this is Jim.

Just one comment.

Remember we are pretty well hedged in '13 and '14.

So we have those -- that volatility is really more relevant for our out-year earnings than it is for the near-term.

Okay.

And then one last question just, Moray, to confirm your comments for this year that basically to get to the midpoint of your guidance this year you just need 2.2% up the fourth quarter?

That is correct.

Okay.

And that doesn't seem to be a stretch to achieve?

No.

I mean, if you think about the drivers for Energy Resources, we are going to see some growth from new assets, and the gas-producing activity should grow a little bit.

The existing portfolio should be very roughly flat.

I'm sure there'll be some puts and takes as usual.

We've got a refueling outage coming up at Duane Arnold, but that's offset by the fact that we should have a shorter outage at Point Beach, because last year we had the big outage for the upgrade.

So fundamentally, we should see some continued good growth from the new assets.

And so we feel pretty good about where that is, subject to all the usual caveats.

There is a lot of time to go and there is always ups and downs in that business.

Also the fourth quarter there is typically less uncertainty around the variability of just market conditions.

Obviously the third quarter is your big quarter.

It was, as I said in the prepared remarks, a little disappointing in Texas.

But you usually have greater visibility on the fourth quarter.

And then on the other side of the house, it's the same story, maintaining a consistent ROE but continuing to invest the capital in the major projects.

We should see a continued trend of earnings growth there.

So we feel pretty good about that and again, as I indicated, we certainly hope we will do better than the midpoint of the range.

But I just provided the 2.2% to give some perspective on it.

It doesn't seem that unreasonable.

Okay, thank you.

Paul Patterson with Glenrock Associates.

Good morning.

Can you hear me?

Good morning, yes.

I just wanted to follow up on Steve's question on the gas business.

I wasn't clear, I'm sorry if I'm just a little slow there.

It does seem like a big jump in that infrastructure business and you said it was because of volumes, is that right?

Could you just help me out a little bit more, drill a little bit deeper for me?

Yes, let me ask you, which numbers are you referring to specifically so I'm --

Well, if you look at the EBITDA numbers for 2013 -- in the portfolio financial information, those hedged numbers.

If you look at 2013 and 2014, the numbers look like they have substantially increased for EBITDA in the range for the gas infrastructure business.

Okay, that's fine.

You're looking at the comparison 2013 to 2014.

Right, and 2013.

You're right.

Just from last quarter to this quarter.

Right, yes.

Well, recognize that that's a fairly -- if you think of the difference between gross margin in EBITDA, that is a very leveraged business.

So there is a certain level of sort of, I won't call it fixed cost, but organizational infrastructure cost that you need to drive that business.

But that doesn't scale linearly with the scale of production.

So as your production ramps up, you should get some profitability leverage.

And I think that is what you're seeing there.

So you've got a volume growth being leveraged by a cost structure because the operating expenses are not growing as rapidly on the line gross margin.

And that volume growth is being -- I mean, the outlook for that volume growth is increased because of anything in particular?

Or just, I mean, how do we think about that?

And I guess is it -- can it go back down or --

I think you should think about this as simply growth in the business, more activities, more wells producing.

Recognize that these are shale gas wells, so they have the typical decline curve that shale gas production does.

So a lot of your activity is really driven by your drilling activity, ultimately.

It's a business that you can modulate, and as we have seen good opportunities, we just scaled up the level of activity.

Okay, great.

And then, just on the production tax credit, sort of the mechanics of that maybe getting extended.

There is some talk about the fiscal cliff and how they might just sort of keep -- agree to sort of kick it down the road, to be addressed with more of a major tax reform kind of a situation, to be developed a few months down the road, if you follow me.

And I was just wondering if that would probably keep the production tax credit where it is?

Or whether or not it would -- and if that were to happen, if they were to say simply -- we will keep things sort of status quo for the next six months as we try to iron something out -- would that mean the production tax credit would be in effect?

And if it were, how would that impact you guys, or how would you -- would be enough time to help you get more projects in?

Or, do you follow what I'm sort of saying?

Yes, one comment first.

Let me ask Jim to comment also.

I mean, obviously any response to that question has to be speculation, because how they might resolve that -- what I'll call a kicking the can down the road scenario -- remains to be seen.

But with that caveat, Jim do you want to --

Yes, I think two things, Paul.

One is that when you look at the history of how the PTC has a been extended as it has expired, historically what's happened is that it's been brought up as part of a package.

There's something like 61 or 62 -- I'm probably getting that number wrong -- but it's a magnitude of expiring tax credits at the end of this year.

The PTC is obviously only one of those.

And historically, what's happened is that lawmakers have simply scratched out 2012 and written in 2013 in the bill, and kick the can down the road.

I think there's certainly some odds that that will happen.

I think the important thing to remember about 2013, though, and Armando already said it is, regardless of whether there is a PTC extension or not, 2013 is not going to be a very big wind installation year in the country.

Folks are not going long equipment in order to bet on whether the PTC will get extended.

Suppliers are not building inventory.

And so there is a -- even if the PTC is extended in December, it will be very hard for folks to get projects in place in 2013.

So it's going to be not a large year whether the PTC is extended or not.

Okay, great, thanks a lot.

Michael Lapides with Goldman Sachs.

Real quick, just on the utility side.

I mean, obviously whatever rate increase comes out of the rate case would be a tailwind for the business.

But how do you think about cost pressures next year and beyond at FP&L?

Well, I guess the short-term outlook is not really inconsistent with what we've seen over the last few years.

Continued modest pressure on O&M, but nothing out of the ordinary.

I guess in the spirit of full disclosure, I should point out that under the settlement agreement, with a fixed term exposure our income exposure to unexpected increases in inflation or interest rates obviously is higher.

So that is an aspect of the overall agreement.

Right now we don't see anything on the horizon that is causing us great concern, just continued slow pressure on nominal O&M, offset by all our normal continued incremental productivity from year to year.

I guess when you think about O&M at the utility, do you think about -- is your goal -- is your normal trend kind of inflationary, plus whatever the cost of any new assets that you bring online in a given year?

Has it been higher than inflationary?

And if so, what are the drivers?

What you think the biggest puts and takes could be?

Well, for the last few years, the net O&M growth has been slightly positive in real terms.

But that's really been driven by a couple of major things, the benefits and insurance costs.

If you factor those out, everything else has been going down maybe a percentage point a year in real terms.

So over the last decade we've gone from a period where we were still able to drive costs out in nominal terms, to a period where we were driving them out in real terms, but were flat to rising nominal.

The last few years, it's been slightly up in real terms, but as I say, primarily due to the benefits in insurance.

Insurance is obviously kind of a cyclical phenomena.

I don't see that continuing at the same pace for future years.

Okay, and last item.

Just pension and OPEB, as you're kind of getting closer to the year-end of 2012, how do you think about that in terms of cost pressures for beyond 2012?

There is an impact in 2013 from the pension.

You've got the effect of losses sustained during the down period a few years back that roll through.

It is not huge.

The OPEBs are a minor factor.

Okay, thanks, Moray.

Greg Gordon with ISI Group.

Thanks, good morning, Moray.

So, the vast majority of my questions have been answered.

I just wanted to ask you to dig down a little bit more into Texas in the quarter.

There were a lot of puts and takes at Energy Resources.

One of them was $0.09 favorable from less extreme weather, better supply and trading in Texas.

But you also indicated that that wasn't as much of a rebound as you had otherwise hoped for, given that the weather kind of flip-flopped the other way and was maybe more mild than people had hoped.

Can you delve a little bit more into the components of that $0.09?

And then sort of going into next year and beyond, are you more or less at a stable platform?

Or are there other adjustments we should expect to get back to sort of what you think a stable margin is in Texas?

Yes, let me make a couple of general comments and then ask Armando also to add his thoughts.

You've got a couple of different things going on.

Recall that last year's third quarter really was some pretty extreme conditions in Texas.

And as we indicated back then, the good performance that we had on our gas-fired assets was more than accounted for by weakness in the retail business, and the fact that the wind happen not to blow during the worst of the spiking prices.

So, all of that in a sense reversed itself and we got back to a normal situation from that perspective.

But relative to a typical summer year, we just didn't see the number of days of strong prices.

I'm not talking about the 1,000-plus megawatt-hour periods, but just regular, strong days.

So for example, there were in the entire quarter -- I believe there were only three days where the average price in ERCOT was above $100 a megawatt-hour, even in what we call the needle peak of 2.00 to 6.00 hours.

So it was just a very flat pricing environment.

And so that is below what we would normally expect of a typical summer.

In a typical summer, you're going to get more short-term periods of volatility than that.

So it sort of -- it came back from the extreme, it did come back to what you would typically think of as a normal level.

With that as those general comments, let me see if Armando wants to add anything.

Yes, Greg.

The only thing I will add is that on a -- you know, we set ourselves up for the ERCOT summer this year to be long and to take advantage of what we believed would be decent market prices.

That didn't happen.

We are now trying to figure out what to do for 2013 and 2014.

But it is very likely that we are going to be in a very similar position in Texas.

And that is, hoping that our assets take advantage of higher prices during the summer.

If that does not happen, then you are obviously going to give up some of the upside that you would have otherwise been able to get.

Because you're going to leave some assets open, hoping for those prices.

And when they don't come in, you're going to get lower margins.

I think most of -- if I remember correctly, there were a lot of days in ERCOT this year where real time prices cleared with a three-handle.

And that is not a 300 handle, that was a 30 handle, which is certainly not what we were expecting.

And one of the consequences is that there are fewer opportunities available for what we call our asset optimization activities.

I feel very good about the way we structured the portfolio to protect against the extreme conditions and the balance that we struck there.

So that was fine.

But if you don't have just the regular short-term periods of volatility, there's less you can do with the assets.

And roughly to scale, maybe all of that is -- if it had been a more normal summer, we would have had like $0.04 or $0.05, or else probably more of income from the Texas segment.

That helps a lot.

So it sounds like you would be positioned next summer very similar to the way you are positioned this summer.

So if you had a mild summer again next year, we wouldn't see a big pullback in profitability.

On the flip side, if we saw a tight summer, you have some upside?

I think that is fair, very fair.

Thank you.

Michael Worms with BMO Capital Markets.

Moray, with regard to all of the equity units done this year, will there be any need for equity in 2013?

Not based on the backlog-only scenario, you know, the capital plans that we have today.

Obviously to the extent that we are successful in adding significantly to the capital profile going forward, we have to make sure that we have the balance sheet strength to support that.

But based on what we see today, which is of course the capital program that supports the earnings expectations out through 2014, we are in good shape on the equity front, the balance sheet.

Great, and one other question, if I can follow up.

Can you give us an update of what is going on in Spain with your project?

Sure, let me ask Armando.

He is much closer to that than I am.

Yes, good morning.

In Spain over the last six weeks or so, there has been a proposed regulation/law that would really affect all of the energy providers in Spain, not just the project that we are interested in, obviously.

Which is a CSP solar project that we hope to get half of it in operation in the first quarter of '13 and the second half, no later than the third quarter of '13.

The two pieces of the legislation that affect us are a 6% essentially revenue tax, and that really affects all energy providers in Spain.

The second piece is a reduction in the amount of natural gas that we would be able to burn at the plant.

Which is really one of the key items that helped us with the investment decision and helped others with their investment decisions over in Spain when they were dealing with solar thermal plants.

But a reduction in the amount of gas that could be used, a pretty significant reduction.

If you look at both of those, and if you assume for a second that there are no changes to that legislation before it becomes final later this year or earlier this year, that is a reduction in our expectations of -- I mean, it's a significant reduction for the project, of roughly $0.03 to $0.04 on EPS basis.

Which is not that significant obviously to the overall Corporation.

But we continue to be very aggressive in what we do in Spain on the both political and regulatory front.

And we are certainly hoping that there is a better outcome.

But if there is not a better outcome, that's essentially the effect that we would see going forward.

Thank you.

Jay Dobson with Wunderlich Securities.

Hey, thanks, good morning.

Armando, continuing on Spain, I remember the project financing there left the lenders with some exposure.

I assume the 6% revenue tax on the limit on natural gas would not trigger that.

So essentially all of those changes would be for next year's account?

That is correct.

The best way to think about it, these projects -- we were very well protected and certainly loved the financing that we did.

But we are very close now to COD on these projects.

So the net result if all of this -- the proposed law gets the final -- might be that we have to put a little more equity into the project.

And by a little bit, I do mean a little bit.

Maybe even in the neighborhood of $40 million to $50 million or so, certainly not significant.

But the reality is that we will likely, with this proposed law, finish our projects, own the projects, and very likely get to the perm part of that mini perm loan sometime later next year, or early 2014.

Got you.

And so simply just realizing lower profitability than you then you might have expected otherwise?

Correct.

Perfect.

Moray, was hoping to go back to Texas just briefly and follow up on the earlier question.

When you look at the results from 2011 third quarter, I think you spent the better part of a couple of months evaluating your policy there.

And then sometime in the fourth quarter suggested you are changing them to go into the third quarter of '12 much longer.

As a result of what you experienced in the third quarter, would you anticipate any changes in the policy?

Or pursuant to the question you answered earlier, is there simply no change and we should anticipate you go into third quarter of '13 with the same policy?

Again, being longer than you might otherwise have been in '11?

Let me try and explain that.

There were a couple of things that really changed coming out -- you know, lessons learned from last year.

One was really, I'll say strictly internal coordination.

And we've now got I think a much tighter approach to the tactical management of the aggregate position in Texas on a weekly and daily basis.

So that has been a good thing that has worked very well for us this year.

The second thing that we did was that we shifted the mix a little bit more.

We left a little more open on the gas plants and protected ourselves against some extreme conditions.

So on that side, what you might call the policy side, obviously we will review that as we prepare for the next summer season and tweak it, I'm sure, somewhat.

But that basic structure I think served well.

And so that is not the reason that we were a little disappointed in the outcome in Texas.

That structurally did what it was intended to do.

The reason that we were a little disappointed in the outcome is simply that there wasn't enough volatility and pricing movement to get what we would normally have expected, primarily out of the gas assets.

So from a policy perspective, we will revise and tweak, but won't fundamentally change it.

Okay, great, no, that is really helpful.

And then, can you remind us the revised cost of the nuclear uprates at FP&L?

About 3.1 is where we are right now.

Got you.

And that is reflective of the revised megawatts you referenced in your prepared comments?

That is correct, yes.

Great, thank you very much.

Thank you for your participation.

That does conclude today's conference.