NextEra Energy, Inc. (NEE) Earnings Call Transcript & Summary

[Audio Gap] from the Morgan Stanley Global sustainability research team. Before we start our next session, I'll quickly read out our standard disclosures. Please note that this webcast is for our institutional and corporate client base and not -- and Morgan Stanley employees. This webcast is not for members of the press. If you are a member of the press, please disconnect and reach out separately. Please also note that this webcast is not for retail and individual wealth management clients. For other important disclosures, please see the Morgan Stanley research disclosure website. If you have any questions, please reach out to your Morgan Stanley sales representative. It is my pleasure to introduce our next session, which will be a fireside chat with Rebecca Kujawa, Chief Financial Officer and a Director of NextEra Energy Partners. Rebecca also serves as Executive Vice President, Finance and Chief Financial Officer for NextEra Energy. Prior to joining the firm in 2007, Rebecca served as Senior Vice President of Equity Research at Stanford Group Company, and she began her career as an equity derivatives analyst at Goldman Sachs. Continuing with our decarbonization discussion, NextEra Energy is the largest generator of wind and solar energy in the world. The company consists of regulated electric utilities and an unregulated generation segment, weighted to cleaner energy sources, mainly natural gas, nuclear, solar and wind power. NextEra Energy's largest regulated utility, Florida Power & Light, plans to build at least 10 gigawatts of solar capacity by 2030. The company also plans to invest USD 4 billion to USD 5 billion annually in renewable development through its NextEra Energy Resources business. [Operator Instructions] I'd now like to pass over to Stephen Byrd, Managing Director at Morgan Stanley and Head of the U.S. Power and Utilities, Clean Energy and Midstream Research, who will be moderating this session.

Great. Thanks, Lucy. And Rebecca, thank you so much for being with us here today.

Becca, maybe we could start at a high level just about NextEra. Lucy provided a couple of good snapshots at NextEra. But I think for some of our investors, they might not fully appreciate the scale of renewables that NextEra has been involved in. Would you mind just talking about your leadership position in renewables, the growth of that business over time and the kind of scale that you're at today?

Yes, of course. And Stephen, thank you so much, and thank you for hosting this fireside chat. And Lucy, thanks for such a terrific introduction. I really do feel like I need to provide less background now. But I will flesh it out with a couple of details just to bring it to life a little bit more. As you highlighted, and Lucy, you did as well, we do have 2 major parts of our business, both the regulated businesses, which are really headlined with the Florida Power & Light business, now supplemented also with Gulf Power, which we acquired at the beginning of last year, and then on the Energy Resources side, really focusing on being the world's leader of -- owner-operator and developer of renewable technologies, and obviously, leaders in wind, solar and now, of course, battery storage as well. On the Florida Power & Light and Gulf side, we really are anchored or focused on a key strategy that has been consistent over a long period of time going back in our history, which is focusing on our customer first, saying how do we invest in our business in order to make that customers' value proposition better over time. And that's through lower cost, higher reliability, terrific customer service and, ultimately, clean energy solutions as well. And we -- the reason why we focus on that strategy is because we focus on the key things related to our customer and ensure that they're getting real value from what we're doing as a business and providing to them. And then ultimately, they will be satisfied with what we provide, and it will have constructive regulatory engagements where we don't necessarily get everything that we ask for, but we get constructive and appropriate treatment in those regulatory proceedings. That enable us to have appropriate returns on our capital so that we can invest and continue doing that over and over again. We call it a virtuous circle. It's nothing -- no rocket science. But at the same time, I think there is something magic in the execution and focus on that over time. And I think in this environment, that has never been more clear to us as to why that's important. Our customers are feeling pain today. They will likely feel pain for quite some time in the future related to COVID-19 and all of the things that come along with that. And so for us to know that every day, they can go in and turn on their lights, they can run their air conditioner, they can turn and try to create opportunities in their businesses to create economic activity in our state, we feel really proud about. When we think about what's the most foundational thing in our lives, it's really an intellectual debate that really doesn't have a point at the end of the day, but you can start to say, "Well, how do you even provide water if you don't have pumps, if you don't have electricity to run the pumps to get water to our customers?" That mission has really focused us as we work through these issues around COVID-19, knowing how important it is that we continue providing great customer service and customer value to our customers in this tough time. As we -- as I turn quickly to the renewables business, the NextEra Energy Resources, we've been capitalizing on what we've been considering the best renewables development environment in our company's history and really, the history of the U.S., and we only see it getting better over time. And it's getting better predominantly because of economics. That as we look at the economics today of renewables with the benefit of incentives in the U.S. that even out into the mid-2020s when those incentives are expected to phase down or step down in the case of the investment tax credit, we see renewables as being more economic than other alternatives in the vast majority of investment decisions in the U.S. And that's comparing to alternatives of new build as well as continuing to operate existing inefficient coal and nuclear facilities, not everyone, but a lot of them. And that if you deploy renewables, you can create value for the end customers through lower cost, cleaner energy solutions. And we're really well positioned to capitalize on that. There are certain competitive advantages that we have that are clear, and they're probably hard to erode over time. One of those is one that's been top of mind in the midst of COVID-19, which is being big. Having scale in this business really does matter. And being able to buy a little bit cheaper, to have deeper relationships with suppliers to be able to finance it just a little bit better or more efficiently and to be able to own and operate them over the long-term, each one of those incremental advantages, which may be small by themselves, adds up to a real competitive advantage. The reason why I think it matters in this environment is that scale differential really could make the difference of being able to execute today versus not or needing to take that extra time that we now have under certain treasury guidance on the renewable incentive side. When we've called our suppliers to talk through issues that they might be having related to COVID-19, they've picked up our phone calls. And that has not been the case with every phone call that they've received in part because they're getting a lot of phone calls, in part they're like we are in that many of us are in our home environments as opposed to in the office. And they're dealing with the uncertainties and the complexities that we're all dealing with. And they're doing it while trying to run a manufacturing facility of some form or fashion in my example. And we've been able to not only engage with them but productively resolve the issues as they have come up. And not every one of our competitors is going to be able to do that. But our scale advantages are not just limited to scale. Some of the advantages come about by having a big business, having been in that business for a really long time, having the relationships that we have and also to have the data that we now have on the renewables fleet and also be able to take advantage of that data through development of algorithms and insights into how do we keep operating better, how do we create more insights and even into the development process to design and ultimately build and be able to offer these solutions to our customers in a more compelling way. I couldn't be more excited about both aspects of our business. I think the strategies and the drivers of our growth are very clear. We've got a terrific track record of execution that when we've seen opportunities, and they've really been there, we've been able to execute on them. And I see the future with respect to our ability to continue to do so as being very bright, and I couldn't be more excited about what's coming in the years ahead.

Well, that's a fantastic start, Rebecca. I think for some of our investors on the phone, the reduction in renewables costs may be surprising to some of them. And I wondered if you might be able to walk through where you see it today and then over time the cost of renewables relative to other types of generation and then maybe expand on that to talk about how you see the evolution of the mix of types of power plants that we'll have in the United States over time. These numbers are, in my mind, sort of mind blowing, and I think that we're sharing here to the broader audience.

Absolutely. If you look at the U.S. generation today, the generation mix, we're about 10% of generation coming from renewables today. And other than the last couple of years, prior to that, all the deployment of renewables really had been -- has been contracted and ultimately built under the support of renewable portfolio standards. So different largely state mandates to build renewables. And then over the last couple of years, we've transitioned from being a policy-driven market to being an economics-driven market. Prevailing market price today in various competitive markets where you can see -- visibly see the cost of power is anywhere from the -- probably just under $20 a megawatt-hour on average in a couple of the very competitive markets where you've got plentiful renewable generation to being in the $30 to $40 a megawatt-hour inclusive of capacity costs in the more generationally challenged or transmission-challenged markets like the Northeast, for example. To give context to where we're signing renewables power purchase agreements today, in the Midwest, it is not uncommon for us to sign a power purchase agreement that I'm happy with the returns for, in the low teens dollar per megawatt-hour escalating over time. And that's very favorable to whatever the prevailing market price is in those markets. So clearly, an economic decision today to build new renewables and turn off other forms of generation, just at the margin or much less, picking your highest cost resource, shutting that one down and replacing it with a low-cost renewable resource. Let me give you an example of that. As I highlighted at the beginning, we are a large owner-operator of nuclear facilities here in the U.S., and we have 3 nuclear power stations outside of Florida and 2 stations inside of -- in Florida, in the Florida Power & Light service territory. In the outside of the state of Florida plants, we've relied with long-term power purchase agreements with our customers, or in the case of Seabrook, at the facility not too far away from the Boston market. So a more power-constrained market where that resource is particularly valuable. In Iowa, we had a -- we still have, but we're in the process of shutting it down, and that's the reason why I brought it up. We have a single unit nuclear facility in Iowa. It was a single unit, so -- it is a single unit. So higher cost just on average. Otherwise, a very well-performing plant, had exceptionally high ratings in its peer review process, very high standing with the NRC, relatively low cost for what it is. But at the same time, because it's a single unit and boiling water reactor, higher cost to operate. When we start engaging with our customer about entering into an extension of our power purchase agreement, our customer indicated that they had cheaper forms of power that they could choose versus continuing to procure from Duane Arnold. We were able to structure an agreement with them where they are no longer taking power from Duane Arnold when it shut down later this year, and they're replacing it with wind power coming from repowered facilities that we own and operate, plus some incremental replacement power that they're going to procure elsewhere. They're going to save their customers hundreds of millions of dollars just between 2021 and 2025, which is the duration -- the remaining part of the contract they had. That included paying us a termination payment for turning the plant off early. So remarkable economic value creation when you think about shutting off these less efficient facilities, certain nuclear facilities and quite a number of coal plants. So we're really excited not only about today's economics, but focusing in the mid-2020s where there's an expected phase-down of the PTC and step-down of the ITC. Out in that time frame, we expect wind to be in the range of $20 to $30 a megawatt-hour and solar to be in the range of $30 to $40 a megawatt-hour. And that compares to a combined cycle natural gas plant probably also in the $35 to $40, $45 a megawatt-hour price long term, including fuel and all the operations costs, and then comparing that also to existing coal and nuclear plants. So no new capital, no returns on existing capital, just cash cost of operating going forward, starting at really efficient plants at $35 a megawatt-hour largely, and many of them could be far higher than that, including $45, $50, $55, and even in some cases, higher than that. The huge rooms of -- room of opportunity to shut down those old plants and build new plants, specifically build renewables, that save customers money. The dollar values that I gave you for wind and solar, respectively, so $20 to $30 and $30 to $40, that included a $5 to $7 a megawatt-hour adder for storage. And we build that in. You don't have to buy storage with it, but we build it in, in order to make it more comparable with the investment decision value that someone might be making at the time. So that gets you to a nearly firm renewable resource wind or solar. And nearly firm doesn't have an explicit definition. In our definition, what turned out to be the $5 to $7 a megawatt-hour is getting it to roughly a 70% capacity factor when our customers were counting on those resources for capacity value. And 70% is arbitrary, but for -- it's roughly comparable for what you might expect the combined cycle natural gas capacity factors to be. So trying to get in the realm of comparability to those resources. So pretty darn compelling. And when we've been wrong about pricing for renewables, and this goes back, unfortunately, for years -- when we've been wrong, it has been -- the prices have been even more compelling. So they've come down faster than even what we were anticipating. So if anything, I'd bias to even more compelling economic value proposition than we were even anticipating today.

It's pretty compelling. You mentioned storage, and one of the very interesting dynamics that NextEra has been pursuing, which I think may not be well understood is, is big data analytics and the combination of storage with solar and wind. Would you mind talking a bit more about what you're doing there? I know you're particularly passionate about this topic. I thought it absolutely fascinating. I wonder if you could touch on that.

I am super passionate about it. And I'll try to keep the comments brief. I really could spend a ton of time talking about data analytics and the machine learning algorithms that we're working on because it really is a huge -- one, it's a differentiator, but it's hugely exciting if you're a believer in renewables and what's possible in the future. So we've been focusing a lot on the acquisition of data attributes and then how do you harness the power of them for quite some time. So on the operational side of the existing fleet, we're getting over 20 billion pieces of information every day out of just our wind fleet. That's not even talking about solar, and solar actually is magnitudes larger than that because we have tons of data sources in an average solar facility. And with that operational data, you can start to transition to much more reactive operation and maintenance position to much more proactive where you have insights to what's going on in the fleet today and what actions if you take today might lead to either better or worse performance in the future so that you can tailor your operation and maintenance cost over time. Where we believe there's even more value is on the front-end design integration and expectations of performance over time, including with batteries. And as we've gotten better at designing the algorithms, to build a better facility and then better operate the interfaces between these facilities, we've been able to realize incremental value that we either translate to more compelling offers to our customers or more competitive advantages relative to the other developers that might compete to build these facilities. On the operational side, there's a lot of complexity to building, owning, operating wind. There's a little bit less, not a little bit, there is definitely less on the operational side for solar. There's some real analytical opportunities to designing the solar facility better, and we can talk about that if you want to go down that path. But the insights on the algorithms of designing the solar facility have created huge opportunities for us. Batteries are not only complex to operate like wind is. They also have some real design attributes that you can capitalize on how you realize value over time from batteries. So we're -- and the reason I highlight that is I do think as you develop those capabilities, both design and operating to be even better over time, that's a competitive advantage, I think, we'll be able to create and maintain over a long period of time. It would be a differentiator for us. We're now -- I've long thought that batteries were an enabler of renewables, and we've thought about it. We've talked about it that way, really not for today because renewable penetration at 10% in the U.S. is really small. You don't run into a high concentration challenges of renewables in most parts of the U.S. until many, many years down the road, much higher penetrations. But many years down the road at much higher penetration, batteries do matter. Some sort of storage capability matters. And so we've long thought about that way, making sure that batteries will ultimately be there at the time where you actually have to have them. It surprised us that when we totaled up our investment dollars in 2021, we're going to spend $1 billion on batteries, and that's blending Energy Resources and FPL together. It's an enormous amount of money. If you'd asked me 5 years ago, I -- we actually would have told you that the whole battery storage market might be $1 billion in 2021, not that we will deploy $1 billion.

It's remarkable. To your point about the evolution of the energy mix and where we might need to go over time, by 2030, you see about 40% of the U.S. generation from renewables. You've been starting to talk more about the importance of hydrogen on the long term and thinking about that as a possible solution. Would you mind talking -- a very common question we get is, how much can the grid absorb in terms of renewables before you have to think about greater reliability needs, bigger changes to the system and hydrogen might be one element of that. Would you mind just speaking to that?

I do think it's pretty far down the path where you really need to think about that or you really need to worry about it. And not only when you need to worry about it, but when it would actually make a difference in what we're investing -- the dollars that we're investing today. So I -- we pay attention to it really to think about our longer-term strategies. And what has changed for us over the last -- I'll even call it, 9 months, I'm not even -- I think it's even more recent than saying a year and certainly more so than 18 months -- is we think that having something like hydrogen is more possible than we thought it was where the cost will come down as a practical supplement or final bridge to super high renewables penetration. Some of that is clearly the R&D that's going into the hydrogen space. If you have significant investment, clearly, costs will come down, which is a key part of it. But some of it is also our own modeling, which we have started to do in the last 9 months or so, both for the Florida market as well as even for markets like Texas. And the reason why we picked both of those markets is it's easier to constrain the system as opposed to a much more integrated system that has different ISOs and different balancing authorities that interact with one another. But if you take both of those markets, they also have decent renewables resource. So caveat that, too. For both of those markets, you can get to very high penetration of renewables. Let's call it 50%, 60%, 70% of renewables still at a relatively small amount of impact in terms of cost to customers. And that includes like actually having a reliable system and all the extra balancing and reserves that you might need to have for those types of systems. But when you get out to that last bit of generation, and it's both capacity value and generation value, and let's just call it the 90% to 100% to simplify when you hit that curve, it's really sharp and dramatic to the incremental cost. And we had long -- we've known that, that dynamic was true, but we'd always assumed that when you get to that really last high cost, that it makes more sense from a policy standpoint to go after solving other parts of our world's emissions. That will be much more economic to solve than paying for that last amount of going from 90% to 100% of your cost of carbon at 0 carbon emissions. But if you -- the modeling we started to do actually show that if you had hydrogen, and we've made a ton of assumptions around hydrogen evolving, which not all of those assumptions may come through, maybe they come faster, or maybe they don't come to fruition. But some assumptions that we don't think are crazy, it actually is a pretty modest increase for that last amount of emissions reduction. And maybe so modest that, that actually is the less expensive way to go and start to address some of the emissions in the industrial and the transportation sector. So does that change very much that we do today? No, probably not. At the margin, makes us think a little bit differently about gas pipeline investments, at the margin. The other part that's probably even more impactful is our experience with building MVP. Building large infrastructure projects in the U.S. today is challenging. And we've now permitted that pipe effectively twice. And in some parts or some aspects of it, you're starting to permit it for a third time. So when we think about making those types of investments, which are 40- or 50-year investments, we need to have appropriate returns that compensate for the risk of getting through the permitting process, but also what do the economics look like 40 or 50 years down the road? Do you really need gas pipeline infrastructure that far down the road? And we aren't as sure as we used to be. Now caveat that with -- if you really believe in hydrogen, and you believe in wide-scale deployment of hydrogen, including for transportation, you actually might need that pipeline infrastructure to move the hydrogen around. So not easy.

Fair point. Now understood. It's fascinating. Hydrogen has been coming up so much more frequently, and we are excited about the cost reductions, the amount of capital being deployed there. And it's interesting to see that, that's factoring into your thinking as well. I wanted to shift gears, Rebecca, to talk about the U.S. utility sector more broadly. The sector overall is certainly decarbonizing, but I'm not saying that simply to be kind, but we really do think NextEra is a leader in terms of understanding how to move away from fossil fuels towards renewables, how to be efficient in your cost structure. And we're more excited than we would normally be about the potential for M&A as a tool to create value. And I thought your acquisition of Gulf Power will be a good example of what is potentially possible if you bring their skill set to bear. Would you mind just talking through that acquisition, the benefits both to customers and the shareholders that you're able to achieve there?

Yes. We were -- we've had a strong appetite for M&A now for quite a number of years, including some opportunities that we pursued that we weren't able to finally bring to closure. And it is exactly for the reasons that you just highlighted and what we're starting to show now with Gulf Power is the power of the strategy of investing capital, taking cost out of the business, improving a customer value proposition in a meaningful way can translate into meaningful value for shareholders. And we're thrilled with having the opportunity to demonstrate that now with Gulf Power. So we closed on the acquisition at the very, very beginning of 2019. So we've now owned it for a full year now and part of 2020. And we were really excited to share some of the improvements that we made. When we had our fourth quarter call, we shared some of the highlights from what we've done just in the first year of operations at Gulf. We've already realized a 20% improvement in our O&M cost just in 1 year, a 20% improvement in service reliability, a 40% improvement in OSHA recordables, which obviously that's not directly a measure of customer value. It's a measure of our employee safety, but we think it's a critical sign because we value the safety of our employees. It's also a sign of operational discipline that you're focused on the right things. To have a 40% improvement in 1 year is really terrific and something that the team is very proud of. And we had a meaningful increase in adjusted earnings as well. And this is just the first year of this 3-year capital program that we laid out at the investor conference. So we're expecting a meaningful improvement even from here on O&M, continued improvements on reliability. And then we'll also start to see a notable improvement in emissions as we transition, for example, Plant Crist, one of the coal facilities in Gulf's portfolio to run on natural gas. But there's other investments as well that will continue to improve the emissions profile over time. So we're super excited about having been able to execute that, to continue to execute against the plans, ultimately go into the commission next year along with FPL to ask for new rates and also ask for the combination of the 2 entities. And we think it's a great demonstration of when you have a company focused on the right things that produces real, notable, measurable improvement for customers, and we hope that we'll be treated fairly in that process.

It's pretty exciting. We looked across the U.S. at every utility, and we've noticed that there is this huge economic wedge, if they're able to move away from their more expensive -- usually, it's coal, but sometimes gas plants, and towards increasingly cheap wind and solar, and we sort of quantify that by utility in a report that we call the Second Wave of Clean Energy. It's that wedge that we're quite interested in NextEra. We think that you are quite superior in terms of what you could do there in terms of that shift. So we'll stay tuned to see how that evolves, but that's exciting. Usually, when we think about a buyer of the business, we get a little concerned, but the value that you create in Gulf, I think, is undeniable. So we're quite interested.

I appreciate that. And Steve, the only thing I'd add on that is as much as you said that you would hesitate when you think about someone being a buyer in an M&A situation, one of the things that's incredibly important to us is that we're going to remain disciplined. We don't need to do any transactions. Our growth plans all assumed organic performance of our existing businesses. And the growth opportunities are significant, and we couldn't be more excited to go after them. So this would be incremental to that. And we will only do it if we're confident in a constructive regulatory environment, our ability to do exactly what you're analyzing, the ability to deploy capital, invest in clean energy technologies, take cost out of the business, make the customers' value better and realize real accretion for our investors. If we -- if those don't line up, which unfortunately, in some cases, they don't, probably in more cases than not, they don't, we will not pursue a transaction.

Well, that's fair. And you've really walked the walk in that regard. There's been some transactions where you all have walked away because just -- it really ultimately didn't make sense. So I think you've proven that discipline. Rebecca, we've received a number of questions just on energy storage and where you see the economic and the cost trajectory of storage. Obviously, $1 billion of CapEx next year gets anyone's attention. Where do you see this evolving over time? I think before, you've mentioned the cost of storage has dropped more rapidly than really anyone would have expected. Where do you see it going from here?

We do expect continued declines. But if I look at -- so we don't measure everything by investor conferences, but it is a period of time where we snap the line and we put together a couple of hundred slides, so it's easy to mark those periods. If you look back at our investor conference in 2017, and then you just go from 2017 to 2019, we were absolutely surprised on how quickly the cost of storage came down. If you look at 2019, and obviously, we aren't nearly as much time away from 2019 as we are from 2017, so there's room to still be surprised. But we had more aggressive targets in terms of the cost for storage. I would say we are more in line with our expectations, which are more aggressive than they were 2 years before. They're probably more in line than they were with that prior forecast, still better, but consistent now with our prior expectations. If I highlight what has been surprising to us even since our -- both for our 2017 conference and our 2019 conference is the adoption of storage. It has been very notable in the last 2 years how much our customers have not only gotten better educated because we've responded more with storage opportunities every time there's an RFP. That was unique maybe 2 years ago. And now I think more people do it and our customers ask for it. Customers ask for proactive education on battery storage. And now they are procuring it in much more higher penetrations than we previously thought that they would. The other part of what has surprised us, and this is pre-investor conference, is something like the Manatee facility in Florida Power & Light. And to remind everybody what Manatee is, Manatee right now is a peaking facility that runs on natural gas. And it's an existing asset that has not run out its physical life. But just like we do with every asset in our portfolio, we occasionally run analysis and say, is the best opportunity for our customer to continue running this existing capital and whatever the ongoing costs are? Is it better -- in this case, it was a peaking facility, is it better to shut it down and build a new peaker, a new gas peaker, that's more efficient technology? So obviously, it will use less fuel, potentially incur less O&M cost. Or is the right alternative to tear down the existing plant and build a battery facility? And in this case, it benefited from some existing solar that's already located in that area and would be charged by that solar. And when we ran this analysis a couple of years ago, it was the most economic decision was tear down the existing facility and not build a new gas peaker but build this large storage facility. It's a 400 megawatt, roughly 900 megawatt-hour battery system that's going to function as a peaker. And if you had asked us back in that 2017, certainly before then conference, would it be economic to build a -- replace a gas peaker today, especially one that was not the end of its physical life, tear it down and build a battery storage facility as a peaking resource, the answer would have been no. Even we didn't necessarily see that. So those types of very quick evolutions in the market have been terrific. What has driven that is largely -- certainly some innovations on our part, but really has been driven by the electric vehicle market. Massive country level mandates to phase out, even ban in certain cases, internal combustion engine cars have really focused the car manufacturers on building out real lines of electric vehicles, in some cases, focusing solely on electric vehicles for their new innovation, and they are committed to it. And they are communicating to battery suppliers what their plans are, what their needs are. And those battery manufacturers are responding with real manufacturing capacity build. And that's creating real cost advantages for us. We're not -- largely not -- we are largely not their biggest customer. Some of that's changing. When you spend $1 billion, that moves the needle. But it's been building up to that. And so we're benefiting both from our own development and build in the power sector, but also, of course, the evolution in the electric vehicle market.

Great. Well, thank you. I think we're going to have to leave it there. And given the time, I want to thank Rebecca for just excellent insights across the energy spectrum. So thank you. Thank you to our clients for listening in. We're going to have a quick break. And at 12:35, we'll be back on with [ Petalvers ]. But Rebecca, thank you again.

Thank you.