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

Good afternoon, everyone. We -- we're happy to have NextEra here with us. We apologize for the delay. From NextEra, we have Rebecca Kujawa, the Chief Financial Officer, who will be making a presentation. Rebecca?

Good afternoon, everybody, and thanks for joining us. I am very happy to be here today and joining you for the conference. Thank you, Barclays, for hosting this great event. I do want to highlight just a couple of things. And if there are some slides, hopefully, we'll be able to show them to you and you can follow along. If not, I'll keep my remarks even more brief. And then Eric and I will have some Q&A as well. So NextEra, of course, as many of you know, is a very large power company. We have about $140 billion market cap and over 50 gigawatts of generation in service. Our business is roughly -- comprised roughly half and half, a little bit more regulated utilities and then the rest of the makeup coming from our competitive business, NextEra Energy Resources. And our regulated utilities really comprised of FPL, the largest electric utility in the U.S. And of course, Gulf Power, which we acquired last year, about 0.5 million customers also in the state of Florida. And of course, Energy Resources is the largest generator of renewables power generation in the world from -- powered by wind and solar. And we run our businesses together. So a combined power procurement, power generation division, nuclear division as well as integrated supply chain and other staff organizations that we leverage in order to deliver value for our -- across our businesses. We have a long history of delivering against the expectations we've laid out. Our adjusted earnings per share over the last decade has grown over 8% per year. Our dividends have grown even faster than that. And if you look at our total shareholder returns, on a 1-, 3-, 5- and 10-year basis, they topped the market indices and utility indices as well as providing just an overall very strong return for our shareholders. If you're following along in terms of slides, on Slide 5, we highlight our new ESG report, which we just published, which we talked about on our second quarter call. And what I think is the most important takeaway from our ESG report is how ingrained many of the things that I think are so deeply important in this focus on environmental, social and governance issues are so deeply ingrained in our various strategies. And I think that has helped us be positioned as one of the best ESG stories because it's so inherent to what we do every day. And on the top left of that slide, you see from an environmental perspective, we have an unbelievable portfolio of generating assets, 47% lower CO2 emissions than the industry average. We're already the world's leader in generation from the wind, solar as well as from battery storage portfolio. And of course, a focus on other aspects of the environment, including water and other emissions. Our customer focus is significant, as you'll hear about from an FPL and Gulf perspective. Our focus on our customers is our strategy to ensure that we are improving the value proposition that we provide to customers as we make investments, take cost out of the business and overall improve the emissions profile and, of course, provide terrific customer service throughout that. And if there's one thing that has been top of mind in this very challenging year for many of us personally and, of course, professionally as well, it's that electricity is the foundation of so many of the basic and needed services that we focus on throughout this pandemic. And it's all the more important that we continue to deliver that reliable and affordable service for our customers. On the bottom left, we highlight our employee focus. We know that our most important valuable asset across our company is the creativity, the ingenuity, the drive and the passion that our team members bring to our business every day. One of the highlights of our focus on our employees is also our focus on safety. And since 2001 -- excuse me, since 2003, we've improved our safety performance by 72%. And that's obviously measured in our OSHA recordable rate. And then on the community side, we're really focused on investing capital in our communities. Since -- from 2010 to 2019, we've invested over $90 billion of capital, which obviously drives jobs and provides economic activity in these communities, enables for provisions to school services and emergency services in these communities, including through state and local taxes paid, which on an annual basis are over $1.5 billion per year. So turning to Slide 6. As we talk about that capital investment, with $90 billion in roughly a 10-year time frame looking back. And we're expecting to invest $50 billion to $55 billion between 2019 and 2022, including the capital plans that we laid out at our investor conference last year. On Slide 7, we highlight our disruptive forces driving our industry today, which includes the provision of very low-cost renewables generation as an alternative to our generating fleets across the U.S. And we expect that competitive -- the competitiveness of the renewables to continue and even grow over time as costs continue to improve and performance of the technology continues to increase. Slide 8, we highlight our focus on our customers at FPL, as I already highlighted, when we're talking about ESG. And again, we didn't start doing this because of an ESG focus. We started doing it because it's the right thing to do, it's the right strategy, to make sure that we are the low-cost provider and then we continue to improve that. We have terrific reliability and continue to have low bills and clean energy solutions for our customers. And on Slide 9, we highlight the fact that we brought that to Gulf Power. In just our first year of operating Gulf Power, so starting in early part of 2019, through 2019 and comparing that to 2018, we've realized a 20% reduction in O&M cost in dollar per megawatt hour; a 20% improvement in service reliability, so minimizing the disruptions that our customers have in their service; improved our OSHA recordables, again, an important measure of are we focused on the right thing at the right time; and obviously, very important and deeply personal to us, to ensure our teammates go home as safely as they arrived from -- to us in the morning. We've improved the OSHA recordable by 35% in 1 year. And of course, the residential bill also improved over the last year as we've taken advantage of efficiencies, including fuel cost savings. Turning to Slide 10. If you focus on Energy Resources business for a minute, we believe there's 80 gigawatts of U.S. renewables demand between 2019 and 2022. And obviously, our competitive advantages that we bring to the table enable us to deploy that capital efficiently and cost effectively and profitably on behalf of our shareholders. And there's a significant amount of demand out there in the renewables market. And turning on to Slide 11, you see that the reason why there's a significant amount of renewables demand is because of economics. It is one of the least cost forms of generation in most parts of the U.S. And paired with low-cost battery storage, you can get to a nearly firm resource that obviously can supplant the technologies in place today that are operating at higher cost. Slide 12 highlights the storage cost declines. If there's one thing that we've been surprised about over the last decade, it's how quickly storage has become really relevant, how quickly our customers have gotten educated, how much they started to procure and, of course, how costs have come down. And it was surprising to us when we totaled, up our expected investment in storage in 2021 is now over $1 billion, so our first $1 billion year in storage. So Slide 13 highlights our backlog. We keep saying it's the best renewables development market in our history. That keeps being true. Even though we've been saying it now for a while, it keeps getting better. And the trajectory is terrific, again, driven by economics and driven by changes in support, both politically and across a variety of stakeholders. Highlighted on Slide 14 is really the growth in our Distributed Generation business. So between 2015 and 2019, we invested about $1 billion in C&I Distributed Generation businesses. And when we look forward to 2020 through 2024, we're expecting to invest $3 billion. So a growth and a real opportunity for us as a company. But really, as we highlight on Slide 15, the power of that DG business is the creativity that the team brings, the opportunities that we see and even some of the incremental business opportunities that we think are going to be powerful for us as a business and even a power sector in the coming years, including hydrogen, which John Ketchum highlighted on our second quarter call, we would be disappointed if by the end of this year we were not able to talk about a pilot project in Energy Resources. And my guess is if we have an opportunity to pilot something in hydrogen, it will likely come from this Distributed Generation team and some of the communications and relationships that they've built across this market segment. On Slide 16, highlights just in picture form why we're so excited about the potential of hydrogen. There are so many applications across a variety of aspects of the U.S. economy, of course, including the power sector, but not limited to it. There are opportunities across transportation, industrial application and even building applications to potentially leverage the storage capabilities of hydrogen to power in a very clean way quite a number of key processes and systems and foundational things to our U.S. economy. Slide 17 highlights our Okeechobee Clean Energy Center Hydrogen Pilot, which we talked about on our second quarter call. It's a $65 million pilot. So in context of our $50 billion to $55 billion capital investment program over these 4 years, relatively small. But I do think it's important to highlight because it is this first toe in the water for us, and a key way that we'll get experience with the technology and position ourselves well to take advantage of it if this market does evolve like we think it will. And how does that market evolve? On Slide 18, the hydrogen opportunity, we took a stab at kind of quantifying what we think the possibility is and how meaningful it is to us as a business. And we put it in context of the overall renewables demand. That if you -- if most of the power sector converted to renewables and then EVs start to leverage clean energy and hydrogen for the industrial and transport sector takes off, you're talking about a market size in 2050, was the example that we used for this case, a market size that's 19 to 24x the size of the existing renewables installed base today. So just a massive -- massive growth from 150 gigawatts to potentially over 3,000 gigawatts by the end of this time frame. So to sum it up for NextEra Energy on Slide 19, we continue to have -- to forward the expectations that we've laid out for ourselves, inclusive of the growth between now and then. But our adjusted EPS expectations of $10 to $10.75 in 2022 and, of course, continue to be disappointed if we wouldn't -- if we're unable to reach the higher end of those expectations that we set out for each of the years, including '22. Quickly on NextEra Energy Partners on Slide 21. As you know, this is a large renewables, clean energy-focused vehicle. We have over 5 gigawatts of renewables in the portfolio now as well as some natural gas pipelines that are particularly well positioned. If you look at Slide 22, we're focused -- we're highlighting the renewables portfolio at Energy Resources, not only in the installed base but in the 14 gigawatts of renewable signed and in the backlog that Energy Resources plans to build in the coming years, plus the incremental demand that we continue to work on. And that is a sizable portfolio for NEP to leverage to be able to meet the expectations that we've set out for NEP of delivering that 12% to 15% of distributions per unit growth through 2024. And one of the ways that we continue to finance that business, as highlighted in Slide 23, is continuing to be flexible. We've positioned ourselves very well to manage the uncertainties both of last year and the beginning part of this year. And there's a tremendous amount of financial flexibility within NEP and the strength of its cash flows and its business to finance that growth going forward. So we're excited about both of our business, NextEra Energy and NextEra Energy Partners. We're positioned extremely well to leverage these terrific growth backdrop in renewables and clean energy across the power sector and potentially beyond. With that, Eric, I'd be happy to talk with you and any questions you might have.

Yes. That's perfect. Thank you, Rebecca, that's a very good overview. Really kind of 3 main questions. We'll start with Energy Resources. No surprise to you, the big questions everyone has really are how far can this go? How do your returns stay up? And given what might happen to the election, how far things go? And before I turn it over, the kind of nuances where people ask us is smaller players are accepting much lower IRRs. Granted, they're doing shorter-term projects not creditworthy. The other one is why would utilities continue to do PPAs of tax rates expire because they'd rather grow rate base. And then the corollary to that is how much room is there to go with the large corporates, the Googles, the Apples, the Amazons of the world? So anything that you could take there would be wonderful.

Yes. Of course. Well, let me start first with the demand backdrop and then get into more of our competitiveness and the overall return picture. The backdrop, as I highlighted in the quick comments that I made, we are super excited about the renewables demand picture, not just in the balance of this decade, but beyond that. If you look at Biden's plan for the energy sector, his ambition is to have 0 carbon in the power sector by 2035 and net 0 for the entire U.S., including these other sectors like transport, industrial and other contributors to carbon and other greenhouse gases by 2050. Those are ambitious plans. So if you look at what we laid out at our investor conference last year, that is about a 30 -- roughly 30% penetration of renewables by 2030. And that was a 15% compound annual growth rate between here and 2030. So if you were to accelerate that, that's even a stronger demand growth. And none of that anticipates any of the conversion of electric vehicles, broader transportation, including long-haul or industrial applications, which, if there were some incentives, and particularly to close the gap that exists today, particularly here in the U.S., would be incremental demand from a power sector renewables perspective. So we are as bullish as we've ever been on renewables. So then that leads like can -- leads you to the question of, can we continue to grow? Can we maintain our market share? And implicit in that is maintain our market share and still have attractive returns. Our competitive advantages are significant, and none of these are going to surprise you, and we've talked about most of them. And I think some of them have improved over time. But let's start first with the size advantage. This is an industry that benefits from scale. And you can see it in so many respects. Operational performance, being able to buy efficiently, being able to manage efficiently is really benefited from scale, and we've got significant scale. That certainly helps with getting leverage with suppliers. And I can tell you, it was real this spring. It still is real today, but I think it was particularly notable in late Q1 and beginning of Q2 with the disruptions related to COVID. Suppliers, one, took our calls, which they were not necessarily taking everybody's phone call, every small developer. And when they had disruptions, we were the first ones they resolved the disruptions for. It's rare for us to have a supplier where we're not their #1 customer. And if we're not in their top 5, then they probably aren't super meaningful to us. So that's pretty helpful not only in the long-term competitiveness, but of course, in these short-term disruptions as well. And then there's all the operational synergies of maintaining a large fleet, being able to get the data from that, invest in technology to be able to understand the technology better, design better systems and manage better systems. So I feel pretty comfortable about our ability to continue to invest in those capabilities and enhance them in many ways, certainly on the digital side. And of course, potentially on the scale side, too, because many of our competitors are not growing as big as we are or as fast as we are. We tend to still see a lot of small competitors. On the IOU side, as you well know, we've got a significant amount of customer base are integrated or another independent-owned utilities. But a lot of them are also munis and co-ops. And of course, they're C&I customers as well. C&I and munis and co-ops don't necessarily care about owning their generation so we fare very competitively there, particularly in the munis and co-ops. And then on the C&I side, we'll pick the types of opportunities we think are best fitted to us, where there's longer-term contracts, creditworthy counterparties, provisions that are in line with the type of provisions we think are particularly financeable. And then on the IOU side, certainly, there has long been a push for utilities to own and rate base. And certainly, some have, some more than others. There are strategically beneficial relationships we can structure with them, where they can benefit from our scale and experience. Sometimes contracts, some of what they procure from us, sometimes own some of what we may build for them. And sometimes the regulators require that they go out for RFP, in which case we tend to be able to compete effectively and certainly consistent with our overall market share. So I continue to be bullish about how we fare against others.

Okay. No, that's great. I appreciate that answer. Moving to the utility, lots of focus on the rate case in combining, obviously, Gulf with FPL. I think one of the questions we get most often is what would be the source of additional reserve amortization? And do you expect that construct to apply to go upon the combination? Go ahead.

Well, as you know, for the rate case, we plan to file the early part of next year and have new rates effective for 2022, so 1/1/22. As part of the rate case, everything, of course, will be part of the conversation, including a new depreciation study, which is something that's typically done every 4 years and coincident with the rate case. And as part of the depreciation study, you look at how much has already been recovered versus what economic life is left and, of course, adjust the depreciation rates accordingly. So even if there's a surplus reserve amortization balance left, that doesn't necessarily there mean that it will be the same balance more or less as we go through the process because you reevaluate everything. One thing to keep in mind since the last depreciation study is we did get the second license extension for Turkey Point. So where we previously would have had the 40 -- the first whole system -- the first license extension in, now we will extend it for the additional 20 years beyond that. So that's one major adjustment. But there's always other adjustments, including, as we do storm hardening, you replace a number of poles, you have to adjust the depreciation rate for that. So there's always pluses and minuses as part of that. Historically, so for the last 2 rate cases, the surplus amortization mechanism came about as part of a settlement agreement. And we have a terrific history in Florida of settlement agreements, not just Florida Power & Light Company, but other utilities in the state as well. And we would be optimistic and certainly open to engaging in those discussions this time around. And obviously, that would be one lever that would be part of the negotiation if we have willing parties to engage in some sort of settlement discussion. It doesn't mean we can't ask for it as part of the rate case itself, but it doesn't have historical precedent with the commission.

Okay. Yes, very helpful. And the last one, we'll go quickly because I know we lost some time on the front end. M&A, I know you're always asked, some numbers came out about where your bid was for JEA. Obviously, Santee Cooper's out there. Rather than getting the nuts and bolts, I mean, if you could remind us the terms of what you're looking for. But obviously, given the numbers that were floated around for JEA I think post Santee Cooper, is there kind of a minimum size it wouldn't go below? It's pretty clear you could go very large, so let's look at the other end. Is there a size that's almost too small to look at?

No. I don't think we're particularly constrained by size. Obviously, there's probably some sweet spots in there and below which we just may not talk about as much. We acquired Trans Bay Cable last year, which was a $1 billion acquisition, and we're thrilled to have it as part of the portfolio. So it just may not hit as much of a radar screen for investors, but we still love the tuck-in acquisition as well. In terms of the criteria, there's clearly a bunch. But the key ones that I like to focus people on is, one, a constructive regulatory environment in which the entity or entities operate, that we have the ability to invest capital, take costs out of the business, effectively deploy the strategy of making the value proposition better for customers. Again, because we think that's important to maintaining a long-term constructive regulatory environment is to be focused on the customer value and the strategy that we have with respect to that. And then, of course, third criteria is that it is value-accretive to our shareholders. And in context of that, also being able to maintain a strong balance sheet. There's not one way that you get there with those 3 criteria, so there's different aspects of it that can be important. But they -- ultimately, all 3 are important, and we need to see a path to be able to meet all 3 of those criteria. And where we can't meet them or there are others that value them differently than we do, we are going to remain committed to that -- to those criteria and disciplined. We have terrific organic growth prospects. And we don't need to do anything. And that really empowers us to ensure that the opportunities that we consider really are value-accretive for our shareholders.