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

Okay. Welcome back, everyone. Very happy to be here today with Jim Robo, Chairman and CEO of NextEra. Before we get started, we've been -- for those who haven't been on yet, we've been doing a poll question beginning of every panel, and we'll do the answers at the end. So if you don't want to tee that up? So question is, why do you think NEE trades at the highest multiple in the sector? High growth, high quality utilities, renewables leadership, best earnings, dividend growth, M&A upside potential, ESG positioning and management? But this is all anonymous, et cetera. So -- and we'll give you the answer at the end. Great. So Jim is going to start with a few slides, and then we'll take -- we'll do some questions for me and then questions from the audience. I did want to just highlight -- make sure I got it there. We've got the NextEra water bottle, very safe, ESG-friendly. So I was trying to find my wind tie -- my wind turbine tie, Jim, but I couldn't find it, and I really also didn't want to wear a tie. So let me try to...

But I'm glad you're on brands. It's good. I appreciate that. So let me start just by reminding you of our cautionary statement on the next slide, and I have some brief remarks. We'll go to the next page to cover on both energy -- NextEra, and then I'll give some brief remarks on NextEra Energy Partners. First of all, on NextEra, our strategy has been very consistent for a long period of time, and that is to be the largest, most profitable clean energy provider in the world. And we have 2 big businesses, our regulated businesses, FPL and Gulf and our renewable business, NextEra Energy Resources. Everything we do is informed by our values, and we are rapidly growing clean energy in both of those businesses across a platform that I think delivers outstanding value for our customers and does the right thing for the environment and our talent. And in the end, ultimately, creates significant shareholder value for you all, our owners. Let's go to the next slide. We have been at the forefront of disruption in our space for a very long time, and those disruptive forces are only accelerating in our view. Obviously, the right-hand side of this slide talks about the disruption going on in generation from renewables. What we -- in storage, what we are seeing in wind and solar and battery storage is nothing short of remarkable in terms of the cost declines year-on-year, in terms of the increasing competitiveness of those alternatives. And the bottom line is even without incentives in the middle of this decade, we expect wind restorage and solar restorage to be more -- to be a cheaper brand-new wind and solar restorage, to be cheaper than the operating cost of existing coal and existing nuclear, that is extraordinarily disruptive. The other piece that I would highlight here for you is hydrogen. Much like what I said about battery storage 10 years ago when we dipped our toe in the water in that business, 10 years ago, we did our first project. Next year, batteries are going to be $1 billion business for us in terms of capital deployment. I'm saying the same thing about hydrogen right now, which is this we're going to dip our toe in the water. It's going to be quite small. We will make probably no money in it for the next few years. But it has the potential to do 2 things: one is completely decarbonize the economy, not just the electric sector, but other key industrial and transportation sectors as well; and secondly, not only does it represent nearly $1 trillion of potential renewable demand over the next 10 to 15 years, above and beyond, decarbonizing the electric sector, but it also represents potentially new markets for NextEra in terms of capital deployment in electrolyzers and other things that create the general hunting. So we don't expect to make a lot of money in that business over the next several years. We'll dip our toe in the water. We'll understand what we can do. But fundamentally, we're very excited about, first and foremost, what we see is an enormous renewable demand in the second half of this decade and the early part of the next one for green hydrogen, and we think that's really going to be game changing. Matt, can you move it on to the next slide, please. Last night, we announced a $660 million transaction of our Transmission business, buying GridLiance. We're very excited about this. It's very consistent with our M&A strategy of being focused on the Southeast, the Midwest and FERC-regulated assets. These are obviously FERC-regulated assets. What I like about these is not only do we think FERC-regulated transmission is a good business. Financially, it's accretive to earnings immediately, and it's also accretive to our growth rate. These assets, we expect this business to continue to grow even faster than our 8% expected growth of the whole company over time. So this acquisition is accretive to our growth rate, which is, I think, very positive as well. Let's go to the next slide, please. And so finally, on Energy -- on NextEra Energy, I would just reiterate that we are -- remain very strong about our long-term growth prospects. And I'd be very disappointed if we're not able to deliver financial results at or near the top end of this adjusted EPS range. Obviously, this is adjusted for the 4:1 stock split and the $0.20 increase in our adjusted earnings expectations in 2021 pre-split. And also, obviously, we've extended our guidance from -- through 2023 of 6% to 8% off of 2021 -- off of that increased 2021 base. This is being driven by the fact that we're seeing just enormous demand for renewables right now. We continue to have great origination success in that business. FPL continues to deliver for customers. And I continue to be very optimistic and very bullish about our prospects going forward and feel very good about how we've executed both year-to-date so far this year and going forward as well. Let's go now to NextEra Energy Partners, if you will. We've had a terrific first half of the year at NEP as well with EBITDA growth and CAFD growth of 26% and 86%, respectively. We've been able to execute on several organic investments that show that NEP has organic growth prospects on top, above and beyond, just third-party M&A and the ability to access energy resources pipeline of projects. Most importantly, we're very, very happy to successfully resolve our issues associated with the PG&E bankruptcy, freeing up $65 million of cash flow from Desert Sunlight. And we expect to achieve our 2020 distribution growth while maintaining a trailing 12-month payout ratio of 70%. Next slide, please. Just a moment on the convertible debt that we just converted into NEP common units. This was a terrific product for us when we issued it 3 years ago. Effectively, and I won't take you through all the pieces of this chart. But effectively, you can think of our cash cost on this deck over the last 3 years was effectively 0. And so this was a great instrument for us. We were also able to issue relative to issuing common equity at the time, 25% fewer units than we would have issued 3 years ago that we issued equity instead of this convertible debt. And so this is a product that we continue to be -- that we continue to like and continue to focus on and one that I think will be an important part of the playbook at NextEra Energy Partners going forward. Next slide, please. And then lastly, on NEP. I remain very excited about the long-term growth prospects for NEP. No one has -- there's really no company that I can think of that has a 12% to 15% distribution growth outlook out through 2024, that's really best-in-class. We don't have to do anything in terms of dropping assets down this year or next year. That's not to say that we're giving the NEP team the next 18 months off. I joke with them all the time that they haven't got the next 18 months off. They are diligently working on a variety of things that are going to be, I think, accretive to NEP story going forward. We're -- there's more to come on that front, but feel very good about NEP's prospects as well. So with that, Steve, happy to open it back up for questions.

Great. Okay. I'm back here. So I think I forgot to mention for everyone online. There's a question box on your screen, and we'll get to some -- I'll be able to see questions if you type them in. We'll get to those in a few minutes here. But let's just start, Jim, with the elephant in the room, which is the story last night about a potential transaction with you and Duke. Could you please give us any color around that and you can right now? Is this true?

Sure. Sure, Steve. Obviously, I can't comment on market rumors. What I can talk about from an M&A standpoint is what I've talked about for the last decade is what is our strategy vis-à-vis M&A? And it's been consistent. I think you can go back and pull the transcripts off of every one of the last 10 or 15 earnings calls that we've had when I've gotten this question, and we have a very consistent approach. And first of all, it has to be strategic. And what's that mean? What's our criteria for it having to be strategic, it's got to be in a good regulatory jurisdiction. And what we've taken that to be is a focus on the Southeast and the Midwest and FERC. I think what we did with GridLiance last night is a good example of that discipline around that criteria. It's got to enable our ability to utilize our playbook. And there's really several key elements of the playbook. First of all is, accelerate the clean energy transformation of whatever we were looking at. Secondly, the ability to manage it better and take costs out in order to both reduce costs for customers as well as make smart investments to improve the grid and make and accelerate the green energy transformation of the generation network. And so it's got to -- obviously, it's got to make sense from our ability to be able to apply our playbook. A second criteria, obviously, is it's got to be doable, i.e., it's got a -- from a regulatory standpoint, we got to feel like we can get it done. Third and probably most importantly, from a criteria standpoint is it's got to be significantly accretive. And what do I mean by that? Obviously, when we did Gulf, you can look at the accretion we got at Gulf per dollar of capital and that's a decent proxy, plus or minus a bit for how I view accretion on in terms of M&A. It's got to make sense. It's got to be significantly accretive. You will never see us announce something that I say is strategic, but LG, it's dilutive or it has no accretion associated with it. So we feel like we're not just operators, but we -- there's not any utility in this country, honestly, that we don't feel like we could apply our playbook to and bring good value to customers, good value to shareholders and good value to all the stakeholders involved, okay? That said, M&A is hard. We just need to look at our track record over the last 20 years in M&A to now it's hard. And it's hard for a variety of reasons. It's hard because, first of all, and people miss this a lot, our balance sheet and our credit rating are very important to us. They're very strategic and we will never do a transaction that sacrifices our balance sheet or sacrifices our credit rating. And for example, our FFO to debt with the -- or CFO to debt with the agencies is much higher than the average utilities is, and you need to look at any time you look at the potential accretion or dilution for a transaction need to take that into account because we have a stronger balance sheet and we always look at these things on a credit neutral basis. Secondly, we're always going to be disciplined. We're never going to chase anything, we're always going to be disciplined. And that has been a hallmark. Financial discipline has been a hallmark of this company ever since Jim Broadhead was CEO. And I think if there's one thing you know about me, it's that I'm financially disciplined. And as a result, that's another challenge in terms of the context of getting M&A done. The third challenge is being able to get regulatory approval often means giving money back to customers, and that obviously makes economics challenged. And so it's -- none of it's easy. And most importantly, on top of all of this is that we don't have to do anything. I love our organic growth prospects. We have the best organic growth prospects of any company in the industry, and we don't have to do anything if it doesn't make sense. And so I can't comment about the market rumors. All I can say is really reiterate. Our approach to M&A as long as I've been CEO and for the -- honestly, for the back 3 CEOs, we've always been disciplined about it, and it's always got to be significantly accretive and be strategic for us to even think about it.

Great. Jim, I'm going to follow-up with a few questions that I got from folks today on this and a little bit on the high level of M&A. So I think the first one you kind of hit, which is you're saying you don't need to do anything. Is that not -- is that just for the next 3 years? Or is that looking out 5 years, 7 years, like in terms of not needing to do anything?

Yes. So we all -- so I think it's looking at a long way, Steve. You know every month, we do a 5-year forecast, I got my monthly 5-year forecast last night. And then every year, we also extend that 5-year forecast to a 10-year forecast. And so both on a 5-year and a 10-year basis, when we look at it, we love our organic growth prospects. We don't think we need to do M&A to keep the business mix consistent. There is a huge bid for renewable assets out there right now, right? When you look at renewables, 80% of the development -- 80% of the value creation is in development. And so there's all kinds of capital recycling opportunities available to us as NextEra. Obviously, NEP is a terrific capital recycling vehicle. There's private capital that's available out there as well to recycle capital. So I am very comfortable that we will be able to continue to do as many renewables as we want and capture the lion's share of that value regardless of whether we find decent do going forward.

Yes. Second question is just, if a company that you're trying to do M&A with says, no. Are you willing to do something semi-hostile or hostile, so to speak, from an M&A standpoint?

So I mean, Steve, this industry, obviously, is -- state regulatory is really important to getting approvals on getting things done. And you can't do anything that isn't neutral in this industry, right? And so it obviously would have to be anything that we do always has to be neutral because you can't get state regulatory approval without a mutual approach to being able to go and getting all the stakeholders onboard. So it's -- it, by the way, is one of the reasons why this is one of the most unconsolidated industries in this -- amongst all the industries in the S&P 500 because that's been a barrier to M&A in the space for a long time. But that is what it is. And the reality is that it has to be neutral, otherwise, you can never get it done.

Next question is that just you got mentioned a lot with Evergy a few months ago and now this. Just is it fair to say that maybe the market is too focused on just one company?

I think I've been pretty clear about what fits our criteria in terms of regions, right? And so I think that is -- we've been very consistent in that. And Steve, we look at everything. We have always been -- we've always learned things. People point to the fact that we -- at least that we didn't win in Encore and that we didn't get Hawaiian Electric across the table. I will tell you, from a capability standpoint, our organization learned enormous amounts that we learned -- there were huge learnings and huge value from both of those processes. I wouldn't change anything we did in either of them. And we -- there's a lot of value that was created as a result of what we learned from those 2 transactions. So I value the learning. You get a lot. I think you can't underestimate the learning. We do business in all 50 states, Steve, right? And so everything that we ever looked at, we come away with a deeper knowledge and a better understanding of where we can deploy our capabilities, where it will be more difficult to do so. And what is important in terms of being able to get something done and what is not important in terms of being able to get something.

Okay. And then my last question on M&A. I'm sure there might be few others. Just you mentioned the focus on accretion with the Gulf deal and that that's a very important. But just everybody always says it's kind of accretive deal. I think your focus has been, not just like accretive, but like big accretive relative to size.

Yes, it's got to make sense.

Maybe can you just give a little more color on that part of it because you didn't say too much about that?

Sure, sure. It's got to make sense, right? We're not ever going to do something, and I apologize because my head is still all pre-split. So all my numbers are still pre-split, right? So the top end of our range next year is, it was $9.95, and we raised it $0.20. On that basis, we're never going to do something for a nickel. That's big because, oh my gosh, it's too much brain damage to do so. You will never see me -- and I said this earlier, you never see me announce something that's "strategic" for something that's a nickel. So if you look at -- if you think about the amount of capital we deployed at Gulf and the fact that Florida is probably the easiest place for us to deploy our playbook, right? So it's probably more accretive per dollar capital deployed than the average deal. But that's a decent rule of thumb, plus or minus a bit for how I think about whether a deal makes sense going forward.

Okay. We've got a bunch of questions here, which I'll get to in a minute. I guess one last one, just on thinking about this topic in terms of business mix. So if you were to do a large utility-type transaction, how should we think about it, what that means for your renewables business? Does it -- I mean, I guess, initially, it might be a smaller piece of the pie, but is it what you grow it even quicker than you've been able to? Has there been limits to some degree on your growth? Any thoughts on the mix?

Yes. On the mix piece, obviously, it allows us, from a mix standpoint. Mix is important from a growth standpoint. We have never turned down a good renewable deal though because there's always a bid for capital. We can always recycle capital, and we don't have to do anything. As I think about our ability to deploy renewables, I think you got to think about it in both a regulated and unregulated way, right? I mean, so if we did something that was big in a regulated way, we would be deploying a lot of renewables within that and storage. And the clean energy transformation is really an important part of any of our thinking on M&A. So if you think about the renewable intensity of the business, I can't imagine the renewable intensity changing at all.

Great. So we got a lot of questions. So let's try to not take -- try to be brief so we can get to as many as we can here. So I guess this is a general question on just on the utility side of looking at the cost of renewables versus coal or gas and how much savings you can generate by transitioning? Question is basically, how much cost can you take out by replacing a megawatt of fossil with a megawatt of renewables?

It's -- in general, and I go back to that slide I showed, we see coal and nuclear on a variable cost basis at $0.04 to $0.05 in renewables at $0.025 to $0.03. So something like $0.02 to $0.03 -- is $0.02 to $0.025 is very doable in terms of variable cost pickup. And that, honestly is one of the things that we've been -- we have a -- we now have a digital tool that allows us to run the IRP for our customers around the country. So we kind of -- we model an IRP and then we say, well, here's an IRP with all renewables, this is what happens to customer costs. So we actually have a digital tool that takes all of our customers' plants and puts it in plus all of our sites and actually spits out a different IRP perhaps than that utility might have been doing before. And it's been a great tool to get discussions going with our renewable customers around what the opportunities are.

Okay. Next question on the -- what has been the favorite topic until today's -- last night's topic, hydrogen business, just what does a fully fleshed out hydrogen business look like for NextEra?

Okay. So I think fully fleshed out, and listen, it's early days, right? And I think I said this in my prepared remarks that we're still -- we're not only in the top of the first, we're probably not even started batting practice yet in this baseball game, okay? So it's very early days. We'll start with that. But from a -- as we modeled it, looked at this, number one, I think there's nearly $1 trillion of incremental renewable demand to decarbonize other sectors other than the electric sector. Or -- and so number one, it's a giant driver of renewal limit, okay, first and foremost. Secondly, it is a replacement fuel for diesel. And also an ability there, I think, to deploy electrolyzers potentially in combination with renewables. And so query, is there a new stream of capital available to us that we can deploy capital and electrolyzers to actually make -- to make hydrogen for industrial applications, for diesel, for other things. And so that's -- that I think, the pairing of the electrolyzers with the renewables is the piece that I think it's still early days. Obviously, we're going to run a pilot starting to PSC approval in Florida. And I think it's an important part piece of the decarbonation of the whole sector puzzle. But those are the things that I -- so you look at that, that's a big market in and of itself. And then just the renewable demand part of it, gigawatts, I said on the call last quarter, gigawatts and gigawatts and gigawatts and gigawatts of new renewable demand. I firmly believe that's the huge upside that hydrogen brings on it.

So I got a couple of questions on the big oil companies coming in. And I guess one question is, what do you think of that as a competitive threat? And the second is, do you think they'll actually look to be acquiring either utilities or IPPs here to enter?