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

Hi, everyone. Thanks for -- thanks for getting in here. Sorry. This one looks like it's standing lonely. But very happy to have Chairman and CEO of NextEra, John Ketchum. John is going to go through some slides, and then we'll have a discussion and take your questions. So turn it over to John.

All right. Good morning, everyone. Let me just start with a few opening remarks for the room. NextEra Energy, as I'm going to discuss today, continues to execute in a very challenging macroeconomic environment. I'm going to explain why I believe that. Four points that I want to make right upfront. The first is that our growth visibility is very well defined. And of course, we're going to be disciplined on how we allocate capital going forward. We plan to finance our growth efficiently for shareholders over time and expect to have minimal equity needs through the period of our expectations. I'll talk more about that as well. Second, while the pressures from inflation and interest rates are real, the state the obvious. Nee is successfully managing the macroeconomic environment through cost productivity, capital efficiency and other means. Cash flow generation from the nation's leading rate regulated utility and our long-term contracted renewable business. give us the ability to weather the ups and downs of various business cycles. Third, The renewables market, which got off to a slow start following the passage of IRA due to inflation, due to interest rates, due to supply chain pressures is starting to gain momentum heading into '24. I'm going to talk a little bit about that as well. And although PPA prices are up, buyers remain resilient as renewables continue to be the low-cost generation option. We're starting to see early signs of panel and battery prices falling as supply chain uncertainties from certain convention and UFLPA are resolved and competition is really starting to increase. And our development effort remains on track against the overall expectations that we put forward on our January call. Finally, tighter monetary policy and interest rates, which have risen over 100 basis points since we announced our plan back in May for NEP, obviously, affect the financing needed to grow distributions at 12%, which has impacted NEP's price and trading yield, we believe lowering the growth rate, which in turn limits NEP's growth equity and overall capital needs until 2027. Best positions NEP for success going forward. Of course, we still need to execute against the transition plan that we communicated back in May, which we are diligently working to advance. So these are the cautionary statements. You guys have all seen those before. Those will cover my remarks today. This is a slide that you're all well familiar with. NextEra Energy is founded and anchored by 2 world-class businesses. First of all, Florida Power & Light, which is located in the nation's fastest-growing state of Florida with one of the most constructive regulatory jurisdictions and NextEra Energy Resources, the world's leader in renewables. And both businesses are successful in large part because of their ability to leverage a common platform being able to buy cheaper, build cheaper, operate cheaper, finance cheaper, all the things that you see in the blue bars on the left-hand side. Clearly, an operations leader, a world-class operations leader in all classes of assets, significant transmission capability, which really enable us to deliver on our customer value proposition through reliability at Florida Power & Light and are a huge competitive advantage for us with regard to transmission. And something that's not on the slide is the strength of the balance sheet with an A- balance sheet, 18% FFO to debt with plenty of room there. The FCG sale that we announced earlier today, giving us even more cushion and some dry powder against that metric, really position the business well and I think are competitive advantages that should not be overlooked. I want to spend just a minute talking about NextEra Energy's execution. We've been able to execute in a very tough macroeconomic environment. Back in '22, we were able to grow adjusted EPS at 13.7%. We're off to another very strong start to 2023, where we've been able to grow adjusted EPS at right around 11%. And one of the things that I want to point out that we have not talked about with regard to our execution back in 2022. That has carried over a little bit to this year is, we've had 2 origination efforts that have been ongoing at the company, right? One is the 12 gigawatts of new renewables that we've been able to add to our backlog over the last 18 months. But the second is, we've had to renegotiate about 5 gigawatts, mainly solar contracts that had been impacted by cost of capital that had been impacted by inflation, that have been impacted by some of the supply chain pressure. So that's what I mean about being disciplined. We're willing to do good deals, not any deal, if a deal doesn't make sense and we can't maintain our return, we'll go back to the customer and try to renegotiate to make sure it does and we are unwilling to compromise on the return expectations on what we built. We also price the current cost of capital into every deal that we do and I'll talk a little bit about how we are able to manage interest rates for success going forward at NextEra Energy. We also are well positioned with about $13 billion of hedges for 2024. So we've been able to manage '23. For 2024, $13 billion of hedges. So think about that. If you use the $13 billion hedges over on the NextEra Energy Resources side, that pretty much covers about 90% of our interest rate exposure on that side of the business. On FPL, we have built-in mechanisms, including the adder that we negotiated from 11.6% to 11.8%, the higher handle a higher cost of capital and interest rate moves on that side of the business. As well as surplus, right, which we can use to help absorb some of the interest rate moves there. So because of that, I think we're probably as well protected against interest rate movements, I would argue as any company in our industry. And I think that's an important fact that should not be lost sight of. And you can see also the strength of the cash flows coming from the business. If you look at the lower left-hand side here, 75% of our business mix right now is regulated, 25% is unregulated from a rating agency standpoint, which gives us plenty of room against the 70-30 that were typically held accountable for. So really in terrific shape there. Long track record of being able to grow earnings, grow the distribution at NextEra Energy. Let me talk a little bit about FPL. Again, FPL located in the fastest-growing state in the U.S. with the most constructive regulatory jurisdiction, I would argue in the United States. And the value proposition is, I think, quite clear. One is very visible opportunities to invest CapEx, $32 billion to $35 billion it's all in transmission, and it's all in renewables for the benefit of customers. We know exactly what we're planning to do and we know exactly when we plan to have it completed by, by putting more solar on the system, we continue to execute in our strategy of lowering fuel bills. We're by far the leader in O&M on a dollar per megawatt hour basis. You can see it here on the right-hand side. All of that has resulted in lower bills for customers. On the Energy Resources side, obviously, a ton of growth visibility there, and I'll speak a little bit more about that as well. But one of the things that I want to point you to is really NextEra Energy, the strength of its cash flows. So right now, 75% on a business mix basis at FPL. If you look at the Energy Resources cut of where it currently stands and you can see it here on the far left-hand side, growing from 2013 to 2016. But look at 2023 in the middle, 82% is coming from mainly renewables and then rate regulated transmission, rate regulated natural gas pipelines in nuclear. Those are high-quality, long-term contracted rate-regulated cash flows for that business growing from 82% to 85% from 2023 to 2026. We also have a very high-quality renewable portfolio. And I know there's been a lot of discussion about some of the portfolios that have come to market. But our portfolio I'd put up against anybody, 72% plus bar, 15-year average contract life, BB+ on counterparty credit and top decile on O&M wind performance. So when you think about that green bar on left-hand side, those are really high-quality projects. You can see the growth visibility that we have. We get up to that 58 gigawatts, get the 69 gigawatts by far, just the renewables piece alone is larger than the generation fleets of just about anybody in our industry. The competitive advantages. Look, the renewable business is not an easy business. You got to be able to do a lot of things well. You got to have experience. You got to have been in this business for a long time to know what you're doing. And we have been able to build a team that has all these different capabilities. But you got to get it right on a number of different fronts, wind resource assessment, solar resource assessment, market knowledge, transmission, OEM quality, operations, site optimization, all those things go into building a great renewable project and it's all centered around a team that has a ton of experience in doing it. But if you fall short on any one of these things, the quality of the project gets compromised. I've had a lot of questions from investors about valuations lately. What do you think about valuations with a lot of the portfolio sales that have come to market. And I have a few response to that. I mean one is Cost of capital has undoubtedly weighed on valuations. You can't take a long-term contracted cash flow stream and say the cost of capital has no impact. Surely, clearly, it does. But the other factors that I would ask you to consider are, there have been a lot of portfolios that have come to market for different reasons. People looking to restructure their portfolios. That's resulted in really an oversupply problem, right? So we have a lot of assets with fewer buyers with some of the capital constraints that we see in the market, forcing really a buyer's market in that regard, which has depressed valuations. The second thing that I would ask you to think about is asset quality. These things -- if you don't have these things and you don't have 2 decades of experience in the areas that I have listed here on the screen. It's tough to build a high-quality project. And I'm not saying that these projects weren't high quality. Some of -- I'm sure some of them were. But I'm also sure that some of them may have fallen short in some of these areas. And again, wind resource assessment, solar resource assessment, OEM quality, understanding of transmission and congestion and basis and market knowledge, all those things drive valuation that impact the value of those portfolios. So the only thing I would suggest and the reason I'm addressing these is, I think, some caution in really thinking that you can take the valuation that you see on a portfolio that's being sold and say, well, that same valuation applies to embedded portfolios of all the others. We don't -- we certainly don't do that when we look at valuations for rate-regulated utilities. We look at them, we apply different premiums. That's not for me to decide. That's for investors to decide. That's just 1 person's point of view. We have a strong focus on developing high-quality assets with well structured contracts with proper risk mitigation that, of course, reflects the experience that we have. We have arguably the best operator of generation assets anywhere, period. And we have the commercial capabilities and tools to manage the risk that we take on. And we're pricing higher cost of capital into our contracts to preserve returns. And we're still having a lot of success in the market given the 12 gigawatts we've been able to do over the last 6 quarters. So to me, it makes sense that our renewable assets should arguably be worth a little bit more than some of the others on average. But again, that's for you all to decide. But I think Bottom line, over time, our real performance operational and financial will show up in our results, as has always been the case for a couple of decades. And I'm confident that we'll be able to keep our eyes focused on doing good deals, executing well and we'll continue to meet the expectations that we share with you, and we're going to continue to be patient and disciplined. Let me talk just a little bit about the renewable growth opportunity. You can see the middle section here. There are a lot of tailwinds still behind on the sector. Clearly, PPA prices are up based on some of the factors that I pointed out. That's not going to continue forever. There are a lot of different things that suggest that renewables are here to stay. It's still one of the lowest cost generation options. You're now starting to see EVs data centers, semiconductor chip manufacturers, a lot of domestic manufacturing moving to the U.S., oil and gas industry looking for opportunities to electrify, hydrogen, all of these things are going to continue to drive more and more renewable demand as we go forward. And we believe that we have the competitive advantages to not only maintain our market share, which has roughly been about 20% of the renewables market. But continue to expand that as we go forward because when you think about it. There are a lot of folks exiting the sector and that creates opportunities for the world's leader in renewables. Let me spend just a minute about how we're managing inflation and how we're managing interest rate risk exposure. One way is cost productivity, as I talked about on the front end. We are laser-focused on taking cost out of the business. We just finished our velocity effort, which is a bottoms up, go to our employees, figure out how to take cost out, $725 million over the last 2 years -- record years for the company and being able to do that. Capital efficiency, staying very disciplined on how we deploy our capital, where we deploy our capital. But when we do deploy capital, really strong cash flow from operations that are helping to finance much of that CapEx. And then the way we finance our business with tax, equity and project finance helps us cover much of what's left. And then we do a little bit through capital recycling. Some of it's on noncore assets like FCG others through NEP. And as I look forward, our -- through the period of our expectations, even with the announcements that I'm going to talk about with regard to NEP in a minute. Our equity needs at NextEra Energy through the period of our expectations are very manageable and minimal. Very manageable and minimal and I also spoke about the interest rate hedges that we have in place. Again, $13 billion that covers us through '24 and then we have some extra hedges that carry over to '25. So again, those are the reasons why I say we're really well positioned. We didn't just wait for this environment to happen. We planned for it. We engage in a lot of long-range planning. We marked the market our book 10x a year. What I mean by that, we do a long-range forecast 10x times a year, where we constantly are marking the impact interest rates have on our business. And we do upside sensitivities and downside sensitivities and make sure we have enough contingency to be able to cover what might not be foreseen. So that's why I feel very good when you put all the pieces of this puzzle together around our ability to manage the pressures of inflation and interest rates going forward and why I believe we're probably better positioned than any company in our industry to manage interest rate risk exposure as we go forward. Our financial expectations remain unchanged. So I don't think there's really anything new to add here other than to say -- we continue to execute. We continue to deliver. If you look at the bottom bullet there, off a 21 base, the earnings expectations that we've communicated reflect 9.5% growth and adjusted EPS through the period of our expectations in 2026. And one thing I want to make clear is the announcements that we're going to -- I'm going to talk about here in a second regarding NEP don't have any impact on our ability to deliver on the financial expectations for NextEra. That does not mean that NEP is not important to NextEra, it is. We own 55% of that business. But what it does mean is that, we have other ways to be able to handle a reduction in the growth rate at NEE in terms of the ability to stay out of the equity markets. Okay. So let's turn to NEP now for a minute. For NEP, it's not about growth visibility, we have plenty of that. Rather, it's about financing the growth, which has been proven -- which has proven difficult to do in today's macroeconomic environment. We've announced some changes that we think will allow NEP to stay out of the equity markets for the most part until '27, which will really help position, I think, NEP for success over the long run. So one question you may have is well, why today? Well, the reason why today is we were faced with a decision either lower the growth rate from 12% to 6% or do a drop this quarter that made no sense, right? Had we done the drop that we had planned to do in today's macroeconomic environment, you all would have been coming to us and saying, why did you do that? Why didn't you provide NEP with a little bit more flexibility going forward? So we made the hard decision of not doing that drop, buying NEP some more time by going from 12% to 6%, it gives NEP a lot more flexibility. It can stay out of the equity markets until 2027 for growth equity and gives us a little bit of breathing room to see what it is we're transitioning to? Hopefully, we're transitioning to a better macroeconomic environment and the pause we've made on the growth rate is something that we can later revisit. But we think this is the best move for unit holders currently. We talk a little bit about the transition plan. You're all familiar with it. We're in the middle of the Texas pipeline. Sales transactions, so I'm not going to make a lot of comments on that. You guys all know that we're selling our gas pipeline to take out our convertible equity portfolio buyout payments through 2025. And once we're able to do that, we will then focus on the last 3 CEPFs, but those aren't due for a very long time. They're in the back end, we have a small payment due in 2026, $147 million. The other payments don't even start until '27 and they're staggered over a number of years. So we have plenty of time to be able to address those last 3 CEPFs. So let's talk a little bit about the growth rate and the visibility that we have going forward. We believe for the reasons I gave you the value maximizing path for NEP is to dial back our growth plans while we await resolution of some of the uncertainties that are affecting us. So why are we doing it? Higher rates. First, we've continued to see rates climb 100 basis points since we first announced our transition plan back in May, while NEP's unit price initially responded favorably to that news. It's -- it's come down significantly ignoring today's performance going into yesterday. So that's one big piece because it impacts how we finance -- how we finance the business and the yield spread that we earn on acquisitions. Second is the higher trading yields, right? So with rates going up, trade -- our trading yield has responded as well. And NEP's unit prices declined, yield has risen pretty much in tandem with the yield curve. The third piece is higher acquisition yields. With a higher cost of capital, NEP has to acquire assets at higher yield. So we believe going from 12% to 6%, there's going to be enough good deals for NEP to be able to grow at 6%. It's going to prioritize organic growth. We have 8 gigawatt portfolio of wind assets that we can repower. That will allow us to take off a good chunk of that 6% growth, and then we can fill in with enough good deals that are accretive for NEP with the other 58 gigawatts that energy resources can offer going forward. And this allows us to stay out of the equity markets until 2027, which I've already spoken about. So we're clearly in a period of tightening monetary policy. It's likely not permanent. We could argue about that. Rates will probably adjust over time. But until, we know exactly what it is that we're transitioning to. The prudent course of action is to be cautious about the capital outlays, particularly when unitholders arguably are not being compensated for those higher rates of growth. And the expectations, I've covered these. You can see that we're reducing our EBIT and our CAFD commensurate with, in tandem with the growth rate. But bottom line, NEP has a plan to stay out of the equity markets until 2027 for how it finances as a growth going forward. So in conclusion, while inflation on rates have created challenges for both businesses. NEE is executing and staying disciplined with highly visible growth opportunities at both of our industry-leading businesses with very manageable equity needs going forward. And NEP has responded by charting a course to a sustainable future with significant growth visibility and limited equity needs until 2027, buying or sell some time to revisit where we are. And with that, that concludes my remarks.

Thanks, John. So I'm just going to ask you a couple of clarifying questions.

Sure.

And I'm sure that a lot of people here will want to ask you stuff too. So just on the NEP changes, if rates were to go up more, let's say, they go up another 100 basis points. Does adjustment have to happen again? Or is this something that since you're not in the equity market for the next several years, it's kind of you've kind of protected it from that.

Yes. So I kind of look at it in 2 ways there, Steve. So since we're out of the equity markets. The trading yield at the cost of capital that we see on an equity side are something that we can put to the side for a minute, right? Obviously, I'd be disappointed with where we may trade. But focusing on acquisitions to finance the 6% growth. That financing activity is going to occur really with tax equity financing, project financing. We're going to be leveraging really the cash flows coming off the assets. And really no different than the way we've always financed our business, whether it's been in energy resources or assets that have been dropped down to NEP, which requires a very small debt component for NEP. And so when we look at it, we feel comfortable with where we are.

And then one other clarifying. Just on the -- you mentioned no growth equity through '27. What is there other...

Until '27.

Until '27, Just Is there -- what does that mean versus like just no equity?

Yes. I mean, so it means -- so no growth equity until '27. The way we say [indiscernible] your question is why are we seeing growth equity instead of no equity. The reason we're saying growth equity is we have the CEPFs that we're pursuing the pipeline sale on working diligently to get that done. That takes out the equity that we would have to use for those CEPF buyouts, assuming that we're successful on those -- on that process, which I believe we will be. And there's a small payment -- CEPF payment that I mentioned in my remarks, that would come due on the fourth CEPF. That's about $147 million. That's due in 2026.

Okay. So that's really it.

That's it.

Okay. I want to open it up so that folks here can ask questions. So if anybody has something they want to ask. I'm sure somebody does. Yes, Reggie?

How are you going to replace the sort of NEP, the capital that it would provide in certain NEEs, sell-down process as NEE continues to grow?

Yes. So we've done a lot of work around that, obviously, with NEP's growth rate coming down from 12% to 6%, I mean, NEP needs fewer assets, right, at a difficult time, which allows it to do deals that are more accretive in a disciplined way that makes sense for NEP unitholders. But by going from 12% to 6%. We've done a lot of analytics around this for NextEra Energy. So statements have been made -- have been made lately. When you look at the cash flow from operations, you look at the tax equity capacity, you look at our ability to project finance the business. . And you look at tax credit transferability, which is a new mechanism to recycle capital. And you add all of those things together. It creates a manageable need for us to make up for that extra 6% on the assets that we would have dropped into NEP in other ways. And certainly, we may also -- as part of that, we don't have to do -- we wouldn't have to do an awful lot of it, but continue to look at other capital recycling opportunities around noncore assets. The FCG transaction that we announced this morning, I think, is a good example of that. And that was the FCG deal that we did was not a deal that we had to do. It wasn't -- I know it came out at the same time as this. And so people may try to link them, but they shouldn't be because we have plenty of room in our downgrade threshold metric currently. We didn't have to do that deal. We did it because it made sense, and we felt like we did it at attractive price. And it was the right thing to do by shareholders.

Question there.

Once MVP is commissioned, where does that fit into your portfolio or not into your portfolio?

MV -- I'm going to stay open on that. I mean, obviously, Gas pipelines, when you think about a rate-regulated business and a renewable business is not necessarily core to what we do. But we have a lot of experience in it. We've been in that business for a very long time. The MVP pipeline is probably one we'd hang on to for a while.

[indiscernible]

Just a follow-up. You touched on the FCG transaction this morning a few times. I think in your press release, it says it's earnings accretive, I believe. Is that -- is the assumption you just using the money to pay off debt? And how do we get to that accretion?

Yes. I mean if you look at it on a credit neutral basis, it's accretive. But yes, the use of proceeds would be used to pay down debt.

Upfront here, John?

John, I guess on the NEP and the timing, I would be interested to hear your thoughts on that a little bit more because obviously, rates have had a big move, but we're all looking for this new -- we're transitioning to this new rate environment, whatever that might be, that could be 100 to 200 basis points higher, that could be 100 to 200 basis points lower. So why make that decision today where you are, given that we're in this very volatile macro period?

Yes. No, good question. Really, we were faced with 2 not great decisions, right? And we made the one that we thought was right for unitholders. So on the one hand, we could have done a drop would have been a sizable drop that we would have had to do to meet our 12% growth rate, preserve -- meet our EBITDA and our CAFD guidance for the year. I don't think that drop would have made a whole lot of sense. I think you guys would have come back to us and said, why in the hell did you do it?" I just didn't make -- it's -- you acquired a sizable portfolio from NextEra Energy. You had to go finance it in an expensive way. The yield spread wasn't terrific. Why did you do it? And so we looked at that and said, look, we could do a bad deal or we could go ahead and take the growth rate from 12% to 6%, which is really the right thing to do by unitholders, get ourselves hopefully into a better macro environment, which is also part of your question. And be able to do that deal later at a much more favorable cost of capital than what we did and buy ourselves a little bit of time to be able to get into a bit of a better macroeconomic environment. And foreseeing a bad deal, I don't think really would have benefited unitholders in the price. And so when I look at the 2 together, that's a decision that we decided to make, give NEP a chance to get to a better macro environment, and then we'll revisit where we are.

I'm going to take the last question before we have to end up. So just I assume if you're dropping less assets into NEP, that means most likely the renewables business within NEE gets maybe a little bit bigger as a percent and is that -- you've talked in the past about keeping a balance there. And just strategically, what does that do? Does that make you want to buy more utility assets or -- yes.

We have a lot of breathing room. That's why I put the wheel on there, the 75-25 on business mix. So we have a lot of room. We have a lot of room right now in terms of the ability to keep more renewable assets on balance sheet that will be there for now for later.

Thank you, John. Appreciate it.

Thank you.

Thanks.