NextEra Energy, Inc. (NYSE:NEE)
2013 Barclays CEO Energy-Power Conference
September 11, 2013 07:45 am ET
Moray Dewhurst - Vice Chairman and Chief Financial Officer
Good morning, everybody. Thanks very much for joining us for this year's Barclays Energy CEO Conference. As you all know, today is the 12th anniversary of the September 11 attacks. An event that affected us all in this room in many different ways, to show our respect for those who lost their lives in attacks, I would like to invite to join me in a moment of silence before we get started this morning. Thank you very much.
To start our conference off this morning, we have NextEra Energy. Moray Dewhurst, who is the Chief Financial Officer, is going to take us through the NextEra story. As I am sure you are all aware, there have been a lot of interesting announcements about CapEx backlog from the company recently and hopefully more to come soon.
Without further ado, here is Moray.
Thank you, Dan. I thought, I would do something maybe a little bit different this morning. First of all, thank you for actually showing up at this time of the morning. I appreciate that. We had a investor conference back in March, which I know many of you attended, so I thought I would take that as my starting point and just remind you a couple of things we said there.
Before I do that, I need to draw your attention to the cautionary statements and remind you that a complete list of the risk factors can be found in our SEC disclosure documents and also remind you that I will be using adjusted earnings per share measures here. Reconciliation is available in material on the website.
I think there were maybe four key messages that we had in March Investment Conference that hopefully everybody took away. We talked about attractive growth prospects of both major businesses and we introduced or reintroduced the concept of backlog and incremental investment. Backlog meaning fundamentally anything on the FPL side that had definition and a regulatory approval on the Energy Resources side, typically a project that had a long-term fixed price PPA attached to it and was going through the development phase. Incremental meaning things that we had identified as possibilities, but either didn't have contracts on or in the case of FPL initiatives didn't yet have regulatory approval to go ahead. We talked a lot about what was in each bucket.
Secondly, we talked about the shape of the portfolio, moderate risk shifting towards more regulated and long-term contracted. We discussed the strong balance sheet and the accelerating growth of operating cash flows fundamentally changing the dynamics of our cash flow picture and we also talked about the change in dividend policy that the board made last year targeting a 55% payout ratio in 2014.
Also, we spoke there and in our quarterly calls, we discussed the things that we are really very focused on for 2013 and have listed here, so rather than just going through the story here today, I thought instead what I would do is just give you an update on where we are on these various initiatives.
Let me start with FPL. Overall, we are having generally a very good year. Everything that FPL starts with what we call the customer value proposition that combination of low rates, high reliability and excellent customer service that we aim to deliver all the time. I am pleased to say that that's going well. Our reliability continues to be strong year-to-date on an annualized basis, our year-to-date SAIFI, that's the average frequency of interruption is slightly below 1. That's below industry average.
Our annualized SAIDI, the average time that a customer is without power is less than 72 minutes compared with an industry average of well over 100 minutes, we were ranked number two in the south region by J.D. Power in the residential customer satisfaction survey, so we are very pleased with that and we have maintained the low bill position in Florida. We do expect some small increase in '14, mainly driven by fuel, but I think we will continue to be, if not the lowest then certainly one of the very lowest bills in Florida.
On the revenue front, the position is a little bit mixed, but overall I think it's very positive. Year-to-date base revenues are up about 13%, 14%. That, as you might expect, is primarily driven by the base rate increases that have gone into effect this year. The general base rate increase that went into effect with the start of the new settlement agreement in January and then the increase associated with Cape Canaveral coming into service. We've also seen a shift from (inaudible) associated with nuclear assets coming into services. We completed the upgrades.
On a volume basis, we are actually down about 0.9%, but that's fundamentally driven weather. Weather comparisons are off about 2% relative to last year. Customer growth has been good and seems to be improving. This is a chart that just shows on a monthly basis, the year-over-year increase in the customer count, so in August, we have been running in the, I'll call, what? 30,000 to 35,000 a year range for quite a while of about a year and a half, maybe longer and in the last couple of months it has started to jump up.
Now, to be fair, I think, some of that is associated with the fact that with our new advanced metering initiative, we now have the capability remotely to connect and disconnect people and in the course of doing that, we have disconnected a whole series of meters but didn't have a customer account associated with them and low and behold the very next day or sometimes very next hour, somebody calls us and says you cut my power off. Meaning that there was somebody drawing power, but not paying for it, so some of that is shown up here, but still it's a healthy trend. Usage about flat, slightly positive for this year.
You turn to the cost side, cost is absolutely critical for our ability to get where we are trying to go at FPL. I mentioned that productivity was a major focus and that was the focus areas. Just a reminder, we have a very strong relative cost position at FPL. This is a benchmark chart of non-fuel O&M retail megawatt hour and for a long time we have been a top decile performer as is indicated here.
However, I would tell you that the trend the last few years has not been what we would like it to see. If you go back to the 90s, we were improving our real O&M per kilowatt hour at about 6% a year. Now, that was associated with some major restructurings and was not sustainable, but in the first half of the last decade, we were still improving at let's say at couple of percent a year, real O&M per kilowatt hour.
In the last five or six years, that actually turned around. Our real productivity was negative, so our real cost was going up 1% or 2% a year. Now to be fair, some of that was simply the fact that the denominator went down with the recession and there was some good regulatory reasons why there was cost pressure, but nonetheless we firmly believe that a well managed business over a long period should be able to drive its real unit cost down and that is certainly our goal and our intention.
Another perspective on it, in 2012, FPL's O&M was about $1.5 billion a year. If you assume that that were to grow all the things equal in nominal terms, that's let's say 2.5% a year. Go out to 2016, you will find out that that means about $150 million increase in the run rate. We previously indicated that it's our goal to keep total nominal O&M roughly flat at FPL, so you can see that that means that we need to improve on a run rate basis to the tune of about $150 million a year give or take.
At the time of the March conference, we indicated that we already saw opportunities that could get us about half of that. Some of you may have heard what we call project momentum, a companywide initiative to have a productivity improve ideas all across the business. That has been going very well. While I can't say that we are absolutely all the way there yet, with the collection of ideas we have, I think today we can definitely see a reasonable pragmatic practical path to get into that target of keeping nominal O&M flat over the period of the four-year rate agreement. There's a lot of execution work to be done, a lot of the initiatives have to be put into practice, but I think that's very much a reasonable goal and I feel good about it overall.
On the CapEx side, just maybe a reminder for some of you, but I know that there's a little bit of confusion about this. There's really two types of capital at FPL at the moment. There's capital that has to be recovered through the base rates that are associated with the four-year settlement agreement. That's the general base rate increase and then the three, so called GBRA, or generation base rate adjustments associate with the new combined cycle units coming into service, so all things like base infrastructure, any maintenance, any incremental storm hardening, any incremental reliability spending that we want to do has to be recovered by the rates that we are already getting.
There's never separate recovery mechanism and that is really why we are so focused on productivity. Every dollar of productivity that we can [eek] out, creates additional headroom for investing in this core infrastructure CapEx, so we are very focused. There's lots of things that we could invest in that would be good long-term for our customers, so we are very focused on figuring out what are the best ways to do that and as maybe you know we have indicated that we will be accelerating our storm hardening program.
We've also got some incremental reliability initiatives that look very attractive from a customer perspective, so at this point I expect a cumulative CapEx, this piece on the left, over the four-year period to be somewhere around $7.5 billion to $8 billion, so we feel good that we can invest that in projects that will be good for the long-term customer value proposition and still maintain ROE are above the midpoint of our allowed ROE range.
Then separately on the right-hand side of the chart, we have a number of major initiatives that would carry with them what I think of as a separate recovery mechanism, so some separate pricing, and let me just give you updates on those.
The pipeline, you will remember I hope that there are two parts to the pipeline. The upstream portion coming from Western Alabama and terminating at the Central Florida hub, that project was awarded to Spectra, and we have agreed to partner with them. Spectra is a very strong company with a lot of experience. We are delighted to be working with them and the two teams are working well together.
Obviously, they know a great deal about pipelines. We also know a little bit about Florida, so I think there are some things that we can help them with in terms of the expeditious development of that project, so that's the larger piece and that wallet has FPL's what I call is anchor tenant was certainly has other shippers on it and one of the major activities now is to canvas the market and see who else has gas transportation demand over the next few years, because signing those peaker up will obviously improve the economics for everybody.
The other piece is the downstream piece running from the Central Florida hub down to generating facility in Martin County. That will be provided by then NextEra affiliate. Our total CapEx in the two combined will be on the order of $1.6 billion. Just as a note, a couple of folks have asked about this, but ultimately when these come into service, they will be reported separately from FPL, because they will be separate legal entities, but at least for the moment, we are considering them part of our regulated segment when it comes to forward-looking statements about earnings and portfolio mix and things like that.
We filed with the commission in late July and we would hope to have all the approvals that we need from the commission by the end of the year or the first quarter will depend a little bit on how much opposition there is to that, but so far the team leads are good, I think.
Peaker upgrades just as a reminder EPA some while ago changed the NOx standard to require essentially on a one-hour basis what had previously been the long-term average standard. That present some real challenges to our fleet peaking capacity at FPL, which is largely composed of old aero derivatives Jet engines which are very cheap, very effective, quick to start but unfortunately will not meet that one-hour NOx standard. We can debate whether that's a real meaningful improvement in the environment, but that's the way it is. We have to meet that new standard, so we have made a proposal for upgrading those existing peakers to a much more modern units and still have black [star] capability we will still have cost ramping capability give us the operational flexibility we need to meet those few peak hours.
That is about an $800 million capital initiative. We have filed an application to recover that through the environmental clause, which we believe is the appropriate vehicle for that, but I have to say that that's a little bit untested generation has not before have been recovered through the environment or is even, well, there has never really been a case where the generation has been driven strictly by the need to meet the environmental standards, so I expect we will have some push back on that.
The alternative of course would be that it would be recovered by a base rate. Given the timing of these projects, we expect to have this initiative completed by the end of '16. It would in financial terms mean that instead of getting a cash recovery through the clause, if the commission didn’t approve clause recovery, we would be recording AFUDC in the '15, '16 time period and then it would be part of a base rate proceeding at the end of the current rate agreement, but I think there is a very good argument for theses assets being in the environmental clause and we certainly intend to make that argument.
The third one I would mention with a question mark here is, incremental solar. We have about 500 megawatts of sites ready to go in Florida. Utility scales are what continues to have and is likely to continue to have better economics than distributed, solar is just inherently by its nature. We are also seeing the impact of improving solar economics overall. While it's a little hard to use their crystal ball I think there is a reasonable case that we could, we are going to have to say 2017 incremental solar at utility scale in Florida could be about rate breakeven from a residential customer perspective which would a huge win. Right now, I don’t think we are in a position to go ahead with new solar, but sometime soon I feel reasonably confident that we will have the opportunity. We need to be ready for that, so I would say that’s likely an initiative for 2015 or 2016, but if and when it happens, it could happen quickly.
Let me turn now to Energy Resources we also have generally good year. We should see very decent earnings growth for the full year, but to be absolutely honest it is not an easy environment in this business. I don’t think anybody who is in this business would disagree on that, so what's going well and what's not, plants are running well. Plant reliability is very good. The nukes are running well. Through July, the wind was blowing nicely. Unfortunately in August, the wind just disappeared. It's been absolutely disaster since then, so hopefully that will come back. Of course, we are benefiting from the roughly 1,500 megawatts of new wind that went into service at the end of last year.
On the other side, market conditions as I'm sure you all know are weak that limits are, what we call, our asset optimization opportunities and especially Texas, which has been essentially flat for the whole summer. We had one little bit of excitement last week where we saw a couple hours of $5,000 of megawatt hour, unfortunately we need a few more days like that to have a real impact on the financials, so it was a very nice day. We hope, the hearts of flattering and we were feeling good but it dint last.
Also, on the mix side, we spent a lot of time over the last number of months maybe dating back almost a year now in taking a deeper look and revising our long-term view of the wind resource. In the course of that, we have come to the conclusion that we have been really attributing more to wind resource than we should have and less to equipment and site issues. If I were to put it really simply what we are seeing, we experience in the field is for a variety of reasons I'm not pointing finger here, but the equipment is not delivering quite the level of performance in the field that we had originally expected, so relative to the theoretical power curves that we get from the equipment suppliers obviously we have always had expectations that you won't hit at performance curve exactly, but relative to where we were before, I think I know we have dialed. I think I know we have dialed back a little bit on that.
Now, the good news is, some of the factors that we have identified are things that we can work on in the field. By optimizing the equipment and the site, we could recapture some of that and I think I talked at length in response to a question on one of the quarterly earnings calls about the alignment of the veins on the turbines themselves is one example of that, so we have a number of programs in place to kind of recapture that.
We have done a recalibration of the whole wind resource and as a result have started a new series of wind resource chart, which we will continue to update. I just warn you that those cannot be compared directly with the old wind resource charts, but we had. At the same time, there is no questions that the new equipment that we are working with, the new equipment that continues to come into the field is significantly better than the old stuff, so over the course of a decade, we have seen the realistic average capacity factor for a high quality wind resource area move from along the mid-30s up to 50% or more.
Let me turn to new development. Progress on the existing backlog is good, 600 megawatts of wind in Canada 125 of that will come online later this year, two big U.S. solar projects Genesis and Desert Sunlight partial in service this year roughly speaking half this year, half next year. On the U.S. wind side, we will have about 250 megawatts in service late this year.
We have also had good progress in signing up new customers. We have got about 975 megawatts of circle PPAs for the 2013-2014 wind program, so far that’s to be compare with the 500 to 1,500 range that we had talked about, so I think that we have a realistic shot of getting as high as 1,500. We will know a lot more in the next really few weeks. We have got a series of discussion, negotiation, RFPs that we are in the midst of that will kind of settle that down.
We also have about 40 megawatts of circle incremental solar and there is a possibility of one or possibly two more large scale projects. I put them sort of, I don’t know 50-50 odds, but there could be something to add again I think we will know within the next two, three months probably whether we have something more on that.
Just before I move on, a little word on construction. Obviously, with the nature of our strategy and what we are doing, we are deploying a lot of capital on both side of the house of development and construction activities. Obviously there is a risk associated with that, but need to hide that and it's clearly a risk factor that you need to assess.
While we are certainly not perfect, I do think our track record is pretty good, so I pulled some data the other day. In the last ten years, our engineering and construction team has managed more than 80 individual construction projects, 66 wind, 13 fossil and solar and three transmission project.
Now I cannot tell you that every single ones have been on time and on budget, but in aggregate they have help us deploy $19.6 billion capital against budgets of $20.3 billion, 89% of the projects were on time or early and most of the schedule and this had actually been associated with third-party issues, which is still our accountability and they have only been a few days or a few weeks.
Some things are tough to control. For example, renewable projects are dependent upon interconnect work typically and that’s something that we don’t control, so we plan for that. We work with the transmission provider as best as we can, but sometimes things happen and that’s what has pushed back the first start of Genesis just delays on the interconnect work. That’s not mended and excused, because that's something again we are accountable but it's part of the inevitable effort development and constructions business.
I should also note that the engineering construction was the same group that we are seeing right now the thirty mile natural gas pipeline from Martin to Riviera to feed the new Riviera modernization, so I don’t think there is any group that knows more about the current economics of construction of pipelines in our part of the world, so they will be an important resource as we build the downstream portion, so we have a lot of construction to do and we don’t take it for granted.
A couple of words just briefly on the transmission side, Lone Star went into service in the spring of this year. That's positive for cash that converts book earnings in to real cash and we recently had a win on the development side with a project up in Ontario. That’s not a done deal yet. The way I think of it is we are essentially at the stage where we are going to get reimbursed for our further development cost, but I would say that one is in our hands to bring to reality.
Let me just, before I turn to questions, few comment on the corporate roll up. On the cash flow side, we are on track for meaningful improvement in our cash flow position. Last couple of years our operating cash flow has been excluding clause impact impacts, which clock around as Jim likes to say have been about $3.9 billion on average. This year, we should come in somewhere around $4.8 billion. Obviously that's subject to working capital derivatives flips and things like that, but roughly a 25% improvement in our underlying cash generating power. That is driven by a number of things. Obviously, base rate increases at FPL are important. New projects coming into services at Energy Resources and a modest little amount from the conversion to cash on the transmission business. That’s obviously a very important step for us in reaching credit metric target 2014 and we expect further growth in the underlying operating cash flow in 2014, so we feel very good about where we are.
On the cash side, financing a couple of comments there, it's been a quieter this year for financing than last year but that’s really just relative, because the CapEx is down and the cash flow from operations is up obviously. Still, we will expect to raise about $4 billion net of maturities nothing out of the ordinary financing plan that we discussed in March. We have done a number of tax equity transactions to the point that roughly 50% of the PGCs we generate our now allocated to our partners.
I would spend one moment on project financing. We raised $1.15 billion of project debt against assets that had remaining book value of less than $1 billion, so these assets have been generating cash pretty much from day one and we have now pulled out more than their remaining book value, so overall they have been excellent value creators and we think that position us well in Texas.
We still are fundamentally optimistic about a long-term supply demand balance and implications as cost spreads in Texas, but in essence in this transaction we have hedged ourselves financially, so we retain the upside to improvements in spot spread over the long haul, but it for some reason the markets should deteriorate we have essentially reset floor in our position through that projects financing. A brief reminder on equity in 2014, we said in the March conference expect a range of up to zero to a $1.5 billion, primarily in '14 depending upon the CapEx profile. Obviously, since we have had significant success since then in adding to the incremental CapEx opportunities, I would expect something greater than zero to be realistic, but where exactly we will come out we will have to see as we get in concert. It will obviously depend a lot on making sure we meet those target credit metrics in '14.
Really, I think that it is important to recognize that, but I would focus your attention on '16 because the equity is really needed to support this next wave of building just as we have been through build waves before when you were in the midst of the build phase, the CapEx is high and the assets that you are investing in haven’t yet started generating cash flow. That's what puts strain on the balance sheet. So that’s what we need to support in 2014. If you look out to 2016 on the current path, actually what's baked into our rollup right now is in repurchasing in 2016, because at that point we have more than enough to sustain very strong credit metrics and meet all our ongoing cash needs, so we will be continuing to look for ways to optimize our capital structure in the months ahead. We have a couple of things on the balance sheet that we may have opportunities to refinance, essentially, so we will see how we do on that.
Finally, I could not end without a few words on the subject of yieldco. Not a lot of news here, we continue to evaluate a variety of possible structures and certainly a public yieldco is just one of them. We don’t feel any great sense of urgency on this. In fact as we dug more into this, looked at the portfolio and some of the assets that might be most suitable for a vehicle of this kind actually some of the things that we think might best fit are not yet in service, so there may be some value in waiting until we have kind of the best package that we can put together, so we want to get a little bit further anyway. There is a lot of issues that we are still working through. I can't confess that we completely understand this thing yet.
One word on asset suitability, a significant proportion of our portfolio, it's important to recognize it’s simply not suitable for this kind of vehicle. Anything that's either merchant or has a contract that is less than 10 years let's say we don’t consider at least at this stage is particularly viable. Significant portion of our portfolio already has been structured into alternative vehicles, all the tax equities essentially different version of this thing and assets that are still in the PTC phase don’t suit themselves well. So, we recognized that there is a funnel here and when you strip out all those things, it’s much narrower proportion still gives us a good meaningful amount but it is important to keep the proportions in mind when you think about the potential impact at the corporate level, especially bearing in mind that FPL depending on how you look at is 60% two-thirds of the enterprise.
Maybe stating the obvious, but our focus on this is value creation for our shareholders. Having a yieldco that trades well per se is not the main objective. Frankly, any vehicle in today's environment that has strong, stable and growing cash flow and high visibility on that cash flow ought to trade really well, so I don't think that should be a surprise and I don't think that should be - the critical issue is what happens to the performance of the sponsor. It's early days obviously, but and I haven't looked at this myself in any great detail and I am sure many of you know this much better than I, but certainly so far it doesn't seem like there has been a big pickup for NRG . Obviously there's a lot of things have been going on. There's been the weakness in Texas that's contributed there, but it's hard to single out and show that there was a big pick up for the in response. The first one was seeing how some of these others do.
There are significant governance issues. I look at the governance structure show some issues about independents that certainly give us convern and where we need to go forward with anything like this, we would be very mindful of the fact that we would have two distinct sets of fiduciary interest. All of which is to say, we are not negative so much as we are cautious and perhaps a little bit skeptical, we certainly want to see if there are other ways of reaching the goal and which is really to my mind tapping into a pool of capital. The price is certain, the cash flow streams differently from the overall market for our stock, so we will keep you updated on our progress on yieldco and related things.
With that I will close and if there are one or two questions, I believe we have the moment.
You have time for questions. There will be a mic that will come around if we have any here today. Let me start out and just ask Moray what is his view on Texas market restructuring, which probably holds a bit of a key to bridging the gap between what is supply and demand balance requires and what we are actually seeing in the ports.
Well, I would say that we continue to be mildly optimistic, although it does seem to take a little longer than we might hope for. Obviously, with the new commissioner, who has expressed the desire and the need to really study the issues and learn what's going on and what the relatively very mild summer, that's certainly taking some of the urgency out of the issue. I still think it's going to keep coming back as an issue. I still think the long-term solution is some form of capacity market, but we are just going to have to see. I think, I would just go back to my comments on the financing is one of the reasons why we feel good about what we have done there, we've reset the floor higher, so to the extent that we see longer term upside that's great, but we are pretty well protected there.
Hi. Good morning. Just two questions. On the yieldco, so would it be safe to say that it's at least six months off if it is going to be done at all?
I don't know, but I can put a direct timeframe on. It's not next month anyway I can say that.
Okay. When do those assets that you talked about come online?
Well, we've got a number of assets that are coming into service into 2014 and 2015. Obviously, one of the things you want to do if you are going to pursue to the yieldco as you want a series of assets that are lined up to be able to drop down into the vehicle in future years, but I think it will be better if we were a little further along into development phase some of the ones that might be suitable.
But not in service, just in the development stage?
Correct, but there can be a difference between, where you are in the development stage. Having something that has all its permits in hand is obviously a lot more attractive than something that's in the earlier stage.
Got it. Then I see them Bloomberg. I came in late, so you are saying for this year you are going to be on upper half of guidance is that correct?
Yes, at this stage of the year, we continue to see ourselves in the upper half of the original range for '13.
Just curious, because you mentioned on August wind, so what's taking you up to the upper end? What parts of the company? What parts of your earnings?
Well, remember that we had very strong performance in the first half over all that kind of put us a little bit ahead of where we had expected to be. Obviously, when we look forward, we are always assuming normal wind resource for the balance of the year, so wind is obviously just one thing in this thing, so there's nothing particularly new that happened since the second quarter earnings release. There have been some positives and some of the customer supply stuff that have offset a little bit of the wind stuff, but nothing really particularly new.
With that I would like to thank Moray for his presentation. We do have a breakout session at Liberty V, if you want to follow for further questions. Thanks, Moray.
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