NextEra Energy's CEO Presents at Bank of America Merrill Lynch 2013 Power and Gas Leaders Conference (Transcript)

Sep.25.13 | About: NextEra Energy, (NEE)

NextEra Energy, Inc. (NYSE:NEE)

Bank of America Merrill Lynch Power and Gas Leaders Conference

September 25, 2013, 08:00 AM ET

Executives

Anthony J. Alexander - President and Chief Executive Officer, FirstEnergy Corp.

James L. Robo - President and Chief Executive Officer, NextEra Energy, Inc.

Analysts

Brian Chin - Bank of America Merrill Lynch

Brian Chin - Bank of America Merrill Lynch

Good morning to you all and thank you very much for joining us on our second day of the Bank of America Merrill Lynch Power and Gas Leaders Conference. To kick things off this morning, we've got -- we've got first panel here that talks about the future direction of U.S. power supply. And I have with me two distinguished guests, Tony Alexander and Jim Robo.

Tony Alexander is the President and Chief Executive Officer of FirstEnergy Corp. He is a leading proponent of electric competition and has participated in many national and regional forums on key issues facing the electric utilities industry. Tony received his Bachelor of Science and Accounting and Law Degrees from the University of Akron and has had a long career at First Energy in a variety of financial and legal positions.

Jim Robo is President and Chief Executive Officer of NextEra Energy. Prior to his positions at NextEra Energy, Jim was President and Chief Executive Officer of a major division at GE Capital. Jim received his Bachelor of Arts degree summa cum laude from Harvard College and his MBA from Harvard Business School.

Gentlemen, thank you very much, appreciate your being here with us on the panel today. Just a quick set up of logistics here. Most of the panels we've had so far in the conference, we've suggested to the companies that they do not necessarily need slides. In this instance because both companies have a number of issues that they would like to discuss, we are going to have slide presentations for this panel. I’ve asked each of the speakers to speak for about five to ten minutes. After that we will go into Q&A and take questions from the audience as well.

Tony?

Anthony J. Alexander

Thank you, Brian. And besides that we don’t take instructions very well, so we will do the best we can, try to stay on your schedule. Good morning, everyone. We're glad to be here today. The weather is absolutely beautiful here in New York and I hope you all get a chance to enjoy it some.

First off, we’ll follow something [here at glimpse], it would be nice Jim if you had taken care that for me. Well let’s have little fun this morning, anyways.. Read this at your leisure, it's obviously the Safe Harbor statement. I am not going to try to go through it again because of the time restriction that Brian put on us. But I think most of you are pretty familiar with it.

Okay, let's talk about some of my thoughts on power supply and I think I would just give you an example of what's going on in PJM so that you can kind of get a sense for some of the issues that we are dealing with. And quite frankly I think this chart tends to sum up much of what’s happening in the [capacity markets anyway].

Now remember the capacity markets themselves about, in the last auction about 74% bid zero. So we'll have to think about the [character of the] market to begin with when so much generation is either a price taker or is bidding or getting something rather than nothing and that’s a pretty significant phenomena that’s going on in that market at this point.

But as you can see and we think about it, the installed reserve requirement in PJM now over 81% would satisfy through demand response, energy imports and energy efficiency. That’s a significant increase over the past years. About 50% of the demand of the reserve required is made up of demand response alone.

And while we think in terms of this as an option for 60 to 70 registered [players], you got to remember based on history, about 30% of that demand response capacity is covered in incremental options, but PJM requires to -- and undertakes during the period, so much of that may not actually be available in the amount that was at least bid into the option.

And obviously we hope energy efficiency and imports from wherever they are coming from now can find their way into the Ohio Valley when the weather is warm or hot all across that region typically. But as you can see that percentage is increasing and it is replacing physical assets that are currently operating.

Right now if you put those in number terms, its 21.9 gigawatts in 2016-2017 versus about 4.2 gigawatts in 2010-2011. And as all of you are aware as a result of the kind of economic stagnation generally we are not seeing that type of load growth in PJM or perhaps anywhere in America.

So what do you do? What do you do when the market is shifting away from physical assets to softer forms of providing reliable service to customers over the long term? Well obviously we have to make some pretty tough business decisions. You have to think about your business in a different way.

You have to particularly be concerned about businesses that are facing significant increases in environmental spend in a market that’s saying, that effectively that asset may not be needed. And obviously, FirstEnergy has taken a number of aggressive steps in that vein to reposition its fleet and deactivate assets that are no longer needed.

So when you think about what we’ve done we’ve essentially changed the character of our competitive business and we’ve done that through a series of actions that I am going to try to highlight for you today. We’ve obviously reduced the size of our fleet and the mix of our assets.

Once we complete the deactivation scheduled for next month, the West Virginia asset transfer and the sale of the hydro assets, which by the way we are disclosing today a price of $400 million for the hydro asset, the fleet will be less than 50% coal, over 30% nuclear and more than 20% gas, hydro, wind and solar.

And while the competitive generating fleet is about the same size as before the Allegheny merger, it is on a much stronger platform of units, more environmentally controlled with overall improved feed rates and much more efficient.

All of the going forward, coal fleet is essentially river supported now and is concentrated in three primary sites. We’ve also reduced our capital spend by about $875 million in this business alone and our max expenditures for the competitive fleet will be less than $300 million. And in total for both the competitive and the regulated fleet, we now expect max spend to be around $525 million, which is a further reduction in our max total spend from what we told you at the second quarter earnings call.

The remaining capital over the next several years will largely support our nuclear program with about 70% -- excuse me, with about 65% of that tied to new steam generator at Davis-Besse, which will go in service in 2014 and new vessel head and steam generators at Beaver Valley Unit 2, which will go in service in 2017. Both of those investments support the long-term life expansion of those facilities.

Overall these recent moves put our competitive operations in a much stronger position and capable of not only supporting successful operations during this continued stagnant economic period, but well positioned to take advantage of improving markets as the economy recovers.

We expect to be cash flow positive next year, including the repurchase of a portion of the sale lease back interest. And we expect to have solid credit metrics of less than 40% debt-to-cap and more than 20% FFO-to-debt, all of those as a result of the repositioning of this -- of our fleet that will take place following -- throughout the remainder of this year.

As we repositioned the competitive fleet, our focus is now pivoting to growing our regulated operations, particularly on the transmission side of our business. As I mentioned at our second quarter call we have significant opportunity to invest in transmission and you can see the size and breadth of our transmission operations in Ohio, West Virginia, Maryland, New Jersey and Pennsylvania.

They are substantial. A major part of them are independently -- are owned by an independent transmission company, [SE] and we intend to invest in this size and scale because it gives us a platform to think differently about our business going forward.

Not only will we improve overall system reliability as a result of these investments, probably more importantly from your perspective they’re going to provide a more stable and consistent near-term path for growing our earnings. Our team is nearing completion of our multi-year transmission strategy. We don’t expect this to be a one-time show. We expect this to continue for several years. And our plan is to provide very detailed description of both projects, timing and the financial impact of these investments at the November EEI Conference.

Our regulated businesses have always been and will continue to be an important part of our strategy, but they will become even more significant percentage of our earnings as we go forward. With the repositioning of our competitive operations and importantly the reallocation of capital to our regulated businesses, our earnings will be more transparent and we end with less exposure to power prices.

As always, we’ll be focused on delivering value to our shareholders. Thank you for your continued interest in FirstEnergy. I look forward to seeing most of you or all of you at the EEI Conference in November. Thank you.

James L. Robo

Good morning, everyone. Hopefully we’ll get -- here we go. I am going to share a few thoughts this morning on our company. First please take note of our cautionary statement and risk factors.

We laid out in March at our Investor Conference our investment proposition. It’s pretty simple, above average and very visible growth through 2016, terrific and increasing cash flow from operations, growing significantly this year, significantly up over last year and we are growing as well from ‘13 through ‘16 by roughly about 10%, compounding growth rate from a cash flow standpoint, have a very moderate risk portfolio, a very strong balance sheet and great dividend growth prospects. So, really simple value proposition.

We are off to a terrific start so far in the first half of this year and we remain well positioned to earn in the upper half of our guidance range that we gave at the beginning of this year of $4.70 to $5 a share.

Let me spend a moment on this chart. When we laid out in March, we laid out two cases in March at our Investor Conference what we call -- what I call the backlog case. I think we may be called it the base line case in March, had about $15 billion of capital in that over the next four years between the two businesses.

That underpinned -- we said that would underpin 5% compound annual growth of EPS through 2016. And that was all things that had already being signed or approved by -- had already being signed from the contract standpoint or already being approved by the commission.

I also said that we were going to work very hard to originate $9 billion of incremental growth projects to be able to deploy a total of roughly $24 billion of capital between 2013 and 2016. And pleased to say that we’ve made terrific progress on roughly $5 billion of that CapEx spend and want to spend just a minute talking about some of the elements of that.

On storm hardening, we filed a plan to spend an incremental $400 million to make our resilient network even more resilient to storms that we should get a commission ruling on that here in October. We are moving forward with $700 million of reliability investment that is going to improve our customer service, which is already one of the -- we have one of the best service in the country as measured by minutes of outage and we are targeting to improve that even more through these investments over the next four years. And we are working through the approval process on a peaker upgrade at FPL as well of $800 million.

I think most of you know that we announced our plans for a third natural gas pipeline into the State of Florida at the end of July. That is an opportunity for a FERC-regulated entity, affiliate of FPL to invest $1.6 billion in a project that overall is about a $3.6 [billion] project that will bring terrific reliability benefits and access to low cost natural gas for the State for years to come.

On the energy resources side, we have made great progress in our wind business. We have signed close to 1,000 megawatts of power purchase agreements. The wind business is making terrific progress.

I think for those of you who don’t know on Friday the IRS came out with additional guidance around the start of construction language associated with the PTC extension that happened earlier this year. As I think most of you know when the PTC was extended in January this year, it was extended for a year. But instead of having to be in service by the end of this year, you needed to have your wind project have started construction.

Now start of construction is a term of art in the tax world and the IRS has spent a better part of this year trying to explain exactly what start of construction means. And they came out with some additional guidance on Friday where fundamentally they laid out a Safe Harbor where you had a project identified by the end of the year, 5% of the money spent on that project by the end of the year and you brought it in service by the end of 2015 you will qualify for PTC.

So effectively if you have a big pipeline and you have equipment and you have project, you will be able to continue with investment in the wind business through the end of 2015. We had been thinking about when we laid out our capital plans that we have been thinking about this PTC extension really as a 2013 and 2014 phenomenon. But the guidance out of the IRS on Friday means that effectively for big players like us we’ve gotten an incremental year extension of the production tax credit. So that’s terrific news for energy resources.

Also making great progress in solar; we are continuing to see cost come down and we’re continuing to see an opportunity on both the utility scale as well as on the distributed side to continue to make investments in solar as well.

So overall we've made I think good progress. It’s not all complete yet on this first $5 billion of the $9 billion. But I remain very optimistic that we’re going to be able to originate $9 billion of very strong growth projects that we will be able to, as a result of that earn at the top end of the range that we laid out for 2016.

I have the team very focused on three things, execution, cost management and growth. And I feel very confident that we’ll be able to originate those growth projects that I just talked about. If we do, we should be able to earn $6 a share in 2016. I have the team very focused on earning $6 a share in 2016.

Just a quick word on our dividend, we, in February 2012 announced that the Board had decided to raise our target payout ratio to 55%. We’re in the process of getting there, we’re not quite there, in ‘13 we’ll get there in ‘14. And what that means is off a 2011 base that we would have grown our dividend per share at a 10% annual growth rate. Going forward, I would expect that our dividend would grow at least as fast as our earnings do going forward.

So I appreciate your time this morning and look forward to your questions. Thank you.

Brian Chin - Bank of America Merrill Lynch

Great, thank you both for your initial comments. I guess to kick things off from a Q&A standpoint, Tony when I listen to your comments, it seems as though FirstEnergy has been involved in the shrinking and repositioning of the competitive merchant fleet and pivoting on a focus towards regulated asset growth.

At the same time Jim, when I hear your comments I see a substantial growth in regulated assets, long-term contracted assets. And so it seems as though the shift and emphasis is towards long term contract and towards regulated asset growth, very much away from deregulated competitive open merchant type assets. Is the trend here -- are we witnessing actually the slow devolution of the integrated facility business model? Are we inevitably diluting that towards a regulated asset base?

James L. Robo

I guess I’ll start, I guess, Brian. When we look around the country at the competitive markets, I think most of you know, we sold several of our gas plants last year. And our thinking around that was frankly many of them were -- by and large most of them were either merchant or soon to be merchant. We’re pretty -- I’m pretty bearish on merchant markets around the country. And this is -- it's because I think natural gas prices are going to be low for very, very long time.

Anything we see in our gas infrastructure business, every bit of information that we gotten out of that suggests that when gas even starts to lift up a little bit the economics of shale gas, the shale oil production has continued to get better and better. People are continuing to pour capital into that space. It’s terrific for the country and it’s going to -- it may very well be the most important thing that's happened to the U.S. economy since the Internet. But fundamentally it’s terrible for the merchant -- for the merchant business and for merchant electric business.

And so I’m very bearish, when you look across most of the markets for load because of gas prices, because of -- and Tony talked about in his first slide because people gaining effectively the capacity markets, political meddling with capacity markets in places like New England and PJM. Probably the only market that I think has some constructive elements to it and that's just because of good demand growth and the lack of reserve margin is Texas.

And even there we did -- we have a big division in Texas and we did a very large project financing earlier this year and effectively took our money off the table if you will from our original investment and left ourselves with the upside on those assets.

So I think the combination of low gas prices, no reserve margin pressure and no demand growth, combined with gaining of capacity markets is very bearish overall for the competitive markets.

Anthony J. Alexander

I think about it just the opposite. I think there is a question if there are things going on in PJM right now and then other capacity markets that the operators are beginning to recognize and will ultimately solve. The capacity has to be available. A grid will not run without generating power. And the question will be what the makeup of those plants will be over time. And I think of natural gas and its low prices as perhaps a two-edged kind of sword.

Yes, there will be some impact on overall energy prices over time as a result of low input prices. So that’s not necessarily bad as long as you can keep your own commodity price mix in the same range of whatever that energy price is.

But the fact of the matter is if you think about it and if we can actually get out of our own way, the economic impact of a manufacturing renaissance within the Ohio Valley and in the area that could take critical advantage of the march down of the Utica Shale plays, particularly along in the Western Pennsylvania, Eastern Ohio and the Northern West Virginia area, that area is just poised to significantly grow if in fact they can convert that ability to produce into a direct manufacturing lawn.

I think there is a lot of people working very hard on trying to make that happen. We are only a couple of steps away from the kind of the first couple of critical things that I think need to get put in place for that to occur. And then you are going to have a significant amount of load growth inside of a market that in this timeframe is going to become as a result of generations plants [shut down], some of the numbers you look right now at don't even include plant.

I mean PJM is still running with plants that we know are going to shut down in 2015. We know they we are going to shut down in 2015, have already been announced to be shut down in 2015. This summer every single one of those plants was called to run 100% of the time.

The balance that's happening in PJM is going to happen, is going to happen relatively quickly and the question will be ultimately whether or not you can actually run an electric system without real electricity -- without real generating assets to satisfy the reserve requirements and the other requirements of the system. As I say recognizing, I think they will kind of work on it and I think they will.

So in the end whether it’s competitive or regulated when it comes to new generation, prices are going to stabilize around in part with the commodity input prices, they always have. And regulated companies and regulated states all can allow generating assets to be built, necessarily that are way outside of trying to find the right mix of generation going forward.

And I don't believe the country can operate without substantial generation. And the fact of the matter is if we look at other countries, the more renewable energy we add to the system, the greater the reserve requirement is. In fact the more hardware you have to have on the ground and the question is how are you going to pay for it.

If you don't pay for it effectively than it won’t be on the ground and you'll have a system that whether it's on the regulated side or the competitive side is [do] not to be able to satisfy the needs of customers. In fact that's what we’re in business to try to accomplish anyway.

So I am a tad bit more bullish on it. I think there is a lot of things going on now that PJM and others are recognizing and trying to deal with. I think it's complicated with a very stagnant economy overall. And I’m still bullish that this country has to grow, has to grow at a much greater rate than it’s doing today. And that growth in the main is going to come as a result of using more electricity. And we have and there is no way that you’re going to build a manufacturing base or any other sizable business we are going to grow without using more electricity.

So those factors ultimately will come together. And now my sense is while, yeah, while we’re going through this period, interesting, it certainly is. But the fact of the matter is, I’m much more bullish on the market.

Brian Chin – Bank of America Merrill Lynch

I guess just to ask each of you one more question before I turn things over to the audience; Tony, does this mean then that we should be looking at a further consolidation in the merchant generation space? And then Jim, from your perspective, Tony is making the argument that we add too many intermittent resources to the grid and reliability becomes a question. Are you seeing or are you running in that saturation point and Tony, did I not raise your point properly?

Anthony J. Alexander

I think you didn’t raise it properly.

Brian Chin - Bank of America Merrill Lynch

Okay.

Anthony J. Alexander

I think as you add more intermittent sources, I think everybody would recognize that you have to have resources behind those. As you rely more and more on them, the resources if you just look at Germany as an example, the resources that are required to back that up don’t go away. So the effective reserves and the effective amount of capacity that needs to be available increases, doesn’t decrease as a result of it.

I don’t have a problem with renewables. Renewables, I think they are an important part of the overall equation.

Brian Chin - Bank of America Merrill Lynch

Yeah.

Anthony J. Alexander

But you’ve got to recognize inside the system, at least in many parts of the country, some parts are likely a little different, but in many parts of the country, they are not running. Customers use it 24 hours a day, 365 days a year; they float it all over the place. We don’t have a system that tells you can use it only when the power plant is on. We’re supposed to have the equipment, the asset in place to serve them 24 hours a day and if you could add an asset, you want to do with an asset that produces 30% of the time, is that all it can produce?

Then you better have something on the ground that can do it the other 70% of the time, or a 100% of the time when the wind doesn't blow as an example or the sun doesn't shine, whatever that is. So those are kind of natural.

Even if we rely on natural gas, we’re forgetting that much of the natural gas plants that are being added are effectively interruptible plants. They have no inventory, they are like a coal-fired plant. They don’t have take-or-pay rights on and no interruption rights on the pipeline.

Pipelines have to catch up with the ability to meet the needs and requirement all the time and this -- in summer time this year. Natural gas is in normally big demand. One of my peaking facilities had to switch to oil because they were cut off the pipeline.

Good thing, we had oil capability to do that, in order to meet that requirement, but if you do not, that entire generating plant dances on the end of the pipeline requirement. That’s not like a coal plant that’s sitting here with 30 or 60 days supply of coal or a nuclear plant that has, whatever 365 days of supply sitting in the core.

So all of those things have to be factored out and work through as we make this evolution to new gas plants, are they in fact going to be intermittent and take care of the renewable side, we need it all. The question is how do you put it together and how do you make sure it’s fairly priced and fairly -- and have fair competition within those types of markets.

Brian Chin – Bank of America Merrill Lynch

Got it, got it. In the interest of time, why don’t we go ahead and turn it over to the audience and see if there is any question.

Question-and-Answer Session

Unidentified Analyst

[Question Inaudible].

James L. Robo

So we’ve worked with CNG vehicles. We also are working very hard at electric vehicles in those -- many of those same applications. It’s unclear to me which are going to win. It is not, honestly not something that we spend an enormous amount of time looking at. I mean we certainly follow the technology, follow the trends there but it's not something that we are spending a ton of time working at.

Brian Chin - Bank of America Merrill Lynch

Any other questions from the audience?

Unidentified Analyst

I think you obtained a good reduction [inaudible]…

Anthony J. Alexander

I think one of the -- there's a lot of pieces and parts to that puzzle. But my own sense is that one of the kind of touchstone events and one of the things that I think was perhaps needed is for cracking facilities to be built in and around the Ohio Valley. There is several now being looked at, several now being proposed, several now being considered, but not unlike much of industry there is not enough certainty yet with respect to everything that we faced as an economy, to actually begin to pull the trigger and say okay, we are going to make the investment.

My own sense that once that happens then the liquid plays become much more viable; the off shots of the liquids into manufacturing in that local region so you don’t have to pipe it so much further and eliminate all that transportation. When you look at that side of the equation and the manufacturing capability of that region historically and in the future, if you are going to locate a manufacturing plant in United States that’s where it ought to be.

You’re going to be within eight hours drive or ten hours drive of about 70% or 60% of the U.S. population and the Canadian population. It is where the action's at and we just need to get things going in a way that allows that resurgence to occur.

And I think -- like I said, I think a big part of that would be having the ability to take local advantage of the liquid natural gas plays that are in that area.

Brian Chin - Bank of America Merrill Lynch

Any additional questions from the audience? I want to go back to an earlier point that was made that with greater intermittent resources, we need to have a greater degree of thermal generation and access backup. Jim I think I inadvertently had cut you off from your response, what’s your thoughts on that topic?

James L. Robo

So I agree with some of the things that Tony said, not all of them. The -- I think the first piece is, we are a long way away in almost all parts of the country from a level of renewable penetration where it becomes an issue that’s first. Second is, renewables are for sure an energy resource, but they are also a -- not a zero-value capacity resource and I think you know any study that you ever looked at in winds shows with a diverse portfolio in a place like Texas for example that for -- if you have a megawatt of capacity that is somewhere in the 0.2, 0.3 range of actual capacity value on some 20% or 30% of input.

Solar I think has a higher capacity value in that of -- and this is also -- and I get frustrated with our own transition team in Florida when we talk about renewables and that this is a business, it's been run the same way for hundred years. They are -- it's a very conservative bunch of folks who run ISOs and that works because their job is to keep the lights on and that's probably the fastest way they can lose their jobs if the lights go off.

So thereby they should be conservative, but they have dealt with intermittent demand for 100 years and the industry needs to get its head around a paradigm where you are going to have both some intermittent supplies as well intermittent demands and be able to manage the grid accordingly and I think there are places like for example Colorado, Texas where they have made tremendous progress in terms of how to manage the network that way.

And with some natural gas is important but gas-fired units are going to be an important part of that mix. You are going to need base loaded units as well. But I think the industry needs to be a little bit more forward thinking about how they integrate renewables into the grid and it will take time.

Brian Chin - Bank of America Merrill Lynch

Great, in the interest of time, unfortunately we've run out of time on this panel. One last attempt to hear questions from the audience, if there are any. No, gentlemen thank very much for your time on the panel

James L. Robo

Thank you.

Anthony J. Alexander

Thanks Brian.

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