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NextEra Energy, Inc. (NEE) Presents at Barclays CEO Energy-Power Conference Call (Transcript)

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NextEra Energy, Inc. (NYSE:NEE) Barclays CEO Energy-Power Conference Call September 4, 2019 11:45 AM ET

Company Participants

Rebecca Kujawa - EVP, Finance and CFO

Conference Call Participants

Eric Beaumont - Barclays

Eric Beaumont

Good morning, everyone, we will go ahead and get started. We're glad to have Rebecca Kujawa here the CFO of NextEra Energy. And just going to go ahead and chat we’ll open up to questions towards the end, but get a few things going. I guess first and foremost before we get into the questions given another hurricane not anywhere passing [ph], why don’t we go ahead and touch on some of the legislation and the preparation that goes on.

So obviously we’ve got the underground past, there is a storm hardening and we can think about how the accrual and reserves were kind of high level for how you’ve positioned to manage through this as compared to some other companies would be probably a good place to start today.

Rebecca Kujawa

Of course be happy to and happy [indiscernible] today as oppose to the story we could be telling if the storm had to turn, but first I want to start Eric, thank you for hosting us here and having such a great conference and we're happy to be here. Up until middle part of last week, we thought we were going to have a cap four, cap five hurricane goes through the center of Florida and we marshaled a significant number of resources, including those a number of resources from some of our utility peers here in the industry.

Pass mutual assistance program to be ready for what might happen and fortunately for us had a lot of close coordination with different state and local officials to make sure that the State of Florida was prepared and we're in a very good position today to say that we were well prepared and also lucky that the storm turned.

And unfortunately, looking at the devastation that occurred in the palmers [ph] from this very storm where it caused over the North Bahamian Island you can see there is a havoc that these types of storms can wreak. And it makes that much more understandable the legislation that was passed that you just referenced in the legislature this past session and ultimately signed by the governor cover storm protection plan.

And it encourages utility such as Florida Power & Light Company and Gulf Power to continue making the investments to make our electrical infrastructure that much more hard and resilient to storm like this. And it’s one of two of the major investment programs that we have really in the next decade to multi-decades in the case of strong protection plan, of investment opportunities to continue making better our customer value proposition.

It’s something that we been doing for years now at Florida Power & Light Company, investing capital to lower the cost of ONM, lower the cost of fuel and improve the customer service that we provide to our customers. And we receive a lot of support from different critical stakeholders to continue doing that.

Question-and-Answer Session

Q - Eric Beaumont

Appreciate that, it’s great. So touching a little bit on the undergrounding when we think about the investment opportunity obviously investing lowering the outages cuts O&M out that’s well and good and as you say reducing the fuel costs. How do you think about tying both the additional cost and how much that might ramp up of undergrounding. And do you also think the renewable program in SoBRA is actually creating more headroom to provide a bigger opportunity for the undergrounding in the rest of the storm hardening.

Rebecca Kujawa

Our whole investment plan and the strategy that we’ve been deploying now for a number of years is exactly as you just highlighted is taking out O&M cost out of our system, taking out fuel cost, creating opportunities to invest capital that further improves our O&M position, our fuel position or the customer value proposition. And solar is a perfect example of that. It is much more front end loaded in terms of cost for our customers, the investment dollar upfront was very little O&M and no fuel cost over the long-term.

Now the most economic form of generation in Florida in many instances, which is one of the reasons why we launched our 30-by-30 program that we announced earlier this year, that we plan to deploy 30 million panels of solar in Florida before 2030 that translate to about 10 gigawatts roughly $10 billion of investment opportunity and it’s terrific for our customers. And that paired battery storage is terrific investment opportunity for Florida Power & Light Company.

The way we think about storm undergrounding and storm hardening is a little bit different and some of that is better O&M, but really is about the improving of reliability and resilience in major situations like storms. And the way that we’ve thought about and talked about with our critical stakeholders is thinking about the economic activity in Florida. Florida is a major economy in and of itself just in Florida Power & Light Company service territory alone, it's about $1 billion of economic activity every day.

And so if you don't have a storm interruption, or you restore service just one day faster, you're talking about billions and multiple billions of dollars for multiple days of storm restoration that you avoid or speed up, huge value for our customers.

Eric Beaumont

Okay. Understood. So when I think about the underground, obviously you've started this process, but now the legislation in place, we think about the program as being more frontend loaded backend loaded, or is it really just critical areas, and it's going to be prorata investment over some period of time?

Rebecca Kujawa

Well, as you know, we've had a storm hardening program for a number of years, really improving the resilience of the major infrastructure feeders and major transmission lines through the state. And so there is a furtherance of that program along with undergrounding certain of the infrastructure.

And the way that we've thought about and talked about it with the stakeholders, the legislature, the governor, as they were proposing the law, and ultimately signing it in the case of the governor, there is really a multi-decade opportunity of many billions of dollars. This isn't something that happens over a couple of years. This is a measure program over many years, which creates terrific visibility for us in terms of the investment opportunity, and also moderates and targets, the overall impact to build over time. So there's not a significant effect of the bill.

Eric Beaumont

Obviously, your O&M controls have been paramount in keeping the above average rate base growth, all the investment affordable for the customers already. Just on two fronts, one, you talked about the multi-decade investment in underground, I think, you've had well above industry rate base growth, earnings growth and O&M reductions, when you start thinking about how sustainable they are in the 5-10 year period and beyond. How do you characterize those? Obviously, the diminishing marginal returns on O&M reductions that one would think that you've been done, a while ago, yet, you continue to average lower. So…

Rebecca Kujawa

It sounds like a budget discussion with our operating unit. How more -- how much more can we find, our program that we call project momentum, and then it trends and translate into project accelerate a couple of years ago, is really was a ground up and a top down approach to identifying new ways that we can do business for lower cost or even for improving our revenue opportunity.

And I think the power of that is, there's not one idea. There's not one thing that if we do this, it'll be a significant cost savings, because then you might run into the issue of [indiscernible] but once you've done the one idea, there's nothing left.

Through course of our project momentum our project accelerates. We've evaluated over 11,000 ideas. And we've implemented 5,000 of those ideas. And as you build that up, it turns out to be over $1 billion of run rate savings. And I feel that we're really at the start of this as opposed to the middle innings or the end innings of this opportunity. And some of the big technology enablers from a themes that continue to be possible for us to go after.

It's really around data science, machine learning algorithms to help streamline some of our processes, have more insight, so that we can do more of predictive maintenance, and proactive maintenance as opposed to reactive maintenance for our facilities, and be able to take out some of the variability of what is otherwise a human invariable nature business.

So I think we're at the beginning stages of it, continue have tremendous amount of opportunity to keep doing what we're doing. So we were best in class last year. We were best in class the year before that. And each year, we've continued to get better. And I don't see that ending.

Eric Beaumont

Okay, that’s helpful. Obviously, you have a lot of dry powder with Gulf acquisition and moving into that, can you just give a quick update on where things stand with the Gulf? And with your thoughts as to whether or not Gulf and FPL are going to be combined or kept separate entities as standard that has shifted a little bit?

Rebecca Kujawa

We are thrilled to have had the opportunity to welcome our Gulf Power employees and our Gulf customers into our portfolio at the very early part of this year. And everything that we saw ahead of being able to close the acquisitions, the early stages, and even into the discussion that we had with investors at our investor conference in June gives us real confidence that being able to execute on everything we thought was possible at Gulf Power. And that is doing exactly what we talked about doing for years with FPL, which is invest capital that makes our customer value proposition better, takes out cost out of the system, improves our customers reliability.

And in the case of Gulf Power gives us real visibility to lowering our customer bills overtime. And in a meaningful way getting down to the mid-$120 per thousand kilowatt hour average built out into the middle part of the next decade. And that's while investing this capital, while taking the cost out of the business and improving reliability emissions and the overall value that our customers receive.

As we think about going into the next rate case we highlighted earlier this summer, our early thoughts on bringing our two businesses, two very big utilities in Florida together, Florida Power & Light Company and Gulf Power. And we're in early stages of that, but we thought it was appropriate to start talking to investors about it, as we start to explore what the value is both for Florida Power & Light customers and Gulf Power customers. But we believe there's a lot of synergies to that, our businesses won the benefits from a lot of scale. It's one of our competitive advantages as a company, not just at Florida Power & Light Company, but all of our companies together is that scale, that ability to deploy resources across all of our businesses, and we think we’ll be able to bring significant value to our customers.

We are at the early stages of that evaluation. But based on what we know today, and what we see today, more likely than not we would file for new rates, file in 2021 for new rates effective 2022 and we are thinking about filing one rate case bringing the two businesses into one merged entity.

Eric Beaumont

Okay. And no conversation will be complete after talking about an acquisition without talking about future. You're one of the few companies in the group that has balance sheet capacity that has dry powder. We know there has been interest in Santee Cooper, we know JEA is up for sale. So just talking about specific merger acquisition targets, can you just remind us again what your criteria are that you use when you examine this?

Rebecca Kujawa

Yes, so we've made no secret about our interest in doing some additional rate regulated acquisitions. Again, we're thrilled with the opportunity to bring Gulf Power into our portfolio. And we'd love to have opportunities to do that with other entities, including potentially the two that you mentioned, but not exclusively, those two. And way that we think about it is really first, that it's in a constructive regulatory environment that it is accretive immediately accretive to our shareholders, and ultimately gives us the opportunity to deploy the FPL playbook, we invest capital, be able to take costs out of the business, improve the customer value equation to be able to create that virtuous cycle.

So we see that in a lot of potential different areas, we've talked about the Southeast part of the U.S., certain parts of the Midwest, having those types of characteristics. But it's often opportunity specific, and we'll continue looking.

Eric Beaumont

Okay. And just lastly on this you talked about the balance sheet dry powder you have the amount you spend, should we think of that as a limiting governor or if you find a good deal, you'd be willing to go to capital markets, look at equity others, just framing the size of the potential deals out there?

Rebecca Kujawa

We think about M&A a lot of the same way that we think about our incremental organic opportunities, if we see a good opportunity, in the case of organic investment opportunity that it meets our returns threshold, fits our core strategies, whether it's in our regulated utilities, or a NextEra Energy resources we don't feel capital constrained, like we want to create value for our shareholders and to the extent that we have the opportunity, we’ll do it.

Similarly with M&A, if we have an opportunity that meets those criteria of constructive regulation, accretive to shareholders, and the ability to deploy the playbook than we’ll pursue those opportunities.

Eric Beaumont

Great. And shifting gears again, looking at energy resources, it's been growing while everything has been going fine. If you go back couple of years, I know, Jim used to say the biggest threats in his mind was extension of tax credits, federal subsidies. There has been chatter about some subsidies being extended some not, just kind of your thoughts of where things are today, testify what happens when credits go away, or if they get extended, how that impacts or how we should think about that impacting your business?

Rebecca Kujawa

We're in the best renewables development market in our company's history and our industry's history by far. We talked about at the end of our second quarter earnings or on earnings call, so we have over 11 gigawatts of backlog signed contracts that we plan to build in the next couple of years. So there is a remarkable position in which to be and the development market continues to be strong.

And we do get a lot of questions about what happens during the phase down of the PTC and the step down in the ITC through the early part of the next decade. And one of the ways that we think about that is to go past that period of time and look to the middle part of the next decade. When the PTC is phased out and the ITC is stepped down. And we see that renewables will be cost competitive with just the remaining operating costs of certain coal and nuclear facilities in the U.S.

So not what is the most economic next megawatt to build, but of the megawatts you already have in operation there are some that should be shut down and you build new renewables with appropriate returns on capital and you will be saving customers, ratepayers money in those situations.

And so we see the renewables development market continuing to be strong well into the better part of the next decade. And that's without the change in the incentive structure as we currently have it.

Eric Beaumont

And just on the cost curves, obviously, we've heard when you can get down to $16 to $18 a megawatt hour, obviously you’ve made comments about where solar is, solar plus storage can be, where do you think they go and overlaying that, although there's a long way to go in this country. And I believe the commentary recently is you believe you can get to at least 30% penetration with storage. What gives you that comfort and is that on a national average or is that even regional market do you think?

Rebecca Kujawa

So we’d laid out, I think we have it in the investor materials that we posted for this month, certainly laid out in even greater detail at our investor conference materials that we published in June. A step down from where we are today, in terms of the cost the overall capital costs and O&M costs offset to some extent by the changes in the incentive structure. And where we expect to do -- expect to be on a PBA basis.

So it’s effectively a levelized cost of energy profile, and we expect to be $20 to $30 a megawatt hour for wind, $30 to $40 a megawatt hour for solar. And both of those include storage adders, to get up to a nearly firm generating resource for our customers.

And again, that's very compelling compared to the ongoing cash operating costs of many nuclear and coal facilities in the U.S. So again, tremendous economic drivers for retiring some of those plants and building renewables.

I think the point in time, we're talking about a true limitation on penetration in renewables in the U.S. is far out to the future. So one of the cases that we talked about in the last couple of months, is the NREL renewables case. And that gets up to about 30%, market penetration by 2030. And that's, I think, more limited by capital deployment and kind of retirement cycles as it is, as opposed to whether or not that's a limitation on renewables deployment. There are certain parts of the U.S. today that is far above 30% today, and all going just fine.

Eric Beaumont

Yes. And it gets to that point. First off, do you see a shift as far as a focus from wind to solar? Do you think it's just whatever the demand is, and geographic shift, and just touching on we're well above 30%, in some parts country, we did see some potential grid nervousness in Texas, recently with the hot weather and the wind not being quite where it was expected. So just kind of comment on both of those?

Rebecca Kujawa

I don't want to necessarily get into market commentary on [indiscernible] has more complex challenges simply than the wind penetration. But in terms of the overall dynamics of where wind might be built, versus solar might be built, I don't think there's going to be one answer for all geographies in U.S. or really any part of the world. Some part of that is driven by where you have particularly good wind resource or particularly good solar resource.

So generally, that's more Southern part of the U.S. has been pretty attractive for solar for quite some time. And the middle part of the U.S. wind has been particularly attractive. And if costs have come down, that's kind of spread out from the center on wind and moved up in the case of solar.

And you might see that dynamic change a little bit as the PTC phases down, but the ITC still remains at 30%, some of that what's most cost effective might change. And as cost curve changes over time, that might change. But from our perspective, we're going to be prepared to sell to our customers, whatever it is, they think is most economic for their customers and what they want to include and incorporate into their system.

Eric Beaumont

Okay. And just lastly on that, you -- historically you’ve identified really good wind sites, really good solar sites, you have technology behind identifying where things should be cited. And you scooped up land and land rights in advance, just from a backlog perspective of thinking how far it is without having to go evaluate new sites or get things how do you feel as far as where your backlog is into the future without kind of stretching out the curve for beneficial site.

Rebecca Kujawa

Development cycle and planning for locking up sites identifying where good interconnect positions might be, it has been one of our competitive advantages, and certainly a focal point for our development organization for a very long period of time. And some of the areas where we’ve focused on improving or applying the more advanced data science and ultimate machine learning and in a perfect position state, artificial intelligence, you does create the opportunity to do that in a more efficient way so that you aren't locking up land that you don't need, or a dynamic change a little more flexible in terms of what you have to offer to customers. But feel very good about what we have in backlog however you want to think about that the positions whether it's key positions, land rights, et cetera.

Eric Beaumont

Okay, great. And with that, we've got about 15 minutes left and just remind people there will not be a breakout after this. So why don't we open up to some audience question. Anyone, please go ahead.

Just, as you're thinking bigger pictures as people are deciding what they want to ask, obviously, we've heard a lot about aging workforce we know again with your O&M, people transitioning out you replacing, what do you see as the biggest structural challenges on the utility side that you are facing or that your biggest concerns over the next 5 to 10 years?

Rebecca Kujawa

Human capital development aren’t fully based investing and developing those capabilities, it’s one of the most important things that we do as a company everyday and certainly our management team takes it very, very seriously. In the last couple of years as I spent time on a quite a number of college campuses whether that’s undergraduate programs or graduate programs. I couldn’t be more excited for our industry. To see the bright eyes, the excitement engagement for many of these young people about what is possible across the power generation sector, renewable the way that they can better our economy and better our country is really, really exciting.

And I think that the way that we can encourage young people to get excited about our industry through renewables, through some of these data science applications through technology has really made is quite a great place for them to consider starting their carriers and ultimately developing it.

So we haven't had a lot of challenges attracting terrific talent to our company or to our industry. There are certain pockets that are more challenging than others. So, nuclear is one of the areas where we're particularly focused on making sure the we have the right talent for the long-term and right level of engagement. The industry has certainly been more challenged recently because of the economics, but we still continue to find terrific talent, both developing internally and also hiring them from other parts of sectors, including the military continue to be great areas for us.

But we also think about long-term developing talent and making sure that the capabilities are built up through the education system. That was one thing that we started probably about 10 to 15 years ago on the wind side where we didn’t have the talent that we needed and the volume that we wanted to be able to be the great service technicians out in the field. And so we work with local colleges to develop those programs. So we will just long-term to make sure that we have the right talent in the right place at the right time.

Eric Beaumont

Wonderful. And anyone with the questions raise your hand otherwise I will happily keep going, but probably the part of the matter when I talk to people obviously the stock has done well, everyone really tends to like stock, like what you are doing, like your term profile. The two things that come up time and again when people are trying to net back are one you have people who are a little bit concerned over the potential of retail competition and we will look at on the ballet what's the sense of that in Florida. And the second is simply law of large numbers for energy resources. So anything you want to comment on that or those would be wonderful.

Rebecca Kujawa

Let me will take the second one and first and then I will go back to the first one and so let me get off the hook on that. On the renewables deployment side, we again are in a best position we’ve ever been in as an industry for renewables deployment it is no longer about incentives in our mind as we look out in the coming years it is all about economics and that’s a terrific place to be especially when it’s on the right side of cultural changes and support across the United State in various pockets of the country for continuing to support deployment.

So I’m not worried at all, we’ve got the largest backlog that we’ve ever seen and we’ve got economics as a tailwind along with various political tailwinds a further support so I feel great. As it relates to retail competition there is a ballet proposal that is trying to get on the 2020 ballot in Florida that would seek to deregulate the State of Florida electricity market and specifically preclude investor owned utilities from owning, generation and potentially electrical infrastructure there is some confusion on the way that the ballet is worded.

We think that it’s a very small probability of moving forward, and ultimately getting on to the ballot much less passing, but of course given what the impact it would have on our state and our utilities, of course, we're taking it very seriously. There are few major things that need to happen for the ballot initiative to ultimately get on to the ballot.

One is that Supreme Court has an obligation to evaluate whether or not the proposal is single subject and is unambiguous, there are significant questions certainly in our mind, but in a quite a number of stakeholders that filed in opposition to the proposal that would suggest that they believe it is both ambiguous and not single subject.

So the Supreme Court heard those arguments and the proponents defensive those arguments last week and will render a decision sometime in weeks or months in the future there is not statutory timeframe the September, October or November timeframe.

The second major thing that needs to happen with the ballet proposal is they need to get a certain number of signatures in order for them to qualify to be on the ballet. And there was a law passed in the Florida Legislature earlier this year and passed an awfully signed by the governor that made it more challenging and potentially more costly to get those signatures and we've seen the rate of signature gathering for this proposal declined since that law went into effect.

There's probably still a path for them to get on, but it's much more challenging than it had been. And it is certainly an uphill battle between now and early part of next year when they need to have those signatures in place. We will certainly advocate on our behalf and we have quite a number of folks including the Florida Attorney General, the Senate, the House, the -- many of this local cities, large cities, small cities, munis, co-ops, environmental groups, et cetera.

Quite a coalition of folks that you never see on the same side of any argument that have come together in opposition to this proposal.

Eric Beaumont

Just real quick, can you remind us how it even really started. When you think about it through on a monthly bill basis, you may not be the cheapest state, but on a per unit basis per kilowatt hour, some of the lowest rates in the nation, obviously there is a retail competition opening up benefit customers.

Rebecca Kujawa

We think it doesn't make a lot of sense and the noise as we talked about and as it relates to archive some of the other "competitive markets throughout the U.S." It is not an unambiguous success by any stretch and to your very point, very important point, rates are very low in Florida, we're the lowest still in the state or usually among the lowest if not the lowest bill in the state. We happen to be the lowest right now. And we are at 30% below the national average and Florida as a whole is well below the national average.

Reliability is strong, and you see day-to-day, especially in events like we've experienced fortunately potential events, in our case, storms, you want strong utilities that have the emergency preparedness, skills, capabilities and incentives to make sure that our electrical infrastructure is found and is there when our customers need it.

Eric Beaumont

Any questions?

Unidentified Analyst

So, obviously, there's an ongoing debate about the ownership structure for renewables as it pertains to regulated utilities, whether a PPA structure or a rate based structure is optimal. And obviously it varies case-by-case, but I feel like, you guys are kind of in a unique position where you can see the benefits of rate basing the assets from the regular utility side, but also from the near side. You see the potential benefits of scaling things and whatnot from the PPA side. So just curious to get your opinion as to how the market evolves and what are some of the sort of puts and takes to both ownership structure?

Rebecca Kujawa

Yes. From our perspective as you very aptly pointed out, we have both regulated utilities, as well as competitive energy provider that seeks to provide low cost power purchase agreements to our customers. And we interact with our customers all the time. And what we want to provide to them is alternatives and solutions that are cost competitive for them to be able to serve their customers as well. And we have quite a number of customers that both rate base and sign power purchase agreements with us.

And some of the most compelling ones are ones in which we have both signed at the same time, opportunities for them to put something in rate base, as well as sign power purchase agreements for wind. And in those win-win situations, we see the ability to bring our scale, our competitive advantages. Our insights into this business to provide low cost solutions for them that they can put into rate base, most economically and be able to earn a return on it, as well as for us to have that long-term benefit of long-term cash flows that we see through power purchase agreements.

Rate basing is -- has been a competitive threat, or something that you guys asked us about -- have asked us about for many, many years. We see it as something that our customers certainly think about. And what we plan to continue doing is what we have been doing, which is further our competitive advantages, ensure that we can develop win-wins for them and make sure that we remain cost competitive and create value for their customers.

Eric Beaumont

I guess, just taking a step further we take a look at Michigan, it passed legislation to allow utilities to earn on PPA to offset the impact of the balance sheet and credit ratios. Do you see that as going forward, obviously, you'd be proponents, it would -- it should enhance the ability for PPAs. But behind the scenes, you're seeing more rumblings of that getting more widespread or anything in DC going on in your view point to help along with that talking to rating agencies any of those?

Rebecca Kujawa

Proposals like that I think are very helpful, because it does create the incentives, align incentives for both those that are securing and those that have the potential to supply and build separately to create the most cost competitive, the most advantageous for customers. Each jurisdiction is going to be a little bit different, so I don't know that you -- I would say that it's widespread or there's some ground swelling of change, where those opportunities are created, we think that tends to be very good for customers.

Eric Beaumont

Okay. Any more questions? Going once, twice. With that, Rebecca, we thank you very much for being here, and answering the questions.

Rebecca Kujawa

Thank you, appreciate the opportunity.

Eric Beaumont

Thank you.