Press Release 10-Q Slides News

NextEra Energy's (NEP) CEO Armando Pimentel on Q1 2018 Results -Earnings Call TranscriptApr. 24, 2018 3:31 PM ETby: SA Transcripts

Q1: 04-22-18 Earnings Summary

EPS of $1.21 beats by $0.74 | Revenue of $212M (+ 7.1% Y/Y) misses by $-52.97M

NextEra Energy, Inc. (NYSEMKT:NEP)

Q1 2018 Results Conference Call

April 00, 2018 09:00 AM ET

Executives

Matthew Roskot - IR

Jim Robo - Chairman and CEO of NextEra Energy

John Ketchum - EVP and CFO of NextEra Energy

Armando Pimentel - President and CEO of NextEra Energy Resources

Mark Hickson - EVP of NextEra Energy

Eric Silagy - President and CEO of Florida Power & Light Company

Analysts

Julien Dumoulin-Smith - Bank of America

Steve Fleishman - Wolfe Research

Greg Gordon - Evercore

Michael Lapideswith - Goldman Sachs

Jonathan Arnold - Deutsche Bank

Matthew Roskot

Thank you, Brian. Good morning everyone and thank you for joining our First Quarter2018 Combined Earnings Conference Call for NextEra Energy and NextEra EnergyPartners.

With me this morning are Jim Robo, Chairman and Chief Executive Officer of NextEraEnergy; John Ketchum, Executive Vice President and Chief Financial Officer of NextEraEnergy; Armando Pimentel, President and Chief Executive Officer of NextEra EnergyResources; and Mark Hickson, Executive Vice President of NextEra Energy, all of whomare also officers of NextEra Energy Partners; as well as Eric Silagy, President and ChiefExecutive Officer of Florida Power & Light Company. John will provide an overview of ourresults and our executive team will then be available to answer your questions.

We will be making forward-looking statements during this call based on currentexpectations and assumptions, which are subject to risks and uncertainties. Actual resultscould differ materially from our forward-looking statements, if any of our key assumptionsare incorrect or because of other factors discussed in today’s earnings news release, inthe comments made during this conference call, in the Risk Factors section of theaccompanying presentation or on our latest reports and filings with the Securities andExchange Commission, each of which can be found on our websites, nexteraenergy.comand nexteraenergypartners.com. We do not undertake any duty to update any forward-looking statements.

Today’s presentation also includes references to non-GAAP financial measures. Youshould refer to the information contained in the slides accompanying today’s presentationfor definitional information and reconciliations of historical non-GAAP measures to theclosest GAAP financial measure.

With that, I will turn the call over to John.

John Ketchum

Thank you, Matt, and good morning everyone. NextEra Energy delivered strong firstquarter results and is off to a solid start towards meetings its objective for the year.Adjusted earnings per share increased almost 11% against the prior year comparablequarter, reflecting successful performance at both Florida Power & Light and EnergyResources. FPL increased earnings per share $0.07 from the prior year comparableperiod, regulatory capital employee grew approximately 12.9% year-over-year and all ofour major capital initiatives remain on track.

During the quarter FPL successfully commissioned nearly 600 MW of cost-effective solarprojects under the Solar Base Rate Adjustment or SoBRA mechanism of our settlementagreement as well as the largest combine solar-plus-storage project in operation in theUnited States. Additionally, the Florida Public Service Commission unanimously approvedFPL's petition for determination of need for the Dania Beach Clean Energy Center, furtheradvancing the roughly 1200 MW project through the regulatory approval process.

FPL continued to deliver on its best-in-class customer value proposition of low bills, highreliability, and outstanding customer service. As announced on our last call, FPL was ableto pass the benefits of tax reform back to customers immediately by foregoing recovery ofthe $1.3 billion in surcharges related to Hurricane Irma and as a result the average 1,000KW residential bill was reduced by $3.35 per month beginning March 1st as the surchargerelated to Hurricane Matthew rolled off.

FPL's typical residential bill is now nearly 30% below the national average and the lowestamong all of the Florida IOUs. Our ongoing efforts to invest in a stronger and smarter gridto further improve the already outstanding efficiency and reliability of our system resultedin FPL delivering its best ever service reliability in 2017, ranking it among the top of allmajor utility companies in Florida. At Energy Resources, the lower federal income tax rateand increased contributions from our repowered wind projects helped drive growth for thequarter.

Consistent with what we had previously characterized as the best renewablesdevelopment period Energy Resources history, we had one of our most successfulquarters of new wind and solar generation origination adding more than 1,000 MW ofprojects to our backlog. We are also pleased with the progress of our natural gas pipelinedevelopment efforts with NWP commencing construction and announcing its firstexpansion opportunity of the mainline pipe which I will discuss in more detail in a moment.

At this early point in the year, we are very pleased with our progress at both FPL andEnergy Resources. Now, let's look at the detailed results beginning with FPL. For the firstquarter of 2018, FPL reported net income of $484 million or $1.02 per share. Earnings pershare increased $0.07 or approximately 7% year-over-year. As a reminder, rather thanseek recovery from customers of the approximately $1.3 billion in Hurricane Irma stormrestoration cost, FPL plans to recover these costs through federal tax savings generatedduring its current settlement agreement.

During the fourth quarter of 2017, FPL utilized its remaining available reserve amortizationto offset nearly all of the expenses associated with the write-off of the regulatory assetrelated to Irma cost recovery ended the year with the zero dollar reserve amortizationbalance. Consistent with our expectations, the tax savings generated during the firstquarter did not fully offset the reserve amortization required to achieve our targetregulatory ROE of 11.6%. As a result, our reported ROE for regulatory purposes will beapproximately 11.2% for the 12 months ended March 2018.

This is above the ROE expectations we shared on our fourth quarter earnings conferencecall and is due to warmer-than-normal weather and reduced O&M expenses driven by ourcontinued focus on cost management. After a strong quarter, we now expect FPL toachieve its target regulatory ROE of 11.6% either late in the second quarter or early in thethird quarter on a trailing 12 months basis and subject to the usual caveats. Based uponour weather normalized sales forecast and current CapEx and O&M expectations, weexpect to begin partially restoring the reserve amortization balance through tax savingslater this year and continuing to expect that FPL will end 2020 with the sufficient amount ofsurplus to potentially avoid the base rate increase for up to two additional years.

Operating under the current base rate settlement agreement would create furthercustomer benefits by potentially avoiding at base rate increase in 2021 and 2022. TheFlorida Public Service Commission has open separate dockets to address tax reform foreach of Florida investor-owned utilities including FPL. We expect hearings to recur inAugust of this year and look forward to working with the FPSC and other interested partiesto further explain how FPL's prompt actions within the terms of settlement agreementbenefit customers. Regulatory capital employee grew approximately 12.9% year-over-yearin all of our major capital initiatives remain on track.

As a reminder, due to the tax reform, FPL will no longer take bonus depreciation of futureinvestments, which is expected to results in an increase to investor sources of capital asthe contribution from the accumulated deferred income taxes decreases overtime.Therefore beginning this quarter, our presentation of FPL regulatory capital employee isnet of accumulated deferred income taxes, which is treated as zero cost equity in ourcapital structure, as this more appropriately reflects the growth in FPL's earnings. In theAppendix of today’s presentation, we have provided a reconciliation of our historicalnumbers to revise methodology.

Turning to our development efforts, all of our major capital projects at FPL are progressingwell. FPL's capital expenditures were approximately $1.2 billion in the quarter and weexpect our full year capital investments to be between $4.9 billion and $5.3 billion. Adding

to the nearly 300 MW of solar projects that were placed in service in January, during thequarter we were pleased to complete construction on schedule and under budget of thenext 474.5 MW solar energy centers developed under the SoBRA mechanism of the ratecase settlement agreement.

The eight solar plant that entered in the service in 2018 are projected to generate morethan $100 million in total savings for FPL customers during their operating lifetime. FPL's10-year site plan that was filed with the Public Service Commission earlier this monthincluded plans for more than 3,200 MW of additional solar projects across Florida over thecoming years, including the approximately 600 MW that remained under the SoBRAmechanism of our settlement agreement. The support will continue to be one of thelargest ever solar expansions in the U.S. FPL has already secured almost 6 GW ofpotential sites.

During the quarter, we also deployed the first two projects under FPL's 50 MW batterystorage pilot program, paring battery systems with existing solar projects. A 4 MW batterysystem with 16 MW hours of storage capacity was deployed at the Citrus solar energycenter, representing the first large scale application of DC coupled batteries at a solarplant in the U.S. and enabling the facility to deliver more energy to FPL's grid.

Additionally, FPL installed the 10 MW battery project with 40 MW hours of storagecapacity at the Babcock Ranch Solar Energy Center creating the country's largestcombined solar plus storage project currently in operation and highlighting FPL'sinnovative approach to further enhance the diversity of its clean energy solutions forcustomers.

FPL will install additional battery storage projects to further enhance the reliability andefficiency of its system and to position FPL for future deployments as battery costcontinued to decline over the coming years. Construction on the approximately 1,750 MWOkeechobee Clean Energy Center remains on schedule and on budget. As I previouslymentioned, in March, the Florida Public Service Commission granted the determination ofneed for the Dania Beach Clean Energy Center. The approximately $900 million project isexpected to begin operation in 2022 and generate nearly $350 million in net cost savingsfor FPL customers while reducing air emissions by roughly 70% compared to the existingpower plant.

We continue to make significant progress with FPL's purchase of substantially all theassets of the City of Vero Beach's Municipal Electric System, receiving approval for thetransaction from the Orlando Utilities Commission and all 19 member cities on the FMPA

Board. The transaction is now undergoing FPSC review, pending commission approvalthis transaction will represent what we believe is the first privatization of a verticallyintegrated electric municipal utility in the United States in more than 25 years and isreflective of FPL's collaborative efforts with the city, local and regional leaders as well asother state authorities to benefit Vero Beach's more than 34,000 customers with FPL'sbest in class value proposition.

FPL's continued smart investment opportunities are expected to support the compoundannual growth rate in regulatory capital employed of approximately 9% from the start ofthe settlement agreement in January 2017 through at least December 2021 while furtherbenefiting our customers. This compound annual growth rate is higher than we hadpreviously discussed as it now is net of declining contribution from accumulated deferredincome taxes for the reasons I mentioned earlier, which more appropriately reflects thegrowth in FPL's earnings. The Florida economy continues to show healthy results and isamong the strongest in the nation. The current unemployment rate of 3.9% is near thelowest levels in a decade and remains below the national average.

The real estate sector continues to grow with average building permits in the Case-Shillerindex for South Florida, up 7.4% and 3.8% respectively, versus the prior year. Florida'sconsumer confidence level also remains near a 10-year high. FPL's first quarter retailsales increased 2.9% from the prior year comparable period, and we estimate thatapproximately 1.3% of this amount can be attributed to weather-related usage percustomer. On a weather normalized basis, first quarter sales increased 1.6% withcontinued customer growth and an estimated 0.7% increase in weather normalized usageper customer both contributing favorably. While the growth in underlying usage is areversal from the trend in recent quarters as we have often discussed, this measure canbe volatile on a quarterly basis. We will continue to closely monitor and analyze underlyingusage and we’ll update you on future calls.

Let me now turn to Energy Resources which reported first quarter 2018 GAAP earnings of$3.926 billion or $8.26 per share and adjusted earnings of $386 million or $0.81 per share.This quarter’s GAAP results reflect certain impacts that I would like to take a moment tosummarize. As we have previously discussed due to the increase government rights thatwere granted to NEP's LP unitholders, NEP was deconsolidated from NextEra Energyfinancial statements beginning in January 2018. NextEra Energy now accounts for itsinvestment in NEP on the equity method of accounting and as a result of this changerecognizing approximately $3 billion after tax gain or $6.32 per share during the firstquarter of 2018 from according its investment in NEP at fair value.

The projects owned by NEP will continue to provide value to NextEra Energy over theiroperating lives through NextEra Energy's continued investment in NEP. Accordingly,NextEra Energy will exclude this initial gain from adjusted earnings and realize that as arelated project provided an economic benefit to Energy Resources, which offset the higherdepreciation and amortization resulting from according the investment in NEP at fair value.Beyond deconsolidation in the first quarter of 2018, Energy Resources re-measured its taxequity arrangements or differential membership interest resulting in a net after-tax gain of$484 million to reflect the impact of the newly enacted tax rate.

Since its re-measurement is not expected to have an economic impact on our underlyingtax equity transactions, we are excluding these tax reform related impacts from adjustedearnings and reflecting the benefit over the original term, which we believe better reflectthe economic substance of the transactions. Additional detail on these and other changesare included in the Appendix of today’s presentation.

Energy Resources contribution to adjusted earnings per share increased by $0.05 toroughly 7% from last year’s comparable quarter with approximately 1,600 MW ofrepowered wind projects being commissioned in 2017, contribution from existinggeneration assets increased by $0.06 per share primarily as a result of increase of PTCvolumes from these repower projects. Contributions from new investments declined by$0.17 per share as the prior comparable quarter benefited from the timing of tax incentivesof certain projects.

For the full year, we expect contributions from new investments to be slightly positive.Contribution from our gas infrastructure business including existing pipelines increased by$0.06 year-over-year, as expected the reduction in the corporate federal income tax ratewas accretive to Energy Resources increase in adjusted EPS by $0.12 compared to 2017.All other items decreased results by $0.02 per share. Additional details are shown on theaccompany slide.

As I mentioned earlier, the Energy Resources development team continues to capitalizewhat we believe is the best renewables development environment in our history adding667 MW of new wind projects and 334 MW of new solar projects to our backlog since lastcall. All of these 1,001 MW added to backlog 34 MW of the solar projects and 247 MW ofthe wind project are for delivery this year. The company chart updates information weprovided on last quarter's call, but our overall expectations have not changed.

For 2019 and 2020, we are now within the range of expectations that we have provided forsolar and for U.S. wind our current backlog is more than half of the low-end of ourexpected range. We continue to track well against the total development forecast for 2017through 2020 that we shared at our investor conference last year and with returns onEnergy Resources renewables projects consistent with what we have previously shared,our backlog continues to track against the assumptions supporting our previouslyannounced financial expectations.

One of the best quarters of new renewables origination in our history is a reflection of theincreasingly strong economic demand for wind and solar, which will continue to benefitfrom additional retirement of coal, nuclear, and less fuel efficient oil and gas firedgenerating units, creating significant opportunities for renewables growth going forward.Combined with our competitive advantages in renewable development, we expect this willhelp drive well into the next decade building on the nearly 300 MW of renewables projects,we have already signed for beyond 2020.

In addition to the progress we made with battery storage projects at FPL, yesterdayEnergy Resources commissioned its first solar plus storage project. These projectsrepresent the beginning of the next phase of renewable deployment that pairs low costwind and solar energy with a low cost battery storage solution to provide a product thatcould be dispatched with enough certainty to meet customer needs for nearly firmgeneration resource all at a lower cost that that required to operate traditional inefficientgeneration resources.

Beyond renewable, we were pleased to begin construction on the Mountain ValleyPipeline during the first quarter and we continue to expect the December 2018 in-servicedate. Earlier this month with project partner EQT Corporation, we also announced theMVP Southgate project, a proposed expansion pipeline that will receive gas from the MVPmainline in Virginia and extend south to new delivery points in central North Carolina.

The project, which is anchored by a firm capacity commitment from PSMC Energy,commenced a binding open season in order to provide additional market participants andopportunities to subscribe to the project. As currently designed, the project has a targetedin service date of the fourth quarter 2020, subject to FERC and other regulatory approvals.We look forward to providing additional details following evaluation of the open seasonresults.

Turning now to the consolidated results for NextEra Energy for the first quarter of 2018,GAAP net income attributable to NextEra Energy was $4.428 billion or $9.32 per share.NextEra Energy's 2018 first quarter adjusted earnings and adjusted EPS were $919million at $1.94 per share, respectively. Adjusted earnings from the corporate and othersegment increased seven cents per share, compared to the first quarter of 2017 primarilydue to certain favorable tax items and lower interest expense.

Based on our first quarter performance at NextEra Energy, we remain comfortable with theexpectations we have previously discussed for the full year and will continue to target the770 midpoint of our adjusted EPS range. Longer term, we continue to expect NextEraEnergy's adjusted compound annual growth rate to be in a range of 6% to 8% through2021 off our 2018 expectation of $7.70 per share, all subject to our usual caveats. Wecontinue to believe that we have one of the best growth opportunity sets in our industryand we will be disappointed if we are not able to deliver financial results at or near the topend of our 6% to 8% range through 2021.

Operating cash flow is expected to grow roughly in line with our adjusted EPS compoundannual growth rate range from 2018 through 2021. As we announced in February, theBoard of NextEra Energy approved a two-year extension of the existing dividend policy oftargeting 12% to 14% annual growth in dividends per share. This extension is expected toresult in a growth rate in dividends per share of 12% to 14% per year through at least2020, off the 2017 base of $3.93 per share. The Board's extension of this policy reflectsthe continued strength of adjusted earnings and operating cash flow growth at NextEraEnergy.

With a payout ratio of only 59% at the end of 2017 below the peer average of roughly 55%and one of the strongest balance sheets in our sector, we remain well positioned tosupport the dividend policy going forward. Similar to the recent recognition of NextEraEnergy's enhanced business risk profile by S&P and Moody's, earlier this month, Fitchannounced that it was widening its sustained FFO adjusted leverage thresholds from 3.5times to 3.75 time to 4 times to 4.25 times. At our current rating agency thresholds, weexpect to have $5 billion to $7 billion of excess balance sheet capacity through 2021.

We continue to expect that it’s a regulated contribution to our business mix improved toroughly 70% that we would receive a further reduction to our current rating agencythresholds from S&P and Moody's creating additional balance sheet capacity. As areminder, our excess balance sheet capacity serves as a cushion as its utilization is notcurrently assumed in our financial expectations. In summary, after a strong start to theyear, we continue to remain as enthusiastic as ever about NextEra Energys future

prospects. At FPL, we continue to focus on delivering our best-in-class customer valueproposition through operational cost effectiveness, productivity and making smart long-term investments to further improve the quality, reliability, and efficiency of everything wedo.

Energy Resources maintained significant competitive advantages to capitalize on theexpanding market for renewables development and continues to make strong progress onits natural gas pipeline development and construction efforts. With the strength of ourcredit ratings and significant balance sheet capacity NextEra Energy is uniquelypositioned to drive long-term shareholder value. We remain intensely focused onexecution and on extending our long-term track record of delivering value to shareholders.

Let me now turn to NEP. NextEra Energy Partners is also off to a strong start to 2018 withsignificant year-over-year growth in both adjusted EBITDA and cash available fordistribution, reflecting new asset additions during 2017 and outstanding underlyingperformance of the portfolio. Yesterday, the NEP board declared a quarterly distribution of$.42 per common unit or $1.8 per common unit on an annualized basis up 15% from theyear earlier. Earlier this month, NEP announced the sale of its Canadian portfolio of windand solar projects to Canada Pension Plan Investment Board. The transaction which wascompleted at an attractive 10-year average cap yield of 6.6% including the net presentvalue of the O&M origination fee highlights the significant underlying value of NEPsportfolio and is expected to be accretive to long-term growth as I will discuss more in amoment.

We continue to expect the NEP will have no need to sell common equity until 2020 at theearliest other the modest issuances under the ATM program and have taken further stepsto enhance our financing flexibility by opportunistically hedging our exposure to futureinterest rate volatility. Overall, we are pleased with the strong start to 2018 and will remainfocus on continuing the success going forward. As I just mentioned at the end of MarchNEP entered into a definitive agreement with CPPIB for the sale of the 396 MW Canadawind and solar portfolio. Total consideration for the portfolio is approximately $582 millionincluded the net present value of LNM origination fee, subject to customary workingcapital and other adjustment plus the assumption by the purchaser of approximately $689million and existing debt.

The foreign currency exchange rate has been hedged for the transaction which isexpected to close in the second quarter of this year subject to receive a regulatoryapprovals and satisfaction of customary closing conditions. When the agreement wasexecuted in the first quarter, it accelerated payment by Energy Resources to NEP of an

approximately $30 million note receivable which was acquired by NEP with the JericaWind Project. This note receivable is not included in the sales in the CPPIB. The saleprice of portfolio represents an attractive 10-year average cap deal of 6.6% inclusive ofthe net present value of the O&M origination fee highlighted an underlying value of NEPsrenewable assets.

We expect to be able to accretively redeploy the proceeds in the higher yielding U.S.acquisitions from Energy Resources of third party to support NEP's long-term growth. Withthe lower effective corporate tax rate and a longer tax yield in the U.S. versus Canada,NEP can retain more can available for distribution in the future for every $1 invested intothe U.S. assets which intern as expected to provide a longer runway for FPL -- for limitedpartner distribution growth. As a result, today we are pleased to announced that we areextending our financial expectation for NEP another year as we see 12% to 15% per yeargrowth and per unit distributions as a reasonable range of expectations through at least2023.

Let me now review the detail results for NEP, which reflect the outstanding operational andfinancial performance for the quarter. Included in the benefit from the acceleration of theJerica note receivables that I just described, first quarter adjusted EBITDA was $258million and cash available for distribution was $95 million, up roughly 52% and 138%respectively against the prior year comparable quarter. Excluding the impact of thispayment, growth remains very strong with adjusted EBITDA and cash available fordistribution increasing approximately 34% and 63% respectively year-over-year.Contributions from portfolio acquisitions were the principal driver of growth.

New projects added $49 million of adjusted EBITDA and $32 million of cash available fordistribution, existing projects also contributed favorably primarily as a result of contractingactivity of one of the Texas pipelines. For the NEP portfolio, wind resource was alsofavorable at 105% of the long-term average versus 99% in the first quarter of 2017. Cashavailable for distribution reflects $17 million of higher debt service due to the timing ofpayments related to the senior unsecured notes that were issued in the third quarter oflast year. As a reminder, these results are net of IDR fees since we treat these as anoperating expense. Additional details are shown on the accompanying slide.

NEP's portfolio of long-dated amortizing project level debt helps limit interest rateexposure. During the quarter, we were pleased to further mitigate potential interest ratevolatility and enhance NEP significant financing flexibility with a $5 billion interest ratehedge agreement. Under the agreement at any date until March 26, 2028, NEP has theflexibility to effectively enter into a 10-year interest rate swap at a fixed rate of 3.192% in

any amount up to the $5 billion total. Any unutilized balance as of March 26, 2028, will becash settled hedging rates at that time through 2038. The swap which is reflective of thelong-term approach, we continue to take with NEP together with amortizing project leveldebt will help limit interest rate exposure going forward and is expected to help maintainNEP's relative cost of capital advantage compared to MLP's and other yieldcos.

NextEra Energy Partners continues to expect that December 31, 2018 run rate foradjusted EBITDA of 1 billion to $1.15 billion and cap fee of $360 million to $400 million,reflecting calendar year 2019 expectations for the forecasted portfolio at year-end 2018.As I just mentioned from the base of our fourth quarter 2017 distribution per common unitat an annualized rate of a $1.62, we now see 12% to 15% per year growth in LPdistributions as being a reasonable range of expectations through at least 2023 subject toour usual caveats. As a result, we expect the annualized rate of the fourth quarter 2018distribution that is payable in February 2019 to be in a range of a $1.81 to a $1.86 percommon unit.

We are pleased with NEP strong start to 2018. We believe NEP continues to provide thebest-in-class investor value proposition with the flexibility to grow in three ways, acquiringassets from Energy Resources organically or acquiring assets from other third parties.NEP's cost to capital and access to capital advantages which have even further improvedrelative to other yieldcos in MLPs, position NEP well to support its growth going forward.These advantages combined with the stability of NEP's long-term contracted cash flowsbacked by strong counterparty credit, favorable tax position and enhanced governancerights leave NEP well-positioned to meet its long term financial expectations and enhanceunitholder value.

That concludes our prepared remarks. And with that, we will now open the line forquestions.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. [Operator Instructions] Our firstquestion today comes from Julien Dumoulin-Smith with Bank of America. Please goahead.

Julien Dumoulin-Smith

So I just wanted to follow up a little bit, clearly, there has been a lot of discussion out in themarketplace of lat. I am just curious. First, with respect to your balance sheet, can youelaborate a little bit more and perhaps define more precisely the additional balance sheetlatitude that you alluded to from the rating agencies? And then perhaps to the extent towhich you can elaborate on acquisition, how do you think about utilizing that additionallatitude? Do you think about maintaining a buffer even in a pro forma any kind ofacquisition? Effectively, how much is this new dry powder or the cumulative dry powderthat you have?

John Ketchum

Yes. So, essentially, the $5 billion to $7 billion results from taking our downgrade thresholdmetric with S&P to 23%. And what we have said is that we have more latitude, if we arefurther able to improve our regulated business mix. So, depending on the size of thepotential opportunity, if we add more regulated business mix that gets us close to 70%regulated. That gives us an opportunity to move from 23% down to a lower amount withS&P and to also further improve on our current downgrade threshold metric with Moody's,which is currently at 20%. I’m not right now going to frame, how much excess balancesheet capacity that actually creates for us, but needless to say it will provide more than anample buffer going forward.

Jim Robo

Julien, this is Jim. The one thing I would add to that is, I think you asked, how close to thethreshold would we ever run the business, given an acquisition and I think two thingsabout that. One is that we would never do anything that isn't accretive and doesn't makesense. And we have been very disciplined about this, and we will continue to bedisciplined. And then secondly, we value strong balance sheet and our strong creditratings, and we are not going to do anything that puts that at risk and which would includeI think, and I think you're seeing some of the implications of that in good playing out in thesector of this year with, as a result of kind of unexpected cash flow impacts, as a result oftax reform folks had -- there has been some equity pressure and some balance sheetpressure on a lot of our peers. And our thinking about how we manage our businesses isnot to manage it on the razor's edge from a balance sheet capacity and credit standpointeither. So, it has to be accretive, and we are going to continue to have a very strong creditis a very important part of our strategy going forward.

Julien Dumoulin-Smith

Let me just take another last point quickly. Obviously, there has been a lot of movement inthe midstream side of the sector as well. You all have been very specific about looking atregulated opportunities given the additional balance sheet latitude afforded out of that. Butis midstream mentioned something that you already are evaluating a new or the creditconcern there so pervasive that again that largely remains off the radar screen in terms ofwhat you are evaluating?

Jim Robo

Yes, I mean I think on the midstream side, midstream creates two potential opportunities,but it has to be a midstream opportunity that fits within our profile. Number one, we’re veryfocused on greenfield. We’ve seen a lot of success on the greenfield opportunitiesmentioned in the mainline, main pipeline expansion opportunity that we have off of MVP.So, we're very happy with the greenfield success that we’re seeing there. And given someof the struggles that we’ve seen in the MLP sector, I do expect us to continue to maintaina cost to capital advantage whether it’s on greenfield opportunities or on third party M&A.

If we’re looking at third party M&A, we’re always going to be picky at NextEra Energybased on what we look at, and we don’t want to see longer average term contract life,we’re also going to want to see higher credit quality if we look at the pipes that we’vedeveloped, they are very high quality pipes that we would not want to dilute, the portfoliothat we currently maintain. But as you look forward, certainly with pipeline opportunitiesthat does present chances for us perhaps at me and at in NEP as well, don’t forget thatNEP enjoys a very favorable yield particularly what’s happen at the MLPs as a result ofFERC decision that was handed down three or four weeks ago.

And then also the higher yields that we see many of the yieldcos trade at. So for us, wehave terrific opportunities to grow NEP in three ways as I mentioned, one is buying assetsfrom energy resources, two is organically, but it's encouraging to see the cost to capitaladvantage that I think we really maintain in both the MLP and the yieldcos space, and youcan expect us to be opportunistic and disciplined as to how we evaluate thoseopportunities going forward.

Julien Dumoulin-Smith

So for instance using some of the latitude created from the Canadian sales wouldn’t becreated to think about that going towards the midstream opportunity at the NEP level?

Jim Robo

Well, I mean at the NEP level, we have a number of opportunities, right. From theCanadian standpoint, we have third party opportunities that we can look at. I wouldn’tisolate those MLP opportunities. We have a lot of renewable opportunities. We have otherasset opportunities that we continue to look at as well. And then obviously always havethe opportunity to buy assets directly from NextEra Energy Resources.

John Ketchum

Julien, let me just add to that and then we’ll going to have to move to the next question. Ithink it would be highly unlikely that you would see NEP enter into a transaction in themidstream space, right. I mean we like what we have, but I think it would be highly unlikelythat you would see us increase our exposure through an acquisition at NEP.

Operator

Our next question comes from Steve Fleishman with Wolfe Research. Please go ahead.

Steven Fleishman

So, just on the NEP expansion of the dividend growth another year at least, you've had apoint to one driver of that what would that be?

John Ketchum

Yes. I mean I think a couple of things. One is Canada, but being able to execute theCanadian transaction at 6.6% yield and be able to reinvest those proceeds in the U.S.under a more attractive tax regime at a higher yield. That's one opportunity. And then alsoall the continued success that you continue to see at Energy Resources, we are clearly inone of the best renewables environments that we have ever been in, and I think that'sevidenced by the fact that we had one of the best quarters of originations in our historyposting over a 1,000 MW.

Steve Fleishman

And then just in terms of the maybe just to talk on the overall renewable market, I meanthere's just so many high level factors, the solar tariffs, the steel tariffs things like that. Justthe core thesis of better economics and the likely, is that -- is the whole kind of thesis stillin place in terms of hitting the targets and then economics beyond 2020?

John Ketchum

Yes, no it absolutely is, I mean first of all we managed around the solar tariff impacts, wehad already brought forward our panel needs for '18 and '19 and now secured a good partof 20. We announced the JinkoSolar opportunity will be an anchor turned tenant on thatopportunity buying about 22.7 GW of panels from Jinko at attractive prices because againwe are the anchor tenants on that facility. So, I feel very good about the mitigation stepsthat we've taken on solar panels. I don't see that as being an impediment to growth for ourportfolio going forward based on what we've been able to secure.

When you look at steel and the wind turbine, you know wind turbine doesn't really use thatmuch steel. I mean the steel is in the tower, the tower is all manufactured domestically.And if you look at the blades and cells, there is just not a whole lot of steel there. So notreally much of a meaningful impact to wind, and then when you look at solar, the solarpanel itself doesn’t contain aluminum or steel. There's some in the racking, it's a verysmall impact overall. And when you look at the economics of the renewable market today,we truly enjoy a competitive advantage that has not changed, the buying power that wehave on the OEM side. The continued productivity that we see on reduced O&M costswhich is only benefits from having the largest renewable operations in North Americawhich is very scalable.

The cost of capital advantage that we maintain, we don't have to pursue expensiveconstruction financing. We can balance sheet finance, our wind and solar build and thenterm it out with access to the tax act equity market or project financing. We have not seenanything on the tax equity side that suggests any compression that would affect our build.Again, we have first call on that market, if anything we've seen tax equity prices fall, whichhas been a nice benefit. And then the last piece is just you benefit by having a largeportfolio because you get much higher principal correlated information as the new sitesthat you can build upon, which really helps with top line growth going forward. And whenyou throw into the mix, the expertise that we developed on the battery side, I feel verygood about the competitive advantages that we have on renewable.

Steve Fleishman

Okay, thank you.

Jim Robo

Just a second, the only thing that John didn't cover was volume really. I mean, thatcovered all the points that we are seeing and is really driving costs down, which areobviously helpful to the economics. But the volume piece I mean there is a lot of volume

right in the industry right now. I mean we are pricing some very large renewable projectsat this point. I don't think, I’m sure we've never seen the volume out in the market that weare seeing. And so it makes us, pretty happy about the future.

Steve Fleishman

Just a reminder when you say volume you mean large-scale like RFPs so to speak or…

Armando Pimentel

Yes, there is just a lot of RFPs out in the market, both the traditional utilities and C&Icompanies. And we are pricing -- we continue to price projects in 2018, but we are goingout as far as 2022 at this point price and projects.

John Ketchum

Yes, and that’s a good point that Armando brought up on volume because the other pointthat I want to make is around capital deployment. We are deploying as much capital aswe've ever deployed in this business. You guys have seen the numbers from our AnnualDay 10 billion to 11 billion a year between both businesses and renewables obviouslymakes up a big piece of that.

We have not seen change in the returns that we have previously communicated toinvestors and we unlevered IRRs, and when high single digits unlevered and the highteens low 20s solar couple hundred bips below on the unlevered IRR and mid teens onthe ROEs, and those are numbers we have been communicating to investors for a longtime. And because of all the competitive advantages that we have in the sectornotwithstanding tax reform, we have been able to make up for some of the impacts onbonus depreciation and preserving those returns.

Operator

Our next question comes from Greg Gordon with Evercore. Please go ahead.

Greg Gordon

Can you just talk about the cadence of earnings at NextEra Energy resources over thecourse of the year? It is somewhat unusual for you guys to have a $0.17 drag in the firstquarter from new developments. I look back at last couple years where the Q1 releasesjust stand in it. It does look like an outlier. So, is there a unique set of circumstances thisyear that’s driving the shape of the earnings contribution this year?

John Ketchum

Yes, one thing I’ll take you back just the January or the first quarter back in 2017. We hada large solar project our blight solar project that was originally announced CITC for variousreasons. We converted that over to ITCs for tax reasons. That was captured all in the firstquarter. Typically, we would spread the ITCs on a project over a year but because thatproject started in place in operation that all showed up in the first quarter. But certainly in'17 nothing unusual, our ITC and PTC make up was very similar to what you've seen for anumber of years from energy resources but that ITC recognition event in the first quarterof 2017 just set up a bad comparison for new investment activity.

Greg Gordon

And then my second and last question because most of them have been answered is…

John Ketchum

I think one other thing I should say, not to interrupt you, is the whole year is fine though.When you look at the new investment activity for the year, it's fine.

Greg Gordon

Okay. Thank you. I appreciate that. Second question, one of the things that you guys havenot done is just have your focus expands to looking at or bidding on, at least you haven’tpublicly disclose any bids on offshore wind, nor have you expanded the breadth of yourfocus geographically outside North America. Can you comment as to why there isn’t anopportunity on a risk adjusted basis either on offshore wind or outside North Americathat’s attractive to you?

John Ketchum

Yes. I’ll turn that question over to Jim.

Jim Robo

So, Greg, just on offshore winds, we work very hard at offshore winds 15 years ago andworked on a project off of Long Island, get very close on it. I personally expect when I wasrunning NextEra Energy resources at the time personally spend a lot of time on thedevelopment on that project. And fundamentally, development timelines are 5 to 10 years,permitting is uncertain, it’s a -- it is a moon shot in terms of building, in terms of findingpeople who actually know what they’re doing from a construction standpoint, it's terribleenergy policy and that it’s really expensive and even in New England for example.

In the last RFP, Massachusetts turned down several projects that we bid at $0.05 for insolar and you can do -- let me tell you offshore wind in Massachusetts -- the offshore windRFP in Massachusetts is not going to come in at $0.05. So, it is just -- its bad energypolicy and its bad business. And so, we don’t tend to do either those things, and so that’swhy we’re not going to be doing offshore wind. In terms of international, this industry hashonestly a pretty lousy track record in international and we have plenty of things to keepus busy here in North America we’re going to continue to be focused in primarily U.S.going forward and we’ll be able to continue to grow well just with our focus. I think ourinvestors are not really too excited about us doing anything outside of U.S.

Operator

Next question comes from Michael Lapideswith with Goldman Sachs. Please go ahead.

Michael Lapides

Just on the FP&L, can you rehash a little bit, I may have lost it during the preparedremarks. Are you effectively kind of raising your earnings expectations for FP&L andmaybe the earnings growth rate off of 2017 actuals?

John Ketchum

Well, let's back up just a minute. So, on FPL because we have taken all the surplusagainst Irma, we expect the depreciation expense to be higher, right, in the first quarterand in the second quarter as well, but we are replenishing our surplus balance at thesame time through continue tax savings. Now, we were able to offset that higherdepreciation expense at FPL through higher base revenues and reduced O&M expensesin the first quarter.

And so what that has allowed us to do is probably move up to timing of when we couldperhaps achieve an 11.6% ROE on that business. We had originally communicated in lastcall that might not be to all third quarter, looks more likely it could be late in the secondquarter, early in the third quarter. So think at FPL continues to progress a bit better thanexpected because of the improvements that we've seen in weather and in O&M.

Michael Lapideswith

And so should we assume kind of in your going forward guidance meaning not just 2018beyond, that you kind of stay in that 11.5%, 11.6 range in terms of on to ROEs? And thenshould we also assume that kind of because there's no bonus depreciation whatever yourolder rate based growth guidance pretax reform is, now, it's actually a higher number?

John Ketchum

Yes, so you know, a couple of things there, I mean, first of all of you the 11.6% is includedin our financial expectations. For 2018, the 770, nothing changed with regard to the 770target or with the financial expectations that we have communicated growing 6% to 8%disappointed not to be at the higher end of that off that -- off of that 770 target. All that'sreally happened with you saw a little bit of an increase in the regulatory capital employedgrowth for the first quarter at the 12.9% and you know we expect regulatory capitalemployed growth to be around 9% between 2017 and 2021.

That's really a factor of just backing accumulated deferred taxes out of our rate basecalculation, and the reason that we've done that is deferred tax liabilities which are zerocost equity are actually going to decrease over time because as you recall with tax reform,FPL and all rate regulated utilities are allowed to take full interest deductibility withoutbeing subject to the German fin cap rule of 30% of adjusted of EBITDA and then than 30%of EBIT after five years.

But in exchange for that regulated utilities can no longer take immediate expensingbecause FPL can no longer take immediate expensing, its book cash difference on taxesdecreases so its deferred tax liability goes down, which means that zero cost equitycomes down. So we just went ahead and pulled the accumulated deferred tax impact lineout of our rate base since its zero cost equity that resulted in a slight uptick in theregulatory capital employed growth that you can expect for FPL at the 12.9%. We have awalk on that in the Appendix.

Operator

Next question comes from Jonathan Arnold with Deutsche Bank. Please go ahead.

Jonathan Arnold

Could I just ask in the market, I know you don't identify individual counterparties, but couldyou give us a sense of the breakdown in the new originations by customer type at allwhether utilities, munis, corporates just some flavor there?

Armando Pimentel

It's probably pretty close to a third a third a third, I mean it's not going to be exactly there,but -- I mean we had a -- we're being, we're having more success in the C&I sector, I'dsay, over the last six to eight months than we had in the past. We talked about that beforethat while that was never going to be a really big sector for us. We needed to bring our

market share up a little bit and we've done that. We're still very competitive on what Iwould call the IOUs, that’s a market that I think we do, not I think we do the best in, interms of market share, compared to the other markets.

But we are also seeing munis and coops that are buying. And interestingly in the commentI made, the comment I made before it's the muni coop and large IOUs that are reallyreaching out further in the curve than the C&I sector, right. When you are pricing the C&Isector, you are really pricing projects for this year or next year primarily. And when you arepricing projects for the larger companies, we are now seeing where pricing projects in2022. So I’m happy with all of the sectors and how we are doing and I'm really happy thatwe are seeing a lot of activity beyond 2020.

Jonathan Arnold

But of the 1,000 MW, that discourse is a roughly equal breakdown?

Armando Pimentel

It's definitely not equally, but I would say it's probably a third, a third, a third, somewherelike, it's not going to be 90 and 10.

Jonathan Arnold

Yes, so that was what I was looking for Armando, thank you. And then just want to thankyou for putting the portfolio slide back in, on the projected numbers, I’m just curious Inoticed on the contracted renewable lines. New investment, you'll now mentioning in thefoot notes, that that includes net proceeds from selling development projects. So, I wasjust curious, how much of the number is that as it a material amount? And is that just thinkyou've already announced or are you anticipating further activity on that front?

John Ketchum

Yes, Jonathan, if you remember I think it was last year we announced a transaction withthe larger customer which I think most of you folks know who that is, is those around1,500 MW and out of that 1,500 MW, 500 of that was going to be PPAs and then about a1,000 MW of that was going to be what I’d call build on transfer projects. Some of themwere early-stage development right projects where we're going to flip the project prior toeven ordering the turbines or doing any of the construction that was going to be done bythe buyer.

And then also some build on transfer, we would actually build the project and then flip it.We see that business in certain circumstances as a very good business for us and acontinuing business for us, because what it can do is it can allow us to get more long-termcontracted PPAs. But if you have an opportunity to sell the development rights,development rights on a project, remember we have a very large land bank, which wetalked about in the past, close to 20 gig watts where we go out, we heat map the entirecountry. We secure land rights. We have interconnection Q positions.

And we can take those pieces of property, which are actually good development sites andsell them and earn roughly 20% of the NPV that we can earn on projects that we builtcompletely in that you know we own for its remaining useful life. And on the build ontransfer, we can build the project and not of taking in the operational risk and sell it for anNPV at roughly 40% to 45% of what we could achieve, if we held the asset through theend of life. So, those are opportunities particularly larger investor-owned utilities that wewill continue to evaluate and look at because they are good return, good NEP producingopportunities for the overall business.

But let’s not forget, the size of the renewable pie is as big as it’s ever been as it's big asever been because coal and nuclear are very expensive. We have a significant costadvantage over both coal and nuclear. And also an efficiency and cost advantage overlower efficient oil fire generation and gas fire generation projects. And so as we goforward, the bulk of our activity is always going to be signing PPAs and holding the assetsthrough life, but there can’t be some opportunities also the build on transfer side which willbe very attractive as well and we want more of those opportunities as it come forward.

Jonathan Arnold

But John again why you’re doing it, but I was curious if this is you can sort of calibrate howmuch of the 200 to 400 relates to that kind of things that's running 2018 and whether that’sthe deal of the time last year you want…

John Ketchum

Yes, the reason I was given the context, Jonathan, is it’s going to move around, right. Imean because it’s something that we will look at, at an on an opportunistic basis,something it will be like what we had announced on the larger transaction last year wherewe were able to do the build on transfer and exchange for getting over 500 MW of long-term contracts out of that deal.

But if you look at our addressable market, it’s -- I’ve always said monies, coops, small tomedium size, investor-owned utilities and larger investor-owned utilities that look to do alittle bit of rate base this provides an nice build on transfer opportunities for us as well, andthen everything that we see on the CNI space.

So, terrific growth opportunities we continue to see on the long-term contract side of thebusiness, but sometimes we are going to be opportunistic as part of our continuingbusiness operation looking at build on transfers. But it’s going to be -- I can’t give you aflat number of I’ll expect this amount in anyone year, it's just going to be -- it’s just going tochange overtime.

Jonathan Arnold

What was the deal that you reference for last year? Was that booked last year or what’sthat sort of booked when regulatory approval comes over this year perhaps?

John Ketchum

This year.

Jonathan Arnold

Because that’s part of this year’s number, but you’re not going to -- you can't give us asense of how much?

John Ketchum

Yes, it’s a -- we’ll make further announcements going forward, but it’s not going to be amaterial part of our earnings for the year.

Jonathan Arnold

Okay.

Armando Pimentel

The other thing Jonathan is, we’ve sold projects every year for the last 15 years, it’s notgoing to be any bigger or less than it’s ever been in the last 15 years as part of NextEraEnergy resources net income. It’s going to be move around, as John said, but it’s not a bigdeal. It’s us making sure that we capitalize on the market and its terrific return on investedcapital, and it’s really good for shareholders.

Jonathan Arnold

Comments (0)

Perfect, so it's a modest thing and not changing that much. Thank you.

Operator

This will conclude the question-and-answer session as well as today’s conference. Thankyou for attending today’s presentation. You may now disconnect.

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