NextEra Energy, Inc. (NEE) Q3 2018 Earnings Report, Transcript and Summary

Good morning, and welcome to the NextEra Energy, Inc. and NextEra Energy Partners, LP Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Matt Roskot. Please go ahead.

Thank you, Brendan. Good morning, everyone. And thank you for joining our third quarter 2018 combined earnings conference call for NextEra Energy and NextEra Energy Partners. With me this morning are Jim Robo, Chairman and Chief Executive Officer of NextEra Energy; John Ketchum, Executive Vice President and Chief Financial Officer of NextEra Energy; Armando Pimentel, President and Chief Executive Officer of NextEra Energy Resources; and Mark Hickson, Executive Vice President of NextEra Energy; all of whom are also officers of NextEra Energy Partners; as well as Eric Silagy, President and Chief Executive Officer of Florida Power & Light Company. John will provide an overview of our results, and our executive team will then be available to answer your questions. We will be making forward-looking statements during this call based on current expectations and assumptions, which are subject to risks and uncertainties. Actual results could differ materially from our forward-looking statements if any of our key assumptions are incorrect or because of other factors discussed in today's earnings news release and the comments made during this conference call, in the Risk Factors section of the accompanying presentation, on our latest reports and filings with the Securities and Exchange Commission, each of which can be found on our websites, nexteraenergy.com and 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. You should refer to the information contained in the slides accompanying today's presentation for definitional information and reconciliations of historical non-GAAP measures to the closest GAAP financial measure. With that, I will turn the call over to John

Thank you, Matt. And good morning, everyone. Before I begin my remarks on the third quarter results, I would like to say a few words about Hurricane Florence and Michael. As you know, residents of the Southeastern US were recently impacted by the severe effects of these dangerous and deadly storms. Our deepest sympathies are with those who have been impacted by these storms’ widespread destruction. We are grateful for the support that others have given us over the years and we were fortunate to be in a position to assist other utilities this year. As part of our assistance efforts, we sent several 1,000 of our employees and contractors to support the restoration efforts of our neighboring utilities. In addition, FPL was able to quickly resource service to the approximately 70,000 customers who were impacted by Hurricane Michael as the hardening and automation investments at FPL was made since 2006 to build a stronger, smarter and more storm-resilient energy grid continue to benefit customers. Now, turning to our financial performance. NextEra Energy delivered strong third quarter results. And building upon the solid progress made in the first half of the year, remains well positioned to achieve our overall objectives for 2018. NextEra Energy’s third quarter adjusted earnings per share increased by $0.33 or approximately 18% against the prior year quarter, reflecting strong execution of both Florida Power & Light and Energy Resources. Year-to-date we have grown adjusted earnings per share by approximately 14% compared to the prior year comparable period, as we continue to execute well on our major initiatives. At Florida Power & Light earnings per share increased $0.18 year-over-year. Strong growth was driven by continued investment in the business to maintain our best-in-class customer value preposition of clean energy, low bills, high reliability and outstanding customer service. Consistent with our expectations, we achieved our target regulatory ROE of 11.6% early in the third quarter. All of our major capital initiatives remain on track including the 1,750 megawatt Okeechobee Clean Energy Center and construction of four 74.5 megawatt solar energy centers that are currently being built under the Solar Base Rate Adjustment or SOBRA mechanism of the rate case settlement agreement. During the quarter we completed the acquisition of Florida City Gas, and welcomed its employees and customers to the NextEra Energy family. As a reminder, starting this quarter, financial results for FCG are being reported as part of our FPL business segment. The proposed acquisitions of Gulf Power and ownership stakes in two natural gas power plants continue to progress well. In September, the Federal Trade Commission granted Early Termination of the Waiting Period under the Hart-Scott-Rodino Antitrust requirements. In addition, the change of control proceedings with FERC are currently uncontested. Subject to obtaining the FERC approval and satisfaction of customary closing conditions, we continue to expect the Gulf Power transaction to close in the first half of 2019. Assuming the transactions close, financial results for the natural gas plants will be reported as part of Energy Resources and Gulf Power will be reported as its own business segment. At Energy Resources, adjusted EPS increased by roughly 18% year-over-year primarily as a result of the favorable impact of the lower corporate income tax rate. Continuing the success of recent quarters, since the last earnings call we had our most successful quarter of renewable origination in our history adding nearly 2,100 megawatts to our backlog, including approximately 650 megawatts of additional wind repowering opportunities and 120 megawatts of battery storage projects. We were pleased to sign our first transaction in which a customer is combining wind and solar energy with the battery storage solution to best match its load profile at the lowest cost. This transaction includes the largest combined solar and storage facility in the United States announced to-date. I will provide more details on our continued origination success later in the call. Overall, with three strong quarters complete in 2018, we are pleased with the progress we are making at NextEra Energy and are well positioned to achieve the full year financial expectations that we have previously discussed subject to our usual caveats. Now, let’s look at the detailed results beginning with FPL. For the third quarter of 2018, FPL reported net income of $654 million or $1.37 per share, an increase of $88 million and $0.18 per share respectively year-over-year. Regulatory capital employed increased by approximately 13% over the same quarter last year and was a principal driver of FPL’s net income growth of nearly 16%. FPL’s capital expenditures were approximately $1.1 billion in the third quarter and we expect our full year capital investments to total between $4.9 billion and $5.1 billion. As I previously mentioned, our reported ROE for regulatory purposes was 11.6% for the 12 months ended September 30, 2018, which is at the upper end of the allowed band of 9.6% to 11.6% under our current rate agreement. As a reminder, rather than seek recovery from customers of the approximately $1.3 billion in Hurricane Irma storm restoration cost, FPL utilized its remaining available reserve amortization to offset nearly all of the expense associated with the write-off of the regulatory asset related to Irma cost recovery ending 2017 with a zero dollar reserve amortization balance. After achieving FPL’s target regulatory ROE of 11.6% early this quarter, we restored $301 million of FPL’s reserve amortization balance. We continue to expect that FPL will end 2020 with a sufficient amount of reserve amortization to operate under the current base rate settlement agreement for up to two additional years for any further customer benefits by potentially avoiding the base rate increase in 2021 and 2022. All of our major capital projects at FPL are progressing well. Construction on the approximately 1,750 megawatt Okeechobee Clean Energy Center remains on budget and on schedule to enter service in mid-2019. The four solar sites totaling nearly 300 megawatts of combined capacity that are currently being built across FPL’s service territory are all on track and on budget to begin providing cost effective energy to FPL customers in early 2019. These projects are a continuation of one of the largest solar expansions ever in the US and are part of FPL’s plans for a significant increase in new solar projects across Florida over the coming years. We have secured sites that could potentially support more than 6 gigawatts of FPL’s continued solar growth. Beyond solar, the roughly 1,200 megawatt Dania Beach Clean Energy Center continues to advance through development and is scheduled for siting board approval later this quarter to support its projected commercial operation date in 2022. Our continued investments in hardening and automation of our existing transmission and distribution system also continued to progress well. We continue to expect that FPL’s ongoing smart investment opportunities will support a compound annual growth rate and regulatory capital employed net of accumulated deferred income taxes of approximately 9% from the start of the settlement agreement in January 2017 through at least December 2021, while further enhancing our customer value proposition. The Florida economy continues to remain strong. Florida seasonally adjusted unemployment rate was 3.5% in September, down 0.3 percentage points from a year earlier, and that's the lowest level in the last decade. As an indicator of new construction, new building permits remain at healthy levels. The most recent rating of the Case-Shiller Index for South Florida shows home prices up 5.1% from the prior year. Overall, Florida's economy continues to grow with the latest ratings of Florida's consumer confidence remaining near the highest levels of the past decade. FPL’s third quarter retail sales increased 2.4% from the prior year comparable period. We estimate that less favorable weather had a negative year-over-year impact on usage per customer of approximately 4.1%, which was partially offset by the absence of the effects of Hurricane Irma. On a weather normalized basis, third quarter sales increased 2.9%, continued customer growth and an estimated 2% increase in weather normalized usage per customer both contributed favorably. While we’re encouraged by the growth and underlying usage, which is an acceleration of the positive trend from the first two quarters of the year, as we have often discussed, this measure can be volatile and at quarterly basis we are not yet ready to draw any firm conclusions about long-term trends. We will continue to closely monitor and analyze underlying usage and we’ll update you on future calls. We’re pleased with FPL’s year-to-date execution and will continue to maintain our relentless focus on delivering low bills, high reliability, clean energy, and outstanding service to our customers. Let me now turn to Energy Resources which reported third quarter of 2018 GAAP earnings of $214 million or $0.44 per share. Adjusted earnings for the third quarter were $348 million or $0.73 per share. Energy Resources’ contribution to third quarter adjusted earnings per share increased by $0.11, roughly 18% from the prior year comparable quarter. Contributions from new investments were flat year-over-year. The contribution from existing generation assets increased $0.01 per share as higher PTC volume from our repowered wind projects and improvement in wind resource was mostly offset by a number of smaller items, none of which is particularly noteworthy. Wind resource was 94% of long-term average versus 87% in the third quarter of 2017. Contributions from our Gas Infrastructure business, including existing pipelines increased by $0.04 year-over-year. The reduction in the corporate federal income tax rate contributed favorably increasing adjusted EPS by $0.11 compared to 2017. All other impacts reduced results by $0.05 per share primarily as a result of higher interest and corporate expenses including increased development activity to support the favorable renewables development environment. Additional details are shown on the accompanying slide. The Energy Resources’ development team continues to capitalize in what we believe is the best renewables development environment in our history delivering a record quarter of wind and solar origination. Since our last earnings call, we have added 850 megawatts of new wind projects, 447 megawatts of new solar projects and 120 megawatts of new battery storage projects to our renewables backlog. Among these approximately 1,420 megawatts of new build contracts, we were pleased to sign our first combined wind, solar and storage transaction as we continue to advance the next phase of renewables deployment that pairs low cost wind and solar energy with a low cost battery storage solution to provide a product that can be dispatched with enough certainty to meet customer needs for a nearly firm generation resource. Year-to-date, approximately one-third of our solar projects that have been added to backlog include a battery storage component and we continue to include a storage alternative in all of our RFP responses to help further educate our customers on the disruptive pricing of nearly firm renewables. As I have previously mentioned, since our last earnings call, we added approximately 650 megawatts to our repowering backlog. During the quarter, Energy Resources also successfully commissioned an approximately 200 megawatt repowering project and we continue to make solid progress on the remaining 2018 sites. In addition to the nearly 2,100 megawatts of projects added to backlog this quarter, we also executed a 200 megawatt build-own-transfer agreement. While customer demand for long-term contracted projects remain stronger than ever, we will continue to selectively pursue similar project sale opportunities that may facilitate additional PPA signings while generating a significant portion of the after-tax NPV that we would realize over the life of a contracted wind project. Through the first three quarters of 2018, we have added nearly 4,700 megawatts to our renewables backlog which now totals approximately 9,300 megawatts. To put our current backlog in context, it is larger than Energy Resources’ operating portfolio at the end of 2011, which took us more than 10 years to develop. The scale of origination success that we have had this year reflects a rapidly accelerating demand for low cost wind and solar projects and we continue to believe that by leveraging Energy Resources’ competitive advantages we are well positioned to capture a meaningful share in these markets going forward. The attached chart provides additional details on where our renewables development program now stands. Based on our current backlog and the ongoing strength of renewables demand, we continue to feel good about the total 2017 to 2020 development ranges that we have previously outlined. With over two years in the development period remaining, we are already within the outlined ranges for solar and wind repowering and are close to achieving the expected range for US wind. Beyond renewables, we continue to make progress with the construction of the Mountain Valley Pipeline. Despite being unable to work on stream and wetland crossings, MVP continues to advance construction on a significant portion of the overall route as it continues to work towards resolving outstanding legal challenges. Largely due to these challenges, MVP recently announced that it has increased its overall project cost estimate to $4.6 billion and is now targeting a full in-service date for the pipeline during the fourth quarter of 2019. As a result of the benefits of tax reform, Energy Resources’ returns for MVP remain attractive despite the recent cost increase. Additionally, the MVP expansion opportunities, including the Southgate project that we continue to advance through development, have strong economics and we believe the overall value of the pipeline will increase through time. Turning now to the consolidated results for NextEra Energy. For the third quarter of 2018 GAAP net income attributable to NextEra Energy was $1.007 billion or $2.10 per share. NextEra Energy’s 2018 third quarter adjusted earnings and adjusted EPS were $1.039 billion and $2.18 per share respectively. Adjusted earnings from the corporate and other segment increased $0.04 per share compared to the third quarter of 2017 primarily due to certain tax items. We continue to advance Project Accelerate, our company-wide productivity initiative, which is expected to yield several $100 million in run rate efficiencies. For the full year, we expect the total transition cost associated with this initiative to be approximately $44 million, of which $27 million will be recorded at FPL and offset with utilization of reserve amortization. The balance will be charged to Energy Resources and is expected to reduce adjusted EPS by $0.02 to $0.03 per share. Based on our strong year-to-date performance at NextEra Energy, we remain comfortable with the expectations we have previously discussed for the full year and we'll continue to target the $7.70 midpoint for adjusted EPS range which reflects growth of 8% off of our 2017 adjusted EPS of $6.70 plus approximately $0.45 for the benefit of tax reform. Longer term, we continue to expect NextEra Energy's adjusted EPS compound annual growth rate to be in a range of 6% to 8% through 2021 off of our 2018 midpoint expectation of $7.70 per share and assuming the Gulf Power and natural gas plants transactions close that the Florida acquisitions will be $0.15 and $0.20 accretive to our 2020 and 2021 adjusted EPS expectations respectively. From 2018 to 2021, we also expect that operating cash flow will be roughly in line with our adjusted EPS compound annual growth rate range. We continue to expect to grow our dividends per share 12% to 14% per year through at least 2020, off of 2017 base of dividends per share of $3.93. As always, our expectations are subject to usual caveats including but not limited to normal weather and operating conditions. As a reminder, shortly after the announcement of the acquisition of Gulf Power, Florida City Gas and ownership stakes in two natural gas power plants, we had potential interest rate volatility on the $5.1 billion cash purchase price through the execution of interest rate swaps. Earlier this year, we also entered into a $3 billion forward-starting interest rate hedge agreement that allows us to flexibly manage interest rate exposure on NextEra Energy debt issuances over the coming years. Following the closing of the Gulf Power transaction, we expect to maintain $5 billion to $7 billion of excess balance sheet capacity through 2021 as a result of anticipated adjustments to rating agency credit metric thresholds. We will look to utilize the remaining balance sheet capacity to either buyback shares or opportunistically execute on accretive incremental capital investments or accretive acquisition opportunities if it makes sense to do so. As a reminder, the remaining excess balance sheet capacity serves as a cushion as its utilization is not currently assumed in our financial expectations. In summary, NextEra Energy continues to execute on its strong start to 2018 and remains well positioned to meet its 2018 expectations and long-term growth prospects. We continue to believe that NextEra Energy offers the best investor value proposition among the utility sector. At FPL, we remain focused on operational cost effectiveness, productivity and making smart, long-term investments to further improve the quality, reliability and efficiency of everything we do. At Energy Resources, we continue to make terrific progress on our development program by leveraging our significant competitive advantages to capture a meaningful share of the best renewables development environment in our history. During the third quarter, we were honored to be named to the top 25 of the Fortune’s 2018 Change the World list, the only energy company from the Americas and one of only two electric companies in the world to be recognized. This recognition is a testament to NextEra Energy’s best-in-class position in the renewable energy sector and our continued commitment to the customers and communities we serve. Combining this advantage with the low cost operating platform that is second to none, one of the strongest credit ratings and balance sheets in the sector, and a strategy that is built to capitalize on ongoing disruption within the industry in the best renewables environment in our history, NextEra Energy is well positioned to drive long-term shareholder value over the coming years. Let me now turn to NEP. NextEra Energy Partners also continued its strong start to 2018 with year-over-year growth in adjusted EBITDA and cash available for distribution of approximately 14% and 72%, respectively. CAFD benefited from new project additions and favorable debt service. Yesterday, the NEP Board declared a quarterly distribution of $0.45 per common unit, or $1.80 per common unit on an annualized basis continuing our track record of growing distributions at the top end of our 12% to 15% per year growth range. During the quarter, NextEra Energy Partners announced an agreement to acquire a geographically diverse portfolio of 11 wind and solar projects from Energy Resources as it continues to execute on its long-term growth strategy. The approximately 1.4 gigawatt portfolio should further enhance the already best-in-class quality and diversity of NEP’s existing portfolio with an average 17 year contract life and counterparty credit rating of Baa1 following the acquisition. The acquired asset should also enable NEP to complete the growth necessary to achieve our previously outlined year end 2018 expectations, while also replacing the Canadian portfolio that we divested earlier this year. The transaction is expected to close in the fourth quarter subject to customary closing conditions and the receipt of certain regulatory approvals. The $1.275 billion cash purchase price is expected to be financed with the Canadian asset sale proceeds and the $750 million convertible equity portfolio financing that I will discuss in more detail in a moment. By redeploying the proceeds from the Canadian portfolio sale, which was executed at an attractive 10 year average CAFD yield of 6.6% inclusive of the present value of the O&M origination fee into a portfolio yielding an approximately 10% CAFD yield that also benefits from a lower effective corporate tax rate and a longer tax shield in the US versus Canada, these transactions are expected to support a longer runway for LP distribution growth. Since the last call, we are also pleased to announce the execution of a long-term contract that enables an approximately $115 million investment and additional pipeline compression capacity on the Texas pipelines, which is expected to be initially financed with NEP’s existing debt capacity. The expansion opportunity is expected to deliver attractive returns to LP unitholders and demonstrates the organic growth potential of NEP’s underlying portfolio. Subject to regulatory approvals, we expect the project to be in service during the fourth quarter of 2020 and continue to pursue additional expansion opportunities for the pipeline system. Consistent with our long-term growth prospects, today, we are introducing December 31, 2019 run rate expectations reflecting roughly 20% and 17% growth from the comparable year end 2018 run rate adjusted EBITDA and CAFD midpoints respectively. Overall, we are pleased with the year-to-date execution at NEP and are well positioned to meet our 2018 and longer term expectations. Now, let's look at the detailed results. Third quarter adjusted EBITDA was $203 million and cash available for distribution was $81 million, up approximately 14% and 72% from the prior year comparable quarter respectively, primarily due to portfolio growth. New projects added $45 million of adjusted EBITDA and $28 million of cash available for distribution. The CAFD contribution from new projects benefited from favorable timing of debt service and tax equity PAYGO payments. Offsetting the growth of new projects was the sale of the Canadian portfolio which drove an $18 million decline in adjusted EBITDA. The divestiture had a favorable impact on cash available for distribution this quarter due to the elimination of debt service payments on the Canadian portfolio. For the NEP portfolio, wind resource was favorable at 94% of long-term average versus 82% in the third quarter of 2017, which provided a benefit to adjusted EBITDA and cash available for distribution year-over-year. For adjusted EBITDA, this benefit was offset by the year-over-year reduction in the pretax value of NEP’s tax credits as a result of decline in the federal income tax rate. This change has no impact on CAFD. As a reminder, these results include the impact of IDR fees which we treat as an operating expense. Additional details are shown on the accompanying slide. As I previously mentioned to finance the acquisition that we announced during the quarter, NEP will use a combination of the Canadian asset sale proceeds as well as a $750 million convertible equity portfolio financing with BlackRock. And exchange for BlackRock’s contribution, it will receive an equity interest in the portfolio that NEP is acquiring. NEP will receive an initial 85% share of the cash distributions from the portfolio during the first three years and BlackRock will receive the remaining 15%, which represents an effective annual coupon during that three year period of approximately 2.5%. During the fourth year of the agreement, NEP expects to exercise its right to buy out BlackRock’s equity interest for a fix payment equal to $750 million plus a fixed pre-tax return of 7.75% inclusive of all prior distributions with a minimum of 70% of the buyout price paid in NEP common units issued at no discount to the then current market price and the balance paid in cash. Following the initial three year period, if NEP has not exercised its buyout right, BlackRock’s allocation of distributable cash flow from the portfolio would increase to 80%. The financing is expected to be an additional low cost equity-like product for NextEra Energy Partners and further demonstrates NEP’s ability to access additional attractive source of capital to finance its growth. In addition to providing further third-party confirmation of NEP’s growth outlook and high quality portfolio, with the right to convert a minimum of 70% of the portfolio financing into NEP units issued at no discount, the transaction further reduces NEP’s equity needs going forward. NEP also recently reinitiated use of its aftermarket equity issuance program. During the quarter, we successfully completed the sale of approximately 1.7 million in NEP common units raising roughly $81 million under the ATM program. Going forward, we will continue to flexibly seek opportunities to use the aftermarket program depending on market conditions and other considerations. For the full year 2018, we expect to achieve growth of roughly 20% for adjusted EBITDA and CAFD even after excluding the benefit from the acceleration of the note receivable related to the Canadian asset sale which was consistent with our expectations at the start of the year. Following the acquisition of the announced portfolio from Energy Resources, we expect the NEP assets to support the previously announced December 31, 2018 run rate expectations, reflecting calendar year 2019 expectations for the forecasted portfolio at year end 2018 for adjusted EBITDA of $1 billion to $1.15 billion and cash available for distribution of $360 million to $400 million. As I mentioned earlier, consistent with our previously announced long-term growth prospects, today, we are introducing December 31, 2019 run rate expectations for adjusted EBITDA of $1.2 billion to $1.375 billion and CAFD of $410 million to $480 million reflecting calendar year 2020 expectations for the forecasted portfolio at year end 2019. Our expectations are subject to our normal caveats and include the impact of anticipated IDR fees as we treat these as an operating expense. From a base of our fourth quarter 2017 distribution per common unit at an annualized rate of $1.62, we continue to see 12% to 15% per year growth in LP distributions as being a reasonable range of expectations through at least 2023. We are pleased with the progress NextEra Energy Partners has made over 2018 against its strategic and growth initiatives. The high quality underlying NEP portfolio is supported by the long-term contracted cash flows, backed by strong counterparty credits. As we have previously highlighted NEP has the flexibility to grow in three ways: Organically; acquiring assets from third parties; or acquiring assets from Energy Resources portfolio, which continues to rapidly expand given Energy Resources’ competitive advantages and corresponding success in renewables origination. In addition to clear visibility into how it will grow going forward, NEP maintains a cost of capital and access to capital advantage. Without a need to sell common equity until 2020 at the earliest, other than modest aftermarket issuances, NEP has substantial flexibility to finance its long-term growth as was further demonstrated by the financing transaction executed this quarter and the $5 billion forward-starting interest rate hedge that remains in place. These strengths together with NEP’s favorable tax position and enhanced governance rights leave NEP well positioned to meet its financial expectations and we remain as enthusiastic as ever about its long-term prospects. That concludes our prepared remarks. And with that, we will open the line for questions.

We will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from Stephen Byrd with Morgan Stanley. Please go ahead.

I wanted to talk about, at NEP, the BlackRock financing that you described John. Is this something that you view as a potential ongoing tool, meaning is it replicable? Does it have the sort of features that you're looking for? Is this more do you think sort of a one-off transaction?

Yes, it's absolutely replicable. To be able to find money at a 2.5% yield for the first three years, to be able to convert 70% of the position into NEP stock, really provides an attractive source of capital for us going forward and it's certainly something that we can replicate on future transactions.

Great. And just on the conversion element, you walked through it quite well. I just want to make sure I understood. If you did not convert the security into NEP common, what would the cash coupon yield sort of move up to in that event?

It moves up to roughly 8%.

Got you. Understood. Okay. And then I wanted to step away back on the wind side and just talk longer term about the growth potential for wind. We do hear a lot of debate about the size of the US wind market when the federal subsidy eventually does sunset. And I know that's down the road, but you all obviously see a lot of technology changes on the wind side. So I was just curious, in the long run, how do you see that playing out in terms of the size of the wind market? Do you see a contraction because of loss of subsidy or technology change is sufficiently beneficial that you see growth continuing? How do you see that changing over time?

Steve, it's Armando. I think longer term, as we've previously pointed out, we think by the mid part of the next decade that the pricing of wind is going to be pretty much on par to where we see it today with a 100% PTC. Now, obviously, we've got to get from a 100% PTC, and 80% and 60% and 40%, down to zero, but we think that the improvements that we are seeing with technology which are essentially taller towers, longer blades, better electronics beyond kind of machine which captures the wind better. We absolutely believe that by mid part of the next decade you're going to have the costs around the same place that you have it today. In the meantime, for ‘19, ‘20 and what we are seeing now in 2021, wind is going to remain very, very competitive, pretty much where we see it today or maybe even a little bit lower. So we think it's -- we think there's going to be a lot of wind that gets built over the next three to four years on top of the solar and storage that we are clearly seeing is coming to market.

Great. Thanks. And if I could, just one last one on the utility side. You’ve spent some time talking about preparing for dealing with storm damage et cetera. Is there more broadly additional work that might be done just to further harden the system beyond? I know you have extensive efforts underway and have had a good track record of storm recovery, but should we be thinking about potential incremental opportunities for preparing for hurricanes or other sort of physical changes to your system?

Yes, absolutely, Steve. I'm going to let Eric comment on the details, but we've spoken a little bit about the undergrounding opportunity that we have going forward, the continued automation, the continued hardening that we have in the existing system. I think that certainly applies to Gulf as well, but I'll let Eric expand upon that.

Yes, Stephen, so this is Eric Silagy. We have a number of different opportunities and programs that are underway currently. So about 88% of our transmission is currently steel or concrete and we are on a program to take all wood out of our transmission system across our service territory. We'll be done with that after beginning of the decade. I would say there's a lot of opportunities also with additional technology that we continue to deploy on the smart grid side that also helps during storm response. And then, John touched on it, the undergrounding initiatives that we have piloted right now on ways to get additional costs out to make it more affordable will be something that we are focused on for years to come. We have about 6,700 miles of distribution in our system in Florida. 40% of that roughly is underground now. So there's a lot of work to do on the remaining piece and doing it cost effectively is what we are focused on now.

Very good. Thank you very much.

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

Yes, good morning. Could you maybe just talk to how we should think about where you stand on your renewables kind of backlog targets now that you’re already in the lower end of the range? Is it likely you might kind of hit the high end of that or how should we just think about the pacing of additional projects within your kind of backlog goals?

Well, Steve, we certainly feel very good about where we are. I mean already have 9,300 megawatts added to backlog, adding almost 5,000 already for the year. We are certainly in terrific position given that we still have a couple of more years before the PTC even runs down on us. And so, terrific wind development opportunities, terrific solar opportunities with the four year start of construction, with all of the success that we are having in pairing batteries with solar is enabling a lot more development. So strong progress and potential opportunities across the board. And even when you look at wind, as the PTC expires or starts to phase down from 100% at the end of 2020 to 80% in 2021 and 60% and 40%, with the technology improvements that we are seeing, we think ‘21 is going to look a lot like ‘19. And so you're going to continue to see a lot of progress as you get into the next decade based on the discussions that we've been having with the OEMs and the technology improvements that we know are coming.

Okay, great. Thank you.

Our next question comes from Julien Dumoulin-Smith with Bank of America Merrill Lynch. Please go ahead.

Hey. So maybe just to pick up where Steve left off. Can you comment a little bit about the cadence of that contracting, given again the range that you have for the 2017 through 2020 period for NEER? I mean obviously tremendous success first half of this year. But when do you have to kind of stitch things up just with respect to the development activities for ‘20, I mean do you expect to have continued success at this current pace through ‘18? I mean, I'm just thinking about kind of hitting the midpoint of that range that you talk about, right, at a minimum, if you will, and what that means for contracting activities kind of in the remaining period of that ‘17 through ‘20?

Julien, it's Armando. I think my comments will probably reflect closely on what we said last time which is when Jim and John say that it's probably the best renewables environment in history, we are absolutely seeing that on the origination side. We do not believe that this third quarter origination total is a peak. Obviously, we have a view as to what's going to be happening in the next three to four months and the contracting remains very strong. We have signed some 2020 wind deals. But my expectation is that we are going to see a lot more 2020 wind deals that get priced over the next six months or so. We have priced actually a lot more 2021 and 2022 solar deals than I would have expected at this point. But I also believe that you're going to see some significant 2020 solar origination over the next six months or so. So our origination folks are very busy. There's a lot of RFPs and there's also individual conversations being had with customers. I think customers understand that the PTC is slated to ramp down. So they're anxious on the wind side to get in the queue. They're also anxious on the wind repowering side to get into the queue before the end of 2020 which was one of the reasons why we had strong origination this quarter. So, in my view, we are far from a peak and I think it's going to continue to remain strong for a while.

Got it. Excellent. And then just digging a little bit into the numbers here. Can you reconcile a little bit the difference here in the debt service between -- on the ‘18 projected NEER portfolio? And I suppose what comes out of that just given what seems like a higher number is potentially some interest rate exposure. And how do you think about using the flexibility afforded, right? You've got this option before you’ve given the interest rate hedge product that you entered into. When do you choose to enter into that? How do you think about that option?

Yes, Julien. So I think you're referring on the first part of your question to our EBITDA, CAFD walk. You see some debt service coming out that impacts CAFD in 2018. The answer is simple. It was NPV positive as part of our liability management program to pay some of those debt obligations off early on some of our older projects. And then second, for our repowering activity, we always go ahead and just pay the debt off. We know we are going to put new tax equity on them. That's just a matter of course. That's all that's happening in that line. And then on your second point on when do we look to use the $3 billion interest rate hedge that we have? Remember that product is designed a lot like the NEP $5 billion hedge. We have a tremendous amount of flexibility under both the $3 billion at NextEra Energy and the $5 billion at NEP. Those don't have mandatory forward starts until 2028. So we can essentially decide to bring those in, in whole or in part, at any time we want to over the next 10 years. So if we see interest rates tick up and we want to use debt financing to finance additional capital expenditures, we can always utilize that. But what we like the best about those products is they provide tremendous amount of flexibility as to when we decide to use them.

And to clarify the earlier point on the walk, you're saying it was NPV positive but the higher debt service is because you're basically layering a new debt preemptively for repowering? I just want to make sure I heard that right.

No. Yes, so two things. One is, we have just debt on all projects that it's just NPV positive to go ahead and pay it off. It gives us a refinancing option going forward. And then second, when we repower a project, we want to pay the debt off because we are planning to put tax equity financing in place on those projects going forward and have to be unencumbered in order to put that tax equity financing on those assets.

So, Julien, this is Jim. Said another way, we had not planned at the beginning of the year to pay that $150 million of debt off, but we -- through the liability management program, we made a decision to pay it off as NPV positive, so it's good for shareholders and we did it. We did it. We are going to do it this year and so that's why you're seeing that. It's actually a good guy, not a bad guy.

Got it. Thank you.

Yes. You’ve to remember, last year -- and remember, last year, Julien, we did the same thing in the fourth quarter of 2017, $150 million of NPV positive moves on debt repayments around our liability management program. So we are constantly looking for opportunities to save shareholders' money.

Much appreciated.

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

Thanks. Good morning. Thanks for clearing that up. That was one of my questions. So there's no material or meaningful floating rate debt exposure at NEER, just to be clear?

No. No, not at all. Quite the contrary. I think we are very well positioned to manage interest rate risk going forward, much better than our peers. And I think that we not only do we have an access to capital advantage, but a cost of capital advantage in that $3 billion hedge that we have in place, I think will be instrumental going forward.

Yes. At first it was little bit confusing, but I see that the debt balance at NEER from Q1 to Q3 is actually on an absolute basis down and that syncs with the footnote there that shows that you include debt retirements in that number. So thank you. The second question I have is -- was on, there were also some moving parts in the -- on overall EBITDA. So if I look at the story arc from Q1 to Q3, it looks like your assumed EBITDA from renewables is lower. I think is it fair to attribute that to just wind resource over the course of the year? And then, nuclear pipeline is significantly higher. Can you just take us through, generally speaking, how the EBITDA contributions have evolved over the year?

Yes. I think when we look at it and you'll get an update on this next quarter on how we did going into the year versus how we finished the year, we expect to be within the range on all the items that we provided to you. So while there’s ups and downs in any one quarter and we always try to give investors a good feel, on the nuclear side, we've had better execution on outages, better execution on E4. And on the wind, it's really just been bad resource. So we've made some adjustments there. But again, for the full year, and you'll see this next quarter, our current expectation is that we should be within the range of what we showed you last year on our EBITDA-to-CAFD walk.

Yes. And do you have any insight as to why the pipeline numbers improved? Is that just better throughput or you've made more conservative assumptions? What changed there?

Hey, Greg, it's Armando. I'm not sure. It could be a little better throughput, but it's nothing that's really sticking out at me as to why there's been an improvement.

Okay, great. Final question. Nobody has asked, Jim, but you usually do make a comment around where you -- given the robust outlook you have, where you would expect to be inside the 6% to 8% guidance range and you haven't volunteered that yet. So is there a reason why you haven't volunteered? That is something changed with regard to your earnings aspiration inside the range?

No, not at all, Greg. I think we continue to target the midpoint for this year of 7.70% and -- but in 2021, I'll be very disappointed if we don't hit the high end of the range.

Thank you very much, guys. Take care.

Our next question comes from Michael Lapides with Goldman Sachs. Please go ahead.

Hey, guys. Just an easy one on Project Accelerate. I think this was probably version three of that. When you talk about several hundred million of run rate efficiencies, are these O&M savings that will drop to the bottom-line, so we'll actually see this in some future EPS or is this just O&M savings that will offset other cost increases that will help, but won't necessarily see them on the bottom-line numbers?

Hey, Michael, this is Jim. So, first of all, FPL, what it does is create surplus, right? And so it gives us headroom to continue to find good projects for customers to invest, to improve our value proposition without having any impact on rates, okay? So that's how you see it on the FPL side. And at the NEER side, it absolutely falls to the bottom-line.

Got it. So safe to assume -- if I were to put a tax rate on the couple of hundred million, let's say, it's $200 million to $250 million to $300 million, some portion of that gets allocated to NEER, I don't know if that's a 50-50 or if this is FP&L weighted and that would almost be something that's already embedded in your EPS guidance for 2020, 2021?

Yes, that's right. That's all right and it would -- the split is roughly equal to the EBITDA split of 65-35.

Got it. Thank you, Jim. Much appreciated.

Our next question comes from Shahriar Pourreza with Guggenheim Partners. Please go ahead.

So just a real quick follow-up on the BlackRock deal. Are you actually seeing players step up for a similar structure even though you can replicate it? And then, as you sort of think about the NEP standalone just from a self-sustaining standpoint, your equity needs, have they sort of evolved post the deal? I know you kind of still guide around 2020 at the earliest, but that was obviously provided even before this BlackRock deal. So just curious on that and I've got a follow-up.

Yes, we have received an inordinate amount of inbound interest on structure that looks similar to BlackRock. As a matter of fact, the NEP and the treasury team have been busy fielding those calls. So a lot of inbound interest there. And on -- from an equity standpoint, I think what we said is, look, I mean this is a very low cost of capital, very attractive financing which certainly puts us in good position going forward.

Got it. That's helpful. And then just real quick on Gulf Power. You guys have obviously have moved past data rooms and have had more time to sort of digest really what you're buying. So as you sort of think about the accretion guide, you've got an O&M that's almost double the size of yours at FP&L. You have materially higher purchase power cost, no standstill agreements. Like I get the playbook but the math seems to point to somewhat of a conservative guide especially with the inefficiencies you're taking on. One, am I thinking about this correctly? And then just from the timing perspective, the process seems to be moving along relatively quickly. Is there any opportunity to close some time in Q1 versus first half?

So I'll take the second part of that first, Shahriar, this is Jim. Listen, we have -- the team has worked very hard to work through all of the potential issues at FERC. We feel very good that in the change of control part of that docket that there are no outstanding protests right now. And so we feel we still have some work to do where we continue to target the first half. But as I tell the team, there's 182 days in the first half and we could close on any one of those days. On the first part, I think when we laid out our guidance for the accretion of the transaction, we were pretty much -- I don't think we were conservative and we weren't aggressive. We were what I'd call [P50], pretty down in the middle of the road on what we think we can achieve. The Gulf Power team is in the midst of a very tough hurricane restoration now. They've done just an outstanding job in a very tough situation and we are doing what we can to help everyone in that part of Florida to restore. And so, we are honestly right now focused on that and feel very good about the transaction. Looking forward to welcoming the Gulf team to the NEE family, and we are looking forward to getting the deal done and moving forward with our plan.

Got it. And then, Jim, since no one's asked, any comments you can provide around South Carolina or Santee and then especially with the RFPs expected sometime in the fourth quarter or early Q1?

So I don't -- it's been no secret that if there is an RFP on Santee that we would have an interest. And so I think I'll stop it at that. And we've been watching it closely for 18 months and we'll see how that process plays out.

Terrific. Thanks, guys.

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

Good morning, guys. Just on the NEP expansion project, can you just clarify, is that included in the 2019 run rate guidance or would that be incremental?

Yes. No, it's included in the 2019 run rate guidance. It doesn't come online until 2020, Jonathan.

Okay. So it's in the 2019 run rate, but it comes in early 2020. Is there incremental -- is there something potentially beyond that, because from memory, there were some bigger opportunities there at one point?

Hey, Jonathan, it's Armando. Just to clear it up. I mean it's -- the expansion project is both in ‘19 and ‘20, right. You've got to start spending CapEx in ‘19 in order to get it done in ‘20. It's COD I think the third quarter of 2020. So it's in the numbers. There's nothing incremental to add. In terms of additional projects, the team continues to work on several projects associated with the pipelines that it has. It's done a decent job so far since we bought those pipelines in 2015 and we continue -- I continue to have expectations that they will be able to find onsies or twosies to add as projects at NEP. I don't foresee anything that significant at this point, but we would all be very disappointed if we don't continue to see small opportunities that they bring to the table.

Great. Thank you. And if I may, just to revisit the debt service question just very quickly. Jim mentioned the $150 million increase. I think that's how much it went up between Q2 and Q3, but it was -- there was also a 90 odd million increase in Q2. Is that the same issue as the buyouts of some of the debt associated with repowerings, et cetera?

Exact same issue. As we repower our assets, you can always expect the debt to be retired and you'll see an impact in the EBITDA, CAFD walk from that.

So, is it safe to assume that ‘19, given the amount of repowering you have in the plan that this will -- we will have a similar dynamic there and at some point that will roll down to that sort of high 800s number it used to be?

Yes, that's correct.

Okay, great. Thank you.

Yes. Hey, Jonathan, real quick, though, understand that's already in our plan.

Oh! Yes.

In our financial expectations, so.

Okay.

This concludes our question-and-answer session as well as today's conference. Thank you for attending today's presentation. You may now disconnect.