XPLR Infrastructure, LP (XIFR) Q2 2018 Earnings Report, Transcript and Summary

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

Thank you, Brendon. Good morning everyone and thank you for joining our Second 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, in the comments made during this conference call, in the Risk Factors section of the accompanying presentation or 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. NextEra Energy delivered strong financial results in the second quarter and remains on track to meet its objectives for the year. Adjusted earnings per share grew by approximately 13% against the prior-year comparable quarter, reflecting successful performance at both Florida Power & Light and Energy Resources. FPL increased earnings per share by $0.20 year-over-year. Average regulatory capital employed increased by nearly 13% versus the same quarter last year and all of our major capital initiatives, including the continuation of one of the largest solar expansions ever in the U.S., remain on track. With residential bills nearly 30% below the national average and the lowest among all of the Florida utilities, FPL’s focus continues to be on finding smart investments to lower costs, improve reliability and provide clean energy solutions for the benefit of our customers. At Energy Resources, increased contributions from new investments and our repowered wind projects, together with the lower federal income tax rate helped drive growth of $0.12 per share for the quarter. Building upon the outstanding origination success with which we started the year, since our first quarter call we added approximately 1,620 megawatts of renewables projects to our backlog, including 535 megawatts of additional wind repowering opportunities and 90 megawatts of battery storage projects. We were pleased to sign two additional solar-plus-storage projects, including the largest solar-plus-storage project announced in the U.S. to date, further signaling the success we are having in the next phase of renewables deployment that pairs low cost wind and solar energy with a low-cost battery storage solution to provide a nearly firm generation resource. This quarter’s origination success in both new and repowered projects is reflective of Energy Resources’ ability to leverage its competitive advantages to capitalize on what we have previously characterized as the best renewables development period in our history. During the quarter, we announced proposed transactions that would expand NextEra Energy's regulated business operations through the acquisition of Gulf Power, Florida City Gas and ownership stakes in two natural gas power plants from Southern Company. The assets are an excellent complement to our existing operations within the state of Florida and will allow NextEra to extend its best-in-class customer value proposition to additional customers over time. Earlier this month, we filed for Federal Energy Regulatory Commission approval to acquire Gulf Power and the two natural gas plants. Subject to obtaining FERC approval and satisfaction of other closing conditions, we expect these transactions to close in the first half of 2019. Meanwhile, we are pleased to announce that the Florida City Gas acquisition is expected to close early next week. Starting in the third quarter, financial results for FCG will be reported as part of our FPL business segment. We expect the approximately $5.1 billion cash purchase price for the transactions to be financed through the issuance of new debt, which we hedged through the execution of interest rate swaps shortly after the acquisition announcement. At the closing of the Gulf Power acquisition, we anticipate that S&P and Moody’s will make further favorable adjustments to our credit metric thresholds as a result of the expansion of the company’s regulated operations, allowing NextEra Energy to continue to preserve our $5 to $7 billion of excess balance sheet capacity, while maintaining our strong balance sheet and current credit ratings. With another strong quarter behind us, we are well positioned to meet our full-year financial expectations, while FPL continues to execute against its capital initiatives and Energy Resources continues to make very strong progress against its long-term development expectations. Now, let’s look at the detailed results, beginning with FPL. For the second quarter of 2018, FPL reported net income of $626 million or $1.32 per share, an increase of $100 million and $0.20 per share, respectively, year-over-year. Regulatory capital employed growth of 12.9% was a primary driver of FPL’s EPS growth of approximately 18% versus the prior-year comparable quarter. As a result of higher than expected base revenues and reduced O&M expenses driven by our continued focus on cost management, our reported ROE for regulatory purposes will be approximately 11.5% for the 12 months ending June 2018. We expect FPL to achieve its trailing 12 month target regulatory ROE of 11.6% early in the third quarter, subject to the usual caveats, after which time we will begin partially restoring the reserve amortization balance. We continue to expect that FPL will end 2020 with a sufficient amount of surplus to operate under the current base rate settlement agreement for up to two additional years, creating further customer benefits by potentially avoiding a base rate increase in 2021 and 2022. Turning to our development efforts, all of our major capital projects at FPL are progressing well. FPL’s capital expenditures were approximately $1.3 billion in the quarter and we expect our full-year capital investments to be between $4.9 billion and $5.3 billion. Construction on the approximately 1,750 megawatt Okeechobee Clean Energy Center remains on budget and on schedule to enter service in mid-2019. Additionally, the approximately 300 megawatts of solar projects being built across FPL’s service territory under the Solar Base Rate Adjustment, or SoBRA, mechanism of the settlement agreement remain on track to begin providing cost-effective energy to FPL customers in early 2019. These projects, which are expected to generate more than $40 million in total savings for FPL customers during their operating lifetime, are part of FPL’s plans for more than 3,200 megawatts of new solar projects across Florida over the coming years. Beyond solar, the roughly 1,200-megawatt Dania Beach Clean Energy Center continues to advance through the development process to support its projected commercial operation date in 2022. We continue to expect that FPL’s ongoing smart investment opportunities will support a compound annual growth rate in 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 remains strong. Florida’s seasonally adjusted unemployment rate in June was 3.8%, down 0.3 percentage points from a year earlier and near the lowest levels in a decade. Within the housing sector, the Case-Shiller Index for South Florida shows home prices up 5% from the prior year and new building permits remain strong, increasing nearly 17% year-over-year. At the same time, the June reading of Florida’s Consumer Sentiment is near the highest levels in a decade. After multiple years of strong economic growth, the GDP of Florida recently passed $1 trillion, which would make it the seventeenth largest economy in the world. FPL’s second quarter retail sales decreased 3.3%, and we estimate that approximately 5.2% of this decline can be attributed to weather-related usage per customer. On a weather-normalized basis, second quarter sales increased 1.9%. Customer growth and an estimated 1% increase in weather-normalized usage per customer, which is a continuation of the positive trend from the first quarter, both contributed favorably. While we are encouraged by the continued growth in underlying usage, 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 will update you on future calls. Let me now turn to Energy Resources, which reported second quarter 2018 GAAP earnings of $274 million, or $0.55 per share. Adjusted earnings for the second quarter were $408 million, or $0.86 per share. Energy Resources’ contribution to adjusted EPS increased by $0.12, or approximately 16%, year-over-year. New investments added $0.07 per share. Contributions from existing generation assets also increased by $0.07 per share, primarily due to the absence of outages at our Seabrook and Point Beach nuclear facilities and increased PTC volume from our repowered wind projects. 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 also contributed favorably, increasing adjusted EPS by $0.013 compared to 2017. Offsetting these gains were lower contributions from our customer supply and trading businesses, which declined $0.05 versus the particularly strong second quarter last year. All other impacts reduced results by $0.14 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. As I mentioned earlier, this quarter the Energy Resources development team continued the strong origination success with which we started the year. Since our last earnings call, we have added 300 megawatts of new wind projects, 692 megawatts of new solar projects and 90 megawatts of new battery storage projects to our renewables backlog. Of these 1,082 megawatts added to backlog, 99 megawatts of the wind projects, 21 megawatts of the solar projects and a 15-megawatt storage-only project are for delivery this year. The accompanying chart updates information we provided on last quarter’s call, but our overall expectations have not changed. We continue to track against our total development forecast for 2017 through 2020. With a backlog of over 7,400 megawatts, our future wind, solar and storage development program has never been stronger. To put that into perspective, the current backlog is nearly two times larger than at any time prior to the end of 2016. Included in this quarter’s backlog additions are 300-megawatts of solar projects for delivery beyond 2020, which brings Energy Resources’ total post-2020 solar backlog to nearly 600 megawatts. These projects are supported by the solar ITC start of construction guidance that the IRS provided last month. Similar to the guidance that was released for wind in 2016, the new IRS guidance extends the ITC for an additional four-year period, subject to beginning significant physical work or meeting certain safe harbor conditions. Therefore, we now expect that a solar facility that commences construction in 2019 by complying with the safe harbor to procure 5% of the total capital to be invested and achieves commercial operation by the end of 2023, will qualify for the full 30% investment tax credit. In addition to driving increased solar development into the next decade, the guidance further supports the next phase of renewables deployment that includes a low-cost battery storage component. Battery storage projects that are paired with and charged a minimum of 75% by a solar facility qualify for the ITC during this period. As battery cost declines and efficiency gains are realized during the four-year start of construction period, we continue to expect that in the next decade new nearly firm wind and solar, without incentives, will be cheaper than the operating costs of traditional inefficient generation resources, creating significant opportunities for new renewables growth going forward. Indicative of customer demand for a nearly firm renewable product, specifically designed to meet the customer’s needs, the 300 megawatts of solar projects added to backlog for post-2020 delivery will be paired with 75 megawatts of battery storage projects. During the quarter, we were also pleased to have project financed our first solar-plus-storage system, providing capital that can be recycled into additional growth opportunities at Energy Resources. As I previously mentioned, since our last earnings call we added 535-megawatts to our repowering backlog. These five repowering opportunities, which are being pursued under new and existing power purchase agreements, bring our total announced repowerings to roughly 2,850-megawatts. Our development team is in active negotiations with customers under other existing PPAs to facilitate additional repowering opportunities and based on the progress of these discussions, we now expect to be in the upper half of the $2.5 billion to $3 billion in total capital deployment for repowerings that we have previously outlined for 2017 through 2020. During the quarter, Energy Resources successfully commissioned an approximately 100-megawatt repowering project and we continue to make solid progress on the remaining 2018 sites. Beyond renewables, the construction of the Mountain Valley Pipeline has faced some recent challenges. The Fourth Circuit Court issued a stay on the stream and wetland crossing permit issued by the U.S. Army Corps [ph] of Engineers for approximately 160 miles of the MVP route in West Virginia. MVP was able to work with the Corps to have a modified 404 Nationwide Permit issued that we believe addresses the Court’s concerns. We are hopeful that the Fourth Circuit will respond favorably to the modified permit and the Army Corps request for the stay to be lifted. If construction is able to resume in the affected areas shortly, we believe that there will only be a slight delay to the in-service date for the pipeline to the first quarter of 2019. At this time, we do not expect any material financial impacts to Energy Resources as a result of the stay. Despite these issues, development on the MVP Southgate project, which is the proposed expansion pipeline that will deliver gas from the MVP mainline in Virginia to customers in central North Carolina, continues to progress well. We continue to evaluate the open season interest from additional market participants and expect to file the FERC application later this year to support the targeted in-service date of the fourth quarter 2020. Turning now to the consolidated results for NextEra Energy, for the second quarter of 2018, GAAP net income attributable to NextEra Energy was $795 million or $1.64 per share. NextEra Energy’s 2018 second quarter adjusted earnings and adjusted EPS were $1 billion and $2.11 per share, respectively. Adjusted earnings from the Corporate & Other segment decreased $0.07 per share, compared to the second quarter of 2017, primarily as a result of an unfavorable tax ruling related to the disposal of spent nuclear fuel. In total, NextEra Energy’s second quarter results reflect a one-time charge of $0.06 as a result of this unfavorable tax ruling. Based on our strong first half performance at NextEra Energy and our continued expectations for an even stronger second half, with more of our growth expected to occur in the fourth quarter, we remain comfortable with the expectations we have previously discussed for the full-year and will continue to target the $7.70 midpoint of our adjusted EPS range. 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 our 2018 midpoint expectation of $7.70 per share, and assuming the Gulf Power, Florida City Gas and natural gas plant transactions close, that they will be $0.15 and $0.20 accretive to our 2020 and 2021 adjusted EPS expectations, respectively. As a result, subject to closing the transactions, we expect our 2020 adjusted EPS expectations to be in a range of $8.70 to $9.20 and our 2021 adjusted EPS expectations to be in a range of $9.40 to $9.95 per share. We continue to believe that we have one of the best growth opportunity sets in our industry and will be disappointed if we are not able to deliver financial results at or near the top end of our 6% to 8% compound annual growth rate range off our expected 2018 base of $7.70 per share, plus the expected accretion from these transactions. We also expect that from 2018 to 2021 operating cash flow will grow 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 a 2017 base of dividends per share of $3.93. As always, our expectations are subject to the usual caveats, including but not limited to normal weather and operating conditions. As I previously discussed, at the anticipated rating agency credit metric thresholds following the Gulf Power transaction closing, we expect to maintain $5 billion to $7 billion of excess balance sheet capacity through 2021. 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. Earlier this month, we were pleased to mitigate potential interest rate volatility on future NextEra Energy debt issuances by entering into a $3 billion interest rate hedge agreement, which is incremental to the interest rate hedge that was executed for Gulf Power, Florida City Gas and two natural gas plant acquisitions. Under the agreement, at any date until July 12, 2028, NextEra Energy has the flexibility to effectively enter into a 10-year interest rate swap at a fixed rate of 3.1164%, in any amount up to the $3 billion total. Any unutilized balance as of July 12, 2028 will be cash settled, hedging rates at that time through 2038. We expect that the swap will help NextEra Energy maintain its relative cost of capital advantage going forward. In summary, after a strong start to the year, we remain well positioned to achieve our $7.70 adjusted EPS target for 2018, as well as our long-term financial expectations. At FPL, we continue to focus on delivering our best-in-class customer value proposition through operational cost effectiveness and making smart long-term capital investments. This focus, combined with the economic tailwinds supporting the Florida economy and the constructive regulatory environment, position us well for continued growth going forward. At Energy Resources, we maintain significant competitive advantages to capitalize on the increasingly strong market for renewables development. By leveraging these strengths, as well as NextEra Energy’s operating model and significant balance sheet capacity, we believe NextEra Energy is uniquely positioned in the sector to drive long-term shareholder value as we have highlighted with the Gulf Power and Florida City gas transactions. We remain intensely focused on execution and are as enthusiastic as ever about our future prospects. Let me now turn to NEP. NextEra Energy Partners continued the strong start to 2018 with year-over-year growth in both adjusted EBITDA and cash available for distribution of approximately 29% and 37%, respectively, reflecting new asset additions during 2017 and outstanding underlying performance of the portfolio. Yesterday, the NEP Board declared a quarterly distribution of $0.4375 per common unit, or $1.75 per common unit on an annualized basis, up 15% from a year earlier. Late in the second quarter, NEP closed the sale of its Canadian portfolio of wind and solar projects, generating net proceeds of approximately $573 million in U.S. dollars, subject to post-closing working capital adjustments. This transaction, 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, highlights the underlying value of NEP’s renewable assets. We expect to accretively redeploy the proceeds into higher-yielding U.S. acquisitions to support NEP’s long-term growth. Additionally, by investing the proceeds into U.S. assets that benefit from a lower effective corporate tax rate and a longer tax shield versus Canada, NEP can retain more cash available for distribution in the future for every $1 invested, which in turn is expected to provide a longer runway for LP distribution growth. We are extremely pleased with the execution of this transaction and look forward to redeploying the proceeds later this year to support NEP’s growth expectations. Let me now review the detailed results for NEP, which reflect outstanding financial performance for the quarter. NEP’s second quarter adjusted EBITDA of approximately $253 million increased $57 million from a year earlier. Second quarter cash available for distribution was approximately $150 million, an increase of $31 million from the prior-year comparable quarter. Adjusted EBITDA and CAFD growth of 29% and 37%, respectively, was primarily driven by growth in the underlying portfolio. Contributions from new projects were the principal driver of growth, adding $48 million of adjusted EBITDA and $21 million of cash available for distribution. Existing projects also contributed favorably to the significant growth in Adjusted EBITDA and CAFD, primarily as a result of increased contributions from the Texas Pipelines. Cash available for distribution also benefitted from the timing of debt service payments, due to the senior unsecured notes that were issued in the third quarter of last year. As a reminder, these results are net of IDR fees, since we treat these as an operating expense. Additional details are shown on the accompanying slide. As we announced last quarter, from a base of our fourth quarter 2017 distribution per common unit at an annualized rate of $1.62, we see 12% to 15% per year growth in LP distributions as being a reasonable range of expectations through at least 2023, subject to our usual caveats. As a result, we expect the annualized rate of the fourth quarter 2018 distribution, that is payable in February 2019, to be in a range of $1.81 to $1.86 per common unit. NextEra Energy Partners continues to expect a December 31, 2018, run rate for adjusted EBITDA of $1 billion to $1.15 billion and CAFD of $360 million to $400 million, reflecting calendar year 2019 expectations for the forecasted portfolio at year-end 2018. We are pleased with NEP’s strong start to 2018. The significant growth in adjusted EBITDA and cash available for distribution are supported by the long-term contracted cash flows backed by strong counterparty credits of the high quality underlying portfolio. NEP’s flexibility to grow in three ways: acquiring assets from Energy Resources, organically or acquiring assets from other third parties, provides clear visibility to support its growth going forward. With what we view as the best renewables development period in our history, as reflected by the outstanding origination success that Energy Resources continues to have, NEP’s already best-in-class distribution growth visibility will further improve over the coming years. Additionally, NEP’s cost of capital and access to capital advantages provide substantial flexibility to finance its long-term growth without a need to sell common equity until 2020 at the earliest, other than modest at-the-market issuances. These strengths, combined with NEP’s favorable tax position and enhanced governance rights help provide a best-in-class investor value proposition and leave NEP well-positioned to meet its long-term financial expectations. For these reasons, NEP is as well positioned as it’s ever been and we look forward to continued strong performance going forward. That concludes our prepared remarks and with that we will open the line for questions.

Thank you. [Operator Instructions] Our first question comes from Julien Dumoulin-Smith with Bank of America Merrill Lynch. Please go ahead.

Good morning, everyone. It's Josephine here. Hope you're all well.

Hi, Josephine. How are you?

Good. So, of course the recent ITC is clearly a huge positive. But could you guys discuss the implications for SoBRA at FPL and the timing on the regulatory filings? And then maybe also on NEER, is there a potential for a shift of demand out of 2019, into the early 2020s given the greater latitude from the safe harboring?

So, with respect to the filings for FPL, remember with the SoBRA mechanism, we have the ability to construct up to 300 megawatts a year. And then anything that is under 75 megawatts does not fall under the purview of the siting act. Does that answer your question, [indiscernible], on that piece? And I'm sorry, your second question…

Yes, NEER.

Go ahead.

So, is there a possibility for some demand to shift out of 2019 into the early 2020s?

Well, you mean with regard to solar?

Yes.

Yes. So, with the ITC extension that we see, obviously that really positions the company well for continued growth, not only this decade, but well into the next decade. So, we are actively developing our safe harbor plans for 2019, which will continue to support our growth through 2023 on the solar side. But, as you can see from our results on our origination efforts this quarter, we continue to see very strong interest in solar, particularly when we combine it with a storage option. That has been a very attractive product for our customers. So, while you may see a bit of a step function like what we've seen in wind as you move well into the next decade, we don't anticipate any material drop-off in demand for solar or solar-plus-storage installations through the end of this decade.

Got it. Great. And then on the Gulf Power acquisition, do you think that there's a possibility to bring Gulf Power closer to the regulatory metrics, i.e., equity ratio, ROEs, reserve amortization, enjoyed by FPL?

Yes. Our plan is to operate Gulf under the terms and conditions of its current settlement agreement. And that is what is included in our base case and what we said on our last call, with our expectations to be able to grow Gulf, Florida City Gas, and the two gas plants on a combined basis at roughly 16%, which is the high-end of our expectations for adjusted EPS growth for NextEra Energy from 2018 through 2021.

So, any such changes would then be incremental to the accretion numbers we're seeing right now.

Any changes would be incremental, but again our base case is to operate under the current settlement agreement that's in place for Gulf.

Okay, great. And then just one last question. Could we get an update on Project Accelerate and how that's tracking and outlook for 2019?

Yes. So, as we said at the Analyst Day in 2017, that was an opportunity to generate roughly $425 million of run rate savings beginning in 2019. The project continues to progress extremely well. And we continue to look for even further O&M savings opportunities across the business. We're only getting started. There are a number of opportunities for us to continue to drive cost savings across the business by leveraging technologies and applying smarter approaches to how we conduct our business. And so, the company is constantly engaged on a mission of continuously improving our cost structure. And so, Project Accelerate 1 is only the beginning.

Got it. Great. Well, that's all for me. Thank you very much.

Thank you.

Our next question comes from Stephen Byrd with Morgan Stanley. Please go ahead.

Hi. Good morning and congratulations on the good results.

Oh, thank you, Stephen.

Wanted to just follow up on storage. You had provided some good commentary in your prepared remarks around storage, but just stepping back, I know you, at your analyst event, laid out your trajectory on where you see costs going. I guess, we continue to get surprised just by how cheap storage is becoming, but I'm just curious from what you're seeing out in the marketplace for storage, is the trajectory at all surprising to you in terms of the cost reductions? Where can it head from here? What's your general outlook on where costs may go for storage?

Yes. I mean, the way I think about it, Stephen, is how we've been pricing it into our PPAs. I mean, roughly on transactions we've done over the last 6 to 12 months, you can think of it as roughly $0.015 a kilowatt hour. That is probably going to move, with what we see with the significant investment being made in electric vehicles and the cost declines that we expect to see on the solar side. Early in the next decade, mid-next decade, it's going to probably be about $0.005 a kilowatt hour adds, maybe $0.01, but probably closer to about $0.005. And so, if we find ourselves in a marketplace where we are selling wind right around $0.02, I mean, a combined wind and solar product probably looks roughly around $0.025. Solar, into the next decade, probably looks more like a $0.03 product, sub-$0.03 in some markets. You add half a penny on that on the high end, you're probably at about $ 0.035 a kilowatt hour, depends on the market and land costs.

That's really helpful.

Hi, Stephen. This is Jim. I just wanted to add something to what John said. So, we've been doing some work recently on thinking about what is firm. And that's a little bit of an existential question, and it depends on obviously the size of the market and kind of the individual characteristics of the generation in those markets. But our thinking is for the first 5-gigawatts in the country, firm, you know a two-hour battery is probably firm for the first 5-gigawatts of battery penetration, maybe three hours. It depends again on the characteristics of the site. And then, as you get to penetration levels of 15% in the country, we see firm battery storage of four hours is about right to really make it firm and make it look a lot like a peaker [ph]. So, there's a lot of work that we're doing, kind of pushing the ball forward on how we think about - because it's not just what the cost is. It's also what the application is, and how you use the storage, and also the streams of value that you can put against it. That's just the capacity value. And obviously there's a bunch of other streams of value that essentially buy down the cost of that battery relative to making it, "firm" in a system context. So, a lot of really interesting work that's going on right now, and we're right at the beginning of, I think, a real revolution in this country in terms of how electricity is – how storage interacts with electricity on the grid, and how we're going to start delivering our much different, firm, renewable products to our customers going forward.

Well, that's really helpful, Jim and John. And maybe, Jim, just adding to that, you've talked in the past about the combination of wind and solar and storage and sort of the – I guess, I'd call it the unique big-data capabilities you have to have and understanding how those three products work together. Is that something you still view as a competitive advantage? Do you see new entrants there? What's the real sort of barriers to entry around being able to master the combination of those three things?

I think there's an enormous amount of intellectual work that's going on, intellectual content that's going on, around that. And big data is just a part of it. But we have a lot of capabilities in that area. Literally, we have now hundreds of data scientists working on several big data applications in our business. I've been talking about how obviously providing firm renewables is one activity where you really need big data to understand how to do that. The other, honestly, is wind O&M and availability, and a third is grid ops. And we have folks working on all three of those things and are generating new ideas and new applications every day. And so, it's actually one of the really exciting pieces of what we're doing now with Project Accelerate, and really the second phase of Project Accelerate that we launched this year was a big focus on artificial intelligence and big data.

Very good. I'll let others speak. Thanks so much.

Thank you, Stephen.

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

Good morning, guys. It's actually Durgesh on for Greg. How are you?

Good. How are you, Durgesh?

Good. Just two quick follow-ups. We had a few questions on storage, but you guys have given a very detailed overview, so I'm not going to bog you down for that. On the MVP pipeline, just to clarify, are you saying that given what you're seeing, you still think that you can bring that into service by Q1 2019. Did I hear that correctly?

You did.

Okay. And then your share of investment in that pipeline is $1 billion, correct?

$1.1 billion.

And just one quick one, and maybe I missed this, the income tax rule, the unfavorable income tax rule that was driving corporate [indiscernible] unfavorable this quarter. What was that again?

I'm sorry. Say that again, Durgesh.

So, there was a – you'd mentioned in your commentary…

Oh, yes. The 172(f). So, we had an adverse court decision under Internal Revenue Code Section 172(f), which basically allows us to carry back net operating losses on decommissioning costs for nuclear plants back to the date when the nuclear plant was first put into service. And we took the position that spent nuclear fuel disposal fees that we have been paying to the DOE would qualify under that unlimited carryback provision. We did not prevail on that position.

I see. So, you've taken that – basically you have trued up that charge. Is that truly one-time?

That is one-time. It's $0.06. And obviously had that $0.06 not occurred, what was a strong quarter would have been even a stronger quarter.

Awesome. Thanks again.

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

Hi. Good morning, guys.

Good morning, Shar.

Apologize. I jumped in a little bit late here. I just want to confirm on sort of the rate proceeding comments. With the reserve amortization, you expect to stay out of a rate case at FP&L through 2022, is that correct?

Yes, the potential is to stay out up to 2022.

Okay. Got it. And then assuming you hit your regulatory ROE by the third quarter, can you just – what's the reserve balance by year-end?

Shar, we haven't said, but obviously that reserve balance starts to reverse, creating a surplus position. And our view is that we would have sufficient surplus by the end of 2020 to stay out potentially up to one to two years through 2022.

Okay. Got it. And then just on Gulf Power, so you're going to support the settlement that's out there. And then is it fair to assume, following the tenor of the settlement, you'll likely file a GRC to at least true up sort of the regulatory construct and sort of the ROEs that you're afforded at FP&L at Gulf Power?

Yeah. Our focus right now is closing the transaction and moving forward and applying the FPL operating model to Gulf within the confines of Gulf's current settlement agreement. So, no plans right now to revisit any of the terms or conditions in the Gulf settlement agreement.

Got it. Okay. And then just lastly, on your $7 billion of borrowing capacity, can you just provide maybe a little bit more context on sort of what could be interesting as you sort of think about the opportunity set out there? Has additional midstream opportunities sort of opened up around the Midwest/Southeast region that could provide some of that source or more electric opportunities, co-ops, or – I guess what seems to be interesting as you guys are looking out there?

Well, the focus is going to continue to be on regulated M&A, not on midstream opportunities. And so, when we think about regulated M&A, the first thing we think about is constructive regulatory jurisdictions. The second thing we think about is the opportunity to really derive value and apply the FPL playbook through generation modernization, the ability to operate the business efficiently. And when you look at all of those things and you put those things together in particularly regulatory environments, the targets would be in the Midwest and in the Southeast as being the most attractive alternatives for us.

Okay. All right. Thanks so much, guys.

Yes. Thanks, Shar.

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

Hi, guys. Just curious, sorry. Where do you see returns being better? Meaning, is there a significant difference at all in the returns for repowered wind projects versus new-builds? And also, when you're doing a repowering, are you usually contracting back to the existing counterparty that had the original contract, or is this a, kind of, open up to market and whoever comes to the table type of environment?

Yeah. So, first of all, the returns are a little better, right? Because we're typically blending and extending the contract. You're restarting the PTC clock, but you're making half the capital investment that you would typically have to make in a new-build scenario. And in terms of contracting, we're always trying to work with the existing counterparty.

A follow-up for utility-scale solar development in the U.S. just in general. What states, or what parts of the country, where currently there isn't a lot of utility scale solar kind of on the ground operating are you starting to get more and more customer or client interest in potential new development over the next three to five years? Like where are the kind of the new opportunity sets geographically starting to pop up where they haven't really been before?

I'll turn that over to Armando.

Hi, Michael; it's Armando. Honestly, it's popping up everywhere. I know you're looking for something more specific. It's easy to say that there are many more opportunities outside the West and the Southwest U.S. than there were just a couple years ago, but I can't really point you to one specific place. We're seeing a lot of activity in the Southeast. We're seeing actually a lot of activity in the Upper Midwest. And we're seeing a lot of activity up in the Northeast. So, all places that that we've been investing in probably for the last couple years in terms of land and interconnects and so on. I mean, places where we feel that we can enter into long-term off-take agreements also.

Got it. Thank you, guys. Much appreciated.

Thanks, Michael.

Our next question comes from Michael Weinstein with Credit Suisse. Please go ahead.

Hi. This is [indiscernible] on behalf of Michael Weinstein. Thanks for taking the questions. Just on NextEra's $5 billion to $7 billion borrowing capacity, could you talk about if the Moody's recent sector downgrade has affected your view on the borrowing capacity?

No. it has not.

And just as a follow-up, do you expect a breathing period as you integrate Gulf Power and FP&L gas into the core business, or when can we expect more M&A announcements going forward?

Yes. It's going to be opportunistic, but again, Gulf will be run as a separate business from FPL.

And just a question on NextEra Energy Partners. The Canada asset sale closed a month ago. So how far are you along dropdown to recycle capital into the U.S. assets? Is it kind a Q3 event or Q4 event? How should we think about that?

I wouldn't want to specify or lock down a quarter, but obviously it's something that we continue to spend a significant amount of time evaluating, and we'll make further announcements coming forward.

Got it. And just one last question from me. On the solar safe harboring, how should we think about your ability to safe harbor like we have some guidance around wind, where you safe harbor multi-gigawatts of turbines to capture the tax credits. Should we think about sort of in the same line or the same lines for NextEra Energy Resources?

Yes. No, absolutely. I mean, we will engage in an active safe harbor program, just as we did for wind. And I think the fact that we have a strong balance sheet with significant capital resources is just one more competitive advantage as you think about the ability to actively exercise our position in the safe harbor program.

Thanks for taking the questions.

Our next question comes from Christopher Turnure with JPMorgan. Please go ahead.

Good morning, guys. As the focus here recently has clearly shifted to the solar side of the business, I wanted to circle back on your latest thoughts on the wind market origination of non-repowered assets versus repowering itself and kind of how things are maybe trending versus your expectations a year ago on total number of megawatts, returns, capital deployment, et cetera.

So, you've – I mean, I think that's right. It seems like analysts and investors want to talk more about solar and storage than wind. But the fact is we're going to build – we're going to originate, and we're going to build a heck of a lot more wind from now through the end of the decade, through the end of 2020, than on the solar side. I think what's happened on the solar side is exciting, especially when you see what prices are doing in 2020 and beyond. And the fact that there's been an extension of the investment tax credit through 2023, I think it's terrific for that market. But the fact is that wind is still much cheaper than solar in many of the states up and down the Midwest, where utilities, munis, co-ops, and even the C&I sector is looking for cheap, long-term power output. And wind remains really our staple product in order to deliver to those folks that are looking for really low energy prices. So, my expectation is that we're going to originate and we're going to build a lot of wind through 2020, and even as the PTC starts phasing down that you're going to see us build a lot of wind in the next decade.

Excellent. And then my only other question was a follow-up on the FPL rig amortization and the tax strategy there. I know the tax docket's open. Can you give us a sense of the next steps to expect from you in that process?

Yes. Again, I think the fact that we were able to apply our surplus against the Irma storm surcharge was a way to accelerate the return of tax savings back to Florida customers, and I think has been well-received. I think that strategy – I commend the FPL team for the thinking there. And I think we're very well-positioned heading into hearings, which are going to occur in February 2019.

Great. Thank you.

Our next question comes from Abe Azar with Deutsche Bank. Please go ahead.

Good morning. Congratulations on the strong quarter. John, can you provide -

Thanks, Abe.

No problem. Can you provide a bit more detail on the base revenue, cost management line item at FPL, and should we expect an uplift of that size in future quarters?

Yes, so with regard to base revenues, we have benefited from stronger weather during the period. And from an O&M standpoint, I mean, that really rolls right into Project Accelerate, which we've talked a little bit about. But all the opportunity that we have with Accelerate 1 with the $425 million of run rate savings on O&M, a good part of that being over at FPL, and then the Accelerate 2 initiatives that Jim described and the ability to not only leverage automation and looking at AI, looking at machine learning, looking at better, more cost-efficient ways to continue to run our business. So, I would expect to continue to see very strong execution on O&M reductions for FPO going forward.

Great. Thanks. My other questions were answered already.

Thank you.

Our next question comes from Colin Rusch with Oppenheimer & Company. Please go ahead.

Thanks so much. Can you guys talk about lead times for energy storage sales and then also the pass-through of commodities from suppliers on those storage sales and how much exposure you have on that?

So, your first question was lead time for storage sales. The lead time is actually fairly long. So, we're responding, we have been responding, and we continue to respond to requests for folks that are looking at – most of the requests, it's folks who are looking for storage products in the 2021 and 2022 time periods. So that doesn't surprise us. That is a little longer, but not much longer than the sales time that you're seeing for solar, which has always been longer than wind. And the primary reason for that is the cost curve for storage and solar is dropping a little bit faster, not much faster, but a little bit faster than it is for wind. And folks are looking. They're weighing the opportunity that they need, the storage, with the fact that price maybe a little cheaper if you just wait another year. So, we're having good results right now in the 2021 and 2022 time periods for both solar and storage. And wind has always been a much nearer product, and we're responding primarily on wind with 2019 and 2020 opportunities.

And then the commodity exposure within the sale pricing?

I think in the near term – so there's been certainly a lot of discussion about cobalt in particular, which is obviously in the chemistry of the batteries. And in the near term, there might be some cobalt price pressures and so on. We're taking a little longer look in the next couple years simply because we expect a battery market, energy storage market, in the next couple years, but we really expect it to be something in the next decade. And we continue to believe that all of these little blips – whether it's cobalt or some other chemistry – all of these little blips will get taken care of, and battery cost curves will just continue to come down.

Okay. And then just on the solar procurement side, obviously the safe harbor clarification – it hasn't been too long since that's come about. But how much more procurement are you going to need to do to get your safe harbor volumes to the levels that you want over the next couple of quarters next year? Are you pretty much there at this point, or do you have a fair amount of contracting left to do?

So, we'll have more to say on that as the year pans out and early next year. Obviously, we have time to figure out what our strategy is through 2023. So, I think it's a little early to determine exactly what our additional resource or CapEx needs are going to be. But as John indicated a couple of minutes ago, we are in a terrific position to be able to take advantage of the safe harboring for solar, and we will take advantage of it. It's just a little early to talk about what that means.

All right. Perfect. Thanks, guys.

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