John Ketchum, NextEra Energy Interview

[00:00:00] Bobby Dameka: Hello everyone, and welcome to the Glio CEO Investor Series. My name is Bobby Dameka, and I'm the co-head of the Income and Infrastructure Investment Team at Jennison Associates, where I manage several listed infrastructure strategies. Today, I have the pleasure of joining John Ketchum, Chairman and CEO of NextEra Energy, the largest electric utility in the world by market cap, for an informative conversation about the exciting prospects in the US electric and power industry, and NextEra Energy in particular. But first, I'd like to thank Glio for providing the platform for this conversation, as well as all the work that Glio does to support infrastructure investing around the world. Now, John, we've known each other for a very long time, but for those who are less familiar with you and the company, would you mind telling us a little bit about NextEra Energy and what makes it such an exciting time for the industry and the company? [00:01:08] John Ketchum: Absolutely, Bobby. I mean, it is such a terrific time to be in our sector to start with. Power demand is surging across the country, and we're expecting about a six-fold increase in power demand over the next 20 years. When you think about a company like NextEra, we are perfectly positioned to lead the charge on driving American energy dominance across the board to meet that power demand. And we have two terrific companies. They are two of the leading companies in this industry. First of all, Florida Power and Light, which is, as you said, makes us the world's largest rate-regulated utility, bar none across the world. And we have NextEra Energy Resources, which is the largest competitive energy company in North America. And when you put those two great businesses together, we are uniquely positioned to capitalize on this massive opportunity that we see around power demand going forward. And what really allows us to do that is, first of all, our team. So we have a team that has been together for a long time. We have a lot of talent within the organization. And in this industry, it all comes down to execution and the ability to deliver. And then you think about the skill sets and the competitive advantages that we've been able to put together. We have massive scale. We have all the skills that we need to achieve our objectives. And we have scope across the U.S. and in different parts of the energy sector. We are truly the quintessential, all the above energy companies. So if you think about generation, we're in wind, we're in solar, we're in battery storage. We have largest gas fire generation fleet in the United States. We're the seventh largest owner and operator of nuclear generation. It doesn't stop there. We're also a leader in competitive transmission. We have a leading pipeline business on the natural gas side. We have also a leading customer supply business. And so when you put all those pieces together, there's no energy challenge that we can't meet. And I think that's what really puts us in an unusual position to be able to cease on the opportunity set that we have going forward. Because we need a lot of electrons on the grid and we need them on the grid quickly. [00:03:42] Bobby Dameka: I think that's a great way to kind of set the table and give people a little bit of a flavor of you know, the breadth and depth of the scope of everything that NextEra Energy does. You know, one of the things that you mentioned, and I think one of the things that's really excited the market over the last couple of years is the, you know, AI opportunity and how AI and the AI related data centers are really, you know, accelerating the power demand growth in the country. We've seen some pretty, I guess, robust forecasts for data center growth over, you know, the next several years. And I guess I'm just wondering from your perspective, how does NextEra kind of assess the viability and the kind of duration of that, you know, demand growth trend related specifically to AI and data centers? How do you, [00:04:40] John Ketchum: how do you get comfortable with that outlook? So first of all, we're a highly analytical decision based company. So when we make decisions, it's after a lot of thought. And we have a lot of capability internally, internally, where we're able to engage in high level analytics. And so one of the things we look at across AI opportunities is what's the demand picture look like? What's the CapEx plans amongst, you know, the top five hyperscalers, the DCOs as well? Where are they looking to invest capital? What's going on in the chip market? What's the energy consumption that's involved? What are the coolant technologies that are coming along? How does electricity and energy fit into the equation? And what does the long-term demand look like for that? And when we do all that work, we see very, very strong picture where we need power. We need power right now to be able to fuel all the data center build out that's coming to support all these artificial intelligence applications. Because one thing that we cannot afford to do as a country and as an economy is lose the war on AI. One of the things that we talked about back in December that you'll recall is our artificial intelligence or technology partnership that we've formed with Google. And so, one of the things I'm really excited about is every year we go through a cost-cutting mechanism or initiative at NextEra. And it's taken the form of different names. We called it velocity. We called it momentum. We called it accelerate. But what it does, we go to our employees and we say, give us your bottoms-up solutions and thinking about how to take costs out and run more efficiently across the board and all the businesses that we're in. But also how to grow the top line from a revenue standpoint. What I'm excited about this year is we've kind of rebranded that initiative. We call it rewire. And what we're doing is we're reimagining every one of our businesses. It doesn't matter if it's operations or development or our treasury function or any of our back office applications. And we're saying to ourselves, how do we do it better? How do we do it more efficiently? How do we redefine the processes that help us get answers in the hands of customers faster and be able to drive lower cost energy solutions across the board? And so as we reimagine the way we can do business, we're also layering technology on top of that because technology is going to play a huge role in how we run the company going forward. [00:07:23] Bobby Dameka: Yeah. Now, a lot of great points there. And we're going to follow up with several of those as we continue this conversation. But I guess before we leave demand growth for a second, you mentioned it earlier. Obviously, data centers AI gets a lot of the headlines in terms of what's driving demand growth. But there are other aspects to the underlying demand growth picture that don't get as much attention. Could you speak to, I guess, to what extent do you think there's some underappreciated aspects to the demand growth trend? [00:07:57] John Ketchum: When we look at demand growth kind of across the board that's driving that 6x increase that I talked about earlier, about 40% of it probably comes from hyperscalers and data centers. But the other 60% is just coming from strong economic growth across the economy, particularly as we embrace the administration's policies of trying to re-domesticate jobs back to the United States. And so we're seeing it across the board in this last quarter where we had 3.6 gigawatts that we added to backlog. A gigawatt of that was hyperscalers, right? But the other 2.6 gigawatts was really everybody else. So that kind of fits within that picture that I just painted for you that demand is coming from other sectors. And let's face it, the average household is also using more power because we all have those devices that we've become addicted to that we use every night. And those devices are becoming a lot more sophisticated. But they also are resulting in a lot more energy uses at the home. And so we're seeing a lot of retail, you know, growth. [00:09:07] Bobby Dameka: I think that's a great segue to, you know, get into it to drill it further down into the NextEra Energy platform of businesses. And probably a good place to start would be a conversation about NextEra Energy resources or NEAR. You know, particularly along this line of, you know, bring your own generation for the data centers. NextEra Energy is one of the few, less than a handful of companies in this space that still have a very significant non-regulated part of their business. And I think for infrastructure investors in particular, NextEra Energy has proven that, you know, non-regulated isn't necessarily synonymous with volatile earnings, right? Like you've had a very dependable and predictable kind of growth path on that business. Could you talk a little bit about what it is about how you've structured NEAR to provide that sort of dependability and visibility in terms of the earnings stream over the long term? [00:10:11] John Ketchum: First of all, it starts with the combination of the two businesses together. And when you're able to take the leading utility in the United States and put it together with what I think is the leading, you know, competitive, unregulated energy business, energy infrastructure business, and energy resources, you get tremendous scale benefits across both of those companies. And it doesn't matter if it's the buying power on the supply chain, the way we operate the facilities together, and both companies use technology to do that so we can reduce and limit the number of folks in the field, the combined expertise that we have around transmission and distribution, and the ability of energy resources to think like a utility when it's designing new solutions and new products for our customers. The majority of the earnings and the cash flow at energy resources come from long-term contracted assets. And so one of the things that I think we've been very disciplined on is a few things. I mean, one is capital allocation, making sure that we're allocating our capital to assets that generate strong returns. Second is that we are allocating that capital towards long-term contracted investments. We're not taking on a lot of merchant risk where, you know, classic IPPs have. And so the ability for us to survive over the long-term, if you look at our track record of the last 20 years, is deploying capital and long-term contracted generation assets. And it's been our ability to build out a platform that supports that long-term contracted model. And we've been able to do it in a way that really allows us to capture upsized opportunities when you have a market like what we have today, where we have really strong power demand. If we have to build transmission, we can do it. If we have to build gas pipelines, we can do it. Every facet of the energy value chain we're in that supports that ability to and that underlies that long-term contracted model. And then one of the things that we talked about as well at the investor conference in December is we're not a one-trick pony over in energy resources, right? The company overall has more than 12 ways to grow. We have FPL, as you mentioned. We now have large load in Florida under the tariff that we got out of our recent rate case. And I know we'll come back to FPL in a minute. And then you think about energy resources. I mean, I've talked a lot about generation, but the transmission business, the gas pipeline business, you combine those with FPL. Think about the regulatory ballast that gives us to be able to grow the company. Then you have the wind, the solar, the storage, the gas power generation, the nuclear, the ability to re-contract assets that we've signed up over the last 20 years to be able to capture all that upside, the customer supply business, giving us all that market knowledge. And then thinking into the future, as we always do, five, ten years down the road, being able to secure a technology partnership with a company like Google, redefining or re-imagining how we're going to do business, leveraging AI like nobody else in this industry can because of the data set and the first mover advantage that we have. I just couldn't be more excited about all the opportunities that we have. But that's what really separates next to our energy resources. And that's what gives us the staying power. So many places we can go from there, [00:13:52] Bobby Dameka: but I guess maybe the next thing to talk about is something that also came up in your December Investor Day where you talked about your plans for development on behalf of data center customers and this goal of building, I think, 15 to 30 gigawatts of data center hubs by 2035. Right. Could you elaborate a little bit more on that concept of data center hubs? [00:14:22] John Ketchum: Sure. Yeah. Let me tell you, let me start with the story first, as a precursor. I was at a CEO conference with, we'll just say an unnamed hyperscaler. I don't know, it was 18, 24 months ago. And I said to this particular CEO, I said, "What's our industry missing?" If you woke up tomorrow and said, "The perfect solution from somebody in the electric generation industry would be X, what would it be?" He said, "John, I need five gigawatts solutions. I need a company that can bring five gigawatts." Because every data center I'm building is going to ultimately grow to be five gigawatts, at least five gigawatts. And when they're making investments in certain parts of the country, you know, they've done all the legwork. You know, all that legwork I talked about, about, you know, working with the local community, you know, selling them on, not selling, but, you know, demonstrating the job growth, the property tax, sales tax, all the economic benefits that come along with that. So once they've already got a gigawatt of compute capacity there, they want to expand to five. Not that five's the mat, maybe it's six, maybe it's seven, maybe it's three, maybe it's four, but five on average was this conversation that I had. And went back to the team and we challenged ourselves to rethink, do we have the right model to approach the hyperscale market? What is it that NextEra could do that nobody else could do, right? And it was to accommodate this goal, right? This goal of, hey, give me five gigawatt solutions. And so we immediately went to the drawing board and said, there's got to be a better way. We are the only company in our sector, or one of the only companies in our sector that can build at scale. Because think about what it takes to build out a five gigawatt data center. I mean, you're looking at north of $20 billion of CapEx investment. It's going to take a multitude of generation solutions to be able to do that. They're always going to come back, the customer, and say, look, if you could just get me a gigawatt that can get me online by 27, by 28, that's all, that's what I need right now. Then I can grow with you. Why? Because their business model fits that. If they have a gigawatt of commitments where they've already sold data center capacity out for a gigawatt, that gets them going on the first gigawatt. It can be renewables, right? Then, as we're getting that first gigawatt built, you know, in that first 18, 24 months, we're already working simultaneously on the gas gen that's going to follow it up. Or maybe it's an SMR that's going to follow it up. Maybe we're in a part of America, though, that's rural where, you know, many of these facilities get built. They don't have adequate transmission access. We can build the line. They don't have adequate gas access to support the gas plant that needs to power the data center. We can build the gas pipeline to get them there. The easiest solution for them is going to be a hyperscaler that's going to bring their own generation. And then we're going to, where we come in, too, is we can build that generation. We can do it low cost. We can take it off the balance sheet of the investor-owned utility or the co-operative municipalities that they don't have to face bill pressure by building that themselves. If they want to own a piece of it or take some of it back in the form of PPA, we'll do that, too, to create a win-win situation, which is what we've been doing for years. You know, I think one of the big takeaways [00:18:02] Bobby Dameka: from the December Analyst Day, Investor Day was, you know, that NextEra presents this kind of all in one shop that, you know, customers can approach to kind of tack on, you know, basically all their needs in terms of development. I think one of the key messages is that NextEra can kind of check all of the above in terms of development capabilities. But I'd say, you know, and before the last couple of years, I think a lot of, you know, investor sentiment around NextEra was very much focused on the renewable aspect of the development operation. And obviously, with the transition in administrations between Biden to Trump, there was a lot of angst in last year in particular about what that transition would mean for the renewable energy development industry, and whether or not there'd be clawbacks on IRA and all that stuff. Obviously, we're on the other side now of the OBBBA. And I was just wondering from your perspective, you know, what are the prospects or what is the outlook for renewable energy development in the US post-OBBBA? First of all, I think it's strong. I mean, I'll just, [00:19:21] John Ketchum: I just like to look at empirical data. Look at last year that we had, right? I mean, we had a record origination year, 13.6 gigawatts. We just had a record quarter of 3.6 gigawatts that through our origination efforts on wind and solar and battery storage. And I think it's indicative of the fact that we need all of the above. We need electrons from wherever they come from. We just need to get electrons on the grid fast. We can't afford to wait. And that's what we're seeing from customers. And so the outlook, I think, for renewables continues to be very strong because it's fast to deploy and it's cheap. And when you think about affordability being a key concern across the board among, you know, with, you know, probably every commission in this country, and renewables will continue to play a big part of that because they really helped to buy down the bill, which is what they've done in Florida. I mean, you look at Florida, we've taken $16 billion of fuel cost out of the bill. Yeah, that's why we have an affordable bill here in Florida because of what we've been able to do on modernizing gas, layering in solar, layering in storage. So renewables will continue to play a very big role, not only this decade, but next as well. [00:20:44] Bobby Dameka: I guess keeping with that, all of the above theme, another source of carbon-free generation that's experiencing a bit of the Renaissance is nuclear power. And NextEra has been playing a role in that with the Dwayne Arnold restart in particular. Could you speak a little bit more about, I guess, maybe an update on how that restart process is going and also the role that you would see nuclear energy playing in powering this demand growth? I guess maybe either industry-wide or for NextEra in particular? And I guess the last add-on would be, to what extent do SMRs fit into that picture? [00:21:24] John Ketchum: So, first of all, Dwayne Arnold's gone terrifically. I mean, the recommissioning's going better, even better than expected. I mean, things are going really well in terms of the execution there. And I always say that I love being in a year of execution because execution's our superpower. That's what this company has always done well and we're equipped to do. But that's going really well. But the recommissioning, look, that's the low hanging fruit for the industry. And so, you know, whether it's Crane, whether it's Palisades, whether it's Dwayne, those have gotten a lot of the attention. There's some upgrade projects too that'll get some attention, you know, as well, that have been announced by some of our peers. But those aren't going to change the game, right? Those aren't game changers. You're really going to have to see, you know, a pivot to small modular reactors or SMRs. And for us, what we have tried to do is really focus on the OEMs, right? So, there's 96 or so folks that call themselves SMR OEMs today. We've called that down to 12. We've done deep dives commercially and technically on technical feasibility studies on the 12 that are left. We're probably more Gen 3 than we are Gen 4 believers at this point, because Gen 3 doesn't have the added complexity of fuel where you have to really go from low enriched uranium, LEU to highly enriched uranium, the HALU, which brings with it a whole another set of complications, you know, around that fuel source. So, we're more focused on Gen 3 and that's been where the attention, you know, has been because a lot of these designs are similar to what we already see in practice and what's, you know, already in operation on a larger scale, whether it's a PWR or a BWR technology. But the key is going to be, you know, how do these first few go, right? And can they be brought online efficiently? Can they be brought online according to schedule? Can they be brought online without hiccups, right? Because that's where investor confidence is going to be able to build, is if we can prove as an industry we can actually get these things built on time, on schedule, and for a reasonable cost. We're not going to take risks that are not smart for our shareholder, right? I mean, you know, I treat every dollar we spend as if it's my own dollar, you know, in trying to protect our shareholder. We're going to be disciplined. We're going to be careful. We're going to take our time. But, you know, we don't have any SMRs in our plan. It would be pure upside, 100% upside, if we were [00:24:16] Bobby Dameka: able to, you know, build and advance one. Maybe now we can pivot to, you know, the biggest part of the company, FPNL, the rate regulated utility in Florida. You touched on it a little bit, but, you know, wanted to congratulate you on another constructive rate settlement that was achieved last year. And I was wondering if you could talk a little bit about the highlights of that settlement. I think one of the things that really differentiates [00:24:43] John Ketchum: FPL with the rate case outcome that we were able to get is we're out for four years, right? And so there's a lot of affordability concerns around the country. We don't have those in Florida. I'm going to go through those in a minute with the outcome. But we're out for four years, so we don't have to, you know, go back in for a rate case, you know, ask or, you know, an increase to bills to customers. Start with that. Second, the outcome for us was terrific. And I'm going to go into why. But, you know, the high end of the ROE 11.95%, the equity ratio intact at 59.6%, a rate stabilization mechanism, which is similar to the surplus depreciation we used to have of roughly $1.45 billion. So really good shape in terms of being able to support all the new capital investment that we need to make in Florida to support what is really a growing economy. But what supports that kind of an outcome? I think that's really what you're getting at the end of the day. It always comes down to performance. And our track record of performance is, I believe, in this industry second to none. So if you look at our O&M, it's 70% lower than national average. 50%, 50, not 15, 5-0% lower than second best on a dollar per megawatt hour basis. Top decile reliability, outstanding customer service, a bill that's 30% lower than national average. And ask, when we went into this rate case proceeding, for a bill that only increases 2% a year on a compound annual growth rate basis, that's less than the rate of inflation at 3%. And so it's all about performance. And our ability to deliver that kind of performance and what we've been able to do on hurricanes with record restoration and record performance. When you can go in with a really strong track record around performance, that helps support a strong regulatory complex, which we have here in Florida. So it always comes down to performance and the ability to run the company low cost and deliver a low bill at the end of the day. And look, you know, where we are in Florida, we have so many opportunities. I mean, Florida is the 15th largest economy in the world, if we're a country. It's one of the fastest growing states in the US. The jobs that are coming here are across industries, but, you know, tech in particular, a lot of growth in the Space Coast, a lot of growth in South Florida, now call it what the Wall Street of the South. And so it's supporting, you know, a lot of new investment and infrastructure to support all that business and residential growth that we're having in the state, whether it's around generation, transmission or distribution. And we're positioned to do it in a very responsible way that does not impact affordability. And then on top of that, we've got a large load tariff, right, for the first time ever. And we are seeing a ton of interest, you know, 20 gigawatts of inbound interest that we're in discussions with in Florida at FPL. Nine gigawatts that we're in advanced discussions with. So we see a big opportunity to support data center build out. Because from a fiber latency standpoint, you want to be close to your end user from an AI standpoint. And you think about all that business growth that I talked about, we're a natural to be able to support, you know, all that power that's going to be required to support data centers that I [00:28:28] Bobby Dameka: think will come to Florida. I think I'd imagine that large load tariff goes a long way in terms of addressing the affordability concerns that we've been talking about. It does, because it was, you know, [00:28:39] John Ketchum: we designed it with the customer in mind, top of mind, right? So the costs are being absorbed by the hyperscale or not shifted off to the customer. I think that's, if I'm an investor, I'm going to be pretty careful on how some of those large load tariffs that were designed 12 or 24 months ago are structured because there could be a battle coming up if there was any cost shifting that occurred [00:29:02] Bobby Dameka: over to the retail base. I think as we wind down this conversation, you know, I think it's probably good to talk about, you know, balance sheet, you know, which I think is kind of one of the key hallmarks of the investment case for NextEra Energy, you know, with so much growth between your, you know, two big business platforms, FPL as well as NIR, there's, you know, a lot of CapEx associated with that. You had touched on that earlier about how having such a strong balance sheet, big balance sheet is a competitive advantage. You've got one of the strongest balance sheets in the industry, A minus rated at both S&P and Fitch and BAA1 at Moody's. Could you talk about, you know, to what extent new equity comes into play in terms of preserving that balance sheet and financing this growth? And to what extent there's any [00:29:56] John Ketchum: implications for dividend policy? When you look at our balance sheet and you look at how the company is positioned with 70%, you know, over 70% of our EBITDA, call it 75% or so today, of our regulated EBITDA, adjusted EBITDA coming from the FPL business, that puts you in a great spot. And then energy resources, where almost all of that business is predicated on a long-term contracted basis. And so when you put those two pieces together, you've got a really strong credit profile and you have two businesses in FPL and energy resources that throw off a lot of cash. So you start thinking about how do you finance the business going forward? Well, cash flow from operations is a big piece of that. We also have given the strength of the investments that we're making in energy infrastructure, the ability to secure project finance or tax equity finance, you know, for the balance. So what's left over in terms of equity needs, we've really been able to minimize, you know, across the board. And I think we said at our investor conference, we're expecting, you know, roughly $2 billion a year, you know, on average, you know, through through 2032. And, you know, that's how we do it. And in terms of the dividend policy, we offer, you know, what is a very compelling dividend, you know, in this industry, we're also being smart about the fact that capital, we have a choice, right? We could return that to shareholders, or we could reinvest that in the business at higher returns. I think shareholders would say, reinvest it in the business at higher returns, given all these growth opportunities that you have across the board. And that's the feedback that we had been receiving from investors. And so, when you put together that really strong dividend that we're going to continue to have, together with the earnings profile of the, you know, of the business at 8% plus, I mean, that total shareholder return is pretty darn compelling. And we've given visibility on the adjusted EPS through 2032, with a target through 2035. So we look for, you know, a long term, sustainable total shareholder return, you know, for the investor, but being smart about how we use that capital and being smart stewards of capitals, incredibly important. On that note, John, I'd like to thank you [00:32:49] Bobby Dameka: again for making the time to have this informative conversation about the exciting prospects for the industry as well as NextEra Energy in particular. I'd also like to thank GLIO again for providing this platform, as well as all the work that they do to support and promote infrastructure investing around the world. And John, would you mind taking us out by, you know, telling people where they can go to find more information about NextEra Energy, as well as any closing remarks? [00:33:19] John Ketchum: Yeah, I mean, first of all, in terms of finding more information on NextEra Energy, take a look at our December investor conference. I think that's the best place to go. I'd start there. I mean, obviously investors will look at our earnings call materials, but look at what we laid out in December for investors at our conference. That's a great place to start. And it reinforces, I think, a lot of the points that I made today. And, you know, before I close it out with remarks, Bobby, first of all, I want to thank you. Thank you for all your support. Thank you for the opportunity. I want to thank GLIO as well. And I'm going to keep it short and sweet on the closing remarks. I mean, first of all, remember what I've said. There are very few builders in this country of energy infrastructure. NextEra is a builder. If you're an investor looking for a way to get exposure to where this industry is headed, which is building new generation to put more electrons on the grid, you would be hard-pressed to find a better opportunity set than the one that NextEra Energy has. And remember, we are in a business where we've been building for 20 years with a foundation of the nation's largest rate regulated utility and the nation's leading competitive energy infrastructure business. And I could not be more excited about the opportunity set that we have in front of us. And, Bobby, thank you again. Thank you.