By Richard A Kessler
Wednesday, March 05 2014
It was the late Eighties and the company — FPL Group as it was called then — had lent money to some wind projects as part of a diversification strategy. It was a tough time for the nascent US wind sector, and some of those projects went bankrupt. To its great surprise, FPL found that it suddenly owned them. An even greater surprise was the realisation that it could make money from them.
From this inauspicious start, the Florida-based company has risen to become the biggest wind and solar developer in North America — and one of the most profitable in the world — with its 10.2GW wind-energy empire alone providing shareholders with double-digit returns and expected earnings this year of at least $1.61bn before interest, taxes, depreciation and amortisation (Ebitda).
By way of comparison, NextEra’s wind capacity in the US is larger than the portfolios of Iberdrola and EDP Renewables put together (9.08GW), while its four closest US-based rivals — MidAmerican, Invenergy, NRG and Duke Energy — can only muster 9.5GW between them.
So how has a company that was little more than a regulated utility (Florida Power & Light) achieved so much success in such a relatively short period of time?
Like many other hugely successful companies, excellent management has been key, along with a little bit of luck and a big gamble that paid dividends.
In 1998, soon after it built its first wind farm, in Oregon, the company created an independent power producer arm, FPL Energy — renamed NextEra Energy Resources in 2010 — to manage its growing interests outside its Florida service area, which included solar, nuclear, hydro and natural gas.
A year later, management abruptly ended wind development in favour of natural gas, which was booming at the time. But an internal analysis of the market later revealed that the glut of gas plants being built across the country would squeeze profits, and that wind would be more profitable. Lewis Hay III, who was appointed chief executive in 2001, immediately changed course, converting a large deal with General Electric for gas turbines into an order for wind turbines. (The agreement benefited both sides: GE, which had recently entered the business, found a big launch customer; and FPL could push ahead with multiple projects — adding to its early-mover advantage. To this day, NextEra is GE’s biggest global wind customer).
Although FPL Group took a financial hit from its sudden turnaround, it was far less than many other utilities. As credit ratings and share prices of other utilities plummeted when the gas boom turned to bust, its ratings remained relatively stable.
Hay decided to improve the company’s profits by increasing its generating capacity from all energy sources and improving the efficiency of its operations. With its rivals weakened, and a decent credit rating, FPL Energy was able to acquire power plants at knock-down prices.
As cash flow improved, so did FPL Group’s credit rating, enabling it to borrow at cheaper rates, leading to better returns and an even better cash flow. A spiral of growth was created.
FPL Energy managed to turn a $169m loss in 2002 into a $194m net profit the following year. By then, the unit was generating 19% of the parent company’s net income, compared to a meagre 1% in 1997.
Around this time, the small US wind sector was on the ropes as Congress repeatedly allowed the vital federal production tax credit (PTC) to “sunset” in 1999, 2001 and 2003. But while other developers put projects on hold, Hay gambled that the PTC — which pays $23 per MWh for ten years, inflation-adjusted — would continue. He ploughed ahead with new projects and acquisitions, securing some of the best wind sites in the US.
The PTC was repeatedly renewed, helping wind energy compete on price with fossil-fuel-derived electricity, and enabling FPL to win long-term power-supply contracts across the country. By 2002, the company had a wind portfolio of 1.74GW — 37% of the US total — and by 2007, this figure had reached 5GW.
Hay’s 11-year reign as chief executive is still felt strongly. The executive team that he recruited oversees the business today — including current group chief executive Jim Robo, chief financial officer Moray Dewhurst and Energy Resources boss Armando Pimentel.
“They are very experienced, well-regarded and savvy,” says Stephen Byrd, clean-energy research director at Morgan Stanley. “NextEra’s management has had a big part to do with why the wind industry is as successful as it is now. These folks have been the biggest player in wind since the beginning. I think that does really set them apart.”
Paul Patterson, an analyst at Glenrock Associates, adds: “It’s pretty remarkable how successful they’ve been in seeing the landscape and how it’s changing, and then acting nimbly and quickly.”
Hay understood that cost control was critical for helping deliver solid returns with wind, and made sure the company did not overextend itself financially to grow the business.
Because it was an early mover, NextEra has some of the best US wind resource areas under lease or an option with landowners until it can win a power-supply contract. “When a utility requests proposals for wind, they know what the wind conditions and economics are quite well,” says Byrd.
While building scale has been an essential part of NextEra’s long-term strategy — helping to cut costs by buying turbines at volume, and adopting efficient, standardised processes — the bottom line has always come first.
“We pursue profitable growth, not growth for growth’s sake,” Robo said last year. He tells his staff that it is better to dip a “toe in the water” when approaching new business development, rather than trying to “swing for the fences” and striking out.
“NextEra is a sophisticated energy company that really knows how to develop these resources. It also is disciplined. Management is not going out on a limb with this stuff,” says Patterson. The credo at NextEra is that projects be executed on time and within budget.
“While we are certainly not perfect, I do think our track record is pretty good,” Dewhurst told investors recently. In the past decade, the company’s engineering and construction team managed 66 wind projects and 17 from other energy sources, deploying $19.6bn capital against budgets of $20.3bn. The result: 89% were on time, with the balance a few days or weeks late due to third-party issues such as transmission hook-ups, for which the company holds itself accountable. “Some things are tough to control, so we plan for that,” he noted.
NextEra’s cumulative wind growth has averaged 19% a year since 2002, with a $5.4bn capital investment in 2010-12 and $3.2bn more targeted for 2013-16. It expects to boost its wind capacity by 2.2GW by the end of 2016.
It now has more than 9,000 turbines across the US and Canada that generated nearly 30 terawatt hours last year — a company record and evidence of its ability to deliver competitively priced clean energy.
If NextEra has a weakness, it may be overdependence on the US wind market, whose future is hard to discern beyond 2015. While it is unlikely that the divided Congress will end all federal support, there is also no guarantee it will renew the PTC. Despite this, analysts do not believe that Robo will push for international activity beyond Canada, after the company was burned by a solar investment in Spain.
Yet the chief executive seems confident. “I would lay our development pipeline in the wind business up against anyone’s,” he declares.
NextEra has got it right for the past 13 years. Few would bet against the company getting it wrong now.
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