NextEra Energy Inc. Chairman, President and CEO James Robo sought to reassure investors Jan. 27 that the future for renewable power remains bright and that his company is well-positioned to hit earnings growth targets regardless of the various corporate tax reforms being floated by congressional Republicans and President Donald Trump.
Clearly, NextEra management determined the markets require reassurance: Robo noted that Nov. 9, 2016, the day after the election, was the worst day for NextEra stock performance relative to the S&P 500 in eight years, and the company's shares have been trading lower than the Nov. 8 closing price of $125.17 ever since. The hit to NextEra's share price appears to be driven by investor concern that the development of new renewables under Trump and tax incentives to promote renewables, could be in jeopardy, coupled with concern over the impact on utilities of corporate tax reform. On both counts, Robo asserted NextEra investors have nothing to fear.
On renewables, NextEra Energy Resources LLC plans to develop 2,800 MW to 5,400 MW of wind and solar in North America over the 2017-2018 period, and Robo said it is "unlikely" Republicans in Congress will make retroactive changes to the phase-out of the production tax credit and investment tax credit, which Republicans themselves extended in 2015. Robo also noted Trump's nominee for treasury secretary, Steven Mnuchin, said he supported the phaseout of renewable credits as currently scheduled during confirmation hearings.
By emphasizing the job growth driven by renewable development, with components mostly made in the U.S. and the economic stimulus wind and solar installations often create in rural areas, Robo seemed to suggest NextEra's renewable investment plans remain well-sheltered against political and policy uncertainty.
Robo also pointed to renewable portfolio standards in place in 29 states, and that the price of power produced by wind and solar generation continues to decline. "So even if I am wrong about continued federal incentives for renewables, as we near the end of this decade, I would expect that in 2020 without PTCs, wind would be a 2-3 cents/kWh product and solar without an ITC will be in the range of 3-4 cents/kWh," Robo said.
Elsewhere at NextEra, Robo praised the four-year rate settlement approved in November 2016 for Florida Power & Light Co. and described good progress on the acquisition of Oncor Electric Delivery Co. LLC. Based on the company's growth prospects, NextEra extended to 2020, from 2018, guidance of a 6% to 8% compound annual growth rate to EPS off of a 2016 base of $6.19 EPS. That guidance, executives clarified, does not include any expected accretion from Oncor.
To prepare for possible corporate tax changes, NextEra has modeled two scenarios: one where there is a 15% corporate tax rate with current depreciation rules and interest is tax deductible, similar to what the Trump administration has outlined; and a second scenario closer to what U.S. House Republicans have outlined, with a 20% corporate tax rate, allowing the expensing of capital expenditure and no interest deduction. Based on NextEra's expected 2020 EPS baseline, Robo described the "administration" plan scenario as accretive by 30 cents to 40 cents per share, and the "House" scenario to be dilutive by approximately 10 cents to 15 cents per share, with the difference "largely driven" by the lack of the interest deduction in the House plan.
After NextEra also modeled those plans with a "very unlikely" downside case where renewable development is 50% lower than current projections, the company still expects to hit the midpoint of its 2020 EPS guidance range, Robo said, adding, "as a result, while there certainly will be challenges that we'll have to manage over the next four years, due to the overall strength and diversity of our opportunity set, I will be disappointed if we are not able to continue to deliver financial results at or near the top end of our range."
Asked whether NextEra and other peer utilities are seeking a "carve-out" under any potential new tax regime, Robo suggested his company and industry were active on that front as well. "The industry understands the importance of tax reform for both the U.S. economy as well as for our industry and it's important to get it right, and we are working very hard to make sure that our voice is heard and that whatever happens with tax reform is both great for the U.S. economy and also doesn't impact our customer bills," Robo said. "I think that's all I can say about it."