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- How a Florida Utility Became the Global King of Green Power; NextEra became a renewable-energy Goliath using tax subsidies to help finance projects around the country and avoiding debt--staying quiet about it allHow a Florida Utility Became the Global King of Green Power; NextEra became a renewable-energy Goliath using tax subsidies to help finance projects around the country and avoiding debt--staying quiet about it all Gold, Russell. Wall Street Journal (Online); New York, N.Y. Who is the world's largest operator of wind and solar farms? It's also America's most valuable power company. Still stumped? It's by design. "That is a marketing problem...that we foster intentionally," Michael O'Sullivan, NextEra Energy Inc.'s head of renewable development, told University of Notre Dame students in 2015. The Florida company has grown into a green Goliath, almost entirely under the radar, not through taking on heavy debt to expand or by touting its greenness, but by relentlessly capitalizing on government support for renewable energy, in particular the tax subsidies that help finance wind and solar projects around the country. It then sells the output to utilities, many of which must procure power from green sources to meet state mandates. NextEra has been careful to build sites only after it has customers lined up, avoiding debt problems that sank rivals such as SunEdison Inc. And it has assiduously avoided the kind of claims of altruistic motives that are common among some green-energy companies. "They were focused on business fundamentals and not the Hollywood status" that comes with being a champion of green power, said Andrew Hoffman, a University of Michigan business professor who was on a NextEra advisory board until 2012. NextEra, as America's most valuable power company, has a market capitalization of $74 billion. In 2001, the company, formerly Florida Power & Light, was the 30th largest U.S. power company, with a $10.2 billion valuation. It said in 2017 federal filings it produced more megawatt-hours of electricity from wind and solar farms than any company in the world; regulatory documents suggest it is, indeed, a bigger wind and solar producer than its largest global competitors, in Europe and China. The way it captured the lead in the renewables market has allowed NextEra to grow despite the fact that the electricity industry has struggled with flat demand for power. The U.S. government expects power companies to generate $4.8 billion in renewable-energy tax credits this year, and NextEra is poised to be the largest generator of them, selling some to other corporations interested in lowering their tax bills and using the rest to shrink its own. NextEra has been led for more than 15 years by the same cadre of executives, notably James Robo, a General Electric Co. alumnus who was elevated to chief executive in 2012. Mr. Robo declined to be interviewed. NextEra declined to discuss its business. The company faces challenges as it strives to continue its rapid growth, including the pending expiration of federal wind tax credits that will begin in 2020. Many industry executives believe companies such as NextEra will shift their focus to building more solar projects, which still benefit from a continuing tax credit. NextEra executives have told analysts in quarterly calls its renewable development business will continue to thrive despite changes in policy, as the declining price of wind and solar power drives investment. NextEra has suffered setbacks trying to expand in utilities, including Texas' rejection last year of its bid to buy a large transmission company and Hawaiian regulators' 2016 rejection of its bid for the state's largest utility. It is currently seeking approval to buy a Florida utility for $5.1 billion . 'Robo math' How the company grew to dominate green power emerges from interviews with more than two dozen former employees, customers and competitors. In 1998, Florida Power & Light created a division, FPL Energy, to explore opportunities created by deregulation of some U.S. power markets. Four years later, Mr. Robo, a Harvard M.B.A. who had been an executive in GE's financial-services division and Mexico operations, joined NextEra. Within a few months, he was assigned to head the new division. Mr. Robo, 55, is known for preaching financial discipline and drilling into accountants and project developers, said former employees. "We called it Robo math," said Adam Bernstein, a financial analyst with the company until 2007. While going through a presentation, Mr. Robo could "stick a screwdriver in you and pry you open," one former employee recalled, hunting for lax thinking such as overly rosy financial projections. He would do it calmly, the former employee said, while munching through a salad he had brought from home in Tupperware--one manifestation of his frugality. He avoided hiring the type of workers who join the industry to change the world, former employees said. When Mr. Robo took over in 2002, the wind industry was small and mostly unprofitable. Wind represented 0.3% of electricity generated, according to federal statistics. That year, GE bought Enron Corp.'s wind business out of bankruptcy. Mr. Robo renegotiated an agreement his company had to buy gas turbines from GE, a problematic commitment because the U.S. was suffering a gas-generation glut. Instead, it swapped them for wind turbines. "We got out from under a very big obligation, around the gas turbines," Mr. Robo said in a 2013 company video, "and got a terrific deal on wind turbines, and it really helped launch our wind business." NextEra began building three large wind farms in Texas and Oklahoma. By 2004, it said it was building about one of every two new megawatts of wind power in the U.S. A factor helping the fledgling green-power provider: federal largess. Congress passed a production tax credit in 1992 to encourage utilities to add renewable energy. "We didn't think we'd get much from it," said Phil Sharp, a former Indiana Democrat congressman who introduced the credit. No one expected renewable energy to become a big business, he said. The value of the credits grew slowly at first, with only a few small wind farms, and didn't break $100 million annually until 1998, according to estimates from Congress' Joint Committee on Taxation. That changed dramatically as individual wind turbines started growing larger and more powerful, generating more megawatt-hours for less money. Wind farms began pumping out tax credits, and companies looking to lower their tax bills snapped them up. A market emerged to let developers finance new wind farms, in part by selling anticipated future credits to Wall Street investment banks and other firms with large tax obligations. In 2008, wind farms generated about $600 million in tax credits. This year, they are expected to generate $4.8 billion, according to the most recent congressional figures. NextEra has used $401 million of these credits over the past three years to offset its taxes, but declined to say how many additional credits it generated and sold to others. Another boost came from states, which began to mandate utilities derive a percentage of power from renewables. The first of these policies was introduced in Iowa in 1991; most were enacted in the 2000s. Today, 29 states covering 56% of electricity sales have mandates. Other companies saw these opportunities, but NextEra's renewable business had advantages, energy analysts say. Most of its potential competitors--companies selling wholesale electricity to utilities--were financially hobbled by fallout from the Enron bankruptcy and the related collapse of power trading. Few had the financial wherewithal to invest in projects. "It was an open terrain and NextEra looked around and said let's own this," said Rob Gramlich, head of government affairs until February 2017 for the American Wind Energy Association, an industry group, and now a consultant. Minimizing risk Regional utilities facing state mandates often didn't have the know-how to build wind farms, so many requested bids to buy the power from someone else. NextEra won many of these auctions because, as such a large purchaser of turbines, it could extract the best deals from manufacturers, and by funding projects using cash and lines of credit to avoid financing charges, according to former employees. It now uses similar strategies to outbid competitors on solar farms. "They are very aggressive at bidding," said Gabriel Alonso, CEO until October 2017 of EDP Renewables North America, one of NextEra's largest competitors. "Most companies couldn't compete with them on the cost of capital." To keep risks low, it didn't make any major capital outlays until it had a long-term agreement to sell the output of a wind farm to a creditworthy counterparty. After regulators in Virginia and West Virginia pushed Appalachian Power Co. to add more wind to its coal-heavy portfolio several years ago, the utility solicited bids for 150 megawatts of renewable energy. Its parent, American Electric Power Co., had limited capital with which to build the farms itself; it was spending several billion dollars installing equipment to clean up its coal fleet, said American Electric spokeswoman Melissa McHenry. NextEra won the contract and built a wind farm for Appalachian in Indiana. In doing so, Appalachian Power effectively contracted 1.1% of its sales to NextEra for the next 20 years. NextEra has done dozens of similar deals. NextEra in 2006 bought WindLogics, a Minnesota company specializing in forecasting wind patterns--widely considered the best consultant with the most data--to help it find and lease the best wind sites. "NextEra already has a lot of the best locations locked up" as a result of that in-house data advantage, said Steve Fleishman, a managing director at Wolfe Research, an investment-analysis firm. Once it secures locations, NextEra demonstrates patience before trying to get a payoff. In 2004, it began leasing up land in windy Dickey County, N.D., according to property records. Maurus Heim, whose family owns land in the area, said he signed with NextEra instead of other developers because "it was not a company that was on the brink of bankruptcy." The initial project faced some setbacks, but NextEra renewed some of the leases and signed 99-year agreements with the Heim family and others for rights to build on more than 20,000 acres in 2009. The return came last year. When Xcel Energy Inc. said it wanted to acquire more wind farms, NextEra sold the Dickey County project to the Minnesota utility for an undisclosed price. NextEra said this year it had 28,000 megawatts of wind and solar projects in various stages of permitting and leasing, and said it plans to expand that pipeline to 40,000 megawatts over the next two years. Last year, its renewable-development arm generated $2.9 billion in net income. The company still operates the Florida utility that was its roots but now derives about a third of its revenue from building renewable-energy projects. NextEra has had setbacks trying to expand into utilities, which have rates of return set by regulators and are generally safer than investing in competitive power generation. The Hawaiian commission's rejection of its bid called NextEra's assurances about supporting the state's renewable-energy goals too broad and vague. Texas rejected NextEra's bid when the company declined to provide certain financial and corporate-governance safeguards. While environmentalists applaud NextEra's commitment to building wind and solar farms outside Florida, they have criticized what they see as its attempts to slow the deployment of rooftop solar inside Florida where it would directly compete with its utility business. NextEra's utility president, Eric Silagy, disputed this in a 2016 newspaper commentary, saying: "Residential private solar is growing faster than ever before in FPL's service area." Half the power-generating capacity added in the U.S. last year was wind and solar, according to the Energy Information Administration, versus 29% in 2010. John Ketchum, NextEra's chief financial officer, told analysts in April: "The size of the renewable pie is as big as it's ever been." NextEra is now expanding beyond its traditional utility customers to build wind farms and solar parks directly for large corporations such as Google parent Alphabet Inc., some of which want to run facilities with green energy for financial and public-relations purposes. |
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