For NextEra, Texas strategy reflects flight from traditional merchant plants 

Texas sometimes likes to think of itself as another country – especially when it comes to electricity.

For observers of NextEra Energy Inc., though, the Lone Star State might serve as a road map. The prominent Florida utility owner and leader in U.S. wind energy production is using Texas to illustrate what’s important – and what’s not – in an era of low power prices.

On the way out: nearly 3,000 megawatts of Texas merchant natural gas-fired generation.

Still in its portfolio: more than 2,700 MW of Texas wind energy capacity.

On a possible wish list: more regulated holdings, as shown by its interest in Dallas-based Oncor Electric Delivery Co. LLC.

NextEra is looking to reduce risk from plants in competitive areas and may seek to trim that exposure further, according to Mihoko Manabe, a senior vice president in infrastructure finance with Moody’s Investors Service. In that regard, a recent agreement to unload the Forney and Lamar gas plants in Texas to a unit of Energy Future Holdings Corp. fits right in.

“What they did with these two plants shows their take on the market there in Texas and their expectations for gas prices, which drive … pricing in Texas,” Manabe said of NextEra and its management, calling the move part of a “bigger strategy to make the business more stable.”

Manabe said NextEra officials generally seem to have a different outlook for wind, which she called a “core competency” and part of a growth strategy, even though wind projects don’t always have long-term contracts.

“They believe that … wind is going to be very competitive against gas and other fossil fuels,” Manabe said.

Steep declines this year in the stock prices of independent power producers such as NRG Energy Inc. and Calpine Corp. have illustrated the general peril of being at the whim of power markets. NextEra seems to be focusing in another direction, including regulated and contracted holdings, as illustrated by its announced deal with Energy Future.

“Merchant assets are all subject to market prices and market demand, which is very difficult to predict, and so they want to make their cash flow stream more predictable, which is credit positive,” Manabe said. “And also the sales proceeds from this transaction will help them to reduce the debt that was on their balance sheet, so that’s another credit positive.”
Part of annual review

Analysts said the focus on stability is part of a trend.

“The company for some time has been doing what a lot of other utilities are doing: emphasizing more regulated and contracted,” said Paul Patterson, a utilities analyst with Glenrock Associates LLC.

Because wind and solar assets often are covered by long-term contracts, those prices won’t fluctuate with the price of power, making them more stable like regulated ones, he said. Many of NextEra’s wind assets outside Texas tend to have contracts, even if some of the ones in Texas don’t.

When NextEra executives talk about Texas, it’s folded into the broader overall company strategy of expanding renewables and grid infrastructure.

Recent examples include buying seven natural gas pipelines and announcing plans to invest more than $1 billion on its growing transmission business. Those are relevant in part because of the implications for natural gas and renewable energy in U.S. EPA’s Clean Power Plan, which seeks to cut carbon dioxide emissions from power plants.

NextEra CEO James Robo has told analysts that selling off fossil fuel assets in Texas is in line with an annual review of merchant assets. Keeping or selling any of those assets may not always fall in line with the market but makes sense based on the company’s view of that market, Robo said.

“I know there has been a focus on those assets; those should not be the only assets that investors and analysts believe that we’re looking at,” he said during a recent earnings call.

Also this year, Robo said: “I think as we continue to see the technology trends in renewables both in solar and winds and their impacts in those markets where you see high penetration of solar and wind, we continued to be pretty bearish in merchant markets around the country.”

Energy Future, which is seeking to emerge from Chapter 11 bankruptcy, arrived at the planned deal with NextEra from a different perspective.

The CEO of Energy Future’s Luminant generation business used a November news release to call the gas plants it planned to buy “strategic investments that enhance our asset portfolio while building on our existing operations in ERCOT [the Electric Reliability Council of Texas].”

Luminant’s Texas holdings include a significant amount of coal-fired generation that could be affected by coming regulations.

Low natural gas prices have caused the economics of renewables to deteriorate, meanwhile, although there still are plenty of opportunities, according to one analyst. That’s in part because of regulatory and possibly legal mandates from federal and state governments.
ERCOT adding generation

Pockets exist where renewable energy is economic, and Texas is one of those places, said Travis Miller, utilities research director at Morningstar Inc.

“There’s a rush to build natural gas generation in Texas, but there’s also a rush to build wind,” he said, referring to recent projections from the state’s main grid operator (EnergyWire, Dec. 2).

ERCOT, the state’s main grid operator, said more than 5,000 MW of new capacity is expected to be in place by the summer of 2017 under its calculations. A year later, an additional 4,300 MW or so should be around to help.

“That’s very expensive generation, so to justify the economics of some of these projects, it requires some pretty aggressive environmental regulations or changes in natural gas price outlook,” Miller said.

Texas also stands out for two other reasons, Miller said. Even though its electricity demand outlook may have slowed somewhat, it’s still higher than many other parts of the country. Energy efficiency and customer-energy management technologies have played a role slowing electricity demand overall.

Also, natural gas in Texas has been in the range of about $2 to $2.50 per million British thermal units. In the Northeast, which gets its gas from the central Marcellus Shale region, gas can be below $1 per million British thermal units.

“The power generators are paying less than $1 in the Northeast for their gas supply, and it’s very hard to compete with that,” Miller said.

Back at Moody’s, Charles Berckmann, an associate vice president and analyst in project finance, said there’s a lot of power supply in Texas and there could be “a lot of good, quality assets” running at lower capacity factors.

But Berckmann noted that, generally speaking, wind projects can benefit from tax credits. That might help offset some negative pricing at off-peak times.

Then there’s Oncor, which is a regulated Texas wires business. A consortium that includes Hunt Consolidated Inc. appears to be the leader to acquire a large Oncor stake from Energy Future.

But reported interest from NextEra in Oncor and a plan to buy a Hawaiian utility demonstrate the company’s regulated interest beyond its traditional Florida operations. And utilities whose rates are overseen by state regulators can offer more stability than operations focused on power from traditional fossil-fuel-based merchant plants.

“You are guaranteed to make a profit with it because it’s regulated,” Ed Hirs, an energy economist at the University of Houston, said of Oncor.