Q3 2023 Earnings Summary
- NextEra Energy reported a record quarter of new renewables and storage origination, adding approximately 3,245 megawatts to the backlog, indicating strong demand and growth prospects in the renewable energy market.
- The company expects return on equity for its backlog to be in the mid-teens for solar and over 20% for wind and storage, maintaining high returns despite higher interest rates. ,
- NextEra Energy's strong balance sheet provides a significant competitive advantage, allowing it to fund growth without issuing additional equity in 2023 and limiting total equity needs to no more than $3 billion from 2024 through 2026. ,
- Regulatory uncertainty: The Florida State Supreme Court remanded NextEra Energy's settlement agreement back to the Public Service Commission, creating uncertainty about the approval of the rate case settlement and potential impacts on timing and outcomes.
- Sustainability of high returns in renewables: NextEra Energy reported over 20% returns for storage and wind, higher than previously indicated, raising concerns about whether this level of return is sustainable given increased competition and the potential impact of higher PPA prices on demand in the renewables market.
- Reliance on complex financial strategies: The company's funding plan relies on tax credit transferability and asset recycling, including raising approximately $3 billion of equity and $3 billion from asset sales. This dependence may pose risks if capital market conditions become more challenging, potentially affecting their ability to meet funding needs without impacting the balance sheet metrics.
-
Funding Plan & Tax Credit Transferability
Q: How does tax credit transferability impact your funding plan?
A: John Ketchum explained that $1 billion in tax transfers creates $6.5 billion of equity content by dividing the $1 billion by the 18% FFO-to-debt ratio, netting $5.5 billion, and adding the $1 billion cash received. The cash shows up in cash flow from operations, and the equity content benefits other sources, including corporate debt issuances. Demand for tax credit transfers is extremely robust, with relationships built with 50 top U.S. taxpayers, leveraging their strong balance sheet to get preferred pricing. -
Interest Rate Exposure & Hedging
Q: How are you managing interest rate risk and exposure?
A: John Ketchum stated they use interest rate swaps with 5- to 10-year tenors and an average coupon of 375 basis points, protecting against interest rate sensitivity. The impact is zero in '23 to '24 and $0.03 to $0.05 in '25 and '26. They hedge about 70% of project debt, including exposure on project and corporate debt issuances. -
Renewables Demand & Returns
Q: How is demand and returns in the renewables market?
A: Rebecca Kujawa reported a record 3.2 gigawatts of signings this quarter, indicating strong demand despite higher capital costs. Returns for storage and wind projects are over 20%, maintained through their competitive advantages in scale and execution. Adoption of storage is expanding beyond California into the Midwest , and they feel good about long-term demand for wind and repowering projects. -
NEP's Texas Pipeline Sale
Q: Any updates on the Texas Pipeline sale process?
A: John Ketchum said they are working diligently, with progress advancing despite a more challenging macroeconomic environment. They aim to maximize value for unitholders and will provide further updates on the fourth-quarter call or before. -
Sources & Uses of Cash
Q: Are there levers to offset equity needs if markets become challenging?
A: John Ketchum is focused on costs, capital productivity, and efficiency. He expects to recycle more than $3 billion in asset sales, leveraging their success in selling renewable projects to NEP and third parties. He feels good about their sources plan and ability to execute against it. -
Supply Chain Status
Q: What is the status of your supply chains?
A: John Ketchum stated that supply chain issues have improved significantly. Circumvention and forced labor issues have been addressed. They have significant inventory of grid-level equipment like transformers, having gone long on these items. Their scale allows them to secure manufacturing lines, a competitive advantage. -
Florida PSC Rate Case Settlement
Q: What are your expectations regarding the Florida PSC rate case settlement process?
A: Armando Pimentel explained that the Supreme Court remanded the settlement to the PSC, which will take it up soon and likely resubmit in the first quarter of next year. They don't expect the record to be reopened, similar to the process followed in the Duke case.