Utilities that develop wind projects are gearing up to apply for
U.S. Treasury grants that could add hundreds of millions of dollars
to their cash supplies in lump sum, rather than over an extended
period.
FPL Group Inc. (FPL), for example, estimates it could raise more
than $500 million in 2009 and 2010. Duke Energy Corp. (DUK),
meanwhile, is tallying up a potential $400 million. And Portland
General Electric Co. (POR) estimates it could qualify for up to
$200 million over the two years. This comes at a time when many
utilities are suffering from lower revenue due to reduced demand
for electricity during the recession.
The stimulus package passed in February offered a new option to
renewable energy project developers that previously received
incentives through federal tax credits. Under the American Recovery
and Reinvestment Act of 2009, developers will be able to choose
whether to apply for tax credits, which are calculated based on the
amount of electricity projects produce and are issued over 10
years, or for Treasury grants that would cover 30% of a project's
cost in cash.
The Treasury expects to receive between 3,000 and 5,000
applications for the grants as soon as it issues the application
process, according to Keith Martin, partner at the law firm of
Chadbourne & Parke LLP, who concentrates on energy finance and
tax law. He said this figure was shared by Fiscal Assistant
Secretary Kenneth E. Carfine to a group of industry executives in
April. But Nayyera Haq, spokeswoman for the Treasury, said the
Treasury didn't make any public comments about the grant
program.
"This new tax credit policy has created valuable options for us
and has enhanced our ability to provide earnings growth," said
Armanda Pimentel, executive vice president of finance and chief
financial officer of FPL Group, on a recent call with analysts.
FPL is the largest developer of wind projects in the U.S.
through its non-utility arm NextEra Energy Resources.
Other utilities that own substantial wind assets include
MidAmerican Energy, Puget Sound Energy, We Energy of Wisconsin
Energy (WEC), Dominion Energy (DOMP.PM)of Dominion, Xcel Energy
Inc. (XEL), Oklahoma Gas & Electric of OGE Energy Corp. (OGE),
Kansas City Power & Light of Great Plains Energy Inc. (GXP),
and Westar Energy Inc. (WR), according to the American Wind Energy
Association.
FPL Group raised its earnings per share estimates by 15 cents
for 2009 and 2010, specifically due to the Treasury grant option.
FPL's earnings per share estimates are now $4.20 to $4.40 in 2009
and $4.65 to $5.05 in 2010, "based on the earnings attributable to
taking convertible [tax credit] fees instead of production tax
credits for certain of our wind projects," Pimentel said on the
call.
FPL's non-utility arm, NextEra, is planning to install about
1,000 megawatts of new wind this year, and another 1,000 to 2,000
MW in 2010. It estimates it will apply for Treasury grants for 600
to 700 MW of the 2009 projects, resulting in more than $500 million
in cash, said Pimentel on the call. This will be split, with $80
million to $100 million in 2009 and the rest next year, because
some of the projects would be completed at the end of 2009 and it
will take up to two months, according to the stimulus package
rules, to get the cash.
In 2010, FPL is likely to have about two-thirds of its projects
go out for the grants, said Pimentel. And in 2011, up to
two-thirds, he said.
Already, the utility recorded a $15 million gain in the first
quarter from the planned grant for a project installed by
NextEra.
For Duke Energy, which has about 500 MW of wind projects in
operation, the tax credit will "generate approximately $400 million
of positive cash flow in 2009," said David L. Hauser, the company's
CFO, on a call with analysts last week. While the wind portfolio
has had an immaterial impact on the company's earnings before
interest and taxes thus far, the new tax credits might change that,
he said.
Portland General Electric, meanwhile, estimated it can qualify
for between $60 million and $90 million of the grants in 2009 and
$80 million to $110 million in 2010 for its Biglow Canyon Wind
Farm.
"The present value of the 10-year production tax credit might be
about 20% of the depreciable cost of the project, but the [grant]
is 30%," said Hugh Wynne, analyst with Sanford C. Bernstein, in an
interview. This calculation depends on how much power a project
produces. If it's located in a windy site and the developer has
large tax obligations, the tax credit may make more sense. But in
most cases, the grant offers more money.
Not only that, as FPL's Pimentel noted: "it gives you a whole
heck of a lot of certainty when it comes to cash."
What will these companies do with the cash? "Develop more wind
and solar projects," said one analyst, who covers utilities, but
spoke on condition of anonymity.
Duke, for example, is "well positioned to bring 250 megawatts of
wind energy on line annually," said James E. Rogers, the company's
chairman, president and chief executive on the call.
Portland General Electric, meanwhile, is planning to own more
wind projects, rather than simply purchasing power from third
parties, in order to ensure it meets the Oregon renewable power
standard.
FPL, for one, didn't change its projection of how much wind it
will install in 2010, even though it expects to get a substantial
cash windfall. The company is evaluating whether it could use the
cash to acquire projects from other developers.
But, overall, this doesn't necessarily make utilities that much
more powerful in their relationship to other wind developers.
"I don't think it changes the relative standing of any of the
market participants," said Chadbourne's Martin.
The Treasury grants are available to all wind developers,
whether small or large. "This helps developers that are less
well-capitalized to survive. So it's less likely to push people to
sell," Martin said.
Although the Treasury has yet to issue an application for the
Treasury grant, most in the wind industry expect the process should
be straightforward. According to Martin, the application may be "as
short as one page."
(Dow Jones Clean Technology Insight covers news about public and
private clean-technology and alternative-energy companies.)
-By Yuliya Chernova, Dow Jones Clean Technology Insight;
Yuliya.chernova@dowjones.com