Wind-Owning Utilities Expect Treasury Grant Windfall

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; [e-mail]