Nextera Energy Inc Q3 FY2022 Earnings Call

Thank you, Matt. Good morning, everyone, and thank you for joining our third quarter 2022 combined earnings conference call for NextEra Energy and NextEra Energy Partners. With me this morning are John Ketchum, Chairman, President and Chief Executive Officer of NextEra Energy; Kirk Crews, Executive Vice President and Chief Financial Officer of NextEra Energy; Rebecca Kujawa, President and Chief Executive Officer of NextEra Energy Resources; and Mark Hickson, Executive Vice President of NextEra Energy, all of whom are also officers of NextEra Energy Partners; as well as Eric Silagy, Chairman, President and Chief Executive Officer of Florida Power & Light Company. Kirk will provide an overview of our results, and our executive team will then be available to answer your questions. We will be making forward-looking statements during this call based on current expectations and assumptions, which are subject to risks and uncertainties. Actual results could differ materially from our forward-looking statements if any of our key assumptions are incorrect or because of other factors discussed in today's earnings news release and the comments made during this conference call in the Risk Factors section of the accompanying presentation or in our latest reports and filings with the Securities and Exchange Commission, each of which can be found on our websites, nexteraenergy.com and nexteraenergypartners.com. We do not undertake any duty to update any forward-looking statements. Today's presentation also includes references to non-GAAP financial measures. You should refer to the information contained in the slides accompanying today's presentation for definitional information and reconciliations of historical non-GAAP measures to the closest GAAP financial measure. As a reminder, Florida Power & Light completed the regulatory integration of Gulf Power under its 2021 base rate settlement agreement and began serving customers under unified rates on January 1, 2022. As a result, Gulf Power is no longer a separate reporting segment within Florida Power & Light and NextEra Energy. For 2022 and beyond, FPL has one reporting segment. And therefore, 2021 financial results and other operational metrics have been restated for comparative purposes. With that, I will turn the call over to Kirk.

Thank you, Jessica, and good morning, everyone. Before I begin today's discussion of our third quarter results, I would like to extend our deepest sympathies to all those who have been affected by the widespread destruction caused by hurricanes Fiona and Ian over the last month. Hurricane Ian was the fifth strongest hurricane to ever make landfall in the Continental U.S. The powerful and destructive storm hit Southwest Florida as a high-end Category 4 hurricane with sustained winds of approximately 150 miles per hour, devastating storm surges and numerous tornadoes, tragically resulting in the loss of lives and causing more than 2.1 million FPL customers to lose power. In preparation for the hurricane, FPL assembled a restoration workforce of approximately 20,000 workers. This preparation and coordinated response, combined with FPL's valuable hardening and smart grid investments, enabled the company to restore service to roughly two-thirds of affected customers after the first full day of restoration following Hurricane Ian's landfall. This represents the fastest restoration rate in our history for a major hurricane. Our dedicated and resourceful workforce was able to restore essentially all FPL customers who were able to safely accept power within eight days. I would like to thank all of our employees who made personal sacrifices leaving their own homes to serve our customers, our communities and our state. It was because of their training, preparation, dedication, and commitment that we were able to restore power to our customers so quickly. I would also like to thank other members of the restoration team, including the contractors, vendors, and first responders that supported our efforts, for their dedicated assistance during this critical time. Finally, we are deeply grateful for the assistance provided by our industry partners who came from thirty different states to help support our customers. Mutual aid in times of disaster is one of the hallmarks of our industry, and this storm was no exception. For nearly two decades, FPL has invested significantly in building a stronger, smarter, and more storm-resilient grid. While no energy grid is hurricane-proof, the performance of our system demonstrates that FPL's hardening and undergrounding investments are providing significant benefits to our customers. Despite sustained winds of approximately 150 miles per hour, FPL did not lose a single transmission pole or tower during Hurricane Ian. Additionally, initial performance data show that FPL's underground distribution power lines performed five times better in terms of outage rates than existing overhead distribution power lines in Southwest Florida. On a related note, we were pleased that the Florida Public Service Commission substantially approved our 2023 Storm Protection Plan earlier this month, which we expect will lead to an even stronger and more resilient grid for the benefit of our customers. Finally, we are proud to report that our generation fleet, including our solar sites, sustained almost no structural damage. Despite thirty-eight of FPL's fifty existing solar sites or approximately twelve million panels being exposed to storm conditions, less than 0.3% of our solar panels were affected, and those impacted were mostly at our older fixed racking sites. Our battery storage sites, including one of the world's largest solar power batteries at our Manatee Solar Energy Center, remained available throughout the storm. We believe these investments, together with our preparation and coordinated response, have improved FPL's overall reliability and resiliency, providing significant value to our customers. Although FPL has not completed the final accounting, our preliminary estimate of Hurricane Ian restoration costs that we plan to recover from customers through a surcharge is approximately $1.1 billion, of which approximately $220 million will be utilized to replenish the storm reserve, subject to a review and prudence determination of our final storm cost by the Florida Public Service Commission. Under its current settlement agreement, FPL is allowed to collect an equivalent of $4 for every 1,000 kilowatt hours of usage on residential bills but can request an increase to the $4 equivalent surcharge given the cost exceeded $800 million. We anticipate discussing the surcharge amount and timing with the Florida Public Service Commission in the coming months. Let me briefly comment on the Inflation Reduction Act, or IRA, and what it means for our customers, for our company, and for our industry. At our investor conference in June, we announced our vision to lead the decarbonization of the U.S. economy, and we announced our industry-leading goal to deliver Real Zero emissions by no later than 2045. We discussed our strategy to get there and how every part of our strategy is focused on saving customers' money on their energy bills. We also said in June that achieving our goals would require constructive governmental policies and incentives. The IRA gives us those policies and incentives at the federal level. It also gives us visibility into what those policies and incentives will look like for what we believe will be more than two decades. We believe that the IRA will not only help reduce carbon emissions, strengthen energy independence and security, and create jobs in our industry and in our domestic supply chain, but also, most importantly, will reduce the cost of energy for everyone. We can already see some of the positive impacts of the IRA on customer bills at FPL. Last month, we filed with the Florida Public Service Commission our estimate that the solar production tax credits in the IRA are expected to save customers nearly $400 million over the course of our current rate agreement. Those savings start with a one-time $25 million refund through the capacity cost recovery clause in January 2023 to reflect the solar PTCs on our completed 2022 rate-based solar projects, subject to a review by the commission, which we expect later this year. Looking forward for our FPL customers, we believe that the IRA makes every solar project, every battery storage project, every renewable gas project, and every green hydrogen project more cost-effective. And these solar, battery storage, renewable gas, and green hydrogen projects are designed to reduce the impact that fuel volatility can have on customer bills. We believe the IRA will help make Florida an even better place to raise a family or build a business as we work toward our goal of delivering 100% carbon emissions-free energy affordably and reliably. We believe the IRA will also make clean energy cheaper for our customers at Energy Resources. We have never been more excited about our opportunity to partner with customers to decarbonize the power sector as well as broader parts of the U.S. economy. The IRA provides decades of visibility to low-cost renewables, and that visibility has already encouraged our power sector customers and customers outside the power sector to think big about how they can realize the value of renewables to reduce cost and emissions. As a world leader in renewables with deep energy market expertise, we are having conversations with customers about large-scale opportunities unlike anything we have seen in the past. And while some will take time to develop, we cannot be more excited about the future. Turning now to our financial performance. NextEra Energy delivered strong third quarter results, with adjusted earnings per share increasing by approximately 13% year-over-year. FPL increased earnings per share by $0.07 year-over-year, growing regulatory capital employed by approximately 11% over the prior year period. We have highlighted in the past that our smart capital investments in fuel efficiency, combined with our best-in-class O&M performance and productivity initiatives, provide significant benefits to customers and have allowed us to continue to deliver residential bills well below the national average and the lowest among all of the Florida investor-owned utilities. At Energy Resources, adjusted earnings per share increased by $0.06 year-over-year. We continue to capitalize on a terrific environment for renewables development, originating approximately 2,345 megawatts of new renewables and storage since the last call. With economics as a significant driver, Energy Resources continues to capitalize on strong renewables demand from both power and non-power sector customers, particularly in light of high power prices and high natural gas prices. Overall, we are well positioned to achieve our long-term financial expectations, subject to our usual caveats. For the third quarter of 2022, FPL reported net income of nearly $1.1 billion or $0.54 per share, which is an increase of $147 million and $0.07 per share, respectively, year-over-year. Regulatory capital employed increased by approximately 11% over the same quarter last year and was the principal driver of FPL's earnings per share growth of approximately 15%. FPL's capital expenditures were approximately $2 billion in the third quarter, and we continue to expect our full year capital investments to total roughly $8.5 billion. FPL's reported ROE for regulatory purposes is expected to be approximately 11.8% for the 12 months ended September 2022. Largely as a result of warm weather, we have fully restored our surplus depreciation reserve, leaving FPL with a balance of approximately $1.5 billion to use over the term of the current settlement agreement. As a reminder, our 2021 settlement agreement provided a mechanism whereby a sustained increase in 30-year Treasury Bond yields would trigger an increase in FPL's authorized ROE range. Accordingly, the Florida Public Service Commission approved an increase in FPL's authorized midpoint ROE from 10.6% to 10.8% with an allowed range of 9.8% to 11.8%, which became effective on September 1, 2022. Importantly, FPL will not increase base rates as a result of triggering the increased authorized ROE. For the full year 2022, FPL continues to target an 11.6% ROE but is allowed to earn at the high end of the revised range, which may occur based on, among other things, warmer-than-expected weather. The Florida economy continues to be healthy. Florida's unemployment rate of approximately 2.7% remains below the national average and at its lowest level in more than 15 years. Florida's labor force participation rate remains strong. In spite of significant inflationary pressures across many parts of the U.S., customer sentiment in Florida ticked up slightly in the third quarter. However, the August reading of the three-month average of new building permits in Florida declined year-over-year, which is not a surprise given the significant growth we have observed since the pandemic and the recent increase in mortgage rates. We continue to believe that Florida offers a unique value proposition and will continue to show strong population growth over the coming decades. FPL's average number of customers increased by nearly 83,000 or 1.5% versus the comparable prior year quarter, driven by continued strong underlying population growth. FPL's third quarter retail sales increased 3.8% from the prior year comparable period. For the third quarter, we estimate that warmer weather had a positive year-over-year impact on usage per customer of approximately 2.9% and that Hurricane Ian had a negative impact of approximately 0.4%. After taking these factors into account, third quarter retail sales increased 1.3% on a weather-normalized basis, with strong continued customer growth contributing favorably. Energy Resources reported third quarter 2022 GAAP earnings of $655 million or $0.33 per share. Adjusted earnings for the third quarter were adjusted earnings per share of more than 19% year-over-year. Contributions from new investments increased $0.02 per share versus the prior year, primarily reflecting continued growth in our renewable portfolio. Our existing generation and storage assets decreased results by $0.02 per share, primarily due to unfavorable wind resource during the third quarter, which was the third lowest wind resource quarter on record over the past 30 years. Our customer supply and trading business contributed $0.06 year-over-year primarily due to higher margins in our customer-facing businesses. All other net impacts were roughly flat year-over-year. Additional details of our third quarter results are shown on the accompanying slide. As I mentioned earlier, Energy Resources had another terrific quarter of origination, signing approximately 2,345 gigawatts of new renewables and storage projects since our last earnings call. Specifically, we originated approximately 1,215 megawatts of wind, 965 megawatts of solar, and 165 megawatts of battery storage projects. Included in these solar additions is approximately 270 megawatts of post-2025 delivery. With these new additions, net of approximately 1.3 gigawatts of projects placed in service and roughly 680 megawatts of projects removed from our backlog, our renewables and storage backlog now stands at roughly 20,000 megawatts and provides strong visibility into the significant growth that is expected at Energy Resources over the next few years. Our development expectations through 2025 are unchanged from what we disclosed at our investor conference in June and reflect a planned renewables and storage build that is, at the midpoint, more than 20% larger than the entire renewables operating portfolio at Energy Resources today. The accompanying slide provides additional details on where our development program at Energy Resources now stands. As previously discussed, we believe Energy Resources is better positioned than anyone in our sector to benefit from the provisions of the IRA, particularly after 2025 when incentives were previously expected to expire or step down. With what we believe is over two decades of visibility for wind, solar, and storage credits, the long-term growth opportunity set is expansive and exciting. Energy Resources is uniquely positioned to capitalize on battery storage colocation opportunities with wind and now has repowering opportunities across this existing renewables footprint. New markets and new investment opportunities are being created for renewables and renewable fuels that require wind and solar as their source. Transmission will be needed to support this significant renewables buildout. And all these opportunities support our vision of leading decarbonization of the U.S. economy. A key component of our vision is helping commercial and industrial customers meet their sustainability goals by providing them with comprehensive clean energy solutions, including providing renewable fuel alternatives such as hydrogen and renewable natural gas. To that end, today, we are excited to announce we reached an agreement to acquire a large portfolio of operating landfill gas to electric facilities, which will become a core part of our renewable fuels and potentially hydrogen strategies. This transaction represents an attractive opportunity for Energy Resources to expand its portfolio of renewable natural gas assets and grow its in-house capabilities in this rapidly expanding market. Energy Resources intends to purchase the portfolio for a total consideration of approximately $1.1 billion, subject to closing adjustments, plus the assumption of approximately $37 million in existing project finance debt estimated at the time of closing. Subject to regulatory approvals, the acquisition is expected to close in early 2023. In the coming years, we expect to invest roughly $400 million net of the investment tax credit benefit of additional capital into the portfolio of projects, primarily to enable production of renewable natural gas. In our base case, we expect that the acquired portfolio would deliver more than $220 million of adjusted EBITDA at Energy Resources by 2025, which is included in our financial expectations. Moreover, the acquisition is expected to deliver double-digit returns. We are particularly excited about additional upside opportunities the portfolio may enable that are not included in our base case and look forward to potentially deploying additional capital and new ventures that may qualify for new federal incentives. Turning now to the consolidated results for NextEra Energy. For the third quarter of 2022, GAAP net income attributable to NextEra Energy was roughly $1.7 billion or $0.86 per share. NextEra Energy's 2022 third quarter adjusted earnings and adjusted EPS were approximately $1.683 billion and $0.85 per share, respectively. Adjusted results for the Corporate and Other segment decreased by $0.03 year-over-year. A hallmark of our business is our financial discipline and forward planning as we grow the business, including the consideration of a range of scenarios to manage interest rate risk. In recent years, we've proactively engaged in liability management initiatives, which we expect to yield significant interest cost savings through 2025. Additionally, we have $15 billion of interest rate swaps to manage interest rate exposure on future debt issuances. With the swaps in place, we're in good shape to manage 2023 and 2024 maturities and new debt issuances despite the current interest rate environment. Finally, the recent increase in interest rates is taken into account in our financial expectations. Our long-term financial expectations through 2025 remain unchanged. For 2022, NextEra Energy expects adjusted earnings per share to be in a range of $2.80 to $2.90. For 2023 and 2024, NextEra Energy expects adjusted earnings per share to be in the ranges of $2.98 to $3.13 and $3.23 to $3.43, respectively. For 2025, we expect to grow 6% to 8% off the 2024 adjusted earnings per share range, which translates to a range of $3.45 to $3.70. We will be disappointed if we are not able to deliver financial results at or near the top end of our adjusted earnings per share expectation ranges for 2022 through 2025, while at the same time, maintaining our strong balance sheet and credit ratings. Inclusive of the increases in our expectations in both January and June of this year, NextEra Energy's adjusted earnings per share expectations reflect a roughly 10% compound annual growth rate from 2021 to the high end of our range for 2025. In addition, for 2021 to 2025, we continue to expect our average annual growth in operating cash flow will be at or above our adjusted EPS compound annual growth rate range. We also continue to expect to grow our dividends per share at a roughly 10% rate per year through at least 2024 off a 2022 base. As always, our expectations assume normal weather and operating conditions. Now let's turn to NextEra Energy Partners, which delivered strong financial performance for the quarter. Third quarter adjusted EBITDA and cash available for distribution were up approximately 13% and 17%, respectively, against the prior year comparable quarter. Last week, the NextEra Energy Partners Board declared a quarterly distribution of 78.75 cents per common unit or $3.15 per common unit on an annualized basis, up approximately 15% from a year earlier. Inclusive of this increase, NextEra Energy Partners has now grown its distribution per unit by approximately 320% since the IPO. NextEra Energy Partners continued to execute against its growth initiatives during the quarter. Since the last earnings call, NextEra Energy Partners completed its previously announced acquisition of an approximately 67% interest in a 230-megawatt 4-hour battery storage facility in California from Energy Resources. This acquisition further diversifies NextEra Energy Partners portfolio into battery storage. During the quarter, NextEra Energy Partners issued approximately $145 million in new equity through its at-the-market program and used these proceeds, along with cash on hand, to fund this acquisition. Consistent with our long-term growth prospects, today, we are also introducing year-end 2023 run rate expectations, which are built upon NextEra Energy Partners' strong existing portfolio and cash flow generation potential and continued ability to access low-cost capital to acquire accretive renewable energy projects. At the midpoints, NextEra Energy Partners' new year-end 2023 run rate expectation ranges reflect estimated growth in adjusted EBITDA and cash available for distribution of roughly 23% and 12%, respectively, from the comparable year-end 2022 run rate expectations. Overall, we are pleased with the year-to-date execution at NextEra Energy Partners and believe we are well positioned to continue delivering LP unitholder value going forward. Turning to the detailed results. NextEra Energy Partners' third quarter adjusted EBITDA was $377 million, and cash available for distribution was $185 million. New projects, which primarily reflect contributions from approximately 2,400 net megawatts of new long-term contracted renewable projects acquired in 2021, contributed approximately $66 million of adjusted EBITDA and $23 million of cash available for distribution. The third quarter adjusted EBITDA contribution from existing projects declined by approximately $18 million year-over-year driven primarily by unfavorable renewable resource. Wind resource for the third quarter of 2022 was approximately 95% of the long-term average versus 101% in the third quarter of 2021. Third quarter cash available for distribution benefited from higher year-over-year PAYGO payments from both new and existing projects after a relatively strong wind resource period in the first half of this year. Additional details of our third quarter results are shown on the accompanying slides. From a base of our fourth quarter 2021 distribution per common unit at an annualized rate of $2.83, we continue to see 12% to 15% growth per year in LP distributions per unit as being a reasonable range of expectations through at least 2025. We expect the annualized rate of the fourth quarter 2022 distribution that is payable in February of 2023 to be in the range of $3.17 to $3.25 per common unit. Additional details of our long-term distribution per unit expectations are shown on the accompanying slide. NextEra Energy Partners continues to expect year-end 2022 run rate adjusted EBITDA and cash available for distribution in the ranges of $1.785 billion to $1.985 billion and $685 million to $775 million, respectively, reflecting calendar year 2023 contributions from the forecasted portfolio at the end of 2022. At year-end 2023, we expect the run rate for adjusted EBITDA to be in the range of $2.22 billion to $2.42 billion and run rate for cash available for distribution to be in the range of $770 million to $860 million. These expectations highlight our continued confidence in NextEra Energy Partners' ability to deliver on its long-term distribution per common unit growth expectations. As a reminder, all of our expectations are subject to our normal caveats and include the impact of anticipated IDR fees as we treat these as an operating expense. NextEra Energy Partners is well positioned to manage financing costs in the current interest rate environment. Approximately 98% of NextEra Energy Partners' long-term debt, including current maturities, is not exposed to fluctuations in interest rates as it is either fixed-rate debt or financially hedged. Moreover, NextEra Energy Partners has $6 billion of forward starting interest rate swaps, which will help mitigate the impact of higher interest rates on future debt issuances, whether for growth or maturities. NextEra Energy Partners has no significant debt maturities in 2023, and its debt maturities over the next five years are manageable with the forward starting swaps. Additionally, we expect the IRA to benefit NextEra Energy Partners and its LP unitholders. With the extension and expansion of clean energy tax credits, we anticipate an acceleration of renewables and storage deployment in the U.S. over the next few decades. Consequently, we expect NextEra Energy Partners to have ample opportunities to acquire assets from both Energy Resources and third parties. We also believe the long-term organic growth potential for NextEra Energy Partners has increased, particularly with new opportunities to repower its existing wind and solar assets totaling approximately 8 gigawatts and to pair battery storage with its nearly 7 gigawatts of existing wind capacity. Considering the potential impacts of the IRA, our expectations regarding the overall tax position for NextEra Energy Partners remain largely unchanged, including the expectation that it will not pay any significant taxes for at least the next 15 years. Combined with its current yield and the expectation of 12% to 15% annual distributions per unit growth through at least 2025, NextEra Energy Partners has the potential to deliver a total after-tax return of approximately 20% annually through this time frame. With the ongoing strength of the renewables development environment and all of the market tailwinds provided by the IRA, we believe that NextEra Energy Partners remains well positioned to continue delivering on its unitholder value proposition. In summary, we continue to believe that both NextEra Energy and NextEra Energy Partners have some of the best execution track records in the industry, and we are extremely excited about the long-term growth prospects for both businesses and the value we can continue to create for both customers and shareholders. That concludes our prepared remarks. And with that, we will open the line for questions.

And our first question will come from Steve Fleishman with Wolfe Research.

In the last quarter, you mentioned the 2 gigawatts of potential backlog that could be at risk due to circumvention and similar issues. I don't see any updated information on that, so I'm unsure if it has been resolved. Could you provide an update on those 2 gigawatts?

Steve, it's Rebecca. And I'd be happy to start with that answer. First, let me start with the most important part, which is everything that we're seeing at this point in terms of origination at Energy Resources is just terrific. We're seeing strong demand across all the technologies, strong demand across the different customer groups, and strong demand across the country. And I feel terrific about meeting the long-term expectations that we've laid out, including reiterating today of the 27.7 to 36.9 gigawatts of new projects put into service between '22 and '25. And I think the origination for this quarter of the over 2,300 megawatts is a great sign to that, and the momentum remains very strong. As you know and appreciate being involved in the development process, there's always some things that can go wrong as you move forward with developing a project where it could be unforeseen permitting or interconnection issues or something else that gets in the way. And so occasionally, we do remove projects from backlog like we did today. We didn't include the reference to the 2 gigawatts mostly because it's going to be harder and harder as time goes by to identify what's related to issues from circumvention and supply chain versus normal development issues. So I think I'd lean more on the side of giving you context for what's going on against our expectations, what's the current momentum. And both of those are just terrific.

Okay. That's good. And I guess just specific to supply chain, any updated things that you're seeing related to UFLPA impacts?

Yes, Steve. It continues to be an opportunity for our team to work through challenges that we're experiencing along with the rest of the industry. We've continued to work with the various agencies, most importantly, Customs and Border Control, with our suppliers to bring clarity to these implementing regulations. And while we continue to see progress, it also continues to be slower than we would like. Everything that we've laid out today in terms of our expectations reflect our latest views on when panels will be delivered to us and we'll be able to bring projects into service for our customers. One of the biggest things that our team has been working on over the last year is how do we mitigate the risks related to these broader geopolitical issues, whether you focus specifically on a circumvention issue or UFLPA or whatever else it might entail. And our suppliers have made tremendous progress on de-risking that. And we've gotten a lot of increased confidence longer-term. It will be able to mitigate the issues even if we see some disruption in the short term.

Okay. Great. One last question regarding the internal investigation related to the situation in Florida. Is there any update on the timing or outcome of that?

Steve, this is John. I'll go ahead and take that. Let me just start from the beginning. As you know, media articles have been published that allege, among other things, campaign finance violations by FPL, and we have a core who’s been conducting a very thorough review of those allegations with the national law firm, Paul, Weiss. Late yesterday afternoon, a complaint was filed by a non-profit corporation with the Federal Election Commission that appears to center around some of the same allegations as those that have appeared in a lot of the media articles. So all those allegations that have been made are within the scope of our review. We have a core who's been taking the matter very seriously, and we will continue to do so as we work towards completing our thorough review of these matters as quickly as possible. And that's really the only update I have at this point.

Our next question will come from Julien Dumoulin-Smith with Bank of America.

Listen, I just want to jump at the heart of the matter here. How do you think about IRA in terms of increasing your EPS through the 2025 forecast? Or is this about extending the duration of the existing growth and/or both, right? The pivot to the solar PTC from ITC for a host of products already in flight should be immediately accretive, you would think. But clearly, there could be some offsets as well. And then related, the added opportunities in the repowering and storage colocation as you guys quantify just now, in theory, should also afford an accelerated opportunity. But I just want to come back on how you guys want to tackle that from an earnings recognition perspective.

Yes, let me address that, Julien. This is John. The IRA presents a significant set of opportunities for us across the board. We have existing contracts that already assumed the ITC on solar and benefit from the production tax credit, which adds value to our current portfolio. I believe we will see further improvements moving forward. Recently, I mentioned at a conference that there's a 70-30 treatment in our unregulated business mix, as the new PTCs help reduce contributions from the unregulated side, which is advantageous for us. The IRA includes transferability options that should enhance our cash flow from operations as we plan for the future of the business. It opens up numerous immediate opportunities for us in wind, solar, and battery storage. No one has the existing footprint that we have, with a 20-gigawatt backlog and an additional 25 gigawatts of operating renewables, giving us a total potential of 45 gigawatts for repowering and colocated storage. Under previous regulations, storage could only be integrated with solar, but now we can colocate storage at all our wind sites, including those we own today and those we may build in the future. The same applies to solar. Additionally, we now have the chance to build standalone storage, which is excellent not only for Energy Resources but also presents great opportunities for NEP going forward. Regarding timing, I want to confirm that we plan to provide a further update on our next call in January during the Q4 call.

Got it. And just to get ahead of that fourth quarter a little bit, you would have a more holistic update on just the extent that the repowering opportunities and colocated opportunities through, call it, the '25 period by fourth quarter. Again, I get that it takes some time to actually execute to decide what...

Yes, Julien, we'll do the best we can. Remember, too, that there are some regulations we're working on with the Treasury Department as well. So some of that update around repower and colocated storage might be tied to finalization of those, but we'll certainly try to give a view.

Our next question will come from Shahriar Pourreza with Guggenheim Partners.

I would like to follow up on Julien's question. Could you clarify how we should consider the impact of the IRA on your near-term earnings guidance, particularly regarding the existing PPAs, which mostly lack any reopeners? Additionally, how do these factors interact with the challenges presented by the higher interest rate environment? Are they offsetting each other or potentially enhancing your position? How should we interpret these aspects in light of what you reiterated this morning?

Yes, Shahriar, it’s important to balance all those factors. Each project varies in how it is affected, particularly in relation to the supply chain challenges we’ve faced. That’s the first consideration. Regarding interest rates, Kirk addressed that. Clearly, the current interest rate changes are factored into our expectations, and we have been cautious in managing our exposure. We hold $15 billion in interest rate swap protection. So, I would view this more as a comparison of ITC to PTC rather than just looking at trade-offs with the supply chain. Some projects will benefit more than others, so it’s essential to evaluate each deal individually.

Got it. That's helpful. Regarding FPL, you had a 10-year site plan adjusted for the inclusion of tax legislation. I think the IRA came out even better than previous proposals. Does that lead to an update for a preferred solution at FP&L, potentially increasing from 10 to 20 gigs? What would be the timeline for an update or a shift in resource strategy there?

We will be updating our 10-year site plan as we do every year, and we are currently in the process of this update. The plan will be filed on April 1. As I mentioned earlier, there are opportunities for the future, and we are consistently exploring ways to enhance the economics of deploying our assets, including the solar initiatives we are currently undertaking. We are currently five years ahead of schedule on our goal of installing 10,000 megawatts of solar, and that information is on file with the commission. We will also file the updated 10-year site plan on April 1.

Got it. Terrific. And then just one last quick one. Just curious on the move in the RNG side. Your '25 EBITDA guidance for the acquisition is based on existing operating assets or does that include a backlog of RNG development that would require additional funding?

Thanks. I appreciate the question. We're really excited about the acquisition. It is about just over thirty projects that do landfill, gas, electricity or renewable natural gas today. And that number in '25 reflects our base case. And in our base case, we are converting a number of those facilities from landfill gas to electricity to renewable natural gas. So it does include the investment that we referenced in the prepared remarks of about $400 million in order to convert them to produce renewable natural gas. One of the reasons why we're really excited about the transaction, though, is there's a lot of optionality in it, and some of which was afforded in the Inflation Reduction Act. One is these projects now qualify for an investment tax credit, which obviously enhances the economics of the conversions. There's also the opportunity to support the further decarbonization or the improving of carbon intensity for blue hydrogen, which really opens up a whole new market for renewable natural gas that we think is going to be very attractive to blue hydrogen producers to enable the full value of the PTC where they otherwise wouldn't have been entitled to the full value of the PTC. And in doing that, we think that creates a real long-term contracted market because a blue hydrogen producer will be very motivated to lock in the value that the renewable natural gas lending will bring to their economics. There's also the opportunity, if it isn't a blue hydrogen contribution, actually to keep some of these assets producing electricity and utilizing what we expect are new regulations coming out of the EPA to enable a pathway for the RINs, the predominant renewable fuel credit that renewable natural gas benefits from today, that there'll be a pathway enabled for electric vehicles. So that might enable us to not invest that $400 million in some or all of those assets to convert them to renewable natural gas. So I think the bottom line is we are very excited about it. We think this is a great platform from which to grow our renewable fuel business, our renewable energy solutions in order to help our customers across the broad set of sectors, both in the power sector and beyond to enable their full decarbonization.

Our next question will come from David Arcaro with Morgan Stanley.

Maybe continuing on that, just wondering more broadly your thoughts on the M&A landscape, are there priorities or attractive opportunities out there in the market right now that you might be considering?

I will go ahead and take that. David, this is John. We have so many terrific organic growth opportunities in front of us. M&A is not an area of focus.

And then, maybe on the renewable side of things, wondering if you could comment on the ICC and FEMA proposal to rate the structural risk ranking of solar and wind? What could that do for your projects, your pipeline, and the costs for developing renewables?

I will address that as well. FEMA recently introduced some proposals, but those have not been finalized yet. A clear example of why these changes are unnecessary is Hurricane Ian. As mentioned in Kirk's remarks, we brought this information back to FEMA because none of it is needed. If we look at Hurricane Ian, which was the fifth most devastating storm to hit the Continental United States, it passed over thirty-eight to fifty of our solar sites with maximum sustained winds of 150 miles per hour. Our solar generating facilities were virtually unaffected. Only about 0.3% of the panels experienced any damage, and it's important to note that those impacts were on older sites with fixed tracker technology. With the new tracker technology, we can pivot it to the necessary angle, allowing the wind to pass without causing damage. Our solar sites performed exceptionally well, and in some instances, they likely outperformed gas plants, which have a maximum wind rating of only 100 miles per hour. We are very pleased with how everything held up. We believe the FEMA proposals are completely unnecessary, and we are presenting compelling evidence of our fleet's recent performance to support this.

This is Eric Silagy. I just want to add a bit more. When John mentions the 0.3% of panels that were affected, many of those panels were not even damaged when we simply put them back on and reused them. To give some context, the number of panels that actually needed to be replaced out of twelve million is 0.03%, which is three thousand panels. So, to John's point, it is immaterial. We were able to resume operations the next morning with output at our plants.

Our next question will come from Michael Lapides with Goldman Sachs.

Congrats on a good quarter. One for Eric. Talk about $8.5 billion of capital deployment this year at FP&L. How should we think about what that level looks like, call it, in 2023 and 2024? And maybe what are the puts and takes that could move it in either direction for those years?

Michael, it's Eric. So look, we have a robust capital plan that continues. We've talked about it before from a standpoint of our storm hardening that program. Obviously, you could see the impacts with Ian and how beautifully it really made a difference. We're going to continue with our storm hardening program, our undergrounding program, our solar build-out. We have great visibility into our capital deployed right through the rate case settlement period and what we have filed through our 10-year site plan.

Got it. So I'm just trying to think about this just, is capital spend above or below 2022 levels for the next couple of years?

It's basically where it is at the 2022 levels. It varies a little bit but is exactly what we put forward for the plan here for the last two years that we've had going forward.

Yes. Michael, I would just add there's no real deviation from what we shared at the investor conference. So it's in line with the plans that we laid out in terms of roughly $8.2 billion to $8.5 billion a year over the settlement terms.

Yes, the reason I ask is that with the full surplus amortization now in place, you could invest more to enhance reliability and further green the system without negatively impacting earnings or raising customer rates for the next few years.

Yes. But Michael, we are currently sticking to our plan. We have a clear outlook. A lot of this is about execution. We have been managing the supply chain and addressing the challenges faced by many across the country. Meeting our CapEx plan is what we believe to be the best strategy moving forward to fulfill the expectations of the commission and our financial goals.

Got it. And then one for Rebecca. Just curious, what are you seeing in terms of the impact of global inflation, particularly in commodities and labor, on the cost of installing new wind and solar? How much has that changed before we factor in the higher tax credit levels?

Yes, Michael, we discussed this at the investor conference. We have observed cost increases in both equipment prices and labor required for project construction. However, I don't believe the situation has significantly changed from what we shared a couple of months ago. We were at the peak of many commodity prices, and some of the key ones affecting our project costs have decreased since then. Looking at the long term, we have expectations regarding future costs, which we incorporate into our Power Purchase Agreement prices with customers. It’s important to note that despite some cost increases, renewable energy solutions still have a competitive edge over alternatives. Even with the rise in costs, alternatives have increased even more. This holds true for both new builds and overall market prices. From our customers’ perspective, they find our offerings as compelling as ever. This includes power customers who aim to reduce electricity prices and non-power sector customers seeking lower carbon intensity products at reduced costs. We have effective solutions for them.

Our next question will come from Jeremy Tonet with JPMorgan.

Just wanted to hit on RNG real quick and maybe round out the conversation a little bit more, big acquisition here, but how do you think about the total addressable market here? And is the focus really just on landfills in certain locations or other parts of RNG could be interesting as well? And then lastly, I guess, further expansion, it seems like you have quite a platform to work off here, but future RNG would be just organic? Or could there be more purchases as well?

Thank you for the question. We're very excited about the potential for renewable natural gas, especially as part of the wide range of solutions we aim to provide our customers. This represents a significant advancement in our ongoing efforts that have involved smaller investments and collaborations with others. We look forward to not only expanding our project portfolio and the value it brings to our shareholders but also leveraging it as a foundation for future growth. As part of this acquisition, we plan to build a services company, which aligns with what our existing portfolio offers, and we’re eager to integrate those capabilities into our team. We are enthusiastic about both landfill gas and alternative sources of renewable natural gas, including dairy, for the long term. Our approach will include both organic growth and acquisitions. We are optimistic about the scale of the acquisition opportunities. However, it's important to remember that our goal is to invest between $85 billion and $95 billion over the timeframe discussed at the investor conference, and this acquisition is around $1 billion. It is a valuable addition to our portfolio, but within the larger context, it represents a measured step forward.

Got it. Very helpful. And just rounding out the conversation on hydrogen, I think you touched on it a bit, but any other updated thoughts you want to share with us post-IRA here?

I'm thrilled with the prospects of hydrogen going forward and not just literally hydrogen itself, but the renewable fuels that that creates is potential solutions for our customers, whether that's synthetic natural gas as potential solutions for customers who are looking for 24/7 fully decarbonized power, but also through synthetic jet fuels, synthetic ammonia products, other things that will help bring out of people's supply chains, manufacturing processes, etc., their carbon-intensive fuels that they use today. Some of those are not going to be economic literally today, but there's a clear pathway to them being economic in a couple of years, but some of them with the benefit of the IRA incentives are economic today. And at the heart of them, what the opportunity is for us is to deploy a substantial amount of renewable energy in the form of wind, solar, battery storage, the core things that we have been very successful doing for years now, if not decades, and we're continuing to invest heavily to maintain those competitive advantages going forward.

This concludes our question-and-answer session, which also concludes today's conference. Thank you for attending today's presentation. You may now disconnect.