At Nearly $185 billion, This Company's Massive Size Is Becoming an Important Competitive Advantage

NextEra Energy (NEE -1.36%) operates the largest electric utility in the country. It's also a world leader in generating energy from wind and sunlight. The utility has a massive $168 billion asset base and an enterprise value approaching $185 billion. 

That enormous scale is becoming a crucial competitive advantage in the current environment. The utility's management team highlighted the growing importance of its scale on its recent third-quarter earnings conference call.

The scale advantage

NextEra Energy has spent the past 20 years building a leading clean energy platform. The company has over 31 gigawatts of operating wind, solar, and energy-storage assets. This "experience and scale matter," stated CEO John Ketchum on the Q3 call. He noted that "we buy at scale, we build at scale, we operate at scale." 

That scale has several advantages. CFO Kirk Crews pointed out on the call that the company is "benefiting from our interest rate swaps, global supply chain management capabilities, and the ability to procure equipment, materials, and balance of plant services at scale across our portfolio."

Ketchum further commented that:

one of the big benefits that we have, given our scale and given our leverage and the ability to buy this equipment in very large quantities and really lock up a lot of the manufacturing lines for this equipment, it's a true competitive advantage for a renewable business the way I think about it.

Its massive size gives it leverage when negotiating with vendors. Because it's buying in such volume, it can get better terms on equipment and material purchases. The company has used its scale and balance-sheet flexibility to build up an inventory of critical equipment, like transformers. That has helped reduce the impact of supply chain issues.  

Customers are starting to realize the importance of working with a larger-scale company. They know that the bigger players can get the job done on time and on budget. Ketchum noted this trend on the call. He stated, "The renewable business is increasingly moving more and more toward the scale players."

That was evident in the company's success in originating new renewable energy development projects over the past quarter. NextEra's energy resources segment had a record quarter of new renewable and storage originations at 3.2 gigawatts (GW), the first time it topped 3 GW in a period. That's a sign of both strong overall demand for renewables and the company's scale advantages that enabled it to win more development opportunities.  

The scale to access capital

One of the biggest scale advantages NextEra Energy has is its strong balance sheet backed by an A bond rating. Ketchum noted the company's strong credit rating gives it a cost of capital advantage, which he said "is really, really important and a super big competitive advantage that we have over the smaller developers that we compete against." The company has worldwide banking relationships, which give it tremendous flexibility in the current market conditions.

A big advantage of having a strong credit rating is that NextEra has the balance sheet to utilize interest-rate hedges that lock in rates on development financing. Crews noted on the call that "we are utilizing interest rate swaps on contracts that we were entered into when rates were lower to maintain our return expectations." Because of that, it's not feeling the impact of higher rates on construction loans like smaller developers are these days. Meanwhile, with one of the strongest balance sheets in the utility sector, it can finance new projects at more attractive rates than smaller competitors in the current environment. That's giving it a lower cost of capital, enabling it to earn higher returns on new investments.

Scale matters

NextEra Energy is one of the country's largest renewable energy operators and developers. That scale is increasingly giving it a competitive advantage over smaller developers. It can get equipment at lower prices while locking in lower capital costs. That's enabling it to win more business and earn higher returns. NextEra's scale advantages position the company to grow faster than rivals in the future and create more value for its shareholders. That makes it a more compelling long-term investment opportunity.