Seeking Alpha | October 17, 2019
- NextEra Energy is now the largest utility in the United States after showing tremendous growth in the renewable and natural gas power gen sectors.
- Battery storage is already proving to be a growth catalyst for the company’s burgeoning wind and solar businesses.
- The recent Gulf Power acquisition from Southern Company should lead to substantial cost efficiencies in NextEra’s Florida utility business.
- The company’s high growth rate is one reason why it trades at such a premium to its utility peers. But it’s hard to bet against NextEra’s excellent track record.
NextEra Energy (NEE) first caught my eye back in late 2016 when I read about its very attractive pipeline projects to supply Mexico with American natural gas (see “NextEra: A Big Beneficiary Of Growing Natural Gas Exports To Mexico“).
At the time, NEE was trading at $126/share, had a P/E=22, and the yield was only 2.8%. In other words, a lofty valuation for a utility company. Yet, three years later, NEE is changing hands at $229, has a P/E=33, and yields 2.2%. In other words, the already high valuation NextEra had two years ago has gotten even higher. Yet, I am sure the investors aren’t complaining given the stock’s high capital appreciation over the past 5 years:
(Source: Yahoo Finance)
That said, perhaps it’s time to re-evaluate NextEra’s lofty valuation given the company’s own projected growth rate. As shown on the graphic below – a slide taken from a recent company presentation – management expects adjusted EPS to grow at a CAGR of 6-8%, while the dividend is expected to grow at 12-14% per year:
(Source: NextEra Presentation at Wolfe Research)
Which begs the question: Does a company with a 6-8% CAGR in earnings justify a PE=32? And the best answer I have is: Perhaps it does.
After all, NextEra’s Florida Power & Light (FP&L) utility operates in a high-growth state that has a very favorable regulatory environment. With the company’s 2019 1,000-kWh Residential Bill averaging $101 kWh – substantially less than the $139 kWh national average – Florida utility regulators are likely well pleased. Due to Florida’s strong economy and relatively high population growth rate, NEE plans to add 10 GW of incremental solar capacity.
Cost synergies are expected by implementing the NextEra “playbook” at Gulf Power – which NextEra acquired from Southern Company (SO) in January of this year. Combined with an expected FP&L base growth rate of 9% and excellent organic growth projects, FP&L could grow earnings by an estimated 15% over the next couple of years.
(Source: Utility Dive)
Renewables + Battery Storage
Meantime, as most of you know, NextEra is the largest generator of wind power in the United States and has a proven record at being the best-in-class renewable energy developer and operator. The company typically enters into long-term PPA contracts (20-year agreements are common) that smooth out cash flow volatility, even if the power generated by these assets is quite volatile and weather-dependent.
Despite common perception that wind and solar are “expensive”, the declining cost of renewable power generation beautifully positions NextEra for the coming decade.
Its deployment of battery storage technology once again has the company riding the leading edge of renewable energy technology. For example, NextEra Energy Resources will develop the largest hybrid renewable project in the United States, the “Skeleton Creek” facility in Oklahoma that has:
- 250 MW of wind energy
- 250 MW of solar energy
- Up to 800 MWh of battery storage (200 MW for 4 hours)
Note, this project is even larger than a similar wind-solar storage project NextEra announced in February of this year with Portland General Electric (POR). That project – with 300 MW of wind generation, 50 MW of solar and 30 MW of peak battery storage power. The duration of battery backup power was not specified in POR’s press release and appears yet to be determined.
Note how the battery storage capacity component of these projects appear to be growing in size. Experts say federal tax credits have the potential to make these type facilities even cheaper than developing new gas peaking plants.
As a result, battery storage is now a prime growth catalyst for NextEra, and is likely to be so for decades to come. In addition, a number of other disruptive factors are positively affecting NextEra’s renewable and lower emissions power generation business:
- Smart Grid
- Big Data
- Shale Gas
- ESG & Renewable Policy Tailwinds
- AI/Machine Learning
- Storage Technology
As a result, and using estimated from the EIA and the National Renewable Energy Lab (“NREL”), wind and solar power generation is expected to be significantly cheaper than existing coal and nuclear generation by 2023. As a result, by 2030, renewable power generation in the US is expected to be significantly larger than coal and nuclear power combined:
(Source: NextEra Presentation at Wolfe Research)
The table below compares various utility companies in terms of P/E, dividend, and yield:
|Southern Company (SO)||14||$2.48||4.1%|
|American Electric Power (AEP)||23||$2.68||2.9%|
|Duke Energy (DUK)||21||$3.78||4.0%|
(Source: Metrics gathered on Yahoo Finance)
Obviously, NextEra is very highly valued and trades at a premium to its (mostly coal-dominated) peer group. As a result, and despite its much higher per share dividend of $5, NEE’s yield is also the lowest among the companies shown in the table above. That said, all these companies were around when NextEra was just a pup, and the company has run rings around all of them and is now the largest utility in America. As we know, the stock market loves growth. And the market also likes a winning long-term strategy. That is exactly what NextEra has with its focus on wind, solar, battery storage, and cleaner-burning natural gas.
Summary and Conclusion
The bottom line is that NextEra is the largest and fastest-growing utility business in the United States. The company has the perfect business model (i.e., renewables and natural gas) for the near, mid-, and long term. While NextEra is obviously more highly valued than its peers, the truth is this the company has earned it. NextEra is generally regarded as the best developer and operator of renewable energy projects. Combined with the relatively new catalyst battery storage offers, it is likely to continue growing for decades to come.