NextEra Energy: Pay Up For The Best Utility Stock In The Market (NYSE:NEE)

NextEra Energy (NYSE: NEE) is one of the best stocks in the marketplace for investors that engage in thematic investing. One of the biggest themes in the marketplace today is the shift towards clean, renewable energy and away from polluting fossil fuels. NextEra Energy is an investment in that trend towards renewable energy, as the company both builds and operates energy projects that produce clean, emissions-free electricity, which drives the company’s results. In addition to the positive effects that NextEra is having on the environment with its renewable energy focus, NextEra Energy has been a great wealth building stock to own over the last several decades for its investors. The company’s future over the next decade also seems it will be equally as bright as its past, as NextEra Energy still has the ability to produce steady long-term growth, in addition to a small, secure, and fast-growing dividend for Growth & Income investors.

NextEra’s dividend has increased annually for 27 consecutive years and the company has the best growth potential in the utility industry. NextEra Energy has outperformed the S&P 500 and the S&P 500 Utilities Index in terms of total shareholder return on a 3, 5, 10 and 15-year basis. Over the past 10 years, NextEra has delivered compound annual growth and adjusted EPS of approximately 9%, which is the highest among all top 10 U.S. power companies, who have achieved, on average, compound annual growth of only around 3% over the same period.

Recently, NextEra’s stock price has dropped off a cliff. Since the beginning of the year, the stock has dropped around 22%, mostly over fears of rising interest rates. In general, utilities get severely impacted by rising interest rates and NextEra is no different. NextEra is a very high-quality stock that growth & income investors should buy as the stock continues to pull back.

Let’s look at NextEra Energy and its subsidiaries operating performance in its end of year earnings report.

NextEra Energy Resources

NextEra Energy is a company that provides both growth and income to investors and the portion of the company that provides most of the growth is subsidiary NextEra Energy Resources (NER). This subsidiary develops, constructs and operates power projects that produce renewable, clean electricity across the USA.

The growth of NER is driven by the number of development projects that the company completes. Over the full year of 2021, the subsidiary wound up adding approximately 7,200 net megawatts to its backlog, with backlog additions having grown at a more than 20% compound annual growth rate since 2017. NER has now signed nearly 80% of the megawatts needed to realize the midpoint of the company’s 2021 to 2024 development expectations range. NER has not only been proficient in signing contracts (sales), but it has also been successful executing the contracts, which is shown by NER commissioning approximately 3,800 megawatts of new wind and wind repowerings, solar and storage projects this year. Over the past two years, NER has constructed more than 9,500 megawatts of renewables and storage projects.

In the fourth quarter, NER delivered $1.63 billion in operating revenues, up 31% versus the prior year and adjusted earnings of $414 million, which is 13% growth versus the prior year. NER also makes a practice of capital recycling meaning that it will often sell assets that it has built to fund higher growth opportunities. In Q4 2021, NER sold a 2.5-gigawatt renewables portfolio of newly constructed and under construction assets to NextEra Energy Partners and to a third-party infrastructure investor, which recycled nearly $3.5 billion of capital back to NER. These numbers all show that the market for wind, solar and storage assets is very strong within the USA at the present time.

NextEra Energy and NER identified the shift towards renewable energy sources very early before it became fashionable. NER was among the first companies to get into building wind generation projects. Because NER was a first mover in securing and developing many of the best locations for wind assets in the USA, it has developed an efficient scale moat in wind projects. It is now very difficult for newer and smaller competitors to compete against NER for wind projects because of NER’s scale advantages. NER has locked up many of the best wind locations with 20-year contracts that contain price escalator clauses. There are only so many places to develop wind energy within the USA and NER has developed most of the best locations. Recently, NER has shifted its focus and has already developed a similar efficient scale moat in solar generation and battery energy storage projects.

NER has also started actively investing in transmission lines because the increasing renewable energy development around the USA requires a large infrastructure build out of transmission lines. In 2021, NextEra Energy Transmission increased net income by nearly 20% over its previous earnings contribution record in 2020. In addition to further investments in transmission lines, investors should also expect growth from investments that NER is currently making in green hydrogen, water utilities, and software. Yes, that is right, software. NER has developed an advanced software analytics platform named Optos, that uses artificial intelligence and blockchain technology. Optos leverages data from NER’s renewables and energy storage fleet that is owned and operated by the subsidiary to provide commercial and industrial customers energy management services. JPMorgan Chase recently signed an agreement with NER to use Optos for those purposes.

Last but not least, one major future potential source of tailwinds for both NER and NextEra Energy, is the focus by the Biden administration on developing renewable energy. One large potential short-term catalyst for NER and all of NextEra Energy’s subsidiaries is if the currently stalled Build Back Better Act ever gets signed.

Florida Power & Light

Florida Power & Light, also known as FPL, is a utility that greatly benefits from being located in Florida, as the state currently still has a has a strong economy, a growing population and favorable regulatory environment, which are the primary drivers in FPL’s relatively high returns when compared with other utilities around the nation.

Among the most important news for FPL in 2021 was that it gained a favorable outcome in the company’s base rate settlement covering the utility through 2025. Under FPL’s new base rate agreement, the company would have a target of 10.6% allowed return on equity, one of the highest guaranteed ROEs in the nation, with a range of 9.7%-11.7%. The allowed return is higher than all other Florida utilities have received in recent settlements. One big reason why the company gets such favorable terms is that Florida regulators love the fact that FPL’s customers have some of the lowest electric rates in the country.

A good portion of FPL’s growth is driven by the company investing in building out its renewable business. FPL’s Q4 capital expenditures were approximately $2.2 billion, bringing its full-year capital investments to a total of roughly $6.8 billion. Regulatory capital employed increased by approximately 11% for 2021. Another source of growth is customer growth. During the fourth quarter of 2021, FPL’s average number of customers increased by approximately 82,000 from the prior-year comparable quarter.

FPL reported Q4 2021 net income of $560 million, or $0.28 per share, compared to $502 million, or $0.25 per share, for the prior-year comparable quarter. For the full year 2021, FPL reported net income of $2.935 billion, or $1.49 per share, compared to $2.650 billion, or $1.35 per share, in 2020. Gulf Power legally merged into Florida Power & Light Company effective on January 1, 2021. However, Gulf Power continued as a separate reportable segment within Florida Power & Light and NextEra Energy through Q4 2021. Gulf Power reported fourth quarter 2021 GAAP earnings of $60 million or $0.03 per share. For the full year, Gulf Power reported net income of $271 million or $0.14 per share, an increase of $0.02 per share year-over-year.

FPL, including Gulf Power, serves more than 5.7 million customer accounts, supporting more than 11 million residents across Florida, and is the largest vertically integrated rate-regulated electric utility in the U.S. as measured by retail electricity produced and sold.

NextEra Energy Partners

NextEra Energy Partners, LP (NYSE: NEP) is a YieldCo limited partnership formed by NextEra Energy that acquires, manages and owns contracted clean energy projects with stable, long-term cash flows. Some investors prefer investing in YieldCos because in addition to primarily owning mature operational power generating projects, they are structured to be more dividend focused. Theoretically, YieldCos are more attractive to risk-averse retail investors and institutional investors but YieldCos don’t always turn out to be low risk.

Many of the energy projects that NEP acquires come from NER, which helps NER recycle capital from older projects into higher growth opportunities. During the year, NextEra Energy Partners acquired interests in approximately 1,900 net megawatts of long-term contracted renewables and storage assets from NextEra Energy Resources.

Over the course of 2021, NextEra Energy Partners delivered a total unitholder return of approximately 30%, bringing its two-year total unitholder return up to more than 72%. NEP grew its LP distributions per unit by 15% YoY and has now grown its distributions per unit by nearly 280% since the IPO in 2014. NEP achieved the company’s distribution growth objectives while maintaining a trailing twelve-month payout ratio of approximately 80% as of year-end 2021.

NextEra Energy Q4 2021 Consolidated Results

NextEra Energy produced Q4 2021 consolidated revenue of $5.05B, up 15.0% YoY from Q4 2020. This missed analyst expectations by $740M. Fourth quarter of 2021 GAAP net income attributable to NextEra Energy was $1.2 billion or $0.61 per share. NextEra Energy’s 2021 fourth quarter adjusted earnings and adjusted EPS were $814 million or $0.41 per share respectively. This beat adjusted earnings consensus analyst estimates by $0.01. Full year 2021 GAAP net income attributable to NextEra Energy was $3.57 billion or $1.81 per share. Adjusted earnings were up over 10% YoY to $5.02 billion or $2.55 per share. This adjusted earnings growth was much more than was anticipated, as the growth rate initially expected to be 6% to 8%.

Guidance

For 2022, NextEra Energy expects adjusted earnings per share to be in a range of $2.75 to $2.85, which is a raise from its prior forecast of delivering $2.55 to $2.75 per share of earnings in 2022. Consensus analysts’ expectations were for $2.75.

For 2023 through 2025, NextEra Energy expects to grow roughly 6% to 8% off of the expected 2022 adjusted earnings per share range. NextEra thinks it is likely that they will be at the top end of the 2025 EPS guidance range of 8%. Consensus analyst expectations, however, is ~8-9%. So, NextEra projections came a bit under where NextEra is guiding to.

Balance Sheet

One of the things that NextEra Energy is most proud of is they are producing above average growth, while still maintaining one of the strongest balance sheets and credit positions in the utility industry. All ratings agencies rate NextEra bonds as investment grade. S&P and Fitch rate NextEra debt at upper medium grade, while Moody’s rates NextEra debt at lower medium grade. Corporate Credit ratings are explained here.

NextEra Energy’s annualized Debt-to-EBITDA for Q4 2021 was 4.78. This is considered high but not excessively high for a utility. Debt/EBITDA ratio can be used to compare the liquidity position of one company to the liquidity position of another company within the same industry. An example of a utility that is considered to have good leverage is Alliant Energy (NYSE: LNT) with a Debt/EBITDA ratio of 3.92. Examples of excessively leveraged utilities are PG&E (NYSE: PCG) and Edison International (NYSE: EIX), which have a Debt-to-EBITDA level of 8.95 and 13.33, respectively.

NextEra Energy’s Q4 2021 Debt to Equity was 1.47. Generally, debt to equity levels between 1.0 and 1.5 are considered good levels for a utility. NextEra Energy’s interest coverage for Q4 2021 was 2.33. Generally, an interest coverage ratio of at least two is considered the minimum acceptable amount for a company. All of these numbers indicate that NextEra carries a high debt level, however, it is not unusual for utilities to be heavily leveraged as infrastructure requirements can make large, periodic capital expenditures necessary.

Leadership Changes

During the earnings call, there was major news concerning the leadership of the company, as CEO Jim Robo surprised investors by announcing his retirement, effective March 1, 2022. He will be replaced by John Ketchum, currently president and CEO of NextEra Energy Resources. Between NextEra missing earnings expectations, Jim Robo retiring and a court reversing approval for Mountain Valley natural gas pipeline, the stock dropped 8% after earnings and the retirement announcement.

Rebecca Kujawa will succeed John Ketchum as President and CEO of NextEra Energy Resources; Kirk Crews currently Vice President of Business Management for NextEra Energy Resources will succeed Rebecca Kujawa as Executive Vice President and Chief Financial Officer of NextEra Energy. John Ketchum, Rebecca Kujawa and Kirk Crews will also be appointed to their respective roles at NextEra Energy Partners. In addition, Eric Silagy, President and Chief Executive Officer of Florida Power & Light Company has been named Chairman and Chief Executive Officer of Florida Power & Light. These changes aren’t expected to change things materially at NextEra.

Analyst Price Targets

The above is based on 19 Wall Street analysts offering 12-month price targets for NextEra Energy in the last 3 months. The average price target is $94.53 with a high forecast of $109.00 and a low forecast of $83.00. The average price target represents a 30% increase from the last price of $72.50.

Valuation

NextEra Energy Valuation Metrics

	2019	2020	2021	Current	5-Yr	Index
Price/Sales	6.15	8.34	11.21	8.38	6.13	3.05
Price/Earnings	36.36	38.96	78.45	40.06	29.18	24.22
Price/Cash Flow	15.38	17.77	24.26	18.95	14.76	18.21
Price/Book	3.24	4.06	5.00	3.82	3.16	4.36
Price/Forward Earnings	26.88	30.86	33.90	26.25	25.24	––
PEG Ratio	––	––	3.49	3.02	3.36	––
Earnings Yield %	2.75	2.57	1.27	2.50	4.84	––
Enterprise Value (BIL)	159.07	197.55	237.83	196.44	147.20	–

Data Source: Morningstar

NextEra continues to be a highly valued stock, even after the recent drop in price. Investors that choose to invest in NextEra have to be comfortable paying up for quality. NextEra Energy is a Dividend Aristocrat that has delivered the highest growth of any US utility over the past 10 years and has the best projected growth moving forward. NextEra is the type of company that will likely continue selling at an above average valuation for at least the next 5 years, with above average company results being driven by growth of renewable energy projects.

Conclusion

Recently, NextEra Energy’s valuation has been cut in half on a P/E basis due to the fact that Federal Reserve will likely raise interest rates this year. Even though, NextEra Energy can be considered a growth stock, at its core, the company is still a utility and utilities don’t often perform well in high inflation environments. NextEra’s stock is likely to remain under pressure for most of 2022. On the other hand, the shift to renewable energy is undeniably a long-term secular trend that will drive growth for NextEra for at least the next 5 to 10 years. Growth & Income investors should start accumulating NextEra stock today and buy more on any further pullbacks.