NextEra Energy - The largest generator of wind and solar energy

I wanted to take a look at an interesting renewable energy company which I wouldn’t normally judge. While looking through the sector NextEra stood out as been unique with a story behind them.

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Who Are NextEra?

This is a trickier question than normal. If you search and try and invest in NextEra you’ll see there are two companies with a similar name, and similar logo. They have a link but they are two independent firms.

NextEra Energy (NEE), who I want to talk about today, owns two electric companies. Florida Power & Light Company serves more than five million customers. This makes them the biggest regulated electric utility provider in the USA! Measured by retail only that is. The second company is Gulf Power Company which operates in eight counties, serving 460 thousand customers. Finally, NextEra Energy also is an energy company in its own right and is the largest generator of renewable energy from wind and sun! As well as being in the battery storage game as well.

Hopefully, like me, this has got your attention as to what they can become and how they can expand.

The other company, NextEra Energy Partners (NEP), is a partnership between itself and NextEra Energy. This separate company focuses on acquiring, managing, and owning clean energy projects and sites for the long term. This means that NextEra Energy can build a new site, get the technology and set up in place, secure a long term energy contract, then sell the whole project to NextEra Energy Partners for instant cash or to aid with cash flow. It does mean NextEra Energy Partners can also create partnerships on projects with multiple businesses and manage them separately from NextEra Energy directly.

While both companies you can invest in, depending on what kinds of exposures you like, I will focus in on NextEra Energy as that is where the R&D and energy generation are happening, rather than going through the partners’ route.


Source: NextEra Energy FY 2019 Report

What Does NextEra Do?

I should start by saying this “clean energy” company is not exclusively green. Gulf Power Company is not exclusively green. If we look at the different business lines when it comes to the revenue we get a clearer picture of what NextEra truly does. As this is the combination of multiple companies and different partnerships what they do runs a lot deeper than their company statement.

The last annual report doesn’t include a clean here is where our money comes from across all our businesses, meaning we have to mash this data together ourselves to figure out what they truly do.


Source: NextEra Energy FY 2019 Report

FPL relies upon a mix of fuel sources for its generation facilities, some facilities can operate on both natural gas and oil, and on purchased power to maintain the flexibility to achieve a more economical fuel mix. This is the strategy here for making Florida Power more “eco”.

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Source: NextEra Energy FY 2019 Report

NEER sells products associated with its generation facilities (energy, capacity, renewable energy credits (RECs) and ancillary services) in competitive markets in regions where those facilities are located. They have a broader remit and get involved in infrastructure and transmission across the US.

Gulf Power was finally acquired and moved over at the start of 2019. This isn’t an eco company at all, and they are working to transition this business to move over to renewables.


Source: NextEra Energy FY 2019 Report

As mentioned, this is the oddest “renewable” energy company I’ve come across, because they don’t appear to be that renewable. It’s a sprawling US-focused energy company with a heavy preference for renewable wind and solar, but that doesn’t limit them.

In terms of how NextEra generates its power, you can expect it to come from a mix of solar, wind, natural gas, coal, nuclear, and oil. However, they have some additional revenue lines, as NextEra is in the business of selling the electricity they also have a trading division. Meaning they not only sell directly to end retail consumers (a few institutional contracts as well) but they also squeeze the margins but using a mix of buying in energy cheaply while also selling their excess. This level of operations is only possible with the scale of NextEra and their scope as an overall business.

Does NextEra Make Money?

Is this a profitable business, the energy sector can be tough, and anyone chasing the renewable energy industry, in particular, can end up being cash burning and supported only by grants and green bonds.


Source: Genuine Impact

A first glance comparing NextEra against the market doesn’t look very promising. I want to know more than just a market comparison though, I want to see the actual numbers past and present. We know they have been acquiring new businesses, and they have a busy pipeline of reinvestment into their new sites, what does that mean for the profitability.

To start us off, NextEra generated $19.2bn in revenue in 2019, $4.6bn in the first quarter of 2020 as well. It’s great to bring in money, but how are they converting this? Back to the annual statements for this. NextEra is running a gross margin of 58.33%, which represents a high cost of revenue. For the energy sector, and renewables especially, this is pretty strong, this isn’t a number I expected to be above 30-40%. Recently I looked at a solar company who’s gross margin was negative, so this is a relief.

Energy companies also love to reinvest into R&D, and in this case, as we are selling directly to customers we can expect a higher than normal marketing budget. I was very impressed to see a very comfortable 19.63% profit margin. In 2018 this was 39.68% but we had less investment and financing activity that year.

So far this mutt of an energy company is showing the right signals, the next pitfall is the debt. With expensive sites and fixed long term contracts, the assets can be extremely high, which tends to encourage borrowing beyond their means.


Source: Wallmine

For me, this is another tick mark. Even with $117.7bn in assets, the debt to assets is a comfortable 64.86%. Looking at the near term (back to quarterly statements!) The current liabilities are sitting at $13.7bn, but we have a problem. The current assets (cash, net receivables, and inventory) are only worth $9.7bn. Given the operational income for the most recent 2020 quarter was only $1.98bn we have a shortfall to think about.

The quarterly interest expense has shot up recently as NextEra takes on more financing. $1.3bn came out in Q1 2020, compared to $0.2bn in Q4 2019 and $0.7bn Q3 2019. While the long term picture isn’t anything to panic about, this short term increasing debt while they are seeing the economy come under pressure is an unwelcome situation.

There is one last aspect of the financials I want to look into. How can I as an investor make money? Thankfully we have a dividend to look at. Due to the recent share price dive, and the darkening financial situation in the short term the dividend yield is a very weak 2.06%.

That 2% yield, however, represents a 73% payout ratio. Meaning if we can see increasing dividend growth and have confidence in the recovery, then there is a lot of long term love to be found here.


Source: Wallmine

It’s not often you come across a company with dividend growth for 24 years with no breaks. A quarterly dividend, with a strong track record, creates a lot of pressure on management to protect this for shareholders. The negative is this can cause short term decisions to create a booster quarter for shareholders and passing the issues onto the next quarter.

The historic growth plus a fairly stable management team gives me the impression passing the buck onto the coming quarter is not something they do (commonly enough to be an issue at least!)

Is NextEra Cheap To Buy?

No. I don’t think this will come as a surprise. For the most part, they have a solid balance sheet, they have a strong history, while the company is structured in a way that means you need six Bloomberg screens just to find a single revenue line, it’s not new knowledge that NextEra exists and the market has been watching.


Source: Google Finance

We have the classic COVID-19 dip we have seen across the market, however, the recovery hasn’t been as strong as other companies even within the energy sector.

With the retail focus leaning heavily on their balance sheet, and Americans faced with a lot of economic issues in the immediate term, investors have reassessed the price a bit more cautiously.

Even now we can see a P/E ratio of 34.21x, price to sales of 6.46x, and a price to book of 3.45x. In the defence of NextEra, we do have a book to share ratio of 72.10x, however, this is not uncommon when you have assets that are functional sites that are bundled with long term energy contracts.

Some other interesting facts which might explain why some investors have taken a moment to raise their eyebrows is internal ownership. Only 0.18% of the shares are held by directors and the institutional ownership sits at 81.04%. Remember that complex structure? NextEra Energy Partners owns the lions share here.

NextEra Energy is selling a lot of directors sells recently but if you peek at NextEra Energy Partners you’ll see similar directors all buying. While the timings are off, and I expect some are locking in some profits, the heavy sell activity is only telling part of the story due to the company structure. That said this confusing relationship and setup will be offputting against other investments where ownership and responsibility is a bit more clear cut.

What Does The Future Hold For NextEra?

As my crystal ball has been broken for some time now, and I’m pretty sure it was defective anyway (thanks Beyond Meat) I’ll have to depend on the far more educated professional sell-side analysts.


Source: Genuine Impact

In terms of the future share price growth, the average prediction for the coming year is a $10~ per share increase, a 3.23% increase. If you are a big-time momentum hunter there are much more volatile and high growth energy firms out there. The dividend will be causing a drag on the share price. The long term plan is the regular and reliable dividend payments than selling off at peaks.

The other aspect to consider is the revenue and EPS predictions, which are both pretty punchy for NextEra. Looking at the annual statements again, NextEra has a pretty rubbish record of beating expectations, they come very close but have trouble sealing the deal.

With a poor track record of meeting analyst expectations and slow growth, is the dividend and green future enough to secure your interest?


Source: Genuine Impact

According to the analysts, it should be! With 18 analysts keeping tabs on what is happening at NextEra (and no doubt fighting the company structure to come up with any conclusion) they are leaning towards a buy. Currently, we are in the overweight zone in terms of sentiment, which is an encouraging future if you are looking for a longer-term investment.

NextEra Energy Executive Summary

  • A strong balance sheet with big revenues and excellent profitability
  • Watch out for the short term this year debt, we might have some problems in the near term due to financing and COVID-19
  • The dividend has grown for over 20 years, pays quarterly and over 70% of the income is being paid out
  • This is expensive to buy right now as it’s not an unknown stock and the short term debt means it might get cheaper short term
  • Analysts are liking what they see, share price growth is barely beating inflation but the dividend is the crown jewel here
  • Not strictly “green energy” but a bit part of their business, if you want pure renewables you’ll have to skip NextEra for now

Thanks for reading! I hope you have enjoyed learning about NextEra as much as I’ve enjoyed writing and researching them.

Please let me know your thoughts, is NextEra something you are interested in or are there other energy firms you prefer? I’ve tried changing up how I’ve written this. If you prefer a different style let me know!

Stay safe and enjoy the weekend!

9 Likes

Another very well detailed analysis :wave:

NEE is on my Growth pie… it looks very promising on long term.

It’s not easy to get it in a “fair price”, but dollar cost averaging + compounding is the key here :wink:

2 Likes

I like your assessment, I also had a look at this one and decided that it was worth a buy :smiley:. I have not decided at what price though, I am waiting for a significant dip.

I think the stock markets need to lower by around 15% before taking off again, so will be waiting a further dip of around 10% on NEE.

What are your thoughts on price?

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Thanks for the lovely comments!

@EquityInvestor I didn’t look too much into the price this time around. With COVID-19 and the current unreasonable market, I guess in the short term it comes down to if you feel like the current rally is justified!

NEE hasn’t returned to it’s all price before all of this kicked off, they have taken on a bit more debt so that is likely weighing them down versus before, but it seems it’s more sentiment driven that fundamentally driven at this point.

I expect Q2 will be tough which might be a slight reduction at the end of this quarter when the new numbers are out.

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