NextEra Energy: Renewables Powering Q3 Growth

NextEra Energy (NEE) and its affiliate NextEra Energy Partners (NEP) recently announced Q3 results and delivered guidance.  

The common thread for both companies is they ignited robust underlying earnings growth by deploying new renewable energy generating capacity, despite pandemic-related pressures. It’s exactly what we saw in their results for the first half of 2020. And there’s every indication we’ll see the same strength in Q4 and beyond.

NextEra Energy was also at the heart of resurgent utility M&A. A potential acquisition of Duke Energy (DUK) by NextEra has been the subject of rumor the past several weeks.

NextEra management made only an oblique reference to M&A during the Q3 earnings call. But its results again prove the earnings growth model of rate basing renewable energy, both for the south Florida unit FPL and in the state’s panhandle at the Gulf Power unit acquired from Southern Company (SO).

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NextEra’s overall Q3 earnings per share increased 11 percent versus a pandemic-free quarter a year ago. A big part of that was the 11 percent net income lift at FPL, fueled by an identical increase in “regulated capital employed” or rate base. The company earned the upper limit of its allowed 9.6 to 11.6 percent return on equity. And with the solar buildout staying on track and cutting system costs, FPL’s residential customer rates remained 30 percent below the national average.

The runway for robust growth from rate-based renewable energy is even longer at Gulf Power, which remains dependent on aging and increasingly inefficient coal-fired power plants. NextEra is still on track to fully merge that unit into FPL starting in January. And the resulting savings will further boost regulated utility earnings growth, even as the unregulated Energy Resources unit brings 15 gigawatts of wind and solar capacity on stream the next few years under long-term contracts.

That record project backlog is actually more than the generating capacity of Resources’ entire current portfolio. And executing on it means future earnings increases ahead like the 23 percent realized in Q3, when the unit brought 800 megawatts of renewable energy generating capacity on stream.

Another 3.2 GW currently in development will enter service by the end of the year to power 2021 results. That includes paired storage to limit intermittency, which is still a formidable hurdle to greater wind and solar adoption.

NextEra’s Q3 results lay to rest any doubts about the resiliency of its business model to the fallout on economic and human health from this year’s pandemic. During the earnings call, management affirmed that weather normalized retail sales at both FPL and Gulf Power were “roughly in line with our expectations at the start of the year,” and customer growth was a solid 1.1 percent.

Q3 results were equally resilient at the company’s NextEra Energy Partners affiliate, which increased its cash available for distribution per share by a solid 10 percent. Year to date, CAD and EBITDA are up 50 percent and 16 percent, respectively, versus 2019. And new projects continue to successfully enter service while operating facilities run efficiently.

Impressively, Partners’ results were achieved despite portfolio-wide wind resource that was 96 percent of the long-term average, versus 107 percent in the year ago quarter. And the company also took advantage of its record-high stock valuation to convert $300 million of convertible debt to equity, which combined with related moves resulted in $50 million of cash savings.

Partners’ facilities, finances and growth prospects are basically inseparable from its parent. That’s another good reason for confidence in management’s continuing guidance for quarterly dividend increases at an annualized pace of 12 to 15 percent.

NextEra Energy itself forecast a similar rate of payout growth, while raising projected 2021 results and affirming the intention to execute a 4-for-1 stock split on October 26. After that date, the stock will trade at roughly 25 percent of its current price, the per share dividend rate will drop to 35 cents from the current $1.40 and investors will hold 4 shares for every one they do now.

NextEra Energy and its Partners affiliate are expensive now. In light of the strong Q3 results and growing investor awareness of utilities’ renewable energy potential, it’s unlikely we’ll see big declines in either stock.

That’s despite the lofty expectations behind current valuations of 31.5 times expected 2020 earnings for the parent, and enterprise value of 20.5 times trailing 12 months EBITDA for Partners. That said, investors should be looking to buy the shares on dips.

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