Pat McKeough recently replied to a Member of his Inner Circle who wanted to know about an energy stock in Florida that serves as a utility in one segment of its business but not in others. Its regulated business supplies electricity to almost 5 million customers. Its non-regulated business includes contracts for wind, solar and wind re-powering projects.
Pat observes that NextEra Energy has made expensive improvements to pre-empt the worst effects of the hurricanes that regularly descend on Florida. The company`s shares are up are 23% this year despite the devastation of Hurricane Irma. The dividend yields a little less than most utilities, at 2.7%, but appears secure.
Q: Pat: Can you take a quick look at NextEra Energy (NEE) for me? Thank you.
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A: NEXTERA ENERGY INC. (symbol NEE on New York; www.nexteraenergyresources.com; formerly FPL Group, Inc.) is a holding company for Florida Power & Light Company (FPL), which provides electricity to 4.9 million customers in a 27,650-square-mile area in eastern and southern Florida. The company’s NextEra Energy Resources is a non-regulated power generator with nuclear, gas and wind plants.
In the three months ended June 30, 2017, NextEra’s revenue rose 15.4%, to $4.40 billion from $3.82 billion. Excluding one-time items, earnings climbed 13.3%, to $881.0 million, or $1.86 a share, from $777.0 million, or $1.67 a share.
Both the utility and non-utility sides of the company’s business are expanding.
Florida Power & Light benefitted from rate increases from its regulators. The utility’s rates were raised by $400 million at the start of this year. In 2018, FPL will receive a further $211 million rate hike. It has also seen strong customer growth and is now constructing eight solar power plants.
Energy stocks: Company has spent $3 billion in anti-hurricane improvements
On the non-utility side (not supported by regulatory rate setting), subsidiary NextEra Energy Resources continues to expand its portfolio of contracted projects. As of late July, the company had signed contracts to provide power through wind, solar and wind repowering (upgrading to newer technology) projects that will produce a total of 3,500 megawatts of capacity this year and next. That figure should rise to as high as 8,000 megawatts by the end of 2018. But renewable energy is not the business’s only area of focus: its two natural gas pipeline projects entered commercial operation in mid-2017.
NextEra’s shares have moved up 23% since the start of the year. They now trade at 22.1 times the company’s 2017 forecast earnings of $6.70 a share. The dividend yields 2.7%, which is a bit below the industry average. It does, however, appear to be secure.
Florida Power & Light has spent $3 billion since its system was severely hit by seven hurricanes between 2004 and 2005. Improvements include replacing wooden poles and transmission structures with concrete ones and installing real-time water monitors to alert the utility to flooding at 223 substations susceptible to storm surges. The company also uses smart meters to identify outages more quickly and relies on automated switching technology to re-route around trouble spots.
NextEra maintained its share price in the wake of Hurricane Irma. The hurricane did cut off power to roughly 4.4 million of the company’s 4.9 million customers. The company was able to restore power to about 98% of those customers within a week.
Inner Circle recommendation: NextEra Energy is okay to hold.
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