Nextera Energy (NEE)
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The Henry Fund Henry B. Tippie College of Business Ruotian Kang [[email protected]] NextEra Energy (NEE) March 11, 2020 Energy – Renewable Energy Stock Rating Buy Investment Thesis Target Price $284-300 DCF Model $284 We give a BUY recommendation on NextEra Energy, Inc with a target price DDM Model $300 range of $284-300. NextEra Energy is a leading company in the both regulated EV/EBITDA $308 electricity generation and renewable energy. The company remains the Price Data world's largest generator of renewable energy from wind and solar. NextEra Current Price $255.73 Energy is planning to make between $50 billion and $55 billion in new infrastructure investments through 2022. NextEra Energy has a long-term 52wk Range $186.92 – 283.35 track record of delivering value to shareholders. From last 15 years, NEE Consensus 1yr Target $266.94 delivered a total shareholder return of 945% compared to 309% for the S&P Key Statistics 500 Utilities. Market Cap (B) $129.65B Shares Outstanding (M) 488.78M Drivers of Thesis CapEx as % of Sales 63% We forecast a 10% increase of operating revenue on NextEra Energy Five Year Beta 0.59 Recourse segment in the next 2 years based on the company’s Dividend Yield 2.20% infrastructure investment plan on wind and solar Est. 5yr Growth 9.1% Price/Sales 7.7 We estimate NEER will keep the operating expense of renewable energy Price/Sales (2020E) 6.8 side as 65% of total revenue and continue to decrease to 55% in the long run after the company’s cost-reducing new infrastructure plan completed EV/EBITDA 22.0 EV/EBITDA (2020E) 16.4 Gulf Power as the company’s new business sector has generated a very Profitability favorable return to the company and this sector expected to have a 3% of Operating Margin 20.42% revenue growth and 19% of revenue as operating expense in 2020 Net Margin 21.55% Return on Assets (TTM) 3.4% Risks to Thesis Return on Equity (TTM) 10.59% The potential downtrend of natural gas price may decrease the demand of renewable energy NEE Industry Sector 40 Data source: FactSet Solar panel and windmill are facing tariffs from different countries. The 30 35.6 potential adverse policy will increase the cost 20 22.0 18.8 10 12.6 Earnings Estimates 11.3 10.6 10.3 11.6 Year 2017 2018 2019 2020E 2021E 2022E 0 EPS $11.47 $14.03 $7.82 $12.10 $13.92 $12.91 P/E ROE-5.8 EV/EBITDA -10 Consensus $11.86 $12.54 $13.25 growth 82.4% 22.3% -44.3% 54.7% 15.1% -7.3% 12 Month Performance Company Description NEE S&P 500 50% NextEra Energy’s base market is in Florida, where 40% Data source: Yahoo Finance it focuses on its core regulated power operations. 30% But it has grown in assets and revenue thanks to its broad push for wind and solar power in the 20% regulated and unregulated markets. The company 10% has been named to Fortune's 2020 list of the "World's Most Admired Companies" and ranked 0% No. 1 in the electric and gas utilities industry for -10% the 13th time in 14 years. MAMJJASONDJF Important disclosures appear on the last page of this report. EXECUTIVE SUMMARY Florida Power & Light NextEra Energy still has more room to grow even at its Florida Power & Light provides electricity to about 5.0 current market capitalization of $125 billion and forward million customers in an area covering nearly all of Florida's P/E ratio of 30. The company consistently produces great eastern seaboard, as well as the southern part of the state. returns and is one of the most forward-looking power At December 31, 2019, FPL had approximately 27,400 MW companies in the industry. In the likely scenario that of net generating capacity, approximately 75,400 circuit NextEra Energy's big bets in emerging technologies like miles of transmission and distribution lines and 661 solar and storage payoff, NextEra Energy should continue substations1. The following map shows the FPL's service to see upward momentum. territory. We recommend a BUY rating on NEE stock. We estimate a target price range of $284–$300 per share of NEE stock, which shows an upside of 11–17% from its current price. NextEra is at the leading position whatever in the hybrid business, regulated business and nonregulated business. NextEra also impressively has the lowest level of cost in both regulated business and nonregulated business. COMPANY DESCRIPTION NextEra Energy is one of the largest electric power companies in North America and a leader in the renewable energy industry, with about 54,400 megawatts (MW) of generating capacity at the end of 2019. NEE has two principal businesses: Florida Power & Light Co. (FPL), and NextEra Energy Resources (NEER). FPL and Gulf Power Source: NEE 10-K report, 2019 generated 63% and 8% of 2019 revenues respectively as the regulated business and NEER generated about 29% of At December 31, 2019, FPL served more than ten million the total revenue as the unregulated business which is a people through more than five million customer accounts. wholesale generator of electricity with operations FPL's primary source of operating revenues is from primarily in the U.S. and operations in Canada as well1. NEE residential and commercial account, but it also serves a also owns Lone Star, a rate-regulated transmission service limited number of wholesale customers within Florida. provider in Texas. There are almost 55% of FPL’s revenue is from residential account, followed by the second largest component which NEE Revenue Component is commercial account. GP, 8% NEER, 29% FPL, 63% NEER FPL GP Source: NEE 10-K report, 2019 Page 2 Source: NEE 10-K report, 2019 As for the commercial accounts and residential accounts as the percentage of total accounts number. There is 89% of accounts are residential accounts and only 11% are 1 commercial accounts as of Dec 2019 . The industrial, Source: NEE 10-K report, 2019 wholesale and other collectively accounts are less than 1%. Based on the Florida area’s 2020 electricity rates, the average monthly electricity cost is $107.55/1,000-kWh. FPL is currently offering a lower bill rate to residents which is $102.72/1,000-kWh2. This means that FPL is continuing to maintain a cost-efficient position, which makes them able to provide a relative lower price of electricity to customers. So, we expect a 3% growth in the following 3 years comparing with the growth rate of 2.78% in 2019 due to its attractive low-price electricity. NextEra Energy Resources The unregulated NextEra Energy Resources subsidiary is one of the largest wholesale generators of electric power in the U.S. with approximately 21,900 MW of total net generating capacity at December 31, 20191. NEER Source: NEE 10-K report, 2019 produces the majority of its electricity from clean and As for the fuel type that FPL uses to generate electricity, renewable sources. NEER is the world's largest generator there are major 4 types of fuel sources which are natural of renewable energy from the wind and sun based on 2019 gas, nuclear, coal and solar. The following bar chart shows MWh produced on a net generation basis. In addition, the distribution of these different fuels. NEER develops and constructs battery storage projects, which when combined with its renewable projects, serve to enhance its ability to meet customer needs for a nearly firm generation source. The following map shows NEER’s generating assets. Page 3 manage reliable customized risk solutions to wholesale customers are competitive advantages. Compared with the regulated business of NEE, this unregulated segment’s future performance is relatively fluctuant because there are a some of factors may impact the demand and the price of renewable energy. Natural gas price is the most crucial factor which will further influence the revenue of NEER. Due to the extreme downtrend of natural gas price in early of 2020, we decide to cut the growth rate of 15.6% in 2019 to 10% in 2020 and 2021. Also, we estimate an increase of its operating expense. The forecasted operating expense is growing Source: NEE 10-K report, 2019 from 35.5% of total revenue in 2019 to 65% in the following 3 years. As for its generating assets at the end of 2019, 65% of net generation capacity which is about 15,955 MW are Gulf Power attributable to wind power, 12% which is about 2,684 MW are attributable to solar facilities, also 12% is belonged to Gulf Power, a rate-regulated electric utility, is engaged in nuclear facilities. Finally, 7% and 4% of net generation the generation, transmission, distribution and sale of capacity which is totally 2,110 MW are attributable to electric energy in northwest Florida. NEE completed the fossil facilities1. acquisition of all of the outstanding common shares of Gulf Power on January 1, 2019. Gulf Power is subject to regulations similar to FPL. The follow map demonstrates the distribution of Gulf Power’s operating territory. Source: NEE 10-K report, 2019 NEER competes in different regions to differing degrees, but in general it seeks to enter into long-term bilateral contracts for the full output of its generation facilities. At Source: Florida Public Service Commission December 31, 2019, approximately 90% of NEER's net generating capacity was committed under long-term As of December 31, 2019, Gulf Power served contracts. NEER primarily competes on the basis of price, approximately 470,000 customers in eight counties but believes the green attributes of NEER's generation throughout northwest Florida and had approximately assets, its creditworthiness and its ability to offer and 2,300 MW of fossil-fueled electric net generating capacity Page 4 and 9,500 miles of transmission and distribution lines As our estimation, we think NEE’s EPS will step in an located primarily in Florida1.