Business Monday

NextEra Energy’s rising fortunes

FPL workers repair power lines that were damaged by Hurricane Irma in September 2017. They are at the corner of Palm Avenue and 37th Street in Hialeah.
FPL workers repair power lines that were damaged by Hurricane Irma in September 2017. They are at the corner of Palm Avenue and 37th Street in Hialeah. Herald file | Sept. 15, 2017

n a stunning transformation from also-ran to star, NextEra Energy has emerged over the past decade as the nation’s most valuable utility, an investor darling and a green-energy stalwart.

As the Juno Beach-based company’s share price routinely sets new records, it’s easy to forget that, in recent memory, NextEra was an afterthought in the energy business, a company whose prospects seemed so mediocre that investors held the stock in hopes that a larger rival would snap it up.

Nearly two decades ago, NextEra — then known as FPL Group — said it would be swallowed by a Spanish utility. That deal fell apart, and FPL Group followed up later in 2000 by announcing it would buy New Orleans-based Entergy. Investors were irritated.

“I thought FPL would be sold to another company at a premium,” Steven Lehman, manager of the Federated Utility Fund, said at the time. “It’s a disappointment to get no premium.”

The Entergy merger collapsed, but NextEra shook off that setback and proceeded to build itself into the utility sector’s star. In 2001, NextEra’s $10 billion value was the 30th-largestmarket capitalization among publicly traded utilities. Today, it’s worth over $90 billion, making it No. 1 by a wide margin. In a distant second is North Carolina-based Duke Energy, worth about $63 billion.

Since the days of FPL’s ill-fated negotiations with Entergy, NextEra has rewarded shareholders with a return of 1,692 percent, said Ken Berman, head of investment-advice service Gorilla Trades in Jupiter and an owner of NextEra stock. In other words, NextEra’s days of disappointing investors are long past.

“They’re perceived as the best — the fastest-growing, the highest-quality, with a robust future,” said Andy Smith, a utility analyst at Edward Jones in St. Louis

How did NextEra outsmart and outmaneuver its rivals? The answer is complicated, but it starts with NextEra’s Florida Power & Light, a reliable profit producer that’s the primary provider of power in a fast-growing state that’s now the nation’s third-largest.

Population growth is only part of the story, however. Florida’s influx of new residents slowed during the Great Recession, just as NextEra was widening its lead on other utilites. At any rate, rapid population growth is something of a mixed bag for utilities, which must invest heavily in new power plants to pump out electricity for all those new homes and businesses.

NextEra’s fortunes have risen thanks to a combination of mergers with smaller rivals such as Gulf Power and investments in wind and solar power around the U.S. and the world.

“The secret sauce of NextEra is an extremely aggressive acquisition strategy in combination with a correct bet on the emergence of wind power,” Berman said.

NextEra declined to comment for this story.

As an early investor in green power, NextEra set itself up to sell wind energy to other utilities. Many power companies are compelled by state regulators to produce at least some of their electricity from green sources.

“NextEra didn’t just see the trend coming,” Berman says. “It was aggressive about capitalizing on government support for renewable energy, in particular the tax subsidies that help finance wind and solar projects around the country.”

The result is that NextEra for years has been the nation’s largest producer of renewable energy — a lead it aims to keep. As the costs of solar panels have fallen, NextEra and its FPL division have invested aggressively in harnessing energy from the sun. FPL, for its part, now operates 18 solar plants. FPL expects to install 30 million solar panels statewide by 2030.

FPL also hopes to begin harvesting solar energy in its home county. The utility plans to build a solar plant in Westlake, the recently incorporated municipality in western Palm Beach County. In another solar project, FPL last year paid $19.3 million for 1,288 acres in western Palm Beach County. That property, surrounded by Indian Trail Groves, is slated for a solar farm.

“They’re the clear leaders in wind and solar, and it looks like the country is moving more and more toward clean energy,” Smith said.

NextEra expects to invest $12 billion in new projects this year.

“Only AT&T, Verizon and Amazon invested more in this country than we did in terms of capital investment,” Chief Executive James Robo told analysts in January. “And we’re going to continue to do what we have done for more than a decade, which is invest smart capital at FPL to improve the value proposition for customers.”

NextEra reported a profit of $6.6 billion on revenue of $17 billion in 2018, making it both massively profitable and the largest company headquartered in Palm Beach County.

Investors aren’t the only ones to benefit from Next<code_hh>Era’s strong run in recent years. The company also employs thousands of well-paid workers. In 2018, the company had 14,148 employees in the U.S., and their median pay was $125,365, NextEra disclosed in a regulatory filing.

That’s higher than any other publicly traded company headquartered in Palm Beach County, according to Palm Beach Post research. NextEra’s employee pay is ninth-highest among publicly traded utilities, a sector that commonly pays six-figure salaries to rank-and-file workers.

Ratepayers also have benefited from NextEra’s acumen, a message that FPL tirelessly repeats. FPL’s residential customers’ typical bill is $99.38, well below the national average of $142.81.

That has led to congenial relations between FPL and its regulatory overseer, the Florida Public Service Commission.

“Much of the company’s success hinges on the relationships it has built through years of low power prices and excellent customer service,” Morningstar analyst Andrew Bischof wrote in a recent report.

“Although regulatory relations in Florida have improved significantly, it’s always possible that regulators could reverse their stance and put at risk FP&L’s ability to deploy capital at attractive rates of return.”

Color him a bit skeptical, if only a little: Bischof lauds NextEra’s results but suggests investors have overvalued the company’s shares. He thinks shares are worth $175, a bit below recent levels. After hitting an all-time high of $195.55 earlier this year, NextEra shares traded Thursday at $197.11. May 10 at $191.

The possibility of rising interest rates also poses a threat. With U.S. unemployment at a 50-year low, it’s possible that the Federal Reserve could raise interest rates — and that, in turn, might lead some investors to trade their utility shares for safer investments.

In general, utility stocks are defensive plays. Utility investors typically focus on the dividend rather than the company’s growth prospects.

“As a general rule, utilities go down or sideways if interest rates go up,” said Carl Domino, a money manager in Palm Beach. “NextEra may well be the exception.”

That’s because NextEra seems to have pulled off the unusual feat of positioning a utility as a growth stock. Its yield of 2.6 percent is below that of other utilities, suggesting its shareholders might be less worried about dividend checks than investors in such companies as Charlotte-based Duke (NYSE: DUK) or Atlanta-based Southern Co. (NYSE: SO), both of which yield more than 4 percent.

Jupiter investor Berman says the looming expiration of federal tax credits for wind power could hamper NextEra’s growth. But he thinks the company can cut through that headwind with more growth in solar power. Intriguingly, NextEra is beginning to build wind farms and solar arrays directly for power-hungry data centers run by Google and others.

NextEra’s “out-performance seems very likely to continue as NextEra keeps investing aggressively in both energy storage and renewables,” Berman said.

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About the company

NextEra Energy, Inc., is a Fortune 200 energy company with operating revenues of $16.7 billion as of Feb. 15.

Headquarters: Juno Beach, in Palm Beach County. The company was founded in 1925.

Key people: <bullet>James L Robo, chairman and CEO; of NEE and chairman of FPL;Eric E. Silagy, president and CEO, Florida Power & Light Company; John W. Ketchum, president and CEO of NextEra Energy Resources; Rebecca J. Kujawa, executive vice president, finance and CFO.

No. of employees: 14,148 employees in the U.S. in 2018

Owns: It owns two electric companies in Florida: Florida Power & Light Company, which serves more than five million customer accounts in the state and is the largest rate-regulated electric utility in the United States as measured by retail electricity produced and sold; and Gulf Power Company, which serves more than 460,000 customers in eight counties in northwest Florida. NextEra Energy also owns an energy business, NextEra Energy Resources, which, together with its affiliated entities, is the world’s largest generator of renewable energy from the wind and sun, according to the company’s website. and a world leader in battery storage. Florida Power & Light; NextEra Energy Resources; NextEra Energy Services; NextEra Energy Transmission.

Areas served: United States, Canada, Spain

Website: www.nexteraenergy.com

Stock price: NEE (NYSE) $197.11 as of May 16.

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Most valuable U.S. utilities

Top 10 energy companies by market capitalization*

1. NextEra Energy (Headquarters in Juno Beach): $94.4 billion

2. Duke Energy (HQ: Charlotte, N.C.): $63 billion. (1.8 million customers are in Florida.)

3. Dominion Energy (Richmond, Va.): $60 billion

4. Southern (Atlanta): $56 billion

5. Exelon (Chicago): $47.5 billion

6. American Electric Power (Columbus, Ohio): $42 billion

7. Sempra (San Diego, Calif.): $36 billion

8. Public Service Enterprise Group (Newark, N.J.): $30 billion

9. Xcel Energy (Minneapolis, Minn.): $29.7 billion

10. Consolidated Edison (New York City): $28.8 billion

*Market cap (rounded-off figures) as of Thursday May 16

Chart: Jeff Ostrowski/Palm Beach Post; Herald staff

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