NextEra Well Positioned for Renewable Energy Growth

Business Strategy & Outlook:

NextEra Energy’s high-quality regulated utility in Florida and fast-growing renewable energy business give investors the best of both worlds: a secure dividend and industry-leading renewable energy growth potential. NextEra’s regulated utility, Florida Power & Light, benefits from constructive regulation that offers high allowed returns, little regulatory lag, and low customer rates. Florida’s strong economy and population growth through 2026. The utility plans to invest $32 billion to $34 billion from 2022-25, supporting 9% rate base growth. Growth opportunities include continued solar generation build out, storm hardening investments, and transmission and distribution infrastructure. The recent Florida rate case outcome supports our view that FP&L enjoys industry-leading constructive regulation. The outcome allows for a target 10.6% allowed return on equity, one of the highest among its peer group, with a range of 9.7%-11.7%. The rate case outcome also supports hydrogen, electric vehicle programs and storm hardening.

The company’s highly contracted competitive energy business, NextEra Energy Resources, has proved to be a best-in-class renewable energy operator and developer. The company was an early adopter of wind generation, building a competitive advantage by securing some of the country’s most desirable locations and locking in 20-year contracts with price escalator clauses. NextEra’s current plans shift the focus to solar. Roughly half its planned renewable energy growth through 2026 will be solar, with the remaining a mix of wind and energy storage. Higher costs could threaten near-term renewable energy development, but high fossil fuel costs have helped maintain renewable energy’s relative economic advantage. Management’s continued execution on its NEER development program gives us confidence that NextEra will deliver on its 28 gigawatts to 37 GW development target range in 2022-25. Investments in green hydrogen, transmission, and water utilities present additional growth opportunities.

Financial Strengths:

We forecast that NextEra will invest over $90 billion through 2026, requiring it to be a frequent debt issuer. We expect NextEra to continue to tap project financing, including tax equity, to build out its renewable energy fleet. The company has manageable long-term debt maturities, and we anticipate that it will be able to refinance its debt as it comes due and maintain its debt/capital ratio. We expect the firm to tap the equity markets in line with its current capital structure. We expect total debt/EBITDA to remain near 5.0 times. Even with its large capital expenditure program, NextEra maintains a strong balance sheet, particularly for an integrated electric utility, and an investment-grade credit rating. We expect debt/capital to average 60% through our 2026 forecast. Interest coverage should average over 5.5 times. NextEra has ample cash liquidity and borrowing capacity available under its master revolving credit facility. We believe NextEra’s dividend is well covered with its regulated utilities’ earnings. We forecast 9% average dividend increases through 2026 with the payout ratio remaining around 60%.

Bulls Say:

FP&L operates in one of the most constructive regulatory environments with numerous capital investment opportunities.
NEER has benefited from renewable energy federal tax credits, but state renewable portfolio standards, corporate purchases, and attractive economics are now driving investments in renewable energy.
Management’s long runway of capital investment opportunities support our industry-leading 9% annual earnings growth outlook from 2022-26.

Company Description:

NextEra Energy’s regulated utility, Florida Power & Light, distributes power to more than 5 million customers in Florida. FP&L contributes more than 60% of the group’s operating earnings. The renewable energy segment generates and sells power throughout the United States and Canada. Consolidated generation capacity totals more than 50 gigawatts and includes natural gas, nuclear, wind, and solar assets.

(Source: Morningstar)

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