Heading into Q1 earnings reporting season, the big question for electric utilities was how big a hit COVID-19 fallout would deliver to demand for power.
The April issue of Conrad’s Utility Investor focused on potential revenue risks to dividends. Now we have answers from first reporter NextEra Energy (NYSE: NEE). And implications are bullish, especially for companies speeding adoption of wind and solar energy.
NextEra’s Q1 adjusted earnings per share increased 8.2 percent from a year ago. That number handily topped the average estimate of the 20 Wall Street analysts covering the stock, as tracked by Bloomberg Intelligence. And results featured solid net income gains of 9.2 percent at Florida Power & Light, 8 percent at Gulf Power and 13.3 percent at unregulated Energy Resources.
Management affirmed guidance for 6 to 8 percent annual earnings growth over the next two years off a 2018 base of $7.70 per share, and a similar lift from 2021 returns in 2022. That’s still expected to fund 12 percent dividend growth in 2020, and 10 percent increases for “at least” the next two years.
These projections don’t include expected accretion from Florida utility acquisitions of 15 cents per share in 2020, with 20 cents more in 2021. Nor do they assume any favorable impact from other potential M&A.
NextEra is uniquely positioned in its industry right now to make major acquisitions, in part by virtue of its shares’ premium equity valuation of 27 times expected 2020 earnings per share. Cost of debt capital is also extremely low, with bonds of December 2077 priced to yield just 3.29 percent to maturity.
The company is apparently a finalist in the bidding for South Carolina’s Santee Cooper, which remains financially stressed from the cancellation of the Summer nuclear plant. And it’s a rumored potential bidder for Missouri/Kansas utility Evergy Inc (NYSE: EVRG), which is under pressure from private capital firm Elliott Management to maximize shareholder value.
NextEra’s surest long-term growth driver is its regulated Florida rate base. Utility CAPEX is focused on building at least 11.6 gigawatts of solar power and related storage capacity by the end of the decade, with the eventual goal of replacing fossil fuel power plants.
That’s a move management now touts as much for cost cutting as environmental benefits, and all projects are on track and on budget. The company plans to reduce expenses further by merging operations at FPL with upstate unit Gulf Power, acquired from Southern Company (NYSE: SO) last year.
Together, FPL (53 percent Q1 earnings) and Gulf Power (3 percent) enjoy robust customer growth of about 1.2 percent a year. They draw 64 percent of revenue from residential users and have minimal exposure to industrial customers (3 percent revenue). And FPL (90 percent of utility revenue) also has “reserve amortization,” which offsets the impact of lost sales on earnings.
On paper, that’s a powerful formula for withstanding potential COVID-19 related impact. And so far at least, it appears to be working.
The utilities’ “weather normalized” usage is down roughly 2 percent since Florida’s lockdown began, relative to the prior two-year average. But even if that entire drop can be blamed on COVID-19 fallout, the impact on actual electricity demand has been dwarfed by weather, with sales rising 3.5 percent from a year ago.
The only real threat to electric utilities’ dividends during 2008-09 was from their unregulated operations. That’s the primary reason for the only sector cut in this downturn so far: Centerpoint Energy’s (NYSE: CNP) 48 percent dividend cut, triggered by reduced cash flow from its ownership stake in battered Enable Midstream Partners (NYSE: ENBL).
NextEra’s ongoing quest to add regulated utility assets is in part motivated by a desire to balance the growth of unregulated Energy Resources. The wholly owned unit is the largest operator of contracted wind and solar power facilities in the US with 25 GW either running or in development. It also has ownership interests in long-term contracted natural gas pipelines.
Though low risk, neither business is without hazards. NextEra affiliate NextEra Energy Partners (NYSE: NEP), for example, still has $48 million in cash held up at facilities selling electricity to PG&E Corp (NYSE: PCG), as surety for lenders until the bankrupt utility completes its restructuring. Other factors beyond Energy Resources’ control that could affect 2020 earnings include variable wind resource, natural gas prices and Texas power market conditions.
The pipeline business primarily transports gas to regulated utilities under long-term contracts, which minimizes counterparty risks. The company does face risk of a potential writeoff of its 30 percent interest in the Mountain Valley Pipeline, should the now 90 percent completed project be unable to secure still needed permits.
But so far at least, Energy Resources is encountering few obstacles to either getting paid for its pipelines, or to fueling its primary earnings driver of building new contracted wind, solar and storage facilities. And power sales contracts also typically include compensation for any customer decisions that reduce delivery of energy, which negate volume risks as well.
Orders for new renewable energy facilities are robust as ever, with management adding 1.6 GW to development during Q1. Supply chains are strong, demonstrated by ahead of schedule wind turbine deliveries this year. And execution is on target, with no “significant equipment or labor issues” at any of the 5 GW of projects slated for startup this year.
During NextEra’s Q1 earnings call, CEO Jim Robo again stated he’d “be disappointed” if earnings for 2020-22 were not “at or near the top end” of guidance. That extends to NextEra Energy Partners, which boosted EBITDA 30 percent and tripled cash available for distribution in Q1.
The risk to buying NextEra now is high valuation. In mid-March, the stock dropped over $100 a share to a level below our buy target of 190. Now it’s back at a lofty price and potentially vulnerable to another bear market down leg. Would-be buyers should again be patient.