Scalper1 News
NextEra represents one of the most socially responsible industrial investments, but we believe valuations are not good enough to buy. The company continues to see a battle over what we believe is their largest catalyst – Hawaii. The company’s business remains strong in regulated markets. NextEra (NYSE: NEE ) has recovered about 5% since the last time we looked at the company, and today, we want to take a fresh look at the utility play after their latest round of earnings. We first looked at the company in late February and followed that with an update in June as well as September . As we have previously noted, we like a lot of aspects of NextEra but have not seen the value in 2015, feeling the company is fairly valued for the year. As we near year-end, how did we do? The stock is down 3% on the year as we felt it was worth in best-case scenario $96. The issues that we believe have kept valuations in check as well as our thesis is margin compression and consistency as well as the potential for the Hawaiian Electric (NYSE: HE ) deal. Today, we will wrap up our 2015 catalysts, look towards the future with 2016, and talk about potential targets for 2016 pricing. 2015 Catalysts Concluded, 2016 Focus Economic Moat Strength For us, in 2016, the main reason you invest into NextEra remains the same. The key strength for NEE remains its economic moat that exists from non-competitive agreements that the company has with many municipalities. These type of agreements mean that the company has negotiated a “fair price” deal with a certain geographic area that does not allow competition to enter the market. The idea is that it keeps prices lower for citizens and allows the company to also benefit from non-competition. NEE is attractive because 80% of its business is in the regulated area, which means higher margins, consistent revenues, and low risk for investors. This image from Market Realist tells the tale: (click to enlarge) (click to enlarge) In the latest earnings call, the company talked about its largest regulatory marketplace – Florida Power and Light: We continue to execute on our overall customer value proposition by delivering clean energy, low bills, and high reliability for Florida customers. Each of our capital deployment initiatives to provide low-cost, clean energy continues to progress in accordance with our development plans. Our generation modernization project at Port Everglades is on schedule to come online in mid-2016 and remains on track to meet its budget. Development of our three new large-scale solar projects remains on schedule, with each of these roughly 74 megawatt projects expected to be completed in 2016. These projects, once complete, will roughly triple the solar capacity on our system and add to the overall fuel diversity of our fleet, which is important for FPL and its customers. Will anything change on this front in 2016? The major regulatory change to watch in 2016 has to do with Hawaii not Florida. The company is seeking state approval after they acquired HE, and that has been the main focus of our articles in the past…it will remain our focus for 2016 as well. The company stands to benefit a lot from adding HE to this high margin regulated environment, and a lot of the value in the company is embedded in that opportunity. Hawaii – Another Regulated Market to Add Shareholder Value As we have noted previously: In 2014, NextEra bought Hawaiian Electric ( HE ) for north of $4B. The move was a chance to come into a new market that was in need of cost savings and be able to combine a regulated market with the company’s practice of making efficient utility deliveries. Further, NEE wanted to be able to bring its ability and knowledge of scaling renewable energy in an area that is burdened by extreme energy costs. Between the company’s initiatives in solar energy and knowledge of other sources, NEE stands to be able to generate a very strong value proposition for Hawaii while also continuing to promote its economic moat. So, how have things been moving since the last time we looked at the company… The last two times we have investigated NEE the key aspect for the company has been getting regulatory approval from Hawaii. When we first looked at the acquisition, NextEra was quite confident they could get the deal done in a timely fashion. Since then, things have gone up and down. For example, in April, HE’s CEO came out saying he was confident that the deal would be completed within a year, and the Hawaiian House of Representatives put a resolution in place to complete the deal by June 2016. Given the market is regulated, it is a major decision for Hawaii, consumers, etc. Yet, in the last report, we noted that the Governor of Hawaii had come out at least much less confident in the deal if not against the acquisition. As CEO James Robo noted: Steve this is Jim, obviously the state filed a testimony ten days ago saying that they opposed the deal in its current form and the Governor held a press release where he, press conference where he said he opposed the deal in its current form. I think the key, the keywords there in its current form, they also, the state also listed several conditions that would be, I think just positive for them to think about changing their view. And we are in the process of responding to that testimony and we think we have a very strong case to put forward to the Commission around the benefits to customers, the benefits to customers were actually pretty compelling and I think we’re going be able to make that case as we go forward. So, this was not necessarily a surprise to me that the state filed a kind of testimony that they did and we are going to continued to move forward on laying out our arguments and we look forward to the hearings we’re going to have in December to make our case. This news was not exactly the type of “positive” news that the company had hoped for. Since that comment in July, the Governor has said the process was still very early, and that he is looking forward to the company’s responses to testimony it presented. The process had grinded to halt. In the latest earnings call, the company noted: Steven Isaac Fleishman – Wolfe Research LLC And then, lastly, just could you maybe give us any color or latest thoughts on the Hawaiian Electric deal? James L. Robo – Chairman, President & Chief Executive Officer Sure. So we continue to work hard to get the final hurdle, which is state regulatory approval in Hawaii. We have recently gotten a couple intervenors to either fall away or announce their support, and I was very pleased that the IBEW announced their support for the transaction last week. And we continue to work it. I think my expectation, based on timing right now, is that we’re not going to get any kind of decision from the PSC until next year, and so we’re going to continue to work it and continue to talk to the parties to try to get it across the finish line. That was the company’s only mention in the call of the deal. Outside of the earnings, the news has been moving positively. As Robo noted, the largest union of electrical workers, representing 1500 workers, came out in support of the acquisition. That type of support is the kind that the company needs as they are seeking approval. The issue has come down to that the Governor wants 100% renewable energy in Hawaii by 2045. NextEra has not made those types of promises. Electricity is extremely expensive in Hawaii, so the move to all renewable would dramatically decrease costs and Hawaii’s dependence on shipping in electricity. NextEra came out recently saying that it would take $30B to get to that 100% renewable energy: Eric Gleason, president of NextEra Energy Hawaii LLC, said at a Waikiki business luncheon this week that getting the state off its dependence on oil would cost $30 billion over the next three decades. “There is no utility in the country that has as much on its shoulders as Hawaiian Electric does right now,” Gleason said. “Hawaii needs a financially very strong utility to either make or backstop something like $30 billion of investments over the next few decades. … There is a big need for capital to make all of this happen.” That number has scared the PUC, which approves the deal. They believe that cost will be passed onto customers, which would make high bills rise even more. The idea of HE getting the capital and infrastructure from NEE was that bills would get lower, but NEE argues that if it is predicated on getting to 100% renewable energy…it can brings bills down. Thus, we have the stalemate. With more support being thrown to NEE, the company has more grounds to pressure the government. We will continue to see this issue for the coming months, and the company’s getting the deal done in the timeframe they originally expected does not look likely. Does this materially change the outlook for NEE? It does not change any revenue/profits, but it changes potential revenue and profits. The deal added about 10% to the value of the stock, so if it falls through or is derailed…we could see that type of reduction in prices as well as our model. 2016 Pricing The company’s 2016 pricing will be delayed for us as we don’t see any material change in our current valuations with one more quarter to go in FY 2015 and the Hawaii deal in limbo. For now, we continue to like the $96 price tag we had originally floated at the beginning of the year. For 2016, we are set to see that price tag increase by the rate of earnings increasing, which is estimated at 5%. If Hawaii does go through, this could change this model, so we want to wait to see how this plays out and FY 2015 closes out. Conclusion NextEra has interesting catalysts to 2016, but a lot of the potential for another major run will be predicated on getting Hawaii right. The company’s valuation has come down with the flat move in the share price this year, which does set it up for probably a 5-10% move in 2016. Without success in Hawaii, though, we could see another flat to weak year in FY 2016. Recent issues in Hawaii Electric ( HE ) make me nervous, but the rest of the company’s business is extremely intriguing and strong, which neutralizes my fears there. With PEG still over 2.0, though, we aren’t interested in dipping a toe at this time still. Scalper1 News
Scalper1 News