This past spring Zane Laws, Quinn Peebles and I competed in the University of Southern California Spring 2018 Investment Competition at USC in Los Angeles. We pitched a long position in NextEra Energy Inc, ticker NEE.
Nextera Energy University of Southern California Investment C
1. Zane Laws, Tim O’Brien, and Quinn Peebles
University of Southern California – Spring 2018 Investment Competition
April 7, 2018
1
2. I. Investment Thesis
NextEra Energy Inc. (NYSE:NEE)
I. Thesis II. Background III. Industry IV. Valuation I. Conclusion
2
3. Investment Thesis
NextEra Energy’s pricing advantage, industry growth optimism, and several expansion opportunities provide
a justifiable long position in the company.
Recommendation: Buy and Hold Current Price: 162.37 One Year Price Target: $198.09 (+ 22%)
NextEra’s pricing advantages offer company
wide stability with additional plans to lower
costs for consumers by the end of 2018.
NextEra is poised to grow with the overall
positive outlook on the electric utilities industry.
NextEra Energy has plans for growth in various
regions and segments of the company that
extend through 2023.
NextEra holds a Net Debt to EBITDA of 4.19.
Typically, this is a sign that a company is
relatively unable to handle the burden of heavy
debt.
Natural disasters may affect the ability of
NextEra to preform scheduled projects.
The current administrations tariff on solar
power panels has the ability to raise the prices
of solar panel parts made outside of the United
States of America.
Catalysts Risks
I. Thesis II. Background III. Industry IV. Valuation I. Conclusion
3
4. II. Company Background
NextEra Energy Inc. (NYSE:NEE)
I. Thesis II. Background III. Industry IV. Valuation I. Conclusion
4
5. Company Background
NextEra Energy is an investment holding
company that, through its primary subsidiaries
FPL and NEER.
NextEra has operations across 32 states in the
U.S., 4 provinces in Canada, and parts of Spain
NextEra is the largest generator of renewable
energy in the world.
Business Model
NextEra One Year Performance
Company Structure
Management
Revenues
CEO – James L. Robo
Robo joined NextEra as VP of corporate
development and strategy in 2002.
Harvard graduate
CFO – John W. Ketchum
During 2016, NEE's Board of Directors
appointed Ketchum to the positions of
Executive VP and CFO of both NEE and FPL.
Ketchum has been with the company since
2002.
I. Thesis II. Background III. Industry IV. Valuation I. Conclusion
5
6. Company Background - Florida Power & Light
FPL focuses on providing energy generation
services to residential and commercial
customer within the Florida region.
The company generates a total of 25,900 MW
(56%).
Although operating mostly with non-
renewables, FPL maintains significantly lower
rates of greenhouse gas emissions in
comparison to the average rates of the U.S.
electric and power industry.
The management behind FPL has achieved
numerous rewards and recognition for the
past 25 years.
In 1989 FPL was the first U.S. company to win
the Deming prize - one of the highest awards
on total quality management in the world
In 2004, the lean Six Sigma program was
introduced to help teams throughout the
company improve solving complex business
challenges and to serve customers in more
cost-effective ways
Operational Map
I. Thesis II. Background III. Industry IV. Valuation I. Conclusion
Business Model
Management Success Fuel Type Breakdown
6
7. Company Background - NextEra Energy Resources
Business Model
NextEra Energy Resources (NEER) emphasizes
the development, acquisition, and operation
of long-term contracted assets with a focus
on renewable projects.
NEER holds 20,000 MW (43%) of generating
capacity, making them the world's largest
operator of wind and solar projects.
Operational MapM&A Activity - NEP
NextEra Energy Partners (NEP) is considered
NEER’s M&A business. NEP specifically
acquires, manages and owns contracted clean
energy projects with stable, long-term cash
flows.
NEP owns a portfolio of 26 wind and solar
projects with a generating capacity
of 3,728 MW and several long-term contracted
natural gas pipeline assets. NEER operates
substantially in all energy projects within NEP's
portfolio.
Fuel Type Breakdown
I. Thesis II. Background III. Industry IV. Valuation I. Conclusion
7
8. Competitive Advantage
When compared to the Florida electric utilities
annual average bill, FPL has a 13% lower
monthly bill. And when compared to the
national average bill, FPL has a 27% lower
monthly bill.
NEE operates heavily within both the
renewable (NEER) and non-renewable market
(FPL). Most competitors have operations in one
or the other.
Moving forward, wherever the energy market
shifts in favor of (renewable versus non-
renewable) NextEra has a foothold in each
market.
NEE’s lean six sigma management approach has
been proven successful for over 30 years now.
The method behind this strategy focuses
primarily on improving existing processes by
removing waste, inconsistency, and overload.
NEE is one of the few businesses that uses this
approach within the entire industry.
Pricing Advantage Energy Market
Management Strategy
MW Capacity
NextEra’s 46,000 MW count is currently the
largest in the renewable industry.
To put it into perspective, Midcontinent ISO,
NEE’s largest competitor, only has 9% of the
generating capacity NextEra has (4,115 MW).
I. Thesis II. Background III. Industry IV. Valuation I. Conclusion
8
9. Competitive Advantage – Reputation
Company Recognition
I. Thesis II. Background III. Industry IV. Valuation I. Conclusion
9
10. III. Industry & Company Growth
NextEra Energy Inc. (NYSE:NEE)
I. Thesis II. Background III. Industry IV. Valuation I. Conclusion
10
11. Industry Growth
Current Outlook
By the end of 2017 the United States became regarded as a major energy exporter by setting a record for renewable energy production*. For the
first time ever, wind and solar power accounted for 10% of all electricity generated in the country.
*According to the Deloitte Center for Energy
Solutions
Analysts at the US Energy Information
Administration project a 39% generation
growth by 2019
EIA also forecasts double digit growth by next
year which would be the first year to surpass
hydroelectric power
Natural Gas
There has been an 40% increase in drilling for
natural gas over the past nine years.
Analysts at Deloitte expect there to be a 29%
increase in the near future.
FPL is principally involved in the natural gas
segment (77% of assets).
Wind Nuclear
World Nuclear Association stated in their
Harmony vision that nuclear power will more
than double in capacity by 2030
Nuclear Energy Institute reported that nuclear
energy accounted for 20% of the US energy
consumption in 2017
I. Thesis II. Background III. Industry IV. Valuation I. Conclusion
11
12. Industry Demand
Nonrenewable Renewable
Falling Prices
Solar power prices have fallen
significantly over recent years.
Reports say that the trend will
continue due to the drop in cost
of operating the panels.
Wind prices have also fallen due
to far-reaching efforts to
integrate the power into
domestic use.
Falling prices for both
renewables will lead to greater
consumer demand.
Technology
Solar panels have became much
easier to produce and install
due to a new mount design.
Wind turbines have become far
more efficient through using
improved communication
methods between the turbines.
The ability to store this energy
has also contributed to the
rising demand as it further helps
the integrating into the grid.
Coal
Coal continues to decline as it is crowded out by renewables with a 17%
decline in consumption expected for 2018.
Coal will be replaced by renewables and removed from electricity production
because it is the most expensive power to produce and consume.
The natural gas market has doubled in the last
decade and outpaced demand which kept
downward pressure on prices.
The low cost of natural gas will spur more
production and as oil prices continue to climb,
natural gas will become its replacement.
Forbes projects that the price of natural gas will
remain $3 per unit in the foreseeable future.
EIA estimates a 3% growth in residential
demand over the next two years due to higher
reserves and lower prices. This will amount to
approximately 59,000 MW of natural gas.
I. Thesis II. Background III. Industry IV. Valuation I. Conclusion
12
13. Company Growth
In Buffalo, NY, NextEra received a commission
from NYISO to develop and construct a 20 mile,
345-kV power line that will be serviceable by
2022. A typical power line has between 1 and
70-kV.
Established Plans for Company Growth
Solar Panel Farm Battery Project New York Power Line
Over the next 5 years, NextEra has set in
motion plans to add 10M solar panels to their
Solar energy generation facilities providing
2400 MW of power. 2.5M are already online
and provide 600 MW, enough to power
120,000 homes.
Tucson Electric selected NEER to construct the
largest combined solar power and storage unit
in the United States. This will add 100 MW of
generation ability and 30 MW of storage ability
to NEER. Within this agreement, there is a
contract for a 100 MW wind farm as well.
I. Thesis II. Background III. Industry IV. Valuation I. Conclusion
13
14. IV. Valuation
NextEra Energy Inc. (NYSE:NEE)
I. Thesis II. Background III. Industry IV. Valuation I. Conclusion
14
16. Valuation – Ratios
Ratios PSX SRE DUK VLO
Market
Capitalization
44B 28B 54B 40B
Price to
Earnings
9.6 109.50 17.41 10.19
Earning per
Share
9.94 1.00 4.36 9.25
Current Ratio 1.42 .50 .67 1.74
Price to Sales .54 2.49 2.48 .42
Price to Book 1.91 2.20 1.29 1.82
Ratios NextEra Energy
Market
Capitalization
75B
Price to Earnings 14.08
Earnings per
Share
11.39
Current Ratio .63
Price to Sales 4.74
Price to Book 2.71
I. Thesis II. Background III. Industry IV. Valuation I. Conclusion
16
NEE Charts
17. Relative Valuation
COGS & SGA
1.Duke Energy Corp. (DUK)
EV/EBITDA- 11.69
2. Valero Energy Corp. (VLO)
EV/EBITDA- 7.60
3. Phillips 66 (PSX)
EV/EBITDA- 25.02
4. Sempra Energy (SRE)
EV/EBITDA- 12.86
5. Edison Inc. (ED)
EV/EBITDA- 10.30
We believe NextEra is trading at a discount to
their peers…
If NextEra were trading at 14x enterprise value
to ebitda, compared to the industry average of
13.7.
Subtracting the current net debt of the
company, 33B, we have an implied market cap
of 90B.
By taking the current shares outstanding of
470M and dividing it by the implied market, we
believe the implied share price to be $192.00
Therefore, we believe Next Era is trading at a
20% discount to their peers.
Valuation Competitors Reasoning
I. Thesis II. Background III. Industry IV. Valuation I. Conclusion
17
18. Discounted Cash Flow Analysis
NextEra Discounted Cash Flow Analysis
Discounting the Perpetuity
Expected Upside
Our discounted cash flow analysis has NextEra presenting a
25% upside.
We have forecasted out revenues as growing 8% per year.
This is based off of several factors. Management forecasts,
future expansion plans, and consumer demand all factor in
to our forecast.
The consistent decline in cost of goods sold can be
attributed to managements guidance related to cutting
costs.
Our projected capital expenditures growth can be attributed
to the expansion plans the company has put in place.
Therefore, we believe Next Era is trading at a 25% discount
to their peers.
I. Thesis II. Background III. Industry IV. Valuation I. Conclusion
Reasoning
18
19. V. Investment Risks and Conclusion
NextEra Energy Inc. (NYSE:NEE)
I. Thesis II. Background III. Industry IV. Valuation I. Conclusion
19
20. Investment Risks
Conclusion
With the Federal Reserve increasing the funds rate, NextEra Energy may be too leveraged to support expansion projects the company has put in place. In addition, the
solar panel tariff President Trump imposed has the chance to flatten top-line expectations. The company’s risk will be hedged against strong, strategic, pricing advantages
that are aided by the various power price declines as well as nationwide expansion involving substantial MW capacity growth. NextEra Energy is reliable investment,
proven to deliver value even amongst uncertainty in economic outlook, therefore we recommend a buy and hold on NextEra Energy Inc.
With NEE’s extensive plans to grow, they open
themselves up to a significant amount of
interest rate risk.
Utility companies are notorious for being highly
debt financed which means that in a rising
interest rate environment, they are uniquely
impacted.
The Fed estimates a total of eight quarter-point
hikes in the fed-funds rate through the end of
2020. That includes three increases this year,
three in 2019 and two in 2020.
By the end of 2020 rates could approximate to
3.4%.
Solar Tariff
President Trump has enacted a tariff on
imported solar panel components that consists
of a 4 year, 30% tax decreasing 5% annually.
Political speculation from installation
companies say the potential loss of American
jobs due to the severely raised prices of solar
panels could put a halt on some projects
Other political speculation from manufacturers
says the tariff has a chance to boost American
productivity and create enough jobs to offset
and even surpass any jobs lost
Industry analysts still hold a positive outlook on
the electric utilities industry regardless of the
outcome
Another risk that has risen over the past few
years is natural disasters.
With one of NEE’s largest subsidiaries (FPL)
operating primarily on the eastern coast of
Florida, they expose themselves to the
destruction of the company’s existing
infrastructure.
Natural disasters have been ever more
prevalent as NEE reported a storm restoration
expense of 1.3 billion in 2017.
I. Thesis II. Background III. Industry IV. Valuation I. Conclusion
Macro Economic Trends Natural Disasters
20
23. The company’s largest renewable competitors consist are:
Midcontinent ISO - 4,115 MW
Southwest Power Pool - 3,592 MW
ERCOT - 2,804 MW
California ISO - 2,073 MW
ISO New England - 2,025 MW
PJM - 716 MW
Independent Electricity System Operator - 565 MW
NYISO - 142 MW
Alberta Electric System Operation - 82MW
23