1. NextEra Energy, Inc. – NYSE: NEE
10/25/2019
Haoran Zhu, Julian Escoto, Kevin Kim, Pranav Wadhwa

2. Table of Contents Security Overview Industry Overview Company Overview
Investment Merits and Risks
Financial Model and Projections
Comparable Analysis

3. Security Overview

4. Security Overview Informational Characteristics CUSIP – 65339KAT7
Coupon – 3.55% Fixed, Semi-Annual
Maturity – 05/01/2027
Callable – Next call date: 02/01/2027
Tranche – Senior Unsecured
Class – Company Guaranteed
Amount Issued/Outstanding – 1.250B/1.250B
Credit Rating – Baa1 (Moody’s), BBB+ (S&P), A- (Fitch), BBB+ (Composite)
Certain Sales of Assets Covenant
Pricing and Yield
Price –
YTW –
YTM –
OAS – 87.0 bps
Source: Bloomberg

5. Security Overview
Source: Bloomberg

6. Industry & Company Overview

7. Current State of Industry
Industry Overview
Current State of Industry
Renewable energy companies capture energy from natural resources and convert it into usable forms of energy such as electricity. In 2017, the global renewable energy market had a market capitalization of $928.0B and is expected to reach $1.512T by 2025. Key players include NextEra Energy, Brookfield Renewable Partners, TerraForm Power, First Solar, General Electric, Invenergy LLC, and Xcel Energy as they generate some of the highest energy capacities in the industry. Due to the impending climate change crisis, the demand for renewable energy is at an all time high. Solar and wind energy have now reached a state of profitability due to improvements in technology and government funding, and share prices are bound to rise over the next couple of decades as a result of our increasing dependence on renewable resources. The key driver for utilities’ earnings growth is capital spending, since it has increased every year since In fact, the consensus for S&P 500 utilities expect record-high spending of $109.5B in 2019, due to state policies towards renewable goals and more investments in contracted renewables to reduce taxable income and increase earnings. The biggest uncertainty for contracted renewables is the expiration of US tax credits, which contributes to cheaper costs, but there is a good chance of an extension. The wind and solar development should keep growing even if tax credits fade, as costs become competitive with gas plants.
Source: Bloomberg, NextEra Energy

8. Company Overview Company Overview
NextEra Energy, Inc. (NYSE: NEE) is a leading clean energy company headquartered in Juno Beach, Florida. In 2018, NEE generated $16.7B primarily through their two principal businesses, Florida Power & Light Company (FPL) and NextEra Energy Resources (NEER). FPL is the largest electric utility in the state of Florida and one of the largest electric utilities in the U.S. FPL’s strategic focus is centered on investing in generation, transmission and distribution facilities to continue to deliver on its value proposition of low bills, high reliability, outstanding customer service and clean energy solutions for the benefit of its more than five million customers. NEER is the world's largest generator of renewable energy from the wind and sun. NEER’s strategic focus is centered on the development, construction and operation of long-term contracted assets throughout the U.S. and Canada, including renewable generation facilities, natural gas pipelines and battery storage projects.
Revenue percentage (2018): 55% residential, 34% commercial, 4% wholesale, and 7% wholesale.
Customer percentage (2018): 89% residential, 11% commercial, less than 1% industrial, wholesale, and other combined.
Source: Bloomberg, NextEra Energy, 10K

9. Company Overview – Recent Acquisitions
NextEra Energy acquired Gulf Power, a rate-regulated electric utility with generation, transmission, distribution and sale of electric energy in northwest Florida in January Gulf Power serves more than 460,000 customers in eight counties throughout northwest Florida and has approximately 9,400 miles of transmission and distribution lines and 2,300 MW of electric generating capacity. The purchase price included about $4.5B in cash consideration, and $1.3B of Gulf Power debt. The cash purchase price was funded through $4.5B of borrowings by NextEra Energy Capital Holdings (NEECH), which matured in June of this year, so NextEra successfully paid back the loan, which demonstrates NEE’s repayment ability. In addition, the synergy resulting from this acquisition is shown through the benefits of a focus on operational cost effectiveness in regards to smart capital investments. For instance, the Plant Smith combustion turbine upgrades, NEE’s first major capital projects, was completed and generated about $40M of net customer savings over their lifetime.
Last month, NEE announced a $1.37B agreement to acquire Meade Pipeline Co. and its interests in Central Penn Line (a 185-mile natural gas line stretching through PA and supplies low-cost natural gas to the mid-Atlantic and Southeastern regions). NEE claimed that this deal would bring $90M in expected revenues via an opportunity to expand the pipeline, anticipating a double-digit return. It would also expand the company's investments in long-term contracted natural gas pipelines to help "mitigate any potential resource volatility" in its portfolio, said Jim Robo, CEO of NextEra. Under the deal terms, BlackRock Global Energy & Power Infrastructure would pay about $170M for an equity interest in Meade Pipeline, which NEE would use to finance part of the deal. NEE expects to close the transaction in the next 60 days but the deal is currently in progress with regulators.
Source: 10-K, 8-K, BJZ Journals, Investor Presentation

10. Investment Merits and Risks

11. Investment Merits and Risks
Investment Risk and Merit Summary
Investment Merits Merit 1 – Size and diversification of business lines Merit 2 – Strong balance sheet and financial health Merit 3 – Strong growth in renewable energy Investment Risks Risk 1 – Regulation of energy and renewables sector Mitigant: History of strong compliance with regulation Risk 2 – Issues with battery storage may make other alternative energy sources more popular Mitigant: Other forms of energy share similar storage problems Risk 3 – Concentration of infrastructure in Florida Mitigant: Efforts to diversify solar and wind farms throughout the country

12. Size and diversification of business lines
Investment Merits
Size and diversification of business lines
NEE has two major business lines: Florida Power & Light (FPL), the largest electric utility in the state of Florida, and NextEra Energy Resources (NEER), the world's largest generator of renewable energy from the wind and sun. Both subsidiaries experienced tremendous growth over time and expanded in size through acquisition and enlarging business capacity. In Florida, FPL obtains almost a monopoly on electric utility, as the largest player in the region. Besides, the acquisition of Gulf Power allowed FPL to gain another 460,000 customers in northwestern Florida. Similarly, NEER’s wind energy capacity has nearly tripled. It has the largest market share of North American wind capacity
In addition to NEE’s separation of its operation into renewable and electric utility, the company as a whole strategically focuses on generation, transmission, and distribution facilities, which constitute a diversified portfolio. In particular, NEE diversifies its operations by fuel type and geographic location (shown by figures). For instance, FPL depends upon a mix of fuel sources including natural gas, oil, coal, and solar for its generation facilities and the ability of some of its generation facilities to operate on both natural gas and oil. These ways of business diversifications reduced the company’s exposure to operation risks, which strengthen NEE’s repayment ability
Source: 10-K, NextEra Energy Resources, Bloomberg

13. Size and diversification of business lines
Investment Merits
Size and diversification of business lines
NextEra Energy’s Generation Facilities by Location
Source: 10-K, NextEra Energy Resources, Bloomberg

14. Strong balance sheet and financial health
Investment Merits
Strong balance sheet and financial health
NextEra’s strong balance sheet and financial health is visible in its Free cash flow, Debt to Equity Ratio, and Net Interest Coverage Ratio. In the last year NextEra has increased its debt by $3B from $35B to $38B, which explains the free Cash flow for Q of $179M. This represents a good free cash flow as they are up from -$4B in cash flow due to the acquisition of Gulf Power for $4.35B in cash. Free cash flow is also trending up due to increases in operating cash flow and recent reductions in financing cash flows. NextEra is also on track to acquire greater market share due to acquisitions of firms like Gulf Power.
NextEra has a debt to equity ratio of .88. This is much lower than the Q2 sector average of 2.42, making NextEra relatively safe in a highly leveraged industry. NextEra’s debt to equity ratio has consistently declined over the past four years and has inched closer to the industry average. When compared to its direct competitor EDP Renewables (Debt to Equity Ratio of 1.16) NextEra is doing considerably better.
Building off the conversation on debt, NextEra has a strong net interest coverage ratio. For a company to be considered “safely able” to pay its interest expenses and handle its debts, the company’s EBITDA should be three times its interest expenses or it should have a net interest coverage ratio of 3x. Though, NE has accrued a lot of debt it has a Net Interest Coverage Ratio of 3.05x, proving that it has the ability to pay its interest expenses and is not likely to succumb/default to its debt load.
Source: 10-K, NextEra Energy Resources, Bloomberg

15. Strong macro growth in renewable energy
Investment Merits
Strong macro growth in renewable energy
Although the generation of renewable energy requires large investments, many companies are committing to making the switch to renewable energy in order to combat climate change. The three main drivers of growth include emerging government policies that support renewable growth, expanding investor interest, and advancing technologies. Over the past two decades, nearly 50 percent of US wind and solar development was driven by state mandates, especially from states with a 100% renewable energy target goal. Federal and state policies are also supporting battery storage development, which adds value to renewables and promotes further growth. But state governments are not the only ones interested in renewables, since at least 156 corporations worldwide committed to a 100% renewable energy goal. Oil and gas companies are also taking interest in renewables in order to diversify their assets, a goal that NextEra Energy uses to structure their enterprise. The increased interest in renewables leads to an increased interest in technology development, such as grid infrastructure and managing household energy usage with the goal of making renewable energy more efficient. In addition, the US renewable energy sector remained strong despite the uncertainty regarding federal tax reform legislation and import tariffs.
Sources: Bloomberg, Deloitte

16. Regulation of energy and renewables sector
Investment Risks
Regulation of energy and renewables sector
NEE and its FPL business line could be negatively affected by federal or state laws or regulations mandating new or additional limits on the production of greenhouse gas emissions. They could add additional costs in taxes or emission allowances, which would make NEE’s generation units vulnerable operating in the long run. For instance, the Regional Greenhouse Gas Initiative (RGGI) comprising of nine states established to reduce emissions cap to 30% below 2020 levels by 2030, which imposes costs to companies such as NEE. Currently, there is increasing momentum for a carbon emissions tax. The Carbon Dividend Act of 2019 proposes a fee on carbon-emitting fuels starting at $15 per metric ton for CO2 emissions. The bipartisan bill was introduced to the House in January but has not advanced past the committees to which it was referred. Potentially, this would be costly to NEE. NEE consequently would have to invest heavily in replacement facilities.
Mitigant: NEE has developed processes and procedures to manage these requirements. In particular, looks for greenhouse gas emission reduction offset, the development of cost-effective, commercial-scale carbon capture and storage technology, and a range of available compliance alternatives. In addition, NEE's and FPL's electric generation units emit greenhouse gases at a lower rate of emissions than most of the U.S. electric generation sector, which already makes NEE more defensive to regulations than its competitors. NEE is also taking measures to reduce its emissions through the development of renewable energy and modernization of its generation fleet. The company’s new goal is to reduce its CO2 emissions rate 67% by 2025, from a 2005 baseline, which equates to a nearly 40% reduction in absolute CO2 emissions, despite the company’s total expected electricity production almost doubling over that period.
Sources: 10-K, Investor Presentation, Bloomberg Intelligence

17. Investment Risks
Issues with battery storage may make other alternative energy sources more popular
Since renewable energy sources are dependent on environmental conditions, batteries are necessary to store excess amounts of energy to prepare for when renewable energy is less available. However, current lithium-ion batteries are costly, dangerous, and the battery life is not well suited to fill the gaps of less solar and wind energy. In addition, lithium-ion batteries are not environmentally friendly, since they are flammable, reactive, and often end up in landfills.
Mitigant: There is additional storage technology in development that is expected to outperform the traditional lithium-ion battery. For example, Aqueous Sulfur flow batteries use sulfur, an abundant byproduct of fossil fuel production, and air, as the reactive components to create a greater storage capacity at a fifth of the cost of lithium-ion batteries. Also, NextEra has more energy storage capacity than any other company in the US, and they continue to invest in additional storage facilities. For example, NextEra owns the Babcock Ranch Solar Energy Center, the largest combined solar-plus-storage facility in the country. This cutting-edge project incorporates a 10-MW battery storage project into the operations of a 74.5-MW solar power plant.
Source: Bloomberg, NextEra, Deloitte

18. Investment Risks
Issues with battery storage may make other alternative energy sources more popular
Cost-efficiency is measured in terms of costs of fuel, production, and environmental damage in comparison to its output
To create geothermal energy, plants capture rising steam or hot water and use it to power a generator. Although geothermal energy is nothing new, it could be able to compete with fossil fuels in some markets soon due to declining prices, higher drilling efficiency, and advancements in technology, such as enhanced geothermal systems and binary cycle plants. Enhanced geothermal systems inject water deeper into the ground, simplifying the steam capturing process and allowing the energy source to be less region dependent. Binary cycle plants release no emissions except water vapor, in comparison to old geothermal plants that release a relatively small amount of greenhouse gases. 
Mitigant: Even though geothermal energy is a renewable energy source, it still comes with a great deal of environmental concerns. Installing geothermal systems can alter the surface’s infrastructure and can trigger earthquakes. Also, geothermal systems excessive amounts of land and water and release sulfur dioxide and silica into the air.
Hydroelectric Energy (3rd most efficient)
Hydroelectric energy captures the energy of falling water to create electricity. Hydroelectricity generates the highest energy capacity, but it is not considered to be as efficient due to the high costs to build and maintain dams. Innovative technologies such as modular hydropower and pumped-storage hydropower are in development in order to minimize the cost of hydroelectric plants and environmental consequences. There is a lot of potential investment in these new technologies, especially with the additional government support from the US Dept. of Energy.
Mitigant: Although hydroelectric plants create the cheapest form of energy, they still cause a great amount of environmental damage to nearby ecosystems. Also, large bodies of water necessary for the technology are increasingly under threat due to climate change.
Source: Energy Informative

19. Investment Risks
Nuclear Energy (4th most efficient)
Nuclear energy reactors work through a fission reaction, a process where atoms split and release energy, by using uranium as a fuel source. However, nuclear energy reactors are still dangerous due to accidents and an inability to dispose of nuclear waste safely. But new technologies like alternative fuel cycles and small modular reactor (SMR) packaging are in development to increase overall safety. Alternative fuel cycles are designed for specialized applications high-temperature gas reactors and create little waste. SMR packaging is less sensitive to residual heat, making the process simple and safe. Nuclear fusion reactors are also in development, and if successful in creating this technology, nuclear energy can deliver virtually unlimited power for an indefinite amount of time. 
Mitigant: Although these new technologies are in development, there is still no safe way to dispose of nuclear waste. It remains untested, unmonitored, and vulnerable to natural disasters and terrorist attacks. Furthermore, nuclear fusion is far too risky at this point to be considered a legitimate energy source for the future.
Issues with battery storage may make other alternative energy sources more popular
Source: Energy Informative

20. Concentration of infrastructure in Florida
Investment Risks
Concentration of infrastructure in Florida
One major risk with NextEra is its geographical location in Florida. NextEra is and will be a first hand victim of climate and change, and is highly susceptible to weather storms (hurricanes). This is due to the fact that NextEra plants and infrastructure are located all around the Florida coast which is constantly at risk from hurricanes and if measures to decrease carbon emissions are not passed through the supreme court, NextEra could be at a big disadvantage. NextEra often tries to downplay the existential threat it faces from rising sea levels and only briefly mentions climate change throughout its risks disclaimer. Recently, an effort to increase NextEra’s disclosure around rising sea levels was defeated in its annual board meeting. EDP Wind and Solar plants are largely located far away from the oceans and will not directly be affected by rising sea levels. However, the same goes for NextEra. The real risk to NextEra, however, its Florida gas-pipeline operations and its other Florida operations, which tend to be a big revenue source for NextEra.
Mitigant: NextEra has committed a lot of resources towards the reduction of Co2 emissions and even submitted a brief in support of the CPP (Clean Power Plan). Even though rising sea levels are a true risk to NextEra’s operations it is likely that the Supreme Court will pass the Clean Power Plan and this will force Florida to reduce emissions by 22% between the years These efforts are likely to help sustainability and the general push towards a more aware nation and statewide efforts to reduce national emissions will curb some of these effects. Further, NextEra competitor EDP does not hold a major competitive advantage in its geographical context, as NextEra also has plants throughout the country. Since, NextEra is not only based in Florida and has done a good job of diversifying itself throughout the country (it has pipelines throughout the country and also has wind and solar farms in all but 14 states) it has an edge over competitor EDP.
Source: Bloomberg

21. Concentration of infrastructure in Florida
Investment Risks
Concentration of infrastructure in Florida
Source: Bloomberg

22. Financial Model and Projections

23. Financial Model and Projections
Source: 10K

24. Financial Model and Projections
Source: 10K

25. Comparable Analysis

26. Comparable Analysis
Source: Bloomberg