NextEra Energy Inc.'s recent acquisitions and a capital spending plan approaching $55 billion continue to add momentum to its growth, but as the energy giant contemplates two prospective utilities on the sales block, NextEra's CEO has stressed the company will remain "disciplined."
"We've been very consistent about M&A for a long time and we're very disciplined about it," NextEra Chairman, President and CEO Jim Robo said during the Wolfe Utilities & Energy Conference on Oct. 2. "And what do I mean by disciplined? It's got to make financial sense."
The Juno Beach, Fla.-headquartered company disclosed Oct. 7 that it had submitted a response to Jacksonville municipal utility JEA's solicitation for strategic alternatives, such as privatization. While proposal details from any prospective buyer have not been released, JEA said its minimum requirements for bids include keeping the utility's value to at least $3 billion.
NextEra has also made a bid for Santee Cooper, legally known as South Carolina Public Service Authority. Its yieldco NextEra Energy Partners also announced Sept. 30 that it agreed to acquire Meade Pipeline Co LLC for $1.37 billion, giving the company a stake in the Central Penn pipeline for about $657 million.
After acquiring Gulf Power Co. from Southern Co. and closing the $4.35 billion deal in January, NextEra has deployed about $6 billion of capital at its new subsidiary, Robo said. Gulf Power has added 20 cents to the company's earnings per share, underscoring NextEra management's focus on deploying capital smartly.
"We're not going to deploy $40 billion of capital for five cents. That's dumb, right, and it's a bad use of resources," Robo said.
During the third quarter of 2019, the utility became the first U.S. power company to surpass $100 billion in market capitalization. NextEra's stock also rose 14.2% during the three-month period and outpaced several utility indexes.
NextEra plans to deploy between $50 billion to $55 billion of capital between 2019 through 2022. In order to maintain growth, NextEra has two options, said Guggenheim Securities LLC analyst Shahriar Pourreza. The utility could either pull back capital spending at competitive generation subsidiary NextEra Energy Resources LLC, or continue to use the money while recycling capital in NextEra Energy Partners and make regulated acquisitions.
"Having confidence in the sustainability of the growth and business mix is core to our thesis, and we believe [NextEra] can remain a premium multi-industry utility name with further value upside, especially as strong cash flow generation continue to be more valued by investors," Pourreza wrote, raising Guggenheim's target price to $250 from $230. Shares of NextEra closed Oct. 10 at $232.00.
The two most likely deals for NextEra are for JEA and Santee Cooper, which both have drawn interest from some of the biggest investor-owned utilities. Both utilities' processes for new ownership structures are expected to play out in 2020. In Guggenheim's view, both deals fit NextEra's business strategy and "could demonstrate to be materially accretive despite equity needs as both transactions could breech [roughly] $20 billion," Pourreza added.
CFRA Equity Research analyst Christopher Muir said in an Oct. 8 note that there will be more positive impacts for NextEra from Gulf Power and other acquisitions, new projects entering service and customer growth in 2019. Capital spending on new renewable and utility projects will also propel the utility's financial growth in 2020.
In a separate Oct. 8 note, CFRA raised its 12-month target stock price for NextEra by $16 to $240 per share, but lowered its recommendation from "buy" to "hold." NextEra's stock has had a dividend yield of 2.1%, compared to its electric utility peers' average yield of 2.9%.
"[W]e now believe the stock's relatively low dividend yield of 2.1% makes the stock less attractive compared with its electric utility peers, which have an average yield of 2.9%," Muir wrote in a note. "We still believe that [NextEra] has positive fundamentals that include $32 billion in capital spending."