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NextEra Energy, Part 2: Leadership Seen In Diversity, Community, And Renewable Energy

Summary The company ranks very well in diversity hiring, community involvement, and renewable energy. The company does not rate well in women hiring, green productivity, and has limited information in other places. We believe NEE is overall a strong leader in social responsibility. In Part 1 of this article, we saw that NextEra (NYSE: NEE ) is, at this time, not a “buy” for us. We see the upper limit of 2015 pricing in the $105-$110 range, and that the company’s fair value sits in the mid-$80s. Essentially, the company is not a buy for us from a purely financial standpoint. In this part of our research, we will focus on the socially responsible aspects of the company. Our findings are very promising. Yet, failing to see an upside in general, we cannot make an overall positive comment. The company should be respected for its work in socially responsible ways. Socially Responsible Scorecard There are many ways to understand and develop socially responsible investing (SRI). What is “responsible” for each person is vastly different, and what might be “responsible” to one person might be “irresponsible” to others. That is the toughest part of investigating companies for SRI. While pure capitalism to some is the most responsible approach to business, others may see that this could harm other areas such as environmental stewardship or economic development. Others may believe too much capital invested into socially conscientious programs could hurt profits and investors. Therefore, we will try to present as much information as we can to render the best opinion possible. Overall, socially responsible investments are more about leadership and paving the way, rather than compliance. Compliance is doing what is required, while corporate responsibility is about leading and doing more than is required. Companies that lead are always the most respected in the long term, and we believe provide both a safe investment platform as well as peace of mind. The criteria we use to examine the company’s overall social responsibility theme are gender equality, employment and diversity, environmental stewardship, leadership values and community involvement. With all research, some areas have more quantifiable parts, while in other areas, there is not as much. We base our research in taking an aggregate look at leading think tanks, research firms and important websites that cover these topics. We split this research into the aforementioned topics to help create a more holistic opinion. Overview NextEra appears to be a leading firm in the SRI space with strong showing in many key areas. The company was rated as a coveted Ethisphere World’s Most Ethical Companies in the 2014 edition, which shows a dedication to be a leading firm that goes above and beyond compliance. They lead in a number of areas with diversity hires, green energy, and a clear intention for community involvement. The company’s CSR Hub rankings did not show a strong lead, but they were above average. Their “Overall” rating comes in at 60, while Employees and Environment lead the way at 66 and 64, respectively. The company is above average, according to the Hub. The company, though, has won many awards and is a leader in a space that is one of the largest polluters. When we search for companies, we look for the ones that are leaders in various areas of business. NEE appears to be that way. Take a look at the company’s awards here . Some of the most interesting awards we have seen are: — ServiceOne Award for Exceptional Customer Service — Best Employees for Healthy Lifestyles – The Fortunes’s Most Admired Companies Award: In 2014, NextEra Energy was named No. 1 among electric and gas utilities for an unprecedented eighth straight year on Fortune magazine’s listing of “Most Admired Companies.” In that same Fortune survey, the company was named No. 1 electric and gas utility in innovation, No. 1 in social responsibility and No. 1 in quality of products and services. Workforce – Diversity, Compensation, Gender Equality NextEra’s is actually quite strong in their approach to diversity, equality, and compensation, serving as a leader in the way companies should approach their workforce. We believe this is very socially responsible and commendable. The company has been recognized as a top leader in hiring veterans and Hispanics. The company has been recognized by Hispanic Business magazine since 2010 as one of the leaders in diversity hiring. As the award states, “(they) determine the list, the magazine analyzed data on companies’ boards of directors and leadership, recruitment, retention and promotion, marketing and community outreach, and supplier diversity.” As for veterans, ” Vetrepreneur magazine, the voice of the National Veteran-Owned Business Association, gave FPL honorable mention in its compilation of the 2011 Best 10 Corporations for Veteran-Owned Businesses.” The company rates well in other areas of its workforce as well. The Human Rights Campaign rates the company as a 70, which is a rating system for a companies rights to gay, lesbian, and transgender employees. The company has the same rights for same-sex partners as opposite-sex partners and spouses outside of relocation assistance. The company’s 70 rating puts them at the upper end of the rating scale. The company is recognized as well as being one of the companies to have non-discrimination policies for sexual orientation as well. The company didn’t have much information on gender equality for hiring, but the diversity aspect is very positive. As for worker compensation, the company rated a 58 by CSR Hub for worker compensation. The company, though, has positive ratings for safety and health benefits. The company won Best Employers for Healthy Lifestyles for the eighth time for “its ongoing commitment to promoting a healthy work environment and encouraging its workers to live healthier lifestyles. The company was one of just two Florida-based companies and one of only two companies in the energy sector to receive the 2013 Best Employers for Healthy Lifestyles® Award in the prestigious Platinum category.” What we are seeing from the company is a dedication to a workforce and a dedication to policy that promotes safety, diversity, and compensation. We believe this is a leader in this arena, and it complements well their placement as a leading green energy utility. Green Initiative The company has been most recognized for its leadership in green energy. The company is in one of the dirtiest industries, and their reputation is strong. Yet, there are some weaknesses/improvements that need to be made. For as many green awards as the company has won, there are still improvements to be made. Just take a look at this chart to start: (click to enlarge) Despite being labeled the “green” utility, the company is using nearly over 50% in natural gas still, and they also use over a quarter in nuclear, which has some very negative consequences on society if not managed properly as well as waste concerns. In face, the company is really only about 17% actual “green” energy. Further, the company is not the cleanest utility out here. (click to enlarge) The company is definitely one of the cleanest, but it is not as clean as some of the best, and that mix could continue to improve. The company is a “leader,” but we should also understand that this is a company that still uses 50% of their fuel in natural gas. Newsweek’s Green List ranked the company 209th on its Green List, which is one of the most comprehensive looks at companies in the marketplace. This list, though, ranks companies fairly across the board and does not quantify their industry. Naturally, a utility company is going to struggle. The company rated at only 10%, 18%, and 13%, on their energy, carbon, and water productivity out of 100%. The company rated very well, though, on reputation. Out of utilities, the company ranked 15th, which is not exceptional especially given their reputation. Also troubling was the company’s decision not to respond to the Carbon Disclosure Project since 2010. The company did rate an 82 in 2009, which is a decent rating. What is troubling, though, is the CDP is one of the leading, respected firms for rating company plans for carbon versus actual carbon productivity. It is not rating on a single scale but looking at all companies individually. Yet, the company has won numerous awards as you can see here . The company is continuously rated in the Dow Jones Sustainability Index and was rated the best utility for renewable energy by EI New Energy. The company has been rated well for its top electric fleet, and it is rated well for their care and dedication to trees. Overall, the company has solid awards and is rated decently, but we are not as sold as these awards given that some of the leading research gatherers have not gotten necessary information or rated it as well when compared to its competition. What is definitely positive is the company’s leadership that they are the top renewable energy producer. It is an industry that is still mostly based in coal, oil, and natural gas, so the company is better in that regard. Yet, the company’s efficiency ratings aren’t as strong, which is something to consider. Additionally, the nuclear energy angle is considered part of renewable energy, but we are not high on this form of energy due to the direct social risk from it that may be even higher than non-renewable sources. Overall, we would like to see a continued reduction in natural gas and increases in wind and solar power. The company is very low on coal, which is great, and they do help bring other utilities into the mix into these renewable sources. There is still much work to be done. Community Involvement NextEra appears to have a pretty comprehensive strong approach to community. Not only do they rate quite well on their diversity hiring, but they are also leading the renewable utility energy game, which is also positive for the community. Yet, the company also has a very comprehensive direct community plan to volunteer, donate, and be involved in their communities. The company’s 22,000 hours of volunteer time in 2011 in their community and a whole week called Power to Care show some definite leading energy being put back into the community. You can read more about the company’s difference making here . The company has a very progressive hiring plan also for military volunteers that falls into the company’s Diversity Inclusion division that we believe is really respectable. In November, the company was awarded an “Above and Beyond” award in Florida for their strong military hiring program. As a retail company as well, the company has won numerous awards for their customer satisfaction and service. The information we collected here was more limited, but the company definitely appears on the right track. The unseen benefits are what excite us most with their efforts in renewable energy and diversity leadership. Conclusion As you can see, NextEra is a leader in quite a number of areas of social responsibility, but we do have concerns in some areas. We would note they are one of the top companies that are public today, though. Right now, they rate high for us in social responsibility, but we are not as high on their price analysis. We would love to add them on any slight dip in valuation to a socially responsibly crafted investment plan. Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

NextEra Energy, Part 1 – This Utility Leader’s Upside Might Be Limited

Summary NextEra’s Hawaii deal is truly a place of growth, but it may be priced in for now. NextEra’s economic moat creates true long-term value to dividend players. NextEra looks unlikely to increase dividend significantly with recent investments and limited FCF or cash on hand. NextEra (NYSE: NEE ) is coming off a very strong 2014 in which the company was able to see a return of 20%. Utilities were very strong. The company’s valuation increased to a nearly 19 P/E. The question, now, is whether this utility giant is still a buy or should investors wait for a pullback. 2015 looks like an interesting year for the company with the development of their operations in Hawaii, continued economic moat strength that is reliable during volatile times, and some moves the company is making in the green arena that we believe has interesting potential. This is Part 1 of a two-part article we are doing on NextEra for our assessment of the company as a socially responsible investment. The first part of all of our work is a traditional analysis of the company as an investment. Do we believe that “X” company has upside in the current environment? From there, we add a lens of socially responsible analysis to understand if the company also presents compelling factors for social responsibility. If both line up, it becomes a great SRI. In this article, we are examining NextEra in terms of traditional financial analysis. In Part 2 , we will examine the secondary factors of socially responsible investing. 2015 Catalysts Economic Moat Strength To us, the most important catalyst for NextEra remains their economic moat strength. Utility companies, as a whole, maintain very strong economic moats due to their non-competitive arrangements with municipalities. These arrangements allow the company to remain very consistent profits, and the more non-competitive arrangements…the better for these companies. These moats are extremely important. For example, the company had 80% of its business in the regulated, and regulated utilities profits continue to increase while competitive utilities stay stagnant. See this image from Market Realist: (click to enlarge) The company continues to see regulated profits growing while competitive profits have been flat to weak. The company has seen lower prices in competitive areas due to wholesale a wider mix of energy that is less profitable. Yet, the company’s 80% regulated market is a huge win for the company. It creates a great economic moat that other companies just do not have, and it is something investors can rely on. The company maintains one of the highest margins in the industry with this strong mix, and there is little threat to a major push down. For those looking for consistency, NEE is definitely a leader. This theory of strong profit, regulated business is why we are excited about the company’s foray into Hawaii. Hawaii – Another Regulated Market to Add Shareholder Value The Hawaiian market has a new entry from NextEra after the company bought Hawaiian Electric (NYSE: HE ) for $4.3B in 2H of 2014. We believe that this move is key to 2015 and even beyond. What we think is the best aspect of this deal is the combination of regulated markets with the company’s penchant for bringing more efficient practices to bear. The company, in fact, will reduce customer costs. The expertise that NEE has in using combinations of energy, especially renewable, will be very beneficial for Hawaii. The state, today, pays greatly for importing oil and other electricity generators. NEE has plans to revolutionize the space with solar energy. The state is one of the best for solar energy, and the company can use their strength here to help the state as well as company revolutionize their grid. The deal is more than just solar, though. The company has already got a deal together with a giant wind farm that will be part of the company’s push to use Hawaii’s natural state to bring down costs: NextEra Energy Resources, a wholesale electricity supplier and subsidiary of NextEra Energy , which is buying Hawaiian Electric Co. for $4.3 billion, has locked in long-term access rights to Parker Ranch Foundation Trust lands to develop renewable energy projects. ‘We have been aggressively seeking ways to reduce the cost of electricity for our community and our island by using the potential renewable energy resources available on PRFT’s Hawaii Island lands,’ Neil ‘Dutch’ Kuyper , president and CEO of Parker Ranch, said in a statement. ‘During this time, we have also been seeking capital and technical expertise from potential development partners. We have been working collaboratively with NextEra Energy Resources for more than a year and believe that they are the ideal partner to utilize PRFT’s wind resources.’ What does that mean for NEE shareholders? The deal was announced on Dec. 4, and the stock has gone nowhere since. There was speculation obviously leading until the deal. Thus far, shareholders have rewarded the company very little for the deal. So, just how much value might this deal add. The deal is still going to take 2015 to get done, but that sets the company up for 2016. Further, they are already doing work at bringing this deal up to speed. It is a short-term capex bust, but we see large potential moving forward. According to Dana Blankenhorn , the state is still very dependent on coal and oil: On my own visit to the Big Island of Hawaii, now served by Hawaiian Electric, I marveled at the wealth of potential renewable resources – wind, solar, geothermal and tidal energy – and was amazed at how much people had to pay for their power. Since then the state has begun tapping into that potential , but 86% of its electricity still comes from coal and oil. The company brings the expertise of how to apply a mix of renewable energy and create consistent returns. With the prices that Hawaii is used to paying, the company should reduce costs for Hawaiians yet also make a strong profit. The company’s mix, though, of more green energy plays has not been as profitable. The company still makes its bread and butter in Florida where it uses a majority natural gas. So, the question will be if they can return the type of 20% operating margin in Hawaii? The nice thing that is baked into the cake for them is that Hawaiians are used to paying more than most Americans, so they will be able to invest more easily. How this plays out is the key theme to watch for the coming year. Current Pricing Let’s take a look at the current price of NextEra stock and understand what it means for the company. From there, we will examine the bull case for that price and the bear case. Finally, we will look at exactly where we believe the company is going. While you may see the article as negative, we presented the first portion of this article to establish how we will look at the current pricing. In order to price the company, we need to make certain assumptions. Revenue growth will continue at a clip of 4-5% per year, and we believe that level will maintain for the next several years. Utility revenue is fairly consistent. The key to the company is definitely margins. Operating margins are key to our DCF analysis. The coming has forecast that they will come in at the 22-23% in 2015, but I imagine this number will dip some with the onslaught of Hawaiian Electric when it is approved. The deal should add roughly $4.5B in sales in 2016, but the company operates with a 10% operating margin. The deal is really essentially to take what is a tough market for making money, revolutionize it, and improve it. This plan, though, will take several years. Therefore, margins will drop in 2016 but gradually improve again through 2020. Taxes have averaged roughly 25% for the past five years, and it’s likely this will stay around 28%-30% over the next several years. We may see it jump even a bit more beyond 2016 when more solar credits are expected to expire. Depreciation will continue to grow at about the same rate as revenue growth. Capex should come down in 2015 to around $6B and again in 2016 to $4B.The $4B rate, though, is pretty standard for the company. Our cap rate or discount rate is at 3%. This does not reflect the high-growth but rather the strong ROE, dividend, and low volatility the company will face over the next several. When we use this math in our five-year DCF analysis, we come up short at $82 for our share price. In order to reach the $100-plus level that the company is currently operating at, they would need to see revenue growth averaging 6% per year for the next five years and maintaining a 22% margin. Here is what that looks like: PROJECTIONS 1 2 3 4 5 2015 2016 2017 2018 2019 Income from Operations 3,740.000 3,700.000 5,148.000 5,456.000 5,784.000 Income Taxes 1,122.00 1,110.00 1,544.40 1,636.80 1,735.20 Net Op. Profit After Taxes 2,618 2,590 3,604 3,819 4,049 Plus: Depreciation 2600 2700 2800 2900 3000 Less: Capex -6000 -3900 -4000 -4250 -4500 Less: Increase in W/C -100 -100 -100 -100 -100 Available Cash Flow -682 1,490 2,504 2,569 2,649 The Bull Case The bull case is twofold. On one end, the company is a strong utility with consistent profits and a yield of nearly 3%. Further, the company provides a green edge that will continue to develop as both a reason to buy companies and a competitive advantage. The company’s margins are strong and consistent. Further, on the other side, the company has real opportunity with Hawaii. While it may detract in the near-term, if the company can do it right, it could end up bringing a strong revenue/profit burst. Yet, we believe that the current pricing on the company suggests that a best-case scenario is priced in. We understand you don’t buy utilities for value or growth. You buy them to hedge volatility, add consistent ROE/yields, and diversify by industry, and NEE is one of the leaders in the industry. The Bear Case Utilities have been very strong, and it appears that NEE is probably cooked about to perfection right now with its current pricing. The company is unlikely to make a major pullback, but near-term upside may be limited. We believe a price target around $90 is more fair level with an upper band at $105 to $110. The reason for this is that we can’t foresee more than 22% operating margins and 6% revenue growth with the HE deal on the docket. The company also is not flush with cash or FCF right now to really pour into share repurchases or add more to its dividend. Therefore, the value in the company is that it is consistent right now. Where We Come In We like NEE’s business model, but as value investors, the company seems priced correctly at this time. We would be interested if NEE came back in under $90. Yet, we also see the value of a true leader in the industry that continues small dividend increases and is making moves in natural gas and new territory that remain intriguing propositions. Conclusion NextEra has interesting catalysts to 2015, but after a tremendous run in 2014, the company looks like its upside may be limited in the near-term. The value of adding a deal like HE to the mix is definitely long-term, and we do like the consistent margins/yield/growth. The company has great economic moats, so it is a nice place to park cash, expect limited losses, and collect dividends. For value/growth investors, though, this play has lost its allure … for now. Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

NextEra Energy (NEE) Q4 2014 Results – Earnings Call Webcast

The following audio is from a conference call that will begin on January 27, 2015 at 09:00 AM ET. The audio will stream live while the call is active, and can be replayed upon its completion. Now that you’ve read this, are you Bullish or Bearish on ? Bullish Bearish Sentiment on ( ) Thanks for sharing your thoughts. Why are you ? Submit & View Results Skip to results » Share this article with a colleague