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NextEra’s Alternative Energy Future

By Jim Fink on January 27, 2011

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The danger appears to be past for Florida’s public utilities.

– Roger Conrad, Utility Forecaster

The annual “state of the union” address given by the president of the United States is typically a very boring affair filled with obligatory applause, perfunctory calls for bipartisanship, and a laundry list of legislative initiatives that don’t have a snowball’s chance in Hell of passing Congress.

The 2011 version by President Obama was no exception, but there were two items that titillated me none the less. First, Obama argued that the U.S. corporate tax rate should be lowered for the first time in 25 years because it is one of the highest in the world and puts American industry at a competitive disadvantage. Way to go, Barry! Of course, he then completely neutered the proposal by stating that corporate tax “loopholes” would simultaneously need to be closed so that, collectively, corporations wouldn’t actually end up paying any less tax. Still, it amazed me that the most left-wing President of my lifetime would speak up for corporations at all. Maybe it has something to do with the devastating midterm election losses suffered by his Democratic Party?  

Obama Likes Clean Energy

The second interesting tidbit I took away from Barry’s speech was his continued push for clean and renewable energy. Not a new subject for him, but the fact that he hasn’t given up — despite failing to get carbon-cap legislation passed last summer — is an impressive show of persistence. Specifically, Obama made the following pitch:

We’ve begun to reinvent our energy policy. We’re not just handing out money. We’re issuing a challenge. We’re telling America’s scientists and engineers to assemble teams of the best minds in their fields, and focus on the hardest problems in clean energy. With more research and incentives, we can break our dependence on oil. Instead of subsidizing yesterday’s energy, let’s invest in tomorrow’s.

Clean energy breakthroughs will only translate into clean energy jobs if businesses know there will be a market for what they’re selling.  So tonight, I challenge you to join me in setting a new goal:  By 2035, 80 percent of America’s electricity will come from clean energy sources. 

Some folks want wind and solar. Others want nuclear, clean coal and natural gas. To meet this goal, we will need them all — and I urge Democrats and Republicans to work together to make it happen. 

Talk is cheap, I know, and some would say Obama is cheating by including non-renewable natural gas, coal, and nuclear in his definition of “clean energy.” Nevertheless, Secretary of Energy Steven Chu told reporters yesterday (Jan. 26th) that Obama will propose $8 billion in additional clean energy spending in this year’s federal budget. That’s most definitely not cheap.

EPA and FERC are Doing What the U.S. Congress is Failing to Do

Furthermore, even if Obama can’t get any legislation through Congress, he still influences the work of the Environmental Protection Agency (EPA) and the Federal Energy Regulatory Commission (FERC). Both of these agencies are moving full steam ahead with clean energy initiatives. As I wrote in Duke Energy-Progress Energy, EPA rules limiting toxic emissions from coal-fired power plants will go into effect this coming November. In addition, by mid-2012 FERC will implement a new national transmission pricing policy that will subsidize connections between wind farms and the national electricity grid. Both of these new administrative regulations will help make renewable energy profitable to produce. 

States with Renewable Energy Mandates

In addition, 29 states have renewable energy mandates and seven more have renewable energy goals. While there will be efforts in some states like Colorado and Kansas to pull back from these mandates, most states are holding strong, including the biggest of them all: California. Back in November, Utility Forecaster’s Roger Conrad described how California voters had convincingly affirmed their commitment to the state’s renewable energy mandate:

The Golden State’s mandate for utilities to draw 33 percent of generation from renewables by 2020 is by far the most aggressive in the country. And it’s backed by legislation requiring a 25 percent reduction in CO2 emissions using a state-administered cap and trade system.

On Tuesday (Nov. 2nd), California voters defeated Proposition 23 — a referendum on the state ballot to essentially gut the law — by a crushing margin of 61 to 39 percent.

How are utilities affected by all this? For one thing, California’s vote means companies can continue to count on one of the few formulas that’s pushed earnings higher in recent years: Investment in renewable energy and efficiency projects that can be completely quickly and rapidly added to rate base with speedy regulatory approval.

NextEra Energy is an Alternative Energy Powerhouse

With clean energy remaining a top priority for both the Obama Administration and a majority of states, I feel much better about investing in NextEra Energy (NYSE: NEE), the largest renewable energy company in the U.S.  NextEra – formerly known as FPL Group – has two separate divisions: (1) Florida Power & Light, a fully regulated electric utility located in the state of Florida; and (2) Energy Resources, an unregulated wholesale generator of renewable energy (wind, solar, nuclear, hydro) that operates in 26 states (including California) and Canada.

Florida Utility Regulation Suffered Temporary Insanity Last Year

A year ago, things were looking bad for NextEra. Florida’s governor at the time, Charlie Crist, was running for the U.S. Senate and decided to make the state’s electric utilities the sacrificial lamb of his campaign. He refused to reappoint highly experienced and competent members of the Florida Public Service Commission (PSC) and tried to replace them with inexperienced, anti-utility political hacks, including a bar owner and a retired editorial writer. As Roger Conrad, editor of Utility Forecaster, wrote at the time:

Florida regulators to Florida utilities: Say good-bye to reliable returns that ensure a low cost of capital. All three major Florida utilities came to the PSC last year requesting rate increases to finance future capital spending. Crist immediately politicized the issue, first openly opposing the rate increases and criticizing the PSC as bought and paid for by utilities. He eventually sacked the entire PSC.

For FPL, the result is that the PSC granted only a miniscule $75 million of a requested $1.2 billion rate increase. The allowed return on equity (ROE) was taken down to a range of 9 to 11 percent, among the lowest in the country.

The bottom line at the new Florida Public Service Commission is that no rate increase is justified for whatever reason. The decision has already landed the utilities on credit watch at all major rating agencies.

Regulatory Sanity Has Returned to Florida

Fortunately, the November midterm elections ended Florida’s utility nightmare. Crist is long gone, replaced in the governor’s mansion by Rick Scott, a former CEO of Hospital Corporation of America (HCA) as well as a venture capitalist. Scott understands business and promises to support Florida’s public utilities. As Roger recently put it, “Florida’s regulatory picture is set to improve radically.” In December, the Florida PSC approved a rate settlement with NextEra and just two weeks ago the PSC went against its own staff’s recommendation and unanimously sided with NextEra on an earnings review issue. The PSC staff had recommended that NextEra be required to set aside $400 million for possible consumer refunds because the company may earn more than its maximum allowed 11% ROE, but the Commission rejected the recommendation. Just yesterday (Jan. 26th), the PSC approved a NextEra fuel surcharge.

Times truly have changed for the better in the Sunshine State!

NextEra’s Financial Results

Florida’s vastly improved regulatory climate since the November election did not have time to positively affect NextEra’s fourth-quarter and full-year financial report, which was nothing to write home about. Earnings per share in Q4 were flat and missed analyst estimates in what CEO Lew Hay called “one of the most challenging business environments we’ve ever encountered.” Full-year adjusted earnings rose 6% to a record high, however. A rate freeze at Florida Power & Light through 2012 is probably responsible for forward earnings guidance in 2011 to be flat with 2010 levels.

Still, I’m optimistic about the future performance of NextEra’s stock, which currently pays a 3.7% annual dividend. It has increased its dividend for 16 consecutive years and operates a highly efficient operation (electricity rates 24% below the national average) in the high-growth “retirement corridors” on both the west (Sarasota, Naples) and east (West Palm Beach, Miami) coasts of Florida.

Wind Power — and Subsidies — Are NextEra’s Golden Ticket to Growth

The real growth kicker looking forward, however, is its renewable energy division (Energy Resources).  Many people may know that NextEra is the largest owner of wind power in the United States with 8 gigawatts, but less well known is that it is also the fourth-largest wind energy owner in Canada with 220 megawatts. As I wrote in Canadian Wind Power is Blowing Strong, wind power companies in Canada are generating strong profits and NextEra is no exception.

NextEra may surprise to the upside in 2011 because of wind. It’s taking full advantage of the $21 per gigawatt-hour production tax credit ($430 million saved in 2010) as well as the Section 1603 cash grant which provides purchasers of wind turbines and other equipment with a 30% subsidy of capital costs. Since these federal subsidy programs are set to expire at the end of 2012, NextEra is expanding its wind operations as fast as it can to receive the maximum subsidy before expiration (754 megawatts added in 2010 with a total of 3,500 to 5,000 megawatts planned additions by the end 2014).

Wind customers of NextEra will likely expand quickly over the next two years also to beat the expiration deadline. Consequently, NextEra’s wind power equipment sales should start to accelerate just about . . . now. 

Find the Best Dividend Stocks with the Help of Utility Forecaster

NextEra used to be one of Roger’s “core holdings” in the Utility Forecaster Growth Portfolio, but he recommended selling it in January 2010 during the regulatory chaos of the Charlie Crist governorship. With Crist now gone, Roger has returned NextEra to a “buy” rating and calls it “a first-rate company with great assets, particularly as a play on low carbon power.” He hasn’t added it back to his recommended “Growth Portfolio,” however, which is the crème de la crème of buy ratings. Will he? Only time will tell.

To find out the names of the other electric, natural gas, and telecommunication utilities that Roger likes right now, give Utility Forecaster a try today!

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