Sector

EnergyRenewable Energy

Background

Mark Tomasovic is an investor at Energize VC. We cover the structure of the energy market, what’s changed in the renewables space over the past twenty years, and how NextEra deploys its cost of capital advantage.

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Date

December 8, 2021

Episode Number

38

NextEra Energy Business Breakdown

Background / Overview

NextEra Energy is the largest utility by market capitalization in the United States, with a market cap of approximately $170 billion and an enterprise value of $235 billion. The company operates two primary business segments: Florida Power & Light (FPL), a regulated utility, and NextEra Energy Resources (NEER), the world’s largest generator of wind and solar energy. Founded in the 1920s as American Power & Light, a utility holding company, it consolidated electric utilities in Florida. Regulatory changes in 1935, following the bankruptcy of another utility holding company, forced American Power & Light to divest its Florida utility, which became Florida Power & Light. This historical context shaped NextEra’s evolution into a dual-structured business, balancing a stable, regulated utility with a high-growth renewables arm.

FPL serves approximately 10 million people in Southeast and Northwest Florida, including through the acquisition of Gulf Power. NEER focuses on developing, constructing, and operating renewable energy assets across the U.S. and Canada, with 24 gigawatts of generating capacity. NextEra’s unique combination of a cash-generative utility and a capital-intensive renewables business positions it as a leader in the energy transition, capitalizing on the shift from fossil fuels to renewables.

Ownership / Fundraising / Recent Valuation

NextEra is a publicly traded company with no specific private equity or sponsor ownership details provided. Its enterprise value of $235 billion and market cap of $170 billion reflect its scale and investor confidence. The company has delivered a shareholder return of 230% over the past five years, significantly outperforming the S&P 500 (approximately 115%), the S&P Utilities Index, and the Dow Jones Electricity Index (both roughly one-third of NextEra’s return). This performance underscores its ability to generate value through its dual business model. Additionally, NextEra operates a yieldco, which purchases renewable assets from NEER and provides dividends to investors, enhancing liquidity and supporting capital recycling.

Key Products / Services / Value Proposition

NextEra’s two segments offer distinct value propositions:

1. Florida Power & Light (FPL):
• Description: A vertically integrated, regulated utility providing generation, transmission, distribution, and retail sale of electricity in Florida. It serves 10 million customers and is known for reliability, low costs, and resilience against hurricanes.
• Value Proposition: Low-cost electricity, high reliability, and regulatory protection as a monopoly. FPL’s focus on operational efficiency, driven by a Japanese-inspired quality control model since the late 1980s, has reduced outages, injuries, and costs while maintaining stable prices.
• Revenue/EBITDA: Generates $12 billion in revenue with a 30% operating income margin and 20% net income margin.
2. NextEra Energy Resources (NEER):
• Description: Develops, constructs, and operates wind and solar assets, primarily in wholesale competitive energy markets. It has 24 gigawatts of capacity, with 85% of revenue from long-term power purchase agreements (PPAs).
• Value Proposition: Capitalizes on the declining cost of renewables (solar costs down 90%, wind down 70% over the past decade) to offer competitive, low-carbon energy. Long-term contracts with major off-takers like Amazon, Microsoft, and Walmart ensure revenue stability.
• Revenue/EBITDA: Generates $5 billion in revenue with a 10% net income margin, though earnings are more volatile due to impairment charges and development risks.

Segments and Revenue Model

NextEra’s revenue model is split between its regulated and unregulated arms:

• FPL (Regulated Utility):
• Revenue Model: Revenue is determined bottom-up by regulators, who set an allowed return on equity (typically 10%) based on the asset base. Expenses are added to this profitability figure to calculate the total revenue FPL can charge customers via electricity prices. By keeping operating expenses (OPEX) low, FPL maintains low electricity prices, which benefits customers and regulators, and can negotiate to retain a portion of cost savings, potentially exceeding the allowed return.
• Key Dynamics: The regulated model ensures stable cash flows, as FPL is a monopoly protected from competition. Its focus on operational efficiency allows it to add customers (100,000 annually) without raising prices, enhancing customer satisfaction and regulatory goodwill.
• NEER (Renewables):
• Revenue Model: NEER generates revenue through long-term PPAs, which commit to price, volume, and term (typically 10 years, though assets last 30+ years). These contracts are primarily with large corporate off-takers or through wholesale markets managed by independent system operators. About 85% of NEER’s revenue comes from these stable, long-term contracts.
• Key Dynamics: NEER benefits from the declining cost of renewable hardware, making wind and solar competitive with fossil fuels. Its focus on high-resource locations (sunny or windy areas) maximizes output, while long-term contracts reduce price volatility. The yieldco structure allows NEER to sell developed assets, recycle capital, and fund new projects.

Splits and Mix

• Revenue Mix:
• FPL: $12 billion (70.6% of total revenue)
• NEER: $5 billion (29.4% of total revenue)
• Total: $18 billion
• Earnings Mix:
• FPL: 20% net income margin on $12 billion revenue = $2.4 billion net income
• NEER: 10% net income margin on $5 billion revenue = $0.5 billion net income
• FPL contributes significantly more to earnings due to its higher margins and larger revenue base, despite NEER’s growth potential.
• Geographic Mix:
• FPL operates exclusively in Florida, serving Southeast and Northwest regions.
• NEER operates across the U.S. and Canada, focusing on high-resource areas (e.g., windy Midwest for wind, sunny regions for solar).
• Customer Mix:
• FPL: Retail customers (10 million individuals and businesses in Florida).
• NEER: Wholesale customers, including large corporations (e.g., Amazon, Microsoft, Walmart) and utilities via PPAs.
• End-Market Mix:
• FPL: Residential and commercial electricity consumers.
• NEER: Corporate sustainability initiatives and utilities seeking renewable energy to meet green mandates.
• Historical/Forecasted Mix Shifts:
• NEER’s revenue share is expected to grow as renewable capacity quadruples over the next 20–30 years, driven by declining hardware costs and increasing electricity demand (projected to rise 30% in 30 years due to electrification).
• FPL’s revenue is stable but may grow more slowly due to its regulated nature and fixed customer base.

KPIs

• Revenue Growth: NextEra’s total revenue is $18 billion, with NEER growing faster due to renewable capacity additions. Specific CAGRs are not provided, but NEER’s focus on high-growth renewables suggests double-digit growth potential.
• Margin Trends: FPL maintains consistent 30% operating and 20% net income margins due to regulatory stability. NEER’s 10% net income margin is more volatile, reflecting development risks.
• Customer Growth: FPL adds 100,000 customers annually without raising prices, indicating strong operational efficiency.
• Renewable Capacity: NEER’s 24 gigawatts of capacity is expected to grow significantly, with $15 billion in CapEx planned for wind and transmission development.
• Shareholder Returns: 230% return over five years, with a dividend yield of approximately 4% and EPS growth above the utility average of 5% annually.

Headline Financials

• Revenue: $18 billion, with FPL contributing 70.6% and NEER 29.4%.
• EBITDA: Not explicitly provided, but operating income for FPL is $3.6 billion (30% of $12 billion). NEER’s operating income is less clear but likely lower due to its 10% net income margin and higher development costs.
• Net Income: $2.9 billion, with FPL contributing 82.8% and NEER 17.2%.
• Free Cash Flow (FCF): Not directly provided, but NextEra’s $15 billion CapEx suggests significant capital intensity. FCF is likely constrained by growth investments, though FPL’s stable cash flows and the yieldco’s dividends provide liquidity.
• Levered FCF: Not calculable without interest expense data, but high debt financing (70% for renewable projects) indicates interest costs impact FCF.

Long-Term Financial Trends

• Revenue Trajectory: FPL’s revenue is stable due to regulatory constraints, while NEER’s revenue is growing rapidly as renewable capacity expands.
• EBITDA Margin: FPL’s high margins (30% operating) reflect operating leverage from low OPEX. NEER’s margins are lower and more volatile due to development risks.
• FCF: Constrained by high CapEx, but FPL’s cash flows and yieldco dividends support reinvestment.

Value Chain Position

NextEra operates across the energy value chain:

• Primary Activities:
• Generation: FPL generates electricity (22% nuclear, rest fossil fuels and renewables); NEER generates wind and solar.
• Transmission: FPL manages high-voltage transmission in Florida; NEER invests in transmission to connect renewable assets to coastal demand centers.
• Distribution: FPL handles distribution to retail customers.
• Consumption: FPL serves retail customers; NEER serves wholesale off-takers.
• Value Chain Position:
• FPL: Fully integrated (upstream generation to downstream retail), capturing the entire value chain in Florida. Its monopoly status ensures stable economics.
• NEER: Midstream (generation and transmission), focusing on wholesale markets. Its value-add lies in low-cost renewable generation and long-term contracts.
• Go-To-Market (GTM) Strategy:
• FPL: Direct to retail customers under regulatory oversight, emphasizing low prices and reliability.
• NEER: B2B sales through PPAs with corporates and utilities, leveraging its scale and low-cost renewable assets.
• Competitive Advantage:
• FPL: Regulatory protection, operational efficiency, and hurricane resilience.
• NEER: Scale, low cost of capital (3% for renewables), and first-mover advantage in renewables.

Customers and Suppliers

• Customers:
• FPL: 10 million retail customers in Florida (residential and commercial).
• NEER: Large corporates (e.g., Amazon, Microsoft, Walmart) and utilities seeking renewable energy.
• Suppliers:
• FPL: Fuel suppliers (natural gas, nuclear), equipment providers, and maintenance contractors.
• NEER: Solar panel and wind turbine manufacturers (heavily reliant on Chinese supply chains), construction labor, and raw material suppliers (e.g., rare earth elements).
• Supply Chain Risks:
• Concentrated solar panel manufacturing in China.
• Potential commodity supercycle increasing costs of rare earth elements.
• Shortage of skilled construction labor for renewable projects.

Pricing

• FPL:
• Contract Structure: Regulated prices set by public utility commissions, ensuring a 10% return on equity. Prices are kept low to satisfy customers and regulators.
• Drivers: Low OPEX (driven by quality control), regulatory negotiations, and customer satisfaction. Savings from cost reductions can be shared with regulators, boosting returns.
• NEER:
• Contract Structure: Long-term PPAs (10 years) with fixed price and volume commitments. Contracts are either through wholesale markets or direct with off-takers.
• Drivers: Declining hardware costs, high resource availability (sunny/windy locations), and competitive bidding in wholesale markets. Subsidies (e.g., production tax credits, investment tax credits) enhance economics.

Bottoms-Up Drivers

Revenue Model & Drivers

• FPL:
• Revenue Model: Revenue = (Allowed ROE × Asset Base) + Expenses. Regulators set a 10% ROE, and low OPEX allows FPL to maintain low prices while adding customers.
• Price: Stable, regulated prices, kept low to avoid customer backlash.
• Volume: 100,000 new customers annually, driven by Florida’s population growth.
• Drivers: Operational efficiency, regulatory goodwill, and monopoly status ensure stable revenue. Growth is limited by regulatory constraints.
• NEER:
• Revenue Model: Revenue from PPAs (85% of revenue) and short-term bilateral contracts. PPAs lock in price and volume for 10 years, with assets lasting 30+ years.
• Price: Competitive, driven by low hardware costs (solar down 90%, wind down 70%) and subsidies. Prices can be low or negative in high-resource areas due to supply-demand imbalances.
• Volume: Driven by capacity additions (24 gigawatts currently, with $15 billion CapEx planned). Demand grows with electrification (30% in 30 years) and corporate sustainability goals.
• Drivers: Declining hardware costs, long-term contracts, and scale advantages. Risks include overinvestment in low-yield locations.
• Absolute Revenue:
• FPL: $12 billion, stable but slow-growing.
• NEER: $5 billion, high-growth due to renewable expansion.
• Total: $18 billion.
• Product/Segment Mix:
• FPL: Stable, high-margin cash cow (70.6% of revenue, 82.8% of net income).
• NEER: High-growth, lower-margin (29.4% of revenue, 17.2% of net income).
• Customer Mix: FPL targets retail, NEER targets corporates/utilities.
• Geo Mix: FPL is Florida-centric; NEER is national with a focus on high-resource areas.
• Organic vs. Inorganic: FPL’s growth is organic; NEER’s includes acquisitions (e.g., Gulf Power) and organic capacity additions.

Cost Structure & Drivers

• Variable Costs:
• FPL: Fuel (natural gas, nuclear), maintenance, and labor. Low variable costs due to efficient operations.
• NEER: Construction labor, raw materials (e.g., rare earth elements), and maintenance. Variable costs are declining due to cheaper hardware but exposed to supply chain risks.
• Fixed Costs:
• FPL: Infrastructure (power plants, transmission lines), administrative overhead, and regulatory compliance. High fixed costs provide operating leverage, as revenue grows without proportional cost increases.
• NEER: Development costs, financing costs (70% debt), and transmission infrastructure. Fixed costs are significant due to capital intensity.
• Cost Analysis:
• FPL: Low OPEX (from quality control) reduces total costs, enabling high margins (30% operating). Fixed costs dominate, providing operating leverage.
• NEER: Higher variable costs (construction, materials) and fixed costs (financing, development) result in lower margins (10% net). Economies of scale from supply chain relationships reduce costs.
• EBITDA Margin:
• FPL: High (30% operating margin) due to low OPEX and regulatory stability.
• NEER: Lower and volatile due to development risks and impairment charges.
• Consolidated: Approximately 20–25% (estimated), driven by FPL’s dominance.
• Incremental Margin: FPL’s high fixed costs mean incremental revenue significantly boosts margins. NEER’s margins improve with scale but are constrained by CapEx.

FCF Drivers

• Net Income: $2.9 billion ($2.4 billion from FPL, $0.5 billion from NEER).
• CapEx: $15 billion annually, primarily for NEER’s wind and transmission projects. Capital intensity limits FCF, but FPL’s stable cash flows and yieldco dividends offset this.
• Net Working Capital (NWC): Not detailed, but utilities typically have stable NWC due to predictable receivables and payables. NEER’s project-based nature may involve inventory and receivable cycles.
• Cash Conversion Cycle: Likely short for FPL (regulated, predictable payments); longer for NEER due to project timelines.

Capital Deployment

• CapEx: $15 billion, focused on NEER’s wind farms ($500 million–$1 billion per project) and transmission lines. Financed with 70% debt, 30% equity, leveraging low cost of capital (3% for renewables).
• M&A: Acquisition of Gulf Power expanded FPL’s customer base in Northwest Florida.
• Dividends: Yieldco provides dividends to investors, with plans to increase as it acquires more NEER assets.
• Organic Growth: NEER’s capacity additions drive organic growth, while FPL grows through customer additions.

Market, Competitive Landscape, Strategy

Market Size and Growth

• Market Size: The U.S. power sector generates $500 billion in revenue, within a $1 trillion total energy market. Electricity demand is 400 gigawatts, with 20% from renewables.
• Growth: Electricity demand is projected to grow 30% in 30 years due to electrification (e.g., electric vehicles, heating). Renewable capacity is expected to quadruple in 20–30 years.
• Price/Volume:
• Price: Renewable energy prices are low or negative in high-resource areas due to supply-demand imbalances. Hydrocarbon-based energy prices are rising due to reduced drilling.
• Volume: Renewable volume grows with capacity additions and electrification.

Market Structure

• Competitors: The U.S. utility market is fragmented, with regulated monopolies (e.g., FPL) and deregulated players (e.g., NEER competitors). Renewable developers face competition from pure-play developers.
• Consolidation: Regulated markets are monopolistic; deregulated markets are competitive, with independent system operators managing wholesale markets.
• Minimum Efficient Scale (MES): Large MES in renewables due to high CapEx and economies of scale. NextEra’s scale (24 gigawatts) creates barriers to entry.
• Industry Traits: Heavy regulation, ESG-driven capital flows, and supply chain concentration (e.g., Chinese solar panels).

Competitive Positioning

• FPL: Low-cost, high-reliability provider in a regulated monopoly. Positioned as a customer- and regulator-friendly utility.
• NEER: Best-in-class renewable developer with scale, low cost of capital, and long-term contracts. Positioned as a leader in the energy transition.
• Risks: Supply chain disruptions, labor shortages, and overinvestment in low-yield renewable projects.

Market Share & Relative Growth

• FPL: Dominant in Florida, serving 10 million customers.
• NEER: World’s largest wind and solar generator, with 24 gigawatts. Growing faster than the market due to renewable expansion.
• Relative Growth: NEER’s growth exceeds the 20–30-year renewable market growth projection (4x capacity), driven by first-mover advantage and low costs.

Hamilton’s 7 Powers Analysis

1. Economies of Scale:
• FPL: High fixed costs (infrastructure) provide operating leverage, reducing per-customer costs as volume grows.
• NEER: Scale (24 gigawatts) enables bulk purchasing, efficient construction, and lower financing costs. Large MES deters smaller competitors.
2. Network Effects:
• Limited applicability. NextEra’s businesses rely on contracts and scale, not platform-like network effects.
3. Branding:
• FPL: Strong reputation for reliability and low costs enhances regulatory goodwill and customer loyalty.
• NEER: Reputation as the largest renewable developer attracts corporate off-takers and investor capital.
4. Counter-Positioning:
• NEER: Early bet on renewables (vs. nuclear or fossil fuels) positioned it ahead of competitors who overinvested in capital-intensive assets. Modular wind/solar assets are cheaper and more flexible than nuclear.
5. Cornered Resource:
• NEER: Access to high-resource locations (sunny/windy areas) and best-in-class supply chain relationships provide a competitive edge.
• FPL: Monopoly status in Florida is a regulatory cornered resource.
6. Process Power:
• FPL: Japanese-inspired quality control (since the 1980s) reduces outages, injuries, and costs, making it one of the most efficient utilities.
• NEER: Adoption of digital technologies (smart meters, outage detection) enhances reliability and efficiency.
7. Switching Costs:
• FPL: High switching costs due to its monopoly status; customers have no alternative providers.
• NEER: Moderate switching costs in PPAs, as contracts are long-term (10 years), but competitors could offer cheaper alternatives post-contract.

Strategic Logic

• CapEx Cycle Bets: NextEra’s $15 billion CapEx is offensive, targeting renewable expansion and transmission to capture future demand. Unlike defensive CapEx (e.g., maintaining fossil fuel plants), this positions NextEra for the energy transition.
• Economies of Scale: NextEra operates at MES, with FPL’s monopoly and NEER’s 24 gigawatts creating barriers to entry. Diseconomies of scale are avoided by focusing on modular renewables rather than over-scaled nuclear or fossil fuel assets.
• Vertical Integration: FPL is fully integrated (generation to retail), maximizing value capture. NEER focuses on midstream (generation/transmission), avoiding retail complexities.
• Horizontal Integration: Acquisition of Gulf Power expanded FPL’s footprint. NEER’s national presence diversifies revenue.
• M&A: Strategic acquisitions (e.g., Gulf Power) enhance scale and customer base without diluting profitability.

Valuation

• Market Cap: $170 billion.
• Enterprise Value: $235 billion.
• P/E Ratio: Not provided, but utilities typically trade at 15–20x P/E. NextEra’s above-average EPS growth (>5%) and 4% dividend yield suggest a premium valuation.
• Dividend Yield: Approximately 4%, in line with utility averages but supported by the yieldco’s growing dividends.
• Valuation Drivers:
• FPL: Stable cash flows and regulatory protection justify a high multiple.
• NEER: Growth potential (renewable capacity quadrupling) and low cost of capital (3%) support a premium.
• Risks: Supply chain disruptions, labor shortages, and potential overinvestment could pressure margins and returns.

Key Dynamics and Unique Aspects

NextEra’s business model is unique due to its dual structure, combining a regulated utility (FPL) with a high-growth renewables arm (NEER). Key dynamics include:

1. Regulated Cash Cow (FPL):
• Stability: Monopoly status and regulatory protection ensure predictable cash flows, with a 10% ROE guaranteed. Low OPEX (from quality control) enhances margins (30% operating) and customer satisfaction.
• Operating Leverage: High fixed costs (infrastructure) mean incremental revenue significantly boosts margins, making FPL a cash-generative engine.
• Regulatory Goodwill: Low prices and high reliability earn favorable treatment from regulators, allowing FPL to exceed its allowed ROE through cost-saving agreements.
2. Renewables Growth Engine (NEER):
• First-Mover Advantage: Early bets on wind and solar (vs. nuclear or fossil fuels) positioned NEER as the world’s largest renewable generator. Declining hardware costs (solar down 90%, wind down 70%) make renewables competitive without subsidies in many regions.
• Long-Term Contracts: 85% of revenue from 10-year PPAs reduces volatility and ensures visibility, attracting corporate off-takers like Amazon and Microsoft.
• Yieldco Structure: Selling assets to the yieldco provides liquidity, recycles capital, and funds new projects while paying dividends to investors.
3. Low Cost of Capital:
• NextEra’s investment-grade balance sheet (from FPL’s stability) and ESG-driven capital flows reduce its cost of capital to 3% for renewable projects, compared to higher costs for hydrocarbon projects. This enables aggressive CapEx ($15 billion) with high single-digit returns.
4. Digital Technology Adoption:
• Deployment of smart meters, outage detection, and grid technologies enhances reliability and reduces costs, particularly for FPL’s hurricane-prone Florida operations. This process power differentiates NextEra in a commodity industry.
5. Capital Allocation Discipline:
• Unlike shale operators who chased production over cash flow, NextEra balances growth (NEER’s CapEx) with returns (FPL’s cash flows and yieldco dividends). This avoids the pitfalls of overinvestment seen in prior energy cycles (e.g., SunEdison’s bankruptcy).

Unique Insights from the Interviewee

• Historical Context: The interviewee emphasizes NextEra’s origins as a utility holding company and its transformation into a lean, efficient utility post-1980s. This historical pivot to quality control was pivotal for FPL’s low-cost model.
• Renewable Cost Advantage: The dramatic decline in renewable hardware costs (90% for solar, 70% for wind) is highlighted as a structural shift, making renewables competitive and reducing reliance on subsidies.
• Yieldco Innovation: The yieldco’s role in purchasing NEER assets and paying dividends is a unique capital recycling mechanism, enhancing liquidity and investor appeal.
• Supply Chain Risks: The interviewee flags concentrated solar panel manufacturing in China and potential commodity supercycles as major risks, reflecting a nuanced view of the renewable boom.
• Digital Edge: NextEra’s adoption of digital technologies (e.g., smart meters) is noted as a differentiator, improving reliability and efficiency in a commodity market.

Critical Considerations

While NextEra’s model is compelling, risks remain:

• Supply Chain Concentration: Reliance on Chinese solar panels exposes NEER to geopolitical and cost risks.
• Overinvestment Risk: Like shale operators in the 2000s, NEER could overestimate resource potential in new projects, leading to poor returns.
• Labor Shortages: Scaling renewable projects requires skilled labor, which is scarce in high-resource areas.
• Nuclear Competition: While currently expensive, a breakthrough in nuclear technology could challenge renewables’ cost advantage.
• Regulatory Dependence: FPL’s stability hinges on favorable regulation, which could change with political shifts.

Conclusion

NextEra Energy’s dual business model—combining FPL’s stable, cash-generative utility with NEER’s high-growth renewables—creates a unique value proposition in the energy sector. FPL’s low-cost, high-reliability operations provide operating leverage and regulatory goodwill, while NEER’s scale, long-term contracts, and low cost of capital position it to capture the renewable energy boom. The yieldco structure and digital technology adoption further enhance its competitive edge. However, supply chain risks, labor shortages, and potential overinvestment warrant caution. NextEra’s ability to balance growth and cash flow, leveraging its first-mover advantage and operational excellence, makes it a standout in a commodity industry, delivering 230% shareholder returns over five years.