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Who is the world’s largest operator of wind and solar farms? It’s also America’s most valuable power company. Still stumped? It’s by design reports the WSJ.
NEXTera Energy (NEE) has grown into the largest power company mostly under the radar.
Let’s see how…
Three important points to their success
• They were focused on business fundamentals and not the Hollywood status that comes with being a champion for green power.
• Only built new sites after it lined up customers. This way, they avoided debt problems that sank rivals such as SunEdison. Instead of debt, they used federal tax credits.
• Has been led by the same executives for 15 years. The CEO, James Robo, came from GE and preaches financial discipline. He avoids hiring the type of workers who join the industry to change the world.
A few company highlights
How did they grow to dominate?
In 1992 Congress passed a production tax credit to encourage utilities to add renewable energy.
Phil Sharp, a former Indiana Democrat congressman who introduced the credit said:
“We didn’t think we’d get much from it,” No one expected renewable energy to become a big business, he said.
In other words,
It was an underpriced asset(the tax credit).
ESPN is a good comparison. When ESPN started, no one was bidding on live sport’s rights, hence they were cheap and ESPN built their business on the back of underpriced attention.
The collapse of Enron also aided in NextEra’s rise. Most of its potential competitors were financially strapped after the collapse and did not have enough capital to invest in new projects.
Finding customers first
In order to minimize their risk, they don’t make any capital outlays until they have a long-term agreement to sell their output to a creditworthy counterparty.
How big is the market for renewables?
The sustained investment in renewables is reshaping how the world’s homes and industries are powered. Last year, the percentage of electricity from renewable sources reached 12.1%, more than double that of a decade earlier, according to a joint report by the Frankfurt School of Finance & Management and the United Nations Environmental Program reports the WSJ.
Bloomberg New Energy Finance estimated some $11.5 trillion of investment will go into electricity generation between now and 2050. Of that, 85 percent, or $9.8 billion, will go into wind, solar and other zero-emissions technologies such as hydro and nuclear, the London-based researcher said.
The IEA(International Energy Agency) has a great article and some cool charts about the renewable space.
A chart and video
But, but, but…
Federal tax credits for wind projects are set to expire between now and 2020, won’t that be bad for NextEra?
Possibly, which is why many believe they will shift their focus to solar, which is growing at a faster clip(see chart above).
My view on regulation: If all tax credits for renewables went away, would that be bad for the current leaders in this space? I think not.
I think it would further entrench their dominant position. It’s expensive to build wind and solar farms.
If competitors don’t have the same financial advantages NEXTera used to build their current business, how can upstarts compete?
Some regulation is good and well-intentioned. But it can also be misguided and further entrench the companies they were trying to regulate in the first place.
Political heat is coming on the big tech companies use of our data.
Those companies used that data to build their businesses. If said regulation hampers the use of data, it not only hamstrings the large companies but also the small ones trying to compete.
They can’t use data in the same way that Google and Facebook used it. This further cements their position at the top and makes it tougher on the little guy.
Select financial data
The picture was too large. Click on financial statements under resources used for a better view.
Cash flow statement
Funding and capital structure(from NextEra’s website)
Peer comparison of adjusted debt as a percentage to total capitalization
Since the financial crisis, their stock has gained almost 400%.
In my view, the risk/reward does not favor new long positions.
They are the market leader in the renewable space. A space that is set to take market share from fossil fuel companies.
We will update this post as new information comes in.
A few questions we’ll be thinking about going forward:
• What is NEXTera’s moat? The large capital investment it takes to build out wind and solar farms?
• If tax credits expire, how will that affect their business? Will it entrench them as the dominant player?
• Most people believe that renewables are on the way in and fossil fuels on the way out. What if that wasn’t true? Is this trend as secure as many believe?
Questions or comments? Please leave below. We would love to hear from you.