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NextEra looks for contracted, regulated assets to drive earnings

For at least the second time in recent weeks, NextEra Energy Inc. executives on Oct. 22 were questioned about their decision to invest in natural gas pipelines through an affiliated "clean energy" company.

NextEra Energy Partners in September agreed to acquire Meade Pipeline Co. LLC, which owns a stake in the Central Penn pipeline in Pennsylvania, in a deal valued at about $1.37 billion. NextEra Energy Partners, which went public in 2014 with a plan to own and operate contracted clean energy projects, held interest in several gas pipelines in Texas at the end of 2018.

Greg Gordon, an analyst at Evercore ISI, said the investments NextEra Energy Partners is making in natural gas infrastructure "make a lot of economic sense." However, he questioned whether the gas spending "might, on the margin, be diluting" the company's attractiveness to investors focused on environmental, social and governance issues.

Referring to the Meade acquisition at an Oct. 2 investor conference, Wolfe Research Managing Director Steve Fleishman asked how NextEra executives convince the "green community" of the continued importance of natural gas.

"We've long believed that what is really valuable from a [NextEra Energy Partners] unit holder perspective is our investing in long-term contracted, clean energy assets with creditworthy counterparties. And we believe that gas infrastructure, specifically pipelines to the extent that they meet those criteria, can be a great fit," Rebecca Kujawa, CFO of NextEra Energy Partners and NextEra Energy, told Gordon.

Shares in NextEra Energy Partners fell by about 3% between Sept. 30, the day the Meade acquisition was announced, and Oct. 21, compared to a 1% increase in the value of the S&P 500. The company's stock rose slightly Oct. 22 after executives said cash available for distribution, a closely watched metric for dividend-paying companies such as NextEra Energy Partners, rose 54% year over year in the third quarter to $125 million.

"A subset of ESG-oriented investors would prefer [NextEra Energy Partners] to focus solely on wind and solar, so the [Meade] deal is somewhat contrarian in that sense, but there is no change in management's holistic approach to low-carbon energy," Pavel Molchanov, an equity analyst at Raymond James & Associates, wrote to clients on Oct. 22.

At NextEra Energy, third-quarter net income fell 13% from a year earlier to $879 million, or $1.81 per share. However, on an adjusted basis, which excludes certain items such as acquisition expenses and is used by the company for planning purposes, third-quarter earnings rose 12% to $1.16 billion, or $2.39 per share.

Kujawa touted the company's growth prospects in the renewable energy market through a development arm called NextEra Energy Resources LLC, which has nearly 5,500 MW of projects slated for completion after 2020.

"NextEra is absolutely dominating the new business market for renewables," analysts at CreditSights said Oct. 22.

More regulated assets wanted

However, Florida Power & Light Co., a monopoly utility, remains the company's earnings engine. FPL, which grew its regulatory capital employed by more than 8% from a year earlier, accounted for 78% of NextEra's third-quarter net income.

NextEra plans to continue increasing earnings in its regulated utility businesses by investing in infrastructure to protect against storms — the company incurred an estimated $274 million in restoration costs related to Hurricane Dorian in September — and by investing billions of dollars building solar farms. NextEra is also eyeing potential acquisitions. After picking up Florida panhandle utility Gulf Power Co. last year, the company has submitted bids for Jacksonville, Fla., municipal utility JEA and for Santee Cooper, which is known legally as the South Carolina Public Service Authority.

"We're certainly interested in doing more regulated M&A," Kujawa said.