NextEra Energy: Selloff Due to NEP Guidance Cut Creates Opportunity for Long-Term Investors

We are maintaining our $82 per share NextEra Energy NEE fair value estimate after the company lowered the long-term growth rate assumptions for its partially owned NextEra Energy Partners, or NEP. Our narrow moat rating is unchanged.

NEP cut its annual unit distribution growth rate to 5%-8% through 2026, with a 6% target. This was a meaningful cut from management’s previous 12% growth rate target, noting higher interest rates as the main reason. NextEra Energy reaffirmed its 2023 EPS guidance of $2.98 to $3.13 and 2024 EPS guidance of $3.23 to $3.43, both in line with our estimate. The company expects to grow earnings 6%-8% annually through 2026, which we view as achievable.

We think NextEra Energy management, which also manages NEP, finds itself in an unusual position having to regain investor confidence after management turnover earlier this year and revising growth expectations at NEP.

We think the market’s readthrough of NEP’s guidance cut to NextEra is unwarranted. We don’t think NEP is vital to NextEra’s ability to finance its capital investment plan. NEP represented a small portion of the equity we estimate NextEra will need to finance its renewable energy growth plan. Management said they have capital recycling opportunities, similar to its announcement to sell Florida City Gas. We think NextEra’s strong balance sheet can support its capital investment plan.

Investing in NextEra Energy is not without its risks, but the company now trades at a wide margin of safety to our fair value estimate with a 4-star rating. Our Medium Uncertainty Rating, unique in our utilities coverage, accounts for increased regulatory risk at Florida Power & Light given ongoing concerns about campaign finance violations. It also accounts for the chance that state regulators will revisit utilities’ renewable energy investments if customer bills climb too quickly. We have yet to see any evidence of regulators cutting utilities’ investment plans.