NextEra Energy Update; September, 2023

NextEra Energy is selling off today, September 27^th with a couple of news items in the headlines.

Source: Factset Database, September 27, 2023

First, NextEra plans to sell Florida City Gas to Chesapeake Utilities Corporation (CPK) for $923 million in cash. NextEra will realize a gain on sale that should be immediately accretive to earnings and reduces debt loads by $145 million. Florida City Gas was an asset included in the Florida Gulf Power deal from Southern Company back in 2019. from This deal is expected to close over the next several months.

This is likely not the primary driver of the sell-off, however. This morning, September 27^th, NextEra Energy Partners (NEP), a limited partnership majority owned by NextEra Energy, revised its dividend distribution growth rate from 12-15% to 5-8%. Because NEP is a master limited partnership, all cash flows must be distributed to shareholders in the form of dividends. These dividends are a form of cash flow for the NextEra Energy parent company. A reduction of expected distribution growth rate reduces the value of NEP to shareholders including NextEra Energy.

Management from NEP cited rising interest rates and tighter borrowing conditions for higher debt costs and thus reduced distributions.

Suspiciously, management also stated that “NEP does not expect to require growth equity to meet its revised growth expectations until 2027. If favorable market conditions exist, the partnership may elect to opportunistically issue equity…”

Occasionally, firms may elect to raise capital by issuing shares to the public markets rather than access the debt markets. Typically, this dilutes existing shares within the public markets and can thus be costly to the firm. Clearly, management believes that the cost to borrow via debt is becoming too costly and is reserving the right to issue new stock to raise capital if the need arises.

I doubt this plan had a desirable effect, however, with NextEra stock down 7% and NEP stock down 16%. Clearly investors do not like the idea of NEP diluting their already reduced distributions.

Source:

1. NextEra Energy. News Releases. “NextEra Energy announces sale agreement for Florida City Gas and reaffirms long-term outlook.” Published September 26, 2023. Retrieved from https://www.investor.nexteraenergy.com/news-and-events/news-releases/2023/09-26-2023-230024850
2. NextEra Energy Partners. News Releases. “NextEra Energy Partners, LP revises growth expectations and limits equity needs.” Published September 27, 2023. Retrieved from https://www.investor.nexteraenergypartners.com/news-and-events/news-releases/2023/09-27-2023-113051460

 

 

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