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The Biggest Electric Utility Company in the World

We first started thinking about the biggest electric utility company in the world when we recently wrote about how bitcoin mining works. While researching the article which focused on bitcoin mining hardware companies, we were surprised by how relevant the cost of electricity is to the profitability of bitcoin mining – which largely takes place in China now because they have cheaper electricity than everyone else – because coal mining. Then, the topic of cheaper electricity came up again in our article on Bloom Energy’s IPO which is finally happening. Everyone’s excited about Bloom because they have developed a shipping-container-sized fuel cell that converts cheap natural gas into electricity. Sounds great, as long as the tax credits don’t expire and natural gas remains cheap as it has:

Natural Gas Spot Prices Over Time

Natural Gas Spot Prices Over Time

All the while we couldn’t help but think how everything seems to be moving towards more electricity consumption. Tesla’s electric cars, China’s electric buses, bitcoin miners, the increase in electric-powered vehicles, advancements in energy storage, the growth of clean energy like wind and solar, all of these trends lead us towards wanting to invest in electricity, not as a commodity, but as a picks-and-shovels play. The icing on the cake would be investing in clean energy as opposed to coal-fired power plants for example. Turns out, the biggest electricity company in the world is NextEra Energy (NEE), a company we wrote about before in our article on The World’s Largest Generator of Solar and Wind Power. That’s because 42.55% of the electricity NEE generates is clean energy.

NextEra Energy (NEE)

Brief description of NextEra Energy businesses

Source: NextEra Energy

Let’s put the electricity output numbers in perspective. (There’s nothing more annoying than listening to people who drone on and on about “megawatt this” and “gigawatt that”, not taking the time to explain what any of that stuff means to commoners like us.)

The term “47 Gigawatts of electricity” needs a little bit of explaining, and we’ll start by using the Bloom Energy Server as a starting point:

Source: Bloom Energy

Let’s go with the upper bound of their estimate and say that one server provides 250 kilowatts of continuous power that is able to meet the demands of 160 homes. (Since homes around the U.S. use dramatically differing amounts of electricity, the bright minds at Bloom have said “the average home.”) Since 1,000 kilowatts is equal to 1 megawatt, we can now assume that 4 Bloom servers produce 1 megawatt which powers 640 homes. We can then say that 4,000 Bloom servers produce 1,000 megawatts or one gigawatt, enough power for 640,000 homes. Since NEE has 47 gigawatts of power in operation, they could theoretically power 30 million average U.S. homes. While this doesn’t take into account variability of production – downtime for energy power plants, the sun doesn’t always shine, and the wind doesn’t always blow – it does give us an idea of how big this electrical utility company is.

When it comes to labeling a company “the biggest electric utility company in the world”, we first need to explain how you determine “biggest”. For example, we recently looked at the biggest artificial intelligence (AI) startups in the world and used “funding taken in so far” as a determining factor, as opposed to say “revenues”. That’s because we think that investors are best suited to ascribe a value to an asset, given all the due diligence they typically do before investing. For publicly traded companies, we use market cap to determine “biggest”. If we looked at the market cap of all utility companies back in 2001, NextEra Energy (NEE) would have been at #30:

Credit: NextEra Energy

In just 17 years, NextEra Energy was able to execute on a growth strategy that has made them the biggest utility company in the world today.

NextEra Energy Historical Performance

Investors in NEE have rewarded the company’s efforts accordingly. Since 2001, shares of NEE have appreciated +432%. Compare that to a return of +59% over the same time frame from the SPDR Utilities Select Sector ETF (XLU):

NEE Stock Price Chart

That dark blue line with the 450.77% return is NEE – Source: Yahoo Finance

As expected, utilities as a sector (orange line) dramatically underperformed the Dow Jones Industrial Average (light blue line) which returned +138% over the same time frame. That’s because utilities are largely considered a defensive sector and “lower risk”. You generally don’t get to buy low risk assets and enjoy this much price appreciation.

While past performance is no indication of future performance, this is a utility company we’re talking about here. Utility companies don’t usually outperform technology indices like the Nasdaq (pink line), which returned +286% during the same time frame. But NextEra managed to do just that, all while paying a dividend and increasing it every year.

NextEra is Almost a Dividend Champion

Utility companies also don’t grow their dividend company as fast as NextEra Energy has. Not only have they paid a dividend for the last 24 years, they’ve also increased it for 24 years. In the past decade, they’ve grown that dividend by an average of 9.1% every year. That’s not normal. Right now, there are 15 utility companies that are dividend champions (paid and increased dividends for at least 25 years running). On average, those companies have only grown their dividends by 3.8% a year on average.

NextEra Energy seems best-in-class when it comes to rewarding shareholders, and planning to continue rewarding shareholders. In looking at the latest NextEra Energy investor presentation, we see that they plan to increase the dividend payments at an even steeper growth rate until 2020:

Source: NextEra Energy Investor Presentation

Right now that number is $4.44 (based on their declared dividend of $1.11 for this month) which results in a yield of roughly 2.77%. If the lower end of the above estimates are used, we will see a yield of 3.43% by 2020. Still, that yield is a lot lower than the income you could realize today by investing in shares of other large utility companies like Duke Energy (4.9% yield) or Dominion Energy (5.15% yield).

Cheap Wind Energy

Maybe the most compelling reason to invest in NextEra Energy is the reason why we wrote about them in the first place. NextEra Energy is deeply committed to moving towards clean energy, which is why 20 of the 47 gigawatts they produce are from wind and solar. It’s not surprising to see that 69% of their clean energy comes from wind, given that wind power is the cheapest way to generate electricity today. The economics are adding up because of charts like these which show the unsubsidized real cost of energy taking into account things like cost to build and maintain:

Source: Lazard

Investing in wind energy isn’t just about saving the planet, it’s now about making money. Just ask Warren Buffet, whose subsidiary MidAmerican Energy is now producing 100% clean energy. Wind now supplies more than 6% of America’s energy:

Wind energy by state

Source: AWEA U.S. Wind Industry Annual Market Report 2017

It also worth noting that while the U.S. is doing lots to adopt clean wind energy, one other country is doing it on a much larger scale:

Top global wind power installations

Source: AWEA U.S. Wind Industry Annual Market Report 2017

Conclusions

Going back to our original comments on electricity generation as an investment thesis, it seems like the trend is moving towards using more electricity, but not just any electricity. The biggest commercial consumers of electricity are now demanding clean electricity, which as you can see, no longer means “more expensive” electricity. Now, you can invest in the biggest electric utility company in the world while at the same time getting exposure to the disruptive forces of renewable energy, a result of our continuing technological advancement as a society.

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