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Rising Interest Rates to Impact NextEra’s Stock Performance

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Market performance

NextEra Energy (NEE) outperformed the utility sector by posting mildly positive returns in 2015. Utilities (XLU) as a sector corrected 8% during the year. Also, 2015 was largely a dull year for utilities, barring few surges on the mergers and acquisition front. Utilities showed a dismal performance in 2015 due to the fear of higher interest rates. The shares of NextEra rose sharply in December 2015 by gaining 8%. Additionally, both Dominion Resources (D) and Duke Energy (DUK) fell ~10% during 2015.

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Interest rates

The possible interest rate hike weighed on utilities in 2015, leading to their poor performance. Utilities are one the prime beneficiaries of the near-zero interest rate period. Note that utilities are an asset-rich business, and so they carry a lot of debt on their books. A series of interest rate hikes may severely dampen their profitability due to a significant rise in interest expenses.

NextEra Energy had a $25 billion long-term debt on its books as of September 30, 2015. A recent rate hike of 25 basis points may not deter NEE much, but an estimated hike of 75–100 basis points in the near future may have a substantial impact on its finances. Thus, interest rates could be the most important indicator for utilities in 2016.

Natural gas price impact

The fall in natural gas (UNG) prices may affect the unregulated business operations of NextEra positively. More than 50% of the total power that NextEra generates comes from plants fired by natural gas. Utilities like Duke Energy (DUK) and American Electric Power (AEP) also have significant power coming from plants like that. Exelon Corporation (EXC) may also benefit from the fall in natural gas prices as a quarter of its total power comes from natural gas. You can go here to learn more about NextEra’s fuel mix.

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