Every stock has risks that investors need to be aware of. In the case of utilities, there are slowly emerging threats to the century old utility monopoly and companies like NextEra Energy (NYSE:NEE) have to adapt - or face tough times. Here are the three risks I think investors need to watch for in 2016.
Rooftop solar passes
Florida is known as the Sunshine State, but very little of that sunshine is hitting rooftop solar panels. That's because Florida utilities, like NextEra Energy, have been able to get laws set up to kill the rooftop solar industry before it ever gets started. Customers in Florida have to buy solar electricity from a utility, they can't buy energy from a third party like SolarCity (NASDAQ:SCTY.DL), who would love to have a presence in the state.
There could be an amendment on the ballot in November to change that, although what would be on the ballot and what the impact would be is currently unknown. The legislature could also change rules to make it easier to install rooftop solar.
If customers in one of the country's sunniest states can suddenly start generating their own energy it could take a big bite out of demand for electricity from the utility. And that could hurt the company's growth long-term.
Hawaiian Electric rejects its buyout
Since the day the acquisition of Hawaiian Electric Industries (NYSE:HE) was announced it has been under pressure from those opposed to the deal. Right or wrong, they view NextEra Energy as a utility that's successfully put rules in place to squash renewable energy, particularly rooftop solar, in Florida and there's concern it will do the same in Hawaii, a state with overwhelming support for the solar industry.
NextEra Energy looks at the addition of Hawaiian Electric as a way to grow its core business and potentially to develop the utility model of the future, of course with a tile toward utility profits. But if the deal falls through it would take away another growth option, something investors may not like.
Utility multiples get crushed
For decades, the utility business was seen as a safe investment because of its monopoly status in the U.S. There's never been a major competitor to buying energy from the utility, like there is now with rooftop solar and even energy storage. If those new competitors start eating into utility growth potential and profits utilities may not be worth the multiple they've enjoyed on the market.
NextEra Energy's stock trades with a forward P/E ratio of 17.3, compared to 15.9 for the S&P 500. If growth slows due to any of the reasons I cited above that multiple could be ratcheted down pretty quickly.
A utility set up to win
It's important to know the risks of any stock, but when it comes to utilities I think NextEra Energy is set up better than most. It is in one of the few states that's seeing significant electricity demand growth and if it can complete the Hawaiian Electric acquisition and integrate the company successfully it could be a big win for today and the long-term. This is one utility I wouldn't be afraid to have in my portfolio, even with the risks outlined above.