Renewable energy is a hot sector as the world increasingly focuses on generating electricity from clean sources that provide an ever refreshed wellspring of power. But before you run out and buy just any old renewable power company, you need to step back and take a deeper look at the businesses you are considering. Two stocks you should be looking at today are Brookfield Renewable Partners L.P.'s (BEP 0.92%) and NextEra Energy (NEE 0.45%), both of which have secret weapons as they grow in the hot renewable power space.
It's all about the water
One of the interesting things about renewable power is that it really isn't a new concept. The world has been using renewable power for thousands of years. Yes, the hot technologies today are photovoltaic solar panels (a relatively new technology) and wind (windmills have been around for ages, but the new versions are much more efficient). But we shouldn't forget water, or hydroelectric power, which has been used for thousands of years and is already a mainstay of the modern power grid.
Image source: Getty Images.
Hydroelectric makes up roughly 80% of Brookfield Renewable Power's generation. It lays claim to being the largest producer of hydroelectric power in the world. The partnership sells this power under long-term contracts to utilities that are very comfortable with the dynamics of hydroelectric power. Water conditions are the key determinant of how much electricity gets generated, but generally speaking, hydro plants are a solid-base-load asset since they are always on. Solar and wind, by comparison, are intermittent power options and inherently more variable sources of electricity generation.
Brookfield's core operations, then, are highly reliable and provide a foundation for the partnership's growth as it increasingly expands into the solar and wind industries. As a partnership, a material amount of cash flow is passed on to unitholders. So this foundation isn't necessarily going to spur incredible growth. However, with such a large hydro footprint, the partnership's 6.5% distribution yield is on very secure footing.
That, in turn, allows Brookfield Renewable Partners more breathing room as it grows in other areas of the renewable power space. Its expansion efforts, meanwhile, included the partnership buying stakes in TerraForm Power and TerraForm Global in 2017. Both of these companies have expanding solar and wind businesses, quickly increasing Brookfield's exposure to these power sources. Solar and wind are likely to be where the partnership's growth comes from going forward.
The benefit of these deals has started to show up this year. For example, adjusted EBITDA from wind power grew nearly 30% year over year in the first quarter. Solar's starting adjusted EBITDA point was zero in the first quarter of 2017, so the increase year over year in the first quarter isn't a meaningful figure. However what is meaningful is that solar is now contributing to adjusted EBITDA.
Brookfield's portfolio breakdown. Image source: Brookfield Renewable Partners L.P.
If you are looking for a pure-play renewable power company, Brookfield Renewable Power's secret weapon is its exposure to old and reliable hydroelectric power. It's a well-tested and consistent technology that underpins its distribution and gives the partnership extra financial leeway as it continues to expand into additional areas of the renewable power space.
A fair bit of diversification
NextEra Energy is another play on diversification, but in a different manner. The company owns Florida Power & Light, a large, regulated utility that serves roughly five million customers in Florida. This business makes up around half of NextEra's earnings. As a regulated utility, this business has to get rate hikes approved by regulators, but in return, it gets a monopoly in the areas it serves. Generally speaking, this is a very stable, slow-growth business.
The regulated utility is the foundation on which the company's NextEra Energy Resources Business, focused on renewable energy, has been built. The company is already among the largest wind farm owners in the world, with that power source accounting for roughly 70% of its renewable generating capacity in this business. But it isn't done expanding, with plans to more than double the size of its renewable power portfolio by 2020.
This is the exciting, growth-oriented part of NextEra, which will help to drive earnings growth of as much as 8% a year through 2021. But here's the thing: If renewable power doesn't turn out to be as exciting of a growth platform as investors hope, NextEra has the regulated, slow-growth business to fall back on. Even this is pretty exciting -- for a utility, anyway. In addition to growth driven by rate hikes (backed by the company's plan to spend as much as $19 billion on capital projects between 2017 and 2020), the population of the state of Florida has been growing relatively strongly. So, there are really two growth drivers underpinning Florida Power & Light's business: capital spending and customer growth.
A breakdown of NextEra's renewable power business. Image source: NextEra Energy.
If you like the idea of investing in renewable power but aren't quite sure a pure-play is within your risk tolerance levels, NextEra's regulated utility assets are an important secret weapon and solid backstop.
Less aggressive, but that's OK
In the end, Brookfield Renewable Partners and NextEra Energy are both ways to gain exposure to the hot renewable power space while limiting the risk that things don't work out as hoped. They are, basically, relatively more conservative ways to play the massive shifts taking place in electricity generation. Brookfield's secret weapon is its large and well-tested hydroelectric portfolio, while NextEra's is its sizable regulated utility business. These are foundations that underpin future renewable power growth at each company. Both should be on your watchlist if you are considering an investment in renewable power today.
