When it comes to ranking the world's largest utilities, there's NextEra Energy (NYSE:NEE) -- and then there's everyone else. The company boasts a market cap of more than $80 billion, whereas the second-most-valuable publicly traded peer doesn't top $60 billion. There are multiple explanations for the giant gap, but one factor is undeniable: The business is all in on renewable energy, the lowest-cost electricity source in several major markets.
Consider that the power-generation arm, NextEra Energy Resources, expects to grow its renewable energy project backlog from 28,000 megawatts of wind and solar at the end of last year to 40,000 megawatts by 2020. For perspective, the entire United States ended 2017 with 121,000 megawatts of installed power capacity for wind and solar.
While that unwavering commitment bodes well for the continued growth of the world's largest utility, it also creates an intriguing long-term opportunity for NextEra Energy Partners LP (NYSE:NEP). The renewable yieldco has taken a page from its parent to run laps around its peers and stake out an ambitious growth strategy of its own. With first dibs on acquiring assets from NextEra Energy Resources and a healthy track record of creating value for owners, this high-yield stock could be a retiree's dream.
Total annual returns of 16% through 2023?
As a group, renewable yieldcos don't have a strong track record of creating value for investors, but NextEra Energy Partners bucks the trend. The stock has posted a total return (stock performance plus the distribution) of 133% in the last three years, whereas the next-best peer, Brookfield Renewable Partners, comes in at just 33%. What's the secret?
NextEra Energy Partners has been the most disciplined when making capital investments and, importantly, takes a long-term approach to distribution growth. So although it sports a yield of 3.6% -- much lower than peers -- it also expects to grow the distribution at 12% to 15% per year. Following the most recent acquisition, the business is on track to deliver on that promise through at least 2023.
The recent transaction with NextEra Energy Resources will add 1,368 megawatts of wind and 20 megawatts of solar to the renewable yieldco's portfolio once completed in the fourth quarter of 2018. Except for a 200-megawatt facility in California, the remaining wind assets are all located in the American Wind Corridor, which runs roughly down the center of the continental United States and is home to some of the best wind generation potential on the planet. And although relatively small, the 20-megawatt solar plant is located in Nevada -- one of the best sites for the energy source.
The acquisition is a pretty big splash for NextEra Energy Partners. Consider several highlights:
- The transaction weighs in at a hefty $1.275 billion, plus the assumption of $930 million in tax equity financing. The business will use proceeds from the sale of its Canadian assets earlier this year and financing from BlackRock.
- The assets have an average distribution-weighted remaining contract life of 18 years.
- The total asset portfolio will increase to 4,100 megawatts of wind and 600 megawatts of solar. That's further supported by seven natural gas pipelines located in South Texas sporting a combined capacity of 4 billion cubic feet per day.
- The new assets are expected to add adjusted EBITDA of $290 million to $310 million per year and cash available for distribution (CAFD) of $122 million to $132 million per year. Each is calculated as the average annual contribution over the first five years of ownership.
Investors should be pleased with the expected financial contributions from the 11 renewable power plants involved in the acquisition. NextEra Energy Partners now expects to exit 2018 with an annual run rate of at least $1 billion of adjusted EBITDA and $360 million of CAFD (and that's after debt payments).
While that should be enough to catch the attention of both long-term-minded investors and retirees, consider management's confidence in the path ahead. Assuming annual distribution growth of 12% to 15% is achieved and shares keep a distribution yield of approximately 4%, management thinks there's an opportunity for investors to sit back and capture annual total returns of 16% to 19% per year through 2023.
In other words, management thinks an investment of $1,000 made on the last day of 2018 would grow to at least $2,100 with distributions included by the end of 2023.
A renewable-energy leader for the long haul
Investors might (and probably should) be skeptical of any investment that claims to offer 16% annual returns. Can NextEra Energy Partners really pull it off?
Well, it's important to acknowledge that returns on that level aren't guaranteed and can be derailed by anything from randomness to slowing growth in the broader economy. But given the company's impressive track record of creating value for unitholders, the business's growth expectations should at least make investors sit up and take notice. Besides, even if the high-yield stock underperforms that ambitious target, it figures to treat long-term investors pretty well.