Global energy demand is expected to grow 30% by 2040, according to an estimate by the International Energy Agency. Consequently, energy companies will need to invest a staggering amount of money in the coming decades to meet that demand. One estimate, for example, pegs the opportunity for renewable investment at a jaw-dropping $10 trillion in the decades ahead. Meanwhile, the projected investment needed to build new natural gas-related infrastructure in North America alone is estimated to be more than $400 billion through 2035.
While many energy companies are focusing their efforts on capturing opportunities in one of those two markets, NextEra Energy Partners (NYSE:NEP) is casting a wider net by investing in both areas. That dual focus positions the company to deliver double-digit annual dividend growth through at least 2023.
Making a big bet on renewables
NextEra Energy Partners currently owns 3,300 megawatts (MW) of wind and solar-generating capacity across the U.S., which is enough to power roughly 2 million homes. The company put together that portfolio by acquiring recently built wind and solar assets from utility NextEra Energy (NYSE:NEE). Those transactions have given its parent the funding to build more renewable power assets while providing NextEra Energy Partners with a growing stream of cash flow to boost its dividend, which has rocketed 133% since late 2014.
The two companies recently teamed up on another deal. In this transaction, NextEra Energy Partners will acquire 10 wind farms and one solar-generating facility from NextEra Energy for $1.275 billion in cash. These assets collectively have the capacity to produce 1,388 MW of renewable energy and should generate $122 million to $132 million in annual cash flow over the next five years since they come with long-term contracts that have locked in power rates. Because of that, the deal will provide the company with even more power to grow its dividend at a fast pace, while giving its parent more funds to build additional renewable assets.
This partnership should continue proving to be an important one in the coming years given the vast opportunity to keep making investments in the renewable power sector. NextEra Energy should have no shortage of opportunities to build new renewable facilities, which will continue expanding the acquisition pipeline for NextEra Energy Partners.
Taking a slice of the gas infrastructure market
In addition to tapping into the massive renewables market, NextEra Energy Partners also operates several gas pipelines in Texas, which it bought from NextEra Energy in 2015 for $2.2 billion. Those pipelines currently generate steady cash flow under long-term contracts, providing a strong base for the dividend.
NextEra Energy Partners recently locked up an opportunity to expand this system. It plans to spend about $115 million to build more pipeline compression capacity so that its existing lines can move more gas. That investment will help boost the cash flow it earns on this system in the future, giving it more fuel for dividend growth.
In addition to that organic expansion project, NextEra Energy Partners could potentially buy more gas pipelines from its parent in the future. NextEra Energy and its joint venture partners recently placed the $2 billion Sabal Trail and Florida Southeast Connection pipelines into service, making them prime dropdown candidates for NextEra Energy Partners. Meanwhile, NextEra is working with several partners to build the $4.6 billion Mountain Valley Pipeline and associated $500 million Southgate expansion project. On top of those projects, NextEra Energy is working with several partners to develop the Whistler Pipeline, which would move natural gas from the Permian Basin to Texas' Gulf Coast. As those pipelines enter service, NextEra could eventually drop them down to its affiliate, which would provide it with additional funding to build more pipelines or wind and solar assets, while giving NextEra Energy Partners more fuel for dividend growth.
High-powered dividend growth ahead
NextEra Energy Partners is going after two gigantic market opportunities. That dual approach leads it to believe that it can grow its dividend at a 12% to 15% annual rate all the way through 2023. That's an elite growth rate, which positions this company to potentially produce high-powered total returns in the mid-to-upper teens in the coming years.