It's only March, but NextEra Energy Partners (NEP -1.93%) has already announced transactions that will allow it to meet its growth objectives for the year. That should pique the interest of investors, especially considering shares are trading roughly 10% below last year's peak, and at more attractive valuations than other renewable energy yieldcos.
In addition to its progress on its near-term objectives, and its compelling stock valuation, the business has a lot to offer long-term investors. Those opportunities are highlighted by its advantageous relationship with subsidiary NextEra Energy Resources (NEER) -- the energy generation business of NextEra Energy and the planet's leading producer of electricity from the wind and sun -- which gives it the ability to acquire stakes in renewable energy assets across the United States. As two recent acquisitions demonstrate, NextEra Energy Partners should be able to leverage that relationship to deliver significant growth for the foreseeable future.
On track to meet its growth objectives
Earlier this month, NextEra Energy Partners announced a string of purchases from NEER that should allow it to meet its 2019 guidance. Management's growth objectives call for the business to exit the year with annual run rates of roughly $1.29 billion in adjusted EBITDA and $445 million in cash available for distribution (CAFD), compared to the $886 million and $339 million, respectively, that it delivered in 2018.
With those recent transactions, NextEra Energy Partners scooped up 611 megawatts of renewable energy projects -- 420 megawatts of wind and 191 megawatts of solar -- for roughly $1.02 billion. The acquired projects are expected to add approximately $107 million in adjusted EBITDA and $102 million in CAFD per year for the next five years.
Those deals follow the acquisition of 1,388 megawatts of wind and solar projects from NEER that closed in late 2018. Before that transaction, investors could only guess that NextEra Energy Partners' close relationship with the world's leading renewable power generator would be advantageous. Now, investors can likely extrapolate what it means to the parent company's long-term viability. After all, those transactions alone, totaling nearly 2,000 megawatts, have driven most of the portfolio's growth from 2,700 megawatts in early 2018 to nearly 5,300 megawatts today.
The most recent acquisition was just one of several related transactions intended to mitigate near-term uncertainty. NextEra Energy Partners will finance it by issuing $900 million in convertible debt to a financial firm, and by recapitalizing four wind farms it already owns. The newly acquired and recapitalized assets will then be placed in a second portfolio owned by the company and the financial firm. When the dust settles, the assets will contribute an additional $125 million in annual CAFD.
Taken together, the recent financial transactions provide the business with more certainty in several key areas:
- The additional adjusted EBITDA and CAFD from the acquired and recapitalized assets will allow the business to meet its 2019 exit-rate guidance for each metric.
- The financial boost will also mitigate risks posed by the bankruptcy of PG&E in California, which would have exposed an estimated 23% of the portfolio's CAFD to increased uncertainty. The business can now meet its 2019 growth objectives without the affected assets.
- With the capital it now has on hand and the credit it has available, the business will not need to issue more common stock until at least 2021 -- one year later than the previous estimate.
Check out the latest earnings call transcript for NextEra Energy Partners.
Importantly, the company's long-term growth remains firmly on track. NextEra Energy Partners expects to grow its distribution per share by at least 12% annually from the end of 2018 through the end of 2023. That includes a 15% step up to $2.14 per share by the end of this year.
Hitting that long-term goal will almost certainly be contingent on NextEra Energy Partners acquiring additional assets in the next few years. And once again, investors can expect the close relationship with NEER to play a central role.
NEER is attempting to grow its renewable energy project backlog to an astounding 40,000 megawatts by 2020. It has quickly ramped up capital expenditures in recent years to meet the surge in demand for wind and solar projects. In fact, the $7.1 billion spent in 2018 made it the fourth-largest capital investor in the United States. The incredible buildup of infrastructure that will take place over the next two years should create plenty of opportunities for NextEra Energy Partners to gobble up assets and keep its impressive growth humming along.
A great way to gain exposure to renewable energy
NextEra Energy Partners provides a complete package for investors with a long-term mindset. It offers a dividend that today yields 4.4%, and while that's lower than other renewable energy yieldcos, it has proven much more sustainable. It has an enviable relationship with the world's largest renewable power generator -- a company that's ramping up to respond to an insatiable demand for wind and solar projects in the United States. And it has beaten the total return (stock performance plus dividends) of the S&P 500 since its market debut in 2014. Simply put, management's execution of its growth strategy to date should give investors confidence in owning this renewable energy stock in their portfolio.