Despite all the doom-and-gloom headlines about climate change, there's actually plenty of room for optimism. Consider that the United States has cut total annual emissions by 862 million tons on a carbon dioxide equivalent basis since 2005. That's a 15% reduction, and more than the entire annual output of Germany. The trend should accelerate in the near future.
The National Renewable Energy Laboratory (NREL) projects that the U.S. could boast over 500,000 megawatts of installed wind and solar power capacity by 2030. That could generate 40% of the nation's total electricity and result in a compound annual growth rate of 15% for wind and solar electricity generation from 2018 to 2030.
That also suggests that NextEra Energy Partners (NEP +0.49%) has a solid growth runway if the business can maintain enough financial flexibility to take advantage of this expansion.
Image source: Getty Images.
A significant long-term growth opportunity awaits
NextEra Energy Partners was created by NextEra Energy (NEE +0.17%), which is the largest publicly traded utility in the world by market cap. Well, technically, it isn't a pure utility. While NextEra Energy operates electric utilities in Florida (read: companies that sell electricity to end users) , it also derives a significant amount of revenue and income from its power generation business (read: a company that sells electricity to utilities). NextEra Energy Resources (NEER) builds, operates, and sells wind and solar power assets across the United States. It's one of the largest capital investors in the country, generates more electricity from the wind and sun than any other company on the planet, and owns more installed wind power capacity -- 15,000 megawatts -- than all but seven countries.
The leadership position of NEER has helped NextEra Energy Partners to assemble its own portfolio of wind and solar power assets across the U.S. The partnership has acquired most of its current 5,330-megawatt portfolio, including nearly 2,000 megawatts since 2018, from the power generation arm of the parent.
While NextEra Energy Partners hasn't outlined specific growth expectations in terms of power capacity, the company and its parent have been outlining America's incredible renewable energy growth potential in recent investor meetings. Consider how NextEra Energy sees the market developing through the next decade:
|
Period |
Average Annual Capacity Additions, Wind Power |
Average Annual Capacity Additions, Solar Power |
|---|---|---|
|
2019 to 2022 |
~10,000 megawatts |
~10,000 megawatts |
|
2023 to 2030 |
12,000 megawatts to 15,000 megawatts |
18,000 megawatts to 20,000 megawatts |
Data source: NextEra Energy investor presentation.
For comparison, the United States exited 2018 with roughly 96,000 megawatts of installed wind power capacity and 62,000 megawatts of installed solar capacity. The nation could boast 500,000 megawatts of combined wind and solar power capacity by 2030.
That sets up a clear growth runway for NEER and, by extension, NextEra Energy Partners. The power generation business currently operates roughly 18,000 megawatts of wind and solar power capacity, but reports 9,600 megawatts in its backlog and thinks it could add and develop another another 7,000 megawatts by 2022. The backlog doesn't extend beyond that point, but investors can expect NEER to remain aggressive.
Image source: Getty Images.
Can NextEra Energy Partners execute on the opportunity?
The partnership has faced some obstacles on its recent growth trajectory. The United States is experiencing a wind drought, which has been painful because wind assets comprise 85% of the portfolio's power capacity. In the first half of 2019, renewable energy sales declined 10% and total operating expenses climbed 23% compared to the year-ago period.
Making matters worse, NextEra Energy Partners saw interest expense soar to $362 million in the first six months of the year, compared to $124 million in the year-ago period. That's because the company has leaned on debt to acquire assets from NEER. Therein lies the most significant obstacle to partaking in the country's renewable energy bonanza by 2030: financing.
Management maintains that the business has accessed low-cost financing to support growth, but the partnership's debt currently has non-investment-grade ratings (albeit at the high end of that rating scale). The business recently consolidated some of its revolving credit lines with long-term debt notes, but it has also been forced to resort to third-party debt financing in the last year. That could limit the company's growth potential if those sources of cash dry up.
Therefore, investors will need to keep a close eye on how NextEra Energy Partners pays for growth, especially considering ballooning debt balances have led to trouble for other renewable energy companies over the years.
A promising renewable energy stock, warts and all
While investors cannot brush aside balance sheet worries and financing obstacles, management has earned the benefit of the doubt. Units of NextEra Energy Partners have delivered a 97% return, with dividends included, since its initial public offering (IPO), a performance that easily tops the S&P 500's total return of 69% in that span.
Management expects to grow distributions 12% to 15% per year through at least 2024 and doesn't think it will need to sell common equity until 2021 at the earliest. The latter could become necessary to maintain respectable leverage ratios, especially if wind droughts persist. But given the company's track record and a distribution yield of 3.9%, investors should be intrigued by the growth potential for this renewable energy stock over the next decade.
