If you love renewable energy and want to both make money and help the industry grow, the best way is by owning renewable energy assets. Right now, the bottleneck in the industry isn't technology or cost, it's simply companies putting wind turbines and solar farms in the ground. And yieldcos are a great way to facilitate that work because they directly finance the construction of renewable energy projects.
One of the most successful yieldcos is NextEra Energy Partners (NEP 2.99%), the subsidiary of utility giant NextEra Energy (NEE 0.54%). It may sound crazy that one of the country's biggest utilities is growing in renewable energy, but it's a big reason why NextEra Energy Partners is the only renewable energy stock you need.
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What is NextEra Energy Partners?
As a yieldco, NextEra Energy Partners buys and owns renewable energy assets. These assets normally have a long-term power purchase agreement tied to them, or an agreement to sell electricity to a utility at a pre-determined price. In effect, these assets act as a bond, with a purchase price up front and then known cash flows throughout the life of the contract.
As of the end of July 2020, the company owned 5,330 megawatts (MW) of renewable energy assets, which included 4,575 MW of wind and 750 MW of solar assets. It also has 4.3 billion cubic feet (BCF) of natural gas pipeline capacity in Texas as a legacy asset.
These assets are expected to have a run rate adjusted EBITDA of 1.2 billion to $1.4 billion by the end of this year and to generate $560 million to $640 million of cash available for distribution (CAFD). Paying out 70% of its CAFD, the company expects a $2.40 to $2.46 annualized distribution by the end of the year. That distribution is expected to grow 12% to 15% through at least 2024 -- and it has that certainty because of its utility parent.
Fueling growth
NextEra Energy's biggest role in NextEra Energy Partners is to provide renewable energy projects that it can drop down to the yieldco. This is similar to how an MLP will buy assets from its parent company.
NextEra Energy Resources is the subsidiary developing renewable energy assets that get dropped down to NextEra Energy Partners and it's one of the biggest developers and operators in the world. As of the end of June 2020, the company had 24 gigawatts (GW) of generation assets, including 16 GW of wind and 3 GW of solar. It has 12 GW of wind and solar assets in its backlog and another 2.2 GW of battery storage projects. Between 2019 and 2022, the company thinks there will be about 80 GW of renewable energy demand for its services.
Over time, some of these assets will be sold to NextEra Energy Partners. That'll keep the yieldco's dividend growing and help fund the next round of development for NextEra Energy Resources.
A renewable energy stock for green investors
NextEra Energy Partners isn't the technology company that's going to change the energy industry or a big manufacturer building millions of solar panels every year. So, in a lot of ways, it's not a sexy renewable energy stock. But it is vitally important to the industry and leverages the new technologies that are developed by financing them into assets that can make money for decades. It doesn't hurt that the company has a 4.2% dividend yield that's built to grow for many years to come. Add all of this up and this is the one renewable energy stock I think investors need.
