This Unstoppable Growth Stock Adds Another Big Fuel Source

NextEra Energy (NEE 0.51%) is a rarity in the utility sector. It has been unstoppable, growing earnings and dividend payments at above-average rates for over a decade. That's given it the power to outperform the utility index and S&P 500 by wide margins.

A big growth driver has been its investments in renewable energy. While renewables will remain a powerful growth driver in the coming years, the company continues seeking additional fuel sources to keep growing at an above-average rate. It recently added another potentially big one that will turn trash into cash flow while reducing emissions.

Adding another fuel source

Earlier this year, NextEra Energy unveiled its ambitious real zero goal to eliminate carbon emissions from its operations by 2045. One aspect of that strategy is to replace natural gas as a fuel source at its power plants with even lower carbon energies like green hydrogen and renewable natural gas (RNG). 

It recently took a big step toward building out its RNG capabilities by acquiring a large portfolio of operating landfill gas-to-electric facilities. It's paying $1.1 billion and assuming another $37 million in debt to expand its existing portfolio of landfill gas-to-electric generating facilities and its in-house capabilities. The company expects this portfolio to deliver more than $220 million of adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) by 2025.

That aligns with the company's strategy of operating a dozen businesses generating at least $100 million in annual earnings by 2025. That's an increase from seven last year and one in 2000. It's taking a measured approach by making relatively small investments to build new growth platforms. In addition to RNG, NextEra has invested in water utilities, electricity transmission, hydrogen, and battery storage to achieve its goal of operating several more expandable business platforms over the next few years.

Why RNG?

RNG is one of many lower carbon fuel sources companies are developing to reduce emissions while providing reliable energy. Companies produce RNG by capturing methane emitted from landfills, farms, and wastewater treatment plants. Once processed, RNG can replace natural gas as a fuel source in power plants or diesel in vehicles equipped with natural gas engines.

There's enormous potential to capture methane from landfills and turn it into RNG, a much lower carbon fuel source than natural gas and diesel. Energy industry research firm and consultancy WoodMac estimates that RNG production from landfills will double from 200 million cubic feet per day (Mcf/d) this year to 400 Mcf/d by 2025, with the potential to reach 3.2 billion cf/d by 2050. Companies that produce RNG can typically sell it under long-term fixed-rate contracts, enabling them to earn predictable cash flow from their investment.

That combination of lower emissions and attractive economics has led several companies to make sizable RNG investments this year. For example, energy giant BP (BP 0.71%) recently made a big bet on RNG by agreeing to acquire leading U.S. RNG producer Archaea Energy (LFG) for $4.1 billion. Archaea currently operates 50 RNG and landfill gas-to-energy facilities in the country, with a development pipeline that could potentially grow its RNG volumes five-fold by 2030. The deal will significantly expand and accelerate BP's bioenergy business. BP expects its biogas EBITDA to double to around $2 billion by 2030 while helping it grow its overall earnings from its energy transition growth businesses to more than $10 billion by the decade's end. 

Meanwhile, natural gas pipeline giant Kinder Morgan (KMI -0.05%) has acquired several RNG businesses over the past year as it builds out its lower carbon energy platform. It expects to invest about $1.1 billion in those acquisitions and their associated development projects. This platform will produce 7.4 billion cubic feet of annual RNG when all its projects come online by early 2024. Kinder Morgan expects its investment to yield a less than six times adjusted EBITDA multiple by 2024, implying it will earn over $180 million of annualized adjusted EBITDA from RNG within two years. Kinder Morgan sees the potential to grow its RNG production by another 600 million cubic feet per year from those assets over the next decade without investing much additional capital. It could also make more acquisitions and invest in new development projects to expand its RNG output and earnings.

Collections and recycling giant WM (WM 1.08%) is also investing heavily in RNG. It plans to spend $825 million through 2025 to expand its RNG output by 600%. That's enough RNG to fully fuel its entire natural gas fleet by 2026. This investment will save money and reduce greenhouse gas emissions. 

Capturing another large fuel source

NextEra Energy has been laying the foundation for its next decade of growth by building out additional expansion platforms. RNG is an important growth driver because it can lower emissions by replacing natural gas at existing power plants. That's leading NextEra to significantly expand its RNG capabilities so that it can capitalize on the enormous growth potential of this lower carbon fuel. It should enable NextEra to continue delivering unstoppable growth.