NextEra Energy (NEE) is both America’s leading producer of wind and solar energy and operator of arguably its healthiest electric utility. So, it’s small wonder it’s also the country’s most power stock, notes utility sector expert Roger Conrad, editor of Deep Dive Investing

That’s meant a challenge for long-term investors to find a decent entry point. One good alternative: Buy shares of NextEra Energy Partners (NEP). 

NextEra Energy Partners is a “yieldco,” owning stakes in parent NextEra Energy’s contracted wind and solar facilities and regulated natural gas pipelines. Cash flow is exceptionally low risk, with counterparties a mix of regulated utilities, government entities and corporations with high credit ratings. 

Partners’ growth stems primarily with drop downs of assets from NextEra Energy’s unregulated wholesale power unit. The parent recycles capital while retaining ultimate control of assets. Yieldco cash flow grows when assets are added, boosting dividends. 

Yieldcos need strong sponsor/parents to succeed. NextEra Energy has never wavered in its support of Partners, including rolling back its incentive distribution rights to cut cost of capital. 

The environment for raising equity capital is still difficult. Management, however, has proven creative, last fall financing the $1.28 billion purchase of 11 wind and solar projects in part with $750 million “convertible equity portfolio financing,” which it arranged from an affiliate of private capital giant Blackrock. 

Parent NextEra has stuck with Partners’ structure in the belief that a combination of increased scale and/or improved conditions for issuing equity will enhance its ability to recycle capital. That decision has paid off.

Partners has consistently maintained a premium valuation, a steep contrast to other yieldcos as well as master limited partnerships that are focused on drop down transactions. Meanwhile, adoption of wind and solar continues to accelerate, increasing opportunity for growth at both parent and yieldco. 

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