Is $NextEra LP(NEP)$ in the Renewable Energy sector the new "Gold Mine" stock?

If you're considering investing in the renewable energy sector, specifically in NEP, I've conducted a SWOT analysis to help us understand the business's challenges and opportunities.

While NEP pays an unusually high dividend yield, it is critical to know where you're getting your self into.

This is not financial advice and I'm not a financial advisor.

SWOT ANALYSIS

INTERNAL – STRENGHTS

Higher growth potential:

- NEP strategy is centered on expanding ownership of long-term contracted projects in renewable energy. The global emphasis on reducing carbon emissions and transition to greener energy sources is a key driver for the industry expansion.

High and stable cash distribution via PPAs

- The projects NEP operates are long-term, which ensure stable and predictable revenues over time. As of 2024, most contracts are extending up to 2046.

Right of First Refusal (ROFR) agreements with NEE/NEER

- If $NextEra(NEE)$ and NEER decide to sell certain renewable assets, NEP gets the opportunity to purchase them first before they can be offered to the wider market. This gives NEP a steady pipeline of acquisition opportunities.

Wind turbine repowering

- This process involves upgrading or replacing old wind turbines with newer and more efficient models. It can extend the lifespan of a wind farm and improve energy production with the same wind resources.

INTERNAL – WEAKNESSES

NEE owns 51.4% of NEP, significant influence on the business decisions

- NEE owns the majority of NEP shares, this means they get to dictate key business decisions. While some people think this is a strength, it could mean that NEE might prioritize its interests over the minority shareholder interests. One bad decision and everyone gets affected.

PPAs not renewed on favorable terms

- Even though NEP relies on long-term contracts, if contracts are renewed with worse terms than before or even not renewed at all, revenues could be impacted. There is also a risk of key counterparties failing to meet their obligations, such as missing payments, etc.

Equipment breakdown

- There would be extra expenses to repair broken equipment, as well as the impact on earnings when the equipment is not operating due to failure.

Repowering capex

- Even though wind turbine repowering can bring benefits, it will incur costs to the business that need to be paid upfront.

Debt agreements can restrict cash

- NEP must follow project-level agreements, which are conditions they must meet to ensure the project has enough cash to service its debt. For example, maintaining adequate cash reserves, meeting operating expense targets, or adhering to specific performance metrics. If these are not met (e.g., if cash flow from a wind farm falls short due to poor wind conditions), NEP might not receive cash until the situation is resolved, therefore limiting the cash available for dividend distribution.

Distribution has exceeded FCF** for over 3 years

- This topic falls under a fundamental balance sheet analysis, where NEP’s dividend distribution has exceeded their free cash flow levels for over 3 years. This indicates that they are not at a sustainable distribution level. Many analysts are expecting a dividend reduction in the upcoming years so the company can stay on track.

EXTERNAL – OPPORTUNITIES

Renewable energy valuation trends

- The industry is becoming more and more popular as time goes by. Companies that invest and align themselves with renewable energy are often viewed with good eyes by the consumers and public. It enhances brand reputation and can lead to an increase in market share.

Tax credits

- Many governments are pushing for stricter carbon regulations and advancing policies promoting clean energy investments. In some cases, repowered wind turbines may qualify for new production and investment tax credits, providing financial benefits.

Technology advancements (AI?)

- Innovation and efficiency are great advances in the renewable sector, reducing costs and creating opportunities for substantial growth and improved profit margins. The possible introduction of AI to systems can boost the advancements even further.

EXTERNAL – THREATS

Non-regulated assets fluctuation

- These assets operate in competitive markets, where prices for energy and services are determined by market conditions rather than government regulation. Their prices can fluctuate with changes in conditions such as energy demand, fuel prices, or competition. This means they are more volatile compared to regulated assets.

Competitive market

- NEP competes with other non-regulated companies in the open market. They may face pricing pressures, and it can impact on PPAs renewal terms.

Weather dependency & natural disasters

- Not enough Sun and Wind can lead to low energy production and fall short on project-level agreements. Natural disasters can damage equipment, requiring higher upfront cash spending for repairs.

Regulatory changes

- Changes in renewable energy incentives or regulations could impact NEP's profitability