NextEra Energy Partners (NEP -0.89%) announced this week that it would acquire a portfolio of wind and solar assets from its parent NextEra Energy (NEE -0.54%) for $1.275 billion. The transaction, which the company will finance through a unique arrangement with leading asset manager BlackRock (BLK 0.33%), keeps it on track to grow its 3.6%-yielding dividend at a 12% to 15% annual pace all the way through 2023. That forecast could energize the company to produce market-smashing returns in the coming years.
Details on the deal
NextEra Energy Partners plans to acquire one solar energy generating facility and 10 wind farms, spread across the U.S., from NextEra Energy; collectively they produce 1,388 megawatts of renewable power. Long-term contracts underpin these assets: The weighted average of remaining life on these facilities is 18 years, so they should provide NextEra Energy Partners with stable cash flow for years to come.
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Overall, the company estimates that the portfolio will make $122 million to $132 million in cash available for distribution in each of the next five years. That visible cash flow provides a solid foundation for the company's dividend growth plan.
Another important aspect of this transaction is the financing arrangement. The company already had some funding in place after selling its Canadian renewable portfolio earlier this year for $573 million. NextEra Energy Partners will initially fund the balance with its credit facility. However, it will immediately repay those borrowings with a new $750 million convertible-equity portfolio financing arrangement with funds managed by BlackRock. This financing agreement has a low initial interest rate, and NextEra Energy Partners has the option to redeem it in four years at a fixed rate, including financing 70% of the price with its common units.
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Enhancing the outlook
This transaction will not only replace NextEra Energy Partners' Canadian portfolio, but do so with assets that will generate higher returns while also benefiting from a better tax structure. Thus, the deal enhances the company's ability to achieve its dividend growth plan. On top of that, it increases its financial flexibility, since the company won't need to issue any equity to fund its current strategy until at least 2020 -- in the near term, the BlackRock deal will provide it with attractive, low-cost, equity-like financing.
Therefore, NextEra Energy Partners has more than enough liquidity to continue making acquisitions: It's generating free cash flow above its current dividend rate, and has ample borrowing capacity on its credit facility. That gives it the financial flexibility to continue making acquisitions from NextEra Energy, and to invest in organic growth projects such as expanding its natural gas pipelines in Texas or repowering its wind farms, as well as potentially making third-party acquisitions.
The company should have no shortage of opportunities. NextEra Energy has a large portfolio of existing renewable assets and a massive backlog of projects that it could drop down to NextEra Energy Partners. On top of that, NextEra Energy is investing in two large natural gas pipeline projects that it could also drop down in the future.
An intriguing opportunity
NextEra Energy Partners has the potential to generate significant total annual returns for investors over the next five years. With its dividend currently around 4%, and the company on pace to grow that payout at 12% to 15% yearly, it could produce 16% to 19% total annual returns from here (assuming the market continues to value the company at around the same multiple).
At more than 20 times cash flow, though, shares trade at a premium valuation compared to other high-yielding renewable power stocks. That's why investors might want to put this stock on their watchlists for now, and wait to see if the valuation comes down a bit before buying.
