NextEra Energy Partners (NEP -0.11%) has a bold plan to grow its already-high-yielding dividend at a 12% to 15% annual rate through 2023. That outlook makes this renewable energy stock an attractive option for income-seeking investors, especially since the company already offers an enticing 4.3%-yielding dividend. Add that to its fast-paced growth, and this stock has the potential to generate high-powered total annual returns in the 17% to 20% range in the company's estimation.
However, given that the company pays out a large portion of its cash flow in support of its high-yielding dividend, it needs to be creative in how it finances growth. NextEra Energy Partners is doing just that, as the company recently announced another innovative transaction that keeps it on track to achieve its ambitious dividend growth goals.
Digging into the latest deal
NextEra Energy Partners unveiled this week that it has agreed to buy a portfolio of six wind and solar projects from its parent NextEra Energy (NEE -1.11%) for $1.02 billion. NextEra secured long-term contracts to sell the power generated by those facilities to several creditworthy customers, which means they'll provide NextEra Energy Partners with steady cash flow to support its dividend. In the company's estimation, the assets should generate between $97 million and $107 million of annual cash flow over the next five years.
Where things get creative is in how NextEra Energy Partners will finance this acquisition. Instead of selling stock and diluting existing investors, the company entered into a convertible equity funding agreement with private equity giant KKR (KKR 0.86%). As part of the deal, NextEra Energy Partners will combine the acquired assets with four other existing wind facilities into a new portfolio. KKR will pay $900 million for an equity interest in the expanded portfolio that NextEra Energy Partners can buy out over time at a fixed rate of return.
NextEra Energy Partners will use this cash, plus incremental borrowings, to not only fund the acquisition from NextEra Energy but also refinance some existing debt on the four legacy wind assets. That refinancing will increase the cash flow of those assets by $25 million per year.
This transaction accomplishes several things for NextEra Energy Partners. First, it achieves the company's growth objectives for this year. Second, it bridges the restrictions relating to the bankruptcy of one of its customers. Finally, it postpones the earliest date at which the company would need to sell more shares until 2021, at which point their value could be much higher, leading to less dilution of existing shareholders.
Check out the latest earnings call transcript for NextEra Energy Partners.
Tweaking a model that worked
The deal with KKR is the second private-equity-funded transaction NextEra Energy Partners has made in the last year. In September the company reached a unique financing agreement with leading asset manager BlackRock (BLK 0.56%) to fund a similar dropdown acquisition from NextEra. In that deal, NextEra Energy Partners paid $1.275 billion for 12 renewable-energy-generating facilities, which it partially financed with $750 million of convertible equity funding from BlackRock. The latest deal with KKR is on slightly better terms than the BlackRock agreement, as it features lower cash costs and the ability to issue equity to buy out the financing over a longer period, which increases NextEra Energy Partners' flexibility.
These deals could serve as a model not only for future transactions between NextEra Energy Partners and its parent but also for others in the energy sector. Many high-yielding renewable energy companies, as well as several midstream entities, have turned to self-funding growth with internally generated cash flow. However, they could enhance their growth prospects by layering in supplemental financing from private equity funds by structuring deals similar to those of NextEra Energy Partners.
With its latest transaction, NextEra Energy Partners achieved its 2019 growth objective at the same time that it offset the potential impact of a customer bankruptcy without diluting existing investors. That kept the company on track with its ambitious plan to continue growing its high-yielding dividend at a high rate for the next several years. That combination of growth and income makes this renewable energy company a dream stock for dividend-seeking investors.