NextEra Energy Partners (NYSE:NEP) has one of the boldest dividend growth strategies in the energy sector. The clean energy-focused company currently plans to increase its dividend at a 12% to 15% annual rate through 2024. That's a fast pace, considering the company's current yield of 3.8% is nearly double that of the average stock in the S&P 500. The company offers investors a high yield and high growth rate.
Delivering on its promised dividend growth recently became even more likely. That's after NextEra Energy Partners agreed to acquire Meade Pipeline from a joint venture owned by several companies, including natural gas driller Cabot Oil & Gas (NYSE:COG). That deal should give the company all the fuel it needs to meet its growth objectives until 2021.
Drilling down into the latest deal
NextEra Energy Partners is paying $1.37 billion for Meade, which includes about $90 million of spending on expansion projects through 2022. Meade owns a 39.2% interest in the Central Penn Line, a 185-mile natural gas pipeline system supporting the Marcellus shale region. The pipeline is part of Williams Companies' (NYSE:WMB) Transco system as a segment of its recently completed Atlantic Sunrise project.
The pipeline has the capacity to ship 1.7 billion cubic feet of natural gas per day (Bcf/d). Williams' Transco has signed long-term contracts with nine shippers -- including Cabot Oil & Gas -- for 100% of that pipeline space. Those agreements will supply NextEra Energy Partners with predictable cash flow that it can use to support its dividend growth plan.
The system's cash flow should grow as NextEra Energy Partners invests the incremental $90 million on expansion projects, which will boost its capacity by another 0.6 Bcf/d. Meade will own 40% of this expanded space, giving NextEra a slightly larger share of the income these projects produce.
Getting creative (again)
Because NextEra Energy Partners pays an above-average dividend, it doesn't retain that much cash to reinvest in expanding its portfolio of clean energy assets. As a result, the company needs to get creative in finding the necessary funding to keep growing.
The company plans to use several means to finance the initial $1.28 billion purchase price for Meade and the expansion-related spending. First, it expects to use roughly $820 million in project finance debt, including $60 million toward the expansion projects. In addition, the company has secured about $170 million in convertible equity portfolio financing with asset-management giant Blackrock (NYSE:BLK). Finally, it will fund the remaining balance with new debt at the corporate level.
The deal with Blackrock marks NextEra Energy Partners' third financing arrangement with an alternative asset manager in the past year. Last September, the company made a similar transaction with Blackrock to help it acquire several wind and solar energy assets from parent NextEra Energy (NYSE:NEE). The company paid $1.275 billion for the portfolio, which it partially financed with a $750 million convertible equity portfolio financing arrangement with Blackrock. The company's next deal came this past April, when it acquired another portfolio of wind and solar projects from NextEra Energy. It paid $1.02 billion for those assets, which it partially financed with a $900 million convertible equity funding agreement with private-equity giant KKR. Each deal has come with better terms for NextEra Energy Partners, enhancing its ability to deliver on its dividend growth plan.
An enticing dividend growth stock for the long haul
With its latest deal, NextEra Energy Partners has all the fuel it needs to grow its dividend at a 12% to 15% annual rate until 2021. Meanwhile, its parent, NextEra Energy, still has an extensive portfolio of clean-energy assets it could sell to its partnership. Add that to the increasingly attractive funding sources available from alternative asset managers, and the company should be able to deliver on its longer-term dividend growth strategy. That income with upside makes NextEra Energy Partners an increasingly appealing clean energy stock to consider buying for the long haul.