NextEra Energy Partners (NYSE:NEP) recently agreed to buy a stake in a large natural gas pipeline by acquiring Meade Pipeline. On the one hand, the deal was a bit of an outlier. That's because it was a notable departure from its focus on acquiring renewable energy assets from its parent NextEra Energy (NYSE:NEE)
However, the purchase still fits in with the company's overall profile of investing in cleaner energy. That was one of the many things NextEra's management team pointed out when discussing the deal on its third-quarter conference call. One of the most important takeaways is that with the transaction, NextEra Energy Partners will now have enough fuel to grow its 4.1%-yielding dividend by another 12% to 15% through next year without needing to make another acquisition. Here's more on why the company couldn't pass up this unique opportunity.
Drilling down into why it made the pipeline acquisition
NextEra chief financial officer Rebecca Kujawa discussed the partnership's natural gas pipeline transaction in great detail on the call. She pointed out several reasons why the company likes the deal. First, "the fixed payment structure of Meade's lease further diversifies the NextEra Energy Partners' portfolio, while helping mitigate any potential wind and solar resource variability." In addition, thanks to the attractive financing the company lined up for the deal, it will "yield a double-digit return to NextEra Energy Partners LP unitholders and generate a CAFD (cash available for distribution) yield of roughly 14%."
Finally, since Meade is a third-party acquisition, it "helps extend NextEra Energy Partners' already best-in-class runway for LP distribution growth." That's because the company won't need to buy any more assets from its parent until 2021 to support its current plan to increase its dividend by 12% to 15% per year. As a result, it could extend its outlook past its current view of delivering that growth rate through 2024.
Kujawa further noted that "we believe this acquisition is consistent with NextEra Energy Partners' focus on investing in long-term contracted clean energy assets with strong creditworthy counterparties, and that natural gas will play an important role in the country's clean energy future." In other words, Meade fits everything the company seeks in an acquisition. Furthermore, because of the excellent return it expects to earn, the transaction fully supports 2020's dividend growth while enabling the company to maintain a healthy payout ratio in the mid-70% range.
Not necessarily a sign of things to come
With the acquisition of Meade, gas pipelines will soon supply 30% of NextEra Energy Partners' CAFD. That led an analyst on the call to question whether the company would make more gas-focused deals. On the one hand, Kujawa noted:
We've long believed that what is really valuable from an NEP unitholder's perspective is our investing in long-term contracted clean energy assets, with creditworthy counterparties. And we believe that gas infrastructure, specifically pipelines to the extent that they meet those criteria, could be a great fit for NEP. And of course, as you know, we executed on an acquisition of some pipelines several years back, and that's added tremendous value to unitholders.
However, she also stated that "there are very few pipelines that fit NextEra Energy Partners' investment criteria of being long-term contracted with creditworthy counterparties." Because of that, and the fact that NextEra has an extensive portfolio of wind and solar projects that it could acquire, NextEra Energy Partners believes that gas pipelines will become a less meaningful contributor to its cash flow in the future.
In other words, the company made this deal because it "was a unique opportunity" to buy an asset where the "returns are particularly attractive," according to Kujawa. If another pipeline comes on the market that meets its criteria, it would certainly consider that deal. However, the company's focus will be to buy wind and solar assets from NextEra. So Kujawa believes that the "percentage of 30% (of CAFD coming from gas pipelines) -- assuming the close of the acquisition -- will likely go down over time, particularly since this is a unique opportunity to acquire the Meade Pipeline."
A rare find
NextEra Energy Partners pounced on the opportunity to buy Meade Pipeline, because it was such a great deal. It was a solid strategic fit because it met the company's criteria of being a clean-energy asset with a long-term contract profile to creditworthy customers. Add in the returns it expects to earn on this investment, and it couldn't say no.
Now it has all the fuel it needs to continue growing its dividend at a fast pace until 2021. That enhanced visibility makes it an excellent option for investors seeking a fast-growing income stream.