NextEra Energy Partners (NEP 4.50%) already had enough power to achieve its ambitious dividend growth strategy until 2022. However, that didn't stop the renewable energy producer from taking advantage of an opportunity to enhance its portfolio and balance sheet via a series of creative transactions with its parent NextEra Energy (NEE 1.87%) and private equity giant KKR (KKR -2.18%). As a result, it will have even more power to fulfill its plan to grow its 3.6%-yielding dividend by 12% to 15% per year through at least 2024.
Details on the deals
NextEra Energy Partners will acquire a 40% interest in a 1 gigawatt (GW) portfolio of renewable energy assets from NextEra Energy. The assets include three wind farms located in Texas, Oklahoma, and Kansas and four solar energy facilities in Florida, Arizona, and Maine. Meanwhile, it's also purchasing 100% of a 100 MW solar-plus-storage project in Arizona from NextEra Energy. The company is paying about $320 million for these assets, which should contribute $75 million to $85 million in annual adjusted EBITDA and $24 million to $29 million of cash available for distribution (CAFD).
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The company plans to contribute these newly acquired assets to a portfolio that will also include four legacy assets (three wind farms and one solar energy center). That portfolio will back a new $1.1 billion convertible equity portfolio financing agreement with KKR and other investors. The company will receive $750 million of those funds to finance the acquisition and pay down its credit facility's remaining balance. It can draw the remaining $350 million starting in the second quarter of next year to help finance future growth opportunities. In addition to that, NextEra Energy Partners and KKR signed a non-binding letter of intent for an additional $900 million convertible equity portfolio financing agreement with similar terms to support its future growth, which it would back with other assets.
Enhancing its cash flow and balance sheet with a stroke of the pen
This acquisition and financing arrangement does two crucial things for NextEra Energy Partners. First, it will boost its earnings and cash flow next year. The company anticipates that its adjusted EBITDA will be in the range of $1.44 billion-$1.62 billion, while CAFD will be between $600 million to $680 million. At the midpoint, that's 10% and 7% above the company's expected year-end run rate for 2020. Its dividend payout ratio will be about 80% next year, even as it grows by another 12% to 15%.
Meanwhile, the deal will significantly enhance the company's balance sheet and liquidity. Because it's an equity transaction, NextEra Energy Partners expects to end this year with a debt-to-EBITDA ratio below 4.0, which is a significant improvement from its more than 5.0 ratio at the end of last year. Furthermore, given the paydown of its credit facility, the second draw's incremental capacity, and the potential future financing agreement, NextEra Energy Partners anticipates that it will have about $2.4 billion of liquidity after this transaction to finance additional growth. That gives it a significant amount of financial flexibility to acquire more assets from NextEra Energy and third parties as well as invest in organic expansion projects. Thus, it enhances the company's ability to deliver on its long-term dividend growth strategy.
An increasingly visible growth plan
NextEra Energy Partners has an ambitious goal to grow its high-yielding dividend at a 12% to 15% annual rate through at least 2024. While it should have no shortage of acquisition opportunities thanks to its strategic relationship with NextEra Energy, access to funding has been a concern given its high payout ratio and sub-investment-grade credit rating. However, it took a big step toward addressing that issue with the financing agreement with KKR as it now has significant liquidity and a much stronger balance sheet. It's growing increasingly likely that the company can deliver on its bold dividend growth plan, making it an ideal stock for income investors.
