NextEra Energy Partners (NEP -0.89%) offers investors a high-yielding and rapidly rising dividend. The company's payout currently yields 5.7%. Meanwhile, it has been growing the dividend at a double-digit annual rate, which it expects will continue through at least 2026.
Until recently, NextEra Energy Partners' dividend relied on two fuel sources: natural gas pipelines and renewable energy. However, it recently unveiled a plan to completely power its dividend with renewable energy. Here's a look at that strategy shift and what's driving the move.
Transitioning to 100% renewable power
NextEra Energy Partners has an extensive portfolio of clean energy infrastructure assets. It has 7.6 gigawatts (GW) of wind energy capacity, 1.5 GW of solar energy, 240 megawatts (MW) of paired energy storage, and 4.3 billion cubic feet of natural gas pipeline capacity. These assets generate relatively steady cash flow backed by long-term contracts. The company distributes most of this cash to shareholders via its dividend.
The company currently gets 80% of its earnings from renewable energy and 20% from natural gas pipelines. It recently revealed that it plans to be 100% renewable powered by 2025. The partnership sees significant growth ahead for renewable energy investments. It wants to be in an even better position to capitalize on this growth by becoming a pure play on the segment.
NextEra Energy Partners has a three-phase strategy to achieve that goal without impacting its ability to deliver dividend growth of 12% to 15% per year through 2026. It plans to:
- Sell its gas pipeline assets: NextEra Energy Partners plans to launch processes to sell its STX Midstream and Meade natural gas pipeline assets in 2023 and 2025, respectively. It intends to use the sales proceeds to buy out three of its four convertible equity portfolio financings (CEPFs).
- Recycle capital into renewable energy: NextEra Energy Partners plans to use the excess cash after buying out the three CEPFs to finance its growth. This strategy will eliminate the need to issue equity through next year to fund new renewable energy investments.
- Suspend incentive distribution rights (IDRs): NextEra Energy Partners' parent, NextEra Energy (NEE -1.36%), has agreed to suspend the management fees the partnership pays through 2026. Suspending the IDRs will help offset the cash flow lost by selling the gas pipeline assets.
NextEra Energy Partners' strategy will enable it to transition to a pure play on renewable energy. The three-part plan will allow it to achieve that goal without impacting its ability to deliver on its dividend growth targets.
A big driver of dividend growth will be its strategic relationship with NextEra Energy. The leading utility has an extensive and growing portfolio of renewable energy projects it can drop down to the partnership. The companies recently revealed their latest transaction. NextEra Energy is selling a 690 MW portfolio of operating wind and solar projects to the partnership for about $708 million. That deal will help power dividend growth this year.
What's driving the strategy shift?
NextEra Energy Partners has grown significantly since NextEra Energy launched the investment vehicle in 2014. CEO John Ketchum noted in the press release unveiling its new plan that the partnership had "increased our renewables portfolio by approximately nine times and have become one of the largest clean energy generators in the world." Ketchum also stated that "we have a terrific track record." That's evident in the following slide:
Image source: NextEra Energy Partners.
Since its formation, NextEra Energy Partners has grown its adjusted EBITDA, cash available for distribution (CAFD), and dividends per unit (DPU) by more than 300%. That has helped power a roughly 130% total return (nearly 10% annually), slightly underperforming the S&P 500 during the period.
The company believes its return should be even higher. Ketchum stated, "We believe NextEra Energy Partners' future growth potential is not reflected in its current valuation. We believe this disconnect is driven by a combination of macroeconomic factors and concerns around the equity required to finance the partnership's convertible equity portfolio financing buyouts." That's leading the company's strategy shift, transforming it into a 100% renewable-powered company while simplifying its capital structure.
The company believes that shifting its focus to 100% renewables should bolster its valuation over the long term. Management noted in the press release unveiling the moves that they "believe these changes could potentially invite a new class of investors looking for a carbon-free, pure-play option to participate in the energy transition."
The potential to produce powerful total returns
NextEra Energy Partners is going all in on renewable energy. It sees significant investment opportunities as the U.S. transitions to renewables. It believes its strategy shift will put it in a better position to capitalize on this trend while also boosting its valuation. Add in its high-yielding and rapidly rising dividend, and NextEra Energy Partners could generate strong total returns in the coming years as it executes its renewable-powered expansion strategy.
