What happened
Units of NextEra Energy Partners (NEP +2.81%) slumped 16.3% during the first half of 2023, according to data provided by S&P Global Market Intelligence. That was substantially below the S&P 500, which rallied 15.9%. The sell-off pushed its dividend yield up to 6%.
The company's funding strategy weighed on its unit price during the first half. While the renewable energy dividend stock unveiled a strategy shift to alleviate those fears, pressure remained on the unit price.
NYSE: NEP
Key Data Points
So what
NextEra Energy Partners has been using a unique financing strategy to fund acquisitions to deliver on its ambitious dividend growth target (12% to 15% annually through 2026). It has secured several convertible equity portfolio financings (CEPF) with institutional investors like private equity funds. It had the right to buy out this financing in the future at a fixed rate of return using either cash or common units.
In April, the company exercised its option to buy out 25% of the $750 million CEPF it secured in 2019 on STX Midstream, a portfolio of seven natural gas pipelines. It paid $200 million in cash, which included $50 million drawn from its credit facility and $150 million raised from selling 2.3 million common units. While the company noted that the unit sale represented less than 3% of its outstanding shares, the market didn't like the dilutive impact.
Analysts voiced concerns about future dilution from other CEPF buyouts, given the higher financing costs from higher interest rates. KeyBanc analyst Sangita Jain said that he downgraded NextEra Energy Partners from overweight to sector weight last month "in light of impending equity dilution in an unfavorable financial landscape."
Jain added, "We believe that upcoming conversions would create a medium-term overhang in the higher capital cost environment," based on the belief that the CEPF redemptions "will likely be more dilutive than envisioned by management when the program was put in place."
These concerns caused NextEra Energy Partners to shift its strategy. In May, the company announced a new funding plan that would also see it become a 100% renewable energy producer. The company will:
- Launch processes to sell STX Midstream and its Meade natural gas pipeline assets in 2023 and 2025. The company expects to use the proceeds from those sales to redeem additional CEPFs over the next few years, leaving only $294 million remaining on one CEPF in 2026.
- Use any additional proceeds from the sale of its natural gas pipelines to help fund new renewable energy investments. That should eliminate the need to sell units to fund its growth until 2025.
- Replace the lost cash flow from the sale of its pipelines with the suspension of management fees by its parent, NextEra Energy, through 2026.
The company believes these steps will eliminate the buyouts of three near-term CEPFs while enabling it to deliver on its dividend growth target.
Now what
Market worries about NextEra Energy Partners' funding strategy weighed on its value during the first half of this year, given the recent significant rise in interest rates. However, the company quickly sprung into action, unveiling a new strategy to address those concerns while achieving its growth plan.
With a new plan of action in place, the sell-off looks like a buying opportunity for those seeking an attractive and rapidly rising dividend income stream.
