NextEra Energy Partners (NEP -0.89%) had an ambitious plan to grow its already high-yielding dividend by 12% to 15% annually through 2026. The company expected to power that strategy by completing more drop-down transactions with its parent, NextEra Energy (NEE -1.36%). It intended to fund those deals with low-cost debt and equity capital.
Unfortunately, surging interest rates threw a wrench in its funding plans. Because of that, NextEra Energy Partners slammed the brakes on its dividend growth plan, cutting its outlook to 5% to 8% per year through 2026, with a target of 6% annually. The company also planned to switch fuel sources from drop-downs to wind repowering projects.
This abrupt change caused shares to crater nearly 70% from their 52-week high, driving its dividend yield into the double digits. That sell-off led the company to shed more light on its revised growth strategy to calm the market's concerns.
Dropping its drop-down growth strategy
NextEra Energy Partners has grown its dividend briskly since NextEra Energy formed the renewable energy company in 2014. Its payout has risen a jaw-dropping 362.7% since the company initiated the dividend in late 2014.
The primary fuel source has been a steady diet of drop-down transactions with NextEra Energy. It acquired operating renewable energy assets backed by long-term power purchase agreements with other utilities and large corporate buyers. Those assets generated steady income, enabling NextEra Energy Partners to grow its dividend. For example, it bought a 690-megawatt (MW) portfolio of long-term contracted wind and solar energy projects from NextEra for $702 million earlier this year. It expects this portfolio to generate an average of $62 million-$72 million of cash available for distribution (CAFD) over the next five years, giving it more income to pay dividends.
While its parent has a vast and growing portfolio of renewable energy assets it could drop down, NextEra Energy Partners can no longer get low-cost financing to make accretive acquisitions. Because of that, it needs to alter its growth strategy.
Repowering its growth engine
With drop-down acquisitions no longer attractive, NextEra Energy Partners has shifted its focus to internally funded organic investments. The company recently revealed plans to repower 740 MWs of existing wind farms through 2026. It will invest money to replace legacy blades and rotors with longer blades. That will enable it to produce and sell more electricity from existing farms. These investments should generate high returns, enabling NextEra Energy Partners to grow its cash flow in support of its reset dividend growth plan.
Wind repowering projects can be meaningful growth drivers. For example, Brookfield Renewable (BEP 0.19%) (BEPC 0.09%) recently completed the repowering of its Shepherd's Flat farm in Oregon, the largest such project in the country. Brookfield replaced the hardware of 320 turbines with longer rotors and more efficient equipment. The longer blades (27% more) can pick up lower wind levels that shorter blades might have missed. It completed the project in under two years, increasing the power-generating capacity of Shepard's flat by 25% while extending its life by 30 years. Projects like this cost a fraction of building a new facility (30% to 50% less), making them very high-return investments.
NextEra Energy Partners is initially only tapping into a fraction of its wind repowering opportunity. The company operates 8 gigawatts of wind energy capacity that it could repower in the future. In addition, it could also invest in adding battery storage to more of its existing wind assets and solar projects.
Meanwhile, the company hasn't completely ruled out making acquisitions, either from NextEra Energy or third parties, in the future. It would make a highly accretive deal it can finance under attractive terms. However, it doesn't need to make acquisitions to achieve its 2024 growth objectives.
Coming into sharper focus
NextEra Energy Partners caught investors off guard when it slashed its dividend growth outlook. Investors worried that the company might be unable to achieve its revised forecast.
However, the additional details on its wind repowering plan show that it has a sizable opportunity to extract more value from its existing assets by investing capital to boost the power production of its existing wind farms. Those high-return investments will grow its cash flow, helping it achieve its revised outlook of increasing its already eye-popping dividend (currently yielding 13%) by at least 5% annually through 2026. That increased visibility into its growth plan makes its sell-off look like a potentially very enticing buying opportunity for income-seeking investors.
