Shares of renewable energy yieldco NextEra Partners (NEP +3.48%) were up as much as 7.5% in Tuesday trading before settling into a 5.1% gain on the day.
Over the course of the year, NextEra was hammered by rising interest rates, which precipitated the company's September announcement that it would lower its dividend growth in the future.
After that, NextEra's stock plunged to levels that made equity sales to buy more renewable energy projects untenable. However, shares have bounced back somewhat as long-term interest rates have come off their highs and the company reported solid earnings.
Yesterday, the company completed the divestiture of a fossil fuel-based asset, which will help NextEra pay off debt and transition its portfolio to a pure renewable one. That, along with another decline in interest rates, seems to be helping shares today.
NYSE: NEP
Key Data Points
Selling off its Texas pipelines to Kinder Morgan
Today, NextEra Partners announced the closing of the sale of its Texas natural gas pipelines for $1.815 billion to pipeline giant Kinder Morgan (KMI 0.88%). NextEra said it would use the proceeds to buy out its partners in another natural gas venture, STX Midstream, as well as pay off some of its other convertible equity linked to renewables projects, and some of its revolver.
Executing on a planned divestiture while lowering debt is a good thing, especially as interest rates have climbed. And in conjunction with the announcement, NextEra reiterated its expectation for an annualized dividend payout of $3.52, based on its projection for the company's next payout in 2024. Despite the share price decline, NextEra also said it continues to expect dividend growth between 5% and 8%, in line with its recent updated guidance in September.
So, those bits of progress may have reassured investors somewhat, leading to today's gains. Furthermore, long-term Treasury bond yields continued to fall, down 9 basis points today to a yield of 4.57% and down from nearly 5% at their peak last month.
NextEra Partners still has its work cut out for it
At the current projected yield, NextEra yields about 12.8%, which looks awfully tempting. However, investors should be aware of what's behind that yield. As a yieldco, NextEra doesn't retain any earnings, instead paying out nearly all profits to unitholders. To grow, the company has to keep buying new projects; however, to do that, it has to constantly raise outside capital in the form of debt or equity.
Therefore, NextEra is highly dependent on things like interest rates and even its own stock price. So, while it may be a value here, unitholders who buy must realize the company's destiny is not totally within its control.
