The renewable-energy industry has been beaten up over the past year as rising interest rates have hurt returns and it's getting more difficult to fund growth projects. One of the stocks that's suffered the most is NextEra Energy Partners (NEP 1.88%), owner of one of the largest fleets of wind and solar assets in the world.
NextEra's assets generally come with long-term contracts to sell electricity to utilities, which lock in cash flow for years and sometimes decades. But projects are also financed with debt, so higher interest rates will eat into returns. And the company has been forced to sell off some assets to pay down financial obligations.
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NextEra Energy Partners' cash crunch
The most recent crunch for NextEra Energy Partners is debt maturing in the next few years. In 2024, the company has $1.3 billion of debt maturing, followed by $702 million in 2025, and $2.0 billion in 2026. Some of that debt holds very low interest rates of under 1%, which are likely to rise sharply when refinanced.
Financing partners also need to be bought out for some projects that were financed a few years ago. NextEran Energy Partners calls these Convertible Equity Portfolio Financings (CEPF) and management has sold pipeline assets to fund CEPF buyouts in 2024 and 2025.
More projects are coming due and will require cash, which may mean selling assets or accepting lower cash returns if CEPF projects aren't bought out.
The market expects the worst
NextEra Energy Partners' structure is complex, and that's one of the reasons investors are skeptical about the stock. There's uncertainty around how much cash will be left over for dividends when project financing is done.
But management still expects the end of 2024 run rate adjusted EBITDA to be flat at $1.9 billion to $2.1 billion. And cash available for distribution is also not expected to change at $730 million to $820 million.
Distributions, or dividends, are expected to be $3.73 by the end of 2024, implying a 14.1% yield for the stock. And that payout is expected to grow 5% to 8% through 2026 with a target rate of 6%.
Investors are currently expecting that the dividend isn't safe long-term given the high yield but management continues to reiterate that's not the case.
Options for NextEra Energy Partners
The reality is that NextEra Energy Partners has gone from growth mode to survival mode over the last two years. It's hard to see how it can finance new projects with the CEPF buyouts and debt refinancing upcoming. And the dividend commitment doesn't help.
But that gives management a number of options. The stock's current market cap is just $2.5 billion and total long-term debt is $6.3 billion. There's significant cash coming to the business with guidance for $1.9 billion to $2.1 billion of adjusted EBITDA.
With that cash, management could pay down debt or make high-value investments to grow cash flow. Even a dividend cut to reduce debt should be on the table.
With assets that will be generating revenue for decades to come, NextEra Energy Partners isn't a weak company at the core. But it may have gotten overvalued during low-interest-rate years, and now that rates are up, I think the correction has overshot to the downside.
Management has questions to answer, but there are options available. And in the meantime, investors get a massive dividend to simply hold the stock.
