XPLR Infrastructure (NEP 0.19%), formerly NextEra Energy Partners, had been an impressive dividend stock. The clean energy infrastructure operator had grown its payout rapidly since its formation over a decade ago. It recently offered a dividend yield in the double digits, mainly because of the more than 85% plunge in its stock price from the peak.
However, because of financial constraints, the energy company is suspending its dividend in a surprising move. While a payout cut seemed almost inevitable, an outright suspension of its dividend caught investors off guard. Here's a look at what's causing this move and what the future holds for XPLR Infrastructure.
NYSE: NEP
Key Data Points
A broken business model
XPLR Infrastructure had historically relied on outside capital to fund its expansion strategy. It initially sold stock, which it used to buy income-generating renewable energy assets and gas pipelines from its parent company, NextEra Energy, and third-party sellers. Those acquisitions grew its cash flow, enabling the company to increase its dividend at a rapid rate.
The company shifted one aspect of its funding strategy in 2018. It started executing convertible equity portfolio financings (CEPFs) with large institutional investors instead of issuing more shares. That strategy shift allowed it to capitalize on the low cost of this funding source, which also limited dilution.
However, the CEPFs had drawbacks, including a requirement to eventually buy out this financing using cash or shares. That became a challenge when interest rates started surging a few years ago, significantly increasing its cost of capital. XPLR had been trying to navigate this issue by selling its natural gas pipeline assets to fund its CEPF buyouts. It also stopped acquiring assets from NextEra and instead focused on organic growth projects, such as repowering existing wind farms, to grow its cash flow and dividends.
Ripping off the bandage
XPLR Infrastructure is now moving to a new business model. It's shifting from raising new capital to acquire assets and distributing nearly all its cash flow to investors to a model of retaining its cash flow to fund new investments. As a result of this strategy shift, it's suspending its dividend indefinitely. That will enable the company to retain cash to repay future CEPF buyouts and fund attractive new growth investments. The company also expects to continue its plan to sell its Meade pipeline investment by the end of this year. It expects those sources of cash will raise a total of $2.5 billion to $2.6 billion over the next two years.
The company expects to reinvest $1.7 billion to $1.9 billion into new growth opportunities. It has already lined up 1.6 gigawatts of wind repowering projects through next year. Other potential future investments include additional repowering projects, co-locating battery storage across its existing portfolio, and other high-return clean energy investments, including acquisitions and development projects. These investments will help grow its earnings and cash flow.
The company also intends to continue buying out its CEPFs. It has five remaining with minimum buyouts through 2034. Its plan would allow it to buy back three CEPFs through the end of 2027. It can then use its cash flow to redeem the remaining ones in the future.
XPLR Infrastructure believes this new business model will unlock significant value for shareholders over the coming years. The company expects that buying out its CEPFs will produce double-digit returns for its investors. As its cash flow grows and its CEPF balance falls, the company intends to evaluate returning cash to investors, which could include reinstating a dividend and potentially buying back some of its shares. That could create additional value for investors.
A difficult but needed shift
XPLR Infrastructure had no choice but to shift its business model. Since it can no longer access outside capital to fund its growth, it has to retain the cash flow produced by its clean energy infrastructure assets to fund its expansion and shore up its financial situation.
The move makes a lot of sense. It should enable the company to get back on a more sustainable financial foundation more quckly, putting it in a better position to start returning cash to investors again in the future. That should eventually help boost the company's beaten-down share price. While it could be a while before its stock starts to recover, it has significant upside potential when the dust settles and its new plan starts delivering the expected improvements.
