NextEra Energy Partners(NYSE: NEP) is coming off the most challenging year in its history. The clean energy infrastructure operator lost nearly 60% of its value last year, pushing its dividend yield into the double digits. The company battled balance sheet and growth concerns, forcing it to launch a new strategy to shore up its financial profile while continuing to grow.
The renewable energy producer has already made solid progress on its plan. However, it still has a lot of work to do. Because of that, questions remain about the long-term sustainability of its high-yielding dividend.
A progress report
Surging interest rates and a slumping stock price forced NextEra Energy Partners to pivot from its original strategy. The clean energy infrastructure company had planned to increase its dividend at a 12% to 15% annual rate through 2026. It aimed to power that growth by using low-cost funding to acquire income-producing renewable energy assets from its parent, NextEra Energy, and third parties.
However, with its cost of capital soaring, the company can no longer obtain new financing at an attractive rate. That made it challenging to refinance maturing financing and fund its continued growth. That led the company to make several notable changes. It planned to sell its natural gas pipeline assets to buy out some funding vehicles. It also slashed its dividend growth target rate to 5%-8% annually, with a 6% goal.
NextEra Energy Partners has already made headway on that plan. CEO John Ketchum discussed this progress on the company's fourth-quarter earnings conference call, noting:
We are executing against the transition plans, and with the closing of the Texas Pipeline portfolio sale, the partnership has addressed two of the three near-term convertible equity portfolio financings. The STX Midstream convertible equity portfolio financing has been extinguished, and we have sufficient proceeds available to complete the NEP Renewables II buyouts that are due in June 2024 and 2025.
The company also opportunistically raised $750 million in December through a high-yield note offering. That enabled it to repay its corporate revolver. It now has the flexibility to use that facility to repay its 2024 debt maturities.
Meanwhile, the company has now identified 985 megawatts (MW) of wind energy projects it plans to repower through 2026 that should generate strong investment returns. It expects to complete 175 MW of those projects this year. Those projects should generate the growing cash flow needed to support its plan to increase its payout by 6% this year without making another acquisition.
More progress needed
NextEra Energy Partners now has the liquidity it needs to cover its 2024 debt maturities and convertible equity portfolio financings through next year. However, more work lies ahead for the company. Ketchum noted, "The third convertible equity portfolio financing associated with the Meade natural gas pipeline assets is expected to be addressed in 2025," when the company plans to sell that asset.
The CEO also stated, "We are evaluating alternatives to address the remaining convertible equity portfolio financings with equity buyout obligations in 2027 and beyond." In addition to figuring out a way to buy out those remaining obligations, NextEra Energy Partners will need to start issuing equity in 2027 to fund its continued growth. It can currently self-fund the growth needed to increase its dividend by 6% annually through 2026.
Hopefully, its stock price will have recovered enough by 2027 to use shares as a currency to finance additional acquisitions. If not, the dividend could be on the chopping block, since a reduction would enable the company to retain more cash to fund growth.
While the company plans to continue growing its high-yielding dividend through 2026, it might not make it that far. NextEra Energy's current projections put its dividend payout ratio in the mid-90s through 2026. That's awfully high, especially considering the company's difficult financial situation. It leaves NextEra Energy Partners with little margin for error.
A high-risk, high-reward dividend stock
NextEra Energy Partners offers a big-time payout that it expects to increase by around 6% annually through 2026. The company could produce powerful total returns if it can deliver on that goal. However, a lot has to go right for it to achieve that target. Because of that, it's a riskier dividend stock, since it might need to cut its payout to retain cash to fund its growth.
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Matthew DiLallo has positions in NextEra Energy and NextEra Energy Partners. The Motley Fool has positions in and recommends NextEra Energy. The Motley Fool has a disclosure policy.
