NextEra Energy Partners (NEP 4.50%) has battled persistent headwinds over the past couple of years. Rising interest rates have made it more challenging for the company to refinance existing funding and finance its growth. Those issues have weighed on the renewable energy stock, driving its dividend yield up over 12%.
Despite those headwinds, the renewable energy company has been able to continue growing. Its earnings, cash flow, and dividend all rose in the first quarter. Meanwhile, it sees more growth ahead.
Growing despite the headwinds
NextEra Energy Partners delivered modest earnings and cash flow growth during the first quarter:
Image source: NextEra Energy Partners.
As that slide shows, the company's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) rose from $447 million to $462 million, a 3.4% increase. The company benefited from new projects added to the portfolio, a reduction in incentive distribution rights (IDRs) paid to its parent company (NextEra Energy), and other factors. These positive earnings drivers more than offset the negative impact from lower earnings at existing projects and the sale of its Texas natural gas pipeline portfolio (STX Midstream) to Kinder Morgan.
Those same factors helped power a 5.1% increase in its cash available for distribution (CAFD). The company's growing cash flow enabled it to continue increasing its dividend. The partnership declared its latest quarterly payment of $0.8925 per share ($3.52 annualized). That's an increase from $0.88 per share in the fourth quarter ($3.52 annualized) and $0.8425 per share in last year's first quarter ($3.37 annualized). The quarterly payment has increased nearly 6% over the past year.
NextEra Energy Partners also secured additional growth projects in the quarter. It added about 100 megawatts of projects to repower existing wind energy facilities through 2026. The company has now secured nearly 1.1 gigawatts (GW) of wind repowering projects. That pushes it closer to its target of repowering 1.3 GW of wind farms through 2026. Those growth projects are crucial to the company's dividend growth plans.
The outlook remains unchanged
NextEra Energy Partners' solid showing in the first quarter kept it on target to achieve its long-term outlook. The company expects its adjusted EBITDA run rate to be between $1.9 billion and $2.1 billion at the end of this year. Meanwhile, it expects its 2024 CAFD exit run rate will be in the range of $730 million-$820 million.
That outlook drives the company's view that it can achieve its revised dividend growth target (5%-8% annually with a goal of 6%) this year without needing to make an acquisition. Further, NextEra Energy Partners continues to believe it can deliver dividend growth in that range through at least 2026. It expects wind repowering projects will grow its cash flow to support that level of dividend growth. However, it also anticipates that its dividend payout ratio will be in the mid-90s through 2026, which is very high.
The other aspect of the company's strategic plan is selling its natural gas pipeline assets to repay funding as it matures and finance future renewable energy acquisitions. NextEra Energy Partners completed the sale of STX Midstream late last year, providing sufficient proceeds to complete the buyouts of convertible equity portfolio financing (CEPF) due in June 2024 and 2025. Meanwhile, the company expects to sell its remaining gas pipeline assets (Meade) in 2025 to address maturing funding associated with that business.
NextEra Energy Partners' strategic plan is paying dividends
NextEra Energy made some big strategic shifts last year to help it navigate its current challenges. It is executing against that strategy by securing additional wind repowering projects to grow its dividend and selling off its gas pipeline assets to fund the buyouts of CEPFs as they come due. Even though the company has more work to do and limited wiggle room, given its high dividend payout ratio, it is doing a solid job executing its strategy. While it remains a high-risk option for income-seeking investors, it could be a highly rewarding investment if it continues executing its strategic plan.
