By Kristin Broughton and Mark Maurer
NextEra Energy Partners is mulling its options for how to pay bills coming due under an obscure type of financing that has weighed on the company since its stock price tumbled last year.
One option is raising capital from private investors, John Ketchum, chief executive of NextEra Energy Partners and its majority owner, said during an earnings call this week. "Those discussions continue to move forward," he said.
NextEra Energy Partners operates as a so-called yieldco, a type of company that purchases assets and distributes cash to shareholders. The company is publicly traded and majority owned by NextEra Energy, the clean-energy powerhouse.
NextEra Energy Partners is facing a peculiar corporate finance challenge, one that shows how the run up in interest rates put some companies in an unexpected bind. NextEra's shares plunged last year after the company cut its dividend growth rate, citing rising financing costs. Its stock also lost luster, in part, because investors had other options in a high-rate environment to generate returns, and clean-energy stocks broadly fell out of favor. Shares of the company closed Thursday at $29.19, down about 50% from a year earlier.
The drop in NextEra's shares upended assumptions -- namely that its stock price would rise in the future -- that underpinned a type of financing that it used to purchase assets, such as wind and solar facilities. "It kind of broke the structure, if you will," said Jeffrey Cassella, senior credit officer at Moody's.
NextEra in 2018 began financing asset purchases with what is known as convertible equity portfolio financings, or CEPFs. Under such arrangements, which analysts describe as unique to NextEra, institutional investors, such as KKR and Apollo Global Management, provided cash to acquire assets, and in return received a set portion of the assets' cash flows. NextEra after several years had options to buy out its investors, including by issuing equity.
CEPFs provided NextEra with a number of financial advantages. They didn't count as debt on the company's balance sheet, meaning they bolstered its leverage metrics. They also provided an efficient way to issue equity in the future.
NextEra's shares fell sharply in September after the company said it would reduce its target dividend growth to 6% from 12%. NextEra at the time cited higher interest rates and financing costs. The company's stock had declined steadily in the months prior to the announcement.
"Nobody anticipated rates going up that much," said Rob Thummel, managing director at the energy investment firm Tortoise Capital. "I don't think anyone expected the NextEra stock going down that much," he added.
The share-price decline hamstrung the company's ability to pay back investors under its CEPF arrangements. With its stock in the doldrums, the company would need to issue more shares than anticipated to fund its buyouts, making such a transaction more dilutive to shareholders.
NextEra has $3.5 billion in buyout options coming due from 2026 onward, according to the credit research firm CreditSights. If the company exercises all of its buyout options, it would own the underlying assets. If it declines to do so, it would relinquish nearly all of the cash flows. NextEra had $245 million in cash on its balance sheet as of March 31.
NextEra said in May it would sell pipeline assets, and that the sale would fund buyouts of its CEPF deals through 2025. The company in December sold its STX Midstream pipeline system to Kinder Morgan for $1.8 billion. It hasn't yet announced a buyer for the second set of pipeline assets, the Meade pipeline.
In addition to raising capital from private investors, NextEra has said it is considering other options for funding its remaining buyouts. Those options could include issuing bonds, or working with existing CEPF investors to modify deal terms in a way that lowers NextEra's buyout price or kicks out the due date, analysts said.
"This isn't a 'walk away' story," said Shahriar Pourreza, a senior managing director at investment bank Guggenheim Securities. "The company is in discussions with infrastructure and private money to make sure that this entity remains viable as a buying vehicle for NextEra into the long term."
"At a minimum, you realize that the company is working on a solution to fix the issues of NEP into perpetuity," Pourreza added, referring to NextEra Energy Partners.
NextEra is expected to announce a plan by the end of the year to deal with its remaining buyout options, said Andy DeVries, head of utilities and investment grade research at Credit Sights, citing lingering concerns among investors. DeVries said he expects NextEra to fund its buyouts either by issuing bonds, which he says its balance sheet can handle, or by working with existing CEPF investors.
Private investors are likely approaching the company, making offers to fund a portion of the remaining buyouts in return for an outsize portion of the underlying cash flows, DeVries said.
"Any time a stock goes down 50%, in any sector, that's going to bring all of the opportunistic investors and hedge funds out of the woodwork to see if they can pick off the carcass a little," he said.
Write to Kristin Broughton at Kristin.Broughton@wsj.com and Mark Maurer at mark.maurer@wsj.com
(END) Dow Jones Newswires
April 26, 2024 06:00 ET (10:00 GMT)
Copyright (c) 2024 Dow Jones & Company, Inc.
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