NextEra Energy Partners (NEP 5.14%) has agreed to sell its Texas natural gas pipeline portfolio to Kinder Morgan (KMI -0.72%). The $1.8 billion all-cash deal is an important next step in NextEra Energy Partners’ transition to a pure-play renewable energy producer. It will also give it the cash to retire some financing. Meanwhile, the acquisition will enhance Kinder Morgan’s pipeline operations and grow its free cash flow.
It’s a win-win deal for both companies, enhancing their ability to pay dividends. Here’s a look at how they will both benefit from the transaction.
Relieving the pressure
NextEra Energy Partners has been under tremendous pressure this year. The clean-energy infrastructure company has lost more than two-thirds of its value, and that has driven its dividend yield up into the double digits.
The main weight has been concerns about how it will address the upcoming maturities of several convertible equity portfolio financing (CEPF) vehicles it used to fund acquisitions over the past few years while continuing to expand. With interest rates rising and its share price plummeting, the company has seen its cost of capital skyrocket. That made it difficult to finance the final buyouts of those CEPFs while also funding new acquisitions.
The company’s deal to sell STX Midstream to Kinder Morgan will allow it to address most of those CEPFs. In anticipation of the deal, NextEra Energy Partners used its credit facility to complete the final buyouts of about $402 million of the STX Midstream CEPF. It also plans to use its credit facility to complete the $180 million buyout of NEP Renewables II, due in December.
It will use the proceeds to repay those borrowings and the $425 million project-related debt associated with its Texas pipeline portfolio. On top of that, it will bank the cash needed to fund the remaining $1.1 billion under the NEP Renewables II CEPF that’s due by June 2025.
As a result, the pipeline transaction will help address most of the company’s CEPF obligations through 2026. That should enable NextEra Energy Partners to regain a more-competitive cost of capital so it can fund growth in the future.
The deal also marks an important step in the company’s transition to a pure play on renewable energy. NextEra Energy Partners also plans to sell its Meade pipeline business in 2025. That sale timeline aligns with the upcoming maturity of its 2019 NEP Pipelines CEPF and its equity needs to finance growth.
NextEra Energy Partners’ issues with funding growth forced it to slash its dividend growth forecast earlier this year from a range of 12% to 15% annually through 2026 down to a range of 5% to 8% annually with a 6% target. Selling STX Midstream enhances the company’s ability to achieve that revised dividend-growth forecast.
It fits like a glove
Kinder Morgan is capitalizing on NextEra Energy Partners’ need to sell its Texas pipelines. It allows the natural gas pipeline giant to acquire a portfolio of integrated gas pipelines that connect the Eagle Ford basin to growing markets in Mexico and the Gulf Coast.
Sital Mody, Kinder Morgan’s president for natural gas pipelines, said, “STX Midstream nicely complements our existing assets and will enable us to capture incremental opportunities serving [liquefied natural gas], power generation…and exports to Mexico'” As this map shows, they fit well with its existing assets:
Image source: Kinder Morgan.
The more than $1.8 billion purchase price represents about 8.6 times the adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) that the pipelines should produce next year. That’s a solid value for a high-quality natural gas pipeline business.
But the company expects that multiple to fall to a range of 7 to 7.5 times as it integrates STX Midstream into its existing assets in the region and captures meaningful commercial synergies.
Kinder Morgan is using its strong balance sheet to pay for the acquisition. It expects its leverage ratio to rise slightly in the near term, but the deal should be leverage-neutral over the longer term.
The transaction will be immediately accretive to Kinder Morgan’s distributable cash flow and provide a meaningful boost to its free cash flow. That will enhance its ability to pay dividends.
Its payout currently yields over 6.5%. The company has increased its dividend for the last six years, including by 2% earlier this year. That steady upward trend should continue, fueled in part by this accretive acquisition.
A winning transaction
NextEra Energy Partners is getting a good value for the business, which is highly complementary to Kinder Morgan. That will give the seller the cash to redeem several CEPFs weighing down its ability to fund its expansion. Meanwhile, the buyer will get more fuel to sustain and grow its dividend. Because of that, it bolsters the investment thesis of both companies.
Matthew DiLallo has positions in Kinder Morgan and NextEra Energy Partners. The Motley Fool has positions in and recommends Kinder Morgan. The Motley Fool has a disclosure policy.
