NextEra Energy (NEE -3.06%) is one of the largest regulated utilities in the United States. It is also one of the largest solar and wind companies in the world. This combination has led to impressive growth for NextEra Energy, notably including its dividend.
There has been a little wrinkle in the growth story, however, represented by a master limited partnership (MLP) now known as XPLR Infrastructure (XIFR -0.57%). NextEra Energy's decision with regard to XPLR Infrastructure was a tough call, but does it make NextEra Energy a better or worse investment choice?
What does NextEra Energy do?
As noted, NextEra Energy is a mixture of a regulated utility and a renewable power company. On the regulated side, NextEra is very well situated. Its main business is Florida Power & Light, which operates in a state that has long benefited from in-migration. More customers mean more revenue and more opportunity for capital investment. This is an advantaged business.
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On the clean energy side, the company's NextEra Energy Resources division builds and owns solar and wind power assets. This business has been growing along with demand for clean energy. However, building solar and wind farms is expensive and requires massive up-front capital spending. This is where the master limited partnership now known as XPLR Infrastructure comes in.
NextEra Energy created the MLP to buy assets from it in transactions known as drop-downs. The MLP would finance those purchases with debt and the sale of MLP units. The goal was to provide NextEra Energy with additional capital while putting cash generating assets into the MLP. The MLP, in turn, would use the cash flows from its clean energy acquisitions to pay interest on the debt it issued and to support distributions to unit holders. Originally, the MLP was called NextEra Energy Partners.
NYSE: NEE
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When good things come to an end
This arrangement worked great when Wall Street was enamored of anything related to clean energy. NextEra Energy Partners' high unit price at that time allowed NextEra Energy to keep dropping down assets.
But when NextEra Energy Partners' unit price crashed as investors moved on to other investment themes, the financial benefit offered by the partnership ended. When NextEra Energy couldn't drop down assets anymore, it stunted the partnership's growth. And the partnership suddenly had to contend with all the debt it issued without the benefit of being able to sell more units at attractive prices. Simply put, the model broke in a very bad way.
This same model was used in the pipeline space by utilities. And it also broke in the same way after midstream MLP unit prices fell. There were, generally speaking, two outcomes in the midstream area. Some utilities bought the MLPs they created, effectively ending the MLPs life. Other utilities basically left the MLPs public, forcing them to figure out a way to survive all on their own.
NextEra Energy chose to go with the second option with NextEra Energy Partners, with the MLP changing its name to XPLR Infrastructure to create some distance between the two entities.
The right call for NextEra Energy
NextEra Energy's outlook for the future is very similar to its recent past. The highly regarded utility has posted earnings and dividend growth that sits at the high end of the utility pack. It expects that to continue with earnings growth of 6% to 8% a year through 2027 and dividend growth of 10% a year through at least 2026. Losing the MLP as a funding source doesn't appear to have caused any disruption to the utility's business.
If NextEra Energy had bought XPLR Infrastructure, however, it would have had to deal with the debt that the MLP had taken on. Notably, Dominion Energy (D -1.19%) buying back an MLP it created to own pipeline assets helped create a situation where the utility cut its dividend. So not buying the MLP seems like it was the right choice for NextEra Energy.
However, the same can't be said for XPLR Infrastructure. The MLP has now eliminated its dividend and is currently focused on dealing with its debt headwinds. It is no longer trying to grow its business with new purchases. Investors in the MLP have taken the full brunt of the pain.
NYSE: XIFR
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NextEra Energy, meanwhile, remains the MLP's general partner, which means it continues to run the partnership. The utility also maintains a large ownership stake in the MLP's units. But that's likely to be cold comfort to any investors that bought the MLP thinking it would provide them with a reliable income stream. Disturbingly, having a large and reliable utility like NextEra Energy as the parent company here was likely a key selling point for many income investors.
The takeaway from NextEra Energy and XPLR Infrastructure
NextEra Energy remains an attractive, fast-growing utility. It protected itself in this situation at the expense of investors that bought into its MLP, now known as XPLR Infrastructure. With no distribution and a heavy debt load to contend with, XPLR Infrastructure is a fairly high-risk turnaround story at this point. Most investors will probably want to avoid it.
As for NextEra Energy, long-term investors should consider this situation carefully. The outcome was good for NextEra Energy, but it left investors in the lurch with regard to the MLP it created. If that bothers you, well, NextEra Energy might not be the best utility for you to buy. Or, at the very least, think twice about buying any other companies this fast-growing utility creates in the future.
