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NextEra Energy Partners (NYSE: NEP) delivered supercharged dividend growth for the first several years of its existence. Its dividend has surged nearly 370% since it became public in 2014, growing by a double-digit annual rate until last year. Powering the surging payout was a steady diet of acquisitions largely funded by convertible equity portfolio financing (CEPFs) arranged by several well-known institutional investors.

The company hoped its rising stock price would enable it to fund the buyouts of those CEPFs as they matured. Instead, surging interest rates (and concerns about its CEPF obligations) caused shares to plunge roughly two-thirds from their peak. That has forced NextEra Energy Partners to shift gears so it can fund its upcoming CEPF buyouts while still growing the dividend (albeit at a more moderate mid-single-digit annual pace).

Making progress on maturities through 2025

NextEra Energy Partners revealed its strategy to address the nearest-term CEPF maturities last May. It's becoming a pure-play renewable energy company by selling its natural gas pipeline assets in phases. It planned to sell its STX Midstream and Meade natural gas pipeline assets in 2023 and 2025. That would give it the proceeds to fund the buyouts of nearly all of its CEPFs through 2026 (it would have $294 million remaining on one CEPF due that year).

The company has already completed the first phase of that plan, selling STX Midstream to Kinder Morgan late last year for more than $1.8 billion. CEO John Ketchum pointed out on the company's first-quarter conference call that it had previously bought out the CEPFs related to STX Midstream in 2023. Further, he noted that the partnership now has "sufficient proceeds available from the Texas Pipeline Portfolio sale to complete the NEP Renewables II buyout due in June 2024 and 2025." Ketchum also commented, "The third convertible equity portfolio financing associated with the Meade natural gas pipeline assets is expected to be addressed in 2025" with the sale of those assets.

The company's progress on its strategy should ease investors' concerns about its ability to handle future CEPF buyouts. It should also give them confidence that the company can deliver on its plan to continue increasing its dividend. NextEra Energy Partners could have chosen to reduce, suspend, or stop growing its generous dividend to retain more cash to help address CEPF maturities. Instead, it has decided to continue increasing its high-yielding dividend (currently around 12%) due to its confidence in executing its strategy.

More work remains

Despite the company's progress, its stock price hasn't bounced back. Because of that, its cost of capital remains high, hindering its ability to refinance debt, make acquisitions, and fund future CEPF buyouts. As a result, the company's focus is on improving its cost of capital, which is vital to its long-term success.

"With that objective in mind," stated Ketchum on the call, "we continue to evaluate alternatives to address the remaining convertible equity portfolio financing with equity buyout obligations in 2027 and beyond." The CEO hinted at a potential solution during the call. He noted, "One is we have talked about private capital raise potentially being a solution to address back-end CEPFs for NEP." He commented that there's a lot of interest in that opportunity due to the company's stature in the market and that of its parent, NextEra Energy. Those discussions are currently progressing. While the company isn't able to say anything about them now, it will as they continue to evolve.

A private capital infusion, which could come in the form of preferred equity or similar investment, could provide it with the money to fund the buyouts of its remaining CEPFs. That should help lift some of the weight currently holding down the stock, which would go a long way toward improving its cost of capital.

Progress with a potential long-term solution looming

NextEra Energy Partners has been working to address its upcoming CEPF maturities by selling off its gas pipeline assets. That plan will buy it some time while it looks for a long-term solution that could address its remaining CEPFs. It's exploring a potential private capital raise, which would be a huge catalyst if the company can secure the right deal. While NextEra Energy Partners is a riskier investment, it has powerful total return potential if it can execute its funding strategy while continuing to increase its big-time dividend.

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Matt DiLallo has positions in Kinder Morgan, NextEra Energy, and NextEra Energy Partners. The Motley Fool has positions in and recommends Kinder Morgan and NextEra Energy. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.