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NextEra Partners Pursuing M&A, Infrastructure Projects To Lay Runway For Growth

NextEra Energy formed NEP in 2014 to isolate and highlight to investors the value of its contracted renewable energy assets. Starting with an initial portfolio of 990 MW of wind and solar capacity upon completion of its IPO in July 2014, NEP's portfolio as of June 30 has grown to approximately 2,400 MW of wind and roughly 400 MW of solar in the U.S. and Canada, as well as four Bcf of natural gas pipeline capacity in Texas. The geographically diverse portfolio generates stable cash flows, supported by longterm contracts (18-year average remaining contract life) with credit-worthy counterparties.

NextEra Partners is structured as a limited partnership that pays quarterly distributions, but unlike a master limited partnership, or MLP, it is treated as a conventional corporation for federal tax purposes. In January, NEP reached an agreement with its sponsor, NEE, to amend the structure of the partnership's incentive distribution rights, or IDRs, paid to NEE management, which controls NEP's general partner. The modification aims to provide more cash available to limited partner unitholders, require fewer asset additions to achieve growth objectives, extend NEP's distribution growth runway, and require the partnership to issue less equity.

With continued technology improvements and cost declines, wind and solar demand is expected to remain robust through 2020. NEP management expects the all-in cost of wind and solar will compete favorably with existing generation resources after 2020.

In October 2015, NEP expanded the scope of its operations beyond renewable energy with the acquisition of seven natural gas pipeline assets in Texas for an aggregate purchase price of approximately $2 billion. The pipelines primarily operate under long-term firm transportation contracts where counterparties pay for a fixed amount of capacity that is reserved by the counterparties, and also generate revenues based on the volume of natural gas transported. NEP management expects electricity generators will continue to demand higher volumes of natural gas, primarily due to emissions rules and ongoing weakness in natural gas prices. NEP is currently exploring a $300 million to $350 million expansion at its Texas pipelines, which could potentially boost annual run-rate EBITDA to $190 million to $200 million, from an estimated $145 million to $155 million in 2017.

The NEP shares outperformed the broader yieldco group in 2015 (-12% vs. -34%) and underperformed in 2016 (-14% vs. -3%). Year-to-date, NEP is outperforming the group by a wide margin (+60% vs. +16%), indicating positive investor sentiment surrounding the pending governance changes ceding more control to LP unitholders, 12% to 15% distribution growth into the foreseeable future and the company's growth prospects.

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Sep 29, 2017
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