Company Deep Dive – NextEra Energy Partners (NEP)

Overview

NextEra Energy Partners LP (NEP) is a wholly-owned subsidiary of NextEra Energy (NEE) and focuses on acquiring and managing contracted clean energy projects in wind, solar and natural gas.  The LP buys clean energy assets from NEE and then establishes long term power contracts with local municipalities, many for decades at a time.  Even though this is a LP, the company issues a 1099-DIV, not a K-1 for tax purposes.

NextEra Energy Partners, LP (NEP) is a renewable energy company that owns and operates clean energy projects in North America. NEP was formed in 2014 as a subsidiary of NextEra Energy, Inc., a leading clean energy company that has been in the industry for more than 100 years. NEP operates in the wind, solar, and natural gas industries and provides energy to both residential and commercial customers.

NEP’s diverse portfolio of clean energy projects and long-term contracts with customers provide stability and predictability for its revenue streams. NEP is well-positioned for future growth, as the demand for renewable energy continues to increase. NEP’s backlog of projects and exploration of new opportunities for growth, such as energy storage and hydrogen fuel cells, will further diversify its portfolio and provide stable revenue streams. 

NEP’s strong financial performance can be attributed to its diverse portfolio of clean energy projects. NEP has a portfolio of wind, solar, and natural gas projects that provide energy to both residential and commercial customers. NEP’s projects are located in 40 states in the US and four provinces in Canada. NEP has long-term contracts with its customers, which provide stability and predictability for its revenue streams.

source

Financials

NEP has consistently reported strong financial results, driven by its diverse portfolio of clean energy projects. 

In 2022, NEP reported:

• Total revenue of $4.1 billion, an increase of 12% compared to the previous year
• Net income of $453 million, an increase of 6% compared to the previous year
• Earnings per share were $1.95, an increase of 7% compared to the previous year
• Total assets were $15.8 billion, an increase of 11% compared to the previous year.

2022 Ratios:

Liquidity Ratios:

Current Ratio: 1.05, indicating that the company has enough current assets to cover its current liabilities.

Quick Ratio: 0.91, indicating that the company has enough liquid assets to cover its current liabilities.

Leverage Ratios:

Debt-to-Equity Ratio: 2.44, indicating that the company has a significant amount of debt compared to equity.

Interest Coverage Ratio: 3.3, indicating that the company has enough operating income to cover its interest expenses.

The company recently released their Q1 2023 results.  

• Adjusted EBITDA of $447 million, a growth of approximately 8.5% over the same period a year ago
• Cash Available For Distribution (CAFD) of $156 million
• Delivered first-quarter financial results in line with management’s expectations

—-
Dividend

NextEra Energy Partners has a fantastic dividend growth record and commitment, raising the dividend quarterly and states it expects to continue with 12-15% increases each year for the next few years at least.  The company has historically raised its dividend by nearly 15% each year for the past 5 years.  In a recent announcement, the company reinforced this guidance with the following statement: “From a base of its fourth-quarter 2022 distribution per common unit at an annualized rate of $3.25, NextEra Energy Partners continues to see 12% to 15% growth per year in limited partner distributions per unit as being a reasonable range of expectations through at least 2026.” 

Source

This is on top of a market beating yield right now of approximately 5.54%.  

These metrics were located on Seeking Alpha.  They are offering a special discount right now if you want to sign up for their paid plan.  I am an affiliate of Seeking Alpha and can receive a small commission at no cost to you if you join here.

—-

Valuation

Even a great business can be a bad investment if not bought at a reasonable valuation.  To quote one of my favorite analysts, Chuck Carnivale from FASTGraphs, “Valuation matters, and it matters a lot”.

Current valuation metrics are currently showing that NEP is a good value today. For example:

Non-GAAP forward P/E:

Current: 24.81 

Historical: 33.13

Discount: 25%

—

Price/Cash Flow

Current: 10.91

Historical: 13.44

Discount: 18.81%

—

Dividend Yield

Current: 5.54%

Historical: 3.92%

Discount: 29%

Due to the high level of depreciation of the assets that NEP invests in, GAAP earnings per share is not a reliable metric.  For this company it is better to focus on Non-GAAP earnings or Cash Available for Distribution (CAFD).  

Source

—-

Stock Performance

Dividend payments and dividend growth are great, but total return is an important metric to check with any investment.  While NEP stock is down over the past few months, the long term results have been very satisfactory.  In fact, since the IPO, the total return of NEP has outpaced SPY, which is the S&P 500.  This is a difficult task to accomplish over a 9 year period.  No one knows the future, but if history is any guide, and the future projects that NEP has, I expect the market to continue to reward shareholders with quality return metrics.

Recent share price returns:

One month: -3.22%

Six months: -22.17%

One year: -9.07%

Five years: +39.41%

—-

Future Opportunities

NEP is well-positioned for future growth, as the demand for renewable energy continues to increase. NEP has a backlog of projects that are expected to come online in the next few years, which will increase its capacity to provide clean energy to customers. NEP’s backlog of projects includes wind and solar which will further diversify its portfolio and provide stable revenue streams.

NEP is also exploring new opportunities for growth, such as energy storage and hydrogen fuel cells. NEP is currently developing energy storage projects that will allow it to store excess energy generated by its wind and solar projects. This will allow NEP to provide energy to customers even when the wind isn’t blowing or the sun isn’t shining. NEP is also exploring the use of hydrogen fuel cells, which have the potential to provide clean energy for a variety of applications.

On May 8, 2023, the company announced a series of initiatives to drive the company’s future growth.  Per the press release,

NextEra Energy Partners’ plan to capitalize on the clean energy transition includes the following:

• First, NextEra Energy Partners is launching a process to sell its STX Midstream and Meade natural gas pipeline assets in 2023 and 2025, respectively. Upon closing of the sales, the excess proceeds would be used to buy out the STX Midstream, 2019 NEP Pipelines and NEP Renewables II convertible equity portfolio financings. Once completed, the only planned convertible equity portfolio financing buyouts with equity requirements through 2026 would be the Genesis Holdings convertible equity portfolio financing, which is limited to $294 million in 2026.
• Second, NextEra Energy Partners expects to use the excess proceeds from the sale of its interest in natural gas pipeline assets to finance its growth, eliminating all equity requirements through 2024 other than opportunistic equity issuances under its at-the-market equity issuance program to fund future growth beyond 2024.
• Third, to replace the cash available for distribution (CAFD) from the expected divested pipeline assets, NextEra Energy, Inc. (NYSE: NEE) and NextEra Energy Partners have entered into an agreement to suspend NextEra Energy’s incentive distribution rights (IDR) fees in respect of all quarters in 2023 through 2026. By suspending the IDR fees, the partnership will be able to use that cash flow to largely replace the reduced CAFD that would be associated with the sale of the natural gas pipeline assets.

Upon successfully completing the sales of the natural gas pipeline assets, NextEra Energy Partners is expected to achieve Real Zero carbon emissions in 2025 and become the leading 100% renewables pure-play investment opportunity. 

Analysts are forecasting strong growth ahead as well, including:

• EPS Diluted Growth (FWD) – 20.22%
• EPS FWD Long Term Growth (3-5Y CAGR) – 12.00%
• Free Cash Flow Per Share Growth Rate (FWD) – 11.08%
• Operating Cash Flow Growth (FWD) – 11.55%
• EBIT Growth (FWD) – 27.49%

—-
Risks

An investment in any company involves risks.  The company operates in an industry that requires regulatory oversight and approval for new production assets.  Ongoing government actions can cause changes to the projects the company is working on or where they can invest.

Another major risk is debt levels.  As interest rates have risen, the cost of financing new projects has continued to rise.   The interest expense will continue to rise for NEP until rates come down in the future. 

Some other risks to note:

• Wind and solar conditions and market prices
• Unplanned power outages, reduced output or capacity
• Weather conditions
• Project development risks
• Geopolitical factors
• Legislative changes
• Limited number of customers
• Government laws, regulations and policies

—-

NextEra Energy Partners Deep Dive Conclusion

NextEra Energy Partners is a renewable energy company that has performed well and consistently reported strong financial results. NEP’s diverse portfolio of clean energy projects and long-term contracts with customers provide stability and predictability for its revenue streams. NEP is well-positioned for future growth, as the demand for renewable energy continues to increase. NEP’s backlog of projects and exploration of new opportunities for growth, such as energy storage and hydrogen fuel cells, will further diversify its portfolio and provide stable revenue streams. Investors looking for a long-term investment in the renewable energy industry should consider investing in NEP.