NextEra partnership's value as drop-down financing vehicle in question

NextEra Energy Partners' distribution growth rate cut and subsequent stock sell-off indicate that the yieldco formed by NextEra Energy Inc. is no longer financially sustainable on its own, according to some industry analysts.

NextEra Energy Partners (NEP) on Sept. 27 reduced its limited partner distribution per unit growth rate to 5% to 8% per year through at least 2026, from 12% to 15%. By the end of the day on Sept. 28, the company's stock price had plummeted nearly 35% to settle at $30.54, raising questions about the partnership's viability.

NextEra Energy spun out NEP in 2014 to house some NextEra Energy Resources LLC assets through drop-downs, ultimately providing less expensive capital for NextEra Energy Resources.

"We are starting to see the argument for NEP as a financing vehicle fading and the economic case for a [NextEra] buy-in getting stronger," as NEP's approximately 12.7% trading yields "are now significantly above the prior drop down valuation at 9.5%," analysts at Guggenheim wrote Sept. 29.

KeyBanc analysts agreed in a Sept. 29 note that NEP "has been in a 'death spiral' for some time now" due to upcoming convertible equity portfolio financing structures and exacerbated by concerns that recent moves to sell its midstream assets may only "barely cover its cash needs."

"With the [incentive distribution rights] now suspended due to liquidity concerns, and with NEP unable to tap capital markets at attractive rates, we don't see compelling reasons for it to remain a standalone entity," KeyBanc continued, saying a third-party sale is more attractive than a buyout by parent NextEra.

"Why today?" NEP and NextEra Chairman and CEO John Ketchum said Sept. 27 during a presentation at Wolfe Research's utilities, midstream and clean energy conference. "We were faced with a decision: either lower the growth rate from 12% to 6% or do a [drop-down] this quarter that made no sense. Had we done the [drop-down] that we planned to do in today's macroeconomic environment, you all would have been coming to us and saying, 'Why did you do that? Why didn't you provide NEP with a little bit more flexibility?'"

Both Guggenheim and KeyBanc emphasized that NextEra Energy should remain mostly insulated from NEP's troubles even though the renewables giant's shares have fallen nearly 13% since NEP's announcement. Analysts at Scotiabank on Sept. 27 estimated that NEP accounts for less than 5% of NextEra's consolidated earnings, while Wells Fargo reassured clients that NextEra will not likely need to raise more equity to compensate for NEP's shift.

NEP acquires, manages and owns contracted clean energy projects. It owns interests in wind, solar and energy storage projects in the US, as well as natural gas infrastructure assets in Texas and Pennsylvania.

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