Company Overview: Nextera Energy Partners LP (NYSE: NEP) is a US-based limited partnership engaged in acquiring, managing, and owning green energy projects, specifically wind, solar, and natural gas infrastructure projects. NEP’s revenue streams encompass renewable energy sales (77% of FY20 revenues) and Texas pipelines service revenues (23% of FY20 revenues). The renewable energy segment operates on the sale of energy under power purchase agreements (PPA), while the pipelines service segment operates under natural gas transportation agreements.

NEP Details –

Fast-Paced Portfolio Acquisitions to Diversify and Complement Business Operations: To exploit market opportunities and fast-paced expansion strategies, NEP recently acquired 391 MW portfolios in wind assets for ~$733 million. The acquired assets are expected to generate $63 - $70 million in adjusted EBITDA and CAFD on a 5-year run-rate annually at the beginning of 31 December 2021.

The Roll-Out of Energy Resources Development Program: NEP introduced the program in FY20, which venture upon the model of build-own-transfer projects with long-term operations and maintenance agreements to steer economies of scale. In FY20, the program cashed upon ~7,000 MW in renewables backlog and further commissioned upon ~5,750 MW of solar, wind, and storage projects.

Figure 1. Signed Contracts under the Energy Resources Development Program:

 Source: Company Reports

Historical Financial Trend:

NEP has maintained a consistent historical performance concerning delivering value to shareholders. Sustainable growth in Adjusted EPS and DPS has rendered value addition for shareholders. From an operational standpoint, the energy storage costs in terms of 4-hour battery storage have declined by ~20% annually from FY10 to FY20. Additionally, the Levelized Cost of Electricity from wind and solar operations has dropped by ~15% on an annual basis from FY10 to FY20. In FY20, NEP’s revenue and Adjusted EBITDA on a reasonably consistent scale by 12.9% and 11.0% 5-year CAGR, respectively.

Figure 2. Consistent Shareholders’ Value Addition:

Source: Company Reports

Quarterly Performance:

Operating revenues increased by ~$34 million and stood at ~$246 million, predominantly attributed to increased revenues from Texas pipelines services and partially offset by a marginal decline in Renewable energy sales on a QoQ basis. Operating income grew from ~$49 million in Q1FY20 to ~$78 million in Q1FY21. From a cash flow standpoint, operating cash flows increased to ~$104 million in Q1FY21 relative to ~$99 million in Q1FY20. Despite the COVID-19 scenario, the energy wind production index has been flat at 98% relative to Q1FY20 (pre-COVID period).

NEP had a cash position of ~$110 million on the balance sheet front as of 31 March 2021. It had ~$851 million of long-term borrowings were outstanding under the existing credit agreement in the name of Meade purchaser and Pipeline Investment Holdings, LLC.

Full-year 2020 performance:

Despite COVID-19 uncertainties, the revenue streams remained intact and growing, as reflected by increased total operating revenues from ~$855 million in FY19 to ~$917 million in FY20, predominantly attributed to increased renewable energy sales. During FY20, NEP embarked upon multiple growth avenues by 40%, acquired an interest in a renewables portfolio of ~1,100 MW, and completed organic growth investments, including repowering 275 MW in wind projects. Adding to the good position of continued growth, distributions per unit grew by ~15%, and CAFD grew by ~40% on a YoY basis. The Adjusted EBITDA stood at $1,263 million relative to $1,104 million in FY19, primarily driven by contributions from new projects (~$139 million) and existing projects (~$37 million).

Figure 3. FY20 Financial Summary:

Source: Company Reports

Top 10 Shareholders: The top 10 shareholders together form ~32.88% of the total shareholding. Neuberger Berman LLC and Jennison Associates LLC hold a maximum stake in the company at ~6.00% and ~4.25%%, respectively.

Figure 4. Top 10 Shareholders

Key Metrics: Consistent capacity addition through fast-paced acquisition activities, inorganic expansion, investment-grade counterparties, and growing CAFD has translated into consistent revenues and operating matrices. Spurt in related party receivables has resulted in an increase in cash cycle days during FY20.

Figure 5. Key Financial Metrics:

Growth and Profitability Profile (Source: Analysis by Kalkine Group)

Outlook: For FY21, NEP expects adjusted EBITDA run rate and CAFD to wander around the upper bound of $1.44 – 1.62 billion and $600 – 680 billion range, respectively. Expectations for 12 – 15% annual growth in distribution per common unit remain intact until FY24. Under the energy resources development program, NEP expects to sign 10,525 – 12,700 contracts in 2021-22 to aggravate renewables’ portfolio to ~1.5x of FY19 levels during FY21 – FY24. The US electricity sector is expected to fully decarbonize by 2050, generating an opportunity to cater to ~3,600 GW renewable energy and storage build, translating to ~20x growth in renewables and storage capacity by 2050.

Key Risks: The business model of NEP is highly susceptible to weather conditions like wind speed and solar energy, in turn, dependent upon wind turbine and solar panel placements. In addition, weather conditions directly influence electricity demand and natural gas, affecting the price of energy. With O&M agreements in place, NEP may lose operational control, which signifies reduced capacity or output, unplanned power outages, and safety issues. NEP’s cash flows depend on specific energy projects and pipelines, which suggests high unsystematic risk.

Valuation Methodology: EV to EBITDA Multiple Based Relative Valuation (Illustrative)

Stock Recommendation: NEP has delivered 3-month and 6-month returns of ~+8.31% and ~-7.11%, respectively. The stock is trading slightly above the average of the 52-week high price of $88.30 and the 52-week low price of $48.45. We have valued the stock using EV/EBITDA multiple-based illustrative relative valuation method and have arrived at a target price of low double digit-upside. We believe that the stock might trade at a slight discount compared to its peer average EV/EBITDA (NTM trading multiple), considering high systematic risks, loss of control from O&M agreements, and susceptibility to weather conditions. For this purpose, we have taken peers such as AES Corp (NYSE: AES), Ormat Technologies Inc (NYSE: ORA), Vistra Corp (NYSE: VST), to name a few. Considering the capacity addition plans via acquired interests, recoveries in EBITDA margins since FY18, consistent shareholders’ value addition, and adequate financing flexibility, valuation, and current trading levels, we give a “Buy” recommendation on the stock at the current market price of US $68.55, up ~0.26% on June 1, 2021.

Technical Indicators Defined:

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest. 

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

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