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Summary NEP is a first-in-class YieldCo with robust fundamentals and a strong sponsor. The upside is driven by long term contracts from diversified energy projects, with double digit distribution growth. NEP trades at a discount to intrinsic value with upside of 55%. By Cillian Huang and Ryan Ren Rating: Buy Market Cap: $732.9M Price Target: $ 37 . 01 Shares Outstanding: 29.67M Price(10/23/2015): $2 3 . 9 5 52 – week High/Low: $48.23/$19.34 Potential Upside: 55 % Dividend Yield: 3.8% Investment Thesis Nextera Energy Partners, LP (NYSE: NEP ) is a growth-oriented Yield Co that acquires and manages clean energy assets with contracted long term cash flows. Affected both by macro market volatility and by sector factors, NEP is currently trading at a discount to its intrinsic value, presenting an attractive buying opportunity with an upside of 55% . We see NEP as a premier Yield Co with strong fundamentals bolstered by a portfolio of existing assets operated by topnotch operators; and by a slate of upcoming assets supported by the development capabilities of North America’s largest clean energy developer NextEra Energy, Inc. (NYSE: NEE ). Why Does The Opportunity Exist? Solid renewable s pipeline : Supported by its sponsor NEE, NEP has been provided with Right-of-First-Offer (ROFO) on a portfolio of clean energy assets that are currently being developed by NEE. NEE is the leader in the clean energy space. It has developed over 12GW of renewables and is the largest clean energy developer with 17% of the current market share. NEE continues to grow its renewable development pipelines, creating a visible stream of projects to propel NEP toward its growth target of 12-15% until 2020. Extended growth runway : NEP recently acquired NET Midstream, which owns and develops seven gas pipelines that are strategically located in the Eagle Ford play. The transaction is immediately accretive to shareholders and contributes approximately $150M adjusted EBITDA and $115M CAFD in 2016. Adding gas pipelines to NEP’s existing renewable portfolio offsets its exposure to resource variability caused by wind and solar. The transaction furthermore provides the platform for NEP’s future expansion into the gas pipeline space, considering NEE is building its presence in the business by developing three pipeline projects that would be dropped down to NEP. Robust renewable s growth prospects : The renewables have presented a robust growth path during the past decade. The momentum will continue with the improving renewable economics, the increasing Renewable Portfolio Standards, the enactment of the Clean Power Plan, and bipartisan support for extension of the production tax credit and investment tax credit. Viable Yield Co model : Yield Co’s growth is dependent on their regular access to the debt and equity market to fund projects acquisitions. Present market conditions have been adverse to the entire Yield Co space, making it challenging for Yield Cos to raise funds by issuing equity that should fairly reflect fundamental values. However, we are confident in the validity of the Yield Co structure, as this model has worked successfully in the MLP space. With effectively managed cost of capital and solid project pipelines, we believe Yield Cos like NEP will continue to deliver stable cash flow in the long run despite a difficult short term trading environment. Proven management track record: The parent company NEE has provided NEP with a high quality management team with extensive experience in developing and financing clean energy projects. With prudent capital market discipline, the management team led by CEO James Robo has demonstrated a track record of success in delivering value to shareholders. Valuation NEP’s unit price has tumbled as a result of market concern over the Yield Co sector and negative market response to the NET acquisition. However, we still see NEP as a premier Yield Co with strong fundamentals. Ultimately, a Yield Co with high distribution growth, strong and stable cash flow, and efficient capital structure deserves high valuation. We reached the one year price target of $37.01 by blending two methodologies – distribution discount method and EV/EBITDA multiple method . Due to the recent financing need for the acquisition of NET Midstream and Jericho Wind Energy, the dilutive effect incurred by potential NEP’s equity issuance has been baked into our valuation models, increasing the total LP units from 93M to 96M. The DDM – Gordon Growth method reflects NEP’s robust distribution profile to satisfy investors’ appetite for income growth. Our view on NEP’s sustainable capacity to deliver growth is reinforced by NEP’s near-term execution on planned drop-down wind energy assets acquisitions and its long-term strategy to expand into the natural gas pipeline space. Supported by a deep assets pipeline developed by its sponsor NEE, NEP is on track to achieve 12.0% to 15.0% distribution per unit growth rate through 2020. In the DDM – Target Yield method, we applied the 2016 target yield to our 2016 estimated distributions per unit. We assumed NEP will maintain a 3.80% yield, which is in line with the pure play peers’ 2016 estimated average yield. Our EV/EBITDA Multiple starts with 2015 estimated adjusted EBITDA of $459.75 million that is driven by 2072MW renewables generation capacity with 19 years average PPA; and by the recently acquired 7 gas pipelines with aggregated capacity of 3 BCF/day binded to 16 years ship or pay contracts. Due to NEP’s stable long term cash flow and better growth prospects, we applied the median EV/EBITDA multiple of 15x derived from trading comps, reflecting a reasonable premium to NEP’s current trading multiple of 12x. Caveats Rising Interest Rates : Interest rates hike presents a downside risk by diverting yield-hungry investors to U.S treasury notes that offer competitive yield with lower risk. High interest rates further undermine NEP’s ability to maintain an efficient cost of capital due to the increasing financing costs. Unfavorable financial markets : The Yield Cos are vulnerable to volatile financial markets. Depressed share prices hinder the Yield Cos’s ability to accretively fund new acquisitions by issuing new shares. Conversely, a healthy financial market is advantageous to the Yield Co, making it easier to raise equity at a proper valuation. Unpredictable resource variability: Although all of NEP’s wind and solar assets are contracted with Power Purchase Agreements, the wind does not always blow and the sun does not always shine. Weak wind together with dimming sun diminishes cash flow estimates. Corporate governance : The sponsor NEE controls the major voting rights of NEP. Besides third party acquisitions, NEP’s growth is largely contingent on its ROFO rights to projects developed by NEE. This could present a risk to NEP’s shareholders when NEP is unable to negotiate favorable terms by catering to NEE’s interest. Conclusion We are confident NEP is the first-in-class Yield Co with robust fundamentals supported by its strong sponsor NEE. The upside is bolstered by contracted cash flow, double digit distribution growth, and experienced management. The downside is indicated by potential interest risk hike, unfavorable financial markets, and possible conflict of interests between NEE and NEP. Scalper1 News
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