Friday, November 06, 2015

Investors Awaken to NextEra YieldCo


Last week NextEra Energy Partners, LP (NEP:  NYSE) reported financial results for the third quarter ending September 2015.  The numbers were released in along with quarter results from its parent, Florida-based utility NextEra Energy, Inc. (NEE:  NYSE).  The partnership is the operating arm of clean energy projects originated by the NextEra parent.  The ‘yieldco’ as these operating entities have been kindly dubbed by shareholders, delivered $1.0 million in reported net income, but operating cash flow was a whopping $36 million in the quarter.

The consensus estimate had been for $0.24 in earnings per share, but NEP delivered only a nickel.  The shortfall should not have been such a surprise.  The company has missed the consensus estimate in each of the last four quarters.  This might be due in part to the fact that NEP has only been public for just over a year.  Analysts may still be having trouble rationalizing NEP’s business prospects after the Company’s well publicized initial public offering last year.

Over the previous two and a half years NEP had converted 53.3% of sales to operating cash flow.  True enough the sales-to-cash conversion rate did slip slightly to 35% in the recently reported quarter.  However, some seasonal variability is expected in the wind and solar energy sources that comprise NEP’s revenue sources.  The company ended the September quarter with $696 million in cash and equivalents derived in part from operating activities. 

Cash is a critical element in NEP’s growth strategy.  The company is expected to continue acquiring renewable and alternative energy assets, some of which could come from the stream of energy projects under development by its parent or sponsor NextEra Energy.  NEP recently acquired natural gas pipelines in Texas and a wind project in Canada.

The company also raised $319 million in new capital from the sale of new common units during the first nine months of 2015.  Going forward NEP has announced a new $150 million ‘dribble program’ whereby the company could issue new common units from time to time.  This program will allow the parent NextEra Energy to purchase units in periods of undervalued.

NEP management has suggested that acquisition plans to grow its portfolio of energy assets could eventually support distributions in excess of $1.20 per unit over the next five years.  This compares to the current distribution rate at $1.08 per unit.  The current distribution rate represents a current yield of 4.0%. 

The yield might appear attractive, but the stock appears to be priced at a premium with a price-to-earnings multiple of 92.2 times trailing earnings.  Importantly, the price-to-cash flow multiple on a trailing basis is 5.2 times.  Since cash generation is NextEra’s forte, it seems appropriate to price the the basis of cash flows rather than reported earnings that include considerable noise from non-cash charges. 

The stock hit 52-week low of $19.34 in late September as traders had seemed to remain stubbornly focused on each successive quarter earnings miss.  There appears to have been an awakening among traders to the value in NEP.  The stock has been attempting a comeback in recent weeks.  Money flows into the stock turned positive in late October just as the company was preparing to release third quarter results.  In my view, NEP is at an interesting point and is worth a serious look for yield-hungry investors.



Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.


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