NextEra: Quarter Earnings Surprise

Last week renewable energy company NextEra Energy Partners, LP (NEP:  NYSE) reported financial results for the second quarter ending June 2021.  Its parent, NextEra Energy, Inc. (NEE:  NYSE) earns it’s bread and butter from the sales of electricity in the Florida and Gulf States region, sourcing power from a mix of wind and solar assets.  To help out its parent, the partnership acquires and manages renewable energy projects, on which it earns impressive returns. 

With a beta of 0.74 NEP offers a bit rockier ride than its parent’s NEE shares with a volatility measure of 0.18.  Still its dividend yield is 3.43%, more than twice its parent’s yield  -  a good reason to consider NEP over NEE.  However, what do shareholders get with NEP?  

For the June 2021 quarter, NextEra Partners turned a report of $253 million in total sales, resulting in a net loss of $74 million or $0.96 per share.  Traders need to look carefully before dismissing NextEra Partners.  The quarter report included $336 million in interest expense, but paid only $25 million in cash interest in the quarter.  Thus there is a significant difference in report earnings and cash earnings  -  one of the attractive characteristics of the ‘yieldco.’  Adjusted EBITDA or earnings before non-cash expenses was $350 million in the quarter, providing resources for investment and dividend payments.  Cash available for distribution was $151 million in the quarter, representing over half of each sales dollar.

With such succulent numbers, traders might expect NEP shares to soar.  However, at first glance the earnings report appeared to have disappointed the market.  The shares opened sharply lower in the first session following the earnings press release last week, falling through a line of price support at the $74.00 price level.  It was not until the market heard management’s commentary on the earnings conference call held on the same morning as the earnings announcement, that the shares began to recover.  The shares recovered from the opening debacle, but still ended last week in oversold territory.

Part of the difficulty could be the set-up of expectations.  The consensus estimate for the quarter had been $0.61 per share in adjusted earnings on $348 million in total sales.  Of course, the consensus simplifies things a bit too much.  There had been a wide divergence in view on the quarter with sales estimate ranging from a low of $235 million to a high of $439 million.  An even greater diversity in view prevailed at the bottom line with adjusted earnings estimates ranging from a surprisingly low $0.16 per share to a high of $0.95 per share. 

Tough to call the quarter a ‘beat’ or a ‘disappointment’ for NextEra Partners given the disarray that appears to have overtaken the consensus.  It is suspect that GAAP estimates have been mixed in with non-GAAP, cash earnings estimates, but that does not explain the wide divergence in view on the pace of sales activity.

The confusion over how NextEra Partners is performing against expectations appears to have created a buying opportunity for traders, who take a more studied approach to the stock.  A good place to begin is NextEra’s portfolio, which was recently expanded with the acquisition of 830 megawatts of distributed generation solar assets from Energy Resources.  NextEra used existing cash resource to cover the cash payment of $563 million, making the deal immediately accretive to NEP unitholders.  During the earnings conference call management guided for a contribution of $90 million to $100 million in annual adjusted EBITDA and potentially as much as $49 million in cash available for distribution.

NextEra management also made very bullish remarks during the earnings call on the company’s trajectory to achieving earnings and cash flow goals.  Guidance was offered for a run rate of $1.4 billion to $1.6 billion in annual adjusted EBTIDA by the end of 2021.  Cash available for distribution could range from $600 million to $680 million.  The team projected unit distributions at an annual run rate of $2.76 per unit to $2.83 per unit.  They did not stop there.  They claimed to being on track to deliver the promised 12% to 15% average annual growth in dividends.

For investors who take the time to look over the entire story, a door has opened to acquire NEP during a period of trading weakness.  A forward dividend yield of 3.43% and promise of double digit growth in distributions in the coming years provide a reason to walk through.

 

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.