Business context and reporting period
NextEra Energy Partners, LP (NEP) filed this unaudited Form 10-Q for the quarter ended September 30, 2015. The filing identifies NEP as the registrant; this differs from the “XPLR Infrastructure, LP” company name in the request metadata. NEP owned contracted wind and solar assets and, after quarter-end, completed its entry into natural gas pipelines through the NET Midstream acquisition. Comparative 2014 figures were retrospectively adjusted for common-control project acquisitions.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Operating revenue | $103 million | $97 million | $297 million | $267 million |
| Operating income | $46 million | $52 million | $131 million | $140 million |
| Net income | $14 million | $23 million | $46 million | $52 million |
| Net income attributable to NEP | $1 million | $3 million | $6 million | $3 million |
| Interest expense | $28 million | $28 million | $79 million | $73 million |
Operating margin was approximately 45% in Q3 2015 versus 54% in Q3 2014, and 44% for the first nine months of 2015 versus 52% in the prior-year period. Revenue growth reflected additional projects entering commercial operation, partly offset by lower wind generation. O&M and depreciation rose with the expanded operating portfolio.
For the first nine months, operating cash flow was $117 million (down from $134 million); investing cash outflow was $553 million; and financing cash inflow was $1.031 billion. Cash and cash equivalents were $696 million at September 30, versus $103 million at year-end 2014. Total debt, including short-term debt and current maturities, was approximately $1.922 billion. Reported liquidity was $956 million, including cash, amounts due under the related-party cash sweep and unused credit and letter-of-credit capacity. Total assets were $4.217 billion and total liabilities $2.536 billion.
Material changes and transactions
- Q3 revenue increased $6 million year over year, while operating income declined $6 million and NEP-attributable net income declined $2 million. Nine-month revenue rose $30 million, but operating income fell $9 million.
- Generation increased to 1,239 GWh for Q3 from 785 GWh, and to 4,077 GWh for nine months from 2,842 GWh, primarily as more projects entered service; management cited weaker wind resource as a partial offset to revenue growth.
- During 2015 NEP acquired or invested in additional wind and solar projects. In September, it issued common units and NEE purchased NEP OpCo units; proceeds helped repay the $313 million term loan and fund acquisitions. NEP’s limited partnership interest in NEP OpCo was 22.6% at quarter-end, with NEE Equity holding the noncontrolling interest.
- On October 1, 2015, after the reporting date, NEP completed the approximately $2 billion NET Midstream acquisition, including seven contracted Texas pipeline assets, and acquired a 149 MW Ontario wind facility. It also borrowed $600 million under secured variable-rate term loans due in 2018.
Outlook, risks and notable items
Management said operating needs are expected to be funded primarily from internally generated cash flow, with acquisitions financed through cash, debt and equity as appropriate. It stated that liquidity and operating cash flows were expected to cover operating, capital and distribution needs, but future acquisitions and distribution growth depend in part on access to capital markets on acceptable terms. No specific earnings or revenue guidance was provided.
NEP announced a quarterly distribution of $0.27 per common unit, payable November 13, 2015. The partnership’s distribution capacity depends on project performance, wind conditions, maintenance, debt service and subsidiary distributions. Key disclosed risks include acquisition financing and dilution, reliance on NEE and related-party credit support, project and weather performance, debt restrictions, and NET Midstream’s dependence on significant pipeline customers; a PEMEX subsidiary was forecast to represent about 14% of NEP’s 2016 firm contracted revenues.
Management reported disclosure controls were not effective at a reasonable assurance level because of an unremediated material weakness in income-tax accounting controls, particularly deferred-tax valuation and monitoring. Remediation efforts were ongoing. The filing also describes Ontario domestic-content requirements for certain wind projects; a failure to meet them could put FIT contracts at risk. Foreign-currency translation and interest-rate swaps contributed to other comprehensive losses.
Important facts for investors to verify
- Confirm the registrant and whether this 2015 NEP filing is the intended filing, given the XPLR Infrastructure metadata.
- Assess the post-quarter NET Midstream and Ontario wind acquisitions, their financing, purchase-price holdbacks and expected contribution to cash available for distribution.
- Review the material weakness, remediation progress and any subsequent assessment of internal controls.
- Evaluate reliance on NEE-related cash sweeps and credit support, including the returnability of amounts due from related parties.
- Verify customer concentration, contracted pipeline volumes, project performance and the status of the Ontario FIT domestic-content audits.
- Reconcile reported liquidity with cash actually available to NEP, subsidiary distribution restrictions and upcoming debt obligations.