NextEra Energy Partners, LP — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. The filing registrant is NextEra Energy Partners, LP; the supplied company label, XPLR Infrastructure, LP, does not match the registrant named in this filing. Financial amounts are in millions unless otherwise noted. 2014 figures were retrospectively adjusted for the common-control acquisitions of Palo Duro and Shafter.
Business context and results
NEP is a growth-oriented limited partnership that owns contracted wind and solar projects through NEP OpCo. NEP holds a 20.1% limited partnership interest in NEP OpCo and consolidates its results; NEE Equity holds the remaining 79.9% noncontrolling interest.
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Operating revenue | $74 | $59 |
| Operating income | $31 | $30 |
| Operating margin | 41.9% | 50.8% |
| Interest expense | $23 | $19 |
| Income before taxes | $10 | $11 |
| Income tax expense | $1 | $5 |
| Consolidated net income | $9 | $6 |
| Net income attributable to NEP | $2 | Not clearly provided in the comparative income statement |
| EPS attributable to NEP | $0.08 | Not clearly provided |
| Operating cash flow | $15 | $29 |
| Investing cash flow | $(119) | $(68) |
| Financing cash flow | $59 | $49 |
Financial position, liquidity and capital
- Cash and cash equivalents were $52 at March 31, down from $98 at year-end 2014. Total assets were $2,928 and total liabilities were $2,316.
- Total debt, including current maturities, was $1,880 ($78 current and $1,802 long-term), compared with $1,836 at year-end. Debt fair value was estimated at $1,960. Less than 10% of debt was exposed to interest-rate risk, with the remainder fixed-rate or hedged.
- Reported liquidity was $236, down from $560 at year-end. It included $52 cash, $51 due under the cash sweep and credit support agreement, $250 of revolving-facility capacity less $122 borrowed, and $83 of letter-of-credit capacity less $78 outstanding. Restricted cash was excluded.
- NEP distributed approximately $4 to unitholders during the quarter; it declared a further approximately $4 distribution in April. The partnership agreement requires quarterly distributions of available cash, subject to reserves and subsidiary-level restrictions.
- Capital expenditures were $68 on an accrual basis (cash capital expenditures were $42). Management estimated approximately $33 of capital expenditures for the rest of 2015, primarily to complete Shafter; estimates may change.
Material changes and unusual items
- Revenue rose $15, or about 25%, primarily as Genesis Unit 2, Bluewater and Palo Duro entered commercial operation. Generation increased to 908 GWh from 648 GWh, although lower wind resource partly offset the added capacity.
- Operating expenses increased to $43 from $29, principally due to the newly operating projects. Operating income increased only $1, and operating margin declined, reflecting the higher expense base.
- Interest expense rose $4, mainly from new financings and revolving-facility draws. Net income attributable to NEP was $2 after $7 attributable to noncontrolling interests.
- Effective tax rate was approximately 10%, versus 45%. Management cautioned that year-over-year tax comparisons are not meaningful because of the change from predecessor to successor tax accounting; the 2014 rate also reflected deferred-tax valuation allowances and CITC effects.
- NEP acquired approximately 250 MW Palo Duro for $228 cash plus assumption of approximately $248 of differential-membership-interest liabilities, and acquired Shafter development rights and facilities under construction for $64. The acquisitions were accounted for as common-control transfers, with prior periods retrospectively adjusted.
- Q1 investing cash use included $292 for acquisitions, partly offset by $159 of net payments from related parties under the CSCS agreement. Operating cash flow fell by $14; management cited higher interest payments classified as operating rather than investing and partly offsetting cash contributions from newer operating projects.
- Other comprehensive loss was $17, mainly from cash-flow hedge losses and foreign-currency translation. NEP reported a $16 liability for interest-rate swaps at quarter-end.
Outlook, risks and contingencies
- Management stated that liquidity and operating cash flows were expected to be adequate for operations, capital spending, distributions and liquidity commitments. Funding needs could be met from cash, operating cash flow and existing or future financing; no earnings or distribution-growth guidance was provided.
- On April 28, 2015, NEP agreed to acquire four wind facilities totaling approximately 664 MW for about $412 cash plus assumption of approximately $269 in debt and tax-equity financing. Closing was expected in Q2 2015, subject to customary conditions; the agreement contemplated a further approximately $60 of project debt. Financing options were still under consideration.
- Also on April 28, the revolving credit facility was amended to permit certain additional secured or unsecured debt and to ease conditions for increasing commitments.
- Project financings restrict distributions and require a minimum 1.20:1.00 debt-service coverage ratio. NEP reported compliance with covenants and ratios at or above the minimum.
- Risks include variable wind and solar output, project and equipment performance, counterparty and contract exposure, debt and refinancing needs, interest and currency movements, reliance on NEE and its credit support, and acquisition and construction execution. Canadian FIT projects face domestic-content audit risk; failure to meet requirements could threaten contract revenue. No material changes to the 2014 Form 10-K risk factors were reported.
- Disclosure controls were concluded not effective at a reasonable-assurance level because of an ongoing material weakness in accounting for income taxes, including valuation allowances and deferred-tax accuracy. Remediation steps were underway but not yet validated.
- Commitments included $168 of minimum land-use payments, $4 of remaining Shafter construction-contract commitments, and $78 of outstanding letters of credit under the Genesis facility. The filing text does not identify a material pending litigation contingency.
Most important facts for investors to verify
- Whether the April 2015 664 MW acquisition closed on expected terms, how it was financed, and whether the additional project debt was incurred.
- Whether operating cash flow, project generation and liquidity remain sufficient to fund debt service, construction, acquisitions and distributions, particularly given the sharp decline in reported liquidity.
- Whether NEP remediated and validated the income-tax control material weakness, and whether subsequent filings report any related misstatements.
- Whether wind-resource and turbine-performance issues, Canadian domestic-content audits, or counterparty and credit-support arrangements affect contracted cash flows.
- How much cash held through the CSCS cash-sweep arrangements is available when required, and the terms and restrictions attached to project-level debt and distributions.