Business context and reporting period
NextEra Energy Partners, LP (NEP; the registrant named in this filing) reported unaudited results for the quarter and nine months ended September 30, 2018. NEP owns contracted renewable generation and natural gas pipeline assets through NEP OpCo. At quarter-end, NEP held approximately 35.6% of NEP OpCo’s limited partner interests. The filing reports 56.0 million common units outstanding.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Operating revenue | $178 million | $191 million | $615 million | $610 million |
| Operating income | $59 million | $69 million | $413 million | $242 million |
| Net income | $110 million | $50 million | $385 million | $167 million |
| Net income attributable to NEP | $33 million | $1 million | $189 million | $26 million |
| Basic earnings per common unit | $0.60 | $0.01 | $3.47 | $0.47 |
| Distributions per common unit | $0.4375 | $0.3800 | $1.2625 | $1.0975 |
For the nine months, operating cash flow was $269 million, down from $293 million. Investing cash flow used $213 million versus $808 million, including $517 million net proceeds from the Canadian Holdings sale and $720 million of net payments to related parties under the cash sweep and credit support agreement. Financing cash flow used $142 million, compared with $502 million provided in the prior period. Cash, cash equivalents and restricted cash totaled $110 million at September 30, 2018, down from $198 million at year-end 2017.
At September 30, 2018, total debt, including current maturities, was $3.555 billion ($3.491 billion long-term and $64 million current), versus $4.317 billion at December 31, 2017. Total assets were $7.850 billion and total liabilities $3.818 billion. Current assets were $1.009 billion and current liabilities $182 million; current assets included $809 million due from related parties, primarily cash sweep balances. Reported liquidity was $1.647 billion, comprising $76 million cash, $807 million due under the CSCS agreement, and net available revolving and letter-of-credit capacity. Management said liquidity and operating cash flows were expected to cover operating needs, capital expenditures, distributions and liquidity commitments. Approximately 6% of long-term debt was exposed to interest-rate fluctuations; the balance was fixed-rate or hedged.
Material changes versus prior period
- Quarterly revenue fell $13 million: renewable sales declined $17 million, largely reflecting the Canadian asset sale, partly offset by higher Texas pipeline service revenue and favorable renewable resources. Nine-month revenue increased $5 million as pipeline revenue rose $22 million.
- NEP sold its Canadian Holdings in June for approximately $563 million in cash and the buyer assumed about $676 million of debt. The sale generated a $158 million pretax gain, materially lifting nine-month operating income and net income.
- Quarterly net income attributable to NEP increased to $33 million from $1 million, aided substantially by favorable interest-rate derivative mark-to-market activity. Management cited $78 million of favorable mark-to-market activity in the quarter; it also reported a $61 million year-over-year reduction in nine-month interest expense, primarily from favorable mark-to-market movements.
- Accounting for partial sales of nonfinancial assets changed in 2018: $1.442 billion of differential-membership-interest deferral was reclassified to noncontrolling interests. The nine-month results include a $231 million pretax adjustment related to tax reform and a $336 million loss allocated to noncontrolling interests from differential membership interests. These accounting and allocation changes complicate comparisons.
- NEP issued approximately 1.7 million common units under its at-the-market program for about $82 million gross proceeds. Common units outstanding rose to 56.0 million from 54.3 million at year-end 2017.
Outlook, commentary and risks
NEP agreed to acquire a portfolio of renewable projects with approximately 1,388 MW of capacity for about $1.275 billion, plus assumption of approximately $930 million of existing noncontrolling interests and $38 million of debt. Closing was expected before December 31, 2018, subject to customary conditions and regulatory approvals. A third-party investor committed approximately $750 million for a 59% noncontrolling Class B interest, subject to conditions; the distribution split and NEP’s later buyout option are detailed in the filing.
The board authorized a $0.45-per-unit common distribution payable November 14, 2018. No broader earnings or distribution-growth guidance is provided in the filing. Management stated that future acquisitions and distribution growth depend in part on access to capital markets on acceptable terms.
Key risks include reliance on wind and solar conditions, weather and project performance; concentration in certain customers and assets; pipeline operating, demand and expansion risks; refinancing and capital-market access; debt covenants and subsidiary restrictions on distributions; and dependence on NEE/NEER for management, credit support and the return of swept funds. NEER held approximately $807 million of cash sweep funds at quarter-end; NEP’s claim to their return and the related credit support are important to liquidity. NEP disclosed no material changes to the risk factors in its 2017 Form 10-K. The company also identified the upcoming lease accounting standard, effective for it in 2019, as under evaluation.
Investor verification points
- Separate recurring operating and cash generation from the Canadian sale gain, derivative mark-to-market gains, tax effects and differential-interest accounting allocations.
- Confirm completion, financing and economics of the proposed 1,388 MW acquisition, including the Class B investor’s funding and distribution rights.
- Assess the collectability, timing and credit support for the $807 million due from related parties under the cash sweep arrangements.
- Review debt maturities, covenants, hedging exposure and the availability of revolving facilities against planned acquisitions and distributions.
- Reconcile reported liquidity with unrestricted cash and restricted cash, and assess whether the $0.45 distribution is supported by sustainable cash available for distribution.