Business context and reporting period
This is NextEra Energy Partners, LP’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2017. The filing’s registrant name is NextEra Energy Partners, LP; it describes a portfolio of contracted wind and solar generation assets and natural gas pipelines. The financial statements are presented in millions of dollars, except per-unit data. Prior periods were retrospectively adjusted for common-control acquisitions.
Key financial metrics
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Operating revenue | $177 | $191 | $563 | $556 |
| Operating income | $66 | $80 | $230 | $235 |
| Net income | $38 | $135 | $132 | $167 |
| Net income attributable to NEP | $1 | $27 | $26 | $40 |
| Basic and diluted earnings per common unit | $0.01 | $0.62 | $0.47 | $0.99 |
| Distributions per common unit | $0.3800 | $0.3300 | $1.0975 | $0.9563 |
- Operating margin, calculated as operating income divided by revenue, was approximately 37.3% in Q3 2017 versus 41.9% in Q3 2016; for the first nine months it was approximately 40.9% versus 42.3%.
- Operating cash flow for the first nine months was $237, down from $260. Investing cash outflow was $569, compared with $1,479; financing cash inflow was $319, compared with $1,186. Cash declined $12 during the 2017 period to $135.
- At September 30, 2017, long-term debt including current maturities was $4,335, versus $3,586 at year-end 2016. Cash was $135. The filing reports estimated debt fair value of $4.5 billion and carrying value of $4.3 billion.
- Reported liquidity was $765, including $135 cash, $366 due under the cash sweep and credit support agreement, and available revolving and letter-of-credit capacity net of borrowings and letters of credit. Restricted cash of $32 was excluded.
- NEP reported covenant compliance. About 11% of long-term debt was exposed to interest-rate fluctuations; the remainder was fixed-rate or financially hedged.
Material changes versus the prior comparable period
- Q3 revenue fell $14, primarily because of approximately $18 of unfavorable wind resource, partly offset by $3 higher Texas pipeline service revenue.
- Q3 operating income declined $14. Operations and maintenance expense rose $4, mainly due to $6 higher incentive distribution rights fees, while depreciation and amortization fell $4.
- Q3 interest expense increased $9, reflecting higher borrowing costs, mark-to-market swap losses, and a debt issuance cost write-off.
- Q3 2016 net income included a $101 favorable revaluation of Texas pipeline acquisition contingent consideration; the comparable 2017 period had no such gain. This materially affects the headline net-income comparison.
- For the first nine months, operating revenue increased $7, while operating income declined $5. Interest expense decreased $49, largely due to lower mark-to-market losses on interest-rate swaps. Higher O&M, including $20 more in incentive distribution rights fees, offset operating benefits.
- Gross debt increased from year-end 2016 amid refinancing and new issuance. In September, NEP issued $300 of 1.50% convertible notes and NEP OpCo issued $1.1 billion of senior notes due 2024 and 2027; proceeds were used in part to repay variable-rate borrowings.
Outlook, management commentary, risks and unusual items
- Management said operating cash flow and liquidity were expected to be adequate for operating costs, capital expenditures, distributions, and liquidity commitments. Acquisitions and distribution growth remained dependent on access to capital markets on acceptable terms. No quantified earnings or cash-flow guidance is provided.
- In October 2017, NEP agreed to acquire interests in four wind and solar facilities with approximately 691 MW of contracted capacity for about $812, plus assumption of approximately $459 in differential-membership-interest liabilities. The company expected closing before year-end, subject to customary conditions and regulatory approvals, and planned to use preferred-unit proceeds and cash on hand.
- NEP had a $550 preferred-unit private-placement agreement. The preferred units rank ahead of common units and carry cumulative quarterly distributions; issuance may dilute common holders and affect cash available for common distributions.
- After quarter-end, the revolving credit facility was increased from $250 to $750 and its maturity extended to October 2022, with potential incremental commitments up to $1.5 billion subject to conditions.
- NEP’s August 2017 governance changes enhanced unitholder rights, including the ability to nominate and elect board members subject to limitations. The filing says acquisitions from NEER would cease to be accounted for as common-control acquisitions beginning January 2018.
- Key risks include variable wind and solar output, weather and operational interruptions, dependence on key customers and contracted revenues, pipeline operating and expansion risks, access to financing, debt and distribution restrictions, reliance on NEE/NEER and cash-sweep arrangements, and regulatory, environmental, foreign-currency and counterparty risks. Canadian FIT projects face potential contract termination if audited domestic-content requirements are not met.
- Other notable items: the useful-life estimate for certain wind equipment was extended from 30 to 35 years, increasing 2017 net income attributable to NEP by an estimated $3 for the first nine months; management expected a $5 full-year benefit. The filing reports no material change in risk factors from the August 2017 Form 8-K.
Important facts for investors to verify
- Confirm acquisition closing, funding, assumed liabilities, and expected economics for the announced 691 MW portfolio.
- Review the availability and collectability of the $366 due under the cash-sweep arrangement with NEER, and the related credit support and restrictions.
- Assess debt maturities, interest-rate exposure, covenant and distribution restrictions, and the implications of convertible-note dilution and preferred-unit distributions.
- Separate recurring operating performance from the prior-year $101 contingent-consideration gain and from derivative fair-value movements.
- Track wind resource, Texas pipeline revenues and costs, maintenance requirements, and compliance with Canadian FIT domestic-content provisions.