Business context and reporting period
NextEra Energy Partners, LP (NEP) filed this unaudited Form 10-Q for the quarter ended March 31, 2017. NEP owns contracted wind and solar generation projects and natural gas pipeline assets through NEP OpCo. NEP held an approximately 34.8% limited-partner interest in NEP OpCo and controlled its general partner; NEE Equity held the remaining 65.2% limited-partner interest. Comparative 2016 figures were retrospectively adjusted for common-control acquisitions.
Financial results and liquidity
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Operating revenue | $175 million | $171 million |
| Operating income | $73 million | $73 million |
| Net income (loss) | $42 million | $(12) million |
| Net income attributable to NEP | $12 million | $5 million |
| Basic and diluted earnings per common unit | $0.22 | $0.14 |
| Operating cash flow | $35 million | $50 million |
| Cash and cash equivalents, quarter-end | $82 million | $147 million at December 31, 2016 |
| Long-term debt, including current maturities | $3.768 billion | $3.586 billion at December 31, 2016 |
Renewable energy sales were $126 million and Texas pipeline service revenue was $49 million. Operating expenses were $102 million, including $52 million of operations and maintenance and $46 million of depreciation and amortization. Operating margin was approximately 41.7% of revenue, versus 42.7% in Q1 2016. The reported distribution per common unit was $0.3525.
At March 31, 2017, total current assets were $333 million and current liabilities were $182 million. Reported liquidity was approximately $445 million, comprising cash, $97 million due under the cash sweep and credit support agreement, available revolving credit and letter-of-credit capacity, net of borrowings and letters of credit. Cash flow from investing activities was $(40) million and financing activities were $(61) million; cash decreased by $65 million during the quarter.
Material changes versus the prior comparable period
- Revenue increased $4 million, primarily from contractual PPA price escalations. Generation was 2,122 GWh versus 2,130 GWh.
- Operating income was unchanged. O&M expense rose $8 million, primarily because of an $8 million increase in incentive distribution right fees; depreciation and amortization fell $4 million, partly due to longer estimated useful lives for certain wind equipment.
- Interest expense declined $43 million to $43 million, primarily because Q1 2016 included larger mark-to-market losses on interest-rate swaps. NEP reported $42 million of net income versus a $12 million loss, while income attributable to NEP was $12 million versus $5 million.
- Operating cash flow fell $15 million, reflecting higher IDR fees and a $14 million acquisition-holdback payment classified in operating activities, partly offset by distributions from an equity-method investee. Investing outflows were substantially lower than in 2016, when acquisitions and construction spending were significant.
- NEP borrowed $200 million under variable-rate term loans and $10 million under a revolving facility. It paid approximately $200 million to Texas pipeline sellers after release of the acquisition indemnity holdback.
Outlook, risks and unusual items
- Management expected operating cash flow and available liquidity to meet operating, capital expenditure, debt-service and distribution needs. Acquisitions, expansions and future distribution growth depend in part on access to capital on acceptable terms. Planned capital expenditures were approximately $33 million for the remainder of 2017; estimates may change.
- On April 20, 2017, NEP agreed to acquire an approximately 249 MW Colorado wind facility for about $238 million, plus assumption of approximately $184 million in existing differential-membership-interest liabilities, subject to adjustments. Closing was expected in Q2 2017. The board also authorized a $0.365-per-unit distribution payable May 15, 2017.
- Key risks include variable wind and solar resource, project and pipeline operating and maintenance risks, dependence on long-term contracts and counterparties, financing and covenant restrictions, and the ability to refinance or raise capital. Canadian FIT contracts carry domestic-content requirements; noncompliance could threaten contract revenues. Management reported no material changes to the risk factors in the 2016 Form 10-K.
- NEP depends substantially on NEE and its affiliates for management and credit support. NEER and affiliates may hold project cash under sweep arrangements; approximately $97 million was due under the CSCS agreement at quarter-end. Related-party fees and the terms governing access to swept funds merit attention.
- Subsidiaries were in compliance with financial debt covenants at quarter-end, but one project had been unable to fully fund a debt reserve by approximately $2 million in Q4 2016. About 10% of long-term debt was exposed to floating-rate changes; the balance was fixed-rate or financially hedged.
- A change in the useful-life estimate for certain wind equipment increased Q1 2017 net income attributable to NEP by approximately $1 million, or $0.02 per unit; management expected a roughly $4 million increase for full-year 2017. NEP was evaluating new revenue-recognition and partial-sale accounting standards and anticipated adopting them in 2018.
Important facts for investors to verify
- Reconcile consolidated net income with the much smaller amount attributable to NEP, including noncontrolling interests and the retrospective accounting adjustments.
- Review the quality and durability of the $35 million of operating cash flow, the decline in cash, and the availability and return terms for funds held by NEE affiliates.
- Assess debt maturities, variable-rate exposure, refinancing needs, project distribution covenants and the reserve-funding shortfall disclosed for one project.
- Confirm the Golden West acquisition’s final price, assumed liabilities, closing and expected contribution to cash available for distribution.
- Evaluate related-party management, O&M, IDR and credit-support fees, along with the dependence on NEE/NEER support and the governance implications.