NextEra Energy Partners: Here Comes The Distribution Cut

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NextEra Energy Partners: Here Comes The Distribution Cut

seekingalpha10-24

NEP units are crashing.Management is signaling a distribution cut.We share how big we think the distribution cut might be and what investors should do now.We also share our top pick in the renewable ...

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Igor Rezende
·10-24
Thank you for your post and for the insights. What metrics were you looking at that led you to believe they could cut their dividends by 2/3?
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On today's earnings call, management strongly hinted that - apparently - this may soon happen, sending NEP units plunging by about 15% as of this writing. In this article, I will discuss the ramifications of this development for investors. The Backstory NEP has been on a rocky journey during the past 13 months. Last September, the unit price plunged sharply on news that management would not proceed with the previously planned drop-down acquisition from its parent, NextEra Energy (NEE), as the partnership's high cost of capital rendered the financials of the deal unsustainable. Since then, NEP has taken steps to address its near-term equity and debt obligations, including selling off its STX pipeline assets to Kinder Morgan (KMI) at a reasonable valuation and refinancing debt that was maturing this year. Additionally, NEP has pursued organic repowering growth projects to fuel EBITDA and cash available for distribution (\"CAFD\") growth. It has also been increasing its distribution each quarter at an annualized pace of approximately 6%. While these actions seemed positive on the surface, several underlying issues indicated that the business model was unsustainable. First, although interest rates have come down somewhat from last year's levels, long-term interest rates and the federal funds rate remain too high for NEP to secure low-cost capital. This limits the company's ability to address upcoming equity and debt obligations without difficult decisions. Moreover, NEP's leverage ratios are approaching downgrade thresholds, leaving little room to take on additional debt. On top of that, NEP's payout ratio on a CAFD basis is in the high 90% range, meaning it's retaining very little equity capital to reinvest in growth. Additionally, NEP is planning to sell off its remaining pipeline asset next year to meet its equity obligations, which will significantly reduce its CAFD and offset the growth generated by repowering projects. Moreover, even if NEP manages to cover its distribution in the near term, it faces billions of dollars in equity obligations in the coming years. The Way Forward To address these challenges, NEP will need to either slash its distribution or sell stakes in its underlying assets to raise enough equity capital. However, such a sale would further pressure CAFD per unit, leading to an inevitable reduction in the distribution anyway. This is why I issued a distribution cut alert back in June and downgraded NEP to a sell. That call has paid off as NEP has since declined by more than one third, while my recommended alternative, Brookfield Renewable Partners (BEP), has risen slightly during the same period. Data by YCharts Today's earnings results were also disappointing, with both EBITDA and CAFD declining year-over-year. Production across the portfolio dropped to 93% of historical productivity during the quarter, compared to 98% year-to-date productivity for its portfolio. On the earnings call, management acknowledged the challenging situation it is in. In the slide deck (slide 18), NEP stated: NextEra Energy Partners is continuing to evaluate all options to address the remaining convertible equity portfolio financing buyouts and its overall cost of capital. NextEra Energy Partners plans to complete its review by no later than the fourth quarter 2024 call and intends to provide its distribution and run-rate cash available for distribution expectations at that time. Then during the Q&A session, the CEO hinted at a shift in the distribution policy, stating: One of the things that we are evaluating is should we deploy more of our capital towards really growing the underlying cash flow of the business and maybe less towards distributions. And so that's one of the things that we're thinking about. Obviously, we have to also address the back-end convertible equity portfolio financings. But what we wanted to do is just be upfront with investors that this review is coming to a conclusion, and we'll be prepared to provide updated feedback on our distribution policy going forward on the fourth quarter call. Interestingly, NEP recently increased its quarterly distribution, a move consistent with how many companies maintain their policies until making a sudden shift. W. P. Carey (WPC) followed a similar pattern last year, raising its dividend before abruptly announcing a cut as part of its exit from the office space sector. At least in this case, NEP is signaling to unitholders what's likely coming, giving them time to prepare - hence the sharp decline in NEP units today. Investor Takeaway What should NEP unitholders do now? First of all, hopefully, you heeded my sell call earlier this year, enabling you to avoid the significant losses suffered since then, as NEP has delivered nearly -35% total returns over that period. If you still hold NEP, however, I would personally exit the position given that it's very risky and speculative right now with an impending distribution cut. Additionally, despite its seemingly cheap valuation based on its distribution and CAFD yields, it trades at roughly nine times its EBITDA, which is not particularly attractive given that recent transactions in the sector have occurred at similar valuations. Additionally, it appears that NEE is shifting away from using NEP as a capital-raising vehicle and instead will likely focus on retaining cash flow to invest in growth projects and acquire drop-down assets from NEE. This strategic shift suggests that a steep distribution cut is coming for NEP. Therefore, I would not be surprised if NEP reduces its distribution by two thirds or more to retain capital and position the business for future growth. Granted, if NEP cuts its distribution by two thirds, the yield would still be close to 5%, with decent growth prospects for NEP moving forward. However, I would not recommend buying NEP, and holding the units remains risky as a steep distribution cut could further depress the unit price. Moreover, the uncertainty about the size of the distribution cut as well as how management will address upcoming equity obligations will continue to weigh on the stock until the policy change is officially announced.  In my view, Brookfield Renewable Partners (BEP)(BEPC) and Clearway Energy (CWEN)(CWEN.A) still offer better risk-reward profiles in the renewable power space, so I would continue to steer clear of NEP for now and instead invest in these alternatives.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[{"id":363363750064280,"gmtCreate":1729738304757,"gmtModify":1729738308808,"author":{"id":"4138333259809052","authorId":"4138333259809052","name":"Igor Rezende","avatar":"https://community-static.tradeup.com/news/83970c54704ce50e40a36ab5596035d4","vip":1,"crmLevel":1,"crmLevelSwitch":0,"idStr":"4138333259809052","authorIdStr":"4138333259809052"},"htmlText":"Thank you for your post and for the insights. What metrics were you looking at that led you to believe they could cut their dividends by 2/3?","listText":"Thank you for your post and for the insights. What metrics were you looking at that led you to believe they could cut their dividends by 2/3?","text":"Thank you for your post and for the insights. What metrics were you looking at that led you to believe they could cut their dividends by 2/3?","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/363363750064280","repostId":2477914599,"repostType":2,"repost":{"id":"2477914599","pubTimestamp":1729717264,"share":"https://ttm.financial/m/news/2477914599?lang=&edition=fundamental","pubTime":"2024-10-24 05:01","market":"sh","language":"en","title":"NextEra Energy Partners: Here Comes The Distribution Cut","url":"https://stock-news.laohu8.com/highlight/detail?id=2477914599","media":"seekingalpha","summary":"NEP units are crashing.Management is signaling a distribution cut.We share how big we think the distribution cut might be and what investors should do now.We also share our top pick in the renewable p","content":"<html><body><ul><li>NEP units are crashing.</li><li>Management is signaling a distribution cut.</li><li>We share how big we think the distribution cut might be and what investors should do now.</li><li>We also share our top pick in the renewable power yieldco space.</li></ul><p><figure><picture><img fetchpriority=\"high\" height=\"3744px\" sizes=\"(max-width: 768px) calc(100vw - 36px), (max-width: 1024px) calc(100vw - 132px), (max-width: 1200px) calc(66.6vw - 72px), 600px\" src=\"https://static.seekingalpha.com/cdn/s3/uploads/getty_images/175494583/image_175494583.jpg?io=getty-c-w750\" srcset=\"https://static.seekingalpha.com/cdn/s3/uploads/getty_images/175494583/image_175494583.jpg?io=getty-c-w1536 1536w, https://static.seekingalpha.com/cdn/s3/uploads/getty_images/175494583/image_175494583.jpg?io=getty-c-w1280 1280w, https://static.seekingalpha.com/cdn/s3/uploads/getty_images/175494583/image_175494583.jpg?io=getty-c-w1080 1080w, https://static.seekingalpha.com/cdn/s3/uploads/getty_images/175494583/image_175494583.jpg?io=getty-c-w750 750w, https://static.seekingalpha.com/cdn/s3/uploads/getty_images/175494583/image_175494583.jpg?io=getty-c-w640 640w, https://static.seekingalpha.com/cdn/s3/uploads/getty_images/175494583/image_175494583.jpg?io=getty-c-w480 480w, https://static.seekingalpha.com/cdn/s3/uploads/getty_images/175494583/image_175494583.jpg?io=getty-c-w320 320w, https://static.seekingalpha.com/cdn/s3/uploads/getty_images/175494583/image_175494583.jpg?io=getty-c-w240 240w\" width=\"5616px\"/></picture><figcaption><p>sbayram</p></figcaption></figure></p> <p>Back in June, I rated NextEra Energy Partners (<span>NYSE:NEP</span>) a sell, stating that it was highly likely to cut its distribution in the future. On today's earnings call, management strongly hinted that - apparently - this may soon happen<span>, sending NEP units plunging by about 15% as of this writing. In this article, I will discuss the ramifications of this development for investors.</span></p> <h2>The Backstory</h2> <p>NEP has been on a rocky journey during the past 13 months. Last September, the unit price plunged sharply on news that management would not proceed with the previously planned drop-down acquisition from its parent, NextEra Energy (NEE), as the partnership's high cost of capital rendered the financials of the deal unsustainable. Since then, NEP has taken steps to address its near-term equity and debt obligations, including selling off its STX pipeline assets to Kinder Morgan (KMI) at a reasonable valuation and refinancing debt that was maturing this year.</p> <p>Additionally, NEP has pursued organic repowering growth projects to fuel EBITDA and cash available for distribution (\"CAFD\") growth. It has also been increasing its distribution each quarter at an annualized pace of approximately 6%. While these actions seemed positive on the surface, several underlying issues indicated that the business model was unsustainable.</p> <p>First, although interest rates have come down somewhat from last year's levels, long-term interest rates and the federal funds rate remain too high for NEP to secure low-cost capital. This limits the company's ability to address upcoming equity and debt obligations without difficult decisions. Moreover, NEP's leverage ratios are approaching downgrade thresholds, leaving little room to take on additional debt.</p> <p>On top of that, NEP's payout ratio on a CAFD basis is in the high 90% range, meaning it's retaining very little equity capital to reinvest in growth. Additionally, NEP is planning to sell off its remaining pipeline asset next year to meet its equity obligations, which will significantly reduce its CAFD and offset the growth generated by repowering projects. Moreover, even if NEP manages to cover its distribution in the near term, it faces billions of dollars in equity obligations in the coming years.</p> <h2>The Way Forward</h2> <p>To address these challenges, NEP will need to either slash its distribution or sell stakes in its underlying assets to raise enough equity capital. However, such a sale would further pressure CAFD per unit, leading to an inevitable reduction in the distribution anyway. This is why I issued a distribution cut alert back in June and downgraded NEP to a sell. That call has paid off as NEP has since declined by more than one third, while my recommended alternative, <a href=\"https://laohu8.com/S/BN\">Brookfield</a> Renewable Partners (BEP), has risen slightly during the same period.</p> <p><figure><img height=\"366\" loading=\"lazy\" src=\"https://static.seekingalpha.com/uploads/2024/10/23/saupload_a6e5c8e7aeff5a3b3cd3aba127c57e4c.png\" width=\"635\"/><figcaption>Data by YCharts</figcaption></figure></p> <p>Today's earnings results were also disappointing, with both EBITDA and CAFD declining year-over-year. Production across the portfolio dropped to 93% of historical productivity during the quarter, compared to 98% year-to-date productivity for its portfolio.</p> <p>On the earnings call, management acknowledged the challenging situation it is in. In the slide deck (slide 18), NEP stated:</p> <blockquote><p><em>NextEra Energy Partners is continuing to evaluate all options to address the remaining convertible equity portfolio financing buyouts and its overall cost of capital. NextEra Energy Partners plans to complete its review by no later than the fourth quarter 2024 call and intends to provide its distribution and run-rate cash available for distribution expectations at that time.</em></p></blockquote> <p>Then during the Q&amp;A session, the CEO hinted at a shift in the distribution policy, stating:</p> <blockquote><p><em>One of the things that we are evaluating is should we deploy more of our capital towards really growing the underlying cash flow of the business and maybe less towards distributions. And so that's one of the things that we're thinking about. Obviously, we have to also address the back-end convertible equity portfolio financings. But what we wanted to do is just be upfront with investors that this review is coming to a conclusion, and we'll be prepared to provide updated feedback on our distribution policy going forward on the fourth quarter call.</em></p></blockquote> <p>Interestingly, NEP recently increased its quarterly distribution, a move consistent with how many companies maintain their policies until making a sudden shift. W. P. Carey (WPC) followed a similar pattern last year, raising its dividend before abruptly announcing a cut as part of its exit from the office space sector. At least in this case, NEP is signaling to unitholders what's likely coming, giving them time to prepare - hence the sharp decline in NEP units today.</p> <h2>Investor Takeaway</h2> <p>What should NEP unitholders do now? First of all, hopefully, you heeded my sell call earlier this year, enabling you to avoid the significant losses suffered since then, as NEP has delivered nearly -35% total returns over that period. If you still hold NEP, however, I would personally exit the position given that it's very risky and speculative right now with an impending distribution cut. Additionally, despite its seemingly cheap valuation based on its distribution and CAFD yields, it trades at roughly nine times its EBITDA, which is not particularly attractive given that recent transactions in the sector have occurred at similar valuations.</p> <p>Additionally, it appears that NEE is shifting away from using NEP as a capital-raising vehicle and instead will likely focus on retaining cash flow to invest in growth projects and acquire drop-down assets from NEE. This strategic shift suggests that a steep distribution cut is coming for NEP. Therefore, I would not be surprised if NEP reduces its distribution by two thirds or more to retain capital and position the business for future growth.</p> <p>Granted, if NEP cuts its distribution by two thirds, the yield would still be close to 5%, with decent growth prospects for NEP moving forward. However, I would not recommend buying NEP, and holding the units remains risky as a steep distribution cut could further depress the unit price. Moreover, the uncertainty about the size of the distribution cut as well as how management will address upcoming equity obligations will continue to weigh on the stock until the policy change is officially announced.</p> <div></div> <p>In my view, Brookfield Renewable Partners (BEP)(BEPC) and Clearway Energy (CWEN)(CWEN.A) still offer better risk-reward profiles in the renewable power space, so I would continue to steer clear of NEP for now and instead invest in these alternatives.</p></body></html>","source":"seekingalpha","collect":0,"html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>NextEra Energy Partners: Here Comes The Distribution Cut</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; 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}\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nNextEra Energy Partners: Here Comes The Distribution Cut\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-10-24 05:01 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4728781-nextera-energy-partners-here-comes-the-distribution-cut><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>NEP units are crashing.Management is signaling a distribution cut.We share how big we think the distribution cut might be and what investors should do now.We also share our top pick in the renewable ...</p>\n\n<a href=\"https://seekingalpha.com/article/4728781-nextera-energy-partners-here-comes-the-distribution-cut\">Web Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","type":0,"thumbnail":"https://static.seekingalpha.com/cdn/s3/uploads/getty_images/175494583/image_175494583.jpg","relate_stocks":{"IE00BMG7P694.USD":"Legg Mason ClearBridge - Global Infrastructure Income A Mdis USD Plus","BK4133":"新能源发电业者","IE00BMG7P587.USD":"LEGG MASON CLEARBRIDGE GLOBAL INFRASTRUCTURE INCOM \"A\" (USD) INC","IE00BMG7P819.SGD":"Legg Mason ClearBridge - Global Infrastructure Income A Mdis SGD-H Plus","IE00BZ18W456.USD":"BNY MELLON GLOBAL INFRASTRUCTURE INCOME \"B\" (USD) INC","IE00BMG7P926.USD":"Legg Mason ClearBridge - Global Infrastructure Income A Acc USD","IE00BZ18W340.USD":"BNY MELLON GLOBAL INFRASTRUCTURE INCOME \"B\" (USD) ACC","NEP":"Nextera Energy Partners","IE00BMQBXF63.USD":"BNY MELLON GLOBAL INFRASTRUCTURE INCOME \"B\" (USD) INC A"},"source_url":"https://seekingalpha.com/article/4728781-nextera-energy-partners-here-comes-the-distribution-cut","is_english":true,"share_image_url":"https://static.laohu8.com/5a36db9d73b4222bc376d24ccc48c8a4","article_id":"2477914599","content_text":"NEP units are crashing.Management is signaling a distribution cut.We share how big we think the distribution cut might be and what investors should do now.We also share our top pick in the renewable power yieldco space.sbayram Back in June, I rated NextEra Energy Partners (NYSE:NEP) a sell, stating that it was highly likely to cut its distribution in the future. On today's earnings call, management strongly hinted that - apparently - this may soon happen, sending NEP units plunging by about 15% as of this writing. In this article, I will discuss the ramifications of this development for investors. The Backstory NEP has been on a rocky journey during the past 13 months. Last September, the unit price plunged sharply on news that management would not proceed with the previously planned drop-down acquisition from its parent, NextEra Energy (NEE), as the partnership's high cost of capital rendered the financials of the deal unsustainable. Since then, NEP has taken steps to address its near-term equity and debt obligations, including selling off its STX pipeline assets to Kinder Morgan (KMI) at a reasonable valuation and refinancing debt that was maturing this year. Additionally, NEP has pursued organic repowering growth projects to fuel EBITDA and cash available for distribution (\"CAFD\") growth. It has also been increasing its distribution each quarter at an annualized pace of approximately 6%. While these actions seemed positive on the surface, several underlying issues indicated that the business model was unsustainable. First, although interest rates have come down somewhat from last year's levels, long-term interest rates and the federal funds rate remain too high for NEP to secure low-cost capital. This limits the company's ability to address upcoming equity and debt obligations without difficult decisions. Moreover, NEP's leverage ratios are approaching downgrade thresholds, leaving little room to take on additional debt. On top of that, NEP's payout ratio on a CAFD basis is in the high 90% range, meaning it's retaining very little equity capital to reinvest in growth. Additionally, NEP is planning to sell off its remaining pipeline asset next year to meet its equity obligations, which will significantly reduce its CAFD and offset the growth generated by repowering projects. Moreover, even if NEP manages to cover its distribution in the near term, it faces billions of dollars in equity obligations in the coming years. The Way Forward To address these challenges, NEP will need to either slash its distribution or sell stakes in its underlying assets to raise enough equity capital. However, such a sale would further pressure CAFD per unit, leading to an inevitable reduction in the distribution anyway. This is why I issued a distribution cut alert back in June and downgraded NEP to a sell. That call has paid off as NEP has since declined by more than one third, while my recommended alternative, Brookfield Renewable Partners (BEP), has risen slightly during the same period. Data by YCharts Today's earnings results were also disappointing, with both EBITDA and CAFD declining year-over-year. Production across the portfolio dropped to 93% of historical productivity during the quarter, compared to 98% year-to-date productivity for its portfolio. On the earnings call, management acknowledged the challenging situation it is in. In the slide deck (slide 18), NEP stated: NextEra Energy Partners is continuing to evaluate all options to address the remaining convertible equity portfolio financing buyouts and its overall cost of capital. NextEra Energy Partners plans to complete its review by no later than the fourth quarter 2024 call and intends to provide its distribution and run-rate cash available for distribution expectations at that time. Then during the Q&A session, the CEO hinted at a shift in the distribution policy, stating: One of the things that we are evaluating is should we deploy more of our capital towards really growing the underlying cash flow of the business and maybe less towards distributions. And so that's one of the things that we're thinking about. Obviously, we have to also address the back-end convertible equity portfolio financings. But what we wanted to do is just be upfront with investors that this review is coming to a conclusion, and we'll be prepared to provide updated feedback on our distribution policy going forward on the fourth quarter call. Interestingly, NEP recently increased its quarterly distribution, a move consistent with how many companies maintain their policies until making a sudden shift. W. P. Carey (WPC) followed a similar pattern last year, raising its dividend before abruptly announcing a cut as part of its exit from the office space sector. At least in this case, NEP is signaling to unitholders what's likely coming, giving them time to prepare - hence the sharp decline in NEP units today. Investor Takeaway What should NEP unitholders do now? First of all, hopefully, you heeded my sell call earlier this year, enabling you to avoid the significant losses suffered since then, as NEP has delivered nearly -35% total returns over that period. If you still hold NEP, however, I would personally exit the position given that it's very risky and speculative right now with an impending distribution cut. Additionally, despite its seemingly cheap valuation based on its distribution and CAFD yields, it trades at roughly nine times its EBITDA, which is not particularly attractive given that recent transactions in the sector have occurred at similar valuations. Additionally, it appears that NEE is shifting away from using NEP as a capital-raising vehicle and instead will likely focus on retaining cash flow to invest in growth projects and acquire drop-down assets from NEE. This strategic shift suggests that a steep distribution cut is coming for NEP. Therefore, I would not be surprised if NEP reduces its distribution by two thirds or more to retain capital and position the business for future growth. Granted, if NEP cuts its distribution by two thirds, the yield would still be close to 5%, with decent growth prospects for NEP moving forward. However, I would not recommend buying NEP, and holding the units remains risky as a steep distribution cut could further depress the unit price. Moreover, the uncertainty about the size of the distribution cut as well as how management will address upcoming equity obligations will continue to weigh on the stock until the policy change is officially announced.  In my view, Brookfield Renewable Partners (BEP)(BEPC) and Clearway Energy (CWEN)(CWEN.A) still offer better risk-reward profiles in the renewable power space, so I would continue to steer clear of NEP for now and instead invest in these alternatives.","news_type":1},"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"}],"hasMoreComments":true,"newsSizeData":{"likeSize":1,"commentSize":1,"repostSize":1,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false}}