To The Moon

I was struck by something quite unexpected when $NextEra Energy Partners LP(NEP)$ reported a shocking 73% decrease in their EPS for the Six Months Ended June 30 compared to 2023. This caught my interest as most analysts usually focus on Earnings Per Share (EPS) and income numbers when screening stocks.

Inspecting their balance sheet, I stumbled upon something rather intriguing. NEP categorizes their interest expense as "Other Income," a practice uncommon among most companies since it normally goes under “Expenses”. This strongly suggests that their net interest income may have outperformed their interest costs. In my opinion, when this occurs, it should be rightly labeled as "interest income".

However, the twist lies in the fact that the reported number is negative. Consequently, their final net income is also negative, painting a concerning picture of their financial struggles.

Upon further reading their reports, we can see NEP uses the effective interest method to calculate interest expense, factoring future escalating rates and amortizing debt issuance costs.

“Wait, Igor. What does it mean?”

This means the reported interest expense includes not only the interest that NEP has paid but also expenses it will incur later. In other words, the interest expense numbers are not immediate cash outflows, they don’t affect the company’s liquidity or cash flow position. The company’s short-term financial health is not impacted by these expenses even though they are recorded in the report.

“Why is interest expense reported under “Other Income?”

NEP's interest expenses are significantly impacted by the use of financial instruments such as interest rate swaps and mark-to-market accounting. These tools are used to effectively manage the risk of rising interest rates. It is logical for NEP to categorize these items under "Other Income" rather than "Operating Expenses," as they are tied to non-operational financial activities, rather than core operational debt payments. Although, this can distort the company’s financial numbers, particularly EPS.

It can also be risky to calculate dividend payment capacity based on reported earnings since not all interest expenses represent actual cash leaving the company; much of it is associated with mark-to-market adjustments.

“So what metrics reflect an accurate number?”

To get a clearer picture of NEP’s operational performances, we should focus on the following metrics:

• Adjusted EBITDA

• Cash Available for Distribution (CAFD)

• Free Cash Flow (FCF)

• Operating Cash Flow (OCF)

• Debt-to-EBITDA Ratio

• Net Asset Value (NAV) or Book Value per Share

These metrics strip out the non-cash impact of financial instruments and focus on the company’s ability to generate earnings and pay dividends based on its core operations.