To The Moon

$NextEra Energy Partners LP(NEP)$ stock was heavily beaten down after their earnings release where it reported a negative Net Income of -$40 million for 3Q24, which is a 175% drop from 3Q23. Their EPS was also reported in the negative at -$0.43, a 191% decline compared to 3Q23. These are very alarming numbers, and many investors likely rushed to sell their holdings without hesitation.

It is important to note the discussion in the article below published previously, which covers the reliability of Net Earnings and EPS numbers specifically in the case of $NextEra Energy Partners LP(NEP)$ .

• Is NEP lying about its EPS numbers?

By analyzing their EBITDA, we gain a clearer understanding of NEP's impressive operational performance. The company achieved a 3.8% increase in year-to-date (YTD) September 30 figures between 2024 and 2023. Over the last five years, NEP has realized an average EBITDA growth of 12.35% during this same timeframe (YTD September). These robust numbers reflect the success of NEP's strategy, driven by an outstanding 44.22% increase in revenues over the same period since 2019. Clearly, NEP is on a strong upward trajectory with its operations.

It is important to note that the lower growth was primarily caused by the divestiture of the Texas gas pipelines of 1.8 billion.

If they have such strong numbers, why is the stock price dropping so significantly?

The main reason NEP has faced challenges is due to its substantial debt, which currently totals $5.17 billion. The company has a Debt-to-EBITDA ratio of 21.3, indicating an extremely high level of leverage. This suggests it would take NEP approximately 21 years to repay its debt using its current EBITDA, assuming there is no growth or any other changes.

NEP said they plan to complete their review on convertible equity portfolio financing and cost of capital by January 2025. The definition of convertible equity is, in short, investors that provide funds with the option to convert their investment into equity (shares) of the company or a portion of its portfolio at a future date.

If NEP decides to issue more shares to fulfill convertible equity portfolio financing, they would dilute the ownership of existing unitholders (shareholders) and could reduce dividend payments per share unless their cash flow grows proportionally.

Alternatively, they could cut dividends to aid in reducing debt, reinvest in growth, and lower their cost of capital. However, this could generate negative sentiment among investors. According to their latest webcast, management has indicated that this option has been passed around the table. If this happens, it would significantly affect their share price.

Examining NEP’s Cash Available for Distribution (CAD) for the YTD period ending September 30, we observe a reduction of 10.61% to 539 million. Although the average CAD growth for this period over the past five years has been 4.16%, the latest decline raises concerns. Even with the current reduction in CAD, the payout ratio (based on CAD) is 55.33% for 3Q24.

Final Remarks

Management has advised they are increasing their wind repowering target to approximately 1.9 gigawatts of wind projects owned through 2026, which should increase efficiency and improve some of the reported metrics.

Many investors are afraid of dividend cuts due to high debt levels, which heavily punishes the share prices. Everyone is eager to hear what management will announce in January 2025, as this will shape the future of NEP and provide more clarity.

The increasing demand for power in the US has been widely discussed, presenting significant growth opportunities, particularly from the AI power demand.