What NextEra Energy Partners’ Q1 Results Mean For Its Dividend (NYSE:NEP)

Article Thesis

NextEra Energy Partners, LP (NYSE:NEP) is an income pick that has seen its shares come under a lot of pressure over the last year. But the company’s most recent results were far from bad, and the same holds true for NEP’s guidance. The company believes that it will be able to grow its distribution by 6% per year going forward — in combination with a starting dividend yield of 13%, which is quite attractive.

What Happened?

NextEra Energy Partners, LP reported its most recent quarterly earnings results on Tuesday morning. The headline Q1 numbers can be seen in the following screencap:

NextEra Energy Partners’ revenue was down compared to the previous year’s quarter, but the company’s top-line results can experience wide swings on a quarter-to-quarter basis. Ultimately, profits and cash flows are more important for investors, as this is what the company needs to pay its dividends. On the profit side, NextEra Energy Partners outperformed expectations, with a huge GAAP profit beat.

Looking at the company’s results from the past, we see that underperforming sales estimates isn’t something new for the company at all — in fact, NextEra Energy Partners has missed the revenue estimate in 19 out of the last 20 quarters:

Wall Street analysts thus seem to have an apparent tendency to being wrong when it comes to the company’s revenue generation. Why Wall Street analysts don’t realize that they are almost always wrong and why they don’t adjust their models to better reflect the actual results the company generates is unknown to me, but when analysts have an apparent history of being wrong, it is not too surprising to see that they were, once again, wrong when it comes to the Q1 report. I thus wouldn’t read too much into this revenue miss — maybe apart from the fact that analysts seem to stick with their (wrong or faulty) models when it comes to forecasting NEP’s revenues.

Perhaps the most important item from the earnings release is NextEra Energy Partners’ forecast for the dividend growth rate going forward: The company believes that it will be able to grow its dividends at a rate in the mid-to-high single digits going forward, with a target of 6% annual dividend growth. That would be very solid for a company with a yield of 3%, but it is highly attractive for a company with a current dividend yield of 13% — which is the case for NextEra Energy Partners.

NEP’s Underlying Performance

NextEra Energy Partners’ revenue performance didn’t look great at first sight, but let’s delve into the details of the company’s performance during the first quarter.

NextEra Energy Partners, which is controlled by one of the largest utilities in the United States, NextEra Energy (NEE), is generally the slower-growing vehicle among these two. But while NextEra Energy Partners offers a yield of around 13%, the yield for its parent company NextEra Energy is just 3%. A slower growth rate should thus be very much “stomachable” for NEP shareholders, as they get a much stronger yield in return.

During the first quarter, the parent company generated attractive earnings per share growth of 8%, driven by a strong performance from FPL (Florida Power & Light), and NextEra Energy believes that it will continue to grow at a high-single-digit pace going forward.

But NextEra Energy Partners’ growth during the first quarter wasn’t bad, either:

Adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) was up by a little more than 3% compared to the previous year’s quarter, largely driven by new projects and IDR fees, while the pipeline sale of STX Midstream, which was sold to Kinder Morgan (KMI), was a headwind for EBITDA generation. That being said, the pipeline sale nevertheless was a good move by NextEra Energy Partners’ management, I believe, as it has generated significant cash that can be used to strengthen the balance sheet and to take care of some of its Convertible Equity Portfolio Financings, or CEPFs. The company also discusses its plan to handle CEPFs in its earnings presentation:

With the pipeline transactions, NextEra Energy Partners believes it has generated sufficient cash to handle near-term CEPF maturities such as NEP Renewables II. So while the pipeline sale hurt NEP’s EBITDA generation to some degree, NEP still was able to grow overall company-wide EBITDA slightly, and the pipeline sale allowed it to address CEPFs, which should be positive for sentiment — after all, worries about the company’s balance sheet and financial strength are part of the bear thesis when it comes to NextEra Energy Partners.

Looking at how EBITDA translates into cash flow, or cash flow available for distribution, we see the following:

We see that cash available for distribution, with debt service being accounted for, was up $8 million year over year, which pencils out to a growth rate of 5%. To me, this is a rather attractive result, considering the impact of the STX Midstream sale and headwinds from high interest rates. In fact, even if cash available for distribution had been flat, that would not have been a bad result, I believe.

NEP’s Financial Position

NextEra Energy Partners has underperformed substantially over the last year, with fears about the distribution and the balance sheet being key factors. NextEra Energy Partners uses considerable leverage, but that is not irregular for a company with long-lived assets that generate reliable cash flows. Other companies in this space and in similar infrastructure-like industries (e.g., real estate) use considerable leverage as well — it makes sense to partially finance long-lived assets with debt.

NextEra Energy Partners’ balance sheet strength ratios currently look like this:

The three major rating agencies use different metrics to evaluate companies such as NextEra Energy Partners, but the company’s management believes that its credit rating should be stable going forward using all three approaches.

While the year-end target ranges are relatively wide in some cases, such as the HoldCo debt to FFO & interest, where management is forecasting a 4.0x to 5.0x range (a difference of 25%), it looks like the company should be able to avoid downgrades throughout this year — at least if management is correct about where the company will stand at the end of the year. When it comes to some ratios, such as the funds from operations to debt ratio, NEP’s management is forecasting improvements throughout 2024. If management can deliver on this goal, this could ease investor worries about NEP’s financial conditions.

A debt to EBITDA ratio of 5.8x, the reading at the end of 2023, is elevated, and it would be positive for the stock if NEP was able to get that ratio to a lower level. But at still less than 6x, I don’t believe that leverage is at a dangerously high level.

Interest rate movements in 2024 and beyond will be impactful when it comes to NEP, as the company would benefit meaningfully if rates were to head lower in a substantial way. Most analysts and investors still expect several interest rate reductions throughout the next two years, which would help NEP. But since recent inflation readings were far from great, there is somewhat of a macro risk — if inflation remains higher than expected for too long, interest rates will stay higher than what is currently predicted. This, in turn, would be negative for leveraged companies like NEP.

NEP’s Dividends

NextEra Energy Partners has maintained its goal of growing the dividend substantially in the coming years. By the end of the current year, management is expecting a dividend of $3.73 per share, which would be up nicely versus the current level of $3.52. In fact, looking at the current share price of $27.50, the $3.73 year-end dividend forecast implies a dividend yield of around 13.5%, versus a current dividend yield of 12.8%. The forecasted dividend increase in 2024 isn’t set in stone, of course, and neither are the expected dividend increases in 2025 and 2026, but investors who believe in management’s ability to deliver on its goals will be happy to hear that their dividend yield could climb to around 15% over the next two years, calculating with a 6% dividend growth rate.

Is NEP A Buy?

NextEra Energy Partners is an LP, and due to tax reasons, these aren’t suitable for everyone. Some investors prefer to invest in C-corps only, which would make NEP unsuitable.

Regulation, tax credits, and so on also play a role for companies such as NEP, which can be seen as a political risk. The aforementioned interest rate risk should not be neglected, either. Finally, there is the risk of a take-under with unfavorable terms by NextEra Energy — I don’t see this as particularly likely, but it can’t be ruled out.

That being said, NextEra Energy Partners, LP has some quite attractive characteristics — the high yield, forecasted dividend growth, and inexpensive valuation. They mean that NEP could deliver quite compelling total returns in the foreseeable future if everything goes right. While far from a risk-free investment, NEP thus could have merit for someone looking for a currently unloved higher-return, higher-risk pick with a huge yield.