Overlooked Utility Spin-off (YieldCo) with Long-Term Contract Sustainability, Partnership Stability, Hidden Earnings Value, and Asymmetric Return Payoff Structure

NYSE:NEP

Jonathan Chang

j.chang@queensu.ca, Queens UniversitySeptember 2015

2.3x Average

(NEP ~3x less than average)

2 |

Source: Company Filings, Company Website, Capital IQ, KeyBanc, Equity Research, Capital IQ

Launched in June 2014, this YieldCo vehicle focuses on

American wind/solar projects with stable, long-term cash flows

Ultimately, despite short-term decline, high quality LT contracted cash flow will attract capital again to space once

investors regain confidence. NEP as best-in-class YieldCo according to KeyBanc/Macquarie.

FACILITY GEOGRAPHIC DISTRIBUTION

Arm

an

do

Pim

en

tel -

Pre

sid

en

t

Mo

ray D

ew

hu

rst

-C

FO

Chairman/CEO of

parent since 06.Previously, CEO at

GE Capital div. &

prior mgmt.

consultant. Harvard

MBA.

With NEE since

08. Prior Deloitte partner and

accounting at the

SEC. Frequent

regulation

speaker.

With NEE since

01. Past executive and partner in

mgmt. consulting

and investment

mgmt. Eng & MSc

from MIT.

Jam

es

Ro

bo

C

hair

man

/CEO 4.2x

2.3x 2.3x

0.7x 0.8x

TERP ABY PEGI NYLD.A NEP

BUSINESS DESCRIPTION

MARGIN OF SAFETY (P/TBV)MANAGEMENT TEAM

Growth-oriented limited partnership formed by NextEra Energy (NEE) that acquires, manages, and owns contracted clean projects.

The contracts provide steady revenues and allow for the distribution of most earnings to shareholders. YieldCos are

thought of as an alternative to REITs or MLPs.

NEP intends to take advantage of favorable trends in the North American energy industry.

Ongoing trend of clean energy projects replacing aging or uneconomic projects.

Demand by utilities for renewable energy to meet state renewable portfolio standard requirements.

Improving competitiveness of clean energy relative to other fuels.

3 |

Source: Company Filings, Equity Research, Spy Hill Research, KeyBanc, Seeking Alpha, Bloomberg, Capital IQ

YieldCo downturn and misunderstood commodity exposure

eclipsing accretive capital allocation and earnings value

NEPs structural advantages allow for stability in its LT equity contribution. In NT, Mr. Market is irrationally evaluating NEP by failing to acknowledge earnings power, accretive acquisitions, and a macro-based overreaction.

MARKET MISPRICING IDENTIFICATION INVESTMENT THESIS OUTLINE

STRUCTURAL COMPETITIVE ADVANTAGES

MACRO-DRIVEN SELL-OFF EV / EBITDA

20

30

40

50

$30

$50

$70

$90

$110

Jun26-'14 Sep26-'14 Dec26-'14 Mar26-'15 Jun26-'15

Crude Oil NEP

Macro-driven

Selloff

NEGATIVE REACTION TO ACCRETIVE DEAL

24x

13x

10x

22x

13x

10x

12x

7x

4x

LTM 15E 16E

Peer Median

Peer Mean

NextEra Energy Partners, LP

HIDDEN VALUE

NEP trades at the low end of peer group

because recent

EBITDA growth has

not been factored

into multiple.

Management guiding future dividend

growth at 12-15%

while EBITDA

expected to grow at

~85% CAGR.

50% drawdown from June 1st provides attractive entry point. Move was

mostly macro-driven and doesnt reflect material change at firm level.

LONG-TERM STABILITY

NEP is sitting on weighted average remaining contract life of 20

years. Counterparties are investment grade or better.

PARTNERSHIP SPONSOR STABILITY

BALANCED JURISDICTION EXPOSURE

NextEra Energy parent maintains majority stake in partnership and

is engaged in success of venture. Directly involved in operations.

Independent power generation facilities are highly regulated.

Exposure throughout North America hedges against political

change in any given area.

Market reacted negatively to NEPs planned 200m public equity issuance to finance $2.1b NET midstream deal (announced in 2Q

results). Also moved in tandum with YieldCo selloff (see

appendix for further explanations).

THE MARKET PERCEPTION

Management and research expects acquisition to be immediately accretive contributing ~$150m EBITDA.

Also announced plan to acquire 149-MW Jericho wind project in Ontario from NEE in 4Q15. NEE is motivated seller for tax

advantage purposes. Acquisition to add $250m to NEP 15 financing needs.

THE ACTUAL PICTURE

4 |

Source: NEP 10k Filing, Capital IQ, Equity Research, NEP 2Q 2015 Release

NextEra Energy Partners provides a compelling valuation story

with consistent upside potential in every methodology

DISTRIBUTION DISCOUNT MODEL

PUBLIC COMPANY COMPARABLES

FUTURE SHARE PRICE ANALYSIS

Market Enterprise LT Growth TEV/Revenue TEV/EBITDA P/E

YieldCo Company Name Cap Value Rate (%) Revenue EBITDA LTM CY+1 CY+2 LTM CY+1 CY+2 LTM CY+1 CY+2

Pattern Energy Group Inc. 1997.4 6904.4 21.8 45.1 47.1 10.4x 8.2x 6.6x 14.4x 10.3x 8.1x 90.1x 27.2x 14.6x

TerraForm Power, Inc. 1971.3 7638.6 13.5 97.3 89.6 15.1x 10.7x 8.6x 21.2x 13.1x 10.3x 67.2x 13.5x 10.8x

NRG Yield, Inc. 1761.6 4931.4 20.0 292.6 480.0 16.7x 10.0x 5.5x 26.9x 12.4x 7.3x NM 75.6x 21.8x

8point3 Energy Partners LP 1732.4 4407.3 14.3 30.9 28.4 16.5x 12.7x 9.1x 27.1x 17.3x 11.7x NM NM 38.6x

Abengoa Yield plc 267.8 775.2 NA NA NA 86.4x 37.4x 10.3x NM NM 10.9x NM 128.9x 81.0x

Overall Mean 32.1x 16.6x 8.0x 22.4x 13.3x 9.7x 78.7x 61.3x 33.4x

NextEra Energy Partners, LP 769.5 3,082.5 34.9 65.7 77.0 9.5x 6.2x 3.7x 12.4x 7.3x 4.2x NM 26.9x 16.9x

Est. 1 Year Growth (%)

Multiple cases based off of three scenarios:

1. 16E NEP Multiple, 2. 15E NEP Multiple, 3. Average between 1 & 2

For the full year 2015, NextEra Energy Partners now expects the portfolio to grow to support a distribution level at an annualized rate of $1.23 per

unit by the end of 2015. NextEra Energy Partners' 2015 expectations

remain unchanged for adjusted EBITDA of $400 million to $440. After

2015, the partnership expects 12 to 15 percent per year growth in limited-

partner distributions for at least the next five years. NextEra Energy

Partners expects 2016 adjusted EBITDA of $710 million to $760 million.

Bear Base Bull

EV / EBITDA 4.2 x 5.8 x 7.3 x

2016E EBITDA $710.00 $710.00 $710.00

Implied Price $22.83 $60.39 $97.95

Current Share Price $23.32 $23.32 $23.32

3-YR Implied Upside -2.1% 159.0% 320.0%

Annualized Return (CAGR) -0.7% 37.3% 61.3%

Gr. Rate 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E Bear Base Bull

Base 13.5% $1.23 $1.40 $1.58 $1.80 $2.04 $2.32 $2.63 $2.98 $3.39 $3.84 15-24E Distribution Value $14.73 $15.82 $17.01

Bear 12.0% $1.38 $1.54 $1.73 $1.94 $2.17 $2.43 $2.72 $3.05 $3.41 Terminal Value $58.85 $66.33 $74.62

Bull 15.0% $1.41 $1.63 $1.87 $2.15 $2.47 $2.85 $3.27 $3.76 $4.33 PV of Terminal Value $32.86 $37.04 $41.67

NPV Sum Total Implied Price $47.59 $52.86 $58.67

Base $15.82 $1.32 $1.41 $1.51 $1.62 $1.73 $1.85 $1.98 $2.13 $2.28 Current Share Price $23.32 $23.32 $23.32

Bear $14.73 $1.30 $1.37 $1.45 $1.53 $1.62 $1.71 $1.81 $1.91 $2.02 3-YR Implied Upside 104.1% 126.7% 151.6%

Bull $17.01 $1.33 $1.45 $1.57 $1.70 $1.85 $2.01 $2.18 $2.36 $2.56 Annualized Return (CAGR) 26.8% 31.4% 36.0%

Present Value of Distributions

Source: Bloomberg, Business Insider, Goldman Sachs, TOWR 10k Filing

Please see Appendix for further valuation models.

Overall recommendation and valuation summary:

NextEra E.P. is a rare opportunity to find such a wide margin of safety

INDICATIVE VALUATION RANGE

$104

$98

$48

$54

$60

$112

$103

$59

$68

$70

$20 $40 $60 $80 $100 $120 $140

EV / EBITDA

EV / Sales

DDM

DCF

FSPA

Non-Annualized Target Price: $60 Valuation Rationale

Bear case applied 2016E low end (710m) EBITDA to 5.8x EV Exit Multiple Bull case applied 2016E high end (760m) EBITDA to 5.8x EV Exit Multiple

Bear case applied 2019E EV Exit multiple to 4.0x EBITDA with 10.02% WACC Bull case applied 2019E EV Exit multiple to 4.5x EBITDA with 9.52% WACC

Bear case applied low end of management guidance of 12% distribution growth Bull case applied high end of management guidance of 15% distribution growth

Bear case applied 10.4x multiple to 2015E Sales Bull case applied 10.8x EV Exit multiple to 2015E Sales

Bear case applied 12.8x multiple to 2015E EBITDA Bull case applied 13.3x multiple to 2015E EBITDA

ANALYST PRICE TARGETSINVESTMENT SUMMARY

NEPs strong cash-flows, and stable dividend earn it a great business model while its relative discount and irrational sell-off provides a compelling entry-point for an underpriced YieldCo.

$47

$40 $38

$34 $33 $31

BMO Credit Suisse KeyBanc Deutsche UBS Macquarie

$31.46 1-YR Implied Price

$37 Average Analyst Price

DCF Target Price $61.16

FSPA Target Price $60.39

DDM Target Price $52.86

Current Market Price $23.32

3-Year Implied Upside 126.7%

Annualized Return (CAGR) 31.4%

Dividend Yield 3.6%

Implied 1-Year Return 34.9%

NextEra Energy Partners (NYSE:NEP)

APPENDIX

7 |

Source: Forbes Investing, Great Speculations, Yahoo Finance, Capital IQ

Appendix I: Macroeconomic Outlook

A further investigation into the YieldCo sell-off

SOLAR-LINKED EQUITY INDEX WHY ARE YIELDCOS DECLINING?

WORLD PRICE OF CRUDE OIL

0.00m

0.25m

0.50m

0.75m

1.00m

$30

$40

$50

$60

$70

$80

$90

$100

Sep9-'14 Dec9-'14 Mar9-'15 Jun9-'15 Sep9-'15

Volume Crude Oil Price

58% Drawdown

0.0m

0.2m

0.4m

0.6m

0.8m

1.0m

1.2m

1.4m

1.6m

1.8m

$20

$25

$30

$35

$40

$45

$50

$55

Sep12-'14 Dec12-'14 Mar12-'15 Jun12-'15 Sep12-'15

Volume Adj Close

44% Drawdown

7 |

At least 15 YieldCos have IPOd since 2013m and raised over $13b. With increased supply, this reduces the

prices/premium that income-focused investors are willing

to pay for this new asset class.

In low interest-rate environment, investors found their

yield attractive. However, if Fed goes through with

expectations and raises rates, YieldCos will face more

competition from government debt and bonds.

Amid economic headwinds in China, looming tax credit

reduction in the United States (2016 end) and depressed oil

market. Oil/solar isnt exact substitutes, but oil is often thought of as a proxy for energy prices.

Solar YieldCos are still new as well as companies focused

on project origination and development. Lack of

sophisticated development yet in terms of transparency

to account for adequate cash flow and reinvestment

needs make it difficult to accurately gauge these vehicles.

SOLAR STOCK SELL-OFF

INTEREST RATE HIKE

INCREASING NUMBER OF YIELDCOS

HIGHER RISK PREMIUM ASSIGNMENT

Source: Bloomberg, Energy Finance Report, Renewable Energy World, Bloomberg, OTC Outlook, Equity Research Reports

Appendix II: Catalysts and Trends

Value-creating events within the near future

UPCOMING TRANSACTION ANNOUNCEMENTS/CLOSES EARNINGS CALLS

RALLY IN INVESTOR SENTIMENTUPDATE ON RENEWABLES TAX EXTENDERS

Closing of 7 natural gas pipelines for $2.1b transaction

should give NEP ability to ship

3b cubic feet shale gas /d.

Closing could trigger change

after equity financing overhang

ceases to exist.

Expected to close mid-Oct.

Further acquisition announcements or transaction

closings could serve as

catalysts.

Purchase of

$2.1B, Aug. 3, 2015

From NET Investment Comp.,

Net Holdings Mgmt, Gutierrez

Ventures, Mission Pipeline

Update to happen in 2nd half of 2015.

Renewable energy developers could take advantage of tax credits through 2016 while an amendment to change the

start construction date does not move forward.

NEP may qualify for increased tax credits as long as the farms begin projects starting in 2016.

Unacknowledged growth will be recognized once they are represented in earnings.

Next call to happen in late October.

Will bring expected EBITDA from acquired projects to the forefront. Management also outlined more

aggressive dividend stance.

NEPs multiple has not yet realized its growth prospects.

Consistent reporting with expectations will help the stock to adjust.

YIELDCO MACRO-DRIVEN SELLOFF

-60%

-40%

-20%

0%

Jun-'15 Jul-'15 Aug-'15 Sep-'15

NEP Peer Group Blended Average

Management has outlined confidence in underlying performance of NEP.

NEP could experience major recovery if macro image fades.

Once investors focus more on firm-level details rather than overall market, the stock will finally see

appreciation.

CONTINUED INSIDER BUYING

September 23 announcement of executive Paul Cutler buying $312k worth in shares through Form 4 filing.

Reported by OTC outlook where it described price expected to reach $40.56 in short-term.

Further buying my management could bolster demand mechanics within market auction system.

9 |

Source: Bloomberg, Energy Finance Report, Renewable Energy World, Bloomberg, Equity Research Reports

Appendix III: Risk Analysis

Evaluating the downside case

RISK DESCRIPTIONS STOCK PRICE MOVEMENT RELATIVE TO INTEREST RATE

DEBT PROFILE

Equity financing sell-off based on this concern. Although overdone,

concern is legitimate since YieldCos need equity to finance growth.

24

26

28

30

32

97

98

99

100

Aug13-'15 Aug20-'15 Aug27-'15 Sep3-'15 Sep10-'15 Sep17-'15

10YR Treasury Rate NEP

DEBT-PAYMENTS DUE IN COMING 5 YEARS

ACCESS TO CAPITAL MARKETS

FAILURE TO MEET EBITDA EXPECTATIONS

INTEREST RATE HIKE

ACQUISITION FAILURE

OPERATIONAL RISK

NEE/NEP CONFLICTS OF INTEREST

Although EBITDA growth appears unrealized, failure to meet

expectations could spook investors who appear to be looking for

further excuses.

NEPs sponsor controls majority rights. Much acquisitions are to be derived from NEE. Conflict of interests between the two companies

could skew results.

Rising interest rate yields would erode NEPs dividend yield and exert downward pressure on valuation. It could also challenge NEPs ability to finance its future acquisitions.

Major equipment failures or unplanned outages could present

downside risk not taken into account.

Failure for Jericho asset purchase or NET midstream deal could have

negative implications. Linked with failure to meet EBITDA expectations.

Many risks have been factored into stock price from pessimistic fears.

Downside case is limited due to recent drop in stock price and wide margin of safety.

$78 $83 $84

$74 $77

2015 2016 2017 2018 2019 Thereafter

$1,440

Maturity Rate (bps) 14A Value

Canyon Wind Term Loan 2030 LIBOR + 225-325 $211

Mountain Praire Senior Secured 2030 656 $282

Genesis Project Note 2038 412.5 $402

Genesis Bank Loan 2019 LIBOR + 120-130 $113

Genesis Senior Secured 2038 560 $280

St. Clair Senior Secured 2031 488.1 $135

Trillium Senior Secured 2033 580.3 $267

Bluewater Term Loan 2032 200-325 $146

10 |

Source: NEP 10k Filing, Capital IQ, Equity Research, Management Guidance

Appendix IV:

Discounted Cash Flow Model

PROJECTED CASH FLOW AND IMPLIED SHARE PRICE

CAGR

2012 2013 2014 | 2015E 2016E 2017E 2018E 2019E 2015-2019

Total Revenue 93.0 142.0 301.0 | 498.9 835.0 1,046.5 1,203.5 1,323.9 27.6%

Annual Growth NA 52.7% 112.0% | 65.7% 67.4% 25.3% 15.0% 10.0%

Cost of Revenue 16.0 26.0 47.0 | 77.9 130.4 163.4 187.9 206.7

EBITDA 72.0 104.0 237.0 | 392.8 657.5 824.0 947.6 1,042.4 27.6%

Less: Depreciation and Amortization 23.0 38.0 75.0 | 142.5 269.1 375.5 475.8 571.8 41.5%

EBIT 49.0 66.0 162.0 | 250.3 388.4 448.5 471.8 470.6

Margin 52.7% 46.5% 53.8% | 50.2% 46.5% 42.9% 39.2% 35.5%

Less: Income Taxes 23.2% (11.4) (15.3) (37.6) | (58.1) (90.1) (104.1) (109.5) (109.2)

Unlevered Net Income 37.6 50.7 124.4 | 192.2 298.3 344.5 362.3 361.4

Plus: Depreciation and Amortization 23.0 38.0 75.0 | 142.5 269.1 375.5 475.8 571.8

Less: Capital Expenditure (710.0) (647.0) (130.0) | (215.5) (360.6) (452.0) (519.8) (571.8) 27.6%

Less: Additions to Intangibles 0.0 0.0 0.0 | 0.0 0.0 0.0 0.0 0.0

Less: Increase in Working Capital (4.0) 21.0 22.0 | 29.6 49.5 62.1 71.4 78.5 27.6%

Unlevered Free Cash Flow -653.4 -537.3 91.4 | 148.9 256.3 330.1 389.8 440.0 31.1%

Annual Growth NA (17.8%) (117.0%) | 62.9% 72.1% 28.8% 18.1% 12.9%

SHARE PRICE SENSITIVITY

Present Value of Equity

PV of 2015 Free Cash Flow Stub 42.7

PV of "2015-2019 Free Cash Flows 1,169.6

PV of Terminal Value (4.2x Exit Multiple) 2,935.0

Enterprise Value 4,147.2

Less: Total Debt (2,294.0)

Less: Preferred Stock 0.0

Less: Minority Interest (119.0)

Plus: Cash and Equivalents 100.0

Equity Value 1,834.2

Shares Outstanding 29.3

Implied Per Share Value 62.62

Current Price 23.32

Premium to Current Price 168.5%

3-YR Implied CAGR (Annualized Return) 39.0%

Equity Value per Share

NYSE:NEP EBITDA Exit Multiple

WACC 3.7x 4.0x 4.2x 4.5x 4.7x

9.27% 51.40 57.48 63.57 69.65 75.73

9.52% 50.31 56.33 62.36 68.38 74.40

9.77% 49.23 55.20 61.16 67.12 73.09

10.02% 48.17 54.07 59.98 65.88 71.79

10.27% 47.11 52.96 58.81 64.66 70.51

11 |

Source: Equity Research Reports

Appendix V: Equity Research Excerpts

A discussion on NEP and outlook for YieldCos

COMPANY EXCERPT

11 |

DEUTSCHE

CREDIT SUISSE

MACQUARIE

KEYBANC

UBS

Recent sell-off in the yieldco space creates a temporary set-back to some of the EM yieldcostories, but project economics in international markets are attractive enough to support the longer

term growth requirements of this sector, in our view.

We continue to see NEP as the highest quality yieldco in the US, and believe its management has many tools to navigate through current rough times. NEP has laid out a clear and logical plan

to deal with the current dislocation in yieldco equity markets

NEP: Best-in-Class YieldCo at Attractive Levels; Upgrade to Overweight

Is the YieldCo Model Broken? We do not think so. Ultimately, we think the high quality, LT contracted cash flows that YieldCo assets generate will attract capital to the space once

again when volatile equity markets stabilize.

Despite the accretive acquisition and guidance increase, shares slumped 7.7% Monday which we attribute primarily to the general YieldCo market weakness where all names looking towards

the tapped-out capital markets have been punished.

Overdone Reaction; We Like NEP. Our take: NEP shares got caught in the ugly cross hairs of an investor base regularly asking for growth through acquisition to take advantage of the attractive

cost of capital and the fatigue of (and now almost Pavlovian response to) selling Yield Cos ahead

of future equity raises. We 'get' the playbook but think the facts are structurally better than the

market response.