Overlooked Utility Spin-off (YieldCo) with Long-Term Contract Sustainability, Partnership Stability, Hidden Earnings Value, and Asymmetric Return Payoff Structure
NYSE:NEP
Jonathan Chang
[email protected], 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.
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