NextEra Energy Partners LP - Getting the Best Deal It Can

		Global Research		6 July 2016

NextEra Energy Partners LP

Getting the Best Deal It Can

NEP's latest deal illustrates the positive of healthy parent sponsorship

We estimate NEP's latest deal inked to acquire Cedar Bluff and Golden Hills Wind Energy Centers from NEE provides a ~10-11% levered IRR (8-9% unlevered), among the healthiest offered since the YieldCo sector inception. We emphasize this deal is consistent with the ~9% levered IRR implied from the prior Seiling wind drop in Feb, and is substantially better than the 7-8% levered IRRs paid by CAFD to acquire its own projects from SPWR (see link: CAFD's latest drop down). We see the latest drop as illustrating not just NEE health, but importance of parent sponsorship thru the cycle.

Holding company leverage: Defining what the 'true' equity commitment is

Consistent with past drops, the transaction includes core project level debt in the form of $253 Mn in tax equity. However, to fund the remaining $312 Mn equity check, NEP breaks this out with $100 Mn in Holdco term loan, $100 Mn in revolver borrowings and a further $112 Mn in cash on hand. Given the desire to target 3.5x Holdco Debt/CAFD, the latest deal maintains parent leverage intact (when considering just the $100 Mn Term Loan as permanent financing). As such mgmt was clear to emphasize that it (still) maintains $300-400 mn of incremental HoldCo capacity. This implicitly assumes that the use of cash liquidity and revolver capacity is ultimately refreshed (eg- revolver doesn’t 'count'). Bottom line, while borrowing capacity remains, there is a clear use of liquidity for the deal. As of 1Q close, NEP had $325Mn available on its revolver and $133 Mn in cash, suggesting the bulk of its cash liquidity was utilized.

Latest Brookfield interest in TERP has wider pos implications for NEP & others

We emphasize the latest public bid for TERP shares by strategic infrastructure player Brookfield. Beyond the public disclosure of Brookfield interest in shares, acquiring ~25% of shares (23 Mn shares). We emphasize the parallel ongoing process for the privately help GP & LP shares from SUNE reported in the media suggests a potential interest in owning the entire entity. At current values, we estimate a discount rate of at least 7% or tighter, and implied baseline DCF value for NEP well into the 20's/sh.

Valuation: See positive YieldCo backdrop and drop in price as quite supportive

We remain more broadly constructive on the YieldCo sector, seeing NEP as a primary beneficiary of the flight to quality amidst a lower interest rate environment. Valuation is based on a 50/50 weight between 2018E DPS yield and DCF on the current operating portfolio.

Equities

Americas

Electric Utilities

12-month ratingNeutral

12m price targetUS$25.00

PriceUS$30.90

RIC: NEP.N BBG: NEP US

Trading data and key metrics

52-wk rangeUS$40.10-19.91

Market cap.US$0.50bn

Shares o/s16.3m (COM)

Free float100%

Avg. daily volume ('000)32

Avg. daily value (m)US$0.9

Common s/h equity (12/15E)US$2.52bn

P/BV (12/15E)0.9x

Net debt / EBITDA (12/15E)4.2x

EPS (UBS, diluted) (US$)
	12/15E
	UBS	Cons.
Q1	0.06	0.08
Q2	0.08	0.16
Q3	0.01	0.05
Q4E	0.68	0.22
12/15E	1.03	0.46
12/16E	1.04	1.31
12/17E	1.00	1.62

Julien Dumoulin-Smith

Analyst

julien.dumoulin-smith@ubs.com

+1-212-713 9848

Paul Zimbardo

Associate Analyst

paul.zimbardo@ubs.com

+1-212-713 1033

Jerimiah Booream

Associate Analyst

jerimiah.booream@ubs.com

+1-212-713 4105

Highlights (US$m)	-	12/13	12/14	12/15E	12/16E	12/17E	12/18E	12/19E
Revenues	-	142	301	518	764	1,038	1,376	1,898
EBIT (UBS)	-	66	162	254	362	483	632	903
Net earnings (UBS)	-	6	3	75	107	138	178	296
EPS (UBS, diluted) (US$)	-	0.36	0.18	1.03	1.04	1.00	0.99	1.94
DPS (US$)	-	0.00	0.75	1.22	1.38	1.58	1.82	2.09
Net (debt) / cash	-	(1,800)	(1,836)	(1,751)	(2,990)	(4,349)	(6,033)	(8,007)

Profitability/valuation
-
12/13
12/14
12/15E
12/16E
12/17E
12/18E
12/19E
EBIT margin %
-
46.4
53.8
49.1
47.5
46.5
45.9
47.6
ROIC (EBIT) %
-
-
6.4
7.4
6.9
6.6
6.6
7.3
EV/EBITDA (core) x
-
-
2.3
1.2
0.8
0.6
0.4
0.3
P/E (UBS, diluted) x
-
-
NM
30.0
29.8
30.9
31.4
15.9
Equity FCF (UBS) yield %
-
-
16.7
79.8
64.2
88.0
117.2
163.6
Net dividend yield %
-
-
2.2
3.9
4.5
5.1
5.9
6.8

Source: Company accounts, Thomson Reuters, UBS estimates. Metrics marked as (UBS) have had analyst adjustments applied. Valuations: based on an average share price that year, (E): based on a share price of US$30.90 on 05 Jul 2016 18:45 EDT

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This report has been prepared by UBS Securities LLC. ANALYST CERTIFICATION AND REQUIRED DISCLOSURES AT END OF NOTE. UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

Acquisition Details

With the completion of the approximately 285 MW Cedar Buff and Golden Hills Wind Energy System acquisition, NEP will expand its contracted renewables portfolio to around 2,656 MW. Both assets already have long-term power purchase contracts in place and will ensure NEP's currently expected annual distribution growth of 12-15% through 2020.

Cedar Buff Wind Energy System

Located in Ellis, Ness, Rush, and Trego counties in Kansas, Cedar Bluff Wind Energy Center is a 198.7 MW wind generation plant consisting of 111 1.7 MW GE turbines. The project commenced commercial operations in December 2015. The asset is fully contracted under an approximately 20 year power purchase agreement with Westar.

Golden Hills Wind Energy System

Located in Alameda County close to San Francisco, California, Golden Hills Wind Energy Center is a 85.9 MW wind generation plant running on 48 1.7 MW GE turbines. The project also commenced commercial operations in December 2015. The asset is fully contracted under an approximately 20 year power purchase agreement with Commercial offtakers including Kaiser and Google.

Drop Down Math

We include the latest details on the deals announced. Interest Expense only reflects Term Loan at 5%.

Figure 1: Capital Structure for the Latest NEP Drop

Source: Company reports and UBS estimates

NEP: Aversion to Raising Equity Unwarranted?

We remain surprised by the relatively conservative approach to raising equity amidst the nascent willingness to invest. We continue to value NEP shares with a 50% probability to each our DCF and YieldCo methodologies, applying an 8% cost of capital in our DCF approach. Our preferred YieldCo remains NYLD given its more limited premium vs. core DCF value.

Doing the Full IRR

We include the full project specific cash flows for the life of the assets below. We assume a PPA in Kansas will be ~$25/MWH whereas a PPA in California will be $50-60/MWh for wind in our assumptions below, weighted 2/3rds for KS and 1/3 for CA. We attempted to reconcile with the Year 1 CAFD contemplated pre-leverage.

Further, we assume a split in the capacity factors down to reflect a ~40% CF in California for 1/3^rd of the project as well.

Lastly, we emphasize we simplify the PAYGO structure into a simple PMT function on tax equity which is a simplifying assumption. We use this as a broad assumption to reconcile EBITDA and CAFD for the project (using a 9% return over 9 years).

Figure 2: Three Periods of Contracted Wind Projects (Tax Equity Period, PPA-Only Period, Merchant Period)

Source: Company reports and UBS estimates

Putting it all together: Consolidated IRRs

We include our full IRR projections for the drop-down including both levered and unlevered approaches. We caution the levered assumption here only reflects the $100 Mn term loan rather than revolver borrowings. We see the 10-11% levered returns to the $212 Mn in 'equity' contributed to the project as particularly robust relative to recent deals and illustrates continued parent sponsorship. We have not done a further debt paydown assuming the payback of the revolver borrowings.

Figure 3: NEP Consolidated Drop IRRs

Source: Company reports and UBS estimates

Forecast returns

Forecast price appreciation-19.1%

Forecast dividend yield4.5%

Forecast stock return-14.6%

Market return assumption5.6%

Forecast excess return-20.2%

Valuation Method and Risk Statement

Valuation is based on a 50/50 weight between 2018E DPS yield and DCF on the current operating portfolio. Risks to our investment thesis include but are not limited to: 1) corporate conduct as many board members are also on NextEra Energy's board; 2) contract risks as contracted assets comprise all of the portfolio; 3) high reliance on wind power could create variability in generation output and thus potentially negatively affect earnings and distributions; 4) the current state of capital markets that has limited the companies’ flexibility to return excess cash to shareholders; 5) unknown impact from a potential carbon legislation). Other investment risks include abrupt changes in weather patterns, sharp slowdown in economic demand, interest rate risks, and disruption of trading activity in power markets; 6) actual commodity prices differing significantly from our assumptions; 7) political and regulatory intervention to change the structure of competitive markets in response to high power prices and insufficient new build; 8) decrease of Investment Tax Credits and Production Tax credits.

Required Disclosures

This report has been prepared by UBS Securities LLC, an affiliate of UBS AG. UBS AG, its subsidiaries, branches and affiliates are referred to herein as UBS.

For information on the ways in which UBS manages conflicts and maintains independence of its research product; historical performance information; and certain additional disclosures concerning UBS research recommendations, please visit www.ubs.com/disclosures. The figures contained in performance charts refer to the past; past performance is not a reliable indicator of future results. Additional information will be made available upon request. UBS Securities Co. Limited is licensed to conduct securities investment consultancy businesses by the China Securities Regulatory Commission. UBS acts or may act as principal in the debt securities (or in related derivatives) that may be the subject of this report. This recommendation was finalized on: 06 July 2016 07:26 AM GMT.

Analyst Certification: Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers and were prepared in an independent manner, including with respect to UBS, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the research report.

UBS Investment Research: Global Equity Rating Definitions

12-Month Rating	Definition	Coverage¹	IB Services²
Buy	FSR is > 6% above the MRA.	49%	32%
Neutral	FSR is between -6% and 6% of the MRA.	38%	26%
Sell	FSR is > 6% below the MRA.	14%	19%
Short-Term Rating	Definition	Coverage³	IB Services⁴
Buy	Stock price expected to rise within three months from the time the rating was assigned because of a specific catalyst or event.	<1%	<1%
Sell	Stock price expected to fall within three months from the time the rating was assigned because of a specific catalyst or event.	<1%	<1%

Source: UBS. Rating allocations are as of 31 March 2016.
1:Percentage of companies under coverage globally within the 12-month rating category.
2:Percentage of companies within the 12-month rating category for which investment banking (IB) services were provided within the past 12 months.
3:Percentage of companies under coverage globally within the Short-Term rating category.
4:Percentage of companies within the Short-Term rating category for which investment banking (IB) services were provided within the past 12 months.

KEY DEFINITIONS: Forecast Stock Return (FSR) is defined as expected percentage price appreciation plus gross dividend yield over the next 12 months. Market Return Assumption (MRA) is defined as the one-year local market interest rate plus 5% (a proxy for, and not a forecast of, the equity risk premium). Under Review (UR) Stocks may be flagged as UR by the analyst, indicating that the stock's price target and/or rating are subject to possible change in the near term, usually in response to an event that may affect the investment case or valuation. Short-Term Ratings reflect the expected near-term (up to three months) performance of the stock and do not reflect any change in the fundamental view or investment case. Equity Price Targets have an investment horizon of 12 months.

EXCEPTIONS AND SPECIAL CASES: UK and European Investment Fund ratings and definitions are: Buy: Positive on factors such as structure, management, performance record, discount; Neutral: Neutral on factors such as structure, management, performance record, discount; Sell: Negative on factors such as structure, management, performance record, discount. Core Banding Exceptions (CBE): Exceptions to the standard +/-6% bands may be granted by the Investment Review Committee (IRC). Factors considered by the IRC include the stock's volatility and the credit spread of the respective company's debt. As a result, stocks deemed to be very high or low risk may be subject to higher or lower bands as they relate to the rating. When such exceptions apply, they will be identified in the Company Disclosures table in the relevant research piece.

Research analysts contributing to this report who are employed by any non-US affiliate of UBS Securities LLC are not registered/qualified as research analysts with FINRA. Such analysts may not be associated persons of UBS Securities LLC and therefore are not subject to the FINRA restrictions on communications with a subject company, public appearances, and trading securities held by a research analyst account. The name of each affiliate and analyst employed by that affiliate contributing to this report, if any, follows.

UBS Securities LLC: Julien Dumoulin-Smith; Paul Zimbardo; Jerimiah Booream.

Company Disclosures

Company Name	Reuters	12-month rating	Short-term rating	Price	Price date
8Point3 Energy Partners LP¹⁶	CAFD.O	Sell	N/A	US$16.09	05 Jul 2016
NextEra Energy^{2, 4, 5, 6a, 6b, 7, 16}	NEE.N	Buy	N/A	US$130.87	05 Jul 2016
NextEra Energy Partners LP^{2, 4, 6a, 16}	NEP.N	Neutral	N/A	US$30.90	05 Jul 2016
NRG Yield¹⁶	NYLDa.N	Buy	N/A	US$15.33	05 Jul 2016
TerraForm Power, Inc.^{2, 4, 6a}	TERP.O	Sell	N/A	US$10.97	05 Jul 2016