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NYSE:NEP

Overlooked Utility Spin-off (YieldCo) with Long-Term Contract Sustainability, Partnership


Stability, Hidden Earnings Value, and Asymmetric Return Payoff Structure

Jonathan Chang
j.chang@queensu.ca, Queens University
September 2015

Launched in June 2014, this YieldCo vehicle focuses on


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

BUSINESS DESCRIPTION

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.

MARGIN OF SAFETY (P/TBV)


4.2x

With NEE since


08. Prior Deloitte
partner and
accounting at the
SEC. Frequent
regulation
speaker.

Moray Dewhurst - CFO

Chairman/CEO of
parent since 06.
Previously, CEO at
GE Capital div. &
prior mgmt.
consultant. Harvard
MBA.

Armando Pimentel - President

James Robo Chairman/CEO

MANAGEMENT TEAM

2.3x
With NEE since
01. Past executive
and partner in
mgmt. consulting
and investment
mgmt. Eng & MSc
from MIT.

TERP

ABY

2.3x

PEGI

2.3x Average
(NEP ~3x less than average)

0.7x

0.8x

NYLD.A

NEP

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

2|

YieldCo downturn and misunderstood commodity exposure


eclipsing accretive capital allocation and earnings value
MARKET MISPRICING IDENTIFICATION

INVESTMENT THESIS OUTLINE

MACRO-DRIVEN SELL-OFF
$110

Crude Oil

HIDDEN VALUE
50

NEP

$90

40

$70

Macro-driven
Selloff

$50
$30
Jun26-'14

30
20

Sep26-'14

Dec26-'14

Mar26-'15

Jun26-'15

50% drawdown from June 1st provides attractive entry point. Move was
mostly macro-driven and doesnt reflect material change at firm level.

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.

NEGATIVE REACTION TO ACCRETIVE DEAL

EV / EBITDA
24x

Peer Median
Peer Mean
NextEra Energy Partners, LP

22x

12x

13x 13x
7x

10x 10x
4x

LTM

15E

16E

STRUCTURAL COMPETITIVE ADVANTAGES

THE MARKET PERCEPTION

LONG-TERM STABILITY

Market reacted negatively to NEPs planned 200m public equity

NEP is sitting on weighted average remaining contract life of 20


years. Counterparties are investment grade or better.

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 ACTUAL PICTURE

Management and research expects acquisition to be

PARTNERSHIP SPONSOR STABILITY


NextEra Energy parent maintains majority stake in partnership and
is engaged in success of venture. Directly involved in operations.

immediately accretive contributing ~$150m EBITDA.

BALANCED JURISDICTION EXPOSURE

in Ontario from NEE in 4Q15. NEE is motivated seller for tax


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

Independent power generation facilities are highly regulated.


Exposure throughout North America hedges against political
change in any given area.

Also announced plan to acquire 149-MW Jericho wind project

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

3|

NextEra Energy Partners provides a compelling valuation story


with consistent upside potential in every methodology
DISTRIBUTION DISCOUNT MODEL
Gr. Rate
Base

13.5%

Bear
Bull

2015E

2016E

$1.23

2017E

2018E

2019E

2020E

2021E

2022E

2023E

2024E

Bear

Base

Bull

$14.73

$15.82

$17.01

$1.40

$1.58

$1.80

$2.04

$2.32

$2.63

$2.98

$3.39

$3.84

15-24E Distribution Value

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

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

Present Value of Distributions

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%

PUBLIC COMPANY COMPARABLES


YieldCo Company Name
Pattern Energy Group Inc.
TerraForm Power, Inc.
NRG Yield, Inc.
8point3 Energy Partners LP
Abengoa Yield plc

Market
Cap
1997.4
1971.3
1761.6
1732.4
267.8

Enterprise LT Growth Est. 1 Year Growth (%)


Value
Rate (%)
Revenue
EBITDA
6904.4
21.8
45.1
47.1
7638.6
13.5
97.3
89.6
4931.4
20.0
292.6
480.0
4407.3
14.3
30.9
28.4
775.2
NA
NA
NA

Overall Mean
NextEra Energy Partners, LP

769.5

3,082.5

34.9

65.7

77.0

LTM
10.4x
15.1x
16.7x
16.5x
86.4x

TEV/Revenue
CY+1
8.2x
10.7x
10.0x
12.7x
37.4x

CY+2
6.6x
8.6x
5.5x
9.1x
10.3x

LTM
14.4x
21.2x
26.9x
27.1x
NM

TEV/EBITDA
CY+1
10.3x
13.1x
12.4x
17.3x
NM

CY+2
8.1x
10.3x
7.3x
11.7x
10.9x

LTM
90.1x
67.2x
NM
NM
NM

P/E
CY+1
27.2x
13.5x
75.6x
NM
128.9x

CY+2
14.6x
10.8x
21.8x
38.6x
81.0x

32.1x

16.6x

8.0x

22.4x

13.3x

9.7x

78.7x

61.3x

33.4x

9.5x

6.2x

3.7x

12.4x

7.3x

4.2x

NM

26.9x

16.9x

FUTURE SHARE PRICE ANALYSIS


EV / EBITDA
2016E EBITDA
Implied Price

Bear
4.2 x
$710.00
$22.83

Base
5.8 x
$710.00
$60.39

Bull
7.3 x
$710.00
$97.95

Current Share Price


3-YR Implied Upside
Annualized Return (CAGR)

$23.32
-2.1%
-0.7%

$23.32
159.0%
37.3%

$23.32
320.0%
61.3%

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

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 limitedpartner distributions for at least the next five years. NextEra Energy
Partners expects 2016 adjusted EBITDA of $710 million to $760 million.

4|

Overall recommendation and valuation summary:


NextEra E.P. is a rare opportunity to find such a wide margin of safety
INDICATIVE VALUATION RANGE
Valuation Rationale

Non-Annualized Target Price: $60


FSPA

$60

DCF

$70

$54

DDM

$48

$68

$59

EV / Sales

$98

EV / EBITDA

$103

$104
$20

$40

$60

$80

$100

$112
$120

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

$140

INVESTMENT SUMMARY

ANALYST PRICE TARGETS

DCF Target Price


FSPA Target Price
DDM Target Price
Current Market Price

$61.16
$60.39
$52.86
$23.32

3-Year Implied Upside


Annualized Return (CAGR)
Dividend Yield
Implied 1-Year Return

126.7%
31.4%
3.6%
34.9%

$47
$40

$38

$37 Average Analyst Price


$34

$33

$31

$31.46 1-YR Implied Price

BMO

Credit Suisse

KeyBanc

Deutsche

UBS

Macquarie

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.
Source: Bloomberg, Business Insider, Goldman Sachs, TOWR 10k Filing
Please see Appendix for further valuation models.

APPENDIX
NextEra Energy Partners (NYSE:NEP)

Appendix I: Macroeconomic Outlook


A further investigation into the YieldCo sell-off
SOLAR-LINKED EQUITY INDEX
$55

Volume

Adj Close

$50

1.8m
1.6m
1.4m

$45

1.2m

$40

1.0m

44% Drawdown

0.6m

$30

0.4m

$25

0.2m
Dec12-'14

Mar12-'15

Jun12-'15

0.0m
Sep12-'15

WORLD PRICE OF CRUDE OIL


$100

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.

Volume

Crude Oil Price

0.75m

$80
$70

58% Drawdown

$60

0.50m

$50

0.25m

$40

Dec9-'14

Mar9-'15

Jun9-'15

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

INTEREST RATE HIKE


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.
INCREASING NUMBER OF YIELDCOS

1.00m

$90

$30
Sep9-'14

SOLAR STOCK SELL-OFF

0.8m

$35

$20
Sep12-'14

WHY ARE YIELDCOS DECLINING?

0.00m
Sep9-'15

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.
HIGHER RISK PREMIUM ASSIGNMENT
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.
7|

Appendix II: Catalysts and Trends


Value-creating events within the near future
UPCOMING TRANSACTION ANNOUNCEMENTS/CLOSES
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.

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

Purchase of

$2.1B, Aug. 3, 2015


From NET Investment Comp.,
Net Holdings Mgmt, Gutierrez
Ventures, Mission Pipeline

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.

UPDATE ON RENEWABLES TAX EXTENDERS


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.

RALLY IN INVESTOR SENTIMENT

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.

YIELDCO MACRO-DRIVEN SELLOFF


Jun-'15
0%

Jul-'15

Aug-'15

-20%
-40%
-60%

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

NEP

Peer Group Blended Average

Sep-'15

Appendix III: Risk Analysis


Evaluating the downside case
RISK DESCRIPTIONS

STOCK PRICE MOVEMENT RELATIVE TO INTEREST RATE

ACCESS TO CAPITAL MARKETS

100

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


concern is legitimate since YieldCos need equity to finance growth.

99

FAILURE TO MEET EBITDA EXPECTATIONS

98

Although EBITDA growth appears unrealized, failure to meet


expectations could spook investors who appear to be looking for
further excuses.

10YR Treasury Rate

30
28
26

97
Aug13-'15

24
Aug20-'15

Aug27-'15

INTEREST RATE HIKE


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.

OPERATIONAL RISK
Major equipment failures or unplanned outages could present
downside risk not taken into account.

Sep3-'15

Sep10-'15

Sep17-'15

DEBT PROFILE
Canyon Wind Term Loan
Mountain Praire Senior Secured
Genesis Project Note
Genesis Bank Loan
Genesis Senior Secured
St. Clair Senior Secured
Trillium Senior Secured
Bluewater Term Loan

NEE/NEP CONFLICTS OF INTEREST


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

32

NEP

Maturity
2030
2030
2038
2019
2038
2031
2033
2032

Rate (bps)
LIBOR + 225-325
656
412.5
LIBOR + 120-130
560
488.1
580.3
200-325

14A Value
$211
$282
$402
$113
$280
$135
$267
$146

DEBT-PAYMENTS DUE IN COMING 5 YEARS


$78

$83

$84

2016

2017

$74

$77

$1,440

2018

2019

Thereafter

ACQUISITION FAILURE
Failure for Jericho asset purchase or NET midstream deal could have
negative implications. Linked with failure to meet EBITDA expectations.
2015

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

9|

Appendix IV:
Discounted Cash Flow Model
PROJECTED CASH FLOW AND IMPLIED SHARE PRICE

Total Revenue
Annual Growth
Cost of Revenue
EBITDA
Less: Depreciation and Amortization
EBIT
Margin
Less: Income Taxes
23.2%
Unlevered Net Income
Plus: Depreciation and Amortization
Less: Capital Expenditure
Less: Additions to Intangibles
Less: Increase in Working Capital
Unlevered Free Cash Flow
Annual Growth

2012
93.0
NA
16.0
72.0
23.0
49.0
52.7%
(11.4)
37.6
23.0
(710.0)
0.0
(4.0)
-653.4
NA

2013
142.0
52.7%
26.0
104.0
38.0
66.0
46.5%
(15.3)
50.7
38.0
(647.0)
0.0
21.0
-537.3
(17.8%)

2014
301.0
112.0%
47.0
237.0
75.0
162.0
53.8%
(37.6)
124.4
75.0
(130.0)
0.0
22.0
91.4
(117.0%)

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2015E
498.9
65.7%
77.9
392.8
142.5
250.3
50.2%
(58.1)
192.2
142.5
(215.5)
0.0
29.6
148.9
62.9%

2016E
835.0
67.4%
130.4
657.5
269.1
388.4
46.5%
(90.1)
298.3
269.1
(360.6)
0.0
49.5
256.3
72.1%

2017E
1,046.5
25.3%
163.4
824.0
375.5
448.5
42.9%
(104.1)
344.5
375.5
(452.0)
0.0
62.1
330.1
28.8%

2018E
1,203.5
15.0%
187.9
947.6
475.8
471.8
39.2%
(109.5)
362.3
475.8
(519.8)
0.0
71.4
389.8
18.1%

2019E
1,323.9
10.0%
206.7
1,042.4
571.8
470.6
35.5%
(109.2)
361.4
571.8
(571.8)
0.0
78.5
440.0
12.9%

CAGR
2015-2019
27.6%

27.6%
41.5%

27.6%
27.6%
31.1%

Present Value of Equity


PV of 2015 Free Cash Flow Stub
PV of "2015-2019 Free Cash Flows
PV of Terminal Value (4.2x Exit Multiple)
Enterprise Value

42.7
1,169.6
2,935.0
4,147.2

Less: Total Debt


Less: Preferred Stock
Less: Minority Interest
Plus: Cash and Equivalents
Equity Value

(2,294.0)
0.0
(119.0)
100.0
1,834.2

Shares Outstanding
Implied Per Share Value
Current Price
Premium to Current Price
3-YR Implied CAGR (Annualized Return)

29.3
62.62
23.32
168.5%
39.0%

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

SHARE PRICE SENSITIVITY

NYSE:NEP
WACC
9.27%
9.52%
9.77%
10.02%
10.27%

3.7x
51.40
50.31
49.23
48.17
47.11

Equity Value per Share


EBITDA Exit Multiple
4.0x
4.2x
4.5x
57.48
63.57
69.65
56.33
62.36
68.38
55.20
61.16
67.12
54.07
59.98
65.88
52.96
58.81
64.66

4.7x
75.73
74.40
73.09
71.79
70.51
10 |

Appendix V: Equity Research Excerpts


A discussion on NEP and outlook for YieldCos
COMPANY

EXCERPT
DEUTSCHE

CREDIT SUISSE

MACQUARIE

KEYBANC

Recent sell-off in the yieldco space creates a temporary set-back to some of the EM yieldco
stories, but project economics in international markets are attractive enough to support the longer
term growth requirements of this sector, in our view.

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.
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.

UBS

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.
11 |

Source: Equity Research Reports

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