What happened
Shares of NextEra Partners (NEP -0.89%) sank again today, falling 10% as of 12:46 p.m. ET.
NextEra Partners is the captive "yieldco" for utility NextEra Energy (NEE -1.36%), designed to raise low-cost capital from the public markets to buy renewable energy projects from its parent company and others.
Yet as we're seeing, when interest rates rise and the price of NextEra Partners' stock and debt fall, NextEra's ability to grow can become blocked. That's why the stock garnered yet another analyst downgrade on Monday, after a few last week.
So what
Today, JPMorgan Chase analyst Mark Strouse issued a note on NextEra Partners, lowering his price target on the stock from $40 to $24. The stock closed on Friday at $22.55, but sank today on the news, even though the analyst's price target is a bit above today's levels. Interestingly, Strouse still has an "overweight" rating on shares.
Although Strouse cited that there is "clear value" in shares today, NextEra has the conundrum of how it can possibly raise capital to fund the acquisition of new solar and wind projects. Until there is visibility on that front, Strouse lowered his price target to his rough estimate of the current portfolio's discounted cash flows.
NextEra Partners owns a variety of solar, wind, and natural pipeline assets under long-term fixed agreements that typically span between 10 and 20 years. Currently, shares are trading at just over half the net asset value of that portfolio today.
Still, while the company trades at less than its net assets, it's never quite clear what it could get from those assets in a run-off or sale scenario. For instance, some of NextEra's long-term assets are the value of its power purchase agreements (PPAs), which are recorded as the discounted value of the estimate future payments under these agreements. But since interest rates have skyrocketed since its last earnings release, it's possible those PPAs are worth less today. And if rates rise further, those fixed-price agreements made in a lower-rate environment can continue to go down.
On the positive side, while some asset values on the balance sheet may be in question, the bulk of NextEra's assets are in its property, plant, and equipment, which are recorded at cost. This is why JPMorgan Chase still sees a solid net positive value here.
Now what
It is hard to know exactly what to do as a NextEra Partners unit holder here, or what to do if you are one of its executives, for that matter. Does management wait and hope interest rates go down? Does it suspend the dividend to begin paying down more of the company's debt?
These are difficult questions to answer. So while there is clear value in the net assets, it's no surprise the uncertainty is causing Wall Street analysts to re-rate shares toward a no-growth "runoff" valuation.
