NextEra Energy Partners (NEP +0.29%) and NextEra Energy (NEE 0.31%) are tied at the hip. But the relationship between the two is vital to understand before you buy NextEra Energy Partners. And, notably, that relationship has just changed in an important way. Here's a quick look at three facts you need to know before putting your money on the line.
1. NextEra Energy Partners is a funding vehicle
NextEra Energy Partners is a limited partnership run by NextEra Energy. The purpose of creating the partnership was to raise capital for NextEra Energy's capital spending efforts. The way NextEra Energy achieves this is by selling, also known as dropping down, assets (in whole or in part) to NextEra Energy Partners. NextEra Energy Partners affords the purchase by issuing debt and new units.
NEP Dividend data by YCharts
In order to attract investors to the new units, NextEra Energy Partners pays a distribution. That distribution has increased at a fairly rapid rate, historically speaking. Since the first distribution was paid shortly after its initial public offering in 2014, it has grown a huge 360%. That, obviously, comes off of a low base. Looking at just the past five years, the distribution has climbed 85%, which is still pretty impressive.
2. Investors aren't as interested in NextEra Energy Partners
Most of that growth, however, took place during a time when investors were particularly hot on renewable power investments. That enthusiasm has cooled off dramatically. NextEra Energy Partners' units have declined by roughly 66% from their 2021 high-water mark.
In fairness, that's not out of line with the decline of the clean energy sector, as seen in the graph above. However, it means that selling units to fund acquisitions is a lot more costly than it once was. The math is pretty simple. When the units were trading at $80 it would require 10 units to be sold to raise $800 (purposely keeping the math simple). Today, with the units trading hands at roughly $30 or so, raising $800 would require the sale of about 27 units. Each additional unit further dilutes existing unitholders and -- perhaps more importantly -- increases the ongoing cost of the distribution.
3. NextEra Energy pulls the rug out from under NextEra Energy Partners
Given the less desirable math mentioned above, the relationship between NextEra Energy Partners and its parent has changed. NextEra Energy no longer sees selling assets to NextEra Energy Partners in quite the same light as it once did. In fact, NextEra Energy has specifically stated that it will pull back on selling NextEra Energy Partners assets because of the MLP's low unit price. At least partly as a result of this, NextEra Energy Partners' distribution growth rate has basically been cut in half.
NYSE: NEP
Key Data Points
There are other issues going on, including convertible financing that is coming due. So the story isn't quite so simple as a parent company choosing to back away from drop down deals. But the big picture for investors doesn't materially change. NextEra Energy Partners is not the same distribution growth machine it once was, and it probably won't be until its unit price perks up again.
Look to the future, not to the past
To sum it all up, NextEra Energy Partners has been a key funding source for its parent, NextEra Energy. It is no longer as valuable as it once was and that has changed the growth trajectory of NextEra Energy Partners' distribution. If you are considering investing in this partnership, you need to understand that the past is no longer a great guide to the future.
