Energy MLP Makes 'Contrarian Play Outside the Renewables Arena'

In an Oct. 22 research note, Raymond James analyst Pavel Molchanov reported that Nextera Energy Partners LP (NEP:NYSE) agreed to acquire the Meade Pipeline for $1.37 billion. Closing is expected in November.

This deal comes at a time when "it seems like a stretch to expect even more multiple expansion [for Nextera], hence our Market Perform rating," Molchanov indicated. Thus, the acquisition is positive in that it does not involve drop-down transactions as most do for the master limited partnership (MLP).

Molchanov described the asset being acquired. Low risk and fee based, the Meade Pipeline holds a 39.2% interest in the Central Penn Line, a 1.7 billion cubic feet per day pipeline in the Marcellus, transporting gas to the Mid-Atlantic markets. Transco, which contracted 100% of the capacity to nine shippers, has a minimum 14-year lease with Meade. The deal will take Nextera into the Marcellus Shale and beyond its current pipeline assets in Texas.

As for the acquisition cost, "the 'headline' valuation is pricey," Molchanov pointed out, with the $1.37 billion translating to 14x EBITDA of $90–100 million. When the proposed pipeline expansion is completed, EBITDA is expected to rise to $105–115 million.

Because Nextera's purchase of Meade Pipeline is not wind and solar energy centered, Molchanov described it as contrarian and wrote that the MLP's management still remains focused on low-carbon energy.

As for drop-downs, Molchanov noted, Q3/19 was the first full quarter with the latest one, a deal for 611 megawatts of alternative energy, two-thirds of it wind, which closed in June. "Distributable cash flow (ex-Desert Sunlight) of $125 million, a perennial source of choppiness, topped our model as well as the previous all-time high of $116 million from Q2/18," the analyst added. Adjusted EBITDA in Q2/19 was $315 million, reflecting a 55% year-over-year increase.

Molchanov wrote that no changes have been made to the years-long, consistent quarterly dividend. Looking forward, annual growth of the distribution still is an estimated 12–15% through 2024 with 2019 likely to fall in the high end.

Nextera's current share price is $50.01.

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Disclosures from Raymond James, Nextera Energy Partners LP, October 22, 2019

ANALYST INFORMATION

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