NextEra Energy Partners LP : Fitch NEP Ratings Affirmation Report

NextEra Energy Partners, LP

Fitch Ratings rates the Issuer Default Ratings (IDR) of NextEra Energy Partners, LP (NEP) and its subsidiary, NextEra Energy Operating Partners, LP (NEP Opco) at 'BB+' with a Stable Rating Outlook. Due to strong legal ties, the IDRs of the two entities are the same. Fitch rates the senior unsecured notes at NEP Opco at 'BB+'/'RR4'. The 'RR4' denotes average recoveries in an event of default. The senior unsecured notes are absolutely and unconditionally guaranteed by NEP. The notes also have an upstream guarantee from NextEra Energy US Partners Holdings, LLC (US Holdings), which is a subsidiary of NEP Opco. US Holdings is the borrower on the revolving credit facility, which is guaranteed by NEP Opco.

NEP's ratings are driven by relatively stable cash flows generated by its portfolio of long-term contracted wind, solar and natural gas pipeline assets, strong asset and geographic diversity, and sponsor affiliation with NextEra Energy, Inc. (NextEra; A-/Stable), which is the largest renewable developer in the U.S. NEP's ratings also take into account the financial complexity and structural subordination of holding company (holdco) debt resulting from limited recourse project debt financings, tax equity and convertible equity portfolio financing structures deployed by the company across its project subsidiaries.

The ratings also reflect management's commitment to manage holdco debt/parent-only FFO ratio in a 4.0x-5.0x range. Although the leverage ratio exceeded this range in 2019, partly driven by bankruptcy implications of one of its key offtakers, Pacific Gas & Electric Company (PG&E), and the timing of the Meade Pipeline Co. LLC acquisition, certain executed and planned actions by management should bring 2020 leverage below the target range.

Fitch expects NEP's holdco FFO leverage ratio to range 3.5x-3.7x over 2020-2022. Fitch does not expect coronavirus concerns to have a material impact on NEP's operations and access to capital due to contractual nature of its portfolio.

Key Rating Drivers

Contractual Cash Flows and Asset Diversity: Fitch favorably views NEP's portfolio of wind, solar and natural gas pipeline assets, which have long -termofftake arrangements with creditworthy counterparties and minimal exposure to either volumetric or commodity risks. As of Dec. 31, 2019, the renewable energy and pipeline projects had a total weighted average remaining contract term of approximately 16 years.

The distributions that NEP receives from its project subsidiaries are well -diversified. The distributions are split as approximately 51% from wind assets, 24% from solar and 24% from natural gas pipeline assets, based on 2020 run rate project level cash available for distribution (CAFD). Although the solar portfolio is largely California based, wind assets have a wide geographic footprint, which mitigates the CAFD exposure to the intermittency of wind resource in any one region.

The November 2019 acquisition of Meade Pipeline, which owns an approximately 39.2% ownership interest in the Central Penn Line, has further diversified NEP 's portfolio and modestly reduced its reliance on wind. Overall, the portfolio derives 37% of its CAFD from Western U.S., 15% from Midwest, 16% from South, 25% from Texas and 7% from the Northeastern U.S.

The concentration risk of the portfolio has materially decreased since its IPO. NEP has 46 operating projects compared to 10 in 2014. The top five projects contribute 41% of CAFD versus 84% at IPO. The top five projects include two Texas pipelines, Meade Pipeline, Genesis solar and Desert Sunlight solar projects.

Corporates

Electric-Corporate

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Ratings

Last Rating

Rating Type Rating Outlook Action

Long-Term BB+ Stable Affirmed

IDRSept. 15,

2020

Click here for full list of ratings

Applicable Criteria

Corporate Rating Criteria (December 2020) Corporate Hybrids Treatment and Notching Criteria (November 2020)

Parent and Subsidiary Linkage Rating Criteria (August 2020)

Corporates Notching and Recovery Ratings Criteria (October 2019)

Related Research

Fitch Affirms NextEra Energy Partners at 'BB+'; Outlook Stable (September 2020)

Analysts

Shalini Mahajan

[phone]

Ivana Ergovic

[phone]

Rating Report │ December 22, 2020

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Robust Outlook for Wind and Solar Generation: Fitch believes improving economics, customer demand for cleaner generation and state renewable policy standards (RPS) will continue to drive wind and solar generation in the U.S. The recent extension of Production Tax Credits for wind projects that begin construction in 2020 at a rate of 60% is expected to support continued wind development until 2024.

As a result, NEP should find no scarcity of renewable assets to acquire from third parties or its sponsor, NextEra, which has more than 15 GW of renewables backlog. Fitch believes NEP can meet its 12%-15% unit LP distribution growth guidance through 2024 and continue to have a competitive cost of capital.

Increased Complexity with CEPF financings: NEP is increasingly reliant on convertible equity portfolio financings (CEPF) to finance its growth and has, since 2018, entered into five such transactions with large institutional investors to raise approximately $3.7 billion in total proceeds. The institutional investor pays NEP an upfront amount in exchange for an equity interest in a portfolio of assets. The investor typically receives a small proportion of distributions from the portfolio for three to six years, which represents a low coupon of between 1.0%-2.5%.

NEP has the option to buy out the investor for a combination of equity and cash at a fixed return or else the cash from the portfolio flips to the investor. The most recent CEPF announced in November 2020 allows NEP to buy out the investors' equity interest at a fixed 6.75% pretax annual return over 5-10 years with NEP having the right to pay 100% of the buyout mount in NEP units.

Fitch views CEPFs as an efficient way for NEP to issue equity, layer in equity issuances over time and limit its exposure to any underperformance of the asset portfolio. A competitive cost of capital is critical to fund acquisitions to meet NEP's 12%-15% distribution growth rate target, which is fairly aggressive compared with the growth rate targeted by its peers.

However, the increased use of CEPFs has added financial complexity to the organizational structure and makes NEP reliant on the stability of capital markets and strength of its unit price to execute the buyouts in a timely and cost-effective manner. While NEP has the ability to issue non-recourse project debt to fund the investor buyout in cash as a significant amount of assets in the CEPFs are unencumbered, doing so will negatively affect parent FFO. Fitch believes it will be prudent for management to maintain sufficient headroom in its holdco leverage metrics to absorb the resulting leverage creep.

TargetCapital Structure: The ratings of NEP and NEP Opco reflect the structural subordination of their debt to the limited recourse debt or tax equity at the project level. The project debt for renewable projects is typically sized to yield a debt service coverage ratio (DSCR) greater than

1.2 and generate a low 'BBB-'/'BBB' rating. The debt typically matures within the expiration date of the long-term contracts on any project. Most recent DSCRs provided to Fitch by NEP indicate that all projects with limited recourse project debt financings are performing well in excess of their DSCR thresholds.

At the holdco level, management has a target of maintaining holdco debt/parent-only FFO ratio in the 4.0x-5.0x range. Fitch defines parent only FFO as run rate project distributions less holdco general and administrative expenses, fee for management service agreement, credit fees and holdco debt service costs. In its calculation of holdco debt, Fitch includes all debt held at intermediate holding companies.

At present, this adjustment includes $205 million of holdco financing at STX Holdings as well as a $270 million revolver upon draw, which is expected to fund the cash portion of the buyout for CEPF-4. Fitch assumes NEP will issue nonrecourse project debt at the asset level to fund the cash buyout portions of other CEPFs, which is not included in our holdco debt calculation.

Fitch expects holdco leverage to be in the 3.5x-3.7x range in 2020-2022. This reflects CAFD growth from 2019 acquisitions, conversion of $300 million convertible units and $183 million of preferred units in 2020 and use of available cash and other capital allocation decisions to bring down the revolver borrowings.

Strong Sponsor Support: NEP benefits from its affiliation with NextEra, which is the largest renewable developer in the U.S. Aside from the dropdown of 990MWs at IPO, NEP has

NextEra Energy Partners, LP
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purchased approximately 4.0GWs of additional wind and solar assets from NextEra. NextEra has demonstrated other forms of sponsor support such as the structural modification to the incentive distribution rights fee structure executed in the fourth quarter of 2017, which lowered NEP's cost of equity and made future acquisitions more accretive to LP unitholders.

NextEra provides to NEP its management, operational and administrative services via various service agreements and also financial management services through a cash sweep and credit support agreement. These agreements will continue to exist subject to the determination by NEP Board. The management service agreement (MSA) between NextEra and NEP has a 20- year contract life and cannot be terminated, except for cause. However, NEP 's board will have the ability to oversee the MSA.

Slippage in Counterparty Credit Quality: NEP's portfolio of assets consists of long-term contracted projects with credit worthy counterparties. The weighted average counterparty credit is 'BBB', based upon Fitch and other rating agencies' ratings. However, the average counterparty rating has declined from 'A-' since 2017, which is a concern. The decline has been driven in large part due to the downgrade in ratings for the California investor-owned utilities. PG&E and Southern California Edison Company comprise 24% of expected 2020 run rate CAFD. The ratings for Petroleos Mexicanos (Pemex), which comprises 10% of expected 2020 run rate CAFD, have also declined to 'BB-'/Stable from 'BBB+'/Stable in 2016.

NEP's Structural tax Advantages: Even though NEP is a C corporation for U.S. federal income tax purposes, it is not expected to pay meaningful federal income taxes for at least 15 years because of NOLs generated through modified accelerated cost recovery system depreciation benefits. NEP distributions up to an investor's outside basis are expected to be characterized as non-dividend distributions or return of capital for at least the next eight years. This makes NEP competitive to master limited partnerships as a yield plus growth vehicle.

Financial Summary

($ Mil., as of Dec. 31)	2016	2017	2018	2019
Gross Revenue	715	807	771	855
Operating EBITDAR	516	533	493	574
Cash Flow from Operations	331	413	340	325
Capital Intensity (Capex/Revenue) (%)	39.6	43.2	3.2	10.9
Total Adjusted Debt with Equity Credit	3,754	4,653	3,752	4,371
FFO Fixed-Charge Coverage (x)	2.8	3.4	2.4	1.5
FFO Leverage (x)	7.1	8.1	5.8	4.0
Total Debt with Equity Credit/Operating EBITDA (x)	7.2	8.6	7.5	7.9

Source: Fitch Ratings, Fitch Solutions.

Rating Derivation Relative to Peers

Fitch views NEP's ratings to be positively positioned compared to those of Atlantica Sustainable Infrastructure Plc (AY; BB/Stable) and Terraform Power Operating, LLC (TERP; BB-/Stable) due to favorable geographic exposure, long-term contractual cash flows with minimal regulatory risk, and association with a strong sponsor. These factors more than offset NEP 's relative higher leverage, aggressive distribution growth strategy and weaker asset composition owing to a larger concentration of wind assets.

All three have strong parent support. Fitch considers NEP best positioned owing to NEP's association with NextEra, which is the largest renewable developer in the U.S. This provides visibility to NEP's limited partnership distribution per unit growth targets, which at 12%-15% are more aggressive than those of AY (8%-10%) and TERP (5%-8%). TERP benefits from having Brookfield Asset Management (BAM) as a sponsor. Algonquin Power & Utilities Corp. (BBB/Stable) has 44.2% ownership interest in AY and could participate in future equity offerings, potentially increasing its ownership interest in AY up to 48.5%.

NextEra Energy Partners, LP
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AY's portfolio benefits from a large proportion of solar generation assets (68% of total MWs) that exhibit less resource variability. In comparison NEP's portfolio consists of a large proportion of wind MWs (84% of power generation portfolio). TERP's utility scale portfolio consists of 41% solar and 59% wind. NEP's concentration in wind is mitigated to certain extent by its diverse geographic footprint Fitch views NEP's geographic exposure in the U.S. (100%) favorably as compared to TERP's (68%) and AY's (30%). AY's long-term contracted fleet has a remaining contracted life of 18 years, higher than NEP's 16 years and TERP's 13 years.

NEP's forecasted credit metrics are stronger than TERP's and comparable with AY's. Fitch forecasts NEP's holdco debt to parent-only FFO ratio to be between 3.5x-3.7x over 2020-2022 compared with mid to high 5.0x for TERP and mid to high 3.0x for AY.

Fitch rates NEP, AY and TERP based on a deconsolidated approach since their portfolio comprises assets financed using non-recourse project debt or with tax equity. Fitch's Renewable Energy Project Rating Criteria uses one-year P90 as the starting point in determining its rating case production assumption. However, Fitch has used P50 to determine its rating case production assumption for NEP, AY and TERP since they own a diversified portfolio of operational wind and solar generation assets.

Fitch believes asset and geographic diversity reduces the impact that a poor wind or solar resource could have on the distribution from a single project. Fitch has used P90 to determine its stress case production assumption. If volatility of natural resources and uncertainty in the production forecast is high based on operational history and observable factors, a more conservative probability of exceedance scenario may be applied in the future.

Rating Sensitivities

Factors that Could, Individuallyor Collectively, Lead to Positive Rating

Action/Upgrade

• NEP's partnership agreement requires a substantial portion of upstream distribution from NEP Opco to be distributed to its unitholders. In addition, the structural subordination of the holdco debt to the non-recourse project debt, tax equity and convertible equity portfolio financings caps the IDR to 'BB+'.

Factors that Could, Individuallyor Collectively, Lead to NegativeRating

Action/Downgrade

• Growth strategy underpinned by aggressive acquisitions, addition of assets in the portfolio that bear material volumetric, commodity or interest rate risks;
• Material underperformance in the underlying assets that lends variability or shortfall to expected cash flow for debt service;
• Lack of access to equity markets to fund growth that may cast uncertainty regarding NEP's financial strategy;
• Higher than expected use of cash to fund the buyout of investors in CEPFs;
• Distribution payout ratio approaching or exceeding 100%;
• Holdco leverage ratio exceeding 5.0x on a sustainable basis.

Liquidity and Debt Structure

Adequate Liquidity: NEP significantly improved its liquidity position through upsizing its credit facility in May 2019 to $1.25 billion from $750 million. The upsized facility provides flexibility for NEP to finance acquisitions partly through revolver borrowings, which can be subsequently termed out through equity and debt capital market issuances. In February 2020, NEP extended the maturity date of the revolving credit facility to February 2025 from February 2024.

As of Sept. 30, 2020, NEP had $550 million drawn on its revolving credit facility and approximately $114 million LOC were issued. NEP plans to use a portion of the $750 million proceeds from the most recent CEPF to repay the revolver borrowings. Per the terms of the CEPF, NEP is expected to draw an additional $350 million by the second quarter of 2021.

NextEra Energy Partners, LP
Rating Report │ December 22, 2020	fitchratings.com	4