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.[NLINSERT]
1) Doresa Banning compiled this article for Streetwise Reports LLC and provides services to Streetwise Reports as an independent contractor. She or members of her household own securities of the following companies mentioned in the article: None. She or members of her household are paid by the following companies mentioned in this article: None.
2) The following companies mentioned in this article are billboard sponsors of Streetwise Reports: None. Click here for important disclosures about sponsor fees.
3) Comments and opinions expressed are those of the specific experts and not of Streetwise Reports or its officers. The information provided above is for informational purposes only and is not a recommendation to buy or sell any security.
5) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their immediate families are prohibited from making purchases and/or sales of those securities in the open market or otherwise from the time of the interview or the decision to write an article until three business days after the publication of the interview or article. The foregoing prohibition does not apply to articles that in substance only restate previously published company releases.
Disclosures from Raymond James, Nextera Energy Partners LP, October 22, 2019
Analysts Holdings and Compensation: Equity analysts and their staffs at Raymond James are compensated based on a salary and bonus system. Several factors enter into the bonus determination, including quality and performance of research product, the analyst's success in rating stocks versus an industry index, and support effectiveness to trading and the retail and institutional sales forces. Other factors may include but are not limited to: overall ratings from internal (other than investment banking) or external parties and the general productivity and revenue generated in covered stocks.
The analyst Pavel Molchanov, primarily responsible for the preparation of this research report, attests to the following: (1) that the views and opinions rendered in this research report reflect his or her personal views about the subject companies or issuers and (2) that no part of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views in this research report. In addition, said analyst(s) has not received compensation from any subject company in the last 12 months.
RAYMOND JAMES RELATIONSHIP DISCLOSURES
Certain affiliates of the RJ Group expect to receive or intend to seek compensation for investment banking services from all companies under research coverage within the next three months.
Additional Risk and Disclosure information, as well as more information on the Raymond James rating system and suitability categories, is available here.