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NextEra Energy Partners (NYSE:NEP) -6.7% in Monday’s trading as RBC Capital downgrades to Sector Perform from Outperform with a $30 price target, cut from $38, anticipating a challenging road ahead with insufficient growth from wind repowerings and ~$3.7B in looming CEPF liabilities after 2026.
Given a challenging CAFD growth outlook, RBC’s Shelby Tucker believes NextEra Partners (NEP) will not be able to sustain long-term 5%-8% dividend/unit growth, ultimately forcing the partnership to cut its dividend, which prompts the analyst to add a Speculative Risk component to his rating.
Tucker thinks a ~50% cut would reset the payout ratio to below 60%, which helps offset the CEPF liabilities and provides a payout ratio cushion through the late years of the CEPF buyout periods, and it might allow NextEra Energy (NEE) to start using NextEra Partners (NEP) as financing again, albeit at a lower stock price.
Management has pointed to private capital raise as a potential solution, but Tucker says he suspects any deal likely would come at a high cost of capital, and while there is still time until management faces the situation, “we are uncomfortable with the risk relative to the return profile.”