NextEra says recent convertible, bond deals give it flexibility, ample cash to finance growth

By Paul Deckelman

New York, Sept. 26 – NextEra Energy Inc. and its affiliated NextEra Energy Partners LP are “very well-positioned with the financing activities that we have undertaken this year,” the Juno, Fla.-based clean-power generating company’s chief financial officer said Tuesday.

John Ketchum, who holds the CFO post at both NextEra Energy, where he is also executive vice president for finance, and at its master limited partnership unit, told investors at the Wolfe Research Power & Gas Leaders Conference in New York that NextEra has “sufficient cash on hand and proceeds from our convertible preferred and convertible debt offering to finance our growth initiatives in the fourth quarter.”

Three big deals

NextEra spent a busy summer in the capital markets.

In late June, NextEra Energy Partners did a $550 million private placement of 4.5% series A convertible preferred units.

Ketchum told the conference participants this was the “lowest coupon ever in the sector, at 4½%, amongst any MLP or Yieldco.” According to the NEP’s investor presentation prepared for use with Ketchum’s appearance at the conference, the deal provided a low cash cost of funds “that is comparable to Holdco debt.”

Those convertible preferreds cannot be converted to common equity until 2019.

According to its filing with the Securities and Exchange Commission announcing the private placement, the company planned to sell the units to participating investors at $39.2253 apiece. Quarterly dividend payments will be made at $0.4413 per unit each quarter in cash, in kind or a combination.

The preferred units may be converted into common units initially on a one-for-one basis. On that basis, the units convert at an initial 15% premium to the 45-day volume weighted average price of $39.23.

Proceeds would be used by NEP’s NextEra Energy Operating Partners, LP unit to acquire assets and for general partnership purposes.

In early September, NextEra Energy Partners did a $300 million Rule 144A offering of 1.5% convertible senior notes due 2020 – “a very low coupon,” Ketchum said.

The issue priced on Sept 7 with an initial conversion premium of 25%. The deal was also discounted at 99% of par.

Holders could convert all or a portion of their notes at any time prior to maturity into NextEra Energy Partners common units and cash at an initial conversion price of $52.8625. The initial conversion rate is subject to adjustment in certain circumstances and has been structured to assume a 15% annualized growth rate on distributions.

In connection with the offering, NextEra Energy Partners entered into a capped-call transaction with an initial purchaser of the notes, at a lower strike price of $52.8625 and a cap price of $63.4350.

The CFO said that the capped-call structure “gets you both economic and dilution protection.” This was echoed by the investor presentation pointing out that the capped-call “could provide upside to NEP similar to notes being offered with a 50% conversion premium.”

A portion of the proceeds from the convertible debt transaction were slated to fund the potential future acquisition of renewable energy assets either from the company’s affiliated NextEra Energy Resources, LLC entity or from third parties, as well as to fund the capped-call transactions and for general partnership purposes.

Then on Sept. 18, NEP visited the junk bond market, pricing $1.1 billion of new notes in a two-part, quickly shopped transaction consisting of $550 million of 4¼% senior notes due 2024 and $550 million of 4½% senior notes due 2027, both of which priced at par.

Ketchum told the Wolfe conference investors that the straight bond deal was “more of an effort to refinance our $950 million of term loans, then also to take out the $130 million that we had on the revolver.”

He called the deal “historic – it was done at historically low yields for both the 7-year and the 10-year tranche.” He noted that it was 5.5 times over-subscribed.

The investor presentation noted that doing this deal and using the proceeds to take out the credit facility debt maturing in 2018 and 2019, NEP’s HoldCo debt maturity was “pushed out into the middle of the next decade.”

Ample debt-coverage capacity

Ketchum further said that “in terms of financial strength and flexibility, one of the things that’s very different about NEP, particularly when you compare it to other MLPs, is the amortizing nature of the financing structure, obviously with wind and solar projects, we do a lot of project-level amortizing financing through tax equity on wind.”

He said that “you can think of that as about 40% to 50% of the economics coming off a wind farm, and then with our solar projects, we’re about 65 to 70% leveraged – so we have plenty of capacity to service our HoldCo debt, very strong coverage ratios.”

According to the presentation, the company estimates that at the end of the year, it will come in with a debt coverage ratio in the area of 1.2 times.

© 2015 Prospect News.
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