Research Update: NextEra Energy Partners L.P. 'BB' Ratings Affirmed Asset Acquisition Plan; Outlook Stable

November 6, 2020

Rating Action Overview PRIMARY CREDIT ANALYST

- NextEra Energy Partners L.P. (NEP) has announced plans to acquire a 40% interest in a 1 GW Kimberly E Yarborough, CFA portfolio of renewable assets (Pine Brooke) and 100% interest in a solar plus storage project in New York Arizona. (1) 212-438-1089 kimberly.yarborough - NEP also announced a $2 billion convertible equity portfolio financing (CEPF) with certain @spglobal.com infrastructure funds, part of which it will use to fund these acquisitions. SECONDARY CONTACT

- We are affirming our 'BB' issuer credit rating on NEP. Aneesh Prabhu, CFA, FRM - We are affirming our 'BB' issue-level rating on NEP's senior unsecured debt. New York (1) 212-438-1285 - The stable outlook reflects our expectation that the company will continue to operate under aneesh.prabhu long-term contracts while maintaining its ratio of funds from operations (FFO) to debt of around @spglobal.com 20% and debt to EBITDA of around 4.0 - 4.5x over the next three years. RESEARCH ASSISTANT

Sachi A Sarvaiya Mumbai Rating Action Rationale

We expect the acquisitions of the Pine Brooke portfolio and Wilmot solar plus storage project will enhance NEP's contractual profile and geographic diversity. In keeping with its 2020 growth plan, NEP plans to acquire the following assets from NextEra Energy Resources LLC's (NEER) portfolio:

- 40% interest in a 1 GW portfolio of seven renewable assets (Pine Brooke portfolio). NEER has offered a 50% stake in this portfolio to KKR and a 40% stake to NEP; KKR and NEP would pay the same purchase price for their interests. The portfolio includes three wind farms and four solar projects.

Pine Brook Portfolio

Pine Brooke Portfolio Technology Capacity (MW)* State

Blue Summit III Wind 200 TX

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Pine Brook Portfolio (cont.)

Pine Brooke Portfolio Technology Capacity (MW)* State

Taylor Creek Solar 74.5 FL

Harmony Solar 74.5 FL

Ponderosa Wind 200 OK

Sanford Solar 49.4 ME

Soldier Creek Wind 300 KS

Saint Solar 100 AZ

*Represents 100% of project size, NEP owns 40% of the portfolio.

Upon completion, we expect these acquisitions to add $50 million to $55 million to NEP's EBITDA (contributing 6% of total EBITDA on a consolidated basis). The proposed portfolio enhances NEP's current contractual profile. With a remaining life of 19 years, the contract structure is favorable compared to NEP's current remaining contract life of 15 years. This portfolio also improves the company's geographic footprint.

We now assess our ratings on NEP ratings under our corporate methodology. We previously rated NEP under our project developer methodology, which incorporated the weighted average quality of distributions from its subsidiaries. Central to the project developer analysis is our view that a developer holds itself separate from its subsidiaries, viewing them only as economic investments. Embedded in our deconsolidation treatment--where we incorporate only parent-level recourse debt in our financial analysis--was our assessment that the developer will extend limited support to a subsidiary, mostly through capital allocation decisions in the subsidiary's growth investments.

Importantly, if a developer extends sustained support to a subsidiary, we consider it no different from a corporate credit and assess its financial risk profile on a consolidated basis. NEP's increased reliance on CEPFs as a preferred mode of financing growth, in our view, extends absolute support to these investments. We view these instruments as parent level quasi-equity because upon conversion, this would materially dilute NEP's market float. As a result, NEP is now rated under our corporate methodology. Our business risk profile of satisfactory and financial risk profile of aggressive is unchanged.

Even on a consolidated basis, we view convertible equity portfolio financing (CEPF) joint ventures (JVs) as potentially cash flow interruptible in the longer run. NEP expects to fund the acquisitions with proceeds from a new CEPF plus additional tax equity proceeds from its existing Baldwin and Northern Colorado repowering projects

- NEP would place Wilmot into a tax equity with the Baldwin and Northern Colorado repowering wind assets.

- NEP would combine these eight assets with four existing assets, including Genesis, to create a portfolio to support the CEPF investment.

We view CEPF with 100% buyout provision in common units as potentially interruptible to NEP's cash flows in the long run. If NEP is unable to or elects not to buy out the funds' interests, cash distributions flip to the investor (85%-99% to the funds). Currently, we view these financings as favorable when compared to traditional intermediate hybrid financings. In the longer run, however,

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we will continue to monitor NEP's progress on the buyouts as any delay would flip cash flows to the counterparties and would cause significant deterioration in NEP's credit quality. We also think these structures expose NEP to market risks if its unit price is depressed due to conditions unrelated to the company's performance over an extended period of time. While no conversions have yet occurred, we expect the first likely in December 2021. We discuss the proposed terms of the current CEPF below.

2020 CEPF overview. NEP is entering into a $1.1 billion, 10-year CEPF with certain infrastructure funds at a 6.75% unlevered return that it can draw over the next two years. Of the $1.1 billion, NEP expects to draw $750 million in 2020, $350 million in 2021, and an additional $900 million commitment to fund future growth as it expands its portfolio. Along with $125 million of cash available from operations, NEP plans to use these funds for:

- $325 million for the 2020 acquisitions; and

- $550 million to pay off the outstanding revolver balance by year-end.

For the first $1.1 billion draw, NEP expects to sell interest in Genesis, Northern Colorado, Baldwin, Elk City and the proposed acquisitions (Pine Brooke and Wilmot). For the remaining $900 million, it proposes to pledge future assets. The four existing assets contribute about 15% to total EBITDA. These assets were unlevered previously.

Assets

Asset Ownership Asset type MW State

Genesis 100% Solar 250 CA

Northern Colorado 100% Wind 174 CO

Baldwin 100% Wind 102 ND

Elk City 100% Wind 99 OK

We don't anticipate these acquisitions will materially improve the financial risk assessment considering the annual cost of additional CEPFs (around $13 million annually). We anticipate the transactions will add about $26 million to NEP's FFO on completion. We expect additional CEPF costs of $30 million annually related to CEPF distributions and funds borrowed repay the revolver.

Outlook

The stable outlook reflects our expectation that NEP's portfolio will continue to operate under long-term contracts with mostly investment-grade counterparties and generate predictable cash flows to support its holding-company debt obligations. We expect the company to continue to make acquisitions in line with the existing portfolio and support the current business risk profile. We also expect adjusted debt to EBITDA of around 4x over the next three years and adjusted funds from operations (FFO) to debt at around 20%.

Downside scenario

We would consider lowering the rating if adjusted debt to EBITDA increases above 5x consistently and if the ratio of FFO to debt consistently falls below 14% over our outlook period. This could result from significantly lower cash flows from the company's projects as a result of worse operating performance and asset reliability, higher-than-expected operating costs, unfavorable

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weather events, or increased leverage at the corporate level. Given its roughly 40-45% reliance on wind-generation-based cash flows, resource risk could be yet another reason for underperformance that could result in a downgrade.

Upside scenario

Although unlikely at this time, we would consider upgrading NEP if we expect adjusted debt to EBITDA to remain below 4x and if adjusted FFO to debt improves and remains above 22% on a consistent basis. We could also raise ratings over time if the company's portfolio becomes highly diversified, resulting in a better business risk profile. Among other requirements, this would need reduced reliance on distributions from NET Holdings, the largest asset in the portfolio, and a degree of certainty around future convertible equity portfolio financings.

Company Description

NEP is a growth-oriented limited partnership formed by NextEra Energy Resources Inc. (NEER) to acquire, manage, and own contracted energy projects with relatively stable, long-term cash flows. As of Dec. 31, 2019, NEP owned a controlling, noneconomic general partner (GP) interest and a 39.2% limited partner interest in NextEra Energy Operating Co. LP (NEOP). (NEER's interest is 60.8%.) Through NEOP, NEP owns a portfolio of contracted renewable generation assets consisting of wind and solar projects as well as eight contracted natural gas pipeline assets.

NEP has grown since its IPO in 2014 and has continued on this path following the initial rating in mid-2017. NEP's growth has diversified the portfolio both geographically and technologically, and it has increased project-level cash available for distribution and reduced off-taker concentration risk.

Asset footprint, as of December 2019:

- NEP owns about 5,330 megawatts (MW) of renewable-energy generation, mostly under long-term power purchase agreements (PPAs). Of this, 4,575 MW is wind, and the remaining 755 MW is solar. This excludes minority interests.

- NEP also owns eight gas pipelines. Seven in Texas that span about 542 miles, with an aggregate capacity of 4 bcf. About 75% of the 4-bcf capacity is contracted. These are wholly owned by NEP with the exception of a 10% PEMEX ownership of NET Mexico.

- In November 2019, NEP acquired Meade Pipeline Co. LLC, which owns a 39.2% interest in the Central Penn Line, a 185-mile intrastate pipeline with a capacity to transport approximately 1.7 bcf of natural gas per day.

In 2019, the company executed about $2.3 billion of asset transactions:

- 650 MW ownership of generation assets; and

- 39.2% interest in Meade.

Our Base-Case Scenario

- We assume P90 generation levels for Wind assets and P50 for Solar assets.

- For NEP's pipeline assets, our EBITDA expectations are 10% lower compared to management expectations.

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- We include EBITDA from announced acquisitions of Wilmot and Pine Brooke.

- We don't include EBITDA from unidentified acquisitions.

- We assume an EBITDA margin of approximately 65%.

- We consider operating project/financing level gross EBITDA as if fully consolidated, net of share of EBITDA attributable to noncontrolling interests.

- In our financial risk analysis, we consider residual distributions from Mountain View, Shafter, and Meade projects. Accordingly, we do not consolidate related debt. For all other assets, we consider gross EBITDA and consolidate related debt.

- We don't expect NEP to pay taxes through our projected period.

- We do not give any benefit for surplus cash as we expect NEP to use any residual cash for other capital allocation decisions like pursuing growth opportunities and dividends.

- We impute debt for certain CEPF transactions with Blackrock and KKR, which have an option of partial redemption in cash--for 2020 $660 million and for 2021 onward $397 million.

NextEra Energy Partners L.P.--Key Metrics*

2019a 2020e 2021f 2022f

EBITDA (mil. $) 567 831 893 924

Funds from operations (FFO) (mil. $) 355 686 760 780

Debt to EBITDA (x) 7.3 4.0 3.4 3.8

FFO to debt (%) 8.5 20.3 24.5 21.6

*All figures adjusted by S&P Global Ratings. a--actual. e--estimate. f--forecast.

Liquidity

We assess NEP's liquidity as adequate, and we estimate the ratio of NEP's sources to uses of liquidity over the next 12 months to be more than 2x. Even if liquidity were numerically higher, we would not assess liquidity any better than adequate under our criteria, based on the potential for unexpected developments at major subsidiaries to disrupt cash flow.

Principal liquidity sources

- Cash of about $95 million as of September 2020;

- Funds from operations of $725 million; and

- Availability from revolver of about $700 million.

Principal liquidity uses

- Capital expenditures of about $70 million;

- Distributions of about $430-460 million; and

- Working capital outflows of less than $5 million.

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Covenants

The holding company needs to maintain a leverage coverage ratio of less than 5.5 to 1 and an interest coverage ratio of at least 1.75 to 1 to make a distribution. Covenant compliance as of Sept. 30, 2020, was well over this level and gives NEP sufficient cushion under our projected base case.

Environmental, Social, And Governance

NEP's wind and solar power plants give it a competitive edge environmentally because they offer reduced emissions. However, spills or leaks at its gas pipelines could affect biodiversity. Therefore, we view the Meade acquisition as slightly dilutive to NEP's environmental impact. Considering NEP's historical focus mainly on wind and solar, we view this gas pipeline acquisition as contrary to its original strategy. We, don't, however, view this as a change in management's approach to low-carbon energy. This is not the first time NEP has owned a pipeline. In 2014, NEP announced a public strategy to own clean-energy projects, but by the end of 2018, it held interest in seven gas pipelines in Texas.

Significant ownership by parent NextEra Energy Inc. (NEE) raises governance issues, and NEP has taken elaborate steps to distance itself from NEE. Management believes that because NEP's size and scale have grown significantly, it's now independent of NEE. NEP GP ceded control of NEP through certain governance changes in 2017, which included a cutback to 5% of NEP GP's voting power. The board can oversee and direct NEP's operations, policies, strategies, and management without oversight from NEP GP. Moreover, the board comprises seven directors: three NEP GP-appointed directors and four independently elected directors. Although we see the distancing of NEP from NEE as favorable from a governance perspective, many business interrelationships between them remain, including management services, operations and maintenance, and administrative service agreements. There are also no NEP employees, unlike peers such as Atlantica Yield, which has clearly delineated the operations of the yield co from Abengoa. Although third parties can provide such services, we still believe NEP depends on NEER and NEE.

Issue Ratings - Recovery Analysis

Key analytical factors

Our default scenario assumes a 30% drop in distributions from major projects following a combination of deteriorating economic conditions and weaker resource availability for NEP's wind-generation assets. The decreasing demand, coupled with low natural gas prices, result in lower capacity factors and higher maintenance spending for the portfolio. We assume this, in turn depresses NEP's equity price and the CEPF structures flip such that the CEPF investor receives the majority of cash flows from the first CEPF structure. As such, NEP is unable to refinance it $1.25 billion unsecured notes due 2024.

Simulated default assumptions

- Operational cost increases across the portfolio in our hypothetical default. In our distressed scenario, we see the potential for portfolio-wide increases of this order.

- Wind assets will have elevated resource risk. Although it is difficult to assess the result of lower

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wind speeds, we have assumed a reduction in availability assets and resource risks affects EBITDA.

- The combined impact of cost increases and higher resource risk leads to a fall of about 30% in distributions from the projects to NEP (including pipelines).

- As a result of operating interruptions, lower availabilities, and lower production at Eagle Ford, there are heightened refinancing risks at NET Holdings. In all scenarios, we have assumed a default by 2024.

- Because we assume deteriorating financial and operational performance from 2021, we view the company as not funding its future growth plans.

- We assume the $1.25 billion revolver is drawn 85% at the point of default.

- We have assumed a 7x default EBITDA multiple.

- We believe that if the borrower were to default, NEP would still have a viable business model (as opposed to liquidation). This is because there is continued demand for NEP's portfolio of contracted renewable energy assets. Therefore, we believe lenders would achieve the greatest recovery amounts through reorganization of the company rather than liquidation.

- NEP owns the general partner of NEOP and about 35% of NEOP's common equity. NEOP, in turn, owns all of the membership interests in NextEra Energy U.S. Partners Holdings LLC (U.S. Holdings). U.S. Holdings is the holding company for all of NEOP's U.S. assets. The securities and debt instruments listed below were issued by one of these three entities. The priority of the debt is affected by this ownership structure, as well as the guarantees with the debt instruments.

- The senior notes will have priority over the convertible senior notes in the event there is a default by NEOP and NEP, causing both classes of debt to come due at the same time and triggering NEOP's and U.S. Holdings' guaranty obligations as described above. U.S. Holdings' guaranty of the senior notes grants structural priority to the holders of those notes over the holders of convertible senior notes, which do not have the benefit of a U.S. Holdings guaranty. As such, we assume the $300 million convertible notes are converted in 2020, as they come due. In order for priority to matter, both NEOP and NEP have to be in default at the same time.

- Although it is theoretically possible, under the current capital structure there is no practical situation in which NEP could default and not NEOP.

- NEP's convertible notes have now converted to equity and are no longer considered. When NEP issued preferred units to investors, NEOP issued back-to-back preferred units to NEP. As with the convertible notes, NEP's payment obligations are paid through the proceeds of NEOP's intercompany obligations. For all practical purposes, a failure to pay under the preferred notes would be the result of a failure to pay at NEOP.

Simplified waterfall

- Our recovery analysis assumes a gross enterprise value of about $4.26 billion, based on emergent projected EBITDA of about $600 million. After reducing the emergence enterprise value by 5% for administrative expenses, there is $4 billion remaining enterprise value.

- Net enterprise value (after 5% administrative costs): $4 billion.

- Senior secured claims: $1.1 billion.

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- Recovery expectation: 90%-100%.

- Senior unsecured claims: $2.4 billion.

- --Recovery expectation: capped at 65% (higher half of range). It is likely that recovery on unsecured debt would be higher based on unsecured obligations of about $2.4 billion. However, we cap it at '3' (meaningful recovery) per our criteria.

Ratings Score Snapshot

Issuer credit rating: BB/Stable/--

Business risk: Satisfactory

- Country risk: Very low

- Industry risk: Moderately high

- Competitive position: Satisfactory

Financial risk: Aggressive

- Cash flow/leverage: Aggressive

Anchor: bb

Modifiers

- Diversification/portfolio effect: Neutral (no impact)

- Capital structure: Neutral (no impact)

- Financial policy: Neutral (no impact)

- Liquidity: Adequate (no impact)

- Management and governance: Fair (no impact)

- Comparable rating analysis: Neutral (no impact)

Related Criteria

- Criteria | Corporates | General: Corporate Methodology: Ratios And Adjustments, April 1, 2019

- Criteria | Corporates | General: Reflecting Subordination Risk In Corporate Issue Ratings, March 28, 2018

- General Criteria: Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017

- Criteria | Corporates | General: Recovery Rating Criteria For Speculative-Grade Corporate Issuers, Dec. 7, 2016

- Criteria | Corporates | General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014

- Criteria | Corporates | Industrials: Key Credit Factors For The Unregulated Power And Gas Industry, March 28, 2014

- General Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013

www.spglobal.com/ratingsdirect November 6, 2020 8 Research Update: NextEra Energy Partners L.P. 'BB' Ratings Affirmed Asset Acquisition Plan; Outlook Stable

- Criteria | Corporates | General: Corporate Methodology, Nov. 19, 2013

- General Criteria: Methodology: Industry Risk, Nov. 19, 2013

- General Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities, Nov. 13, 2012

- General Criteria: Principles Of Credit Ratings, Feb. 16, 2011

Ratings List

Ratings Affirmed

NextEra Energy Partners LP

Issuer Credit Rating BB/Stable/--

NextEra Energy Operating Partners, LP

Senior Unsecured BB

Recovery Rating 3(65%)

Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of RatingsDirect at www.capitaliq.com. All ratings affected by this rating action can be found on S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column.

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