NextEra Launches Alternative Energy MLP — in Name Only

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Electricity generation firm NextEra Energy Inc. (NYSE: NEE) is spinning off its wholly owned alternative energy subsidiary into a new firm named NextEra Energy Partners L.P. The initial public offering (IPO) is expected to price in a range of $19 to $21 per common unit, and NextEra Energy Partners plans to sell 16.25 million units. NextEra Energy Partners will trade on the New York Stock Exchange under the ticker symbol NEP.

Joint book-running managers and structuring agents for the IPO are Bank of America Merrill Lynch and Goldman Sachs & Co. Morgan Stanley is also acting as a joint book-running manager. The underwriters have a 30-day option to purchase an additional 2.44 million shares at the IPO price, less the underwriter’s discount.

Because a master limited partnership (MLP) structure for alternative energy companies has not yet been approved by Congress, NextEra Energy Partners is organized as a limited partnership under state law, but it will be treated as a corporation for U.S. federal income tax purposes. From the S-1 filing:

Accordingly, we will be subject to U.S. federal income tax at regular corporate rates on our net taxable income. We expect to generate net operating losses (“NOLs”) and NOL carryforwards that we can use to offset future taxable income. As a result, we do not expect to pay meaningful U.S. federal income tax for a period of approximately 15 years. This estimate is based upon assumptions we have made regarding, among other things, [NextEra] Operating LP’s income, capital expenditures, cash flows, net working capital and cash distributions. We may not generate NOLs as expected. Accordingly, our future tax liability may be greater than expected.

As a result of our treatment as a corporation for U.S. federal income tax purposes, distributions we make to holders of our common units will be taxable as ordinary dividend income to the extent of our current and accumulated earnings and profits as computed for U.S. federal income tax purposes. We estimate that we will have limited earnings and profits for eight or more years. As a result, for these years, we expect that a meaningful portion of the distributions received by our unitholders will be treated first as a nontaxable return of capital to the extent of the purchaser’s tax basis in its common units (reducing that basis accordingly) and thereafter as capital gain. However, the tax characterization of our distributions may not be as estimated.

Because NextEra Energy Partners expects little to no earnings for eight years, the usual tax implications of an MLP are substantially changed. If the U.S. Congress ever approves alternative energy MLPs, this company will have head start, but the legislation has languished for more than a year and hope is fading that it will be approved soon.

NextEra Energy shares were trading at $100.34 Thursday morning, up 0.5%, in a 52-week range of $76.91 to $101.50.

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