There are some things that you really like NextEra Energy Partner (New European Commission) 2.93%)including its lofty 13%+ distribution yield and a decade-long streak of annual distribution increases. The truth is, I was tempted to buy it. However, there’s been a big change in the master limited partnership’s (MLP) business position that’s keeping me from pulling the trigger. For that reason, I’d rather keep this renewable energy MLP 10 feet away.

Why does NextEra Energy Partners exist?

Before making a decision to buy or sell NextEra Energy Partners, it is important to understand the purpose of the MLP. On the surface, the answer is to buy and own clean energy investments. While it is indeed true that NextEra Energy Partners does this, that is not really the reason for its existence. It exists because giant utilities NextEra Energy (born 0.94%) created it. But why?

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NextEra Energy is unique in the utility sector because it operates a large regulated utility and a large renewable energy company. The regulated assets grow slowly and reliably, while the clean energy portfolio provides faster growth. Together, these two businesses have enabled NextEra Energy to grow its distribution 10% per year over the past decade, which is incredibly fast for a utility (half that level would be considered pretty good). To fund NextEra Energy’s clean energy investment plans, the company formed NextEra Energy Partners.

The relationship is not unique in any way. Other utilities have done basically the same thing (though not necessarily with clean energy assets). NextEra Energy, as the parent company, sells assets to NextEra Energy Partners, a so-called drop-down transaction, which NextEra Energy Partners finances by selling shares and taking on debt. As long as NextEra Energy Partners’ cost of capital is low enough, the cash flows it buys will be enough to cover its financing costs while paying a solid and potentially growing distribution. All in all, though, NextEra Energy Partners exists to be a source of financing for parent company NextEra Energy.

NextEra Energy Partners’ equation has changed

A few years ago, things were working out very well for NextEra Energy Partners, and the company was able to issue shares and debt at very attractive prices. This allowed NextEra Energy to regularly unload assets. However, as interest rates rose, debt financing became less attractive. And as NextEra Energy Partners’ share price fell, selling shares became less attractive. NextEra Energy Partners simply doesn’t have the same value to its parent company as it once did.

In fact, in 2023, NextEra Energy Partners has scaled back its growth plans. The company reduced its sales growth target, announced plans to sell non-core assets, stated that it would not issue new units until 2027, and its plans to buy more spin-offs from NextEra Energy have been put on hold. The core purpose that NextEra Energy Partners serves seems to have been lost. There are some solutions to this.

NextEra Energy could simply spin off NextEra Energy Partners as a standalone company, which is more complicated than it sounds given the MLP structure. Additionally, the MLP would need to raise enough money to buy out NextEra Energy’s general partner position, which is no easy feat in today’s capital environment. And if that were the route, NextEra Energy Partners could end up cutting its distribution to fund the transaction.

Conversely, NextEra Energy could simply buy NextEra Energy Partners and bring the operation back in-house. That’s exactly what happened with a number of midstream pipeline MLPs not too long ago. NextEra Energy Partners’ shares trade at a high yield and below book value, so this could be an attractive option for parent company NextEra Energy. Notably, NextEra Energy’s yield of 2.6% is far lower than NextEra Energy Partners’, so it would also lose revenue.

NEP data from YCharts

Or, as the simplest solution, NextEra Energy Partners could simply cut its distribution and hold cash until capital markets become more attractive again. While it’s possible that NextEra Energy Partners will continue to muddle through as the MLP has said it will, it can’t go on forever until it becomes a pesky distraction that parent company NextEra Energy no longer wants to deal with. At that point, something will have to happen, and cutting its distribution would be the quickest and easiest course of action.

The likelihood of a bad outcome just seems too great for income investors, and I’m avoiding NextEra Energy Partners for the time being.

It could be a great opportunity, but don’t ignore the risks

Aggressive investors may be willing to take the risk of owning NextEra Energy Partners to earn the extremely high yield. But for me, the risks clearly outweigh the rewards. This is especially true as I try to build a reliable source of income to live off of in retirement. A potentially large distribution cut to a core holding is simply not something I want to willingly commit to. And that is exactly what I think could realistically happen with NextEra Energy Partners in the future.