As NextEra Energy Inc. looks ahead to 2022 deal-making, eyes are on how yieldco subsidiary NextEra Energy Partners and third parties might benefit from initiatives to buy and sell nonregulated renewable assets.
On Nov. 30, NextEra Energy announced its unregulated corporate affiliate NextEra Energy Resources LLC, or NEER, would sell half of its interest in a portfolio of contracted renewable energy projects with a total capacity of about 2,520 MW to the Ontario Teachers' Pension Plan Board for $849 million, adding that it would receive roughly $16 million annual fee income the first year after the deal closes for operations, maintenance and management services.
The pension plan board in September set targets to reduce greenhouse gas emissions from its holdings by 45% by 2025 and 67% by 2030, compared to its 2019 baseline, aiming for net-zero by 2050.
In October, NextEra Energy Partners, or NEP, agreed to acquire the other half-interest in the portfolio of 13 wind and solar facilities, including three with energy storage, from NEER for a total consideration of approximately $849 million.
At the time, NEP said it would contribute its interests in the newly acquired facilities to a new portfolio. Related to the creation of the new portfolio, NEP secured an $824 million convertible equity portfolio financing from funds managed by affiliates of Apollo Global Management Inc.
Under the financing, NEP can periodically buy out the investor's equity interest in the portfolio five to 10 years after the agreement at a fixed pre-tax annual return of about 5.6%. NEP can pay 100% of the buyout price in NEP's common units, issued at no discount to the then-current market price.
"These things have a specific cash flow for a period of time and then it flips around ... they seem to have a lot of front-end loaded cash," Glenrock Associates LLC analyst Paul Patterson said in an interview, specifically noting the convertible equity portfolio financing. "In general the company is very open to trying new things to extract value from its portfolio."
NextEra Energy Chairman and CEO Jim Robo, in the October deal announcement, called the convertible "the lowest cost [financing] in the partnership's history."
NextEra Energy spun off NEP in 2014 in an initial public offering as a vehicle for owning and operating contracted fossil and renewable fuel portfolios. NEP pays U.S. corporate taxes similar to its sponsor, but it focuses on using the revenue from those long-term contracts to pay most cash flow to shareholders instead of the much lower — but often steadier — dividends paid by utilities thanks to their regulatory oversight.
Since its launch, the partnership has grown through a series of asset dropdowns, including from NextEra Energy corporate subsidiary Next Era Energy Resources, despite the broader utility yieldco sell-off that began in 2015.
The October transactions "highlight NEP's ability to acquire NEER and third party assets at attractive multiples ... and its ability to finance the projects with access to low-cost capital sources," analysts at Credit Suisse told clients Oct. 25. "The dropdowns help improve growth visibility, which along with dropdowns from NEER can drive 15% per year distribution growth beyond 2024."
Glenrock's Patterson added he expects NextEra Energy to drop down more similar assets into NEP in 2022, while analysts at Wells Fargo Securities noted that the renewables giant seems to be laser-focused on selling parts of its unregulated portfolio.
"Our sense is that regulated M&A is less of an emphasis than in the past, given 1) accelerating growth and visibility at [NextEra Energy Resources] related to renewables opportunities ... and 2) greater flexibility afforded by the credit rating agencies to scale up the non-utility operations without affecting ratings," they wrote Dec. 1.
Neil Kalton, managing director of utility equity research at Wells Fargo Securities, said in an earlier interview that buyers are paying "attractive" multiples for contracted renewables and that there should be more of those transactions in 2022.