About a month ago NextEra Energy (NEE 0.06%) announced that it submitted a confidential draft registration statement for a yieldco vehicle. Basically, it wanted to see if it could file an initial public offering for an MLP-type investment that would own clean-energy assets. Just this week NextEra Energy announced that it now plans to go ahead with an initial public offering of units of NextEra Energy Partners. With that offering investors would have a pure-play, clean-energy income vehicle to fund their retirements, while at the same time owning assets that are saving the environment.
The plan
Under the plan filed with the SEC, NextEra Energy plans to raise up to $50 million by selling common units of NextEra Energy Partners. The company, which was formed this year, operates 10 wind and solar energy projects. Over the past 12 months those assets generated $169 million in revenue.
The idea behind a yieldco vehicle like this is to use the issuance of common units to fund growth as a bulk of the cash flow will pass through to unit holders. It's a concept that has been well received by oil and gas investors as MLPs have become a popular income vehicle for investors seeking income security for retirement. What's different this time is that investors don't have to choose their retirement or the environment as NextEra Energy Partners will only own clean energy assets.
The new vehicle will enable NextEra Energy to build solar plants and wind farms and then sell these assets down to NextEra Energy Partners once the projects are fully contracted for the long term. This arrangement will provide NextEra Energy a new source of growth capital to fund additional clean-energy projects.
First, but not the last
NextEra Energy Partners could actually open up the floodgates of additional yieldco type vehicles. With interest rates still low, and so many Americans heading toward retirement there is a huge market for high yielding stocks. Because of this we're likely to see other utilities with growing renewable portfolios like Exelon (EXC +1.26%) follow suit.
The company's generation business currently plans to invest over $2 billion per year through 2016 just to maintain and grow its generation business. Less than 10% of that capital will be used to grow its clean energy portfolio because the company needs to spend so much on base capex and nuclear fuel just to keep its business going. But that's not stopping the company from looking for growth from the outside as it recently announced it was paying $6.8 billion to buy Pepco Holdings (NYSE: POM).
Photo credit: Exelon
There problem with acquisition-fueled growth is it is adding a lot of debt to Exelon's balance sheet. While Exelon is selling off about a billion dollars' worth of fossil-fuel power plants to help pay for the Pepco Holdings deal, it certainly could benefit from selling some of its wind or solar assets into a yieldco vehicle. The value uplift that comes from the higher valuation investors assign MLPs could provide a nice boost, while the cash influx could help reduce debt levels or fund high-returning growth projects. It's certainly an option that Exelon, and many of its peers, could consider in the future if NextEra Energy Partners finds success in the marketplace.
Investor takeaway
NextEra Energy's new clean energy income vehicle is likely just the first of many for the sector. We could see growth-strapped companies like Exelon following suite as the move could make a lot of sense for it. That's good news for investors as it means they'll have more options to fund their retirement without worrying about funding projects that aren't always environmentally friendly.
