Yieldco NextEra Energy Partners (NYSE: NEP) is making a surprise move by selling $1.3 billion of Canadian wind and solar projects in Ontario, Canada, to the Canada Pension Plan Investment Board (CPPIB). The sale will bring $582.3 million into NextEra Energy Partners and CPPIB will take on $689 million in debt as part of the deal.
What's unusual about this deal is that NextEra Energy Partners is selling renewable energy assets in hopes of buying different renewable energy assets in the future. In effect, it's betting it can play arbitrage on the price of Canadian renewable energy assets versus the price of U.S. renewable energy assets, which could create value for shareholders in the long term.
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Why NextEra Energy Partners is cashing in now
There were a few notable comments in NextEra Energy Partners' announcement of the sale of the Canadian assets. One was the "10-year average CAFD [Cash Available For Distribution] yield of 6.6 percent," which is an extremely low yield for renewable energy assets today. A low yield means a high sale price, which is why NextEra Energy Partners is selling the assets today.
While CAFD yield isn't a perfect comparison because companies use different amounts of leverage, 8point3 Energy Partners recently sold for a CAFD yield of 9.1% and industry sources say that SunPower's recent residential solar portfolio was sold with an implied yield of 7% to 8%. Based on these comparisons, NextEra Energy Partners is getting a great price for this sale.
Going big in the U.S.
What NextEra Energy Partners is going to do with the money could drive higher returns in the long term. Management said this in the announcement: "[W]e expect the sale of the Canadian portfolio to enable us to recycle capital back into U.S. assets, which benefit from a longer federal income tax shield and a lower effective corporate tax rate, allowing NextEra Energy Partners to retain more CAFD in the future for every $1 invested."
Management's comments about the Canadian sale are once again consistent with the higher yields on U.S. assets that mentioned above. In effect, NextEra Energy is doing arbitrage with renewable energy assets, selling low-yield (high-value) assets in Canada and buying higher-yield (lower-value) assets in the U.S.
A potentially great deal in the long term
NextEra Energy Partners' goal is to generate the highest cash returns possible by investing in renewable energy assets that themselves generate strong yields. By selling Canadian assets at a high price, the company can reinvest that capital into new acquisitions that will likely generate even higher yields. That will drive cash available for distribution higher, allowing for more dividend growth in the long term.
The practice of managing a yieldco's portfolio to maximize returns hasn't been commonplace for yieldcos, partly because many yieldcos were built as vehicles to dropdown a manufacturer's project assets (see TerraFrom Power and 8point3 Energy Partners). But moves like this may become more common as more yieldcos are managed by utilities and third-party asset managers. This sale shows that management of NextEra Energy Partners is managing its portfolio to maximize market opportunities as they arise.
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