On March 4th, private equity firm KKR & Co. (NYSE: KRR) announced an agreement with NextEra Energy Partners, LP (NYSE: NEP) to buy an equity stake in a newly formed partnership between the companies that owns ten United States wind and solar power farms. KKR will provide $900 million for NEP to buy the portfolio of plants for about $1.02 billion.
NextEra Energy Partners is an indirect subsidiary of NextEra Energy (NYSE: NEE). NextEra Energy, America’s largest power company, formed NEP in 2014 to take advantage of renewable energy trends. NEP focuses on acquiring and managing clean energy projects with stable cash flows stemming from long term contracts to sell power to utility companies. As state and federal regulations surrounding renewable energy emerged in the 1990’s, NEE capitalized on tax credits and utility companies’ needs to meet standards requiring certain amounts of their total energy to be produced renewably.
This deal is not a traditional buyout. Normally, a private equity firm like KKR would buy an entire company and gain control of it. The deal gives KKR 100% ownership of Class B non-controlling shares for a NEP subsidiary. NEP owns 100% of the Class A controlling shares. The capital will allow NEP to buy six plants and recapitalize four of their existing plants. NEP has the option to periodically purchase KKR’s stake in the venture. After the sixth anniversary of the deal, if NEP has not fully executed its buyout option, KKR is then entitled to 99% of the distributable cash flows from the portfolio plants to the partnership. Until then, KKR is entitled to 5% of the cash flows. If certain buyout minimums are not met by NEP within four and a half years, this condition is also triggered. NEP has the option to pay up to 70% of the total buyout amount in its own public shares.
For KKR, this deal poses a lower risk than a traditional buyout. The structure of the deal and its industry, utilities, should in theory better protect KKR’s capital. NEP is also a risk averse business. As the renewables industry grew, NEP’s parent only built new projects when they had customers lined up, and stayed out of debt, unlike competitors. KKR’s head of North American Infrastructure said that all of the plants have “long-term contracts with investment grade customers.” If NEP exercises their buyout rights, KKR should see an annual return of about 8.3%, according to an 8-K filing outlining the details of the deal. KKR’s capital for the deal comes from an undisclosed mix of loans and equity from its $7.4 billion Global Infrastructure fund, which closed in 2018.
This deal provides several strategic benefits for NEP. The agreement gives NEP low cost financing and accomplishes the company’s growth objectives for the year. For the longer term, the deal recapitalizes several of their existing projects and postpones a date which more shares of the company must be sold by. Perhaps the biggest benefit to the deal is how it counters risk stemming from PG&E’s troubles. 18 percent of NEP’s 2018 revenue came from contracts with PG&E, and those contracts could be cancelled during bankruptcy proceedings. By growing production, NEP can lower its overall reliance on its PG&E contracts, mitigating risk that stems from uncertainties around PG&E’s bankruptcy. NEP investors reacted positively to the deal, with shares rising more than four percent by the end of trading on March 4th, while the S&P 500 declined slightly.