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Talkin’ ’bout Green Generation

By Roger S. Conrad on Apr. 2, 2015

Over the past few years, the universe of energy-focused master limited partnerships (MLP) has expanded significantly through a bumper crop of initial public offerings (IPO).

These MLPs took advantage of investors’ appetite for above-average yields, tax advantages and exposure to the shale oil and gas revolution to monetize assets at significant premiums to the valuations achieved within the framework of a larger energy company.

One popular feature in the MLP universe involves a sponsor that sells assets to the partnership over time; these drop-down transactions provide a highly visible pipeline of growth opportunities, which appeals to investors in these uncertain times.

Yieldcos offer exposure to a similar investment thesis: The parent monetizes power-generating assets that operate under long-term contracts, selling them to the yieldco to drive dividend growth and price appreciation. This strategy provides the parent with access to low-cost capital to invest in additional growth projects. Many of these yieldcos focus on renewable energy.

NRG Energy (NYSE: NRG) pioneered this structure, contributing some of its thermal, renewable and conventional generation assets to NRG Yield (NYSE: NYLD), which went public July 2013 at $22.00 per share.

Roughly a year later, NRG Yield issued another 10.5 million common shares to the public at a price of $54.00—an increase of 145 percent. The transaction’s underwriters also exercised their option to purchase an addition 1.575 million shares, bringing the total to 12.075 million shares.

Needless to say, the yieldco has proved popular among investors seeking dividend growth and the safety of long-term contracts. NRG Energy’s success with NRG Yield has prompted a number of renewable-energy developers and generation companies to spin off their own copycats.

NextEra Energy (NYSE: NEE) also took advantage of this craze to spin off NextEra Energy Partners LP (NYSE: NEP), an MLP that has elected to be taxed as a C corporation and provides its sponsor with a vehicle to monetize generation assets.

Given the familial resemblance, we have included Next Era Energy Partners in our table of yieldcos.

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