REITs for renewables: Wind, solar farms put into new companies called yieldcos
You can now fit a wind or solar farm into your portfolio, even if your portfolio isn't exactly vast.
Energy companies are wrapping renewable energy projects and other power-related assets that generate steady cash into new companies they hope attract investors hunting for dividends.
In an unfortunate victory for corporate speak, they are called yieldcos. They're the electric power industry's answer to real estate investment trusts, which distribute rental income to investors, and master limited partnerships, which distribute income from oil and gas pipelines to investors.
Yieldcos aim to distribute most of the proceeds from generating or delivering electricity to shareholders through a steady stream of dividends. They try to grow the dividend by buying more power projects.
Analysts say they are a relatively safe way to invest in renewable energy - much safer, for example, than buying shares in notoriously volatile solar panel makers. Warren Buffet agrees. He's invested US$15 billion in the same type of wind and solar projects that yieldcos own, and he plans to double that amount.
But analysts caution there are risks for yieldco investors because their popularity has inflated share prices and the concept is so new.
"They are new types of companies, so we have very little visibility into what they might evolve into in the future," says Mihoko Manabe, an analyst at the credit rating agency Moody's.
NRG Yield, which was created by the power producer NRG Energy, went public last July at US$22 a share and is now trading at US$54. Next Era Energy Partners, which was created by the electric utility Next Era Energy, went public this month at US$25 and is now trading near US$35. TerraForm Power, created by SunEdison, also went public this month at US$25 and now trades at US$33.
These yieldcos own power plants that have entered into long-term power purchase agreements at set prices with local utilities. For example, Next Era Energy's Tuscola Bay wind farm in Michigan will sell all of its power over 20 years to DTE Energy. And assets go beyond wind or solar projects, or even ones that generate power. Abengoa Yield owns power transmission lines in Peru and Chile along with solar farms in Arizona and California. NRG Yield owns a natural gas-fired plant in Delaware.
Because these companies own assets operating under long-term agreements, they aren't subject to wild swings in the price of wholesale electricity the way traditional power producers are. The idea is that while some investors would like to pay for the risk and upside of a traditional power producer, many others would rather have a steady flow of cash.
For the companies, these new businesses have created a new and cheaper source of funding to buy or build new power projects.
"It's the biggest thing going on in energy finance," says Peter Davidson, executive director of the Energy Department's loans programmes office, which lent money to projects that are now in yieldco portfolios. "We think it's the next great step in the evolution of clean tech."
One big concern for investors is that share prices could fall, perhaps sharply, if interest rates rise. That's because comparable yields will then be available from safer investments, such as bonds.
Another is that investor enthusiasm in these companies has pushed yields down so far that some barely justify the name yieldco. NRG Yield now pays out just 2.7 per cent, not much more than the 2.2 per cent that the components of the Dow Jones industrial Average pay, on average.
Investors are banking on fast dividend growth, which all the companies project. NRG has told investors it hopes to grow the dividend an average 15 to 18 per cent per year over the next five years. But that requires buying more projects at good prices. With more and more yieldcos chasing these projects, there might not be enough to go around, or they might get too expensive.
Manabe, of Moody's, recommends sticking with yieldcos controlled by large, stable companies that have many projects available to sell to the yieldco, such as Next Era Energy Partners. It's controlled by Next Era Energy, the biggest wind power producer in the US and one of the largest solar power producers.
Nathan Kubik, a principal at a Colorado Springs financial advisory firm Carnick & Kubik, says he thinks yieldcos could have a place in his clients' portfolios along with REITs and MLPs - some day.
"I like what they are doing," he says. "But right now it's probably a little premature for us to get in. It needs to be proven a little more."