Wind farm can fit into portfolio
NEW YORK — 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 a 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 $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 established by the power producer NRG Energy, went public last July at $22 a share and is now trading at $54. Next Era Energy Partners, which was developed by the electric utility Next Era Energy, went public this month at $25 and is now trading near $35. TerraForm Power, developed by SunEdison, went public this month at $25 and now trades at $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 coal-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 would rather have a steady flow of cash.
For the companies, these new businesses have developed 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 programs 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.”