Finance experts expect more initial public offerings (IPO) in the wind energy sector in 2014 after a year in which half a dozen companies on both sides of the Atlantic successfully raised nearly $2.3 billion by tapping the public equity markets.
"It is hard to really predict how many will come out of the gate and actually get done. But there are 10-20 companies out there working on it, wondering if this is good source of low-cost capital for them and if they have what it takes to make a placement like this," says Michael Eckhart, global head of environmental finance with Citigroup.
British fund Greencoat UK Wind started a wave of IPOs in March 2013, raising £260 million ($433 million). NRG Yield in the US and the Renewables Infrastructure Group (TRIG) in the UK followed in July with offerings of $431 million and £300 million, respectively. Canada's TransAlta Renewables completed a C$221 million (US$200 million) share sale in August, California-based Pattern Energy raised $352 million in October, and the UK's Infinis rounded up the year with a £234 million share sale in November (see box, overleaf).
Eckhart sees the offerings as the beginning of a transition for the sector. "What we're seeing is the maturing of the industry. Basically, wind and solar have grown up to meet the expectations and the requirements of capital markets," he says.
Reliable cash flow
Accessing those markets will be necessary for the industry to grow beyond where it is today, Eckhart adds. "It's not going to attract more and more bank debt, more and more private equity. It has to reach the public and institutional capital markets in order to scale up fully. Big energy companies are financed by the capital markets, and now we have renewables reaching that stage. This has been 15 years in coming."
The vast majority of last year's IPOs were variations on a theme. Generically dubbed yieldcos, their focus is on holding operating plants with long-term power contracts that generate reliable cash flows paid out to investors in the form of dividends.
The structure is attractive for both investors and industry, experts agree. It provides wind-energy producers with an avenue to sell off some of their existing assets and plough the money back into their businesses. And by accessing the huge pool of stock-market investors, they can drive down the cost of capital.
NRG, for example, is currently paying a dividend yield of less than 4% to its shareholders. "That's pretty cheap money," says Greg Jenner, co-chair of the energy team at US law firm Stoel Rives. The dividends paid by these companies appeal to investors hungry for income in today's low interest-rate environment, beating returns on ten-year government bonds that are paying out less than 3% in both the US and UK. By holding only operating assets, yieldcos also sidestep the more volatile project development and construction part of the business. "There's a lot of risk there that investors are not interested in taking on," says Jenner. "What the market is looking at with these yieldcos is essentially just a pure cash stream."
Expertise on hand
The promise of reliable income from that cash stream could prove key to mobilising the large flows of institutional investor money needed to move the wind industry forward, Eckhart says. Although some pension funds - notably PensionDanmark and PKN in Europe and the Caisse de depot et placement du Quebec in North America — are investing directly in wind projects, Jenner believes that most others lack the capability to execute that kind of strategy. An Ernst & Young survey released in November seems to confirm this. It found that 61% of North American and European pension and insurance funds have no current investment in renewable-energy infrastructure and cite the lack of in-house expertise as a major reason why.
"(Yieldcos provide) an easy route for them to get access to some investment in this marketplace," agrees Ben Warren, lead adviser in environmental finance for Ernst & Young UK. "What the listed yieldcos are is a conduit they can invest in, and a team they can rely upon to do their execution, to undertake the credit assessment, and to manage the assets."
Warren, however, is not convinced that most institutional investors are ready to essentially pay for the privilege of having someone else do the work for them. "Some of these investors are saying 'we don't have the capability, but we're going to bring it in'," he says. Warren expects institutional investors will ultimately prefer to partner with project sponsors and other investors to create privately placed funds or holding companies to own renewable-energy assets, thus avoiding the need to pay management fees to a third party. "Personally I think this is the real seismic change that we'll see in the coming years."
Warren notes that, at least in the UK, the bulk of the interest in last year's IPOs came from individual retail investors, raising the question of how much appetite there will be for future share issues. "I don't think one can assume that there are endless pots of capital there," he says. "I personally have concerns at the level of depth that the retail investor market has for these types of investments."
The yieldco structure brings other challenges. "One of the things it is probably important to keep in mind is that size matters," says Jenner. Portfolios need to be large and diverse enough to minimise the risk to investors, as well as offset the significant transaction costs associated with forming a new public company and launching an IPO. That requires operating project value in the "hundreds of millions of dollars" at a minimum, Jenner says.
Another issue is the need to continue to build the portfolio to maintain value for shareholders, meaning these companies need access to a sizeable pipeline of future projects to invest in. "The assets that yieldcos own are wasting assets. Their contracted cash streams will eventually go away," explains Jenner. "That means two things. One is they have to keep feeding the beast. They have to keep adding assets to keep up the income stream, or otherwise the value is going to go down. But in order to do that, they have to divert cash flow in order to build up reserves. So there's a tension that exists within the entity between paying out high dividends and making sure that they don't wither away."
This appetite for new assets is expected to have a major impact on merger and acquisition activity in the renewable-energy sector. "The companies that successfully deploy a publicly traded yieldco will be on the acquisition side of deals from now on, because they have access to the lowest-cost capital. They have the best opportunity to be an acquirer. And we know that has already started," says Eckhart (TRENDSETTERS — SIX RENEWABLES IPOS, below).
Companies looking to create publicly traded yieldcos have to be aware of other potential pitfalls as well. One is that they are interest rate-sensitive, meaning demand for yieldco shares could soften as interest rates rise and competing investments become more attractive. Permanently transferring a portion of a company's most reliable cash-flow producing assets to a yieldco could also weaken the credit quality of the parent, warned Moody's Investor Service in a November report. That is a key concern of NextEra Energy, the US's largest producer of wind power, as it considers whether to create a yieldco.
"We would want to be sure that it was structured so it will not negatively impact our corporate credit position, which we continue to view as an important element in our competitive strategy," NextEra chief financial officer Moray Dewhurst said in January when discussing the company's fourth-quarter results. NextEra has said it is considering putting as much as 2GW of power plants, mostly wind and solar, into a publicly traded yieldco and has identified another 1.2GW under development that could be sold into it by 2017.
Whether or not yieldcos prove to be a sustainable financing model over the long term, as Eckhart expects, or whether the challenges limit their usefulness, as Warren fears, the structure is an important step forward in the wind industry's quest for alternative sources of funding. "I warmly welcome the emergence of yieldcos because it brings to people's attention that there are new ways to finance renewable-energy assets and there is new capital that is seeing them as attractive investments," says Warren.
TRENDSETTERS — SIX RENEWABLES IPOS
Greencoat UK Wind
The first renewable-energy infrastructure fund to list on the London Stock Exchange's main market, Greencoat raised £260 million at 100p a share in a March 2013 offering. It used the proceeds to buy a seed portfolio of six wind projects from utilities RWE and SSE. It has since added to its holdings, and currently has interests in ten operating UK wind farms, including the Rhyl Flats offshore project, with an aggregate capacity of 184MW.
NRG Yield began trading on the New York Stock Exchange on 17 July 2013, raising $431 million at an initial share price of $22 a share. Its project holdings, carved out from parent NRG Energy's 45GW fleet, includes about 1.4GW of contracted renewable and thermal generation assets. NRG Energy's recent $2.64 billion purchase of the generating assets of bankrupt Edison Mission Energy provides it with another 1.1GW of contracted wind and 500MW of gas-fired capacity that the company says could be dropped into the yieldco. NRG Energy retains a majority interest in NRG Yield.
The Renewables Infrastructure Group (TRIG)
The subject of last year's biggest clean-energy flotation on the London Stock Exchange's main market, TRIG raised £300 million at an issue price of 100p a share. It used the proceeds to buy 14 onshore wind farms and four solar plants in the UK, France and Ireland with a combined capacity of 276MW. It has since added four solar plants. TRIG has the rights to buy projects built by Renewable Energy Systems (RES), a project developer that holds 5% of the issued share capital and manages TRIG's assets.
Trading on the Toronto Stock Exchange since August with an IPO that raised C$221 million (US$200 million) at a price of C$10 (US$9) a share, TransAlta Renewables' initial portfolio consisted of 16 wind farms and 12 hydro facilities totalling 1.11GW. The company has since purchased a 114MW Wyoming wind farm that it says will provide a platform for expansion in the US market. Calgary-based TransAlta Corporation retains an 80% interest in the new company.
Pattern Energy Group
Pattern Energy Group listed on both the Nasdaq exchange in the US and the Toronto Stock Exchange in Canada in October. The IPO raised $352 million through the sale of a minority interest in eight operating wind farms in the US, Canada and Chile totalling 1.04GW. It has since added two wind projects totalling 214MW to its portfolio.
With 611MW of renewable-energy plants and more than 500MW of onshore wind in its development pipeline, Infinis raised £234 million at 260p per share on the London Stock Exchange in a November flotation. The IPO differed from the others completed in 2013 in that it offered up to a 30% stake in the company as a whole and not just a select portfolio of projects.