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Analysis: NRG buys into world's biggest project

UNITED STATES: NRG Yield's purchase of 947MW of the vast Alta wind project in California may have kicked off a significant new trend. It is the first major third-party acquisition in the US by a renewable-energy "yieldco", a financing concept that is relatively new to wind energy.

A Vestas V90 turbine being installed at the Alta Wind Energy Centre
A Vestas V90 turbine being installed at the Alta Wind Energy Centre

NRG Yield is buying seven phases of the Alta project from developer Terra-Gen Power for $870 million plus the project financing cost of $1.6 billion. The world's largest wind project at 1.32GW, Alta is in the Mojave Desert in southern California. And all of its 11 phases have been completed.

"It looks like a good group of assets," said Travis Miller, director of utilities research at Morningstar, a Chicago-based investment research firm. "[The phases of the project] have long-term contracts, and have a good geographic location, where we think they can operate well."

Yieldcos are publicly traded companies formed specifically to own operating assets that have a predictable cash flow. NRG Yield is part of NRG Energy, the US's largest publicly traded independent power producer in terms of market capitalisation.

None of the phases involved in the purchase is more than four years old, said NRG Yield. They consist of Vestas and GE turbines, and all have power purchase agreements (PPAs) with utility Southern California Edison with more than 20 years of remaining contract life. The length of the PPAs is key for a yieldco to be interested.

Reduced exposure

Miller also noted that the purchase will dilute the exposure of NRG Energy investors to coal and other fossil-fuel generation. Yieldcos tend to pass on the vast majority of their cash flows to investors in the form of dividends, whereas traditional companies such as utilities will pass on a lower proportion.

NRG Energy owns 81 oil and gas plants, 22 coal plants, one nuclear plant and 46 others. Once the transaction has been completed, in the third quarter, it expects to have 2.84GW of wind projects, the fifth-largest overall operating portfolio in North America.

The purchase is significant in other ways, said Joe Salvatore, an analyst for clean energy economics at Bloomberg New Energy Finance. It will increase NRG Yield's power-generation portfolio from about 1.5GW to 2.5GW.

NRG Yield is also forecasting that the transaction is expected to increase its annual run-rate earnings before interest, taxes, depreciation and amortisation (EBITDA) by approximately $220 million, he noted.

In an investor presentation May, NRG Yield had estimated its EBITDA — a gauge of operating cash flow — as $292 million. So the purchase will add a sizeable 75% or so to the measure, said Salvatore. He noted the market's favourable response to the deal.

Asked why NRG Yield would have bought the projects, he said: "There's probably a significant amount of capital locked up in them." Yieldcos do not typically shoulder development risk.

Tax equity

The purchase will not change the tax equity investments by internet firm Google or financial giant Citigroup, said Greg Wetstone, a spokesman for developer Terra-Gen, which is owned by two private-equity firms, Global Infrastructure Partners and ArcLight Capital Partners.

Google and Citigroup each invested $157 million in Alta phases IV and V. The leveraged leases were among the first for tax-equity investments in wind power projects. Citi also underwrote the equity financing for Alta Projects II though V, which total 570MW.

The other phases of Alta had previously been sold. Warren Buffet's Mid-American Energy, now Berkshire Hathaway Energy, bought phases VII and IX. Canada's Brookfield Renewable Energy purchased phase XIII. EverPower Wind Holdings, a portfolio company of private-equity firm Terra Firma, bought phase VI.

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