IPO Boom Grows in Renewables as Dividend Yield Beat BondsAndrew Herndon
Wind and solar companies are tapping the stock market for cash at the fastest pace in two years, led by three initial public offerings in London luring investors with dividends that beat returns on government bonds.
Clean-energy companies raised $3.8 billion in IPOs in the second-quarter, double the pace of the first three months of the year, according to data compiled by Bloomberg. The Renewables Infrastructure Group Ltd. raised 300 million pounds ($460 million) and began trading July 29. Its intention, to pay a 6 percent yield, compares with a 2.31 percent yield on the U.K. government’s 10-year gilt.
The offering was the biggest of three London IPOs this year by renewable companies taking advantage of investors’ thirst for income as the Bank of England keeps interest rates at record lows. Surging share prices have revived stocks as a source of funds, allowing companies that traditionally rely on banks and private equity to tap deeper pools of capital at lower costs.
“There’s really nothing out there that has more predictable cash flows than a solar farm contracted by an investment-grade utility,” said Brandon Blossman, an analyst at Tudor, Pickering, Holt & Co. in Houston. “Everybody likes a yield vehicle that has growth potential.”
Yields on the 10-year gilt plunged to as little as 1.41 percent in August 2012 from as much as 5.55 percent in July 2007. The global recession and credit crisis prompted the Bank of England to slash its benchmark lending rate to 0.5 percent, the lowest since it was founded in 1694.
Since the yield bottomed, it has risen to as much as 2.59 percent on June 24. In the U.S., the yield on the 10-year Treasury climbed past 2.69 percent yesterday, down from 5.29 percent in June 2007.
A rebound in the stock market is encouraging the IPOs. The NYSE Bloomberg Solar Index of 102 companies has appreciated 65 percent since the beginning of December.
“Over the last few years, there has been a desire for a yield-oriented vehicle, and one just frankly has not existed in the power space,” said Julien Dumoulin-Smith, an analyst at UBS Securities LLC in New York.
Greencoat U.K. Wind Plc kicked off the IPO wave in March, raising 260 million pounds with a pledge to pay a dividend of 6 pence on each 100 pence share. Bluefield Solar Income Fund Ltd. raised 130 million pounds. It will have a dividend of almost 4 percent in the first year after the offering and 7 pence in the next, according to Bloomberg forecasts.
North American companies are following suit. NRG Yield Inc., controlled by the largest U.S. independent power producer NRG Energy Inc., raised $431 million in its July 16 IPO, and will post a quarterly dividend of 30 cents a share according to a July 18 filing. The yield will reach 4.25 percent by the end of next year, according to Bloomberg projections based on company filings.
TransAlta Corp., Canada’s top independent power producer created in June a new unit, TransAlta Renewables. It’s seeking to raise C$200 million ($193 million) in an IPO this month and will pay an annual dividend of 75 Canadian cents according to a July 31 filing. Threshold Power Trust plans an IPO in Toronto in the first week of August. It intends to pay out 75 percent of its cash flow to investors as monthly taxable dividends.
The companies, dubbed “yieldcos,” hold operating power plants with long-term contracts to sell electricity. That ensures a predictable source of revenue and supports dividends.
The emergence of yieldcos is a sign the renewables industry is maturing, said Arno Harris, chief executive officer of Recurrent Energy, a solar developer owned by Sharp Corp. Funds from an IPO are “significantly less expensive capital” than funding from private equity backers, he said.
As the industry become more mainstream, more developers are chasing new sources of capital. Investors in companies like NRG Yield may be satisfied with returns of about 5.5 percent to 6 percent, compared to an 8 percent “cost of money” that many paid five years ago, said Harris, who’s also chairman of the Solar Energy Industries Association, a Washington-based trade association.
The yieldcos expect to purchase more power plants once developers finish building them. NRG Yield operates eight wind and solar farms, two portfolios of solar facilities and three gas-fired plants. It has rights to buy more projects from NRG, including five solar farms and a gas plant under development.
TransAlta has 1,076 megawatts of hydropower, wind and geothermal power plants that may be sold to TransAlta Renewables. Renewables Infrastructure Group has deals to acquire 14 wind farms and has rights on projects completed by Renewable Energy Systems Ltd., a related company developing facilities.
The new companies are designed to hold power projects after other ventures develop them. That removes much of the risk that comes from spending years planning large power plants that are undone at the last minute because they threaten an endangered species, for example, or regulators refuse to approve rates in power-purchase deals.
“It’s becoming more and more important to drive down all costs, not just the cost of equipment, but the cost of capital,” said Keith Martin, a partner with Chadbourne & Parke LLP, a Washington-based law firm advising clean energy companies.