By Tom Kleckner

Uncertainty over renewable tax credits and competition from low-priced natural gas may be discouraging some wind power investors — but not SunEdison’s TerraForm Power.

Established by SunEdison to own and operate its solar farms, TerraForm has since expanded its focus to wind and other clean-power assets, seeking long-term contracts that generate steady revenues for additional investments.

In the year since its July 2014 initial public offering, TerraForm has added 2 GW of wind assets to its portfolio. Last week, TerraForm made its biggest splash yet, joining with SunEdison to acquire a 930-MW energy portfolio for $2 billion from Invenergy Wind.

Just the week before, TerraForm and SunEdison announced they had finalized the acquisition of another 521-MW portfolio of operating wind farms in Idaho and Oklahoma from Atlantic Power. In January, the two companies closed a similar 521-MW package of wind and solar assets from First Wind Holdings.

The Deal

TerraForm said it intends to acquire net ownership of 460 MW of Invenergy’s wind plants, with the remaining 470 MW to be acquired by a “warehouse” facility, a financing mechanism that will be sponsored by SunEdison and third-party equity investors.

The initial acquisition includes the 187-MW Rattlesnake farm in Texas, the 196-MW California Ridge project in Illinois and the 78-MW Raleigh wind farm in Ontario. The warehouse facility includes the three Prairie Breeze wind farms totaling 279 MW in Nebraska and the 190-MW Bishop Hill, Ill., facility.

The deal is expected to close in the fourth quarter, subject to the approval of the Federal Energy Regulatory Commission and the Public Utility Commission of Texas.

Bucking a Trend

The companies are upping their stake in wind at a time in which other developers have scaled back.

Second-quarter investments in U.S. wind projects were $9.4 billion, down 4% from the first quarter and 21% from 2014’s second quarter, according to the American Wind Energy Association. Bloomberg New Energy Finance reported that global clean energy investment dropped 28% in the second quarter versus a year earlier. The U.S. entered 2015 with 65.9 GW of installed wind, AWEA says.

Yieldco Strategy

TerraForm is seeking value by “aggregat[ing] a highly fragmented industry,” CEO Carlos Domenech said.

The company’s strategy is based on the use of “yieldcos,” an increasingly popular method of holding renewable energy assets. Yieldcos allow developers to raise capital at lower costs by selling — or dropping — completed projects to the yieldco and using the proceeds to fund new projects.

“The thinking with warehouse assets is that as you drop or acquire assets into the warehouse, you’ll be tranching those assets,” SunEdison CFO Brian Wuebbels explained in a conference call last week. “Equity investors, debt investors, us … we all want to know the quality of the assets we’re putting into the warehouse. Getting an investor to put down $2 billion into an empty warehouse without having an idea of the particular asset’s performance would be creating [higher] costs. … By having definitive, high-quality assets, we can drive down the cost of capital.”

The assets being acquired from Invenergy have a weighted average remaining contract life of 19 years.

UBS Securities noted only 93 MW will be under construction upon the deal’s close, easing concerns about developmental risk. The deal also diversifies the portfolio of SunEdison, the world’s largest renewable energy development company.

Invenergy

For Invenergy, a privately held company, the sale will provide capital to invest in more projects, CEO Michael Polsky told Bloomberg. “It’s a new phenomenon. It’s helped to proliferate renewable energy.”

Domenech said he expects that TerraForm’s “ongoing partnership” with Invenergy will result in additional acquisitions in the future.

Invenergy bills itself as North America’s largest independent wind power generation company, with 51 wind farms in the U.S., Canada and Europe totaling more than 4.4 GW.

The company, which is selling 10% of its total contracted portfolio to TerraForm, will retain a 9.9% stake in the U.S. assets being sold, providing operation and maintenance services for the facilities.

Cash Flow

TerraForm and SunEdison say the assets they are purchasing should generate average unlevered cash available for distribution (CAFD) of $141 million annually over the next 10 years, a levered cash-on-cash return of about 8.4%.

Private equity investors have expressed “a lot of interest in the warehouse,” Wuebbels said.

In announcing the deal, TerraForm raised its 2016 dividend target 26% to $1.70/share from $1.53 and projected a 20% compound annual growth rate from its current first-quarter dividend “driven by the increased visibility and growth provided by this transaction.”

Market Reaction

Shares in both SunEdison and TerraForm stock rose following the sale announcement Monday, with TerraForm shares up 4.4% for the week.

Travis Hoium, a columnist for The Motley Fool, was less impressed, warning that yieldcos’ appeal could fade if they turn out to be based on overly aggressive assumptions.

“Adding $141 million in cash available for distribution may sound like a lot, but the $2 billion price tag is steep for that kind of return. Remember that the cash flow from projects has to cover the depreciating value of a wind turbine over time as well as pay for debt that will be used to acquire the assets, so the return for shareholders may not be as attractive as it seems. … Unless TerraForm Power can re-up contracts for equal or greater electricity prices well beyond the current contracts, the company may not even earn its cost of capital back.”