The Fall issue of the North America Renewable Energy Brief targets the simple question, “what’s next for Yieldcos?” And the future isn’t looking as bright as we had originally thought.
Published by CohnReznick — one of the top accounting, tax, and advisory firms in the US — “What’s Next for Yieldcos” is the third edition of the company’s North America Renewable Energy Brief, “a quarterly publication focused on the clean energy sector in North America.” In this edition, CohnReznick’s Renewable Energy Industry practice and CohnReznick Capital Markets Securities experts examine the fate of the Yieldco.
Barely a thing three years ago, Yieldcos quickly sprung up to become the primary way for independent power producers (IPP) to create attractive dividends for investors — attraction that is heightened by (normally) only needing to pay one level of tax, making the Yieldco an alternative to Master Limited Partnerships and Real Estate Investment Trusts.
We’ve seen numerous renewable energy companies roll out their own Yieldcos, the most well-known likely being SunEdison’s two Yieldcos — TerraForm Power and TerraForm Global — and the joint Yieldco created by First Solar and SunPower, 8point3 Energy Partners. Despite dominating “the renewable energy financing and M&A agenda over the past two years” and “[raising] billions of dollars on the public markets, [amassing] some of the world’s largest portfolios of renewable energy assets and, until recently,” standing as “by far the most active acquirers of projects,” CohnReznick point out that this fairytale simply didn’t last. The future of the Yieldco isn’t even as secure as we thought it would be 9 months ago, when a report from Bloomberg New Energy Finance predicted that Yieldcos were on track to become a $100 billion market.
Despite challenges on numerous fronts, the most obvious is the massive stock price slump nearly every Yieldco has seen since June of this year.
An Overview of Funds Raised by North American Yieldcos
“Yieldco stock prices plummeted as part of a broader market sell-off due to global economic concerns, such as declining commodity prices,”explained Carl Weatherley-White, President, Lightbeam Electric. “MLPs and energy stocks have all suffered. Investors in Yieldcos tend to also invest in the energy sector. When they need to sell they likely divested their Yieldco holdings first as they are more of a recent niche asset class. Also, in late summer there was a high volume of equity issued. There were two IPOs and several secondary offerings, creating a huge demand and supply imbalance.”
This slump is the result of numerous factors, including a general downturn in energy stocks due to low oil and gas prices, as well as a general bringing into question of whether the basic Yieldco structure is as valuable as first thought. CohnReznick believes that the heart of the matter is the depreciating value of renewable energy assets, which forces the Yieldco to be in an ongoing effort to acquire more and more, and a general lack of transparency.
“Some Yieldcos don’t have as much transparency as investors would like to see,” explained Rob Sternthal, President of CohnReznick Capital Markets Securities LLC. “So investors have started to question this and it is a big issue. The assets don’t grow in value like real estate because they depreciate. So, they constantly need to acquire new assets to grow. The bigger they get, the more assets Yieldcos need to acquire to grow at the same pace.”
One of the interesting things we have seen is the formation of warehouse facilities intended to pacify investor fears. CohnReznick notes in its briefing that “Warehouse facilities are relatively new structures that sit between the Yieldco vehicle and its parent company – usually a large IPP” that “finances the construction and acquisition of projects from the parent company and the Yieldco then has the right to acquire these assets when feasible to do so.”
We saw this happen in the wake of SunEdison’s woeful second quarter earnings report, when the company created a $1 billion warehouse investment vehicle that was set to fund construction costs and acquire operating assets.
“This summer’s precipitous stock price drop makes it more difficult to continue to acquire projects since many Yieldcos use their stock as currency,” said Tim Kemper, co-national director, renewable energy industry at CohnReznick and a frequent speaker on Yieldcos at key industry conferences.”Yieldcos were always the first potential buyer of assets. Now the markets are looking for other potential buyers as the primary acquirers.”
Whether independent power producers and other developers look to owning and operating renewable energy projects on their own, or look towards Master Limited Partnerships, or even stick with the Yieldco, CohnReznick’s view is that the current trend in Yieldcos “may not spell the death of the structure,” but “it has certainly focused investors’ minds on the alternatives.”