The rise and fall of the yieldco was swift, even by the standards of today's volatile capital markets.
The yieldcos concept made its debut on the public markets in the second half of 2013. The idea: The developers of renewable energy power plants would sell their properties to the yieldcos, which would then offer investors steady dividend increases thanks to long-term contracts that provided easy-to-forecast profit growth. By the next year, there were a half-dozen yieldcos trading on North American exchanges. And by mid-2015, the stocks had cratered – many down by half or more – as investors began to doubt both the business model and the macroeconomic outlook, particularly with oil prices in freefall.
The yieldco stocks have now bounced off those lows, but many remain well under their early 2015 peaks. There's opportunity here, but not indiscriminately so: The market tumult has revealed some of the yieldcos as likely to deliver the safety and security once promised, while others are only appropriate for risk-embracing investors for which the industry was never intended.
One key, say analysts Andrew Hughes and Brian Chin of Merrill Lynch, is that "during dislocations," as they politely called what happened last year, "own the tail with the strongest dog." What they mean is that a yieldco is often only as good as its sponsor or parent, the development company that's selling assets to it. If the development company doesn't have the properties to sell, or the ability to build more because of financing or operational difficulties, there isn't a pipeline of acquisitions for the yieldco. (These sales are called "asset drops" or "drop-downs" in the industry lingo.)
This concept explains the issues at TerraForm Global Inc. and TerraForm Power Inc., two yieldcos spun off from SunEdison Inc. SunEdison's shares have dropped 90 per cent among a host of problems, including a failed attempt to buy rooftop solar panel installer Vivint Solar Inc. A recent Bloomberg News story says July 20, 2015, the day the proposed deal was announced, was "when the party ended for the financial trend that was supposed to transform the renewables sector: yieldco mania." SunEdison's plan to sell some of Vivint's operating assets to TerraForm Power meant "suddenly, yieldcos were no longer viewed as safe bets."
SunEdison, TerraForm Power and TerraForm Global all said Thursday that they would not be filing their annual reports with U.S. regulators, the second time they've missed their deadline this year. The two SunEdison yieldcos haven't fallen back to last year's lows, but they're close – and their dividend yields of 15.4 and 32.8 per cent, respectively, reflect deep investor skepticism about the future of their payouts.
A horror story like that is enough to turn off investors to every yieldco. But that would mean ignoring companies with stronger partners and better growth stories, analysts say. Perhaps the top example: Pattern Energy Group Inc. (PEGI), which has 12 buys among the 13 analysts who cover it. The San Francisco-based yieldco has both Nasdaq and Toronto Stock Exchange listings, owing to four of its 16 wind projects being in Ontario and Manitoba. Its partner, Pattern Development, is a private limited partnership and is not traded on an exchange.
"Sponsor Pattern Development may not be well known, but it is a formidable player in a fragmented wind market, and its relationship with PEGI positions both entities for sustainable, long-term growth," says JPMorgan's Christopher Turnure, who has a $25 (U.S.) target price, versus Friday's close of $19.10. "PEGI shares currently reflect essentially no value for this relationship, in our view, or for future accretive asset drops, purchases and financing ability. We view PEGI as a lower-risk, high-quality name that has been inappropriately punished by current challenging capital market conditions."
Analsyst also favor NextEra Energy Partners LP (12 buys of 18 analysts) and NRG Yield Inc. (10 of 14). NextEra's sponsor is NextEra Energy Inc., a Florida electric company whose stock hit a 52-week high Friday. NextEra Energy Inc.'s market capitalization is more than $50-billion, and it's set to join the S&P 100 list of the United States' biggest companies. In their late-October note, Merrill Lynch's Mr. Hughes and Mr. Chin said the yieldco's "growth prospects are unmatched in magnitude and quality, and carry little to no development risk at the sponsor level." (According to S&P Capital IQ, they currently have a $32 target price, versus Friday's close of $26.05.)
Analyst Praful Mehta of Citigroup Global Markets Inc. says NRG Yield, whose sponsor is New Jersey-based NRG Energy Inc., is on track to meet its goal of 15-per-cent annual dividend growth through 2018. Mr. Mehta estimates the yieldco's existing cash flow as worth $14.50 a share, with its future growth worth another $4.50, for a target price of $19. NRG Yield closed Friday at $14.04.
Canada's pre-eminent yieldco, TransAlta Renewables, has been an exception to much of the phenomena that we've just described, as it avoided the 2015 swoon that bedevilled its southern neighbours. Its 52-week low was set just two months ago, in mid-January.
Since then, it reported a pleasantly surprising fourth-quarter earnings report, and, also importantly, it's set to join the S&P/TSX composite on Monday. With that kind of good news, the shares are up roughly 30 per cent from its January low, and they're closer to their all-time high than any other yieldco stock.
It also means the stock price – $11.91 (Canadian) at Friday's close – is creeping up on analysts' average target price of just over $13. Jeremy Rosenfield of Industrial Alliance Securities describes the yieldco as "a lower-carbon avenue to invest in the TransAlta brand" with "a diversified mix of contracted power assets, growth tied to future additional asset drop-down transactions from TransAlta, and an attractive dividend yield."
The one warning from analysts covering the yieldco is that TransAlta Renewables includes an Australian portfolio that counts miners as major power customers. "Although we believe TransAlta Renewables is attractively valued and pays a sustainable … dividend, investors who want to minimize counterparty risk to the mining sector … should stay on the sidelines for now."
The “yieldco” was supposed to “transform” the renewables sector, in one observer’s words, by giving the developers of wind and solar plants the ability to sell their operating plants to new companies that would attract investors through steady, growing dividends. Market tumult in 2015 disrupted the tale, however, and the sector remains out of favour. That means large dividend yields – but for some, not necessarily “healthy” ones, as the market is picking the yieldco winners and losers.
|Company||Ticker||Market Cap (US$-mil)||Net Debt (US$-mil)||Enterprise Value (US$-mil)||Revenue (US$-mil)||EBITDA (US$-mil)||Net Income (US$-mil)||EV/EBITDA||P/E||Dividend Yield|
|8point3 Energy Partners LP||CAFD-Q||301||243||828||12||-3||20||11.7||132.3||5.8%|
|Abengoa Yield PLC||ABY-Q||1,825||5,911||7,877||792||538||-209||11.7||9.4||8.8%|
|NextEra Energy Partners, LP||NEP-N||795||3,357||4,785||471||355||10||7.5||21.3||4.8%|
|NRG Yield, Inc.||NYLD.A-N||1,345||4,797||6,933||869||599||33||8.4||14.4||6.7%|
|Pattern Energy Group Inc.||PEGI-Q||1,424||1,719||4,088||328||178||-33||12.9||66.7||8.0%|
|TerraForm Global, Inc.||GLBL-Q||391||131||1,080||87||52||-89||3.3||9.6||32.8%|
|TerraForm Power, Inc.||TERP-Q||726||1,911||3,955||405||258||-44||6.5||31.5||15.4%|
|TransAlta Renewables Inc.||RNW-T||2,073||612||2,713||166||132||150||9.5||15.5||7.3%|
Source: S&P Capital IQ
Net debt is debt minus cash. Enterprise value is market capitalization plus net debt. Revenue, EBITDA and net income are for the past 12 months. EBITDA is earnings before interest, taxes, depreciation and amortization. EV/EBITDA and P/E are based on analysts' estimates of future earnings
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