Canadian Solar Inc., caught in the downdraft that has hit solar industry stocks, is reconsidering its move to spin off a publicly traded "yieldco" that would hold a portfolio of its solar farm assets.
While it still intends to go ahead with the creation of a separate entity that would own its completed solar projects, chief financial officer Michael Potter said Canadian Solar is also developing "alternative plans." He told analysts on the company's second quarter conference call late Tuesday that the firm made this decision because the market has "recently experienced volatility around yieldco valuations."
Indeed, solar yieldcos – and most public solar companies of any kind – have stepped on a very icy patch recently. Many solar stocks are down sharply, and yieldcos have been hit particularly hard.
Spinoff yieldcos are vehicles that hold the less-risky cash-generating components of the solar business – completed solar projects. While making and selling solar panels is relatively risky, once a solar farm is built and operating it usually generates a predictable flow of income under a long-term electricity contract.
Guelph, Ont.-based Canadian Solar, like other solar companies that have done this in recent years, wants to spin off its completed projects into a dividend-paying public company. Because they are less risky, these firms can raise capital more cheaply for development and acquisitions. Solar panel manufacturing would stay with the parent firm.
Until recently, Canadian Solar usually sold the solar farms it built to third parties as soon as construction was complete, generating a big one-time financial gain but leaving the cash flow from electricity sales in someone else's hands.
Currently, however, yieldcos have been hit with the malaise that has dented many other dividend paying stocks. With interest rates poised to rise in the United States, high yielding shares have fallen out of favour, and this has sent existing renewable energy yieldcos such as Nextera Energy Partners, NRG Yield and Abengoa Yield sharply lower.
In a double-whammy, solar stocks overall have come under pressure lately. This is usually attributed to low oil prices, which some see as damaging to the renewable energy sector.
In any event, Canadian Solar has been caught up in all this just as it was putting the finishing touches on its yieldco plans. While it still hopes to get the split off the ground by early 2016, Mr. Potter's comments make it clear the company is putting in place back-up plans, which would include potentially returning to its earlier model of disposing of solar farms after they are complete.
Investors didn't react well to Canadian Solar's yieldco news – and its third quarter guidance, which some analysts felt was weak – sending the stock down by 18 per cent in Nasdaq trading Wednesday.
Analyst Jed Dorsheimer of Canaccord Genuity cut his one-year price target on Canadian Solar stock to $40 (U.S.) from $45, saying in a report that "we question whether current investor demand for yieldcos will be enough for the company to go to market."
Others are more optimistic that the downward pressure won't last, and might represent a buying opportunity – for both yieldcos and the wider universe of solar stocks.
P.J. Deschenes, a partner with Greentech Capital Advisors in New York, said there has been a big influx of new yieldco stock – either in initial public offerings or secondary offerings – and that over-saturated the market and depressed investor appetite for shares.
However, he said, "we think [the correction] is temporary. The fundamental value proposition of the yieldco is very sound."
Well-structured yieldcos with strong solar companies behind them will continue to do well, he said. Canadian Solar, he noted, has "a really big backlog" of solar projects.
Earlier this year , Canadian Solar beefed up its project pipeline by buying solar project developer Recurrent Energy LLC from Japanese electronics giant Sharp Corp. for $265-million. That almost doubled its pipeline of new projects.
John Cook, president of Toronto-based clean-tech investor Greenchip Financial Corp., said he thinks part of the reason for the broadly based slippage in solar stocks is a "misunderstanding" of the link between oil prices and renewable energy. "There is really very little connection," he said, because not much electricity is generated with oil.
At the same time, many solar panel manufacturers with links to China have been "cast with this general sell-off in mainland Chinese markets," Mr. Cook said, even though they trade on U.S. exchanges and are very solid companies with strong potential in a huge and growing industry.
Canadian Solar does most of its manufacturing in China, but it also makes panels in plants in Guelph and London, Ont. It has built dozens of projects in Canada, and hundreds more in about 70 countries.