by Tom Konrad Ph.D., CFA
Note: This article was first published
on GreenTechMedia on Noveber 27th.
In the last six months, YieldCos have fallen from stock market
darlings to pariahs.
YieldCos are companies that buy clean energy projects such as
solar and wind farms, and use the majority of free cash flow from
these projects to pay dividends to investors. Many are listed
subsidiaries or carve-outs of large developers of clean energy
Last year, investors repeatedly punished leading solar
developers and manufacturer First Solar and SunPower for their
reluctance to launch YieldCos. When they finally relented and
formed a joint YieldCo (later called 8point3 Energy Partners),
both were instantly rewarded. Their stock prices each rose 20
percent over the course of two weeks.
Now, the situation is reversed, with many YieldCos trading at
half their peak prices. The Global X YieldCo ETF (YLCO)
is trading around $10, down one-third from its $15 launch near the
peak of the YieldCo mania in May.
Is the YieldCo model broken?
Many market observers are questioning if the YieldCo model is broken.
The YieldCo model has no official definition, but its detractors
typically point to the rapid dividend growth targeted by many of
the ones based in the United States when making their point. This
dividend growth was achieved (as I explained
at the time) by public offerings of stock at successively
higher prices, which produced more capital per share to invest.
More capital per share allowed dividend growth and higher share
Each link in this virtuous cycle depended crucially on the last,
and when share prices broke down, the ability to raise cheap
capital did too.
What managers are saying
If the YieldCo model is broken, it is only this aspect of the
model that's a problem. How YieldCo managers are confronting the
new environment depends on how much they intended to rely on stock
market capital before the crisis.
Below is what a selection of YieldCo managers said in their
recent third-quarter conference calls. How bullish they are
depended directly on how much they were relying on stock market
capital for their growth plans, but all emphasized how they remain
sustainable businesses even without growth.
Independent YieldCos, which often have other ways to access
capital and less pressure to buy projects from their sponsors,
were also generally more sanguine about the market turmoil.
Subsidiaries of clean energy developers
NextEra Energy Partners: “The YieldCo model can work
and work well”
NextEra Energy (NEE)
is widely seen to be the strongest of YieldCo sponsors, and many
investors appreciate this strength. Although NextEra Energy
shares have fallen significantly, Jim Robo, chairman and CEO of
NEP, said, “The YieldCo model can work and work well for our
partnership like NEP that has the right structure and the support
of a world-class sponsor.”
He thinks “the capital markets' re-evaluation of the YieldCo
space can play to our competitive advantage.”
But even NEP is cautious about raising new capital in the
current market conditions. “We continue to evaluate the optimal
capital structure for NEP. As it has some additional debt capacity
that can help finance future transactions.” The YieldCo “plan[s]
to issue a modest amount of NEP public equity” in 2016, but will
both buy and sell NEP units based on market conditions.
Abengoa Yield: Working to “become a completely
Abengoa SA (ABGB)
is in significant financial difficulty, so its YieldCo [ABY]
is taking steps to protect itself from any possible fallout. CEO
Javier Garoz spoke about Abengoa Yield's plans in a conference
call in early November.
“ABY has all necessary [elements] in place to achieve the run
rate in 2016; concentrating on the execution and delivery of the
expected cash flows…must be our top priority.” He continued,
“We want to reinforce our autonomy from Abengoa to become a
completely independent company. We will incorporate the necessary
resources at the corporate and staff functions to avoid the
In addition to building its own management team, ABY is actively
searching “for another sponsor, in addition to Abengoa.” Garoz
reaffirmed 2016 dividend guidance of $2.10-$2.15 per share,
emphasizing that it does not “depend on any additional
Like many other YieldCo managers, Garoz thinks his company's
assets are undervalued by the market. “[E]ven considering an
hypothetical worst case scenario, where ABY have no access to
growth for some time, our current portfolio of assets have a very
significant value not recognized by the market at this point.”
TransAlta Corporation will continue to pursue
drop-downs to YieldCo
Unlike most YieldCos listed on U.S. exchanges, TransAlta
never promised double-digit dividend growth rates. Because of
this, its share price has suffered much less than those of its
In a conference call on October 30, TransAlta
Corporation (TAC) CEO Dawn Farrell emphasized that little had
changed for the YieldCo. She stated that TAC will continue to
“pursue asset drop-downs to TransAlta Renewables.”
She also felt it important to emphasize the YieldCo's value
proposition, stating that management believes “TransAlta
Renewables is a solid investment for shareholders who want stable
and secure dividends with moderate growth.”
NRG Yeild: "Investment porposition is unchanged."
NRG Yield (NYLD
will continue to target 15% anual dividend pre share growth, and
will be able to do so for at least two years without access to the
equity markets by increasing its payout ratio.
8point3 Energy Partners: Sponsors committed to
In a call on October 29, First Solar (FSLR)
CEO James Alton Hughes said that plans for 8point3 Energy Partners
were on track. “Both sponsors at this point in time are committed
to the drop-downs that we would envision in the first half of
2016. We've also indicated that we do not have a need to raise
capital at this point in time. We've left enough capacity in
8point3 to manage those anticipated drop-downs.”
SunPower's CEO Tom Werner agreed, saying, “We think 8point3 can
successfully buy projects without issuing equity for a period of
The TerraForms: TERP and GLBL “maintaining liquidity”
and “sufficient capital”
twin YieldCos have been suffering more than any of the others,
because investors had previously looked at the YieldCos as the
cure for SunEdison's over-leveraged balance sheet. With TERP's
stocks in the tank, it looks less likely that the TerraForm twins
will be able to access the market in order to buy more solar farms
from SunEdison in exchange for much-needed cash.
Both YieldCos have been trying to soothe investors' worries with
comforting talk about sufficient resources to fund existing
Recently replaced CEO Carlos Domenech stated that TERP has $1.5 billion in cash
and an undrawn credit facility. The CFO, Alex Hernandez, pointed
to a recent U.K. project financing which he said "demonstrates the
company’s access to financing markets at an attractive cost of
capital and ability to continue funding the growth of our
He said TERP “remain[s] focused on further strengthening the
company’s liquidity position and maintaining the quality of our
Regarding TerraForm Global, Domenech said the company has sufficient capital to
fund pending transactions, bringing the portfolio to 1.3
gigawatts. At the time, it had $1.1 billion in unrestricted cash
and a $500 million credit facility.
On Monday, Domenech was replaced as CEO of both TerraForm
YieldCos by SunEdison CFO Brian Wuebbels. And on Tuesday,
SunEdison reversed its prior stance of not selling additional
assets to the TerraForms, selling 425 megawatts of Indian solar to
GLBL for $231 million. In order to buy these projects, the YieldCo
canceled plans to buy other projects from third parties.
Was the deal forced, or were the Indian solar farms simply too
good a deal to pass up? The timing, right after the replacement of
Domenech, looks suspicious. At $0.51 per watt, the $231 million
purchase price of the Indian farms seems very low, but without
knowing how much debt was involved in the transaction and a number
of other details, it's impossible to know how good a deal this was
for Terraform Global.
In a transaction agreed on in June, NRG Yield
bought 137.5 megawatts of the Desert Sunlight Solar Farm from GE
Energy Financial Services for cash and the assumption of debt
amounting to $4.16 per watt.
Pattern Energy: Volatility in YieldCo sector “very
In a conference call on November 5, Pattern (PEGI)
CEO Michael Garland said, “We believe [the recent volatility] is
very healthy for Pattern and the sector, as it allows us to
highlight the strength of our corporate strategy, the robustness
of our cash flows and soundness of our growth strategy.”
He went on to discuss Pattern's ability to manage without
returning to the capital markets. He stated, “[C]ash available for
distributions is stable and sustainable...over the next 25 years.
These assets don't require any additional equity capital.”
Pattern increased its dividend for the third quarter, but
declined to give a dividend growth target for 2016, stating that
growth would depend on market conditions. Garland emphasized the
advantage of Pattern's private development arm, Pattern
Development, which is not subject to stock market whims. If
Pattern's stock price does not recover, Pattern Development will
hold operational assets longer, rather than dropping them down to
a YieldCo, which cannot finance them at attractive rates.
Hannon Armstrong Sustainable Infrastructure: YieldCo
pullback is an opportunity
Hannon Armstrong (HASI)
does not have a development arm, but its expertise in energy
efficiency finance gives it access to high-quality
energy-efficiency projects beyond the scope of other YieldCos. It
also invests in many of the same projects as other YieldCos, but
generally as a more senior creditor.
In a conference call on November 4, CEO Jeffrey Eckel stated
that there has been a “pullback of buyers of projects from the
YieldCo issues. … [T]he required rate of return for investors in
the equity has gone up. … [T]hat gives a little air cover for the
senior slices of capital to go up as well.”
Hannon Armstrong reaffirmed its 14 percent to 16 percent annual
per-share earnings growth target for 2015 and 2016.
Brookfield Renewable Energy Partners: “We're very
In a call
on November 3, Brookfield (BEP)
CEO Sachin Shah emphasized that Brookfield does not have most of
the characteristics that are leading investors to question the
“We're very different. We have internal operating capabilities.
We have our own development. We don't rely on a drop-down from
parent. We fund our growth largely through our own existing cash
flow," said Shah.
He added, “I think the opportunity set will actually get better
if we see a weaker capital market, and we're one of the few
organizations that is really well positioned to benefit from that.
We saw YieldCos drive the cost of assets to levels that were
really difficult for us to compete with, and this was largely off
the back of them trading at a very, very low cost of capital and,
really, the market believing that their growth into perpetuity
could sustain itself."
While most YieldCos are responding to low stock market prices by
shelving plans for new share issuance and new acquisitions, the
model of connecting low-cost stock market capital with
capital-intensive clean energy projects is far from dead.
Even the growth of YieldCo dividends is not dead. Many YieldCos
have considerable cash on hand, borrowing capacity, or (a few)
retained cash flows. These companies are likely to take advantage
of the new environment to scoop up a few choice assets on the
Investors would likely do well to do likewise and scoop up
YieldCo shares on the cheap.
Tom Konrad is a portfolio manager and freelance writer with
a focus on clean energy income investments. He manages the Green
Global Equity Income Portfolio and is editor of
DISCLOSURE: Tom Konrad, his clients, and the Green Global
Equity Income Portfolio own shares of NEP, ABY, TSX:RNW, CAFD,
TERP, GLBL, PEGI, HASI, and BEP.