Ever since the first YieldCo, NRG Yield (NYSE:NYLD),
went public in 2013, it and other similar YieldCos have been
reshaping the market for operating renewable energy assets,
especially wind and solar PV farms.
A YieldCo is, to put it simply, a publicly traded subsidiary of
a developer and operator of clean energy farms that uses the cash
flow from its assets to return a high current dividend to
shareholders. Most large, publicly traded clean energy developers
have already launched or are preparing to launch a YieldCo. The
current crop includes NRG Yield, Pattern Renewable Energy Partners
(NASD:PEGI),
NextEra Energy Partners (NYSE:NEP),
Abengoa Yield (NASD:ABY),
TerraForm Power (NASD:TERP),
and TransAlta Renewables (TSX:RNW,
OTC:TRSWF). First Solar (NASD:FSLR)
and SunPower (NASD:SPWR)
are jointly planning the IPO of a YieldCo to own PV farms to
be called 8point3, after the time it takes the sun's rays to
reach the Earth.
This rush to launch YieldCos is unsurprising, given that
investors can't seem to get enough of them. Since their IPOs, the
YieldCos listed above have advanced between 15 percent (Abengoa
Yield) and 127 percent (NRG Yield), while at the same time paying
dividends and selling large amounts of stock in secondary
offerings to fund their growth plans and raise cash for their
sponsors.
THE NEW KIDS ON THE BLOCK
YieldCos were not the only, or the first, publicly listed
companies to use clean energy assets and pay a dividend. Long
before they came along, there were the Canadian Income Trusts,
many of which were focused on clean energy. The tax advantages
that first made Canadian Income Trusts a tax-favored structure
have since been changed, but several of these trusts survive in a
similar form, the most notable being Brookfield Renewable Energy
Partners (NYSE:BEP
/ TSX:BEP.UN), which differs from the YieldCos only in that it
develops some projects internally, rather than buying them from a
sponsor.
Another is Capital Stage
AG (XETRA:CAP),
the largest operator of solar PV parks in Germany. Capital Stage
also has large holdings of PV in Italy and France, and wind in
Italy and Germany, and is in the process of acquiring PV parks in
the United Kingdom. It bought its first PV project in 2009.
GERMAN SKEPTICISM
In an interview, Felix Goedhart, Capital Stage's CEO, expressed
mixed feelings about the YieldCo phenomenon. "We like having
peers," especially highly valued peers like the YieldCos, but they
are also competitors for buying PV and wind projects. Many such
projects do not even make it to the market, since they are sold
directly by developers to their captive YieldCos.
Goedhart is confident, however, that Capital Stage will continue
to find attractive deals at after-tax internal rates of return
well in excess of what is available to "anyone with a pot of
money" who takes part in solar and wind mergers and
acquisitions.
He says that his firm's experience and reputation for
reliability allow it to find special situations that less
experienced players are not able to touch. When Capital Stage
finds such deals, it can act quickly because it does due diligence
internally, and can handle "complex situations" such as the
current acquisition of solar in the U.K.
He said some investors new to the business would have backed
away from that deal because it looked complex. Capital Stage, on
the other hand, knows "basically everything" about the deal and
has "seen so many things [that] we know what to do to take on
these challenges."
Goedhart's skepticism of YieldCos centers on their accounting
practices, and the inherent conflict of interest when they
purchase assets from their sponsors. He asks, "Are you worried by
the fact that [developers] and some 'independent' decision-making
body decides which asset goes at which price?"
This conflict of interest has not worried investors yet, but it
will doubtless begin to worry them if purchasing overpriced assets
from their sponsors keeps YieldCos from producing the long-term
dividend growth they currently expect.
A KIND OF PONZI SCHEME?
Goedhart's other point of skepticism lies around the source of
YieldCo dividends. He contrasts Capital Stage's own dividend,
which is "paid out in cash, not paper, not on a business plan,
[but] real money operationally earned. Not in a kind of Ponzi
scheme where you're raising real funds and taking parts of the
funds to pay out a dividend which you haven't earned
operationally."
Do YieldCos pay out dividends in a kind of Ponzi scheme as he
claims?
In 2014, NRG Yield produced 223 million in cash flows from
operations (CFO), and paid out 122 million in dividends to
shareholders and distributions back to its parent, NRG. Cash flow
from operations is a very broad measure, and does nothing to
account for cash needed to replace its assets at the end of their
useful lives. Actual income, which does include depreciation, was
only 16 million, far below what would be needed to pay its
current level of dividends and continue as a viable business
beyond the useful life of its current assets.
Other YieldCos operate in a similar fashion. Abengoa Yield paid
24 million in dividends, created 44 million in CFO, but produced
a net loss in 2014. Although their track records are short, most
YieldCos seem similar: they have cash flow from operations to
comfortably pay their dividends in the short term, but
insufficient earnings to both pay a dividend and invest for the
future.
Is Capital Stage any different? The company has not yet released
its 2014 results, but in 2013, it earned EUR14 million from which it paid EUR7 million in dividends in 2014. Its dividend is easily
covered by both earnings and cash flow.
SUMMING UP
YieldCo dividends are not supported by earnings, and so they are
not sustainable in the long term unless the companies continue to
raise capital to re-invest. Further, there are reasonable
questions about the conflicts of interest when YieldCos purchase
assets from their controlling sponsors.
While the YieldCo model is valuable in that it matches the
strong cash flow producing characteristics of operating clean
energy projects with the cash flow needs of income oriented
investors, dividends from YieldCos are not directly comparable to
dividends from operating companies which have earnings, not just
cash flow, sufficient to replace their assets over time.
Instead, investments in YieldCos should be viewed as amortizing
assets. Over the 15- to 30-year typical remaining life of YieldCo
assets, the value of those investments will slowly be paid out as
a dividend, causing the share price to fall when aging assets are
no longer able to support the dividend, or because early
investments become diluted by the capital needed to invest in
newer assets.
That does not make YieldCos any sort of Ponzi scheme, but it does
mean that YieldCo dividends is not worth as much as dividends from
operating companies that can fully cover their dividends with
earnings.
Tom Konrad is a financial analyst, freelance writer, and
portfolio manager specializing in renewable energy and energy
efficiency. He's also an editor at AltEnergyStocks.com.
Disclosure: Tom Konrad and/or his clients have long
positions in PEGI, FSLR, ABY, RNW, BEP, and a debt investment in
GridEssence, a private company which Capital Stage AG is in the
process of buying. They have short positions in NYLD and TERP.
This article was first
published on GreenTech Media, and is republished with
permission.
