Despite rapid growth, yieldcos face money troubles

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Over the last two years, yieldcos have been the story for renewable energy asset management. After NRG went public with the first renewable energy yieldco in 2013, a total of eight North American yieldcos have been formed, six of which own solar assets.

In the process, these investment vehicles have raised a a massive US$19 billion through IPOs, secondary offerings and debt, and acquired 16 GW of projects, mostly solar and wind.

However, yieldco stock prices are in trouble, with the stock of all but three currently trading well below IPO prices. In a special report on the space, accounting, tax and advisory firm CohnReznick looks at the difficulties that yieldcos are having, especially with falling stock prices.

The company notes that yieldco prices have been caught in the wider energy stock downturn driven by falling oil prices and other macroeconomic factors.

“Yieldco stock prices plummeted as part of a broader market sell-off due to global economic concerns, such as declining commodity prices,” says Lightbeam Electric President Carl Weatherley-White in the report. “MLPs and energy stocks have all suffered. Investors in Yieldcos tend to also invest in the energy sector.”

However, it also notes that investors are questioning the basic structure of yieldcos.

“The assets don’t grow in value like real estate because they depreciate,” explains CohnReznick Capital Markets Securities President Rob Sternthal. “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.”

CohnReznick notes that the fall in stock prices is making this worse.

“The precipitous stock price declines have made it more difficult to continue to acquire projects since many yieldcos use their stock as currency,” confirmed CohnReznick Co-National Director of Renewable Energy Tim Kemper. “Those that have suffered the largest price drops, and the ones that have not matured, naturally have less cash available for acquisitions.”

The result is that while yieldcos have traditionally been the first buyers of assets, this is changing. The owners of yieldco vehicles are also taking different approaches to dealing with these issues.

CohnReznick notes the rise of warehouse vehicles to hold projects until they are ready for acquisition, with the object to sell these projects if need be. SunEdison alone has three warehouse facilities backed by $3 billion in capital.

The report also identifies the pending drop-down of the U.S. Investment Tax Credit as another problem for yieldcos, as fewer utility-scale projects are available for acquisition.

“It really hurts them because it means they have to put a lot of assets together on the C&I or residential side to get the growth that they want,” says CohnReznick Capital Markets Securities President Sternthal.

“The only way to get into that market in a meaningful way is to actually create a vertical company with development or rollup EPCs or developers, so I expect we will see a number of acquisitions of these companies.”

At least one company appears to be ahead of these trends. SunEdison was the first solar developer to get into the yieldco space and has already begun moving more distributed solar projects into yieldcos TerraForm Power and TerraForm Global.

The report finds that due to these difficulties, many companies are looking for alternative strategies for long-term asset ownership. These include securitization of assets, which SolarCity has pioneered.

Master Limited Partnerships have also been identified as a potential vehicle, however this tax-beneficial structure is currently limited by U.S. law to the oil and gas industry and it would take federal legislation to change that.