Solar goes public: The rise of yieldcos

In late July, SunEdison’s new subsidiary TerraForm Power went public on the NASDAQ stock exchange. Priced at $25 per share with 23 million shares including underwriters’ options, this brought the company $533 million in net proceeds.
SunEdison has done a lot of different things as a company, from making polysilicon for semiconductor applications under its previous incarnation as MEMC, to becoming one of the world’s largest solar PV project developers. By contrast, TerraForm Power has one product: electricity, and the value that it provides to shareholders is based on the long-term sale of that electricity.
While SunEdison has many different kinds of assets, TerraForm Power’s assets are all solar PV plants, albeit hundreds of them spread across three continents, totaling 808 MW of capacity.
TerraForm Power is one of at least eight yieldco vehicles in existence, three of which – TerraForm, NextEra Energy Partners, and Abengoa Yield – went public in June and July 2014. These vehicles hold portfolios of renewable and conventional energy assets, and pay dividends to investors through the sale of electricity.
They also provide a new source of low-cost capital, which can support further renewable energy project development and acquisitions. This point is emphasized by Keith Martin of the law firm Chadbourne & Parke, who has written extensively about yieldcos. “The most important advantage is just that it is the lowest-cost way to raise capital,” says Martin. “The renewable energy industry is always trying to find a way to reduce the cost of the product it is delivering. It can’t really compete with fossil fuels, especially gas, unless it cuts costs.”

The yieldco concept

The concept behind yieldcos is borrowed from the conventional energy industries, and specifically the oil, gas, and coal industries, which have utilized a similar concept with master limited partnerships (MLPs) for years. Like yieldcos, MLPs do not pay corporate taxes, and instead dividends are taxed at the investor level. In the real estate industry, real estate investment trusts (REITs) offer a similar structure. Yieldcos, MLPs and REITs all offer stable cash flows to investors, and a fixed yield is a fundamental component of the yieldco structure.
These structures offer a way to separate fixed assets that generate revenue from the more risky parts of businesses. While investors are generally comfortable with power plants, and becoming more so with wind and solar projects, investing in manufacturers and project developers carries more perceived risk. As such, yieldcos can attract low-cost capital by focusing on the reliable cash flows of electricity sales.
Yieldcos have been around for years. The first yieldco, Brookfield Renewable Energy Partners, was created in 1999. With 6 GW of installed capacity, Brookfield holds mostly hydroelectric plants. In 2013, several more yieldcos went public, including TransAlta Renewables, Hannon Armstrong, Pattern Energy Group and NRG Yield. These hold mostly wind assets, although NRG Yield’s portfolio includes eight utility-scale PV plants and two portfolios of distributed solar assets.
Many in the industry had been considering yieldcos as a potential vehicle for solar assets for years, and a June 2012 report by Reznick Partners for Bloomberg New Energy Finance identified the need for high liquidity vehicles to “make solar project investments a more liquid option and that allow these projects to tap a broader pool of investors via the capital markets.”

Solar goes mainstream

The three yieldcos that were launched in June and July are different in that they contain mostly solar assets. Also, two were launched not by independent power producers, but by solar developers.
Abengoa Yield features mostly concentrating solar power (CSP) plants and some conventional assets, and SunEdison’s portfolio is entirely solar PV plants.
This is a milestone for solar. As GTM Research Solar Analyst Corey Honeyman explains, “I think both the securitizations we have seen issued by SolarCity and these wave of yieldcos both represent an increasing confidence in solar as an asset class.” Despite the interest, the solar industry had to achieve a certain scale to make this possible. Martin estimates that a yieldco needs 1 – 1.2 GW of development assets in order to gain sufficient interest from investors.
A peculiarity of SunEdison’s yieldco is that it is based not only on utility-scale assets, but also on residential and commercial projects, including projects on food and clothing stores, schools, and a civic center. All told, TerraForm’s 220 projects in the U.S. and Canada have an average capacity of under 3 MW.
Not only developers but also investors are taking to renewable energy yieldcos. Trading has been brisk on many yieldco stocks and stock prices high. NextEra Energy Partners, which combines wind and solar assets, held an IPO at $25 per share, and has been trading at or just below $35 per share for most of the last month.

Retained value

The motivation for solar developers to adopt such a structure is simple. For companies such as SunEdison, SunPower, and Abengoa, holding solar PV and CSP projects is often far more profitable in the long run than selling them. SunEdison has been quite clear about the long-term financial benefits. During the first quarter of 2014, the company retained 74 MW of the PV projects that it completed, which captured an estimated $100 million in additional value.
“So while we forgo higher short-term gross margins, giving up about $25 million in Q1 gross margins, we create higher long-term value of more than $120 million in those same projects for SunEdison shareholders,” explained SunEdison CEO Ahmad Chatila on the company’s first quarter 2014 conference call.
Developers such as SunPower and First Solar are holding projects without yet resorting to yieldco structures.
SunPower says that due to the company’s large cash balance and deep reserves, it does not have to launch a public vehicle. First Solar has also been reluctant to commit to a yieldco.
Other companies are in a different position, and would be difficult for SunEdison to hold the plants in TerraForm Power without this structure, says Honeyman: “There are a whole other suite of risks that come with owning large utility-scale assets, which SunEdison does not have experience doing. If they were to do this without a yieldco, a lot of the financing costs would be too prohibitive.” It remains to be seen how far this trend will go. The solar PV and CSP portfolios of TerraForm, NextEra Energy Partners and Abengoa Yield totaled 1.76 GW at the time that IPOs were launched. However, these companies have right of first offer on multiple GW of projects under development, and in late July SunEdison acquired a 156 MW solar project in Colorado, which will be available for its yieldco upon completion.
Martin notes that once yieldcos are created, they tend to rapidly absorb assets. “The one drawback is that these yieldcos are like vacuum cleaners – they hoover up assets.” As such, the availability of assets could be a limiting factor for the expansion of the structure. “The real talk is how much capacity there is for yieldcos in the market,” explains Martin. “There may not be as many assets to hoover up to start and then to grow.” In the long run, yieldcos are one more sign of the solar industry’s growing maturity, and yet another way to bring down the cost of capital, as solar becomes more and more of a mainstream source of energy.