Energy Finance Report

Are Seesaw Share Prices Impacting YieldCo Buying Power?

Posted by Joshua L. Sturtevant on 11/12/15 11:57 AM

Make money.YieldCos have been hammered lately, both in the stock market (though things have recently been picking up) and in the press. The reasons are myriad with theories addressing MLP values, rising interest rates, negative public statements from management teams, a slowing Chinese economy, lower oil prices, capital constraints and YieldCo disassociation from parents entities all being floated as potential reasons for recent losses in shareholder value.

Over the past year or so, many have become hopeful that the YieldCo model, in the absence of an IRS-compliant Renewable Energy REIT structure, would become a viable way to access relatively cheap public market capital for transitional energy projects. Thus far, that has played out according to plan, as the YieldCo form has exploded. The question now becomes, do the current issues with share price deflate those hopes in any way? Should developers be concerned about the ability of YieldCos to be viable asset buyers?

While it is important to decouple share price from the ability of a YieldCo to remain in business (to a point) there is one important aspect of recent share price declines that everyone with an interest in renewable energy markets should pay attention to. From a recent Seeking Alpha piece:

…YieldCos need to issue new shares (generally at higher prices than their IPOs) from time to time to raise capital for new investments as most of their cash flow gets wiped out by paying dividends. However, they are facing difficulties on this front due to depressed renewable energy stocks and an oversupply of YieldCos in the market, making investors reluctant to pay higher prices.

Compounding this problem is the fact that it is highly likely that debt issuances will, at some point in the short- to medium-term, become a more expensive proposition. Today’s rates are historically low, and despite its occasional equivocation, the Fed has been preparing the market for rises in the discount rate, which will indirectly impact borrowing costs for corporate issuers. In short, more expensive capital may make it difficult for YieldCos to buy more assets, thus hindering the ability to increase dividend growth in a cycle some have compared colorfully to a Ponzi scheme.

While it would be disingenuous to suggest that an inability to raise new capital is not problematic in the long-term for YieldCos and those that sell assets to them, they have cash and investment appetite in the near term. With the ITC step-down looming, the near term is what most developers, looking to sell over the next 12-18 months, are concerned about at present.

If the premise that YieldCos are viable partners through the ITC step-down is true, developers and other sellers of projects should consider what their projects would need to be saleable. While we have preached the benefits of standardization, project readiness and on this page in the past, certain principles stand repeating in the face of transacting on an accelerated timeline with sophisticated counterparties. Market-ready document suites should be used. Tax structuring should ensure optimization of benefits under IRS-compliant structures. Projects need to be ready for primetime and not presented as ‘shovel ready’ if they aren’t as it is unlikely that Yieldcos will be willing to take on much in the way of completion risk.

Even if publicly-traded YieldCos are viable partners in the short-term, recent negative perceptions may have asset sellers shifting their gazes elsewhere. For those looking to move away from these partners, it could be a good time to consider private models that are funded by sources such as pension funds and insurance companies with lower return expectations than traditional sources and therefore greater ability to both monetize developers’ projects and exhibit staying power after the ITC drop off.

While the share price roller coaster investors have been on may not be that amusing, asset sellers shouldn’t be any more concerned about counterparty risk with YieldCos than they were earlier this year. YieldCos remain a viable counterparty in the near term and, while they may indeed have trouble raising capital in the future as share prices lag, and as cheap debt becomes harder to come by due to the decoupling of these entities from their parent’s balance sheets and the threat of a rising interest rate environment, the ITC step-down should be a far greater concern, both on a macro level and in the context of time.

Disclaimer: The above is not intended to be, nor should it be construed as, investment advice.

Special thanks to Morgan Gerard who assisted in the preparation of this post.

Topics: Energy Policy, M&A, Structured Transactions & Tax, Power Generation, Energy Finance, Distributed Energy, YieldCo, Solar Energy, Renewable Energy

Mid-Atlantic: Distributed Energy Opportunities

Posted by Joshua L. Sturtevant on 11/3/15 11:58 AM

Solar panels at a roof with sun flowersThe Mid-Atlantic region (Maryland, Delaware, Virginia and the District of Columbia) is currently at the forefront of discussions regarding the next generation of distributed electricity markets. Notable developments pushing the region into the spotlight recently include M&A activity, creativity on the part of public service commissions, local innovations in PACE finance, and increasing flexibility on the part of local utilities.

Programs and developments of particular note include:

- Net metering and renewable portfolio standards in Maryland

- PACE financing in Montgomery County, Maryland

- Discussions around undertaking a REV-like proceeding in Maryland

- Interconnection standardization in D.C.

- Microgrid studies being undertaken in D.C.

- Potential third-party bidding for large-scale solar in Virginia

- Renewable portfolio standards and net metering in Delaware

- Community solar innovations and discussions throughout the region

Please join SEIA and Sullivan & Worcester’s Energy Finance team on November 5th live in SEIA’s new offices, or by dial-in, as we host a roundtable discussion on developments in the region and the unique business opportunities they could present. After Rhone Resch’s introductory remarks, Elias Hinckley will moderate a panel comprised of industry experts with unique opinions, including Maryland PSC Commissioner Anne Hoskins, Dana Sleeper of MDV-SEIA, Anmol Vanamali of the DC Sustainable Energy Utility, Bracken Hendricks of Urban Ingenuity and Rick Moore of Washington Gas. Interested parties can register here.

Topics: Water Energy Nexus, Utilities, Water, Carbon Emissions, Energy Security, Thermal Generation, Energy Policy, M&A, Structured Transactions & Tax, Energy Storage, Energy Efficiency, Power Generation, Microgrid, Energy Finance, Distributed Energy, Energy Management, Solar Energy, Renewable Energy, Wind, Oil & Gas

SunEdison/Vivant Deal a Harbinger of Things to Come?

Posted by Joshua L. Sturtevant on 7/24/15 11:58 AM

SunEdison and Vivant, two of the largest players in the residential solar market, announced this week that the former agreed to purchase the latter for $2.2 billion. Some of the basic deal terms include:

- SunEdison will acquire Vivint and will subsequently drop down Vivant's 523 MW rooftop solar portfolio to its yieldco affiliate TerraForm Power
- The portfolio is expected to produce an unlevered annual CAFD of $81 million, which would generate a 9.5% 10-year average levered cash-on-cash yield

While acquisitions are often positive indicators for a sector (the news pushed Vivant shares to record highs post-announcement; the broader sector also received a bump from the news), many observers are wondering whether this deal was a one-off linked to a need to feed the TerraForm platform rather than a data point in a trend line.

However, with the step down in the solar investment tax credit looming, it would not be surprising to see M&A activity pick up in 2016 as uncertainty makes opportunistic buyers out of large players with the ability to navigate a frothy market.

More information on the proposed SunEdison/Vivant transaction can be found here.

Topics: M&A, YieldCo, Solar Energy, Renewable Energy

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The Energy Finance Report analyzes developments in energy finance as well as provides updates and perspectives on market trends and policies.

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