Battered Yieldcos Still Offer Returns After 54% Share Slump

  • Back to square one: `a steady-as-she-goes financing vehicle'
  • Yieldcos hold 15 gigawatts of power plants worth $35 billion

Yieldcos have been battered, but they’re not in danger of dying.

The eight publicly traded North American companies known as yieldcos control 15 gigawatts of power-producing assets valued at more than $35 billion, with long-term contracts to sell electricity. They’re “the optimal long-term ownership vehicle” for renewable-energy plants, according to a report released this week by Marathon Capital LLC.

Yieldcos are essentially holding companies, created to own and operate power plants, and they’ve taken a beating this year as share prices tumbled and investors began questioning their ability to sustain rapid growth. Those concerns ignore the fact that the assets yieldcos already own will continue to fund dividend payments for years to come, and that all the companies have met every one of their payout targets to date, according to the Marathon report.

“There’s always concern about a yieldco death cycle,” Josh Cornfeld, an associate at Bannockburn, Illinois-based Marathon who co-wrote the report, said in an interview. “We don’t feel that’s true.”

Dividend Growth

Yieldcos are typically formed by clean-energy developers to buy their power plants. This gives developers capital for new projects, and yieldcos end up with assets that generate steady revenue from selling electricity. That helps fund dividends, and part of the appeal for investors is the idea that as yieldcos buy more assets, their revenue increases and so will their dividends.

“We believe yieldcos are a rational vehicle,” said Terry Grant, a Marathon managing director and co-author of the report.

The yieldco market began slowing in the second quarter, largely due to external factors including lower oil prices that affected the entire energy industry, according to Cornfeld. As share prices declined, investors grew concerned about the companies’ ability to maintain dividend growth, fueling even steeper declines in market value. A model weighted index of six yieldco equities created by Marathon peaked on May 28, and then slumped 54 percent by late September. (Two more yieldcos held IPOs in this period and aren’t included in the index.)

That’s prompted some investors to reconsider how they value the companies. Previously, the main metric was dividends with the promise of growth, Cornfeld said. Specifically, they watched the two- to three-year forward dividend-yield curve -- the cash available for distribution.

Now, investors are increasingly looking at yieldcos’ net present value -- the value of their existing assets.

“In some ways, they’re back at square one -- a useful steady-as-she-goes financing vehicle that provides cash flows of operating clean energy projects,” said Ethan Zindler, a Washington-based analyst at Bloomberg New Energy Finance.

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