First Solar, SunPower Foresaw Tepper's Concerns About Yieldcosby and
With two sponsors for yieldco, `we keep each other in check'
Billionaire Tepper cites conflicts at SunEdison's TerraForm
When First Solar Inc. and SunPower Corp. decided to create a yieldco together in February, the result, 8point3 Energy Partners LP, was unique for having two corporate parents instead of one.
Now that the market for these clean-energy holding companies has tanked, their strategy seems prescient. The reason: Neither parent can dominate the venture, giving 8point3 more independence at a time when investors are expressing concern about conflicts of interest at other yieldcos. On Monday, 8point3 said it’s on track to boost its dividend in 2016 and that every project in its initial 432-megawatt portfolio is generating revenue.
“We keep each other in check,” First Solar Chief Financial Officer Mark Widmar said in an interview Dec. 4. “We knew there was a lot of risk inherent in the existing models.”
A key example of concerns with the existing model is TerraForm Power Inc., a subsidiary of SunEdison Inc. After the parent company restructured the yieldco’s management last month, two of TerraForm’s independent directors quit, saying they couldn’t “protect the interests of the stockholders.”
Investors including billionaire hedge fund manager David Tepper are raising questions about yieldcos’ independence, since their primary function is to buy power plants from a corporate parent.
That relationship between yieldco and sponsor has Tepper concerned. He disclosed Dec. 2 a 9.25 percent stake in TerraForm, and says the company isn’t providing enough details about pending acquisitions from SunEdison.
In a critical letter to the board released the day before his disclosure, he cited “obvious conflicts between the interests” of TerraForm and “its sponsor SunEdison,” and said some of these deals have more benefit to SunEdison than TerraForm.
Tepper said in an interview that he was prompted to write his letter by the resignation notices of the former TerraForm directors, who questioned the yieldco’s independence. Ben Harborne, a spokesman for SunEdison and TerraForm, declined to comment.
TerraForm has lost almost two-thirds of its market value in the past three months through Dec. 4, as investors pull back from the holding companies. That’s the most on the Bloomberg Intelligence North America Power Yieldco index of seven companies, and the entire index is down 23 percent over the same period. The 14 percent decline at 8point3 is the smallest for a U.S.-based yieldco. Goldman Sachs Group Inc. analyst Brian Lee upgraded 8point3 to neutral last week.
Under the most common model, yieldcos are publicly traded holding companies that buy power plants, from their parent and from other developers. Those sales give developers capital to build new projects, and the yieldcos get long-term revenue streams from selling electricity.
The risk is that the parent, sometimes known as the sponsor, will influence yieldco management to approve purchases of power plants that don’t make economic or strategic sense.
Mike Garland is aware of the perception that a sponsor and its yieldco may be too closely linked. He’s chief executive officer of Pattern Energy Group LP, a closely held developer, and holds the same title at its publicly traded yieldco Pattern Energy Group Inc.
"Conflicts are real,” Garland said during a panel discussion Dec. 3 at the Renewable Energy Yieldco Conference in New York. “They’re a real problem.”
Pattern buys assets from its sponsor and other companies. Garland said in an interview that yieldcos are typically purchasing projects at about 11 to 13 times cash flow these days, and his holding company is making deals with its developer parent at about 10 times cash flow, in part to demonstrate value to shareholders.
Other yieldco investors share Tepper’s concerns about TerraForm’s independence.
“The oversight is gone,” Tom Konrad, head of research for JPS Global Investments LLC’s Green Economy Fund, said in an interview at the yieldco conference.
Similar concerns over conflicts have dogged master-limited partnerships, a similar type of holding company that’s common in the oil and natural gas industry. In August, Kinder Morgan Inc. agreed to pay $27.5 million to resolve claims it had artificially inflated more than $3.2 billion in payouts from pipeline partnership Kinder Morgan Energy Partners LP.
FirstSolar and SunPowerwere touting the advantages of having two sponsors before 8point3’s initial public offering in June.
“We felt it was a superior governing structure because you have an extra layer of protection, you have an objective buyer,” said 8Point3 CEO Chuck Boynton, who’s also SunPower’s CFO. “We discussed all this on the roadshow.”
Having two sponsors has another benefit over single-parent yieldcos, said Swami Venkataraman, a vice president at Moody’s Corp. in New York.
“You have better access to projects and pipelines than if you’re just dependent on one sponsor,” Venkataraman said in an interview. “Having two fifty-fifty investors makes it stronger.”