Renewable Energy Companies Struggling To Salvage Their Businesses
$SUNE, $SCTY, $NRG, $CAFD, $FSLR
Not so long ago, the renewable energy sector could do little wrong: Stock prices were rising, and money was flowing in as participants charged into the sector.
No more.
Low Crude Oil and Nat Gas prices have shaken up the energy markets, and the notion of rising interest rates has rattled participants’ confidence in the industry’s returns. Although energy and financial experts say that the basics of the business are still sound, the high stock prices have cratered, leading renewable energy companies to scramble for new approaches to salvage their businesses.
Nowhere has the retrenchment been more acute than in a new financing mechanism called a yieldco.
Yieldcos’ are public companies conceived by renewable energy companies as a way to raise cheaper capital for project development, have attracted billions f dollars in new investments.
The yieldcos buy and operate power plants, mainly those that their parent companies develop. The yieldcos then collect the contracted electricity fees and pay the bulk of them out as dividends. With investors hungry for stable returns, energy yieldcos were greeted with enthusiasm through IPO’s of their stocks over the last 18 months.
Last week, though, 1 of the most aggressive companies in the sector called a “timeout.”
SunEdison (NYSE:SUNE), which has bought several companies in recent months in a bid to become the world’s largest renewable energy developer, told investors it would not sell any more projects to its yieldcos, TerraForm Power and TerraForm Global, until conditions change.
The company said it would trim expenses and streamline operations, including reducing project development by 20%, withdrawing from Britain and cutting roughly 15% of its work force.
“We need to adjust our tactics, at least in the short to intermediate term,” SunEdision’s CEO Ahmad R. Chatila,, said in a conference call with financial analysts last Wednesday.
That adjustment is hardly unique to SunEdison, or even to yieldcos.
Last month, NRG Energy (NYSE:NRG) announced that it would separate its once-heralded Green enterprises, which include a home solar division and an electric vehicle charging network into a separate company with a tight budget. It also said it would pursue a more limited strategy with its yieldco.
Last Tuesday, Moody’s Investors Service downgraded that company, NRG Yield, saying the 30% decline in its share price in recent months would inhibit its ability to raise money for new projects.
But, executives and analysts say that the industry’s long-term prospects remain sound.
“Since July, the sun has continued to shine and the wind has continued to blow and the performance of the wind farms and solar farms that are in the ground hasn’t changed at all,” said an analyst at JPMorgan. “This is really in large part turmoil of the market’s own making.”
That market churn is complicating efforts to push renewable energy to mass scale at a critical time in its development. As subsidies, incentives and mandates totter on the brink of planned and potential extinction, it is more important that the industries reduce costs to compete in the marketplace, experts say. Yieldcos were to be an important part of solving that puzzle, and without them, advocates say, it may be harder to reach that goal.
The idea behind yieldcos was simple on its face
Bundle together completed or nearly completed power projects that ostensibly offered steady, low-risk cash flows in the form of power purchase agreements covering electricity payments over 15 years or so. And because they were tied to power plant developers the yieldcos would have steady pipelines of projects from the parent companies and the parent companies could replenish their capital through those sales.
Part of the rationale was that energy development is expensive and renewable energy projects do not have access to tax-advantaged financing mechanisms like MLPs (master limited partnerships).
Such MLPs spurred the building of Oil & Gas infrastructure like pipelines over the decades. “This was an inventive twist on master limited partnerships, and provided some of the same benefits,” said Dan W. Reicher, executive director of the Steyer-Taylor Center for Energy Policy and Finance at Stanford. But, he said, they do not get all the tax benefits.
Nonetheless, the system proved attractive to investors for a time, and analysts and clean-energy advocates predicted ever more activity and success in the sector. More than a 12 yieldcos have formed since Y 2013, and many have gone public, including 8point3 Energy Partners (NASDAQ:CAFD), a joint venture of First Solar (NASDAQ:FSLR) and SunPower that raised $420-M in its initial public offering in June.
But as yieldcos came to market, each with a hunger to bring in new projects to satisfy investor demand for growth they drove up competition and prices for projects. Participants began to lose confidence that there would be enough projects to go around. In addition, the threat of rising interest rates made the yieldcos less attractive than more conventional financing. And depressed prices for Crude Oil and Nat Gas brought down energy values across the board.
Several analysts and executives attributed the declines to a mismatch between the investors, which include hedge funds looking for a relatively quick return and the investments, intended to pay back over a long time. Others said participants who were losing money in Crude Oil and Nat Gas began dumping their renewable stocks to cover those losses.
Either way, the new companies became caught in a kind of self-reinforcing downward spiral in which the drop in share prices raised dividend yields, making it more expensive to borrow money or issue equity. That, then lowered the returns on new projects and pushed down share prices further.
At SunEdison, one of the most prominent companies involved, there were additional pressures.
Its acquisition spree left investors wary and confused. Executives at SunEdison, whose stock has declined by 70% acknowledged last Wednesday that they needed to do a better job of explaining to investors what they were doing and why.
Despite all the problems, executives say interest in clean energy remains robust.
“There may not be that much enthusiasm for yieldcos, but the pendulum has swung to the opposite direction,” with private lenders and corporations making investments, said the CEO of SolarCity (NASDAQ:SCTY). That company has not yet created a yieldco but said it is “keeping an open mind” to the approach, saying, “Financing is still very strong.”
Stay tuned…
HeffX-LTN
Paul Ebeling
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