Newfangled Energy Stocks -- The Yieldcos -- DIsappoint -- November 9, 2015

From a post back on October 12, 2015:

Now we have this story from The New York Times: intermittent energy financing has hit a snag (if you hit a paywall, google renewable energy financing hits a snag).

Only a few months ago, it seemed that the renewable energy sector could do little wrong: Stock prices were soaring and money was pouring in as investors flocked to get in on the action.

That is no longer the case. Low oil and gas prices have roiled the energy markets, and the specter of rising interest rates has rattled investors’ confidence in the industry’s returns. Although energy and financial experts say that the basics of the business remain sound, the lofty stock prices have tumbled, leading renewable energy companies to scramble for new approaches to their businesses.

Nowhere has the retrenchment been more acute than in a newfangled financing mechanism called a yieldco. Yieldcos, public companies conceived by renewable energy companies as a way to raise cheaper capital for project development, have attracted billions 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 initial public offerings of their stocks over the last year and a half.

Last week, though, one of the most aggressive companies in the sector called a timeout.

SunEdison, 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 percent, withdrawing from Britain and cutting roughly 15 percent of its work force.

I bring that up because The Wall Street Journal has a very similar story today:

When they were first launched, “yieldcos” lit up the stock market like fireworks with their impressive dividends and the prospect of even higher yields to come. But these new renewable-energy stocks flamed out as dramatically as they appeared, and it now looks as though many may fall short of the hopes of yield-seeking investors.

Then someone thought of "yieldcos."

For a decade or more before yieldcos came along, it was one of the biggest enigmas on Wall Street: The world’s largest economies were shifting their electricity grids to renewable-energy sources, but investors and corporations, with rare exceptions, couldn’t seem to make a buck on the energy revolution.

In theory, yieldcos combined the safety of a steady revenue stream and the sexiness of a fast-growing company, in an era when these companies’ 5%-plus yields have been almost impossible to find elsewhere. In the 30 months following NRG Yield’s launch, about $28 billion was raised in yieldco IPOs, according to Bloomberg research.
But in the time-honored tradition of Wall Street, yieldcos sounded too good to be true precisely because they were.

Investors who piled in saw share prices drop in recent months as the answers to some questions about yieldcos emerged. Namely, who was going to pay for the new projects after the IPO money dried up? (Answer: the investors, whose stakes would be diluted by new offerings of yieldco stock.) What would happen to the construction costs for solar-panel complexes and wind farms when billions of dollars of newly raised capital started chasing the builders? (Answer: They would shoot higher.) Would yieldco investors sit tight as interest-rate increases loomed or flee like many other utility investors? (Answer: They ran for the hills.)