WUEG September 2015 Newsletter

whartonundergradenergy

September 2015

Alternative Energy Yield Companies: Gimmick or

Game Changer?

Max Isenberg – Senior Member, Academic Committee

One of the core problems for a capital intensive

and growing industry is financing. In the past 2

years, alternative energy companies have

gravitated towards yield companies (or yieldcos) as

the solution. The first alternative energy yield

company was Brookfield Renewable Energy

Partners, which IPO’d in 2012. By mid 2015, the

number of yieldcos had risen above 15, raising over

$12 billion in capital for their parent companies.

What has been encouraging so many firms to

pursue this new source of capital, and will they

remain the method of choice for the foreseeable

future?

To an investor, a yieldco offers up a similar value

proposition as a real estate trust fund (REIT) or a

master limited partnership (MLP). All three

investment vehicles essentially collect the cash

flows of very stable and highly capital-­‐intensive

assets (either solar modules/wind turbines, large

real estate portfolios, or oil pipelines) and pay cash

flows out in the form of dividends to investors,

with the operations of acquiring and constructing

the assets being left to the parent company. For

the parent companies, the motivations also are

quite similar among all of these types of

subsidiaries. To get the financing for very

expensive projects (be it building solar farms,

buying up lots of property, or laying down an oil

pipeline), existing assets can be “dropped down”

into a subsidiary and subsequently IPO’d to raise

capital off of their existing assets. Yieldcos also

benefit tremendously from tax breaks, as parent

companies can earn significant tax-­‐offsetting net

operating losses (NOLs) via non-­‐cash depreciation

expenses associated with these assets. Thus, firms

can raise capital, pay low-­‐risk dividends, and avoid

taxes.

Up until the summer of 2015, investors

aggressively sought Yieldcos for investment. In a

low interest rate environment, attaining higher

yields is very difficult, and so yieldcos, which pay

the equivalent of 4.5 -­‐ 7.5% annually, are highly

sought after. Energy companies, and in particular

photovoltaics manufacturers like First Solar and

SunEdison, have continued to bundle their assets

for new yieldcos. To these module makers, the

yieldco has enabled them to raise relatively cheap

capital in large quantities with relative ease.

However, after SunEdison’s most recent yieldco

IPO, Terraform Global, the music may have

stopped for the yieldco party. Unlike the other

yield companies that experienced large pops in

their stock price post IPO, Terraform Global

declined 6% on its first day and never returned to

its IPO price. Existing yieldcos have also faced

significant losses. Several theories abound as to

why the good fortune for yield companies has so

suddenly reversed. The Federal Reserve is

expected to begin raising interest rates soon,

making the dividends that yieldcos pay seem less

whartonenergygroup.com 6

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