$2.6bn double deal shows good side of US yieldcos


February 9, 2018

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Have you been reading our weekly North American edition?

Well, you should. It goes out at 1pm UK time on Thursdays, and yesterday’s was a cracker. It included news of two acquisitions worth a combined $2.6bn involving major US yieldcos. Phew!

Regular readers will know we’ve always treated US renewables yieldcos with healthy scepticism. Four years ago, these were a popular way for energy companies in North America to raise funds. These firms would set up a yieldco to hold its operating wind and solar farms, and use it as a buyer its newly-completed schemes.

The parent firm would then list the yieldco on the stock market, and raise cash from regular share offerings. The problem was that returns offered by US yieldco owners were too high, which meant that they had to keep buying new assets to meet those targets.

The result was that more yieldcos were chasing the same pool of assets, and prices rose. That made the market unstable – and, in the second half of 2015, we saw the result as investor interest in listed US renewables yieldcos fell.

But this week’s deals suggest we are seeing more maturity now.

First, TerraForm Power confirmed this week it has made a $1.2bn (€995m) takeover bid for Spanish yieldco Saeta Yield, with backing from parent group Brookfield Asset Management.

TerraForm said the transaction would be financed with a $400m equity offering backed by Brookfield; and that Saeta’s two main shareholders – construction group ACS and US firm Global Infrastructure Partners – are to sell their stakes of 24% each.

The deal would enable TerraForm Power to increase its 2.6GW portfolio of wind and solar assets by 40%. Saeta Yield owns 1GW of wind and solar farms, of which wind accounts for 777.5MW in Spain (538.5MW), Portugal (144MW) and Uruguay (95MW). It also means TerraForm Power can expand in western Europe.

This deal is all the more intriguing when you recall that TerraForm Power was one of two that US firm SunEdison set up to help bring in stock market money that would support its rapid expansion.

In the end, though, SunEdison’s growth was too unstable. It took on too much debt and was hit hard when investors started to shy away from renewables yieldcos. This hit both TerraForm vehicles hard, and was a big factor in the financial problems at SunEdison that ended up with the firm filing for bankruptcy protection in 2016.

SunEdison only exited bankruptcy protection last month after Brookfield agreed to buy 51% of TerraForm Power for €551m,
and all of TerraForm Global – the other SunEdison yieldco – for €630m. And now Brookfield is looking to bolster the former by growing with Saeta Yield’s portfolio of renewable energy assets.

It looks like a sensible move. The problems with yieldcos in 2014 and 2015 were speculation and too much ambition but, at their heart, they own cash-generating assets and can operate as sensibly as any other developer. Yieldco consolidation can work.

Those sound fundamentals are making US yieldcos attractive for other investors. In yesterday’s other big deal, Global Infrastructure Partners agreed to pay $1.4bn for NRG Energy’s development and O&M arms; and a 46% stake in its yieldco NRG Yield. It isn’t a pure yieldco investment, but shows that such deals can fit neatly with wider corporate strategies.

GIP is set to put NRG Yield, and its 5.1GW wind, solar and gas portfolio – of which 3.1GW is wind – into its Global Infrastructure Partners III fund. This is in addition to 2.4GW of projects for which NRG provides operations and maintenance services; and 6.4GW development pipeline. This should complement GIP’s strategy.

Last month, it finalised its $5bn takeover of Equis Energy, which gives GIP a 4.4GW operational wind, hydro and solar portfolio in the Asia-Pacific region; and 6.7GW in development. It said Equis Energy would provide it with a strong platform to grow in Asia-Pacific, and we think NRG could play a similar role in the US.

These deals highlight what we always thought. The problem with US yieldcos wasn’t that they bought bad assets, but they overpaid for good ones. If that era is at an end, we’ll be big fans.

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