Enel yieldco plan fits push in new markets


February 20, 2015

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Listing a yieldco on the stock exchange is like creating a “monster that you have to feed”.

So said Enel’s chief executive Francesco Starace, when discussing the Italian utility’s plan to set up a yieldco for its North American projects. Enel is set to form the structure in the coming weeks but, crucially, it will not list it on the stock exchange. Why?

There are two reasons we think Enel is avoiding a listing. First, because of problems with the inherent instability the US yieldco structure; and second, because it is concentrating on emerging markets. More on both of those in a minute.

First, let’s take a closer look at the utility’s plan. An Enel yieldco would certainly hold a wide range of assets. The firm’s renewable energy arm Enel Green Power owns over 90 projects in North America, spanning the wind, solar, hydro and geothermal sectors. These are spread over 21 US states and two states in Canada.

Aggregating them into a single yieldco enables Enel to attract investors who want to invest in a portfolio of established projects that are already generating reliable returns.

With historic low interest rates in Europe and the US, that makes an investment product like this attractive — and Enel says it has already courted interest from a multitude of institutional investors.

The financial structure also enables Enel to move assets off its balance sheets and, in turn, free up finance for new projects.

And so to the key question: why not publicly list?

Over the past two years, energy firms in North America have raised around $2bn by spinning out their yieldcos in initial public offerings. Businesses that have done so include the likes of Brookfield, NRG, Pattern Energy and TransAlta. The IPOs have been successful.

However, in order for yieldcos to maintain growth, they have to keep adding new assets. No ifs, no buts.

Greencoat Capital’s Richard Nourse outlined at our 2014 annual conference that this constant investor pressure meant yieldcos would overpay for some assets to secure portfolio growth.

In our view, this makes the US yieldco structure inherently unstable, and Enel is right to exercise significant caution. It does not want the pressure to grow to affect the quality of its business decisions; and it will also want to avoid the significant commitment in time and money that comes with communicating regularly to the market.

Yes, it will keep adding projects to the yieldco, but far better to do so on the its own terms, as opposed to meet the needs and potentially unrealistic expectations of a public investor base.

The lack of a public listing suggests that Enel is not targeting huge development plans in North America, since it does not anticipate having a large pipeline of domestic projects to add into its yieldco. Rather, it sees a North American yieldco as a neat way in which to free up capital to invest in new projects in emerging markets.

In Enel Green Power’s 2014-2018 Business Plan, published last April, it identified markets such as Ecuador, Egypt, Kenya, Russia, Saudi Arabia and Uruguay as key growth prospects, as well as in its 16 established markets. Leveraging its existing, stable North American asset base enables the firm to pursue its long-term strategy of diversifying away from established markets.

That leverage is critical, but the company doesn’t want its attention consumed by a North American monster.

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