Renewables Turn to Yieldcos for ‘Cheapest’ Equity, Abengoa Says

Apr 04, 2014 1:31 pm ET

April 4 (Bloomberg) -- Renewable-energy companies are showing increasing interest in creating “yieldcos,” a strategy that may provide cheap capital, according to Abengoa SA’s chief executive officer.

The yieldco concept is hitting “critical mass,” Manuel Sanchez Ortega said in an interview yesterday in New York. The Seville, Spain-based energy company filed April 1 to form a yieldco unit in the U.S. through an initial public offering.

It’s one of at least a dozen developers in North America and Europe that are considering yieldcos or have already formed one. A yield company is a separate business that owns and operates power plants. Revenue from selling electricity lets them buy new plants as they go into production, and those purchases give the developers capital to build projects.

“The yieldco is the cheapest equity you can find in the market,” Ortega said. “You’re going to see more and more.”

Abengoa Yield Plc is seeking to raise as much as $600 million through an IPO on the Nasdaq Stock Market.

It will follow companies including NRG Energy Inc.’s NRG Yield Inc., which has risen more than 95 percent since it began trading in July, and TransAlta Corp.’s TransAlta Renewables Inc., which has gained 18 percent since its August IPO.

SunEdison Inc. has a yieldco unit that’s expected to go public this year. The company said April 2 that Goldman Sachs Group Inc. was providing $250 million in initial capital for the unit to buy projects from SunEdison and other companies.

SunPower Corp. and First Solar Inc. have both said they’re evaluating yieldcos, though neither is planning one anytime soon.

New Model

The yieldco model is still relatively new, so it’s hard to evaluate their long-term risks, said Mihoko Manabe, senior vice president at Moody’s Investors Service Inc. To be viable, a yieldco needs a steady stream of new assets, so they may be limited to large developers.

“You have to have enough projects in backlog to demonstrate to investors that you can sustain these dividends and a growth in these dividends,” Manabe said.

“Most of the companies we look at don’t have that kind of backlog,” she said.

“They’re just not sizable enough or have the growth potential to keep feeding these yield vehicles,”

Free Fuel

Yieldcos typically maintain a close relationship with their developer partners. Owning wind farms or solar parks gives the yieldcos a steady stream of revenue with low costs because wind and sunshine are free. That helps them buy new plants from developers at favorable terms, said Swami Venkataraman, a vice president at Moody’s.

Under this model, the developers are “recycling” their capital. “If they build one plant and then want to build the next one, they could sell an existing plant into the yieldco and raise equity,” Venkataraman said. “It makes it cheaper to raise equity than some other means.”

That’s exactly what Abengoa plans to do. The company expects Abengoa Yield to become its main vehicle for owning, managing and acquiring renewable energy projects, conventional power plants and transmission lines.

“It makes perfect sense in our case to try to accomplish this,” Ortega said. “This is equity we have already invested and we recover it.”

For investors, the appeal is dividends. As yieldcos acquire new projects they can offer higher returns. NRG Yield raised its dividend to 33 cents a share in January, from 23 cents. TransAlta Renewables is paying 6.4 Canadian cents, up from 4.7 cents announced in August.

In the U.K., Greencoat U.K. Wind Plc raised 260 million pounds ($431 million) in its March 2013 IPO, pledging to pay a dividend yield of 6 percent. The Renewables Infrastructure Group Ltd. raised 300 million pounds in its July IPO and said it targets a dividend of 6 percent.