A new corporate structure known as a YieldCo is gaining popularity across the utilities and power sector. YieldCos are publicly traded companies which own power-related infrastructure that have long term offtake agreements in place which enable predictable cash flows that allow stable (and growing) dividends for investors. There have been over 15 IPOs of YieldCos on either the London or New York stock exchanges since the first YieldCo, Greencoat Wind, went public on the London Stock Exchange in March 2013. The UK YieldCos have, however been small in comparison to the US listed companies. Greencoat for instance, has only 275MW of assets as opposed to NRG Yield in the US with 3GW of cash generating power and heat generation assets and a market capitalisation of $3.3bn.
The sponsor and majority shareholder NRG Energy, a large US independent power producer, was able to liquidate some of its assets without having to outright sell them thereby enabling them to retain the management and servicing of those assets. The YieldCo also enabled NRG Energy to get a better valuation for those power generation assets than if they just kept them on their own balance sheet. The reason for this is that the YieldCo structure takes advantage of current investor appetite for yield investments who are willing to pay high prices to get safe and secure returns going forward. Another benefit for NRG Energy is that the YieldCo enables it to recycle its capital into further growth which is reflected in a stock market valuation which is, today, well beyond a standard utility. And the result for NRG Energy is that it has created significant shareholder value and probably a revolution in the power market.
With regards NRG Yield, IPO investors were buying into a vehicle that was promising to pay a 5.5% dividend. However a strong performance in the share price means that a new investor today will only receive a dividend of circa 3% but they will receive a planned dividend growth of 15-18% each year for the next five years thanks to an agreement with its sponsor NRG Energy that cover a set group of assets.
There appears to be significant appetite for YieldCos which on average are up 25% since IPO. This should not be a surprise given the low interest environment we are currently operating in. Where else can you put your money? German 10 year government bonds recently reached an all-time low of 0.98% returns. The thirst of investors for yield continues unabated and the steady, long terms returns available from regulated assets in the power sector are very attractive to investors. This can be clearly seen in the success of the most recent YieldCo IPO, Abengoa Yield which launched on the NYSE in June. It is currently trading up 30% on its IPO price of $38 and is trading at a forward dividend of 3% and that despite what looks like a risky portfolio. The assets are in Spain (which has made retroactive changes to legislation), Chile, Uruguay, Peru and the US and they are also different technologies. The initial portfolio comprises 710 MW of renewable energy generation (solar and wind), 300 MW of conventional power generation and 1,018 miles of electric transmission line.
YieldCos lend themselves perfectly to renewable assets which have no fuel price risk and tend to have long term power purchase agreements in place (such as feed in tariffs) and other regulated assets such as the grid (which again have long term agreements in place). Given that some of the largest global owners of renewables assets (Iberdrola, EDP, SSE, Enel, E.ON) are all in Europe it begs the question why we have seen no European utility doing a YieldCo?
The good news is they are all thinking about YieldCos but thinking and doing are separate things and utilities (especially European ones) are notoriously slow with complex decision making processes and oftentimes poor leadership. It is also not a coincidence that NRG Energy was the first utility to do launch a YieldCo and that Abengoa was the first European developer and asset owner to do so. Both David Crane from NRG Energy and Manuel Sanchez Ortega from Abengoa are two leaders who have long ago fully embraced the enormous changes going on in our power markets as well as the opportunities it brings. YieldCos are about value creation. That said European utilities have destroyed a lot of shareholder value in recent years so it is probably not a surprise that they are not leading the race to YieldCos…