Avoiding the YieldCo Debacle
We’ve been skeptical about so-called YieldCos from the start. And it turns out we were right. Over the past year, many of these securities have undergone steep selloffs, while one firm has even entered bankruptcy.
Companies such as NRG Yield Inc. (NYSE: YLD), the first YieldCo, TerraForm Power Inc. (NYSE: TERP) and NextEra Energy Partners LP (NYSE:NEP) have suffered disastrous declines by as much as 45%, 76% and 36%, respectively.
Further, as we reported two weeks ago, the Spain-based sponsor of Abenoga Yield (NYSE: ABY) appeared to be headed for bankruptcy, though the subsidiary has taken steps to shield itself from its parent’s fall-out.
And there was speculation in a recent Wall Street Journal article that TerraForm could be impacted by what was then the expected bankruptcy of its parent, solar developer SunEdison Inc. (NYSE: SUNE). Yesterday, SunEdison announced that it had filed for Chapter 11 bankruptcy protection.
Back in 2014, in an article entitled, “YieldCos: Let the Buyer Beware,” we argued that these entities were still too new and too small to compete with other energy companies, and had questionable corporate structures.
At Utility Forecaster, we always demand that any new type of investment establish a strong track record before we’re willing to consider it.
In the case of YieldCos, we couldn’t help but wonder whether utilities were making an ill-timed bet on the master limited partnership (MLP) craze. Similar to MLPs, YieldCos are a way for utilities to monetize operating assets that generate steady, low-risk cash flows. Instead of pipelines, however, YieldCos typically house contracted renewables, since current law precludes them from being dropped down into an MLP.
You know a new asset class is sunk when one of its pioneers is having second thoughts. Recently, former NRG Energy Inc. (NYSE: NRG) CEO David Crane, the architect of one of the first YieldCos, told Bloomberg that there are too many YieldCos, which is “overwhelming the market,” and that the business model was “completely broken.”
Among their many shortcomings, YieldCos have significant governance risk. Indeed, many YieldCo senior officers hold similar positions at their parent companies.
Clearly, non-arms-length transactions can be a recipe for disaster, given examples from the recent past where parent companies negotiated advantageous agreements at the expense of subsidiaries. In some cases, the parent company even dumped non-performing assets into a subsidiary or off-balance sheet partnership to improve the optics of the legacy company’s financials.
The question here is how to know whether a YieldCo is getting a good deal on an asset, when the parent company’s management team essentially controls the terms on both sides. To ensure such deals are better aligned with shareholder interests, investors should demand that YieldCos have their own independent management teams.
But as we predicted, without independent boards, conflicts of interest have abounded. With regard to SunEdison, there have already been allegations made that the parent took advantage of its YieldCo subsidiary in controlling both sides of deals.
According to Business Insider, at one point, SunEdison and TerraForm did a major conflicts-committee-board shake-up, and TerraForm’s CEO and CFO were replaced with executives tied to SunEdison.
Specifically, former SunEdison CFO Brian Wuebbles became CEO of both YieldCos, and a SunEdison board member, Peter Blackmore, became chairman of the companies, according to the report.
This action caused the resignations of several board members, while also prompting a strongly worded letter from billionaire David Tepper, who has a stake in TerraForm. Tepper, according to Business Insider, “accused SunEdison of unloading low-grade assets onto TerraForm Power, and stacking the board with loyalists who would do its bidding.” Sound familiar?
Of course, what happens to YieldCos now is anyone’s guess. Former NRG CEO Crane believes they will have to be remade and will likely be taken private.
We would hope so, as many of these YieldCos clearly had no business being public investments. After all, their promises of “yield” have proved to be empty.
Our Super-Secret Stock Pick
In May, we’re holding our annual Wealth Summit–this year in Las Vegas. It’s a great way for us to meet you, our subscribers, one-on-one, and there are still spaces open if you’re interested.
Also this year, we’ll be making a special recommendation to those who attend the Summit, and to those who are part of our Wealth Society, whose members receive all the Investing Daily newsletters and other premium services.
It’s a fun exercise for us because there are no rules. We don’t have to pick a utility stock. In fact, our pick doesn’t even need to be a stock: It could be an alternative investment that isn’t traded on a public market.
Our publisher says we can’t reveal the pick in Utility Forecaster, or even to him before the Summit. But in the weeks ahead, we’ll let you in on some of the research we’re doing to identify this exclusive pick.