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Amid selloff likely tied to PG&E, yieldcos remain positioned for growth

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Following a weak finish to 2018, yieldco stock performance is mixed thus far in 2019, with negative investor sentiment for some yieldcos likely tied to fears over associated exposure to Pacific Gas and Electric Co., or PG&E, and its parent, PG&E Corp. PG&E Corp. plans to tender a Chapter 11 bankruptcy reorganization by Jan. 29 as it grapples with the anticipated financial liabilities associated with the devastating November 2018 Camp Fire and October 2017 wildfires.

Negative sentiment may have been exacerbated by a Jan. 9, S&P Global Ratings report stating that project companies with material PG&E counterparty exposure through power purchase agreements - particularly those that derive a substantial portion or all of their revenues through a power purchase agreement, or PPA, could be negatively impacted by reduced levels of cash available for debt service in a PG&E Corp. bankruptcy, which we believe has contributed at least in part to recent stock underperformance. Despite this caution, S&P Ratings expects PG&E will likely continue to honor its PPA contracts.

Atlantica Yield PLC, NextEra Energy Partners and Clearway Energy Inc. are the top yieldco power suppliers to PG&E, with 280 MW, 254 MW and 199 MW, respectively, of renewable energy contracted under power purchase agreements, or PPAs, with the utility as of late November, according to S&P Global Market Intelligence data.

Despite depressed equity valuations in recent months, we believe those companies with diversified assets under long-term contracts - as opposed to those exposed to potentially volatile merchant wholesale power prices - and strong equity sponsors that offer enhanced access to growth capital and asset acquisition opportunities through right-of-first-offer agreements, are well-positioned to grow cash available for distribution, or CAFD, and thus investor distributions.

Additionally, we note companies within the yieldco sector have taken steps in recent months to preserve cash for distribution growth, including operations and maintenance cost improvements, project and corporate debt refinancing, and operational enhancements to increase production from existing assets.

Clearway Energy, identified by S&P Global as "the most exposed" to PG&E through ownership or investment in the power plants, including the 805-MW gas fired Marsh Landing Generating Station, 66-MW Alpine Solar facility and 250-MW California Valley Solar Ranch (High Plains II & III), saw its shares decline more than 20% on Jan. 15, touching a 52-week low before recovering somewhat to bring year-to-date losses to 18%, and approximately 45% below the S&P Global Market Intelligence mean analyst price target. The shares surged in the 2018 third-quarter under the new sponsorship of Global Infrastructure Partners following NRG Energy's sale of its interest in the yieldco. However the shares declined through much of the fourth quarter amid a broader sector sell-off, possibly due to rising interest rates, which could increase yieldcos' borrowing costs and hamper access to capital to fund new investments, distribution growth and other cash needs. Through third-quarter 2018, the company's development pipeline comprised 6,645 MW of wind and 2,495 MW of utility-scale solar assets, as well as 366 MW of distributed solar generation, and a capital raise of $675 million, including $600 million of senior notes and $75 million of equity, to support growth initiatives and balance sheet management. The company is targeting 5% to 8% distribution growth in 2019.

Algonquin Power & Utilities Corp.-backed Atlantica Yield was down approximately 6% through Jan. 15, following December 2018's outperformance. In late November, Algonquin Power & Utilities acquired an additional equity interest in Atlantica Yield, bringing its stake in the yieldco to about 41.5%. The pairing gives Algonquin a foothold in renewable asset development outside of North America, while providing Atlantica Yield with a strategic sponsor that could help it secure more assets in the future. In mid-December, the company stated it reached a preliminary agreement with Algonquin to co-invest in the 200-MW Sugar Creek wind development in Illinois, with construction expected to begin in the first half of 2019. Atlantica Yield is targeting 8% to 10% annual dividend increases, with growth expected to be driven by expansions of the company's current portfolio, including asset repowerings, project co-investments and project acquisitions.

NextEra Energy Partners was down 2.9% through Jan. 15, following December 2018's approximate 8% decline. With peer-leading shareholder returns and the financial flexibility to pursue multiple growth avenues, we consider NextEra Partners LP as being well-positioned to continue to generate earnings and dividend growth into the foreseeable future; the company is targeting 12% to 15% distribution-per-share growth through at least 2022. The company's three-pronged growth strategy benefits in part from its right of first offer with respect to projects that NextEra Energy Resources LLC, or NEER — a global leader in wind and solar development — may elect to sell to NextEra Partners. Management indicates that dropdowns from NEER's existing portfolio alone could provide one potential path to 12% to 15% distribution growth. Additional growth opportunities could come to bear through third-party acquisitions as well as organic growth projects including natural gas pipeline expansions and wind repowering projects.

NextEra Partners in December 2018 closed a $1.28 billion acquisition of an approximately 1,388-MW portfolio of wind and solar projects from NEER. The acquisition was funded with proceeds from the June 2018 sale of NextEra Partners' Canadian assets and with $750 million of convertible equity financing from a BlackRock Global Energy & Power Infrastructure fund in exchange for an equity interest in the acquisition portfolio. For additional detail, see the Nov. 14, 2018, Financial Focus Company Report, NextEra Partners continues M&A pursuit, infrastructure projects to fuel growth.

Pattern Energy Group Inc. was the group's top performer through mid-January, up 6.1%, possibly due to recent weakness in shares as the stock declined 10% in December 2018 to lag the group. The company in recent months has taken steps to enhance cash available for distribution, including selling certain assets and "recycling" sale proceeds into higher-yielding investments or for debt repayment. During the third quarter of 2018, Pattern Energy sold its 81-MW stake in the 115-MW El Arrayán wind project in Chile in a deal that closed in August and, with the Public Sector Pension Investment Board, acquired the 147-MW Mont Sainte-Marguerite Wind project in Québec. In November, the company acquired a controlling stake in the 80-MW Stillwater wind facility in Montana. In somewhat of a unique corporate structure, Pattern Energy owns a 29% equity investment in its development affiliate Pattern Development 2.0, providing Pattern Energy with a pipeline of potential asset acquisitions. Pattern Development 2.0 was created in December 2016 via the acquisition of early- and mid-stage renewable energy development assets from a prior development affiliate, with the purpose of the transaction to enable additional long-term capital raises by Pattern Development 2.0 to support ongoing development pipeline growth.

At the Jan. 16 close, yieldcos continued to trade mixed, with Pattern Energy Group up nearly 9%, and Clearway Energy down about 17%.

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For additional RRA coverage of PG&E's potential bankruptcy, see:

Potential PG&E Corp. bankruptcy awakens ghosts of utility bankruptcies past

Potential PG&E bankruptcy presents regulatory quagmire for rate makers

For whom the bell tolls: Will PG&E's bankruptcy impact California energy policy?

PG&E under pressure for wildfires and gas safety; break up, bankruptcy possible

Regulatory Research Associates is a group within S&P Global Market Intelligence.

For a complete, searchable listing of RRA's in-depth research and analysis, please go to the S&P Global Market Intelligence Energy Research Library.