By Tom Konrad Ph.D., CFA

Despite a run-up in the fourth quarter of 2023, it has been a long time since valuations of clean energy stocks have been this cheap.  Perhaps it is worries about hostility towards clean energy under a new Trump administration, or disappointment at the slow implementation of the Inflation Reduction Act.  Whatever the cause, prices are low, and many clean energy stocks are likely to  produce good returns even if the political climate turns further against them.

This is especially true for companies that are less dependent on favorable policy or subsidies.  For instance, Yieldcos, high yield companies that own and develop clean energy assets like solar and wind farms get most of their profits from things which are already built.  New subsidies, like those included in the Inflation Reduction Act, almost exclusively target new facilities.  Because of this, changes in subsidies and interest rates will affect a Yieldco’s growth prospects, but will have limited effect on its short term earning potential.  

Yieldcos such as Brookfield Renewable Energy (BEP and BEPC), Atlantica Yield (AY), Clearway (CWEN and CWEN-A), and Nextera Energy Partners (NEP) fell as much as 50% in 2023.  At current prices, I love them all.  Collectively, these four names account for a fifth of the portfolio.  My current favorite is Nextera Energy Partners, which I have historically felt was consistently relatively overvalued because investors have had faith in its strong sponsor, Nexterea (NEE).  That valuation did not survive the effects when persistently high interest rates led NEP to sharply cut its dividend growth targets last September.

Among the Yieldcos, NEP got the least benefit of the strong rally in the fourth quarter, and it is still trading at a price that gives it an 11% dividend yield.  That high a yield would normally signal that investors are expecting a dividend cut.  I think such a cut is unlikely.  First, NEP’s liquidity and cash flow ratios are in line with other Yieldcos, and if management felt that a dividend cut might be necessary in the near future, they would have done it when they were already disappointing investors by slashing their dividend growth plans.  Instead, I expect NEP’s dividend growth to stall for several years.  But at 11%, who needs growth?  

Another likely scenario would be for NEE to buy back the outstanding shares of NEP to improve its own cash flow ratios.  This is far from unprecedented – Transalta (TA) did exactly that last year by buying back the outstanding shares of TransAlta Renewables (Toronto: RNW).  NEE, like TA, would buy NEP at a 10-20% premium to current prices.  NEP has significant convertible debt financing, much of which will need to be refinanced in 2026.  If NEP has trouble refinancing this convertible debt, I expect the most likely scenario will be a buyback by it parent, NEP.   I’d prefer to collect an 11% dividend for several years to come, but a small short term gain is not something to scoff at.

DISCLOSURE: As of 1/15/2024, Tom Konrad and funds he manages own the following securities mentioned in this article: Brookfield Renewable Energy, Atlantica Yield, Clearway, Nextera Energy Partners. He expects to add to (but not sell) some of these positions in January 2024.  This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  All investments contain risk and may lose value. Past performance is not an indication of future performance. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

ABOUT THE AUTHOR: Tom Konrad, Ph.D., CFA is the Editor of AltEnergyStocks.com (where this article first appeared) and a portfolio manager at Investment Research Partners.

The post Yieldco Valuations Look Attractive appeared first on Alternative Energy Stocks.

by Tom Konrad Ph.D., CFA

This morning, hedge fund Water Island Capital called on Pattern Energy (PEGI) Shareholders to vote against the merger with the Canada Pension Plan Investment Board (CPPIB).

Water Island claims the merger is undervalued compared to the recently surging prices of other Yieldcos, and that PEGI would be trading at over $30 given current valuations.  There are not a lot of other Yieldcos left, especially if we eliminate those with their own special circumstances.  These are Terraform Power (TERP) which is subject to its own buyout agreement with Brookfield Renewable Energy (BEP), and Clearway (CWEN and CWEN/A) where the PG&E (PCG) bankruptcy is still causing a little lingering uncertainty.

Of the remaining Yieldcos, NextEra Energy Partners (NEP) is up 25% since the merger was announced, Atlantica Yield (AY) is up 33%, and Brookfield Renewable (BEP) is up 50%.

PEGI’s pre-merger price was approximately $23, meaning that if it had risen as much as its peers, it would currently be trading between $28.75 and $34.50, so Water Island’s valuation is credible.

Scenario Analysis

Let’s consider the options:

1. A shareholder could sell the stock today for approximately $28.00 a share.
2. A shareholder could hold the stock and vote against the merger:
   1. If the vote fails, the voting period will likely be extended.  Subsequent extensions could last until November.  CPPIB might raise the merger price to induce more shareholders to vote for the merger
   2. If the vote succeeds, shareholders will walk away with $26.75 plus one or two dividends of $0.422 each.  $27.172 or $27.594 total.

Between 1 and 2b, selling now is clearly the better choice.  In the case of 2a, we need to consider likely changes in Yieldco valuations between now and November.  If they continue to increase, we will see an even higher valuation for PEGI, but we could have also invested the $28 we got by selling today in one of the other Yieldcos.

If Yieldco prices stay the same, we will have a return of between $1 and $7 compared to our $28/share in the next 9 months.  That’s about 14%, which is good, and fairly large compared to the risk that the merger goes through.

I chose to take the money and run.  $28 cash seems like a good deal in an uncertain market.  The decision is more because I worry about Yeildco valuations overall than my concern about the small loss if the merger does go through.  If Yeildco prices fall back to more reasonable levels, the potential gains of voting against the merger vanish.

Naturally, if PEGI’s price falls back down or rises more by the time you read this, the calculations will change.  $0.50 either way can make a big difference in this risk-reward calculation.  Expect the stock to remain volatile until we know the result of the vote on March 10th, and even longer if the first vote fails.

Disclosure: Long PEGI, short PEGI calls, long BEP, AY, CWEN/A, TERP, short NEP.

The post Should Pattern Energy Shareholders Vote Against the Merger? appeared first on Alternative Energy Stocks.

Alternative energy power production stocks are companies whose main business is the production and sale of electricity from alternative energy installations, such as solar farms, wind farms, hydroelectric generators, geothermal plants, cogeneration facilities, and nuclear plants.

This list was last updated on 9/11/2020.

If you know of any alternative energy power producer that is not listed here or any stock that should be removed, please let us know by leaving a comment.

The post List of Power Production Stocks appeared first on Alternative Energy Stocks.

by Daryl Roberts

The Need To Accelerate Renewables Adoption

Renewables are growing rapidly as a percentage of new electric generation, but are still being assimilated too slowly and still constitute too small of a fraction of total generation, to be able to transition quickly enough to scale into a low carbon economy in time to mitigate climate change.

The issue of providing public support, with subsidies and other reallocation methods, is a politically charged subject. High carbon advocates, for example American Petroleum Institute, argues that support for renewables distorts the market. On the other hand, it has been argued, for example by the IMF, that subsidies for high carbon industries are so pervasive, estimated for 2015 at US$5.3 trillion (6.5% of global GDP) that not only is the market distorted but governments are effectively captured. This dispute will not be resolved in the near term, but the “market” will continue to respond, as has been seen by the dramatic reduction in costs for photovoltaic hardware and batteries.

Capital Structure and Cost

Structuring the transactions to incentivize the capital markets to reduce financing and other “soft” costs is the pathway that will most likely contribute to accelerating continued development. The market, in broad strokes, consists of three generic groups: 1) project developers (Sponsors) that coordinate project finance to underwrite planning, design, procurement, permitting, etc. 2) end users of the generated power (Off takers) which include major utilities, large commercial industrial corporations, municipalities, universities, etc. 3) and asset holders (Portfolio funds), which acquire completed projects to operate, distribute earnings, and are focused on net yield. Risk Mitigation measures targeted at each transactional node may be the best way to accelerate the ascendancy of renewables.

Sponsors have to manage costs to be able to compete as electricity suppliers, to be able to offer a competitive pricing to the Offtakers. Risk mitigation at the project level involves various forms of insurance against an array of more common risks, for example with performance bonds. Complete guides can be found Risk Mitigation Reference Guide for New Energy Financing, by Energi, Managing the Risk in Renewable Energy by Economist, and Unlocking Renewable Energy Investment: The role of risk mitigation and structured finance by IRENA. One of the primary risks is offtake risk, and fluctuations in revenue from intermittency due to weather related causes. Another risk is related to the costs of early stage project financing in tax equity partnerships, which are structured to maximize the benefits of applying investment tax credits, to produce a targeted yield, after which, a flip in ownership is executed for the equity partner to exit. An extended review of Partnership Flips is presented by a law firm specializing in renewable tax issues, and process is shown in the diagram from NREL.

Offtakers are under pressure to buy renewable generation, for several reasons: a) statutory requirements from state Renewable Portfolio Standards (RPS), federal emissions guidelines, and avoided cost requirements under PURPA; b) because new generation is pricing lower than non-renewables, and c) because there is growing participation by corporations making commitments to achieve 100% renewable energy use.

Both Sponsors & Offtakers are motivated to negotiate long term Power Purchase Agreements (PPA’s) to lock in pricing, which benefits Sponsors by setting a reliable value for revenue to be able to service debt, and for Offtakers in setting a reliable cost that hedges against inflation. In the current market, smaller Offtakers & Sponsors are disadvantaged but increasingly are being assisted by aggregator services which can assist in negotiating multi-party PPA’s or virtual PPA’s, such as the platform developed by LevelTen Energy platform that matches groups of small buyers to groups of small generators, or as in the case involving MIT as anchor offtaker.

Portfolio funds come in various forms – publicly traded yieldcos like NEP, NYLD, AY and TERP, private infrastructure funds, green bonds, clean energy investment trusts, etc. They aggregate operating renewable projects, take accelerated depreciation and investment (or production) tax credits, and distributes most of its earnings in dividends, as either private or publicly traded funds, and are generally considered a means for raising capital for renewable development, directly or indirectly. As of 2015, RBC Capital Markets estimated that yieldcos held about $32 billion worth of renewable generation enterprise value in North America, with projections to grow to $500 billion. Further, it estimated that by 2030, yieldcos could globally have a potential asset pool worth more than $6 trillion. However, a bubble developed for yieldcos that deflated later in 2015, due in part to over-pricing the projects acquired and valuations based on dividend growth expectations. Fund relationships to Sponsors varies, in some cases, funds have “internal sponsors”, as with utilities that form yieldcos from “drop down” projects placed in the spinoff vehicle, which provides relief for its balance sheet, enabling it to recapitalize new projects, grow revenues, and support cash available for distribution (CAFD).

For Portfolio funds, risk mitigation is managed by acquiring projects bundled with optimized offtaker pricing and creditworthiness, coverage for execution risks related to construction and system operation, and increasingly, bundled with mitigation strategies for various kinds of weather and indeterminacy related risk. A central consideration for acquisitions is cost of capital, and the premise of this last group of risk strategies is that capital costs can be reduced by 100 basis points or more, which significantly impacts marketability of the project.

To simplify the model relationship between Sponsor and Fund, the asset upon completion will be packaged, along with the PPA, to include long term financing that combines debt and equity, tax credits, RECs & carbon credits, with debt ratio typically constituting 70%-80%.

Risk mitigation may be able to shift the Weighted Average Cost of Capital further towards debt, at lower cost than equity, & spare up to 1% in yield, which in turn, could move the market.

We can see if that could be true, by first verifying that a shift in WACC can achieve a 1% gain. Costs for debt was reported, as of 1^st quarter 2018 as in the range of 3.6% by one deal tracking source, which indicated that credit facilities spreads were in the range of 130 basis points (1.3%) over 3-mo LIBOR of 2.3% which = 3.6%. Equity costs spreads were reported to be in the range of 6-9% over LIBOR which = 8.3% – 11.3%. Weighted Average Cost of Capital (WACC) is calculated as follows:

Ver1 in the example below shows debt ratio starting at 70%, with rates of return at 11.3% for equity, 6% for debt. Ver2 shifts the ratio by 15%, increasing debt, decreasing equity, reducing the debt rate to 3.6% & leaving equity rate constant at 11.3%.

This confirms that the difference can result in a reduction of WACC by 2.49%, and, after netting out the estimated 1% cost of the hedge, this translates into an IRR gain of 149 basis points. This is in the ballpark, when compared to an estimate from a swap provider that a 15% increase in debt produce a gain of 100 basis points. For reference, a range of debt ratio variables are also shown against Debt Service Coverage Ratio (1.30 represents 70% debt ratio to cash flow to cover, 1.10 represents 90%, etc.)

How do these hedges work, what are the mechanics? There are three broad types of weather risk transfer: insurance (and reinsurance), derivatives and swaps, often used in combinations.

Insurance provides comprehensive coverage for low probability, high risk events (i.e., hurricanes) as compared to derivatives which offer narrow single risk coverage for high probability, low risk events, (i.e., weather, low wind, low irradiance). Premiums and payouts for derivatives are determined by the market value of the underlying assets not by the probability of a loss event occurring. Claims for derivatives are quicker, usually paid out based upon a triggering event against a specified index, whereas settlement of insurance claims can be a protracted process due complex valuation of losses.

If a wind farm underperforms because of a streak of windless days, a derivative contract might be structured as a “put” that would be triggered if production dips below the “strike,” value. One downside is that the market for such derivatives is thin, not enough counterparties that are naturally short wind or sunlight, who can create a demand pull by buying up these contracts from the originators to hedge their own investments. Currently the market consists of larger financial institutions (ie., Goldman Sachs (GS) and other bespoke market makers) & specialty insurers, and potentially natural gas generators whose capacity factors decrease when wind power comes on the grid. 

One such provider in the Weather Risk Transfer market, of hybrid “Insurance Linked Securities”, GCube contends that lack of efficient and effective weather risk transfer in the wind energy sector has resulted in stakeholders in the space being left with as much as $56 billion in untapped asset values that can be remedied with adequate structuring of risk mitigation.

Swaps transfer risk by exchanging a variable asset for a fixed asset, in this case, a revenue stream with intermittency risk exchanged for a fixed quarterly payment. The “seller” in the swap offers a guarantee, to levelize the revenue stream by promising to insure any shortfall in revenue in exchange for assignment of the total revenues. They evaluate the risks of long-term shortfall with detailed actuarial analysis of weather databases, to estimate cost of underwriting the exchange and to build in sufficient profit to justify the risk. Currently premiums to provide a floor or “put” for revenue fluctuations, are approximately 1% of the revenues being covered.

One such transaction, termed a “Proxy Revenue Swap”, was explained in detail in an article in Environmental Finance reporting on a transaction in which a 10yr commitment for fixed cash flow was swapped for the floating revenues of the wind farms, designed to hedge wind volume risks. The participants were:

1. 1. 1. Renewables developers: Apex Clean Energy and private equity firm Northleaf Capital Partners
      2. Insurer: Allianz Risk Transfer (ART)
      3. Weather risk transfer partner: Nephila structured the deal using Insurance Linked Securities, catastrophe bonds & weather derivatives.
      4. Risk transfer intermediary REsurety and energy management specialist Altenex served as calculation agents.
   1. Legal counsel: Norton Rose Fulbright Chadbourne & Park structured the bespoke contract instrument, on behalf of both the debt financing through Deutsche Bank & the consortium of tax equity partners JPMorgan, Itochu & US Bank.

Norton Rose elaborates on the nuance of the payment arrangement, in Proxy revenue swaps for solar: “Risk-transfer products, such as volume puts or swaps, are now standard product offerings, serving as offtake arrangements in lieu of traditional power purchase agreements.” Proxy revenue swaps address “shape risk” associated with revenue reductions at midday due to drop in price (“duck curve” effect) as the correlated output of solar production peaks.

• The Project pays the hedge provider a floating amount each quarter, which is calculated as the project’s “proxy generation”, multiplied by the hub price for the settlement period, which in turn is determined using a negotiated formula that converts irradiance into a calculated amount of electricity output. The premium is linked to the variable elements of irradiance, timing & volume, as well as the fluctuating hub price.
• In exchange, the Hedge Provider pays the project a fixed lump-sum per quarter, regardless of irradiance, volume or timing of the energy produced or the market-clearing price for electricity.
  • Because the fixed payment is not linked to actual output, the solar proxy revenue swap offers a predictable revenue stream and mitigates irradiance risk, price risk and shape risk for the project.
  • It is a financial hedge, meaning no energy is purchased in the transaction, all the energy produced is sold by the Project to the local grid, with the Project collecting the revenues.
• The hedge is settled quarterly, with the Hedge Provider paying the fixed amount & the Project paying the “proxy revenue”, the Swap.
  • Difference: If the proxy revenue is less than the fixed amount, the hedge provider pays the difference to the Project; & vice versa, if the proxy revenue is more than the fixed amount, the net excess revenue is paid by the Project to the hedge provider. If they are equal, no payment is made by either side.

Several others intermittency risk mitigation providers were found in this survey:

1. kWh Analytics markets the transaction as a Solar Put through a wholly owned insurance subsidiary called Kudos Insurance Services, which not only bundles coverage for the revenue enhancement along with weather risk, equipment failure & construction defects. It conducts the data analytics in-house, rather than contract out these services, as in the ART transaction.

It contends that reducing the Debt Service Coverage Ratio from 1.30x to 1.10x would reduce the effective levelized installed cost of energy by $.05/watt, and reports that 7 lenders have now issued term sheets for 1.10x DSCR.

1. Meteo Protect a French firm that provides weather derivatives for wind, solar & hydro projects, has also developed weather risk assessment tools for short- and medium-term project financing that allow investors to have objective information to determine the risk premium, for guarantees of expected profitability of a project while optimizing the allocation of capital.
2. Munich Reinsurance
3. NortonRose referenced hedge deals that do not use a long-term PPAs, but instead use a 12-year price hedge from an investment bank or global energy company, against merchant price risk (from CAISO or ERCOT), while the project assumes operating risk and basis risk.
4. Green Banks https://www.nrel.gov/technical-assistance/basics-green-banks.html. As of 2017, several Green Banks in the US have been established by enabling legislation at the state and local level, capitalized by a surcharge on utility costs, averaging about $10/yr to end users.

• Connecticut Green Bank
• NY Green Bank
• California Lending for Energy and Environmental Needs
• Rhode Island Infrastructure Bank
• Montgomery County Green Bank (Maryland)
• Hawaii Green Energy Market Securitization

The New York Green Bank offers credit enhancements, a multi-developer aggregation service (bundling of multiple smaller solar investments), and traditional loans. CT & NY have collectively invested nearly $575 billion in total clean energy investment, which have mobilized private sector investment by 3-6x the amount of public sector dollars.

Conclusion

Although risk mitigation clearly can add value to both developers and asset managers, there are several other key factors that may overshadow these benefits: a) tax policies affecting financing at both the project finance level and the asset management level, and b) factors affecting utility’s willingness to add renewable capacity, which can be resisted both in lobbying and at the operational level in building out interconnections.

Nevertheless, risk mitigation in renewables development as a nascent field will likely continue to expand, and hopefully the volume of assets held in all forms of portfolio management will continue to grow and be recognized as an important driver for rapid growth of renewable generation.

Bio

Daryl Roberts has been following renewable energy technology & policy for 20 years, most recently interested in EV charging infrastructure, community solar development and net metering policy, utility scale solar development and project financing, and renewable energy asset management. He has participated in Sierra Club electric vehicle policy initiatives, and offered consulting for grant applications to install municipal EV charging stations. He has been involved with business plan development for commercial projects in diverse technologies, for ethanol, waste-to-energy gasification of municipal solid waste, PV fabrication on architectural glass, and LENR research. Previously he had worked for almost 20 years on litigated medical malpractice claims.

Resources

Deal flow – information both for polling adoption of risk mitigation as well as for marketing services, is in large part curated on privately developed databases.

The following is a list of additional deal flow database resources discovered to date, some with paywalls:

1. KWH Analytics deal flow database, covers “20% of transactions in the renewable space”, and recently offered lender list Solar Lendscape
2. I3connect may be the largest, is a subsidiary or spinoff of https://www.cleantech.com/
3. Rocky Mountain Institute Business Renewables Marketplace & Transactions
4. GreenDealFlow
5. CohnReznickCapital
6. Mercom funding news
7. BloombergNewEnergyFinance
8. SparkSpread
9. PWC Global
10. PowerFinance&Risk
11. GreentechMedia How to finance a Trillion Dollar Opportunity
12. Crunchbase – renewables principals
13. Yieldcos altenergystocks.com Comparative valuation of 15 yieldcos

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The post How Weather Risk Transfer Can Help Wind & Solar Development appeared first on Alternative Energy Stocks.

Solar farm owner and developer stocks are publicly traded companies who develop or manufacture equipment that converts sunlight into other types of useful energy.  Includes manufacturers and developers of both solar photovoltaic and solar thermal equipment, as well as their supply chain.

This list was last updated on 3/21/2022.

See also the list of Solar Manufacturing Stocks, the list of Residential Solar Stocks, and solar and wind inverter stocks.

7C Solarparken AG (HRPK.DE)
Abengoa SA (ABG.MC, ABGOY, ABGOF)
Acciona, S.A. (ANA.MC, ACXIF)
Adani Green Energy (ADANIGREEN.NSE)
Algonquin Power and Utilities (AQN, AQN.TO)
Atlantica Yield PLC (AY)
Azure Power Global Ltd. (AZRE)
Bluefield Solar Income Fund (BSIF.L)
Boralex (BLX.TO, BRLXF)
Brookfield Renewable Energy Partners (BEP)
Canadian Solar (CSIQ)
Capital Stage AG (CAP.DE)
Clearway Energy, Inc. (CWEN, CWEN-A)
Edisun Power Europe AG (ESUN.SW)
Etrion Corp. (ETX.TO, ETRXF)
Canadian Solar (CSIQ)
First Solar Inc (FSLR)
GCL-Poly Energy Holdings Ltd. (3800.HK)
Iberdrola, S.A. (IBE.MC, IBDSF, IBDRY)
Infigen Energy Limited (IFN.AX, IFGNF)
Infraestructura Energética Nova, S.A.B. de C.V. (IENOVA.MX)
Innergex Renewable Energy Inc. (INE.TO, INGXF)
JinkoSolar Holding Co. (JKS)
Greenbriar Capital Corp. (GRB.V)
Guggenheim Global Solar ETF (TAN)
Neoen S.A (NEOEN.PA)
New Energy Exchange Limited (EBODF)
NextEra Energy Partners, LP (NEP)
NextEra Energy, Inc. (NEE)
Northland Power Inc. (NPI.TO, NPIFF)
Panda Green Energy Group Limited (0686.HK)
Premier Power Renewable Energy (PPRW)
Principal Solar (PSWW)
Renesola Ltd. (SOL)
ReNew Energy Global plc (RNW)
RGS Energy (RGSE)
Scatec Solar ASA (SSO.OL)
Shunfeng International Clean Energy Limited (1165.HK)
Sky Solar Holdings Ltd. (SKYS)
Solar Wind Energy Tower (SWET)
Solaria Energía y Medio Ambiente, S.A. (SLR.MC, SEYMF)
Sunpower (SPWR)
Sunvalley Solar, Inc. (SSOL)
Sunworks, Inc. (SUNW)
Terraform Power, Inc. (TERP)
The Renewables Infrastructure Group (TRIG.L)
US Solar Fund PLC (USF.L)
UGE International (UGE.V)
Vivint Solar (VSLR)
Yingli Green Energy Holding Company (YGEHY)

If you know of any solar farm developer or owner stock that is not listed here and should be, please let us know by leaving a comment. Also for stocks in the list that you think should be removed.

The post List of Solar Farm Owner and Developer Stocks appeared first on Alternative Energy Stocks.

Wind farm owner and developer stocks are publicly traded companies that site, permit, develop, construct, own, or operate wind farms for producing electricity.

This list was last updated on 3/22/2022

Acciona, S.A. (ANA.MC, ACXIF)
Adani Green Energy (ADANIGREEN.NSE)
Algonquin Power and Utilities (AQN, AQN.TO)
Atlantica Yield PLC (AY)
Atlantic Power Corporation (AT)
Avangrid, Inc. (AGR)
Boralex (BLX.TO, BRLXF)
Brookfield Renewable Energy Partners (BEP)
China Longyuan Power Group Corporation Limited (0916.HK, CLPXF)
China Ruifeng Renewable Energy Holdings Limited (0527.HK)
Orsted (ORSTED.CO, formerly DENERG.CO)
E.ON AG (EONGY)
Enel SpA (ENEL.MI, ESOCF)
Greencoat UK Wind (UKW.L)
Infigen Energy Limited (IFN.AX, IFGNF)
Innergex Renewable Energy Inc. (INE.TO, INGXF)
Neoen S.A (NEOEN.PA)
NextEra Energy Partners, LP (NEP)
NextEra Energy, Inc. (NEE)
Nordex AG (NRDXF, NDX1.DE)
Northland Power Inc. (NPI.TO, NPIFF)
NRG Yield, Inc. (NYLD, NYLD-A)
Otter Tail Corp (OTTR)
PNE Wind AG (PNE3.DE)
ReNew Energy Global plc (RNW)
The Renewables Infrastructure Group (TRIG.L)
TransAlta Renewables, Inc. (RNW.TO, TRSWF)
Xcel Energy Inc. (XEL)
Wind Works Power Corp. (WWPW)

If you know of any wind farm owner or developer stock that is not listed here, but which should be, please let us know in the comments. Also for stocks in the list that you think should be removed.

The post List of Wind Farm Owner and Developer Stocks appeared first on Alternative Energy Stocks.

by Tom Konrad, Ph.D., CFA

It’s been a busy several days in the YieldCo space.

The post One Week, Three YieldCo Deals. Are More Buyouts on the Horizon? appeared first on Alternative Energy Stocks.

By Tom Konrad Ph.D., CFA

2017 is turning into a second banner year in a row for my “Ten Clean Energy Stocks” model portfolio. I expected at best to make high single digit returns after the impressive 20% (while my benchmark fell 4%). Instead, the portfolio produced a 36.8% total return while its benchmark is up 19.5% with only four trading days left in the year.

Such returns are obviously cause for celebration, and also for profit taking. I plan to replace at least five of this year’s list with new stocks in the 2018 (tenth annual) “Clean Energy Stocks” model portfolio.

Two companies on the cusp are software-as-a-service vehicle and fleet management provider MiX Telematics Limited (NASD:MIXT) and energy-from-waste (EfW) operator and developer Covanta Holding Corp. (NYSE:CVA).

I’m tempted to keep both of these stocks because they seem to be entering phases of long term growth. With MiX, the growth is the result of the company’s long term strategy of diversifying into new markets and emphasizing its bundled subscription offerings, which are finally taking off. The stock has taken off as well, more than doubling since the start of the year.

Covanta has long been a low growth, high dividend company because of the high capital costs of developing new EfW plants. However, Covanta recently announced a new partnership with the Macquarie-owned Green Infrastructure Group which should allow Covanta to fund its next four projects in the UK without any new equity capital. In the week since the deal was announced, the stock has jumped 20%.

While I’m still bullish about both these companies for the long term, if their stock prices continue to climb rapidly in the next week, the potential for further gains over the next year will be reduced. Since I build this list based on my estimate of expected return over the following year, I may decide to drop either from the list despite their longer term potential.

On the other hand, leading Yieldco NextEra Energy Partners (NYSE:NEP), will be leaving the lists purely as a profit taking measure. Yieldcos are owners of clean energy infrastructure that use most of the cash flow produced by their assets to pay dividends to shareholders. When I added NEP to the 2017 list, I did so because I liked the current yield at 5.3%, even though I have long been skeptical of the faith many Yieldco investors seem to put in the company’s strong sponsor (NextEra Energy (NYSE:NEE).) I agree that having a strong sponsor is helpful, and have nothing against NEE in particular, but I’m not comfortable owning Yieldcos when their valuation is heavily dependent on achieving long term, double-digit dividend growth. That is the case for NEP today, now that stock appreciation of approximately 65% over the last year has reduced the current yield to 3.8%.

NEP had already reached its current stock price of $41 to $42 by the end of August, when I wrote in my regular update, “As long as investors are willing to buy more shares at its current yield of below 4%, NEP should be able to maintain its target annual per share dividend growth of 12% to 15%. I personally prefer Yieldcos with higher current yields and lower growth prospects, and so have been taking profits on my position.” While there is no reason to think that other investors will not be willing to continue funding NEP’s growth at the current yield, I prefer not to invest on the assumption that they will.

Perhaps my worst call over the course of the year was my decision to sell aerogel insulation manufacturer Aspen Aerogels (NYSE:ASPN) after a weak first quarter which looked likely to be followed by weak second quarter performance as well. I sold in the expectation that second or third quarter earnings would drive the already cheap stock down further, and I would be able to get back in at a lower price than I sold. As it turned out, I sold near the bottom at a small loss, and the stock is now up over 20% from my selling price, and up 18% from the start of the year.

I will be dropping Aspen from the list partly because this year’s bad call is yet one more piece of proof that I’m much worse at predicting the performance of growth stocks like Aspen than I am with the income stocks I tend to focus on. Over the last decade of Ten Clean Energy Stocks model portfolios, all of my biggest losers have been growth stocks. Although readers who sold when I did likely only lost a couple of percent, and readers who held on for the entire year saw a 20% gain, I’ve decided that it’s time to stop trying to pick growth stocks. I will not be picking any new growth stocks at all in 2018, although, as I noted above, I may decide to keep MiX Telematics in the list.

Finally, regular readers will not be surprised that I will be dropping 8point3 Energy Partners (NASD:CAFD). Although the Yieldco is has a current yield of 7.5%, I believe its dividend is unsustainable, for two reasons. First, while most other Yieldcos finance themselves mostly with amortizing, non-recourse debt at the project level, 8point3 uses interest-only debt at the company level. All of 8point3’s current debt will come due in 2020, and rising interest rates mean that the Yieldco will have to refinance at a higher interest rate, and may in fact have trouble finding lenders willing to lend without some return of capital.

Higher interest rates and possibly having to begin making principal payments will both reduce 8point3’s Cash Available For Distribution, also called CAFD. Since the company is currently paying nearly all its CAFD out as dividends, a drop in CAFD from refinancing will force the Yieldco to cut its dividend.

Since 8point3’s sponsors, SunPower (SPWR) and First Solar (FSLR), are looking for a buyer for their stakes, some shareholders are doubtless hoping that a deep pocketed white knight will bail them out. I think this is unlikely given 8point3’s current valuation. First of all, I believe that 8point3 is very aggressive in how it defines CAFD (not all Yieldcos use the same definition.) Second, even if we accept 8point3’s CAFD number, any buyer will be comparing 8point3’s valuation to similar possible investments. Since 8point3’s assets consist entirely of solar, it makes sense to compare the Yieldco to a solar farm for the purposes of valuation.

At the current $15 share price, 8point3 has a market capitalization of $1.2 billion, and $710 million in long term debt. It pays approximately $23.2 million in annual interest (3.2%) on that debt, and expects at least $106 million in annual CAFD in 2017. If we accept 8point3’s aggressive methodology for calculating CAFD, this means that $1.9 of assets are producing $130 million in annual cash flow, or a cash yield of 6.8%. (A less aggressive CAFD methodology gives 6%.)

Existing solar farms usually sell at 7% to 8% current yields, making 8point3’s stock slightly overvalued in comparison.

In short, I think 8point3 is overvalued with an unsustainable dividend.

Summary

I find myself shocked at how well my model portfolio has performed this year. Part of that is good (or lucky) stock picking and timing, and part is the strong performance of the stock market as a whole in 2017. The real-money Green Global Equity Income Portfolio which I manage has also had a good year, up 22.5%. It’s relatively weak performance compared to the model portfolio is largely due to holding a fair amount of cash and less concentrated holdings in this year’s big winners, MIXT and (especially) NEP.

All in all, I can’t complain. I’ll be happy to do half so well in 2018. Stay tuned for 10 Clean Energy Stocks for 2018 on New Year’s Day, or see here if you’d like a sneak peak.

Disclosure: Long MIXT, CVA. Short Puts on NEP and FSLR [net long position], Short Calls on CAFD [net short position].

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

The post Ten Clean Energy Stocks For 2017: Taking Profits appeared first on Alternative Energy Stocks.

Tom Konrad Ph.D., CFA

Yieldco Buyouts

A Canadian Yieldco Invasion sent clean energy stocks running up in October and November.  My Ten Clean Energy Stocks model portfolio benefited from the purchase of 25% of Yieldco Atlantica Yield (NASD:ABY) by Canadian utility and renewable power generation conglomerate Algonquin Power and Utilities (TSX:AQN or OTC AQUNF), which was one of my Ten Clean Energy Stocks for 2009.

Rumors had circulated that the Atlantica stake would be purchased by Brookfield (NYSE:BAM) and its Yieldco Brookfield Renewable (NYSE:BEP).  If there were discussions, Brookfield must have decided that it had enough on its plate with the recently consummated purchase of Terraform Power (NASD:TERP) and the soon to be completed purchase of its sister Yieldco (and Clean Energy Stock for 2016) Terraform Global (NASD:GLBL).  The Canadian buying spree continued with Yieldco Innergex (TSX: INE and OTC:INGXF) buying Clean Energy Stock for 2012, 2013, and 2014 Alterra Power at a substantial premium.

Performance

The two months were again good for clean energy stocks, with my growth benchmark PBW up 14.7% although my income benchmark YLCO fell 1.5%.  My 8 income stocks did better (up 3.4%) while my two growth stocks lost some of their lead with a gain of only 7.7%.  My managed income portfolio, the Green Global Equity Income Portfolio (GGEIP) rose 2.0%.  The 10 stock model portfolio was up 4.3% compared to its blended benchmark, which was up 1.8%.  For the year to the end of October, my two growth picks are up 37.5%, compared to their benchmark PBW which is up 34.7%. My 8 income picks are up 28.8%, GGEIP is up 23.7%, and their benchmark is up 17.0%.  The 10 stock model portfolio is up 30.6% with its benchmark up only 20.6%.

The strength looks likely to continue with a number of companies reporting strong earnings in early November.

See the chart below for individual stock performance.

Stock discussion

Income Stocks

Pattern Energy Group (NASD:PEGI)

12/31/16 Price: $18.99.  Annual Dividend: $1.63 (8.6%). Expected 2017 dividend: $1.64 to $1.67.  Low Target: $18.  High Target: $30. 
10/31/17 Price: $23.02.  YTD Dividend: $1.252 (6.6%).  Annualized Dividend: $1.68.  YTD Total Return: 28.1%

Wind-focused Yieldco Pattern Energy Group will report third quarter results on November 9th.  The stock has been trading lower since an October offering of common stock at $23.40.  It is typical for Yieldcos to trade down in the weeks after a secondary offering, but as long as the Yeildco can invest the proceeds to increase cash flow per share (and Pattern can), these offerings support growth of the dividend and boost the stock’s medium and longer term prospects.  As such, buying after a secondary offering (even with the uncertainty of an upcoming earnings announcement) is often a good strategy.

Although I have a large position already, I took the opportunity to sell cash covered $22.50 puts on October 25th, effectively increasing my exposure to the stock.

8point3 Energy Partners (NASD:CAFD)
12/31/16 Price: $12.98.  Annual Dividend: $1.00 (7.7%). Expected 2017 dividend: $1.00 to $1.05.  Low Target: $10.  High Target: $20.
10/31/17 Price: $15.02.  YTD Dividend: $0.7931 (4.0%)  Annualized Dividend: $1.088.  YTD Total Return: 22.2%

Yieldco 8point3 Energy Partners continues to be the wallflower at the high school dance.  Its sponsors First Solar (FSLR) and Sunpower (SPWR) continue to look for a buyer for their stakes.  Rumors of possible partners have surfaced, and Sparkspread reported that “final bids” in the strategic review were due on October 16th.  No offers have been made public, and the silence around the process makes it increasingly likely that the sponsors were not happy with any of the offers they received.

The stock peaked after an optinistic earnings call on October 4th at $15.73,  but started to trend down as the lack of public bids slowly deflated the market.  Earnings were good, with cash flow coming in ahead of expectations (including mine), but the worrying problem of lack of future growth and approaching debt refinancing in 2020 remain.

Hannon Armstrong Sustainable Infrastructure (NYSE:HASI).

12/31/16 Price: $18.99.  Annual Dividend: $1.32 (7.0%).  Expected 2017 dividend: $1.34 to $1.36.  Low Target: $15.  High Target: $30. 
10/31/17 Price: $23.98.  YTD Dividend: $0.99 (5.2%).  Annualized Dividend: $1.32.  YTD Total Return: 31.8%

Sustainable infrastructure and clean energy financier Hannon Armstrong reported earnings on November 1st.  The headline numbers were lower than expected, but for a very good reason. The company has spent the last few months locking in low interest rates by refinancing its floating rate debt with fixed rate debt.  The company has a 60-85% target for fixed rate debt as a portion of overall debt, but the recent issuance brought this ratio to 93%.

Since fixed rate debt bears a higher interest rate than short term debt, the increased interest payments reduced Core Earnings, and will likely do so for several quarters going forward.  Although management insists that they are still looking at divided growth going forward, it now looks as if 2017 Core Earnings will be slightly below the current $1.32 per share annual dividend payment.  The company has raised its dividend by at least 10% every December since it went public, but this December I expect the increase to be much more modest, probably by only 1 cent (3%) to $0.34 a quarter or $1.36 annually.

Over the longer term, however, the greater portion of fixed rate debt could be a springboard for future dividend growth.  If interest rates continue to rise (as most analysts expect), the yields on Hannon Armstrong’s new assets will rise with them.  With interest costs largely fixed, the spread between assets and liabilities will increase, leading to more rapid growth in future earnings.

The stock sold off and then quickly rebounded in response to this mixed earnings news.  If I am right about a low dividend increase in December, the stock will likely sell off again.  That should be a good entry point for long term investors who like the lower risk and potential for accelerating future growth in a rising interest rate environment.

NRG Yield, A shares (NYSE:NYLD/A)

12/31/16 Price: $15.36.  Annual Dividend: $1.00 (6.5%).  Expected 2017 dividend: $1.00 to $1.10.  Low Target: $12.  High Target: $25. 
10/31/17 Price: $18.34.  YTD Dividend: $0.81 (5.3%).  Annualized Dividend: $1.12.  YTD Total Return: 25.0%

Yieldco NRG Yield’s (NYLD and NYLD/A) parent, NRG Energy (NRG), like 8point3’s parents, continues looking for a buyer.  So far, it too, remains a wallflower.   While its valuation is not nearly stretched as 8point3’s, it’s not trading at a big discount to its value like the Terraforms. Atlantica, and Alterra were.

The Yieldco announced earnings on November second, and more importantly they increased guidance for 2017, and issued new guidance for 2018.  In addition to raising their quarterly dividend to $0.288, management stated they had a target for increasing the dividend a further 15% in 2018 while maintaining an 80% payout ratio.

Lastly, they gave a timeline for understanding how NRG’s current restructuring will affect the Yieldco.  “NRG Yield management continues to work closely with NRG on its transformation plan with the resolution of the portion of the transformation plan impacting NYLD expected to be announced by year-end 2017.”  Even if there is no sale, we should know something more by the end of December.

The market reacted favorably to the news, most likely because of the improved 2017 guidance and newly issued guidance for 2018.

Atlantica Yield, PLC (NASD:ABY)
12/31/16 Price: $19.35.  Annual Dividend: $0.65 (3.4%). Expected 2017 dividend: $0.65 to $1.45. Low Target: $10.  High Target: $30. 
10/31/17 Price: $22.38.  YTD Dividend: $0.76 (3.9%).  Annualized Dividend: $1.04.  YTD Total Return: 19.9%

While it was Algonquin Power and Utilities that purchased a 25% stake in Atlantica Yield from Abengoa, rather than the previously rumored Brookfield, the fact that Atlantica had found a new sponsor was good news, and the market reacted favorably.  While I’m generally more skeptical of the benefits of a strong sponsor than most analysts who follow Yieldcos, but I welcome the end of the uncertainty surrounding Abengoa’s stake.

One immediate benefit Algonquin might be able to bring to the table is helping Atlantica in negotiations with lenders for its Mexican ACT cogeneration plant.  Abengoa’s bankruptcy put Atlantica in technical default on the loan supported by that facility, and, until Atlantica can negotiate some sort of waiver or forbearance with the lenders, it is not able to use any of the cash flow generated by the facility.  With Algonquin as a new potential guarantor, Atlantica will have one more bargaining chip in these negotiation, or it may be able to refinance the debt entirely.  That would pave the way to a large increase in the current quarterly dividend from $0.26 to $0.35 or more.

NextEra Energy Partners (NYSE:NEP)
12/31/16 Price: $25.54.  Annual Dividend: $1.36 (5.3%).  Expected 2017 dividend: $1.38 to $1.50.  Low Target: $20.  High Target: $40.
10/31/17 Price: $39.44.  YTD Dividend: $1.10 (4.3%).  Annualized Dividend: $1.57.  YTD Total Return: 59.3%

Two months ago, I wrote “I no longer consider [NextEra Energy Partners (NEP)] to be attractively valued, had have sold all my positions.”   The timing was fortunate, because their third quarter earnings on October 26th disappointed the market.  The significant shortfall was attributed to extremely poor wind conditions.  Despite this, the Yieldco raised its quarterly dividend $0.3925, and its outlook remains on track for continues 12% to 15% growth through 2022.

The stock sold off because of the bad quarter, but I’m not rushing in to buy since the decline was not large enough to bring it down to make it anything resembling a bargain.

Other Income Stocks

Covanta Holding Corp. (NYSE:CVA)
12/31/16 Price: $15.60.  Annual Dividend: $1.00 (6.4%).  Expected 2017 dividend: $1.00 to $1.06.  Low Target: $10.  High Target: $30. 
10/31/17 Price: $16.23.  YTD Dividend: $0.75 (4.8%)  Annualized Dividend: $1.00.  YTD Total Return: 9.5%

Waste-to-energy developer and operator Covanta Holding’s reported strong third quarter earnings.  The results were buoyed by the commencement of operations at its new Dublin plant and a much stronger market for recycled metal.

I highlighted Covanta as an “excellent buying opportunity” in August, with recovering metals prices as a possible trigger for improved results.  Even with the recent 14% advance over the last two months, I think the stock remains a good value.  I expect the metals and waste markets to remain strong.  One factor which might soon start increasing supply of municipal waste is China’s current refusal to take low-quality paper and plastic recycling that comes out of single-stream facilities.  If no other taker for these materials can be found, both burn well in Covanta’s incineration facilities.

When I selected Covanta for this list, I highlighted Trump’s bias towards removing environmental protections and how that might benefit Covanta, if not the country or the world as a whole.  EPA Administrator Scott Pruitt’s anti-science move to pack the agency’s science advisory board with industry representatives is a case in point.  He has appointed Paul Gilman, chief sustainability officer of Covanta, as the new chair of the Board of Scientific Counselors, which reviews EPA’s in-house research.   It could be worse, he could have appointed another coal company lobbyist.

Seaspan Corporation, Series G Preferred (NYSE:SSW-PRG)

12/31/16 Price: $19.94.  Annual Dividend: $2.05 (10.3%).  Expected 2017 dividend: $2.05.  Low Target: $18.  High Target: $27. 
10/31/17 Price: $24.63.  YTD Dividend: $2.05 (10.3%).  Annualized Dividend: $2.05.  YTD Total Return: 34.9%

In its third quarter report, leading independent charter owner of container ships Seaspan reported on continued improvement in the market for container ships.  The company even managed to sell three ships it had bought last December at 140% of the December price.  The unjustified discount at which the company’s preferred shares were trading last year has largely disappeared, although some room for improvement remains.  Going forward, preferred shareholders are likely to see only modest capital gains, supplemented by a still generous preferred dividend.

While still a good value, Seaspan Preferred shares are no longer a steal.  I have been selling some of my positions opportunistically to reduce my previously very large allocation, and have removed my hedge on Seaspan common stock.  Going forward, I am considering reducing my exposure to the Preferred shares further and adding a position in the common shares.  The latter still have potential for significant upside.

Growth Stocks

MiX Telematics Limited (NASD:MIXT).
12/31/16 Price: $6.19.  Annual Dividend: $0.14 (2.3%).  Expected 2017 dividend: $0.14 to $0.16.  Low Target: $4.  High Target: $15. 
10/31/17 Price: $10.20.  YTD Dividend: $0.124 (2.0%).  Annualized Dividend: $0.192.  YTD Total Return: 67.3%

Vehicle and fleet management software as a service provider MiX Telematics reported continued strong second fiscal quarter results on November 3rd. Subscription growth was a highlight, with subscription revenue growing 18% year over year, with approximately half of the growth from new subscribers and the other half from existing subscribers adding additional services.  The rapid subscription growth is feeding in to improving profit margins, with Adjusted EBITDA margin hitting a new high of 25.1% compared to 18% a year earlier.

The company raised its guidance for both revenue and profit for the fiscal year ending on March 31, 2018.

I expect the stock will continue to advance over the short term.

Aspen Aerogels (NYSE:ASPN)

12/31/16 Price: $4.13.  Annual Dividend and expected 2017 dividend: None.  Low Target: $3.  High Target: $10. 
10/31/17 Price: $4.45.  YTD Total Return: 7.6%

Aerogel insulation manufacturer Aspen Aerogels reported third quarter results on November 2nd.  The company has succeeded in enforcing its patents through the International Trade Commission and the US Patent office.  This is essential to the company’s long term strategy going forward, and the completion of these actions will also reduce the associated costs, which have dragged down results for over a year.  There is a similar action in Germany which is expected to be resolved in the first part of 2018.

The company has been successfully executing on its strategy of diversifying end markets in the face  of weakness in its core petrochemical and subsea markets during the recent oil price slump.  This sets the company up for stronger growth as its core markets recover.

My Trades

Two months ago, my top picks and largest holdings were Seaspan Preferred, Covanta, and Atlantica.  All have advanced significantly since then, but I still consider Atlantica and Covanta to be attractive.  I have been taking some gains in Seaspan Preferred, and am considering reducing my allocation to the Preferred shares in order to invest in Seaspan’s common shares (SSW), which (at $6.45) still have significant potential upside in a recovering market.

Recent weakness in Pattern Energy Group is providing a decent entry opportunity for investors who do not yet have a significant position in the Yieldco.  Potential investors in Hannon Armstrong should hold off, however, as I expect weakness around what I anticipate to be a disappointing dividend increase in early December, although the company’s prospects remain excellent for the longer term.

Final Thoughts

I entered 2017 with a very cautious attitude towards the prospects of the stock market.  Both the stock market’s gains have so far exceeded my wildest expectations.  Although a few attractive investments remain, I believe a cautious approach remain in order, and a wise use of this gains so far this year would be a move into cash.

Disclosure: Long HASI, MIXT, PEGI, NYLD/A, CVA, ABY, NEP, SSW-PRG, GLBL, TERP, BEP. TSX:AXY, INE, AQN.  Long puts on SSW (an effective short position held as a hedge for SSW-PRG.  Short calls on CAFD.)

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

The post Ten Clean Energy Stocks For 2017: Fall Forward appeared first on Alternative Energy Stocks.