By Tom Konrad, Ph.D., CFA

A reader of my recent article on Yieldcos asked which share class of Clearway Energy was the better to buy for tax purposes: Class A shares (CWEN-A) or Class C Shares (CWEN).

For tax purposes, they are identical.  They pay the same dividend, and it is treated the same no matter which share class you buy.  The reason many large investors often trade CWEN rather than CWEN-A is because it is more liquid.  As I write on Jan 23rd, Yahoo! Finance puts the 3 month average share volume for CWEN at 1,372,714, while the corresponding number for CWEN-A is 412,958.  When you are trading tens of thousands of shares, this can make a big difference.  For you (presumably) and me, not so much.  I actually like illiquidity, since I usually trade using limit orders, and let people who want to trade a lot of shares come to me, rather than chasing the current market price.

Because large investors prefer CWEN, it usually trades at a small premium to CWEN-A, even though the dividends are the same, and a single share of CWEN-A represents 100 times more votes when it comes to proxy ballots.  This is only a big deal when there are rumors of a possible buyout or similar corporate action, but at such times the price premium CWEN usually enjoys is likely to become a discount, as investors who care how the vote turns out focus on buying votes instead of liquidity.

As you can see from the above chart, CWEN usually trades at around a 5% premium to CWEN-A, meaning you have to pay about 5% more for a class C (CWEN) share, even though you get more votes and the dividend is the same (so the percent dividend yield a.k.a. dividend for every $100 invested higher.)

Recently, the CWEN premium has been rising, and is around 7.5%.  I’ve always bought CWEN-A. Now, if anything, CWEN-A is an even clearer way to buy Clearway.

Maybe I Was Wrong?

I started this article by saying that there was no difference between CWEN and CWEN-A for tax purposes.  But now I’m thinking that the CWEN premium is more likely to narrow than widen in the medium term, so there is one difference: You’re likely to make more money buying CWEN-A than CWEN, and making money leads to a higher tax bill.

So if taxes are all you care about, you should buy CWEN.  Those of us who care more about making money should buy CWEN-A.

DISCLOSURE: As of 1/23/2024, Tom Konrad and funds he manages own the following securities mentioned in this article: CWEN-A. In the next two weeks, he may buy more or CWEN-A, and might sell some CWEN short as an arbitrage trade, especially if the premium over CWEN-A increases.

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 The Clear Way to Buy Clearway appeared first on Alternative Energy Stocks.

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

Why Green Buildings are Profitable Buildings

Buildings are responsible for approximately a third of greenhouse gas emissions, so making buildings more efficient and switching them to renewable sources of energy is an essential part in addressing climate change.

Fortunately, new technologies such as cold climate heat pumps, heat pump water heaters, induction stoves, as well as the ever falling cost of renewable electricity and improvements to insulation and building envelopes often provide opportunities to improve buildings while achieving extremely attractive investment returns from the energy and maintenance savings alone.

Because of the great financial returns, building owners who recognize and implement these opportunities are likely to be at a competitive advantage to those that continue with business as usual.  They will also be better prepared when governments require building owners to reduce greenhouse gas emissions as part of their own environmental efforts.

Real Estate Investment Trusts

Stock market investors can invest in real estate through a large number of publicly traded Real Estate Investment Trusts, or REITs.  Due to their special tax status (REIT income is not taxed at the company level if at least 90% of it is distributed to investors), REITs also often have relatively high dividend yields, making them attractive to income investors.

Nearly every REIT on the stock market has a sustainability page touting its green building achievements.  Unfortunately, often this is just greenwashing: highlighting a sustainable project or touting efforts to engage with tenants on renewable energy while continuing with business as usual across the rest of the portfolio.  

But this is not true for every REIT.  There are REITs that have made strong green commitments, and have the track records to back them up.  

REIT Industry ESG Report

To help me identify some of these truly green REITs, I started with the REIT Industry ESG Report 2022 published by the REIT advocacy organization, Nareit in July.  Since Nareit is an advocacy organization, we can’t expect it to publish an industry green ranking which might upset lower-ranked REITs, but it does contain 15 case studies.  

I went through these case studies, searching for convincing action on climate change.  I eliminated the ones that focused on single buildings, or on social issues (the “S” in ESG).  Of the ones that were left, here are the ones that seemed to be committed to greening their entire property portfolios.  I’ve written some short notes on the green efforts highlighted in the case studies, and included the page number in the REIT Industry ESG Report so you can read and decide for yourselves.

• Rexford Industrial Realty (REXR, p.36)  While this REIT is short on its list of achievements, it seems to be incorporating the environment in decision making processes. 
• American Tower Corp (AMT, p.57) The REIT’s business of sharing space on communication towers has a lot of inherent sustainability.  On top of this, they have significant fossil fuel usage reduction achievements and goals.
• Federal Realty Investment Trust (FRT, p 60) I have mixed feelings about this one… It does not build on greenfields (sites which had not been previously built on- a very important step) but makes no mention of energy usage at its properties. 
• Iron Mountain (IRM, p.62) – Has a very strict hour by hour clean energy sourcing goal which will likely drive innovation, plus a company wide process of energy use analysis and reduction.
• Prologis (PLD, p.66) – company wide commitment to green certifications on all new and redevelopment projects.Uses low carbon building products, and adopts energy reducing tech and renewable energy on its buildings.

There Are More

Note that this list is far from comprehensive… it’s just the five most convincing examples highlighted in the Nareit report.  Many other green REITs exist… my personal favorite being Hannon Armstrong Sustainable Infrastructure (HASI).

Note: This post was first published on my Patreon page.  You can gain an early look at drafts of my articles and other benefits by becoming a patron.

DISCLOSURE: Long HASI. A family member owns PLD.

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 Five Green REITs appeared first on Alternative Energy Stocks.

By Tom Konrad, Ph.D., CFA

Last week, I published this call to buy Innergex (INGXF, INE.TO) because investors had been overreacting to the losses from the February cold snap in Texas.  The stock is up since then, but still seems a decent value.

Canadian Yieldco Innergex Renewable Energy (INGXF, INE.TO) took a big financial hit from the power disruptions in Texas in March. 

It’s complex, but their financial hedges on power prices for three of its wind farms ended up creating enormous liabilities – more, in fact, than two of their wind farms are worth.  Two of their facilities also had benefits from the high power prices, but not nearly as large as the losses on the financial hedges.

Innergex claimed “Force Majeure” at the affected sites – a contract clause that would allow them out of the financial obligations of the hedges.  The counterparties rejected the claims, and now two of the claims are in court, and one is subject to negotiation between the parties.

The two claims that are in court are there because Innergex now values those wind farms (Flat Top and Shannon) at less than the financial loss on the hedges.  The worst case scenario here is that the court will decide against Innergex and allow the counterparties to foreclose on the two wind farms.  There is no additional liability to Innergex beyond the value of its financial stakes in Shannon and Flat Top.

The hearing in the Shannon and Flat Top cases was held on May 6th, and a ruling is expected at latest by May 20th.  I’ve been buying today (in the mid $15 US range) because I estimate the decline in the stock price has more than priced in the full loss of both wind farms, and the increased certainty of a ruling (even one against Innergex) should send the stock price back up.

I generally feel that investors overreact to this kind of uncertainty, so it’s often a good time to buy- especially when the financial impacts of the downside risk are limited, as they are with Innergex.

DISCLOSURE: Long INGXF

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 Buying Innergex – Texas Was Bad, But Not That Bad appeared first on Alternative Energy Stocks.

By Tom Konrad, Ph.D., CFA

Here are two more updates from last week on Patreon.  Also, I realize I neglected to publish the monthly performance chart for my 10 Clean Energy Stocks model portfolio here at the start of the month, so here it is as well:

Atlantica Sustainable Infrastructure Earnings

(published May 11th)

Atlantica Sustainable Infrastructure (AY) released its first quarter earnings announcement and financial statements on May 6th.

Atlantica is one of the higher yielding Yieldcos, 5.3% at the new quarterly dividend rate of $0.43 and a $32.50 stock price.  The dividend is safe, since most of Atlantica’s debt is fixed rate, non-recourse project debt which will be paid off before the project Power Purchase agreements expire.  

In addition to paying down debt, the company has also been investing in new projects, most recently a 49% stake in a 596 MW collection of 4 wind projects in Illinois, Texas, Oregon and Minnesota.  This has been financed by a well-timed issue of new equity in December, while the stock was trading at elevated levels with most other clean energy companies.  

The stock decline since then is getting me interested, and I have started selling out of the money cash-covered put to add to my current position.

Hannon Armstrong Selling Off Today- I’m Buying

(published May 12th)

This is going to be brief, but I wanted to give subscribers a heads-up.  Hannon Armstrong (HASI) is a unique REIT financing in renewable energy and energy efficiency.  Its investments typically are relatively senior (that is, they take losses last), making them safer than the typical equity investments of your average Yieldco.

Given the exposure to energy efficiency (a very difficult clean energy asset class to invest in), and the safety of its investments, HASI deserves to be in every clean energy income portfolio.  For the last few years, however, it has been selling at a large premium to the Yieldcos, so I’ve been slowly whittling down my stake.

The sell-off today (seemingly on inflation fears) looks like a great opportunity to buy some of that back (or, in my case, sell cash covered puts.)

Clearway Class A (CWEN-A) and Atlantica (AY) are also starting to look attractive.

DISCLOSURE: Long HASI, AY, CWEN-A.

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.

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By Tom Konrad, Ph.D., CFA

This is a roundup of first quarter earnings notes shared with my Patreon supporters over the last week. If there is any theme, it’s that low interest rates and increased interest in green investments is lowering Yieldcos’ cost of capital to the benefit of stock investors.

Avangrid Earnings

Avangrid’s (AGR) Q1 earnings report showed solid progress.  Key items of note were:

• Increased outlook for full year 2021 Adjusted EPS a little over 5% 
• Key environmental approval for 800 MW offshore wind farm Vineyard Wind. Expected to begin construction later this year, with expected completion in 2024.  Avangrid is a leader in US offshore wind development, with over 4,000 MW already in the pipeline (including Vineyard) and plans to bid on more.
• The company’s Networks (electricity transmission and distribution) division is also performing strongly, and they are well placed to benefit from Biden’s plans to streamline long range transmission planning and open up existing rights of way to new transmission projects.  Transmission upgrades are essential to transitioning to a renewable electricity based grid, and Biden is the first president to take significant action on it.  It’s a little recognized clean energy investment theme, so it’s still possible to purchase stakes in key players like AGR at reasonable prices.
• The purchase of PNM Resources (PNM) looks likely to close near the end of the year.  I have mixed feelings about this one because PNM has a fair amount of coal generation, but on balance it’s probably a good thing because Avangrid will close coal plants faster than PNM would have as a stand alone, and the purchase will bolster its Networks business making it much more of a national player.  

Although Avangrid’s share price increased significantly after it got shareholder approval for the PNM merger, it remains reasonably priced compared to most Yieldcos.

Brookfield Renewable Partners Earnings Highlights

I originally put Brookfield Renewable Partners (BEP) shares in the 10 Clean Energy Stocks for 2021 portfolio because I thought its ability to raise capital by selling its turbocharged Brookfield Renewable Corp. (BEPC) share class would give the stock a boost if the ongoing clean energy stock bubble continued a few more months.

Two things undermined that thesis- the clean energy stock bubble popped sooner than I expected, and while its parent Brookfield Capital Management (BAM) did take advantage of the huge premium BEPC shares commanded at the time, the company itself did not issue any new BEPC shares so it was not able to get the influx of cheap capital I had hoped for.

Now that the stock is down 15 percent since the start of the year, I’m beginning to get interested again, and am beginning to sell out of the money cash covered puts on BEP to replace the BEPC shares I was selling at the end of last year during the height of the bubble.

To be clear, I don’t think BEP is cheap enough to be a strong buy yet, but it’s an important company to keep in the portfolio as a core long term holding.

A couple of the reasons I think of BEP as a core holding came up in the earnings call:

• They sold some of their older, de-risked assets at a 15% compounded annual return based on their initial cost.  This is just one example of Brookfield’s excellent value discipline.  Their strong balance sheet and long experience in renewable infrastructure let them stay on the right side of the investment cycle: When capital is flowing into the sector, they have assets to sell.  When capital is scarce, they can swoop in and buy assets at big discounts (as they did with Terraform Power in 2019.)
• They made their first investment in offshore wind.  Like Avangrid (AGR), they have the scale and financial strength to participate in this up and coming renewable sector where only the largest and strongest financial players will be able to participate, given the gigantic scale of most offshore wind projects.

In short, the first quarter earnings showed the ability to generate profits by operating their extremely stable assets well, selling assets after they have seen great appreciation, and by investing in new sectors like offshore wind where they are one of only a few players with the size and experience to operate successfully.  Given the limited number of developers who can compete in offshore wind, I expect the returns for those developers who can participate will be higher than solar and onshore wind where smaller players have a chance of being competitive.

Clearway Gets Green Bond Boost

While it’s not in the 10 Clean Energy Stocks list this year, Clearway Energy (CWEN, CWEN-A) was from 2016 to 2018, when it was NRG Yield, so I suspect it is still in many readers’ portfolios (as it is in mine.)

I thought it was interesting just how significant a boost the company got by refinancing… replacing $600 million of senior notes at 5.75% with a new green bond at 3.75% while extending the maturity from 2025 to 2031.  The lower interest payments alone allowed it to boost its outlook for cash available for distribution to shareholders by 5 cents a share annually.

Clearway is not alone; most Yieldcos have been refinancing and raising new debt in the current low interest rate environment, and the newly maturing market for green bonds.  The evidence is strong for a “Greenium:” a green premium allowing green bonds to trade at higher prices (and lower interest rates) than conventional bonds that do not support green projects. 

This bodes well for hopes for massive new investments in green infrastructure including wind and solar. Since these projects can be financed at lower interest rates due to the greenium, there will be more well financed developers willing to build them.

Green Plains Partners Earnings

Green Plains Partners (GPP) made significant progress reducing its debt burden in the first quarter.   In an agreement with lenders reached last year, substantially all its free cash flow beyond the current $0.12 dividend is going to pay down debt until the debt burden is paid off.  This quarter, that included cash from the sale of one of the partnership’s ethanol plants.

Without additional asset sales, GPP will be debt free in the second half of 2022, and free to redirect cash flows to paying the dividend and making new investments.  Before it cut its dividend last year, it was paying $0.475 a quarter.  This was using all of GPP’s free cash flow,  so if dividends are increased it will be to some lower level.  I would expect a new dividend in the $0.25 to $0.30 range, but with some prospects for dividend growth given the retained capital for investment.

At the current stock price of $12, that would be a substantial yield in the 8 to 10 percent range.  This is in line with most MLPs, so I consider GPP to be approaching fair value at this point and am beginning to take profits and trim my holdings so it’s no longer an outsized part of my portfolio.

DISCLOSURE: Long AGR, BEP, BEPC, CWEN-A, GPP

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 Q1 Earnings Roundup: Yieldcos (AGR, BEP, CWEN, GPP) appeared first on Alternative Energy Stocks.

by Tom Konrad, Ph.D. CFA

Two more earnings notes I shared with my Patreon followers on February 18th.

Covanta Holdings (CVA)

Leading waste-to-energy firm Covanta Holdings (CVA) announced 2020 earnings today.  There will be a conference call tomorrow morning, but here is my high-level impression:

The company managed well through Covid and ended the year within it’s original pre-covid guidance.  Metals and energy prices, as well as increased maintenance capital expenditures were a drag on results, but  prices are improving and capital expenditures will fall in 2021.

The company is conducting a strategic review which will likely result in the sale of some underperforming assets.  I expect any money raised this way will go to pay down debt, as will retained cash flow from its dividend reduction last year.  

As I wrote in April 2020, while covid was the excuse for the dividend reduction, the underlying reason was that the company’s debt and dividend were too high. That opinion has not changed, so readers should not expect to see a dividend increase as a result of the ongoing strategic review, which management expects to conclude by the middle of the year.  

Rather, I expect the dividend to be maintained at its current level while the company strengthens its balance sheet and invests in growth projects.  This should be  good for the company’s long term prospects, but I don’t expect anything spectacular to happen to the share price in the short to medium term.

Hannon Armstrong (HASI)

Sustainable infrastructure financier Hannon Armstrong (HASI) was down on earnings today.    I did not see anything bad in the earnings report, so I think the cause is just that the stock is overvalued, and the new guidance of 7-10% annual earnings growth does not justify its current lofty valuation.

Maybe the stock will decline far enough that I want to buy it again… not likely without a major market decline, which is probably not something I should “hope” for, but it would definitely be a silver lining.

Love the company, hate the price.

DISCLOSURE: Long CVA, HASI

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.

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By Tom Konrad, Ph.D. CFA

Here are a couple earnings notes I shared last week with my Patreon followers.

Eneti, Inc. (NETI) – formerly Scorpio Bulkers (SALT)

Eneti completed its name and ticker change on February 8th. New ticker is NETI (formerly Scorpio Bulkers (SALT), which I recently wrote about here.

Highlights from February 2nd earnings report:

• 37 of the 47 vessels owned at the 3rd quarter have been sold or have completed sale agreements.
• Net asset value is $23.94/share. Since most assets are cash or vessels held for sale, this number is basically accurate.

The stock is still a good buy at the current $20-ish per share, since it’s trading below asset value. As the market starts to value this stock based on its new offshore wind turbine installation model, I expect it to start trading at a significant multiple of book value. I will be surprised if it ends 2021 under $30.

Brookfield Renewable Secondary Offering & Earnings

Brookfield Renewable Partners (BEP) and Brookfield Renewable Corp. (BEPC) announced a secondary offering of BEPC shares, as I predicted last month. What I did not predict was that the sale was by the company’s parent, Brookfield Asset Management (BAM) so this sale will lower BAM’s stake in the company rather than raising cash for Brookfield Renewable.

It has already had the predicted effect of lowering the BEPC/BEP price premium. When I added BEP to the 10 Clean Energy Stocks list on December 31st, BEPC shares were trading at a 35% premium to BEP. Since then BEP is up 9.8% while BEPC is down 9.1%. The premium has fallen to 12%.

In the short term, I expect the premium to start increasing again in a week or two, although I doubt it will ever get back above 30%. After it recovers, we can expect more secondary stock offerings, which will drive it back down. In the longer term (after a year or so) I would expect the premium to stabilize in the 10-15% range.

If the premium falls to 5% or less because of the secondary offering, it will probably be worth selling BEP to buy BEPC, at least for shareholders with relatively small unrealized capital gains.

Brookfield Renewable also announced fourth quarter earnings last week. I’d sum it up as “Steady as she goes.” The company increased its quarterly dividend by 5% to $0.30375, at the low end of its 5% to 9% target annual increase.

Disclosure: Long NETI, BEP, BEPC, short BEPC calls

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 Eneti and Brookfield Renewable Earnings appeared first on Alternative Energy Stocks.

by Tom Konrad, Ph.D., CFA

Readers who followed my coverage of the Yieldco bubble in 2015 know the Yieldco Virtuous Cycle.  

1. A Yieldco’s stock price rises
2. It issues new shares, and invests the money in renewable energy projects.  
3. Because the stock price is high, it is able to buy more project cash flow by issuing fewer shares than it has in the past.
4. Cash flow available for distribution (CAFD) per share increases, despite the increasing number of shares outstanding.
5. Yieldco management sets a target for continued rapid annual distribution growth, which can be met either by further share issuance (if the share price continues to increase), increasing the payout ratio (the percentage of CAFD used to pay dividends) or borrowing.
6. The share price rises in response to rising expectations of CAFD per share growth, allowing management to repeat the cycle.

This cycle ran from 2013 to mid-2015, when the public Yieldcos at the time got too greedy, issuing more shares than the market could absorb.  Share prices stopped rising rapidly, so Yieldcos turned to increased debt and increased payout ratios in order to meet their lofty dividend per share growth targets.  They hoped that share prices would accelerate again while their payout ratios were still below 100% and banks were still willing to finance their debt.

But the writing was on the wall… Yieldco share price growth can continue indefinitely as long as investors believe it will. But, like Tinkerbell, the Yieldco bubble popped as soon as investors stopped believing in it.  The virtuous cycle turned viscous.

By the end of 2015, many Yeildcos had fallen enough that their stocks were attractive even without assuming any dividend per share growth.  That’s not where we are now.  Although valuations feel very lofty, the past few years of fiscal discipline has led to lower payout ratios and reduced debt burdens.  Combine these with current high share prices, and conditions are right to kick off a new Yieldco virtuous cycle and boom.

A New Yieldco Boom

Most Yieldcos’ share prices have increased rapidly in the second half of 2020.  This sets the stage for a new Yieldco boom, with a new virtuous cycle of rising share prices, expectations of dividend per share growth, and new investments beginning to take off.  Given the momentum of the divestment movement, a new Yieldco boom seems likely.  If a new boom is going to happen, the best Yeildcos to buy today will be the ones with the lowest current dividend yields, because they can raise the cheapest capital in new secondary offerings and they will be able to promise the fastest dividend per share growth.

While a new Yieldco boom is likely, it is not certain.  The most likely event to derail the Yieldco growth train would be a US market crash.  Given the current high valuations and the worsening pandemic, a crash is impossible to rule out.   If this happens, the best Yieldcos to own today are the ones that have the highest yields and/or are retaining the most cash to invest in new projects and pay down debt.  These cheaper Yieldcos will also do well if a new Yieldco boom materializes, but not as well as the leaders.

Since I’m more interested in avoiding losses than going for the big win, the Yieldcos in the 10 Clean Energy Stocks for 2021 model portfolio are: Covanta Holding (CVA), Green Plains Partners (GPP), Avangrid (AGR), and Brookfield Renewable Energy Partners (BEP).  Covanta, Green Plains Partners, and Avangrid did not appreciate as much as other Yeildcos in the past six months because they are not the pure solar and wind power owners that many investors will be looking to as a replacement for fossil fuel stocks.  Covanta is a leader in Energy from Waste, Green Plains Partners is a Master Limited Partnership (MLP) that owns ethanol storage and transportation assets.

Avangrid (AGR) is not completely fossil fuel free, since it owns some natural gas utilities, which is why it has not run up with the purely renewable Yieldcos.  Nevertheless, it is a leader among electricity generators in the US, with its CO2 emissions per kWh in 2018 at 15% of the US average.  Its utility networks are 77% electric and 23% gas. 

That picture is being made somewhat worse by its planned purchase of PNM Resources.  After the PNM merger, its electricity generation also includes 22% to 32% fossil fuel (depending on if you measure by electricity capacity or production – see chart), but planned generation investments will be almost entirely renewable, while it phases out coal.  While Avangrid’s valuation remains low compared to its more renewables-focused peers, it could benefit if a Yieldco investment boom materializes.  Its existing and new renewable generation assets will become more valuable as the increased demand by Yieldcos drives up prices.  

It could also take advantage of the boom by selling its fossil fuel assets and becoming a truly fossil fuel free company, although management seems committed to its natural gas utilities, at least for the moment.  

Finally, Brookfield Renewable Energy Partners (BEP) is a pure clean energy Yieldco which has seen massive price appreciation over the last six months, and trades at low (2.7%) yield.  But compared to other highly priced Yieldcos, BEP has an advantage for raising money in secondary offerings.  It has a second type of share in Brookfield Renewable Energy Corporation (BEPC), which is even more highly valued than BEP.  While BEP and BEPC pay the same per-share dividend, BEPC shares ended 2020 at $58.27, a 35% premium compared to BEP which closed at $43.15.  With this price differential, Brookfield Renewable can issue new BEPC shares and use the funds to invest in clean energy projects which will benefit both share classes equally.  Alternatively, the company could sell ten million BEPC shares, buy ten million BEP units, and instantly have an extra $150 million to invest without increasing the total number of shares outstanding.  For this reason, I expect the company to issue many new BEPC shares in 2020, with the benefit accruing to both classes of share equally.  Over time, this will erode the large premium of BEPC shares over BEP units.

Hedging BEP with BEPC

The safest way to bet that the premium of BEPC over BEP will narrow would be a long-short hedge, buying BEP and selling an equal dollar amount of BEPC short.  For every 100 shares of BEP purchased (for $4315), the investor would also sell $4315/$58.27 = 74 shares of BEPC short.  This long-short hedge would only change in value if the price premium changed, but the investor would collect approximately $116 in dividend on BEP, while only paying $86 in dividends on the short BEPC shares.  Meanwhile, each 10% decrease in the premium would lead to a 10% ($431) gain, while each 10% increase in the premium would lead to a 10% loss.

Unfortunately, there are many hedge funds that follow absolute return strategies like the one I have outlined above, and their demand for BEPC shares to sell short will lead to additional fees for anyone trying to sell BEPC short. 

Another option for a partial hedge for BEP shares using BEPC would be to sell call options on BEPC.  For this, I would use the longest-dated call options available with a strike price just above the current market price.  In this case, that is the call option to buy 100 shares of BEPC at $60 at any time before June 18, 2021, or BEPC 6/18/21 $60 Call.  Selling one such contract would be a hedge against small declines of 135 shares of BEP.  While I was initially thinking I would include a hedge like this in the model portfolio, the requirement that the BEP position to be at least 135 shares (or $5800) to work means that in order to follow the model portfolio, a reader would have to invest at least $5800 in each of the 10 stocks, or $58,000 total.  Since I want this strategy to be accessible to readers with only $10,000 or so to invest, I will include BEP in the portfolio without a hedge.

Conclusion

The end of 2020 looks like it may have set the stage for a new Yieldco boom, with rapidly rising stock prices leading to new investment and rapid dividend per share growth.  If this virtuous cycle emerges, the Yieldcos to own will be the ones with the lowest yields and the highest potential for compound dividend growth.

Unfortunately, a Yeildco boom is not certain.  Higher yield Yieldcos will also benefit from a boom as investors attracted by the leaders look for diversification in the space, but they offer more safety.  If a new Yieldco boom fails to emerge or turns to a bust, more value priced Yieldcos like CVA, GPP, and AGR have less far to fall.  

Brookfield Renewable Energy Partners (BEP) is one of the Yieldcos that saw the largest rise (69%) in the second half of 2020. It has the advantage over other Yieldcos that it can raise cash through the sale of shares of the even more highly valued Brookfield Renewable Energy Corp. (BEPC) shares, which are up 126% over six months and now trade at a 35% premium to BEP.  BEP shares can not only benefit from a renewed Yieldco boom, but can also benefit from any narrowing of the BEPC/BEP share price premium, which I believe is too large to be sustainable.

DISCLOSURE: Long CVA, GPP, AGR, BEP, BEPC. Short calls on BEPC.

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 The Yieldco Virtuous Cycle appeared first on Alternative Energy Stocks.

by Tom Konrad, Ph.D., CFA

With interest rates as low as they have ever been, I believe there is little point in small investors investing in bonds or bond funds, even if an allocation to fixed income is needed to match their investments to their ability and desire to take on risk.  With little potential upside from interest, I believe it is better to take advantage of the added safety of federally backed insurance by depositing money in a bank or credit union savings account or certificate of deposit (CD) ladder. 

We can do that and avoid having our deposits fund fossil fuel companies by choosing to bank with local banks or credit unions.  Last year, I wrote about Aspiration, which does this by keeping deposits with a local bank in the Puget Sound region north of Seattle. I concluded that while Aspiration’s investments were fossil fuel free, they were only interesting because I was not aware of anything better.

Thanks to a reader, now I am.   That better option is Clean Energy Credit Union.  I’ve already opened an account.

The following interview is with Blake Jones, a co-founder and board member of Clean Energy Credit Union. 

Q: What is Clean Energy Credit Union?

Clean Energy Credit Union (“Clean Energy CU”) is a federally chartered credit union (aka not-for-profit, financial services cooperative) that focuses exclusively on providing loans for clean energy and energy-saving projects such as electric vehicles, electric bicycles, residential solar electric systems, residential geothermal systems, and other green home improvements. It is an online/digital-only financial institution and does not have any brick-and-mortar branches. Clean Energy Credit Union is based in Colorado, but it serves members who live throughout the entire USA.

Clean Energy Credit Union’s vision is a world where everyone can participate in the clean energy movement, and our credit union helps make this vision a reality by: (1) making it easier for everyone to afford clean energy and energy-saving products and services by offering clean energy loans with amazing terms; and (2) making it easier for everyone to invest in the clean energy movement by offering federally insured deposit accounts and clean energy CDs whereby the deposits are solely used to help others pursue their clean energy and energy-saving projects.

Q: Tell us a little about yourself and your role at Clean Energy CU.

I started my career as an engineer in the oil and gas industry working for a subsidiary of Halliburton. I later became passionate about renewable energy, and that’s what I’ve been doing ever since, spanning the last 20 years. I’m also passionate about cooperatives and have co-founded five of them, including Clean Energy CU. I’m happy to serve on its board of directors as one of about a dozen volunteers. I love our team, our mission, our unique credit union model, and everything about what we’re doing – in other words, I love the who, what, how, and why of Clean Energy CU!

Q: When and how was it founded?

Clean Energy Credit Union was started by a group of passionate volunteers who self-identify as cooperative geeks, clean energy geeks, and/or enviro-geeks. After an arduous three-year application process, we successfully obtained a federal charter for Clean Energy CU in September 2017. While there are currently over 5,000 banks and over 5,000 credit unions in the USA, starting a new federally insured credit union or bank has become increasingly difficult and rare. For example, we estimate that less than two-dozen new credit unions have successfully obtained a federal charter since the economic downturn of 2008. So, needless to say, we had a lot to celebrate when we finally obtained our federal charter just over three years ago, even though we fully understood that this only signified that we were “crossing the starting line” in terms of pursuing our vision for Clean Energy CU.

Q: What inspired you to help found Clean Energy CU?

Despite the barriers that we encountered while applying for a federal charter, our group was determined to start Clean Energy CU because we’re very passionate about its mission and its potential impact. We earnestly believe that Clean Energy CU can play a unique role in disrupting the retail banking sector to help address climate change and grow the clean energy movement. 

Q: What were the greatest obstacles?

Initially, our greatest obstacle was getting a federal charter. Then it was raising enough donations to initially capitalize the credit union. Unlike a bank, which can raise capital from stockholders/investors, federally chartered credit unions are 501(c)(1) not-for-profit organizations which can only capitalize themselves with retained earnings – which start-ups don’t have – and with donations. Fortunately, we’ve been able to raise almost $3M in donations from over 600 individual supporters and numerous foundations and corporate donors. This has allowed us to not only start the credit union, but also to “get over the start-up hump” and reach the point where the credit union is operating sustainably and can stand on its own two feet. I’m happy to say that Clean Energy CU has achieved healthy profitability in 2020, and in turn, this gives us (and our regulators) renewed confidence that our unique strategy is indeed viable. That being said, we still face some formidable obstacles if we want to achieve the kind of scale that we’re aiming for in order to have the greatest positive impact on climate change and the clean energy movement. So, our biggest challenge now is to rapidly grow our lending capacity by hiring and training new, mission-aligned employees as quickly as we can, by attracting new members and deposits to fund our loans, and by ensuring that we’re utilizing the best available software and IT infrastructure which is critically important for an online/digital-only credit union. While we don’t “need” more donations because we’re now profitable, all of these challenges that I just mentioned can be addressed more rapidly and effectively if we’re able to raise more capital via additional donations.

Q: What can you offer to small investors that is not available at other banks or credit unions?

We offer federally insured deposit accounts and CDs whereby the funds are used solely to help others obtain financing to pursue their clean energy projects. In other words, we offer federally insured investment opportunities in clean energy. As far as we know, nothing like this can be found anywhere else.

A growing number of people are asking, “what can I do to help combat climate change?” Many of us can purchase an electric vehicle, go solar, or make our homes more energy efficient – and many of us already have – but what else can we do?  And what about people who live in urban areas and don’t need a car, or people who live in a high-rise and can’t install solar – what can they do? People who can’t pursue a clean energy or energy-saving project don’t have a way to support people who can. The goal of Clean Energy CU is to provide everyone with an opportunity to support clean energy, protect our environment, and improve our economy.  Whether buying an electric vehicle or opening a checking account, everyone can make a difference.

People need more “sustainable banking” or “impact banking” options. Decades ago, conscientious consumers began channeling their purchases towards companies that make products which are less harmful – or ideally are beneficial – for our environment and society. Similarly, socially responsible investors began investing in carefully selected companies and mutual funds for similar reasons. Then, people began seeking careers which are more meaningful and impactful, and this has especially been the case with millennials in recent years. We believe that the next frontier, so to speak, is to be able to do your banking somewhere in which your deposits will have a positive impact. Most of the “big banks,” of which the top 10 hold almost 50% of all deposits in the U.S., are financing fossil fuel projects like the Keystone pipeline and/or are regularly embroiled in scandals like Wells Fargo’s recent “fake account” scandal. So, while we can all probably think of consumer, investment, or careers choices that we – or someone we know – have made that seek to do some good in the world, how many examples can you think of that fit into this new “impact banking” category? Unfortunately, there are far too few choices, and this needs to change. When we started Clean Energy CU, yes, we were thinking about bringing down the cost of financing for clean energy projects, but we were also thinking about the other side of the equation – the deposits that fund the loans – and the unique opportunity that was presented by being able to invest in the clean energy movement by doing your banking at a place where your deposits would be federally insured and would solely be used to help someone else finance their clean energy or energy-saving project. 

Q: What types of loans do you offer?

We offer loans for electric bikes, clean energy vehicles (e.g. electric vehicles and plug-in hybrids), residential solar electric systems, residential geothermal systems (aka ground-source heat pumps), and green home improvements. This last loan category is kind of a catch-all for many different measures like insulation, weatherization, high-efficiency HVAC systems, high-efficiency water heaters, high-efficiency windows, and many others. An Energy Star rating makes it easy for us to approve appliances and equipment, for example, and a full list of eligible measures and their requirements can be found here. Our goal is to provide the best – or among the best – loan terms in the country that are custom-tailored for these types of projects.

Public demand for clean energy is growing rapidly, and people increasingly want to purchase electric bikes, electric vehicles, residential solar electric systems, residential geothermal systems, and other green home improvements. However, the cost of these projects can range from $5K-$100K (depending on numerous factors), so there’s a growing need for affordable financing. The best source for consumer financing for other large purchases such as auto loans, home mortgages, home improvement loans, boat loans, RV loans, etc., tend to come from banks and credit unions. Unfortunately, however, among the 10,000+ banks and credit unions in the USA, only a handful currently offer clean energy loans that meet the market’s needs. Instead, the vast majority of current clean energy loans are provided by Venture Capital-backed “fintech” companies whose financing terms are much more expensive than they should be. Clean Energy CU aims to set a positive example for other credit unions and banks, to teach them how to do clean energy lending, and to demonstrate that clean energy lending is far less risky than they currently perceive it to be (e.g. because the financial savings that result from lower utility bills or lower fuel costs can be applied towards monthly loan payments) in order to mobilize the tens of trillions of dollars that are managed by the retail banking sector towards bringing down the cost of financing for projects that utilize clean energy or conserve energy.

Q: What other new products is Clean Energy CU planning for? What is the expected timeline for launching them?

The next products we want to offer are home mortgages, credit cards, and loans to businesses and nonprofits. First, we’re aiming to offer home mortgages and home equity loans by the end of 2021, and similar to all of our lending, qualifying loans will have to be mission-aligned. So, for example, in order for a home to qualify for one of our mortgages, it’ll have to be a net-zero energy home, an energy efficient home with a good “HERS” (Home Energy Rating System) score or “EPS” (Energy Performance Score) score, or a home that is certified as Built Green, LEED, Energy Star, or something similar. Next, while we already offer debit cards, we’re also aiming to start offering credit cards by early 2022. Lastly, we can currently only offer residential and consumer loans, so we want to start offering loans to businesses and nonprofits by the end of 2022. In addition to providing loans to help businesses and nonprofits go solar, go geothermal, or make energy efficiency improvements, we also want to offer business banking services and lines of credit to companies and organizations that engage in clean energy work or environmental stewardship work.

Q: One of the reasons I wanted to write about Clean Energy CU is that I think a CD ladder is better alternative than a bond mutual fund for the fixed income of a person’s portfolio, and I think that Clean Energy CU will appeal to readers who want their investments to be actively helping solve the problem of climate change. Unfortunately, it looks like that while Clean Energy CU offers 1, 2, 5, and 10 year CDs. Without 3 and 4 year CDs, investors will have large gaps in their CD ladders, or have to stick to short term ladders. Do you have any plans to offer CDs which could fill in the gaps?

To be honest, we hadn’t thought of this and it wasn’t on our radar, so thank you for proposing this excellent idea. I plan on bringing this idea to our board of directors, and if they agree, I’d like us to start offering both 3- and 4-year clean energy CDs as soon as possible and by the end of Q1 2021 at the latest. Thank you for the suggestion!

Q: Are there other ways besides banking with Clean Energy CU that readers can help Clean Energy CU grow?

First, I want to emphasize that even just banking with Clean Energy CU is tremendously helpful because we need to grow our deposits in order to keep pace with the rapidly growing demand for our clean energy loans. As a result, we need more people to join the credit union and open checking accounts, money market accounts, IRAs, and clean energy CDs. We’d also like to make more electric vehicle loans, in particular, so if any readers are considering buying a new electric vehicle or refinancing their current loan, please know that Clean Energy CU has some of the best interest rates in the country. Lastly, as I mentioned earlier, Clean Energy CU can scale up its operations and positive impact more quickly if we’re able to raise additional donations. So, any readers who already make donations – or are willing to consider making new ones – for environmental causes, please consider Clean Energy CU as a potential option for leveraging your donation dollars to combat climate change and grow the clean energy movement via what amounts to a perpetual, revolving, clean energy loan fund.

Q: My wife works with credit unions, and she notes that their management typically lacks any diversity.  I notice that Clean Energy CU has a very diverse management and staff.  How have you accomplished this, and what have been the biggest barriers to success in this regard?

When we started the credit union, the initial people involved were drawn mostly from our own social and professional networks, so they were people that we already knew. This was one of numerous factors that resulted in our initial team being mostly white and mostly male. For multiple reasons, it’s very important to us that the clean energy movement be as diverse and inclusive as possible, and we want to make sure that we preempt any potential perception that the movement is comprised mostly of white, male, “techie” geeks, for example (like me!).

One of the first things we did was to create a hiring committee for our first and most important hire, our CEO, that intentionally consisted of three women and one man. Out of many highly qualified candidates, we ended up hiring a Hispanic woman, Terri Mickelsen, to become our CEO. Terri’s experience and qualifications were amazing, and I’m happy to say with the benefit of hindsight that she’s been the perfect CEO for Clean Energy CU and has been an extraordinary leader for our organization.

Next, we made significant efforts to promote diversity and inclusion in our top two initial marketing initiatives: our website and our two-minute animated “explainer video”. For example, our top two “banner images” on the homepage of our website are of two families that have solar electric systems on their homes: an Asian-American family and a mixed-race family consisting of two LGBTQ parents and two adopted children. Fortunately, and partly by chance, the ~3,000 members who have already joined Clean Energy CU are diverse.  However, we’ve also been proactively reaching out to mission-aligned organizations that also inherently represent diverse groups – such as the African-American Credit Union Coalition, GreenLatinos, Women in Renewable Industries and Sustainable Energy, and the National Society of Black Engineers – and trying to recruit these organizations to join our “field of membership,” which represents the groups or communities from which Clean Energy CU draws its members.

More recently, we’ve been working towards diversifying our governance teams: our board of directors and our supervisory committee (which is an important body which may be unique to credit unions). We realized that we needed to look beyond our own networks and reach out to others for help. Fortunately, we’ve recently added four women of color to our governance teams, and we’re very grateful to the Hewlett Foundation, the African-American Credit Union Coalition, GreenLatinos, and the Network of Latino Credit Union and Professionals for helping us in our search for diverse candidates. Our efforts were further helped by two of our white male board members who proactively volunteered to step down from the board in order to make way for diverse successors. For what it’s worth, we use the table below to help us monitor the diversity (in all its forms) of our leadership and officials:

Regarding our staff team, we still have lots of room for improvement, and we’re seeking new ideas for how to improve our diversity, equity, and inclusion (DEI) in the hiring and retention of mission-aligned employees. At the end of the day, I think the biggest barrier was our own willingness to make DEI a top priority for our organization. I believe it requires an unwavering commitment from the entire organization – especially the board of directors – as well as humble introspection and a concerted, sustained effort. We still have a long way to go, such as with further diversifying our staff team, and we realize that our DEI efforts need to be an ongoing practice and mindset rather than a “project” that will someday be marked as “complete.” Fortunately, I think we’re off to a good start, and we’re committed to working on this, increasing our awareness, and searching for new ideas to keep us moving in the right direction.

Q: Thank you for your work in helping create Clean Energy Credit Union, and for your time in this interview helping me tell my readers about it.

My pleasure! And thank you for introducing your readers to Clean Energy Credit Union!

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DISCLOSURE: No conflicts of interest.

DISCLAIMER: Hey, I don’t need a disclaimer.  Unlike stock market investments, deposits of up to $250,000 at Clean Energy Credit Union are NCUA insured.  Well, maybe just a little disclaimer… I’m not an investment advisor, and this interview is for educational purposes, not intended as investment advice.

The post Funding The Energy Transition at Clean Energy Credit Union appeared first on Alternative Energy Stocks.