Public investor expectations for earnings and dividend growth have led to a clash between stock markets and renewable energy yieldcos. Companies like 8point3 Energy Partners, TerraForm Power, and NRG Yield didn't perform well, acting more like bonds than investors in public stocks typically expect, and were eventually sold to investors that hold similar assets.
Pattern Energy (NASDAQ:PEGI) is the latest yieldco to look for private alternatives, and has found a good suitor for its assets: The Canada Pension Plan Investment Board (CPPIB) is buying the company for $6.1 billion, or $26.75 per share, in one of the industry's biggest buyouts ever. The deal may be a new blueprint for how renewable energy stocks and assets should be financed.
The CPPIB isn't just buying Pattern Energy's wind and solar portfolio -- it's also buying Pattern Development, the development arm of the business, in a separate transaction. This implies that the new owner intends to both own renewable energy assets and develop more renewable energy projects in the future.
What makes CPPIB unique is that it isn't subject to the pressures that public markets bring. It has over 400 billion Canadian dollars in assets, and is mandated to provide benefits to over 20 million Canadians. But those obligations stretch for decades into the future, so there's no pressure to do anything more than generate the expected cash flow that renewable energy projects generate.
Owning single assets isn't new to the pension fund world, but owning one of the world's largest project development firms isn't common, and may become a strategy that other big pension funds choose to explore.
Bringing expertise in-house
The advantage of CPPIB owning the development arm of Pattern Energy is that it will now keep some of the margin usually made by developers. This will allow the fund to generate higher returns and build at a pace that it chooses.
The structure may also make financing new projects simpler. The fund can use tax benefits like the investment tax credit to offset gains elsewhere in its portfolio. This compares favorably to the position of most other developers, which have to sell tax assets to one buyer and project cash flows to another.
Bringing the flexibility of building renewable energy assets in-house could be a big advantage, and simplify the development process overall. The company will now answer to itself rather than the whims of banks and investors looking for tax benefits year after year. That could be a big advantage for the CPPIB.
The new world of yieldcos
Most of the major yieldcos that still exist are attached to larger entities that can take a long-term view of their development. NextEra Energy (NYSE:NEE) owns NextEra Energy Partners (NYSE:NEP), and Brookfield Asset Management (NYSE:BAM) controls Brookfield Renewable Partners (NYSE:BEP) and TerraForm Power (NASDAQ:TERP). But independent yieldcos have proven to be a bridge too far for public investors, and Pattern Energy getting gobbled up is another sign that the yieldco boom is over.