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Yieldco Exodus Continues as Pattern Energy Takes $6.1 Billion Buyout

By Travis Hoium - Nov 9, 2019 at 12:26PM

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Maybe renewable energy yieldcos aren't built for public markets?

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 ( 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. 

Wind turbines and a solar farm with an urban background.

Image source: Getty Images.

The buyout

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 ( NEE -0.67% ) owns NextEra Energy Partners ( NEP -0.55% ), and Brookfield Asset Management ( BAM -2.82% ) controls Brookfield Renewable Partners ( BEP -2.83% ) and TerraForm Power ( 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

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Pattern Energy Group Inc. Stock Quote
Pattern Energy Group Inc.
Brookfield Asset Management Inc. Stock Quote
Brookfield Asset Management Inc.
$55.50 (-2.82%) $-1.61
NextEra Energy, Inc. Stock Quote
NextEra Energy, Inc.
$88.03 (-0.67%) $0.59
Brookfield Renewable Partners L.P. Stock Quote
Brookfield Renewable Partners L.P.
$33.99 (-2.83%) $0.99
TerraForm Power Stock Quote
TerraForm Power
NextEra Energy Partners Stock Quote
NextEra Energy Partners
$84.64 (-0.55%) $0.47

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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