What: Shares of NextEra Energy Partners LP (NYSE:NEP) plunged 23% in September, one of the worst sell-offs in a terrible month for yieldcos.
So what: Yieldcos had a tough month and NextEra Energy Partners' actions show one of the reasons why. To grow, yieldcos need to sell debt and equity to buy renewable energy projects, and that's exactly what the company did. It offered 8 million shares of stock for $26 per share in an effort to increase capacity for growth, but as stock prices fall the stock yield rises and it becomes harder to buy projects with attractive returns.
The downward spiral of yieldcos is astounding and it may only get worse. The ongoing issue is that yieldcos need high stock prices to buy accretive projects, and if stock prices fall it means they won't be able to expand or grow dividends. That's a narrative NextEra Energy Partners is falling into right now.
Now what: I think the yieldco sell-off in general is overdone, but there are reasons to be concerned. Falling stock prices make growth more difficult, no matter what asset the company is buying. And with so many yieldcos now on the market it's unlikely that competitive bids will lead to high margin project wins in the future.
With an implied dividend yield of just 4.1%, based on last quarter's distribution, there are also higher yielding yieldcos available. I am bullish on the industry in general, but NextEra Energy Partners doesn't have much differentiation and that's not a recipe for long-term success.