After years of lackluster growth, renewable energy yieldco stocks recovered in dramatic fashion in 2019 — and Avangrid, one of the largest U.S. renewables operators, is paying close attention.
Avangrid is open to the idea of launching its own separately listed yieldco company to house its huge portfolio of wind farms, CEO James Torgerson said Wednesday. “With the yieldco market doing better, it’s something to at least think about,” Torgerson told analysts on an earnings call. “It’s obviously something we’re going to take a look at.”
In addition to its collection of electric and gas utilities in the Northeast, Avangrid has long been one of the country's leading developers and operators of wind farms. The company owns around 6 gigawatts of operating renewables capacity, and it built another 800 megawatts of onshore wind last year, trailing only Berkshire Hathaway Energy and NextEra Energy in annual additions. Through its Vineyard Wind joint venture, Avangrid is playing a leading role in the emerging U.S. offshore market.
Despite its large renewables portfolio, Avangrid stayed on the sidelines during the yieldco boom of the middle part of the last decade, which saw IPOs from operators including Pattern Energy, NRG Yield and TerraForm Power. NextEra Energy, a company that shares a number of similarities with Avangrid, launched its own yieldco in 2014.
A second yieldco boom?
The basic idea behind yieldcos is to separate the low-risk business of operating wind and solar farms from the higher-risk business of project development. Yieldcos buy finished projects from their sponsor companies, and in doing so developers are able to recycle capital back into new projects — while investors gain access to different types of renewables assets.
After an initial period of exuberance, however, many yieldco stocks fell hard amid concerns over governance structures and overly optimistic growth plans.
Avangrid, which is majority-owned by Spanish power giant Iberdrola, avoided the yieldco crash by keeping its renewables assets in-house. But investor interest in yieldcos returned with a roar last year, with many yieldco stocks now trading near multiyear highs.
NextEra Energy Partners gained nearly 40 percent on the stock market over the past year. TerraForm Power, SunEdison’s former yieldco, surged 55 percent in that same period.
When yieldco stock prices rise, their dividend yields fall, making them a more attractive option for companies.
“We always look at ways to be able to finance things better and use our capital appropriately,” Torgerson said on the conference call. "In the past it’s not an area that we looked at, because frankly we didn’t need the capital that we’d recycle through a yieldco."
“Going forward…maybe it’s something that could bear fruit," he said. “We’re keeping that at the back of our minds right now, but it may be more at the forefront in the future.”
Offshore headwinds
Avangrid struggled in 2019; Torgerson said he was “very disappointed with the financial results," noting low wind production in parts of the country and outage restoration costs at some of the utilities.
Adjusted earnings came in at $2.17 per share for the whole of 2019, down from $2.21 per share in the previous year. The company forecast adjusted earnings of $2.17 to $2.37 per share in 2020.
Avangrid shares fell nearly 8 percent on Wednesday, to below $52.
Among the company's challenges in 2019 was the unexpected permitting delay for the 800-megawatt Vineyard Wind project off the shore of Massachusetts, owned jointly with Copenhagen Infrastructure Partners.
Vineyard Wind originally planned on building its project in two 400-megawatt phases, finishing them in 2021-2022 — and in effect launching the U.S. industry. The permitting delay has made that timeline impossible.
After months of uncertainty, the federal government recently issued a new permitting timeline, saying the project should not count on receiving its final go-ahead until the end of 2020. That means the project will not finish construction until 2023 at the earliest.
As of late last year, Avangrid was still hoping to qualify the first phase of Vineyard's project for the 24 percent federal Investment Tax Credit, but the company now says it anticipates an 18 percent ITC for the full 800 megawatts.
The delay will at least come with some benefits, Torgerson said, including the potential for cost efficiencies through a closer alignment with the next big development in Vineyard Wind’s pipeline: the 804-megawatt Park City project to be built by 2025 for Connecticut.