Today from Gordon PApe. GLTA
It's been a lousy year for yieldcos. Their share prices have dropped significantly and there is no sign of improvement any time soon.
Yieldcos have been around for a while but their popularity increased dramatically in recent years as investors responded to low interest rates by moving out of bonds and GICs and into stocks and limited partnerships that offered better cash flow. Yieldcos were created to meet that demand by providing dependable and growing income to investors at what was supposed to be reasonable risk.
The phenomenon began in the U.S., with most of the yieldcos created by energy-related businesses. Several Canadian firms have followed the lead including major companies like Enbridge, which set up Enbridge Income Fund Holdings, TransAlta (TransAlta Renewables), and Brookfield Asset Management(Brookfield Renewable Energy Partners, Brookfield Infrastructure LP). Typically, the parent company "drops down" stable, low growth assets into the yieldco in exchange for cash, shares, debt assumption, or any combination thereof.
For example, during the third quarter Enbridge Income Fund closed the acquisition of the Canadian Liquids Pipelines business and other renewable assets from parent Enbridge Corp. in a $30.4-billion deal. This included, among other assets, the Canadian portion of the Enbridge Mainline as well as its Regional Oil Sands assets. This followed the $1.8-billion acquisition of Enbridge's 50 per cent interest in the U.S. segment of the Alliance Pipeline and an interest in the Southern Lights Pipeline, completed in November 2014.
Enbridge Income Fund president Perry Schuldhaus said the latest deal "positions our company as the premier energy infrastructure investment vehicle in Canada."
Cash-starved investors initially gobbled up yieldco shares, driving prices to what turned out to be unsustainable levels. But disenchantment has now set in - not because the yieldcos aren't delivering as promised but because of fears about where they may go from here. There are two major negatives at work.
The first is the relationship of most yieldcos to the energy sector. Even though they may not be directly exposed to fluctuations in the price of oil and natural gas, they are feeling the ripple effect. For pipeline companies like Enbridge Income Fund, investors worry that volumes will be negatively affected, reducing revenue and profits. For renewable energy companies, cheap oil makes the high cost of their green output even less attractive and more dependent on government subsidies.
The second concern is higher interest rates in the U.S. By definition, yieldcos are interest-sensitive - as rates rise their yields become less attractive when compared to ultra-safe U.S. Treasury bonds and the cost of servicing debt rises. The result: a price retreat.
Enbridge Income Fund has seen its share value drop from an all-time high of $44.93 in mid-February to around $27 now - a decline of almost 40 per cent. This is despite the fact the company raised its dividend by 10 per cent twice in the past 12 months. Effective with the January payment, investors will receive 15.55 cents monthly (about $1.87 per year) to yield 6.9 per cent.
The latest financial results showed no sign of weakness. The Fund reported strong third-quarter results with earnings of $36-million (50 cents a share, fully diluted). That compared to $22 million (38 cents per share) for the same period last year. For the first nine months of the fiscal year, the Fund had earnings of $97-million ($1.37 per share), up from $65 million ($1.15 per share) in 2014.
I think the sell-off in yieldcos in general and Enbridge Income in particular has been overdone and that we're looking at a good buying opportunity. Patient investors who want good, dependable cash flow and can handle moderate downside risk may want to ask their financial advisers about this stock.
Wed, 23 Dec 2015 12:53 EST