Morgan Stanley Doesn’t Think PG&E Bankruptcy Will Topple Yieldcos

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When PG&E Corp. (NYSE: PCG) announced Monday that it plans to file for bankruptcy by the end of January, the company detailed at some length the liabilities it faces. What it did not do was indicate how it would dispose of those liabilities.

Morgan Stanley’s research group on Wednesday issued a report on the risks to power generators that supply PG&E with renewable energy. These so-called yieldcos all have above-market rate contracts to supply the utility with renewable energy.

Yieldcos are similar to the familiar master limited partnerships (MLPs) that dominate the energy infrastructure sector with pipelines and storage facilities to transport and store oil and gas and the main function of which is to spin off cash distributions, primarily to the parent (sponsor) company.

One such renewable energy yieldco is Clearway Energy Inc. (NYSE: CWEN), which operates as a subsidiary of NRG Energy Inc. (NYSE: NRG), and its stock has lost about 12% in the past week as investors fret about whether PG&E will honor its power purchase agreements (PPAs) with the company. Other yieldcos that have PPAs with the utility have fared somewhat better, but all are at risk.

Morgan Stanley’s research team notes that many of the PPAs were signed at prices well above the current price of power, but the team sees a low probability that PG&E will reject the PPAs it has with renewable energy supplier for the following reasons:

  • These contract costs are passed through to customers, so a reduction in contract costs does not benefit PG&E shareholders or creditors.
  • Many key policymakers in California are committed to increasing renewables growth and rejection of the PPAs would have a chilling effect that would deter renewable projects developers from working on new projects.
  • Furthermore, PG&E needs the electricity. If it cancels the contracts the company needs to find more than 2GWh of electricity to meet its customers’ demand.

Regarding Clearway, which supplies 1,200 megawatt-hours under its contract with PG&E, Morgan Stanley believes the company is “pricing in a high risk of cash flows being eliminated, but we remain cautious on the stocks given the uncertainties of bankruptcy and potential project cash flow restrictions.”

Since the disastrous Camp Fire started on November 8, Clearway stock has lost about 27% of its value. Other yieldcos have also been knocked down: NextEra Energy Partners L.P. (NYSE: NEP) is down 14%, Atlantica Yield PLC (NASDAQ: AY) is down 11% and Patterson Energy Group Inc. (NASDAQ: PEGI) is down 7%. The S&P 500 has dropped 8% over that same period.

For investors, the big risk is to the yieldcos’ cash available for distribution (CAFD). At Clearway, the yield is currently 8.05% largely due to the depressed stock price. NextEra’s yield is 4.08%, Atlantica’s is 7.42%, and Patterson’s is 8.34%.

If PG&E were to cancel their existing PPAs with the yieldcos and write new ones at current prices, Morgan Stanley reckons the utility would create more than $2 billion in customer bill “headroom” that PG&E could use to boost spending on fire risk mitigation.

Morgan Stanley lists 16 yieldcos that have PPAs with PG&E. Clearway’s is the largest at 1,200 MWh and Public Service Enterprise Group Inc.’s (NYSE: PEG) is the smallest at 22 MWh. NextEra Energy Partners supplies 400 MWh and its parent, NextEra Energy Inc. (NYSE: NEE) supplies 375 MWh. Atlantica is contracted for 280 MWh and Patterson supplies 101 MWh.

Shares of Clearway, NextEra, Atlantica, and Patterson are all trading higher Wednesday, no doubt due in large part to the Morgan Stanley analysis.

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