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Global Credit Research - 20 Mar 2014
New York, March 20, 2014 -- Some diversified utilities and unregulated power companies will create
yield-oriented financial vehicles in the coming year, says
Moody's Investors Service. These yield vehicles, such
as master limited partnerships (MLPs), yieldcos, and even
energy real estate investment trusts (REITs), are the current financial
engineering fad in the utility/power sector receiving fanfare on Wall
"These yield vehicles are credit-negative, but they
will start out as a minor part of a large diversified organization,
so it will take a long time to reach a point where they pressure the ratings
of their sponsors," says Moody's Senior Vice President
Mihoko Manabe in the report "Diversified Utilities and Power Companies:
Looking to MLPs, Yieldcos, and REITs While Keeping Credit
Although MLPs have been around for over 30 years in the oil and gas industry
and over 50 years for REITs, the electric-power sector is
just getting in as price-earning multiples for yield vehicles soar
above those for utilities. Moody's says electric power companies
that are considering yield vehicles are often looking to raise equity
capital for growing a business segment that is typically secondary to
their core utility or generation business. Others are looking to
yield vehicles as a way to monetize a portion of their assets while also
retaining control and potential upside from those assets.
"If these higher multiples persist, owning a yield vehicle
will provide sponsors with an attractive equity currency to buy assets
or gain access to capital at a significantly lower cost than otherwise
available," says Moody's Vice President Swami Venkataraman.
Moody's says reliable long-term forecasts of acquisition-driven
models such as MLPs and nascent financing structures such as yieldcos
and energy REITs are not possible. The rating agency expects its
analysis of the yield vehicles and their corporate sponsor will evolve
over their growth cycle as their asset portfolios, business risk,
and capital structures change their credit profiles.
The impact of a yield vehicle on its sponsor's credit quality is
very much company-specific and so will be Moody's analysis.
Using examples as precedents, such as a seasoned MLP sponsors like
Kinder Morgan Inc. (Ba2 stable), the Moody's report
discusses some analytical considerations that would be pertinent to a
diversified utility or power company that sponsors a new yield vehicle.
These considerations include analyses of capital structure, including
structural subordination, non-recourse debt, and off-balance
sheet debt. Moody's will also consider how the sponsor company
is impacted by having to pay dividends to a new set of yield-vehicle
shareholders, which could result in that company having less cash
flow to service its own debt.
The Moody's report lists the many utility and power companies that
own renewable and midstream energy assets, and the rating agency
cites which are the likeliest to create a yield vehicle. Moody's
expects most of these companies will not create one, because they
lack the assets or the strategy to keep adding assets to these vehicles
as MLP and yieldco investors would expect. Other companies will
not create a yield vehicle, because they either need to retain cash
rather than paying it out as dividends, or raise capital through
other means .
For more information, Moody's research subscribers can access
this report at https://www.moodys.com/research/Diversified-Utilities-and-Power-Companies-Looking-to-MLPs-Yieldcos-and--PBC_165861
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Senior Vice President
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
Associate Managing Director
Vice President - Senior Credit Officer
Moody's: New MLPs, yieldcos expected in the utilities/power sector
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
No Related Data.
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