Yieldcos are different from typical corporations. Accordingly, the metrics used to analyze their performance and positions are also different. In this part of our series, we’ll discuss some key yieldco terms.
Cash available for distribution
Yieldcos are dividend growth–oriented entities. What’s more, their cash flows differ vastly from their net income due to high depreciation expenses, which are non-cash in nature. As a result, common measures of financial performance such as EBITDA (earnings before interest, taxes, depreciation, and amortization) and net income aren’t appropriate ways to measure yieldco earnings.
Instead, cash available for distribution, or CAD, also known as funds available for distribution, is a commonly used performance measure for yieldcos, REITs, and MLPs.
Investors should watch for trends in CAD. Since the yieldco is a new innovation, not much history in terms of CAD trends is available.
SunEdison makes up 8.85% of the Guggenheim Solar ETF (TAN).
Yieldcos need to invest constantly in new operational projects to ensure growth in the distributions that they have to offer investors. As projects age, the depreciation benefit diminishes, resulting in higher tax expenses. As a result, yieldcos keep investing in newer projects to remain tax efficient and to grow distributions.
Yieldcos contract with sponsors to buy assets that these sponsors are developing. The contracts have a “right to first offer” provision, or ROFO. The provision obliges sponsors to offer its assets for sale to yieldcos first before negotiating with third parties.
The assets under such contracts are known as ROFO assets. The ROFO asset pipeline provides some idea of future cash flows. In rare cases, ROFO agreements can be agreed with third-party developers—other than sponsors.