History of yieldcos
A yieldco is a recent financial innovation that can be compared to REITs and MLPs. REITs started trading in 1951, while MLPs started in 1981. The first yieldco was started in 2005 by Seaspan (SSW), a Hong Kong–based shipping company.
In July 2013, NRG Energy (NRG) floated NRG Yield (NYLD). Currently, there are many yieldcos in the renewable energy space. SunEdison (SUNEQ) sponsored TerraForm Power (TERP) in 2014 and TerraForm Global (GLBL) in 2015. The Guggenheim Solar ETF’s (TAN) portfolio includes corporations as well as yieldcos.
What is a yieldco?
A yieldco is an investment vehicle formed by a parent company to own operating assets. These long-term contracted assets are expected to generate stable cash flows, most of which are distributed as dividends. Yieldcos are often known as synthetic MLPs. However, unlike MLPs that get a tax pass, yieldcos have to pay corporate-level taxes. They depend on depreciation and tax credits to manage corporate taxes.
Operational renewable energy projects produce predictable cash flows. So the yieldco structure is helpful to separate risky and predictable activities for the parent company.
Cash available for distribution
The metrics used to analyze the performances and positions of yieldcos are different from corporations. Yieldcos are dividend growth-oriented entities. Their cash flows are different from their net incomes due to high depreciation expenses, which are non-cash. Therefore, we can’t use common financial performance calculation methods such as EBITDA (earnings before interest, tax, depreciation, and amortization) and net income to measure yieldco earnings.
The appropriate performance measure for a yieldco is cash available for distribution (or CAD), also known as funds available for distribution. It’s also the measure for REITs and MLPs. Many investors follow the trends in CAD.
Yieldcos consistently invest in new operational projects. As plants age, the depreciation benefit declines, which results in growing tax expenses. So yieldcos invest in newer plants or farms to remain tax-efficient.