Yield co

A yield co or yieldco is a company that is formed to own operating assets that produce a predictable cash flow, primarily through long term contracts. Separating volatile activities (such as development, R&D, construction) from stable activities of operating assets can lower the cost of capital[1] Yield cos are expected to pay a major portion of their earnings in dividends, which may be a valuable source of funding for parent companies which own a sizeable stake.[2]

Yield cos are commonly used in the energy industry, particularly in renewable energy to protect investors against regulatory changes.[3] They serve the same purpose as master limited partnerships (MLPs) and real estate investment trusts (REITs), which most utilities can't form due to regulatory constraints.[4] Yield cos give investors a chance to participate in renewable energy without many of the risks associated with it.[4]

The number of yield cos grew rapidly in 2013 and 2014 through initial public offerings. They include:

  • NextEra Energy Partners
  • NRG Yield[5]
  • Brookfield Renewable Energy Partners[5]
  • TransAlta Renewables [5]
  • Pattern Energy Group[5]
  • Atlantica Yield PLC[2]
  • Hannon Armstrong Sustainable Infrastructure[6]
  • TerraForm Power[7]
  • TerraForm Global
  • 8point3 Energy Partners.[8]
  • Saeta Yield

There is also an ETF (Exchange Traded Fund) that was set up by Global X Funds under the ticker Symbol YLCO, which seeks investment results that correspond generally to the price and yield performance, of the Indxx Global YieldCo Index.

Benefits for parent companies

Deutsche Bank mentioned several benefits of creating yield cos for their parent companies:[9]

Deutsche Bank, Crossing the Chasm (February 2015)[9] —

  1. YieldCos enable investors to better value the company's ability to grow assets and assign a multiple on cashflows.
  2. By creating a YieldCo, solar companies have the option to create an IDR structure and potentially benefit from growth of the YieldCo in the longer term. Solar companies were previously not able to benefit from this strategy by simply selling projects to a YieldCo.
  3. More revenue streams can be dropped down into the YieldCos especially as assets continue to grow. One specific example is inclusion of O&M revenues from installed base of operating assets.
  4. YieldCos expand the investor base and contribute to valuation multiple expansion. Several energy/MLP/utility investors are looking to invest in solar companies that have announced plans to form a YieldCo.

References
  1. See the transcript of a panel discussion with Lyndon Rive, CEO of SolarCity, Bob Hemphill, CEO of Silver Ridge Power (formerly known as AES Solar), Jeff Eckel, CEO of Hannon Armstrong Sustainable Infrastructure, Ed Fenster, co-CEO of Sunrun, and Carl Weatherley-White, CFO of K Road Power. Moderated by Keith Martin. "New financing strategies". Globe Business Media Group. August 9, 2013.
  2. Reuters Editorial (13 June 2014). "Renewable energy firm Abengoa Yield's shares rise in U.S. debut". Reuters.
  3. "Solar yield co launched to 'protect EU PV investors' - PV-Tech". PV-Tech.
  4. "Want to Play Renewable Energy? Focus on the New YieldCos". InvestorPlace.
  5. "Sorry, the page you requested cannot be found…".
  6. "Bloomberg New Energy Finance Summit, "Investment Yield Vehicles" Gather Speed at BNEF..."
  7. "SunEdison solar yieldco TerraForm Power files for a $50 million IPO". NASDAQ.com. 29 May 2014.
  8. "Update: First Solar and SunPower's YieldCo, 8point3, Raises $420M".
  9. "Crossing the Chasm" (PDF). Deutsche Bank Markets Research. 27 February 2015. p. 42. Archived (PDF) from the original on 1 April 2015.


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