Yieldcos Turn Wind, Solar Energy Into Income Vehicles

In a world of rock bottom interest rates, what’s an income-seeking investor to do?

At a time when the global energy landscape is being rewritten, shouldn’t there be a way to capitalize on the certainty that millions of homes and businesses need a constant supply of power?

The answer to both questions may be yes — and the same type of innovative financial product claims to offer the solution.

Abengoa's solar thermal energy plant in Sanlucar la Mayor, Spain. Abengoa Yield is one of a handful of young yieldcos that own renewable energy...

Abengoa’s solar thermal energy plant in Sanlucar la Mayor, Spain. Abengoa Yield is one of a handful of young yieldcos that own renewable energy… View Enlarged Image

Yieldcos — so named because they’re structured to provide dividend-like yield to equity investors — are investment vehicles usually carved out of larger power companies. The spinoffs start with utilities such as NRG Energy (NYSE:NRG) and Pattern Energy (NASDAQ:PEGI), for example, constructing new power-generation locations. When the new facilities are operating, and have locked in long-term contracts with customers, they spin the assets into yieldcos.

The business model pays little-to-none in corporate taxes by figuring asset depreciation against its earnings. As a result, it distributes the cash flow that’s not reinvested in the company to investors as a payout. The companies are in many ways similar to the real estate investment trusts and master limited partnership models that have successfully lured income investors to the commercial real estate and energy pipeline industries in recent years.

It is typical for a yieldco to have no employees or payroll, relying instead on the parent company to manage its operations. Once a yieldco has facilities built and operating, and cash flows rolling in from customers, it offers investors a steady income stream, as well as a promise that the company will keep expanding its energy assets.

NextEra Energy Partners (NYSE:NEP) is the yieldco spun out by Florida-based NextEra Energy (NYSE:NEE) in June. It launched with a portfolio of 10 wind and solar facilities generating 989 megawatts of power and scattered from Colorado to Ontario, Canada. It has since acquired assets in California and Texas.

TerraForm Power (NASDAQ:TERP), whose parent is SunEdison (NYSE:SUNE), also targets wind and solar acquisitions.

Last month, First Solar (NASDAQ:FSLR) and SunPower (NASDAQ:SPWR) announced plans for an IPO of their new 8point3 yieldco joint venture.

Renewable energy experts think yieldcos are a great buy. Louis Berger, a co-founder and director of Washington Square Partners, a New York-based socially responsible investing advisory firm, thinks the sky is the limit for their growth.

“Five years ago these yieldcos probably wouldn’t have been viable, and now there’s scale,” Berger told IBD. “It’s grown considerably and yet is still in its infancy.”


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