Yield co

A yield co is a company that is formed to own operating assets that produce a predictable cash flow, primarily through long term contracts. Separating volatile activities (e.g. Development, R&D, construction) from stable and less volatile cash flows 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]
• Abengoa Yield PLC^[2]
• Hannon Armstrong Sustainable Infrastructure^[6]
• TerraForm Power^[7]
• TerraForm Global
• 8point3 Energy Partners.^[8]

There is also an ETF that was set up by Global X 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