The biggest recent surprise from First Solar, Inc. (NASDAQ:FSLR) didn’t come from its earnings report, but instead was the announcement that it was teaming up with rival SunPower Corporation (NASDAQ:SPWR) to form a joint venture known as a “yieldco.”
Yieldcos have become quite the rage among the utility and renewable energy set because they provide an easy way to obtain financing. And they’ve become quite the rage among investors because they’re a new source of dividend yield.
How do yieldcos work? In short, a utility or renewable energy company places its existing power plants and projects into a new subsidiary, then sells a stake in the firm to the public. The power projects in the new subsidiary are tied to long-term and predictable power purchase agreements, and most of the cash that comes from those agreements is distributed to shareholders through dividend payments — hence the name “yieldco.”
The beauty is that most solar and wind projects don’t generate taxable income for many years, as depreciation often outstrips revenues. Without accounting basis earnings or profits, a yieldco’s cash flows and distributions are considered nontaxable returns of capital to shareholders. That’s a win-win for FSLR and SPWR, which have been moving away from panel manufacturing and into utility-scale solar projects.
The First Solar/SunPower yieldco hasn’t been finalized just yet, but you don’t have to wait for them to tap into this new source of dividend yield. Several yieldcos already are available and are churning out cash for investors.
Here are four of the best.
Yieldcos: NRG Yield Inc (NYLD)
NYLD Yield: 2.9%
Utility NRG Energy Inc (NYSE:NRG) was the first firm to actually do a yieldco transaction by spinning off 10 utility-scale solar, wind and distributed solar generation facilities as well as three natural gas plants into NRG Yield Inc (NYSE:NYLD). That initial 1,300 megawatts worth of capacity was all under long-term contracts and generates significant cash flows for NRG Yield.
However, NYLD continues to benefit from the “drop-down” relationship with its major utility parent.
Not long ago, the pair closed on a $480 million deal to add an additional 785 MW worth of solar, wind and natural gas plants into the yieldco. Those additional plants should help NYLD increase its full-year cash available for distribution to $195 million, up from $160 million.
That’s cash that will make its way to shareholders’ pockets. In its relatively short history, NYLD has delivered on the yieldco promise and has raised its payout each quarter, with a total bump of 70% since its first payment. And while NYLD currently only yields 2.9%, analysts expect it yield more than 5% in just three years as it continues to receive long term drop-downs from NRG.
Yieldcos: NextEra Energy Partners LP (NEP)
NEP Yield: 2%
Florida-based utility NextEra Energy Inc (NYSE:NEE) is the poster child for adding renewables to its mix. In fact, NEE is the nation’s largest solar and wind operator. And given that status and its huge portfolio of renewable generation assets, NEE makes the perfect candidate for a yieldco.
NextEra Energy Partners LP (NYSE:NEP) already owns a variety of solar and wind projects — totaling around 990 MW worth of generation capacity — that it received from NextEra.
NEP’s YieldCo story gets better when you consider recent moves of its parent.
NEE is buying utility Hawaiian Electric Industries, Inc. (NYSE:HE) for $4.3 billion. The key is that Hawaii has been one of the most renewable-energy-friendly states in the entire country, offering tons of tax incentives to spur adoption on the islands. HE features plenty of solar and wind capacity — the kind that can be quietly tucked inside a yieldco. And considering that HE supplies power to 95% of the state’s residents, you have a recipe for stable cash flows.
Like NRG, NextEra Energy Partners’ relationship with its parent should help boost its current 2% yield significantly over time.
Yieldcos: Abengoa Yield PLC (ABY)
ABY Yield: 3%
Investors might not be familiar with Spanish firm Abengoa SA (ADR) (NASDAQ:ABGB). It’s a global renewable energy and construction powerhouse that’s been in business since the 1940s. On that front, it has built up an impressive series of solar, wind, geothermal and other renewable energy facilities that span the globe.
The downside is that ABGB is quite laden with debt.
Sensing an opportunity to cut that load, the firm launched a yieldco. Abengoa Yield PLC (NASDAQ:ABY) owns 891 MW worth of renewable energy generation, 300 MW of conventional power generation and 1,018 miles of electric transmission lines. These assets are located not only in North America, but in Europe and South America as well. However, ABY does have plans to acquire more assets from ABGB in Africa and the Middle East. Additionally, ABY has first crack at anything that Abengoa wants to sell.
Those additionally drop-downs and rising cash flows from its current roster of assets should help ABY increase its dividend from 3% last year to more than 5.7% this year and 7.8% in 2016.
Yieldcos: TerraForm Power Inc (TERP)
TERP Yield: 3.4%
Like FSLR and SPWR, Sunedison Inc (NASDAQ:SUNE) has moved from being strictly a solar panel producer to a builder of utility-scale solar projects. After a big restructuring — in which it spun out its traditional semiconductor assets — it formed a yieldco to house some of these assets.
TerraForm Power Inc (NASDAQ:TERP) currently owns 887 MW worth of solar projects located in the United States, Canada, the U.K. and Chile. And like the others on this list, it will continue to see the benefits of its parent by purchasing completed projects.
However, SUNE still is a relative small-fry in the grid-scale space. Seeking an opportunity for growth, TERP recently purchased its first wind project to add to its generation mix. TerraForm Power purchased 500 MW worth of operating wind power facilities and 21 MW of solar capacity from privately held First Wind. Those projects should help increase cash available for distribution at TERP by $73 million this year.
Under that scenario, TERP expects to pay a $1.30 dividend this year — an increase of almost 21%.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.