Will YieldCo structure change energy investments?

Monday, November 4, 2013

A relatively new way some utility companies are structuring their assets is drawing increased investment.  Dubbed the "YieldCo" model, the basic idea is that an established energy and utility companies will create a YieldCo subsidiary as a vehicle for holding investments in assets that produce sustained or increasing cash flow.  The YieldCo then pays out a relatively high percentage of its earnings to its shareholders as dividend yield.  Utility giant NRG Energy Inc. launched NRG Yield, Inc. this July, and other companies and market watchers have hinted that more YieldCo spinoffs may come in the near future.  Will the YieldCo model catch on?  How will it change the flow of money to and from energy projects?

The YieldCo model offers several kinds of benefits.  One is an answer to the question of renewable energy projects can compete during long-term periods of low power prices and reduced demand for electricity?  YieldCos are hoped to offer lower cost of capital for these projects.  Most often, they are conceived of as as holding electric generation projects whose output is fully contracted for, and older renewable and other assets that no longer qualify for special tax benefits.  The structure lets owners monetize assets without giving up control.  Meanwhile, the expected high and consistent yields can also attract capital and new investors, much as real estate investment trusts (REITs) or master limited partnership (MLPs) have done for other sectors

In the case of NRG Yield, its initial asset base featured a mix of conventional and distributed elcetric generation projects.  This mix included eleven utility-scale power plants and renewable projects, plus and two portfolios of distributed solar projects.  NRG Yield appears to have been a success, attracting $430 million in its initial public offering, with shares subsequently rising over 50% more in value. 

But despite NRG Yield's success since July, the structure is relatively novel as applied to electric generating infrastructure.  Downsides to the YieldCo structure include less favorable tax treatment than is available to REITs or MLPs (basically, a higher level of taxation), the cost of establishing a spinoff YieldCo, and increased exposure to interest rate risk.

If the YieldCo structure catches on, it could attract new investment capital to the renewable and conventional electric generation sector.  Will other companies follow NRG Yield's example?  NextEra Energy Inc. (owner of Florida Power & Light) is said to be exploring the concept, and is reportedly considering a portfolio of 1,500 to 2,000 MW of operating assets and another 1,200 MW in the development pipeline for contribution to a YieldCo in the next 4 years.  How big a shift we see to YieldCos remains to be seen, but for now excitement about the possibilities remains high. 

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