What is Yield Co?
Yield Co is a company that is capable of generating predictable cash flow through long term contracts. The procedure involves the separation of volatile activities of an organization such as R&D, construction, and development from that of stable operations. Majority of the Yield Cos pay in dividends, which plays a crucial role in funding for a parent company that holds a significant stake. Certainly, such investments are spread across the energy sector, especially renewable energy, to protect investors from changing regulations.
Initially, solar manufacturers formed the yield co as a separate entity. It helped the manufacturing units to buy solar projects in drop-down transactions. The allocation of the funds of cash available for distribution (CAFD) can be quarterly or yearly. Such an investment is attractive to investors because of the low risk involved, which otherwise can project high over a period. Additionally, the capital garnered through this procedure helps pay off debt or finance new projects.
Renewable energy projects have uncertainty during the initial stages. However, the cash flow falls under the low-risk category once a project commences its operation. Through Yield Co, it is possible to unlock the potential of assets required for the renewable energy industry.
The investment and the returns
With the help of Yield Cos, solar manufacturing companies possess the possibility to attract new investors. As they are investing in low-risk assets, they typically gain 3-5% as returns with a long-term dividend reaching between 8 and 15%. For example, TerraForm Power is targeting a 15% annual growth through CAFD over three-year tenure. The return for the investor links directly to the performance of the assets and CAFD results. Out of this, around 80% is distributed as dividends.
TerraForm is the leading Yield Co and is facing fierce competition from other independent energy developers. Many industries supporting renewable energy and possess manufacturing units are sponsoring their own Yield Cos. As the age of a renewable project depreciates over a period resulting in the growth of taxes, Yield Cos invest continuously and consistently in new projects. Such a procedure helps gain tax benefits offered by a government.
The asset pipeline schedule is critical for tax benefit and cash inflow. Therefore, the business model helps Yield Cos to look towards future projects, the required investment, capture new investors, and look towards a viable long-term financing structure. To reduce the uncertainty of cash flow in the future, entering an agreement is typical for the Yield Co and Parent company.