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Yieldco
Practical Law Glossary Item 7-585-7847 (Approx. 3 pages)
Glossary
Yieldco
A subsidiary that has been established by a project developer to hold certain operating assets. In this structure, a project developer forms a new entity to which it contributes a portfolio of operating or almost completed electricity generating assets in exchange for stock and cash. The developer then sells a minority interest (about 20% to 40%) to the public through an initial public offering (IPO). The contributed assets generally have long-term offtake agreements (for example, power purchase agreements) that are capable of generating stable and predictable cash flows that can be used to pay dividends to the yieldco's stockholders. Yieldcos are expected to pay out a majority of their earnings to their stockholders, making them an attractive investment.
The first US yieldco was established in 2013, but this structure is growing in popularity. This is because yieldcos:
- Can use the proceeds of the IPO to acquire more projects from the project developer or third parties.
- Allow project developers to monetize their interests in operating projects, which frees up capital for investment in more projects and to pay down debt. Project developers can also use the proceeds of asset sales to the yieldco to pay dividends to their equityholders.
- Have a lower cost of capital which makes them more competitive than other capital structures. For example, tax equity, a major source of financing for renewable projects, is very expensive financing source (see Practice Note, Project Finance: Sources of Available Financing: Tax Equity Investors). As a result, yieldcos have been able to acquire assets and projects at the expense of other types of investors.
- Give project developers an additional source of revenue. They typically enter into project support agreements or project management agreements with the yieldco to manage and operate the projects they sold to the yieldco.
For more information on yieldcos, see Articles, US Project Finance Round-Up: Mid-Year 2014: Yieldcos and US Project Finance: Key Developments and Trends from 2014 and the Outlook for 2015.