TerraForm Power Inc. (NASDAQ:TERP) was one of the first yieldcos, opening up a new financing source for renewable energy projects in the U.S. But after the bankruptcy of the company's sponsor, SunEdison, it suspended its dividend, and has since been trying to break free from the drag of its parent's troubles.
While TerraForm Power may not have performed as well as hoped on the market, some yieldcos are worth investors' consideration heading into 2017. 8point3 Energy Partners LP (NASDAQ:CAFD), NextEra Energy Partners LP (NYSE:NRP), and NRG Yield, Inc. (NYSE:CWEN) top the list.
8point3 Energy Partners
Last year, SunPower and First Solar launched 8point3 Energy Partners to buy and own solar projects they developed. The fact that only solar projects are included in the yieldco means there's stability in cash flows, because the sun is very consistent year to year.
Despite this consistency, the market hasn't appreciated 8point3 Energy Partners' shares, with the result that their dividend is yielding 7.8% today. That's both attractive to investors and problematic for 8point3 Energy Partners. If the company wants to sell shares to buy projects in the next year, it may need the promise of higher returns on investment, or even have to add leverage on a project level. In short, it will be harder to buy projects in the future and add to the dividend.
For at least the next year, it appears that we can expect dividend growth of around 15%, but that may be a challenge going forward. A high dividend yield today creates challenges for future growth, but that's a trade-off investors may be willing to accept if yield is their goal.
NextEra Energy Partners
Utility NextEra Energy launched NextEra Energy Partners to house most of its renewable energy assets. The company owns 2.8 GW of wind and solar power systems, as well as 542 miles of pipeline assets in Texas. This diverse set of assets generates cash for the company's dividend, which currently yields 5.4%.
One advantage NextEra Energy Partners has over 8point3 Energy Partners (and TerraForm Power) is that it is technology and developer agnostic. This gives it flexibility in buying projects, and would allow the yieldco to more easily pick up assets from distressed developers or competitors.
The other advantage is that a lower dividend yield means the company can issue shares to buy more assets accretively. And with NextEra Energy's large asset base, there should be plenty of opportunities to buy new projects, whether they're wind, solar, or pipelines in the future.
Another early player in the yieldco business was NRG Yield. The company bought wind, solar, and some fossil fuel assets from NRG Energy when it began operations. Underperformance by some of those assets led to disappointing performance, but that issues should be leveling out as investors get a clearer idea of what the long-term performance of power plants will look like.
The dividend yield of 6.2% isn't the lowest in the industry, but it's low enough to allow the company to issue more shares and buy growth assets. Having NRG Energy as a sponsor may also be advantageous because the utility has been aggressive in buying assets from bankrupt SunEdison that will likely be dropped down to NRG Yield eventually. As long as the dividend remains relatively low, the company will be able to grow via NRG Energy dropdowns and third-party purchases.
Its flexibility, dividend yield, and link to a large utility make NRG Yield a much better yieldco to own than TerraForm Power today.