MOTLEY FOOL - Yieldcos are the hottest investment in the renewable energy industry these days. On the surface, they're relatively simple companies and investment vehicles. A yieldco buys solar, wind, or other energy-generating assets and generates long-term cash flow from those assets. That cash flow goes to investors in the form of dividends.
But there's a big difference between yieldcos. Asset base matters, as does financing structure. But what may matter most is how aggressive management is in buying a project, adding debt, and distributing cash flow. I recently talked to some of the key players in8point3 Energy Partners (NASDAQ:CAFD) to see what makes its yieldco different.
Chuck Boynton, SunPower's (NASDAQ:SPWR) CFO and CEO of 8point3 Energy this year, as well as Mark Widmar, CFO of both First Solar (NASDAQ:FSLR) and 8point3 Energy, gave me some insights into this new company.
Cash available for distribution is a dangerous metric
One of the strange things about yieldcos today is their incentive structure. Sponsors, of which there is usually only one, typically have an incentive to increase cash payouts as quickly as possible to reach incentive distribution rights (which I explained for 8point3 Energyhere).
This structure can lead companies to increase payouts short term to reach IDRs, while overlooking the financial health of the company by adding debt that could cripple operations long term. The best example of this is TerraForm Power (NASDAQ:TERP), which is sponsored by SunEdison (NYSE:SUNE).