What are YieldCos and why are they often compared to MLPs?
YieldCos and MLPs are often compared because they both pay a yield and participate in the energy arena. Yet, while MLPs are involved in the exploration, development, mining or production, processing, refining, transportation, and marketing of natural resources and minerals, YieldCos are known for owning renewable energy assets. It is important to note, however, that YieldCos are not required to participate in renewable energy or energy of any kind. Any type of business can be a YieldCo, but companies who own renewable energy assets have found YieldCos to be a good fit for their business models.
YieldCos are corporations that don’t qualify under Section 7704(d)(1)(E) of the US Code and aren’t eligible for pass-through tax status like MLPs. Nevertheless, YieldCo income is tax-advantaged for the foreseeable future due, in part, to a step-up in basis and the government tax credits available for renewable energy companies. For example, the Production Tax Credit (PTC) is an “inflation-adjusted per-kilowatt-hour (kWh) tax credit” allowed for projects under construction prior to January 1, 2015. Rebates in the amount of $0.023/kWh are available for electricity generation via wind, geothermal, and close-loop biomass. Other eligible technologies see a $0.011/kWh credit. The PTC is generally applicable only during a company’s first 10 years of operation. Other incentives such as the Investment Tax Credit (ITC) and state issued Renewable Energy Certificates (RECs) also help YieldCos avoid paying a hefty tax bill.
MLPs and YieldCos are also known for their cash distributions and the advantageous tax shield that comes alongside them. MLPs may shelter 70-90% of distributions from current taxes provided that assets are added each year, and YieldCo distributions could be shielded 100% as long as Net Operating Losses (NOLs) don’t run out.
Finally, these two structures are each recognized by investors for generating stable cash flows. YieldCos call it Cash Available for Distribution (CAFD) and MLPs call it Distributable Cash Flow (DCF). MLPs generate fee-based, take-or-pay, or hedged revenues. YieldCos have Solar Power Purchase Agreements, which have an average 15-year term.
In a recent presentation, Vinson & Elkins provided this useful table which offers a quick guide for comparing YieldCos with MLPs.
