InvestingDaily.com

Account Information

  • My Account

    Manage all your subscriptions, update your address, email preferences and change your password.

  • Help Center

    Get answers to common service questions, ask the analyst or contact our customer service department.

  • My Stock Talk Profile

    Update your stock talk name and/or picture.



Close
FEATURED STRATEGY

This Two-Minute Market Move Could Make You Rich

This Two-Minute Market Move Could Make You Rich[Revealed] How to generate instant income from the stock market. Over and over again. At will. This technique is so powerful – and safe – we’re guaranteeing you can use it to generate $1 million (or more) in retirement cash. And we’ll even send you a $1,000 check to kickstart your journey. Go here for details.

 

Yieldcos Recharge

By Robert Rapier on September 29, 2016

In recent years a new investment vehicle gained in popularity among income-seeking investors as the “yieldco” became renewable energy’s answer to the master limited partnership. Today I want to provide an update on the recent performance of this segment.

Internal Revenue Code Section 7704 states that at least 90% of MLP income must come from qualified sources, such as natural resources or real estate. Section 613 of the tax code requires qualifying energy sources to be depletable resources such as crude oil, petroleum products, natural gas and coal, or their derivatives. Various proposals to extend MLP eligibility to renewables like wind and solar have thus far failed to clear Congress.

As an aside, one notable exception to the denial of MLP tax benefits for renewable energy ventures is wood pellet producer Enviva Partners (NYSE: EVA), which we recommended to subscribers back in March. It has returned more than 30% since our Buy recommendation and is currently the best performing MLP over the past 12 months.

A yieldco, like an MLP, owns assets that produce cash flow for investors. For example, a solar power company may form a yieldco to solicit investments in utility-scale solar farms supplying energy under long-term power purchase agreements.

Yieldcos are not exempted from the corporate income tax like MLPs and other pass-through partnerships. But the accelerated depreciation provisions of the tax code and other tax breaks offered to renewable power producers allow them to report net losses for five years or more, while paying out positive cash flow to investors via dividends classified as a return of capital.

Yieldco distributions are treated as dividends under US tax law to the extent they are paid out of current or accumulated earnings. If payouts exceed current and accumulated earnings, the excess is treated as a return of capital for US federal income tax purposes, just as with an MLP. This reduces the adjusted tax basis of the shares, and once the adjusted basis reaches zero, subsequent payouts are taxed as long-term capital gains.

A number of yieldcos debuted over the past three years, many to very high investor demand. But as the market became saturated with these vehicles, skeptics began to question the sustainability of the business model. Adding to the uncertainty around the space was the recent implosion and subsequent bankruptcy of SunEdison (OTC: SUNEQ). As a result the yield chase hit a wall, and after peaking in the spring of 2015 many yieldcos saw their share price fall by 50% or more by the end of the year.

But after bottoming out in February of this year along with much of the energy sector, yieldcos have staged a comeback. Here is how the current roster of renewable energy income plays stacks up, sorted in descending order by enterprise value:

160929TELyieldcos

  • EV – Enterprise Value in billions of U.S. dollars as of Sept. 28
  • EBITDA – Earnings before interest, tax, depreciation and amortization for the trailing 12 months (TTM), in billions
  • FCF – Levered free cash flow for the TTM, in millions
  • FQ – Fiscal quarter
  • Debt – Net debt at the end of the most recent fiscal quarter
  • Yld – Annualized yield based on the most recent quarterly distribution
  • YTD Ret – Total shareholder return, including dividends, thus far in 2016   

Financial metrics for the group span a wide range, but the average year-to-date performance lags that of the Energy Select Sector SPDR ETF (NYSE: XLE), which is up 15.7% YTD. Seven of the nine companies listed managed to generate positive free cash flow (FCF) in the most recent quarter, and six of the nine have a positive total shareholder return for the year. Yields are comparable to midstream MLPs, with the exception of Terraform Global’s (NASDAQ: GLBL).

Note that GLBL and its sister yieldco TerraForm Power (NASDAQ: TERP) show stats that are likely out of date, as a result of filing delays tied to the bankruptcy of sponsor SunEdison. TERP and GLBL are currently up for sale.  

Brookfield Renewable Energy Partners (NYSE: BEP) is the bellwether of this group, larger in size than the next four biggest rivals. BEP is a publicly traded partnership investing primarily in hydropower, along with some wind power. BEP has 260 distinct renewable assets totaling over 6 GW of power in North America, Latin America and Europe. Unlike the rest of the group, BEP issues K-1 tax forms as do most MLPs. This tax treatment may make BEP more attractive to income-seeking investors, but less suitable for tax-deferred retirement accounts.

While we have covered the yieldcos in previous articles, we have generally avoided recommending this particular class of investments. The risks are higher than in the leading midstream MLPs and the tax treatment ultimately less generous.

We believe there is one exception, so we do in fact have one of these yieldcos in the portfolios of MLP Profits and The Energy Strategist. In fact, since being added to our Energy Strategist portfolio in February, this one is up more than 70% — and we still think it has room to move higher. To receive in-depth analysis and our current portfolio recommendations, please consider subscribing.

(Follow Robert Rapier on Twitter, LinkedIn, or Facebook.)


You might also enjoy…

 

R.I.P Bull Market—Here’s How To Protect Your Wealth

I hope you’ve enjoyed the phenomenal bull market of the past eight years…

Because it’s about to come to a screeching halt.

The Federal Reserve’s nearly decade-long spending spree has finally come to an end.

With no other options left at their disposal, the Fed has no other choice than to raise interest rates to keep inflation in check.

And that leaves you with two options…

Do nothing and suffer the agony of watching the profits you’ve accumulated over the years evaporate right before your eyes…

Or reposition your portfolio and invest in companies which prosper as inflation rises and interest rates soar.

I think the choice is clear. And I’ll show you the best new positions you can take if you click here.

Stock Talk — Post a comment Comment Guidelines

Our Stock Talk section is reserved for productive dialogue pertaining to the content and portfolio recommendations of this service. We reserve the right to remove any comments we feel do not benefit other readers. If you have a general investment comment not related to this article, please post to our Stock Talk page. If you have a personal question about your subscription or need technical help, please contact our customer service team. And if you have any success stories to share with our analysts, they’re always happy to hear them. Note that we may use your kind words in our promotional materials. Thank you.

You must be logged in to post to Stock Talk OR create an account.

Create a new Investing Daily account

  • - OR -

* Investing Daily will use any information you provide in a manner consistent with our Privacy Policy. Your email address is used for account verification and will remain private.

Stock Talk

  1. avatar
    Gerald Pollack Reply October 4, 2016 at 9:04 PM EDT

    I wish I could afford MLP Profits.