NextEra Energy: Best in Show
Roger Conrad, a long-standing expert in utility stocks and dividend investing, explains the pros and cons of yieldcos, a lesser-known income sector that has faced some headwinds. The editor of Conrad’s Utility Investor focuses on one favorite that he considers the “best in show” within the sector.
Steve Halpern: Today, we are joined by one of my very favorite guests, Roger Conrad, editor of Conrad’s Utility Investor. Roger is the leading expert in income investing, and here we’re going to talk about the pros and cons of yieldcos. First, Roger, how are you doing?
Roger Conrad: I’m doing great. How are you?
Steve Halpern: Very good. Now, yieldcos are an interesting subsector of the market that many people aren’t familiar with, and they’ve become increasingly popular, but I’ve ran into some head winds and challenges very specific to that sector. Can you give our listeners a background of the whole yieldco story?
Roger Conrad: Yeah, absolutely. You know, this was basically a construct modeled on Master Limited Partnerships, which were very successful. They’ve been a very successful financing vehicle for building out pipelines and so forth.
So what happened about two or three years ago was a few companies started to look at a way of financing what they thought was going to be a pretty big buildout of renewable energy, primarily, meaning utility-scale solar and wind power plants, which the cost of power has really come down, and which are supported by governments, as well as by tax credits.
We just had those tax credits actually extended into the next decade for solar and wind development. There’re 29 states that have renewable power standards, which means that the power generators have to get a certain percentage of their energy from renewable power by a certain date.
So these are pretty aggressive buildout targets, and as a result, we’re seeing a lot of building of wind and solar plants.
These were conceived of as a way of these companies that are doing the development of basically giving the public an opportunity to participate in the cash flows from contracts on these projects, thereby, in the form of dividends, and then also allowing the developers to recycle capital to do more development.
What we saw a lot of the IPOs come out.
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