CAFD vs Free Cash Flow in Yieldcos
CAFD is a yieldco's own cash metric, stopping before growth capex. What it leaves out that free cash flow keeps, and how to convert one to the other.
Educational analysis for professional use. This guide is not investment advice or a recommendation to buy or sell any security, and it is not personalised.
CAFD Stops Before Growth Capex, Free Cash Flow Doesn’t
Cash available for distribution, CAFD, is the number a yieldco actually pays its dividend from: cash from operations after sustaining capital expenditure, project-level debt service and partnership-level charges, but before any spending on growth. Growth capex, new wind and solar builds or acquired projects, is deliberately left out, because a yieldco typically funds growth from a separate pool: sponsor drop-downs, project-level debt, or new equity, not from the cash set aside for its existing unitholders.
Free cash flow is the measure used almost everywhere else: cash from operations minus all capital expenditure, sustaining and growth together. It does not carve out a growth bucket. Whatever the company spent to maintain the fleet and whatever it spent to expand it both come out before the number is called free.
That single difference, whether growth capex is inside or outside the calculation, is why the two numbers can diverge sharply for the same company in the same year, and why a payout ratio built on one reads nothing like a payout ratio built on the other.
What a Filed CAFD Bridge Looks Like
Brookfield Renewable’s FY2025 disclosure is the fullest bridge in the sector: it starts from Normalized FFO, a company cash-flow measure close to operating cash flow, and works down.
| Company | Starting point | Deductions | CAFD | Payout | As-of |
|---|---|---|---|---|---|
| Brookfield Renewable (BEP) | Normalized FFO $1,484M | Sustaining capex $98M; wind/solar amortisation of construction revenue $122M | $1,264M | 90% | Year ended 31 Dec 2025 |
| Clearway Energy (CWEN) | Adjusted EBITDA $1,217M | Not itemised in the filing | $430M | ~83% (derived: $358M distributions ÷ $430M CAFD) | FY2025 |
Neither line subtracts growth capex. BEP’s 613 MW Deriva project, its 967 MW of repowerings and its 291 MW of battery storage committed at 31 December 2025 are all funded outside this bridge. The $1,264M measures what was available to pay out on the existing fleet, before any growth spending is subtracted.
Standard Free Cash Flow, by Contrast
Neither BEP nor Clearway reports a standard free cash flow line; both report CAFD instead, which is the point of this comparison. A conventional FCF figure for the same company would start from cash from operations rather than a company-defined FFO measure, and it would subtract total capital expenditure, sustaining and growth combined, in one line. It would also, in most presentations, leave in cash that CAFD strips out: partnership or holding-company-level charges, such as incentive distribution rights or preferred payments, that never reach the pool available to ordinary unitholders even though they appear inside reported operating cash flow.
Because neither company files a standard free cash flow figure, the illustration below uses round numbers rather than a named company’s figures.
Why the Payout Ratio Reads Differently on Each
Take a yieldco reporting $600M of cash from operations, $60M of sustaining capex, and $150M spent on growth projects during the year, distributing $450M to unitholders.
| Measure | Calculation | Result | Distributions | Payout ratio |
|---|---|---|---|---|
| CAFD | $600M − $60M sustaining capex | $540M | $450M | 83% |
| Free cash flow | $600M − $60M sustaining capex − $150M growth capex | $390M | $450M | 115% |
On CAFD, the payout looks conservative and sits inside the sustainable band this site uses for contracted yieldcos. On free cash flow, the same $450M distribution exceeds the cash left after all spending, because free cash flow has already charged the $150M of growth capex that CAFD assumes is funded elsewhere. Neither number is wrong. They answer different questions: CAFD asks whether the dividend is covered by cash from the existing fleet; free cash flow asks whether the dividend is covered once every dollar spent that year, growth included, is accounted for.
Converting Between the Two From a Filing
Where a filing discloses growth capex as a separate line from sustaining capex, an approximate conversion is possible in either direction:
Free cash flow ≈ CAFD − growth capex spent in the period. This moves from the yieldco’s own metric toward the standard one, since growth capex is the main item CAFD leaves out.
CAFD ≈ Free cash flow + growth capex spent in the period. This moves the other way, though it will understate CAFD if the filer also nets out partnership-level charges, such as incentive distribution rights, that a plain FCF calculation would not have removed.
Both directions are approximations. A precise reconciliation needs the filer’s own itemised bridge, of the kind BEP publishes and Clearway does not.
What Matters Most
A yieldco’s CAFD payout ratio and a C-corp’s free-cash-flow-based payout ratio are not the same measurement wearing different labels. The gap between them, in a growing yieldco, is largely the growth capex CAFD leaves out and free cash flow charges. Before comparing a payout ratio across two companies, check which metric each one is built on, and whether growth spending sits inside or outside the number.
Renewables & IPPs Sector Primer
Contracted price, contract term and the merchant tail are the inputs. This primer takes them through a multi-period DCF to a value per share, with the spark spread and CAFD bridge for the merchant and yieldco cases.
The Excel model is the primer's two archetype builds live across 10 sheets: a multi-period DCF with a contracted-or-merchant toggle, step-down discount rates for the PPA term and the merchant tail, a spark-spread build for the merchant case and a CAFD-and-payout bridge for the yieldco. Change the realised PPA price, the contracted discount rate or the merchant spread and the value per share moves; the premium and payout sheets update alongside it. It also splits the contracted premium into the part the pipeline explains and the part contract quality explains, splits the PV between contracted years and the merchant tail, and reads EV per kW on both archetypes.
Frequently Asked Questions
- What is the difference between CAFD and free cash flow?
- CAFD (cash available for distribution) is a yieldco's own metric: cash from operations after sustaining capital expenditure, project-level debt service and partnership-level charges, but before growth capital expenditure. Free cash flow is the standard measure: cash from operations after all capital expenditure, sustaining and growth alike. The gap between the two, in a growing yieldco, is largely the growth capex CAFD leaves out.
- Why do yieldcos report CAFD instead of free cash flow?
- Because a yieldco funds growth separately, through sponsor drop-downs, project-level debt or new equity, rather than out of the cash it distributes to unitholders. Netting growth capex against operating cash flow, as a standard FCF figure does, would make a growing yieldco look like it could not afford its own dividend, when the dividend is set against a smaller, unrelated pool of cash.
- Can you convert a yieldco's CAFD into a free cash flow figure?
- Approximately, if the filing discloses growth capital expenditure for the period. Subtracting that growth capex from CAFD moves you toward a standard free cash flow figure; the reverse, adding growth capex back to a reported FCF, moves toward CAFD. Any partnership-level charges CAFD also strips out, such as incentive distribution rights, need separate disclosure to reverse cleanly.