the rise of the yieldco
TRANSCRIPT
The Rise of the Yieldco
Tom Konrad Ph.D., CFA
HistoryWhat is a YieldCoImportance and PurposeCommon YieldCo featuresYieldco AssetsBenefits and Drawbacks
About Me
Editor, Freelance writer
Hedge fund focused on green economy.Head of research.
Global Equity Income PortfolioGlobal Equity Income PortfolioCo-Portfolio Manager.
Invests in high income Fossil Free Green Stocks, including some Yieldcos
Disclosure
Tom Konrad and/or his clients own the following securities discussed:
US: BEP, EVA, HASI, PEGI, PFBOF, PW, PW.PRA,
Canada: CSE, RNW, AQN UK: TRIG
Disclaimer
Past performance is not a guarantee or a reliable indicator of future results. This presentation contains the current opinions of the author and such opinions are subject to change without notice. This presentation is inteded for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
In the Beginning:Pre-Yieldco
Flow of capital for Clean Energy projects mostly frozen
Solar typically requires 20% equity Wind typically requires 50% equity Developers needed access to high volume,
low cost capital from stock market to scale.
2012 - Present: MLP Parity Act
Would allow solar & wind in Master Limited Partnerships
Repeatedly introduced by Sen. Coons [D-DE] and Rep. Poe [R-TX]
Bipartisam support: 58 Dems & 11 Republicans in House 3 Dems & 3 Republicans in Senate
Has never been brought to a vote.
2012: Solar REITs?
IRS has authority to decide which assets qualify as real propert and are REIT-safe.
Could be in response to a request for a Private Letter Ruling (PLR) or urging by a government official.
NREL report concludes "PV meets many of the important criteria to be considered “real property”
2013: Solar REITs?
Hannon Armstrong Sustainable Infrastructure (NASD:HASI) granted PLR for its unique mix of energy efficient building upgrades.
No Solar PLRs granted
2013: Solar REITs
Power REIT (NYSE MKT: PW) begins to invest in land under solar farms.
Difficulty finding suitable investments and unrelated legal troubles prevent reaching scale.
What Is A Yieldco?
Developer perspective: A way to raise (cheap) equity capital for Clean Energy projects
Investor perspective: A company that pays a (usually) high dividend based on cash flow from Clean Energy assets.
Why Yieldcos Are Important Lower cost of funding = cheaper electricity.
Yieldco effect
Why Yieldcos Are Important Green option for income investors. Lower costs for developers and buyers of
renewable electricity.
IPO Timeline
Features of Yieldcos
Invests in Clean Energy assets Pays (almost) all Cash Available For
Distribution (CAFD) to investors Developer/sponsor
ROFO – Right Of First Offer IDR – Incentive Distribution Rights
Public Listing Uses depreciation as tax shield
Features of Yieldcos
What Are Yieldco Assets?
OwnedBy Yieldcos
Solar
Wind
Efficiency
Coal?
thermal
Natural gasTransmission Hydropower
BiomassNuclear?
Storage
Cleaner/Greener
Asset RisksEnvironmental Risk
Commodity Risk
Solar
Wind
Efficiency
Coal?
thermal
Natural gas
Transmission
Hydropower
Biomass
Nuclear
Storage
Solar
WindCoal?
thermal
Natural gasTransmission
Hydropower
BiomassNuclear Storage
Efficiency
Yieldcos Value Green Assets, But Also Need Volume and StandardizationS
tandardized
Frequently Owned
Why Distribute All Cash (CAFD)?
Pros Better
accountability. Lower cost of
capital.
Cons Secondary offerings
needed for growth. Temptation to skimp on
maintenance
Developer/ROFO vs Internal Development
Developer/ROFO Lower risk. Higher distributionsBUT: Conflicts of interest
Internal Development Higher growthBUT: Requires retained
earnings Higher risk
Incentive Distribution Rights (IDR)
Developer/Sponsor receives larger proportion of distributions after dividend/share reaches specified levels.
Can give developer/sponsor an incentive to sell assets to Yieldco at better prices.
May cause its own perverse incentives, such as increasing asset value per share even if new investments are not attractive.
NEP, TERP, BEP, CAFD, and EVA.
Public v. Private
Public listing Low capital cost Constant need for new
assets Reduced flexibility-
may not be able to adapt to new situations.
Private Funds Higher capital cost Lower compliance cost Fewer investors Can adapt quickly.
Depreciation As Tax Shield
Pros No need for tax-
advantaged structure like REIT/MLP
Cons No tax appetite for
ITC/PTC. Must use (expensive) tax equity.
Constant need for new assets.
There's A Lot We Don't Know
How long can dividend growth continue? What happens after depreciation runs out? Are asset markets (especially solar) getting
overheated? Will fossil assets dilute Yieldco brand? Will PPAs be renewed on favorable terms?
Two Predictions
Yieldcos are here to stay. Yieldco prices will be volatile as market
continues to mature.
