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The Rise of the Yieldco

Tom Konrad Ph.D., CFA
History
What is a YieldCo
Importance and Purpose
Common YieldCo features
Yieldco Assets
Benefits and Drawbacks
About Me
Editor, Freelance writer
Hedge fund focused on green economy.
Head of research.
Global Equity IncomePortfolioGlobal Equity IncomePortfolio
Co-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?
Owned
By
Yieldcos
Solar
Wind
Effi
cien
cy
Coal?
thermal
Natural gas
Transmission Hydropower
BiomassNuclear?
Storage
Cleaner/Greener
Asset Risks
Environmental Risk
Commodity
Risk
Solar
Wind
Effi
cien
cy
Coal?
thermal
Natural gas
Transmission
Hydropower
Biomass
Nuclear
Storage
Solar
Wind
Coal?
thermal
Natural gas
Transmission
Hydropower
BiomassNuclear Storage
Effi
cien
cy
Yieldcos Value Green Assets, But Also Need Volume and Standardization
Standardized
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 distributions
BUT:

Conflicts of interest

Internal Development

Higher growth
BUT:

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.
The Rise of the Yieldco
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.
Tom Konrad Ph.D., CFA®
tom@altenergystocks.com
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The Rise of the Yieldco

  • 1. The Rise of the Yieldco  Tom Konrad Ph.D., CFA History What is a YieldCo Importance and Purpose Common YieldCo features Yieldco Assets Benefits and Drawbacks
  • 2. About Me Editor, Freelance writer Hedge fund focused on green economy. Head of research. Global Equity IncomePortfolioGlobal Equity IncomePortfolio Co-Portfolio Manager. Invests in high income Fossil Free Green Stocks, including some Yieldcos
  • 3. 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
  • 4. 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.
  • 5. 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.
  • 6. 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.
  • 7. 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”
  • 8. 2013: Solar REITs?  Hannon Armstrong Sustainable Infrastructure (NASD:HASI) granted PLR for its unique mix of energy efficient building upgrades.  No Solar PLRs granted
  • 9. 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.
  • 10. 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.
  • 11. Why Yieldcos Are Important  Lower cost of funding = cheaper electricity. Yieldco effect
  • 12. Why Yieldcos Are Important  Green option for income investors.  Lower costs for developers and buyers of renewable electricity.
  • 14. 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
  • 16. What Are Yieldco Assets? Owned By Yieldcos Solar Wind Effi cien cy Coal? thermal Natural gas Transmission Hydropower BiomassNuclear? Storage Cleaner/Greener
  • 18. Solar Wind Coal? thermal Natural gas Transmission Hydropower BiomassNuclear Storage Effi cien cy Yieldcos Value Green Assets, But Also Need Volume and Standardization Standardized Frequently Owned
  • 19. Why Distribute All Cash (CAFD)? Pros  Better accountability.  Lower cost of capital. Cons  Secondary offerings needed for growth.  Temptation to skimp on maintenance
  • 20. Developer/ROFO vs Internal Development  Developer/ROFO  Lower risk.  Higher distributions BUT:  Conflicts of interest  Internal Development  Higher growth BUT:  Requires retained earnings  Higher risk
  • 21. 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.
  • 23. 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.
  • 24. 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.
  • 25. 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?
  • 26. Two Predictions  Yieldcos are here to stay.  Yieldco prices will be volatile as market continues to mature.
  • 27. Tom Konrad Ph.D., CFA® tom@altenergystocks.com Questions?