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The Rise of the Yieldco

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General introduction to Yieldcos (income oriented companies investing in clean energy) persented at "The Rise of the Yieldco" workshop July 2015

Published in: Economy & Finance
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The Rise of the Yieldco

  1. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 11. Why Yieldcos Are Important  Lower cost of funding = cheaper electricity. Yieldco effect
  12. 12. Why Yieldcos Are Important  Green option for income investors.  Lower costs for developers and buyers of renewable electricity.
  13. 13. IPO Timeline
  14. 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
  15. 15. Features of Yieldcos
  16. 16. What Are Yieldco Assets? Owned By Yieldcos Solar Wind Effi cien cy Coal? thermal Natural gas Transmission Hydropower BiomassNuclear? Storage Cleaner/Greener
  17. 17. Asset Risks Environmental Risk Commodity Risk Solar Wind Effi cien cy Coal? thermal Natural gas Transmission Hydropower Biomass Nuclear Storage
  18. 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. 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. 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. 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.
  22. 22. 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.
  23. 23. 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.
  24. 24. 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?
  25. 25. Two Predictions  Yieldcos are here to stay.  Yieldco prices will be volatile as market continues to mature.
  26. 26. Tom Konrad Ph.D., CFA® tom@altenergystocks.com Questions?

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