WORLD-GENERATION MAY/JUNE 2015 V.27 #2
15
PERSPECTIVE
The recent proliferation of yieldcos
has begun to change the renewable energy
landscape by ramping up the demand and
price for renewable energy operating
assets and accelerating a long-anticipated
consolidation in the sector. The growth of
this investment vehicle is also reshaping
traditional project finance capital struc-
tures, most notably the tax equity struc-
tures used by yieldcos to monetize the tax
benefits from their renewable energy
assets. When choosing tax equity struc-
tures, we expect yieldcos to gravitate
towards lease pass-through transactions
and modified partnership flip structure,
while largely avoiding sale-leaseback
transactions.
This article explores some of the fac-
tors contributing to the growth of the
yieldco vehicle, the tax profile of these
entities and how tax equity structures are
being redesigned to accommodate the
needs of this new investor class.
For a host of reasons, yieldcos are a
prime customer for tax equity investors
and likely to continue to grow in impor-
tance in the foreseeable future. First,
yieldcos generally do not have the ability
to make optimal use of the tax credits
and depreciation deductions generated by
renewable energy projects. Second, yield-
cos are, for the most part, power develop-
ers with significant and growing asset
pipelines and strong access to the project
debt and equity markets needed to round
out a project’s capital structure. Lastly,
yieldcos or their sponsors generally have
the experience to supply reliable asset
management and operation services to its
asset portfolio and the financial stability
to provide the necessary guaranties and
indemnities sought by tax equity inves-
tors.
The key tension point in structuring
tax equity arrangements with yieldcos is
the need to preserve a steady and predict-
able cash flow to the shareholders of the
yieldco. This need for predictable and
unimpeded cash flows means that yieldcos
will generally gravitate towards tax equity
products that are structured so that most
of the project cash flow is distributed to
the sponsor. Additionally, yieldcos are
most sensitive to any feature in a tax equi-
ty arrangement that can divert cash flow
away from its shareholders, such as proj-
ect underperformance or the occurrence
of indemnity events. Finding the right bal-
ance between the investment needs of
yieldco shareholders and tax equity inves-
tors continues to be one of the principal
challenges to the growth of yieldcos.
BACKGROUND ON YIELDCOS
Over the last 18 months, six yieldcos
have gone public. NRG Yield was the first
to access the public markets, followed by
TranAlta Renewables, Pattern Energy,
Abengoa Yield, NextEra Energy Partners
and TerraForm. Initially designed as invest-
ment vehicles to acquire and hold operating
projects developed by its sponsor, yieldcos
have quickly morphed into acquisition vehi-
cles, buying an increasing share of operat-
ing renewable energy assets. According to
Bloomberg New Energy Finance, yieldcos
already hold more than 7,000 MW of oper-
ating power assets, including hydro, small
PV, wind, utility scale PV, solar thermal, gas
and thermal energy. Based on planned
expectations, operating assets held by yield-
cos could exceed 15,000 MW in the near
future. Some analysts are predicting the
launch of up to 10 additional yieldcos in the
next two to three years.
A confluence of market forces have
resulted in a significant portion of yieldco
holdings being concentrated in renewable
energy assets. First among those is the
high demand for dividend yielding assets in
today’s low interest environment. Also,
renewable energy assets comprise a grow-
ing share of newly built power assets in the
U.S., far outstripping the growth of other
power sources. Yieldcos are a natural
owner for renewable energy assets given
their need to acquire a portfolio of long-
term operating assets. Further, yieldcos
solve a challenge for the renewable energy
industry that has been struggling to access
the capital markets through a tax-efficient
vehicle. Industry groups have been actively
lobbying for the expansion of real estate
investment trusts and master limited part-
nerships. REITs and MLPs enable special-
ized industry groups (real estate in the case
of REITs and oil and gas pipeline assets in
the case of MLPs) to access the capital
markets through a funding entity that is not
subject to the corporate income tax.
Without the benefit of a special funding
vehicle, renewable energy developers seek-
ing to access the capital markets would
subject themselves to tax at both the entity
and shareholder level significantly eroding
GROWTH OFYIELDCOS
BY ELI KATZ AND MICHAEL MASRI,CHADBOURNE & PARKE,LLP
Eli Katz
Michael Masri
(continued page 16)
