PERSPECTIVE
WORLD-GENERATION MAY/JUNE 2015 V.27 #2
30
take 100% of the cash distributions until it
recovers its capital investment after which
100% of the cash is distributed to the tax
equity investor until it reaches a target
yield. In other deals, the tax equity investor
may take a specified share of the cash flow,
say 40%, or a preferred distribution
expressed as a percentage of its investment
(say, 2% of its capital investment each year).
DRY PERIODS
Historically, partnership flip transac-
tions have been structured with sponsor
“dry periods” during which most or all of
the cash flow from the project is used to
repay the tax equity investor’s preferred
return. Also, these transactions often con-
tain cash override provisions, where the tax
equity investor can sweep all or most of the
cash flow upon the occurrence of certain
specified events, such as project underper-
formance, change in tax assumptions or a
breach of the sponsor representations or
covenants. These dry periods typically
don’t work well for yieldcos that require a
steady and predictable cash flow stream to
pay dividends to its shareholders.
Compromises emerged where tax equity
investors have begun to structure transac-
tions with cash sharing provisions that pay
the sponsor some significant percentage of
project cash flow and do not permit cash
diversions to the tax equity investor beyond
a certain cap, say 50% of project cash flow,
regardless of circumstance. Some yieldcos
have offered upstream guaranties to tax
equity investors as a trade off to preserve
consistent cash flow from their project com-
panies.
SALE-LEASEBACK
Sale-leaseback transactions are likely to
be the least hospitable tax monetization
structure for yieldcos. In a sale-leaseback
transaction, the developer sells its project
to a tax equity investor and immediately
leases it back. The sale transfers to the tax
equity investor all the tax benefits associat-
ed with the project. The tax equity investor
compensates the developer for these tax
benefits in the form of reduced rental pay-
ments throughout the lease term. Sale-
leasebacks are typically structured with
long-term leases to permit the maximum
tax deferral period and price based on a
rent coverage ratio that requires most of
the project cash flow to be used to make
rental payments under the lease. Most sale-
leasebacks in the market are sized in the
neighborhood of 1.2 to 1.4 rent coverage
ratios, resulting in little excess cash flow
available to the sponsor. Yieldco investors
looking for a steady stream of cash flow are
therefore likely to be less enthused with
this financing structure. Some sale-lease-
back structures, however, particularly those
with very high-coverage ratios may allow
for sufficient sponsor cash flow far a yield-
co. High-coverage leases, however, general-
ly correlate with lower purchase prices, cre-
ating a less than optimal tax structures to
the seller/lessee (e.g., lower tax basis and
investment tax credit).
Yieldcos can therefore be expected to
build asset portfolios that provide for
steady cash flow and shelter from corporate
income tax. The balance of their tax bene-
fits are likely to be monetized with tax equi-
ty investors using structures that permit
maximum cash flow certainty to its share-
holders.
BIOS
Mr. Katz joined Chadbourne from GE
Energy Financial Services where he was
Vice President and Tax Counsel. He regu-
larly publishes articles in tax and energy
periodicals. He received a BS from Touro
College, his JD from Fordham University
School of Law and his LL.M from New York
University School of Law.
Prior to joining Chadbourne & Parke,
Mr. Masri was a tax associate at another
large international law firm. He graduated
from Baruch College of the City of New
York and Fordham University School of
Law. He is also approved as a Certified
Public Accountant.
GROWTH OFYIELDCOS
CONTINUED FROM PAGE 16
policies and tax credits favorable to
renewable investments and developments.
OUTLOOK/CHALLENGES
· Grid Integration & Stability
How flexible do grids need to be to use
the maximum amount of renewable energy?
Should there be a ceiling on renewables
development to help with regulating fre-
quency and distribution?
· Electricity Demand
Utilities often operate on the premise of
increasing electric demand – is this still an
acceptable premise, given the small 1%
increase in demand for electricity each
year until 2020?
· Utility’s role in balancing first two chal-
lenges
Who will pay for shared infrastructure
changes as renewable power use increases?
Are costs being unfairly shifted on non-
renewable customers?
OPPORTUNITIES
Electricity storage is already being
used across the grid, as one of several
options to smooth the effects of variable
resources like wind and solar.
Storage technologies like batteries
are gaining traction quickly, as perfor-
mance improves and costs decline.
Energy storage growth is projected to
explode from 0.34 GW in 2012-2013 to 6
GW by 2017 and over 40 GW by 2022.
Clean Power Plan – If approved, states
will be required to cut CO2, and would
have to use renewable sources of power
Other Clean Air Act rules, such as
CSAPR and MATS, depending on court rul-
ings
US-China Climate Accord – US
pledged to cut CO2 more than 25% by
2025, with incentives for wind and solar
development.
RENEWABLES ENTERTHE MAINSTREAM
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