Page 8 - North American Clean Energy January February 2015

Renewable Financing

A closer look at YieldCos
By Justin Boose & Patrick Ryan

In the search for cheaper capital, energy companies are increasingly looking to form yield-oriented, publicly listed entities, known
as YieldCos. YieldCos share similarities with master limited partnerships (MLPs) and real estate investment trusts (REITs)—neither

of which are broadly available for use with renewable energy assets. MLPs are largely restricted under the Internal Revenue Code to

qualifying income derived from depleting natural resources. REITs are restricted because of IRS precedent that portions of renewable
energy assets, such as solar panels and wind turbines, don’t qualify as real property assets.

Although the impetus has been on cheaper capital for renewables, YieldCos are not limited investors because of the natural de-risking that occurs when the assets are bundled and
to alternatives, and may also include conventional energy assets. In either case, the YieldCo separated from riskier development activities.
is essentially a holding company for a portfolio of energy-related assets, which may consist YieldCos are attractive because they pay regular dividends and often hold stable, income-

of title-to-energy projects owned outright, and/or contractual assets and revenue streams producing assets with long, useful lives (i.e. 20 years). Another important consideration
relating to such projects. Shareholders are paid dividends derived from the income from is the ability of the YieldCo to expand to meet additional demand, and to replace retiring
the YieldCo assets, and the shares are freely tradable on public markets.
assets that may be enhanced by the existence of the right of irst ofer (ROFO). his also

Often a parent company that develops renewable energy projects will retain a holds for other preferential rights of the YieldCo to bid on or acquire new projects that
majority ownership in the company after it spins it of. here might be additional layers the parent company is developing. Additionally, there are considerable liquidity beneits
of ownership between the YieldCo and the underlying assets, and ownership of the relative to a loan for a development company that might be secured by a single project.
intermediary entities may be split between the YieldCo and the parent company to allow

the parent to retain control. A YieldCo is also dependent on the parent company, at least Past & future considerations
during its early years of operation, for a steam of projects and other assets.
In the last few years, several established players in the energy sector have established
One of the key diferences in structure between a YieldCo and an MLP or a REIT is that YieldCos. NRG Energy spun of NRG Yield, Inc., which raised $430 million in its July
the former is subject to taxation at the corporate level. In MLPs and REITs, taxes are only 2013 IPO on the New York Stock Exchange. NRG sold a 34.5% interest and had a share

imposed on the dividends received by the shareholders. However, YieldCos are generally price of $22 per share, implying an annual dividend yield of 5.45%. In August of that year,
structured to mitigate (for some period, at least) the entity level tax burden and the TransAlta Corporation listed TransAlta Renewables on the Toronto Stock Exchange at
shareholder tax burden by means of depreciation deductions available with respect to the C$10 (US $9.71) per share, with a projected annual yield of 7.5%. TransAlta sold a 19.3%
portfolio assets.
stake in its original portfolio, raising C$221 million ($220 million).

Despite the potential for double-taxation, YieldCos are attractive relative to other Other high-proile YieldCos to go public since that time include Pattern Energy Group,
sources of project inance because of the low cost of capital available in public markets. TerraForm Power (SunEdison), Abengoa Yield, and NextEra Energy Partners. As of this
A large portfolio of income-producing renewable energy assets is an appealing option for
writing, energy YieldCo shares are mostly trading up, and the access to cheap capital

8 JANUARY/FEBRUARY 2015 nacleanenergy.com