North America Renewable Energy Brief - Fall 2015

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North America Renewable Energy Brief – Fall 2015

North America R e n e w a b l e En e r g y B r i e f WHAT’S NEXT FOR YIELDCOS - FALL 2015

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North America Renewable Energy Brief – Fall 2015

IN FOCUS: WHAT’S NEXT FOR YIELDCOS? ¡¡ Update on Yieldco financing and M&A activity ¡¡ The recent downturn in Yieldco stock prices ¡¡ The ITC and interest rate rises – exploring emerging challenges ¡¡ Alternative structures for long-term asset ownership

Welcome to the third edition of North America Renewable Energy Brief. This issue shines a spotlight on the evolving investment landscape for Yieldcos in the U.S. Specifically, it explores what is behind recent stock price declines, how this is impacting financing and M&A strategies, and how Yieldcos will respond to the challenges caused by the anticipated expiration of the 30% solar Investment Tax Credit (ITC). In light of the current challenging environment, this issue also explores alternative structures for long-term asset ownership.

We hope you find this newsletter thought provoking and insightful. As always, we welcome your feedback.

Sincerely, Anton Cohen and Tim Kemper Co-National Directors, Renewable Energy Industry CohnReznick LLP

Rob Sternthal President CohnReznick Capital Markets Securities LLC

What is a Yieldco?

Yieldcos are listed investment funds that target contracted renewable energy assets. The majority of the cash flows generated from the sale of electricity from these assets are distributed as dividends to shareholders. As shown in Fig. 1 below, Yieldcos pay an attractive dividend yield, ranging from 3.93% at the lower end (NextEra Energy Partners) to 9.71% at the high end (TerraForm Power Inc). This high dividend and the potential for stock appreciation has attracted a range of investors, from short-term investors such as hedge funds to long-term low risk institutional investors.

Most Yieldcos are structured so that they only pay one level of tax. Many investors, therefore, view Yieldcos as an alternative to Master Limited Partnerships (MLPs) and Real Estate Investment Trusts (REITS) which have long been used as tax efficient structures for investment in the oil & gas and real estate sectors.

Typically, Yieldcos have a limited public float, with the sponsor, usually a large Independent Power Producer (IPP), owning a majority stake. Yieldcos are often granted a Right of First Offer (ROFO) to acquire projects developed by the sponsor, limiting the risk of obtaining access to projects.

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North America Renewable Energy Brief – Fall 2015

Transactions overview Deal activity and fundraising Yieldcos have dominated the renewable energy financing and M&A agenda over the past two years. They have raised billions of dollars on the public markets, amassed some of the world’s largest portfolios of renewable energy assets and, until recently, were by far the most active acquirers of projects.

But two and a half years ago, Yieldcos didn’t even exist. Since the first Yieldco, NRG Yield Inc, listed on the New York Stock Exchange in July 2013, nine Yieldcos have raised a staggering $19 billion through IPOs, secondary offerings, and various debt instruments. Figure 1 details these Yieldcos and the funds they have raised.

Figure 1: Funding raised by North American Yieldcos Issuer

Dividend yield (as of Nov 11)

Portfolio

8point3 Energy Partners LP

4.48%

Solar (432MW)

Abengoa Yield plc

8.19%

Solar (2,336MW), Thermal (300MW), Transmission line (1,099 miles), Water (10.5 Mft3/day)

NextEra Energy Partners LP

3.93%

Wind (1,782MW), Solar (290MW)

NRG Yield Inc.

5.19%

Wind (1,389MW), Solar (491MW ), Thermal (2,069MW)

Pattern Energy Group Inc.

7.17%

Wind (1,925MW)

TerraForm Global Inc.

9.44%

Wind (825MW), Solar (468MW), Hydro (114MW)

TerraForm Power Inc.

9.71%

Solar (1,738MW), Wind (1,483MW)

TransAlta Renewables Inc.

7.76%

Wind (1,153MW), Hydro (105MW), Gas (575MW)

Source: Clean Energy Pipeline

Deal value $millions 525 420 290 670 328 125 255 829 208 650 109 313 467 620 288 500 652 450 345 495 125 225 351 195 586 352 675 810 300 100 150 300 688 150 515 352 725 800 350 350 577 440 250 331 180 124 220

Month

Deal type

June 2015 June 2015 July 2015 May 2015 January 2015 December 2014 November 2014 June 2014 September 2015 August 2015 May 2015 May 2015 June 2014 June 2015 June 2015 August 2014 July 2014 April 2014 February 2014 July 2013 July 2015 July 2015 February 2015 December 2014 May 2014 September 2013 July 2015 July 2015 May 2015 May 2015 December 2014 July 2015 June 2015 June 2015 March 2015 January 2015 January 2015 January 2015 November 2014 October 2014 July 2014 July 2014 April 2014 September 2015 April 2015 April 2014 August 2013

Corporate debt IPO Corporate debt Secondary Secondary Corporate debt Corporate debt IPO Secondary Corporate debt Secondary Corporate debt IPO Secondary Convertible Green bond Secondary Corporate debt Convertible IPO Secondary Convertible Secondary Corporate debt Secondary IPO IPO Green bond Corporate debt Corporate debt Corporate debt Green bond Secondary Corporate debt Corporate debt Secondary Corporate debt Green bond Secondary Corporate debt IPO Corporate debt Corporate debt Green bond Secondary Secondary IPO

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North America Renewable Energy Brief – Fall 2015

Capital raising activity accelerated in 2015. As shown in figure 2, Yieldcos secured $11.3 billion in debt and equity in the first three quarters of 2015, more than double the $5.2 billion secured in the

first three quarters of 2014. TerraForm Power Inc leads the pack in recent fundraising, securing $3.5 billion, or 31% of all funds raised by Yieldcos, over the first three quarters of 2015.

Figure 2: Funds raised by yieldcos 2013 Q3-2015 Q3

Source: Clean Energy Pipeline

Figure 3: Funds raised by yieldcos on the public markets 2013 Q3-2015 Q3

Source: Clean Energy Pipeline

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Figure 4: Marketshare of funds raised

by Yieldcos – 2015 YTD

Source: Clean Energy Pipeline

North America Renewable Energy Brief – Fall 2015

Figure 5: Marketshare of funds raised by Yieldcos – 2014

Source: Clean Energy Pipeline

Acquisition strategies Yieldcos have ramped up their acquisition activity, purchasing 6.5 GW of effective capacity (the capacity of the project multiplied by the stake acquired) through the first three quarters of 2015.

This is already more than the 6.0 GW of effective capacity acquired during all of 2014 as well as the 3.5 GW purchased in 2013. In addition to raising the most capital, TerraForm Power Inc was also most active on the acquisition front, acquiring 2.3 GW of effective renewable energy capacity through the first three quarters of 2015. TerraForm Global Inc was second, acquiring 1.3 GW, followed by NRG Yield Inc (812 GW) and NextEra Energy Partners (664 GW).

Acquisition strategies have evolved over time.

For example, 51% of effective renewable energy capacity acquired by Yieldcos was located in the US in the first three quarters of 2015. In 2014, 94% of all capacity acquired by Yieldcos was US-based.

This is due to the emergence of Yieldcos with a global mandate. For example Abengoa Yield completed its IPO in June 2014 and acquired 702 MW of effective solar capacity in Spain in 2015.

Meanwhile TerraForm Global listed in July 2015 and has since acquired 1.3 GW of effective hydro and wind capacity in Peru and Brazil.

Targeted sectors have also changed.

Approximately 56% of capacity acquired by

Yieldcos was solar in 2014. But solar has accounted for just 28% of capacity acquired by Yieldcos through the first three quarters of 2015. Instead, 56% of capacity acquired was through wind projects - a direct result of a small number of acquisitions of large wind portfolios. These include TerraForm Power’s purchase of a 930 MW contracted portfolio of wind farms from Invenergy in July 2015 and NextEra Energy Partners’ acquisition of a 664 MW portfolio of wind farms in May 2015.

Each Yieldco tends to have a different risk appetite with respect to geography, technology, size of asset, stage of asset, and offtaker credit worthiness. Some focus on just one technology. For example, 8point3 Energy Partners LP, the Yieldco vehicle of First Solar and SunPower, only invests in solar assets. Conversely, Pattern Energy Group Inc, the Yieldco vehicle of Pattern Energy, only targets wind.

Most Yieldcos have a broader technology approach and invest in both solar and wind.

Some have also invested in non-renewable assets. Abengoa Yield owns a 300 MW gas-fired cogeneration facility in Mexico and 1,100 miles of transmission assets in Peru and Chile in addition to its vast solar portfolio. Meanwhile, NRG Yield and TransAlta Renewables own 2 GW and 575 MW respectively of gas-fired generation.

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North America Renewable Energy Brief – Fall 2015

Figure 6: Location of assets acquired by Yieldcos (by effective capacity) – 2015 YTD

Source: Clean Energy Pipeline

Figure 7: Location of assets acquired by Yieldcos (by effective capacity) – 2014

Source: Clean Energy Pipeline

The Yieldco stock crash Despite the surge in both fundraising and M&A activity in 2015, Yieldcos are challenged on a number of fronts. Most important, the stock price of nearly every Yieldco has plummeted since June 2015 (see figure 8). Abengoa Yield has performed worst and is currently trading at 48% below its June 2014 listing price. TerraForm Global and TerraForm Power shares are also underperforming – trading 40% and 39% respectively below their IPO prices.

Currently, just three of the nine Yieldcos listed in North America are trading above their listing price, but these have experienced sharp declines over the past four months.

A number of factors are causing the declines.

First is the general downturn in energy stocks due to low oil and gas prices (the Dow Jones U.S. Oil and Gas Producers stock market index is currently trading 16% below its level at the beginning of the year).

Most Yieldcos only own renewable energy assets so their revenues are not correlated with commodity prices. But this has not stopped many investors from selling Yieldco stocks as part of a wider strategy to broadly divest from energy stocks.

“Yieldco stock prices plummeted as part of a broader market sell-off due to global economic concerns, such as declining commodity prices,”

explained Carl Weatherley-White, President, Lightbeam Electric. “MLPs and energy stocks have all suffered. Investors in Yieldcos tend to also invest in the energy sector. When they need to sell they likely divested their Yieldco holdings first as they are more of a recent niche asset class.

Also, in late summer there was a high volume of equity issued. There were two IPOs and several secondary offerings, creating a huge demand and supply imbalance.”

Second, and perhaps most important, the fundamental structure of Yieldcos has been called into question. At the heart of the matter is the issue that the value of renewable assets depreciates over their lifetime - eventually to zero.

Given this, Yieldcos need to constantly acquire more assets to maintain a steady growth rate.

The larger Yieldcos become, the more assets they need to acquire to maintain this growth.

“Some Yieldcos don’t have as much transparency as investors would like to see,” explained Rob Sternthal, President of CohnReznick Capital Markets Securities LLC. “So investors have started to question this and it is a big issue. The assets don’t grow in value like real estate because they depreciate. So, they constantly need to acquire new assets to grow.

The bigger they get, the more assets Yieldcos need to acquire to grow at the same pace.”

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North America Renewable Energy Brief – Fall 2015

Stock prices The decline in stock prices (see figure 8) is a major issue for Yieldcos because many use their stock to acquire assets or finance acquisitions. “The precipitous stock price declines have made it more difficult to continue to acquire projects since many Yieldcos use their stock as currency,” confirmed Tim Kemper, Co-National Director, Renewable Energy Industry, at CohnReznick

LLP. “Those that have suffered the largest price drops, and the ones that have not matured, naturally have less cash available for acquisitions. But all of them certainly have been impacted. In the past, Yieldcos were always the first potential buyer of assets.

Now, this is not the case. The markets are looking for other potential buyers as the primary acquirers.”

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Index

Figure 8: An overview of funds raised by North American yieldcos

Source: Clean Energy Pipeline

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North America Renewable Energy Brief – Fall 2015

Warehouse facilities To counter declining stock prices, many Yieldcos and their parent companies have established warehouse facilities financed by banks or financial institutions. Warehouse facilities are relatively new structures that sit between the Yieldco vehicle and its parent company - usually a large IPP. The warehouse facility finances the construction and acquisition of projects from the parent company and the Yieldco then has the right to acquire these assets when feasible to do so.

For example, SunEdison established a $1 billion warehouse facility in August 2015. The facility is comprised of a $300 million equity investment from West Street Infrastructure Partners III, an infrastructure fund managed by Goldman Sachs, and $700 million of debt commitments from Bank of America, Morgan Stanley, and Deutsche Bank. This is SunEdison’s third warehouse facility following the formation of its $1.5 billion First Reserve Warehouse and the $500 million TerraForm Private Warehouse.

Other factors impacting Yieldcos Tumbling stock prices aside, Yieldcos are also contending with the pending expiration of the 30% solar ITC at the end of 2016. Given construction lead times, utility-scale solar projects must start construction in late 2015, depending on the size of the project, to qualify.

The 30% ITC has been crucial in attracting tax equity investment to utility-scale solar projects, ensuring there is a stable supply of assets for Yieldcos to acquire.

Yieldcos have historically acquired many utilityscale solar projects so they will need to change strategy when these assets stop coming online.

The obvious step is to acquire smaller projects although this is not ideal given the large number of projects Yieldcos would need to acquire to achieve targeted growth.

“Yieldcos need to have a strategy for the ITC falloff,” explained Sternthal. “It really hurts them because it means they have to put a lot of assets together on the C&I or residential side to get the growth that they want. The only way to get into that market in a meaningful way is to actually create a vertical company with development or

rollup EPCs or developers, so I expect we will see a number of acquisitions of these companies. I know of about ten EPCs/developers that are up for sale or are raising capital right now.”

Interest rates are another looming issue. At 0.25%, Federal Reserve interest rates are at an all-time low but analysts expect rates to rise in early 2016.

Since Yieldcos borrow huge sums of capital to fund acquisitions, and low rates make their dividend yield very attractive, a natural question is how they will be impacted when rates do inevitably rise.

Despite much talk about the impact of an interest rate hike, everyone interviewed for this report did not expect Yieldcos to be significantly affected, particularly when compared to other challenges.

“Any interest rate rise will be small so it shouldn’t materially impact their borrowing costs,” explained Sternthal. “The bigger impact will be if the dividend becomes less attractive. TerraForm Power has been paying a dividend between 6%-8% more recently, which is still compelling even if interest rates tick up.”

What does CohnReznick think?

With Yieldco stocks trading below historic levels, many are starting to question whether publicly listed Yieldcos are a viable structure for the longterm ownership of renewable energy assets.

But what are the alternatives? One option is for developers and IPPs to continue to own the assets once operating, perhaps selling a minority or majority stake to a long-term financial owner.

Anton Cohen, Co-National Director, Renewable Energy Industry at CohnReznick LLP, believes that many developers and IPPs are already looking at this option. “Developers and IPPs are evaluating the creation of structures that will enable them to own and operate long-term,”

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North America Renewable Energy Brief – Fall 2015

he said. “It all comes down to strategy and how you finance, but I do believe they are seeing value in holding these assets themselves or with a financial partner. Increasingly, companies that I have talked to this year who have traditionally developed and sold are now saying that they will turn their focus to implementing the best structure so they can own and operate.”

Another option is Master Limited Partnerships (MLPs) which have long been used as a tax efficient investment vehicle for the long-term ownership of oil & gas assets. However, the current regulatory environment prohibits MLPs from owning renewable energy assets.

“MLPs continue to be discussed and people are still trying to amend MLP legislation so that

they can include renewables assets,” explained Kemper. “This would open up the marketplace to more retail investors. It would, of course, need legislative change from Congress, which may be difficult to achieve.”

Another structure gaining traction is securitization.

Thus far, three renewable energy asset-backed securities (ABS) totalling $274 million have been issued in the US in 2015. The most notable is SolarCity’s $123.5 million issuance of solar assetbacked notes. Four ABS were issued in 2014 and two were issued in 2013.

The recent downturn in Yieldco stock prices may not spell the death of the structure. But it has certainly focused investors’ minds on the alternatives.

About CohnReznick: CohnReznick LLP is one of the top accounting, tax, and advisory firms in the United States, combining the resources and technical expertise of a national firm with the hands-on, entrepreneurial approach that today’s dynamic business environment demands. Headquartered in New York, NY, and with offices nationwide, CohnReznick serves a large number of diverse industries and offers specialized services for middle market and Fortune 1000 companies, private equity and financial services firms, government contractors, government agencies, and not-for-profit organizations. The Firm, with origins dating back to 1919, has more than 2,700 employees including nearly 300 partners and is a member of Nexia International, a global network of independent accountancy, tax, and business advisors.

The Firm’s Renewable Energy Industry Practice helps clients navigate the industry’s nuanced business, regulatory, and financial issues. The Practice’s integrated service platform includes assurance and attestation, technical accounting consulting, tax and advisory structuring, and advisory (IPO readiness, YieldCo, valuation, transactional, capital markets) services. The team includes more than 40 highly experienced professionals with deep industry credentials.

For more information on CohnReznick, visit www.cohnreznick.com and to learn more about our Renewable Energy Industry Practice, visit www.cohnreznick.com/industries/renewable-energy.

About CohnReznick Capital Markets Securities: CohnReznick Cap Markets offers a comprehensive financial advisory platform for the renewable energy industry, providing solutions for tax equity, equity, debt, asset sales or purchases.

An affiliate of parent company CohnReznick LLP, the company represents financial institutions, infrastructure funds, strategic participants (IPPs and utilities) and more than 60 wind, solar, biomass and other alternative energy developers nationwide.

Contact our renewable energy team for more information: Anton Cohen Co-National Director, Renewable Energy Industry CohnReznick LLP 301-280-1822 anton.cohen@CohnReznick.com

Rob Sternthal President, CohnReznick Capital Markets Securities LLC 917-472-1272 rob.sternthal@crcms.com

Timothy Kemper Co-National Director, Renewable Energy Industry CohnReznick LLP 404-847-7764 timothy.kemper@CohnReznick.com

cohnreznick.com cohnreznickcapmarkets.com

CohnReznick is an independent member of Nexia International

This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.