Principal Solar Institute

Kenneth P. Kramer Managing DirectorRushton Atlantic, LLC

Public Market Alternatives for Energy Portfolios - Comparing Yieldcos to REITs, MLPs and Related Instruments

Ken Kramer has 30 years’ experience in structured asset finance, in valuation

consulting, banking and corporate treasury. He is a co-founder and Managing

Director of Rushton Atlantic, LLC, a boutique valuation advisory firm specializing in

the energy, infrastructure, manufacturing and transportation sectors. Ken also

serves on the Steering Committee of the Department of Energy's Future of the

Grid Initiative, and on the Renewable Energy and Energy Efficiency Advisory

Committee to the Secretary of Commerce. Rushton Atlantic provides specialized

valuation services supporting structured and project financings, acquisition due

diligence, insurance placement, financial reporting and tax compliance. 

2

Background of Energy Project Finance

Off BS financing for large energy, mining projects

Financed with corporate equity & project debtNot tax intensiveRenewables were bankable in terms of credit

quality – issue was competitiveness of capital cost

3

Alternative Forms of Incentives

Feed In Tariffs (FITs) successful in Europe, worked well with project finance model

US history with “highest avoided cost” PURPA contracts made FITs problematic

In 2009 ARRA brought in 30% ITCs and $.023/kWh PTCs, and 5-year MACRS

Biggest issue was non-transferability of tax benefits

4

Growth of Tax Equity Finance

During recession, 1603 program for refundable ITC was huge success, but allowed to expire

Back to tax equity – flip partnerships, sale/leasebacks, inverted leases

Complex, expensive, limited supply2017 ITC reductionIn low rate environment, public market

alternatives become increasingly attractive

5

Public Investment Vehicles

Public equity capital markets are deep, liquid, and attractively priced with $100 Bns invested in income generating assets

Many investment vehicles, most prominently REITs and MLPs, are untaxed at the entity level

With contracted revenue streams, are particularly attractive when traditional fixed income alternatives offer historically low yields

6

US Public Yieldcos

NYLD – NRG Yield, Inc. - NYSEPEGI – Pattern Energy Group Inc. - NasdaqABY – Abengoa Yield plc - NasdaqNEP - NextEra Energy Partners, LP - NYSETERP – Terraform Power, Inc. (SunEdison) - NasdaqCAFD - 8point3 Energy Partners LP (First Solar &

SunPower) Nasdaq

7

Yieldco Trading History

8

Yieldco Overview

Sponsor Public

Yieldco

Operating Sub

Operating Sub

Opco

9

Yieldco Overview

Yieldco is a C corp, generally with a partnership subsidiary which holds its operating businesses, which are power generating assets with long term offtake agreements.

Yieldcos, like REITs and MLPs, appeal to public equity market investors, seeking income plus appreciation, and target double digit total returns

While taxable at the entity level, the initial portfolio assets provide sufficient tax shelter, from ITC, PTC and MACRS deductions, to eliminate corporate income tax liability and maximize cash flow available for dividends

Dividends in excess of earnings may also be treated nontaxable return of capital

As a taxable C corp, a Yieldco has no legal restrictions on types of assets it owns, type of earnings permitted, or percentage of income or cash flow paid out to investors

10

Alternative Public Vehicles

Real Estate Invest Trusts (REITs)Master Limited Partnerships (MLPs)Canadian Foreign Asset Income Trusts (CFAITs)Up-C structureEquipment Lease Income Funds

11

Real Estate Investment Trusts

Investors

REIT

Property Property

12

Real Estate Investment Trusts

REITs can deduct dividends paid to shareholders, and avoid tax at the corporate level, so long as:– 75% of assets are qualifying assets such as real

estate assets– 75% of income is generated from rents or

mortgages, and– 90% of taxable income is distributed to

shareholders 2014 market cap of REITs - $907 Bn

– Equity REITs - $846 Bn– Mortgage REITs $61 Bn

13

Real Estate Investment Trusts

Broadened definition of eligible income includes:– Rentals of gas and electric distribution systems– Revenues attributable to hotel and hospital services

Issues for renewable generation:– Rental income definition doesn’t include PPA revenues– Real property definition doesn’t include fixtures

such as solar panels and related hardware Rooftop solar can be owned by a Taxable

REIT Subsidiary (TRS)

14

Umbrella Partnership REITs (UpREITs)

Public Investors

Public REITGP

Property Contributors/Sellers - LPs

UpREIT Operating

Partnership

Property Property

15

UpREITs

Property is contributed tax free for partnership units in 1031 like-kind exchange

After 1 year, put option is exercisable to convert partnership units to liquid REIT shares

Exchange is taxable, but for estate planning purposes, appreciated real estate can be stepped up in basis upon inheritance, avoiding capital gains on sale of REIT shares

16

Example – Hannon Armstrong Sustainable Infrastructure (“HASI”)

Focus on energy efficiency, and renewable energy projects Structure is subject to IRS private letter ruling Investments include:

– Financing receivables– Debt & equity securities– Real estate– Equity Investments in unconsolidated affiliates

Portfolio composition (12/31/2014):– 71% loans, receivables, financing leases, debt securities– 13% real estate with long-term leases– 16% minority ownership of wind projects

17

Master Limited Partnerships

Property Property

MLP

General Partner

Public

Managers

18

Master Limited Partnerships

Current rules established in 1987 by IRC section 7704, which limited classes of investments held by publicly traded partnerships eligible to avoid entity level taxation.

Per sec. 7704 (d), 90% of MLP income must be from interest, dividends, rents, capital gains, and the exploration, development, mining or production, processing, refining, transportation or marketing of minerals or natural resources, including real estate; and since 2008 certain biofuels and industrial source carbon dioxide

Current MLP market is $488 billion, predominantly midstream oil & gas pipelines

19

Master Limited Partnerships

Tax code does not require minimum distribution to investors, although partnership agreements customarily require all available cash to be distributed to the partners

General partner typically manages the MLP’s operation in return for 2% of distributable cash flow, plus incentive distribution rights

Limited partners are entitled to 98% of distributable cash flow

Distributions are treated as a tax-deferred return of principal to the extent of the investor’s basis.

20

MLPs – Proposed Changes

IRS proposed regs (currently out for public comment) intended to clarify how far down the value chain of minerals and depletable resources businesses can be MLP eligible, - e.g. oilfield catering/fuel delivery to gas stations/plastics & petrochemicals?

Senator Coons (D, MD) has reintroduced the MLP Parity Act, extending MLP eligibility to renewable energy resources, including wind, biomass, geothermal, solar, MSW, hydropower, fuel cells, CHP, cellulosic, ethanol, biodiesel, and algae-based fuels, energy-efficient upgrades for buildings, electricity storage, CCS, renewable chemicals, and waste-heat-to-power technologies.

21

Example – Sol-Wind

Public Management Team

Sol-Wind RenewablePower LP

Sol-Wind JV CLN LLC

Tax Equity Investor

RenewableEnergy Asset

RenewableEnergy Asset

Project LLC

Project LLC

Project Holding

Companies

Sol-Wind Global Holdings

LLC

Sol-Wind JV SWP LLC

Sol-Wind

LLP GP

22

Example – Sol-Wind

Intent was to launch an IPO of an MLP with energy assets whose income didn’t qualify for the 7704(d) tax exemption.

Structure included a top level partnership that owned a corporate sub, rather than a top level corporate entity that owned a partnership, as in a yieldco

KKR had used a similar partnership structure for similarly non-qualifying investments, for which partnership treatment was advantageous, having both US and offshore investors

Intent, like yieldcos, was to avoid corporate taxation by investing in new renewables transactions with attractive tax benefits, as well as to raise tax equity financing

23

Canadian Foreign Asset Income Trusts

Unit Holders

TSXFAIT

Canadian Holdco

US Opco

USAsset

USAsset

24

Canadian Foreign Asset Income Trusts

Until 2006, Canada didn’t tax income trusts at the corporate level. With their increasing popularity, the corporate level tax exemption was limited to REITs and Foreign Asset Income Trusts

US assets are eligible, and deals can be structured to avoid US withholding taxes on distributions from the Canadian trust. Like a yieldco, renewable energy assets may provide sufficient tax shelter for US unitholders to avoid personal income tax on distributions

IPO’s can be done on the TSX more quickly, more cheaply and with lower market caps than on the NYSE.

US oil & gas issuers Eagle Energy and Parallel Energy succeeded in this market. CleanREIT Partners was unsuccessful with a US solar deal

25

Up – C Structure

Historic Partners Public

Pubco

LLC or Partnership

Operating Subsidiary

Operating Subsidiary

26

Up – C Structure

Up-C uses features of UpREITs and MLPs Usually partnerships can’t go public – Up-C can do so in stages Seen in PE exits (GoDaddy, Shake Shack), and energy deals Public company sells A shares, downstreams the proceeds to partnership

which redeems partnership units for cash, and supervoting, non-economic B shares

Pass through entity continues to own and operate assets, Pubco is taxable on A share assets only, and partners exchange units for liquid A shares over time, taxable at capital gains rate

Transferred assets written up based on A share value, and basis step-up on intangibles is amortized for tax over 15 years

85% of tax savings paid to partners per Tax Receivable Agreement

27

Equipment Lease Income Funds

Low volume – under $1 billion/yearOrganized as partnerships, distributed through

investment advisorsSEC registered, but not publicly tradedSome tax deferral through depreciationFinite life, self liquidating – principal is returned upon

sale of assets, providing nontaxable return of principal

28

Questions and Discussion

Please enter your questions into the Chat window

Contact: ken.kramer@rushtonatlantic.comwww.rushtonatlantic.com

Kenneth P. Kramer Managing DirectorRushton Atlantic, LLC845 Third Avenue - 6th FloorNew York, NY 10022