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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
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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
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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
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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: [email protected]
Kenneth P. Kramer Managing DirectorRushton Atlantic, LLC845 Third Avenue - 6th FloorNew York, NY 10022