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How Long can YieldCo PV Financing Model Go?

YieldCo sprouted from the United States market, has spread to the European market. Although it did not enter the energy sector until 2013, it quickly became the focus of market chase. Recent YieldCo market downturn will herald the Imperfect YieldCo model has entered the premature decline it? This paper combs the YieldCo model as the basis to explore its future vitality.

June 19, 2015 First Solar and SunPower Joint Venture YieldCo - 8point3 Energy Partners LP is traded on the NASDAQ Global Select Market with a starting price of US $ 21 / share. 8point3 name from the sun shines on the earth's average time of 8.3 minutes, however, people who aspire to, if the name is so beautiful, 8point3 listed that day below the issue price to 20.49 US dollars / share closed down 2.43%. Since then, its share price has plummeted. It closed at $ 14.18 per share on August 25, 2015 and has fallen 32.48% from its first strike price, but weaker than the Nasdaq Index (see below). In the meantime, other YieldCo shares, like NRG Yield, also dropped notably. Questions and concerns arise: Is not the YieldCo model popular with investors and can it continue to play?

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eldCo model of the three pillars

YieldCo model can be attributed to the three pillars of low-cost financing. The rationale is simple: Since low financing costs correspond to the required rate of return, investors need to be attracted by financing models or tools with a low risk premium and a liquidity premium.

(A) Core Pillar: Long-term and stable cash flow

The long-term YieldCo model, stable and reliable cash flow is the core pillar of shaping its low-risk attributes. There are three key:

First, select the appropriate basic assets. Theoretically, assets that generate long-term, stable cash flow such as thermal power, hydropower, wind power, solar energy, heat supply and pipelines all have the basis for adopting YieldCo model. Among YieldCo's already on the market, there are both pure pure single-player advertisers such as 8point3 Energy Partners, as well as those claiming to diversify through diversified portfolios, such as NRG Yield. In addition, the geographical distribution of basic assets is also quite diverse, and some focus on a single area, such as 8point3 Energy Partners assets in the economically developed and politically stable OECD countries; while others are relatively dispersed, typical such as TerraForm Global, whose portfolio is located in emerging market countries such as China, Brazil, India, South Africa and Peru, aims to share its huge growth potential. Of course, in order to raise enough funds to public shareholders, YieldCo's portfolio needs to reach a certain size, which is why a leading company with a scale advantage can take the lead in trying out the model.

Second, separate development assets and working assets with different risk attributes. YieldCo holds only working assets that generate long-term, stable and reliable cash flows, and its theoretical risk is less than the development assets with higher uncertainties.

Third, long-term, fixed-price sales contracts (offtake agreements) should be signed with strong and creditworthy counterparties to further enhance YieldCo's safety margin. YieldCo counterparties have a lead rating above the investment-grade and also have a credit rating requirement for resident users (for example, 8point3 Energy Partners has a FICO credit score of 765). In addition, YieldCo holds assets for more than a dozen years over the contract term, such as 17 years for the weighted average life of electricity sales contracts held by NGR Yield as of the end of 2014.

Together, the above constitutes the theoretical basis for YieldCo to generate long-term, stable and reliable cash flows. As a result, YieldCo typically discloses (but does not necessarily commit) to investors the expected level of dividends and claims that it will strive to achieve steady growth in dividends at a specified rate for a given period of time (eg, 3-5 years). There is a notable concept here: Cash Available For Distribution (CAFD), which directly determines the amount of dividends, and because CAFD is not a concept of accounting standards (such as GAAP), the lack of a unified calculation of the caliber, CAFD can not be directly compared between different YieldCo.

(B)two wings pillar: tax-friendly and high liquidity:

YieldCo model and two unique skills to further enhance the attractiveness of investors.

The first is tax-friendly. YieldCo cleverly resolved C-corporation's double taxation of income tax at company and shareholder level, and even achieved some tax benefits. Specifically, at the corporate level, generating enough net operating losses (NOLs) to offset taxable expenses by accelerating depreciation of new energy assets, the mix of traditional energy and new energy assets, and the mix of old and new assets Income, making YieldCo less or not to pay income tax in a long period of time. For example, NGR Yield's 2014 pretax income was $ 85 million, income tax paid $ 4 million, and the company-level effective tax rate was only 4.7%. At the shareholder level, dividends distributed to non-corporate shareholders (which are common to most investment funds) are eligible for preferential tax rates if they are recognized as qualified dividend income. In special cases, shareholders may also enjoy more tax benefits if their dividend distribution is recognized as return of capital. In addition, the 1099-DIV Form completed by YieldCo Public Shareholders is relatively simple and has certain advantages in tax treatment.

Followed by high liquidity. YieldCo as a public company, its shareholders can publicly transfer shares on the stock exchange. YieldCo's high liquidity effectively reduces the liquidity premium of investors and helps reduce the financing cost.

Together, these three pillars have resulted in YieldCo being able to raise equity in the U.S. market at a lower cost. It is noteworthy that YieldCo's comprehensive financing costs also depend on its capital structure and debt financing costs, which can not be directly equated with equity financing costs.

It is not perfect for YieldCo

At the moment, YieldCo, which is already on the market, has reached the core objective of low-cost financing, just like the financing upstart of the new energy industry. However, YieldCo is a new thing that lacks the historical and data accumulation but has the maturity essence. Whether the future will continue to be stable or not will require a question mark.

The first is whether the long-term reliability of cash flows can be guaranteed. As YieldCo's current sales contracts expire and asset aging leads to lower efficiencies and higher operating costs, cashflow stability and reliability can not be achieved if new long term contracts with favorable terms and conditions are formed and effective asset replenishment mechanisms are formed Sex will be severely negatively affected, shaking the core pillar of YieldCo.

Second is how to ensure the long-term steady growth of earnings. For example, to generate enough NOLs to offset taxable income and maintain steady growth in dividends, YieldCo needs to continue to acquire qualified basic assets from parent or third parties and dro-in to the portfolio. An example is SunEdison, the world's largest renewable energy developer, that announced in July 2015 that it would acquire Vivint Solar, a NYSE listed company, for about $ 2.2 billion and would like to sell Vivint Solar's 523MW rooftop photovoltaic Power Station to its YieldCo entity TerraForm Power. While most YieldCo companies have a right of first offer on parent projects, there is greater uncertainty regarding project development and construction, and whether all parent companies have SunEdison-like capabilities to meet YieldCo's portfolio replenishment needs, Yet to be time tested. In another example, due to technological advances and other factors to promote renewable energy power generation costs continue to decline, the decline in sales prices have been growing trend. According to the recently concluded 20-year PPA between First Solar and Buffett's NV Energy, the initial sale price is only $ 0.0387 / kWh, less than NV Energy's purchase price of new energy for the previous year of $ 0.137 / kWh One-third, a record low. Against this background, some of the major industries have doubts about the long-term steady growth of YieldCo, which generates electricity from renewable energy sources. It would be even worse if we take into account the reduction in subsidies of various kinds in the United States, such as the reduction of the investment tax rebate on investment in renewable energy (ITC).

Look back GCL and Artes intends to test YieldCo's news has set off waves in the country, Taiwanese new Nikko, China and the United States have also announced the establishment of YieldCo, for some time. In this context, how to respond to the aforementioned challenge will be the key to decision-making in many enterprises. All of this, only sort out the past and present life and love and hate of YieldCo model, really clear the logic of its operation can be done.