Dissecting the YieldCo Structure: Project Finance Perspective

Publication August 14, 2015

 

Overview

  • At what stage are projects purchased?
  • What do buyers want to see?
  • How should a transaction be structured?

 

At What Stage Are Projects Purchased

  • Development
    • Missing one or more of: IA, PPA/Hedge, full site control, permitting, environmental studies, initial site plan
    • "Shovel Ready"
      • Holds all of the above and/or BOP contract and TSA
  • In Construction
  • Post-COD (pre or post flip)

 

YieldCo as Buyer

  • There are many potential buyers
    • E.g., Strategics, P.E., New Entrants, Canadian Funds,Hedge Funds
    • A yieldco is just one option
      • Yieldcos prefer de-risked assets. That generally means operational, but may mean operational with a few years of operating history.
      • That does not mean a yieldco will not look at a development or construction stage project.

 

Motivations of Buyers

  • A yieldco’s motivations are CAFD and growth
    • Consistency
    • First 10-12 years most important
  • Other buyers may be looking to flip, green a reputation, meet RPS requirements, RPS requirements, stave off competition or buy in as a give to regulators that want to shut down a brown resource.

 

So, what does a buyer want to see?

 

Buyers want to see...

  • Financial metrics vary depending on the buyer
  • Resource
  • Land
  • Interconnection
  • Permitting
  • Offtake
  • Optionality
    • *Residual value

 

What is the Target?

  • 100% Ownership with no encumbrances
    • Common “ask” for Development or In Construction
    • Less likely if Post-COD
    • Tax equity, JVs, carried interest of original developer
  • Issues
    • Control
    • Additional capital funding
    • Alienation

 

Issues if Acquiring Less than 100%

  • Member Voting Rights
    • Deadlock provisions
  • Limits on Alienation of Interests
  • Project Administration
  • Project Company Capital Accounts
  • Capital Calls
    • Deferred maintenance?
    • Commitments to expand or dismantle?

 

Financial return and other metrics

  • Pre-tax/post-tax/levered/unlevered
  • Cash?
  • Accounting treatment
  • Project Company Capital Accounts
  • Model inputs
    • Capital cost of development, construction, interconnection
    • Expenses—operation, maintenance and replacement
    • Financing—debt and tax equity
    • Price for power, RECs, capacity attributes (if any)

 

Land and Title

  • Site Control?
    • Is sufficient land under control?
    • Transmission easements, setbacks and good neighbors
    • Surface vs mineral rights
    • Title curatives
  • Location, Location, Location
    • Resource, market, local support
    • Cost-to-develop—land costs, studies
    • Cost-to-construct—winter?
    • Wetlands, species issues

 

Interconnection

  • Availability and timing
  • Cost of upgrades and cost of interconnection facilities
  • Maintenance cost
  • Risk of curtailment
  • Transmission
    • Who is buyer/who is transmitting utility
    • Cost of transmission
    • Losses

 

Permitting

  • Timing to complete permitting
  • Cost-to-permit—mitigation requirements, risk of challenge
  • Are there local community issues?
  • Species issues—bats, Golden Eagles, condors, plovers, desert tortoises?
  • Airports
  • Are there any unusual conditions in the permits?

 

Offtake

  • Does the project have a PPA or hedge?
    • what is the term/remaining term?
      • Does the term need to be 20 years?
    • who and in which market is the offtaker located?
    • is there an RPS?
      • If no PPA, what is the market like to get one?
      • Is there an offtake agreement for RECs?
  • If not:
    • who are the possible buyers?
    • who or what is my competition?
    • is there a liquid market if I lose my PPA?
    • what are the market rules for intermittent resources?
  • Operating Documents
  • Availability and Performance Guaranties
    • LDs
    • Termination rights
  • Offtaker Creditworthiness
  • Curtailment
    • Does your counterparty = your transmission provider = control area?
  • Regulatory 20/20 hindsight (particularly with FITs)
  • Prices Relative to Market

 

Optionality/Residual Value

  • Optionality
    • Are RECs included? Capacity Value?
    • What’s the term? Are there renewal terms?
    • Does the Offtaker have a ROFO/ROFR?
  • Residual Value
    • Term of leases and permits
    • Useful life of equipment
    • Liquidity of market beyond PPA
    • O&M costs
    • Availability of spare parts
  • Site Permit
    • Reduce number of turbines?
  • Land Rights
    • Potential for expansion?
  • New Resources -- i.e., Thermal/Wind or Wind/Solar
    • Interconnection capacity
      • Net-Zero
      • "Behind the Meter" Rules
    • Market?
  • Battery?

 

Post COD Projects

  • Site Control
    • Has developer/owner maintained site control?
    • Have leases lapsed?
  • Priority in Chain of Title
    • Still have to look at title?
  • Post-Operation Reports
  • Reports
  • Mitigation Obligations
    • Have they been met?
    • Community support still strong?

 

How should the transaction be structured?

 

Acquisition Structure Options

  • Acquisition Structure Type
    • Outright sale
    • Joint Venture
    • Outright sale of pre-structured deal
  • Acquisition Timing

 

Outright Sale

  • Share sale or asset sale
    • What are you selling?
  • Will the seller do EPC and then asset management?
  • What, if anything will the seller guaranty?
  • Do you have to retire an existing capital stack (debt/tax-equity) to buy the project outright?
  • How are payments structured?
  • How creditworthy is the seller?

 

Joint Venture

  • Most yieldcos want to own assets outright.
  • However, it may be important for the "seller" to remain in the deal.
  • Customer relations.
  • Ability to monetize or use RECs or tax benefits.
  • Seller may want to retain certain benefits?
  • Avoid loss of tax "goodies."
  • What is the path to outright ownership?
  • Purchase option, staged sell-down, flip partnership, sale-leaseback
  • Who controls?

 

Pre-structured Transaction

  • Alternatively, the seller can set up the capital stack prior to selling.
    • Partnership-level debt
    • Back-leverage
    • Tax-equity
  • This really relieves the yieldco of a post-acquisition obligation, filling the capital stack. While a yieldco has access to cheapish equity, it will want to use other peoples’ money to the extent possible.
  • Selling a pre-structured deal layers on additional issues, but can further de-risk the project.
    • Each piece of the stack will have transfer restrictions.
    • Tax-equity will often want a direct agreement with the buyer, to address issues related to preserving tax benefits.
    • The parties will have to work out whether and to what extent the seller continues to guarantee certain things to the lender or tax-equity investor.
    • Assess whether the transfer could cause the loss of a tax benefit?

 

Post Acquisition Cash Flows

  • Cash Flow Certainty.
    • Cash is king to a yieldco.
      • That means that any contingency on cash flows can be an issue.
        • Historically, most tax-equity investors swept cash if something bad occurred or if the flip date was delayed.
        • Many wind deals have a pre-defined period when cash is diverted to the investor.
      • Sweeps should be limited.
        • Can a sponsor guarantee replace a sweep?
      • Control by lenders and investors should be limited.

 

Obtaining 100% Ownership

  • Purchase Options
    • A yieldco will want to push out other parties at some point. This likely means it will want a preset purchase option. If set at a fixed price, that is better.
    • Some investors will want a withdrawal right and will want to sweep cash flow if the investor is not paid out immediately upon exercise. Lenders and yieldcos are aligned in their dislike for these provision. Care should be taken to minimize such a right’s effect on cash flows

John Marciano, Partner


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