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How Wind Developers Raise Equity in Public Markets

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How Wind Developers Raise Equity in Public Markets Reprinted with permission from the May 2014 issue How Wind Developers Raise Equity In Public Markets Led by the likes of Pattern Energy Group and Atlantic Power, some wind companies are thinking outside the box when it comes to capital raising. By David Burton any wind developers regu- therefore, it has a higher dividend is all wind, and thus, it has a higher larly require additional cap- yield than NRG’s yieldco. dividend rate than NRG, but it does Mital infusion and keep their Unfortunately, few developers have geographic diversification with eyes peeled for opportunities to raise will have a sufficient portfolio to sat- projects in the U.S., Canada and Chile. it. Three recent trends in public equity isfy the investment banking rules of Further, many developers’ projects transactions for developers are yield- thumb for a yieldco. are financed using tax equity struc- cos, listing on the Toronto Stock Ex- First, the yieldco needs to be of tures. Pattern’s yieldco portfolio in- change (TSX) and the declining use of a sufficient size to merit the cost of cluded only one project structured as real estate investment trusts (REITs). the initial public offering (IPO) and a tax equity transaction. NRG Yield There have been two high-profile ongoing costs incurred by public has no tax equity transactions in it, and successful yieldco offerings by companies, such as compliance with as the renewables projects included U.S. developers: NRG and Pattern En- Sarbanes-Oxley. This roughly trans- in it had opted for the 1603 Treasury ergy Group. As a general finance mat- lates to raising at least $150 million in cash grant. It remains to be seen if the ter, a yieldco refers to corporations equity in the IPO. public markets will embrace a yieldco that use most of their earnings to pay However, a $150 million portfolio whose portfolio includes significant quarterly dividends, thus producing will not suffice because the markets tax equity deals. SunEdison will be a relatively predictable stream, much demand that the sponsor have mate- testing the public equity market with like a bond, but with a higher yield rial skin in the game. This generally a solar yieldco that predominantly than is available in the bond market. means that less than half of the value includes projects subject to tax eq- NRG’s yieldco, NRG Yield Inc., of the portfolio can be monetized in uity financings. SunEdison may not has a dividend yield of 3.5%. Pattern’s the IPO; NRG monetized only 40% of be able to execute a public offering at yieldco, Pattern Energy Group Inc., is the value of the assets it included in its the 4.5% dividend yield that Pattern not quite as diversified and its spon- yieldco. Thus, a developer considering achieved; however, even a 9% divi- sor is smaller than NRG’s, so its divi- a yieldco needs a portfolio available dend yield would be a meaningful im- dend yield is 4.5%. A dividend yield is for the yieldco of upwards of $300 provement on its cost of capital. roughly equivalent to a cost of equity, million. A yieldco will be subject to two and most wind developers would give In addition, the market will require layers of tax: The public entity, as a their right arms for a 4.5% cost of consistent cashflows to enable the corporation, will pay corporate in- equity. yieldco to pay the quarterly dividend. come tax, and the shareholders will Pattern’s yieldco has the benefit of Therefore, the portfolio will need to owe taxes on dividends and capital geographic diversification with proj- be able to withstand “stress tests,” gains upon disposition of their stock. ects in the U.S., Canada and Chile. whereby the dividend can still be paid For individual shareholders, the tax However, yieldco investors place more even if a significant project runs into rate with respect to qualified capi- emphasis on technology diversifica- problems. NRG Yield’s portfolio has tal gains and dividends is currently tion, and the Pattern yieldco’s port- different technologies: wind, solar and 23.8%. folio consists of only wind projects; natural gas. Pattern’s yieldco portfolio To avoid the corporate income tax Subscription information is available online at www.nawindpower.com. Copyright © 2014 Zackin Publications Inc. All Rights Reserved. (and defer the second layer of tax on be under only Canada’s more user- we did not receive anything from the distributions), the yieldco needs to friendly securities laws. For instance, IRS that mentions renewables.” keep growing by adding assets that Canada has not adopted its own ver- When the ruling was made pub- provide additional depreciation, in- sion of Sarbanes-Oxley, the post- lic, it was apparent that it applied to terest expenses associated with the Enron reforms enacted in the U.S. environmentally friendly “structural financing of those assets and possi- that imposed substantial compliance improvements” to buildings, rather bly tax credits. After the yieldco stops costs on public companies. Further, than wind or solar projects. growing and has used the tax losses the disclosure documents that must Second, the IRS announced a or credits it has carried forward, it be prepared for a TSX Venture listing moratorium on new REIT rulings. will start paying income taxes. That have a more limited scope than that Although the agency has since lifted tax bill will take a large bite out of of a Form S-1 that is required for a the moratorium, there have been no the cashflow available for distribu- public offering in the U.S. recent rulings issued. tion. Thus, potential yieldco investors Additional steps must be taken to Heather Zichal, who recently re- will want to see a “growth story” and ensure that the listed company does signed as President Obama’s energy not just a one-off portfolio monetiza- not fall under U.S. securities law. For and climate advisor, gave a speech on tion. NRG fulfilled this need for its instance, a Canadian holding compa- Jan. 21 suggesting that the Treasury yieldco by granting it a right of first ny must be used, Canadian directors Department may issue a revenue rul- offer with respect to any proposed are required, and the stock certificates ing that renewable energy projects sale, transfer or other disposition by must contain a legend that they are not qualify as REIT assets. The renew- NRG itself of six large specified assets intended to be sold to U.S. investors. able energy trade associations are not for a period of five years following The formation of a Canadian pressing for the issuance of that rul- the completion of the IPO. Similarly, holding company that owns an ex- ing because, to be REIT-eligible, an Pattern Energy Group LP provided its isting U.S. corporation can raise asset must be “real property.” There- yieldco, Pattern Energy Group Inc., a issues with the Internal Revenue Ser- fore, such a ruling could draw into right of first refusal with respect to its vice (IRS). In 2004, Congress enacted question a renewable energy asset’s 3 GW development pipeline for five “anti-inversion” rules to prevent U.S. eligibility for investment tax credits years. corporations from escaping the U.S. and five-year accelerated tax depre- policy of worldwide taxation by mov- ciation, both of which are not avail- TSX listing ing their parent entity offshore. The able for real property. If the Treasury Pattern Energy Group Inc. is listed anti-inversion rules are highly techni- were to rule that renewable energy on both the NASDAQ and the TSX. cal and can be triggered by a corpo- projects are “real property” for REIT In having a dual listing, it is follow- rate migration, even when the move purposes but not any other tax pur- ing in the footsteps of wind developer is not motivated by tax but is a result poses, it could raise a concern that it Atlantic Power (NYSE: AT and TSX: of pursuing a friendly securities regu- was legislating as opposed to merely ATP) and U.S. Geothermal (AMEX: lation regime and investors with an implementing the tax law. HTM and TSX: GTH). The reason re- appreciation of renewable energy as The IRS announced on April 2 that newable energy developers are drawn an asset class. it was developing proposed regula- to the TSX is that the Canadian retail tions to refine the definition of “real market is perceived as having a greater REIT decline property” for REIT purposes. Neither level of acceptance of renewable en- A year ago, renewable energy con- the announcement nor the commen- ergy; however, with SolarCity (NAS- ferences were abuzz with talk of REITs tary that followed suggested that the DAQ: SCTY) up eightfold since its being an attractive format for renew- refinement was intended to include public offering, that perception could able energy developers. This talk was renewable energy projects. be changing. spurred by press reports that Renew- In light of the land mines for re- Ram Power (TSX: RPG) and newly able Energy Trust Inc. had requested newable energy with respect to REITs, public OneRoof Energy (TSX Ven- an IRS private letter ruling that solar large developers have moved on to ture: ON) are U.S. renewable energy projects constitute “real estate” for mastering yieldcos, while smaller de- companies listed solely in Canada. purposes of the REIT rules, and Han- velopers are looking to markets like OneRoof is listed on the TSX Venture non Armstrong, with renewable en- the TSX Venture Exchange for their Exchange. TSX Venture is an exchange ergy operations, had gone public as a equity.
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