EDP Renewables North America: Tax Equity Financing and Asset Rotation

Abstract

This case examines an innovative project finance solution in the renewables industry. In 2015, the CEO of EDP Renovaveis, S.A. (EDPR), the world's third-largest wind energy producer, was being briefed by the U.S. finance team on the financing of a 200 MW “wind farm” (or wind power plant). EDPR had ambitious growth targets and to keep its capital structure targets it was doing this capital investment using project finance. In the U.S. market, the solution was “tax equity” investment (a hybrid between debt and equity) to take advantage of the tax incentives for wind energy and the second source of external financing consisted of the “asset rotation” or “cash equity” investment from institutional investors. This project would be EDPR's 14th tax equity and 5th U.S.-based cash equity asset rotation transaction. The finance team had to develop a valuation model to explain to the CEO the key drivers of returns to EDPR shareholders with this particular financing strategy. How much did the tax equity and asset rotation financing strategy really boost the returns for EDPR shareholders? What made more sense, an attractive IRR on residual cash flows or a higher NPV for the complete project? Some competitors seemed to favor a public “YieldCo” (a portfolio of renewable energy–generating assets formed into a corporation and sold to the public); should EDPR consider it an alternative financing solution? The questions piled up as the team prepared to go through the analysis. Excerpt UVA-F-1757 Aug. 9, 2016 EDP Renewables North America: Tax Equity Financing and Asset Rotation In November 2015, Jo©o Manso Neto, the CEO of EDP Renovaveis, S.A. (EDPR), was arriving at the Houston, Texas, headquarters of EDP Renewables North America (EDPR-NA), its platform for the United States, Canada, and Mexico. He was going to be briefed by Gabriel Alonso (CEO of EDPR-NA), Bernardo Goarmon (EVP Finance of EDPR-NA), and the finance team on a new 200 MW wind farm investment located in Florida. Right before entering the meeting room, Manso Neto passed the state-of-the-art dispatch center that oversaw all of the 34 wind farms located across 12 U.S. states and one Canadian province. Over 2,300 wind turbines, totaling more than 4.2 GW of installed capacity, were monitored in real time for load factors and energy output. The new Rising Star wind farm under construction in Florida consisted of 90 turbines, and its start of operations was scheduled to occur at the end of 2015.