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EDP Renewables North America: Tax Equity Financing and Asset Rotation
Matos, Pedro; Humphreys, Griffin Case F-1757 / Published August 9, 2016 / 28 pages.
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Product Overview

This case examines an innovative project finance solution in the renewables industry. In 2015, the CEO of EDP Renováveis, 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.

Learning Objectives

The case is targeted at MBA students as an illustration of project finance. The case can be used to pursue the following teaching objectives: ? Illustrate financial innovation in the renewables industry (U.S. wind energy). ? Applying the equity residual valuation method in a project finance transaction. ? Compare the trade-offs between a private transaction with institutional investors (tax equity and asset rotation) versus a public market transaction ("YieldCo").

  • Overview

    This case examines an innovative project finance solution in the renewables industry. In 2015, the CEO of EDP Renováveis, 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.

  • Learning Objectives

    Learning Objectives

    The case is targeted at MBA students as an illustration of project finance. The case can be used to pursue the following teaching objectives: ? Illustrate financial innovation in the renewables industry (U.S. wind energy). ? Applying the equity residual valuation method in a project finance transaction. ? Compare the trade-offs between a private transaction with institutional investors (tax equity and asset rotation) versus a public market transaction ("YieldCo").