Woodlawn Associates

Management Consulting

Finance » Page 2

YieldCo Cost of Capital

Posted on by and

Large renewable energy project developers often use a type of financing vehicle colloquially known as a “YieldCo” to finance portfolios of assets that are expected to have stable cash flows over relatively long periods, such as solar or wind farms.  In theory, investors should be willing to accept lower returns on investments in these “safe” assets than they would on investments in the developers themselves, thus reducing the cost of capital for such assets and increasing their value.

We thought it would be useful to see how this has worked out in practice.  In this post, we show how we determine the cost of capital for a yieldco using 8point3 Energy Partners, a yieldco formed by SunPower and First Solar to own and operate solar systems, as an example.  Then we show the results of using the same methodology across a number of public yieldcos with a variety of asset types.  On average, we find a cost of yieldco equity is 7.01% levered and 5.46% unlevered.

This relatively low cost of capital has implications for the value of projects held or purchased by yieldcos.  It should allow developers that have yieldcos to sell their projects at attractive prices, and allow their yieldcos to pay more than many other project investors for projects they purchase from independent developers.

[Read more…]

What is the Solar Cost of Capital?

Posted on by

In a previous post, I said Woodlawn Associates believes solar project sponsors (i.e., equity investors other than tax equity) expect to earn an 8-11% after-tax internal rate of return on their investments.  As I said in that post:

Whether 8-11% is a good deal for the financier depends on its cost of capital.  If a financier’s cost of capital is 10%, the net present value of its investment is essentially zero.  On the other hand, if its cost of capital is 5-7%, the NPV of each solar system is several thousand dollars.

So how does one determine cost of capital for a project sponsor?  First, we have to understand what we mean by “sponsor”.  I use the term to mean the company that invests regular equity in project companies, which is usually a holding company subsidiary of a parent solar financing company:

Figure 1: Simplified Subsidiary Structure of Solar Finance Company,
and Sources of Capital

Solar Cost of Capital Figure 1

In this post I will first examine the cost of capital for project companies and then for sponsors/holding companies (the green boxes in Figure 1).

[Read more…]

Financing Returns in Residential Solar

Posted on by

Happy 2014 everyone.  The deep freeze here in the Midwest is making me wish I was in California this week.  By the way, how much better do solar panels perform when it is 15 degrees below zero?  (Assuming they aren’t covered with snow?)

We’ve had several organizations ask us over the last few months about the returns for financing residential solar.  Before we get there, however, let’s make sure we understand what’s included in the returns.

Essentially, there are only two places to earn returns in residential solar: from installation or financing.  Installation (or “dealer”) businesses earn profits much like any contractor does, by finding customers and getting them to pay for an installation of equipment.  Financing businesses earn money by investing money in solar systems up front and collecting fees over a long period of time.

Some companies, like SolarCity and Vivint, are vertically integrated in these business. Others, such as Sungevity, acquire customers and provide financing but rely on others to do installations.  However, these variations don’t create new profit pools, they are just different ways of splitting up the profit pie.

We’ve discussed the profits in the dealer part of the business before.  But how much profit is there in the financing part of the business?  This depends on a few key factors:

[Read more…]

Preparing for a Successful IPO

Posted on by and

Twitter will soon go public, but more than 100 companies have completed IPOs in the past six months or so. Many of those newly-public companies have struggled as stocks. They are up an average only 2%, while NASDAQ is up 13% over the same period. Nearly half of those IPO companies are actually trading below their offering price.

We have directly participated in 17 IPOs and supported many more.  In our opinion there are three main stumbling blocks for companies going public in today’s market:

Stumbling Block 1:  Public and private investors have very different expectations

Most companies that IPO started with venture capital backing. These and other private investors in high-growth companies tolerate of a lot of uncertainty. They value a company’s “story” and have long time horizons. By contrast, public market investors have quarterly, monthly, or even daily time horizons. They hate surprises and value consistency. This is not to say that venture investors have infinite patience, nor that public investors are short-sighted, but that there is a very real difference in the pressures on each of them.

Stumbling Block 2:  The IPO process does not help management bridge this gap

The IPO process itself can become all-consuming for management. Preparing forecasts and offering documents and going on roadshows can consume a major portion of management’s time. And, there is tremendous pressure to get the deal done. There may only be a limited time in which the IPO window is open. The board, which typically represents the company’s venture investors, wants a liquidity event. The bankers’ incentives are largely aligned with completing a listing. In this environment there is little time for management to learn about the needs of its new investors. In fact, at the very time the company is shifting from investors who value the long-term outlook to those who value quarterly consistency, management is pulled far away from actually operating the business.

Stumbling Block 3:  The IPO is only a first impression

Public investors have grown skeptical of IPOs to a degree and are looking to see whether management can meet expectations for several quarters after being public before really committing to a stock.

We advise our clients considering IPOs about five major solutions to these stumbling blocks:

[Read more…]

SolarCity S-1: Observations

Posted on by

SolarCity, the largest residential and commercial solar installer in North America, has filed a public registration statement for its IPO (see it here).  Here are a few observations we pulled from the document.

Installer Gross Margins

SolarCity reported overall gross margins of 21% for 2011 and 30% in the first half of 2012.  However the really dramatic revelation in the S-1 is the difference in gross margins between systems they sold for cash and those they financed:

[Read more…]