EUROPEAN CLEAN ENERGY YIELDCOS 1H15

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1 DATA INSIGHT REPORT cleanenergypipeline.com EUROPEAN CLEAN ENERGY YIELDCOS 1H15 TURQUOISE 1

2 This Data Insight Report analyses the fundraising and investment activities of European clean energy yieldcos in the first half of 2015 (1H15). The analysis is based on deals tracked in Clean Energy Pipeline s public markets and mergers & acquisitions (M&A) transaction databases. Yieldco issuances surge 83% in 1H15 Clean energy yieldcos raised $944 million on European public markets in 1H15, almost double the $517 million secured during in 1H14. The robust start to the year was underpinned by the $493 million IPO of Saeta Yield - the yieldco vehicle of Spanish construction company Actividades de Construccion y Servicios - in February The offering, which was more than 2x oversubscribed, was priced at Eur10.45 per share, the bottom of the Eur target price range. Saeta Yield is the first yieldco to be listed on a continental European stock exchange. The second most notable deal in 1H15 was The Renewables Infrastructure Group s (TRIG) $152 million oversubscribed EUROPEAN CLEAN ENERGY YIELDCO OFFERINGS ( YTD) 2013 $1.4 bn Foresight Solar Fund Ltd. Greencoat Wind plc Bluefield Solar Income Fund Greencoat Wind plc 2014 $1.2 bn Greencoat Wind plc Bluefield Solar Income Fund NextEnergy Solar Fund Foresight Solar Fund Ltd. NextEnergy Solar Fund John Laing Environmental Assets Group Bluefield Solar Income Fund Greencoat Wind plc 2015 YTD $0.9 bn Foresight Solar Fund Ltd. Saeta Yield SA NextEnergy Solar Fund Greencoat Wind plc Foresight Solar Fund Ltd. 2 TURQUOISE

3 EUROPEAN YIELDCO PUBLIC MARKET ACTIVITY (1H14) EUROPEAN YIELDCO PUBLIC MARKET ACTIVITY (1H15) 52% IPO 74% 48% Secondary 26% Secondary IPO secondary offering on the Exchange in March NextEnergy Solar Fund and Greencoat Wind also secured $94 million and $74 million respectively in secondary offerings in February Clean energy yieldcos have proven attractive to investors in the current low interest rate environment due to their steady and predictable income stream generated by long-term off-take agreements and an inflation-linked yield that is higher than traditional fixed income assets such as government bonds. As of September 2015, Saeta Yield provided the best dividend yield (8.54% per annum) among the European yieldcos. The 5-6% annualised dividend yield offered by the other -based yieldcos makes them an enticing investment opportunity given the historically low interest rates in the. Number of acquisitions waning European yieldcos announced 12 acquisitions valued at $900 million in 1H15, a 34% decrease in number on the 20 deals totalling $800 million in 1H14. The largest transaction was TRIG s 246 million purchase of a 49% stake in Fred. Olsen Renewables 433 MW operating wind portfolio in June Notable investments also include Bluefield Solar Income Fund s 56.5 million ($83 million) acquisition of a 49.9 MW solar PV plant in Norfolk from Chinese module manufacturer Trina Solar in March 2015, and NextEnergy Solar Fund s 54.7 million ($80 million) acquisition of the 33.7 MW Glebe Farm and the 11.7 MW Hawkers Farm solar projects in April Looking to the remainder of 2015 It remains to be seen whether yieldcos will continue to dominate the public markets in the second half of On the one hand, existing yieldcos such as The Renewables Infrastructure Group, NextEnergy Solar Fund, and John Laing Environmental Assets Group, to name a few, have hinted at future share issues or actually launched share offerings that are scheduled to complete by the end of the year to fund further acquisitions. On the other hand, the recent volatility in the public markets might make it difficult for yieldcos to raise further capital. Indeed, two recently formed European solar-focused yieldcos - NextEnergy European Solar Utility and Bluefield European Solar Fund - both postponed IPO plans in late July 2015 due to market volatility. NextEnergy European Solar Utility had planned to raise Eur300 million from an IPO on the Exchange to fund the potential acquisition of 1.3 GW of solar assets mainly in Spain TURQUOISE 3

4 and Italy. Bluefield European Solar Fund planned to raise Eur200 million to fund acquisitions of Italian and Spanish solar projects. Two other notable yieldco vehicles in the pipeline are not likely to list in the second half of PNE Wind AG established PNE WIND Yieldco Deutschland (focused on the German market) and PNE WIND Yieldco International (focused on international markets) in December The German wind developer indicated it plans to sell the yieldco vehicles in part or wholly to investors by the end of Further details of all yieldcos in the pipeline are outlined in the table below. The yieldco story so far Greencoat Wind, the first clean energy yieldco, listed on the European public markets in March By June 2015 there were seven quoted yieldcos in the and Spain and a further four in the pipeline. In 2013, four yieldcos (Greencoat Wind, TRIG, Bluefield Solar Income Fund and Foresight Solar Fund) completed their initial public offerings (IPO) on the Exchange, raising a total of c.$1.3 billion. In 2014, John Laing Environmental Assets Group and NextEnergy Solar Fund became the fifth and sixth yieldcos respectively to list on the NOTABLE LISTED EUROPEAN YIELDCO VEHICLES Yieldco Stock exchange Sector focus & portfolio (as of September 2015) Bluefield Solar Income Fund Foresight Solar Fund Ltd. Greencoat Wind plc John Laing Environmental Assets Group NextEnergy Solar Fund Saeta Yield Spain The Renewables Infrastructure Group Ltd. Exchange: BSIF Exchange: FSL Exchange: W Exchange: JLEN Exchange: NESF Madrid, Barcelona, Bilbao & Valencia Stock Exchanges: SAY Exchange: TRIG Dividend yield (as of September 2015) Issue type Issue date Deal value ($ m) Solar PV (260MW) 6.81% IPO Jul Secondary Feb Secondary Nov Solar PV (338MW) 6.01% IPO Oct (249MW) & off-shore wind (22.5MW) (68MW), solar PV (35MW), & water and waste management Secondary Oct Secondary Mar Secondary Jun % IPO Mar Secondary Dec Secondary Jan-14 3 Secondary Oct Secondary Feb % IPO Mar Solar PV (235MW) 6.03% IPO Apr (539MW) & solar thermal (150MW) (532MW) & solar PV (171MW) Secondary Nov Secondary Dec Secondary Feb % IPO Feb % IPO Jul Secondary Nov Secondary Mar Secondary Oct Secondary Mar Secondary Apr TURQUOISE

5 Exchange, raising a combined total of nearly $400 million. In February 2015, Saeta Yield completed its $493 million IPO on the Madrid, Barcelona, Bilbao & Valencia Stock Exchanges and became the first non- publicly listed clean energy yieldco. The fundraising activity of the seven European clean energy yieldcos since 2013 is outlined in the table at the end of this report. By the end of June 2015, the seven European yieldcos had raised a total of $3.6 billion and their portfolios comprised 1,388 MW of onshore wind, 22.5 MW of offshore wind, 964 MW of solar PV and 150 MW of solar thermal capacity. Their investments are currently spread across the (69%), Spain (28%), France (3%) and Ireland (1%). NOTABLE EUROPEAN YIELDCO VEHICLES IN THE PIPELINE Yieldco Headquarters Sector & geographical focus NextEnergy European Solar Utility Bluefield European Solar Utility PNE WIND Yieldco Deutschland GmbH PNE WIND Yieldco International Limited Germany Solar PV in Europe, primarily Italy and Spain Solar PV in Europe, primarily Italy and Spain in Germany in Offering size ($ m) Expected listing 335 Postponed (initial target: H2-2015) 224 Postponed (initial target: H2-2015) Brief description NextEnergy European Solar Utility (NEESU) is an affiliate of the -focused yieldco vehicle NextEnergy Solar Fund. Both yieldco vehicles will be managed by NEC Group. NEESU has the right of first offer from NextNergy Capital s renewables pipeline, and has already entered discussions, or put forward bids for over 427 MW of solar projects. It represents an equity investment of approximately Eur500 million. NEESU aimed for dividends of between Eur0.03 to Eur0.05 in 2015, Eur0.08 in 2016, and Eur0.09 in It targeted internal rate of returns of 10-12%. Bluefield European Solar Utility will be managed by Bluefield Partners LLP. The yieldco is targeting acquisitions of renewable energy assets in EU countries, primarily Spain and Italy. n/a n/a On 19 December 2014, PNE WIND AG announced the establishment of two yieldco vehicles - PNE WIND Yieldco Deutschland GmbH (headquartered in Cuxhaven, Germany) and the PNE WIND Yieldco International Limited (headquartered in Edinburgh, Scotland). PNE WIND expects to initiate a yieldco with 150 MW of German onshore wind farms. Commissioned wind farms will be placed in PNE WIND Yieldco Deutschland GmbH before being acquired by PNE WIND Yieldco International Limited. PNE WIND AG plans to sell the yieldco vehicles in part or wholly to investors by the end of TURQUOISE 5

6 Q&A with Francis Wright Managing Director Turquoise International Can you provide an overview of the work you currently do with yieldcos? We have primarily assisted in selling solar assets to yieldcos and have spoken to most of the European yieldcos that are in the solar sector. It is a competitive market with lots of investors seeking solar assets, but yieldcos are generally very proactive and fast moving. They also know exactly what they want and are mostly easy to deal with. Are yieldcos interested in acquiring specific types of solar assets? When yieldcos first appeared they looked for operating assets. Over time, competition in the market forced them to invest pre-construction and if their fund rules don t allow this, they will have some kind of third-party finance option in place to bridge the construction phase. With recent policy uncertainty, risk appetite is reducing with a preference to buy after accreditation. Transaction costs are a significant component, especially for smaller projects and so there is a strong preference to secure project pipelines from established developers, so multiple projects can all use the same purchase and EPC documentation. To what extent are yieldcos prepared to take construction-stage risk? Most will now take some construction risk although the money is paid to an EPC contractor that has signed a lump sum turnkey type agreement. If there was a problem with the project it would be the EPC contractor who would be liable to fix it. Clearly, there is a risk that the EPC contractor might become insolvent half way through a project, which incentivise the use of more creditworthy contractors. To mitigate this risk, some investors prefer to purchase the solar modules directly themselves and supply them to the project. With the loss of ROC grandfathering, investors are also typically deferring a large part of the purchase consideration to accreditation. Given the recent subsidy cuts, will solar continue to be attractive for yieldcos? There is a lot of uncertainty about the future of the solar sector in the. From April 2016 onwards there is no Renewables Obligation (RO) subsidy, and even before then, there is a risk that a banding review could cut the current 1.3 ROCs in the period before April. There is currently a rush to get pre-accredited FiT projects built by December, 6 TURQUOISE

7 after which the tariff falls by 25%. It is likely to fall further in Taken together with the recently announced heavy reduction in FiTs (including rooftop), the solar market is going to come to a grinding halt by the end of March If yieldcos want to carry on investing they re going to have to look elsewhere. Do you think -based yieldcos are capable of raising funds on mandates that target projects outside the? Investors in yieldcos don t want to take any material risk so either they buy operating assets in jurisdictions where the risk of retrospective policy change is unlikely, or where they understand the market very well so can take construction risk in the knowledge that it takes three months to build a solar plant. If there is uncertainty that the rules will change within three months and there is no ability to lock in a price at the start of construction they re not going to do it. So the question remains, are there any markets in Europe where that certainty exists? That will change on a quarterly basis. Some investors are interested in buying operating assets in slightly distressed markets, such as wind or solar projects in Spain and Italy. These are places where the original investors or the current owners are nursing a big loss. There are risk taking people out there if they want an exit. They might not be yieldcos, but certainly the hedge funds will look at these opportunities. Do yieldcos typically leverage solar projects? They don t lever at the project level but they do at the fund level. There are people like Foresight, for example, who used Novatio Capital to arrange an inflation linked facility to lever one of their funds. This can lead to a small improvement in equity returns, but the main driver is usually to release additional capital which can be used to acquire more assets. Solar assets are currently purchased on a project IRR of approximately 7%. The cost of debt isn t much lower than that so there s not a huge benefit of leveraging for equity returns. How have returns from solar projects changed in the past year? A couple of years ago a buyer of assets would be looking at an IRR of 8-9%, but with competition this has now fallen to around 7%. For a portfolio of 100 MW or more, IRRs are moving towards 6%. This very low cost money is coming from pension funds and is unlikely to be of interest to yieldcos (unless they are selling portfolios). With the current policy uncertainty, it should still be possible to sell a TURQUOISE 7

8 project for 7% IRR, but the buyer will be more risk averse for pre-accreditation projects. Are yieldcos the predominant acquirers of solar assets at the moment? The yieldcos between them are the largest buyers in the market and compete aggressively amongst themselves. They also compete with a number of funds backed by hedge funds such as Magnetar, Primrose and Equinox. Theoretically the largest buyers should be the pension funds, but they are not very nimble and are more likely to acquire large portfolios in the secondary market in years to come. Do you think new yieldcos will come to market or will the incumbents continue to be most active? We have heard of people looking to set up yieldcos in different markets such as Africa. That could well happen and there are others looking at other technologies such as electricity storage. Electricity storage is not yet commercially viable in most markets, but if the project economics improve there might be some assets that could be put into a yieldco structure. It s unlikely we will see more of the standard European wind and solar yieldcos unless the issuer already owns a large portfolio and is looking to release cash for investment or deleverage. Turquoise is a London-based merchant bank specialising in Energy and Environment. The business was founded in 2002, making us one of the longest-established players in this field. Our main activities are: Corporate Finance: including Fundraising and M&A advisory for early and growth stage companies Investment Management: we are fund manager of the Low Carbon Innovation Fund and have provided investment advice to other funds and corporates. We have been ranked #1 Investor in Companies and #1 Financial Adviser in European VC/PE and M&A over the period (by Clean Energy Pipeline). We believe that Turquoise has worked on a wider range of transactions than any of our peers. The Turquoise team comprises people from backgrounds including banking, consultancy, utilities and industrial management. Collectively we have decades of experience in the Energy and Environmental sectors as advisers, investors and business founders. Turquoise has completed advisory assignments and investments in renewable energy, energy efficiency, transport, energy-from-waste, water and many other sectors. These transactions include financing technologies, project development and infrastructure. ABOUT CLEAN ENERGY PIPELINE company offers customized research and organizes senior executive forums. 8 TURQUOISE For more information: +44 (0) (EMEA) or (Americas) Subscription enquiries: ce.sales@vbresearch.com