24 th Annual Health Sciences Tax Conference

Transcription

1 24 th Annual Health Sciences Tax Conference Partnerships: emerging structures and current developments December 8, 2014

2 Disclaimer EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young LLP is a clientserving member firm of Ernst & Young Global Limited operating in the U.S. This presentation is 2014 Ernst & Young LLP. All rights reserved. No part of this document may be reproduced, transmitted or otherwise distributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP. Any reproduction, transmission or distribution of this form or any of the material herein is prohibited and is in violation of U.S. and international law. Ernst & Young LLP expressly disclaims any liability in connection with use of this presentation or its contents by any third party. Views expressed in this presentation are those of the speakers and do not necessarily represent the views of Ernst & Young LLP. This presentation is provided solely for the purpose of enhancing knowledge on tax matters. It does not provide tax advice to any taxpayer because it does not take into account any specific taxpayer s facts and circumstances. These slides are for educational purposes only and are not intended, and should not be relied upon, as accounting advice. Page 2

3 Presenters Dan Jensen Director, Federal Tax Research and Planning HCA Inc. Scott Luecke Ernst & Young LLP Minneapolis, MN David Miller Ernst & Young LLP Dallas, TX Page 3

4 Agenda Recent technical developments Section 704(c) proposed regulations Contributions of built-in loss property Netting vs layering Section 707 proposed regulations Sections 743 and 755 proposed regulations Mandatory basis adjustments Nonrecognition transfers Section 755(c) Section 751 proposed regulations Section 752 proposed regulations Stock acquisitions Allocation of personal vs corporate goodwill Use of partnership vehicles to raise capital Up-C structures and yield-based vehicles (REITs, MLPs and yieldcos) Page 4

5 Section 704(c) proposed regulations Page 5

6 General concepts: Section 704(c) Section 704(c) property contributed property with difference between Section 704(b) book basis (fair market value, or FMV) and adjusted tax basis of property on the contribution date This difference is the contributed property s Section 704(c) built-in gain or loss. Result partnership is required to allocate tax items of income, gain, loss or deduction related to Section 704(c) built-in gain or loss to the contributing partner Page 6

7 Section 704(c)(1)(C): built-in loss properties Built-in loss in contributed property shall be taken into account only in determining the amount of items allocated to the contributing partner. Except as provided in regulations, allocations to other partners are based on FMV of contributed property at date of contribution, not its tax basis. It is effective for contributions of property after October 22, Page 7

8 Section 704(c)(1)(C): proposed regulations Proposed regulations issued January 16, 2014 Generally, regulations are proposed to be effective when finalized. Regulations do not apply to: Reverse Section 704(c) items Reg liabilities Technical terminations Operative rules Only transferor is entitled to loss. Tax basis is FMV for determining allocations to other partners. Proposed regulations treat the tax basis in excess of FMV at contribution in a manner similar to Section 743 adjustments. Page 8

9 Section 704(c)(1)(C): proposed regulations Taxable transfer of property (i.e., sale of Section 704(c)(1)(C) property) Section 704(c)(1)(C) partner s basis adjustment is taken into account in determining the impact on such partner s income, gain, loss or deduction. Nonrecognition transfer of property (i.e., Section 721, Section 351 or Section 1031 transactions) A partner s Section 704(c)(1)(C) basis adjustment is generally transferred to the partnership s exchanged property. Special tracking rules are created for Section 721 transfers between upper-tier and lower-tier partnerships. Nonrecognition transfer of partnership interest A partner s Section 704(c)(1)(C) basis adjustment is generally transferred with a nonrecognition transfer of the partnership interest. Page 9

10 Reverse Section 704(c) property Section 704(b) revaluations partnership can elect to revalue its Section 704(b) book assets and partner capital accounts to reflect FMV of partnership assets upon the occurrence of certain events Reverse Section 704(c) gain or loss built-in tax gain or loss that will be specially allocated (using Section 704(c) principles) to partners with revalued capital accounts Prevents inherent gain or loss in partnership assets from shifting to new partner or upon change in percentage interests Page 10

11 Revaluations: netting vs layering A and B form partnership PS. A contributes land with a value of $100 and a basis of $50 and B contributes $100 cash. Book Tax Cash $100 $100 Land 100* 50 $200 $150 A 50% 50% Land $100 B A $100 $ 50 B $200 $150 PS Cash - $100 Land FMV - $100 Tax basis - $50 * Forward Section 704(c) in the land of $50 Page 11

12 Revaluations: netting vs layering When land worth is $80, C contributes $90 cash for a 1/3 interest. Book Tax Cash $190 $190 Land 80* 50 $270 $240 A 1/3 B C A $ 90 $ 50 B C $270 $240 1/3 PS $90 1/3 * Forward Section 704(c) in the land of $50 Reverse Section 704(c) of ($20) is this netted against the forward Section 704(c), reducing A s Section 704(c), or is it a separate layer allocated equally to A and B? Cash - $190 Land FMV - $80 Tax basis - $50 Page 12

13 Revaluations: netting vs layering Proposed regulations issued January 16, 2014 Generally, regulations are proposed to be effective when finalized. Netting versus layering Government concerned with distortions Proposed regulations would require layering Allocation of tax items among layers Can use any reasonable method Subject to: Anti-abuse rule Single method for each item of contributed property Reasonableness Page 13

14 Section 707 proposed regulations Page 14

15 Disguised sale general rules Disguised sale rules act to recharacterize all or part of the contribution to the partnership as a sale to the partnership. Transfers to a partnership from a partner and related transfers from the partnership to the partner occurring within the two-year period are presumed to be disguised sales. Contribution of encumbered property may cause a disguised sale. Exceptions to disguised sale for: Operating cash flow distributions Debt-financed distribution Reimbursement of pre-formation capital expenditures Assets Property contributor Joint venture (JV) Partnership interest and cash (or other property) Issue: should the contribution and distribution transactions be integrated and treated as a disguised sale of property to the partnership? Page 15

16 Disguised sale rules Proposed regulations issued January 16, 2014 Proposed to apply to transactions in which all transfers occur on or after the date final regulations are published Debt-financed distributions Reg (b) debt financed distribution to apply before Reg (d) reimbursable capital expenditure exception. Per the preamble, this rule ensures that the application of one of the exceptions in [-4] does not minimize the application of the debt-financed distribution exception. Reimbursements Property-by-property calculation of 20/120% rules, but how to deal with large partnerships? Capital expenditures don t reduce amount by benefit of tax deductions for the capital expenditures, but don t count deductible items for which capitalization is elected. No double dipping if contribution of debt-financed property and related qualified liability (QL). Page 16

17 Disguised sale rules New category of QL (category (E)) QL if: Not incurred in anticipation But incurred in connection with a trade or business if all (but immaterial) assets related to the trade or business are transferred No encumbrance requirement Anticipated reduction Ignore reductions subject to entrepreneurial risk If reduction within two years due to reduction in partner s or related parties net worth, presumed to be anticipated; disclosure required Page 17

18 Disguised sale rules Tiered partnership rule Debt-financed distribution rules apply to tiers Apply aggregate principles regarding lower-tier partnership debt for purposes of determining whether the upper-tier partnership s share of lower-tier debt is a QL New rule permits netting in partnership mergers. Reg rules IRS is considering a holding period requirement (e.g., lowest share of the debt within prior 12 months). Page 18

19 Sections 743 and 755 proposed regulations Page 19

20 General concepts: Section 743 adjustments Section 743(a) general rule: basis of partnership property is not adjusted when there is a sale or exchange of a partnership interest unless: A Section 754 election is in effect Or The mandatory basis adjustment rules apply The Section 743(b) adjustment is the difference between the buyer s outside basis and share of inside basis. If outside basis is higher positive adjustment If outside basis is lower negative adjustment Once the election is made, it is effective for all future transactions until it is revoked. A technical termination of the partnership under Section 708(b)(1)(B) terminates a Section 754 election. Revocation must be approved by the IRS Commissioner. Page 20

21 General concepts: Section 743 adjustments After October 22, 2004, the election to adjust basis is mandatory: In connection with a transfer of an interest in a partnership that has a substantial built-in loss (aggregate built-in loss in partnership property >$250,000) On distribution of property if there would be a substantial basis reduction under Section 734 if a Section 754 election were in effect (>$250,000 negative adjustment) Page 21

22 Mandatory basis adjustments Proposed regulations issued January 16, 2014 Proposed to be effective immediately Significant guidance on the application of the mandatory basis adjustment rules under Section 743 (in the case of substantial built-in losses) and Section 734 (in the case of substantial basis reductions) Clarify manner in which applied Tier partnerships; request for comments Page 22

23 Section 755: proposed regulations regarding allocation of Section 743 adjustments Once the Section 743(b) basis adjustment has been calculated, it must be allocated to the various partnership assets. Section 755 governs how the Section 743(b) basis adjustment is allocated. The objective is to allocate Section 743(b) adjustment to each class and within each class to reduce the difference between the FMV and adjusted basis of each of the partnership assets. Page 23

24 Section 755 Section 743 allocation Current Reg (b)(5) allocates Section 743 adjustment to assets in substituted-basis transactions (e.g., Section 351 of partnership interest). If increase in basis, only to built-in gain property If decrease in basis, only to built-in loss property Partnership interest purchasers in taxable transactions may allocate upward Section 743 adjustments to built-in gain assets and downward Section 743 adjustments to built-in loss assets from the same transaction. A Section 743 adjustment is calculated fresh for each transfer. To some extent, this has provided electivity between the available allocation schemes. Page 24

25 Section 755 Section 743 allocation Proposed change If a transferor has a purchased transaction Section 743 adjustment, a substitute-basis transaction transferee succeeds to transferor s basis adjustment. It is limited to amounts attributable to the acquired interest. It is intended to prevent electivity in the allocation of Section 743 adjustment. Page 25

26 Section 755(c) Section 755(c) from Enron No downward Section 734 adjustments to stock of partner/related; otherwise, Section 1032 eliminated the cost of the downward adjustment Reallocate that adjustment to other property; if insufficient other basis, gain Page 26

27 Section 751 proposed regulations Page 27

28 Section 751 Application of Section 751(b) to distributions A distribution to a partner may cause the partner, the partnership or both to recognize gain or income if the distribution alters the distributee s share of the partnership s hot and cold assets. Under Section 751, a partnership s hot assets include unrealized receivables as defined in Section 751(c) (e.g., property subject to depreciation recapture, cash method accounts receivable, etc.) and inventory as defined in Section 751(d). Thus, hot assets generally include any property that would produce ordinary income on a taxable sale of such property. Do partnership allocations affect the determination of a partner s share of the partnership s hot and cold assets? Do the partners disproportionately share any partnership items? For example, is the debt of the partnership allocated to the partners in the same ratios as the partners liquidation rights? Page 28

29 Section 751 proposed regulations Current guidance Determines a partner s interest in Section 751 property by reference to the partner s share of the gross value of the partnership s assets, not by reference to the partner s share of the unrealized gain or loss in the property Examples may be too broad or too narrow, which may allow a distribution that reduces a partner s share of the unrealized gain in the partnership s Section 751 property without triggering Section 751(b), and, conversely, may trigger Section 751(b) even if the partner s share of the unrealized gain in the partnership s Section 751 property is not reduced Proposed regulations May rely on these rules on or after November 3, 2014 Applies a hypothetical sale approach relying on the principles of Section 704(c) Many taxpayers already applying based on Notice Also makes changes to the Section 704(c) regulations mandating revaluations when the partnership owns Section 751 property immediately after the distribution Page 29

30 Section 752 proposed regulations Page 30

31 Section 752 economic risk of loss (EROL) Proposed regulations issued December 16, 2013 Generally, regulations are proposed to be effective when finalized. Recourse Obligations recognized if certain factors are present ( to establish that the terms of the payment obligation are commercially reasonable ) if not met, treat as if obligation did not exist Net worth requirement must retain commercially reasonable net worth throughout the term of the obligation or be subject to commercially reasonable contractual restrictions on transfers Periodic documentation Term coterminous with debt No money held Arm s-length consideration Liable up to full amount of payment obligation Recognized only to the extent of net value of obligor Page 31

32 Section 752 EROL Recourse Anti-abuse rules modified to address intermediaries, tiers, etc. to avoid bottom-dollar guarantees Nonrecourse revise tier 3 (T3) Eliminate T3 based on deductions or significant items T3 profits defined by reference to liquidation value Page 32

33 Stock acquisitions Page 33

34 Stock acquisitions allocation of goodwill How should consideration be allocated when acquiring a closely held corporation? A key employee may personally create and own goodwill independent of the corporate employer by developing client relationships. The corporate employer may benefit from the personal goodwill developed by the employee, but it does not necessarily mean the goodwill is an asset of the corporate employer, as the corporate employer cannot freely use the asset. An employee may transfer the personal goodwill to the employer through a noncompete agreement or other agreement that transfers the relationships to the corporate employer. Assuming no agreement is in place, consideration may be bifurcated between (i) stock of the corporation and (ii) other assets of the acquirer. Recent court cases supporting bifurcation of consideration Bross Trucking, Inc. v. Commissioner Estate of Adell v. Commissioner Page 34

35 Use of partnership vehicles to raise capital in the public markets Page 35

36 Up-C structures Page 36

37 Partnership initial public offering (IPO) structures Traditional IPO vs Up-C Traditional IPO Up-C Sponsors Public Sponsors Public Golden shares $100 $100 FMV = $100 Adjusted basis (AB) = $0 FMV = $100 AB = $0 IPO Co PubCo $100 OpCo Page 37

38 Up-C Exchange rights Exchange rights Sponsors interests exchangeable on 1:1 basis for stock in PubCo or cash equivalent Typically between Sponsors and OpCo Avoid treatment of OpCo interests as readily tradable on secondary market or its substantial equivalent Exchange consequences Taxable to sponsors as sale of partnership interest Section 743(b) adjustment for PubCo OpCo and any lower-tier partnerships have Section 754 elections in effect. Page 38

39 Up-C Tax receivable agreements (TRAs) Why are they paid? Typically, 85% of the realized (cash) tax benefits to PubCo from Section 743(b) step-up to PubCo s share of OpCo assets TRA payments treated as contingent sales proceeds for OpCo interests Creates additional step-up and deemed interest deductions for PubCo Increases TRA payment amounts incrementally over a period of years TRA payments for tax attributes other than Section 743(b) adjustments? Page 39

40 When to consider an Up-C? Insufficient qualifying income to be a real estate investment trust (REIT) or master limited partnership (MLP) Business valued based on earnings (not yield) Sponsors have deficit tax capital accounts Sponsor wants to be paid for step-up in tax basis Sponsor cannot consolidate with PubCo Page 40

41 Up-C Issues to consider Compensation arrangements Section 704(c) methods Section 197 anti-churning Potential to distribute IPO proceeds to sponsors in taxdeferred manner Page 41

42 Yield-based structures: REITs, MLPs and yieldcos Page 42

43 What is driving the current market interest in REITs, MLPs and yieldcos? There is a growing market demand for yield each vehicle pays high dividends in a low-yield environment. They may provide greater access to public debt and equity markets at a lower cost of capital than other structures. REITs do not pay corporate tax on distributed income, although their shareholders pay tax at ordinary income tax rates. MLPs do not pay corporate tax on income, although their partners pay tax at ordinary income rates. Yieldcos pay corporate tax, but are structured to have enough cost recovery to shelter income for 10+ years. Page 43

44 REIT structuring alternatives Page 44

45 Impact of REITs in the boardroom Multiple expansion for companies announcing REIT conversion transactions Pressure from activist shareholders Particularly for corporations that can convert to REIT status without a spin-off Increased boardroom interest in unlocking value from corporate real estate Recent announcements by several companies seeking to unlock value in various forms Reaction of popular press to REITs (both spin-offs and, in particular, nontraditional REITs) Legislative outlook Page 45

46 Triple-net (NNN) retail market trends Substantive cap rate compression in NNN retail market Over the past several years, average cap rates for net lease real estate have decreased from 7.25% in 2011 to 6.30% in the second quarter of Improved pricing for retail net leased assets has been driven by a variety of factors, including investors seeking yield in a low interest rate environment and the attractive credit profile and payment structure of net leased real estate assets. These factors have contributed to the ongoing decline in capitalization rates. These market dynamics and the opportunity they create to unlock value in real estate will not last indefinitely. 7.50% NNN retail cap rate trends 7.00% Cap rate 6.50% 6.00% 5.50% 2011 Q Q Q Q2 Source: RCA Analytics Page 46

47 Who is converting to REIT status? Company American Tower Caremark (spin-off) CBS Outdoor (spin-off) Corrections Corp of America CorEnergy Infrastructure Trust CyrusOne (Cincinnati Bell) EIAA Equinix GEO Group Hannon Armstrong Iron Mountain Lamar Advertising Lifetime Fitness (spin-off) Penn National (spin-off) Ryman Hospitality (Gaylord Entertainment) Weyerhaeuser Windstream (spin-off) Business Cell towers Skilled nursing Billboards (pending) Prison owner/operator Infrastructure Data centers Electric transmission and distribution Data centers Prison owner/operator Energy Document storage (pending) Billboards (pending) Fitness centers (announced) Casino/gaming Convention hotels Timber Telecommunications (pending) Page 47

48 Taxation of REIT and REIT shareholders REIT level Dividends paid deduction (no tax on operating income if all earnings are distributed) Built-in gains tax Prohibited transactions tax Shareholder level Dividends taxed as ordinary income (not eligible for reduced rate) Capital gain distributions taxable as capital gain Page 48

49 Summary of REIT qualification requirements A domestic corporation that elects to be taxed as a REIT must satisfy certain organizational tests, asset tests and income tests, and meet certain distribution requirements Organizational requirements Not closely held Calendar tax year Others Quarterly asset tests 75% asset test (real estate assets, cash, cash items and government securities) Others Annual income tests 95% income test (rents from or gain on sale of real property, dividends, interest) 75% income test (rents from or gain on sale of real property, interest on mortgages) Distribution requirements Distribute at least 90% of taxable income No undistributed C corporation earnings and profits at end of year Page 49

50 Potential REIT structures Tax-free spin-off with a REIT election Tax-free spin-off with merger into an existing REIT UpREIT IPO Joint venture with an existing REIT (or other investor) Paired share transaction (taxable) Page 50

51 Spin-off and conversion (e.g., Windstream and Penn National structure) Public shareholders* OpCo Lease agreement REIT (new entity) Note that for this structure to enable the REIT to qualify for REIT status, no single shareholder can own 10% or more of both the OpCo and REIT. * C corporation undertakes the formation and spin-off of a REIT owning real property. Page 51

52 Modeling potential value of a REIT Page 52

53 Spin-off and merger (e.g., The Timber Company/Plum Creek structure) Public shareholders* OpCo Propco (new entity) Merger Existing REIT C corporation undertakes the formation and spin-off of a Propco owning real property. Propco merges with an unrelated public REIT. If Propco is worth less than existing REIT, the second step merger must be unrelated to the spin-off. Any C corporation earnings and profits allocable to Propco must be distributed in cash or as a part cash/part stock dividend. * No shareholder can own 10% or more of both OpCo and Propco/REIT. Page 53

54 IPO (e.g., CyrusOne structure) Public Sponsor REIT (IPO vehicle) Lease OP units General partner interest and OP units Operating partnership (owns real property)* * Sponsor would lease the real estate from operating partnership. This approach generally does not implicate the related-party rent restrictions in the REIT tax rules. The OP units would contain an exchange right into REIT shares on a one-for-one basis (with the conversion being taxable). Page 54

55 OP unit transaction Public Sponsor Existing public REIT Lease OP units General Partner interest and OP units Operating partnership (owns real property)* * Sponsor would lease the real estate from the operating partnership. This approach generally does not implicate the related-party rent restrictions in the REIT tax rules. The OP units would contain an exchange right into REIT shares on a one-for-one basis (with the conversion being taxable). Page 55

56 Alternative to OP unit transaction Sponsor Nontraded REIT Lease General partner interest General partner interest Partnership (owns real property)* * Sponsor would lease the real estate from partnership, but would not have an exchange right. Alternatively, partnership could raise capital from a sovereign wealth fund, a private or public pension fund, or some other investor. Page 56

57 MLP alternative Page 57

58 Why use an MLP? Sponsor s perspective Top reasons sponsors may form MLPs A need for capital Desire for a valuation uplift Create a vehicle to execute a growth strategy Benefits to be gained by the sponsor(s) Lower cost of capital Improved cash flow Monetization of valuation uplift Potential to defer taxable gain Ability to retain control of strategic assets through general partner (GP) Access to capital markets Increase economic returns through incentive distribution rights (IDRs) Page 58

59 Qualifying as an MLP A publicly traded partnership will be taxed as a partnership only if at least 90% of the entity s gross income is: Interest Dividends Rent from real property or gain on the sale of real property Income and gains derived from the exploration, development, mining or production, processing, refining, transportation or marketing of any mineral or natural resource (including fertilizer, geothermal energy and timber) or industrial-source carbon dioxide, or the transportation or storage of certain fuels Other Page 59

60 MLP IPO Sponsor Public Lease* GP/LP units and IDR** MLP Real property * Lease of real estate from MLP should not implicate the related-party rent restrictions in the tax rules. ** Sponsor is the general partner of MLP and, therefore, controls MLP. Sponsor also retains incentive distribution rights (i.e., a promote with respect to the capital contributed by public). Page 60

61 Modeling potential value of an MLP Page 61

62 MLP economic structure considerations Distribution policy MLPs typically distribute all available cash each quarter. Distribution coverage ratio: rate of available cash to distributions paid. Common units IDRs Publicly traded; senior to other classes of units IDRs allow the holder to receive an increasing percentage of quarterly distributions after achieving target distribution thresholds. IDRs provide incentive for the GP to grow distributions. Subordinated units Subordinated units are not entitled to receive any distribution until the common units have received a minimum quarterly distribution. Page 62

63 Significant MLP formation tax matters Qualifying income Tax-efficient structure Built-in gains and tax shield Disguised sales Technical terminations Tax-sharing arrangements Change in tax status Page 63

64 Advantage REIT or MLP? REIT Publicly traded Y Y Liquidity Y Y Larger market Y N Institutional investors, exempt investors, foreign investors Y N More favorable market impression/larger following Y N Lower cost of capital Y N Single level of tax Y Y Avoid unrelated business taxable income (UBTI)? Effectively connected income (ECI)? Simple tax reporting Y N Congressionally created Y N Market driven distribution requirement Y Y Ability to retain earnings N N* Step-up to purchaser of interests N Y * While an MLP is not required to distribute any portion of its earnings under the tax law, the market generally requires MLPs to distribute a substantial amount of their earnings as a practical matter. Y MLP N Page 64

65 Advantage REIT or MLP? REIT MLP Ability to operate permitted assets Depends Y** Nontaxable contribution of assets (including through use of (umbrella partnership) UPREIT structure) Nontaxable conversion of C corporation Y N Nontaxable merger of C corporation Y N Income test Y Y May own any asset (subject to income test) N Y Return of capital based on accelerated depreciation N Y Y Y ** Critical distinction for transmission pipelines, but not an advantage for MLPs with respect to transmission or distribution of electricity, water, steam, etc. Page 65

66 Yieldco Page 66

67 What is a yieldco? A yieldco is a publicly traded corporation with no restrictions on asset composition or income composition. This makes a yieldco a potential investment vehicle for all types of asset classes. Valued is based on yield of cash distributions to the investors and on expectations of cash growth. Yieldco is governed by a board of directors. The sponsor s majority voting interest in a yieldco allows the sponsor to control investment and other operational decisions. Page 67

68 Taxation of yieldco and yieldco shareholders While yieldco is a corporate taxpayer, it generally obtains the benefit of a step-up in the tax basis of the assets contributed by the sponsor, which shields the entity from paying taxes for a number of years. This depreciation effectively makes yieldco a nontaxpaying entity, similar to a REIT or MLP, for as long as it can utilize basis step-up to eliminate taxable income. Asset classes typically include alternative energy (e.g., wind, solar) with short useful lives for tax purposes but long-term power purchase agreements. The basis step-up obtained by yieldco may also eliminate or minimize its earnings and profits. Distributions by a corporation are taxable as dividends to its shareholders only to the extent that the corporation has current or accumulated earnings and profits. Distributions that are not dividends constitute a nontaxable return of capital to the shareholders to the extent of the shareholders investment in the corporation. Page 68

69 Basic yieldco structure Sponsor Class B units (% economic interest) Yield LLC Class B common stock (% voting only) Public Class A common stock (% voting, 100% economic interest) Yieldco Class A units (managing member, % economic interest) Description Sponsor contributes existing projects to Yield LLC (a tax partnership). Yieldco sells ownership interest to public investors. Yieldco uses proceeds to buy interest in Yield LLC. Sponsor retains economic interest in Yield LLC. Sponsor has no economic interest in Yieldco, solely a majority voting interest. Assets Page 69

70 YieldCo recent examples NRG Yield Inc. (July 2013) TransAlta Renewables Inc. (August 2013) Pattern Energy Group (September 2013) Abengoa Yield (June 2014) NextEra Energy Partners (June 2014) SunEdison (TerraForm) (June 2014) Emerging markets (announced) Others in the wings Page 70

71 Comparison of yieldco to MLPs and REITs REIT MLP Yieldco Single level of tax Y Y N Flow-through of tax credit/losses N Y N Tax reporting 1099 K UBTI N Y N ECI N Y N Ability to make nontaxable contribution Withholding on distributions N (except with UPREIT) Y N (except with Up-C) Y Y Y Income test Y Y N Asset test Y N N Distribution requirement Y N N Step-up to purchasers of interests N Y N Operation of assets N Y Y Page 71

72 Questions? Page 72

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