alternative energy 101
TRANSCRIPT
Alternative Energy In The United States Presented to:
Disclaimer This document is not an offer to sell limited partnership interests (LP interests). Meridian Investments, Inc. (MII) is not soliciting an offer to buy LP interests, or any part thereof, in any state where such offer or sale is not permitted.
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LP interests will only be sold pursuant to an offering document. The sponsor and MII will each make available to each prospective purchaser the opportunity to ask questions and receive answers concerning the terms and conditions of an investment or any other relevant matters, and to obtain any additional information that a prospective purchaser may request (to the extent that the sponsor or MII, as the case may be, possesses such information or can acquire it without unreasonable effort or expense). A prospective purchaser having questions or desiring information about the LP interests should contact MII. Prospective purchasers must rely on their own examination of the information provided and are not to construe the contents of this document as investment, tax or legal advice. The nature of the investment should be reviewed by each prospective purchaser’s investment advisor, accountant, regulatory advisor and/or legal counsel. The Interests may be sold in a private placement only to persons who are (i) either "qualified institutional buyers" (each, a "Qualified Institutional Buyer") as defined in Rule 144A under the Securities Act ("Rule 144A") or institutional "accredited investors" described in Rule 501(c)(1), (2), (3) or (7) of Regulation D under the Securities Act ("Regulation D") and (ii) Qualified Purchasers as defined in the Investment Company Act of 1940. This document contains a brief discussion of the alternative energy market. Such discussion is not complete, may be changed and therefore should not be relied upon in any manner whatsoever. MII makes no representation or warranty, express or implied, as to the accuracy or completeness of the information contained in this document, and nothing contained herein is or shall be relied upon as a promise or representation by MII as to the past or future. Statements contained in this document that are not historical facts are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Also, words such as “planned”, “projections” or similar expressions indicate forward-looking statements and are not guaranteed. They are based on present beliefs, expectations and assumptions. Prospective purchasers should not place undue reliance on these forward-looking statements. MII does not undertake any obligation to update or revise any forward-looking statements as a result of new information, future events or otherwise. SECURITIES PRODUCTS SOLD 0R DISTRIBUTED THROUGH MERIDIAN INVESTMENTS, INC.,
MEMBER FINRA & SIPC
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Contents
Sections Executive Summary 4
Alternative Energy Overview 9
Solar Photovoltaic 19
Wind 27
Tax Equity Market 34
Appendices Tax Equity Financing Structures 39
Case Studies 44
Project Evaluation Check List 48
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Section I Executive Summary
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Executive Summary Meridian appreciates the opportunity to discuss the alternative energy space and opportunities within this industry
Through…
extensive experience in energy and structured finance a wide-ranging network of developers and technical resources unique and proven structuring capabilities
An ideal partner to…
originate investment and financing opportunities source and place capital along all points of a project’s life cycle and its capital structure advise investors on optimal entry points, as well as efficient structures
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Meridian Investments, Inc. MEMBER FINRA & SIPC Established in 1981, Meridian Investments, Inc. (MII) is a FINRA registered Broker/Dealer and member of SIPC, licensed to sell direct participation programs and other forms of securities
Leader in placing tax-advantaged investments codified by the IRC with corporate investors: Renewable Electricity (§45 & §48) Affordable Housing (§42) Alternative Fuels (§29) New Markets (§45D)
Total equity placements exceeding $15 billion since inception
Over 150 institutional clients including: Major money center banks Utility companies Global financial services firms National insurance companies Retail companies Government sponsored enterprises Technology corporations
Tax Equity Placements
Energy (~$6B)Housing (~$9B)Other (~$600MM)
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Meridian Asset Finance Meridian Asset Finance (MAF) is the structuring arm within the Meridian family of companies for alternative energy transactions and other asset classes
Together for over 14 years with over 55 years of combined experience
over $12 billion in assets financed over $15 billion of restructurings
Specializes in asset-based solutions for capital intensive industries
extensive expertise in structuring, finance, banking, leasing, accounting and tax financed a wide variety of assets, including power, transportation, manufacturing, infrastructure, real estate
and technology assets
Structured several “firsts” including
first corporate level letter of credit facility used for individual wind projects first synthetic lease funded in the high-yield bond market first real estate synthetic lease in Mexico
Developed numerous innovative structures for tax-efficient monetization
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Representative Transactions Meridian has consistently been active in the energy space, meeting sponsor and investor objectives 1998 Syndicated the first §45k (formerly §29) coal to synthetic fuel transaction Subsequently sponsored and raised equity for follow on §45k projects and was active in the
secondary marketplace
2004 Structured and Arranged Tax Equity on the first project based levered wind transaction
2005 Structured and Arranged Tax Equity on first multi-asset wind fund which featured cross-collateralization of Power Purchase Agreements (PPA) to provide more favorable debt financing terms to enhance the project returns of the tax equity and project developer/sponsor
2007 Closed first wind project in US market to utilize pre-paid PPA
2008 Closed first financing facility for distributed generation residential solar portfolio
2010 Closed first financing facility for distributed generation projects using commercial scale fuel cell technology
2012 Engaged by Google to advise on renewable energy tax credit investment opportunities
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Section I Alternative Energy Overview
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Overview Of Alternative Energy In The US Commodity price volatility, environmental concerns, economic growth and a changing political landscape have all contributed to the growing importance of alternative energy in corporate and personal affairs
Energy security and low-carbon based economic growth and job creation Tax incentives have been the main economic driver behind federal government incentives At the state level, Renewable Portfolio Standards (RPS) are the basic initiatives to further capacity
growth
Estimates show that some 123GW will be needed to meet existing RPS
Will require 456 TWh by 2030 With current capacity estimated at 68GW, an additional 60GW expected in next five years (including
capacity above and beyond RPS targets in some regions) Over next five years, about $139B to be spent on asset costs, R&D and corporate level investments
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Alternative Energy Technologies In The US Type Variation Highlights
Wind Onshore Basic technology; decent to good capacity factor (~35%); production variability; declining capital costs
Offshore Transmission constraints; regulatory approvals; good capacity factor (~40%); high capital costs
Solar Photovoltaic Basic technology; scalability; decent efficiency (~15%); little production variability; high yet declining capital costs
Solar Thermal Slightly higher efficiency; large utility scale; high capital costs
Biomass Thermal Base load type facilities; long construction lead times; feedstock concerns
Biochemical
Waste-to-Energy Environmental impact
Geothermal Dry steam Drilling risk; high capacity factors; long development and construction lead times; geographically concentrated
Flash steam
Hydro Large/Dam Storage Environmental impact; regulatory issues
Small/Run-of-river Geographically concentrated; resource variability
Fuel Cell Distributed generation; base load technology; high capital costs
Next Generation Algae; Storage; Marine/Wave
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Demand Side Incentives To date there is no standard, uniform national policy intended to directly stimulate demand for alternative energy usage
Instead, 29 states, as well as the District of Columbia and Puerto Rico, have established RPS mandates in various forms, including carve-outs for specific technologies
Eight additional states have renewable portfolio goals
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Supply Side Incentives Federal government incentives have mainly come in the form of tax incentives aimed at alleviating some of the financing burden for capital intensive technologies.
Incentive Highlights Depreciation 5 year MACRS accelerated depreciation
Bonus depreciation (currently 50%)
Tax Credits §45 Investment Tax Credit 30% of eligible project capital costs 15% reduction in basis Must be operational by 12/31/2016
§48 Production Tax Credit 2.2¢/kWh for 10 years from start of operations Inflation based adjustment Must be operational by 12/31/2012
Grant §1603 Grant in lieu of §45 Investment Tax Credit Established by American Recovery and Reinvestment Act of 2009 (ARRA) Must have qualified by 12/31/2011 AND must be operational by 12/31/2012
Loan Guarantee §1703
“…innovative clean energy technologies…unable to obtain conventional private financing”
§1705
“…temporary program…for certain renewable energy systems…
Financial Institution Partners Program (FIPP) Public private partnership; DoE pays credit subsidy cost of guarantee and provides guarantee for up to 80% of loan
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Tax Credit Overview Tax credits are congressionally mandated subsidies that support a public purpose such as affordable housing or alternative energy
Investment Tax Credit
Allocated Tax Credit Credit eligibility is allocated to developers/sponsors by government agencies, and have national caps in total allowed amount Credit production based on amount of qualified investment and allocated over time as program remains in compliance Low-Income Housing Tax Credit (LIHTC) (§42) New Markets Tax Credit (New Markets or NMTC) (§45D)
Non-Allocated Tax Credit There is no allocation process for these programs and, similarly, no national cap Tax Credit based on amount of qualified investment, but earned in the first year when project in placed in-service Rehabilitation Tax Credit (Historics) (§47) Energy Investment Tax Credit (ITC) (§48)
Production Tax Credit (PTC)
Credits are earned from the production and sale of electricity from a qualified renewable energy resource; no government allocations or national caps Wind, Geothermal, Biomass (“PTC’s”) (§45) – (ARRA allows for the election of either a PTC or ITC)
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Overview Of Tax Credit Programs LIHTC ITC PTC
Program §42 Low-Income Housing Tax Credit (“LIHTC”)
§48 Renewable Energy Investment Tax Credit (“ITC”)
§45 Renewable Energy Production Tax Credit (“PTC”)
Purpose Development of affordable rental housing
Installation of solar, wind, biomass and fuel cell power generation equipment
Production of renewable energy from wind, geothermal, and biomass
Inception 1986
1980 (2005) 1992
Sunset Permanent 2016 (Solar) 2013 (Wind, Geo & Biomass)
2013 (Wind) 2014 (Geo, Biomass)
Note: §45 historically renewed in 1-2 year increments
AMT Use Yes
Yes Yes – first 4 years
Carry Back/Forward
1 Year/20 years 1 Year/20 years 1 Year/20 years
Credit Delivery Period
10 years 1 year 10 years
Compliance Period
15 years 5 years None
Credit Rate 4% or 9% of qualified development expenses
30% of cost of renewable equipment 2.2¢ / kwh of energy sold, indexed for inflation (1.1¢ open-loop biomass)
Tax Basis Reduction
No Yes – by 50% of credit amount No
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Overview Of Tax Credit Structures Multi-Investor Fund Sale-Leaseback Partnership Flip
Tax Credit LIHTC ITC ITC, PTC Fund Structure Limited Partnership- Investor is
limited partner in fund partnership with the syndicator as the general partner
Typically a single asset LLC or LP Typically a single asset LLC or LP
Asset Level Structure
Limited Partnership- The upper tier fund is the limited partner in the property-level partnership, with the developer as the general partner
Sale-Leaseback- Investor purchases the project from the developer and then leases it back to the developer; lessee has the option to repurchase the asset at the end of lease
Limited Partnership- Investor is limited partner in the project partnership, with the cash equity investor as the general partner; the cash equity investor could be the sponsor or a third party investor
Sponsor Syndicator Project Developer (typically has ongoing exposure to economics of the asset)
Project Developer (typically has ongoing exposure to economics of the asset)
Co-Investors Other tax credit driven equity investors pari passu
Cash equity investor or sponsor, with return subordinate to tax equity; possibly other tax equity investors pari passu
Cash equity investor, with return subordinate to tax equity; possibly other tax equity investors pari passu
Structure Timeframe
15-17 years 15-20 years (Typically matches term of PPA)
15- 20 years (Typically matches term of PPA)
Early Termination Options
Investor option to put units back to syndicator after the tax credit period
Sponsor-held early buyout option at fair market value, typically no sooner than completion of 5th year
Sponsor-held call option on tax equity at pre-determined fair market value after flip date
Exit Partnership dissolves or investor sells interest
Lease terminates or sponsor exercises option
Sponsor exercises option or asset is sold after flip date
Residual Value Typically minimal Fair Market Value buyout Fair Market Value Return Components
Tax Credits Depreciation
Tax Credits Depreciation Rental payments under lease Residual Value/FMV Buyout
Tax Credits Depreciation Cash flow from project Residual Value/FMV Buyout
Allocation of Return Components
Pro rata share of tax credits and depreciation
100% of tax credits and depreciation based on ownership of asset plus cash flow from rent as negotiated under the terms of the lease
Tax investor typically receives 99% of tax and cash benefits until target yield is achieved, at which point allocations flip with tax investor typically receiving 5% of tax and cash benefits
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Risk Profile Of Federal Tax Credit Investments LIHTC
Multi-Investor Fund ITC
Partnership-Flip, Sale-Leaseback PTC
Partnership-Flip
Construction & Lease Up Risk Likelihood Medium None None Impact Low None None Timeframe 12-24 months 3-12 months 3-12 months Drivers Uncertainty of completion and lease up
timing; cost overruns and D/S coverage Equity in post construction Equity in post
construction Mitigants Developer guarantees, reserves, equity
hold backs, adjusters N/A N/A
Compliance Risk
Likelihood Low Low None Impact High High None Timeframe 16-18 years 5 years None Drivers Units not providing housing to qualified
tenants Project ceases to be a “qualified energy facility”; change in ownership
N/A
Mitigants Compliance reviews at lease up and every 2 years after
Default provisions, performance measures, coverage ratios, reserve accounts, forbearance and/or stand-till provisions
N/A
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Risk Profile Of Federal Tax Credit Investments LIHTC
Multi-Investor Fund ITC
Partnership-Flip, Sale-Leaseback PTC
Partnership-Flip
Tax Risk Likelihood Medium Low Medium Impact Low Low Low Timeframe Lifetime of structure Lifetime of structure Lifetime of structure Drivers Change in investor’s tax position
Change in tax law Ownership structure
Change in investor’s tax position Change in tax law Ownership structure
Change in investor’s tax position Change in tax law Ownership structure
Mitigants 20 year carry forward on credits Private Letter Rulings and revenue procedures from IRS, audit history, tax opinions
20 year carry forward on credits Upfront delivery of credit Private Letter Rulings & revenue procedures from IRS, audit history, tax opinions
20 year carry forward on credits Private Letter Rulings & revenue procedures from IRS, audit history, tax opinions
Operating Risk
Likelihood Medium Low to high depending on technology and available resource
Low to high depending on technology and available resource
Impact Low Medium High Timeframe 16-18 years full term Lease: 15-20 years full term
5-10 years with EBO exercised Partnership: 15-20 years full term 5-10 years with call exercised after flip
15-20 years full term 10-15 years with call exercised
Drivers Property management: vacancy, expenses, maintenance, debt service coverage
Equipment, resource performance, energy prices, credit of off-take, debt service, operating expense
Equipment, resource performance, energy prices, credit of off-take, debt service
Mitigants Reserves, developer guarantees, strong property management, asset management by syndicator, low/no hard debt, subsidies, advantage to market rates
O&M contract, manufacturer guarantees, PPA from credit worthy off-taker, hedging, third party insurance
O&M contract, manufacturer guarantees, PPA from credit worthy off-taker, hedging, third party insurance
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Section III Solar Photovoltaic
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Solar PV Technology Overview Solar photovoltaic (PV) converts solar radiation directly into electricity using panels consisting of solar cells made of various types of material
Crystalline Silicon Thin Film Higher material cost Lower material cost Higher efficiency Lighter weight Longer track record More flexible and stronger Area needed per kW = 7-8m2 Area needed per kW = 10-15m2
Monocrystalline Image: SunPower
16 – 27% Efficiency
Polycrystalline Image: Kyocera
14 – 20% Efficiency
4 – 12% Efficiency
10 – 17% Efficiency
7 – 20% Efficiency
Amorphous Silicon Image: Sharp
Cadmium telluride Image: First Solar
Copper indium (gallium) diselenide Image: HelioVolt
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Solar PV Technology Overview Solar PV costs have steadily declined and are expected to continue to do so
The US benefits from an “experience curve” from European markets Commercial and residential projects benefit from scope and size, but costs are expected to converge
Source:Bloomberg New Energy Finance
0
1
2
3
4
5
6
7
8
9
2007 2008 2009 2010 2011 2012 2016 2020
$/W
Average PV System Cost
Germany CA Commercial CA Residential Global Utility Global Commercial Global Residential
Reported & Actual Projected
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Solar PV Resource
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Solar PV Capacity Despite weaker PV solar resource, Germany has the highest installation rate…
Country 2010 Capacity (MW) % Of Global Capacity 1 Germany 17,320 44% 2 Spain 3,892 10% 3 Japan 3,617 9% 4 Italy 3,502 9% 5 United States 2,519 6% 6 Czech Republic 1,953 5% 7 France 1,025 3% 8 China 893 2% 9 Belgium 803 2%
10 South Korea 573 1%
…but future installations are expected to be more equally distributed with the US gaining
Source: Bloomberg New Energy Finance
-
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
2007 2008 2009 2010 2011 2012 2013 2014
MW
Annual Installed PV Capacity
Germany Italy Japan USA China Spain
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US State-level Solar Incentives Several states have an RPS with solar and/or distributed generation provisions, including carve-out, multiplier and double/triple credit elements
Source: Database of State Incentives for Renewables & Efficiency
DC
Renewable Portfolio Standard Renewable Portfolio Goal
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Projected Solar Expansion In The US Commercial and utility scale PV are expected to dominate the expansion of solar throughout the US in the coming years
Source: Bloomberg New Energy Finance
0
5
10
15
20
25
30
35
40
45
50
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Solar Thermal Commercial & Utility PV > 10kW Residential PV <= 10kW
GW
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Solar Opportunities Despite recent activity and events, the solar market remains fragmented, while demand will largely be driven by RPS solar carve outs
Best positioned developers
Multi-regional or national presence to adapt to changing state policies and fluid markets Strong marketing and origination Flexible with regard to market segment (commercial and utility) Engineering, Procurement & Construction (EPC) capabilities
Other considerations
Pretenders vs. Contenders Panel manufacturers Ability to absorb market volatility Waiting for 2012 to crystalize
Res
iden
tial
Corporates
Ver
tical
ly In
tegr
ated
Man
ufac
ture
rs
Joint Ventures
Utilities
Pure Play Solar Developers
Independent Power Producers
?
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Section III Wind
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Wind Technology Overview Wind technology converts wind into electricity using a relatively simple generation method
In the past decade, the average turbine size (in MW) has increased by over 100%
Source: American Wind Energy Association
0.000.200.400.600.801.001.201.401.601.802.00
1998-99 200-01 2002-03 2004-05 2006 2007 2008 2009 2010Average Turbine Size (MW) 0.71 0.88 1.21 1.43 1.6 1.65 1.66 1.74 1.79# of Turbines 1,425 1,987 1,757 1,960 1,532 3,190 5,029 5,733 2,855Annual Capacity (MW) 1,016 1,758 2,125 2,803 2,454 5,249 8,350 9,993 5,113
MW
Average Turbine Size (US)
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Wind Technology Overview Technological improvements have offset seasonal weather patterns and recent curtailment
Projects 6 12 41 85 98 118 144 169 212 256 358 338 MW 549 1,005 1,545 3,285 3,826 5,182 5,894 8,726 10,712 15,686 24,403 31,986
Source: National Renewable Energy Laboratory
Manufacturers with large, diversified balance sheets and reliable track records dominate Manufacturer 2005 2006 2007 2008 2009 2010
1 GE 1,433 1,146 2,342 3,585 3,995 2,543 2 Siemens 0 573 863 791 1,162 828 3 Gamesa 50 50 494 616 600 564 4 Mitsubishi 190 128 356 516 814 350 5 Suzlon 25 92 197 736 702 312 6 Vestas 700 463 948 1,120 1,488 221 7 Acciona 0 0 0 410 204 99 8 Clipper 3 0 48 470 605 70 9 REPower 0 0 0 94 330 68 10 Nordex 0 0 3 0 63 20
Source: American Wind Energy Association
0%
5%
10%
15%
20%
25%
30%
35%
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Cap
acity
Fac
tor
Average Cumulative Sample Capacity Factors
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Wind Resource
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Wind Capacity After leading the world in wind capacity, the US is now second behind China, but firmly so
Country MW Capacity (2010) % of Global 1 China 44,781 22% 2 US 40,267 20% 3 Germany 27,364 14% 4 Spain 20,300 10% 5 India 12,966 6% 6 France 5,961 3% 7 UK 5,862 3% 8 Italy 5,793 3% 9 Canada 4,011 2% 10 Portugal 3,837 2%
Source: National Renewable Energy Laboratory
Within the US, Texas is still at the top, despite congestion issues State 2010 Annual State 2010 Cumulative
1 Texas 680 Texas 10,089 2 Illinois 498 Iowa 3,675 3 California 455 California 3,253 4 South Dakota 396 Minnesota 2,205 5 Minnesota 396 Washington 2,104 6 Oklahoma 352 Oregon 2,104 7 Wyoming 311 Illinois 2,045 8 Indiana 303 Oklahoma 1,482 9 Oregon 283 North Dakota 1,424 10 North Dakota 221 Wyoming 1,412
Source: American Wind Energy Association
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Projected Wind Capacity In The US Historically, wind in the US has tracked very closely to PTC availability
Source: Department of Energy, American Wind Energy Association, Bloomberg New Energy Finance
0
2
4
6
8
10
12
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
GW
Annual Built Capacity No PTC Extension 3-Year Extension (2012) 3-Year Extension (2013)
PTC Expiration
Estimated
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Wind Opportunities Converging December 31st, 2012 deadline for both 1603 Grant projects and PTC qualification should lead to heightened activity in 2012; especially first half of year
Best positioned developers
Strong development track record Well capitalized Financing alternatives and network Deep and flexible pipeline Ample power offtake alternatives
Other considerations
Pretenders vs. Contenders Turbine manufacturers Merchant power Political, legislative, regulatory and policy issues
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Section V Tax Equity Market
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Tax Equity Trends Many tax investors have either exited the market or have disappeared during the financial collapse
Total investor pool dropped from 25+ to as low as 5-10; today at about 15
Despite tax investor exit and decreased demand, After-Tax tax equity returns started to trend down by 2009
Unlike LIHTC yields which continued to increase through end of 2010
Grant option effectively allowed developers to use debt financing instead of tax equity
Some statistics show that as much as 65% of developers have chosen that route
The decreased demand by tax equity was met with a decreased supply of tax credits
Sunset of 1603 grant expected to mimic trend seen in LIHTC yields from 2008 to 2010
2012 yields for PTC/ITC projects are expected to increase substantially
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0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
2007 2008 2009 2010 2011 2012
Yield Comparison1
LIHTC Wind UST BB BBB
Tax Equity Yield Trends
1 UST, BB & BBB yields for ten (10) year term; LIHTC & Wind yields are pre-tax equivalents assuming 35% tax rate
ARRA Enacted
Lehman Bankruptcy
Expected Trend
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Tax Equity Participants Project Finance Groups Focus on pre-tax yields with a higher percentage of benefits coming from
cash benefits Prefer longer investment durations to keep cash at work Prefer to limit debt and cash equity in capital stack, resulting in higher
investment as percent of project cost Usually have in-house expertise to fully underwrite the transaction
independently
Pure Tax Equity (Passive Tax Equity) Focus on tax benefits and limiting project exposure with a higher
percentage of benefits coming from tax benefits Prefer shorter duration with quick recovery of principal Rely on third parties for due diligence and underwriting
Strategic Investors Look to fully own and operate projects
As renewables yields rise and LIHTC yields keep dropping, many insurance companies that have entered the tax equity market are expected to start looking at renewables
Investment considerations for insurance companies include… Most LIHTC investments are done through multi-investor funds Often consider outside investment guidelines to invest more than 25% of
project’s equity Look to avoid consolidation for accounting purposes
There are currently about 25 active tax investors in alternative energy, including…
Representative insurance companies include…
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Tax Equity Capacity After a steep drop, the availability of tax equity has picked up again
Source: Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
But the funding gap for needed capital is expected to increase
Source: Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
$3.20
$6.10
$3.40
$1.20
$3.70
$0
$1
$2
$3
$4
$5
$6
$7
2006 2007 2008 2009 2010
Am
ount
(in
bill
ions
) Historic Tax Equity Investments
$31.10 $41.20
$48.90
$24.70 $30.28 $34.10
$6.40
$10.92 $14.80
$0
$10
$20
$30
$40
$50
$60
2011 2012 2013
Inve
stm
ents
(in
bill
ions
)
Gap In Project Financing
Project Financing Demand Project Financing Supply
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Appendix I Tax Equity Financing Structures
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Partnership Flip Tax Investor must possess sufficient taxable income to monetize project’s tax benefits Tax Investor contributes equity and typically receives 99% of tax and cash benefits Once Tax Investor’s After-Tax IRR (Flip Yield) is achieved, allocations flip down with Tax Investor
typically receiving 5% of tax and cash benefits Allows for significantly reduced Fair Market Value (FMV) of residual benefits and efficient Tax Investor
exit Post-Flip FMV Sponsor call option on tax equity (5-year restriction); no Tax Investor put option to
Sponsor Target flip date normally corresponds to the end of tax credit period for PTC (10 years) or end of tax
credit compliance period for ITC (5 years) PayGo variation Can be used with or without project debt
Special Allocation
Of Tax & Cash
ITC/Grant Or PTCs
Debt
Sale Of Power
Sponsor Tax
Investor
Project Company
Offtake or Power Market
Project Lender
US Treasury
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Partnership Flip Tax Investor Considerations
Wind Safe Harbor – (Rev. Proc. 2007-65 as revised) Specific to wind/PTC transactions, but widely accepted for other renewable transactions, as well as, with ITC transactions 20% minimum unconditional investment with 75% of: (i) fixed capital contributions plus (ii) reasonably anticipated contingent capital
contributions, fixed and determinable obligations that are not contingent in amount or certainty of payment. Maximum 99%/1% allocations No guarantees of PTCs or of wind resource (except weather derivate contract) and no Sponsor loans By following ruling, structure benefits from protection from audit
Investment has fairly short average life due to front-end tax benefits and reflects tax credit delivery or recapture periods (5-10 years); hold period shorter than Lease structure where Tax Investor typically holds the project for the term of the lease (usually 20 years).
Preferred return feature (Flip) can protect Tax Investors from the intermittency or potential volatility inherent in wind projects, credit risk in distributed generation solar, fuel supply deficiency in biomass, etc.
Tax Investor has higher probability of achieving targeted return; if project underperforms, reducing corresponding tax credits or cash benefits, Pre-Flip allocations remain until Tax Investor meets Flip Yield
Hypothetical Liquidation at Book Value (HLBV) accounting Assumes project company is liquidated at book value and records change in such amount (plus distributions, less contributions) as income
from investment since the date previously measured Negative consequence of producing After‐Tax losses in periods where no tax credit is available, but depreciation is available Not an issue for PTC transactions since tax credit is available in 10 year period Pre-Flip producing positive after‐tax earnings ITC transactions have only one year with the tax credit producing positive return; with remaining years potentially producing losses Special allocation of proceeds to Tax Investor upon early liquidation can alleviate problem; designed to decrease by anticipated flip
date resulting in participation in liquidation proceeds as originally contemplated
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Lease Tax Investor must possess sufficient taxable income to monetize project’s tax benefits Lessor (Tax Investor) purchases project for current FMV and leases back to Lessee (Sponsor) pursuant to
long term lease - typically equal to project’s life (20 years) Lessor, as owner of the project, is entitled to 100% of tax benefits including credits and depreciation Through lease, Lessee retains operating control and “quiet enjoyment” over the leased asset Lessee has purchase or renewal rights at Lease end; can have predetermined early buy-out option
(EBO) Lessee receives any project cash flow in excess of rent Does not work for PTC (can only be utilized with ITC/Grant) Can be used with or without project debt
Rent
ITC/Grant
Debt
Sale Of Power
Sale Leaseback
Sponsor
Lessee (Project
Company)
Offtake or Power Market
Project Lender
US Treasury
Tax Investor
Lessor (Special
Purpose Entity)
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Lease Tax Investor Considerations
IRS Guidelines for Advance Ruling Purposes – (Rev. Proc. 2001-28, 2001-19 I.R.B. 1156) Minimum equity investment of 20% equity investment at inception and throughout lease term Maximum lease term of 80% of asset’s expected remaining useful life No Lessee loans or guarantees of Lessor’s debt No Lessor put option to Lessee No bargain purchase options; any purchase option in favor of Lessee must be FMV-based No limited use property – use of asset by Lessor or person other than Lessee must be commercially feasible
Leveraged lease accounting (if applicable) Absent Lessee exercise of EBO, Tax Investor typically holds investment for entire Lease term/life of
project, but due to front-end tax benefits, investment has shorter average life Cash component of overall Tax Investor return (as a percentage of total benefits) can be higher than in
Partnership Flip structure To claim PTCs, must be owner, operator and producer of electricity; therefore, Lease structure does not
work for PTCs Tax equity often represents a larger percentage of overall project capitalization than Partnership Flip 90 day post in-service date window to execute sale and lease back Structure has a long history and has been successfully utilized in non-renewables related applications
44
Appendix II Case Studies
45
Tax Equity Return Analysis - Case Study Solar Transaction XYZ
2MW in California; 25 year PPA with Investment Grade Offtake $4.5/W Cost = ~$9MM Total Capex 100% of Total Capex is Grant eligible July 1st, 2012 in-service date
Lease 10% After-Tax IRR 50% Bonus Depreciation 1.2X Rent Coverage 0% Residual
Partnership
10% After-Tax IRR Flip Target Pre-Flip Cash & Tax Allocations: 99%/1% Post-Flip Cash & Tax Allocations: 5%/95% 50% Bonus Depreciation Flip After Year 6
46
Partnership Scenario Tax Investor Partnership Accounting
Year Ending Pre-Tax Cash
Beginning HLBV
Ending HLBV
Change in HLBV
Pre-Tax Book
Income Provision For Taxes
Tax Effect Of Grant
And Basis Reduction
Allocated Tax Credit
After-Tax Book Income
Dec-12 -2,880,480 0 2,700,845 2,700,845 -179,635 62,872 0 0 -116,763 Dec-13 483,737 2,700,845 2,286,408 -414,437 69,300 -24,255 92,496 0 137,541 Dec-14 521,698 2,286,408 2,031,317 -255,091 266,607 -93,313 92,496 0 265,791 Dec-15 538,437 2,031,317 1,693,287 -338,030 200,406 -70,142 92,496 0 222,760 Dec-16 555,845 1,693,287 1,304,380 -388,907 166,938 -58,428 92,496 0 201,005 Dec-17 573,948 1,304,380 838,492 -465,888 108,060 -37,821 92,496 0 162,735 Dec-18 593,212 838,492 341,158 -497,334 95,878 -33,557 0 0 62,320 Dec-19 30,970 341,158 325,895 -15,263 15,707 -5,498 0 0 10,210 Dec-20 32,019 325,895 306,692 -19,202 12,817 -4,486 0 0 8,331 Dec-21 33,108 306,692 285,075 -21,617 11,491 -4,022 0 0 7,469 Dec-22 34,238 285,075 260,761 -24,314 9,924 -3,473 0 0 6,451 Dec-23 35,412 260,761 233,437 -27,324 8,088 -2,831 0 0 5,257 Dec-24 36,631 233,437 202,757 -30,680 5,951 -2,083 0 0 3,868 Dec-25 37,896 202,757 168,340 -34,417 3,479 -1,218 0 0 2,261 Dec-26 39,210 168,340 129,763 -38,577 634 -222 0 0 412 Dec-27 40,575 129,763 95,109 -34,654 5,921 -2,072 0 0 3,849 Dec-28 41,992 95,109 89,257 -5,852 36,139 -12,649 0 0 23,491 Dec-29 43,463 89,257 83,040 -6,217 37,246 -13,036 0 0 24,210 Dec-30 44,991 83,040 75,561 -7,479 37,512 -13,129 0 0 24,383 Dec-31 46,578 75,561 64,086 -11,475 35,103 -12,286 0 0 22,817 Dec-32 48,225 64,086 51,701 -12,385 35,841 -12,544 0 0 23,296 Dec-33 49,936 51,701 39,271 -12,430 37,506 -13,127 0 0 24,379 Dec-34 51,713 39,271 26,836 -12,435 39,278 -13,747 0 0 25,531 Dec-35 53,558 26,836 14,403 -12,433 41,124 -14,394 0 0 26,731 Dec-36 55,473 14,403 1,971 -12,432 43,042 -15,065 0 0 27,977 Dec-37 57,463 1,971 0 -1,971 55,491 -19,422 0 0 36,069 Totals 1,199,847 0 1,199,847 -419,946 462,480 0 1,242,380
47
Lease Scenario FASB 13 – Statement Of Earnings
Year Ending
Lessor's Net Investment At End Of Year
Total Cash Flow
Pre-Tax Cash Flow Allocated To Investment
Pre-Tax Income Allocated At
9.91%
Pre-Tax Income
Without Fee Amortized
Fee
Tax Effect Of Pre-Tax
Income Investment Tax Credit
After-Tax Income
Dec-12 4,856,947 -4,629,308 1,728,407 227,639 228,474 -836 -71,397 0 156,241 Dec-13 4,936,581 407,186 -79,634 486,820 487,988 -1,168 -152,688 0 334,132 Dec-14 4,991,182 439,140 -54,601 493,741 495,146 -1,405 -154,859 0 338,882 Dec-15 5,036,766 453,230 -45,584 498,814 500,450 -1,636 -156,450 0 342,364 Dec-16 5,071,811 467,883 -35,045 502,928 504,804 -1,876 -157,740 0 345,188 Dec-17 5,094,614 483,121 -22,803 505,924 508,048 -2,123 -158,680 0 347,244 Dec-18 5,102,886 499,336 -8,273 507,609 509,984 -2,375 -159,208 0 348,401 Dec-19 5,094,476 516,171 8,410 507,761 510,389 -2,628 -159,256 0 348,505 Dec-20 5,066,982 533,648 27,494 506,154 509,034 -2,880 -158,752 0 347,402 Dec-21 5,017,726 551,795 49,255 502,540 505,664 -3,125 -157,618 0 344,921 Dec-22 4,943,728 570,636 73,998 496,638 499,996 -3,358 -155,767 0 340,871 Dec-23 4,841,668 590,200 102,060 488,139 491,713 -3,574 -153,102 0 335,037 Dec-24 4,707,852 610,513 133,815 476,697 480,462 -3,764 -149,513 0 327,184 Dec-25 4,538,175 631,605 169,677 461,928 465,849 -3,921 -144,881 0 317,047 Dec-26 4,328,073 653,507 210,103 443,404 447,436 -4,032 -139,071 0 304,333 Dec-27 4,072,474 676,249 255,598 420,651 424,737 -4,086 -131,934 0 288,716 Dec-28 3,765,750 699,865 306,724 393,140 397,209 -4,068 -123,306 0 269,834 Dec-29 3,401,650 724,387 364,100 360,287 364,249 -3,962 -113,002 0 247,285 Dec-30 2,973,241 749,852 428,409 321,442 325,188 -3,746 -100,818 0 220,624 Dec-31 2,472,830 776,294 500,411 275,884 279,281 -3,397 -86,529 0 189,354 Dec-32 1,891,889 803,753 580,941 222,812 225,702 -2,890 -69,884 0 152,928 Dec-33 1,220,962 832,267 670,926 161,341 163,532 -2,191 -50,604 0 110,737 Dec-34 449,573 861,877 771,389 90,488 91,754 -1,266 -28,381 0 62,107 Dec-35 286,782 200,995 162,791 38,204 38,738 -533 -11,983 0 26,222 Dec-36 74,360 232,417 212,422 19,995 20,288 -293 -6,271 0 13,724 Dec-37 0 78,768 74,360 4,408 4,474 -66 -1,382 0 3,025 Totals 9,415,387 6,585,354 9,415,387 9,480,588 -65,202 -2,953,077 0 6,462,309
48
Appendix III Project Evaluation Check List
49
Project Evaluation Check List Review of Overall Project Concept Review of Sponsor/Developer, Offtakers and
Technology Providers Project Viability Track Record in Renewable Energy Specific Renewable Sector List of Prior Projects / Installed MW Renewable Energy Resource Financial Strength Technology Ownership Structure Location Business Model Feedstock Asset Management Capabilities Offtake & Power Purchase Agreement (PPA) Future Direction of Company Interconnection and Transmission Alignment with Investor’s Investment Objectives Review of Financing Structure Review of Pro Forma
Description of Financial Structure Overall Reasonableness of Project Assumptions Benefits and Risks of Structure List of Prior Projects / Installed MW Tax Assumptions Availability & Level of Federal & State Incentives Impact of Debt Equity Pay-In Assumptions Equity Levels (Investor and Sponsor) Debt – Sizing / Coverage / Rates / Fees Cash Flow and Residual Splits Reserves –Target Levels and Funding Schedules Optimization for Monetizing Investment Tax Credits (ITCs) / Production Tax Credits (PTCs) / Depreciation / Renewable Energy Certificates (REC) & Solar Renewable Energy Certificates (SREC) / State Rebates
Level and Distribution of Development and Management Fees
Residual Value Assumptions Sensitivity Analysis
50
Project Evaluation Check List Deal Pricing Review of Project Development
Review Investor and Sponsor Benefit Projections EPC and Construction/General Contractor Utilize Proprietary or Third-Party Software Pricing Models as necessary
Construction Schedule
Analyze Investor and Sponsor Economics Construction Review & Disbursements Process Comparative Review Permits Environmental Regulation Technology Providers Site Preparation and Interconnection Balance of Plant (BOP) Review of Project Operations and Risks Review with Associated Professionals
Operations & Maintenance (O&M) Provider Engineering and EPC Contract Operations Plan Permitting Review O&M Reporting Environmental Impact Statements Technology Risk Resource and/or Feedstock Agreements Market Risk Offtake Agreements / PPA Construction Risk Equipment Warranty and Insurance Tax and Legislative Risk Lease and Land Agreements Resource Risk Appraisal and Valuation Operating Risk Interconnection and Transmission Agreements Reputational Risk Financing/Structure Documents Other Risks Legal and Tax Opinions