Presented by: Edward Zaelke, Chair of Global Project Finance Practice, Akin Gump Strauss - PowerPoint Presentation

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Presented by: Edward Zaelke, Chair of Global Project Finance Practice, Akin Gump Strauss Hauer & Feld LLPOctober 28, 2015

Tribal Renewable Energy Webinar: Advanced Financing ModelsFinancing Structures for Renewable Energy ProjectsSlide2

Basic Facts About Renewable Energy Finance in the U.S.Since 1992, the Federal Government has “paid” for about 60% of the costs of renewable energy projects

Wind Energy Production Tax Credit Solar Energy Production Tax CreditFederal MACRS Depreciation (sometimes bonus depreciation

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Basic Facts About Renewable Energy Finance in the U.S.State and local incentive payments have also been available in some instancesState tax credits

Local “Public Benefit Incentives” (PBI) payments2Slide4

Basic Facts About Renewable Energy Finance in the U.S.Federal Tax Incentives are only available to U.S. taxpayersTribes cannot “own” projects that receive federal tax credits

Tribes can be landownersTribes can operate the facilitiesTribes can purchase powerTribes can have the right to purchase the projects after the federal incentives have been concluded

10

years for wind project

5

years for solar

projects

Tribes

can develop and sell projects on their own lands

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Utilizing Federal Tax Credits for Wind and Solar Typically Requires Very Highly Structured TransactionsWindSection

45 of the Internal Revenue Code Provides a 30% Production Tax Credit for Wind Projects based upon production during the wind project’s first 10 years of operationCurrently the PTC is $23 per MWh, subject to inflation adjustments each yearThe

party claiming the credit must both own and operate the wind

project

This

requirement prevents wind projects from monetizing their tax credits through “sale and leaseback” or similar

methods

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Utilizing Federal Tax Credits for Wind and Solar Typically Requires Very Highly Structured TransactionsWindThe

most common method for monetizing the production tax credit and MACRS depreciation for wind is the “Flip Partnership” because it allows for the “own and operate” requirement to be met, while shifting the tax benefits to a tax equity investorA Typical Flip Partnership may involve capital invested as follows:40 to 50 percent developer

equity

50

to 60 percent tax

equity

The

developer may also borrow against its equity in what is typically referred to as a “back levered”

loan

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Utilizing Federal Tax Credits for Wind and Solar Typically Requires Very Highly Structured TransactionsWindThe Profit/Loss and tax sharing in a “Flip Partnership” is as follows:

Years 1 to 10 (the PTC Period)99% of the income and tax benefits to the Tax Investor; and1% of the income and tax benefits to the developer/owner

After year 10 (or after the tax investor has received its required

IRR

, so that the “flip” can occur):

5

% of the income and losses to the Tax Investor;

and

95

% of the income and losses to the Developer/Owner

Owner/Developer typically has the right to purchase the 5% interest from the Tax Investor at fair market value

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Utilizing Federal Tax Credits for Wind and Solar Typically Requires Very Highly Structured TransactionsSolarThe Investment Tax Credit for solar does not have the same “own and operate” rule as does the

PTC, so there are more alternatives for monetizing the tax credit for solarThe Partnership FlipSale and LeasebackSale

and leaseback may take one of several structures, with varying degrees of tax

risk

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Utilizing Federal Tax Credits for Wind and Solar Typically Requires Very Highly Structured TransactionsSolarIn

a traditional sale and leaseback:The Developer sells the project (or the project company) to a tax investor and receives cash sufficient to pay for a significant portion of the projectThe Developer then leases the project back from the Tax InvestorUnder the Tax Code, the Developer and Tax Investor can agreed between the two of them who should get the tax benefits from the project

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Utilizing Federal Tax Credits for Wind and Solar Typically Requires Very Highly Structured TransactionsSolarIn

a traditional sale and leaseback:The Tax Investor receives all of the Investment Tax Credit (currently 30%), but receives a reduction in its depreciable basis equal to half of the ITC takenThe depreciable basis is increased to the purchase price paid by the tax equity investor

The

Developer pays an upfront rental payment and then monthly payments necessary to repay in the tax investor and provide the tax investor a return on its

investment

After

the period of

MACRS

depreciation (5 years) or at other agreed intervals, the developer can repurchase the project at fair market

value

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Other Factors Affecting Renewable Energy Development and Finance That May Impact Development on Tribal LandsWind projects have become much more productive

This has increased the relative value of the PTC for those projectsThe current PTC expires for projects commenced by December 31, 2104, unless they are completed by December 31, 2016, or unless “continuous construction can be shown

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Other Factors Affecting Renewable Energy Development and Finance That May Impact Development on Tribal LandsSolar Projects have become significantly cheaper

This has decreased the importance of the ITCInstalled Solar Projects now cost between $1.80 and $2.50 per watt to install (compared to about $4.00 to $5.00 per watt 4 to 5 years ago)Large Solar projects (with the 30% ITC and MACRS depreciation in place) are now selling power as low as $40 to $45

perMWH

The

ITC for solar drops from 30% to 10% at the end of

2016

Many

successful solar projects, including those on Tribal Lands, have relied upon local

PBIs

. While those continue to exist in some areas, in many other areas they are

decreasing

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Other Factors Affecting Renewable Energy Development and Finance That May Impact Development on Tribal LandsCheaper capital for renewable projects continues to exist, although the “Yieldco craze” of large amounts of money chasing projects has

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Tribal ProjectsThe number of wind and solar projects on Tribal Lands has increased over the past several years, although many are simply tied to the use of land.Financing

of Projects with the end users of power as the power buyers has increasedThis has allowed Tribes with casinos or other users or power to stand as power purchasers in financeable dealsTribal power companies can also act as the power purchaser for purposes such as residential use or water pumping/transferThe lower of the unsubsidized cost of renewable power will help further development on tribal lands through tribal ownership

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