Discussion of the financial structures appropriate for community wind investment in Pennsylvania and the impact of the ITC. Description of the REC\'s investment analysis tool and how it can be used to assess investment structures, project assumptions, and policy impacts.

1. 1 Financial Structures for Community Wind Development in Pennsylvania Gwen Andersen Director www.francis.edu/rec.htm 814-472-2872 Our thanks to the Penelec Sustainable Energy Fund of the Community Foundation for the Alleghenies and the Pennsylvania Department of Environmental Protection for funding the development of this tool. The tool was developed by Mark Bolinger and Matthew Karcher.

6. 2008 finance-induced slowdown in broader wind market provides an opportunity

7. States implementing incentive programs to help community wind

9. Accelerated Tax Depreciation (5-Year MACRS)

10. USDA Grants (REAP)

11. Clean Renewable Energy Bonds (CREBs)Post “Recovery and Reinvestment Act of 2009” (“ARRA”): Same as above, except that wind projects can now choose between the PTC, a 30% investment tax credit (ITC), or an equivalent 30% cash grant - but ends in December 2012 This choice is a HUGE deal for community wind in particular….

16. System size not limited by customer load

18. PEDA Grants ($1.5 million limit)

20. Statewide dollar cap starting at $5 million and increasing to $10 million (by 2014)Regional Public Benefits Funds: May support community wind at times

22. Institutional Investor Partnership Flip

23. Sale/Leaseback

25. Clean Renewable Energy Bond (CREB) FinanceFirst three require tax equity investors

26. 10 Private Sector Structure:Strategic Investor Partnership Flip Local Investor(s) (1% of equity) Tax Equity Investor (99% of equity) Most-used community wind structure in US Tax investor is a “strategic” investor e.g., John Deere, Edison Mission) Tax Investor provides almost all the equity Pre-flip cash and tax allocations are proportional to equity investment Post-flip allocations favor local investor(s) Grant 1 (USDA REAP) Lender (debt) Project Company (equity + debt + grants) Grant 2 (State Agency) Power (and REC) Sales 30% Federal Cash Grant Cash Revenue 99%   1% less Operating Expenses less Tax-Deductible Expenses (including MACRS and interest on debt) less Debt Service equals Taxable Losses/Gains (which result in Tax Benefits/Liabilities) 99% / 10%   1% / 90% equals Distributable Cash  1% / 90% 99% / 10% 

27. 11

28. 12

29. 13

30. 14

32. Tax Investor provides less equity (~70%)

33. All cash initially goes to local investors, until investment recovered

34. Typically no project-level debtNot as suitable for community wind as the Strategic Investor Flip Grant 1 (USDA REAP) Project Company (equity + debt + grants) Grant 2 (State Agency) Power (and REC) Sales 30% Federal Cash Grant Cash Revenue 99%   1% less Operating Expenses less Tax-Deductible Expenses (including MACRS and interest on debt) equals Taxable Losses/Gains (which result in Tax Benefits/Liabilities) 99% / 10%   1% / 90% equals Distributable Cash 0% / 100% / 10%  100% / 0% / 90%

36. Lessee operates the project, receives all cash revenue, and makes regular lease payments (regardless of how well the project performs)

37. Lessor receives lease payments and takes all tax benefits

38. Lessee can buy out lessor at end of lease term

39. Pros:

40. Provides 100% financing (lessor owns entire project)

41. Most efficient tax credit monetization (100%)

42. Leases are familiar to banks – may broaden tax investor base

43. Cons:

44. Lessee must pay full FMV to buyout lessor (no prior “flip” down)

46. No tax equity investor

47. No “flip” in cash or tax allocations

48. Very pure and simple structure

49. Must adhere to SEC regulations when raising equity

50. Much more viable under the 30% cash grant than it was under the PTCLocal Investors (100% of equity) Grant 1 (USDA REAP) Lender (debt) Project Company (LLC) (equity + debt + grants) Grant 2 (State Agency) Power (and REC) Sales 30% Federal Cash Grant Cash Revenue less Operating Expenses less Tax-Deductible Expenses (including MACRS and interest on debt) less Debt Service equals Taxable Losses/Gains (which result in Tax Benefits/Liabilities) equals Distributable Cash

52. No tax equity investors

53. Town invests small amount of equity, finances remainder with either municipal bond or CREB

54. Muni Bonds: Longer terms (15-20 years), higher interest rates, lower issuance cost (than CREBs)

56. “General Project Assumptions” worksheet contains assumptions that are common to all six financing structures

57. Project capacity, capacity factor, hard costs, O&M costs, incentives, depreciation schedules, etc.

58. “Structure-Specific Assumptions” worksheet contains those assumptions that might vary by structure

59. Construction and term financing, soft costs, revenue, allocations, etc.

60. This worksheet also contains modeling results

62. Must be run manually in this direction

63. Must take care that other modeling elements also make sense (i.e., that flip dates do not happen too early, etc.)

64. Backwards: User specifies the financial return required by project investors, and the model solves for the amount of revenue required to generate that return

65. Model uses Excel’s “Solver” (simple linear program) to iterate to a solution; simple macro calls Solver function

70. 25 Policy Analysis:Calculating the Value of the 30% ITC/Grant Tool: Financial pro forma model that can analyze a community wind project under both the old (PTC) and new (30% ITC or cash grant) incentive regimes and under various financing structures Value Metric: Levelized 20-year PPA price (or LCOE) required to generate a target after-tax return for relevant investors Approach: Start with a fully constrained project under the PTC, and relax each individual constraint one by one in transitioning from the PTC to the 30% ITC to the 30% cash grant. Note the impact on the levelized PPA price at each step along the way.

72. Nameplate Capacity: 10.5 MW

73. Installed Cost: ~$2,500/kW ($2,200/kW hard cost)

74. Capacity Factor: 30% net

75. O&M Costs: $20/kW-year (fixed) plus $7.50/MWh (variable)

76. Depreciation: 90% 5-yr MACRS, 5% 15-yr MACRS

77. Income Tax Rates: 35% federal, 8% state

78. Debt: 10-yr term, 1.45 minimum DSCR (interest rate varies)

79. Grants: $500k USDA REAP, $500k state grant ($1m total)

80. 2 Financing Structures: Strategic Flip and Cooperative LLC

82. 28

83. 29

84. 30

85. 31

86. 32

88. Tax policy is everything

89. The details can have huge impact