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									                          Street,      800, Denver,
             1400 Wewatta Street Suite 800 Denver CO 80202

Financing Renewable Energy in Today's
           Capital Markets
                       LEE WHITE
                 Executive Vice President
                      (303) 391-5498
Table of Contents

  Section                                          Page
  Executive Summary                                 4
  1. Renewable Energy Project Financing Methods     7
  2. Tax Credit Bonds                              20
  3. Department of Energy Loan Guarantee Program   29
  4. The Future of Renewable Energy Finance        33


Renewable Energy Project Finance

•   The set of prior federal incentives which depended upon tax motivated equity investors to
    finance renewable energy projects has failed due to current market conditions

•   The bank lending market is still in credit crisis mode with little capacity to lend to renewable

•   Congress and the Obama Administration have designed a new set of incentives to enable
    more renewable financing via ARRA (The Economic Stimulus Bill)

•   Equity capital will flow back to this asset class

•   The bond markets, particularly the tax exempt bond market, is relatively healthy and could
    become a new source of leverage for renewable projects
     –             g
         DOE loan guarantees for taxable bonds
     –   Elimination of the double dip “haircut” for use of tax exempt bonds

•   States energy offices will have important new role in renewable energy opportunities

Renewable Share Performance, Last Twelve
•   Renewable energy stocks were hit by frozen liquidity and investor fears of future
•   Returns turned sharply lower across the renewable energy spectrum

                           *Source: Ewing Bemiss & Co. ACORE Presentation: State of Renewable Energy Financing. Publication. 2009.   6

Renewable Energy Project Finance

•   Traditionally, renewable energy projects secured financing through the lucrative
    tax incentives afforded to renewable energy generating facilities

•   The two most common forms of these tax credits are the Renewable Electricity
    Production Tax Credit (“PTC”) and the Business Energy Investment Tax Credit
    (“ C”)

•   PTC is a 2.1¢/kWh (or 1.0¢/kWh for some technologies) tax credit based on the
    a ou t o e ect c ty p oduced and sold      the taxpayer o qualified energy
    amount of electricity produced a d so d by t e ta paye for qua ed e e gy
     –   Credit is paid annually for 10 years

•   ITC is a tax credit equal to 30% of the qualified project costs for certain qualified
    renewable energy projects
     –   Credit is paid upfront

•   V l of these credits are substantially di i i h d with the credit crisis
    Value f h       di         b     i ll diminished i h h        di    i i

Ownership Structures

•   Most renewable energy project developers do not have sufficient tax-liabilities to
    utilize the tax credits

•   Developers partner with a tax credit-motivated equity investor in order to
    improve the deal economics

•   For a PTC project, developer owns (almost entirely) the project for 10 years to
    capture 99% of the PTC and accelerated depreciation benefits
     –                           flips
         After year 10, project “flips” and developer owns 95% of project for the rest of the PPA
     –   Equity investor must remain in project, albeit a 5% stake, for entire project

•                             project,
    Similar structure for ITC project except tax credit-motivated investor is majority
    owner for only 5 years, instead of 10.

Asset Finance*

•   Cash flow lending extremely limited to non-existent
•   Project finance for renewable power deals – available but more stringent qualifications
        i d
      – 50 to 70% leverage available for highly                               – Experienced developers only
        qualified projects                                                    – Merchant plants much more
      – Little to no fuel price risk with hedges                                difficult/requiring hedges
        or pass through needed                                                – Development projects need strong EPC
      – No new technology                                                       contracts
      – Strong PPA with creditworthy                                          – Increased rates (>9%)

                                    1 Source: New Energy Finance, 2009                                                                        10
                                    *Source: Ewing Bemiss & Co. ACORE Presentation: State of Renewable Energy Financing. Publication. 2009.
Changes to PTC & ITC in ARRA

•   The American Recovery and Reinvestment Act of 2009 contained several changes
    to the PTC and ITC

•   Most notably:

         1. Extended “placed i service” d t t D
         1 E t d d“ l       d in                      b 31,         for i d
                                   i ” date to December 31 2012 f wind
            projects and December 31, 2013 for other Section 45 facilities

            Election f  instead of PTC
         2. El i of ITC i     d f

         3. PTC/ITC can now be used with tax-exempt bonds without “double
            dipping” haircuts of the past

         4. Direct Treasury Grants to Project Owner available in lieu of

Production Tax Credit (“PTC”)

•   The value of the PTC has been reduced

     –   ITC = now available for all types of renewable energy facilities

     –   ITC Grant is paid upon project completion

     –   Receiving the PTC over 10 years carries more economic risk to project


ARRA Changes to Residential Project Tax
•   Tax credit cap of $1,500 for residential and small scale renewable energy projects
     –   Investor receives a 30% investment tax credit on full cost of the project through 2016
     –   Both new construction and remodels are eligible
     –   Eligible projects include geothermal heat pumps, solar panels, solar water heaters, small
         wind energy systems and fuel cells (for fuel cells 30% of the cost, up to $1,500 per .5 kW
          f             i )
         of power capacity)

•   ARRA allows an investment tax credit for the remodeling of homes
     –   Investor receives a 30% investment tax credit, up to $1,500, on the cost of the project for
         2009 & 2010
     –   Eligible projects include energy efficient windows and doors, insulation, energy efficient
         roofs (metal and asphalt), energy efficient HVAC, energy efficient water heaters (non-
         solar) and biomass stoves

Tax Equity*

•   Tax Equity market severely reduced – majority of players either do not exist any more or
    have no tax appetite (Lehman Brothers, Wachovia, Morgan Stanley, Merrill Lynch, Bank of
    America, Citi
    A     i            )
•   Appear to be 5 – 8 players remaining with some on sidelines indicating that they are looking
    at participating
•   Yields have increased from 5 – 7% to 8 – 12%, forcing some projects to determine at what
    point forgoing the monetization makes sense and use tax benefits over time
•   Proposed legislation of 30% ITC (which can be monetized by government immediately)
    included in new legislative proposal. Has substantial benefits to all qualifying projects that
    are not baseload generating assets (wind and solar primarily)
         sent Value of the ITC vs the PTC for a Typica 1

                                                                                                                                 •    A 100 MW example wind project
                                                                                                                                      would prefer an Investment Tax
                                                                                                                                      Credit to a Production Tax Credit
                                                                                                                                      unless it could achieve a 42% capacity
                    100MW Win Project

                                                                                                                                                 The average 2008 wind farm


                                                                                                                                                 capacity factor was 31%

                                                               Wind Capacity Factor
                                                           1 Source: New Energy Finance, 2009                                                                        14
                                                           *Source: Ewing Bemiss & Co. ACORE Presentation: State of Renewable Energy Financing. Publication. 2009.
Grants in Lieu of PTC or ITC

•   The government realizes the tax-credit markets are not what they once were, so ARRA
    makes cash available for renewable energy projects through government grants

•   Department of Treasury will issue grants of up to 30% of the cost of “qualified
    facilities,” which include all facilities eligible for ITC or PTC

•   The grant program is expected to function similar to the ITC program

•   Availability restricted to:
     –   Facilities placed in service by December 31, 2010 and;
     –   Facilities that initiate construction in 2009 or 2010 and are completed by the “credit
         termination date,” which ranges from January 1, 2013 to January 1, 2017 depending on the
         type of facility

•   Grant will be paid once the facility is operating commercially so construction loan may
    be necessary

•   Grant can be used with tax-exempt bonds which was not permitted due to double dip
Grants in Lieu of PTC or ITC (Cont.)

•   Borrower can use Grant to payoff construction loan/equity investors and can be
    pledged or assigned to a lender

•   Grant is not subject to tax

•   No capped amount of availability, unlimited amount of grants can be given out by
    the government

•     P j t ith          it i     t     h h       i df d f
    A Project with an equity investor who has received funds from state or local
                                                                   t t     l   l
    government pensions is ineligible for a grant

•   Expect Grant application from the IRS by end of April

Grants and Municipal Utility Power Prepayment

•   Projects may take advantage of both a Grant and a Municipal Power Prepayment

•   How does a Municipal Utility Power Prepayment work?
     –   Public utility enters into long-term PPA with an electricity producing project
     –   Net present value of future stream of sales calculated
     –   Utility purchases energy for a specific period with one upfront payment
     –   Upfront payment amount can be issued with tax-exempt bonds

•                         locks in long term
    The Municipal Utility locks-in long-term renewable power supply at relatively
    low cost

•   Project developer receives upfront payment for future delivery of power – reduces
           t f    it l     i
    amount of capital requirementst

•   Grant in lieu of ITC is available in conjunction with this financing structure

Accelerated Depreciation

•   Modified Accelerated Cost Recovery System (MACRS) – Current method of
    accelerated depreciation under U S tax code
     –   Various depreciation schedules for different asset classes

•   ARRA extended the “Bonus” depreciation option
     –   50% of eligible project costs are depreciable in year one of operation, with the remaining
         50% depreciable according to the normal depreciation schedule

•   Depreciable basis must be reduced by 50% of the ITC amount or Treasury Grant
    amount, in the case that either of these incentives are used

•   MACRS cannot be combined with tax-exempt financing
     –   12 year straight line depreciation
     –   If a borrower takes advantage of tax-exempt bonds, the borrower is not allowed to
         accelerate depreciation as the IRS considers this “double dipping”

•                                               significantly,           tax-credits
    Value of depreciation benefits has suffered significantly similar to tax credits

New Markets Tax Credit (“NMTC”)

•   Federal tax credit program created to stimulate investment in low-income

•   If project is located in a qualified area (significantly disadvantaged areas), project
    is eligible for a Qualified Low Income Community Investment

•   39% of this investment is available as a tax-credit, and is received over a 7 year
     –   Investment must remain fully invested in community for full 7 years
     –   The tax credits can be sold

•   Net effect is 20% of the QLICI is forgiven after year 7, in effect free equity to
           bl      j t
    renewable project


Clean Renewable Energy Bonds (“CREBs”)

•   Created in the Federal Energy Policy Act of 2005, Clean Renewable Energy
    Bonds provide an interest free financing mechanism for public entities to
    construct renewable energy projects

                Qualified Issuers                     Qualified Projects

    •   States or US territories           •   Wind
    •   District of Columbia               •   Closed-loop biomass
    •   Indian tribal government           •   Open-loop biomass
    •   Certain political subdivisions     •   Geothermal
    •   Cooperative electric companies     •   Small irrigation
    •   Public power p
               p      providers            •   Hydropower
                                                y    p
                                           •   Landfill gas
                                           •   Marine renewable
                                           •   Trash combustion facilities

Clean Renewable Energy Bonds (“CREBs”)

•   Interest is provided to the investor in the form of a tax credit from the U.S.

•   Treasury will base these rates on “its estimate of the yields on outstanding bonds
    from market sectors selected by the Treasury Department in its discretion that
    have an investment grade rating of between A and BBB for bonds of a similar
    maturity for the business day immediately preceding the sale date of the tax
    credit bonds”

•   Tax credit is considered taxable income

•   Investor tax credit reduced to 70% from 100%

•   Credit amount may be “stripped” and sold to other investors which will
    dramatically broaden market for tax credits and restore their utility to renewable
    d   l

•   Depending on the creditworthiness of the borrower, in some cases a supplemental
    coupon (1-2%) may be required by investors

•   Repayment consists of annual mortgage style principal payments
Clean Renewable Energy Bonds (“CREBs”)

•   Amortization of approximately 15 years now permitted

•   The American Recovery and Reinvestment Tax Act (“ARRA”) increased the
    national limit on new CREBs by $1.6 billion in February, 2009 to a total capacity
    of $2.4 billion
     –                                                   providers
         1/3 of this amount is allocated to public power providers, 1/3 to governmental bodies and
         1/3 to cooperative electric companies

•   Allocations have historically been awarded to smaller projects first

•   No sunset provision, CREBs can be issued as long as funds are available

Clean Renewable Energy Bonds (“CREBs”)

•   Must spend 100% of the proceeds within 3 years

•   Cannot use bond proceeds for reimbursement of prior expenditures
     –   Anti-stimulus?

•   Cannot use CREBs in conjunction with a Treasury grant in lieu of ITC

•   CREB can finance costs of issuance up to 2% of the face amount of the bond

•   Reserve Fund can be established as security for the bond, pursuant to certain

Qualified Energy Conservation Bonds
( QECBs )
•   QECBs are “enhanced” CREBs
     –   Similar to CREBs with broader approved usage

•   QECBs were created by The Energy Improvement and Extension Act of 2008

•   The Act originally authorized $800 million to be issued, ARRA authorizes an
               $2 4
    additional $2.4 billion
     –   30% of QECBs allocated for private activity bonds (issuers such as private developers,
         private colleges, hospitals, independent schools, etc.)
     –   Allocated by the IRS based on the population of each state
     –   Within each state, cities with a population of more than 100,000 people receive an
          ll   ti
     –   Issuers in cities with less than 100,000 people receive funds from state allocated funds
     –   Colorado, with approximately 1.6% of the US population, will receive a QECB allocation
         of approximately $51.2 million

•   State and local governments can issue QECBs for “Qualified Conservation
    Purposes” (as defined on the following page)

•   Private activity bond issuers can only issue QECBs for capital expenditures
    (as defined on the following page)

Qualified Energy Conservation Bonds
Qualified Uses
                              “Qualified Conservation Purposes”
                                                                            Private Activity Bond 
                                                                            I               l
                                                                            Issuers can only use 
1.   All projects eligible for CREBs PLUS:                                 QECBs for Uses #1 & #2
2.   Capital expenditures for projects related to:
      • Reducing energy consumption in publicly-owned buildings by at least 20%
      • Implementation of “green” community programs
      • Rural renewable energy development
3.   Research facilities grants to support:
      • Development of cellulosic ethanol and other biofuels
      • Technologies for CO2 capture and sequestration
      • Automotive battery technologies and other technologies to reduce fossil fuel consumption
          in transportation
      • Energy conservation in buildings
4.   Mass transit facilities and expenditures to reduce pollution caused by mass transit facilities
5.   Demonstration projects to encourage:
      • Green building technology & technologies to reduce “peak demand”
      • Waste-to-fuel projects
      • Advanced battery technologies
          Technologies f                  d
      • T h l i for CO2 capture and sequestration     i
6.   Public education campaigns to promote energy efficiency
QECBs Continued

•   QECBs, like CREBs, are intended to provide a zero interest loan to the borrower
     –                                                                             U.S.
         Interest is provided to the investor in the form of a tax credit from the U S Treasury
     –   Rates based on market rates for “BBB” - “A” rated corporate bonds
     –   Tax credit is considered taxable income
     –   Investor only receives 70% of tax credit
     –   C di amount may be “stripped” and sold to other investors
         Credit               b “ i      d” d ld          h i
     –   May require a supplemental coupon

•                 g         pp y                               project
    Davis Bacon wage rules apply to borrower’s construction of p j

•   Cannot use proceeds for reimbursement of prior expenditures

Recovery Zone Bonds

•      The American Recovery and Reinvestment Tax Act of 2009 authorized $25 billion
           Recovery      Bonds                                     recovery zones
       in “Recovery Zone Bonds” to stimulate economic recovery in “recovery zones”
        –   The Federal government will allocate the bonds to the states according to each state’s
            decrease in employment as compared to the national decrease in employment

                           There are two types of “R
                           Th                               Zone B d ”
                                                f “Recovery Z    Bonds”

             y                     p
      Recovery Zone Economic Development Bonds                              y             y
                                                                     Recovery Zone Facility Bonds

•   Total allocation of $10 billion                      • Total allocation of $15 billion
•   Taxable Governmental Bonds                           • Tax-exempt financing for projects that traditionally
•   Can be issued by Governmental entities                 have not had tax-exempt funding available
•   Issuer received credit from Federal Government for   • Cannot finance “bad projects” – i.e. gambling
          fi t     t
    45% of interest expense                                facilities, lf          li      t      t
                                                           f iliti golf courses, liquor stores, etc.

•      Potentially could be used to finance renewable energy projects


Department of Energy (“DOE”) Loan Guarantee

•   Title XVII of the Energy Policy Act of 2005 allows the DOE to guarantee loans in
    support of debt financing for projects in the United States that employ energy
    efficiency, renewable energy, and advanced transmission and distribution
    technologies that constitute New or Significantly Improved Technologies
     –   The loan guarantee gives the debt a ‘AAA’ rating and allows the borrower to borrow at
         lower rates

•   To date no loan guarantees have been made

•   143 applications were submitted in the first round of applications to the DOE
         pp                                                pp
    Loan Guarantee Program, 16 projects were invited to submit second round

•                 y     g
    Credit Subsidy Charge: To have loan g             y      ,              pay
                                          guaranteed by DOE, borrowers must p y a
    credit subsidy charge (estimated to be between 5-10% of loan amount)

•   Last deadline for applicants was February 26th, 2009
     –      app cat o s were ece ved      t e O
         70 applications we e received by the DOE

DOE Loan Guarantee Program Post ARRA

•   Revised DOE Loan Guarantee Program expected to be open for applications in

•   Accept applications on a rolling basis

•   Projects must break ground by September 30, 2011

•   Projects no longer have to be new or significantly improved technologies, can
       lif        j t     t       f th three criteria b l
    qualify if project meets one of the th     it i below:
     1. Transmission
     2. Cellulosic ethanol
     3. Renewable energy systems which means almost any renewable p j
                          gy y                              y           project

•   It is expected that credit subsidy charges will be reduced or paid for with $6
    billion of funds set aside by ARRA
     ―   Could be ll  d t fi       th     dit b id h
         C ld b allowed to finance the credit subsidy charge

Potential Problems with a DOE Loan Guarantee

•   DOE requires a first priority lien on all of the project assets
     –   They will agree to share proceeds of a foreclosure with other lenders

•   National Environmental Policy Act (“NEPA”) – DOE has to be comfortable with
    environmental impact of the project
     –   A full environmental assessment review may be required by NEPA

•   Tax-exempt bonds do not qualify for a loan guarantee from the DOE
     –   Taxable bonds are allowed, DOE would have senior lien and bondholders would have a
         subordinate lien

•   To qualify, project owner has to be an American company


Transmission Boards

•   Transmission accessibility is key to the future of renewable energy, Colorado and
    other states in the Rocky Mountain Region have realized this and created entities
    to promote the development of renewable energy transmission financing

•   Colorado Clean Energy Development Authority (“CEDA”) – Established by the
                                f                           fC
    legislature in 2007 to help facilitate the development of Colorado renewable
    energy and renewable energy transmission

•   Wyo    g     ast uctu e ut o ty (WIA)- stab s ed      00 , as     a ced one
    Wyoming Infrastructure Authority (W ) Established in 2004, has financed o e
    transmission project

•   New Mexico Renewable Energy Transmission Authority (“NM RETA”) –
    Established in 2007, NM RETA focuses on electric system transmission
    infrastructure planning, financing and implementation
     –   At least 30% of a NM RETA transmission project’s energy must come from renewable

Challenges to Renewable Energy Finance

1. Project financing, in particular construction lending and permanent loans

2. Pricing of renewable energy given lower fossil fuel pricing

3. Credit market sensitivity to increased project risk….credit spreads increasing for
   less credit worthy projects

4. Tax appetites for equity investors have been significantly reduced and new
   federal i
   f d          ti      t t d
         l incentives untested

5. Transmission of renewable energy not an eligible tax-exempt bond use….state
   infrastructure authorities seeking federal legislation so cost of capital for
   renewable transmission can be reduced

6. Renewable transmission not eligible for ITC or PTC incentives

Biography – Lee White

Lee White is an Executive Vice President and Manager for George K. Baum & Company at its Denver
Public Finance Headquarters. He has been in the investment banking business for more than 20 years
                                                                 bonds Mr.
and is responsible for underwriting over $6 billion of municipal bonds. Mr White has assisted numerous
state and local governments and private corporations finance their infrastructure needs. He came to
investment banking with extensive cabinet level experience in state government. He was Executive
Director of the Colorado Department of Administration in 1979-80 and then Executive Director of the
Colorado Office of State Planning and Budget in 1981-82.

Mr. White is Co-Chairman of the U.S. Congress Joint Economic Committee’s Study on Infrastructure in
the United States, member of the Colorado Clean Energy Development Authority, and numerous other
airport, stadium, higher education, and non-profit projects. Mr. White participates in numerous
p                        g          ,                                                              y,
professional and civic organizations, and has served as a Trustee of the Colorado Historical Society, the
Greater Denver Corporation and is a member of the Colorado Forum and the Mile High Club. He was
elected to the Denver Board of Education in 1996 and served for four years.

Mr. White has served as the lead or co-lead banker on a number of major utility financings, the most
                $79.5                                                                         Colorado.
recent being an $79 5 million Pollution Control Revenue Refunding issue for Public Service of Colorado
He is actively working on financing a wind and renewable energy project that includes use of Clean
Renewable Energy Bonds.

Mr. White received a Masters of Business Administration from Harvard Business School, a Masters of
City Planning from the Massachusetts Institute of Technology and a Bachelor of Science in Mechanical
Engineering from Rensselaer Polytechnic Institute.



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