Mike Costanti Using CREBs for Financing

Using CREBs to Finance Renewable Energy Projects Can CREBs work for me? Mike Costanti, Principal Matney Frantz Engineering, LLC Bozeman, Montana Summary Presentation March 22, 2007 CREB Overview   Clean Renewable Energy Bonds (CREBs) were created by the Energy Policy Act of 2005 (Baucus and Grassley) Provide gov’t entities with the ability to obtain interest-free financing for renewable energy projects by providing investors with a federal tax credit in lieu of interest payments 2006 CREBs were authorized for $800M through FY07:   $500M: Cities, Counties, Tribes $300M: Rural Electric Co-ops    Allocations made from smallest to largest (pyramid) CREBs are an excellent funding vehicle for county/city/tribally-owned renewable energy projects 2 Why CREBs?  Tax-exempt vs. Taxable Entities  PTC and MACRS depreciation are only applicable to taxable entities  The tax benefits on these taxable projects can easily comprise 60% of the project’s value to the investor  CREBs sought to level the playing field for taxexempt entities, e.g. achieve parity with the PTC and depreciation benefits  Political subdivisions (e.g. cities, counties), tribes, and co-ops are tax-exempt 3 2006 CREB ROUND  743 CREB applications were received     $2.5B in allocation requests 2.5 times what was available (a seemingly popular program) Applications from 40 states 610 projects approved (November 20, 2006)  532 city/county/tribal projects, 22 states  $23,000 to $3.2M  78 co-op projects, 24 states  $120,000 to $31M 4 2007 CREB ROUND  Recent federal congressional action authorized a second CREB round 1. Extended the 2006 CREB Round Issuance Date to December 31, 2008 2. $400M will be allocated (at this point)  $250M for city/county/tribes  $150M for co-ops  Applications due July 13, 2007  What will the allocation cutoffs be? 5 How CREBs Work?         NOT A GRANT Revenue vs. General Obligation (GO) bonds Interest & Tax Credits Ratable payments Credit rate tied to Treasury Index 1st Round: Must issue bonds by December 31, 2008 95% hard costs, 5% soft costs Arbitrage: Spend proceeds within 5 years 6 CREB Challenges  New program, never been done  Who will buy?  Will they sell at a discount?  What will the due diligence requirements be?  The “Time Clock Issue”  Need to make first pmt 12 months after issuance  Debt Service Reserve Fund  An allowable use of CREB proceeds? 7 MT’s 1st Round CREB Projects  MFE submitted CREB applications on behalf of 35 cities and counties during the 2006 cycle  33 of the 35 applications were approved  $30.6M CREB allocations totaling 34 MW (wind)  The two largest applications ($3.5M and $4.0M) were just above the cutoff  All projects will be 100% CREB financed and built using re-manufactured turbines 8 Why Re-manufactured Turbines?  3 Main Reasons to Use RWTG: 1. Installed Cost:   New projects: Re-manufactured projects: $1,500-$4,000 per kW $900-$1,200 per kW 2. Re-manufacturing Process    Better materials, tooling, controls Better than original Great warranties Turbines range from 65-kW to 660-kW Built upon a distributed generation philosophy 9 3. Well matched to rural electric loads   Why CREBs Worked Well in MT  5 Main Reasons: 1. 8 of the 20 poorest counties in US in MT  5 of these received CREB allocations 2. MT is 47th in that US in terms of per capita income  Looking for new revenue streams NREL/WPA, HCE, etc 3. Foundation and understanding in place  4. Economic Development Impacts     Property Taxes, Local Impact Fees, PILOT payments Construction and Annual Phase Jobs Landowner Easement Payments Judith Gap: 135-MW, 90 turbines, very visible, working well 5. First MW-class project 10 MT’s Core CREB Team  Matney-Frantz Engineering  Prepare and submits CREB applications  Program Manager, Engineer  Oversee real estate, financing, design, contracting and operations  Senator Baucus’s Office  RC&Ds, LDOs, State Energy Offices  Orrick Law Firm (Washington, DC)  Federal tax opinions  Dorsey & Whitney LLP (Missoula, MT)  Local tax opinions  (Working with state-specific firms may make sense…) 11 The CREB Process  Make Philosophical Conclusion: “Local gov’t should not compete with private industry.” OR “My CREB allocation is not enough…I want more.”  Bring together a qualified team to assist you  Submit Application  Technical Requirements: Issuing authority, Engineer’s approval letter, Project description, Regulatory approval plan, and Financing plan Local gov’t procurement guidelines 12  Build your project  “Is a CREB Application for Me?”  Renewable energy projects are a “three-legged stool”: 1. 2. 3. Renewable Resource Transmission Access & Capacity Project Buyer / On-site offsets  At a minimum you will need to work with a qualified engineer to assess your “3-legged stool” 1. 2. 3.  Renewable Resources: wind,, geothermal, biomass, small hydro, etc Transmission Access/Capacity: FERC mandated SGIA Project Buyer: Direct utility sale, QF, net metering, bi-lateral sale Conclusion: Does it appear that you have the required project components to submit a CREB application? 13 “What if I’m Successful?”  In the end, your CREB project must make legal, financial, and technical sense to move forward  If any of these 3 items do not line up, your project will not be built (nor will anyone purchase your bond!)  These determinations must be done by a qualified legal, financial, and technical team  The feasibility process typically take 3-12 months  Start thinking about how you’ll pay for these costs 14 Things to be Thinking About 1. 2. 3. 4. 5. 6. There is no such thing as a dumb question! Importance of “philosophical discussions” Working with a qualified team Submitting a solid application How to pay for feasibility if successful? How to deal with the “Time Clock” and DSRF issues 15 Thank you for your time 16