FINANCING RENEWABLE ENERGY PROJECTS Case Studies Intro Energy Finance Course Council of Development Finance Agencies September 16 17 2010 by tku11874

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                 Case Studies

          Intro Energy Finance Course
    Council of Development Finance Agencies
              September 16-17, 2010

                    John M. May
                 Managing Director
     Head of Alternative Energy Finance Group
                Stern Brothers & Co.
                    St. Louis, MO
    Waste to Fuel and Power / Biorefinery Project
•    Financial advisor and investment banker for a biorefinery project
     converting waste into cellulosic ethanol and electricity.
     • Parent is a European chemical company; project pursued with its
        American subsidiary

•    Project cost is approximately $160 million and will use the USDA 9003
     loan guarantee program.
     • $75 million financed with senior debt, of which $60 million covered by
        USDA guarantee
     • Project was awarded $50 million Department of Energy grant
     • Difference financed with additional grants and equity

•    Role of the Lender of Record in the USDA process.

•    Role of Stern Brothers in the USDA process.
     Biomass Wood Waste-Fired Steam Plant
•   Financial advisor and investment banker for a wood waste-fired steam
    plant that will serve a paper mill.

•   The paper mill is a non-rated entity.

•   Signed off-take for 100% of steam and electricity created from the
    biomass plant.

•   Project cost is approximately $23 million.

•   A key component of the capital structure will be $16.5 million of Recovery
    Zone Bonds that will be issued through the state’s finance authority.
              Hydro Power Dam Expansion
•   Project cost of approximately $20 million to expand an existing hydro

•   Dam is unrated and has an off-take agreement with a local municipality
    for the additional power the dam will create.

•   Project to be financed with a combination of Qualified Energy
    Conservation Bonds, Recovery Zone Bonds and taxable debt
    • Stacked to achieve lowest cost of capital possible.

•   Stern Brothers has partnered with a leading equity boutique to finance
    this transaction.
                         Solar PV Projects
•   Solar PV DG developers are currently looking for sources of debt
    financing for various projects.

•   Currently, these developers are finding that the bank market is illiquid
    and tax equity is scarce.

•   RZBs and QECBs can be used to finance solar projects.

•   Stern is currently working on getting a PLR on tax-exempt IRBs for
    manufacturing applied to solar (ie, production of electricity from solar is

•   Bonds can be used with ITC / Tax Equity or the Section 1603 Grant in
    Lieu. Stern can bridge the Grant in Lieu.
Financing Wind or Solar Projects with Pre-Pays
•   Underlying project financed with a sale leaseback or a special allocation

•   Power purchase agreement with project company and power purchaser.

•   Power purchaser provides prepayment for power produced.

•   Power sold to power purchaser as power is produced.

•   Tax benefits from structure.

•   Requirements for tax-exempt debt.

•   Ownership structure.
    • True lease ownership guidelines
    • Safe harbor for alternative energy service agreements
    PPPs: Biomass to Power Project for Hospital
•    Off-balance sheet financing but pass through of project risks. DASNY

•    BTP project owned by separate non-controlled NFP.

•    PPA or lease with hospital where all costs of production and debt service
     are passed through on take and pay basis.

•    Key to credit is failure to transfer operating risk and rating of hospital.

•    NFP bonds are tax-exempt and rated as project financing.

•    LLC debt is “on credit” to hospital.

•    Project not 1603 grant eligible as NFP owner not a taxpayer. Financing
     done as 100% leverage but more expensive than Case 1 due to absence
     of grant.
                 Cellulosic Ethanol Project
•   DOE 1703 loan guarantee for 100% of 80% project debt necessary
    because technology is not commercialized.

•   Federal Financing Bank loans 80% of capital cost at Treasuries plus 75
    bps (under 4%) for 20 years (concurrent with offtake). Loan is
    guaranteed by DOE under 1703.

•   No unguaranteed debt.

•   20% equity from sponsor.

•   Developer pays credit subsidy cost. Limited track record of success
    under this program. Still an option for new and unique technologies.

•   Application process expensive, time consuming and risky.

•   Risk of changing RFS approach to advanced biofuels.
        Biomass Project with NIG Rated PPA
•   FIPP program with DOE 1705 loan guarantee for 80% of 80% project debt.
    • Need enhancement due to credit of PPA counterparty
    • Technology is commercialized
    • FIPP is applicant

•   Bank loan or bonds subject to guarantee.
    • Guaranteed bonds are taxable unless rule is changed
    • Unguaranteed loan or bonds can be stripped and placed with different
      lender than guaranteed tranche

•   Unguaranteed bonds can be tax exempt or tax credit (QECBs) but will be rated
    as project financing with floor of BB.
    • Cost of rating is $200,000

•   Project is 1603 eligible and loan or note used to bridge grant.
    • Bridge a separate tranche priced at reasonable spread to Treasuries
    • Diligence necessary for bridge includes legal opinion and Big Four
       accounting firm opinion
    Biomass Equipment Manufacturing Project
     Using DOE Manufacturing Loan Guarantee
    and Section 48 Advanced Manufacturing Tax
•   USDA loan guarantee under B&I program for 60% of project, with $40
    million cap. Guarantee can apply to bonds as it is assignable.

•   Unguaranteed portion of debt must be taken by bank or bondholder who
    takes guaranteed tranche.

•   Guaranteed bonds are taxable but still low interest rate; unguaranteed
    bonds can be tax-exempt but rate may be higher than 10%, depending on
    overall credit quality.

•   Qualifies for advanced manufacturing tax credit. How to monetize this
    credit (it is not a grant)?

•   Also consider new DOE FIPP style program for manufacturing.
        Renewable Project Using State Moral
               Obligation Guarantee
•   State moral obligation guarantee applies to bonds giving them an A- rating.
    • No longer a project financing
    • Requires BB underlying rating like 1705

•   Bonds can be tax-exempt as moral obligation does not affect tax status
    of bonds the way federal guarantee does.

•   State still has to be satisfied of credit quality, may have its own rating
    floor requirement.

•   Can be combined with DOE 1705 SDFO program where there is a
    separate DOE guaranteed tranche of senior debt.

•   1603 eligible but bondholders want 15-25% equity from sponsor to
    remain in deal after grant is recieved.

•   Developer cannot use grant as substitute or take out of its own equity,
    must have skin in the game, amount of which depends on credit quality
    and lender.
      WTE Project in Vermont with Feed-in Tariff
•   Feed in tariff obligates State PUC to buy electricity at above market levels
    sufficient to make financing IG.

•   Feed in tariff is legislative analogue to creditworthy PPA.

•   Tenor of PPA is longer than many utility PPAs available in other markets.

•   Bonds can be used and can be tax-exempt.

•   State still has to be satisfied of credit quality, may have its own rating
    floor requirement.

•   1603 eligible.
          Anaerobic Digestion Project Using
             Export/Import Bank Guarantee
•   Private developer can use tax-exempt or tax credit bonds backed by
    Export/Import Bank Guarantee from Denmark.

•   Bonds are rated AAA up to amount of debt guaranteed and remain tax-
    exempt (are not converted to taxable).

•   Unguaranteed portion will be sold as separate bond tranche wand will
    need to be BB credit quality to get a reasonable interest rate.

•   Amount of bonds subject to guarantee is greater of 70% of loan amount
    or 110% of amount of non-US content.

•   Developer must pay fee for use of ex-im guarantee reflecting difference in
    rate caused by higher rating.
       New Market Tax Credit (NMTC) Financing
•   Improves capital structure by introducing capital with de minimis claim on
    project cash flow.
•   NMTC capital subsidy equal to approximately 20% of the “Leveraged Loan”.
•   Challenges related to the principal repayment schedule and reduced rights
    and remedies associated with the NMTC Leveraged Loan structure.
    • Leveraged Loan is interest only for 7 years
    • Leveraged Lender receives an indirect security interest in the physical
      assets of project
    • Leveraged Lender agrees to forebear during 7 year compliance period to
      avoid recapture of tax credits
    • Proceeds from project level loan foreclosure would likely be reinvested in a
      new qualified project and not returned to the Leveraged Lender during first
      6 years of Leveraged Loan
•   Leveraged Lenders require a higher interest rate to compensate for the
    increased risk from delayed principal repayment and their reduced rights and
    remedies during the 7 year NMTC compliance period, potentially eroding the
    benefits of the NMTC capital subsidy.
•   Alternative energy projects have unique capital sources that can preserve the
    NMTC capital subsidy.
      NMTC Financing for Alternative Energy
•   ITC Grant Anticipation Notes--Explicit federal guarantee for qualified
    costs (if you build it, the government will fund it).
    • Actual Leveraged Loan carrying cost on Sponsor limited to time
       required to construct project and receive grant
    • NMTC Equity capital subsidy equal to approximately 6% of total
       project cost (30% ITC Grant X 20% Net NMTC Equity Capital Subsidy)
    • Project Finance Close
         • ITC GANs fund the NMTC Leveraged Loan
         • Sponsor pledges rights to ITC grant in exchange for Leveraged
           Loan creating implicit federal credit enhancement
    • Completion of Construction
         • Sponsor receives ITC Grant 60 days after placed in service date
         • Sponsor becomes its own Leveraged Lender by buying the ITC
           Grant Anticipation Note from investor with ITC Grant proceeds and
           holds Note during the balance of the 7 year NMTC compliance
  ITC Grant Anticipation Note Funds NMTC
               Leveraged Loan
                                                                   Investment Fund
                                        ITC                        ITC Grant Anticipation Notes      $ 17,000,000
                                 Grant Anticipation                NMTC Equity Investor              $ 5,944,458           NMTC Equity
                                        Note                       Total                             $ 22,944,458
ITC Bridge                                                                                                                  $5,944,458
                                    $17,000,000                                                                                                   NMTC Equity
“Leveraged                                                         Uses
  Lender”                                                          QEI
                                                                                                     $ 22,419,458
                                                                                                     $     85,000
                                                                   ITC GAN UW Fee                    $    340,000
                                                                   Other                             $    100,000
                                                                   Total                             $ 22,944,458
                                                                  Qualified Equity Investment
     Grant Anticipation
        $17,000,000                                                                                                        Project
                                                                                                                           Direct Project Bonds               $ 30,000,000
                                                                  NMTC CDE (Subordinate Lender)                            Subordinate Loan A (ITC GANs)      $ 17,000,000
                                                                  Sources                                                  Subordinate Loan B (NMTC Equity)   $ 3,898,485
                                                                  QEI                                 $ 22,419,458         Fund Earnings                      $    509,623
                                                NMTC Allocation                                                            Developer Equity                   $ 7,725,523
                                                                  Total                               $ 22,419,458
                                                                                                                           Total Sources                      $ 59,133,631
                  Federal                         $22,415,000
                Government                                        Subordinate Loan A (ITC GANs)       $ 17,000,000
                                                                                                                           Project Costs & Working Capital    $ 50,000,000
                                                                  Subordinate Loan B (NMTC Equity)    $ 3,898,485          Construction Interest              $ 5,883,631
                                                                  CDE Allocation Fee                  $ 1,120,750          DSRF                               $ 2,400,000
                                                                  Closing Costs                       $    400,000         Senior Debt UW Fee                 $    600,000
                                                                  Total                               $ 22,419,458         Transactions Costs                 $    250,000
                                                                                                                           Total Financing Need               $ 59,133,631

                                                                         Loans A & B

                                                                                                             Direct Project Bonds
                                                                                                                                           Bond Investors
                                                                                                                                             (1st Lien)
      NMTC Financing for Alternative Energy
•   Prepaid PPA—Provides capital for a Sponsor affiliated Leveraged Loan at
    Tax-Exempt rates.
    • Traditional bonds with the standard rights and remedies are issued by
      Sponsor for a portion of capital needs
    • Standard tax credit equity investment (or grant in lieu) from interested
      party bridged
    • Municipal entity issues tax-exempt bonds to fund a Prepaid PPA with
      Sponsor for a portion of the power to be generated by the assets
    • Prepaid PPAs by rule are similar to unsecured loans—no security
    • Sponsor uses Prepaid PPA funds to make the Leveraged Loan to the
      NMTC Structure at lowest possible pass-through interest rate
    • Prepaid PPA funds plus NMTC capital subsidy become subordinate
      loans to Project during 7 year NMTC compliance period
Prepaid PPA Funds NMTC Leveraged Loan
                                    Investment Fund
                                    Prepaid PPA Affiliate Loan       $ 15,000,000
                                    NMTC Equity Investor             $  5,006,411         Tax Credit Equity
                                    Total                            $ 20,006,411            $5,006,411
                                                                                                                               NMTC Investor
                                    QEI                              $ 19,831,411
                                    Legal                            $     75,000
                                    Other                            $    100,000
                                    Total                            $ 20,006,411

                            Qualified Equity Investment                                  Sources
                                    $19,831,411                                          Direct Project Bonds                 $   15,000,000
                                                                                         ITC/PTC Equity (Bridge)              $   14,000,000
                                  NMTC CDE (Subordinate Lender)                          Subordinate Loan A (Prepaid PPA)     $   15,000,000
                                  Sources                                                Subordinate Loan B (NMTC Equity)     $    3,439,840
                                  QEI                                 $ 19,831,411       Fund Earnings                        $      416,840
                                  Total                               $ 19,831,411       Developer Equity                     $    8,596,788
                                                                                         Total Sources                        $   56,453,469
     Federal                      Uses
   Government                     Subordinate Loan A (Prepaid PPA)    $ 15,000,000
                                                                                         Project Costs & Working Capital      $ 50,000,000
                                  Subordinate Loan B (NMTC Equity)    $  3,439,840
                                                                                         Construction Interest                $  4,023,469
                                  CDE Allocation Fee                  $    991,250
                                                                                         DSRF                                 $  1,200,000
          NMTC Allocation         Closing Costs                       $    400,000
                                                                                         Senior Debt UW Fee                   $    880,000
                                  Total                               $ 19,831,411
            $19,825,000                                                                  Transactions Costs                   $    350,000
                                                                                         Total Financing Need                 $ 56,453,469

                                            Loans A & B
                                             $18,439,840                             Direct Project Bonds
                                                                                                                             Bond Investors

Affiliate Leveraged Loan
                                                                                         Prepaid PPA
                                                         Project                                                            Municipal Offtake

                                                                                       Tax Credit Equity
                                                                                                                            ITC/PTC Investor
      NMTC Financing for Alternative Energy
•   Federal Loan Guarantee (USDA, DOE).
    • Project level loans (ie not the Leveraged Loan) receive federal agency
      guarantee under various programs
    • Leveraged Loan is structured to capture on a “look-through” basis as
      much of the federal guarantee as possible to provide indirect credit
      enhancement to the Leveraged Lender mitigating the higher interest
      rate associated with reduced rights and remedies
    • Amortization of principal on Federal Loan Guarantee if required can be
      accommodated with creative structuring
“Look-through” Federally Guaranteed NMTC
              Leveraged Loan
                                                    Investment Fund
                                                    Bonds                               $ 11,904,464
                                                    NMTC Equity Investor                $ 4,376,965
                            Bonds                   Total                               $ 16,281,429
                                                                                                       NMTC Equity
  Bond Investors          $11,904,464                                                                   $4,376,965              NMTC Equity
“Leveraged Lender”                                  QEI                                 $ 15,874,295                              Investor
                                                    Legal                               $     59,522
                                                    USDA Loan Placement Fee             $    297,612
                                                    Other                               $     50,000
                                                    Total                               $ 16,281,429


                                                    NMTC CDE                                            Project
                                                    Sources                                             Sources
                                                    QEI                                 $ 15,874,295    QLICI A (Fed Gurantee)              $ 11,904,464
                                Federal Guarantee   Total                               $ 15,874,295    QLICI B (Subordinate NMTC CDE Loan) $ 2,976,116
                                                                                                        Fund Earnings                       $     92,451
               Federal             $11,904,464
                                                    Uses                                                Developer Equity                    $ 3,627,709
             Government         NMTC Allocation
                                                    QLICI A (USDA Gurantee)             $ 11,904,464
                                                    QLICI B (Subordinate NMTC CDE Loan) $ 2,976,116
                                                                                                        Total Sources                       $ 18,600,740

                                  $15,870,000       CDE Allocation Fee                  $    793,500    Uses
                                                    Closing Costs                       $    200,000    Project Costs & Working Capital     $   15,000,000
                                                    Total                               $ 15,874,295    Construction Interest               $    1,356,476
                                                                                                        DSRF                                $    1,506,174
                                                                                                        Fed Guarantee Fee                   $      238,089
                                                                                                        Transactions Costs                  $      500,000
                                                                                                        Total Financing Need                $   18,600,740

                John M. May
            Managing Director
Head of Alternative Energy Finance Group
           Stern Brothers & Co.
           (Office) 314.743.4026
            (Cell) 314.583.2130
    8000 Maryland Avenue Suite 800
           St. Louis, MO 63105

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