CREBs: Financing for Renewable Energy Projects

Robinson & Cole LLP David M. Panico [email protected]

(860) 275-8390

What is a CREB?

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CREB: “clean renewable energy bond” Enacted as part of Energy Tax Incentive Act of 2005 Section 54 of Internal Revenue Code Expired December 31, 2008, but was extended by H.R. 1424 to December 31, 2009

Tax Credit Bond

– Provides holder with a credit against tax, rather than tax exempt interest – Credit rate and term set by IRS – Level principal paid in each year of term – Taxable bond, but subject to some tax exempt provisions – Amount of credit included in gross income – Designed to provide issuers with 0% interest cost

Economics of Issue

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$2.5 million CREB sold April 2008 15 year maturity $166,666.67 annual principal Credit rates 3.30% (2008) to 5.73% (2022) 0.85% supplemental interest rate

Economics of Investment

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$2.5 million CREB sold April 2008 Credit for 2022 maturity: 5.73% Supplemental Interest Rate: 0.85% For holder of $100,000 par amount:

– Tax credit – Interest – Tax on Credit Amount ($5,730 X 35% tax rate) – Tax on Supplemental Interest ($850 X 35% tax rate)

Net benefit

$5,730 850 (2,006) ( 298)

$4,276

CREB Requirements:

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Bond is issued by “qualified issuer” Allocation by Secretary of national CREB limit 95% of proceeds used for capital expenditures for qualified project Designation as CREB and registered form Spending and arbitrage requirements

Qualified Issuers

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Clean renewable energy bond lender

– Lender/coop with 100 or more owners or 100 or more loans to coop electric companies

Cooperative electric company

– 501(c)(12) or 1381(a)(2)(C) – Not-for-profit electric utility with loan or loan guarantee under Rural Electrification Act

Governmental body

– State, political subdivision, Indian tribal governments

Allocation

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$800 million originally

– Increased to $1.2 billion in 2006

No more than $750 million for governmental units or Indian tribes Secretary allocates limitation in manner Secretary determines appropriate

– Allocated in order of smallest requests first

Qualified Projects

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Qualified facilities under Code Section 45(d) Wind facilities

– facility using wind to produce electricity – turbine, blades, generator, tower, pad

Closed-loop biomass facilities

– use organic material intended for use as fuel

Open-loop biomass facilities

– use agricultural livestock waste, wood shavings, wood pallets and crates, crops and crop by-products

Qualified Projects

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Geothermal or solar energy facilities

– produce geothermal energy from natural heat stored in rocks, liquid or vapor

Small irrigation power facilities

– use irrigation system canal or ditch

Landfill gas facilities

– use methane from biodegradation of municipal solid waste

Qualified Projects

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Trash combustion facilities

– Burn municipal solid waste to produce steam to drive turbine

Refined coal production facilities

– produce refined coal to be used to produce steam

Qualified hydropower facilities

– produce hydroelectric power

Spending and Arbitrage Requirements

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95% or more of proceeds spent for qualified project within five years

– can be extended for reasonable cause – if not met, nonqualified bonds must be redeemed within 90 days – commitment for 10% or more of proceeds within six months – projects completed and proceeds spent with due diligence

Spending and Arbitrage Requirements

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Arbitrage Requirements of Section 148

– Yield limitations • five year temporary period • yield reduction payments available – Rebate requirement • regular rebate exceptions apply • small issuer exception includes CREB amount • yield would be 0% assuming no OID or supplemental interest payment

Spending and Arbitrage Requirements

– Refinancing and Reimbursement • CREB proceeds can be used to refinance another obligation incurred after August 8, 2005 • CREB proceeds can be used for reimbursement of expenses after August 8, 2005 if: – prior to payment of expenditure, borrower declares intent to reimburse with proceeds of CREB – issuer adopts DOI not later than 60 days after expense – reimbursement occurs not later than 18 months after expenditure

Application Process

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Applications for latest $400 million were due July 13, 2007

– Additional allocation would have new deadline

Application form included in IRS Notice 2007-26

– Submitted by qualified issuer – Identifies qualified borrower – Detailed description of qualified project – Certification by independent engineer – Prior CREB allocations, if any – Location of project – Plan to obtain all federal, state and local approvals

New Legislation

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H.R. 1424 (Passed by Senate 10/01/08 & House 10/03/08)

– Extension to December 31, 2009 for issuance of CREBs – Creation of two new types of Tax Credit Bonds: • New Clean Renewable Energy Bonds • Qualified Energy Conservation Bonds

New Clean Renewable Energy Bonds “New CREBs”

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Allocation by Secretary of the $800M national New CREB limit 1/3 of the allocation available to each of (i) Public Power Provider, (ii) Governmental Body and (iii) Cooperative Electric Company 100% of proceeds used for capital expenditures for qualified project

New Clean Renewable Energy Bonds “New CREBs”

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Designation of bond as New CREB Qualified Issuers – same three as for CREBs with the addition of a Not-For-Profit Electric Utility Qualified Projects are the same as for CREBs with the exception that New CREBs cannot finance a refined coal production facility Annual credit for New CREBs is 70% of rate determined for tax credit bonds

Qualified Energy Conservation Bonds “QECBs”

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Allocation by Secretary of the $800M national QECB limit - allocations are in proportion to populations of States Allocation available only to States and Large Local Governments (a municipality or county with a population of 100,000 or more) 100% of proceeds used for Qualified Conservation Purpose QECB issued by State or local government

Qualified Energy Conservation Bonds “QECBs”

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Designation of bond as QECB Numerous Qualified Conservation Purposes Annual credit for QECBs is 70% of rate determined for tax credit bonds Allocation to Large Local Governments may be reallocated to State Up to 30% of QECB may be used for private activity bonds