Transcript Financing Renewable Energy Projects: Bond Financing Alternatives S. 672 Windustry Renewable Energy Seminar Denver, Colorado June 1, 2007 Renewable Energy Seminar Lee White Executive Vice President [email protected] 303-391-5498 Page 1

Financing Renewable Energy Projects:
Bond Financing Alternatives
S. 672
Windustry Renewable Energy Seminar
Denver, Colorado
June 1, 2007
Renewable Energy Seminar
Lee White
Executive Vice President
[email protected]
303-391-5498
Page 1
Presentation Overview
Lee White
George K. Baum & Company
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George K. Baum & Company
•
Current Federal Incentives: Production Tax Credit (PTC) & Accelerated Depreciation &
Clean Renewable Energy Bonds (CREBs)
•
Renewable Energy Finance Coalition
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Tax-Exempt Bond Financing: Senate Bill 672
George K. Baum & Co. S. 672 Community Renewable Energy
Bond Presentation
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George K. Baum & Company
• George K. Baum & Company has been engaged for the following renewable energy
projects:
– Two community wind projects
– One tribal community wind project
– Five Clean Renewable Energy Bond (CREB) applications/projects (two wind power,
one solar and two hydro projects)
– Tax exempt municipally owned solar and hydro projects
– Financial Advisor to City of Chicago re solar thermal domestic hot water project
• Several colleges and universities have engaged George K. Baum & Company to investigate
potential wind power projects: Both as a part of their endowment investments and as
educational/environmental assets
• Baum is assisting the Renewable Energy Finance Coalition to identify and support
additional financing vehicles for community renewable energy projects
George K. Baum & Co. S. 672 Community Renewable Energy
Bond Presentation
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Current Federal Incentives
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Production Tax Credit ( PTC)
– 1.9 cent per KWH federal income tax credit
– 10 years of project operation eligible for PTC credit
– Reauthorized in 2005 Energy Bill for projects put in operation by December 31, 2007,
renewed to 2008
– Owner of project only entity eligible to receive federal tax credit
– Federal 10 year cost: $2.7 billion
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Accelerated MACRS Depreciation
– 5 year accelerated depreciation of wind equipment
•
The combination of the PTC and MACRS provide most of the net cash flow for wind
projects during the first 10 years of operation.
•
Clean Renewable Energy Bond (CREBS): Coops, local governments, and Indian
Tribes: Federal 10 year cost $411 million
George K. Baum & Co. S. 672 Community Renewable Energy
Bond Presentation
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Current Financing Models
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PTC Equity Investor “Minnesota Flip”
– Tax motivated investor owns 99% of project for first 10 years then ownership
flips to developer, land owner or other investors
– Contracts with utility to sell the wind power and the Renewable Energy Credits (
RECS) via the PPA
– Usually 60 % or less Loan to Value: Bank financing for loan portion
Utility Owned: 10,000 MW in US at end of 2006
– Major utility finances project with cash/bank debt and uses PTC credits itself
( FPL, PPM, Mid America)
- Over 40% of all privately owned wind projects are owned by one company ( FPL)
and 67% by 5 companies ( Source: AWEA)
Community/land owner model: Very little local ownership…less than 2%
– Difficult to achieve since little appetite/ability to use substantial PTC federal tax
credits
– Land owner usually ends up with minor owner ship share (1%) and modest land
lease revenues
George K. Baum & Co. S. 672 Community Renewable Energy
Bond Presentation
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The Difference Between Tax Credit Bonds
and Tax-Exempt Bonds
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Tax Credit Bonds, e.g. CREBS
– The Federal Government provides the bond holder a tax credit against their federal income
tax liability equal to the interest rate they would have earned as a bond holder.
– The Tax Credit bond holder derives 100% of their bond “interest” from the Federal
government
– The Coop or government that issues a CREB therefore only has to repay the principal of the
CREB to the bond holder
– This is a useful but expensive federal subsidy to a renewable project
•
Tax Exempt Bonds, e.g. Rural Community Energy Bonds per S. 672
– Interest paid to a bondholder is exempt from federal and state income taxes
– The bond investors will accept a lower interest rate since they do not have to pay taxes on the
income
– Still, interest must be paid to the bondholder by the bond issuer as well as repayment of the
bond’s principal
– The cost to the Federal government in lost taxes on interest income is more modest and
therefore less expensive federal subsidy than a tax credit bond
George K. Baum & Co. S. 672 Community Renewable Energy
Bond Presentation
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Renewable Energy Finance Coalition
• Goal is for Congress to encourage local renewable project ownership. Modify tax code to
allow privately owned wind projects to be financed with tax-exempt bonds: A compliment
to PTC & CREBs and not a replacement for these incentives
• Formed in 2005 by members of the renewable energy industry
• Seeking congressional and gubernatorial support
• Much Grassroots Support : Windustry, farm and environmental group, rural banks
• Tax-exempt bond financing is among the least expensive forms of long-term capital
• Incentive would decrease cost of capital of deliverable renewable energy
• Tax exempt bonds will have a reduced net negative federal budget consequence
compared to PTC
• Would result in more community owned renewable energy projects with enhanced local
economic benefits
• www.REFCoalition.com
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Bond Presentation
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Tax-Exempt Bond Financing: S. 672
• Introduced by Sen. Salazar ( D-C0) and Sen. Smith (R-Or)
• Objective: Permit more of the economic benefits of renewable projects to remain in the
community
• Private Purpose tax-exempt Bonds ( a 15th category) which provide the lowest cost of
capital available for privately projects
• 40 mw or smaller projects and at least 49 % locally owned: Not targeted toward large
utility scale projects ( e.g. 100 mw and up)
• Not designed to compete with the PTC but to provide another federal renewable incentive
for community scale projects
• Borrower benefits from low tax-exempt interest rates (now about 5%) but must forego
50% of PTC
• Secured by Power Purchase Agreement (PPA) with a credit-worthy utility
• Typical amortization is 15-20 years to match PPA
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Bond Presentation
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Bond Financing for Renewable Energy Projects
After S. 672
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Taxable and tax-exempt bond financing available
•
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Taxable with 100% PTC
Tax exempt with 50% PTC
•
Access lower cost of capital bond market as contrasted to commercial bank loans
•
Secured by a Power Purchase Agreement (PPA) with a credit-worthy utility/power purchaser
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A 15-20 year mortgage-style amortization to correspond to the duration of the PPA
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Smaller projects may be “pooled”
– Combined project cost of at least $10 mm
– Otherwise bond issue is not cost effective due to cost of issuance
•
Two primary types of borrowers
– Private developers who could qualify for either taxable debt or tax-exempt bonds
– Governmental entities and 501(c)(3) borrowers who are eligible borrowers of tax-exempt bonds
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Lee White
Executive Vice President
LEE WHITE is an executive vice president and manager for George K. Baum & Company at its Denver
Public Finance office. He has been in the investment banking business for more than 20 years 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. Mr. White
has served as the lead or co-lead banker on a number of major utility financings including $79.5
million Pollution Control Revenue Refunding issue for Public Service of Colorado. Other electric
utility issues in which he has been involved in recent years include: $16 million Cheyenne Light Fuel
and Power, $20 million Wyoming Municipal Power Agency, $60 million City of Colorado Springs and
$324 million City of Colorado Springs. He is actively involved in financing renewable energy projects.
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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Bond Presentation
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George K. Baum & Company
• Founded in 1928, George K. Baum & Company is one of the nation’s oldest privately held
investment banking firms.
– Underwriting of fixed rate and variable rate tax-exempt bond financings
– Refundings
– Rating Agency presentations
– Assistance in obtaining credit enhancement
– Variable rate remarketings
– Derivative products
• Since 1990, Baum has been involved with more than 5,470 municipal bond issues,
totaling more than $179 billion
• In 2006, our firm served as underwriter or financial advisor for 33 utility issues –
including both water and sewer and public power transactions – totaling $892 million
• George K. Baum & Company maintains public finance offices in 16 U.S. cities
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Bond Presentation
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