2009 ANNUAL MEETING AND EDUCATION CONFERENCE American College of Investment Counsel New York, NY

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1 2009 ANNUAL MEETING AND EDUCATION CONFERENCE American College of Investment Counsel New York, NY Recent Developments in Renewable Energy and Other Opportunities Under the American Recovery and Reinvestment Act 3:15 p.m. - 4:15 p.m. October 15, 2009 Philip F. Corsello Dewey & LeBoeuf LLP (Moderator) William H. Bulmer The Prudential Insurance Company of America Jessica A. Graf Greenberg Traurig, LLP

2 US Renewable Resource Investment Incentives and Recent Developments Presentation to: American College of Investment Counsel Annual Meeting and Education Conference October 15, 2009 By: Philip Corsello Dewey & LeBoeuf LLP Americas Europe Russia/CIS Asia Pacific Africa Middle East dl.com Summary of Recent Developments in US Renewable Energy Incentives White House Goal: Double the amount of renewable energy produced in the US in the next three years The American Recovery and Reinvestment Act of 2009 includes a number of incentives for energy projects Long-term extension of production tax credits Temporary election to claim the investment tax credit in lieu of production tax credits 30% investment tax credit in the year that the facility is placed in service, for facilities placed in service in 2009 or 2010 (energy property only) Cash grant from Treasury Department for 30% of the facility cost Repeal subsidized energy financing limitation on the investment tax credit Changes to, subsidies of and new solicitations under the Department of Energy Loan Guaranty Program Advanced Energy Manufacturing Project Credit 1

3 Overview of US Federal Tax Incentive Programs The US has historically subsidized renewable power projects in two main ways through the tax code: tax credits and accelerated/bonus depreciation deductions, both of which are used to offset income tax of the taxpayer. The subsidies enhance the revenue generated by a renewable facility and/or reduce the cost of a project. Internal Revenue Code (IRC) Section 45 production tax credits (PTCs) 2.1 per KWh renewable electricity production tax credit (increases for inflation annually) IRC Section 48 investment tax credits (ITCs) 30% of the basis of energy property placed in service during the taxable year Taxpayer selection of PTCs or ITCs Now also may select an equivalent cash grant 5-yr. depreciation energy property is typically depreciable over five years using a method that allows for greater depreciation in earlier years Bonus depreciation for assets placed in service in 2009 allows taxpayer to depreciate 50% of the eligible costs of an asset in the year it is placed in service and then continue depreciating the asset on an accelerated schedule 2 Overview of ITCs The ITC is available as a tax credit equal to 30% of the taxpayer s basis in property involved in the production of energy up to the transmission stage that is originally placed in service by the taxpayer Because of the originally placed in service requirement, in order to qualify for the ITC, an equity investor must be in place on or prior to the date the ITC eligible property is placed in service Basis reduction of 50% of the amount of the ITC claimed by the taxpayer Reduces available depreciation deductions to such property Subject to recapture if the taxpayer divests the eligible asset during the initial 5-year period after the placed-in-service date Amount of credit subject to recapture is 100% in year 1 and decreases by 20% of the initial total credit each year thereafter ITCs that cannot be used may be carried back 1 year and forward for 20 years in certain circumstances 3

4 Overview of PTCs PTCs go to the person that is both the owner of the renewable facility and the producer of the electricity Leasing structure cannot be employed for benefit of PTCs (neither party qualifies) Location project must be in US, but can sell across the border Applies to new projects Potential for additional PTCs by making significant upgrades to old projects State and local-level incentives can cause reductions (foreign subsidies not relevant) State credits will not reduce PTCs (including renewable energy credits), but other state incentives/subsidies based upon the cost of a project may do so 4 Overview of PTCs (continued) Passive loss rules smaller, passive individuals, S corps and closely-held C corps may have issues using PTCs as they are only permitted to offset against other passive income. These rules do not impact larger corporations. PTCs that cannot be used may be carried back 1 year and forward for 20 years in certain circumstances Unrelated person electricity purchaser must be unrelated to the owner of the wind farm (up to 50% overlapping ownership of wind farm may be permissible) Wind Project Safe Harbor IRS blessed the typical Pre-tax/After-tax Partnership (PAP) structure Issues remain (not all transactions fit within the Safe Harbor despite best efforts (e.g., safe harbor does not contemplate more than one developer) 5

5 Overview of Cash Grant Program The American Recovery and Reinvestment Act of 2009 (ARRA) authorizes Treasury to provide a cash grant in lieu of the PTC or ITC Applies only to energy property Facility must otherwise be eligible for PTCs or ITCs under the Code Applies to facilities placed in service during 2009 or 2010 (or if construction commences during such time and is completed by January 1, 2013 for wind, January 1, 2014 for other PTC eligible property or January 1, 2017 for ITC) Grant shall not be included in gross income of taxpayer, however, the basis of the property shall be reduced in the same manner as the ITC The ARRA contemplates that the cash grant shall be subject to recapture similar to the ITC 6 Overview of Department of Energy (DOE) Loan Guaranty Program Established Under Title XVII of the Energy Policy Act of 2005 (EPA) Section 1703 Authorized DOE loan guaranties to qualified projects avoid, reduce, or sequester air pollutants or anthropogenic emissions of greenhouse gases employ new or significantly improved technologies as compared to commercial technologies in service in the United States at the time the guaranty is issued DOE Loan Guaranty Regulations (issued October 23, 2007) 10 CFR Part 609 Original Section 1703 solicitations First in 2006 but no projects selected to proceed until March 2009 Issues: High costs of loans and DOE lien and security requirements 7

6 DOE Loan Guaranty Program: Key Financing Considerations DOE claims to approach its potential commitment like a commercial lender. Project must demonstrate a reasonable prospect of repayment of the principal and interest on the obligation by the borrower Guaranty Amount Up to 80% of project cost Project costs are those directly related to design, engineering, financing, construction, startup, commissioning and shakedown. Includes customary some soft costs (legal/consulting fees) but not others (e.g., affiliate expenses, costs of obtaining federal funds and post-completion operating expenses). If Guaranty is for less than 100% of the loan amount - can be made by any Eligible Lender. If for full 100% the loan must be provided by Federal Financing Bank. Loan term may not exceed earlier of 30 years or 90% of project s useful life Interest rate must not exceed a level that the DOE determines is appropriate taking into account interest rates charged by the private sector for similar loans and risks Equity investment requirements Cash equity commitment required to be significant (no bright-line level) 8 DOE Loan Guaranty Program: Key Financing Considerations (continued) Credit assessment requirement (This is a central application component) If corporate financed use most recent corporate credit rating If project financed (and project costs exceed $25M), project must get separate rating from nationally recognized agency Costs: Substantial: application, facility, facility maintenance fees, engineering and environmental reports; credit rating New: potential credit subsidy (ARRA/Section 1705 of EPA (Collateral requirements Section 1702 of EPA requires that the DOE s guarantied obligation not be subordinate to other financing Previous requirement: DOE 1 st lien on all project assets and control over collateral on default Effect: forced project finance structure, no co-tenancies; no utilities with outstanding first mortgage bonds New softer DOE interpretation pending 9

7 Recent/Pending Changes in DOE Loan Guaranty Program ARRA added Section 1705 to Title XVII of the EPA Expands program to spur Rapid Deployment of qualifying energy projects that can commence construction by September 30, 2011 No new or significantly improved technology requirement ARRA appropriated $5.965B to cover credit subsidy costs of the program Section 1705 qualifying projects: renewable energy systems, including those that generate electricity or thermal energy or manufacture components of such systems leading-edge biofuel projects (up to $500M per project) likely to become commercial technologies, producing transportation fuels with substantial reduction in GHG emissions Eligible, substantial electric power transmission facilities, including upgrades 10 Recent/Pending Changes in DOE Loan Guaranty Program (continued) Proposed amendments to DOE rules issued August 7, 2009 Proposes change in collateral requirements DOE now proposes that first lien on all project assets should be one element Secretary may consider for a project, but not required for all projects. DOE still will require that guarantied obligation is not subordinate to other financing (pari passu with other holders/lenders) Contemplates deal-specific DOE evaluation of collateral and intercreditor arrangements Issues Remain (e.g., intercreditor relationship between lenders and DOE) Comment period to proposed amendments recently extended 11

8 DOE Loan Guaranty Solicitations Since Implementation of ARRA DOE issued two Loan Guaranty solicitations on July 29, 2009 (6 th and 7 th solicitations to date) Solicitation for Projects that Employ Energy Efficiency, Renewable Energy and Advanced Transmission and Distribution Technologies the Innovative Technology Solicitation For renewable energy, advanced electric power transmission and leadingedge biofuels projects that employ a new or significantly improved technology that is not a commercial technology Solicitation for Electric Power Transmission Infrastructure Investment the Transmission Infrastructure Solicitation For large transmission infrastructure projects that use commercial technologies and commence construction by September 30, 2011 Additional solicitations forthcoming 12 Innovative Technology Solicitation $30B in DOE loan guaranties available from Section 1703 and 1705 appropriations/authorizations. The solicitation mixes the requirements of both categories. Key question of eligibility Section 1703 or Section 1705? Section 1703: new or significantly improved technology requirements apply to all Section 1705 eligibility requirements (credit subsidy costs covered by DOE): satisfy Section 1703 commence construction by Sept. 30, 2011 One of the following categories Biomass Efficient Electricity Transmission, Distribution and Storage Geothermal Solar Wind and Hydropower May also need to satisfy applicable ARRA requirements 13

9 Innovative Technology Solicitation (continued) DOE Review Criteria Factors Detail Weighting Technical Relevance and Merit 15.0% Technical Applicant Capabilities, Technical 20.0% Approach and Work Plan Environmental Benefits 15.0% Creditworthiness 30.0% Financial Construction Factors 10.0% Legal and Regulatory Factors 10.0% Total 100.0% 14 Innovative Technology Solicitation (continued) Other Eligibility Factors Project must be beyond pilot and initial demonstration phases Must show a minimum of six months operating and performance data, including 1,000-2,000 hours of operations data, from demonstration project. 15

10 Transmission Infrastructure Solicitation Solicitation for guaranties for substantial electric power transmission projects Eligible for $750 million provided in ARRA to subsidize credit subsidy costs Eligibility requirements: Commence construction by Sept. 30, 2011 Cannot be financed from private sources on standard terms (very important) Must meet one of the following criteria: new / upgraded lines more than 100 miles of 500+ kv, or 150 miles of 345 kv at least 30 miles of transmission cable underwater a high voltage DC component a major interregional connector designed as [within] a DOE National Interest Electric Transmission Corridor associated with offshore generation (e.g., open ocean wave energy, ocean thermal, or offshore wind) mitigates a substantial reliability risk for major population center, or is a set of improvements to an integrated system within a state or region that aggregated meet the first criteria above 16 Transmission Infrastructure Solicitation (continued) All other requirements for Section 1703 projects apply Commercial technologies are eligible Other factors: the availability of other federal and state incentives the importance of the project in meeting reliability needs project s effect on US, state and region s environment (including climate change) and energy goals 17

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