Matt Ferguson. Tax & Accounting Issues. Financing Wind Power: The Future of Energy May 8 & 9 The Phoenician Scottsdale, AZ

Transcription

1 Tax & Accounting Issues Matt Ferguson Financing Wind Power: The Future of Energy May 8 & 9 The Phoenician Scottsdale, AZ

2 Reznick Group Public Accounting, Tax, and Business Advisory Firm Registered With the PCAOB SEC Practice for Public Companies Over 1400 Employees Consulting Services

3 Overview Reznick Group U.S. Wind Development Monetization Benefits Risks CFO 5 Questions Common Issues Accounting Tax

4 US Wind Development IRC 45 + MACRS Federal government pays 2/3 rd of capital cost of wind power projects Production Tax Credit (PTC) earned over 10 years based upon electricity production and sale Recover portion of capital cost through depreciation deduction over 5 years State incentives may pay a portion of cost State renewable portfolio standards

5 Partnership Wind developer admits an institutional investor with a tax base to be its partner and own the project Investor Tax Equity Investor is allocated most of the economic returns until a flip date that is no earlier than when the investor reaches a target return Tax Equity Investor s interest flips down to 5% or 10% Developer has option to repurchase interest Developer remains the managing member or general partner of the partnership and is responsible for the day-to-day operation of the project Major decisions require Investor input

6 Project Development Monetization Developer (General Partner) 1% Corporate Investor (Limited Partner) 99% Must own the facility, produce Kwh, & sell to third party Project Partnership (LP (LP or or LLC) PTC is enjoyed in same proportion of gross revenues PTC cannot be sold separately The party claiming the PTCs must also produce the electricity Owner must retain the risks of operation

7 Monetization Investor Perspective Investment that is managed like a publicly traded stock Stable and predictable benefits stream like a bond Make money Avoid negative press No surprises Avoid or Eliminate Uncertainty Confidence in Valuation and Accounting

8 Benefits for Financial Investor General business tax credit used to offset tax liability Accelerated tax depreciation Understandable risk and confidence in valuation and accounting for the transaction

9 Risks Business Issues/Risks Wind does not blow Sale of Electricity - Power Purchase Agreement Project risk - construction, operations, maintenance, warranties Tax Issues/Risks Partnership formation Economic substance Capital account issues related to front-loaded losses

10 Five Questions every CFO will ask 1. How do I record the transaction on my books? 2. Will I have to consolidate the business on my books? 3. What happens when performance varies from forecast? 4. Do I have any future financial obligations or risks? 5. Does the structure or operation create tax risk that impacts my books?

11 Five Questions every CFO will ask 1. How do I record the transaction on my books? Methods of Accounting Equity Method Not in control but able to exert significant influence Hypothetical Liquidation Book Value (HLBV) Consolidation Method Investor is the controlling party Cost Method No ability to exercise control over operating activities Investments of more than 3% to 5% are not minor - SEC

12 Five Questions every CFO will ask 2. Will I have to consolidate the business on my books? Consolidation of Variable Interest Entities (VIE) Equity at risk is insufficient to self finance activities Equity holders lack any one of the following: Ability to make decisions about activities that significant impact Obligation to absorb losses Residual ownership Varying voting rights

13 Five Questions every CFO will ask 3. What happens when performance varies from forecast? Impairment

14 Five Questions every CFO will ask 4. Do I have any future financial obligations or risks? Asset Retirement Obligations

15 Five Questions every CFO will ask 5. Does the structure or operation create tax risk that impacts my books? Accounting for uncertainty in income taxes Whether transaction will more likely than not succeed upon IRS audit assuming full knowledge

16 Common GAAP Issues Revenue Recognition Guarantee/Warranty Accounting for Uncertainty in Income Taxes Method of Investment Accounting Consolidation of Venture - FIN 46(R) Fair Value Accounting Impairment Lease Push-Down Accounting Depreciation Asset Retirement Obligation Operating and Maintenance Profit Allocation Reserves Rebates REC Contingent Promises

17 Matt Ferguson (703) Joe Cruz (703) Beth Mullen (916) Gloria Morse (512)