AN INTRODUCTION TO RENEWABLE ENERGY

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1 July 1, 2015 Institute for Professionals in Taxation -- San Diego AN INTRODUCTION TO RENEWABLE ENERGY Matt Haskins Principal PwC Washington, DC

July 1, 2015 Institute for Professionals in Taxation -- San Diego 2 With you today 600 13 th Street, NW; Suite 1000 Washington, DC 20005 Telephone: (202) 414-1570 Fax: (813) 329-9008 E-mail: matthew.

2 July 1, 2015 Institute for Professionals in Taxation -- San Diego 2 With you today th Street, NW; Suite 1000 Washington, DC Telephone: (202) Fax: (813) matthew.haskins@us.pwc.com Matt Haskins is a principal with PwC s Washington National Tax Services office, where he leads the firm's Cleantech and Sustainable Business Solutions tax practice, focusing on renewable energy, energy efficiency investments, and tradable environmental rights. In that role he works with clients ranging from cleantech manufacturers to project developers to multinational corporations seeking to improve their performance on energy and environmental issues. In recent transactions, Matt has advised both financial institutions and project developers on tax equity structures for wind, solar, biomass, and other renewables technologies. He has also worked with several clients on initial structuring for yieldco investments and acquisitions of pipeline assets by yieldcos. Matt has co-chaired the energy and environmental taxes working group for the U.S. Council on International Business and served as a delegate to the Organization for Economic Cooperation and Development's business advisory panels on tradable emissions permits and the development of the OECD's Green Growth Strategy. Matt earned a J.D. magna cum laude from Harvard Law School in 1995, an A.M. in public policy studies from Duke University in 1990, and a B.S. in Business summa cum laude from Miami University in He is a member of the District of Columbia and New York bar associations.

3 July 1, 2015 Institute for Professionals in Taxation -- San Diego 3 Agenda 1 Renewable energy incentives the basics 2 Unlocking value renewable energy transaction structures 3 Other emerging structures 4 The takeaway thinking about when and how to deploy renewables

4 July 1, 2015 Institute for Professionals in Taxation -- San Diego 4 Renewable energy incentives the basics

5 July 1, 2015 Institute for Professionals in Taxation -- San Diego 5 Section 45 PTCs PTC is equal to Production tax credit (PTC) $0.023 multiplied by the kilowatt hours of electricity produced by the taxpayer from qualified energy resources, at a qualified facility during the 10-year period beginning on the date the facility was placed in service, and sold by the taxpayer to an unrelated person during the taxable year. Applies primarily to wind and biomass projects The PTC is on the tax extenders list; it currently is available only for projects that began construction by 12/31/2014

6 July 1, 2015 Institute for Professionals in Taxation -- San Diego 6 Investment tax credit (ITC) Section 48 ITCs The ITC provides a 30% investment tax credit for solar, fuel cell and small wind property placed in service before 2017 and qualified facilities elected to be treated as energy property (and 10% for other types of energy property) With only 18 months left to place ITC assets into service for the full 30% credit, many developers are actively pursuing strategies to maximize asset deployment by the end of 2016 Taxpayers can elect to take the ITC on property that would be a qualified facility for the PTC The basis of the Section 48 property is required to be reduced by 50% of the amount of the ITC claimed (i.e., by either 15% or 5%, depending on the credit amount) Certain grandfathered projects also still may qualify for the Treasury section 1603 program, which allowed taxpayers to receive cash instead of ITCs for projects that began construction by the end of 2011

7 July 1, 2015 Institute for Professionals in Taxation -- San Diego 7 Accelerated depreciation Most renewable energy property qualifies for a special five-year class life under MACRS, and this benefit can be even more pronounced in years where bonus depreciation is available IRS guidance applies this to remaining basis following an ITC or Treasury grant claim (and the resulting basis haircut under Section 50(c)(3)). Example Eligible costs 100 Investment tax credit (30) Basis after reduction 85 Cash tax savings for 100% bonus depreciation (@ 35%) (30) TOTAL YEAR ONE BENEFIT 60

8 July 1, 2015 Institute for Professionals in Taxation -- San Diego 8 R&D and cost segregation Don t forget to consider how other tax incentives apply to sustainability projects Research Credit An incentive for companies to develop new or improved Products, Production processes, or Software The credit is determined based on incremental qualified expenses over an established base amount The net cash impact of the credit is 9.1 or 13 cents for every $1 of incremental QRE depending on the method adopted Permanent benefit State and global R&D tax credits also may be available Cost Segregation Distinguishes tangible property (which has a shorter depreciable life) from the building or structure (which has a longer depreciable life). Interplay with bonus depreciation makes this even more beneficial. Temporary difference but may help with short term ROI issues Think of cost segregation when there is new construction, renovations, expansions, or a purchase price allocation.

9 July 1, 2015 Institute for Professionals in Taxation -- San Diego 9 Energy efficiency The costs of energy-efficient commercial building property placed-in-service before 2014 are allowed as a deduction pursuant to IRC Section 179D for otherwise capital costs: The basis of any energy efficient commercial building property must be reduced by the amount of the deduction. The deduction is treated as depreciation. $1.80 Sq. ft. 179D deduction Must achieve certain energy reductions relative to a building baseline to be eligible for full credit. Government contractors may be eligible to have agencies assign them this deduction. Rev. Proc allows Form 3115 to claim open-year 179D benefits Note that 179D expired on 12/31/14 but may be extended

10 July 1, 2015 Institute for Professionals in Taxation -- San Diego 10 Alternative fuels and vehicles Credits for Alternative Fuels Excise and income tax credits for certain nonpetroleum fuels sold or used by taxpayer. Many of these credits expired on December 31, 2011 but potentially significant refund opportunities may exist. Tax credit(s) must be used against certain fuel excise tax first, and then may be applied against income tax or refunded. There is no limitation on the amount of the tax credit (i.e., no cap or phase-out). Thus, the entire amount of the credit is claimable. Credits for Alternative Vehicles Many alternative vehicles received tax credits but these credits in many cases have been fully claimed Tax credits remain for plug-in vehicles: $7,500 per vehicle Tax credits for alternative vehicle recharging stations -- $1,000 for residential and $30,000 for depreciable property Significant move by off-road vehicle makers to switch from propane or battery power to Hydrogen Fuel Cell power. $0.50/gal Alt. fuel Alt. fuel mixtures $0.60/gal Alcohol mixtures $1.00/gal Biodiesel mixtures

11 July 1, 2015 Institute for Professionals in Taxation -- San Diego 11 State and local incentives Many states, localities, and utilities offer incentives for climate change and sustainability. Income tax credits Property tax abatements Sales tax exemptions Bond financing or direct grant programs Rebates and subsidized financing Areas of focus in these programs Renewable energy Energy efficiency LEED buildings Property use/density State programs are often oversubscribed proactive planning is critical to achieving the desired benefits.

12 July 1, 2015 Institute for Professionals in Taxation -- San Diego 12 Unlocking value renewable energy transaction structures

July 1, 2015 Institute for Professionals in Taxation -- San Diego 13 Maximizing value of tax incentives Since many renewables companies are start-ups, they need to

13 July 1, 2015 Institute for Professionals in Taxation -- San Diego 13 Maximizing value of tax incentives Since many renewables companies are start-ups, they need to bring in partners to use the tax incentives. There are three commonly used structures for this. Partnership flip structure Saleleaseback structure Inverted lease structure

July 1, 2015 Institute for Professionals in Taxation -- San Diego 14 Maximizing value of tax incentives Since many renewables companies are start-ups, they need to

14 July 1, 2015 Institute for Professionals in Taxation -- San Diego 14 Maximizing value of tax incentives Since many renewables companies are start-ups, they need to bring in partners to use the tax incentives. There are three commonly used structures for this. Partnership flip structure Saleleaseback structure Inverted lease structure

15 July 1, 2015 Institute for Professionals in Taxation -- San Diego 15 General Characteristics FLIP structures Developer (clean tech company with know-how and typically the management resources) and Tax Equity Investor (a capital investor with passive involvement). Developer doesn t have tax capacity to take the tax credits and other benefits (e.g., depreciation) derived from project. The Developer is able to finance the project largely using credits and accelerated depreciation that may have otherwise been worthless. Investor contributes cash to the project for an expected IRR in the form of return of capital and tax savings (via tax credits, accelerated depreciation and grants, etc.). Project held in a separate legal entity ( Project Company ) which has a power purchase agreement ( PPA ) with customers. Generally, the Investor wants to sell its partnership interest after reaching the expected IRR ( FLIP Date ), but the Developer wants to continue the project.

16 July 1, 2015 Institute for Professionals in Taxation -- San Diego 16 FLIP structures the blueprint Revenue Procedure Developer Project Company Cash 1% 99%** Tax Equity Investor(s) Wind Farm ** Often through a put/call arrangement, the Investor may exit the investment after 10 or more years (or once the flip is achieved).

17 July 1, 2015 Institute for Professionals in Taxation -- San Diego 17 FLIP structures lifecycle Typical Operating Profile Pre-FLIP Date: 99% of gross income, deductions, and production credits allocated to Investor until IRR is achieved. Cash distributed to Developer until capital contributions are returned. Remaining cash distributed to Investor until IRR is achieved. Post FLIP Date: 95% of gross income, deductions and cash are allocated to the Developer (5% to Investor).

18 July 1, 2015 Institute for Professionals in Taxation -- San Diego 18 FLIP structures issues Technical Issues Compliance with Revenue Procedure Partnership tax rules that may limit ability to fully allocate deductions or credits Potential deficit restoration obligations or minimum gain chargebacks for tax accounting purposes Modeling Issues Compute Investor s IRR and Flip Date Loss limitations (e.g., Investor s capital plus limited DRO) Basis limitations Minimum gain chargeback Gain on exit HLBV Risk of credit or grant recapture if ownership structure changes in first five years Other issues

19 July 1, 2015 Institute for Professionals in Taxation -- San Diego 19 FLIP structures common accounting issues Consolidation - Which entity should consolidate the Project Company - Determines whether day 1 revenue recognition is possible for the Developer Day 1 Revenue Recognition for Developer - Sale or Financing? Day 2 Revenue Recognition relating to Project Company - How to allocate income between Developer and Tax Equity Investor? Impact of PPA accounting (consider if it is a lease) on: - Consolidation - Revenue Recognition

20 July 1, 2015 Institute for Professionals in Taxation -- San Diego 20 Maximizing value of tax incentives Since many renewables companies are start-ups, they need to bring in partners to use the tax incentives. There are three commonly used structures for this. Partnership flip structure Saleleaseback structure Inverted lease structure

21 July 1, 2015 Institute for Professionals in Taxation -- San Diego 21 Sale-leaseback structures 4. PPA Payment 2. Lease Utility 3. Power Developer 1. Sell Equipment Investor -Production Revenue -Operating expenses -Rent Expense - Rental Income - Depreciation Overview Investor purchases the qualified equipment from Developer for cash and a note Investor claims ITC and depreciation Developer leases the equipment back from the Investor Developer produces power and sells to utility under a PPA Pursuant to an option at end of the lease term, Developer repurchases the equipment from the Investor

22 July 1, 2015 Institute for Professionals in Taxation -- San Diego 22 Sale/leaseback structures common accounting issues Consolidation - If a separate special purpose entity is created by the Investor, Developer is most likely required to consolidate the entity and cannot recognize revenue. Day 1 Revenue Recognition for Developer - Developer to consider if the equipment qualifies as real estate. If so, revenue recognition is precluded due to the repurchase option. Day 2 Revenue Recognition for Developer - Depends on whether PPA is a lease and its lease classification - If PPA is a lease, Developer to also consider the income statement geography for the lease-in-lease-out transaction and whether such should be presented gross vs. net.

23 July 1, 2015 Institute for Professionals in Taxation -- San Diego 23 Maximizing value of tax incentives Since many solar companies are start-ups, they need to bring in partners to use the tax incentives. There are three commonly used structures for this. Partnership flip structure Saleleaseback structure Inverted lease structure

24 July 1, 2015 Institute for Professionals in Taxation -- San Diego 24 Sample inverted pass-through lease structure Sponsor/Developer Managing Member 51% 49% Lease + Credits Master Tenant Cash PPA Payments Investor Cash Power Project Owner Utility

25 July 1, 2015 Institute for Professionals in Taxation -- San Diego 25 Inverted pass-through lease structures Overview Project Owner leases facility to Master Tenant and passes through ITC. Master Tenant generates and sells power to utility under PPA. Tax Equity Investor s cash is contributed to the Project Owner and used to finance project. Master Tenant uses the PPA payments to make lease payments under the Master Lease. Project Owner allocates 51% of depreciation to Developer. Project Owner pays development fee which is included in cost basis.

26 July 1, 2015 Institute for Professionals in Taxation -- San Diego 26 Inverted pass-through lease structures Technical Issues Developer issues - Indemnities/guarantees of credits and benefits - Deferred developer fees inclusion in cost basis Investor issues - Income inclusion under old section 48(d)(5) (1/2 of ITC) - Recapture of ITC - sale within 5 years or reduction in profits interest - Partnership basis limitations on depreciation

27 July 1, 2015 Institute for Professionals in Taxation -- San Diego 27 Inverted leases common accounting issues Consolidation - Both Developer and Investor to consider who should consolidate Master Tenant entity. Day 2 Revenue Recognition - Need to consider the classification of lease arrangement between Master Tenant and Project Company. - Need to consider whether PPA contains a lease and its lease classification and impact on P&L and EPS.

28 July 1, 2015 Institute for Professionals in Taxation -- San Diego 28 Other emerging transaction structures

29 July 1, 2015 Institute for Professionals in Taxation -- San Diego 29 Hannon Armstrong PLR Recent PLRs and impact on market Solar REIT Limited practical impact Windstream PLR MLP permitted Telecommunications assets Distribution system Possible extension to other utilities and possibly portions of renewable assets Kinder Morgan Reverse MLP Reduce complexity Reduce borrowing costs Create cash flow to invest in new assets

30 July 1, 2015 Institute for Professionals in Taxation -- San Diego 30 MLP Parity Act YIELDCOs and MLPs Would have permitted renewable assets in MLPs YIELDCOs The DeFacto MLP Partnership vehicle YIELDCO is actually C Corporation Partnership holds renewable assets Income and depreciation flow to YIELDCO to cancel entity level taxation Investors receive return of capital distributions if E&P properly managed Renewable assets typically post-itc recapture GP YIELDCO ASSETS

31 July 1, 2015 Institute for Professionals in Taxation -- San Diego 31 The takeaway thinking about when and how to deploy renewables

32 July 1, 2015 Institute for Professionals in Taxation -- San Diego 32 Think about tax incentives when... You are building LEED-certified facilities or retrofitting existing facilities to improve energy efficiency You want to install renewable energy (wind, solar, etc.) to support your carbon reduction commitments You embed sustainability into R&D by using more environmentally friendly materials, reducing packaging, etc. You use alternative fuels or alternative vehicles in corporate fleets or install an alternative fuel vehicle refueling station

33 July 1, 2015 Institute for Professionals in Taxation -- San Diego 33 Making sure you don t miss opportunities No strategy Ad hoc approach for completed projects Tax function consulted to evaluate project on an after-tax basis Tax function fully integrated in sustainability planning Tax approaches to sustainability are evolving from ad hoc efforts toward full integration How can your company ensure that capital expenditure budgeting is done on an after-tax basis?

34 July 1, 2015 Institute for Professionals in Taxation -- San Diego 34 What s available to support your green initiatives? Accelerated depreciation for energy efficiency Production tax credits Investment tax credits Bonus depreciation and R&D credits State and local incentives AND utility rebate programs Alternative fuels and vehicles

35 July 1, 2015 Institute for Professionals in Taxation -- San Diego 35 Making sure you don t miss... your capital budgeting process Establish regular communication between tax and capital budget functions Build on existing capex approval process Identify key projects for further review of incentive opportunities

36 July 1, 2015 Institute for Professionals in Taxation -- San Diego 36 Questions? This document is provided by PricewaterhouseCoopers LLP for general guidance only, and does not constitute the provision of legal advice, accounting services, investment advice, written tax advice under Circular 230 or professional advice of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal or other competent advisors. Before making any decision or taking any action, you should consult with a professional adviser who has been provided with all pertinent facts relevant to your particular situation. The information is provided as is with no assurance or guarantee of completeness, accuracy or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties or performance, merchantability, and fitness for a particular purpose PricewaterhouseCoopers LLP. All rights reserved. In this document, PwC refers to PricewaterhouseCoopers LLP, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.

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