Finance & Tax Seminar

Transcription

1 Finance & Tax Seminar June 1 st -2 nd, 2017 New York, New York Thank You to Our Sponsors June 2,

2 Welcome Abby Hopper President & CEO, SEIA

3 Master of Ceremonies John Marciano Partner, Akin Gump Strauss Hauer & Feld LLP

4 Washington Update Moderator Brandon Audap Director of Federal Affairs, SEIA Lee Peterson Senior Manager, Renewable Energy, CohnReznick Gregory Jenner Partner, Stoel Rives LLP Aruna Kalyanam Tax Counsel, House Committee on Ways and Means William Davis Tax Policy Counsel, U.S. House of Representatives

5 Finance & Tax Seminar June 1 st -2 nd, 2017 New York, New York Thank You to Our Sponsors June 2,

6 Opening the Small C&I Sector: Platforms to Underwrite, Insure and Pool Unrated Credits Moderator Michael Mendelsohn Senior Director of Project Finance and Capital Markets, SEIA Andrew Gilligan Senior Director, Investments, SolSystems Jonathan Abe CEO, SunWealth Graham Smith CEO and Founder, Open Energy Brian Jones Founder, Windmill Capital Management

7 Private Equity Investment Moderator Andrew Jack Partner, Covington & Burling David Zwillinger Senior Vice President, D.E. Shaw & Co. Laura Stern Co-founder and President, Nautilus Solar Energy Kathryn Rasmussen Vice President, Capital Dynamics Ja Kao President, Onyx Renewable Partners

8 Finance & Tax Seminar June 1 st -2 nd, 2017 New York, New York Thank You to Our Sponsors June 2,

9 Mergers & Acquisitions Moderator Mona Dajani Principal Partner, Baker & McKenzie LLP Conor McKenna Managing Director, CohnReznick Capital Skip Grow Managing Director, Morgan Stanley John Marciano Partner, Akin Gump Strauss Hauer & Feld LLP Thomas Plagemann Chief Commercial Officer, Vivint Solar

10 Financing & Tax Challenges with Solar+Storage Projects Moderator Elliot Hinds Partner, Crowell & Moring Bill Bush Chief Financial Officer, STEM, Inc. Joel Meister Tax Manager, Deloitte Rhys Marsh Director, CIT

11 Relevant IRS Private Letter Rulings PLR July 11, 2011 PLR October 27, 2011 PLR November 20, 2012 Energy property Utility-scale wind Utility-scale wind (subject to curtailment) Rooftop solar PV (prospective for typical customer) Storage device Li-ion battery Advanced lead acid battery Undisclosed battery Placed in Service Timeframe Unclear. Wind farm is described as including the storage device. PLR notes that selected turbines have already begun to be put into service. Storage device would be placed in service after wind farm was already operational. Added to address curtailment. Battery included with PV system Use case(s) Frequency regulation - Time shifting - Frequency regulation - Time of use - Demand charge management - Frequency regulation - Ramp rate June 2,

12 Relevant IRS Private Letter Rulings PLR July 11, 2011 PLR October 27, 2011 PLR November 20, 2012 Non-qualified input % Redacted - reportedly ~3% no methodology discussed Redacted - reportedly ~15% no methodology discussed No mention of inputs from grid or other non-qualifying sources IRS analysis Mentions dual use rules, but only concludes that it is not auxiliary equipment Mentions dual use rules, but only concludes that it is not auxiliary equipment Notes inputs from solar and grid for offpeak/peak use, as well as supplying to grid during peak hours via NEM IRS conclusion Full cost eligible for ITC in lieu of PTC election under IRC Section 48(a)(5) Full cost eligible for ITC in lieu of PTC election under IRC Section 48(a)(5) - Applies dual use rules - No additional credit for subsequent increase in % June 2,

13 Recurring Issues Property that is Integral vs. Functionally Interdependent How do PPAs and other contracts describe the storage function? Eligibility of Storage Property Added to Existing Energy Project Separate Ownership of Qualifying Energy Generation (QEG) and Storage Property Dual Use Equipment Rule Compliance During 5-Year Recapture Period Drawing the box to identify relevant property Uncertainty around measurement methodology Who bears the risk of recapture? More recently: Is the energy storage device really just part of the transmission stage? (see Treas. Reg (d)(3)) Storage eligibility under IRC section 25D June 2,

14 Finance & Tax Seminar June 1 st -2 nd, 2017 New York, New York Thank You to Our Sponsors June 2,

15 Finance & Tax Considerations with Low & Middle Income Solar Moderator James Duffy Partner, Nixon Peabody Benjamin Healey Director, Clean Energy Finance, Connecticut Green Bank William Bocra Managing Partner, Baker Martin Capital, LLC Harshul Banthia Director, Sustainable Capital Advisors Lee Peterson Senior Manager, Renewable Energy, CohnReznick

16 SEIA Federal Policy & Finance Brandon Audap, Director of Federal Affairs, SEIA Michael Mendelsohn, Senior Director of Project Finance and Capital Markets, SEIA Low & Moderator Income Solar James Duffy Partner, Nixon Peabody Mergers & Acquisitions John Marciano Partner, Akin Gump Strauss Hauer & Feld LLP Ask the Experts Credit Risk Jonathan Silver Managing Partner, Tax Equity Advisors Tax Equity Jessica Robbins Director of Structured Finance, Sol Systems Solar + Storage Joel Meister Tax Manager, Deloitte

17 Finance & Tax Seminar June 1 st -2 nd, 2017 New York, New York Thank You to Our Sponsors June 2,

18 Welcome June 2 Thomas Plagemann Chief Commercial Officer, Vivint Solar

19 State of the Solar Industry Thomas Plagemann Chief Commercial Officer Vivint Solar SEIA s Solar Goes Corporate June 2, 2017

20 Growth of Residential Solar Share of solar capacity additions by generation source Key Question: How should we interpret this recent slowdown in the residential solar space? Source: GTM Research / SEIA SEIA s Finance and Tax Seminar 2

21 Installed Capacity Over Time is Nonlinear U.S. utility-scale electric capacity additions and retirements ( ) U.S. utility-scale electric generating capacity by initial operating year (as of December 2016 Source: EIA; U.S. Energy Information Administration, Electric Power Annual and Preliminary Monthly Electric Generator Inventory SEIA s Finance and Tax Seminar 3

22 Industry Matures, Focus Shifts Vivint Solar installs and revenues ( ) Key Takeaway: % Change More important metric for developer than year over year install growth is growth in installed base and increasing revenues. Installs (MWs) % Installed Base (MWs) % Revenues $64M $135M +111% Source: Vivint Solar SEIA s Finance and Tax Seminar 4

23 Solar Distress and Bankruptcy Two Forms of Capital: 1. Developer or Development Capital 2. Asset Finance or Project Finance Unconstrained use of developer capital to pay for non-productive expenditures Developer expenses have to be amortized in asset cash flows if you are going to own and operate Other than the YieldCo model, fairly disciplined model for finance Cash-flow based, verifiable, not based on assumed growth or future success in developing new projects Capital-intensive infrastructure does not grow linearly hard to finance future asset sales Key Takeaway: Distress caused by inexperience and not matching capital structure to business not industry fundamentals. Case Studies: SEIA s Finance and Tax Seminar 5

24 Availability of Capital Overview of VSLR Capital Raised Since March 2016 MAR 2016 Subordinated Hold Co. Debt $200M JUL 2016 Tax Equity Fund $75M AUG 2016 Bank Debt $300M OCT Tax Equity Funds $100M DEC 2016 Tax Equity Fund $100M JAN 2017 Rated Long-term Bond $200M MAR 2017 Renewed and Extended Warehouse Facility $375M Key Takeaway: Sound capital structures and solid business plans will continue to drive capital investment. MAY 2017 Tax Equity Fund $100M $1,450M Source: Vivint Solar SEIA s Finance and Tax Seminar 6

25 Solar Loans vs. PPA: The Great Debate Share of third-party vs. customer-owned PV systems ( E) Source: GTM Research SEIA s Finance and Tax Seminar 7

26 Loan Capital Availability Driving Adoption 20 year consumer financing is not the norm Early solar loan products were cumbersome and complicated Loan product evolved to meet market s need for simplicity and frictionless origination Companies like Mosaic figured out how to access temporary capital and increasingly term capital for these loans Limited players offer Loans and PPAs side by side Key Question: Are loans indicative of a shift in consumer preferences or something else? Insufficient history and experience to determine true preference Both are powerful financing tools and suitability will depend on various customer specific characteristics SEIA s Finance and Tax Seminar 8

27 Paris Agreement Clean Power Plan Coal Industry Power Grid Study SEIA s Finance and Tax Seminar Suniva 201 Filing 9

28 Why Coal is Declining 49% 26% 18% Competition from cheap natural gas Lower than expected demand Growth of renewable energy Key Takeaway: Coal is not coming back, and not just because of renewable energy. Source: Columbia SIPA SEIA s Finance and Tax Seminar 10

29 Cost of Solar Continues to Decline Share of third-party vs. customer-owned PV systems ( E) $9.00 $8.00 $7.00 $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 $- Residential C&I Utility Scale $8.20 $7.50 $7.60 $7.50 $6.90 $6.61 $6.40 $6.15 $6.20 $5.60 $4.90 $5.22 $5.25 $4.10 $4.75 $3.78 $3.50 $3.34 $2.86 $3.03 $3.58 $2.68 $2.33 $2.39 $3.02 $2.07 $2.18 $2.01 $1.74 $1.87 $1.49 $1.31 $2.09 $1.22 $1.14 $1.91 $1.08 $1.81 $1.56 $1.28 $1.06 $0.99 $0.90 $0.86 $ E 2018E 2019E 2020E 2021E Source: GTM, "U.S. PV System Pricing H2 2016" Report SEIA s Finance and Tax Seminar 11

30 Renewable energy continues to out-invest fossil by 2 to 1. I keep telling people, this is not alternative energy. This is just mainstream power-generating technology. No alternative energy, no alternative facts. Michael Liebreich Chairman, BNEF Source: State of the Industry Keynote at BNEF Global Summit 2017 SEIA s Finance and Tax Seminar 12

31 SEIA s Finance and Tax Seminar 13

32 Nevada Aftermath Nevada essentially killed the solar industry, an industry that employed thousands of Nevada workers prior to December Key Takeaway: Nevada taught us that consumers, when united, can force change. The state's 36,000 residential solar adopters vigorously protested the PUC decision to end NEM for existing customers and in response, the PUC did allow for grandfathering. Several casino companies, some of NV Energy s largest customers, left for other energy providers. The fight to bring retail NEM back to Nevada is currently in play at the NV Legislature with Assembly Bill 405. Last November, NV voters voted overwhelming to deregulate by passing the Energy Choice Initiative. It will go before the voters again in SEIA s Finance and Tax Seminar 14

33 NEM 3.0 On May 10 th SEIA adopted new NEM principles that anticipate an evolution to Net Metering. Basic Principles: Consumer right to reduce consumption Traditional NEM creates net benefits at low penetration levels Rate Design Guiding Principles Clear price signals that encourage complementary technologies Should encourage solar and other DERs Time of use approaches are consistent with solar deployment Criteria for Considering Alternatives to NEM Penetration levels Grandfathering Process should be open and collaborative Simplicity, gradualism and predictability Guiding Principles for Alternative Compensation Fair value of solar Buy all Sell all rates at customer s option Should consider and promote adoption of complementary DER technologies Solar specific surcharges are discriminatory SEIA s Finance and Tax Seminar 15

34 The Energy Ecosystem of Tomorrow Requires Cooperation Smart Home Technology The Grid kwh SMART METER Rooftop Solar Home Energy Management Battery Storage Solar Key Takeaway: Lower Cost, technological innovation and customer choice will drive adoption and change in the future. Electricity Meter Electric Vehicles & Charging Stations SEIA s Finance and Tax Seminar 16

35 Current Finance & Tax Developments Moderator David Lowman Partner, Hunton & Williams Forrest Milder Partner, Nixon Peabody Jaime Park Director, KPMG Gary Hecimovich Partner, Deloitte

36 Panel Discussion Topics 1. White House Actions Impacting Renewable Energy 2. Government Guidance Projects Proposed ITC Regulations Proposed Partnership Audit Regulations Beginning of Construction Guidance Service Contract Safe Harbor for Energy Sales Agreements / Rev. Proc CAIC Interconnection Gross-Ups / Notice Grant Litigation and Tax Controversy Alta Wind Appeal Other Cases in Litigation or Settlement Talks IRS Audit Activity Refined Coal TAM June 2,

37 White House Actions Impacting Renewable Energy Jaime Park Director, KPMG June 2,

38 White House Actions Impacting Renewable Energy Presidential Memorandum on Regulatory Freeze Pending Review (January 20, 2017) Freeze on regulations Executive Order on Reducing Regulation and Controlling Regulatory Costs (Signed January 30, 2017) 2 for 1 Executive Order Executive Order on Identifying and Reducing Tax Regulatory Burdens (Signed April 21, 2017) Review of significant tax regulations Executive Order on Promoting Energy Independence and Economic Growth (Signed March 28, 2017) Reduce regulatory burdens Executive Order on Implementing an America-First Offshore Energy Strategy (Signed April 28, 2017) Encourage energy exploration and production June 2,

39 White House Actions Impacting Renewable Energy Potential for rolling back or modifying Begun Construction Notices Deference afforded to prior notices / reliance and IRC section 7805(b) relief Key government players still undetermined Assistant Treasury Secretary Tax Policy - David Kautter Confirmation process will take time Chief Counsel at IRS Office of Chief Counsel TBD June 2,

40 Government Guidance Projects Gary Hecimovich Partner, Deloitte Tax LLP Forrest Milder Partner, Nixon Peabody June 2,

41 Proposed ITC Regulations Notice (comments due February 2016) Are storage devices and power conditioning equipment considered energy property? What portion of the basis of dual use property should be taken into account in computing the energy percentage? What facilities/technologies should be defined? What additional definitions are needed? 35 comment letters submitted SEIA comment letter Re-affirm integral property rule Re-affirm building component rule Re-affirm a storage device is qualifying ITC system property Revise the dual use equipment rule to provide flexibility and certainty to taxpayers Apply integral property and primary use standard to dual function property Clarify technical issues concerning energy property that includes a storage device Current status? June 2,

42 Proposed Partnership Audit Regulations On January 18, 2017, Treasury and IRS released proposed regulations (REG ) providing detail into the administration of the new centralized partnership audit regime enacted as part of the Bipartisan Budget Act (BBA) of The effective date for new rules under the BBA is for partnership taxable years beginning after December 31, The new rules are designed to shift the burden for actually assessing and collecting tax after a partnership-level adjustment from the IRS to the partnership and partners. Proposed regulations were immediately withdrawn as part of the Trump administration s initial freeze on regulatory activity. The proposed regulations were never officially published in the Federal Register and thus became subject to the Trump administration s January 20, 2017, regulatory freeze. Proposed regulations provide important insights into the IRS s views at the time issued regarding implementation of the BBA rules. Current status? June 2,

43 Beginning of Construction Guidance 6 IRS Notices defining the beginning of construction for the PTC (and ITC in lieu of PTC) Basic begun construction requirements Physical work of a significant nature + continuous program of construction 5% Safe harbor + continuous efforts toward completion Continuity Safe Harbor Must be placed in service by the later of four years after calendar year during which BOC occurs or December 31, 2018 Inventory rule Binding written contract rule SEIA comments: 1. Provide a technology-neutral Continuity Safe Harbor that aligns with statutory placed-in-service deadline; 2. Confirm eligibility of property integral to qualifying activity and provide examples; 3. Clarify relevant unit of property and adopt a single project election for units of property engaged in qualifying activity; 4. Clarify application of inventory rule; 5. Provide specific examples of physical work of a significant nature; 6. Adopt 5% safe harbor and incorporate a scale-back provision in recognition of cost over-runs; 7. Clarify requirements to preserve ITC eligibility when a project or solar energy property is transferred; and 8. Provide excusable disruptions specific to solar project development June 2,

44 Begun Construction for Solar Continuity Safe Harbor Recommendation 1/1/2019 1/1/2020 1/1/2021 1/1/2022 1/1/2023 CY 2019 CY 2020 CY 2021 CY 2022 CY /1/2024 Continuity Safe Harbor Satisfied if Placed in Service before 1/1/2024 Construction Begins Before 1/1/ % ITC 10% ITC Construction Begins in % ITC 10% ITC Construction Begins in % ITC 10% ITC June 2, 2017 Construction Begins in % ITC Value Regardless of Placed-in-Service Date 28

45 Service Contract Safe Harbor for Energy Sales Agreements Rev. Proc Federal regulations for government contracts have raised questions about whether certain energy contracts may be re-cast as leases or conditional sales. Example: Power Purchase Agreement to sell electricity on a military base. Treatment as service contract is critical to preservation of ITC. Lease or sale treatment would disqualify the project from the ITC. Rev. Proc. clarifies when government will not challenge the treatment of an energy savings performance contract ( ESPC ) sales agreement between an energy service company and the federal agency ( FA ) for provision of electricity from an alternative energy facility. Rev. Proc. States that the IRS will not issue rulings on this issue. Applies to any ESPC sales agreement entered into after February 5, Contracts executed prior to the effective date that meet the safe harbor criteria will not be challenged. June 2,

46 Service Contract Safe Harbor for Energy Sales Agreements Rev. Proc Under IRC section 7701, a contract related to an alternative energy facility will generally not be treated as a lease, unless the following occurs: 1. The service recipient (or a related entity) operates such facility, 2. The service recipient (or a related entity) bears any significant financial burden if there is nonperformance under the contract or arrangement (other than for reasons beyond the control of the service provider), 3. The service recipient (or a related entity) receives any significant financial benefit if the operating costs of such facility are less than the standards of performance or operation under the contract or arrangement, or 4. The service recipient (or a related entity) has an option to purchase, or may be required to purchase all or a part of such facility at a fixed and determinable price (other than for fair market value). Government will not challenge contracts if all of the following are true: 1. Total term of the ESPC ESA cannot exceed 20 years in length and must be consistent with and appropriate for the scope and scale of the renewable project, 2. ESPC ESA must satisfy other federal guidance, specifically the requirements of 42 U.S.C. section 828 and OMB Memorandum M-12-21, 3. Under no circumstances will the FA attempt to operate the renewable energy generation asset: in the event of a shut-down or mechanical issue, FA will immediately notify ESCO or its designated contractor, 4. ESCO bears all financial risk for non-performance, except to the extent such non-performance is attributable to a temporary shut-down of the facility for repairs, maintenance, or capital improvements, 5. Contract price for electricity will not be reduced if operating costs should diminish, and 6. FA may have the option to purchase, or may be required to purchase, the renewable energy generation asset at the end of the contract term, for its fair market value (FMV) at the time of the purchase. June 2,

47 CAIC Interconnect Gross-Ups Notice Contributions made to a utility to encourage the provision of services to a utility customer generally taxable. Interconnections payments made by power plant owners to transmission grid owners generally taxable unless specific requirements are met. IRS guidance Notices , 90-60, and Many private letter rulings historically, but Notice states that the IRS will not issue private letter rulings involving this safe harbor. Section 61(a) gross income means all income from whatever source derived, unless excluded by law. Section 118(a) exclusion from gross income for any contribution to the capital of a corporate taxpayer. Section 118(b) exception from the term contribution to the capital of the taxpayer for any contribution in aid of construction from a customer or potential customer. June 2,

48 CAIC Interconnect Gross-Ups Notice $ for construction or property Stand-alone generator (supplier) Electric transmission utility Electricity Consumers or intermediaries, including affiliates (customer) Requirements for exclusion Transferor may be a electricity generation or cogeneration facility or an energy storage facility Asset may not be included in rate base of the transmission utility Title to power must transfer to purchaser before transmission No requirement for an interconnection agreement or power supply contract The transferor may not purchase electricity from the utility, unless the purchase satisfies the 5% test Amortization period of 20 years for the interconnection costs June 2,

49 CAIC Interconnection Gross-Ups Notice This Notice applies to transfers of interties meeting all the requirements under this Notice made on or after June 20, However, taxpayers may choose to rely on this safe harbor for transfers with respect to qualifying transfers made prior to June 20, Automatic accounting method changes June 2,

50 1603 Grant Litigation and Tax Controversy David Lowman Partner, Hunton & Williams June 2,

51 1603 Grant Litigation and Tax Controversy Alta Wind v. U.S. (October 24, 2016) 1603 Grant requested for 30% of purchase price of eligible property Treasury reduced Grant award to 30% of Alta s cost to build Court awarded $206 million in damages to taxpayer IRS expert witness testimony dismissed Court rejected government s arguments holding: 1060 does not apply No goodwill or going concern value could attach PPAs not separate intangible assets with value independent of tangible property Wind projects had turn-key value No peculiar circumstances indicating inflated purchase prices Appealed to Federal Circuit: Government brief filed April 27 th Decision expected this Fall June 2,

52 1603 Grant Litigation and Tax Controversy Sequoia Pacific Solar I, LLC v. U.S. (October 24, 2016) Residential solar with valuation issues Currently in mediation LCM Energy Solutions v. U.S., 170 Fed. Cl. 770 (2016) LCM sued for basis reductions equal to approximately $400,000 in residential DG solar systems (roughly 50% haircut) Court determined Treasury was correct to disregard taxpayer s claimed basis and use the better, more reasonable approach to use installation costs plus a 20% profit, which is what Treasury did in issuing the original 1603 Grants Court rejected Government counterclaims June 2,

53 1603 Grant Litigation and Tax Controversy GUSC Energy, Inc. v. U.S., Fed. Cl. (Nov. 8, 2016) Treasury awarded 6.6% of claimed award for co-generation biomass plant where only 6.6% of total steam available for end-use was converted to electricity Government expert proposed an efficiency method allocation by focusing on energy used for electricity generation, and comparing that generation efficiency to the efficiency of a hypothetical electricity-only biomass plant (i.e., facility generates 15.25% of the electricity it would generate if it only generated electricity). Plaintiff expert argued 100% of costs should be treated as qualifying because all equipment was necessary for the generation of electricity. As a co-generation facility the Court found the steam generated to serve predominately significant role in heating, rather than electricity generation Court choose to follow energy efficient method allocation presented at trial by Government s expert witness and rejected policy arguments made by Plaintiff Court rejected Government counter claims to recapture grant for prolong periods where the plant ceased operations June 2,

54 1603 Grant Litigation and Tax Controversy Increased IRS audit activity IDRs requesting justification for eligible basis higher than similar projects awarded grant under the 1603 Program Eligible basis and valuation risk typically born by Project Sponsor Tax equity imposing limits on cost approach vs. accepting valuations based on income approach Refined Coal TAM What does refined coal have to do with the solar ITC? IRS disallowed tax credits as an impermissable sale of tax credits IRS cites lack of variability- upside and downside where payments tied directly to credits June 2,

55 Finance & Tax Seminar June 1 st -2 nd, 2017 New York, New York Thank You to Our Sponsors June 2,

56 Debt Panel Moderator David Burton Partner, Mayer Brown Jordan Blanchard General Manager Renewable Energy Lending, Live Oak Bank Susan Nickey Managing Director, Hannon Armstrong Jean-Pierre Boudrias Managing Director, Goldman Sachs Scott Zajac CEO, Rockwood Group

57 Finance & Tax Seminar June 1 st -2 nd, 2017 New York, New York Thank You to Our Sponsors June 2,

58 Credit And Tax Risk Mitigation Moderator Gary Blitz Senior Managing Director, Aon Transaction Solutions Chris Roetheli Business Development Officer, US Bancorp Community Development Corporation Ira Palgon Partner, Energy and Infrastructure, Wilson Sonsini Goodrich & Rosati Victoria Dal Santo Executive Director, Energy Investments, J.P. Morgan Jason Cavaliere Vice President, Project Finance, Sunrun David DeBerry CEO, Concord Specialty Risk, Inc.

59 Tax Equity Update Moderator Keith Martin Partner, Chadbourne & Parke LLP Lan Adair Sasa Assistant Director of Project Management, Renewable Energy Investments, U.S. Bancorp Community Development Corporation Anand Dandapani Executive Director, JP Morgan Jessica Robbins Director of Structured Finance, Sol Systems Matthew Ptak Director, BlackRock Judy Kwok Vice President and Tax Counsel, GE Energy Financial Services

60 Finance & Tax Seminar June 1 st -2 nd, 2017 New York, New York Thank You to Our Sponsors June 2,

61 The Energy Ecosystem of Tomorrow Requires Cooperation Smart Home Technology The Grid kwh SMART METER Rooftop Solar Home Energy Management Battery Storage Solar Key Takeaway: Lower Cost, technological innovation and customer choice will drive adoption and change in the future. Electricity Meter Electric Vehicles & Charging Stations SEIA s Finance and Tax Seminar 16