Financing Renewable Energy Projects Bond Financing Alternatives S
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 whiteml@gkbaum. com 303 -391 -5498 Page
Presentation Overview Lee White George K. Baum & Company • Current Federal Incentives: Production Tax Credit (PTC) & Accelerated Depreciation & Clean Renewable Energy Bonds (CREBs) • Renewable Energy Finance Coalition • Tax-Exempt Bond Financing: Senate Bill 672 George K. Baum & Co. S. 672 Community Renewable Energy Bond Presentation Page 2
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 Page 3
Current Federal Incentives • 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 • 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 Page 4
Current Financing Models • • • 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 Page 5
The Difference Between Tax Credit Bonds and Tax-Exempt Bonds • 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 Page 6
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 George K. Baum & Co. S. 672 Community Renewable Energy Bond Presentation Page 7
Tax-Exempt Bond Financing: S. 672 • Introduced by Sen. Salazar ( D-C 0) 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 15 th 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 George K. Baum & Co. S. 672 Community Renewable Energy Bond Presentation Page 8
Bond Financing for Renewable Energy Projects After S. 672 • Taxable and tax-exempt bond financing available • • 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 • A 15 -20 year mortgage-style amortization to correspond to the duration of the PPA • 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 George K. Baum & Co. S. 672 Community Renewable Energy Bond Presentation Page 9
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. George K. Baum & Co. S. 672 Community Renewable Energy Bond Presentation Page 10
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 George K. Baum & Co. S. 672 Community Renewable Energy Bond Presentation Page 11
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