CREBs

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Debt Financing for Wind Projects By John Harper,
Birch Tree Capital, LLC
IPED Financing Wind Power Conference July 25-27,
2007
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Birch Tree Capital Background

• Financial advisory services supporting financing
  for clean power generation and biofuels projects
• Multi-technology focus (wind, PV, biomass, MSW).
• Clients include investors, developers, and public
  sector entities.
• Collaborates with Deacon Harbor Financial other
  firms.
• Recent wind sector assignments
• Advising a large insurance company in due
  diligence review and negotiation of tax-oriented
  interests in new wind projects.
• Co-author of review and comparative analysis of
  wind financing structures for Lawrence Berkeley
  National Labs (to be published next month)
• Co-author of April 2007 study profiling financial
  viability of states wind resources for State of
  Rhode Island.
• Advising the Cape Cod Compact on using a
  cooperative to finance local wind projects.

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Wind Financing Structures

• Historically, few financing sources and
  structures available to developers.
• Now, multiple structures available.
• Equity Debt sources have expanded.
• Varying combinations of equity, tax equity, debt,
  grants.
• No one optimal structure.
• Relative utility varies by
• Project size.
• Developer characteristics goals

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Wind Financing Structures

• Developer types
• Small, independent developer
• Large, Strategic developer/investor
• Utilities (for own supply)
• Community groups
• Individual entities (for own use)
• Structures created to meet varying developer
  needs.
• Relative ability to fund development costs.
• Relative ability willingness to fund
  construction costs.
• Relative ability to use tax benefits.
• Focus on up-front profits vs. ongoing cash flows
  from operations.
• Relative need for early cash returns vs. waiting
  10 years.
• Relative interest in managing operations.

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Wind Financing Structures

• Main structures in use for utility-scale wind

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Wind Financing Structures using debt

• Many types of debt in use
• Turbine construction loans.
• Construction loans.
• Equity bridge loans.
• Term loans.
• Cash-based loans
• Production tax credit-based loans
• Backing for letters of credit.
• Tax-exempt bonds
• Tax credit bonds (CREBs)
• Facilities vary in their purposes and terms.
• A given project may use multiple facilities.

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Financing Structures using debt

• Why use debt?
• Improve liquidity.
• Improve profits from project development.
• Husband developer capital.
• Reduce equity risk.
• Recycle developer capital.
• Enable marginally economic projects.
• Third party risk validation.

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Financing Structures using debt

• Profile three structures that use term debt
• Cash Leveraged
• Cash PTC Leveraged
• Back Leverage

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Cash Leveraged Financing Structure

• Note typically involves separate tax investor.
• Parties
• Developer
• Tax Investor
• Lender
• Loan reduces upfront equity capital requirements
• Limited-recourse, aka project financing,
  structure
• Loan to special-purpose project entity
• Loan sized on project cash flows (power RECs)
• Typically debt is 40-55 of total capital costs
• Key drivers tenor, debt service coverage ratio,
  interest margin
• Lender has first lien on project cash flows,
  assets, contract rights, and pledges of equity
  shares
• Term loan is distinct from/replaces
• Turbine Supply Loan, Construction Loan, Equity
  Bridge Loan

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Cash PTC Leveraged Financing Structure

• Same basic structure as Cash Leveraged Structure
• But, loan sized on both
• Project cash flows (power RECs)
• Production tax credits
• Typically aggregate debt is 50-65 of total
  capital costs
• Key drivers tenor, debt service coverage ratio,
  interest margin
• Lender provides incremental debt, based on
  present value monetization of projected PTC flows
• Projected PTC flows based on conservative
  independent review
• Base case 1.45x DSCR using 10 year P50 scenario
• Stress test 1.00x DSCR using 1 year P99 scenario
• Requires Tax Investor contingent guarantee to
  inject new equity to project company tied to PTCs
  actually generated
• Effectively creates 2nd flow of cash to project
  company that supports the incremental debt
• Detailed loan terms relating to tax investor
  obligations/rights.

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Back Leveraged Financing Structure

• Used when tax investor doesnt want debt at the
  project company level or when developer
  anticipates a later refinancing.
• Same parties developer, lender, tax investor
• All-equity financing at level of project company.
• Loan leverages only developers share of equity
  funding obligations.
• Loan made to developers holding company holding
  developers equity shares in project company.
• Limited-recourse, aka project financing,
  structure.
• Loan sized on developers share of project cash
  flows (power RECs)
• Consequently, debt is lower of total capital
  costs
• Loan terms usually include a cash sweep to fund
  loan prepayments
• Tenor typically shorter
• Collateral security limited to pledge of
  developers shares in project company.

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Why not use debt?

• Increased transaction costs.
• Increased time.
• PTC expiration worries.
• More complex deal structure.
• Many tax investors dislike debt.
• Equity squeeze concerns
• Term conversion hassles
• Pricing future PTC-loan equity contributions
• PTC-loan equity funding into troubled projects

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Debt Considerations

• Project size small projects may not merit debt
• Timing
• Transaction cost
• Complexity
• Power/REC off-take arrangements
• Turbine technology
• Limits pool of willing tax investors

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Community/Public Wind Financing Structures

• Still need to establish the projects financial
  goal
• Financing structure options
• Public-private partnerships
• Strategic Investor Flip
• Institutional Investor Flip
• Full community/public ownership
• All-equity
• Debt
• Grants

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Community/Public Wind Financing Structures

• Financing Sources
• Federal
• USDA Farm Bill Section 9006 grants
• USDA Farm Bill loan guarantees
• CREBs
• State
• Clean energy funds
• Economic development funds
• Private
• Taxable bonds
• Cobank, NRUCFC
• Local lenders
• Local tax investors
• Rural Community Renewable Energy Bonds Act (Bill
  S.672) (www.refcoalition.com)
• Most small projects to date have tapped multiple
  sources.

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Community/Public Wind Financing Structures

• Recommended financing options
• Use private sector incentives/capabilities/money
• PTC accelerated depreciation provide more
  financial boost than other non-grant incentives.
• Partner with an experienced private developer
  and/or a tax investor.
• Take project through permitting to reduce private
  sector risk.
• Community/public sector buys long-term power at
  fixed rate.
• Use flip partnership structures to enable
  ultimate ownership.
• For smaller projects
• USDA Farm Bill Section 9006 grants.
• Partnering with local contractors/investors

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Wind Financing Structures

• Trends Observations
• Relative popularity of structures varies from
  year to year.
• Leveraged structures being considered more than
  in the past.
• Emerging financing source power pre-payments.
• Utility ownership waxing.
• Need to watch market trends.
• Be clear on your own role in the market.
• Seek expert advice on tax-oriented deals.
• Simplicity remains a virtue.

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Wind Financing Structures

• Most importantly, a comment from that wise
  sage of the office

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• Get outside and enjoy Santa Fe!

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• Thank you.
• John Harper
• Birch Tree Capital, LLC
• www.birchtreecapital.net