presents Energy Financing Opportunities in the Stimulus and Bailout Acts Leveraging New Grants, Loans and Tax Incentives for Renewable Energy and Energy Efficiency A Live 90-Minute Audio Conference with Interactive Q&A Today's panel features: John T. W. Mercer, Partner, Troutman Sanders, Atlanta Philip H. Spector, Partner, Troutman Sanders, New York Bonnie A. Suchman, Of Counsel, Troutman Sanders, Washington, D.C. Thursday, May 7, 2009 The conference begins at: 1 pm Eastern 12 pm Central 11 am Mountain 10 am Pacific The audio portion of this conference will be accessible by telephone only. Please refer to the dial in instructions emailed to registrants to access the audio portion of the conference. CLICK ON EACH FILE IN THE LEFT HAND COLUMN TO SEE INDIVIDUAL PRESENTATIONS. If no column is present: click Bookmarks or Pages on the left side of the window. If no icons are present: Click View, select Navigational Panels, and chose either Bookmarks or Pages. If you need assistance or to register for the audio portion, please call Strafford customer service at 800-926-7926 ext. 10
Energy Financing Opportunities in the Stimulus Act Leveraging New Grants, Loans and Tax Incentives for Renewable Energy and Energy Efficiency Strafford Publications Teleconference Seminar May 7, 2009 1
Presenters Bonnie Suchman Of Counsel Troutman Sanders LLP Washington, DC Philip H. Spector Partner Troutman Sanders LLP New York, NY John T.W. Mercer Partner Troutman Sanders LLP Atlanta, GA 2
Appropriations for Energy in the Stimulus Bill Bonnie Suchman Of Counsel Troutman Sanders LLP 3
Appropriations for Energy in the Bill American Recovery and Reinvestment Act of 2009 ( ARRA or Stimulus bill ) Of the $787 Billion in the bill, over $40 billion is provided to support energy projects and energy efficiency Generally, the bill supports: Transmission and smart grid Loan guarantees for renewable technologies Energy efficiency Clean coal technologies 4
Transmission and Smart Grid $4.5 provided to support transmission and smart grid technologies $100 million for worker training $80 million for DOE analysis of future transmission needs $10 million for Smart Grid Interoperability Framework Process DOE will be issued a draft FOA and Notice of Intent on April 16 º Comments/questions due May 6 º Final FOAs to follow Grant recipients to receive no more than 50% of costs. Other transmission support Temporary loan guarantee up to $60 billion in loans for transmission and renewable projects BPA/WAPA borrowing authority an additional $3.25 billion each. 5
Renewable Technologies Temporary Loan Guarantee $6 billion provided to support up to $60 billion for biofuel projects and renewable technologies. $2.5 billion for applied research, development, demonstration and deployment activities $800 million for biomass projects $400 million for geothermal projects $50 million for information and communications technologies $1.25 billion for other research and development purposes Military R&D -- $300 million for energy efficiency and renewable R&D 6
Energy Efficiency DOE State Grants $3.2 billion for Block Grants $3.1 billion for State Energy Program $2.5 billion for EERE (see previous slide) $5 billion for Weatherization $400 million for ARPA-E Federal Buildings Defense Department O&M $4.5 billion for GSA facilities Low Income Assistance $510 million for Native American Housing Block Grants Low income housing: $250 million for green retrofit assistance; $1 billion for public housing capital fund; $1 billion for community development fund. 7
Clean Coal $3.4 billion is provided to the Fossil Energy Program $1 billion to be used for fossil energy research and development programs. $800 million for additional CCPI Round III funding $1.5 billion for competitive solicitation for industrial carbon capture and energy efficiency improvement projects $50 million for competitive solicitation for site characterization activities for geologic formations $20 million for geologic sequestration training and research grants $10 million for program direction funding 8
Tax Incentives For Energy in the Economic Stimulus Bill Philip Spector Partner Troutman Sanders LLP 9
Federal Tax Incentives for Renewable Energy Investment Tax Credit (Section 48): 30% of capital cost of facility, taken entirely in year of placement in service 5-year vesting Election to pass through ITC to lessee in a sale-leaseback Offsets AMT Production Tax Credit (Section 45): 2 cents per KwH production tax credit for energy produced and sold during the first 10 years of service to unrelated persons Utility s sales to retail customers are unrelated Offsets AMT for first four years 10
Federal Tax Incentives for Renewable Energy 5-year MACRS accelerated depreciation (Section 168) depreciable basis reduced by 50% of ITC (to 85% of original cost) bonus depreciation for 2009 Interest expense deductions (if leveraged) Transaction expense deductions 11
Economic Stimulus Act of 2008 and American Recovery and Reinvestment Act of 2009 Extends solar 30% ITC eight years to projects placed in service by the end of 2016 Allows solar ITC to offset AMT Allows regulated public utilities to claim solar ITC Extends PTC for two years for wind (2012) and three years for biomass, geothermal and other non-solar renewables (2013) Allows elective conversion of PTCs into 30% ITC Allows elective conversion of PTC or ITC into federal cash grants in amount of 30% of asset cost (ITC amount) 12
Cash Grants in Lieu of Tax Credits Parties have option to forego tax credits and receive a check from the Treasury for 30% of project cost Projects placed in service or begun in 2009 or 2010 and are completed before end of 2016 (solar), 2012 (wind) or 2013 (other) 60-day turn around Grant payable to the party that would have been entitled to the ITC Grant is not includible in gross income Like ITC, grant reduces depreciable basis by one-half of the grant 13
Cash Grants in Lieu of Tax Credits Grant vests over five years and is subject to recapture like ITC Certain tax-exempt entities not eligible: federal government, state and local governments, municipal utilities Possible disqualification if asset owner is a pass-through entity (partnership or LLC) has a tax-exempt member or partner Do individuals qualify despite passive loss rules? Grants are in lieu of ITC/PTC, not depreciation: Developer left with stranded depreciation 14
Sale-Leaseback of Renewable Energy Facility Developer and Operator (lessee) Power sale revenue PPA Power Purchaser sale leaseback Rent and assignment of PPA Tax Investor (owner/lessor) 30% ITC (or grant) 5-year MACRS deductions interest expense deductions Energy project 15
Partnership Flip Structure (Rev. Proc. 2007-65) ITC Period (Years 1-5) or until Flip 1% Taxable Income/Loss 100% Cash until return to Developer of its initial investment Post ITC (Post-Flip) Period 95% Taxable Income + Cash Developer Tax Investor ITC Period (Years 1-5) or until Flip 99% Taxable Income/Loss 100% Cash after return to Developer of its initial investment ITC (Post-Flip) Period 5% Taxable Income + Cash Partnership LLC PPA revenues owner Project 30% ITC (or grant) 5-year MACRS deductions interest expense deductions Power Purchaser 16
Partnership Flip Tax risks mitigated by Rev. Proc. 2007-65 Accounting treatment for tax investor more complicated Developer s cash investment returned over initial 5-year period Developer retains residual economic upside/downside through purchase option Investor achieves projected yield after about 10 years; no booked residual Negative pre-tax earnings Sale-Leaseback Tax risks familiar to equipment leasing market Single investor capital lease accounting under FASB 13 Developer s cash returned on the sale (day one): current tax gain but spread accounting income Tax investor retains residual economic upside/downside Longer term and booked residual required Positive or neutral pre-tax earnings are possible 100% Financing 17
Municipalities and Other Tax-Exempts A lease of a project to a tax-exempt entity results in deferral or loss of ITC and MACRS depreciation deductions For tax purposes, a power purchase agreement, properly structured, is a service contract and is not a lease Under 2009 Act, municipal projects are eligible for ITC even if project is financed with tax-exempt bonds 18
NOL Carryback Provision Limited net operating loss (NOL) carryback provision Small businesses with a net operating loss in the tax year ending in 2008 can elect to offset this loss against income earned in up to five prior years rather than two years Requires an affirmative election by the due date (including extension of time) for filing the taxpayer s return for the taxable year of the net operating loss A small business must have no greater than an average of $15 million in gross receipts over a three years period ending with the tax year of the NOL 19
Cancellation of Indebtedness (COD) Prior law: When the taxpayer renegotiates debt resulting in reduction in principle the cancellation of debt is taxable income to the taxpayer i.e. COD income New law: Allows COD income to be spread out and included ratably in income over 5 years beginning in the fifth year following the transaction for 2009 income and the fourth year following the transaction for 2010 income Includes debt-for-debt rather than just cash for debt (Total revenue cost $43 billion/ 5 years) 20
The New Temporary Loan Guarantee Program John T.W. Mercer Partner Troutman Sanders LLP 21
New Energy for America: Current Market Status Traditional project finance debt markets are closed (for all practical purposes) as part of general credit freeze Most traditional tax equity investors have (hopefully temporarily) exited the market Developers with balance sheet capability can finance and construct projects State Renewable Portfolio Standard (RPS) requirements continue to drive utility RFPs and PPA and project development activities 22
New Energy for America: Current Market Status (continued) Even if project debt and equity were available, transmission constraints inhibit development of wind (offshore and onshore) and solar sites Implementing regulations for Stimulus Bill programs are still in process Uncertainty as to practical implementation 23
DOE Loan Guaranty Program DOE Loan Guaranty Program was originally enacted as Title XVII to the Energy Policy Act of 2005 Before 2009, Congress had authorized DOE to make $38.5 billion of loan guarantees for certain Innovative Energy Technologies not in current commercial use in the United States ($18.5 billion allocated by Congress for advanced nuclear technologies) In the 2009 Stimulus Bill, Congress authorized an additional (estimated) $600 billion of loan guarantees for renewable energy and transmission facilities under Section 1705 ( Section 1705 Program ) 24
DOE Loan Guaranty Program To date, DOE has not made any actual loan guarantees under Title XVII DOE is under intense pressure from both Congress and the Obama Administration to speed up the process and get loan guarantees out the door The first Conditional Commitment was issued to a California PV panel manufacturer (Solyndra, Inc.) on 3/20/09 -- commitment is subject to DOE legal and financial review 25
DOE Loan Guaranty Program New Section 1705 Rapid Deployment Program $6 Billion appropriated to pay COST OF GUARANTEES Conference Committee estimate that this would support $60 billion of loan guarantees Credit subsidy cost debate 26
DOE Loan Guaranty Program Eligible Section 1705 Projects Renewable energy systems (including incremental hydro) that generate electricity or thermal energy, and facilities that manufacture related components Electric power transmission systems, including upgrading and "reconductoring" projects 27
DOE Loan Guaranty Program Eligible Section 1705 Projects (continued) Leading edge biofuel projects that will use technologies performing at pilot or demonstration scale that the DOE determines are likely to become commercial technologies and will produce transportation fuels that substantially reduce life-cycle GHG emissions compared to other transportation fuels (separate guarantee limit of $500 million) 28
DOE Loan Guaranty Program Eligible Section 1705 Projects (continued) Do not have to comply with the requirements of old Section 1703 re Eligible Projects No new or significantly improved technology test No commercial use test Other restrictive definitions do not apply 29
DOE Loan Guaranty Program Eligible Section 1705 Projects (continued) Must commence construction not later than September 30, 2011 Factors for transmission projects Viability of project without guarantees Availability of other Federal and State incentives Importance of project in meeting reliability needs Effect of the project in meeting a Sate or region s environment (including climate change) and energy goals 30
DOE Loan Guaranty Program Eligible Section 1705 Projects (continued) Sunset for entire Section 1705 program is 9/30/2011 Still must meet most requirements of Section 1702 Guarantee limited to 80% of project cost Secretary must determine there is a reasonable prospect of repayment current heavy emphasis on creditworthy projects 31
DOE Loan Guaranty Program Still must meet most requirements of Section 1702 (continued) Secretary must determine there are sufficient funds to carry out the project No sub debt Appropriate interest rate taking into account prevailing rates in the private sector 32
DOE Loan Guaranty Program Still must meet most requirements of Section 1702 (continued) Maturity not to exceed lesser of 30 years or 90% of estimated useful life Superior rights of liens co-lender and intercreditor issues Borrower must pay administrative fees in amounts the Secretary determines are sufficient to cover administrative expenses 33
DOE Loan Guaranty Program -- Rulemakings Rules for Pre-2009 loan guarantee program have been in place since October 2007 Rules for Section 1702/1703 Program are deficient in a number of respects, particularly as regards intercreditor issues, undivided ownership issues, applications, solicitations and payment of fees Rules for Section 1705 Program not yet in place 34
DOE Loan Guaranty Program -- Rulemakings DOE current plan is for a two-stage rulemaking: First stage is to implement an interim rule to cure the most significant problems with the existing rules make program more user-friendly Scope presently being negotiated between DOE and OMB Plan is for a very short comment period before interim final rule put in place 35
DOE Loan Guaranty Program -- Rulemakings Second stage is an interim or final rule to implement the provisions of Section 1705 Plan is to have both sets of rules in place sometime in May time is slipping away to meet that goal 36
Thank you for your participation today! If you have any additional questions or comments, please feel free to email direct to Bonnie Suchman bonnie.suchman@troutmansanders.com Phil Spector phil.spector@troutmansanders.com John Mercer john.mercer@troutmansanders.com 37