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Renewable Energy Project Financing Ken Kramer Managing Director Rushton Atlantic, LLC.

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Presentation on theme: "Renewable Energy Project Financing Ken Kramer Managing Director Rushton Atlantic, LLC."— Presentation transcript:

1 Renewable Energy Project Financing Ken Kramer Managing Director Rushton Atlantic, LLC

2 What is Project Finance? Financing of a project based solely on its risks and future cash flows, with limited or no recourse to a corporate obligor Project finance was developed to finance large infrastructure projects that might be too large or risky for an individual investor’s corporate balance sheet Risks are mitigated through contracts and guarantees, ranging from design and construction through operation and sale of project output

3 What Makes Project Finance Feasible? Certainty of sale of project output to guarantee a revenue stream and operating margins Long-term power purchase agreement Long-term operating agreement (toll roads) Capacity purchase agreement (transmission lines) Production sharing agreement (oil fields) Certainty of merchant sales (some windfarms)

4 Sponsor Considerations Developers/equity investors benefit from off-balance sheet financing, maximize equity returns, and monetize tax financing opportunities Expensive & time consuming to document and close Operating restrictions, including cash sweeps

5 Lender Considerations Critical mass? $50-100MM minimum Receipt of revenue contractually enforceable against creditworthy buyer? Will physical assets secure lender repayment? Technology risk? Reputable contractors? Permits in place?

6 Project Agreements With sponsor O&M - operating & maintenance agreement ASA - administrative services agreement TLA - technology license agreement With outside parties EPC - engineering, procurement and construction PPA - power purchase agreement Renewable energy credit agreement Other offtake agreements (e.g. steam, CO2, other byproducts) Site lease agreement Interconnection agreement Feedstock supply agreements Hedging agreements

7 Contract Issues PPA Generally required with sufficient term and revenues to fully amortize debt or lease obligations Utility scale projects may negotiate take or pay contracts Wind projects may be financeable on merchant basis, with wind histories, etc. EPC Necessary if sponsor has not financed construction internally Corporate guarantees or performance bonds required for construction (schedule and budget) “Full wrap” coverage preferred, including maintenance guarantees Available leverage is function of strength of EPC guarantee

8 Typical Project Finance Structure

9 Other Revenues – Renewable Energy Credits Compliance vs. voluntary markets Qualifying generation technologies Solar Wind Geothermal Low impact hydro (small run-of-the-river) Biomass, biofuels & landfill gas Fuel cells (with “green” hydrogen) Combined heat & power (some states)

10 Renewable & Alternative Energy Portfolio Standards

11 SREC Trading Ranges by State NJ DE DC PA MD OH

12 Debt Options Syndicated & club loans Construction loans Term loans Working capital loans 144A Private placements USDA Sec. 9007 REAP loans & guarantees (to $25MM)

13 Typical Project Finance Waterfall

14 Top Renewable Energy Project Finance Arrangers for 2011 1. Federal Financing Bank $10,135 2. BNDES $4,229 3. Bank of America $2,500 4. Mitsubishi UFJ Financial $2,309 5. Banco Santander$2,037 6. KFW $1,889 7. Nordic Investment Bank $1,889 8. UniCredit $1,167 9. European Investment Bank $1,046 10. BBVA $1,006

15 Top Renewable Energy Project Sponsors for 2011 1. NRG Energy$6,463 2. NextEra Energy$3,367 3. Abengoa$3,072 4. Acciona$2,105 5. Exelon Corp$1,359 6. General Electric$1,294 7. Terra Firma Capital Partners$1,110 8. DONG Energy $920 9. WindlandEnergieerzeugungs $881 10. Blackstone $881

16 Third Party Equity What is the gap between sponsor equity and debt? Active or passive investors? Is project technology and sponsor management attractive to potential equity investors? Type and terms of equity investment Common vs. preferred Board seats, dividends, liquidation preference, etc. Anticipated liquidity event

17 Tax Benefits ITC – 30% (or 10% for microturbines, CHP & certain geothermal including heat pumps) of qualifying renewable energy generation equipment 1603 cash grant in lieu of ITC – 30% or 10%, as above, for facilities with construction started (or 5% spent) before 1/1/12 and placed in service before: 1/1/13 for “large” wind 1/1/14 for biomass, geothermal (30%), landfill gas, MSW, hydro & marine/hydrokinetic 1/1/17 for solar, “small” wind, geothermal (10%), fuel cells, microturbines, CHP, geothermal heat pumps

18 Tax Benefits – cont’d. PTC – payments for 10 years of: 2.2 cents/kwh for wind turbines placed in service before 1/1/13 2.2 ckwh (for closed-loop biomass, geothermal, & pre-2006 solar) or 1.1 ckwh (for open-loop biomass, small irrigation, MSW, qualified hydro & marine/hydrokinetic) placed in service before 1/1/14 Depreciation – 5 year MACRS, on basis reduced by one half of ITC or 1603 cash grant claimed, with bonus depreciation of 100% for assets placed in service before 1/1/12, and 50% for assets placed in service before 1/1/13

19 Tax Structured Financing Options More efficient use of tax benefits Availability of step-up in basis Structural alternatives Sale/leaseback Partnership flip Pass through lease

20 Sale/leaseback 100% financing Can monetize ITC only Must be structured as “true” lease per IRS guidelines Lease term approximates term of PPA, which is typically pledged as collateral

21 Partnership flip Partial project financing Can monetize both PTC and ITC May or may not be leveraged Disproportionate allocation of cash flows and tax benefits between developer and tax equity investor Developer has option to repurchase facility after “flip date” – the point at which investor has realized his return of and on investment

22 Inverted lease Developer leases to tax equity investor, who sells power to ultimate user Lease rentals may be prepaid Beneficial ownership automatically reverts to developer Enables investor to claim ITC (but not PTC) while developer retains depreciation

23 Top Tax Equity Investors for 2011 Bank of America J. P. Morgan GE Capital Union Bank Citi Credit Suisse Morgan Stanley Google MetLife PNC PG&E Wells Fargo Northern Trust Key U.S. Bank

24 Ken Kramer Managing Director Rushton Atlantic, LLC 845 Third Avenue – 6 th floor New York, NY 10022 (646) 290 - 5069

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