1. 1 FINANCING POWER PLANTS FEDERAL TAX ISSUES MITCH RAPAPORT NIXON PEABODY LLP 401 9 th Street, N.W. #900 Washington, D.C. 20004 (202) 585-8000 January 19, 2007 Copyright © 2006, Nixon Peabody LLP

2. 2 Tax-Exempt Financing of New Generation Tax Issues Joint Ownership Qualified Management Agreements Private Use Limits Permitted sales under private use rules Using equity to maximize flexibility 2

3. 3 Tax-Exempt Financing and Joint Ownership IRS generally permits tax-exempt financing of municipal portion of a jointly owned plant Limits on joint ownership arrangements to avoid private use issues Impact of QMA rules on operations 3

4. 4 Even More About QMAs Management agreements can be an issue outside joint ownership situations Management agreements raise private use issues unless done as a QMA –Problems with life of the unit contracts –Permitted 20 year contracts –No sharing of profits

5. 5 Private Use Limits 10% or $15million limit on private use Typically, any specially negotiated wholesale or retail contract results in private use Private Use is measured over life of the bonds 4

6. 6 Private Use Exceptions – Permitted Contracts Small wholesale requirements contracts Retail requirements contracts Short-term contracts (3 years or less) Very small contracts

7. 7 Maximizing Flexibility Using Equity Private use rules do not apply to equity Private use can be allocated to equity in a mixed use facility Equity includes equity and taxable bonds 5

8. 8 Other Federal Subsidies CREBs –Limited to munis and coops –Very small programs –Effectively an interest free loan –Limited to renewables Tax Credit Programs –Clean coal –Advanced nuclear facilities –All are production tax credits –Only benefit taxpayers –Munis and coops cannot own the facility and get tax credits