Alternative Energy In The United States

Presented to:

Disclaimer
This document is not an offer to sell limited partnership interests (LP interests). Meridian Investments, Inc. (MII) is not soliciting an offer to buy LP
interests, or any part thereof, in any state where such offer or sale is not permitted.

LP interests will only be sold pursuant to an offering document. The sponsor and MII will each make available to each prospective purchaser
the opportunity to ask questions and receive answers concerning the terms and conditions of an investment or any other relevant matters, and to
obtain any additional information that a prospective purchaser may request (to the extent that the sponsor or MII, as the case may be,
possesses such information or can acquire it without unreasonable effort or expense). A prospective purchaser having questions or desiring
information about the LP interests should contact MII. Prospective purchasers must rely on their own examination of the information provided
and are not to construe the contents of this document as investment, tax or legal advice. The nature of the investment should be reviewed by
each prospective purchasers investment advisor, accountant, regulatory advisor and/or legal counsel.
The Interests may be sold in a private placement only to persons who are (i) either "qualified institutional buyers" (each, a "Qualified
Institutional Buyer") as defined in Rule 144A under the Securities Act ("Rule 144A") or institutional "accredited investors" described in Rule
501(c)(1), (2), (3) or (7) of Regulation D under the Securities Act ("Regulation D") and (ii) Qualified Purchasers as defined in the Investment
Company Act of 1940.
This document contains a brief discussion of the alternative energy market. Such discussion is not complete, may be changed and therefore
should not be relied upon in any manner whatsoever.
MII makes no representation or warranty, express or implied, as to the accuracy or completeness of the information contained in this document,
and nothing contained herein is or shall be relied upon as a promise or representation by MII as to the past or future.
Statements contained in this document that are not historical facts are forward-looking statements as defined in the Private Securities Litigation
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guaranteed. They are based on present beliefs, expectations and assumptions. Prospective purchasers should not place undue reliance on
these forward-looking statements. MII does not undertake any obligation to update or revise any forward-looking statements as a result of
new information, future events or otherwise.
SECURITIES PRODUCTS SOLD 0R DISTRIBUTED THROUGH MERIDIAN INVESTMENTS, INC.,
MEMBER FINRA & SIPC

Contents
Sections
Executive Summary

Alternative Energy Overview

Solar Photovoltaic

19

Wind

27

Tax Equity Market

34

Appendices
Tax Equity Financing Structures

39

Case Studies

44

Project Evaluation Check List

48

Section I
Executive Summary

Executive Summary
Meridian appreciates the opportunity to discuss the alternative energy space and
opportunities within this industry
Through
extensive experience in energy and structured finance
a wide-ranging network of developers and technical resources
unique and proven structuring capabilities

An ideal partner to
originate investment and financing opportunities
source and place capital along all points of a projects life cycle and its capital structure
advise investors on optimal entry points, as well as efficient structures

Meridian Investments, Inc.

MEMBER FINRA & SIPC

Established in 1981, Meridian Investments, Inc. (MII) is a FINRA registered Broker/Dealer

and member of SIPC, licensed to sell direct participation programs and other forms of
securities
Leader in placing tax-advantaged investments codified by the IRC with corporate
investors:

Renewable Electricity (45 & 48)

Affordable Housing (42)
Alternative Fuels (29)
New Markets (45D)

Tax Equity Placements

Total equity placements exceeding $15 billion since inception

Over 150 institutional clients including:

Major money center banks

Utility companies
Global financial services firms
National insurance companies
Retail companies
Government sponsored enterprises
Technology corporations

Energy (~$6B)
Housing (~$9B)
Other (~$600MM)

Meridian Asset Finance

Meridian Asset Finance (MAF) is the structuring arm within the Meridian family of
companies for alternative energy transactions and other asset classes
Together for over 14 years with over 55 years of combined experience
over $12 billion in assets financed
over $15 billion of restructurings

Specializes in asset-based solutions for capital intensive industries

extensive expertise in structuring, finance, banking, leasing, accounting and tax
financed a wide variety of assets, including power, transportation, manufacturing, infrastructure, real estate
and technology assets

Structured several firsts including

first corporate level letter of credit facility used for individual wind projects
first synthetic lease funded in the high-yield bond market
first real estate synthetic lease in Mexico

Developed numerous innovative structures for tax-efficient monetization

7

Representative Transactions
Meridian has consistently been active in the energy space, meeting sponsor and investor
objectives
1998

Syndicated the first 45k (formerly 29) coal to synthetic fuel transaction
Subsequently sponsored and raised equity for follow on 45k projects and was active in the
secondary marketplace

2004

Structured and Arranged Tax Equity on the first project based levered wind transaction

2005
2007

Structured and Arranged Tax Equity on first multi-asset wind fund which featured crosscollateralization of Power Purchase Agreements (PPA) to provide more favorable debt
financing terms to enhance the project returns of the tax equity and project developer/sponsor
Closed first wind project in US market to utilize pre-paid PPA

2008

Closed first financing facility for distributed generation residential solar portfolio

2010

Closed first financing facility for distributed generation projects using commercial scale fuel cell
technology

2012

Engaged by Google to advise on renewable energy tax credit investment opportunities

Section I
Alternative Energy Overview

Overview Of Alternative Energy In The US

Commodity price volatility, environmental concerns, economic growth and a changing
political landscape have all contributed to the growing importance of alternative energy
in corporate and personal affairs
Energy security and low-carbon based economic growth and job creation
Tax incentives have been the main economic driver behind federal government incentives
At the state level, Renewable Portfolio Standards (RPS) are the basic initiatives to further capacity
growth

Estimates show that some 123GW will be needed to meet existing RPS
Will require 456 TWh by 2030
With current capacity estimated at 68GW, an additional 60GW expected in next five years (including
capacity above and beyond RPS targets in some regions)
Over next five years, about $139B to be spent on asset costs, R&D and corporate level investments

10

Alternative Energy Technologies In The US

Variation
Onshore

Highlights
Basic technology; decent to good capacity factor (~35%); production
variability; declining capital costs

Offshore

Transmission constraints; regulatory approvals; good capacity factor

(~40%); high capital costs

Photovoltaic

Basic technology; scalability; decent efficiency (~15%); little

production variability; high yet declining capital costs

Solar Thermal

Slightly higher efficiency; large utility scale; high capital costs

Thermal
Biochemical

Base load type facilities; long construction lead times; feedstock

concerns

Waste-to-Energy

Environmental impact

Geothermal

Dry steam
Flash steam

Drilling risk; high capacity factors; long development and construction

lead times; geographically concentrated

Hydro

Large/Dam Storage

Environmental impact; regulatory issues

Small/Run-of-river

Geographically concentrated; resource variability

Wind

Type

Solar

Biomass

Fuel Cell

Distributed generation; base load technology; high capital costs

Next Generation

Algae; Storage; Marine/Wave

11

Demand Side Incentives

To date there is no standard, uniform national policy intended to directly stimulate
demand for alternative energy usage
Instead, 29 states, as well as the District of Columbia and Puerto Rico, have established
RPS mandates in various forms, including carve-outs for specific technologies
Eight additional states have renewable portfolio goals

12

Supply Side Incentives

Federal government incentives have mainly come in the form of tax incentives aimed at
alleviating some of the financing burden for capital intensive technologies.
Incentive
Depreciation

Highlights
5 year MACRS accelerated depreciation
Bonus depreciation (currently 50%)

Tax Credits

45 Investment Tax Credit

Grant

1603 Grant in lieu of 45 Investment Tax Credit

Established by American Recovery and Reinvestment Act of 2009 (ARRA)
Must have qualified by 12/31/2011 AND must be operational by 12/31/2012

Loan Guarantee

1703

1705

innovative clean energy

technologiesunable to obtain
conventional private financing

temporary programfor
certain renewable energy
systems

30% of eligible project capital costs

15% reduction in basis
Must be operational by 12/31/2016

48 Production Tax Credit

2.2/kWh for 10 years from start of operations

Inflation based adjustment
Must be operational by 12/31/2012

Financial Institution Partners

Program (FIPP)

Public private partnership; DoE pays

credit subsidy cost of guarantee and
provides guarantee for up to 80% of
loan

13

Tax Credit Overview

Tax credits are congressionally mandated subsidies that support a public purpose such as
affordable housing or alternative energy
Investment Tax Credit
Allocated Tax Credit

Credit eligibility is allocated to developers/sponsors by government agencies, and have national caps in total allowed amount
Credit production based on amount of qualified investment and allocated over time as program remains in compliance
Low-Income Housing Tax Credit (LIHTC) (42)
New Markets Tax Credit (New Markets or NMTC) (45D)

Non-Allocated Tax Credit

There is no allocation process for these programs and, similarly, no national cap
Tax Credit based on amount of qualified investment, but earned in the first year when project in placed in-service
Rehabilitation Tax Credit (Historics) (47)
Energy Investment Tax Credit (ITC) (48)

Production Tax Credit (PTC)

Credits are earned from the production and sale of electricity from a qualified renewable energy
resource; no government allocations or national caps

Wind, Geothermal, Biomass (PTCs) (45) (ARRA allows for the election of either a PTC or ITC)

14

Overview Of Tax Credit Programs

LIHTC
42 Low-Income Housing
Tax Credit (LIHTC)

ITC
48 Renewable Energy Investment Tax
Credit (ITC)

PTC
45 Renewable Energy Production
Tax Credit (PTC)

Purpose

Development of
affordable rental housing

Installation of solar, wind, biomass and

fuel cell power generation equipment

Production of renewable energy from

wind, geothermal, and biomass

Inception

1986

1980 (2005)

1992

Sunset

Permanent

2016 (Solar)
2013 (Wind, Geo & Biomass)

2013 (Wind)
2014 (Geo, Biomass)

Program

AMT Use

Yes

Yes

Note: 45 historically renewed in 1-2

year increments
Yes first 4 years

Carry
Back/Forward
Credit Delivery
Period
Compliance
Period
Credit Rate

1 Year/20 years

1 Year/20 years

1 Year/20 years

10 years

1 year

10 years

15 years

5 years

None

4% or 9% of qualified
development expenses

30% of cost of renewable equipment

2.2 / kwh of energy sold, indexed

for inflation (1.1 open-loop biomass)

Tax Basis
Reduction

No

Yes by 50% of credit amount

No

15

Overview Of Tax Credit Structures

Tax Credit
Fund Structure

Asset Level
Structure

Sponsor

Multi-Investor Fund

LIHTC
Limited Partnership- Investor is
limited partner in fund partnership
with the syndicator as the general
partner
Limited Partnership- The upper tier
fund is the limited partner in the
property-level partnership, with
the developer as the general
partner
Syndicator

Co-Investors

Other tax credit driven equity

investors pari passu

Structure
Timeframe
Early Termination
Options

15-17 years

Exit
Residual Value
Return
Components
Allocation of
Return
Components

Investor option to put units back to

syndicator after the tax credit
period
Partnership dissolves or investor
sells interest
Typically minimal
Tax Credits
Depreciation
Pro rata share of tax credits and
depreciation

Sale-Leaseback

Partnership Flip

ITC
Typically a single asset LLC or LP

ITC, PTC
Typically a single asset LLC or LP

Sale-Leaseback- Investor purchases the

project from the developer and then
leases it back to the developer; lessee
has the option to repurchase the asset at
the end of lease
Project Developer (typically has ongoing
exposure to economics of the asset)
Cash equity investor or sponsor, with
return subordinate to tax equity; possibly
other tax equity investors pari passu
15-20 years
(Typically matches term of PPA)
Sponsor-held early buyout option at fair
market value, typically no sooner than
completion of 5th year
Lease terminates or sponsor exercises
option
Fair Market Value buyout
Tax Credits
Depreciation
Rental payments under lease
Residual Value/FMV Buyout
100% of tax credits and depreciation
based on ownership of asset plus cash
flow from rent as negotiated under the
terms of the lease

Limited Partnership- Investor is limited

partner in the project partnership, with the
cash equity investor as the general partner;
the cash equity investor could be the sponsor
or a third party investor
Project Developer (typically has ongoing
exposure to economics of the asset)
Cash equity investor, with return subordinate
to tax equity; possibly other tax equity
investors pari passu
15- 20 years
(Typically matches term of PPA)
Sponsor-held call option on tax equity at
pre-determined fair market value after flip
date
Sponsor exercises option or asset is sold
after flip date
Fair Market Value
Tax Credits
Depreciation
Cash flow from project
Residual Value/FMV Buyout
Tax investor typically receives 99% of tax
and cash benefits until target yield is
achieved, at which point allocations flip with
tax investor typically receiving 5% of tax
and cash benefits
16

Risk Profile Of Federal Tax Credit Investments

LIHTC
Multi-Investor Fund
Likelihood
Impact
Timeframe
Drivers
Mitigants

Likelihood
Impact
Timeframe
Drivers
Mitigants

ITC
Partnership-Flip, Sale-Leaseback
Construction & Lease Up Risk

Medium
Low
12-24 months
Uncertainty of completion and lease up
timing; cost overruns and D/S coverage
Developer guarantees, reserves, equity
hold backs, adjusters
Low
High
16-18 years
Units not providing housing to qualified
tenants
Compliance reviews at lease up and
every 2 years after

None
None
3-12 months
Equity in post construction
N/A

Compliance Risk

Low
High
5 years
Project ceases to be a qualified energy facility; change in
ownership
Default provisions, performance measures, coverage ratios,
reserve accounts, forbearance and/or stand-till provisions

PTC
Partnership-Flip
None
None
3-12 months
Equity in post
construction
N/A

None
None
None
N/A
N/A

17

Risk Profile Of Federal Tax Credit Investments

LIHTC
Multi-Investor Fund
Likelihood
Impact
Timeframe
Drivers
Mitigants

Likelihood

Medium
Low
Lifetime of structure
Change in investors tax position
Change in tax law
Ownership structure
20 year carry forward on credits Private Letter
Rulings and revenue procedures from IRS, audit
history, tax opinions

Medium

Impact
Low
Timeframe 16-18 years full term

Drivers

Property management: vacancy, expenses,

maintenance, debt service coverage

Mitigants

Reserves, developer guarantees, strong property

management, asset management by syndicator,
low/no hard debt, subsidies, advantage to market
rates

ITC
Partnership-Flip, Sale-Leaseback
Tax Risk

Low
Low
Lifetime of structure
Change in investors tax position
Change in tax law
Ownership structure
20 year carry forward on credits
Upfront delivery of credit
Private Letter Rulings & revenue
procedures from IRS, audit history, tax
opinions

Operating Risk

Low to high depending on technology

and available resource
Medium
Lease: 15-20 years full term
5-10 years with EBO exercised
Partnership: 15-20 years full term
5-10 years with call exercised after
flip
Equipment, resource performance,
energy prices, credit of off-take, debt
service, operating expense
O&M contract, manufacturer
guarantees, PPA from credit worthy
off-taker, hedging, third party
insurance

PTC
Partnership-Flip
Medium
Low
Lifetime of structure
Change in investors tax position
Change in tax law
Ownership structure
20 year carry forward on credits
Private Letter Rulings & revenue
procedures from IRS, audit history, tax
opinions

Low to high depending on technology

and available resource
High
15-20 years full term
10-15 years with call exercised

Equipment, resource performance,

energy prices, credit of off-take, debt
service
O&M contract, manufacturer
guarantees, PPA from credit worthy
off-taker, hedging, third party
insurance

18

Section III
Solar Photovoltaic

19

Solar PV Technology Overview

Solar photovoltaic (PV) converts solar radiation directly into electricity using panels
consisting of solar cells made of various types of material
Crystalline Silicon

Thin Film

Higher material cost

Higher efficiency
Longer track record
Area needed per kW = 7-8m2

Lower material cost

Lighter weight
More flexible and stronger
Area needed per kW = 10-15m2

16 27%
Efficiency

14 20%
Efficiency

Monocrystalline

Polycrystalline

Image: SunPower

Image: Kyocera

4 12%
Efficiency

Amorphous Silicon
Image: Sharp

10 17%
Efficiency

Cadmium telluride
Image: First Solar

7 20%
Efficiency

Copper indium (gallium) diselenide

Image: HelioVolt

20

Solar PV Technology Overview

Solar PV costs have steadily declined and are expected to continue to do so
The US benefits from an experience curve from European markets
Commercial and residential projects benefit from scope and size, but costs are expected to converge
Average PV System Cost
Germany

CA Commercial

CA Residential

Global Utility

Global Commercial

Global Residential

9
Reported & Actual

Projected

$/W

6
5
4
3
2
1
0

2007

2008

2009

2010

2011

2012

2016

2020

Source:Bloomberg New Energy Finance

21

Solar PV Resource

22

Solar PV Capacity
Despite weaker PV solar resource, Germany has the highest installation rate
1
2
3
4
5
6
7
8
9
10

Country
Germany
Spain
Japan
Italy
United States
Czech Republic
France
China
Belgium
South Korea

2010 Capacity (MW)

17,320
3,892
3,617
3,502
2,519
1,953
1,025
893
803
573

% Of Global Capacity
44%
10%
9%
9%
6%
5%
3%
2%
2%
1%

but future installations are expected to be more equally distributed with the US gaining
Annual Installed PV Capacity

Germany

Italy

Japan

USA

China

Spain

8,000
7,000
6,000
MW

5,000
4,000
3,000
2,000
1,000
-

2007

2008

2009

2010

2011

2012

2013

2014
Source: Bloomberg New Energy Finance

23

US State-level Solar Incentives

Several states have an RPS with solar and/or distributed generation provisions, including
carve-out, multiplier and double/triple credit elements
Renewable Portfolio Standard

Renewable Portfolio Goal

DC

Source: Database of State Incentives for Renewables & Efficiency

24

Projected Solar Expansion In The US

Commercial and utility scale PV are expected to dominate the expansion of solar
throughout the US in the coming years
Solar Thermal

50

Residential PV <= 10kW

Commercial & Utility PV > 10kW

45
40
35

GW

30
25
20
15
10
5
0
2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Source: Bloomberg New Energy Finance

25

Solar Opportunities
Despite recent activity and events, the solar market remains fragmented, while demand
will largely be driven by RPS solar carve outs
Best positioned developers

Other considerations
Pretenders vs. Contenders
Panel manufacturers
Ability to absorb market volatility
Waiting for 2012 to crystalize

Independent Power Producers

Utilities

Vertically Integrated Manufacturers

Multi-regional or national presence to adapt to changing state policies and fluid markets
Strong marketing and origination
Flexible with regard to market segment (commercial and utility)
Engineering, Procurement & Construction (EPC) capabilities

Pure Play Solar Developers

Residential

?
Corporates

Joint Ventures

26

Section III
Wind

27

Wind Technology Overview

Wind technology converts wind into electricity using a relatively simple generation method

In the past decade, the average turbine size (in MW) has increased by over 100%

MW

Average Turbine Size (US)

2.00
1.80
1.60
1.40
1.20
1.00
0.80
0.60
0.40
0.20
0.00

Average Turbine Size (MW)

# of Turbines
Annual Capacity (MW)

1998-99
0.71
1,425
1,016

200-01
0.88
1,987
1,758

2002-03
1.21
1,757
2,125

2004-05
1.43
1,960
2,803

2006
1.6
1,532
2,454

2007
1.65
3,190
5,249

2008
1.66
5,029
8,350

2009
1.74
5,733
9,993

2010
1.79
2,855
5,113
Source: American Wind Energy Association

28

Wind Technology Overview

Technological improvements have offset seasonal weather patterns and recent curtailment
Average Cumulative Sample Capacity Factors
35%
Capacity Factor

30%
25%
20%
15%
10%
5%
0%
Projects
MW

1999
6
549

2000
12
1,005

2001
41
1,545

2002
85
3,285

2003
98
3,826

2004
118
5,182

2005
144
5,894

2006
169
8,726

2007
212
10,712

2008
256
15,686

2009
358
24,403

2010
338
31,986

Source: National Renewable Energy Laboratory

Manufacturers with large, diversified balance sheets and reliable track records dominate
1
2
3
4
5
6
7
8
9
10

Manufacturer
GE
Siemens
Gamesa
Mitsubishi
Suzlon
Vestas
Acciona
Clipper
REPower
Nordex

2005
1,433
0
50
190
25
700
0
3
0
0

2006
1,146
573
50
128
92
463
0
0
0
0

2007
2,342
863
494
356
197
948
0
48
0
3

2008
3,585
791
616
516
736
1,120
410
470
94
0

2009
3,995
1,162
600
814
702
1,488
204
605
330
63

2010
2,543
828
564
350
312
221
99
70
68
20

Source: American Wind Energy Association

29

Wind Resource

30

Wind Capacity
After leading the world in wind capacity, the US is now second behind China, but firmly so
1
2
3
4
5
6
7
8
9
10

Country
China
US
Germany
Spain
India
France
UK
Italy
Canada
Portugal

MW Capacity (2010)
44,781
40,267
27,364
20,300
12,966
5,961
5,862
5,793
4,011
3,837

% of Global
22%
20%
14%
10%
6%
3%
3%
3%
2%
2%
Source: National Renewable Energy Laboratory

Within the US, Texas is still at the top, despite congestion issues
1
2
3
4
5
6
7
8
9
10

State
Texas
Illinois
California
South Dakota
Minnesota
Oklahoma
Wyoming
Indiana
Oregon
North Dakota

2010 Annual
680
498
455
396
396
352
311
303
283
221

State
Texas
Iowa
California
Minnesota
Washington
Oregon
Illinois
Oklahoma
North Dakota
Wyoming

2010 Cumulative
10,089
3,675
3,253
2,205
2,104
2,104
2,045
1,482
1,424
1,412
Source: American Wind Energy Association

31

Projected Wind Capacity In The US

Historically, wind in the US has tracked very closely to PTC availability
12
Estimated
10

GW

8
6
4

PTC Expiration

2
0

2002

2003

2004

Annual Built Capacity

2005

2006

2007

No PTC Extension

2008

2009

2010

2011

3-Year Extension (2012)

2012

2013

2014

2015

3-Year Extension (2013)

Source: Department of Energy, American Wind Energy Association, Bloomberg New Energy Finance

32

Wind Opportunities
Converging December 31st, 2012 deadline for both 1603 Grant projects and PTC
qualification should lead to heightened activity in 2012; especially first half of year
Best positioned developers

Strong development track record

Well capitalized
Financing alternatives and network
Deep and flexible pipeline
Ample power offtake alternatives

Other considerations

Pretenders vs. Contenders

Turbine manufacturers
Merchant power
Political, legislative, regulatory and policy issues

33

Section V
Tax Equity Market

34

Tax Equity Trends

Many tax investors have either exited the market or have disappeared during the
financial collapse
Total investor pool dropped from 25+ to as low as 5-10; today at about 15

Despite tax investor exit and decreased demand, After-Tax tax equity returns started to
trend down by 2009
Unlike LIHTC yields which continued to increase through end of 2010

Grant option effectively allowed developers to use debt financing instead of tax equity
Some statistics show that as much as 65% of developers have chosen that route

The decreased demand by tax equity was met with a decreased supply of tax credits
Sunset of 1603 grant expected to mimic trend seen in LIHTC yields from 2008 to 2010
2012 yields for PTC/ITC projects are expected to increase substantially

35

Tax Equity Yield Trends

Yield Comparison1
LIHTC

Wind

UST

BB

BBB

20%
18%

Lehman
Bankruptcy

16%
14%
12%

ARRA
Enacted

10%

Expected
Trend

8%
6%
4%
2%
0%

2007

2008

2009

2010

2011

2012

1 UST, BB & BBB yields for ten (10) year term; LIHTC & Wind yields are pre-tax equivalents assuming 35% tax rate

36

Tax Equity Participants

Project Finance Groups

Focus on pre-tax yields with a higher percentage of benefits coming from

cash benefits
Prefer longer investment durations to keep cash at work
Prefer to limit debt and cash equity in capital stack, resulting in higher
investment as percent of project cost
Usually have in-house expertise to fully underwrite the transaction
independently

There are currently about 25 active tax

investors in alternative energy, including

Pure Tax Equity (Passive Tax Equity)

Focus on tax benefits and limiting project exposure with a higher

percentage of benefits coming from tax benefits
Prefer shorter duration with quick recovery of principal
Rely on third parties for due diligence and underwriting

Strategic Investors

Look to fully own and operate projects

As renewables yields rise and LIHTC yields keep dropping, many insurance companies that have entered the tax
equity market are expected to start looking at renewables
Representative insurance companies
Investment considerations for insurance companies include

include

Most LIHTC investments are done through multi-investor funds

Often consider outside investment guidelines to invest more than 25% of
projects equity
Look to avoid consolidation for accounting purposes

37

Tax Equity Capacity

After a steep drop, the availability of tax equity has picked up again
Historic Tax Equity Investments

Amount (in billions)

$7

$6.10

$6
$5
$4

$3.70

$3.40

$3.20

$3
$2

$1.20

$1
$0

2006

2007

2008

2009

2010

But the funding gap for needed capital is expected to increase

Source: Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.

Gap In Project Financing

Project Financing Demand

Project Financing Supply

Investments (in billions)

$60
$50
$40
$30
$20
$10
$0

$14.80

$10.92
$6.40
$31.10

2011

$41.20
$24.70
2012

$48.90
$34.10

$30.28

2013

Source: Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.

38

Appendix I
Tax Equity Financing Structures

39

Partnership Flip
Tax Investor must possess sufficient taxable income to monetize projects tax benefits
Tax Investor contributes equity and typically receives 99% of tax and cash benefits
Once Tax Investors After-Tax IRR (Flip Yield) is achieved, allocations flip down with Tax Investor
typically receiving 5% of tax and cash benefits
Allows for significantly reduced Fair Market Value (FMV) of residual benefits and efficient Tax Investor
exit
Post-Flip FMV Sponsor call option on tax equity (5-year restriction); no Tax Investor put option to
Sponsor
Target flip date normally corresponds to the end of tax credit period for PTC (10 years) or end of tax
credit compliance period for ITC (5 years)
PayGo variation
Can be used with or without project debt
Tax
Investor

Sponsor
Special Allocation
Of Tax & Cash

Offtake or
Power Market

Sale Of
Power

Project
Company

ITC/Grant
Or PTCs

US
Treasury

Debt

Project
Lender

40

Partnership Flip
Tax Investor Considerations
Wind Safe Harbor (Rev. Proc. 2007-65 as revised)

Specific to wind/PTC transactions, but widely accepted for other renewable transactions, as well as, with ITC transactions
20% minimum unconditional investment with 75% of: (i) fixed capital contributions plus (ii) reasonably anticipated contingent capital
contributions, fixed and determinable obligations that are not contingent in amount or certainty of payment.
Maximum 99%/1% allocations
No guarantees of PTCs or of wind resource (except weather derivate contract) and no Sponsor loans
By following ruling, structure benefits from protection from audit

Investment has fairly short average life due to front-end tax benefits and reflects tax credit delivery or
recapture periods (5-10 years); hold period shorter than Lease structure where Tax Investor typically
holds the project for the term of the lease (usually 20 years).
Preferred return feature (Flip) can protect Tax Investors from the intermittency or potential volatility
inherent in wind projects, credit risk in distributed generation solar, fuel supply deficiency in biomass, etc.
Tax Investor has higher probability of achieving targeted return; if project underperforms, reducing
corresponding tax credits or cash benefits, Pre-Flip allocations remain until Tax Investor meets Flip Yield
Hypothetical Liquidation at Book Value (HLBV) accounting

Assumes project company is liquidated at book value and records change in such amount (plus distributions, less contributions) as income
from investment since the date previously measured
Negative consequence of producing AfterTax losses in periods where no tax credit is available, but depreciation is available
Not an issue for PTC transactions since tax credit is available in 10 year period Pre-Flip producing positive aftertax earnings
ITC transactions have only one year with the tax credit producing positive return; with remaining years potentially producing losses
Special allocation of proceeds to Tax Investor upon early liquidation can alleviate problem; designed to decrease by anticipated flip
date resulting in participation in liquidation proceeds as originally contemplated
41

Lease
Tax Investor must possess sufficient taxable income to monetize projects tax benefits
Lessor (Tax Investor) purchases project for current FMV and leases back to Lessee (Sponsor) pursuant to
long term lease - typically equal to projects life (20 years)
Lessor, as owner of the project, is entitled to 100% of tax benefits including credits and depreciation
Through lease, Lessee retains operating control and quiet enjoyment over the leased asset
Lessee has purchase or renewal rights at Lease end; can have predetermined early buy-out option
(EBO)
Lessee receives any project cash flow in excess of rent
Does not work for PTC (can only be utilized with ITC/Grant)
Can be used with or without project debt
Tax
Investor

Sponsor

Offtake or
Power Market

Sale Of
Power

Lessee

Sale Leaseback

Lessor

(Special
Purpose Entity)

(Project
Company)

Rent

US
Treasury
ITC/Grant

Debt

Project
Lender

42

Lease
Tax Investor Considerations
IRS Guidelines for Advance Ruling Purposes (Rev. Proc. 2001-28, 2001-19 I.R.B. 1156)

Minimum equity investment of 20% equity investment at inception and throughout lease term
Maximum lease term of 80% of assets expected remaining useful life
No Lessee loans or guarantees of Lessors debt
No Lessor put option to Lessee
No bargain purchase options; any purchase option in favor of Lessee must be FMV-based
No limited use property use of asset by Lessor or person other than Lessee must be commercially feasible

Leveraged lease accounting (if applicable)

Absent Lessee exercise of EBO, Tax Investor typically holds investment for entire Lease term/life of
project, but due to front-end tax benefits, investment has shorter average life
Cash component of overall Tax Investor return (as a percentage of total benefits) can be higher than in
Partnership Flip structure
To claim PTCs, must be owner, operator and producer of electricity; therefore, Lease structure does not
work for PTCs
Tax equity often represents a larger percentage of overall project capitalization than Partnership Flip
90 day post in-service date window to execute sale and lease back
Structure has a long history and has been successfully utilized in non-renewables related applications

43

Appendix II
Case Studies

44

Tax Equity Return Analysis - Case Study

Solar Transaction XYZ

2MW in California; 25 year PPA with Investment Grade Offtake

$4.5/W Cost = ~$9MM Total Capex
100% of Total Capex is Grant eligible
July 1st, 2012 in-service date

Lease

10% After-Tax IRR

50% Bonus Depreciation
1.2X Rent Coverage
0% Residual

Partnership

10% After-Tax IRR Flip Target

Pre-Flip Cash & Tax Allocations: 99%/1%
Post-Flip Cash & Tax Allocations: 5%/95%
50% Bonus Depreciation
Flip After Year 6

45

Partnership Scenario
Tax Investor Partnership Accounting
Year
Ending
Dec-12
Dec-13
Dec-14
Dec-15
Dec-16
Dec-17
Dec-18
Dec-19
Dec-20
Dec-21
Dec-22
Dec-23
Dec-24
Dec-25
Dec-26
Dec-27
Dec-28
Dec-29
Dec-30
Dec-31
Dec-32
Dec-33
Dec-34
Dec-35
Dec-36
Dec-37
Totals

Pre-Tax Cash
-2,880,480
483,737
521,698
538,437
555,845
573,948
593,212
30,970
32,019
33,108
34,238
35,412
36,631
37,896
39,210
40,575
41,992
43,463
44,991
46,578
48,225
49,936
51,713
53,558
55,473
57,463
1,199,847

Beginning
HLBV

0
2,700,845
2,286,408
2,031,317
1,693,287
1,304,380
838,492
341,158
325,895
306,692
285,075
260,761
233,437
202,757
168,340
129,763
95,109
89,257
83,040
75,561
64,086
51,701
39,271
26,836
14,403
1,971

Ending
HLBV
2,700,845
2,286,408
2,031,317
1,693,287
1,304,380
838,492
341,158
325,895
306,692
285,075
260,761
233,437
202,757
168,340
129,763
95,109
89,257
83,040
75,561
64,086
51,701
39,271
26,836
14,403
1,971
0

Change in
HLBV
2,700,845
-414,437
-255,091
-338,030
-388,907
-465,888
-497,334
-15,263
-19,202
-21,617
-24,314
-27,324
-30,680
-34,417
-38,577
-34,654
-5,852
-6,217
-7,479
-11,475
-12,385
-12,430
-12,435
-12,433
-12,432
-1,971
0

Pre-Tax
Book
Income
-179,635
69,300
266,607
200,406
166,938
108,060
95,878
15,707
12,817
11,491
9,924
8,088
5,951
3,479
634
5,921
36,139
37,246
37,512
35,103
35,841
37,506
39,278
41,124
43,042
55,491
1,199,847

Provision
For Taxes
62,872
-24,255
-93,313
-70,142
-58,428
-37,821
-33,557
-5,498
-4,486
-4,022
-3,473
-2,831
-2,083
-1,218
-222
-2,072
-12,649
-13,036
-13,129
-12,286
-12,544
-13,127
-13,747
-14,394
-15,065
-19,422
-419,946

Tax Effect
Of Grant
And Basis
Reduction
0
92,496
92,496
92,496
92,496
92,496
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
462,480

Allocated
Tax Credit
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0

After-Tax
Book Income
-116,763
137,541
265,791
222,760
201,005
162,735
62,320
10,210
8,331
7,469
6,451
5,257
3,868
2,261
412
3,849
23,491
24,210
24,383
22,817
23,296
24,379
25,531
26,731
27,977
36,069
1,242,380

46

Lease Scenario
FASB 13 Statement Of Earnings
Year
Ending
Dec-12
Dec-13
Dec-14
Dec-15
Dec-16
Dec-17
Dec-18
Dec-19
Dec-20
Dec-21
Dec-22
Dec-23
Dec-24
Dec-25
Dec-26
Dec-27
Dec-28
Dec-29
Dec-30
Dec-31
Dec-32
Dec-33
Dec-34
Dec-35
Dec-36
Dec-37
Totals

Lessor's Net
Investment At
End Of Year
4,856,947
4,936,581
4,991,182
5,036,766
5,071,811
5,094,614
5,102,886
5,094,476
5,066,982
5,017,726
4,943,728
4,841,668
4,707,852
4,538,175
4,328,073
4,072,474
3,765,750
3,401,650
2,973,241
2,472,830
1,891,889
1,220,962
449,573
286,782
74,360
0

Total Cash
Flow
-4,629,308
407,186
439,140
453,230
467,883
483,121
499,336
516,171
533,648
551,795
570,636
590,200
610,513
631,605
653,507
676,249
699,865
724,387
749,852
776,294
803,753
832,267
861,877
200,995
232,417
78,768
9,415,387

Pre-Tax Cash
Flow Allocated
To Investment
1,728,407
-79,634
-54,601
-45,584
-35,045
-22,803
-8,273
8,410
27,494
49,255
73,998
102,060
133,815
169,677
210,103
255,598
306,724
364,100
428,409
500,411
580,941
670,926
771,389
162,791
212,422
74,360
6,585,354

Pre-Tax Income
Allocated At
9.91%
227,639
486,820
493,741
498,814
502,928
505,924
507,609
507,761
506,154
502,540
496,638
488,139
476,697
461,928
443,404
420,651
393,140
360,287
321,442
275,884
222,812
161,341
90,488
38,204
19,995
4,408
9,415,387

Pre-Tax
Income
Without Fee
228,474
487,988
495,146
500,450
504,804
508,048
509,984
510,389
509,034
505,664
499,996
491,713
480,462
465,849
447,436
424,737
397,209
364,249
325,188
279,281
225,702
163,532
91,754
38,738
20,288
4,474
9,480,588

Amortized
Fee
-836
-1,168
-1,405
-1,636
-1,876
-2,123
-2,375
-2,628
-2,880
-3,125
-3,358
-3,574
-3,764
-3,921
-4,032
-4,086
-4,068
-3,962
-3,746
-3,397
-2,890
-2,191
-1,266
-533
-293
-66
-65,202

Tax Effect
Of Pre-Tax
Income
-71,397
-152,688
-154,859
-156,450
-157,740
-158,680
-159,208
-159,256
-158,752
-157,618
-155,767
-153,102
-149,513
-144,881
-139,071
-131,934
-123,306
-113,002
-100,818
-86,529
-69,884
-50,604
-28,381
-11,983
-6,271
-1,382
-2,953,077

Investment
Tax Credit
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0

After-Tax
Income
156,241
334,132
338,882
342,364
345,188
347,244
348,401
348,505
347,402
344,921
340,871
335,037
327,184
317,047
304,333
288,716
269,834
247,285
220,624
189,354
152,928
110,737
62,107
26,222
13,724
3,025
6,462,309

47

Appendix III
Project Evaluation Check List

48

Project Evaluation Check List

Review of Overall Project Concept
Project Viability
Specific Renewable Sector
Renewable Energy Resource
Technology
Location
Feedstock
Offtake & Power Purchase Agreement (PPA)
Interconnection and Transmission
Alignment with Investors Investment Objectives
Review of Financing Structure
Description of Financial Structure
Benefits and Risks of Structure
Tax Assumptions
Impact of Debt
Equity Levels (Investor and Sponsor)
Cash Flow and Residual Splits
Optimization for Monetizing Investment Tax Credits
(ITCs) / Production Tax Credits (PTCs) / Depreciation /
Renewable Energy Certificates (REC) & Solar
Renewable Energy Certificates (SREC) / State Rebates

Review of Sponsor/Developer, Offtakers and

Technology Providers
Track Record in Renewable Energy
List of Prior Projects / Installed MW
Financial Strength
Ownership Structure
Business Model
Asset Management Capabilities
Future Direction of Company
Review of Pro Forma
Overall Reasonableness of Project Assumptions
List of Prior Projects / Installed MW
Availability & Level of Federal & State Incentives
Equity Pay-In Assumptions
Debt Sizing / Coverage / Rates / Fees
Reserves Target Levels and Funding Schedules
Level and Distribution of Development and
Management Fees
Residual Value Assumptions
Sensitivity Analysis
49

Project Evaluation Check List

Deal Pricing

Review of Project Development

Review Investor and Sponsor Benefit Projections

Utilize Proprietary or Third-Party Software Pricing
Models as necessary
Analyze Investor and Sponsor Economics
Comparative Review

EPC and Construction/General Contractor

Construction Schedule

Review of Project Operations and Risks

Construction Review & Disbursements Process

Permits
Environmental Regulation
Technology Providers
Site Preparation and Interconnection
Balance of Plant (BOP)
Review with Associated Professionals

Operations & Maintenance (O&M) Provider

Operations Plan
O&M Reporting
Technology Risk
Market Risk
Construction Risk
Tax and Legislative Risk
Resource Risk
Operating Risk
Reputational Risk
Other Risks

Engineering and EPC Contract

Permitting Review
Environmental Impact Statements
Resource and/or Feedstock Agreements
Offtake Agreements / PPA
Equipment Warranty and Insurance
Lease and Land Agreements
Appraisal and Valuation
Interconnection and Transmission Agreements
Financing/Structure Documents
Legal and Tax Opinions

50