American Public Power Association Clean Renewable Energy Bonds Workshop

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American Public Power AssociationClean Renewable
Energy Bonds Workshop

• Ed Oswald
• Orrick, Herrington Sutcliffe LLP
• 3050 K Street, NW
• Washington, DC 20007
• [phone]
• eoswald_at_orrick.com
• February 9, 2006

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Background on CREBs

• The 2005 Energy Policy Act provides a financial
  incentive for Municipal Utilities and Electric
  Coops to invest in certain renewable energy
  facilities.
• IOUs already have a tax incentive for investment
  in certain renewable energy facilitiesproduction
  tax credit under IRC 45.
• The new form of incentive to Municipal Utilities
  and Coops is the ability to issuea tax credit
  bond(a relatively new type of debt instrument)
  known as a Clean Renewable Energy Bond or CREB.
• The goal of the CREB initiative is to provide a
  comparable subsidy to Municipal Utilities to
  invest in certain renewable energy facilities.

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Q What is a Clean Renewable Energy Bond or CREB?

• A A CREB is a tax credit bond in which
  interest on the bond is paid by the Federal
  Government in the form of tax credits.

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Tax Credits ()
Issuer
Bond Holder

Principal ()
Project
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Q What kind of federal subsidy-incentive do
CREBs provide to issuers when compared to
tax-exempt bonds?

• A CREBs are intended to provide issuers with a
  0 cost of funds. To the extent that CREBs are
  sold at discount, there is an implicit interest
  cost.

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Q Who can issue CREBs?

• State, territories and possessions of the U.S.
• District of Columbia
• Indian tribal governments
• Any political subdivision of the foregoing and
• A cooperative electric company.

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Q What types of projects can be financed with
CREBs?

• Wind facilities
• Open-Loop and Closed-Loop Biomass Facilities
• Small Irrigation Power Facilities
• Trash Combustion Facilities
• Geothermal or Solar Energy Facilities
• Landfill Gas Facilities
• Refined Coal Production Facilities and
• Qualified Hydropower Facilities.

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Tax-Energy Policy Regarding CREBS

• CREBs may finance the same type of renewable
  energy facilities that are currently eligible for
  the production tax credit (PTC) under Code
  Section 45.
• One benefit of the CREB legislation is that the
  placed-in-service date requirements applicable
  to such facilities under the PTC regime do not
  apply to CREBS.

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Q What do I need to know about the structure of
CREB bonds?

• Tax Credit Rate the tax credit rate is
  determined daily by the Treasury Department.
• This rate will apply to the bonds for their
  entire term effective as of the date of sale of
  the bonds.
• The credit rate is intended to allow for the sale
  of the bonds without discount.
• Think Taxable Coupon ()
• Bond Term the bond term is based on a discount
  rate published by the Treasury Department on a
  monthly basis. The discount rate is designed to
  provide for a maximum term equal to produce 50
  of the face amount of the bond.

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Example of Term Calculation

• Face - 40 million
• Discount Rate - 7

Year 10
Year 1
40 Million
Investment 50 of Face of debt 20 million
invested at 7
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Repayment of Principal

• Repayment of principal-a ratable amount of
  principal needs to be amortized annually
  (different from QZABS).
• The repayment of a ratable amount of principal
  will complicate the pricing of CREBs.
• Repayment of principal will often occur before
  the project is placed in service and generating
  revenue.

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Example of Amortization

• Principal - 40 million
• Term 10 years
• Principal Amortization - 4 million per year

1
3
2
7
6
5
4
10
9
8
4 million
4 million
4 million
4 million
4 million
4 million
4 million
4 million
4 million
4 million
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Q What is the maximum amount of CREBs that can
be issued?

• A The nationwide cap is limited to 800 million
  with State and local governments capped at 500
  million.

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Q Is there a time limit regarding the issuance
of CREBs?

• A CREBs can be issued from January 1, 2006
  through December 31, 2007.

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Q Who can buy CREBs?

• A Anyone can buy the bonds and they can be sold
  on the secondary market.

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Q How is the amount of the tax credit taken
into account for tax purposes by the bondholder?

• A The amount of the tax credit is reported as
  taxable income by the bondholder.

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Flow of Credits to Bondholders
Total Credits in Year 1 1000.00
Bondholder Tax Bracket 30
Taxable Interest to Bondholder 300.00
Net economic return to Bondholder 700.00
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Marketplace Assumptions - Limitations

• Credit cannot be stripped from bonds.
• Single credit rate does not address differing
  credit quality among projects and issuers.
• Credits only have value () to bondholders with
  current Federal tax liability.
• The tax credit may not be carried forward or
  backward into another tax year (use or lose).

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Q What are the CREB program requirements?

• 95 of the proceeds must be spent within 5 years
  of the issuance of CREBs on capital expenditures
  unless extended by the IRS.
• If 95 of the proceeds are not spent within 5
  years, a portion of the CREBs must be redeemed
  within 90 days.
• CREBs are subject to arbitrage rebate rules.

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New Developments -- CREB Application Process

• Deadline for CREB Application is April 26, 2006.
• The CREB Application Requirements are provided in
  IRS Notice 2005-98.
• CREB Applications will be reviewed by IRS staff
  and CREB allocations will be made on a
  project-by-project basis.
• It is expected that the IRS will make allocations
  60 to 90 days after the application deadline.
• The Application must be submitted and signed by a
  qualified issuer.

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CREB Application Process (continued)

• Each Application must contain the following
• The name of the qualified borrower expected to
  own the project.
• A detailed description of the project including
  information which demonstrates that the project
  is a qualified project.

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CREB Application Process (continued)

• The application must contain a certification by
  an independent licensed engineer that the project
  will meet the requirements to be a qualified
  facility and that the project is technically
  viable.
• The placed in service date of the project.
• The location of the project.
• Projects located at the same site and owned by
  the same qualified borrower are treated as a
  single project.

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CREB Application Process (continued)

• The application must describe a plan to obtain
  all necessary federal, state and local regulatory
  approvals of the project.
• The application must contain a detailed
  description of the plan of financing for the
  project including all private and public
  sources of financing and the status of the
  applicants efforts to secure all such financing.

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CREB Application Process (continued)

• The anticipated date of bond issuance.
• The sources of security and repayment of the
  bonds.
• The aggregate face amount of the bonds expected
  to be issued for the project.
• The Issuers expected schedule for spending CREB
  proceeds.
• The dollar amount of the CREBs requested ().

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Allocation Methodology

• Projects will be allocated full CREB authority
  (100 funding) beginning with projects for which
  the smallest dollar amount of CREB authority has
  been requested.
• Example, assume 10 million is the smallest
  request. If 10 projects request 10 million each
  of CREB authority, each project will get 100 of
  the request.

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Allocation Methodology (continued)

• Then the next-smallest dollar amount request will
  be funded at 100.
• This process will continue until the full 800
  million is exhausted.
• If you have a project with a price tag of 50
  million, you can request a lower dollar amount
  and fund the balance of the project with
  tax-exempt bonds or other financing.

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Allocation Methodology (continued)

• Challenge - For more expensive projects issuers
  will need to formulate an approach which
  maximizes the CREB financing but does not
  overshoot the minimum allocation threshold to
  result in getting no allocation at all.