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Financing Wind Power: The Future of Energy

IPED

Scottsdale, AZ * May 7 - 9, 2008

ARE THERE MUNICIPAL BONDS IN THE WIND?

Travis C. Gibbs, EsquireNixon Peabody LLP

555 West Fifth Street, Floor 46

Los Angeles, CA 90013Tel.: (213) 629-6029Fax: (213) 629-6001

tgibbs@nixonpeabody.com

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ARE THERE ANY MUNICIPAL BONDS IN THE WIND?

• Traditional Municipal Financing

• Clean Renewable Energy Bonds (CREBs)

• Electricity Prepayments

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CREBs

• Added in 2005 (Energy Policy Act of 2005)

• Designed to provide an incentive for governmental bodies (including Indian tribes) and cooperative electric companies to produce renewable energy comparable to incentives available to the private sector

• Eligible projects include generally Section 45 projects, including wind

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CREBs

• CREBs are “tax credit bonds”

• Designed to provide the borrower with a 0% loan -- the Federal tax credit received by bondholder intended to be comparable to interest on interest bearing loan

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CREBs

•A total of $1.2 billion of CREBs has been authorized

•Eligible borrowers must apply for an allocation by providing information about the project and its financing

•$750 million of the $1.2 billion in CREBs can be allocated to governmental bodies and the remainder must be allocated to cooperatives

•CREBs are allocated to applicants beginning with the project with the smallest amount requested and then the next-smallest amount, until the total is exhausted

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CREBs

•The $1.2 billion authorized has all been allocated –

•All CREBs must be issued prior to 2009

Round 1 Round 2

Total Authorized

$800M $400M

Total Applications

$2,500M $900M

Number of Approved Wind Projects

112 102

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CREBs

• Legislative Proposals - Senate Economic Stimulus Bill

– Extends for one year to December 31, 2009

– Authorizes an additional $400M

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Electricity Prepayments Background

• Number of gas prepayments and energy/capacity prepayments done in the 1990s

• IRS audits of several gas deals in the late 1990s

• IRS issued proposed regulations to stop new deals

• Ultimately closed all the audits with no changes

• Final regulations on prepayments issued in 2003

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Prepayments-General Rules

• Prepayments made with bond proceeds ordinarily treated as an investment and not an expenditure of bond proceeds

• If prepayment discount rate exceeds bond yield, generally does not qualify for tax exemption

• Final regulations eliminate substantial business purpose exception

• Exception for “customary prepayments” -- limited applicability

• Exception for 90 day prepayments

• Exception for certain gas and electricity supply prepayments

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Final Regulations-Special Rule for Prepayments for Electricity

• Final Regulations permit prepayments for electricity

• Can be combined with private ownership and attendant tax benefits to reduce cost of financing

• At least 90% of the electricity must be used for a Qualifying Use

• “Qualifying Use” means:

– Sold to retail customers located in the historic service area of a municipal utility

– Sold to a municipal utility which resells the electricity to retail customers located in its historic service area

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Final Regulations-Special Rule for Prepayments for Electricity

• Qualifying service area: Area throughout which service was continuously

provided for 5 years, or service area as defined under state law

• Non-qualifying Uses limited to 10 percent and are defined as sales to:

– Governmental entities outside the service area that are not utilities

– Nongovernmental persons or entities outside service area

– Direct sales to retail customers of another municipal utility

• Comparable rules for prepayments for gas

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90% Test and Remedial Actions

• Regulations provide that the 90% test is based on actual facts, not merely expectations

• Compliance with 90% test is measured over life of prepayment

• An effective tracking system is needed

• Remedial action to cure noncompliance:

– Bond redemption or defeasance

– Taxable refunding

– 2 year rule for alternate use of cash generated by “bad” sales of gas

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Commodity Swaps

• Use of commodity swaps may be used to convert fixed price to indexed price

• Final regulations limit the use of commodity swaps in prepayment transactions

• Swaps are permitted between:– Issuer of the bonds and an unrelated third party (but not the

electricity supplier)

– The electricity supplier and an unrelated third party (but not the issuer)

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Compliance for Bond Issue with Multiple Project Participants

• 90-percent requirement applies on an aggregate basis

• Project participants may agree on allocation of the 10-percent non-qualifying use

• Appropriate documentation and certifications from project participants upon issuance.

• Periodic reports from project participants throughout the term of the financing