Negotiating Wind Park Easements

andAnalyzing Comparable Sales

presented by

Justin BierschwaleBierschwale Appraisals

PO Box 154517 College StreetJunction, TX 76849Ph (325) 446-3052

jbierschwale@gmail.com

Terry ArgotsingerStalcup Ag Service, Inc.

P O Box 67910 Flindt Drive

Storm Lake, IA 50588712-732-6462

targotsinger@stalcupag.com

Take a look from their perspective first

Wind Project Development Process

Site Selection

Land Agreements

Wind Assessments

Environmental Review

Economic Modeling

Interconnection Studies

Permitting

Sales Agreements

Financing

Turbine Procurement

Construction Contracting

Operations and Maintenance

Locating Wind Parks

• Power Grid

• Wind Velocity• State and Federal Mandates (cap and trade)

• Tax incentives

• Power demand

• Will of the people

Mutual desire to make it compatible for everyone

Cost of Construction1.5 MWh turbine

• Blades $300,000• Generator $1,250,000• Transportation $225,000• Tower $330,000• Materials $400,000• Labor $400,000• Engineering, Dev., etc $80,000• $3,000,000 / 1.5 Mwh = $2,000/Kwh RCN• Deprec., O&M, Land rent, RE Tax – $60,000• Debt Service ?

Income Stream

• Electricity - $35 to $100 per Mwh at the hub

• Carbon Credits - $5 to $25 per mmt

• PTC/ITC/Direct payments - $.021 per Kwh

• Depreciation – 5 year equipment

Actual Production(1.5 MW Turbine)

• 4,000,000 Kwh x $.055/Kwh = $220,000• 4,000,000 Kwh x $.021/Kwh PTC = $84,000• 1.5 Mwh x 2,000 mmt CO2/Mwh x $15/mmt = $45,000

SO2, NOx – EPA clearing house for pollution credits

(Meets Electricity needs for 300 people/year)

The Queue

• Federal Energy Regulatory Commission - FERC• Independent Transmission System Operators - ISO

http://www.midwestmarket.org/page/Total+Wind+Generation

• $200,000 to $300,000 for permits• Application• Feasibility Study• System Impact Study• Facilities Study• 459 to 884 days

Method of Negotiation

• Get legal advice

• Individually

• As a group

• Trustee, LLC – Combine wind rights into one package if rights can be separated under state code

• Option, Lease, Easement

• Privacy clause – Agreement and Memorandum

Key Terms of Agreement

• 3 phases Development – Construction - Operations

• Rates• Site selection• Insurance• Re-powering• Decommissioning• Most Favored Nation

Development Phase

• 3 to 5 years

• State mandates with limits – 7 years

• http://www.dsireusa.org/

• $3 to $40 per acre per year

Construction Phase

• Usually less than one year

• One time payment

• Crop Damages

• Compaction

• Access

• Laydown areas

• Crane paths

Operations Phase

• 30 to 90 years• Fixed Payments - $2,500 - $6,000 per MW• CPI-U minimum 2%• Royalty – individual tower 3,4,5 or 6%• Royalty – prorated• Fixed plus royalty• Per acre plus royalty – 40/60• Renewable energy credits• Carbon credits• Roads, cables, buildings, substation

Site Selection

• Proposed plat

• Final plat

• Landowner approval

• The larger the turbine the fewer per farm

• 1.1 fall down distance – state code ?

• Setbacks from roads, dwellings

Insurance

• State code minimums

• $2,000,000 to $10,000,000

• Adjust to inflation

Re-Powering okay but renegotiate

Decommissioning5 feet

400 cu ydsPerformance bond for 1.5 x cost of removal

180 days

Most Favored Nation

• Same terms for all agreements

• Private negotiation - addendum

ELECTRIC TRANSMISSION SYSTEM OF TEXAS

FIRST WIND DEVELOPMENT

CONTINUED DEVELOPMENT

BOTTLENECK

DEVELOPERS AREN’T STUPIDCURRENT DEVELOPMENT

DEVELOPERS AREN’T STUPIDTIRED OF WAITING FOR EXPANSION

FP&L PRIVATELY BUILT TRANSMISSION

LINE

WHAT THE TRANSMISSION COMPANIES ARE SAYING

• $4.93 BILLION IN EXPANSION PROJECTS

• 2400 MILES OF NEW TRANSMISSION• POTENTIAL FOR 18.5 GIGAWATTS IN

NEW WIND POWER PROJECTS• AEP & DUKE ENERGY – 240 MILES OF

765 KV TRANSMISSION LINES, EST. $1 BILLION

• COMING ONLINE WITHIN 8 YEARS

ONSITE DATA

• Anemometers

• Research Facilities

• Terrain

• Neighborhood

• Existing Turbines

• Data, Data, Data

Regulations• Siting• Visual & Noise• Wildlife Impact• Development Stages• County Zoning?• Safety?• Synchronization with Power Grid• Property Tax

Who All Gets Involved

• Wind Developer

• State Government

• Local Government

• Federal Agencies

• Community Groups & Activists

• Environmental Organizations & Activists

• General Public

BACK TO BASICS--6 FUNCTIONS OF $1.00

1. Future Worth of $1.00

2. Future Worth of $1.00 Per Period

3. Sinking Fund Factor

4. Present Worth of $1.00

5. Present Worth of $1.00 Per Period

6. Annuity Worth of $1.00 TODAY

INTERNAL RATE OF RETURN• RATE THAT SETS THE VALUE OF FUTURE

CASH FLOWS EQUAL TO THE CURRENT VALUE

CF8 CF9 CF10

$28,000 $28,000 $31,000

CF4 CF5 CF6 CF7CF0 CF1 CF2 CF3

$25,000 $25,000 $25,000 $28,000-$145,000 $20,000 $20,000 $20,000

10.4%

IRR???

SALE DETAILS

• 640 Acres

• Sale Price $1,581,257

• Land Contributory Value: $2,000/Acre

• Residual Wind Lease Contribution: $301,257

• Number of Turbines: 5

• Lease Period at time of sale: Development

FINDING THE PIECES

CONSTRUCT THE TIMELINE

CF7CF0 CF1 CF2 CF3

X

CF4 CF5 CF6

X X

CF8 CF9….. CF33

DEVELOPMENT TERM OPERATIONS TERM

X X($301,257) X X X X X

THINGS TO WATCH FOR

RENTS

Turbines 5Year 1-7 Royalty 4%Year 8-14 Royalty 6%Year 15-21 Royalty 7%Year 22-30 Royalty 8%Turbines Capacity 1800Wind Efficiency 35%In Service 90%Days (per month) 30Hours(per day) 24Available Capacity (Kwh) 1,166,400Total Production (Kwh) 408,240Price of Electricity (per Kwh) $0.07Gross Income (monthly) $28,576.80Line Loss & Other Costs (monthly) 3%Adjusted Gross (monthly) $27,719.50Adjusted Gross (annually) $332,633.95Total Adjusted Gross $1,663,169.76

GROSS INCOME CALCULATIONS

YEAR 1-7 $66,526.79YEAR 8-14 $91,474.34YEAR 15-21 $108,106.03YEAR 22-30 $133,053.58

ROYALTY PAYMENTS

BASE PAYMENT$37,800$46,800$60,300$69,300

Possible Expenses to Consider?

CALCULATE THE IRR

CF6 CF7CF0 CF1 CF2 CF3 CF10

($301,257) $640 $480 $320 $109,027 $66,527 $66,527

CF4 CF5

$66,527 $91,474 $91,474 $91,474

CF8 CF9

$108,106 $108,106 $108,106

CF20 CF21

$91,474 $91,474 $91,474 $91,474 $108,106 $108,106 $108,106 $108,106

CF11 CF12 CF13 CF14 CF15 CF16 CF17 CF18 CF19

$133,054 $133,054 $133,054

CF33

$133,054$133,054 $133,054 $133,054 $133,054$133,054 $133,054 $133,054 $133,054

CF29 CF30 CF31 CF32CF22 CF23 CF24 CF25 CF26 CF27 CF28

IRR = 17.36%

SUBJECT DETAILS

• 320 ACRES

• ROYALTY PAYMENTS – SAME AS SALE

• TERMS – SAME AS SALE

• NUMBER OF TURBINES – 2

• STAGE ON DATE OF APPRAISAL– DEVELOPMENT

CONSTRUCT THE TIMELINE

CF6 CF7CF0 CF1 CF2 CF3 CF10

NPV??? $320 $240 $160 $43,611 $26,611 $26,611

CF4 CF5

DEVELOPMENT TERM OPERATIONS TERM

$26,611 $36,590 $36,590 $36,590

CF8 CF9

CF11 CF12 CF13 CF14 CF15 CF16 CF17 CF18 CF19 CF20 CF21

$36,590 $36,590 $36,590 $36,590 $43,242 $43,242 $43,242 $43,242 $43,242 $43,242 $43,242

CF22 CF23 CF24 CF25 CF26 CF27 CF28 CF29 CF30 CF31 CF32

$53,221 $53,221 $53,221 $53,221 $53,221 $53,221 $53,221 $53,221 $53,221 $53,221 $53,221

CF33

$53,221

APPLY IT

DEVELOPMENT TERM OPERATIONS TERM

$26,611 $36,590NPV??? $320 $240 $160 $43,611 $26,611 $36,590 $53,221

CF8 CF9….. CF33

$26,611

CF4 CF5 CF6 CF7CF0 CF1 CF2 CF3

17% IRR

NPV = $131,670

320 ACRES X $2,500/ACRE = $800,000+ CV OF WIND LEASE: $131,000TOTAL VALUE = $931,000

What Ifs: Justin’s Fuzzy Logic

• What if the Subject already had turbines producing and had 5 years of payment history?

• What if the Subject sat right next to an expanding wind farm but did not yet have a lease in place?

Things to Consider• Make certain you have measured value as it

contributes to the whole package, i.e. avoid flat out summation.– Extract Rates as they relate to contributory value, not as

they stand separate and apart from the land.

• Extract and Apply in the exact same way.– If you include bonus payments in extraction, include them

in application, etc.

• Step Away from the ledge at the end of the day and think through your conclusions. Are they logical?

QUESTIONS