Tax & Accounting Issues · • Business Issues/Risks – Wind does not blow – Sale of Electricity...

© 2008 Reznick Renewable Energy Practice [email protected]

Tax & Accounting Issues

Financing Wind Power: The Future of EnergyMay 8 & 9

The PhoenicianScottsdale, AZ

Matt Ferguson


Reznick GroupPublic Accounting, Tax, and Business Advisory Firm

Registered With the PCAOB

SEC Practice for Public Companies

Over 1400 Employees

Consulting Services


OverviewReznick GroupU.S. Wind DevelopmentMonetization

BenefitsRisks

CFO 5 QuestionsCommon Issues

AccountingTax


US Wind DevelopmentIRC 45 + MACRSFederal government pays 2/3rd‏ of capital cost‏ of wind power projects

Production Tax Credit (PTC) earned over 10 years based upon electricity production and sale

Recover portion of capital cost through depreciation deduction over 5 years

State incentives may pay a portion of costState renewable portfolio standards


PartnershipWind developer admits an institutional investor with a tax base to be its partner and own the project

Investor – “Tax Equity Investor” is allocated most of the economic returns until a flip date that is no earlier than when the investor reaches a target return

Tax Equity Investor’s interest flips down to 5% or 10%Developer has option to repurchase interest

Developer remains the managing member or general partner of the partnership and is responsible for the day-to-day operation of the project

Major decisions require Investor input


Project Development Monetization

Developer(General Partner)

1%

Developer(General Partner)

1%

Corporate Investor(Limited Partner)

99%

Corporate Investor(Limited Partner)

99%

Project Partnership(LP or LLC)

Project Partnership(LP or LLC)

Must own the facility, produce Kwh, & sell to third party

PTC is enjoyed in same proportion of gross revenues

PTC cannot be sold separately

The party claiming the PTCs must also “produce” the electricity

Owner must retain the risks of operation


MonetizationInvestor Perspective

• Investment that is managed like a publicly traded stock• Stable and predictable benefits stream like a bond• Make money• Avoid negative press• No surprises• Avoid or Eliminate Uncertainty• Confidence in Valuation and Accounting


Benefits for Financial Investor• General business tax credit used to offset tax liability • Accelerated tax depreciation• Understandable risk and confidence in valuation and

accounting for the transaction


Risks• Business Issues/Risks

– Wind does not blow– Sale of Electricity - Power

Purchase Agreement– Project risk - construction,

operations, maintenance, warranties

• Tax Issues/Risks – Partnership formation– Economic substance – Capital account issues

related to front-loaded losses


Five Questions every CFO will ask1. How do I record the transaction on my books?2. Will I have to consolidate the business on my

books?3. What happens when performance varies from

forecast?4. Do I have any future financial obligations or risks?5. Does the structure or operation create tax risk that

impacts my books?


Five Questions every CFO will ask1. How do I record the transaction on my books?• Methods of Accounting

– Equity Method• Not in control but able to exert significant influence• Hypothetical Liquidation Book Value (HLBV)

– Consolidation Method• Investor is the controlling party

– Cost Method• No ability to exercise control over operating activities• Investments of more than 3% to 5% are not minor - SEC


Five Questions every CFO will ask2. Will I have to consolidate the business on my

books?• Consolidation of Variable Interest Entities (VIE)

– Equity at risk is insufficient to self finance activities– Equity holders lack any one of the following:

• Ability to make decisions about activities that significant impact

• Obligation to absorb losses• Residual ownership

– Varying voting rights


Five Questions every CFO will ask

3. What happens when performance varies from forecast?

• Impairment


Five Questions every CFO will ask4. Do I have any future financial obligations or risks?• Asset Retirement Obligations


Five Questions every CFO will ask5. Does the structure or operation create tax risk that

impacts my books?• Accounting for uncertainty in income taxes

– Whether transaction will more likely than not succeed upon IRS audit assuming full knowledge


Common GAAP Issues• Revenue Recognition• Guarantee/Warranty• Accounting for Uncertainty

in Income Taxes• Method of Investment

Accounting• Consolidation of Venture -

FIN 46(R)• Fair Value Accounting• Impairment• Lease

• Push-Down Accounting• Depreciation• Asset Retirement Obligation• Operating and Maintenance• Profit Allocation• Reserves• Rebates• REC• Contingent Promises


Beth [email protected](916) 930-5750

Matt [email protected](703) 744-7424

Joe [email protected](703) 744-7478

Gloria [email protected](512) 499-1442

Tax & Accounting Issues · • Business Issues/Risks – Wind does not blow – Sale of Electricity...

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