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WELCOME

Structuring and Financing

the Cleantech Deal

May 26, 2011

Corporate and Project Finance Structures in the

Cleantech Industry

Presented by Dirk Michels [email protected]

May 26, 2011

mailto:[email protected]

3

A Brief Introduction to the Firm

Nearly 2000 lawyers in 37 offices throughout the U.S., Asia and Europe.

Developed and handled innovative project financings for cleantech clients in the Bay Area and beyond.

Highly experienced in cross-border transactions with German and Chinese companies.

Team of lobbyists in DC help clients get access to grants and loans from the Stimulus Package.

One of the largest international practices in Asia with offices in Hong Kong, Beijing, Shanghai, Taipei and Singapore.

4

Dirk Michels

Resident in K&L Gates' Palo Alto and San Francisco offices.

Corporate and strategic advice, including all aspects of project financing, debt and equity financing, and securing of public grants.

Developed power purchase agreements and supply agreements for cleantech companies, as well as agreements related to renewable energy credits.

Assisted in the development and financing of projects in U.S. and Europe.

In more than 15 years of practicing law in Germany and California, total value of transactions exceeds $3 billion.

5

Cleantech Requires

Multidisciplinary Service

Corporate/

Transactional

M&A/Joint Venture

Strategic Alliance

Project

Financing

Intellectual

Property/Patents

Public Policy/

Regulatory

Real Estate/

Development

6

Emerging Growth Corporate Financing

Seed Financing: $200K - $1M

First Institutional Round – Series A: $1-10M

2-3 Rounds of Expansion Financing

$5-15M

$10-25M

$20-50M

Exit

7

Emerging Growth Corporate Financing - Continued

Time between Seed and Institutional Series A

Financing < 1 year

Time between different rounds of Expansion

Financing – 12-24 months

Exit – after 4-8 years

8

Most Cleantech Companies Are Different

High capital requirement soon after Seed/Series A

rounds (< 1 year)

$50-150M and more

Facility Build Out or Project Financing

9

Two Different Shades of Green

Corporate Growth (venture financing)

Facility Build Out/Project Development (project

financing: equity and debt)

10

Two Different Languages

Venture Capital Growth potential

IRR

Board representation

Multiples to exit

Corporate valuation

Project Financing Cash flows

Debt seniority

Debt service coverage ratio

Lockbox and reserve account

Securitization

11

Different Financing Structure

Venture Capital

Familiar preferred stock structures

Project Financing

Complex debt leveraged equity structures

12

Sample Project Finance Structures

Partnership Flip

Sale Leaseback

Lease-Pass Through

13

Partnership Flip Structure

Tax Credit

Equity Investor

99%

Fund

General Partner

1%

Investment Fund

Tax Credits

Depreciation Deductions

Cash Flow

System Integrator/

Installer

$

1%

Solar

Installation

Host #1

PPA/Lease Agreements

Developer

Fee

Solar

Installation

Host #2

Solar

Installation

Host #3

Solar

Installation

Host #4

Solar 1, LLC

Solar 2, LLC

Solar 3, LLC

Solar 4, LLC

100%

Developer

99%

Source: Novogradac & Company LLP 2008

14

Sale Leaseback Structure

Solar Developer may provide

certain guarantees to Corporate

Investor and funds would be held

in escrow accordingly. Yield

guarantees, O&M, Insurance etc.

Funds released to Solar Developer

as guarantees burn off.

Solar Developer, LLC

Lessee

System Integrator/

Installer Solar

Installation

Host #1

PPA/Lease

Agreements

Solar

Installation

Host #2

Solar

Installation

Host #3

Solar 1, LLC

Solar 2, LLC

Solar 3, LLC

Corporate Investor

Lessor

Energy

Procurement

Contract (“EPC”)

Lessor is owner of SEF, Investment Tax Credits,

Tax Losses (Depreciation Deductions), Rebates,

RECs, Recipient of lease payments, Potential

residual buyout

Lease Agreement

Sales Proceeds

Sale of SEFs and

Lease Payments

Solar

Developer

Purchase Agreement


15

Lease Pass-Through Structure


16

Thank You Very Much!

For Further Questions:

Dirk Michels K&L Gates LLP 630 Hansen Way Palo Alto, CA 94304 T: 650-798-6709 F: 650-798-6701 E: [email protected]

Copyright © 2010 by K&L Gates LLP. All rights reserved.

CONNECT Public Policy Forum

Structuring and Financing the Cleantech Deal May 26, 2011

California Developments

PL51640.2

Fred Greguras

Palo Alto Office

[email protected]

650.798.6708


18

California Renewables Portfolio Standard (RPS) New Statutory requirements: 20% from renewable energy

sources by 12/31/2013; 25% by 12/31/2016; 33% by 12/31/2020. Reasonable annual progress in each year after 2013 to ensure 2016 and 2020 goals are met.

Targets California’s investor-owned utilities (“IOUs”), municipal and other public utilities as well as independent sellers

Renewable energy projects must provide actual delivery of electricity not just signed contracts

Current status of IOU compliance

RPS helps create demand for renewable energy products and systems that are used in generation, storage and grid management

Products need to be developed to the “bankable” commercialization stage ASAP. “Proven technology” which operates for the life of the system

19

California Tradable Renewable Energy Credits

REC is one megawatt-hour of electricity generated from an eligible renewable energy source. Credit representing such generation. Utilities must either generate renewable energy or buy RECs to satisfy RPS

CPUC 2010 decisions moved TRECs closer to having monetary value

TRECs are acquired by utilities together with the renewable energy under Power Purchase Agreements (“PPA”)

May provide an additional revenue stream for non-utility projects in the future but not 2011

Need a REC purchase agreement with a creditworthy purchaser in order to be predictable revenue for a financing in NJ and other places where RECs are currently available

TRECS may be an important source of financing revenue in the future because of limitations on government funding

Contracted as annual progress ?

20

Other Developments California Solar Initiative Production Based Incentive (“PBI”)

Payment per kilowatt-hour of electricity generated from an eligible non-utility renewable energy source during the first 5 years of operation

Provided a revenue stream in the past that can make the financing numbers work in a non-utility project

New reservations for PBI are currently on a waiting list for non-residential applications other than from Southern California Edison (“SCE”)

Even when available, PBI per kilowatt-hour rate has decreased significantly which means a smaller revenue stream for project financing

Global Warming Solutions Act (AB32). Purpose is to reduce carbon emissions

by 25% by 2020 and by 80% by 2050 (relative to 1990 levels)

Emission reduction requirements were to begin in 2011 with mandatory caps beginning in 2012. Proposition 26 approved implementation

March 18 Superior Court decision will delay; other law suits likely from Proposition 23, etc.

May eventually create demand for a broader variety of renewable energy products and systems but not in 2011

21

Reverse Auction Pricing/ Feed-in Tariffs (FiTs)

CPUC is approving reverse auction pricing for many utility projects rather than FiTs. FiT is a kilowatt-hour rate paid during a specified period of generation. California is unlikely to ever have a meaningful FiT because of limitations on funding and ratepayer impact

Public Utility Regulatory Policies Act provides that states may not set the PPA rate above the avoided cost as opposed to actual cost which utilities may use in determining ratepayer impact

Federal Energy Regulatory Commission 10/21/2010 decision provided more flexibility for state avoided cost calculations for PPA pricing – including RPS requirements. Decision permits but does not require this flexibility to be used.

Reverse auction-bids are selected on price starting with the lowest price per kilowatt-hour until the auction capacity cap is reached. See SCE RFP announced 5/13/2011.

Result is more utility financed and owned projects (rather than independent power producers) because utilities may use actual costs in ratepayer financing of projects

Build and transfer business model

Demand for products and systems regardless but need to be bankable

22

Summary

Technology companies need to develop products to the “bankable” commercialization stage as soon as possible

TRECS may be an important source of financing revenue in the future because of limitations on government funding

California is unlikely to have a meaningful FiT because of limitations on funding and ratepayer impact

There will be more utility financed and owned projects because actual costs may be used in ratepayer financings.

Renewable Energy Federal Tax Credits and Incentives

Tom Stevens Deloitte Tax LLP

May 2011

Summary of credits and incentives

Tax Credit Brief Summary

Research and Development (“R&D”)

(§41)

Increasing qualified research and experimentation expenditures

Investment Tax Credits (“ITC”)

(§47, §48, §48A, §48B, §48C, §48D)

Investment in qualified property by acquisition, rehabilitation or

construction (e.g., solar, advanced energy project, therapeutic

discovery project, historic rehab, clean coal)

Production Tax Credits (“PTC”)

(§45, §45K, 45J)

Production-based credits for qualified facilities placed in service

(e.g., renewable energy, Indian coal, refined coal, coke, advanced

nuclear)

Cash in Lieu of ITC/PTC

(ARRA §1603)

Grant in lieu of ITCs or PTCs to reimburse a portion of expense of

certain specified energy property (e.g., solar, wind, biomass)

Economic Development Credits

(§45D, §42, §1397-1397F, §1400-

1400U)

Commercial or residential investment in qualifying low-income

areas (e.g., New Markets, Low-Income Housing, GO Zone,

Empowerment/Renewal Community Credits)

Employment Credits

(§51, §45A, §45B, §38)

Wage credits for hiring targeted groups, within empowerment

zones or GO Zones, paying excess social security taxes for

employee-received tips, or retaining qualified individuals under the

HIRE Act

Renewable and Alternative Fuel

Incentives

(§40, §40A, §4041, §6426, §6427)

Using, mixing, producing or selling as fuel alcohol, agri-biodiesel,

biodiesel, renewable diesel, cellulosic biofuel, and alternative fuels

Summary of credits and incentives (cont’d)

Tax Credit Brief Summary

Energy Conservation Incentives

(§25C, §25D, §45L, §45M, §179D)

Producing or investing in certain renewable or energy efficient

property (e.g., new energy efficient home credit, energy efficient

appliances credit, residential energy efficient property credits,

energy efficient commercial building deduction)

Alternative Fuel Vehicle Credits

(§30, §30B, §30C, §30D)

Investment credit for acquisition or lease of certain fuel cell, hybrid,

lean burn, alternative fuel, plug-in electric motor vehicles

Accelerated Cost Recovery Non-

Fossil Fuel

(§168(e)(3)(B)(vi), §168(l), §169,

§291)

Accelerated cost recovery and expensing provisions for certain

renewable and alternative energy property, cellulosic biofuel plant

property, and pollution control facilities

Accelerated Cost Recovery Fossil

Fuel

(§167(h), §168(e)(3)(C)(iii),

168(e)(3)(E)(vii), §169, §291)

Accelerated cost recovery and expensing provisions for geological

and geophysical expenditures, Alaska natural gas pipeline, natural

gas gathering and distribution lines, tertiary injectants, intangible

drilling costs, depletion

Miscellaneous Credits Employer provided child care credit (§45F), Railroad track

maintenance expenditures (§45G), agricultural chemicals security

credit (§45O), and others

Renewable Energy Generation Incentives

• Investment and production tax credits

• ARRA Section 1603 Treasury Grant in lieu of tax credits

• Accelerated MACRS and bonus tax depreciation

• State tax credits, exemptions and incentives

What if I can’t monetize the incentives currently?

• One year carryback; 20-year carryover period

• Multiple monetization structures are utilized

– Partnership flip

– Sale-leaseback

– Inverted lease

– Power prepayment

Incentives are Integral to Project Economics

26 Copyright © 2010 Deloitte Development LLC. All rights reserved.

A High Level Summary of Incentives

Production Tax Credit

• 10-year credit period for

qualified resources

• 2.2 cents per kWh

• Credit reduction for

subsidized or tax-exempt

financing

• Third-party sales

requirement

• Ownership requirement

• No basis reduction in

property

Investment Tax Credit

• One-time tax credit (30%

or 10% of eligible basis)

• No credit reduction for

subsidized or tax-exempt

financing after 12/31/08

• No third-party sales

requirement

• No ownership

requirement

• 50% basis reduction of

property

• Recapture applies

• Normalization required

Treasury Grant

• Cash payment (30% or 10%

of eligible basis)

• If not placed in service in

2009, 2010 or 2011,

construction must begin

during 2009, 2010 or 2011

completed by required

placed-in-service date

• Received within 60 days of

receipt of complete

application

• May be taxable by certain

states or localities

• No ownership requirement

• 50% basis reduction of

property

• Limited recapture applies

• Normalization required Copyright © 2010 Deloitte Development LLC. All rights reserved.

Summary of Qualifying Resources and Facilities

Qualified

Resources/

Facilities

Credit

Amount

for 2010

Placed-in-Service

Date

30% ITC

Election

Treasury

Grant

Solar 30% Before 1/1/2017 N/A 30%

Fuel cell 30% Before 1/1/2017 N/A 30%

Stationary

microturbine 10% Before 1/1/2017 N/A 10%

Geothermal heat

pump 10% Before 1/1/2017 N/A 10%

Small wind 30% Before 1/1/2017 N/A 30%

Combined heat/power 10% Before 1/1/2017 N/A 10%

Geothermal 10% N/A Section 45 is

available 10%

Copyright © 2010 Deloitte Development LLC. All rights reserved.


* Adjusts for inflation. 2010 rate.

Qualified Resources/

Facilities

Credit

Amount

for 2010

Placed-in-Service

Date

30% ITC

Election

Treasury

Grant

Wind 2.2 cents/kwh*

(10 years) Before 1/1/2013 2009-2012 30%

Geothermal (new

facilities)

2.2 cents/kwh*

(10 years) Before 1/1/2014 2009-2013 30%

Closed-loop biomass 2.2 cents/kwh*

(10 years) Before 1/1/2014 2009-2013 30%

Open-loop biomass 1.1 cent/kwh*

(10 years) Before 1/1/2014 2009-2013 30%

Municipal solid waste

(landfill gas, trash)

1.1 cent/kwh*

(10 years) Before 1/1/2014 2009-2013 30%

Hydropower 1.1 cent/kwh*

(10 years) Before 1/1/2014 2009-2013 30%

Refined coal $6.20/ton*

(10 years) Before 1/1/2010 N/A N/A



* Adjusts for inflation. 2010 rate.

Qualified Resources/

Facilities

Credit Amount

for 2010 Placed-in-Service Date

30% ITC

Election Treasury Grant

Indian coal $1.625/ton*

(7 years)

Before 1/1/2009 (not extended)

N/A N/A

Marine and

hydrokinetic

renewables (including

small irrigation power)

1.1 cents/kwh*

(10 years) Before 1/1/2014 2009-2013 30%


31

ARRA Section 1603 Treasury Grant

Which technologies are getting the money?

Source: “Solar Commercial Financial Intensive” workshop at Solar Power International on October 11, 2010


32

ARRA Section 1603 Treasury Grant

Who is submitting the most applications?

Source: “Solar Commercial Financial Intensive” workshop at Solar Power International on October 11, 2010


ARRA Section 1603 Treasury Grant Guidance When Construction Begins…

Physical work of a significant nature • Work performed by the applicant and by other persons

under a written binding contract is taken into account in

determining whether construction has begun

• Work must be continuous

OR

5 percent safe harbor • An applicant may treat physical work of a significant nature

as beginning when more than 5 percent of the total cost of the

property has been paid or incurred

• Only costs included in the eligible basis of the specified

energy property are taken into account in determining if 5

percent of total costs has been exceeded

• No continuous work requirement Copyright © 2010 Deloitte Development LLC. All rights reserved.

ARRA Section 1603 Treasury Grant Guidance When are Costs Incurred (Accrual Basis)?

All events test

• Fixed and determinable

Economic performance • Depending on taxpayer’s method of accounting, the cost of such property is treated as “incurred” or provided either when:

– title passes

– delivered, or

– accepted

Note:

• 3 ½ month rule

• Look through to supplier’s costs (binding contract)


Tax Equity Structuring

Tax credit monetization

• Monetization is the process of turning certain tax credits into

capital for project financing

• Third party investors provide capital in exchange for the tax

credits and tax losses (from MACRS tax depreciation)

• Monetization is accomplished through commonly accepted

structures, which vary depending on the credit and motivating

factors of each party

• There are large taxpayers in the U.S. actively looking to invest

• There are more developers looking for tax equity investment into

their projects, however…

• Credit investors are motivated by Return on Investment (“ROI”)

and ability to utilize tax attributes generated by the project Copyright © 2010 Deloitte Development LLC. All rights reserved.

Tax Equity Partnership Flip Structure

Partnership Flip

Gross income (loss)

Period 1: 1%

Period 2: 1%

Period 3: 95%

Cash distributions

Period 1: 100%

Period 2: 0%

Period 3: 95%

Cash distributions

Period 1: 0%

Period 2: 100%

Period 3: 5%

Gross income (loss)

Period 1: 99%

Period 2: 99%

Period 3: 5%

Rev. Proc. 2007-65

Example 1

Project

Entity

Developer Tax Investor


Tax Equity Leasing Structures

Sale Leaseback Structure – (Construct / Sell)


1. Developer buys

or obtains long

term roof lease

rights and

installs solar

panels

2. Tax Investor

purchases the

installed panels

from Developer

and leases them

back under LT

lease

3. Tax Investor will

receive the 30%

Investment Tax

Credit based

upon the

purchase price

paid for the

panels and

accelerated

depreciation

Lessee

(Developer

Owned)

Tax Credits

1

2

3

Lessor

(Investor

Owned)


Sale Leaseback Structure – (Leaseback / Operate)


4. Tax Investor will

lease the panels

back to the

Developer

5. Developer will

make annual

lease payments

to the Tax

Investor to cover

debt service

6. Developer enters

into Power

Purchase

agreement to sell

electricity from

panels

4

5

Local Utility

6

Lessee

(Developer

Owned)

Lessor

(Investor

Owned)


Inverted Lease Structure


1. Owner obtains

long term roof

lease rights and

installs solar

panels

2. Owner leases the

panels to Operator

& makes election

to pass through

credits to lessee

allocated 99% to

Tax Investor

3. Operator enters

into Power

Purchase

agreement to sell

electricity from

panels

4. Operator will make

annual lease

payments to the

Owner to cover

debt service

Owner

(Lessor)

Operator

(Lessee)

Tax

Credits

1

2

3

51% owner

49% owner

99% owner

1% owner

Local Utility Lease panels

4


Sale Leaseback Inverted Lease

FINANCING • Investor provides 100%

financing (secured by PPA)

• Investor provides partial financing

(secured by PPA)

EXIT COST • Higher exit costs • Lower exit costs

OPERATING

RISK • Insulates tax investor from

operation risk by separating

ownership from operations

• Tax investor takes on a share of

operation risk but will seek to transfer

this risk contractually to Developer

through various agreements

TECHNOLOGY

RISK • Insulates tax investor from

technology risk since

financing closed after placed

in service date

• Tax investor has technology risk since

financing must be closed prior to

placed in service date

BASIS

ADJUSTMENT • Tax investor benefits reduced

by 50% basis adjustment

(only 85% of property

depreciated)

• Owner entity depreciates 100% of

basis

• Tax investor recognizes 50% basis

adjustment into income (offset by

allocable share of 49% full

depreciation and rent)

• This “anti-depreciation” increases Tax

Investor’s capital account and basis

allowing basis recovery on disposition

Comparison


Tax Equity Power Prepayment Structure

Power Prepay Structure

Electricity

Buyer

Tax Equity Lender

Prepay for

Tier 1 power

Pass-thru

some O&M costs

Tier 2 power

billed monthly

Project

(Owner)

Electricity Buyer may have an option to

buy the Project in the future at FMV

Illustrative example for discussion purposes only

Electricity Buyer may hold a security interest in the

project to secure delivery of the Tier 1 power Copyright © 2010 Deloitte Development LLC. All rights reserved.

Tom Stevens

619-237-6785

[email protected]

Contact Information



Circular 230 Statement

Any tax advice included in this written or electronic communication was not

intended or written to be used, and it cannot be used by the taxpayer, for the

purpose of avoiding any penalties that may be imposed on the taxpayer by any

governmental taxing authority or agency.

Limitation on Use

The information contained in this publication is for general purposes only and is

not intended, and should not be construed, as legal, accounting, or tax advice or

opinion provided by Deloitte Tax LLP to the reader. This material may not be

applicable or suitable for the reader’s specific circumstances of needs.

Therefore, the information should not be used as a substitute for consultation with

professional accounting, tax, or other competent advisors. Please contact a

Deloitte Tax LLP professional before taking any action based upon this

information.


Navigating the “Valley of Death”

By: Gerry Di Popolo

VP, Business Development

Situation Profile

• In spite of being a +30 year old renewable energy developer, Cannon consistently faces the challenge of navigating the valley of death

– New technology (e.g., renewable vs. conventional) – New markets, policies and customers (e.g., international, solar, PTC/ITC, IOU’s/muni’s) – New sources of capital (e.g., founders, investors, vendors, operations, etc.)

• Significant challenges exist (and often emerge) along our company’s and/or projects’ path to success – Proven technology (or the lack thereof) – Access to capital (or the lack thereof) – Government policy support (or the lack thereof) – Entrenched enemies (oddly, never a lack thereof)

• All emerging clean technologies, new cleantech companies, and renewable energy developers must build a bridge on sound fundamentals to cross the valley of death (of course, never overlook timing and luck)

Even with a bridge, crossing the valley of death may still feel more like this …

… than cruising in a ‘69 Corvette across the beauty and precision of this

Shrink the gap with prudent planning and sheer

determination, while achieving quantifiable milestones

time

Patient (warm promise)

Permanent (cold execution)

“valley of death”

risk

reward

Value (i.e., cashflow or

net present value)

Risk (i.e., discount

rate, premium)

?????

Investor Type (and mood)

Hard Won Wisdom: Think backwards while always moving forward

• Know what end the game looks like – Investor mood, profile, and requirements (understand the implications

it will have on you, your team and goals)

– Financial benchmarks – clear, realistic, and achievable

– Single or multiple exit options, cherish the art of closing

• Understand how decisions/actions today impact end game – “Going slow” versus “fast tracking” (impact on day-to-day cash flow,

snapping branches off decision tree, home-run swinging)

– Key staffing (leadership, commitment, most valuable role players)

– Forging relationships with stakeholders, investors, proponents and opponents (helps with decisions on permitting, technology and investments)

About Cannon • Established in 1979 by current founder and chairman Gerry Monkhouse

(determination), and fortified by long-time partner Gary Hardke (key staffing)

• Developed in Tehachapi, CA in the 1980’s, overseas in the 1990’s (e.g., Europe, Asia), returned to Palm Springs, CA post-energy crisis, “exported” green power from Pacific Northwest to California in 2000’s (Windy Point), and focused on utility-scale solar (CA) and foreign wind markets (e.g., Mexico, Croatia, Poland) (timing, luck, new markets, customers, and policies)

• Sold original CA operations to Florida Power & Light, partnered with strategic/local partners overseas, built turn-key projects for Shell Oil, financed Windy Point with innovative muni-financing, and currently co-developing a Mexico wind project with a turbine vendor (access to capital, proven technology, and entrenched enemies)

PANEL DISCUSSION

Moderated by: Duane Roth, CEO, CONNECT

WELCOME [] · 2019-06-20 · General Partner 1% Investment Fund Tax Credits Depreciation Deductions...

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Transcript of WELCOME [] · 2019-06-20 · General Partner 1% Investment Fund Tax Credits Depreciation Deductions...