Development and Financing of Renewable Thermal Energy ...

Development and Financing of Renewable Thermal Energy Projects Andrew Bobenski Attorney Day Pitney LLP

The Development and Financing of Renewable Thermal Energy Projects: Deal Structuring, Credits and Incentives EBC – New Hampshire Chapter January 8, 2013

Presented by: Andrew L. Bobenski © 2013 Day Pitney LLP

Location and financing concerns drive renewable project development

 Renewable resources are generally locationspecific  Most renewable technologies are capital intensive  Two economic models for development  “BOT” - Build-Own-Transfer  “BOO” – Build-Own-Operate  Economics of using OPM

 What can’t be financed can’t be built Page 3 | 1/8/2013 EBC – New Hampshire Chapter

Three Sources of Funding  Equity  Debt  On-balance sheet  Off-balance sheet

 Government Subsidies and Incentives

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“Simplified” Project Finance Structure Equity Collateral Agent/ Paying Agent

Debt

Subsidies

Project Company

Offtake Purchaser(s)

Project Sponsor

Project Assets

Operator EPC Contractor Project Operating Expenses

Key Contractual Relationship Collateral

Reserve Accounts Page 5 | 1/8/2013 EBC – New Hampshire Chapter

Cash Flow

Ring Fencing  Essential element of project development  Project is owned by “Project Company”  Special purpose entity  Remote from sponsor and other equity

 Off-balance sheet financing for sponsor/developer  Protection in bankruptcy  No recourse to assets of sponsor/equity

 Project revenue is sole source to repay financing Page 6 | 1/8/2013 EBC – New Hampshire Chapter

Organization of Project Company  “Pass-through” Entity for Federal Income Tax Purposes  Limited liability company  Limited partnership

 Different Classes of Equity Interest  Distribution Preferences  IRR triggers

 “Carried Interest” for Developer

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Tax Equity  Driven primarily by opportunity to realize federal tax incentives  Production Tax Credits  Investment Tax Credits  Accelerated Depreciation

 Generally “passive” investors  Income tax credits only matter to investors with income to be taxed  Impact of recession on tax equity

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Economics of Tax Equity  Pass-through nature of project company permits equity investors to use tax credits  10-year term of PTC creates “flip” structures:  Change in ownership percentages after flip  IRS requirements for flip

 Recapture of ITC if transfer interest in first five years after placed in service Page 9 | 1/8/2013 EBC – New Hampshire Chapter

Debt Financing  Typical approach is “project financing” using ring-fence structure  Project revenue is sole source of funds  Bankruptcy-remote structure  On-balance sheet possible for some developers

 Significant transaction costs  Minimum deal size  Small projects can become uneconomic quickly  Warehouse and portfolio financing options Page 10 | 1/8/2013 EBC – New Hampshire Chapter

Typical Elements of Project Finance Model        

Single-project special purpose entity Investment grade offtake purchaser(s) Secure cash flow – long-term offtake contract(s) Lockbox for payments Waterfall payment structure Reserve accounts Lien on all project assets/all project equity Strong lender consent rights and step-in rights

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Debt Service Coverage Ratio  Basis for amount of debt a project can support  At most basic level: ratio of (income minus operating expenses) to (scheduled principal and interest payments) over same period of time  Generally a DSCR of at least 1.5:1  Determined based on pro forma projections at closing – probable project performance – with “sensitivities” off base case  Distributions to equity only if minimum DSCR is satisfied Page 12 | 1/8/2013 EBC – New Hampshire Chapter

Projects Risks and Mitigation  Revenue Risk  Long-term Offtake Agreement  Investment grade purchaser

 Resource Risk  Proven resource with history  Models are often optimistic  Fuel available on economic terms

 Technology Risk    

Commercial stage technology Experienced O&M provider Availability of spare parts Predictable operating costs

 Completion Risk  Experienced EPC Contractor  Fixed price turnkey contract Page 13 | 1/8/2013 EBC – New Hampshire Chapter

Collateral for Loans  Lender must be able to step in and own/operate or sell project after a default  Collateral includes all projects assets:      

Equipment and other tangible assets Real estate Contract and warranty rights Intellectual property Permits (if allowed) Lockbox accounts

 Collateral also includes pledge of all project equity Page 14 | 1/8/2013 EBC – New Hampshire Chapter

Renewable Energy Credits (RECs)  Based on idea that energy includes many separate and marketable commodities  A REC represents some or all of the environmental attributes of electric power generated by a specific generating unit  1 MWh of useful thermal energy generated = 1 REC

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RECs are Regulatory Creations  RECs are used to comply with Renewable Portfolio Standards (RPS)  Value varies from state to state  Value varies by technology  Different classes  Eligible technology reflects state’s economy

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Tracking Systems  Electronic “registries” in which RECs are created and tracked  Accounting systems, not trading systems

 Transactions for RECs happen bilaterally, outside of tracking system, and are reported to tracking system  Each tracking system has different rules  Limited transfers between tracking systems Page 17 | 1/8/2013 EBC – New Hampshire Chapter

Questions?

Andrew L. Bobenski [email protected] 617-345-4619

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Andrew L. Bobenski Associate Day Pitney LLP

Andrew Bobenski is an attorney within Day Pitney LLP’s energy and utilities practice group, residing in the firm’s Boston office. His practice focuses particularly on renewable energy development, and he has represented a variety of clients in a number of capacities with respect to solar, wind, hydro, biomass and geothermal generation facilities. Included in such representations are four geothermal project financings totaling nearly $450 million. Andrew is a graduate of the University of Connecticut and the University of Notre Dame Law School.

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