in North Carolina Tim Kemper, CPA, Partner National Co-leader, Renewable Energy practice CohnReznick LLP

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1 Using State and Federal Tax Credits in North Carolina Tim Kemper, CPA, Partner National Co-leader, Renewable Energy practice CohnReznick LLP

2 Driving the deal forward in NC Key Elements Certificate of Public Convenience and Necessity ( CPCN ) Power Purchase Agreement ( PPA ) Site Control Purchase Option / Lease Option / Lease Agreement Interconnection Interconnection Agreement and/or Interconnection Studies Construction Financing Tax equity both Federal and NC investors are required due to relatively low regulated utility PPA rates Strong balance sheet for the sponsor is key for ease of financing and investor underwriting

and/or Interconnection Studies Construction Financing Tax equity both Federal and NC investors are required due to

3 NC Renewable Energy Tax Credits The Rules North Carolina investment tax credit 35% of the cost of eligible property (7% per year over 5 years for business use) Must construct, purchase or lease renewable energy property in NC RE property includes: solar, biomass, wind, hydro, CHP and geothermal Credit against: NC income tax, franchise tax and gross premiums tax Allocated by profits no special tax credit allocations allowed Lessee (instead of owner) can receive the tax credit if pass-thru election is made. Various special rules apply. No recapture, but future credits can be eliminated 5 year carry-forward (not refundable) Expires January 1, 2016 Limitations: Can only offset tax up to 50% of tax liability per year Business use maximum of $2,500,000 per installation 3

special tax credit allocations allowed Lessee (instead of owner) can receive the tax credit if pass-thru election is made. Various special rules apply.

4 Best Ways to Structure a Deal in NC Structures used for Federal ITC and other incentives (outside of NC): Partnerships (with or without "flip") Leasing structures used to better separate the tax and economic benefits such as: Inverted Lease Sale-Ieasebacks Structures used with NC Renewable Energy Tax Credits: Partnerships (with or without "flip") Leasing structures used to better separate the tax and economic benefit (currently the ONLY way to bifurcate NC from Federal) such as: Inverted Lease Pass thru Fed ITC & NC RETC, or Just pass thru Fed ITC (leaving NC RETC at Lessor / Project Owner) Capital Lease NC RETC at Lessor and Fed ITC at Lessee (tax owner) 8x Rent Model true lease with Fed ITC at Lessor and NC RETC at Lessee

structures used to better separate the tax and economic benefit (currently the ONLY way to bifurcate NC from Federal) such as: Inverted Lease Pass thru Fed ITC & NC RETC, or Just pass

5 What Makes a Transaction Successful / Unsuccessful? Financially strong Developers / Sponsors are required: Must to be able to ensure that projects will be completed even if there are delays in construction financing or other funding sources Needs to provide skin in the game of at least 40% of the deal funding either through equity, debt or other financing (with the balance of funding typically provided by Federal and NC Tax Equity Investors) Tax equity investors have many options and will underwrite project Developer / Sponsors with that in mind Aggregation of smaller projects into portfolios increase financial feasibility Experience with and understanding of industry practices and technical rules as well as market terms for tax equity transactions

Needs to provide skin in the game of at least 40% of the deal funding either through equity, debt or other financing (with the balance of funding typically provided by Federal and NC Tax

6 Status of Tax Appetite in NC In general it is a challenging market that can be broken up into basic categories of investors that each have their own priorities when looking at the investment Regardless of the pool of investors, a single transaction into one portfolio will almost always take an investor out of the market for the next 5 years As such, it is a constant push to find new investors, get them comfortable and execute to meet the appetite in the market, creating a long lead time.

transaction into one portfolio will almost always take an investor out of the market for the next 5 years As such, it is a

7 Status of Tax Appetite in NC (Continued) Three primary pools of capital in the NC State credit market (in descending order of participation and ease of execution): Insurance companies Looking to offset the taxes paid on insurance premiums in the state: Positive accounting for these benefits in terms of above the line and below the line accounting Strong visibility over a 5 year horizon for state tax liability Historically have invested in other state tax credit vehicles Large corporate investors Starting to see more interest from this group Historic liability in the state, looking to offset their gains over the 5 year ITC period Typically they are new to state tax credit investing, so there is a longer lead time to address the structure of the investment and to get them comfortable with the accounting High net-worth individuals While individuals have may have larger tax liabilities in a given year, they typically have less visibility over the 5 year investment horizon Harder to aggregate enough of these investors to get to a scale that makes sense for some of the larger portfolios

state tax liability Historically have invested in other state tax credit vehicles Large corporate investors Starting to see more interest from this group Historic liability in the state, looking to

8 NC Solar Market Meeting its Potential or More Room for Growth? NC has positive state policy for solar further opportunities to consider: If NC had 3rd party PPA legislation, it would encourage further economic activity NC could pass the Good Neighbor Act enabling the military in NC to use 3rd party PPA legislation Companies like FLS Energy could do PV deals like the solar thermal hot water deals they delivered for USMC at Camp Lejeune Allow governments and tax-exempts to sell or otherwise monetize credits they can't use.

further economic activity NC could pass the Good Neighbor Act enabling the military in NC to use 3rd party PPA legislation

9 NC Solar Market Meeting its Potential or More Room for Growth? (Continued) Could there be more growth if the tax credit were easier to use? Transferability as an option, allowing the tax credit to be certificated and sold instead of just allocated to an owner Remove 50% of tax liability limitation Allow special allocations similar to those available for the NC Mill Rehabilitation and Historic Rehabilitation Tax Credits Make the credit refundable to the extent not used to offset tax liability Education is critical industry needs to be more pro-active in outreach and education in order to increase the profile of solar as an asset class and attract investors making their first foray into solar

allocations similar to those available for the NC Mill Rehabilitation and Historic Rehabilitation Tax Credits Make the credit refundable to the extent not used to offset tax

10 Sources and Applications of Funds Depreciable Site Funded Non- Total Property Prep Expenses Amortize Tax Equity Investor (Federal ITC Component) 28,781, % Tax Equity Investor (NC RETC Component) 14,576, % Managing Member Contribution 24,106, % Permanent Financing - 0.0% Deferred Developer Fee 1 9,798, % TOTAL SOURCES: 77,263, % Energy Equipment Costs Solar Hard Cost 64,990,000 64,990, Site Prep 974, ,850 Upfront Interconnect Fees 500, ,000 - Developer Fee 9,798,500 9,798, Miscellaneous Transaction Costs 1,000, , , ,333 TOTAL USES: 77,263,350 75,121, , , ,333

0% Deferred Developer Fee 1 9,798,500 12.7% TOTAL SOURCES: 77,263,350 100.

11 Projected Benefit Schedule (Through Call Date)for a Corporate Investor Member Assuming a 35% Effective Tax Rate Federal Total Total Federal State Deduction Operating Annual Tax Benefit Cumulative Cum Net Federal & State Income Tax Savings Investment Investment Benefits Lost by Cash Benefit /(Cost) Cash from Benefit Investment Year Credit Equity (Losses) (Expense) Credit Credit NC RETC Flow From P/ship from Call Call thru Call thru Call 2013 (8,671,614) (8,671,614) 2014 (34,686,455) (11,603,971) 4,061,390 22,311,185 5,205,943 (1,822,080) 491,231 30,247, ,247,669 (13,110,400) (18,106,423) 6,337,248-5,205,943 (1,822,080) 900,187 10,621, ,868,966 (2,489,102) ,355 (46,324) - 5,205,943 (1,822,080) 899,686 4,237, ,106,191 1,748, ,183 (314,714) - 5,205,943 (1,822,080) 899,183 3,968, ,074,523 5,716, ,677 (314,537) - 5,205,943 (1,822,080) 898,677 3,968, ,042,527 9,684, ,591 (314,507) , , ,626,610 10,268, (159,345) 788,604 54,255,870 10,897,801 (43,358,069) (26,881,588) 9,408,556 22,311,185 26,029,715 (9,110,400) 4,987,555 53,626,610 (159,345) 788,604

P/ship from Call Call thru Call thru Call 2013 (8,671,614) - - - - - - - - - - (8,671,614) 2014 (34,686,455) (11,603,971) 4,061,390 22,311,185 5,205,943 (1,822,080) 491,231 30,247,669 - - 30,247,669

Tax Credits The Lynchpin for Federal Renewable Energy Financing Policy. Kathy Parker

Tax Credits The Lynchpin for Federal Renewable Energy Financing Policy Kathy Parker Partner Rodman and Rodman CPA Environmental Business Council of New England Energy Environment Economy GREEN ENERGY TAX