What s New? Keith Martin

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1 University of Texas Renewable Energy Law February 9, 2016 What s New? Keith Martin kmartin@chadbourne.com

2 Wind, geothermal, biomass, landfill gas, incremental hydroelectric and ocean energy projects must be under construction by December 2016 to qualify for full tax credits. Wind farms that start construction in 2017, 2018 or 2019 qualify for tax credits at 80%, 60% or 40% of the full rate.

3 Solar projects have until the end of 2019 to start construction and qualify for a full 30% investment tax credit. The ITC will fall to 26% for projects starting construction in 2020 and 22% for projects starting construction in It will fall to 10% after that. in-service deadline

4 Fuel cells, geothermal heat pumps and CHP projects were left out of the extensions. All three must be in service by December 2016 to qualify under existing law. The House may revisit them later in the year. Pelosi

5 It is not enough merely to have started construction: there must also be continuous work on the project after the deadline. The IRS has not made developers prove continuous work if a project is finished within two years. A new IRS notice is expected in March explaining how the two-year presumption works when the credit is phasing out. vintaging v. single date project types started too early?

6 The IRS will address later how the constructionstart rules work for solar. How much benefit solar rooftop companies get from the constructionstart deadline remains to be seen. It may be harder for utility-scale solar projects than for wind to start construction under the physical work test. inventory

7 Another rush is expected in 2016 by wind developers to sign contracts with turbine vendors for "PTC components." Excavation and road contractors should be in demand again at year end. The extension is an opportunity to shore up weak physical work facts during It is also an opportunity to sell stockpiled equipment to other developers for use in their projects without taking at least a 21% interest. transfer issues

8 A number of lessons can be drawn from experience with the last several deadlines to start construction. Start under the 5% test if at all possible. Keep logs. It is best in physical work cases to dig both turbine foundations and put in roads. A right to terminate for convenience turns a purchase order into an option rather than a binding contract: require payment of at least 5% of the remaining contract price in damages. others

9 Congress extended a 50% depreciation bonus that expired at the end of 2014 retroactively to the start of Half the cost of new equipment put in service in 2015, 2016 or 2017 can be deducted immediately and the other half depreciated using the normal depreciation table. The bonus phases out to 40% in 2018 and 30% in Transmission lines and natural-gas fired power plants get an extra year. utilities Indian reservations

10 A wind developer lost an effort in December to persuade the US Claims Court to order Treasury to disclose the developer fees paid on 108 wind farms and the extent to which they were allowed to be included in basis. Twenty-nine lawsuits have been filed against Treasury over cash grant issues. The government has won one case and lost one. Both decisions have been appealed. The next cases set for trial are on April 26 (rooftop solar) and June 21 (biomass). Treasury lookback audits whistleblowers

11 Many LLC agreements need to be revised to reflect new partnership audit rules that were enacted in November. Many companies are still feeling their way. The new rules may complicate future sales of interests in existing partnerships, loans where a partnership is the borrower, and the allocation of risk and tax contest provisions in tax equity deals. More states could decide to impose entity-level taxes on partnerships. default position?

12 The IRS is expected to issue a notice this spring to make it less expensive for independent generators to reimburse neighboring utilities for the cost of network upgrades to relieve grid congestion. Some wind farms in the Midwest are facing curtailments of up to 90% due to congestion. energy storage 481 adjustment

13 The IRS is debating when large batteries added to wind and solar projects should qualify for investment tax credits. The industry is pushing to replace a "75% cliff" with a primary use or functional use test. The battery should be owned by the same legal entity that owns the power project and be adjacent to the project on the low side of the transformer. four PLRs measurement issues

14 A number of other issues affecting renewable energy companies are in play in the latest IRS business plan. They include REITs and solar rooftop systems, prepaid forward contracts, inverted leases, series LLCs, targeted partnership allocations, installment sales with contingent purchase prices, energy-related MLPs and management contracts with private companies in projects where tax-exempt debt is used. net metering

15 A private letter ruling released in December confirms that MLPs can be used to amass a portfolio of site rights to put up renewable energy facilities, including wind farms and rooftop solar, and monetize the future rents in the public equity markets. debt? yield cos

16 Moving to larger trends, new commercial PPAs signed in 2015 reached 3,160 MWs, more than double the year before. About 75% of the 1,800 MWs of new wind PPAs signed in Q were commercial PPAs.

17 A US Supreme Court decision in late January to allow demand-response companies to bid on equal terms as independent generators in hourly energy auctions run by regional grids could lead to lower wholesale electricity prices in such markets. The Supreme Court will hear oral arguments in two cases on February 24 that could establish law on how far states can go in directing utilities to sign contracts with independent generators. valuations

18 Hedges are being used to increase leverage in wind financings by protecting against volatility in revenue due to fluctuating wind velocity and weather. Tax insurance is being used in rooftop solar tax equity deals to avoid cash sweeps that make it harder to support back leverage.

19 Mexico is emerging as a more important market. A new law in December sets renewable electricity targets at 25% by 2018, 30% by 2021 and 35% by Mexican installed capacity was 25.3% renewable energy in 2015, but renewables accounted for only 18.2% of output.

20 It could be easier this year to tap foreign pension funds for true equity. Foreign pension plans will now be able to invest in US "real property" without having to pay capital gains taxes upon exit. FIRPTA

21 There are a number of potential inflection points this year. One is an expected US appeals court ruling as early as late summer in a suit by a majority of US states to block implementation of the Clean Power Plan. (An Oklahoma Corporation Commission decision in December could be a sign that coal plant retirements will accelerate even without a Clean Power Plan.) Other potential inflection points are a series of expected net metering decisions, corporate profits reports, Fed interest rates and the November elections. corporate tax reform?

22 The number of tax equity investors was increasing on the back of rising corporate profits. There are at least 36 currently. Renewable energy tax equity was an $11.5 billion market in 2015, up from $10.1 billion the year before. Yields have been trending down. Tax equity could be on the verge of shifting back to a buyer's market for the first time since 2007, at least for larger sponsors.

23 Banks remain eager to lend. North American deal volume reached $56 billion in 2015, up 24% from the year before. Renewables were up 70%. There were 104 active banks, up 10% from Another increase in number of banks is expected in 2016.

24 Construction debt is pricing as low as 1.5% to 1.75% over LIBOR. Add 25 bps for term debt with step ups over time. Most banks are lending for terms under 10 years. DSCRs at P50 are 1.45x for wind and 1.35x for solar. Back-levered debt is generally at a 50-bp to 100-bp premium to term debt, depending on the tenor and shape of cash flows. Some banks are starting to report increases in funding costs.

25 Term loan B volume shrank again in 2015 to $3.3 billion, down two thirds from Rates moved higher. A strong BB credit is pricing at least at 425 to 450 over LIBOR, compared to 350 bps over in Three term loan B deals were repriced or pulled from the market in the fall. The Panda Hummel deal closed in late October at 600 bps over with 4% OID, after early pricing talk of 550 to 575. The turmoil reflected a broader retreat from energy stocks by the institutional market. $250 million

26 The project bond market is expected to remain sleepy this year, and will not pick up until there are fears of a significant rate increase. There is one deal in the pipeline currently. There were six deals in Project bonds are long-term fixedrate debt pricing at low 200 to low 300 bps over average-life treasuries.

27 What s New? Keith Martin kmartin@chadbourne.com

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