Distributed Generation Financing NWPPA Meeting February 18, 2015
Vendor Financing for Customer Sited Solar Turn-key approach for residential and commercial solar Design Permitting Installation Utility interconnection Monitoring and Maintenance Financing Power Purchase Agreement Pay for the energy produced on site at a fixed rate for the term of contract. Solar Lease Fixed Monthly Payment Keep system overproduction Purchase Outright 2 Confidential and Proprietary
On-Bill Financing Program Utility borrows funds from a lending institution Utility then loans these funds to individual consumers to make an energy improvement to their home/business The consumer then repays the loan through a monthly charge on the utility bill The monthly loan payment is less than the savings achieved by the improvement Considerations: Secured/Unsecured loan to the consumer Credit determination regarding each loan Regulatory requirements associated with lending Risk for non-payment Administrative costs of filing and releasing liens G&T provides program for all distribution members Consumer sells home Confidential and Proprietary 3
Banking Partnership Utility develops partnership with banking partner to make loans to consumers for improvement projects Utility markets the loan program to consumers under that partnership Considerations Does utility guarantee the consumer loan? Bank determines credit worthiness of borrower Bank has responsibility of regulatory compliance as a lender Bank has responsibility for collecting payments Generation cooperatives develop program and provide guarantee for all distribution utilities Confidential and Proprietary 4
Traditional Loan Program Lender can provide traditional loan to utility for projects These loans can be secured or unsecured The length of the loan may match the useful life of the asset purchased Utility has the total freedom to develop the program to suit their specific needs Confidential and Proprietary 5
Rural Energy for America Program USDA Provides guaranteed loan financing and grant funding to agricultural producers and rural small businesses to purchase or install renewable energy systems or make energy efficiency improvements. Loan guarantees on loans up to 75% of total eligible project cost. Grants for up to 25% of total eligible project costs. Combined can not exceed 75% of the project cost. Funds may be used for small and large solar generation. Renewable energy system grants from $2,500 to $500,000. More information can be found at: http://www.rd.usda.gov/programs-services/rural-energy-america-program-renewableenergy-systems-energy-efficiency 6 Confidential and Proprietary
Clean Renewable Energy Bonds Notice 2015-12 Clean renewable energy bonds (CREBs) may be used by certain entities -- primarily in the public sector -- to finance renewable energy projects. The list of qualifying technologies is generally the same as that used for the federal renewable energy production tax credit (PTC). Participants must first apply to the Internal Revenue Service (IRS) for a CREBs allocation, and then issue the bonds within a specified time period. The bondholder receives federal tax credits in lieu of a portion of the traditional bond interest, resulting in a lower effective interest rate for the borrower. The issuer remains responsible for repaying the principal on the bond. Each transaction is unique and the application process can be challenging. 7 Confidential and Proprietary
Clean Renewable Energy Bonds (Cont.) The initial IRS allocations totaled $2.4 billion split equally amongst public power providers, governmental bodies and electric cooperatives, but large portions went unused. On February 3, 2015 the IRS announced the opening of an application period for the following volume caps available for reallocation: Public Power Providers - $516,565,691.35 Governmental Bodies - $597,134,963.60 Electric Cooperatives - $280,778,469 Applications for the reallocation to public power providers must be received by June 3, 2015. Governmental bodies and cooperative electric companies can begin submitting applications on March 5, 2015. Details and the application can be found at: http://www.irs.gov/pub/irs-drop/n-15-12.pdf 8 Confidential and Proprietary
Solar Lease Financing Discussion Confidential and Proprietary 9
What Is a Lease? A lease is simply an agreement between an owner (lessor) and a customer (lessee) to pay for use of the equipment in the form of rental payments for a specific amount of time with an option to purchase or return the equipment at the end. The customer is responsible for insurance, maintenance, taxes, and all other costs of ownership. Confidential and Proprietary 10
True Lease Benefits Ease of Execution: Straight-forward, commonly used financing with simple documentation under Master Lease Agreement, outside Indenture / Mortgage. Capital Cost: Financing is economically priced, supporting 100% of the project cost, and enables the lessee to monetize the 30% Investment Tax Credit on qualified costs. Asset Control: Ability for lessee to control the solar facility. Financing Flexibility: Construction financing available, converting to permanent financing with no out of pockets costs, or down-payments. Cash Flow: Fixed payments through lease term, with a fixed Purchase Option. Lease Structure: Renewable Energy Credits and Carbon Credits may be available to pass-through to the customer-owner / lessee. Confidential and Proprietary 11
Life Of The Lease Lessee Negotiates The Construction Contract o Lessee decides on a solar contractor o Lessee negotiates the construction contract o Lessor reviews the construction contract to review ITC compliance o Construction contract is assigned to lessor prior to being placed in service Construction Process o Lessor provides the construction financing o Lessor provides the progress payments as requested by the Lessee o The construction financing converts to perm financing when the project is put into service Operations And Maintenance Of The Solar Facility o Lessee provides the operation and maintenance of the solar array throughout the lease End Of Lease Options o At the end of the lease the lessee has two options. Purchase the solar installation for the stated residual amount or renew the lease for up to an additional two years Confidential and Proprietary 12
True Solar Lease True Lease financing, which has been commonly used for commercial solar installations: o True Lease to taxable entity, which would operate solar project (Option 1) o True Lease to taxable entity, which may sell power to another entity (Option 2) True Lease: o Lessor purchases and owns the equipment throughout the life of the lease. This entitles the lessor, as the owner, to the ITC and depreciation benefits associated with the solar array. o The lessor utilizes 30% Federal Tax Credit (currently available through 2016) and asset depreciation to pass the savings back to the lessee in the form of a lower lease payment (resulting in a negative implied interest rate). o Typical lease structure for a taxable entity: 120 months At end of lease, Lessee has the option to purchase the system for a residual value payment or renew the lease for an additional term 20% Fixed Purchase Option (Residual Payment) Level payments or Step-down payments available. Confidential and Proprietary 13
FPO/PRO Residual Purchase or Renew Only (PRO) o 1 st Amendment Lease o Lessee is required to either purchase or renew the equip at lease expiration. o Renewals for 12 or 24 months. o After renewal term, lessee may purchase at FMV, renew, or surrender equipment. o Used with a FMV or FPO to transfer residual risk to credit risk. o Longer lease term, higher residuals than FPO s. o Predominantly used for non-rolling stock o Lessee benefits: Facilitates a larger residual during base lease term. Back-ended cash flow structure and known renewal option structure. Confidential and Proprietary 14
Lease Option #1 Tax Credit Equity Solar Leasing Program Lessor Equipment Lease Lease Payments Taxable Entity Financing Option Description Degree of Difficulty Solar True Lease Taxable entity (lessee) leases equipment from lessor; Tax economics are realized due to lessor s tax appetite. Lessee maintains control. Lessor monetizes ITC and deprecation benefits, passing through to customer owner through a negative implied lease rate. Easy Confidential and Proprietary 15
Lease Option #2 Tax Credit Equity Solar Leasing Program Lessor Equipment Lease Lease Payments Taxable Entity / Subsidiary Sale of Electricity PPA Payments Tax-Exempt Entity Financing Option Description Degree of Difficulty Solar True Lease Taxable Entity / Subsidiary ( T-Sub ) leases equipment from Lessor; T-sub may enter into a PPA to sell the power to another entity, including a tax-exempt entity. Tax economics are realized due to lessor s tax appetite. Lessor owns the equipment but lessee maintains control. Lessor monetizes ITC and depreciation benefits, passing through to customer owner through a negative implied lease rate. Moderate Confidential and Proprietary 16
Lease Option #2 Parameters Lease Terms o 10-12 year lease term / 15-20% Residual Value. o End of lease options include purchase or renewal. If the lease is renewed, the lessee may have the option to return the equipment. o T-sub must be an eligible entity o Note: Interim financing available during construction, prior to permanent lease financing PPA Terms o PPA may be structured with capacity and / or energy payments o PPA Term up to 9 years (shorter tenor than lease) o PPA may have unlimited renewal options o PPA Term must be within useful life of equipment o Lessor likely to take an assignment Confidential and Proprietary 17
Contact Info Brendan Ronayne CoBank Farm Credit Leasing 1478 Stone Point Drive, Suite 380 Roseville, CA 95661 Phone (916) 380-3536 Cell (530) 848-6076 bronayne@cobank.com Doran Dennis CoBank Electric Distribution Lending 900 Circle 75 Pkwy, Suite 1400 Atlanta, GA 30309 Phone (770) 618-3220 Cell (843) 687-1732 ddennis@cobank.com Confidential and Proprietary 18