What’s New?

1. What’s New? Keith Martin kmartin@chadbourne.com

3. Treasury cash grants paid on renewable energy projects will be subject to haircuts of 7.6% starting January 2 if $984 billion in automatic spending cuts take effect.  There is talk in Congress of a six-month delay.  The haircuts could drive more companies to claim tax credits rather than grants. • "obligated balance"

4. The Treasury has been limiting developer fees paid to affiliated development companies to 3% to 5% of project cost.  It has generally allowed markups of 10% to 20% above cost in cases where projects are sold to third parties, including in tax equity transactions.  There are three lawsuits pending against Treasury.  The government accused a solar company in one of fraud in a counterclaim in July.  The Treasury inspector general is back out in the field, but using the IRS this time to assist with audits. • False Claims Act  

5. All remaining cash grant applications must be filed by September 30.  The Treasury has been sending back emails acknowledging the filing deadline has been met, but reserving the right to question later whether the project was under construction in time to qualify for a cash grant.  The Treasury is taking a tougher line on what "physical work" means.  There have been a number of "2012 transfer" issues with developers hoping to rely on the 5% test.

6. The IRS revoked a private letter ruling that said a PPA that can only be performed by delivering electricity from a particular power plant has no separate value.  The ruling said all the value is in the power plant. • in the money?

7. The IRS has issued two private letter rulings that large batteries installed at wind farms qualify for investment tax credits, at least in cases where the batteries are like knobs on a motor that regulate the flow of electricity into the grid.  Another ruling is pending on batteries that are part of solar rooftop installations.

8. The Senate gave up trying to pass a bill before the election that would extend production tax credits for wind farms through December 2013.  Whether the bill moves in a "lame duck" session will depend on the outcome of the election.  The bill would change the deadline to a deadline to start construction of new projects rather than complete them. • geothermal •       offshore wind

9. The odds of major corporate tax reform in 2013 or 2014 are receding.  The potential for such reform is like a hurricane approaching the Atlantic coast that could eventually affect the weather pattern.  Both parties want to reduce corporate tax rates.  This can only be done by sweeping most incentives from the US tax code. •      “binding” contract

10. If Obama wins and Democrats pick up seats in the Senate, it could breathe new life into the clean energy agenda.  A Republican sweep would give a boost to corporate tax reform and lead to a rollback of recent EPA regulations limiting emissions from power plants.  It is hard to see a break otherwise in the current gridlock.

11. The HistoricBoardwalk decision by a US appeals court in late August calls into question a fixed-flip partnership structure that some solar and wind companies have used to raise tax equity, at least in its earliest form.  It may also require rethinking some "pay-go" structures where tax equity investors pay for tax credits as they are received. • refined coal

12. Developers draw on as many as six tiers of capital from cheapest to most expensive.  The government is pulling away the two lowest tiers.  The focus should remain on how to raise as much money as possible from the cheapest sources.  Treasury cash grants          government-guaranteed debt       straight debt       tax equity       back-levered debt       true equity

13. There is still some government-guaranteed and tax-credit-enhanced debt: US Exim, USDA, ECAs and NMTCs.  Prepaid power contracts and prepaid leases are a way effectively to borrow at the offtaker's borrowing cost.  Inverted leases are a way of borrowing against future electricity revenue. Solar companies are moving toward ABS structures or placing rated portfolio debt in the capital markets.  There is growing demand among mid-tier developers for depreciation-only tax equity plays.

14. MLPs and REITs continue to receive a lot of attention.  MLPs require changes in the tax code before they can be used for most renewable energy projects.  REITs may be a way to raise equity at close to a debt rate.  REITs are a four-piece puzzle of which the industry has solved 2 1/2 to 3 pieces. • Treasury •       solar REITs

15. In 2011, 25 banks did four or more deals.  Only 15 are expected to do so in 2012.  Pricing has remained stable at 225 to 275 bps over LIBOR since 2009, although it is trending toward 300 bps.  Tenors have shortened to five to seven years with mini-perm terms.  All lenders except the Japanese have reduced volumes.

16. There are 15 to 20 active lenders in the institutional debt market, although deal volume remains thin.  Pricing is 250 to 375 bps over average life treasuries.  Tenors run to 20 to 25 years.

17. There are 20 active tax equity investors and another five to seven have approval to invest but have not yet closed a deal.  Yields in the benchmark wind deals are slightly under 8%, and have been trending down in solar residential.  Deal volume was $5.9 billion in 2011.  Commitments through the end of Q2 2012 had already reached $4.7 billion.

18. In terms of opportunity, eight years ago, one could see three large waves coming: renewables, biofuels and PPPs.  Now all that seems visible is a series of smaller wavelets: LNG, nuclear, Latin America, energy storage, inbound Chinese investment, net zero projects and PPPs.

19. I cdnuolt blveiee that I cluod aulaclty uesdnatnrd what I was rdanieg. The phaonmneal pweor of the hmuan mnid, aoccdrnig to a rscheearch at Cmabrigde Uinervtisy, it dseno't mtaetr in what oerdr the ltteres in a word are, the olny iproamtnt tihng is that the frsit and last ltteer be in the rghit pclae. The rset can be a taotl mses and you can still raed it whotuit a pboerlm. This is bcuseaethe huamn mnid deos not raed ervey lteter by istlef, but the word as a wlohe. Azanmig huh? Yaeh and I awlyas tghuhot slpeling was ipmorantt!

20. Percentage of top 40 songs from the 1960s that were written in a major key: • 85%

21. From the 2000s that were: • 43%

22. What’s New? Keith Martin kmartin@chadbourne.com