New Big Ticket Products Alternative Energy. Erik Lange - KPMG, LLP September 17, 2007 Chicago, Illinois

Transcription

1 New Big Ticket Products Alternative Energy Erik Lange - KPMG, LLP September 17, 2007 Chicago, Illinois

2 Agenda Example Structure Diagram Background Information FIN 46R Evaluation Variable Interest Evaluation Determining Whether an Arrangement Contains a Lease Operating vs. Capital Leases Fixed Price Forwards Executory Contract Voting Interest Analysis Disproportionate Allocations ( Flip Structure) Hypothetical Liquidation of Book Value (HLBV) Application of HLBV Other Issues

3 Example Structure Diagram Alternative Energy Parent [Sponsor] 100% 3 rd Party Bank Back Leverage Loan Holding Company Class A Option to purchase TEI equity at FMV Offtaker Parent 30% Class A Intermediate Company 70% Class B Tax Equity Investor 100% Guarantee 100% Offtaker PPA (20+ yr) Project Company O&M Agreement Operations & Maintenance Wind Farm

4 Background Information Basics: Sponsor and Tax Investor Equity Interests Flip structure Production Tax Credits ( PTCs ) Power Purchase Agreement (PPA)

5 FIN 46R Evaluation Step 1: What are the (possible) variable interests (VI s) in the entity? Step 2: Is the entity a variable interest entity (VIE)? Step 3: If a VIE, who is the primary beneficiary (PB)?

6 Variable Interest Evaluation First: Is it a lease? No Next: Is it a fixed price forward? No Then, it is an executory contract.

7 Determining Whether an Arrangement Contains a Lease The PPA contains a lease if: The utility has the ability or right to operate the PPE. The utility has the ability or right to control physical access to the PPE. There is a small chance that anyone other than the utility will take more than a minor amount of the PPE s output, and the price is neither fixed per unit NOR equal to market value at time of delivery. In the example structure, the PPA with the utility would contain a lease if it met one of the criteria above. If the Project Company had arrangements with multiple offtakers, the PPA would not contain a lease.

8 Operating vs. Capital Leases Operating Not variable interests (assuming no fixed price purchase option or residual value guarantee) The entity may not be a VIE. Capital Are variable interests Causes the entity to be a VIE Offtaker consolidates

9 Fixed Price Forwards Are variable interests Likely cause the project to be a VIE Does the Offtaker consolidate? Only if the Offtaker absorbs the majority of the entity s economic variability Fixed Price Forwards Present Higher Risk of OFFTAKER CONSOLIDATION

10 Executory Contract Likely not a variable interest Likely does not cause entity to be a VIE

11 Voting Interest Analysis Project Co - LLC Partnership form EITF 04-5 Sponsor akin to GP Sponsor presumed to control No tax equity investor participatory rights Sponsor generally consolidates in voting interest model

12 Disproportionate Allocations ( Flip Structure) First 10 years: 100% income to tax equity investor years: 100% income to sponsor to equalize 20+ years: 70%/30% income split plus sponsor has FMV call on TEI equity Mechanism in place to true up investor returns if partnership dissolved

13 Hypothetical Liquidation of Book Value (HLBV) Balance sheet focused Allocation based upon liquidation at book values Investors true up to stipulated IRR s Follow the economics in liquidation rather than the contract

14 Application of HLBV Sponsor Consolidates, with Minority Interest & Minority Interest in Income/Expense based on HLBV allocation Tax Equity Investor Recognize income (gross of Project Co NI & PTC s) according to HLBV allocation Key: Include production tax credits in determination of allocations

15 Other Issues Is the Project Co. a business? A business is a self-sustaining integrated set of activities and assets conducted and managed for the purpose of providing a return to investors. Is a wind farm a single integrated asset or a series of multiple assets?