Financing Wind Transactions

1. Financing Wind Transactions Financing Wind Power The Future of Energy IPED Conference July 25-27, 2007

2. OVERVIEW • Wind power continues to grow • 2,454 MW of new capacity added in 2006 at a total cost of approximately $3.7 billion • 2007 is projected to see an additional 25% to 30% growth in wind power capacity with more money invested than in 2006

3. COSTS • Substantial work must be performed in advance of actually commencing construction of a project. • For example: i) Wind monitoring assessment; ii) Feasibility study; iii) Access agreements; iv) Zoning and site permitting; v) Environmental approvals; vi) Transmission/interconnection agreements; vii) Turbine and other equipment supply; viii) Power purchase agreements; andix) Operations and maintenance agreements.

4. COSTS • Costs for constructing a wind power project continue to rise, largely driven by increased costs of turbines. • Cost of commodities (steel, concrete, etc.) has also increased. • Demand for turbines has increased worldwide and supply is scarce. • Turbine manufacturers have increased prices and require sponsors to make down payments in order to secure a position “in the queue.” • These factors and others have raised the amount necessary that sponsors need to finance a wind power project.

5. FINANCING • A number of structures are used to finance wind power projects. Usually all of these structures are project finance arrangements. • A diagram of the major contracts comprising a wind project is as follows:

6. MAJOR PROJECT DOCUMENTS SPONSOR PURCHASE & SALEAGRMT EQUITY INVESTOR OPERATING AGRMT PROJECT HOLDING LLC VARIOUS PROJECT LLCs PROJECT LLCOPERATING AGRMTS EQUIPMENT SUPPLY AGRMTS INCLUDING WARRANTIES & INDEMNITIES ACCESS RIGHTSLEASES, EASEMENTS POWER PURCHASE AGRMT CONSTRUCTION CONTRACTS O&M AGRMTS TRANSMISSION/INTERCONNECTION AGRMTS

7. FINANCING • Usually approximately one-third of returns to investors in wind projects has come from cash (sales of power or sales of renewable energy credits) and approximately two-thirds of the returns have come from tax benefits. • Debt providers exist to finance initial equipment and construction costs.

8. FINANCING • Initially, many developers developed their projects with the intent of selling the project to a strategic investor, thereby earning a return and paying off the debt to construct the project. • Some strategic investors use internally generated funds to construct the projects and thereafter keep the projects and make use of all the tax benefits (FPL; perhaps Iberdrola after the acquisition of Energy East is completed). • How are developers not using either one of the above remaining independent?

9. FINANCING • Several techniques have been developed by sponsors who wish to retain an interest in their projects but are unable to use tax benefits. These are the so called tax equity investment projects. • Under these structures, the equity investor obtains substantially all of the cash and tax benefits (production tax credits and depreciation) until the “Flip Date”. Thereafter, the cash and tax benefits are allocated substantially to the sponsor with the equity investor maintaining a residual return. • Returns to equity investors have been trending down over the recent past.

10. FINANCING • There are certain variations on this theme: • Cash is allocated to the sponsor until the sponsor has received the return of its capital (the so-called “Cash Flip Date”) and thereafter cash and tax benefits are substantially allocated to the equity investor until the Flip Date. • Pay-as-you-go (“PAYG”). The equity sponsor makes an initial capital contribution and thereafter makes additional capital contributions as the production tax credits (“PTCs”) are generated. The PAYG is usually evidenced by a fixed note based on certain assumptions with respect to the PTCs and a contingent note again based on assumptions with respect to the PTCs. • PAYG provides some protection to the investor in case PTCs are not generated in accordance with the model. But money is not put to use as quickly.

11. FINANCING • Leverage – most of the permanent financing arrangements taking place are equity investments. However, debt can be added to the structure: • Debt can be incurred against the amount of cash being generated by the project and the value of the production tax credits. This adds certain complications because of the lender’s desire to get its money back and the equity investor’s desire to protect its equity investment. • Some transactions allow the sponsor to pledge its interest in the holding company as security for a loan. This can reduce the amount of cash necessary for the equity investment. However, the equity investor will want the ability to take over management of the project if there is an involuntary transfer of the sponsor’s equity position. • There are numerous permitted transfer issues which are heavily negotiated between the sponsor and the equity investor as part of the financing package.

12. CONCLUSION • This concludes a summary overview of financing structures for wind transactions. • The panelists will now give a more detailed discussion of the financing structures and what they see as the current drivers in the financing market.