Debt Financing for Wind Projects By John Harper, Birch Tree Capital, LLC

1. Debt Financing for Wind Projects By John Harper, Birch Tree Capital, LLC IPED Financing Wind Power Conference July 25-27, 2007

2. Birch Tree Capital Background • Financial advisory services supporting financing for clean power generation and biofuels projects: • Multi-technology focus (wind, PV, biomass, MSW). • Clients include investors, developers, and public sector entities. • Collaborates with Deacon Harbor Financial & other firms. • Recent wind sector assignments: • Advising a large insurance company in due diligence review and negotiation of tax-oriented interests in new wind projects. • Co-author of review and comparative analysis of wind financing structures for Lawrence Berkeley National Labs (to be published next month) • Co-author of April 2007 study profiling financial viability of state’s wind resources for State of Rhode Island. • Advising the Cape Cod Compact on using a cooperative to finance local wind projects.

3. Wind Financing Structures • Historically, few financing sources and structures available to developers. • Now, multiple structures available. • Equity & Debt sources have expanded. • Varying combinations of equity, tax equity, debt, & grants. • No one optimal structure. • Relative utility varies by: • Project size. • Developer characteristics & goals

4. Wind Financing Structures Developer types: • Small, independent developer • Large, Strategic developer/investor • Utilities (for own supply) • Community groups • Individual entities (for own use) Structures created to meet varying developer needs. • Relative ability to fund development costs. • Relative ability & willingness to fund construction costs. • Relative ability to use tax benefits. • Focus on up-front profits vs. ongoing cash flows from operations. • Relative need for early cash returns vs. waiting 10+ years. • Relative interest in managing operations.

5. Wind Financing Structures Main structures in use for utility-scale wind:

6. Wind Financing Structures using debt • Many types of debt in use: • Turbine construction loans. • Construction loans. • Equity bridge loans. • Term loans. • Cash-based loans • Production tax credit-based loans • Backing for letters of credit. • Tax-exempt bonds • Tax credit bonds (CREBs) • Facilities vary in their purposes and terms. • A given project may use multiple facilities.

7. Financing Structures using debt Why use debt? • Improve liquidity. • Improve profits from project development. • Husband developer capital. • Reduce equity risk. • Recycle developer capital. • Enable marginally economic projects. • Third party risk validation.

8. Financing Structures using debt Profile three structures that use term debt: • Cash Leveraged • Cash & PTC Leveraged • Back Leverage

9. Cash Leveraged Financing Structure • Note typically involves separate tax investor. • Parties: • Developer • Tax Investor • Lender • Loan reduces upfront equity capital requirements • Limited-recourse, aka project financing, structure • Loan to special-purpose project entity • Loan sized on project cash flows (power & RECs) • Typically debt is 40-55% of total capital costs • Key drivers: tenor, debt service coverage ratio, interest margin • Lender has first lien on project cash flows, assets, contract rights, and pledges of equity shares • Term loan is distinct from/replaces: • Turbine Supply Loan, Construction Loan, Equity Bridge Loan

10. Cash & PTC Leveraged Financing Structure • Same basic structure as Cash Leveraged Structure • But, loan sized on both: • Project cash flows (power & RECs) • Production tax credits • Typically aggregate debt is 50-65% of total capital costs • Key drivers: tenor, debt service coverage ratio, interest margin • Lender provides incremental debt, based on present value monetization of projected PTC flows • Projected PTC flows based on conservative independent review • Base case: 1.45x DSCR using 10 year P50 scenario • Stress test: 1.00x DSCR using 1 year P99 scenario • Requires Tax Investor contingent guarantee to inject new equity to project company tied to PTCs actually generated • Effectively creates 2nd flow of cash to project company that supports the incremental debt • Detailed loan terms relating to tax investor obligations/rights.

11. Back Leveraged Financing Structure • Used when tax investor doesn’t want debt at the project company level or when developer anticipates a later refinancing. • Same parties: developer, lender, tax investor • All-equity financing at level of project company. • Loan leverages only developer’s share of equity funding obligations. • Loan made to developer’s holding company holding developer’s equity shares in project company. • Limited-recourse, aka project financing, structure. • Loan sized on developer’s share of project cash flows (power & RECs) • Consequently, debt is lower % of total capital costs • Loan terms usually include a cash sweep to fund loan prepayments • Tenor typically shorter • Collateral security limited to pledge of developer’s shares in project company.

12. Why not use debt? • Increased transaction costs. • Increased time. • PTC expiration worries. • More complex deal structure. • Many tax investors dislike debt. • Equity squeeze concerns • Term conversion hassles • Pricing future PTC-loan equity contributions • PTC-loan equity funding into troubled projects

13. Debt Considerations • Project size: small projects may not merit debt • Timing • Transaction cost • Complexity • Power/REC off-take arrangements • Turbine technology • Limits pool of willing tax investors

14. Community/Public Wind Financing Structures • Still need to establish the project’s financial goal • Financing structure options: • Public-private partnerships • Strategic Investor Flip • Institutional Investor Flip • Full community/public ownership • All-equity • Debt • Grants

15. Community/Public Wind Financing Structures Financing Sources: • Federal: • USDA Farm Bill Section 9006 grants • USDA Farm Bill loan guarantees • CREBs • State: • Clean energy funds • Economic development funds • Private • Taxable bonds • Cobank, NRUCFC • Local lenders • Local tax investors • Rural Community Renewable Energy Bonds Act (Bill S.672) (www.refcoalition.com) Most small projects to date have tapped multiple sources.

16. Community/Public Wind Financing Structures Recommended financing options: • Use private sector incentives/capabilities/money • PTC & accelerated depreciation provide more financial boost than other non-grant incentives. • Partner with an experienced private developer and/or a tax investor. • Take project through permitting to reduce private sector risk. • Community/public sector buys long-term power at fixed rate. • Use flip partnership structures to enable ultimate ownership. • For smaller projects: • USDA Farm Bill Section 9006 grants. • Partnering with local contractors/investors

17. Wind Financing Structures Trends & Observations: • Relative popularity of structures varies from year to year. • Leveraged structures being considered more than in the past. • Emerging financing source: power pre-payments. • Utility ownership waxing. • Need to watch market trends. • Be clear on your own role in the market. • Seek expert advice on tax-oriented deals. • Simplicity remains a virtue.

18. Wind Financing Structures Most importantly, a comment from that wise sage of the office:

19. Get outside and enjoy Santa Fe!

20. Thank you. John Harper Birch Tree Capital, LLC www.birchtreecapital.net