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© 2008 Reznick Renewable Energy Practice energy@reznickgroup.com
Tax & Accounting Issues
Financing Wind Power: The Future of EnergyMay 8 & 9
The PhoenicianScottsdale, AZ
Matt Ferguson
© 2008 Reznick Renewable Energy Practice energy@reznickgroup.com
Reznick GroupPublic Accounting, Tax, and Business Advisory Firm
Registered With the PCAOB
SEC Practice for Public Companies
Over 1400 Employees
Consulting Services
© 2008 Reznick Renewable Energy Practice energy@reznickgroup.com
OverviewReznick GroupU.S. Wind DevelopmentMonetization
BenefitsRisks
CFO 5 QuestionsCommon Issues
AccountingTax
© 2008 Reznick Renewable Energy Practice energy@reznickgroup.com
US Wind DevelopmentIRC 45 + MACRSFederal government pays 2/3rd of capital cost of wind power projects
Production Tax Credit (PTC) earned over 10 years based upon electricity production and sale
Recover portion of capital cost through depreciation deduction over 5 years
State incentives may pay a portion of costState renewable portfolio standards
© 2008 Reznick Renewable Energy Practice energy@reznickgroup.com
PartnershipWind developer admits an institutional investor with a tax base to be its partner and own the project
Investor – “Tax Equity Investor” is allocated most of the economic returns until a flip date that is no earlier than when the investor reaches a target return
Tax Equity Investor’s interest flips down to 5% or 10%Developer has option to repurchase interest
Developer remains the managing member or general partner of the partnership and is responsible for the day-to-day operation of the project
Major decisions require Investor input
© 2008 Reznick Renewable Energy Practice energy@reznickgroup.com
Project Development Monetization
Developer(General Partner)
1%
Developer(General Partner)
1%
Corporate Investor(Limited Partner)
99%
Corporate Investor(Limited Partner)
99%
Project Partnership(LP or LLC)
Project Partnership(LP or LLC)
Must own the facility, produce Kwh, & sell to third party
PTC is enjoyed in same proportion of gross revenues
PTC cannot be sold separately
The party claiming the PTCs must also “produce” the electricity
Owner must retain the risks of operation
© 2008 Reznick Renewable Energy Practice energy@reznickgroup.com
MonetizationInvestor Perspective
• Investment that is managed like a publicly traded stock• Stable and predictable benefits stream like a bond• Make money• Avoid negative press• No surprises• Avoid or Eliminate Uncertainty• Confidence in Valuation and Accounting
© 2008 Reznick Renewable Energy Practice energy@reznickgroup.com
Benefits for Financial Investor• General business tax credit used to offset tax liability • Accelerated tax depreciation• Understandable risk and confidence in valuation and
accounting for the transaction
© 2008 Reznick Renewable Energy Practice energy@reznickgroup.com
Risks• Business Issues/Risks
– Wind does not blow– Sale of Electricity - Power
Purchase Agreement– Project risk - construction,
operations, maintenance, warranties
• Tax Issues/Risks – Partnership formation– Economic substance – Capital account issues
related to front-loaded losses
© 2008 Reznick Renewable Energy Practice energy@reznickgroup.com
Five Questions every CFO will ask1. How do I record the transaction on my books?2. Will I have to consolidate the business on my
books?3. What happens when performance varies from
forecast?4. Do I have any future financial obligations or risks?5. Does the structure or operation create tax risk that
impacts my books?
© 2008 Reznick Renewable Energy Practice energy@reznickgroup.com
Five Questions every CFO will ask1. How do I record the transaction on my books?• Methods of Accounting
– Equity Method• Not in control but able to exert significant influence• Hypothetical Liquidation Book Value (HLBV)
– Consolidation Method• Investor is the controlling party
– Cost Method• No ability to exercise control over operating activities• Investments of more than 3% to 5% are not minor - SEC
© 2008 Reznick Renewable Energy Practice energy@reznickgroup.com
Five Questions every CFO will ask2. Will I have to consolidate the business on my
books?• Consolidation of Variable Interest Entities (VIE)
– Equity at risk is insufficient to self finance activities– Equity holders lack any one of the following:
• Ability to make decisions about activities that significant impact
• Obligation to absorb losses• Residual ownership
– Varying voting rights
© 2008 Reznick Renewable Energy Practice energy@reznickgroup.com
Five Questions every CFO will ask
3. What happens when performance varies from forecast?
• Impairment
© 2008 Reznick Renewable Energy Practice energy@reznickgroup.com
Five Questions every CFO will ask4. Do I have any future financial obligations or risks?• Asset Retirement Obligations
© 2008 Reznick Renewable Energy Practice energy@reznickgroup.com
Five Questions every CFO will ask5. Does the structure or operation create tax risk that
impacts my books?• Accounting for uncertainty in income taxes
– Whether transaction will more likely than not succeed upon IRS audit assuming full knowledge
© 2008 Reznick Renewable Energy Practice energy@reznickgroup.com
Common GAAP Issues• Revenue Recognition• Guarantee/Warranty• Accounting for Uncertainty
in Income Taxes• Method of Investment
Accounting• Consolidation of Venture -
FIN 46(R)• Fair Value Accounting• Impairment• Lease
• Push-Down Accounting• Depreciation• Asset Retirement Obligation• Operating and Maintenance• Profit Allocation• Reserves• Rebates• REC• Contingent Promises
© 2008 Reznick Renewable Energy Practice energy@reznickgroup.com
Beth MullenBeth.Mullen@reznickgroup.com(916) 930-5750
Matt FergusonMatt.Ferguson@reznickgroup.com(703) 744-7424
Joe CruzJoe.Cruz@reznickgroup.com(703) 744-7478
Gloria MorseGloria.Morse@reznickgroup.com(512) 499-1442
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