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American Public Power Association

Clean Renewable Energy Bonds Workshop

Ed OswaldOrrick, Herrington & Sutcliffe LLP3050 K Street, NWWashington, DC 20007(202) 339-8438eoswald@orrick.com

February 9, 2006

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Background on CREBs

• The 2005 Energy Policy Act provides a financial incentive for Municipal Utilities and Electric Coops to invest in certain renewable energy facilities.

• IOUs already have a tax incentive for investment in certain renewable energy facilities—production tax credit under IRC §45.

• The new form of incentive to Municipal Utilities and Coops is the ability to issue—a tax credit bond—(a relatively new type of debt instrument) known as a Clean Renewable Energy Bond or CREB.

• The goal of the CREB initiative is to provide a comparable subsidy to Municipal Utilities to invest in certain renewable energy facilities.

Q: What is a Clean Renewable Energy Bond or CREB?

A: A CREB is a “tax credit bond” in which interest on the bond is paid by the Federal Government in the form of tax credits.

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Issuer

Project

Bond Holder

Tax Credits ($)

Principal ($)

$

Q: What kind of federal subsidy-incentive do CREBs provide to issuers when compared to tax-exempt bonds?

A: CREBs are intended to provide issuers with a 0% cost of funds. To the extent that CREBs are sold at discount, there is an implicit interest cost.

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Q: Who can issue CREBs?

• State, territories and possessions of the U.S.;

• District of Columbia;• Indian tribal governments;• Any political subdivision of the

foregoing; and• A cooperative electric company.

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Q: What types of projects can be financed with CREBs?

• Wind facilities;• Open-Loop and Closed-Loop Biomass

Facilities;• Small Irrigation Power Facilities;• Trash Combustion Facilities; • Geothermal or Solar Energy Facilities;• Landfill Gas Facilities;• Refined Coal Production Facilities; and• Qualified Hydropower Facilities.

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Tax-Energy Policy Regarding CREBS

• CREBs may finance the same type of renewable energy facilities that are currently eligible for the production tax credit (“PTC”) under Code Section 45.

• One benefit of the CREB legislation is that the “placed-in-service” date requirements applicable to such facilities under the PTC regime do not apply to CREBS.

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Q: What do I need to know about the structure of CREB bonds?• Tax Credit Rate – the tax credit rate is determined

daily by the Treasury Department.– This rate will apply to the bonds for their entire term

effective as of the date of sale of the bonds.– The credit rate is intended to allow for the sale of the

bonds without discount.

• Think Taxable Coupon ($);• Bond Term – the bond term is based on a discount

rate published by the Treasury Department on a monthly basis. The discount rate is designed to provide for a maximum term equal to produce 50% of the face amount of the bond.

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Example of Term Calculation

Face - $40 million

Discount Rate - 7%

Year 1Year 10

Investment:50% of Face of debt$20 million invested at 7%

$ 40 Million

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Repayment of Principal

• Repayment of principal-a ratable amount of principal needs to be amortized annually (different from QZABS).

• The repayment of a ratable amount of principal will complicate the pricing of CREBs.

• Repayment of principal will often occur before the project is placed in service and generating revenue.

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Example of Amortization

Principal - $40 millionTerm – 10 yearsPrincipal Amortization - $4 million per year

$4 million

1 32 7654 1098$4 million $4 million$4 million$4 million $4 million$4 million$4 million $4 million $4 million

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Q: What is the maximum amount of CREBs that can be issued?

A: The nationwide cap is limited to $800 million with State and local governments capped at $500 million.

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Q: Is there a time limit regarding the issuance of CREBs?

A: CREBs can be issued from January 1, 2006 through December 31, 2007.

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Q: Who can buy CREBs?

A: Anyone can buy the bonds and they can be sold on the secondary market.

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Q: How is the amount of the tax credit taken into account for tax purposes by the bondholder?

A: The amount of the tax credit is reported as “taxable income” by the bondholder.

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Flow of Credits to Bondholders

Total Credits in Year 1 $1000.00

Bondholder Tax Bracket 30%

Taxable Interest to Bondholder $300.00

Net economic return to Bondholder $700.00

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Marketplace Assumptions - Limitations

• Credit cannot be stripped from bonds.• Single credit rate does not address differing

credit quality among projects and issuers.• Credits only have value ($) to bondholders

with current Federal tax liability.• The tax credit may not be carried forward

or backward into another tax year (use or lose).

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Q: What are the CREB program requirements?

• 95% of the proceeds must be spent within 5 years of the issuance of CREBs on capital expenditures unless extended by the IRS.

• If 95% of the proceeds are not spent within 5 years, a portion of the CREBs must be redeemed within 90 days.

• CREBs are subject to arbitrage rebate rules.

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New Developments -- CREB Application Process• Deadline for CREB Application is April 26,

2006.• The CREB Application Requirements are

provided in IRS Notice 2005-98.• CREB Applications will be reviewed by IRS

staff and CREB allocations will be made on a project-by-project basis.

• It is expected that the IRS will make allocations 60 to 90 days after the application deadline.

• The Application must be submitted and signed by a qualified issuer.

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CREB Application Process (continued)

• Each Application must contain the following:– The name of the “qualified borrower”

expected to own the project.– A detailed description of the project

including information which demonstrates that the project is a “qualified project.”

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CREB Application Process (continued)

– The application must contain a certification by an independent licensed engineer that the project will meet the requirements to be a qualified facility and that the project is technically viable.

– The placed in service date of the project.– The location of the project.– Projects located at the same site and owned

by the same qualified borrower are treated as a single project.

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CREB Application Process (continued)

– The application must describe a plan to obtain all necessary federal, state and local regulatory approvals of the project.

– The application must contain a detailed description of the plan of financing for the project – including all private and public sources of financing and the status of the applicant’s efforts to secure all such financing.

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CREB Application Process (continued)

– The anticipated date of bond issuance.– The sources of security and repayment of

the bonds.– The aggregate face amount of the bonds

expected to be issued for the project. – The Issuer’s expected schedule for

spending CREB proceeds.– The dollar amount of the CREBs

requested ($).

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Allocation Methodology

• Projects will be allocated full CREB authority (100% funding) beginning with projects for which the smallest dollar amount of CREB authority has been requested.

• Example, assume $10 million is the smallest request. If 10 projects request $10 million each of CREB authority, each project will get 100% of the request.

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Allocation Methodology (continued)

• Then the next-smallest dollar amount request will be funded at 100%.

• This process will continue until the full $800 million is exhausted.

• If you have a project with a price tag of $50 million, you can request a lower dollar amount and fund the balance of the project with tax-exempt bonds or other financing.

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Allocation Methodology (continued)

• Challenge - For more expensive projects – issuers will need to formulate an approach which maximizes the CREB financing but does not overshoot the minimum allocation threshold to result in getting no allocation at all.