Clean Renewable Energy Bonds (CREBs)

1. Clean Renewable Energy Bonds (CREBs) Anthony Hedlof MMUA Finance Program Coordinator

2. Questions to Answer • What are CREBs? • Why were CREBs created? • Who & what qualifies? • How do CREBs work? • What is the CREB advantage? • What is Wall Street’s view? • Where does MMUA fit in? • What is the allocation & application process? • Contact Information

3. What Are CREBs? • Created as part of the Energy Policy Act of 2005. • CREBs are “tax credit bonds” in which interest is paid for by the Federal Government in the form of tax credits. • Goal – provide comparable subsidy for Municipal Utilities to invest in renewable energy generation. • CREBs are modeled after Congress’s QZAB school improvement program.

4. Why Were CREBs Created? • Congress wanted to provide comparable investment incentives to public power for renewable energy generation. • The Renewable Energy Production Incentive program has not been able to keep up with demands. • States are beginning to apply Renewable Portfolio Standard objectives. • Currently, 95% of renewable generation is done by private investors. • Mainly due to the Production Tax Credits.

5. Comparison to Production Tax Credits (PTCs) • CREBs have incentives similar to PTCs. • Both provide benefits for investing in renewable generation. • Both use section 45 of the Tax Code to determine qualified projects. • How they differ. • CREBs are structured as financing tools to aid the construction of a project, whereas PTCs are financing incentives received after the project is completed and generation has commenced. • No placed-in-service date requirements for CREBs. • PTCs vary for certain projects (around 1.9 cents/kWh), whereas CREBs have the same benefit for all qualified projects.

6. Qualified Issuers Clean renewable energy bond lenders. Cooperative electric companies. Governmental bodies. State & local governments Political subdivisions Indian tribal governments Qualified Borrowers Mutual or cooperative electric companies. Governmental bodies. State & local governments Indian Tribal governments Who Qualifies? CREBs cannot be used for privately-owned projects.

7. What Qualifies? Qualified projects are defined under Section 45 of the U.S. Tax Code and include: • Wind facilities • 2. Closed-loop biomass • 3. Open-loop biomass • 4. Solar energy • 5. Qualified hydro facilities • 6. Small irrigation facilities • 7. Geothermal energy • 8. Landfill gas • 9. Trash combustion • 10. Refined coal production

8. How Do CREBs Work? • There is $800 Million ($500 Million for governmental bodies) in CREBs available for qualified projects. • CREBs act as an interest free loan to the borrower. • Still have some associated costs ( i.e. cost of issuance). • CREBs are authorized to be issued for two years from January 1, 2006 – December 31, 2007. • 95% of proceeds must be spent for capital expenditures within 5 years of closing.

9. Tax Credits ($) Qualified Issuer Bond Holder Principal Only ($) Principal Only ($) Qualified Project

10. How Do CREBs Work? • Credit rate is set daily by the Treasury Dept. at www.publicdebt.treas.gov • Rate based on estimated yields of outstanding AA-rated corporate bonds with similar maturities. • Rate will apply for the entire term of the bonds effective on the date of issuance. • Rate is intended to allow for the sale of bonds at par. • Arbitrage restrictions are similar to those of tax-exempt bonds.

11. How Long is the Term? • The max term will be published by the Treasury Dept. at www.publicdebt.treas.gov. • Maturity is based on how long it takes 50% of the principal invested at a supplied discount rate to equal par. • Interest rates used will be the average annual rate for 10-yr TE bonds. • Terms are projected to be 12-15 years (rounded to nearest whole number).

12. Term Calculation Principal - $20 Million Discount Rate – 7% Year 1 Year 10 $20 Million Investment: 50% of Face of Debt $10 Million invested at 7%

13. Repayment of Principal • Principal repayments are amortized annually & equally over the length of the term. • Principal repayments may occur prior to generating revenue. • Example • Principal - $20 Million • Term - 10 Years • Principal Amortization - $2 Million per year Year 1 Year 10 $2M $2M $2M $2M $2M $2M $2M $2M $2M $2M

14. Reimbursement of Expenses • Project expenses incurred after August 8, 2005 can qualify for CREBs • Refinancing for tax and tax-exempt projects incurred after to that date also qualify. • Reimbursement resolutions can be used up to 18 months prior to the issue date • Resolutions must be passed within 60 days of incurring expenses.

15. What is the Advantage? • Utility repays only the principal amount. • Federal government provides bondholders a tax credit in lieu of interest payments. • Tax credits are applied to bondholders to reduce federal income tax liability. • CREBs help achieve the State of MN 20% by 2020 RPS objective.

16. Flow of Tax 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* * Resulting in a net credit of $700 to apply to taxable income.

17. Wall Street’s View • Will CREBs sell at par? • Goal is to sell at par but, like QZABs, may sell at a slight discount due to a new kind of security. • Perception of the market will depend on the credit of the issuer. • Single credit rating does not address different credit qualities among projects and issuers. • Credit quality (project, bond security) will be important. • Credits only have value to bondholders with federal tax liability. • Credits may not be carried forward or backward into another tax year (use or lose).

18. Where Does MMUA Fit in? • If there is interest in CREBs from the members; MMUA can use MCMU as a qualified issuer. • Reducing the cost of issuance due to an economy of scale. • Must be a designated pool. • Issuer must have written loan commitment prior to bond issue. • If MCMU is not used. • MMUA will act as a point person to help coordinate potential borrowers.

19. What is the Allocation Process? • CREBs are to be allocated by the Treasury Department. • Allocations are on a project-by-project basis. • All projects located at the same site and owned by the same borrower are treated as a single project. • Qualified projects will be ranked by size of dollar amount requested. • Those requesting the smallest dollar amounts first will have the highest ranking.

20. Allocation Process • Allocation example: • Assuming $5M in CREBs is the smallest request and there are 10 projects, all 10 will receive 100% funding. • The next smallest dollar amount requested will receive 100% of funding and so on until the cap is reached. • Larger projects may apply and obtain partial CREB financing. The challenge will be formulating the minimum allocation threshold.

21. What are the Application Requirements? • Application deadline is April 26, 2006. • Requirements provided in IRS Notice 2005-98. • Applications will be reviewed by IRS Staff. • Applications must be signed and submitted by a qualified issuer. • Each application must contain • The name of the qualified borrower expected to own the project.

22. Application Requirements • A detailed description of the project demonstrating it is a qualified project. • Certification by an independent licensed engineer that the project will meet the requirements of a qualified facility and is technically viable. • Engineers should be independent of the borrower. • Provide a description of the location, dollar amount, plan to obtain necessary regulatory approvals, and the projected place in service date.

23. Application Requirements • Contain a detailed description of the plan financing. • Provide sources of security and repayment of CREBs. • Can be a general obligation or revenue pledge. • Must provide total aggregate face amount of all bonds used. • Anticipated issue date, expected spending schedule and requested dollar amount of the CREBs. • It is expected the IRS will make allocations 60 to 90 days after the application deadline.

24. Contact Information ANTHONY HEDLOF MMUA Finance Program Coordinator (763) 746-0715 ahedlof@mmua.org WEBSITES www.elpc.org/CREBs www.cleanenergybonds.org IRS REGULATIONS www.irs.gov/pub/irs-drop/n-05-98.pdf www.irs.gov/pub/irs-drop/n-06-07.pdf