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Cash flow already allocated
A large portion of cash flow has been already allocated to tax-equity investors, see ‘tax equity financings’ below |
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Tax incentives may be in jeopardy
Federal tax incentives drive financing options that may be in jeopardy with a new Congress, See ‘federal tax incentives’ below |
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Competition:
There has been heavy competition for financially feasible wind power sites in the US in the last 10 years – their future supply is limited |
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BUSINESS |
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Wind farms in Northeastern and Western regions of the continental United States and in Hawaii |
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DIVIDEND POLICY |
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Debt agreements effectively limit WIND’s ability to pay dividends |
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FEDERAL TAX CREDITS DRIVE FINANCING OPTIONS |
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May be in jeopardy with a new Congress |
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Production tax credits |
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. The federal PTC (production tax credit) provides a federal tax credit of $21 per MWh for a renewable energy facility during the first ten years of its operation. |
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. This incentive currently applies to facilities that are placed in service before the end of 2012. |
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. Since 1992 the PTC has been extended and has been continuously available for wind energy projects, except for three non-consecutive periods between 1999 and 2004 when the PTC temporarily expired but was retroactively reauthorized by subsequent legislation. |
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Investment tax credits |
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. The federal ITC (investment tax credit) provides a federal tax credit for 30% of total eligible capital costs for a renewable energy facility following commercial operation.
. A wind developer may elect an ITC in place of the PTC and has the option to collect the ITC as a cash grant from the U.S. Treasury that is payable within 60 days after an application submission.
. Currently, wind projects must be under construction by the end of 2010 and in commercial operation by the end of 2012, in order to qualify for the cash grant.
. Congress is considering several bills that would extend the grant program in some form.
. WIND cannot predict whether or in what form an extension would take place. |
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Accelerated depreciation |
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. The Tax Reform Act of 1986 established MACRS, which divides assets into classes and assigns a mandated number of years over which the assets in the class depreciate for tax purposes.
. Under MACRS, wind energy projects have a depreciation life of five years, which is substantially shorter than the 15 to 20-year lives of non-renewable facilities.
. Like PTCs, the accelerated depreciation benefit may be sold to investors. |
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TAX EQUITY FINANCING |
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. WIND has sold equity interests in certain of its operating projects under tax equity financing arrangements. |
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. These financing arrangements entitle the tax equity investors to most of the operating cash flows and substantially all of the PTCs and taxable income or loss generated by the project, including the tax benefits of accelerated five-year depreciation available under the Modified Accelerated Cost Recovery System (MACRS) until the tax equity investors achieve their targeted investment returns and return of capital, which WIND typically expects to occur in 10 years
. Terms of the tax equity financing arrangements also include restrictions on the transfer of assets from the relevant subsidiary without the consent of the tax equity investors. |
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Flips |
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Following achievement of the targeted investment return (typically 8%–9%), the allocation of the project's operating cash flows, PTCs and taxable income or loss "flips" or reverses from WIND’s tax equity investors to WIND so that WIND receives substantially all of the project's operating cash flows, PTCs and taxable income or loss from the ‘flip’ point point forward. |
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. Upon the tax equity investors' achieving their targeted investment returns, WIND has the option to acquire their equity interests, typically representing 5% to 10% of the project's allocations of profits and losses and distributable cash, at the higher of their capital account balance and the then-current fair market value of their interest.
. WIND retains controlling interests in the subsidiaries that own the projects and, therefore, will continue to consolidate these subsidiaries. |
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COMPETITION |
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Wind power overpriced relative to natural gas
. Big picture, the federal subsidy for wind energy is about equal to the current delivered cost of natural gas
. Boone Pickens (who has withdrawn from mega-sized wind projects in Texas) has estimated that wind energy is viably competitive with natural gas only when the wellhead price is $9.00 per MCF or more -- currently its about $4.00 per MCF at the wellhead, plus processing and transportation to the burner tip. |
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Competition: there has been heavy competition for financially feasible wind power sites in the US in the last 10 years – their future supply is limited |
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Renewable energy sources, including wind, biomass, geothermal and solar, currently benefit from various governmental incentives such as PTCs (production tax credits), ITCs (investment tax credits), cash grants and loan guarantees, and accelerated tax depreciation. |
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In the wind energy sector, competition occurs primarily during the development stages of a wind energy project rather than during a project's operational phase. |
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. Wind energy projects require wind conditions that are found in limited geographic areas and at particular sites. Projects must also interconnect to electricity transmission or distribution networks to deliver electricity.
. WIND competes with other developers for desirable sites and for the ability to connect to transmission or distribution networks. |
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HISTORY & REORGANIZATION |
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. Began developing wind energy projects in North America in 2002.
. First Wind Holdings, LLC is currently taxed as a partnership for federal income tax purposes.
. Following the reorganization and this offering, all of the earnings of First Wind Holdings Inc. will be subject to federal income taxation |
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Financing Requirements |
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. Wind energy project development and construction are capital intensive. |
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. the beginning of 2009, WIND has refinanced, raised or received approximately $2.3 billion for projects in 19 refinancing and new capital-raising activities and customer prepayments.
. These activities included project debt financings, tax equity financings, intermediate holding company financings, government grants, Sponsor equity contributions and customer prepayments. |
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WIND expects to fund the development of projects with a combination of cash flows from operations, debt financings, tax equity financings, government grants and capital markets transactions such as this offering. |
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USE OF PROCEEDS |
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$275mm |
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. $15-$20 million for a principal payment
. $78.1 million to retire the First Wind Term Loan in March 2011 in advance of its March 2013 maturity.
. Remainder to fund a portion of project development and construction costs for 2010-2013 and for general corporate purposes |
