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American Public Power Association

2005 APPA Legal SeminarClean Renewable Energy

Bonds

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

November 15, 2005

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Background on CREBs

• The 2005 Energy Policy Act provides a financial incentive for Municipal Utilities and 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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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 be 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.

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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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Q: How do I apply for a CREB allocation?

• Under the Energy Act, the Treasury Department has 120 days from the enactment of the Energy Bill to promulgate regulations.

• The regulatory process is underway.• It is unclear at this point whether the

volume cap will be allocated on a State-by-State basis or by the Treasury Department pursuant to an application process.