Expensing

We were pleased to participate in Power Finance & Risk’s (PFR) Tax Equity Roundtable.  We were joined in the roundtable discussion by Rich Dovere of C2 Energy Capital, Marshal Salant of Citi, Kathyrn Rasmussen of Capital Dynamics Clean Energy and Infrastructure, Pedro Almeida of EDP Renewables North America and as moderator PFR’s editor, Richard Metcalf. …

Mayer Brown’s David K. Burton and Jeffrey G. Davis both Tax Transactions & Consulting partners and part of the firm’s Renewable Energy group co-hosted a heavily attended webinar on how tax reform is impacting the tax equity market and certain renewable energy structures with Vadim Ovchinnikov, CFA, CPA and Gintaras Sadauskas of Alfa Energy Advisors.…

Below are soundbites from panelists from the Renewable Energy Finance Forum (“REFF”) Wall Street on June 19 and 20. The mood was upbeat.  There were many references to a “wall of cash chasing projects” as a metaphor for how competitive it is to win bids to finance or purchase projects.

The soundbites are edited for clarity and are organized by topic, rather than in chronological order.  They were prepared without the benefit of a transcript or recording.

The topics covered include the tax equity, debt and M&A markets, C&I solar, offshore wind, bonus depreciation, storage, YieldCos and others.

Tax Equity Market

“Solar tax equity is 30 to 38 percent of the capital stack of a project.  Wind tax equity is 47 to 62 percent of the capital stack of a project.”  – Managing Director, Boutique Investment Bank

“We are seeing a lot more wind.  We are using our tax equity capacity in wind in 2018.  Solar is looking good for 2019 and beyond.”  Managing Director, Trust Company

“This year we will invest more in wind than in solar.” – Managing Director, Money Center Bank

“We are seeing tax equity portfolios that are seasoned trade in a secondary market.  [Generally These are tax equity portfolios] that haven’t flipped on time or that [have the benefit of material cash distributions] but not tax” credits.  – Managing Director, American Multinational Financial Services Company

“There is more tax equity now than there was before tax reform.”  Managing Director, REIT

“2018 is a slow down due to tax reform and tariffs.”  Managing Director, National Bank

“There is a lot less tax equity capacity due to the lower tax rate.” – Managing Director, American Multi-National Investment Bank

[Explained: there may be more tax equity investors in the market than last year; however, last year the corporate tax rate was 35 percent, and this year it is 21 percent, so a typical tax equity investor has 40 percent less tax appetite (and ability to invest in tax equity) in 2018 than it did in 2017.]

“If you are in BEAT [(i.e., the base erosion anti-avoidance tax in enacted as part of 2018 tax reform)], you cannot compete in tax equity.  A couple of investors were hit with BEAT and exited.” – Managing Director, American Multi-National Investment Bank

“We get ten requests for tax equity a week and say ‘yes’ to less than one a week.  We have to prioritize opportunities.”  – Managing Director, American Multi-National Investment Bank
Continue Reading Renewable Energy Finance Forum Wall Street Soundbites: the Tax Equity, Debt and M&A Markets, etc.

Below are soundbites from panelists at Infocast’s Solar Power Finance & Investment Summit from March 19th to 22nd in Carlsbad, CA.  It was an extremely well-attended event and the mood of the participants was generally upbeat.  Many people observed that there was more capital for projects under development or to buy operating portfolios than there was such supply of projects available to meet that demand.

The soundbites are edited for clarity and are organized by topic, rather than in chronological order.  They were prepared without the benefit of a transcript or recording.

Impact of Tax Reform on the Tax Equity Market

Impact of the Corporate Tax Rate Reduction on the Supply of Tax Equity, Yields and the Capital Stack

“This year we can do $9 million in tax credits; before we could do $15 million.”  [The implication is that a 21 percent federal corporate tax rate is 40 percent less than a 35 percent corporate tax rate, so the tax appetite has declined by 40 percent.]  Vice President, Industrial Bank

“The [supply side of the] tax equity market has declined by 40 percent; some tax equity investors are taking a pause.”  Vice President, Regional Bank

“Our bank this year is slightly below the billion dollars of tax equity it originated last year for its own book.” Vice President, Midwestern Bank

Some “mainstream tax equity investors have taken a pause [from investing] to figure out what the 21 percent corporate tax rate means for them.  It is an investors’ market, but we nervously see a sponsors’ market ahead.”  Managing Director, Financial Advisory Firm

Traditionally, rates for tax equity have been a function of supply and demand, but now we are seeing real pressure on rates.”  Managing Director, Money Center Bank

[It is difficult to jibe this banker’s quote regarding pressure on tax equity rates with the quotes above regarding the supply of the tax equity market being smaller due to tax reform.  Possibly, tax equity investors are agreeing to share some of the yield detriment of the depreciation being less valuable and that has resulted in reduced after-tax yields.]

“Some utilities that had tax appetite no longer have tax appetite and need to raise tax equity for their projects.”  Director, Money Center Bank

“We are trying to get back to the same all-in return where we were before tax reform.”  [As the depreciation is less valuable at a 21 percent tax rate than it was at a 35 percent tax rate, this means either (i) contributing less for the same 99 percent allocation of the investment tax credit or (ii) contributing the same amount and requiring a distribution of a larger share of the cash.]  Vice President, Midwestern Bank

“Tax reform helped us because it means tax equity contributes less to the project, so it makes our loan product more necessary.” General Manager Renewable Energy Finance, Small Business Bank

“The debt market has come in and is filling the decline in tax equity.” Executive Director, Manufacturing Corporation

“The buyouts of [tax equity investors’ post-flip interests] are more valuable because of the lower tax rate.”  Partner, Big 4 Firm

“We see sponsors’ financial returns over a 35-year project life increase due to the tax rate reduction.”  ” Managing Director, Structuring Advisory Firm
Continue Reading Infocast’s 2018 Solar Power Finance & Investment Summit Soundbites

Pratt’s Energy Law Report has published our article 2018 and Onward: The Impact of Tax Reform on the Renewable Energy Market. We are pleased to be able to make a PDF version of the article available.  (The article starts on page 6 of the PDF).

The Equipment Leasing and Finance Association has published our article The Impact of Tax Reform: What Leasing Companies Need to Know (subscription required).  We are also pleased to be able to make the article available in PDF format.  The article addresses equipment leasing generally, rather than being renewables or tax credit focused.

A Word About Wind has published our article What Is the Impact of Tax Reform on US Wind Tax Equity Deals? in its blog (subscription required) and newsletter.  If you are unable to open the blog post, the text of the article is available below:

On 22 December 2017, President Trump signed the first major reform of the United States tax code since 1986. Here are some of the ramifications of the reforms on wind tax equity transactions.

Corporate Tax Rate Reduced to 21%

In 2018, the corporate tax rate has been reduced from 35% to 21%. The rate reduction means that US corporations will pay significantly less federal income tax, so the supply of tax equity will decline. However, most tax equity investors are expected to still pay enough tax to merit making tax equity investments.

Importantly, the rate reduction means sponsors of wind projects will be able to raise less tax equity as depreciation deductions are worth only $.21 per dollar of deduction rather than $.35 per dollar.

100% Bonus Depreciation

A partial mitigant to tax rate reduction is that the act provides the option of claiming 100% bonus depreciation (i.e. expensing), so depreciation deductions can be available in the first year (rather than over multiple years). However, the partnership tax accounting rules hamper the efficient use of 100% bonus depreciation.
Continue Reading What Is the Impact of Tax Reform on US Wind Tax Equity Deals?

Today, the House voted 227 to 303 in favor of the tax reform bill agreed to by the conference committee.  No Democrats voted for the House bill, and 12 Republicans from high tax states voted against it.  The Senate is expected to vote later this evening to approve it; it is possible that the president could sign the bill as early as tomorrow.

The enacted legislation is expected to be identical to the bill approved by the conference committee.  Our analysis of the conference committee’s bill’s impact on the renewable energy market is below, which is followed by a chart that summarizes the relevant provisions in each of the three bills.
Continue Reading House Passes Tax Reform & the Impact of Tax Reform on the Renewable Energy Market