Below is the text of an article we published in Law360 on September 14.  (The article is also available at Law360.)

On September 7, the Internal Revenue Service issued Revenue Procedure 2017-47 to provide a safe harbor for public utilities that inadvertently or unintentionally use a practice or procedure that is inconsistent with the so-called normalization rules. Before describing the revenue procedure, we first discuss the basics of normalization.

Normalization is an accounting system provided for by Treasury regulations that is used by regulated public utilities to reconcile the tax treatment of the investment tax credits (ITC) set forth in section 46 of the Internal Revenue Code of 1986 or accelerated depreciation of public utility assets under section 168 of the Code with their regulatory treatment.

Although the ITC generally was repealed with respect to “public utility property” (i.e., property that earns a regulated return set by a public utility commission (PUC) (which has different names in different states)) that was placed in service after 1985, normalization remains relevant with respect to the ITC due to the long economic useful lives of much public utility property. Thus, Revenue Procedure 2017-47 addresses the ITC, not because solar projects (or other renewable projects) that earn a regulated return would currently qualify for the ITC, but because public utility property up until 1985 qualified for the ITC and some of that property is still being used and included in utility rate-making calculations as described below.

Understanding normalization requires an understanding of certain fundamentals of rate-making for regulated utilities. As a general matter, a regulated utility is entitled to earn an after-tax return on its investments in its utility system. The PUC that regulates the utility then sets the rates paid by customers for the utility service (e.g., electricity) to allow the utility to earn that after-tax return on its investments. In setting those rates, the PUC must determine economic depreciation for the utility’s assets and “tax expense.” Continue Reading An IRS Lifeline To Public Utilities On Normalization

The U.S. Department of Energy recently released its 2016 Wind Technologies Market Report (available here). The 94-page report provides an in-depth review of the current health and direction of the wind industry, replete with data, analysis and projections. Below are quotes from the report that are of particular interest to participants in tax equity transaction.

Tax Equity Economics in 2016

• [According to AWEA in U.S. Wind Industry Annual Market Report: Year Ending 2016], [t]he U.S. wind market raised more than $6 billion of new tax equity in 2016, on par with the two previous years. Debt finance increased slightly to $3.4 billion. Tax equity yields drifted slightly higher to just below 8% (in unlevered, after-tax terms), while the cost of term debt fell below 4% for much of the year, before rising back above that threshold towards the end of the year.
• According to AWEA [in U.S. Wind Industry Annual Market Report: Year Ending 2016], roughly $6.4 billion in third-party tax equity was committed in 2016 to finance 5,538 MW of new wind projects. This total dollar amount is slightly higher than, but largely on par with, the amount of tax equity raised in both 2014 and 2015. Partnership flip structures remained the dominant tax equity vehicle, with indicative tax equity yields drifting slightly higher in 2016, to just below 8% on an after-tax unlevered basis. Continue Reading DOE’s 2016 Wind Market Report – Tax Equity Highlights

Our article AZ Companies Win Preferential Tax Treatment for Solar Panels was recently published in State Tax Notes.  The article analyzes a favorable opinion by the Arizona Supreme Court in a case brought by SolarCity and SunRun.  The Arizona Supreme Court that held that an Arizona law allowing taxpayers to attribute no value for property tax purposes to solar panels leased to customers did not violate the Arizona Constitution.

The American Wind Energy Association’s (AWEA) annual conference, WindPower, was held in Anaheim, California. Below are soundbites from panel discussions on May 24, 2017. The soundbites were prepared without the benefit of a transcript or recording and were edited for clarity. Further, they are organized by topic, rather than appearing in the order in which they were said.

Each year WindPower seems to devote less space on its schedule to topics related to tax equity. This year there was only one panel that purported to address tax equity; it was a panel about tax reform.  It also appeared that there were fewer conference attendees who work in the tax equity space.

Tax Reform

“There’s lots of tax equity in the market today. Deals are getting done regardless of uncertainty [with respect to tax reform].” Managing Director of a Money Center Bank

“There’s so much tax equity capacity right now that should there be tax reform [with a reduction in the corporate tax rate] there should [still] be enough tax equity out there.” Managing Director of a Money Center Bank

“A lot of people are handicapping [tax reform] as rate reduction that is less severe than what’s in [any of the Republican] proposals.” Managing Director of a Money Center Bank

“Tax reform will have a negative net present value impact on projects’ economics. To maintain the same return level, sponsors will need to drive down costs or increase revenue. Revenues have been going down, but costs have been going down faster. If we can keep that up, [the wind industry] may be able to absorb the cost of a change in the corporate tax rate. Managing Director of a Money Center Bank

“The cost of tax law change will not be as high as some people have projected.” Managing Director of a Money Center Bank

“Our intelligence shows support [on Capitol Hill] for maintaining the PTC phase-out as it is today, but we don’t take that for granted.” SVP Federal Legislative Affairs of AWEA

“The general consensus among tax equity investors and sponsors is [any tax reform would include] minimal change to depreciation benefits and no change to the PTC phase-out.” Managing Director of a Money Center Bank

“For now, people are making [tax reform assumptions in financial models] and getting deals done, but that could change with more tax reform proposals. What the market wants is certainty.” Managing Director of a Money Center Bank Continue Reading WindPower 2017 Soundbites

On June 28, Mayer Brown and Alfa Energy Advisors presented the webinar Tax Structuring and Impact of Potential Tax Reform.  An audio recording of the presentation with video of the slides is available here (the button is near the bottom of the page).  A pdf file with just the slides is available here.

Below are the questions submitted by the webinar audience with answers:

1. Question: For solar projects that use a third-party investor to monetizes the tax benefits, what is the split between the use of a sale-leaseback, partnership flip or an inverted lease structure in the market today?

Answer: There is no published data on this question. An educated guess in the current market is that partnership flips are more than half the market, inverted leases are less than ten percent of the market with the remaining portion made up of sale-leasebacks.

2. Question: In today’s solar tax equity market, are time- or yield-based flips more prevalent?

Answer: Yield-based flips are more prevalent. However, one very large tax equity investor prefers time-based flips. A generalization is that solar tax equity investors that started in wind projects prefer yield-based flips as that is what is sanctioned in the safe harbor for wind projects in Revenue Procedure 2007-65, while investors that started in tax equity by investing in historic tax credits prefer time-based flips. Continue Reading Presentation from Tax Equity Structuring & Impact of Potential Tax Reform and Q&As from the Webinar

Please join Mayer Brown and Alfa Energy Advisors for another session of our popular webinar addressing how tax reform could affect various tax equity structures, how the market is allocating tax reform risk between sponsors and tax equity investors.

Key Event Information
Date & Time
Wednesday, June 28, 2017
12:00 p.m. – 1:30 p.m. EDT
Register here for this complimentary webinar.

Topics to be covered in the seminar will include:

• Trends in the tax equity market

• Impact of potential tax reform on flip partnership structuring

o Wind PTC projects
o Solar ITC projects
o Earnings per share impact analysis
o Key takeaways

• Comparison of time- and yield-based partnership flip structures

• The IRS’s updated “start of construction” guidance for tax credit qualification

Continue Reading Tax Equity Structuring & Impact of Potential Tax Reform Webinar June 28

Below are soundbites from panelists at the Solar Energy Industries Association’s (SEIA) Finance & Tax Seminar in New York City.  The seminar was held on June 1 and 2, but only comments from the second day are reflected below.  The soundbites were prepared without the benefit of a transcript or recording and were edited for clarity.  Further, they are organized by topic, rather than appearing in the order in which they were said.

Tax Equity Market in 2017

  • It has been a slow start to the year. We will see a down year [compared to the $11 billion of tax equity funded in 2016]. – Executive Director, Energy Investing, Money Center Bank
  • There is relatively smaller tax equity flow in 2017, but there is continued demand for good projects with experienced sponsors. – Director, Investment Fund Manager
  • We saw a lag coming into this year. We haven’t seen a large uptick in investment. – Director, Structured Finance, Solar Services Company

Partnership Flip v. Sale-Leaseback Structures

  • A partnership flip provides an attractive balance for a cash equity investor to invest at scale and earn an attractive yield. The structure is attractive to cash equity investors because it raises less cash than a sale-leaseback.  [A cash equity investor is, generally, an investor other than the developer of the project.  Such investors are eager to invest, but typically do not have tax appetite.  Therefore, the partnership flip suits them well as it allows the tax equity investor to monetize 99% of the ITC, and much of the depreciation, while still requiring a significant cash equity investment.] – Director, Investment Fund Manager

Tax Equity Investors’ Reaction to the Possibility of Tax Reform

  • We are putting into our documents cash sweeps for the risk of tax reform resulting in a lowering of the tax rate. – Business Development Officer, Retail Bank
  • We want to be sure that if a tax law change occurs, we are protected with a step-up in our cash-sharing percentage or an indemnity. – Executive Director, Energy Investing, Money Center Bank
  • There is the potential for a tax equity investor’s economics to improve with a reduction in tax rates, if the reduction occurs after the losses are used. – Director, Project Finance, Solar Services Company

Continue Reading SEIA’s Finance & Tax Seminar Soundbites

On May 11, 2017, Senators Edward J. Markey (D-Mass.) and Sheldon Whitehouse (D-R.I.) introduced the Offshore Wind Incentives for New Development Act or, simply, the Offshore WIND Act (here).  The Offshore WIND Act would extend the 30% investment tax credit (ITC) under Section 48 of the Internal Revenue Code (Code) for offshore wind through 2025. Continue Reading Wind in the Sails of Offshore Wind Farms: Recent Developments in Incentives for Offshore Wind Generation