Agreements with Landowners and Local Governments Financing Wind Power: The Future of Energy May 8, 2008, Scottsdale, AZ

1. Agreements with Landowners and Local GovernmentsFinancing Wind Power: The Future of EnergyMay 8, 2008, Scottsdale, AZ Matthew S. Moses Nixon Peabody LLP 1100 Clinton Square Rochester, NY 14604 P (585) 263-1306 mmoses@nixonpeabody.com

2. Introduction • Wind power projects are essentially real estate projects • Most significant development assets: • site control • right to build • tax agreement • Goal – create financeable project • Objectives: • take care of real estate details at earliest possible time • fix project costs to greatest extent possible, including state and local tax cost

3. Real Estate Matters • Goal – obtain site control to all project property from turbine to point of interconnection • Landowner Agreements • Potential interests and instruments • Easement • Lease • Fee • License • Option • SNDA

4. Real Estate Matters (cont’d) • Key issues • Scope • Control of entire farm/ranch – location of improvements determined later • Contemplated improvements • Access roads • Laydown areas • Collection wires • Overhead • Underground • Turbines – foundations and towers • Transformers • Substation/Switchyard • Met towers • Communications towers • Fencing

5. Real Estate Matters (cont’d) • Payment • Fixed • Pros: easy to calculate and administer; predictable revenue to landowners • Cons: landowners may disfavor • Variable – Royalties • Pros: landowners want to share in wealth • Cons: difficult to calculate; unpredictable; risk of opening books to landowners; government may want similar deal • Signing bonus • Revenue expectation management

6. Real Estate Matters (cont’d) • Environmental • Land disturbance and restoration • Repair of farm/ranch improvements • drainage tile, farm roads, ditching, irrigation system • Minimal impact on current and future farm/ranch use • Hazardous Substances • protect against activities of landowner • Decommissioning • Standard of decommissioning – what stays and what goes • Security • When funded • Amount – net of salvage value • Form of instrument – bond, letter of credit, fund/escrow account, parent guarantee

7. Real Estate Matters (cont’d) • Indemnification and insurance • Limit to just project and project-related activities • Taxes • Beware of indemnification for increases in tax on landowner property • Financing issues • Free alienability – no restrictions on assignment or transfer • SNDA – subordination and non-disturbance agreement • Project agreements not subject to foreclosure by a landowner’s lender • Need to work with landowners’ lenders • Project mortgage allowed

8. Real Estate Matters (cont’d) • Other Real Estate Matters • Title insurance • involve title insurance company early on in process • Municipal franchise and road permits • Substation/switchyard • transfer to utility • Project mortgage • Stands in position of project real estate, ahead of farm/ranch mortgage • Landowners not involved

9. Real Estate Matters (cont’d) • Trouble Spots • Financing – issues that may stand in the way of closing • Incomplete real estate interests • Power collection system – not all dots connected • Roads – adjacent landowners own to middle of road • Municipal franchises • Underlying land rights but no permit from municipality • Road crossings • Wrong owner – marriage, divorce, death, joint ownership, etc. • Sale of parcel during development • Setbacks – lack of border easement

10. Real Estate Matters (cont’d) • Construction and Operation of Project • Location of improvements • Hyper-communication with landowners • Build project consistent with Plans and Specs / turbine locations should match locations identified in permits • Construction loan covenants • Construction impacts – remediation • Tax liability on underlying farm/ranch • Release of unnecessary land from project • TV, noise, shadow flicker (landscaping) • beware of adjacent property owners

11. Agreements Between Developers and Municipalities • Goal – obtain all permits necessary to built and operate project and protect project from uneconomic taxation • Major issues • Permits • What’s in it for me (for local governments) • Effectively a pay-for-permit game • Governmental oversight of project • Taxes • Property (personal and real property), Sales, Mortgage Recording, and Transfer Taxes • Exemptions and abatement programs • Vehicle for property tax agreement (e.g. payment in-lieu of tax agreement (PILOT), host community agreement (HCA), voluntary payment agreement (VPA)) • Appropriate amount in face of high capital cost of project • Amount project can afford to achieve hurdle rate • Local government expectations

12. Agreements Between Developers and Municipalities (cont’d) • PILOT Agreement • Term • Scope – covers all project improvements • Include transmission line and substation/switchyard • Underwater lands? Offshore? • Payment Amount • Fixed • Assessment-based with percentage abatement • Tax rate risk • Adjustments to Payment Amount • Inflation • Variable payments based on capacity factor, energy prices, etc. • Additions to project • Additional MW – same payment rate • No new MW – no additional payment (e.g. operations building) • Deletions from project • Damage, destruction, condemnation, decommissioning • Reduce payment by MW dropped from project

13. Agreements Between Developers and Municipalities (cont’d) • Payment split among local governments • municipal concern (unless deal hinges on split) • Payment security • company should not offer security but should be prepared for request from municipality • form of security • Parent guarantee • PILOT mortgage • LC

14. Agreements Between Developers and Municipalities (cont’d) • Special district taxes • Fire, water, sewer, refuse, ambulance, etc. • Dominance of tax base • How to control • Bells and whistles • Capacity factor kicker • Energy price kicker • Economic development power • Host payments for community/charitable purposes • Historic preservation payments • Transaction fees

15. Agreements Between Developers and Municipalities (cont’d) • Substation/switchyard • Utility may require ownership of substation/switchyard • Transfer after construction • Interconnection Agreement may require tax indemnification • PILOT should cover substation taxes • Financing issues • Free alienability – no restriction on assignment or transfer • Collateral assignment • Consent to Assignment in favor of lender • Lender right to cure default • Termination – right of company to terminate if project uneconomic

16. Agreements Between Developers and Municipalities (cont’d) • Approach to PILOT Negotiations • Due diligence on local tax system • Scope of exemption • Statutory scheme and process for obtaining exemption • Model full tax on project to determine municipal revenue appetite • Model amount of tax project can afford • Establish strategy • Portion of full tax • “Competitive” payment with other generators • “Competitive” payment with other wind projects • Portion to tax base

17. Agreements Between Developers and Municipalities (cont’d) • Build relationship with community leaders • Negotiate terms – plan on multiple meetings • Exchange term sheets to capture ground gained • Approvals

18. Agreements Between Developers and Municipalities (cont’d) • Host Community Agreement • Non-financial aspects of municipal agreement, but can be brought into PILOT Agreement or used as a substitute for a PILOT Agreement • May help “steer” payment to permitting authority • One document – best if covers all non-tax business dealings with municipality (e.g. road use, municipal costs, decommissioning, etc.)

19. Agreements Between Developers and Municipalities (cont’d) • Potential provisions • Municipal franchise rights and road permits • Road use • Why needed? • Public use • Limit risk to project for damage to roads caused by project • Repair – not replace – road • Cost advantage of private bid • Separate agreement? • Traffic plan – list of involved roads • Right of access to inspect and improve roads • Agent of municipality • Over-sized vehicles • Construction, operation, repair and decommissioning

20. Agreements Between Developers and Municipalities (cont’d) • Pre-construction engineer’s inspection to establish baseline condition • Reinforcement activities • Post-construction engineer’s inspection to establish damage needing repair • Repair activities • Municipal acceptance of repair • Costs • Indemnification and insurance • Car wreck – make sure covered by insurance policy • Security (e.g. performance bond)

21. Agreements Between Developers and Municipalities (cont’d) • Municipal review and oversight costs • Should developer pay? • Separate agreement? • Attorneys’ fees • Engineers’ fees • Escrow account • Initial funding • Draws • Replenishment • Interest • Return of principal

22. Agreements Between Developers and Municipalities (cont’d) • Building permits • Who reviews application – qualifications • Who oversees construction – qualifications • Permit conditions • Building codes • Plans and Specs • Who issues certificate of completion – qualifications • When can project first sell energy • Operations • Administration of permit conditions • Complaint resolution

23. Agreements Between Developers and Municipalities (cont’d) • Decommissioning • Standard of decommissioning • Municipal right to decommission in the event company fails to do so • Security • When funded • Amount – net of estimated salvage value • Form of instrument – bond, letter of credit, fund/escrow account, parent guarantee • Insurance and Indemnification • Limit to just project and project-related activities • Approvals

24. Agreements Between Developers and Municipalities (cont’d) • Other State and Local Taxes • Sales tax • Statutory exemption – production equipment • BOP costs • Discretionary exemption – governmental abatement • Mortgage recording tax • Face value of mortgage • Discretionary exemption – governmental abatement

25. Q&A

26. Contact Information Matthew S. Moses Nixon Peabody LLP 1100 Clinton Square Rochester, NY 14604 P (585) 263-1306 mmoses@nixonpeabody.com