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Financing Wind Power: The Future of Energy IPED Scottsdale, AZ * May 7 - 9, 2008

ARE THERE MUNICIPAL BONDS IN THE WIND?. Financing Wind Power: The Future of Energy IPED Scottsdale, AZ * May 7 - 9, 2008 . Travis C. Gibbs, Esquire Nixon Peabody LLP 555 West Fifth Street, Floor 46 Los Angeles, CA 90013 Tel.: (213) 629-6029 Fax: (213) 629-6001 tgibbs@nixonpeabody.com.

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Financing Wind Power: The Future of Energy IPED Scottsdale, AZ * May 7 - 9, 2008

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  1. ARE THERE MUNICIPAL BONDS IN THE WIND? Financing Wind Power: The Future of Energy IPED Scottsdale, AZ * May 7 - 9, 2008 Travis C. Gibbs, Esquire Nixon Peabody LLP 555 West Fifth Street, Floor 46 Los Angeles, CA 90013 Tel.: (213) 629-6029 Fax: (213) 629-6001 tgibbs@nixonpeabody.com

  2. ARE THERE ANY MUNICIPAL BONDS IN THE WIND? • Traditional Municipal Financing • Clean Renewable Energy Bonds (CREBs) • Electricity Prepayments

  3. CREBs • Added in 2005 (Energy Policy Act of 2005) • Designed to provide an incentive for governmental bodies (including Indian tribes) and cooperative electric companies to produce renewable energy comparable to incentives available to the private sector • Eligible projects include generally Section 45 projects, including wind

  4. CREBs • CREBs are “tax credit bonds” • Designed to provide the borrower with a 0% loan -- the Federal tax credit received by bondholder intended to be comparable to interest on interest bearing loan

  5. CREBs • A total of $1.2 billion of CREBs has been authorized • Eligible borrowers must apply for an allocation by providing information about the project and its financing • $750 million of the $1.2 billion in CREBs can be allocated to governmental bodies and the remainder must be allocated to cooperatives • CREBs are allocated to applicants beginning with the project with the smallest amount requested and then the next-smallest amount, until the total is exhausted

  6. CREBs • The $1.2 billion authorized has all been allocated – • All CREBs must be issued prior to 2009

  7. CREBs • Legislative Proposals - Senate Economic Stimulus Bill • Extends for one year to December 31, 2009 • Authorizes an additional $400M

  8. Electricity Prepayments Background • Number of gas prepayments and energy/capacity prepayments done in the 1990s • IRS audits of several gas deals in the late 1990s • IRS issued proposed regulations to stop new deals • Ultimately closed all the audits with no changes • Final regulations on prepayments issued in 2003

  9. Prepayments-General Rules • Prepayments made with bond proceeds ordinarily treated as an investment and not an expenditure of bond proceeds • If prepayment discount rate exceeds bond yield, generally does not qualify for tax exemption • Final regulations eliminate substantial business purpose exception • Exception for “customary prepayments” -- limited applicability • Exception for 90 day prepayments • Exception for certain gas and electricity supply prepayments

  10. Final Regulations-Special Rule for Prepayments for Electricity • Final Regulations permit prepayments for electricity • Can be combined with private ownership and attendant tax benefits to reduce cost of financing • At least 90% of the electricity must be used for a Qualifying Use • “Qualifying Use” means: • Sold to retail customers located in the historic service area of a municipal utility • Sold to a municipal utility which resells the electricity to retail customers located in its historic service area

  11. Final Regulations-Special Rule for Prepayments for Electricity • Qualifying service area: Area throughout which service was continuously provided for 5 years, or service area as defined under state law • Non-qualifying Uses limited to 10 percent and are defined as sales to: • Governmental entities outside the service area that are not utilities • Nongovernmental persons or entities outside service area • Direct sales to retail customers of another municipal utility • Comparable rules for prepayments for gas

  12. 90% Test and Remedial Actions • Regulations provide that the 90% test is based on actual facts, not merely expectations • Compliance with 90% test is measured over life of prepayment • An effective tracking system is needed • Remedial action to cure noncompliance: • Bond redemption or defeasance • Taxable refunding • 2 year rule for alternate use of cash generated by “bad” sales of gas

  13. Commodity Swaps • Use of commodity swaps may be used to convert fixed price to indexed price • Final regulations limit the use of commodity swaps in prepayment transactions • Swaps are permitted between: • Issuer of the bonds and an unrelated third party (but not the electricity supplier) • The electricity supplier and an unrelated third party (but not the issuer)

  14. Compliance for Bond Issue with Multiple Project Participants • 90-percent requirement applies on an aggregate basis • Project participants may agree on allocation of the 10-percent non-qualifying use • Appropriate documentation and certifications from project participants upon issuance. • Periodic reports from project participants throughout the term of the financing

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