Attracting Investors to Attracting Investors to Community Renewable Community Renewable Energy (Wind) ProjectsEnergy (Wind) Projects

Harvesting Clean Energy VI

Spokane, WashingtonTed Bernhard

February 28, 2006

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Ted BernhardTed Bernhard• Stoel Rives corporate and securities attorney in Portland• Founder of the Stoel Rives Energy Ventures and Finance Group• Before joining Stoel Rives: general partner of a venture capital

investment fund focused on energy technology investing• Current law practice focused on equity finance issues

representing involved with renewable and clean energy businesses:– Private Equity Investors– Startup Energy Technology Companies– Sub-utility scale, distributed, community, renewable energy

projects

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Raising Private Equity Capital for Raising Private Equity Capital for Small Scale Wind ProjectsSmall Scale Wind Projects

1. Clearing up some common misconceptions about financing small scale wind

2. Why it’s difficult to raise equity capital for small renewable projects

3. Recommendations for successful equity fundraising

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Misconception #1: No equity capital is Misconception #1: No equity capital is available for community wind projects available for community wind projects

• Staggering amount of equity capital has mobilized that is showing an interest in renewables investing, including small scale renewables– Private Equity Funds– Public Capital Markets– “Green” corporations– Strategic investment partners– Individual angel investors– Community Members– Energy Trust– (not Venture Capital!)

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Misconception #2: The returns are not Misconception #2: The returns are not high enough to attract investorshigh enough to attract investors

• Tax appetite investors– Not just return, its risk/return – 12 to 15 Percent, low risk return

• Risk capital– Extremely high returns because of extra risk– BUT, comes post “flip” at the tail end of the project

• Reason returns are high relative to risk is the leverage from state and federal incentives (Oregon in particular has an unparalleled combination of incentives Energy Trust, DOE SELP loans, freely marketable state BETC – learn more about them at the conference in Bend March 20, 21)

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Misconception #3: It’s the Misconception #3: It’s the developers versus the community developers versus the community • Economic theory: in the long term, compensation received is

based on value created for which a third party will pay. • Multiple economic payment streams in a wind project

– Development fees, management fees, debt repayment, tax benefit allocation, cash flow distributions or dividends)

– Bottom line: if the project is profitable, there are plenty of opportunities for both DEVELOPER AND COMMUNITY win economically

• Word of caution to developers: leaving nothing for the communities will hurt long term deal flow and drive up siting costs

• Word of caution to communities: Whenever you take significant outside investment dollars, the project is no longer completely yours alone (but the entire pie is larger)

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Reality Check: Attracting Equity investment Reality Check: Attracting Equity investment for community wind is not easyfor community wind is not easy

• The U.S. Wind Industry has made it very difficult for Private Equity to ACTUALLY INVEST – Complex and confusing investment structures– Failure to provide incentives that matter to investors and

equipment suppliers– Failure to communicate the opportunity effectively

• Not all of the issues are the industry’s fault: some of this is due to factors outside of any one individual’s control– Amazingly complex regulatory patchwork– The economics of wind projects are what they are (power is

cheap in the NW and transactions costs are high)

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Understand the details of your own Understand the details of your own project’s economics project’s economics beforebefore talking to talking to

investorsinvestors• Understand overall revenues and expenses of the project by

year and over the whole life• Make sure your numbers are real, concrete, accurate• Include all grants and “free money” in the mix• Think in terms of the distribution waterfall:

– Debt service– Tax Equity allocations and cash distributions– Risk equity allocations

• If you are a community that is new to renewables, get

assistance of experienced developer/advisor to guide process

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Structure your project Structure your project efficientlyefficiently

• Many ways to structure community wind projects– Community/landowner owned private LLC/S Corp– Minnesota style New Generation Energy Cooperative– Not for profit– Fully outsourced model with royalty payments– Become a part of a larger developer’s project– Hybrid structure

• Success at raising capital is in large part due to the ability to provide a structure that MATCHES the right project economics to the investors return/risk expectation

• Work with experienced professional service providers and project developers

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Speak the language of Private Speak the language of Private

Equity InvestorsEquity Investors• Understand the financial landscape (players and motivations) • Stop talking about:

– government subsidies– tax credits– wind regulatory policy– social benefits of investing (I.e. triple bottom line)

• Start talking about ROI, IRR, Investment Multiples, and EBITDA• Even simpler, start talking Profits and Revenues and cash flow• Make presentations the way investors are used to seeing

investment pitches – only the info they need to hear

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The Search for El Dorado: The Search for El Dorado: Finding Tax-Hungry Corporate Investors Finding Tax-Hungry Corporate Investors

• There simply aren’t very many of them• Here’s why they are so few and far between:

– Corporation, generally not a pass through entity– Enough taxable income to utilize PTCs and depreciation– Unless they are an owner of virtually all of the project for a

period of time, their income also has to be passive– Understand wind power project structures– Comfortable with the risk/reward profile offered to them

• However, bring them in as much as you can – cheapest and least dilutionary money short of a grant or subsidized loan that you will find

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Not about finding a “clever” way out of Not about finding a “clever” way out of this mess – keep things simplethis mess – keep things simple

• The whole investment structure is already too complex• Many funds won’t invest in anything other than stock in

corporations• Even those that are comfortable with pass-thru entities may not

be comfortable with complex, customized allocation provisions• The solution is not more complex, convoluted structures, it is

simplicity• Bottom Line: complexity scares away all but the most die hard

investors – give them only the relevant information, don’t inundate them with operational details

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Quick note about Quick note about Securities Law LimitationsSecurities Law Limitations

• Serious consideration, but probably not as big of an issue as frequently made out to be

• No formal prospectus required if you sell solely to Accredited Investors

• No limit on number of Accredited Investors one can sell to

• If you accept non-accredited investors money, you will need to:– Write a Prospectus– Limit the number of non-accredited investors to 35

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Long term goals – Building Long term goals – Building the equity investment poolthe equity investment pool

• Create a viable long term investment pool of recurring investors– Educate them about how wind projects work – Find ways for them to pool their capital for long term investing– Provide access to multiple projects for diversification purposes– Get real projects up and running and make them successful

• Work with lawyers and other professional service providers to:– streamline and standardize agreements – Understand and access the right type of equity capital– Find efficiencies in collaboration

• One small policy note: making federal and state credits PERMANENT and freely MARKETABLE inspires investor confidence

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Thank youThank you

Ted Bernhard

www.stoel.comPacific Northwest Energy Ventures Blog:

www.energyventuresnw.blogspot.com