Download Ted Bernhard - Stoel Rives

Equity Investment in
Community Wind:
What’s the problem?
Oregon Wind Working Group
Klamath Falls, Oregon
Ted Bernhard
April 8, 2005
Ted Bernhard
• Stoel Rives corporate and securities attorney in the
firm’s technology venture and wind energy groups
• Practice focused on equity finance issues
representing:
– Private Equity Investors
– Startup Technology Companies
– Sub-utility scale (community) renewable energy
projects
• Prior life: Venture capital investor focused on energy
technology investing
• Specific involvement in this area with Paul Woodin,
DOE on China Hollow Community Wind
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Stoel Rives, LLP
www.stoel.com
• A 100-year old leading law firm in the
Western United States based in Portland,
Oregon
• More than 370 lawyers practicing across the
full spectrum of corporate law, energy law
and business litigation
• Offices in five western states (Oregon,
Washington, Idaho, Utah, and California)
• One of the largest and most respected
dedicated renewable energy legal teams in
the nation
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Raising Private Equity for Wind
Projects
• Level of Investor Interest
• Problems for attracting equity investors
– Define six general issues
– Clarify the specific roadblocks in each
category
• Potential Solutions
– Near term
– Longer term
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Investors (large and small) truly
ARE interested in wind!
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Financial Institutions
Private Equity Funds
Angel Investors
Non-profit groups
States
Commercial Banks
Individuals
The U.S. Wind Industry has made it
very difficult for them to
ACTUALLY INVEST
• Complex and confusing investment structures
• Failure to provide incentives that matter to
investors
• Failure to communicate the opportunity
effectively
• Qualification: some of this is due to factors
outside of any one individual’s control
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– Amazingly complex regulatory patchwork
– The economics of wind projects are what they are
(power is cheap in the NW and transactions costs
are high)
Bickering #1: Fighting about ways
to carve up the non-existent pie
• Landowners and communities:
– Should not get nothing
– Should not get everything
• Economic theory: in the long term, compensation
received is based on value created for which a third
party will pay.
• Control vs. money is not unique to wind,
entrepreneurs in start-up mode face it all the time
• Whenever you take significant outside investment
dollars, the project is no longer yours (but the entire
pie is larger)
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Bickering # 2: Playing the Blame
game -- Utilities and Large Wind
Developers are not the enemy
• Utilities:
– Distributed generation is clearly the future (with or
without the utilities)
– Near term – Standardized PURPA contracts will
help make the transition less painful for them
– Still need to remember, the projects must be
valuable and profitable for all stakeholders,
including those who buy and transmit the energy
• Large Developers:
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– primarily irrelevant to community wind
– Could actually partner with them in a way that is
mutually beneficial (share common costs and
issues)
The Pot of Gold #1:
“Tax-Hungry Corporate Investors”
• There simply aren’t very many of them
• Here’s why they are few and far between:
– Corporation, not a pass through entity
– Enough taxable income to utilize PTC credits 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 that you will find
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The Pot of Gold #2 - Venture Capital
• Venture capitalists will not invest in renewable
energy projects!
• Venture Capitalists’ goals:
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New Technologies
On going, rapid growth businesses
Highest risk/reward profile
Expected IRR of 45-55%
Exit strategy of IPO or acquisition
• Exception: they will invest if there is a new
technology that happens to also be a project
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Finding a “clever” way out of this
mess
• The whole investment structure is already too
complex
• Many funds won’t invest in anything other
than stock
• Even those that are comfortable with passthru 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
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the most die hard investors
Securities Laws
• Serious consideration, but probably not as big
of an issue as you think
• No formal prospectus required if you sell
solely to Accredited Investors
• No limit on number of Accredited Investors
you 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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Back on the bright side…
• Projects can make money
• Relatively low risk once the project financing
comes together (almost no technology risk)
• Energy prices are rising = higher potential
revenues
• Very broad based federal and state support
for these program that make the economics
far superior to other low-risk investments
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First Steps for those Considering
Community Wind Projects
• Understand the financial landscape
– Types of players
– Motivations of the various parties (separate tax driven investors
from others)
– Speak their language (see next slide)
• Strive for “Balance”
– Its not all or nothing: think in terms of compromise
– Don’t get too greedy -- get the deal done rather than
remaining defensive
– Seek ways for all interested parties win
• Simplicity. Keep investment structure as simple as possible and
make it easy to invest.
• Comply with Securities Laws, but don’t get hung up on them
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– Work with a professional
– Know the law
Speaking the language of
Equity Investors
• Stop talking about:
– government subsidies
– tax credits
– Wind regulatory policy
– Social benefits of investing
• 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
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Longer Term steps towards
a solution
• 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 service
providers to streamline and standardize
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agreements and minimize the costs
Since all of these things
take time…
• Make the Federal PTC PERMANENT
and freely MARKETABLE
– Create confidence among long term
investors
– Open up the pool of investment
• Oregon is outstanding in its leadership
in this area – BETCs, DOE loans/grants
– take advantage of it.
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