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Analysis - old projects provide new investment opportunity

UNITED STATES: A plan to take Threshold Power Trust, an owner of long-term US wind farms, public could help address the question of what happens to projects as the tax equity deals that originally financed them start to mature.

Threshold Power Trust, headed by Susan Nickey, former chief financial officer of Acciona Energy North America, has filed a preliminary prospectus for the offering of shares on the Toronto Stock Exchange.

Threshold’s initial investment includes buying a portion of JP Morgan’s tax equity stakes in a portfolio of nine projects totalling 805MW, as well as a 25% ownership interest in the 74MW Blue Canyon wind farm from EDP Renewables North America.

In its prospectus, Threshold points to a "significant and growing" opportunity for consolidation in the US. The market’s main support mechanism is a federal production tax credit (PTC), currently worth $0.023/kWh and paid on the first ten years of a project’s life. By the end of 2008, it explains, tax-motivated investors looking to take advantage of the PTC and other tax benefits had sunk about $13.2 billion in renewable energy projects. Under the complicated partnership flip agreements underpinning those deals, most are entering a phase where the returns to tax equity players are shifting from primarily tax credits to cash.

"As such, management believes that tax equity investors invested in such projects are motivated to sell their interest to, among other reasons, invest in new projects with additional tax attributes," Threshold said.

Threshold has already lined up a chance to take a significant share of that pie, with a right-of-first-offer on any proposed sale of JP Morgan’s tax equity interests over the next two years. JP Morgan is the biggest tax equity investor in US wind, with interests in about 90 projects totalling more than 10GW.

Threshold is not limiting its investments to the tax equity side of the equation either. Under the flip structure, project developers eventually take majority ownership of the projects once the tax equity investor reaches a targeted return, and Threshold expects many will be looking to sell and plough the money back into building their businesses. Buying them out, said Threshold, will help secure long-term cash flows.

Threshold’s plans are noteworthy on a couple of fronts, said Daniel Sinaiko, a partner at law firm Akin Gump. He said: "I do think it’s interesting that we’re seeing tax investors looking to exit their investments in an environment where there traditionally has not been a market to do that. So creating a secondary market here is definitely interesting."

The strategy also fits with an increasing need in the US wind sector to find ways to tap into a bigger base of lower cost capital, he adds. "A lot of developers have been trying to crack the code on access to public markets. This is part and parcel of that."

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