1
Differential Membership Interests
October 2019
Tax Equity Partnerships
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Agenda
Tax Equity - Financial Reporting Overview
Hypothetical Wind Project Example
Hypothetical Solar Project Example
Appendix (Additional Hypothetical Wind Example Detail)
Tax Equity Overview
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Similar to equity, the timing of an investor’s return varies and is based on the performance of the
project(s) owned by the partnership
• Renewable developers’ capacity for tax benefits is often limited
– MACRS and Bonus Depreciation
(1)
often drive taxable operating losses, which creates a need for
developers to partner with companies that can more readily utilize the tax benefits
• A partnership structure is introduced to include a tax-paying investor into the
ownership chain, and allows companies across diverse industries to own renewables
– NextEra Energy Resources generally utilizes one of three available tax equity structures for its
renewable assets: the Pre-Tax, After-Tax, Partnership Structure (PAPS), the Pay-As-You-Go
Partnership Structure (PAYGO), or the Solar ITC Partnership Structure (Solar ITC)
• The IRS has given clear guidance on acceptable partnership structures
What Is Tax Equity?
The differential membership interest structure, commonly referred to as tax
equity, allows for the efficient monetization of renewable energy tax benefits
1) The Modified Accelerated Cost Recovery System (or MACRS), established in 1986, determines the depreciable life or cost recovery period of a business’
investments in tangible property; bonus depreciation, which has generally been available since September 11, 2001 (the provision temporarily expired between
2005 and 2007), provided accelerated first-year depreciation that has ranged from 30% to 100%. Current law allows for 100% expensing of bonus depreciation for
non-utility entities.
4
The tax equity investor or minority holder effectively earns its return via tax attributes allocated
from the LLC
• Tax equity is a partnership structure with
two investors:
– NextEra Energy Resources (Sponsor)
– Minority Holder (tax-efficient investor)
• Tax equity investor acquires its LLC
interest either upfront (PAPS or Solar ITC)
or upfront and over time (PAYGO)
• Under IRS rules, the LLC distributes a
disproportionate allocation of tax attributes
and cash distributions over the life of the
partnership
What Is Tax Equity?
The differential membership interest (or tax equity) structure is an alternative
source of capital for renewables
NextEra
Energy
Resources
Partnership
or LLC
Structure
Tax Equity Structure
Tax Equity
Investor
Operating
Facility
5
Percent of Annual PTCs
Allocated to Tax Equity Investors
0%
20%
40%
60%
80%
100%
Historic Deal Volume ($B)
(1)
$0
$2
$4
$6
$8
$10
$12
$14
Rest of Market Energy Resources
When Has NextEra Energy Resources
Used Tax Equity Partnerships?
NextEra Energy Resources uses the tax equity market as a source of capital for
its wind and solar businesses
1) Represents new money tax equity investments only; excludes secondary market transactions.
Source: Chadbourne & Parke LLP; Renewable Energy World; Platts; Norton Rose Fulbright; Mayer Brown.
6
Comparison of Significant Terms
NextEra Energy Resources generally utilizes one of three tax equity structures,
while retaining control of the underlying operating facility
PAPS Solar ITC PAYGO
Present value (PV) of cash
distributions and tax attributes
allocated to the tax equity investor
(TEI) at the agreed upon after-tax
return
Same as PAPS
~75% of the PV of cash distributions
and tax attributes allocated to the
TEI at the agreed upon after-tax
return; remaining proceeds come
from PAYGO contributions
Not applicable Not applicable
Sized to ensure that <25% of total
investment is ‘contingent’ (per IRS
Rev. Proc. 2007-65)
Varying allocations between the TEI
and the Sponsor
(1)
;
generally, 99% of
tax attributes to the TEI during the
term
Generally consistent with PAPS,
except in years subsequent to
operating facility COD
(2)
the TEI
receives 67% of the tax attributes
Same as PAPS
Varying allocations between the TEI
and the Sponsor
Allocations are generally fixed
throughout, with the majority going
to the Sponsor
Same as Solar ITC
The Sponsor may purchase the TEI’s
interest once the targeted IRR has
been achieved
(1)
Same as PAPS Same as PAPS
Tax Attribute
Allocations
Cash Distribution
Allocations
Initial Sizing of
the Investor’s
Contribution
Sponsor Buyout
Provision
Investor PAYGO
Contributions
1) The Sponsor is the developer of the wind or solar facility (NextEra Energy Resources)
2) COD is defined as Commercial Operations Date
3) Typically, the buyout price is based on an Independent Appraiser’s fair market value that is agreed upon at closing
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Typical Allocations for a PAYGO Partnership
(1)
In addition to the unique ongoing contributions from the TEI, the typical PAYGO
structure allocates the majority of cash distributions and minimal tax attributes
to the Sponsor
PTCs
Taxable
Income
Cash
Distribution
NextEra Energy Resources Tax Equity Investor
Pre-flip = 85%
Post-flip = 95%
Pre-flip = 15%
Post-flip = 5%
Pre-flip = 1%
Post-flip = 95%
Pre-flip = 99%
Post-flip = 5%
Pre-flip = 1%
Post-flip = 95%
Pre-flip = 99%
Post-flip = 5%
•
Once the investor earns its specified targeted return (typically
occurs close to the end of the PTC team, or 10 years), then:
» Cash distributions and earnings allocations flip as noted, and
» NextEra Energy Resources has the right to acquire the TEI’s LLC
interest at fair value
(2)
Buyout
1) For illustrative purposes only; each tax equity arrangement is structured differently based on commercial negotiations
2) Fair value is typically determined and agreed to at the initial closing date
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NextEra Energy consolidates the underlying assets, liabilities, income statement and cash flows
activity of its tax equity partnerships
Financial Reporting Overview
NextEra Energy presents tax equity ownership as a minority ownership interest
in its consolidated financial statements
Balance Sheet
• Presented as equity transactions (noncontrolling interests, or NCI)
• Represents the TEI’s economic ownership rights in the net assets of the
partnership
Income
Statement
Cash Flows
Statement
• The TEI’s share of the partnership’s earnings are presented as net income
attributable to NCI
– Represents the tax and cash attributes allocated to the TEI
– Computed using HLBV
(1)
based on the partnership’s liquidation provisions
– NextEra Energy’s tax provision represents only its share of the partnership’s income
• Initial cash proceeds, PAYGO proceeds, and cash distributions are
presented as financing activities
– By issuing tax equity, it has the effect of moving tax attribute cash flows from operating
activities to financing activities
1) The hypothetical liquidation at book value (HLBV) approach allocates earnings between NextEra Energy and the tax equity investor based on the change from the
beginning of the period to the end of the period in each party’s share of the partnership’s book value according to the liquidation provisions of the partnership
agreement
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• Tax equity transactions were formerly
presented under “deferral related to
differential membership interests” in
other non-current liabilities
• Under the new guidance, NextEra
Energy continues to consolidate the
project-level operations and presents
its tax equity as noncontrolling
interests in equity
Balance Sheet Presentation
Under new accounting guidance effective January 1, 2018, tax equity financings
are presented as equity transactions
NEXTERA ENERGY, INC.
CONSOLIDATED BALANCE SHEET
(millions)
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• Tax equity is generally accounted for as
a sale for tax purposes, but not for
GAAP purposes
– NextEra Energy continues to consolidate
and present all income and expense from
the related projects
• There is no Day 1 GAAP impact
• Net Income Attributable to NCI
represents the monetization of tax
attributes and cash distributions that
are allocated to the TEI, partially offset
by the TEI’s specified rate of return
Income Statement Presentation
Under the new guidance, NextEra Energy presents all benefits associated with
its tax equity as net income attributable to NCI
NEXTERA ENERGY, INC.
CONSOLIDATED STATEMENT OF INCOME
(millions)
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• NextEra Energy’s presentation did not
change with the new guidance that
became effective on January 1, 2018
• Cash distributions and PAYGO
contributions were reported in Other-
net in the presented financial
statements due to materiality
Cash Flows Statement Presentation
NextEra Energy presents all cash flows from and to the tax equity investor as
financing cash flows
NEE ENERGY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(millions)
NEXTERA ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(millions)
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Statement of Equity Presentation
Tax equity makes up a large portion of NextEra Energy’s NCI in its statement of
shareholders’ equity
• The adoption of the new accounting standard resulted in a $5B increase to NCI and a
reduction to other liabilities
• Future TEI cash contributions will increase NCI, while allocations of future tax
attributes and cash distributions will decrease NCI
NEXTERA ENERGY, INC.
CONSOLIDATED STATEMENT OF EQUITY
(millions)
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Example: Project Membership Interest Assumptions
(1)
The hypothetical PAYGO tax equity partnership has an expected tenor of 10
years followed by a buyout payment to the TEI
Technology
: Wind
Site Capacity:
150 MW
Expected Tenor :
10 years (PTC period)
After
-Tax Return : 7%
Tax Credits :
Sponsor 1%
Investor
99%
Cash
Pre / Post Flip :
Sponsor 85% / 95%
Investor 15% / 5%
Taxable income / (loss)
Pre / Post Flip :
Sponsor 1% / 95%
Investor 99% / 5%
Buyout Price :
FMV of interest for post flip period
1) Actual values can vary materially; example is for illustrative purposes only
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Year:
0
(1)
1 2 3 4 5 6 7 8 9 10 Total
Balance Sheet Rollforward:
138.3$ 138.3$ 131.7$ 122.7$ 112.4$ 100.3$ 86.2$ 71.1$ 54.3$ 35.5$ 18.0$ 138.3$
4.7 4.7 4.7 4.7 4.7 4.7 4.7 4.7 4.7 4.7 47.0
(1.1) (1.1) (1.1) (1.1) (1.1) (1.1) (1.1) (1.1) (1.1) (1.1) (11.0)
(7.8) (7.8)
(10.2) (12.6) (13.9) (15.7) (17.7) (18.7) (20.4) (22.4) (21.1) (13.8) (166.5)
138.3$ 131.7$ 122.7$ 112.4$ 100.3$ 86.2$ 71.1$ 54.3$ 35.5$ 18.0$ -$ -$
Cash Flow Statement:
138.3$ 3.6$ 3.6$ 3.6$ 3.6$ 3.6$ 3.6$ 3.6$ 3.6$ 3.6$ (4.2)$ 166.5$
Net cash provided by financing activities
Noncontrolling interests - beginning of period
(2)
Contributions - PAYGO payments
Distributions to tax equity investors
Buyout payment
Net income / (loss) attributable to NCI
Noncontrolling interests - end of period
Wind Project PAYGO Financial Results
($ MM)
NextEra Energy Resources receives cash and allocates losses and tax attributes
to the tax equity investor over the PAYGO term
NextEra Energy Resources will recognize earnings comparable to the amount of net cash received
from the TEI over the term of the PAYGO tax equity structure
• Represents net cash flows the tax equity
investor pays to the partnership
• Treated as a Financing Cash Flow
• Represents tax attributes and cash allocated to the tax equity
investor
• Treated as a net loss allocated to noncontrolling interest holder,
which results in earnings to NextEra Energy Resources
=
=
1) Simplified to assume completion of project and closing of tax equity at December 31st of year 0
2) NCI represents the tax equity investor’s ownership share of the partnership. NCI is reported as a component of equity on NextEra Energy’s balance sheet
Annual income
statement
recognition in NCI
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Example: Project Membership Interest Assumptions
(1)
The hypothetical Solar ITC tax equity partnership has an expected tenor of 6
years followed by a buyout payment to the TEI
Technology :
Solar
Site Capacity:
100 MW
Expected
Tenor : 7 years
(2)
After
-Tax Return : 6%
Tax Credits :
Sponsor 1%
Investor
99%
Cash: Pre / Post Flip :
Sponsor 70% / 95%
Investor 30% / 5%
Taxable income / (loss) : Pre / Post Flip :
Sponsor 33%
(3)
/ 95 %
Investor 67%
(3)
/ 5%
Buyout Price :
FMV of interest for post flip period
1) Actual values can vary materially; example is for illustrative purposes only
2) ITC recapture period is 5 years
3) Year 1 allocation is 99% Investor, 1% Sponsor
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Year:
0
(1)
1 2 3 4 5 6 7 Total
Balance Sheet Rollforward:
54.8$ 54.8$ 45.8$ 36.5$ 26.2$ 17.4$ 9.1$ 6.0$ 54.8$
(2.3) (2.3) (2.3) (2.3) (2.3) (2.3) (2.3) (16.1)
(3.0) (3.0)
(6.7) (7.0) (8.0) (6.5) (6.0) (0.8) (0.7) (35.7)
54.8$ 45.8$ 36.5$ 26.2$ 17.4$ 9.1$ 6.0$ -$ -$
54.8$ (2.3)$ (2.3)$ (2.3)$ (2.3)$ (2.3)$ (2.3)$ (5.3)$ 35.7$
Cash Flow Statement:
Net cash provided by financing activities
Noncontrolling interests - beginning of period
(2)
Distributions to tax equity investors
Buyout payment
Net income / (loss) attributable to NCI
Noncontrolling interests - end of period
Solar ITC Financial Results
($ MM)
NextEra Energy Resources receives cash at closing and recognizes earnings
over the Solar ITC term by allocating losses and tax attributes to the tax equity
investor
NextEra Energy Resources will recognize earnings comparable to the amount of net cash received
from the TEI over the term of the Solar ITC tax equity structure
• Represents net cash flows the tax
equity investor pays to the partnership
• Treated as a Financing Cash Flow
• Represents tax attributes and cash allocated to the tax equity
investor
• Treated as a net loss allocated to noncontrolling interest
holder, which results in earnings to NextEra Energy Resources
=
=
1) Simplified to assume completion of project and closing of tax equity at December 31st of year 0
2) NCI represents the tax equity investor’s ownership share of the partnership. NCI is reported as a component of equity on NextEra Energy’s balance sheet
Annual income
statement
recognition in NCI
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Tax Equity Impact on the Balance Sheet
and Cash Flow Statement
Accounting for the receipt of cash at closing is straightforward
Balance Sheet View
Cash Flow Statement View
Cash Flow from Operating Activities
Cash Flow from Investing Activities
Cash Flow from Financing Activities
Proceeds from Differential
Membership Interest $138.3
____
Net Increase/ (Decrease) in Cash $138.3
Property, Plant and Equipment
Current Assets
Cash and Cash Equivalents $138.3
Other Assets ____
Total Assets $138.3
Capitalization
Noncontrolling Interest (NCI) $138.3
Liabilities ____
Total Capitalization and Liabilities $138.3
($ MM)
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Example: Closing through Year 1 Accounting
($ MM)
Each year, the membership interest is increased by the TEI’s specified rate of
return and decreased for the value transferred to the TEI
Beginning membership interest
$
138.3
Constructive interest
(1)
$0.0
Membership Interest
$138.3
Add after
-tax TEI specified target return
$9.1
Target return x membership balance
(2)
Add PAYGO
$4.7
Contribution
from the TEI for PTCs generated during
the period
Subtract:
Value of PTCs allocated to
the TEI ($
17.1)
~723K
MWh x $24 / MWh x 99% allocation
Depreciation tax benefit allocated to
the TEI ($
22.7)
~$109
MM deduction x 21% tax rate x 99% allocation
Remaining tax attributes (EBITDA x 21%)
$1.5
Tax obligation without MACRS
Operating cash allocated to
the TEI
($1.1)
Ending membership
interest, before the change in
constructive
interest
$112.7
Change
in constructive interest
(1)
$19.1
Accelerated tax obligation that would be incurred by
the TEI
in a premature buyout
Ending membership interest
$
131.8
Change
- total membership interest
($6.5)
1) The constructive interest is the federal income tax “make whole” the TEI is entitled to in a premature liquidation of the partnership. Refer to the next two pages
for additional details on the calculation of the constructive interest
2) Illustration shown as though the TEI’s specified target return is calculated annually; the actual calculation and resulting accounting is recorded monthly
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Hypothetical Liquidation
In a hypothetical liquidation, the TEI may have an income tax obligation that
pursuant to the tax equity partnership agreement would result in the TEI being
made whole in order to achieve the specified after-tax target return
…implying net proceeds of only $97.6 MM,
instead of the $112.7 MM membership interest
Therefore, in a premature liquidation, the TEI
would incur a tax liability of $15.1 MM…
Investor Tax Basis and Membership Interest
Investor Membership
Tax Basis Interest
Day 1 proceeds
$
138.3
$
138.3
PAYGO
4.7
4.7
After
-tax TEI specified target return
9.1
Operating Cash
(1.1)
(
1.1)
PTCs
(
17.1)
Tax loss / benefit
(101.0)
(
21.2)
Ending balance
$40.9
$112.7
At end of year 1, membership interest is $112.7 MM,
but the TEI’s tax basis is only $40.9 MM
Liquidation at Membership Interest
Proceeds (at membership interest amount)
$
112.7
Less tax basis
($40.9)
Tax gain
$71.8
Tax expense
($
15.1)
Proceeds (at membership interest amount)
$
112.7
Tax expense
($
15.1)
Net cash
$97.6
($ MM)
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Hypothetical Liquidation
The sponsor recognizes a “constructive interest” to account for the TEI’s “tax
make-whole” payment in a premature liquidation
The constructive interest provides an additional
allocation of pre-tax proceeds to the TEI in order
for the TEI to receive its full membership interest
in a premature liquidation
The tax make-whole naturally declines in
subsequent years
Calculation of "Make-Whole" Payment
Net cash
$97.6
Membership interest
$
112.7
Tax expense
$
15.1
Tax gross
-up (1 minus 21%) ÷
79%
Make
-whole payment (constructive interest)
$19.1
We calculate the “tax make-whole” payment by
grossing up the difference between the $112.7 MM
and the $97.6 MM
We refer to this amount as the “constructive
interest” and it is embedded in the total
membership interest (NCI) on NextEra Energy’s
balance sheet
Liquidation with "Make Whole" Payment
Proceeds (membership interest +
“tax make-whole
")
$
131.8
Less tax basis
($40.9)
Tax gain
$90.9
Tax expense
($19.1)
Total proceeds in premature liquidation
$
131.8
Tax expense
($19.1)
Net cash (equals membership interest)
$
112.7
($ MM)
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Example: Year 6 Accounting (Simplified)
After the depreciation tax benefit is exhausted, the constructive interest declines
Effect on Income Statement
Beginning membership interest
$86.2
Constructive
interest
$21.4
Membership
interest, before tax make-whole
$64.8
Add after
-tax TEI return
$4.5
Decreases Earnings Before
Taxes
Add PAYGO
$4.7
Subtract:
Value of PTCs, allocated to
the TEI
($19.3)
Increases Earnings Before
Taxes
Depreciation tax benefit allocated to
the TEI $
0.0
No change
– MACRS expires after year 5
Remaining tax attributes (EBITDA x 21%)
$1.5
Decreases Earnings Before
Taxes
Cash operating margin allocated to
the TEI
($
1.1)
Ending membership interest, before the change
in constructive
interest
$76.5
Change in constructive interest
($5.4)
Increases Earnings Before
Taxes
Ending membership interest
$71.1
Change
- total membership interest
($15.1)
($ MM)
