Longview
Infrastructure
Memo
To:
Riley Allen and Cost Analysis Subgroup
From:
Ron Hosie
CC:
Date:
August 5, 2009
Re:
Comments to Wind Cost Model
Co-costers:
I won’t be able to make tomorrow’s conference call/meeting so I’m offering a few comments to the wind
model for general consideration.

The single project cost line of Utility Plant In-Service is presumed to be the total project cost.
Perhaps more detail showing the buildup of project cost for each technology will ensure that
we don’t miss key expense items. Some items from our development proformas that seem
relevant would be:
1. EPC (turnkey contract) cost
2. Sales tax
3. Electric interconnection
4. Spare parts inventory
5. Investment banking commitment fees
6. Organizational costs
7. Regulatory permitting costs
8. Development expenses
9. Owner and Lender Engineers during construction
10. Interest during construction
PO Box 62, Mottville, NY 13119
Ph: 315 685 3475
Fax: 315 685 3486
11. Builder’s risk and liability insurance
12. Developer’s fee (distinct return center as part of overall project cost recognizing that
developer’s funds are at risk until project closing and that less than 100% of
development expenses are recovered due to projects that do not proceed, except for
projects by VT utilities that have costs for failed development as recoverable
expenses under the statute – please excuse the slight rant)
13. Project contingency to cover unknowns
The largest budget items on this list are regulatory permitting (particularly in the absence of any
simplified Sec. 248 process), interest during construction, investment banking fees, organizational
costs, and project contingency. For the larger solar projects we have looked at, the additional costs
seem to run about 15% of the EPC contract price.

Just a fine point note that the tax credits do not work as reductions to project cost. Instead
they are treated more like returns of invested capital. In other words, the project must actually
raise and pay out the full project cost, pay financing fees and interest during construction on
the full project cost and equity returns are therefore calculated on the basis of the full
commitment. (Nobody commits equity for free.) The ITC credits are viewed and treated as
returns against the equity committed to fund the full project cost.

The concept of a ratebase investment is utility based only. Non-utility investors look at total
project cost and returns with an IRR. For our purposes, it doesn’t really matter provided the
resulting power rate is sufficient to encourage private investment. However, I’m not sure it
provides an accurate comparison to private market analysis.

Projects for these small renewable will have a variety of financing sources. Very small projects
may simply be owner financed with equity or business lines of credit. Larger projects are more
likely to fall into a project non-recourse financing model. In such cases, debt equity ratios will
be governed by the competing desires of the lenders for more safety and the equity investors
for more return. Debt/equity ratios are therefore determined by a number of factors. One is
the debt coverage ratio required by the lenders. The best projects (lowest risk) can usually
obtain a DCR requirement of 1.5 average for the life of the debt, with no single year less than
1.25 on a debt term that is as much as 85% of the contract term. Lender underwriting
perception of greater risk in the deal, from technology, regulatory environment, key contract
terms, or economic disconnect between income and expenses, will result in more stringent
DCR requirements. (The lack of an escalating O&M component tied to CPI will be viewed as
such a risk.) This is balanced with the market equity return demands to find the DCR/IRR
controlling factor in setting debt/equity ratio. We believe the balance point in the uncertain
market today will be somewhere between 60/40 and 70/30 due to a primary lending focus on
safety.

Market equity return demands will be significantly higher that 12.28% for non-utility investors.
Thanks for the opportunity to make these comments and I hope they are useful to meet our objective of
determining fair costs for encouraging the rapid deployment of renewable energy projects in Vermont.
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