NextEra Energy : Tax Equity Partnerships (Differential Membership Interests)

Tax Equity Partnerships

Differential Membership Interests

October 2019

Agenda

Tax Equity Overview

Tax Equity - Financial Reporting Overview

Hypothetical Wind Project Example

Hypothetical Solar Project Example

Appendix (Additional Hypothetical Wind Example Detail)

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The differential membership interest structure, commonly referred to as tax equity, allows for the efficient monetization of renewable energy tax benefits

What Is Tax Equity?

• 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

Similar to equity, the timing of an investor's return varies and is based on the performance of the

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project(s) owned by the partnership

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.

The differential membership interest (or tax equity) structure is an alternative source of capital for renewables

What Is Tax Equity?

• 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

Tax Equity Structure

NextEra		Tax Equity
Energy
	Investor
Resources

Partnership

or LLC

Structure

Operating

Facility

The tax equity investor or minority holder effectively earns its return via tax attributes allocated

from the LLC

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NextEra Energy Resources uses the tax equity market as a source of capital for its wind and solar businesses

When Has NextEra Energy Resources

Used Tax Equity Partnerships?

Historic Deal Volume ($B)(1)

$14

$12

$10

$8 $6

$4

$2 $0

Percent of Annual PTCs

Allocated to Tax Equity Investors

100%

80%

60%

40%

20%

0%

Rest of Market		Energy Resources

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.

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NextEra Energy Resources generally utilizes one of three tax equity structures, while retaining control of the underlying operating facility

Comparison of Significant Terms

PAPS

Solar ITC

PAYGO

Initial Sizing of

the Investor's

Contribution

Investor PAYGO

Contributions

Tax Attribute

Allocations

Cash Distribution

Allocations

Sponsor Buyout

Provision

Present value (PV) of cash

distributions and tax attributes

allocated to the tax equity investor (TEI) at the agreed upon after-tax return

Not applicable

Varying allocations between the TEI and the Sponsor(1); generally, 99% of tax attributes to the TEI during the term

Varying allocations between the TEI

and the Sponsor

The Sponsor may purchase the TEI's interest once the targeted IRR has been achieved(1)

Same as PAPS

Not applicable

Generally consistent with PAPS, except in years subsequent to operating facility COD(2) the TEI receives 67% of the tax attributes

Allocations are generally fixed

throughout, with the majority going

to the Sponsor

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

Sized to ensure that <25% of total investment is 'contingent' (per IRS Rev. Proc. 2007-65)

Same as PAPS

Same as Solar ITC

Same as PAPS

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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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

Typical Allocations for a PAYGO Partnership(1)

Cash	NextEra Energy Resources	Tax Equity Investor
Pre-flip = 85%	Pre-flip = 15%
Distribution
Post-flip = 95%	Post-flip = 5%
PTCs	Pre-flip = 1%	Pre-flip = 99%
Post-flip = 95%	Post-flip = 5%
Taxable	Pre-flip = 1%	Pre-flip = 99%
Income	Post-flip = 95%	Post-flip = 5%

	• Once the investor earns its specified targeted return (typically
Buyout	occurs close to the end of the PTC team, or 10 years), then:
» Cash distributions and earnings allocations flip as noted, and

1. • NextEra Energy Resources has the right to acquire the TEI's LLC interest at fair value(2)
2. For illustrative purposes only; each tax equity arrangement is structured differently based on commercial negotiations
3. Fair value is typically determined and agreed to at the initial closing date

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Agenda

Tax Equity Overview

Tax Equity - Financial Reporting Overview

Hypothetical Wind Project Example

Hypothetical Solar Project Example

Appendix (Additional Hypothetical Wind Example Detail)

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NextEra Energy presents tax equity ownership as a minority ownership interest in its consolidated financial statements

Financial Reporting Overview

Balance Sheet

Income

Statement

Cash Flows

Statement

• Presented as equity transactions (noncontrolling interests, or NCI)
• Represents the TEI's economic ownership rights in the net assets of the partnership
• 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

NextEra Energy consolidates the underlying assets, liabilities, income statement and cash flows

activity of its tax equity partnerships

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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Under new accounting guidance effective January 1, 2018, tax equity financings are presented as equity transactions

Balance Sheet Presentation

• 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

NEXTERA ENERGY, INC.

CONSOLIDATED BALANCE SHEET

(millions)

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Under the new guidance, NextEra Energy presents all benefits associated with its tax equity as net income attributable to NCI

Income Statement Presentation

• 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

NEXTERA ENERGY, INC.

CONSOLIDATED STATEMENT OF INCOME

(millions)

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NextEra Energy presents all cash flows from and to the tax equity investor as financing cash flows

Cash Flows Statement Presentation

• 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

NEXTERA ENERGY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(millions)

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Tax equity makes up a large portion of NextEra Energy's NCI in its statement of shareholders' equity

Statement of Equity Presentation

NEXTERA ENERGY, INC.

CONSOLIDATED STATEMENT OF EQUITY

(millions)

• 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

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Agenda

Tax Equity Overview

Tax Equity - Financial Reporting Overview

Hypothetical Wind Project Example

Hypothetical Solar Project Example

Appendix (Additional Hypothetical Wind Example Detail)

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The hypothetical PAYGO tax equity partnership has an expected tenor of 10 years followed by a buyout payment to the TEI

Example: Project Membership Interest Assumptions(1)

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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NextEra Energy Resources receives cash and allocates losses and tax attributes to the tax equity investor over the PAYGO term

Wind Project PAYGO Financial Results

($ MM)

Year:	0 (1)		1		2		3		4		5		6		7		8		9		10		Total
Balance Sheet Rollforward:
Noncontrolling interests - beginning of period(2)	$ 138.3	$	138.3	$	131.7	$	122.7	$	112.4	$	100.3	$	86.2	$	71.1	$	54.3	$	35.5	$	18.0	$	138.3
Contributions - PAYGO payments			4.7		4.7		4.7		4.7		4.7		4.7		4.7		4.7		4.7		4.7		47.0
Distributions to tax equity investors			(1.1)		(1.1)		(1.1)		(1.1)		(1.1)		(1.1)		(1.1)		(1.1)		(1.1)		(1.1)		(11.0)
Buyout payment																					(7.8)		(7.8)		Annual income
Net income / (loss) attributable to NCI			(10.2)		(12.6)		(13.9)		(15.7)		(17.7)		(18.7)		(20.4)		(22.4)		(21.1)		(13.8)		(166.5)		statement
Noncontrolling interests - end of period																									recognition in NCI
$ 138.3	$	131.7	$	122.7	$	112.4	$	100.3	$	86.2	$	71.1	$	54.3	$	35.5	$	18.0	$	-	$	-
Cash Flow Statement:
Net cash provided by financing activities	$ 138.3	$	3.6	$	3.6	$	3.6	$	3.6	$	3.6	$	3.6	$	3.6	$	3.6	$	3.6	$	(4.2)	$	166.5

• • 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

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

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

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Agenda

Tax Equity Overview

Tax Equity - Financial Reporting Overview

Hypothetical Wind Project Example

Hypothetical Solar Project Example

Appendix (Additional Hypothetical Wind Example Detail)

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The hypothetical Solar ITC tax equity partnership has an expected tenor of 6 years followed by a buyout payment to the TEI

Example: Project Membership Interest Assumptions(1)

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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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

Solar ITC Financial Results

($ MM)

Year:		0 (1)		1		2		3		4		5		6		7		Total
Balance Sheet Rollforward:
Noncontrolling interests - beginning of period(2)	$	54.8	$	54.8	$	45.8	$	36.5	$	26.2	$	17.4	$	9.1	$	6.0	$	54.8
Distributions to tax equity investors				(2.3)		(2.3)		(2.3)		(2.3)		(2.3)		(2.3)		(2.3)		(16.1)
Buyout payment																(3.0)		(3.0)		Annual income
Net income / (loss) attributable to NCI				(6.7)		(7.0)		(8.0)		(6.5)		(6.0)		(0.8)		(0.7)		(35.7)		statement
											recognition in NCI
Noncontrolling interests - end of period	$	54.8	$	45.8	$	36.5	$	26.2	$	17.4	$	9.1	$	6.0	$	-	$	-
Cash Flow Statement:
Net cash provided by financing activities	$	54.8	$	(2.3)	$	(2.3)	$	(2.3)	$	(2.3)	$	(2.3)	$	(2.3)	$	(5.3)	$	35.7

• • 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

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

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

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Agenda

Tax Equity Overview

Tax Equity - Financial Reporting Overview

Hypothetical Wind Project Example

Hypothetical Solar Project Example

Appendix (Additional Hypothetical Wind Example Detail)

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Accounting for the receipt of cash at closing is straightforward

Tax Equity Impact on the Balance Sheet

and Cash Flow Statement

($ MM)

Balance Sheet View

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

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

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Each year, the membership interest is increased by the TEI's specified rate of return and decreased for the value transferred to the TEI

Example: Closing through Year 1 Accounting

($ MM)

Beginning membership interest

Constructive interest(1)

Membership Interest

Add after-tax TEI specified target return Add PAYGO

Subtract:

Value of PTCs allocated to the TEI Depreciation tax benefit allocated to the TEI Remaining tax attributes (EBITDA x 21%) Operating cash allocated to the TEI

Ending membership interest, before the change in constructive interest

Change in constructive interest(1)

Ending membership interest

Change - total membership interest

$138.3

$0.0 $138.3

$9.1

$4.7

($17.1) ($22.7) $1.5 ($1.1)

$112.7

$19.1

$131.8 ($6.5)

Target return x membership balance(2)

Contribution from the TEI for PTCs generated during the period

~723K MWh x $24 / MWh x 99% allocation

~$109 MM deduction x 21% tax rate x 99% allocation Tax obligation without MACRS

Accelerated tax obligation that would be incurred by the TEI in a premature buyout

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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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

Hypothetical Liquidation

Investor Tax Basis and Membership Interest	($ MM)
	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
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

At end of year 1, membership interest is $112.7 MM,

but the TEI's tax basis is only $40.9 MM

Therefore, in a premature liquidation, the TEI

would incur a tax liability of $15.1 MM…

…implying net proceeds of only $97.6 MM, instead of the $112.7 MM membership interest

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The sponsor recognizes a "constructive interest" to account for the TEI's "tax make-whole" payment in a premature liquidation

	Hypothetical Liquidation
Calculation of "Make-Whole" Payment	($ MM)
		We calculate the "tax make-whole" payment by
Net cash		$97.6		grossing up the difference between the $112.7 MM
Membership interest		$112.7		and the $97.6 MM
Tax expense		$15.1		We refer to this amount as the "constructive
Tax gross-up (1 minus 21%)	÷	79%		interest" and it is embedded in the total
	membership interest (NCI) on NextEra Energy's
Make-whole payment (constructive interest)	$19.1
	balance sheet
Liquidation with "Make Whole" Payment
Proceeds (membership interest + "tax make-whole")	$131.8
Less tax basis		($40.9)
Tax gain		$90.9		The constructive interest provides an additional
Tax expense		($19.1)		allocation of pre-tax proceeds to the TEI in order
				for the TEI to receive its full membership interest
Total proceeds in premature liquidation		$131.8		in a premature liquidation
		The tax make-whole naturally declines in
Tax expense		($19.1)
		subsequent years
Net cash (equals membership interest)	$112.7

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After the depreciation tax benefit is exhausted, the constructive interest declines

Example: Year 6 Accounting (Simplified)

($ MM)

		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	$76.5
in constructive interest
Change in constructive interest	($5.4)	Increases Earnings Before Taxes
Ending membership interest	$71.1
Change - total membership interest	($15.1)

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