An oversight arm of the U.S. Treasury Department is in the midst of auditing cash-grant beneficiaries in an effort to ensure that funding from Section 1603 cash grants have been properly dispersed. Industry observers suggest the audits could pose problems for some wind developers.
The Treasury's Office of the Inspector General explains that the audits began in February as part of its ongoing audit oversight of the department's 1603 program, which provides cash grants in lieu of tax credits.
‘We are conducting audits of selected program recipients,’ says a department spokesperson, adding that the sample of program recipients ‘is not exclusive to wind farms.’
The spokesperson notes the audit objective is to determine whether fund recipients met Section 1603 program-eligibility requirements, adding that audits are based on areas of potential risks, such as ‘significant funding levels and program administration.’
Section 1603 of the American Recovery and Reinvestment Act of 2009 has been credited with stabilizing the wind industry by establishing a method for project funding after the tax-equity markets froze due to the financial crisis.
Developers can choose to receive a cash grant equal to 30% of the company's eligible investment in a project in lieu of the production tax credit (PTC) or investment tax credit (ITC) so long as construction on the project begins no later than Dec. 31, 2010, and the project is placed in service before Jan. 1, 2013.
The 1603 program has provided more than $3 billion in payments to more than 100 wind projects in 30 states for a total capacity of 5.3 GW, according to an August 2010 report released by Vice President Joe Biden.
Lawrence Berkeley National Laboratory reports 64% of the eligible wind power capacity built in 2009 had either elected, or planned to elect, the cash grant rather than the PTC or ITC.
To be eligible for a Section 1603 grant, the Treasury requires a wind developer to submit a report – provided by the project engineer, the equipment vendor or an independent third party – certifying that the equipment has been installed and tested, and is ready and capable of being used for its intended purpose. The applicant must also submit an interconnection agreement with the applicable electric utility indicating that the facility is intended for commercial operation.
The Treasury has already begun reaching out to some wind developers.
‘We've been working with the Treasury on a routine examination of our tax credit reimbursements from the Recovery Act,’ says Paul Copleman, a spokesperson for Iberdrola Renewables, who adds that the developer has been awarded 13 grants for wind power projects placed into service in 2009 and 2010.
Copleman adds that Iberdrola Renewables committed to invest up to $6 billion in the U.S. between 2010 and 2012 after the stimulus package was passed.
However, a looming concern for wind developers is what might happen if the Treasury makes a refund claim for the cash grant. Such a scenario could have big implications related to project finance.
‘A project owner receiving an audit request will have to justify the cash-grant amount claimed,’ says Allan Marks, project finance partner at Milbank, Tweed, Hadley & McCloy, adding that the key element will be verifying the start of construction and the eligible costs that were incurred to build the wind project.
‘If the audit results in a demand by Treasury for the grant recipient to repay any amount awarded erroneously, the main challenge will be liquidity,’ he says. ‘Where will the project owner get the funds to repay the amount demanded?’
Marks says some equity sponsors provide an indemnity to cover the risk of tax (or grant) recapture, which protects the project and its lenders from the loss of the federal benefits
If deal sponsors did not account for possible action from the Treasury, ‘depending on the amount due and other factors, a default under the project debt documents ultimately could result,’ he says. ‘Either way, someone will then have to write a refund check to the government.’
Although the Office of Inspector General declined to provide a timeline, all of its reviews are still pending, according to a spokesperson.
