The Verndale School District is pursuing the planning of a wind farm with developer Johnson Controls Inc., and other Minnesota school districts to support renewable energy and receive revenues.
Jackie Coleman, representing Johnson Controls, spoke about the wind project at the Verndale School Board meeting Monday.
The Verndale school filled out a grant application last year for a chance to take part in a wind energy program, which includes 24 school districts. The year before, a group of other school districts took part in the program to construct a turbine, which can be used to sell the electricity generated to power companies. That group is being called the first phase and Verndale is part of the second phase.
Initially, school districts were told Clean Renewable Energy Bonds dollars could be issued to finance the project. Instead, Johnson Controls is proposing equity financing, Coleman said.
CREB dollars could be used, Coleman said, but they are not an advantage for what the developer is trying to do with the districts.
“What we committed was that we were going to develop a project with minimum or no risk for districts with high financial returns,” she said.
Coleman explained how the equity flip model works. Johnson Controls will have a banking partner who will identify a private investor. That private investor would partner with the school districts to form a Limited Liability Corporation, she said.
“Forming an LLC will protect the owners from any liability,” Coleman said. That private investor would front the project and make the down payment on the turbines instead of the school districts, if CREB dollars were used, she said.
The private investors are able to take advantage of tax credits and depreciation and that’s why they are interested in the project, Coleman said.
For the first 10 years of the project, the investors will own 99 percent of the turbine farm and the school districts will own 1 percent. After about 10 years, when the investor takes advantage of the tax credits and depreciation, then the model will flip. Then, the school districts will own about 95 percent of the turbine farm and the investors will own about 5 percent, she said.
“The returns will be much greater and the risk is less because the equity partner is shouldering the risk,” Coleman said.
The 1 percent that the school district will finance isn’t financed until the project is developed and up and running, she said.
There is some questions as to whether school districts can enter into LLCs and a bill is being proposed at the state level, Coleman said.
“We are pretty confident that the legislation will be approved so it is clear that school districts can enter into LLCs,” she said.
The board had some questions about the different financing.
“How does the financing affect the payoff in year one?” asked board member Jim Runyan.
Coleman said it won’t affect the payoff and the return is expected to be greater than when using the CREBs.
After 20 years, or as long as the agreement is written for, the school district could buy out the shares of the private investor, she said. The school district could also sell out the portion of shares at any time if it wanted, she added. A Joint Powers Authority will need to be written up between the districts.
The longevity of the turbines is estimated at about 25 years, Coleman said. But it is just an estimate because it is a fairly new energy source, she said.
School board member Bill Blaha asked how much the 1 percent ownership by the school districts would cost.
The 1 percent would be about $100,000 for the school district, Coleman said. “But that is conservative,” she added. Blaha also asked how much the return would be the first year. Coleman said it would be roughly $30,000.
The board wondered what the time line was.
“The time line for schools to make the 1 percent investment would be about early 2010,” Coleman said.
This will be the second phase but it is entirely dependent on the first phase, which is about a year behind, she said.
“They’re getting the kinks out for you guys,” Coleman said.
The board had several concerns about how much maintenance would be required and the ownership of the turbines.
School board member Harvey Schoon was concerned about becoming the 95 percent at 10 years.
“At year 10, we become 95 percent owner and no one knows how long these things last,” Schoon said. “Even the IRS recognizes equipment as a 10-year depreciation.”
From the beginning, the school needs to turn it over to legal counsel and see if it’s too good to be true, he added.
“If we inherit something that’s 10 years old, do we have to make decisions about putting money back into this?” Schoon asked.
Others on the board would like to have more detailed information before anything is signed.
“It would be nice to see a more solid business plan,” Blaha said. “Everything we’ve heard about so far is speculative.”
By Anna Erickson
27 March 2008
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