U.S. Bancorp USB and Zions Bancorporation ZION have taken a “sustainable” step forward. These banks, together, will provide tax equity financing for a renewable project in Arizona, reflecting their increasing focus on sustainable energy and clean technology.
Notably, the banks entered into a syndication agreement on Jul 31 to invest more than $200 million in Red Horse 2, a solar and wind project, owned by an affiliate of D. E. Shaw Renewable Investments, L.L.C. (“DESRI”).
The project is expected to generate 71 megawatts of energy, capable of providing electricity to roughly 13,500 houses in the service territory of Tucson Electric Power Co. More importantly, the project serves to curb 5 metric tons of carbon dioxide emissions over a span of 30 years.
A Smart Move?
Unlike a typical equity investment with active ownership and returns in form of cash flows from the underlying asset or project; the tax equity financing structure provides for passive ownership in the underlying, with additional returns in form of tax credits as well as tax deductions (example: MACRS accelerated depreciation benefit).
As such, not only does the investor earn from the project’s cash flows without being actively involved in the management, but also gains from reduced tax burden.
Notably, having launched its first renewable syndicated product last year, U.S. Bancorp has invested more than $450 million toward renewable energy projects. Moreover, fees on these tax-advantaged products helped U.S. Bancorp record a 4% sequential rise in net revenue during the second quarter of 2015.
Besides, involvement in environment friendly projects will support the banks’ goodwill and public image.
The Downside
Association with the project calls for a rise in employee count and other expenses at these two banks. U.S. Bancorp expects the project to create nearly 800 jobs which will elevate compensation-related costs. Overall, the bank predicts roughly $110 million in “economic impact” from the project, including salaries, construction material, solar industry vendor supplies and equipment purchases.
Sadly, mounting expenses are already a major concern for both banks.
Bottom Line
The tax equity financing structure is interesting. While the primary focus is to generate investments for renewable energy projects, it will help the involved banks to increase profitability, backed by higher income and lower tax burden.
Separately, the contribution of the banking sector toward combating environmental concerns has been commendable. In Feb 2015, Citigroup Inc. C made a massive $100-billion commitment to lend, invest and facilitate funds directed toward mitigating the adverse impact of climate change and other environmental hazards over a span of 10 years.
In 2012, Bank of America Corp. BAC had committed to deploy $50 billion for funding low-carbon initiatives. In the same year, The Goldman Sachs Group, Inc. GS had announced devoting $40 million toward green technology.
We believe the banks’ involvement in mitigating environmental hazards is an impressive way to align their corporate and sustainability objectives.
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