Financing Wind Transactions

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Financing Wind Transactions

• Financing Wind Power
• The Future of Energy
• IPED Conference
• July 25-27, 2007

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OVERVIEW

• Wind power continues to grow
• 2,454 MW of new capacity added in 2006 at a total
  cost of approximately 3.7 billion
• 2007 is projected to see an additional 25 to 30
  growth in wind power capacity with more money
  invested than in 2006

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COSTS

• Substantial work must be performed in advance of
  actually commencing construction of a project.
• For example
• i) Wind monitoring assessment ii)
  Feasibility study iii) Access agreements
  iv) Zoning and site permitting v)
  Environmental approvals vi) Transmission/interc
  onnection agreements vii) Turbine and other
  equipment supply viii) Power purchase
  agreements andix) Operations and maintenance
  agreements.

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COSTS

• Costs for constructing a wind power project
  continue to rise, largely driven by increased
  costs of turbines.
• Cost of commodities (steel, concrete, etc.) has
  also increased.
• Demand for turbines has increased worldwide and
  supply is scarce.
• Turbine manufacturers have increased prices and
  require sponsors to make down payments in order
  to secure a position in the queue.
• These factors and others have raised the amount
  necessary that sponsors need to finance a wind
  power project.

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FINANCING

• A number of structures are used to finance wind
  power projects. Usually all of these structures
  are project finance arrangements.
• A diagram of the major contracts comprising a
  wind project is as follows

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MAJOR PROJECT DOCUMENTS
EQUITY INVESTOR
SPONSOR
PURCHASE SALEAGRMT
OPERATING AGRMT
PROJECT HOLDING LLC
VARIOUS PROJECT LLCs
PROJECT LLCOPERATING AGRMTS
EQUIPMENT SUPPLY AGRMTS INCLUDING WARRANTIES
INDEMNITIES
ACCESS RIGHTSLEASES, EASEMENTS
POWER PURCHASE AGRMT
OM AGRMTS
CONSTRUCTION CONTRACTS
TRANSMISSION/INTERCONNECTION AGRMTS
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FINANCING

• Usually approximately one-third of returns to
  investors in wind projects has come from cash
  (sales of power or sales of renewable energy
  credits) and approximately two-thirds of the
  returns have come from tax benefits.
• Debt providers exist to finance initial equipment
  and construction costs.

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FINANCING

• Initially, many developers developed their
  projects with the intent of selling the project
  to a strategic investor, thereby earning a return
  and paying off the debt to construct the project.
• Some strategic investors use internally generated
  funds to construct the projects and thereafter
  keep the projects and make use of all the tax
  benefits (FPL perhaps Iberdrola after the
  acquisition of Energy East is completed).
• How are developers not using either one of the
  above remaining independent?

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FINANCING

• Several techniques have been developed by
  sponsors who wish to retain an interest in their
  projects but are unable to use tax benefits.
  These are the so called tax equity investment
  projects.
• Under these structures, the equity investor
  obtains substantially all of the cash and tax
  benefits (production tax credits and
  depreciation) until the Flip Date. Thereafter,
  the cash and tax benefits are allocated
  substantially to the sponsor with the equity
  investor maintaining a residual return.
• Returns to equity investors have been trending
  down over the recent past.

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FINANCING

• There are certain variations on this theme
• Cash is allocated to the sponsor until the
  sponsor has received the return of its capital
  (the so-called Cash Flip Date) and thereafter
  cash and tax benefits are substantially allocated
  to the equity investor until the Flip Date.
• Pay-as-you-go (PAYG). The equity sponsor makes
  an initial capital contribution and thereafter
  makes additional capital contributions as the
  production tax credits (PTCs) are generated.
  The PAYG is usually evidenced by a fixed note
  based on certain assumptions with respect to the
  PTCs and a contingent note again based on
  assumptions with respect to the PTCs.
• PAYG provides some protection to the investor in
  case PTCs are not generated in accordance with
  the model. But money is not put to use as
  quickly.

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FINANCING

• Leverage most of the permanent financing
  arrangements taking place are equity investments.
  However, debt can be added to the structure
• Debt can be incurred against the amount of cash
  being generated by the project and the value of
  the production tax credits. This adds certain
  complications because of the lenders desire to
  get its money back and the equity investors
  desire to protect its equity investment.
• Some transactions allow the sponsor to pledge
  its interest in the holding company as security
  for a loan. This can reduce the amount of cash
  necessary for the equity investment. However,
  the equity investor will want the ability to take
  over management of the project if there is an
  involuntary transfer of the sponsors equity
  position.
• There are numerous permitted transfer issues
  which are heavily negotiated between the sponsor
  and the equity investor as part of the financing
  package.

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CONCLUSION

• This concludes a summary overview of financing
  structures for wind transactions.
• The panelists will now give a more detailed
  discussion of the financing structures and what
  they see as the current drivers in the financing
  market.