Terra-Gen franchise brings in new names
With Google as an investor and a slew of similar financings under its belt, Terra-Gen should have been an easy sell. But the deal faced a market radically different from that of its last approach. By Alison Healey.
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The amount of financing Terra-Gen was able to raise in its latest deal was remarkable, considering challenging conditions that have yielded few widely syndicated transactions combined with an uncertain future for renewable incentives.
In its latest deal, Terra-Gen Power closed US$650m of financing for the 168MW Alta Wind VII and 132MW Alta Wind IX projects. Union Bank and RBS Securities acted as co-bookrunners for the financing, with Union Bank on the left, while Bank of Montreal, Canadian Imperial Bank of Commerce, Key Bank, KfW-IPEX Bank, and Santander acted as joint lead arrangers. Sumitomo, BayernLB, DZ Bank, and Associated Bank also came into the deal.
Noticeably absent from the syndicate was a handful of European banks that had been major backers of Terra-Gen in the past. New banks stepped up, however, with Canadian banks playing a major role and Associated Bank committing to its first wind deal.
The completion of the Alta Wind VII and IX projects will bring the total capacity of the Alta Wind Energy Center (AWEC) located in Tehachapi, California to 1,320MW, of which 1,020MW is currently in operation. The American Wind Energy Association’s recent market report for 2011 named AWEC as the nation’s largest wind farm.
The Alta VII and IX financings include construction and seven-year term loans, bridge loans to the ITC cash grants from the US Department of Treasury, and ancillary credit facilities. The proceeds of the financing will be used to reimburse funds previously advanced by ArcLight Capital Partners and Global Infrastructure Partners for development of the projects, as well as to fund the balance of the projects’ construction costs. Together the projects will utilise 100 V90-3.0MW turbines manufactured by Vestas-American Wind Technology.
The syndication of the facilities received significant interest from a broad range of commercial lenders and was oversubscribed. The loan was priced at 262.5bp over Libor, stepping up to 287.5bp in year five. Pricing on the bridge loan was lower, at Libor plus 237.5bp. The financing has an 18-year amortisation profile. The deal was launched with a New York bank meeting in March and closed in just over a month.
The sponsors sought commitments between US$25m and US$100m. Banks were allocated down from original commitments based on oversubscription.
Risk related to the speed at which the projects must be completed was the major concern. The projects must be placed in service prior to December 31 2012 to qualify for the Production Tax Credit (PTC). Uncertainty remains about whether Congress will renew the PTC for wind energy, although many in the industry predict it most certainly will not be renewed.
The credit has been a vital driver of wind power development in the last decade, including more than doubling installed capacity between 2008 and 2010 and dramatically increasing US-based manufacturing capacity. It now may become a thing of the past as it becomes a victim of the budget deficit as well as energy policy backlash, although some last-minute legislative manoeuvring is under way.
However, Terra-Gen’s track record of delivering more than 1,000MW of projects on time or ahead of time and under budget was a huge draw and banks were able to become comfortable with that risk. And even with the tight timeframe, the deal was able to be done with no incremental upstream support. Sponsors of other renewables projects have had to provide this type of support in terms of backstopping the grant.
The level of equity contributed by the sponsor was also considered somewhat low by industry standards, at between 10% and 15%. But the strength of contracts and cashflows served to compensate for that risk. Terra-Gen has long-term contracts with SCE for 1.55GW of wind from the project. Latham & Watkins acted for the sponsor, while Simpson Thacher represented the lenders.
The financing, large in size for today’s market, has been done as the company works to explore project sell-offs to free up capital for continued project development. Terra-Gen recently sold the Alta Wind VIII (150MW) phase to Brookfield and has entered into an agreement to sell the Alta Wind VI phase (150MW) to EverPower.
Terra-Gen’s development plan includes up to 3.1GW in California. For EverPower, which Terra Firma acquired in 2009, Alta VI is part of the company’s strategy of owning assets near load centres such as the Northeast and West Coast that it considers attractive.
Alta Wind VII and IX, like all earlier phases of the Alta Wind Energy Center, will sell their renewable energy to Southern California Edison under separate power purchase agreements carved out from a 1,550MW master power purchase agreement, and will be managed, operated and controlled by Terra-Gen Power.
The projects will each interconnect to and utilise SCE’s Tehachapi renewable transmission project. As part of the new 4,500MW Tehachapi Renewable Transmission Project (TRTP), the Alta Wind projects will use some of the first transmission lines developed specifically to transport renewable energy from remote, resource-rich areas, such as the Mojave, to major population centres. Blattner Energy is leading the construction of the projects.
Alta Wind VII and IX are each owned by California Highwind Power, a subsidiary of Terra-Gen. Terra-Gen is an affiliate of ArcLight Capital Partners and Global Infrastructure Partners.
Terra-Gen was last in the market in June 2011 with a US$631m financing for Alta Wind VI and VIII that was priced at 225bp over Libor. The deal financed two 150MW projects and was led by Credit Agricole and MUFG. The Alta VI and VIII financing, similar to the latest deal, included a seven-year construction and term loan and a bridge loan to the ITC cash grant from the US Department of Treasury. ING, Rabobank, Santander, and RBS acted as joint lead arrangers. CoBank, Bank of Montreal, Key Bank, Lloyds, DZ Bank and Helaba also came into the deal.
That financing was in the market on the heels of an announcement that Google and Citigroup were each investing in the 102MW Alta Wind IV project, a different phase of the AWEC effort. In May 2011, Google and Citigroup announced plans to invest US$55m in the 102MW Alta IV project in California. Google and Citigroup will purchase the project and lease it back to Terra-Gen, which will manage and operate it under a long-term agreement.
The Alta projects employ a leveraged lease structure through which Terra-Gen will manage and operate the wind projects under long-term agreements. Google has publicly said that it hopes the demonstration of the use of this structure will encourage more investment by enabling other types of investors that might not typically consider wind projects.
In June 2011, Citi and Google announced plans to invest an additional US$102m in the 168MW Alta V project, bringing each company’s total investment to US$157m. The companies will now hold leveraged leases for two phases, totaling 270MW, of what will soon be the nation’s largest wind farm. Citi also underwrote the equity financing for Alta Projects II–V, totalling 570MW.
The company has a history of using a wide range of financing mechanisms to back its Alta projects, also hitting the market last year with a US$360m Term Loan B led by Goldman Sachs and Credit Suisse. The deal was structured with a cash sweep that steps up or steps down depending on the level of debt relative to cashflow. That deal priced at a premium to comparable corporate deals at 400bp over Libor with a 1.25% Libor floor. The financing was backed by a collateral pool of 22 projects, many of which have contracts in place with Southern California Edison.
The facility comprises a US$300m, six-year senior secured term loan B and a US$60m, five-year senior secured working capital facility. Proceeds of that term loan were used to fully repay corporate level debt, fund a cash distribution to Terra-Gen, and partly fund the debt service reserve. The working capital facility will be used to issue letters of credit for the borrower, its subsidiaries and other affiliates, as well as for partly funding the debt service reserve.
Terra-Gen has a history of innovation in renewable project finance. The company was the first to hit the market with a Rule 144a offering with renewable project risk. In July 2010, Terra-Gen’s subsidiary, Alta Wind Holdings II–V, raised US$580m through a 7.00% 24.5-year 144a bond issue. The deal was also notable as the first wind project bond that had been launched since 2005.
Moody’s pointed out at the time of that financing that Terra-Gen relied on cash distributions from its portfolio of projects to service its debt obligations, and at that time approximately 30% of its portfolio capacity was exposed to price risk.
Terra-Gen is the holding company for a portfolio of 22 renewable projects. Affiliates of ArcLight Capital Partners and Global Infrastructure Partners hold the ownership interests in Terra-Gen through their ownership of Terra-Gen’s parent, Terra-Gen Power. The portfolio consists of geothermal, solar and wind projects with a total capacity of 1,236MW. Facilities located in California and Nevada account for 86% and 5%, respectively, of portfolio capacity. The remaining 9% is distributed among several wind projects primarily situated in the western US.
An important consideration in the Terra-Gen financings has been wind resource risk. Moody’s notes that the large and well-established wind regime in the Tehachapi Pass region of Southern California partially mitigates this risk, however.
Refinancing risk has also been brought up, although this is considered by Moody’s to be manageable given the six-year refinancing window, the relatively small amount of refinancing at the end of the term, and the long-term nature of the PPAs, which have expiry dates ranging out to 2038 and will still have a weighted average remaining term of over 12 years upon maturity of the term loan.
AWEC will help California meet its ambitious renewable portfolio standard of 33% clean power by 2020. The whole site will boost California’s wind generation by 30%.