Debt Financing for Wind Projects
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Debt Financing for Wind Projects By John Harper, Birch Tree Capital, LLC IPED Financing Wind Power Conference July 25-27, 2007 Birch Tree Capital Background Financial advisory services supporting financing for clean power generation and biofuels projects:

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Debt Financing for Wind Projects

By John Harper, Birch Tree Capital, LLC

IPED Financing Wind Power Conference

July 25-27, 2007

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Birch Tree Capital Background

  • Financial advisory services supporting financing for clean power generation and biofuels projects:

    • Multi-technology focus (wind, PV, biomass, MSW).

    • Clients include investors, developers, and public sector entities.

    • Collaborates with Deacon Harbor Financial & other firms.

  • Recent wind sector assignments:

    • Advising a large insurance company in due diligence review and negotiation of tax-oriented interests in new wind projects.

    • Co-author of review and comparative analysis of wind financing structures for Lawrence Berkeley National Labs (to be published next month)

    • Co-author of April 2007 study profiling financial viability of state’s wind resources for State of Rhode Island.

    • Advising the Cape Cod Compact on using a cooperative to finance local wind projects.

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Wind Financing Structures

  • Historically, few financing sources and structures available to developers.

  • Now, multiple structures available.

    • Equity & Debt sources have expanded.

    • Varying combinations of equity, tax equity, debt, & grants.

    • No one optimal structure.

    • Relative utility varies by:

      • Project size.

      • Developer characteristics & goals

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Wind Financing Structures

Developer types:

  • Small, independent developer

  • Large, Strategic developer/investor

  • Utilities (for own supply)

  • Community groups

  • Individual entities (for own use)

    Structures created to meet varying developer needs.

  • Relative ability to fund development costs.

  • Relative ability & willingness to fund construction costs.

  • Relative ability to use tax benefits.

  • Focus on up-front profits vs. ongoing cash flows from operations.

  • Relative need for early cash returns vs. waiting 10+ years.

  • Relative interest in managing operations.

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Wind Financing Structures

Main structures in use for utility-scale wind:

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Wind Financing Structures using debt

  • Many types of debt in use:

    • Turbine construction loans.

    • Construction loans.

    • Equity bridge loans.

    • Term loans.

      • Cash-based loans

      • Production tax credit-based loans

    • Backing for letters of credit.

    • Tax-exempt bonds

    • Tax credit bonds (CREBs)

  • Facilities vary in their purposes and terms.

  • A given project may use multiple facilities.

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Financing Structures using debt

Why use debt?

  • Improve liquidity.

  • Improve profits from project development.

  • Husband developer capital.

  • Reduce equity risk.

  • Recycle developer capital.

  • Enable marginally economic projects.

  • Third party risk validation.

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Financing Structures using debt

Profile three structures that use term debt:

  • Cash Leveraged

  • Cash & PTC Leveraged

  • Back Leverage

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Cash Leveraged Financing Structure

  • Note typically involves separate tax investor.

  • Parties:

    • Developer

    • Tax Investor

    • Lender

  • Loan reduces upfront equity capital requirements

  • Limited-recourse, aka project financing, structure

  • Loan to special-purpose project entity

  • Loan sized on project cash flows (power & RECs)

    • Typically debt is 40-55% of total capital costs

    • Key drivers: tenor, debt service coverage ratio, interest margin

  • Lender has first lien on project cash flows, assets, contract rights, and pledges of equity shares

  • Term loan is distinct from/replaces:

    • Turbine Supply Loan, Construction Loan, Equity Bridge Loan

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Cash & PTC Leveraged Financing Structure

  • Same basic structure as Cash Leveraged Structure

  • But, loan sized on both:

    • Project cash flows (power & RECs)

    • Production tax credits

  • Typically aggregate debt is 50-65% of total capital costs

  • Key drivers: tenor, debt service coverage ratio, interest margin

  • Lender provides incremental debt, based on present value monetization of projected PTC flows

    • Projected PTC flows based on conservative independent review

      • Base case: 1.45x DSCR using 10 year P50 scenario

      • Stress test: 1.00x DSCR using 1 year P99 scenario

    • Requires Tax Investor contingent guarantee to inject new equity to project company tied to PTCs actually generated

    • Effectively creates 2nd flow of cash to project company that supports the incremental debt

  • Detailed loan terms relating to tax investor obligations/rights.

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    Back Leveraged Financing Structure

    • Used when tax investor doesn’t want debt at the project company level or when developer anticipates a later refinancing.

    • Same parties: developer, lender, tax investor

    • All-equity financing at level of project company.

    • Loan leverages only developer’s share of equity funding obligations.

    • Loan made to developer’s holding company holding developer’s equity shares in project company.

    • Limited-recourse, aka project financing, structure.

    • Loan sized on developer’s share of project cash flows (power & RECs)

      • Consequently, debt is lower % of total capital costs

      • Loan terms usually include a cash sweep to fund loan prepayments

      • Tenor typically shorter

    • Collateral security limited to pledge of developer’s shares in project company.

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    Why not use debt?

    • Increased transaction costs.

    • Increased time.

      • PTC expiration worries.

    • More complex deal structure.

    • Many tax investors dislike debt.

      • Equity squeeze concerns

      • Term conversion hassles

      • Pricing future PTC-loan equity contributions

      • PTC-loan equity funding into troubled projects

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    Debt Considerations

    • Project size: small projects may not merit debt

    • Timing

    • Transaction cost

    • Complexity

    • Power/REC off-take arrangements

    • Turbine technology

    • Limits pool of willing tax investors

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    Community/Public Wind Financing Structures

    • Still need to establish the project’s financial goal

    • Financing structure options:

      • Public-private partnerships

        • Strategic Investor Flip

        • Institutional Investor Flip

      • Full community/public ownership

        • All-equity

        • Debt

        • Grants

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    Community/Public Wind Financing Structures

    Financing Sources:

    • Federal:

      • USDA Farm Bill Section 9006 grants

      • USDA Farm Bill loan guarantees

      • CREBs

    • State:

      • Clean energy funds

      • Economic development funds

    • Private

      • Taxable bonds

      • Cobank, NRUCFC

      • Local lenders

      • Local tax investors

      • Rural Community Renewable Energy Bonds Act (Bill S.672) (

        Most small projects to date have tapped multiple sources.

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    Community/Public Wind Financing Structures

    Recommended financing options:

    • Use private sector incentives/capabilities/money

      • PTC & accelerated depreciation provide more financial boost than other non-grant incentives.

      • Partner with an experienced private developer and/or a tax investor.

      • Take project through permitting to reduce private sector risk.

      • Community/public sector buys long-term power at fixed rate.

      • Use flip partnership structures to enable ultimate ownership.

    • For smaller projects:

      • USDA Farm Bill Section 9006 grants.

      • Partnering with local contractors/investors

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    Wind Financing Structures

    Trends & Observations:

    • Relative popularity of structures varies from year to year.

    • Leveraged structures being considered more than in the past.

    • Emerging financing source: power pre-payments.

    • Utility ownership waxing.

    • Need to watch market trends.

    • Be clear on your own role in the market.

    • Seek expert advice on tax-oriented deals.

    • Simplicity remains a virtue.

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    Wind Financing Structures

    Most importantly, a comment from that wise sage of the office:

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    Thank you.

    John Harper

    Birch Tree Capital, LLC