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:
– 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.
© 2007 Birch Tree Capital
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
© 2007 Birch Tree Capital
Wind Financing Structures
Developer types:
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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.
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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.
© 2007 Birch Tree Capital
Wind Financing Structures
Main structures in use for utility-scale wind:
Financing
Structure
Corporate
Project
Capital
Structure
All equity
Equity
Investors
Description
Strategic Investor
Assumes developer able to utilize Tax Benefits (no flip)
Strategic
Investor
Flip
All equity
Developer and
Strategic Investor
Strategic Investor contributes almost all of the equity
and receives a pro rata percentage of the cash & Tax
Benefits prior to a return-based flip in the allocations
Institutional
Investor
Flip
All equity
Developer and
Institutional Investor
Institutional Investor contributes most of the equity and
receives all of the Tax Benefits and, after the developer
has recouped its investment, all of the cash benefits,
until a return-based flip in the allocations
Pay-As-You-Go
(“PAYGO”)
All equity
Developer and
Institutional Investor
Similar to the Institutional Investor Flip, but with the
Institutional Investor injecting equity only as the PTCs
are generated, rather than at the outset of the project
Cash
Leveraged
Equity and debt
Developer and
Strategic Investor
Similar to the Strategic Investor Flip, but including
commercial debt leverage, with the loan size based on
the amount of cash flow from power sales
Cash & PTC
Leveraged
Equity and debt
Developer and
Strategic Investor
Similar to the Strategic Investor Flip, but including
commercial debt leverage, with the loan size and
amortization profile based on the amount of cash flow
from power sales plus a monetization of the projected
PTCs from the project
Back
Leveraged
All equity (but
developer uses
debt outside
of the project)
Developer and
Institutional Investor
Similar to the Institutional Investor Flip, but with the
developer leveraging its equity stake in the project
using commercial debt
© 2007 Birch Tree Capital
Wind Financing Structures using debt
• Many types of debt in use:
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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.
© 2007 Birch Tree Capital
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.
© 2007 Birch Tree Capital
Financing Structures using debt
Profile three structures that use term debt:
– Cash Leveraged
– Cash & PTC Leveraged
– Back Leverage
© 2007 Birch Tree Capital
Cash Leveraged Financing Structure
• Note typically involves separate tax investor.
• Parties:
– Developer
– Tax Investor
– Lender
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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
© 2007 Birch Tree Capital
Cash & PTC Leveraged Financing Structure
•
Same basic structure as Cash Leveraged Structure
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But, loan sized on both:
(1) Project cash flows (power & RECs)
(2) Production tax credits
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Typically aggregate debt is 50-65% of total capital costs
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Key drivers: tenor, debt service coverage ratio, interest margin
Lender provides incremental debt, based on present value
monetization of projected PTC flows
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Projected PTC flows based on conservative independent review
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Base case: 1.45x DSCR using 10 year P50 scenario
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Stress test: 1.00x DSCR using 1 year P99 scenario
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Requires Tax Investor contingent guarantee to inject new equity to
project company tied to PTCs actually generated
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Effectively creates 2nd flow of cash to project company that supports the
incremental debt
Detailed loan terms relating to tax investor obligations/rights.
© 2007 Birch Tree Capital
Back Leveraged Financing Structure
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Used when tax investor doesn’t want debt at the project company level or when
developer anticipates a later refinancing.
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Same parties: developer, lender, tax investor
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All-equity financing at level of project company.
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Loan leverages only developer’s share of equity funding obligations.
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Loan made to developer’s holding company holding developer’s equity shares in
project company.
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Limited-recourse, aka project financing, structure.
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Loan sized on developer’s share of project cash flows (power & RECs)
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Consequently, debt is lower % of total capital costs
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Loan terms usually include a cash sweep to fund loan prepayments
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Tenor typically shorter
Collateral security limited to pledge of developer’s shares in project company.
© 2007 Birch Tree Capital
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
© 2007 Birch Tree Capital
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
© 2007 Birch Tree Capital
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
© 2007 Birch Tree Capital
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
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Taxable bonds
Cobank, NRUCFC
Local lenders
Local tax investors
Rural Community Renewable Energy Bonds Act (Bill S.672)
(www.refcoalition.com)
Most small projects to date have tapped multiple sources.
© 2007 Birch Tree Capital
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
© 2007 Birch Tree Capital
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.
© 2007 Birch Tree Capital
Wind Financing Structures
Most importantly, a comment from that wise sage of
the office:
© 2007 Birch Tree Capital
Get outside and enjoy Santa Fe!
© 2007 Birch Tree Capital
Thank you.
John Harper
Birch Tree Capital, LLC
www.birchtreecapital.net
© 2007 Birch Tree Capital