Wind Power

New Financing Option for Wind Developers

Issue 3 and Volume 2.

Wind power plant developers have an additional financing option available to them, thanks to changes in federal tax law. Previously, production tax credits were available to parties that owned, operated and sold electricity generated by the wind project. The changes now allow for leasing entities not directly engaged in project operations to claim either investment tax credits or to qualify for an ITC cash grant in lieu of production tax credits. This additional flexibility broadens the financing options available to project developers.

And that opens a new source of money for developers, said Lance Markowitz, senior vice president and manager of the Leasing and Asset Finance Division of Union Bank, N.A., which has been in the power business for close to 30 years. Markowitz, a Los Angeles native who graduated from the University of Colorado at Boulder, leads a division that focuses on providing finance to the renewable energy sector, largely in the U.S. and Canada. The division also actively provides construction and term loans for renewable energy projects.

In 2009, the unit served as lead arranger for eight construction and/or term-debt financings totaling some $1.7 billion and representing 950 MW of capacity. It also was a lead investor in nine wind and solar projects. Union Bank has partnership or lease investments in 20 renewable energy projects aggregating over 1,750 MW and $3.7 billion in value.

Leasing options can be attractive because they can provide more incremental financing and help clarify the extent of a firm’s financial obligation, Markowitz said.

“In a flip structure the cash is either shut off or turned on,” he said. As a result, a developer may see no cash at all. Under a rental obligation, certain coverages relative to cash flow are targeted. The result is more consistency across the project lifetime. “We’re getting rents, tax benefits and residual benefits” which, when compared with the loan or partnership over 10 years, result in a larger financing amount, he said.

Markowitz set up a lease structure for a portfolio of four photovoltaic projects totaling 6 MW. Each project was bought individually, but the cash flow went into a waterfall structure made up of revenue collected, expenses paid and rent dispersed on the transaction.

“The developer got fairly significant financing,” Markowitz said. A key component to writing a lease is to pay market value for the assets. For solar photovoltaic assets he said that was around $6 a watt “and prices are going down significantly.”

Union Bank is part of the Mitsubishi UFJ Financial Group’s (MUFG) project finance effort. Some clients include Acciona, AES, Enel, EnXco, Infigen, SunEdison, Terra-Gen Power and EME.

Markowitz and his two-person team, who include Melisa Wilson, senior vice president, and Kenji Ogawa, vice president, look for fully developed projects with a well-defined outlook. In evaluating a loan opportunity the bank considers the quality of the developer, the terms and quality of the resource power purchase agreement, the quality of the technology and the adequacy of the resource.

“We need to have confidence in the resource projections,” he said. Land rights and water rights are also important review criteria.

Apart from its lending activities and partnership investments, Union Bank, N.A., has been active during the past decade in underwriting leasing solutions for the power sector. To date, Union Bank has been a lead investor in 14 power generation facilities that use a lease structure. These facilities aggregate over 4,500 MW and $4.3 billion in value.

For example, a U.S.-based chemical company wanted a 750 MW cogeneration facility, including steam for its own internal use and power to sell to the local distribution grid. Union Bank bought the project and leased it back to the chemical manufacturer for 20 years. The lessor earns a stream of rents and monetizes the depreciation and residual interest in the facility.

“We have interests in 5,000 to 6,000 MW through partnerships and leases,” Markowitz said.

Leasing clients include AES, SunEdison, First Energy, Mirant and Calpine. While leasing in the renewable energy market remains nascent, Union Bank believes that leasing will become an increasingly important financing tool due to certain changes to the tax code as well as continued growth in the renewable energy market.

UnionBanCal Corp. is a wholly-owned subsidiary of The Bank of Tokyo-Mitsubishi UFJ, Ltd., which itself is a unit of Mitsubishi UFJ Financial Group, Inc.

Photo, top left: Lance Markowitz (right), senior vice president and manager of Union Bank’s Leasing and Asset Finance Division, and team members Melisa Wilson, senior vice president, and Kenji Ogawa, vice president, visit client SunEdison’s Chula Vista solar installation at the City of San Diego’s Otay Mesa water treatment facility. Union Bank provided a lease to SunEdison, which will sell power to the City of San Diego under a 20-year solar purchase agreement.