Wind Power

The DEAL: Terra-Gen’s Landmark Wind Farm Sale-Leaseback

Issue 5 and Volume 2.

Terra-Gen Power LLC closed a $1.2 billion financing for four wind power projects with a total of 570 MW of capacity at its Alta Wind Energy Center in Kern County, Calif. The four projects, known as Alta Projects II-V, will use 190 V90-3.0 MW turbines manufactured by Vestas-American Wind Technology Inc. Project construction work began July 27.

The financing closed July 21 and includes a forward commitment for one of the first sale-leasebacks of a portfolio of wind energy projects in the U.S. This structure was largely unavailable to wind project developers before last year’s American Recovery and Reinvestment Act, popularly known as the stimulus bill. Previously, one of the only games in town for financing wind was the Production Tax Credit. Its rules said the taxpayer that benefited from the credit had to own and operate the project. This meant financial institutions with a leasing group could not be tapped for wind farm project equity as they could for, say, geothermal and solar energy projects.

At a macro level the 2009 stimulus bill opened “an additional universe of equity investors” to the wind industry, said Adam Umanoff. The former president of Enron Wind, Umanoff led a legal team at Chadbourne & Parke that advised Terra-Gen and helped close the landmark deal.

Terra-Gen Power LLC closed a $1.2 billion financing for four wind power projects with a total of 570 MW of capacity at its Alta Wind Energy Center in California. An earlier phase of the project is shown under construction. Photo credit: Ron Thornburg.

Under a more traditional flip partnership structure, the investor could have partnered with Terra-Gen on the project. After receiving a share of cash and tax benefits, the investor’s position would have “flip” and allowed Terra-Gen to collect the remaining cash and tax benefits.

Under the leveraged lease structure selected for Alta Projects II-V, Citibank N.A. will buy the projects at the start of commercial operations and lease them back to Terra-Gen, which will manage and operate the power projects under long-term agreements. Citibank is a passive owner.

“We believe this transaction is the first to be structured as a leveraged lease in the wind space as well as the first 144A bond issuance for wind assets since 2005,” said John O’Connor, CFO of Terra-Gen in a statement.

In an interview, Umanoff said the sale/leaseback structure makes sense for large-scale projects or portfolios, given the transaction costs. And as long as the federal Investment Tax Credit is available to wind projects, he expects to see more leasing activity. Umanoff said the U.S. wind market can add around 10,000 MW of capacity a year on a long-term basis. From a political standpoint having state renewable portfolio standards “with teeth in them” keeps the market active and investors interested. The stimulus bill clearly has helped the wind industry, he said, as have the ITC and PTC. “It wouldn’t be as robust a market” without those incentives, he said.

The Alta Wind Energy Center is a 3,000 MW wind power development that will include 600 turbines when completed. Already underway is the 150 MW Alta Project I. It uses GE turbines and closed financing and started construction in March 2010. The latest financing puts Terra-Gen on its way to completing what it says could be one of the largest wind energy farm in the United States.

The $1.2 billion financing for Alta Projects II-V included issuing approximately $580 million of bonds due 2035, a construction bridge loan facility of $499 million and ancillary credit facilities of $127 million. Proceeds from the certificates and bridge loans will fund project construction.

Ned Farquhar, deputy assistant secretary, Land and Minerals Management, U.S. Dept. of the Interior, addresses guests at Terra-Gen Power’s groundbreaking ceremony for Alta Wind Energy Center in Mojave, Calif. in July. Left to right: Michael Picker, senior advisor to the governor for renewable energy facilities; Commissioner Timothy Alan Simon, California Public Utilities Commission; Don Maben, Second District supervisor, Kern County; Assemblywoman Connie Conway; Assemblywoman Jean Fuller (partially obscured); Shawna Seldon, The Rosen Group; Jim Pagano, CEO, Terra-Gen Power; Jonathan Bram, partner, Global Infrastructure Partners; Eric Lammers, principal, ArcLight Capital Partners. Photo credit: Ron Thornburg.

Vestas-American Wind Technology will use its facilities in Colorado to complete an order for 190 turbines, which the company says is its largest single-site order in 31 years.

Citi, Barclays Capital and Credit Suisse acted as joint book-running managers for the bonds. Mitsubishi UFJ Securities, Credit Agricole Securities, ING and Rabo Securities acted as co-managers. MUFG Power & Utilities Group, Credit Agricole, ING Capital, Rabobank, Citi, Barclays and Bank of Montreal provided the credit facilities. Credit Agricole acted as administrative agent and MUFG Power & Utilities Group, Credit Agricole, ING Capital, Rabobank, Citi and Barclays acted as joint lead arrangers.

Around 1,550 MW of Alta Wind’s 3,000 MW total capacity will fulfill a power purchase agreement signed with Southern California Edison in 2006. Delivery and commissioning of the Vestas turbines will begin in October 2010. Alta Project I is anticipated to begin commercial operations in January 2011.

Terra-Gen is an affiliate of ArcLight Capital Partners and Global Infrastructure Partners. Terra Gen has more than 830 MW of generating capacity in operation and 720 MW under construction. The company currently has 21 wind, solar and geothermal projects in operation in six states and more than 5,000 MW of capacity under development.

ArcLight is an energy investment firm with more than $6.8 billion under management. It made its initial investment in Terra-Gen Power’s predecessor company in 2002. ArcLight is based in Boston with offices in New York City, London and Luxembourg. Global Infrastructure Partners is an independent infrastructure fund that invests worldwide in infrastructure assets and businesses in both OECD and selected emerging market countries. It has offices in New York and London with an affiliate in Sydney and portfolio business operations headquarters in Stamford, Conn.