Cannon Power received a first tranche of stimulus grants for its Windy Point/Windy Flats phase II project in November. The $17.4 million grant, the first of a total of $170 for which Cannon has applied, follows Cannon's close in October of an amended and restated construction financing that allowed the developer to expand the project by roughly 30%.

The financing is notable as the reappearance of the prepayment financing structure in US wind. The prepay was once marketed as a way for public power entities to gain control of wind generation and still benefit from the tax benefits available to wind producers. It was, at least initially, an offshoot of the tax equity market.

But the structure offers equally compelling advantages to private developers because a wind power prepayment is essentially a loan that reflects the low, usually tax-exempt, costs at which public power authorities can borrow. The pre-pay, however, far from joining tax equity as a victim of the crunch, could benefit from a combination of high long-term debt costs and the US treasury's provision of cash grants. Neither outcome, however, is guaranteed.

A wind power prepayment involves an offtaker making a large lump-sum payment to a wind developer at the project's completion, and getting in return a certain amount of its output for a fixed term. The offtaker gets a lower cost of power, to reflect the fact that the sponsor does not have to pay the yields a commercial lender and/or tax equity provider would demand.

According to Michael Toke, senior vice-president and general counsel at Cannon, the developer started looking at the project in 2005, and more recently at returning to being an owner-operator as well as a developer. In the recent past Cannon has frequently sold projects in late-stage development to larger utilities or oil majors, or even just after arranging construction financing and building them.

The prepay structure has a limited pedigree. The first financing to use a prepay – 205MW White Creek – closed a $362 million construction financing with HSH Nordbank in late 2006. Its customers were Cowlitz County Public Utility District (PUD), Klickitat County PUD, Lakeview Light & Power and Tanner Electric Cooperative, while Meridian Clean Fuels placed its tax equity with itself, Lehman Brothers and Prudential.

That project, like Cannon's latest, is located in Klickitat County, Washington, and uses the same type of turbines, Siemens 2.3MW machines. The area, a sparsely populated and mountainous part of the south of the state, boasts an excellent wind resource, and benefits from 20 years of wind measurements.

The Windy Point/Windy Flats site supports up to 500MW of capacity, and the first phase went online on 28 May 2009. That phase consists of 42 Siemens 2.3MW turbines and 20 REPower 2MW machines.

Cannon had planned that the construction financing for this phase, a $341 million loan from HSH Nordbank, would be refinanced with tax equity from AIG and Citigroup, and a prepayment from the Turlock Irrigation District, a Californian public water and power authority.   The financing launched to syndication in August 2008, and a month later, both debt and tax equity markets dried up. Turlock formed the Tuolumne Wind Project Authority, and bought the project outright, and retired the construction debt, for $385 million on 15 July 2009, with the proceeds of a $425 million Citigroup-led bond issue. That financing included a $151.6 million Build America Bond tranche due 2034 that priced at 250bp over the 30-year treasury, and was rated A1/A+/A+ (Moody's/S&P/Fitch).

For the 202MW phase two, Cannon lined up an even stronger power purchaser, the Southern California Public Power Authority (SCPPA, pronounced, Scapa). The authority is a joint powers authority consisting of 10 municipal utilities and one irrigation district, chief among them the Los Angeles Department of Power and Water (LADPW). It was formed to acquire generation and transmission, and like other California utilities, as racing to meet the state's aggressive renewable portfolio standard.

The SCPPA has agreed to a $500 million prepayment of 20 years of the project's P99 production, or the wind it is projected to produce with 99% certainty. The authority will in turn sell 93.37% of the output to the LADPW, and 6.63% to the city of Glendale. It will finance the prepayment with an issue of bonds led by JP Morgan. The bonds will be either tax-exempt or Build America, depending on market conditions at the time.

In March, Cannon closed a construction financing of $472 million with HSH Nordbank, which again struggled to syndicate down its one-year debt commitment, even at 400bp over Libor with a Libor floor. It could afford to be a little more calm, however, because the financing would be repaid with the proceeds of the pre-pay, and thanks to the US Treasury's cash grant programme, the developer would not need to line up tax equity.

In September, Cannon added an additional 60MW phase 2a, again with Siemens turbines, and brought in Siemens Financial Service to provide some additional debt. Siemens is lending $178 million to the project, some of which expands the total debt to $637 million, and some of which pays down a little of the HSH commitment.

The amendment that brought in Siemens closed in early October, and necessitated the appointment of Deutsche Bank as a third-party administrative agent, maintaining an escrow account and providing letters of credit. The deal marks the entry of SFS into the US wind market, and gives Siemens a leg up in selling turbines, although its units' reliability had already made many fans among developers.

The cash grant and the prepay work well together, though unlike the grant, the prepay rewards developers for picking the best wind resources, because the better P99 levels are, the more of a project's cost a developer can recover from the prepay. In better times the developer might prefer to minimise the amount of the project's output hands over, but the savings in financing costs, and tax advantages, of the prepay are considerable.

The documentation is time-consuming, however. While the public power authority will take steps to reassure lenders that the take-out will happen, even if bond markets are moribund, it expects oversight over the plant's operation. "The documentation is much more stringent than would be typical on a standard power purchase agreement," notes Tom Trimble, a partner and co-head of the renewables practice at Hunton & Williams, which advised Cannon on the prepay and tax aspects of Windy Point, and also advised on White Creek. "Remember also that in early 2008 the operation of the cash grant was not fleshed out." The developer's protections include an offtaker backstop of the treasury cash grant, on top of an option to buy out the project after five years.

Cannon is now moving fast to close financing for a final 100MW at the Windy Point site and get it online before the treasury cash grant programme ends at the end of 2010.

Windy Flats Partners, LLC
Status: Closed October 2009, first tranche of grant funding received November
Size: $1 billion
Location: Klickitat County, Washington
Description: 262MW wind farm
Sponsor: Cannon Power
Offtaker: Southern California Public Power Authority
Debt: $637 million
Lead arranger: HSH Nordbank
Lender: Siemens Financial Services
Administrative agent: Deutsche Bank
Sponsor counsel: Hunton & Williams (Lead counsel, prepay and tax), Stoel Rives (financing), K&L Gates (permitting)
Lender counsel: Sidley Austin (HSH), Chadbourne & Parke (Siemens)
Independent Engineer: RW Beck
Wind resource consultant: Ron Nierenberg
Lender insurance adviser: Aon
Offtaker financial adviser: Public Financial Management
Offtaker bond counsel: Fulbright & Jaworski; Curls Bartling
Prepay bond underwriter: JP Morgan