Raser Technologies recently received the last tranche of its combined $51 million debt and tax equity financing for the Thermo geothermal project. Thermo is the first project financing that Raser has closed, though it has a pipeline of 155MW under late-stage development. The lead bank for Thermo, and the rest of this pipeline, is Merrill Lynch.

Thermo is a 10MW geothermal power plant located in Beaver County, Utah. It will sell power to the city of Anaheim, California, under a 20-year power purchase agreement at a price of $78 per MW, with a 2% annual increase. Anaheim, home to Disneyland, has a high rating and prosperous population, and its city-owned utility system must buy 20% of its power from renewable sources by 2010.

Raser differs from other geothermal developers in using modular binary cycle technology from United Technology Corporation that can operate at temperatures of between 175°F and 325°F (164°C), and can be installed by the developer in a modular fashion. The technology allows it to work with fields that have been overlooked in the recent rush for geothermal assets.

On 16 January 2008, after talks with several institutions, Raser signed a commitment letter with Merrill Lynch, under which Merrill committed to financing 100MW of capacity, with a right of first refusal on another 55MW. The first financing under the agreement was set to be Truckee, a 10.5MW asset located in Nevada that would require $44 million in 15-year debt.

But Truckee's water temperatures have fluctuated, and Raser has decided to spend more time on assessing its resource. Thermo, which has a much hotter and more easily measured resource, jumped ahead in the financing queue. On 18 May Raser signed a financing commitment letter with Merrill for the Thermo project.

UTC provides lenders with a fixed-price maintenance contract and guarantee for ten years of 92% availability, but Raser must put the units in properly, and its steam resources must hold up. The Thermo resource, at roughly 300°, is hot enough to provide very strong performance, and is in fact closer to the upper limits of what the UTC units can handle.

Thermo's heat explains, in part, Merrill Lynch's ability to provide a more expansive commitment than the Truckee resource allowed. Merrill is providing a mixture of construction debt, tax equity and 18-year long-term debt, a little more than Truckee's proposed tenor. It is providing a $45 million construction loan, to be partly repaid at completion by $17 million of a $29 million tax equity commitment, with the remaining $26 million converting into discounted term debt.

Under the tax equity agreement, Raser, the managing member of the partnership that owns the project, receives a fee, and then the tax equity provider receives 99% of remaining cash until it receives a target internal rate of return of 15%, with Raser receiving the remaining 1%. After the IRR target is reached, Raser receives 99% and the tax equity provider the rest, although if the project is still eligible for tax credits, the tax equity provider could buy these from the vehicle.

Geothermal projects are now eligible to receive production tax credits, since the 2005 Energy Policy Act, as well as accelerated depreciation, in common with other technologies. But as David Lowman, a partner at Raser's counsel, Hunton & Williams, notes, geothermal projects also receive tax benefits from intangible drilling costs, as well as from the depletion of geothermal resources.

The debt is provided at a fixed rate of 9.5%, roughly equivalent to 500bp over Libor. The nearest precedent, Nevada Geothermal's Blue Mountain, raised $270 million in debt in September at 14%. The most notable aspect of the deal is Merrill's willingness to contribute both debt and tax equity in advance of completion of the plant.

Merrill can do this because Raser, at financial close, placed funds in escrow to make sure that drilling is completed as planned. If it is, then these funds are released to Raser, but if not, then the funds will be used to pay down the debt and reduce leverage. The financing also includes a waterfall structure to apply revenues to various accounts and participants.

Raser's ability to hold Merrill to the commitment letter has not protected it from credit market conditions altogether. But compared to the rate at which Blue Mountain, and even an investment grade utility like Illinois Power (9.75%) have raised debt, Raser's early commitment to Merrill looks prescient. It has since sold on the debt to Prudential Capital.

Few project finance lenders or sponsors will ever admit to assembling a slate of prefabricated financings, if only to justify the fees that such deals attract. But Raser hopes that Thermo will serve as a direct template for the rest of its 155MW project slate, and wants to roll out the follow-ups, many of them clustered around a few locations, quickly.

"This structure will be a useful way of bridging smaller developers to completion and beyond without having to depend on the project finance market," says Cesar Gueikian, director and co-head of Merrill Lynch's structured principal investments group. "We see it being repeated both by Raser and other geothermal developers."

But Raser's experience will be difficult for other developers to follow. Not only does it have preferential access to UTC equipment, but its ability to get competitive long-term debt is dependent on a strong relationship with Merrill Lynch. Merrill receives warrants to buy Raser shares as part of its financing agreement, but is in the middle of being acquired by Bank of America, after which its appetite for such development risk might be curtailed.

According to Raser, it has not suffered, and does not expect to suffer, any adverse effects from the merger. Raser has also had interest from other banks, according to its head of investor relations, Richard Putnam, and might turn to these banks for projects that are not part of the Merrill commitment.

Thermo No. 1 BE-01, LLC
Status: Closed 9 September 2009
Size: $51 million
Description: 10MW binary cycle geothermal unit
Location: Beaver County, Utah
Sponsor: Raser Technologies
Debt: $45 million construction, reducing to $26 million at completion
Tax equity: $25 million
Debt Tax equity provider: Merrill Lynch
Debt provider: Prudential Capital
Administrative agent: Deutsche Bank
Maturity: 18 years
Sponsor legal counsel: Hunton & Williams
Lender legal counsel: McDermot Will & Emergy
Tax equity legal: Chadbourne & Parke
Resource consultant: GeothermEx
Equipment supplier: UTC
Borrower's engineer and construction manager: Cummins & Barnard
Independent engineer: RW Beck
Drilling contractor: Layne Christensen, Patterson-UTI Drilling