Spanish renewables developer NaturEner closed the construction debt and equity financing for a Montana wind project on 22 August. The deal involves a combined construction debt, tax equity, power purchase agreement and wind hedge package from Morgan Stanley.

Glacier I, located near Ethridge, Montana, has a capacity of 106.5MW, and uses 71 1.5MW turbines built by Acciona in Iowa. NaturEner, whose shareholders number SAPEC and Caja Castilla La Mancha, bought the developer of the project, Great Plains Wind Energy, in early 2007.

It took over an Alberta-based wind developer, Energy Logics, at the same time, and signed up for capacity on a proposed 350km power transmission intertie between Alberta and Montana. The line would make controlling capacity on both sides of the border extremely valuable, but its permit has been at the mercy of review by Montana, Alberta and US federal regulators.

NaturEner's attempts to sign up regional utilities as offtakers took place in a brutally competitive environment, as wind developers scramble to line up customers, close financing, and complete construction in advance of the expiration of the production tax credit for wind generators at the end of 2008.
Utilities in the Western US have some of the strictest renewable portfolio standards in the country, but can still afford to be strike a hard bargain with suppliers. As Alfredo Cahuas, the CFO of NaturEner's US unit explains, "the prices from the utilities just weren't there." The sponsor looked instead for an alternative offtaker or hedge provider.

NaturEner benefited from having an ex-Shell power trader on staff, but the Western US is a much less liquid power trading market than Texas or New York, where most wind hedges have been struck. Power prices in Montana are much more dependent on the hydrological conditions that drive hydroelectric plants' economics than the price of natural gas. Since most wind hedge providers rely upon gas either to structure their hedge or hedge out their own exposure, working in markets such as Texas or New York is much easier.

Morgan Stanley Capital Group also had an ex-Shell trader on staff, but more importantly, controls a substantial amount of generating capacity in the Western US. Not only could it structure a hedge, it could also offer one of ten years, beyond the typical seven-year limit for wind hedges. Morgan Stanley's offtake package breaks down into a 10-year power purchase agreement, indexed to market prices, for all of the project's capacity, and a fixed price hedge of 70% of the project's capacity, a proportion set by the sponsor's debt requirement and the predictability of the wind resource.
The developer also had to assume dispatch and congestion risk. Montana does not lack – for now – transmission capacity between states. But while Glacier I is one of the first wind generators in the state to target the mid-California power market, several others will probably follow. One project in the state, Invenergy's Judith Gap, has already experienced some issues balancing its dispatch. NaturEner has hired Constellation Energy to provide it with an in-house balancing authority, and relies on local utility Northwestern Corporation only for interconnection.

Bypassing the utility's dispatch management functions allows the generator to avoid intruding upon Northwestern's relationship with Montana's Public Service Commission. The PSC recently blocked the utility's acquisition by Babcock & Brown and is currently casting a sceptical eye over Northwestern's purchase of, and plans to sell, the coal-fired Colstrip unit.

The project also had to contend with the restrictions placed by California's regulators on sales of renewable energy credits that are not bundled with power sales. It is likely that California's Public Utilities Commission will soon rule that these can be bought and sold separately, but for now the sale of the project's RECs to San Diego Gas & Electric, is structured as a one-way sale of the RECs and back-to-back sale and purchase contracts for power.
Selecting Morgan Stanley for the hedge gave the provider a huge advantage in submitting debt and tax equity proposals, though it has been better known for its geothermal tax equity activities than as a player in wind, where yields have been declining steadily. According to Cahuas, however, its tax equity adviser Capstar was able to benchmark the Morgan Stanley bid against the established tax equity providers.

The financing consists of a $135 million construction loan from Morgan Stanley and Banco Espirito Santo, with Dexia Sabadell as participant, which will be paid down upon completion and before the end of the year. Paying down the debt, as well as a portion of sponsor equity, will be a tax equity commitment of $160 million, again from Morgan Stanley. And behind this tax equity stands a $28 million backlevered holding company loan, again from Sabadell. Cahuas declined to put a figure on debt pricing or equity yield, but notes that the backlevered loan is priced lower than the New York bank market, and that the tax equity yields less than transactions that are pricing in the current market.

The use of Dexia's Spanish subsidiary to finance a US wind farm, rather than its active New York wind group, will raise eyebrows. Sabadell, along with BES, was among the relationship banks that helped finance NaturEner's 300MW Spanish portfolio, which was subsequently sold to Iberdrola. NaturEner, like its counterparts in the Spanish PPP sector, has learned to put pricing pressure on European relationship bankers to bypass the demands of the New York power finance market.

Now NaturEner, which expanded outside Spain after finding its home market inhospitable to mid-size operators, is waiting for the PTC extension to happen and for regulators to clear the Alberta intertie. It has a 103.5MW expansion at Glacier that will not be financed till the PTC is extended, but it is hoping to bring a 90MW Alberta project to market shortly. That deal with have to cope with a deregulated power market where hedging products are even less established than Montana.

Glacier I wind project
Status: Closed 22 August
Size: $245 million
Location: Ethridge, Montana
Description: 106MW wind farm
Sponsor: NaturEner
Debt: $132 million construction loan, $28 million backlevered loan
Lead arrangers: Morgan Stanley, BES
Participant and backlevered provider: Dexia Sabadell
Tax equity: $160 million
Tax equity provider: Morgan Stanley
Tax equity adviser: Capstar
Offtaker and hedge provider: Morgan Stanley Capital Group
Independent engineer: RW Beck
Wind consultant: Garrad Hassan
Clean energy adviser: Evolution Markets
Insurance adviser: Moore-McNeil
Debt, tax equity and hedge legal counsel: Dewey LeBoeuf
Sponsor legal counsel: Chadbourne & Parke