RES Americas has closed the $342 million financing for its Hackberry wind project. The 21-year combination of fixed and floating rate date bonds completed syndication on 31 December. It is one of the longest-dated and least expensive financings for a renewable energy project, and certainly the longest for a single asset.

Hackberry is a 165.6MW wind project in Shackleford County, Texas, towards the north of the state, but just outside its Panhandle. It uses 72 Siemens Mk II 2.3MW wind turbines, and interconnects with Oncor Electric Delivery Company, part of the now privately-held TXU Corp.

RES Americas is the US subsidiary of Renewable Energy Systems, itself a subsidiary of UK construction firm Sir Robert McAlpine, and it carries out construction work both for itself, on turnkey projects, and for outside developers. It recently decided to begin developing more projects for its own account, and its first owned and operated project, Whirlwind, reached financial close early last year.

Hackberry is larger and more complex, and highlights RES' preferences in structural and contractual terms more completely. It benefits from a 15-year power purchase agreement with Austin Energy, a department of the city of Austin that serves the immediate area. Austin Energy was also the offtaker on Whirlwind.

With a contract the length of Hackberry's, RES can afford to go to banks for a financing with a longer term than the 10 years on offer in the unlevered tax equity market, and the 5-7 years that banks will finance on the back of that unlevered equity.

But leveraged wind financings are rarer than unlevered deals, and are typically the preserve of sponsors that have no need of outside tax equity, such as utilities and oil companies. Structural complications make it difficult to co-ordinate senior debt and tax equity, and the pay-as-you-go (PAYG) tax equity structure, which comprises an upfront lump sum contribution from outside equity and continued payments following completion, has attracted unfavourable attention from the US Internal Revenue Service.

In fact, Hackberry and the recent Noble NY wind financing were among the last deals to close before an IRS ruling limiting the proportion of post-completion contributions to 25% of total contributions. This, combined with higher tax equity yields, reduces the attractiveness of the structure to sponsors. As things stood, the number of potential PAYG equity providers was limited – GE Energy Financial Services provided the equity for both Hackberry and the Noble projects.

The debt financing is, at 21 years, comparable with project bonds from FPL, the only other wind operator to use long-tenor institutional financing. FPL got 19-year operating company tenors for its first two wind portfolio deals, and 24.5 years for its Bison private placement. But FPL does not have to use the tax structuring that RES did, and it primarily uses project bonds on operating assets rather than those in construction.

The financing consists of long-term debt of $167.8 million, a short-term construction loan of $134.5 million from CIC, Commerzbank, WestLB and Wells Fargo, and a working capital loan of $14 million. At completion the construction loan will be replaced with $135 million in tax equity, both upfront and deferred. The long-term debt consists of a 21-year fixed rate loan that priced at 250bp over 10-year treasuries, and was placed to Manulife and Siemens Financial Services, and a floating rate piece arranged by WestLB. The floating rate tranche was swapped back into fixed rate, and both tranches have an effective interest rate of 6.6%.

The spread is historically high by comparison with shorter-term bank loans, although lower interest rates have offset some of this spike. Nevertheless, the financing closed 65bp inside the recent holding company financing for ArcLight's Caithness geothermal acquisition. That deal exhibited stronger cashflows, a less complex structure, but was subordinate to some existing debt.

According to the administrative agent, the deal was placed successfully, and while infrastructure as an asset has so far held up well in difficult market conditions, placing such a tenor without difficulty is noteworthy. The five-year merchant tail on the transaction, while familiar to banks, is also significant, since when the Austin Energy PPA expires roughly 15% of the debt will still be outstanding.

Hackberry is a larger and more fully realised deal than Whirlwind, but may not be easily repeated. RES has a large number of projects, as much as 600MW, hitting the market in the second half of 2008. But the IRS ruling means that its chosen path – leveraged PAYG deals – is now shut. The sponsor may have to return to the well-populated unlevered tax equity plus backlevered bank debt market.

The developer is also considering alternative arrangements. It has hired Credit Suisse to find a minority equity partner that would bring in roughly $400 million. Such an infusion would be extremely helpful in funding an ambitious development programme, and if the provider has the tax capacity RES' tax equity problem becomes simpler still.

Hackberry Wind LLC
Status: Closed 31 December 2007
Size: $317 million
Location: Shackleford County, Texas
Description:
169.5MW contracted wind farm
Sponsor: RES Americas
Debt: $134.5 million construction loan, $167.8 million in term debt
Sole lead arranger and bookrunner: WestLB
Tax equity: GE Energy Financial Services
Sponsor legal counsel: Holland & Hart
Lender legal counsel: Milbank Tweed
Tax equity legal counsel: Bingham McCutchen
Market consultant: DAI
Independent engineer: RW Beck
Wind study: Garrad Hassan
Congestion study: Global Energy Decisions
Insurance adviser: Moore-McNeil