Q7: First offshore

The Eu383 million 120MW Q7 wind project is the first offshore farm to be fully project financed and includes a number of novel mitigants to offset offshore wind development risk – notably a contingent facility (with contingent equity provided by joint sponsor ENECO) to cover potential cost overruns or delays, cash sweeps and tailored availability guarantees under the operating contract with turbine supplier Vestas that allow debt service to continue even during periods of lower availability than expected.

The permit for development of the site was originally owned by Econnection which held it for two years before selling to the Q7 consortium – comprising ENECO, Econcern and Energy Investment Holdings – in late 2004.

Dexia, Rabobank and BNP Paribas were mandated for financing in early 2005. But the project ground to a halt in mid-2005 when the market for wind turbines overheated and Vestas had trouble fulfilling its orders in the US where the market went from near-nothing to 3000MW in the space of a year. Q7 was put on hold and renegotiated at the start of 2006.

The project will be built by Vestas Wind Systems and Van Oord Dredging & Marine Contractors under separate construction contracts, and will initially be operated by Vestas Offshore, an affiliate of Vestas, under a five-year warranty, operations and maintenance contract. Construction started last summer and is expected to be completed by 1 March 2008.

Q7 will use 60 2MW Vestas V-80 turbines and produce approximately 400 GWh per year. The land-based version of the V-80 is a tried and tested workhorse but the offshore V-80 model has suffered problems. The 160MW Horns Rev offshore wind farm in Denmark uses the V-80 and had every turbine dismantled, with some components shipped back to land for repair, after it opened in 2002.

Consequently the banks on Q7 were very cautious. A six-month technical due diligence was carried out using Horns Rev as a case study. The reliability of the turbines is key to the availability risk on the project which needs to be minimal during the first 10 years of production because of the various cashflow benefits that Q7 has in place: Q7 has a power purchase agreement (PPA) for 11 years with ENECO Trading which is fixed price for five years and then variable but with a price floor for the next six. Furthermore, the project benefits from a Dutch MEP (renewable energy) subsidy for 10 years, which adds on a guaranteed Eu97 for every MW per hour produced based on real production.

To mitigate availability risk the deal has comprehensive built-in availability guarantees from Vestas (i.e. includes major and unscheduled maintenance). The system guarantees a bonus for Vestas if availability is higher than the target percentage but also triggers penalties for availabilities under a threshold that is lower than the guaranteed level – those penalties are high enough to compensate fully for lost revenue.

Nevertheless, the lenders are clearly as confident as Vestas about the technology and, on the basis of the report provided by their technical advisors, have agreed to a higher level of availability in the financial model than that guaranteed by Vestas, thus allowing for higher debt levels.

The financing comprises an 11-year Eu188million ($249.8 million) senior facility provided 50/50 by Dexia and Rabobank, with Danish ECA Eksport Credit Fonden (EKF) guaranteeing Eu47 million. The third mandated lead arranger, BNP Paribas, missed the original signing date and will sign when the deal syndicates on December 31. Consequently, BNP will have a smaller take than Dexia and Rabobank of only Eu25 million. Bank of Tokyo-Mitsubishi and NIBC also came in as lead arrangers and will take Eu20 million each. Further debt may yet be syndicated.

Debt-to-equity on the project was 53:47 and could not have been much higher given the tenor – if it had been the project may have found the debt service payments too much of a burden.

During construction the margin ranges from 125 to 185bp over Euribor depending on whether the project is operational by March 2008. The base case during construction is 155bp. After construction, margins on projected average scenarios are 165bp during the first 4.5 years and 185bp for the final 5. The DSCR is projected to be 1.35x at P90 wind levels (which means that in 90% of years the wind should be at least at that level).

The financing also features a Eu30 million contingent facility, only available during construction, with Eu20 million of the risk taken by EKF and a margin range of 150bp to 245bp. There are also two L/Cs for Vestas (Eu90 million) and Van Oord (Eu70 million) provided 50/50 by Dexia and Rabobank.

A fully non-recourse financed offshore wind farm has been a long time coming and Q7 appears to be the financial engineering template for getting the market funded until lenders become more comfortable with the relatively new offshore technology risk.

The PPA and subsidy were crucial to getting Q7 off the ground. And the 10-year time frame of those guarantees govern the tenor of the senior loan which at 11 years is fairly short given the concession is 25 years: The Dutch government has changed the subsidy level for future wind projects and so it was important for the banks to get their money back within the 10-year price frame.

Q7
Status: Financial close 25 October 2006
Location: 23km offshore from IJmuiden, Netherlands
Description: 120MW offshore wind farm
Sponsor: Q7 (ENECO, Econcern and Energy Investment Holdings)
Contractors: Vestas and Van Oord
Debt: Eu188 million senior facility: Eu30 million contingent facility available during construction only; Eu160 million L/Cs
Mandated lead arrangers: Dexia, Rabobank, BNP Paribas
Lead arrangers: Bank of Tokyo-Mitsubishi and NIBC
Export Credit Agency: EKF
Legal counsel to lenders: Allen & Overy; Loyens & Loeff (tax)
Technical advisers to lenders: Mott MacDonald (Engineer); Sgurr Energy (wind); James Ingram Associates (Offshore Engineer)
Model audit: Operis
Insurance advisory to lenders: Miller Insurances
Legal advisers to sponsors: Stibbe N.V.; CMS Derks Star Busmann (tax)
Technical adviser to sponsor: Advistaal
Insurance advisory to sponsors: Profin financiële & assurantie adviseurs BV; Marsh
Project insurance: Delta-Lloyd N.V.