The US wind market has come to be dominated by financial institutions, whether in providing tax equity, development equity, debt, or, increasingly, hedges against price risk. Horizon Wind's financing for its interests in the Blue Canyon II and Maple Ridge projects features Goldman Sachs in all four roles. It is the first widely-syndicated wind deal to feature a hedge against price risk from a financial institution, and the first to feature a element of merchant risk beyond this hedge.

Lenders, and the wider syndication market, will need to become more familiar with such credits. Developers in the US have been adding capacity at a breakneck pace, frequently in markets where utilities are unwilling to sign power price agreements or generators must sell their power on spot markets. Both experienced developers such as FPL and PPM, and newcomers to the US market such as Airtricity have been enthusiastic users of hedges.

Goldman Sachs commanded instant attention from the financial press when it announced an agreement to buy Zilkha Renewable Energy from Selim and Michael Zilkha. The deal was cited as a breakthrough example of a major financial player showing an interest in renewable power, but probably more significant was the financial discipline that Goldman brought to the sector.

The two most prominent projects, or those closest to fruition, at the time of the acquisition were Blue Canyon Phase II and Maple Ridge, then known as Flat Rock, a 50/50 joint venture with ScottishPower's PPM Energy. Maple Ridge, located in Lewis County, New York, has a capacity of 198MW, and uses 120 1.65MW Vestas V82 turbines, while Blue Canyon II, located in Oklahoma, uses 84 Vestas 1.8MW V80 turbines. Vestas is the operator of both projects, which have a total cost of $540 million.

The two have different offtakers. Blue Canyon II sells all of its output to Public service of Oklahoma under a 10-year power purchase agreement. Maple Ridge, however, is fully merchant, and dispatches power into the NY ISO market. Its P99 output (i.e. the output that can be forecast with 99% certainty) is hedged for eight years with Goldman Sachs' commodity trading arm, J. Aron. Beyond the tenth year of operation, both projects are fully merchant.

The portfolio, though, benefits from substantial additional revenues, since the PPA and hedge only account for 23% and 22% of revenues, respectively, in the first ten years of operation. Production tax credit payments alone account for 30% of revenues and are guaranteed by Goldman, while state tax benefits bring in 5% and the sale of Maple Ridge's renewable energy credits to NYSERDA brings in 11% of revenues.

Goldman Sachs (syndication agent) and Bayerische Landesbank (administrative and collateral agent), as joint lead arrangers, underwrote a 15-year debt facility for the project. The loan has an average life of six years and is priced at 137.5bp over Libor in years 1-4, 150bp in years 5-8, 175bp in years 9-10, 225bp in years 11-13, and 250bp in years 14-15.

The solid showing of the debt in the market is a sign that banks are happy to take on an element of merchant exposure in exchange for higher margins, since those on fully contracted deals have reached as low as 112.5bp, and European sponsors had threatened to drive them down further. Unlevered tax equity refinancings of construction debt also remain competitive with long-term debt deals.

Indeed, PPM Energy financed its $180 million share of the construction costs of the Maple Ridge project using unlevered tax equity. This separate financing arrangement further complicates the task for Horizon's debt arrangers, since the loan is secured at the BCII Maple Ridge Wind LLC holding company level, rather than on the assets.

Still, the $263 million loan sold briskly in the syndication market, especially since US banks have struggled to originate strong power assets, and have been forced to match European pricing levels on transport assets. The more conservative banks have balked at taking on merchant exposure, even so late into the loan's life, and have fretted that merchant exposure will become a more significant component of future deals.

In practice, lender exposure to merchant wind risk is not substantial. Under the base case, 70% of the loan will have amortised by the end of year seven, and 95% by the end of year 10. If at this stage the debt service coverage ratio is less than 1.2x, the debt service reserve account is increased from sufficient for six months' interest to sufficient for 12 months' service. Merchant risk, therefore, has not for now been married to refinancing risk.

The arrangers approached 13 banks, of which 12 responded and all 12 committed to the deal. Of these, Fortis and Mizuho gained documentation agent titles and Nord/LB was technical agent. The remaining nine were HVB, LBBW, HSH, Natexis, Dexia, John Hancock, Helaba, Lloyds TSB and Prudential. Syndication closed on 30 June.

The deal achieves a judicious mix between contracted, hedged, and merchant revenues, although this mix is largely the function of timing rather than choice. Still, most of the decisions on the project's financing route were taken before the Goldman acquisition was complete, and Horizon would be happy to repeat the structure, according to Jayshree Desai, vice-president, finance, at Horizon Wind Energy.

This was Horizon's first project financing, since Zilkha had previously been a turnkey developer rather than a long-term operator. But hedges are now in widespread use. FPL, the largest operator in the US, and the largest user of project debt, recently closed a portfolio financing featuring hedges from two financial counterparties.

BCII Maple Ridge Wind LLC
Status: Closed 25 April, syndicated 30 June 2006
Size: $540 million
Location: New York and Oklahoma
Description: Financing of holding company for 250MW net wind capacity
Sponsor: Horizon Wind Energy
Debt: $263 million
Lead arrangers: Goldman Sachs, Bayerische Landesbank
Arrangers: Fortis, Mizuho, Nord/LB
Lender's legal counsel: Milbank Tweed
Borrower's counsel: Baker Botts
Independent engineer: RW Beck
Wind consultant: Garrad Hassan
Market consultant: Global Energy Decisions