Although not the first wind financing to include an element of offshore risk, the 120MW Q7 wind project, signed in late October and currently in syndication, is the first offshore farm to be fully project financed.

The 2003 Beaufort deal, refinanced in January this year to include the 60MW North Hoyle offshore farm, was always intended to carry an element of offshore technological risk – but only post-construction. What sets Q7 apart is that it carries full construction risk.

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

In May 2005 Dexia, Rabobank and BNP Paribas were mandated for financing, but the project ground to a halt in mid-2005 when the market for wind turbines overheated. Turbine supplier 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, which had yet to sign anything, was put on hold and renegotiated at the start of 2006.

The deal features some significant technology risk and mitigants. Q7 will use 60 2MW Vestas V-80 turbines. 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 technical due diligence of six months was carried out using Horns Rev as a case study. Since then Vestas has modified the design of the offshore V-80 and the turbine has been used at Scroby Sands and North Hoyle where it has had less problems.

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 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 advisor, 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.

More offshore projects will follow. Dexia has already been mandated as sole lead arranger on C-Power – an offshore wind farm in Belgium that could be the next benchmark. Initially it will be a 30MW project and cost around Eu100 million. But if the scheme proves successful there are plans to expand it to 300MW, bringing the total project cost to over Eu500 million. C-Power is expected to reach financial close in the first half of 2007 and benefits from a generous government subsidy of Eu107 per MW hour for 20 years.

Q7
Status: Signed 25 October,2006; syndication close due December 31
Size: Eu383 million
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 adviser to lenders: Allen and Overy
Technical adviser to lenders: MottMacDonald (Engineer) Sgurr Energy (wind) James Ingram Associates (Offshore Engineer)
Legal adviser to sponsor: Stibbe N.V.
Technical adviser to sponsor: Advistaal
Project insurance: Delta-Lloyd N.V.