Three Winds: Necessary but novel

2004 was, by and large, a sleepy year in US wind finance. While FPL Energy produced a follow-up to its bond financing, the year was characterised by a stop-start regulatory environment, and sporadic small-scale bank financings. There were some small tax-driven deals, but these operated under the radar of the bank market.

By far the most active developer was Shell Renewables, which closed the $125 million Colroado Green financing, a joint venture with PPM, through ANZ and Rabobank, in 2003 and followed with the $87.5 million Brazos financing, a joint venture with Mitsui, in June 2004. But its most ambitious financing was the Three Winds portfolio deal.

Three Winds is billed as the first portfolio of wind farms to raise debt in the US bank market, an indication of the thin dealflow in the past few years. It is also the first to feature a standby facility that can be sized according to wind resource. It is also the deal that convinced Shell it would in future approach the market on much more aggressive terms.

The sponsor usually finances its wind farms as joint ventures, bringing in a 50% equity partner at financial close. This was the pattern established on the two earlier deals, and in this case the partner is Goldman Sachs. Goldman is largely a silent equity partner, and this is one of its first wind deals, but it is understood to be more interested in the section 45 production tax credits than control of the asset.

The Three Winds portfolio consists of Rock River I, Whitewater Hill and Cabazon, with a total capacity of 152.5MW. Rock River I, located in Wyoming, was Shell's first commercial scale wind farm and its first project in the US. It is a 50MW farm that uses 50 Mitsubishi MWT1000 turbines, and sells power to Pacificorp, part of Scottish Power, under a 20-year power purchase agreement.

Cabazon is a 41MW farm that uses Vestas 660kW turbines, while Whitewater Hill is a 61.5MW plant, that uses 1.5MW GE turbines. Both plants are located in the San Gorgonio Pass, near Palm Springs, both sell power to the California Department of Water Resources under long-term contracts, and both were originally developed by Cannon Power.

Shell's need to bring in joint venture partners within a specific timeframe was a key influence upon the way the financing structure emerged. The structure, in particular the contingent debt facility, were driven by the need to close a deal before a definitive wind resource study could be completed. Since the quality of the wind resource is the main determinant of the size of the financing that is possible, the sponsor was looking for a structure that accommodated the possibility that the resource might be more fruitful than the original studies indicated.

Shell settled upon Fortis Capital as lead arranger on the basis of its long history in wind finance. Fortis had had a quiet year since completing AEP's Trent Mesa financing, and Three Winds was a high profile, and substantial mandate. But the lead benefited from strong demand for wind assets.

The deal was also richly priced, at least in comparison to subsequent deals, as well as European norms – as Shell has frequently complained. In this instance, the pricing may have been a necessary consequence of needing to close the financing within a tight deadline.

Nevertheless, the $123.5 million total financing included an interesting tweak, in that part of the total is a $6 million contingent facility that can only be drawn if the sponsor is able to procure an independent engineer's report that justifies a higher debt total. The structure could be described optimistically as a borrowing base, since it does utilise resource-based debt.

But the structure is best understood as a nimble way of making a financing as palatable as possible to the wider bank market. It also explains why the three wind farms are bundled together – to create a financing of sufficient size to interest the wider bank market.

If anything, the deal was syndicated too widely, and the deal's response was far in excess of Fortis' expectations. Whether the syndication was a chance for the bank to make a splash or a reaction to the more sedate Trent syndication, the reaction was very strong.Virtually every bank invited into the deal partcipated. Some banks were left with much lower hold positions than they had anticipated.

But the deal has a very strong credit, starting with the two highly-rated sponsors (Shell's recent stumbles over reserve accounting have not made it an any less desirable client), and extending to the offtakers. Both the CDWR and Pacificorp are solidly investment grade, and are experienced wind power buyers.

The reception has convinced Shell that it can obtain better terms from the banks on its other US wind financings. Its latest deal, the Top Deer portfolio, has apparently raised seven-year debt at 112.5bp, comfortably less than the Three Winds portfolio. Other developers willl note how keen the banks are to do wind business, and will approach the market accordingly.

Three Wind Holdings
Status: Closed September 2004
Size: $123 million
Location: Wyoming and California
Description: 152MW portfolio wind farm financing
Sponsors: Goldman Sachs, Shell
Lead arranger: Fortis Capital
Tenor: 15 years
Borrower legal: Holland & Hart
Lender legal: Milbank, Tweed Hadley & McCloy
Independent engineer: Garrad Hassan
Consultant: Global Energy Concepts