The US bank market has its first taste of a wind portfolio - the $123.5 million Three Winds financing. The deal has been pitched as a step forward in wind finance, and a chance for banks and sponsors to achieve the economies of scale of a big-ticket financing. The deal also invites initial comparisons to borrowing base finance - the flexibly-sized loans devised for the oil and gas production industry and recently adapted for use in the thermal power segment.

The reality is a little more prosaic, and suggests that in the face of thin dealflow US wind finance sponsors and arrangers are using every trick available to maintain bank interest. And the long list of banks invited into the deal suggests that lead arranger and bookrunner Fortis Capital has attempted to create as much of a buzz in the syndication market as possible. Now that President Bush has signed into law the corporate tax bill in which the production tax credit for renewable producers is currently lodged, such strategies will be less necessary.

The sponsors of the Three Winds project are Shell Renewables and Goldman Sachs, each with roughly 50% of the equity. Shell has essentially kept the wind project finance market alive in the United States over the last 12 months, with two financings - Colorado Green and Brazos Valley. Brazos Valley, a 160MW financing for a Texan farm, closed in June courtesy of Dexia and ANZ Investment Bank. Syndication of the $87.5 million debt, of which Mitsui was also a 50% sponsor, was well received.

Colorado Green, a 162MW farm in which PPM, part of Scottish & Southern, held a sizeable stake, closed in December 2003. That deal featured $125 million in debt from ANZ and Rabobank, and had a 15-year tenor, as compared to Colorado's ten years. Colorado sold its output to Xcel Energy subsidiary Public Service Company of Colorado, while Brazos sold its output to TXU.

The first plant included in the current portfolio is Rock River I, located in Wyoming, which in 2001 became Shell's first commercial scale wind farm and its first project in the US, after it bought out developer SeaWest. The 50MW project consists of 50 Mitsubishi MWT1000 turbines, and sells power to Pacificorp under a 20-year agreement.

The other two wind farms are both located in California - Whitewater Hill and Cabazon. Cabazon, a 41MW farm that Shell bought from Cannon Power in June 2002, was Shell's first investment in California. It uses Vestas 660kW turbines. Whitewater Hill is a 61.5MW plant, using 1.5MW GE turbines, that Shell also bought from Cannon, in July 2002. Both plants are located in the San Gorgonio Pass, near Palm Springs, one of the best wind resources in California.

The two plants in California sell their output to the California Department of Water Resources (CDWR). According to contracts lodged with the CDWR, Whitewater is selling all of its output for $51.50 per MWh until 31 December 2013, while Cabazon receives $54 per MWh over the same period. Both contracts were originally struck at $60 per MWh, but renegotiated down to the present levels in April 2002.

Goldman Sachs, the second sponsor, is making its first foray into the wind business with the acquisition. Goldman has created an impressive portfolio of thermal capacity with purchases from Allegheny Energy Supply, of Cogentrix, and of some of El Paso's plants. But this deal does not look like an attempt to aggressively expand Goldman's portfolio, or build a renewable trading business, if only because the farms do not produce any marketable surplus.

It is likely the timing of the purchase agreement with Goldman Sachs governed the timing of the debt issue. Shell usually prefers to bring in partners on its wind ventures, and a partner such as Goldman would be able to share in the benefits of the production tax credit.

Fortis Capital, probably the most long-established of the US wind houses, snagged the mandate, despite what several observers would call an outside chance - ANZ has frequently been the banker of choice for Shell. Fortis then brought in RBS as an arranger of the loan, underwriting $40 million.

Fortis has not been able to discuss the deal, citing the wishes of the sponsors that the transaction be kept private. But bankers active in the syndication market are puzzled about Fortis' decision both to hand such a sizeable chunk of the underwriting to RBS, and by its decision to approach such a large number of banks on the deal. The 15-year loan is understood to be priced at roughly 150bp over Libor.

The final allocations have not been completed yet, but are likely to be thin - WestLB, Natexis, HSH, HVB, Manulife, CIT and a further four banks are believed to have made commitments, of between $15 million and $25 million, although fees at both levels are understood to be the same.

Their totals could be smaller if the consultants' reports do not come in as planned because $6 million of the $123 million headline figure is dependent upon further studies of the wind resources at the project sites. Should these come through with news that the sites will likely support greater production, the projects' debt capacity will be adjusted accordingly upwards.

As such, the deal does resemble a borrowing base facility, where borrowers in the power sector can increase their debt capacity in response to better power prices or borrowers in the oil industry can increase their drawdowns in response to good news of reserves. But is also an indication that the timing of Goldman's investment intervened before the agents could get the best study possible.

Nevertheless, it is this type of financial engineering that will be more important as projects begin to compete more aggressively for available project debt. If a renewal of the production tax credit, from which the three projects benefit, leads to more development activity, the strong response to the Three Winds financing may not be repeatable.

Three Winds
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
Joint underwriter: RBS
Tenor: 15 years
Pricing: 150bp over Libor
Borrower legal: Holland & Hart
Lender legal: Milbank, Tweed Hadley & McCloy