Nevada Geothermal has closed a $98.5 million loan for its Blue Mountain 1 geothermal plant with John Hancock. The US Department of Energy is guaranteeing 80% of the 20-year loan under the financial institutions partnership programme (FIPP), and the deal is the first FIPP loan to close. FIPP involves a private lender, rather than the project’s developer, applying to the department for a guarantee on behalf of a developer and sharing in due diligence with the department.

The FIPP debt, carrying an all-in interest rate of 4.14%, partially repays a $180 million loan from TCW, which carried an interest rate of 14%. The financing is comfortably inside the sponsor’s original 5% expectation, thanks to a recent plunge in yields on US treasury bonds, which are used as a benchmark for FIPP loans. The interest rate is equivalent to a spread of 77bp over where the yield on the 20-year Treasury stood on 7 September.

The department uses an internal algorithm to calculate its credit subsidy score on FIPP loans, based on likely recoveries and future project cash flows. The cost of this credit subsidy is covered by the appropriations for the loan guarantee programme, funded under the February 2009 American Recovery and Reinvestment Act. The FIPP loan falls under an October 2009 solicitation authorised under Section 1705 of Title XVII of the Energy Policy Act for renewable generators using commercial technology.

The TCW loan closed in September 2008, as the credit crisis reached its height, and was essentially the only source of debt capital that would allow the developer to meet its deadline to issue a notice to proceed on construction. TCW remains in the deal as a mezzanine lender, and part-equity owner, and its debt cannot be paid down to less than $70 million. This loan is at the level of NGP Blue Mountain Holdco LLC, a holding company, and ranks subordinate to the new debt, although until the FIPP loan closed it was effectively the project’s senior debt.

Nevada Geothermal received a US Treasury cash grant of $57.9 million on 12 November 2009, one of the first geothermal developers to benefit from the cash grant, and used the proceeds to pay down some of the loan. The department is wary of describing the deal as a refinancing, and Jonathan Silver, the executive director of the department’s loan guarantee programme office, notes that the financing pays down interim construction debt, and also pays for new drilling at the site.

Closing the first FIPP loan meant working through lender concerns about how the department would translate its exposure as effective majority lender into voting rights and control over collateral. These intercreditor issues essentially meant working out which issues required unanimous consent, and which required a majority vote, bearing in mind that the department would always hold a majority.

Geothermal projects have considerable advantages as FIPP beneficiaries. They are baseload producers, and long-term lenders such as John Hancock are familiar with the technology. The loan gained a rating of BB+ from Fitch, one notch above the department’s minimum BB rating. According to Nevada Geothermal, proceeds from the loan that are not dedicated towards paying down TCW will be dedicated to additional drilling at the Blue Mountain resource.

The Blue Mountain project, located near Faulkner, Nevada, currently has a capacity of between 36MW and 38MW (net), and sells power to NV Energy under a 20-year power purchase agreement. The sponsor believes that the plant’s capacity can be increased to 45MW (net) with additional drilling. Nevada Geothermal says it has identified three additional areas with potential resources of 50MW each nearby.

The sponsor’s financial advisers on the deal were RLR Consultants, headed up by Capstar founder Lee Rigley, and MC Capital Partners, founded by Markus Christen, formerly of Credit Suisse and MMC Energy, and also a director of Nevada Geothermal. The project’s resource consultant and independent engineer carried over from the first financing.

The financing paves the way for additional borrowers to close FIPP loans, and they will probably benefit from the process, especially since most of them will not need to be structured around an existing lender. The department is comfortable with FIPP applicants selling on participations to third parties, and stripping out guaranteed and non-guaranteed portions, so long as the applicant retains voting rights.

It may even be possible for participations in FIPP financings to be sold on in the bond market, and banks will be particularly eager to test this feature, though the department would have to consent to any change in the lender of record. FIPP loans usually involve an initial period when applicant lenders are asked to retain full economic interests in the deal.

John Hancock has applications in with the department for over $1 billion in FIPP loans, compared to a total power group portfolio of $16 billion. As a life company, it has strong appetite for structured AAA debt, for which some banks can struggle to get the desired lenient capital treatment. The uncovered portion of the loan, a little under $20 million, counts against the sub-investment grade part of its portfolio, for which it has finite appetite.

Ormat, the engineering, procurement and construction contractor on Blue Mountain, and John Hancock have applied for a $350 million FIPP guarantee to fund up to 120MW in new capacity in Nevada. US Geothermal is applying for a full loan guarantee from the department for its Neal Hot Springs plant, which would be funded by the Federal Financing Bank, based its use of newer supercritical binary cycle technology.

NGP Blue Mountain 1 LLC
Status: Mezzanine construction financing closed September 2008, long-term FIPP deal closed September 2010
Cost: $227 million
Location: Faulkner, Nevada
Description: 38MW (net) geothermal facility
Sponsor: Nevada Geothermal
Senior debt: $98.5 million financial institutions partnership programme loan
Senior debt provider: John Hancock Financial Services
Partial debt guarantor: US Department of Energy
Mezzanine debt: $70 million
Mezzanine lender: TCW
Cash grant: $57.9 million
Provider: US Treasury
Sponsor financial advisers: RLR Consultants and MC Capital Partners
Resource consultant: GeothermEx
Independent engineer: Luminate
Lender legal adviser: Day Pitney
Sponsor legal adviser: Miller Thompson