Caithness Energy and GE Energy Financial Services’ Shepherds Flat wind project is – at 845MW of installed capacity in one phase – the largest wind plant ever developed in the US, and with more than $1.4 billion in debt it is one of the biggest project financings ever in US wind. But the project did not reach financial close on 16 December easily, and the sponsors had both to structure a deal round the US Department of Energy’s (DoE) guarantee requirements and convince US public opinion that their deal needed government support.

The $1.4 billion financing was split bet­ween a $675 million floating rate construc­tion and term loan with a tenor of 12 years plus construction, a $525 million fixed-rate private placement with a tenor of 19.5 years plus construction and $231.2 million in letter of credit facilities. The DoE provided a partial loan guarantee for 80% of the debt under its financial institutions partnerships programme (FIPP), equal to $540 million of the loans and $420 million of the private placement. The debt priced at 175bp over Libor for the guaranteed portion and starts at 300bp for the un­guaranteed funds. Fitch privately rated both tranches BBB-.

The sponsors provided $702.2 million in equity, of which $494.1 million will be repaid with a cash grant from the US Treasury, and $208.1 million in permanent equity. The financing also incorporates a partnership flip structure, under which GE EFS holds the majority of class A equity and provides the class B tax equity that allows it to monetise the project’s incentives (especially accelerated de­preciation benefits) for a certain number of years. The GE/Caithness split of cashflows will reverse after a certain period.

Bank of Tokyo Mitsubishi-UFJ (BTMU), Citi, Royal Bank of Scotland (RBS) and WestLB were joint lead arrangers on the financing. BTMU was coordinating, co-documentation and guaranteed letter of credit (LC) administrative agent; Citi was co-syndication agent and lender-applicant for the DoE guarantee programme; RBS was co-documentation agent; and WestLB was co-syndication agent. Banco Sabadell, Banco Santander, BayernLB, BBVA, CoBank, Dexia, Helaba, Intesa, Scotiabank and UOB were participants in the loan. The private placement was sold down to 12 institutions.

“[We] felt no one market could take down a project loan or bond [for the entire project] without adverse pricing,” says John McNamara, chief financial officer of Caithness Energy, on why the sponsors decided to split the financing. The developer estimated that the private place­ment market only had enough depth for a bond of around $400 million. But McNamara adds that both tranches were more than two times oversubscribed.

Lenders say the deal was structured to allow the sponsors to optimise the amortisation period, with the bank maturing first, followed by the bond. In order to abide by DoE rules, the leads set up a trust structure in order to allow the guaranteed and un­guaranteed portions of the debt to be strip­ped from each other and sold separate­ly in the secondary market. They were subsequently stapled and sold to investors pro rata in the primary market. This structure was likely chosen because it allowed the guaranteed funds to be sold to private investors, which have strong appetite for structured triple-A paper, and the unguaranteed pieces to be retained by banks, which are paid to take the additional risk.

Shepherds Flat involves the installation of 338 2.5MW GE turbines, their first use in the US. The plant will straddle the state’s Gilliam and Morrow counties, roughly 240km east of Portland. Once the plant is in operation in August 2012, Southern California Edison will buy all the output under a 20-year power purchase agreement (PPA). The developers have a fixed-price turnkey build and operate contract with Blattner Energy for the plant. Construction began in April 2010.

Caithness first floated plans for a 105MW plant at the site in 2002. After further study, the sponsor applied for a maximum 909MW capacity facility to the Oregon Energy Facility Siting Council in June 2006, which approved the plant in July 2008.

The developer signed its PPA in August 2008 and the entered discussions with GE EFS the same year. The offtake agreement was approved by the California Public Utilities Commission in September 2009.

Caithness, with input from GE, submitted a part one application for a DoE section 1705 FIPP loan guarantee in November 2009. The federal government approved the guarantee on 1 November 2010. However, a leaked White House memo contemplating winding down the DoE programme used Shepherds Flat as an example of a project that could have been financed “without the loan guarantee” and raised questions regarding the benefit to the marketplace. This prompted GE to respond that the guarantee programme was “critical” in helping the sponsors secure multi-year financing for the project in an “uncertain renewable energy and financing market”.

Faced with the challenge of financing the country’s largest wind project, the developers made the decision to seek all the support they could get. The move, in retrospect, may not have been needed, but was a hedge against potential future market upsets. A source close to the deal says that while the FIPP stripping is a model for future deals, FIPP may not have long to run.

BTMU, Citi, RBS and WestLB held a bank meeting for potential participants on 10 November. According to a source close to the transaction, 15 lenders attended and were asked to take tickets of between $25 million to $40 million each. Questions over the project risks were assuaged by the guarantee and, in the case of the 2.5MW GE turbines, the fact that the manufacturer was willing to risk its own equity in the project, and was providing an operations and maintenance guarantee, if not a full warranty. December saw confirmations from 10 of the 15 tickets during its first week, allowing the financing to close on 16 December. 

Caithness Shepherds Flat
Status: Closed 16 December 2010
Size: $2.13 billion
Location: Oregon
Description: An 845MW wind plant
Sponsors: Caithness Energy and GE Energy Financial Services
Equity: $702.2 million
Debt: $1.4 billion
Bond placement agent: Citi
Arrangers: Bank of Tokyo Mitsubishi-UFJ, Citi, RBS and WestLB
FIPP debt guarantor: US Department of Energy (DoE)
Trustee: Deutsche Bank
Legal counsel: Milbank (lenders), Chadbourne & Parke (sponsors) and Clifford Chance (DoE)
Independent engineer: Garrad Hassan
Insurance consultant: Moore-McNeil
Transmission consultants: Navigant and Pascoe
Sponsors’ engineer: Sigma Energy
Contractor: Blattner Energy
Turbine supplier: GE