The Department of Energy’s financial institutions partnership programme (FIPP) had a short and controversial existence. It proved as controversial with the lending community as the wider loan guarantee programme became with the US public. FIPP was rolled out in October 2009, during a period when the department had struggled to demonstrate progress on its existing applications, and was designed to enlist commercial lenders’ due diligence skills and create a new origination pipeline.

FIPP turned out to be a useful way to broaden the investor base for US power finance debt, as banks worked out how to syndicate the 80% DoE-guaranteed and 20% uncovered portion of FIPP deals separately. The negotiations between banks that allowed for this separation of tranches – stripping in market terminology – consumed much of the life of the programme. With the expiration of the section 1705 authorisation that created FIPP it came to an end, but capital markets financings for renewables in the US and elsewhere may yet benefit from the example of this year’s solar award winner.

Desert Sunlight is a 550MW solar photovoltaic project that will be located in Riverside county, California, near the town of Desert Center and on the southern edge of Joshua Tree National Park. The developer of the project, its equipment supplier and engineering, procurement and construction contractor, is First Solar. The project is located on 4,165 acres of land owned by the US Bureau of Land Management, which started its environmental review in January 2010 and released its final environmental impact statement in April 2011. The BLM’s parent, the US Department of the Interior, approved the project in August 2011.

The project interconnects with the Southern California Edison system and sells power to SoCal Edison, under a 20-year power purchase agreement for 250MW of capacity, and Pacific Gas & Electric, under a 25-year contract for 300MW of capacity. The utilities will use the power to meet their aggressive 30% renewables production target. The project uses thin-film cadmium telluride PV modules, a comparatively new variation of solar photovoltaic technology that has experienced rapid adoption.

FIPPs usefulness lies in the way it allows lending institutions to gain exposure to newer technologies under the umbrella of a guarantee from the US government. FIPP falls under the 1705 authorisation, which passed in the American Recovery and Reinvestment Act in February 2009, and allows the department to cover a broad range of renewable technologies. Indeed FIPP has concentrated on technologies with which commercial lenders have some familiarity, even if it is limited.

In June 2011 the DoE awarded Desert Sunlight a $1.88 billion conditional commitment, along with commitments to two other First Solar-developed plants, Topaz and Antelope. Antelope was sold to Exelon and closed on its $646 million conditional commitment in September. Topaz was unsuccessful in closing on its $1.93 billion DoE commitment, and recently closed an uncovered, but Berkshire Hathaway-enhanced, bond issue.

As the project worked towards receiving its approvals, criticism of the DoE loan programmes intensified, in the wake of the bankruptcy of the DoE’s first borrower, Solyndra. Solyndra, a manufacturer rather than a generator, was not typical of the programmes’ applicants. But the stream of investigations distracted an office already reeling from the looming cut to its funding at the end of September. By the time the DoI approved the project, NextEra Energy Resources and GE Energy Financial Services were lined up to each buy effectively half of the project.

The financing draws heavily on the precedent of the 845MW Caithness Shepherds Flat wind financing, a $1.4 billion FIPP deal that closed in December 2010. Shepherds Flat involved hard-fought negotiations on the stripping of the covered and uncovered debt, and allowed the sponsors to get the best pricing on each portion. For the Caithness deal, Citi was the lender-applicant on the FIPP loan, while on Desert Sunlight Goldman Sachs was lender-applicant, joined by Citi as joint financial adviser and placement agent.

The debt is split between two separate borrowers, for the capacity covered by each power purchase agreement, so that the two PPAs do not cross-collateralise, though dividends from a holding company for both borrowers are subject to a consolidated distributions test. The split between bank and bond tranches is $744 million fixed-rate privately placed notes, with a maturity of 25 years (construction plus 21.5 years) and an average life of 17.7 years, and $993 million of bank debt and letters of credit. The fixed rate notes were split between a $595.2 covered and $148.8 million uncovered tranche. The covered tranches are rated AAA, while the uncovered tranches are rated BBB- (both Fitch).

The bank debt consists of a $292 million 4-year (construction plus six months) bridge to the investment tax credit cash grant, split between $233.6 million guaranteed and $58.4 million unguaranteed portions; $425 million in 15-year (construction plus 11.5 years, 10.5-year average life) bank term debt, split $340 million/$85 million covered/uncovered, and $276.2 million in unguaranteed letters of credit. The lead arrangers on the bank debt were Bank of Tokyo-Mitsubishi UFJ, Lloyds Bank, Bayerishe Landesbank, UniCredit, SMBC and Santander, while Intesa, DNB, Sabadell, Helaba, DZ, SG and Key Bank participated,

The sponsors realised attractive pricing on the deal, despite it including a delayed-draw component, with the blended spread on the fixed rate tranche of 165bp over the interpolated Treasury, so the first draw priced for a blended coupon of 4.27%. The structure of the deal, which featured pass-through trusts for each type of debt, allowed for wider distribution of the deal to asset- backed commercial paper conduits, which still demonstrate appetite for AAA debt. FIPP might be no more, but the experience of Desert Sunlight is already influencing capital markets deals in US solar. Topaz may have missed the 1705 deadline, but its uncovered deal could be marketed to a tested investor base.

Desert Sunlight 250, LLC and Desert Sunlight 300, LLC
STATUS: Closed 30 September 2011
SIZE: $2.3 billion
DESCRIPTION: Bond/bank DoE-enhanced financing for 550MW solar photovoltaic project in Riverside county, California
SPONSORS: NextEra Energy Resources and GE Energy Financial Services
PARTIAL GUARANTOR: United States Department of Energy
DEVELOPER: First Solar
OFFTAKERS: Southern California Edison; Pacific Gas & Electric
DEBT: $1.74 billion, of which $744 million is fixed rate term debt, $425 million is floating rate term debt is a $330 million cash grant bridge loan, and $280 million is letters of credit
FINANCIAL ADVISERS AND PLACEMENT AGENTS: Citi, Goldman Sachs
LEAD ARRANGERS: Bank of Tokyo-Mitsubishi UFJ; Lloyds Bank; Bayerishe Landesbank; UniCredit; Sumitomo Mitsui Banking Corp; Banco Santander
TRUSTEE AND AGENT: Deutsche Bank
SPONSOR LEGAL ADVISERS: Chadbourne & Parke (GE) and Hogan Lovells (NextEra)
LENDER LEGAL ADVISER: Latham & Watkins
DEVELOPER LEGAL ADVISER: Skadden Arps (transaction), Farella Braun + Martel (environmental, real estate and permitting)
TRUSTEE LEGAL ADVISER: Dewey & LeBoeuf
GUARANTOR LEGAL ADVISER: Clifford Chance
INSURANCE ADVISER: Moore-McNeil
LENDER INDEPENDENT ENGINEER: Black & Veatch
GUARANTOR INDEPENDENT ENGINEER: Luminate
GUARANTOR FINANCIAL ADVISER: Greengate