Background and rationale

In the late 1990s the American government joined the rest of the world by throwing its weight behind the quest to develop environmentally-friendly energy from renewable sources, encouraging utility companies to seek alternative sources of electricity production with the production tax credits (PTC).

This move saw the US invoke the carrot, rather than the stick, approach to driving the energy sector towards clean energy production, with the creation of PTC which paid generators US$0.018 per kilowatt hour of power generated from renewable sources.

However, the US Congress last year failed to extend the PTC facility, which instantly threw the renewables sector into doldrums and put on hold a raft of renewable energy sources. This could be on the verge of being turned around with news that the government is considering reintroducing the tax breaks.

The Vansycle Ridge on the Oregon and Washington state border – with average wind speeds of 16mph – was identified by FPL Energy, a subsidiary of FPL Group, as the ideal location for a 300MW Stateline Wind Generation Project, the world’s largest single wind energy development.

FPL Energy won the contract to build, own and operate the now complete windfarm through its subsidiary FPL Energy Vansycle. The energy generated is sold to PacifiCorp Power Marketing (PPM), a subsidiary of PacifiCorp – the leading supplier of renewable electricity in the Pacific north west.

The Project

The windfarm has 454 660KW Vesta V-47 turbines, each of which stand 74 metres tall, and together they have a combined capacity of 300MW – enough to power around 70,000 homes.

Stateline is situated either side of the north east Oregon and south west Washington borders and is adjacent to existing PPM and Bonneville Power Administration (BPA) transmission lines through which power is delivered to the west coast power grid.

The project was completed in two stages, an initial 263MW was brought online in July 2001 and the remaining 37MW came online towards the end of 2002.

As reported in IJ News (22 April 2004) the project closed its US$126 million refinancing at the end of March.

Financing

For the refinancing of the project, Australia New Zealand Banking Group (ANZ) and Bayerische Landesbank (BayerLB) were the mandated lead arrangers.

The co-arrangers were BBVA, AIB, Bank of Scotland, Hypo Vereinsbank, CoBank, ACB, HSH NordBank, KBC, KFW, Lloyds TSB, NordLB and WestLB.

The debt:equity ratio is 50:50. The debt tenor is 14 years and is priced at 175bps for the first four years, 187.5bps for years five to eight, 200bps for years nine to 12 and 212.5bps for the remainder of the contract.

Legal advisers

White & Case advised co-lead arrangers ANZ and BayerLB. Steel Hector & Davis acted for FPL Energy.

Risks

The profitability of windfarms relies on the PTC system being readopted by the US government. The so-called Corporate Tax Bill recently cleared a hurdle towards becoming law once again with its successful passage through the US Senate (IJ News, 17 May 2004).

In effect, this would mean that the government is once again throwing its weight behind the renewables sector. Reintroduction of PTCs is essential for the wind power industry and – if the bill goes through as drafted – it will mean the system will run until the end of 2006.

In addition to these legislative variables, the legal teams had to structure contracts that covered their clients from other potential pitfalls. Among the risks facing investors were fluctuating regulatory controls, complicated environmental issues, tenant farmers and the nature of the project itself – the generation of power through an erratic renewable source.

PPM required legally-backed assurance that FPL – regardless of any new legislation and its effect on profits – could physically satisfy its customer’s requirements.

Regulatory issues

PTCs were pivotal to FPL’s decision to develop the Stateline project in the first place. The US government’s decision not to renew the credits at the end of 2003 came as a huge blow to the renewable energy sector.

FPL spokesman Steve Stengal told IJ News: ‘What we have seen in the last three years is an overbuild of power utilities in the US. The credits nave now lapsed and we have no plans to build any new wind projects. We are however optimistic that the credits will be renewed.’

Environmental issues

Wind projects, by their very nature, are sited in open areas – an issue that stirs up resentment within the increasingly-vocal environmental lobby. Before planning permission was secured, the Stateline project underwent a rigorous review process and full Environmental Impact Study. Additional spring and autumn night bird migration studies were conducted to determine location of some turbines.

The Vanscycle ridge is populated by ground squirrels – a protected species in Oregon – and before any construction could start, FPL had to prove that the squirrels’ nesting areas would still be protected.

Conclusion

With the European Commission considering lowering renewable energy targets (IJ News 12 May 2004) and the US refusing to make long term commitments to PTCs, the future of projects powered by renewable energy sources is perhaps not as rosy as many analysts foretold.

In addition, although windfarms provide an environmentally friendly form of power generation, campaigners are becoming increasingly concerned with the impact such developments have on the landscape.

But, as Steve Stengal says, projects such as Stateline require investors be patient and possess confidence in the long term benefits: ‘It is fair to say that overall we are happy with the project, but, we view all our projects over the long term. We are looking at 15 to 25 years in what is a volatile sector.’