The close of SIIF Portugal’s massive wind farm portfolio marks not only the wind power bonanza in the Iberian country, but also the willingness of lenders to commit funds up-front in such an attractive regulatory framework – writes Marc Roca.

The €243m (US$299m) financing, reached in 18 May 2005, is seen by the industry as the largest-ever wind farm deal in Portugal, involving as it does a total of nine winds farms with a total capacity of 197.8MW. It stands out from other projects as it is innovative in that it involves a commitment to finance a majority of projects that have yet to be constructed.

SIIF Energies, a subsidiary of Electricite de France (EdF), has proved its interest in Portugal’s fast growing wind sector – which jumped from 311MW to 585MW in 2004 – through its effort to secure funding for a total of seven future wind projects, as well as refinancing for two existing facilities.

The company went into Portugal back in 1998, and by 2002 it had the two largest wind farms in the country, with a combined capacity of 38MW. It has now managed to refinance them and include them in this deal – its largest wind investment in Europe – that will provide funds for its expansion in one the fastest-growing wind markets in the world.

Selma Peres, financial controller for SIIF Portugal, says; ‘The portfolio represents EdF’s largest wind investment in Europe and it is also the first deal in Portugal to include future wind farm projects.’

Duarte Brito de Goes, of law firm Uría & Menéndez, comments: ‘This deal represents a landmark in project financing of wind farms in Portugal as it is by far the largest wind farm portfolio to have been directly financed.

‘A larger deal followed after a few weeks, but this was more of an umbrella agreement, where you have several projects under the same agreed terms and conditions. In contract, in the SIIF deal we have already financed 200MW.’

The choice of Portugal is not random, as the country has one of Europe’s most attractive regulatory frameworks. Dexia’s senior manager for energy, Romain Talagrand, explains: ‘Portugal has a very good regulatory framework for wind. It is one of the most robust, with a good feed-in tariff which is guaranteed for a full 15 years.’

Such a feed-in tariff is not only better than its neighbour, the wind powerhouse Spain – where the tariff varies year-on-year – but is much more attractive to funders and promoters than countries like the UK, where a power purchase agreement (PPA) is needed and there is price risk.

Talagrand says: ‘It is also better to finance a large number of wind farms – nine in this case – because they cross-guarantee each other, limiting risk. Banks bear construction risk in this project because some of the wind farms are not completed, but construction risk is well mitigated, probably better than in other projects. This is because you already have two that are in operation – without risk – and because construction is in different stages: three now and the remaining four next year.

‘For instance, if in the later ones you have a problem, you’ll already have a few operating projects generating cash flow to finance any extra costs.’

 

The Project

SIIF’s wind farm portfolio comprises nine wind farms located south east of Porto in northern Portugal and has an anticipated total aggregate capacity of 197.8MW. It is being developed through four separate project companies, subsidiaries of SIIF, and in some wind farms there are minority shareholders.

Two of the wind farms – Cabril and Pinheiro – have been in operation for more than two years and have now been refinanced. They include 21 turbines that each pump out 1.8MW and generate a total of 38MW from nearby sites in the Sierra de Montemuros, 150km south east of Porto. A further 4MW will be added through this deal.

A further three wind farm projects totalling 54MW are currently under construction, in Candal, Coelheira and San Pedro. They will be connected to the grid through the same line as the existing two and will be operational by the year-end.

The remaining four wind projects are known as Arada, the name of the project company that is to develop them in nearby sites from next year. They are expected to generate 106MW.

The deal is tranched so some of the farms have already secured licenses and some have licenses pending. The projects are developed upon satisfaction of a set of pre-defined criteria triggering the release of the funds committed up-front. Three out of the seven have already satisfied these criteria and are being constructed.

The four Arada wind farms will start construction once the committed funds are allocated, which is expected in summer 2006.

The four SPVs are:

• Eolica do Centro
• Eolica do Montemoro
• Eolica de Cabreira
• Eolica do Arada

The wind farm projects are being built under EPC contracts, which is not always the case in the wind sector. The contractor is ENERCON which built the two existing wind farms and supplied the 1.8MW turbines. It is working on a further three facilities that will be based on 2MW turbines. The future four Arada projects have yet to be awarded.

 

Financing

Financing efforts started in September 2004 and the deal was underwritten in mid-May 2005 by mandated lead arrangers (MLA) Dexia Credit Local, Millennium BCP, Banco BPI and Caja Madrid.

The wind farm portfolio financing includes:

€220m (US$278m) 15.5-year term loan facility €14m (US$17.5m) facility to pre-finance and guarantee subsidies granted by IAPMEI, a Portuguese public authority €9m (US$11.5m) VAT facility

The debt represents an 85 per cent of the expected project value. The equity stake is 10 per cent (90:10 ratio) during the current construction of three wind farms, and will go up to a 15 per cent once a definitive financial close is reached for the four Arada wind farms next year.

Pricing on the term loan is 110-130bp over EURIBOR, depending on the period and the level of the ratios. During construction it is set at 110bp and it goes up over time, as well as if ratios are lower than expected.

The grid payment mechanism does not allow pricing to fall under 100bp, as in recent wind deals across the border in Spain, despite the cashflow certainties created by the introduction of a similar 15-year fixed tariff regime in Portugal in January 2005.

The structure is designed to allow the refinancing of the existing two wind farms while securing financing for the next seven farms to be developed upon satisfaction of a set of pre-defined criteria triggering the release of the funds committed up-front. A cross-guarantee is provided between all four project companies.

Selma Peres says: ‘The gross of the financing, which is Arada’s 106MW, has not reached financial close. Money has been committed, but will not be available until the closing around 30 June 2006. Once the licences are obtained, though, financial close will be very easy to close.’

Dexia’s Romain Talagrand says: ‘SIIF decided to finance everything together for two main reasons. Together, all project companies cross-guarantee each other, so for the lenders that improves the risk profile. If a project doesn’t work, then the debt for that project is repaid by the others, which in turn improves the terms for the sponsor.’

He adds: ‘Also from an administrative point of view it’s easier to have one transaction, one group of banks, etc. – everything with the same terms. This improves the terms and condition.’

The two refinanced wind farms, by being included in the large portfolio, also could benefit from the conditions.

Duarte Brito de Goes says: ‘Documents were very detailed and risks very well allocated; not much risk because of a background guarantee from EdF [through the project companies].

‘The cross-guarantee involves a cash pool which secures the remaining funds after debt service, so all the cash flow that remains from a project you put in the same place, and if there’s a problem in any other wind farms, you use some money.

‘It’s a cross-collateralisation between the project companies and such bank account agreements were difficult to establish.’ he adds.

A very limited syndication is going on at the moment with few banks invited. There are plans for a larger syndication, when the Arada projects reach construction stage.

In practice it is not being syndicated right now.

 

Hurdles

The project, however, was not without its complications. Financing and legal issues had to be overcome to push through this innovative project.

Talagrand says: ‘The structure of the financing is quite complex, because of two things: the cross-guarantees, which are complex to put in place, and also because some of the financing is for future projects. So when the future projects are ready, if they satisfy all the criteria they will be able to draw on the debt. If not, they won’t.

‘Defining the criteria and the process to agree between the banks and the borrowers whether the criteria are fulfilled or not, that was a bit complex and the most difficult point.’

Selma Peres agrees: ‘The biggest challenge was to include Arada, because we had to put in place the conditions for future wind farms and you never know if legislation will change or what will happen in 2006. We had to imagine all possible scenarios.’

The criteria that trigger, or not, the release of the committed funds include technology (certain turbine requirements) the terms of construction contract – must have minimum guarantees – due diligence criteria (need to have wind studies with minimum measurements, demonstration of all licences and legal criteria, among others).

On the legal side, Brito de Goes says: ‘The deal was a good result from the coordination of both the French and Portuguese jurisdictions, which is not always easy considering the complexity and innovation of the project.

‘It was a great effort for the banks and the legal teams that permitted the inclusion of the Arada wind farm in the project, future but included in the financing.’

 

Conclusion

The SIIF wind farms deal will not stand out in Portugal for long. Large deals are edging closer, as the Portuguese government not only has introduced the attractive 15-year feed-in tariff, but is about to launch an international tender for 1,700MW. Most large players in the industry are already showing interest and bids will be in by early 2006.

The government is not wasting time in the push for renewables, particularly wind, as it imports a massive 85 per cent of its energy requirements from abroad and is languishing in last place as Europe’s worst performer in its bid to hit 2012 Kyoto targets.

Some concerns remain due to saturation of the national grid and the long time needed to secure licenses and connection permits for wind farms, but both aspects are being tackled by a very supportive government.

Portugal was the second fastest-growing wind market in 2004 after New Zealand. Its installed wind capacity jumped a massive 88 per cent to 585MW by the year-end, and that was before the introduction of the 15-year guaranteed tariff.

In the second half of 2005, a large number of wind farms are expected to come online, so growth is continuing – if not accelerating.

With a neighbouring Spain having 9,000MW already installed, Portugal has a good role model. The boom is not expected, it is happening already.

 

Project at a glance

Project name	SIIF Energies wind portfolio - Financing of a portfolio of nine wind farms in northern Portugal: refinancing of two existing wind farms and committed funds for seven new projects
Location	Northern Portugal, south east of Porto
Description (Technical)	Refinancing of two existing wind farm projects and financing for seven new wind farms totalling 198.7MW: three under construction and four to be constructed in 2006 following the release of committed funds
Sponsor(s) Equity	SIIF Energies Portugal (subsidiary of EdF Energies Nouvelles)
Contractor	ENERCON (confirmed for five of the nine wind farms)
Total project value	€279.5m (US$341m)
Total equity	10 per cent rising to 15 per cent of debt (€36.5m / US$44.5m)
Equity Participants	SIIF Energies Portugal
Total senior debt	€243m (US$296m)
Senior debt pricing:	EURIBOR plus 110bp (rising to up to 130bp)
Participants	Dexia Credit Local, Millennium BCP, Banco BPI, Caja Madrid
Tenor	15.5 years
Debt:equity ratio	90:10 rising to 85:15 after all funds released
Legal advisor to sponsor	Antonio Castilho Labisa, Stephenson Harwood
Financial advisor(s) to sponsor(s)	F9 Consulting
Legal advisor to banks	Uria & Menendez, Allen & Overy
Date of Financial Close	13/05/2005