The financial close of the 270MW, £1 billion (US$1.56 billion) Lincs offshore wind farm off the UK coast marked the completion of a number of firsts for the UK offshore wind industry: the project represented the first limited recourse construction financing for offshore wind in the UK, and the first deal to address the disposal of an offshore transmission asset. It was also the first instance of lenders taking on construction risk for a UK offshore project.

Background to the project

Lincs was one of nine offshore wind energy projects planned for the Greater Wash area off the UK coast, under Round 2 of the UK government’s development plans for offshore wind. Developer Centrica acquired the rights to the project in 2004 from Renewable Energy Systems, but it would be three years until an application for planning consent for the Lincs offshore wind farm was submitted to government in January 2007. At the time, Norfolk County Council's Planning and Highway Delegations Committee submitted a report recommending opposition to the scheme, on the ground of uncertain adverse effects, and concerns were expressed about the ecological impacts of the project by various environmental groups. But the project faced no major obstacles, and the UK’s Department for Energy and Climate Change (DECC) announced planning consent in October 2008, 19 months after the original submission.

Denmark’s DONG and Siemens entered the project in late 2009, when it was in the final design and procurement phase. The two companies became co-developers and acquired 25 per cent of the project each, committing £166 million (US$259.4 million) and £75 million (US$117.2 million) in equity respectively.  Construction began on the wind farm in 2010 and it is expected to be at least partly operational by the end of 2012.

Financing the project

At the start of the financing process in 2010, the sponsors set out to borrow the project cost of £1 billion from the banks. Debt financing was initially expected to comprise a (sterling-denominated) US$868.2 million term loan, a US$395 million OTFO loan, a US$39.4 million standby facility, a US$197 million letter of credit facility, US$31.5 million working capital facility and a US$47.3 million VAT facility. This original – and some might say, overly ambitious – financing plan was downsized by September 2011, with the three sponsors  eventually taking on more equity, up to around 40 per cent of the construction cost. Several proposed financial packages were launched during the two –year financing period, and in the spring of 2012, it was starting to look like the project was unlikely to achieve a successful close anytime soon. In February, a source told IJ Online that the deal was close to closing, “but banks are struggling to get their commitments reapproved.”

But financial close for the project was eventually reached in June of 2012. The debt - £425 million (US$ 664.2 million) - was not the billion-pound figure the sponsors had orignially hoped for, but the project could claim the distinction of being the first UK offshore project to be fully financed during its construction phase.  The final consortium of banks consisted of:

• Abbey National Treasury Services (trading as Santander Global Banking and Markets)
• BNP Paribas
• Nordea Bank
• Skandinaviska Enskilda Banken
• Unicredit Bank
• DNB Bank
• HSBC Bank
• KfW IPEX-Bank
• Lloyds TSB
• BTMU

The agreed tenor of the debt is 15 years plus construction, with debt priced upwards of 300bp. A source at the time told IJ Online that the ticket size was “anticipated to vary between £50 million (US$78.5 million) and £75 million (US$117.2 million) but had been scaled back from that” following oversubscription.

The lender’s willingness to lend capital to the scheme and take on construction risk is a first for offshore wind, and could be taken as a sign of the industry’s maturing reputation and risk profile.

Acting deputy chief executive of DONG Morten Hultberg Buchgreitz said at the close of the deal: "We're very pleased with the interest and effort the banking group have shown and put into establishing the Lincs project financing. That the project is still in its construction phase and that a multi-contracting strategy has been chosen adds to the complexity of project financing and makes this milestone quite an accomplishment.”

Buchgreitz added, “We see a well-functioning and deep project financing market for offshore wind projects as one of the important funding sources for the development of the sector and the strive to achieve the targets for implemented capacity set by the EU-countries.”

Transmission Capital Partners (TCP) won the contract to own and operate the high voltage transmission cable to the wind farm. The offshore wind asset is worth around £282 million (US$456.1m).

Project legacy

As construction and financing for Round 2 wind rumbles on, the successful financing of the Lincs wind project will surely be a shot in the arm for the wind industry and its stakeholders. As Round 3 approaches, the structure and outcomes of the Lincs project will be likely to influence future project finance deals in the sector. However, the long road to achieving financing and the large amount of deleveraging the sponsors took on as a result means that lenders may look to strike similarly equity-heavy deals. As the next round promises only bigger and costlier projects, it looks like Lincs won’t hold the largest offshore wind transaction title for long.

Project at a glance

Project Name: Lincs Offshore Wind Farm

Location: Located in the Greater Wash strategic area for offshore wind energy development about 8 km off Skegness in Lincolnshire and about 15 km off Hunstanton in Norfolk, on the east coast of England.

Description: 270MW offshore wind farm, a part of the UK government’s Round 2 portfolio of offshore wind projects

Sponsor: Centrica (50 per cent), Siemens (25 per cent), and Dong Energy (25 per cent)

Banks:  Abbey National Treasury Services (trading as Santander Global Banking and Markets), BNP Paribas, Nordea Bank, Skandinaviska Enskilda Banken, Unicredit Bank, DNB Bank, HSBC Bank, KfW IPEX-Bank, Lloyds TSB, BTMU

Total project value: £1 billion (US$1.56 billion)

Total equity: £574 million (US$897.2 million)

Total debt: £425 million (US$664.2 million)

Debt:equity ratio: 43:57

Financial adviser to sponsor: BTMU

Legal adviser to sponsor: Slaughter & May (Centrica); Watson Farley & Williams (DONG)

Date of financial close: 6th June 2012