Bankers have started mapping out financing for Cape Wind, the first offshore wind farm in North America, and part of it could come in the form of a bond.
Bankers have started mapping out financing for
Cape
Wind
, the
first offshore wind farm in
North America
, and
part of it could come in the form of a bond.
Federal regulators in January issued the last in a series of permits for the $2
billion project, located six miles off
Hyannis
Port
,
Mass.
U.S.
Interior Secretary Ken Salazar last month approved the construction plan, a day
before the anniversary of the Deepwater Horizon disaster, the worst offshore
oil spill in
U.S.
history.
The company behind Cape Wind, Energy Management Inc., wants to finance 80% of
the 468-megawatt project with government loans under a Department of Energy
financing program for innovative technologies. Separately, it has applied for a
DOE grant to cover a credit charge reflecting the risk of the government not
being repaid on the loan.
The developer hopes at least 20%, or $400 million, will come from an equity
partner. Barclays Capital, the project's primary financial adviser, recently
began looking for one on
Cape
Wind
's
behalf and is talking with utilities, private equity firms and infrastructure
players.
If the DOE doesn't come through with financing aid by Sept. 30,
Cape
Wind
would
go a more traditional project-financing route, tapping commercial banks, export
credit agencies, the bond market, or a combination of these, according to
people familiar with the funding plans. Jim Gordon, its president, declined to
comment on the financing, as did Barclays Capital.
So far, the DOE has committed financing for 27 clean-energy projects, including
four wind projects, for guarantees on $30 billion of debt, said Jonathan
Silver, executive director of the loan programs office. Of these, 16 have the
funding in place. The DOE has a goal of seeing 10 gigawatts of offshore wind
energy deployed by 2020 and 54 GW by 2030.
Offshore wind projects can suffer delays and cost overruns because of
difficulties with maritime installation, which could make a bond a tricky sell.
The risk to investors is that the project isn't built in time, or that it
generates less revenue than forecast. A growing track record with offshore wind
farms in
Europe
helps address these risks and recent onshore wind
bonds in the
U.S.
have
sold well.
It is unclear how a
Cape
Wind
bond
would be rated, but junk bonds have been popular recently amid unusually low
interest rates on investment-grade debt. John Anderson, head of power and
infrastructure investing at John Hancock Financial Services in
Boston
, said
"project-finance paper" has been selling well recently. John Hancock
invested in the most recent onshore
U.S.
wind
financing, Shepherds Flat, in December.
Shepherds Flat was a $2.2 billion deal featuring $1.4 billion of debt to fund a
845 MW wind project along the Columbia River Gorge in Oregon, sponsored by GE
Energy Financial Services and developer Caithness Energy. The project was
financed with $525 million in fixed-rate bonds maturing in 22 years, $675
million in floating-rate loans due in 14 years and $226 million in letters of
credit. The DOE gave it an 80% loan guarantee.
The unguaranteed portion of both pieces was rated BBB-minus by Fitch Ratings,
the lowest rung of the investment-grade ladder, and the guaranteed tranche was
rated AAA.
Cape
Wind
would
look for a rate of around 7.5% on a bond, said people familiar with the
developer's financing goals. That translates to a potential rating of BB or
BB-plus--just into junk, although the developer would pursue something higher.
The fact that Siemens AG (SI) is providing 130 turbines from its wind division
in
Denmark
may
also provide an incentive for Danish export credit agency Eksport Kredit Fonden
to get involved, said Jerome Guillet of Green Giraffe Energy Bankers, another
Cape
Wind
adviser.
Alternatively, Energy Management may need to sell a larger equity stake in the
project, or sell it outright to a company able to fund it on its balance sheet,
the people familiar with the matter said.
National Grid PLC (NGG) has agreed to buy 50% of the power generated by the
project over the next 15 years, which would likely be the maturity on any
forthcoming bond. The other 234 MW doesn't yet have a buyer.
Gordon said the most abundant offshore wind resources are off
New
England
and the mid-Atlantic states--coincidentally close to tens of millions
of consumers--and, a decade after starting its development, he is committed to
making the project happen, despite objections from some environmentalists and
Kennedy family members. The project would be visible from the family's summer
home in
Hyannis
Port.
"We are talking about harnessing an inexhaustible resource we have off our
coast for increased energy independence, more stable electric prices and new
green jobs," Gordon said.
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