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United States

United States

Investors seek security in uncertain world

UNITED STATES: A new breed of long-term owner is entering the US wind energy market, driven by the search for attractive returns and a growing list of potential acquisition targets.

Buy-in… Canadian pension firm Borealis Infrastructure bought a 49% stake in four US wind projects (pic:EDPR)
Buy-in… Canadian pension firm Borealis Infrastructure bought a 49% stake in four US wind projects (pic:EDPR)

One of the main drivers is the 6.5GW of wind power generation that is nearing the end of its ten-year eligibility for the production tax credit (PTC), freeing up economic returns on the projects.

There has been a spate of pension funds and infrastructure investors buying up stakes in operating wind projects in recent months. The Caisse de Depot et Placement du Quebec, for example, in January spent C$512 million ($500 million) of the C$176 billion in public and private pension and insurance money it manages to take a minority stake in a portfolio of 13 wind projects owned by Chicago-based Invenergy Wind.

In October, PensionDanmark made its first direct wind investment outside its home market for a 50% share of three US E.on projects totalling 433MW. A month later, Borealis Infrastructure, an investment division of Canadian pension firm OMERS, invested US$230 million for a 49% equity stake in a 599MW portfolio of four US wind farms owned by EDP Renovaveis.

"What's driving it? Steady returns," says Lloyd MacNeil, a partner at law firm Akin Gump. "That's really the key. Any long-term investor is looking for predictability and, if you're a pension fund, that's absolutely what you're looking for."

Predictable income

Wind projects with long-term power purchase agreements provide that stability. "You can see predictability of income stretching out ten years, 15 years or longer," MacNeil explains. The returns are very similar to what you can expect from equities with significantly less risk than navigating the ups and downs of the stock market, says Torben Moger Pedersen, CEO of PensionDanmark. They are also more attractive than government bonds, long a mainstay for pension investors, with ten-year US Treasury notes currently yielding around 2% and 30-year bonds in the 3% range.

Another factor driving interest in wind investments is the potential for future growth. "The projects will enable us to broaden our presence in a forward-looking sector," says Macky Tall senior vice-president of infrastructure for the Caisse, which has also invested close to C$100 million in Quebec developer Innergex Renewable Energy, provided C$25 million in debt financing to the 272MW Seigneurie de Beaupre wind farm in Quebec, and is reportedly considering buying a C$792-million stake in Dong Energy's London Array offshore wind farm in the UK.

Growing market

In the US at least, timing is a factor in the ownership shift. In the next year or so, says MacNeil, roughly 6.5GW of wind farms built a decade ago are going to come off the production tax credit (PTC), a $0.022/kWh incentive paid on the first ten years of a project's life. Many were financed using a complicated partnership flip structure that allocates nearly all the economic returns from the project to a tax-motivated equity player until that investor reaches its targeted return. At that point, majority ownership flips back to the developer.

It is also the point where pension and infrastructure funds, which are unable to use the PTC themselves and have no interest in foregoing cash payments until the tax equity is satisfied, are looking to step in.

"I think there is a very good market for these assets. I think it is probably headed upward," says MacNeil. "You're going to have a rolling, increasing number of megawatts that are coming off PTCs, and that will drive pension fund-type acquisitions for years."

There is also a large block of operating wind facilities in the US without the complexity of tax equity to discourage pension fund acquisitions. Projects built between 2009 and the end of last year had the option to take a cash grant equivalent to 30% of eligible project costs instead of the PTC.

"I don't think its is an accident that all this pension fund money and the cash grant programme happened over the last three or four years," says Ted Brandt, chief executive of Marathon Capital. "I think there was a lot of correlation."

Developers selling these assets are driven by a variety of factors. Rebalancing portfolios to focus on core markets is one, while raising cash to fund further project development is another. "Many of the merger-and-aqcuisition transactions we've seen over the past 12-18 months have largely been driven by the need to raise capital," says John Fouts, a managing director at financial-services firm Morgan Stanley.

Some of the private-equity players that put money into wind-development companies see it as a good time to monetise their investments. "You definitely see sales of projects in order to capitalise on the return requirements and recycle capital as these funds are required to do," says MacNeil.

He points to Terra-Gen Power, owned by investment firms ArcLight Capital Partners and Global Infrastructure Partners, which last year sold a 150MW piece of the Alta Wind project in California to Canada's Brookfield Renewable Energy Partners, a publicly traded limited partnership with 5.3GW portfolio of operating renewable-energy projects in Canada, the US and Brazil.

"That was a case of one fund selling and one fund buying. The reason for that was the ArcLight people saw a return opportunity, or basically a liquidation event, and Brookfield saw an acquisition opportunity."

Another category of seller includes companies with European-based parents looking to shore up their balance sheets. "They've got their own issues at home they need to deal with, so they are selling assets here in North America," says Fouts. "My personal view is that we are going to see an acceleration of that."

Canadian influx

The money coming into the market from pension and infrastructure funds to date, he adds, has been largely Canadian. It is a definite trend, agrees MacNeil. "These investors are big players with lots of money and now that you've got parity between the two countries in their currencies, it's much, much more attractive to come down here."

In fact, given their size and the way they prefer to make their investments, one of the major challenges the market faces is scale. "The issue is they don't want to buy 50MW here or 100MW there," says Fouts. "They want to write cheques that are $500 million-plus and, frankly, morph into a much bigger capital position. There are not a tonne of portfolios out there like that."

Another challenge is that this new class of long-term owner has little tolerance for operations-and-maintenance costs that are beyond budget, says Jim Adams, president of renewable-energy consultancy Natural Power in North America. "Historically, I don't think it's a secret that the budget for plant operations in the US has been bare-bones." The new ownership structure is helping change that, he adds, pushing the industry to lock-in long-term costs through things such as full-service agreements with turbine vendors. "These investors really want to make sure there is minimal risk for plant operations and then budget for that."

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