AWCC, a Connecticut-based financial firm, intends to buy up long-term leases that wind farm operators have signed with landowners. The landowners will receive a one-off cash payment, while AWCC takes on the right to receive payments from wind farm operators for the term of the lease. This process of buying up long-term payments is called factoring.
In a separate process, called securitisation, AWCC will eventually combine the leases into one financial package and sell portions of that package to large institutional investors looking for guaranteed income streams.
The company was launched this summer by former top executives at wind plant developer Noble Environmental Power, which has brought more than 700 MW of wind power online. Most of that was in New York state, in the US Northeast. AWCC is drawing from a recent infusion of tens of millions of dollars of equity investment, from UK bank Barclays, to buy up the leases. AWCC officials say they will tap their knowledge of the Northeast regional market to acquire leases, but will also consider buying leases at any operational project in the US.
Hinkley says that landowners have long wondered why it was difficult to get one-off cash payments when partnering with wind developers. The answer, he says, is that long-term yearly payments can help to keep the initial costs down for wind plant developers, who already struggle to secure finance for their wind projects - which require large amounts of upfront capital.
Lump-sum buyouts of leases are common in the oil, gas and mining sectors, but are new in the wind industry. "Our knowledge and background developing and financing $2.5 billion of wind projects in the past four years provides us a great advantage over anybody from any other sector who might attempt this," says Hinkley
At a time when investors worldwide have suffered vast losses from bets on complicated financial instruments, including securitised home loans, critics wonder whether AWCC's business model carries similar risks. Hinkley brushes off such concern, saying the company conducts rigorous due diligence on wind projects to ensure the leases represent safe and steady income streams.
AWCC only considers leases with operational wind projects holding long-term power purchase agreements (PPAs) signed with utilities, says Hinkley. The utilities' PPA payments represent a wind project's income stream, underpinning the wind plant owner's ability to pay its land leases. Because of their own steady income from electricity ratepayers, utilities are broadly considered to be highly stable companies and, for the wind operators, reliable sources of income.
While Hinkley declines to reveal details of AWCC's business strategy, Robb Rice, executive vice president at Davies Public Affairs, which has worked over the years to build local support for wind project development, explains how factoring and securitisation could work in the wind sector. A company could buy a few hundred leases held by plant operators, paying 30% of the total amount that landowners would have received through the lease's lifetime, and the company would then receive the regular payments from the plant operators. The new owner of the leases would sell the securitised portfolio to an outside investor for 50% of the package's long-term value, pocketing the difference of 20%. After paying for operations and fees or dividends to investors, it would keep the remainder as profit. Margins would differ in practice, says Rice.
Paul Copleman, a spokesman for major wind developer Iberdrola, says annual operator lease payments to landowners range between $3000 and $9000 a turbine.
Wall Street idea
Rice believes there is a place for securitisation in the wind sector. "I think it's very interesting," he says. "If you can actually factor the leases and turn around and sell them to a portfolio manager, then why not? You're not going to be involved at all. It's like the guys that sold credit default swaps. They bundled up portfolios, sold them, got their money. They're no longer the holder of the paper, so what do they care what happens? To me it's like another Wall Street great idea: Get in, get out, make some money, see you later, it's not my problem."
But Rice adds that wind securitisation will not necessarily lead to a catastrophic outcome like that caused by securitisation of subprime mortgages in the US. He believes the parcelled-up fragments of aggregated leases that AWCC plans to sell will have more intrinsic value than the securitised subprime mortgages and other high-risk financial instruments blamed for the recent global meltdown. Most comforting, says Rice, are plant operators' reliable income from utilities.
That said, David Flynn, an attorney with Phillips Lytle LLP who specialises in wind project permitting, believes that some wind developers may prefer that leases be retained by landowners. His reason? Because many landowners lack financial nous, they are unlikely to set demanding terms when agreeing leases. Flynn says: "Now, all of a sudden, you've got this investment group that's controlling the leases for your project."
Some observers call AWCC's approach exploitative. Almost all wind projects are in rural areas where landowners are generally of modest means. Many are farmers battered by the recession and falling commodity prices - and therefore willing to forego long-term rewards from their land holdings to gain immediate cash, they say.
"Of course it's opportunistic," says Rice. "Clearly, if this were three or four years ago, (AWCC) would probably have a much more difficult time." Flynn agrees. "I think they're kind of preying on the fact people may be willing to take less money if they take it up front versus over time because, frankly, they may need it now," he says. "So it's a buyer's market from that perspective. There are probably a number of struggling farmers and landowners who are saying it's great to get $50,000 a year but I would rather have a quarter million right now because I've got to make my mortgage payment, or whatever. I have to think the economy is playing a role." While freely conceding that his company seeks profit, Hinkley denies that AWCC is exploiting landowners. Rather, he says that the company provided a new approach for its founders after finance for projects in the wind business dried up under the economic downturn. He also maintains that landowners have long sought the option of lump-sum payments for leases.
The AWCC model is so new that most developers contacted were reluctant to comment on how it might pan out. Heather Otten, from mid-sized developer and project owner Invenergy, is the head of development in Texas, Oklahoma, Kansas and Arkansas. Otten did not study the details, but says that Invenergy would frown on third parties buying leases from its landowners amid concerns it would sour relationships with landowners. "(Normally) you have this ongoing relationship with the landowner and the revenues are what maintains that relationship," says Otten. "(But), if the landowner no longer stands to gain from you, I guess that relationship could become strained." Other developers speaking off the record shared her view.
Some question the very basis of AWCC's plan. Otten wonders whether landowners are actually clamouring, as Hinkley says, for an upfront cash payment instead of the long-term returns typically provided. And there may be logistical problems, she adds. She recognises that AWCC's approach may be common in the oil and gas and mining industries, but says: "In those cases, there is usually just one landowner at a particular gas or oil well. But in wind, you might have a hundred landowners for one project. It was hard enough to get them all signed up in the first place, but then to get them all bought out of their leases and to sell that as a product seems to me like a monumental task to do. It makes my head spin thinking about it."