United States

United States

Comeback for lease deal in California

UNITED STATES: In a still-shaky climate for bankrolling US wind developments, leveraged-lease equity financing seems ripe for a comeback - as shown by the December deal between Pattern Energy Group and insurance firm MetLife involving the 101MW Hatchet Ridge project in Shasta County, California.

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Pattern developed Hatchet Ridge, sold the project to MetLife and now leases it back. Terms of the deal, not fully disclosed, allow San Francisco-based Pattern to operate Hatchet Ridge with an opportunity to repurchase the project at the end of the lease. The companies will share short-term gains from the federal government's 30% cash grant rebate and use MetLife's significant tax burden to make the most of annual federal tax depreciation benefits, which Pattern would be unable to do alone.

MetLife's long-term investment approach includes more than $1 billion already invested in renewable-energy projects. Hatchet Ridge, which began full operation in October, is the only California wind project completed in 2010.

"Leasing wasn't available to the wind industry up until the passage of the stimulus bill," Pattern CEO Mike Garland says. "We actually have a model that looks at how efficiently you use the tax credits - meaning, are you getting full value for the tax benefits? There are a number of things that we've done in the lease structure that have improved the efficiency. Leasing is a very sophisticated exercise."

Developers now have time to draw up lease contracts following the US Congress decision in December to extend the cash grant (see page 53), which means that projects must begin construction by the end of this year and connect before 2014.

Lease financing, popular with wind developers in the 1980s, vanished with the enactment of the federal production tax credit (PTC) in February 1992. The PTC, which excluded lease arrangements, was the centrepiece of US industry financing until February 2009 - when the Obama administration's stimulus package included an investment tax credit (ITC) that allowed leases as one option on the way towards collecting the programme's cash grant.

Finding ways

Pattern, however, does not necessarily intend to lean on the lease-financing model, expecting instead to explore other options.

A majority of the company's 100 employees worked for Australia's Babcock & Brown, which operated a successful US wind development arm before financial problems forced it to sell off its wind segment, which re-emerged as Pattern in late 2009. "Many of us come out of the finance world," Garland says. "And the irony is that this year we're going to be taxable."

In other words, Pattern is about to turn a profit and is likely to create a significant tax appetite of its own in years ahead. "We may decide that we're more efficient using the tax benefits than doing a lease or a partnership," Garland says. "Or we might want to bring a partner into our business or into a particular project. And the partnership structure may be a more appropriate tool than a lease."

Regardless, all the emerging options bode well for finding solutions in an industry still climbing out of a hole created by the financial meltdown. "Developers who want to be successful have to think a little bit outside the box, and that's where some of these alternate financing arrangements have come from," says Tim Stephure, a senior analyst at Massachusetts-based IHS Emerging Energy Research. "This is all part of a bigger trend for finding different ways to work with the incentives that have been made available."

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