Financial markets get serious about wind -- Developers break new ground with bond financing

Britain's ScottishPower reported "huge appetite" for its sale of convertible bonds in June this year. Due to high demand, the company sold $700 million of bonds -- up from the original offering of $575 million. The money is to be used to finance organic growth, including renewables, across the group's companies in the UK and US.

FPL Energy, the dominant producer of wind generation in the US, dipped into the bond market to finance seven of its completed projects spread across the nation. Financing for wind projects in the past has come from the developer's considerable balance sheet. This is the first time it has gone to the bond market and the first time an American wind developer has sought such financing.

FPL completed the private offering of 20-year senior secured bonds for $380 million at 6.639%, a deal that was closed by Credit Suisse First Boston in July. It will repay the debt with cash flow from the projects, aided by the $0.018/kWh it receives from wind's federal production tax credit.

In doing the deal, FPL says it is probably the only US wind developer with the portfolio size and diversity to have pulled it off. According to both industry analysts and FPL, however, the bond sale is more remarkable for its acceptance of wind generation by the bond-buying public than for being a US first.

"We are delighted with the receptivity shown by the market to this new, unique financing opportunity," says Moray Dewhurst, chief financial officer for the FPL Group, FPL Energy's parent company. "This transaction is verification that wind generation is now viewed as more than a niche business by the financial markets and the credit rating agencies." The reason the developer issued the bonds this year and not a year ago, says FPL's Steve Stengel, is because it has taken time to educate investors about the viability of wind as an investment.

Scotland too

Although this bond sale is a first for the US, the UK's Scottish Power Plc sold $700 million in convertible bonds a month earlier in London to finance unnamed transmission and distribution projects, along with gas storage and renewable generation projects in both Britain and the US.

Jan Johnson of PPM Energy in the US, a subsidiary of Scottish Power, declines to say whether the company's wind projects in the US, now or in the future, could potentially benefit from the bond sale. By the end of this year, PPM, described by its parent as a leading provider of renewable energy products to wholesale customers, will have 725 MW of wind in its energy portfolio, which includes both ownership and purchases, and 806 MW of gas generation. Its goal is to bring the wind total to 2000 MW by 2010. In addition, it owns some gas storage facilities in Texas. "It's a great way to finance wind projects," Johnson says of bond financing.

The FPL Energy wind portfolio has 36 operating wind farms worth more than $2 billion scattered across 15 US states, says Stengel, and will add three more projects by the end of this year, which will add 94.5 MW in Pennsylvania and 144 MW in Wyoming (Windpower Monthly, September 2003), bringing the FPL wind portfolio to nearly 2600 MW.

The seven projects picked for bond financing amount to 697 MW of wind plant completed between 1999 and 2003 In Iowa, California, Minnesota, Wisconsin, and Texas. Turbines in the projects were supplied by NEG Micon, Vestas, Enron, and GE Wind. All the projects have power purchase agreements running for between 20 and 25 years.

The developer singled out the seven due to their long term power contracts and their diversity of regions, turbine technology and power purchaser. That diversity, Stengel says, helped to minimise the risk for investors.

As with most investments, there still are risks associated with the deal, according to Moody's. The rating agency pointed to such risks as the use of the Vestas V80, 1.8 MW turbine at FPL's 162 MW High Winds project in California, a first use for the turbine in the US, as well as the first use of the wind regime in New Mexico at the developer's 204 MW project in that state. Moody's also expressed uncertainty about whether all turbine manufacturers could provide support and parts during the bonds' 20-year term.