United States

United States

Moving into energy business big time -- John Deere changing gear and picking up speed

In just four short years, John Deere, America's iconic agricultural machinery supplier, has come a long way in wind power. From regarding its first dabble in the business in 2003 as little more than an exercise in public relations and a smart move in customer service, Deere & Co is well on its way to becoming a formidable wind project developer, owner, operator and financier. In effect, the company has entered the energy business, a strategic shift now being recognised in the boardroom as well as among its grass roots customers.

Not that the company is yet comfortable with that description. Ignoring the maxim that actions speak louder than words, David Drescher, who leads the company's wind efforts, hesitates to concede that the company is moving in a commercial direction -- and away from its original focus on assisting farmers to install wind turbines on their property. "I would agree with this: that we're finding more ability to meet our desired goals and returns with medium sized projects. And you will probably see us do some larger projects," he says.

By the end of this year, John Deere Wind Energy will bring three major wind plant on line in northern Missouri, which although it shares borders with strong wind states like Iowa, Illinois and Kansas, has seen no wind development as yet. The three wind plant are co-developed by John Deere and Missouri-based Wind Capital Group (WCG). Coming online shortly is the 56.7 Bluegrass Ridge Wind Farm, followed by the 50.4 MW Cow Branch Wind Energy Centre, and the 50.4 MW Conception wind project, both expected online in the fall. All three projects in northern Missouri use 2.1 MW turbines from Suzlon of India, John Deere's regular technology partner.

Debt and equity

Despite the "capital" in WCG's name, it is John Deere Credit, basically a giant bank, providing an unknown mix of debt and equity for the projects. Neither Drescher nor Tom Carnahan of WCG will say what the financial arrangement is with the Missouri projects but it is clearly a part of Deere's accelerated commitment to putting money into the wind business. "The revenue from the projects is in early gestation but we've made sizable commitments," says Drescher. "We have invested $300 million in capital expenditures as of the end of 2006, and the 2007 rate of growth is even greater."

The existence of wind's federal production tax credit (PTC) is a major factor in luring John Deere into the business. The company has a huge tax bill and investment in wind generation is an almost risk-free way of reducing it. Many of Deere's initial projects employed the so-called "Minnesota Flip," in which it retains 99% percent ownership for the first ten years of a project in order to leverage the PTC. After the ten years elapse, ownership of the projects is flipped over to a local owner, most likely a farmer. Farmers seldom have a tax bill large enough to set the PTC against.

Not just for ta

xDrescher says the company does not have one model based solely on flipping the ownership for tax credit benefits. "We can structure transactions with a variety of means. We're not just a tax investor; we're more owners and operators. The things we bring are far greater than a passive investor for tax benefits."

He says Deere is becoming an integrated co-developer, with local developers initiating projects, studies, permitting, and maybe a power purchase agreement. Deere enters at a second stage of development with preconstruction planning and the provision of debt, equity, turbine supply and construction assistance. It also oversees operations and maintenance. "We firmly understand and know that the economics of small projects can be challenging. Transportation and crane availability can put some limitation on how small you can be," says Drescher. To deal with this problem, Deere has been aggregating smaller projects like last year's four JD Wind installations in Texas, at 10 MW each and also using Suzlon machines.

Drescher says Deere took the wind plunge four years ago after deciding it was the most commercial of the renewable energy opportunities. The company partnered with Suzlon, which was keen on expanding into the US market. In 2004, Deere bought an operating wind farm from Suzlon as a pilot project in Bewster, Minnesota. "We looked globally, and we looked at who wanted to be active. It was a part of [Suzlon's] expansion globally and then our timing was fairly similar." Suzlon has provided the bulk of Deere's turbines, although Drescher stressed this is not an exclusive arrangement, pointing to a recent order for 65 Vestas 1.65 MW units.

Much loved

When it comes to prospecting for wind farm sites, John Deere's close links with landowners are set to give it an edge over competitors. The company has a reputation for being smart and well managed and it is much beloved -- and trusted -- in rural America. As Drescher says, "Often the farmers where our sites are located already have some Deere equipment in their sheds."

Ryan Wolf, an owner of two Deere tractors, is a typical example. He and his family in rural Minnesota partnered with John Deere on a PTC flip project using five 1.24 MW Suzlon machines that went up last year. But he sees John Deere's appetite for wind power growing fast. Deere's size, tax liability, and heft in being able to procure turbine orders moves them inevitably into larger projects, he says. "Deere is a business and as nice as they are, they are still a business and they need to make returns for their investors and if they need to make a return for investors in Missouri, I'm sure they'll do that."

In Missouri, WCG's Carnahan is pleased that with Deere's help his company was able to get on the map as a successful first stage developer. "I talked to a top person at a top wind energy development company and they told me they were proud of me and my passion for this, but that I just could not get it done," says Carnahan. "They didn't think there was decent wind here and most national wind maps were consistent with that. It looked like the wind stopped at the border." Carnahan knew the wind was strong in nearby Iowa and Kansas so he arranged for wind speeds to be tested at sites in northern Missouri and found his hunch was correct: the wind did not stop at the border. Fast forward to this summer, and Carnahan -- along with John Deere as co-developer -- is on the way to replacing Missouri's zero record in wind power with 157 MW of generating capacity.

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