Wind Energy Rejoins the Leveraged Lease Club

Paul Schwabe's picture

For wind energy, leveraged leases are back. 

Noticeably absent in the wind sector since the nascent days of wind energy in the early 1980s, this equipment financing tool has been used recently to finance new and existing solar and geothermal projects [1] [2]. Beginning in late 2010, a string of new wind projects in the U.S. financed used leveraged leases as well.

Leveraged leases work primarily in the same way as the more common sale leaseback approach.  Under both mechanisms, a renewable energy plant is sold from a project’s developer to equity investors.  The equity investor simultaneously leases the project back to the renewable energy developer who operates the project, pays expenses and lease payments, and receives any residual cash flows. The equity investors, known as tax equity investors, receive the economically valuable federal tax benefits of the project.  Under the all equity sale leaseback, the equity investors provide 100% financing for the project. 

The unique aspect of a leveraged lease transaction is the inclusion of a debt lender that finances a sizeable portion of the project (hence the term “leverage”).  In a typical leveraged lease transaction the equity investor will provide 20%-35% of a project’s costs [3] while the debt lender provides the remainder of the financing.
 
Table 1 shows the key financing parties in each of four known leveraged lease transactions utilized in the wind sector since December 2010. 
 

Project Capacity (MW) Announcement Date Project Developer Tax Equity Investors Debt Lender / Creditor
Table 1. Sampling of wind energy levereaged lease transactions since December 2010
Hatchet Ridge, CA 101 December, 2010 Pattern Energy MetLife Crédit Agricole Securities
Lakefield Wind, MN 205 May, 2011 enXco Union Bank,
MetLife
Cobank,
Banco Santander,
Helaba,
Lloyds TSB
Alta IV of Alta Wind Energy Center, CA 102 May, 2011 Terra-Gen Power Google, Citibank MUFG Power & Utilities Group,
Credit Agricole,
ING Capital,
Rabobank,
Citi,
Barclays,
Bank of Montreal
Alta V of Alta Wind Energy Center, CA 168 June, 2011 Terra-Gen Google, Citibank Unspecified

Sources: [4] [5] [6] [7]

There are a few reasons for the recent momentum of leveraged leases in the wind sector. 

First, the use of leveraged leases was spurred by the opportunity for wind energy owners to elect either a 30% investment tax credit (ITC) or cash grant instead of a production tax credit (PTC) [8]. Under PTC accounting rules, a wind energy project owner must also operate the project to qualify for the incentive [9]. This ruled out lease financing as the owner and operator of the project are different parties.  There are no such owner/operator requirements, however, for the ITC or cash grant incentives.  

Secondly, the leveraged lease transaction has increased in popularity as the available supply of debt financing has generally recovered quicker from the effects of the financial crisis than tax equity investment [10].  As shown in Figure 1, the number of renewable energy projects lenders increased for the third consecutive year, while the number of tax equity investors has yet to reach the high water mark set before the financial crisis [10]. Moreover, in terms of total amounts invested, the American Wind Energy Association (AWEA) estimates that in the wind section approximately $8.4 billion of debt financing closed in 2010, compared to only about $2.7 billion of tax equity financing during the year [11]. 


Figure 1.  Debt lenders and tax equity investors to renewable energy projects
Source: Mintz Levin [10]

It remains to be seen if the leveraged lease transaction is here to stay for wind energy financing. The recent trend of leveraged leases could suggest some level of comfort and replicability within the industry.  Looking ahead, the near-term expiration of the 30% ITC for wind (but not solar) and the 30% cash grant could indicate that the use of the leveraged lease transaction for wind sector may be fleeting. 

Sources:
[1] Murray, T. “Pattern Energy, MetLife Complete Leveraged Lease Transaction.” Green Economy.
https://www.ibtimes.co.uk/articles/20101216/pattern-energy-metlife-complete-leveraged-lease-transaction.htm.  Accessed June 28, 2011.
[2] LXRICHTER. “Terra-Gen Power closes US$286m lease financing for Dixie Valley.” Think Geo Energy.
http://thinkgeoenergy.com/archives/5998. Accessed June 28, 2011.
[3]Brady, D.; Ingram, P. “A Leveraged lease primer.” bNET. http://www.elfaonline.org/cvweb_elfa/Product_Downloads/E06MAYBRADY.PDF. Accessed June 28, 2011.
[4]Braverman, M. “Milbank Represents Institutional Investors in $143 Million Leveraged Lease Financing of Hatchet Ridge Wind Farm.” Milbank.
https://www.milbank.com/en/NewsEvents/RecentPressRel/Milbank_Represents_Institutional_Investors_in_143_Million_Leveraged_Lease_Financing.htm. Accessed June 28, 2011.
[5] enXco. “enXco Announces Closing of Financing for Lakefield Wind Project.”
https://www.edf-re.com/about/press/enxco_announces_closing_of_financing_for_lakefield_wind_project. Accessed June 28, 2011.
[6] Needham, R. “Investing in the Alta Wind Energy Center.” Google Blog.
https://googleblog.blogspot.com/2011/05/investing-in-alta-wind-energy-center.html. Accessed June 28, 2011.
[7] Business Wire. “Citi, Google to Invest in Additional Phase of Terra-Gen Power's Alta Wind Energy Center.”  Business Wire.
https://www.marketwatch.com/story/citi-google-to-invest-in-additional-phase-of-terra-gen-powers-alta-wind-energy-center-2011-06-22?reflink=MW_news_stmp. Accessed June 28, 2011.
[8]Gruen, A. “Tax equity financing, cash grants broaden investor appetite for renewables”. SNL Financial. Republished at,
http://newenergy2020.blogspot.com/2011/01/tax-equity-financing-cash-grants.html. Accessed June 28, 2011.
[9] Marks, A. Frederick, A. “How Leasing Can Maximize Benefits in Wind Power Project Financings.” https://www.milbank.com/images/content/9/2/926/Equipment_Leasing_May11.pdf
[10] Mintz Levin. Renewable Energy Project Finance in the U.S.: An Overview and Midterm Outlook.” Mintz Levin. 
[11] AWEA. “U.S. Wind Industry Annual Market Report 2010.” American Wind Energy Association. http://www.awea.org/_cs_upload/events/7302_1.pdf