Tuesday, October 14, 2008

Credit woes pose threat for green energy sector

Renewable energy projects, which can cost hundreds of millions of dollars to construct, are singularly dependent on a small cadre of institutional investors to put up money in return for tax credits and early electricity generation revenue.

And many of the biggest backers of renewable projects are on shaky ground or have disappeared altogether, saddled by bad bets in the housing and consumer credit markets. Among them: bankrupt Wall Street giant Lehman Brothers Holdings.

GE Energy Financial Services, whose parent company could see its financial footing hampered by a deteriorating credit market, alone invested $2 billion in renewable projects last year. One of those deals, a $300 million investment in wind farms in Oregon, Minnesota, Illinois and Texas, included a coinvestment with a subsidiary of troubled Wachovia Corp.

“I think we’ve seen a changing market in the last several months. Anyone who is dealing with an investor that’s been in the news lately is rethinking things,” said Jim Duffy, a partner in the syndication group at Boston’s Nixon Peabody LLP. “There is a definite concern that there is a narrow pool of investors and three or four may not be around” gong forward, based on the recent wave of consolidation in that industry.

The credit crunch has caught the attention of wind developers nationally. Earlier this week, the American Wind Energy Association hosted a workshop on investment and financing of wind projects. The agenda included discussions about credit markets and wind developer IPOs.

Boston renewable energy developer BlueWave Strategies LLC said some of the third-party financiers it has worked with in the past are in rough times, but it has yet to be directly affected.

“It’s a tough marketplace, but not an impossible marketplace,” said partner John DeVillars, although the company has yet to close on a financing deal post-meltdown. BlueWave has received capital commitments from GE for some of its projects.

Other developers say their projects are not immediately at risk as they wait to secure final permits before seeking financing.

Cape Wind hired Lehman to advise the company on securing project financing. The Lehman group working with Cape Wind was led by managing partner and longtime environmentalist Theodore Roosevelt IV.

Cape Wind expects to secure final project approval some time next year.
“We’ve always had a ‘permitting first’ strategy which has worked out so far. It’s probably better that we’re not looking for financing right now,” said Cape Wind spokesman Mark Rodgers. “By the time we complete the permitting process we hope that the markets will be stabilized.”

Newton-based First Wind Holdings LLC is a prime example of how renewable energy developers rely on institutional investors to fund critical capital investments.

First Wind estimates that about 50 percent to 60 percent of final project costs are funded through tax equity investments provided by large financial institutions, according to the company’s prospectus. The investments retire construction and turbine loans as well as equity investments in exchange for equity interests in subsidiaries that own the projects.

Those investments enable investors to receive sales revenue, tax credits and accelerating depreciation benefits for fixed periods, depending on the agreement.

First Wind closed on two tax equity financing transactions totalling $146.3 million last year. The deals with several banks, including JP Morgan Chase and Wells Fargo & Co., have funded the development of projects in Hawaii and Maine. The banks, in turn, stand to collect the vast majority of the projects’ revenue and tax credits until they receive their targeted returns.

In January, First Wind completed an agreement with Lehman Brothers for $208 million in tax equity financing for several projects in New York. The company expects to spend $1.4 billion in capital expenditures through 2009, but did not say who would provide the financing.

“To date, our projects’ tax equity investors have been large financial institutions with significant taxable income,” First Wind’s prospectus notes.

First Wind officials declined comment, citing the company’s pending public offering, in which the company expects to raise up to $450 million.

Jackie Noblett can be reached at jnoblett@bizjournals.com.

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