Offering Memorandum Bond - DOC

Document Sample
Offering Memorandum Bond - DOC Powered By Docstoc
					                                    ERNEST ORLANDO LAWRENCE BERKELEY
                                           NATIONAL LABORATORY
                                          Environmental Energy Technologies Division
                                       1 Cyclotron Rd., MS 90-4000, Berkeley, CA 94720
                                    ph: 510-486-5474, fax: 510-486-6996,


From: Ryan Wiser, Berkeley Lab
Subject: Energy Northwest Bond Issuance for 48 MW Wind Project
Date:    December 4, 2001

Revealed cost data for wind power projects has always been difficult to come by. The
issue of municipal ownership of wind projects has also received recent attention. Energy
Northwest, a publicly owned utility in Washington, recently issued revenue bonds for a
48 MW wind project. I recently reviewed the “Limited Offering Memorandum” on these
bonds, and summarize some of the interesting highlights here.

The bonds will be used to finance the acquisition, development and construction of the
“Nine Canyon Wind Project” near Kennewick, Washington, including related T&D
upgrades and various reserve accounts. The issuance is for revenue bonds, to be repaid
only through revenue generated by the wind power project; the bonds are not secured by
other revenue streams or by the physical assets of the wind project itself. (The bonds are
secured by various accounts established upon bond issuance, which especially cover risks
prior to commercial operation). Accordingly, the level of detail on the wind project in the
Limited Offering Memorandum is relatively high, and the yield on the bonds may say
something about risk premiums for wind projects in the bond market.

A series of bonds have been issued, with maturities from as early as 2004 to as late as
2023. Yields range from 4.05% for 2004 maturity bonds, to 5.00% for 2008 bonds, and
up to 6.00% interest rate for 2023 bonds. A total of $70,683,622.70 of bonds have been
issued for this 48 MW wind project. The aggregate bond issuance will result in total
repayments of approximately $5.955 million per year through 2023.

I have not done a detailed analysis, but these yields appear to reflect some risk premium
on this issuance relative to other recent municipal bond issuances. This may reflect the
fact that this is a wind project, or that there is simply one project from which revenue can
be generated, increasing risk. It may also reflect to some degree past experience in the
bond market with Energy Northwest, which was previously called Washington Public
Power Supply System and has a rather sordid history with nuclear power.1

The wind project is to be developed in phases. Phase I consists of 28 1.3 MW BONUS
turbines for a capacity of 36 MW. Phase II consists of 9 1.3 MW turbines for 12 MW.
The project is to be installed under an EPC contract by Renewable Energy Systems
(USA) Inc. December 1, 2002 is the expected commercial operations date.

In addition to the project itself, a maintenance building, gravel access roads, and T&D
and interconnections costs are included.

The capacity factor of the project is estimated at 30%, based on an analysis by Impact
Weather. The reliability of 165 1.3 MW BONUS turbines installed before 2000
worldwide is reviewed, and an availability of 96.23% is revealed.

The bonds are intended to cover the following costs:

       1. Development and construction of the wind project and related T&D and
          interconnection investments.
       2. A portion of the interest accruing on the bonds in first years of project operation.
       3. Initial deposits into the Reserve Account, the Operating Reserve Account, and the
          Reserve and Contingency Account.
       4. Premiums to acquire indemnity contracts to cover certain construction risks.
       5. The costs of issuing the bonds.

These costs break down as follows:
Uses of Funds                                         Cost       Percentage
Bond Proceeds Account                               53,657,708      76%
Debt Service Account                                 6,151,933       9%
Reserve Account                                      5,960,200       8%
Reserve and Contingency Account                        800,000       1%
Operating Reserve Account                              200,000     0.3%
Indemnity Contract Fees                              2,872,356       4%
Cost of Issuance                                     1,041,426       1%
TOTAL                                               70,683,623     100%

The Bond Proceeds Account will initially cover project constructions costs. The Debt
Service Account is created to help pay off interest and principal on the bonds. The
Reserve Account is created to provide further security to bondholders. The Reserve and
Contingency Account is established for major capital improvements, repairs, and
replacements. The Operating Reserve Account will initially be used to cover any O&M
costs, and later used to level out costs from year to year.

    Including defaults on bonds for their nuclear efforts.
An EPC contract with RES, Inc. was executed in August 2001. Under the EPC contract:
    RES is responsible for turnkey installation of the project, road construction and
      maintenance, construction of an operations and maintenance building, and
      installation of meteorological towers.
    RES is required to provide a 100% performance bond to reduce construction risk.
    RES also provides a 3-year “all parts and labor” warranty for their work.
    RES warrants that the wind turbines will attain a minimum average 95%
      availability during the first year of operation, and a 97% availability during the
      remaining 2 years of the warranty period.

The EPC contract established a maximum price of $44,30,000, but $28 million of
this costs is subject to fluctuations in the exchange rate between the U.S. Dollar and the
Danish Krona. If one assumes that this $28 million represents the cost of the turbines
themselves, then turbine costs equal $550/kW. This contract was signed under the
assumption that 39 turbines would be installed. At the revised 37 turbines, Energy
Northwest expects to sign an amendment to the contract revising the maximum price
downwards to $42,174,990. For the 48.1 MW facility, this comprehensive EPC contract
works out to $877/kW.

The overall construction budget, however, also includes other costs including: (1) Energy
Northwest Development Costs of $1,080,000, (2) Benton PUD costs for T&D and
interconnection of $6,643,944, and (3) construction contingencies such that the total EPC
contract equals $45,548,989. The total construction budget is therefore $53,272,933. This
equates to $1,108/kW, $138/kW of which comes from interconnection costs.

If one includes the costs of bond issuance and indemnity contracts, then the all-in cost
would increase further, to approximately $1,189/kW.

The table below summarizes these findings:
Cost Variable                     Cost            Cost/KW
EPC Contract                  $42,174,990           887
EPC Contract with             $45,548,989           947
T&D and Interconnection        $6,643,944            138
Development Costs              $1,080,000             22
Bond Issuance Costs            $1,041,426             22
Indemnity Contract Cost        $2,872,356             60

Energy Northwest is responsible for maintaining the facility. Actual costs will be
determined annually under the “Budget and Operating Plan,” described later. Anticipated
costs for the first 5 years are provided, assuming a 30% capacity factor. For 2004 to 2007
these costs include:
Costs                           2004          2005     2006     2007
Fixed Operating Costs       $1146000      $1475000 $1519000 $1565000
  $/MWH                             8.7         11.3         11.6        11.9
Variable Operating Costs       $82000      $355000     $366000      $377000
  $/MWH                             0.6          2.7          2.8         2.9
Lease Payments                 $92000       $94000       $96000      $97000
  $/MWH                             0.7          0.7          0.7         0.7

Adding debt repayment costs to these costs, and deducting REPI payments, Energy
Northwest expects that total costs will equal $34/MWh in 2003, rising to $38/MWh in

Energy Northwest believes that no more than 3 FTEs will be employed on site.

The project is to be built on dry-land wheat farm properties. Leases expire no earlier than
2040. Three leases have been signed. Lease payments include:
    One time “option” payment of $500 per turbine proposed to be erected on the
       landowner’s property.
    Annual “rent” of the greater of $1000 per turbine or 3.5% of gross revenues.
       Energy Northwest will also compensate landowners for any increase in property
The specific lease terms are provided in the bond documentation.

The project’s output and costs will be apportioned among 8 public utility districts in
Washington and the Columbia Generating station. The PPA under which these purchases
will take place was signed in October 2001, and is included in the bond documentation.

The PPAs are not traditional $/MWH purchase agreements. Instead, the PPAs obligate
the purchasers to contribute their share to overall project costs, including bond repayment
and ongoing operation and maintenance costs. These costs are established on an annual
basis through an agreed-upon Budget and Operating Plan. An overall Payment Cap limits
these payments. This approach to a PPA reduces the risk of bond default.

Further, if one or more purchasers fail to live up to their commitments, Energy Northwest
may require each non-defaulting purchaser to pay up to an additional 25% of its share to
cover the deficiency. This will reduce risk for bondholders.

The REPI will be distributed to the purchasers through reductions in the Annual Project
Budget. REPI benefits are to be levelized over time to minimize possible payment
“shocks” if REPI payments end.

   Various reserve accounts established upon bond issuance serve as security,
    especially prior to commercial operation.
   Indemnity contracts further protect against construction risk.
   The EPC contract reduces the risk of construction cost overruns.
   Liquidated damages must be paid by RES of $200 per day per turbine for delays
    in commissioning.

Description: Offering Memorandum Bond document sample