Longroad Energy has financed its 300 MW Prospero solar project in Texas with tax equity from Facebook — the social media company’s first such investment — and debt from seven banks.
Located in Andrews County, the Prospero project is partially hedged under a 12-year power purchase agreement with Shell Energy North America. The tax equity investor, Facebook, will also buy some of the renewable energy credits generated by the project.
"Facebook is proud to have helped finance a solar project under this innovative off-take arrangement," said Peter Freed, energy strategy manager at Facebook, in a statement. "We hope our participation will help validate the structure and bring many new solar projects to the grid."CIT Bank led the lender group as co-ordinating lead arranger, admin agent and collateral agent, with Daniel Miller leading the deal team from Santa Monica, Calif. Silicon Valley Bank and Zions Bank participated as joint lead arrangers and underwriters and the final tier of lenders comprised National Australia Bank, Helaba, Rabobank and Commerzbank.
The financing package totaled about $416 million. The relative sizes of the tax equity and term debt portions of the deal were not disclosed.
Some of the banks only participated in the loan covering the construction period, and not the term loan, which is a seven-year mini-perm.
The precise division between the banks could not immediately be established but it is understood that CIT, SVB and Zions all took tickets in the mini-perm.
"Not all the banks are comfortable with the term loan," says a banker close to the deal. "A lot of credit was given to merchant cash flows."
In this way, the deal was similar to last year's financing of Longroad's 250 MW Phoebe project, also in Texas, which likewise had a 12-year PPA with Shell and included a seven-year mini-perm. Many of the same banks were involved in that deal, on which CIT also led (PFR, 3/12).
“SVB actively seeks to support energy and resource innovation, whether that be technological or financial innovation," said Kerri L. Fox, managing director and market manager, project finance, at Silicon Valley Bank, which was involved in both deals, via email. "We were one of the first banks, for example, providing financing for the mass deployment of residential rooftop solar. Hedged solar projects with quasi-merchant risk are another area of financial innovation that we have sought to support, since it is important for our clients’ business. We are very pleased to have been able to support Longroad on both the Phoebe and Prospero solar projects, and in particular to act as a JLA for Prospero.”
The merchant risk arises because the debt is sized in a way that takes into account cash flows that are not covered by the hedge during the contracted period as well as cash flows during the period after the hedge has expired.
When financing hedged solar projects in Texas, merchant risk must be balanced with basis risk, which arises when a project injects its generation into the grid at one point but its hedge contract settles at a hub which can be far away, and where power prices may at times be very different.
In the case of both Prospero and Phoebe, basis risk was dealt with in part by including a tracking account, but also by leaving a portion of the project's expected output to be sold spot.
"There’s this inherent tension," says the banker close to the deal. "You might want to hedge as much as possible to stabilize cash flows, but the more you hedge, the more you expose the project to potential basis risk, because once you’ve hedged it you have to deliver it."
As corporations like Facebook, Apple and Google have ramped up renewable energy procurement in recent years, non-utility PPAs have become a major theme.
But solar developers are increasingly asking financiers to look at deals based on hedges with energy traders and marketers like Shell, Luminant, Calpine Energy Solutions, Constellation and ENGIE North America.
In such deals, energy marketers like Shell can act as intermediaries, providing developers with a single, rated offtaker to facilitate project finance while passing on the environmental and cost benefits of wind and solar procurement to a variety of end customers whose individual loads does not justify a large PPA.
“It’s almost like credit enhancement or a wrap,” says a project finance banker in New York. “The simple fact is you’re not looking at 60 counterparties.”
Although its probability of default is considered to be low, Facebook is not rated by the three main credit rating agencies, whereas Shell Energy North America has single-A credit ratings (A2/A+) from Moody’s Investors Service and S&P Global Ratings, higher than many regulated utilities.
Another benefit to contracting with an energy company like Shell rather than a non-energy company like Facebook is the clear strategic rationale for the transaction.
"Shell actually owns a subsidiary that delivers solar power to customers," says the project finance banker close to the Prospero deal. "So from our perspective, one thing is the rating and another thing is strategic alignment, the business rationale for purchasing the power."