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Utilities Unbundled - The Capistrano solution - EY - Global

Utilities Unbundled    issue 12

The Capistrano solution

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Edison Mission Energy created a highly innovative financing structure for its new wind investment deal.

Usually, the innovative aspect of a renewable energy deal is its engineering. But with Edison Mission Energy’s (EME) latest wind power deal, the financing and legal structure itself was the main event.

The Santa Ana, California-based independent power producer created a unique financing structure that enables two institutional investors, TIAA-CREF, the teachers’ pension fund, and CIRI, Cook Inlet Region Inc., a company that benefits Alaska Natives who have ties to the Cook Inlet region, to invest in tax credit-financed wind farms.

“I think it was, in that way, a path-breaking transaction,” says Randolph Mann, Vice President for Development of EME, and a wind industry veteran who helped lead the development of nearly 2,000MW of wind projects.

TIAA-CREF and CIRI have made a total commitment of US$460m, which includes an upfront investment of US$238m for three operating wind projects, the 61MW Mountain Wind I project and the 80MW Mountain Wind II project, both located in Wyoming, as well as the 150MW Cedro Hill project in Texas.

As EME begins commercial operation of two new wind farms in Nebraska, the outside investors will provide US$140m of additional consideration. Eventually, the new company, Capistrano Wind Partners, may invest in as many as seven wind power projects around the US for a total portfolio of 500MW.

Attracting institutional investors
The new facility matches the long-term investment needs of institutional investors with the long-term life of a wind farm — a natural fit, but one that had not been utilized before EME developed this structure.

Although pension and endowment investors had sometimes expressed interest in investing in renewables, they had not been able to take advantage of the tax credits that help to make such investments advantageous.

“We concluded that if we could structure a way to join together with those investors, it might be pretty strong — coupling an approach to allow Capistrano to realize tax benefits and our ability to develop, build, operate and manage projects, with their desire to have very large-scale investments in renewable energy with long-term, predictable cash flows over 10 to 20-plus years,” Mann says.

Tough to execute
But as straightforward as that might sound, it was complex to execute. “It's a transaction that's relatively simple in terms of the basic idea — we're putting together a portfolio of wind projects, and we want to bring in preferred equity alongside our sponsor equity — but when you pull back the covers, it's pretty complicated,” Mann says.

Finding the right investors, who were able to execute despite shifting market conditions, proved challenging. All in all, the deal took about 18 months to pull together.

What makes the Capistrano program unique, according to Mann, is not so much gathering a portfolio of assets but the fact that EME developed all the projects. “If you think about the private equity guys, they're usually bringing investors into a pool. Then they're adding more projects or investment opportunities into the vehicle over time. But each of those investments is sponsored by a different company, whereas in this case, we really are the developer, operator and owner of all the projects.”


For more information, contact:

Americas Power & Utilities Leader
Global Power & Utilities Transaction Advisory Services Leader
New York, US
+ 1 212 773 3382
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