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Wind farm owner’s inability to refinance debt raises questions about health of renewable energy market

Northeast Wind, the joint venture between First Wind and Emera that now owns five wind farms in Maine, has postponed efforts to refinance $385 million in debt because of unfavorable market conditions. The move, while not highly unusual, has some industry watchers asking whether the market is souring on the renewable energy sector.

The joint venture, formed by the two companies in June 2012, went to the market in early August to refinance $385 million in debt incurred during the deal, but the market wasn’t offering terms better than those the company currently has, according to John Lamontagne, a spokesman for Boston-based First Wind.

“An analogy would be if you went to refinance your house and you have 5 percent rate for a 30-year fixed, and you try to refinance and it’s 5 and a quarter,” he told the Bangor Daily News on Monday. “You’re not going to refinance.”

As part of the creation of Northeast Wind, First Wind transferred 385 megawatts of wind energy projects in New England, including all four of its projects in Maine – Mars Hill, Rollins Wind, Stetson Wind I and II – to the new company. A fifth Maine project, Bull Hill in Hancock County, was added later in 2012.

Emera then invested $211 million to own 49 percent of the new company, with First Wind owning the remaining 51 percent. In addition, Emera loaned $150 million to First Wind, according to Dina Bartolacci Seely, a spokeswoman for Halifax-based Emera, which owns Bangor Hydro Electric Co. and Maine Public Service Co.

Seely called the testing of the market “basically a standard process, for lack of a better term.”

“There was no obligation to refinance,” Seely told the BDN on Monday. “Essentially, they were testing the market, and based on results of that decided to wait until conditions were more attractive to the joint venture.”

But withdrawing the debt package raises broader questions about the current market interest in the renewable energy sector, and perhaps First Wind in particular, according to industry watchers.

From a policy perspective, there’s still strong support for renewable energy projects throughout New England states, according to Todd Griset, an attorney at Preti Flaherty in Portland who focuses on the energy sector.

“But from a business perspective, this suggests this particular debt offering wasn’t sufficiently attractive to this market,” Griset said. “Is it the terms of this particular offering or for the larger market for renewables as a whole? It’s hard to know. It’s possible it could be either one.”

This isn’t the first time First Wind has had problems in the credit market. It pulled an initial public offering in 2010 after the market conditions didn’t meet the company’s expectations.

Griset isn’t a completely neutral voice in the matter. He and his firm represent the Industrial Energy Consumers Group, which filed an appeal – along with the Maine Office of the Public Advocate and the Houlton Water Co. – after the Maine Public Utilities Commission, against the recommendation of the PUC staff, approved First Wind and Emera’s plan to form Northeast Wind Partners as a joint venture in 2012. The appelants argue the creation of Northeast Wind violates the Maine law that restructured the state’s electricity market and bars transmission companies such as Bangor Hydro from owning electricity-generating facilities, including wind farms.

That appeal is still pending at the Maine Supreme Court, Griset said. If the court agrees with the appellants, the decision will be sent back to the PUC, which will have to review whether it has the authority to approve the joint venture. If that occurs, “that makes the whole joint venture of Northeast Wind a whole lot different,” Griset said.

Eric Bryant, the attorney at the Maine Office of the Public Advocate who filed the appeal, was not available this week for comment, but last year told the Maine Center of Public Interest Reporting that he was “somewhat surprised” when First Wind and Emera went along with their business plan despite the pending appeals.

“It’s unusual for a company to make a decision when there’s risk involved that it may have to undo it because of a legal matter,” Bryant said at the time.

Moody’s Investor Services on Aug. 5 gave Northeast Wind’s proposed $385 million debt package a rating – Ba3 – it reserves for obligations “judged to have speculative elements and are subject to substantial credit risk.”

While the Moody’s rating doesn’t mention the pending appeals as a risk, it does mention other risks, including the fact First Wind has experienced a series of expensive gearbox failures at four wind farms in New York and Vermont that use turbines from Clipper Windpower LLC. According to Moody’s, First Wind suffered seven gearbox failures at those sites in 2013 through July, and five in 2012.

Because of Clipper Windpower’s restructuring in 2012, the company’s operating and maintenance and warranty agreements with First Wind were terminated, according to the Moody’s report. As a result, each gearbox failure costs First Wind $650,000 to refurbish, according to Moody’s. The Maine wind farms have turbines from Vestas and General Electric.

Moody’s mentions another credit risk is “utility curtailment issues” at three of its Maine wind farms, Rollins and Stetson I and II. “The curtailment of the projects has been caused by transmission constraints and has reduced their respective generation outputs and cash flows,” Moody’s reported.

“While steps have been taken to mitigate each of these items, they represent significant and ongoing risks for the Northeast JV and could, if unresolved, negatively impact the borrower’s rating,” the Moody’s report reads.

Despite the withdrawn debt offering, Lamontagne said First Wind is not having a hard time attracting investors, pointing out that it sold $200 million of senior secured bonds to investors in 2011. In total, the company has since 2004 raised between $4 billion and $5 billion to develop, build and operate its projects, Lamontagne said.

“I think that’s a strong statement in support from different investors,” he said.

Northeast Wind will return to the market to refinance its debt if market conditions improve, according to Seely from Emera, “but there are no immediate plans to do so.”