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Friday, February 17, 2012

Cape Wind: Ready to Seek Project Financing

Following years of challenges, litigations, delays, and concerns, Cape Wind has announced that it is ready to seek project financing for its 420 megawatt 130-turbine offshore wind generation project in Nantucket Sound. The announcement was made in the wake of a deal brokered by Massachusetts’ Governor Deval Patrick’s administration with respect to a proposed merger between NSTAR Electric Company, NSTAR Gas Company, and Western Massachusetts Electric Company and its holding company parent Northeast Utilities. The proposed merger includes a condition that requires the merged utility to purchase 27.5% of Cape Wind’s output—that is, 129 megawatts of capacity from the proposed 468-megawatt project—via a 15 year power purchase agreement (“PPA”). In combination with the sale of 50% of its output to National Grid, Cape Wind now has buyers for 77.5% of the wind farm’s total proposed output which Cape Wind President Jim Gordon has stated is enough to seek project financing.

Before investors will commit to financing the project, merchant generators such as Cape Wind must demonstrate that investors will be able to earn a return on their investment. For energy generators, this means securing purchasers for the majority of the energy generation project’s proposed output—usually via a PPA.

The PPA with NSTAR is one of several conditions of a settlement brokered by the Patrick administration with respect to the NSTAR/ Northeast Utilities merger, a $17.5 billion transaction. The merger has been heavily litigated since the utilities initially petitioned the Massachusetts Department of Public Utilities (DPU) for approval in 2010. Under the proposed settlement, the utilities will be permitted to merge subject to certain conditions designed to create enhanced benefits for Massachusetts ratepayers. Thus, conditions include a four-year freeze on base energy distribution rates and a one-time $21 million credit for ratepayers. Massachusetts Attorney General Martha Coakley has stated that the deal will save Massachusetts consumers an estimated $217 million. Copies of the proposed settlement documents are available here.

If the DPU approves the settlement proposal and allows the merger, NSTAR will have to negotiate the price terms of the PPA with Cape Wind. Under the proposed Settlement, NSTAR and Cape Wind must file a Memorandum of Understanding ("MOU") with DPU within 20 days of the Settlement to set forth proposed timetables and methods by which the parties will negotiate the terms of the PPA. In turn, the parties must file an executed PPA with DPU no later than March 30, 2012. See here.

Notably, the Settlement includes an "out" for NSTAR in the event that Cape Wind fails to begin construction of its facility by December 31, 2015. Specifically, the Settlement provides that if the DPU determines that Cape Wind has not commenced "physical construction" by December 31, 2015, "then NSTAR Electric shall terminate the Cape Wind Contract [the PPA] as of December 31, 2015." "Physical Construction" is defined as "any physical installation of equipment or materials into the seabed of the Cape Wind construction site that is integral to the assembly of the wind turbine generation units." Id.

The NSTAR PPA will likely contain terms similar to those set forth in the National Grid PPA which was approved by DPU and upheld by the Massachusetts Supreme Court in December 2011. Under the National Grid PPA, National Grid will purchase power from Cape Wind at a starting price of 18.7 cents per kilowatt-hour, escalating 3.5 percent annually over a 15-year term.

Cape Wind has obtained all of the necessary environmental permits and, in 2010 received the first-ever submerged land lease for a renewable energy project to be located on the outer continental shelf from the U.S. Department of the Interior.