by Andrew Walden
Hawaii’s largest windfarm developer is selling its windfarms to a “dividend growth-oriented” holding company, Terra Form Power, Inc. Fortunately for Hawai’i Free Press readers, TerraForm’s S-1 report filed with the SEC December 9, 2014 is very revealing about problems with turbines, batteries, tax credits, golden parachutes, and dead birds and bats at First Wind’s Kahuku, Oahu, and Kaheawa, Maui, windfarms.
According to TerraForm, HECO paid over $27M to First Wind in 2012 and 2013. MECO gave First Wind over $45M. Now the windfarms will be transferred to a company whose executives are hiding their “golden parachutes” and admit they “lack experience” and are “prone to errors.” The turbines and batteries are defective and their manufacturers are not going to repair them. First Wind got paid even after the Kahuku battery fire and their projects “are not obligated to physically deliver electricity.” TerraForm acknowledges that financing for windfarms “would likely cease to exist” without government tax credits.
Here are the details excerpted from TerraForm’s 272 page report to the SEC:
Defective Batteries May Cause Default, Termination of Maui Power Sales
First Wind’s Kaheawa Wind Power II, or “KWP II” project is required under its PPA to install and maintain a battery energy storage system, or “BESS,” for electric grid stability and system reliability purposes. The manufacturer of the BESS, Xtreme Power, is in bankruptcy and is no longer providing replacement batteries and other components for the BESS. First Wind is sourcing replacement batteries from a new supplier that we expect will be installed and tested in the near future, but such replacement batteries may not be sufficient for the system to operate as designed or may not be available in the quantities or at a price that permit the KWP II to operate economically or in compliance with its PPA. First Wind’s Kahuku project had a similar BESS that was required to be operated under its PPA, but the BESS was destroyed in a catastrophic fire. The project installed a Dynamic Volt-Amp Reactive System, or “D-Var,” as a replacement for the BESS under the Kahuku project PPA, which D-Var has been operating as designed. If the BESS system at KWP II was damaged or could no longer operate due to a lack of sufficient batteries or other system components, a D-Var could not be used at the KWP II project as a replacement to the BESS due to technical constraints, and another replacement system may not be compatible or available at a price that would allow the project to operate economically. Failure to maintain the battery system constitutes a default under KWP II’s PPA and could result in the termination of KWP II’s PPA, which could negatively impact our business financial condition, results of operations and cash flow. (p51)
Wind Turbines Defective, Manufacturer Will Not Repair
Certain of the wind projects use equipment originally produced and supplied by Clipper Windpower, LLC, or its affiliates, or “Clipper,” which no longer manufactures, warrants or services the wind turbine it produced that are owned by First Wind. Such equipment has experienced certain technical issues with its wind turbine technology and may continue to experience similar issues.
The Cohocton, Kahuku, Sheffield, and Steel Winds I and II projects operate ninety two Liberty turbines (230 MW) supplied by Clipper. Since initial deployment, Clipper has announced and remediated various defects affecting the Liberty turbines deployed by First Wind in its wind projects and by other customers that resulted in prolonged downtime for turbines at various projects.”
Beginning in 2012, First Wind and Clipper engaged in a number of litigation and arbitration proceedings concerning the performance of the Liberty turbines. On February 12, 2013, all such disputes were settled pursuant to a Settlement, Release and O&M Transition Agreement among certain First Wind and Clipper entities, or the “Settlement Agreement.” Pursuant to the Settlement Agreement, First Wind has, among other things, released Clipper of all of its warranty obligations with respect to the equipment supplied by Clipper, and the obligations under the related operation and maintenance contracts, and has been granted by Clipper a non-exclusive, royalty-free, perpetual, irrevocable license to make, improve and modify any Clipper-supplied equipment and to create derivative works from such equipment.
As a result, if Clipper equipment experiences defects in the future, we will not have the benefit of a manufacturer’s warranty on such original equipment, may not be able to obtain replacement components and will need to self fund the correction or replacement of such equipment, which could negatively impact our business financial condition, results of operations and cash flows. (P53)
First Wind May Not Have Notified FAA Before Windfarm Construction
Wind energy towers and turbines can physically interfere with air navigation, and solar facilities can generate glare that may have a distracting effect on pilots. Although First Wind is required to notify the Federal Aviation Administration, or “FAA,” of the location of its wind towers and facilities, they may not have correctly notified the FAA in all cases. There is some chance that the facilities we expect to acquire as part of the First Wind Acquisition could result in adverse effects on air safety, or that we could be ordered to mark our facilities or modify operations to avoid such effects. In addition, we could incur fines or penalties in connection with the failure to property notify the FAA or otherwise fail to comply with regulations relating to hazardous to air navigation. In addition, wind energy facilities can interfere with military radar operations or telecommunications. If such interference occurs, we may be required to modify our operations to avoid such interference. Any of these events could have a material adverse effect on our business, financial condition and results of operations…. (p54)
Hawaii Windfarms Killing Endangered Bats, Birds
Excessive taking of protected species can result in requirements to implement mitigation strategies, including curtailment of operations. First Wind’s projects in Hawaii that we intend to acquire, several of which hold incidental take permits to authorize the incidental taking of small numbers of protected species, are subject to curtailment (i.e., reduction in operations) if excessive taking of protected species is detected through monitoring. At some of the projects in Hawaii, curtailment has been implemented, but not at levels that materially reduce electricity generation or revenues. Such curtailments (to protect bats) have reduced nighttime operation and limited operation to times when wind speeds are high enough to prevent bats from flying into a project’s blades. Based on continuing concerns about species other than bats, however, additional curtailments are possible at those locations. (p48)
Windfarm Financing ‘Would Cease to Exist’ Without Federal and State Tax Credits
Renewable generation assets currently benefit from various federal, state and local governmental incentives. In the United States, these incentives include investment tax credits, or “ITCs,” production tax credits, or “PTCs,” loan guarantees, RPS programs and modified accelerated cost-recovery system of depreciation. For example, the United States Internal Revenue Code of 1986, as amended, or the “Code,” provides an ITC of 30% of the cost-basis of an eligible resource, including solar energy facilities placed in service prior to the end of 2016, which percentage is currently scheduled to be reduced to 10% for solar energy systems placed in service after December 31, 2016. The U.S. Congress could reduce the ITC to below 30% prior to the end of 2016, reduce the ITC to below 10% for periods after 2016 or replace the expected 10% ITC with an untested production tax credit of an unknown amount.
PTCs and accelerated tax depreciation benefits generated by operating projects can be monetized by entering into tax equity financing agreements with investors that can utilize the tax benefits, which have been a key financing tool for wind energy projects. The growth of our wind energy business may be dependent on the U.S. Congress extending the expiration date of, renewing or replacing PTCs, without which the market for tax equity financing for wind projects would likely cease to exist. (p45)
Projects Not Obligated to Physically Deliver Electricity
First Wind has entered into, and, after the First Wind Acquisition, we may enter into, financial swaps or other hedging arrangements. We may also acquire additional assets with similar hedging arrangements in the future. Under the terms of First Wind’s existing financial swaps, the projects are not obligated to physically deliver or purchase electricity. Instead, they receive payments for specified quantities of electricity based on a fixed-price and are obligated to pay the counterparty the market price for the same quantities of electricity. These financial swaps cover quantities of electricity that First Wind estimates are highly likely to be produced. As a result, gains or losses under the financial swaps are designed to be offset by decreases or increases in a project’s revenues from spot sales of electricity in liquid ISO markets. However, the actual amount of electricity a project generates from operations may be materially different from First Wind’s estimates for a variety of reasons, including variable wind conditions and wind turbine availability. If a project does not generate the volume of electricity covered by the associated swap contract, we could incur significant losses if electricity prices in the market rise substantially above the fixed-price provided for in the swap. If a project generates more electricity than is contracted in the swap, the excess production will not be hedged and the related revenues will be exposed to market-price fluctuations.
We sometimes seek to sell forward a portion of our Renewable Energy Certificates (RECs) or other environmental attributes to fix the revenues from those attributes and hedge against future declines in prices of RECs or other environmental attributes. If our projects do not generate the amount of electricity required to earn the RECs or other environmental attributes sold forward or if for any reason the electricity we generate does not produce RECs or other environmental attributes for a particular state, we may be required to make up the shortfall of RECs or other environmental attributes through purchases on the open market or make payments of liquidated damages. Further, current market conditions may limit our ability to hedge sufficient volumes of our anticipated RECs or other environmental attributes, leaving us exposed to the risk of falling prices for RECs…. (p45)
First Wind Got Paid Even After the Kahuku Batteries Burned
In August 2012, a fire struck Kahuku destroying the project’s BESS, and the associated BESS enclosure building. The project’s substation control room, which was housed in the BESS enclosure building, was also destroyed. Since the fire, First Wind has rebuilt Kahuku’s substation control room and equipment within a stand-alone enclosure, and installed a D-VAR. The D-VAR provides voltage regulation and stability to meet the interconnection requirements of HECO and replaces some critical functionality (overvoltage mitigation) that was once provided by the BESS. Kahuku received business interruption insurance and property damage insurance to minimize the financial result of the loss. The project is currently connected to the grid and has completed system testing with HECO. As part of the rebuilding process and in concert with HECO, the PPA was amended to include revised interconnection and performance standards to reflect the shift from the BESS to the D-VAR, as well as a change to the fixed energy price received by Kahuku based on the same and the amendment is pending regulatory approval. (p162)
In July 2010, First Wind entered into a $117.3 million construction and term loan facility guaranteed by the DOE under Section 1703 to help finance construction of the Kahuku project. (p249)
The First Wind Operating Entities insure against losses stemming from business interruptions. In the years ended December 31, 2012 and 2013, the First Wind Operating Entities recognized $6.2 million and $8.6 million, respectively of business interruption recoveries that resulted from a fire at Kahuku’s battery energy storage system (BESS). The recoveries are included in revenues in the accompanying combined statements of operations. (p255)
We lack experience, may be prone to errors, could suffer irreparable harm
We have limited experience in energy generation operations. As a result of this lack of experience, we may be prone to errors if we expand our projects beyond such energy projects other than solar and, upon consummation of the First Wind Acquisition, wind. We lack the technical training and experience with developing, starting or operating non-solar generation facilities. With no direct training or experience in these areas, our management may not be fully aware of the many specific requirements related to working in industries beyond solar energy generation. Additionally, we may be exposed to increased operating costs, unforeseen liabilities or risks, and regulatory and environmental concerns associated with entering new sectors of the power generation industry, which could have an adverse impact on our business as well as place us at a competitive disadvantage relative to more established non-solar energy market participants. In addition, such ventures could require a disproportionate amount of our management’s attention and resources. Our operations, earnings and ultimate financial success could suffer irreparable harm due to our management’s lack of experience in these industries. We may rely, to a certain extent, on the expertise and experience of industry consultants and we may have to hire additional experienced personnel to assist us with our operations. (p46)
We Are Using a Loophole to Hide Executive Compensation and Avoid Audits
…our Sponsor (SunEdison) is our controlling stockholder and exercises substantial influence over TerraForm Power, and we are highly dependent on our Sponsor; (p19) … (but) …
As a company with less than $1.0 billion in revenue during our last fiscal year, we qualify as an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act, or the “JOBS Act.” Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or the “Securities Act,” for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.
An emerging growth company may also take advantage of reduced reporting requirements that are otherwise applicable to public companies. These provisions include, but are not limited to:
• not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended, or the “Sarbanes-Oxley Act;”
• reduced disclosure obligations regarding executive compensation in our periodic reports, proxy statements and registration statements; and
• exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved….
We have elected to take advantage of certain of the reduced disclosure obligations regarding financial statements and executive compensation in this prospectus and may elect to take advantage of other reduced burdens in future filings. As a result, the information that we provide to our stockholders may be different than you might receive from other public reporting companies in which you hold equity interests. (p162)
100% Mainland-Owned After First Wind Bought Out the Local Guys
In October 2012, the First Wind Operating Entities purchased from its partner, Makani Nui Associates, LLC, the membership interests in Hawaii Wind Partners, LLC. (p255)