Noteworthy Article Regarding 2015 Production

The article also includes an interesting chart showing inter-annual variations in wind energy output.


Why wildlife issues matter to a wind lease revenue analysis

A recent article in SFGate notes Altamont Winds, Inc. has decided to permanently, and ahead of schedule, shut down 828 turbines at Altamont Pass. While these turbines are planned to be replaced (with 33 units), this early cessation of production will eliminate revenue until then. This is one example of wildlife issues affecting revenue and one reason for assessing wildlife risks when evaluating a wind lease.

Noteworthy article about wind’s long-term role in the power sector

More notably than Xcel’s plan to add wind is its projections regarding long-term (20-year) wind and gas pricing and the hedge value of wind in the case of Xcel, which is moving away from coal. Any Xcel-related wind lease should be analyzed considering Xcel’s plans and projections.

Changes in PPA Terms and Off-Takers

A recent, interesting article in PowerSource notes a shift in PPA terms in de-regulated markets. For landowners hosting projects in these markets, these shifts need to be considered when valuing long-term wind lease revenue, particularly post-PPA revenue valuations.

The PowerSource article also includes interesting information regarding purchasers — namely, corporations. The existence of these corporate off-take options (in these same markets) arguably should mitigate stranded-asset risk and also should be considered as an off-take option in these particular markets.

Wind Anomalies

A recent North American WindPower article confirms Q2 US wind continued below normal. Anecdotally, we also have heard from some US wind producers that 2015 has been “off.”

This evidence confirms the importance of considering wind anomalies (low wind years) when valuing wind lease revenue, especially in the case of a conservative valuation. While there likely will be some level of offsetting high wind years, the potential for offsetting stronger years may be limited by the number of years remaining under a lease or applicable power purchase agreement, and this point also should be considered, especially if a conservative analysis is desired.

Recent Xcel acquisition is an example of an important consideration when valuing wind revenue

The recently-announced acquisition by Xcel of a 200 MW project in ND confirms utilities remain interested in wind project ownership. The issues that arise in the case of utility ownership, however, may not be adequately addressed in a landowner’s lease/easement. If these issues are not adequately addressed in the lease/easement, then additional consideration may need to be given to the prospect of a utility purchase when valuing lease/easement revenue stream.

Selling Your Wind Rights – A few practical considerations

I’ve just returned from a trip to Iowa and have been speaking with more and more landowners and their advisors about turbines, turbine lease revenue stream value, wind rights severances, wind rights sales, ….

And the issue of severance associated with wind rights sales seems to be coming up more regularly.  And so I wanted to share a few thoughts about the issue.

Let’s say you own 1000 acres and also that “BigCo” has installed two turbines on your land pursuant to a wind easement agreement you signed in 2008. Now, let’s also say that to date you have been paid +/- $18,000.00/yr under your easement.

You’ve now received a letter from a company asking to buy your wind rights.

Firstly, there’s presumably no harm in talking to these firms. In fact, it may be useful to know what they think this contracted revenue stream is worth.

But whether you choose to make a deal will depend on a number of factors and issues – contractual, economic, legal, and personal, among others.

Presuming the law and your wind easement agreement (and maybe also your mortgage) are clear (i.e. you can sever your wind rights) and that compelling personal reasons encourage you to seriously explore a sale, then you must first consider (in this order) economic and then structure issues before making a deal, and even before signing a term sheet.

Based on recent discussions, odds are that the company asking to buy your wind rights is not offering you a price that’s in line with the long term value. Recently, where we have been asked about offers landowners have received from these firms, our assessment has been that the offers are significantly low – by as much as 50%. We reach this conclusion based on a comprehensive analysis of the multiple contract, economic, market, and project factors that are the reason for the value of the revenue. Frankly, the reason you receive a call to sell your wind rights is because the buyer also has analyzed these factors – and if there wasn’t good value, the buyer wouldn’t be talking to you.

If you still want to sell and need to bridge the gap between your valuation of the lease revenue stream and the buyer’s offer, then you need to understand what you have, and you need to be able to address the “holes” and “pitfalls” to the deal that, according to the buyer, support their number. You can only do this if you dig in to the overall economics, the market, and the features of the project. You know your lease, and you may know that it’s “better” (economically) than your neighbor’s, but you can’t stop your analysis there – you need to be able to show why your project is better than the one in the neighboring county – maybe it’s the wind resource; the turbines; the power purchase agreement; the market; … or all of these (plus other) factors combined. You need to be able to show why there is more value flowing from your lease (and from the project behind it). If you can’t address these issues, then you need to hire someone who can help you do it.

Once you have determined the value to you, there is one other issue you must seriously think about. And this is the effect on the value of your land of the turbines without their revenue stream. There are competing studies regarding this effect. Some of these suggest a significant (maybe more than 20%) reduction in value due to the fact of one or more turbines. So before you commit to a price (and to sell your wind rights), you need to balance the value of your lease revenue stream against the potential loss in value to your property due to the fact of the turbines without that revenue stream.

Now, let’s say that you have determined the value of the revenue stream and have concluded it is sufficiently greater than any potential reduction in the value of the property due to the turbines, and now you and the buyer are getting close to a price at which you are willing to sell. His price is still maybe a little lower than what you want, but he has offered to pay cash and to pay your legal fees, …. At this point, it may be time to think about the structure of the deal (not to mention the terms of the deed or assignment, but these are beyond the scope of this discussion), because structure elements may get you the additional value you need.

There are no shortage of ways that you can structure this deal. The buyer will tell you differently, but so long as you hold the wind rights, then you have the leverage, and you should explore your options. Maybe you want to spread some of the payments out over a short period of time. Or maybe you want to build in bonus payments (maybe for good wind years) or maybe for a continuation of the project beyond a pre-determined number of years, …. Or maybe you want a right of first refusal to buy back the wind rights (I can think of multiple reasons why this would be good to have). Or, maybe ….  In this analysis, you’ll only be limited by your and your advisor’s creativity – all of which should be geared to your maximizing your long-term value. You may not be able to get all (or maybe even any) of what you ask for, but you’ll certainly get nothing if you don’t ask.

These are a few of the immediate issues that come to my mind when thinking about a wind severance.  And every deal is different, and some of these issues may not apply, and even others may apply, depending on your specific situation. Two constants, though, seem to apply to every deal – 1) that you need to determine the value of what you have and 2) that you need to structure the deal to meet your needs.

RLI Article

Please enjoy the RLI TerraFirma Lease Gen Article by us.

Recent North American Wind Power Articles Regarding Wind Anomalies Worth Noting

Two recent articles in North American Windpower discuss first quarter 2015 wind anomalies for certain projects — resulting in 5% production drops in the first quarter of 2015, and as much as a 20% drop in January. While meteorological review suggests these drops are not outside the range of what should be expected, they confirm wind anomalies should be factored in to a lease turbine revenue analysis. In a hypothetical analysis performed by LeaseGen, three production drops of this magnitude (1.25% annually) over the course of a project’s estimated 30-year useful life resulted in an approximate drop in value of 1.5%, a significant percentage where a considerable number of turbines are installed.

MinWind — An Example of Why the Subtle Elements of a Project Require Consideration

The recent MinWind bankruptcy shows why even the seemingly-insignificant elements of a project require consideration when valuing turbine lease revenue — in this case, the developer’s power sector experience.