You Don’t Need a Weatherman to Know Which Way the Wind Blows

But we do need a national energy policy to stimulate wind, solar, and other renewable fuel projects, says Acciona Energy North America's CFO, Susan...
David KatzOctober 28, 2009

You might not expect to spot a finance chief on Capitol Hill, jawboning senators and representatives. Yet that’s where Susan Nickey of Acciona Energy North America found herself on February 11, just two days before Congress passed the American Recovery and Reinvestment Act, better known as “the stimulus bill.” The only CFO among a group of wind-power advocates, she was holding forth on the need to spur capital investment in renewable energy.

Unlike most other finance chiefs, Nickey feels that an important part of her job consists of making things happen in Congress. Thus, she’s found herself nose to nose with the likes of California Sen. Barbara Boxer and has joined a number of policy-oriented committees of the American Wind Energy Association aimed at boosting the financing of renewable-energy projects. “The biggest challenge and the most difficult issue that I need to work on is to get Washington to think about the energy policy and the legislation in terms of its having has to work for the capital markets. Our work is so capital intensive,” she says.

Her main reason for such work: a major source of project financing isn’t up to producing the growth the industry needs to stay viable. Up until now, wind, solar, and other alternative-energy efforts have been funded heavily in the United States via tax credits given to investors in such projects. Investment banks like JPMorgan and GE Capital, which tend to report huge profits, are in the market for deals that will provide them with tax credits to slim down their tax liabilities.

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In contrast, project developers and owners like Acciona, the Spain-based parent company of Acciona Energy North America, don’t have a big-enough U.S. tax base to make efficient use of the tax credits.

Thus investment bankers and big commercial banks like Citigroup have been moved to take equity stakes in tax-favored renewable energy projects. But the amount of funding unleashed by a tax-based national energy project is limited, especially since the nation’s investment banking sector was walloped by the global financial crisis, Nickey notes. What’s more, the current tax-oriented financing system for renewable energy is “overly complex, restrictive and [provides] a too-small pool of available capital,” she says.

Currently, she’s most worried that the U.S. Treasury Department won’t continue supplying the cash refunds mandated by the stimulus bill for qualified renewable energy facilities. The amount of a grant generally equals that of the investment tax credit the owner otherwise would have been eligible for (usually 30% of the qualified cost of the project).

 Acciona-Nickey“We have an expression: we ring the bell. We ring the bell when we have a success, like a financial closing or a power-purchase agreement. I hope to be ringing the bell a lot.” — Acciona Energy North America CFO Susan Nickey

She sees such funding as a “bridge” from a system based on tax incentives to “the enactment of a stable, long-term energy policy to support renewable energy growth and attract capital investment through the larger capital market pools available for energy in the U.S.” From a CFO’s perspective, she says, she feels that such a policy must provide investors with “a predictable minimum economic return stream to attract long-term capital.”

The bulk of Nickey’s job at Acciona Energy North America is taken up with project finance issues — something she knows a good deal about, having worked for 20 years in commercial and investment banking experience, including 15 years in the renewable energy sector. In fact, she made the transition to CFO three years ago, working as an investment banker for Mesirow Financial on Nevada Solar One, a project that Acciona had become involved in that employs concentrated solar energy. She proceeded to start up the finance operations of the European company’s new Chicago-based North American unit from scratch.

Nowadays, she spends the bulk of her time wrapping up financing on such deals as the Red Hills Wind Farm in Oklahoma, a project Acciona closed with $100 million in “tax-equity” financing and $65 million in debt financing on August 21. But as the finance chief for not only Acciona Energy North America, but for the conglomerate’s separate U.S. wind and solar power subsidiaries as well, she’s responsible for the usual run of a CFO’s duties: accounting, financial planning and analysis, asset management, compliance, and risk management.

Indeed, making use of what seems like a wellspring of energy, she hasn’t taken very many vacation days in the last three years, Nickey told CFO Deputy Editor David M. Katz and Senior Editor Marie Leone in an interview in New York on October 13. An edited version of the conversation follows.

How is Acciona North America positioned in terms of the parent corporation?
The strategy is for 70% of the growth to be international, with the North American market being the primary growth market. Given the size of the North American market for renewable energy today — in which about 2% of our power is in renewables — we have a huge opportunity to be a good chunk of that 70%.

The North American operations really kicked off about three years ago. I was the financial advisor for them on Nevada Solar One, and they looked at that project as a key entree into the marketplace. They then made a commitment to open a wind-turbine manufacturing facility, and then three were built, for a total of over 500 megawatts. That’s three huge wind projects. We’ve been in a start-up to high-growth mode in the last three years.

What’s your current sales figure for North America?
We haven’t published the North American sales figures externally yet, but we will. We’re a private company, so we publish things on a consolidated global basis instead of just for North America. But you know, we’ve gone from a couple of million in revenues to over a couple hundred million in revenues. I can also say that in the past three years, we have added 546 megawatts of wind energy (410 in the United States, 136 in Canada) and 64 megawatts of solar energy, for a total of 610 MW. [In comparison, U.S. nuclear power plants have net summer capacities of between about 500 and 1300 megawatts.]

How do you finance a typical project?
What drives the market in the U.S is the tax incentives. For example, I financed Nevada Solar One with tax investors and debt, and it’s the same thing for our wind projects. When you look at individual wind projects, typically the tax credits have driven the majority of the capital structure — say 50% to 60% — with traditional project debt being another 20%, and 20% in sponsored equity from Acciona.

How did you move from investment banking into being a CFO?
As an investment banker for Nevada Solar One, I was brought on as a financial advisor to work with the State of Nevada and come up with a structure that would build an almost $300 million project. My role was to look at the development and the contracts, and to produce something that the markets would invest in, up-front, as a 25-to-30-year asset [on their books]. Acciona came in and said they wanted to invest in the United States and were willing to launch. But from across the seas, they said to me, “you’re the person on the spot that helps give us comfort that the pieces, the market, and the tax investors are there.”

So I helped put together the whole package, with a bow on it. I prepared the due diligence for Acciona to come in as the equity investor and gave them the comfort that we were going to have the long-term takeout. As we closed that project, they continued to spend a lot of time in North America and decided to open an office in Chicago and continue to build the human capital infrastructure to leverage what they had. They became confident that U.S. financial investors would step up and invest in these projects. I was with Mesirow Financial and then I joined Acciona as their CFO as we were closing that project.

What exactly is a “tax-equity investment”?
An equity investment in which the return is tax-benefit-driven, rather than cash-driven. In the case of renewable energy investments, a tax-equity investment would be motivated primarily by the production tax credit or investment tax credit and accelerated depreciation. The tax-equity investor market in renewables has primarily been comprised of institutional equity investors, typically large financial institutions such as JPMorgan and GE Capital. They have a significant tax base to efficiently use the tax incentives that developers and owners of renewable projects, such as Acciona, lack.

An investment credit is the same concept as a tax-equity credit. They get a dollar-for-dollar reduction in their tax bill today by making this investment. Let’s use a round number: there’s a $100 million a tax credit for making a $300 million investment in a solar project. You can allocate it through a partnership.

How many partners does a typical project have?
Usually you have financial institutions like the JPMorgans or the Citibanks. The reason for that is that banks don’t have manufacturing or other depreciation [that they can claim for tax purposes]. They’re typically very profitable, but they have nothing to offset their profitability because they’re not an operator or manufacturer. That’s why the financial institutions have historically been tax investors in housing, renewable energy, and other things that our government has wanted to promote.

The issue with that is there’s limited tax appetite. We’ve also lost many of our financial investors or banks in the last two years. But we want to take renewable energy from being alternative to mainstream. To do that, we need to change our regulatory and energy policy to open up the capital markets for traditional, 20-year utility loading. That’s my mission.

So what change needs to be made?
What we’d like to see is a national renewable portfolio standard that would require utilities to buy renewable energy. And that would help clear the price they pay for power. Then, that can be financed through bond markets or any of the capital that we have available in the United States. Actually, I think there’s adequate capital that’s interested in sustainable infrastructure development.

What role would the federal government play in the policy you favor?
Right now the government is providing an important bridge to get from a tax-oriented policy to a financial structure that’s less complicated. Tax investors helped grow the industry to where it is today — it wouldn’t be there without that. What was passed in the stimulus bill was a direct treasury grant to help continue renewable development as the capital markets recover [from the economic downturn]. Meanwhile, the government has worked on longer-term renewable energy portfolio standards and how we address carbon on a national basis. Because those are more complicated issues, they’re going to take more time.

In the interim, there’s a 30% direct cash grant refund that a project sponsor can apply for. We’re in the process of doing an application this week for two of our projects. That helps us continue to fund projects while the capital markets are recovering and fill some of the gap.

Turning to your role as a corporate CFO, what has it been like to start up a new department?
Not very many vacation days in the last three years. But as the first CFO for North America, I had the wonderful opportunity to build a finance organization from scratch. When I joined, our accounting system was outsourced. So I’ve developed the infrastructure for accounting, financial planning analysis, finance, asset management, compliance, and risk management.

How large a finance operation do you have?
I have a team at Acciona Energy North America; Acciona Wind Power has a team at our manufacturing plant; and also Acciona Solar Power has one. There’s an organization of about 30 and growing.

How do you balance your project finance role with the more traditional parts of a finance chief’s portfolio of tasks?

Because of the nature of the business, capital raising and having an external focus as a CFO is a critical part of my role and takes a good portion of my time. But I balance that with the operational side of the business. From the time we first go out and execute a land lease to the time we build and then close a project and then decide how we’re going to structure our financial statements and our reporting, it all has a finance-driven touch to it: to be able to go out and produce that package, to raise all those billions in capital. I’ve tried to make my finance organization function not only as a controllership; we have to be partners with all the cross-functional teams because they understand what the financial markets are like.

What role does the finance organization have in terms of compliance work for the assets in your portfolio?
Take our Red Hills wind project. I have two tax-equity investors and a lender. We have the monthly compliance of reporting to them. We do their tax returns and financial reporting. If we amend a contract, we have to make sure that what’s stated in the amendment is going to happen: it’s a 20-year living asset. We need to make sure we’re in compliance with that financial commitment we made to them as long as they’re continuing to do this.

Internally speaking, how is your company structured?
The closest business to what we do is a real estate company. But we invest in wind or solar companies, and they’re actually little limited liability companies. If you have a land lease, it’s not with Acciona Wind Energy, it’s with Red Hills. Each one of our projects is a little self-contained box that’s that particular asset. But even if we’re a portfolio company that raises the capital for a number of projects, we have a balance sheet and we raise corporate debt: that’s how we have to think about running and managing our business.

Do you tend to be an owner, a part-owner, or just an operator on these projects?
If it weren’t for the tax quirks in the U.S., Acciona would be what it typically is — a long-term owner-operator of wind projects. We try to bring in tax investors who monetize the project because they can get a majority of the tax attributes. Our financial structures let us become the majority long-term owner after the tax investors have gotten their investment, because they’re not long-term owners. So we run our projects like we’re the long-term owner. The investors also have the opportunity to flip down to a 5% ownership after they’ve gotten their return when the tax benefit runs off, in 7 to 10 years.

How many banking relationships do you have?
A lot. Globally, Acciona attracts banks that want to be relationship-oriented with an organization where they can have a long-term stable of lending activities. In the U.S., in addition to managing relationships with the project-finance arms of our global [financial] institutions, I’ve focused on bringing in new U.S.-based institutional investors to diversify and bring more capital to our activities: the life insurance companies, the John Hancocks, and the Prudentials.

Any pension funds?
We have not had any pension funds yet, but I’m talking to some because everyone’s heard that renewable energy now is sustainable. The financial crisis wasn’t caused by renewable energy; it’s actually been a very attractive and stable sector for investment. Pension funds need a long-term asset. They have a special interest, because some of them are labor oriented and may represent unions. And they’re saying, oh gee, renewable energy is creating jobs; if we invest in that sector, we’re a huge growth engine for new jobs.

What differences have you seen between the banks in Spain and the banks in the United States over the last year?
The Spanish lenders were not allowed by regulators to invest in mortgage paper. So fortunately the Spanish banks didn’t get into trouble. And they’re tremendous lenders to Acciona, so we benefited from having that continued stability with some of our core banks. European banks have generally restructured and gone through a reorganization with their governments.

They’re a very experienced and sophisticated lender group that has bought banks here in the U.S. When lenders are more conservative, there’s less capital and more deals chasing them. But as a CFO I have to make sure that our package rises to the top of their list.

The Spanish banks want to work with long-term sponsors, and particularly now they want projects that are well packaged, safe, stable investments. Having been on their side of the table, I also know that for bankers or institutional lenders like insurance companies, it’s important to have a package that they can literally cut and paste and go and get approved.

How do you feel about your job?
I have a dream job. To me, this is a perfect way to wrap everything I’ve learned in the last 20 years into working for a company where I can contribute to sustainability, renewable energy, and making the world a better place every day.

It is very, very satisfying that you can see a finished product that cross-functionally pulls the whole organization together. And we have an expression: we ring the bell. We ring the bell when we have a success like a financial closing or a power-purchase agreement. I hope to be ringing the bell a lot.