DALLAS — Proceeds from an estimated $1.65 billion of industrial revenue bonds would link the nation’s three major power grids and bear the name of Clovis, N.M., but the town will carry no risk if the project falters, officials say.

The taxable IRBs will allow developers of the proposed Tres Amigas SuperStation to avoid state and local taxes while issuing debt under the name of the town in eastern New Mexico, according to those involved in the planning.

“New Mexico may be a little unique in that the bearer of the legal title is the city,” said Duane Brown, attorney at Modrall, Sperling, Roehl, Harris & Sisk in Albuquerque that provides bond counsel for Clovis.

However, the incentive provided by Clovis “is really about the tax benefits,” Brown said. “Don’t get distracted by the size of the issue.”

Under terms of an agreement approved by the Clovis City Commission earlier this month, the developers known as Tres Amigas LLC will pay the debt service on the bonds through leasing of the power station. Tres Amigas will, in effect, buy the bonds with financing from private sources. The bonds are expected to be created in three tranches to coincide with development of the plant.

“These bonds are ‘self-funded,’ which requires that we provide all of the capital from our own balance sheet for the IRBs,” said Russell Stidolph, chief financial officer for Tres Amigas.

“Since these IRBs are not being ‘raised’ and are not taking in outside capital, there are no ratings,” Stidolph said via email. “Our capital-raising process for phase one of the project, traditional debt and equity, in the amount of $500 million, will commence before year end.”

The Clovis City Commission is expected to consider the bond resolution Dec. 6, with approval expected by early January, said Clovis city manager Joe Thomas.

The company, which had planned to break ground in November, now expects construction to start early next year. The first phase of the project is budgeted at $429 million, with the second and third phases at $433 million and $793 million respectively.

When built, the Superstation will handle 30 gigawatts of power transfer capacity, according to plans. The first phase, handling 750 megawatts, is scheduled to be operational in 2015, linking all three grids serving the United States and Canada for the first time.

While $1.65 billion sounds like an enormous sum for a city with fewer than 40,000 people to bear, such a transaction is not unprecedented.

Sandoval County in 2004 authorized $16 billion of IRBs for an Intel plant in the town of Rio Rancho on the outskirts of Albuquerque, a deal that ranked as the largest in U.S. history.

In 2004, Clovis provided $350 million of IRB financing for a Southwest Cheese plant that employs more than 200 people nine miles from the Texas border.

“In the 1990s, the New Mexico Legislature realized we were not being competitive and needed something to entice industry to the state,” said Thomas. “And the IRB does that.”

Tres Amigas’ developers first sought authority for $1.9 billion of financing from Curry County, for which Clovis is the seat of government. But the firm withdrew that request in August. A spokesperson said the company switched to the city because it had experience with IRBs and the county did not.

RBC Capital Markets is serving as financial advisor to the city.

Explaining industrial revenue bonds to Clovis citizens has been one of the key tasks for local officials, said Gene Hendricks, economic development specialist at the Clovis Industrial Development Corp., who played a role in luring Tres Amigas from its original proposed site in the Panhandle of Texas.

“I don’t know that there’s any opposition to this project at all,” Hendricks said. “There’s uncertainty that someday, somehow we’re going to get stuck with this. Really, there’s no way we could lose.”

Under the laws regulating IRBs, the political subdivision issuing the IRB retains ownership of the bond-financed facility and leases it back to the company at a rate sufficient to pay the principal and interest on the bonds as they mature.

The company enjoys tax advantages such as exemption from sales tax on construction materials, use tax on the purchase of equipment, as well as mortgage-deed tax and ad valorem tax for a term limited to 10 years.

Local sales and use taxes and school property taxes are not eligible for exemption.

Taxable IRBs come with fewer restrictions and in unlimited amounts while the user maintains tax savings. Interest rates are generally higher than on tax-exempt bonds.

One major feature that helped Clovis attract Tres Amigas was its offer of a single, 22.5-square-mile site with one owner about 17.5 miles north of the city, avoiding negotiations with multiple landowners, Hendricks said.

The project is expected to have an enormous impact on power generation and transmission across North America, particularly renewable energy from wind and solar.

Promoters describe the SuperStation as, in essence, the world’s first high-capacity “renewable energy hub,” although trading of conventional sources of electricity will be accommodated as well.

The three electric grids that it will connect through direct current are the eastern, known as the Southwest Power Pool, the western, known as Western Electricity Coordinating Council, and Texas, called the Electric Reliability Council of Texas or Ercot.

The goal is to create strong and reliable renewable power from intermittent renewable sources such as solar and wind. The new strategy will allow customers to purchase a portfolio of power with the largest possible component of solar and wind power, backers say.

While the eastern and western power grids already share interconnections, including one in Blackwater, N.M., the Tres Amigas station — as the Spanish words for “three girlfriends” imply — would require participation by Ercot. As the nation’s leading producer of wind energy, Texas would gain access to other markets through Tres Amigas.

Ercot is also considering linking to the eastern power grid through a $2 billion project known as the Southern Cross. Both projects would follow Texas’ own development of transmission lines for wind energy known as CREZ, for Competitive Renewable Energy Zone lines.

In 2008, the Public Utility Commission of Texas assigned $4.93 billion of CREZ transmission projects to seven transmission and distribution utilities, primarily investor owned. The project, expected to be completed in 2014, will transmit 18,456 megawatts of wind power from West Texas and the Panhandle to the most populated metropolitan areas of the state.

“ERCOT received an interconnection request for the Southern Cross project in 2010 and, to date, has not received a formal request for the Tres Amigas project,” said ERCOT spokesman Robbie Searcy.  “Regardless of how the projects proceed, ERCOT would not have a financial role.”

Texas officials have heretofore resisted any perceived loss of autonomy through linking to the other power grids, but officials with Tres Amigas say the state has an incentive to join its system.

Along with providing additional power for the peak summer season in Texas, Tres Amigas would allow producers of wind power in the state to sell to any market in the U.S. Part of the Texas Panhandle, home to major wind farms, is already part of the eastern grid.

“We’ll be able to get an interconnection and keep ERCOT independent,” said David Raskin, an attorney for the law firm of Steptoe and Johnson that is handling regulatory issues for Tres Amigas. “I think that would be a great thing for Texas.”

Raskin said that he expects negotiations with ERCOT to take about a year. Agreements with the eastern and western grids are likely to come first, he said.

Investors in the project include major electricity marketing firms and the engineering firm CH2M Hill of Colorado. Last year, Japan’s Mitsui & Co. joined with a $12 million stake. The Navajo Nation, which covers parts of New Mexico and Arizona, is also considering an investment in the project as it develops its own renewable energy production. q

Minnesota-based National Renewable Solutions LLC is banking on Tres Amigas to carry up to 500 megawatts of new wind energy from eastern New Mexico and West Texas to its customers. Renewable Solutions is building a small, 18-megawatt wind farm in Grady, north of Clovis, for sale to Farmers Electric Cooperative Inc. of New Mexico. The company could build up to 200 more megawatts of wind farms on both sides of the border for sale to local utilities if it gains access to national markets through Tres Amigas.

The Tres Amigas plan comes amid a wave of expansion in investor-owned utilities prompted by growth and environmental regulatory issues.

“Capital expenditure plans for most U.S. utilities remain at elevated levels, outpacing depreciation and amortization expense by almost 100%, on average, for the past five years,” according to a report from Moody’s Investors Service. “From a credit perspective, we view capital investment in rate base positively, because a growing rate base, coupled with timely recovery, adds to net income, operating and retained cash flow.”

Tres Amigas and Southern Cross would not be ERCOT’s first link to outside power grids, but the five existing connections, including two to Mexico, are considered choke points for Texas’ stranded energy.

While private investors would largely fund Southern Cross, the public Garland Power & Light utility in suburban Dallas is a major player. GPL will operate the power transfer station on the Texas-Louisiana border and the 30 miles of transmission line leading to it.

The amount of power that can be exported or imported into Texas through the new transmission facilities will be three times more than exists currently, according to GP&L.

“The project, which will provide the southeast United States with the opportunity to access affordable renewable energy, will also provide significant reliability benefits to both regions by connecting two robust systems and allowing sharing of resources,” said Mike Garland, chief executive of Pattern Energy Group.

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