Winds of change

CFO
October, 2006 Page: 34

Babcock & Brown wind partners has harnessed a renewable source of profit.

Fostering a market for renewable energy in Australia is one of the challenges facing investors and financiers in a market in which coal is indisputably a cheaper source of energy than almost all other alternative sources.

So the financial mechanics of organising large-scale investment in energy sources such as wind power depend, controversially, on a government scheme, the Mandatory Renewable Energy Target .

Against this background, the sponsors of the Lake Bonney wind farm project in South Australia were able to mitigate the commercial risks to create a project that generated good economic returns. Babcock & Brown Wind Partners (BBW), a listed entity on the Australian Stock Exchange, sponsored and provided the equity investment in Lake Bonney Stage 2, a wind farm now under construction on the Woakwine Range between Millicent and Mount Gambier in South Australia. The second stage of the wind farm will provide 53 turbines over 10 kilometres of the range, and is expected to generate a net annual electricity output of about 500 gigawatt hours.

Stage 2 is adjacent to a slightly smaller number of turbines installed three years earlier during the first stage of the project. For stage 1, BBW's advisers negotiated a conventional off-take contract with NSW electricity retailer Country Energy to buy 100 per cent of the electricity generated. In this instance, for Lake Bonney 2 BBW elected to sell the electricity generated directly on the spot market, an approach motivated by the relatively small number of generators in SA as well as confidence in their analysis of the outlook' for electricity prices.

Peter O'Connell, chief executive of Babcock & Brown Wind Partners, says the attitude of investors also informed their approach. "More than 80 per cent of our output worldwide is sold under fixed contracts. We've had a lot of comment, from shareholders that they'd like to balance that out, we do see a strong market for this sort of power in the future,"

The financiers had to share the sponsor's comfort on the merits of the spot market as opposed to the traditional contracting of the electrical output. As with other renewable energy projects, the legal framework in Australia means that wind farms have two revenue sources: the electricity itself, and revenues from selling the renewable energy certificates. The sponsors also entered into relatively unusual construction arrangements, with local contractors taking responsibility for site works (including roadworks, turbine bases and connection to the electricity grid), with the supplier of wind turbines, Vestas, obliged to install the turbines on site. "This required a great deal of attention to the coordination arrangements between the different contractors to ensure that the contracts meshed together as seamlessly as possible, O'Connell says.

BBW's advisers approached banks during the last quarter of 2005 and produced an information memorandum in January 2006. B&B picked a club of four banks to provide $310 million in nine-year term debt: Dexia, KBC, Societe Generale and Suncorp. Rothschild Australia provided $20 million in mezzanine finance, repayable after 11 years. The financial package also included a take-out on $90 million in non-recourse debt provided by BNP Paribas, Commonwealth Bank, West LB and Dexia for stage one of the project, a finding line negotiated three years ago.

O'Connell says of the banks: "They have reached a level of maturity over the statistics and data about wind farms that allows them to asses the risks. The [key performance indicators] for Lake Bonney 1 were well-known by the time we did Lake Bonney 2, so the banks understood the area's potential as a centre for wind generation"