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Analysis - BP and its 2.6GW uturn

GERMANY: BP's surprise decision to cancel the sale of its US wind assets - after less than four months - came just hours before the London-based oil giant reported disappointing second-quarter profits.

Clipper's Liberty wind turbines at BP's Fowler Ridge wind farm
Clipper's Liberty wind turbines at BP's Fowler Ridge wind farm

Nevertheless, it's unclear why BP's reserved itself on offloading its wind assets and closing its American wind unit. That's despite the well-known problems in BP's portfolio – namely, the numerous troubled Clipper turbines and four merchant plants in Texas.

The oil firm said on 30 July that it was no longer selling its 16 or more US wind projects -- 2.6GW of installed capacity-- and 2GW project pipeline. It would have been one of the largest wind asset sales in some time. "Despite receiving a number of bids, the company has determined that now is not the right time to sell the business," said spokesman Matt Hartwig. He would not elaborate.

The bids cannot have met BP's own valuation – but there was apparently no shortage of interest. "I believe that the most of the major IPPs (independent power producers) and utilities were looking at the assets," said Dan Sinaiko, a partner at Akin Gump and member of the law firm's global project finance group. He had no information on interest from second tier buyers, such as smaller developers.

"The asset portfolio had fleas," noted Sinaiko. But the recent market for selling commissioned wind projects has been good, he said, with low interest rates and little for sale. "What's puzzling is that they had to understand their assets were flawed and that they are not likely to see a better price [in the near future]," he said. "I would be surprised if the assets are back on the market in the short-term."

BP may have had trouble identifying other infrastructure assets for investment, he suggested, precisely because prices are high. BP officials have said the firm did not need to sell its wind unit to meet BP's infamous oil-spill liabilities.

More than a quarter of BP's US fleet consists of Clipper Windpower's troubled Liberty 2.5MW turbines, which have a record of gearbox failures. There are questions as to how easily the ailing Clipper can offer spare parts. In April, BP confirmed it was 'self performing' operations and maintenance on its Clipper machines. Sinaiko, who stressed he has no direct knowledge of the sale, said buyers may have asked BP to back the technology by adopting some risk.

Another factor is that BP's 585MW in merchant projects, in Texas, have uncertain revenue streams, he noted. "That would [also] affect the price," he said.

In a May research note, Bloomberg New Energy Finance (BNEF) gauged BP's stake in operating US wind projects as worth $1.6 billion to $2.1 billion, or $1.2 million to $1.5 million per MW, and the book value as $1.2 billion. BP only had to sell the projects for more than $1.2 billion to avoid recording a loss to its net income, said BNEF. But BP has not been recuperating its investment costs, said the note. "As such, BP needs to find a buyer who values [its] development team and not just the operational and development assets," it said.

The cost and availability of tax equity may have made a sale more difficult, said BNEF's head US wind analyst, Amy Grace. All of BP's US wind projects use the Production Tax Credit and have no third-party provider of tax equity. The interest rate on tax equity is currently about 8%, or the equivalent of 12% to 13% when compared on a pre-tax basis to debt, she said. The comparable rate for debt is about 5.5%. BNEF valued BP's remaining tax credits at $522 million to $594 million.

BP's Hartwig would not comment on whether BP would have acted as a tax-equity investor in any of its own projects post-purchase, thereby retaining some ownership. Nor would he comment on whether BP was willing to retain some of its assets or sell to multiple parties. "There are not that many players out there that could swallow the whole portfolio," said Sinaiko. Keeping the wind unit open with fewer assets might not have made sense, however, he said.

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