Risk aversion strategy at play -- Babcock & Brown buying spree

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Australian investment fund and wind developer Babcock & Brown (B&B) continued its wind acquisition spree last month, leading with a purchase of seven wind projects in the American Midwest totalling 750 MW. The transaction is expected to follow B&B's usual model of acquiring or developing wind projects and later moving the assets to its pure-play wind power fund, Babcock & Brown Wind Partners (BBW).

The purchase and pass-on investment model is a risk mitigation strategy already practised in other areas of the B&B empire, says the company's Matt Dallas. It removes development risk from investors in B&B funds, which are pure asset management vehicles. B&B has 13 listed funds in areas such as infrastructure, energy, and real estate.

Taking the development risk on six of the seven acquired wind projects was Gamesa subsidiary Navitas Energy. The projects are located across five states in the Midwest, including three in Illinois -- in Woodford and Stephenson Counties -- one in Manitowoc, Wisconsin; one in Brookings, South Dakota; and one in Pocahontas, Iowa. The seventh project, bought directly from Gamesa, is in Logan, Ohio. The projects are not expected to be completed until between 2009 and 2011, says Dallas. The exact size of each and the turbines to be used are still to be decided.

Cash and shares

In Australia, a different twist was applied to the usual B&B shuffle of wind assets when BBW used shares as well as cash to buy the 132.3 MW Capital Wind Farm from a consortium consisting of B&B, Carbon Solutions and US-based National Power Company. Once construction is complete in mid-2009, the deal is expected to have an enterprise value of A$370 million.

Just over 14 million stapled securities in BBW -- worth A$23 million at current share prices -- went to National Power Company and Carbon Solutions. Carbon Solutions received around 7.3 million shares and National Power 6.7 million. There are no restrictions as to when the companies can sell their shares, though BBW expects they will be "medium to long term holders of BBW securities."

This is only the second time the company has used such a structure, which has the benefit of preserving BBW cash reserves. From the vendor's side, it allows the project developer to retain a share of the earnings through an ownership stake without the need for significant liquidity. While BBW says it has no firm plans to use such a structure again, the company would consider it under the right circumstances.

Merchant plant

BBW CEO Miles George calls Capital Wind Farm "a premium quality addition to our portfolio with capacity factor and load profile characteristics at the top end of the range for a New South Wales-based wind farm." The plant will initially be operated as a merchant facility, but BBW will consider contracting a portion of the generation at completion.

December also saw BBW follow through on part of a long running framework agreement with Gamesa for the acquisition of 550 MW of wind capacity in Spain and Germany. It took over 150 MW in four completed projects in Spain: the two Carrascal wind plants, at 50 and 28 MW each, and the two Cerradilla wind plants, at 50 and 22 MW each. That chunk of capacity leaves 350 MW of the framework deal outstanding, 90 MW of which is in Germany and the rest in Spain. BBW took over the first 50 MW in August (Windpower Monthly, September 2007).

The recent transactions bring BBW's broadly diversified global wind asset portfolio to a total installed capacity of 2430.6 MW in 76 wind projects, of which 572.1 MW is under construction. The 76 projects, some of which are joint-owned by BBW, have a total installed capacity of 3187.2 MW.

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