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Spain

Spanish wind assets first to be sold off -- Babcock & Brown's cash raising exercise under way

Babcock & Brown Wind Partners (BBW), a major investor in wind power generating capacity across six countries, has agreed to sell its wind farm assets in Spain to a Spanish construction conglomerate Fomento de Construcciones y Contratas SA (FCC). The wind farms, with an installed capacity of 420.7 MW, make up about 17% of BBW's international portfolio of operating projects.

BBW, listed on the Australian stock exchange, sold the wind farms for about A$1.4 billion (EUR 826 million). At A$3.33 million (EUR 1.96 million) a megawatt, the sales price compares reasonably with recent wind farm deals, such as the purchase by German utility RWE of 148 MW of capacity from Spain's Urvasco for a reported EUR 250 million, or EUR 1.7 million a megawatt.

BBW has not disclosed what it plans to do with the proceeds of the sale, apart from the retirement of some debt associated with the Spanish assets. The company has said that further debt retirement, purchase of other wind assets, a capital return to shareholders, or a combination of the above options are all possibilities.

The company is in the process of trying to divest other wind farm assets in Portugal and France and has indicated it hopes to have a deal by the end of this year. It has shelved plans to divest its German assets because it could not attract sufficiently attractive bids.

The asset sales are part of a "strategic initiative" announced by BBW in February under which the company plans to divest its existing European operations to monetise what it believes is "unrealised value" in the portfolio. CEO Miles George says the price achieved for the Spanish assets is "materially higher" per megawatt than the current market implied value of the company's total wind power portfolio. The robust market in Spain and good prices paid for wind power, however, are likely to have added a premium value to the Spanish assets that may not be reflected in other markets, such as the United States.

BBW owns two wind farms in France, located next to each other in the north-west of the country, with a combined installed capacity of 52 MW. One of them is still under construction. In Portugal, BBW has a 50% stake in 30 wind farms, with a capacity of 257 MW. BBW's equity partner in the Portugal operations is the parent of BBW's management company, Babcock & Brown (B&B), an embattled Australian investment company.

B&B is a major developer of wind farm assets, with a 16 GW pipeline due for completion over the next eight years. It is under pressure to reduce debt since the precipitous decline in the firm's share price put it in violation of loan covenants. BBW denies that its asset sales are in any way connected with B&B's financial plight. B&B holds an 11.14% stake in BBW, but neither company has any outstanding loans to the other party.

Locked in

Even as BBW has sought to divest its European wind assets, the company has bought further wind farms in Europe, announcing the acquisition of four in Germany with a combined capacity of 19.6 MW. The modest purchase was made under the terms of agreements that BBW has with Babcock & Brown (UK) Holdings and Germany's Plambeck Neue Energien AG. Under the agreements, BBW could potentially find itself obliged to buy more wind assets. This could explain the company's need to raise cash through asset sales.

Under a further agreement between B&B UK and Spanish wind project developer Gamesa, BBW may also be obliged, subject to certain conditions, to buy up to 340 MW of capacity in Spain and Germany between 2008 and 2009. In the same period, BBW may also have to take delivery of 247 MW of capacity in Germany under an agreement with Plambeck.

B&B declines to say what it has agreed to pay for the Gamesa and Plambeck projects. Since the agreements were written in September 2005 and March 2006, presumably before the projects were complete, the purchase price per megawatt is likely to have been lower than the price BBW achieved with its sale of existing Spanish assets to FCC. Given the profit on the sale of the Spanish assets, a likely price agreed for the Plambeck and Gamesa assets may be around A$2.7 million per MW, making the potential cost to BBW of the combined portfolio about A$1.6 billion.

Even following the sale of the Spanish assets, analysts estimate BBW's net debt at about 60% of its enterprise value, which is at the high end of the company's target debt levels. For this reason, it seems likely that BBW will want to conclude its planned sales of assets in Portugal and France before it takes delivery of new assets under the agreements with B&B UK and Plambeck. The European wind farm industry is starting to look like a buyer's market.

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