Background:The £300 million non-recourse loan financing known as Beaufort Wind that closed on 30 January 2004 is the debt portion of a dual debt-and-private equity package arranged on behalf of Innogy to refinance 130 MW of existing wind farm capacity and fund the construction of new projects, chiefly the UK's first major offshore wind power plant at North Hoyle.

The project is 8 kilometres off the coast of Wales, comprises 30 2MW turbines, and came on-line in November 2003. Including projects under development, the expected Beaufort portfolio will comprise 20 wind farms with total generating capacity of 430 MW.

Beaufort Wind qualifies for a number of firsts including the first UK portfolio financing of wind farms on a non-recourse basis operating under the ROC mechanism and the first UK wind project to fund an offshore development.

The Consortium Partners:RWE-Innogy is selling two 33 per cent stakes in a special purpose company, Zephyr Investments, that it established in April 2003. The new investors - Englefield Capital and the First Islamic Investment Bank (FIIB) accounts for 66 per cent of the company and  both contributed nearly all the new capital raised of £112 million. RWE-Innogy contributed its existing portfolio of wind assets.

First Islamic Investment Bank’s headquarters are in Bahrain. Its investment vehicles are arranged by its wholly owned subsidiary Crescent Capital Investments (Europe).

Englefield Capital is a European private equity firm that raised €700 million (US$866 million) in 2003 to invest in buyout and development capital opportunities primarily in the UK and Western Europe.

Zephyr is the 100 per cent shareholder of Beaufort Wind which owns RWE - Innogy’s existing operating wind assets. Wind developments completed over the next three years, up to an estimated portfolio total of 430 MW, will continue to be developed, constructed and managed by National Wind Power – a subsidiary of RWE-Innogy, but will be sold to Beaufort Wind after completion.

The project:Beaufort Wind is designed to meet Innogy's UK renewables obligations. Currently, RWE-Innogy satisfies a portion of its obligations through a portfolio of 11 onshore wind farms wholly owned by its subsidiary National Wind Power.

RWE-Innogy will now move these assets, 13 existing farms with a total generating capacity of 130MW, into Beaufort Wind and grow the vehicle to 430MW over the next three years. The debt drawdown will cover the initial acquisition but will not be for the full £300 million.

It is the only deal ever done in the wind sector where an equity purchaser pre-commits firmly to buy assets not yet built.

Financing:The debt:equity ratio will depend on debt service coverage ratio requirements, but the shareholders will provide at least 15 per cent equity and, according to BNP Paribas, possibly 20 per cent.

The £300 million debt financing is done in three tranches:

Tranche A will finance the existing farmsTranche B will finance subsequent acquisitionsTranche C will finance an offshore wind farm acquisition

The tenor is 18 years door-to-door (15 years from the last acquisition) and margins are dependent on the assets. Libor + 110bp to 140bp for the existing plants and Libor + 125bp to 155bp for new projects.

Seven banks have assumed the role of mandated lead arrangers to provide the £300 million senior debt facility: BNP Paribas, ABN AMRO, Bank of Tokyo Mitsubishi, Fortis Bank, Bayerische Hypo und Vereinsbank, Bank of Scotland and Royal Bank of Canada (also financial advisor to the sponsor). Each bank is underwriting £42.8 million.

Risk Analysis:The risk sharing structure is such that the main sponsor shoulders both the construction risk and the price risk. This means zero construction or price risk for lenders. In effect, the deal is all about RWE-Innogy’s corporate risk and wind risk in the UK, which is where the project strength really lies.

Construction risk: The risk of developing and constructing the new wind farms will remain with RWE - Innogy and will only be purchased by Beaufort once they have become operational Price risk: The project structure eliminates ROC uncertainties, although that is largely symptomatic of the fact that the producer and off-taker are ultimately one and the same Off-take risk: RWE-Innogy’s retail subsidiary, npower, will purchase power and Renewable Obligation Certificates from Beaufort Wind. The deal is backed by 15-year PPAs with npower which will replace the old NFFO (non-fossil fuel obligations with a fixed and escalating price) contracts for the existing plants as they run out  and cover the price risk on the renewable obligations certificates (ROCs) for new plants . These PPAs will be back-stopped by RWE-Innogy’s parent company RWE. Consequently, Beaufort Wind has no exposure to merchant risk or the wholesale electricity market NETA (New Electricity Trading Agreement) Regulatory issues: The British energy regulator, OFGEM, is considering proposals to amend and align electricity grid rules governing connections to the transmission systems in England, Wales and Scotland The aim is to establish common technical requirements to help non-synchronous generation such as wind farms. The present connections regime is not tailored to offer any help on this front and is a source of uncertainty both for the transmission companies and parties seeking connection Market Price: Certain commentators have raised the possibility that ROC prices will collapse in 2006-7 if all the planned renewable capacity comes on line (3.4GW). The fall could be as much as  one third taking prices down to £33 per MWh by 2007. This is disputed by others who question the ability to physically develop and install such a large number of wind turbines in such a relatively short period of time and by the willingness of the project finance community to provide the necessary non recourse loans. Wide variation on future price estimates are due to varying assumptions on rate of successful new wind projects and the amount of competing biomass co-firing by power stations. The market basis of the Renewables Obligation encourages developers to build new capacity in the face of apparently higher ROC premium pricing but over time will also self regulate and lower prices as the level of renewable energy development reaches its target. What has been learnt in the electricity market in the UK and US is that timing is everything and bankers will be particularly wary not to overbuild

Conclusion:Last year saw a range of key wind deals across Europe such as the Sistemas Energeticos Cando (SEC) acquisition in Spain, IVPC2000 in Italy. And more are to come, notably the €800 million Eolico Dragados portfolio in Spain.

But the long pipeline of wind deals throughout Europe (the target cumulative capacity by 2010 is 75,000MW according to the European Wind Energy Association) should not be taken for granted. Incentive regimes across Europe vary extensively, ranging from very supportive in Germany to uncertain in the UK. And the necessary but yet-to-be-implemented EU framework means current regimes may have to be altered.

In such an environment, lenders will only act on a project-by-project basis and not all planned wind farms will make it to lenders review.

The Beaufort deal could be a leading example for future UK and European wind projects. And with the North Hoyle project being the first offshore farm structured on this basis, it provides other sponsors with a template for getting banks comfortable with the untested offshore market, but unlike other project finance deals in the energy sector, the risks will have to remain with the equity providers for off-shore wind deals to stand firmly on the seabed of the British Isles. IJ