Alternative energy is without question the big thing in the power sector, but early days projects tend to have been balance sheet financed, wites Angus Leslie Melville. It is for this reason that the UK’s Beaufort Wind project – as the first project financed transaction in this sector – stands out from the crowd.

With the government throwing its weight behind international efforts to reduce carbon emissions and committing to alternative and renewable sources of ‘green’ energy, it is vital that the power sector embraces new technologies to develop clean power and attracts private investors to drive forward projects.

Wind power is so far proving to be the most popular option and on-shore wind farms attracted the first wave of interest for the simple reason that the logistics of installing and maintaining wind farms off-shore is a good bit more difficult and expensive than land-based wind farms.

For all these reasons and more, the £300m (US$561m) Beaufort project that closed at the end of January 2004 is a keen contender.

The £300m non-recourse loan financing is the debt portion of a dual debt-and-private equity package arranged on behalf of RWE-Innogy to refinance 130MW 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 along the Welsh coast, comprises 30 2MW turbines, and went on-line in November 2003. Including projects under development, the projected Beaufort portfolio will comprise 20 wind farms with total generating capacity of 430MW.

Beaufort 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.

Innogy first looked to Beaufort as a means to help it meet its UK renewables obligations. Prior to the wind farm going on-line, Innogy satisfied a portion of its obligations through a portfolio of 11 onshore wind farms wholly-owned by its subsidiary National Wind Power.

It then moved these assets, 13 existing farms with a total generating capacity of 130MW, into Beaufort Wind, with the plan to grow the vehicle to 430MW over the following three years. The debt drawdown covered the initial acquisition but will not be for the full £300m.

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

The Beaufort deal could provide a benchmark 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.

Transaction

RWE-Innogy sold off two 33.3 per cent stakes in a special purpose company Zephyr Investments that it originally set up in April 2003. The new investors – Englefield Capital and the First Islamic Investment Bank – took two-thirds of the company and each contributed nearly all the new capital raised of £112m (US$210m). Innogy contributed its existing portfolio of wind assets.

First Islamic’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 €700m (US$866m) 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 Innogy’s existing operating wind assets. Wind developments completed over the next three years – up to an estimated portfolio total of 430MW – 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 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 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.

Eight of the 11 existing wind farms have NFFO/SRO contracts and three of the 11 have npower PPAs. The NFFO/SRO farms have top-up npower PPAs to extend contract life, and each new farm will have NFFO/SRO contract and/or npower PPA.

All new farms must demonstrate at least three months operation. However, being the only offshore asset, North Hoyle – 60MW round 1 – will have to demonstrate 12 months operation.

Each new wind farm has to be approved by a technical committee of three banks, then approved by the majority banks.

Debt and equity are sized for each new farm on a standalone basis using pre-agreed cover ratios – 1.30 for onshore assets, higher for North Hoyle. Once in the portfolio, all cover ratios and covenants are with reference to the entire portfolio.

New wind farms are expected to come from npower Renewables’ development pipeline but no restriction provided that Investment Criteria are met.