Financing offshore wind

Scottish Renewables – Annual conference 2014

19 March 2014

Clément Weber

Financing offshore wind

1. The offshore wind market

2. Focus - The equity market

3. Focus - The debt market

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Table of contents

We have an unparalleled track record in successfully closing deals for our clients

GGEB – the offshore wind finance specialists

Advisor to C-Power to raise project finance debt

325 MW

Belgium 2010

• 20 professionals in London (UK), Paris (FR), Utrecht (NL) and Hamburg (DE)

• Project & structured finance, full scope equity advisory and contracting expertise

• Focus on renewables and specifically offshore wind

Advisor to Northwind to raise project finance debt

216 MW

Belgium 2012

(Sponsor)

Advisor to WindMW to raise project finance debt

288 MW

Germany 2011

The GroupBlackstone ®

Non-recourse financing of 25% stake in Walney offshore wind farm

367 MW

UK 2012

(Sponsor)

Advisor to Highland in the acquisition of the

Deutsche Bucht project

210 MW

Highland Group

Holdings Germany

2012

Financial advisory services French offshore

wind tender

1,428 MW

France 2012

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1. The offshore wind market - Past and present

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Past project overview

Robin Riggs - 180 MW

Ormonde - 150 MW

Barrow - 90 MW Walney I&II - 367 MW

Burbo Bank - 90 MW North Hoyle - 60 MW

Rhyl Flats - 90 MW

Teesside - 62 MW

Lincs - 270 MW

Lynn & Inner Dowsing - 194 MW Sheringham Shoal - 317 MW

Gwynt y Môr - 576 MW

Scroby Sands - 60 MW

Greater Gabbard - 504 MW

Gunfleet Sands I&II - 172 MW

Kentish Flats - 90 MW

London Array - 630 MW

Thanet - 300 MW

Belwind I & II – 330 MW

Thornton Bank I,II &III – 326 MW

Northwind – 216 MW

Prinses Amalia – 120 MW

Gemini – 600 MW Alpha Ventus – 60 MW

Borkum West - 200 MW Gode Wind I&II–584 MW

MEG I – 400 MW

Nordergründe– 110 MW

Roenland - 17 MW

Horns Rev II - 209 MW Horns Rev I - 160 MW

Butendiek - 288 MW

Meerwind– 288 MW

NordseeOst -295 MW Amrumbank - 300 MW

Samsø - 23 MW

Rødsand II – 207 MW

Nysted - 165 MW

Anholt – 400 MW

Baltic I – 48 MW

BARD I – 400 MW

Global Tech I – 400 MW

Operating wind farm

PF current deal

Developing wind farm

PF past deal

Text:

Marker:

not PF deal

• 5 GW operational at end-2012, with 1.4 GW added in 2013 and 1.9 GW expected in 2014

• With the end of Round 2 in the UK, and the delays in Germany caused by the grid uncertainty, there is less visibility beyond the next few years

• Utilities have financed 77% of the EUR 16 billion spent to build the current 5 GW of operating capacity

Luchterduinen - 129 MW

West of Duddon Sands - 389 MW

Dan Tysk - 288 MW

Frederikshavn - 7 MW

Middelgrunden - 40 MW

Baltic II – 288 MW

2. The equity market

Recent transactions - projects under development

Project Transaction Specifics

Gode Wind I, II, III 900 MW, sold by PNE 100% sold to DONG

Purchase of 3 projects at various stages of development Transaction price at EUR 157 M – 0.17 MEUR/MW

Deutsche Bucht 210 MW, sold by Windreich 100% sold to Highland Holding in 2012

Purchase from an independent developer by a financial investor

Aquamarin, Bernstein and Citrin

portfolio of +/- 1,400 MW Sold by BARD to PNE in 2013

Purchase of 3 projects by PNE at EUR 17M – 14kEUR/MW Projects in early development stage, construction planned for 2020 - 2025

NSWP 4-7 4 projects sold by Enova 100% sold to Hochtief/Ventizz in 2012

Projects in early development stage, construction planned for 2020 - 2025

Dudgeon UK, 560 MW, sold by Warwick Energy 100% sold to Statkraft/Statoil in 2012

One of the few projects developed by an independent taken up by utilities

Navitus Bay UK Round 3, up to 1,200 MW, sold by ENECO

50% sold to EDF in 2012

Part of the “reshuffling of the cards” of the UK Round 3 projects

Rhiannon UK Round 3, up to 4,200 MW, sold by Centrica

50% sold to DONG in 2012

Part of the “reshuffling of the cards” of the UK Round 3 projects

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2. The equity market

Recent transactions - projects at FC, under construction or in operation

Project Transaction Specifics

Borkum Riffgrund I 277 MW, Siemens 3.6 MW, sold by DONG 50% sold to Oticon/LEGO group

Project previously purchased from PNE in 2009 at EUR 56 M – 0.2 MEUR/MW

Sale of 50% to private investor at DKK 4,700 M (EUR 630 M – 4.7 MEUR/MW) includes CAPEX + development premium

Parkwind BE, 381 MW sold by Parkwind (Colruyt group) Sold to Sumitomo 39% of Belwind I (operational, 165 MW) and

33.3% in Northwind (under construction, 216MW)

Parkwind and Sumitomo have also entered into a project development agreement to work together on the development of the Belwind 2 project, a 165 MW offshore wind farm adjacent to the Belwind 1 wind farm.

Luchterduinen NL, 129 MW, 50% sold by Eneco to Mitsubishi Part of a larger investment by Mitsubishi in offshore wind (e.g interconnectors )

Japanese trading companies increasingly involved

Gemini NL, 600MW sold by Typhoon and HVC Sold to NPI (55%), SFS (20%), Van Oord (10%)

Project under development (financial close expected in 2014) Two contractors (Siemens and Van Oord) co-invest

Rhyl Flats

UK, 90 MW, sold by RWE 25% sold to the GIB and 25% to Greencoat

Operational asset (fully commissioned in 2009) New source of capital through Greencoat’s IPO First investment by the GIB in equity in offshore wind Acquisition price: 2.6 MGBP/MW

Butendiek 288 MW sold by WPD 90% sold to Marguerite, SFS, PKA,

IndustriesPension

Transaction simultaneous with closing of non recourse debt financing

First time pension funds & infrastructure funds take construction risk

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2. The equity market

• An active market – and a wider range of investors beyond utilities than people assume

• Infrastructure funds and pensions funds (PensionDanmark, PKA, Industries Pension, TCW, PGGM)

• Private equity groups (Blackstone, etc.)

• Corporations with specific strategies (LEGO, Colruyt, Marubeni)

• …. and many more sniffing around the sector

• Valuations are actually relatively consistent

• Permitted projects – development cost + premium @ 200kEUR/MW

• Contracted projects – construction cost @ 3.5MEUR/MW unlevered (or 1.1 MEUR/MW levered)

• Operational projects – linked to regulatory framework and IRR target of investors (8-10%)

• Trade off between construction risk and returns now closely examined

• As more assets are operational, the universe of investors grows and IRR targets are going down

• A number of investors are now looking to take construction risk to improve returns (to double digits)

• A “bankable” deal is also one which many investors can find attractive

Some lessons

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3. Debt project finance: lessons learned from the early years

The banking market is there if the transactions are well structured

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Lessons learned from the first projects – now up and running

• The first projects using project finance closed in the “early years” (2006-2009) are now in operation.

• Construction has never been easy (it is a full-time job for the banks as well) but mechanisms to limit the risk have proved to be successful and all projects using PF have been built on time and within budget (including contingencies)

An active PF market becoming mature

• Most active market ever, despite the crisis and the atmosphere of gloom

• No bank or individual institution is indispensable

• Debt sizing principles are quite stable and predictable

• Due diligence standards and main covenants are similar across transactions

• The same rules apply in different countries and with different banks involved

32%

5%

0% 41%

45%

47%

37%

35%

0

200

400

600

800

1000

1200

1400

1600

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2000

2006 2007 2008 2009 2010 2011 2012 2013

Offshore wind project financed volumes

Project financed capacity (MW)

Installed capacity (MW) - brought forward 2 years (est)

3. Debt project finance: some recent highlights

A number of large transactions have taken place

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Notable transactions:

• C-Power – Belgium – 2010: billion-euro senior debt can be raised with construction risk for a project with new turbine

• Meerwind – Germany – 2011: private equity enters into the market and uses PF

• Lincs – UK – 2012: there is no “UK malediction” with construction risk and project finance

• Walney – UK – 2012: first commercial financing of a minority stake

3. The debt market

• Butendiek (DE, 288 MW, Siemens 3.6 MW, EUR 940 M financing)

• First transaction under the new grid law in Germany

• Full construction risk, on a billion-euro scale, borne by both lenders and financial investors

• London Array (UK, 126 MW, Siemens 3.6 MW, GBP 266 M financing)

• Refinancing of Masdar’s 20% stake in the 630 MW project at completion

• Very long process, as it was started in 2009

And pending…

• Gemini (NL, 600 MW, Siemens 4.0 MW, financing launched)

• Transaction currently on the banking market

• Would be the largest ever wind financing (PFI has reported an amount of EUR 2.26 billion)

• Closing expected Q1 2014

• Innogy Nordsee 1 (DE, 288 MW, Repower 6M, financing pending)

• Financing launched by utility with parallel equity and debt transactions

• Closing expected H1 2014

2 transactions in 2013 and more in the pipeline

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3. Debt project finance: current market – volumes available

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The bank market is broader and broader

• More than 30 banks have taken offshore wind risk today

• More than 20 banks have construction exposure

• Experienced banks – an active pool of banks able to structure and lead transactions:

• Rabobank, KfW-IPEX, Unicredit, BoTM, SocGen, BNPP, Santander, Commerzbank, (Dexia)

• HSH, NordLB (German focus)

• Many banks were involved in recent deals in the last 2 years:

• Lloyds, ING, KBC, Siemens Bank, Deutsche Bank, NIBC, ASN

• Calyon, BayLB, NAB, Helaba, SEB, Deka, DnB Nor, Natixis, NIBC, Sabadell, Nordea, BBVA, LBBW, Mizuho, SMBC

• RBS, HSBC (UK focus)

• More have expressed their appetite

An average EUR 100 M available per bank per year

• EUR 30-150 M exposure per bank per year, in 1-3 deals

Commercial banks

At least EUR 2.5 billion available per year

3. Debt project finance: current market – volumes available

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Public Financial Institutions

Several active public financial institutions

• EIB – historic key player with cheaper funds (support to European offshore projects), but generally conservative

• EKF – offshore wind’s “best kept secret”: participation linked to Danish exports, up to EUR 250 M per transaction

• Euler-Hermes – participation linked to German exports, can do large tickets

• KfW – potentially large amounts available (in Germany): able to provide cheaper funding in significant volumes

• GIB – UK Green Investment Bank, first involved in Walney

Their role has been instrumental to get deals done

• Will typically bear approximately half of the risk and/or funding of a transaction

• Will normally take the same risks as the commercial banks, but they usually run their own internal assessment

• Some geographical / national restrictions

• Small deal teams, so availability is a constraint

Altogether, there are EUR 5 billion of debt funding available for 4-6 industrial size projects (400 MW) per year today

Can contribute as much as the commercial banks

3. Debt project finance: current market – financial conditions

Market trends

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Typical project finance conditions offshore

Leverage Maturity

post-completion Margins

Maximum underwriting

2006-2007 60:40 10-15 years 150-200 bps 50-100 M

2009 70:30 15 years 300 bps 30-50 M

2010-2011 65:35 12-15 years 250-300 bps 50-75 M

Current market 70:30 10-15 years 250-350 bps 50-100 M

Structures have been quite stable since 2007

• Long-term debt is still available

• Consensus on 70% leverage

• DSCR reflects price risk in the UK

Banks have refocused on known clients, core countries and strategic sectors of activity

• The good news is that offshore wind is unambiguously “strategic” for many banks today

• Countries where offshore wind is developing are seen as “safe” (Germany – until now) and core for most banks

Debt is not that expensive

• Margins rise reflects higher bank cost of funding rather than higher cost of risk,

but the overall cost of debt is stable or decreasing

• Recent deals have seen overall cost of >15-year debt at 6.0% or less

Conclusion: PF is available for well-structured projects

Structuring a deal is time-intensive

• Non-recourse finance requires a specific discipline and approach to project risks

• Multiple complex tasks to run in parallel, with numerous third parties (with often contradictory requirements)

• Several critical paths to manage

• ongoing development work

• external advisors

• contract negotiations

• internal approvals

How to make a deal bankable

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Offshore wind projects have access to a very diverse project finance universe, as long as some rules are respected

• the contractual package has to include banks requirements as early as possible

• experienced advisors consulted upstream

• timing adapted to the banking process

Lenders ideally want strong equity commitments

• A strong majority investor is usually a must have

• An good project management team through a dedicated team

• Equity commitments paid upfront or backed by strong entities

• A long term commitment to the sector by the majority investor

• Long term equity retention commitments for the majority investor

The quality of the contracts can help bridge the difference

• The more « bankable » the contracts are, and the more flexible banks will be on equity issues

• The stronger the contractual commitments, the less important the owner

• Requirement for direct agreement and oversight of commercial contracts

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