Eco Investor December 2013

Pre-Dividend Securities

Infigen Step Closer to Selling US Assets

As part of the gradual separation of its Australian and US assets, Infigen Energy has acquired some of the Class A interests in nine of its US wind farm projects, giving it access to the future cash flows from these projects.

The cost is US$95 million including upfront financing costs, and has been financed through US$37 million from Infigen's cash holdings and a new US$58 million debt facility.

Chairman, Mike Hutchinson told the company's annual general meeting that there is a comfortable margin between the future revenues and the interest on the new debt facility. "Given our familiarity with these assets we are confident that their acquisition represents a prudent use of our scarce cash that meets our demanding investment criteria," he said.

In addition, the cash that was used will give a higher return than otherwise from current low interest rates. Although Infigen's borrowings increase, this is offset by a reduction in its Class A liabilities. Overall gearing rises by 2 per cent. Infigen will receive the cash flows that until now have gone to the Class A tax equity investor. The investment has a relatively short payback period.

Infigen Energy’s US Acquisitions

Infigen's managing director, Miles George, said "A key challenge for Infigen is to remove the constraints of our existing capital structure in order to grow our business and resume distributions to our security holders.

"One avenue to remove that constraint is to separate the financing of our US and Australian businesses. This transaction represents a useful step towards addressing that challenge."

An analysis of Infigen's balance sheet prior to the acquisition shows that most of the net assets are in Australia while most of the debt is in the US. Separating the two makes it easier to sell the US assets, whether by IPO or trade sale.

This would leave the Australian business with a much stronger balance sheet and a better chance to resume dividends and have its shares rerated by the market.

Infigen Production and Revenue by Country

The nine US wind farms in the deal have a total capacity of 804 MW. Infigen's US chief executive, Craig Carson, said Infigen's intimate knowledge of the underlying assets allowed it to appropriately assess the risks of the investment.

The revenue from the assets is contracted through long term power purchase agreements (PPAs) and post-warranty maintenance agreements.

Another avenue for Infigen to reduce its debt is to sell some Australian assets. Mr Hutchinson said that earlier this year it undertook a market testing exercise for the 141 MW Capital Wind Farm in Australia. "The purpose of any divestment of this asset would be to reduce Global Facility debt. Despite recent adverse changes in regulatory certainty, we remain in discussion with a small group of interested parties," said.

Meanwhile, the mandatory cash sweep from the assets in the Global Facility Borrower Group precludes the payment of distributions.

On its solar energy ambitions, Infigen's two solar photovoltaic (PV) projects in California are now advanced enough that they could commence construction in 2014. Favourable power purchase agreements for a total of 40 MW have been executed, and Mr Hutchinson said Infigen is assessing the optimal capital arrangements for the projects and that there is currently a strong appetite for fully developed solar PV projects in the US.

In Australia, Infigen's solar PV and energy storage demonstration facility near the Capital Wind Farm in NSW was completed in September and was the first of its kind in Australia and the first solar farm to be registered in the National Electricity Market. There were many lessons learned and the experience will be very valuable when Infigen constructs a large scale solar project, he said.

Mr Hutchinson also took a strong swipe at climate change deniers.

"Australia is not well served by those in and close to Government who are in denial of the facts of climate change science and the need for action ahead of crisis. These old men of yesterday's industries risk our children's and grandchildren's future for imagined short term political advantage and the avoidance of necessary adjustment costs - costs that will only be massively higher if deferred until the crisis is upon us. History will judge these people harshly; ranking them along with the pre-Pythagorean flat-earth theorists, those who persecuted Galileo's 17th century heliocentric vision, and those who appeased 20th century militarism and worse," he said.

He was also critical of vested interests and their lobbying against Large Scale Generation Certificates (LGCs).

"Major vested commercial interests that have deliberately engineered a future shortfall in their access to LGCs are lobbying hard to have legislation amended to relieve them of their RET obligations, rather than face the economic cost of meeting them." Any change that weakened future demand for renewable energy products from investments made in good faith on the basis of the RET legislation would be a significant realization of sovereign risk at shareholders' expense, he said.

Mr George said that due to this uncertainty the market for developing new renewable energy projects is very weak and the appetite to contract existing assets is poor. This also affects Infigen's pipeline of Australian wind energy projects.

On the positive side, Infigen's Cherry Tree Wind Farm near Seymour in Victoria has received development consent. The proposed wind farm will have up to 16 turbines and 50 MW of installed capacity and generate enough energy to power 27,500 typical Victorian homes.

Construction of the wind farm is expected to create approximately 90 jobs and another 4 ongoing jobs during commercial operation.

The Victorian Civil and Administrative Tribunal found no causal link between wind farms and adverse health.

The NSW Department of Planning and Infrastructure has recommended that Infigen's proposed Flyers Creek Wind Farm in central NSW be granted development approval. The Planning Assessment Commission will make the final planning approval decision. (ASX: IFN)