News

Infrastructure Capital Group targets USD769 million for mid-market assets

Source: The Asset

Specialist Australian fund manager Infrastructure Capital Group (ICG) is targeting A$1 billion (US$769 million) from domestic and international institutional investors to add quality established infrastructure businesses and new development projects to its mid-market infrastructure portfolios.

The capital will be deployed across ICG’s A$450 million Diversified Infrastructure Trust (DIT) and A$1.1 billion Energy Infrastructure Trust (EIT), as well as separate accounts for institutional investors.

ICG chair Andrew Pickering said the firm believes that there is fair value in the mid-market driven by asset recycling initiatives, strained government and corporate balance sheets, non-core divestments from corporates as well as steady organic growth opportunities.

“There are assets out there that are reasonably priced, with more coming to market, particularly in the renewables space,” Pickering says. “The mid-market, often overshadowed by mega deals, remains less crowded and more receptive to firms that can demonstrate expertise in project development, and asset origination, ownership and strategic management. Most deals we complete are proprietary, which speaks to our expertise, agility, speed and experience. Our patient and cost conscious approach preserves capital for the right deals with better odds of success.”

“We don’t wait for all deals to come to market, we originate deals from the idea stage and work with development partners to structure them for commercial close. In the longer term, our investors and their members benefit from de-risking, growth and enhanced returns throughout the asset’s lifecycle,” Pickering says.

ICG Global head of Capital Peter Welch says the firm is engaged with domestic and international investors seeking specialist infrastructure asset growth and revenue via pooled funds and separate accounts.

“To allow greater liquidity and flexibility, we’ve introduced to the once open-ended DIT and EIT terms a right for investors to redeem after an initial ten year term, or roll for additional five year increments, effectively converting them to closed-end funds,” Welch says. “We are certainly seeing more interest from investors to partner with ICG to build bespoke exposures and partnership programs, which is presenting exciting investment opportunities.”

ICG has invested in 24 assets across all subsectors of infrastructure. More recent transactions include Port Hedland International Airport, in partnership with AMP Capital, and the Hallett 4 wind farm in South Australia.

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Infrastructure Capital Group targets $1bn for asset purchases

Author: Mark Smith
Source: In Investment

Fund manager Infrastructure Capital Group (ICG) is looking to raise $1 billion from domestic and international institutional investors to add quality established infrastructure businesses and new development projects to its mid-market infrastructure portfolios.

The capital will be deployed across ICG’s $450 million Diversified Infrastructure Trust (DIT) and $1.1 billion Energy Infrastructure Trust (EIT), as well as separate accounts for institutional investors.

ICG chair Andrew Pickering said the firm believes there is fair value in the mid-market driven by asset recycling initiatives, strained government and corporate balance sheets, non-core divestments from corporates as well as steady organic growth opportunities.

“There are assets out there that are reasonably priced, with more coming to market, particularly in the renewables space,” Pickering said.

“The mid-market, often overshadowed by mega deals, remains less crowded and more receptive to firms that can demonstrate expertise in project development, and asset origination, ownership and strategic management.

“We don’t wait for all deals to come to market; we originate deals from the idea stage and work with development partners to structure them for commercial close. In the longer term, our investors and their members benefit from de-risking, growth and enhanced returns throughout the asset’s lifecycle.”

ICG global head of capital Peter Welch said the firm is engaged with domestic and international investors seeking specialist infrastructure asset growth and revenue via pooled funds and separate accounts.

To allow greater liquidity and flexibility, the firm has introduced to its once open-ended DIT and EIT terms a right for investors to redeem after an initial 10 year term, or roll for additional five year increments. The move effectively converts them to closed-end funds, Welch said.

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as Fitzpatrick’s ICG looks to Asia for Aussie Investments

Author: Greg Bright
Source: Investor Strategy News

Australia’s ‘Mr Infrastructure’, Mike Fitzpatrick, and his colleagues at Infrastructure Capital Group, which they acquired from ANZ Bank just after the global financial crisis, have turned their eyes to Asia. With their latest raising they are garnering Asian investment into Australia.

According to Andrew Pickering, ICG’s executive chairman and CIO, the investors, mostly Australian, who account for the current $1.5 billion in two infrastructure funds, want the firm to “stick to our knitting”. They want ICG to continue to invest in Australian infrastructure assets, such as its headline investments of Stadium Australia and various big energy distribution projects.

So, too, do investors elsewhere in the Asia Pacific region, Pickering says. ICG is targeting about $1 billion from domestic and international, mainly Asian, institutional investors to add quality established infrastructure businesses and new development projects to its mid-market infrastructure portfolios.

The capital will be deployed across ICG’s $450 million ‘Diversified Infrastructure Trust’ and $1.1 billion ‘Energy Infrastructure Trust ‘, as well as separate accounts for institutional investors.

As well, ICG has introduced a liquidity point, after 10 years, with an option for investors to re-sign for a further five years.

In 2009, Fitzpatrick, the renowned founder of Hastings Funds Management, joined ICG founder John Clarke – who started the company as a joint venture with ANZ in 2000 – to buy out the bank and set up ICG as a new independent infrastructure business. They both remain directors and shareholders. Fitzpatrick was joined, at the time, by another experienced infrastructure investor, Les Fallick, and then, subsequently, by Lachlan Douglas as chief executive. The firm prospered.

Pickering said ICG believed that there was fair value in the mid-market infrastructure sector. This was driven by asset recycling initiatives, strained government and corporate balance sheets, non-core divestments from corporates as well as steady organic growth opportunities.

“There are assets out there that are reasonably priced, with more coming to market, particularly in the renewables space,” he said.

The mid-market, often overshadowed by mega deals, remains less crowded and more receptive to firms that can demonstrate expertise in project development, and asset origination, ownership and strategic management.

“Most deals we complete are proprietary, which speaks to our expertise, agility, speed and experience. “Our patient and cost-conscious approach preserves capital for the right deals with better odds of success,” Pickering said.

“We don’t wait for all deals to come to market, we originate deals from the idea stage and work with development partners to structure them for commercial close. In the longer term, our investors and their members benefit from de-risking, growth and enhanced returns throughout the asset’s lifecycle.”

Peter Welch, ICG’s ‘global head of capital’, said the firm was engaged with domestic and international investors seeking specialist infrastructure asset growth and revenue via pooled funds and separate accounts.

“To allow greater liquidity and flexibility, we’ve introduced to the once open-ended DIT and EIT terms a right for investors to redeem after an initial 10-year term, or roll for additional five-year increments, effectively converting them to closed-end funds,” Welch said.

“We are certainly seeing more interest from investors to partner with ICG to build bespoke exposures and partnership programs, which is presenting exciting investment opportunities.”

ICG has invested in 24 assets across all subsectors of infrastructure. Recent transactions include Port Hedland International Airport, in partnership with AMP Capital, and the Hallett 4 wind farm in South Australia.

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Investment stalemate puts renewable energy target at risk

Author: Andrew White
Source: The Australian
Andrew Pickering says only short-term contracts are available. Picture: Stuart McEvoy.

A stand-off between investors, banks and electricity retailers has put Australia at risk of missing even the lower 2020 renewable energy target, with a lack of long-term supply contracts stalling the needed $10 billion of development for new solar and wind farms.

Despite hopes a compromise deal on the 2020 RET last year would give the industry certainty to invest, new projects have been stalled as investors and other project developers push for longer-term contracts to underwrite their investment.

Investors said they were being asked to assume too much merchant risk in selling power on the spot market and were uncomfortable with committing to new development. Banks wouldn’t lend as much for projects without long-term contracts, forcing investors to put more equity into a project, industry sources said.

Infrastructure Capital Group chairman Andrew Pickering said energy companies were offering three to five-year contracts for prospective wind and solar energy developments, rather than the 10 to 15 years needed to justify investment from infrastructure funds.

“The problem will be that the retailers, not only do they not want to deploy their own balance sheet for these things themselves … they don’t want to offer long-term fixed-price contracts to support these projects,’’ Mr Pickering said.

“They think they can offer short contracts, and for us at least that is a little too far up the risk curve for our liking, a little too much merchant risk in the portfolio.’’

The industry is facing a critical period, with an estimated $10 billion of investment — equivalent to all spending since 2001 — needed over the next four years to meet the 2020 RET target of developing another 6000 megawatts of capacity.

Clean Energy Council chief executive Kane Lucas said more than 6000MW of projects had been given planning approval but were yet to be financed or started. Each projects takes about 18 months to develop, according to industry estimates.

Mr Lucas said there was also a surplus of Large Scale Generation Certificates — sold by renewable energy companies to electricity retailers to help underwrite the cost of new projects — which was acting as a drag on development.

“This is a critical year for the target,’’ he said.

“Each of the retailers will have their own targets, but through this year there needs to be a number of projects reach financial close and ready to be in production in the next year or two when that shortfall hits.’’

The federal government last year cut the RET from 41 gigawatt hours of generation to 33GW/h after a year-long review by businessman Richard Warburton that stalled investment and slashed jobs.

Prices of certificates collapsed from above $60 a megawatt to as low as $22.50 in July amid concerns the target would be cut. But they have since quadrupled to $83.50 in January, a level industry observers say makes green energy projects highly profitable.

John Titchen, the chief executive of GoldWind Australia, a Chinese wind turbine supplier, said the industry should be building capacity at the moment because the strength of the LGC price showed the market was concerned about a shortfall of capacity.

“The LGC price is strong, the market conditions are right for investment,’’ Mr Titchen said.

GoldWind has partnered with CECP Wind-Power Corporation to develop the White Rock wind farm west of Glen Innes in the New England region of NSW.

The 175MW project will be the largest in NSW when it comes online late next year.

But work will start later this month despite the project having no long-term supply contracts, with Goldwind funding the development via its own balance sheet and taking merchant risk on the project.

ICG’s Mr Pickering said that without a change in supply contracts the market was likely to require a new class of investor, such as equipment manufacturers like GoldWind with the balance sheet and risk appetite to finance developments on expectations of strong prices. ”The risk premium for these projects is going to go up,’’ Mr Pickering said.

“The banks will not be able to gear up very much so the capital will need to be equity and I am not sure who is going to provide it.

“It is unlikely to be infrastructure funds like us. I am not sure how much the retailers can fund, so I would expect to see a new class of investors, be it the equipment suppliers, more developers who have a bit of a balance sheet and like to take risk.’’

Green Energy Markets analyst Tristan Edis said the market needed to go through a period of adjustment to bring in new investors, but there was still uncertainty about the long-term price and supply for the large-scale generation certificates.

“I think we will see some investment but it will probably be too slow and not enough to meet the target,’’ Mr Edis said.

The chief executive of the government-funded Clean Energy Finance Corporation, Oliver Yates, said the volatility of the price of the certificates had caused concerns for some investors, but they would have to fall a long way for investors to lose money. A wind farm can receive about $40 a megawatt hour for power and about $80 for the certificates for a combine price of $120. That combined price would have to fall below $50 to lose the owner money.

“The underlying asset is still good, but you can’t get as much debt as you used to and will have to put more equity in,’’ Mr Yates said,

“That should not affect their long-term returns, because if they put more in and develop the project the market will turn eventually and they will get long-term contracts.’’

The GoldWind investment is among a handful of new investments announced since June when the new RET was settled.

Origin recently announced a 15-year deal with Spanish group FRV for the offtake from the 56MW Moree Solar Farm and is evaluating Darling Downs as a site for utility-scale solar in Queensland. “Origin supports the RET and, consistent with our renewables position, we intend to meet our obligation under the target,’’ the company said.

AGL, the country’s biggest emitter, said in February it would establish a $3 billion fund to house renewable energy projects, including its recently completed solar project in western NSW. AGL will tip $200 million into the fund and invite others, including infrastructure funds, to invest alongside.

The Clean Energy Finance Corporation has also announced a partnership with fund manager Palisade to accelerate $1 billion of investment in renewable energy, while the federal government has announced a $1bn clean energy innovation fund.

Environment Minister Greg Hunt said more than 550MW of investment had been announced since and innovative new ways of financing projects were emerging.

“We expect more major announcements in the near future with a significant pipeline of investment,’’ Mr Hunt said.

Mr Lucas said there was a strong incentive for retailers to correct the market and buy capacity as they would face fines for failing to purchase 20 per cent of electricity from renewable sources by 2020.

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DIT Acquires 50% of Port Hedland International Airport

Infrastructure Capital Group, on behalf of the Diversified Infrastructure Trust, and AMP Capital, have executed key agreements with the Town of Port Hedland Council to lease the Port Hedland International Airport for 50 years. The transaction was previously approved at a special council meeting in August.

Port Hedland International Airport is the gateway to Western Australia’s North West and the nationally significant Pilbara region. Located approximately 1,650 kilometres north of Perth on the Pilbara coast, the airport has around 450,000 passenger movements a year on nearly 70 flights a week, with flights daily to Perth and weekly to Brisbane, Melbourne and Bali. Port Hedland is the world’s largest bulk tonnage export port and achieved record throughput of 447 million tonnes in FY15.

The consortium will pay the Town $165 million upfront and significantly upgrade the existing terminal over the next five years. The upfront price represents 10 times current year EBITDA. DIT will hold a 50% stake in the asset with the remaining stake held by two of AMP Capital’s infrastructure funds.

ICG’s Managing Director and DIT’s Portfolio Manager, Tom Laidlaw said: “Port Hedland International Airport is a unique asset. It is a critical piece of infrastructure for the Town of Port Hedland and the local resources industry and, as such, has characteristics that make it a great fit for our investors such as stable cash flows and the fact the nearest airport is some 250 kilometres away. We are also very excited at the prospect of developing and implementing a new master plan for Port Hedland International Airport that, once completed, will significantly enhance the passenger experience at the airport.”

Andrew Pickering, ICG’s Chairman and Chief Investment Officer, commented: “This acquisition further diversifies the DIT portfolio and importantly positions ICG well for upcoming regional airport transactions. The investment in the airport is particularly pleasing as it builds upon the depth of in-house experience the team has in this sector and strengthens ICG’s presence in Western Australia, with this asset being our fifth investment in the state.”

Completion of the transaction occurred in March 2016.

 

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Sandi Orleow appointed Independent Director of the ICG Board

Infrastructure Capital Group (ICG) is pleased to announce that it has appointed Sandi Orleow to the role of Independent Director of the ICG Board.

Sandi has worked globally and locally in financial services for over two decades, with a focus on superannuation, funds management and investment research. Having started her career at Arthur Andersen as a Chartered Accountant, she became the Head of Consulting at Brockhouse Cooper in South Africa and then the Head of Private Markets in Australia for Towers Watson. Sandi was a Senior Portfolio Adviser at Perpetual Limited and established her own consulting business, Orleow Consulting in 2010. Sandi is involved in a number industry organisations and committees and is a Director for Women in Super and Chair of the NSW State Committee. Sandi is also a signatory of the Banking and Finance Oath.

Sandi is a CFA Charter holder and a graduate of the Australian Institute of Company Directors.

ICG’s Chairman, Andrew Pickering commented: “Sandi brings a wealth of industry experience to ICG, which will strengthen the firm’s connections with investors in Australia and globally.”

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Infrastructure funds focus on de-risking energy investments

Author: Stella Farrington

Source: Energy Risk | 30 Jul 2015

As energy companies face a tough time gaining access to capital, a growing number of them have found relief from infrastructure funds and other investors keen to snap up low-risk, low-yielding assets. Three such investors outline their approach.

Meeting global energy needs requires a colossal amount of capital – and the price tag keeps growing every year. In 2014, it cost over $1.6 trillion to supply the world’s consumers with energy, a figure that has doubled since 2000, the Paris-based International Energy Agency said in a report last year.

Unfortunately, gaining access to capital has become a difficult task for the energy industry in the present financial and economic climate. Banking regulation in the wake of the 2008 financial crisis – particularly capital adequacy requirements – has made banks much more cautious about lending. The trend towards loans with shorter maturities has introduced a higher element of risk for energy projects, which are almost always long-term in nature. Meanwhile, structural change in the utility sector has worsened the investment picture. German gas and power giant E.on posted a record annual loss of €3.2 billion (US$3.2 billion) for 2014, hit by weak demand and renewables production eating into market share, and many utilities face similar woes.

Such conditions have led many larger energy firms to divest low-yielding assets. As a result, the past few years has seen a slew of assets come to market – assets that offer lower returns than those sought by traditional investors in the energy sector, such as commodity trading houses or private equity firms, market participants say. For instance, while a typical utility may target annual returns in the low double digits and divest assets delivering below that level, private equity firms would want returns of at least 15%, say investors familiar with the industry.

That has created an opening for a new breed of investors, which previously were not seen as a major source of capital for the energy industry. Such investors – including infrastructure funds and pension funds – seek relatively low yields and long-term, stable revenues. With interest rates at rock bottom and yields on government bonds struggling to make 2% in many of the world’s developed economies, energy infrastructure has emerged an attractive alternative, often yielding returns of 6% to 9%, investors say.

Larry Kellerman, managing partner of Washington, DC-based investment firm Twenty-First Century Utilities, says interest in energy infrastructure has grown to the point where there is now stiff competition for desirable assets. “Currently there is so much capital seeking to be deployed that the good, solid investments are definitely attracting very high-premium returns relative to where they had been clearing even just a couple of years ago,” he says.

Risk management is a crucial piece of the puzzle in making such investments. Infrastructure funds vary in their risk appetite. At the conservative end of the spectrum are ‘buy-and-hold’ firms that seek low but predictable yields, investing in projects where most or all of the risk has been laid off to others – for instance, a wind farm with a 20-year power purchase agreement (PPA) or a transmission line operating under a contract with little variability in its return. At the other extreme, more aggressive funds are ready to take on higher levels of risk, or have more control over the asset, in exchange for higher returns.

Those are the exceptions, though, and most funds seek assets that have been de-risked in some way. “I think the issue now has become the ability to carve the value chain in such a way that you can give an asset the attributes that the low-risk, low-yield seeking funds are looking for,” says Andy Brogan, London-based global oil and gas transactions leader at auditing and consulting firm EY. “The challenge is to insulate them not just from commodity price risk, but execution risk, volume risk and maintenance risk.”

Energy Risk spoke to three investment officers at infrastructure investment funds about how they make business decisions, de-risk their investments and build relationships with players in the energy industry.

Andrew Pickering, Infrastructure Capital Group (ICG)

ICG is an Australian infrastructure investment manager with A$1.5 billion (US$1.1 billion) of assets under management. Pickering (pictured above), based in Melbourne, is the firm’s chief investment officer as well as the portfolio manager of its Energy Infrastructure Trust. The trust’s investments include the 320 megawatt (MW) Kwinana combined cycle power station – one of the largest power plants in Western Australia – as well as gas pipelines, wind farms, other gas-fired generation assets and port infrastructure. Its most recent investment, in April of this year, was the Hallett 4 wind farm in South Australia, which took ICG’s renewable generation capacity to 350MW, making it a sizeable player in the Australian renewables market.

Q: What is your investment model?

Andrew Pickering: We look for long-term investments where we can stabilise or improve the revenue stream. We generally prefer to hold assets for the long term rather than sell them back after a certain time. It’s not a turnaround play; it’s generally a cost of capital play.

Our investors’ required rate of return is lower than that of the typical strategic investor in energy – the trade players, utilities and international energy companies. With pension funds getting between 0% and 2% from government bonds right now, they’re happy to get a 6% to 9% return on infrastructure assets as long as they are comfortable with the credit. Our returns are in the range of 8% to 12%.

Q: How do you decide which assets to invest in?

AP: We filter first geographically, then we look at the revenue stream of the asset. We want to ascertain how certain it is, how stable it is, whether it’s regulated, whether there are long-term contracts in place. If the revenue is merchant, or there are no contracts in place, we’d probably cross it off the list quite quickly.

If there are contracts then we’d look at the cost structure, revenue and the risks around those. For energy infrastructure assets, pure operating costs may be modest but financing and fuel costs may be significant and subject to change. For example, because banks in Australia are less willing to give long-term loans these days, the project could face debt refinancing every few years. Also, input fuel costs could rise. On the revenue side, there’s demand and price risk to consider as well. And if, for example, power prices are fixed, but gas prices rise, you are left with a real exposure to gas prices unless you are lucky enough to have cost pass-through.

Once you have two or three inputs based on assumptions about future prices, the combination could be sufficiently volatile to produce a really bad outcome. We’ve certainly had one project that suffered from a dislocation of prices. It was a biofuel project we invested in in 2005, and feedstock – which was tallow – and off-take prices became completely uncorrelated. The biodiesel was being sold at a fixed discount to the market price, which remained stable, but tallow prices doubled during the early years of operation, far exceeding historical levels. It wasn’t expected and wasn’t a scenario we had modelled. We certainly learnt a lot from that one. The project is still operational, but we sold it a few years ago to a strategic investor. Today we’d be very reluctant to make long-term assumptions based solely on historical market prices, and we’d be even more reluctant to do that for more than one input.

Q: How do you stabilise or improve the revenue stream?

AP: Usually by putting longer-term arrangements in place around financing, costs or revenue. For example, we would rather do long-term fixed-price debt than refinance every few years and hope interest rates will not shoot up. We’ve done a lot of projects with 15- to 20-year fixed-revenue contracts but with only five-year bank loans because that’s all that’s available in Australia. To improve that, we’ve been offshore recently and have borrowed money in the US private placement market and from US insurance companies, and now we have 10- and 12-year debt on two of our wind farms.

In terms of input fuel costs, in certain assets we have the ability to trade around some of our gas contracts if actual usage veers away from what’s been contracted. For example, we own a base load combined cycle generator in Western Australia called Kwinana Power Station. ICG bought a 50% share in Kwinana in 2010 from [Australian natural gas and electricity firm] ERM Power, with the other partner – [Japanese trading firm] Sumitomo – retaining a 50% share and commencing as the operator after ERM’s exit. [Australian energy retailer] Synergy has a 25-year off-take agreement, which covers 97% of capacity. Additionally, we secured a long-term gas supply contract, so we essentially had our key cost and revenue risks managed.

On the face of it, it looks very stable, but we have to constantly work in both the gas and electricity markets to buy and sell both products to keep the revenue steady. Synergy pays a fixed price to use the facility but can run it as little or as much as it needs to. Therefore its gas usage will alter, meaning we may have to sell surplus gas at certain times or buy in the market at other times to top up our contract. We can also run the plant and sell the electricity – it’s just a question of what would be more profitable.

Q: How do you see infrastructure funds impacting the energy market?

AP: Because pension funds are willing to take a lower return on capital, it has enabled utilities to offload assets they don’t want and invest in other things, particularly in renewables. Developers will often get [a project] off the ground and then move it on to infrastructure funds. In Australia there’s more power generation capacity than is needed, so if someone else can take it off the developer’s hands for a good price, that’s appealing and may help repair the balance sheet.

Q: Is there anything energy firms could do better when selling assets to investors?

AP: I don’t think sellers always appreciate the benefit in dollar terms they could bring to their sale if they run the sales process well. One of our criteria for looking at projects seriously is whether the seller has invested in the process and prepared all the necessary reports and materials for the buyer. This can be expensive, but that way they will attract as many buyers as possible.

 

Todd Bright, Partners Group

Switzerland-based Partners Group has over €42 billion ($47 billion) in assets under management placed in private equity, private debt and direct investments in real estate and infrastructure around the world. Its clients are institutional investors such as pension funds, insurers and sovereign wealth funds seeking exposure to private markets. It has put €734 million (US$807 million) in a dozen direct investments in energy infrastructure, 11 of which have been made since 2010. These include wind farms in Australia, France and Thailand, solar parks in Japan and Italy, a natural gas pipeline operator in Mexico, gas distribution companies in Turkey and Spain, a coal export terminal in Australia and two combined cycle gas turbine (CCGT) projects in Texas. Todd Bright (pictured, above), a Houston-based managing director with Partners Group, heads the firm’s Americas private infrastructure team.

Q: What do you look for when deciding whether to invest in an energy asset?

TB: We look first at the asset profile. We don’t focus on fully merchant assets as they hold too much risk for us. For example, we’d have a hard time getting comfortable with most of the quasi-merchant, new-build CCGTs being built in the US at the moment to replace coal retirements, where there’s perhaps a five-year hedge just to support a five-year financing but then a pure market view beyond that for equity returns. At the other end of the spectrum, we’re not likely to compete for fully long-term contracted assets with single digit returns – for example, an operational wind farm with a 20-year PPA in place.

We don’t invest at the development stage or look at novel technologies. We need enough cashflows contracted, or enough revenue predictability, that principal is well protected but there’s still some sort of value creation agenda around the asset.

Q: What might that be?

TB: It might be an asset that has expansion prospects. Partners Group’s acquisition of Mexican gas pipeline operator Fermaca is an example of this. Partners Group became a majority stakeholder and sole equity provider in Fermaca on behalf of its clients in February 2014, in a transaction that valued the firm at $750 million. Fermaca already had two fully built pipelines but also had a growth plan to further build out its network of gas pipelines and continue to capitalise on opportunities to bring US shale gas into Mexico. The following May, Partners Group led the refinancing of Fermaca’s existing debt, issuing $550 million in investment-grade bonds. This has allowed Fermaca to secure new projects including tenders for a 262-mile natural gas pipeline within Mexico and a 200-mile pipeline connecting Texas and Mexico.

Another kind of value creation opportunity we look for is investing at the construction phase and de-risking it simply by taking it into the operational stage. For example, in June of this year, Partners Group became the largest shareholder in the 240MW new-build Ararat Wind Farm in Victoria, Australia. The AU$450 million (US$334 million) project was originally developed by UK-based Renewable Energy Systems, which remains a shareholder and operator. Construction on the site has started, with completion scheduled for mid-2017. Once completed, it will be Australia’s third-largest wind farm. In February 2015, the project was awarded a 20-year feed-in tariff by the Australian Capital Territory Government for a significant portion of the wind farm’s total output.

Another major value creation opportunity we look out for is an asset that has a re-contracting opportunity in the future, such as an expiry of an off-take contract. We’re looking at an opportunity now in the US for a power asset that has less than 10 years remaining on its PPA. Beyond that, a new contract can be signed either with the existing off-taker or with new counterparties.

This is a good example of the type of profile we might look for. There is principal protection from existing contracts but upside potential from a re-contracting opportunity. Some infrastructure funds would not be comfortable with the re-contracting risk and this keeps the competition down for us, but at the same time these investments are not as risky as merchant or development-stage assets.

Q: How involved do you get in the day-to-day operation of the asset?

TB: We are an active, hands-on investor, but it’s not our business to manage assets day-to-day ourselves. The day-to-day management is provided by management teams or service providers at the asset level. There’s a big universe of asset management services providers. Potential partners could be a management team or strategic players in the business, such as a utility.

Q: What do you look for in an asset management partner or operator?

TB: We look to partner with management firms that have the necessary industry experience to carry out our value-creation agenda. Ideally they have also worked with private equity-type sponsors in the past so they know how we operate and view the world. But most importantly, there needs to be an alignment between the two parties over issues such as the valuation of the asset and the share of risk and reward to be taken by each party. There are lots of firms with the industry know-how and experience of working with investors like us, but getting alignment is the toughest part. It’s the biggest source of friction in negotiations with management team partners, and we’ve had to walk away from many deals because there wasn’t proper alignment.

Q: What difference do infrastructure funds make to energy markets?

TB: Capital formation for energy projects would be a tougher process without these investors. It’s still not an easy process, but for well-structured projects there’s ample equity and debt capital right now in part due to the presence of financial sponsors and funds in the market. It’s a capital-intensive sector and without sponsors it would be difficult to get projects off the ground.

 

Larry Kellerman, Twenty-First Century Utilities (TFCU)

Larry Kellerman (pictured, above) has spent much of his career buying, restructuring and selling power plants, notably as head of Goldman Sachs’s Cogentrix unit from 2003 to 2010 and then as chief executive of Quantum Utility Generation, a unit of Houston-based private equity firm Quantum Energy Partners, from 2010 until January of this year. Upon leaving Quantum he started TFCU, which aims to acquire regulated utilities in North America and optimise their commercial models.

Q: Why are you targeting regulated utilities now?

Larry Kellerman: A well-run regulated utility can, in today’s macro environment, economically outperform an independent power producer (IPP) and is much more attractive from a risk-return standpoint. This is a phenomenon that’s only emerged in the past three years or so. It’s what’s attracted infrastructure-type funds as well as the likes of Berkshire Hathaway [the US conglomerate owned by billionaire investor Warren Buffett] to electric utilities. If this space is attractive enough for Warren Buffett to be highly focused on, that’s a statement on the relative attractiveness of a regulated utility.

In today’s marketplace, returns on solid, high-quality regulated utilities – if acquired at the right value propositions and managed effectively – can be very similar to, if not several hundred basis points higher than, the returns that can be garnered in the IPP space, but with less risk. It’s not because the regulated space has improved, but because the IPP space has become a poorer place to deploy capital from a rate-of-return standpoint than it has been probably for the past 20 years. Even a contracted IPP is, at best, a derivative utility credit, as opposed to [a regulated utility with] the benefits of a regulatory safety net and a cost pass-through mechanism.

Q: What sort of assets will you look for?

LK: We are targeting integrated regulated electric utilities, and we would consider individual or bundled regulated generation or transmission and distribution assets. We’ll start looking at what’s out there seriously once we have secured our upsized funding.

Q: Can you describe your optimisation strategy in more detail?

LK: We believe the regulated utility space is an asset class that’s subject to optimisation. There are a lot of new technologies and ways of interfacing with customers that the incumbent utilities are often hesitant to embrace or even, in some cases, afraid of. We see technologies that typically exist on the customer side of the meter – such as smart-grid applications, rooftop and community photovoltaic, customer-facing co-generation [combined heat and power generation], community wind generation, conservation-oriented technology and even battery storage – as potentially very impactful. It’s not just about supplying electrons any more. We believe that offering customers ways to reduce consumption and produce clean, cost-effective power is one of the emerging functions of a modern utility. We are looking at all these technologies because customers are looking at them and are interested in them.

We believe what a utility does best is to provide a secure, reliable product at the lowest possible cost. Most regulated utilities have investment-grade credit ratings thanks to having a workable regulatory scheme, a large capital base and essential monopoly status in their own service areas. This gives them a very low cost of capital in an extremely capital-intensive industry. For example, over 95% of the cost of solar power is capital-related, with operating costs being very low. Utilities’ low cost of capital means they can help drive down the cost that customers would otherwise have to pay for these new technologies. A utility could use its cost-of-capital advantage to own, finance, operate, manage and maintain all rooftop solar panels in its service territory. Customers could select from any pre-qualified vendor, with the utility being able to help bring these important technologies into much wider-scale deployment through enabling customers to take advantage of its financing terms and costs. And all of this would be done on a voluntary basis. By giving customers an additional low-cost and reliable choice, customers will be more likely to adopt the cost-saving and environmentally attractive technologies that are today only being deployed by the wealthiest subset of customers in any utility service territory.

Essentially, we will make money just as a utility makes money today, on earning a fair, regulated rate of return on owning and financing high capital cost items. But instead of building a large nuclear plant, I want us to build 25,000 small photovoltaic installations.

Q: Do you think distributed generation spells the end of the current utility business model?

LK: I don’t subscribe to the death-spiral theory, and I believe that utilities will embrace new technologies and rejuvenate their business models rather than being made obsolete by new technologies. Rather than seeing, for example, rooftop solar as an existential threat, utilities will use their local logistics and cost-of-capital advantage to incorporate this technology into their business model. They need to reach out to customers and offer to be the financier and provider of these technologies.

Over the decades many new technologies have emerged that have affected both power generation and the use of electricity, and utilities have been able to adapt incrementally to include them in their business models over the decades. I have no doubt that this evolutionary, adaptive process will continue in a manner enabling utilities to survive and thrive well into the future.

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EIT acquires 39.9% interest in Hallett 4 Wind Farm

Infrastructure Capital Group (ICG) is pleased to announce that Energy Infrastructure Trust (EIT) has acquired a 39.9% interest in Hallett 4 Wind Farm (Hallett 4) – a 63 turbine, 132.3 MW wind farm located in South Australia.

The transaction was completed after a sale process undertaken by Marubeni Corporation. Following the acquisition, Hallett 4 will be owned by EIT (39.9%), Osaka Gas Co. Ltd (39.9%) and APA Group (20.2%).

It is the third AGL Energy backed wind farm that EIT has in its portfolio complementing Wattle Point and Hallett Hill No 2 Wind Farms that were acquired in 2007 and 2008, respectively. Similar to Wattle Point and Hallett Hill No 2 Wind Farm, AGL is responsible for all operational matters including any change in law risk related to the Renewable Energy Target.

Andrew Pickering, Portfolio Manager for EIT, said the investment complements EIT’s portfolio stating: “We are delighted to have secured another investment in a stable, highly contracted asset that provides immediate strong cash yields to our investors. The investment in Hallett 4 strengthens EIT’s position as one of Australia’s pre-eminent renewable energy providers by increasing its renewable generation capacity to almost 350MW’s.”

Given its familiarity with very similar AGL Energy structures, ICG acted as financial advisor to EIT and was responsible for all aspects of the transaction which included arrangement and analysis of due diligence material, financial modelling and negotiating sale documentation. The acquisition follows the successful A$205m US Private Placement undertaken last month by ICG for Hallett Hill No 2 Wind Farm.

Hallett 4 commenced operations in December 2010 and is supported by long-term off-take and asset management agreements with AGL Hydro until May 2036. AGL Hydro’s obligations are backed by a parent guarantee from AGL Energy (S&P: BBB stable).

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Hallett Hill No 2. Wind Farm becomes the First Australian Wind Farm to successfully Issue in US Private Placement market

Infrastructure Capital Group (ICG) announced today that Hallett Hill No. 2 Wind Farm (Hallett Hill) successfully launched a $A205m issue in the US Private Placement (USPP) market.
The USPP issuance comprises two 12‐year tranches of notes for $US99m and $A76m. The notes will be issued at T+175bps (US tranche) and T+185bps ($A tranche). As part of the transaction, cross currency swaps were entered into to convert the $US notes into $A. The issue was heavily oversubscribed with strong appetite from investors.
Funds from the USPP issuance will be used to refinance Hallett Hill’s current senior debt facility. Funding will occur on 27 May 2015.

The transaction represents a significant milestone for the renewable energy market with Hallett Hill being the first Australian wind farm to issue in the USPP market. Executive Director of ICG and Director of Hallett Hill, Craig Whalen, noted: “The issue demonstrates there is strong appetite from US investors for well‐structured transactions backed by a strong counterparty such as AGL Energy. The 12‐year debt issue provides a long‐term funding solution for Hallett Hill Wind Farm which materially de‐risks our investment. We are delighted with the outcome.” ICG also notes that it significantly reduces EIT’s refinancing requirements for the short term and is an important step in EIT’s ongoing capital management.

Hallett Hill is a 71MW, 34 turbine, wind farm located in mid‐north South Australia near the township of Mt Bryan. Hallett Hill has been operational since 2009. Hallett Hill is wholly owned by the Energy Infrastructure Trust (EIT) which is managed by ICG. It is backed by 25‐year Offtake and Asset Management Deeds with AGL Hydro whose obligations are guaranteed by its parent AGL Energy (S&P: BBB (stable)).

ICG acted as financial and ratings advisor to Hallett Hill. BNP Paribas and National Australia Bank Limited were the Joint Placement Agents. Allens and Sidley Austin provided legal advice to the issuer, Herbert Smith Freehills and Chapman & Cutler provided legal advice to the noteholders and Chatham Financial provided hedging advice to the issuer.

The USPP issue for Hallett Hill follows the successful refinancing of Wattle Point Wind Farm (which is also wholly owned by EIT) in November 2014 by ICG which also included a long term tranche provided by US investors.

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ICG Deal named among the finalists of the 7th Annual International M&A Awards

Infrastructure Capital Group (ICG) is pleased to announce that the Wattle Point Wind Farm refinancing has been named as a finalist in the Cross Border Restructuring Deal of the Year category of The M&A Advisor Awards.

The transaction involved the refinancing of Wattle Point Wind Farm’s $A161 million senior debt facility.

Winners of the award will be announced at the 2015 International Financial Forum, featuring the 7th Annual International M&A Awards Gala, on 27 and 28 April in New York.

The refinancing was strongly supported by the project finance market with a 5-year facility being provided by Commonwealth Bank of Australia and Sumitomo Mitsui Banking Corporation together with a 10-year facility provided by investors managed by US fund manager, Babson Capital.

The transaction marked a significant milestone for the senior debt market in Australia with the introduction of US-based institutional funds as long-term senior-debt lenders to an Australian infrastructure project.

Craig Whalen, Executive Director of ICG commented: “This is one of the first times in the Australian infrastructure finance market that non-traditional lenders have participated in a syndicated debt facility alongside institutional banks. The refinancing takes advantage of a favourable debt market and provides funding diversification to Wattle Point.”

ICG was responsible for all aspects of the refinancing which involved a competitive tender process with prospective bank and institutional lenders, arranging due diligence, financial modelling and negotiating loan documentation.

Wattle Point Wind Farm is a 91MW generator located on the Yorke Peninsula in South Australia. The project is supported by a long-term off-take and asset management agreement from AGL and was acquired by EIT in 2007.

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