CASE STUDY


A financing with which one of your authors was involved was building a wind farm on an empty site in Wales. A licence had been obtained under the UK government’s Non Fossil Fuel Obligation, whereby the government was trying to reduce dependence on carbon-based fuels. The licence gave the right, for a period of over 20 years, to sell into the National Grid all electricity generated by the wind farm at a price well in excess of the normal price for electricity, indexlinked to infl ation. So, the project involved raising the money, building the wind farm, and operating it for the full period of the licence. Although logistically this was a complex task to coordinate and manage, in fi nancing terms it was quite low risk. The manufacturer of the turbines was under contract to complete the build on time, or to pay liquidated damages, so the construction risk was mitigated. The manufacturer had also guaranteed a certain level of effi ciency of the turbines, which meant that the likely level of electricity generation was known. The government had agreed to buy all that was produced, and the price was known, so there was little sales risk. And the contracts to maintain the turbines had been agreed several years in advance, so that too was a known cost. The project had been put together in such a way that the only risk that was being taken was whether or not the wind would blow in Wales! The cash fl ow profi le of the project was that it would be heavily cash negative in the fi rst year, during the construction phase, and then would be cash generative thereafter. Thus, only a small amount of the fi nance was in the form of equity. Most of the money was put in as debt of varying types, so that the debt could be repaid once the wind farm was up and running. A distribution policy was devised, included in the legal agreement between all of the parties, that provided for the majority of the cash fl ow to be paid out, with minimal retention as there was no prospect of growth in this business.

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