Infigen sells us business
15 July 2015
Infigen Energy (ASX: IFN) announces that it has agreed to sell its US wind business to Primary Wind Power, LLC, a newly-formed portfolio company affiliated with ArcLight Capital Partners, LLC, for approximately US$272.5 million. The transaction is the result of a competitive sale process conducted by UBS Investment Bank on behalf of Infigen.
Completion of the transaction is subject to various closing conditions including Infigen obtaining consent to the disposal from its Global Facility lenders, receipt of relevant US regulatory approvals and certain other third party consents and approvals being obtained. The transaction is expected to close by October 2015.
Infigen’s US wind business comprises Class B equity interests in 18 US wind farms with a total installed capacity of approximately 1,557 MW, of which Infigen’s Class B equity interests comprise 1,089 MW on an economic interest basis. In addition, Infigen has an investment in Class A cash flow interests in relation to 9 of those wind farms and owns a US based asset management business.
A sale of the US wind business will realise the value of future economic benefits associated with Infigen’s Class B interests, which otherwise would not accrue to Infigen in a meaningful way until the end of the decade. Infigen will use the proceeds of sale to reduce its Global Facility debt and thereby place Infigen’s retained Australian business on a stronger financial footing.
Infigen’s Managing Director, Miles George, said, “Infigen has been assessing various options to improve the capital structure of our business and unlock securityholder value for quite some time. The sale of our US wind business is consistent with that strategic objective, represents fair value for securityholders having regard to the cash flow profile of the US assets and is a significant milestone on the path to improving the future prospects for Infigen and its securityholders.”
“The outlook for our remaining Australian business is positive following the recent passage of the amended renewable energy target legislation in Australia that provides policy certainty. The amended target requires a near doubling of large-scale renewable energy capacity in the next five years, creating opportunities for profitable growth in the industry,” he said.
Further information on the anticipated effect of the transaction on Infigen’s financial statements is included in Appendix A.
Application of Sales Proceeds
The sale proceeds from the Class B interests will be applied approximately as follows:
- US$24.2 million will be used to close out interest rate derivative liabilities
- US$10.7 million will be used to pay transaction costs
- US$186.3 million will be used to repay approximately 25% of the debt outstanding under Infigen’s Global Facility.
US$10 million will be held in escrow pending the resolution of certain specific operational matters, with the net funds released from escrow also to be used to repay debt outstanding under Infigen’s Global Facility if and when successfully resolved.
The net proceeds from the sale of the Class A interests of approximately US$40.5 million (after US$0.8 million of transaction costs) will be added to the cash that Infigen holds in entities outside the Global Facility borrower group. Infigen currently intends to apply a portion of those proceeds towards contributing to future Global Facility leverage ratio covenant compliance, if and when appropriate. This should assist with enabling an orderly refinancing of the Global Facility when operating and market conditions permit.
Infigen will provide further information regarding the financial implications of the sale upon completion of the transaction.
Following the signing of the sale agreements, Infigen has reclassified its US operations as a discontinued operation ‘held for sale’, and has written down the book value of its US wind business by approximately US$225 million to reflect fair value less the cost of selling the assets. The written down value resulting from the transaction is attributable to a number of factors, including:
- the lack of meaningful near term cash flow for the Class B interests results in debt financing being difficult for a new owner to secure
- bidders adopting less favourable operating assumptions in relation to production and long term merchant electricity and renewable energy certificate prices than those used by Infigen
- bidders adopting their own views in relation to long term operating costs, having regard to the expiration profile of existing service and maintenance contracts.
Less favourable operating assumptions have a cumulative effect on valuation by both reducing the amount of cash flow received and pushing out the date that the majority of future cash flows accrue to Class B members. This is a consequence of the US Institutional Equity Partnership structure and agreements, particularly the fixed return entitlement of the Class A members. The greater certainty of cash flows associated with the US Class A interests means that lower discount rates are applied when valuing those cash flows.
The sale will result in Infigen’s US based employees becoming employees of the purchaser. Infigen will also assess its broader organisational requirements following completion of the transaction. The sale is not expected to have any effect on the ‘business as usual’ operational requirements of the Australian business.
In Australia, Large-scale Generation Certificate (LGC) prices have recovered strongly over the last six months and now trade at over $50/LGC. Each $1 increase in bundled merchant prices adds approximately $1 million to Infigen’s Australian operating EBITDA. Infigen has been offering long term LGC offtake contracts from its Australian operating merchant assets to liable parties under the RET legislation at prices well below the effective LGC penalty price.
Mr George said, “It is Infigen’s goal to improve the value and certainty of the cash flows within its portfolio to provide an avenue for Infigen to refinance its Global Facility.”
UBS Investment Bank is exclusive financial adviser and Skadden, Arps, Slate, Meagher & Flom LLP is legal counsel for Infigen on the US wind business sale transaction.