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In reply to: grahamj on Friday 29/08/08 03:06pm

The Children's investment fund has 11% of BBW as of this week. Sounds unthreatening. Sounds philanthropic. Note that , in fact , this Fund is aggressive , has a history of forcing issues , & has bought companies around to their point of view, through hard nosed & successful negotiation & threat.


This ain't no Kiddies Kindergarten Playgroup. It is shareholderholder focussed & is willing to fight for results. Could be good for us still hanging in, & praying for wind.


Watch this happen G.

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Michael Pascoe

January 12, 2009 - 2:38PM

Babcock and Brown Wind is formally cutting its ties with the Babcock and Brown funeral procession but the spirit of the financial engineers still blows hard through the wind farm owner - and perhaps not to the benefit of shareholders.


Despite all the lessons of the credit crisis, an analysis of BBW's strange course over the past year could lead to the opinion that it's still very much old-school Babcock and Brown, preferring wheeling and dealing to managing, financial engineering to the mechanical kind, and a less than totally frank information flow from management and board to shareholders.


That shouldn't be surprising: BBW is still run by the same people who, until the end of last month, were dedicated and often long-term Babcock and Brown employees. BBW's belated interest in governance still has the same independent directors who were happy to keep the hundreds of millions of dollars flowing up to BNB, plus a little new blood that is likely to still be finding its feet and, in any case, remains surrounded by the old advice and management.


Despite management's rhetoric about responding responsibly to the global financial crisis, it looks like BBW has sold off its best assets to fund an extraordinary 30% share buy back, pay off BNB and maintain a relatively high dividend while gambling the complex company's future on US wind farms that offer riskier cash flows and require constant roll out of deal after deal...just like good ol' BNB.


There are plenty of grey areas in accounting - areas that can, for example, allow a $24 million upwards revaluation of US wind farm assets last year - a fair whack of BBW's $40 million bottom-line profit, before minorities. And as a BBW spokesperson noted, the company's auditors accepted that fair value revaluation.


But, as another matter of opinion, it's possible to think BBW is in danger of blowing the funds freed up by the sale of its rich Portuguese and Spanish wind farms, leaving shareholders exposed to the vagaries of US tax policy and deal flows. (It's probably just a coincidence that the US wind farms are still ``managed'' by BNB.)


Selling the farm


BBW's rationale for putting its best wind farms up for sale last year was bemusing from the start. Basically the management would have shareholders believe they were ''selling the farm to prove the farm was worth owning''. BBW phrased it slightly differently, saying it was out to ''demonstrate and capture value''.


That repeated claim was undermined at the company's annual general meeting when it was suddenly claimed that the Spanish farms really weren't much chop and that BBW basically had to put its half of the Portuguese joint venture up for sale because BNB was putting its half on the market. (See BusinessDay AGM report November 27)


In other words, BNB was calling the tune. But, just in my opinion, it's hard to know what the real story might be with BBW.


In any event, BNB looks like blowing the $400-odd million freed up by the sale in short order - starting with a $40 million payment to BNB to buy out its management contract.


Some might see that $40 million as a very generous payment to a company that appears increasingly desperate for money - a company with self-confessed negative asset values now that it's valuing itself for its present circumstances.


(Which reminds me to mention that BBW's 2008 annual accounts show goodwill of $753 million, which makes up two-thirds of BBW's net assets.)


Fee talks


When Babcock satellites suddenly appeared to become more interested in corporate governance late last year, BBW negotiated down BNB's management base fee which would indicate an annual payment of only about $9 million this year, down from 2008's $20.5 million.


The official line from BBW is that the board thought it best to end the relationship quickly and but the company isn't saying how that $40 million figure was derived. And there are on-going negotiations to buy unspecified BNB assets.


But the official fee was the least of the revenue BNB derived from BBW. (It is ironic that the ''base management fee'' actually didn't pay for BBW's management - that was another $8 million or so.)


Among the many payments to the BNB mothership in the 2008 financial year, were $54.2 million for financial advisory services, $9 million for debt advisory services, $77.8 million for ''the framework incentive fees'', $11.5 million for development premiums relating to an Australian wind farm, $239.2 million for half of the Portuguese Enersis wind farm portfolio (of which $94.3 million were for net assets, the rest goodwill), $360.4 million for US wind farms and several sundry other millions for technical and project management.




Perhaps some of the goodwill for Enersis was justified by its financing. The Portuguese portfolio's debt facility of $591 million was non-recourse and had a final maturity of 2024 - the sort of long-term non-recourse credit that plenty of companies right now would die for. Just as BNB.


Enersis was a rich asset on any measure. While BBW only owned it for half of the 2008 year, it still managed to provide $79 million cash flow - nearly a quarter of BBW's total cash flow. Yet BBW started looking to sell Enersis just two months after it bought it - finally managing to do so at a loss.


But the Spanish wind farms flogged off by BNB also were rich, as is the smaller French operation that's still up for sale. CEO Miles George's spray in the annual report highlights the juicy EBITDA margins enjoyed from Spain, Portugal and France - 81, 86 and 92% respectively - but doesn't mention the United States' more modest 71%.


(The rump German holdings also appear less sparkling performers, which might be why BBW has given up trying to find a buyer for them.)


Deal dependent


But what's worse about the cash flow BBW now is relying on from the US is that it's subject to financial engineering to make the best of tax deductions for US investors and requires constant deal flow to maintain. Rather than blowing most of the Spanish and Portuguese sale money on its extraordinary share buyback, BBW might well need the money for other purposes.


As one concerned BBW shareholder put it in an email to me:


I'm not sure that many observers of BBW in Australia fully understand that its US assets, while significant in terms of installed (megawatt) capacity at around 1100MW, generate very little cash to BBW due to the fact that these US assets, like all US wind farms, are essentially tax deals in which most of the cash generated by the wind farms goes to the tax investor (usually a bank like JP Morgan that invested in the wind farms for the tax deductions) for the first 10 years of the life of the wind far. The ''owner'' or ''sponsor'' (ie., BBW) gets little or no cash until that 10 years is up, except for an initial return of capital in the first few years.


The point of this is that because BBW has sold its ''jewels in the crown'' in the form of Portugal and Spain, the majority of its remaining assets are US assets which generate disproportionately less cash than wind farms in any other jurisdiction.


What no-one in Australia seems yet to have focused on is that if a company like BBW is to be left with primarily US wind assets in its portfolio, it needs to have the capital and the development pipeline to continuously develop new US assets and finance them with new tax investors, in a never ending stream, otherwise it will fall into a big cashflow hole after the initial ''capital return pop'' after initiating the tax deal - and BBW's cashflow hole in this context starts to show up in only the next couple of years.


That's a diabolical problem for the company because it has neither the development pipeline of new US assets nor the cash to develop them in its current lame duck state.


My correspondent went on to say unflattering things about BBW management and the BNB structure, but it's the cash flow problem that seems most important. From my reading of the BBW annual report and investor briefings, it looks like he has a point.


In my opinion, BBW sold off its best assets because BNB had to sell off its best wind farm assets - something that was dressed up in the ''demonstrate and capture value'' slogan and that now leaves the management and board without much of a clue beyond a truly extraordinary share buy back proposal and a riskier future being much more heavily dependent on the US market.


Along the way, the board and management betrayed the trust of investors who thought they were going to hold a broadly diversified portfolio of wind farm ''green energy''. But that's just my opinion - and financial engineering can be a very grey animal.


BBW remains housed in BNB headquarters for now. They say they're hoping to be fully divorced by mid-year. And Babcock and Brown Wind is promising to change its name to rid itself of the Babcock and Brown stigma - but it looks like the culture remains.


Michael Pascoe is a BusinessDay contributing editor.

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As far as I know the dividends are now paid out of operating cashflows and stand at 9c or 10% yield. No debt. Massive buyback virtually guaranteeing a floor around 90c. It is not a coincidence that the SP always recovers back to this level. There may be some dodgy stuff behind the scenes but in current environment buying a stock at a buyback level and collecting 10% in yields is pretty good. Yes they have sold some of their best assets, at least they can still do that. Had they not done it they could have been in low 10s alongside with BBI and BBP. BBW is not going to grow profits but they will likely preserve my capital, pay me few dividends and will be there to grow once the good times come back.


ATM quite comfortable holding these. I feel MP is heavily biased for some reason.

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IFN has cancelled dividends for now. Prices sagged but now there is a resurgence. Moving out of 1.30 and moving through 1.40. As the big wind farm co. world wide this is a valuable own and probably underpriced when stability returns. If you picked it up around a 1.00 you will be laughing by years end. In fact you can laugh now with more to follow.



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I am a holder but the unknown is what will hapen when IFN sell half their revenue generating assests in the US and Europe. They will ahve a lot of cash but half as many cash flow generating projects. I know they will reinvest in Australia but how long will that take?


Any ideas?



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I have struggled with same. We can only assume that debt reduction is a major factor. The management strategy is to focus on the Australian developments. Perhaps there is more predictability here. More control. With debt reduction and a more controlled environment there maybe a sense of safety after the Great Babcock&Brown meltdown. SP has been climbing recently & I wonder that an announcement isn't in the near future. Perhaps as sale as you mention.


Also the economic environment is changing. Plans made for 2009 may be less apparent in today's climate. & what of tomorrow's economic climate. I think the plan is for security and control in an unpredictable volatile world economy. Australia is relatively stable and with reduced debt the once Babcock partner can be perhaps less expansive but more secure.


That's my reading anyway. Cheers



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IFN is showing me tonight another "Early Warning" icon. Yesterday's bottom reversal doji candle makes it a little more credible.

A break above $1.24 would also overcome the falling resistance trendline.




Still I'm hesitant, after consulting the Weekly chart. The shape of the past 12 months could be seen as a Head and Shoulders. OK, it's somewhat quasimodoesque, but the last directional arrow being red doesn't fill me with must-buy confidence. Maybe watchlist 2?



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Todays press release at least gives some hope that distributions, be they ever so humble, might resume. Make that "damn humble" and a big "MIGHT". At least I still can have the warm inner glow of backing a renewable energy play. Doesn't pay the bills mind. Bugger.
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