DONG Energy Renewables

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DONG Energy Renewables
Use of Project Finance for Offshore
wind? Henrik Balle Manager Germany, Poland
Benelux Head of Project Finance May, 2007
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The merger of six companies
Medarbejdere

• 6 companies
• 4500 employees
• 6 different businesses
• Offices various places in Denmark
• Affiliates in a number of European countries

Samfundet
Kunder
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A company with revenue of DKK 36 billion (2006)
Distribution
Markets
EP
Generation
DKK 2.6bn (7)
DKK 19.9bn (56)
DKK 5.6bn (16)
DKK 7.6bn (21)
Revenue
DKK 1.0bn (11)
DKK 1.6bn (18)
DKK 3.5bn (40)
DKK 2.7bn (31)
EBITDA
Geographic area
Thermal
Renewables
Electricity and gas markets
Offshore Wind Onshore Wind Hydropower
Electr. distribution
Sales offices
Geographic focus areas
Gas distribution
Central power stations
Energy exchanges

• Gas distribution in two geographic areas and one
  gas storage facility
• Electricity distribution in the metropolitan area

• Markets buy and sell gas to large companies and
  are engaged in wholesale trading and retail
• Markets buy electricity for intra-group resale
  and international markets

• Oil and gas exploration and production
• Focus on building up gas reserves to underpin gas
  sales activities
• Oil Gas pipelines

• Renewables produce energy, primarily from wind
  turbines and hydropower

• Electricity and heat production and sales in
  eastern and western Denmark

Segment overview
Contribution from acquired power companies only
included for 6-8 months in 2006 results.
Eliminations included in Markets
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State ownership expected to remain above 50
DONG Energy is currently owned 73 by the Danish
State through the Ministry of Finance, the
remaining is owned by former Elsam (16) and
Energi E2 (11) shareholders (comprising one
municipality and several consumer owned
cooperatives)

• According to a political agreement
• The State shall maintain a majority ownership
  interest in the company until 2015. Reduction of
  the ownership interest below 50 requires
  approval from the parties behind the political
  agreement
• The State shall repurchase (at market price) the
  natural gas grid system and storage facility from
  the company, if the State ownership gets below
  50
• IPO expected in second half of 2007, if the
  market conditions are favourable

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DONG Energy Renewables
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Renewables core activities

Project Development
Construction
Production
PROJEKTUDVIKLING

• Market analyses and identification of potential
  sites
• Acquisition of project rights
• Partnering
• EIA studies, feasibility studies and project
  design
• Engineering and project planning
• Procurement strategy and tendering
• Planning of operating phase
• Financing

• Construction management
• Quality, health, safety environment management
• Project management
• Commissioning management
• Time and cost control

• Power production
• Operation and maintenance
• Asset management
• OM support, trouble shooting and warranty
  follow-up
• Re-powering analysis, decommissioning

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Generation Renewables asset base
3.5 MW wind
Nygårdsfjellet
Narvik
SKS
131 MW hydro
Indalsälven
205 MWhydro
427 MW wind
Barrow
45 MW wind
Ploudalmezeau
9.1 MW wind
DISCLAIMER Capacities recognised on pro rata
basis and thus include minority owned facilities
215 MW wind

• Hydro power Unsubsidised but regulated regimes.
  Subject to taxation
• Wind power Subsidy systems vary by market.
  Typical systems are Feed-in tariff, add-on
  premiums, renewable certificates and construction
  grants
• Competitive power of renewables is likely to
  increase in the future

25 MWhydro
CRISA Mini hydro
Evia, Karistos and Tourla total 18.6 MW wind
Wind power
Hydro power
Assets in operation and under development wind
and/or hydro power
Assets under development or construction only
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DONG Energy Renewables development map 2005-2010
DONG Energys core markets
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Offshore wind
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DONG Energy Renewables is a major player among
utilities focusing on wind energy and is world
leading within offshore wind energy
Nysted Offshore Wind Farm
The global offshore wind farms in operation
Source BTM March 2005
Sold to Vattenfall (Horns Rev 1 only 60)
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Selected major projects in Renewables pipeline
focus on offshore
Offshore
Offshore
Offshore
Offshore
Offshore
Offshore
Offshore
Offshore
Offshore
Offshore
In addition to these major projects, DONG Energy
Renewables has an onshore pipeline of more than
1000 MW in Poland, France, Norway, Sweden and
Spain/Portugal
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Wind projects in the UK
Round 1
Round 2
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Major obstacles for development of offshore wind
focus for banks

• Technical complications
• large scale turbines in development phase only
  (gt3,6MW)
• Gear boxes under investigation
• Long distance electrical cables new and
  expensive technology is required
• Cable installations offshore more difficult
  than expected
• Long distances from coast (30-40 km) requires
  accommodation platform on offshore site

• Supply Chain issues
• Offshore vessel availability for installation and
  OM DONG will charter/lease own vessels
• Lack of production capacity for turbines
  suppliers and subcontractors DONG arrange frame
  agreements
• Bottlenecks with sub-suppliers due to strong
  world market growth

• Contracting issues
• No turnkey suppliers and lack of overall
  contract managers with offshore AND wind
  experience

• Grid interconnection/infrastructure
• Legislative ground is in place (many permits
  still outstanding though), but still to be
  realized by TSO which is complicated in practice
  long lead time for upgrades

• Permitting procedure
• Local permitting still an issue with regional and
  local authorities not progressing current
  applications.
• New techniques applied requires new permits

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Financing of offshore wind

• Basic choice of
• Balance sheet financing
• Portfolio financing (stand-alone)
• Project financing

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The basic choice for larger corporates/utilities

Balance sheet financing
Portfolio financing
Project financing

• Ease of use
• Full consolidation of debt
• Gross returns only
• Group liquidity applied
• No remarks from rating institutions
• More flexibility concerning offtake, operations,
  insurance etc.
• Full integration of assets in generation
  portfolio
• Enhance corporate image

• Stand alone basis
• No consolidation of debt
• Higher net returns
• Cash efficient
• Less flexibility around offtake, operations,
  insurance etc.
• No integration of assets
• Use of portfolio effect and reduce wind risk (to
  increase leverage)

• Same as Portfolio financing
• Little flexibility around offtake, operations,
  insurance etc.
• Can be tailor-made to individual projects
• Flexible use in partnerships

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Screening of market for Project Finance for
offshore wind

• DONG Energy have consolidated energy sector in
  Denmark
• An important financial criteria for DONG Enegy is
  focused on the corporate rating

• DONG Energy Renewables
• To consider future strategy and financing options
  for wind, DONG Energy investigated financing
  options and not least the non-recourse project
  finance route during 2006
• Indicative Terms for non-recourse project finance
  was requested on existing individual assets of
  DONG Energy and structures/format to be
  replicated to future projects

• Projects in different phases
• Nysted Offshore windfarm - 165 MW - in operation
  since 2003 - partnership with E.ON Sweden
• Barrow Offshore Wind - 90 MW - during
  commissioning - partnership with Centrica/British
  Gas
• Walney Offshore Wind 165 MW in development
  construction finance

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Major issues when considering project finance for
offshore wind

• Sharing of risk between Equity and Debt
• Technical issues
• Supply chain issues
• Contracting (no turn key available - yet)
• Operation issues
• Offtake

• Most important points taken away
• Big difference in terms due to sponsor
  quality/experience
• Massive interest in capital markets to provide
  project finance
• Aggressive terms and tenors
• Market exposure (merchant risk) can be managed
• Lack of Project Finance will not be relevant..
  for DONG Energy

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Henrik Balle Manager Germany, Poland Benelux
Head of Project Finance henba_at_dongenergy.dk
Tel. [phone]