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DONG Energy Renewables

DONG Energy Renewables. Use of Project Finance for Offshore wind? Henrik Balle Manager – Germany, Poland & Benelux Head of Project Finance May, 2007. The merger of six companies. Medarbejdere. 6 companies 4500 employees 6 different businesses Offices various places in Denmark

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DONG Energy Renewables

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  1. DONG Energy Renewables Use of Project Finance for Offshore wind? Henrik Balle Manager – Germany, Poland & Benelux Head of Project Finance May, 2007

  2. 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

  3. A company with revenue of DKK 36 billion (2006)* Generation E&P Distribution Markets DKK 7.6bn* (21%) DKK 5.6bn (16%) DKK 2.6bn* (7%) DKK 19.9bn* (56%) Revenue DKK 2.7bn (31%) DKK 3.5bn (40%) DKK 1.0bn (11%) DKK 1.6bn (18%) EBITDA Thermal Renewables Geographic area Electricity and gas markets Offshore Wind Onshore Wind Hydropower Electr. distribution Sales offices Geographic focus areas Gas distribution Central power stations Energy exchanges • Electricity and heat production and sales in eastern and western Denmark • Renewables produce energy, primarily from wind turbines and hydropower • Oil and gas exploration and production • Focus on building up gas reserves to underpin gas sales activities • Oil & Gas pipelines • 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 Segment overview * Contribution from acquired power companies only included for 6-8 months in 2006 results. Eliminations included in Markets

  4. 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

  5. DONG Energy Renewables

  6. 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 • O&M support, trouble shooting and warranty follow-up • Re-powering analysis, decommissioning

  7. 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

  8. Increase in wind capacity from 724 MW to 1,200-1,500 MW by 2010 (and hydro production from 1.6 to 1.9 TWh) DONG Energy Renewables’ development map 2005-2010 DONG Energy’s core markets

  9. Offshore wind

  10. 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%)

  11. 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

  12. Wind projects in the UK Round 1 Round 2

  13. Major obstacles for development of offshore wind – focus for banks • Technical complications • large scale turbines – in development phase only (>3,6MW) • 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 O&M – 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

  14. Financing of offshore wind • Basic choice of : • Balance sheet financing • Portfolio financing (stand-alone) • Project financing

  15. 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

  16. 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

  17. 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

  18. Henrik Balle Manager – Germany, Poland & Benelux Head of Project Finance henba@dongenergy.dk Tel. +45 2096 1065

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