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Gamesa Energía Nobody knows more about wind

Gamesa Energía Nobody knows more about wind. September 24, 2010, Madrid. Table of contents. 1. Gamesa Energía´s history. 2. Business model and value generation alternatives. 3. Accounting and financial modeling. 4. Gamesa Energía pipeline breakdown and balance sheet value. 5. Strategy.

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Gamesa Energía Nobody knows more about wind

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  1. Gamesa EnergíaNobody knows more about wind September 24, 2010, Madrid

  2. Table of contents 1 Gamesa Energía´s history 2 Business model and value generation alternatives 3 Accounting and financial modeling 4 Gamesa Energía pipeline breakdown and balance sheet value 5 Strategy Valuation 6 Financing 7 Conclusions 8

  3. Gamesa Energía´s history • Gamesa Energía started its activity in 1995 in Galicia and Aragón to complement the WTG manufacturing business with the rest of activities in the wind business cycle • In 1999 it started it international expansion opening offices in Portugal, Italy and Greece. • It launched its US operations in 2003, followed by China in 2006, and India in 2010. • The business started with 15 people located in 3 offices. Currently counts with 300 people in 16 countries, 25 offices, managing the development of 22,000 MW

  4. Table of contents 1 History of Gamesa Energía 2 Business model and value generation alternatives 3 Accounting and financial modeling 4 Gamesa Energía pipeline breakdown and balance sheet value 5 Strategy Valuation 6 Financing 7 Conclusions 8

  5. Business model and value generation alternatives Business model description 1 Key considerations in the sale of a wind farm 2 Alternatives and evolution of current business model 3 Procurement of WTG – relationship with the manufacturing business 4 Competitive advantages 5 Site selection: wind resource expertise 6

  6. Greenfield /Medium Stage Development EPC Construction (using GEOL WTG) Wind Farm Sale Business Model DescriptionHighlights • Focus in countries with a significant expected volume in terms of yearly installed capacity  solid regulation • Full regional organisational platforms in target countries (development, administration, legal, construction…) supervised by corporate level  25 offices in 16 countries • EPC commitment in every project KEY FACTORS CORE COMPETENCES • Exhaustive local know-how on political, social, bureaucratic and legal picture of each target market • Quick knowledge acquisition of the development methodology for each new market • Wind farm optimum design taking into account technical and development restrictions • Deep understanding of wind farm business modeling and regulation

  7. Business model descriptionValue creation phases Yes Yes No No End of Project LOW capital intensity (3 to 4 years) HIGH capital intensity (1 year)

  8. Business model and value generation alternatives 1 Business model description Key considerations in the sale of a wind farm 2 Alternatives and evolution of current business model 3 Procurement of WTG – relationship with the manufacturing business 4 Competitive advantages 5 Site selection: wind resource expertise 6

  9. Key considerations in the sale of wind farmsWe sell… A fully operational wind farm, with all permits, licences, and authorizations to allow operation during 20 to 30 years

  10. Key considerations in the sale of wind farms… through the sale of a SPV… Development Permits Land lease contracts Sites, allowances, access roads cable lines etc. Authorities Licenses Permits etc Grid Connection Company Connection Agreement and Connection Conditions Gamesa WF Division Development, Basic Engineering & Services contract Lease contracts authorizations Evacuation Permit Licensesprocurement contracts Engineering etc. Gamesa WTG Division EPC Contract SPV Wind Farm • WTG Supply • WTG Transportation & erection • Civil works & electrical infrastructure (including connection) Ex-works WTG Supply WTG transportation & erection Construction works Wind turbine / Wind Farm Maintenance (depending scope) Insurance company Construction all risk Insurance coverage until at closing Electrical & civil infr. Maint. terminated at closing Internal financing Shareholder facility agreement Gamesa to pay for all liabilities of the SPV O p e r a t i o n & M a i n t e n a n c e Financing until closing

  11. Key considerations in the sale of wind farms … once we finished the development and start the construction. PLA (Permits, Licenses and Authorizations) 1st kWh Take-Over Development Construction Operation Sales Process Pre - DD 4/6 months SPA: Share Purchase Agreement Closing Down Payment Transfer of the SPV’s shares

  12. Key considerations in the sale of wind farmsTo whom do we sell? Main characteristics Advantages/disadvantages Utilities (+) Familiar with operating risks. (+) Global players with a high capacity of buying WTG’s and wind farms. (+) Finance their purchases with their own resources. The sale does not depend on external debt (-) Required higher profitability than IPP’s and Financial Players. Active in generation, distribution and retailing. Seek a presence in the renewable market Strategic motivation IPPs • Companies with an alternative business that look for: • Capitalization of their excess cash • Renewable image • Search for synergies with their core business (+) Can accept some business risks (-) External financial resources are needed, and are not financing experts (+) High financial knowledge and access to financing (+) Competitive pricing (-) Limited business knowledgemay involve some requirements difficult to comply with (-) Adverse to risk – demanding warranties required Financial Players Profitability is their only objective Usually, funds specialized in infrastructures and renewable energies Low technical knowledge

  13. Key considerations in the sale of wind farmsSome of our clients Utilities • Iberdrola • Edison • Endesa • ENEL • Electrabel • Eon • EWE • Duke Energy Core Market IPPs Increasing weight  market opportunity • Gestamp • Genera Avante • Naturener • Acciona / CESA • Aldesa • Ikea • ACS Financial Players • B&B • Viridis • Taiga Mistral • Fortuny • Marubeni

  14. Key considerations in the sale of wind farmsFollowing a structured process Once the wind farm is close to start of construction, and the construction planning is known, the following steps are taken: • In-house DD performed prior to initiating the Process • Contacting potential buyers → targeting ‘educated buyers’ • Gather feedback and fine-tune transaction structure • Elaborate exhaustive Information memorandum • Distribute Information memorandum with interested buyers (post-NDA) • Request Non Binding Offer • Select preferred bidders (2/3) • Open DD to preferred bidders • SPA final negotiations and execution • Follow up of Condition Precedent fulfillment • Closing 4-6 months >6 months

  15. Business model and value generation alternatives 1 Business model description Key considerations in the sale of a wind farm 2 Alternatives and evolution of current business model 3 Procurement of WTG – relationship with the manufacturing business 4 Competitive advantages 5 Site selection: wind resource expertise 6

  16. Alternatives and evolution of current business model GESA does not intend to become an IPP

  17. Alternatives and evolution of current business model Alternatives to generate value Structured Financing during construction (Project Finance and/or external equity) 1 • These alternatives allow: • Maximizing asset value by adding historical operation data • Reduction of capital employed • Maximizing return on capital Operation Management for a limited period of time 2 Alternatives to GAMESA pipeline • Acquisition of equity stake in medium/late stage projects • Provides access to new business opportunities • Privileged access due to unique dual expertise (developer – EPC contractor) • Facilitates long term external financing

  18. Business model and value generation alternatives 1 Business model description Key considerations in the sale of a wind farm 2 Alternatives and evolution of current business model 3 Procurement of WTG – relationship with the manufacturing business 4 Competitive advantages 5 Site selection: wind resource expertise 6

  19. Procurement of WTG – Relationship with Gamesa´s WTG manufacturing business A strong and recurrent customer purchasing more than 450 MW yearly Gamesa’s historical WTG sales (MWe) 3,684 3,289 9% 3,145 16% 18% 1,101 18% Contribution of Gamesa Energía to Gamesa´s WTG sales

  20. Business model and value generation alternatives 1 Business model description Key considerations in the sale of a wind farm 2 Alternatives and evolution of current business model 3 Procurement of WTG – relationship with the manufacturing business 4 Competitive advantages 5 Site selection: wind resource expertise 6

  21. Competitive advantages • Our unique global presence (Europe, US, Lat-Am, China) allows a natural hedge to slow downs of specific markets due to regulatory changes • Preferential access to WTGs during a sellers market cycle • Advantages related with recurrent nature of selling wind farms vs one spot seller: • Professional DD and negotiation process • Can remain involved in all relationships with the local authorities in order to allow a smooth transition • The reputational factor ensures fair terms and conditions • Deep in house expertise in all aspects of wind development (lands, permitting, wind resource evaluation, micrositing, EPC)

  22. Business model and value generation alternatives 1 Business model description Key considerations in the sale of a wind farm 2 Alternatives and evolution of current business model 3 Procurement of WTG – relationship with the manufacturing business 4 Competitive advantages 5 Site selection: wind resource expertise 6

  23. ? Site selection: wind resource expertiseEvolution of site identification and meteorological models Wind resource atlas • Lack of information in some areas • Non digital formats • Low resolutions: 100 km2 • Available at Scientific institutes or Foundations • Scientific uses Meteorological models • No lack of information by areas • Digital and formats for GIS • High resolutions: 1 Km2 • General commercialized • GAMESA uses its own model and other external models

  24. GIS: Geographic Information System It is an application that manages digital geographic information at different levels, permitting operations: Additions, subtracts, multiplications… Delete areas under constrains criteria The main geographic information used are the following: Wind resource Electricity lines, substations… Property & land value maps Environmental constrains Topography Nodal prices (USA) Other: archeological, noise emission maps… We can match with other criteria: Distances to electrical lines / substations Distances to restricted areas: airports, environmental… Delete areas with less than…5m/s, for example Site selection: wind resource expertiseGIS for prospecting uses

  25. Site Selection: wind resource expertiseBusiness approach Case Study: Pennsylvania Prospecting by GIS • Geographic information used • Wind resource • Nodal prices • Electricity lines, substations… • Property & land value maps • Environmental constrains • Topography • Other: archeological, noise emission maps, airports, military areas… • Key factors • Searching sites under profitability criteria • Using the most advanced tools: Met. Models + GIS

  26. Wind resource assessment & optimizationProcess description • Measurement campaigns • 1 year minimum, 3 years recommended • > 90% availability data • Data cleaning and filtering • Corrective and preventive maintenance • Main principle: 1 month data lost won’t be recoverable until next year • Assessment (wind to energy) • Micrositing - Layout design • Constrains (environmental, landowners..) • Wind turbine suitability studies • Energy production calculations • Long term wind resource (long term data) • Density – Altitude – Temperature • Losses: electrical, availability, farm, noise… • Tools (Fluid dynamic, topography and design) • WASP, Windpro, Windfarmer… • CFD models: Windsim, Meteodyn… • Wind atlas applications • ACAD and similar • GIS software

  27. Wind resource assessment & optimizationNew technology available: remote sensors • LIDAR: LIght Detection And Ranging • SODAR: SOund Detection And Ranging • How it works • It emits laser beams/sounds in different upward directions under a fix frequency • Waves are reflected against atmospheric particles (aerosols) • Waves come down under a different emission frequency, depending on wind speed (Doppler Effect) • Wind data is collected due to information among emitted and collected waves • Information collected • Wind speed, wind direction, turbulence and wind shear • Feasible use in combination with met masts • Met mast (2/3 hub height) + remote sensors • Measurements campaigns costs over 100m are reduced, keeping quality of measurements • Turbulence must be measured by met masts

  28. Wind resource assessment & optimizationOptimization and business approach • GAMESA designs wind farms under profitability criteria, based in energy calculations • GAMESA has designed specific tools for that approach, aligned with business • Best configuration is done WTG by WTG • Compares platforms (G5X, G8X, G10X) & hub heights (67, 78, 100, 120m) • The analysis is done from initial stage of projects andbefore each relevant decision (internal investment approvals) • Tools has a high level of automation, due to huge amount of information regarding to the project (for WTG and country) • Energy yield estimation • Investment information (WTG prices and BoP) • Economical information: Electricity sale mode, Operational costs • Financial hypothesis • Technical constrains (environmental, WTG suitability…)

  29. The importance of wind resource expertise • Gamesa introduces maximizing profitability criteria from initial stages of the projects • Site selection and wind resource assessment are difficult tasks which requires complex computer tools and internal know-how • Gamesa has the needed internal knowledge and expertise to design internal tools, always improving profitability of projects • Gamesa invests in knowledge to test new technologies for client support with a business approach

  30. Table of contents 1 History of Gamesa Energía 2 Business model and value generation alternatives 3 Accounting and financial modeling Gamesa Energía pipeline breakdown and balance sheet value 4 5 Strategy Valuation 6 Financing 7 Conclusions 8

  31. Accounting and financial modeling Accounting process 1 Cash flow and P&L through the project life 2 Accounting example 3 Example of a recent transaction 4

  32. Accounting rulesAccounting through the project life 3-4 Years ~1 Year Early promotion Accounting validation (1) Frame agreement Sale completion SPV constitution Project Development Construction Likely Probable Highly confident Accounting validation gives the go ahead to capitalization ofdevelopment costs that are recognized as inventory Frame agreement gives the go ahead to margin recognition tied to milestone achievement ( % of completion accounting). Agreed sales progression accounted as trade debtors Cash in at sale completion. No impact on P&L Early promotion costs are expensed and never capitalized (1) Accounting validation requires economic (wind resource study) and technical viability (no obvious risks to development and grid connection) of the wind farm

  33. POC milestones and margin recognition The margin of a project starts getting recognized through P&L once a sale agreement is in place following a country specific milestone logic 40% of margin recognized in the first 5 years while less than 10% of costs incurred

  34. Percentage of completion (POC) impact on P&L and balance sheet

  35. Accounting and financial modeling Accounting process 1 Cash flow and P&L through the project life 2 Accounting example 3 Example of a recent transaction 4

  36. Cash flow and P&L through the project life 3-4 Years ~1 Year Early promotion Accounting validation Frame agreement Sale completion SPV constitution Project Promotion Construction Likely Probable Highly confident Down payment Inflow Cash flow Cumulative outflow - - - - Cumulative net CF Accounting Validation Frame Agreement Cumulative net P/L impact P&L Cumulative expenses - - - - Cumulative net P/L impact including early development costs

  37. Accounting and financial modeling Accounting process 1 Cash flow and P&L through the project life 2 Accounting example 3 Example of a recent transaction 4

  38. Accounting example • Accounting methodology is POC once the sale agreement has been signed • Early development costs are expensed • Accounting validation gives the go ahead to cost capitalization and wind farm inventory • Margin recognition starts after sales agreement is reached (percentage of completion accounting); recognition of trade debtors starts • Sale completion: cash in, trade debtors out, no impact on P&L • This accounting methodology (POC) is applied to both large framework agreements or single sale contracts but signature timings differ affecting when P&L impact occurs: • For large framework agreements sale signature and beginning of margin recognition is close to validation date and far from sale completion Margin recognition starts earlier and is spread over more years (historic business model) • For single sales, signature is very close to the construction stage and further away from validation date  margin recognition starts later and is more concentrated in time • Except for downpayments at signing, the cash flow line is identical, as costs incurred do not vary and cash inflow happens mainly at completion of the sale

  39. Accounting examples EBIT recognition Net cash flow x x X X Down payment framework Down payment single sale • Framework Sale. Margin recognition starts earlier and is spread over more years for framework sales • Single Sale. The sales agreement is reached at the latest stages of development or first stages of construction, thus margin recognition is concentrated in time • Cash flow evolution is very similar for both types of sales with the difference being in the size and timing of the down payment

  40. Accounting example of a framework agreement • Sales agreement takes place very close to the validation point. • Margin recognition is concentrated is spread in time

  41. Accounting example frame agreements Early development costs are expensed directly and paid After sales agreement is reached, percentage of completion accounting starts and margin is recognised Early margin recognition is aligned with project milestones

  42. Accounting example of a single sale • Sales agreement takes place very close to the construction phase. • Margin recognition is concentrated in time

  43. Accounting example of a single sale After accounting validation, development and construction costs are capitalized and taken to inventory After sales agreement is reached, percentage of completion accounting starts and margin is recognised Early development costs are expensed directly and paid Early margin recognition is aligned with project milestones

  44. Accounting and financial modeling Accounting process 1 Cash flow and P&L through the project life 2 Accounting example 3 Example of a recent transaction 4

  45. Example of a recent transaction P&L € MM Description • 30 MW wind farm • Sales agreement in Spain • WTG: G8x – 2MW Milestones Balance Sheet € MM Final cash in cleans balance sheet with no P&L impact • Development start: 2002, March • Construction start: 2007, April • Start up: 2008, January • First frame agreement: 2006, February • Final frame agreement: 2009, May • Sell of wind farm: 2009, June Terms Cash Flow € MM • Sales Price: 44,5M€ • Total CAPEX : 35,0M€ • Margin: 8,6M€ • Margin/MW 0,3M€ • EBIT: 2,3M€

  46. Table of contents 1 History of Gamesa Energía 2 Business model and value generation alternatives 3 Accounting and financial modeling 4 Gamesa Energía pipeline breakdown and balance sheet value 5 Strategy 6 Valuation Financing 7 Conclusions 8

  47. Pipeline breakdown by geography Over the last 4 years, the pipeline has grown to 22 GW and increased its maturity while 2,000 MW have been sold. EUR USA CHINA TOTAL

  48. What is today in the Balance Sheet of Gamesa Energía? Balance Sheet evolution (EUR MM) Pipeline Evolution • ~260 MW under POC: • €22 MM margin already recognized • - €13 MM to be filed 92% of the total POC booked reflects costs for projects under construction or finalized

  49. Table of contents 1 History of Gamesa Energía 2 Business model and value generation alternatives 3 Accounting and financial modeling 4 Gamesa Energía pipeline description and evolution 5 Strategy Valuation 6 Financing 7 Conclusions 8

  50. Gamesa Energia strategy 1 Integration vs. pure play Value creation opportunities 2 Strategy by geographic area 3 Agreement with Iberdrola Renovables 4

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