Life is a lottery. And lottery winners are a mixed bag.
Sometimes it’s that battler from Bundaberg who scoops the jackpot, immediately pays off the mortgages of his mates and buys five identical V8 Holden Commodores.
On other occasions, the lottery was won at birth. Sometimes the advantage of parentage is immediate and other times chance and serendipity combine with ancestry to provide windfall opportunities that would ordinarily be deprived to others.
There is, of course, nothing insidious about parents seeking to smooth the path for their offspring. Indeed, that’s part of every parent’s obligation.
Insofar as life is a gamble, so is investing in the great wind power fraud.
Take Babcock & Brown, which having disintegrated in 2009, became Infigen.
As an investment ‘prospect’, the Infigen story has been all about bleeding cash.
In an effort to spin away its losses in 2013/14, Infigen pointed to …. wait for it … the wind – as the reason for a massive drop in revenues (as pitched to wind worshippers, ruin-economy).
In the mother of all ironies, Infigen tried to brush off its monumental $304 million loss for 2014/15 by blaming “particularly poor wind conditions” (the pitch again appearing on the pages of that august journal, ruin-economy).
During its first incarnation as Babcock and Brown, these boys fleeced investors and creditors to the tune of something like $10 billion (while its directors pocketed – and somehow managed to retain – 10s of $millions at creditors’ and investors’ expense).
Having spectacularly crashed and burned, Babcock and Brown then shamelessly phoenixed into Infigen. In 2015 it was all set to do it all over again: its losses continued to pile up, it continued to bleed cash, its share price continued to head in a general Southerly direction and its mountain of debt looked insurmountable (see our posts here and here).
In a last ditch attempt to forestall its brewing Babcock and Brown reprise, Infigen put its US wind farms on the block back in January 2015, hoping to scoop up $500 million for the lot, as reported by Reuters:
Australian wind farm operator Infigen Energy Ltd is exploring the sale of 18 U.S. wind farms, worth about A$500 million ($409 million), so they escape impact from the uncertain future of Australian state rebates for renewable energy firms.
But, as with everything Infigen plugs, its stated aims look more like ‘dreams’, which – as every one in creditor and investor land knows – don’t often translate into satisfied debts or realised profits. Instead of bagging $500 million, it managed to pocket a little over half that.
Now, with that track record it would be a very bold punter indeed who would throw their own, or even someone else’s, money at Infigen.
Defying the odds, the Prime Minister’s son, Alex Turnbull did just that.
And his timing was impeccable, if not uncanny.
Before we give a chronology of a remarkable run of coincidences, we’ll go back in time to March 2016 with this article from the Australian Financial Review.
Renewable energy set to boom after ‘two-year drought’
Australian Financial Review
1 March 2016
The Turnbull government’s support for the goal of getting about 23.5 per cent of Australia’s electricity from renewable sources by 2020 has sparked a rise in the prices of renewable energy certificates and fresh M&A talk across the sector.
Infigen Energy managing director Miles George says that after a “two-year drought” in investment in the sector, interest has surged over the last six months thanks to the changed government rhetoric on the sector under Prime Minister Malcolm Turnbull, which has built confidence around the revised 2020 target for renewables.
The revised target of 33,000 gigawatt-hours of renewable energy supply by 2020 was cut from 41 GWh after the lengthy review that concluded last June.
Together with Infigen’s improved balance sheet after the $US274 million ($383 million) sale of its US business, the changes have sparked interest from third parties, both in individual projects in the wind energy player’s portfolio, as well as broader corporate interest, Mr George said.
“There is nothing of that nature at a level at the moment that requires disclosure, but yes there has been interest expressed by a number of people in Infigen … particularly after the change of Prime Minister,” Mr George said in an interview.
“Are people coming and expressing interest? The answer is yes.”
Shares in Infigen, which reached a low of 22¢ last August, have responded, more than doubling since then.
Investors in Infigen include Keshik Capital, the Singapore-based hedge fund of Mr Turnbull’s son Alex Turnbull alongside major investor The Children’s Investment Fund Management, which owns about 32 per cent of the company.
Heightened M&A interest in the sector was evident from IFM’s sale in December of wind and hydropower player Pacific Hydro to China’s State Power Investment Corporation, said to be worth more than $3 billion, including debt.
The deal brought a new, little-known player into the local sector after a hotly contested auction that is understood to have lured interest from players including China’s Huadian Corporation, France’s ENGIE and Spain’s Gas Natural.
Meanwhile AGL Energy has launched a $3 billion renewable energy fund to develop at least 1000 megawatts of new projects to which it wants to attract superfunds as partners.
Players from other parts of the sector such as pipeline owner APA Group are also looking to grow their exposure to renewables.
Prices for large-scale renewable generation certificates or LGCs, which help underpin new renewables projects under the RET legislation, have surged from about $38 a year ago to more than $80, and are set to remain strong, with forward prices of $82 to $85 for the 2016-18 financial years.
With wholesale power prices also on the rise, prices are becoming supportive of new projects, while renewed interest on contracting for renewable power is emerging among the big three electricity retailers to meet their obligations under the RET after a few years on the sidelines.
“LGC prices have started to move dramatically in the last six months and are now at a level – about $82 – where they should be sufficient to incentivise new builds,” Mr George said.
“The liable parties have also changed their positions dramatically in the last 12 months.”
With substantial new renewables capacity of between 5000 and 6000 megawatts needed to meet the 2020 target, industry sources say prices of LGCs should remain strong for the rest of the decade.
Mr George said that 12 months ago, the major retailers did not want to even discuss new renewable energy purchasing contracts, while now the debate is around the duration of those contracts, which are likely to be shorter than the 15 or 20-years typical historically.
“The contract market, which was dead 12 months ago, is now stirring,” he said, pointing to expressions of interest for renewable capacity called by Alinta Energy, Ergon Energy and Synergy.
“We haven’t seen a lot of concrete being poured yet, but just the signs that now we are in a debate about tenor rather than in a debate about whether there’s a contract at all is a very positive sign that the market is moving.”
Australian Financial Review
[Infigen’s share price: September 2015 to date]
Many of the world’s successful investors (think Warren Buffett) consider the art of beating the market as one involving gut instinct rather than cool cerebral activity.
So what was it that attracted Alex Turnbull to Infigen?
Certainly couldn’t have been their balance sheet or cash flow. Running a fleet of clapped-out Suzlon S88s, which are close to the end of their useful economic life, losing $304 million in single year, blaming its ‘performance’ on a lack of beneficial breezes, burdened with a staggering pile of debt and watching its senior management run to the hills would ordinarily spook any sensible investor.
But not Alex Turnbull.
As outfits like Infigen exist and only exist as a result of government mandates and subsidies, anyone backing them would need to be reading the political tea leaves with a particularly keen eye.
Of course, politics moves fast and the creation and removal of policies that favour rorts like wind power subsidies are very hard to forecast in advance.
On that score, Alex ‘Lucky’ Turnbull must’ve simply read it better than most.
With Infigen’s shares tanking to around $0.20 in 2014 and trading at that level through most of 2015, in the latter part of that year – through his hedge fund, Keshik Capital – Alex began pouring money into an outfit that had been losing it faster than a drunk in a casino.
And, wouldn’t you know it, the political tea leaves aligned, as if by magic.
On 22 April 2016, Alex’s dad, Australia’s PM, Malcolm Turnbull sent his then Environment Minister, young Gregory Hunt off to Paris to sign the climate change agreement. This from daddy’s website:
Australia signs Paris Agreement on climate change
23rd April 2016
Today Australia joined over 150 countries in signing the Paris Agreement, securing a global agreement to combat climate change.
Minister Hunt signed the Paris Agreement in New York. We will begin our process to ratify the Agreement immediately, and will seek to ratify this year.
The Paris Agreement is a turning point in the transition to a lower emissions global economy. The Agreement provides for five yearly reviews of national targets, underpinned by a rules based system that will assess whether countries are meeting their commitments.
Australia is playing its part to tackle climate change with effective policies to cut emissions by 26 to 28 per cent below 2005 levels by 2030.
Australia is a partner to the Mission Innovation initiative and will double investment in clean energy research and development over the next five years.
The Turnbull Government’s new $1 billion Clean Energy Innovation Fund will support emerging technologies to make the leap from demonstration to deployment.
We are working with a broad range of partners through our $1 billion climate finance commitment, the Asia-Pacific Rainforest Partnership, our International Partnership for Blue Carbon and the Montreal Protocol.
The latest estimate from the Department of the Environment confirms that Australia is on track to beat our 2020 target by 78 million tonnes of emissions. This is a 50 million tonne improvement on the last estimate in December last year.
The Turnbull Government is also today announcing a further $11 million investment in new projects to improve the health and resilience of the Great Barrier Reef, which will help the Reef to withstand pressures such as the El Niño exacerbated high sea surface temperatures that are causing the current coral bleaching event.
Federal Member for Wentworth
Prime Minister of Australia
No doubt, Alex Turnbull’s mammoth Infigen punt was just a series of very lucky coincidences.
Signing the Paris agreement might have sent Infigen’s struggling share price into orbit, but it did not alter its fundamental debt position and weather-dependant cash flow. Infigen’s management was still desperate to dump the company.
Infigen Energy ramps up efforts to find potential buyer, funding partners
Australian Financial Review
Sarah Thompson, Anthony Macdonald & Joyce Moullakis
17 May 2016
There has been a formal expressions of interest round to flush out a buyer for all or parts of ASX-listed Infigen Energy, sources told Street Talk.
Street Talk can reveal that Infigen’s house-adviser, Lazard, wrote to potentially interested parties seeking formal expressions of interest in the company.
It’s understood those interested parties were asked to provide details on who they were, the nature of their interest in Infigen and any foreign investment hurdles they may have to overcome to make an investment in the company or one of its assets.
The expressions of interest were due in mid-April, multiple sources told Street Talk, and was to be followed by a potential bid stage should the company have received sufficient response.
It is understood the process was aimed at parties who had been seeking an Australian renewable energy investment, including Chinese energy companies in and around renewables auctions.
Infigen has made no secret of its desire to consider all options, in what’s widely seen to be an exciting time for the company.
Infigen’s shares have been on a strong run as expectations grow of strong earnings growth thanks to underlying electricity market conditions. Much of Infigen’s merchant capacity is located in South Australia, where wholesale electricity prices have been rising thanks to a number of changes among existing market participants.
Infigen has also benefited from the rising price of renewable energy certificates – or LGCs – which are expected to fuel the company’s bottom line.
As Street Talk reported earlier this month, there is also growing expectation of corporate activity around Infigen. The company’s largest shareholder, The Children’s Investment Fund Management, is seen to be a seller at the right price, while prices for renewables assets more generally have been strong.
There are also few ways for new entrants to play the Australian energy market, particularly if they are after coal-light options.
The hotly contested sale of Pacific Hydro by IFM Investors to China’s State Power Investment Corporation in a deal said to be worth more than $3 billion, including debt, left several suitors standing on the sidelines in late 2015.
Australian Financial Review
Nearly 12 months on and Infigen is still looking for someone to take over its pile of debt and its worn out fleet of wind turbines; and its share price is on the slide again.
Which brings us back to Malcolm Turnbull. Paralysed with inaction, the PM acts as if Australia’s energy debacle will somehow resolve itself.
Ranting and raving about the damage that could be done by Labor’s 50% Renewable Energy Target is all very well, but every energy hungry business and now even Australia’s biggest power retailers recognise a clear and present danger in the existing Large-Scale RET, which Turnbull continues to defend.
A first-year economics student could point to the market perversion caused by the LRET; and the manner in which it has destroyed Australia’s once reliable and affordable power supply. No sensible commentator on Australia’s brewing energy disaster believes that the LRET is sustainable. And yet, Turnbull continues to drag his feet.
Which leaves STT wondering. Is Malcolm Turnbull’s intransigence all about protecting his progeny?