01 Performance OUR INVESTMENT PORTFOLIO

CEFC ANNUAL REPORT / 2014–15

OUR INVESTMENT PORTFOLIO

Overview

The CEFC has made $1.4 billion in investment commitments since inception which, net of portfolio run-off and repaid investments, presently stands at a $1.2 billion portfolio of Australian clean energy investment commitments. This has been achieved despite a narrow sector-specific mandate and difficult market circumstances.

In a financial year in which Australian renewable energy investment fell by 31 per cent, the CEFC’s portfolio grew by 29 per cent. The CEFC was an active investor throughout the year, providing necessary investment to help the continued development of the clean energy sector across a wide range of target areas.

The CEFC’s portfolio remains well diversified across technologies, finance types, borrowers and geography. Even with the CEFC’s more narrow technology focus, the Corporation has succeeded in building a portfolio with an overall shadow credit rating of BB, and a projected yield of 6.1 per cent.

Portfolio Activity

The CEFC portfolio of commitments grew to $1.2 billion in the 2014–15 year. While the CEFC does selectively invest in equity, the investment portfolio consists primarily of debt instruments, which may include publicly traded bonds or bank loans. Accordingly, new investments during the year were predominantly in debt instruments.

Growth in the portfolio from new investment activity was offset by portfolio run-off. Portfolio run-off occurs when investments are repaid in part or in full, or undrawn loan commitments expire or are cancelled by the borrower.

2014-15 portfolio performance highlights

  • The CEFC made $484 million of new investment commitments in the year

  • The CEFC’s portfolio of investment commitments grew to $1.2 billion in 2014–15, a year-on-year net increase of $273.4 million. The increase of $484 million in new investments was partially offset by $210.5 million in portfolio run off

  • Since inception, the CEFC has made cumulative investment commitments of $1.42 billion, including commitments which have been repaid or were ultimately not drawn

  • Projects in the CEFC’s portfolio have attracted $2.19 billion in private sector investment, equating to $1.80 of matching or ‘crowded in’ private sector investment for every $1 of CEFC funds invested

  • CEFC-financed projects are expected to achieve lifetime abatement of 77 million tonnes of CO2-e. The CEFC does not claim that this abatement occurs independently of complimentary policy, such as the RET

  • This abatement is anticipated to generate an estimated gross return of $2.30 per tonne of abatement (i.e. payback to the taxpayer)

  • Since inception, the CEFC has invested in renewable energy projects estimated to add 500MW of new generation once constructed. Added to existing generation the CEFC has invested in, this brings a total of 2,000MW in total nameplate capacity supported by the CEFC. The CEFC’s 2014–15 investments represent an estimated 66MW of new nameplate generation capacity supported by the CEFC in the year

  • The CEFC’s portfolio has an average portfolio shadow credit rating of BB

  • The projected yield for the existing portfolio once fully deployed is 6.1 per cent.

 

Figure 6: Movements in the CEFC portfolio

Movements in CEFC Portfolio 2014–15 $m
TOTAL PORTFOLIO AT 30 JUNE 2014 931.9m
Minus loans fully amortised / repaid /
exited
-10.6m
Minus expired undrawn commitments -146m
Minus cancelled undrawn commitments -53.9m
Plus new investments contracted +484.2m
Plus capitalised establishment and
commitment fees
+0.3m
TOTAL PORTFOLIO AT 30 JUNE 2015 $1,205.9m

 
2014–15 (investment of principal only)

Project Milestones

Over the 2014–15 year, a number of projects within the CEFC portfolio achieved significant milestones. Examples include:

  • Construction at the Taralga Wind Farm was completed, with the wind farm becoming fully operational and generating in July 2015.

  • Sundrop Farms Pty Ltd secured sufficient capital to enable its solar greenhouse project to proceed with an equity investment from global investment firm KKR and project finance debt from Challenger and Commonwealth Bank.

  • Construction at the Moree Solar Farm continued, employing up to 150 people and involving up to 40 local businesses.

  • Carnegie Wave Energy successfully began exporting renewable energy to the grid using its innovative CETO wave energy technology.

  • Shareholders in Energy Developments Limited approved a $1.7 billion takeover offer from DUET Group which provides a positive market validation of a business the CEFC has supported with growth capital.

  • EDL and Landfill Gas Industries were successful bidders in the first auction for the Australian Government’s Emissions Reduction Fund.

  • Bankstown Sports Club achieved recognition with an Energy Productivity in Action award from the NSW Office of Environment and Heritage for its energy efficiency investment achievements, which have reduced energy use by 1.5GWh and delivered energy savings of $500,000 a year. The club has drawn finance from the CEFC-Commonwealth Bank Energy Efficient Loans program.

  • The CEFC experienced increased activity under third party managed co-financing programs as businesses sought finance for energy efficiency upgrades or the installation of renewable energy technologies. This is a strong indicator of the benefits of acting to take control of energy costs, even at the small scale.

Financing Outcomes

Despite its youth, the CEFC is developing a positive record of supporting Australian companies to bring innovative technology to their operations. These investments have been central to enabling recipients to increase efficiency, reduce costs and lower carbon emissions. The 2014–15 financial year saw two loans successfully exit the CEFC portfolio. The CEFC underwrote a further project which was ultimately financed by private sector participants. These examples are further practical demonstration of how the CEFC’s activities are successfully catalysing and ‘crowding in’ private sector investment.

Australian Paper has now fully integrated its new $90 million premium wastepaper recycling and de-inking plant into its operations at Maryvale in Victoria. The plant, developed with the support of $9.9 million in CEFC finance, uses quality waste paper collected locally, which is then sorted and cleaned on site, to be re- manufactured into premium paper products. Incorporating the latest in technology, the waste paper recycling plant is the only one of its kind in Australia and has the capacity to divert 80,000 tonnes of waste paper from landfill each year, the equivalent of 16 billion sheets of A4 copy paper.

With this plant in operation, Australian Paper is now looking to triple the use of quality, recycled fibre in its office, printing, publishing, envelope and stationery papers, ranging from 10 per cent to 100 per cent recycled content. The construction phase of the new plant supported almost 1,000 jobs. The new plant has created an additional 240 regional, full time jobs, contributing an additional $50.7 million per annum to the Australian economy. The CEFC loan was fully repaid in 2014–15.

A $700,000 loan for an energy efficient upgrade to 247 Adelaide St, Brisbane, a seven-storey 1970s Brisbane office block, was repaid in 2014–15. This $1.23 million upgrade successfully achieved a 5-star NABERS Energy Base Building Rating. The 247 Adelaide Street building’s 0-to-five-star transformation achieved a reduction in base building electricity use of nearly 50 per cent.

Its achievement also gained industry recognition, winning the Best HVAC and Refrigeration Retrofit or Upgrade category at AIRAH’s Awards of Excellence 2014. The improvements involved installing new high efficiency air cooled chillers, new pumps and variable speed drives, a new mechanical switchboard, solar thermal heating, ventilation and air conditioning (HVAC) units and LED lighting.

Sundrop Farms announced in December 2014 that it had secured development capital to fund the construction of its project from private sector financiers Commonwealth Bank of Australia, Challenger and global investment firm KKR. Ultimately, the company no longer required the CEFC’s underwritten commitment of $40 million in debt financing which had been in place to support a capital raising for the project for over a year. Sundrop Farms is a leader in sustainable horticulture for the arid world, growing high-value crops using seawater and sunlight. The company has the technology and knowledge to develop and operate greenhouses in locations that have little or no access to arable land, fresh water sources, or grid energy. Its proprietary food production system grows high-quality produce year-round in greenhouses that use the abundant and renewable resources of sunlight and seawater.

The CEFC’s commitment of debt helped the innovative South Australian agricultural project attract private capital investment from major Australian commercial lenders to back its state-of-the-art greenhouses, which use solar thermal technology. The Sundrop Farms project demonstrates how the CEFC is developing investment in Australia’s clean energy market by helping draw in private sources of funding, generating new economic activity and employment in regional areas. Sundrop is now extending their range of crops and after success in Australia are expanding the model globally to other arid areas.

“Without the CEFC we would not have been in a position to negotiate funding with KKR. The CEFC underwrote a debt package for the project which helped Sundrop Farms secure a debt package with major Australian commercial lenders. Upon this foundation, we then entered into a partnership with global investment firm KKR, which allowed us to proceed with our state-of-the-art glasshouse in Port Augusta.”” Sundrop Farms CEO Philipp Saumweber

Other Portfolio Developments

In the dynamic environment that the CEFC operates in, there are instances where CEFC involvement does not ultimately result in a commitment of finance, or where the amount loaned is less than the agreed limit for a project or company, or where the CEFC is refinanced out of a deal.

Investments which have not proceeded or where CEFC finance was not ultimately required

The CEFC commonly provides finance to support new and emerging business models, technologies and capital structures that typical private sector financiers may find difficult to support. The CEFC was designed to address market failures or gaps in Australian capital markets that may be attributable to an absence of a local operating track record or a lack of familiarity with a business model or technology that has a proven successful overseas but is new to Australia.

Our investment commitments may also be contingent on the proponent undertaking a capital raising of equity or further sources of debt which will be necessary so that the transaction can proceed.

The CEFC, like any lender, sometimes makes investment commitments for a project or program which may not subsequently proceed. This may be due to a variety of factors, including: 

  • Circumstances can change, and the borrower may change their mind, or business conditions may no longer be conducive to progressing an investment

  • A project pilot fails to attract expected interest, leading equity sponsors to cancel or postpone investment, and CEFC debt finance is therefore not required

  • A business model or financing program which has proven successful in markets overseas cannot be replicated in Australia, due to different business/consumer preferences, or different tax structures

  • The proponent may not be able to raise sufficient equity, secure a necessary grant or operating approval, or negotiate other private sector finance

  • A borrower may be able to successfully finance internally or find another suitable financier or investor.

Where these circumstances arise, and a CEFC offer of finance expires, the loan will be removed from the portfolio and funds will be added back into uncommitted funds available for allocation to new investments.

In 2014–15, $146 million in CEFC loan commitments expired and were removed from the portfolio. Investment commitments expiring are returned to the pool of funds available for other investments.

The CEFC’s Sundrop Farms investment of 2013–14 is an example of the CEFC using its public funding to draw in new market participants to facilitate financial flows to the clean energy sector, even though the CEFC funds were in the end not required (at the option of the borrower).

For a purely private sector investor, this circumstance could be seen as a loss of a business opportunity. However, this is not the case under the CEFC’s public policy objective. Where our involvement helps conclude the successful financing of a project by the private sector, this demonstrates the successful use of the CEFC’s convening and market–making capabilities to facilitate financial flows without distorting the market.

When there are lengthy developmental and piloting phases, we structure our involvement so that fees are included to cover sunk costs of a transaction, should the deal not proceed, or should the proponent obtain finance elsewhere.

When a project the CEFC has made a commitment to does not proceed, this provides experience which allows the CEFC to continuously improve our understanding of evolving market circumstances. This gives us the experience to expedite similar business offers in the market. Recording and tracking these lessons is an important part of documenting our impact and role in the market.

Reductions in amounts loaned

The CEFC often structures loan contracts on an ‘up to’ basis, where the amount ultimately loaned by the CEFC is determined by the characteristics of the project, subject to an agreed limit, depending on the borrower’s access to alternative finance sources or uncertainty around the ultimate take up of its own products.

Actual final loan amounts and the amount drawn down can vary depending on final construction costs and savings achieved by a project during construction. The CEFC experienced some $54 million in reductions in this category in 2014–15.

Refinancing and asset sales

The payback period for many renewables and energy efficiency projects can often be quite long, which is in line with other infrastructure type investments. However, the availability of long-term debt is limited in Australia and therefore projects will often face at least one event of refinancing during their useful life.

As our portfolio of successfully operating companies and projects expands and matures, gaining a longer operational track record, we expect the CEFC may be refinanced out of deals in the future. We believe this is an indicator of market maturity and a signal that we have fulfilled a funding gap in the market and assisted new project sponsors and investors.

A robust pipeline of potential investments

Projects within the CEFC pipeline include:

  • Waste-to-energy power

  • Utility-scale solar power

  • Inputs instrumental in the manufacturing of clean energy products

  • Enhanced financing for low emission and electric vehicles

  • Energy efficiency upgrades in the local government, university and property sectors

  • Development of energy efficient social and affordable housing

Since beginning operations in 2013, the CEFC has received proposals from more than 300 project proponents, seeking CEFC finance has received proposals from more than 300 project proponents, seeking CEFC finance of almost $8 billion, for total project costs of more than $25 billion. 

For the coming year, CEFC is expecting a heightened level of activity. 

Despite 2014–15 being a difficult year for investor confidence in the sector, the CEFC has secured a robust pipeline of innovative investment opportunities and is well advanced in closing a pipeline of investments valued at more than $350 million.


Figure 7: Current CEFC pipeline of investment opportunities

 
At September 2015