16 December 2005 BBW $1.75 Babcock and Brown Wind Partners · 16 December 2005 Page 1│32 BBW|...

16 December 2005

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BBW| $1.75 Babcock and Brown Wind Partners Initiating coverage Analyst | Max Wheeler

(613) 6224 9899 [email protected] Ken Fleming (613) 6224 8155 [email protected]

Fully diluted shares

on issue | 494.0M

Market cap | A$864.5M

Key points

BBW listed on the ASX on 28 October 2005, at an offer price of $1.40 and with a market capitalisation of $692M.

Based on Prospectus forecasts (adjusting for $35M oversubscriptions) the company listed on a PE multiple for FY07 of 31.5x and an EV/EBITDA multiple of 12.6x.

The company expects to pay a distribution of 10.2 and 11.2 cps in FY06 and FY07 respectively.

BBW has a geographically diverse base of wind farm assets in Europe, Australia and the US.

Babcock and Brown (ASX: BNB) was a founding investor and remains a significant strategic investor with 15%.

BBW has a number of additional investments lined up in its sights, courtesy of its relationship with BNB.

Comment

Since listing BBW has performed strongly, increasing in value by 25% to $1.75 in two months.

Using a DCF valuation methodology, based purely on its existing asset base,we initiate coverage on BBW with a 12 month price target of $1.74. We notethat our dividend discount model returns a valuation of $1.69.

Investment View

Globally, the renewable energy sector has been extremely active over the past 12 months and has become de rigueur, as the space has gained investor momentum. In a sector with a positive growth outlook and assets that generate predictable cash flows, BBW has established a defensible and attractive niche in this rapidly evolving industry.

Yet, BBW’s initial portfolio offers limited medium term earnings growth, although it has a strong balance sheet and potential to be a global consolidator.

At its listing price of $1.40, BBW’s investment appeal, based on our valuation, was attractive although that value has been capitalised in the current share price.

However, if BBW is able to execute its growth strategy, our analysis, albeit simplistic, suggests the stock could be re-rated to a price closer to $3.00.

Performance & Valuation

Last Price | $1.75

52 wk hi/low | $1.80 / $1.66

12 month price target3 | $1.74

Valuation | $1.40

Valuation methodology | DCF Share price performance

BBW versus SP/ASX200

Earnings Summary Y/E Jun 2005A 2006F 2007FRevenue - A$M 16.6 77.0 105.3EBITDA - A$M 12.9 51.8 72.3NPAT (reported) A$M 3.1 11.5 19.7NPAT (normalised) A$M1 3.1 11.5 19.7EPS (diluted) - cents2 1.9 2.3 4.0EPS (diluted) - % chg n/a 20.9 71.6PER (diluted) - x2 90.9 75.2 43.8DPS - cents 0.0 10.2 11.2Dividend Yield - % 0.0 5.8 6.4Franking - % 0 0 0Notes: 1. Normalised earnings is pre goodwill, amortization and after adding back non-recurring items. 2. Based on normalized earnings. 3. Price target is calculated by moving current valuation one year forward.

Final results analysis & outlook

Babcock and Brown Wind Par tne rs│16 December 2005

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Valuation Methodology: DCF1 Key assumptions Beta 0.9WACC|% 8.5Forecast period|years 10.0Risk premium|% 5.5PV cash flows|$M 770.5less net debt/(add cash)|$M 264.0add equity adjustments2 183.0Total 689.5Fully diluted shares on issue|M2 494.0Value per share|$ 1.40

Return on invested capital

Ratio analysis Year end Jun 05A 06F 07FRevenue growth|% 0.0 363.5 36.8EBITDA growth|% n/a 302.6 39.6EBITDA margin|% 77.4 67.3 68.6EBIT margin|% 43.3 41.3 44.0Tax rate|% 36.2 30.0 30.0ROA|% 1.6 4.7 5.5ROE|% 2.5 2.6 3.9Net debt/equity|% 161.0 58.3 61.8Net interest cover |x 3.2 1.7 2.0Capex to deprec'n |% >1000 417.0 0.0NTA per share|$ 0.86 0.86 0.79 Multiple analysis Year end Jun 05A 06F 07FMarket cap|M 865Net debt (cash)|$M 264.0Options|$M 0.0Enterprise value|$M 945.8EV/EBITDA|x 73.5 18.3 13.1EPS|c 1.9 2.3 4.0P/E|x 90.9 75.2 43.8Cashflow / Share|c (3.5) 7.7 11.1Price / NTA|x 2.0 2.0 2.2 Shares outstanding Year end Jun 05A 06F 07FBasic|M 162.8 494.3 494.3Other|M 0.0 0.0 0.0Fully diluted|M 162.8 494.3 494.3

Notes: 1. Discounted cash flow. 2. Equity adjustments and shares on issue include all notes and options on issue (if in the money or deemed appropriate).

Year end Jun 2005A 2006F 2007F

Profit & Loss Summary | A$M Operating revenue 16.6 77.0 105.3Invest & other income 0.0 0.0 0.0EBITDA 12.9 51.8 72.3Depreciation/Amortisation (5.7) (20.0) (26.0)EBIT 7.2 31.8 46.3Net Interest (2.3) (18.2) (23.0)Pre-tax profit 4.9 13.5 23.3Tax expense (1.8) (4.1) (7.0)Associate 0.0 2.0 3.4NPAT 3.1 11.5 19.7Non recurring items 0.0 0.0 0.0Reported profit 3.1 11.5 19.7add goodwill/non recurring 0.0 0.0 0.0Adjusted profit 3.1 11.5 19.7

Cashflow Summary | A$M EBITDA 12.9 51.8 72.3Working capital changes (18.6) 1.7 0.0Interest and tax 0.0 (21.0) (28.7)Other operating items 0.0 5.4 11.1Operating cashflow (5.8) 37.9 54.7Required capex (237.0) (83.4) 0.0Maintainable cashflow (242.7) (45.5) 54.7Dividends/Other (12.0) (25.2) (52.9)Acq/Disp 0.0 (312.2) 0.0Other investing items 0.0 0.0 0.0Free cashflow (254.8) (382.9) 1.8Equity 121.3 363.1 0.0Debt inc/(red'n) 164.1 19.8 (1.8)

Balance Sheet | A$M Cash & deposits 110.1 309.0 284.0Inventories 0.0 0.0 0.0Trade debtors 8.2 9.0 9.0Other curr assets 18.1 12.4 12.4Total current assets 136.5 330.4 305.4Prop., plant & equip. 399.9 625.4 599.4Non-curr intangibles 23.7 99.3 99.3Non-curr investments 0.0 77.6 70.0Other non-curr assets 21.9 21.9 21.9Total assets 581.9 1,154.6 1,095.9Trade creditors 26.8 12.0 12.0Curr borrowings 185.8 177.0 177.0Other curr liabilities 1.1 2.4 3.7Total current liab. 213.6 191.4 192.7Borrowings 188.3 436.0 409.2Other non-curr liabilities 7.4 5.2 5.2Total liabilities 409.4 632.7 607.2Minorities/Convertibles 8.5 0.0 0.0Shareholders equity 172.5 521.9 488.8

Final results analysis & outlook


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Year end Jun 2005A 2006F 2007F

Divisional Summary |A$M

Revenue

Division 1 16.6 77.0 105.3

EBITDA

Division 1 12.9 54.6 75.1

Margin|%

Division 1 77.4 70.9 71.3


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1 | S.W.O.T.

Strengths Weaknesses

Contemporary and extensive asset base – greater efficiencies and enhanced portfolio effect.

Geographic diversity - reduces wind energy resource risk, regulatory risk and market related risks.

Predictable operating and maintenance contracts.

Predictable cash flows and balance sheet strength to execute growth strategy.

Strong demand for wind energy assets.

Initial portfolio provides restricted earnings growth.

Wind energy resource is unpredictable - potential for lower than expected energy production and subsequent impact on earnings.

Execution risk going forward, as growth strategy based on acquisition or further site development.

Potentially high management fees.

Opportunities Threats

Strong growth profile for wind energy generation.

Pipeline of assets as part of Framework Agreements.

Scope globally for market consolidation.

Untapped developing markets.

Wind power is becoming increasingly more competitive – price differential between traditional gas and oil fired power generation and wind has narrowed significantly.

Unfavourable changes to legislative framework.

Global climate change could alter wind profiles at sites.

Power Purchase Agreements (PPAs) terminated due to BBW’s failure to fulfil its off take obligations.

Operation and maintenance costs inflate when renegotiated at the end of their term.

Terms of future PPAs is less favourable to BBW due to difficult prevailing electricity market conditions.

Manufacturing shortage of turbines could halt BBW’s growth aspirations.


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2 | Overview Preamble

BBW’s business proposition BBW is an investment vehicle focused solely on the global wind generation sector. It has a geographically diverse portfolio, which (including US and additional Spanish assets) will have an installed capacity of 671MW located inEurope (26%), North America (49%) and Australia (25%).

This initial portfolio is expected to be fully operational in FY07 and, based on company expectations, generate NPAT of $22M and pay an 11.2 cents per security distribution, which at $1.75 represents a 6.4% yield. (We note that our forecasts diverge from BBW’s as we have factored in higher managementfees in FY07).

Once fully operational, earnings growth becomes relatively pedestrian but the predictable nature of its off take power agreements means, baring a disaster, that BBW should be able to increase its distributions by 3.5% pa.

BBI’s business proposition is relatively simple - establish a portfolio of assets that should, where possible, have:

Off take arrangements whereby assets are:

o Governed by well established or defined regulatory and legislative frameworks, and/or

o Benefited from power purchase arrangements with established utilities.

Predictable operating costs – assets should have operations and maintenance contracts locked in with reputable operators and system manufacturers.

Favourable locations - assets to be situated on sites that offer a combination of quality wind energy resource, efficient access to transmission infrastructure and long term land tenure arrangements.

Long term investment horizons – assets should afford re-powering opportunities whereby existing assets have the potential to create added value by adopting new turbine technologies.

Superior asset quality - systems should be (or have been) designed, manufactured, installed and maintained by leading manufacturers and operators - Vestas, Mitsubishi, Nordex, Gamesa and General Electric.

Manageable construction and/or commissioning risk – contractors have to be locked into guarantees that ensure the project is delivered on time and meets stipulated reliability tests. Failure to comply results in damage payments.

Portfolio diversification – across geography, contract counterparties, and asset life cycle.

A key facet to the growth of BBW’s portfolio is the relationship that the company shares with its founding and active strategic investor Babcock and Brown (ASX:BNB).

BNB is a recognised player in the wind energy sector with over 16 years of experience and has arranged finance of over US$3B for wind projects globally.

As is customary with BNB, it has assumed an active role managing and sourcing opportunities for BBW. Already, BNB has lined up a number of assets for BBW to possibly acquire under US, Spanish and German Framework Agreements.

There are downsides with the relationship, as BNB usually takes its pound of flesh in management and other fees and these can be onerous.


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Wind power so de rigueur Sentiment towards the renewable energy space has changed significantly over the past few years and this can be attributed to a number of factors:

Renewable technologies, notably wind power, are now able to cost effectively produce electricity (but not yet as cheaply as traditional power generating sources),

Oil prices have spiraled,

Introduction of supportive legislated frameworks,

Greater public awareness for a cleaner environment, and

Increasing thirst for listed investment vehicles offering predictable cash flows and solid yields.

Consequently, the heightened interest in the sector has, over the past 12 months, culminated in a number of significant global wind power initiatives:

US-based PPM Energy announced in 2005, its intention to invest £950M over the next three years to install an additional 1,400MW of capacity in the Americas.

In July 2005, Victoria-based industry superannuation fund - Industry Fund Services - acquired the then listed Pacific Hydro for $788M, around20 times FY06 earnings.

In August 2005, the US government extended its Production Tax Credit (PTC) system for a further two years.

Hydro Tasmania announced a $100M strategic alliance with a Chinese group - CLP Power in October 2005.

AGL purchased Southern Hydro for $1.4B in October 2005.

The Victorian State Government announced its intentions, in late October 2005, to lift its renewable emissions target from 2% to 10% by 2010.

Thus, it is probably fair to conclude that the renewable energy sector is very much de rigueur and with the oil price increases recently experienced, BBW’s decision to list has been timely.

Float details BBW listed on the ASX on 28 October 2005, with a market capitalisation of $694M (496M triple stapled securities at $1.40 each). The issuer, BBW, consists of three entities:

Babcock and Brown Wind Partners Limited (BBWPL) – an Australian company, which owns US, Australian and European assets,

Babcock and Brown Wind Partners Trust (BBWPT) – an Australian registered managed investment scheme, and

Babcock and Brown Wind Partners Bermuda (BBWPB) – a company registered in Bermuda that does not own any assets.

Each stapled security is made up of one share in BBWPL, one share in BBWPB and one unit in BBWPT. The components of the triple stapled security cannot be traded separately.

The IPO was over subscribed raising $396M (including $35M in oversubscriptions), by the issue of 283M new securities, leaving the founding investors BNB and Babcock and Brown Infrastructure (ASX: BBI) with 15% and 16.5% of the company respectively. BNB has contractually committed not to dispose of its securities for a period of six months from the allotment date.

BBW expects to pay a distribution of 10.2 cents per security and 11.2 cents per security in FY06 and FY07 respectively, which based on the $1.40 issue price represented a fully tax deferred yield of 7.25% and 8.0%. On the


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current price of $1.75, this represents a fully tax deferred yield of 5.8% and 6.4% respectively.

BBW is managed by a subsidiary of BNB, Babcock and Brown Infrastructure Management (BBIM), under a 25 year Management Service Agreement.

Pre and post IPO funding sources and uses are detailed below.

Source BBW

Transaction commitments

US Acquisition - BBW will use $82M of the IPO proceeds to fund its obligation to purchase an 80% interest (64% in the case of Caprock) in BNB's investment in a portfolio of five wind farms in the US. This is known as BBW's US Acquisition Agreement. This deal was completed on the 5 December 2005.

Olivo Acquisition – three of the six wind farms in Olivo have been acquired by BBW to date. The remaining three - El Sardon, El Redondal and Serra da Loba - are either completed or awaiting issuance of permits for assets under construction. These remaining three wind farms are expected to be acquired by BBW by the end of 2005 and early 2006. The current intention is to use existing cash reserves and drawings under the debt facility to fund the purchase price of these Spanish wind farms.

LB2 Acquisition - BBW has acquired Lake Bonney 2 Co (LB2) and its development rights for $20M. LB2 financial close is yet to be achieved, and the LB2 vendors are under the obligation to achieve that milestone within 12 months of the date of the acquisition agreement. BBW has satisfied its obligation to pay for the rights of LB2 by issuing BBW securities as part of the securities issued under the IPO. The LB2 vendors are obliged to develop a wind farm with long-term mean net electricity output of 501GWh per annum, with an estimated installed capacity of 170MW.

Alinta ‘Walkaway’ Acquisition - BBW has acquired the remaining minorityinterest in the Alinta wind farm for a purchase price of $48M. BBW has satisfied its obligation to pay for Walkaway by issuing BBW securities as part of the securities issued under the IPO.


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IPO and valuation arithmetic

IPO arithmetic The table below sets out BBW’s financial arithmetic that underpinned the list price of $1.40 per share and a market capitalisation of $692M.

We note our earning forecasts diverge from BBW’s as we have factored in the additional $35M cash from the over subscribed IPO and higher management fees.

On BBW’s Prospectus numbers, the company was listed on a forecast FY06:

P/E - 51x (based on FY06 NPAT of $13.5M)

EV/EBITDA multiple – 17.8x (based on FY06 EBITDA of $57.5M and an EV of $1,022M).

Source: BBW Notes: 1 US assets are equity accounted. 2. EBITDA pre Associate

Earnings sensitivity analysis There are a number of factors that could impact the financial forecasts provided by BBW. The most critical of these are:

insufficient wind energy resource, and

management fees.

In our forecasts, we assume BBW’s wind energy production is as stated in its Prospectus estimates an average of 2,181 GWh per annum.

Due to the stock’s performance we assume a base management fee payable of $15M cf Prospectus of $12.8M and have adjusted our FY06 and FY07 earnings accordingly.

The impact of various factors on FY06 and FY07 earnings can be found in the table below.


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Impact on FY06 Impact on FY07

EBITDA changes by (after associate) ($M)

NPAT changes by ($M)

EBITDA changes by (after associate) ($M)

NPAT changes by ($M)

Base fee = $15M (Prospectus $12.8M) (2.2) (2.0) (2.2) (2.1)

Incentive fee = $14M (Prospectus zero) (14.0) (10.4) (14.0) (10.9)

Wind energy 6% below BBW forecasts (4.5) (3.3) (6.9) (5.1)

Wind energy 11% below BBW forecasts (8.9) (6.5) (12.5) (9.4)

Olivo – low market price (4.1) (2.9) (5.0) (3.8)

Interest rate +1% negligible 1.2 negligible 2.0

Interest rate -1% negligible (1.2) negligible (1.9)

A$/US$ rate +5% (0.1) negligible (0.2) negligible

A$/US$ rate -5% 0.1 negligible 0.2 negligible

A$/€ rate +5% (1.7) (362) (2.2) (0.5)

A$/€ rate -5% 1.9 (399) 2.4 0.5 Source BBW

Valuation We have considered two valuation scenarios:

Scenario 1 is based on our forecast cash flows generated by BBW’s initial portfolio. Our DCF valuation is $1.74 per share.

Scenario 2 considers the impact if BBW were to add further capacity of 750MW by FY09. With this additional capacity our DCF valuation rises to $3.05 per share.

Our comparative analysis is somewhat subjective as we have had to line BBW up against hybrid energy infrastructure businesses, as we were only able to identify two listed global wind farm companies. So arguably, few conclusions can be drawn from this analysis other than indicating that, generally, these types of companies, as with BBW, trade on relatively high FY07 PE multiples (34x average cf BBW 43x).

Comparatives

Outside BBW, there are no pure listed wind farm operators in Australia, so our comparative analysis has been broadened to encompass power/energy infrastructure utilities and diversified renewable energy companies.

Overseas, there are several listed wind farm companies but these were at the development stage and had yet to generate significant earnings. For instance:

Sea Breeze (SBX.V) is a listed Canadian wind power generation business that does not have any wind farm sites in operation but has received a permit to build its 450MW site in British Columbia in September 2004.

Western Wind Energy (WND.V) also a listed Canadian company only purchased its first wind farm in September 2005, which we understand to be a small 18MW facility in California.

So we have chosen not include these in our comparative analysis. Instead, we have included Scottish Power (LSE: SPW), whose subsidiary PPM Energy is the largest renewable company in the US. In FY05, SPW had 905MW of installed wind power capacity, with PPM Energy intending to invest £950M over the next three years to install an additional 1,400MW of capacity in theAmericas.


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In FY05, SPW generated NPAT of £1B with PPM contributing £59M or 5% of total group NPAT.

Our comparative analysis can be found in the following table.

Company ASX code

Description Share price (A$)

Yield (%) P/E (x) EV/EBITDA (x)

Net debt /equity (%)

Babcock & Brown Infrastructure Fund

BBI Diversified energy and infrastructure investment vehicle.

1.64 7.7 40.9 10.1 354

Australian Pipeline Trust

APA A regulated gas transmission business.

3.90 5.8 19.1 12.0 153

Diversified Utility and Energy Trust

DUE A regulated gas transmission business.

2.57 9.1 14.9 9.4 467

Envestra ENV Gas distribution business. 1.14 8.5 Non meaningful

13.2 >1000

Hastings Diversified Utilities Fund

HDF An utility fund, with investments in gas transmission and water utilities.

2.47 9.9 92.3 11.4 114

GasNet Australia Group

GAS A regulated gas-transmission business.

2.49 8.0 24.3 12.4 330

Energy Developments

ENE Supplier of electricity from the alternate energy source of landfill gas (LFG) in Australia, US and Europe.

4.16 1.0 25.5 7.6 67

Scottish Power (LSE: SPW)

Diversified power utility with extensive wind farm assets.

13.60 4.0 19.4 12.2 103

Average 6.8 33.7 11.0 226

Babcock & Brown Wind Partners

BBW Global wind farm investment vehicle.

1.75 6.4 43.8 13.1 62

Exchange rate GBP1:2.39AUD

Source Tricom Equities and Aegis Equities Research (using forecast data for FY07 where available)

Valuation We have run two valuation scenarios.

Scenario 1 – this valuation is based on our forecast cash flows generatedfrom BBW’s initial portfolio of assets. This returns a 12 month price target valuation of $1.74 per security, 0.6% below the current share price of $1.75.

Scenario 2 - this valuation is based on our forecasts cash flows generated from BBW’s initial portfolio of assets plus additional cash flowsgenerated by the installation of 750MW capacity. This analysis returns a 12 month price target valuation of $3.05 per security.

Our arithmetic and assumptions are detailed in the following sections.


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Scenario 1 - Initial portfolio

Assumptions:

Additional $35M cash due to the over subscription of the IPO is included in our analysis.

Cash flows generated from initial portfolio of assets – Lake Bonney 1, Alinta, Olivo (six farms), Niedderrhein (two farms) and the US assets (five farms).

Revenue growth capped at 3% pa.

Pricing regime for Olivo portfolio remains stable (no low market price).

EBITDA margins expand to 71.5%.

Wind farms operate at BBW’s Prospectus long term mean energy production rate.

Using a DCF valuation, we value the US assets at $183M.

Average forward A$:US$ exchange rate of A$1=US$0.75.

Average forward A$:€ exchange rate of A$1=€0.59.

BBIM receives a management fee of $6M, a base fee of $15M and no incentive fee.

Cash reserves of $284M in FY07

WACC of 8.5%.

Tax rate of 30%.

Target debt/(debt + equity) is set to 30%.

Dividends increase at 3.5% per annum.

Long term growth rate 3%.

Long term inflation 2.5%.

Cash-f low forecasts ($M) 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 EBITDA 52 72 75 77 79 82 84 87 89 92Provisions (2) 0 0 0 0 0 0 0 0 0Change in working capital 2 0 0 0 0 0 0 0 0 0Maintenance capex (83) 0 0 0 0 0 0 0 0 0Expansion capex (312) 0 0 0 0 0 0 0 0 0Notional tax (10) (14) (14) (15) (16) (18) (19) (20) (21) (22)Cashflow Used in WACC DCF (191) 58 60 61 63 64 66 67 69 70

Valuation summary $M NPV of forecasts 348 Perpetuity [e/(r-g)] 631 Total operational NPV 979 Less:debt (304) Value of investments 183 Shareholder value 858 Current number of equiv shares (M) 494 Value per share ($) 1.74

PIF share price sensitivity ($)

WACC Discount Rate Risk free rate 5.3% Risk premium 5.5% Beta 0.85 Cost of equity 9.9% Cost of debt 7.5% Tax rate 30.0% Post-tax cost of debt 5.3% Target D/(D+E) 30.0% WACC disc. rate 8.5% Source Tricom Equities


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Scenario 2 - Initial portfolio + additional wind farm assets BBW has indicated its intentions to expand its asset base as part of it growth strategy and in its Prospectus singled out a pipeline of potential acquisitions. Our analysis is not directly based on this pipeline but we use this information plus previously released data by the company on which to build our acquisition analysis.

Assumptions: Additional $35M cash due to the over subscription of the IPO is included

in our analysis. Cash flows generated from initial portfolio of assets (as above) plus BBW

makes the following acquisitions/investments: o An additional 750MW of capacity is added between FY07 and FY09. o The added capacity when fully operational in FY10 contributes an

additional $135M EBITDA. o BBW investment is $1.6B, which is in part funded by cash $285M and

the remainder is debt funded. Revenue growth capped at 3% pa. Pricing regime for Olivo portfolio remains stable (no low market price). EBITDA margins expand to 71.5%. Wind farms operate at BBW’s Prospectus long term mean energy

production rate. Using a DCF valuation, we value the US assets at $183M. Average forward A$:US$ exchange rate of A$1=US$0.75. Average forward A$:€ exchange rate of A$1=€0.59. BBIM receives a management fee of $6M, a base fee of $15M and no

incentive fee. Zero cash reserves in FY07 WACC of 8.5%. Tax rate of 30%. Target debt/(debt + equity) peaks at 80%. Dividends increase at 3.5% per annum. Long term growth rate 3%. Long term inflation 2.5%.

Cash-f low forecast ($M) 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015EBITDA 55 120 167 214 220 227 233 240 248 255Provisions (2) 0 0 0 0 0 0 0 0 0Change in working capital 2 0 0 0 0 0 0 0 0 0Maintenance capex (83) 0 0 0 0 0 0 0 0 0Expansion capex (312) (400) (400) (400) (400) 0 0 0 0 0Notional tax (10) (27) (36) (46) (44) (43) (46) (49) (52) (55)Cashflow Used in WACC DCF (185) (307) (270) (232) (224) 184 188 191 196 200 Valuation summary $MNPV of forecasts (171)Perpetuity [e/(r-g)] 1,797Total operational NPV 1,626Less:debt (302)Value of investments 183Shareholder value 1,508Current number of equiv shares (M) 494Value per share ($) 3.05 PIF share price sensitivity ($) WACC Discount Rate Risk free rate 5.3% Risk premium 5.5% Beta 0.85 Cost of equity 9.9% Cost of debt 7.5% Tax rate 30.0% Post-tax cost of debt 5.3% Target D/(D+E) 30.0% WACC disc. rate 8.5%


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Source Tricom Equities

3 | Babcock and Brown Wind Partners

Background BBW, formerly known as Global Wind Partners, was established in June 2003 as a private investment vehicle by BNB and other founding investors, with BBI taking a 50% interest in December 2003.

BBW listed on the ASX on 28 October 2005, having grown from a single asset investment vehicle to a global wind farm operator with 15 sites situated in three different continents.

There are 494M stapled securities on issue and at listing price of $1.40, the company had a market capitalisation of $692M. Since listing, the share price has appreciated by 25% to $1.75 and now has a market capitalisation of $864.5M. The founding investors, BNB and BBI, remain cornerstone investors with 15% and 16.5% of the company respectfully.

Structure As with any BNB investment vehicle the structure is rather complex, with security owners holding a triple stapled security. The following sets out an overview of the structure of BBW and its investments.

Source BBW

68.5% 15% 16.5%


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BBW is managed by BBIM under a 25 year Management Services Agreement and the responsible entity of BBW Trust is Babcock and Brown Wind Partner services (BBWS). As the manager of BBW, BBIM has to:

provide ongoing management

o implement Board decisions,

o manage investor relations, and

o invest and manage asset portfolios and undertake all financial reporting.

source investment opportunities

o identify, investigate, evaluate and advise on investment opportunities, and

o provide investment management services.

In performing its services, BBIM must adhere to BBW’s investment policy. BBIM is also the managing member of BBWPUS, which is BBW’s and BNB’s co-investment vehicle, that owns interests in the US assets. For more detail on the Management Services Agreement, refer to the Prospectus 12.1.3.

Management fees The responsible entity receives $500K (indexed at CPI) pa.

BBIM receives $6M pa (indexed at CPI) pa plus any costs it pays on behalf of BBW. In addition, BBIM will also receive a base fee and an incentive fee, based on the following formulas:

1.4% per annum of the Net Investment Value (NIV), where NIV is the market capitalisation in respect of the relevant quarter plus external borrowings plus firm investment commitments less uncommitted cash and the book value of externally managed assets. Payable quarterly in cash.

20% of the net % increase if BBW outperforms S&P/ASX 200 Accumulation Index. Paid half yearly in cash or up to 60% in issued securities.

To provide some indication as to the possible level of these fees we provide the following hypothetical examples.

Incentive fee - hypothetical assumptions Input Assumption

Average market capitalisation during last 20 trading days in the last half year period ($M)

865

BBW security return during last 20 trading days in the last half year period (%)

25%

Accumulation Index return during last 20 trading days in the last half year period (%)

22%

Incentive fee for the half year period ($M) 5.0 Source Tricom Equities


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Base fee - hypothetical assumptions

Input Assumption

Days in quarter 92 92

Average number of securities over last 20 trading days in the quarter (M)

494 494

Volume weighted average price per security over last 20 trading days in the quarter (M)

1.40 1.75

Average market capitalisation during last 20 trading days in the quarter ($M)

692 865

External debt at the end of quarter ($M) 583 583

Firm commitments to future projects ($M) 0 0

Sum of uncommitted cash ($M) 309 309

Book value of externally managed assets ($M) 85 85

Base fee for the quarter ($M) 3.1 3.7

Source Tricom Equities At this point we are assuming in our valuation that BBIM:

does not receive an incentive fee, and receives a base fee of $14.8M approximately $2.8M above the fee

estimated by BBW in its Prospectus

Wind Farm Assets The initial portfolio comprises 15 wind farm sites in the US, Germany, Spain and Australia with a total gross installed capacity (when commissioned) of 671.6MW and average per annum production of 2,181GWh. (We are assuming BBW will purchase late 2005 and early 2006, three wind farm sites in Spain that it has agreed to purchase under an Olivo Share Purchase Agreement, subject to commissioning permits being issued).

The initial portfolio is expected to fully operational in FY07, and based on company expectations, is set to generate EBITDA of $75M and NPAT of $22M in that year. FY07 EBITDA contribution by region and portfolio, as is seen below.

Australia41%

Europe48%

US11%

Lake Bonney 1

13%

Olivo43%

Niederrhein5%

US11%

Alinta28%

Source: BBW


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The following provides a summary of the portfolio.

Wind Farm Location BBWP's equity interest (%)1

Operations start date

Installed capacity (MW)

LT Mean energy production (GWH p.a.) 4

Capacity efficiency

Power purchase agreement terms 5

Land leases (years)

Regulatory regime 5

Australia Alinta Western Australia 100% Dec-05 89.10 366.5 47% 20 years (Elec

with 10 yrs RECs)

25+ Australian MRET

Lake Bonney Stage 1

South Australia 100% Feb-05 80.50 211.2 30% 10 years (Elec with RECs)

30+ Australian MRET

Olivo Portfolio Europe 100% Sierra del Trigo Spain - Jaen 100% Jan-02 15.18 32.3 24% MPO 30+ MPO or FTO La Muela Norte Spain - Zaragoza 100% Aug-03 29.75 70.6 27% MPO 30+ MPO or FTO El Redondal Spain - Leon 100% Jan-05 30.60 66.5 25% MPO 30+ MPO or FTO Serra da Loba 2 Spain - Galicia 100% Dec-05 36.00 99.9 32% MPO 30+ MPO or FTO La Plata Spain - L.Mancha 100% Jun-05 21.25 45.6 24% MPO 30+ MPO or FTO El Sardon 2 Spain - Andalucia 100% Feb-06 25.50 47.9 21% MPO 30+ MPO or FTO Niederrhein Europe 99% Wachtendonk Germany –

North Rhine 99% Dec-05 12.00 23.7 23% In place 20+ Fixed price

system Bocholt-Lieden Germany –

North Rhine 99% Dec-05 7.50 13.3 20% In place 20+ Fixed price

system

North America Sweetwater 1 USA - Texas 40% Dec-03 37.50 141.7 43% 20 years 30+ USA PTC Sweetwater 2 USA - Texas 40% Feb-05 91.50 361.8 45% 12 years 30+ USA PTC Caprock USA - New Mexico 64% Dec04/

May05 80.00 316.6 45% 20 years 35+ USA PTC

Blue Canyon USA - Oklahoma 40% Dec-03 74.25 264.1 41% 20 years 20+ USA PTC Combine Hills USA - Oregon 40% Dec-03 41.00 119.6 33% 20 years 60+ USA PTC

TOTAL 671.6 2,181 32% (average)

Notes: 1. North American percentage ownership for Class B stock of project entity only i.e. 80% of 50% or in the case of Caprock 80% of 80%. Class A and Class B economic interests vary from US project to project, but are typically in the range of 75%:25%. 2. Wind farms are not acquired by BBWP until commencement of operations and receipt of permits/approvals. 3. Serra da Loba, El Sardon and both Niederrhein sites were under construction as at October 2005. 4. The current grid connection regarding La Plata limits the capacity to 10MW. A new grid connection is under construction and has to be completed by the end of September 2005 otherwise Gamesa must compensate Olivo for the loss of revenues due to limited capacity. 5. MPO - market pricing option; FTO - fixed tariff option; PTC - Production tax credits; MRET - Mandatory Renewable Energy Target; REC – Renewable energy certificate

Source: BBW/Tricom Equities

We discuss each asset in more detail later in this section but in general BBW’s portfolio exhibits the following key features: contemporary assets manufactured by a variety of established

operators, manageable construction and/or commissioning risk and predictable

ongoing operating costs, off take agreements with established utilities, location and manufacturer diversity - a combination of quality wind

energy resource (see Appendix A), efficient access to transmission infrastructure and long term land tenure arrangements.

long term investment horizons with re-powering opportunities, debt financing – farms funded with long term recourse secured bank

debt (except US assets which are funded solely by equity), operating within supportive legislative frameworks (see Section 4).

In the following section we provide key information related to each wind farm asset. For simplicity we have chosen not to provide the specifics for each of the various (and many) contractual agreements that exist in relation to each site as these can be found in some detail in the Prospectus (Appendix 3).


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Australian assets

BBW has two wind farms in Australia – Alinta and Lake Bonney 1 – both of which are 100% owned. Collectively (when fully operational) these sites should generate ~ 575GWh per annum and contribute about 41% of FY07 EBITDA.

Asset name Alinta Wind farm

Location Western Australia

Ownership 100%

Funding Australian denominated limited recourse debt provided by a syndicate of banks. Based on previous BBI market releases, we estimate the debt to be ~ $170M. Upon completion BBW intends to partly pay down this debt (no guidance provided) from equity contributions with the balance paid over the next 13 years.

Revenue assurance All electricity and renewable energy certificate (RECs) are sold under long term off take agreements with terms of 20 years for electricity and 10 years for the RECs.

Customers Alinta Sales (electricity and RECs) and AGL (RECs only).

Construction Fixed price turnkey contract with Vestas (formerly NEG Micon).

Operation & maintenance Full commercial operations as from December 2005. Five year operations and maintenance contract with Vestas.

Land Land lease with 25 year tenure with option to extend for five years.

Regulatory regime (see Section 4) Federal Australian MRET scheme and possibility that NSW and ACT greenhouse gas abatement schemes might ultimately apply.

FY07 EBITDA contribution ~$22M

Installed capacity (MW) 89.1

Net long term mean energy production (GWh pa) (see Appendix A)

366.0

Net capacity factor (see Appendix A) 47%

Asset name Lake Bonney 1

Location South Australia

Ownership 100%

Funding Australian denominated limited recourse debt provided by a BNP Paribas. Based on previous BBI market releases, we estimate the debt to be ~ $100M.

Revenue assurance All electricity and RECs are sold under long term off take agreement with a term of 10 years.

Customers Country Energy (electricity and RECs).

Construction Fixed price turnkey contract with Vestas (formerly NEG Micon).

Operation & maintenance Full commercial operations as from February 2005. Five year operations and maintenance contract with Vestas.

Land Land lease until 2032 with option to extend for two additional five year tenures.

Regulatory regime Federal Australian MRET scheme and possibility that NSW and ACT greenhouse gas abatement schemes might ultimately apply.




211.2

Net capacity factor (see Appendix A) 30% Source BBW


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European assets BBW should have eight wind farms in Spain (six sites) and Germany (two sites) by late 2005/early 2006. BBW has 100% ownership of the Spanish assets and 99% ownership of the German assets. Collectively (when fully operational) these sites should generate ~ 195GWh per annum and contribute about 48% of FY07 EBITDA.

Under the terms of the Olivo Share Purchase Agreement, BBW has the right to purchase the three remaining wind farms that were either awaiting completion permits or are nearing completion. BBW expects to purchase these three assets in late 2005/early 2006 for $229M, which will be funded from IPO cash reserves and drawings under its debt facility. This would takeBBW’s Spanish assets up to six sites. Note - our financial arithmetic assumes the Spanish assets are purchased.

Spanish Assets

Olivo portfolio Sierra del Trigo

La Muela Norte

El Redondal Serra da Loba

La Plata El Sardon

Owned Yes Yes Late 2005 Late 2005 Yes Early 2006

Operational Yes Yes Yes No – late 2005

Yes No – early 2006

Installed capacity (MW) 15.2 29.8 30.6 36.0 21.31 25.5


32.3 70.6 66.5 99.9 45.6 47.9

Net capacity factor (see Appendix A) 24.3 27.1 24.8 31.7 24.5 21.5

1 Grid connection restraints currently limit capacity to 10MW but a new connection is under construction. Source BBW

Ol ivo portfol io: key issues common to al l s ites

BBW ownership 100%

Funding Euro denominated debt arranged by Bank of Scotland and Dexia limited. Based on previous BBI market releases, we estimate the debt to be ~ $280M.

Revenue assurance Electricity can either be sold on a (i) fixed tariff or (ii) market option basis. The market option allows for part compensation to be derived from spot prices in the wholesale market and part from legislated premium plus bonus. Currently electricity is sold under the market option as it is significantly higher in value.

Operation & maintenance Ten year operations and maintenance contract with Gamesa under which Gamesa guarantees turbine availability levels and liable for repairs and insurance costs.

Construction Three facilities are commissioned fixed price turnkey contract with Vestas (formerly NEG Micon).

Land Land leases, easements and surface rights with 30 year+ tenure.

Regulatory regime Market option or fixed tariff. BBW has adopted the more favourable market price option.


Source BBW


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German Assets

Nierderrhein portfolio Wachtendonk Bocholt-Liedern

Owned 99% BBW 1% Babcock and Brown Germany

99% BBW 1% Babcock and Brown Germany

Operational No – late 2005 No – late 2005

Installed capacity (MW) 12 7.5


23.7 13.3

Net capacity factor (see Appendix A) 22.5 20.2

Source BBW

Nierderrhein portfol io: key issues common to al l s ites

BBW ownership 99%

Funding Euro denominated debt arranged by HSH Nordbank. Based on previous BBI market releases, we estimate the debt to be ~ $30M.

Revenue assurance Under German law, utilities are obliged to connect wind farms to their networks and take 100% of the electricity produced at the regulated fixed tariff. Power Purchase Agreements have been signed with RWE Rhein-Rhur and Bocholter Energie und Wasserversorgung (BEW).

Construction Fixed price turnkey contract with Nordex Energy.

Operation & Maintenance Ten year maintenance contract with Nordex. Ten year operating and technical management contract with Renerco.

Land Land leases with 20 year+ tenures.

Regulatory regime German fixed price tariff.


Source BBW

US assets On 5 December 2005, BBW purchased membership interests in BBWPUS representing 80% of the economic interests in BBWPUS. The US vendor BBWE retains a 20% holding.

BBWPUS owns 100% indirect interests in five limited liability companies (LLC) (note 80% interest in Caprock LLC). Each LLC has a 50% interest - Class B ‘managing’ membership - in a wind farm project. The other 50% interest is held by Class A ‘non-management’ members. The economic ownership structure is detailed below.

Investor base of Project LLC

Source: BBW

Class A Members (non managing members)

Class B Members (managing members)

Project LLC

Wind Farm


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BBWP’s economic ownership structure in the US Assets

Note: 100% unless otherwise stated. Source: BBW

The US assets are fully operational, and have a total installed capacity of ~ 1,205MW.

There is no project debt funding associated with the US assets. Due to its equity shareholding, BBW equity accounts its US assets.

BBW expects to receive cash distributions of A$7.6M in FY06 and A$11.1M in FY07 from its US assets.

Babcock & Brown Wind Partners

BBIM Babcock & Brown

BBWPUS

Wind Investment 1

Wind Investment 2

B&B Blue Canyon LLC

B&B Combine Hills LLC

B&B Sweetwater 2 LLC

B&B Caprock LLC

Sweetwater 1 Project

Blue Canyon Project

Combine Hills Project

Sweetwater 2 Project

Caprock Project

B&B Sweetwater 1 LLC

50% 50% 50% 50% 100%

80%

20%

80% non-managing member

Managing member

20% non-managing member

Investment LLCs

Class B Member

Project LLCs


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Asset name Sweetwater 1

Location Texas

BBW equity ownership 40%

Funding No project debt funding.

Revenue assurance All electricity is sold under an off take agreement with a term of 20 years.

Customers TXU Portfolio Management

Construction Fixed price turnkey construction contract with MA Mortenson. Fixed price turbine and tower contract with GE Wind Energy.

Operation & maintenance Full commercial operations commenced in February 2005. Five year operations and maintenance contract with GE Wind Energy. Babcock and Brown Power Operating Partners (BBPOP) manage day-to-day activities and financial reporting.

Land Land lease with 30 – 40 year tenures.

Regulatory regime USA PTCs



141.7


Asset name Sweetwater 2

Location Texas




Customers Austin Energy

Construction Fixed price turnkey construction contract with Renewable Energy Systems. Fixed price turbine and tower contract with GE Wind Energy.

Operation & maintenance Full commercial operations commenced in December 2003. Five year operations and maintenance contract with GE Wind Energy. BBPOP manage day-to-day activities and financial reporting.

Land Land lease with 30–40 year tenures.




361.8


Asset name Caprock

Location New Mexico




Customers Southwestern Public Service Company

Construction Fixed price turnkey construction contract with Texas Wind Power. Fixed price turbine and tower contract with Mitsubishi Power Systems.

Operation & maintenance Full commercial operations commenced in December 2004 (Phase A 60 turbines) and May 2005 (Phase B – 20 turbines). Five year operations and maintenance contract with Mitsubishi Power Systems. BBPOP manage day-to-day activities and financial reporting.

Land Land leases with two successive 25 year tenures.




316.6



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Asset name Blue Canyon

Location Oklahoma

BBW equity ownership 80% of 50% of Class B Membership interest. Zilkha Renewable Resources holds remaining 50% of Class B Membership.

Funding No project debt funding


Customers Western Farmers Electric Cooperative

Construction Fixed price turnkey construction contract with MA Mortenson. Fixed price turbine and tower contract with Vestas US.

Operation & maintenance Full commercial operations commenced in December 2003. Five year operations and maintenance contract with Vestas. BBPOP is the fiscal administrator. Zilkha Renewable Resources manage day-to-day activities.

Land Land leases with two successive 25 year tenures.




264.1


Asset name Combine Hills

Location Oregon

BBW equity ownership 80% of 50% of Class B Membership interest. Eurus Energy America holds remaining 50% of Class B Membership.

Funding No project debt funding


Customers PacifiCorp

Construction Fixed price turnkey construction contract with Wind Energy Constructors. Fixed price turbine and tower contract with Mitsubishi Power Systems.

Operation & maintenance Full commercial operations commenced in December 2003. Five year turbine operations and maintenance contract with Mitsubishi Power Systems and a two year (with eight year extension) ‘balance of plant’ contract with Renewable Management. BBPOP is the fiscal administrator. Eurus Energy America manage day-to-day activities.

Land Land lease with 60 year tenure.




119.6



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Growth opportunities BBW’s has a number of medium-term growth prospects.

LB2 - pre IPO, BBW acquired Lake Bonney 2 company (LB2) and its development rights. Under the terms of the acquisition agreement, the LB2 vendors are obliged to take steps to develop a 501GWh per annum facility within 12 months of the agreement. Failure to do so may result in the vendors repurchasing BBW’s development rights.

Framework Agreements - BBW has entered into three Framework Agreements with BNB, to purchase further wind assets, the details of which are discussed below. If theses agreements are executed, this would provideadditional assets for BBW in the US, Spain and Germany with a total installed capacity of ~700MW, almost doubling BBW’s existing capacity.

Source BBW

Management and Board

Source: BBW


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4 | Wind Energy – industry overview

Market Dynamics The wind energy market has experienced significant growth over the past 15 years and in 2004 alone, 8,154MW of wind energy capacity was installed. By December 2004, there were approximately:

74,000 turbines,

in more than 60 countries,

with an installed capacity of 47,912MW,

generating 0.6% of the world’s electricity supply.

Europe dominates the wind industry, accounting for 72% of total installed capacity, with Germany, Denmark and Spain seen as market leaders. The Americas is the second largest market accounting for 15% or 7,391MW with installed capacity in Australia accounting for 1% of the global market.


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BTM Consult, forecasts that the wind energy sector will grow at 20% pa until 2009 with both Asia and the US being strong growth markets, as seen below.

Source BTM Consult

There are a number of reasons that we perceive for this proposed growth:

the need/desire by countries to reduce their dependence on non- renewable resources and diversify their energy supply,

greater emphasis on the security of energy supply with the level and volatility of fossil fuel prices increasing considerably over the past three years,

the ability to re-power (replace existing facilities with newer, larger capacity, more efficient models),

offshore farm facilities (still in its infancy with only 589MW installed),

recognition by governments to address climate change by reducing greenhouse emissions.

technological development has led to new turbines becoming far more effective at harnessing energy from the wind, as is evidenced in the following diagram.


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Source BBW

Falling generation costs - wind costs are down by 50% over the past 15 years and with rising oil prices, the price differential between traditional oil fired power generation and wind has narrowed significantly. Yet, as the following chart below highlights, wind power in many countries is stillmore expensive to produce. Notwithstanding, we note that the oil price when these data sets were compiled was US$30 per barrel so the cost gap would have narrowed.


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Legislated programmes The uptake of wind energy has been most prevalent in those countries where the Government has taken a proactive stance on renewable energy resources and introduced legislative incentives to support the development and use of alternative energy supplies. The EU has been quite proactive, which has resulted in it setting defined national targets for the contribution of electricity from renewable energy resources as a proportion of gross consumption.

Source Directive 2001/77/EC of the European Parliament of 27 Sept 01

In addition, government programmes typically also grant special privileges to provide renewable energy generators with priority access into the electricity grid and/or some form of economic benefits such as a price premium.

For example, the US and Canadian governments have introduced a Production Tax Credit (PTC) system and in Australia under the Federal scheme, a non-deductible tax penalty is applied to those not complying to its Mandatory Renewable Energy Target (MRET).

Providing further support to the sector, collectively countries have worked together to develop internationally based incentive and emission trading schemes. The most recognised of these are the Kyoto protocol – International Emissions Trading mechanism and the European Union – Emission Trading system.

Kyoto Protocol and Emission Trading Scheme The Kyoto Protocol came into force on 16 February 2005 with 141 countries ratifying the treaty – though the US, China, Brazil and Australia are not participants. Treaty participants have pledged to cut 1990 emissions levels by 5.5% by 2012.

The Kyoto Protocol includes three mechanisms to earn or buy credits outside their borders:

The Clean Development Mechanism (CDM) – looks at credits being earned by investing in emission reducing projects in developing countries,


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Joint Implementation (JI) looks at ‘certified emission reduction (CERs)’ credits being earned by investing in emission reducing projects in developing countries that have adopted the Kyoto target, and

International emission trading (IET) which permits developed countries that are Kyoto participants to buy and sell ‘emission reduction units (ERUs)’ amongst themselves. An early stage example of this trading platform is the European Union – Emission Trading system, which allows for trading of CERs and ERUs but there is no understanding of how this system should interact with existing individual national incentive schemes.

Incentive schemes There are essentially two legislated incentive schemes employed globally:

Fixed price system – under a fixed priced system, wind farms are paid a fixed price (or a fixed premium to electricity pool price) for every unit of electricity produced, with extra costs borne by the end user or taxpayers. Countries such as Denmark and Germany have adopted a fixed price system. In Spain, operators can choose between a market price option or a fixed price.

Fixed quantity system – under a fixed quantity system, governments generally set a targeted level of renewable electricity to be produced during a certain period and market forces determine the electricity tariff. This system has been adopted in the UK and Australia. The US has adopted a variant of this termed the Production Tax Credit (PTC).

The following provides an overview of the various tariff systems in key geographic locations.

Country Installed capacity (MW) Tariff (€/MWh)1 Incentive scheme

Austria 607 78.0 Fixed price

Australia 421 42.5 Fixed quantity

Denmark 3,083 36.4 Fixed price

France 386 83.6 Fixed price

Germany 16,649 91.0 Fixed price

Greece 587 61.6-73.1 Fixed price

Italy 1,261 68-95.2 Fixed quantity

Japan 991 105.2 Targeted subsidy

Netherlands 1,081 80-90 Fixed quantity

Portugal 585 82.0 Fixed price

Spain 8,263 62.7 Fixed price2

UK 889 71.9-76.7 Fixed quantity

USA 6,750 36.83 PTC/Fixed quantity (in some US states)

Source BTM Consult Report 2004 Note: 1 Euro/AUD assumed to be 0.62. Spain allows the option for fixed tariff or market option 3. excludes benefit of tax credit payable under PTC system.


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Legislative framework for BBW assets The following table considers specifically the legislative framework in the countries in which BBW assets are located.

Australia

The Mandatory Renewable Energy Target (MRET) was set up by the Australian Federal Government, in April 2001, to encourage renewable energy production to increase to 9,500 GWh by 2010 and then to maintain that level of renewable energy generation until 2020.

The MRET scheme provides for the sale of environment credits in the form of a renewable energy certificate (REC). A REC is an electronic record corresponding to 1 MWh of electricity generated from approved renewable fuels, including wind energy. Under the MRET scheme, electricity wholesalers and retailers are required to surrender a predetermined number of REC’s each year otherwise they are currently liable to pay a penalty of $40 per MWh.

BBW has already sold its RECs to Alinta Sales, AGL and Country Energy with the company expecting to receive about $26.5M in revenue from these sales in FY07.

The MRET scheme has been successful, and the renewable energy target of 9,500GWh has almost been reached. Despite this, the Federal government has confirmed that it will not raise the MRET target.

This has triggered a significant amount of debate, as a cap of 9,500GWh, arguably, would stop all further renewable energy development. This has spurred the State governments into action, most notably Victoria, where the Premier Steve Bracks, announced in late October 2005, his intentions toraise the State’s renewable energy use target from 2% to 10% by 2010.

In addition to the Commonwealth regulatory regime, two States, ACT and NSW, have established an emissions trading system. At this stage both these schemes are embryonic and it is not clear if these schemes will be available to wind farm assets in other States.

We note however, that it is our understanding that a renewable energy company will not be able to trade both RECs and other credits such as carbon credits – it has to be one or the other.

Spain

The wind energy industry in Spain benefits from a developed legal framework which has evolved over the last eight years and provides a stable basis upon which wind farm developers and operators can rely for their business and investment decisions. The legal framework created through a number of Royal Decrees encourages new investments in renewable energies by placing them under a “Special Regime”.

The Electricity Act of 1997 establishes the right to

connect renewable installations to the grid,

transfer output from renewable installations to the grid, and

receive a premium payment in return.

The current regulations, which expand on the Electricity Act of 1997, were put into place by the Spanish government in March 2004 under the Royal Decree 436/2004.

The Spanish regulatory regime allows wind generators to choose each year between a regulated fixed tariff which is benchmarked to between 80%-90% of the average reference price for end users of electricity in Spain or a market option which is set at a legislated premium plus bonus to the (variable) electricity pool price.


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Under the regulated fixed tariff option the wind farm sells directly to the local utility at a fixed tariff calculated at the beginning of the year as a sliding percentage of the average reference price. This percentage varies depending on the age and capacity of the wind farm from 90% at commissioning; declining to 85% after five years and 80% after 15 years. The tariff is constant throughout each year.

The market option allows the generator to sell electricity to the pool and receive a legislated premium plus bonus to the market price. The premium is determined annually in accordance with formulae specified under Spanish law.

BBW has elected to adopt the market price option, as it generates greater returns for BBW, as we understand the market price for electricity is currently A$140/MWh compared to a fixed price of A$105/MWh. The downside of the market price option is it is inherently more volatile.

Germany

In April 2004, an amendment to the Renewable Energy Sourced Act (“EEG”)was passed in order to provide further impetus to the German renewable energy sector. Under the EEG, electricity produced by wind farms will be paid a fixed tariff for 20 years (plus the year of commissioning). In general, two different rates will apply during the tariff period. Renewable energy generating facilities commissioned after the act came into force in 2004 will receive an initial rate per KWh for at least five years, followed by a differentrate per KWh, during the remaining period. Depending on the location of the renewable energy generating facility, the period during which the initial higher rates will be paid may be extended (e.g. in areas where the wind yield is low).

United States

The production Tax Credit or PTC system is a system promoted by the US Federal Government. It is unique to the US and can be viewed as a variant of the fixed price system.

It offers tax credits to wind farm owners which are worth approximately US$19 per MWh (CPI Adjusted) and can be available for the first 10 years of operations. In the case of the US Assets, the PTCs are passed through to class A Members who can use them to offset taxable income derived from other US-based operating businesses.

The PTC was established in 1992 and has had an on/off existence most recently the PTC system was due to expire at the end of 2005, but has been extended for a further two years. We also note in addition to the PTC some 18 States also adopt a fixed quantity system.


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5 | Appendix A Wind speed assessment

All potential wind farm sites are evaluated to determine their commercial viability, with particular regard to the wind speed and its variability over time. A typical assessment process involves determining:

Long-term wind speed characteristics at the turbine hub height (this can be 100M+ above the ground),

Gross energy output of the wind farm – this looks at site topography, wind farm layouts, air density, turbulence and turbine blade design, and

Net capacity factor – this looks at turbine downtime, wake loss (turbine interaction) and electrical efficiency.

Wind speed and its variability are the most critical factors – for instance if wind speed lifts from 6m/s to 9m/s (50% uplift) the energy output lifts by 100%. However, if the wind only intermittently blows at these speeds the farm is unviable.

Ultimately, the object of wind speed assessment is to determine the long term mean energy production for a wind farm site.

Probability of exceedence Once the long term mean energy production for a wind farm is obtained, uncertainty analysis is completed to determine a range of output values – termed the probability of exceedence. The probability of exceedence means the probability that a given level of energy is exceed in any year. The most common values used are P50, P75 and P90. P90 means there is a 90% probability that a given level of energy is exceeded in any year.

For example, the output at BBW’s Spanish Redondal site has the following output probabilities tabulated below, which tells us that the mean output (as used by BBW in its forecasts) is 66.5GWh pa and that there is a 90% chance that the plant will output energy of 57GWh pa.

P50 (long term mean)

P75 P90

Net energy (GWh pa) 66.5 61.5 57.0

Energy reduction from mean (%) 0 7.5 14.3 Source BBW

Portfolio effect

Aggregating wind farms, provides a means to smooth out the aggregate energy output from wind farms as the wind speeds and other sources of uncertainty become less correlated.

As BBW expands, the portfolio effect will become increasingly more beneficial. This is best explained by considering the current portfolio effect for BBW as detailed in the table below

Net energy output (GWh pa) P50 P75 P90

Sum of individual asset outputs 2,181 2,056 1,944

Output as a portfolio 2,181 2,117 2,059

Output benefit (portfolio effect) 2.9% 5.9%

Source BBW


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Important Notice Analyst Certification As at the time of writing, the authors of the report held an equity interest in Babcock & Brown Wind Partners, which were acquired as part of BBW's IPO, in October 2005. The authors also holds shares in Babcock & Brown Capital Limited, although do not hold shares in any other associated Babcock & Brown company. Provider of this publication This publication has been prepared by Tricom Equities Limited (ABN 92 067 161 755) (Tricom) (AFSL 238148). Tricom makes the statements in this Important Notice Section for itself and on behalf of each of its related bodies corporate and their respective officers, agents and employees from time to time (collectively, the Tricom Group). This publication is provided only on the following basis. If you retain and use this publication, each member of the Tricom Group relies on your acceptance on this basis. Information in this publication References in this publication to data may rely on third parties over which Tricom has no control and for which Tricom accepts no responsibility. Whilst all of the information and statements contained in this publication have been prepared with all reasonable care, no responsibility or liability is accepted by any member of the Tricom Group for any errors or omissions or misstatements however caused or arising. Any opinions, forecasts or recommendations reflect the judgment and assumptions of Tricom on the basis of information as at the date of publication and may later change without notice. This publication is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Any securities recommendation contained in this publication is unsolicited general information only. Tricom is not aware that any recipient intends to rely on this publication and Tricom is not aware of the manner in which a recipient intends to use it. In preparing this publication, it is not possible to take into consideration the investment objectives, financial situation or particular needs of any individual recipient. Investors must obtain specific individual financial advice from their investment advisor to determine whether recommendations contained in this publication are appropriate to their personal investment objectives, financial situation or particular needs before acting on any such recommendations. Investment in securities involves risk. Past performance of securities is no assurance of future performance. Investors should take advice on the basis of current information relevant to their particular circumstances, and have regard to the risk that the future performance of investments will differ from past performance. This publication is not for public circulation or reproduction whether in whole or in part and is not to be disclosed to any person other than the intended recipient, without obtaining the prior written consent of Tricom. All intellectual property rights in this report are, and at all times remain, the property of Tricom Equities Limited, unless otherwise attributed. Liability for this publication Each member of the Tricom Group excludes to the full extent permitted by law all liability of whatever kind, whether in negligence, tort, contract or under fiduciary duties strict liability or otherwise, for any loss or damage of any kind (including without limitation indirect, incidental or consequential loss or damage, whether reasonably foreseeable or not) however arising in relation to the publication of this document, including any reliance on it or making any transaction in respect of any securities or strategy mentioned in it. Tricom's Interests Tricom Equities Limited (Tricom) acted as a Co-Lead Manager of the offer of shares by Babcock & Brown Wind Partners in October 2005. Tricom also acted as a Co-Lead Manager of the offer of shares by Babcock & Brown Capital Limited in February 2005, Babcock & Brown Japan Trust in April 2005, Everest Babcock & Brown in April 2004 and Babcock & Brown Limited in October 2004. Tricom was theLead Manager to the issue of Subordinated Prime Reset Convertible Securities (SPARCS) in February 2005 for Prime Infrastructure and Co-manager of the placement of shares for Prime Infrastructure in March 2005. Tricom received a commercial rate of fees for performing these roles. Other than the abovementioned, the Tricom Group has no other associations or relationships, and has received no other remuneration, commissions or fees in relation to the financial products mentioned in this report. Each member of the Tricom Group may, from time to time hold positions in any financial products included in this report (or derivatives of them) and may buy or sell such financial products or derivatives or engage in other transactions involving such financial products or derivatives, as principal or as agent for clients.

Other than the abovementioned, the Tricom Group has no other associations or relationships, and has received no other remuneration, commissions or fees in relation to the financial products mentioned in this report. Each member of the Tricom Group may, from time to time hold positions in any financial products included in this report (or derivatives of them) and may buy or sell such financial products or derivatives or engage in other transactions involving such financial products or derivatives, as principal or as agent for clients. Each member of the Tricom Group may, from time to time hold positions in any securities included in this report (or derivatives of them) and may buy or sell such securities or derivatives or engage in other transactions involving such securities or derivatives, as principal or as agent for clients. A member of the Tricom Group from time to time may earn brokerage, fees or other benefits from securities mentioned in this publication or derivatives of them. These will be disclosed, as required, in the ordinary course of providing financial services. No member of the Tricom Group has, or will receive, whether directly or indirectly, any commission, fee, benefit or advantage, whether pecuniary or otherwise in connection with making any recommendation contained in this report. A member of the Tricom Group or a consultant to it may, from time to time perform paid services for the companies whose securities are the subject of recommendations inthis report. Under no circumstance, however, has any member of the Tricom Group been influenced, either directly or indirectly, in making any recommendation contained in this report. Other important information This Important Notice must be read in conjunction with the Legal Notice which can be located at http://www.tricom.com.au. Further information is available on request. © Tricom Equities Limited 2005

16 December 2005 BBW $1.75 Babcock and Brown Wind Partners · 16 December 2005 Page 1│32 BBW|...

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