The growing complexity of infrastructure and renewable projects in Australia – a case study of the Onslow Road Project. By Brendan Quinn, partner and head of project finance Asia-Pacific, Hilary Cure, partner, SuZanne Yap, senior associate, and Laurence Judges, senior associate, White & Case
Renewable energy projects in Australia are rapidly expanding in scope and scale as developers seek to capitalise on the Australian Federal Government’s target of 82% renewable energy in the National Electricity Market by 2030. As a result, the industry is witnessing a trend towards the segmentation of projects into phases, distinct packages, or interdependent projects, which may be delivered by different parties.
In structuring, financing and delivering large and complex infrastructure projects, renewable energy developers can draw on the experience of large-scale infrastructure procurement by the government and the mining, oil and gas industries.
One such example is the Onslow Road Project, a unique venture involving the acquisition of a 49% interest in the holding entity of the Onslow Iron haul road (Road Trust) by Morgan Stanley Investment Management, through investment funds managed by Morgan Stanley Infrastructure Partners (MSIP) from Mineral Resources Limited (MinRes).
The private haul road, the Onslow Road, will be built, operated and maintained by MinRes and its affiliates, but owned by the Road Trust.
The Onslow Road Project forms an integral part of a transportation infrastructure solution in the Pilbara region of Western Australia that has been developed to unlock an iron ore region that currently has billions of tonnes of stranded ore.
The 150km dual lane Onslow Road will link the Onslow Iron mining project (Onslow Mine) at Ken’s Bore to the Port of Ashburton, facilitating the transport of the mined materials to market.
The Onslow Mine is being developed by an unincorporated joint venture that includes MinRes, Baowu, AMCI and POSCO (Mine JV). Following the acquisition, the Onslow Road and the Onslow Mine are owned by different entities, with MinRes as a common owner, but there is strong commercial alignment between the parties due to the Onslow Road being essential infrastructure required for the shipping of iron ore from the Onslow Mine.
Segmentation and risk diversification
The segmentation of projects into distinct packages, often owned, financed, developed, and operated by different parties, is becoming increasingly common in Australia. There are numerous examples of this in the procurement of large-scale infrastructure projects by the government, particularly transport infrastructure such as Victoria’s North East Link, currently estimated to cost a total of A$26.2bn.
The project was broken down into packages, with a primary package for the tunnelling works structured as a project financed availability public private partnership, and various packages for the freeway upgrades structured as alliances.
A separate tolling company will collect and own the toll revenue generated from the project to repay the cost of building and maintaining it. This approach allows for projects to be broken down into smaller, more manageable units that are easier to finance and to control. It also allows specialised expertise to be applied to different aspects of a project, thereby enhancing efficiency and distributing the risk of the project across multiple contractors.
While careful planning is required to manage interface risk, this strategy is considered to reduce the overall risk of not developing the project on time and on budget.
In the case of the Onslow Road Project, MSIP won a competitive process pursuant to which it agreed to acquire the minority interest in Road Trust for A$1.3bn.
The acquisition price was funded through a holding company financing, with an upfront cash consideration of A$1.1bn paid at completion and an additional deferred cash consideration of A$200m payable by MSIP upon the Onslow Road achieving a 35 million wet metric tonnes per annum run rate for any quarter before June 30 2026.
This structure unlocked significant capital for MinRes while allowing it to retain operational control of the Onslow Road. It also significantly derisked MSIP's exposure to the greenfield nature of the project and aligned the interests of both parties towards the successful ramp-up of the Onslow Road to full tonnage in conjunction with both the completion of the port infrastructure and delivery by the Onslow Mine of its first ore shipment and ramp-up to nameplate capacity.
Onslow Road – Financing structure
The debt financing structure for MSIP's acquisition of Road Trust was uniquely tailored. Unlike a typical project finance arrangement where lending occurs at the project company or asset level, the financiers provided debt at a higher tier within the MSIP group structure, making the financing more akin to a holding company financing than a standard project financing.
Given that the holding companies' primary asset is their equity interest in Road Trust, the obligors under the financing package do not have the benefit of any independent cashflow. Rather, the financiers rely on MSIP’s share of operational cashflow from Road Trust being distributed to MSIP in order to service the repayment of the debt facilities.
Due to this reliance, holding company financings place greater emphasis on the distribution regime to ensure that all freely available cash at the operating level is distributed up the structure to the obligors.
Given the greenfield nature of the Onslow Road Project, particular attention was given to the due diligence and obtaining comfort that the Onslow Road would be completed on time and that the project documents have adequate protections for the revenue stream, as detailed further below.
Lastly, since the financing was utilised to fund the acquisition of MSIP’s ownership in Road Trust, the financing terms include customary acquisition financing features. This includes the provision of funding on a certain funds basis, whereby only a limited number of representations and undertakings are conditions to the availability of funding. This gives MSIP greater certainty regarding its ability to fund the purchase price as and when required under the sale agreement.
Onslow Road – Bankability issues
In the context of separately financed and owned infrastructure projects, "project on project" risk refers to the potential negative impact that one infrastructure project can have on another, even when financed and managed independently. In our example, the interdependencies between the Onslow Mine and the Onslow Road mean that one project has the ability to affect the financial viability and risk profile of the other.
* Operational and revenue alignment – The financier’s primary focus was the protection of the revenue stream received from Road Trust required to repay the debt. This required a detailed review of the contractual structure granting the land access rights of the Road Trust, the construction, operation and maintenance of the Onslow Road, the governance of the Road Trust and the tolling arrangements underpinning the revenue of Road Trust.
The Road Trust was entitled to receive a life-of-mine CPI-adjusted tolling fee per tonne of iron ore transported through the Onslow haul road of A$8.04 (100% basis), capped at 40m wet metric tonnes per annum. However, to understand the risks to Road Trust in receiving this revenue, the financiers were also required to conduct due diligence on the contractual structure underpinning the Onslow Mine, including the construction of the Onslow Mine, the mine-to-ship arrangements and the offtake arrangements supporting the tolling fee.
The effectiveness of the arrangement is dependent on MinRes's ability to maintain consistent operational performance to generate the flow-through revenue to pay the tolling fee and effective levers for Road Trust in the event of such revenue not being received.
Key to these arrangements is the mutual need of both MinRes and Road Trust to reach a solution to any issues that arise during the life of the Onslow Mine to ensure the continued operation and commercial viability of both the Onslow Road and the Onslow Mine.
* Governance and control – Critical to the revenue certainty for the financiers was understanding the ability of MinRes as majority shareholder in Road Trust to control the decision-making of Road Trust. MinRes retained control over operational issues relating to the Onslow Road to protect the revenue for the Mine JV generated by the Onslow Mine.
The governance arrangements in respect of Road Trust were structured so as to provide MSIP with sufficient minority protections to ensure that decisions of Road Trust do not affect or undermine the contractual arrangements that support the ownership, management and use of the Onslow Road (including maintenance of the land access rights for the entire 130km of the road for the life of the Onslow Mine) and safeguard the right of Road Trust to receive the tolling revenue from MinRes.
* Credit and counterparty risk – Where project on project risk exists, the developer of the first project must assess and mitigate the risk of insolvency of the developer of any interdependent project. Closely tied to this issue is the ability of the other developer to transfer any interest held by such party in any entity that holds key contractual rights required for ongoing operation of the first project, particularly the ability to transfer to a non-investment-grade entity.
The structure of the Onslow Road Project depends on MinRes and the Mine JV achieving the nameplate capacity of the Onslow Mine to realise the projected haulage volumes to support the payment of the tolling fee and repayment of the debt. Consequently, the ability of, and restrictions on, MinRes transferring its interest in Road Trust was important to MSIP and the financiers when conducting the due diligence on the contractual structure.
Conclusion
The Onslow Road Project exemplifies the growing complexity and sophistication of infrastructure and renewable projects in Australia. By segmenting the project into distinct, but interdependent projects, the stakeholders can diversify risk among a broader group of investors, raise capital and optimise risk management. However, this approach also introduces complex challenges for both developers and their financiers.
As the infrastructure and renewable energy landscape continues to evolve, industry participants must navigate these complexities with careful planning, robust financial and contractual structures, and effective risk management strategies.
The Onslow Road Project serves as a valuable case study for understanding the nuances of financing and managing large-scale projects in today's dynamic environment. It is a useful precedent for developers of large-scale renewable energy projects, particularly where the broader project can benefit from segmentation into distinct, but interrelated projects.
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