Lead Manager

BABCOCK & BROWN PROSPECTUS
• a provision, with retroactive effect to November 2003, disallowing depreciation and interest deductions in
transactions commonly known as LILOs and SILOs, and
• a provision that would codify the “economic substance doctrine” which could make finance leasing a less
attractive financing alternative and could negatively affect Babcock & Brown’s development of other
structured finance lease products in the US
These bills are not likely to involve penalties for Babcock & Brown but could potentially have a negative impact
on future income. In addition, the mere existence of these proposals has substantially shut down this business and
resulted in the redeployment of personnel previously engaged in this market to other areas or in some cases has
led to a reduction in employees.
7.1.15 US Promoter Penalty Examination (PPE)
Like many companies in the financial services industry, Babcock & Brown is routinely subject to tax audits.At
present, there is an ongoing examination being conducted by the US Internal Revenue Service (IRS).The IRS is
looking into Babcock & Brown’s US affairs in relation to the years ended 31 December 1993 to 1999, with a view
to determining whether Babcock & Brown should have made certain filings and registrations required under US
tax law in relation to corporate tax shelters that may have been used by the Group’s clients in that period.
At present, the IRS is still gathering information and reviewing documents.The IRS has not commenced
proceedings against Babcock & Brown, nor has it issued an assessment for liability under the relevant provisions.
However, there is no time limit requiring the IRS to conclude the audit by a specific date.
It is uncertain whether or not the IRS will ultimately make a claim against Babcock & Brown as a result of its
examination. If the IRS does make a claim, the amount is also highly uncertain, and could be within a wide
range. Based on advice from its legal and financial advisors, the Group has made such provision as it considers
appropriate in its financial statements in respect of this matter.
7.1.16 Windpower/tax credits legislation
Development of private sector funded windpower projects in a number of jurisdictions, including the US, is
heavily dependent on government financial assistance (which is provided in a number of forms). In the US the
Production Tax Credit (PTC) for renewable energy expired at the end of 2003 and an extension of the PTCs
must be passed by Congress and signed by the President of the United States in order for Babcock & Brown’s
wind projects to be progressed to the full extent anticipated.The extension of the PTC is included in a number
of pending tax bills and is not regarded as controversial and is supported by both major parties in both houses,
however, the timing of its enactment is uncertain. If these bills are not enacted, or are not enacted in their current
form, the US windpower business may be adversely affected. See discussion on Forecasts in Infrastructure and
Project Finance in Section 3 for additional discussion on the impact on Forecasts of a delay in the extension of
the PTC regime.
Similar risks are applicable to all other Babcock & Brown businesses which rely, in part, on a favourable
legislature framework, including the Australian and European windpower and other regulated businesses.
7.1.17 Provision of warranties on sale of businesses
When Babcock & Brown disposes of assets it is sometimes required to provide warranties regarding the assets
(and associated liabilities).These vary significantly in content and length required. Recent examples of sale
contracts in which Babcock & Brown has provided certain warranties include UK businesses recently sold to
Tagus Infrastructure Assets Limited (in August 2003) and Powergen Renewable Holdings Limited (in September
2003). Babcock & Brown’s maximum ongoing liability under the warranties is £14 million and £5.3 million,
respectively.These warranties expire in 2010. Babcock & Brown management has not received notice of any
claims under either sale agreement and does not anticipate any such claims.
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