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Wind farming at any cost
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When there is considerable debate over future financial prospects of an industry, it’s hard to argue over the present value of an asset.
But some Scottish & Southern Energy investors are bound to raise eyebrows over the €1.46 billion it’s just paid for wind-farm operator Airtricity.
After all, it costs roughly £1 million/MW to set up a modern windmill. Airtricity has 600 MW of assets built up and permission to build another 963 MW of assets. Which means that if Scottish & Southern had set up the mills on its own, it would have cost roughly £1.6 billion. In buying Airtricity, it’s now likely to end up paying nearly £3 billion. Scottish & Southern has warned investors the deal won’t enhance earnings until 2011.
Scottish & Southern’s problem is the scarcity value of wind-power assets as the EU’s energy policy makers have set a renewable-energy target of 20 per cent of total supply by 2020. The UK has a self-imposed target of 10 per cent by 2010.
Another issue is the slow planning-approval process for new wind farms. Currently, renewables generate over 4.5 per cent of electricity in the UK with only 1.5 per cent coming from wind.
According to the British Wind Energy Association, 1,890 MW of onshore wind was operational and another 2810 MW of capacity was either consented to or under construction at September 30, 2007. Nearly 8,000 MW of capacity is awaiting approval. On its own, Scottish & Southern has just 168 MW of wind assets on stream.
So it’s understandable why Scottish & Southern has decided to buy its way in to becoming a major wind-energy player despite the cost. The acquisition brings in 308 MW operational onshore assets in Britain and Republic of Ireland, with 1,434 MW of capacity in the pipeline as well as 483 MW planned in Scotland.
But this deal remains a financial stretch for the utility whose bid has put a €1.46 billion enterprise value on a business, which, as at March 31, 2007, had revenue of just €177 million and a gross profit of €42 million, with negative free cash flow of €577 million.
Given Airtricity’s capex plans, it means it will continue to absorb cash for the next 3 to 5 years.
Utilities are generally loath to cut dividends, so Scottish & Southern’s current ‘A’ credit rating may be at risk.
Shareholders, if not Scottish & Southern’s creditors, will hardly rejoice at that prospect when its stock, while up 70 per cent in the past two years, has broadly underperformed the UK and mainland European sector.
Scottish & Southern and its shareholders are left counting on current valuations in the renewables sector proving more sustainable than their bubble-like multiples suggest, that turbine costs fall further, and that the sector attracts cheaper financing as banks’ confidence in renewable energy’s future grows.
Dow Jones
8 January 2008
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