A market test for renewable energy
With European governments looking to rein in subsidies for renewable energy generation, boom times are over for clean technology investors. Still, Italian utility Enel is pressing ahead with plans for an initial public offering (IPO) of its Enel Green Power unit next month amid sliding stock prices. The Rome-based company wants to retain control over the subsidiary and may be driven more by a need to honour its promise to reduce debt than a desire to get the best value for Enel Green Power.
|The current headwind in equity markets provides a major test for the clean energy industry|
The pre-financial crisis enthusiasm for so-called clean-tech or green business has evaporated and investment flows have struggled to pick up, despite a rebound in the overall economy this year. Back in December 2007, Spanish utility Iberdrola raised €4.5 billion by selling to the public a 20% stake in its Iberdrola Renovables unit, the world’s biggest wind power company by installed capacity, output and project portfolio. Today, the stock is worth less than half as much as it was in the initial public offering (IPO) and is down more than 20% this year alone.
It is in this environment that Italy’s Enel is pressing ahead with plans to sell a stake in its own renewable energy unit, Enel Green Power. While talks are on-going with unidentified investment funds about them investing directly in the company, Chief Executive Officer Fulvio Conti is upbeat and has said the public stock market offering is likely to be worth at least €3 billion. That would make it the biggest IPO in Europe in any sector since Iberdrola Renovables. Conti and other executives have suggested about 30% of the company is likely to be offered in the second half of October, with a possible dual listing on the Milan and Madrid stock exchanges.
Given the current headwind in equity markets, Enel Green Power will provide a major test for investor sentiment towards the clean energy industry globally. ‘It’s not a great time,’ says Angus McCrone, senior analyst in London at Bloomberg New Energy Finance, which specialises in providing information and analysis on the renewable energy industry and carbon markets. ‘Clean energy shares have underperformed by about 20% this year.’
According to data published by Bloomberg New Energy Finance, public offerings of clean energy shares totalled $4.6 billion in the first half of 2010, compared with $14.1 billion in all of 2009. After a quiet third quarter, the total for 2010 will be ‘fairly modest in proportion’, according to McCrone.
While many understand that government incentives for renewable energy production will be phased out over time, companies and investors were shocked earlier this year by Spain raising the possibility of cutting back tariffs on existing plants, not just limiting support for new installations. The government, seeking to support business by reducing power prices, has sought to cut incentives on renewable generation such as wind and solar, although the principle of retroactivity applied to adjustments to feed-in tariffs was rejected in June.
A similar shock went through the Italian renewables industry this summer when a measure was inserted in the government’s €25 billion austerity budget that scrapped guaranteed purchases of green certificates. These had been issued as part of a system to force utilities to source a certain percentage of their power from renewable sources. The decree halted investment in the industry, forcing the government to reinstate purchases by a state-run energy agency for 2010 and promise other reforms for 2011.
‘If Enel really wants to do it, they can get the shares sold but without the kind of high price they could have got in more bullish conditions,’ McCrone says. ‘Most of the big European offerings have been postponed.’
Enel Green Power (EGP) is currently a 100% owned subsidiary of Enel. According to the Italian utility, EGP is the world’s second-biggest renewable energy company by production and the No. 3 in terms of its 5,700 megawatts of installed capacity. The unit was bolstered earlier this year by Enel transferring into EGP the renewable energy assets of Endesa, which Enel acquired between 2007 and 2009. On the other hand, EGP has also been loaded with almost €3 billion of debt. Its generation is now spread across 600 plants in 16 countries.
As with most renewable energy companies, Enel Green Power is looking to expand fast with a €5.1 billion investment plan for 2010-2014 (just over a tenth of which will be spent on maintenance, the rest on growth). It has plans to construct a total of 30,600 megawatts of generation capacity, although it expects to add 3,500 megawatts by 2014. In the first six months of 2010, EGP had revenues of €1.04 billion and earned a profit of €253 million.
Analysts say Enel has one sole priority in offloading a minority stake in Enel Green Power: debt reduction. The Italian company has become Europe’s most indebted utility thanks to the financial burden of buying control of Spain’s Endesa. At the end of June, Enel had net debt of €53.9 billion, 6.5 billion more than Eon, almost €10 billion more than Electricité de France and almost twice as much as RWE.
CEO Conti has pledged to trim debt to €45 billion by the end of the year to protect the utility’s credit rating. Most of that effort will come from €10 billion of asset sales in 2009-2010, including the EGP stake and gas and electricity networks in Spain and Italy.
‘An IPO of Enel Green Power is surely a good way to reduce debt, one that has been used by other utilities in the past,’ says Francesca Fraulo, director of EMEA Energy, Utilities & Regulation at Fitch Ratings in Milan. ‘It shows that size matters: big utilities can have more flexibility and variety in terms of their sources of financing than smaller companies. I can’t see any strategic benefits from an IPO apart from those related to the need to raise cash immediately. But keeping ownership and operational control seems like a better solution than the traditional and more simple option of a single asset disposal.’ Fraulo is currently reviewing her credit rating and outlook on Enel.
So it appears that Enel is more intent on meeting its pledge to cut debt than get the best price for Enel Green Power. In order to convince sceptical investors about Enel Green Power’s prospects, the company will focus on its relatively low exposure to subsidy-dependent sectors such as solar and wind. Of EGP’s existing facilities, 2,500 megawatts is hydroelectric capacity and 700 megawatts is geothermal. A total of 2,300 megawatts is wind, with the remaining 200 megawatts in other technologies, such as solar and biomass.
‘You can’t rule anything out until the last minute, but I am convinced that (the IPO) will go ahead and will be a success,’ Conti told Italian daily newspaper La Repubblica in August. ‘Aside from the state of the markets, we are convinced that investors, small and large, will like Enel Green Power for its strength. It was created as the world’s second biggest operator in renewables, the energy of the future. It’s a multinational where three quarters of revenues don’t depend on subsidies from various governments.’
The company has also been quick to damp stock-market talk of needing to offer a large ‘discount’ to investors to convince them to buy Enel Green Power, fuelled in part by the fact that the IPO, first talked about in 2009, appears to have been postponed from earlier this year. Simon Gottelier, a portfolio manager at Impax Asset Management, a leading U.K. environmental investment company, was quoted by news agencies in late August as saying Enel would have to offer a discount of 30% to 50% to the current valuations of similar companies to fuel appetite for the IPO. Enel Chairman Piero Gnudi responded days later, telling reporters: ‘We’re listing a company with major prospects and I don’t think there will any need to offer discounts.’
‘The IPO has been a bit off-and-on and that signals that Enel is uncertain and makes people clamour for a discount,’ says Mahendra N. Churaman, whose law practice at Herrick, Feinstein LLC in New York focuses mainly on representing energy and utility companies and underwriters. ‘They are trying to get it out and get it done so one has to be sceptical. In such a buyer's-market environment, pushing through an IPO does not seem to be a recipe for success.’
But an analyst at a leading Milan brokerage who has been briefed by Enel on the IPO points out that Enel Green Power is a ‘different animal’ to many other listed renewable energy companies, which often focus on wind or solar. The analyst explains that it is hard for investors to buy exposure to hydroelectricity assets while there is some enthusiasm about the prospects for geothermal energy, citing a recent article in The Economist.
‘Wind is still perceived as a technology that depends on subsidies to survive,’ the analyst says. ‘People have a fair concern about the future. So it’s a question of showing you are less exposed to subsidies.’
Enel Green Power also has the advantage of being a big company, diversified not only between technologies but also geographically, reducing risks for investors. It is also likely to have a sufficiently large market capitalisation to be included in benchmark and sector indexes, forcing mainstream money managers to buy the stock to replicate index performance.
One final question mark hangs over Enel’s continued insistence that it is also in talks with investment funds and potentially sovereign wealth funds about them buying a stake in Enel Green Power – either in alternative to or in conjunction with the public share offering. Many analysts say it’s unlikely funds from the Middle East or Asia would invest in renewable energy in Europe and the U.S.
‘If a minority stake is sold to a financial or industrial partner, this would obviously be an ideal situation because Enel would get support from another shareholder in the first case and could benefit from industrial synergies in the second case,’ says Fraulo of Fitch Ratings.
The lack of rumours in financial circles about genuine interest from sovereign funds has only added to the feeling that Enel Green Power will be a hard sell. In the end it will be a question of how eager Enel is to pay down debt by the end of the year – and how investors look at the long-term prospects of renewable energy.