It's not easy to second-guess politicians' moods. But that's what you
have to do to value wind-energy assets which are being priced as if
there was absolute certainty regarding future environmental policy.
Iberdrola has come out with a valuation range for its wind
business Iberenova of roughly EUR18 billion to EUR24 billion. If you
add net debt, that's equivalent to mid-range enterprise value of EUR25
billion, which puts the renewables unit on a 19x forward EV/Ebitda
multiple.
That's punchy, even allowing for recent growth and forecasts
of more to come. Lehman Brothers reckons that global installed capacity
will grow between 7% and 10% a year in mature markets like Germany and
Spain and by more than 25% a year for 5 years in U.S., with higher
rates off a lower base in China and India.
The key risk concerns the regulatory framework that guides prices for wind.
Within Iberenova's own portfolio, wind energy is priced in
three different ways in its three main markets - U.S., Spain and the
U.K - according to whim of government.
In Spain, it's essentially involves a subsidy with a cap and
a collar. In the U.K. it's driven by incentive certificates given to
energy users who have to source a proportion of their electricity from
renewables. In the less regulated U.S., there are tax breaks.
So in the case of Iberenova's U.S activities, the tax
credits currently contribute $32/MWh out a total achieved price that
can range between $75/MWh and $100/MWh - or roughly 40%.
These incentive schemes aren't simple and have often changed
in the past so much of Iberenova's value depends on understanding how
they work and how they might change.
Some real industrial constraints also exist in terms of
future growth with supply bottlenecks for components like turbine
blades and gearboxes. There is a degree of vertical integration at
Iberenova through its stake in turbine-maker Gamesa.
A successful Iberenova's IPO would spur other wind players to seek value by floating their wind assets.
Iberenova, with a 2010 target capacity of 13.5 gigawatts is
the largest player, equivalent to a $2.8 billion enterprise value for
each gigawatt of short and medium-term capacity. That values Florida
Power Light's wind assets at $39 billion and those of Energias de
Portugal's at $21 billion.
That has echoes of the dot.com bubble when a bricks &
mortar company ould list a fledgling online business at valuations
close to, if not higher than, the core business.
Of course, there are sound reasons why the likes of
Iberenova should attract premium valuations. The world needs more
energy and as much of the clean variety as possible. Wind energy is an
effective source at the margin - with government support.
The support has been forthcoming. Wind turbines are safer
and cheaper to set up than the alternatives. One MW/h of wind energy
costs $72, cheaper than solar at $113 and nuclear at $89 but more
expensive than CO2-emitting natural gas at $68 and coal at $58,
according to Standard & Poor's.
That's probably enough to ensure investors will find
Iberenova shares hard to resist. But they need to their homework
carefully considering returns from the company's EUR8-billion
investment program remain contingent on a benign regulatory environment.