Novera in play

Over the past few days, Novera has announced that it is in talks which may lead to a bid for the company at a price of 90p. 3i has just broken cover to day that it's the possible bidder. Now, there's many a slip twixt cup and lip, but let's see what this means.

A bid at 90p values Novera at £111 million. According to the company's website, there was a cash balance of c. £10.8 million at 31st December 2007, making the wind and other renewables assets worth near enough £100 million.

On a multiple basis, Novera's revenue for 2007 was expected to be around £34 million, making the offer price 3 times turnover. Figures for 2007 aren't available yet, but EBITDA in 2006 was just shy of £10 million on revenue of £31 million. Since the company was apparently debt free in 2006, let's assume that interest is minimal and the accounts show that depreciation was very small and there was no tax charge as tax losses exceed profits, so we can probably infer that the post tax profit was around £10 million, making the multiple an apparently conservative 10 times 2006 earnings.

Looking at the valuation from the asset side: the portfolio is dominated by the wind assets:

Status Capacity
Operating sites: Mynydd Clogau, Wales 14.5 MW
Consented sites: Lissett Airfield, East Riding 30 MW
Sites in Planning: Mount Boy, Angus, Scotland 6 MW
Sites in Planning: Fleeter Wood, Cumbria 10 MW
Sites in Planning: Glenkerie, Scottish Borders 22-27 MW
Sites in Planning: A'Chruach, Argyll and Bute 40-48 MW
Additional sites in pre-planning: 300 MW

The recent Airtricity experience suggests that buyers are prepared to pay £2 million/MW or more for installed capacity, and perhaps £1 million/MW for consented sites (leaving the other £1 million/MW to pay for the actual development costs of the project). This would amount to £29 million for Mynydd Clogau and £30 million for Lissett.

We think that Novera still has the 112 MW of landfill gas capacity it had in 2005. So looking for landfill analogues...

In 2004, Viridor paid £30 million for 45 MW of landfill capacity, and in 2006, Pennon paid £25 million for 7 MW of landfill capacity. Taking the lower basis for valuation, Novera's landfill would be worth around £60 million. (Taking the higher, it would be worth nearly £400 million, which seems extraordinary - there must be more in that deal we haven't seen).

So we've found £60 million of wind value, without the development pipeline, and £60 million of landfill value and £10 million of cash.

In the mid 2007 trading statement, net debt was around £72 million with £17 million in the bank, so if this hasn't changed, the asset value is £130 million plus the value of the development pipeline minus £90 in debt.

With the bid at £100 million, the development pipeline is being implicitly valued at around £60 million by 3i. For, say, 80 MW in planning you might apply a risk factor of 50% and value as if it's consented (ie, half the project capacity eventually gets consented). This would give you another £40 million, so you're getting the development pipeline for £20 million. If you were to risk this at 20% and apply the same valuation of £1 million/MW - you get to £60 million. On this basis, the development pipeline is worth £100 million, but it would seem that 3i is offering £60 million for it.

So either we've missed something important, or 3i is risking future developments more aggressively (or thinking they'll cost more to deliver) or 3i's getting a bargain if the deal goes through!

MCT/npower

Interesting announcement from MCT and npower. npower has joined with MCT in a new company Seagen Wales, which will pursue the project.

They say that "Development of the site will start with a full assessment and detailed surveys of the environment and tidal resources, followed by preparation of an outline scheme incorporating the studies' outcomes.

Studies are about to get started and will last throughout 2008, with a consent application likely to be submitted in mid 2009. Construction and commissioning timescales will be subject to the length of the planning process, but it is anticipated this could take place between 2011 and 2012."

Of the big six utilities (Centrica, EdF, Eon, RWE, SSE, Scottish Power), five have now announced marine renewables aspirations:

EdF has a shareholding in Marine Current Turbines;
Eon has an involvement in the Lunar/Rotech Pembrokeshore tidal project
RWE (npower) has just announced this investment
SSE has the Neptune tidal and Aquamarine wave interests
Scottish Power (Iberdrola) has its Orkney Pelamis project

Surely Centrica's got to move soon?

More on the airtricity deal

Latest information is that onshore developments might be costing as much as £1.5 million per MW installed, making SSE's deal look even smarter. Of course the nub of the thing is how much of the future capacity SSE can really make happen. With the SSE balance sheet and its share price's resilience in recent difficult market conditions, you've got hope a fair bit.

SSE/Airtricity - analysis

So, we know that SSE paid around £1 billion for Airtricity.

The detailed breakdown of the portfolio from SSE's website is:

• The principal assets of Airtricity which SSE will acquire comprise (net of joint venture interests):


• a 308MW (megawatt) portfolio of operating onshore wind farms in Scotland, Northern Ireland and the Republic of Ireland;
  
• a 187MW portfolio of onshore wind farms in Scotland, Northern Ireland and the Republic of Ireland which have full consent and are under construction, and on which €77m had so far been invested by 31 August 2007;


• a further 104MW of onshore wind energy capacity in Scotland, Northern Ireland and the Republic of Ireland which has full consent but is not yet under construction;


• a 50% stake in a 504MW offshore wind farm development, with full consent, at Greater Gabbard off East Anglia. Subject to a final investment decision, construction work on the first phase is expected to start later this year and turbines have been reserved;


• a 288MW offshore wind farm in Germany which has full consent;


• the 483MW onshore wind farm proposed for Clyde, between Biggar and Moffat in southern Scotland, which is at an advanced stage in the consent process;


• a 1,434MW portfolio of other onshore wind energy projects in the UK and Ireland that are in various stages of development but not yet with full consent;


• an option to participate in a 350MW offshore wind farm in Ireland;


• a 1,222MW portfolio of early stage European wind energy development projects in Portugal (587MW) and the Netherlands (635MW; offshore);


• a 6,675MW portfolio of wind energy development projects in China;


• and an electricity supply business providing power to around 35,000 mainly commercial customers in Ireland, with related trading and risk management functions operating in the all-island electricity market.

In summary, it appears that Airtricity's portfolio comprises

308 MW in operation
187 MW onshore in construction on which €77 has already been invested
104 MW consented onshore
540 MW offshore consented
483 MW onshore near consent
1434 MW onshore unconsented
1222 MW in development in Europe
6675 MW in development in China

A rule of thumb for onshore windfarm development used to be around £700,000/MW installed, although recent increases to turbine, steel and associated costs have probably driven this up to £1 million/MW. So perhaps £300 million of the purchase price could be sensibly applied to the producing capacity (unless SSE is paying a premium to capture guaranteed capacity, rather than taking time and planning risk to develop its own portfolio).

If SSE is valuing installed capacity at £1 million/MW, that would make the price for the consented development £190 million (once developed). If our rule of thumb is right, there's a further £130 million or thereabouts to spend, around £60 million of the consideration might relate to this capacity.

In the past, a typical price for a fully consented offshore windfarm has been around £5 million for 100 MW consented. This might be be a sensible place to start with the development assets. This adds up to (generously) 1,000 MW, of which about half is offshore. Let's assume that onshore consented developments are worth £10 million per 100 MW, and the total value of this element of the portfolio around £75 million.

Valuing assets in the development pipeline is very hard: if we assume that they're worth 10% of the consented value, the 8,000 MW of (assumed most onshore) projects would be worth £60 million.

Finally, an electricity supply business with 35,000 customers might be worth...well, the only analogy I could find was a Canadian gas and electricity supply business which sold for C$130 per customer, which would come to around £2 million.

Summarising this analysis, we can find around £500 million of value. So, it must be that either we've woefully underestimated the future value of the development pipeline, or SSE is paying closer to £2 million/MW for installed and productive capacity.

Any way you slice it, this is a useful benchmark. It also gives a clue about how hard developers must consider it to be to drive a material development portfolio to justify a premium like this over ordinary development costs.

SSE buys Airtricity, sets a benchmark?

Just announced, SSE has won the auction for Airtricity for around £1.1 billion (according to the Herald. The deal involves a purchase price of some £800 million and the adoption of around £300 million of Airtricity debt (which you'd expect SSE to be able to refinance cheaply).

The Airtricity website claims that the company has 455 MW in operation, with 636 MW under development and up to 9,000 MW of longer term projects in planning and pre-planning. The majority of these last projects appear to be offshore and aren't specifically identified.

The Herald article quotes from SSE's own press release and says "...Among the Airtricity assets to be acquired by SSE are a 308-megawatt portfolio of operating onshore windfarms in Scotland and Ireland, plus a further 187 megawatts of windfarms that have been given consent and are under construction. There is also a proposed 483-megawatt windfarm between Biggar and Moffat in the Borders, which is "in an advanced stage in the consent process"."

Over the next few days, I'll be undertaking an economic assessment of the deal...