Thursday, February 28, 2008

Landfill valuations

A recent potential deal, 3i's bid for Novera, has stimulated a need for a rule of thumb on the value of landfill gas.

Existing landfill projects receive 1 ROC per MWh, making their total electricity price around £90/MWh (electricity £40/MWh, ROC £35/MWh, recycle value c. £15/MWh).

Analysis of the OFGEM ROC register shows that, in a typical month, the UK's 800MW of operational landfill capacity generates 130,000 ROCs. Each MW of capacity therefore generates 165 ROCs in a month or 2,000 per year. 1 MW therefore enjoys revenues of £180,000/yr (at £90/MWh)

No, we know that landfill was economic even before ROCs, but only just, so let's assume £40/MWh of operating costs run at around the electricity price in those days, say £30/MWh, making the gross profit £120,000/yr/MW.

Now, If we assume this goes on in perpetuity (which on a DCF basis is fair enough, as landfill sites typically operate for 20 years or so - effectively infinite in DCF terms). With a discount rate, this would make 1 MW worth £1.2 million pretax.

The deals we found in the analysis of the Novera offer reassuringly bracket this figure: one was 7 MW for £25 million - about £3.5 million per MW, and the other was £30 million for 45 MW or £0.67/MW.

So a rule of thumb of £1 million/MW may be about right.

Tuesday, February 19, 2008

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!

Saturday, February 09, 2008


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?