Fitch Positive on Renewable IPOs by European Utilities
Recent renewable energy company IPOs by integrated European electricity utilities have enabled these companies to strengthen their financial profiles and raise alternative funding for future investments amid cost inflation, according to Fitch Ratings.
This month, Energias de Portugal (Euronext Lisboa: EDP), floated 25% of its renewable business, which includes US subsidiary Horizon and European unit NEO, for EUR 1.6bn (excluding greenshoe). This followed IPOs of Iberdrola (Madrid: IBE) renewables arm Iberdrola Renovables (20% IPO) in December 2007 and the 25% IPO of EDF Energies Nouvelles (Euronext Paris: EEN) in November 2006.
Fitch generally views these transactions as beneficial for companies’ credit profiles.
However, despite the obvious potential benefits of renewable IPOs for the financial profiles of the utilities, Fitch notes that substantial proportions of the funds raised are typically used to buy and develop generation capacity, the costs of which have spiralled in recent years due to heavy competition for assets and short supply of turbines. Asset valuations have been particularly buoyant in countries with an attractive and stable regulatory framework for renewable energy, but if the aforementioned higher cost levels persist, then it will mean that over time the effect of the IPOs on net debt levels is likely to be limited.
Another potential concern for integrated utility company ratings is the reduced access to cash flows generated by renewable assets following an IPO. However, this risk is partially offset by the relatively moderate percentage of total shares sold to investors in recent transactions, as utilities are typically keen to maintain overall control of these businesses, as well as lower cash outflows if IPO proceeds are used to fund capex.
Fitch sees scope for further renewable energy IPOs, given apparent strong investor appetite for renewable assets and the substantial funds needed to roll out new capacity, particularly as debt market conditions remain volatile.
Utilities current investment allocations to renewables are supported by high fuel prices, fuel sourcing bottlenecks, ongoing pressure on companies to reduce CO2 emissions, and increasing cost competitiveness of these technologies.
Fitch expects renewable energy developments and strategy to continue to play an increasingly important role for utility companies, and thereby potentially impact their credit risk profiles, which it will continue to monitor closely.
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