Greencoat UK Wind IPO heralds change for listed cleantech

Lack of funding and some woefully poor execution has left the junior market littered with cleantech failures.

So much so that investors have become rather jaded and cynical about the sector.

Going against type is Greencoat UK Wind, which is preparing to list next month.

Britain’s first ever green infrastructure fund, it has been set up as a yield play with the funding and development risk removed.

In that context, it is a unique vehicle rather than the latest iteration of unsatisfactory green investment attempts of the past.

Its initial public offering (IPO) is expected to raise at least £205mln, which will bankroll the acquisition of six established wind farms (five onshore, one offshore) from Scottish and Southern Energy and the German giant RWE.

The average price for the onshore assets is £1.8mln per megawatt – the market rate for deals in this sector.

And because they are established generating facilities (they are aged between one and seven years old), it is fairly well known how much energy they produce.

“We are not taking development risk, construction risk and critically you are not taking energy forecasting risk,” said the company’s founder Laurence Fumagalli.

Guaranteed green subsidies and off-take agreements with utilities will generate the cash to pay a 6 pence in the pound dividend (around three times the 10-year gilt yields), and there will be enough left to re-invest to grow the company’s net asset value in real terms.

The kicker to Greencoat is that the dividend will track the retail price index – which marks it out from others in the sector such as the HSBC and 3i infrastructure funds.

“We are very similar to what private investors understand in terms of infrastructure investing, but we are different in that we are in the renewable sector,” said co-founder Stephen Lilley.

“It is very simple because it is UK, it is sterling (only invested in UK assets), it is on and offshore wind.

“These assets have been operating and producing, and so we know what they will produce. It [the fund] will pay a dividend that is higher than its peers and it’s a dividend that is inflating.”

The group will use short-term debt and the equity market to expand its asset base – and there are ready sellers of assets.

Generators will continue building wind farms to meet their environmental and supply obligations.

However, they don’t necessarily want their portfolios to be heavily skewed towards these projects. Greencoat provides an obvious exit for them.

With predictable and low operating costs, wind assets are more suited to ownership through a fund than are the more traditional forms of electricity generation; gas and coal plants, for instance, depend on the cost of the fuel, which isn’t as easy to forecast as output from wind turbines.

With around £40bn-worth of operational and soon-to-be-commissioned capacity, wind isn’t exactly a niche market.

Unlike traditional infrastructure funds, where projects tend to be highly leveraged, Greencoat’s wind farms will be debt free, removing another layer of risk.

The looming energy crisis means the long-term outlook for generators is a fairly healthy one.

The gap is unlikely to be filled in the near-term at least by new nuclear capacity following Centrica’s decision to quit the sector and French giant EDF’s recent wavering.

The first crunch comes next month when five coal powered plants without flue-gas desulphurisation facilities are forced offline.

None of this suggests UK electricity prices are going down in the near future.

And of course there is the weight of green legislation behind wind, with the government pledged to be procuring at least 15% of energy via renewable means by 2020.

The company published its prospectus for the float this week ahead of an investor road show.

Institutional demand for the stock is expected to be strong, particularly from socially responsible investment funds.

However, it already has £93mln committed from the Government and SSE.

Greencoat expects there to be keen demand for the stock from the institutions looking to earn a predictable income, although the offer is also open to private investors too.

For more information about the company and its flotation go to www.greencoat-ukwind.com

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