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The winds of change: An insight into M&A in the renewable energy sector in 2009

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This report is an annual review of M&A activity within the renewable energy sector. It was written in co-operation with the Economist Intelligence Unit and is based on a survey of 200 senior …

This report is an annual review of M&A activity within the renewable energy sector. It was written in co-operation with the Economist Intelligence Unit and is based on a survey of 200 senior executives from across the global energy industry, conducted in February and March 2009.
All respondents are from management positions, with 71 percent holding executive boardroom positions or who are directors or vice-presidents. They represent power generating businesses, renewable energy suppliers, energy distributors, oil and gas majors and financial investors. A range of company sizes are represented, including some of the industry’s largest operators: 23 percent of respondents had annual revenue of US$10bn or more. They are broadly evenly split between Europe (32 percent), North America (30 percent) and Asia-Pacific (26 percent), with the remainder from Latin America, the Middle East and Africa.
Supplementary to the survey results, interviews were also conducted by the EIU with the following senior executives:
Airtricity: Donal Flynn, CFO A leading renewable energy company developing and operating wind farms across Europe. In January 2008, the sale of Airtricity was completed to Scottish and Southern Energy Plc.
BP Alternative Energy: Katrina Landis, COO Alternative Energy
A global energy company investing in a portfolio of cleantech and renewable energy operations. Since 2005, BP Alternative Energy has invested around US$2.9bn in wind, solar, biofuels,and hydrogen power with carboncapture and storage.
Essent: Erik van Engelen, Director of Innovation
A Netherlands based vertically integrated energy company. Essent develop and operate both conventional and renewable generating resources as well as beinga major supplier of electricity and gas.
Macquarie Group: Daniel Wong, Division Director, Macquarie Capital Advisers
A global provider of banking, financial, advisory, investment, and funds management services. Macquarie is dedicated to sourcing investments across renewable technologies including wind, solar, landfill gas, hydro, biomass, biogas, and geothermal.

Moody’s: Neil Griffiths-Lambert and Helen Francis, Vice Presidents and Senior Analysts, EMEA Utilities and Infrastructure Finance Team
Moody’s Investors Service is among the world’s most respected and widely utilized sources for credit ratings,research, and risk analysis. Moody’s provides research data and analytic tools for assessing credit risk, and publishes market-leading credit opinions, deal research, and commentary, serving more than 9,300 customer accounts.

Mainstream Renewable Power: Manus O’Donnell, Head ofCorporate Finance Development, construction and operation of wind, solar, thermal and ocean current plants. Mainstream works closely with governments, development partners, and investors to deliver successful projects.
ScottishPower Renewables: Keith Anderson, Managing Director Part of Iberdrola Renovables Group, the world’s biggest producer of renew

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  • 1. The winds of changeAn insight into M&Ain the renewable energy sector in 2009A DV I S O RY
  • 2. ContentsAbout the research 01Foreword 02Executive summary 03The crunch hits renewables 05Despite the gloom, positive signs are evident 06Stimulating growth: the crucial role ofgovernments in renewables 08Whats in the US Stimulus Bill? 12Different players, different focus 13Renewables M&A will not recover overnight 15The shape of the market in the coming year 17
  • 3. 1 KPMG The winds of change About the research This report is an annual review of Essent research, and risk analysis. Moody’s M&A activity within the renewable Erik van Engelen, Director of Innovation provides research data and analytic tools energy sector. It was written in A Netherlands based vertically integrated for assessing credit risk, and publishes co-operation with the Economist energy company. Essent develop and market-leading credit opinions, deal Intelligence Unit and is based on operate both conventional and renewable research, and commentary, serving more a survey of 200 senior executives generating resources as well as being than 9,300 customer accounts. from across the global energy a major supplier of electricity and gas. industry, conducted in February Mainstream Renewable Power and March 2009. Macquarie Group Manus O’Donnell, Head of Daniel Wong, Division Director, Corporate Finance All respondents are from management Macquarie Capital Advisers Development, construction and operation positions, with 71 percent holding A global provider of banking, financial, of wind, solar, thermal and ocean current executive boardroom positions or advisory, investment, and funds plants. Mainstream works closely with who are directors or vice-presidents. management services. Macquarie is governments, development They represent power generating dedicated to sourcing investments across partners, and investors to deliver businesses, renewable energy renewable technologies including wind, successful projects. suppliers, energy distributors, oil and solar, landfill gas, hydro, biomass, biogas, gas majors and financial investors. and geothermal. ScottishPower Renewables A range of company sizes are Keith Anderson, Managing Director represented, including some of the Moody’s Part of Iberdrola Renovables Group, the industry’s largest operators: 23 percent Neil Griffiths-Lambert and Helen Francis, world’s biggest producer of renewable of respondents had annual revenue Vice Presidents and Senior Analysts, energy. ScottishPower Renewables is of US$10bn or more. They are broadly EMEA Utilities and Infrastructure currently the UK’s largest developer evenly split between Europe (32 Finance Team of onshore windfarms with over 30 percent), North America (30 percent) Moody’s Investors Service is among windfarms fully operational, under and Asia-Pacific (26 percent), with the world’s most respected and widely construction, or in planning. the remainder from Latin America, utilized sources for credit ratings, the Middle East and Africa. Location of survey respondents: Businesses represented by Supplementary to the survey results, survey respondents: interviews were also conducted by 6% the EIU with the following senior 7% 13% 24% executives: 30%% 8% 9% Airtricity Donal Flynn, CFO A leading renewable energy company 11% developing and operating wind farms 25% 18% across Europe. In January 2008, the 12% sale of Airtricity was completed to 26% 14% Scottish and Southern Energy Plc. Key Key BP Alternative Energy North America Gas/oil/coal extraction/mining/refining Katrina Landis, COO Alternative Energy Asia Pacific Power generator A global energy company investing in Western Europe Financial investor (including private a portfolio of cleantech and renewable Latin America equity funds and infrastructure funds) energy operations. Since 2005, BP Eastern Europe Energy distributor/supplier Alternative Energy has invested around Middle East and Africa Renewable energy supplier US$2.9bn in wind, solar, biofuels, Lender or advisor (eg, non- equity provider) and hydrogen power with carbon Other capture and storage. Source: Economist Intelligence Unit 2009
  • 4. KPMG The winds of change 2 Foreword Since our last survey into Renewables M&A, “Turning up the heat” , was published in May 2008, major shifts in the global economy have had a significant impact on many aspects of the renewables sector. While respondents last year were clearly worried that a bubble was developing, their concerns today focus much more around how the renewables M&A market will react to the new financial landscape. Without doubt, the global financial crisis has made access to capital for even the largest players in the sector difficult. Nevertheless, the fundamental drivers which have madeAndy Cox renewables such a dynamic sector in the last few years remain,Partner, notably the climate change agenda, dwindling fossil fuel stocksKPMG in the UK and concerns over the security of energy supply. Despite theGlobal Head of financial difficulties, our respondents - more than 200 executivesEnergy and Utilities across the global energy industry - agree that renewable energyfor TransactionServices projects will continue to be economically viable. Digging down into the detail, the report unearths some interesting insights into where many energy companies are planning to invest their cash in the coming year, how much they are seeking to commit and the underlying factors motivating their ambitions. Understandably, we are witnessing step changes in who is investing, how much is being invested, and how deals are being financed. A significant change from last year is that buyers appear to be less willing to pay a premium for development pipelines, evidence perhaps that some of the froth in valuations last year may have dissipated. Yet the M&A market is by no means dead, and our report suggests that activity is likely to continue through 2009 and beyond, as potential bargain opportunities arise for those who have both the will and the means to invest. Our respondents have also identified how changes in the political climate could affect the industry. As governments seek to reinvigorate national economies through a series of fiscal stimulus packages, one of the key beneficiaries is clearly green energies. Nowhere is this more evident than in the United States, the country which respondents see as by far the most attractive for investment in the next 12 months. A key factor is the election of Barack Obama, with respondents from across the globe having faith that he will be able to deliver on his green promises. We are going through challenging times across the M&A market and the renewables sector is no exception. Despite this, a range of positive signals remain, driven primarily by national government commitments to meeting challenging renewable energy targets. The renewables deal environment is changing: this survey provides valuable insight into what the future deal environment might look like.
  • 5. 3 KPMG The winds of changeExecutive SummaryThe world has seen immense The US, India and China are ...underlying reasonsfinancial turmoil in the last year, being targeted as key countriesand the renewables sector has for investment in M&A. The US is for the substantialbeen no exception. A white-hot, if likely to be the most popular target growth in the sectornot overheated, M&A environment for M&A deals in the year ahead. over the last fewchanged dramatically in the space Forty-two percent of all respondents years—climate changeof several months in late 2008, with say that they will be investing there in the next year, notably heading and energy security—more speculative premiums paid toundeveloped projects disappearing the list of destinations for European remain as pertinentovernight. Multi-billion dollar deals in respondents. India, China and Canada as ever.early 2008, such as the acquisition are also popular, with 24 percent, 22of Airtricity by Scottish and Southern percent and 21 percent of respondents reflection of where the value lies, says ”Energy for US$2.2bn, have so far not respectively, earmarking them for Manus O’Donnell, head of corporatebeen evident in 2009. In tandem with investment (respondents could be finance for Mainstream Renewables.the rest of the global economy, the investing in more than one country). An overview of completed deals inmomentum shifted dramatically as the This interest is very likely to be closely early 2009 (deals by Valero Energy,financial crisis worsened sharply in linked to stimulus activity in these Green St. Energy and HGCapitalSeptember, with the fourth quarter of countries. The US government’s provide some examples) confirms this2008 recording the lowest volume of stimulus funds targeted at the clear preference for asset acquisition,corporate M&A in renewables for over renewables sector, for example, which ahead of just licenses or approvals.three years. So what is the outlook for include both grants and tax credits, are Daniel Wong, division director,the year ahead? certainly attracting attention. China, Macquarie Capital Advisors agrees: too, will direct more than one-third “In terms of [operating assets], theDespite the global economic of its stimulus spending towards market is still relatively active. In termsmeltdown, a significant majority environmental initiatives, including of owners of development businessesof energy sector executives renewable energy projects. Nearly ... that is where the greatest volatilityinterviewed for this survey believe two-thirds (63 percent) of respondents has been experienced. ”renewable energy projects remain expect growth in government subsidieseconomically viable. Seventy-eight during the year ahead (up from 37 Despite these positive signals,percent of respondents to our survey percent in last year’s survey). however, the typical size of M&Abelieve renewable energy projects deals is far smaller than a yearcontinue to be economically viable, a Investors are switching their ago, with overall activity in thekey indicator of the sector’s ongoing attention to productive operating sector remaining muted. Moreimportance amid the general economic assets, at the expense of respondents to this survey expectgloom. Similarly, despite the financial undeveloped ones. Given the tougher a further decline, rather than anturbulence, executives believe M&A operating environment, executives increase, in the size of transactionscontinues to prove valuable for many are focusing their attention on deals over the next 12 months (37 percentof those engaged in it. In considering considered lower risk. Direct asset compared with 30 percent). Abouttheir last acquisition, 37 percent of acquisitions nearly doubled in 2008 half (49 percent) foresee a drop in theexecutives experienced an increase in compared with 2007 The big losers . volume of transactions worth overshareholder value, compared with just were companies that had been US$1bn (compared to just 13 percent8 percent who suffered a decline. obtaining planning permission for expecting an increase) and, of thoseMore important for the long term is projects or only developing them to who expressed an answer, 58 percentthat two of the underlying reasons for a very early stage and then selling say that their companies would bethe substantial growth in the sector these off at a premium. Such activity spending less than US$50m on M&Aover the last few years—climate has now dried up, which is probably in the coming year. Donal Flynn, CFOchange and energy security—remain a healthy sign. “The shift from early of Airtricity, warns “we are not at theas pertinent as ever. to later stage development is a better bottom yet” Once things pick up again, .
  • 6. 30 KPMG The winds of change 4 20 10 0some of the conditions that helped are finding financing harder to obtain. "The shift fromto stimulate the growth of recent Larger companies are also squeezed:years are likely to be absent such as 57 percent of those with sales of early to later stageintense competition for development over US$10bn complain of the same development is aopportunities and easy credit. Assets problem*. Instead, where possible, better reflection ofwill continue to come onto the market, companies are turning to balance where the value lies"especially from distressed companies, sheets and cash reserves, while Manus O’Donnell, Mainstream Renewablesbut, in the words of Katrina Landis, also making greater use of deferredCOO of BP Alternative Energy, there payments in funding investments.will just not be the “growth we haveseen for the last several years” .Large corporates with strongbalance sheets and well-establishedbanking relationships are likely to Over the next 12 months, what changebe the main beneficiaries. Other do you expect to each of the followinginterested buyers may struggle to aspects of the M&A environment forfind financing. More companies are renewable energy?expecting to make purchases in thecoming year than actually did last year, 08 09 08 09 08 09 08 09 08 09but in an opportunistic way. “People 100 1% 3% 6% 3% 5% 4% 5% 8% 7% 3% 10%with money are definitely waiting for 3% 4% 15% 34% 37% 34% 8% 90 23% 8%bargains, says Mr Wong of Macquarie ” 24% 25% 26%Group. One recent example has been 31% 29% 80 39%the US$477m acquisition by ValeroEnergy of the assets from VeraSun 70 71% 69%(which entered Chapter 11 bankruptcy 31% 60 63% 31%filing in October 2008) in April 2009— 22% 27%less than a year after VeraSun’s larger 56% 56% 50merger with BioEnergy. However,those in need of finance should expect 40 42% 39%to work hard to secure funds. Many 36%banks are showing little interest in 30 .32% 30%one-off deals that do not support 20an ongoing relationship. Smallercompanies are encountering particular 10troubles: 70 percent of those withannual revenue of under US$500m 0 ni le ct or ct d s s et se an pa ab al se f es or or de rg e es m w e s ta th nd co ene th sidi of r in fu fo ze ub gy f r s e n Si er o ts e r ur io en ons ay ct en tit pl tru pe nm i at al s m lu ci fra er Co Va ov an in G fin om r tf es ert In“We are not at the Key bottom yet. ” Increase Decrease No change Don’t know Donal Flynn, Airtricity Source: Economist Intelligence Unit 2009* Economist Intelligence Unit, 2009
  • 7. 5 KPMG The winds of changeThe crunch hits renewablesM&A in the renewable energy sector declined from the first quarter 2008 "The markets arebegan 2008 in good form: Scottish and —with the last three months showingSouthern Energy’s US$2.2bn purchase the worst result since the second nervous” Donal Flynn, Airtricityof Airtricity started the year. Then, quarter of 2005. This decline in M&A inin June, Bosch bought a 54 percent the latter half of the year partly reflectscontrolling interest in ErSol Energy trends across the entire financial world, the end of November. In contrast,and put out an offer for the rest, as the collapse of several major US the decline over the same periodwhich represented a purchase price banks last year crystallized investor for the Dow Jones, for example,of US$1.67bn. In December 2008, concerns. Global M&A activity (across was 42 percent.GDF Suez acquired FirstLight Power all sectors) fell in 2008 to US$3.1trnResources for US$1.9bn. Such activity from a record US$4.4trn in 2007 . Infrastructure funds have beenhelped to put overall M&A numbers for For the year ahead, the Economist hit particularly hard. Mr Wong at2008 slightly ahead of the record pace Intelligence Unit forecasts that activity Macquarie Group highlights a generalset in 2007 According to New Energy . will fall by about a third to US$2trn. market trend for these vehicles to beFinance (NEF), a specialist information traded at a discount on the valuesprovider, overall renewables M&A Like other sectors, M&A in renewable of their underlying assets. Sharesactivity reached US$67bn, up from energy companies is simply being more generally, however, are sufferingUS$61bn. This includes private equity, affected by greater caution as the a similar fate. Even some largerventure capital purchases and other price of stocks across the economy individual companies are trading atbuy-outs. Pure corporate equity M&A has plummeted. Shares in renewables less than the replacement cost ofand asset acquisitions also rose, to companies, however, have done assets currently in production. MrUS$49bn from US$43.2bn. noticeably worse than average. From Flynn at Airtricity believes that the January 1 2008 to March 25 2009, decline has been excessive, “but theAggregate figures, however, hide a the NEX, an index of renewables markets are nervous” .substantial drop in M&A activity in companies, dropped by 65 percent,the latter half of the year. According with most of the impact being felt Doom and gloom, however, is not theto NEF corporate M&A in renewables , between the start of September and complete story.
  • 8. KPMG The winds of change 6Despite the gloom, positive signs are evidentAmid the economic turmoil, a range of medium term. Governments have set energy projects remain economicallypositive signals remain. Certain basic, targets. All these things are going to viable, although returns will generallyunderlying factors that have driven attract industry players. Finally, while ” drop. About one in five of these maygrowth in the industry remain in place. fossil fuel prices have slumped from require a change in how they areAs Mr Flynn points out: “Climate the significant reduction in demand, funded in order to remain viable,change is still as big an issue as they will rise again once economic but just 15 percent felt that the creditbefore; security of supply is as big as growth resumes. crunch and simultaneous drop inbefore. Mr O’Donnell at Mainstream ” fossil fuel prices had actually madeRenewables agrees. “Renewables over Respondents to our survey strongly further renewable investmentsthe short term will continue to grow, ” concur: 78 percent of executives economically unviable.he says. “The pace will pick up in the believe investments in renewable Then and now: the disappearance of the billion-dollar deals Target company Stake Acquirer Purchase Completed 2009 price, US$ Selected assets (from 100% Valero Energy $477m Apr, 2009 Verasun Energy) Photovoltaic pipeline n/a First Solar $400m Apr, 2009 (from OptiSolar) Alta Wind Project 100% Green St. Energy $390m Mar, 2009 Solar assets (from AIG n/a HGCapital $379m Mar, 2009 Financial Products) Amper Central Solar 34% Mitsubishi $329m Mar, 2009 (from Acciona) 2008 Airtricity 100% Scottish and $2200m Feb, 2008 Southern Energy FirstLight Power 100% GDF Suez $1900m Dec, 2008 Resources ErSol Energy AG 100% Bosch $1670m Jun, 2008 Enersis (from Babcock & 100% Magnum Capital $1450m Nov, 2008 Brown Wind) Industrial Partners US BioEnergy 100% VeraSun (merger) $700m Apr, 2008 Selected major renewable energy M&A deals, Jan-Apr 2009 versus Jan-Dec 2008 Sources: Bloomberg; Zephyr; deal values as per M&A databases; where necessary, deals converted at historical exchange rate to US$.
  • 9. 7 KPMG The winds of changeSimilarly, respondents are also are still profitable. Just under 40 Moreover, respondents seem to beremarkably optimistic about the percent of respondents agree that looking more favorably at buying. Asindustry’s immediate prospects. their last acquisition had added to the chart shows, in every category ofRoughly six in ten think that onshore shareholder value by more than 5 technology, more expect to purchase awind (62 percent) and solar (60 percent, compared with just 8 percent business in the next year than have inpercent) will grow by over 5 percent who saw a decrease. These figures the past year, particularly in the morethis year, and nearly half believe represent a deterioration from last established technologies of onshorethe same of biofuels (48 percent). year—61 percent compared with 3 wind and solar.As expected in the current risk percent—but still show that M&Aaverse climate, respondents are not activity is seen as being much more Finally, the very recession that isexpecting significant growth in the less likely to be beneficial than harmful causing the sector so many problemsdeveloped industries of offshore wind to companies. Indeed, the current may also be prompting a reason forand marine technology. dislocation between share prices and optimism. Government stimulus the value of underlying assets would spending, especially in the US,Looking specifically at M&A, whatever normally make M&A highly profitable. is becoming greener in nature.today’s challenges, these activities In the past 12 months, has your company acquired a business within any of the following sectors of the30 renewable energy industry? Does it plan to acquire a business in these sectors in the next 12 months? 27%24 24% 22% 20%18 19% 18%12 10% 10% 9% 8%6 5% 2%0 d e r o s d la in in el r in yd So w ar fu w H M o re re Bi ho ho ffs ns O O Key Have acquired in the past 12 months Plan to acquire in the next 12 months Source: Economist Intelligence Unit 2009
  • 10. KPMG The winds of change 8Stimulating growth: the crucial roleof governments in renewablesGovernment regulation and support percent of those in the Asia-Pacifichave always been fundamental to region—all well above last year’s overallthe viability of the renewables sector. averages. Quite simply, renewablesWithout active assistance, fossil fuels should be one of the winners in theare simply cheaper. Helen Francis, a current round of government pump-vice-president and senior analyst in the priming. “If governments are lookingEMEA Utilities & Infrastructure Finance to stimulate various economies,Team at Moody’s, the rating agency, renewables infrastructure ticks a lot ofcalls government policy “critical” to a boxes, says Mr Flynn. The UK’s 2009 ”successful sector. Her colleague, Neil budget, presented in April, promisesGriffiths-Lambeth, also a vice-president an additional £535m of support forin the team, notes a strong correlation offshore wind investments throughbetween the strength of the regulatory the country’s Renewables Obligationregime and activity in renewables. scheme. It also includes up to £4bn of new capital from the EuropeanOur survey suggests that most Investment Bank, earmarked forcompanies do not expect countries renewable energy projects.to succumb to the temptation torelax existing targets and rules in At the national level, the biggest newsthe name of economic expediency. is clearly the green approach of theOverall, 61 percent expect government new US administration. A total of 63 Europeans. It is not just the stimulusdetermination to either stay the same percent of respondents believe that, money. Ms Francis points out, foreignor increase, compared with just 27 even with the economic crisis, the companies also seem to be drawn bypercent who see an easing. Mr Flynn new US president, Barack Obama, the fact that the federal governmentat Airtricity reflects the views of many will be able to deliver on his campaign is giving out grants rather than merelyinterviewees that there is no signal commitments regarding renewable tax credits [see box - Whats in the USthat governments are walking away. energy and climate change. US policies Stimulus Bill? - page 12].“The reverse is actually true, he notes. ” are sparking interest, as research byEurope has recommitted to its 2020 HSBC shows, along with a numbertargets, and the new US administration of other countries, the US is puttinghas already begun counting the income serious money into renewables viafrom a new cap-and-trade regime. its stimulus spending package [seeThe concerns driving carbon emission table - page 10]. This, in turn, is "If governments arepolicy, such as climate change and driving investor interest. Forty-two looking to stimulateenergy security, are just as relevant percent of respondents say that they various economies,to developing countries as they are to envisage their company investing renewablesdeveloped ones. in renewables in the US in the next year, making the country by far the infrastructure ticksMore striking still, 63 percent expect most common choice. India, China a lot of boxes”an increase in government subsidies and Canada are also popular with 24 Donal Flynn, Airtricityfor the sector over the next year percent, 22 percent and 21 percent of(up from 37 percent last year). This respondents respectively, earmarkingpartly reflects the much anticipated them for investment. Although thereUS stimulus, but the opinion goes is a marked preference for companiesbeyond just one region: while 90 to invest within the region in whichpercent of US respondents foresee they operate, the US is not just thea rise in government help, so do expected preferred destination for65 percent of Europeans and 46 money among Americans, but also for
  • 11. 9 KPMG The winds of change
  • 12. KPMG The winds of change 10The likely impact on the renewables producer in an all-stock deal valued at the government room to use stimulussector in the US and beyond is unclear. about US$700m. However, financing payments. As Keith Anderson,The stimulus is more likely to revive constraints and a sharp drop in ethanol managing director at ScottishPowerthan to overheat the US industry. prices resulted in VeraSun filing for Renewables, notes, such a policy inAfter a number of years of substantial Chapter 11 bankruptcy in October the UK, or in other markets, couldgrowth, renewables in the US suffered before auctioning off its assets to simply reinflate the premium for earlyheavily from the credit crunch. All Valero Energy for just US$477m in April development projects because of thecompanies in the sector suffered, 2009. The market now has more than restriction on the number of viablebut biofuels were especially hard hit. enough development opportunities sites arising out of slow planningAt the beginning of 2008 VeraSun for companies with cash to exploit. permission or other constraints.merged with US-based BioEnergy to In other words, the current doldrumscreate the country’s largest ethanol of the US renewables industry gives A Climate of Recovery? The climate change investment dimension of economic stimulus plans Country Fund Period Green Fund % Green USDbn Years USDbn Fund Asia Pacific Australia 26.7 2009-12 2.5 9.3% China 586.1 2009-10 221.3 37.8% India 13.7 2009 0.0 0.0% Japan 485.9 2009 onwards 12.4 2.6% South Korea 38.1 2009-12 30.7 80.5% Thailand 3.3 2009 0.0 0.0% Europe European Union 38.8 2009-10 22.8 58.7% Germany 104.8 2009-10 13.8 13.2% France 33.7 2009-10 7.1 21.2% Italy 103.5 2009 onwards 1.3 1.3% Spain 14.2 2009 0.8 5.8% United Kingdom 30.4 2009-12 2.1 6.9% Other EU states 308.7 2009 6.2 2.0% Americas Canada 31.8 2009-13 2.6 8.3% Chile 4.0 2009 0.0 0.0% US EESA* 185.0 10 Years 18.2 9.8% US ARRA** 787.0 10 Years 94.1 12.0% Total 2,796 436 15.6% *EESA - Emergency Economic Stabilization Act **ARRA - American Recovery and Reinvestment Act Source: HSBC estimates, February 2009
  • 13. 11 KPMG The winds of changeThis harks back to another unchanging, planning system and market to cope grid. There are still planning restrictions.basic fact of life for renewables with such growth—may have merely We’ve seen investors pull out ofcompanies: in the long term, success gone into abeyance, able to resurface [projects] because of any number ofdepends as much on enlightened, in better economic times, rather than issues. The financial crisis may have ”sensible government policy providing a disappeared. Mr Griffiths-Lambert saved governments from a bubblepredictable investment environment as explains that even in the EU, the created by combined demands forit does on business acumen. Indeed, number of countries hitting current greater use of renewable energy andsome of the problems that sparked the targets is very small. “Is the EU going tight restrictions on where it could beM&A boom in renewables—notably to get a bigger stick?” he asks. “Here deployed. They should take advantagea disconnection between targets in the UK, we signed up to ambitious of the space to try to prevent thisfor renewable energy demanded targets, but people can’t build out. recurring in the recovery.of generators and the ability of the There aren’t enough connections to the Share of energy from renewable sources: EU targets by country40 for 20203530252015105 0 en ia m y ta ia d k a n e K g a Ro ia us D gal ly ia s y um ia nd ic a nd ce ar ni r tri an ai ec ur an nd U an ni tv en Ita ar Lu nga al ak bl ed pr la to Sp an la m rtu s bo ua La M gi nl re m lg pu m la ov ov Au Cy Po IreSw Es en Cz Bel Fr Fi Bu er u G th er Po Re Sl Sl H h Li G xe et h N ec Key 2005 level Percent required to achieve 2020 target Source: European Commission 2009 Note: Percentage of final energy consumption
  • 14. KPMG The winds of change 12Whats in the US Stimulus Bill? The American Recovery and practice of renewing the credit Reinvestment Act of 2009, also annually had led to a pattern of known as the Stimulus Bill, contains relatively high investment at the start substantial provisions relating to of the year that decreased markedly renewable energy and energy by the end. conservation. The exact amount depends on how much the tax • The investment tax credit (ITC) incentives finally cost the Treasury, but that allows companies, rather than the best estimates are that the Act claiming the PTC, to take a tax will require US$39bn in spending and credit of 30 percent on the costs about US$18bn in tax credits. of a renewables facility. This has been extended to wind, geothermal Not all of this money will be of direct and biomass operations. Previously relevance to the renewables industry. solar was the only major technology In fact, the spending addresses a covered. The scheme allows broad range of issues, including, for operators to access tax credits much example, US$5bn for weather-proofing earlier than the PTC. homes and nearly as much for energy conservation in federal buildings. • A grant program allowing companies, One of the most important uses for instead of claiming the ITC, to renewables is the US$11bn set aside receive a grant for the same amount for modernization of the country’s within 60 days of bringing a facility electricity grid. Although smart grids into service. Not only will this are mentioned in the bill, the system help credit-restricted companies at the very least needs a traditional faster than the ITC, it also makes upgrade if it is to transport large investment far more interesting to volumes of wind-generated electricity smaller companies, as well as large from places like the Midwest and Texas foreign investors who do not have to the coasts, where much of the the US tax bill to benefit fully from nation’s power is consumed. the ITC or PTC. There is no limit on the amount of grant money available Renewable energy companies are under the Stimulus Bill. particularly interested in the Act’s tax provisions, which should remove some Help for the renewables sector does important problems for investors in not stop there. A total of US$6bn has renewables, including the following: been set aside for loan guarantees, which should help to relieve the • The production tax credit (PTC). difficulties that companies are facing A per energy unit credit lasting ten in accessing funding. Moreover, the years from when a facility begins newly proposed budget includes an generating power. This has been extra US$26.3bn for the Department extended by three years, to cover of Energy in 2010, a 10 percent wind facilities that enter service increase on 2008. Although the before the end of 2012, and those of proposal contains no specific spending most other renewable technologies programs, it makes clear that at least before the end of 2013. The previous some of this will go to promoting renewable energy.
  • 15. 13 KPMG The winds of changeDifferent players, different focusToo great a focus on the fallout of permission and selling it for a premium "The days of gettingfinancial turmoil or on signs of hope are gone, confirms Mr O’Donnell of ”for future growth amid the wreckage, Mainstream Renewables. Mr Anderson planning permission andhowever, can hide a significant of ScottishPower Renewables adds selling it for a premiumunderlying shift in the renewables that his company has always been are gone."M&A market. Investors have been careful to give detailed information on Manus O’Donnell, Mainstream Renewablesrefocusing on what they really want to the state of development of projectsbuy. Overall, even with a healthy first in its pipeline. Investors, however, hadquarter, corporate M&A in renewables previously tended to look at pipelines On the other hand, citing bothdropped from US$25.9bn in 2007 to as generic. “Not enough was done to wind and solar examples in Europe,US$18.4bn in 2008, according to NEF . differentiate their value, he argues. ” Mr Wong explains that, perhapsThe companies that have suffered “If you go back 9-12 months in the surprisingly, operating assets are stillmost are those that had no assets UK, we were seeing people buying being traded at reasonably good value.in production, but whose valuations development projects at very high Assets actually generating electricity,relied on the potential for development premiums. That has certainly gone out rather than shares based on promisesbased on planning permission, of the market. Mr Wong at Macquarie ” in the wind, are what investors areand sometimes little else. This is Group also notes that it is the seeking. Indeed, the direct purchasesomewhat reminiscent of the dotcom development side of the market that of assets rather than corporate equitycollapse. “The days of getting planning has seen the greatest volatility jumped from US$17 .3bn in 2007 to and where profits have dropped.
  • 16. KPMG The winds of change 14US$30.6bn in 2008, according to NEF . percent of respondents, private equity "Operating assets areOur table showing the largest deals of by 32 percent and hedge funds by 122008 and 2009 to date also illustrates percent. This year, the combined figure still being traded atthe trend: the majority of buyers are for all of these is just 31 percent. “A reasonably good value"now snapping up operating assets year ago there were a lot of financial Daniel Wong, Macquarie Capital Advisersrather than large scale development players chasing assets, says Mr Flynn. ”portfolios [see table - page six]. “The PE guys don’t have the money project did so to financial investors. any more, and the banks are being a Moreover, a year ago there were aThis change alone will affect the lot choosier [whom to back]. You are large number of financial players andM&A picture in the current economic not seeing many financial players. ” funds looking to take a stake in bigenvironment, as large utilities or their Instead, he believes that the primary offshore projects. Today, “most of thatsubsidiaries are finding it easier than activity is coming from large European money is gone” says Mr Anderson. In ,smaller companies to access financing utilities, with strong balance sheets particular, according to Mr Wong, whilefor investment. An even bigger and access to funds. Mr Anderson infrastructure funds are still around,development, however, is the decline has seen a similar shift. He notes that hedge funds and, to a lesser extent,in the number of financial investors. many of the small developers who private equity, have left the scene.Last year, when listed separately, used to achieve such high premiumsinfrastructure funds were seen as by selling in the early stages of a These are not the only changes likelyamong the biggest likely buyers by 35 to affect the renewables M&A market.
  • 17. 15 KPMG The winds of changeRenewables M&A willnot recover overnightThe positive signs for renewablesdiscussed in this report show someof the underlying promise of thesector. Nevertheless, recovery willbe slow here as everywhere else. Ingeneral, respondents to our survey arenoticeably more pessimistic than thosewho took a similar poll last year. Inearly 2008, participants expected boththe size and the volume of M&A dealsto grow. Over the next 12 months,however, 57 percent of respondentsexpect that the size and the number ofdeals will either stay at current levelsor decline further. “We are not at thebottom yet, says Mr Flynn of Airtricity. ”He argues that it is difficult to say howlong the situation will last, certainly tothe end of 2009, although he notesthat it will vary by market."Due to the world crisis, all the activities that are not strictly must-do suffer” Erik van Engelen, Essent
  • 18. KPMG The winds of change 16"The shift from early to Secondly, disagreement over price to later stage development is a better valuations is dampening activity. reflection of where the value lies, ” later stage development Sellers demanding too much were the he argues. is a better reflection of leading cause of deals failing in the last where the value lies. ” year, cited by 55 percent of relevant When a recovery does occur, however, respondents. This may simply reflect an renewables valuations will lack some Manus O’Donnell, Mainstream Renewables initial unwillingness to drop prices as of their previous sparkle. Ms Landis M&A activity declined. Mr Wong refers of BP Alternative Energy says that her in particular to some “price stickiness” company expects that markets will beVarious specific factors will continue challenged throughout 2009 and into among development companies, whichto dampen the scale and volume 2010. “When the recovery comes, it is where the greatest volatility hasof renewables M&A deals in 2009. will be slow and it will take time to been experienced. Looking ahead,The first is the broader economic get back to where the markets were however, even with the significantsituation. Of respondents who had [in 2008], she says. Mr Wong agrees. ” decline in share prices, uncertaintyconsidered a takeover in the last year, Before the credit crunch, renewables persists. Roughly equal numbersbut had not gone ahead, nearly half M&A saw a “perfect storm” with, expect valuations to increase (31(48 percent) cited doubts arising from utilities needing to build out their percent), stay the same (32 percent)the economic climate as the main capacity quickly, a restricted supply of or decrease (34 percent). Moreover,cause for their caution. They have good development projects and easy access nearly one in three respondents stillreason: the Economist Intelligence to capital. Now, he notes that many worry about a bubble, and 42 percentUnit expects the world economy to large utility companies have substantial of these think it will burst this year,contract by 2.6 percent this year at renewables businesses and pipelines making immediate investment bymarket rates. Similarly, 58 percent of on their books, so the level of activity them unlikely. Even those who seeall those surveyed expect to make should come down. no bubble, however, disagree aboutsignificant reductions in either planned, price dynamics: they are split relatively The biggest barrier, however, and theor sometimes even ongoing, projects evenly between those who say there one which will define those able tobecause of the downturn. never was one and those who say benefit from current conditions andQuite simply, as Mr Wong notes, it burst last year. Interviews for this those forced to sit on the sideline,“capital is more expensive, so there study suggest that the question will be access to cash.needs to be more of a capital allocation requires further nuance. Mr O’Donnellexercise” than previously, deciding of Mainstream Renewables echoesbetween M&A or alternative uses for many when he says if there were a “When the recoverythose funds. More generally, Mr van bubble, it would be an overvaluationEngelen of Essent explains that: “Due of early stage assets. “I don’t think comes, it will be slowto the world crisis, all the activities that renewable energy assets as a whole and it will take time. ”are not strictly must-do suffer. ” were overvalued. The shift from early Katrina Landis, BP Alternative Energy
  • 19. 17 KPMG The winds of changeThe shape of the market in the coming yearThe new balance of risks and and opportunity driven: 49 percent "It will be moreopportunities in the renewables expect the number of deals worth overmarket is likely to create a different US$1bn to decline, compared with consolidation thanM&A picture. Companies will be 13 percent who expect an increase. growth”looking for opportunities, sometimes Moreover, of those who expressed an Katrina Landis, BP Alternative Energyas those facing bankruptcy hold fire answer, 58 percent say they would besales, but will be unlikely to take big spending less than US$50m on M&Agambles, especially in an environment in the coming year.where access to funding is severelyconstrained. “There will be assets Mr Wong at Macquarie Groupcoming onto the market, but we won’t notes that “people with money aresee the growth we have seen for definitely waiting for bargains. Tradingthe last several years. It will be more in operating assets is still relativelyconsolidation than growth, confirms ” active. The strategies of companies ”Ms Landis. interviewed for this study bear him out. Mr Anderson at ScottishPowerSurvey respondents believe that M&A Renewables says that his companyin the near future will be smaller scale prefers to develop its own sites, but On which of the following will your company rely most heavily to fund investment into renewables over the next 12 months? 32% Bank financing 23% 26% Financing through parent company/group 20% 15% Cash reserves 14% 7% Share issue 11% 6% Corporate bond 8% 4% Sale of assets 5% 10% Other 3% 0 5 10 15 20 25 30 35 Key 2009 Responses 2008 Responses Source: Economist Intelligence Unit 2009
  • 20. KPMG The winds of change 18"What is key at the Just under 40 percent of respondents with many lenders not prepared to to our survey say they are having support renewables. Mr van Engelen of moment is whether a significantly harder time securing Essent agrees that now is a tough time there is value. We funding for renewables projects, with a for financing: “I don’t know of any tricks can afford to be a further 25 percent finding it moderately [to get around the problem], he says, ” lot choosier” more difficult. Along with other and adds that, "even with guarantees investments, this has a direct impact from substantial partners, it remains Donal Flynn, Airtricity on M&A: bank financing is the most complicated to get banks interested." common means of funding, cited by 32will engage in M&A “if there is a very percent of companies as the one theygood strategic fit and if we can drive would rely on most heavily. The growthvalue out of the transaction” Similarly, . in the use of banks reflects the evenMr Flynn describes Airtricity’s current bigger problems in the stock and bondapproach as opportunistic. “What is markets. The number of companieskey at the moment is whether there likely to issue shares to fund investments is down from 17 percentis value. We can afford to be a lot in last year’s study to 7 percent this "Banks are lesschoosier, he says, including in terms ”of the stage of development. year, and those using corporate bonds inclined to do one- from 10 percent to 6 percent. off deals, and areThe key to being able to exploit Mr Griffiths-Lambeth at Moody’s says focused insteadthese opportunities, however, will befinancing. A vast gulf exists between companies used to finance themselves on longer-termthose buyers with the cash on hand primarily through banks but loans are relationships. ”to pursue deals versus those without. now hard to get and margins very high, Manus O’Donnell, Mainstream Renewables
  • 21. 19 KPMG The winds of change Mr Anderson believes the problem, think they will access group financing. however, varies “dramatically” with According to Mr Anderson, large utility- the size of the company. The largest backed developers are continuing companies in the survey—those with to fund their projects from balance annual sales of over US$10bn—are sheet and existing cash flow. “Where finding it easier than the smallest— the market is seeing issues is on the those with less than US$500m in independent developer end, he says. ” revenue per year—to secure what money is available. A total of 57 Smaller companies simply have fewer percent of big company executives fundraising options at their disposal. confirm that financing has become The stock markets are at a low point. harder to obtain, compared with 70 Meanwhile, as Mr Griffiths-Lambeth percent of respondents from smaller points out, bond issues of under companies. Larger companies benefit £100m do not make economic sense not only from presenting a lower risk, and low grade bonds are out of favor banks are also interested in the long- anyway. Purely financial investors are term business they can represent. leaving the scene, and banks are According to Mr Flynn, when it comes not interested. to capital allocation, many banks The better position of larger are far pickier with project sponsors companies is relative rather than with whom they don’t have a key absolute. Ms Landis notes that banks relationship. “[Financing] is a much are “extraordinarily conservative” bigger issue for financial players compared to last year. Among other and smaller developers than bigger things, they want all parties involved in utilities. This will drive consolidation, ” a deal to have at least single A credit he says. Mr O’Donnell of Mainstream ratings, and are unwilling to take any Renewables agrees: “Banks are technology risk, to the point of insisting less inclined to do one-off deals, that they will not provide funding for and are focused instead on wind projects where the turbines are longer-term relationships. ” deemed to be too risky. “Even when At the same time, those companies you clear all of these hurdles” she , that can, in particular larger ones, are says, “they still want to charge you turning to other sources of finance. a large number of basis points. ” Among the biggest companies in Sellers themselves may need to the survey, 34 percent expect to provide funding: 55 percent of rely on financing through the parent respondents expect an increase in company for renewables investment, the number of deals with delayed the most common means of funding or contingent payments rather than for that group. Nearly one in four (23 up-front money. “It is really a very big percent) will either tap cash reserves challenge, confirms Mr van Engelen ” or turn to their banks. For the smallest of Essent. An ability, where necessary, companies, however, about one in to find such creative arrangements may three (32 percent) will need to head well differentiate the winners from the to the bank, while only 17 percent losers in the new M&A environment. have cash reserves and 16 percent
  • 22. Background About the KPMG Global EnergyThe KPMG Global Energy & Natural Institute (GEI)Resources (ENR) practice is dedicated The KPMG Global Energy Instituteto assisting all organizations operating has been established to provide anin the Oil & Gas, Power & Utilities, open forum where industry financialMining and Forestry industries in executives can share knowledge,dealing with industry trends and gain insights, and access thoughtbusiness issues. We believe we have leadership about key industry issuesa distinct portfolio of service offerings and emerging trends.which have been carefully tailored to Energy Companies’ financial, tax,the needs of our clients, and can be risk, and legal executives will finddelivered by our industry professionals. the GEI and its Web-based portal toWe have a well balanced portfolio of be a valuable resource for insight onclients, ranging from global super- emerging trends.majors to next generation leadersincluding those raising capital, some To register for your complimentaryfor the first time, in local markets. membership in the KPMG Global Energy Institute, please visitThe M&A Energy and Utilities team at www.kpmgglobalenergyinstitute.comKPMG is a leading global network oftransaction professionals that regularlyadvises on some of the largest dealsin the sector. The team providesstrategic, financial and commercialadvice on all types of transactionsincluding acquisitions, disposals, fundraisings and capital market offerings.
  • 23. kpmg.comKPMGs Global Energy & Natural Resources ContactMichiel SoetingGlobal Chair, Energy & Natural Resources+44 (0) 20 7694 3052michiel.soeting@kpmg.co.ukKPMG’s M&A Energy and Utilities team Primary ContactsKPMG in the UK KPMG in Germany KPMG in SpainAndy Cox Leif Zierz David HohnPartner Partner Partner+44 (0) 207 311 4817 +49 69 9587 1559 +34 914 563 400andrew.f.cox@kpmg.co.uk lzierz@kpmg.com dhohn@kpmg.esRichard Noble Ingo Bick Manuel Santillana OwenPartner Partner Director+44 (0) 207 311 4259 +49 211 475 7015 +34 914 563 400richard.noble@kpmg.co.uk ibick@kpmg.com msantillana@kpmg.saAdrian Scholtz Niels Buck KPMG in the USDirector Partner Tony Bohnert+44 (0)207 311 4230 +49 40 32015 5848 Partneradrian.scholtz@kpmg.co.uk nbuck@kpmg.com +1 713 319 2524 abohnert@kpmg.comJamie Carstairs KPMG in the NetherlandsDirector - Energy Regulation Hans Bongartz Peter Gray+44 (0) 20 7311 3511 Partner Managing Directorjamie.carstairs@kpmg.co.uk +31 10 4 53 4466 +1 212 872 7642 Bongartz.hans@kpmg.nl petergray@kpmg.comKPMG in AustraliaMat Panopoulos Jaap Van RoekelDirector Partner+61 3 9288 5148 +31 20 656 7623mpanopoulos@kpmg.com.au Vanroekel.jaap@kpmg.nlKPMG in France KPMG in RussiaWilfrid Lauriano Do Rego Leonid BalanovskyPartner Partner+33 1 5568 6872 +7 (495) 937 4444 ext:10455wlaurianodorego@kpmg.com lbalanovsky@kpmg.ru Whilst every effort has been taken to verify the accuracy of this information, neither The Economist Intelligence © 2009 The Economist Intelligence Unit Ltd. Unit Ltd nor its affiliates can accept any responsibility or liability for reliance by any person on this information. All rights reserved. The information contained herein is of a general nature and is not intended to address the circumstances of any Designed and produced by Tugboat Ltd particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the Publication name: The winds of change future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. Publication number: 1073 KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative. Publication date: May 2009 The views and opinions expressed herein are those of the survey respondents and do not necessarily represent the Printed on recycled material views and opinions of the Economist Intelligence Unit, KPMG International or KPMG member firms.

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