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An interview with the renewable energy group's CFO.
Jason Karaian, CFO Europe Magazine
November 4, 2008
"We have predictable cash flow and no risk of a margin squeeze." These days, few finance chiefs are as confident as Philippe Crouzat, CFO of EDF Energies Nouvelles (EDF EN). The renewable energy group, part-owned by the eponymous French utility, enjoys large government subsidies for its products and gets raw materials — namely sunlight and wind — free. In the first six months of this year, it reported a rise in sales of more than 150%, with operating income up nearly 60%. In September, the company raised €500m in an oversubscribed rights issue, one of the few such capital raisings not launched under duress amid the credit crunch. The funds will be used to expand its solar business, contributing to plans for increasing gross installed capacity to 4,000 megawatts in 2012 from 1,700 megawatts today.
The company listed in 2006, kicking off a spate of spin-offs by Europe's large utilities. Spain's Iberdrola Renovables listed a year later while EDP Renováveis of Portugal went public this June.
These relatively young companies operate in markets with growth rates that the firms' former parents could only dream of. Last year, the solar photovoltaic market grew 40% and wind power capacity increased 20%, according to their respective industry associations.
But the future may not be as bright. Stretched public finances might dampen enthusiasm for subsidies, while a looming recession is pushing down prices for fossil fuels, making renewable energy less competitive. From his Paris office, Crouzat spoke with CFO Europe about how EDF EN can thrive despite these headwinds.
Despite the widespread financial turmoil, EDF EN and its peers have tapped the capital markets with relative ease. How?
Once we have developed, built and commissioned a wind or solar farm, we have very predictable cash flows, for two reasons. First, the fuel is free, so there is no risk of a squeeze on margins. Second, in the countries where we operate, there are either feed-in tariffs or purchase agreements signed with utilities that last for 15 years or more and are indexed to inflation. For these reasons, we can support our capital-intensive business with an average of 80% non-recourse project finance and 20% equity.
Our relationship with banks has not changed meaningfully. Ours is not an exotic business. Wind and solar farms are low-risk investments. Although conditions are difficult for them, the banks are not cutting off financing, at least not yet. The fact that we bear the name EDF, even if we operate independently, also gives us more credibility. We clearly benefit from the shadow rating of EDF when it comes to financing, which it something that I appreciate today.
The company pledged to "fast-track" its solar business, boosting capacity from less than one megawatt last year to 500 megawatts in 2012. Is this an overly ambitious target?
We started in the wind business less than ten years ago, and today we have a gross capacity of around 3,000 megawatts under operation or construction. The solar photovoltaic market is very similar to the wind market ten years ago in terms of growth and the relative level of subsidies necessary for investments to be profitable. And the development time for a solar project can take only two years, versus at least five for wind. We intend to leverage our presence in countries where we have been settled for a long time with wind farms. Developing 500 megawatts of solar capacity by 2012 is not easy, but it will not be that different from what we achieved with wind.
The renewable-energy industry depends on government subsidies. Is this sustainable?
Regulatory risk is one of the main threats to the industry. We can mitigate this by operating in several countries. We added Mexico and Canada to the ten countries we were in at the time of the IPO, for example.
Revenues from farms already commissioned are secured for the next 15 to 20 years. But over time, we expect that government support will decrease. That's why, when we enter a country, we go in at an early stage of its development. We need to secure the best sites and ensure that regulatory support will not vanish in the near future. This is why we are not in Germany or Spain and, after entering in 1999, we stopped wind development in Portugal a few years ago because the tariffs were falling too fast.
The name of the game is clearly to get the political support to help a business develop. In many countries today, wind power needs few subsidies to compete on price in wholesale markets. In some cases, green electricity is even less expensive than grey.
Most of the talk at the company remains focused on growth. Aren't you worried about a recession?
Today, some firms that find access to finance difficult may have to put themselves up for sale. Up until now, our preferred route has been organic growth, because we can create more value with our own projects and also because transaction prices were too high. Now, if the conditions are right, we could consider bolt-on acquisitions. For a company with cash, a crisis creates opportunities.
Jason Karaian is deputy editor at CFO Europe.