Portugal

Portugal

European dominance of American market continues -- Another major US wind developer swallowed by power company from Europe

Portugal's national electric utility, a relative minnow among European power companies, is now a big fish in the United States wind business. Its purchase of Horizon Wind Energy, a developer, owner and operator of wind power stations in America, from Goldman Sachs, an investment bank, propels Energias de Portugal (EDP) from nowhere into third place in the ownership rankings of US wind power.

EDP gains stakes in 559 MW of operating wind plant, 997 MW of projects under construction, and project development opportunities put at 9000 MW. By the end of the year, when all Horizon's projects now building are due on line, EDP will control 9% of US wind capacity, said the company's CEO, Antonia Mexia, when announcing the deal at the end of March.

The sale of Horizon comes only two years after Goldman Sachs bought the Houston-based firm, reportedly paying less than $1 billion to the Zilkha family who founded it. EDP paid $2.15 billion, but agreed to invest an additional $600 million in existing wind power projects and assume another $180 million in debt, bringing the deal's final tally closer to $3 billion.

EDP's Gabriel Alonso acknowledges the utility paid a premium for Horizon. "There is a reasonable premium to pay for reputable companies with mature pipelines. You have to pay for quality and ability to execute -- that is worth the premium," says Alonso. EDP, he says, is looking forward to receiving the standard regulatory approvals for the transaction to go through so it "can start running this Ferrari." Alonso recently left the American division of Spanish wind turbine maker Gamesa to join EDP as head of renewables in the US.

Part of a trend

EDP, a stock exchange listed company which sells electricity to seven million customers in its home continent, is one of several to have fled the crowded wind markets of Europe to seek their fortunes in the huge opportunities opening up in the US. Dutch Shell, British BP, major Spanish utility Iberdrola, Italian utility Enel, and state owned French utility EDF have all shown the way, vacuuming up American wind developers under the noses of the US power industry. "If you want to grow in the wind business beyond Europe, the North American market is where you want to be," says Alonso.

Goldman Sachs' decision to sell Horizon, which for the past two years has been the third most active wind developer in the US after FPL and PPM, had been anticipated almost from the day it bought the company. Rumours of an imminent sale have been rife for months. "I think what Goldman has done is not atypical of what they do," says Horizon's Michael Skelly. "They find a company in a promising industry, put in a lot of capital and grow it, then sell."

EDP's plan

EDP has stakes in 4200 MW of wind capacity in Europe. The biggest chunk of that, 66%, is in Portugal's neighbour, Spain, where EDP is the fourth largest wind plant operator, a position achieved both through developing projects and buying up developers. Spain, with more than 12,000 MW on line, runs more wind power generating capacity than any other country bar Germany. EDP has also been in the thick of Portugal's rapid build-out of wind power and 22% of its wind capacity is located there. Portugal is aiming to get 45% of its electricity from renewables by 2010. The remaining EDP wind capacity in Europe is in Belgium and France.

With the acquisition of Horizon, North America is set to become EDP's major wind market, representing 45% of its wind business, with Spain following at 36%, Portugal at 12% and the rest of Europe at 7%, says the company. But without a tax burden in the US it cannot directly take advantage of the federal production tax credit (PTC) on which the American wind market is based. Alonso says EDP has a plan.

"We need to monetize the PTC in the market and given the current juncture we don't think that will be a problem," he says. "We believe the wind tax credit is very liquid and there are many players interested in investing in wind." The company intends to build out a portfolio of about 750 MW of projects and then go to the financials markets to entice different tax equity investors -- who do have sizeable US tax burdens -- to invest in the projects. He says there is considerable demand for these tax advantaged equity investments (page 58) and that financial markets are getting more comfortable with wind power as a safe investment.

What Horizon feels

For Horizon, the deal means continued backing from a big company and the chance to keep doing what it does best. "We want to build a lot more wind farms," says Horizon's Michael Skelly. "Will this help us? EDP will be the fourth largest wind company by ownership in the world. Yes, this will enhance our ability."

Horizon started out as Zilkha Renewable Energy in the late 1990s, founded by an entrepreneurial father and son team that had sold an oil exploration company for a billion dollars before turning to wind. The sale to Goldman Sachs raised the stakes for Horizon by gaining it access to the PTC, which had not been available to a family-owned business with a relatively low tax bill to offset. From that point it made financial sense for Horizon to own the projects it built.

Now, just as America has reached its tipping point in favour of renewable energy, Horizon will be getting a big push from a motivated, deep-pocketed European company with global ambition. Skelly has no problem with big foreign companies buying up US developers. "One of the exciting features of the wind industry is that there are all kinds of players up and down the chain," he says. "The industry is at a point where it can attract big companies. But we can't do everything. Big companies don't have all the great ideas. There are lots of great ideas from small, medium and large companies."

Fewer than ten years ago, Horizon swam among the smaller fry. "We've been fortunate because we started as Zilkha and we were owned by an entrepreneurial family that took some early risks that Goldman Sachs found of some interest," says Skelly. "Then Goldman Sachs invested some resources and brought us to the next level. Now we're part of a company where we're at the very heart of their growth strategy. That seems like a good place to be."

Skelly has faith in the American wind power model too. "The system has got its imperfections, but it's getting its share of projects built," he says. "Over the long term, competitive forces will do their thing and wind energy will keep gravitating toward reasonable prices," he says.

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