Greencoat Renewables Purchase Another Poor Performing Wind Farm

Greencoat Renewables have purchased another poor performing wind farm in Tipperary, Cnoc Wind Farm, which made a loss of €897,000 in 2019. Its debts exceeded its assets by €1.1 million which is an indicator of insolvency although the accounts state that up front losses are a facet of wind farm development during the operational stage. The wind farm did trade during the year however with turnover of €1.4 million. Included in the loss is depreciation of € 872,000.

Irish Energy Blog previously showed that many wind farms in Ireland are making losses.

Brookfield Renewables have today indicated that they intend to sell the remainder of their Irish wind platform.

 

Greencoat Wind Farms Part 2 - Lisdowney

Lisdowney Wind Farm in Co.Kilkenny was purchased by Greencoat Renewables in 2017. At that time, it was making losses. The latest accounts filed are showing profits of € 345,000 for 10 months or about € 400,000 for the year 2018. Whilst this looks more promising, the wind farm's debts still stands at € 13 million which means it will take another 32 years to pay off. Since the wind farm has been operating for about four years, the likelihood is that it will continue to operate for another 10-15 years, when at that stage it will need further capital investment to extend it's useful life.
 

Greencoat Wind Farms Part 1 - Gortahile

Greencoat Renewables recently purchased Gortahile wind farm in Co. Laois for an undisclosed sum from a Dutch owned company Glennmont Clean Energy. It has been operating for about eight years and has a capacity of 20MW. It was originally built by German company ABO Wind, then sold to a Danish green fund, then repurchased by ABO for €42 million in 2010. It was also apparently owned by a French company at some stage. It is now back in Irish hands.

It's accounts for last year show it made a profit of € 288k but with gains on financial instruments, comprising interest rate swaps, making up about 45% of these profits. Like depreciation, these financial instruments are non cash items. To get a better look at the financial position of the wind farm, one needs to look at the cash flow statement.

The actual cash generated after paying interest was €1.5 million. The company repaid borrowers to the tune of € 2 million and so incurred a cash deficit of about half a million euros. However, they still showed total cash assets of € 2 million thanks to the waiver of a  € 3.6 million  parent company loan in 2017.

The wind farm's short term liabilities exceeded its short term assets by € 90k, which means it was unable to meet it's debts as they fell due.  The Dutch parent company had vouched it's willingness to provide enough income to keep the wind farm in operation till 2019. At the end of last year, it had combined losses of €2.3 million and debts of over € 18 million.

Will Greencoat need to prop up the wind farm with more cash? It remains a bit of a mystery why a wind farm in such difficulties has generated so many buyers but perhaps it's telling that the recent price tag was not disclosed.

Greencoat Renewables and the Magic of Fair Value Accounting

Make the prices rather higher than lower so that you can make a larger profit - Luca Pacioli, 16th century mathematician

The Irish media recently announced with great fanfare that Income and Profits were up sharply at Greencoat Renewables for the year 2018. On closer scrutiny, things don't look as rosy as one might think. The accounts show income of € 58m.

The majority of this income, € 46m, has nothing to do with actual wind energy or trading as most people would have assumed. It is in fact due to an accounting trick called a fair value adjustment. This boosted the income figure to produce a profit of €43m compared with a loss of € 2.5m for the previous year.   Interestingly, this new profit figure did not result in any tax to be paid.

The Accountancy Standard IFRS No. 13 allows assets to be stated at their Fair Value as opposed to their cost, which conventionally would have been the case. The Fair Value is the amount that an asset (in this case the wind turbines) could be traded for, i.e the selling price. A clause in the accounting standard allows room for subjective assumptions where there is no readily available market information. Greencoat have made use of this clause by increasing the asset life assumption from 25 to 30 years which allows them to record a higher fair value for their wind farm investments. This subjective increase in the value of their wind turbine assets is then recorded in the Income Statement as if normal income.

No actual cash is generated from fair value adjustments, it is simply a bookkeeping exercise to boost profits.

Financial Engineering

Michael Hudson gives an insight into how modern financial markets work. It perhaps explains why wind farms in Ireland are being continuously bought and sold on. 

MH: The stock market no longer primarily provides money for capital investment. It has become a vehicle for bondholders and corporate raiders to borrow from banks and private funds to buy corporate stockholders, make the companies private, downsize them, break them up or strip their assets, and borrow more to buy back their stocks to create asset-price gains without increasing the economy’s tangible real asset base. So the financial sector, except for a brief period in the late 19th century, especially in Germany, has rarely financed productive growth. Financial engineering has replaced industrial engineering, just as in Antiquity creditors were asset strippers.

How Greencoat Renewables Were Able to Pay a Dividend

In theory, dividends should only be paid to shareholders from profits generated during a trading year. Profits arise from excess trading income over expenses. On the other side of a set of accounts are capital items like assets and shareholdings in the company. 

According to the new book "Bean Counters" by Richard Brooks, historically speaking, English common law allowed companies to pay dividends only out of profits. The books goes on to describe how some of the large and badly managed railway and shipping companies of the 18th and 19th centuries were found to have paid dividends from shareholders funds (capital) converted into income, which allowed them to boost their share price further. These companies eventually needed Government bailouts when the bubble burst.


Both Irish and UK law presently allows companies to reduce their share capital and use the funds for distribution i.e. paying dividends, once certain procedures have been followed. This is known as "Capital Reduction". As part of the process, the company must apply to the High Court for approval.  Alternatively, the directors must sign a statement of solvency for which they could be held liable if it turns out to be false.

Greencoat Renewables, which owns around 300MW of Irish wind farms, made a loss last year, yet were still able to declare a dividend. They did this though a capital reduction where the share premium account of €267,000 was converted to Distributable Reserves of € 250,000. It was from this that dividends of € 11 million were paid to shareholders. In effect, shareholders were paid a dividend out of their own money (to which the shareholders would have agreed to). Greencoat obtained High Court approval for this capital reduction.

Greencoat are not alone in this. Other Irish companies have also applied to the High Court for a capital reduction - Bank of Ireland in 2012 and AIB in 2017 both were successful in their applications. Irish News and Media applied to the High Court in 2017 but the outcome I have been unable to ascertain.

Fossil Fuel Divestment Bill a Token Gesture and Commerically Reckless

The Irish Government is set to divest over €300 million of it's investments in mostly US fossil fuel companies. This paves the way for more investments in renewables, including the Irish wind sector which as this blog has shown has been making losses in recent years. 

BP data shows that oil, natural gas and coal will still be the dominant energy sources in the future even with rapid growth in renewables. 

BP Data

In transport, oil will comprise over 80% of the energy sources used by 2040. 

The mission statement of the NTMA (National Treasury Management Agency) is to manage public assets and liabilities commercially and prudently.  The fossil fuel divestment bill is at odds with this mission statement as it's purpose is to divest from the most profitable energy markets and from energy sources that will be in high demand for many more years to come. The NTMA do not seem to have carried out a commercial assessment of renewable sources like wind energy. Is it commercially viable or not ? The fact that many Irish wind energy companies are selling up and divesting from the wind energy business altogether might give you a clue. 

The farcical nature of the discussion that took place around the Bill was on full display in the Dail (Irish parliament) with contributions made like this one by Michael D'Arcy of Fine Gael :

I am concerned about something that is happening now, which I see in my own county, whereby people are objecting to everything. It is everywhere. Wind farms are objected to. We brought in new controls to keep turbines back from property boundaries, which is appropriate. There are objections to solar farms. People are creating fear and doubt and saying the craziest things about renewable energies that are clean and tested and have been for decades. It has to stop or we will never meet these targets.  Events like what happened with the Apple data centre in Athenry cannot continue. People who object to a project because it is close to them are wrong in so doing.

It doesn't take too much research to learn that data centres will consume more fossil fuels and make it harder to meet our targets. But here we have somebody in government who believes the opposite. I was waiting for him to say the sun revolves around the earth next.

The fossil fuel divestment bill is a token gesture, will have zero impact on global emissions and will result in losses for the taxpayer.

Brookfield Renewables Sale Part 2

Canadian company Brookfield Renewables sold two wind farms to Greencoat Renewables last week - Knockacummer and Killhill. I took a look at Knockacummer in my last post. This time I will examine Killhill.  Things don't look any better from a financial point of view.

Killhill is outside Cashel in Co.Tipperary. It has sixteen Enercon 2.0 MW turbines and was commissioned in 2014. The latest accounts show operating profits for 2015 and 2016 but a net loss for both years after interest is accounted for. In fact, since it came into operation, it made a loss every single year  and now has accumulated losses of nearly € 900,000. It had net current liabilities of €3.2m and was completely dependent on financial support from Brookfield, the parent company, to meet it's debts. There were about €37m of loans outstanding by the end of 2016. 

Im speculating, but it could be that the banks will be paid out of the sale proceeds leaving the company completely financed by equity under Greencoat. This could account for the apparently large, but undisclosed, sale price of both wind farms. 

Canadian Company Sell a Loss Making Wind Farm for a Profit to State Backed Investors

A wind farm sold for a profit in the region of €7 million last year made a net loss of € 4 million in the latest accounts filed with the companies office for 2016.

The wind farm, Knockacummer, in Cork, has a capacity of 87.5MW, was commissioned in 2013 and has thirty five 2.5MW turbines. It was sold by Canadian company Brookfield Renewables.

It paid interest of € 12m (at 7.5%) in 2016, which was 54% of it's turnover. The interest was higher than it's operating profit which turned the profit into a net loss. It also made a net loss in 2015. 

At 31st December 2016, it was carrying Accumulated Losses of € 5.7m.

It's outstanding loans stood at €145m at end of 2016. €3.8m of which was written off by Brookfield during the year. The company was financed by loans from Brookfield, which in turn was financed by external loans. 

The buyer was Greencoat Renewables. Last year, the Irish State, through ISIF and AIB, acquired a 33% stake in the company. Which could potentially rise to 49%. 

Greencoat also bought another loss making wind farm, Lisdowney, last month. 

One has to question as to why the Irish State is helping to purchase loss making wind farms. Are we looking at another NAMA in the making ?

Are wind farms financially viable into the future ?

Loss making wind farm sells for € 22 million

Lisdowney wind farm in Co.Kilkenny is quite small at 9MW but it sold for a whopping 22.5 million last week to Greencoat Renewables. Although the company is solvent, the published accounts show it made a loss in 2017 of € 262,000 and € 59,000 the previous year. The accumulated losses now stand at €374,000. “This acquisition is in line with our strategy of acquiring high-quality wind farms in the Republic of Ireland, ” said Greencoat Capital.

There are signs that the days of lucrative profits for wind farm companies may be over. Gaelectric, one of the largest renewable companies in the country, are winding down and laying off staff. Windfarms owned by SSE Airtricity are also in financial difficulties. According to published accounts, Gartnaneane wind farm in Cavan and Meentycat in Donegal are both insolvent i.e. unable to pay their debts as they fall due. The financial statements state that both companies "are dependent on ongoing financial support from a fellow group company". Airtricity claims to provide 100% green energy to Irish homes, although quite how it separates the green electrons from the gas and coal generated electrons in the grid remains a mystery. 

The National Development Plan for 2040 states that ESB, Bord na Mona and Coillte are currently planning to invest in renewable energy technologies. These companies have about 15% of the overall operational wind farm fleet in the State. They plan to continue to invest, predominantly in wind generation, over the coming years.  

Derrybrien wind farm, one of the largest in Ireland, and owned by ESB made losses last year. Should these state run companies still be investing in unprofitable ventures ?

Liam Halligan points out in the Spectator that the era of easy money may be over and that it's no bad thing. Is there a big crunch on the way for wind farm companies ?

Ultra-low rates have also kept thousands of ‘zombie’ companies alive, so we have firms able only to pay debt-interest rather than clear actual debts. Around a quarter of a million struggling UK firms are in this situation, kept on life support by unnaturally low rates. Unable to invest and expand, they tie up resources that should be channelled into healthier firms. This helps to explain the low productivity and wages that have cursed the UK economy in the past ten years.

Gaelectric to Wind Down

Gaelectric, one of the largest wind and renewable energy companies in Ireland, is winding down. Staff numbers have been slashed from 100 to 20. In 2016, the company sold part of its wind farms to a Chinese Nuclear firm. The proceeds were used to pay off their debt of €350 million. A second sale to the same Chinese company fell through last year which has triggered the wind down.  Shareholders are only expected to be repaid a portion of the funds they put in. The Chinese firm expected Ireland to commit to a new renewable fixed tariff scheme, which has still not materialized. 

The accounts show a profit in 2017, but when gain on disposal of € 105m is discounted, there was a trading loss of € 44m. Cost of sales and admin expenses totaled € 50m exceeding sales of € 38m. Loan interest trebled to € 31m since 2016.