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.

 

Wasteful Spending Must be Cut in Wake of Coronavirus

Now that Ireland is entering a period of extended lockdown, which the people are complying with, people are asking what will the future hold.  Money will of course be tight in the future,  so wasteful spending will need to be curtailed.

The virus will simply not go away post lockdown but will be around in our environment for some considerable period of time. Quite considerable sums will have to be spent recalibrating the health service. In this context we have the European Investment Bank, the Commission's Bank, providing €530 million to fund the Celtic Interconnector to France:

https://www.dccae.gov.ie/en-ie/news-and-media/press-releases/Pages/Press-Release-Government-Secures-%E2%82%AC530m-EU-grant-for-Celtic-Interconnector.aspx   

We already have so much wind on the Irish grid, that huge surges occur whenever a low pressure system passes through. Not only are conventional plants being curtailed, but so to are the two Waste to Energy plants in Ireland, 50% of whose electrical output is renewable as that is the fraction of biomass in the incoming municipal waste. Their furnaces have to be maintained at a minimum of 850 C, to combust the incoming waste, so the steam is diverted away from the generators and into the cooling system. in 2018 these two plants curtailed the equivalent renewable electricity of 1.5 times what the Dart used that year, dumping instead the energy (in the case of Dublin Waste to Energy into Dublin Bay). As we know the whole programme is a mess.

If we consider the East West Interconnector built a few years ago from Malahide in Dublin to North Wales, this was a completely uneconomic project, as the Irish Academy of Engineers pointed out several times, neither was there any justification other than to facilitate more wind energy. Hence no commercial bank would have provided the funding. The EIB stepped in with a €300 million loan, the EU Commission gave direct funding of €100 and suddenly the €600 million project was viable. The UK paid not a penny for the infrastructure and our network charges on our electricity bill, which is around 30% of it, went up by about 5% to pay these loans back. We don't have those hundreds of millions to be just wasted in this manner in the months ahead, there is after all resonance in that we need ventilators not wind turbines. 


The millions to be spent on the North south Interconnector now also looks questionable. What of the billions being spent every year on NGOs ? In the wake of the coronavirus pandemic, difficult financial decisions will have to be made to ensure essential services such as health and social welfare are maintained. Priorities will have to change.

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.

Leitrim Wind Farm Racks Up Losses of € 5.6 Million

Garvagh Glebe, a 26MW wind farm in Leitrim,  made a loss of € 3.5 million last year and has racked up combined losses of € 5.6 million after nine years. In 2017, it had a load factor of 23% after it's availability dropped to 59%. This means it was out of operation for 40% of the year and when it was operating only running on average at 23% of it's potential output.

The wind farm was completely dependent on funding from it's shareholder ESB to continue operating for another 12 months. This makes a complete mockery of the idea that renewables are competing against fossil fuels. ESB, which owns most of the fossil fuel power stations in the country, can only maintain investment in it's  loss making wind farms with funding from it's more profitable fossil fuel power sector. 

In 2008, during construction of the wind farm, 6,000 fish, mainly trout, were killed when tonnes of peat swept through the Owengar river which runs into Lough Allen. A similar incident occurred in Co.Galway during construction of another ESB owned Derrybrien wind farm where around 50,000 fish were killed. 

ESB - A Financial Perspective

This post will be a longer examination into the financials of electricity generation plant around the country (mainly wind). It will get a bit technical in places but I will do my best to explain terms used. 

ESB is the largest energy company in Ireland and is 95% owned by the Irish State. Last year, it recorded a loss of €31 million after writing down the value of their generating assets by € 276 million. The operating profit before the impairment was € 490m, the lowest profit in the past five years.

Following impairment reviews of the generation assets ESB recognised an exceptional impairment charge of €276 million in relation to Moneypoint (€142 million), Aghada Unit 2 (€69 million), Synergen (€30 million), Poolbeg (€21 million), Marina (€1 million) power stations and €13 million across five wind farms

Moneypoint is a critical piece of infrastructure. Without it, the 400kv lines in the west of Ireland will have insufficient voltage to carry the power eastwards.  The impairment now means that Moneypoint coal power station is practically worthless. However, it must be noted that Moneypoint has been around since the 1980s.

Two of their power stations are to close altogether - Marina and Aghada (steam unit)

Capacity contracts were not accepted for ESB’s open-cycle gas unit at Marina and the conventional steam unit at Aghada and, after many years of excellent performance and service to electricity customers, once I-SEM starts in May, there will be no commercial basis for the continued operation of these units. 

The loss of the steam unit at Aghada will increase emissions from the site as this generator would be more efficient than the open gas cycle turbines built there around the same time in the 1980s (there still remains a separate and very efficient CCGT at Aghada built in 2010).

The published accounts do not show a breakdown of operating profit into fossil fuel / renewables (which seems to be a trend among the large energy companies), which would have been very useful.  But there are indications that the renewables part of their business is not performing as might have been as expected. 

Return on Capital Employed (ROCE) 

The Return on Capital Employed (ROCE) is used as an indicator for the Return on an Investment i.e. how much one pound spent on assets generates in profits. I have calculated it by taking the Operating Profit (profit before interest and tax) and divided by total assets less current liabilities.  The sweet spot seems to be in the 14-17% range and this crops up in successful companies from across different industries. Successful Irish companies like Ryanair, Kingspan, Glanbia and Kerry Gold have ROCEs in the region of 14 - 17%. In the UK, Marks and Spencer's recent report shows an ROCE of 14%. 


The ROCE for ESB seems to be around 6% historically. The highest I can find was 10% in 2007 when the prices of fossil fuels peaked. It now stands at 4.6% for 2017, which is historically low.  It has dropped every year for the past three years from 6.5% to 6.1% to 4.6%. Low wholesale prices are of course a contributing factor. However, the average wholesale price rose from €41.82 in 2016 to € 47.48 in 2017 so we should have in theory have seen an improved ROCE ratio.

Comparable companies like SSE and E.ON have recently reported ROCE ratios in the region of 10% so ESB's ratio is comparatively low.

Interest Cover

A company needs to have enough profit left over from paying normal business expenses to cover interest payments on their loans. From Investopedia:

The interest coverage ratio is used to determine how easily a company can pay their interest expenses on outstanding debt. The ratio is calculated by dividing a company's earnings before interest and taxes (EBIT) by the company's interest expenses for the same period. The lower the ratio, the more the company is burdened by debt expense. When a company's interest coverage ratio is only 1.5 or lower, its ability to meet interest expenses may be questionable.

ESB in 2016 had a healthy interest cover of 3.5. However, this has dropped below the safety threshold to 1.1 in 2017.


Financial Statements

I will only be taking a look at the Generation part of ESB's business. ESB also have a retail and grid development business. The financial statements for the gas power station and wind farms are published on the CRO website. Only financial reports for 2016 and 2015 are currently available. There was a deterioration in profits in 2016.  Presumably, things got even worse for the company in 2017. 


Gas power

A look at the most recent accounts (2016) of ESB's gas power station in Dublin shows that it was still making good profits despite the low gas prices. Dublin Bay (400MW) made net profits of €28m and €43m in 2016 / 2015. The drop in profits was presumably due to a drop in wholesale prices of 18%. It had very healthy ROCEs of 19% and 29%.  With accumulated profits of €41m by the end of 2016, the power station was doing very well. In 2015, a dividend had been paid out of € 37 million. It proves that the business model for gas generation is still very strong. The power station was built in 2002 so a very strong performance after 13-14 years of operation. 

Of course, it is based in a high demand centre and is generating power to the grid most of the time. I was unable to find financial statements for any other power stations. I presume most of the other ones wouldn't have been as profitable.

Wind power

I looked at the financial statements of nine of ESB's wind farms in the South of Ireland. A total of 175MW of wind generation. 2015 is a good year to begin with as most of the farms had high load factors, equal to or above the national average of 33% (except for one - Derrybrien). All wind farms made an operating profit, however two made net losses, most notably Garvagh Glebe, a 26MW wind farm in Leitrim which made a loss of € 480,000 despite having the highest load factor at 42%. This was because of very high interest payments - which were about 45% of turnover. 

The average ROCE was 6%, in line with the overall average for ESB Group. Another Leitrim wind farm, Blackbanks, had the highest ROCE at 11%. Blackbanks has a smaller 10MW output and interestingly has smaller (0.85kw) turbines than nearby Garvagh which has 2MW turbines, yet the smaller wind farm had double the ROCE of the larger one (remember that ROCE is based on profit before interest). This seems to fly in the face of conventional wisdom that says the bigger the turbine, the bigger the return.

Combined operating profits in 2015 for the nine wind farms was € 9.2m and net profits was € 2.1m. Depending on how you measure it, this gives an operating profit of €52,000 per MW and net profit of €12,000 per MW for 2015. Compare this with the gas power station in Dublin which had an operating profit of € 127,000 per MW and a net profit of € 107,000 per MW in the same year. Gas power was 2.5 times more profitable in 2015 than wind before interest and and nine times more profitable after. Operating profit, however, is the best way to compare the two generation sources as the gas power station had paid off most it's loans by 2016 and so had very low interest payments. Therefore, gas, which has fuel input costs, is two and half times more profitable than wind, which has no fuel input costs (and wind gets priority on the grid). This fact deserves a separate article on it's own but presumably the much higher load factor for gas has a lot to do with it.

By the end of 2015, accumulated profits from all these wind farms was € 14 million. One dividend of € 1.5m was paid out by Mount Eagle wind farm in Kerry. Again, this wind farm has the smaller older style wind turbine. 

In 2016, the average load factor was still decent at 31% but the ROCE had switched to negative. All wind farms made a net loss apart from two. Combined losses for the year were € 5m. Over the two years, combined losses were € 3m. 

In 2016, interest cover went from positive to negative. Average interest cover over the two years was 1.09, which falls short of the recommended baseline of 1.5. The ROCE would need to rise to at least 10% to reach a safe interest cover and to 15-16% to reach an ideal one.

The worse performing wind farms were the larger ones built in 2010 and 2011. The larger 2MW turbines on average cost 4.5 times more than the smaller older models for 2.3 times the capacity.  In fact, these newer wind farms had high accumulated losses by the end of 2016 of € 6m and some had notes in their accounts stating that they were dependent on financial support from ESB group, which indicates that the higher output from their bigger turbines was not enough to compensate for the additional associated costs.

Two dividends were paid out, € 1m from Mount Eagle and € 1.5m from Blackbanks, both older wind farms with smaller 0.850KW turbines. They were both in good financial health by the end of 2016. 

In total, ESB group had loans outstanding of €170 million to all nine wind farms by the end of the year. 

In 2017, total impairments for wind farms was € 13 million. In Northern Ireland, the value of a wind farm in Tyrone had been written down by nearly €5m :

A review of the Hunters Hill 20 MW wind farm in Co. Tyrone, Northern Ireland was undertaken at year end. An impairment loss of €4.9 million has been recognised in the income statement in respect of this wind farm. This impairment has arisen as a result of a reduction in load factor.

ESB Networks division were also investing heavily in the grid infrastructure required to support renewables :

The focus of the 2017 investment in the transmission network was on continuing the reinforcement of the system to facilitate the connection of new renewable electricity generation. 

Capital investment in the networks businesses continued in 2017 with €644 million (74% of total capital investment) invested in the networks infrastructure in ROI and Northern Ireland (NI)

Conclusion

ESB's traditional generation model in Ireland has changed from investment in reliable power generation to renewables. However, there are signs that things have not turned out quite as planned with wind energy, in particular the newer and more costly wind farms have built up considerable losses. In essence, the older profit making gas generation fleet is subsidizing the newer loss making renewable generation. The older and smaller wind farms may well be benefiting from better sites, but it could also be the case that the smaller 1MW technology is more efficient. These smaller wind farms have by and large turned out to be good investments.  The same cannot be said for the more recent wind investments.

There are still gains to be made from conventional baseload generation. As the grid becomes increasingly unstable in the future, there will be gains to be made for ESB in building fast acting fossil fuel generators that can be switched on quickly. If Moneypoint is converted to gas, it will certainly be profitable like Dublin Bay, but will leave ESB (and Ireland) increasingly dependent on gas lines from the UK which may not be as dependable in the future. 

Wholesale prices are recovering so we should be seeing better profits for ESB. Investing in large loss making wind farms may be negating some of the benefits from higher wholesale prices. Other benefits from investing in wind farms such as carbon credits are no longer financially lucrative as the carbon price has fallen too low. ESB's investment in wind energy should be reviewed.

ESB Financial Report for 2017 : https://esb.ie/docs/default-source/investor-relations-documents/annual-report-and-financial-statements-2017-single-pages.pdf?sfvrsn=dae93bf0_2

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.