Saturday, 19 January 2019

Eureka! Aligning financials and industrials

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On November 5, infrastructure investor F2i and Edison completed an innovative partnership in the renewable energy sector in Italy. Have they possibly pioneered a new alignment of interests between financial and industrial operators? By Matteo Ambroggio, partner ofF2i – Fondi Italiani di Investimento.

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In 200 BC the Greek scholar Archimedes proclaimed “Eureka!” when stepping into a bath and noticing the water level rising; the volume of displaced water was indeed equal to the volume of his submerged body part. From that day Eureka! was associated with discoveries, intuitions, achievements … but above all to forward thinkers, as Archimedes was.

In the beginning of 2013, when we received the transaction teaser from the seller and made the first considerations on the potential acquisition of the Edens wind portfolio, we quickly realised that we had to elaborate on the deal structure offered by the seller, which was based on long-term off-take and O&M contracts, to build with the latter a long-lasting partnership scheme aiming at transforming Edens into a catalyst for aggregation of Italian wind power capacity.

That is why we all felt Eureka! was the right name for our project, for our forward thinking.

Transaction successfully closed in November 2014, almost two years after receiving the initial teaser and after a year of intense negotiations with our new partner, Edison, and the banks that had supported us since the bidding phase in autumn 2013.

The transaction was built around the concept that the new Edens (now renamed E2i Energie Speciali) should have become not only the third largest wind operator in Italy (already from day one, with 594MW installed capacity), but also a platform for future growth and consolidation in the sector. This reflects the inner sprit of F2i, creating centre of excellence investing in large, strategic assets in all infrastructure sectors and Edison andEDF Energies Nouvelles, with their long-lasting experience in energy management and operation and maintenance activities.

The project consists of a 589MW wind portfolio (consolidating Edison and most of EDF Italian renewable assets) and a 5MW solar PV plant. Assets are diversified in terms of (i) technology (mainly Vestas, Enercon), (ii) asset life (46% of plants have less than five years and only 0.5% are older than 15 years) and (iii) incentive scheme (Green Certificates, CIP 6, Conto Energia and plants fully merchant).

The seller was offering potential buyers strong contractual frameworks consisting in (i) a 10-year off-take agreement at fixed prices, provided by Edison (the first of its kind in terms of tenor and structure in the Italian market) covering the projects from substantial market volume and price risk (bringing the portfolio a mix of incentivised and non-incentivised assets), giving Edison the flexibility of managing those risks vis-à-vis the market price scenario and (ii) a 10-year operation and maintenance agreement provided by a spin-off of EDF Energies Nouvelles Services Italy, offering also developments services. In exchange for those contracts, the organisational structure of Edens was supposed to be very lean, including no more than seven employees in total.

We felt that the structure proposed by Edison could have been satisfactory for long-term, passive investors, but was not convenient to our strategy, which aims at actively managing the existing assets and looking for growth opportunities. For those reasons, F2i requested the seller to organise the company with a much more structured management team, which included approximately 22 employees, to ensure full monitoring of operations, an immediate reaction to any business interruption and constant presence of company representatives to the circa 30 wind farms of Edens spread in several Italian regions.

Additionally, a finance department has been set up to carefully assess any potential repowering projects, as well as internal and external growths opportunities.

F2i decided to leverage on the strong stability of cashflow generation that derived from the offtake and O&M contracts (although the buyer remains exposed to regulatory risk on current and future incentives on energy production) to maximize size and tenor of an acquisition financing, which we negotiated with a consortium of five banks (ING, Banca IMI, Societe Generale, Santander and UniCredit).

This is not a project financing. Indeed, the deal balances features of a non-recourse/acquisition and quasi-corporate financing. The nine-year term loan was provided at holding company level with an innovative mix of covenants and cross-references, so to allow Edens to remain substantially debt-free with maximum operational and financial flexibility to serve the expansion strategy.

The negotiations with the banks have been beneficial to the overall outcome of the deal: on one side the presence of long-term off-take and O&M contracts provided the lenders with the right comfort to provide a sizeable amount of debt, after a season in Italy whereby lenders have been sceptics on the sector and very cautious with the companies. On the other side, the banks requested a number of covenants and contractual undertakings, thus impacting on the negotiation between F2i and Edison, both the operational contracts and the company’s by-laws and shareholders’ agreement.

The final loan agreement contains interesting features for the F2i in terms of size, tenor, ability to distribute dividends, for Edens in terms of operational flexibility (remember that this was a holdco financing), and for the banks, in terms of safety covenants and juicy spread. But, honestly, what is the right price for long-term debt at holdco level, whereby our industrial partner Edison formally maintains a veto right on dividend distributions?

At closing, F2i bought 70% of the company, with overall debt provided by the banks equal to €215m, which represented about 3.9x 2015 expected pro rata Ebitda and around two-thirds of the acquisition price. An initial request by the banks to introduce a DSRA had finally been replaced with a much more convenient revolving facility of €30m.

Based on the debt features negotiated with the banks and with the cash distribution rules agreed with Edison, we expect to return our investors the invested amount well before the end of the off-take period, thus minimising the potential impact of production volatility and the fluctuations of the energy prices in the long run on the overall return of investment for our investors.

Once we initiated negotiation on an exclusive basis, we devoted an enormous amount of time to the documentations phase, which included the finalisation of the offtake and the O&M agreement, a service contract on administrative services, a development agreement as well as an agreed business plan. Overall, this activity took us more than 3 months, together with a parallel negotiation on the shareholders pact and the SPA.

The final governance will allow EDF/Edison to monetise renewable assets in Italy while continuing full accounting consolidation of the assets portfolio, through a 30% ownership. They will remain the industrial partners of E2i Energie Speciali, and will provide constant technological and operational support to the venture.

This role perfectly matches with EDF/Edison’s stated purpose for the project, consisting in enhancing value and synergies from the power generation activities in Italy, through the integrated management of renewables-thermo assets, with opportunities of increasing the size of the assets portfolio.

All the reasons above made the deal a perfect match between F2i sector consolidation strategy and Edison/EDF industrial approach combining generation and energy management. Or, at least, they constitute a promising beginning of the partnership.

Two months after closing the transaction, the company is making its first steps in the market with the new business model, and is already monitoring the Italian market to exploit any potential growth opportunities, with the aim of improving its current ranking of third Italian player in the wind sector. The Italian wind sector remains, in fact, still pretty much granular, with few large players.

F2i and Edison could say again “Eureka!”, after some 2214 years since the first historical Eureka! was proclaimed, if their company E2i Energie Speciali will be able to aggregate other players in the coming years, thanks to strong and predictable cashflow generation and a balance sheet that is, at the moment, still cash-positive.


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