Hydropower IPO tests appetite for weather risks

VERBUND AG

28/06/2023 11:20

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are her own.)
    By Yawen Chen
       LONDON, June 28 (Reuters Breakingviews) - A jumbo
hydropower listing may define how investors assess extreme
weather risks.
    Romania’s Hidroelectrica, valued at around 10 billion
euros at the top end of a proposed price range, enjoys high
margins, a healthy balance sheet and annual dividends exceeding
90% of net income. Yet as droughts in Europe become more
frequent, water scarcity may prove a headache.
    Over the last decade, hydropower has been the largest source
of clean energy, International Energy Agency data shows. That
allows Hidroelectrica to fit nicely into a global drive to cut
polluting carbon emissions: it boasts 6.3 gigawatts of power
capacity from 182 hydroelectric plants across Romania. 
    The utility enjoyed a huge boost in earnings from the energy
crisis triggered by Russia’s invasion of Ukraine last year.
Average power prices in Romania nearly tripled in a year to
above 250 euros per megawatt-hour in 2022, although
the government chose in November to cap them at around 90 euros
through 2025.
    Last year Hidroelectrica’s adjusted EBITDA margin hit 64% of
revenue, twice the 30% margin reported by Austria’s Verbund
 VERB.VI , its closest competitor, and well above the 20% at
German utility RWE  RWEG.DE . And while rivals relying on fossil
fuels suffered higher costs, Hidroelectrica’s share of the
domestic electricity market expanded from 2% in 2021 to 8% last
year.
    CEO Bogdan Nicolae Badea is hoping to list nearly 20% of
Hidroelectrica. At the top of the range it would raise up to 2
billion euros and be Europe’s largest IPO so far this year. That
would value the whole company at over 8 times last
year’s adjusted EBITDA, Breakingviews calculated. That’s a
multiple similar to that of 12 billion euro Verbund, which also
generates over 90% of the electricity it sells from hydro
assets.
    Yet there are some red flags. The Romanian state, which
currently trails most European peers in Transparency
International’s Corruption Perceptions Index, will retain an 80%
stake.
    A more unpredictable and potentially severe problem is
climate change. Hidroelectrica’s focus on harnessing flowing
water power is a double-edged sword. In 2022, intense droughts
hit countries from China to France. Romania wasn’t immune, and
it is also prone to floods, which pose a threat to its
dams, according to the World Bank. Alarmingly, Hidroelectrica’s
gross hydropower generation fell about 15% last year from its
annual average of 15.9 terawatt-hours in the decade to 2022.
    The company is trying to diversify into wind and solar
power. That would take time and be expensive. Investors willing
to bet on Hidroelectrica may need to brace for volatile weather.
    Follow @ywchen1 on Twitter
    
    CONTEXT NEWS
    Romania’s financial supervision authority has approved the
prospectus of the initial public offering of majority
state-owned hydropower producer Hidroelectrica, the company said
on June 23.
    The IPO will consist of sales of existing shares held by
Fondul Proprietatea, a fund managed by U.S. asset manager
Franklin Templeton, which is offering 78 million shares,
representing 17.3% of the company. An overallotment option could
allow Fondul Proprietatea to sell up to 90 million shares and
offload its entire 19.94% stake.
    The IPO carries a price range of between 94 Romanian lei and
112 lei (18.95 euros and 22.58 euros) per share, giving the
company a potential market capitalisation of 42.3 billion lei to
50.4 billion lei (8.53 billion euros to 10.16 billion euros),
Hidroelectrica said in its prospectus.

 (Editing by Lisa Jucca and Oliver Taslic)
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