Hot deal or hot air?

ENERGY:The Airtricity deal may suggest rich pickings in alternative energy deals, but it's not a quick path to easy gains

The fact that big utilities like Germany's Eon and Scottish and Southern Energy (SSE) paid close to €2.5 billion in total for Irish group Airtricity's businesses seems to indicate that alternative energy, and specifically wind power, has not just come of age, it can now deliver lucrative returns to investors.

Airtricity's biggest shareholder, waste and energy group, NTR, which holds 51 per cent, will collect around €850 million in cash from the two deals. But the experience of another more recent arrival to the wind power company's share register, gives you an idea of just how fast the value of these businesses appears to be multiplying.

Specialist British fund manager, Ecofin, paid €16.43 a-share for a 16 per cent stake in Airtricity in August 2006. It followed this with a €10 million top up in November, a result of a second share issue completed by the Irish group that year.

Last week, Ecofin said that it expected a return of €33 a-share from its investment in Airtricity, so it has effectively doubled its money in less than a year-and-a-half. Not bad when you consider that you would have lost money by investing in leading Irish stocks last year, while putting your cash into a fund pegged to London's FTSE 100 would have earned you an increase of just over 3.8 per cent.

All this seems to indicate that wind energy advocates, like Airtricity founder Eddie O'Connor (who'll take home €50 million or so), are right - not only is it good for the earth, it's also good for investors.

Though not everybody agrees. Or at least, not everybody agrees that the Airtricity deal is going to be good for the company's latest investor, Scottish and Southern, which last week agreed to pay €1.46 billion for its European business.

Within days of the deal, credit ratings agencies, Moody's and Standard & Poors, said they were putting SSE on credit watch. Credit ratings agencies grade organisation's ability to repay debts. The higher a company's grade, the safer the bet for a bank, and thus it pays less interest than a business with a poorer grading.

Scottish and Southern is borrowing the money to buy Airtricity. Moody's has said it may well downgrade at least part of the group's overall debt as a result. This could lead to increased interest payments for SSE, something that will put an extra strain on its balance sheet.

The ratings agencies argue that Airtricity is making little in the way of real profit as it is still very much a developing business. In fact, it made no real profit in the 12 months to March 31st. Moody's estimated last week that SSE is paying a multiple of 7,000 times earnings for the Irish company.

They're also concerned about the fact that SSE will have to spend heavily to develop Airtricity's actual power producing network, which is largely in the planning and development process.

In November, an Airtricity spokesman said its development pipeline is made up of wind farms with the capacity to produce 11,000 mega watts (MW) in Europe and China.

In the nearer term, it has 1,434 MW in development in Europe and planning for 483 MW in Scotland. Building these will cost between €1.5 million and €2 million a mega watt, and this could go up, as there are very few people producing wind turbines for power generation, but a lot of people trying to buy them. SSE has told shareholders that the deal will not be "earnings enhancing" until 2011.

The credit ratings agencies are not the only people to notice all this. Dow Jones analyst, Arindam Nag, believes that Airtricity will continue to absorb cash for the next three to five years. He agrees that there is sound reasoning behind SSE's decision to buy its way into wind generation, which benefits from direct cash support from European governments, and allows traditional utilities to write off some of their carbon liabilities.

But for anyone who thinks that renewable energy represents a path to easy or lucrative investment gains, Nag warns that anyone buying in at those prices is betting on "current valuations in the renewables sector proving more sustainable than their bubble-like valuations suggest".

He suggests that turbine costs will have to fall and bank finance will have to get cheaper in order to underpin that sustainability. For the moment, both of these are going in the opposite direction.

NTR, Ecofin and O'Connor may have earned lucrative returns for their alternative energy ventures, but the signs are that anyone who wants to follow in their footsteps should tread very carefully indeed.