Getting connected to green profits

Prysmian SPA is one of the world's three largest cable manufacturers. With revenues in 2010 of €4.57 billion and net profits of €309 million, Prysmian is well placed to facilitate and benefit from the development of the global smart grid infrastructure. Prysmian's core business focus is in the utilities and telecommunications markets. While Europe and America represent its primary geographic markets, Australasia and Latin America (up 18 per cent in 2010) are growing rapidly and now represent more than 20 per cent of corporate revenues. During 2010 Prysmian acquired new businesses in Russia and India to better position for growth.

2011 has started well for Prysmian, with the successful €840 million acquisition of its major Netherlands-based competitor, Draka Holdings; significant cost synergies underpinning the acquisition logic.

2010 saw a progressive turnaround in Prysmian's business momentum after a major downturn during the GFC. The March 2010 quarter was very weak, with sales down 11 per cent year-on-year. By the December 2010 quarter, however, sales were up 12 per cent year-on-year. This positive momentum saw earnings before interest, tax and depreciation up 14 per cent half-on-half.

Huge growth is forecast in offshore wind farms in Europe and America, with Prysmian undersea cabling a key input requirement. France has recently announced plans to develop 6 gigawatts (GW) of offshore wind by 2020, the UK has awarded 25 GW of licences, while Germany expects to have 10 GW of offshore wind grid-connected by 2020. To put these plans in context, there is currently only 2.95 GW of grid-connected off-shore wind in Europe. 2010 saw a growth in the installed base of 53 per cent, and with Prysmian forecasting 41 GW of offshore wind in Europe by 2020, huge growth is still ahead. In 2010 Prysmian won cabling contracts for the BorWin1, HelWin1 and SylWin1 wind farms, all using progressively larger wind turbine sizes.

The growth in offshore wind is giving a significant lift to undersea high voltage energy cabling for the North Seas Countries Offshore Grid Initiative (NSCOGI), which links Scandinavia, the UK and Northern Europe. Undersea links are now operational between Ireland-Wales, England-France and England-Netherlands. In February 2011 ABB Ltd won a $US180 million contract to build the 240km Norway-Denmark sub-sea NSCOGI link. With commissioning due in 2014, this link will provide Europe access to Norway's enormous hydro dams, which can be used as energy storage facilities. This involves pumping water upstream, and storing it in the dam for release to drive hydroelectric turbines when the power is needed. Already enormous in size, these hydro assets are eminently expandable, and provide a store of electricity potential that is very complementary to the successful scaling-up of intermittent wind and solar farms.

An extension of this plan last week saw Iceland announce a feasibility study into building a 1,170km power cable to Scotland to facilitate the development of its untapped potential in terms of export revenues from geothermal and hydropower.

During 2010 Prysmian won a contract to supply the new Spain-France electricity grid interconnection. This interconnection will help move Europe away from a system of independent national electricity grids. This should allow greater grid efficiency, reduced blackouts, reduced peaking capacity requirements and lower electricity prices. Power plant overcapacity means Spain has some of the lowest wholesale electricity costs in Europe at €40-45/MWh. By comparison, Italian electricity prices in 2010 averaged €75/MWh, almost double that of Spain.

The visionary Desertec grid infrastructure project is designed to link up electricity grids across Europe, the Mediterranean and North Africa and will allow the development of wind and solar farms in North Africa which will supply power to Europe. Solar radiation in North Africa is many times higher than in Northern Europe, resulting in significantly better project economics for desert based solar projects. For Desertec, the significantly higher efficiency of high voltage cabling is again a key enabler. Undersea cables linking Gibraltar-Morocco, Spain-Algeria, Greece-Crete-Libya and Italy-Sicily-Tunisia, with additional land based cabling linking Turkey-Palestine-Israel-Eygpt are envisaged. Prysmian is a key partner in this project, alongside a number of global giants such as Siemens and Deutsche Bank. The German government is also backing the plan, given Germany has a significant energy security issue due to an over-reliance on Russian natural gas. Indeed, the recent events in North Africa also support the logic of the Desertec dream, given energy access and the relief of poverty are inextricably linked.

Are these projects pipe-dreams? Arguably not, as almost anything is possible when electricity and gas prices follow oil sustainably north of $100 per barrel equivalent.

In a similar vein, we note that in October 2010 Google announced it would take a strategic 37.5 per cent equity stake in the $US5 billion Atlantic Wind Connection undersea cable grid project. This huge new American grid infrastructure project was followed by final approvals for the $US1 billion Cape Wind US offshore wind farm in November 2010 (most likely using Siemens 3.6 MW turbines). With a firm the size of Google now putting its balance sheet to work in funding the move to a low-carbon economy, many obstacles will diminish in relevance. As an aside, Google's net cash as at December 2010 was just shy of $US30 billion!

On a completely different tack – this week saw the interim 2011 results presentation for the Australian listed clean energy company CBD Energy Limited. With a market capitalisation of $70 million, CBD Energy is for now too small for our large cap investment portfolio. However, this company is leveraging a very powerful driver of business in China – relationships and connections. Both Chairman Mark Vaile and CEO Gerry McGowan have very strong credentials and CBD is aggressively building its position with several Chinese clean energy heavyweights.

CBD's success is a long way from being proven, but the multiple mutual benefits suggest the company is moving strongly in the right direction, particularly at a time when domestically-focused clean energy companies are finding the constantly shifting Australian regulatory regime a massive impediment. CBD has announced strategic alliances with the Baoding Tianwei Group (a Chinese state-owned enterprise) and the now Hong Kong listed China Datang Corporation Renewable Power Co, Chinese solar and wind-focused majors respectively.

The size disparity is stark – so why would two Chinese giants seek an alliance with a newly established Australian minnow? To our way of thinking, it is because CBD has four key attractions to its Chinese partners. Firstly, CBD Energy offers a nimble and non-aligned Australian-based clean energy firm. In the Australian context of an energy industry dominated by majors such as Origin, Santos, Woodside and AGL, which all predominantly focus on gas, CBD Energy has no legacy fossil fuel assets. Secondly, given the fluid regulatory regime for energy in Australia, CBD Energy is currently outward-looking. With an expanding presence in China, Thailand and Italy, CBD has strong growth aspirations. Thirdly, China has a great desire to build solar and wind brands and downstream business activities outside of China, but nationalistic fears make partnering with an Australian firm strategically sensible. Finally, clean energy developments are long term in nature and very capital intensive. Over the past year, China Development Bank (another state-owned enterprise) has provided its clean energy champions virtually unlimited lines of credit to fund international expansion ($US38 billion at last count). To date, these debt facilities remain almost entirely undrawn. So we will watch events unfold with real interest.

Tim Buckley is a Managing Director and Portfolio Manager at Arkx Investment Management

Disclaimer: Arkx Investment Management (Ark – x) focuses its investment approach on a small portfolio of high conviction stocks in the listed global cleantech universe. It looks for proven performers with world leading technologies backed by strong balance sheets and priced on sensible valuation metrics. While Arkx holds a long position in Prysmian, nothing in this article should in any way be considered as investment advice.