Union funds to bail from flagship renewable energy investment

Industry Funds Management, one of the key investment vehicles established by union-based superannuation funds, has reportedly decided to sell its flagship investment in renewable energy, Pacific Hydro.

The Australian Financial Review, in its market gossip section Street Talk, reported on Thursday that Bank of America Merrill Lynch and Credit Suisse had been retained by IFM to sell Pacific Hydro, an asset the paper said could be worth $2 billion. (See link here, subscription required).

The sale commission comes at an interesting time for the renewable energy industry in Australia, where investment in large-scale renewables – the core business of Pacific Hydro – has come to a standstill due to the Abbott government’s attempt to wind back the renewable energy target by nearly half.

According to data compiled by Blomberg New Energy Finance, only one large-scale project got investment in the last six months in Australia, a $6 million pilot project for new floating solar technology. There were no new investments in wind farms or large-scale solar.

The decision to sell underpins why many in the renewable energy industry are keen for a bipartisan agreement on a revised renewables target. They argue that any agreed target is better than none at all, and any reduced target could be raised again if Labor wins the next poll. But the industry is split down the middle on the strategy.

So far, negotiations have failed. The Clean Energy Council, which argues no cut is justified, has proposed a compromise figure of 33,500GWh, a near 40 per cent cut from the current target of 41,000GWh. It now has the support of other industry groups and Labor.

However, the Abbott government is refusing to budge above its nominated level of 32,000GWh, citing increasingly bizarre reasons, such as the inability to build that much renewable energy. It says it wants, instead, an agreement with cross-bench Senators.

While many in the cross bench are anti-wind, at least three Senators stand in the way of a deal. And financiers say any such deal was unlikely to be considered high enough to encourage investment.

Pacific Hydro, however, will need some policy clarity if it is to achieve anything more than a fire-sale price.

And it is a crucial time for other companies, too. Senvion, Acciona and Vestas – who, like Pacific Hydro and Infigen are all senior members of the CEC – have all warned that investment will move offshore and Australian projects abandoned permanently if the issue is not resolved.

Pacific Hydro and Infigen have already brought Australian investments to an effective halt. Pacific Hydro moved its main corporate base to South America, where it has been investing in Brazilian wind projects and Chilean hydro projects.

However, the company returned a $665 million loss last year, and two of its most prominent directors stood down, Garry Weaven and Brett Himbury. According to the AFR, the last annual report, in 2012/13, revealed revenue of $224.2 million and $913.4 million in shareholders’ equity.

IFM took full ownership of the formerly listed Pacific Hydro in 2005, at a cost of more than $900 million. IFM in turn is owned by 30 industry (union-based) super funds, which represent around 5 million people.

It is not the first time that IFM has sought buyers for Pacific Hydro. In 2009, it tested the market for buyers in a minority stake to help fund the investments in the new renewable energy target. At the time, it hoped to crystallise a valuation of $2 billion.

The sale offer was subsequently withdrawn, but the market for renewables is now a lot tougher in Australia, with the RET facing uncertainty and likely to be cut. PacHydro has more than 1,500MW of projects in its pipeline, but is unlikely to be able to find the funds to develop that portfolio without financial support. Last month, Pacific Hydro said it was cutting one-quarter of its staff.

A 1,500MW portfolio of large-scale solar projects, held by US-based Recurrent Energy, was recently sold to Canadian Solar as a free option as part of a broader sale.