A jumbo hydropower IPO lured investors with an appetite for green investments

Autor: Article based upon analysis from Reuters Breakingviews | Link: Hydropower IPO tests appetite for weather risks
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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 6.5 gigawatts of power capacity from 188 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, its closest competitor, and well above the 20% at German utility RWE.

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.

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CEO Bogdan 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.

Hydro power had the highest share of clean energy production in the last decade. Note: Share of cumulative power capacity by technology Source: International Energy Agency | A.F. Alias | Breakingviews | June 28, 2023