Wind, solar, and other renewable energy markets and industries continue to grow at faster rates than those of their respective national economies. Yet, in large part, continued development of their businesses, their staying power, or financial sustainability — whether they are involved in wind, solar, geothermal or other industry segments — remains in doubt. This poses serious problems for customers and market demand.
Wind turbines, solar panels, and other clean technologies are built to provide decades worth of clean, renewable energy. Issuing warranties on these products is common practice, but how confident can customers be that vendors will be around as long as their products and warranties. It’s a vexing problem, yet this is the case even when it comes to some of the leading, or formerly leading, names in their respective businesses.
Take India’s leading wind turbine manufacturer Suzlon, for instance. India’s wind power market and renewable energy industry have grown tremendously in recent years, driven by the enactment of renewable energy legislation, targets, and incentives, as well as the establishment in 2006 of the top-level government Ministry of Renewable Energy. Though still largely dependent on imported fossil fuels, India’s wind energy market is now the fifth largest in the world. Some 2,400 MW of wind power were expected to be installed in 2011-12, adding to an accumulated total of 16,179MW as of the end of January this year. Suzlon’s been a prime beneficiary — yet, the company’s been on the verge of default and possible insolvency.
Back from the Financial Brink
Fortunately for Suzlon, its recent operating and financial performance has improved bankers and investors’ confidence. A group of some 20 banks has stepped up and pledged to loan the company as much as $300 million. Facing convertible bond redemptions of $358 million on June 12, and another round of redemptions in October, the loans bring Suzlon back from the brink.
On May 25, Suzlon reported fiscal year 2012 revenue grew 18%, to $3.75 billion, while its cash flow, as measured by EBITDA (earnings before interest, taxes, depreciation and amortization), jumped 74%, or 274 basis points (2.74%). The jump in EBITDA was due to a change in accounting policy, however. Management decided not to align the revenue recognition policy of REpower, its main international subsidiary, with that of the parent company. Had they done so, its EBITDA margin growth would have shrunk, The Economic Times of India reported.
Looking forward, the wind turbine manufacturer’s order book grew to $7.4 billion, its highest level ever. Management expects to see revenue of around $4.8 billion in 2013, while improving EBIT cash flow margin to 6%.
In addition to securing the loan pledges, management has had to take some additional steps it might not otherwise have taken, however. In April, Suzlon announced it would generate some $40 million in cash through the sale of a block of wind energy assets, the majority of which are located in the southern Indian state of Tamil Nadu.
“I am pleased to announce that we are divesting in certain non-core assets and are set to raise approximately US$40mn as per our plan outlined in February this year. This is a modest – but important – step forward in our strategy to optimize our capital structure and meet our repayment obligations in this year,” commented CFO Kirti Vagadia.
“In addition to divesting these non-core assets, we believe our consistently improving business performance and outlook, particularly our strong revenue visibility for FY13, puts us in strong position as we begin the new fiscal.”
A Wind Energy World Leader Struggles for financial Survival
Suzlon’s quickly forged itself into a major player in the global wind power market. The announcement of loan pledges and its recent performance will no doubt prove reassuring to its growing customer base, which directly or indirectly extends to national governments, such as that of India and South Africa, embarking on ambitious renewable energy development programs.
Just last week, Suzlon was chosen as the preferred wind turbine supplier by Cennergi, a 138-MW wind power project and joint venture between South Africa’s Exxaro Resources and Tata Power Co. Ltd., India’s largest utility. Per the terms of the as yet unfinalized engineering, procurement and construction (EPC) contract, Suzlon is to supply 66 of its S97-2.1MW wind turbines for the project, which is scheduled to start construction in South Africa’s Eastern Cape Province early next year.
Nonetheless, Suzlon remains on the fine edge dividing financial sustainability from default and possible bankruptcy. Its debt burden totaled nearly $2.1 billion as of the end of March. Management continues to pursue a variety of options to restructure its capital base, including selling more non-core assets and issuing more equity or additional debt. Hence, as the Economic Times wrote, “investors and bondholders will be anxiously waiting to see whether it will eventually manage to fulfill its commitment.”
The same can be said of growing numbers of wind and renewable energy companies across the international landscape. Europe’s been the world leader when it comes to installing wind and renewable energy, instituting innovative, market-based mechanisms to stimulate and foster demand. Facing another recession, European countries are pulling back the Feed-in Tariff rates that have been the key growth factor, however.
In the midst of its own debt problems and a slow, still fragile recovery, the U.S. Congress appears unable and unwilling to extend key wind and renewable energy investment and production tax credits. With the economies of its largest export markets weakening, and concerned about rising inflation, growth has also slowed in China. As a result, things are likely to get worse before they get better. More economic carnage can be expected across the renewable energy marketscape barring significant new impetus to stimulate demand.