OTPP and PSP Bet on Clean Energy?

The Ontario Teachers' Pension Plan just put out a press release, Ontario Teachers’, PSP Investments and Santander partner on global renewable energy and water portfolio:
Ontario Teachers' Pension Plan (Teachers') and the Public Sector Pension Investment Board (PSP Investments), two of Canada's largest pension funds, today announced an agreement with Banco Santander, S.A. (Santander) to jointly acquire a portfolio of renewable energy and water infrastructure assets. The assets, currently owned solely by Santander, will be transferred to a new company owned equally by all three parties.

The transaction, which is expected to close within the first half of 2015 subject to receipt of customary regulatory approvals, values the assets in excess of US$2.0 billion. Santander, PSP Investments and Teachers' intend to invest significant additional amounts in the new company over the next five years.

The portfolio includes wind, solar and water infrastructure assets located in seven countries that are operating or in development. The portfolio will be managed by an experienced team led by Marcos Sebares.

"We are excited about partnering with Santander and PSP Investments and look forward to supporting management in growing this company significantly in the coming years. This investment directly supports our focus on investing in platforms that provide access to development opportunities globally," said Andrew Claerhout, Senior Vice-President, Infrastructure at Teachers'.

"This investment fits well with our strategy of deploying capital in sizeable opportunities that offer long term revenues and growth potential along with solid partners. It also allows PSP Investments to continue to develop its portfolio of private energy assets while contributing to environmentally sustainable energy production," said Bruno Guilmette, Senior Vice-President, Infrastructure Investments at PSP Investments.

"Over the last seven years in Santander, the business has become one of the leading developers of renewables projects around the world, having invested over US$2 billion in renewable energy and water projects. A combination of Santander, which has consistently been voted the greenest bank in the world, and two investors, such as PSP Investments and Teachers', who have a long history of sustainable investing, marks the beginning of a new phase in the development of our company into one of the world's leading renewable energy investment companies. We have a strong balance sheet and long term investment strategy, with a mandate from shareholders to grow the new company over the next five years," said Marcos Sebares, CEO of the new entity.

Teachers' investment was led by its Infrastructure Group, which manages a global portfolio of C$11.7 billion of direct infrastructure investments, including water and wastewater, electricity distribution, gas distribution, airports, power generation, high-speed rail and port facilities.

PSP Investments' investment was led by its Infrastructure Group, which manages a global portfolio of C$6.0 billion of direct infrastructure investments, including power generation, airports, toll roads, port facilities, electricity and gas transmission, and water.

Santander's sale was led by its Asset & Capital Structuring (A&CS) team of 30 people specialized in infrastructure equity investments through its global footprint in Spain, Italy, UK, US, Brazil and Mexico. This team will manage the acquired portfolio and will lead investments in the new global renewable energy and water platform. Macquarie Capital acted as financial advisor to Santander.
This is a big deal and I expect to see more deals like this in the future as more European banks shed private assets to meet regulatory capital requirements. In doing so, they will be looking to partner up with global pension and sovereign wealth funds that have very long-term investment horizons. 

The Spaniards are global leaders in infrastructure projects (Germans and French are also top global infrastructure investors led by giants like HOCHTIEF and VINCI). When it comes to renewable energy, Spain is the first country to rely on wind as  top energy source:
Spain is the first country in the world to draw a plurality of its power from wind energy for an entire year, according to new reports by the country’s energy regulator and wind energy advocacy group Spanish Wind Energy Association (AEE)
Wind accounted for 20.9 percent of the country’s energy last year — more than any other enough to power about 15.5 million households, with nuclear coming in a very close second at 20.8 percent. Wind energy usage was up over 13 percent from the year before, according to the report.

The news is being hailed by environmental advocates as a sign that Spain, and perhaps the rest of the world, is ready for a future based on renewables. But the record comes at the end of a very rocky year for Spain’s renewable energy sector, which was destabilized by subsidy cutbacks and arguments over how much the government should regulate renewable energy companies.

Despite the flaws in Spain’s system, the numbers are promising for green energy fans. The renewable push brought down Spain’s greenhouse gas emissions by 23 percent, according to another industry report from Red Electric Espana (REE).

Spain also has one of the largest solar industries in the world, with solar power accounting for almost 2,000 megawatts in 2012. That’s more than many countries but still just a fraction of the energy produced by wind in Spain. In 2013, solar power accounted for 3.1 percent of Spain's energy, according to the AEE report.

By contrast, the U.S. produced only 9 percent of its energy with renewable sources last year, and wind accounted for only 15 percent of that.

But as the world reaches for more renewables, Spain’s record-breaking year is also a cautionary tale.

Going into 2014, it’s unclear how wind will survive steep government cutbacks.

At the moment, Spain heavily subsidizes its renewable energy sector, which costs billions of dollars in a country still in the depths of a financial crisis. When the country tried to raise individual rates for renewables, people complained bitterly and the government backed off, leaving the country with a nearly $35 billion renewable energy deficit.

The idea that renewables can’t survive without heavy subsidies might be cooling off the market in Spain and elsewhere, bringing the future of renewable growth into question. Global investment in renewable energy slipped 12 percent last year, despite the fact that the European Union and the UN have set ambitious energy goals for the next decade.

It remains unclear how the world will meet those goals given the spending-averse climate of most Western governments, but there’s no doubt they’ll be looking to Spain in 2014 to see if it can be done without going broke.
Indeed, over the summer, Spain's government dealt a death blow to renewable energy:
In the latest move to draw down Spain’s energy sector debt, Madrid unveiled a new clean energy bill this week that will cap earnings on power plants as well as introduce retroactive actions, earning a quick rebuke from the country’s already ailing renewable sector. According to a Bloomberg report, clean energy “generators will earn a rate of return of about 7.5 percent over their lifetimes,” adding that the rate may be revised every three years and is based on “the average interest of a 10-year sovereign bond plus 3 percentage points.” The new plan will be retroactively applied to programs active from July 2013.

The new plan was presented by Spain’s Industry Minister Jose Manuel Soria as a necessary evolution of the country’s renewable energy subsidy system, which he said would have gone bankrupt if no changes were made. Since taking over the country’s leadership in 2011, the right-leaning Partido Popular has continued to expand on earlier efforts to chip away at the country’s renewable energy support programs, which many critics have called unsustainable. Once hailed as one of Spain’s most viable sectors for strong growth, renewable energy has suffered under a steady restructuring of government support programs.

In addition to slowing the country’s solar and wind growth, the restructuring garnered legal action on the part of both international investors and domestic trade organizations, the latter of which has appealed to the European Commission for some level of protection from tariff and agreement reductions. Early cuts resulted in legal action against Madrid from over a dozen investment funds with stakes in the country’s solar market, adding to the unease of foreign investors.
I can tell you the cash strapped Greek government did the exact same thing on solar projects in Greece. One of the biggest risks in infrastructure projects is regulatory risk as these governments can change regulations at a moment's notice, severely impacting the projected revenues.

What are the other risks with infrastructure projects? Currency risk and illiquidity risk as these are very long-term projects, typically with a much longer investment horizon than private equity or real estate.

But both PSP and Ontario Teachers' are aware of these risks and still went ahead with this investment which meets their objective of finding investments that match their long-term liabilities. The Caisse has also been buying wind farms but I am wondering whether they're blowing billions in the wind.

Interestingly, this is the second major deal between PSP and OTPP this year. In November, I wrote about how they are nearing a $7 billion deal for Canadian satellite company Telesat Holdings Inc.

And on last week, Bloomberg reported that Riverbed Technology (RVBD), under pressure from activist investor Elliott Management Corp., agreed to be acquired for about $3.6 billion by private-equity firm Thoma Bravo and Teacher’s Private Capital.

In fact, Ontario Teachers' has been very busy completing all sorts of private market deals lately, all outside of Canada, which is smart.

Let me end with a story that inspired me this Christmas. I was struck by a CTV news clip last night, Hundreds rally to help paralyzed Alberta boy return home from hospital:
This holiday season, hundreds of people are donating money to help a paralyzed 13-year-old boy return home after months in hospital.

Lincoln Grayson has been at the Stollery Children's Hospital in Edmonton since a bicycling accident on July 4 left him paralyzed from the chest down.

"I'm grateful that my accident wasn't too severe that I don't have any brain damage," said Grayson who is one of seven children in his family. "I'd like to just be with the whole family."

The accident happened during a bike ride with his brother just six days after the family moved to Beaumont, Alta. from Lethbridge.

"We were just out exploring Beaumont," said Grayson's brother, McKay. "We just decided to go down a hill and it just didn't go so well."

Grayson flipped over the handlebars of his bicycle and landed on his face. The accident left him with several broken bones in his face and neck. Grayson, who was an athletic teenager, will likely never walk again.

"They said if he survived, he would be institutionalized for the rest of his life," said Carmen Grayson, the boy's mother. "I said no way. He's 13 years old, he's coming home."

But to bring him home, the family needs money to renovate their house to accommodate Grayson's wheelchair and other needs.

This is where family, friends, and hundreds of complete strangers have stepped in. In two weeks, Grayson's GoFundMe page has raised more than $40,000. Many of the donations have come from people in Beaumont and Lethbridge.

"It has meant the world to us," said Carmen. "We could not have done nor can we do what we're doing without the help of wonderful neighbours and friends."

For the first time since his accident, Grayson was able to spend the day at home on Saturday. His family hopes to take him home again for Christmas and eventually, on a permanent basis.

Renovations to the Grayson family home will begin in the New Year.

For now, Grayson is spending his time in hospital creating "Lincoln's 12 Days of Christmas." Each day, he films himself in his hospital bed talking about something he is thankful for, and then posts the video to his website.

"I want to share Christmas with everyone," Grayson said in his first video, struggling to speak because of the tube in his throat that keeps him breathing. "This year, my gifts will be gifts of gratitude."
Watch the CTV report and please donate to Grayson's GoFundMe page and help his family raise the funds they need to renovate their house. I wish all of you  a very Merry Christmas and Happy Holidays.