ELIA: Taking equity stake in AWC Project, US

Yesterday, after market, Elia announced it will join Google, Marubeni, Good Energies and Antlantic Grid Investments in the Atlantic Wind Connection project for the development of the first high voltage direct current offshore backbone in the US, that will enable the connection of 6,000 MW of offshore wind produced off the coast of New Jersey, Delaware, Maryland and Virginia.
The backbone is expected to be 556km long and its development will be divided into five segments (A, B, C, D and E) with a budget estimated at $ 5.5bn. Elia (via Eurogrid International, in which Elia holds a 60% stake) acquired a strategic 10% minority participation in the first phase and 5% on the subsequent phases. The first segment (A, in which Eurogrid International takes a 10% stake) is worth approximately $ 1.8bn, of which $ 540m equity. Elia’s equity investment in segment A corresponds to $ 540m*10%*60% or $ 32.4m (€ 22.9m).
In addition, Elia entered into a long-term consultancy contract with the AWC Project developer, Atlantic Wind Developer. Under this contract, Elia will bring to the AWC project its expertise in the design and development of offshore electricity highways in Europe.
The project still needs approval (by PJM Interconnection), which is expected by the end of 2012/2013. If approved, the project is expected to become operational by 2016/17.
The activities are fully regulated but allow for more favourable returns than in Europe (assuming 60% equity financing, allowing a 12.59% return on the equity part). In addition, the activities will be put in a holding structure (1/3 debt financed). In addition, the regulator allows for an immediate return (hence, return on capitalised expenses as incurred).

Conclusion:
While this is a project on the longer term (expected to become operational in 2016 at the earliest), we highly welcome the announcement. The project not only will yield attractive returns but especially is to become a nice reference in the offshore market for Elia.
In addition, RWE yesterday announced it is selling a majority stake in its transmission network Amprion (retaining a 25.1% stake). This transaction suggests a sale at roughly 1x RAB while Elia acquired 50Hertz at a 40% discount. Elia’s current valuation (assuming Elia Belgium is correctly valued), assumes a 30% discount for 50Hertz or a theoretical value for Elia of about € 33 per share. Hence, we regard the RWE announcement as supportive news.