BREAKINGVIEWS-Apollo cashes in on Orsted’s offshore wind angst

By Yawen Chen

LONDON, Nov 4 (Reuters Breakingviews) - Orsted’s ORSTED.CO latest asset sale shows how the green energy pioneer has become a price-taker in its own transition. The $24 billion Danish group is selling half of its giant offshore wind farm in the UK to Apollo Global Management APO.N for 39 billion Danish crowns ($6 billion), easing pressure on its stretched balance sheet and on a credit rating already hanging by a thread. But Apollo’s terms make clear who’s getting the better deal.

Hornsea 3, located 160 kilometres off the Yorkshire coast, is enormous. With a capacity of 2.9 gigawatts, it will generate enough power for more than 3 million British homes when completed around 2028. Yet it also carries big risks for Orsted. In August, S&P Global Ratings cut the company to BBB-minus, the lowest rung of investment grade, after it failed to sell stakes in U.S. wind farms and warned that delays in “farm-downs” - selling equity in large projects to partners - were straining its finances. The agency cautioned that if Orsted failed to offload half of Hornsea 3 by the end of 2025, another downgrade could follow.

Apollo is capitalising on the Danish group's plight. Its contribution does admittedly cover roughly half of Hornsea 3’s cost, giving Orsted early funding and helping avoid a repeat of the sort of crunches it suffered with various U.S. schemes. But Apollo also gets most of the upside from the deal, with little of the risk.

For the first three years after completion, cashflows will be split evenly. Then, for nearly two decades, Apollo will take about 70% of them, covering the project’s most lucrative phase during which government subsidies shield the risk to payments from gyrations in the market price of electricity. Only after year 31 will Orsted reclaim nearly all the income.

That setup suits Apollo. The U.S. investor has $840 billion of assets and is keen to buy long-term, stable cash flows to back the insurance liabilities it manages. A giant wind farm with the predictability of government-backed revenue streams offers exactly that: steady, bond-like returns without the headaches of cost overruns or construction delays - these will remain headaches for the Danish group's chief executive Rasmus Errboe.

Orsted had warned during its equity raise that such “asymmetrical” deals were coming. It will still book 50% of Hornsea 3’s EBITDA over the entirety of the project's life, and the sale moves it closer to its 35 billion-crown asset-sale goal. But Citi analysts reckon the net present value of the cashflows Orsted earns will be 21% less than under a normal 50-50 split in a project lasting 35 years. There’s no mistaking who caught the better breeze.

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CONTEXT NEWS

Denmark's Orsted said late on November 3 it agreed to sell a 50% stake in Britain's Hornsea 3 offshore wind farm to New York-listed Apollo Global Management for around 39 billion Danish crowns ($6 billion).

Apollo's investment includes a 50% stake and a commitment to fund 50% of the project's remaining construction costs, the company added.

Orsted shares were flat at 115 Danish crowns as of 0947 GMT on November 4.