Wind Denmark Energy Annual Event 2015

Financing of companies within the wind industry from a bank perspective

Torben André Petersen, Head of Branch RegionNordea

22 September 2015

The wind industry is growing but is also facing challenges- the industry is volatile and strongly influenced by political and governmental decision-making processes

Strong industry

drivers and growth

opportunities

• Clean industry fitting well into overall global political agenda: Reduction of emission of green house gasses

• High growth rates and positive prospects in many major markets, including China etc. • Technological development and innovation

• The increasingly lower cost of wind generated electricity

• State tax and financial incentives• However, substitution risk by alternative energy sources

Volatile and political

influenced industry

• The players face significant fluctuations in turnover and earnings as well as share price development

• Very large investments – long decision-making processes increase uncertainty• Political issues

• US: PTC-schemes for renewable energy

• Dependence on governmental subsidies

• Market, wind and environmental risks

Small and medium sized companies as sub-suppliers- sub-suppliers to the wind industry should strive to achieve a high degree of financial robustness

Value chain pressure

• The sub-suppliers in the wind industry are often family owned, small and medium sized companies

• One product company and/or one customer company

• Customers are typically large (wind) companies

• Seeking outsourcing opportunities in order to be asset light

• Increasing value chain pressure

• Low price and margin pressure from large customers

• Short deadlines of delivery

Financial strength

• Cost-efficient and flexible production setup

• The financing conditions and payment terms are under pressure from customers as well as suppliers

• Requirement of enhanced financial strength and strong balance sheet

High business risks in the industry- the risk profile of the industry requires a strong capital structure and balance sheet of the company

Strong capital structure

• The nature of the industry - volatility and political issues - implies a strong capital structure in order to absorb uncertainties and fluctuations in earnings

• Equity financing • The owner(s) and external equity investors• Willingness to share profits with your external investors

• Debt financing• Credit facilities on a daily basis (bank)• Working capital finance (bank)

• Other credit lines and financial instruments (bank and other)

Management and reporting

• Strong management • Extensive and deep knowledge about the industry and dynamics

• Financial reporting: Budget / forecast, including P&L, balance sheet and cash flow statements on a regular basis

• Financial policy and risk management

• Financial covenants

Debt capacity is determined by several factors - but a number of the factors could be influenced by the company itself

Good corporate governance

Competition and barriers of entries

The industry

Business model

Country and debtor risks

Finance policy andRisk management

Produktansvar

Private consumption and investments

Debt capacity

Earnings and cash flow (accounts and

budget)

Capital basis and ownership structure

A strong capital structure deemed important especially in industries where:• Competition is fierce, earnings

are challenged and low profit margins

• Significant fluctuations in earnings and working capital

• Important to maintain a high operational and financial freedom

Political issues / duties

Predictability and transparency

Working capital(fluctuations)

Internal factorsExternal factors

Debt capacity

• Debt capacity is not just a question of financial ratios, but a level which is determined by many factors

The industry

EBIT interest coverage

NIBD/EBITDA Equity ratio0

20406080

100120140160180200

DKKm

Strong earnings and balance sheet is crucial- debt capacity is very dependent on transparent earnings and strong cash flow

Ne

t in

tere

st-b

ea

ring

d

eb

t

GældskapacitetDebt capacity based on key financial figures

Debt capacity and capital structure

• A significant debt capacity is crucial for achieving a strategic and operational freedom, and allows the company even better to cope with unforeseen events and changing market conditions

• Seasonal fluctuations and significant changes in working capital may also mean that there must be a certain cash position

NIBD

Level is too highLevel should not be increasedLevel is appropriate

Summary - Compelling industry characteristics- growing industry which due to the risk profile demands a strong financial position

Strong capital structure

• Strong capital structure is needed due to the nature of the volatile industry, demanding a high equity ratio

Strong industry drivers

• On the overall global political agenda: Reduction of emission of green house gasses

Volatile and political influenced

• Volatile industry in terms of turnover and earnings and globally political influenced

Value chain pressure

• Increasing value chain pressure from customers and suppliers

Financial strength • Enhanced financial strength and strong balance sheet

Debt capacity• Although debt capacity is more than number, it is very

dependent on transparent earnings and strong cash flows