INNERGEX RENEWABLE ENERGY INC. $15(Toronto symbol INE; High-Growth Dividend Payer Portfolio, Utilities sector; Shares outstanding: 108.6 million; Market cap: $1.6 billion; Dividend yield 4.4%; Dividend Sustainability Rating: Above Average; www.innergex.com) operates 31 hydroelectric plants, 21 wind farms and one solar power field. The company gets 52% of its power from hydro, 45% from wind and 3% from solar. It has a total generating capacity of 1,093 megawatts.
Innergex began operating in 1990, but waited until 2003 to sell shares to the public (as Innergex Power Income Fund). In 2010, the fund converted to a regular corporation.
With the April 2017 payment, Innergex raised its quarterly dividend by 3.1%, to $0.165 a share from $0.16. The new annual rate of $0.66 yields a high 4.4%.
Prudent expansion strategy
The company has steadily expanded its operations in the past few years. To cut its risk, Innergex makes sure it has firm long-term power-purchase contracts in place before it starts to build, or buy, new plants.
Thanks to those new operations, the company’s revenue jumped 65.7%, from $176.7 million in 2012 to $292.8 million in 2016.
Innergex uses hedging contracts to lock-in interest rates on its debt. However, gains and losses on those contracts tend to distort its earnings. As a result, the company lost $0.03 a share (or a total of $5.4 million) in 2012, but earned $0.43 a share (or $48.2 million) in 2013. It then lost $0.63 a share (or $54.9 million) in 2014, and $0.37 a share (or $48.4 million) in 2015. Earnings recovered to $0.28 a share (or $32.0 million) in 2016. .
Due to those distortions, most investors prefer to focus on Innergex’s cash flow, which improved from $0.70 a share in 2012 to $1.00 in 2014. Cash flow per share dipped to $0.99 in 2015, but rose 12.1% to $1.11 in 2016.
Innergex recently paid $24.2 million for 69.55% of two wind power plants in France. The new facilities have 43 megawatts of generating power and should contribute $14.5 million to the company’s annual revenue.
In October 2017, Innergex agreed to buy Alterra Power Corp. (Toronto symbol AXY) for $1.1 billion (25% in cash, 75% in stock). It expects to complete the purchase in early 2018.
Alterra operates eight projects (three hydro, two wind, two geothermal and one solar) in Canada, the U.S. and Iceland. It also plans three more projects (one each for wind, hydro and solar); it has another three in advanced stages (two wind and one geothermal).
Alterra shareholders will own 19% of the combined firm. The new operations will help Innergex diversify geographically, both in the U.S. and Iceland. It also adds a new energy source: Icelandic geothermal plants.
High debt loads typical for power utilities
The company will have borrow most of the cash it needs to buy Alterra. That will push up its long-term debt of $3.3 billion (as of September 30, 2017), which is already a high 2.1 times its market cap. However, steady revenue streams from Alterra’s facilities will help it pay down that debt.
The acquisition should increase Innergex’s projected cash flow, from $1.42 a share in 2017 to $1.81 in 2018. The stock trades at just 8.3 times that 2018 forecast.
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