Today, Pat McKeough has an answer for a Member of his Inner Circle who wants to know whether it’s time to sell Northland Power. Northland has a large investment in wind power. It has two major projects in the North Sea that are expected to do well as Germany phases out its nuclear power plants and offers subsidies for renewable energy sources. Pat examines the process of developing and financing these projects and looks at the long-term outlook for this high-yielding dividend stock.
Q: Hi, Pat: I have some shares in Northland Power. I have made money on them, but I am wondering if I should sell. Your opinion would be appreciated.
A: Northland Power Inc. (symbol NPI on Toronto; www.northlandpower.ca) develops, builds, owns and operates natural-gas-fired power plants, wind farms, solar projects and hydroelectric facilities.
The company converted to a corporation from an income trust on January 1, 2011.
Northland owns or has stakes in 1,345 megawatts of operating generating capacity, with an additional 1,072 megawatts (692 megawatts net to Northland) under construction.
One of these developments is Project Gemini, in which Northland holds a 60% stake (purchased in May 2014). Project Gemini is a 600-megawatt (360 megawatts net to Northland) wind farm in the North Sea, off the coast of the Netherlands.
As of March 31, 2015, Northland and its partners had spent $1.7 billion on this $3.8-billion project. Gemini has a 15-year deal to sell its power to the government of the Netherlands, which cuts this investment’s risk. The project should start up in 2017.
As well, Northland recently acquired 85% of the Nordsee wind project, also in the North Sea, 40 kilometres north of Germany. RWE AG, a leading utility company, owns the remaining 15%.
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This project’s first phase, Nordsee One, is a 332-megawatt (282 megawatts net to Northland) wind farm.
It will cost 1.2 billion euros to build Nordsee One, of which Northland’s share is 1.02 billion euros (1 euro = $1.41 Canadian). This phase has a 10-year deal to sell its power under Germany’s feed-in tariff program. Construction is set to start in 2016, and it should begin operating by the end of 2017.
Northland plans to build two additional phases over the next decade, Nordsee Two and Nordsee Three, when it secures the necessary subsidies from the German government. Together, these two projects would produce 670 megawatts.
The Nordsee projects’ long-term outlook is positive. Germany is phasing out nuclear power and expects to get 35% of its electricity from renewable sources by 2020, with the goal of raising that to 85% by 2050.
In the three months ended March 31, 2015, Northland’s revenue fell 12.1%, to $201.6 million from $229.4 million a year earlier. Free cash flow (operating cash flow minus capital expenditures) declined 11.5%, to $50.2 million from $56.8 million. The company sold 17.6 million shares at $16.00 each to finance its construction costs. Due to more shares outstanding, free cash flow per share fell at a faster pace of 20.1%, to $0.33 from $0.41.
In the year-earlier quarter, Northland decided to take advantage of higher natural gas prices and sell some of its inventory of the fuel instead of using it to generate electricity. This was the main reason for the lower revenue and free cash flow in the latest quarter.
Northland needs to successfully complete its new projects to increase its revenue and cash flow. Still, its operations are spread across four separate regulatory areas, which limits its risk. Its long-term contracts also give it stability.
The company pays monthly dividends of $0.09 a share, for a 6.8% annualized yield. In the latest quarter, dividends accounted for 81% of its free cash flow, up from 63% a year earlier. However, some investors choose shares in lieu of dividends under the company’s dividend reinvestment plan, so its cash payout ratio falls to a more reasonable 60%.
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