Recently a Member of Pat McKeough’s Inner Circleasked about a Canadian power company that is getting a big boost from the German government. The key is Germany’s decision to phase out nuclear facilities and subsidize renewable sources like wind power.
Northland Power owns controlling interests in three major wind farms in the Netherlands and the North Sea. Pat notes that the company’s debt remains high and that its dividend drains off a good deal of its free cash flow. On the other hand, revenue and cash flow are rising thanks to a recently-completed project and the company is strengthened by long-term contracts.
Q: Pat: Can I have your recommendation on buying shares of Northland Power? Thank you.
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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.
Northland owns, or has a stake in, 1,754 megawatts of generating capacity, with an additional 584 megawatts under construction.
The company owns a 60% stake in Project Gemini, a 600-megawatt wind farm (Northland’s share is 360 megawatts) located off the coast of the Netherlands. Gemini reached completion in April 2017. It has a 15-year deal to sell its power to the Dutch government.
As well, Gemini owns 85% of Nordsee One, a 332-megawatt offshore wind farm (Northland’s share is 282 megawatts) also located in the North Sea. Nordsee One has a 10-year deal to sell its power in Germany under controlled rates.
In August 2017, Northland acquired 100% interest in the Deutsche Bucht, a 252-megawatt wind project located off the coast of Germany in the North Sea. Northland expects the project to be completed by the end of 2019. Deutsche Bucht will receive a tariff subsidy for roughly 13 years under the German Renewable Energy Act. Its total estimated project cost is $1.9 billion.
With subsidies from the German government, Northland plans to build two additional phases of the Nordsee project over the next decade, Nordsee Two and Nordsee Three. Together, those two projects are expected to produce 670 megawatts.
The long-term outlook is positive for these North Sea projects as Germany plans to phase out use of nuclear power by 2022. By 2025, at least 35% of Germany’s electricity is expected to be generated from renewable sources and 80% by 2050.
Energy stocks: Recently raised, dividend now yields 5.2%
Thanks to new power projects and acquisitions, Northland’s revenue rose 208.9%, from $356.1 million in 2011 to $1.1 billion in 2016.
Cash flow soared 341.3%, from $54.9 million in 2011 to $242.3 million in 2016. The company sold shares to help finance its construction projects. As a result, cash flow per share fell 22.5%, from $0.71 in 2011 to $0.55 in 2012. Cash flow per share then improved to $1.05 in 2013 and $1.12 in 2014. It then dropped to $1.09 in 2015, before rising to $1.40 in 2016.
In the three months ended September 30, 2017, Northland’s revenue rose 11.1%, to $295.2 million from $265.7 million a year earlier. The increase was primarily due to revenues from its Gemini and Nordsee One projects.
The company’s free cash flow (cash flow less capital expenditures) increased 41.1% in the quarter, to $45.3 million from $32.1 million. On a per-share basis, free cash flow rose 36.8%, to $0.26 from $0.19, on more shares outstanding. This increase was primarily due to contributions from its Gemini project.
Northland’s long-term debt of $7.1 billion is a high 1.8 times its market cap. However, the cash flow increases from its Gemini and Nordsee projects will allow the company to pay down that debt over the next few years.
In the third quarter of 2017, the company’s dividend payout equaled 104% of its free cash flow, down from 145% a year earlier. Under Northland’s dividend reinvestment plan, some investors chose shares instead of dividends, so its cash payout ratio for the quarter was a more reasonable 73%.
The company will raise its monthly dividend by 11.1% with the January 2018 payment, to $0.10 from $0.09. The stock now yields a high 5.2%.
Northland has successfully completed its Nordsee One project and has seen an increase in its revenue and cash flow. Its long-term pricing contracts will provide cash flow stability as Northland continues with construction of its Deutsche Bucht project and plans for its Nordsee Two and Nordsee Three projects.
The stock trades at 12.3 times its forecast 2018 free cash flow of $1.86 a share
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. That limits its risk. Its long-term contracts also provide stability.
Inner Circle recommendation: Northland Power is okay to hold.
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