Pat McKeough responds to many requests from members of his Inner Circle for specific stock advice as well as questions on investment strategy and the economy. Every week, his comments and recommendations on the most intriguing questions of the past week go out to all Inner Circle members. And each week, we offer you one of the highlights from these Q&A sessions.

A: Northland Power Inc. (symbol NPI on; 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 640 megawatts (400 megawatts net to Northland) under construction and another 456 megawatts (348 megawatts net to Northland) with awarded power contracts.

One development with a long-term power deal 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. If you include an 80-million-euro loan Northland provided, this investment is worth $557 million (Canadian).

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.

Nordsee wind project starts with 10-year deal as Germany phases out nuclear power

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%.

This project’s first phase, Nordsee 1, is a 332-megawatt (282 megawatts net to Northland) wind farm in the late stages of development. It will cost 1.2 billion euros to build, of which Northland’s share is 1.02 billion euros (1 euro = $1.36 Canadian). This phase has a 10-year deal to sell its power under Germany’s feed-in tariff program. It should begin operating by the end of 2017.

Northland plans to build two additional phases over the next decade, Nordsee 2 and Nordsee 3, when it secures the necessary subsidies from the German government. Together, these two projects would produce 670 megawatts.

The long-term outlook for the Nordsee projects 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 December 31, 2014, Northland’s revenue rose 8.0%, to $188.2 million from $174.3 million a year earlier. Free cash flow (operating cash flow minus capital expenditures) also gained 8.0%, to $41.1 million from $38.1 million. Free cash flow per share was unchanged at $0.28 on more shares outstanding.

These gains are mainly from several projects the company recently started up. In June 2013, it began operating its $677-million, 260-megawatt natural-gas-fired plant in North Battleford, Saskatchewan; Northland has already sold this facility’s power under a 20-year deal. It also started up the first six of 13 Ontario solar farms in 2013.

In 2014, the company completed its 60-megawatt McLean’s Mountain wind farm on Manitoulin Island, Ontario. This $190-million project has sold all of its power under a 20-year contract.

Northland needs to successfully complete its new projects to keep increasing its revenue and cash flow. Still, its operations are spread across four separate regulatory areas, and its long-term contracts give it stability.

The company pays monthly dividends of $0.09 a share, for a 6.3% annualized yield. In 2014, dividends accounted for 95% of its free cash flow, down from 101% in 2013. If you exclude shares issued under Northland’s dividend reinvestment plan, the 2014 cash payout ratio falls to 70%.

Inner Circle recommendation: HOLD.