My sister, who is a linocut artist, just finished some wind turbine prints for me.  One is below, you can check out the others at facebook.com/SarahKonradArt

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By Tom Konrad, Ph.D., CFA

With its purchase of Seajacks, Eneti (NYSE:NETI) has become the world’s largest owner of offshore wind installation vessels.  The two articles were shared with my followers on Patreon as the news came out.

Valuing the Eneti/Seajacks Combination (First published August 5th)

Eneti (NETI) just announced it is buying offshore wind turbine installation firm Seajacks.  The purchase will be with a combination of shares, cash, and assumed debt: 8.13 million shares, $299 million of assumed net debt, $74 million of newly-issued redeemable notes, and $12 million of cash.  Current Eneti shareholders will own 58% of the combined firm.

After the transaction, Eneti will have 19.36 million (common and preferred) shares outstanding, and about $416 million in debt.  Seajacks is expected to produce approximately $125 million of EBITDA in 2022.   

An Enterprise Value to EBITDA ratio (EV/EBITDA) below 10 is generally considered attractive.  At an EV/ EBITDA ratio of 8, the combined firm would be worth $1 billion, or $30/share, so the attention and revenue this transaction brings should be very good for the share price.  

The attention is particularly important… Eneti has been languishing recently as investors look elsewhere, unwilling to wait for revenue to begin after the expected delivery of its first Wind Turbine Installation Vessel (WTIV) in 2024.  Now they don’t have to.  The increased market capitalization from the additional shares should also help the combined firm attract new shareholders and analyst attention.

NETI remains my largest shareholding.

Eneti Earnings / Seajacks (first published Aug 18th)

Eneti (NETI) came out with second quarter earnings yesterday.  They made more than expected selling the last of their dry bulk fleet, but most of the discussion was about the future, and the new combination with leading wind turbine installation company Seajacks.

Seajacks is the early leader of wind turbine installation, but had been starved for new investment from its former parent companies for the last 4-5 years, so the ability to raise money through Eneti’s stock market listing makes the deal makes sense for Seajacks as well as Eneti.  (I discussed the deal from Eneti’s perspective here.

Eneti dropped its quarterly dividend from 5 cents to one cent without explanation.  Readers should not be alarmed about this, I think that now that Eneti is starting on a new chapter as an operating wind turbine installation company, it wants to set its dividend at a normal level.

In this context, “normal” means at a fraction of quarterly earnings, so that there is room to reinvest most of its earnings to fund growth and leave room for future dividend increases.

At this lower dividend level, Eneti no longer qualifies as an income stock, so I will stop purchasing shares for my Green Global Equity Income Portfolio strategy.  However, I plan to hold on to most of my current (very large) position until it gets close to what I consider fair value $30+ a share.  I think a few quarters as the listed global wind turbine installation leader should attract new investors and make that happen.

Take The Name, Too!

I thought Eneti missed a great PR opportunity when it adopted its current name to reflect the shift from its old business of dry bulk transport.   According to Wikipedia, the Eneti were three ancient peoples who lived in lands bordering the Adriatic Sea and the Black Sea.  While they were probably seafaring peoples, there is no reason for modern investors to associate the name with offshore wind.

Meanwhile, Seajacks has a great name: short, memorable, and descriptive of what the company does.  Eneti management would do itself and current shareholders a favor by taking the leading offshore wind installation name now that it is the leading owner of offshore wind installation vessels.

DISCLOSURE: Long NETI.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

The post Eneti: The New Offshore Wind Installation Leader appeared first on Alternative Energy Stocks.

By Tom Konrad, Ph.D., CFA

About a month ago, an astute reader asked me if Eneti’s (NETI) contracted Wind Turbine Installation Vessel (WTIV) would be able to operate in US waters since it will not be compliant with the Jones Act.  For those not familiar, the Jones Act requires that all transport of goods between US ports must be done by vessels built in the US, and owned and operated by US citizens.

I looked into it, and concluded that it probably could, since installing wind turbines is not transport, but rather lifting (jack-up, in the parlance), an exemption which is already used in the oil and gas industry by drilling vessels.  

It turns out I was correct in a legal sense, but not in practice.  

Normally, a WTIV both transports the turbines to the installation location, and then installs them.  According to Enerti investor relations, “There are a variety of opinions about how these components could be safely transferred on the outer continental shelf.    Many experts, and most importantly a number of field developers, are having difficulty getting comfortable with the risks involving barges and existing marine assets in US.”

Hence, Eneti’s first WTIV is most likely to be deployed in Europe or Asia.  The long lead times for large WTIVs and trend towards using larger and larger turbines for offshore wind means that the company expects to find a lease for its first vessel long before it is complete in 2024.  The company expects “to announce an employment contract for our first new-build vessel within the summer of next year, 2022.”  That contract, and the certainty it will bring to future revenues, should give the stock a significant boost when it is announced.

There is currently only one Jones Act compliant WTIV under construction in the US. This vessel is being built by Dominion Energy to suit its own anticipated needs.   Eneti is exploring contracting for its own Jones Act compliant WTIV. It is currently in discussions with potential customers and US shipyards about their likely needs to determine the best configuration of the vessel.  In order to comply with the Jones Act, Eneti will be neither the majority owner nor operator of the vessel. It is in discussions with potential partners for these roles.

Taking The Time To Get It Right

Based on the discussions so far, Eneti anticipates that this potential Jones Act compliant WTIV will have a different configuration than either its first vessel, or the one under construction by Dominion Energy (D).  Like the first vessel, Eneti plans to design the specifications in order to best meet its expected customers’ needs at a reasonable construction cost.

The process of taking extra time to nail down the best configuration of its first vessel added to the cost because of the recent large increase in steel prices.  While Eneti management anticipates the extra cost will turn out to have been worth it, I anticipate that taking a little extra time is likely to be advantageous with this second vessel if that gives steel prices time to drift down from their current lofty levels.

Conclusion

I remain enthusiastic about Eneti stock, which I believe has yet to catch the attention of most clean energy investors.  When will that happen?  It’s unpredictable.  It could be today, if a large fund manager reads this article and decides to go all in.  It could be when the first WTIV is contracted to its first customer, or when a Jones Act compliant vessel is contracted to be built.  

Timing is always uncertain.  What I am certain of is that Eneti will catch the attention of clean energy investors eventually.  For now, it is my largest holding.

Disclosure: Long NETI

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

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By Tom Konrad, Ph.D., CFA

Last week, I published this call to buy Innergex (INGXF, INE.TO) because investors had been overreacting to the losses from the February cold snap in Texas.  The stock is up since then, but still seems a decent value.

Canadian Yieldco Innergex Renewable Energy (INGXF, INE.TO) took a big financial hit from the power disruptions in Texas in March. 

It’s complex, but their financial hedges on power prices for three of its wind farms ended up creating enormous liabilities – more, in fact, than two of their wind farms are worth.  Two of their facilities also had benefits from the high power prices, but not nearly as large as the losses on the financial hedges.

Innergex claimed “Force Majeure” at the affected sites – a contract clause that would allow them out of the financial obligations of the hedges.  The counterparties rejected the claims, and now two of the claims are in court, and one is subject to negotiation between the parties.

The two claims that are in court are there because Innergex now values those wind farms (Flat Top and Shannon) at less than the financial loss on the hedges.  The worst case scenario here is that the court will decide against Innergex and allow the counterparties to foreclose on the two wind farms.  There is no additional liability to Innergex beyond the value of its financial stakes in Shannon and Flat Top.

The hearing in the Shannon and Flat Top cases was held on May 6th, and a ruling is expected at latest by May 20th.  I’ve been buying today (in the mid $15 US range) because I estimate the decline in the stock price has more than priced in the full loss of both wind farms, and the increased certainty of a ruling (even one against Innergex) should send the stock price back up.

I generally feel that investors overreact to this kind of uncertainty, so it’s often a good time to buy- especially when the financial impacts of the downside risk are limited, as they are with Innergex.

DISCLOSURE: Long INGXF

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

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By Tom Konrad, Ph.D. CFA

Here are a couple earnings notes I shared last week with my Patreon followers.

Eneti, Inc. (NETI) – formerly Scorpio Bulkers (SALT)

Eneti completed its name and ticker change on February 8th. New ticker is NETI (formerly Scorpio Bulkers (SALT), which I recently wrote about here.

Highlights from February 2nd earnings report:

• 37 of the 47 vessels owned at the 3rd quarter have been sold or have completed sale agreements.
• Net asset value is $23.94/share. Since most assets are cash or vessels held for sale, this number is basically accurate.

The stock is still a good buy at the current $20-ish per share, since it’s trading below asset value. As the market starts to value this stock based on its new offshore wind turbine installation model, I expect it to start trading at a significant multiple of book value. I will be surprised if it ends 2021 under $30.

Brookfield Renewable Secondary Offering & Earnings

Brookfield Renewable Partners (BEP) and Brookfield Renewable Corp. (BEPC) announced a secondary offering of BEPC shares, as I predicted last month. What I did not predict was that the sale was by the company’s parent, Brookfield Asset Management (BAM) so this sale will lower BAM’s stake in the company rather than raising cash for Brookfield Renewable.

It has already had the predicted effect of lowering the BEPC/BEP price premium. When I added BEP to the 10 Clean Energy Stocks list on December 31st, BEPC shares were trading at a 35% premium to BEP. Since then BEP is up 9.8% while BEPC is down 9.1%. The premium has fallen to 12%.

In the short term, I expect the premium to start increasing again in a week or two, although I doubt it will ever get back above 30%. After it recovers, we can expect more secondary stock offerings, which will drive it back down. In the longer term (after a year or so) I would expect the premium to stabilize in the 10-15% range.

If the premium falls to 5% or less because of the secondary offering, it will probably be worth selling BEP to buy BEPC, at least for shareholders with relatively small unrealized capital gains.

Brookfield Renewable also announced fourth quarter earnings last week. I’d sum it up as “Steady as she goes.” The company increased its quarterly dividend by 5% to $0.30375, at the low end of its 5% to 9% target annual increase.

Disclosure: Long NETI, BEP, BEPC, short BEPC calls

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results. This article contains the current opinions of the author and such opinions are subject to change without notice. This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

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by Tom Konrad, Ph.D. CFA

The Baltic Dry Index (BDI) is a shipping and trade index created by the London-based Baltic Exchange. It measures changes in the cost of transporting various raw materials, such as coal and steel.

Since the BDI is a measure of the income which firms that own dry bulk cargo ships can earn, changes in the BDI tend to drive changes in the stock prices of such companies.

Stock Price Correlation

Until recently, one such company was Scorpio Bulkers (SALT), one of my Ten Clean Energy Stocks for 2021 picks. The chart below shows the last 5 years, with changes in the BDI leading to changes in SALT’s stock price.

There is also one notable exception to these correlated moves in June 2020, when the company recapitalized in a secondary offering.

On August 3rd, SALT announced its new strategy of investing in the next generation of offshore wind turbine investment vessels and selling its fleet of dry bulk carriers.

As SALT’s dry bulk fleet is sold, the company’s future earnings become increasingly independent of BDI. If the market were acting rationally, the correlation of the stock with BDI should also fall over time.

We’re not seeing that.

In October, 50-ish percent moves in the BDI led to 25-ish percent moves in SALT. In January, we saw two 30-ish percent moves in the BDI, and the corresponding moves in SALT were around 10 percent to 20 percent.

Vessel Sales

In both cases, the stock moves were approximately half the size of changes in the BDI. Between the start of October and the end of January, SALT announced the sale of 22 Vessels: 7 in October, 3 in November, 6 in December, and 6 in January. The company has sold approximately two-thirds of its fleet since the new strategy was announced on August 3rd, but the stock is still following the index..

Why is BDI Still Driving the Stock?

The continued correlation between SALT and BDI is likely due to quantitative hedge funds using programmatic trading to take advantage of correlations between BDI and all dry bulk shippers. Some of these programs (which may rely entirely on machine learning) have not yet been updated (or updated themselves) to reflect SALT’s declining dependence on dry bulk shipping for its future earnings.

Timing

When a stock falls for reasons that do not have to do with its fundamentals, I call it a buying opportunity.

BDI and SALT have both fell in late January. Enough said.

DISCLOSURE: Long SALT.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results. This article contains the current opinions of the author and such opinions are subject to change without notice. This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

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by Debra Fiakas, CFA

A stream of impressive news has been delivered by wind turbine producer Vesta Wind Systems AS  (Copenhagen: VWS.CO, US OTC: VWSYF, US ADR: VWDRY) over the last few weeks.  Over the last two months the company has received orders for wind power turbines totaling 3,781 megawatts.  Customers in the U.S. appear to be quite shy, withholding their names and the final destination of the power projects. Nonetheless, the more transparent European, Chinese and Brazilian customers provide a good view on how well regarded Vestas has become.

Business has been so good Vestas is opening a new nacelle and hub assembly factory in Chennai, India.  The company already has two production units in the area that will be combined and expanded in the new Chennai facility.  Vestas plans to begin production at the site by the end of 2020.  The company has 20 factories around the world that in providing good jobs can be used to leverage local support for its wind turbine products.

Vestas has made progress in penetrating the U.S. market with a lower-cost solution called the V138 wind turbine with 3.0 megawatt capacity.  The turbine has a tip height under 500 feet, which is frequently a limitation for wind park sites in the U.S. The turbine is expected to have 30% higher energy production than an older V120 2.2 megawatt solution.

General Electric (GE:  NYSE) is Vestas primary competition in the U.S.  Both companies have had to adjust to the expiration of government subsidies for wind power.  GE’s product line offers a range of capacities from 1.7 megawatts to 5.3 megawatts.  The company has made good progress in the wind market in the U.S. and around the world.  However, Vestas remains number one in nameplate capacity.

With all this warm breeze blowing at Vestas’ back it is no surprise to find that the shares are trading at 135 times trailing earnings on the Copenhagen market and 20.38 times trailing earnings in the U.S. equity market.  Small-cap investors who frequent this blog may find the stock entirely unaffordable.  However, the 1.25% dividend yield on the shares in the U.S. market helps make the price-earnings multiple more palatable.  The stock is underpinned with exceptional financial performance:  6% net profit margin, 20% return on equity and 10% sales-to-cash conversion.

The share price has leveled off after a steep drive higher that began in 2013 as Vestas began capturing market share with new turbine products.  However, the company is just now beginning to realize the benefits of its pioneering efforts in wind power.  Some investors might see the stock as fitting well into a buy-and-hold portfolio focused on larger companies with well established operations.

Recent Vestas Orders

• An undisclosed customer ordered 420 megawatts of V120 2.2 megawatt wind turbines for a project in the United States.  The planned commissioning is late 2020.
• PacificCorp, a subsidiary of Berkshire Hathaway Energy, ordered V136 4.2 megawatt wind turbines totaling 459 megawatts that will be installed at two wind projects in Wyoming.
• Ekola Flats in Wyoming will receive V136 4.2 megawatt wind turbines totaling 228 megawatts.  The project is owned by PacificCorp.
• EDF Renewables order 249 megawatts of V120 2.2 megawatt wind turbines for its Las Majadas wind project in Texas.
• Energy supplier Fortum will use 21 V150 4.2 megawatt turbines for its project Kalax in western Finland.
• An undisclosed customer in China ordered 20 V120 2.2 megawatt wind turbines for a project that matches a hub height record in China.
• A project in the New South Wales Southern Tablelands is to receive 54 V117 4.2 megawatt wind turbines as part of an engineering, procurement and construction project.
• Vindkraft ordered 39 of Vestas V150 4.2 megawatt wind turbines for a project in the Kherson region of southern Ukraine that will reach a total 164 megawatts when completed.
• The Rio de Ventro project in the state of Rio Grande do Norte in Brazil will receive 106 Vestas V150 4.2 megawatt wind turbines.  Project developer Casa dos Ventos placed the order in early June 2019.
• Vesta won a contract auction in Denmark to supply 16 V126 4.34 megawatt wind turbines for the Overgaard 1 Wind Park in Randers Municipality in Denmark.  Project owner SE Blue Renewables  is a joint venture of Denmark’s SE energy company and PFA Pension company.
• Vestas will supply 67 V150 4.2 wind turbines to an unnamed customer in Brazil.  The turbines will be produced at Vestas’ factory in Ceará, Brazil in cooperation with the Brazilian Development Bank.
• Brazilian energy company Echoenergia order 76 megawatts of the V150 4.2 megawatt turbines for its Serra do Mel wind project in the state of Rio Grande do Norte, Brazil.
• The first order for wind turbines in El Salvador will be installed by Ventus S.A. de C.V. and Tracia Network Corp. The order is for 15 V136 3.45 megawatt turbines.
• An undisclosed customer has contracted with Vestas America for the supply and commissioning of 454 megawatts of V120 2.2 megawatt wind turbines.
• Vestas America received an order for supply and commission of V150 4.2 megawatt wind turbines for two projects being developed by an undisclosed customer.
• A mix of V110 2.0 megawatt and V150 4.2 megawatt wind turbines will be installed for an undisclosed customer by Vestas America.  The contract includes a 25-year service agreement.
• Bürgerwindpark Rauβenköge GmbH & Co. ordered 12 V112 3.45 megawatt turbines for a wind park in Schleswig-Holstein.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

This article was first published on the Small Cap Strategist weblog on 7/9/19 as “Warm Wind Blowing at Vestas’ Back”.

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Last week NextEra Energy, Inc. (NEE:  NYSE) broke ground on its newest wind power project.  The company plans to build 71 wind towers in Wayne County, northeastern Nebraska, outfitting each with General Electric (GE:  NYSE)turbines.  Called the Sholes Wind Energy Center, the wind farm will have a collective generating capacity near 160 megawatts and require $200 million in to build.  Construction is expected to begin in March 2019, to meet a December 2019 planned operational start.

The Omaha Public Power District (OPPD) has already signed a twenty-year power purchase agreement with NextEra, making return on the Sholes project close to guaranteed.  OPPD is the twelfth largest public power utility in the U.S., serving over 374,000 customers across thirteen counties in Nebraska.

Nebraska Winds

OPPD is not new to wind power.  The public utility already sources electricity from the Grande Prairie Wind Farm in Holt County, Nebraska.  Grande Prairie is comprised of 200 turbines with a total capacity of 400 megawatts.  The wind farm is owned by Berkshire Hathaway Energy Renewables, a privately held renewable energy developer based in Des Moines, Iowa.  In 2017, wind power represented 29.5% of OPPD retail electricity sales.

Nebraska’s prairie landscape is ideal for wind power generation.  The state ranks fourth in wind energy among U.S. states, generating over four billion kilowatts hours annually.  According to the State of Nebraska Energy Office, the state has 786 operating wind turbines with total capacity of 1.4 million kilowatts.  In addition to the 71 wind turbines slated for the Sholes Wind Farm, three other projects are underway in Nebraska totaling 150 turbines with a collective generating capacity of 431.5 megawatts.  All have power purchase agreements in place.

Grousing over Prairie Grouse

Not all in Nebraska are enamored with wind power.  Legislation was introduced in the 2018 state legislative session to strip the ‘renewable’ designation from wind power, pulling wind power projects into the purview of the Nebraska Power Review Board and requiring public hearings on wind power projects.  Supporters of the legislation cited risks to wildlife and the environment that go challenged without public scrutiny.

True enough Nebraska’s iconic Sandhills do have a fragile ecology of mixed-grass prairie and sand dunes that do not hold up well under construction activities.  Wind farm operations could potentially interrupt the delicate mating dances of the greater prairie chicken or grouse.  There is also a building body of evidence on the mortality of birds and bats due to wind towers and blades.   The American Wind Wildlife Institute has been building a knowledge base and recently made available a compilation of studies that suggest bird and bat mortality in a range of 3 to 6 birds per megawatt per year.  While populations of smaller birds are apparently not at risk, large raptors and bats may be in peril given their smaller populations that could be trimmed to endangered levels by unfortunate encounters with turbine blades.

Jobs, Taxes and Cash

Nonetheless, economic growth appears to be just too rich an incentive to forestall interest in wind power.  NextEra’s Sholes Wind Farm in Nebraska is expected to create 200 construction jobs over the next year and then another 10 permanent jobs for ongoing operations. Wayne County and the adjacent Stanton Counties expect to receive $1 million in incremental annual property taxes over the Sholes planned thirty years of operation.  The icing on the cake and possibly the reason wind power is given little check in Nebraska is an estimated $1.3 million in annual payments to landowners from the Sholes.

The Nebraska project will help keep NextEra with its NextEra Energy Resources (NEER) subsidiary in its leadership position as the one of the largest operators of wind and solar power projects in the world.  NEER has over 19,000 megawatts of renewable energy generation capacity spread out across the U.S., Canada and Spain.  Wind power represented 69% of NEER net generating capacity in 2017.

NextEra Profits

NEER earns revenue from the sale of electricity and as well as renewable energy credits (REC).  However, that is not the only source of revenue for NextEra.  The company also operates the utility Florida Power and Light (FPL), which serve customers along the eastern coast of Florida as well as the western coast of the Florida peninsula.

NextEra reported $17.1 billion in total sales in the twelve months ending March 2018, providing $8.2 billion in net income or $17.34 per share.  In the same period, the company converted 37.7% of sales to operating cash flow or $6.5 billion.

The hefty cash generation figure helps support quarterly dividends that are expected total $4.44 per share in 2018.  The current price the dividend represents a yield of 2.7%.  The attractive yield helps explain why the stock is priced at 20.4 times forward earnings.  Then again the broader utility industry is trading at a forward price earnings ratio near 20.2 times.

Debt Play in Public Utility

For those investors who are not interested in a position in a large capitalization company like NextEra  –  the market cap is $80.4 billion  –  the prairie winds have blown up an investment alternative.  The Omaha Public Power District is not a public company, but it uses leverage to pay for infrastructure build-out.  Its most recent bond issue in December 2017, was composed of $220.2 million in revenue bonds that received an Aa2 rating from Moody’s and AA from Standard and Poor’s.  The bonds offered a coupon rate of 5.0% and were sold at yields to call in a range of 2.46% to 2.78%.

While OPPD does not make quarterly or annual filings with the SEC, its financial reports are made available to the public.  The district reported $1.1 billion in total revenue in 2017, providing $77.2 million in net income.  Operations generated $367.9 million in cash flow.  We estimate free cash flow after capital investment was $120.5 million.

Generation of free cash flow is important given the debt load of $3.8 billion on OPPD’s balance sheet.  Total debt has declined in recent years as OPPD engaged in debt refunding over the past four years.  The debt-to-equity ratio was 3.45 at the end of 2017, which may seem like a significant amount of leverage.  Importantly, OPPD had enough cash earnings before taxes to cover interest expense 3.19 times.

Wind Alernatives

OPPD debt may not be any more suited for a broad audience than NEE as a large cap utility is appealing to investors seeking strong growth.  The debt of OPPD is privately placed by large underwriters, and not all investors will get a taste. Nonetheless, the two companies give investors alternatives to participate in the value that blows on  prairie winds.

Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries. Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

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by Daryl Roberts

The Need To Accelerate Renewables Adoption

Renewables are growing rapidly as a percentage of new electric generation, but are still being assimilated too slowly and still constitute too small of a fraction of total generation, to be able to transition quickly enough to scale into a low carbon economy in time to mitigate climate change.

The issue of providing public support, with subsidies and other reallocation methods, is a politically charged subject. High carbon advocates, for example American Petroleum Institute, argues that support for renewables distorts the market. On the other hand, it has been argued, for example by the IMF, that subsidies for high carbon industries are so pervasive, estimated for 2015 at US$5.3 trillion (6.5% of global GDP) that not only is the market distorted but governments are effectively captured. This dispute will not be resolved in the near term, but the “market” will continue to respond, as has been seen by the dramatic reduction in costs for photovoltaic hardware and batteries.

Capital Structure and Cost

Structuring the transactions to incentivize the capital markets to reduce financing and other “soft” costs is the pathway that will most likely contribute to accelerating continued development. The market, in broad strokes, consists of three generic groups: 1) project developers (Sponsors) that coordinate project finance to underwrite planning, design, procurement, permitting, etc. 2) end users of the generated power (Off takers) which include major utilities, large commercial industrial corporations, municipalities, universities, etc. 3) and asset holders (Portfolio funds), which acquire completed projects to operate, distribute earnings, and are focused on net yield. Risk Mitigation measures targeted at each transactional node may be the best way to accelerate the ascendancy of renewables.

Sponsors have to manage costs to be able to compete as electricity suppliers, to be able to offer a competitive pricing to the Offtakers. Risk mitigation at the project level involves various forms of insurance against an array of more common risks, for example with performance bonds. Complete guides can be found Risk Mitigation Reference Guide for New Energy Financing, by Energi, Managing the Risk in Renewable Energy by Economist, and Unlocking Renewable Energy Investment: The role of risk mitigation and structured finance by IRENA. One of the primary risks is offtake risk, and fluctuations in revenue from intermittency due to weather related causes. Another risk is related to the costs of early stage project financing in tax equity partnerships, which are structured to maximize the benefits of applying investment tax credits, to produce a targeted yield, after which, a flip in ownership is executed for the equity partner to exit. An extended review of Partnership Flips is presented by a law firm specializing in renewable tax issues, and process is shown in the diagram from NREL.

Offtakers are under pressure to buy renewable generation, for several reasons: a) statutory requirements from state Renewable Portfolio Standards (RPS), federal emissions guidelines, and avoided cost requirements under PURPA; b) because new generation is pricing lower than non-renewables, and c) because there is growing participation by corporations making commitments to achieve 100% renewable energy use.

Both Sponsors & Offtakers are motivated to negotiate long term Power Purchase Agreements (PPA’s) to lock in pricing, which benefits Sponsors by setting a reliable value for revenue to be able to service debt, and for Offtakers in setting a reliable cost that hedges against inflation. In the current market, smaller Offtakers & Sponsors are disadvantaged but increasingly are being assisted by aggregator services which can assist in negotiating multi-party PPA’s or virtual PPA’s, such as the platform developed by LevelTen Energy platform that matches groups of small buyers to groups of small generators, or as in the case involving MIT as anchor offtaker.

Portfolio funds come in various forms – publicly traded yieldcos like NEP, NYLD, AY and TERP, private infrastructure funds, green bonds, clean energy investment trusts, etc. They aggregate operating renewable projects, take accelerated depreciation and investment (or production) tax credits, and distributes most of its earnings in dividends, as either private or publicly traded funds, and are generally considered a means for raising capital for renewable development, directly or indirectly. As of 2015, RBC Capital Markets estimated that yieldcos held about $32 billion worth of renewable generation enterprise value in North America, with projections to grow to $500 billion. Further, it estimated that by 2030, yieldcos could globally have a potential asset pool worth more than $6 trillion. However, a bubble developed for yieldcos that deflated later in 2015, due in part to over-pricing the projects acquired and valuations based on dividend growth expectations. Fund relationships to Sponsors varies, in some cases, funds have “internal sponsors”, as with utilities that form yieldcos from “drop down” projects placed in the spinoff vehicle, which provides relief for its balance sheet, enabling it to recapitalize new projects, grow revenues, and support cash available for distribution (CAFD).

For Portfolio funds, risk mitigation is managed by acquiring projects bundled with optimized offtaker pricing and creditworthiness, coverage for execution risks related to construction and system operation, and increasingly, bundled with mitigation strategies for various kinds of weather and indeterminacy related risk. A central consideration for acquisitions is cost of capital, and the premise of this last group of risk strategies is that capital costs can be reduced by 100 basis points or more, which significantly impacts marketability of the project.

To simplify the model relationship between Sponsor and Fund, the asset upon completion will be packaged, along with the PPA, to include long term financing that combines debt and equity, tax credits, RECs & carbon credits, with debt ratio typically constituting 70%-80%.

Risk mitigation may be able to shift the Weighted Average Cost of Capital further towards debt, at lower cost than equity, & spare up to 1% in yield, which in turn, could move the market.

We can see if that could be true, by first verifying that a shift in WACC can achieve a 1% gain. Costs for debt was reported, as of 1^st quarter 2018 as in the range of 3.6% by one deal tracking source, which indicated that credit facilities spreads were in the range of 130 basis points (1.3%) over 3-mo LIBOR of 2.3% which = 3.6%. Equity costs spreads were reported to be in the range of 6-9% over LIBOR which = 8.3% – 11.3%. Weighted Average Cost of Capital (WACC) is calculated as follows:

Ver1 in the example below shows debt ratio starting at 70%, with rates of return at 11.3% for equity, 6% for debt. Ver2 shifts the ratio by 15%, increasing debt, decreasing equity, reducing the debt rate to 3.6% & leaving equity rate constant at 11.3%.

This confirms that the difference can result in a reduction of WACC by 2.49%, and, after netting out the estimated 1% cost of the hedge, this translates into an IRR gain of 149 basis points. This is in the ballpark, when compared to an estimate from a swap provider that a 15% increase in debt produce a gain of 100 basis points. For reference, a range of debt ratio variables are also shown against Debt Service Coverage Ratio (1.30 represents 70% debt ratio to cash flow to cover, 1.10 represents 90%, etc.)

How do these hedges work, what are the mechanics? There are three broad types of weather risk transfer: insurance (and reinsurance), derivatives and swaps, often used in combinations.

Insurance provides comprehensive coverage for low probability, high risk events (i.e., hurricanes) as compared to derivatives which offer narrow single risk coverage for high probability, low risk events, (i.e., weather, low wind, low irradiance). Premiums and payouts for derivatives are determined by the market value of the underlying assets not by the probability of a loss event occurring. Claims for derivatives are quicker, usually paid out based upon a triggering event against a specified index, whereas settlement of insurance claims can be a protracted process due complex valuation of losses.

If a wind farm underperforms because of a streak of windless days, a derivative contract might be structured as a “put” that would be triggered if production dips below the “strike,” value. One downside is that the market for such derivatives is thin, not enough counterparties that are naturally short wind or sunlight, who can create a demand pull by buying up these contracts from the originators to hedge their own investments. Currently the market consists of larger financial institutions (ie., Goldman Sachs (GS) and other bespoke market makers) & specialty insurers, and potentially natural gas generators whose capacity factors decrease when wind power comes on the grid. 

One such provider in the Weather Risk Transfer market, of hybrid “Insurance Linked Securities”, GCube contends that lack of efficient and effective weather risk transfer in the wind energy sector has resulted in stakeholders in the space being left with as much as $56 billion in untapped asset values that can be remedied with adequate structuring of risk mitigation.

Swaps transfer risk by exchanging a variable asset for a fixed asset, in this case, a revenue stream with intermittency risk exchanged for a fixed quarterly payment. The “seller” in the swap offers a guarantee, to levelize the revenue stream by promising to insure any shortfall in revenue in exchange for assignment of the total revenues. They evaluate the risks of long-term shortfall with detailed actuarial analysis of weather databases, to estimate cost of underwriting the exchange and to build in sufficient profit to justify the risk. Currently premiums to provide a floor or “put” for revenue fluctuations, are approximately 1% of the revenues being covered.

One such transaction, termed a “Proxy Revenue Swap”, was explained in detail in an article in Environmental Finance reporting on a transaction in which a 10yr commitment for fixed cash flow was swapped for the floating revenues of the wind farms, designed to hedge wind volume risks. The participants were:

1. 1. 1. Renewables developers: Apex Clean Energy and private equity firm Northleaf Capital Partners
      2. Insurer: Allianz Risk Transfer (ART)
      3. Weather risk transfer partner: Nephila structured the deal using Insurance Linked Securities, catastrophe bonds & weather derivatives.
      4. Risk transfer intermediary REsurety and energy management specialist Altenex served as calculation agents.
   1. Legal counsel: Norton Rose Fulbright Chadbourne & Park structured the bespoke contract instrument, on behalf of both the debt financing through Deutsche Bank & the consortium of tax equity partners JPMorgan, Itochu & US Bank.

Norton Rose elaborates on the nuance of the payment arrangement, in Proxy revenue swaps for solar: “Risk-transfer products, such as volume puts or swaps, are now standard product offerings, serving as offtake arrangements in lieu of traditional power purchase agreements.” Proxy revenue swaps address “shape risk” associated with revenue reductions at midday due to drop in price (“duck curve” effect) as the correlated output of solar production peaks.

• The Project pays the hedge provider a floating amount each quarter, which is calculated as the project’s “proxy generation”, multiplied by the hub price for the settlement period, which in turn is determined using a negotiated formula that converts irradiance into a calculated amount of electricity output. The premium is linked to the variable elements of irradiance, timing & volume, as well as the fluctuating hub price.
• In exchange, the Hedge Provider pays the project a fixed lump-sum per quarter, regardless of irradiance, volume or timing of the energy produced or the market-clearing price for electricity.
  • Because the fixed payment is not linked to actual output, the solar proxy revenue swap offers a predictable revenue stream and mitigates irradiance risk, price risk and shape risk for the project.
  • It is a financial hedge, meaning no energy is purchased in the transaction, all the energy produced is sold by the Project to the local grid, with the Project collecting the revenues.
• The hedge is settled quarterly, with the Hedge Provider paying the fixed amount & the Project paying the “proxy revenue”, the Swap.
  • Difference: If the proxy revenue is less than the fixed amount, the hedge provider pays the difference to the Project; & vice versa, if the proxy revenue is more than the fixed amount, the net excess revenue is paid by the Project to the hedge provider. If they are equal, no payment is made by either side.

Several others intermittency risk mitigation providers were found in this survey:

1. kWh Analytics markets the transaction as a Solar Put through a wholly owned insurance subsidiary called Kudos Insurance Services, which not only bundles coverage for the revenue enhancement along with weather risk, equipment failure & construction defects. It conducts the data analytics in-house, rather than contract out these services, as in the ART transaction.

It contends that reducing the Debt Service Coverage Ratio from 1.30x to 1.10x would reduce the effective levelized installed cost of energy by $.05/watt, and reports that 7 lenders have now issued term sheets for 1.10x DSCR.

1. Meteo Protect a French firm that provides weather derivatives for wind, solar & hydro projects, has also developed weather risk assessment tools for short- and medium-term project financing that allow investors to have objective information to determine the risk premium, for guarantees of expected profitability of a project while optimizing the allocation of capital.
2. Munich Reinsurance
3. NortonRose referenced hedge deals that do not use a long-term PPAs, but instead use a 12-year price hedge from an investment bank or global energy company, against merchant price risk (from CAISO or ERCOT), while the project assumes operating risk and basis risk.
4. Green Banks https://www.nrel.gov/technical-assistance/basics-green-banks.html. As of 2017, several Green Banks in the US have been established by enabling legislation at the state and local level, capitalized by a surcharge on utility costs, averaging about $10/yr to end users.

• Connecticut Green Bank
• NY Green Bank
• California Lending for Energy and Environmental Needs
• Rhode Island Infrastructure Bank
• Montgomery County Green Bank (Maryland)
• Hawaii Green Energy Market Securitization

The New York Green Bank offers credit enhancements, a multi-developer aggregation service (bundling of multiple smaller solar investments), and traditional loans. CT & NY have collectively invested nearly $575 billion in total clean energy investment, which have mobilized private sector investment by 3-6x the amount of public sector dollars.

Conclusion

Although risk mitigation clearly can add value to both developers and asset managers, there are several other key factors that may overshadow these benefits: a) tax policies affecting financing at both the project finance level and the asset management level, and b) factors affecting utility’s willingness to add renewable capacity, which can be resisted both in lobbying and at the operational level in building out interconnections.

Nevertheless, risk mitigation in renewables development as a nascent field will likely continue to expand, and hopefully the volume of assets held in all forms of portfolio management will continue to grow and be recognized as an important driver for rapid growth of renewable generation.

Bio

Daryl Roberts has been following renewable energy technology & policy for 20 years, most recently interested in EV charging infrastructure, community solar development and net metering policy, utility scale solar development and project financing, and renewable energy asset management. He has participated in Sierra Club electric vehicle policy initiatives, and offered consulting for grant applications to install municipal EV charging stations. He has been involved with business plan development for commercial projects in diverse technologies, for ethanol, waste-to-energy gasification of municipal solid waste, PV fabrication on architectural glass, and LENR research. Previously he had worked for almost 20 years on litigated medical malpractice claims.

Resources

Deal flow – information both for polling adoption of risk mitigation as well as for marketing services, is in large part curated on privately developed databases.

The following is a list of additional deal flow database resources discovered to date, some with paywalls:

1. KWH Analytics deal flow database, covers “20% of transactions in the renewable space”, and recently offered lender list Solar Lendscape
2. I3connect may be the largest, is a subsidiary or spinoff of https://www.cleantech.com/
3. Rocky Mountain Institute Business Renewables Marketplace & Transactions
4. GreenDealFlow
5. CohnReznickCapital
6. Mercom funding news
7. BloombergNewEnergyFinance
8. SparkSpread
9. PWC Global
10. PowerFinance&Risk
11. GreentechMedia How to finance a Trillion Dollar Opportunity
12. Crunchbase – renewables principals
13. Yieldcos altenergystocks.com Comparative valuation of 15 yieldcos

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The post How Weather Risk Transfer Can Help Wind & Solar Development appeared first on Alternative Energy Stocks.

Wind farm owner and developer stocks are publicly traded companies that site, permit, develop, construct, own, or operate wind farms for producing electricity.

This list was last updated on 3/22/2022

Acciona, S.A. (ANA.MC, ACXIF)
Adani Green Energy (ADANIGREEN.NSE)
Algonquin Power and Utilities (AQN, AQN.TO)
Atlantica Yield PLC (AY)
Atlantic Power Corporation (AT)
Avangrid, Inc. (AGR)
Boralex (BLX.TO, BRLXF)
Brookfield Renewable Energy Partners (BEP)
China Longyuan Power Group Corporation Limited (0916.HK, CLPXF)
China Ruifeng Renewable Energy Holdings Limited (0527.HK)
Orsted (ORSTED.CO, formerly DENERG.CO)
E.ON AG (EONGY)
Enel SpA (ENEL.MI, ESOCF)
Greencoat UK Wind (UKW.L)
Infigen Energy Limited (IFN.AX, IFGNF)
Innergex Renewable Energy Inc. (INE.TO, INGXF)
Neoen S.A (NEOEN.PA)
NextEra Energy Partners, LP (NEP)
NextEra Energy, Inc. (NEE)
Nordex AG (NRDXF, NDX1.DE)
Northland Power Inc. (NPI.TO, NPIFF)
NRG Yield, Inc. (NYLD, NYLD-A)
Otter Tail Corp (OTTR)
PNE Wind AG (PNE3.DE)
ReNew Energy Global plc (RNW)
The Renewables Infrastructure Group (TRIG.L)
TransAlta Renewables, Inc. (RNW.TO, TRSWF)
Xcel Energy Inc. (XEL)
Wind Works Power Corp. (WWPW)

If you know of any wind farm owner or developer stock that is not listed here, but which should be, please let us know in the comments. Also for stocks in the list that you think should be removed.

The post List of Wind Farm Owner and Developer Stocks appeared first on Alternative Energy Stocks.