A Gust of Wind Industry Mergers
Tom Konrad CFA
Turbines photo via Bigstock
A rising tide may float all boats, but a stiff wind separates the wheat from the chaff.
Over the last week, it’s become clearer which wind developers are the wheat, and which are the chaff. Stronger developers with deeper experience are buying projects from their weaker kin. At least two such deals were announced last week.
On May 15th, Western Wind Energy (TSXV:WND, OTC:WNDEF) signed a deal to acquire the entire 4,000 MW wind energy development pipeline of private Champlin/GEI Wind Holdings, with near term projects in Hawaii and Utah.
On May 18th, Alterra Power (TSX:AXY, OTC:MGMXF) continued its quest to become a major global renewable energy developer and producer, and announced a deal to buy four sites in British Colombia from private sellers led by English Bay Ltd. Alterra estimates the early-stage sites have the potential for generating capacity over 1,000 MW.
A large part of the reason wind development projects are changing hands is access to cash. Financing for wind projects has become much harder to come by. If you can’t get financing to develop your project, it makes more sense to sell it to someone who can.
Western Wind should soon receive a $90 million cash grant from the US government for a previous wind projects completed in 2011. Alterra received $38.5 million from a group of Icelandic pension funds in return for an increased stake in its HS Orka geothermal facility.
Despite the cash inflows, both buyers are paying the sellers in shares and, in Alterra’s case, royalties on any future production.
The sticker price for the Western Wind deal was $20 million
dollars, but the deal will be paid for in shares of Western
Wind, which will be valued at $2.50. According to a Western
Wind spokesman, Champlin/GEI had invested “almost $20 million” in
the pipeline so far. Since WNDEF closed at $1.61 the
day before the deal, Champlin/GEI
are effectively accepting a third less than
what they paid to develop the pipeline.
Alterra is paying 1.34 million shares, worth C$549,000, in addition to the promise of future royalty payments.
The discount and the fact that no cash is changing hands points to hard times for sellers of wind prospects in the current environment. No developer invests $20 million cash in the hope of receiving $13 million in shares for it a few years down the road. The flip side of this is that it’s a good time to be a buyer. Even without cash and at a discount, buyers can pick and choose wind farms they want to develop.
Western Wind has often repeated its plans to focus on wind farms in markets where Renewable Portfolio Standards (RPS) or high local electricity prices make wind farms profitable without (currently expired) federal subsidies. Western Wind management estimates that approximately 40% of the 4,000 MW Champlin/GEI portfolio (1,600 MW) would be economic even in the absence of the federal Production Tax Credit (PTC.) The crown jewel of the portfolio is a 75MW wind farm in Hawaii. Hawaii not only has an aggressive RPS, but wind power there displaces electricity generated from (very expensive) oil.
Alterra also chose its projects carefully. Of the eight wind farms under development by English Bay, Alterrra chose three near proposed Liquefied Natural Gas (LNG) export terminals. British Colombia is experiencing rapid growth in industrial power demand from both mining and natural gas sectors, and British Colombia is the only region in North America to pass a Carbon Tax.
What the Deals Mean for the Wind Industry
There is a saying among stock traders that “Price follows volume.” A fall-off in trading volume is often a sign of a stock peaking, and a pick-up in trading volume can a bottom. The same patterns appear in other markets as well. These two deals (and the many other which have been done over the last few months) look like signs of better (or at least no worse) times ahead for wind developers with projects to sell.
The increased number of deals is also a sign that buyers are finding prices attractive. It’s drawing new entrants.
Just this month, a new type of entrant to the renewable energy business came to my attention: a Real Estate Investment Trust (REIT). Power REIT (AMEX:PW), is planning to expand on its existing rail infrastructure asset by purchasing renewable energy infrastructure. As far as I know, PW will be the first company to bring the tax-advantaged REIT structure to renewable energy. Owning shares of a REIT with renewable energy assets will be much more like owning a piece of a wind or solar farm than owning shares of a traditional power producer: REIT profits are not taxed at the company level, and pass directly through to the shareholder. This structure should be particularly attractive to investors like charities and individuals investing through retirement accounts, since REIT payments are taxed as income, not at the reduced rate used for qualified dividends.
Power REIT is looking at many prospects, and has not ruled out solar investment, but the picture of a wind farm on its home page is probably not an accident.
What other outside investors will be breezing in to pick up wind farm bargains?
Disclosure: Long WNDEF, MGMXF, PW