Tom Konrad CFA
Monday morning, Finavera Wind Energy (TSXV:FVR, OTC:FNVRF) announced that it had finalized its agreement with Pattern Energy Group to sell two of its four Canadian wind energy projects for $28 million. This should come as a relief to shareholders, who had been concerned when the original date by which they had expected to ratify the deal, March 31st came and went.
Since the start of March, when shareholders would reasonably have expected to have heard an announcement of the meeting date and the circulation of proxy materials, Finavera’s stock had drifted down 15% (from C$0.20 to C$0.17.) Some of investors’ worries seem to have been justified, in that the original agreement outlined in December had been for the purchase of all four projects.
Meet The New Deal. (Pretty Much) Same as the Old Deal
I spoke to Finavera’s CEO, Jason Bak, to try to better understand the changes.
A view of Finavera’s Miekle Wind Energy project. Photo Source: Finavera
The revised agreement is only for the purchase of Finavera’s 47 MW Tumbler Ridge and 117 MW Meikle Wind Energy Projects. Pattern retains an option (but not an obligation) to purchase the 77 MW Wildmare and 60 MW Bullmoose projects for the remaining C$12 million of the C$40 million originally envisioned for the four projects. According to Bak, these latter two projects had run into a number of obstacles in discussions with the local utility (BC Hydro) and “other stakeholders.” Because of this, Finavera will not be able to bring them to financial close as quickly as hoped. Since Pattern’s purchase had always been contingent on the projects reaching financial close, the downgrade of the agreement from an obligation to purchase the projects to an option is less of a change in Pattern’s position than it may seem at first. The real problem are the difficulties bringing these projects to financial close in the near term.
Despite this change, the most important aspects (for Finavera and its shareholders) of the December agreement remain in place:
- Pattern will still forgive Finavera’s C$9.3 million in debt when Finavera’s shareholders ratify the agreement at a shareholder meeting to be scheduled before the end of June.
- Pattern will provide Finavera with a credit facility at a 10% interest rate to cover its liquidity needs until the end of 2013.
- Finavera will receive 70% of the compensation originally envisioned in exchange for only 54% (on a per-MW basis) of the projects.
Most importantly, the revised deal alleviates the liquidity problems which forced Finavera to seek a deal to pay off an overdue loan to GE late last year. With the ability to repay outstanding liabilities and still put cash in the bank, Finavera will be in a much stronger position when it comes to acquiring attractive development projects, or even returning some cash to its long-suffering shareholders. Bak says the use of the funds will be put to a shareholder vote after the cash is in hand and Finavera has potential projects to present to shareholders.
Finavera still expects to receive approximately C$9.4 million for bringing its Cloosh wind project in Ireland to financial close in the fourth quarter of this year. This, along with the C$9.3 million of debt forgiveness from Pattern upon shareholder and exchange approval of the deal should be enough to cover Finavera’s outstanding liabilities.
The Tumbler Ridge project already has completed environmental and construction permits, and Finavera will submit Meikle for environmental permitting later this year. Bak expects both projects will achieve financial close in the second half of 2014, at which point Pattern will pay the approximately C$19 million balance.
Bak says that Finavera will issue an information circular with details on the agreement in the next couple of weeks, after which he will hold a shareholder conference to address shareholder questions. A shareholder meeting and a vote on the contract will take place by the end of June.
In the press release, Bak said, “Based on the Pattern transaction and the value of the Cloosh Valley Wind Project assets, and using a set of conservative working assumptions, Finavera estimates the Company’s net asset value to be $0.41 per share.” I asked him to walk me through the calculation, in order to assess if I also felt he was being conservative.
- C$28 million from Pattern
- C$19 million in debt
- C$10 million payment for Cloosh
- C$3 to C$4 million residual value for 10% interest in Cloosh.
- No value attributed to Wildmare or Bullmose projects.
- Minus ongoing expenses to achieve the payments listed.
That sums to about C$22-3 million in net cash and assets expected before the end of 2014. Finavera has 39.6 million shares outstanding after a debt-for-share swap announced in March. Management and the Board have options exercisable at C$0.205 a share for an additional 1,783,800 shares. After exercise, Finavera would have 41.4 million shares outstanding and an additional C$365,679 in cash.
At 41.4 million shares, Bak’s C$0.41 per share comes to a net asset value of C$17 million, compared to my C$22 to C$23 million, minus the time value of money and two years of operating expenses. Finavera’s free cash flow in the first 9 months of 2012 was an outflow of C$1.6 million, so two years of operations and project development should easily be covered by the C$5 to C$6 million difference in Bak’s C$0.41 per share estimate and my back-of-the-envelope calculations.
While less attractive as the original deal, the finalized agreement with Pattern still relieves Finavera’s liquidity problems, and Bak’s reasonably conservative valuation for the company at C$0.41 a share should still produce decent upside for investors who buy today at C$0.17 a share, or even investors who bought at the C$0.225 the stock was trading at when I analyzed the original deal in December.
The 24% decline in price since then more than compensates for not selling Wildmare and Bullmoose. If Pattern eventually exercises its option to buy those projects as well, that will just be gravy.
Disclosure: Long Finavera
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