Finavera Wind Energy's Path to Cash
Tom Konrad CFA
Location of the Miekle wind energy project. Photo source: Finavera
On June 21st, Finavera Wind Energy (TSXV:FVR, OTC:FNVRF) announced the ratification of the sale of its Tumbler Ridge and Meikle wind energy projects to Pattern Energy with 99.63% of votes cast in favor (a 2/3 majority was needed).
The result should have surprised no one, given that the sale was essential to Finavera’s liquidity and ability to fund its operations. After shareholder, stock exchange, and regulatory approval, Pattern will forgive C$9.3 million of Finavera’s debt. Shareholder approval is now complete, exchange approval is expected this week, and regulatory approval should be complete by early September. (See below.) Pattern is also providing a credit facility which will allow Finavera to continue its operations.
The company’s board of directors was also approved, although not with the same 99%+ of the votes. Roughly a quarter of the votes for Finavera’s four directors were withheld. According to Finavera’s CEO Jason Bak in an interview, a large block of the votes withheld from the directors were because one larger shareholder and creditor, Sprott Power Corp. (TSX:SPZ, OTC:STWPF) was registering its disapproval that it was not going to have a $900K loan repaid sooner. That loan and Sprott’s 2 million share stake in Finavera arose last year, when Sprott was considering doing a deal with Finavera, but instead ended up buying assets from Shear Wind, Inc..
Going forward, there are a number of milestones needed to complete the Pattern transaction and to realize the value of Finavera’s stake in the Cloosh Wind Project in Ireland. If both are completed, most likely in mid to late 2014, I calculate that Finavera will have between 32 and 44 cents of net cash on hand. Bak promises a shareholder vote as to the use of this cash: should it be returned to shareholders as a dividend, or used to invest a new opportunity. The timing of the vote will depend on when Finavera is able to present shareholders with a specific investment opportunity, and will likely precede the completion of the Pattern asset sale.
The next milestones for Finavera will be
- Next day or two: Approval of the purchase by the Toronto Venture Exchange. This should be completed in the next day or so.
- July: Finavera will submit Miekle into the environmental review process. Tumbler Ridge already has all necessary approvals.
- Late August/ Early September: Approval by BC Hydro. BC Hydro needs to update the Power Purchase Agreement (PPA) for the Miekle and Tumbler Ridge projects to reflect the new owner. With the business-friendly Liberals returned to power in British Columbia, Bak expects this process to go smoothly. The defeated NDP had favored the utility to develop its own projects, rather than buying power from independent producers like Pattern. At this point, Pattern will pay Finavera C$9.3 million which the latter will use to repay a similar amount of debt to Pattern. For simplicity, I’ve also been referring to this as loan forgiveness.
- H2 2013: Shareholder vote on use of net proceeds from Cloosh and Pattern transaction. Dividend or pursue a new opportunities? If the vote is to pursue new opportunities, the goal will be to build Finavera’s assets and eventually qualify for listing on a much more liquid exchange than the Toronto Venture.
- Q4 2013: Financial close of the Cloosh wind farm. Bak says this process remains on track, and involves finalizing only “minor issues” around access to the site, grid connections, and landowner agreements. He says the largest remaining issue permitting of the electrical substation. Turbine design and layout should be complete by the end of the summer. When Cloosh reaches financial close, Finavera will receive approximately C$9.3 million (This is confusingly approximately the same amount as the Pattern loan, but a different payment from a different source,) and begin an auction process to sell its 10% stake in the Cloosh wind farm. Bak estimates this stake will be worth between C$3 and C$4 million. I used C$3 million in my valuation below. Bak has a “high degree of confidence” in reaching financial close on Cloosh by the end of the year.
- Q1 2013. The environmental approval process should take six months for Miekle. This process was thrown off in the past because the BC auditor general got involved, but now the process is set, and that is unlikely to happen again. The environmental approval is followed by ministerial approval, which takes another 45 days.
- Ongoing: Finavera continues to measure the wind regime at Miekle, and the additional data will be used to optimize the combined design of the Miekle and Tumbler projects. So far, the the wind regime at Miekle seems better than anticipated, and this may allow Pattern to fill the full power requirement of the PPA with 187 MW of turbines at Miekle, what Bak calls the “Super Miekle” option. This will be more profitable for Pattern, because it will allow the company to fill the entire PPA with less supporting infrastructure (access roads, substations, etc.) The other likely option would be to build 117 MW at Miekle and 47 MW at Tumbler Ridge. This will be relatively less profitable to Finavera because a Super-Mielke project will likely be larger than the two smaller projects combined.
- Q3-4 2014: Meikle and Tumber Ridge projects or Super-Miekle project shovel-ready. Final payment from Pattern.
Value on Financial Close of Pattern Deal
Given the different possibilities, I decided to do a quick scenario analysis of the possible outcomes for Finavera, and look at what that means for Finavera. To be conservative, I not only considered the two options Bak thinks are likely (Super-Miekle or Meikle and Tumbler) but also considered a couple possibilities which he considers very unlikely.
With regards to Cloosh, I gave a 10% probability that something will go horribly wrong, and Finavera will not receive the final C$9.3 million payment or be able to sell its residual stake. In reality, even if something goes wrong at Cloosh, Finavera should be able to recover some value from this very advanced project, but I wanted to be conservative. With regards to Miekle and Tumbler, I gave a 5% probability to building only 114 MW at Miekle and none at Tumbler Ridge. Bak says that the wind regime has now proven strong enough at Tumbler that this is no longer an option being considered, but I decided to throw it into the mix anyway, with a 5% probability. I then gave a 45% probability to the Super-Miekle option, which Bak considers most likely, and a 50% probability to the Miekle and Tumbler option. This is again conservative, as I gave the higher probability to the less valuable scenario.
The results are shown in the chart below:
In my calculations, I assumed 37.5 million diluted shares outstanding, C$22.6 million in liabilities, C$2 million in current assets, and C$3 million in operating expenses before Finavera receives the final payment from Pattern.
The positive result from the Annual General and Special Shareholder meeting had begun to lift Finavera off its low, only to be reversed by two days over cratering stock markets on Wednesday and Thursday. Although there is always considerable risk in small companies like Finavera, even discounting next year’s expected cash holdings of C$0.35 per share by 50% gives a value to Finavera today of C$0.175. Today’s 14 cent share price looks likely to double (or more) over the next 18 months, as Finavera completes the milestones above.
Disclosure: Long FVR, SPZ.