Tom Konrad CFA
Disclosure: Long FNVRF, short PEGI $30 and $35 calls, $20 and $25 puts.
The Good News
Finavera Wind Energy (TSXV:FVR, OTC:FNVRF) shareholders have had a long and trying wait for the sale of its wind projects to Pattern Energy Group (NASD:PEGI) since the deal was announced in December 2012. The timeline has slipped repeatedly, two of the projects proved impossible to permit, and there have been questions about just how large the remaining ones would be. The long silence since the company’s interim financial update last November has probably led many investors to give the company up for dead.
Rumors of the company’s demise were premature. On March 17th, Finavera announced that it had “executed agreements that provide for the Assignment of the 184 MW Meikle Wind Energy Project Electricity Purchase Agreement (‘Meikle EPA’) from Finavera to Pattern. The assignment of the Meikle EPA from Finavera to Pattern is the last major milestone outstanding to close the Pattern acquisition of the Meikle project for gross cash consideration of $28 million.”
The key numbers here are 184 MW and $28 million. Those correspond to a strong wind regime at Meikle, allowing the Meikle and nearby Tumber Ridge projects to be consolidated into one giant “Super-Meikle” project. I spoke to Finavera CEO Jason Bak by phone later the same day, and he confirmed that this was the case. There is a wind speed adjustment in the contract with Pattern which could reduce the $28 million figure by $1 to $2 million.
The 116MW of PPAs which the announcement stated had been canceled are likely the Wildmare (77 MW), Bullmoose (60MW), 47 at Tumbler Ridge (47MW) projects, after allowing for the 67 MW expansion of Meikle over the earlier 117 MW plan. Bak says Meikle was re-designed and expanded to accommodate additional turbines. While the other three PPAs have been canceled, other permits remain in place. Over the longer term, Finavera could yet see some revenue from Wildmare, Bullmoose, or Tumbler Ridge.
The announcement is unadulterated good news. More confirmation can be had that this is a better-than-expected outcome in Pattern’s 2013 Annual Report, page 63 of which conservatively lists the Meikle project as a 175 MW (not 184 MW) pre-construction project.
Bak tells me that he expects the Meikle sale to close in the next few weeks, which will trigger a $10 million payment from Pattern to Finavera, which Finavera will use to repay the project loan from Pattern made last year. In addition to that $10 million, Pattern has demonstrated its confidence that this project will go forward by spending $4 million in development costs to date. An additional $2 million may be spent to bring the project to financial close in late 2014 or early 2015. All but $2 million of this $4 to $6 million of this will be deducted from Finavera’s final payment, but Pattern will not be reimbursed for these expenses if the project does not close.
The 184 MW project size and $28 million (elsewhere $27.9 million – $26.5 after wind speed adjustments) gross payment remove the largest piece of uncertainty regarding Finavera’s value going forward. Below, I give my estimates Finavera’s net cash position after Meikle’s financial close and the final Cloosh payment over the next six to twelve months.
Assets: (Canadian $ except €)
Expected proceeds from Pattern: $26 million to $27.9 million, after wind speed adjustments.
Expected Payment for Cloosh Wind Farm: €7.14 ($11. million.) This project has also been delayed, and is now expected to close in 2014.
Value of 10% interest in Cloosh: $3 million to $4 million
Other potential upsides:
Potential value in Wildmare, Bullmoose, or Tumber Ridge.
Value in the new business opportunity Bak plans to present to shareholders after the Pattern sale is finalized in the next few weeks.
Liabilities on Interim Report: $24 million to $26.9 million (the low end may result through negotiations with creditors.) $2.4 million of these liabilities are secured by Cloosh, and are payable only from the proceeds from Cloosh.
Finavera’s share of Meikle development costs: $2 million to $4 million, payable out of final Meikle incentive payment.
$9 million to $17 million. My best guess: $12 million.
2.46 million at $0.085. (42.2 million shares outstanding if exercised for $0.21 million.)
Value Per Diluted Share
$0.21 to $0.40 ($0.19 to $0.36 US). Best guess: $0.28 ($0.26 US)
The press release also stated that
Finavera continues to work diligently on a strategic plan for the Company. The imminent close of the Pattern transaction will provide a solid platform for the next stage in Finavera’s development. Further information on the Company’s strategic plan will be released following the close of the Pattern transaction.
As Bak has said all along, there will be a shareholder vote on the use of the proceeds, including the option to return them to shareholders. He has been working on the strategic plan mentioned above for at least half a year. He told me that he has not been willing to bring it to shareholders until he has the working capital to pursue the opportunity. Bak seems very confident that shareholders will like the strategic plan when they see it. If they don’t, they will have the opportunity to vote for a cash distribution from the wind farm proceeds, instead.
Bak also told me that he expects to issue more frequent updates on the company’s prospects over the coming months.
Given the years of delays and disappointments, it’s not surprising that Finavera’s stock has been trading at only 8 Canadian cents. I expect that the elimination of a major source of uncertainty and the final size of the Meikle project will finally breathe life into the stock. More frequent updates from the company going forward may also bring investor interest “Bak” from the dead.
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.
Finavera Wind Energy finalizes PPA for 184 MW “super-Meikle” project, removing the greatest source of uncertainty regarding the company’s valuation.