Pat McKeough recently replied to a member of his Inner Circle asking for an opinion on Northland Power Inc. The ‘green’ energy supplier is expanding its capacity with wind farms and help from government contracts, says Pat.
Q: Pat: I am interested in your views on Northland Power. Regards.
A: NORTHLAND POWER INC. (symbol NPI on Toronto; www.northlandpower.ca) develops, builds, owns and operates natural gas-fired power plants, wind farms, solar projects and hydroelectric facilities.
The company converted to a corporation from an income trust on January 1, 2011.
Northland owns or has stakes in 1,338 megawatts of generating capacity, with an additional 692 megawatts under construction.
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One of these developments is Project Gemini, in which the company holds a 60% stake (purchased in May 2014). The operation is a $4.1 billion wind farm in the North Sea, off the coast of the Netherlands. It should generate 600 megawatts (360 megawatts net to Northland) when it starts up in 2017.
Gemini has a 15-year deal to sell its power to the Dutch government. That cuts the investment’s risk.
As well, Northland owns 85% of the Nordsee wind project, also in the North Sea—40 kilometres off the German coast. RWE AG, a leading utility company, owns the remaining 15%.
This project’s first phase, Nordsee One, is a 332-megawatt (282 megawatts net to Northland) wind farm. It will cost $1.8 billion to build, and has a 10-year deal to sell its power under Germany’s feed-in tariff program. Operations should begin by the end of 2017.
Northland plans to build two additional phases over the next decade, Nordsee Two and Nordsee Three, when it wins subsidies from the German government. Together, these last two projects would produce 670 megawatts.
The long-term outlook for all three phases is positive. Germany wants to reduce its use of nuclear power and expects to get 35% of its electricity from renewable sources by 2020. The goal is to raise that to 85% by 2050.
Growth stocks: Revenue rises 104% since 2011
Thanks to new power projects and acquisitions, Northland’s revenue rose 104.5%, from $356.1 million in 2011 to $728.1 million in 2015.
Cash flow soared 232.1%, from $54.9 million in 2011 to $182.2 million in 2015. The company sold shares to finance its construction projects. As a result, cash flow per share fell 22.5%, from $0.71 in 2011 to $0.55 in 2012. Cash flow per share then improved to $1.05 in 2013, and rose to $1.10 in 2014. It dropped to $0.99 in 2015.
In the three months ended March 31, 2016, Northland’s revenue fell 11.6%, to $178.1 million from $201.6 million a year earlier. Cash flow declined 10.7%, to $44.9 million from $50.2 million; cash flow per share fell 21.2%, to $0.26 from $0.33, on more shares outstanding.
Northland needs to successfully complete its new projects to increase its revenue and cash flow. Still, its operations are spread across four separate regulatory areas, which limits its risk. Its long-term contracts also give it stability.
The company pays monthly dividends of $0.09 a share, for a 4.9% annualized yield. In the latest quarter, dividends accounted for 103% of its cash flow, up from 81% a year earlier. However, under the company’s dividend reinvestment plan, some investors choose shares instead of dividends so its cash payout ratio for the quarter was a more-reasonable 81%.
The stock trades at 21.5 times this year’s forecast cash flow per share of $1.02.
Inner Circle recommendation: HOLD.
For our advice on how to profit most with the least risk in growth stocks, read 7 tips to cut your growth investing strategy risk.
For our recent report on a Canadian growth stock with a unique niche, read Sales—and acquisitions—lift Stella-Jones Inc.
