Friday, September 30, 2016

Wind in America

The last post shined a spotlight on Infraestructura Energetica Nova (IENOVA:  MX) the new owner of recently commissioned Ventika Wind farm in northeastern Mexico.  The 252-megawatt facility is the largest wind farm in Latin America and is expected to be a vital source of power for some of Mexico’s most important companies, including FEMSA and Fiat Chrysler Automobiles.  Ventika has bragging rights in Mexico, but in the U.S. it is the Mojave Wind Farm in California with 1,528 megawatts of installed capacity that tops wind power generation charts.

The Mojave Wind Farm is the third largest onshore wind energy project in the world.  Located in the famed Tehachapi Pass through California’s mountain range of the same name, the wind farm is composed of series of wind projects originally developed by Terra-Gen Power LLC.  Southern California Edison has lengthy power purchase agreements with the various owners of the Mojave projects.
Investors can get of piece of the Mojave action through a stake in NRG Yield (NYLD:  NYSE), a yield-co subsidiary of NRG Energy (NRG:  NYSE).  The power generation and utility company bought Alta Wind Projects I through V as well as Projects X and XI in August 2014.  NextEra Energy (NEP:  NYSE) and Berkshire Hathaway (BRKA:  NYSE) own other projects at the Mojave Wind Farm.  At the end of 2015, NRG Yield held a portfolio of 4,559 megawatts, all of which was subject to off-take agreements with an average duration of seventeen years.  The portfolio is composed of the Mojave Wind assets as well as solar, thermal and conventional power generation assets.
NRG Yield reported $64 million in net income on $912 million in total revenue in the most recently reported twelve months.  The same period produced $478 million in operating cash flow.  This may seem like an exceptional number.  Over the previous three fiscal years the company generated an average of $268 million in operating cash flow.  However, NRG Yield is growing through the addition of new power generation assets, increasing revenue by well over 200% in the last three years.      
Earlier this year NRG Yield raised $350 million in new capital through the issuance of bonds.  The proceeds were used to repay outstanding obligations under revolving lines of credit and put the company in an improved financial position with lower cost debt.  The debt-to-equity ratio is 190%, making NRG Yield one of the most levered of the energy yield companies.  Still the cost of capital for NRG Yield is lower than for its parent NRG Energy.  The Alta Wind deal was accomplished with a 50/50 mix of debt and equity.  Expect the company to continue raising capital through a blend of equity and debt.
NRG Yield pays a dividend of $0.91, providing of a yield of 5.4% at the current price level.  The shares are trading well off the 52-week high stock price.  Relative price level might suggest a bargain.  However, at 25 times trailing earnings few investors would call the shares of NRG Yield a bargain.  In the current depressed interest rate environment the shares have been sought by yield-hungry investors.  It will be interesting to watch the impact on NYLD and other ‘yield-co’ stocks under higher interest rates.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

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