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Judging by the emails/comments I’m getting, there’s plenty of current & potential investors out there delighted to see Monday’s announcement from NTR plc, confirming the sale of its US wind farms. [i.e. NTR’s 201 MW Post Rock, KS & 150 MW Lost Creek, MO wind farms – both approx. 3 years old, with 20 yr investment-grade PPAs in place]. Like many corporate releases though, it raises just as many questions as it answers…including the most obvious question:

So, what are the implications now for NTR’s NAV & share price?!

Far be it for me to predict a near-term share price trajectory – let’s see what the next few weeks’ trading brings – but I’m obviously keen to arrive at a fresh NAV estimate, based on this key value-realisation event. First, let’s take a breath & revisit my original NTR investment write-up (from Aug-2014). I won’t recap it here…because I’d suggest (re-)reading that piece is probably essential prep for the rest of this post (it definitely was for me!).

Picking up where I left off, I wrapped up that post with this speculation: ‘…it will be interesting to see if there’s any fireworks at the [September AGM] meeting’ – little did I know how fortuitous, yet prescient, this would prove to be! Preceded by a number of critical press articles (which prompted this pre-AGM response), there were indeed fireworks at the AGM itself…I think it’s fair to say management looked a tad defensive & beleaguered by all the questions and attention!

However, the real AGM highlight was confirmation the board had already requested management (in April-2014, which of course ‘preceded and was entirely independent from any…shareholder discussions’) to consider the strategic options for NTR’s US wind assets. It was also acknowledged (as I’d already argued in my prior post) ‘there could be strong interest in the US wind assets given their quality and operational performance’, and that ‘a successful sale could result in an opportunity for an additional liquidity event for all our shareholders.’ This was capped off with a commitment to appoint expert advisers, and (subject to their report) to potentially move ahead with a sale process.

Shortly after the AGM, the company then confirmed its three main shareholders (representing 71.5% of NTR’s issued share capital) had reached agreement, and had ‘put a proposal to the Board that it initiate a process to sell the NTR US wind assets as soon as possible and that NTR implement a tender offer as soon as possible thereafter for NTR’s issued shares.’ Depending upon the tender price per share, One Fifty One plc & Pageant Holdings informed the board they intended to accept such a tender offer for all their shares, while Woodford Capital (family investment vehicle of Chairman Tom Roche) stated its intention not to sell any shares in such a tender offer. This obviously allayed any lingering investor concerns management wouldn’t follow through on a value-realisation strategy…as evidenced two months later by the appointment of Marathon Capital to formally launch a sale process for the US wind farms.

Which brings us bang up-to-date – here’s Monday’s sale announcement again. To summarise: NTR’s (96.5% owned) subsidiary Wind Capital Group has agreed to sell its Post Rock & Lost Creek wind farms for a gross USD 244 million to Pattern Energy Group Inc. (PEGI:US) – after repayment of third party debt, proceeds will amount to USD 195 million. Straight off, I have to admit, I’m irked by the timing (Easter Monday?!) & the brevity of the release (compare it with the Pattern release). And by the questions it leaves unanswered:

– What’s the likely timing for the closing of the deal?

– Will there be escrow/warranty agreement(s) for a portion of the proceeds?

– Will there be any related working capital adjustments on closing of the deal?

– What are the tax implications of the deal, if any?

– What FX hedging arrangements are in place (considering recent EUR/USD rate volatility) for this deal, if any?

– Why is Pattern’s assumption of USD 102 million of net debt in the deal not disclosed?

– Why is there no disclosure re the wind farms’ tax equity investors*?

[*They may be called tax equity investors, but their project investment is actually a contractual financial liability (‘equity capital contribution debt‘), and is included in NTR’s consolidated loans & borrowings. See Note 25 of the latest annual report. Oddly enough, Pattern confirms it will end up with a 270 MW owned interest in Post Rock & Lost Creek. So, what happens with the remaining 81 MW – does it end up in the hands of the tax equity investors? At this point, who bloody knows..?!]

And there’s a potentially more disturbing aspect to this deal – Pattern Energy may ring a bell for shareholders. Chris Hunt, one of NTR’s non-executive directors, is actually a director of Pattern Energy Group LP – the main shareholder in Pattern Energy Group Inc. He’s also an MD at Riverstone LLC – where two of the partners, Lord John Browne & Michael Hoffman, are actually directors of Pattern Energy Group Inc. And prior to Riverstone, it looks like Hunt also worked for Lord Browne (at BP). Shareholders may also recall Riverstone (in a JV with AES Corp) previously purchased the 709 MW Imperial Valley solar project from NTR in 2011. Again, why isn’t any of this highlighted in NTR’s press release?

Surely shareholders have the right to know what part (if any) Hunt played in this transaction & whether NTR’s board had appropriate corporate governance controls in place to avoid potential conflicts of interest, etc.?

But even more disappointing is the announced USD 195 million proceeds. First, it seems an extraordinarily obtuse way of presenting the deal. I’m sure plenty of investors were eagerly awaiting the company’s sale of its crown jewels. [NTR’s net wind assets effectively represent its reported net worth]. At first glance, a shareholder might well calculate an equiv. EUR 183 million of proceeds & compare it with NTR’s current market cap…a much higher EUR 234 million! Who could blame them for being alarmed by such a comparison? But who could really fault them either – there’s nothing in the press release to confirm all of NTR’s wind-related loans/liabilities (which far exceed actual cash proceeds) will also be eliminated/extinguished in this deal!?

Second, there’s the implied (gross) value of the deal. If you recall, a primary component of my prior NTR analysis was the Enterprise Value/MW for Post Rock & Lost Creek. Based on an original total project cost of USD 715 million (equiv. to $2.0 Million/MW), a capacity-weighted US average installed project cost of nearly $2.1 M/MW, and deal multiples generally ranging between $2.0-2.6 M/MW in recent years, I was pretty comfortable using an estimated depreciated book value of USD 651 million (i.e. $1.85 M/MW) for the lower end of my valuation range.

Unfortunately, neither NTR or Pattern provide a specific deal EV. But if I tot up the cash proceeds, assumed net debt, third party debt, plus an estimate* for the current tax equity investment, I reckon the deal EV is just over USD 500 million (approx. $1.5 M/MW). [*Looking back: Total tax equity was USD 215 million in Mar-2014 & an estimated USD 191 million in Sep-2014]. Am I missing something here, because this doesn’t really make sense to me…why is the multiple so much lower than other deals? And if such a divergence reflects unique characteristics in the tax/debt structure & operational performance of Post Rock & Lost Creek (vs. the general characteristics of most other wind farm deals/projects), shouldn’t this have been readily apparent in NTR’s shareholder reports in recent years? Once again, we’re forced to ponder the frustrating opacity of NTR’s accounts…

Well, the buyer certainly appears to like the deal! Despite a veiled Q1-2015 production/profit warning, Pattern raised its cash available for distribution (CAFD) per share growth target to an impressive 12-15% CAGR (vs. a recent 10-12% CAGR) for the next three years, based on the deal with Wind Capital (plus an additional 90 MW deal). As did its shareholders – on Monday, Pattern’s share price initially spiked nearly 7% on the news, almost a USD 140 million increase in market cap!

Here’s hoping we receive further/necessary clarification from management, as soon as possible – meanwhile, let’s work with the best info/estimates on hand & derive a new valuation range for NTR. [fyi My prior NAV range was EUR 2.68 to EUR 5.49 – now, we should be able to narrow our new range significantly]. What appears to be a disappointing deal multiple obviously bodes poorly for a new NAV estimate…but fortunately, as happens with many investments, we’ve also enjoyed an unexpected positive here (namely, a collapsing EUR/USD rate) which should offset a significant portion of the damage.

As before, I’ll present two adjusted balance sheets – derived from the last interim report (& annual report, if necessary), and this week’s press release – we’ll call them Pro-Forma I (Conservative) & Pro-Forma II (Aggressive). Again, there’s no easy way to do this – I’ll work my way down through each balance sheet line item (with specific comments), then summarise with actual & pro-forma balance sheet tables below (you may want to print them out first):

[NB: Assume a 1.3769 EUR/USD for the Mar-2014 balance sheet, a 1.2633 EUR/USD for the Sep-2014 balance sheet, and a current 1.0650 EUR/USD rate. For NPV purposes, I’ll now use a 5% discount rate, with no discount applied for anything under a year. I also intend commenting on balance sheet pro-forma adjustments only where they exceed EUR 5 million – feel free to email me if you have any specific questions.]

Property, Plant & Equipment:

Pro-Forma I & II:  US wind farm assets moved to Trade & Other Receivables. PP&E still inc. €14 million (M) of other assets (per last annual report), and subsequent net capex has been de minimis.

Goodwill:

Pro-Forma I & II:  Assume Zero.

Joint Ventures:

Pro-Forma I:  NTR has an effective 38.5% stake in Celtic Anglian Water – I went to the trouble of downloading a CRO copy of its latest Mar-2014 annual report, and I’m glad I did! [Email me for a copy]. Revenue increased 14% to €30.3 M & operating margins expanded to 21.6% (from 19.0%) (NTR’s interims confirm no reversal in current year profitability). For a utility with such margins & growth, a 2.25 P/S multiple is conservative (equiv. to a rock-bottom 11.8 P/E & a 6.2% dividend yield). €30.3 M * 2.25 P/S * 38.5% = €26 M

Pro-Forma II:  Noting such an increase in revenue & margins (for a utility), we can justify stretching to a 2.75 P/S. Plus the balance sheet’s exceptional for a utility – net receivables, cash of €8.4 M & zero debt! Clearly, the cash could be extracted & debt of (say) almost €20 M comfortably supported, without impacting our P/S multiple – as per usual, I’ll haircut this debt by 50% to be conservative. [Equiv. to a 17.6 P/E & a 4.2% dividend yield]. (€30.3 M * 2.75 P/S + 8.4 M + 19.6 M * 50%) * 38.5% = €39 M

Trade & Other Receivables:

Pro-Forma I:  €6 M of other receivables. $195 M wind farm proceeds from Pattern, less 2% in deal fees & a 3.5% minority interest in Wind Capital. $45 M consideration receivable from sale of Osage by Sep-2015. $20 M of guaranteed deferred consideration in 2016 from sale of Greenstar Recycling to Waste Management & an assumed 25% of an additional $20 M deferred consideration in 2018 – apply NPV. Assume an estimated $16 M receivable from US FERC re transmission upgrades is project-specific & therefore eliminated, post-wind farms sale. €6 M + $195 M * 98% * 96.5% + $45 M + $20 M * 94% + $5 M * 85% = €243 M

Pro-Forma II:  €6 M of other receivables. $195 M wind farm proceeds from Pattern (no clarity if proceeds are net/gross of fees/minority interest). $45 M consideration receivable from sale of Osage by Sep-2015. $20 M of guaranteed deferred consideration in 2016 from sale of Greenstar Recycling to Waste Management & an assumed 75% of an additional $20 M deferred consideration in 2018 – apply NPV. Assume an estimated $16 M receivable from US FERC re transmission upgrades is specific to Wind Capital, not the wind farms (or a working capital deal adjustment’s made accordingly – again, no clarity). €6 M + $195 M + $45 M + $20 M * 94% + $15 M * 85% + $16 M = €276 M

Other Financial Assets:

Pro-Forma I:  Assume $0.5 M of interest rate derivative assets & $31 M of restricted cash are project-specific & therefore eliminated, post-sale. Let’s also include an estimate for the Blackrock NTR renewable power investment platform: It appears to have finally closed at USD 611 million, NTR retains a ‘significant economic interest’ & NTR’s former CEO (Jim Barry) actually departed to become CIO of the platform. Alternative asset managers can easily achieve a 7.5% of AUM valuation – let’s assume 20% of this valuation may accrue to NTR (bearing in mind income earned would probably come at little/no incremental cost to NTR). Miscellaneous assets net to €2 M. €2 M + $611 M * 7.5% * 20% = €11 M

Pro-Forma II:  Assume $0.5 M of interest rate derivative assets are project-specific & therefore eliminated, post-sale. Assume $31 M of restricted cash is specific to Wind Capital, not the wind farms (or a working capital adjustment’s made accordingly – again, no clarity). Let’s also include an estimate for the Blackrock NTR renewable power investment platform – alternative asset managers can easily achieve a 7.5% of AUM valuation, let’s assume 33% of this valuation may accrue to NTR. Miscellaneous assets net to €2 M. €2 M + $31 M + $611 M * 7.5% / 3 = €46 M

Cash & Cash Equivalents:

Pro-Forma II:  Interim report notes dollar cash reserves have been converted to euro – assume all dollar cash has been converted. And assume an additional €5 M of net profit (as per H1-2015) is generated in cash for H2-2015. €47 M + €5 M = €52 M

Loans & Borrowings:

Pro-Forma I & II:  Remember, NTR holds ‘no debt at the centre’, and all project financing is at a subsidiary level & on a non-recourse basis – despite the lack of specific management confirmation, we can safely assume all loans & borrowings are therefore eliminated, post-sale. Zero.

Deferred Income:

Pro-Forma I & II:  The risk this US wind farm grant liability ever crystallised (or became repayable) was always remote & was due to be legally extinguished in 2015 anyway – any residual risk now passes to Pattern. Zero.

Provisions:

Pro-forma II:  Noting the substantial release of prior accruals/provisions in recent years, assume this remaining provision will be reversed/offset elsewhere. Zero.

Derivatives:

Pro-Forma I & II:  All project financing is at a subsidiary level & on a non-recourse basis – despite the lack of specific management confirmation, we can safely assume all related interest rate derivative liabilities are therefore eliminated, post-sale. Zero.

Deferred Tax Liabilities:

Pro-Forma I:  Noting the disappointing wind farms sale value, related $83 M US deferred tax liability now appears immaterial/irrelevant – assume it’s also extinguished, post-sale. €6 M annual tax liability on €50 M annual West-Link payments from NRA (’til 2020), equates to €31 M liability – subject to an average 2.5 year NPV, and assuming a 25% reduction (in light of minimal tax payments in past few years). €9 M offsetting deferred tax asset also reduced by 25%. €31 M * 89% * 75% – €9 M * 75% = €14 M

Pro-Forma II:  Again, assume related $83 M US deferred tax liability is extinguished, post-sale. €6 M annual tax liability on €50 M annual West-Link payments from NRA (’til 2020), equates to €31 M liability – subject to an average 2.5 year NPV, and assuming a 50% reduction (in light of minimal tax payments in past few years & further tax planning). €9 M offsetting deferred tax asset also reduced by 50%. €31 M * 89% * 50% – €9 M * 50% = €9 M

Non-Controlling Interests:

Pro-Forma I & II:  Wind Capital Group minority interest now incorporated in Trade & Other Receivables. Zero.

NTR Total Assets Apr-2015

NTR Total Liabilities Apr-2015

NTR Net Assets Apr-2015

[NB: Share count includes 0.3 million restricted shares (for tax purposes). Any EU wind strategy investment (since the interims) is ignored – it may reduce cash (likely by single digit millions), but obviously won’t impact overall NAV.

– Risks:   i) If NTR has hedged wind farms sale proceeds, or any other dollar assets/liabilities, it could negatively impact this NAV range (likely by a single digit %, noting the current EUR/USD rate), and ii) NTR granted a USD 60 million environmental indemnity to Waste Management (from Jan-2013 ’til mid-2017, re its Greenstar disposal, see Note 29.f) – however, it has insurance cover in respect of a significant portion of this potential liability. Noting this coverage & the fact only USD 3.4 million’s been claimed to date, this risk appears fairly minimal.

– Opportunities:   I haven’t included FV estimates for certain other assets (for which book values are/appear negligible), like: a) NTR’s stake in Highview Power Storage – despite minimal book value (EUR 0.2 million), NTR’s CEO still serves as a director & highlights important milestones for the company, b) its stake in the CRG toll road concessions, and c) its ‘residual interest in the development of US solar assets disposed of in prior years as development milestones are reached’ (Note 3.c). Considering the EUR 65 million+ in gains NTR realised (in its most recent FYs) from legal claims, asset sales, contingent consideration, and release of prior accruals/provisions, considerable optionality may still exist in such legacy assets.]

Based on this new Pro-Forma EUR 3.04 to EUR 4.04 NAV range, I’ll use the lower tertile of the range (i.e. weighted 2/3:1/3 towards the Conservative end of the range) this time ’round to determine my best estimate of NTR’s updated intrinsic value – this equates to a EUR 3.37 Fair Value per share. [This is a good place to remind investors of the risks of investing in grey market shares – as they say, talk to your broker (and/or see my previous post for brokers who actively deal in NTR shares)]. This continues to offer Upside Potential of 40% vs. the current EUR 2.40 share price (and now we obviously have the wind farms sale announcement & a commitment to a tender offer in hand).

At this point, I should again stress this NAV fair value (& range) is clearly dependent on further adjustments in NTR’s book values (above & beyond the impact of the wind farms sale), to reflect what I reasonably believe to be fair & accurate valuations. But the CFO has specifically noted NTR’s breakdown of reported net assets ‘Represents book values only ‐ does not represent potential market value of assets’ – see page 3 of the latest shareholder presentation:

NTR Net Assets Sep-2014

Which is again evidenced by the EUR 183 million (equiv.) wind farms sale proceeds – despite what appears (in my opinion) a disappointing deal price, it’s still double their reported EUR 90-95 million net book value (eyeballing the slide above, ex-Osage)! And investors should now be far more confident the remaining value gap will be closed – the wind farms sale has been announced & the shareholder agreement (between NTR’s three main shareholders) should obviously assure us the board will go ahead with a tender offer. In fact, the return of capital via a tender offer should also provide further reassurance: Shareholders could be unfairly penalised if they accepted a tender offer based on incomplete info, and/or an NAV per share that did not represent market values for all assets (& liabilities) – potentially exposing the board/company to legal action.

[It’s important to also highlight the funding & timing of a potential tender offer here. Post-wind farms sale, NTR’s NAV will be highly liquid – liabilities should barely reach EUR 40 million, while cash should soon hit somewhere between EUR 220 M to EUR 264 million once Pattern Energy settles the wind farms cash consideration. If we then assume i) a tender offer’s priced at EUR 3.37 per share, ii) all external shareholders (approx. 59.5% of all outstanding shares) accept the tender, and iii) Tom Roche & management (approx. 40.5%) do not sell any shares in the tender, in aggregate the tender offer would cost a total of EUR 196 million – which can obviously be funded with cash on hand.

Of course, that would leave NTR with a revised NAV of EUR 134 million – which provides ample funding for management to continue with its newly proposed EUR 50 million equity investment in an EU wind strategy. But frankly, that still won’t solve the problems associated with being an unlisted Irish company. In the current environment, far better returns & valuations would be attainable via an (asset light) asset management model, which invests/manages capital via private & listed wind energy/renewables investment fund vehicles. And management’s already pointed in this direction – look at page 8 of the latest NTR presentation. btw This potential has prompted me to now include value estimates for the Blackrock NTR renewable power platform – I suspect this might ultimately prove to be a much larger & potentially far more rewarding relationship/investment.]

Of course, I need hardly remind you One51 & Pageant Holdings each have major stakes in NTR (of 23.5% & 9.2%, respectively), and to date both have clearly demonstrated they’re highly engaged & determined activist investors. If there’s any disagreement over valuations, they can obviously push for further asset sales – for example, Celtic Anglian would be an ideal business to put up for sale in the current environment! [And every 5 cents increase in NTR’s NAV/tender offer price is worth an additional EUR 1.6 million to them, in aggregate – if that’s not sufficient motivation…I don’t know what is!?].

And Alan Walsh plays a particularly crucial role here – he’s an NTR director, so it would be intriguing to know how personally involved he’s been with the wind farms transaction, and how pleased or disappointed he actually is with the outcome. Of course, he is also One51’s CEO – i) disposing of non-core assets (like its NTR stake) is a key step towards going public, as he’s already stated, ii) the ultimate value of its NTR stake (perhaps EUR 78 million) is integral to One51’s own market cap (of EUR 211 million), and iii) clearly, he has a duty to his own shareholders to maximise the disposal value of this stake. [And study One51’s share register (see p. 23) – in turn, it has a large block of corporate shareholders who now have a similar vested interest in NTR & a duty to their own investors/members].

All in all, the NTR board is now under widespread & attentive scrutiny, in relation to this sale, the fair value of the balance sheet, and the ultimate realisation of value for all shareholders (in both NTR & One51).

To date, NTR’s delivered a 53% gain for me (the majority of this gain actually occurred in the week after my original August write-up). NTR has now become my largest holding (a 10.9% portfolio allocation) – reflecting its appreciation, and my increased conviction & risk tolerance in light of the steady progression in its new value-realisation strategy.

  • Tgt Price/Book:     2.6      (based on Sep-2014 Net Equity)
  • Tgt Market Cap:     EUR 330 M  
  • Tgt Fair Value:       EUR 3.37
  • Upside Potential:   40%
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