Clean Energy Demand Powers Growth for this Utility…

Northland Power is a power producer that develops, builds, owns and operates clean and green power infrastructure assets in Canada, Europe, and other global markets. As one of Canada’s first independent power producers, Northland Power has operating facilities generating 2,429 MW of electricity, with an additional 399 MW of generating capacity under construction and 1,044 MW in advanced development.

Northland has in-house development, plant design, financing, and operations capabilities. The company has a long track record of 31 years in the business of producing electricity from natural gas and renewable resources such as wind, solar and biomass. The company is highly diversified by assets and technologies i.e. thermal (40%), wind (55%) and solar (5%). Northland’s large geographical footprint provides ample opportunities in leading markets. Its regulated utility serves 480,000 customers in Latin America.

Investment Data

Revenue Growth & Market Exposure

Given its three-decade-long history in the power industry, Northland has a good track record of bagging high quality projects characterized by revenue contracts delivering predictable cash flows. Northland partners with indigenous partners, municipalities and independent companies to develop and operate power generation facilities. The company’s ability to deliver projects on-time and on-budget further make it a preferred choice of customers. A good track record of operational excellence helps Northland to extend its long-term contracts with existing customers.

Northland has 1,400+ MW of visible renewable power projects pipeline. It actively seeks to invest in jurisdictions where it can get an early mover advantage and can successfully establish a significant presence. The company is expecting the acquisition of EBSA, a regulated utility in Colombia to be completed in the fourth quarter of 2019. This acquisition will further diversify Northland’s asset base and drive future opportunities in Colombia and Latin America.

Northland Power has grown its revenues at a rate of 23% CAGR over the last decade. It is well-positioned to benefit from the growing trends of a global shift towards renewable power, offshore wind expansion and construction of large power and infrastructure assets globally. The company could also leverage its early mover advantage to establish a presence in new markets.

Dividends

Northland Power is known for delivering strong and consistent returns and stable dividends to its shareholders. Its 10-year total shareholder return stands at 16%. The company has also demonstrated solid growth in adjusted EBITDA and free cash flow per share over the last five years. It has an attractive annual dividend yield of 4.3% and a dividend payout ratio of 71%. Northland last raised its dividend by more than 11% and has grown them at 3.6% CAGR over the last three years.

Northland Power has a proven track record of growing cash flows. The company’s cash flows are derived from a diversified asset base consisting of wind, natural gas, hydro and solar facilities. Long weighted average contract lives of natural gas and wind assets lead to long term stable cash flows. Northland Power’s contracted cash flows have supported its stable dividend payouts. Northland is expecting adjusted EBITDA of $950-$1,000 million and free cash flow of $1.65-$1.80 per share in 2019.

Northland’s business is subject to stringent environmental laws and regulations by the federal, provincial, state and municipal governments. Necessary environmental permits and laws need to be strictly followed. All these acts as significant entry barriers for newcomers. Its management team with over 200 years of combined power industry experience aids in careful management and mitigation of project risks. The company enjoys stable investment grade credit ratings by top rating agencies.

EBSA’s utility infrastructure business is expected to generate average, mid-single digit accretion to FCF per share during the period ending 2023 and increasing accretion thereafter in the long-term. The company stands a good chance to gain from an exciting portfolio of attractive and strategic global development and partnering opportunities. Its well diversified, modern fleet of high quality global assets and proven excellence in managing projects and operating facilities should further support future growth.

Competition

Northland Power competes directly with other utility companies in North America. It competes with several utility companies such as Fortis Inc., Brookfield Infrastructure Partners, TransAlta Renewables, ATCO, etc. having a huge presence in the US and Canada. Fortis is a leading Canadian utility company with assets worth $50 billion and operating through ten utility operators. TransAlta Renewables is one of the largest generators of wind power in Canada while ATCO is a diversified company providing services and business solutions globally.

Bottom Line

Ownership of sustainable infrastructure assets and significant development opportunities across multiple jurisdictions and technologies act as strong growth enablers for Northland Power. The company has a strong core business with a proven track record and is in a good position to leverage its knowledge and customer relationships to develop new sites. Northland is known for its operational excellence and financial strength which positions it well for future growth opportunities. The company should continue its dividend growth streak in the high single-digit rate going forward driven by strong investment in regulated assets and infrastructure growth projects.

NPI is a relatively new business when you compare the company with the competition and when it comes to developing new infrastructure as a new company, it’s important to understand the background of the leadership team as they are the currency of the company. I was pleased to find applicable experience on the executive bench with relevant and senior roles in other companies worldwide. Their expertise can make or break the company in the long term as it takes years to get projects going and built.

When it comes to NPI, while the numbers are important, deciding to invest in this utility is investing in the future green energy and putting your faith in the executive team to execute. I have this feeling that NPI could be an acquisition target of the larger players in the longer term as it would prove to be a green energy accelerator for the larger players. Its market capitalization is still small at nearly $5B.

NPI is a winner but not a buy and forget. It’s also not a dividend growth stock but rather an income stock. One project setback can negatively impact the stock performance and subsequently the dividend. Simply be aware.

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