Water, Wind Power Green Profits

06/16/2009 12:01 am EST


Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

The Innergex Power Income Fund is a modest-risk alternative energy play with a fat monthly payoff, writes Roger Conrad in Canadian Edge.

I [recommended] Innergex Power Income Fund (TSX: IEF.UN, OTC: INRGF) in December 2008 for its ability to generate extremely stable revenue under the worst possible circumstances. Since then, the owner and operator of hydroelectric and wind power plants has turned in strong numbers for two of the worst quarters in decades for the North American economy.

The trust’s fourth-quarter operating income rose 37.5%, paced by a 42% increase in generation. That triggered a 51% jump in cash flow from year-earlier levels. For an encore, Innergex turned in a fivefold increase in first-quarter 2009 earnings, adjusted for one-time items, and a 37% jump in distributable cash flow. The trust’s wind farms produced 11% more power, combining with strong performance at the Quebec hydro facilities to offset weaker output at dams in British Columbia and Idaho.

The vast majority of Innergex’s output is sold to provincial authorities in Canada. Innergex’s current contracts have an average life of 15 years. Hydro contracts in Quebec feature built-in annual rate increases tied to consumer price inflation, with a minimum yearly boost of 3% and maximum of 6%. The hydro facility in British Columbia enjoys annual boosts of 50% of [the increase in] Canada’s Consumer Price Index (CPI). Meanwhile, the wind farms in Quebec have built-in rate hikes equal to 18% of the rise in the CPI.

The upshot is [that] Innergex is actually an inflation beneficiary, because revenue boosts will always exceed increases in expenses. These government-mandated rates are an incentive to encourage green power. The advantage is compounded for US investors, as the monthly dividends are paid in Canadian dollars, which generally move in tandem [with] energy prices and hence inflation.

With demand for carbon-neutral electricity surging in North America, renewable energy companies such as Innergex have an unprecedented opportunity to expand their generation assets, and hence future cash flow and distributions. Innergex has proven its ability to develop and integrate new assets in the past, and management states it’s on the lookout for more. The chief challenge is financing, and it’s proven a bridge too far for many developers. Not so Innergex, which maintains an extremely conservative financial strategy.

Innergex last raised its distribution in February 2008, by 3.6%, after completing the acquisition of a 38% interest in the 109.5-megawatt Baie-des-Sables wind farm in Quebec. That was a deal dubbed by management “the most important in its history,” as it diversified power sources out of hydro and allied the company to the green energy movement.
No one should expect a bump up in the payout until the economy improves and/or management is able to make another accretive deal. That may not be too long in coming. But in any case, there’s the 10%-plus yield to make the wait more pleasant. Buy Innergex Power Income Fund up to US$12. (Shares closed at $8.99 in New York and at C$10.16 in Toronto Monday, for a current yield of 9.8%—Editor.)

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