Northland Power Produces cheap Electricity

Above is a picture of Niagara Falls and it produces an abundance of cheap electricity.These days Northland Power is producing cheap electricity also.The price to the consumer is the same but the price to Northland Power investors is quite cheap.

Q2 Performance

Northland Power had a somewhat below average quarter.As Northland Power over the last 2or 3 years has shown continuous above average performance.This quarter saw a 5% increase in revenues and 9% increase in adjusted EBITDA over Q2 in 2017.While net income increased by 12% over 2017.Adjusted EBITDA came in at $183 million for Q2 and $350 million for the 6 months.This puts NPI on track to hit $950 -$1000 million for 2018.

The Earnings Conundrum

The problem is that there seems to be some controversy over Northland's earnings.Scotiabank and Google Finance show  their earnings at $1.26 per share;another broker Qtrade shows earnings at $1.30 per share.But adjusted EBITDA for 2017 was $980 million and with 175 million shares this makes e.p.s of above $5.00 per share.This is the usual method of calaculating e.p.s.However NPI has an anomaly ;it had to debt finance two huge offshore wind farms which in total cost about $3 to 4 billion.Consequently interest expense was $333 million in 2017.Most estimates then were quite different for  EBIT,cash flow and adjusted EBITDA.This blog's best estimate of e.p.s. uses EBIT.And adjusted EBITDA for 2018 will be $950 to $1050 million and EBIT will be $600 to $700 million or $3.25 to $3.75 per share.Here lies the conundrum.If e.p.s is $1.26 as Scotiabank says then the stock is trading at about a 17 P/E multiple and is priced right.But if e.p.s is about $3.50 as this blog says then NPI is trading at a P/E ratio of 6.So even with interest expenses close to $350 million and taxes at $45 million EBIT is still in the $600 to $700 million range.And this means that e.p.s is in the range of $3.25 to $3.75 so the P/E ratio is about 6 times.This is too low for such a profitable utility.

Another anomaly this year is that NPI took a very large depreciation charge of $383 million.This is $140 million more than last year because it has added a huge amount of new assets to it's balance sheet.This reduces cash flow but does not affect earnings.So in total e.p.s remain robust but cash flow is lower than  some investors expected.

New Construction

As mentioned above NPI will be completing it's new De Bu wind farm in 2019.It is on schedule and will contribute pre-completion revenues in the fourth quarter.However it will add only 289 MW of power.

 Surely $30.00 a share

Northland Power is an unusual stock.It has a huge amount of adjusted EBITDA.But it also has very large interest expenses and has taken huge depreciation charges.Cash flow per share is about $1.26 per share but EBIT/share is about $3.25 -$3.75 per share and EBITDA/ share is about $5.00 per share.A low multiple of 10 would put the stock at $35.00 or $50.00 depending on what performance indicator is chosen.But the high interest expenses and depreciation keep it lower.Surely$30.00 per share is more reasonable. 

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