Canadian Hydro Developers: Right place, right time
Among the many ill effects of global warming are unusual and violent weather conditions. So there’s some poetic justice in the fact that many forces have combined to create a kind of perfect storm for Canadian Hydro Developers, Inc. (TSX: KDH), one of Canada’s leading renewable energy companies, and an undiluted, pure play on green energy.
The favorable conditions for Canadian Hydro Developers really began to find traction with the run-up in oil prices and electricity shortages following the lashing of New Orleans by Hurricane Katrina. Adding fuel to Canadian Hydro Developers’ fire has been former U.S. vice president Al Gore’s pushing of the global warming issue onto the world stage, along with the focus on the failure of the Kyoto Accord and the release of many books on climate change.
In turn, governments have stepped up support for alternative energy through subsidiaries, grants, and tax credits. Meanwhile, a system for trading emissions credits is rapidly evolving.
And sharing in the spotlight that has been focused in a surprisingly unrelenting way on global warming and the damage caused by fossil-fuel power production are green energy stocks like KHD.
Of course, as with most alternative energy companies, Canadian Hydro Developers comes with all the usual small-cap caveats and then some. Technology advances in fits and starts, and setbacks are inevitable. Government involvement and investment are still fairly integral, yet by definition often fickle and unfocused. And then there’s the long-term – and often delay-prone – nature of utilities.
On the bright side, Canadian Hydro Developers has a good deal of built-in buffers, not the least of which is that the company has a track record that is especially impressive given that many companies in the sector are still in their infancy. Canadian Hydro Developers has a track record of 17 years of growth. Canadian Hydro Developers’ shares have responded in kind. The compounded annual return on the stock over the last decade is 24%.
Just as important, Canadian Hydro Developers - despite the niche-like nature of the industry – is diversified in three very important ways.
By Project: Canadian Hydro Developers currently has 18 different power facilities in its portfolio. There are five wind farms, which places the company third in Canada in terms of installed wind capacity. In addition, there are 12 hydroelectric plants, and one biomass facility.
By location: Canadian Hydro Developers has operations in three Canadian provinces. Once current facilities under construction in Ontario and British Columbia are completed, Ontario will account for 58% of production, Alberta 22%, and British Columbia, 20%.
By Technology: Another factor that sets Canadian Hydro Developers apart from many smaller players is it isn’t focused on just one type of power. When all Canadian Hydro Developers’ projects in Ontario and British Columbia are online, some 64% of generation will come from wind, while 28% will come from hydro, and 8% from biomass.
Further evidence of the relatively “blue chip” nature of Canadian Hydro Developers is DMSR’s BBB/Stable rating on the company’s credit, a rating it has had on the company since the third quarter of 2005.
Further stability comes from the built-in long-term nature of power production. Canadian Hydro Developers regularly runs into setbacks and project delays. But the upside is that once production kicks in, so do predictable revenues. Currently, 80% of Canadian Hydro Developers’ production is sold under long-term contracts.
Looking ahead, Canadian Hydro Developers has a number of projects in the pipeline, and is forecasting that its generation base will grow by 183% from 2006 to 2009. Net capacity, which in 2002 was 89MW, is expected to be 265 MW for 2007, and by 2009, 650 MW.
At its annual meeting in April 2007, the company said it had C$0.8-billion in planned construction that would add an additional 385 MW. In addition, Canadian Hydro Developers has further estimated prospects of 1,370 MW, and some $3.3-billion of future potential construction.
And the way the Canadian Hydro Developers’ business is managed, any increases in power generation are mirrored by increases in revenue and cash flow. In 2005, for instance, net generation was 465 GWh, revenues were C$28.9-million, and cash flow from operations was C$9.9-million. Generation in 2006 jumped to 707 GWh, juicing up the financials accordingly. That year, revenues were C$48.2-million, and cash flow from operations C$22.8-million.
The timing of approvals and the potential for HGH capital expenditures may discount the stock in the shorter term. There have been one-year delays on approvals for two Ontario projects – Melancthon II and Island Falls - and the Wolf Island project in Ontario and the Dunvegan project in Alberta are also now delayed. But these kinds of setbacks are par for the course in the power generation world.
Earnings per share in 2006 were C$0.07, up from C$0.01 EPS in 2005. Looking forward, EPS estimates for 2007 range from C$0.09 to C$0.14, and for 2008, analysts have the EPS coming in at anywhere from C$0.11 to C$0.22.
Canadian Hydro Developers has a market cap of C$750-million. The stock is currently trading at about C$6.14, down from its 52-week high of $C6.94, but still ahead of the one-year low of C$4.60. Scotia Capital has a sector outperform rating on the stock with a one-year target of C$8.25. BMO Capital Markets is calling the shares reasonably valued at current levels, noting that its target of C$6.60 is approximately 100% of the discounted cash flow value of the company. First Energy Capital, meanwhile, has a C$9.00 target, and Scotia Capital, $8.25.
