Wind Power Investment Opportunity
Warren Buffett Doubles Down on Wind Power
Warren Buffett announced last week he was ponying up big to get his hands on two massive wind farm projects in Tehachapi, California.
I wasn't surprised to read the news, as the two recently-purchased wind farms are very close to completion and should be operational by the end of the year.
Both will qualify for the expiring federal tax breaks, and both are locked into power purchase deals until 2035.
It was a sweet deal for Buffett, as he took on none of the development risk — but will reap the rewards of more than 20 years' worth of power being sent to a California utility that needs every watt of renewable power it can get in order to meet the state's very aggressive renewable energy portfolio goal of 33% by 2020.
At a time when most wind power news is either hostile or depressing, this certainly provided the wind power industry with a brief respite from the weight of the entire industry being sidetracked once the wind energy production tax credit expires at the end of the year.
Snooping Around the Tehachapi Pass
Over the past few months, there have been scores of folks taking sides on the wind energy tax credit that's set to expire in less than three months...
Most of it's nothing more than hype, sour grapes, and partisan buffoonery.
Although I admittedly am no supporter of subsidies of any kind for any form of power generation or transportation fuel (I'm looking at you, oil and gas industry), the wind energy tax credit in question doesn't really cost taxpayers anything.
As a recent editorial contributor pointed out:
It’s not every day that Congress enacts legislation that meets an urgent national challenge head-on, stimulates job growth, promotes energy independence and protects the environment — without costing taxpayers a dime.
But that’s just what results from the renewable energy Production Tax Credit (PTC), the policy driver behind the rapid growth in U.S. jobs and manufacturing since 2005. The PTC is tax relief that only rewards results, and it doesn’t cost taxpayers a dime. It pays for itself, through federal, state, and local taxes paid by the expanded industry, including wind farm operators and their employees. As Republican operative Karl Rove recently said, this is a market mechanism that doesn't pick winners and losers, merely creates the incentive for private investment needed by a growing new American industry.
And it's working. Equipped with the PTC, the wind industry has been able to lower the cost of wind power by more than 90%, power the equivalent of nearly 13 million American homes, and foster economic development in all 50 states.
But now, the PTC is set to expire at the end of 2012, and it is crucial that it be extended immediately. Failure to extend the PTC would lead to significant job losses and roll back the progress we are making as a nation to diversify the U.S. electricity portfolio.
Now look, I don't want to make a political thing out of this. Whether you're for or against ending the PTC is of no concern to me...
At the end of the day, our opinions on this matter are not going to help us make money.
But if you snoop around the Tehachapi Pass, where Warren Buffett just landed himself the deal of a lifetime, you will find an opportunity that can make you a decent chunk of change — with or without the PTC.
An Easy Double in 4 Months
It was in early 2007 when I first met with management at a company called Western Wind Energy Corp. (TSX-V: WND) at one of its properties in the Tehachapi Pass. This was a company I'd discovered about a year prior, after an analyst friend of mine was talking up the company's management.
These were old-school wind guys with modern-day management skills. They had a jewel of an asset, some pretty impressive expansion plans, and they actually had the funding necessary to accomplish nearly all of their near-term goals.
|Touring Western Wind's Tehachapi Property in 2008|
So I flew out there, took a tour of the property, and got to see firsthand what would eventually become one of my biggest winners...
I initially recommended this company back in February 2008 when the stock was trading around $1.95. By June, it had hit a high of $4.35.
A 123% gain in four months? Not bad at all!
Of course, once the recession kicked in, the stock got knocked down hard — along with pretty much everything else in the market. And quite frankly, it never fully recovered.
This was typical with most small renewable energy companies after 2008/2009.
Still, I always kept this one on my watch list. Despite the headwinds in the renewable energy space, WND has always been a pretty solid outfit that actually generates revenue and, from a financial position, is quite solid.
But you know how it is; you can't fight the market. All you can do is be ready to pounce when opportunity presents itself.
And that's exactly what's happening now with Western Wind...
Wind Farm for Sale!
Back in August, Western Wind Energy's CEO announced the company and all of its assets were for sale.
Last year Algonquin Power launched a $2.50 takeover bid, but WND blew it off as it did not fully represent the true value of the company. Some were not pleased with the decision and a proxy battle ensued to replace the board.
Now, I don't know the ins and outs of what went down, but I do know that after that initial takeover bid was declined, the stock struggled...
But then, when the press release about the sale came out, the stock soared — indicating the market knows this one's worth a hell of a lot more than the $1.20 it was trading around at the time.
Around the end of August, Brookfield Renewable Energy Partners acquired just over 16% of the company's common shares. Brookfield is now the second largest shareholder of Western Wind. The company bought 10.7 million shares at $2.28 per share and also picked up close to 320,000 warrants.
While we still don't know what the final number will be when Western Wind gets picked up, estimates continue to range from between $2.53 and $5.06 per share...
But here's something you should know: The CEO of Western Wind receives a $2 million bonus if the sale price is $3 a share. He also gets an extra $1 million for each additional dollar above $3.
Assuming the future sale of this company isn't hijacked by those outside the company looking to pull a fast one, I can't imagine this thing selling for less than $3.00...
Right now, Western Wind is trading around $2.46.
To a new way of life, and a new generation of wealth...