Good News, Bad News
The good news is that the grant was finally issued after over a month and a half after the Treasury’s normal 60-day cycle of considering the grants. This will come as a relief to investors who may have been wondering if the grant might be denied, although I concluded that there was not much chance of Western Wind not receiving the grant when I looked into it two weeks ago.
The bad news is that the amount received is a 12.5% ($12,221,994) less than the amount applied for. Since the average 1603 grant award is 97% of the amount requested, this shows that there is a serious disagreement between Western Wind and the Treasury about what costs can be legitimately included in the application. According to the company, the discrepancy was “apparently due to changes in the administration of the program by the Treasury Department which has reduced the suggested guidance on the amount of any developer fee which can be included in the 30% cash grant amount.”
Western Wind management believes that the whole grant should have whole grant should have qualified, despite the changed guidance, and plans to “engage in discussions” with the Treasury in the hope of getting the original amount reinstated.
Of course they would engage in such discussions (it only costs them a little in legal fees, when compared to the eight-digit potential gain,) but I think investors should write that $12M off in their valuation of Western Wind. If it comes through, it will be a nice upside surprise, but I’m sure the company was already engaging in discussions with the Treasury while the grant was being processed. Why should new discussions achieve a different result?
(NOTE: Since this article was written, Western Wind held a conference call to answer that question. I detail why management thinks they will succeed in getting the full grant reinstated here, and discuss investor concerns about lack of transparency here.)
What should this mean for the stock? I think we should look back to the stock price in May, before the grant was delayed. At that point, WNDEF was trading at about $1.50. The company has 70.66 million shares outstanding (including the 8 million to be issued in the acquisition of the Champlin/GEI wind pipeline, or about 78 million fully diluted.) Based on the average grant-to-application for 1603 grants, the “expected” grant was 97% of the $90,556,707 applied for, or $87,840006, putting the shortfall at $9,505,293, or $0.135 a share.
On the other hand, if Western Wind cannot recover the $9.5M, that amount will be subject to 100% bonus depreciation, and so can be used to reduce taxable earnings from the WindStar farm this year. Assuming a (conservative) effective tax rate of 25%, 4 cents a share will effectively be recouped through bonus depreciation. So if we totally write off the chance of recovering any of the tax grant, the loss amounts to 9.5 cents a share, and WNDEF should be trading around $1.40 based on prices in May, before the grant was delayed.
This calculation ignores the fact that, even in May, Western Wind was trading well below the value of its assets, which are worth on the order of $400 million, or between $5 and $6 a share. Even if we ignore Western Wind’s pipeline, the value of the company’s completed Windstar, Kingman I, and Mesa projects comes to $230-240 million, or about $3/share, even after the smaller-than expected tax grant.
That makes Friday’s sell-off to $1.23 / C$1.26 a share a little confusing. The market does not like surprises, and may take a some time to digest the actual numbers. I just bought a little more of the stock, but this is intended as a short term trade, since the purchase brought me above my target allocation.
Disclosure: Long WNDEF
DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results. This article contains the current opinions of the author and such opinions are subject to change without notice. This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.