National Grid To Acquire Geronimo Energy For U.S. Renewable Energy Development

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About: National Grid plc (NGG), Includes: XEL
by: Donovan Jones
Summary

National Grid has agreed to acquire Geronimo Energy and its projects for at least $225 million.

Geronimo is a prominent developer of renewable energy projects for utilities and businesses in the Northeast and upper Midwest U.S.

With the deal for Geronimo, National Grid is expanding its renewable energy focus and footprint in favorable U.S. energy markets.

Quick Take

National Grid (NGG) announced it has agreed to acquire Geronimo Energy for at least $100 million.

National Grid is also in the process of acquiring a 51% share of Geronimo’s operating and in-construction wind and solar power projects with a total power output of 378MW for $125 million.

Geronimo Energy operates as a full-service clean energy developer for utility providers, corporations and landowners in the US.

NGG is acquiring Geronimo to increase its footprint in renewable energy development in the U.S.

Target Company

Minneapolis, Minnesota-based Geronimo was founded in 2004 and has developed and sold over 2,200MW of wind and solar projects, both in-development and completed.

Management is headed by President and CEO Blake Nixon, who has been with the firm since 2008.

Below is an overview map of the company’s projects:

Source: Geronimo Energy

Geronimo is the sixth largest renewable energy developer in the U.S., according to EnergyAcuity’s ranking in 2018.

Market

According to a market research report by Allied Market Research, the global renewable energy market was valued at $1.469 trillion in 2017 and is projected to reach $2.153 trillion by 2025.

This represents a CAGR of 4.9% between 2017 and 2025.

The main drivers for this expected growth are the long-term cost-effectiveness of renewable energy, continued depletion of non-renewable resources as well as rising demand.

The European region is projected to grow at the fastest CAGR of 6.2% during the forecast period due to governmental support.

Geronimo intends to expand its operations from its historical focus in the Northeast U.S. to the Southeast and Midwest regions.

Acquisition Terms And Rationale

NGG disclosed the acquisition price for Geronimo as $100 million plus the potential for earnouts combined with $125 million for a controlling interest in certain existing projects.

A review of the firm’s most recent financial report indicates that as of March 31, 2018, NGG had cash and equivalents of $436 million and total liabilities of $53 billion of which long-term debt accounted for $29.4 billion.

Free cash flow during the 12 months ended March 31, 2018, was $1.02 billion.

In the past 12 months, NGG’s stock price has risen 6.6% vs. Xcel Energy’s (XEL) rise of 26.8%, as the chart below indicates:

Source: Sentieo

Analyst ratings are roughly split between ‘Strong Buy’ and ‘Underperform’ and the consensus price target of $58.83 implies only a 1.5% upside from the stock’s current price at press time:

Source: Seeking Alpha

Analyst sentiment in the 2018 earnings calls dipped even as the stock price recovered after the Q4 2018 overall market dropped:

Source: Sentieo

Commentary

NGG is acquiring Geronimo to increase its footprint in renewable energy development in the U.S.

In management’s most recent earnings call, for its U.S. operations, it highlighted the favorable results from recent tax reform which will provide significant tax reduction for its customer base there.

As a result, management sees a favorable demand environment for Geronimo’s renewable energy projects and capabilities.

The firm also completed its regulatory rate refresh in 2018, so now has clarity on its cash flow and other financial metrics needed to pull the trigger on the Geronimo deal.

NGG has been eyeing a significant deal in the renewables space for some time. In the November 8, 2018 earning call, NGG’s CEO John Pettigrew stated:

Beyond our core regulated networks and interconnector investments, we're also developing other opportunities. In particular, we're investing in opportunities arising from the growth in large scale renewable generation. We have a small, but growing portfolio of renewables, with almost 30 megawatts of installed solar and storage in the U.S. and more under construction. As I mentioned at the year-end results, the long-term contracted nature of regulatory underpinning makes renewables well suited in the risk-reward profile of our portfolio. This is because they leverage many of our core capabilities in engineering and project development, Asset Management and financing. For these reasons, in the coming months we'll continue to look for opportunities in the rapidly expanding U.S. renewables space.

The deal for Geronimo was apparently one of the ‘opportunities’ he alluded to in the call.

Investors seem to like the news, pushing the stock up since its announcement on March 7, so I wouldn’t be surprised to see another deal as NGG may have a consolidation play it is beginning to put into action.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.