Understand Alterra: Cashflow is king; GAAP losses irrelevantReading this bullboard for the last while, it seems like many in here don't really understand the true value driver for Alterra, despite being investors in the stock.... I've been following the Company since 2006 when it was Plutonic Power, originally as a sell-side analyst for Toll Cross.
After watching casually for years from the sidelines, I re-entered in a big way as an investor in 2013 at $0.30 because it became clear that there was a lot of underappreciated asset value here and zero hype. This Company has had a ton of disappointments on unrealistically optimistic original estimates, often driven by the sell-side analyst models, but the recent comeback is solid and grounded in the reality of cold, hard cashflow.
Alterra will likely continue to post GAAP losses for the forseeable future, and that is the way it should be with this Company! Losses mean that the Company will pay minimal taxes, despite generating solid amounts of cashflow which can be reinvested or distributed to shareholders. Alterra's losses are a result of 2 key factors: the writedown of historical projects, accounting treatment regading depreciation of existing assets.
The writedown of historical projects represents past missteps by management. This may or may not be duplicated in the future, although based on the current development plans, Alterra seems to be spending less money & time developing potentially disappointing projects. Their farm-out of initial development at Mariposa is a good example of the kind of thing which may have resulted in future writedowns if they went at it alone, but instead EDC is the one spending ~$60 million on the initial Geothermal drilling. A great move by Alterra management in my opinion. The Company seems much more cautious about throwing money around to develop potentially pie-in-the-sky projects these days.
Rules allowing accelerated depreciation will result in greater GAAP losses in the initial stages of a renewable energy project. This is not a bad thing, this is a good thing as it allows Alterra to hold on to more of its cashflow which can be reinvested in projects, share buybacks or distributed as a dividend.
Alterra is roaring back to life because it has a very solid set of existing assets and Jimmie Creek + Shannon Wind should increase cashflow by 30-40% beginning in mid-2016. The 2014 results were the best in Company history with almost $27 million in positive operating cashflow and solid reductions in G&A expenses. Add to that the elimination of capital controls in Iceland, and things are looking better and better for Alterra.
Once Jimmie and Shannon are complete, we could realistically be looking at $25-30 million in distributable cashflow in 2017, although it doesn't mean that they will actually pay it out. Assuming though that it would be valued at ~7% yield, we're looking at a total valuation of ~$350-$425 million, vs. about $200 million today. It could be worth even more to an acquirer, since they could probably cut about 75% of the G&A expenses, adding another $7+ million in cashflow.
Target Price (2017): $0.75-$0.90