Transeastern Power Trust (TSX: V.TEP.UN, Forum) is set up to create a portfolio of operating renewable energy assets including hydro, solar and wind power generation projects in order to provide investors with a stable source of income, much like TransCanada Corporation (TSX: TRP, Forum), Algonquin Power & Utilities (TSX: AQN, Forum), Boralex (TSX: BLX, Forum) and Northland Power (TSX: NPI, Forum), all of which pay a consistent dividend to shareholders. Finally out of the gate and ready for a market run, this Toronto-based trust is a potentially lucrative investment prospect with a relatively untold story.
It was for this reason that I got on the phone with Transeastern Chairman, Ravi Sood, and CEO, J. Colter Eadie, to get the low down on the company, its current state and future prospects as the $615.0 billion renewable energy market continues to explode. Part of that interview ended up in the above podcast and the remainder is below, have a listen and a read.
GE: It’s clear that the renewable energy trend is massive and is expected to overtake natural gas as a generation source by 2018 as climate change, pollution and energy insecurity take focus on the world stage. In fact, in the US, it is estimated that renewable energy’s share of the electricity generation market is expected to soar from 14% to 50% by 2030, making the United States the second largest consumer of renewable energy. Why is it then, Transeastern is focused on the European market? Is it the wine and cheese?
RAVI: The North American market is extremely competitive and valuations are very high, creating an incredibly difficult atmosphere to build a new business within the space. The European Union, on the other hand, is another story entirely. While it is still Europe, it is tremendously out of favour, so the multiples are much lower and the competition for deals is also much lower.
Within the European market we’ve also taken the view that it is an increasingly connected Europe. The EU from a legal standpoint is a single entity and the EU from a power standpoint is not yet a single entity but it is very much trending that way. So by having power generation in Germany or France is increasingly the same as having it in Poland or Romania. So in that regard, we’ve focused on what we’ll call the ‘periphery’ of the EU or ‘emerging Europe’ starting with Romania where we’re able to acquire connected operating projects with very little risk and two years or even in some cases more of operating history. This way we’re not assuming any construction, development or financing risk – we’re buying cash flow.
I feel it’s also important to note that these purchases come at multiples much lower than the rest of Europe, which is already lower than North America, so we’re taking on average half the price for the same asset if it were on North American soil.
Also, it’s worth noting that Renaissance Capital, a global Russian Investment, rates Romania and Mexico as their top two countries in the world from a macroeconomics perspective. In Romania, from the government down to the individual, there is a general aversion to taking on debt. So as a country, they have a surprisingly good balance sheet, run one of the lowest deficits in Europe and have a very good position from a credit perspective.
COLTER: I also want to add that they’ve also been listed as having the highest GDP growth in the EU for the 12 trailing months. These are huge positives, but that’s not what drove us to Romania. We didn’t say, ‘Hey, this is a great macroeconomic country.’ It’s not so much a play on Romania, it’s a play on Europe and the fact you’re buying it at half the multiple, because you’re, as Ravi stated, at the ‘periphery’ selling into an increasingly connected EU market.
I mean ultimately, the Europeans tried to approve the 2020 policy on renewables and then they tried to approve the 2030 policy and they couldn’t give everybody a line on it, but one of the things they’ve planted their flag on, is the interconnection of the European Market. So you’ve got four different zones of interconnection in Europe right now and over the next few years that will become one market. So conceptually, we will be able to generate power in Romania at our projects and sell it to the European Energy Exchange which is the same place a German producer would be selling their energy. As a result, the Romanian market is institutionalizing and this is something that I think we can capitalize on in the short to medium term.
GE: So what the assets do you currently hold in your portfolio?
RAVI: When we hit our IPO at the end of May 2014, we created a platform containing three small Romanian run-of-river hydro facilities in the cities of Alba, Bistrita Nasaud, and Suceava. These operating assets came to a total €12.7 million in acquisition costs and currently generate a combined 19,570 MWh annually. They are contributing to our cash flow now, which is a major milestone for us as we went from a PowerPoint Presentation slide to an actual operator of renewables assets that paid monthly distributions.
We just completed our first transaction as a public company in a $46 million deal that closed at the end of July for two solar energy projects operating in Giurgiu and OLT County, Romania. This was a transformative transaction for us. It took our market cap from $11.0 million to about $25.0 million and raised our enterprise value from about $25.0 million to about $70.0 million. These might be viewed as small increases in the world of big power generation, but these are substantial increases for us at this point. Our revenues now are up by about a factor of six and our cash flow is up dramatically as well by about the same power.
All-in-all, a big leap forward in terms of relevance and proving out the sustainability of our business as we are now able, over the course of a year, to cover all our costs on a combined basis.
GE: Sounds like Transeastern’s acquisition strategy is working out, but like you said, this is ‘emerging Europe,’ what guarantees do you have that the government isn’t going to step in and appropriate your assets?
RAVI: Well, this is a major perceived risk for us. The first reaction for many is ‘Hey, I see you’re getting great returns from these projects and they’re already built and operating, so you don’t have all that permitting or construction or financing risk, but what’s the risk of governmental interference or them flat out taking these things away from you? After all you’re in Romania’
This is an important question that we have to address. Our answer is that this is in the EU. This is not Ceau?escu’s Communist era Romania. This Romania post-2007 when they joined the European Union. That type of appropriation isn’t possible any more. They are in the EU, they have to follow the rules and they are ultimately dependent on being in the EU so that’s what they are going to do. I mean, we’ve seen what the EU can do to you when you get out of line. In the end, this fear of government interference will never materialize.
GE: Okay, your assets are safe. To sum up, what other key attributes make Transeastern attractive from an investment standpoint?
RAVI: Number one is yields and it’s nice to have high yields, but the key is sustainable yields – we give a very solid argument to that now. That’s just it, this is a yield-oriented investment, you will over time, get most of your return from cash distributions paid quarterly. We’re not a 10x mining stock although we do have good arguments on capital appreciation, but the big thing is you’re getting a yield and you can take that to the bank.
From a portfolio diversification point of view, it’s renewables and it’s Europe. I don’t see Europe not needing electricity. Even if the economy never recovers, I don’t see energy assets going for sale at any less than multiples of six to cash flow, which, broadly speaking is the kind of metrics of the deals we’re looking at.
Also you could with economic stabilization in five or whatever years’ time frame, see the EU renewables energy market go back to a premium valuation like North America and be traded at 15 times multiples, which would translate into a massive gain for us. However, that’s not what we’re out to do, although we are positioned for it, our main focus is again, yields.
FULL DISCLOSURE: Transeastern Power Trust is a Stockhouse Publishing client.