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Does America’s largest windmill turn your crank?
by Chris DeHaemer
You’ll be all fired up with the triple -- make that quadruple upside potential of this fast-growing utility!
In a remote corner of the Pacific Ocean, some fifteen hundred miles west of Chile, lies a grim rock called Easter Island. It is well known for its multi-ton monolithic busts and the mystery of their origin -- which, of course, begs the wrong question. The conundrum does not lie in the method of production -- for primitive man has built many massive stone structures from Stonehenge to the Pyramids of Giza. The riddle, rather, is in the demise of monument builders.
The account of Easter Island is the rats-in-a-cage syndrome writ large. As the civilization advanced, the population ballooned and the people devoured the means of their own survival. They killed their livestock and destroyed their forests. This in turn prevented the manufacture of the great Polynesian canoes, ending trade and leading to a subsequent decline in the fish harvest as well as erosion and loss of crops.
In 1722, less than a century and a half after the Golden Age of the monument builders, the Dutch Captain Roggeveen found a motley race of cannibals without the natural resources necessary to build a seaworthy craft. The standard of living had deteriorated to the point where a common insult was translated "I have the flesh of your mother stuck between my teeth."
Don’t eat your relatives: Benefits and growth of new age power
Call me a tree-hugging, acid-popping, hippie freak if you like, but I know a trend when I see one. A world of limited resources and exploding populations will destroy itself unless technology finds a new path and discovers methods of renewable energy. These new methods are now available, and with a consumer base willing to pay greenbacks for green energy, capitalism is making these methods profitable.
Utility deregulation laws have passed in 16 U.S. states and more will follow. Along with these laws, the framework for commercially viable, environmentally friendly powerplants has been built. Consumers now have the ability to pay a little extra and receive their electricity from renewable sources -- and they are doing so.
People want green energy. Or at least they say they do. One nationwide survey asked if consumers would accept "a lower standard of living if it meant a cleaner environment." 63 percent said yes. 56 to 80 percent of respondents said they would pay a premium for environmental protection or renewable electricity.
Let’s all go press daisies -- shall we?
Look, I wouldn’t be telling you all this unless there was an extremely undervalued company with explosive upside potential at the end of the rainbow coalition.
Blow me
Wind power is the fastest-growing energy source in the world and has been for the past four years. 2,100 megawatts of new wind energy capacity was added in 1998. That’s 35 percent more than was added in 1997. In 1999 the wind will generate enough power to feed 3.5 million suburban homes with 21 billion kilowatt-hours of electricity. Unstable air is now a US$2 billion industry.
The U.S. alone added 235 megawatts of new capacity. Granted, much of this surge was to take advantage of the wind energy tax credit that is scheduled to expire in June 99, but that doesn’t mean the growth is over. This isn’t your uncle Hans windmill. Modern wind turbines are high-tech devices with aerodynamic blade designs, made of lightweight composite materials, and electronic computer-controlled drives for optimum performance.
Large-scale turbines, economies of scale and strategic placement have reduced costs from $2,600 per kilowatt in 1981 to US$800 per kilowatt in 1998. Wind power has reached a cost parity with coal-based electricity and is encroaching on the other fossil fuels. And like digital wristwatches and VCRs, it will only get cheaper. Taipan predicts that wind power will become the cheapest source of electricity in many countries by 2010.
Hey, you with the face
Taipan has uncovered a company that is building the largest wind turbine in North America. Of course it’s in Texas. You know what they say about Texans -- the size of the windmill...This company has signed up to supply TU Electric (TXU-NYSE) with 117 million kilowatt-hours of electricity for the next 15 years, which equates to 7,300 homes a year.
The first wave of turbines started producing on December 2, 1998, and the wind farm will become fully operationally in February of 1999 at an installation cost of $40 million dollars. The cornerstone of this project will be four V-66 wind turbines each standing 371 feet with a rotor diameter of 216 feed each generating 1,650 kilowatts of power -- solid!
Trinidad and Tobago -- Power! Power! Power!
Now, I’m not here to talk about some small-time purveyor of windmills in Podunk, Texas. I’ll have you know this month’s featured company also has its gold-tipped tentacles in the thriving metropolis that is Port of Spain, Trinidad.
Our beloved company has contracted with the Trinidad and Tobago Electricity Commission (T&TEC) to build a US$100 million natural gas-fired turbine, which will produce 225 megawatts. This bad boy is set to come on line in September 1999.
T&TEC has assumed all commodity risk associated with this project, in that, they will supply the natural gas of which Trinidad and Tobago has plenty. It’s a 30-year contract and fixed capacity payments tied to U.S. inflation rates will constitute the majority of project revenues. This project will be run by InnGogen, a subsidiary of York Research Corporation (YORK-NASDAQ) of New York.
So maybe it’s not a strictly green tree-hugging play, unless by green you mean greenbacks.
 You just don’t wake up in the morning with enough cash to build windmills and power plants all over the planet. You need collateral, like a 40-year deal valued at US$7.5 billion with the Brooklyn Navy Yard (BNY).
York Research Corporation has been in business for 30 odd years, but it wasn’t until the BNY cogenerator came online in November 1996 that they entered the big leagues. (A cogenerator is a modern, highly efficient generator that produces hot water and steam as well as electricity.) York borrowed against this US$7.5 billion revenue stream to build the Big Spring and Trinidad and Tobago projects. They also refinanced a bond worth US$400 million and bought out their partners in BNY to insure revenue going forward.
York also provides power and steam to Warbasse Houses, a 2,585-unit apartment complex in Brooklyn where they have successfully operated a 28-megawatt plant since 1994. Did I mention a market cap of US$66 million with dynamic revenue growth expected to total more than 800 million over the last year?
- US$801 million in trailing revenue vs US$261 million the previous four quarters or 306% top-line growth!
- 12 quarters of sequential growth followed by half a year of refinance and consolidation
- Stock price bouncing off its all-time lows below US$4 -- a market cap below US$70 million
- Insider owernship above 30% with strong buying on the open market valued at 763,735 over the summer and fall.
York Research Corp. is set up like a management firm with five main subsidiaries: The four mentioned above plus their biggest current cash cow North American Energy Conservation (NAEC). NAEC markets natural gas primarily in the Northeast at wholesale and retail levels. They recently took a one-time charge and sold off their money-losing electricity brokerage business, which adversely affected last quarter’s earnings.
Blowing in the wind
The company has stated that it expects significant increases in earning from continuing operations in the fiscal year beginning March 1, 1999. The impact on earnings of the interest expense related to the US$150 million CS First Boston bond financing will be increasingly offset as the two new projects ramp up to full commercial operations.
| Quarterly Revenue (Thousands of U.S. Dollars) |
| |
1996 |
1997 |
1998 |
1999 |
| 1st Qtr MAY |
2,673 |
4,025 |
31,612 |
170,022 |
| 2nd Qtr AUG |
3,384 |
5,196 |
56,890 |
186,183 |
| 3rd Qtr NOV |
3,683 |
10,557 |
145,977 |
233,089 |
| 4th Qtr FEB |
4,652 |
26,550 |
212,408 |
preliminary |
There is also speculation that First Boston will put out a buy recommendation at some unknown point in the future. I usually don’t cover a company that has no institutional support because it risks being a dog with little volume on good news or bad. However, York Research is so absurdly undervalued (trading at book, Price/Earnings of 8 and a Price/Sales of 0.08, US$31 million in cash and a market cap south of 70? That’s cheap by anyone’s standards. I am going to take that chance and let the institutional coverage be the catalyst for capital gains.)
Risky business
This company has a lot of debt, as you would expect from a fast-growing utility...though most investors don’t expect utilities to grow at all. The debt to equity ratio is 2.40 -- extremely high. Margins are small -- about 1 percent -- so that seemingly small movements such as the US$9 million loss for selling off their electric brokerage business can bring in a negative quarterly Earnings Per Share number even though this company expects revenues of more than a billion for fiscal 1998. The upside is that a small increase in margins would show up as incendiary EPS growth.
Cheap tricks
York has a market cap of US$66 million, US$15 million in cash, a 40-year deal worth US$7.5 billion, a quickly growing natural gas brokerage -- which alone should be worth half of fiscal 1999 projected sales of close to a billion or five times today’s market cap. Don’t forget the two new electric generators coming online this year: The Texas wind farm in February and the Trinidad and Tobago plant in September of 1999.
Let’s compare York Research to another high-growth utility like the AES Corporation (AES-NYSE), a company that Forbes, The Wall Street Journal and others have been hyping as the best of the world’s next-generation utilities. AES has a market cap of US$6.65 billion on sales of US$2.28 billion. That’s 100 times York’s market cap based on twice its sales.
What’s up with that? It’s not debt. AES has a debt to equity ratio of 2.95 -- more than York’s 2.40. AES has trailing revenue growth of 96 percent -- less than 1/3 of York’s 300 percent top-line growth over the last four quarters. Fine, AES has three years of sequential EPS growth while for the past year York has invested in the future -- but a p/e of 24 vs. York’s p/e of 8?
You won’t even get an argument from me that York doesn’t play the Wall Street game very well while AES gets hyped every other week. But a market cap divergence of US$6.5 billion versus US$66 million is as insane as it gets. I won’t even go into the "what ifs" and figure that if York had a price to sales ratio similar to AES (3.04) rather that its own paltry 0.08 its share price would be US$161 or a return of 3,788 percent. Hell, I won’t even tell you that if York traded at half of trailing sales its share price would be around US$23 -- because those highly conservative numbers seem out of whack with reality. I’ll simply say that I expect York to retest its 52-week high of US$9 by September for a 100 percent gain in nine months.
If it goes higher, well, that’s gravy.
York Research has successfully taken advantage of the evolution of the utility industry. They have used the potential of green energy and have the option of taking substantial tax credits (US$4-5 million?) this year because of it. York has gone offshore to take advantage of Trinidad and Tobago’s supply of natural gas, harnessed cutting edge technology in the BNY cogenerator and taken advantage of their natural gas brokerage business, all the while reinvesting its revenue streams in new projects and buying out partners.
Shareholders have greeted this by selling the company down to ridiculous levels. Sucks for them. Buy York Research (YORK-NASDAQ) as a long-term investment under US$5 -- you should be able to get in under US$4.50.
Contact: York Research Corp., 280 Park Avenue, Suite 2700 West, New York, NY 10017; Phone: (212) 557-6200, Fax: (212) 557-5678.
Catalyst for growth is the continued revenue and earnings growth, the ubiquitous possibility of a merger/takeover and pending buy recommendation from CS First Union. This company has continued to beat the previous year in sales every year for the past four. There is nothing I like better than continuing revenue acceleration in an undervalued, undiscovered company. There is nothing priced into this stock.
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