Buying Innergex – Texas Was Bad, But Not That Bad

By Tom Konrad, Ph.D., CFA

Last week, I published this call to buy Innergex (INGXF, INE.TO) because investors had been overreacting to the losses from the February cold snap in Texas.  The stock is up since then, but still seems a decent value.

Canadian Yieldco Innergex Renewable Energy (INGXF, INE.TO) took a big financial hit from the power disruptions in Texas in March. 

It’s complex, but their financial hedges on power prices for three of its wind farms ended up creating enormous liabilities – more, in fact, than two of their wind farms are worth.  Two of their facilities also had benefits from the high power prices, but not nearly as large as the losses on the financial hedges.

Innergex claimed “Force Majeure” at the affected sites – a contract clause that would allow them out of the financial obligations of the hedges.  The counterparties rejected the claims, and now two of the claims are in court, and one is subject to negotiation between the parties.

The two claims that are in court are there because Innergex now values those wind farms (Flat Top and Shannon) at less than the financial loss on the hedges.  The worst case scenario here is that the court will decide against Innergex and allow the counterparties to foreclose on the two wind farms.  There is no additional liability to Innergex beyond the value of its financial stakes in Shannon and Flat Top.

The hearing in the Shannon and Flat Top cases was held on May 6th, and a ruling is expected at latest by May 20th.  I’ve been buying today (in the mid $15 US range) because I estimate the decline in the stock price has more than priced in the full loss of both wind farms, and the increased certainty of a ruling (even one against Innergex) should send the stock price back up.

I generally feel that investors overreact to this kind of uncertainty, so it’s often a good time to buy- especially when the financial impacts of the downside risk are limited, as they are with Innergex.

DISCLOSURE: Long INGXF

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.