Investment Highlights
- Large-scale, highly profitable solar project
- Favourable macroeconomic landscape
- An ESG investment opportunity
- IMMINENT CATALYST: Final signature from US-Puerto Rico Oversight Board
The instability of fossil fuel prices is presenting a global opportunity to accelerate the shift to clean energy sources. In addition, I have also been looking for ways to diversify my portfolio outside of the natural resources sector. For this reason, I have been keeping my ear to the ground in search of renewable energy plays, and then I remembered Greenbriar Capital Corp (TSXV:GRB). Greenbriar is a story that I was introduced to a while back, but more recent developments at the company’s Montalva Solar Project are presenting a timely opportunity for what may be, a very profitable investment. The Greenbriar story is quite complex, but if you take the time to fully understand it, you will realize just how profitable it may be.
Greenbriar operates in two different areas of business: renewable energy (Montalva Solar Project) and sustainable real estate (Sage Ranch). For me, the blue-sky potential for Greenbriar lies in the Montalva Solar Project in Puerto Rico, which will be my focus moving forward. In order to understand the true potential of Montalva, we must first understand the macroeconomics of the energy space in Puerto Rico.
Macroeconomics Brief
In September 2017, Hurricanes Irma and Maria made landfall two weeks apart and destroyed much of Puerto Rico’s electricity transmission and distribution infrastructure. Puerto Rico was again hit on Jan. 6, 2020, by a 6.4 magnitude earthquake. Among the damage was a ruptured steam line at the 990 MW Costa Sur Oil Plant. The plant provided 25% of the power for the entire island of Puerto Rico. After the damage had been assessed, the government decide to close the plant indefinitely. This was a harsh lesson for the government, and it would ultimately lead to a mandate to shift more towards renewable energy sources. In May 2019, the Puerto Rico Energy Public Policy Act was signed into law.
Under the law, Puerto Rico must obtain 40% of its electricity from renewable resources by 2025, 60% by 2040, and 100% by 2050.
If these targets are to be reached, the country will need to act swiftly, especially considering the fact that renewables accounted for only 2.3% or Puerto Rico’s total electricity generation in 2019. The other 97.7% came from petroleum, natural gas, and coal.
Puerto Rico only has 2 utility-scale wind farms, which became operational in 2012: the 101.2-megawatt Santa Isabel facility on the southern coast and the 23.4-megawatt Punta Lima facility at Naguabo. If Puerto Rico wants to meet their ambitious renewable energy targets, then the country will need to start putting renewable energy projects like Montalva on the fast-track.
The Montalva Solar Project
Montalva is a planned, large-scale 160mwac/80MWac solar facility in Puerto Rico. Once completed, it will be the largest solar facility in the Caribbean. A sizeable battery storage facility, as part of the solar field, will enable 24/7 power dispatch which is unique in large-scale solar generation facilities. Greenbriar is confident that it can expand the project to 320MWdc/160MWac after phase one (160MW) construction is completed. To put Montalva’s size into perspective, the entire country of Canada is expected to generate ~6600MW of solar energy this year. Montalva would account for ~5% of the solar energy MW capacity of Canada.
Project Economics
With regard to the economics of the Montalva project, the NPV (Net Present Value) is around $190M and the CAPEX (Capital Expenditure) is USD$200M, on paper. However, we believe that the model was understated in terms of energy capacity as well as unit pricing. The model was built using $0.15/kwH pricing, which is higher than the expected $0.09/kwH pricing. Also, the amount of energy output stated in the report was significantly less than what Montalva is capable of producing. If we input the actual pricing and maximum energy output into the model, the CAPEX will be reduced nearly in half (about $168M USD) with energy capacity coming in at (280MW).
Why were the numbers understated?
Likely because the true profitability of this project would be considered insulting to the local utility companies. I am assuming Greenbriar did not want to put the contract at risk by “rub it in the faces” of the utility companies.
For mining projects, an NPV/CAPEX of less than 1 is considered unfavourable. But Montalva is not a mining project; it is a renewable energy project.
So, what’s the difference?
Solar energy companies will never need to worry about depletion. We are not expecting the sun to die out anytime soon, and if it does, the stock price of GRB will be the least of your concerns! All jokes aside, what Greenbriar will need to worry about is the length of their contract with the government of Puerto Rico. We know that at the end of the 35-year contract, Montalva’s operator will simply continue to renew the contract for as long as the government allows them to, considering the money that has already been spent to build the initial $200M facility. So, in reality, the NPV could be calculated in perpetuity using a terminal value, which would result in a much higher NPV value.
It is also important to note that some of the financing risk is mitigated by the fact that the US government has agreed to provide funding for 26% of the CAPEX to construct Montalva. VOYA, a $550B fund, has already signed a $195M term sheet to provide a senior DEBT loan to fund the remainder of the CAPEX, leaving equity holders unaffected. As Elon Musk would say, “Funding secured!”
An ESG Investment Opportunity
The cherry on top for Greenbriar would be that it falls under the ‘ESG’ category of investing.
ESG is an umbrella term for investments that seek positive returns and long-term impact on society, environment, and the performance of the business. It is a badge of responsibility.
For Montalva, the project is not only hugely profitable, but it will also provide Puerto Rican citizens with lower-cost, clean and reliable electricity and replace some of the current expensive and dirty oil generation. It is a win-win for the citizens of Puerto Rico as well as for investors in Greenbriar.
The Final Step
On May 28th, PREPA accepted Greenbriar’s proposal for Montalva and an energy contract was signed. So, the project is fully permitted. But this was not the FINAL step for Greenbriar. Greenbriar is still awaiting a signature from the US Federal Oversight Management Board (‘FOMB’) before it can begin construction at Montalva. The FOMB is run by the United States Federal Government therefore, is directly connected to the Current administration at the White House. The FOMB essentially determines how federal funds will be spent on the island of Puerto Rico.
Why has the oversight board not yet approved Montalva?
PREPA is currently evaluating proposals for renewable energy projects from 16 different companies. Once all of these projects have been thoroughly evaluated, then it will decide which proposals are accepted and rejected. It would not be fair to accept a project before all other options have been visited.
**UPDATE: The last of the 16 projects has just been approved THIS WEEK, meaning all that is left is for the FOMB, is to decide which project(s) it will give a contract to, after which, construction may begin.***
Why would they select Montalva over other projects?
Montalva is the largest of any of the submitted projects in terms of energy capacity by a landslide. Also, due to the small size and complex topography of Puerto Rico, there are limited opportunities on the island for large scale wind and solar farms. Montalva has the largest, relatively flat, land position of any other project on the island, in terms of acreage (1800 acres). Montalva is also located in the area of Puerto Rico which has the highest levels of solar insolation. The area is generally protected from hurricanes and also has an existing 115 kV PREPA transmission line traversing the property for interconnection to the Puerto Rican electrical grid.
Imminent Catalyst
I am confident that the FOMB will sign the contract. It is a no brainer for them considering the plethora of social, environmental, and economic benefits that Montalva would bring. Keep in mind that it is possible that the contract signing becomes delayed until after the election.
So what will likely happen if either party wins?
The Case For Biden
Joe Biden is a huge advocate for the shift towards renewable energy. He has vocalized his mission to decrease U.S. reliance on fossil fuels by increasing renewable energy output. If Biden wins, Montalva, as well as other pending renewable energy projects will be pushed to the top of the priority list. In addition, there will likely be a flurry of loans, grants, and subsidies which come pouring into the renewable energy space. We see this as the best possible scenario for Greenbriar.
The Case For Trump
Right now, the only thing on President Trump’s mind is the upcoming election. There is an increasingly critical voting bloc in Florida which is made up of a large Puerto Rican population. In an effort to please them, just this week the Trump Administration announced an $11.6 billion aid package for Puerto Rico, three years after the territory was hit by Hurricane Maria. The aid package will be to assist Puerto Rico’s energy and education systems as the island continues to deal with the aftermath of the devastation brought by the 2017 hurricane.
Despite what the media portrays, around 90% of republicans actually support the shift towards renewable energy. Better yet, 75% of current renewable energy production in the U.S. comes from Republican States. If Trump wins, the contract will still get signed, but it may take a little longer than if Biden wins.
Either way, there will be a trigger point in the very near future which likely leads to the contract being signed by the FOMB. This could act as the fundamental catalyst for GRB to break through to new all-time highs. Despite the high likelihood of the FOMB contract signing, Greenbriar shares are still trading at a heavy discount. Although it could be a few months before the actual signing of the contract, I view the current price environment as an opportunity to accumulate discounted shares in Greenbriar before that date.
IMPORTANT: Keep in mind that the overall risk for Greenbriar is reduced by the fact that the company is diversified. Greenbriar also has a 50% carried interest in a $400 million high margin, entry level, sustainable housing project called Sage Ranch. Sage Ranch is located in California, which is home to a housing market that is currently short 2.4 million homes.
For now, the focus will be on Montalva, as the most imminent catalyst for Greenbriar's stock will be the FOMB contract signing.
DISCLOSURE: Author owns shares of Greenbriar Capital Corporation and may choose to buy or sell at any time without notice. Author did not receive any compensation for publishing this article.
