Timberline Energy Inc.: Value Creation vs. Corporate Welfare

INTRODUCTION Timberline Energy, Inc. was founded in Rochester, Minnesota in 2002 by Timothy Albright, a professional electrical engineer with more than 10 years of consulting experience in the energy sector. Although oil prices were relatively low at the time, Albright was convinced that renewable sources of energy would become increasingly important in the future, and sought to gain a foothold in this emerging line of business. Early on, Timberline's specialty was small-scale turbine installations, which provided power for homes, farms, and other facilities in remote locations. Over the next few years, Timberline's business expanded and evolved into designing and building larger and larger wind installations for various customers (electric utilities) throughout the upper midwestern United States. In 2008, Albright was approached by the Brazilian energy firm Energia do Brasil (EDB) regarding a possible acquisition. By the end of that year, EDB had acquired a controlling interest in Timberline, with Albright remaining in the position of Chief Executive Officer. The infusion of capital enabled Timberline to shift its focus from by -contract construction to direct farm development. Timberline's first company-owned farm, a 50-megawatt installation in northern Illinois, went online in late 2009, generating electricity to be sold into the national grid at prevailing market rates. The project was considered a success by Albright and his partners at EDB, and they continued to seek out opportunities for additional energy developments. Consolidated financial statements for EDB are provided as Exhibits 1 and 2. One of the factors driving Timberline's success during this time was the existence of the Production Tax Credit (PTC). The PTC was enacted by congress in 1992 with the goal of fostering the development of new, sustainable sources of energy. In particular, the PTC provided a tax credit of $0.022 per kilowatt-hour generated for operators of commercial farms. Although the cost of producing electricity with turbines was still relatively high (considering the capital costs and maintenance costs), the PTC had made farm installations attractive investments for many operators. The Production Tax Credit had originally been slated to expire in 1999; however, over the subsequent 14 years, the PTC was repeatedly renewed and extended by congress in 1- and 2-year increments. At the end of 2013, though, the PTC was allowed to expire, and in the present political climate, prospects for its reinstatement were uncertain at best. In any case, there would be no such tax break for projects started in 2014. THE SAGINAW PROJECT The opportunity that is the focus of Albright's attention is a proposed 240 megawatt farm to be constructed in a rural area west of Saginaw, Michigan. The area is known to have fairly steady winds from the northwest, and Timberline is in the process of negotiating a lease agreement with a landowner. Albright has developed a plan for the site that involves the installation of 133 turbines, each nearly 400 feet tall, and with a nameplate capacity of 1.8 megawatts. This is a fairly ambitious project for the young firm, over four times the size of its largest project to date. The installation would eventually generate enough electricity to power almost 50,000 homes. The size of the project meant that it would require a far greater investment of capital than his own budget authority allowed, so Albright knew he would have to make a strong case for it to EDB's board of directors. The details of the lease agreement for the land have yet to be finalized, but Timberline's usual practice is to seek a 30-year lease, in exchange for an annual royalty payment of $0.45 per megawatt-hour (1000 kilowatt-hours) produced, in addition to an initial payment. The amount of the up-front payment is still under negotiation, but Albright is expecting a figure of about $25 million. …