Tom Konrad Ph.D., CFA
Earnings season began in earnest in February. My Ten
Clean Energy Stocks model portfolio gave back a little of
January gains because a mix of good and bad earnings
mostly offset each other. One pick (Seaspan Preferred) gave
back its large January gains. Neither the original gain nor
the loss were driven by news. Instead, they seemed driven by
investors changing expectations for global trade in an uncertain
For the year to March 17th, the portfolio and its income
and growth subportfolios were all up 7.7%, 8.8%, and 5.4%.
Clean energy stocks in general also did well, with my three
respective benchmarks up 7.0%, 6.6%, and 8.0%. (I use the
Yieldco ETF YLCO as
a benchmark for the income stocks, the Clean Energy ETF PBW
as a benchmark for the growth stocks, and an 80/20 blend of
the two as a benchmark for the whole portfolio.) The Green
Global Equity Income Portfolio (GGEIP), an income and green
focused strategy I manage returned 6.7%.
The overall and growth portfolios all continue to
out-perform their benchmarks, while PBW shot ahead of my two
growth picks in February.
Detailed performance is shown in the chart below:
Below I describe each of the stocks and groups of stocks
in more detail.
Pattern Energy Group
12/31/16 Price: $18.99. Annual Dividend: $1.63
(8.6%). Expected 2017 dividend: $1.64 to $1.67. Low
Target: $18. High Target: $30.
2/28/17 Price: $20.79. YTD Dividend: $0. Annualized
Dividend: $1.655. YTD Total Return: 9.5%
3/17/17 Price: $20.41 YTD Total Return: 7.5%
Wind-focused Yieldco Pattern Energy Group reported fourth quarter
and full year 2016 results on March 1st, increasing the quarterly
dividend 1.4%. I did not see anything to be concerned about in the
earnings report, and I like the fact that Pattern, unlike many
Yieldcos, has a focus on managing its assets efficiently rather than
being content to be a passive owner of wind farms.
The stock declined slightly in response to the report, most likely
because the firm's accountants reported a material weakness in
Pattern's internal accounting controls. Management announced
the discovery of this weakness in its third quarter earnings report,
and they are working to correct it and continue to certify the
accuracy of their financial statements.
Some investors will only invest in companies where the independent
accountants have no reservations, and this report is the first one
to be audited since the weakness was discovered. This is why I
expect the stock fell slightly in response to an otherwise solid
While not yet relevant to Yieldco shareholders, Pattern Energy's
parent, Pattern Development,
completed the largest wind power project in British Columbia
the 184.6 MW Meikle Wind farm. Long-time readers will
recognize Meikle as the same project that Finavera (a speculative
extra pick in 2014
) sold to Pattern Development that
year. My track record picking such speculative stocks is poor
(Finavera was no exception,) which is why I don't do it any more,
and stick to companies with long term solid cash flows like Pattern.
12/31/16 Price: $12.98. Annual Dividend: $1.00 (7.7%). Expected
2017 dividend: $1.00 to $1.05.
Low Target: $10.
High Target: $20.
2/28/17 Price: $13.31. YTD Dividend: $0. Annualized
Dividend: $1.00. YTD Total Return: 2.5%
3/17/17 Price: $12.70 YTD Total Return: -2.2%
Solar-only Yieldco 8point3 reported fourth quarter earnings on
January 26th, and I covered
them at the start of February
. As I said at the time,
the market is concerned about the Yieldco's plans to refinance its
interest-only company level debt with amortizing project level debt,
and the impact this might have on its ability to grow its dividend.
I personally like the move, as it increases the safety of the stock,
and I don't require dividend growth to think that a company with a
7.8% yield is a decent value. Worries that 8point3 will not be
able to refinance its debt and comparisons
to bankrupt SunEdison
are overblown. Unlike SunEdison,
the overall level of 8point3's debt ($673 million, per the Q4
) is easily manageable given its current
annual EBITDA ($106 to $133 million expected for 2017.) The
weighted average of 8point3's power purchase agreements is over 20
years, and the company currently pays LIBOR+2% (less than 4%)
interest on most of its debt. If we assume the company
refinances with amortizing project level debt at a 5% interest rate
and an average 20 year term, the annual payment (interest plus
principal) will be about $50 million, compared to the current annual
interest-only payment of $25 million.
The company's outlook is for $91 to $101 million in 2017 cash
available for distribution. Since this number likely includes
some principal payments, we can expect that even if all of the
Yieldco's debt is immediately replaced with amortizing debt, there
will be $80 million to $90 million in CAFD available to continue
paying the current $1 annual dividend on the company's 79.1 million
class A and B shares.
As a worst-case scenario for shareholders, we should consider buying
the stock at its current price, and receiving the current $1
dividend for 20 years, after which the stock becomes
valueless. The internal rate of return for this cash flow
stream is 4.8%: not particularly attractive, but something I'm quite
comfortable with as a worst-case scenario.
I've been selling puts on the stock in order to add to my position
if the stock price falls any further, or collect income if it does
Sustainable Infrastructure (NYSE:HASI)
12/31/16 Price: $18.99. Annual Dividend: $1.32
(7.0%). Expected 2017 dividend: $1.34 to
$1.36. Low Target: $15. High Target: $30.
2/28/17 Price: $19.79. YTD Dividend: $0.
Annualized Dividend: $1.32. YTD Total Return: 4.2%
3/17/17 Price: $19.20 YTD Total Return: 1.1%
Real Estate Investment Trust and investment bank specializing in
financing sustainable infrastructure Hannon Armstrong reported
earnings after the close on February 22nd.
As I've previously discussed, the stock has been depressed
recently because of worries about the possibility that the company
might lose its REIT status. I have long believed that the
company's REIT status is not in danger, and, if it were, the
impact on distributions would be minimal. In the earnings
conference call, CEO Jeff Eckel addressed these concerns, saying
that he did not expect the IRS to question HASI's REIT
status. He went on to say that if the company chose to
convert to a taxable corporation, it could do so without any
impact to its core earnings or distributions.
Shortly after the earnings announcement, the company conducted a
secondary offering of common stock. The company typically
makes several small secondary offerings each year shortly after
earnings announcements. The new supply of stock temporarily
depresses the stock price and provides an excellent buying
opportunity for stock market investors. The current price of
$19.20 represents such an opportunity.
Yield, A shares (NYSE:NYLD/A)
12/31/16 Price: $15.36. Annual Dividend: $1.00 (6.5%).
Expected 2017 dividend: $1.00 to $1.10. Low
Target: $12. High Target: $25.
2/28/17 Price: $16.82. YTD Dividend: $0.26.
Annualized Dividend: $1.04. YTD Total Return: 11.2%
3/17/17 Price: $16.70 YTD Total Return: 10.4%
Yieldco NRG Yield (NYLD
and NYLD/A) announced
4th quarter earnings
on February 28th and increased its
quarterly dividend 4% to $0.26. The company is targeting
continued annual per-share dividend growth of 15% through
2018. While such growth is likely for the next few quarters, I
believe analysts' dividend expectations will be scaled back for 2018
unless the stock price recovers and allows the company to raise new
equity at more attractive prices.
One sour note was a $183 million non-cash impairment charge on
certain wind farms acquired in 2015. $162 million of this was
pure accounting fiction, and simply reflects that the price at which
the assets were originally recorded on the books was more than NRG
Yield had actually paid for them, but the other $21 million has to
do with a change in NRG's assumed long term power prices after the
Power Purchase Agreements expire in 2017, 2022, and 2025. In
other words, NRG Yield is admitting that, in hindsight, it overpaid
for these three wind farms by at least $21 million, or about
$0.20/share because of overly rosy long term assumptions about the
value of the wind farms.
I believe many Yieldcos make overly rosy assumptions about the value
of their assets after contract expiration, which is part of the
reason why I have always preferred Yieldcos with high current
dividends over ones promising high levels of long term growth.
It's easy to come up with assumptions that can justify very
attractive long term growth rates, but that does not mean that those
assumptions will be true. Dividends paid today are much harder
to manufacture with accounting gimmickry.
Yield, PLC (NASD:ABY)
12/31/16 Price: $19.35. Annual Dividend: $0.65 (3.4%).
Expected 2017 dividend: $0.65 to $1.45. Low Target: $10.
High Target: $30.
2/28/17 Price: $21.76. YTD Dividend: $0.
Annualized Dividend: $1.00. YTD Total Return: 12.5%
3/17/17 Price: $21.67 YTD Total Return: 12.0%
Atlantica Yield announced its fourth quarter and full year
results on February 27th. As expected following the receipt of
forbearances from the Department on Energy on January 13th (and discussed
), the Yieldco raised its dividend 53% to $0.25. I
expected a larger increase, to near $0.29 a share, but the firm
still says that it will be able to increase the dividend to a
sustainable rate of $1.60 when/if it is able to obtain forbearances
on two projects in Mexico. Reduced dividends in 2016 gave the
company the opportunity to reduce corporate debt by 4% in 2016 even
while making acquisitions.
The company has a conservative capital structure of mostly
amortizing project level debt, as well as a conservative 80% target
payout ratio and no IDRs. Without a sponsor, the Yieldco has
the freedom to use the retained cash flow to make targeted
acquisitions from third parties. Most other Yieldcos are
committed to only making acquisitions from their sponsors, reducing
competition for attractive projects. All this means that
Atlantica, now that the last effects of its former sponsor's
bankrupt are being dealt with, is better positioned for growth than
most Yieldcos (with the possible exception of NEP.)
I've also been selling puts on ABY, and think the stock remains
attractive at the current price.
Energy Partners (NYSE:NEP)
12/31/16 Price: $25.54. Annual Dividend: $1.36 (5.3%).
Expected 2017 dividend: $1.38 to $1.50. Low
Target: $20. High Target: $40.
2/28/17 Price: $30.79. YTD Dividend: $0.353.
Annualized Dividend: $1.41. YTD Total Return: 21.9%
3/17/17 Price: $33.51 YTD Total Return: 32.7%
NextEra Energy Partners stock continues to advance
after the release of its fourth quarter earnings in January, most
likely due to analysts continuing to increase their price targets in
response to the reduced IDR (see the last
Other Income Stocks
Holding Corp. (NYSE:CVA)
12/31/16 Price: $15.60. Annual Dividend: $1.00
(6.4%). Expected 2017 dividend: $1.00 to
$1.06. Low Target: $10. High Target: $30.
2/28/17 Price: $16.18. YTD Dividend: $0.
Annualized Dividend: $1.00. YTD Total Return: 3.7%
3/17/17 Price: $15.65 YTD Total Return: 0.3%
Waste-to-energy developer and operator Covanta reported fourth
quarter and annual results on February 16th. Earnings and revenues
fell short of analysts' expectations, although they were in line
with company guidance. With the commencement of operations
at the company's Dublin facility, and higher metals recovery, the
company is guiding for modest EBITDA growth but lower Free Cash
Flow growth in 2017. The lower free cash flow for 2017 does
not seem likely to be the beginning of a trend. Rather, it
will be mostly driven by the reversal of a decline in working
capital in 2016.
The company also declared its regular $0.25 dividend payable to
shareholders of record on March 30th. It also issued $400
million of 5.875% notes due in 2025 to refinance debt with an
interest rate of 7.25% and maturing in 2020. The net effect
of this transaction should be to lower the company's interest
payments while extending the maturity of its outstanding debt.
The company is preparing
to commence operations at its newest facility in Dublin,
Ireland in March.
Series G Preferred (NYSE:SSW-PRG)
12/31/16 Price: $19.94. Annual Dividend: $2.05
(10.3%). Expected 2017 dividend:
$2.05. Low Target: $18. High Target: $27.
2/28/17 Price: $20.56. YTD Dividend: $0.51.
Annualized Dividend: $2.05. YTD Total Return: 5.4%
3/17/17 Price: $20.41 YTD Total Return: 4.7%
Leading independent charter owner of container ships reported
earnings on March 1st, with a two-thirds cut to the common stock
dividend. A dividend cut was expected, and this cut was at
the high end of the expected range. This is good news for
preferred shareholders, since the less money is paid to common
share holders and is instead used to strengthen the company's
balance sheet and operations, the safer the (fixed) preferred
Operationally, the company also delivered good news, with cost
controls resulting in an 11.7% reduction in vessel ownership costs
in the fourth quarter.
The common stock fell, as would be expected with such a large
dividend cut, but the preferred shares have also declined
slightly. I've added to my already large position in the
preferred since the earnings announcement.
MiX Telematics Limited
12/31/16 Price: $6.19. Annual Dividend: $0.14
(2.3%). Expected 2017 dividend: $0.14 to
$0.16. Low Target: $4. High Target: $15.
2/28/17 Price: $7.12. YTD Dividend: $0.037.
Annualized Dividend: $0.14. YTD Total Return: 15.6%
3/17/17 Price: $6.90 YTD Total Return: 12.0%
Vehicle and fleet management software as a service
provider MiX Telematics announced
the results of its third fiscal quarter on February 2nd,
delivering strong subscription revenue and increasing its guidance
for its 2017 fiscal year, which ends on March 31st. I find
it encouraging that the strong results came from strength in
virtually every aspect of MiX's business, rather than a couple of
large sales. The growth and increase in subscription revenue
is also allowing the company to increase its profitability because
subscriptions produce higher margins than equipment sales, and
spreading its fixed cost over a larger revenue base reduces
Investors initially reacted favorably to the strong quarter,
sending the stock upward. It has since fallen back
somewhat. If you do not already have a position in the
stock, I see this as an excellent opportunity to take advantage of
the company's strengthening growth prospects before they are fully
priced in by the market.
Aspen Aerogels (NYSE:ASPN)
12/31/16 Price: $4.13. Annual Dividend and expected 2017
dividend: None. Low Target: $3. High Target: $10.
2/28/17 Price: $4.13. YTD Total Return: 0%
3/17/17 Price: $4.08 YTD Total Return: -1.2%
Aspen Aerogels fourth quarter earnings were worse
than expected, with the important subsea segment reducing revenue
even below the company's already bearish guidance. The company
has made progress expanding the customer base, but this is a slow
process and the company does not expect any large sales to single
customers like it has had in the past. While the growing base
of smaller customers should lead to better long term income
stability and growth, they are currently only filling the gap left
by the disappearance of larger one-off sales.
The company's long term prospects remain encouraging, but investors
should be prepared for a couple more quarters for disappointing
growth. I have sold my position in anticipation of short term
stock weakness which should allow me to repurchase the stock at a
lower price, most likely after first or second quarter earnings
Broad stock market valuations remain high despite an unpredictable
political climate. I think that investors should continue to
position themselves companies with long term contracted cash flows
that are unlikely to be significantly affected by possible economic
disruptions. Given the anti-renewable energy rhetoric coming
from Washington DC, Clean Energy Yieldcos like PEGI, ABY, HASI, and
CAFD seem to have the perfect mix of low valuations combined with
very safe revenue streams. Worries about global trade also
seem to be causing investors to undervalue the security of the
dividends on Seaspan's preferred shares.
I've been increasingly focusing my investments on these names, while
reducing exposure to the market in general. These tactics are
unlikely to deliver the 20-30% portfolio returns I managed last
year, but right now I think investors should be wise to focus on
protecting themselves from potential market disruptions.
Disclosure: Long HASI, MIXT, PEGI, NYLD/A, CAFD, CVA, ABY, NEP,
SSW-PRG, ASPN, GLBL, TERP. Long puts on SSW (an effective
short position held as a hedge on SSW-PRG.)
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