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October 29, 2008

Lithium Technology Corporation (LTHU.PK)

Quite a while ago, I promised readers that  I'd write an article looking into Lithium Technology Corporation (LTHU.PK,) in addition to articles I've already written on US Geothermal (HTM) and Evergreen Solar (ESLR)  Lithium Tech is a provider of custom lithium rechargeable batteries for military, national security, stationary power, and transportation applications.  Investors hoping for the big score probably have their eyes on the transportation applications, which should drive demand for lithium-ion batteries over the next decade. 

That's all wonderful, but since August, we've had a financial meltdown, prompting me to focus much more on companies' need to raise new financing and balance sheet liquidity.  Although I thought both Evergreen and US Geothermal were good companies for their respective industries (Solar and Geothermal), the stock prices of both have plummeted since the articles were written.  Evergreen has been badly hurt because they had loaned 30.9 million of ESLR shares as part of a financing transaction.  With the Lehman bankruptcy, the recovery of these shares is murky, and the company may find that existing shareholders have been greatly diluted without any new capital flowing to Evergreen.  I have sold my stake in Evergreen as part of my move to re-focus my portfolio on energy efficiency and transmission companies (after the news came out about Lehman, however- ouch).  I can find no reasonable explanation for the decline in US Geothermal's stock price except forced selling due to margin calls.

Now that the financial crisis is upon us, I find it much easier to give my opinion on Lithium Technology: Don't buy it.  Despite the fact that Lithium is so thinly traded that the stock has stayed around $.06 since February, the company has not published any financial data since December 2007.  According to the most recent letter to shareholders from December 2007, the company has had to restate financial data going back to 2004 and 2005.  Even with the uncertainty that such restatements bring to more current financial data, the company showed an operating cash loss of $13 million in 2007, with a levered free cash loss of $2.5 million.  With only a quarter million dollars in cash on hand, and an operating tax loss of  $13 million over 12 months, this is a company which looks likely to have to return repeatedly to the capital markets for new financing.  New financing is unlikely to be available on favorable terms, given current market conditions and the company's weak balance sheet.

All that is based on data which is almost a year old.  With no new data to go by, it is usually best to assume the worst.  Even the data we have looks dire.  If you don't own this company, good for you.  If you do, you can console yourself with the fact that even investors in well capitalized companies have been losing money recently.

DISCLOSURE: Tom Konrad owns HTM.

DISCLAIMER: The information and trades provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

October 28, 2008

Wise Energy Use Stocks, Part 6: Smartgrid Pioneers

This is the final article on the companies in the Wise Energy Use index.  I believe that the current turmoil has given stock pickers an opportunity to buy well capitalized firms which make money by helping people save money on energy.    The industry is poised to do well in hard financial times, but companies with weak balance sheets may not survive.  In this series, I try to separate the wheat from the chaff.   I generally liked the efficient lighting, smart metering and energy management, and global services companies in the index, but wasn't thrilled by any of the electric vehicle picks.  

Although the Smart Grid is something which is definitely necessary to use our electricity more wisely, it's also something of a research project: we don't really know what it's going to look like when it gets here.  What it does look like and which companies profit will be highly dependant on future regulation, so while many of the smart grid projects pursued by the following companies are quite admirable, I have to wonder if they will do much for any of the company's bottom lines.

Duke Energy (NYSE:DUK).  Duke has a current ratio of just over 1, which is lower than I would like with its cash from operations only about a quarter of its total debt, and a slightly negative levered free cash flow.  However, since Duke is in part a regulated utility with very stable operations, a less solid balance sheet could potentially be tolerated, although I'd want to look deeper into the company's structure to see just how this affects the riskiness of the company as a whole before investing.  The pilot project in smart grid technology is interesting, but not much of a reason to invest.

Xcel Energy (NYSE:XEL).  I'm very familiar with Xcel, which is my electric and gas utility in Colorado, as well as a company I deal with at the Colorado Public Utilities Commission (PUC).  Because of my personal involvement as an expert witness in Demand Side Management cases for the Energy Efficiency Business Coalition, I believe that the current program the PUC adopted as a result affords Xcel the opportunity to slightly increase their profit margins by aggressively adopting energy efficiency, benefiting both Xcel and its customers.  Therefore, I'm also a small shareholder (I consider the Smart Grid pilot in Boulder to be unlikely to affect the bottom line any time soon.)  The company also leads the country for the amount of wind power delivered to customers.  Although the current ratio is only 0.8, and operating cash flow is a fraction of total debt, as a regulated utility profits are relatively stable.  I have also heard from company employees (water-cooler talk, essentially, but this could be confirmed by a review of company financial statements) that the company has been taking every opportunity they had over the last year to raise new debt financing, in anticipation of tightening credit markets. 

Whirlpool Corp (NYSE:WHR). As a manufacturer of consumer durable goods, albeit appliances ready for the Smart Grid, Whirlpool's revenues are likely to be hurt by an extended downturn.  Therefore, although the current ratio is 1.2 and operating cash flow would cover the company's entire debt in three years if it were not to decrease, I would still be uncomfortable holding this company.

Samsung Electronics.  Samsung does not have a US listing, but Energy Tech Stocks chose to add it to the index because it's looking into the same unpromising business of selling Smart Grid-enabled appliances to consumers as is Whirlpool. As I'm reluctant to invest in any company hoping to sell durable goods to consumers, I decided not to hunt down the financial statements in order to examine the company's liquidity.

Freescale Semiconductor (NYSE:FSL).  With a current ratio of about 3.5, and enough operating cash flow to cover all debt in a year, this company seems like a better bet to gain from putting chips in appliances than the appliance makers themselves, since each smart grid chip will be a new sale for Freescale, but simply replace another appliance sale for Whirlpool and Samsung.

DISCLOSURE: Tom Konrad owns XEL.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.  

October 25, 2008

Trading Alert: EarthFirst Canada (ERFTF.PK or EF.TO)

A few weeks ago, I wrote an article on the upcoming Clean Power Call in the Canadian province of British Columbia (BC). In a nutshell, the Clean Power Call consists of an auction conducted by the government-owned integrated power company to award long-term power purchase agreements (PPAs) to private wind developers. This is the model that has dominated in Canadian wind power so far. The notable thing about this model is that the PPA facilitates access to financing significantly for successful bidders, since the counterparty is a proxy of a credit-worthy government.

EarthFirst Canada (EF) (ERFTF.PK or EF.TO) is one of the most active small-scale Independent Power Producers (IPP) in this region of the country. The company already holds a PPA for 144 MW of wind in BC (the Dokie I project), as well PPAs for a combined 75 MW of wind in other parts of the country. In total, the company's development pipeline in Canada is roughly 2400 MW, which is quite large for a pure-play wind power IPP.

A few months ago, EF was hit by the triple whammy: (1) it announced cost overruns for its flagship Dokie I project - capital costs were going to shoot up to $360 million (~$2.5 million/MW) from a previously planned $325 million (~$2.26 million/MW); (2) the firm's wind consultant reduced its estimate of the annual electricity output for Dokie I by 2.3%, thus reducing potential cash-flows and the amount of leverage the project can employ; and (3) the credit crisis swung into full gear, making it all but impossible to find reasonably-priced capital to complete construction of the project and even impacting EF's investment bank and financial partner negatively. With the Dokie I project less than 10% complete, running out of cash at this juncture could prove highly problematic.

The result from all this was that in late August the firm announced it would engage 'strategic' advisors to help formulate next steps. In other words, EF is no longer able to secure the project finance facility it was counting on to build Dokie I and it will almost certainly run out of cash before too long. EF has about $65 million in the bank right now and ploughed through, according to its Q2 2008 cash flow statement, $51.7 million in project development costs in the first six months of the year.

But is all lost for shareholders? I, for one, am not so sure. Like in many other industries, the result of this credit crisis for the wind developer sector will be a shakedown and consolidation. EF has about 220 MW of wind PPAs with solid counterparties (government-owned utilities), and an attractive growth pipeline. Canadian provinces have shown a willingness to push the wind industry forward, and, if anything, this could strengthen as the economy softens in Canada and governments look for counter-cyclical infrastructure spending. Lastly, I know from my own work in the field that a number of large international wind IPPs with good balance sheets are looking to enter the Canadian market, which is viewed by many as a potentially-strong market for wind.

EF has gotten battered so badly in recent weeks that I decided to take a look. Generally, when I invest, I analyze companies as going concerns, or businesses that will be around for at least the duration of my investment in them. In my view, EF should not be looked at as such; the company will either go out of business entirely or its assets will be picked up by another IPP. This makes analysis of this company quite easy, as all one has to do is go over the balance sheet and figure out whether there is more value per share in the business than what the stock is trading at.

Valuation

The graph below shows the company's balance sheet as at Q2 2008, the latest period for which financial statements are available. I went through each item on the balance sheet and adjusted them by a discount factor meant to represent the fact that, should the business be bought out, it would likely be a fire-sale price. The adjustments I made are discussed below.





Cash - Cash should be cash, and probably doesn't need to be discounted. However, since EF probably used some of its cash in Q3, I reduced the amount by an arbitrary 50% and didn't make it up elsewhere on the balance sheet. This is part of working my margin of safety into this analysis as I go along.

Other current assets - I assigned no value to any of the other current assets. Why not? To be safe.

Fixed assets - Those are computers and chairs. I also assigned no value to them.

Windpower prospect development costs - This is the 500-lb gorilla in the room. This item effectively represents the nominal value of all of the expenses that have gone toward developing the wind projects to date. This includes items like foundation work on the projects, turbines, electrical connections, etc. Generally, companies would expense those items, and record them as costs on the income statement and reduce their income accordingly. However, EF has so far capitalized the majority of it, or made these expenditures into an asset. While some might term this approach "aggressive" as it understates losses on the income statement, it makes it a lot easier to perform this kind of an analysis, as it gives us a good idea of what a starting point would be for an asset sale: the total amount spent on project development to date. Here, I reduced the item by 70%. I think this is quite aggressive and the firm might fetch more than $0.30 on the dollar for those assets, but these are very uncertain times so better safe than sorry!

Liabilities - I kept all liabilities all as they were, again to be safe.

The result I came to was net (i.e. minus liabilities) adjusted assets of about $36.3 million, or roughly $0.35 per share. I had had a buy order at $0.10 for about a month (on the TSX) and it finally kicked in last Wednesday (Oct. 22). The position I took is tiny as this is emphatically a bet on a take-over or at least a significant asset sale. At the price I got and considering the analysis above, I think I have a solid margin of safety in case I missed something in my analysis. Nevertheless, I have no objective basis on which I can base the probability of EF being taken over rather than failing, thus my taking only a very small position.

UPDATE (Dec. 1, 2008): Despite having placed itself under creditor protection, EF still managed to submit bids for the upcoming BC Hydro Clean Power Call. They are clearly still looking for a major asset sale but the question is: what is the likelihood that BC hydro will award them power purchase agreements if they are uncertain the projects can be developed? I am holding on to my shares but have written this investment off. To be continued...

DISCLOSURE: Charles Morand has a position in EarthFirst.

DISCLAIMER: I am not a registered investment advisor. The information and trades that I provide here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

October 21, 2008

Wise Energy Use Stocks, Part 5:Global Services Companies

This article continues a series on the companies in the Wise Energy Use index.  I believe that the current turmoil has given stock pickers an opportunity to buy well capitalized firms which make money by helping people save money on energy.    The industry is poised to do well in hard financial times, but companies with weak balance sheets or poor liquidity may not survive.  In this series, I try to separate the wheat from the chaff.   I generally liked the efficient lighting, and smart metering and energy management companies in the index, but wasn't thrilled by any of the electric vehicle picks. 

General Electric (NYSE:GE)GE has been a long-time favorite of mine (much to my dismay when it got caught with a small subprime exposure.)  In the short term, GE has shown that it can still raise money even in troubled times by doing a (rather expensive) deal with Warren Buffett's Berkshire Hathaway.  The $3 Billion injection, followed by the $12B public offering was necessary because GE has long maintained a very low current ratio, something they were easily able to do in ordinary times due to their triple-A credit rating.  Even a triple-A rated company (especially one with a large finance division) has trouble raising money in this market, and they need new cash to maintain that credit rating.  I wish I had looked at GE two weeks ago when I started dumping companies which would need to raise financing.  In fact, GE was a company I suggested would become a good buy when this market finds a bottom.  Now that GE has strengthened their balance sheet, I'm comfortable with my stake.  

Nevertheless, GE is a graphic example of what happens to companies which need to raise cash quickly when cash is tight.  Consider the company's recent drop in stock price, and then consider what would have happened without the extra confidence they obtained by bringing Warren Buffett on board first.

Honeywell (NYSE:HON).  Honeywell, which I like for its building controls systems and performance contracting business, has an OK current ratio of 1.3, and a very strong operating cash flow equal to half the company's total (not just short term) debt load, meaning they will probably not need to tap the markets for new funds in the near future.  I'm holding my stake in this company.

International Business Machines (NYSE:IBM).  IBM has a current ratio just over 1, and a strong operating cash flow sufficient to cover their total debt in two years.  Although IBM's push into solar was one of 2007's most blogged stories, I tend to avoid solar companies because of the investor excitement around the sector.  That said, there seems to be no reason to think IBM will have any immediate need to raise cash.

Johnson Controls (NYSE:JCI).  Johnson Controls has long been my top energy efficiency pick among blue chip companies.  With a current ratio of 1.2, and enough cash from operations to pay off their total debt in two years, the valuation is becoming increasingly attractive.  In response to my (negative) article on electric car companies, a reader wondered if Johnson Controls was also risky because of exposure to car buyers needing financing.  I like the current valuation, but, especially in the short term, we can expect earnings and cash flow to drop significantly.   If I didn't already own it, I'd be tempted to wait for the price to drop a little more before getting in, but I would not avoid the company all together, because they are well placed to buy up smaller battery companies to consolidate their lead in that market.  

Siemens (NYSE:SI).  Siemens also has a current ratio of 1.2, and enough cash from operations to pay off their total debt in two years.  I've long liked Siemens for their interests in a wide variety of my favorite sectors, in addition to energy efficiency.  They're a global leader in electricity transmission infrastructure, efficient lighting, rail infrastructure, and have a strong wind turbine unit.  Their wide array of businesses is less exposed to the potentially cash-strapped consumer than GE and Johnson Controls.

DISCLOSURE: Tom Konrad owns GE, HON, JCI, and SI.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.  

October 18, 2008

Keynes Meets Carson, And How You Can Invest It (Part 1)

I'm not sure whether John Maynard Keynes, the father of Keynesian economics and an ardent proponent of government interventionism during hard economic times, and Rachel Carson, the mother of modern environmentalism and the author whose work is credited for the eventual creation of the EPA, ever met during their lifetimes. But if current voter sentiment holds until November 4, their ideas could soon converge and form the basis of government policy for at least the next four years. Let me explain.

First, John Maynard Keynes. There is no doubt that the deliberate and coordinated nationalization of financial services institutions across the West marks a new low for neoconservative economic thinking. This line of thinking holds that government should play as small a role as possible in the economy, and leave spending decisions to individuals and firms. Proponents of this philosophy argue that the best fiscal move a government can ever make is to return money to its citizens and corporations through tax cuts, who will then spend that money most efficiently. The Keynesian approach, on the other hand, is premised on the idea that it is not only OK but even desirable for governments to step in and directly incur large expenditures in difficult times to jump-start the economy.

Until the credit crisis hit, the Keynesian view had all but disappeared from Washington, and small and unobtrusive government was all the rage. However, in the wake of the economic and financial havoc wrecked by what many view as too much withdrawal of government from the economy, it appears as though its has become politically-acceptable for American lawmakers to overtly push for a more activist state. What form will this take, according to proponents? In old Keynesian fashion, large-scale infrastructure investments to create jobs and kick-start aggregate demand. While it is not especially surprising to hear academics argue for this form of government intervention, it's quite something to see Democratic politicians so emboldened by recent polls that they feel they can safely write about it in op-eds. The current crisis, it appears, has cast serious doubts in the minds of a growing number of voters on the ability of the free market to deliver wealth and well being for everyone, thus setting the political stage for a return to a more interventionist state in America.

Second, Rachel Carson. Obama's environmental credentials are strong to be sure. He has remained steadfast in his support of clean energy as a cornerstone of his broader energy policy, even in the face of overwhelming public support for domestic drilling and falling fossil fuel prices. It is therefore no wonder that in cleantech-addicted Silicon Valley, generally a place where big government is seen as a break on innovation and entrepreneurship, a number of high-profile VCs and their employees are supporting Obama. AltEnergyStocks.com officially endorsed Obama last week specifically for his credentials on alternative energy and energy efficiency. While some of Obama's motivations for being in favor of clean energy have to do with energy independence and economic development, it is fair to say that he is also strongly motivated by his own environmental values and his belief that climate change must be addressed.

What does this all mean for investors? As the macro-economic consequences of the credit crisis continue to spread, I expect an Obama victory to result in some form of an activist government strategy to boost employment and the economy. This activist program will revolve around massive expenditures in large-scale infrastructure projects, and if Obama can help it there will likely be an environmental angle to the program. If what politicians are currently saying is a true indication of what they intend to do, rail transportation is likely to be a major beneficiary. In the first of this two-part series on how investors can play the build-out in clean infrastructure, I present four stocks I came across while doing research on this.

Besides rail transport, the other major area of infrastructure alt energy investors care about is electricity transmission. Given Obama's promises on clean energy and the environment, the amount of press the Pickens Plan is receiving, and the state of America's transmission system, it is not unreasonable to expect that Washington could seize this opportunity to direct massive investments into this area as well. In the second part of this series, I will discuss potential plays on transmission.

Stocks For The Clean Infrastructure Build-out, Part 1 - Rail Transport

When doing research on this topic, I looked for companies that would benefit from investments in the rail infrastructure network, rather than companies linked to running or manufacturing/maintaining trains and cars. A severe economic downturn coupled with lower gasoline prices would reduce demand for rail transport, so this is not an area I'm particularly bullish on for the next year or so. In the long run, however, I believe that the renaissance of North American rail driven by high energy prices, tighter environmental regulation and an increasingly clogged highway network that's running out of space to expand, will be a strong theme to watch for alt energy investors.

I did not run any numbers or do an extensive amount of due diligence on the firms below, so if you have any information to share please go ahead.

Koppers Holdings (KOP). Financial statements here. At upwards of 45%, Koppers holds the largest market share in the North American railway tie business. Railway ties are the wooden beams that support the rails. Koppers also makes utility poles, and could thus benefit from investments in electricity transmission. One interesting thing about Koppers is that it runs a biomass power plant that burns recycled railway ties and utility poles (I found that out while checking the website. They have a video about it). At a PE of around 6.3x last year's earnings, this stock is trading in cheap territory.

LB Foster (FSTR). Financial statements here. LB Foster's rail division sells rail and other related products to a range of industries including passenger and freight railroads, rail transit, ports and others. One interesting feature of this company is that it also recycles and re-sells used rail. This stock is currently trading at a trailing 12-month PE of around 2.2x, which is very cheap by most measures. I haven't looked closely into this firm so I'm not sure why it would be trading at such a discount to its peers, even in difficult market conditions.

Stella Jones (STLJF.PK or SJ.TO). Financial statements here. At about 20%, this company has the second largest market share in the North American railway tie market after Koppers, and it has been an aggressive consolidator of the fragmented treated wood market. The company also has a 70% market share of the Canadian railway tie market, another jurisdiction where the government is weighing the merits of infrastructure spending as a counter-cyclical measure. Stella Jones is also active in wooden utility poles and could benefit from spending programs in electricity transmission. One of the major negatives with this stock is illiquidity: the largest shareholder owns about 62% of shares outstanding, and volumes tend to be extremely light. At a trailing 12-month PE of around 9.8x, Stella Jones is reasonably priced, although increased debt levels recently on the back of five acquisitions in five years could be a concern.

Global Railway Industries Limited (GRWIF.PK or GBI.TO). Financial statements here. Most of the company's business is in the sale of locomotive and other train components. However, it also sells a range of railway track and signal products. This stock is currently trading at around 10x last year's earnings, so it is the most expensive of the four.

DISCLOSURE: Charles Morand does not have a position in any of the stocks listed above.

DISCLAIMER: I am not a registered investment advisor. The information and trades that I provide here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

October 16, 2008

Wise Energy Use Stocks Part 4: Metering and Energy Management

This is a continuation of my look into which companies in the Wise Energy Use index seem to have the financial strength to survive a prolonged slowdown.  I generally liked the efficient lighting companies in the index, but wasn't thrilled by any of the electric vehicle picks. This article looks at the energy management and metering companies described here, many of which were also featured in my article on smart metering.

Many of these companies sell their products to utilities, not consumers, so their revenues should be less vulnerable to a drying up of consumer credit than most. 

Itron, Inc. (NASD: ITRI).  Metering company Itron has a lowish current ratio (.93), but positive operating and free cash flow. It also sells its products into the utility market, not to consumers, giving it a relatively stable revenue base in a downturn.

Echelon (NASD:ELON).  Energy management company Echelon also sells into the utility market, has a strong current ratio over 5, and while operating cash flow is negative, it is less than 4% of cash on hand.  

Woodward Governor (NASD: WGOV).  Energy control company Woodward Governor sells into a wide variety of industry, aerospace, and energy companies.  Some of these will be exposed to a slowing economy, but certainly not as much as consumers, and some are relatively stable (utilities and military.)  The company has a comfortable current ratio of 3.3, and positive cash from operations and levered free cash flow.

EnerNOC (NASD:ENOC).  Demand Response company EnerNOC also sells into the relatively stable utility market.  Although still losing money, their current ratio is a relatively comfortable 2.8 and they have four years of operating cash loss and two years of levered free cash loss in cash on hand.

Energy Recovery (NASD: ERII). Energy Recovery was a new company to me.  According to Energy Tech Stocks, they provide "power to water desalination plants. Experts say Energy Recovery’s equipment provides significant cost savings over its competitors."  Desalinization plants should be a relatively stable market, even in a downturn.  The company has a solid current ratio of 3, but very little cash on hand; most of their current assets are in the form of accounts receivable and they have a small negative operating cash flow.  Doing a little more digging, I see that these numbers are from before the company's well-timed July 8 IPO, so the balance sheet now looks much better than would be expected from the last quarterly report.  I still need to do more digging, but Energy Recovery is going on my list of stocks for further research.

DISCLOSURE: Tom Konrad owns ITRI, ELON, WGOV, and ENOC.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.  

October 14, 2008

Wise Energy Use Stocks Part 3: Electric Vehicles

This is a continuation of a series looking into the financial stability of companies in Energy Tech Stocks' "Wise Energy Use" index, described in part 1.  The first article in the series looks at three efficient lighting companies, while this one looks at four electric vehicle stocks and a private company, as described here.

Electric Vehicles... Good, but not Disruptive

I personally don't consider investing in any car companies, even relatively fuel efficient ones.  Either or both lean economic times and high oil prices are likely to lead to lower use of cars over the next few years, and this will likely weigh on car companies.  I'm more enthusiastic about relatively economical forms of transport, such as bikes, scooters, light rail, and bussesElectrification is likely the future of ground transport, but which will come first, the electric car, or the electric bus?

New car sales typically rely on financing and consumer demand, something which could weigh heavily on all automobile manufactures, even for efficient vehicles.   But I didn't create the index, I'm just screening it for companies I think will stay strong in a prolonged downturn.  

I agree with Neal's post yesterday where he says, "In energy, there is no disruptive technology, only disruptive policy that makes some technologies look disruptive after the fact."  Neal makes an excellent case that Silicon Valley ingenuity will not overcome the energy industry.  The disruption, when it comes, will not be a better car, like a plug-in hybrid... it will come in the form of people abandoning the personal car for something better.

Today, I was at the Colorado New Energy Economy Conference, and I saw Neal's "disruptive policy" coming in the form of Denver's new Strategic Transportation Plan.  According to Bill Vidal, of Denver Public Works, Denver transportation planning has taken a new focus.  No longer will Denver transportation be car-centric.  It will instead focus on moving people, goods, and info, becoming more multi-modal.  A move to multi-modal transport will not be good for car companies.  While Denver may be on the forefront of progressive transportation, they are not the only ones, and a slowing economy is as much a driver of multi-modal transportation options as is a rising oil price.

So while I don't like any of the car companies in the Wise Energy Use Index, there is a bus company I like. 

Nissan (NASD:NSANY).   Financial data from 1Q 2008.  First quarter operating income was a positive 80 Billion yen, and they have a current ratio is about 1.3.  This is not bad, but I'd spend a lot more time scrutinizing their financing needs over the next few years before I would invest, if I were so inclined.  Nissan may be looking into electric vehicles, but if few people are buying any vehicles, how much will that help the company?

Mitsubishi Motors (MMTOF.PK).   Financial data from 1Q 2008.  Although Mitsubishi had positive operating income of about 10 billion yen in the first quarter, current liabilities exceeded current assets, with a current ratio of 0.87.  This might not be a reason to worry in ordinary times, but we are not living in ordinary times.

Toyota Motor (NYSE:TM).  Toyota's current ratio is almost exactly 1, but they did have operating cash flow of $30 Billion in the first quarter.  Like Nissan, Toyota may be able to survive without tapping the financial markets for a while, but I'm still uncomfortable owning any auto firm, even a progressive one such as Toyota.  Also like Nissan, I'd take a hard look at the next few years' financing needs before I decided to invest, if I were so inclined.

Ener1 (AMEX:HEV).  Battery, Fuel Cell, and Nanotech company Ener1 is not one I've considered before, partly because the ticker and company description make me think that they're slick marketers, while I'm more interested in boring companies that don't know how to get investors interested in their story.  Nevertheless, their technology is not totally tied to cars, and they have a fairly solid balance sheet with a current ratio of 7.7.  Their current assets less current liabilities are slightly larger than their twelve month operating cash loss, and they have no debt.  Ener1 should be able to survive for about a year without going to the capital markets again for new financing, so if you're betting on a quick resolution of the financial crisis, this is a company you might consider for your wise energy use portfolio.  I will not be making that bet.

A123 - This widely acclaimed lithium-ion battery company is private, and so not available to stock market investors, nor dues it publish financial statements.  They are planning an IPO, but until the prospectus is available, I won't be able to say anything about the financials.  Unless markets improve, I don't expect the IPO to take place.

DISCLOSURE: Tom Konrad has no position in any of these companies.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.  

October 13, 2008

Cleantech Venture Capitalists Beware - What You Don't Know About Energy Can Kill You

Oil prices quietly (at least in the cleantech world), slipped below $80 last week, off some 50% from their highs a few months ago. Did I say 50%? Yes 50%. And gas has slipped, too, as with some variations, natural gas historically trades at a roughly 10:1 price ratio of Barrels to MCF.

It's easy to get caught up in the cleantech hype and forget that only 10 years ago this year oil prices fell two thirds, caught between rising supply from a decade of drilling and nasty Asian flu, triggered in part by, wait, a financial debt crisis, that time in emerging markets. Sound familiar? And oil hit less than $11 per barrel, less than 1/13th of its recent high, with people talking $6.

And it's easy to forget that the half decade following 1998 the not yet named as such cleantech investment sector hyped fuel cells, microturbines and distributed generation on the back of clean cheap natural gas, which was the fuel of the future.

And it's easy to forget that rising commodity prices wiped 99% of those business cases (only a few billion in value, though!) off the map until not a single cleantech venture investor today discusses distributed generation at all. But after a short hiatus, solar and ethanol exits on the back of some huge subsidies came through and cleantech was boomed.

And it's easy to forget that only a couple of years ago we as an industry debated the viability of hybrids and biofuels - because of a breakeven at $40-50/barrel or higher (the oilman's breakeven in Saudi Arabia is maybe $5/bbl)? Breakeven at $40 in biofuels? Corn ethanol maybe, cellulosic, dream on. But the switch from MTBE to ethanol came through on the policy side and unforeseen Chinese demand growth pushed oil prices stratospheric. And the corn ethanol plant owners built hundreds of plants at 5% of the size of average refinery, made hay and traded at tech multiples. Only to get crushed when corn prices, driven up by (gasp!) demand and higher natural gas and oil drove up their feedstock, fertilizer and transport costs and margins down. Welcome to refining, freshman.

And it's easy to forget that the core economic value proposition for solar has the ever present cost escalation analysis - "lock in your power costs, energy prices have risen x% per year, if they continue to do so you'll be paying 2.5x your current power prices in 30 years". And that the solar industry quietly ignores that energy prices will decline, not rise, with economic turmoil. But the ITC and feed in tariffs came through paying more than half the cost and so the party goes on.

It's easy to forget that energy is about commodity prices. And commodity prices are about cycles, supply AND demand. And that demand is GDP growth driven in energy. And that in our global markets GDP growth is more interlinked than ever, making it more, not less subject to cycles.

And that alternative energy is called alternative because it's the most expensive form of energy, meaning it's the swing producer, the type of guys who get killed in cycles (subsidies aside, of course).

And that the big fortunes made in cleantech investing to date have not been made on high risk early stage technology bets, but on 10 or 20 year old technologies who were in the right place at the right time when the policies came in. Or the low cost manufacturers of mature known technologies (think corn ethanol or wind developers and Chinese solar manufacturers) who moved fast when policies moved, making hordes of "that's not a venture" bets. Disruptive technology has never been the winner.

In energy, there is no disruptive technology, only disruptive policy that makes some technologies look disruptive after the fact. In energy, the risk is in the scale up, not the R&D, and the end application is so massive, so capital intensive, and so utterly dependent on commodity prices, that you can't invest in it like you invest in IT. It takes longer, 10x as much money, and the ante up to play the game for one project is the size of your largest fund. At scale, there is no capital efficient strategy in energy.

But we are Silicon Valley and we smash open gates with technology, and we know better than those energy dinosaurs in Houston, London, and Abu Dhabi, right? They just don't get it, right? One game changing technology can force the oil companies and power companies to their knees. The one I've found really is new and different. This entrepreneur has discovered something new. And it can be *cheaper* than oil (if you define cheaper right).

Beware Silicon Valley, the great fortunes, wars, and economic crises of the world for 100 years are not technology ones, they were energy made. Half the schools you went to were built by oil money. And the entrepreneurial spirit in this industry was born in the hardscrabble oilfields of Pennsylvania and Texas, and grew up in the far reaches of the globe. And the oil companies those entrepreneurs founded have forgotten more about technology in energy than you even know existed.

Be forewarned, you do not have a comparative advantage here. The oil men invented risk taking, AND risk management. The oil men are bigger, faster, smarter, richer, have more scientists and more entreprenuerial spirit than you, AND they know energy.

So while you fight the good fight to develop technology to change the world, don't forget, be humble, learn what can be learned, build what can be built, and walk softly, because the elephant in this room floats like a butterfly and stings like a bee, and he has yet to take the field.

The little guys whose pension funds are paying you a cushy 10 year guaranteed contract are counting on you to put aside your hubris.

Neal Dikeman is a partner at Jane Capital Partners and the CEO of Carbonflow. He is the Chairman of Cleantech.org and edits Cleantech Blog. He is from Houston, is a Texas Aggie, and believes in both energy and the power of technology to change the world.

October 12, 2008

Wise Energy Use Stocks: Efficient Lighting

Opportunity

On Friday, October 10, 2008 , I stopped being bearish for the first time since the 1990s.  My long term expectation of a crash that didn't come had been undermining my self confidence.  Even the decline in 2001 and 2002 had not seemed severe enough, given the financial imbalances in the system.  I had begun to worry that I might be genetically bearish, and that my worries had nothing to do with a market that was greatly overvalued.

I am relieved to say that I am not a permabear, and that the market as a whole now seems to me to be fairly valued.  Some sectors and many stocks are still overvalued, but bargains are there for those who look.  I don’t know where the market will go from here, but I now feel that we've seen the worst of what is likely to happen, even if the market has farther to fall.  We have just seen two weeks where the largest investors in the market have been forced to sell everything they could in order to meet margin calls and cover debts.  The wildcard is how long such distress selling will continue.

Anyone who currently has cash on hand and the courage to buy is in an enviable position.  Selling has been indiscriminate, with the best companies being sold as hard as the worst.  Now is the time to begin buying quality companies at a large discount to their true value.  Forced selling may continue for a while yet, but fundamental buyers are beginning to move into the market, and the best companies may never be this cheap again.

Buy Carefully

I am not calling a bottom here for the market as a whole.  I would not be surprised if the Dow falls as low as 7000, but I do think that the current mispricings from forced selling are as extreme as they are likely to get.  Now is not the time to buy a market index, be it a general market fund, or a green mutual fund or ETF.  

It is extremely timely that I have already begun a series of articles looking into companies which help people and businesses save money by using energy more efficiently.  Energy Efficiency seems to be the most likely alternative energy sector to benefit from an extended recession or depression.  With that said, I will continue my look into the liquidity of companies in the Wise Energy Use Index.  A liquidity screen is a good way to quickly eliminate companies from consideration before you've wasted too much time researching them.

Wise Energy Use Stocks, Part 2: Lighting

Philips (NYSE: PHG).  Philips is a long time favorite of mine, has a current ratio of 1.7, and operating cash flow of $1.7 Billion.  With $3.3 Billion on hand, Philips may be able to continue their acquisition of other lighting firms at reduced prices, and cement their world leadership in efficient lighting.  Energy efficient lighting upgrades typically have paybacks of less than two years, and are a staple of utility demand side management programs.

Cree, Inc. (NASD: CREE).  Cree is a leader in bright white LEDs.  With no debt, and a current ratio of over 4, operating cash flow of $312 million, Cree should be able to weather a financial storm, despite trouble at a major customer.  Cree may even use its healthy balance sheet for a small acquisition or two.

Lighting Science Group (LSCG.OB).  Lighting Science is a manufacturer of LED fixtures, including replacements for normal incandescent household bulbs.  Although the industry is poised for explosive growth in 1-2 years as costs fall, Lighting Science may not survive to benefit.  The company has a marginal current ratio of 1.35, but their twelve month operating cash loss of $19M is far in excess of both their current assets less current liabilities and cash on hand ($2.8M.)  Despite recent good news in a patent case with Philips, and resolution of a dispute with the former CEO, Lighting Science will be in a bind if credit markets continue to be tight.  

According to Bill Paul of Energy Tech Stocks, the company is in his Wise Energy Use Index because it is in a great industry, and a rising tide floats all boats.  That had been my reasoning when I bought the company for myself, and recommended it as a speculative play in 2008, but now I think that a rising tide only floats those boats that don't sink first.  I decided to sell my stake while writing this article.  

Philips may consider buying Lighting Science now that they have been stymied in their patent dispute, but holders of the stock should not count on this to raise the stock price significantly.  Just as Barclays chose to wait and buy Lehman's core assets out of bankruptcy, a potential acquirer of Lighting Science might also choose to wait for the LED Light Bankruptcy Special.   Other potential acquirers include Cree, Osram Sylvania, a division of Siemens (NYSE:SI), and General Electric (NYSE:GE).

DISCLOSURE: Tom Konrad and/or his clients own PHG, CREE, GE, and SI.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.  

October 11, 2008

The Week In Cleantech (Oct. 5 to Oct. 11) - Move Away From Pure-plays And Into Conglomerates

In General Industry News,

The Wall Street Journal's Environmental Capital told us about the Green Meltdown. There is no doubt that alternative energy stocks have a rough ride ahead of them. On the one hand, revenue-less companies whose business model is heavily leveraged to technological innovation may not be able to access sufficient funding to go on for an extensive period of time. On the other hand, business models that rely on cheap credit and large amounts of debt, like large wind and solar parks, will get squeezed by credit tightness.

In Environmental Markets,

McKinsey discussed how climate change could affect corporate valuations.

In Ocean Power,

Greentech Media let us know of a new report on ocean power firms. The authors argue that that ocean power will grow from a 10 MW affair today to 1,000 MW and $500 in revenue million annually within six years. The one challenge the authors probably couldn't get into their report is the lack of financing. Many of the small firms working on Ocean power technologies don't have especially solid balance sheets, and such firms could become casualties in the current crisis.

In Ethanol,

Auto Blog Green reported on the Platts Cellulosic Ethanol Conference. Interesting updates from three leaders in the field, including SunOpta (STKL) whose stock price never recovered from inventory problems at their food distribution operations a few months ago.

In Batteries,

Environmental Leaders informed us that hybrid vehicles were going to drive demand for batteries and smart grid applications. Some interesting statistics here, and another area where certain diversified firms like Johnson Controls (JCI) are currently doing work that could pay off soon.

In Solar,

Barron's Tech Trader Daily informed us that Goldman was turning cautious on solar, fearing oversupply and the impacts of the credit crisis. Actually, looks like a number of them are turning negative on solar.

October 09, 2008

AltEnergyStocks.com Endorses Barack Obama in the U.S. Presidential Race

With about a month to go to the 2008 presidential election campaign, and after two presidential and one vice-presidential debates, we have heard enough from both tickets on the issue of energy to make up our mind on an official endorsement, an issue we do not take lightly.

John McCain's and Barack Obama's stances on energy can seem very similar to the casual observer. Both candidates support a cap on carbon emissions, and both tend to argue for "All of the Above" when asked about specific forms of energy.

But there are key differences:

1. In the second presidential debate [transcript], Tom Brokaw asked each candidate to prioritize the important issues of Healthcare, Energy, and Entitlement reform. McCain avoided the question, saying that he would work on all simultaneously, while Obama put energy first and foremost. At AltEnergyStocks.com, we also believe that energy should be the new president's top priority.

2. Energy Efficiency. Despite supporting an "all of the above" approach to energy, John McCain very seldom speaks of energy efficiency, and using the energy we have more wisely. Barack Obama nearly always speaks about energy efficiency when he speaks about energy. The incident where Barack Obama truthfully said that properly inflating tires would save more oil than offshore drilling is likely to produce [video], after which McCain ridiculed him for it, is just one memorable example. Although AltEnergyStocks.com supports all forms of renewable energy, we know that energy efficiency is the cheapest and cleanest form of energy available, and so energy efficiency has to come first.

For more differences, this Wall Street Journal article explores the candidates' energy policies and voting records in more depth, and shows that Barack Obama has consistently supported renewable energy, while John McCain has sometimes been an obstacle.

For all these reasons, AltEnergyStocks.com joins other alternative energy and cleantech businesses in endorsing Barack Obama as the best candidate for the Alternative Energy Industry, and for our personal investments in the sector. But beyond immediate economic and financial considerations, we believe that a fundamental shift in the way we produce and utilize energy is a necessary condition for peace and prosperity for the generations that will follow us, and we believe that Barack Obama is the most willing and best able to ensure that this shift occurs.

Charles Morand, Partner & Editor

Tom Konrad, Ph.D., Partner & Analyst

Brian Gomes, Partner & CTO

Wise Energy Use Stocks for Troubled Times

Part 1: Introduction

In a financial world where there seems to be little hope, I see a bright spot in energy efficiency.  This is because energy efficiency improvements pay for themselves in a very short time, in addition to being the best thing we can do for energy security and reducing greenhouse gas emissions.  Given the current financial crisis, I also believe that investors should focus on companies with strong balance sheets, which will be able to internally fund their investment needs for the next couple years.

While I was making the above case, Energy Tech Stocks introduced their "Wise Energy Use" stock index, intended to "start every investor thinking about building a portfolio of companies whose fundamental business is to save their customers money by saving them energy."   Since I have been thinking about just that, I thought it worth asking the question, "Which companies in the index might be able to thrive in times when funding is scarce?"  Since there are fifteen companies in the Wise Energy Use index (nor was it intended as a formal index), this will not be an in-depth analysis of each, but rather more of a quick screen to find those which look ready to weather a continuing storm.

In general, using energy wisely is a good business to be in when times are are hard.  When times are easy, conservation falls to a low priority, because the pennies saved will never add up to a big score.  When times are hard, people stop thinking about the big score, and spend more time thinking about making ends meet.  This should be great for companies whose business model is helping customers save money by saving energy, or Wise Energy Use.

In going through the list, I'll be looking for companies with short term assets in excess of short term liabilities (i.e. a Current Ratio greater than 1) and, if cash from operations is negative, it should be small relative to cash on hand, as well as small relative to the difference between short term assets and short term liabilities.  I'll also take a look at how levered free cash flow compares to cash and current assets.

I'm also going to be more interested in companies which are not dependent on consumer demand, but rather will stand to benefit from infrastructure investment, which seems more likely to be a safe haven as governments everywhere attempt to get their economies going again.

Next week, I'll go through the companies.  If you want a preview, here are the EnergyTechStocks articles describing the companies:

Lighting firms; Efficient Cars; Smart Grid and Energy Management; Global Services Companies

October 08, 2008

My Portfolio's Latest Casualty And Addition

The Casualty

Last Monday, I discussed how I had recently reviewed Railpower Tech with a view to potentially adding to my position on grounds that: (a) the company had a fair amount of cash in the bank, which reduced the need to go to capital markets for financing for a while; and (b) that it was getting badly battered by general market conditions, potentially offering an attractive entry point. Although my portfolio has taken a beating in recent weeks, I remain ready to take small positions in stocks if I feel they are being unfairly bashed, including in penny stocks. The current situation is bad to be sure, but I don't think we are at the point yet where every small and medium business faces certain bankruptcy.

I noted in the article that the reason why I decided not to commit any more money to Railpower for the moment was the lack of contracts being signed given the operating leverage the firm was taking on by building a new factory. Unfortunately, this exact problem forced Railpower to materially alter its plans, and on Monday evening it announced it was canceling construction of the plant on grounds that new orders were not coming in (PDF). I fully exited my position on Tuesday morning at a pretty handsome loss on a percentage basis, although luckily my position was very small and the cash loss wasn't needle-moving.

With my portfolio, I keep a log and always record the reasons why I enter and exit positions and what I've learned from different investments. What are main lessons I took away from this one? First, as money rarity spreads into non-financial industries, capital expenditures, especially for big-ticket items, will be some of the first things to be delayed or canceled. Prudence is therefore in order with firms that derive a large portion of their revenue from the capital expenditures of other firms. However, as pointed out by Tom yesterday, it is not impossible that the government may try to invest in infrastructure as a counter-cyclical measure.

The second thing I noted down was that in uncertain times, it is cautious to start out a position small and see how things develop. If the market turns in your favor, you can build up your position and the only real cost is an opportunity cost. If you missed something in your analysis or if the market ceases to pay attention to fundamental value as it is currently doing, you can exit the position at a smaller cash loss or you can try to weather the storm without loosing sleep over it.

Lastly, the balance sheet weighs a lot more heavily in my analysis in tough times in three main ways: (1) the cash position - it's gotta very strong; (2) debt levels - there has to be little or no debt and ideally refinancing isn't needed in the near-term; and (3) the value of tangible assets per share must compare favorably to share price (notably with the Price-to-Book-Value ratio). For penny stocks, I would look for firms with no debt, a completely depressed Price-to-Book ratio and assets that can be readily sold off to unlock some shareholder value should the going get too rough.

The Addition

Last Thursday, I purchased ABB Ltd. (NYSE:ABB) for the first time. I am down quite substantially since but it doesn't bother me very much. This is a long-term buy (3 to 5 years) that I had had my eyes on for quite some time but that I had always found too rich on a PE and Price-to-Book basis. ABB, a stock Tom has discussed on several occasions, is a prime play on the transmission infrastructure build-out and energy efficiency. I also applied my rule and took a very small position, which I stand ready to increase.

The Positive News

A stock that I've held for quite some time now, AAER Inc. (AAE.V or AAERF.PK), an emerging Canadian maker of utility-scale wind turbines, finally signed its first major contract on Monday. It is to deliver 100MW of turbines to a large Canadian wind project.

The next step in closing this transaction is for both parties to show they have secured financing within three months. This could prove tough in the current environment, so this is not a done deal just yet. However, if AAER can pull this through successfully, it could be the beginning of what patient investors such as myself have been waiting for for a long time - a buildup of the order book. The supply/demand situation for large turbines continues to be heavily skewed in favor of turbine companies and AAER should in principle be able to find customers.

Ironically, after the stock experienced a 40% pop last Friday probably because the news was leaked, I put in a sell order to exist most of my position Monday morning in case this was just an aberration. The company asked for a trading halt and I was never able to sell before the news came out. I wrote down in my log that I had been quite lucky on this one.


DISCLOSURE: The author is long ABB and AAE.V and does not have a position in RPWRF.PK

DISCLAIMER: I am not a registered investment advisor. The information and trades that I provide here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

October 07, 2008

The Light at the End of the Tunnel is Energy Efficient

The Solar Investment Tax Credit has been extended, and the market for mortgage debt "rescued," but neither renewable energy nor the rest of the economy are out of the woods.  We'll probably be feeling the effects of the financial imbalances which have built up in our economy for years to come.

While the extension of the tax credit will help renewable energy technologies raise funding, the headwinds from the continued fallout of the structured finance and real estate bubble will be blowing in the other direction.  This will be a problem both for developers of new technologies, and project developers.  On the other hand, changes in the ITC (allowing it to offset the AMT, and removal of the public utility exemption) allow new investors, such as property and casualty insurers, into tax equity investing.  These investors are likely to be more cautious, but they are likely to be there.

The good news is that we already have the technology we need to decarbonize the economy.  The key now is adapting our regulatory structure and infrastructure to accept the technologies we already have.  Unarguably, project finance has become more difficult with the drying up of many pools of capital, but that is not the end of the story.  

Too Much Money

When money was relatively cheap, investors grew careless choosing their investments, most dramatically in structured mortgage products, but also in other sectors.  Now investors are more likely to careful about where they put their money.  For marginal or speculative companies, this is bad news, but it could be an advantage for dull but profitable businesses which might have been overlooked previously. 

The first steps towards decarbonizing out economy do not need to be high tech; they need to be hard work.  Energy efficiency is cheap (in fact, it usually pays for itself in just a few years, if not months,) but often requires new ways of thinking.  Investors and politicians have been quick to talk up photovoltaic companies.  Using the energy we already have more efficiently seldom received more than lip service.

I think that's likely to change, now that money is scarce.  In politics, it's no secret to anyone that the economy is hurting.  Even John McCain figured it out a couple of weeks ago.  This means that politicians are going to be looking for ways to help workers and create new jobs.  But with money scarce, there will be a push to do as much as they can with as few taxpayer dollars as they can.  

Energy Efficiency programs are an obvious option.  Most energy efficiency measures save far more money in fuel costs than they cost to implement.  This means that programs to promote energy efficiency put more money in peoples' pockets than they cost to implement.  This stimulates economic growth and jobs, all while reducing carbon emissions.  Typically, many opportunities to save energy at low cost are missed because people are too busy or in too much of a hurry chasing the big score to spend time thinking about saving a few dollars a week by sealing their house or driving sensibly.

Policy can do a lot to promote energy efficiency, through utility energy efficiency programs, independent programs with mandates to help consumers save energy, as well as labeling and information schemes such as Energy Star, and incorporating energy efficiency into building codes and other standards, such as the CAFE standard for automobiles.

Because few consumers consider energy usage in their purchasing decisions, such legislative measures as those outlined above save consumers more money than they cost to implement, and boost the economy because less money is spent over time on imported energy, therefore more can be spent on goods produced locally, keeping the money in the local economy.  Even in energy producing states, less money spent on locally produced energy means that more energy can be exported, also helping the local economy.

Transmission for Economic Transformation

Another traditional way for government to fight a slow economy is infrastructure spending.  As I've long argued, in order to reduce our carbon emissions, we need better energy infrastructure far more than we need new energy technologies.  Right now, our electrical grid is outdated and Balkanized.  Just as the national highway system contributed as much as one-third of US economic growth in the 1950s by facilitating the transport of goods across the country, a national electric transmission system would contribute to national growth by lowering electricity prices in areas without abundant cheap generation, and adding export income in areas with inexpensive generation.  A national transmission network, by providing export opportunities, would allow wind penetration in under populated, windy areas to grow beyond the needs of the local utility.  A strong transmission backbone, combined with electricity demand responsive to price signals, and electricity and heat storage are how Denmark hopes to go from 20% to 50% wind penetration.

Price responsive electricity demand (which I discuss in my articles on the one-house grid and wind and heat pumps) and and a better transmission network both make the electricity market closer to the free market ideal. Any economist will tell you that improving price signals in a market or broadening the pool of possible buyers will improve market efficiency.  Efficient markets bring economic gains, which is why transmission investments (not to mention investments in smart metering to improve the price response of demand) are not only wins for renewable energy, but wins for the economy.

Might a slowing economy make political authorities see the potential of improving our electricity transmission?  Transmission advocate Charles Benjamin of Western Resource Advocates thinks it might.  At the Second Annual Concentrating Solar Power Summit, he told the story of how he persuaded the Republican Public Utilities Chairmen to support a transmission authority.  Key to his argument was the fact that electricity rates in East Kansas were six times the rates in West Kansas, so it was clear how West Kansas residents were losing out due to lack of transmission from one side of the state to the other.

Mr. Benjamin is currently making progress getting a similar transmission authority in Nevada, despite the fact that the local utility hates the idea.   The key to this battle is bringing politicians to the realization that what is good for the utility is not necessarily good for the public, and that he was having success pitching transmission as an economic development tool.  

Rather than a hindrance, Mr. Benjamin thinks the current economic crisis is making the case for improved transmission in Nevada easier, not harder.  Google CEO Eric Schmidt seems to agree.

Those of us who want to see the whole nation have access to plentiful renewable energy can hope that the same will hold true in our nation's capitol.

October 06, 2008

What I Sold: Electro Energy, Inc. (NASD:EEEI)

Of all the stocks I've sold in response to the market turmoil, Electro Energy was the most painful to sell, both emotionally and financially.   

The sale was painful emotionally because I've been recommending this company for a year (albeit with the caveat that it was a speculative bet.)  In each article I wrote I said something along the lines of "If EEEI can obtain financing..."

Now even investment grade companies have serious trouble obtaining financing.  If an outside company is interested in EEEI's manufacturing assets or technology, there is little reason for them to buy EEEI stock.  Any outside investor with cash will be in an enviable bargaining position.   I no longer want to be on the other side of that bargain, so I sold my (much diminished) stake.

Other entries in this series:

  1. Held: UQM Technologies
  2. Sold: Carmanah Technologies
  3. Sold: Pacific Ethanol
  4. Sold: Dynamotive Energy Systems
  5. Sold: Nova Biosource Fuels
  6. Sold: VRB Power
  7. Ten stocks to buy at the bottom.

DISCLOSURE: None.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.  

October 05, 2008

Concentrated Solar Power and the New ITC

When the financial turmoil began, I sold my riskiest stocks.  Even a successful bailout bill is unlikely to return us to the heady days of 2006 and 2007.  Yet there is a bright side for clean energy investors.  Despite the recent evidence to the contrary, a financial crisis is likely to convince legislators of the importance of getting the economy going again, and of doing so with the least amount of public money possible.

Concentrating Solar Power

It was with this thought in mind that I attended CSP Today's Second Annual CSP Summit US in San FranciscoCSP, or Concentrated Solar Power, is a proven technology.  Several CSP plants have been operating reliably in the California desert since the late 1970s.  The technology uses mirrors to concentrate the sun's heat, and that heat is used to create steam to run a turbine, just as the heat from fossil fuels is used to create steam to run a turbine in a conventional gas or coal fired power plant.

What do utilities like about CSP?

  • Steam and turbines are familiar technologies.  It's hard to underestimate the attraction of the familiar, especially in a conservative industry like electric utilities..
  • The generation profile of CSP is an excellent match for load shape, especially in the sunny locations where CSP works best.  In this aspect, CSP is a better match for load shape than even photovoltaic solar power, because the thermal latency of the system means that, even without storage (see below), CSP tends not to be subject to temporary losses of power each time a cloud passes over (cloud transients.)
  • Thermal Storage.  Unlike chemical storage (batteries) which degrade when charged and discharged, thermal storage such as the commonly used molten salts are unchanged when they are heated and then cooled.  While these salts (a mixture of ammonium nitrate and potassium nitrate, both also used as fertilizer) are expensive in the quantities used in CSP, expanding storage capacity on a CSP plant is just a matter of building bigger insulated storage tanks and buying more fertilizer.  This means that a CSP plant can be built to be a nearly perfect match for a utility's load, and even used for voltage support and load following.
  • Price.  According to California's Renewable Energy Transmission Initiative (RETI) report [.pdf], referenced by Mark Rawson of the Sacramento Municipal Utility District as an accurate analysis of cost figures, the levelized cost per MWh for CSP varies from $140 to $190 per MWh (or 14 to 19 cents per kWh.)  This makes CSP price competitive with natural gas peaking turbines, and although these prices are more than twice the prices usually quoted for wind power, this is not a barrier for power which fits a utility's load.  Hal LaFlash of PG&E  mentioned that the most recent RFP from San Diego Gas and Electric was offering four times the price for power produced in the afternoon compared to power produced at night.  In markets like that, firm, dispatchable, on peak power at three times the price can easily out compete power from wind, which tends to be anticorrelated with load.

As with all new energy, there are barriers.

  • Incentives.  The nearly  universal refrain at the conference was that CSP needs an 8 year extension of the Investment Tax Credit (ITC.)  The complex permitting issues, transmission connection times, the large size of the plants, and wait times for the turbines mean CSP has a longer development cycle than most other renewables, hence the need for the 8 year extension of the ITC.   Since an 8-year ITC extension for solar was included in the financial "rescue" package which was just signed by President Bush, and this bill also makes the ITC exempt from the Alternative Minimum Tax (ITC), CSP was a big winner from the delay of the rescue package.   The first version of this bill did not contain the tax credit extension.
  • Transmission.  CSP is not a distributed technology, and it relies on direct ray radiation, and project sizes running into the hundreds of MW.  We currently have no national transmission planning, and only a few states have gone through a process of locating renewable energy resource zones and have a plan to get the transmission to where the power is needed.
  • CSP, like all thermal electric technologies, uses water for cooling, unless designed for dry cooling.  But dry cooling comes with a penalty of about 15% higher capital costs and about 9% lower efficiency of power production.  Despite the efficiency hit and added costs, most CSP projects in California are looking at dry cooling.
  • CSP is land intensive, producing only 4 to 6 acres per MW (according to Michael DeAngelis of SMUD).   According to Rainer Aringhoff of Solar Millennium, the current West Mojave Plan strongly hinders CSP development.  Even though the Mojave Desert has the highest direct ray radiation in California (and the world), the West Mojave Plan allocates only 1% of the land area to renewable energy... less even than the 5% allocated to off-road recreation.  This is only dramatic one of the many environmental barriers to CSP development, but the consensus at the conference is that CSP faces a regulatory thicket which must be dealt if CA will be able to bring on the 800 MW of CSP a year it needs to meet its recently passed goals in AB 32.  (Numbers also according to Rainer Aringhoff.)
  • Financing.  Especially for newer technologies, banks are uncomfortable financing a project they are not certain will work.  The companies which will have an advantage getting financing will be the ones with technology that banks and tax investors can be confident the power plant will continue to operate long enough to pay off their investment.

The Light at the Other End of the Tunnel is the Sun

Overall, CSP is likely to be a relatively calm place for investors during the coming years.  The financial rescue package is not going to make the underlying problems which cause the current financial turmoil go away... it will simply smooth the current market and probably avoid the collapse due to loss of liquidity of many financial institutions.  But this does not change the fact that Concentrating Solar Thermal Power is the only renewable energy resource that is can deliver dispatchable, firm power and also has the scale to meet a large percentage of our electricity needs.  In the Southwest US, which does not have the wind resource of the Great Plains, solar is the only renewable option which states can use to meet renewable portfolio standards once they get into the double digits.  Since CSP costs considerably less than PV solar technologies, and can match local peak demand with just a few hours of storage, CSP is likely to be a large share of it.

Investing in a Shifting Landscape

All Renewable technologies are likely to benefit from the ITC and PTC extensions in the recent bailout bill. But the big winner is Solar, and specifically large scale CSP.  The scale, permitting, environmental, and interconnection issues of these giant plants mean that without the long term certainty that the 8 year extension of the ITC, the plants would have had trouble getting financing.  

The good news for CSP does not stop there.  With the ITC exemption came two changes to the current ITC.  First, the tax credit has received an AMT exemption, which, according to Michael Bernier, and attorney at Ernst & Young, this allows a much broader class of investors to invest in CSP for the tax benefits, and allows existing investors to invest more.  This new source of funds will be critical for CSP given the gigantic capital costs for the projects.  Where previously the only major tax credit investors were investment banks and General Electric (NYSE:GE), new investors such as Property and Casualty insurers will become interested.

The second change in how the ITC work was the lifting of the "Public Utility exemption."  Previously, a utility could not own a solar plant and take advantage of the ITC.  Now they can.  Since many utilities would prefer to own generation so that it can be incorporated in the rate-base and earn a return on equity, vendors of CSP technology and developers who can sell a turnkey plant to the utilities will gain an advantage over developers who want to own the plants and only sell the power to the utilities.

The changes also mean that developers with proven technology, who already had an advantage getting financing, have an even greater advantage because the new tax investors will not know the industry as well as the current investors.  This means that developers will need to spend more time assuring investors that their technology is reliable, and a long track record will be an advantage in doing so.

For public company investors, the options for CSP investments are still slim.  Acciona (ACXIF.PK) is a diversified Spanish renewable energy company with a strong presence in CSP, and United Technologies (NYSE:UTX) has a small exposure to solar thermal through their investment in solar tower vendor Solar Reserve.  On the bright side, both of these companies have what it takes to reassure a new crop of tax credit investors.  Acciona built the only recent full scale CSP plant in the United States, Nevada Solar One, while Solar Reserve's less proven but more efficient power tower technology was demonstrated by the same engineers now working for Solar Reserve demonstrated the technology (and thermal storage with molten salts) at Solar Two in the Mojave desert in the late 1990s.

For investors willing to take a less direct approach, we can be certain that a large build out of CSP plants will have to be preceded by a large build-out (or at least upgrading) of transmission lines in the desert Southwest.  I discuss several transmission stocks which should benefit in this entry on renewable energy and transmission.

DISCLOSURE: Tom Konrad  and/or his clients have long positions in GE, UTX, ACXIF.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

October 03, 2008

What I Sold: VRB Power (VRBPF.PK, VRB.V)

VRB Power is the only public vendor of a flow battery chemistry, the Vanadium Redox Battery. I bought the company when I first realized that in order to get a large proportion of intermittent wind and solar energy onto the grid, long term electricity storage would be essential.  Of the available technologies, flow batteries are some of most technically elegant.  Since VRB is one of only two publicly traded vendors of large scale batteries, I bought some.  

Lessons Learned

I was not being discriminating.  Even with the belief that large scale storage will soon be needed to integrate intermittent resources onto the grid, buying VRB would still have been a mistake.  Although flow batteries are an extremely elegant solution, they are a solution that is not ready for market.  As Michael DeAngelis, SMUD's Manager of Advanced Renewable and Distributed Generation Technologies, told me, "It's a research project.  It's not price competitive."  SMUD has a share of a 20 kW x 9hr  VRB system [.pdf 1.83 mb, slide 12].

SMUD invests in research projects because they want to help develop future technologies they may need in the future.  Although that may also be a motivation for CleanTech investors, those investors would do better to think of such investments as charitable donations than investments; the results are more likely to be a tax write-offs than a capital gains.

Research projects are the most tempting way for cleantech aficionados to lose money in our investing.  In this case, I was seduced by what a speaker at the same conference aptly described as a "pretty toy."  Venture capitalists and angel investors can make money by finding a new technology and jumping on it at the right time, although they usually have more losers than winners. For investors in public companies, making money on technology projects is mostly limited to finding a bigger fool to sell the company to.  The problem with this is even if you manage to find a bigger fool, you've gained something with the money you made... you gained self-confidence.

Self-confidence arising from knowledge of the asset you're investing in is an asset, but confidence based on your own belief in yourself and your own qualities as an investor is poison.  All investors make mistakes. (This series of entries is a showcase of several of mine. Part of the value of writing this series is in maintaining my own humility.  A tendency to revel in success and dismiss mistakes will make an investor happier in the short term, but poorer in the long term.)  

For the above reasons, I seldom advocate investing in research projects.  In the current context of much dearer money, research projects (which often need to return to the capital markets for more money) are even less attractive.

None of this is to say that VRB's quite interesting technology has no place in the future of our electric grid.  I strongly hope it does, because inexpensive, large scale storage will be key to completely decarbonizing our electric grid.  Nevertheless, at any future date when VRB flow batteries are widely accepted by utilities, the current shareholders of VRB Power are unlikely to retain any significant ownership of the technology.

Other entries in this series:

  1. Held: UQM Technologies
  2. Sold: Carmanah Technologies
  3. Sold: Pacific Ethanol
  4. Sold: Dynamotive Energy Systems
  5. Sold: Nova Biosource Fuels
  6. Ten stocks to buy at the bottom.

DISCLOSURE: None.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.  

October 01, 2008

The Bailout Package & Renewable Energy

As most of you will probably know by now, the US Senate voted tonight to pass the $700 billion bailout package for the financial sector. As part of the this new version of the bill full of so-called "sweeteners", or measures meant entice certain individuals to vote in favor, lawmakers included a one-year extension of the Production Tax Credit for wind and an eight-year extension of the Investment Tax Credit for solar.

Now the House must still vote on Friday, so this isn't a done deal just yet. However, although it probably won't get much attention in the general press, the extensions of the PTC and ITC are important measures for alt energy investors, especially if credit conditions don't ameliorate in the next few months. General weaknesses in equity markets coupled with concerns over renewal of these tax credits created nothing short of a perfect storm for many of alt energy stocks.

View the full text of the bill here.

What I Sold: Nova Biosource Fuels (NBF)

Preparing for a world in which financing will be much more difficult to come by, I have been selling companies which are likely to need financing in the next couple of years.  A listing of the companies I've discussed so far is at the end of this entry.

My sale of Nova Biosource Fuels (AMEX:NBF) continues my general moves out of biofuels, also discussed in my entries on Pacific Ethanol and Dynamotive Energy Systems.  I have long argued that electric propulsion is a superior way to power ground transport than even "Second Generation" biofuels such as cellulosic ethanol.  My forays into biofuels have therefore been attempts to find companies better positioned in the industry, rather than an attempt to get exposure to the whole industry, as I have tried to do with geothermal power.  Even those picks have fared poorly, however, and my review of the cash flows and balance sheets of my holdings has led me to dispose of the majority of my biofuel investments.

Nova Biosource was brought to my attention by James Kingsdale at Energy Investment Strategies.  Nova's ability to handle a wider range of biodiesel feedstocks, should protect them somewhat from a commodity squeeze arising from expensive high grade oils and low prices for diesel fuel.  However, protection from a commodity squeeze is not protection from lack of new sources of financing.  As of the most recent quarter, Nova had a $15M operating cash outflow for three months, with only $17.6M in current assets and $8M in current liabilities.  The company has been meeting its cash flow needs with short term borrowing.  Any hiccough in terms of availability of funding could put Nova between a rock and a hard place.

Other entries in this series:

  1. Held: UQM Technologies
  2. Sold: Carmanah Technologies
  3. Sold: Pacific Ethanol
  4. Sold: Dynamotive Energy Systems
  5. Ten stocks to buy at the bottom.

DISCLOSURE: No position.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.  


« September 2008 | Main | November 2008 »

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