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January 31, 2013

The API Bushwhacks Ethanol

Jim Lane
320px-1967-1969_Looney_Tunes_Opening_Title_Card[1].png

Who’s right, in the fight of their lives over E15 ethanol blending?

Whose data’s a Looney Tune, whose is from the real-world?

Yesterday the American Petroleum Institute, in an apparent impression of Yosemite Sam, held a press conference in DC to highlight a new report from the Coordinating Research Council on E15 ethanol blends.

The report is here.

The API: Blast your scuppers, now I gotcha, ya’ flea-ridden riff-raff!

Use of the ethanol gasoline blend E15 may endanger fuel systems in millions of 2001 and newer vehicles, says API. The Institute’s Group Director of Downstream and Industry Operations Bob Greco said the fuel system failures could lead to vehicle breakdowns, also cited CRC research completed last year that found E15 could damage valve and valve seat engine parts in vehicles.

“The additional E15 testing, completed this month, has identified an elevated incidence of fuel pump failures, fuel system component swelling, and impairment of fuel measurement systems in some of the vehicles tested. E15 could cause erratic and misleading fuel gauge readings or cause faulty check engine light illuminations.

“It also could cause critical components to break and stop fuel flow to the engine. Failure of these components could result in breakdowns that leave consumers stranded on busy roads and highways. Fuel system component problems did not develop in the CRC tests when either E10 or E0 was used. It is difficult to precisely calculate how many vehicles E15 could harm. That depends on how widely it is used and other factors. But, given the kinds of vehicles tested, it is safe to say that millions could be impacted.”

The Industry: Eh, what’s up Doc?

The reaction from ethanol trade groups was, as expected, apoplectic — and we’ll get to that in a minute.

EPA and the Department of Energy have not responded to the study, yet — but the DOE did respond to the May 2012 CRC study, and described it as “deeply flawed”.

The issue

Ford and GM say that E15 is safe for all of their 2013 model year cars – and are cautionary about earlier models. The auto industry, taken as a whole, would prefer to see higher blends of ethanol in flex-fuel cars, not the entire fleet – for now.

By contrast, the EPA, based on a review of DOE test results, has declared E15 safe for 2001 model year cars, and later. So what we have is a dispute over E15, vs E10, in non flex-fuel cars for model years 2001-2012. Sounds pretty narrow, doesn’t it?

What’s at stake

Absent the arrival of drop-in fuels in large quantities — or an (unexpected) surge in the near-term availability and popularity of higher blends of ethanol for flex fuel cars — there isn’t going to be any way to meet the Renewable Fuel Standard targets without higher blends of ethanol put into the standard fuel distribution.

The testing and the dispute

The results are the results, and no one is saying that CRC faked the data. The cat fight between ethanol groups and anti-ethanol forces centers on whether the CRC designed a real-world test — that is, would any of these problems really be seen in actual autos on actual roads, and if they are seen, would they really be due to E15 ethanol, as opposed to something else.

The most recent tests focused on the fuel pumps and sensor systems on a series of cars – one set were left to “soak” for 12 weeks, with eight brief starts to measure performance. In the second, pumps were operated continuously for 3,000 hours to “age” them to the equivalent of 90,000 miles. In general, they were a follow-up to earlier work CRC did on E20 — which was understandably rendered less useful when EPA approved E15 use.

The RFA has prepped a response, here.

Meanwhile, we’ll point out three problems that ought to be troubling to thoughtful people.

1. The “Measure Twice, Cut Once” problem. RFA tells us: “The AVFL-15 project was duplicated by Minnesota State University back in 2008 also using an aggressive E20 test fuel on fuel system components.  Conclusions of the report stated “E20 was found to have a similar effect as E10 and gasoline on fuel pumps and sending units.”

2. The sulfur problem. Excessive sulfur can cause fuel sensors to fail – ask CRC, they wrote the book on the topic back in 2009, here.  For that and for emissions reasons, it is limited to 30 parts per million in (corporate averaged) gasoline, and 10 PPM in California. We noted that the CRC soak test pitted 10.4 PPM gasoline against 14.4 PPM E15 ethanol. That’s a 40% “juicing” of the sulfur content — and you would need to blend 37 PPM ethanol with 10.4 PPM gasoline to get that sulfur level.

3. The aging problem. Fuel pumps fail, and they are known to do so, starting at 60,000 miles or so in the real world  — for a host of reasons. Particularly if, as in this case, you run for 90,000 miles without mentioning a change of fuel filter. Ask Ford – they tell you to change the filter every 15,000 miles in the real world, here.

Industry responds.

OK, now over to industry response.

Bob Dinneen, President and CEO of the Renewable Fuels Association

“API has absolutely no credibility when it comes to talking about E15.  That point has never been more clear than in this new study in which they ‘cooked the books’ by using an aggressive fuel mix to try and force engine damage.  This isn’t real testing and this certainly isn’t real life.  Enough already with the scare tactics.  E15 is rolling forward and API needs to get out the way of progress that will result in a stronger country, a stronger economy, and stronger, cleaner environment.  E15 will not be stopped by feet dragging and forecasts of fictional faults.”

Ron Lamberty, Senior Vice President for the American Coalition for Ethanol

“This is just another ghost story, told by people who stand to lose market share when consumers finally have access to E15. We shouldn’t be surprised at Big Oil’s latest attempt to scare consumers – they’ve shown no shame in twisting test results to protect their market share. There is a reason that the oil companies don’t want E15 and it has everything to do with protecting the bottom line and nothing to do with protecting consumers.”

Tom Buis, CEO, Growth Energy

“Today’s study is no surprise. This is a classic example of ‘he, who pays the piper, calls the tune.’ Oil companies are desperate to prevent the use of higher blends of renewable fuels. They have erected every regulatory and legal roadblock imaginable to prevent our nation from reducing our dependence on oil. For Big Oil, this is about market share. To see what’s driving them, ‘follow the money,’ as every gallon of renewable fuel that enters the market reduces Big Oil’s market share. Obviously they have deep pockets in which to fund studies that can at best be described as incomplete and cherry picking.

More data for thought

The CRC maintains an extensive library of its ethanol test program, here.

Disclosure: None.

Jim Lane is editor and publisher  of Biofuels Digest and BioInvest Digest where this article was originally published. Biofuels Digest is the most widely read Biofuels daily read by 14,000+ organizations. Subscribe here.

January 30, 2013

A123's Sale Moves Ahead

Doug Young

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A123 Systems battery cell products (Source: A123)
After a stormy 2012 that saw growing trade friction between China and the US, I'm happy to see that 2013 is getting off to a better start with Washington's approval of a potentially sensitive sale of a bankruptcy US technology firm to a Chinese buyer. Many readers will know that I'm talking about the case of A123 Systems (AONEQ), a former high-flying US battery maker that fell on hard times as new energy industries worldwide experienced a broader downturn in demand for their products.

In this case, Chinese buyer Wanxiang Group had won an auction for most of A123's assets in a US bankruptcy court, which should have been the final step for closure of the deal. But then some US politicians, prodded by one or more companies that lost in the bidding process, started pressuring the Obama administration to kill the deal, since it involved cutting-edge technologies used in lithium ion batteries.

In this case, I'm glad to report that the Obama administration has seen the light of reason, and the agency that reviews deals for national security concerns has just approved the sale, according to foreign media reports citing Wanxiang. (English article) The deal still requires one more government approval to close, but presumably it will receive such a green light after getting this first important approval.

I've been saying all along that this deal should get approved, as Wanxiang looked like it was in a good position to develop some of A123's technologies that otherwise may have been wasted if a suitable buyer couldn't be found. I'm also hopeful that this is a sign that cooler heads will prevail in Washington now that the US presidential election is in the past and politicians can get back to the business of governing rather than looking for opportunities to curry public favor by opposing China acquisitions on national security grounds.

Readers will recall that 2012 was a particularly bruising year for US-China trade relations, as US politicians took just about any opportunity to oppose any Chinese purchases of US companies based on national security concerns. Washington spent much of the year crafting a package of punitive tariffs against China's embattled solar panel sector, citing Beijing's unfair subsidies for the industry that put other global rivals at a disadvantage.

That dispute wasn't really related to national security, but still had plenty of anti-China overtones. The anti-China rhetoric reached a crescendo in October, just a month before the election, when the US government said that Chinese telecoms equipment makers Huawei and ZTE (HKEx: 763; Shenzhen: 000063) should be blocked from selling their products in the US due to national security concerns.  (previous post) Washington said that equipment from both companies presented a risk because Beijing could potentially use networks built by both Huawei and ZTE for spying.

Despite the heated rhetoric, reason did prevail to the north in Canada, where the government in December approved the sale of oil exploration giant Nexen to China's CNOOC (HKEx: 883; NYSE: CEO) after months of foot dragging. (previous post) But the government added that it might not approve similar deals in the future, again highlighting the sensitivity of such transactions.

Yet another sensitive deal is still pending, which has a Chinese group in negotiations to buy ILFC, the biggest US aircraft leasing company, from insurance giant AIG (NYSE: AIG). It's not clear if the Chinese buyer in that case will ultimately reach a deal to buy ILFC, which would then require US government approval. But now that the US election is behind us, I'm hopeful that the US will get back to the business of more governing and do less politicking with these cross-border acquisitions. If that happens, look for an uptick in cross-border M&A, with rhetoric from both Washington and Beijing fading as both sides get back to the business of promoting economic growth.

Bottom line: The US approval of the sale of a battery maker to a Chinese buyer could mark the beginning of a toning down in US-China trade friction in 2013.

Doug Young has lived and worked in China for 15 years, much of that as a journalist for Reuters, writing about publicly listed Chinese companies. He currently lives in Shanghai where he teaches financial journalism at a leading local university. He also writes daily on his blog, Young’s China Business Blog, commenting on the latest developments at Chinese companies listed in the US, China and Hong Kong. He is also the author of an upcoming book about the media in China, The Party Line: How The Media Dictates Public Opinion in Modern China .

January 28, 2013

Trading Strategy Around Lime Energy's Possible Feb 2 Delisting

Tom Konrad

Lime logoSeveral readers have asked me if I still recommend buying Lime Energy (NASD:LIME) now that it looks like the company could be delisted from NASDAQ on February 2nd.  I won’t go into the details of why, when, or how, since John Downey has done an excellent job of covering that in the Charlotte Business Journal.

Instead, I’ll look at the various possible scenarios, and how it will likely be best to trade the stock.  To understand what will happen, we first have to decide A) will Lime’s appeal against delisting be granted? and B) Will Lime be able to file its financial reports by April 30?

Scenario 1: All’s Well (Appeal successful, on time reports)

One possibility is that everything goes as Lime management hopes.  In this case, Lime’s appeal to NASDAQ to stop delisting is granted, and Lime manages to file its delinquent reports by April 30.  As always, the time to buy will be during the period of greatest uncertainty, which will likely correspond with the stock price low and happen sometime between now and February 2nd.

Scenario 2: Late Filing or Appeal Denied

If Lime again is unable to file its reports on time (they have already been delayed repeatedly) or the stock is delisted, it’s probably best to stay away from the stock until after the reports are filed.  Even then, Lime seems unlikely to meet the standards for initial listing on NASDAQ because of its low market capitalizationI don’t know if the requirements for relisting on NASDAQ are less stringent than for initial listings (as are the requirements of continued listing.)   However, I cannot find anything related to a re-listing process, so I think it’s best to assume that Lime would have to go through the initial listing process if it wants a new NASDAQ listing.  Until such time as it is relisted, it will trade on the over the counter (OTC) markets, where most stocks typically trade at a substantial discount to similar stocks on NASDAQ.

Once Lime begins to file financial reports again, we’ll have more information, and then we may have a good buying opportunity.  Although filing reports will doubtless help the stock on the OTC market, the lack of an exchange listing will keep the price down and give investors interested in getting back in a chance to do so inexpensively.

Conclusion

Clearly the decision to buy now depends on the chances of the appeal being denied or of additional delays to filing financial reports.  I think the chance of not getting the reports in on time by April 30 are low, since the consequences would be so dire for Lime, and I just find it hard to believe any audit could take that long.

The chance that the appeal will be denied is harder to know.  Lime seems to be complying with the spirit of the rules, in that they are trying to file accurate financial statements, and it seems to me that NASDAQ’s panel should take that into account.  But I have no insight into this process, and investors who focus on what “should” happen often get burned.

In the end, I’m doing what I usually do when I know I don’t know what’s going to happen.  I sold some of my position, but kept most of it.    The reason for that is mostly my own psychology. By recognizing some of my losses, I’m less emotionally attached to the idea that Lime has to go up, and I should be able to look at the question more objectively, as information emerges.  However, since I still hold most of my position, I’ll still be watching the stock closely, and so will be able to react to new developments in a timely manner.

Disclosure: Long LIME

This article was first published on the author's Forbes.com blog, Green Stocks.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

January 26, 2013

The CapEx-OpEx Fallacy, Electric Cars, and Biofuels

Jim Lane

“Electric power is cheap”, and “cellulosic biofuel costs less than $1.00 per gallon”.
English: Photo of the Tesla Model S, from the ...
The Tesla Model S, from the unveiling on 26-Mar-2009. (Photo credit: Wikimedia Commons)

So why isn’t everyone buying a Chevy Volt? And why can you get lower interest rates on your Visa Card than next-gen biofuel developers face?

It’s the old capex-opex (Capital Expense vs. Operating Expense) fallacy.

Earlier this week, a new study from researchers at UC Santa Barbara determined photovoltaics to be much more efficient than biomass at turning sunlight into energy to fuel a car.

“Even the most land-use efficient biomass-based pathway,” the researchers wrote, “(i.e., switchgrass bioelectricity in U.S. counties with hypothetical crop yields of over 24 tonnes/ha) requires 29 times more land than the PV-based alternative in the same locations.”

Which raises two fundamental questions. First, why don’t all biofuels developers close shop and go home? Second, why for all that efficiency are the sales of battery-electric vehicles so low?

Time for a fresh look at the data.

Turns out that rational consumers — i.e. you — make choices not based on land use but on price and preference.

To cite an example, it takes more land to support a US football football team than an MLS soccer team, so why does anyone watch the Super Bowl? It takes far more land to produce a pound of hamburger than a pound of grass, so why doesn’t McDonalds sell grass? Yada yada yada.

But there’s something else in this analysis that is more important to look at.

The comparison — between biofuels-ICU engines and the solar-electric engine driving option — is actually a variation on the business model for selling razors and blades, or printers and inks.

You know how it goes, you buy a cheap printer for under $100, then spend a fortune on the ink.It’s the old capex-opex fallacy.

What is that? “Low operating expense doesn’t always lead to the best choice” — because the capex might be unaffordable, unfinancable, or so high that no operating efficiency will ever make up the difference.

Comparing the all-electric Chevrolet Volt to the comparably-sized Chevrolet Eco Cruze, the New York Times reported that (based on a workup from TrueCar), the payback period on a Volt was 26.6 years. After the article appeared, rebuttals surfaced placing the true break-even period at 8.7 years.

8.7 years!? 26 years?! Cars go vintage at 25.

The 8.7 year payback required the Volt owner to never drive more more than 38 miles in a single excursion, was based on a gasoline price of $3.85 per gallon (vs the current average price of $3.31), 15K miles driving per year (vs. the real-world average of 13.4K) and based on a $7,500 subsidy given to the Volt buyer.

And — oops — that all-electric subsidy that, by law, will sunset if Chevrolet’s all-electric sales ever climb above 200,000 cars in a single year. In short, if it helps the economics so much that you actually want to buy an all-electric, it goes away.

That’s like Mom saying “If you get a job this summer, you can can give us all the money you earn for extra rent.” Yes, Mom. Looking at the want ads right now, Mom.

We might add, the costs are based on a car without many of the trimmings – the MRSP of a fully-loaded Volt is $46,265 — and, surprise, you need to install a $490 charging system in your garage — if you have one — and it takes four hours to power up.

Cost, recharge time and range anxiety — that’s why the general public has not embraced the electric car.

Perhaps one day soon the economics will change. Sigh.

Turning to advanced biofuels

When it comes to biofuels as a system, too — beware of the capex-opex fallacy — that any system is a feasible system as long as the operating costs are low.

Or vice-versa. Just in case I can interest you — step right this way, sir and madam — in a FREE phone! …er, pay no attention to the man with the five year mobile contract with those debilitating prices.

One of the highly-touted advantages of all next-generation biofuels platforms is that it provides a work-around for a dependency on a single feedstock such as corn, sugarcane or soybeans — and prices for all those feedstocks have soared over the years, regardless of whether you think biofuels or other sector demands or input costs are to blame.

It was Coskata that first tipped a potential, roughly four years ago, for a fuel with an operating cost of $1.00 per gallon. The company picked up a tremendous amount of attention with that line of argument. So why has the company been unable to construct its first commercial plant, even more than a year after being “open for business” after the highly-successful conclusion of its pilot project?

In fact, the company has pivoted away from biomass and towards natural gas as a feedstock for its first commercial plant. Why is that, if it can produce fuel at $1.00 per gallon?

Ah, it’s the capex-opex problem, again.

Cellulosic fuels, for sure, have access to transformatively low-cost biomass. For example, a bushel of corn yields around 50,000 BTUs per dollar of corn, depending on how you value the co-products. By contrast, a dollar of $55 per ton biomass brings you 140,000 BTUs or so – if you use the Coskata yields of 100 gallons per ton.

So why is there so much corn ethanol and so little cellulosic ethanol?

The answer lies in the capex — because it costs less than $2 per gallon of installed corn ethanol capacity, vs somewhere between $6 and $12 per gallon for cellulosic ethanol capacity, depending on which technology you choose.

Given the cost of capital for high technology in these nefarious times we live in, that’s why there aren’t cellulosic ethanol plants cropping up everywhere, every day. And that’s why, if you ask advanced biofuels developers what they are working hardest on, it is knocking down the capital costs.

When the Congress passed the 2007 Energy Independence and Security Act, it probably seemed incomprehensible to lawmakers that credible technologists — backed by credible investors, with significant offtake contracts and low-cost inputs — could get lower financing costs for a shopping spree charged to a Visa Card than for their emission-busting, energy security-promoting and job-creating technologies.

Perhaps one day soon the financing economics will change. Sigh.

Here’s a thought. Maybe one of these days, someone is going to produce a car with a fuel nozzle that only accommodates, say, renewable diesel — and they are going to offer you “FREE FUEL FOREVER!” and simply load the projected lifetime cost of the renewable fuel into the cost of the car.

At an average of $3.30 per gallon, 30 mpg, and 13,000 miles per year for five years, it would add about $7,150 to the price of the car. Even if drivers doubled up on fuel consumption because of the all-inclusive effect, the difference would still be less than the premium paid, at this time, to drive an all-electric.

Hoo-boy, I wonder what people will write then. They probably will point out the capex-opex fallacy — and would be right in doing so. But I see an awful lot of low-cost printers flying off the shelves at my local Best Buy – don’t you?

Between now and then — beware of the free printers, phones, the cheap razors, $1 per gallon cellulosic ethanol, and buying an electric car in order to save money. Buy an electric car in order to do something positive and personal for the environment, or because you like the zippy acceleration or the low-noise. If you do, rock on with your Tesla (NASD:TSLA) and peace on you, my friend.

But leave off with the smug glance for your hard-pressed neighbor, just trying to pay the bills, who chooses the lower-cost route of embracing a biofuels-powered vehicle — and who ought to be getting your “awesome!” or your fist-bump, not your gentle shove under the bus.

And, we might add: beware of research papers that put some lipstick, for those who haven’t seen it before, on the old capex-opex fallacy.

Disclosure: None.

Jim Lane is editor and publisher  of Biofuels Digest and BioInvest Digest where this article was originally published. Biofuels Digest is the most widely read Biofuels daily read by 14,000+ organizations. Subscribe here.

January 25, 2013

Alternative Energy Investing for 2013

By Harris Roen

2013 is poised to be an exciting year for alternative energy investors. Despite the conflagration solar had in 2012 we see opportunities there, as well as in wind and energy efficiency. This article also reveals why 2013 is shaping up to be a good year for the stock market in general, and alternative energy in particular.

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Solar

If 2011 was a bad year for solar, with the bankruptcy of Solyndra, tariff wars with China, and other damaging events, then 2012 was a disaster. The Ardour Solar Energy Index (SOLRX) lost 35% in 2012. This is on top of a blistering 66% loss in 2011!

The chart below shows the change in net profit margin from 2011 to 2012 for the largest solar companies. Performances were not stellar in 2011, only 12 out of the 13 companies turned a profit and the average net profit margin was just over $5 million. In 2012, however, only one of the companies posted a tiny profit, and companies averaged over $28 million in losses. I could throw up similarly downbeat charts for other measures of financial health, including earnings per share (EPS), price to book ratios, and sales growth.

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Even analysts’ projections for solar earnings have come way down. In 2011, the average EPS estimate for these large solar companies was a meager 0.57 one year out. In 2012, analyst EPS estimates dropped to a very negative average assessment of -1.72. Though depressing, this reality jived with my forecast at the beginning of 2012, where I predicted another year of rough sledding for solar stocks.

Despite the gloomy statistics, financial and energy analyst may look back at 2012 as the turnaround year for solar. Many individual companies (particularly the upstream photovoltaic (PV) manufacturers) are facing economic realities of oversupply and falling PV prices, which will ultimately lead to bankruptcies or mergers. According to IHS iSuppli Market Intelligence, the number of PV suppliers is expected to plunge by 70% in 2013. Those left standing, however, will profit immensely, since solar is a white-hat energy source that is likely only at the beginning of its long-term growth story.

It is very hard to pick winners and losers in this environment, so a broad collection of solar stocks is likely the best route for adventurous investors to take from here. One good option is a Mutual Fund (MF) or Exchange Traded Fund (ETF) concentrated in solar. For MFs, I currently like Guinness Atkinson Alternative Energy (GAAEX). Market Vectors Solar Energy ETF (KWT) also looks like a good value.

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Wind

One of the fastest growing clean energy sectors is wind. The chart below shows projected growth of installed wind power in the three largest markets—the EU, North America and China. In 10 years, the amount of installed wind could more than triple from current levels, and in 20 years it could grow by 8 times! Moreover, this chart does not even include other important growth regions around the world.

wind02[1].jpg

Another exciting and dynamic area in renewable energy is offshore wind, and the Obama administration is starting to move forward on this. According to the U.S. Department of Energy (DOE), the generating potential of offshore wind in areas with less than 100 feet of water equals the entire generating capacity of the U.S. electric system!

Bloomberg reports that at the beginning of January, the Bureau of Ocean Energy Management started to gage interest in offshore wind leases for 127 square miles off the coast of New York. Also, in 2013 the administration plans to conduct competitive lease auctions off the Massachusetts coast.

Since there are very few publically traded pure-play wind companies in the U.S., a good way to add wind to a portfolio is by investing in ETFs. Two good examples are First Trust ISE Global Wind Energy Index Fund (FAN), and PowerShares Global Wind Energy Portfolio ETF (PWND). Though these funds were down between 15% and 20% for 2012, they have bounced back nicely since their July lows. In fact, both funds are up in the 33% range since that time.

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Energy Efficiency

One of the most promising investment areas for 2013 may come from the area of energy efficiency. From an economic standpoint alone, smart efficiency measures that businesses and individuals can deploy have a short payback period, and many can bank immediate cost savings.

In 2012, Fidelity Investments featured energy efficiency as a “compelling investment opportunity.” According to Fidelity, global power needs are expected to rise 50% in the next 25 years, creating an increasing market for more efficiency lighting, engines and buildings.

Energy efficiency companies tracked by the Roen Financial Report have done extremely well in the past three months. Almost three quarters of stocks have been gainers, and 45 companies, or fully 20% of those energy efficiency businesses covered, have gained over 25% for the quarter.

Companies I like as long-term investments in energy efficiency include A. O. Smith Corp. (AOS) and Tetra Tech, Inc. (TTEK). AOS is in the commercial and residential water heating business, which has a strong balance sheet, excellent sales growth, reasonable debt levels, and its stock is considered undervalued in the high 60 to low 70 price range. TTEK is an engineering and management firm whose services include water resources, energy efficiency and carbon management. It is a very well-managed company with excellent free cash flow, but its stock is considered overvalued at current prices. If it dips to the mid to low 20’s, TTEK would merit a look.

I have no doubt that energy efficiency companies with good management and strong balance sheets will do well in 2013 and beyond.

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Oil Prices

Even though the Roen Financial Report does not follow big oil, we do track oil and natural gas prices very closely. As reported previously (Volume 3, Issue 12), the long-term prospects of solar, wind and other clean energy options are clearly tied into the cost of the prevailing dominant energy source, which are petrochemicals.

Until recently, oil was a commodity that traded principally on supply and demand, or on the perception of how supplies may be squeezed due to regional conflicts. In the past several years, however, oil prices have turned into a proxy for how traders believe the economy, and thus the stock market, will fare. The logic goes that the more economic activity occurs, the greater oil consumption will be. Since 2009, the price of a barrel of crude oil has been almost exactly correlated to the S&P 500 index.

corr02[1].jpg

Of course, other factors will contribute to the price of oil in 2013. New drilling technologies are on the rise, giving life to what were thought to be unproductive wells, which will increase supplies. This increased production efficiency, though, has associated environmental issues. Also, the increased production will be more than offset by increased consumption, particularly by developing countries. For example, according to the International Energy Agency, energy consumption in China is likely to double in 10 years from 2008 levels, and triple by 2025!

Since I believe increased consumption will continue to more than offset increased production, I envisage that oil prices will continue to be pegged to the stock market. Because of this, domestic crude oil prices should rise slightly to the $100/barrel range by year’s end, but may peak out at $115/barrel at some point in 2013.

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As Goes January…

Alternative energy stocks do not exist in a vacuum, so it is important to look at the prevailing stock market trajectory in 2013.

There is a saying on Wall Street “as goes January, so goes the rest of the year.”  Indeed, since 1950, the direction of the stock market in the month of January foretold the movement of the market for the rest of the year 70% of the time. Additionally, almost all Januarys that had over a 5% gain (11 out of 12) predicted a gain for the rest of the year. In fact, the average gain in those years was 17%, far exceeding historical averages.

annual_gain[1].jpg

So far the stock market, as measured by the S&P 500, is up 4.8% since the beginning of the year, and is on track to have continued gains for the month. Even more impressive, alternative energy stocks are up 9.2% so far for the year on average. Even if you take out volatile penny stocks, gains averaged 8.1%. Considering this I feel all stocks, including the alternative energy sector, will have a very positive 2013.

Another reason I believe stocks will do well in 2013 is that the economy is improving. Unlike the gloomy years of 2009-2011, where a continuum of bad economic news was the rule of the day, 2012 revealed some financial bright spots. These include improved business sentiment, a turnaround in housing, and healthy stock market returns.

Also, companies are still primed for business investment. S&P 500 companies in total have over $4.2 trillion in cash and short-term investments on hand, a 4.2% increase from the previous quarter, and 6.6% above levels of the same quarter last year.

Another positive is that inflation remains low. The chart below shows the annual change in the core rate of inflation over the past 50+ years. Though there was a 2.1% jump in the past 12 months, the graph clearly shows inflation is well below the long-term average. A low inflation rate has always been helpful for the economy.

inflation[1].jpg

I believe inflation will remain tame, despite unprecedented amounts of government spending. The “Velocity of Money’ (the rate at which money flows through the economy) is still very low, and actually dropped in 2012. Unless this indicator picks up, we do not see excessive inflation coming any time soon.

The bottom line is that low interest rates and plenty of corporate cash will be a strong driver of stocks in 2013, including the growth industries within alternative energy.

About the author

Harris Roen is Editor of the “ROEN FINANCIAL REPORT” by Swiftwood Press LLC, 82 Church Street, Suite 303, Burlington, VT 05401. © Copyright 2010 Swiftwood Press LLC. All rights reserved; reprinting by permission only. For reprints please contact us at cservice@swiftwood.com.

Disclosure

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January 24, 2013

Inevitable Shifts and Indispensable Technologies

Next Economy Inflection, Pt. III

Garvin Jabusch

Back at the New Year, I thought it’d be fun to write up a short recap of some of the evidence that, finally, the world is waking up to the real need to get our economies on a footing that can allow it to persist indefinitely. In that post I wrote of those observations that “these are just the first few recent ‘tipping point’-like stories to come to mind. I've read dozens more examples recently, and I feel the fact that I can no longer be aware of all the evidence of inflection much less keep track of it all is surely a sign in itself.”

2013 has already revealed key moves forward from institutions not traditionally aligned with post fossil fuels economy thinking.

First is the U.S. Government, which released its somewhat regular (approximately every four years), multi-agency National Climate Assessment (caution: link is to the full report PDF of 147MB) on January 11th. Its message is unequivocal, “…observed climatic changes are having wide-ranging impacts in every region of our country and most sectors of our economy. Some of these changes can be beneficial, such as longer growing seasons in many regions and a longer shipping season on the Great Lakes. But many more have already proven to be detrimental, largely because society and its infrastructure were designed for the climate of the past, not for the rapidly changing climate of the present or the future.” (Italics mine.) Federal scientists and career professionals clearly get the need for transition, as does at least one governor.

In his 2013 State of the State Address, New York Governor Andrew M. Cuomo went far beyond recognition of these facts and expressed his desire to make his state an economic leader in and therefore a beneficiary of the next economy transition: “The economy of tomorrow is the clean tech economy.  We all know it, it’s a foot race – whatever state, whatever region gets there first wins the prize, and we want it to be New York.” On the topic of government inflection, I suppose it’s obligatory to mention that during his second inaugural address, President Obama did appear to be talking the talk on climate. But we’ve heard encouraging words from him before, most notably during his 2011 State of the Union Address, which I discussed at the time as being generally positive. Time will tell. As many have pointed out, the watershed decision for Obama will be final approval or disapproval of the Keystone XL pipeline. Approval would demonstrate beyond any doubt that he prioritizes short term political/monetary benefits over the long term health of the American economy or environment.

Next, in the realm of leading think tanks, the World Economic Forum (WEF), leading up to its annual meeting at Davos, Switzerland, issued its “Global Risks Report 2013,” citing climate change, water scarcity and greenhouse gas emissions among society’s chief risk factors. There’s a slightly longer discussion of WEF’s important acknowledgements towards the end of our 2012 annual shareholder letter.

Finally, Bloomberg last week reported about Goldman-Sachs that, “[t]he investment bank is backing renewable energy that it expects will gain favor in a global shift it says is inevitable. That’s why short-term volatility will be trumped by long-term gains as emerging technologies first become commonplace and then become indispensable, according to Stuart Bernstein, the Goldman partner overseeing its renewables unit.” (Italics again mine.) ‘Inevitable shifts and indispensable technologies’ might as well have been Green Alpha’s motto these past five years, and it’s great to see the world’s leading bank, which for better and worse also influences the highest monetary and fiscal policymakers worldwide, thus publicly recognize reality.

As one colleague remarked to me via email, “nobody can accuse the Goldman boys and girls of being dumb...”

Garvin Jabusch is co-founder and chief investment officer of Green Alpha ® Advisors, and is co-manager of the Green Alpha ® Next Economy Index, or GANEX and the Sierra Club Green Alpha Portfolio. He also authors the blog “Green Alpha's Next Economy." 

January 23, 2013

The Kandi Story

Denny Schlesinger

The policy is hot, but the market is cold

"The policy is hot, but the market is cold" is how a Chinese industry spokesman described the problem facing electric vehicles, the public is not buying.

The core problem is the battery. A battery is no match for a tankful of gasoline in energy density meaning reduced driving range. Recharging the battery is time consuming, no match for a quick fill-up. If you use fast charge, you diminish the battery's life expectancy. To add to these worries, the battery typically costs as much as the rest of the car but its life expectancy is just a fraction meaning you'll have some big expenses during your ownership of the vehicle. Additionally there is the problem of the resale value, just how much life is left is that used battery?

Optimists want to rely on battery R&D but the time-frame for a breakthrough, if there is one, is too far in the future to promote car sales today.

New Business Model

In China they have discovered that the short term solution to the battery problem is not a better battery but a new business model. You cannot sell pure electric vehicles (EV) the way you sell traditional internal combustion engine (ICE) cars.

The first proposal was to sell the vehicle without the battery. The battery would be leased and instead of it being charged by the car owner, spent batteries would be swapped for fully charged ones using the Quick Battery Exchange (QBEX). By transferring ownership of the battery to a leasing company, the car owner would be relieved of the problems created by the battery. The batteries would be charged and maintained by an entity more capable of giving them the proper care. The EV ownership experience would be more in line with traditional car ownership.

The program was launched with great expectations in 2011. The two major state owned electric utilities were recruited, the provincial and city governments offered copious subsidies yet sales failed to materialize beyond a few hundred to so called "visionaries." One can only speculate about the reasons: maybe a lack of a sufficient number of QBEX stations, maybe a lack of parking spaces, maybe the out-of-pocket cost was still too high despite the subsidies.

Kandi Technologies (NASD:KNDI), the company at the heart of this plan, survived 2011 on the strength of their legacy all-terrain vehicle (ATV) business. Kandi proposed two additional business models. Instead of selling the cars, lease or rent them.

The lease model would use the QBEX battery swap while the rented cars would have rechargeable batteries. The rental cars are charged in the vertical garages located at airports, train stations, and other convenient high traffic locations.

The first 20,000 car lease program was set to start in August 2012. The first order for the delivery of 5,000 cars by the end of December 2012 was placed but delays again occurred. This time they were of a bureaucratic nature. Initially the EV programs were handled on a province by province basis but it was soon realized that China required a nationwide set of standards if cars were to drive from city to city and province to province. There was also the issue of the change in Communist Party leadership.

The good news is that the infrastructure continues to be built out. Additional cities and provinces are setting up plans for the adoption of pure electric vehicles. Three hundred of the new vehicles have been granted license plates.

The Kandi Story

Disruptive technology follows in a fairly uniform pattern, uniform enough that Clayton Christensen was able to document it in his book The Innovator's Dilemma. A new technology comes along that is too underpowered to threaten incumbents but also cheap enough that it finds under-served markets. One example Christensen gives is the hydraulic backhoe which was so underpowered that it presented no threat to the mechanical monster excavators of the day but was perfect for digging narrow ditches in urban settings, a job for which no equipment exited at the time. In time the hydraulic excavator took over from the mechanical ones as it developed more power and more capabilities.

Tesla Motors (NASD:TSLA) is one contender making a lot of headlines and it has its full contingent fans and detractors. One reason why Tesla is not a disruptive technology is that the price is too high, there is no under-served luxury car market that I know of. Tesla is taking the luxury car market head on, where it might or might not succeed, but even if it does it won't disrupt the automobile mass market. The small size --so often derided by American commentators-- and the low cost of the Kandi EV are key features in the disruptiveness of the Kandi model.

Why don't incumbents develop the disruptive technology themselves, why do they ignore the new technology until it is too late? The reply to those questions is quite complex but it centers on the fact that the new technology is of no interest to the incumbents' best clients. It is seen an neither a threat nor a money maker by the incumbents. This phenomenon is covered in The Innovator's Dilemma as well as in Geoffrey Moore's Living on the Fault Line .

It might seem strange at first that a small, unknown Chinese all-terrain vehicle (ATV) maker should lead the innovation in pure electric vehicles. It is precisely the lack of an existing mass market auto business that allows them to think outside the box, they don't have a market to defend but one to attack. And on the attack they are. Not content to push passenger vehicles, Kandi recently gained certification for its new pure EV van, pictured above.

After the false start last year, 2013 might prove to be the turning point for the adoption of the pure EVs in China. Unfortunate as it is, the record SMOG in major Chinese cities, reminiscent of the storied London Fog, might provide that last push to get the business going.

Disclosure: Long KNDI.
Denny Schlesinger is a retired management consultant, individual investor and editor of Software Times where this article was originally published.

January 21, 2013

Solazyme's Oilcane Boom

Jim Lane
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Though building capacity globally, Solazyme’s operations in Brazil are getting traction fast – and raised $235M last week.

How much oil could be produced in Brazil via sugar-munching microalgae? Today, the Digest looks at Solazyme’s (SZYM) progress and the bigger picture.

In California, two monster announcements came out of Solazyme headquarters last week. One related to project finance and one related to raising cash.

In midweek, Solazyme Bunge (BG) Renewable Oils received approval for project financing in the form of a $120M (R$245.6M) loan from the Brazilian Development Bank (BNDES).

The BNDES funding will support the joint venture’s first commercial-scale renewable oil production facility in Brazil, which is being constructed adjacent to Bunge’s Moema sugarcane mill in São Paulo state. The 8-year loan will have an average interest rate of approximately 4%.

At week’s end, Solazyme announced the pricing of its offering of $115 million in Convertible Senior Subordinated Notes due 2018. Solazyme also granted the initial purchaser a 30-day option to purchase up to an additional $10 million aggregate principal amount of Convertible Notes solely to cover over-allotments. The Convertible Notes will bear interest at a fixed rate of 6.00% per year. The initial conversion price will be approximately $8.26 per share of common stock and, under certain circumstances, Convertible Note holders will be entitled to additional payments upon conversion.

What’s up? Why raise capital now?

At latest glance, Solazyme had $167M in cash and was burning through roughly $20M per quarter – so why the rush?

Raymond James’ Pavel Molchanov explains: “Bankers the world over tell their clients that “you raise money when you can, not when you must”. At a time when the capital markets “window” is open for clean tech firms – amid a broad-based resurgence of market optimism – we also recognize management’s logic in taking advantage of this in order to bulk up the cash balance.

Interestingly, the stock was down but not crushed. As Molchanov noted, “[Yesterday's] 9% drop was less than the implied dilution of 23% (assuming full conversion), making the market’s response far gentler than that which greeted Gevo’s (GEVO) similarly sized capital raise (equity plus convert) last June.”

Bottom line, the company raised a net of $230 million in debt this week, at a 5 percent interest rate. Any advanced biofuels (or renewable oils) company would, generally, commit mayhem to get those opportunities. Which brings us to the source of investor optimism, which is more related to cane-crush than stock-crush.

The Moema project

Solazyme Bunge Renewable Oils broke ground in June 2012 and is scheduled to be operational in the fourth quarter of 2013. It will service the renewable chemical and fuel industries within the Brazilian marketplace and will initially target 100,000 metric tons per year of renewable oil production.

In November 2012, Solazyme and Bunge announced in a framework agreement that they intend to expand production capacity from 100,000 metric tons to 300,000 metric tons globally by 2016, and that the portfolio of oils will broaden to include a range of healthy and nutritious edible food oils for sale in Brazil.

READ MORE: Solazyme and its hybrid vigor

READ MORE: Solazyme, Bunge break ground

Brazil’s above-ground oil fields

Let’s look at the opportunities — breaking them, as Caesar divided Gaul, into three parts. First, Solazyme’s current opportunity’s based on their cost structure. Third, we’ll look at the comparable value of ethanol vs renewable oil. Second, a look at Brazil’s oil production capacity.

Production cost

What’s Solazyme’s production cost – the last we have on that topic is this, from the company’s 2011 IPO: “our lead microalgae strains producing oil for the fuels and chemicals markets have achieved key performance metrics that we believe would allow us to manufacture oils today at a cost below $1,000 per metric ton ($3.44 per gallon or $0.91 per liter) if produced in a built-for-purpose commercial plant. This cost includes the cost of anticipated financing and facility depreciation.”

Ethanol vs oil

Latest we have from Solazyme on yield forces us to do some sleuthing. Last we have from them is that their Bunge partnership gives them access to up to 8 million tons of annual crush, and they indicated a maximum production of 400,000 tons of oil per year. They never have put those two figures together in one place, so caveat emptor – but it indicates roughly a rate of 20 pounds of cane required to produce a pound of oil. Now, generally, you get around 2 pounds of sugar from a pound of (good) cane — indicating a potential yield of up to 50 percent.

That compares pretty favorably with ethanol yields — where you get roughly 7.5 pounds of ethanol (1 gallon) from 12 pounds of corn starch.

As we said, caveat emptor – the data stream is pretty thin. For now, consider these reasons to think that the management at Bunge is rightly focused on value-add opportunities in producing oils from sugars — rather than definitive economics.

Brazil’s capacity

Keeping with the same data, and the same warnings on using it, let’s look at Brazil’s oil capacity. In this case, we’ll look well beyond the 8.5 million hectares that is currently in sugarcane production in Brazil – and towards the 63 million hectares of land that has been authorized for production agriculture in Brazil’s long-term plan — converting idle or underused land in the country’s southwest (and farther from the Amazon as Miami is from New York, for those worried about deforestation.)

That. er, is a lot of land — and is expected to support, to a great extent, a large rise in cane cultivation. The opportunities in ethanol and sugar being well understood, the opportunity for renewable oils is novel and worth a look.

How much capacity is that? Well, consider that Brazil raises 660 million tonnes of cane from its current 8.5 million hectares. With comparable yields, there could be 4.9 billion tonnes of cane. That’s enough to produce, in this example, 244 million tonnes of oil. Now, Solazyme believe it can generate premium values (as much as 30 percent above market) for its tailored oils, based on their performance characteristics.

Now, take soybean oil — price is now around $1140 per tonne. Ethanol has been trading in the $700-$800 per tonne range. Suggesting there is a lot of upside in upgrading to oil — or simply, a more balanced “portfolio” approach to matching supply and demand with both oil and ethanol opportunities in hand.

Disclosure: None.

Jim Lane is editor and publisher  of Biofuels Digest and BioInvest Digest where this article was originally published. Biofuels Digest is the most widely read Biofuels daily read by 14,000+ organizations. Subscribe here.

January 20, 2013

The Next Economy in 2012: Progress Towards Inflection

Green Alpha Advisors' Annual Client Letter and Portfolio Commentary

Garvin Jabusch and Jeremy Deems

2012 saw a return to positive performance for the next economy and for markets overall. Generally, global economic conditions, as indicated by some jobs growth, slowly improving industrial output and a housing rebound, improved marginally, but debt crises in Europe and America, exacerbated by eternal dithering, gamesmanship and posturing by politicians and other policy makers on both continents, kept optimism in check and moderated expectations for growth. With respect to the next economy, though, growth and expectations for growth began showing real signs of building momentum as mainstream awareness of the need ensure the longevity of the world economy by changing some of its foundations continued to advance. Thus our ‘next economy’ macroeconomic thesis became still more relevant and closer to fruition.

The basic macroeconomics of the next economy thesis are fundamental, and their essentials don’t change over time.  As we wrote in last year's letter: “Earth’s economies may stagnate or grow; either way, we believe things like renewable energy, clean transportation, sustainable infrastructure and water resources must grow in value. Over time, the value of stocks in our models will not be dependent on Wall Street gamesmanship, but on simple necessity. As awareness of the magnitude of our growing resource-climate-security problems advances, so will the valuations of our portfolio companies.” Even as chronic fiscal imbalances distract world leaders’ attention from climate and resource challenges, business, individual and institutional investors, academia, think tanks and research all are addressing the latter at an ever accelerating pace.

Thus we continue to be very optimistic about our potential to provide competitive long term returns performance to our portfolio shareholders. Essentially, Green Alpha Advisors is an asset manager offering portfolios of stocks in companies with proven business plans responding to the challenges presented by a warming, increasingly populous, resource-constrained world. Portfolios of these companies deliver growth in all sectors including transportation, communications, commerce, infrastructure, materials, energy, agriculture and water. Considering:

I. The world’s population is growing fast, but its resources aren’t,

II. Energy security and national security depend upon the U.S. minimizing use of foreign oil,

III. The fossil-fuels based economy, with its digging, burning, scarring of the landscape, disruption of ecology, and disease causing pollution, is ultimately too expensive to maintain, and

IV. Climate change,

it’s clear the time is past due for serious investment in mitigation and adaptation, and indeed the signs that people and institutions are getting that are becoming omnipresent.

Each of the three Green Alpha portfolios saw a positive return for 2012. Our flagship green economy benchmark, the Green Alpha Next Economy Index (or GANEX) returned 4.21%; our Sierra Club Green Alpha portfolio (SCGA), actively managed and more concentrated than the GANEX, returned 6.79%; and our newest portfolio, the Green Alpha Growth and Income Portfolio (GAGIP), was up 6.96% for the partial year from its inception on October 8th, 2012.  While we are happy to return to positive performance after a tough year for next economy stocks in 2011, we did nevertheless underperform the legacy fossil-fuels based indices; the S&P 500 was up 16% and the Dow Jones Industrial Average returned 7.26% in 2012. All three of our portfolios did however outperform prominent green economy ETF portfolios (see discussion below).

All Green Alpha portfolios are based on our universe of next economy companies, with individual securities and weights selected to best fit the mandate of each portfolio. We’re especially pleased that December 30th 2012 saw the fourth anniversary of the inception of the GANEX, reflecting a four year track record milestone measuring the growth and progress of the overall next economy. (On the topic of portfolios, look for an exciting announcement from us later in Q1 regarding our fourth and newest portfolio offering that will greatly enhance our ability to serve current and future clients.)

On the securities level, we saw once again in 2012 the importance of diversification across all sectors of the next economy. We find it hard to overemphasize this point: the post fossil fuels economy is emerging in all sectors, so to invest as though renewable energy (as critical as it is) is the only aspect of a green economy is shortsighted and results in high volatility. Attempting to represent the entirety of the next economy, our Green Alpha Next Economy Index (GANEX) is invested in 27 sectors and 52 sub-sectors, spanning, we believe, nearly everything required for a broad-based economic system to function. Reviewing GANEX’s top five 2012 total return performers gives some indication of its diversification:

  1. Badger Meter, Inc. (BMI), 63.98%. Badger makes water meters, “flow measurement and control solutions” for farming, commercial, utility and residential applications. The U.S. drought of 2012 (and continuing) has brought the need for smarter, more productive water management into sharp focus. You can’t manage what you don’t measure.
  2. Trex Company, Inc. (TREX), 62.51%.  Trex is the world's largest manufacturer of high performance wood-alternative decking. We consider Trex a prime example of waste-to-value economics that not only keeps huge quantities of waste out of landfills and oceans (Trex used 3.1 billion plastic bags in 2010, participates in a system responsible for 70% of all U.S. plastic bag recycling, and has never harvested a single tree to make its product), but also delivers a superior product with better long term value. In a world of constrained resources, making great stuff from leftovers is the best of all worlds.
  3. Cree, Inc. (CREE), 54.17%. Cree is a leading developer of high efficiency LED lighting and systems and semiconductors for radio frequency applications. Cree LEDs can provide illumination as efficiently as 200 lumens per Watt, compared to 14½ lumens per Watt of a 60W incandescent bulb. This translates to big savings in energy and money, and is a straightforward example of one of our primary themes, focusing on innovation in economic efficiencies – getting more output out of less input.
  4. Valmont Industries, Inc. (VMI), 51.03%. Valmont Industries provides critical infrastructure such as efficient mechanized poles and towers for wind turbines, lighting, communications and more. In 2012, VMI gave our portfolios exposure to the infrastructure aspects multiple trends such as the booming mobile and mobile web markets as well as the growing wind energy sector without the risk associated with an individual turbine manufacturer. Full disclosure, for valuation reasons, we removed Valmont from our portfolios as of year-end 2012.
  5. The Hain Celestial Group, Inc. (HAIN), 47.9%. Hain Celestial is a leader in natural and organic food that vertically integrates manufacturing, marketing sales and distribution. We think of Hain as a macroeconomic bet on efforts of people to improve their individual health, and also on efforts at a policy and advocacy level to manage mushrooming and economically destructive escalation in healthcare costs. In addition, from a long-term agricultural management point of view, we think that that industry’s ever more potent pesticides, herbicides and petroleum based fertilizers will prove so deleterious to human health, land productivity and biosphere health that organic methods will continue to increase in popularity, and may one day even be required.

From the standpoint of our next economy sector classification scheme (NESC), the top performing Industry and Sector in the GANEX Portfolio was the Products (Industry), Capital Goods & Equipment (Sector), with Portfolio exposure of 16.11%. 

The chart below shows the performance of the GANEX, from its inception on December 30, 2008 to the end of 2012, versus two prominent green exchange traded funds, the Guggenheim Solar portfolio (TAN, in gold here), and the PowerShares WilderHill Clean Energy ETF (PBW, the black line). Over this period, the GANEX returned 28.15%, while the TAN was -79.22% and PBW performance was -46.68%. To be clear, GANEX differs significantly from these other two. TAN is a basket of exclusively solar and solar-related stocks, and PBW, though not as sector focused as TAN, is limited primarily (but not exclusively) to renewable energy. GANEX by contrast attempts to capture the entirety of the next economy, including renewable energy and solar, but also everything else we’ll need to have a thriving economic system, including, again, transportation, communications, commerce, infrastructure, materials, energy, agriculture, water and more. So while the comparison with these two may not be exact, we believe it does show the importance of careful diversification into all areas of the emerging green economy.  

Client letter 2012 chart
Inception to 12/31/12 GANEX chart w/PBW and TAN

While we are generally growth oriented managers, we also in 2012 had good reason to believe that many of our holdings represent excellent values. As of December 31st 2012, 66 of our 80 holdings were trading below the average (1979 to present) price to book ratio of the S&P 500 index.  Our average price to book was 1.45, compared to 2.27 for the S&P 500.

Finally, a compelling argument, if we needed one, for hastening the transition to an economy that can persist and even thrive in a warming world was recently articulated by the World Economic Forum at Davos. "On the economic front, global resilience is being tested by bold monetary and austere fiscal policies. On the environmental front, the Earth's resilience is being tested by rising global temperatures and extreme weather events that are likely to become more frequent and severe. A sudden and massive collapse on one front is certain to doom the other's chances of developing an effective, long-term solution." In other words, we need to get the economy on a sustainable footing before it comes unraveled. Given the imperative of this reality, we have difficulty imagining a near-future scenario where the best next economy companies don’t become the most important to society and subsequently, potentially the best performing.

The decisions we make as an interconnected global civilization now will be the difference between catastrophe and a thriving society with a healthy economy. Given the stakes, we have no doubts about how to place our bets.

Thanks for your continued support of Green Alpha Advisors and investing in the next economy.

 Sincerely,

 Garvin Jabusch and Jeremy Deems

Garvin Jabusch is co-founder and chief investment officer of Green Alpha ® Advisors, and is co-manager of the Green Alpha ® Next Economy Index, or GANEX and the Sierra Club Green Alpha Portfolio. He also authors the blog “Green Alpha's Next Economy."  Jeremy Deems, Co-Founder, Chief Financial Officer & Chief Operating Officer is co-founder and chief investment officer of Green Alpha ® Advisors,

January 19, 2013

Chinese Solar Stock Rally Looks Unsustainable

Doug Young

clouds blue
Clouds linger despite solar rally
After more than a year of coming under constant assault, shares of solar panel makers have suddenly received an unexpected boost from investors who are suddenly showing renewed interest in the battered sector. Many are attributing the sudden surge in solar stocks to growing signs that China will soon embark on a massive building spree of new solar power plants, which should theoretically provide a major new business opportunity for solar panel makers who have been posting massive losses for more than a year now.

What's most interesting to me is the fact that investors also seem to believe that most solar companies will emerge from an upcoming restructuring without having to declare bankruptcy -- a process that usually results in all of a company's publicly listed shares becoming worthless. This assumption seems a bit optimistic in my view, especially for some of the weaker companies that are almost certain to be taken over by state-run entities before the current industry restructuring is finished. If and when that happens, holders of the companies' publicly listed shares are likely to take a major hit, losing most or quite possibly all of their investment.

All that said, let's take a look at the latest headlines, which have 2 of the weakest players -- LDK (NYSE: LDK) and Suntech (NYSE: STP) -- both recently announcing that they have regained compliance with New York Stock Exchange listing rules that stipulate all company shares must trade at $1 or more. (Suntech announcement; LDK announcement)

I'll admit that I hadn't followed the stocks too closely since shares of both companies went below the $1 level last fall, so I went to look and see when both Suntech and LDK declared reverse share splits that most companies in their situation usually perform to bring their share prices back up above the $1 mark. But after extensive searching, there was no sign that either company had done such a reverse share split.

Instead, it was investors who helped each company back into compliance with NYSE listing rules by more than doubling the value of both Suntech and LDK shares over the last 2 months. Suntech shares now trade at about $1.75, after moving below the $1 mark last September and trading as low as 77 cents each in November. Similarly, LDK shares now trade at about $2, again after falling as low as 71 cents last fall.

Another company that fell below $1, JA Solar (Nasdaq: JASO), actually did have to perform a 5-for-1 reverse share split to bring its stock back above the $1 mark. But even JA Solar has seen a rally in the last few weeks, and and its current price of $5.39 per share means the recent rally would have lifted its share price above the $1 mark even without the reverse share split.

In a sign that the industry is indeed still going through a major shake-up, JA Solar has announced that its chairman is taking over the role as CEO, again showing that this is hardly an industry that is worthy of serious investment again just yet. (company announcement) But for some reason, investors seem to be ignoring the fact that this industry is still highly troubled and are suddenly buying solar shares again.

To all of those people who have recently purchased solar shares on hopes of a major turnaround, I would warn that the bloodbath isn't over just yet and I still do believe that many of the companies will ultimately get taken over by Beijing and other Chinese government entities. Those new masters will then demand the cancellation or severe dilution of all publicly listed shares as part of any rescue plan. When that rescue comes, Suntech and LDK are likely to be among the first to receive bailouts, prompting major sell-offs in their shares that will once again see them tumble below the $1 mark.

Bottom line: A recent rally in solar shares looks unsustainable, with investors in many companies likely to lose most or all of their money after a Beijing-led rescue plan gets announced.

Doug Young has lived and worked in China for 15 years, much of that as a journalist for Reuters writing about Chinese companies. He currently lives in Shanghai where he teaches financial journalism at Fudan University. He writes daily on his blog, Young´s China Business Blog, commenting on the latest developments at Chinese companies listed in the US, China and Hong Kong. He is also author of a new book about the media in China, The Party Line: How The Media Dictates Public Opinion in Modern China.

January 18, 2013

New Ways to Invest in Solar Like Buffett

Tom Konrad

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Over the last couple of years, investors who were hoping to do well by doing good have gotten bad sunburns.  Since the start of 2011, the two ETFs which track the solar sector, Guggenheim Solar (NYSE:TAN) and Market Vectors Solar Energy (KWT) are down 74% and 75%, respectively, even after the large jumps up in the first week of the year.

That jump was in large part caused by the January 2nd purchase of two large solar projects by Warren Buffett controlled MidAmerican Solar from Sunpower Corporation (NASD:SPWR.)

You might wonder, Why would a famously cautious investor like Warren Buffett invest in a sector with such a lousy track record?

The Difference Between Solar Manufacturing and Solar Projects

The question is a bit of a red herring.  As a value investor, Buffett often invests in companies that have had poor price performance: that’s where great values come from.

More importantly, MidAmerican Solar is not buying Sunpower the company (down 41% since January 2011), but two of Sunpower’s solar projects.  The economics of solar manufacturers and solar projects could not be more different.

Solar manufacturers like Sunpower face fierce competition and have little pricing power for their mostly undifferentiated products (solar cells and modules.)  Worse, the prices of these products have been declining rapidly, squeezing margins.   They also have little control over the prices of their raw materials, which means they find it difficult to pass price declines on to suppliers.  While offerend with the best intentions, changing incentive regimes lead to boom and bust cycles for panel sales.

Solar farms and developers face a much different pricing landscape.  The price of solar panels (one of their largest costs) has been falling rapidly, and many governments are working to cut the balance of system and soft costs such as permitting which are becoming a relatively large part of their cost structure.  More importantly, they almost always sell power under long term contracts, providing a predictable income stream.  Incentive regimes are also more stable, with projects’ incentives often fixed when the project is built.

The better economics of solar development has not been lost on solar manufacturers, many of whom have been developing their own projects.  It was two such projects that MidAmerican bought from Sunpower.

Invest in Solar Like Buffett

Until recently, small investors’ ability to invest in solar projects was limited to putting solar on the roof of their homes.  And this was a viable option for only a few: they had to own a home with a suitable, un-shaded roof, live somewhere with a favorable incentive regime, and be able to come up with several thousand dollars (sometime tens of thousands of dollars) up front.

Fortunately, new options are rapidly becoming available.

Mosaic’s Model

Mosaic allows small investors to invest in debt backed by revenues from solar projects.  Mosaic acts much like a bank would, if many banks were interested in funding relatively small solar projects.  It first conducts due diligence on a project to assure itself that project risks are acceptable.   Such risks include the creditworthiness of the power buyer, site design, quality of the equipment, weather and insurance adequacy.

If a project passes muster, Mosaic offers a loan against the revenues from the solar PPA or solar lease.  Mosaic then funds this loan by parceling it off to the small investors on its platform, with a minimum investment of only $25.  Mosaic passes most of the interest on to the investors, and keeps a slice to pay for its costs.   The five projects offered on Monday offered a 4.5% return to investors, with 1% retained by Mosaic out of a 5.5% loan, and had terms of between eight and ten years.

24 hours after they were made available on Mosaic's site, only this project in San Bruno had not been fully allocated to small investors.

With long term CDs currently offering less than 2%, these investments are proving very popular.   As I write, barely 24 hours after the projects were listed on Mosaic’s website, the ones open to small investors are almost fully subscribed, with only $12,475 left unallocated on the largest of the three projects, a 102 kW project on an affordable housing complex in San Bruno, CA.

Because the SEC has not finished writing the rules that would allow crowd-funding under the JOBS Act, these investments were only available to residents of California and New York state, when the Mosaic team has been working with state securities regulators.   Mosaic chose to work with these states because that is where most of the investors who had signed up for their platform live.

Mosaic also launched two projects available nationwide to “accredited” (i.e. wealthy or high income) investors nationwide.  Such investors are presumed to have the resources to better evaluate investments than small investors, and so Mosaic was able to offer them a wider range of projects.

On behalf of an accredited investor, I was able to review these two projects as well as the three open to small investors.  One was very similar to the three projects available to small investors, with the exception of a slightly shorter duration of eight years, compared to nine years for the others.  The final project stood out, in that it is larger than the other four projects combined, and is located in New Jersey, rather than in California.  It also had the longest term, of twelve years for the loan.

As I write, the smaller of the two accredited-only projects is 96% funded, but the large project is only 15% funded.  Nevertheless, I would be surprised if Mosaic fails to fully fund the large project as well.  With more to choose from, accredited investors most likely did not need to rush to get in to projects, as smaller investors did.  (UPDATE: At noon on Jan 8th, the day after launch, all of Mosaic’s offerings except except the large New Jersey project were fully funded.)

Risks and Rewards

The accredited investor I was working with eventually chose not to invest.  While a 4.5% 10 year CD would be a very attractive investment, Mosaic’s offerings are not as low risk as CDs, which are FDIC insured against loss of principal.  Although it appears that Mosaic does an excellent job managing risk, that is nothing like a guarantee.   Since she is able to accept a high degree of risk, she has other attractive investment available.  For example, Power REIT, mentioned above, isriskier than Mosaic’s offerings and currently yields only 4%, but has the potential of significant upside and tax advantages.

A small investor may also have more attractive options, the most common of which is paying off debt.  While interest in a Mosaic solar investment will be taxable, the interest saved from paying of a car loan or credit card debt is saved from after-tax money, and so is essentially tax free, which makes paying down debt at interest rates of 4% more more clearly more attractive than the 4.5% on offer from Mosaic.

Yet Mosaic investments are less risky than most stocks and mutual funds, and provide relatively attractive returns in the current environment.  For an individual without debt to pay off, these seem like attractive investments.

Mosaic President Billy Parish told me by email that the company is working on making its investments available in tax-sheltered accounts such as IRAs.  That would make Mosaic’s offerings attractive to more people, including the accredited investor I was working with.

Not that I expect a Mosaic IRA offering any time soon.  With these solar investments selling like hot cakes, Mosaic’s priority is almost certainly to bring more quality projects to its platform.

Finding more investors seems to be taking care  of itself.

Disclosure: Long PW

This article was first published on the author's Forbes.com blog, Green Stocks on January 8th.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

January 17, 2013

Power REIT's First Solar Deal

Tom Konrad


Salisbury Solar Farm
The 5.7 MW Solar Farm in Salisbury, MA is the largest solar farm in New England. The land under if was purchased by Power REIT (NYSE:PW) in December. Photo source: Power REIT

I first wrote about Power REIT’s (NYSE:PW) plans to invest in renewable energy real estate in May 2012.  The intent was to buy the real estate underlying a solar, wind, or other renewable energy project, charging the project owners rent.  This can be done profitably because REITs often have a lower cost of capital than other businesses, such as renewable energy power producers.

At the time, I (and Power REIT’s CEO, David Lesser) thought such a deal was immanent.

Then life got in the way.

A Potentially Lucrative Distraction

Life, in this case, was a civil action between Power REIT and the lessees (Norfolk Southern Corp. (NYSE:NSC) and sub-lessee (Wheeling and Lake Erie Railroad, aka WLE)) of its only asset at the time, 112 miles of railroad track.  Although still making lease payments, WLE and NSC had failed to comply with the terms of the lease, at least in Power REIT’s interpretation.  Power REIT attempted to foreclose on the lease, and WLE and NSC filed a civil action to prevent the foreclosure.

Power REIT initiated the foreclosure attempt because WLE had failed to pay some of its legal fees, as the lease requires the lessee do for all such fees reasonably incurred in order to maintain Power REIT’s interest in the leased track.  Since the lease requires the lessee  to pay all its legal fees, Power REIT has little incentive to drop its attempt at foreclosure, as might be expected when a tiny company has to take on a much better-funded opponent in court.  In addition, the lessees could be forced to pay as much as $84 million dollars (PW’s market capitalization is currently only $16.2 million) in debt and back interest incurred since the inception of the lease in 1967.  Even if, in the worst possible case,  Power REIT loses in all counts and is unable to foreclose, the $15.9 million principal portion of this indebtedness could be written off on Power REIT’s taxes.  That write-off would allow 25 years’ worth of its current dividend to be characterized as a return of capital, and hence be tax-free to PW’s shareholders.

Investment Delays

Despite the heads-I-win-big-tails-I-still-win situation for Power REIT in court, the litigation has been a massive drain on the firm’s resources and management’s time over the last year.  While Power REIT’s legal costs are likely to be recovered through the court, WLE is not currently reimbursing them.  Meanwhile, the legal tussle with much larger companies has been making some lenders and investors wary, leading to a low stock price and making it more difficult to finance renewable energy real estate transactions.

A few months ago, I noticed that Power REIT had removed the investor presentation from its investor relations page.  This presentation had detailed its  investment plans for renewable real estate.  When I asked Lesser about this, he told me it was because so much of the firm’s focus had been on the litigation.

Proof of Concept

Salisbury Solar.png
Location of True North solar farm from Salisbury Assessor map.

As it turns out, Power REIT’s renewable plans had not been completely to the back burner.  On January 4th, the company filed an 8-K with the SEC detailing an investment in 54 acres of land under a 5.7 MW solar farm in Salisbury, MA. Given its size, location, and 54 acre site with 43 buildable acres, I identified the farm as the solar farm recently completed by Power Partners MasTec (NYSE:MTZ), and owned by True North, LLC.   The total cost to Power REIT was $1.037 million, including the assumption of a $122,000 municipal sewer financing carrying a 5% interest over 19 years.  Lesser’s investment company provided an $800,000 bridge loan at 5% for six months, to allow the transaction to close quickly.  According to Lesser, the seller wanted a quick sale.  Lesser’s statement is corroborated by this article, which states the land was listed for sale in October with a “minimum bid” of $1.75 million.  It seems unlikely that True North would have come down 42% from its asking price in just two months if there had not been some urgency to sell.  [Update: Since this was written I spoke to a Salisbury reporter who has been covering the True North solar farm since before its inception.  She confirmed that the developer of True North was under considerable financial pressure.]

The bridge loan can be extended for another six months at 8.5% interest.  In an interview, Lesser told me he believes Power REIT will be able to obtain bank financing for the property at an interest rate in the high 5% range.

True North has a 21 year lease on the property paying $80,800 annual rent, with a 1% annual escalation.  Power REIT will be responsible for paying real estate taxes on the property (but not taxes on the solar farm.)  According to the Salisbury Assessor’s website, the Fiscal 2013 Tax Rate is $11.51 per thousand dollars (1.151%) of assessed value.  The property is currently assessed at $715,100, for an annual tax bill of $8,231.  If the property is assessed at the sale price of $1 million and tax rates are unchanged, annual tax will be $11,510 in 2014.  Annual interest on the sewer financing is $6,100.

Power REIT’s revenue from the lease will be $80,800 in 2013 and $81,608 in 2014.  Between 2000 and 2010, Salisbury property taxes have increased at a 4.6% compound annual rate.  If we assume the higher property assessment and a 5% annual increase in property taxes, Power REIT will have $63,422 in annual income to cover the financing costs on the $915,000 closing price.  That means that the transaction should increase earnings per  share if Power REIT is able to obtain financing at an interest rate below 6.9%, or if they receive more than $7.25 for any shares issued to finance the deal.

Since PW stock is currently trading around $10 a share, and Lesser thinks banks will be willing to lend against the property at interest rates below 6%, the deal will likely increase PW’s earnings per share.  However, given the small size of the deal, the annual earnings increase will be less than a penny a share.  I estimate the earnings increase will be approximately 0.5 cent a share.

After the Lease

After the current lease is up, it seems likely that Power REIT will be able to extend the lease on terms at lease as favorable as the current lease.  After all, solar farms typically last longer than twenty-two years, and they are difficult to move.  Furthermore, according to Lesser, the property was assessed at twice the purchase price in 2010.  Given that assessment, Power REIT will likely  have several financially viable options for the land  when the solar farm is at the end of its useful life, or if it is not possible to extend the lease on favorable terms.

Delayed Dividend

In the same SEC filing, Power REIT declared its regular $0.10 quarterly dividend for the fourth quarter of 2012, to shareholders of record on January 14th, 2013.  The dividend was delayed because Power REIT’s low income in 2012 (caused by legal expenses) and the possibility of a tax write-off in 2013 make it more advantageous to pay the dividend in the 2013 tax year.  Power REIT still intends to pay usual $0.10 first quarter dividend as well.

Conclusion

The Salisbury solar transaction is likely to increase Power REIT’s earnings per share, if only in a small way.  The more important aspect of this transaction is as a proof of concept for Power REIT’s business plan.  It shows the company can increase earnings per share by investing in real estate underlying renewable energy production.   Power REIT’s strong balance sheet should make more and larger deals possible in the future, especially once the litigation with WLE and NSC is resolved.

Disclosure: Long PW

This article was first published on the author's Forbes.com blog, Green Stocks on January 7th.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

January 16, 2013

Eight Upsides of the New Ethanol

Jim Lane

Eight technologies, seven public stocks – who’s adopting what, who’s in the lead?

Perhaps you have written off ethanol as a bum investment.

That’s understandable. Though, as a general rule, all acts of mind-closing should be made while chanting Michael Dell’s mantra from 1997, writing off Apple as a bum investment.

It’s a good chant, you could try it. Here’s how it goes.

“What would I do?” Hari Rama.
“I’d shut it down.” Rama Krishna.
“And give the money back”. Krishna Rama.
“To the shareholders.” Rama Rama.
Missing the biggest gold rush. Krishna Hari.
In market history. Hari Krishna.”

If chanting is not your thing, perhaps you and I can visit a while on the 8 Upsides of the New Ethanol.

The technologies out there are five in number. They are all in commercial deployment now, though some are at the capacity-construction stage. Some of them vary the feedstock, some vary the products produced. What they share is an ability to be co-located, bolted-on, or retrofitted into existing ethanol plants.

The upside varies in character. In some cases, there are cost reductions. In others, higher volumes. Some offer higher-priced product opportunities. Some allow access to higher-value renewable fuel credits (called RINs) that are used under the Renewable Fuel Standard to encourage the development of advanced, non-food biofuels.

We’ve looked at them as technologies, here in “7 Bleeding Edge Technologies unlocking Mighty Value in the First-gen Ethanol fleet“, and here in “The (Next) Next-Gen Cellulosic Biofuels“, and here in “7 Paths of the New Agriculture“.

Here, in BioInvest Digest, we look strictly at the investment aspect – what does it mean, when, for whom, and always, always how much.

Here’s the investment set – Aventine Renewables (AVRW), Pacific Ethanol (PEIX), Green Plains Renewable Energy (GPRE), Gevo (GEVO), Biofuel Energy (BIOF), BlueFire Renewables (BFRE), and Aemetis (AMTX).

Now, the technologies.

1. Feedstock switching. Sorghum as the new corn?

What it is: Switching from corn and natural gas to grain sorghum and biogas.

As we saw in “The New Milo-naires: Corn, Milo and the Biofuels Market’s Invisible Hand”. Aemetis (AMTX:OTC) operates a 60 mgy corn ethanol plant which imported milo from Argentina in Q4 2012 at a cost savings of about $0.90 per bushel under corn. They require approximately 22 million bushels per year at capacity, so the milo savings are more than $18 million per year. Add $18 million to the $24 million per year AB RIN’s, subtract about $8 million for the increased cost of biogas, and the net increase in cash flow is about $34 million per year for the 60 mgy (former) corn ethanol plant operated by Aemetis.

Who makes it: The milo is being imported from Argentina.
The upside: $0.56 per gallon, according to Aemetis.
Who’s using: Aemetis (AMTX).

2. Advanced extraction and yield technologies.

What it is: Pacific Ethanol is installing Edeniq technology at Pacific Ethanol’s Stockton, California ethanol plant. Pacific Ethanol will install Edeniq’s proprietary Cellunators™ to boost ethanol yields, and will also deploy Edeniq’s patented OilPlus™ corn oil extraction process to increase corn oil recovery.

Who makes it: EdeniQ
The upside: Not yet made public.
Who’s using: Pacific Ethanol (PEIX).

3. Advanced enzymes.

What it is: Our 2012 Biofuels Digest Yield Improvement Award went to Mascoma and Lallemand’s TransFerm enzymes. It’s a bioengineered drop-in substitute for conventional fermenting yeast that lowers costs for corn ethanol producers by alleviating the need to purchase a significant amount of the expensive enzymes currently used in corn ethanol production.

Who makes it: Mascoma and Lallemand.
The upside: 3.4% increase in ethanol yield, or 7.6 cents per gallon.

4. Enzymes in corn.

What it is: In October, we reported that Syngenta and Plymouth Energy signed an agreement to use Enogen trait technology starting in fall 2013. Syngenta states that when using Enogen trait technology there is no need to use liquid alpha amylase enzyme for dry grind ethanol production.

Over in Massachusetts, Agrivida has been working hard too. “Agrivida has created a proprietary INzyme molecular engineering technology that allows the renewable chemicals, fuels and other industries to grow a substrate of non-food energy crops that contain dormant enzymes.

Who makes it: Syngenta, Agrivida
The upside: $70 cents per gallon, according to Agrivida, on cellulosic ethanol production cost.
Who’s using: Plymouth Energy among others have adopted Enogen.

5. Algae co-location and production.

What it is: Our 2012 Industrial Symbiosis Award went to Green Plains Renewable Energy and BioProcess Algae — for the BioProcess Algae project as it advances from a small pilot system to a 5-acre demonstration including all components systems that lead from CO2 capture through algae growth, harvest, and extraction.

Who makes it: BioProcess Algae.
The upside: Could be more than $2.60 per gallon in revenue- early days on the cost to get there. That’s the upside with high-value algae made from waste CO2.
Who’s using: Green Plains Renewable Energy (GPRE).

6. Switchover to biobutanol.

What it is: Take the same corn ethanol feedstock stream, add a relatively low-impact unit for biobutanol production, and produce a $4 molecule instead of a $2 molecule.

Who makes it: Gevo (GEVO), Butamax
The upside: Could be $1.60 per gallon of revenue upside, long term, based on $2 more per gallon for the molecule and 20% drop in production yield.
Who’s using: 10+ plants in early adopter programs. Gevo’s plant in Luverne, MN has the technology installed but is awaiting an upgrade.

7. Cellulosic Ethanol add-on

What it is: Take a 100 million gallon traditional ethanol plant in Emmetsburg. Start bringing in the corn stover as well as the corn kernels – add-on some highly cool enzymatic hydrolysis technologies and – voila – you have 25 million gallons of bolt-on production, same grower base, same location.

Who makes it: POET-DSM
The upside: $0.56 per installed gallon of capacity, based on boosting capacity by 25 percent. Costs to get there – that’s not yet stablized.
Who’s using: POET-DSM

8. Cut-over to cellulosic sugars.

What it is: A hub-and-spoke process to convert locally available cellulosic, non-food biomass, such as crop residues, energy crops, and woody biomass into highly fermentable sugar, which an ethanol producer will ferment into ethanol.

Who makes it: Sweetwater (in this model), but also Renmatix, BlueFire (BFRE), Comet, and Proterro among others,
The upside: In the Sweetwater model, as much as $0.55 per gallon in upside based on reducing feedstocks costs by as much as 15% over last-bushel of corn and a $0.40 gain in RIN value.
Who’s using: Front Range Energy, Ace Ethanol.

Disclosure: None.

Jim Lane is editor and publisher  of Biofuels Digest and BioInvest Digest where this article was originally published. Biofuels Digest is the most widely read Biofuels daily read by 14,000+ organizations. Subscribe here.

January 15, 2013

Earnings Are Mixed for the New Year

By Harris Roen

There have been six earnings reports released so far in 2013 for alternative energy stocks, all small or microcap companies. There were no blowouts, but also no superstars – most were within analyst expectation or somewhat below. 

Date
DayStar Technologies Inc. (DSTI)
More Info
1/7/2013 Revenues remain elusive for this thin cell PV producer. EPS dropped about 10%, and gross losses doubled. The stock is down 35% for the year, but has bounced up 20% for the quarter. SEC Filing

Acuity Brands, Inc. (AYI)

1/8/2013 Revenues for Acuity Brands are flat for the year, but down for the quarter, as are profits. EPS remains razor thin but is up slightly. Still the stock has dropped 4% for the week, since actual earnings came in about 15% below street estimates. The stock is considered at fair value by the Roen Financial Report. Press release

Mistras Group, Inc. (MG)

1/8/2013 A positive earnings report showed a 21% increase in revenue and a doubling of net income for the quarter. Mistras Group also raised the low end of its range of earnings expectations for FY 2013. The report is in line with analyst estimates, but the stock price has remained flat. Reuters Article

Schnitzer Steel Industries (SCHN)

1/8/2013 EPS turned slightly negative for this salvage company on dropping revenue, down 22% from the previous quarter. The stock gave up about 8% for the week on the news. Press release

AZZ Inc. (AZZ)

1/9/2013 Revenues were basically flat for the quarter, but up 28% from the same quarter last year. Similarly, EPS were down slightly quarter, but up over 50% year over year. Earnings were in line with analysts expectations, and AZZ has slightly raised guidance for 2013. The stock price has been stair-stepping up nicely, with a gain of 70% for the year. Press Release

SemiLEDs Corporation (LEDS)

1/14/2013 Revenues picked up for this Taiwanese LED company, gaining 14% for the quarter. Revenues for the year, however, are still down 8%. EPS remains negative, missing analyst estimates by about 25%. The companies stock price continues to fall, down 52% for the quarter and 77% for the year. Press release

About the author

Harris Roen is Editor of the “ROEN FINANCIAL REPORT” by Swiftwood Press LLC, 82 Church Street, Suite 303, Burlington, VT 05401. © Copyright 2010 Swiftwood Press LLC. All rights reserved; reprinting by permission only. For reprints please contact us at cservice@swiftwood.com. POSTMASTER: Send address changes to Roen Financial Report, 82 Church Street, Suite 303, Burlington, VT 05401. Application to Mail at Periodicals Postage Prices is Pending at Burlington VT and additional Mailing offices.

Disclosure

Individuals involved with the Roen Financial Report and Swiftwood Press LLC do not own or control shares of any companies mentioned in this article, but it is possible that individuals may own or control shares of one or more of the underlying securities contained in the Mutual Funds or Exchange Traded Funds mentioned in this article. Any advice and/or recommendations made in this article are of a general nature and are not to be considered specific investment advice. Individuals should seek advice from their investment professional before making any important financial decisions. See Terms of Use for more information.

Remember to always consult with your investment professional before making important financial decisions.

January 14, 2013

7 Bleeding-Edge Technologies Reinventing First-gen Ethanol Plants

Jim Lane

The US Ethanol Fleet reinvents as super-advanced technologies target the old fleet for new purposes.

bigstock-night-shot-of-plant-producing--18525755.jpg
Ethanol Plant Photo via BigStock

For some time, perhaps one of the toughest assets to manage in the Western World — possibly the Milky Way Galaxy or even the local galaxy group — has been a starch ethanol plant. They’ve been through it all, just about.

Food vs fuel, indirect land-use change, the ethanol blend wall, attacks on the RFS from cattle and dairy interests, attacked on ethanol tax credits, a turbulent relationship with the oil refining industry — not to mention, occasionally upside-down economics, rising input costs, and tough times ahead for E15, E30 blender pumps and E85 as a platform.

But they are here — and increasingly, the advanced biofuels industry is seeing them as a diamond-like deployment asset. We looked at that phenomenon, in prospect, some time ago in the Bioenergy Project of the Future Series — in which we outlined that step one in creating a Project of the Future was “buy or partner with a corn ethanol plant.” But it’s no longer theory, it’s becoming solid reality.

The most popular technologies that are targeting the corn ethanol fleet?

1. Feedstock switching. Sorghum as the new corn?

As we saw in “The New Milo-naires: Corn, Milo and the Biofuels Market’s Invisible Hand”.

Aemetis (OTC:AMTX) operates a 60 mgy corn ethanol plant which imported milo from Argentina in Q4 2012 at a cost savings of about $0.90 per bushel under corn. They require approximately 22 million bushels per year at capacity, so the milo savings are more than $18 million per year.
Add $18 million to the $24 million per year AB RIN’s, subtract about $8 million for the increased cost of biogas, and the net increase in cash flow is about $34 million per year for the 60 mgy (former) corn ethanol plant operated by Aemetis.

As Aemetis CEO Eric McAfee outlined for shareholders in a conference call just before Christmas: ”[The] market disadvantage for corn ethanol facilities allowed Aemetis to acquire the 60 million gallon per year Keyes ethanol plant near Modesto, California. The plant originally cost $132 million to construct, and was acquired in July 2012 by Aemetis for only about $15 million in cash and approximately 11% of Aemetis fully diluted shares. On an actual cash cost basis for the investors in the Keyes plant, this transaction values Aemetis common stock at about $6 per share.

“Aemetis originally leased the Keyes plant in late 2009, and then retrofitted the plant to implement Aemetis design upgrades at a total cost of about $8 million. The plant was restarted in April 2011.”

2. Advanced extraction and yield technologies.

Just this morning, we heard that Edeniq and Pacific Ethanol (PEIX) entered into an agreement to install Edeniq technology at Pacific Ethanol’s Stockton, California ethanol plant. Pacific Ethanol will install Edeniq’s proprietary Cellunators™ to boost ethanol yields, and will also deploy Edeniq’s patented OilPlus™ corn oil extraction process to increase corn oil recovery.

3. Advanced enzymes.

Our 2012 Biofuels Digest Yield Improvement Award went to Mascoma and Lallemand’s TransFerm enzymes. It’s a bioengineered drop-in substitute for conventional fermenting yeast that lowers costs for corn ethanol producers by alleviating the need to purchase a significant amount of the expensive enzymes currently used in corn ethanol production.

4. Enzymes in corn.

In October, we reported that Syngenta and Plymouth Energy signed an agreement to use Enogen trait technology starting in fall 2013. Syngenta states that when using Enogen trait technology there is no need to use liquid alpha amylase enzyme for dry grind ethanol production.
The technology improves ethanol production while reducing energy, gas and water usage. Syngenta is currently contracting corn growers to grow Enogen corn. Under the agreement, growers will receive a premium price for each bushel of Enogen grain delivered to the ethanol plant.

Another win? Last month, Syngenta signed Bonanza BioEnergy of Garden City will use the revolutionary technology that allows corn to express a robust form of alpha amylase enzyme, the primary enzyme used in dry grind ethanol production to convert starch to sugars. For those reasons, we awarded Enogen corn the Biofuels Digest 2012 New Trait Deployment Award.

Over in Massachusetts, Agrivida has been working hard too. “Agrivida has created a proprietary INzyme molecular engineering technology that allows the renewable chemicals, fuels and other industries to grow a substrate of non-food energy crops that contain dormant enzymes, “said Agrivida’s Dr. Michael Lanahan.  “These enzymes accumulate in the energy crop—which can be corn stover or other grains or plants—and are then activated during processing. This approach adds significant value by greatly reducing pretreatment energy and chemical costs normally associated with glucose conversion.”  Agrivida’s engineered energy crops and proprietary low temperature, low cost processes release over 80 percent theoretical glucose yield from cellulosic biomass.

5. Algae co-location and production.

Our 2012 Industrial Symbiosis Award went to Green Plains Renewable Energy (GPRE) and BioProcess Algae — as the as the BioProcess Algae project advances from a small pilot system to a 5-acre demonstration including all components systems that lead from CO2 capture through algae growth, harvest, and extraction – it aims at transforming not only the opportunities for algae production, but the potential to transform GPRE’s operating income stream.

6. Switchover to biobutanol.

Gevo (GEVO), Butamax, and Green Biologics are working on these opportunities – though Butamax and Gevo have been more active to date with the US corn ethanol fleet. The opportunity? Take the same corn ethanol feedstock stream, add a relatively low-impact unit for biobutanol production, and produce a $4 molecule instead of a $2 molecule. Payback, say the technology developers, can come within three years.

We looked at the Gevo-Butamax competition in “Gevo vs Butamax: Biofuels’ Montagues and Capulets race for scale with new agreements.”

7. Cellulosic Ethanol add-on

This is the POET-DSM route. Take a 100 million gallon traditinoal ethanol plant in Emmetsburg. Start bringing in the corn stover as well as the corn kernels – add-on some highly cool enzymatic hydrolysis technologies and – voila – you have 25 million gallons of bolt-on production, same grower base, same location. More on the latest with POET-DSM, here.

Disclosure: None.
Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

January 13, 2013

Methes: The McDonald's of Biofuel

by Debra Fiakas CFA
 
Methes logo.gif Few would make the connection, so Methes Energies International (MEIL: Nasdaq) chief executive office explains his company’s unusual business model in McDonald’s terms.  Methes, which is a contraction of ‘methyl ester,’ has developed a biodiesel system that accommodates various feedstocks that yield methyl esters.  The system is a handsome, compact configuration of stainless steel tanks and piping that are all capable of automated operation.

The company operates its own commercial-scale facilities in Ontario, Canada.  Sales of biodiesel represent the majority of Methes revenue, which totaled $10.3 million in the twelve months ending September 2012.  This first leg of the Methes business model is comparable to sales of Big Macs at McDonald’s company owned stores.

Two models of the Methes system are available for sale as turn-key biodiesel plants.  It is an attractive market in the U.S., Canada and Europe where government mandates require transport fuel producers to blend a minimum amount of renewable sources into fuel before it is sent to the gas station.  In the U.S. gas blenders must purchase a minimum of 1.3 trillion gallons of renewable fuel in 2013 and 1.6 trillion gallons in 2014.

Few gas producers have invested in their own renewable fuel capacity.  One exception might be Valero (VLO:  NYSE) which snapped up ethanol plants from Vera Sun and others after the wave of bankruptcies in that sector in 2009.  Valero also has a renewable diesel joint venture with food-by product recycler Darling International (DAR:  NYSE) that is expected to go into production in the first quarter 2013.  The vast majority of the renewable fuel mandate must come from independent producers.

It makes sense for aspiring renewable fuel players to use a proven system and tap the expertise of an established player.  Methes sells licenses for its turn-key systems along with proprietary operating software.  Methes engineers can also remotely monitor a licensed system for optimum performance and maintenance.  Methes gets paid a royalty of $0.11 per gallon for the system and assistance.  Methes can also sell feedstock to its licensees.  Call this the franchise component of the business model where Methes sells equipment (friers, grills and McDonald’s seating and décor) along with feedstock supplies (ready to cook fries and burgers).

At least two licensees in Canada are already operating Methes systems.  Each of the two plants can produce up to 1.3 million gallons of renewable diesel per year.  Methes recently announced the sale of a license in California to U.S. Energy Initiative (USEI:  OTC/PK) for a system that can produce up to 1.3 million gallons per year, which Methes calls the Denami 600.  A second system, the Denami 3000, has a capacity of 6.5 million gallons per year.

Methes Energies has yet to reach profitability, but management is confident its unusual business model is viable.  They expect profits as its installed base expands in North and South America.  In the meantime, Methes is using cash to support operations  -  $2.0 million in the most recent twelve months.  Cash resources are thin, so an investor taking a long position in Methes needs to appreciate near-term pressures.  Successfully translating the McDonald's business model to biofuel production will take a bit longer to prove out.
 
Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. 

January 12, 2013

Three Green Money Managers; Six Green Stocks for 2013

Tom Konrad

When I asked my panel of green money managers their predictions for trends 2013, I got enough material for four articles: On where the cleantech sector is heading in 2013, as well as on Solar, Smart Grid, and LED technology.

I also asked them for stock picks, some of which I included in the previous articles.  Several had opinions about EnerNOC (NASD:ENOC), which I wrote about here, and two picked LED stocks Veeco Instruments (NASD:VECO) and Universal Display Corp. (NASD:PANL), which I discussed here.

Since I just published my annual model portfolio of Ten Clean Energy Stocks for 2013, I thought it would be interesting to compare the performance of their six picks as well, especially since there is absolutely no overlap.   It’s not exactly an apples-to-apples comparison, since I did these interviews before the holidays, but I still expect it to be interesting.

Here are the rest of their picks.

Shawn Kravetz: Amtech Systems

Shawn Kravetz is President of Esplanade Capital LLC, a Boston based investment management company one of whose funds is focused on solar and companies impacted by the emergence of solar.  Kravetz likes Amtech Systems (NASD:ASYS), a maker of capital equipment for the semiconductor and solar industries.  He likes Amthech because it is

Image representing Amtech Systems as depicted ...

 Currently trading at a 40% discount to the cash on its balance sheet as their business has deteriorated sharply, they are managing cash superbly and have significant business opportunities should there be any activity whatsoever in solar manufacturing in 2013.

Kravetz made these comments when Amtech was trading at $3.10.

Sam Healey: Hudson Technologies

Sam Healey is a portfolio manager at Lamassu Capital.  He likes Hudson Technologies (NASD:HDSN), saying:

Hudson is a refrigerant technology/reclamation company.  For the majority of the past years they have served as a refrigerant re-seller, selling R-22 and other refrigerant gases.  With the EPA currently cracking down on its R-22 phase out and severely limiting the virgin R-22 production, R-22 prices tripled in 2012 and will likely move up materially again in 2013.  Hudson has the ability to reclaim used R-22 (it is illegal to vent though many do it) and clean it up and resell in.  Prior to the EPA phase out the economics were not attractive enough to promote wide spread reclamation   Despite the fact that it is illegal, many many contractors would and did vent the gas into the air rather then capture and reclaim it because in many cases they would have to pay to get rid of the dirty gas.  With the R-22 price spike HDSN can now pay contractors for the dirty gas thereby getting supply to clean up and decreasing the amount of gas that gets into the atmosphere.  The demand for R-22 will last years beyond the allowed period of virgin production.  If one uses the R-12 phase out as a template, R-12 prices went from 3$ per pound to 20$ per pound.  R-22 went from $4  up to $9 last year, and now I think is moving into the low double digits.  HDSN also has R-Side technology which they use to enhance/diagnosis large cooling units and make them much more energy efficient   The R-side product, though not materially significant in Revenue right now, I think gets this company into a clean energy universe as an energy efficiency play.  I like HDSN, think it has the right product at the right time and has a large upside potential.

Sam made these comments when HDSN was trading at $3.31.

Garvin Jabusch: First Solar

Garvin Jabusch is cofounder and chief investment officer of Green Alpha ® Advisors, and is co-manager of the Green Alpha ® Next Economy Index, or GANEX and the Sierra Club Green Alpha PortfolioHe also authors the blog ”Green Alpha’s Next Economy.” Among renewable energy companies, he likes First Solar (NASD:FSLR).  He says,

GM logo

They’re the global thin-film leaders, to the extent that they’ve even been invited to bid and work on projects in China, where the state is aggressively trying to support its domestic PV manufacturing players. Yet, where thin film is the appropriate approach, FSLR gets the call. FSLR will continue to be strong in the U.S. as well since it’s not subject to tariffs imposed on Chinese solar makers. First Solar – and solar in general – have been so unfairly maligned that the stage is set for an upside surprise as the reality of how we need to power the global economic production function sets in.

Jabusch made these comments when FSLR was trading for $32.56.

Conclusion

I find other manager’s picks particularly useful because they give me new companies to consider.  Of these, I find Amtech and Hudson Technologies particularly interesting, and will be keeping an eye out for a stock pull-back to possibly acquire one or both.

Disclosure: Kravetz has along position in ASYS, and Healy owns HDSN.  I have no positions in these stocks.

This article was first published on the author's Forbes.com blog, Green Stocks on January 2nd.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

January 11, 2013

The Big Green Apples: The Week In Cleantech, Jan 11, 2013

Jeff Siegel

This Car gets 108 Miles per Gallon

Although it's little more than a compliance car (which is why it's only being sold in California), the electric Fiat 500e actually offers some pretty impressive fuel economy numbers.

The official EPA numbers indicate 108 MPGe. This makes it the most efficient highway car in the marketplace. The range clocks in at around 87 miles, so that means it probably gets anywhere from 60 to 90 miles, depending on driving style and conditions. With a level 2 charger, you can juice it up in about 4 hours.

I-wind

Although the patent was filed back in June, 2011, Apple's (NASDAQ:AAPL) media machine kicked into gear last week as it began to spread the news of the company's new wind turbine.

The technology, which allows for the generation of electricity by converting heat energy, instead of rotational energy, offers on-demand power by way of stored wind energy.

According to the patent, the new generation system can reduce costs associated with natural variations in wind supply. As well, it can be used as a replacement for conventional energy storage systems.

Of course, this isn't Apple's first investment in renewable energy. You may remember last year when Apple filed plans with the North Carolina Utilities Commission to double the number of fuel cells the company operates at its Maiden data center.

These fuel cells, which are manufactured by Bloom Energy, use methane from a nearby landfill as a feedstock. Apple also owns and operates a 20 megawatt solar farm in North Carolina for the same data center. That solar farm, by the way, is the largest end-user-owned onsite solar array in the nation.

Mitsubishi Soleil

Mitsubishi Corp. has recently announced that it has acquired a 50 percent stake in a solar power plant in France. This particular power plant boasts a capacity of 55 megawatts, and has been operational since June.

Interestingly, this news comes around the same time we learn that France has doubled the production capacity target for solar. The government intends to offer more financial support to small solar farms that use European-made panels.

Although I'm always happy to see the solar sector get some love in the policy arena, I have little faith in the ability of the new French government to avoid continued fiscal hardships. New regulations and extremely high tax rates for the wealthy are likely to accomplish little more than chasing out those who provide employment for French workers.

Of course, I could be wrong. I suppose we'll just have to wait and see. In the meantime, I expect we'll see a nice little bump in solar installations in France this year.

The Big Green Apple

New York Governor Andrew Cuomo has proposed a $1 billion Green Bank in an effort to further develop the state's clean energy economy.

Cuomo said the “Green Bank” would help lower capital costs and bring cleaner energy solutions to scale. He went on to say. . .

“The NY Green Bank leverages private capital in a fashion that mitigates investment risk, catalyzes market activity and lowers borrowing costs, in turn bringing down the prices paid by consumers. Through the use of bonding, loans and various credit enhancements, a Green Bank is a fiscally practical option in a time of severe budget conditions. The NY Green Bank is another forward-looking way for our state to lead on energy policy and improve our residents' economic prospects and quality of life. The benefits of early innovation will be tremendous, as we see states around the nation moving quickly to catalyze their clean and renewable energy sectors.”

Kudos to Cuomo for manning up on this one!

China and India Will Lead Global Solar Market Growth in 2013

In a recent note to investors, Deutsche Bank predicted the global solar market to rise 22 percent to 33.4 gigawatts this year as a result of increased investment in China and India.

Although declines are anticipated in Germany and Italy, those are expected to be offset by aggressive solar agendas elsewhere.

China is also moving forward to cut its idled wind farm capacity this year.

As you know, China's race to install wind turbines at such a rapid pace left many without connections to the grid due to lack of transmission and distribution. This, perhaps, was one of the worst cases of planning we've ever seen in this space.

However, China's State Grid Energy Research Institute claims that the rate of wind capacity still sitting idle could fall from over 20 percent to ten percent this year. It'll be interesting to see how this pans out over the course of the year.

DISCLOSURE: No positions

Jeff Siegel is Editor of Energy and Capital, where his notes were first published.

First Solar, Intermolecular Pushing Thin-film Solar PV Materials R&D

James Montgomery

logo[1].gifFirst Solar (NASD:FSLR) is arguably the leader in thin-film solar photovoltaics (PV). It's relentlessly inched up conversion efficiencies of its cadmium-telluride (CdTe) technology, while chipping away at manufacturing costs (now at $0.67, reported in November).
Jim Montgomery is Associate Editor for RenewableEnergyWorld.com, covering the solar and wind beats. He previously was news editor for Solid State Technology and Photovoltaics World, and has covered semiconductor manufacturing and related industries, renewable energy and industrial lasers since 2003. His work has earned both internal awards and an Azbee Award from the American Society of Business Press Editors. Jim has 15 years of experience in producing websites and e-Newsletters in various technology.

This article was first published on RenewableEnergyWorld.com, and is reprinted with permission.

January 10, 2013

Top Alternative Energy Mutual Funds and ETFs for 2013

By Harris Roen

The Roen Financial Report closely covers the universe of almost 30 alternative energy Mutual Funds (MFs) and Exchange Traded Funds (ETFs). We use a proprietary ranking method to pick the best funds, looking at measures that include fees, risk, tax liability, and the financial health of individual holdings within each fund. In the latest round of rankings, all top rated funds retain their premier slots.
Subscribers can see the complete list of funds, including rankings and technical breakdowns, in both Excel and PDF format, by going to roenreport.com/mfsetfs.

Mutual Funds (MFs)

2012 Mutual fund returns

2012 was a good year for alternative energy mutual funds. On average all funds returned over 9% for the year, with over half the funds posting gains of 15% or better. The best performing funds were Allianz RCM Global Water (AWTAX) and Pax World Global Environmental Markets (PGRNX). Both had annual returns in the 20% range.

These two best performing funds for the year have also dropped one notch from their Rank 1 status (see rankings here). The fund that declined most in rank was Calvert Global Alternative Energy A (CGAEX), which now rests at a Rank 5. This drop is accredited to shortcomings in the mechanics of the fund, including its high expense ratio relative to the other alternative energy mutual funds, and a low “Alpha” (essentially a measure of the value a fund's manager brings to the portfolio).

It is interesting to note that the funds which performed the worst for the year overall, Guinness Atkinson Alternative Energy (GAAEX) and Firsthand Alternative Energy (ALTEX), also performed best in the past month. This goes to show that chasing performance, especially on mutual funds, is usually not the best way to pick an investment. A much better approach is to look at multiple criteria in order to determine the fund most likely to have good returns going forward.

I see good opportunity in putting fresh money in several funds at this time. Mutual funds that look attractive now are AWTAX, New Alternatives (NALFX), Portfolio 21 R (PORTX) and Alger Green A (SPEGX). These are all Rank 1 or Rank 2 mutual funds, and the average underlying security in the fund is considered to be trading at below fair value.

Exchange Traded Funds (ETFs)


ETF Returns 2012

Alternative energy ETFs did not fare as well as MFs in 2012. The average ETF lost 3% for the year, though the number of ETFs that were up for the year were the same as the number that showed losses. The average gainer was up 9%, and the average loser was down over 15%. This discrepancy between returns on MFs and ETFs shows that having a professional manager actively overseeing investment decisions in a fund can make a great difference in net long-term returns.

The ETF with the best annual return was First Trust NASDAQ® Clean Edge® Smart Grid Infrastructure Index Fund (GRID) which held four stocks that gained over 50% for the year: AZZ, Inc. (AZZ), Prysmian (PRYMF), Valmont Industries, Inc. (VMI), and MasTec, Inc. (MTZ). In fact, over half the shares that this ETF held had annual gains over 15%.

PowerShares WilderHill Progressive Energy Portfolio (PUW) got bumped up to a Rank 1 due to its many positives, including good returns at moderate risk (see heat map below). Investors should be aware, though, that PUW has a high potential capital gain exposure due to the increased value of its holdings. An ETF that looks good to me at current prices is Market Vectors Solar Energy ETF (KWT). It holds at Rank 2 ETF, and is considered undervalued.

The graph above shows ETFs sorted by annual return, from largest to smallest, illustrated by the dark blue bars. The light blue bars show three month returns, which in this case have almost no correlation to annual returns. In fact, as with the MFs above, the two worst 12 month performers, Guggenheim Solar (TAN) and KWT, posted the best three months performance.

About the author

Harris Roen is Editor of the “ROEN FINANCIAL REPORT” by Swiftwood Press LLC, 82 Church Street, Suite 303, Burlington, VT 05401. © Copyright 2010 Swiftwood Press LLC. All rights reserved; reprinting by permission only. For reprints please contact us at cservice@swiftwood.com. POSTMASTER: Send address changes to Roen Financial Report, 82 Church Street, Suite 303, Burlington, VT 05401. Application to Mail at Periodicals Postage Prices is Pending at Burlington VT and additional Mailing offices.

Disclosure

Individuals involved with the Roen Financial Report and Swiftwood Press LLC do not own or control shares of any companies mentioned in this article, but it is possible that individuals may own or control shares of one or more of the underlying securities contained in the Mutual Funds or Exchange Traded Funds mentioned in this article. Any advice and/or recommendations made in this article are of a general nature and are not to be considered specific investment advice. Individuals should seek advice from their investment professional before making any important financial decisions. See Terms of Use for more information.

Remember to always consult with your investment professional before making important financial decisions.

January 09, 2013

Mega-Solar Matchmaking in California

James Montgomery

KD501Flexing its billion-dollar muscles once again in the renewable energy space, MidAmerican Energy Holdings Company (famously backed by Warren Buffett's Berkshire Hathaway Inc. [BRK-A and BRK-B]) is buying two co-located solar projects in California from SunPower [SPWR], billed as the world's largest permitted solar PV power development. The deal for Antelope Valley Solar Projects (AVSP), totaling approximately 579 megawatts (AC) combined generation capacity, is for an unspecified amount between $2-$2.5 billion.
To SunPower president Howard Wenger, this deal represents no less than "a historic milestone for the energy industry." Cost-competitive with natural gas peaker plants, the AVSP projects define "a perfect example of how scale is driving cost reduction."

The Facts About AVSP

SunPower has been developing the two co-located AVSP projects for four years, on 3230 acres of private property in Kern and Los Angeles Counties near Rosamond, CA: the 309-MW (AC) "AVSP 1" owned by Solar Star California XIX; and the 270 MW (AC) "AVSP 2" owned by Solar Star California XX, which according to SEC filings includes the option to develop another 49-MW facility, dubbed "AVSP 3." (There is no relation to the similarly named 230-MW Antelope Valley Solar Ranch One project, developed by First Solar and sold in 2011 to Exelon, which is planned to be fully operational by late 2013.) AVSP will incorporate SunPower's own Oasis power plant modular solar technology, high-efficiency solar panels, and trackers to boost energy capture. The company will be the engineering, procurement, and construction (EPC) contractor, and operate and manage the facility under a 20-year services agreement.

AVSP has secured final conditional use permits and has completed full environmental review pursuant to the California Environmental Quality Act. Both projects are under two 20-year power purchase contracts with Southern California Edison (SCE); grid connection will be through the Whirlwind Substation being constructed as part of SCE's Tehachapi Renewable Transmission Project. Construction of the plants, which will create 650 jobs, is slated to begin in 1Q13 and completed by the end of 2015.

A snapshot of MidAmerican Renewables' project portfolio:

Solar: 1.271 GW

- AVSP 1 & 2; the 550-MW Topaz project in San Luis Obispo County, CA; and a 49% stake in the 290-MW Agua Caliente project in Yuma County, AZ

Hydro: 5 MW

- A 50% ownership in the 10-MW "Wailuku" project on the eastern coast of the island of Hawaii

Wind: 381 MW

- Recent acquisitions of the 168-MW Alta Wind VII and 132-MW Alta Wind IX projects in Kern County, CA; and the 81-MW Bishop Hill II project in Henry County, IL

Geothermal: 174 MW

- Projects primarily in the Salton Sea area of Southern California's Imperial Valley

SunPower: Balancing the Equation

From the beginning, SunPower’s plan for AVSP has been to develop the projects, get them financed (including finding an equity owner), and then building and operating the projects with its own technology. With AVSP’s size and scope, the company specifically was seeking a partner "with a strong balance sheet, who understood the economics and importance of renewable energy," according to SunPower president Howard Wenger. The bidding process was well underway by mid-2011, with "very strong" initial interest from prospective financiers — “We were very pleased with the level of interest and quality of companies and offers,” he said.

Projects of this size and scope are getting harder and harder to come by, and  developers such as SunPower, First Solar, and SunEdison are finding it tougher to refill their pipelines, especially ones with the same favorable economics. "They're selling projects that were priced a couple of years ago when modules were expensive," points out Shawn Kravetz, president of Esplanade Capital LLC. And now they're being delivered in an environment where module costs are much lower and likely will continue to go down for the next year or two. He thinks 2013 will be "an unusually robust year" for those big solar project developers that secured projects over the past several years, but as they try to replenish their pipelines, "high price and low costs — that's not happening anymore."

SunPower in particular needs to keep feeding that downstream business, asserts Kravetz, due to its relatively high-cost manufacturing operation vs. a host of ruthlessly low-cost competitors (think Tier-1 Chinese firms including Yingli [YGE], Suntech [STP], Trina [TSL], and JA Solar [JASO]). As more of these large profitable projects are harvested, that upstream exposure will weigh even more heavily, especially in a solar market that promises to remain challenging for the next year. Stifling cost pressures is rough on the upstream, but makes the financial equation more attractive on the project development side of the equation.

Perhaps most importantly for SunPower: this deal represents a vote of confidence from an up-and-coming energy player with the desire and ability to invest substantially in renewable project development. “MidAmerican Solar’s decision to invest in these projects underscores the bankability and long-term strength of SunPower’s business,” Wenger said. (Investors agreed, spiking the company’s stock nearly 50% with 24 hours of the deal, though they had pulled back about 12% a few days later.) And as Kravetz points out, this isn’t exactly the inimitable Warren Buffett stamping his approval of solar stocks, but “it’s a company owned by him, saying these are energy projects that are a good investment.”

MidAmerican: Sealing the Deal

In Jan. 2012, MidAmerican Energy formed a new unit, MidAmerican Renewables LLC, to manage and grow its renewable energy interests — and the company has professed, and proved, its appetite for renewable energy investments from Day 1. After one year, MidAmerican Renewables' total portfolio of owned assets, including solar, wind, geothermal, and hydro, now exceeds 1.83 GW, including the AVSP projects (see sidebar). That's more than twice the size of the parent group's 872 MW in natural gas energy generation projects.

These AVSP projects satisfied MidAmerican's criteria checklist for any renewable energy generation investment: "All the critical things we look for were there," explained Paul Caudill, president of MidAmerican Solar. It's an area with good solar insolation and a good weather record. There is available land and land that can be permitted. Transmission access is suitable for a grid-type plant, with both existing infrastructure and commitment for network upgrades, Caudill explained; the Whirlwind Substation is "well underway so we know where they are at," and the Tehachapi interconnection "also has very good progress." (MidAmerican was already familiar with the local transmission infrastructure; its recently acquired "Pinion Pines" wind projects, formerly called Alta Wind, are also located in Kern County.) Additionally, there are deals in place with California ISO and a buyer in Southern California Edison.

One other aspect of AVSP's profile was attractive: it used SunPower's technology, which is different than the First Solar thin-film (cadmium telluride) technology used at MidAmerican's Topaz and Agua Caliente projects. "We saw diversification as a strong point," Caudill said. That "diversification" could put MidAmerican in an excellent position to evaluate performance of two competing solar PV technologies on a grid-scale playing field: SunPower's higher-efficiency modules with trackers, vs. First Solar's thin-film panels that have lower conversion efficiencies but perform better in high-temperature environments. MidAmerican, however, rejects that idea, saying they see "tremendous benefits" in having both technologies at its disposal, and it follows the parent company's pattern of using different suppliers — for example, two types of wind turbines (Siemens and GE) incorporated into its wind projects in Iowa.

Beyond "Megaprojects," Going Distributed?

To feed its ravenous appetite for renewable energy projects, MidAmerican keenly tracks what has been "a tremendous amount of development in solar and wind in the past few years," particularly outside of California, Caudill says. "We're very in tune with the industry and where the good markets are." MidAmerican currently has "a fairly sizable pipeline of projects" that it is evaluating; "we're comfortable that there are good solid assets out there."

But those attractive multihundred-MW megaprojects like AVSP, with proven technology and PPA(s) in hand, are increasingly hard to come by -- so MidAmerican is looking to add other types of projects that make sense. "We don't sit down and say, 'we have to invest in a plant that's 100 MW or greater or we're not interested,'" Caudill said. MidAmerican's sweetspot for future renewable project development, Caudill said, "could be substantially smaller than we see today." He expects over the next few years the company will pursue more projects in the 40-MW to 60-MW range, which have their own attractive features: they require less land use, transmission requirements aren't as stringent, and of course costs are lower. And the convergence of costs coming down, energy prices going up, and the economy picking up momentum, he said, opens up emerging markets in areas not traditionally seen as "solar states," in places such as Tennessee and Georgia.

And that likely includes forays into distributed generation deals, Caudill pointed out. He envisions growing involvement in "behind-the-meter projects," working with local utilities and businesses to offset carbon footprints and compete at peak power needs. "The distributed generation market, once it gets fleshed out, could be very strong," he said.

The bottom line for MidAmerican is identifying places where rates are high at peak and that are squeezed on the generation side, Caudill says. "Those drive the market. It's hard to say where we end up next — but I feel strongly that there are opportunities out there."

Jim Montgomery is Associate Editor for RenewableEnergyWorld.com, covering the solar and wind beats. He previously was news editor for Solid State Technology and Photovoltaics World, and has covered semiconductor manufacturing and related industries, renewable energy and industrial lasers since 2003. His work has earned both internal awards and an Azbee Award from the American Society of Business Press Editors. Jim has 15 years of experience in producing websites and e-Newsletters in various technology.

This article was first published on RenewableEnergyWorld.com, and is reprinted with permission.

Want to learn more about solar match-making, which companies are getting into solar and which are exiting? Come to Solar Power-Gen next month and check out our plenary session: Who is Buying Whom and Why? More information about the show is here.]

January 08, 2013

Valuing Finavera's Deal With Pattern Reveals Buying Opportunity

Tom Konrad

Wildmare
Finavera's Wildmare Wind Energy Project is one of three projects in Bristish Columbia to be sold to Pattern Renewable Energy Holdings Canada for C$40M. An earlier sale to of Wildmare Innergex Renewable Energy fell through in September.  Photo source: Finavera.

On October 1st, following the failed sale of Finavera Wind Energy’s (TSX-V:FVR, OTC:FNVRF) 77 MW Wildmare Wind Energy Project to Innergex Renewable Energy Inc (TSX:INE, OTC: INGXF), Finavera announced that it was in talks with three potential bidders and would review all offers for the company.  Finavera did not have much choice in the matter: the proceeds of the Wildmare sale had been needed to repay an overdue note to GE.

While Finavera talked about its plans as a “Corporate Transaction,” most investors (including me) assumed the process would conclude with a sale of the company.  The stock promptly shot up approximately 70% from the 20-25 cent range where it had been trading to the 35-40 cent range in anticipation of a sale.

Market Reaction

As it happened, after reviewing the offers, Finavera decided to accept a financing deal and project purchase agreement from Pattern Renewable Energy Holdings Canada.   According to Finavera CEO Jason Bak in an interview, what sealed the deal was Pattern’s willingness to refinance the GE note immediately, and provide financing at 10% for project development going forward once shareholders approve the deal. While there were offers for outright purchase of the company on the table, none of the bidders would have been able to perform as quickly as Pattern and satisfy GE. As a result, Finavera’s board, which contains four of the company’s ten largest shareholders and collectively owns 35% of the company’s stock, chose to sign the deal with Pattern.

Since many investors had been anticipating an outright sale, the announcement of the deal sent some scurrying for the exit. Thin trading over the holidays compounded the problem, and Finavera’s stock plummeted from near $0.40, where it had been trading before the announcement, to the low 20 cent range, which created a tremendous buying opportunity. I personally nearly doubled my holdings on Thursday and Friday.

Valuation

While the Pattern deal does not provide immediate liquidity for shareholders, it does make the company much easier to value. Over the last year, investors’ biggest concern about Finavera has been the lack of financing, a problem which the Pattern deal will solve. In addition, the deal sets a price for Finavera’s project portfolio in British Colombia, to be paid when the projects reach financial close (i.e. all permits are in place and the project is ready for construction.) Bak estimates that this will be achieved for the more advanced projects in 2013, and the later projects in 2014.

Hence, Finavera should receive approximately C$40 million for its projects from Pattern before the end of 2014, in addition to C$9.3 million for reaching financial close on its Cloosh wind farm in Ireland in 2013. Offsetting this against Finavera’s existing liabilities of C$18.3 million (about C$2-3 million of which Bak says are likely to be renegotiated) we have a net cash value of Finavera at the end of 2014 of about $30 million.  This assumes that the renegotiated liabilities and the residual value of Finavera’s 10% stake in the Cloosh project mostly cover ongoing development costs. With roughly 40 million diluted shares outstanding, that places the value of a Finavera share at roughly C$0.75 at the end of 2014.

Some allowance needs to be made for the time value of money, as well as the possibility that site development will not go as smoothly as Bak expects.   If we use a 50% discount to cover that risk, we still arrive at a value of C$0.375 per share., or 67% more than the current price of C$0.225.  I expect Finavera to quickly rebound to at least the C$0.30 range over the next few days or weeks, as liquidity returns to the market, and investors revalue the stock based on the agreement with Pattern.

Update: On January 7th, Finavera announced a conference call to discuss the deal with investors and the financial community.  The call will be held on January 9th at 8am PST.

Disclosure: Long FVR

This article was first published on the author's Forbes.com blog, Green Stocks on December 30th.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

January 07, 2013

The Next Zipcar

By Jeff Siegel

Well, I was partly right..zipcar_header_logo[1].png

Last year I wrote the following about the car sharing company Zipcar (NASDAQ: ZIP):

... because Hertz and Enterprise are foaming at the mouth to tap the car sharing market, I wouldn't be surprised if one or both eventually made a bid for ZIP in a couple of years. Either way, I don't think Zipcar is under any serious threat in the near-term, and I may be looking to pick some up on dips.”

When I got to the office on Wednesday morning, I read the following headline:

Avis buying Zipcar in deal worth nearly $500 Million

OK, so I didn't nail it on which rental car behemoth would eventually acquire Zipcar — but I knew Zipcar was an early leader in a market that's destined to grow dramatically going forward, and that it was a prime target for acquisition.

Millennial Money

About six months ago, a new study was released that suggested Millennials (those born sometime between the early 1980s and the mid 2000s), had become so neutral about driving that they were starting to represent one of the many factors behind slower auto sales growth.

That particular study followed a similar survey conducted by Deloitte in 2010 which found Millennials have different attitudes towards cars (different from those shared by many generations prior), and are more likely to take public transportation, bike, walk, or utilize car sharing services like car2go and Zipcar.

If you're a regular readers of these pages, you know I've been quite bullish on the car sharing market since around 2006, and I continue to believe this is a powerful new industry with a lot of robust growth ahead of it.

In fact, a Frost and Sullivan report found that car sharing networks increased 117% between 2007 and 2009 in North America. And within five years, 4.4 million people in North America and 5.5 million people in Europe are expected to sign up for car sharing services.

Of course, I'm not suggesting car sharing services will have a massive impact on individual car sales anytime soon, if ever... although it is likely that car manufacturers offering superior fuel economy will continue to find additional buyers in car sharing companies.

The Next Zipcar

Because gas is often included with car sharing memberships, these services tend to seek out high-mpg vehicles. And increasingly, we're seeing these services focus their attention on hybrids and electric cars.

The latter made quite a spark back in March after Daimler's car2go registered 6,000 members for its electric car sharing program. Zipcar also placed some Toyota Plug-in Priuses in its Boston fleet, and recently introduced a few Chevy Volts in Chicago.

On the hybrid side, Zipcar currently has a ton of Honda Insights in its fleets, though I wouldn't be surprised to see a shift to the Prius or Ford hybrid models, now that Avis is behind the wheel. Avis currently rents the Toyota Prius and eight different Ford models. It also has no Hondas in its rental offerings.

But getting back to the recent Zipcar deal...

Avis agreed to to pay $12.25 per share to acquire the company.

That's almost a 50% premium to Zipcar's closing price the day before the deal was announced!

Those who picked up shares of ZIP near the bottom, which was around $6.00, are now sitting on gains in excess of 104%. Talk about a knockout score — and one of the fastest doubles I've ever seen inside of two months.

Not surprisingly, investors are now looking for the next Zipcar...

But unfortunately, there are none to be found. Zipcar was the only pure play on car sharing, and I don't expect to see another one again.

Zipcar boasted the lion's share of this market before the Avis deal. Now it's simply going to be unstoppable.

To a new way of life and a new generation of wealth...

To a new way of life and a new generation of wealth...

 signature

Jeff Siegel is Editor of Energy and Capital, where this article was first published.

January 06, 2013

A Clean Energy Inflection Point in 2013? The Best ETF to Play the Trend

Tom Konrad

In 2007, it seemed like clean energy was finally becoming mainstream.  Both candidates for the US Presidency accepted the need to act on global warming, even if they did not agree on the degree, and clean energy stocks were rising even faster than the broad stock market.

Then came the 2008 financial crisis, and many Americans discovered they had much more immediate worries than the slow but inexorable warming of the planet.  Fossil fuel interests and the politicians who benefited from their donations  played to the new mood by providing a worried populace with the excuse they wanted not to worry about the lumbering menace by denying it’s existence.

Always Darkest Before the Dawn

Fast forward to 2012.  Leading clean energy stock indices continued to decline while the broader market staged a recovery.  A solar company became the poster boy for why government should not meddle in the energy market (despite the reality that energy is the most-meddled-in sector of the entire economy.)  The Doha round of climate talks concluded with no progress, and only the possibility of more progress in the future.

I started writing this article on the last day of the Mayan Calendar, I recall that it always seems darkest before the dawn.  Contrarian investors also know this, and know that the best time to buy is when other investors are running in terror.  The fact that you are reading this article means that we survived the winter solstice and the end of the Mayan calender.  (Incidentally, the world also survived the much more momentous end of the entire Mayan civilization, a fact that seems lost in the apocalyptic kerfuffle.)

In this apparent darkness, my panel of green money managers finds reasons to hope for a much better 2013.  Here is what they have to say:

Garvin Jabusch: Climate Changes Get Noticed

Garvin Jabusch is cofounder and chief investment officer of Green Alpha ® Advisors, and is co-manager of the Green Alpha ® Next Economy Index, or GANEX and the Sierra Club Green Alpha PortfolioHe also authors the blog ”Green Alpha’s Next Economy.” 

Jabusch says,

[T]he green economy is finally showing signs of approaching a meaningful inflection
point into mainstream acceptance.

Sandy, in slamming into the geographical and symbolic hearts of finance and policy in this country has brought climate risks and costs into popular discussion, but even before that, there were indications of a cultural tipping point. PricewaterhouseCoopers, McKinsey, the World Bank, the National Academy, Berkshire Hathaway, the Center for American Progress and the Clinton Global Initiative (among many others) have all recently issued strongly worded statements and reports about looming climate risks and also opportunities to mitigate and adapt. This year saw polar ice and also snow reach an all time minimum, and the drought in America’s heartland has only worsened as we’ve headed into winter. For example, fully 100% of Kansas was this week named to be in at least “severe drought” stage.

All these things do not go unnoticed, and people understand the need for an economic transition to put society on a more sustainable footing more than they ever have, in spite of efforts from some quarters to convince them otherwise. Lester Brown and his team at Earth Policy Institute have we believe correctly identified the weakest link in global economics with respect to climate: food security. What this means is that there is no disambiguating the energy-water-food nexus if we want to have a thriving civilization going forward. An investment manager who works hard to identify and buy the best mitigation and adaptation solutions delivered by the smartest companies in the most profitable ways now has almost an embarrassment of options for his clients’ portfolios. A carefully selected
basket of companies across various green energy and green economy applications should have an excellent chance to provide competitive returns.

Rob Wilder: A Conservative Surprise

Dr. Rob Wilder is Index Committee Chair for WilderHill Clean Energy Index (ECO), the first to capture and track this sector.   ECO underlies the PowerShares WilderHill Clean Energy ETF (NYSE:PBW.)

Dr. Wilder thinks Jabusch could be right.  He says,

Perhaps what might truly surprise and impact clean energy stocks the most, could be Conservative Republicans beginning to embrace renewable energy. So that American patriotic, Renewable resources which give independence and free us from reliance on foreign oil, are seen as a good thing. Right now it’s this political opposition to U.S. technologies that could grow fast like American-made electric cars, solar homes and businesses, offshore wind, and energy efficiency etc has most held us back.

Break that logjam and huge progress could be unleashed. For conservatives to embrace green as good in itself, or appreciation for emerging forces like climate change and new polls showing Americans accept the science here, would be compelling because it’s such a surprise.

Jan Schalkwijk: A Year of Triage

Jan Schalkwijk, CFA is a portfolio manager with a focus on Green Economy investment strategies at JPS Global Investments in Portland, OR.

Schalkwijk takes a more nuanced view, but is still optimistic about the prospects of stronger green companies.  He predicts that 2013 will be “a year of triage,” by which he means “investors will become more discriminating in evaluating which companies are terminally ill and which have just caught the flew from exposure to their sickly brethren. … stocks with the prospect of earnings, healthy gross margins, and positive cash flow should do better than science project stocks with low quality fundamentals.”

He continues,

I think 2012 might have marked the beginning of a reversal of fortunes for some clean energy stocks and the beginning of the end for others. It is my prediction that this process of triage will build steam in 2013. If we look at how the performance of the Wilderhill Clean Energy ETF (PBW) and Market Vectors Global Alternative Energy ETF (NYSE:GEX) differed in 2012, we get a glimpse of what might lie ahead. The former fund, which has a seat for almost any publicly traded green stock, is down nearly 22% year-to-date, whereas the latter, which has size and liquidity requirements, is flat for the year. In 2011 the two funds moved down in tandem.

Schalkwijk’s ETF Pick

Schalkwijk thinks the best ETF to play the triage trend is  PowerShares Cleantech (NYSE:PZD).  He says, “Over the last 5 years, PZD has “only” lost 35% of its value vs. 85% for the WilderHill Clean Energy ETF (PBW). The Fund’s strengths are its inclusion of larger diversified industrials that are building a lot of the clean energy infrastructure (Schneider (PA:SU, OTC:SBGSF), Siemens (NYSE:SI), ABB Group (NYSE:ABB)) as well as its underweight to the more speculative corners of the cleantech and alternative energy space.”

Rafael Coven: In His Own Words

Rafael Coven is Managing Director at the Cleantech Group, and manager of the Cleantech index (^CTIUS) which underlies the Powershares Cleantech ETF (NYSE:PZD.)

Given Schalkwijk’s endorsement, it’s no surprise that he sees 2013 in a similar way.  While he picks stocks for longer than one year, he expects a “Greater focus on generating cash flow and ability to be profitable without relying on subsidies and government largess” in 2013.  He expects the overall number of cleantech companies to contract, “as the best ones continue to get snapped up by old-line industrial players that can buy cheaper than innovate.”

Conclusion

Even if politicians tackle US Fiscal Cliff and Europes ongoing woes do not lead to outright crisis, it’s almost certain that 2013 will not be a repeat of go-go years like 2006 and ’07.  Hence, while the optimists may be right that climate events will be noticed, perhaps even by conservative Republicans, even a more favorable political climate will continue to test companies’ financial strength and business models.

Hence, even a year of inflection will probably also be a year of triage.  If I had to pick an ETF to play the trend, I’d go with the one that discriminates between strong and weak cleantech companies: Coven’s PZD.

Disclosure: I have no position in the ETFs mentioned, and a long position in ABB.

This article was first published on the author's Forbes.com blog, Green Stocks on December 27th.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

2013: Green Economy Inflection Point

Garvin Jabusch

There are a few truths that make the fundamental case that investing in the emerging next economy is the clearest path to long term competitive portfolio performance. First, innovation – meaning improving economic output without increasing material or capital inputs - always wins. This is simply how capitalism works, money chasing the best ideas, and has been the basis of the industrial revolution. Second, successfully mitigating the worst effects of economically and societally disastrous climate change (that we're not already irreversibly committed to) will save enormous costs, provide generational investment opportunities and also be inestimably economically stimulative.

For over a decade now, Green Alpha cofounders Jeremy Deems and I have been wondering when popular awareness of these truths would emerge. And while I can't represent that we're there yet, I can say that we definitely are noticing a major shift in both frequency and tone of recent journalism and punditry on the subject of sustainability economics. Fellow green economist Tom Konrad got me thinking about all this when he asked me and a few other money managers for thoughts about 2013 for his Forbes piece on the subject. The more I thought about framing an answer, the more I realized how much momentum I’ve been noticing just over the last quarter or so. To give an idea of what I mean, here's a representative but far from complete list of some smart people and organizations articulating a vision of and working towards a next economy wherein society can thrive without exceeding earth's tolerances or threatening the underpinnings of the global economy. Each of these is worth delving into in its own right.

- PricewaterhouseCoopers’ November 2012 report titled “Too late for two degrees?” (N.B., 3.6 degrees Fahrenheit) states flatly that “[i]t’s time to plan for a warmer world.” Since, as they conclude, to limit warming to two degrees Celsius, the world needs to begin slowing its carbon dioxide emissions “by 5.1 percent every year from now to 2050, essentially slamming the breaks on [CO2 emissions] growth starting right now," is not going to happen, we need to take all realistic mitigation steps we can and also plan for adaptation. Coming as it does from a mainstream accounting and auditing firm with no tree hugger ax to grind, this serves as a particularly stark warning, but also signals the truly massive scale of the investment opportunity.

- The National Research Council’s report (via the National Academy) on climate change and national security, “Climate and Social Stress: Implications for Security Analysis,” released in November 2012, was “prepared at the request of the U.S. intelligence community.” It provides a clear-eyed look at economic and politico-social consequences of climate change.  It states, in part, “[a]s a practical matter, [climate change] means that significant burdens of adaptation will be imposed on all societies and that unusually severe climate perturbations will [be] encountered in some parts of the world over the next decade with an increasing frequency and severity thereafter. There is compelling reason to presume that specific failures of adaptation will occur with consequences more severe than any yet experienced, severe enough to compel more extensive international engagement than has yet been anticipated or organized.” When realized, this “more extensive international engagement” means more opportunities for companies providing solutions, and crucially, in this case, the momentum for economic transition is coming from the security and intelligence community. The more disparate the voices urging transition, the closer to popular inflection we become.

- Not to be outdone by the National Academy, the World Bank (also in November 2012) warned that in its opinion, the globe is on track for warming of four degrees Celsius (7.2 degrees Fahrenheit) if mitigation does not commence immediately. The Bank, in asserting that that kind of warming could devastate the global economy, cited in particular “Ocean Acidification,” “Heat Extremes,” “Lower agricultural yields,” and “Risks to Human Support Systems.” The Bank concludes by indicating a pressing need for “increased support for adaptation, mitigation, inclusive green growth and climate-smart development.”

- Warren Buffett’s MidAmerican Renewables has been pouring money into renewable energy projects. In addition to US$11 billion invested in renewable energies over the last year or so, MidAmerican just announced that it’s investing $2.5 billion more for a 579 Megawatt plant in Los Angeles County. As MidAmerican’s Chief Financial Officer Patrick Goodman recently said, “we believe renewables is the better investment right now.” Buffett, certainly not one to invest this kind of money for the sake of being “green,” sums up the opportunity this way: “[m]any more wind and solar projects will almost certainly follow.”

- The U.S. Department of Defense, which cares first about national security, second about costs and traditionally not much about ecology, has nevertheless put together America’s single most impressive list of renewable energy and low and zero emissions transportation initiatives. Why? As then Joint Chiefs Chairman Admiral Dennis McGinn said, “Ultimately, as we gain proficiency in generating sustainable, renewable energy sources as a nation we build national strengths and stability.” How far is the military going with these projects? “The DOD is positioned to become the single most important driver of the cleantech revolution in the United States,” according to Clint Wheelock, president of Pike Research, one of America’s leading pure research firms on the subject of renewable energy.

- The insurance industry, which ultimately has to pay every time there’s a new climate disaster, has had enough. Munich RE, a leading global reinsurer whose climate practice releases key reports on the economic risks of climate change, in October wrote (registration required), "[i]n the long term, anthropogenic climate change is believed to be a significant loss driver…It particularly affects formation of heatwaves, droughts, thunderstorms and -- in the long run -- tropical cyclone intensity."

- Reuters recently published a piece explaining “Why you need a climate change portfolio,” using the cogent argument “[w]hether you believe in man-made global warming or not, it's undeniable that trillions of dollars will be spent on technologies to address the collateral damage of climate change.” We do believe in climate change, so we think there may be reason for all those dollars to flow to the appropriate mitigation and adaptation technologies with even more velocity than Reuters may be assuming.

- 350.org’s “Fossil Free” institutional divestment campaign is, amazingly, already starting to see some traction. Really. From 350’s website: “Seattle Mayor Mike McGinn sent a letter to the city’s two chief pension funds on friday [sic], formally requesting that they ‘refrain from future investments in fossil fuel companies and begin the process of divesting our pension portfolio from those companies.’”

- Even the slow-to-change traditional investment banking industry is showing signs of tuning into reality. In a blog post on its website, the New York Times cites evidence for “A Change in the Weather on Wall Street,” largely as a result of superstorm Sandy, which impacted Wall Street directly. But in addition, “[t]he other new argument is economic. Until this year, the political calculus about climate change had only one side. The oil and coal companies made sure everyone knew about the costs of action. But few people mentioned the costs of inaction. Now they cannot be ignored.”

Public opinion has already begun to change. According to Yale University’s Public Support for Climate and Energy Policies (Nov 13, 2012) report, “A large majority of Americans (77%) say global warming should be a “very high” (18%), “high” (25%), or “medium” priority (34%) for the president and Congress. One in four (23%) say it should be a low priority.”

These are just the first few recent ‘tipping point’-like stories to come to mind. I've read dozens more examples recently, and I feel the fact that I can no longer be aware of all the evidence of inflection much less keep track of it all is surely a sign in itself.

There are several additional trends underway now that may have significant impacts on renewable energy companies and their stocks in 2013: the new, emerging ways to invest in and to monetize electric utility revenues from scale solar and wind plants, and infrastructure upgrades to accommodate a renewables-friendly distributed smart grid (especially where networks have been damaged (such as in the wake of superstorm Sandy). Each of these presents opportunities and interesting ways to invest.

For us, though, the most interesting macroeconomic trend is simply that the green economy is finally showing signs of approaching a meaningful inflection point into mainstream consciousness.   

Adding it all up, it sure seems like the time is now.

Garvin Jabusch is co-founder and chief investment officer of Green Alpha ® Advisors, and is co-manager of the Green Alpha ® Next Economy Index, or GANEX and the Sierra Club Green Alpha Portfolio. He also authors the blog “Green Alpha's Next Economy."

January 05, 2013

Last-Minute PTC Revision Sparks New Hope for Geothermal Stocks

Meg Cichon
bigstock-Geothermal-Well-3584966.jpg
Geothermal well photo via Bigstock

The renewable energy industry had quite a bit to celebrate this week as 2013 rang in a PTC extension that many had feared would never come to fruition. Though the extension to January 1, 2014 greatly benefits the wind industry, whose PTC was set to expire at the end of 2012, it also included a provision that could be huge for geothermal development. This provision states that projects under construction by January 1, 2014 would quality for the PTC, rather than the previous rule that required projects to be completed and operational.

A 2013 Development Boom

Karl Gawell, executive director of the Geothermal Energy Association (GEA) expects this provision to significantly boost U.S. geothermal development in 2013. He explained that under the previous provision, companies were already starting to back away from new developments for fear of not being able to finish a project and qualify in time. 

This fear stems from the notoriously long project development time geothermal typically faces – an average of seven years. Therefore, geothermal faces a much earlier drop-off for the PTC than other technologies, explained Paul Thomsen, director of policy and business development at ORMAT (NYSE:ORA). Though the geothermal PTC expires at the end of 2013, most developers had lost hope of taking advantage of the incentive years ago.

“The fact of the matter is with geothermal having such a long lead time, we faced that hurdle two or three years ago because as the PTC stands now, we have to have a project constructed, online, and delivering power to the grid by Dec 31st of 2013,” said Thomsen. “In the geothermal development world that is right around the corner, so people stopped drilling projects a year or two ago because they knew they couldn’t risk missing that deadline.”

But with the new provision, Gawell believes the industry will now be scrambling to get more projects qualified in 2013.

“The Geothermal Energy Association estimates that new geothermal power projects in as many as a dozen states could be stimulated to move forward this year as a result of this change,” said Gawell in a release following the decision.  “Congress’ action will spur significant new employment and sustain geothermal industry growth. Consumers and utilities will benefit, as well, because developers will have greater certainty about whether the credit will be available for their project.”

Thomsen explained that the provision is like the geothermal industry’s “fiscal cliff” – if a project can start construction and still be eligible for the tax incentive, the industry won’t fall. Projects that had previously put on the breaks can now move forward and the industry can expand and take advantage of the vast amount of resources in the U.S.

Renewable Portfolio Standard Push

While the PTC provision is a huge win for geothermal, many in the industry remain bullish on other policies and strive to set geothermal on a “level playing field” with other technologies. Thomsen said that industry advocates will continue to work with energy regulators, particularly in many Western States, to properly value geothermal energy with a focus on its inclusion in renewable portfolio standards (RPS).

Many states will soon see an increase in RPS mandates, and some, like Nevada, are starting to consider removing compliance mechanisms such as energy efficiency. These changes would create more demand for renewable energy, which is where geothermal advocates are trying to state their case: while many states have brought on wind and solar to fill the RPS, those in the geothermal industry believe that states will start to have intermittency issues. Geothermal can be brought on as a baseload power to help stabilize the grid.

“Though [other renewables] they may have gotten a leg-up on us in the past couple of years, we’re catching them. It’s like the tortoise and the hare – wind and solar raced off and created tons of projects that all delivered energy, but with no capacity,” said Thomsen. “We have been a little bit slower because we are building a project that has energy and capacity and now utilities and regulators are starting to say ‘holy cow, capacity is much more valuable to us today than energy.’”

Industry advocates will not only be fighting for a level playing field with other renewables in 2013, said Thomsen, but also for the same treatments that oil and gas companies already receive. Fossil fuels have had some of the same subsidies for more than 100 years, and they don’t expire – geothermal could take advantage of some of these provisions. For example, oil and gas can deduct their well field drilling costs from their gross revenue, explained Thomsen. There are other tax incentives that these industries get in the tax code that could benefit geothermal in reducing upfront capital costs -- a major hurdle to development. 

“We are always going to be pushing policies that create a level playing field and give us an equitable tax position so that we can compete with any technology out there,” said Thomsen. “Give us the certainty in tax provision so we can continue to develop these projects in the future.”

Consider Global Expansion 

While the U.S. geothermal industry struggles with incentives and advocating for a fair playing field, many in the industry recommend shifting some business focus overseas in 2013. Companies like TAS Energy and POWER Engineers have recently opened offices in Turkey and Africa, where development is starting to blossom at a rapid rate.  

Though it may be beneficial to roll the dice overseas, Thomsen warns that the grass isn’t always greener on the other side. While there may be action in the developing world, these countries may be just as difficult to do business in as the U.S. – companies will simply face different hurdles. While the U.S. struggles with incentives, countries like Indonesia face bankability difficulties and in Kenya, companies will be bidding for projects against government-backed companies. However, Thomsen says it is never a bad idea to have an international portfolio, but to just be aware of all possible challenges. 

“While we see the international market robust at the moment, we haven’t given up on the U.S. and we think the U.S. market can be just as robust,” says Thomsen. “It’s an ebb and flow as we go through the years.”

Meg Cichon is an Associate Editor at RenewableEnergyWorld.com, where she coordinates and edits feature stories, contributed articles, news stories, opinion pieces and blogs. She also researches and writes content for RenewableEnergyWorld.com and REW magazine, and manages REW.com social media.  Formerly, she was an Associate Editor of ideaLaunch in Boston, MA. She holds a BA in English from the University of Massachusetts and a certificate in Professional Communications: Writing from Emerson College.

This article was first published on RenewableEnergyWorld.com, and is reprinted with permission.

January 04, 2013

Wind Industry Lifeline, SunPower's Buffett Deal: The Week In Cleantech, Jan 4, 2013

Jeff Siegel

PTC Extension

It looks like the wind power tax credits survived the fiscal cliff deal. But I wouldn't get too excited. The credit was extended only for an additional year. Which, as we see time and time again does not allow for any real, long-term commitment by developers or manufacturers.

Of course, I still don't believe subsides are the best way to transition our energy economy, anyway. The truth is, decades worth of subsidies in the energy markets has never allowed for a real free market to flourish. It's why prohibitively expensive nuclear power still exists in its current form and it's why you don't pay $8.00 for a gallon of 87 octane. If you did, we wouldn't need any form of tax credit to help sell electric cars. But that's another diatribe, for another day.

In the meantime, I am happy to know that the extension of the tax credit could end up saving as many as 37,000 jobs. I just hope they're keeping their resumes fresh for next year.

Editor note: The PTC's provisions were also changed so that projects under construction in 2013 can qualify.  This change also applies to geothermal projects.  More here.

Record German Solar Installations Despite Cuts

Despite cuts to solar subsidies in Germany, German developers added a record number of solar panels in the first 11 months of last year.

Installations resulting in more than 7,200 megawatts more than doubled that which was initially targeted by the government. This is a 62 percent gain over the previous year's numbers. For the full year of 2012, installations are expected to top 8,000 megawatts.

Cuomo Boosts Energy Efficiency in New York

New York Governor Andrew Cuomo recently issued an Executive Order that directs state agencies to increase the energy efficiency of state buildings by 20 percent. The goal must be met by 2020.

The Governor also launched a new program that will use state building energy data to prioritize projects that can deliver the greatest energy savings per dollar. Those buildings that are the largest and most inefficient will be among the first to undergo energy efficiency upgrades, such as new lighting fixtures and controls, HVAC systems, electric motors and automated energy management systems.

Sunpower (NASD:SPWR) Soars on Buffett Deal

It was announced January 2nd that Warren Buffett's Berkshire Hathaway bought two solar projects from SunPower Corporation (NASDAQ:SPWR) in a deal said to be worth about $2.5 billion.

This is great news for this particular domestic solar company. As CEO Tom Werner noted, the stamp of approval from a Buffett utility combined with expected cash flow from the projects will make SunPower more bankable and more credit worthy.

Of course SunPower continues to deal with very tight margins in a very competitive space. And although the Buffett deal is a feather in its cap, SunPower is still a bit risky for me. That being said, I wish nothing but success for SunPower. At the time of this writing, SPWR is up about 34%.

Hawaii Reduces Solar Subsidies

We recently learned that the state of Hawaii is about to see a 50 percent reduction in the state's solar tax credit.

Although I don't tend to be a fan of subsidies, in Hawaii, this is really a matter of economic security.

Bottom line: With nearly all of Hawaii's power coming from diesel generators, this is just an accident waiting to happen. And if you destroy the beaches, you destroy the economy. It's that simple.

Hawaii is a treasure among treasures, and lawmakers should be doing everything possible to rapidly decrease the island's reliance on imported oil. The climate is absolutely perfect for solar, wind and geothermal, as none of this needs to be shipped in. The islands are blessed with an abundance of these resources on a daily basis.

Insurer XL Refuses to Pay For Fisker's Sandy Losses

As a result of severe flooding during Superstorm Sandy, high-end extended range electric car manufacturer Fisker Automotive lost 340 vehicles, estimated to be worth about $33 million.

The company followed up with its insurer, but word is, that insurer, XL Insurance, has denied Fisker's claim.

This is just one more headache in a long line of headaches for the automaker.

Fisker is now suing XL over the claim.

I'm not sure how this will all pan out, but certainly $33 million worth of damage to a startup electric car maker is nothing to sneeze at. You can read more here.

DISCLOSURE: No positions

Jeff Siegel is Editor of Energy and Capital, where his notes were first published.

Banks Cool on Solar, Beijing Steps In

Doug Young

A few of the latest headlines reflect a cooling appetite by banks for funding solar energy related projects, creating a worrisome vacuum that Beijing may need to fill as it seeks to stop struggling sector from sinking further still. Two of the latest such headlines look like particular cause for worry, with Canadian Solar (Nasdaq: CSIQ) taking over financial responsibility for a solar power project from one of its construction partners for unspecified reasons that I suspect are related to waning interest by banks in funding such projects. (company announcement) Another similar recent domestic media report says that a Chinese company that insures solar panel sales has just made its biggest-ever payment to JA Solar (Nasdaq: JASO) after the panel maker couldn't collect payment from one of its overseas customers. (Chinese article)

Both of these pieces of news seem to point to the fact that banks are quickly losing their appetite for funding new solar power plant construction outside China. That could lead to a rapid slowdown in the building of new projects and create even more headaches for the already oversupplied sector.

Meantime, I would be remiss not to mention the latest news from the largely insolvent LDK Solar (NYSE: LDK), whose state-led bailout and takeover has taken another step forward with the "sale" of one of its most problematic assets to what appears to be a state-run entity. (company announcement)

Let's start off this solar round-up with a look at the latest overseas-related news that may point to rapidly evaporating financing for new solar power projects in the key North American and European markets. One report has Canadian Solar, one of China's leading solar panel makers, announcing it has purchased 2 solar power projects being built in Canada by MEMC Electronic Materials' (NYSE:WFR) SunEdison division for about $38 million.

This kind of relationship has become commonplace in the sector over the last few years, with panel makers like Canadian Solar often working closely with plant builders like SunEdison to construct new projects. In these cases, the plant constructor like SunEdison obtains financing for the project, then builds the plant with panels supplied by its partner, in this case Canadian Solar. When the project is complete, the panel supplier would then typically help the constructor find a long-term buyer for the project.

But in this case, SunEdison has apparently sold the 2 projects back to Canadian Solar midway through the construction process rather than waiting for the projects to be complete, putting an unwelcome new financial burden on Canadian Solar. It's hard to know what led to this development, but I suspect that SunEdison was having trouble financing the deal, possibly due to waning interest from its local lenders.

Moving on to the JA Solar case, Chinese media are saying an insurer recently paid the company a record $5 million in compensation after an overseas buyer failed to pay for panels that it received from JA. The report doesn't contain any detail on who the buyer was or why the reason for the default, but it does point out that the market has taken a strongly negative turn recently for Chinese companies that insure overseas panel sales.

Lastly, let's take a quick look at LDK, which announced the sale of its LDK Anhui unit to a Shanghai-based company that I suspect is state owned and acting on government orders. The buyer, Shanghai Qianjiang Group, is buying LDK Anhui for 25 million yuan, even though LDK Anhui has negative net assets of $54 million, and had $485 million in outstanding bank loans.

The sale will help improve LDK's own balance sheet by relieving it of this problematic asset, as the company is slowly rescued by Beijing through this kind of state-led assistance that will ultimately see the company taken over by the government. Look for LDK's state-led bailout to continue and similar deals to follow for other panel makers, with cooling interest from foreign banks in financing solar sector projects only increasing the industry's reliance on funding from Beijing.

Bottom line: New developments indicate foreign banks may be losing their appetite for financing the struggling solar energy sector, putting an even greater onus on Beijing to bail out the industry.

Doug Young has lived and worked in China for 15 years, much of that as a journalist for Reuters writing about Chinese companies. He currently lives in Shanghai where he teaches financial journalism at Fudan University. He writes daily on his blog, Young´s China Business Blog, commenting on the latest developments at Chinese companies listed in the US, China and Hong Kong. He is also author of a new book about the media in China, The Party Line: How The Media Dictates Public Opinion in Modern China.

January 03, 2013

Improved Wind Energy Tax Credit Extension Passes with Fiscal Cliff Deal

Renewable Energy World Editors
bigstock-Offshore-Wind-Turbines-In-Port-24577481.jpg
Offshore Wind Farm photo via Bigstock.

On January 1, 2013, Congress passed legislation that included the long-sought extension of wind energy tax credits in a bill to avert the "fiscal cliff" that now moves to President Obama for his expected signature.

The extension of the production tax credit (PTC) and Investment Tax Credit (ITC) is expected to save up to 37,000 jobs and create far more over time, and to revive business at nearly 500 manufacturing facilities across the country. Wind energy PTC, and ITC for community and offshore projects, will allow continued growth of the energy source that installed the most new electrical generating capacity in America last year, according to the American Wind Energy Association (AWEA).

The version included in the deal would cover all wind projects that start construction in 2013. Companies that manufacture wind turbines and install them sought that definition to allow for the 18-24 months it takes to develop a new wind farm.

Leaders of the Senate Finance Committee included that version in a "tax extenders" package they assembled in August, which made it into the overall fiscal cliff deal that passed the Senate early Tuesday morning and the House Tuesday night. President Obama is expected to sign the bill into law swiftly.

The Energy Information Administration said that wind set a new record in 2012 by installing 44 percent of all new electrical generating capacity in America, leading the electric sector compared with 30 percent for natural gas, and lesser amounts for coal and other sources. 

However, America's wind energy workers have been living under threat of the PTC's expiration for over a year and layoffs had already begun, as companies idled factories because of a lack of orders for 2013. Uncertain federal policies have caused a "boom-bust" cycle in U.S. wind energy development for over a decade.

Half the American jobs in wind energy – 37,000 out of 75,000 – and hundreds of U.S. factories in the supply chain would have been at stake had the PTC been allowed to expire, according to a study by Navigant Consulting.

"On behalf of all the people working in wind energy manufacturing facilities, their families, and all the communities that benefit, we thank President Obama and all the Members of the House and Senate who had the foresight to extend this successful policy, so wind projects can continue to be developed in 2013 and 2014," said Denise Bode, CEO of AWEA for the past four years who recently announced that she is stepping down.

"Now we can continue to provide America with more clean, affordable, homegrown energy, and keep growing a new manufacturing sector that's now making nearly 70 percent of our wind turbines in the U.S.A.," said Rob Gramlich, who took over as AWEA's interim CEO yesterday.

About the authors: Renewable Energy World's network editors help deliver the most comprehensive news coverage of the renewable energy industries. Based in the U.S. and the UK, the team is comprised of editors from Pennwell Corporation's myriad of publications that cover renewable energy.This article was first published on RenewableenergyWorld.com and is reprinted with permission.

January 02, 2013

Year In Review: 11 Clean Energy Stocks for 2012

Tom Konrad CFA

Year In Review

For the fourth year in a row, my model portfolio of clean energy stocks has beaten the clean energy sector as a whole, this year by 23.8%.   Unfortunately, this was mostly due to another year of poor performance by my industry benchmark, the widely held Powershares Clean Energy (PBW) ETF, which lost 16.4% for the year.  My model portfolio, composed of eleven clean energy stocks listed in this article published on January 2nd, gained 7.4%, still short of the performance of the broad market, which gained 16.6%.  The general market gains also hurt a hedged version of the model portfolio, which finished the year up a paltry +0.3%.

I published my list of Ten Clean Energy Stocks for 2013 on New Year's Eve.

Detailed performance of the individual pics can be found in the chart and discussion below.
11 for 12 year end.png

Stock Notes

Waterfurnace Renewable Energy (TSX:WFI / OTC:WFIFF), +1%

Waterfurnace was basically flat for the year, with a small stock price decline offset by a healthy dividend.  The decline was mostly due to slowing sales caused by low natural gas prices, which make using the company's geothermal heat pumps less cost effective by comparison.  Waterfurnace stock is still cheap, and I expect natural gas prices to continue their recent rise, so Waterfurnace remains in the list for 2013.

Lime Energy (NASD:LIME), -82%
The big loser of the year was Lime Energy, which discovered accounting problems with revenue recognition in July.  The company's internal review is ongoing, and includes all its financial statements going back to 2008, and possibly some fictitious revenue recorded between 2010 and Q1 2012.  Although the board believed the size of the revenue misstatements to be limited to $15 million when the internal inquiry was first announced, the protracted uncertainty and a dilutive fundraising over the last six months have eviscerated the firms' stock price. 

The final results of the audit have been delayed several times, and are now expected in the first quarter of 2013.  Despite the ongoing uncertainty, the firm's shares are currently so cheap, I expect that any conclusion to the protracted process should lead to a substantial rally in the stock price, and so Lime remains in the list for 2013.

Honeywell, Inc. (NYSE:HON), +20%

Honeywell produced a respectable gain over the course of the year, and I'm dropping it from the list because several other stocks have become relatively more compelling.

Rockwool International A/S (COP:ROCK-B / OTC:RKWBF), 38%

Insulation manufacturer Rockwool produced a very healthy return over the year, but the stock's rise now leads me to conclude that it's no longer a great value, even though I appreciate the international diversification it brought to the portfolio.  I've removed Rockwool from the list for 2013, and have taken some profits on my personal stake as well.

Waste Management (NYSE:WM), 7%
Waste Management produced a modest return in 2012, and remains a good value in a cyclical business that is currently recovering.  With a healthy 4.2% dividend yield and good potential for price appreciation in 2013, WM remains in the 2013 list.

Veolia Environnement S.A. (NYSE:VE), 19%
Veolia produced a strong return in 2012 as it rebounded from a very low valuation at the start of the year, even while paying a healthy dividend.  The stock remains cheap, but I'm dropping it in 2013 in favor of even more attractive value stocks.

Accell Group (Amsterdam:ACCEL), 2%
Dutch bicycle manufacturer Accell produced a small positive return in 2012 because its large 6.9% dividend more than offset a small decline in the stock price.  The stock was hurt in 2012 by higher than expected expenses integrating its purchase of Raleigh Bicycles, but the benefits of that merger should begin to show in 2013.  Accell remains in the list for 2013.

New Flyer Industries (TSX: NFI / OTC:NFYEF), 67%
Bus manufacturer New Flyer Industries was the star performer of 2012, as the high-dividend payer recovered from a depressed valuation at the start of the year caused by a stock reorganization that saw it cut its previously unsustainable dividend in half.  (New Flyer currently yields 6.8%.)  While the dividend is still very attractive, New Flyer's potential price appreciation is much reduced, so I've dropped it from the main list but included it as an alternative pick for 2013.

Finavera Wind Energy (TSX:FVR, OTC:FNVRF), -42%
Finavera saw its stock first fall as it failed to obtain sufficient new financing to repay outstanding debts, and then rise as looked to sell first a single wind projects, and then put the whole company up for bid when the wind farm sale fell through.  On December 23rd, it announced a financing and sale of most of its wind projects which disappointed investors hoping for a clean sale.  I believe they misunderstood the value of this deal. I expect the stock to recover significantly as investors return from their holiday breaks and revalue the stock with the new deal in mind,  Needless to say, Finavera remains in the list for 2013.

Western Wind Energy (TSX-V:WND / OTC: WNDEF), +43%
Western Wind first fell and then rallied when it, too, put itself up for sale under pressure from a hedge fund and other disgruntled investors.  Shareholders have so far received an offer of C$2.50 a share, but most expect a final offer to be closer to C$3, at least if the current stock price is anything to go by.  Since most of the price appreciation from the impending sale is likely already reflected in the stock, I'm dropping the company from the list in 2013.

Alterra Power (TSX:AXY / OTC: MGMXF), +6%
I think the modest gain in Alterra's stock price does not fully reflect the value of the company or its future prospects in a climate where many new investors seem to be looking at renewable energy projects as a viable source of stable income.  Hence, Alterra remains in the list for 2012.

Conclusion

For the first time since I started publishing this annual list, I have retained more than half of the stocks into the next year.  Those that I've dropped have been mostly discarded because their gains make their new valuations less attractive, but even most of these remain in my personal portfolio.  The two big losers in the 2012 list remain in the portfolio, with Finavera in particular likely to produce outsized gains in 2013.  I only truly regret including Lime in the 2013 list, but I'm including it again because, while there are legitimate reasons to question management's behavior, I think many of these questions will be resolved in 2013.  While I think it's unlikely that holders of LIME will recoup their 2012 losses unless they greatly increase their positions, selling now seems likely to be a mistake.

We enter 2013 with a number of clouds hanging over the stock market and the world economy.  That instability holds risks for stock market investors, but it also creates great bargains for those brave enough to look for them.

DISCLOSURE: Long WFIFF, LIME, RKWBF, WM, ACCEL, NFYEF, FNVRF, WNDEF, MGMXF, VE.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

January 01, 2013

Six More Clean Energy Stocks for 2013

Tom Konrad CFA

This article is intended as a companion piece to Ten Clean Energy Stocks for 2012.

In the past, I've generally avoided illiquid stocks like Lime Energy (NASD:LIME) and PFB Corporation (TSX:PFB, OTC:PFBOF) which are included in this year's list.  The reason is simple: it's hard for all but the smallest investors to buy such stocks without significantly moving the price.  This year, I've instead chosen to publish a short list of alternative picks which readers can substitute for stocks they consider too illiquid or otherwise risky for their portfolio. 

Another advantage of this approach for smaller investors is that they can use these stocks to substitute for foreign companies that do not have a US listing, for which brokers often charge a much larger commission than they do to trade US stocks or foreign stock with an OTC ticker.  Accell Group (Amsterdam:ACCEL) is one foreign stock included in this year's list that is probably only practical to buy for larger investors.

You can, of course, use this list any way you like.  Investors looking for a more diversified portfolio might consider buying all sixteen.

My six alternative are:

Company (Ticker)
Price 12/31/12
Good substitute for
New Flyer Industries (TSX:NFI, OTC:NFYEF) $8.69
Accell, Kandi
LSB Industries (NYSE:LXU) $35.42
PFB Corp, Zoltek, Waterfurnace
Ameresco (NYSE:AMRC) $9.81
Lime Energy,  Zoltek, Maxwell
Power REIT (NYSE:PW) $9.90
Waste Management
US Geothermal (HTM) $0.362
Finavera, Alterra
Ram Power (TSX:RPG / OTC:RAMPF) $0.257
Finavera, Alterra

About the Picks

New Flyer Industries (TSX:NFI, OTC:NFYEF)
New Flyer has been in my list of annual picks more often than not because of its high yield and leading position in a very sustainable business: manufacture of heavy duty buses.  It was the star performer of the 2012 list, producing a 67% total return for the year.  While the stock was extremely depressed last year, I left it off the list because of the reduced potential for price appreciation.  However, with a yield of 6.75% and a recovering industry, it remains in my portfolio and could easily produce a respectable return in 2012.

LSB Industries (NYSE:LXU)
LSB is a manufacturer of chemicals for agriculture and mining, as well as geothermal heat pumps under its Climatemaster brand.  The chemicals business accounts for about two-thirds of revenue, and the climate control segment accounts for about one third.  

LSB's chemical business suffered an explosion and a pipe rupture at different plants last year, but the company's insurance is expected to cover the majority of the costs, including business interruption.  The work stoppages put a big dent in earnings in 2012, but the insurance proceeds will mostly be paid in 2013, giving a big boost to earnings.  I don't think the company's stock price fully reflects the expected insurance payments, making LSB an excellent buying opportunity at $34.60.

Despite my optimism about LSB's prospects for the year, there are two reasons I chose not to include it in my annual list of clean energy stocks.  First, only 1/3 or revenue comes from clean energy, and, second, because of the acquisition of a working shale gas interest in October.  Natural gas is a significant part of LSB's cost structure, and the intent of this acquisition is to create a natural hedge against rising natural gas prices.  However, LSB already has something of a natural hedge against rising gas prices in their climate control business: geothermal heat pump sales tend to be stronger when natural gas prices are high, because high natural gas prices make geothermal heating look relatively attractive.

Ameresco (NYSE:AMRC)
Ameresco is a leader in Performance Contracting: making energy efficiency and renewable energy improvements for institutions which are financed and then paid for out of the subsequent cost savings.  Ameresco's price is currently low because its earnings have been hurt among government entities which have been delaying decisions in the climate of uncertainty surrounding the fiscal cliff.  While Congress remains deadlocked as I write, Ameresco's services often help budget-constrained government entities pay for necessary improvements they otherwise would be unable to afford.  I expect the coming era of fiscal austerity will likely be improve Ameresco's long term prospects, rather than hurt them.

I chose to leave Ameresco out of this year's picks only because the price had spiked from $9.43 to $10.03 in the thin holiday market on December 28th, the day I compiled my list, and I anticipate that that spike will be reversed over the next day or two, which would be a 6% drag on the company's annual performance.  If the price had stayed near $9.50, where it had been trading over the previous few days, I would have included it in the list.

Power REIT (NYSE:PW)
Power REIT is a railroad infrastructure REIT with plans to expand into renewable energy real estate.  It's currently involved in a civil case with Norfolk Southern (NYSE:NSC) and Wheeling and Lake Erie Railroad which I discussed in detail here.  The short version is that Power REIT could collect payments worth several times its market capitalization if they win, and even if they lose on all counts, it will result in a tax write off which will allow the company to designate its current $0.40 annual dividend a return of capital (and hence tax-free to investors) for the foreseeable future.

The prospect of a tax-free dividend is enough to fully justify Power REIT's current price of slightly over $10, but it does nothing to account for the very real chance of even a partial victory in the civil case, or for the potential dividend increases which would come from its expansion plans.  I only chose to leave Power REIT out of this year's list because it is very illiquid and the timing of the resolution of the NSC case are unknown.

Ram Power (TSX:RPG / OTC:RAMPF) and US Geothermal (HTM)
Ram and US Geothermal are geothermal power developers which, after two years of declines are currently trading at very attractive valuations.  As Ram and Nevada Geothermal Power (TSX-V:NGP, OTC:NGPLF) have shown over the last two years, such companies can lose a great deal of their value from unexpected development risk.  I try to compensate for development risk by holding relatively small stakes in several renewable energy developers at once.  With only ten slots to fill in my list, I could not include these two in addition to Finavera Wind Energy (TSX-V:FVR, OTC:FNVRF) and Alterra Power (TSX:AXY, OTC:MGMXF), which are in the list this year.

Of the four, I currently consider Finavera and Alterra to be the least risky, but I think including a little Ram and US Geothermal along with Alterra and Finavera would reduce overall portfolio risk through the added diversification.

Conclusion

The abundance of great values among clean energy stocks this year bodes well for the performance of my annual model portfolio in 2013.  For the first time, it also left me with an abundance of clean energy stocks to choose from.  I hope you, my readers, will be able to use these six extra picks to build portfolios more suited to your particular needs than you might otherwise have been able to do.

DISCLOSURE: Long NFYEF, RAMPF, LXU, AMRC, PW, HTM, FNVRF, MGMXF, ACCEL, LIME, PFBOF

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.


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