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April 28, 2015

Electric Cars Will Bury Internal Combustion

By Jeff Siegel

Audi wants to save internal combustion from its ultimate demise.

This makes about as much sense as saving the typewriter.

Despite the fact that such a demise is likely many decades away anyway, the quest to “save the internal combustion engine” will ultimately result in a complete waste of time, effort and money.

But that's not stopping Audi.

Apparently, the German auto maker has been busy developing e-diesel, which is a transportation fuel that only requires two raw materials: water and carbon dioxide.

On the surface, this may sound promising. Especially after reading what Reiner Mangold, Head of Sustainable Production said regarding this new development …

In developing Audi e-diesel we are promoting another fuel based on CO2 that will allow long-distance mobility with virtually no impact on the climate.

An Exercise in Complacency

While I don't doubt Mangold's “eco” intentions, the undeniable fact is that the internal combustion engine is still an antiquated technology.

Sure, the thought of a transportation fuel that doesn't rely on oil sounds great. But the process of internal combustion itself is inferior to electric mobility.

Let us not forget that electric cars have fewer parts in comparison to internal combustion vehicles. Less “things” can break and require costly repairs. As well, there are no oil changes or regular engine maintenance required with electric cars. For the most part, it's just a battery and an electric motor. Pretty simple, really.

Of course, what I find most odd is that the process of making e-diesel seems to be much more complex, cumbersome, and costly compared to what it takes to produce electrons and use those electrons to “fuel” an electric car.

Take a look at this diagram that Audi produced to illustrate the production process …


How does that make sense when this is the future of "filling up" …


This is where Google (NASDAQ: GOOG) employees "fuel" their electric cars.  It should also be noted that this parking lot is powered by solar panels installed on the top of the carports.

Now in terms of efficiency, reliability, and design, this Tesla (NASDAQ: TSLA) electric motor ...


Is far superior to this Audi engine …


Audi should spend more time embracing the future instead of trying to hold on to it.

The truth is, we don't need better, cleaner fuels to power out internal combustion vehicles. We need to stop acting like we can't live without internal combustion. To accept such a thing is little more than an exercise in complacency and defeatism - neither of which enables pathways to prosperity.

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

April 27, 2015

Green Bond Market Heats Up After Slow Start To 2015

$7.2 billion of green bonds issued.  Market shows signs of maturity, including more currencies, and non-investment grade bonds.  Emerging market green bonds are ramping up, while green munis are booming.

by Tess Olsen-Rong, Climate Bonds Market Analyst

The first three months of 2015 (Q1) have seen 44 green bond deals totalling $7.2bn of issuance. After relatively low issuance in January the amount of green bonds issued has been climbing each month, with March three times bigger than January. This year will be the biggest year ever for green bonds: there’s a healthy pipeline of bonds in the works and we expect Q3 and Q4 in particular to be strong in the lead up to the UN COP.

From a slow Q1 2015 start green bond issuance is climbing

To grow a deep and liquid green bond market we need to not only scale issuance but we also need diversification of currency and ratings. This was starting to show in Q1 with 11 different currencies and ratings ranging from AAA to B-.

The big story in Q1 was the growing interest in green bonds in emerging markets shown by the increasing commentary on potential green bonds from the Middle East, China and South Asia. However, it was India who made the headlines, with the first Indian green bond issued in February.

The US municipal green bond market continued to grow with water and green buildings dominating the use of proceeds. One big difference between US municipal green bonds and other green bonds, however, is the low uptake in second opinions: none of the Q1 green muni issuances chose to get a second opinion.

Finally, if you think the role of the development banks in the green bonds is petering out, think again! In addition to contributing with benchmark issuances, many are increasingly supporting the green bond market through more specialised issuances in different currencies and structures, as well as on the investment side of the market.

Emerging markets: India’s first two green bonds, beating China to the punch

Low-carbon and climate resilient finance needs to grow fast in emerging markets with huge levels of investment required by 2050. The good news is that green bonds offer a potential solution. We had thought that China would be first of the largest emerging economies to enter the green bond market, but India beat them to the punch with a corporate green bond from Yes Bank. The INR 10bn ($161.5m) bond will finance renewable energy projects.

Hot on the heels of Yes Bank was the Export Import Bank of India, with a larger $500m green bond. The bond will finance renewable energy and low carbon transport projects – although not in India, but in neighbouring Bangladesh and Sri Lanka. Policy support for the low-carbon transition may have been influential in encouraging these Indian green bonds: India has a target of creating 165 gigawatts of new renewables by 2022. According to Yes Bank, $70bn of debt investment is required to achieve this goal – meaning ample opportunities for green bonds! After some lobbying, the Indian government has become supportive of the use of green bonds as a tool to meet India’s green financing needs; they have apparently been asking Indian Government agencies and development banks to start issuing green bonds. Expect to see more of green bonds out of India this year.

But let’s not forget about China. We now expect the first Chinese green bond mid-year, heralding a rush of green issuance.

Currency diversity allows more investors to gain exposure in green bonds

Green bonds need to be available in a range of currencies to give a wide range of investors the opportunity to invest. The bulk of green issuance continues to be in USD and EUR, but the development banks have been increasingly issuing smaller green bonds in a range of currencies including Turkish Lira, Brazilian Reals and Indian Rupees — in Q1 green bonds were issued in 11 different currencies. Australian investors were also able to buy the KfW’s Kangaroo green bond in local Aussie dollars, which proved incredibly popular. Outside of the development banks, some corporates also appealed to local investors, such as the Wallenstam and Vasakronan green bonds in Swedish Kronor. Creating a deep and liquid green bond market requires currency diversity and in the past three months we’ve started to see that.

Green bonds were issued across 11 different currencies in Q1 2015 showing the growing depth in the market – however the USD and EUR issuance continued to dominate

Non-investment grade: Greater diversity as green bonds move down the ratings

We’ve also seen more high-yield bonds in the market — another important indicator of depth. Two of the largest green bonds (Terraform’s and Paprec’s) in the first quarter were non-investment grade; and they came from different types of issuers, respectively a yieldco and a corporate.

Terraform Power Operating (BB-) yieldco hit the market early in January with a sizeable $800m green bond to finance the acquisition of renewable energy assets. The bond followed the successful yieldco green bonds last year from NRG Yield and Abengoa Greenfield. French recycling company Paprec then issued its inaugural bond; a whopping (EUR 480m) $523m bond split across two tranches of EUR 185m/$201m (B-) and EUR 295/$321 (B+).

US munis ramp up issuance, but stay clear of second opinions, leaving green credentials more difficult to determine

Four US states saw green bond issuance during Q1: Washington (Tacoma), Massachusetts, Arizona and Indiana. Proceeds from the green muni bonds are funding a wide range of projects, but are mainly centred on clean water and low-carbon buildings.

The State of Indiana joined Chicago and Iowa in issuing a green water bond; in fact, they did two separate green water bonds within a month. Now, the green credentials of a water bond can be a tricky subject: for example, if the investments funded involve long-term water infrastructure, has exposure to physical climate change impacts and the necessary adaptation measures been accounted for? What is the energy intensity, and therefore emissions impact, of the water infrastructure (this can be very high)? Clean water provision that involves building infrastructure that ignores expected changes to rainfall patterns and intensity is frankly foolish – yet still all-too common. Ditto investments that rely on increased energy when other options are available, like demand management.

To be confident a water investment will deliver positive environmental benefits, investors need to have access to this kind of information. We saw an important recognition of this issue in the recent update of the Green Bond Principles when the water category was changed from ‘clean and drinking’ water to ‘sustainable’ water. Now we need more detailed criteria and an independent review model breaking into the green water municipal markets.

There’s also a growing trend amongst US universities to follow in the footsteps of MIT in refinancing their low-carbon buildings through green bond issuance. This quarter, both the University of Virginia and Arizona State University jumped on the bandwagon with a $97.7m and $182m issuance, respectively. Great news – but similar to the green muni water bonds, we‘d like to see an independent review of these bonds or at least a commitment to improve and report on the buildings’ energy efficiency during the tenor of the bonds.

US munis have tended to avoid independent review, and their dominance in Q1, along with some un-reviewed Indian issuance, has meant more than half the Q1 bonds were un-reviewed

Development Banks: Playing from both sides by providing issuance and investment in green bonds, as well as pushing the envelope on reporting frameworks

Development banks have continued to hold their dominant market position in Q1 2015. They maintained a 46.2% share of total issuance - the same as their 2014 share. Development banks continue to be green bond pioneers, and are now finding ways to support the market other than simply issuing large USD denominated green bonds. For example, this quarter KfW – already a repeat green bond issuer - announced it would also participate in the market on the asset side of the business and invest in a broad range of green bonds through a EUR 1bn green bond portfolio. Similarly, IFC, the private sector arm of the World Bank, supported emerging market issuance by committing $50m of cornerstone investment to India’s first green bond from Yes Bank.

Q1 2015 green bonds have been issued by a variety of types of issuers

The development banks also continued to provide demonstration issuance and liquidity through benchmark-sized issuance. The World Bank issued both its largest-ever green bond of $600m and its longest dated green bond (40yr) in the same week, yet again proving its strength as a green bond powerhouse.

The development banks are pushing the envelope on green bond processes as well; for example, the EIB launched an upgraded green bond impact report in late March. Development bank reporting practices, however, are costly. Lower costs will be needed for the corporate green bond sector to grow, plus some levels of disclosure are difficult, such as when a bank is including in it’s green bond pool syndicated loans that are subject to confidentiality clauses in the syndication contracts. We believe that clear standards around green assets and around reporting methodologies, combined with audit-style certification, can keep the cost of verification suitably low while still providing confidence in the green credentials of a bond.

Energy and low-carbon buildings account for the largest share of use of proceeds of Q1 green bonds

To provide an indication of the types of projects to be financed by the Q1 2015 crop of green bonds we split the proceeds of each issuance into the declared eligible green project categories and pooled together. On first glance it shows that renewable energy is the biggest proportion, with the top three biggest bonds of the quarter — Terraform Power Operating, World Bank and Vestas — all financing renewables.

Proceeds from Q1 2015 green bond issuance have gone to a range of project types

Green buildings and water are the second and third biggest categories, largely through US green munis. Transport appeared largely because the EXIM of India bond finances rail and bus transport as well as renewable energy.

Investor interest in green bonds remains high, even as they become more vocal on expectations of green

It’s no surprise to close followers of the green bond market that the investor appetite for green bonds has continued in Q1 2015. This shows through in the upsizing of green bonds as a result of strong demand –the World Bank’s retail green bond in January, for example, was upsized from $15 to $91m; KfW’s kanga green bond intended to be AUD 300m ended up ballooning to AUD 600m; and Yes Bank doubled its green offering from INR 5bn to INR 10bn ($161.5m).

Another indicator is the continued high levels of oversubscription. An example from Q1 is the latest Kommunalbanken Norway’s (KBN) green bond issued in March, which received $700m orders for a $500m issue. Of course, oversubscription is a common feature of bond issuances generally in the current market environment; but green bonds seem to be seeing higher rates of oversubscription than non-green ones.

A more diverse set of investors are getting involved in the green bond market. There have been many public commitments over the quarter to invest in green bonds including €1bn from Deutsche Bank treasury – in addition to the mentioned EUR 1bn commitment from KfW. The number of green bond funds/mandates are also growing: during the first quarter Swedish insurance company SPP announced a green bond fund following in the footsteps of Nikko Asset Management, BlackRock, State Street, Calvert and Shelton Capital Management. Plus Norwegian investment powerhouse Norges Bank Investment Management (with over $800bn of assets under management) also disclosed it has established a green bonds mandate.

Investors are also becoming more involved in structuring green bond products to fit their specific requirements. For example, the World Bank issued a green bond with longer tenor of 30year ($34m) specifically for Zurich Insurance, who wanted to match long-term liabilities with a green bond. Partnerships such as this will be important as demonstration issuances to show off green bonds in new markets.

Another development is the launch of an investor statement of expectations for the green bond market from a group of key green bond investors, brought together by Ceres Investor Network on Climate Risk. The investors’ main ask is for greater transparency and reporting, especially quantitative reporting where possible, on the green credentials and impacts of green bonds. The report states: “this will minimise ‘greenwash’ concerns and reputation risk to issuers and investors”. The 26 signatory investors are: Addenda Capital, Allianz SE, AXA Group & AXA IM, BlackRock, Boston Common AM, Breckinridge, CalPERS, CalSTRS, Colonial First State, Community Capital Management, Connecticut Retirement Plans, Retirement System of the State of Rhode Island, Everence, Mirova, NY State Comptroller Thomas P. DiNapoli, North Carolina Retirement System, Pax World Investments, PIMCO, RBC Global Asset Management, Standish Mellon Asset Management, California State Treasurer John Chiang, Trillium Asset Management, UN Joint Staff Pension Fund, University of California, Walden Asset Management and Zurich Insurance.


So, interesting start to 2015 — slowish start but the market is now heating up, and growing both in size and diversity. We expect strong growth in Q2 and we’re not the only ones expecting 2015 to be a big year: In Q1 we have seen S&P forecasting $30bn of corporate issuance alone in 2015; SEB is predicting the total 2015 issuance to reach $70bn and Bloomberg’s Michael Liebreich said in New York last week they are expecting $80bn. The race is on!

There were $60bn of green bonds outstanding at the end of March 2015

——— Tess Olsen-Rong is a market analyst at the Climate Bonds Initiative, an "investor-focused" not-for-profit promoting long-term debt models to fund a rapid, global transition to a low-carbon economy. 

April 24, 2015

Alternative Energy Stock Returns, Past and Future

By Harris Roen

Alternative energy became a serious market player after the turn of the millennium. Since that time, solar, wind, smart grid and other alternative energy stocks have experienced both strong up and down trends. The forces at work driving these markets are complex, counterintuitive, and sometimes mysterious. This article looks at what has been driving the price of alternative energy markets, and as a result, alternative energy company stocks. Looking ahead, we will also consider what should affect the direction of alternative energy stock prices.

Past trends in Alternative Energy Stocks


The Wilder Hill New Global Index (NEX) is a fitting proxy to track overall alternative energy markets. This index contains companies that “focus on generation and use of cleaner energy, conservation and efficiency, and advancing renewable energy generally.” The chart at right shows some of the clear trends the alternative energy sector has had in the recent past.

The first down channel on the chart coincides with a general stock market slump. This drop started during the eight month recession which began in March 2001.

By 2003, alternative energy stocks started to turn around. This marked the beginning of a fantastic five year run, as investors started noticing wind power and photovoltaics were becoming economically viable alternatives to traditional electric generation. Annualized returns in this five year period averaged a remarkable 38%!

The Great Recession then hit in December 2007, just as alternative energy stocks appeared to be ascending into nosebleed territory. As a result, prices came crashing down a painful 71% in about a year. This outstripped the distressing declines the stock market in general had at that time.

After this crash, no clear trend emerged until the end of 2012, when the next up-channel started. At that time, investors felt that alternative energy stock prices better reflected the economic realities of the underlying business, and started buying again. There is likely another reason, though, that it took five years for alternative energy markets to recover. Psychologically, after getting severely burned in the crash of 2008, it took a long time for investors to feel comfortable dipping their toes back in the water.

Following the uptrend that went from 2012 to the beginning of 2014, there was a noteworthy giveback. The NEX fell 21% in about nine and a half months. Much of that giveback has been regained. It remains to be seen if the current trend will continue to be positive, or if we have entered into a sideways market.

Do Fossil Fuel Prices Drive Alternative Energy Markets?

Are fossil fuel prices the main driver of failure or success of green energy companies? Though this seems like a reasonable theory, the answer, in my analysis, is that it depends.

Alternative Energy versus Oil

oil_altenergyMost of the larger alternative energy stocks are multinational corporations that are part of an international economy. As a comparison, crude oil prices are good indicator of global fossil fuel values. Oil is a worldwide commodity that can more easily flow to markets than coal or natural gas. The latter two fossil fuels are subject to local supplies and disruptions, so prices can range widely by region.

The chart at right shows crude oil (Cushing OK spot) as compared to the NEX over two time periods. From 2001 to 2009, oil and alternative energy prices were very strongly linked. For you math wonks, the two had a correlation coefficient of 0.87, which is extremely significant. This makes sense, since a rise in oil prices would mean that other energy alternatives become more attractive. From 2010 to the present, the NEX had a slight negative correlation to oil prices. The two markets did not exactly go in opposite directions, but they had virtually no corresponding movement.

oil_S&P_02A further reason for the 2002-2009 correlation is that the economy was humming along very well at that time. This helped fuel investor optimism that the market would continue to grow for solar, wind, and the like. Similarly, oil became a strong proxy for the stock market at that time, as speculators started investing heavily in oil. They believed that as the global economy expanded, there would be more demand for oil, thus raising the prospects for oil prices. In essence, oil became a proxy for the stock market.

The correlation between oil and the stock market remained strong for a decade, but finally started to diverge at the end of 2013. Since then there has been a strong negative correlation.

oil_S&P_divergOil prices are now being affected more by supply and demand. Much of this has to do with the North American oil and natural gas boom, which is injecting an abundance of supply right where it is being used. This not only tips the supply/demand equation by reducing U.S. oil imports, but also mitigates the fear that oil prices will skyrocket when a crisis crops up in the Middle East. For this reason, I expect any rise in oil prices going forward will positively affect alternative energy stocks.

Alternative Energy versus Natural Gas


Often, the decline in alternative energy electricity generators such as wind and solar has been attributed a drop in natural gas prices. There is a correlation between the two, though it is not as strong as one might think.

The charts at right show natural gas (Henry Hub LA spot) compared to the NEX. There is a clearly a correlation between the two, though it is somewhat weak. It is also interesting to note that at starting around 2015, there was a divergence between natural gas prices and the NEX.

Prospects for Alternative Energy Stocks

Though no one can tell with certainty where alternative energy stocks will head in the future, there are factors that can shed some light on the long-term prospects for this sector. These include increased manufacturing efficiencies, financial innovations and energy policy.


Much of what many alternative energy companies do is similar to tech sector stocks. As product design and production engineering keeps improving, manufacturing efficiency can greatly help a company’s bottom line. Whether its photovoltaics, LED lighting or wind arrays, the cost of production continues to drop for green economy companies. This trend shows no signs of abating, which bodes well for alternative energy investors.

Financial Innovations

The alternative energy sector has profited greatly from new and innovative financial models. Companies like SolarCity (SCTY) and SunPower (SPWR) have benefited from various financial arrangements that allow consumers to install solar with no upfront costs. These include lease arrangements, power buyback agreements, and securitization of tax benefits.

Another innovative financial model to benefit alternative energy is the advent of renewable YieldCo’s. These are companies that bundle solar and wind generating assets into predictable cash flows that are paid out in dividends. This innovation allows green investors can choose from several companies with strong yield attributes.

Investors love dividends, especially in this low interest rate environment. Any added yield an investor can put in their portfolios is of great value. YieldCo’s should continue to attract investors and lead to higher stock prices.

These types of financial innovation reflect a maturing of the alternative energy sector, which I see as a good sign. As long as these products have strong fiscal underpinnings, the prospects for long-term growth remain healthy.

Energy Policy

Because of the public good that results from reduced fossil fuel use, alternative energy has benefitted from government policies supporting the industry. Indeed, targets and incentives remain strong internationally, particularly in Europe and Asia. These regions and others continue to be serious in their commitment to solar, wind, energy storage, efficiency and other alternative energy strategies. Domestically, there are two important policy developments to watch, one a carrot and one a stick.

The first important domestic incentive is the Business Energy Investment Tax Credit (ITC). The ITC rebates up to 30% for solar, fuel cells, wind, combined heat and power (CHP) and geothermal. This incentive is scheduled to sunset at the end of 2016. Whether it gets renewed or not will affect the rate at which renewable projects go forward. This will cause concern for investors.

The second policy development is the Clean Power Plan. These proposed rules from the EPA target pollution reduction from power plants, and will have a vast affect on how energy gets produced and consumed in the country. Essentially each state has an emission target, which will force it to find ways to reduce carbon emissions. There has been some strong pushback from many states, especially those heavily reliant on coal for production electricity. The rule making process will likely take a few years and several court cases to resolve, but if the Clean Power Plan remains mostly intact, it will accelerate renewable energy projects in a big way.


By keeping an eye to the ground on fossil fuel prices, energy policies and other factors, investors can go far to understanding prospects for alternative energy stocks. There will undoubtedly be up and down swings ahead, but there are enough positives underlying the sector that we remain bullish for the long-term.


Individuals involved with the Roen Financial Report and Swiftwood Press LLC do not own or control shares of any companies mentioned in this article. It is also 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.

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

April 23, 2015

Power REIT Loses; What Now?

Tom Konrad CFA

On April 22nd, the court ruled against Power REIT (NYSE:PW) in the summary judgement phase of its litigation with Norfolk Southern Corp (NYSE:NSC) and Wheeling and Lake Erie Railroad (WLE).  At issue were if NSC and WLE were in default on a lease of 112 miles of track, and a number of claims surrounding the lease, and if they owed Power REIT's legal fees under the lease.

Had power REIT prevailed on any of a number of counts, it could have been worth as much as $15 dollars a share to Power REIT shareholders. 

As it is, Power REIT still has the option to appeal, and there are a couple of claims against Power REIT which will need to be decided in a status conference scheduled by the court on April 29th, or at trial.  These remaining claims regard whether Power REIT acted improperly when it reorganized itself into a holding company which owns its predecessor entity, the Pittsburgh & West Virginia Railway.  According to David Lesser, Power REIT's CEO, NSC and WLE have said in court that it is impossible to show financial harm because of these claims, and so I expect them to be settled or dropped at the at the status conference, unless Power REIT decides to appeal.

Grounds For Appeal?

I found the ruling shocking in that I did not expect much at all to be decided in summary judgement.  While I thought many of Power REITs claims were weak, I thought others (such as default under the books and records clause of the lease, and the payment of legal fees) were quite strong.  Another investor who has read the judgement told me he was "Truly shocked how one sided this went through, not that it matters but makes me wonder if [the] judge [was] corrupted or biased somehow."

To me, the ruling seemed very biased as well, and I'm sure it seemed so to Lesser, judging from a short conversation with him.  He felt the judge had gone far beyond the bounds of summary judgment, and was even creating new rights under the lease where none had existed before.

I don't know if any of this constitutes grounds for appeal, but I am confident that if PW were to appeal, NSC and WLE would again fight the appeal vigorously, and the company could easily be left to pay even more legal bills than it has to now.  Whatever the grounds, I don't think such an appeal would be a cost-effective way to create value for shareholders.

Valuing the Remains

Due to a very timely note from another investor who had seen the ruling before I did, I was able to sell all of the client holdings of PW in accounts I manage, but I did not have time to sell my own before the stock fell below $8 and began to plummet. Shortly thereafter, trading was halted, and Power REIT made a press regarding the ruling.

When the market opens Thursday, the only remaining questions  are if Power REIT will appeal, and what the stock worth now.  Since I don't think an appeal would be in shareholders' interests, and Lesser is the largest shareholder, an appeal seems unlikely.  Hence, I will focus on the remaining value.  This ruling means that the company will be able to write off (for tax purposes) the $16.6 million value of a "Settlement Account" under the lease because the account is essentially un-collectible.  This write-off allows the next $16.6 million worth of dividends on Power REIT's common and Preferred stock to be taxed as return of capital rather than income. 

The common stock does not currently pay a dividend, while the preferred stock pays a 7.75% annual dividend based on its $25 par value, or $1.875 per preferred share annually.  Power REIT's most recent shareholder update puts Funds From Operations (FFO) available to pay dividends on both classes of stock at $1.260 million annually (slide 18).  $260 thousand of this is needed to pay annual dividends on $3.5 million of preferred stock, with the remaining $1 million available to pay the legal expenses which are the majority of the accounts payable at $1.260 million.  Approximately five quarters of free cash flow will be needed for accounts payable before the dividend on the common stock can be resumed. 

There are currently 1.7 million shares outstanding, which will probably grow as the company continues to pay stock based compensation.  Let us assume conservatively that Power REIT resumes its dividend in late 2016, at which time it has 1.8 million common shares outstanding.  Then FFO per share would be $0.56, easily sufficient to resume its former $0.40 annual dividend, while retaining significant capital to fund future growth.  This dividend would now be categorized as return of capital, so shareholders would not have to pay taxes on it until they sold the stock, when it would be taxed as capital gains (usually at a much more favorable rate than income.)  PW could choose to pay a higher dividend, but given its plans to rapidly expand its renewable energy holdings, I would expect it to retain some capital for growth.  At any reasonable dividend rate, the tax write-off is large enough to ensure all dividends count as return of capital for well over a decade.

A 5-6% dividend yield seems reasonable for a tiny, but growing, REIT like PW, depending on how much investors value the tax advantages of the dividend and the growth prospects.  A 6% yield would put PW $6.67 per share in late 2016, a 5% dividend would put the stock at $8 per share.  Discounting that by 20% to account for the one to two year wait for the dividend to resume, I see the company's shares to be worth between $5.30 and $6.70 per share.


There are a number of possible upsides to this estimate.  On page 19 of the same investor presentation, the company valued its assets based on discount rates currently being paid on the open market for similar assets.  The jewel in the crown is the railroad lease, which has similar cash flow characteristics as a perpetual bond from NSC.  Valued at the 4% discount rate NSC pays on long term debt, the lease is worth $13.21 per share.  At a more conservative 6% which I think PW might be able to get if it sold the lease to the highest bidder, it's still worth $8.80 per share.  Such a sale would do a lot to increase the current stock price by allowing Power REIT to repay its most expensive debt and/or pay legal bills and resume the dividend sooner.

The end of the litigation might also solve the problem of expensive debt by making banks more willing to provide financing with the perceived risks of the lawsuit are gone.  Refinancing existing debt at a lower rate could immediately free up cash flow to reduce accounts payable and resume the dividend sooner, possibly at a higher rate.

Without the distraction of  the lawsuit, Power REIT could continue the process of turning itself into a yieldco by buying land under solar and wind parks with mostly debt financing.  Given the large tax advantages of its REIT structure combined with the return of capital treatment of its distributions for years to come, it might be able to resume and begin to grow its dividend much more quickly than I outlined above.


At $6.33 a share, where PW closed on the day of the summary judgment, the company falls within the range of fair value based on when I would expect it to resume its dividend.  As the market adjusts to the new reality, look for buying opportunities below $5, or chances to sell if it quickly advances above $7 without news (such as a refinancing of debt) which has the potential to increase cash flow.

To me, the preferred stock, PW-PA seems like a much more attractive proposition.  Power REIT has plenty of cash flow to continue paying the preferred dividend, and now that dividend will be categorized as return of capital for the foreseeable future.  Even if the preferred dividend were to be suspended, it would have to be paid in arrears before the common dividend was resumed.

 Disclosure: Long PW, PW.PR.A.

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.

April 22, 2015

The Cost Of 'Free Solar'

by Paula Mints

Economic theory holds that when a good is provided it must be paid for and that the value for that good will be set by a dance between the sellers and buyers in a market. It is assumed that when the price is too high buyers will back away and the price will adjust. When the price is too low sellers will fail to make sufficient margin to continue producing the good and the price will adjust. And finally, when the price is just right, equilibrium will be achieved and buyers and sellers will be content. This economic theory has chugged along since way back to, and even before, Adam Smith wrote The Wealth of Nations.

The economic theories found in The Wealth of Nations, specifically the invisible hand theory, have been used and misused for decades to prove countless points. This has essentially resulted in breathtaking economic roller coasters that all assume some version of the-market-knows-best and that rational behavior will arise from what is a market free-for-all.    

In the PV industry, equilibrium price is not the goal.  Instead, prices for cells and modules are never low enough and the need for sellers to make a profit sufficient to support their business is often ignored. The global PV industry has long been haunted by expectations of rapid and consistent price declines as well as the belief that progress in terms of efficiency increases and stringent quality control can co-exist with low to negative margins. 

Misunderstandings concerning the variable nature of inputs (raw materials and consumables) as well as the cost of labor are the basis of most learning curves.  The celebration of low prices for cells, modules and systems are the basis of most company failures. The hourly cost of labor decreases only when you use less of it, while wages should and do rise so that the people producing and eventually buying products are afforded the opportunity to engage in the buying/selling dance.

Historically PV industry pricing has not been cost-based. In fact, there have been long stretches of PV industry history during which manufacturers priced technology at or below the cost of production. The current situation of low ASPs for PV technology is an example of aggressive pricing strategy, also serving as an example of how destructive this strategy can be when practiced in an industry where demand is incentive-driven.

Figure 1 details PV module costs, prices, shipments and the ASP/cost delta from 1974 through 2014.

PV 1974-1984.png 84-94 PV 1994-2004.png PV 2004-2014.png

Figure 1: PV Costs, ASPs and Shipments, 1974-2014.

With the considerable amount of confusing pricing information currently being repeated in the market, it is important to remember that prices for re-sold manufacturer- and demand-side inventory should not be confused with the average price of technology to the first buyer, nor should they be taken to represent progress. 

The secondary market is the buying and selling of PV modules through distributors and retailers. The distributors and retailers may buy at the large quantity rate and resell this product on the secondary market to smaller participants.  Distributors and retailers also resell inventory.  This group takes a margin based on the current market situation.

Figure 2 offers PV cell/module revenues and ASPs from 2002 through 2014.

revs v ASPs  

Figure 2: PV Cell/Module APS and Revenues 2002-2014

The Invasion of Free Solar

Marketing slogans — catch phrases developed to sieze the buying public’s imagination — should not be mistaken for truth, wisdom or anything other than the means to sell a product or service. 

Currently popular among residential solar lease providers, the term “free solar” refers to the ability to have a PV system installed at a homeowner’s domicile without the homeowner paying for the installation.  This means that the installation charge is avoided up front and applied to the back end.  That is, the installation cost is recouped over time by the lease provider via the monthly rental of the installation and the annual escalation of the initial monthly lease payment.  Typically ~3 percent, the escalation charge means that eventually the lifetime cost of leasing the PV system will be greater than the cost of buying the installation at a reasonable (and static) interest rate. 

All buyers of all economic strata seek the best deal and the best deal is free. That "free" is an illusion is not the point.  A free good can come at the cost of quality meaning that a poorly functioning free good will likely cost more in repairs and eventual replacement than a good that is acquired at a price that approaches its true value. A price set at free obscures the cost of developing the good or service and creates the illusion that the research, development, manufacturing and selling of the good was, in the worst case, free itself. 

An offer of free solar commoditizes the residential installation, shores up the assumption that the cost of manufacturing a PV panel is approaching zero and undermines the true value of owning a residential PV system.

The true value of owning a residential PV system, aside from the benefits to the environment, is energy independence on a personal level.  Never mind (for a moment) the ongoing attacks directed at net metering from utilities, an appropriately sized PV system gives the electricity consumer control over how much electricity is bought from the utility at retail rates.  Pardon the pun, but there is a power switch from the utility as electricity landlord to the end user — and this is where it should be. Leasing a residential PV system does not imbue the lessee with the same power; simply put, it means that the electricity lessee potentially serves two masters, the utility and the solar lease company.  

The true value of independence is obscured and the value of the product (PV generated electricity) is undervalued.  This is not what Adam Smith meant by the invisible hand.  In the case of the solar lease, the invisible hand would seem to be implying that the value of the PV installation is zero. 

The marketing phrase "free solar" undermines the true value of personal energy independence, obscures the true costs and benefits of PV system ownership, shores up false expectations of ever cheaper PV modules and installations, and undercuts the need of an innovative industry to continue innovating by eviscerating the revenue stream that pays for research and development, not to mention, strategic planning, marketing and sales.

Paula Mints is founder of SPV Market Research, a classic solar market research practice focused on gathering data through primary research and providing analyses of the global solar industry.  You can find her on Twitter @PaulaMints1 and read her blog here.
This article was originally published on RenewableEnergyWorld.com, and is republished with permission.

April 21, 2015

Chinese Solar Blows Hot and Cold

Doug Young

Bottom line: Solar products maker Tianwei is likely to get a government bailout before it defaults on an upcoming bond payment, while a massive 2 GW solar farm being built by a new private equity fund is likely to get completed.

Two solar news items are drawing attention to both the opportunities and challenges facing this increasingly schizophrenic sector in China. A new mega-project is spotlighting the huge opportunities for new construction in the space, with word that a recently launched private equity fund plans to build a massive solar farm with a whopping 2 gigawatts of capacity. But big challenges are also apparent in another story, which says mid-sized player Baoding Tianwei is on the cusp of defaulting on a bond interest payment as it faces a cash crunch due to falling prices.

These 2 phenomena aren’t completely separate or contradictory, and in some ways even have their roots in a common origin. That origin dates back a decade ago when China embarked on a campaign to build up its solar panel manufacturing sector, in a bid to move up the value chain from its traditional strength in lower-tech products like textiles. But it created a huge oversupply of production capacity as a result of that push, and is now trying to absorb some of the excess output through a campaign to build new solar farms at home.

The massive overbuilding of manufacturing capacity sent the sector into a downturn that has dragged on for much of the last 3 years, and is directly responsible for the crisis now facing Baoding Tianwei, a maker of traditional transformers that more recently moved into the solar business. According to the latest reports, Tianwei has announced that due to huge losses from its solar business, it may not be able to make an interest payment that comes due this Tuesday on corporate debt issued in 2011. (Chinese article)

The company reported a massive loss of 10.14 billion yuan ($1.6 billion) last year, which makes it understandable why it might have other priorities besides making this particular interest payment. Its total debt at the end of last year stood at 21 billion yuan, far higher than its total assets of 13 billion yuan.

Companies like Tianwei flocked to solar manufacturing after Beijing made development of the sector a priority, and are now paying the price in the form of massive debt from big investments they made at that time. Another solar company, Chaori Solar, looked set to become the first solar player that might default on debt last year, but was bailed out at the last minute by state-run entities, almost certainly acting under government orders. (previous post)

Media are speculating that the government may be tiring of bailing out a growing number of debt-burden companies, and that Tianwei could stand at the forefront of a new wave of defaults for China’s corporate debt market. It may be too early yet to forecast such a default wave, and I expect we’ll probably see another bail-out for Tianwei even if it initially misses the interest payment. But eventually the debt load will become too much for Beijing to bail out, and we may see many of these mid-tier companies default.

Meantime, another media report is saying that China Minsheng Investment Corp (CMIC), a recently formed private equity firm backed by the entrepreneurial Minsheng Bank (HKEx: 1988; Shanghai: 600016), is preparing to build a massive 2 gigawatt solar farm with an investment of 15 billion yuan. (Chinese article) To put that in perspective, China was on track to build about 10 gigawatts of capacity last year, and was aiming to have 35 gigawatts by the end of this year — a goal that looks nearly impossible to reach.

If the project is really built, it would be the world’s largest solar farm in a single location, according to the reports. The plant would be built in interior Ningxia province, in a massive area being developed specifically for solar farms. CMIC was officially launched last August with initial capital of 50 billion yuan, and said at the time that solar power was going to be one of its main focuses. (previous post)

I have quite a bit of respect for CMIC, as many of its executives are entrepreneurs with strong track records and good financial sense. What’s more, this project is being built in an area specifically being developed for solar farms, meaning logistical issues like grid connections shouldn’t present major problems. Accordingly, I do expect this project will probably get built, though it’s unlikely to provide enough support to save struggling companies like Tianwei.

Doug Young has lived and worked in China for 16 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.

April 20, 2015

Investing in German Wind Power

By Jeff Siegel

When it comes to understanding the EU, I'm not the brightest star in the sky.

And to be honest, after stumbling down a rabbit hole of proposals, directorates, and laws on the European Commission's website, I was even worse shape than before I started.

The European Commission is the EU's executive body that represents the interests of the EU as a whole. And just yesterday it made a decision that will result in a huge boost for wind energy in Germany.

Germany's 7 Gigawatts are Coming

So as many in the renewable energy game know, following the Fukushima disaster, Germany decided it wanted to put the kibosh on its fleet of nuclear power plants. In its place, the Germans would build out their wind energy capacity to make up most of the difference.

This is actually a pretty lofty goal, and of course it was heavily criticized by nuclear apologists and fossil fuel-powered knuckle-draggers. But you know, Germans tend to be a pretty industrious group of people, so I've never doubted their ability to get this done.

What I didn't realize, however, was that because the investment necessary for this wind energy development was so massive – about 30 billion euros – the European Commission would have to ensure that it didn't violate any state rules.

Yesterday we got word that the Commission has given Germany the go-ahead to proceed.

Here's a clip from the Commissions press release on the matter …

Brussels, 16 April 2015

The European Commission has found that German plans to support the building of 20 offshore wind farms are in line with EU state aid rules. Seventeen wind farms will be located in the North Sea and three in the Baltic Sea. The Commission concluded that the project would further EU energy and environmental objectives without unduly distorting competition in the Single Market.

In October 2014 Germany notified plans to support the construction and operation of several offshore wind farms. Aid would be granted to operators in the form of a premium paid on top of the market price for electricity.

The size of each wind farm ranges from 252 megawatt (MW) to 688 MW and, in total, the projects will make available up to 7 gigawatt (GW) of renewable energy generation capacity. The total investment costs amount to € 29.3 billion. All wind farms are planned to start producing electricity by the end of 2019 at the latest. In total, they are expected to generate 28 terawatt-hours (TWh) of renewable electricity per year amounting to almost 13% of Germany's 2020 scenario for renewable energy given in the National Renewable Energy Action Plan (NREAP).

The Commission assessed the projects under its Guidelines on State aid for environmental protection and energy that entered into force in July 2014 The Commission found that the projects contribute to reaching Germany's 2020 targets for renewable energy without unduly distorting competition in the single market. In particular, the Commission verified that the state aid is limited to what is necessary to realising the investment. The rates of return that investors would achieve thanks to the premium were limited to what is necessary to implement each project and in line with rates previously approved by the Commission for similar projects. The Commission also took into consideration that these projects will enable new electricity providers to enter the German generation market. This will have a positive effect on competition.

Now Siemens (OTCBB: SIEGY) is the king of the castle when it comes to offshore wind turbines in Germany. Sadly, in the U.S., it only trades on the pink sheets now. But hardcore renewable energy investors are rarely scared off by pink sheets. Particularly pink sheets with market caps of $94 billion, like Siemens.

Of course, with such a huge undertaking – about 7 gigawatts of wind power – this will only add further momentum to the wind industry in general. Certainly GE (NYSE: GE), Vestas (OTCBB: VWDRY), and ABB (NYSE: ABB) will enjoy some residual momentum. Rising tides to indeed lift all boats.

Of course, with the Dow down about 325 points right now, I suspect few investors are too giddy over this news. But looking at this development from a long-term perspective, yesterday's announcement from the European Commission was a pretty big deal, and we'll be wise to invest accordingly.

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

April 14, 2015

The (Spend)thrifty Ways of Capstone Turbine

by Debra Fiakas CFA

Last week Capstone Turbine (CPST:  Nasdaq) announced changes around the table in its boardroom, bragging of the costs savings it can achieve.  Capstone is a well established manufacturer of microturbines used in power generation.  The company claims over 8,000 of its turbines are in use around the world.   Despite the clear footprint in the wind power market, Capstone needs to achieve efficiency.  Sales of its turbines totaled $122 million in the twelve months ending December 2014.  Unfortunately, the period ended with a net loss of $20.6 million or $0.06 per share.

The solution, decided the top minds at Capstone, is to ‘reorganize’ and along the way cut executive compensation costs.  Edward Reich, who has been with the company since 2005 and the chief financial officer since 2008, will be leaving the company.  The CFO seat will now be occupied by Jayme Brooks, who has been the chief accounting officer and also serves as Vice President of Finance.  Brooks joined the company at the same time as Reich and has actually served in the past as interim CFO.  She will retain the position of chief accounting officer and assume the role of chief financial officer.

The expected savings in salary, benefits, bonuses and travel costs are estimated to be $2 million per year.  One man leaves a company and operating costs are reduced by 5%!  Reich’s compensation totaled $485,873 in fiscal year 2014.  Investors are left to conclude that the rest of the savings must be coming from reduced benefits, travel and other costs associated with keeping Reich on as CFO.  For every $1.00 the company paid Reich in salary and bonuses, it spent another $3.00 on benefits and travel.

The announcement has focused a bright light on Capstone’s compensation practices. Is Capstone spending more on leadership than is justified by its size?  If Reich’s departure tells shareholders nothing else it reveals that Capstone spends quite lavishly on benefits and travel for its leadership that is not otherwise reported in detail to shareholders.

In the year 2014, total compensation for the top four executives at Capstone was $2.3 million, including salary, stock and option awards and non-equity incentives.  The company reported a total of $2.1 million in stock compensation in the year 2014, for all recipients, but I estimate non-cash option and stock awards were near $978,000 for the four top positions.  If the information we get from the Reich departure is a valid measuring stick, then shareholders can conclude that the company spent another $6 million on benefits and travel for this bunch.

There is more than extravagant spending that captured my attention in this story.  Jayme Brooks, the new CFO is obviously capable of handling the position.  However, she is going to continue in her capacity as chief accounting officer as well, which means she will be doing two jobs for the price of one.  For Brooks’ sake I hope Capstone at least gave her a raise of some kind.  As these things go, shareholders should not be surprised if Brooks is expected to do the job of two for far less than what Reich was being paid.   Reich is leaving now, but shareholders should be wondering what it was that Reich was doing at Capstone to justify spending $2 million for his compensation and various accoutrements.  Apparently, he is easily replaced by a professional who can do his work and her own together.

Anyone who owns shares in Capstone Turbine has to be pleased with the efforts to reduce costs.  The stock closed at the end of last trading last week at $0.62 per share.  That may appear egregiously undervalued for a company that is expected to deliver over $150 million in sales in the current fiscal year.  However, traders might be applying a discount for the company’s spendthrift management.   

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.

April 13, 2015

EPA Agrees To Timeline For Ethanol And Advanced Biofuel Targets Through 2016

Jim Lane

rp_epa.jpgProposed consent decree offers timelines for ethanol, advanced fuels through 2016, biobased diesel through 2017.

In Washington, the EPA released a proposed consent decree in litigation brought against EPA by, the American Petroleum Institute (API) and the American Fuel and Petrochemical Manufacturers (AFPM), that would establish the following schedule for issuing Renewable Fuel Standards for 2014 and 2015:

•By June 1, the agency will propose volume requirements for 2015;

•By November 30, EPA will finalize volume requirements for 2014 and 2015 and resolve a pending waiver petition for 2014.

Outside the scope of the consent decree, EPA also commits to:

•Propose the RFS volume requirements for 2016 by June 1, and finalize them by November 30;

•Propose and finalize the RFS biomass-based diesel volume requirement for 2017 on the same schedule; and

•Re-propose volume requirements for 2014, by June 1, that reflect the volumes of renewable fuel that were actually used in 2014.

EPA intends to issue a Federal Register Notice allowing the public an opportunity to comment on the proposed consent decree.

Reaction from stakeholders

Tom Buis, CEO, Growth Energy

“I am pleased to hear that the EPA has finally put a process in place to establish some certainty for biofuel producers with the recent announcement of the timeline for the proposed 2015 RVO rule by June 1st as well as the final 2014 and 2015 volume obligations by November 30, 2015.

“Our producers have faced ambiguity for too long and today is welcome news that they are establishing a level of certainty with this announcement. However, far more important than timing is that that the EPA establishes a final rule that moves our industry forward, and reflects the bipartisan vision Congress intended for the RFS.

“Additionally, while not part of the consent decree, we are pleased to see that the EPA has committed to finalizing the 2016 RFS RVO numbers this year as well. By taking this action, they are ensuring that the RFS is back on a path to certainty for the biofuels industry, providing the necessary guidance for the industry to continue to thrive and advance alternative fuel options for American consumers.”

Brooke Coleman, executive director, Advanced Ethanol Council

“The scheduling agreement between the oil industry and EPA is actually a good signal for the advanced biofuels industry because it lays out a time frame and a reasonable market expectation for resolving the regulatory uncertainty around the RFS. Now that we have a better idea of when it will happen, we look forward to working with EPA to make sure that the new RFS proposal supports the commercial deployment of advanced biofuels as called for by Congress. We were encouraged by EPA’s decision late last year to pull a problematic 2014 proposal, and we are optimistic that EPA will make the necessary adjustments and put the RFS back on track going forward.”

Brent Erickson, executive vice president, BIO’s Industrial & Environmental Section

“To continue making visible progress in commercializing advanced biofuels, our member companies need stable policy. The changes EPA proposed in 2013 to the Renewable Fuel Standard program and the delay in taking final action on the rule have chilled investment in advanced biofuels, even as the first companies began to successfully prove this technology at commercial scale.

“Today, EPA has set out a timeline to get this program back on track. The agency must take strong action to reverse the damaging proposal to change the methodology of the program in order to comply with the requirements of the RFS.”

The Bottom Line

Good news, indeed, some degree of policy certainty on 2014 volumes, which will be finalized on the basis of produced volumes, and in terms of timelines for 2015, 2016 and even parts of 2017.

As BIO points out, there’s not much in the agreement as proposed that addresses how the methodology problems will be resolved that caused the EPA’s delay in the first place.

And a comment period is shortly underway, and if reaction to the 2013 EPA proposal on 2014 volumes is any indidation, large numbers of comments can be expected and, to the extent that those comments derailed the 2014 proposals, may be expected to be given great weight.

The complete proposed consent degree can be viewed here.

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.

April 10, 2015

Making Residual Value Real: Where is Solar’s Emilio Estevez?

by Colin Murchie

Seeking Solars' Emilio Estevez
It is no secret that costs of capital must decrease to make distributed generation a massively scaling resource. And, as costs of capital steadily decrease, the “residual value” – what happens to the asset once the PPA has run out – becomes more and more important. With that in mind, it no longer seems reasonable to fill the years after the PPA’s expiration – with a row of zeros on the pro forma. There is residual value there that is often ignored.

Customers and investors often assume a negative residual value – that the panels will need to be removed at end of term at some significant net cost. In fact, there’s been a recent trend in public RFPs in particular to require a reserve or bond for same. The effect of these requirements is to raise the cost of solar to the customer – they’re buying pricey insurance against the exceedingly unlikely event that the panels will need to be removed.

Clearly, there is not agreement on the ability to monetize an out of term or defaulted asset. It’s in this kind of situation that our thoughts must inevitably turn to Emilio Estevez.

How Emilio Estevez Relates to Solar

In the 1984 classic Repo Man*, Emilio’s character, Otto, works as – we’ll call him a facilitator to lower costs of capital in the secured asset finance market – and “stumbles into a world of wackiness as a result.” Emilio’s work represents something critically missing from the solar industry as a whole – a robust, standard, and low-friction set of secondary industries that permit off-contract or out-of-contract assets to be monetized.

So how do we capture this real value? There’s a few means of approaching it, of radically different levels of sophistication. To illustrate this point, let’s look at an end-of-term 1MW system today and see what cash they’d generate to the hopeful PPA provider (or creditor) in three different scenarios below, presuming an active Emilio working on behalf of the hopeful investor or developer:.

Scenario One: The Renewal – $130,000 / MW / yr

In the first and most simple scenario, the developer may leave the system in place and encourage the customer to renew or extend their PPA contract at the then-prevailing PPA price. Most PPAs explicitly contemplate this one way or another. In fact, Job #1 of SolarCity’s (SCTY) investor relations team is probably convincing the public that their 50,000+ PPA customers will extend or renew their contracts in an exchange for just a 10% discount of their then-applicable contract rate. Presuming a system in the Maryland area might enjoy a 10 – 20% discount to retail rates – from say $.13/kWh to $.10/kWh - a 1MW system so renewed could add $130,000 in annual revenue.

To be clear, the level of assumption in this number makes it much more debatable than the others; it’s more of an equity valuation assumption than a valid underwriting one. Customers at end of term will have some amount of leverage – roughly, the amount of space between the discounted cash flow in the fully loaded “Repo” model and whatever Emilio charges the developer. (This probably contributes to the significant spread between Solar City’s market price and its analyst valuation targets.)

Scenario Two: The Repo- $40,000 / MW / yr

In our second scenario, at the end of the contract term, a customer stops paying their PPA contract, and Emilio comes by to repossess the system, and then plant the modules on the cheap land next to the junkyard and tow lot, selling the resulting electricity is sold at a wholesale price. Solar panels are not perishable items (as a sort of party trick, John Perlin will happily produce from his briefcase and produce a 40+ year old and entirely functional mini-module). Even though a 20-year old panel will have significantly degraded performance, its value is much higher than zero.

Imagine a boneyard of more – or – less matched panels, placed on string inverters and some sort of highly undesirable land. On an 8,760 hour adjusted basis, a brand new 1MW system airdropped into the PJM market would earn something like $56,250 / year in pure wholesale revenue; an end of life system panel operating at perhaps 80% of initial output should still garner north of $40,000– more than $50,000 if PJM doesn’t make its proposed disastrous modifications to the wholesale market. That’s revenue that could be reliably expected to increase in future (and while the ITC would be long gone, the new owner would be able to restart depreciation on their purchase price).

Of course, someone would still need to erect racking and string inverters, plant hedges around the motley array, handle wholesale market scheduling, feed the Doberman, etc. But these are (mostly) fixed startup costs associated with the single facility; the marginal MW still makes a great deal of sense.

In sum, solar still has the potential to generate significant value, even if the modules are removed from the roof after the expiration of the PPA.

Scenario 3: Scrap Cars Hauled for Free? One-time payment of ~$30 – 50,000 / MW

Even if Emilio decides to just take the modules to the scrapyard after removing them from a customer’s roof at the end of the contract, even the scrap steel in a typical ground mount array (roughly 275,000 lb / MW**) would fetch $30 – $50,000 / MW in today’s market. This is enough to pay for three month’s work by four construction laborers, some 15 x 30 yard dumpsters for the (nonhazardous) panels, and a fair amount of grass seed. Customers anxious about removal or restoration of the system should just preserve the right to an abandoned system; escrowing funds for what should be a positive-cash flow removal just increases end user PPAs to insure against an unrealistic risk.

Why You Should Pay Attention to the Residual Value of Solar

Solar is still in the early days of project finance; while some of its supporting and secondary industries are robust and well established, others do not yet exist. But, it is still possible and desirable to make end of life assumptions that are empirical, conservative, defensible, and which make a real impact on project economics – and another horizon of opportunity for solar support businesses.

As the weighted age of end of term assets increases, the opportunity to build a business in the space becomes more concrete. (Consider – some of SunEdison’s first PPAs have already hit their first customer buyout eligibility dates.)

*We will not for the purposes of this metaphor be discussing the inferior 2010 Jude Law vehicle.

** Approximately 2,500 lb. of steel including piles to support a 5 x 6 module array of ~ 7.5 kW; 133 such subassemblies in 1 MW, at conservatively just <$.12 / lb scrap prices for SAE 3xx stainless steel as of April 2015 would be $40,000; purlins and other components would be seperateable, higher quality stainless components – thanks to MJ Shiao of Greentech Media for some thinking here.


Colin Murchie is Director of Project Finance at Sol Systems, a solar energy finance and investment firm. The company has facilitated financing for 180MW of distributed generation solar projects on behalf of Fortune 100 corporations, insurance companies, utilities, banks, family offices, and individuals. Sol Systems provides secure, sustainable investment opportunities to investor clients, and sophisticated project financing solutions to developers. The company’s tailored financial services range from tax structured investments and project acquisition, to debt financing and SREC portfolio management.

April 09, 2015

Orion Energy Systems: Seeing The Light

by Debra Fiakas CFA

On Monday Orion Energy Systems (OESX:  NYSE) issued a press release to reiterate previous guidance for sales in the quarter ending March 2015.  Given that the quarter has already ended, it is more like a pre-announcement of results than guidance.  At any rate management has indicated the results, when finally reported will bring sales for the fiscal year ending March 2015, to some point in a range of $72 million to $74 million.

The announcement might not be so much motivated by a need to assure shareholders of financial performance, as much as it created another opportunity to drill home points about the company’s evolving business model.  Orion Energy Systems used to be described as a power technology company.  Today management skips all the high brow language about technology and points directly to the only technology it has been able to turn into a product.  So now management is describing Orion as a “producer of energy-efficient LED lighting for residential and commercial applications.”

The press release might have been regarded as a bit redundant given that Orion management has had plenty of opportunities to give its pitch to investors during the company’s recent road show.  In late February 2015, Orion raised $19.1 million by selling 5.5 million shares of its common stock at $3.50 per share.

It is relatively easy to undertake due diligence on Orion and its market opportunity .  Test out a few LED lights on your own.  Most hardware stores have a selection on display.  Statistica offers a few details on the market for LED lights, suggesting LED now accounts for a 53% share.  Manufacturing efficiency is expected to lead to selling price reductions, helping to drive market share to over 60% within the next five years.

Orion Energy Systems is operating in a strong market, but its stock has gone through a period of trading weakness beginning right about the time management began that road show period.  The stock was left looking quite oversold until the offering closed.  Indeed, while management was out pounding the pavement with its efficient-lighting story, the stock registered a particularly bearish formation in a point and figure chart called a ‘double bottom breakdown.’  Yes, that technical indicator is just as scary as it sounds and this one suggested the stock had developed such a negative momentum it could drop to zero.

Now it appears OESX has begun a recovery.  Still it is possible to buy a growing company at a compelling price  -  even more compelling than the price paid by an entire group of investors who heard the company’s ‘lighting’ pitch first hand.

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.

April 08, 2015

OriginOil Renames Product - Will It Help The Business?

by Debra Fiakas CFA

Mid-March 2014, OriginOil, Inc. (OOIL:  OTC/QB) relaunched its waste water treatment process for shale gas producers.  The company’s CLEAN-FRAC and CLEAN-FRAC PRIME products are now called OriginClear Petro.  OriginOil is expanding into the industrial and agricultural waste water treatment markets using the product name OriginClear Waste. 

The company has been toiling away since 2007 perfecting its “Electro Water Separation” process that uses electrical impulses in a series of steps to disinfect and separate organic contaminants in waste water.    In June 2014, OriginOil management declared its development stage completed and start of full commercial operations.  In the months since the company has issued a series of product announcements:  in June 2014, CLEAN-FRAC to clean up water used in oil and gas production in June 2014, In February 2015, Smart Algae Harvester to enhance algae production, and in early March 2015, CLEAN-FRAC PRIME for treatment of hydraulic fracturing flowback water.

The oil and gas industry has been a prime target market for OriginOil technologies since it can take eight to ten gallons of water to produce one barrel of oil.  However, OriginOil sales personnel are calling on shale gas producers in the U.S. at a time when the entire industry is under pressure from exceptionally low world oil prices.  Crude is trading near $49.00 per barrel.  OriginOil claims its OriginClear Petro solution can save the shale oil producer more than $4.00 per barrel in production costs.

OriginOil is not the only company out pitching a fracking water solution to oil patch engineers.  GreenHunter Resources, Inc. (GRH:  NYSE) offers a portfolio of oilfield fluid management solutions, providing clean water supplies and foul water disposal.  An even more formidable competitor is Ecolab, Inc. (ECL:  NYSE), a provider of water treatment, sanitizing and cleaning solutions for industry, energy and petrochemical sectors around the world.  Then there are a swarm of other smaller contestants with a cornucopia of solutions.  Oasys Water, Inc. provides forward osmosis desalination services to shale gas producers to recycle water and reduce waste water for disposal.  Desalination is also in the service menu of Altela, Inc., which has patented a process that relies on evaporation accelerated by a solar concentrator to mimic the natural hydrologic cycle.

There are dozens of other providers just like these with one kind of solution or another.  It is hard to stand out in the crowd.   OriginOil management is hoping a refined sales pitch with a new name will make a difference.  Fortunately, any incremental sales will be meaningful.
OriginOil has reached commercial stage just like its press release claimed almost a year ago.  In the twelve months ending September 2014, OriginOil had reported only $166,200 in sales.  The company used $4.9 million in that period to support operations, leaving only a half million in cash on the balance sheet.

In October 2014, after the company’s last financial report OriginOil signed a $1.4 million order from oil services provider Gulf Energy LLC for a CLEAN-FRAC system, now called OriginClear Petro.  Gulf Energy has a growing customer base of oil and gas producers in the Middle East and North Africa.  The fourth quarter and year-end 2014 report should show a much improved top-line.

OriginOil needs many more customers like Gulf Energy  -  and a bit of magic.  It seems management is relying on a name change to work a bit of magic in the market place.  Investors apparently are not expecting a bunny to jump out of the OriginOil hat.  The company’s stock has been on a steady decline since the company went public in 2007.   The stock is now trading at seven pennies per share, which is a price that barely qualifies as an option on management’s ability to execute on company’s strategic plan.  Even the string of new product announcements and the Gulf Energy order have not been enough to excite investors.

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.

April 07, 2015

Green Mutual Funds and ETFs Show Signs of Life in 2015

By Harris Roen

Alternative Energy Mutual Fund Recovering

Alternative Energy Mutual Fund Returns

Alternative energy mutual funds are continuing to recover from a slump which started in fall 2014. Annual returns range greatly, though, from a high of 15.6% for Brown Advisory Sustainable Growth (BIAWX), to a low of -15.8% for Guinness Atkinson Alternative Energy (GAAEX). The large 12-month drop by GAAEX was precipitated by painful losses in some of its top weighted holdings…

Alternative Energy ETFs Remain Volitile

Alternative Energy ETF Returns

Green ETFs are showing a wide variety of returns, reflecting the volatility of the renewable energy sector. Less than 20% of ETFs have had gains in the past 12 months, with returns ranging from a gain of 28.5% for iPath Global Carbon ETN (GRN), to a loss of -48.1% for First Trust ISE-Revere Natural Gas Index Fund (FCG). ETFs have fared much better over the past three months. A little more than half of the funds ended in the black, averaging a gain of 3.8%…


Individuals involved with the Roen Financial Report and Swiftwood Press LLC do not own or control shares of any companies mentioned in this article. It is also 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.

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

April 06, 2015

Bank of America's call on Tesla is Foolish

Tesla's "Long Shot" Could be a Game-Changer

By Jeff Siegel

TESLABOA“It's a long shot at best.”

That's what Bank of America analyst John Lovallo recently said regarding Tesla's new stationary battery packs being designed for individual homes.

While we know Lovallo is incredibly bearish on Tesla (NASDAQ: TSLA) – locking in a sell rating and a $65 price target on the stock – he is right. Such an ambitious goal is a long shot. But you know what else is a long shot? The existence of a superior electric car that can travel 200 miles on a single charge. Oh, wait. No, that's not a long shot, anymore. It actually exists. It's called the Tesla Model S, and it's received some of the highest ratings of any vehicle – internal combustion or electric – ever offered.

I'm not saying to run out and buy shares of Tesla, but this negative attitude of crapping all over anything that even remotely smells like a long shot bores me. Why reach for the stars when you can just sit in a comfy chair and cradle your nuts?

Instead of burying our heads in the sands of disbelief, maybe we should consider rooting for the guy that's looking to make the world a better place.

Although I understand Lovallo's analysis, it stinks of the same kind of pessimism we've seen in the past regarding other game-changing technologies that ultimately proved to be grand slams. Here are some of my favorites …

History is full of bad calls

This telephone has too many shortcomings to be seriously considered as a practical form of communication. – Western Union internal memo, 1878.

Radio has no future. - Lord Kelvin, British mathematician and physicist, 1897.

[Television] won't be able to hold on to any market it captures after the first six months. People will soon get tired of staring at a plywood box every night. - Darryl Zanuck, head of 20th Century Fox, 1946.

Rail travel at high speed is not possible because passengers, unable to breathe, would die of asphyxia. - Dr. Dionysus Lardner, Professor of Natural Philosophy and Astronomy at University College, London, 1823.

Airplanes are interesting toys but of no military value. - Marshall Ferdinand Foch, French military strategist, 1911.

There is no reason for any individual to have a computer in their home. Kenneth Olsen, president and founder of Digital Equipment Corporation, 1977.

I don't know what the outcome will be with Tesla's new stationary battery. But what I do know is that if it does prove successful, Tesla will rapidly become one of the most profitable companies on the planet. And I'm rooting for Elon Musk all the way. Anything less would be an act of defeatism, and quite frankly, just uncivilized.

And by the way, any individual who can build a re-usable rocket and a top-notch electric car that can travel in excess of 200 miles per charge can probably figure out how to build a stationary battery pack for somebody's house. Think about it.


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

April 05, 2015

More Gevolution

Jim Lane

gevolution-2014The results from Gevo’s (GEVO) 4th quarter are in, and a worth a look-see, not only for fans of isobutanol and its prospects.

Also for a look at how this member of the 2010-12 IPO group of companies is crossing the multiple Valleys of Death that have arrayed before it.

In the fourth quarter of 2014, Gevo continued to progress the commercial operation of isobutanol at Luverne under the Side-by-Side mode of production (SBS), meeting its stated milestone in December 2014 of producing greater than 50K gallons of isobutanol in one month. This achievement, Gevo notes, “was a result of the introduction of Gevo’s second-generation yeast biocatalyst at the plant, as well as significant process improvements learned by Gevo since switching the plant to SBS production earlier in 2014.”

The good news there is well highlighted by Gevo. We’ll note that, ultimately, the Luverne facility has a 15 million gallon or so theoretucal capacity for isobutanol, based on the guidance we’ve had from experts over the years. Right now, one production train out of four is engaged in isobutanol, so the company could be producing at a 200K gallon/month rate, or 2.4M gallons per year. So. there’s a ways to go.

Where do you get in the end?

Gevo says: “The data generated at the Luverne plant and in the labs in Denver continues to support ultimate, optimized isobutanol production costs that would support EBITDA margins for isobutanol of $0.50-$1.00 per gallon. In the fourth quarter, Praj Industries, a global leader in process engineering and equipment manufacturing for the ethanol and brewing industries, conducted extensive due diligence at the Luverne plant, and has confirmed these cost projections.”

And it’s worth noting that Praj subsequently signed a memorandum of understanding (MOU) wherein Praj will undertake to license up to 250 million gallons of isobutanol capacity for sugar-based ethanol plants over the next ten years — so, that’s a pretty strong affirmative although 10 years could be read as “not tomorrow, bub.”

The licensing expands

After a long couple of years of optimization, Gevo’s focus has turned decisively towards licensing. In addition to the Praj MOU, Gevo signed a letter of intent (LOI) in the fourth quarter to license its technology to Highland EnviroFuels’ sugar cane and sweet sorghum project based in Florida. These supplement the LOIs that were previously entered into with IGPC Ethanol Inc.based in Canada, and Porta Hnos S.A. based in Argentina.

What’s the conversion rate of LOIs and MOUs into actual biding agreements that will be inked in 2015. Gevo says it is is targeting “at least one licensee” this year.

Expanding partner set, especially in fuels

In Q4, Gevo highlighted partenrships with Brenntag Canada, who began sales of isobutanol to the specialty chemical markets, and Gulf Racing Fuels who have introduced isobutanol for use in off-road applications, including sales to retail consumers through NAPA Auto Parts in North Dakota.

The testing was performed in collaboration with the National Marine Manufacturers Association, the American Boat and Yacht Council and several engine and boat manufacturers across the industry, and was also supported by The US Department of Energy, the Office of Energy Efficiency and Renewable Energy and Argonne National Laboratory.

Expanding product set

Gevo announced the introduction of a new technology it has developed to convert ethanol into a tailored mix of end-products, including propylene and renewable hydrogen. “Preliminary technical and economic analyses indicate that the products, sourced from renewable feedstock, would be cost competitive with traditional petrochemical approaches,” we

Partnership we didn’t hear as much about

The Coca-Cola partnership, subject of a paraxylene pilot in Texas — nary a reference to Coca-Cola in the latest word from Camp Gevo.


You can’t sell a fuel if it’s not registered and certified. How’s it going there? “Gevo anticipates achieving both ASTM and MIL-SPEC certifications for its jet fuel in 2015,” which it says “would help accelerate the commercial adoption of Gevo’s product in both the commercial and military jet markets,” and there’s no disagreement there, although any expectations on specific volumes and timings for those segments should be marked “speculative grade” for the moment.

Plus, a consortium of “leading organizations from the recreational marine industry” announced the completion of more than four years of testing of Gevo’s isobutanol for use in boat engines, and gave isobutanol a thumbs-up.

Capital calls

Speaking of “gas in the tank” how much does Gevo have?

The company “Ended the fourth quarter with cash and cash equivalents of $6.4 million,” had Q4 revenues of “as compared to $1.7 million for Q4 2013. No doubt there are going to have to be more debt-raising or equity-raising activities, and relatively soon, with a net loss of $11M for Q4.

“The conversion of alcohols to hydrocarbons is also generating significant interest from potential strategic investors,” noted Gevo CEO, Pat Gruber, perhaps tipping the direction the company will take for capital raising. “The ability to produce cost competitive renewable propylene, which is used in a multitude of consumer products, as well as renewable hydrogen, have been “holy grails” of the bio-based economy. We believe that we have an effective proprietary technology to do this based on feedback from partners and potential strategic investors.” he added.

Jeffrey Osborne at Cowen & Co writes: “Gevo’s revenue ramp continued in 4Q14, bolstered by Side-by-Side operations at the Luverne facility. Management focused on ethanol production at the plant to generate additional cash. Isobutanol production continues on a limited basis to support and seed customer demand as well as validate the technology. Looking forward, Isobutanol licensing could be an important revenue stream for Gevo.”

Osborne also noted that “Ethanol production at the Luverne facility is generating the cash flows necessary to support the business as isobutanol continues to mature… [and] the isobutanol produced at the Luverne facility helps not only to meet existing customer demand, but also increases the products visibility and seeds new markets.”

Three good items in Gevo’s favor, in Osborne’s analysis. An enterprise value of $62M vs market cap of $37M, suggesting that Gevo is substantially undervalued. Net debt is shown at zero. and short interest at a not-so-high 6.5%.

The final word

We’ll give the final word to Praj CEO Prahmod Chaudhari, who says:

“Praj has conducted significant diligence on Gevo’s corn starch-based isobutanol technology and we believe in the technology. Isobutanol has a substantial market opportunity given that isobutanol is a high performance biofuel that can solve many of the issues of 1st generation biofuels. It also enables a true biorefinery model wherein a number of specialty chemicals and bio-products can be produced using isobutanol as a feedstock. We look forward to creating a new opportunity for 1st generation sugar-based ethanol plant owners, as well as accelerating the use of 2nd generation cellulosic feedstocks to produce isobutanol.”

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.

April 03, 2015

The Tesla Home Battery Pack Will Change The World

By Jeff Siegel

On the 30th of April, everything is going to change...


Because Elon Musk says so.

OK, maybe he didn't actually say that, but he did recently reveal that on April 30th, he'll be making a major announcement about a new product that is NOT an electric car.

Most analysts have suggested that the announcement is regarding the release of what could ultimately be a game-changer for the solar industry — a game-changer that, if it delivers the way the Tesla Model S has delivered on performance, design, and efficiency, could catapult Tesla (NASD:TSLA) into one of the most powerful companies in the world.

Because if this product release is what so many Elon Musk worshipers expect it to be, Tesla could actually end up being the biggest energy company on the planet. Bigger than GE, Duke Energy, and Exelon combined.

That's not to say these companies would go belly-up anytime soon. But their death knells will be ringing.

Like a Piece of Art

Here's the tweet Musk put out on Monday:


Following this announcement, Tesla jumped about 3%.

Now check out what Musk said during an earnings conference call last month:

We're going to unveil the Tesla home battery, the consumer battery that would be for use in people’s houses or businesses, fairly soon. We have the design done, and it should start going into production in about six months or so. We probably got a date to have sort of product unveiling, it’s probably in the next month or two.

Now, I suppose there are any number of applications for a home battery that could run your entire house for days at a time. But mark my words: This is aimed at the solar market, which is growing like a beautiful, unstoppable weed.


Although solar can save you a boatload of cash over the life of the system, in most cases it's still tied to the grid. This means that if the grid goes down, your power still goes out.

But what if you could harness that power during the day, then utilize that power after the sun goes down?

Essentially, with such a system, your utility would become superfluous.

Now, it's not as if this option doesn't exist now. But in order to store your own power, you need lots of batteries and lots of storage space. It's very expensive, not particularly efficient, and aesthetically offensive.pvstorage

But the way Musk describes it, the new Tesla home battery pack would be similar to the Model S pack: something flat, five inches off the wall, wall-mounted, with a beautiful cover, an integrated bi-directional inverter, and plug and play. This is a far cry from what you see to the right.

I can just imagine something attached to a wall, almost like a piece of art. Because that's how Musk thinks.

But forget the aesthetics for a moment. Think about what this would do to the solar industry.

All of a sudden, all those people with solar, or about to go solar, can disconnect from the grid. They can turn their homes into their own power plants. This is huge, and solar providers would have one more selling point to offer customers. A big selling point!

I suspect SolarCity (NASDAQ: SCTY) would benefit first, as the company is genetically tied to Tesla. The company's CEO, Lyndon Rive, is Elon Musk's cousin, and Musk himself is the chairman of SolarCity.

But this is good all around, as any solar producer would see yet another increase in consumer demand. SunPower (NASDAQ: SPWR), First Solar (NASDAQ: FSLR), and SunEdison (NYSE: SUNE) will all drink from the same fountain of fortune.

I'll be there with my straw, too!

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


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

April 02, 2015

Tesla's Chinese Reboot Complete, But Questions Remain

Doug Young

Bottom line: Tesla’s China reboot appears to be complete, paving the way for it to gain some traction in the market by year end if it can effectively target the nation’s wealthy, image-conscious trend setters.

Nearly a year after driving into China on a wave of fanfare and big hopes, electric vehicle (EV) superstar Tesla (Nasdaq: TSLA) is pressing the reset button on a market that has huge potential but also some major obstacles. This particular reset has been in the works for the last few months, but appears to be near completion with indications that the company has discarded its previous short-term aggressive sales targets for the market.

The reboot to Tesla’s China business is discussed in a series of interviews by Zhao Kuiming, its head of China sales, who was on a PR offensive following the recent overhaul. (Chinese article) It’s unclear from the reports if Zhao is new to Tesla, but he appears to be the company’s new public face after previous China President Veronica Wu resigned in December after just 9 months on the job. (previous post)

In one of the interviews, Zhao points to China’s lack of infrastructure as a major obstacle for the company in the first year since it entered the market. Previous reports had indicated Tesla believed that China could quickly become one of its top global markets, with annual sales of 4,000 to as many as 8,000 EVs possible as quickly as this year. But the most recent reports have said the company only sold 120 cars in China in January, showing just how difficult those lofty targets would be to attain.

The headline on Zhao’s latest interview says the company has temporarily put aside any short-term sales targets, and instead is focusing on building up the foundation it will need to support customers over the longer term. Zhao never actually addresses the issue of specific sales targets in the body of the article, though the tone does seem to indicate that Tesla is focusing on other matters for now.

The fact that Tesla is now going on a PR offensive appears to show that its China overhaul may be complete. The lack of figures in Zhao’s first interviews is also striking, and seems like a smart tack even though it will inevitably leave investors hungry for a clearer picture of how the company sees the market. Tesla’s shares surged last year, partly on unrealistic expectations for China, and have lost about a third of their value since last September as reality has set in.

I can’t comment on Tesla’s situation in the US, but China is clearly a market that isn’t quite ready for EV prime time. Billionaire Warren Buffett has made a similar discovery with his investment in the sputtering BYD (OTC:BYDDF; HKEx: 1211; Shenzhen: 002594), which has also struggled after its big bet on the China EV market failed to materialize as quickly as the company had expected.

Tesla zoomed into China with big hopes last year, and its charismatic chief Elon Musk personally presided over the company’s first high-profile local sale last April. (previous post) But since then Tesla has struggled to meet the high expectations it set for itself. It has blamed the problems on lack of infrastructure, though that’s probably only part of the problem. After all, the company was never targeting a mainstream audience with its high-end cars, and anyone who could afford a Tesla was probably more interested in being a trend-setter without too much worries of where to find a charging station.

Instead, Tesla’s problems are probably due to a combination of factors, including management and marketing teams that failed to understand the complexities and unique features of the China market for luxury cars. As a result of those stumbles, Tesla has cut about a third of its China workforce, with media reporting earlier this month that the company had laid off about 180 of its 600 locally based workers.

It’s good to see that the overhaul appears to be in the rear view mirror, and also that Tesla is tamping down expectations to avoid a similar disappointment with its relaunch. The company’s previous moves to develop infrastructure look like a good start to building up a solid platform for long-term growth in China. But Tesla will also have to show it can manage in the tough market, which will only become clearer in the year ahead as we get a better glimpse of the new team that will lead its reboot into China.

Doug Young has lived and worked in China for 16 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.

April 01, 2015

Ten Clean Energy Stocks For 2015: Marching Ahead

Tom Konrad CFA

 My Ten Clean Energy Stocks for 2015 model portfolio added a second month to its winning streak, with a 6.1% gain for the month and a 5.7% gain for the year, despite a continued drag by the strong dollar.  If measured in terms of the companies' local currencies, the portfolio would have been up 7.5% for the month and 10.5% for the quarter or year to date.  For comparison, the broad universe of US small cap stocks rose 1.5%  for the month and 4.0% for quarter, as measured by IWM, the Russell 2000 index ETF.

The six income stocks continue to lead, with a gain of 5.9% for the month and 10.2% for the year.  This compares to a miserable performance by my income benchmark of global utility stocks (JXI), which was down 3.1% for the month and 5.5% for the year.  The fossil free Green Alpha Global Enhanced Equity Income Portfolio (GAGEEIP), which I co-manage, also outperformed the global utility trend and turned in a 0.6% gain for the month, and 5.3% gain for the year to date.

The four growth and value stocks gained 6.3% for the month, but remain down 1.0% for the year.  This compares to their clean energy ETF benchmark (PBW), which rose 1.6% for the month and is up 5.9% for the year.

The chart below (click for larger version) gives details of individual stock performance, followed by a discussion of March news for each stock.

10 for 15 February.png

The low and high targets given below are my estimates of the range within which I expected each stock to finish 2015 when I compiled the list at the end of 2014.

Income Stocks

1. Hannon Armstrong Sustainable Infrastructure (NYSE:HASI).
12/31/2014 Price: $14.23.  Annual Dividend: $1.04.  Beta: 0.81.  Low Target: $13.50.  High Target: $17. 
3/31/2015 Price: $18.28. YTD Dividend: $0.26  YTD Total Return: 30.3%.

The stock of sustainable infrastructure financier and Real Estate Investment Trust Hannon Armstrong continued its impressive advance. 

The market price is now above the $17 "High Target" I gave it at the start of the year.  That means that it is higher than I expected it to go by the end of 2015, and while I revised my expectation upward when Hannon Armstrong increased their core earnings per share growth target from its previous 12% to 15% range to its current 14% to 16% range, I now feel the company is near its fair valuation.  While I am happy to hold the company for its dividend and dividend growth prospects, I have begun trimming my position for rebalancing.  It was already my largest holding at the end of 2013; it's time to bring the stock back in line with the rest of my positions.

Although I am trimming my holdings, I think HASI retains significant upside potential.  While I feel it is near its fair valuation now, there is no reason to believe it cannot become overvalued.  That has certainly happened with many of the conventional YieldCos: NRG Yield (NYSE:NYLD) and NextEra Enegy Partners (NYSE:NEP), for example.  These boast similar growth prospects to HASI, but much lower dividend yields.  To bring HASI's yield down to 4%, which is in the middle of the range for YieldCos today, the stock would have to rise to $26.  While I believe many YieldCos are overvalued at current levels, I see no reason why Hannon Armstrong can't join them.

2. General Cable Corp. (NYSE:BGC)
12/31/2014 Price: $14.90.  Annual Dividend: $0.72.  Beta: 1.54.  Low Target: $10.  High Target: $30. 
3/31/2015 Price: $17.23. YTD Dividend: $0.  YTD Total Return: 15.6%.

International manufacturer of electrical and fiber optic cable, General Cable Corp.'s stock spiked on March 17th based on rumors that it might be bought by larger Italian rival Prysmian (OTC:PRYMF).  Prysmian later said in a statement that it had consulted with its advisors about the possibility of buying General Cable or France's Nexans, but had had no direct discussions with either company.  General Cable's stock held on to most of its gains as investors revalued the company as a possible acquisition target.

3. TransAlta Renewables Inc. (TSX:RNW, OTC:TRSWF)
12/31/2014 Price: C$11.48.  Annual Dividend: C$0.77.   Low Target: C$10.  High Target: C$15. 
3/31/2015 Price: C$12.55. YTD Dividend: C$0.19  YTD Total C$ Return: 11.0%. YTD Total US$ Return: 1.6%.

Canadian yieldco TransAlta Renewables, agreed to invest C$1.78 billion in a portfolio of Western Australian assets owned by its parent, TransAlta (NYSE:TAC), with the purchase funded mostly by issuing stock on the public market and to TransAlta at C$2.65 a share.  TransAlta will own 76-77% of the yieldco after the transaction closes.  TransAlta Renewables will use the increased cash flow per share enabled by the acquisition to increase its monthly dividend to C$0.07 (an increase of 9%) and intends a further 6% to 7% increase after the completion of the South Hedland gas power plant, which is part of the acquisition.  After the first dividend increase, the annual dividend will be C$0.84, or 6.7% at the current price.

Although I'm a fan of dividend increases, and think this is a good transaction for current shareholders, the gas pipeline and gas power plant included in the transaction mean TransAlta Renewables will no longer be completely fossil fuel free.  That means that all the accounts I manage with Green Alpha Advisors using the Green Alpha Global Enhanced Equity Income Portfolio will need to sell TransAlta Renewables when the deal closes or soon after, which I expect in May.  We will be holding on to the stock for the now, however, because I expect the dividend increase should increase the share price once the market absorbs the stock from the secondary offerings.

In fact, I bought the company in some accounts which are managed to a green, but not strictly fossil fuel free, mandate.  For my non-fossil fuel free accounts, I consider a company to be green if it would benefit from increased action to combat climate change and other environmental problems.  I believe this will still be the case for TransAlta Renewables after the transaction closes. In practice, I tolerate some natural gas assets in managed accounts which are not strictly fossil fuel free as long as they are not large compared to the clean energy assets of the same company.

For readers who do not follow a strict fossil fuel free mandate themselves, I consider the pull-back caused by the secondary offering to be a buying opportunity.

4. Capstone Infrastructure Corp (TSX:CSE. OTC:MCQPF).
12/31/2014 Price: C$3.20. 
Annual Dividend C$0.30.  Low Target: C$3.  High Target: C$5.  
3/31/2015 Price: C$3.55. YTD Dividend: C$0.075  YTD Total C$ Return: 13.6%.  YTD Total US$ Return: 4.0%.

Canadian power producer and developer (yieldco) Capstone Infrastructure lost ground gained in January, and is now down almost 7% in US dollar terms, although all of that decline is due to the weakness of the Canadian dollar.  I continue to think that this 9%+ yield company remains one of the best values among clean energy income stocks: it's high yield and low price are entirely due worries about a very disappointing decision by the regulator of its British water utility subsidiary.  Capstone is appealing that ruling, but management has stated that the dividend is not at risk even if the appeal fails.  Insiders has put their money where their mouths are by buying the stock on the open market.

In addition to the high yield (which alone seems sufficient reason to own the stock), there is potential for upside if the Bristol Water appeal is successful. Even if this appeal fails, I expect the high yield to cause the stock to appreciate as investors gain confidence that the dividend will not be cut.

5. New Flyer Industries (TSX:NFI, OTC:NFYEF).
12/31/2014 Price:
C$13.48.  Annual Dividend: C$0.585.  Low Target: C$10.  High Target: C$20. 
3/31/2015 Price: C$14.08. YTD Dividend: C$0.15  YTD Total C$ Return: 5.5%.  YTD Total US$ Return: -3.4%.

Leading North American bus manufacturer New Flyer report 2014 fourth quarter and full year results on March 18th.  Revenue and Adjusted EBITDA were up for the year, but earnings lagged slightly because of a number of low margin contracts which had been negotiated during the industry downturn.  The company is currently focusing on consolidation of its model line after the acquisition of NABI last year.  When this consolidation of models is complete, New Flyer will have more free cash flow to return to shareholders or make additional investments. There was some interesting discussion about this at the end of the Q&A part of the conference call.  CEO Paul Soubry said:

[W]e continue to look at opportunities where we can acquire and/or invest in new programs. And so we have done that very aggressively and very prudently to look at scenarios that makes sense for us, some inside our space, some adjacent to our space. So as we evaluate some of those scenarios as we look at the leverage of the business, as we execute now on [the consolidation of bus models] for the first part of this year, it's not out of the realm that we would look at shareholder value enhancement, right now we want to get through this next chapter before make a decision on that. But, we are in a way better place as you know to be able to have that conversation today than we were two years ago than we were six years ago. So that one is a little bit of kind of wait and see for a little bit, but very, very pleased about our ability to have the conversation.

I take this to mean that the board is thinking about dividend increases or share buybacks.  Nothing is going to happen until the business consolidation is complete; we could hear more on this in the second half of the year.

Overall, I liked what I heard on the conference call.  I wasn't the only one.  New Flyer had its price traget raised by analysts at National Bank and BMO Capital Markets.  Canaccord Genuity upgraded the stock to "Buy" from "Hold."

6. Accell Group (XAMS:ACCEL, OTC:ACGPF).
12/31/2014 Price: €13.60. 
Annual Dividend: Varies: at least 40% of net profits. €0.55 in 2014.  Low Target: 12.  High Target: €20.
3/31/2015 Price: €17.31. YTD Dividend: 0.  YTD Total Return: 27.3%.  YTD Total US$ Return: 12.9%.

The stock of bicycle manufacturer Accell Group continued to advance, although US investors will not see as much of an increase because of the declining euro, which had its worst quarter against the dollar in the 12 years it has existed. Part of Accell's appreciation may in fact be due to the declining euro, since the strong dollar may help sales in North America, where Accell has its greatest growth potential.  But the rising Euro is mixed news for the Netherlands based bicycle manufacturer, which had to raise prices 5% in its core European market because of higher Euro import prices for components. 

Value Stocks

7. Future Fuel Corp. (NYSE:FF)
12/31/2014 Price: $13.02.  Annual Dividend: $0.24.   Beta 0.36.  Low Target: $10.  High Target: $20.
3/31/2015 Price: $10.27 YTD Dividend: $0.06.  YTD Total Return: -20.7%.

Specialty chemicals and biodiesel producer FutureFuel, has been hit hard over the last few days since it revealed that Proctor & Gamble had given notice that it would terminate its contract with Future Fuel at the end of 2015.  FutureFuel makes a bleach activator for P&G: The little blue specks (NOBS) in Tide detergent, which accounted for 13% of 2014 sales.

Sales to P&G have been declining over the last few years because of the overall decline in the market for dry laundry detergents.  2014 sales of NOBS had already declined 27% in 2014 compared to 2013.  This announcement is more an acceleration of the existing timeline for FutureFuel to find replacement products than a bolt out of the blue.  FutureFuel's chemical business has a natural churn.

The 18% sell-off in the four days since the termination was announced is far out of proportion to the damage to FutureFuel's future prospects. Although the current agreement was terminated, the two companies are in talks about a new agreement going forward. It's likely that FutureFuel will continue to supply some bleach activator to P&G in 2016 and beyond, if at reduced volumes, while it is also likely that FutureFuel will find other products to fill much of the chemical capacity not being used for the bleach activator.  I added to my position on the decline.

8. Power REIT (NYSE:PW).
12/31/2014 Price: $8.35
Annual Dividend: $0.  Beta: 0.52.  Low Target: $5.  High Target: $20.
3/31/2015 Price: $8.65. YTD Total Return: 3.6%.

Rail and solar investment trust Power REIT filed its annual report on March 31st.  I have not yet had time to review it, but a first glance shows core FFO per share growing to $0.49 in 2014 from $0.41 a year earlier.  FFO is a non-GAAP measure of recurring cash flow used by many REITs as a measure of cash available for distribution to shareholders.  Net losses, however, were substantial because of litigation costs, property acquisition expenses, and an unrealized loss on an interest rate swap which is part of the financing for one of its solar farms.

As far as I can tell, there was nothing unexpected in the annual report, and the future value of the stock continues to hinge on the outcome if its civil case with its railway lessees.

9. Ameresco, Inc. (NASD:AMRC).
12/31/2014 Price: $7.00
Annual Dividend: $0.  Beta: 1.36.  Low Target: $6.  High Target: $16.
3/31/2015 Price: $7.40. YTD Total Return: 5.7%.

Energy service contractor Ameresco released fourth quarter and full year 2014 results on March 5th.  Once again, management was upbeat about the improvement of its industry.  To quote from the press release, "We anticipate that our traditional U.S. energy services segments, which have tempered our financial performance the past few years, will experience broad-based revenue growth in 2015." 

The market failed to react to the news, but Obama's executive order on March 19th for Federal agencies to greatly increase their efforts to reduce Greenhouse Gas emissions seems to have galvanized investors.  The stock gained 18% for the month, with almost all of the gain coming after the executive order.  Much of Ameresco's business comes from cost-effectively helping government agencies meet goals like these.

Growth Stock

10. MiX Telematics Limited (NASD:MIXT).
12/31/2014 Price: $
6.50Annual Dividend: $0.  Beta:  0.78.  Low Target: $5.  High Target: $20.
3/31/2015 Price: $6.98. YTD Dividend: $0.  YTD Total South African Rand Return: 12.9%.  YTD Total US$ Return: 7.4%.

Vehicle and fleet management software-as-a-service provider MiX Telematics turned in a very strong month.  I'm not sure what drove the rise other than the extreme undervaluation I discussed in detail last month.   Despite the rise, it's still quite cheap, in my opinion.

There was one interesting news story about how many companies struggle to make use of the data collected by the spread of telematics devices to more vehicles.  MiX is a leader in providing the sort of sophisticated solution which helps customers with this problem, and its relatively inexpensive South African software engineers should enable MiX to keep its lead in this area.


Last month, I used this section to comment that "Capstone Infrastructure and MiX Telematics look particularly attractive at their current prices.  Ameresco also looks quite attractive, but its near term performance will hinge on the March 5th earnings announcement and management's outlook for the rest of the year."

I was wrong about the reaction to Ameresco's earnings announcement. It was exactly what I hoped for, but the market was unimpressed.  Instead, it took Presidential action to get the stock moving two weeks later.  But move it did, and Capstone, MiX, and Ameresco were up 11.6%, 23.5%, and 18.2% for the month in dollar terms, and even more for MiX and Capstone in terms of their local currencies.

I should probably quit while I'm ahead, but this month's losers, TransAlta Renewables and Future Fuel both look to me like they have fallen too far.  I think it would be too much to ask to expect them to do in April what the three stocks above did in March.  That said, these two are the stocks I'm buying now.

Disclosure: Long HASI, CSE/MCQPF, ACCEL/ACGPF, NFI/NFYEF, AMRC, MIXT, PW, FF, BGC, RNW/TRSWF.  I am the co-manager of the GAGEEIP strategy.

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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