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January 31, 2016

Exelon's Dividend Siren Song

by Debra Fiakas CFA

When the market gets volatile, many investors dive behind the protective shield of dividends.  Exelon Corporation (EXC:  NYSE) is an owner of nuclear power generation plants and is included in Crystal Equity Research’s Atomics Index of companies using the atom to create energy because more than half of its power output is generated at nuclear power plants.  The company offers a handsome dividend near $1.24 per year.  Granted it is not a small-cap company, which is the usual target for this column, but yield is beguiling.  At the current price the dividend yield is 4.6%, a level better than most bank rates and even some corporate bonds.

The trick to buying dividends is to seek the company with the most reliable cash flows and the stock with the best value.  There is a bit of friction in those two objectives as financially health companies that would be able to sustain a dividend payout would logically be valued higher than other less secure companies.

There are at least a dozen and a half analysts with published estimates for Exelon.  There appears to be little agreement amongst them about the next year, as the range of sales estimates fall in a wide range from $20.5 billion to $32.7 billion.  The median sales estimate suggests Exelon is struggling to grow its top line, but apparently not everyone in the group seems to see the problems.

The range of earnings estimates is not as wide, with the low estimate coming in at $1.98 and the high at $2.73.  While the range of earnings estimates might not tell us, much the predictions of profits are some comfort for dividend seekers.  Exelon has consistently beat the consensus estimate over the past year, suggesting either that things have gone better than analysts have predicted or that Exelon management has done a good job of jawboning down the forecasts.

Exelon had recorded $30.0 billion in power generation revenue over the twelve months ending in September 2015, providing $2.0 billion in net income or $2.25 in earnings per share.  More importantly, Exelon is a consistent generator of cash, converting 22% of sales over the past four years to operating cash flow.  The trouble is, Exelon’s capital spending soaks up most of the internal cash and the company has had to borrow to keep cash levels level on the balance sheet.  The company’s long-term debt increased to $27.0 billion at the end of September 2015 (including the current portion), compared to $22.5 billion a year earlier.

EXC is trading at 11.1 times the consensus earnings estimate for 2016 of $2.52 per share on $25.3 billion in sales.  This is a bit lower valuation than the industry average of 17.0 times earnings.  The apparent discount could be as a result of the comparative muted view on Exelon’s growth than the rest of the power generation pack.  Then there is the building leverage.  The 20% increase in debt over the past year might have spooked some investors.

For the rest of investors who are not put off by slowed growth or building leverage, relatively low price volatility might be the final stone in the proverbial water jar.  The beta for EXC is 0.22, suggesting there is not a great deal of volatility compared to the broader U.S. equity market.  So even if the sirens of the dividend are calling investors near the rocks, they are not large rocks!

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. AMRS is included in Crystal Equity Research’s Beach Boys Index of companies developing alternative energy using the power of the sun.

January 28, 2016

Renewable Energy Group Teams Up With ExxonMobil For Cellulosic Biodiesel

Jim Lane

Two giants hook up to bring cellulosic biodiesel to scale. A new source of biodiesel feedstock, and a new source of renewable fuels.

In Iowa, ExxonMobil (XOM) and Renewable Energy Group (REGI) have agreed to jointly study the production of biodiesel by fermenting renewable cellulosic sugars from sources such as agricultural waste.

REG has developed a patented technology that uses microbes to convert sugars to biodiesel in a one-step fermentation process similar to ethanol manufacturing. The ExxonMobil and REG Life Sciences research will focus on using sugars from non-food sources. Terms were not disclosed.

Readers will remember the technology unit, branded as LS9 before the REG acquisition in 2014. LS9 focused on biodiesel from its earliest days in 2006 — in fact, that was the sole product in development until a detergent alcohol was put into development in 2008.

“The core technology is advanced”

Through the research, the two companies said they will address the challenge of how to ferment real-world renewable cellulosic sugars, which contain multiple types of sugars, including glucose and xylose, but also impurities that can inhibit fermentation.

“The core biodiesel technology is advanced,” REG Vice Presdient Eric Bowen told The Digest. “That’s one of the reasons ExxonMobil reached out, they know there’s a quicker timelines than other projects they’ve looked at, because there’s 7 years of work already done to ferment sugars into FAME biodiesel. The work now is to port that technology to cellulosic sugars, something which there has been DOE-sponsored work on in the past, some of which was announced publicly.”

“The bulk of cellulosic sugars development has been for cellulosic ethanol, which is primarily though not exclusively a yeast-based fermentation. It’s much more dilute, too. In our work, we do very concentrated fermentations and we like a very concentrated sugar source. So, optimizing those sugar streams, and understanding the impurities is an important part f the work going on now. The impurities depend on the source. They could include acids from the hydrolysis, or ash content. We’ll be looking at how concentrated those impurities are.”

“If there were large volumes of sugars available today, I have no doubt we could manufacture almost right away.”

ExxonMobil’s interest?

Exxon has been quiet of late in renewables, though they ran some algae TV ads around the time of COP 21. Maybe, in the context of showing that they are “doing something”. Lately, they’ve been more active in partnering and talking up their algae research. Consider this $1 million partnership with Michigan State University, here , or this recent ExxonMobil perspectives posting, here.

Back in the days before REG acquired LS9 and before the cellulosic sugar path was discovered, Chevron became an investor in 2009. Back then, the aim was to show that it could produce renewable diesel at $45-50 per barrel, by 2011, with a goal of commercial-scale production as soon as 2013. The basic science, said LS9 at the time, was completed — it was a matter of yield and scale.


“The timing is really about the availability of cellulosic sugars,” Bowen added. “If there were large volumes of sugars available today, I have no doubt we could manufacture almost right away. The technology has been significantly de-risked.

“Clearly, our interest and ExxonMobil’s is on commercial-scale production,” Bowen said. “There’s a stage-gate process in place.

The pivot to cellulosic feedstocks

On LS9’s fuel aspirations we wrote some time back:

Given that there are seven pounds of oil to a gallon, the cost of US sugar makes fuel production completely out of the question for now, and will push bioprocessors towards the higher-end chemical and bio-based products for the near term. In the company’s early days, the magic bug lived on corn or cane syrups – and for that reason the company was initially expected to build its first commercial facility in Brazil, the Saudi Arabia of cane syrup.

But, no longer.

That’s where Jay Keasling’s lab at UC Berkeley/JBEI comes into the picture. In early 2010, working with REG Life Sciences, they came up with a way to utilize cellulosic sugars. At the time, they said that the team of researchers engineered a microbe that “consolidates advanced biofuels production and cellulosic bioprocessing for the first time. This breakthrough enables the production of advanced hydrocarbon fuels and chemicals in a single fermentation process that does not require additional chemical transformations.” The research results appeared in the January 28, 2010 edition of Nature.

The cellulosic option broadened the geography considerably — conceptually, into REG’s base of operations in the Midwestern US. Or, possibly in its new operating sphere of Eastern Europe.

Advanced fuels, good, advantaged fuels, better

Biodiesel is America’s favorite advanced biofuel, but it also is one of the most advantaged by policy considerations. Specifically, biodiesel qualifies under the Renewable Fuel Standard as a biomass-based diesel fuel; it qualifies for the biodiesel tax credit, if that is extended beyond 2016; it conceivably qualifies under RFS relating to the sale of cellulosic waiver credits, as a cellulosic fuel. If produced in California, it would qualify under the California Low Carbon Fuel Standard.

Bowen agrees. “Cellulosic RINs? There’s that nested category, cellulosic diesel, that was established for some players that aren’t around any more, but it’s there, and although we have not completed the lifecycle analysis and not yet formally approached EPA, we’re expecting that the fuels would not only qualify as an advanced biofuels but as a cellulosic diesel. California would welcome this fuel, I would expect, and we expect it to fit the Low Carbon Fuel Standard very well, though again, the lifecycle analysis has yet to be completed.

What about cellulosic drop-in fuels?

Well, REG Life Sciences has IP in that area too. In the article “Microbial Biosynthesis of Alkanes” published in Science magazine in July 2010, a team of REG LS scientists announced the discovery of novel genes that, when expressed in E.coli, produce alkanes, the primary hydrocarbon components of gasoline, diesel and jet fuel. This discovery is the first description of the genes responsible for alkane biosynthesis and the first example of a single step conversion of sugar to fuel‐grade alkanes by an engineered microorganism.

Yield, and scale-up

Scale? That’s something for later in the partnership, as the partners have indicated. So, we are left with the chase for yield. It’s the task that consumes Amyris (AMRS) every day, Yield, yield, yield.

No more so than with cellulosics, where the sugars are only a fraction of the biomass and the transportation and logistics penalties for low yields add up quickly.

“Right now, as with all our process development, we’re focused on the 5 liter stage now,” REG’s Bowen told The Digest, “and then it moves to the 650-liter stage, and then as with all our work it would move to Okeechobee for testing in large scale fermenters.”

ExxonMobil’s reaction

“This research is just one way ExxonMobil is working to identify potential breakthrough technologies to reduce greenhouse gas emissions, increase energy supplies and realize other environmental benefits,” said Vijay Swarup, vice president of research and development at ExxonMobil Research and Engineering Company. “The science is extremely complex, but we hope to identify new affordable and reliable supplies of energy for the world that do not have a major impact on food supplies.”

“As we research renewable energy supplies, we are exploring future energy options with a reduced environmental impact,” Swarup said. “Our first challenge is to determine technical feasibility and potential environmental benefits during the initial research. If the results are positive, we can then take the next step and explore the potential to expand our efforts and explore scalability.”

The REG Life Sciences demonstration plant

REG Life Sciences’s demonstration plant is in Okeechobee, Florida, and was initially designed, and has been used, to scale-up LS9’s fermentation technology and generate large commercial samples for testing and product qualification by key partners and prospective customers. Since the company’s initial run at 135,000 liter scale in Q3 2012, LS9 has made numerous additional fatty alcohol runs, production runs of fatty acid methyl esters (biodiesel), and some co-operative work with Cobalt Technologies.

In 2012, we wrote of LS9’s demonstration plant opening day.

In the glades north of Lake Okeechobee, in rural Florida, a 135,000 liter fermenter column stands out against the landscape like Salisbury Cathedral rising over the plains of Thomas Hardy’s Wessex, and you half expect a tropically-attired Tess of the D’Urbervilles to come around the corner at any moment.

But the VIP-filled sedans, kicking up dust as they head northwest from the lake, are greeted primarily by dumbfounded cows and bulls that are still wondering, to the extent that they wonder, how yellow dragon disease took the citrus trees away, and where all the workers went in Okeechobee County, why so many Family Dollar thrift shops have popped up, and why so many people are using boards in place of window glass.

After all, the cows see all the Mercedes sweeping from the rich coastal enclaves like Jupiter and Palm Beach, en route to one of the several appealing hunting clubs that dot the region, or the golf courses of the west side.

Do they wonder how the rich got so rich, and the poor so poor, in such a hurry, down in Florida? To the extent that bulls consider macroeconomics, in between meals in the pasture as the cars go by.

The opening of that fermenter column is what the VIPs are coming to celebrate, because LS9’s demonstration facility opened for business in Okeechobee yesterday. A wonder of science it is – a technology that takes in sugars, and through microbial fermentation directly converts the material into a programmable array of products, including biodiesel, jet fuel, diesel, or surfactant alcohols, just for starters.

The Bottom Line

Well, ExxonMobil. REG. Biodiesel and its established market, and legion of fans. The “we could manufacture almost right away” perspective from REG. What’s not to like about this one? It’s a pick-me up of the first magnitude, and coming on the heels of the US Navy, Tesoro, and Suntory in recent days — it’s a tidal wave of dive-ins by major partners, for sure.

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

January 26, 2016

First Solar And Trina: Dueling Ratings

by Debra Fiakas CFA
Solar module producer First Solar, Inc. (FSLR:  Nasdaq) received a boost last week from a new rating upgrade from Hold to Buy.  There are at least fifteen sets of analytical eyes scrutinizing First Solar.  The prevailing view on First Solar had been ‘hold’ or ‘neutral’ with a median price target of $70.00, representing a 13% return potential from the current price level.

Solar power generation has on a roll in recent years as lower solar cell prices have helped find demand at higher volumes.  The U.S. Solar Energy Industries Association has forecast 25% to 50% growth in the solar market in 2016.  So the enthusiasm for solar components producers like First Solar, is understandable.

However, on nearly the same day the First Solar investors saw the upgrade in FSLR, a body blow was delivered to one of First Solar’s competitors, Trina Solar Ltd. (TSL:  NYSE).  An analyst at a top-bracket investment bank downgraded TSL to Neutral from Buy.  The mean rating on TSL has been Hold or Neutral as well.  The median price target is $14.80, promising a 67% return from the current price level. 

How can traders and investors make sense of these seemingly contradictory views on the solar sector?  What is it about First Solar that supports a compelling bull case, while Trina Solar shares are to be avoided?

A check of estimates for the two companies provides some clues.  Trina Solar missed the consensus estimate in the quarter ending September 2015 after trouncing expectations in each of the two previous quarters.  This might have been why analysts following the company trimmed estimates for the quarter ending December 2015.  Despite the disappointment investors might have experienced from the third quarter report and the immediate caution for the fourth quarter, estimates for the year 2016 were only trimmed by a nickel to $1.36 per share.  It appears analysts with earnings models for Trina Solar are still looking for earnings growth in the 20% to 22% range in 2016.  If we use that growth rate as a proxy for an earnings multiple, that would suggest a target price of $27.20.

Could it be that the analyst is simply running scared -  or embarrassed  -  after the third quarter disappointment?  The stock gapped down in trading in the first day of trading following the downgrade.  Granted the entire U.S. equity market was in peril during the day and could also have influenced TSL downward.  TSL now appears oversold despite continued strong money flows into the stock.

TSL is priced at 6.5 times the 2016 consensus estimate.  For the price, investors get a company that delivered 20% top-line growth and converted 8.0% of sales into operating cash flow in the last twelve months.  Granted sales growth has slowed from the previous two years.  However, reported profitability has improved dramatically right along with higher operating cash flows.

First Solar on the other hand has been having trouble maintaining its top-line and reported only 7.6% top-line growth in the last year.  Perhaps the most recent enthusiasm for FSLR it from the company’s conversion of 14.1% of sales to operating cash flow, a rate that is a bit better than its peers.

The growth forecasts for the solar sector are impressive.  However, if an investor takes a more cautious view given that the rest of the world economy is in greater doubt, it seems prudent to choose the company with the financial strength to withstand slowing growth  -  the one that has lower leverage.  Forget demand measures, growth rates and cash conversion rates.

There is $308.6 million in debt on First Solar’s balance sheet, leaving the company with a debt-to-equity ratio of 5.73.  Trina Solar by contrast has deployed far more leverage with total debt of $1.5 billion and a debt-to-equity ratio of 138.68.

The duel is decided by the balance sheet.

Debra Fiakas is the Managing Director of
Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

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

January 24, 2016

BYD Increases Profit Projections On Accellerating EV Sales

by Doug Young

Bottom line: BYD’s EV sales are likely to see strong growth based on government-supported buying in China this year, but could slow sharply in 2017 if China’s economic slowdown accelerates.

Chinese electric vehicle (EV) maker BYD (HKEx: 1211; Shenzhen: 002594; OTC:BYDDY) shot into the headlines in 2008 when investment guru Warren Buffett bought 10 percent of the company. But it has struggled to find a mass audience for its cars since then, at times raising doubts about its future. That seems to be changing recently, as a nascent surge in its home China market has quietly begun to charge up the business, bringing some excitement back to the company.

Now one of BYD’s biggest backers, the man who first introduced the company to Buffett, is quietly building up his own stake in BYD, and disclosed that his LL Group recently bought more shares to boost its stake to 8.24 percent. (HKEx announcement) That’s up from 6.3 percent of BYD’s H-shares that LL Group, formerly known as Himalaya Capital, held at the middle of last year, and is a sign of growing confidence by LL Group founder Li Lu.

BYD’s EV sales do indeed seem to be gaining some new traction recently, helping it take the spot as the world’s top EV seller last year. But the big footnote to that victory was the company’s heavy reliance on its home China market to win that position. That’s an important distinction, since EV buying in China is heavily driven by government-linked customers who are trying to fulfill Beijing’s ambitious targets for new energy vehicle sales.

Such buying is driven by target-setting rather than real commercial demand, meaning there’s no guarantee that many of BYD’s China car sales won’t end up sitting parked in garages rather than out on the road. What’s more, the company’s recent robust China sales could easily slow sharply if the nation’s economic slowdown accelerates, since EV buying would become a lower priority in such an environment.

BYD’s Hong Kong-listed shares doubled in the first half of last year, amid a broader Chinese stock market rally. They later gave back most of the gains as China’s stock markets underwent a big correction from last June, though they still trade around 20 percent above their year-ago levels.

Booming China Sales

Much of BYD’s stock movement has admittedly been in tandem with China’s broader stock market, so let’s instead look more closely at some of the latest company data and other trends that excited Li Lu enough to boost his stake in the company. The company sold 61,722 plug-in vehicles last year, easily beating out global leaders Tesla (Nasdaq: TSLA) and Nissan (Tokyo: 7201), which each sold around 50,000.

The surging sales prompted BYD to recently upgrade its initial projections for its 2015 profit, saying it now expects the figure to rise 481 percent from 2014 levels. It had previously projected 435 percent growth. (company announcement) In the revision announcement, BYD specifically cited “explosive growth” in China for new energy vehicles in the fourth quarter.

At the same time, BYD founder Wang Chuanfu has made it clear in recent interviews that he doesn’t plan to try to export his cars in big numbers anytime soon. That means the company will be dependent on China for its EV sales for the foreseeable future, and hints that BYD’s numerous pilot programs around the globe in both western and developing markets aren’t going anywhere fast.

At the end of the day, it’s quite likely that BYD will do well for at least the next year, as Chinese buyers continue to purchase its vehicles at a brisk pace to help Beijing meet its clean energy vehicle targets. But I do expect the China sales could slow sharply in 2017 as China’s economy slows more sharply, and it’s unlikely that BYD will be able to offset that growth by relying on foreign markets.

Doug Young has lived and worked in China for 20 years, much of that as a journalist, writing about publicly listed Chinese companies. He currently lives in Shanghai where, in addition to his role as editor of Young’s China Business Blog, he teaches financial journalism at Fudan University, one of China’s top journalism programs.  He writes daily on his blog, Young´s China Business Blog, commenting on the latest developments at Chinese companies listed in the US, China and Hong Kong. He is also author of a new book about the media in China, The Party Line: How The Media Dictates Public Opinion in Modern China.

January 23, 2016

What the L.A. Methane Leak Tells Us About Investing

by Garvin Jabusch

Sempra Energy’s leaking gas field in Porter Ranch, CA, near Los Angeles, has been making national headlines recently, as it now enters its third month of being the largest methane leak in U.S. history. How big is that? The LA Times says that, “by early January, state air quality regulators estimate, the leak had released more than 77 million kilograms of methane, the environmental equivalent of putting 1.9 million metric tons of carbon dioxide in the air.”

1.9 million metric tons of carbon dioxide and counting. In addition, methane isn’t only a powerful greenhouse gas, it can have health consequences for those exposed. In reporting that California Governor Jerry Brown has formally declared the leak an emergency, the New York Times on January 6 wrote that, “already, more than 2,000 families have left this affluent suburb because of the terrible smell and its side effects, which include nosebleeds, headaches, dizziness and vomiting.”

What does it all have to do with investing? It tells us more than you might think, and it speaks volumes about how many investment managers think about the idea of a sustainable economy, and also about the limited tools they have to construct a portfolio that reflects actual long-term viability of the global economic system. As economist and sustainability expert Ken Coulsen tweeted recently, “I thought the idea in #trading was to ask ALL the [questions] - most investment groups refuse to go deep on the intersection of #science [and] #economics.”

Coulsen’s right. Investment managers are supposed to be assimilating all the risks, so why do some have a blind spot when it comes to natural gas and other fossil fuels? Part of it is inertia, a sense that doing things the way they’ve always been done must be “right.” Part of it is ideological and a tribal affiliation among some institutions and investors who resist the idea of an economic switch to renewables as simply contrary to the way they view the world.

The fact that Ted Cruz, a  leading  GOP candidate for the U.S. presidency,  recently described  signatories to the COP12 agreement as, “ideologues, they don’t focus on the facts, they won’t address the facts, and what they’re interested [in] instead is more and more government power" tells us all we need to know about both the  politics involved and the power of Orwellian rhetoric in claiming truth in the opposite of reality. 

Finally, the standard tool kit used by most portfolio managers, collectively called modern portfolio theory, doesn’t particularly allow one to attempt to look forward in assessing risk, basing almost all such calculations on the way stocks and groups of stocks have performed historically.

In any event, Sempra’s utility SoCalGas didn’t think too much about the risks, and neither did a lot of energy investors. SoCalGas/Sempra, as reported by Newsweek, had not installed a “subsurface safety valve that was found faulty and removed in 1979—but never replaced, because the well was not close enough to residential areas to necessitate such a valve. [Rodger] Schwecke, the SoCalGas vice president, says he does not know why the valve was removed and never replaced, but he downplays the ability of a subsurface valve to stop a powerful leak like this one. “It wasn’t a requirement,” he says without much contrition.”

Zero Hedge reports that, “The Company Behind LA's Methane Disaster Knew Its Well Was Leaking 24 Years Ago,” and yet the firm was still considered an upright corporate citizen, among the finest and safest of our fossil fuels firms. Many money managers did not perceive a risk. According to StreetInsider.com, on October 30th eight days after the leak was detected, “Standard & Poor's Ratings Services affirmed its 'BBB+' issuer credit rating (ICR) on Sempra Energy (NYSE: SRE) and our 'A' ICRs on subsidiaries San Diego Gas & Electric Co. (SDG&E) and Southern California Gas Co. (SoCal Gas). The outlook remains stable.”

Then, on November 16, seven weeks after the world became aware that the leak had begun, the company itself announced that, “Sempra Energy (NYSE: SRE) has been selected for the S&P 500 Climate Disclosure Leadership Index in 2015. The S&P 500 Climate Disclosure Leadership Index lists the top 10 percent of companies within the S&P 500 Index for the depth and quality of climate change data disclosed to investors and the global marketplace.”

Obviously, there is a disconnect between real world, scientifically verifiable risks and traditionally contemplated investment risks, at least in the case of SoCalGas at Sempra. Which is a danger when you get into the business of looking for standouts in an inherently destructive business: even the very best are still destructive. It’s like trying to decide which cancer you would like to get. Maybe you’d select skin cancer because it’s eminently curable if caught early, but the real answer is you don’t want cancer at all.

The risks are real. The Los Angeles Daily News says that “Since Oct. 23, Southern California Gas Co. has spent $50 million to try to stem the flow from the nation’s fifth largest natural gas field, while relocating two schools and some 12,000 residents, many of them sickened by gas detection fumes. A fix may not be in the works until March.”

That means SoCalGas may still be in for more expenses than they thought. Maybe a lot more. Again, from the Los Angeles Daily News, “the researchers recorded elevated levels of the main ingredient in natural gas—10 miles away from the nation’s largest gas leak.” A recent essay from the Union of Concerned Scientists adds, “while this is just the most recent in a long history of oil and gas industry disasters, the particulars of this circumstance are unprecedented (sadly not unheard of). Legal experts predict that SoCal Gas will be on the hook for billions over a long period of time,” and “3,000 more [families] are waiting to be relocated…As these houses sit empty, they become vulnerable to crime and decline in value. And beyond paying to fix the leak, cover medical costs, and relocate families, SoCal Gas is already fielding 25 lawsuits with more expected in the coming weeks, months and perhaps years.”

The traditional way of thinking about investment risks excludes hugely important ones that should have been incorporated into the fiduciary standard a long time ago, begging the question: what is the fiduciary standard for if not to assess these risks? We allow extremely risky activities from a regulatory point of view and then ignore these risks in investment management. But if you don’t include these risks, you’re exposing yourself and your clients to them, and the minute these risks are recognized for what they really are, you could see your value in certain companies, such as SoCal Gas, evaporate before you can get your next statement.  So why build a portfolio with only the ‘good cancers’ in it? Why not build one with no disease at all?

As Newsweek points out, “The methane leak in Porter Ranch, though, is an apt demonstration of our complex affair with carbon fuels. The natural gas stored in Aliso Canyon flows to the homes of about 20 million customers in the greater Los Angeles area. So while we contemplate wind farms and solar arrays, we remain married to an antiquated infrastructure that lets us do what we have done for centuries: extracting energy by burning carbon.” And so, sometimes ignoring all seemingly non-financial risks, do fund managers.

But, increasingly, someone has to answer for those risks. Fossil fuels companies don’t think it will be them. EDF.org says it all when they report that, “none of the 65 oil and gas companies reviewed in a just-released study by Environmental Defense Fund disclose targets to reduce methane emissions, the main ingredient in natural gas.”

You don’t manage a risk you don’t think you’re going to have to pay for, and therefore most oil and gas companies don’t manage them adequately. For portfolio managers it’s different though, we can and should be thinking about risks even when companies themselves don’t. Our clients’ financial well-being is at stake.

Yet portfolio management, populated with professionals who try to leave no stone unturned in rooting out risks and dangers associated with every stock, has a blind spot when it comes to fossil fuels. In a time when it is clear that the beginning of the end of the fossil fuels era has begun, when we know fossil fuels contribute massive risks to the global economy from all the outcomes of warming to failing health to destruction of land and biodiversity, when we can say with certainty that for many purposes renewable energies are now more economically competitive, most investment professionals still continue to hold coal, oil and gas stocks. They have their stated reasons: diversification, historical performance, modern portfolio theory and fiduciary standard requirements. But backward-looking diversification methodology (again, the standard in present day investment management) has allowed construction of portfolios fraught with systemic risks.

What the LA methane leak tells us about investing today is as much about inertia as it is about research and new ideas. This is probably inevitable and to be expected, but it’s a shame, because where capital is invested in this world is where change happens, and it’s time professional investors realized they need to stop investing in the world’s greatest systemic risk.

Given the tools provided by modern portfolio theory, mainstream investment management only seems to be able to think as far as: "we need to be sustainable, so which fossil fuels firms are greenest?" This is shortsighted. The world economic forum at Davos now sees climate as the world's number one economic risk; why don't most portfolio managers and other fiduciaries?

Garvin Jabusch is cofounder and chief investment officer of Green Alpha® Advisors, LLC. He is co-manager of the Shelton Green Alpha Fund (NEXTX), of the Green Alpha Next Economy Index, the Green Alpha Growth & Income Portfolio, and of the Sierra Club Green Alpha Portfolio. He also authors the Sierra Club's green economics blog, "Green Alpha's Next Economy."

January 19, 2016

Yin and Yang of Yield for Abengoa

by Debra Fiakas CFA
The atmosphere started getting uncomfortably hot for power developer Abengoa SA (ABGB:  Nasdaq)  in early August last year  -  and it was not just the seasonal high temperatures in the company’s home town of Seville, Spain.  Management had finally admitted that operations could not generate as much cash as previously expected, causing worries about Abengoa’s ability to meet debt obligations.  At the heart of the company’s cash flow woes is the reversal of Spain’s policies on solar power that has reduced subsidies and feed-in tariffs for solar power producers.

In August 2015, Abengoa also announced plans to raise capital by selling 650 million euros (US$715 million) in common stock and 500 million euros in assets (US$550 million).  The plan was to pay down debt thereby reducing future interest and principal obligations.  At the time the company had about 9.0 billion euros in debt (US$9.9 billion).

The company’s share price had already been weakened by rumors, but the news sent the stock plummeting to historic lows.  After stabilizing for a several months near the $5.00 level, ABGB was gain sent into a free fall last month with more negative news on Abengoa’s cash and debt woes.  The company has asked for protection from creditors, a precursor to declaration of bankruptcy.  The stock price at the time of this article was just a few pennies over a dollar.

The question for investors is whether Abengoa’s share price is oversold, opening a window of opportunity for equity investor with an eye for deep value.

 It is the calendar more than anything that has spooked shareholders and bond holders.  Abengoa has 500 million euros in bonds (US$530 million) coming due in March 2016.  The plan to sell equity appeared to be a viable solution until one of the largest equity investors pulled out in late November 2015, citing Abengoa’s failure to meet prerequisites for the financing.  Other than a 106 million euro line of credit to pay employees (US116 million), the company’s creditors have appeared reluctant to refinance the debt.  There appears to be little time for Abengoa to reach an orderly resolution to its balance sheet problems.

A financial solution might require a restructuring of the company and its many operating subsidiaries and investments.  Abengoa has already been selling assets, including shares of Abengoa Yield, plc (ABY:  Nasdaq).  Abengoa now owns less than half of the ‘yield-co,’ which is a portfolio of power generation and electricity transmission assets in the Americas and Europe that were originally developed by Agengoa SA.

Unlike its sponsor, Abengoa Yield is profitable, reporting US$674 million in revenue and US$7.4 million in net income in the twelve months ending September 2015.  Operating cash flow generated during that period was $282.9 million, making it possible for Abengoa Yield to support US$7.3 billion in debt and still provide shareholders with US$1.72 in annual dividends per share.  The recently negotiated line of credit is secured with the Abengoa’s yield-co shares.

There appears to be a great deal of uncertainty for Abengoa.  Even decision makers at the yield-co are hedging against a demise of their sponsor by proposing a change in the name from Abengoa Yield to Atlantica Yield.  Thus as tempting as the ABGB price might seem, perhaps it would be more prudent to take a position in Abengoa “Atlantica” Yield and collect a dividend.  The current yield is 10.0% and ABY shares are trading at 11.2 times forward earnings.

Debra Fiakas is the Managing Director of
Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

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

January 15, 2016

Pushmi-Pullyu: Biofuel Incentives Come Together In A Strange Creature

Jim Lane

BD TS 011216 pushmi smSometimes, the set-up of the transition from fossil fuels is as pretty and impractical as Dr. Doolittle’s Pushmi-Pullyu. The Digest investigates.

As you may have noticed in the stories around the launch of the Great Green Fleet, it is a complex maze of relationships when it comes to a technology benefitting from mandates like the Renewable Fuel Standard and the California’s Low Carbon Fuel Standard and various carbon taxes and tax credits.

For example, a renewable fuel does not qualify under the Renewable Fuel Standard if it is to be used in an ocean-going vessel, but it can qualify under the California Low Carbon Fuel Standard if it is loaded on ships in California. And, it qualifies for the federal renewable diesel tax credit even though it does not qualify for RINs.

Conversely, jet fuel from the same biorefinery can qualify for the Renewable Fuel Standard, but does not qualify under the California Low Carbon Fuel Standard. It does not qualify for the renewable diesel tax credit though it does qualify for RINs.

To make matters more complicated, consider the problem of feedstocks. A jet fuel made from eucalyptus oils by the same California biorefinery would not yet qualify for anything — not the RFS, not the LCFS and not the renewable diesel tax credit.

Yet, were you to take old branches from eucalyptus trees, grown in Burundi, ship them back to California and convert them into ethanol, you would qualify the fuel under the Renewable Fuel Standard and the California LCFS. Alas, no renewable diesel tax credit.

So, by now we should all be completely confused. One might argue that so long as a renewable fuel reduces CO2 emissions and is used within a given jurisdiction, it should qualify as a renewable fuel. Doesn’t work that way.

Weird, huh?

In the perfect world we don’t live in

As originally conceived, a mandate, and a tax on the incumbent (or a tax credit for the new entrant) should work well together.

First, the mandate should ensure that there is a market available, taking into account that incumbents directly or indirectly control fuel supply (through direct ownership of fueling outlets, or franchising agreements, or the inability of dispensers to handle a new product.

The mandating regime can assist the transition away from that old system of ownership and control via incentives or regulations (e.g. the installation of blender pumps, the manufacture of flex-fuel vehicles, or banning agreements that limit fuel selection at any location), or not. In the US, there are limited blender pump incentives, flex-fuel manufacturing incentives that are on the verge of expiring, and that’s about it.

That takes care of availability. Initially, renewable volumes are small compared to fossil fuels — yet they are requires to both meet the same ASTM fuel performance spec, and there is limited opportunity for the kind of early-stage performance differentiation that assists the launch of anything from electric cars to iPhones.

So, the small refinery has to make essentially the same fuel as the large refinery, and unless there are huge disparities between feedstock costs, the small refinery’s fuel will cost more.

Production credits, investment credits and carbon credits, what they are and how they work

We generally attack the resulting production cost problem with tax credits, of which there are three kinds, production credits, investment credits and carbon credits.

Production credits are the easiest to understand. You produce a qualifying fuel, you receive a tax credit. The taxing regime gets to decide if it will award the credit to the producer of the fuel, or the marketer that blends and distributes the fuel (known as the Producer’s Credit or the Blender’s Credit) — this past year, the US considered switching from a blender’s credit to a producer’s credit when it comes to biodiesel or renewable diesel. A blender’s credit can benefit, for example, an off-shore producer, while a producer’s credit might narrow the benefit to domestic producers.

Then, there are investment tax credits, These always incentivize local producers, who are paid out when they install new production capacity. It’s a lot faster than the production credit, and helps with the capital stack by which these facilities are financed. Investors tend to prefer investment credits for new capacity, because there’s more certainty that they will truly be available. On the other hand, the taxing regime has less certainty that the capacity will be utilized.

Carbon credits are the most murky. A federal credit under the Renewable Fuel Standard comes in two flavors. One is a RIN and one is a cellulosic waiver credit. Each obligated party under the RFS has to submit a given number of RINs each year, a mandated percentage of their overall production, for each mandated fuel. Each gallon of renewable fuel comes with a RIN, or a Renewable information Number. The simplest way to comply is to buy the wet gallon, blend it into the fuel supply, and submit the RIN.

But obligated parties can also buy RINs on the open market. Sometimes, refiners have excess RINs, so they sell them to obligated parties who are short. The resulting price of the RIN indirectly assists the renewable fuel producer — setting a floor price for a fuel.

For example, if gasoline costs $2.00 and a RIN costs $0.75, you can sell a renewable fuel to an obligated party for $2.70, and they’d be delighted to lock in some extra margin.

The cellulosic waiver credit works in a similar way. An obligated party can buy a cellulosic waiver credit from the EPA for a given price that is set each year, in lieu of buying or blending a gallon of cellulosic biofuels. In the same way as the RIN example, if gasoline costs $2.00 and a CWC costs $0.75, you can sell a cellulosic fuel to an obligated party for $2.70, and they could lock in some savings compared to distributing gasoline and buying a CWC.

The problem of performance differentiation in fuels

So, the theory is sound. There is a mechanism to address the absence of an open market in fuels at the consumer level, and there is a mechanism to address the lask of performance differentiation in fuels that we generally see in new market entires like iPhones.

You see, the real performance differentiations between renewable fuels and fossil fuels lie in emissions, energy security and economic development that renewables achieve when they are deployed, by reducing imports and reducing CO2. These are social benefits enjoyed by society as a whole, they do not accrue to the investor in the project, because investment and return in measured in dollars instead of social benefit.

The carbon credits internalize the benefits inside the project, monetizing a social benefit such as cleaner air or less dependence on fuels made by unfriendly regimes.

Why are the various regimes so contradictory and confusing?

Tax credits generally are fuel-specific, for one — so you might have one for ethanol but not biodiesel, or one for biodiesel and renewable diesel but not ethanol. The latter is the case in the US right now.

Second, each carbon scheme is based on the idea of pathways. One example would be using a Midwestern dry mill ethanol refinery that uses coal for process energy, and makes ethanol from corn starch. From California’s point of view, a local refinery would have a lower carbon footprint because of the reduced carbon of transporting fuel from the Midwest, Or, a facility that switched to natural gas for process energy would do better on carbon. Better still, biogas. Or, the refinery could switch over to lower-still biomass sorghum. Each of these represents a pathway and they have to be individually and painstakingly approved by the mandating authority.

In many cases, California and the US government are simply able to approve pathways at a much slower pace than the pace of innovation, so they fall behind as new feedstocks, technologies and end-uses pop up. For example, algae was not originally included as a feedstock under the RFS.

Another thing. Originally, these schemes were designed for road transport. So, marine fuels, jet fuels and the use of molecules to make renewable chemicals were outside of the system of credits. Slowly, the mandating authorities are working through the possibilities.

But California has not yet embraced jet fuel for the LCFS, while the US government has not yet embraced marine fuels for the RFS. Chemicals are not yet approved uses, even thought they reduce carbon, and sometimes offer much longer carbon sequestration in a durable good, such as a chair.

To give an example, you can qualify for a RIN by making isobutanol and blending it into the fuel supply to be combusted in ICU engines. But, if you sell isobutanol as a blendstock for a renewable chemical, in which case the carbon might be sequestered for a hundred years, you don’t get the credit.

On the one hand that makes perfect sense — after all, a durable good is not a renewable fuel and fitting it into the Renewable Fuel Standard is a sketchy proposition. Yet it provides the same (or more) carbon benefit based on the same feedstock, possibly made at the same refinery, such as Butamax or Gevo. And, the producer gets a higher price, generally, for the chemical, which provides more margin and more incentive to build more refineries and reduce carbon faster.

So, these are some of the dilemmas that regulators are working through.

Ways to improve

One way to improve is to shift the way we approve pathways. Right now, we place to burden in EPA to approve a pathway before it can be used. If they get backlogged, innovation stalls and innovative producers can go to the wall.

Another way to go forward is to allow producers to use a novel pathway, so long as it meets a basic “first glance” standard based on the producer’s data submissions, subject to EPA review. The EPA review, then, would only be able to shut down a pathway if the data proved to be falsified. Producers could get into the market as fast as they galvanize their own resources to build a data set.

Another way to improve is through the use of “pathway” treaties. For example, the US could, by treaty, recognize a California-approved pathway as a US-approved pathway. Or, vice-versa. Saves filing in two regimes for a novel pathway, and prevents cases as with AltAir where the producer is incentivized towards a given pathway not because of reducing more carbon or getting a better margin, but because of differences in the regulatory regimes.

Another way to improve is to allow the use of fuels as renewable chemicals, and allow refineries to produce chemicals and qualify them under LCFS and RFS. At the end of the day, both use cases reduce carbon footprints and reduce imports equally. It seems counter-productive and overly complicated that, for example, Gevo could sell isobutanol to an obligated party, and the refiner can sell the RIN if it is used as a fuel blendstock but must retire the RIN if it is used as a chemical feedstock.

One final improvement. The EPA decided that RINs would be calculated on energy content and no other factor. Yet, molecules have downstream pathways just as they do upstream pathways. It would be generally acknowledged that higher-ethanol blends incentivize more use of renewable fuels and do more towards achieving aggressive Congressional targets, yet E15 blends (based on a $0.70 RIN) provide no more than a 3.5 cent incentive to the blender compared to E10 blends. That’s not the kind of incentive that breaks through the E10 saturation problem. If higher blends received higher RIN values based on their value in incentivizing a distribution system that could achieve Congressional targets, they would be serving the Congressional purpose.

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

January 13, 2016

Molycorp: Holding a Stinky Bag

by Debra Fiakas CFA
Last week news agencies reported plans by Molycorp (MCPIQ:  NYSE) to move forward with plans to sell major assets as part of a plan to emerge from bankruptcy.  Molycorp was the single largest producer of rare earths in the U.S. until it discontinued product at its Mountain Pass mine in Colorado.  Molycorp filed for bankruptcy protection in June 2015 after it became apparent that it could no longer support the debt on its balance sheet on historically low selling prices for its rare earth materials.

The turn of the tide for Molycorp and its rare earth business plan surprised few who follow the mining industry.  The U.S. had led the way in the rare earths arena.  The Mountain Pass mine had been the world’s leading producer  of these unusual metals in the 1960s when new color television designs escalated demand for europium.  It took a while for the Chinese to catch up, but by the 1990s producers there had increased production to rival that of Mountain Pass.  What is more, strategists in China had also figured out how to use low prices to force competitors out of business.  The machinery came to a stop at Mountain Pass.  Other mines in Japan and elsewhere followed suit, leaving China with as much as 95% of the market for rare earth materials.

Then the Chinese decided to curtail exports of rare earths.  Sensing an opportunity to grab customers from the Chinese and sufficiently high selling prices to justify investment, Molycorp management decided the time was ripe to return Mountain Pass to its previous glory.  Why anyone would invest billions on the vagaries of Chinese business and political strategies seemed a bit ludicrous to me, but it passed the tests of lenders who extended over $1.7 billion in loans to Molycorp.  

Of course, about the time that Molycorp and its lenders became fully committed to the Mountain Pass plan, Chinese rare earths producers were treated to a reversal in policy by government officials.  In an attempt at compliance with World Trade Organization rules, China resumed rare earth exports and the world prices plummeted.
Molycorp’s business model at Mountain Pass was no longer viable at the new, lower prices.  Production at Mountain Pass was confined to the ‘light’ rare earths, europium oxide, dysprosium, lanthanum oxide and cerium oxide, which commanded the lowest prices of all.  Furthermore, Molycorp management had experienced problems in coming to market in the first place.  There were impurities in initial rare earths production and low-quality construction of tanks at one of its plants ended up increasing costs and delaying achievement of target production.

To make matters worse, all the while that the Chinese were holding back exports of rare earths and Molycorp was gearing up production at Mountain Pass, manufacturers of magnets, batteries, electronics devices and other items requiring rare earths got busy figuring out ways to get along with lower amounts of rare earths.  As a consequence demand for rare earths has diminished.

By the time Molycorp finally got to the rare earth materials market its production cost was as much as $20 per kilogram.   With the Chinese now back at the sales block and customers reluctant to pay top dollar, the rare earth portfolio is selling for around $10 per kilogram.

The creditors of Molycorp are now left holding the bag and it is apparently a stinky one.  Certain of Molycorp’s junior lenders have been at odds with one of the more significant creditors, Oaktree Capital Management.  There is good reason to argue.  Initial bids for the company’s assets, which will go to the auction block on the first week in March 2016 and are valued at $2.5 billion on the company’s balance sheet, have risen from a nickel on the dollar to more than a dime on the dollar.  That means there will be more money available to repay creditors.

Shares of Molycorp closed last week at $0.05 per share, suggesting that after debt the value of the company is $14 million.  It appears shareholders and traders have some optimism that Molycorp can emerge from bankruptcy with some sort of business intact.  The company’s mine operation is a money loser, but its downstream processing facility in   China is turning a profit.  Can this management team be trusted to craft a viable business with whatever assets are left after the March auction?  So far their business strategies have been wrong and execution weak at best.  The March asset auction might be worth watching to see what sort of asset base is left over and whether the current management team survives the battle that is unfolding as the date draws near.
Debra Fiakas is the Managing Director of
Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

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

January 12, 2016

Ten Clean Energy Stocks For 2015: Income Comes In First; Growth Shrinks

Tom Konrad Ph.D., CFA

2015 was a very tough year for energy stocks, especially income oriented energy stocks such as (mostly fossil fuel) MLPs and (mostly clean energy) Yieldcos.  Not only did oil and gas prices drop dramatically, but most other commodities did as well.  Low commodity prices hurt commodity producers, but also commodity recyclers and efficiency companies that help reduce the consumption.

Against this backdrop, I'm happy that my Ten Clean Energy Stocks for 2015 model portfolio ended the year in the black, with a 5.8% total return from December 31st 2014 to December 31st 2015.  For the same period, the broad market of small cap stocks (as measured by the Russell 2000 index ETF IWM) fell 4.8%.  The Powershares Wilderhill Clean Energy ETF (NASD: PBW), which is representative of most clean energy stocks, fell 8.3%.  My model portfolio is heavy on income stocks (six out of ten), so I also use a clean energy income benchmark.  For the year through May, this was the global utilities ETF, JXI, but I switched to the Global X YieldCo Index ETF (NASD:YLCO) at the start of June when it went public.  This income benchmark fell 30.4% for the year.   I use a 60/40 blend of the income benchmark and PBW for the whole model portfolio, and this benchmark fell 21.6%.

The positive returns were driven by the six income stocks, which were collectively up 23.8%, beating even the Green Global Equity Income Portfolio (GGEIP) which I manage.  This was up 12.0% after fees, and still far ahead for the income benchmark.  The four value/growth stocks did not fare nearly as well, collectively falling 21.2%, far behind their benchmark, PBW.

Individual Stock Returns and Highlights

Detailed performance for individual stocks can be seen in the chart below (click for a larger version), including performance in the two months since the last update.

10 for 15 full year

Price Targets

At the start of the year, I provided high and low price targets indicating the range in which I expected most of the stocks to finish the year. 

As you can see from the following chart, my range predictions were only accurate for half of the stocks, with three income stocks exceeding my high targets, and two value stocks falling below my low targets.  I examine the reasons for the two that fell short (Power REIT and MiX Telematics) in the individual stock discussions below.

2015 Price targets.png

Income Stocks

1. Hannon Armstrong Sustainable Infrastructure (NYSE:HASI).
12/31/2014 Price: $14.23.  Forward Annual Dividend: $1.20.  Beta: 0.81.  Low Target: $13.50.  High Target: $17. 
12/31/15 Price: $18.92. 2015 Dividends: $1.08  YTD Total Return: 40.5%.

Sustainable infrastructure financier and Real Estate Investment Trust Hannon Armstrong finally received the investor recognition I'd hoped it would since its IPO in 2013.  This recognition drove HASI as high as $21.50 near the height of the Yeildco bubble during the second quarter, and also kept it from crashing back along with its Yieldco cousins.

Also unlike most Yieldcos, Hannon Armstrong retains access to the capital markets, as demonstrated by its secondary offering of stock at $18/share in October and issuance of $100.5 million worth of A-Rated bonds in September.

At a recent Yieldco conference, CEO Jeff Eckel said his goal for the company was to keep boring investors with its predictability.  It did just that when the company announced an increase in its quarterly dividend to $0.30 per share, exactly in the middle of its guidance range on December 15th.

HASI remains the largest holding in my managed accounts, but I expect to continue to trim my holdings in the coming year whenever the stock is over $20 to invest in other opportunities.

2. General Cable Corp. (NYSE:BGC)
12/31/2014 Price: $14.90.  Forward Annual Dividend: $0.72.  Beta: 1.54.  Low Target: $10.  High Target: $30. 
12/31/15 Price: $13.43. 2015 Dividends: $0.72  YTD Total Return: -5.0%.

International manufacturer of electrical and fiber optic cable General Cable Corp. had a volatile year, ending down 5%.  In part, that was the normal behavior of a highly leveraged, economically sensitive company in an uncertain economy, but it was also news-driven.  The company shot up in the second quarter on buyout rumors, then crashed back when no buyout materialized.  The company also ran into a hiccup in its restructuring, when the buyer of its Asian operations, MM Logistics (MML), failed to close on the second part of its purchase. 

The company says it is evaluating all its options with regard to MML, but we can expect it to continue to seek buyers for its remaining Asian holdings.

Although I am not selling General Cable in my managed accounts, I have dropped it from the 2016 list because of the high volatility and lack of insider buying.

3. TransAlta Renewables Inc. (TSX:RNW, OTC:TRSWF)
12/31/2014 Price: C$11.48.  Forward Annual Dividend: C$0.84.   Low Target: C$10.  High Target: C$15. 
12/31/15 Price: C$10.37. 2015 Dividends: C$0.811  YTD Total C$ Return: -2.6%. YTD Total US$ Return: -18.4%.

Yieldco TransAlta Renewables outperformed most of its troubled Yieldco peers, but still fell for the year.  Its decline has only improved its attractive valuation.  My dividend discount model values it at C$18.61 at a 9% discount rate, 79% above the year-end price.

Even at the current price, the company is able to access the equity market for capital to acquire new assets and expand the dividend.  It just closed on a third drop down from its parent, TransAlta Corp (TAC), which allowed it to increase its per-share annual dividend 5% to C$84. 

TransAlta Renewables remains in the list for 2016 because of its compelling 8.1% current yield, and its ability to continue its modest dividend increases in future years.

4. Capstone Infrastructure Corp (TSX:CSE. OTC:MCQPF).
12/31/2014 Price: C$3.63. 
Forward Annual Dividend C$0.30.  Low Target: C$3.  High Target: C$5.  
12/31/15 Price: C$3.20. 2015 Dividends: C$0.30  YTD Total C$ Return: 22.8%.  YTD Total US$ Return: 2.9%.

Canadian power producer and developer (Yieldco) Capstone Infrastructure rose sharply in November when it announced that it had retained two investment banks to aid it in "reviewing and considering various alternatives involving the Corporation."   A sale of the corporation to a better capitalized buyer could lead to further gains in 2016, but  a conclusion of the review without a sale might lead the stock to fall, despite a very attractive 8.3% dividend. 

My dividend discount model values Capstone at C$4.89 at a 10% discount rate, and C$3.74 at a 12% discount rate, making Capstone a good to excellent value at its current price.  That said, I removed Capstone from the 2016 list to make room for other Yieldcos with even more compelling valuations.

New Flyer Industries (TSX:NFI, OTC:NFYEF)

12/31/2014 Price: C$13.48.  Forward Annual Dividend: C$0.70.  Low Target: C$10.  High Target: C$20. 
12/31/15 Price: C$28.32.  2015 Dividends: C$0.557 YTD Total C$ Return: 114.6%.  YTD Total US$ Return: 79.9%.

Leading North American bus manufacturer New Flyer ended the year with a bang, rising 42% in the past two months, and 115% for the year in Canadian dollar terms.  The rise was due to the recovery of the bus manufacturing industry, and New Flyer's repeated success in becoming the industry's clear leader.  Over the last two years, New Flyer had consolidated its lead in the transit bus industry with the takeover of rivals NABI and Orion's parts business.  It then announced the merger with the leading motor coach (long distance bus) manufacturer, MCI, and a 12.9% annual dividend increase to C$0.70.

Although I consider New Flyer a great company to own, and excellent diversifier in a green portfolio, I think it's fully valued at the current price.  I have dropped it from the 2016 list and sold roughly two-thirds of the holdings in managed accounts to invest in better valued stocks.

6. Accell Group (XAMS:ACCEL, OTC:ACGPF).
12/31/2014 Price: €13.60. 
Forward Annual Dividend: TBA.  Low Target: 12.  High Target: €20.
12/31/15 Price: €21.07. 2015 Dividends: 0.61  YTD Total Return: 59.4%.  YTD Total US$ Return: 43.0%.

European bicycle manufacturer Accell Group has also been consolidating it s position, albeit in a much more fragmented industry.  The company's leadership is particularly strong in the booming European electric bike (e-bike) market.  Despite economic headwinds, Accell rode the surging e-bike trend to better revenues and profits in 2015.  Like New Flyer, I am dropping Accell from the 2016 list because of its comparatively high valuation and low dividends compared to many Yieldcos.  Unlike New Flyer, I have only trimmed my holdings because I believe the e-bike trend will only accelerate. 

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.
12/31/15 Price: $13.50. 2015 Dividends: $0.24.  YTD Total Return: 5.5%.

Biodiesel and specialty chemicals producer FutureFuel had a turbulent year.  The biodiesel market remained depressed because of low oil prices and political uncertainty.  Although oil prices have not ceased their decline, the price of biodiesel feedstocks has also fallen, albeit more slowly.  When feedstock prices catch up with oil, biodiesel profitability should improve.  Low oil prices also increase fuel usage, and hence biofuel demand where regulatory mandates require a certain percentage of fuel sold to be biofuel.

Political uncertainty was greatly reduced when the EPA set target renewable fuel standard (RFS) volumes for 2014, 2015, and 2016 and reinstated the $1-per-gallon tax credit for biodiesel.  While ethanol producers were generally unhappy with the new targets, biodiesel producers fared better. All these factors mean 2016 is likely to be a banner year for biodiesel.

While FutureFuel's biodiesel business stagnated in 2015, its chemicals business recovered from previous missteps.  This led to a small positive return for investors in 2015.

While I believe there is still room for improvement in the chemical business, I'm much more optimistic about biodiesel.  Hence, I am replacing FF with Renewable Energy Group, a.k.a REG (NASD:REGI) in the 2016 list.  REG is the leading pure-play bio-based diesel stock, and it has spent the downturn using its ample balance sheet to buy up weaker rivals, diversify geographically, and consolidate its lead in the industry.

8. Power REIT (NYSE:PW).
12/31/2014 Price: $8.35
Annual Dividend: $0.  Beta: 0.52.  Low Target: $5.  High Target: $20.
12/31/15 Price: $4.35. YTD Total Return: -47.9%.

Solar and rail Real Estate Investment Trust Power REIT received the final ruling in its civil case with its lessees, Norfolk Southern and Wheeling & Lake Erie railways. The main issues in this case were previously resolved in favor of the lessees during summary judgement.  Power REIT has hoped to be able to foreclose on the lease of its 112 miles of track, since the value of the lease payments have fallen far below the value of the assets since it was signed in 1967.  Although the language of the lease seemed to support Power REIT's contention that the lessees were in default, the court ruled that past performance under the lease supported the lessees.

The final ruling was decided mostly in Power REIT's favor.  Power REIT's CEO, David Lesser, was found to have committed fraud in an email as part of the process of creating the holding company Power REIT, and only $1 in damages were awarded.  The lessees were unable to prove any damages, and the judge dismissed their attempts to undo the reverse merger by which Power REIT now owns the Pittsburgh & West Virginia Railway (the lease holder.)  The court also dismissed the lessees attempts to prevent Power REIT from issuing any more securities.

The remaining legal risks and possible rewards for Power REIT rest on the possibility that Power REIT may appeal. The company has been researching the possibility of an appeal since the unfavorable summary judgment was handed down in August.  No decision has yet been made, but Lesser has said me that he believes the cost of an appeal would be limited.  While the potential upside from winning an appeal are gigantic, the chances seem low, and so I do not place any value on a potential appeal.

When I came up with my low $5 target below which I did not expect Power REIT's stock to fall, I had not anticipated the massive decline in Yieldco valuations.  Aside from the legal case, Power REIT is a micro-cap Yieldco which owns land under solar farms, and which is likely to resume its $0.40 annual dividend sometime in late 2016 or 2017.  On the plus side, the popping of the Yieldco bubble means that Power REIT will have more opportunities to acquire more land under renewable energy projects.  Conversely, lower current Yieldco valuations mean that a microcap Yieldco would have to pay a much higher dividend to attract investors.  Capstone Infrastructure (discussed above) currently pays an 8.7% dividend.  While dividends for Canadian stocks are often higher than US-listed stocks, Power REIT has only 1/30th of the market capitalization of Capstone.  Hence a 9% yield seems reasonable, which would give Power REIT a price of $4.44 upon the resumption of the dividend.

Power REIT, while undervalued, is less undervalued than several larger and more liquid Yieldcos.  Hence, I am dropping it from the 2016 list.  I maintain a position in the common stock in my personal portfolio, and the preferred stock (PW-PA) remains in both my personal and managed portfolios.

9. Ameresco, Inc. (NASD:AMRC).
12/31/2014 Price: $7.00
Annual Dividend: $0.  Beta: 1.36.  Low Target: $6.  High Target: $16.
12/31/15 Price: $6.25. YTD Total Return: -10.7%.

Energy service contractors Ameresco continues to benefit from redoubled efforts to save energy in public buildings.

It had been suffering for two years because its clients, mostly government entities, had been slow to finalize contracts. That has been turning around in 2015, and Obama's recent initiatives to further improve energy efficiency in government buildings should help as well.  Further, Ameresco has diversified its business into commercial solar installation, and that business will benefit over the next few years from the long term extension of the Solar Investment Tax Credit.

Despite all this, the stock fell again in 2015.  Company insiders, especially CEO and controlling shareholder George Sakellaris, maintain their faith in the company by continuing to buy the stock in quantity.  If other investors fail to recognize Ameresco's potential in 2016, the stock has fallen low enough that he may decide to take it private.

Ameresco remains in the list for 2016.

Growth Stock

10. MiX Telematics Limited (NASD:MIXT).
12/31/2014 Price: $
6.50Forward Annual Dividend: ZAR 0.08 or $0.15  Beta:  0.78.  Low Target: $5.  High Target: $20.
12/31/15 Price: $4.22. 2015 Dividends: $0.221  YTD Total South African Rand Return: -8.4%.  YTD Total US$ Return: -31.7%.

MiX provides vehicle and fleet management solutions customers in 112 countries. The company's customers benefit from increased safety, efficiency and security.   Like Ameresco, MIXT stock has fallen despite progress in the business, which has been regularly posting annual subscriber growth around 15%. 

I attribute the stock decline to a combination of the oil price decline, the fall of  the South African rand, and flat earnings caused by falling hardware sales as MiX shifts from a sales model to a bundled subscription model.

The oil price decline hurts MiX because a large proportion of its customers are in the Oil & Gas sector, and the falling rand hurts because South Africa is the company's home market.  Both oil and the rand could go up as easily as down in 2016, having a positive effect on the stock.  Also, as more and more of MiX's revenues come from subscriptions, earnings are becoming less sensitive to hardware sales.

MiX also reinstated its dividend in 2015, a move which did not seem to please the market, but makes it even more attractive to me.  The current low valuation and solid finances provide a measure of protection for shareholders even while the company's strong position in a rapidly growing industry provide excellent long and short term potential. 

Even with the falling oil price and rand, I still find the magnitude of MIXT's fall (and the fact that it fell below my expected range of $5-$20) difficult to explain.  When I can't explain a stock's fall, I look harder for reasons.  When I still can't explain it, I call it a buying opportunity.

Needless to say, MiX remains in the list for 2016.  I have been adding modestly to my position despite considerable losses in the stock over the last two years.

Final Thoughts

2016 holds many risks for the world economy and the stock market.  The market remains expensive, despite its small decline in 2015.  Growth outside the US seems elusive, and seems especially uncertain in China.  On the other hand, clean energy stocks seem particularly undervalued, with most trading at valuations which would interest the most conservative value-oriented investors.  In addition to inexpensive valuations, Clean Energy just received important boosts from the historic long term extensions of three important tax credits (the Solar ITC, the wind PTC, and the biodiesel blender's credit.)

The ITC extension was the longest and is getting the most attention, but it is a little bit of a two-edged sword.  Its expected expiration at the end of 2016 has led manufacturers to boost capacity in order to meet an expected demand surge, as projects which might have been built in 2017 or 2018 were expected to be pulled forward to take advantage of the credit.  With the ITC extension, these anticipated projects may now be delayed.  This, combined with economic weakness in China may cause a temporary glut of solar modules and components.  If such a glut emerges, it will damage (already thin) industry profit  margins.

I see no such problems for wind or biodiesel.  Wind manufacturers (unlike solar) have lived with stop-and-go incentives in the US for the last decade, and so a long-term extension of the PTC should finally allow them the certainty to build out North American manufacturing for the long term.  More local manufacturing should drive down costs, setting the stage for a multi-year boom for wind in the US. 

Likewise, the biodiesel industry has not had this much regulatory certainty for years.  While oil prices are low, feed stock costs are also falling, and regulations have set the stage for industry growth through 2017.  Many producers have been driven out of business during the industry downturn, and the survivors are more efficient and have more flexible technology and supply chains than ever before. 

Finally, Yieldcos are still widely misunderstood, and so have become extremely cheap.  Since the start of the year, worries about China have pulled down the stock market, and many Yieldcos have fallen with it.  Since most Yieldco revenues do not depend on Chinese or even domestic growth, this decline is simply extending what I expect to be a historic buying opportunity for Yieldco stocks. 

While I have significant fears about the direction of the broad stock market in 2016, the year could be a first for clean energy stocks.  In the past, they have only done well in conjunction with good performance of the broader market, and have sometimes suffered while the broad market held its own.   Given the current valuations and strong policy drivers, 2016 could be the first year to see clean energy profits against a backdrop of general market malaise. 

Investors hoping to ride the trend should consider this year's Ten Clean Energy Stocks for 2016.

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

January 11, 2016

Green Bonds: 2015 Year End Review

by the Climate Bonds Team

Another successful year for the green bond market with 2015 issuance hitting $41.8bn making it the biggest year ever for green bonds.

2015 graph

Achieving scale hasn’t been the only reason to celebrate the green bond market at the year-end; the real success is the geographical spread of green bonds across the world. Green bond markets are popping up all across the world, in Brazil, China, Estonia, Mexico and India… just to name a few!

tall trees green shoots

Green bond market momentum continues to build after a successful COP in Paris.

Now we did push hard in 2015 to get $100bn issuance of green bonds out over the year; although the market has not yet hit our ambitious target, there is no doubt that green “shoots” of green bond markets are spreading far and wide. This was ever present at the Paris COP in December 2015 where green bonds were highlighted as a key tool in many of the Climate Finance side-events.

Check out our COP blog for more details.

2015 saw a wider range of issuers and types of green projects or assets.

end use

Similar to 2014, the entry of more corporates, banks, and municipalities into the green bond market bolstered growth in 2015.  There was also a widening of the type of projects financed by green bonds with more proceeds leveraged for other green sectors outside of the renewable energy space, in particular low carbon transport and sustainable water.

Policy support is catalysing green bonds, especially in emerging markets as India and China start rolling out green development plans and green finance policies to support them.

Building up to and post COP21, strong political commitment to grow local green bond markets has driven the global green bond market towards increasing involvement in emerging markets. In 2015, China and India have both had inaugural green bond issuances, and considered policy support. China published official green bond guidelines in December, and India have also started developing official guidelines.

​India led with an inaugural green bond from Yes Bank, (INR 1000 crore, AA+, 10 yrs), followed by Export-Import Bank of India ($500m, BBB-, 5 yrs); CLP Wind Farms (INR 6bn, AA, 3-5yr), and lastly IDBI ($350m, BBB-, 5 yrs).

China wasn’t far behind with its first corporate green bond (issued offshore in Hong Kong) from Goldwind ($300m, 3 yrs). Agricultural Bank of China then issued the first finance sector green bond in three tranches RMB600m, $400m, and $500m (A, 2-5 yrs).
top deals
Greater disclosure on green project selection, proceeds management and environmental impacts shows increased transparency in green bonds. The US green bond market has been relatively slow to adopt the independent review model prevalent in other green bond markets (with the exception of DC Water, which got a Vigeo second review). Instead US issuers tend to use proxies such a green building certification to identify green projects, for example leveraging LEED to identify low carbon buildings.

However, this year there was a small shift towards the independent review model Europe uses, with Morgan Stanley providing a review for its inaugural green bond ($500m, BBB+), followed by Renovate America ($201.5m, AA) and U.S. municipal bonds (Central Puget Sound Transit ($942.8m, AAA, 3-35 yrs); DC Water ($100m, AA, 3-12 yrs)). We expect this trend to continue in 2016.

A growing number of green bonds are aligned with or certified against the Climate Bond Standard. Certified green bonds have been issued by Mexico’s Nacional Financiera ($500m, BBB, 5 yrs); ABN AMRO (€500m, A, 5 yrs); ANZ (AUD600m, AA-, 5 yrs) and NAB ($300m, AA-, 7 yrs); and a number of smaller retail bonds from BELECTRIC in the UK. Certification provides assurance that proceeds are used for assets aligned with a low carbon and climate resilient economy.

Investor interest in green bond outstrips the supply

Growing investor demand, particularly by institutional investors and corporate treasuries, continues to result in over subscriptions as well as pledges to invest billions more capital into green bonds.

2015 commitments to invest in green bonds include: EUR 1bn by ACTIAM, EUR 1bn by Deutsche Bank, $1bn by HSBC, £2bn by Barclays, $2bn by Zurich Insurance and EUR 1bn by KfW

Further to these commitments, specific green bond mandates or funds are being managed by AXA, SEB Investment Management, State Street, BlackRock, Calvert Investments, Nikko Asset Management and Shelton Capital Management.

In December 2015, at the Paris COP, asset owners, investment managers and individual funds managing $11.2trn of assets signed a statement in support of the green bond market.
The rising tide of reporting on green bonds


Importance of reporting

Reporting is key to validating the green credentials of the bonds. Investors need to know what their green bond holdings are financing. The Climate Bonds Initiative will dive further into reporting on trends and market states in 2016.

There has been increasing interests and efforts in green bond reporting

We have seen higher quality reporting (e.g. EIB Climate Awareness Bonds broke down proceeds allocation by bonds and projects). There have also been strong trends in establishing outcome KPIs, disclosing reporting framework, and committing to third-party assurance on reporting.

Majority of issued green bonds provide annual reports

Half of outstanding green bonds were issued more than a year ago therefore should have reported. The majority of them have disclosed their annual reports. Over 90% of the reports disclosed proceeds allocation and climate impacts of projects or assets financed.

Growing awareness in the market

In addition to the update of the Green Bond Principles wording on reporting, several development banks jointly drafted a framework on Green Bond impact reporting harmonization.

Looking towards 2016, we anticipate that the green bond market will diversify in financial products, with potentially the first sovereign green bond and green sukuk in the pipeline. Certified bonds are also expected to grow in the coming year, along with more forestry bonds.

Read the full 2015 year end report here.


Notes on the figures:

  • Currency exchange rates are taken from the last price on the date of issuance
  • Some issuances fall on the cusp of the year in which case we use the announcement date as recorded on Bloomberg to determine its quarter
  • Additional taps of bonds are included dependent on tap announcement date
  • $41.8bn is the labelled green bond total – this means that the issuer has self-labelled the bond as green in a public statement or bond document.
——— The Climate Bonds Team includes Sean Kidney, Tess Olsen-Rong, Beate Sonerud, and Justine Leigh-Bell. 
 The Climate Bonds Initiative is an "investor-focused" not-for-profit promoting long-term debt models to fund a rapid, global transition to a low-carbon economy. 

January 07, 2016

Hydrogenics: New Capital, New Orders

by Debra Fiakas CFA
Hydrogen technology developer and fuel cell producer  Hydrogenics, Inc. (HYGS:  Nasdaq) closed out last year ‘following on’ with new capital and new fuel cell orders.  The company staged a public sale of its common stock through what is frequently referred to as a ‘follow on’ offering, coming along as this one did some years after the company’s initial public offering.  The pricing of these new shares of common stock was ‘followed’ quite closely by announcement of a new order for Hydrogenics fuel cells by a forklift manufacturer in North America.  The appearance of positive fundamental momentum sparked my interest because it is often the case that improved valuation sentiment can ‘follow’ a string of good news.

The company took home approximately $17.9 million in new capital (before expenses) after selling 2.4 million new shares of common stock at $7.75 per share in mid-December 2015.  Management has indicated the extra money will be used to support operations while the company ramps up sales of its proprietary hydrogen fuel cell technology.  In the twelve months ending September 2015, the company used $8.6 million in cash to shore up operations.

Hydrogenics was not out of money before the offering.  At the end of September 2015, the company had $6.9 million in the bank.  However, at the recent pace in cash usage by operations, that cash kitty would only have lasted about eight to nine months.  With proceeds from the stock offering, Hydrogenics has plenty of runway to get sales up and at least reach break-even altitude.

Indeed, the order from the forklift customer is encouraging for achieving break-even.  Valued at $2 million, the order requires Hydrogenics to deliver fuel cell components to a forklift manufacturer within the first quarter of 2016.  The components will be installed in forklifts destined for use in warehouses owned by a ‘big box retailer’ in North America.  To put the order in perspective, $2 million represents a 5% increase in sales over the company’s revenue run rate near $40 million per year.  There is potential apparently for ‘follow on’ orders (there are those interesting words again) as the retailer replaces conventional forklifts with new forklifts powered by hydrogen fuel cells across its warehouse operations.

If this was the only recent order activity, Hydrogenics situation might not be as interesting.  In November 2015, the company won supply agreements from an unspecified number of Chinese electric vehicle manufacturers for its hydrogen fuel cell and fueling station solutions.  Hydrogenics did reveal that one of the relationships is with Yutong, China’s largest bus manufacturer.  While it is a bit worrisome that the company was not a bit more forthcoming about how many unique supply agreements were actually signed, the opportunity clear to penetrate the China market with a product that fits that country’s transportation and environmental goals.

Whichever companies have shown interest, the supply agreements involve fuel cell components for 2,000 vehicles over the next three to five years.  The new relationships will evolve over time, with potential revenue near $10 million in the first year.  There is potential for ‘follow on’ (there we have it again) that could lead to revenue near $100 million over the next five years.

It is possible the company ended 2015, with over $20 million in the bank, a nest egg that could support the operations are the current level of sales and spending for at least another two years.  With so many sales opportunities for Hydrogenics to ‘follow on’ the cash might last quite a bit longer.  What is more, Hydrogenics may have enough cash to pay down some of its debt, which totaled $12.1 million at the end of September 2015.  Even more interesting might be a deployment of cash for investments in new technology or production capacity.

Shares of Hydrogenics have held up since the stock offering a few weeks ago.  The stock closed the year 2015 at $8.77 on improved trading volume compared to most of the previous year.  Just the same the stock price is off highs reached in late November 2015 when the stock reached a 52-week high of $12.08, making the stock as interesting as the fundamental developments in the company.

Debra Fiakas is the Managing Director of
Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

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

January 05, 2016

2015: a Mixed Year for Alternative Energy Funds

By Harris Roen

Alternative Energy Mutual Funds Trade Flat for the Year

Alternative energy mutual funds followed the overall stock market this year, closing about flat on average for 2015. The story gets more interesting, though, when you look at gains in the last quarter. Sectors such as solar and wind took a big hit by September, but then rebounded handsomely before years end. Green MFs were up 7% on average for the past three months, with 14 out of the 15 funds trading in the black…

  Alternative Energy Mutual Fund Returns

ETFs are Widely Lower

2015 was a year of financial ups and downs, and alternative energy exchange traded funds were no exception. Returns of green ETFs varied widely but took a hit on average, losing 10.1% for the year. About three-quarters of ETFs showed losses in 2015, with some funds trading down heavily.

Alternative Energy ETF Returns


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.

January 03, 2016

10 Clean Energy Stocks For 2016

Tom Konrad CFA

The History and Future of the "10 Clean Energy Stocks" Model Portfolios

2016 will be the eighth and possibly final year I publish a list of ten clean energy stocks I expect to do well in the coming year.  This series has evolved from a simple, off-the-cuff list in 2008, to a full blown model portfolio, with predetermined benchmarks and monthly updates on performance and significant news for the 10 stocks. 

While there is much overlap between the model portfolio and my own holdings (both personal and in managed accounts), the model portfolio is designed to be easily reproduced by a small investor who only spends a few hours a year on his or her investments. Trading is kept to a minimum by retaining many names from each annual list, and only trading in the middle of the year in extreme cases.  There has been only one intra-year trade so far, in 2013 in the event of a bankruptcy.

Despite (or perhaps because of) the lack of trading, the model portfolios have performed well, at least relative to clean energy stocks in general.  The model portfolio has outperformed its benchmark every year since 2008 except 2013.  That year it returned 25% compared to the benchmark's 60% return.

In the early years, the model portfolio mirrored the Clean Energy sector's notorious volatility.  More recently, I have attempted to focus the portfolio on less risky stocks, and this has allowed the portfolio to consistently outperform its benchmarks.

The move to less risky stocks has also been a function of my growing personal focus on high yield Clean Energy stocks.  The only current Clean Energy mutual fund or ETF is the Global X YieldCo ETF (YLCO), which was launched in May.  Its low liquidity and worse performance will probably prevent it from gathering enough assets for long term viability.

I've been talking to investment advisory groups and mutual fund companies about possibly launching a mutual fund or other pooled fund based on a Global Green Equity Income Portfolio (GGEIP) which I've been managing in a seed account since the end of 2013.  The seed account has had excellent returns (up 6.6% in 2014 and 12.6% in 2015) while YLCO and fossil fuel based income alternatives have mostly fallen.

If I am successful in making GGEIP available to retail investors, SEC rules will likely prevent me from continuing to update the list regularly.  That is why this may be the last such model portfolio.  Or it may continue in a slightly different form: Aurelien Windenberger has offered to continue the updates if I am unable to.

The Making of 10 for 2016

Not only are income stocks my personal focus, but I believe that late 2015 will prove to be to be the best buying opportunity for clean energy Yieldcos.  Yieldcos are public companies that own long term contracted clean energy assets such as solar and wind farms, and use the cash flows to pay a high dividend to shareholders.  Many Yieldcos are listed subsidiaries of larger renewable energy developers.  These stocks became market darlings in 2014 and early 2015, when investors flocked to them because they had seemingly created a magic formula to combine high current dividends with a high dividend growth rate.  In fact, as I pointed out shortly before the bubble burst, the current dividends were unimpressive, and the cheap capital provided by seemingly endless investor enthusiasm was essential for the high dividend growth rates.

The Yieldco bubble popped over the summer, and I believe we have already seen the lowest point to which the sector as a whole will fall.  That said, many Yieldcos remain amazingly cheap on an absolute basis, and so the best valued Yieldcos will form the core of this list.  I recently wrote an article looking at Yieldco valuations using the dividend discount valuation model.  An updated version of the most important graph from that article follows; the Yieldcos in this list will be selected because of their attractive valuations on this chart.  

ddm valuations update.png
Read the article linked above for a full explanation of how to interpret the chart.

What Is A "Clean Energy" Stock?

Many followers of this series have noted that I tend to stay away from well-known green stocks, like Tesla (NASD:TSLA) and the solar manufacturers and installers most people think of first when they think of clean energy.  This is not just because I prefer less volatile stocks. It's also because I believe that avoiding well-followed stocks gives me a better chance of finding great values that other investors have overlooked.  While some of these stocks may indeed be good values, they clearly have not been overlooked. 

For any investor with limited time to do research (i.e. all investors), deciding where that limited time can (and can't) be spent most productively may be the most important part of the research process.  Investors who skip this step will inevitably squander valuable time researching stocks that are already well priced by the market.  I try to avoid such stocks with some quick tools that help me quickly eliminate most stocks as potential candidates for further research, which I wrote about here.  One of those tools is simply eliminating any company that might make good cocktail party conversation.  Whenever I tell people I what I do, those who are interested in investing always bring up Tesla and/or solar stocks.  Which is precisely why I seldom have much to say about such stocks, and you won't see any of them in this list. 

While I don't try to be a boring conversation partner, I do try to keep my portfolio as boring as possible.  Two other tools I use are looking for buying by company insiders, and low beta.  Among less followed stocks with limited public information, I believe that the actions of insiders is a very important indicator of a company's prospects.  Low correlation with the overall market, or "Beta,"  not only indicates less risky stocks, but much recent research has found that (contrary to traditional market theory) that low volatility and low Beta stocks tend to outperform the market as a whole over time. 

For similar reasons, there are a couple stocks in this list that are not obviously "Clean Energy" stocks.  For my purposes, if a company's products or services reduce the use of dirty energy (i.e. fossil fuels), then it is a clean energy company.  Renewable energy manufacturers, installers, and owners (such as Yieldcos) obviously qualify, but so do companies that sell insulation or help others manage vehicles more efficiently, even if those companies' primary customers are fossil fuel companies themselves. 

The following table shows this year's list in rough order of riskiness (by my own subjective assessment) along with market Beta and a summary of recent insider trading activity. 

Ticker Yield Beta Insider Buying?
1 PEGI 6.7% 1.22 More buying than selling
RNW.TO 8.0% 0.63 Buying, no selling
EVA 11.25% N/A* No trades since IPO
GPP 10.51% N/A* No trades since IPO
NYLD/A 5.8% 1.02 Buying, no selling
HASI 6.3% 1.22 Buying, no selling
MIXT 4.3% -0.13 More buying than selling
GLBL 22.4% 1.22 No trades since IPO
REGI - 1.01 More buying than selling
10 AMRC - 1.1 Buying, no selling

*EVA and GPP have not been public long enough to calculate Beta accurately.


This year's list consists of eight income stocks and two value/growth stocks.  As in 2015, the benchmark for the income stocks will be YLCO, and the benchmark for the value/growth stocks will be the Powershares/Wilderhill Clean Energy ETF (PBW).  I will benchmark the 10 stock model portfolio as a whole against an 80%/20% blend of the two, and also compare it to the Russell 2000 index ETF (IWM) to show how its performance compares to the broader universe of small cap stocks.

Income Stocks Added for 2016

Pattern Energy (NASD:PEGI)

12/31/15 Price: $20.91.  Annual Dividend: $1.488 (7.1%).  Beta: 1.22.  Low Target: $18.  High Target: $35. 

Pattern is a Yieldco owning mostly wind projects in North America.  While Pattern is smaller than most other Yieldcos, and has a more limited development pipeline from its sponsor, it has historically been able to acquire new projects at higher cash flow yields than its bigger rivals with higher profile sponsors. 

The higher cash flow yields of Pattern's projects are in part due to its emphasis on wind projects, and stronger independence at the Yieldco. Wind farms tend to have higher returns than solar because wind production varies more from year to year than solar, and the higher cash flow yields are compensation for higher risk.  That said, the risk of variable production from wind farms is easily diversifiable.  Since average wind speeds in one location have little correlation with wind speed in locations on other parts of the globe, let alone with solar production or the stock market in general, wind production risk production risk will have little effect on a highly diversified stock portfolio, and so the higher returns from owning wind farms come without significant added risk for the stock market investor.

The stronger independence of Pattern Energy from Pattern Development is by design. When Pattern Development offers Pattern Energy a wind farm for potential purchase, a committee of independent board members uses outside consultants to value that farm before price is ever discussed.  The purchase only takes place if the eventual price falls within the range of that initial valuation.

Enviva Partners, LP (NYSE:EVA)

12/31/15 Price: $18.15.  Annual Dividend: $1.76 (9.7%).  Low Target: $13.  High Target: $26. 

Enviva Partners is a Master Limited Partnership (MLP) which owns wood pellet manufacturing and transportation infrastructure.  Unlike wind and solar, the IRS considers wood products to be natural resources, allowing Enviva to use the tax advantaged MLP structure.  The advantage of this structure is that returns to investors can be higher because MLPs avoid taxation at the corporate level. The disadvantage is that MLPs are partnerships, and limited partners (shareholders) receive K-1 tax forms which usually include Unrelated Business Taxable Income (UBTI) which, if the MLP is owned within an IRA or other taxable account, means that the account will have to file a separate tax return with the IRS.  The added paperwork means that most investors will prefer to own MLPs in taxable brokerage accounts.

Most of Enviva's customers are European power companies, which buy the partnership's wood pellets under long term contracts.  This market is expected to continue to grow quickly because converting coal plants to burn sustainably sourced wood pellets is easily one of the most cost effective ways for an electricity utility to reduce its carbon footprint.  Enviva has most of its plants in the US Southeast, where the warm climate and plentiful rainfall results in fast growing forests which lend themselves to sustainable forestry. 

Some newspaper articles have questioned Enviva's sustainability practices with allegations of wood from clear-cutting old growth hardwood forests.  While I believe it is possible that some wood from such clear cutting may have found its way into Enviva's plants, I am confident that sale of wood to Enviva was not the motive for such clearcutting, and the company's presence as a long term source of demand is more likely to encourage sustainable forestry than the opposite.  First of all, Enviva's plants cannot accommodate large logs, just the small trees and branches which might otherwise be burned in place or left to decay (and release its stored carbon) on the forest floor.  Second, the vast majority of Enviva's plants have FSC certification, which I consider to be the gold standard of sustainable certification for wood products.  They would not be able to achieve this certification if they made a practice of accepting wood from unsustainable forestry operations.

Hence Enviva easily meets my green criterion that the company's operations have the net effect of reducing greenhouse gas emissions.

Green Plains Partners, LP (NYSE:GPP)

12/31/15 Price: $16.25.  Annual Dividend: $1.60 (9.8%).  Low Target: $12.  High Target: $22.

Like Enviva, Green Plains is a new MLP.  The company owns ethanol production and transportation infrastructure.  All of its facilities have long term contracts which protect the partnership from direct exposure to the commodity cycle.

Like wood pellets, corn ethanol has also been the subject of questions regarding its sustainability.   Ethanol's detractors often cite studies from the 1990s and early 2000s which showed that it required more energy inputs (in the form of fertilizer, fuel for harvest and transport, and heat for fermentation) than it produced when used to power vehicles.  While there may have been truth to such arguments a decade ago, ethanol production has become much more efficient since then. Ethanol production is a commodity business, and as the industry has grown, ethanol and other biofuel producers have become the main source of marginal demand for commodity crops such as corn. With the price of ethanol effectively set by the price of oil, and the price of ethanol effectively setting the price of corn, only the most efficient ethanol producers can survive and make a profit.  This market process has increased the industry's overall efficiency, leading to net energy and greenhouse gas benefits from ethanol production.

I'm not going to argue that corn ethanol is as green as solar, wind, or even biodiesel.  Nevertheless, it reduces greenhouse gas emissions and the use of oil in transportation in the existing vehicle fleet.  Solar and wind cannot compare to ethanol in transportation until we have much higher penetration of electric vehicles, while biodiesel's contribution is more constrained by the supply of suitable feedstock.

NRG Yield, A shares (NYSE:NYLD/A)

12/31/15 Price: $13.91.  Annual Dividend: $0.86 (6.2%). Beta: 1.02.  Low Target: $11.  High Target: $25. 

The term "Yieldco" was first applied to NRG Yield (NYLD and NYLD/A), and the company rode the Yieldco bubble in 2014 and early 2015.  During this period, I was often short the stock, as a hedge against the other, significantly better valued, Yieldcos.  Three of these (Hannon Armstrong, TransAlta Renewables, and Capstone Infrastructure (TSX:CSE, OTC:MCQPF) were in the 2015 list.  While NYLD fell more than 50% in 2015, Hannon Armstrong, TransAlta Renewables, and Capstone produced total US dollar returns of 40.5%, -18.4%, and 2.9%, respectively.  Now NRG Yield, and especially its A shares, have fallen so far that it has one of the best valuations in my DDM model.

Offsetting its very attractive valuation is the turmoil at its parent, NRG Energy (NRG), where the CEO recently stepped down because of investor skepticism about his aggressive green initiatives.  NRG Yield's low share price and likely lack of management support at NRG may reduce its future ability to grow, but not so much as to significantly undermine its valuation.

The reason I include the less liquid A shares rather than the more liquid and widely held C shares (NYSE:NYLD) is because this list is mostly targeted towards small investors for whom A shares should be sufficiently liquid for unconstrained trading.  Other than liquidity, all the advantages lie with NYLD/A.  Both classes of stock pay the same absolute dividend, but A shares are less expensive and produce a higher yield.  A shares also have more votes, which will make them more valuable in any potential restructuring of the Yieldco.

Investors who do face liquidity constraints should consider splitting their purchase between the two share classes.

Terraform Global (NASD: GLBL)

12/31/15 Price: $5.59.  Annual Dividend: $1.10. Beta: 1.22.  Low Target: $4.  High Target: $15. 

Terraform Global had its IPO in late July, just as the Yieldco bubble was beginning to pop.  It is easily the riskiest of all Yieldcos.  It invests in relatively risky clean energy projects in developing markets like Brazil, China, India, and Brazil.  Another significant contributor to its risk is its sponsor, SunEdison (SUNE).  In order to avoid bankruptcy, SunEdison took complete control of both Terraform Global and its sister Yieldco, Terraform Power (TERP) in November.  GLBL's new management promptly announced that it would focus on acquisitions from SunEdison.  The independent directors on the Terrafroms' conflicts committees promptly resigned, stating that they could no longer ensure that all transactions between they Yieldcos and their parents would be to the advantage of the Yieldcos' shareholders. 

With the departure of the independent directors, TERP and GLBL shareholders must now rely on shareholder activism and class action lawsuits to make sure that SunEdison does not abuse its power at the Yieldcos.  TERP's shareholders found their champion in activist investor David Tepper, who seems to have been the impetus behind the renegotiation of SunEdison and TERP's agreement to acquire Vivint (VSLR.)  The revised agreement was to both SunEdison's and Terraform Power's advantage, but, in my opinion, the Yieldco got the best of the deal.

While Terraform Global is undoubtedly risky, it is also a great value.  At the end of the third quarter, it held $9.50 in cash per share, well above the current share price of $5.59.  The declared dividend is $1.10 annually, or 20%, so even though there is a risk that SunEdison will use GLBL's cash to bail itself out of its financial difficulties, the threat of future lawsuits should ensure that that cash is exchanged for clean energy projects at something close to market prices.  As long as those projects are sufficient to support the current $1.10 dividend, there should be significant upside for shareholders who buy at the current price.

Growth Stock Added for 2016

Renewable Energy Group (NASD:REGI)

12/31/15 Price: $9.29.  Annual Dividend: $0. Beta: 1.01.  Low Target: $7.  High Target: $25. 

Renewable Energy Group, or REG, is the leading producer of biobased diesel with a US listing.  It replaces smaller biodiesel producer FutureFuel (FF) from the 2015 list.  FutureFuel combined a biodiesel business with a large chemicals business which helped shield the company from the continued decline of the biodiesel industry and allowed it to produce a modest 5.5% total return while REG fell 4.5%.  This year, all the factors are in place for a strong industry recovery, and so I'm switching my emphasis to the pure-play.

The factors driving the decline of the biodiesel industry were 1) regulatory uncertainty, 2) declining diesel (and hence biodiesel) prices, and 3) declines in the price of biodiesel feedstocks which lagged the declines in biodiesel.  Regulatory uncertainty was greatly reduced when the EPA set target renewable fuel standard (RFS) volumes for 2014, 2015, and 2016 and reinstated the $1-per-gallon tax credit for biodiesel.  While ethanol producers were generally unhappy with the new targets, biodiesel producers fared better. 

Low crude oil prices are beginning to cut into production, especially shale oil production in the US, a trend which will mitigate future declines and set the stage for a potential rebound.  Slower oil price declines will allow declines in the price of biodiesel feedstocks to "catch up," which will improve biodiesel industry profitability.  REG has used the industry downturn to consolidate its position as an industry leader, leaving it extremely well positioned to capitalize on any improvement in the market.

Returning Income Stocks

Hannon Armstrong Sustainable Infrastructure (NYSE:HASI).

12/31/15 Price: $18.92.  Annual Dividend: $1.20 (6.3%).  Beta: 1.22.  Low Target: $17.  High Target: $27. 

Hannon Armstrong is a Real Estate Investment Trust and investment bank specializing in financing sustainable infrastructure.  It's a leader in the disclosure of the net effect on greenhouse gas emissions caused by its activities.  Hannon Armstrong was my top pick for 2015 as well as one of the three top performing stocks.  I nearly dropped it from the list this year because so many other Yieldcos are more significantly undervalued, but in the end chose to keep it because of the company's unique niche in financing clean energy which I believe gives it a significant competitive advantage over all other Yieldcos.

TransAlta Renewables Inc. (TSX:RNW, OTC:TRSWF)
12/31/15 Price: C$10.37.  Annual Dividend: C$0.77 (6.7%).   Low Target: C$10.  High Target: C$15. 

TransAlta Renewables produced disappointing returns in 2015, although its performance was much better than practically all other Yieldcos.  It remains solidly in the list because it remains attractively valued.  Its stock trades at an approximate 30% discount to my dividend discount valuation.

Returning Growth Stocks

MiX Telematics Limited (NASD:MIXT; JSE:MIX).
12/31/15 Price: $4.22 / R2.80Annual Dividend: R0.08 (2.9%).  Beta:  -0.13.  Low Target: $4.  High Target: $15.

MiX provides vehicle and fleet management solutions customers in 112 countries. The company's customers benefit from increased safety, efficiency and security.   Like Ameresco, MIXT stock has fallen despite progress in the business, which has been regularly posting annual subscriber growth around 15%. 

I attribute the stock decline to a combination of the oil price decline, the fall of  the South African rand, and flat earnings caused by falling hardware sales as MiX shifts from a sales model to a bundled subscription model.

The oil price decline hurts MiX because a large proportion of its customers are in the Oil & Gas sector, and the falling rand hurts because South Africa is the company's home market.  Both oil and the rand could go up as easily as down in 2016, having a positive effect on the stock.  Also, as more and more of MiX's revenues come from subscriptions, earnings are becoming less sensitive to hardware sales.

MiX also reinstated its dividend in 2015, a move which did not seem to please the market, but makes it even more attractive to me.

Ameresco, Inc. (NASD:AMRC).
Current Price: $6.25
Annual Dividend: $0.  Beta: 1.1.  Low Target: $5.  High Target: $15. 

Energy service contractor Ameresco had been suffering for two years because its clients, mostly government entities, had been slow to finalize contracts. That has been turning around in 2015, and Obama's recent initiatives to further improve energy efficiency in government buildings should help as well.  Further, Ameresco has diversified its business into commercial solar installation, and that business will benefit over the next few years from the long term extension of the Solar Investment Tax Credit.

Despite all this, the stock fell again in 2015.  Company insiders, especially CEO and controlling shareholder George Sakellaris, maintain their faith in the company by continuing to buy the stock in quantity.  If other investors fail to recognize Ameresco's potential in 2016, the stock has fallen low enough that he may decide to take it private.

Final Thoughts

Many income investors are particularly cautious now that the Federal Reserve has begun to slowly increase interest rates.  But any interest rate rise promises to be very gradual, and the recent decline of Yieldco prices and the long term extensions of the Solar, Wind, and biodiesel tax credits should all help clean energy stocks in 2016.  I expect this year to be a strong one for clean energy stocks in general, especially recovering Yieldcos.


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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