by Tom Konrad

When I asked, Alternative Energy Stocks readers overwhelmingly wanted me to take another look at Composite Technology Corp. (OTC BB:CPTC.OB)  I've discussed CPTC several times over the last year, and consider it my most speculative pick in electricity transmission and distribution.  True to the nature of a speculative stock with no current earnings which is still trying to establish markets for its products, the stock price has been all over the map.

The reader interest is doubtless due to the recent sharp decline since mid January.  I personally sold a portion of my and client positions when the stock was in the $1.75-$2.00 range, and repurchased it for some accounts around $1.30 (including my own.)  These accounts are currently showing a loss of around 30-35%, not counting the gains taken last year.

I actually have not been watching the recent decline, but seeing the stock at $0.82 today makes me wonder: should I buy more?  Should I take a tax loss for those accounts that could use one?  Has something happened to make the stock look worse, or is the current decline just the effect of falling markets on what has always been a very speculative stock?

Those Pesky Banks

Two weeks ago, I was talking to a friend who acts as a CFO for small wind developers.  Unprompted, he mentioned that banks would not finance CPTC's DeWind turbines because of their lack of track record, which is a gigantic barrier to incorporating them in a US windfarm.  My friend made the same comment about  AAER Inc [TSE:AAE], a company which AltEnergyStocks Editor Charles Morand bought last year (He still owns it, and says he bought if for other reasons, but is not overly concerned about turbine financing.)  In general, I have not been paying nearly as much attention to CPTC's wind division, because I'm more interested in the transmission play, and I had assumed that, given the long backlog for turbine orders from major manufacturers, DeWind would find places to sell as many turbines as Westinghouse can manufacture for them.  This financing difficulty is not news to investors who have been following DeWind, but it raised the question of how many turbines they will be able to sell until they build more of a track record in such places as the Czech Republic.

However, since this is not news, it can't account for the stock's decline.  CPTC does seem to be making accepted progress towards getting these turbines tested and certified, which should do something to ameliorate banks' reluctance to finance DeWind turbines.  They are currently waiting on two reports from the National Renewable Energy Laboratory and the Department of Energy, as well as negotiating with insurance companies which would insure the turbines to allow bank financing.   

Uncertainty among investors as to the results of the DOE and NREL certifications are likely to be the cause of some of the decline.  This sort of uncertainty can feed on itself in down markets like the one we are currently experiencing, but that leads to buying opportunities for brave investors.

Latest Earnings Release

The Feb 11 December quarter earnings release certainly provides no explanation for the recent decline (although the decline began a full month before the release, so it would require the leak of insider information if it had.)  With revenues having doubled from the 2006 December quarter, and up 40% from the previous quarter, the expectation would be that the stock would also be up.  Both the DeWind and ACCC Cable divisions seem to be making headway towards broader market acceptance.

In contrast, operating cash flow for that quarter was almost $14 million in spending, mostly due to a large increase in inventory.  With cash on the books of only $11.5 million, their balance sheet looks weak, so failure to convert those inventories to cash could lead to a liquidity crunch in the coming quarters.  This might lead to a dilutive stock offering, which would probably be bad for current shareholders, unless it were in order to finance an increase in orders.

The company currently does not anticipate needing new cash until June, but seems determined to avoid further dilution if at all possible, mostly by relying on customer payments to fund inventory growth.  This adds both uncertainty, but also means that any gains are likely to be much more profound.

Conclusion

I like what I see.  The company has made considerable progress over the last year, and the stock is staying at the same price.  As the ACCC conductor begins to make a significant contribution to the bottom line, and its turbine certification continues as expected, the company seems likely to maintain current revenue growth rates.  At some point, barring too many unforeseen hiccups, investor greed sparked by rapid revenue growth should overcome uncertainty.

UPDATE: Shortly after publication, two readers pointed out that I'd missed the most likely cause of the sell off: selling by Millenium Partners, to pay an SEC fine.  All the more reason to buy, if the reason for selling has nothing to do with the company.  One of these readers gave the following detailed reasoning:

One issue that I noticed you did not cover is the selling by Merriman (Englander) of Twelve million shares to cover a 148 million fine by the SEC.  This can explain the dropoff in share price.  The market maker that handled the sale of the shares is ARCA, I believe.  If you notice, when ARCA appears to be off the ask, the stock has a tendency to go up.

Good enough for me.  I just bought some more.

DISCLOSURE: Tom Konrad and/or his clients have long positions in CPTC.  Charles Morand owns AAE.

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

Posted by Tom Konrad at 11:11 PM | Permalink | Comments (6) | TrackBacks (0)

Like Quanta Services, (#8 in this series), National Grid PLC (NYSE:NGG) allows investors to participate in the massive build out of electricity transmission and distribution infrastructure necessitated by years of neglect and the growing need to decarbonize our electric infrastructure.  See the article linked above for more detail on these two forces driving the sector.

Having its origins in British electricity deregulation in the 1990s, Nation Grid is a regulated utility in Britain and the United States, and operates high pressure gas pipelines and high voltage transmission in Britain, and electricity transmission and natural gas distribution in the Northeastern US.  The US operations were acquired with the purchase of Keyspan and the gas distribution network of Southern Company in 2007, as well as some smaller previous aquisitions.  They also own some electricity generation assets (mainly acquired as part of Keyspan)

Comparables

The only pure play publicly owned electricity transmission and distribution utility I'm aware of is ITC Holdings (NYSE:ITC), a company I recommended in my article on transmission stocks last April.   Since then, the stock has risen almost 30%, and I now think that it looks expensive, compared to NGG and Quanta Services, which is why it did not make it into this series.  In contrast, NGG trades at a forward P/E of around 13.3, below the utility industry average, with a dividend of 3.2%.

Environment

As a European company based in Britain, management understands dealing with regulators and customers who are far more concerned with Climate Change and renewable energy than those of it's recently acquired US operations.  I expect that the British experience will be a valuable asset to the US based operation as we see carbon regulations in the US (something I expect early in the next Presidential administration, considering that Congress and all the leading Presidential candidates support it), and as the United States begins to catch up with the Europeans in our level of environmental awareness and demand for lean energy sources.

National Grid's leadership can be seen in their initiatives, such as their inclusion the Dow Jones Sustainability indexes, and their award winning energy efficiency programs.

Valuation

As a regulated utility (with 95% of revenues from regulated businesses,) large price appreciation is unlikely, but given National Grid's position and expertise in transmission and distribution, a P/E below industry averages makes the stock seem a solid, safe bet, especially in uncertain economic times.

Click here for other articles in this series.

DISCLOSURE: Tom Konrad and/or his clients have long positions in NGG, ITC, PWR.

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

Posted by Tom Konrad at 11:44 PM | Permalink | Comments (0) | TrackBacks (0)

It may be a stretch to call a company with a P/E ratio in the high 30s "cheap," but in the case of Quanta Services (NYSE:PWR), it's a bargain.  

I won't repeat myself about why electric transmission and distribution (T&D) investments are a good bet.  Put simply, the grid has been long neglected, and improved long distance transmission is essential to bringing large scale renewables such as solar and wind onto the grid.

How does Quanta fit in?  They build transmission line for utilities.  When I ask industry insiders what company is best placed to actually string the wires or lay the cable, the answer is Quanta Services (the answer used to be InfraSource, until that company was acquired by Quanta.)

According to a recent article in the January/February issue of EnergyBiz (this particular article, on p.56 of the print version, does not seem to be online), Northeast Utilities (NU) signed a 6 year contract with Quanta in order to assure themselves access to T&D contracting services which they expect to be in short supply.  According to Jim Muntz, a Senior Vice President at NU, "There are only a few contractors who have the capability to do contracts on this scale, so we determined that before it's taken away from us, we would have to lock up their services for a number of years."

Another reason to expect growth in the industry comes from the same article.  According to Tim Hope, a vice president of operations at ABB (another excellent transmission investment), "While other parts of the utility's operations... looked to outsourcing solutions, T&D seems to be one of the last departments to embrace the concept."  This means that the market for outsourced T&D can not only grow as utilities invest more, but also as they increasingly turn to outsourcing, either due to regulatory pressure or because of insufficient internal resources.

While I might have preferred the pure-play electric T&D opportunity of Infrasource before the merger, Quanta's strategy of becoming a one-stop shop for infrastructure in natural gas, telecommunication, and broadband cable as well as power should serve it well if these industries continue to converge.  The strategy may also allow the power division to draw on additional workers with similar skills from telecoms and cable, if or when the skills shortage outlined above takes hold.

Doesn't that make a high-thirties P/E start to sound cheap?  It does to Cramer and an analyst at Morgan Stanley. I'm hoping the current market decline will make even cheaper.

Click here for other articles in this series.

DISCLOSURE: Tom Konrad and/or his clients have long positions in PWR, ABB.

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

Posted by Tom Konrad at 05:03 PM | Permalink | Comments (0) | TrackBacks (0)

I'm a fan of investing in electricity transmission, both because the grid in the US is in a sad state of repair, and because considerable expansions to the grid will be needed to take large scale renewable energy (especially concentrating solar and wind) from the lightly inhabited areas with renewable energy resources to population and demand centers.

Unfortunately, the need  for new transmission can put renewable energy advocates at odds with more traditional environmentalists, who are concerned about the local damage to views and habitat caused by new transmission lines.  Cases in point are opposition which looks like it will prevent a proposed new line in West Virginia, and opposition to the "Green Path" transmission line which was proposed to allow geothermal, solar, and wind development in the Salton Sea area of Southern California.

If new transmission is not built, we won't be able to wean ourselves from fossil fuels quickly, and the global effects of climate change will cause more disruption to ecosystems than any number of transmission towers would.

Investors Take Note

No matter where you stand in the debate, the issue is a serious one for Renewable Energy and Transmission investors.  If the lines don't get built, neither will the clean energy generation.  For transmission investors, opposition to new lines means that the US grid will have to make current rights of way work harder and transmit more electricity, since fewer new lines will be built than if there were no opposition to new transmission.

Transmission investors concerned about NIMBY opposition should tilt their portfolios more towards technologies that allow for line upgrades than towards builders of new lines.  This can be by either upgrading the existing lines with higher capacity technology, or by managing the grid better.  

I can think of three companies which might be insulated from a lack of new rights-of-way, because they have technology for upgrading the existing grid.  First, there is Composite Technology Corp., which was my #4 Speculative pick for 2008. In that article I describe Composite Technology's (OTC BB:CPTC) ACCC cable which can be used to replace conventional conductors to upgrade power lines without the need to make any alterations to the towers.  This can lead to as much as a doubling of the capacity of an existing transmission corridor at very low cost to the transmission owner.

For larger scale upgrades needed for very long distance transmission, as well as for new long distance transmission lines, the technology of choice is likely to be High Voltage DC Transmission (HVDC). The top suppliers of  HVDC technology are The ABB Group (NYSE:ABB), and Siemens (NYSE:SI). See this article about ABB's HVDC technology for more information.

I'm looking for more ideas in this area.  I love the desert, and don't want to see any more new transmission towers than absolutely necessary.  On the other hand, I don't want to see more and more of our land turned into desert because of Climate Change.

DISCLOSURE: Tom Konrad  and/or his clients have long positions in ABB, SI, and CPTC.

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

Posted by Tom Konrad at 04:10 PM | Permalink | Comments (0) | TrackBacks (0)

This article is a continuation of my Ten Alternative Energy Speculations for 2008, with picks #8, 9, and10 published last Thursday.  If you haven't already, please read the introduction of that article before buying any of the stock picks that follow.  These companies are likely to be highly volatile, and large positions are not appropriate for many investors.   My least risky picks (#8,9, and #10) are part of that same article; my most speculative plays (#1-3) will are here.

#7 Electro Energy, Inc. (NasdaqCM:EEEI) $0.68

Electro Energy has risen 36% in the month and a half since I last wrote about it.  But the reasons to own it are still strong, and the rising share price should actually help the company raise the money they need to ramp up production.  See this article and the one linked to above for my reasons to like this stock.  

More recently, EEEI briefly rose to over $1 because of some excitement generated by their participation in an electric vehicle symposium.  My guess is that year end tax loss selling has brought the stock back down since then.  If I'm right, we can expect it to rebound again the next time they get attention from the press.  In any case, we can expect a lot of volatility.

#6 Capstone Microturbine (NasdaqGM:CPST) $1.62, and

#5 FuelCell Energy Inc. (NasdaqGM:FCEL) $10.30

I'm bullish on both these companies because I'm bullish on distributed generation and Combined Heat and Power (CHP) technologies.  My intuition is that 2008 or 2009 will be the year that distributed generation and CHP grab the attention of Wall Street, the way thin-film PV stole the show in 2007.  Both FuelCell and Capstone stand to benefit.  They may even get a boost from making ethanol production more efficient. 

Regular readers may be surprised that I am recommending a fuel cell stock, since I call Hydrogen Fuel Cell Vehicles "a politically inspired boondoggle."  But there are more types of fuel cells than hydrogen: molten carbonate or solid oxide fuel cells.  FCEL makes a variant of  molten carbonate fuel cell, called the Direct Fuel Cell (DFC), a different beast than the hydrogen  fuel cells, because it can work without an external mechanism to reform the hydrogen.  

FuelCell's DFCs burn methane rather than hydrogen, and are very tolerant not only of low heat content methane (which is often produced in anaerobic digestion or wastewater treatment.)  Note that on page 10 of this EPA study [.pdf] of combined heat and power installations at wastewater treatment plants, a 300kW fuel cell requires a less expensive fuel treatment pressurization facility than a much smaller microturbine system. This is almost certainly due to the lower need for fuel pressurization.

Biogas can be a particularly tricky fuel given the presence of impurities such as H₂S and siloxanes which build up as deposits in combustion chambers.  Microturbines, fuel cells, and internal combustion engines need fuel treatment if siloxanes (which are usually present in waste water treatment plants as a byproduct of deodorants) are present.  Fuel cells and reciprocating engines also require the removal of H₂S.  Nevertheless, wastewater treatment facilities combine an abundant source of free fuel (biogas) with a need for heating, and so present excellent opportunities for CHP.

Fuel cells are more efficient (47% fuel to electricity conversion) than comparably sized microturbines (30-35%) or internal combustion generators (about 40%), which not only translates into fuel savings (or higher electricity output), but also leads to only 85% or less CO₂ emissions than the less expensive (per kW) or internal combustion generators.  Both microturbines and fuel cells get a large system efficiency boost when the heat is also used; both FuelCell and Capstone claim that their products can reach 80% overall efficiency in a CHP context, while the relatively small size of microturbines and fuel cells are particularly well suited to small scale industrial facilities and commercial buildings.

Rising fuel prices make efficient generation important and new fuel sources such as biogas and other waste gasses (such as the Ford plant using a DFC to make electricity from paint fumes) will present opportunities for both DFCs and microturbines in CHP and distributed generation applications.  While DFCs have the advantage of working well on low energy content gas, microturbines are better suited to many projects due to their smaller size, and more fuel flexibility.  Microturbines are much more tolerant of a wide variety of fuels, and can even handle the H₂S in digester gas, as noted above.  Capstone sells versions which can run on liquid fuels such as diesel, propane, and kerosene.  While fuel cells also have this capability, they are less tolerant of impurities, and FuelCell does not currently sell products for these markets.  

One final advantage for microturbines is their ability to ramp up and down quickly, meaning they can used in remote locations with irregular fuel supplies, or when demand for electricity is not constant.   DFCs are less able to ramp up and down because of the need to maintain a high temperature in the fuel cell stacks, so they will only be used when they can be always on, but their ability to supplement biogas with natural gas from the pipeline system still means that they can be used with fuel of variable availability.

FuelCell's DFC and Capstone's microturbines should be able to compete effectively with internal combustion engines in distributed generation applications, since reciprocating engines are too large for many potential projects.  Rising energy prices and tightening emissions limits should allow DFCs to slowly increase their market share in a rapidly growing market.  Incidentally, there has also been a successful test of a fuel cell/microturbine hybrid system [.pdf], with a Capstone turbine generating electricity from the waste heat of a fuel cell.

Capstone finished 2008 with a year-end surge because of new rules which streamline the installation of microturbines in New York City, but could easily continue higher, if I am right about distributed generation taking off.  The new NYC guidelines could easily be one sign of the beginning of this trend.  On the other hand, I wouldn't be surprised to see a small price retreat in January.  It may be wise to wait a couple weeks and see what happens with CPST.

#4 Composite Technology Corp. (OTC BB:CPTC) $1.37

I first recommended CPTC last April in an article about how electricity transmission is essential for renewable energy on a large scale.  At the time I focused on how transmission helps even out the variability of wind power, but transmission is going to be if anything more essential to the development of Concentrating Solar Power (CSP).  While a 100x100 mile square of Southwest Desert theoretically receives enough sun to generate electricity for the entire US, and that electricity could meet both peaking and baseload needs with thermal storage, if the population centers in the East and California are to be served, it will require a massive transmission build out.  

I don't expect Southwest CSP to ever supply all our electricity needs, but I do expect that this abundant, storable electricity will start to be used for more than just the local needs of the desert Southwest within the next decade.  Even this much smaller vision will require a large upgrade to our transmission infrastructure, as will the growing penetration of wind as a percentage of utility resource bases.  CPTC's Aluminum Conductor Composite Core (ACCC) is gaining acceptance in China (which is building out its electric infrastructure much faster than we are building ours.)  I expect the US to follow (although just the China play could be enough to keep the stock rising.)  In the US, I see an opportunity for ACCC with utilities that want to move more power down existing rights of way.  Many utilities need to upgrade their transmission after decades of relative neglect, and the added demands of higher wind penetration and the possibility of long range transmission of CSP power only enhance this need.

Using ACCC instead of traditional (Aluminum Conductor Steel Reinforced) power cables allows the same line to carry higher currents (up to 2x as much) with less sagging in hot weather, and line losses are reduced by as much as a third under all conditions.  For high usage lines, a straight retrofit with ACCC can have good financial returns for a utility based solely on the lower line losses. 

CPTC also has a wind division, which like all turbine manufacturers should, in my opinion, be able to sell all the turbines they can build for the foreseeable future, which should greatly help CPTC with their ongoing operating cash flow as they ramp up production of their D8.2 turbines.  However, they are not profitable, and much of their turbine technology is assembled through patents licensed from other companies, and these revenues are vulnerable to a declining dollar and other foreign currency exchange risks.  CPTC will not become profitable in the near future, and will almost certainly have to return to the capital markets for additional capital.  If their products catch on, it should be easy for them to raise capital on favorable terms; if they don't, we can expect massive dilution.

In all, the "Risk Factors" section of their most recent annual report is long and many of the risks (including multiple lawsuits) are not trivial.  Perhaps the most serious risk is the United States' utility industry's resistance to change, which may lead to a complete unwillingness to use ACCC, despite its superior properties.  This is a big if, and I expect to long term inventors returns to be excellent if they persuade utilities to adopt their technology, and miserable if utilities stick to the way they have always done things.

Three more speculative picks available here.

DISCLOSURE: Tom Konrad and/or his clients have long positions in EEEI, FCEL, CPST, and CPTC.

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

Posted by Tom Konrad at 08:56 PM | Permalink | Comments (6) | TrackBacks (0)

In the most recent two installments of Energy Tech Stocks' interview with me cover my views on transmission stocks, and biofuel stocks.  Readers of AltEnergyStocks know that I am a big fan of electricity transmission, a theme I keep coming back to.  You also know that I have a very ambivalent relationship with both ethanol and biodiesel.  So I liked Bill's transmission article, but I just wasn't able to convey to him the subtleties of how I feel about biofuels.  But he got one thing right: the owners of biofuel feedstock are likely going to be the biggest winners.

Relevant articles on Biofuels

Competition in Ethanol

An Insider's View of the Ethanol Industry

Let Them Eat Grass

Blue Sun Biodiesel

Biodiesel's Competition

My Biodiesel Jeep

The Answer is Trading in the Wind

While you're on the Energy Tech Stocks site, read a little about trading of wind power futures (here and here.nbsp; While I personally have no interest in speculating in wind futures, I predict this will be a great boon to wind farm owners and climate scientists everywhere.  I also predict hedge funds which will use strategies based on emerging inverse correlations between wind power futures and natural gas futures, probably sooner than anyone might guess. 

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

Posted by Tom Konrad at 02:17 AM | Permalink | Comments (0) | TrackBacks (0)

Alternative energy stocks are usually exciting, development stage companies with break-through technology which just might to totally transform the way we live.  Unfortunately, that's a better description of a speculative lottery ticket style company than a solid investment which will provide solid, long-term capital gains.  So it's always a pleasure to find a company whose products are so commonplace that we don't even notice them, even when we see them every day, and yet is involved in essential work to reduce our dependence on fossil fuels. 

I took this picture in a new subdivision near me.  They are scattered unobtrusively in back alleys, and painted a dark green to fade into the background.  This is a transformer, which takes high voltage electricity and converts it into the lower voltage that runs your refrigerator and lights your compact fluorescent bulbs.  It's also made by The ABB Group, a glaring omission from my article on transmission stocks as a way to invest in wind energy.  That omission was due to the fact that, while I knew they are heavily involved in electricity Transmission and Distribution (T&D), I had no idea that they were anything other than what you might expect when looking at all those boring green boxes with the scary warning labels.

T&D Technologies

That changed when I read last weeks Renewable Energy Insider column about improving T&D efficiency by Bob Fesmire, an ABB spokesman, and listened to an interview with him on the Inside Renewable Energy podcast.  He mentioned ABB's FACTS (Flexible A/C Transmission Systems - also supplied by Blue Chip Alternative Energy Portfolio pick Siemens (NYSE:SI)) which improve the carrying capacity of existing transmission lines (which is very important because of the difficulty and expense of expanding existing lines in urban areas, and of building new transmission lines anywhere), as well as Gas-Insulated Substations (GIS) which allow utilities to upgrade substations in dense urban areas with a smaller footprint and less noise than the original (also supplied by Toshiba (TOSBF.PK) and Mitsubishi Electric, among others.)  Finally, they also have a strong presence in High Voltage DC transmission, which many energy advocates are arguing will be essential for a modern grid which will allow us to bring concentrating solar power from the US Southwest to the rest of the country as well as bringing North African Concentrating Solar power to Europe.

Efficiency High-flyer

ABB clearly does not have the T&D efficiency space to itself, but it is hard to imagine a future in which it wouldn't be a player in upgrading our T&D infrastructure.

As you see from the chart, ABB has been on a tear.  With a P/E ratio of 32 and a dividend yield of just 0.8%, this is not a value pick.  Nevertheless, it has the same P/E as its larger and more diversified competitor Siemens (but without the cloud of the bribery scandal, which Siemens is trying to put behind itself).  

Transmission Investment vs. Retail Electricity Sales
Source: IEEE

T&D investment has been lagging in the United States for decades, and politicians and public utilities commissions are starting to take this long-term underinvestment seriously.  Hence, it is not unreasonable to assume that annual transmission spending in the US will increase to at least 1975 levels, and possibly much higher in the next couple of years, with ABB's US revenues doubling as well.  European T&D spending is also increasing in order to ease the adoption of renewable electricity generation, but is unlikely to increase as much, as they have not neglected their grid to the same extent as has the United States.  To me, this implies annual revenue and earnings growth even in in excess of the 25% currently predicted by analysts, making the 32 P/E look reasonable.

Given that most alternative energy picks don't have earnings at all, and those that do have even higher valuations, ABB deserves a look.  I expect to buy more for my clients and myself on any decent pullback.

Speculative investors interested in T&D might also consider American Superconductor (NasdaqGM:AMSC.)  As the name implies, they hope to use high temperature superconductors to increase the capacity and efficiency of the grid, as well as providing enabling power electronics for wind farms.  Earnings are negative, but revenue is growing at 30-50% a year, and the stock has been on a tear since they secured Department of Homeland Security money for a superconducting cable to help shore up New York City's grid.  In other words, they're an exciting, early stage company with break-through technology which just might totally transform the way we get electricity. 

DISCLOSURE: Tom Konrad  and/or his clients have positions in these companies mentioned here: ABB, SI.

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

Posted by Tom Konrad at 07:02 PM | Permalink | Comments (0) | TrackBacks (0)

Last week, Charles told us to expect wind power industry suppliers to benefit from shortages in wind turbine components. Owens Corning (NYSE:OC) which I mentioned in my Blue Chip Alternative Energy Portfolio fits nicely into this category with their composites for turbine blades, as do the power converter stocks I mentioned two weeks ago.

As essential to wind power as any of these is improved power transmission. The National Wind Coordinating Collaborative states,

Electrical transmission facilities connecting windy areas and load centers are sometimes non-existent or minimal. Even in cases where a good wind resource has nearby transmission, that transmission often has limited capacity to transport additional energy. In fact, transmission facilities throughout much of the country are strained, and this problem is acute at specific points of congestion. The expansion of wind power is hampered by this situation, but the associated problem is not confined to wind. Instead, it is a general problem of concern to many in the electric power sector.

While the need for long distance transmission often holds up the construction of wind farms for logistical reasons (there is no incentive to erect wind turbines if you cannot get the power to market), it is unlikely to prevent investment in renewables for financial reasons. The ERCOT Competitive Renewable Energy Zones Study found that the necessary investment in transmission for the high resource zones they identified in Texas ranged from a low of 1.5% to about 12% of the cost of the generation, which will only change the overall economics of any project in marginal cases. Some of these transmission improvements will also be likely to improve system reliability, and so the full cost is unlikely to be considered totally attributable to the wind projects.

As a less expensive but unavoidable investment for new renewable energy projects, transmission improvements are well positioned to be profitable investments in our energy infrastructure as the US shifts to more sustainable electrical supplies.

The FERC opens up Transmission

Politicians and regulators are beginning recognize the necessity of new transmission. This started with the Energy Policy Act of 1992 (EPAct), which opened access to the transmission grid to allow power to be delivered from one generator to another utility.  The Federal Energy Regulatory Commission (FERC) Order 888 laid out laid out the terms under which this was implemented. Order 888 fell short of providing the necessary incentives for investment in transmission and access for renewables, and in December of 2000, the FERC issued order 2000 and 2000-A which require transmission-owning companies under FERC's jurisdiction to file either proposals to form Regional Transmission Organizations (RTOs) or progress reports on the development of RTO proposals. RTOs will have sole responsibility for operation and expansion of the transmission system, maintaining short-term reliability, establishing and managing tariffs, and responding to requests for service.

The credible threat of RTOs in competitive bidding for projects acts as an incentive for utilities to stop delaying necessary investment in transmission, and make such investments quickly at the lowest possible costs.  This should benefit investors in the companies best able to build transmission efficiently and quickly.

Action at the State Level

My own Governor, Bill Ritter recently signed Colorado Senate Bill 100, which requires electric utilities subject to rate regulation to identify high-potential wind-energy locations by undertaking biennial reviews to designate “Energy Resource Zones��? where transmission constraints hinder the delivery of electricity. Texas passed a similar law in 2005, and, as a result, there are several competing proposals for transmission to bring wind power from Texas' remote, windy areas to where it is needed, such as the proposed "Panhandle Loop".

Transmission is not only necessary for large scale wind installation, it also goes a long way (pun intended) towards dealing with wind power's most oft-cited drawback: the wind seldom blows when you need it. Typically, the wind blows at night, and the overall capacity factor for most wind turbines is around 30%. But long distance transmission allows wind from different areas to be combined, allowing benefits similar to the diversification that we investment advisors are always pushing for our client's portfolios. The more wind farms that are built over a wider geographical location, the more reliable wind energy is, and it is transmission that ties it all together.

In the Great Plains, wind typically blows at night in the winter... but winter peak load in California is typically in the evening: due to the time difference, midwest winter wind is on-peak; a more robust transmission system will bring the power from where and when it is cheap to where and when it is needed. Minnesota has also passed enabling legislation to study and develop plans for transmission network enhancement to support Renewable Energy Standards.

In the United States, the grid is characterized by decades of under-investment, with the established operators having insufficient incentives to invest, and as a consequence, having until recently rested on their laurels, treating their existing transmission assets as a sinecure. Therefore, I expect the best investments to be those transmission owners who have shown the ability to upgrade their networks quickly and effectively, with the rest likely to lose out to upstart RTOs which will increasingly be able to win projects from incumbent utilities. There will also be a political aspect to these potential returns: states still have fairly broad authority to implement FERC rules, and the actions of state legislators in utilities commissions will undoubtedly have significant impacts on the decisions and profitability of building new transmission.

States which seem particularly supportive of new transmission include the perennial leader, California, along with New Mexico, and the states mentioned above. Ohio, Virginia and Washington are have long been leaders.

The Best Companies

I see three distinct ways to invest in the coming transmission building boom. We can invest in owners who have shown a willingness and ability to invest effectively in transmission; we can invest in the contractors who do the actual building of new transmission, or we can invest in suppliers of pieces of the transmission puzzle.

Among owners, the undisputed US leader is ITC Holdings Corp. (NYSE: ITC). ITC was created three years ago when DTE Energy decided to spin off their transmission assets (2600 miles of lines.) ITC CEO Joseph Welch has run the company since, and has since acquired the transmission properties of Michigan Electric (6800 miles), and is expected to close a deal for 6800 miles of lines from Intrastate Power and Light late this year. Welch recognizes that ITC's assets have suffered from over two decades of neglect, and expects to spend in excess of $1 billion in upgrades over the next 5 to six years. Given that transmission qualifies for a regulated rate of return, a high rate of investment is a good thing in a transmission organization.  ITC seems committed to acquiring more assets and upgrading what it has, which I believe will be good for investors.  It's current territory (in Michigan, Iowa, and Minnesota) also has lots of potential for wind development, which creates the need for even more transmission development. I'd love to see the acquire or develop assets in northern Illinois and Indiana to tie the system together and connect windy Iowa with power-hungry Chicago. The downside: ITC is up 50% since the Michigan Electric deal last summer. In situations like this, I usually sell put options to generate income if the stock does not pull back, or to pick the company up on the cheap if it does.

The company known for their ability to build new transmission rapidly and inexpensively is InfraSource Services (NYSE: IFS). It has recently agreed to be acquired by Quanta Services Inc. (NYSE: PWR) in an all-stock transaction. Given that both companies are up over 80% since last summer, and acquiring companies often have earnings hiccups as they struggle to integrate the acquisition, most investors would probably do well to wait for a pullback, and buy stock in the merged company after a disappointing earnings report or two.

Among suppliers, I like bulletin board traded Composite Technology Corp (OTC BB: CPTC), which is also up about 90% since last summer, but that is less worrying to me in a microcap company... that sort of volatility comes with the territory. CTC makes an Aluminum Conductor Composite Core cable which they claim can double the current carrying capacity of existing lines, or significantly lower costs for new lines. As a bonus for renewable energy investors, their DeWind subsidiary also manufactures support structures for wind turbines. They recently announced their first contract to supply turbines to XRG in Minnesota. A larger cable supplier is General Cable Corp (NYSE:BGC) which sells not only high voltage cable for electricity transmission as well as telecommunication applications. It has had a similar run-up in the stock price and trades at a rather high multiple for an industrial business.
[UPDATE: I said that DeWind "manufactures support structures for wind turbines." This is not strictly true, and it's a lot more complex than that... see comments.]

Conclusion

All in all, an investor looking to get into transmission today is confronted by rather high multiples for industrial businesses.  Given the good potential growth in the industry, these companies may not turn out to be overvalued, even at current prices, but I prefer to wait for a pull-back on most of them. For those concerned about missing a continued rise, I would advise putting in only a fraction of the amount you hope to invest now, and slowly buying more whenever one of the stock pulls back to a level you are more comfortable with (or using my naked puts strategy, if you understand the risks involved with options and can get sufficient options trading approval from your broker.)

DISCLOSURE: Tom Konrad and/or his clients have positions in the following stocks mentioned here: CPTC.OB.

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

Thanks to Lynn Greene for her help with the research for this article.

Posted by Tom Konrad at 07:35 PM | Permalink | Comments (4) | TrackBacks (0)