Power Production Archives


March 06, 2017

Juhl Energy Diversifies

by Debra Fiakas CFA

Renewable energy producer Juhl Wind filed to terminate registration of its common stock and cease filing financial reports with the Securities and Exchange Commission in September 2015, but the company was not withdrawing from the wind energy industry.  Instead Juhl expanded.  Now called Juhl Energy (JUHL:  OTC/PNK), the company’s corporate website boasts of its corporate headquarters in Minnesota powered exclusively by wind and solar energy.  The company also claims the successful development of over 350 megawatts of wind power generation capacity at 25 different wind projects.  Additionally, the company has dipped its corporate toe into biomass energy and natural gas systems.

After keeping a fairly low profile over the last two years, Juhl is making headlines again. The company is developing a mixed-source project in Red Lake Falls, Minnesota that is expected to be the first commercial solar-wind power generation source in the U.S.  When construction is complete in August 2017, there will be two 2.3 megawatt wind turbines and 1.0 megawatt solar conversion capacity.

Juhl is making small, community-based energy development like the Red Lake Falls project the focus of its business strategy.  The company recently sold several of its renewable energy assets to ConEdison Development, including three operating wind projects in Minnesota and Iowa with a total of 36 megawatts generating capacity and additional interests in various wind power projects with a total of 500 megawatts capacity.
Going forward Juhl plans to focus on renewable energy projects under 20 megawatts.  The company’s standard design for mixed-source power generation from wind and solar is expected to be a key offering.  The company sees demand for smaller projects in the 5 megawatt size from rural communities, small municipalities, industrial complexes and commercial campuses.

At the time of the asset sales, management expressed optimism about the ability of the company to grow with this new, more focused strategy, as proceeds of the asset sales could be used to pay down long-term debt.  However, no details have been made public.  Investors are left to guess about Juhl’s balance sheet.  The company has not filed financial statements for two years.  The last balance sheet filed in August 2015, indicated Juhl held $1.6 million in cash and had $15.9 million in long-term and non-recourse debt.

Juhl is not entirely cut off from investors.  Besides entertaining questions from the public, until recently the company accepted investments in preferred stock in a subsidiary called Juhl Renewable Assets.  The preferred stock gave investors a stake in Juhl’s solar and wind power projects.  Those preferred shares were redeemed at par when the assets were sold to ConEdison Development.

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 16, 2017

Power REIT: Why David Should Defeat Goliath

by Al Speisman, Esq.
Al Speisman
Al Speisman, Esq.

Power REIT1 (NYSE MKT:PW) is a micro-cap Real Estate Investment Trust with assets generating consistent, secure cash flow.  Power REIT’s assets consist of long-term railroad infrastructure as well as 600 acres of land leased to solar farms. Power REIT’S current underlying value of $11.07 per share is delineated in a shareholder presentation on Power REIT’S Web-Site. This valuation does not factor in potential success in Power REIT’s pending Federal Appeal.

A recent article appearing in Value Investors Club lists Power REIT’s Net Asset Value at $10.62 per share plus a “lawsuit optionality value” of $1.09 or a total current valuation of $11.71 per share.  The Value Investors Club analysis assumes a 15% probability of success in the appellate litigation.  I believe this greatly under-estimates Power REIT's chance of success, and the company has a strong chance of prevailing on its appeal.  The potential damage recoveries should it succeed are huge.

The Case

Power REIT has a CEO with vision, persistence and patience: David Lesser.  Mr. Lesser has been involved for several years in pursuing Norfolk Southern on potential lease violations and defaults. The Power REIT/Pittsburgh & West Virginia Railroad (PWV) litigation with Norfolk/Wheeling has been going on for five years. The Appellant Brief (PW), the Appellee Brief (Norfolk/Wheeling), and Appellant Reply Brief (PW) have been filed with the Third Circuit Court of Appeals (Federal Court).

Power REIT’s appeal with Norfolk Southern and Wheeling & Lake Erie Railway (Case No 16-1195) is ripe for a decision. The case “will be submitted on the briefs” to an Appellate panel of three justices on Thursday, January 19, 2017.  As is the norm in the vast majority of 3rd Circuit cases, “there will be no oral argument.”  It is reasonable to believe that the appellate decision should be forthcoming during the First Quarter of 2017.

My summary of Power REIT’s position on the appeal follows.  My primary source is Attorney  Steven A. Hirsch ’s Amended Appellant Brief and Reply Brief.  It is enlightening to review both of these in conjunction with the original lease document.  Mr. Hirsch's background and the outstanding job he has done preparing the appeal both lead me to believe it has an excellent chance of success.

The Lease

My overall assessment is that the lease itself is the key to this case, and the lease is the “blueprint of the deal.” 

Power REIT’s subsidiary, Pittsburgh and West Virginia Railway (PWV), owns 111.21 miles of rail line going between Pennsylvania and Ohio.  It also owns 5 short branch lines comprising an additional 20.38 miles.

In 1962, PWV entered into a 99-year renewable lease with Norfolk Southern (hereinafter “Norfolk”) with a fixed base rental of $915,000 per year plus “Additional Rent.”  Additional Rent includes, among other things, “deduction-based additional rental.” (Federal tax deductions for depreciation, amortization, etc.)  Norfolk is also obligated to pay all expenses Pittsburgh & West Virginia Railroad incurs when they come due and assumes “all obligations” Pittsburgh & West Virginia Railroad incurs relating to Pittsburgh & West Virginia Railroad performing its legal duties and protecting its rights under the terms of the lease.

Key lease provisions include:
  • Leasing of Pittsburgh and West Virginia Railway’s property including the 111 mile stretch of Railroad and the 5 short branch lines (limited exceptions excluded). (See Section 1.)
  •   Pittsburgh and West Virginia Railway property that Norfolk Southern determines to be not “necessary or useful” may be sold, leased or otherwise disposed of” by Norfolk Southern and shall be an indebtedness to Pittsburgh and West Virginia Railway. (See Section 9.)
  • When lease terminates, whether by failure to renew or by default, leased property “shall be returned to Lessor in the same condition as it (was) in at the commencement of the term of this lease, reasonable wear and tear excepted….” (See Section 11.)
  •  Norfolk Southern shall return enough property at the termination of the lease to run the railroad for one year with such property being in unchanged condition. (See Section 11.)
  • A default under the Lease requires Pittsburgh and West Virginia Railway to provide 60-day written notice to cure. Upon determination of default, Pittsburgh and West Virginia Railway is entitled to the return of its property. (See Section 12b.)
  •  Damages from a default of the lease include Interest at 6% from date of default, reasonable attorneys’ fees and expenses. Also, all remaining indebtedness becomes due when the lease is terminated. (See Section 11.)
  •  Indebtedness between Norfolk Southern and Pittsburgh and West Virginia Railway is capped at 5% of the value of Pittsburgh and West Virginia Railway’s total assets “as long as any of the obligations of lessor (Pittsburgh and West Virginia Railway) which have been assumed by lessee (Norfolk Southern) remain outstanding and unpaid.” (See Section 16a.)
During 2011, David Lesser became CEO of Pittsburgh and West Virginia Railway.  He pinpointed the injustices involved in the Norfolk Southern transactions.

Norfolk Southern attempted to sell certain property and Power REIT challenged Norfolk Southern, alleging among other things, that it was entitled to attorney fees for reviewing and acting upon the proposed sale.  Norfolk Southern, trying to avoid a “default” under the lease terms, filed a Declaratory Judgment action in Federal District Court.  The District Court determined by summary judgment that Norfolk Southern had not defaulted.

A key aspect of the case, which goes to the extent of the damages recoverable by Power REIT, is whether Norfolk Southern and/or its sub-lessee, Wheeling & Lake Erie Railway Company, defaulted on the lease.

Four (4) potential defaults under the lease are being appealed by Power REIT:
1. Norfolk Southern violated Section 9 of the lease by failing to pay or record as an indebtedness almost $14 Million from “dispositions” of Pittsburgh and West Virginia Railway’s Property.

2. Norfolk Southern violated Section 11 by allowing resource extraction from these unrecorded dispositions, thus permanently altering Pittsburgh and West Virginia Railway property.  Each time resource extraction occurs it should be construed as a “permanent transfer”.

3. Norfolk Southern violated Section 4(b)6 by failing to pay Pittsburgh and West Virginia Railway’s attorney fees and litigation costs.

4. Norfolk Southern violated Section 16(a) which imposes a 5% cap based upon the assets of Pittsburgh and West Virginia Railway.  The section requires Norfolk Southern to pay any excess indebtedness in the Transactions/Settlement Account beyond the 5% cap to Pittsburgh and West Virginia Railway.  Confirmation of the indebtedness is evidenced by Norfolk Southern’s course of performance with the IRS.  Norfolk Southern prepared Pittsburgh and West Virginia Railway’s tax returns through 2012. Norfolk Southern’s tax returns, as well as the tax returns prepared by Norfolk Southern on behalf of Pittsburgh and West Virginia Railway, acknowledge and affirm the outstanding indebtedness in the Transaction/Settlement Account. (For greater detail and analysis of the tax treatment involved, see the Alpern Rosenthal expert report dated 3/29/13 concluding the Settlement Account on Norfolk Southern’s financials is an indebtedness/liability to PWV.)  Based upon that report, the Settlement Account balance exceeded five percent (5%) of the value of the assets on a market capitalization basis, of each year ending December 31, 1983 through December 31, 2012.  By December 31, 2012, the balance of the Settlement Account, per Norfolk Southern, was $16.66 Million and exceeded five percent (5%) of the value of Pittsburgh and West Virginia Railway’s assets by $15.91 Million.
Potential Damages include:
1. Recovery of Power REIT/ Pittsburgh and West Virginia Railway Attorney Fees: approaching $4 Million.

2. Recovery of Interest:  Section 11, (Termination of Lease) provides for interest at 6% per annum from date of default.

3. The Transactions Account reflects an admitted indebtedness of approximately $17 Million as of 2012. Of that amount, approximately $16 Million exceeds the 5% cap.  No updates of the current Transactions Account balance have been provided by Norfolk Southern to Pittsburgh and West Virginia Railway.

4. An additional $14 Million in dispositions have been identified by Pittsburgh and West Virginia Railway but have not been recorded by Norfolk Southern in the Transactions Account.

5. If the Court determines a Norfolk Southern default has occurred, under Section 11, Pittsburgh and West Virginia Railway is also entitled terminate the Lease and to “such machinery, equipment, supplies, motive power, rolling stock and cash as will be sufficient to enable Lessor to operate the demised property for a period of one year after the return thereof….”. A key variable in determining the amount owed to Pittsburgh and West Virginia Railway would require analysis of Wheeling & Lake Erie Railway Company’s detailed financial statements.

6. If the Court rules Norfolk Southern has defaulted, the entire property reverts back to Pittsburgh and West Virginia Railway.  The rental established of $915,000 per year was established in 1962 and does not escalate and is likely significantly below the current market value.

7. What Pittsburgh and West Virginia Railway could actually lease the property for in today’s market is speculative. Norfolk Southern and Wheeling & Lake Erie Railway have refused to provide operational and income data to Pittsburgh and West Virginia Railway (also a potential default based on a failure to comply with a contractual right contained in the lease that allows Pittsburgh and West Virginia Railway to inspect the  books and records of Norfolk Southern).  However, based upon discussions with railroad consultants, a generic valuation range may be in the range of $1 Million per track mile. Pittsburgh and West Virginia Railway has a total of 131.59 track miles. Note that in recent years, Wheeling & Lake Erie Railway has experienced significant traffic growth as a result of Marcellus Shale activity.

8. One could speculatively project that with either a new or renewed lease, annual revenues to Pittsburgh and West Virginia Railway would be between $5 Million to $10 Million per annum.  That projected valuation does not include potential mineral rights on Pittsburgh and West Virginia Railway land.


Litigation, especially Appellate Litigation, can have a life of its own. Recent articles written on Power REIT have predicted a probability of success in the area of 10 to 15 percent. However, after extensive review of the ongoing litigation, including in depth review and analysis of the facts and pending appellate briefs before the 3rd Circuit Court of appeals, I sincerely belief that David (Pittsburgh and West Virginia Railway) should defeat Goliath (Norfolk Southern) based on the merits of the case. Ultimately there is no way to know if the appeal will be successful….


1) Price (1/13/17):  $6.88.  Shares Outstanding (in M) 1.78 Million.  Market Cap:  12.28 Million. Core Funds from Operations Annualized (FFO) .50 to .60.  Net Asset Value (NAV):  $10.62 to $11.07 (assumes Power REIT loses appeal)

ABOUT THE AUTHOR: Al Speisman is the principal of Speisman Law, LLC. As an investor, he focuses on undervalued, micro-cap companies. He received his M.B.A. from Northwestern University’s Kellogg Graduate School of Management with concentrations in finance and accounting. Mr. Speisman earned his Juris Doctorate degree from The John Marshall Law School.

DISCLOSURE: Al Speisman is a significant shareholder in Power REIT.  On January 3, 2017, he filed an Amended 13G.

DISCLAIMER:  Al Speisman is not employed with Power REIT.  Nor is he a Board Member. The above article should not be construed as legal or financial advice.  It’s strictly the opinion of the author.  For specifics regarding Pittsburgh and West Virginia Railway’s legal position on the appeal, Power REIT’s appellant briefs should be reviewed in detail in conjunction with the lease. The appellee brief filed on behalf of Norfolk Southern/Wheeling should also be reviewed. These, as well as other documents, are readily available on Power REIT’s website: www.pwreit.com. Go to PWV Litigation Update under the “Investor Relations” tab.

Other sources of articles online to consider reviewing when evaluating Power REIT as an investment include, but should not be limited to, the most recent Power REIT Investor Presentation on Power REIT’s website: www.pwreit.com, Tom Konrad’s numerous articles on Power REIT, several articles published with Seeking Alpha, Forbes On Line, AltEnergyStocks.com, and most recently Value Investors Club (VIC).
Investors are also encouraged to participate in dialogue on this article via http://investorshub.advfn.com/Pittsburgh-&-West-Virginia-Railroad-PW-20486/ as well as via the Seeking Alpha post of this article.

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.

November 27, 2015

Abengoa Seeks Insolvency Protection

Jim Lane

In New York, NASDAQ shares in Abengoa SA (ABGB) plunged 49% in Wednesday trading after the embattled renewable energy developer said it would seek bankruptcy protection as it seeks to reorganize nearly $9.4 billion in debt. The protective filing was announced after an expected infusion of nearly $300 million from Spanish steelmaker Gonvarri did not materialize.

The company’s debt had been previously downgraded to a B3 rating by Moody’s, six rungs on the ladder beneath investment grade. Last week, Moody’s described the company’s cash reserves as “insufficient” and expressed that asset sales and a round of investment by existing backers would not be enough to stabilize the company’s finances.

Abengoa in an SEC filing Wednesday stated:

“In relation to the Material Fact (Hecho relevante) of November 6, 2015 (No. 230768) concerning the framework agreement entered into with Gonvarri Corporación Financiera (“Gonvarri”), the Company announces that it has received notice from Gonvarri that the framework agreement is terminated considering that the conditions to which that agreement was subject have not been satisfied.

“The Company will continue negotiations with its creditors with the objective of reaching an agreement that ensures the Company’s financial viability, under the protection of article 5 bis of the Spanish Insolvency Law (Ley Concursal) , which the Company intends to apply for as soon as possible.”

The company did not elaborate on the problems in meeting Gonvarri’s conditions. At the time of the announcement of the proposed investment, which would have made Gonvarri the largest shareholder in Abengoa, the companies said that “the Investment Agreement is subject to certain conditions such as the standby underwriting of the share capital increase by the underwriters announced on September 24th, 2015 continuing to be in force and the signing of a substantial package of financial support in favour of the Company by a group of financial institutions.”

The company developed the 25 million gallons cellulosic ethanol facility in Hugoton, Kansas, and is a major operator of ethanol and biodiesel production assets in the US and Europe.

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.

November 11, 2015

Investors Awaken to NextEra YieldCo

by Debra Fiakas CFA

Last week NextEra Energy Partners, LP (NEP:  NYSE) reported financial results for the third quarter ending September 2015.  The numbers were released in along with quarter results from its parent, Florida-based utility NextEra Energy, Inc. (NEE:  NYSE).  The partnership is the operating arm of clean energy projects originated by the NextEra parent.  The ‘yieldco’ as these operating entities have been kindly dubbed by shareholders, delivered $1.0 million in reported net income, but operating cash flow was a whopping $36 million in the quarter.

The consensus estimate had been for $0.24 in earnings per share, but NEP delivered only a nickel.  The shortfall should not have been such a surprise.  The company has missed the consensus estimate in each of the last four quarters.  This might be due in part to the fact that NEP has only been public for just over a year.  Analysts may still be having trouble rationalizing NEP’s business prospects after the Company’s well publicized initial public offering last year.

Over the previous two and a half years NEP had converted 53.3% of sales to operating cash flow.  True enough the sales-to-cash conversion rate did slip slightly to 35% in the recently reported quarter.  However, some seasonal variability is expected in the wind and solar energy sources that comprise NEP’s revenue sources.  The company ended the September quarter with $696 million in cash and equivalents derived in part from operating activities.

Cash is a critical element in NEP’s growth strategy.  The company is expected to continue acquiring renewable and alternative energy assets, some of which could come from the stream of energy projects under development by its parent or sponsor NextEra Energy.  NEP recently acquired natural gas pipelines in Texas and a wind project in Canada.

The company also raised $319 million in new capital from the sale of new common units during the first nine months of 2015.  Going forward NEP has announced a new $150 million ‘dribble program’ whereby the company could issue new common units from time to time.  This program will allow the parent NextEra Energy to purchase units in periods of undervalued.

NEP management has suggested that acquisition plans to grow its portfolio of energy assets could eventually support distributions in excess of $1.20 per unit over the next five years.  This compares to the current distribution rate at $1.08 per unit.  The current distribution rate represents a current yield of 4.0%.

The yield might appear attractive, but the stock appears to be priced at a premium with a price-to-earnings multiple of 92.2 times trailing earnings.  Importantly, the price-to-cash flow multiple on a trailing basis is 5.2 times.  Since cash generation is NextEra’s forte, it seems appropriate to price the the basis of cash flows rather than reported earnings that include considerable noise from non-cash charges.

The stock hit 52-week low of $19.34 in late September as traders had seemed to remain stubbornly focused on each successive quarter earnings miss.  There appears to have been an awakening among traders to the value in NEP.  The stock has been attempting a comeback in recent weeks.  Money flows into the stock turned positive in late October just as the company was preparing to release third quarter results.  In my view, NEP is at an interesting point and is worth a serious look for yield-hungry investors.

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

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

July 28, 2015

SunEdison Spinning Yieldcos

by Debra Fiakas CFA

Two weeks ago TerraForm Global, Inc. filed yet another amendment to its S-1 registration statement as the SunEdison, Inc. (SUNE:  NYSE) spinout grinds forward with its initial public offering.  TerraForm is a collection of SunEdison’s renewable energy properties, primarily its solar, wind and hydro-electric power generation facilities around the world.  The current portfolio sums up to over 1,400 megawatts in total generating capacity, of which over 900 are spoken for through power purchase commitments that cover the next 19 years.    On a pro forma basis, the assets produced $298.9 million in total revenue, providing $44.1 million in net income.   

This will be SunEdison’s second spinout of renewable assets.  TerraForm Power, Inc. (TERP:  NYSE) was spun out of SunEdison a year ago, gaining 48% from its IPO price of 25%.  Even at its present elevated price, the stock offers a dividend yield of 3.3%.  The success of SunEdison’s first ‘yieldco’ is likely to influence the pricing and trading of the international properties now up for grabs if the SEC can be appeased.

SunEdison has been the premier acquirer of renewable energy projects.  Its reputation precedes it, opening doors and priming negotiations.  A central point of the case for Terraform Global is the existence of over 600 gigawatts of power generating capacity that the company apparently considers fair game for adding to the portfolio.  Seven acquisitions are already in the pipeline, representing 921.7 megawatts of generating capacity. 

SunEdison is projecting 32% compound annual growth over the next five years for Terraform Global and expects to have $231 million in cash available to distribute as a dividend in 2016.  Projecting cash generation in the next year is relatively easy given all those power purchase agreements that lock in sales levels and pricing.  However, in predicting high double digit growth for the next five years, SunEdison could be out on the proverbial limb.

Indeed, with big numbers like 32% growth etched into the prospectus, do not be surprised if Terraform Global debuts at a health multiple of earnings  -  a multiple that might be sustainable if growth fails to materialize.  Thus it might be wise to wait for the stock to mature a few weeks before jumping into long positions.  I note that the ‘big sister’ Terraform Power closed near $32.00 on its first day of trading, but within three months had skidded below its offering price.  This presented an interesting window of opportunity to access shares at compelling prices.  It will be worthwhile watching this new IPO for similar developments.  

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.

May 26, 2015

My Yieldco Raised Its Dividend With This Weird Trick

Tom Konrad CFA

Clean energy yieldcos buck the general trend by paying out a large proportion of cash flow to investors, and rapidly increasing their dividends at the same time.  The key to this trick has been their rapidly appreciating stock prices.

High yield companies generally grow slowly, while high growth companies have low dividend yields.

Normal companies grow by investing some profits in new business opportunities.  Early stage growth companies typically retain all their earnings to invest in new business.  More mature companies have fewer opportunities, and so share a larger proportion of profits with their shareholders.  Mature companies tend to grow more slowly: they return more of their earnings to shareholders in the form of dividends, and the investments they do make tend to be less transformative and more incremental. 

New investments can also be financed by selling more shares to the public.  In this case, the company's overall income will grow because it has more investments, but income per share can only increase if the new investments produce more income per share issued than the company's existing investments. 

The Strange Case of Yieldcos

Yieldcos are subsidiaries of clean energy project developers.  They buy clean energy projects from their parent companies or other developers, and pay out nearly all of the income the projects produce as dividends to shareholders.

In finance jargon, the percentage of profits reinvested in the business is the "Retention Rate."  "Return on Investment" is a measure of how lucrative or transformative a business opportunity can be.  Financial theory says that, if all new investments come from retained earnings, its growth rate will be the product of Retention Rate and Return on new investments. 

By design, yieldcos' retention rates are very low, yet all have been regularly increasing dividends, and most have targets for continuing to increase dividends per share at an extremely rapid rate.

According to the financial theory outlined above, yieldcos should only be able to accomplish this if their new investments are much more lucrative than their existing investments.

Skipping the math for clarity, the following chart looks at the three oldest yieldcos, chosen because they have more data available than other yieldcos.  The three yieldcos shown are NRG Yield (NYSE:NYLD, NYLD-A), Pattern Energy Group (NASD: PEGI) and TransAlta Renewables (TSX:RNW, OTC:TRSWF).

The chart shows recent Retention Rates (amount of cash flow available for distribution which they do not pay out) in blue.  It also shows recent dividend growth (red) and dividend growth targets (yellow and green.)  The brown bars are return on investment from each company's most recent publicly announced acquisition, while the light blue bars show what each yieldco's calculated implied growth rate would be if the only source of growth were from investing retained earnings in the announced projects.  The data is derived from company financial statements and press releases.

Yieldco growth rates.png

The Mystery

Without retained earnings or great returns on investment, how are yieldcos raising their dividends?

As you can see, the implied growth rates (1% to 2%) are far below actual and target dividend growth rates.  This would normally lead us to the conclusion that yieldcos have extremely attractive opportunities for new investments.  We would guess that money raised from the sale of shares to the public is invested these extremely attractive opportunities, and all shares would see a cash flow and dividend boost because the very high returns on new investments more than compensates for the dilution of the new shares.

As you can see in the following chart the returns on the yieldcos' recent investments have been fairly low, and have not been rising significantly. 

Yeildco ROI
I show a rough measure return on investment for those acquisitions from the same three yieldcos where there was sufficient information disclosed for me to make the calculation.  The measure shown is estimated annual cash flow divided by the equity invested.  A more technically accurate measure would also take into account how annual cash flow changes over time, but that information is not available in the press releases. 

As an aside, since these returns are based on estimates from company management, inter-company comparisons may not be meaningful.  In particular, the fact that Pattern's returns on investment have been higher than those of NRG Yield or TransAlta Renewables may be a product of different management assumptions, rather than a true economic advantage.

The mystery remains: Without retained earnings or great returns on investment, how are yieldcos raising their dividends?

The Weird Trick

Although yieldcos are not getting better returns on dollars invested, they are getting more money for the shares they sell.

For example, NRG Yield raised $11 per split adjusted share in its July 2013 IPO.  In its July 2014 secondary offering, it sold shares at a split-adjusted $27 per share.  Every dollar invested in the Energy Systems Company acquisition in 2013 produces 6.7¢ of annual cash flow.  At $11 per share, that is 73¢ cash flow per share.   In contrast, NRG Yield's 2015 investment in the second group of Right of First Offer (ROFO) assets from its parent, NRG, produces a very similar 7.3¢ per dollar invested.  But the shares it sold in July produce $1.97 of cash flow per share when invested in the ROFO assets. 

While NRG Yield's return on invested cash has barely budged since 2013, its return on each new share sold has grown almost three-fold.
The key to NRG Yield's massive dividend per share growth is not better investment opportunities.  The key to its dividend per share growth is selling stock to the public at ever increasing prices.  Many other yeildcos are projecting per share dividend growth based on similar share price growth.

When Will It End?

As long as yieldcos can increase their invested capital per share by selling stock at higher prices, they should be able to continue increasing their per share dividends quickly.  But given many yieldcos' low current yields, the stock prices will only continue to rise as long as investors expect dividends to continue to grow rapidly.  

So far, most yieldcos have enjoyed the benefits of a virtuous cycle of rising share prices and rising dividends.  Rising share prices allow more cash flow per share sold, which in turn allows large dividend increases.  Large dividend increases excite investors, who drive up stock prices, and the cycle repeats.

To keep the cycle going, yieldcos are on a treadmill which requires them to make ever larger purchases of new assets. This growing demand for renewable energy assets, will raise the prices of such assets and lead to declining returns on investment.  This, in turn, is undermines future dividend growth, which in turn will undermine stock price growth. 

At some point, the virtuous cycle will turn vicious.  Failure to meet dividend growth expectations may lead to declining share prices, and lead to further declines in dividend growth, and so on.  Or flat stock prices may make increases in cash flow per share harder to achieve, and this will lead to low dividend growth rates, leading investors to sell the stock.

What Can Investors Do?

Yieldco investors who wish to avoid getting caught in this vicious cycle should focus on those yeildcos with prices that are based more on current dividends than on future dividend growth.  These are easy to identify: they are the yeildcos with the highest current yields.

TransAlta Renewables (TSX:RNW, OTC:TRSWF) currently tops the list, with a 6.6% yield at the current (Canadian dollar) share price of C$12.68 and 7¢ Canadian monthly dividend.  It also has the advantage of slightly higher retained earnings than the other yieldcos, which should allow it to produce a little more conventional dividend growth than the others.

Note: The author of this article will be an instructor at EUCI's "The Rise of The Yieldco" workshop on July 30th and 31st.

Disclosure: Long PEGI, TSX:RNW.  Short NYLD, NYLD-A

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

April 23, 2015

Power REIT Loses; What Now?

Tom Konrad CFA

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

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

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

Grounds For Appeal?

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

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

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

Valuing the Remains

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

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

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

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

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


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

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

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


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

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

 Disclosure: Long PW, PW.PR.A.

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

February 08, 2015

Sol-Wind: A Unique Yieldco

By Jeff Siegel 

President Obama gave renewable energy investors a very nice gift this week...

As a part of his new budget proposal, the president is seeking a 7.2% increase in funding for “clean energy.” As well, he is asking for a permanent extension for the solar investment tax credit (ITC) and the wind energy production tax credit (PTC).

The solar ITC is set to expire at the end of 2016, and the wind energy PTC has already expired.

I can pretty much guarantee that a permanent extension of these tax credits is not going to happen. However, because so many red states generate an enormous amount of tax revenue and jobs from solar and wind, it is likely that both sectors will be thrown some sort of bone — particularly solar, as the industry now supports nearly 174,000 jobs

That data does not fall on deaf ears, despite the dog-and-pony show some lawmakers will put on during election season.

No, solar is the real deal. The market is booming, and cost reductions continue to make it more and more affordable for homeowners and businesses.

Which is why I hope you've been taking some of my advice over the past couple of months and taken a position in some of the more impressive solar names, like SunEdison (NYSE: SUNE), SunPower (NASDAQ: SPWR), and Canadian Solar (NASDAQ: CSIQ). 

Canadian Solar absolutely crushed it yesterday after announcing its acquisition of Sharp Corporation's Recurrent Energy. Check it out...


Recurrent has a massive utility-scale project pipeline that's scheduled to be built before the planned date of the solar ITC expiration. This is a huge win for Canadian Solar, representing an estimated $2.3 billion in revenue.

Going forward, I remain bullish on these major solar stocks, as well as the alternative energy yieldcos.

Year of the Yieldco

Back in November, I wrote in my yearly alternative energy predictions report that 2015 will be the year of the yieldco.

Yieldcos essentially allow retail investors to buy into multiple alternative energy assets that produce steady cash flow. For those who are not particularly keen on risk but still want exposure to the burgeoning alternative energy space, this is a great way to do it. Some of the bigger names include:

  • Hannon Armstrong Sustainable Infrastructure (NYSE: HASI)
  • Brookfield Renewable Energy (NYSE:BEP)
  • NRG Yield (NYSE: NYLD)
  • TerraForm Power (NASDAQ: TERP)
  • NextEra Energy Partners (NYSE: NEP)
  • Pattern Energy Group (NASDAQ: PEGI)

And next week, we'll be adding a new one to this list: Sol-Wind (NYSE: SLWD).

MLP for You and Me

As we wrote to our Green Chip readers earlier in the year, Sol-Wind will be the eighth yieldco to debut since 2013. However, this one is a bit different in that it seeks to utilize a master limited partnership (MLP) structure, so it'll actually be taxed differently from other yieldcos.

Now, because federal law does not currently permit MLPs for renewable energy companies (although oil and gas companies are permitted), Sol-Wind must utilize an exemption that allows certain publicly traded master limited partnerships to be taxed as partnerships instead of corporations.

It's a tricky arrangement that's often used by private equity and hedge funds to avoid taxation. A blocker corporation is set up to absorb the 35% corporate tax that would otherwise be applied to the partnership's assets. However, the corporation makes nothing, and any income made by the MLP is taxed only at shareholder level.

Back in 2012 and 2013, several bills known as the MLP Parity Act (MLPPA) were submitted to Congress, seeking to amend the tax code for publicly traded partnerships to treat all income from renewable and alternative fuels as “qualifying income.” The Senate bills and House resolutions known as the MLP Parity Act died in committee.

However, if an MLP Parity Act is enacted, the company could then be able to use a normal MLP structure, thereby allowing it to dodge extra corporate-level tax.

Long story short, Sol-Wind found a way to utilize an MLP structure despite the fact that renewable energy is still technically not invited to the MLP party.

$400 Million

Sol-Wind management describes the company as a growth-oriented limited partnership formed to own, acquire, invest in, and manage operating solar and wind power generation assets that generate power for retail, municipal, utility, and commercial customers under long-term power purchase agreements.

Following the completion of the IPO, Sol-Wind will acquire from its general partner equity and debt interests in an initial portfolio that represents 184.6 MW of nameplate capacity solar and wind power generation assets in the United States, Puerto Rico, and Canada.

Currently, the company is planning to issue 8.7 million shares at between $19 and $21 a share. At the high end, this would give it a fully diluted market value of $401 million.

Although it's still yet to be seen how Sol-Wind will compare to other alternative energy yieldcos, it'll be interesting for investors to see how the MLP model performs in this particular case.

Definitely keep a close eye on this one.

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


Jeff Siegel is managing editor of Energy and Capital, where this article was first published.  He is also contributing analyst for the Energy Investor, an independent investment research service focusing primarily on stocks in the oil & gas, modern energy and infrastructure markets.  He has been a featured guest on Fox, CNBC, and Bloomberg Asia, and is the author of the best-selling book, Investing in Renewable Energy: Making Money on Green Chip Stocks .

January 09, 2015

Sol-Wind: New Yieldco With A Tax Twist

By Tim Conneally

The pool of public solar yieldcos keeps growing.

Just before the Christmas holiday, Sol-Wind Renewable Power LP filed for a $100 million initial public offering with the Securities and Exchange Commission. This will be the eighth Yieldco to debut since 2013, and the stock will trade on the NYSE under the symbol SLWD.

But there's something different about this one.

Sol-Wind is a yieldco that utilizes a Master Limited Partnership (MLP) structure, so it will be taxed differently from the other Yieldcos.

Generally speaking, a Yieldco is similar to MLPs by nature, but the taxation rules are very different.

The offering from Sol-Wind merits a closer look.

What it is, Why it's different

Sol-Wind is a New York-based company that has only existed for a year. It has already booked $15 million in PPAs across the U.S., Puerto Rico, and Canada. It has a portfolio of 184.6 MW of generating capacity which is made up of 131 discrete solar assets and 16 wind assets.

According to the IPO prospectus, Sol-Wind intends to put the proceeds of the IPO toward acquiring more assets. The document states:

“We are focused on acquiring assets from middle-market developers, which is an area where we see particularly compelling opportunities. We define "middle-market developers" as those developers who typically, in the case of solar assets, develop projects of between 100 kW and 5 MW in nameplate capacity and, in the case of wind assets, between 1 MW and 10 MW in nameplate capacity.”

It seems pretty straightforward, but Sol-Wind is attempting to structure itself in such a way so that it can receive the tax benefit of an MLP instead of a typical yieldco.

A regulation known as I.R.C. § 7704 allows certain publicly-traded master limited partnerships to be taxed as partnerships instead of corporations, and Sol-Wind has the ability to meet that exemption.

It's a tricky arrangement that's often used by private equity and hedge funds to avoid taxation. A blocker corporation is set up to absorb the 35% corporate tax that would otherwise be applied to the partnership's assets. However, the corporation makes nothing, and any income made by the MLP is taxed only at shareholder level.

Why is this structure necessary?

“By statute, MLPs have only been available to investors in energy portfolios for oil, natural gas, coal extraction, and pipeline projects. These projects get access to capital at a lower cost and are more liquid than traditional financing approaches to energy projects, making them highly effective at attracting private investment,” Senator Chris Coons (D-DE) says on his website. “Investors in renewable energy projects, however, have been explicitly prevented from forming MLPs, starving a growing portion of America's domestic energy sector of the capital it needs to build and grow.”

Currently under federal law, qualified sources of income for tax-free partnerships include: interest, dividends, rents, capital asset sales, real estate, and natural resources (including oil/gas/petroleum, coal, timber, etc).

Several bills known as the MLP Parity Act (MLPPA) were submitted to congress in 2012 and 2013, seeking to amend the tax code for publicly traded partnerships to treat all income from renewable and alternative fuels as “qualifying income”.

Unfortunately, senate bills and house resolutions known as the MLP Parity act all died in committee.

Tim Conneally is an analyst at Energy and Capital, where this article was first published.

November 23, 2014

Yield Co Pricing Less Irrational, But Plenty Of Opportunity Left

Tom Konrad CFA

  Yieldcos are companies which own clean energy assets and use the cash flows from them to deliver a high level of current dividend yield and (in some cases) the promise of significant dividend growth.  Investors like them because yield is scarce in the current low interest rate environment. 

While investors like the relatively high yield offered by yield cos, they are only starting to discriminate between yield cos on the basis of current and future dividends.  Four months ago, I published the following chart and noted that the yield cos with the highest current and expected yields were the most attractiveYieldcos by yield.png.  They were (from most to least attractive): "TransAlta Renewables [TSX:RNW, OTC:TRSWF], Hannon Armstrong [NYSE:HASI], Capstone Infrastructure [TSX:CSE, OTC: MCQPF], Brookfield Renewable Energy Partners [NYSE:BEP, TSX:BEP], Primary Energy Recycling [TSX:PRI,OTC:PENGF], and Innergex Renewable Energy [TSX:INE, OTC:INGXF]."

In the four months since then, the six yield cos I listed have produced an average total return of 3.9%, compared to the remaining five, which lost an average of 5.3%, even after the payment of dividends.  These relative moves make current pricing slightly more rational, but a mere 9% relative move is not nearly enough to correct the mispricing in this new and still misunderstood sector of clean energy investing.

Below, I will present an updated version of the same chart, accounting for dividend increases and price moves in the meantime, along with a couple corrections about plans for dividend increases at Abengoa Yield (NASD:ABY) and NextEra Energy Partners (NYSE:NEP).  Note that while correcting these mistakes would have made ABY and NEP relatively more attractive, they were overpriced relative to my six picks, just less overpriced than I thought.  NEP remains relatively overpriced today.  I also incorrectly showed Pattern Energy Group (NASD:PEGI, TSX:PEG) as a US-listed company when, in fact, it is also listed in Canada.  I've corrected these mistakes in the following chart:

Yieldcos by yield Nov 2014.png
The most attractive yield cos are the ones shown in the upper right.  The vertical axis shows current yield, while the horizontal axis shows the expected increase in yield over the next two year, based on management targets.  The changes in bubble size are in part due to increases in market capitalization due to secondary offerings, and partly due to my decision to use full market capitalization, as opposed to just the market capitalization of the stock which is held by the public.

Ignoring the green London-listed yield cos which are almost impossible for a US investor to purchase, the two most attractive yield cos remain Hannon Armstrong (HASI) and TransAlta Renewables (RNW).  Neither has changed much in price, but Hannon Armstrong has become significantly more attractive because of an increased dividend. 

Two other notable moves are Pattern (PEGI)) and Primary Energy Recycling (PRI.)  Pattern has become more attractive after a 21% decline in its stock price (resulting in a 27% corresponding increase in yield.)  I've dropped Primary Energy from the new chart because the company is in the process of being taken private and has suspended its dividend in the meantime.

What will happen in the next four months?  If the market continues its slow moves to price yield cos more rationally, it's a good bet that the three most attractive yield cos (Hannon Armstong, TransAlta Renewables, and Capstone Infrastructure) will out perform the three least attractive yield cos.  Those are Terraform Power (TERP), NextEra Energy Partners (NEP), and NRG Yield (NYLD.)

I'm invested accordingly. 

Disclosure: Long HASI, BEP, PEGI, RNW, CSE, INE, PRI, TRIG.  Short NYLD.

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.

November 21, 2014

Northland Power's Solar-Backed Bond

By Beate Sonerud

Canada’s Northland Power (TSX:NPI / OTC:NPIFF) issued an asset-backed bond (ABS) last month through a SPV (Northland Power Solar Finance One LP). The amortising bond was a private placement of CA$232m with 18-year tenor. Semi-annual coupon is 4.397% and DBRS (Canadian credit rating agency) rated the issue BBB.

It is Northland’s first bond backed by renewable energy projects.  Since the bond is asset-backed the recourse is to the solar projects instead of to Northland Power. This allows Northland to move operational-phase renewable energy assets off their balance sheet, freeing up space for new renewable energy investments. The specific assets are six “Ground-Mounted Solar Phase I projects”, with each operating a 10MW solar facility that sell all electricity to the Ontario electricity grid.

Stable revenue streams for the duration of the bond are provided by the 20-year feed-in tariff contract between Northland’s solar projects and the Ontario grid. This is a good illustration of how policies providing price signals for green in the real economy can enable climate bond issuance. That the bond has achieved a BBB investment-grade rating without further credit enhancement is exciting: As feed-in-tariffs are in place in many countries, there are vast opportunities for other utilities to copy Northland’s model for ABS issuance backed by renewable energy assets that have their less risky operational phase.

Proceeds from the bond “will be transferred via intercompany loans to the six Ground-Mounted Solar Phase” and to Northland for “general corporate purposes”. Now, at first we were a bit worried about the latter, as Northland Power operates facilities for natural gas as well as wind, solar and hydro - meaning general corporate use of proceeds would have excluded the bond from our climate bonds universe.  However, we were happy to include it after Northland confirmed that the proceeds of the bond that are not used for the solar projects has been earmarked for the purchase of a large offshore wind project (Nordsee One) due to close early next year.

So why is that so exciting? Essentially the bond is an ABS version of the corporate use of proceeds bonds (such as Verbund) where proceeds are earmarked for specific green purposes. This matters as the bond not only refinances the underlying projects (that we would expect) but also enables Northland Power to grow its green portfolio - this additionally is what so many investors are looking for.

Now, Northland’s bond is not actually labelled green, but as we clarified that proceeds are aligned with a low-carbon economy, the bond issuance does fall into our unlabelled climate bonds universe. While we are happy to include the bond in our non-labelled climate bonds universe, future similar bonds could benefit from being labelled green. If Northland had decided to monitor and report on proceeds (and ideally gained a second opinion on green) we could easily have welcomed it to the green labelled universe.

Overall, exciting issuance structure – we hope to see it replicated by other utilities and renewable energy developers. Great work, Northland!

———  Beate Sonerud is Policy Researcher at the Climate Bonds Initiative, an "investor-focused" not-for-profit promoting long-term debt models to fund a rapid, global transition to a low-carbon economy. 

October 30, 2014

Power REIT: Light At The End Of The Tunnel?

Tom Konrad CFA

It Could Have Been The First Yieldco

Light at the End of the Tunnel photo via BigStock
I first became interested in Power REIT (NYSE MKT:PW) in 2012 because of the company's plans to become what would have been the first US-listed "yieldco," i.e. a clean energy power producer paying a high level of reliable dividends to investors.  The company was an infrastructure Real Estate Investment Trust (REIT) with a single asset: its subsidiary, Pittsburgh & West Virginia Railway (P&WV) which owned 122 miles of track leased to Norfolk Southern Corp. (NYSE:NSC), which had in turn subleased the track to Wheeling & Lake Erie (WLE.)

The rent on the rail asset was fixed at $915,000 per year with no adjustment for inflation, meaning that the expenses of remaining a public company had been taking a larger and larger share of income. 

In 2011, David Lesser was an executive with experience running REITs and a passion for renewable energy looking for his next opportunity. He realized that solar and wind farms produce reliable, long term cash flows, but at the time, there were no publicly traded vehicles for income oriented investors to benefit from these cash flows.  He saw the opportunity for a REIT to buy the land underlying wind and solar development, lease it back to the wind and solar operators, and deliver the payments to investors in the form of a sustainable yield.  Lesser and his allies saw P&WV as an appropriate vehicle for this, and began buying its stock.  In 2011, he became Chairman and CEO, and formed the holding company Power REIT to own P&WV and future renewable energy real estate assets as a publicly listed holding company.

The immense appetite that investors have shown for the yeildcos launched by renewable energy developers in 2013 and 2014 has amply demonstrated Lesser's business plan to be a good one, but P&WV's railroad asset has side tracked its execution.  The company has only done two smallish solar deals because of the distraction.

Side Tracked On West End Branch

The side track started with a minor dispute over legal fees.  The lease is somewhat unusual, in that (according to the court filings of the lessees) it was designed to give the lessees as much control of the property as possible without taking legal ownership under US tax laws.  Since P&WV retained ownership of the property, but ceased to be an operating company when the lease was signed, the lease provides for the lessees to pay any of P&WV's expenses which are "necessary or desirable" to protect its interest in the property, unless those expenses were "solely" for the benefit of its shareholders.

When Lesser received notification in 2011 that WLE intended to sell a part of the property known as "West End Branch" he consulted with his attorneys to understand P&WV's rights and obligations under the lease. While WLE does have the right under the lease to sell parts of the property it does not need as long as it follows the appropriate procedures, it refused to pay the resulting attorney's fees.  Since the lease seemed to be clear to Lesser and his attorneys in this regard, after several attempts to get WLE to pay, this refusal became an incurable default under the lease.   Since the default was incurable, P&WV's only recourse was to foreclose.

WLE and NSC wanted to maintain what had become a very attractive agreement in their favor over the fifty years since it had initially been signed, and so they filed a civil action against P&WV and Power REIT to prevent the foreclosure in early 2012.  Over the last two years, increasing amounts of PW management and resources have been required in the litigation against two larger and much better funded companies, but Lesser feels firmly that the time and expense will eventually prove to be very attractive investments.  Not only does a reasonable interpretation of the lease provide for WLE and NSC to pay all the expenses (which seem to be a clear example of expenses which are "necessary or desirable" to maintain P&WV's interest in its property), but numerous other violations of the letter of lease have come to light since the initial dispute about West End Branch legal fees. 

If PW is able to foreclose, a bookkeeping "settlement account" under the lease worth at least $16 million and as much as $68 million will be due, and it (or part of it) may be due even if the court finds the lease not in default. 

The State Of Litigation

The current litigation is complex, with multiple accusations in both directions.  Power REIT has posted an archive of most of the court documents on its website.  The most recently filed documents are each party's opposition to the other's Motion for Summary Judgement, and these documents do an excellent job of summarizing each party's position in a very complex case.

Perhaps the most remarkable feature is just how far apart the two sides are.  Power REIT spells out several counts on which WLE and NSC have violated the wording of the lease.  WLE and NSC deny them all, and say that Lesser is a money-grabbing capitalist whose intention has all along been to manufacture defaults under the lease to extract money out of them.  Their main argument is that the parties had been doing everything their way all along, and so that should not change, even if the lease says otherwise.  They also claim, somewhat hypocritically considering the above argument, that Lesser is trying to change the terms of the lease, and that should constitute a default.

I'm not a legal expert, and I have no way of knowing which side is in the right when it comes to the legal issues.  How much does the intent behind the lease count compared to the words of the lease itself?  How important are the previous actions of the parties?

All that said, my layman's reading of the lease tends to support PW's side in almost all cases. I am also repeatedly shocked that WLE and NSC repeatedly say things in their testimony that I find impossible to believe.  For instance, I know from my many interactions with Lesser that his business plan for Power REIT was always been to turn the company into a yieldco: The lease is a distraction, even if it may turn out to be a very lucrative one. 

The evidence in the case also seems to directly contradict some of their testimony.  For example, on page 4 of Document 210 "Plaintiff Opposition to PWV Motion for Summary Judgement", they state that the West End Branch invoice I discussed above "did not relate to the West End Branch sale," and that the attorney's testimony supported this statement.  Yet the attorney said that he recalled reviewing the lease with Lesser for "the general purpose of determining [P&WV's] rights under the lease" relating to the sale of such property (Document 211-4, pp.49-50.)

I found this contradiction because the opposing side's motions seemed to directly contradict each other when it came to the evidence in the exhibits.  Having found one such contradiction, I expect there are more.

Likely Outcome and Timing

With the opposition documents filed, the parties have two more weeks to file another round of attempts to refute each other, after which the judge will decide on each of the motions for summary judgement.  Given that the parties are so far apart, it seems unlikely that many (if any) of the issues will be decided in summary judgment.   At the judge's behest, the parties have also agreed to attempt mediation and have agreed on a mediator.  This seems even less likely to lead anywhere, given the complete lack of common ground, although if the judge were to rule mostly in one party's favor in summary judgment, the other party might be spurred to compromise on the remaining points rather than to go to trial before a clearly unsympathetic judge.

The most likely course seems unsuccessful mediation leading to a trial in early 2015.  I have no idea how long a trial will take, but with three years having past since the dispute began, the judge has been pushing for the speediest possible resolution. 

If WLE and NSC get their way on every count, the lease will continue as it was before PW's attempt to foreclose.  The company will be out its substantial legal fees, but will be able to write off the $16 million at which the "settlement account" is carried on its tax records as an asset.  This will cause future distributions to PW common and preferred shareholders to be characterized as return of capital rather than income, increasing their value to taxable shareholders.

If PW is able to foreclose, the settlement account will be due, as well as the likely reimbursement of its legal costs.  It will be able to re-lease or sell the track at market rates.   All this could be quite substantial: $16 million is $9.25 per share of common stock, which is currently trading around $10/share.  The company does have liabilities, but it also has other assets such as its solar land and leases and the railroad property itself.


I first bought Power REIT stock because I saw a very promising yieldco in the making.  After this legal case is resolved, the company will be able to get back on track to becoming a promising if minor yieldco which takes advantage of the REIT tax structure.  (The only other REIT yieldco is Hannon Armstrong Sustainable Infrastructure (NYSE:HASI.))  The long litigation caused Power REIT to lose its first mover advantage, but it also offers the potential of a substantial upside and limited downside for shareholders.  Three years have passed since the dispute began, but it will likely reach a conclusion before the end of a fourth.

Disclosure: Long PW, PW-PA, HASI

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.

September 22, 2014

5 Clean Energy Yieldcos Flying Under The Radar

by Tom Konrad CFA

The launch last year of NRG Energy's YieldCo, NRG Yield (NYSE:NYLD), and the subsequent near-doubling of its price, set off a feeding frenzy on Wall Street. 

YieldCos are companies which own clean energy assets and use the reliable cash flows from those assets to pay dividends to investors. Investors like YieldCos because many offer yields well above that available from most other stocks, including the fossil fuel-based master limited partnerships, upon which many YieldCos are modeled. Developers of clean energy projects find YieldCos attractive because the stock market provides capital for clean energy projects at a much lower cost than they have historically been able to obtain.

Since its listing, NRG Yield has been joined in U.S. markets by Hannon Armstrong Sustainable Infrastructure (NYSE:HASI), Brookfield Renewable Energy (NYSE:BEP), Pattern Energy Group (NASD:PEGI), NextEra Energy Partners (NYSE:NEP), and TerraForm Power (NASD:TERP). In Canada, YieldCo TransAlta Renewables (TSX:RNW) joined a number of established clean energy producers like Innergex Renewable Energy (TSX:INE), Capstone Infrastructure Corp (TSX:CSE) and Brookfield and Patten, which are listed in both New York and Toronto.

The flood has not stopped there. Analysts are now habitually asking large solar companies and other clean energy developers if they are considering forming a YieldCo. SunPower (NASD:SPWR) has been retaining more of its own solar farms in preparation for a possible YieldCo launch in 2015 or 2016. First Solar (NASD:FSLR), German developer PNE Wind, and Sempra Energy (NYSE:SRE) are all contemplating launching YieldCos as a home for some of their power generation assets. 

Not all of these projects will come to fruition. First Solar's management has commented that they can benefit from the YieldCo phenomenon without going to the trouble and expense of listing by selling assets to existing YieldCos.

Although not every clean energy developer needs to form its own YieldCo, U.S. investors cannot seem to get enough of the IPOs and secondary offerings. This can be seen in the low yields of U.S.-listed YieldCos, since yields fall as investor buying causes the stocks to rise. Most U.S.-listed YieldCos have annual dividend yields below 4 percent, while Canadian-listed YieldCos offer yields in the 5 percent to 6 percent range.

Because the cash flows from clean energy projects are still well above the amount YieldCos need to pay to attract investors, many project developers and aggregators of clean energy assets are currently working to develop their own YieldCos, sometimes at a much smaller scale than the ones listed above. Below are five that have come to my attention, listed in order of approximate invested capital.

Securities laws mean most only take investments from accredited (i.e., rich) investors, but recent changes in securities laws are allowing some to relax that requirement.

Joule Energy Reduction Assets (ERA)

Joule ERA is a private equity fund investing in energy efficiency and demand response assets; anything that saves energy is fair game. After management expenses, the ERA fund offers a very attractive 11 percent to 14 percent target yield, the first 6 percent of which is secured with reserve funds, and the balance comes from less reliable sources of yield. That said, even the base 6 percent yield makes the Joule ERA fund competitive with the most attractive publicly traded YieldCos, and the 5 percent to 8 percent upside above that seems like excellent compensation for the liquidity of a private equity fund. 

Mike Gordon, Joule ERA's fund manager, told me that ERA has significant opportunities for additional investments, so they are raising money from accredited investors and institutions. Unfortunately for most readers of this article, they have a $1 million minimum investment. Although Gordon says this minimum is flexible, it seems unlikely that Joule ERA would accept an investment in even the low-six-figure range.

You can find a presentation about the fund here. Note that the returns mentioned in that presentation are higher (8 percent secured yield plus 7 percent to 10 percent additional yield) than the ones outlined above. This is because they are presented before Joule's management fees, and the numbers above are net of fees.

Grid Essence

Grid Essence is an independent power producer which owns 38.2 megawatts of operating solar farms in the United Kingdom and is currently developing another 21 megawatts. The company has been financing its development with a combination of bank debt from Deutsche Bank and convertible bonds, which it has been selling to accredited investors. The company is working on listing stock on the Toronto Stock Exchange, which it expects before the end of the year. At that point, the bonds will convert to common stock at a discount. The company's target distribution after listing is 7 percent.

Because the offering is ongoing, the company was unwilling to answer questions at this time. If they did, their lawyers were concerned this article might be interpreted as a public solicitation by securities regulators. Other companies were willing to talk to me, but none of these have to deal with both U.S. and Canadian regulators.


Greenbacker Group is a management company that has organized a YieldCo, Greenbacker Renewable Energy Company (GREC), to fund, own and operate a wide variety of renewable, energy efficiency and sustainability projects. 

Greenbacker's senior managing director initially agreed to talk to more about the details of the fund, but was not able to get to my questions in time for publication because of work on a prospectus supplement. I expect the supplement was necessitated by Greenbacker's acquisition of a solar portfolio on September 2.

According to the company's website and prospectus, GREC is a publicly registered but non-traded limited liability corporation that allows individual investors to participate for as little as $2,000. Although the YieldCo is able to offer its shares to non-accredited investors under the JOBS Act, it does not plan to take advantage of the JOBS Act's reduced reporting requirements. The fund targets a high level of current income, currently 6 percent per annum, payable monthly.

Greenbacker intends to provide investors with an exit by either selling assets, listing the company on an exchange, or merging with another company in exchange for cash or publicly traded shares within five years. Investors also may redeem up to 5 percent of outstanding shares annually at the fund's net asset value minus some associated fees.

Power REIT Preferred Series A

Power REIT (NYSE:PW) is a tiny infrastructure REIT with a legacy asset in rail. The company has been diversifying into the real estate underlying renewable energy farms for the last two years. The small size ($1M to $2M) of its investments, along with uncertainty due to an ongoing civil case, has meant that financing for these investments was harder to come by than originally anticipated, so the company turned to a YieldCo-like structure of issuing preferred stock with a 7.75 percent coupon, now listed as PW.PA on the New York stock exchange. The offering size was $4.3 million.

While the yield of 7.75 percent is much more attractive than all other listed alternatives I am aware of, Power REIT's legal situation adds significant uncertainty to the mix. I have written extensively about both Power REIT and its preferred shares elsewhere, and I believe that the upsides from the civil action far outweigh the possible downsides. But investors should make sure they are familiar with the situation before investing.

Juhl Renewable Assets

Pink-sheet-listed Juhl Energy (OTCBB:JUHL) is a wind and solar developer focused on community and behind-the-meter corporate projects. Its subsidiary, Juhl Renewable Assets (JRA), has been selling unlisted preferred stock with a 9 percent coupon to finance (alongside bank debt) the acquisition of community wind projects. Juhl plans to list both the JRA Preferred and Juhl common stock on the NYSE MKT exchange “as soon as possible,” which could be before the end of 2014.

The JRA Preferred offering is open to accredited investors with a modest $25,000 minimum investment. To date, the company has raised $4 million and hopes to offer additional tranches in the future at a rate of $30 million per year to fund future investments. JRA owns a handful of small wind projects with capacities of between 1 megawatt and 11 megawatts, including the recent purchase of two operating 1.62-megawatt, single-turbine wind projects for $4 million.

If the listing is successful, I would expect JRA Preferred stock to appreciate, since its closest comparable, Power REIT Preferred, has been trading at par with a lower coupon.

The Outlook for YieldCos

YieldCos are already transforming the clean energy development landscape by providing a new, low-cost source of capital. The flip side of this low cost of capital is unimpressive yields on the best-known U.S.-listed YieldCos. But the underlying economics of clean energy development still allow a wide variety of players -- listed, unlisted and in the process of planning IPOs -- to offer yields in the high single digits and beyond to investors who are willing to venture into the corners of U.S. exchanges (Power REIT Preferred) or to Canadian exchanges. 

Accredited investors have a wide variety of potential high-yield investments to choose from, some of which are likely to be listed on exchanges in a matter of months, which will likely provide them with significant capital appreciation in addition to the underlying yield. The five listed above are not an exclusive list. Securities laws limiting advertising of unlisted securities mean that most such companies operate quietly, far from the public eye.

While the wealthiest and best-informed investors may be able to make the most profits from this transition of clean energy project financing from private hands to the public markets, in the end, everyone will benefit. YieldCos provide lower-cost capital which allows quicker and wider deployment of the technology we need to slow the growth of the harmful greenhouse gases which are already causing climate change.

Disclosure: Tom Konrad and/or his clients have long positions in JUHL, HASI, BEP, PEGI, RNW, INE, CSE, PW, PW.PA, and Grid Essence, and short positions in NRG Yield.

This article was first published on GreenTech Media, and is republished with permission.

July 20, 2014

Fifteen Clean Energy Yield Cos: Company Structure

Tom Konrad CFA

In the first article of this survey of yield cos, I looked at the possible reasons for the seemingly endless enthusiasm for US-listed clean energy yield cos.  Here, I'll take a look at how these yield cos are constructed, and why investors should prefer one structure over another.

Who's Your Daddy?

Most yield cos have been created by clean energy project developers in order to create a ready, low-cost buyer for those projects.  With the recent string of very successful IPOs, the capital available for such projects may prove to be even lower cost than anyone expected.  Terraform Power's (TERP) on July 18th only makes it more certain that other developers and owners of operating clean energy projects will be rushing new yield cos to market.

A yield co's parent company is often its largest shareholder, and the relationship may work either to the advantage or disadvantage of other shareholders.  On the plus side, many yield cos have a "Right of First Offer" (ROFO) for projects the parent develops.  While the details of ROFOs may vary among yield cos, a ROFO will always be a potential source of value for the yield co because it may provide access to a pipeline of projects at favorable prices, or at least the benefits of dealing with a familiar party such as lower due diligence costs for project acquisitions.  Since a ROFO is a "right," not an obligation to buy projects, having a ROFO with an established developer is an advantage for a yield co, and is likely to be a greater advantage if the parent has a large pipeline of projects.

On the other had, many yield cos' cozy relationships with their parents could easy lead to choices which are not in the best interests of other yield co shareholders.  A ROFO may give the yield co the right to buy a project, but this right is of no value unless the project in question is sold at an attractive price. In some cases, the parent may use its effective control of yield co decisions to obtain above-market prices for unwanted projects, doing harm to other yield co shareholders.

Conflicts of Interest

I expect that it will be virtually impossible for most yield cos to escape the influence of their parent companies.  In order to mitigate the risk that the parent uses its influence to the detriment of other shareholders, it's very important that the parent's interests be completely aligned with those shareholders.  For this purpose, I like the parent company to own a large stake in the yield co composed of the same class of shares as common shareholders. 

Another red flag is "Incentive Distribution Rights" or IDRs.  IDRs allow parent company to receive an increasing percentage of distribution increases.  Advocates of IDRs say that they provide the parent with an incentive to increase the distribution as quickly as possible.  However, if the parent already owns a large stake in the yield co, the distributions themselves should provide adequate incentive for this purpose. 

IDR are also asymmetric  incentives: they pay off for the parent when distributions increase, but do not inflict a penalty for a decrease in distributions.  Because of their asymmetric nature, IDRs may incentivize increased risk taking, such as using higher levels of debt to increase the dividend.  I prefer yield cos without IDRs, or IDRs at low percentages. 

Corporate Structures

Most yield cos are organized as corporations, but a few are partnerships.  The partnership structure facilitates the use of IDRs, but I consider the corporate form of a partnership to be less important than the existence and level of any IDR. 

15 Yield Cos

Six US-Listed Yield Cos

Name (Ticker)
NRG Yield (NYLD)
Hannon Armstrong Sustainable Infrastructure (HASI)
Annual dividend (Management dividend growth target) $1.45 (15-18%, five years)
$0.88 (13% to 15% for 2 years)
Parent (Ticker)
NRG Energy (NRG)
Parent's retained interest
65.5% voting with complex share structure.
Relationship with parent
ROFO. Parent earns management fee based on assets.
Management has significant stake in common shares; insiders mostly buying in public market.
Solar, Wind, Thermal (facility heating and cooling)
Energy efficiency (performance contracts), Wind, Solar, Geothermal, water, telecommunications and other sustainable infrastructure all of which must contribute to reductions in GHG emissions.

Name (Ticker)
Pattern Energy Group (PEGI)
Terraform Power (TERP)
Annual dividend (Management dividend growth target) $1.29 (10% to 12% for three years)
$0.9028 (15% for 3 years)
Parent (Ticker)
Pattern Development (private)
SunEdison (SUNE)
Parent's retained interest
Relationship with parent
ROFO. Parent will not compete for projects.
ROFO, IDR starting at 0% but increasing to 50%.

Name (Ticker)
NextEra Energy Partners (NEP)
Abengoa Yield (ABY)
Annual dividend (Management target dividend growth) $0.75 (12% to 15% over 3 years)
$1.04 ( 6.5%, 12 months)
Parent (Ticker)
NextEra (NEE)
Abengoa SA (ABGB)
Parent's retained interest
Relationship with parent
ROFO, IDR starting at 0% but increasing to 50%
ROFO. Parent provides line of credit.  Will have interal management after 1 year.
Wind, Solar
Solar, Wind, Transmission, Conventional generation (gas)

 Four Canadian Yield Cos and One Dual-Listed Yield Co

Most of the Canadian "yield cos" have existed much longer than the term "yield co," which was coined last year.  With the exception of TransAlta Renewables, these were former Canadian Income Trusts, a structure which lost its tax benefits 2011.  The ones I have chosen to include here are the ones with the highest proportion of clean energy assets.

Name (Canadian Ticker, US OTC Ticker)
TransAlta Renewables (RNW.TO, TRSWF)
Capstone Infrastructure Corp: (CSE.TO, MCQPF)
Annual dividend (My estimate of future growth) C$0.77  (8% to 15%, 2-3 years)
C$0.30 (0%, 2-3 years)
Parent (Ticker)
TransAlta Corp (TAC)
Parent's retained interest
Relationship with parent
ROFO, managed by parent for management fee based on EBITDA; Parent also supplying line of credit.
Develops projects in-house.
Wind, Hydro
Combined Heat and Power, Wind, Hydro, Solar, Water utility, district heating

Name (Canadian Ticker, US OTC Ticker) Innergex Renewable Energy (INE.TO, INGXF) Primary Energy Recycling (PRI.TO, PENGF)
Annual dividend (My estimate of future growth) C$0.60 (2% sustained)
US$0.28 (0%, 2-3 years)
Parent (Ticker)
Relationship with parent Develops projects in-house. Develops projects in-house. 
Other notes

The company has stated that it may be for sale.
Hydro, Wind, Solar Waste Heat Recovery, Combined Heat and Power

Name (US Ticker, Canadian ticker)
Brookfield Renewable Energy Partners (BEP, BEP-UN.TO)
Annual dividend (Historical dividend growth) $1.55 (12%)
Parent (Ticker)
Brookfield Asset Management (BAM)
Parent's retained interest
Relationship with parent
Develops projects in-house.  IDR at 15% of future increases eventually rising to 25%
Hydro, Wind, Combined Heat and Power

Three UK Listed Yield Cos

These are organized as investment companies, and securities laws make them difficult if not impossible for US based investors to purchase.  Because of this, I'm including the UK based yield cos mostly for comparison purpose.

Name (Ticker)
The Renewables Infrastructure Group (TRIG.L)
Greencoat Wind (UKW.L)
Bluefield Solar Income Fund (BSIF.L)
Annual dividend (Target dividend growth) 6p (with inflation)
6.16p (with inflation)
7p (with inflation)
Parent (Ticker)
The RES Group (private)
Wind, Solar

Yieldcos by fuel

Up Next

The final article in this series will discuss which I consider the most attractive investments, and why.

Disclosure: Long HASI, BEP, PEGI, RNW, CSE, INE, PRI, TRIG.  Short NYLD Calls.

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.

June 26, 2014

The Safest Alternative Energy Yieldco

By Jeff Siegel

If you're a regular reader of these pages, you know I'm bullish on alternative energy yieldcos.

In fact, I've covered Pattern Energy Group (NASDAQ:PEGI) and NRG Yield (NYSE:NYLD) at length.

The way I see it, yieldcos are the next big alternative energy investments for retail investors. They enable regular investors to buy into multiple alternative energy assets that produce steady cash flow. For those not particularly keen on risk, but still want exposure to the burgeoning alternative energy space, this is a great way to do it.

The bottom line is that the alternative energy market continues to grow rapidly. Even those who are loyal oil & gas investors must admit that the growth potential in the alternative energy space – particularly solar and wind – is absolutely astounding. And this is not a trend that will peter out any time soon.

In fact, according to Bloomberg's New Energy Finance, 70 percent of new power generation capacity added between 2012 and 20130 will be from alternative energy technologies. This is huge.

Point is, there is no reason for you to not have at least a small portion of your portfolio dedicated to the alternative energy space. So you might want to take a look at the latest alternative energy yieldco to go public.

Strong Debut for Abengoa Yield

The company is Abengoa Yield (NASDAQ:ABY). This is a unit that was formed to serve as the primary vehicle through which Abengoa, the Spanish energy behemoth, will own, manage and acquire renewable energy assets. Conventional power and transmission assets are also included in the yieldco.

The IPO surged nearly 30% on its debut. Initially priced at $29 a share, it's now trading around $39. Of course, it's only been a week, and certainly the initial enthusiasm of the offering likely pushed the price up. But overall, I actually like ABY.

Abengoa is actually one of the strongest alternative energy players in the world. It has first-mover advantage in certain areas, and has well-diversified coverage across the globe with revenue-generating assets in North America, South America and Europe.

Currently, ABY owns 11 total assets which include 710 megawatts of renewables, 300 megawatts of conventional generation and 1,018 miles of transmission.

I didn't jump in early on the IPO, but will be looking to pick some up on a shake-out. The lockup doesn't end until December 10, too. So that should allow for some wiggle room throughout the summer and fall.

Of all the alternative energy yieldcos trading publicly right now, I foresee the most safety with ABY.


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

May 11, 2014

It's Easy Being Green. Fossil Fuel Free Is Harder

Tom Konrad CFA

Disclosure: Long BEP, MCQPF. PENGF, AQUNF

Last week, I was surprised to discover that Brookfield Renewable Energy Partners (NYSE:BEP, TSX:BEP-UN) is not entirely renewable.

I’ve owned shares of Brookfield for many years, but as a relatively safe income stock, I’ve parked it in the back of my portfolio to gather dust and dividends. I apply my limited time for in-depth analysis to riskier stocks where a quarter’s earnings are likely to make a much bigger difference in the stock price.

I may have noticed the “Other” category in addition to BEP’s wind and hydroelectric generation before last week, but I would not have paid much attention.  4% of Brookfield’s power production is not going to make the other 96% of its production non-renewable, no matter how dirty it may be, at least in my own opinion.

BREP Operations

But my opinion is not the only one that matters.   I have been managing the Green Alpha Global Enhanced Equity Income Portfolio (GAGEEIP) since December with Green Alpha Advisors.  Green Alpha is currently offering GAGEEIP in separately managed accounts.  Like all of Green Alpha’s portfolios, we’re managing it to an entirely fossil free mandate.

I came across the “Other” category when I evaluated Brookfield and four other renewable electricity producers in terms of how many dollars it costs to buy a watt of renewable generation last week.  Since BEP was a holding of GAGEEIP, I had to dig deeper.  I found:

  • Brookfield owns two co-generation natural gas facilities in New York and Ontario.
  • These were acquired along with a larger purchase of hydropower assets several years ago.
  • The company is not actively trying to sell them, but would if “the right offer came along.”

It’s Not Easy Being Fossil Free 

I’m a fan of co-generation, where the waste heat from power production is also used.  Despite the fact that these facilities are often powered by natural gas, I’d consider Brookfield to be green even if co-generation accounted for the entire portfolio.  But no matter how green these facilities are, they’re not fossil fuel free, and we had to remove Brookfield from GAGEEIP.

Brookfield is now the fourth of my favorite green income stocks that aren’t in GAGEEIP.  The others are Algonquin Power (TSX:AQN, OTC:AQUNF), Capstone Infrastructure (TSX:CSE, OTC:MCQPF), and Primary Energy Recycling (TSX:PRI, OTC:PENGF).  All have some gas generation, although it's also cogeneration in the case of Capstone and Primary Energy.

So why not manage a green equity income portfolio rather than a fossil fuel free one?  Marketing.  Green Alpha’s current mutual fund, the Shelton Green Alpha Fund (NEXTX) is one of only four broad based mutual funds which is entirely fossil free.  As far as I know, there is not a single fossil free mutual fund or exchange-traded fund (ETF) targeting a high level of current income.  In fact, most have a distinctive growth emphasis, which is the natural consequence of investing in firms in emerging industries (renewable energy) rather than a mature one (fossil fuels.)

It’s simply much easier to explain “fossil fuel free” than “hardly any fossil fuels, except co-generation.”   And when an individual, a pension fund or university endowment decides to heed 350.org‘s call to go entirely fossil fuel free but needs to maintain a high level of current income, we’re to giving them somewhere to go.

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.

March 20, 2014

Atlantic Power: Not So Clean

Tom Konrad CFA

Disclosure: Long MCQPF

A reader recently said he thought “that the majority of [Atlantic Power Corporation's (NYSE:AT)] portfolio is in wind power.”

Actually, it’s not even close.  While Atlantic Power’s website says “95% of our power is ‘clean power’.”  By “clean” they mean “not coal.”  They are also indulging in a bit of fudging by counting the size of projects by megawatts (MW) of capacity, which has the effect of decreasing the apparent weight of baseload power generation like coal.

AP Adj EBITDA by Project.png

Page 30 of their annual earnings presentation gives a much clearer picture of the their assets, since it breaks out the projects by cash flow (adjusted EBITDA.)  Only 21% of Atlantic Power’s 2013 Adjusted EBITDA came from wind.

The following is Alantic Power’s graph of Adjusted EBITDA by project from the earnings presentation.  I’ve added notations to each wedge to identify the project fuel by cross referencing it with their project list:

As you can see, coal accounts for 8% of Adjusted EBITDA (not 5%.)  It’s not clear how much of the “Other” wedge is natural gas, but if we break out those “other” projects by MW capacity, they are about three quarters natural gas.  Of the 76% of cash flow which is broken out by project, 29% is natural gas, 18% is wind, 12% is hydropower, 9% is biomass, and 8% is coal.

The natural gas industry certainly likes to call itself as “clean.”  I’m willing to concede that it’s not as bad as coal.  I even consider it clean when it’s used in a Combined Heat and Power (Cogeneration) project, as is the case with Capstone Infrastructure’s (TSX:CSE, OTC:MCQPF) natural gas fleet.

Here are some comparable charts from Capstone’s investor fact sheet:
Capstone breakdown.png

Note that Capstone takes the trouble to break out its Adjusted EBITDA by fuel source.  A big chunk of cash flow comes from its water utility, but of the rest, only the 4% slice from district heating does not meet my definition of “clean”.  The rest is cogeneration (17%), wind (13%), solar (13%), hydropower (8%), and biomass (6%.)  It’s also worth noting that a larger chuck of cash flow has come from renewable power since Capstone acquired Renewable Energy Developers in 2013.  I’m sure Capstone’s management will highlight that in their 2013 earnings presentation today.  UPDATE: Here is the 2013 chart:

Capstone 2013 Adjusted EBITDA.png

If a power producer claims to be “clean” and does not prominently break out its electricity production, revenue, cash flow, or earnings by fuel source, they’re probably talking about natural gas or nuclear power.   Some people consider these clean, but I suspect even Atlantic Power’s management has doubts.

If management really thinks natural gas is clean, why did I have to dig to find out how Atlantic Power fuels most of its generation?

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

March 11, 2014

Covanta: Waste Yield

by Debra Fiakas CFA

Last week Covanta, Holding Corp. (CVA:  NYSE) announced the pricing of a note offering.  The waste disposal and waste-to-energy company raised $400 million in the deal.  The new capital will make it possible for Covanta to repay some older debt when enough to spare for future expansion capital.  Covanta’s business model of using the municipal waste it collects for electricity generation is capital intensive.  What is more management has shown a penchant for acquisitions.  Just two months ago Covanta acquired two waste transfer stations from a competitor.

Covanta appears to be making good on its investments.  The company earned $45 million in net income on $2.3 billion in total sales in the most recently reported twelve months.  The company boasts a 2.1% return on assets.  That is not quite up to the average of the waste management industry, but Covanta can be given a bit of consideration.  The company converted 19.4% of its sales to operating cash flow.  For a company perpetually in need of investment capital, strong cash flows are vital.

Strong cash flows are also vital for Covanta’s dividend.  The company has raised its payout twice since initiating the dividend in March 2011.  The current yield is 3.7%, putting Covanta among the few small-cap companies in our Beach Boys Index of biofuel companies to pay a dividend.  The stock trades at 36.1 times the 2014 consensus earnings estimate, making it one of the most expensive as well.

A review of recent trading patterns suggests CVA is overbought at the current price level.  The stock has been on the rise since the beginning of February, largely in response to bullish chatter encouraged by the note offering.  Anyone considering long positions in CVA might watch for periods of trading weakness to accumulate shares.

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.

Image: Abengoa's PS20 and PS10 in Andalusia, Spain . Photo by Koza1983.

February 03, 2014

The Muscle Car Of Energy Efficiency

Tom Konrad CFA
Disclosure: I am long TSX:PRI / PENGF.

The poster child of energy efficiency has long been changing a light bulb.  First, it was swapping out an incandescent for a compact fluorescent, now the swap is to an LED.  Changing a light bulb is a small step that anyone can take, and it’s so cost effective that it can pay for itself in months if the bulb is used frequently.

This is a good example of household energy efficiency measures: a small action requiring a limited investment that anyone can take that pays back quickly.

But efficiency does not have to be small scale and simple.  Efficiency can also be an industrial scale engineering project.  At any scale, however, it tends to be profitable, often very profitable.

CHP and Waste Heat Recovery 

Combined Heat and Power (CHP) is just such an industrial-scale energy efficiency opportunity.  CHP, also called cogeneration, involves capturing the waste heat from a power plant and delivering it to an industrial or other customer.  A related technology, Waste Heat Recovery, involves capturing waste heat from an industrial process and either using it to generate power, or for some other process.

combined heat and power-DOE.png

Image source: Energy.gov

CHP has been around for over a century.  I once toured the 40MW cogeneration plant at the Miller-Coors brewery in Golden, Colorado, which has been operating since 1976.  The waste heat from the power plant is used as process heat for the brewery, and some even goes to heat the nearby Colorado School of Mines campus.  That tour happily ended in the tasting room, which is where I developed a taste for Blue Moon and got the phrase “CHP is the muscle car of energy efficiency” stuck in my head.

CHP accounts for approximately 8% of current installed US generating capacity, and President Obama is seeking to increase that by half again by 2020.

Primary Energy Recycling

I expect Primary Energy Recycling (TSX:PRI, OTC:PENGF) to be part of the coming expansion of the US CHP fleet.  Primary Energy operates four recycled energy projects and one CHP project at ArcelorMittal (NYSE:MT) and US Steel facilities in Northern Indiana.   These facilities collectively avoid 1,850,000 tons (or 24 kg per share) of CO2 per year  according to EPA data.  Although the company’s customers are concentrated in the steel industry, the facilities they serve are among the most efficient and profitable facilities worldwide, giving Primary Energy significant protection from a steel industry downturn.

The company has 30 years of experience operating and improving these and other CHP facilities.    It previously had as many as 14 such plants, but many were sold when much of the company’s debt came due in 2009 in the midst of the financial crisis.  This was only one of several challenges the company has faced in recent years.  Others were the changes in Canadian tax law which effectively removed the tax benefits of the income trust tax structure, and the recontracting of all but one of their five facilities.  The contract for the final facility (Cokenergy) has been extended several times as the details of a long term contract are worked out.

In an interview, Primary Energy’s CEO John Prunkl explained to me that there is virtually no risk that this contract will not be extended.  It is part of a three-way agreement between ArcelorMittal, SunCoke, and Primary Energy.  The first two finalized their contract in October, and that part of the deal represents 90% of the economic impact for ArcelorMittal.  Primary Energy’s piece is the other 10%.  Analysts John McIlveen at Jacob Securities Inc. and Jeremy Mersereau at National Bank are also both confident the contract will be renewed.

The contract is expected to be similar to the existing contract, but is likely to contain a variable component which will allow Primary Energy to profitably invest to improve the energy efficiency of the facility, as they have at their other facilities.  In 2012, they completed an upgrade at their Portside facility which improved its efficiency from 70% to 90%.  Primary Energy has already begun the upgrades to Cokenergy to improve its efficiency.


The recontacting of the Cokenergy facility will also allow the company to borrow against its cash flows and invest in expanding its business without issuing new equity. They are currently evaluating a number of opportunities, but Mr. Prunkl emphasized to me that they would be emphasizing care in project selection rather than speed of execution.  The types of opportunities they are looking for are with industrial customers, located within the customers’ facilities.  They welcome complex projects where they can efficiently convert hard-to work with fuels into power and heat for their customers.  They expect to be able to achieve a risk-adjusted internal rate of return in excess of 12%.

The Stock

Primary Energy Recycling’s stock trades in Toronto with the ticker PRI, and over the counter in the US as PENGF.  It pays a US$0.05 quarterly dividend, which amounts to 4.5% at the recent price of C$5.00 / US$4.49.  The company has low debt, with only $41 million compared to a $223 million market cap, which is why it should be able to grow both its business and the dividend without issuing new equity.  I expect the stock price will increase somewhat when the Cokenergy contract is finalized, and more when definitive plans for expanding the business are announced.  While a finalized contract is likely soon, plans for business expansion will take longer.  Mr. Punkl did not want to make any promises regarding timing.  He said, “We’re going to work hard to avoid negative surprises on our investment plans after the Coke Energy deal.  We’re more concerned with making sure the investment will be the right one for us. ”

One downside is that the stock is very illiquid, with an average volume of only 6 thousand shares traded daily, and the average has been closer to two thousand since the start of the year.  Hence, it should only be bought with limit orders or very small market orders to avoid paying over the odds.  I hope a few readers already got a chance to buy after reading my Ten Clean Energy Stocks for 2014.


Primary Energy Recycling is an independent power producer using the greenest form of fuel imaginable: waste heat.  It has a rock solid balance sheet, a healthy dividend, and four long term contracts with solid industrial partners.  With its fifth and final contract soon to be finalized, Primary Energy is on the cusp of several years of growth.

CEO John Prunkl says, “We’re pretty excited, but it does require patience.”  I think investors should be (patiently) excited, too.

This article was first published on the author's Forbes.com blog, Green Stocks on January 23rd.

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 29, 2014

EBODF Owns Over $22 Per Share Of Solar Developer Goldpoly,Trades Under $7

by Shawn Kravetz

In ten years of solar investing, we have never encountered an opportunity as obscure and potentially lucrative as Renewable Energy Trade Board Corporation (OTCPK:EBODF).  Disclosure: I am long EBODF.

Before walking through the long thesis, we must caution potential investors that EBODF "went dark" with the SEC in March 2013. However, we have conducted rigorous due diligence on the ground in Asia and through the Hong Kong Stock Exchange filings of Goldpoly New Energy Holdings (0686.HK) - EBODF's sister company sharing the same parent/leading shareholder - China Merchants New Energy Group (part of massive Chinese State-Owned-Enterprise China Merchants Group). Further reinforcing our view, EBODF engaged in several publicly disclosed transactions in December 2013 (http://tinyurl.com/q5z58lp and http://tinyurl.com/klrjtg8). Given its tremendous unappreciated value and recent activities, we suspect EBODF will not remain "dark" for much longer.

So what excites us about an anonymous, tiny solar company?

  • Simply stated, EBODF owns a sizeable stake in its sister company Goldpoly New Energy Holdings - the premier, Chinese solar independent power producer (IPP) listed in Hong Kong with a $1.3B market capitalization
  • Those shares of 686 HK alone are worth ~4.0X EBODF's current market capitalization or ~$22 per share
  • While we believe that several other intriguing catalysts/options could drive EBODF to even greater heights, we believe that the 686 HK position alone holds tremendous value not reflected in EBODF's share price.

Goldpoly (0686.HK)

US investors covet exposure to downstream solar economics as evidenced by oversubscribed capital raises from US-listed, downstream solar companies in the past few months:

  1. Jinko Solar (JKS) just raised ~$260M in January 2014 by marketing the deal as a means to gain exposure to Chinese downstream projects
  2. SunEdison (SUNE) raised $1.2B through 2 convertible bonds in December 2013 to finance 2014 downstream solar plans
  3. SolarCity (SCTY) raised ~$400M in October 2013 to finance its rapidly growing downstream business

While US investors have flocked to companies offering exposure to downstream solar projects, they likely have gazed right past the best positioned downstream solar opportunity, Goldpoly. We believe that owning EBODF offers a massively discounted method to invest in Goldpoly shares.

Goldpoly is the leading solar power plant investor and operator in China and one of the largest in the world

  • Whereas SolarCity manages ~460 megawatts (MW) of solar projects, Goldpoly operates ~530 megawatts of grid-connected solar projects in China
  • In addition, Goldpoly has ensured years of future growth having harvested a robust 7 gigawatts (GW) project pipeline through strategic alliances with powerful state-owned enterprises like State Grid Corporation (controls China's electric network) and China Guodian (massive Chinese power company) as well as major solar players like GCL (3800.HK), Yingli (YGE), and Zhongli Talesun Solar (002309 CH)
  • Unlike its US-listed peers, Goldpoly enjoys strong sponsorship from its leading shareholder and state-owned enterprise China Merchants Group
  • Despite an operating portfolio and pipeline that every US-listed solar company would envy coupled with a unique platform and strategic alliances, Goldpoly trades a steep discount to its US-listed peers
  • While downstream solar models differ from company to company, we think a simple comparison between Goldpoly and its US-listed peers reveals this discrepancy:

686 HK Valuation.png

686 HK Portfolio.png

We believe this discount will evaporate as Goldpoly continues to deliver on its lucrative pipeline and is recognized as the leading global, solar downstream player. However, rather than wait for that discount to fade, we prefer to exploit this arbitrage opportunity and express our view on Goldpoly through EBODF today.

EBODF Stake in Goldpoly (686 HK)

  • EBODF acquired its stake in Goldpoly through a series of transactions involving the sale of various assets in exchange for 686 HK shares back in May and November 2012
  • As a result of these transactions, EBODF beneficially owns ~42.2M shares of Goldpoly and another ~160M underlying shares from an in-the-money convertible bond
    • EBODF also may have received another 23M shares of Goldpoly in consideration for some other asset sales, but Goldpoly's most recent filings cannot verify these incremental shares
      • As such, we do not include these 23M shares worth ~40-50% of EBODF's current market cap in our valuation of EBODF
    • Details of the transactions available here (pages 17-18)
  • Interestingly, EBODF acquired another 1M shares on the open market on December 9, 2013 - EBODF's first acquisition of Goldpoly shares since 2012
  • To further buttress our view, Goldpoly's Hong Kong Stock Exchange filings and further validated that EBODF still retains their Goldpoly stake via a November 2013 proxy statement (pages 34-35)

686 HK Ownership Structure_11.2013 Proxy.png 686 HK Ownership Structure EBODF Footnote_11.2013

Confident that EBODF still owns a major stake in Goldpoly, we value that stake at nearly $50M or ~$22 per share. This valuation EXCLUDES the incremental but unverifiable 23M shares of Goldpoly noted above which are worth ~$2.25 per share.

EBODF Valuation of 686 HK Stake.png

Since EBODF has not filed a balance sheet since the June 30, 2012 period, we EXCLUDE the $5/share in net cash & equivalents reported for that period. For conservatism, we ascribe no value to the non-Goldpoly net assets which totaled $2.64 per share as of last filing. However, including these items leads to a valuation closer to $30 per share for EBODF.

Free Options/Catalysts

Our diligence also suggests that EBODF may be pursuing a truly unique downstream solar strategy to complement 686 HK which entails:

  1. Acquiring distressed and underperforming Chinese solar projects and re-selling the rehabilitated assets (likely to 686 HK on a right of first refusal basis)
  2. Brokering solar project transactions - connecting buyers and sellers for a fee
  3. Arranging financing/structuring such as sale-leasebacks and collateralized loans for solar projects

Finally, we hypothesize that the leading shareholder of 686 HK and EBODF, China Merchants New Energy Group, may be taking notice of US investors' insatiable appetite for downstream solar exposure as noted above and could seek to capitalize through its US-listed entity - EBODF. In December 2013, EBODF co-invested in a sizeable solar project with 686 HK, and while we admit no special insight on this topic, we find the timing peculiar given the capital market activities by other downstream players. We speculate that China Merchants could transform EBODF into a US-listed version of HK-listed Goldpoly thereby unleashing the first US-listed, Chinese solar yield vehicle offering US investors' exposure to downstream solar economics in China.

We ascribe no value to either option above; however, should either of these scenarios materialize, we believe EBODF is worth many multiples of the 686 HK stake.


With a $22-$30 per share of conservative intrinsic value plus the free option of a potential first mover, US-listed solar yield generating vehicle, we believe EBODF will quickly emerge from the dark.

Shawn Kravetz 2013 crop.jpg Shawn W. Kravetz is President of Esplanade Capital LLC, a Boston-based investment management company.   Esplanade Capital manages two private investment partnerships.   Esplanade Capital Partners I LLC, launched in 2000, is focused on a handful of sectors, including: retail, consumer products, casino gaming, business services, education, and solar power.   Esplanade Capital Electron Partners LP, launched in 2009, intends to be the world’s premier private investment fund dedicated to public securities in solar energy and those sectors impacted by its emergence.  

November 01, 2013

Investors Expect Rapid Growth At Pattern Energy Group

Tom Konrad CFA

Pattern Energy's Gulf Wind Farm in Armstrong, Texas

Disclosure: Long BEP.

Pattern Energy Group (NASD:PEGI, TSX:PEG) completed a very successful Initial Public Offering (IPO) on the Nasdaq and Toronto stock exchanges on September 27th.  Not only did the shares price at $22, near the top of the expected range, but the underwriters exercised their full over allotment option to purchase 2.4 million shares in addition to the initial 16 million offered.  Total proceeds from the offering were $404.8 million.  Most of the proceeds went to Pattern Energy Group, LP (PEGLP) in consideration for a number of contributions and class A shares sold in the offering, but $56 million will be used to pay down debt and $60.2 million will be retained for general corporate purposes.

Investors greeted the offering enthusiastically, and the stock is trading comfortably above the offering price at around $23 per share since the IPO.

The Company

Pattern owns six wind power projects in the US and Canada with total capacity of 1040 MW and two development projects in Ontario (270 MW) and Chile (115 MW) which are expected to enter production in 2014.  Post-IPO, public shareholders will control only a minority of the company’s common stock.  Control of the company is held by PEGLP, which, along with its partners, will control 63.1% of voting rights through as combination 47.4% of Class A shares and 99% of Class B shares.  Management owns the remaining 1% of Class B shares.  Class B shares do not currently pay a dividend, but will convert into Class A shares at the end of 2014, or upon commercial operation of the Ontario Wind farm, if that has not yet occurred.

Distributable cash flow for 2014 is expected to be approximately $55 million,80% of which the company plans to pay to shareholders as a quarterly dividend of $0.3125 per share.  Achieving this cash flow will depend on the on-time completion of the Ontario and Chilean wind projects.  At $23 a share, $0.3125 quarterly amounts to a 5.4% annual dividend.

While completion of the Ontario and Chilean wind projects in 2014 can be expected to increase distributable income, conversion of Class B into Class A shares will offset this in 2015 by increasing dividend-paying shares by 29%.  As a back-of-the-envelope estimate, if the income from the new wind farms is comparable to the existing wind farms on a per MW basis, we can expect distributable income to be increased by 37%.  Given the wide range in profitability of wind farms, however, I feel it is safer to assume that the increased income from the Ontario and Chilean wind farms will only serve to offset the share dilution.

After the transaction, Pattern’s capitalization will be approximately 67% debt, and 33% equity, which is stronger than its closest comparable, Brookfield Energy Partners (NYSE:BEP, TSX:BEP-UN), which has about 20% equity and preferred equity.  Brookfield’s longer track record and larger and more diversified portfolio of hydropower, wind, and solar assets should allow it to offer a lower yield than Pattern, but at $27.43, Brookfield’s yield of 5.3% is almost identical to Pattern’s.


Pattern’s shareholders seem to be betting on Pattern achieving rapid growth, or at least faster growth than comparable companies such as Brookfield.  However, most of its growth in distributable income over the next two years is likely to be offset by the increased number of shares paying dividends, when class B shares convert to class A shares.

At the current price, Pattern Energy Group seems fully valued relative to its US-listed peers, and expensive relative to clean energy power producers with only Canadian listings.  As such, the stock may be useful to increase the diversification and income in a clean energy stock portfolio, but it will probably not produce much share price growth in the near future.

This article was first published on the author's Forbes.com blog, Green Stocks on October 22nd.

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.

September 22, 2013

Capstone Infrastructure: Green Income At A Cardinal Discount

Tom Konrad CFA


Capstone Infrastructure Corp.'s Gas Cogeneration facility in Cardinal, Ontario.

Capstone Infrastructure Corporation (TSX:CSE, OTC:MCQPF. Disclosure: I own this stock) is an international operator and developer of green infrastructure assets and utilities which is currently selling at a significant discount to most comparable firms.  I recently ran a comparison of six similar Canada-listed firms, and Capstone seemed much cheaper on several measures.

The Discount

The following chart compares five renewable energy and green infrastructure firms with most of their operations in Canada: Capstone, Algonquin Power and Utilities (TSX:AQN, OTC:AQUNF), Brookfield Renewable Energy Partners (NYSE:BEP), Northland Power (TSX:NPI, OTC:NPIFF), and Innergex Renewable Energy (TSX:INE, OTC:INGXF).  (I own all these stocks.)

CA income.png

As you can see from the chart, Capstone has not only the highest dividend yield, but also scores better on factors which reflect on its ability to maintain that dividend.  In particular, Capstone has much higher revenue and income relative to its market capitalization than the other companies.

That said, neither revenue nor income is a very good measure of a company’s ability to maintain its dividend for this sort of infrastructure company.  Revenue is not a good indicator of the ability to maintain a dividend when a company has too much  debt or preferred equity, or the business is not profitable.  As you can see from the chart to the right, Capstone’s common equity is in line with or stronger than the other firms in the comparison.

For capital-heavy infrastructure firms, income may understate the ability of a firm to pay dividends because of large non-cash depreciation and amortization charges.  Two of the firms compared (Algonquin Power and Infrastructure  and Brookfield Renewable Energy Partners) actually had negative income over the previous twelve months.  Most such firms publish a measure of Adjusted Funds From Operations (AFFO) to give investors insight into their ability to pay dividends.  Unfortunately, these measures are not defined by standard accounting rules, and so they can be problematic to compare across firms.

Rather than use published AFFO numbers, I chose instead to adjust for amortization and depreciation directly to get EBDA (Earnings Before Depreciation and Amortization), by adding them back in to income.  This has some of its own problems, in that it involves double counting the tax deductions on depreciation and amortization and it leaves out some other potentially relevant adjustments, but at least it is comparable between firms.  The yellow bars in the first chart (titled “Green Canadian Infrastructure Firms”) confirm that Capstone’s EBDA is also in-line with the other firms in the comparison.

Given Capstone’s high dividend and apparent ability to continue paying that dividend based on these accounting measures, I have to conclude the firm is trading at a discount.


Since Capstone seems to be trading at a discount to similar firms, it’s quite reasonable to ask why.  A quick review of management’s most recent discussion and analysis in its quarterly and annual filings makes the answer clear: Capstone’s largest asset, the 156 MW Cardinal gas cogeneration plant in Ontario (pictured in the lead photo) has an expiring Power Purchase Agreement.  This agreement covers the sale of the generated electricity to the Ontario Electricity Financial Corporation, and it expires in 2014.  The steam and compressed air generated by Cardinal is sold at contracted rates to an Ingredion (NYSE:INGR) Canada Inc. (formerly Casco Inc.) facility, one of the largest corn refining facilities in Canada, located adjacent to the Cardinal plant.  The agreements with Ingredion expire in 2016.

Capstone has been in discussions with the Ontario Power Authority over a new contract, but have not yet reached an agreement “that recognizes Cardinal’s value and its industrial, economic, social and community importance.”

Shareholder concern over the lack of a new contract has clearly been hurting the stock price.  Management is clearly aware of this, and says “Securing a new contract for Cardinal [is] our top priority for 2013.”

In 2012, electricity sales from Cardinal amounted to approximately 31% of revenue.  However, Capstone is in the process of buying Renewable Energy Developers (TSX:RDZ, OTC:STWPF).  After the merger, Cardinal’s share of revenue should drop below 29% for the combined entity, and will be even lower going forward, because RDZ brings with it a development pipeline which should increase Capstones future growth.

Is it really that bad?

With the market for 29% of Capstone’s revenue up in the air, it makes sense for Capstone to be trading at a discount relative to its peers.  But how much of a discount?

  • Based on its dividend yield of 7.8%, Capstone is trading at a 21% discount compared to similar firms, which pay on average 6.2%.  So investors are pricing in a 21% decrease in Capstone’s ability to pay dividends, which equates a 72% reduction in Cardinal’s profitability.
  • Based on Revenue, Capstone could lose all sales from Cardinal and still be trading at a lower multiple of sales than the comparable firms.
  • Based on a price to book ratio (P/B) of 0.7, it should be able to write off the entire value of Cardinal and still have Capstone trade in the P/B range of its peers (1.3 to 2.1, with an average of 1.6,) even if it accounts for up to two-thirds of Capstone’s equity.
  • Based on reported AFFO, Capstone’s dividend payout ratio was only 50% of AFFO in the first six months of 2013, while the company targets a long term payout ratio of 70% to 80% of AFFO.  Hence, AFFO could fall by one third and Capstone would be able to maintain its dividend while meeting its target payout ratio.

While the market of electricity in Ontario is not growing rapidly, economic factors make me believe that Cardinal should be able to operate at a profit even without a PPA.  In particular, growing demand in connecting regions (Manitoba, Quebec, New York, Michigan, and Minnesota) should provide a floor for electricity prices.  As long as  natural gas prices remain low, Cardinal should be able to sell its power at attractive prices, especially since some of its costs will be covered by sales of heat and compressed air to Ingredion.  Finally, with most of Ontario’s power coming from inflexible baseload nuclear and coal plants, the increasing penetration of renewables under Ontario’s Feed in Tariff makes Cardinal’s flexible gas cogeneration an increasingly valuable part of Ontario’s generation mix.

In any case, Capstone’s discussions with the Ontario Power Authority are more about “plans to reconfigure and expand the facility, rather than on extending the existing power purchase agreement (PPA)” according to the most recent quarterly report.  The negotiations in Ontario seem as likely to provide an upside opportunity as to reduce the firm’s future prospects.


With the uncertainty around the renewal of the Cardinal PPA, Capstone is trading at a substantial discount to its peers.  But that uncertainty has both upside and downside, while the market seems to be pricing in only a catastrophic downside.  With a 7.8% yield based on a C$0.30 dividend which was already reduced (in June 2012) to reflect the uncertainty around the PPA negotiations, Capstone should be very attractive to income investors.

If the results of the negotiations are unfavorable, Capstone should be able to maintain its current dividend.  If they can continue business as usual or achieve a framework which allows them to invest in and expand Cardinal, there is substantial scope for dividend increases going forward.

In either scenario, the increased certainty and constant or increasing dividend should lead to stock price appreciation on top of an attractive dividend over the next couple of years.  If the PPA is renewed on terms which allow the dividend to be maintained at C$0.30, and the yield falls to the 6.15% average of Capstone’s peers, then Capstones stock price would have to rise to C$4.88, 30% higher than the current C$3.76.

This article was first published on the author's Forbes.com blog, Green Stocks on Sepetmber 11th.

Disclosue: Long CSE, AQN,NPI,BEP,INE,RDZ

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.

July 02, 2013

Finavera Wind Energy's Path to Cash

Tom Konrad CFA

Location of the Miekle wind energy project. Photo source: Finavera

On June 21st, Finavera Wind Energy (TSXV:FVR, OTC:FNVRF) announced the ratification of the sale of its Tumbler Ridge and Meikle wind energy projects to Pattern Energy with 99.63% of votes cast in favor (a 2/3 majority was needed).

The result should have surprised no one, given that the sale was essential to Finavera’s liquidity and ability to fund its operations.  After shareholder, stock exchange, and regulatory approval, Pattern will forgive C$9.3 million of Finavera’s debt.  Shareholder approval is now complete, exchange approval is  expected this week, and regulatory approval should be complete by early September. (See below.)  Pattern is also providing a credit facility which will allow Finavera to continue its operations.

The company’s board of directors was also approved, although not with the same 99%+ of the votes.  Roughly a quarter of the votes for Finavera’s four directors were withheld.  According to Finavera’s CEO Jason Bak in an interview, a large block of the votes withheld from the directors were because one larger shareholder and creditor, Sprott Power Corp. (TSX:SPZ, OTC:STWPF) was registering its disapproval that it was not going to have a $900K loan repaid sooner.  That loan and Sprott’s 2 million share stake in Finavera arose last year, when Sprott was considering doing a deal with Finavera, but instead ended up buying assets from Shear Wind, Inc..


Going forward, there are a number of milestones needed to complete the Pattern transaction and to realize the value of Finavera’s stake in the Cloosh Wind Project in Ireland.  If both are completed, most likely in mid to late 2014, I calculate that Finavera will have between 32 and 44 cents of net cash on hand.  Bak promises a shareholder vote as to the use of this cash: should it be returned to shareholders as a dividend, or used to invest a new opportunity.  The timing of the vote will depend on when Finavera is able to present shareholders with a specific investment opportunity, and will likely precede the completion of the Pattern asset sale.

The next milestones for Finavera will be

  • Next day or two: Approval of the purchase by the Toronto Venture Exchange.  This should be completed in the next day or so.
  • July: Finavera will submit Miekle into the environmental review process.  Tumbler Ridge already has all necessary approvals.
  • Late August/ Early September: Approval by BC Hydro.   BC Hydro needs to update the Power Purchase Agreement (PPA)  for the Miekle and Tumbler Ridge projects to reflect the new owner.  With the business-friendly Liberals returned to power in British Columbia, Bak expects this process to go smoothly.  The defeated NDP had favored the utility to develop its own projects, rather than buying power from independent producers like Pattern.  At this point, Pattern will pay Finavera C$9.3 million which the latter will use  to repay a similar amount of debt to Pattern.  For simplicity, I’ve also been referring to this as loan forgiveness.
  • H2 2013: Shareholder vote on use of net proceeds from Cloosh and Pattern transaction.  Dividend or pursue a new opportunities?  If the vote is to pursue new opportunities, the goal will be to build Finavera’s assets and eventually qualify for listing on a much more liquid exchange than the Toronto Venture.
  • Q4 2013: Financial close of the Cloosh wind farm.  Bak says this process remains on track, and involves finalizing only “minor issues”  around access to the site, grid connections, and landowner agreements.  He says the largest remaining issue permitting of the electrical substation.  Turbine design and layout should be complete by the end of the summer.  When Cloosh reaches financial close, Finavera will receive approximately C$9.3 million (This is confusingly approximately the same amount as the Pattern loan, but a different payment from a different source,) and begin an auction process to sell its 10% stake in the Cloosh wind farm.  Bak estimates this stake will be worth between C$3 and C$4 million.  I used C$3 million in my valuation below.  Bak has a “high degree of confidence” in reaching financial close on Cloosh by the end of the year.
  • Q1 2013.  The environmental approval process  should take six months for Miekle.  This process was  thrown off in the past because the BC auditor general got involved, but now the process is set, and that is unlikely to happen again.  The environmental approval is  followed by ministerial approval, which takes another 45 days.
  • Ongoing: Finavera continues to measure the wind regime at Miekle, and the additional data will be used to optimize the combined design of the Miekle and Tumbler projects.   So far, the the wind regime at Miekle seems better than anticipated, and this may allow Pattern to fill the full power requirement of the PPA with 187 MW of turbines at Miekle, what Bak calls the “Super Miekle” option.  This will be more profitable for Pattern, because it will allow the company to fill the entire PPA with less supporting infrastructure (access roads, substations, etc.)   The other likely option would be to build 117 MW at Miekle and 47 MW at Tumbler Ridge.  This will be relatively less profitable to Finavera because a Super-Mielke project will likely be larger than the two smaller projects combined.
  • Q3-4 2014: Meikle and Tumber Ridge projects or Super-Miekle project shovel-ready.  Final payment from Pattern.

Value on Financial Close of Pattern Deal

Given the different possibilities, I decided to do a quick scenario analysis of the possible outcomes for Finavera, and look at what that means for Finavera.  To be conservative, I not only considered the two options Bak thinks are likely (Super-Miekle or Meikle and Tumbler) but also considered a couple possibilities which he considers very unlikely.

With regards to Cloosh, I gave a 10% probability that something will go horribly wrong, and Finavera will not receive the final C$9.3 million payment or be able to sell its residual stake.   In reality, even if something goes wrong at Cloosh, Finavera should be able to recover some value from this very advanced project, but I wanted to be conservative.  With regards to Miekle and Tumbler, I gave a 5% probability to building only 114 MW at Miekle and none at Tumbler Ridge.  Bak says that the wind regime has now proven strong enough at Tumbler that this is no longer an option being considered, but I decided to throw it into the mix anyway, with a 5% probability.  I then gave a 45% probability to the Super-Miekle option, which Bak considers most likely, and a 50% probability to the Miekle and Tumbler option.  This is again conservative, as I gave the higher probability to the less valuable scenario.

The results are shown in the chart below:

Finavera Valuation.png

In my calculations, I assumed 37.5 million diluted shares outstanding, C$22.6 million in liabilities, C$2 million in current assets, and C$3 million in operating expenses before Finavera receives the final payment from Pattern.


The positive result from the Annual General and Special Shareholder meeting had begun to lift Finavera off its low, only to be reversed by two days over cratering stock markets on Wednesday and Thursday.  Although there is always considerable risk in small companies like Finavera, even discounting next year’s expected cash holdings of C$0.35 per share by 50% gives a value to Finavera today of C$0.175.  Today’s 14 cent share price looks likely to double (or more) over the next 18 months, as Finavera completes the milestones above.

Disclosure: Long FVR, SPZ.

This article was first published on the author's Forbes blog on June 21st.

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.

February 14, 2013

Western Wind & Brookfield: Time To Declare Victory and Go Home

Tom Konrad CFA

Western Wind logo.png Yesterday, I tendered my shares of Western Wind Energy (TSX-V:WND, OTC:WNDEF) to Brookfield Renewable Energy Partners' (TSX:BEP.UN, OTC: BRPFF) extended offer for Western Wind at C$2.60 a share.  This is despite the fact that I think (and was even quoted in a Western Wind press release) saying Western Wind is worth more than C$2.60.

Two things have changed.  After conversations with other investors, Western Wind CEO Jeff Ciachurski, and a representative of Brookfield, as well as reading some evidence of extremely bad governance in Western Wind's Q3 2012 filing, I no longer think that Western Wind's management or board are committed to the sale process.  If there is another bidder willing to offer more than C$2.60 a share, I don't have confidence that the directors will present it to shareholders.  On September 20, Western Wind issued a press release, signed by all five directors, where they committed to the sale process.  They said, "The highest bid will not be denied and regardless of market conditions, the highest bid will be forwarded to the shareholders, for their approval."

C$2.60 is the highest bid, yet the directors are recommending we reject it.  It does not build confidence.

I went into a lot more details as to why I don't think we'll see a higher bid and why we should tender our shares in an article on Forbes yesterday.  Here are the basic points:
  1. While there may be potential bidders willing to pay over C$2.60 per share, none are willing to pay C$3 or more.
  2. Ciachurski and the board have already paid themselves the change of control bonus for selling the company, and no longer have that incentive to sell.
  3. Bringing the Yabucoa project to financial close will not add significant value for potential bidders.
  4. If the Brookfield’s offer expires unsuccessfully, WND will decline significantly in the short term.
  5. Ciachurski has a habit of alienating possible buyers.  This reduces the potential pool of bidders, and lowers the price that shareholders can expect for their stock.
  6. Brookfield is very close to succeeding; the readers of this article are likely to make the difference.
The title of this article comes from my conclusion:
It’s not as if I or most of my readers are selling at a loss.  Since I started writing about the company shortly before the Algonquin bid in 2011, Western Wind has traded mostly in the $1 to $2 range, so we’re all looking at gains between 25% and 100%.  It’s time to declare victory and go home.
You can read the details here.

You'll note that point 5 above was that Ciachurski has a habit of alienating possible buyers.  It's not just buyers he goes after... it's anyone who gets in his way.  Here's an email he sent me this morning, in response to the Forbes piece.
Hi Tom,

I read your news blast today.  I have no problem with your desire to do what you want with your stock I do find the reasoning to border on stupidity.
Do to your conclusions, I am certain your lack of knowledge is the reason you have a very few followers.  I should of done my DD on you first, but now I know why you have no followers.

I do not have the time to respond to anywhere near you babbling comments, but a few come to mind.

1)  AQN [Algonquin Power and Utilities (TSX:AQN, OTC:AQUNF)] and BEP are the largest pure play renewable energy players in NA.  reality check - AQN has a huge portfolio of fossil fuel generating assets, clearly making you a moron when it comes to research and knowledge.

2) I can take my money and invest in FVR.[Finavera Wind Energy (TSXV:FVR, OTC:FNVRF)] reality check - FVR has no production, has been rolled back 10 for 1 and is down 1000% in three years.  FVR has no production or decent revenues.  Looks like you need the public to bail out your position.

3) I am getting paid bonuses not to sell the company - Tom, I could sue you until you are in the poor house for this serious defamation and lies. You printed this now it is easy to sue you.

4) By having low dilution and therefore low equity into our projects our project loans are higher. -  You have exceeded the moron threshold by a factor of 500%.  Our project loans are the lowest in the industry. In fact triple AAA banks that we use could NEVER charge more interest. This would imply more risk which no A rated bank will take on.

5) I do not care what Brookfield did in Brazil, I just want their Canadian dollars - really - yet you published a defaming article about myself last year and now you lie about the WSJ article.  It said many people were indicted and Brookfield hire an armoured truck to carry the pay off bribes.

Anyhow, the 39% like you who have tendered have weakened the case for the 61% who want more dough.

I hope you are aware that I can use unlimited funds to sue you for your defamation. In addition to defamation you have displayed total stupidity in your investment recommendation to sell WND to buy FVR.

Tom, I look forward to seeing you in court and sanctioned by the regulators.

I'm not particularly concerned about the threats, since everything I said is backed up by published documentation.  I do have to wonder where the "unlimited funds" with which he is threatening to sue me for defamation are going to come from.

According to several people I've talked to about Ciachurski over the two and a half years I've been covering Western Wind, such threatening letters (as well as text messages and midnight phone calls) are his standard MO when anyone crosses him.  (Here's a quick note to you, Jeff: If you want to annoy me, you'll have more luck with the midnight phone calls.  With phone calls, it will be annoying to transcribe them for publication.  With email, I can just cut and paste.)

Needless to say, I won't be investing in another a Jeff Ciachurski-run company any time soon.

Disclosure: Long WNDEF, BRPFF, FNVRF, AQUNF.

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.

December 09, 2012

Power REIT: Good if They Lose, Much Better if They Win

Tom Konrad CFA

It’s Good to be Small

Small investors have an advantage over big hedge funds and other professional investors: They don’t have as much money.

Why is not having much money an advantage?  It allows us to invest in stocks that large investors simply cannot touch because of lack of liquidity.  If a stock only trades $50,000 worth of shares a day, a even a relatively small $50 million dollar hedge fund would have to buy all of the shares traded for two weeks just to allocate 1% to the stock, and would have to do the same if it were to sell.  As you can easily imagine, that would send the stock price rocketing (or plummeting when the fund sold), and remove much potential for profit.

If the big funds can’t buy a stock, they’re not going to spend any time researching it.  Likewise, analysts, who make their money selling their research to large investors, are not going to research it either.   With professionals out of the picture, it’s relatively easy for a small investor to gain an informational advantage: We just have to dig a little deeper than others.  The fewer investors who are paying attention, the easier that is.

That’s not to say that all (or even most) illiquid stocks are a good buy.  You still have to do some digging.  Yet unlike with more widely followed companies, the stock price can occasionally be much less than the value of the company, especially if that value is not yet shown on the company’s books.

pwlogo5[1].jpgA Very Illiquid Stock

Which brings me to Power REIT (NYSE:PW.)  The stock’s average daily volume is about 1300 shares, or only $10,000.  With a market cap of $13 million, if a $100 million dollar hedge fund tried to allocate just 1% to PW, it would send the price skyrocketing as it attempted to purchase as much stock as normally trades in five months.  The fund would also end up owning over 5% of the company, becoming subject to extra restrictions on trading and disclosure.

With a stock this illiquid, even small orders of a few hundred shares can move the price five to ten percent, so it’s best to use limit orders to make sure you’re not paying a lot more than you expected.  Even limit orders will move the price over time, however.   That said, the current stock price of $8.10 is more than justified by the current 4.9% annual yield alone.  Which means the large upside potential I’ll discuss below is essentially free.

What Most Investors See

I mentioned Power REIT in my recent article on the possibility of Solar REITs, as well as profiling the company earlier this year.  I think the comments I’ve received are indicative of what most small investors see when they look at PW:

Personally, I consider a 5% yield attractive in the current interest rate environment, but it’s the litigation with Norfolk Southern Corp. (NYSE:NSC) that provides the opportunity to dig deeper than most other investors have.

According to Power REIT’s recent quarterly report and court documents, the substance of the litigation is this:

  • Power REIT believes that  NSC, and its sub-lessee, Wheeling & Lake Erie Railroad (WLE) are in default on their lease with Power REIT’s wholly owned subsidiary, Pittsburgh & West Virginia Railroad (P&WV.)   That leased property is 112 miles of railroad track and railroad property in Pennsylvania, West Virginia and Ohio, and is Power REIT’s main asset.  For the sake of brevity, I will refer to NSC and WLE collectively as the lessees from this point forward.
  • The lessees are seeking a judgment that they are not in default of the lease.   If they are not declared in default  they have the right to unlimited renewals of the 99-year lease on the current terms which are very favorable to them.
  • If the court declares the lessees in default, they would have to re-negotiate terms for using P&WV’s property.  In addition, a substantial “indebtedness” arising from tax payments made by P&WV on NSC’s behalf and asset sales of unused portions of the leased property would come due.  The court may also declare the lessees owe back interest on the indebtedness.  NSC has not provided access to the books which would document the size of this indebtedness, but it was carried (without interest) on P&WV’s 2009 tax return (prepared by NSC) at $15,517,325.  It has since increased to at least $15,882,651, according to an exhibit filed by Power REIT.  The lessees refer to this indebtedness as the “settlement account.”  The lease limits the size of this indebtedness to a tiny fraction of the size of the current settlement account.
  • P&WV believes that the lessees are in default for at least three reasons, which they state in their answer legal filing:
    1. Failure to pay specific P&WV’s legal fees which it believes the lessees were required to pay under the lease after 60 days notice.
    2. Failure reimburse P&WV in cash for Federal tax payments made under the terms of the lease.
    3. Failure to allow P&WV to inspect books and records regarding its property or inspect its track.

Payment of Legal Fees

The lessees argue that the lease does not require them to pay P&WV’s legal fees.  The relevant section of the lease, 4(b)(6), states that the lessee is

[R]equired to pay all obligations reasonably incurred by [P&WV] … for … all acts and things necessary or desirable for the protection [of P&WV]’s rights …. pursuant to this Lease, except such obligations … solely for the benefit of its stockholders.

While I’m not an attorney, it seems clear to me that the legal fees Power REIT has incurred to determine its rights under the lease and to protect its interest in the current litigation are both “necessary or desirable” to protect its rights under the lease.  While everything Power REIT does should eventually be for the benefit of its stock holders, that clause is not relevant here because, as P&WV points out in its legal filings, NSC has not historically applied that exemption to paying any of P&WV’s taxes.  These tax payments are also required under the lease subject to the same exemption.

Payment of Taxes

The lease allows the lessees to use the depreciation of the property to reduce their tax bills, so long as they compensate P&WV for the taxes then owed.  Section 4(b)7 of the lease states such taxes (as well as the legal fees discussed above) “shall be paid or discharged by Lessee as and when they become due and payable.”

Rather than paying these taxes for P&WV, the lessees have simply been increasing their “indebtedness” to P&WV, as discussed above, forcing P&WV to pay the taxes out of its own cash.  This is another reason Power REIT argues that the lessees are in default.

P&WV Rout Map
Pittsburgh and West Virginia Railway Route Map, pre-1967 from Wikipedia

Refusal to Allow Inspections

NSC has also refused to allow Power REIT to inspect NSC’s books, despite the fact that section 8(a)3 of the lease seems crystal clear that it should be allowed to do so:

[NSC and WLE] shall permit at any and all reasonable times such person or persons as [P&WV] may designate to inspect the books and records of [NSC or WLE] for any purpose whatsoever.

As far as I can tell, the track inspection Power REIT requested is not required by the lease, but the refusal to allow an inspection of NSC’s books seems sufficient to declare NSC to be in default.

WLE amp A portion of Wheeling and Lake Erie Railway's Route Map

Timing and Likely Outcomes

The case is pending in Federal Court in Pittsburgh, PA.  The litigation is currently in the active discovery phase.  While it’s extremely difficult to predict how long the litigation might continue, and what the cost might be, both parties are asking the court for a summary judgment, which means that there could be a judgment soon after this phase is over.

The various issues that will need to be decided are:

  • Can Power REIT terminate the lease?
  • How should the “indebtedness” in the settlement account be treated?
  • Are the lessees responsible for any of Power REIT’s legal costs?

From reading the filings, it seems to me that WLE and NSC’s strongest argument is that they have been doing things this way for 45 years, and P&WV has never objected before.  Hence, the argument goes, P&WV implicitly agreed to their procedures with its lack of objection over four decades.  Power REIT’s counter is that P&WV was for all intents and purposes a captive of NSC.  NSC controlled PW’s board (WLE’s President was chairman of the board.)  NSC even prepared P&WV’s taxes.   Since P&WV did not have the capacity to object, its previous silence did not constitute assent.

Termination of the Lease

It seems clear to me that WLE and NSC are in default of the lease on several counts, and the lease  is quite clear that there is no remedy once a default has occurred.  That said, the court might still decide that the possibility of economic disruption  would be too great if Power REIT were allowed to completely revoke the lease, and so might simply change the terms of the lease, or order that they negotiate a new lease that the court deems fair.

Any of these outcomes would most likely be favorable to Power REIT, since the current lease has no provision for inflation, past or future, and the current rent is far below a market rate.  The worst-case scenario for Power REIT would be if the court were to rule in WLE and NSC’s favor, and re-affirm the status quo.

If the court finds the lease in default, then WLE or some other railway will need to renegotiate a lease with Power REIT.  Given the fact that the current lease is 50 years old and has no inflation adjustment, it seems reasonable to expect that any new lease would be considerably more lucrative for Power REIT than the old one.  It’s also worth considering that the rail in question lies on top of the active Marcellus Shale natural gas play.  While the environmental impacts of shale gas drilling are in question, the impact on rail usage are not: shale gas drilling requires incredible volumes of water, sand, and drilling chemicals to be hauled, and rail is far more economical for moving bulk goods than roads.   Any new market lease would probably be worth many times the $915,000 per year ($0.55 per PW share) paid under the old lease.


The lease does not define the terms of the “indebtedness” represented by the almost $16 million in the “settlement account,” and is silent on when the indebtedness is due.  PW argues that because the lease is silent on the matter, the money is payable on demand.

Even if Power REIT is not able to demand the money immediately, the lease caps the settlement account at five percent of P&WV’s assets, which, depending on how assets are valued, is almost certainly less than $1 million.

Hence, there are a large number of avenues by which the court might decide that at least $15 million of the settlement account is due and payable immediately.  Since Power REIT has only 1.62 million shares outstanding, that amount to a payment of over $9 a share.  As I write, Power REIT’s stock last traded at $8.10.

In any case, the court may decide that the balance is subject (as Power REIT argues) to interest at the Applicable Federal Rate (AFR).  I was only able to find AFR data back to 1990, but the long term AFR appears to be about 1% less than the 10 year Treasury rate for those years, so I used this approximation for 1967 to 1989.  If we assume that the settlement balance has accrued in straight-line fashion over the 45 years since the beginning of the lease, we get a total (with compounded interest) of around $70.7 million.

While the legal argument that a debt should accrue interest seems sound to me, I have trouble believing that the court would award $70 million to a company with a $13 million market cap.  On the other hand, much stranger things have been known to happen.

Payment of Legal Costs

The lease seems quite clear that the lessee should pay all P&WV’s tax payments and legal costs that are not strictly for the benefit of shareholders.

The legal costs are disclosed in Power REIT’s 10Q, and amount to $366,000, or $0.23 a share.    Although these legal costs are recoverable under the lease, GAAP accounting rules require them to be booked as an expense, and this has been depressing earnings over the last few quarters.  There was also a smaller amount spent in 2011.

Power REIT management believes that the lessees will have to reimburse these legal fees.  This confidence makes this tiny company willing to take on a behemoth like NSC in a legal battle.  The expense might be hurting the stock now, but the cost is much easier to bear when it’s likely your opponent will be paying your expenses.  This also means the lessees have an incentive to wrap the case up quickly.

When the case is over, the worst case scenario is that the court decides NSC will not have to reimburse any of these expenditures or taxes.  In that case, the bleeding will stop, and PW’s earnings per share will return to their former level of about $0.44 a year based on the rent from the lease.  Otherwise, we will see a one-time earnings boost of $0.23 a share or more, some of which might have to be returned to shareholders as a special dividend in order for Power REIT to retain its REIT status.

Implications for Power REIT

This litigation has so far prevented Power REIT from progressing with its plans to diversify its business into Renewable Energy Real Estate.  I have also spoken to multiple investors who are unwilling to invest in the company until the dispute is resolved.  I think such investors are being overly cautious.

Potential moneys that the lessees might be ordered to pay are

  • $0.23 per share or more in legal fees.  I think this is very likely.
  • $15,882,651 or $9.80 a share for the value of the settlement account.  I think there is a decent chance that the court will order NSC to pay this one way or another, although it might not come as a lump sum.
  • Interest on the above amount.   If the court does award interest, it would come to about $55 million ($34 per PW share) of compound interest on top of the $15.5 million principal if they use the long term AFR.
  • Increased rent under a renegotiated lease, which could be many times the current lease payment.  The current lease pays $915,000, or $0.56 per PW share per year.

The downside for Power REIT would simply be that the court orders that the status quo be maintained (in which case they could still order the lessees to reimburse Power REIT’s legal fees.)  In this case, the legal spending will stop, investors will have greater certainty and still own a REIT yielding over 5% which has plans to expand its asset base into renewable energy real estate.  As I have previously written, that expansion is likely to allow PW to increase its per share dividend.

In addition, Power REIT could write off the noncollectable settlement account against future income.  This has been carried on Power REIT’s tax returns as a receivable. 

While no cash would change hands, writing off the $15,882,651 against future income would allow Power REIT to return $9.58 per share to shareholders as a tax-exempt return of capital, rather than as unqualified dividends.  At the current quarterly dividend rate of $0.10 per share, that would mean that all Power REIT’s dividends would be exempt from tax for the next almost 24.5 years.

With the stock price at $8.10, PW’s annual yield is 4.9%.  While the write-off would make no difference to a tax-exempt investor, a taxable investor in the 30% tax bracket would get an after-tax income stream comparable to another REIT yielding  7%, a substantial difference which I do not believe is yet priced into the stock.

Normally, I would suggest that any investor with the option should purchase a REIT in a tax-advantaged account, such as an IRA.  In this case, if you think the chances of Power REIT being able to collect on the indebtedness are low, a taxable account would be most appropriate.

Heads: Win Big, Tails: Win Small

PW is a $8.1 stock carrying no debt whose price can be justified on the basis of current assets and dividend alone.  On top of that, it has a decent (in my opinion) chance of a legal victory in 2013 that could result in payments significantly in excess of the company’s entire market capitalization.  If they lose, they can still write off the noncollectable $15,517,325 settlement account, allowing the company to characterize distributions to shareholders as non-taxable capital gains for many years to come.

That’s an investment even a large investor would love… if only they did not have too much money to buy it.

Disclosure: Long PW.

This article is derived from two articles published on the author's Forbes.com blog, Green Stocks on November 27th and 29th.

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.

December 07, 2012

Mockumentary: This is Western Wind

Tom Konrad CFA

Windstar wind farm
The Windstar Wind Farm. Photo credit: Western Wind Energy
If the sale of Western Wind Energy Corp (TSXV:WND, OTC:WNDEF) were a movie it would be a satire like This Is Spinal Tap, the 1984 Rob Reiner classic Mockumentary profiling a “Heavy Metal band on the verge of spontaneous combustion.”

I doubt any wind turbines are about to spontaneously burst into flame, but the news keeps getting weirder.

First, there was the hedge fund (Savitr) which began pressuring management to put the company up for sale after Western Wind huffily refused an unsolicited C$2.50 per share offer from Algonquin Power (TSX:AQN, OTC:AQUNF) late last year.  This pressure included personal attacks and dirt digging on the part of a private eye (not necessarily connected to Savitr) who claimed to be able to connect Western Wind’s CEO, Jeff Ciachurski with criminal elements.

Ciachurski played his part as rock diva well, displaying a thin skin and hot temper (at least by the standards of corporate press releases.)  First, he dismissed the Algonquin offer out of hand as “extremely low-ball,” and only formed a special committee to consider formal offers under pressure two weeks later.  Quite possibly not wishing to be part of the drama, Algonquin dropped its informal offer a week later, and the special committee was apparently wound up after having considered a grand total of zero formal offers.

In August, after Western Wind’s stock had plummeted into the low C$1 range by the negative rumors circulating about management and an unexpected cut in a Federal tax grant, Ciachurski gave Savitr what he thought the fund wanted: he put the company up for sale.  But even that did not go smoothly, with Savitr keeping up the pressure by running their own slate for the board of directors, with the stated goal of doing exactly what Ciachurski & Co. were already doing: selling the company to the highest bidder.  Accusations continued fast and thick on both sides, with each impugning the other’s willingness and ability to get the best deal for shareholders.

In September, Brookfield Renewable Energy Partners (“Brookfield”, TSX:BRP.UN, OTC: BRPFF) entered the fray, signalling its intention to bid for Western Wind by acquiring the 18.6% of shares and warrants owned by the company’s largest shareholder and the voting rights which went with them.  At the time, I thought Brookfield’s motivation was to influence the outcome of the proxy battle, perhaps calculating that it could get a better deal out of the eager to sell Savitr than the reluctant salesman Ciachurski.

Today, that intuition was proved correct.  According to a company press release, Brookfield has not been participating in management’s sale process, and has instead attempted to form its own bilateral agreement with Western Wind.  Brookfield representatives also appeared at the company’s annual meeting in the company of the dissent board backed by Savitr.  Since Ciachurski successfully saw off the proxy challenge, Brookfield made it’s own informal offer (again at C$2.50) on Friday, having refused to sign the non-disclosure and standstill agreements signed by the other participants in the auction process, some of whom the Company claims have already (informally) expressed willingness to pay considerably more than C$2.50 a share.

Perhaps all the drama is more of a low-brow made-for TV movie than classic Mockumentary, but the box office returns in the form of the stock’s reaction today (up 12% at C$2.72) have been quite good.

Disclosure: Long WNDEF, AQUNF, BRPFF

This article was first published on the author's Forbes.com blog, Green Stocks on November 26th

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.

September 15, 2012

Brookfield Renewable Energy Likely To Vote Against Western Wind Management in Proxy Battle

Tom Konrad CFA

When it emerged that Brookfield Renewable Energy Partners (“Brookfield”, TSX:BRP.UN, OTC: BRPFF) had acquired approximately one sixth of Western Wind Energy’s (TSXV:WND, OTC:WNDEF) stock last Thursday from Western Wind’s largest institutional shareholder, Goodman & Company, investors cheered.

The transaction was seen as a signal that Brookfield intends to bid at least C$2.25 for Western Wind in its upcoming sale, and so the company’s stock has been trading for slightly more than C$2.25 since the announcement.

Despite this, the Brookfield/Goodman transaction may not prove to be a good deal for Western Wind’s other shareholders.  Goodman had not said how it intended to vote in the upcoming proxy battle between Western Wind’s management and 4.78% owner Savitr Capital.  The main issue in this proxy battle is which team is best suited to manage the process of selling the company.

Because the purchase comes with a promise from Brookfield to compensate Goodman if Western Wind is sold for more than C$2.25 in the next year, the transaction only makes sense if Brookfield intends to use its newly acquired votes to influence the vote in its favor.  As a likely bidder in the sale, Brookfield’s incentive is to vote for the management team which it believes will accept the lowest offer for Western Wind.  Savitr has stated that Western Wind management made a mistake rejecting Algonquin Power and Utilities Corp.’s (TSX:AQN, OTC:AQUNF) 2011 offer of C$2.50 a share, so it’s clear that Savitr is willing to accept less for the company than management.

Other shareholders  will want to sell the company for as much as possible.  They should vote for the team they think is best able to interest the broadest range of possible buyers in the company, and best able to advance its Yabucoa solar project and increase the company’s value in the meantime.   I personally think current management has the best team for these two jobs, and will be voting my yellow proxy in favor of management’s nominees on September 25th.

While Brookfield’s stock purchase has been good news for Western Wind shareholders in the short term, if Brookfield casts the decisive vote in the proxy battle, it may well mean that we will end up with less for our shares that we would have gotten otherwise.

Brookfield must think so, or they would not have bothered striking the deal with Goodman.

Disclosure: Long WND, BRP-UN, AQN.

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

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

August 12, 2012

Western Wind to Sell Company, Avoid Proxy Battle

Tom Konrad CFA

Western Wind and the Toronto Hedge Funds

Last October, Western Wind Energy (TSXV:WND, OTC:WNDEF) received an unsolicited takeover bid of $2.50 a share from Algonquin Power (TSX:AQN, OTC:AQUNF) to buy the company.  Before the bid, the stock had been trading in the $1.20-$1.25 range, but President and CEO Jeff Ciachurski felt that it did not fully value the company’s projects and assets, including approximately $1 per share of US tax assets which the Canadian company Algonquin would not be able to use.

Large shareholders at the time were in favor of the sale, including at least one shareholder owning 18.6% of the stock who had entered into an agreement to support Algonquin’s bid.  However, in the face of Western Wind’s vociferous opposition, Algonquin decided a hostile takeover was not in its interest, and withdrew the offer and terminated the lock-up agreement.

A group of shareholders, which management identifies as Toronto-based hedge funds, were unhappy to be unable to book a quick profit, and took steps to begin a proxy battle to take control of Western Wind’s board.  The intent was to take control of the company’s board and put Western Wind up for sale.

Kingman solar and wind.png
Western Wind's Kingman I Wind & Solar park. Photo courtesy of the company.

Proxy Battle Looms

That proxy battle would have taken place at Western Wind’s annual meeting, due this September.

In a conference call two weeks ago, Ciachurski said he had no plans to sell the company until 2013 at the earliest.  Today, the company announced plans to sell the entire company and its assets as soon as possible.  What changed?

Although I’m now entering the realm of pure speculation, it appears to me that management believes that the recent share price fall in the wake of a disappointing federal cash grant for the company’s Windstar project has allowed the hedge funds and their allies the opportunity to gain control of enough of Western Wind’s stock to win a proxy battle.  With two weeks having passed since Western Wind CEO and President Jeff Ciachurski announced he would lead a delegation to Washington in the hopes of getting the full grant re-instated, Ciachurski likely now believes that additional grant money will not be forthcoming, and disappointed shareholders are more likely to vote against management in any proxy battle.

[UPDATE: A company spokesman contacted me to say that my speculation regarding the Windstar cash grant is incorrect, and that the delay is related to difficulty scheduling time with a judge.]

Since Ciachurski now seems to believe he would lose a proxy battle, and the new board would be likely to put the company up for sale anyway, he has decided to steal their thunder, and put the company up for sale himself.  The press release mentioned that,

The CEO of Western Wind receives a bonus within his Compensation Agreement that pays out increased amounts of cash on obtaining the highest share price on the sale. Western Wind emphatically states that the CEO and Board are highly motivated to achieve the highest sales price, and are the only parties able to achieve the highest sale price possible.

In particular, this “increased amount” is $2 million which Ciachurski will receive if the sale price is $3 a share or more and an extra $1 million for each additional dollar above $3, according to Western Wind’s 2011 proxy statement.

Likely Sale Price and Timing

If Ciachurski believes that he has a better chance of eliciting an offer of $3 or more for Western Wind than would the new managers after a successful proxy fight, he has a strong incentive to conduct the sale himself.  We know they would be satisfied to sell the company for $2.50 a share, so he justifiably worries that they might sell for less than $3, if only to expedite the sale.

With the company already up for sale, other shareholders are much less likely to vote for a slate of directors whose platform is to put the company up for sale.  Further, with a sale already in progress, the Toronto funds will likely not go through the trouble and expense of staging a proxy battle, unless they believe that Ciachurski would cancel sale process after the annual meeting.  But since such a cancellation would destroy any trust most shareholders have for Ciachurski, I would expect the sale to go through (although the search for a buyer could drag on if Ciachurski is unable to find a buyer willing to pay the magic $3 per share or more he will want to hold out for.

I expect Western Wind will sell for something more than $3 a share.  This is easily possible, since the value of the company’s assets based on discounted cash flow is north of $5 a share, so a protracted sale process is far from inevitable.  Even if Ciachurski wants to delay a sale, he will have limited flexibility to do so.  This morning’s press release listed three milestones:

1. Financial completion and start of major construction on the 30-MW Yabucoa Project, Puerto Rico. This will add $160 million to Western Wind’s balance sheet to approximately $560 million at time of sale;

2. Negotiating the balance of the cash grant proceeds from treasury;

3. Completion of the mezzanine loan facility from our senior lender in the amount of $25 million, which can repay the high cost corporate notes;

Negotiations with the treasury are unlikely to drag on for months: The original grant process is supposed to take only 60 days, so it seems unlikely that Western Wind’s appeal will task that long.  The completion of the mezzanine loan facility is also unlikely to drag out for more than a month or two.  That leaves the start of construction of the Yabucoa Project, which the company expects to begin by October, and almost certainly to begin by December.

Champlin / GEI Acquisition

The all-share deal to acquire a 4 GW development pipeline from Champlin / GEI Wind Holdings is almost certainly off.  In a conference call exactly two weeks ago, Ciachurski said that this deal would be finalized “in the next two weeks.”  If it were going to be finalized at all, there would have been a mention in today’s news release.

The stated motivation for the Champlin/GEI deal was to provide a long term development pipeline for Western Wind, and that pipeline is unlikely to be useful in the case of a quick sale, while the 8 million shares of stock which were to be issued in exchange for the pipeline would lower the expected sale price.  Further, the unstated motivation for the deal was likely that Ciachurski wanted those 8 million shares in friendly hands, supporting him in any proxy battle.  Since a proxy battle is now unlikely, this motivation no longer applies.


A sale agreement will almost certainly be finalized sometime this year, even in the event Ciachurski cannot get his $3 price.  But we will not have to wait months in order to get a lot more information about the process, and even see some bids.  In order to avoid a proxy battle at the annual meeting, the company will need to provide enough information to shareholders to make it clear that a sale is virtually certain.  That means that before the late August record date for the annual meeting, Western Wind will likely have selected two M&A advisory firms to advise on the sale.  I think it’s also likely that we will see one or more initial bids or expressions of interest  before the end of August.

A sale may not be finalized until towards the end of the year, but expect Western Wind shares to continue rising rapidly, as more details of the expected sale emerge over the next few weeks.

Disclosure: Long WNDEF.

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

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

July 29, 2012

Western Wind Energy: A Matter of Trust, and Value

Tom Konrad CFA

Windstar wind farm
The Windstar Wind Farm. Photo credit: Western Wind Energy

Yesterday, I wrote about Western Wind Energy’s (TSXV:WND, OTC:WNDEF) plans to increase the 1603 cash grant for their Windstar wind farm.  But that was not the only thing discussed in Monday’s conference call.

Investor Frustration

During the Q&A, many investors were concerned about Western Wind’s recent deal to acquire a 4 GW wind development pipeline from Champlin/GEI Wind Holdings.  

The concern was that the company would be issuing 8 million shares for the assets, but the company has revealed very little about the projects.  With the federal Production Tax Credit (PTC) set to expire at the end of 2012, many development projects will not be viable.  In the absence of more information, the entire four gigawatts of potential could effectively be worthless.

On the other hand, the loss of the PTC doubtlessly affected the price paid for the assets.  Champlin/GEI had invested “almost $20 million” in the pipeline so far, and Western Wind is acquiring the pipeline for 8 million shares, at a notional value of $2.50 per share ($20 million.)  At the current market price of only $1.25 a share, that’s $12.5 million, but if we consider Western Wind’s net asset value per share, which I put at over $5 per share, then the company is paying over $40 million for the assets.

What is the development pipeline worth?  I think it’s safe to assume that most of the 4,000 MW of projects will not be built without the PTC.  But the company has spoken of a near term project 75 MW project Hawaii, which they say is viable without the PTC.  Given that Hawaii has extremely high electricity prices (most electricity is generated from oil) and an aggressive renewable energy mandate, it’s quite believable that a project in Hawaii would be economical without the PTC, despite the high cost of building anything in Hawaii.

The company has also claims that other projects in the pipeline will be viable without the PTC, but has given few details.

“Trust Me”

In response to investor’s questions during the conference call, President and CEO Jeff Ciachurski was not particularly forthcoming.  He says he cannot reveal more details about the projects in the pipeline because it would provide ammunition to opponents who want to reduce the price paid for wind power in the power purchase agreements he negotiates with utilities.  Like investors’ concerns about lack of transparency, Ciachurski’s worries are valid.  If the company tells investors it will receive a high rate of return on a project, utility customers will use that statement in front of regulators to try to reduce the amount the utility pays the company for electricity.  In other words, information is a two-edged sword.

From his tone in conference calls, Ciachurski seems offended by the implication that the Champlin/GEI deal will not be a good one for investors.  He asks us to consider his track record, management’s ability to grow its assets and projects.  The value of Western Wind’s projects has been validated in two ways: by the in-depth due diligence of the leading banks among the project lenders, and by the independent valuation the company commissioned last year, on which I based my $5 to $6 valuation of the stock.

Western Wind’s 2004 annual report shows only $200 thousand in liabilities on the balance sheet.  On March 31, 2012, the most recent quarterly report shows $360 million in liabilities.   Over those seven years, the amount of money banks were willing to lend grew at a compound annual growth rate (CAGR) of 187%.  The book value of assets on the balance sheet also grew, from $3.3 million to almost $400 million, a 93% CAGR, although this greatly understates the growth in the value of Western Wind’s assets, since they are shown on the balance sheet at cost, not on a discounted cash flow basis.

WND balance sheet data
Data source: Western Wind financial statements and press releases. Note that assets are shown at book value, and are much lower than they would be in a DCF analysis.

The company has issued shares to fund some of this growth: shares outstanding rose six-fold, a CAGR of 27%, but not in a dilutive way.  Even using just the balance sheet values of net assets, net assets per share grew from $0.29 to $1.85 (after the receipt of the reduced cash grant), or over 30% CAGR.

Given that track record, I’m willing to give Ciachurski and his team the benefit of the doubt on the Champlin/GEI pipeline.  I agree that Western Wind could reveal more about their pipeline than they are without tipping their hand in PPA negotiations, such as a list of projects giving their locations, potential megawatts, wind regime, and a rough idea of how much progress has been made on them.

In short,  I don’t like the secrecy, but I’m willing to put up with it because I’m able to buy Western Wind shares at a tiny fraction of what I see as their true value.

WND per share
Data source: Western Wind financial statements and press releases. Note that assets are shown at book value, and are much lower than they would be in a DCF analysis.


There are some who say any trust in Ciachurski is misplaced.  I’ve received comments on my articles saying that “ the executives have been plundering the company for years with impunity,” but if such plundering occurred on any large scale, we would not have seen the asset growth discussed above.  I was also contacted by a Vancouver-based private investigator, who claimed to be working for a group of investors who had been swindled by Ciachurski.  He asked me to publish his research linking Ciachurski to convicted felons.  But he was unable to substantiate the linkage, other than to repeat hearsay from unidentified individuals.

The company says such allegations are the work of a group of Vancouver based hedge funds, who have been buying the stock near current prices ($1.25 a share) and want to sell the company to a buyer like Algonquin Power (TSX:AQN, OTC:AQUNF), which made and offer of $2.50 a share last October.  Even if the unsubstantiated allegations about Ciachurski “plundering the company” were true, the plundering has been minimal, since shareholder value has increased substantially during the  supposed plundering.  That’s hardly typical of a company with unscrupulous management: Shareholder value in such companies almost always goes down, not up.  We only have to look to wind turbine and solar manufacturers to see many examples of honestly run renewable energy companies with rapidly dropping shareholder value.

Although I’m not averse to a quick profit (most of my stake, like that of the Vancouver hedge funds, was acquired around the current price), I agree with Ciachurski that the best time to sell Western Wind will be after the company’s recently completed projects have been producing cash for a few quarters, and the Yabucoa solar project in Puerto Rico is complete.  The company expects that each of the next seven quarters will be record quarters for revenue and earnings, and they can say this with a good degree of confidence.  The revenue in question depends only on the wind blowing, the sun shining, and utilities with good credit ratings paying for the power generated.

At $1.25 a share, I don’t see much downside.  If the Vancouver funds manage to force an immediate sale, I get a quick 2x profit.  If Ciachurski gets his hoped for sale in 2014, I get a 4x or even 8x profit after only a couple years.  That seems worth the wait.

UPDATE: Western Wind has just announced that they are selling the company. Looks like the disgruntled shareholders (and anyone looking for a quick profit) won.

Disclosure: Long WNDEF, AQUNF

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

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

Western Wind Expects Full Cash Grant for Windstar

Tom Konrad CFA

Windstar wind farm
The Windstar Wind Farm. Photo credit: Western Wind Energy

On July 10, shares of Western Wind Energy (TSX:WND, OTC:WNDEF)plummeted because of a $12.2 million shortfall in the 1603 cash grant from the US Treasury for the company’s Windstar wind farm compared to the application.  In order to reassure skittish investors, the company held a conference call on Monday, July 16.

On the tenth, I thought that investors should write off the 1603 cash grant shortfall, despite the fact that the company intended to send a delegation to Washington consisting of company management along with their advisers in order to argue for the full cash grant.  I wrote,

“I’m sure the company was already engaging in discussions with the Treasury while the grant was being processed.  Why should new discussions achieve a different result?”

Western Wind President and CEO Jeffrey Ciachurski disagrees.  Here is his argument:

  • The Treasury was hit by a flood of 1603 tax grants for rooftop solar leaseback projects with “inflated” developer fees.  As a result, the Treasury went against IRS guidelines and put a 5% cap (as a percentage of other expenses) on all developer fees for both solar and wind projects.
  • Wind projects are generally more complex than solar projects, and typically have developer fees at 10% to 30% of costs.
  • Western Wind’s independent advisers’ opinion is that a developer fee between 27% and 41% of assets would be fair for Windstar, based on the  fair market value of the project.
  • Western Wind applied for a relatively conservative 20% developer fee for Windstar.
  • Western Wind’s earlier Mesa project had a 15% developer fee, which was granted in full.

Ciachurski went on to say that, in 95% of cases, Treasury is right about developer fees, but in the case of Windstar and a few other extremely profitable wind farms, they are wrong, and so he and his advisers need to go to Washington to make the case in person.

Will they succeed?  I hesitate to predict.  For me, I think it’s best to wait and see.

Disclosure: Long WNDEF

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

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

July 09, 2012

Alterra Power: Cash to Invest

Tom Konrad CFA

new_logo1[1].jpg I sometimes think Alterra Power (TSX:AXY, OTC:MGMXF) is unfairly lumped with other small, renewable energy developers.

A typical problem for small developers over the last few years has been raising the funds to invest, even when they have compelling prospects.  For instance, Western Wind Energy stock (TSX:WND,OTC:WNDEF) has been beat up recently because a large Federal cash grant is delayed.  Finavera Wind Energy (TSXV:FVR, OTC:FNVRF) has been declining for most of the year as they look for a strategic partner to help fund their permitted wind developments, despite significant progress permitting those projects and obtaining a bridge loan to fund operations and development in the meantime.

Alterra, on the other hand, has plenty of cash on its books to invest, and does not need to look for partners.  Two news items today drove that point home.  First, they announced that their Dokie Wind Farm (which commenced commercial operations in 2011) had funded its loan reserve and commenced equity distributions back to Alterra.  Second, that the company had received an unsolicited offer for their stake in their HS Orka geothermal plant in Iceland.

With $57 million cash on the books ($0.12 per share), Alterra has no immediate need to sell its 66.6% stake HS Orka, but it has agreed to explore the deal.  Alterra’s VP Corporate Relations, Anders Kruus, stated, “[W]e felt we should consider this unsolicited proposal if it maximizes value for Alterra shareholders and is supported by Icelandic stakeholders.”  In other words, they’ll sell if the price is right and it does not cause political waves in Iceland, where Alterra plans to continue to do business.

It’s a nice position to be in, and maybe investors are starting to recognize it.  The stock is up C$0.05, or 13.5% to C$0.40 as I write, although it’s still trading at only a little more than 50% of book value.

Disclosure: Long MGMXF, WNDEF, FNVRF

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

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

July 07, 2012

Where's Western Wind Energy's Tax Grant?

Tom Konrad CFA

 On March 22, Western Wind Energy (TSX-V:WND, OTC:WNDEF) applied for a $90,556,707 tax-free 1603 grant from the US Treasury on behalf of the completed 120MW Windstar project.  The press release stated that the grant is subject to approval by the Treasury and payable within sixty days.

The Windstar Wind Farm. Photo credit: Western Wind Energy

It’s now more than three months later, and no tax grant.  The stock is down 24% since May 22, when the grant was expected, but management remains confident they will get the grant.  In the company’s May 30 quarterly earnings announcement, the company said,

Our application has exceeded the 60 day program guidance review period and we continue to monitor our application status on a daily basis. We are not aware of any issues associated with our application and through our network of advisors we believe a majority of the applications are delayed.

The Western Wind CEO Jeffrey Ciachurski had to attest to this statement under the Dodd-Frank rules, so we can be confident he believes the grant is just delayed, and will not be denied.  In a phone interview on Friday, he told me flat out that “There is no risk to the cash grant,” and “most 1603 applications are running late.”   He also told me that the company has attended legal seminars on 1603 grants, and the average deviation (amount the grant is reduced by Treasury) is 3%, so we can expect Western Wind to receive about $88 million.

According to Western Wind, the reason the 1603 grants are running late is because of a flood of solar applications as the program expired at the end of 2011, and because there is pressure on Treasury to vet applications very carefully given the current charged political climate in Washington.

When I was at the Renewable Energy Finance Forum, Wall Street last week, I tried to get independent confirmation of the company’s statement that most 1603 grants are running late.  No one was able to give me direct confirmation.  Most industry insiders told me they would not be surprised if that were the case, but they did not have any personal knowledge.  I also asked Richard Kauffman, Senior Advisor to the Secretary of Energy in the Department of Energy (DOE).   Although DOE helps the Treasury vet 1603 grants, he had not heard anything about grants being delayed.

I also got in touch with a source at Treasury, who was not willing to talk on the record.  That source did say that Treasury’s “policy”  is a 60 day turnaround.  The source said that I should not assume that the grant would be denied just because it had not yet been granted, as there are reasons a grant might take longer than 60 days to process.


Western Wind is still confident they will receive the tax grant, and the Treasury Department did not deny that many 1603 grants are delayed.  It makes a certain amount of sense to me that if most 1603 grants are running late, Treasury is not willing to come out and say that’s the case: it would not make them look good.  The fact that my Treasury source did not deny that grants are running late and was unwilling to go on the record, lends credence to the possibility that many grants are late.  After all, if everything were running smoothly, why not just say so?

Overall, I think the chances of Western Wind receiving the grant are very high.  I recently bought more stock at $1.15 on the gamble that I’m right, but to be perfectly clear, it is a gamble.  While the chances seem very low to me, if Western Wind does not receive the tax grant, it could easily bankrupt the company.  Western Wind had only $272,720 in unrestricted cash on hand at the end of May, and has substantial project-related debt that it plans to pay down with the grant proceeds.  If the tax grant were denied, I can’t imagine there would be many lenders willing to step up and fill the breach.

On the other hand, I can’t find any reason to believe that the Windstar project should not qualify for the 1603 grant.  If the grant were to be denied, what would be the basis for denial?

Disclosure: Long WNDEF

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

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

June 03, 2012

Buying Opportunity at Renewable Energy REIT, Courtesy of Disgruntled Shareholder

Tom Konrad CFA

Power REIT (AMEX:PW) aims to be the first renewable energy infrastructure Real Estate Investment Trust (REIT).

The Renewable Energy REIT

pwlogo5[1].jpg Renewable energy advocates have been calling for a change in the tax laws to allow renewable energy within the REIT structure.  A REIT is allowed to pass profits directly through to investors.  These profits are not subject to double-taxation like most corporate profits.  Owning shares of a renewable REIT would be much like owning a slice of a wind or solar farm.  This would open up the renewable energy investment opportunity to everyone, not just corporations and homeowners with with a roof suitable for solar.

The catch is that REITs are limited to certain types of real estate based assets, and without a new ruling from the IRS, wind and solar farms are out.  Which is why renewable advocates have been calling for just such a ruling.

Power REIT CEO David Lesser has beaten them to the punch.

Lesser was an investment banker at Merrill Lynch, where he helped create a large number of REITs to provide more equity to over-indebted real estate property.  That experience allowed him to see what the renewable advocates did not: there is a place in the existing REIT structure for renewable energy.   It’s possible to strip out the real estate assets from a wind or solar farm, and put them into the REIT.  Renewable energy developers are already familiar with complex ownership structures (thanks to our tax laws), so stripping out real estate assets should not be a big leap.

Power REIT

In order to implement his vision, Lesser and his team began buying the shares of what was then known as the Pittsburgh & West Virginia Railroad, an infrastructure REIT holding 112 miles of main line railroad real estate that is triple-net leased to Norfolk Southern Railroad (NYSE:NSC) for 99 years.  The renamed PW still holds the railroad asset, and has no debt.

Based on the income from the railroad lease, PW pays a $0.40 annual dividend, for a 5.5% yield at the current stock price of $7.24.  Lesser believes he can invest in renewable energy assets at yields in the 8.5% to 9% range.  These will be financed with debt at around 6.5% and potentially additional equity.  Any such transaction would bring an immediate increase in income per share.

Acquisitions have an added advantage of increased scale.  Power REIT needs to grow in order to better manage the expenses of being public.  Income from the existing railroad asset is insufficient to support these expenses.

One other potential upside lies in the railroad asset itself.  PW has initiated litigation with Norfolk Southern, which management believes has failed to pay all its contractual obligations under the lease.  The risks involved in this suit are limited to litigation costs, while the potential gains could be quite large for the microcap REIT.

Proxy Battle

The one hitch in Lesser’s plan was that he did not expect the actions of a disgruntled Pittsburgh & West Virginia shareholder, Paul Dorsey.  Dorsey owns 1,000 shares (0.06%) of PW stock, but feels that he is entitled to a board seat because he had been coming to board meetings for the last decade.  When Lesser (who is the largest shareholder, at 3%   almost 10%) turned him down because he lacked relevant experience, Dorsey decided to take matters into his own hands.

Dorsey has run proxy battles in both 2011 and this year, seeking to replace the entire PW board with a slate led by himself and his brother.  While he has no chance of winning due to lack of a business plan, experience, and backing by large shareholders, he has managed to scare smaller shareholders with a series of ad hominem attacks on Mr. Lesser in SEC filings.  The company maintains that these filings lack basis in fact.  I perused one of them myself, and feel that, even if all the allegations were true, Lesser would be better qualified than Dorsey to run the company.  (The allegations are mostly about poor performance of REITs under Lesser’s watch, but they at least claim that Lesser has extensive experience with running REITs.  The period of poor performance is cherry-picked to coincide  with a period of poor performance of REITs as an asset class and ignores dividend payments, which are significant.)

Buying Opportunity

Nevertheless, leading up to PW’s annual meeting tomorrow, small shareholders (who do not have the time or expertise to analyze the issues involved) are getting spooked, and the stock has fallen from the mid $9 range to the $6 range today in the last few days.

Because I believe the current selling is irrational and motivated by fear, I’ve been buying agressively all the way down, and PW is approaching the size of my largest individual holding.  I believe Lesser and other insiders would also be buying, if they could.  They were actively buying last year when the stock was in the $12.50 range.  Unfortunately for them, but perhaps fortunately for those of us with money to invest, they are most likely barred from buying by SEC rules.  So long as they believe they are near a material announcement, such as a deal to acquire assets, they cannot trade the stock.

Hence, there are few buyers who are both aware of the opportunity presented by Power REIT, and able to grab the shares dumped by skittish small shareholders.

If and when a deal materializes, I expect the stock to head up rapidly.  As I said above, insiders seem to believe such a deal is close.  Why else have they not been buying the stock at such a large discount to the $12.50 they were buying it at last year?

Disclosure: Long PW.

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

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

May 31, 2012

A Gust of Wind Industry Mergers

Tom Konrad CFA

Wind Turbines photo via Bigstock

A rising tide may float all boats, but a stiff wind separates the wheat from the chaff.

Over the last week, it’s become clearer which wind developers are the wheat, and which are the chaff.  Stronger developers with deeper experience are buying projects from their weaker kin.  At least two such deals were announced last week.

On May 15th, Western Wind Energy  (TSXV:WND, OTC:WNDEF) signed a deal to acquire the entire 4,000 MW wind energy development pipeline of private Champlin/GEI Wind Holdings, with near term projects in Hawaii and Utah.

On May 18th, Alterra Power (TSX:AXY, OTC:MGMXF) continued its quest to become a major global renewable energy developer and producer,  and announced a deal to buy four sites in British Colombia from private sellers led by English Bay Ltd.  Alterra estimates the early-stage sites have the potential for generating capacity over 1,000 MW.

Preserving Cash

A large part of the reason wind development projects are changing hands is access to cash.  Financing for wind projects has become much harder to come by.  If you can’t get financing to develop your project, it makes more sense to sell it to someone who can.

Western Wind should soon receive a $90 million cash grant from the US government for a previous wind projects completed in 2011.  Alterra received $38.5 million from a group of Icelandic pension funds in return for an increased stake in its HS Orka geothermal facility.

Despite the cash inflows, both buyers are paying the sellers in shares and, in Alterra’s case, royalties on any future production.


The sticker price for the Western Wind deal was $20 million dollars,  but the deal will be paid for in shares of Western Wind, which will be valued at $2.50.  According to a Western Wind spokesman, Champlin/GEI had invested “almost $20 million” in the pipeline so far.   Since WNDEF closed at $1.61 the day before the deal, Champlin/GEI are effectively accepting a third less than what they paid to develop the pipeline.

Alterra is paying 1.34 million shares, worth C$549,000, in addition to the promise of future royalty payments.

The discount and the fact that no cash is changing hands points to hard times for sellers of wind prospects in the current environment.  No developer invests $20 million cash in the hope of receiving $13 million in shares for it a few years down the road. The flip side of this is that it’s a good time to be a buyer.  Even without cash and at a discount, buyers can pick and choose wind farms they want to develop.


Western Wind has often repeated its plans to focus on wind farms in markets where Renewable Portfolio Standards (RPS) or high local electricity prices make wind farms profitable without (currently expired) federal subsidies.  Western Wind management estimates that approximately 40% of the 4,000 MW Champlin/GEI portfolio (1,600 MW) would be economic even in the absence of the federal Production Tax Credit (PTC.)  The crown jewel of the portfolio is a 75MW wind farm in Hawaii.  Hawaii not only has an aggressive RPS, but wind power there displaces electricity generated from (very expensive) oil.

Alterra also chose its projects carefully.  Of the eight wind farms under development by English Bay, Alterrra chose three near proposed Liquefied Natural Gas (LNG) export terminals.  British Colombia is experiencing rapid growth in industrial power demand from both mining and natural gas sectors, and British Colombia is the only region in North America to pass a Carbon Tax.

What the Deals Mean for the Wind Industry

There is a saying among stock traders that “Price follows volume.”  A fall-off in trading volume is often a sign of a stock peaking, and a pick-up in trading volume can a bottom.  The same patterns appear in other markets as well.  These two deals (and the many other which have been done over the last few months) look like signs of better (or at least no worse) times ahead for wind developers with projects to sell.

The increased number of deals is also a sign that buyers are finding prices attractive.  It’s drawing new entrants.

Just this month, a new type of entrant to the renewable energy business came to my attention: a Real Estate Investment Trust (REIT).  Power REIT (AMEX:PW), is planning to expand on its existing rail infrastructure asset by purchasing renewable energy infrastructure.  As far as I know, PW will be the first company to bring the tax-advantaged REIT structure to renewable energy.  Owning shares of a REIT with renewable energy assets will be much more like owning a piece of a wind or solar farm than owning shares of a traditional power producer: REIT profits are not taxed at the company level, and pass directly through to the shareholder.   This structure should be particularly attractive to  investors like charities and individuals investing through retirement accounts, since REIT payments are taxed as income, not at the reduced rate used for qualified dividends.

Power REIT is looking at many prospects, and has not ruled out solar investment, but the picture of a wind farm on its home page is probably not an accident.

What other outside investors will be breezing in to pick up wind farm bargains?

Disclosure: Long WNDEF, MGMXF, PW

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

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

November 03, 2011

Western Wind: A Clean Energy Rodney Dangerfield?

Tom Konrad CFA

Renewable energy power producer Western Wind Energy Corp (WNDEF.PK, WND.V) feels it gets no respect.  In particular, they have long felt that the investing public does not recognize the value of the company's existing and nearly completed wind farms. 

Kingman solar and wind.png
Western Wind's Kingman I Wind & Solar park. Photo courtesy of the company.

Independent Valuation

Almost every company will tell you that their shares are undervalued, but what's a bit more unusual in this case is that their assets (Wind farms with a little solar thrown in) are fairly easy to value with a rigorous discounted cash flow (DCF) model.  While wind and solar resources vary from hour to hour and even year to year, the expected energy production from wind and solar farms is fairly predictable over time, and all Western Wind's projects except for Mesa have Power Purchase Agreements (PPAs) with electric utilities that specify the prices those utilities will pay for as long as 20 years, leading to fairly predictable revenue streams over time, and fairly low uncertainty in asset valuation.  The company is currently selling electricity from Mesa at the spot price, but they are in the process of negotiating a longer term PPA.

Last year, company management decided to back up their words by hiring the independent DAI Management Consultants, Inc to value the company's equity stake in their renewable energy projects.  Western Wind has a 30MW operating wind farm (Mesa), an operating combined wind (10MW) and solar (500kW) farm (Kingman I), a 120 MW wind a farm and that is nearing completion and expected to be fully operational by the December 2011, and a 30 MW solar farm in Puerto Rico (Yabucoa) that is expected to be completed by the end of 2012.  Windstar and Kingman have signed PPAs and debt financing in in place, and Mesa is fully financed and operating under a spot price sale agreement. Yabucoa has a signed PPA and the company expects to close financing for it by the end of 2011.


Western Wind has released the results of DAI's valuation in a series of press releases as the valuation of each project was completed.  The complete valuation is not public because it depends on the terms of the PPAs, which are confidential.  (Confidential PPAs are a practice which I believe is counterproductive as well as counter to free market principles.  Nevertheless, keeping PPAs confidential is standard utility industry practice, and could only be banned by utility regulators; it's not something I or Western Wind have the power to change.)  They did, however, release the assumptions on which DAI's valuation was based.  These assumptions are included in the table below.

Assumptions used by DAI in valuation model.



Kingman I



Project type and size

120MW wind

10MW wind, 0.5MW Solar

30 MW Wind

30MW Solar

Commercial operation date in valuation model

Dec 31, 2011

Dec 31, 2011

Existing operations

Dec 1, 2012

Remaining asset life

30 years

30 years

20 years (older assets)

30 years

Power Purchase Agreement  (PPA)

fixed price for years 1 to 20 via signed PPA and merchant prices thereafter

fixed price for years 1 to 20 via signed PPA and merchant prices thereafter

fixed price per CPUC MPR for years 1-20

fixed price for years 1 to 20 via signed PPA and merchant prices thereafter









27 year right of way

40 year lease

Tax incentives

30% cash grant and 100% bonus depreciation

30% cash grant and 100% bonus depreciation


30% cash grant, 50% bonus depreciation and 50% Puerto Rico investment tax credit

Source of key assumptions

Independent engineer

Independent engineer



Debt --to-capital ratio





Term of debt

20 years

20 years

15 years

20 years

Cost of debt





Discount rate on equity returns

Under PPA: 11.48% Merchant generator:15.75%

Under PPA: 11.51% Merchant generator:15.85%

Under PPA: 10.52%
Merchant generator:NA

Under PPA: 10.96% Merchant generator:14.74%

Weighting of income approach vs cost approach





Construction cost contingencies





One assumption that I would have liked to see is the expected capacity factors for each of the wind farms, since that is key to knowing how much energy each project is likely to produce, but otherwise the disclosure seems comprehensive. 

Assuming the capacity factor estimates are accurate, an assumption which shows the fairly conservative nature of the valuation is the second-to-last row "Weighting of income approach vs cost approach."  This row indicates that for each of the incomplete wind farms, only 75% percent of the valuation given is based on a DCF model; the other 25% of the valuation is a replacement cost approach using comparable market transactions.  This is conservative because the DCF model should give a considerably higher value than cost when valuing a wind project because unfinished projects trade at a discount: Why invest money if the expected returns (DCF valuation) are below what you could get by selling the project?

Another row worth noting is the third to last, "Discount rate on equity returns."  This is extremely important because DCF valuations are highly sensitive to the discount rate assumption: a slightly lower discount rate can lead to a much higher project valuation.  Discount rates vary with the riskiness of the project, and with interest rates in the economy in general. (Risky projects should have higher discount rates, and we see this reflected in the fact that when power is to be sold on the spot market rather than under a PPA, DAI used a significantly higher discount rate.) 

As an investor, the simplest way to judge if an equity discount rate is appropriate is to ask yourself if you would be willing to earn that discount rate as an annual return for owning a slice of the project.  For myself, I would be happy to own a slice of a operating or nearly-completed wind farm for 10.5-11.5% per year.  I'm not quite sure why the Yabucoa solar farm is given a lower discount rate than the others even though it is over a year from completion, but I still consider the return to be sufficient.

Given these assumptions, DAI came up with the following project valuations:

Project Valuations from DAI

Kingman I
Project Valuation
$358 million
$32 million
$25 million
$206 million
Project Liabilities
$275 million
$24 million
$152 million
Value of Western Wind's Equity stake
$203 million
$16 million
$24 million
$110 million
Value Per diluted share (70m shares)

I then calculated the implicit value per share of Western Wind and adding in the value of the company's tax loss carry-forward, and assuming that all unexercised share options and warrants with exercise prices below the current stock price would be exercised.  This has the effect of increasing the number of shares outstanding from 60 million to 70 million, and adding $12 million dollars of cash to the company's balance sheet to reflect the cost of exercising the options and warrants.  Note that the fully diluted shares given on Western Wind's website are 71.8 million, but this included the exercise of options and warrants with exercise prices above the current share price: the exercise of those options would result in a net gain to investors who buy at the current price.

Share Valuation

Value (millions $)
Value per diluted share
(70 million shares)
Total DAI Company Valuation (including above projects plus project pipeline)
Tax Asset (loss carry forward)
Value of Cash Paid for Exercise of Warrants & Options
Total $404
Share price (10/31/11)
Appreciation needed to reach fair value

As you can see, I arrived at a per-share valuation of $5.78, three and a half times the current share price.   I think it is unlikely that the company's share price will go quickly to this fair value given the current climate of uncertainty, but even if the company were to remain at this current 3.6x discount, we could still expect the stock to rise over time, for a couple of reasons.

First, if the Windstar is completed on schedule by the end of the year, it should no longer be valued partially based on cost, and should be valued solely based on DCF.  This should lead to an immediate value boost, as discussed earlier.  Kingman is already fully operational, and so should also be valued solely with a DCF model.   Second, as time passes, cash flow will be produced from the operating farms (and Yabucoa will come closer to completion), and this should lead to a gain in value approximately equal to the discount rate on equity returns used in the project valuations. 

Hence, even if a company trading at a 3.6x discount to fair value does not attract takeover offers or the share price does not quickly adjust upwards for other reasons, we can expect at least a 10% annual return just from accrued income and impending project completion.  In fact, since the valuations above were completed in February (Windstar) and May (the other three), the current valuation of the company should be at least $18 million or $0.26 per share higher today than shown in my table above.  But who's counting?

I personally found the calculations above convincing, and began buying the stock in September.


Possible Takeovers

If the relatively slow 10-12% annual growth in the project values is not enough to excite investors, the possibility of a buyout offer seldom fails to do so. 

The first hint we got about takeover offers was on October 1st, when Western Wind asked  the Investment Industry Regulatory Organization of Canada (IIROC) to review the large numbers of matched trades which had been occurring over the previous six months.  In the complaint to IIROC, Western Wind stated "it has been made aware in the past few days, that a certain party would like to make a take-over bid of certain or all of the assets of the Company," with the implication that the company's share price had been manipulated down to make a low takeover offer look attractive to investors.

On October 11, the Company revealed that Algonquin Power and Utilities (AQN.TO/AQUNF.PK), a company I also own, had expressed interest in buying the company at $2.50 a share.

I most recently wrote about Algonquin in a review of the larger alternative energy power producers.  I chose not to discuss Western Wind and another Renewable Energy project developer, Finavera Wind Energy (FNV.V/FNVRF.PK) in that article because they are earlier stage companies, because I was in the process of buying shares of both at the time, and I did not want to raise the price for my own purchases in these relatively thinly traded stocks. 

After the Algonquin offer became public, there followed a series of press releases from Western Wind and Algonquin, with Western Wind basically saying that the price was way too low, and that they were looking around for other offers, and Algonquin making it clear that they weren't ready to raise their price significantly.  Western Wind made the point that Algonquin was not the ideal acquirer because, as a Canadian company, they would not be able to realize approximately $1 per share worth of tax deductions in the form of accelerated depreciation on the company's wind farms.  Before making the bid public, Algonquin had entered into a "lock-up agreement"  with a large Western Wind shareholder owning 18.6% of the company.  The shareholder had agreed to support Algonquin's bid, giving the company the confidence they needed to make the bid public.

At Algonquin's request, Western Wind formed a special committee to consider any formal offer for the company, including Algonquin's.  Nevertheless, on October 26th, Algonquin terminated the lock-up agreement and indicated they were no longer interested in pursuing the deal.  I can only speculate as to Algonquin's reasoning, but my feeling is that they were not interested in a prolonged takeover battle which would probably require them to raise their $2.50 initial offer.

About the same time, Western Wind announced that it was discussing a buyout of a 100 MW wind project, in order to remind investors that there was a lot more to the company than the possibility of a takeover from Algonquin.

It concerned me that Western Wind was considering the acquisition of a wind project if they thought their own shares were so far undervalued.  Why not just buy up the company's own undervalued shares instead? 

I tried to get some details from Western Wind's investor relations contact, but he could not reveal any details of the negotiations, which are at a very early stage.  He did say that the reason the project's owners are willing to sell is because they cannot get the capital to develop it.  Western Wind expects that, if the company proceeds with the deal, it could find a way to develop the property with minimal or no share dilution.  Lack of dilution is no guarantee that such an acquisition would create more value than a share buyback, but it is comforting that they are paying attention to shareholder value.

What it Means

As a long-time Algonquin shareholder, I'm pleased to see that the company was only interested in buying Western Wind at a knock-down bargain price, and hope that they continue to take that approach to all future acquisitions.

As a Western Wind shareholder,  I was a bit disappointed that the deal did not go through.  I'm not immune to the lure of a considerable and very quick profit on my WNDEF shares.  On the other hand, I did not buy those shares because I was expecting a near-term takeover.  Instead, I bought them because I expected (and still expect) long term appreciation based on the fundamental value and earning power of a company with large wind projects just now coming online.
The IR spokesman also pointed out that the company is considering a share buyback in 2012 using some of the proceeds of the Windstar and Kingman federal cash grants, as announced last December.

Give Western Wind Some Respect

Western Wind became profitable only in 2010, and is right in the middle of the transition from being primarily a renewable energy developer to a renewable energy power producer with strong cash flow.  This change means this Rodney Dangerfield of a company will begin to get some respect from a new class of investors, and the attention brought by the takeover offer seems to have attracted the attention of a few such.

Although Western Wind's shares fell when Algonquin decided not to pursue its offer, the shares are still trading higher than they were in September.  But at $1.50-$1.60 per share, there is still considerable room for appreciation to fundamental value. 

In the near term, the free cash flow after operational expenses from Windstar and Kingman alone should be $14 million annually, with the potential for another $4-5 million from Mesa and Yabucoa, or 26 cents a share before company level expenses and the benefits of accelerated depreciation and cash grants.

For that alone, Western Wind deserves a lot more respect from investors.


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.

September 05, 2011

Dividends and Value Among Renewable Energy Power Producers

Tom Konrad CFA

Almost every stock market sector fell significantly in late July and August this year, and such market declines send me searching for value stocks paying good dividends which I can hold for the long term.  In mid-July, I found some decent values by sifting through the trash, but I was less enthused by the value proposition of conglomerates involved in the clean energy space.  Today I'll take a look at a group of companies you might expect to be good income producers: renewable energy power producers.  These companies operate wind and solar farms, hydroelectric, geothermal, and biomass power plants, as well as cogeneration and recovered heat facilities.

They typically also develop such renewable energy facilities, but here I've chosen to focus on the ones that already have significant capacity under operation, as opposed to the ones which are tilted more towards development, because I'm interested in companies that have a chance to produce a significant income stream from dividends.  Although some of these also have regulated utility operations, I've chosen to focus on independent power producers because regulated utilities tend to have a high proportion of fossil fuel assets.

Renewable Power Producers

The seven companies I've found that meet these criteria are:
  1. Algonquin Power and Utilities Corp (AQN.TO/AQUNF.PK), which owns hydroelectric, wind, landfill gas, cogeneration, and biomass generators, as well as some regulated water and wastewater utilities and an electric distribution business.
  2. Boralex (BLX.TO/BRLXF.PK) develops and owns wind, hydroelectric, solar, and biomass generation, as well as natural gas cogeneration facilities.
  3. Innergex Renewable Energy (INE.TO/INGXF.PK) owns 20 run-of-river hydroelectric plants and 3 wind farms, and is developing more hydro, and wind, as well as a solar farm.
  4. Capstone Infrastructure Corp (CSE.TO/MCQPF.PK) owns gas cogeneration, wind, hydroelectric, biomass and solar farms in Canada, and operates a district heating facility in Sweden
  5. Northland Power (NPI.TO/NPIFF.PK) owns wind farms, wood biomass, gas combined cycle and cogeneration plants mostly in Ontario.
  6. Brookfield Renewable Power Fund (BRC-UN.TO/BRPFF.PK), an owner of hydroelectric and wind farms.
  7. Ormat Technologies (ORA) is the vertically integrated geothermal industry leader, and also develops and owns recovered energy generation worldwide
  8. Covanta Holding (CVA) owns several energy-from-waste facilities in the US an Canada as well as a California based insurance company.
Below, I have compared the dividend yield, earnings yield, operating and free cash flow (OCF and FCF) yields, as well as Equity to Debt and Equity to Price ratios.  The last two ratios have been inverted from their traditional forms (Debt/Equity and Price/Book) and scaled by a factor of 10.  I inverted them so that larger numbers would reflect better value as with the other measures, and the scaling makes them easier to compare on the graph.
Power Producers.png

Many of these companies (Boralex, Capstone, Innergex, Northland, and Ormat) exhibit large negative FCF because of heavy investment in new generation facilities, so OCF probably gives a better comparison of these companies' ability to generate cash from existing facilities, while FCF gives a better idea of the companies' ability to pay dividends without raising additional funds.  Capstone and Innergex's dividends (9.5% and 13.64%) seem at first glance too high to be sustainable based on the ratios here, so much more research would be warranted before I would consider investing in either of these.

The Best Options for Income

Investors looking for current income will want to avoid those companies with large negative free cash flow.  Algonquin Power and Brookfield Renewable Power both offer healthy dividends and have strong balance sheets with low Debt to Equity (high Equity/Debt) ratios and trade at modest Price to Book (Equity/Price) ratios.  Both also seem to have the earnings and cash flow to maintain payouts given the flexibility afforded by their modest use of debt.

Value Stocks

Investors looking for value stocks will be attracted to Boralex, with its high Earnings yield and a Price to Book ratio of 0.7, despite the lack of dividend.  Boralex may be somewhat volatile, however, given its relatively heavy use of debt, with more than twice as much debt as equity.


In the absence of retail Climate Bonds, Algonquin Power and Brookfield Renewable Power look like good options for the income investor wishing to add some clean energy to his or her portfolio, while Boralex deserves further research as a possible value play, so long as the current low price does not turn out to be the product of deeper financial problems.


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.

May 27, 2010

Valuing the Boralex Power Income Fund Buy-Out

Tom Konrad, CFA

Boralex Inc. made an offer to buy out the Boralex Power Income Fund on May 19.  The price is reasonable. 

Boralex (BLX.TO, BRLXF.PK) announced on May 2 that it would offer C$5 per share in convertible bonds for all outstanding shares of the Boralex Power Income Fund (BPT-UN.TO, BLXJF.PK) that it did not already own in an acquisition approved by both boards.  As usual with mergers, the Boralex Power Income Fund's ("the Fund's") unit price jumped from C$4.61 to C$4.90 the next day, but then if started to fall back as people had time to review the precise terms, dropping as low as C$4.51 on May 13 before recovering and always holding over its average values from before the deal was announced.  The market particpants seem to believe that this deal adds value for unitholders, but only by a thin margin.  What follows is my analysis.


Bid Premium

C$5.00 represents an 11% premium over the Fund's average unit price of C$4.50 for the preceding 60 trading days.  That's low compared to average bid premiums, which have recently averaged in the low 20%'s.  However, the Fund is an income investment, with most earnings returned directly to investors.  Becasue of this, investors cannot reasonably expect much appreciation in the fund's unit price, and a small buyout premium seems justified in this case. 


If the Fund's owners accept a low premium for their income investment, they should not be expected to accept a large drop in income.  On the other hand, some drop in income may be justified because of the additional security they will receive as bondholders of Boralex rather than equity holders in the Fund.  The Fund is currently paying a C$0.03333 monthly dividend, or C$0.40 annually per unit.  The C$5.00 face value, 6.25% debenture offered in exchange will pay C$0.3125 annually, meaning that unit holders who accept the offer will suffer a 21.875% loss of income. 

Using the pre-merger average share price of C$4.50, Fund unit holders were previously receiving an 8.89% annual yield, and will now be receiving a 6.94% annual yield, which seems on its face like a bad deal.  Yet, as discussed above, the Fund's unit holders cannot reasonably expect price appreciation given the fund's current structure, and hence the C$5 face value (which will be redeemed for cash five years after the merger date) should be included in the return calculation.  Using a spreadsheet, I calculated the internal rate of return (IRR) of paying C$4.50 today for C$0.3125 for five years, plus C$5 at the end of the period (the "Debentures" column) as well as the same price calculation with the Fund units' current C$0.40 annual income but no price appreciation.

Debentures Year
Fund Units
-$4.50 T=0 -$4.50
$0.3125 T=1 $0.40
$0.3125 T=2 $0.40
$0.3125 T=3 $0.40
$0.3125 T=4 $0.40
$5.3125 T=5 $4.90

As you can see, the internal rate of return of the offer is 8.81%, within a gnat's whisker of the expected return without the offer (8.89%).  Differing tax rates for some unit holders between the current distributions and interest income may make the offer less attractive to those investors, but the increased security of bondholders compared to unitholders may more than compensate for risk-adverse investors.

An article from the Streetwise column of Globe and Mail on May 12 was skeptical about the offer.  This article quoted Connor O'Brien, the Chief Investment Officer of a major holder of the trust, Stanton Asset Management.  Mr. O'Brien "calculates that unit holders will receive approximately 50 per cent less after-tax income if they end up holding the convertible bonds, rather that trust units."  This is a red herring.  The Fund's privileged Canadian tax status will end in 2011.  Unitholders do not have the option of continuing to receive distributions under the current regime, even if the merger does not go through.  The change in tax status is not the result of the merger, it's the result of the tax law changes which have caused most Canadian Trusts to reorganize in one way or another over the last three years.

Conversion Option
Mr. O'Brian was also concerned about the conversion price.    He was also particularly critical of the C$17 conversion price for the bonds, a "70 per cent premium to where the stock was trading in the 30 days prior to the offer for the trust."  He is right that the conversion option adds very little value for Fund unit holders.  If you're trying to decide if this deal is a good value, you should focus on the value of the cash flows, assuming the debentures are redeemed for C$5.00 after five years.  The value of the conversion option is small, but positive.


Overall, I believe this is a fair value for unitholders.  Maintaining the status quo is not an option.  The Fund's favored tax status will expire at the end of the year, and the fund would have to cut distributions in order to pay the new taxes.  The value of the cash flows from the Boralex Power Income Fund units and the convertible debentures offered by Boralex are roughly equivalent, and the (small) value of the conversion option adds a little spice to the mix.

This conclusion seems to be confirmed by market action.  Fund units have been consistently trading for more than they were before the merger announcement, while the S&P/TSX Composite Index has fallen 5% since the merger was announced.

DISCLOSURE: LONG Boralex Power Income Fund.

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.

December 26, 2009

CBD Energy and SFC Smart Fuel Cell Look Promising

From Small Fries to Big Shots? (Pt. 2 of 2)

Bill Paul

Here now are two more small alternative energy companies, both of which look to be just starting to hit their stride. How far they'll go only time will tell, but each seems to warrant a closer look.

Take note: like the vast number of other pure-play alternative energy firms with intriguing growth prospects, neither of these is U.S.-based. Rule of thumb: whether you're a big institutional or small individual investor, to succeed in alternative energy, you must scour every corner of the earth.

First up: CBD Energy, an Australian renewable energy firm that trades on the Australian Stock Exchange under the symbol CBD (CBD.AX).

CBD looks to be starting down the road to becoming a fully-diversified renewable energy power producer with solar, wind and energy storage projects across Asia. It just got what the company called "strong" institutional support for a new round of capital that will go toward acquisitions, including the recently-announced purchase of eco-Kinetics Pty. Ltd., another Aussie firm that is involved in solar PV, solar thermal and wind installations, both residential and commercial. CBD also just signed to deliver wind turbines to a Chinese company, another first for the firm. CBD's share price has roughly tripled since last spring; however, it's still selling for only pennies per share. (No, CBD is not yet in the black.)

Next up: Germany's SFC Smart Fuel Cell AG (Symbol SSMFF.PK), which describes itself as the market leader in fuel cell technologies for mobile and off-grid power applications serving the leisure, industrial and defense markets.

In partnership with DuPont (Symbol DD), SFC just got a glowing preliminary review from the U.S. Defense Department for its lightweight portable power packs that soldiers can use in the field. The review isn't complete yet, but so far DOD believes that "This product and its technology could offer a significant advancement in the area of soldier portable power in the field."

SFC isn't in the black yet either, but its third-quarter loss did narrow by more than 50% vs. the year-earlier period.

Click here for Part 1 of this series - which discusses prospects for World Energy Solutions (Symbol: XWES) and Ram Power Corp. (Symbol: RPG.TO, RAMPF.PK).

DISCLOSURE: No position.

DISCLAIMER: This is a news article.  Please read terms and policy.

Bill Paul is Managing Editor of EnergyTechStocks.com.

September 24, 2009

Climate Change & Corporate Disclosure: Should Investors Care?

Charles Morand

On Monday morning, I received an e-copy of a new research note by BofA Merrill Lynch arguing that disclosure by publicly-listed companies on the issue of climate change was becoming increasingly "important". The note claimed: "[w]e believe smart investors and companies [...] will recognize the edge they can gain by understanding low carbon trends." I couldn't agree more with that statement.

It was no coincidence that on that same day the Carbon Disclosure Project (CDP), a non-profit UK-based organization that surveys public companies each year on the state of their climate change awareness, was releasing its latest report at event organized by BofA/ML in NYC.

I am fairly familiar with the CDP, having worked on one of the reports in 2006. In a nutshell, the CDP sends companies a questionnaire covering various topics such as greenhouse gas (GHG) emissions, programs to manage the identified risks of climate change, etc. (you can view a copy of the latest questionnaire here). The responses are then aggregated and made into a publicly-available report.

The CDP purportedly sends the questionnaire on behalf of institutional investors who are asked to sign on to the initiative but have no other obligation. The CDP currently claims to represent 475 institutional investors worth a collective $55 trillion. Not bad!

Putting Your Money Where Your Signature Is?

Despite their best efforts, initiatives like the CDP or the US-based CERES are mostly inconsequential when it comes to where investment dollars ultimately flow. Investors are asked to sign on but are not required to take any further action, such as committing a percentage of assets under management to low-carbon technologies or avoiding investments in companies with poor disclosure or that deny the existence of climate change altogether.

Case in point, the latest Global Trends in Sustainable Energy Investment report found that, in 2008, worldwide investments in "sustainable energy" totaled $155 billion. That's about 0.28% of the $55 trillion in assets under management represented by CDP signatories. A mere 1% commitment annually, or $550 billion for 2008, would substantially accelerate the de-carbonization of our energy supply, probably shrinking the time lines;we're currently looking at in several industries to years rather than decades.  

And that's ok. By-and-large, investors are investors and activists are activists. In certain cases, investors can be activists, either from the left side of the political spectrum with socially-responsible funds or from the right side with products like the Congressional Effect Fund. But overall, most sensible people want investors to be investors.

That's because the function that investors serve by being investors rather than activists is a critical one in a capitalist system - they force discipline and performance on firms and their management teams. By having to compete for capital with other firms in other sectors, clean energy companies have an incentive to crank out better technologies at a lower cost, and that process will have positive implications for all of society in the long run.

The problem with the CDP is that it's really an activist organization parading as an investor group. If the Sierra Club were to go around and ask Fortune 500 companies if they wanted to be hailed as environmental leaders in a glossy new report with absolutely no strings attached, I bet you anything they would get 475 signatures in a matter of days. And so it goes for CDP signatories - institutional investors the world over get to claim that climate change keeps them up at night while not having to deploy a single dime or alter their asset allocation strategies.

Approaching Climate Change Like An Investor

Someone approaching climate change like an investor - that is, as a potential source of investment outperformance (long) or underperformance (short or avoided) - isn't likely to care for activist campaigns aimed at forcing large corporates to disclose information on the matter; in fact, they may prefer less public disclosure to more.

That is because one of the greatest asset an investor can have is an informational advantage. In the case of climate change, those of us who believe that it's real and who think they can put money to work on that basis have a pretty good idea where to look and what to look for - we don't need the SEC to mandate disclosure. Those who think it's one giant hoax couldn't care less - they don't need the SEC to get involved, either. Yet this is where such campaigns are going, according to the BofA/ML report.

I like to think of climate change as an investment theme in terms of three main areas: (1) Physical, (2) Business, and (3) Regulatory. All three areas present investment risks and opportunities.

Opportunity Risk
Physical DESCRIPTION: Companies that stand to gain  from strengthening or repairing the physical infrastructure because of an increased incidence of extreme weather events or a changing climate. Examples include electric grid service companies such as CVTech Group (CVTPF.PK), Quanta Services Inc (PWR) and MasTec Inc. (MTZ)

: Medium-term   
DESCRIPTION: Companies that stand to be negatively impacted by more frequent and more powerful extreme weather events, or by a changing climate. Examples include ski resort operators, sea-side resort operators and property & casualty insurers.  

: Long-term
Business DESCRIPTION: Companies that provide technologies and solutions to help reduce the carbon footprint of various industries, be it power generation, transportation or the real estate industry. Renewable energy and energy efficiency are two obvious examples.

: Immediate     
DESCRIPTION: Companies that make products that increase humanity's carbon footprint and that could fall out of favor with consumers on that basis. Examples include car makers with a large strategic and product focus on SUVs and other needlessly large vehicles.

: Medium-term
Regulatory DESCRIPTION: Firms that have direct positive exposure to the regulatory the responses to climate change enacted by governments. Examples include firms that operate exchanges or auction/trading platforms for carbon emission credits such as Climate Exchange PLC (CXCHY.PK)  and World Energy (XWES).

: Near-term
DESCRIPTION: Companies that are in the  regulatory line of fire for carbon emissions. Coal-intensive power utilities are a good example, as are other energy-intensive industries that might have a limited ability to pass costs on to consumers because of high demand elasticity or fierce competition.

: Near-term 

This categorization provides a high-level framework for thinking about what may be in store for investors as far as climate change goes. However, with the exception of Business/Opportunity and Regulatory/Opportunity, the investment case is not necessarily clear-cut and requires some thinking.

For instance, oil would seem like a perfect candidate for the Business/Risk category were it not for another major and more powerful price driver: peak oil. As for Regulatory/Risk, the European experience thus far has shown how open a cap-and-trade system is to political manipulation, and firms there have been able to withstand the regulatory shock more because of achievements on the lobbying side than on the operational side. That is why I have stressed in the past that understanding emissions trading was more about understanding the rules and the politics than about understanding the commodity.

Nevertheless, these trends are worth following for people who: 1) like investing and 2) think that climate change is not the greatest hoax ever perpetrated on the American people. For instance, CVTech Group (CVTPF.PK), a small Canadian electrical network services company, reported that in fiscal 2008 around 58% of its annual revenue increase (C$23.0 MM) was due unscheduled electricity infrastructure repairs as a result of hurricanes in Texas, Louisiana, North Carolina and South Carolina. In the annual report, management noted: "Since 2005, an increase in the occurrence of hurricanes has resulted in growing demand for our services in these states."


I have nothing against the concept of activist organizations going after corporations with various demands, be they influenced by left- or right-wing thinking; after all, we live in a free, open society and it's everyone's right to do so within the confines of the law.

What I don't like quite as much is hypocrisy and greenwashing. As far as I go, if an institutional investor truly believes that climate change can be a worthwhile investment theme, they should put a couple of analysts on it and figure out how to put money to work. If they don't believe that it is, then they should just go on doing what they do best: manage money.

What they shouldn't do is pretend to see an investment risk or opportunity where they really don't just to appease a handful of vocal stakeholders. Lobbying to get the SEC to force disclosure on climate change is nothing more than window dressing; investors who think this is real already know where to look and what to look for and - surprise, surprise - it's not rocket science!


September 16, 2009

Another Look at the Algonquin Power Income Fund

The Algonquin Power Income Fund (AGQNF.PK) has been one of my star performers in an excellent year.  Is it still a good investment at these prices?

 Since I recommended the Algonquin Power Income Fund (AGQNF.PK/APF-UN.TO) in January as a renewable energy income stock for 2009, the company is up 69%, in addition to the C$0.02 monthly dividend, worth approximately another 8% through August on the US$1.82 purchase price, making it the second-best performing of my ten picks (after Cree, Inc (CREE).)  However, since the major basis for my recommendation at the time was the stock's extremely cheap valuation and high yield, I thought it was worth revisiting, on the occasion of the company's Q2 update [pdf]


Major events in the first half  were Algonquin's planned acquisition of a 50% stake in California Pacific Electric Company (Calpeco), the former California assets of NV Energy (NVE), and the fund's plan to convert into a corporation and acquire some tax loss assets through a deal with Hydrogenics Corporation (HYGS).


The Calpeco deal gives Algonquin some exposure to electricity transmission and distribution (in which their partner Elmira has management expertise) in addition to their current exposure to renewable energy generation.  Since I like the potential opportunities in electricity transmission, I think this was a step in a good direction for Algonquin.  Furthermore, about half of Algonquin's stake in Calpeco will be financed with an equity investment in Algonquin from Elmira at C$3.25 per unit.  Since this is only slightly below the current price, and well above the price at which I recommended the stock, the transaction will be non-dilutive for both me and my readers, and a reasonable exchange for more recent investors.


In July, a reader worried that the deal with Hydrogenics was a bad idea because Hydrogenics is a fuel cell company, an alternative energy sector neither of us is enthusiastic about.  In fact, this is a short term deal, and shareholders need not be concerned with ending up owning a fuel cell company when they thought they owned a renewable energy power producer.  Despite the legal complexity, this deal is not a tie-up with Hydrogenics, but rather a way for Algonquin to acquire corporate status, and Hydrogenics' tax loss assets at the same time.  Because Algonquin is profitable, and Hydrogenics is not, these tax loss assets are valuable to Algonquin, but not Hydrogenics, allowing both companies to benefit. Algonquin will gain the benefit of Hydrogenics previous losses in exchange for a cash payment, which will allow the cash-poor, unprofitable company to continue operations. The transaction has been approved by Algonquin unitholders and Hydrogenics shareholders, and awaits regulatory approvals.


The Trust's first half revenue was down compared to 2008, which management attributes to lower natural gas prices.  Gas prices affect the trust's revenues through lower contract prices for the heat from their thermal generation units.  I find this to be a good sign, since I expect that low current natural gas prices will rebound because they do not provide sufficient incentive for natural gas companies to drill and replace the gas supply from depleting wells. Although I expect that low natural gas prices will depress revenues in the short term, Algonquin's operating cash flow and earnings should continue to be easily sufficient to fund distributions to unit holders with plenty left over to fund Algonquin's growth plans.

At current prices of C$3.32 for APF-UN.TO and US$3.07 for AGQNF.PK, with a yield of 7.2%, I consider Algonquin to be reasonably valued, and continue to hold my positions.  However, because I currently expect a market decline, I would only suggest buying Algonquin today if you also hedge your position against general market moves.

DISCLOSURE: Tom Konrad and/or his clients have long positions in AGQNF.

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

July 14, 2009

De-Carbonizing Electricity - Will King Coal Finally Be Dethroned?

Charles Morand

Last Friday, the WSJ's Environmental Capital blog noted how, according to HSBC, growing government efforts to de-carbonize the electricity supply across the developed world would hurt makers of power generation technology with high exposure to coal.

Yesterday, the EIA released its Electric Power Monthly report for April 2009. In it, the agency notes the following:

The drop in coal-fired generation was the largest absolute fuel-specific decline from April 2008 to April 2009 as it fell by 20,551 thousand megawatthours, or 13.9 percent [...] The April decline was the third consecutive month of historically large drops in coal-fired generation from the same month in the prior year  [...]

Coal's drop is larger than the national decline at 5% between April 2008 and April 2009, and that of all other fuel sources but petroleum liquid:

Generation from conventional hydroelectric sources was the largest absolute increase in April 2009 as it was up by 3,918 thousand megawatthours, or 18.4 percent from April 2008. [...] Nuclear generation was up 3.1 percent. Generation from natural gas-fired plants was down by 1.5 percent. Net generation from wind sources was 34.8 percent higher. [...] Petroleum liquid-fired generation was down by 26.5 percent compared to a year ago [...]

The main culprit for the fall overall fall in generation is the significant decline industrial production:

 For April 2009, sales in the residential and commercial sectors both decreased by 0.7 percent and 1.6 percent, respectively, while sales in the industrial sector decreased by 13.6 percent, as compared to April 2008.

Yet coal remains the single most widely-used fuel in power generation in the US, accounting for more than nuclear, gas and renewables combined:

Year-to-date, coal-fired plants contributed 46.1 percent of the Nation’s electric power. Nuclear plants contributed 21.0 percent, while 20.5 percent was generated at natural gas-fired plants. Of the 1.2 percent generated by petroleum-fired plants, petroleum liquids represented 0.9 percent, with the remainder from petroleum coke. Conventional hydroelectric power provided 7.0 percent of the total, while other renewables (biomass, geothermal, solar, and wind) and other miscellaneous energy sources generated the remaining 4.1 percent of electric power [...]

Coal is indeed public enemy number 1 in the fight to de-carbonize the electricity supply and, as noted in the HSBC report, the elusive (I think illusive is actually more appropriate here) quest for carbon capture and storage is unlikely to change that.

The next two years are going to be interesting as a number of currents converge: (1) a price will be placed on carbon across America; (2) billions of dollars in subsidy money for environmental industries are going to trigger a significant amount of activity both in alternative energy and in energy efficiency; and (3) an economic recovery will eventually get underway and industrial production will rebound, raising the demand for electricity.

Are we truly witnessing the beginning of the end or is King Coal set to rebound with a vengeance as soon as demand picks up again? If coal declines in the U.S. abd Europe, will that make any difference at all given China's love affair with the black stuff?         

Power generation, transmission, distribution and management in North America offer very attractive investment opportunities for investors, and something tells me that the age of coal will end here before the world runs out of it, much like the stone age ended with plenty of stones left.

April 02, 2009

Investing In Wood Pellets, Part II - A Stock

Two weeks ago, I wrote about the emerging wood pellets industry and how this form of biomass was experiencing rapid growth as a coal substitute in power generation, mostly in Europe as a result of renewable energy and climate regulations. In the time since I wrote that article, I have been looking for ways to invest in the global wood pellets sector. Unfortunately, my search came up mostly empty (except for 1 stock discussed below).

In response to my previous post, a reader pointed me to an article Joe Romm at Climate Progress had recently written about biomass co-firing. In that article, we learn that co-firing biomass with coal has the technical and economic potential to replace at least 8 GW of America's coal-based generating capacity by 2010 (~2.4% of  the 2007 nameplate coal installed capacity), and as much as 26 GW by 2020 (probably somewhere between 5 and 8% by then). We also learn that demonstrations and trials have shown that biomass can replace up to about 15% of the total energy input at coal-fired plants with only minor modifications - this is thus probably a good figure to go by given that international trade in pellets can overcome supply limitations in the US.

As I was searching for ways to invest in the wood pellets sector, I came across some additional information on the current state of the market provided by Andritz Group. In 2008, the global market for wood pellets was estimated at around 9 million metric tons in volume, which replaced around 6.3 million metric tons of coal (you thus need around 1.43 metric ton of pellets per ton of coal displaced). Whereas coal packs in about 24 gigajoules of energy per metric ton, wood pellets contain about 17 GJ/metric ton (17 x 1.43 = 24.31). To put the volume numbers into perspective, over the past few years, the US electric power sector has been using around 1.04 billion short tons of coal per year, or about 944 million metric tons. 15% of this total would represent around 144 million metric tons of coal, or about 206 million tons of pellets. There is thus plenty of theoretical room to grow in the US alone, even if you cut that number down by 50%.        

The fuel substitution from those 9 million metric tons of pellets has helped save around 7.5 million metric tons of CO2 emissions. Assuming CO2 prices of €25 ($33)/metric ton, this could be worth around $248 million gross, from which the fuel cost difference would be subtracted to get to a net figure. Although I did not run the numbers, it is safe to assume this difference yields a positive amount given how popular wood pellets have become in Europe for exactly that purpose (i.e. meet regulatory limits on greenhouse gas emissions). 

What drew my attention to wood pellets the most is that they offer a standardized means of moving carbon-neutral energy around, much in the same way crude oil or coal are used to transport carbon-positive energy (of course neutral and positive are relative terms in this context, but let's leave that discussion for another time).

The North American forest industry is currently facing a difficult time, and using biomass for power generation is one means of killing two birds (the environment and the economy) with one pellet, although as the numbers above indicate it is no a panacea. In fact, wood biomass will most likely never account for more than 10-15% of total power production and is unlikely to be cost competitive with coal without a price on carbon. However, given that a price on carbon is forthcoming in the US, it is fair to assume that wood pellets will represent one of those fundamental bridge solutions to reduce the costs of moving to a de-carbonized economy. This is a point Joe Romm makes in his articles on the topic.    

However, the trade in wood biomass for power generation cannot be expected to scale up if a standard isn't adopted around which transportation logistics and technology requirements can be established. Wood pellets provide this standard. This is why I have left other wood biomass sources such as wood chips or waste wood from logging operations out of my analysis. If a sizeable market for wood biomass is to emerge, it will have to be in the form of a market for pellets. 

A Wood Pellet Stock

The wood pellet production process is relatively simple (see video below): (1) wood material is dried and turned into a dough-like mass by being passed through a hammer mill; (2) and this mass is then squeezed through a high-pressure die with holes of the size required (i.e. standard pellet size) - the pressure causes a rise in temperature which causes the lignin in the wood to plastify and hold the pellet together.    

Andritz Group (ADRZF.PK) currently has, according to itself, an about 50% share of the global market for wood pellet production equipment. Andritz is an Austrian firm that provides equipment and services for the global hydro power, pulp & paper, steel, animal feed & biofuels and other industries. In fact, following the acquisition of a large chunk of GE Energy's hydro power operations, Andritz cemented its position as a dominant player in large hydro globally.

The main problem with Andritz is that its US listing is on the Pink Sheets Grey Market (this is common for foreign shares), making it hard for some investors to trade the stock through their brokers. Moreover, trades on the Grey Market are not always efficient as the lack of a Market Maker for the security can result in lower liquidity and higher prices. The quality of the company is not problematic however, as Andritz is a blue chip stock in Austria.

Despite this limitation, Andritz is, in my view, an interesting beast. In 2008, revenue (€3.61 billion/$4.85 billion) was broken down as follows between the business segments: Hydro (electromechanical systems and services for large hydro power stations), 33%; Pulp & Paper (equipment and services for all forms of pulp and paper production), 37%; Metals (production and finishing lines for metallic strip), 16%; Environment & Process (equipment and services for solid/liquid separation for various industries), 10%; and Feed & Biofuel (equipment and services for production of animal feed and biomass pellets), 4%.   

Balance sheet-wise, the company is well-positioned to weather the current storm: although it had gross debt (bonds, bank debt and leases) of about €432 million ($580 million) as at the end of 2008, its €822 million ($1.1 billion) in cash and marketable securities gave it ample net cash (debt minus cash & equivalents) of about €390 million ($524 million). The current ratio is only 1.29. However, around 35% of current liabilities are accounted for by a revenue recognition liability which has no bearing on liquidity. Dividing only cash and equivalents €822 million ($1.1 billion) by accounts payable (€306 million/$411 million) plus the current portion of debt and lease obligations (€37 million/$50 million) yields a ratio of around 2.4, which is very healthy and even begs the question: what is the company planning on doing with all this cash?.

Operationally, Andritz has been stable over the past five years, maintaining stable EBITDA, EBIT and net margins in the neighborhood of 7.5%, 6.0% and 4.2% respectively. However, cash flow from operations has been somewhat volatile, standing at €255 million ($343 million) in 2008 but only €33 million ($44 million) in '07.

The stock is currently off around 65% from its high of May 2008 (the Pink Sheets listing). Andritz is trading at a trailing 12-month PE of about 7.9x and price-to-book of about 2.08x. On a PE basis, that is a cheap stock, especially given that the company's scale and market share in the hydro segment probably confer it a certain amount of earnings power. The stock pays a dividend per share of €1.10 for a yield of 5.08%, which is quite attractive in my view (this information is for the Frankfurt listing so one would need to inquire to his/her broker to know what the figures are for US investors purchasing the Pink Sheets security).


Although the wood pellets concept is attractive (I certainly thought so when I first attended a workshop on it), the global trade in them remains comparatively small and largely Europe-focused for the time being. As a result, finding ways to play this emerging sector in the stock market is rather difficult. However, if activity by private firms is any indication of the future of this industry, then it could turn out to be interesting niche to be in, although it will not grow past a certain point and is no panacea.

The one stock I identified as global leader in wood pellets, Andritz, is actually attractive for a number of other reasons. The exposure to large hydro is very interesting, in my view. Although certain greens find large hydro objectionable, most individuals and organizations concerned about climate change agree that it's better than the fossil-fuel alternatives, and the sector is forecasted to get a boost from installations in China and India over the next few years. The focus on industrial energy efficiency should also be of interest given the focus this area received in the Obama Stimulus Package.

But this is a stock that will unfortunately be hard or impossible to trade for many small investors. You might just have to wait a few more years to see more interesting plays on wood pellets emerge on a stock exchange near you!

The Wood Pellet Production Process: A Vid!

DISCLOSURE: Charles Morand does not have a position in Andritz.

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

March 19, 2009

Investing In Wood Pellets, Part I

Last week, I mentioned that I had attended a conference focused on opportunities in the biomass and bioenergy sectors. One of the article ideas I got from this conference was on the emerging market for wood pellets (tightly packed sawdust and other wood shavings) for heat and electricity. How interesting that, over the weekend, the magazine Science published an article suggesting that the US should ramp up its use of wood for small-scale heat and electricity production (the article is not available free of charge but you can find a summary here).

The Wood (Pellet) Advantage

It must be stated from the get-go that wood harvested at sustainable levels will never account for a significant percentage (i.e. >20%) of total energy consumption. The Science article states that total US energy consumption currently stands at around 100 quads annually, and that wood-based energy makes up about 2% of this. At sustainable harvest levels, the authors estimate that wood could represent about 5 quads, or roughly the amount of energy contained in the Strategic Petroleum Reserve. That number is for all wood-based energy and not only pellets, so the potential market for the latter is even smaller.

That said, wood pellets are rapidly gaining acceptance as a readily-available, carbon-neutral fuel source that can be used on its own or co-fired in coal plants. The global trade in wood pellets is not especially extensive just yet, so pricing data can be a little difficult to obtain. Various sources I looked at seem to put the price range at between $150-200/ton. The International Energy Agency conducted a detailed study of the global marketplace for wood pellets in 2007, and reported that pellets cost in the neighbourhood of $11.50/million BTU. It is therefore no surprise that with residential fuel oil and, increasingly, nat gas prices pushing above that level in 2007 and 2008, wood pellets bbecame a popular option in the colder US Northeast and Northwest.

Environmentally, wood pellets are considered greenhouse-gas neutral as wood is existing biomass (i.e. not ancient biomass trapped beneath miles of Earth's crust) and it is assumed that forest re-growth will, in time, sequester the carbon dioxide emitted through photosynthesis.

With regards to conventional air pollutants, SOx emissions are reduced almost on a 1-to-1 basis when pellets are co-fired with coal (i.e. a 20% pellet/80% coal mix will reduce SOx emissions by 20%). The relationship between wood and NOx is apparently not as straight forward and I didn't find a good source on this.  

The Science article claims that advanced wood combustion technologies can reach thermal efficiencies of around 90%, which compares very favorably with other fossil-fired technologies.

The Wood Pellet Trade

At the end of 2006, pellet demand in the US stood at around 1.4 million tons, a >200% jump on 2002. Pellets in the US are used mostly in residential and small-scale applications and very little if at all in large-scale power generation. Although pellet popularity is growing, the US market remains comparatively small.  

The real story volume-wise has been occurring in Europe, where renewable power generation and greenhouse-has emissions regulations have triggered a boom in wood pellet use. Current EU commitments call for 20% of final energy consumption to come from renewables by 2020 and the meeting of the Kyoto Protocol's targets. It is estimated that the EU currently supplies about 4% of its total electricity from wood waste (vs. 2% in the US) and this number is expected to double by 2010. Current consumption is now greater than 6 million tons annually.

In 2006, EU nations consumed around 5.5 million tons of pellets, but produced only 4.5 millions, an 18% 'deficit'. Canada is currently the largest pellet exporter to the EU but there is also significant export potential in the US, as evidenced by the fact that pellet manufacturing capacity has been expanding rapidly.

In the US, the low price of coal and its prominence in power generation (coal accounted for roughly 48% of electricity generated in the US in 2008) present the biggest challenges to the growth of the wood pellets market. However, upcoming greenhouse gas regulations could change this. Because wood pellets are considered greenhouse gas neutral, co-firing them with coal reduces CO2 emissions on a 1-to-1 basis.

This has been one of the major drivers in Europe, and can represent a comparatively cheap way of transitioning toward cleaner power generation technologies. Given the relative abundance of biomass across North America (don't forget Canada, the biomass superstore to the North), federal greenhouse gas caps could jump start the wood pellets market here.

Wood Pellets Stocks

This is admittedly a sector I knew very little about, so ramping up my industry knowledge alone took a bit of time. When I started my search for stocks on this, nothing evident jumped at me. I therefore thought I would break this article into two, with the next part dedicated only to company analyses. I will publish it next week. In the meantime, if you know of stocks related to this, please let me know.

February 25, 2009

The Ontario Green Energy Act: What Can Alt Energy Legislations Do For Investors

Dedicated legislations have been at the core of some of the most impressive regional growth stories in alternative energy, most notably in Germany with the Renewable Energy Sources Act or in California with the various legislative solar initiatives. On Monday, the Canadian province of Ontario became the latest jurisdiction to join the fray as lawmakers introduced the Green Energy and Green Economy Act. Why should investors care? Because such legislations have been at the core of some of the most impressive regional growth stories in alternative energy. 

As a bit of a backgrounder on Ontario, there is currently about 800 MW of installed renewable power capacity (~95% wind) in the province with around 2,500 MW under power purchase agreement (PPA) and scheduled to be brought into commercial operations in the next few years. In late 2006, the province introduced a renewable power feed-in tariff incentive, the first one in North America. This incentive was suspended in May 2008 due to transmission constraints. By then, there were about 500 MW of solar capacity under PPA linked to the incentive, including one of the world's largest solar PV farms.

To put these numbers into perspective, California, the largest solar PV market in the US by quite a stretch, had around 500 MW of PV installed by the end of '07. Next came New Jersey at 69 MW and New York at 32 MW. None of the 500 MW under PPA in Ontario has yet reached commercial operation, and at least some of it will probably be cancelled given current credit conditions. Nevertheless, these figures provide a good idea of the market's potential is. The Canadian Solar Industries Association estimates that Ontario could install up to 16,000 MW of solar PV by 2025, with the potential on Toronto's rooftops alone estimated at 3,600 MW.   

The Green Energy and Green Economy Act

The Act targets three main areas: (1) renewable power generation; (2) energy efficiency; and (3) the smart grid.

1) Renewable Power Generation

Perhaps the most significant measures here are aimed at removing what had proven to be critical barriers to renewable energy projects reaching commercial operation in the province:

  1. Renewable energy projects meeting certain criteria will be guaranteed a connection to transmitters and distributors' networks and will be given priority access over other forms of power generation
  2. Transmitters and distributors will have to make the necessary network upgrades to allow for the connection of renewable power projects and the eventual expansion of renewable power capacity
  3. Renewable power projects will be exempt from all forms of municipal permit requirements to counter a growing trend of NIMBY groups lobbying their municipal councils to block renewable energy projects  
  4. A new office of Renewable Energy Facilitation has been created to help speed up the permitting process (e.g. environmental assessments, etc.)

On the revenue side, the legislation does the following:

  1. The feed-in tariff that had been suspended in May 2008 will be reintroduced once new rules have been designed (no timeline provided but Q2 2009 has been thrown around)
  2. A system of PPA auctions for large-scale renewable power projects that has been in operation since 2004 will be maintained 


The measures aimed at removing barriers to renewable projects are significant. However, until the new rules around the feed-in tariff are released (e.g. pricing, eligible fuels, etc), the exact impact of the law will remain unclear. My own guess is that the government will be very aggressive with ramping up renewable energy installed capacity over the next five years as, as its name indicates, this law is also about the economy. If you believe the government, this bill is as much about creating a counter-cyclical effect as it is about cleaning up the environment. If my thesis is correct and this turns out to be a boon for developers, the following stocks should be watched:

Name Ticker Description Potential Upside Related to Legislation
Algonquin Power Income Fund AGQNF.PK Ontario-based renewable power developer with exposure to Ontario (income trust) V. High
Boralex BRLXF.PK Canadian renewable power developer with exposure to Ontario V. High
Canadian Power Developers CHDVF.PK Canadian renewable power developer with significant exposure to Ontario V. High
Great Lakes Hydro Income Fund GLHIF.PK Ontario-based hydro power developer (income trust) V. High
Innergex Renewable Energy Inc. INRGF.PK Canadian renewable power developer with exposure to Ontario V. High
Macquarie Power & Infrastructure Income Fund MCQPF.PK Ontario-based renewable power developer (income trust) V. High
ARISE Technologies Corporation APVNF.PK Ontario-based silicon and PV cell manufacturer with a module installation segment. The module installation segment is focused on the Ontario residential market V. High
Northland Power Income Fund NPIFF.PK Ontario-based power developer with some exposure to renewables (income trust) High
Brookfield Asset Management BAM Infrastructure development firm with exposure to Ontario renewables Medium
FPL FPL FPL Energy unit is one of the world's largest wind park owners and has exposure to Ontario wind Low

2) Energy Efficiency

The Act introduced a number of energy efficiency measures with a focus on building efficiency:

  1. No real property can be sold or leased for an extended period of time without undergoing an energy audit
  2. Public agencies will be required to come up with an energy conservation and demand management plan
  3. Public agencies will be required to consider energy efficiency when making capital investments or when acquiring goods and services (although the devil will be in the details here with more precise rules to come)
  4. Energy distributors will be required to meet efficiency and demand management targets (see the brackets above about the devil)
  5. The Building Code will be reviewed to include stronger efficiency measures


Energy efficiency measures are clearly targeted at the building stock. There aren't really any good direct plays on this, and won't be until the government releases further information on what it intends to do with its own buildings. Building efficiency firms such as Johnson Controls (JCI) could benefit, although its unclear whether this would be needle-moving. 

3) The Smart Grid

Ontario has been somewhat of a leader in smart grid, with legislation passed back in 2005 requiring every home and business in the province to be equipped with a smart meter by 2010. Hydro One, the largest transmitter, has also begun smartening its network by embedding communication equipment from RuggedCom (RUGGF.PK). The Act contains provisions to expand smart grid capex. The Ontario Smart Grid Forum estimates that C$1.6 billion could be spent on a smart grid ramp up in Ontario over the initial five years of such a program. As I mentioned in a past article, while the absolute amount isn't huge, it is still a fair chunk of change for this emerging industry.

The smart grid measures are:

  1. A timeline for rolling out the smart grid and apportioning spending responsibilities to different players (e.g. transmitters, distributors, retailers) will be released
  2. Communication standards and other technical aspects will de defined through regulation
  3. The regulator (called the Ontario Energy Board, the equivalent of a PUC in the US) will be directed to take actions related to the implementation of the smart grid, although these actions aren't yet defined

Once all the rules are released, the legislation will have the effect of formalizing a patchwork of initiatives already underway. In my view, significant smart grid capex can be expected in Ontario over the next few years with a focus on the transmission and distribution infrastructure (rather then end consumers). There are several companies large and small entering the world of smart grid. My personal favorite play on this legislation is RuggedCom (RUGGF.PK): (1) it has already won contracts here; (2) it is part of the home team (based in Ontario); (3) it already generates EBITDA; and (4) even though its stock has withstood the latest storm in equity markets, it's still trading at a reasonable trailing PE compared to peers.   


Many people in the investment world loathe government intervention into anything. However, alt energy has been and continues to be primarily driven by regulation and government policies. In the absence of government support schemes, industry growth rates would be a fraction of what they currently are, and solar PV would not be on the steep cost decline curve it's currently on. It is therefore critical to keep an eye on the policy side to know where growth opportunities will emerge next.

With this new Ontario legislation, my favorite play is the Canadian clean power IPP sector (stocks listed above). The smart grid initiatives will also be worth watching, although more clarity on the rules is required before potential winners can be identified.

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

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

January 13, 2009

Focus On Clean Power Income Trusts

Last week, Tom brought you a piece on the Algonquin Power Income Fund (AGQNF.PK), in which he opined that shift in investor attention away from capital gains toward yield might eventually provide a catalyst for the prices of yield-focused securities such as income trusts to rise. So-called utility trusts, or income trusts where the underlying corporation is engaged in utility activities such as power generation, are a common feature of the Canadian income trust sector (the mother of all income trust sectors). A sub-set of utility trusts is the clean power utility trust, where the power generation assets consist of technologies such as wind, small hydro, biomass and waste-to-energy (WtE). Though new tax rules have effectively made it impossible for new income trusts to be brought to market (barring certain exceptions such as REITs), existing clean power utility trusts (existing as of Oct. 31, 2006) get to operate under the old tax regime until 2011.

The clean power utility trust model is similar to the clean power Independent Power Producer (IPP, see definition) model, whereby firms are pure-play clean power generators (i.e. they own only generation assets) that sell their electricity to utilities, with the exception that the tax treatment awarded to income trusts allows them to pay higher yields by avoiding double taxation.

While changes in legislation mean that this investment vehicle is dying a slow death, Tom was correct to point out that in times where the prospects for strong capital gains are uncertain and interest rates low, income trusts provide a good way for investors to access high yields. What's more, clean power utility trusts, this most unique of Canadian investment sub-sector, allow investors (including US investors) to play North American clean power in a way that does not entail a risky bet on a technology play but is rather much more akin to a utility investment.

Clean Power Utility Trusts             

Name Ticker Related Corp. Entity (Ticker) Yield (%)* Assets
Algonquin Power Income Fund AGQNF.PK N/A 9.16 Hydro, Cogen, WtE, Wind, Water/Wastewater
Boralex Power Income Fund BLXJF.PK Boralex (BRLXF.PK) 19.77 Biomass (wood residue), Hydro, Nat Gas Cogen
Macquarie Power & Infrastructure Income Fund MCQPF.PK N/A 18.88 Nat Gas Cogen, Wind, Biomass (wood residue), Hydro, Long-term Care Home
Innergex Power Income Fund INRGF.PK Innergex Renewable Energy (INGXF.PK) 10.81 Hydro, Wind
Northland Power Income Fund NPIFF.PK Northland Power (not public) 9.44 Nat Gas Cogen, Wind
Great Lakes Hydro Income Fund GLHIF.PK N/A 8.01 Hydro

*As at close on Friday Jan. 9, 2008

One of the major risks facing income trusts is distribution cuts, something that generally happens when the fundamentals of the underlying business are severely diminished or distributions were set too high to begin with (in order to attract investors). As can be noted from the table, the yields on some of these trusts (i.e. Boralex Power Income Fund and Macquarie Power & Infrastructure Income Fund) appear to indicate that investors are anticipating distribution cuts and are demanding a risk premium. Yet preliminary screens on both funds don't uncover much evidence that distribution cuts are in the cards (caveat: these were very preliminary screens).  

While growth will be challenging as long as credit conditions remain tight (individual projects typically use over 50% debt), the underlying business model and existing assets of these funds remain largely immune from a slowing economy - they are utilities with a clean twist. Barring another major round of indiscriminate selling in equity markets, investments in one or more of the clean power utility trusts is a good way of generating returns in the form of cash yields (something that's worth a lot more than the promise of future capital gains in this economic environment) from a comparatively low-risk sector.

Some of the things to look for as red flags in assessing these trusts are: liquidity position (cash on hand; quick ratio) and ability to borrow for emergency purposes (undrawn line of credit); leverage level (debt-to-capital ratio) and the need to roll over debt in the next 12 months; any signs that operating conditions have deteriorated (e.g. for wood biomass, indications that pulp/saw mill closures related to the bad economy are decreasing fuel supply).

DISCLOSURE: Charles Morand does not have a position in any of the securities discussed above.

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

January 06, 2009

Algonquin Power: A Renewable Energy Income Investment

The Pendulum Swings to Cash

Over the long term, market cycles are characterized by swings of sentiment, and changes in investor preferences.  The recent cycle was characterized by an emphasis on growth and capital gains.  In the current financial crisis, investors are again learning the value of cash, and companies which produce steady cash flow and dividends.  Since the market tends to overshoot, I expect there will be a time a few years hence when, once again, the first question any investor asks about a stock is "What's the yield?"

If I'm right, companies with strong cash flows that pay high dividends will likely outperform the market as a whole over the next few years.  This is why I've been looking carefully at company's cash flow statements and balance sheet, and we've been bringing you our picks of dividend paying alternative energy and energy efficiency stocks.

Beyond Dividends

Taking this reasoning a step farther, it makes sense to look at the slightly more exotic income trusts.  Income trusts are companies that own mature, cash producing assets, from which substantially all the income is returned to the trust owners.  In many cases, this structure provides the company with favorable tax treatment.  For instance, US REITs are a type of income trust which holds real estate assets on which the income is not taxed at the company level, so long as 90% of that income is returned to investors.

Various types of income trusts may have different tax treatments for different classes of investors, and for different types of income trust.  Both current tax treatment and changes in tax treatment can greatly influence returns.  Nearly two years ago, I brought three renewable energy income trusts to reader's attention because changes in Canadian tax law meant that the funds were changing hands, and I thought there might be future buying opportunities, although at the time I noted "It's impossible to say what good price entry levels are for any of these funds."

Since then, the tax changes and the market meltdown mean that I now think we are seeing at least one such opportunity.  I more than doubled my position in The Algonquin Power Income Fund (AGQNF.PK), at US$1.62 a share in December.

The Algonquin Power Income Fund 

The Algonquin Power Income Fund owns a mix of hydroelectric, wind, cogeneration, waste-to-energy, and water and wastewater facilities in the US and Canada.  The power and services from these facilities are sold under mostly long term contracts, generating mostly stable cash flows, although some contracts are indexed to natural gas prices, and some come up for renewal each year.

In October, the company cut distributions to unit holders by almost three quarters, and the stock price collapsed.  Nevertheless, the price drop means that the yield, even with the lower level of distribution, is still nearly 11% (based on C$2.22 /US$1.83 stock price.)  However, the large cut in distribution means that further cuts are much less likely to be necessary, and the company will have much less need to raise new capital at current low prices.

Given the good yield, the main concern for investors should be the likelihood of any future cuts in distributions.  According to the press release, the fund's trustees believe that the lower distributions will allow them to both internally fund capital investment, and pursue growth opportunities.  

Unless cash flow deteriorates from the level in the third quarter financial results, the new level of distributions should mean that the company will just be able to fund the current level of investment with cash from operations, without having to raise new debt or equity.  Since this agrees with the fund's stated intent in reducing the distribution, I would be surprised if there is any further reduction in the distribution over the next couple years, although there are likely to be further changes when the Canadian tax law changes finally take effect in 2011.  If cash flow falls below expectations, the Fund retains the option of drawing on a revolving credit facility, as well as temporarily curtailing new investments until cash flow recovers. 


If I am correct in my expectation of stable distributions, and a growing preference among investors for income producing securities, the The Algonquin Power Income Fund should be able to appreciate as the business grows with new investment, all the while returning a healthy return from distributions.  

The biggest risk I see is that the financial climate may prevent the fund from rolling over some of its debt (either at the project or company level) at a favorable rate.  However, currently the main problems companies are having with financing are not because of rates on offer, but rather the much higher credit standards lenders expect from borrowers.  Because the fund has debt at both the project level and the company level, there could easily be some project level debt which would be difficult to refinance in the current climate.  That said, borrowers like Algonquin, which have verifiable, steady cash flows are just the type of borrowers most lenders are currently looking for.  If Algonquin proves unable to roll over debt at a large scale, it will only be in a climate even worse than today's, with no one being able to borrow at all.

Spectacular gains seem unlikely, unless market conditions improve dramatically.  Nevertheless, in this climate, I'm happier with a steady distribution over 10% from the sale of clean energy than a chance of a spectacular gain but no expectation of cash anytime soon.

Note: This article was written in late December, and not published until now because I wanted to bring you 2 top ten lists and a 2008 year in review article around New Year's.  I included Algonquin in my 10 Stocks for 2009, when the stock was trading at $1.82.  As I write, the stock has risen to $2.37, meaning the yield is down to about 8.6%, and the potential upside gain is reduced.  On the other hand, Obama has now said that he wants to double renewable energy production as part of his stimulus plan, although he was not specific over what time period he expected that doubling to occur.  Nevertheless, the additional confirmation of Obama's long-standing commitment to renewable energy will be good for Algonquin's projects in the United States, and may explain the recent rally.  At this price, I'm not in a hurry to buy more, although I might still consider it if I did not own any of the stock.

Tom Konrad, Ph.D.

DISCLOSURE: Tom Konrad owns AGQNF.

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

August 11, 2008

Power Plant Costs & The Case For Energy Efficiency

A few weeks ago, I stumbled upon a presentation that was given by FERC officials on the phenomenon of rapidly rising costs in US power generation (presentation link at the end of this post). The FERC, or Federal Energy Regulatory Commission, is America's energy watchdog.

The presentation begins by noting that across America's major electricity hubs, power prices are up significantly on last year (between 62% in the Midwest and 123% in NYC) and that, unfortunately, this probably isn't an anomaly. In fact, the presentation argues, there may be something secular at play. Two main trends are noted.

Energy Costs

Because of gas' prevalence in US power generation, the cost of generating a unit of electricity through gas often sets the unit price in the marketplace across fuels - gas is said to be the marginal fuel. Commodity market watchers and anyone who needs to buy gas on spot or futures markets will have noticed a sharp increase in the price of gas over the past five years. This increase is what is responsible for the vast majority of power price increases currently being experienced by US electricity customers.

Of course, it hasn't helped that the price of coal has been rising as well on the back of a weak US currency and an explosion in demand from India and China. In some parts of the US, such as in the Midwest, coal is the marginal fuel. Tom wrote an interesting piece last year on how to play coal shortages.

Capital Costs

The second factor impacting the cost of power generation is a rapid rise in the cost of many key inputs needed to build a power generation facility. Increases in the price of steel and cement, for instance, have appreciably outpaced inflation as whole over the past few years, as have those for other commodities and even labor (albeit to a much lesser extent).

The result is the chart below, which shows the capital costs of building generation capacity in 2008 as compared to 2003-2004. The caveat with this graph is that accurate data on power plant capital costs is hard to come by given the sensitivity of this information. Nevertheless, the results from these estimates show that while the inflationary environment in power generation capital costs has impacted all fuel sources, wind has been impacted to a lesser extent than competing fuels like coal. While combined cycle and combustion turbine gas remains cheaper than wind, wind has made up some ground on the 2003-2004 period.

The effects of this phenomenon on power prices, however, may not be fully felt for a few more years.

Connecting The Dots

Throw these two factors together (rising capital and fuel costs), and the weighted-average levelized cost of electricity across the system - the levelized cost is the present value of the costs of building and operating a power plant and are used to set prices over the plant's economic life - looks like it could favor wind a few short years down the road.

There are two forces at play improving the economics of wind relative to conventional power generation: (a) growing wind manufacturing capacity currently under construction (this is not apparent at the moment because of the inflationary environment discussed above, but once new manufacturing capacity comes on line and the supply chain loosens up wind costs will decrease) and (b) worsening economics for fossil-fired generation due to increases in capital costs but mostly fuel costs.

Add to this regulation to force fossil generators to internalize the cost of carbon and a growing number state mandates for renewable power, and the picture looks even more positive.

But The Real Winner Is...

Unsurprisingly, the FERC expects there to be a response to rising electricity prices - in other words, demand for power is elastic.

What's the main response likely to be initially? An increase in demand-response (technologies that adjust power consumption based on prices). The FERC estimates that the first round of demand-response (the low-hanging fruit) could come in at about $165/kW, which compares rather favorably to the capital costs of the cheapest option on to the graph above, combustion turbine gas, at between $500 and $1,000/kW. And, like renewable energy, there are no fuel costs.

Somewhat paradoxically, one of the main impediments to demand-response growth could be energy efficiency measures more broadly, or reducing power use at any time instead of only at peak times, which is what demand-response does. Available energy efficiency measures would cost in the order of $0.03/kWh, compared to $0.09/kWh for the fuel alone for a combined cycle gas plant.

Demand-response is likely to be more popular in states where most customers have some exposure to fluctuating daily power prices, whereas energy efficiency measures may gain more ground in states where the pricing is more static for most customers.

It's The Economics, Stupid!

One of the biggest beefs alt energy detractors have with the industry is that "the economics don't make sense without state support." (Of course such detractors generally like to avoid conversing about the mammoth tax breaks the fossil industry receives) This could very well change in the years ahead as the burden of fuel costs on the levelized cost of fossil electricity boosts wind and solar's competitiveness.

However, as shown above, the cheapest kW is the kW saved, and regulators are aware of this. Unlike cars, where the entire vehicle has to be changed to gain access to more efficient technologies, energy efficiency measures in commercial, industrial and residential buildings can be implemented fairly painlessly. Now that the "economics make sense", expect such installations to grow in popularity

Access the FERC presentation here (PDF document).

September 27, 2007

Two Canadian IPPs For Your Portfolio

Most alternative energy investors are aware of North American wind power's very bright growth prospects. In past articles, we discussed encouraging projections for the US and Canadian (PDF document) wind markets between now and 2015. While onshore European capacity is fast being exhausted, North America is only beginning its foray into wind and some major capex can be expected in this space over the coming years.

Besides solid expected growth, another phenomenon is currently impacting the wind industry; consolidation. This is a global movement that is affecting all of the power gen sector, and that has no-doubt been aided by easy credit in the past few years. Examples of recent deals in the North American wind industry include EDP's July, 2007 acquisition of Horizon Wind for $2.7 billion, and Suez' July, 2007 acquisition of Ventus Energy (PDF document) for C$124 million.

Playing Growth & Consolidation

Two of the most interesting ways to play growth and consolidation in the North American wind sector lay on the Canadian side of the border. They are two Independent Power Producers (IPPs) with attractive pipelines of projects, good forward-looking revenue visibility because of their exposures to Power Purchase Agreements (PPAs) with credit-worthy customers, and attractive take-over targets due to their size and the location of their generation assets. These two companies are: Boralex [TSX:BLX or BRLXF.PK] and Canadian Hydro Developers [TSX:KHD or CHDVF.PK].


Boralex currently runs a generation portfolio totaling around 350 MW, with 103 MW of wind. Over the next five years, however, Boralex is expected to add another 690 MW of wind to its portfolio. Besides having access to PPAs, Boralex is also active in the US Renewable Energy Credits (RECs) market - in 2005 and 2006, respectively, one of the company's facilities in the US recorded C$8.1 million and C$6.2 million in RECs revenue alone. With 2007E EV/EBITDA of around 12x and 2007E PE of around 21x, Boralex is trading roughly in line with its comps. The company is geographically well-diversified, with operations in Quebec (one of Canada's hottest wind markets), Ontario, the Northeastern US and France.

Canadian Hydro Developers

At upwards of 60x 2007E PE and around 24x 2007E EV/EBITDA, KHD does not come cheap, either as a stand-alone stock or relative to industry peers. However, the company has a very attractive pipeline of wind projects across Canada, and valuations are expected to converge with industry averages over the next three years. Canadian Hydro currently has around 265 MW of generating assets with around 154 MW of wind. The company has a further 384 MW of wind currently under construction and a total project pipeline of about 1,400 MW - one of the most interesting such pipelines of any mid-size North American IPP. While KHD is an expensive buy at the moment, a lot of that has to do with all of the growth the firm is projected to undergo between now and 2010, as well as with a high amount of revenue visibility associated with high exposure to PPAs.

Two Of a Kind...

Both firms belong to a very rare breed - publicly-listed alternative energy generation pure-plays. While there are a number of similar companies listed on the Toronto Stock Exchange, most of them are income trusts with limited growth pipelines or small players with next to no track records. Both companies are increasingly on the radar of public market investors due their projected growth and to the fact that they are potential acquisition targets. Fundamentally-speaking, both look very attractive in the medium term (3 to 5 years) due to their extensive exposure to various schemes by Canadian provincial governments to boost wind generation capacity. These two companies really are, for all intents and purposes, two of a kind.

DISCLOSURE: The author is long Canadian Hydro Developers.

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.

March 05, 2007

What to Make of the TXU Deal?

Last weekend, TXU Corporation (NYSE: TXU) made the stunning announcement that it would be acquired by two private equity giants -- Kohlberg Kravis Roberts (KKR) and Texas Pacific Group (TPG) -- in a transaction valued at $45 billion.

Press release

Two things leap out at me from the announced deal.

First, the investors are willing to pay a 25% premium over the recent share price, while at the same time committing to a 10% rate reduction for TXU's residential electricity customers in Texas. KKR and TPG are no dummies: it must mean that they truly think they can run TXU much more efficiently than it has been run -- even though TXU has been widely viewed as a glowing success story since the meltdown of the merchant power markets in 2002. If a "good" utility TXU can be taken over by a private equity group at a premium price and earn the required rates of return on invested capital while cutting prices to customers, pretty much any electric utility should be in the same boat. Conclusion: there must be a lot of fat in the utility industry that can be cut with more aggressive management. If I were a large institutional investor in an underperforming utility, I'd be pressing the executives to dress the company up for sale. If I were a senior manager in the utility sector, I'd be expecting to be pushed to a much higher degree of performance for shareholders. If I were a mid-manager or lower level employee at a utility, I'd become increasingly worried about my job.

Second, the investors are the prime movers in axing 8 of 11 announced coal fired powerplants from TXU's growth ambitions, in lieu of increasing expenditures on customer efficiency by $400 million. This will be a major reversal for John Wilder, TXU's CEO, who has been loudly touting a vision for massive coal expansion. I'm certain that Wilder's rich payday from this lucrative deal will help soften the blow to his ego, but it will be interesting to see how Wilder copes under his new owners. These are smart investors, and they seem to be saying that energy efficiency (along with renewables) is a much better investment than new coal fired powerplants -- especially in a world with likely future carbon restrictions. This deal no doubt sends a signal that the capital markets are increasingly unwilling to make big bets on continued status quo in the utility industry. Wall Street is saying that the utility industry must change, and that it isn't just going to keep dumping money into utilities that want to perpetuate the 20th Century.

Based on initial reports, it appears that there are few hurdles to the deal being closed, but I remain curious as to how KKR and TPG expect to monetize their $45 billion investment. It seems like there are three possibilities: simply holding the company and recouping returns via dividends from improved operations, flipping the company to another owner (or re-taking the company public) at a higher price, or breaking the company apart and selling the pieces to more natural owners. I'm sure they have thought through these possibilities in great detail, though it's not obvious to me.

The examples of private equity attempting to earn attractive returns through investments in the U.S. electric utility sector have, to date, been not very successful. Let's hope this deal works out for the investors. I'd love to see many more utilities bought by private equity firms and shaken up. I bet that many utility CEO's and management teams wouldn't last long under the reins of more aggressive owners. And, I'd bet we'd see better environmental performance from these historically lethargic companies. I hope the TXU deal is the beginning of a trend.

Richard T. Stuebi is the BP Fellow for Energy and Environmental Advancement at The Cleveland Foundation, and is also the Founder and President of NextWave Energy, Inc. Richard is a Contributor to Clean Tech Blog where this story was first published.

April 10, 2006

Calpine to sell about a fifth of power plants

Calpine Corp. (CPNLQ.PK) said it plans to sell about one-fifth of its power plants in a bid to emerge as a leaner company focused on its profitable geothermal and gas-fired operations. The company also said it plans to close three offices and cut about 775 jobs. Without identifying the plants, Calpine said the sale of about 20 facilities would allow it to focus on core assets and key markets. The company's largest power markets are California and Texas. [ more ]

The plans drafted by CEO Robert May should allow the company to save over $150 million a year and also allow the company to focus on profitable segments of the existing business.

February 22, 2006

E.On Launches $34.72B All-Cash Endesa Bid

German utility E.On AG launched a 29.1 billion euro ($34.72 billion) all-cash bid for ENDESA (ELE) on Tuesday, topping a previous offer from Gas Natural by more than 30 percent and threatening to disrupt carefully laid plans for Spanish power-market consolidation.

Endesa said in a statement that the E.On offer was "clearly" the better of the two, but added that it still did not adequately reflect Endesa's true value. [ more ]

Shares of Endesa were up 15% in yesterday's trading.

January 27, 2006

FPL Group Beats Estimates By $0.06 and Profits Rise

fpl_logo.gifFPL Group Inc (FPL) reported 2005 fourth quarter net income on a GAAP basis of $206 million, or $0.53 per share, compared with $173 million, or $0.47 per share, in the fourth quarter of 2004. FPL Group's net income for the fourth quarter 2005 included a net unrealized after-tax gain of $27 million associated with the mark-to-market effect of non-qualifying hedges. The results of last year's fourth quarter included a net unrealized after-tax loss of $2 million associated with the mark-to-market effect of non-qualifying hedges.

Excluding the mark-to-market effect of non-qualifying hedges, FPL Group's earnings would have been $179 million, or $0.46 per share for the fourth quarter of 2005, compared with $175 million, or $0.47 per share, in the fourth quarter of 2004. [ more ]

FPL fourth-quarter profit rose on gains related to hedges, though earnings were reduced by damages from Hurricane Wilma. Excluding the hedging gains they earned 46 cents a share. The average forecast of analysts was 40 cents. The stock should open up strongly this morning.

December 14, 2005

FPL Group in Talks to Buy Constellation Energy Group

fpl_logo.gifFPL Group Inc (FPL) is currently in the advanced stages of negotiations to acquire Constellation Energy Group (CEG). An FPL-Constellation merger would create a giant East Coast-based utility with a market capitalization, based on Tuesday's closing stock prices, of $26.97 billion - $16.93 billion for FPL and $10.04 billion for Constellation.

Constellation Energy Group is based out of Baltimore Maryland and is the holding company for Baltimore Gas and Electric. They also have an extensive presence in the wholesale power supply and generation business. The Power Generation Division currently uses 4.6% alternative sources for power generation.


FPL has a strong commitment to alternative energy generation and is one of the largest utilities in the US utilizing extensive wind farms. CEG has a large footprint in Nuclear power generation and the combination of these two companies would make a top-tier producer of power generation for the East coast markets and a potential of 30,000 megawatts of power generation. CEG also gives FPL the ability to enter the wholesale supply side of the power generation business.

Typically you would see shares of the acquiring company down and shares of the acquired company up with this type of announcement. The market is liking this potential merger and CEG is up over 7% and FPL is also trading up 0.6% this morning.

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