August 06, 2014

No Longer Just Growth: Investing in Renewable Energies for Yield

by Robert Muir

Given the determined investor quest for yield as the Federal Reserve maintains the benchmark Federal Funds rate at zero, and the resurgence of attention being paid to alternative energy generation, mainly solar, and to a lesser extent wind and hydro, it’s no wonder Yield Co’s have gained so much investor interest lately. In the near to mid-term, the enthusiasm may be justified. Supported by Power Purchase Agreements, energy infrastructure financing and leasing contracts, and electricity transmission and distribution concessions, all with credit-worthy counter-parties, Yield Co’s are designed specifically to pay out a large portion of their EBITDA to shareholders in the form of dividends. By virtue of their steady cash flow and above market yields, these companies are often viewed by investors as relatively safe and stable, similar to high yielding traditional utilities, and their shares tend to trade with low volatility and beta.

Structured as they are to generate and pay out cash flow to investors these firms are to a large extent valued on both current yields and their anticipated ability to maintain and increase future dividends. Therefore vigorous deal flow and a robust acquisition pipeline are key. I'm most in favor of Yield Co’s that are direct spin offs and by contract have Right of First Offer (ROFO) on any projects developed by the parent. The other very important factor I consider is financing. I like to see structured debt financing at attractive rates that is properly engineered into the financial metrics of the acquisition. I tend to avoid Yield Co’s that finance development projects and acquisitions with the issuance of new equity.

Green Alpha Advisors holds Yield Co’s in some of our portfolios. One I particularly like is Pattern Energy Group (PEGI). PEGI has the ability to expand it MW production capacity, and therefore grow its revenues and cash available for distribution, through a solid pipeline for identified projects from Pattern Development on which it has ROFO, while also being able to consider beneficial third party project acquisitions. It will benefit through 2016 from the Federal Renewable Electricity Production Tax Credit. PEGI currently holds only wind capacity generation in its portfolio but management is open to adding solar as well. The company has a stated goal of increasing its cash available for distribution by 10-12% annually and increasing its dividend by 12% annually over next 3 years. With a current yield of 4.10%, and an annual dividend of $1.31, PEGI is currently fairly priced at around $32.00. Its forward performance estimates are trending nicely, with estimated full year revenue growth of 25.5% in 2014 and 35% in 2015 and estimated full year EPS growth of 32.8% in 2014 and a whopping 133% for 2015. Both its Price to Book and Price to Cash Flow are estimated to trend lower in 2014 and 2015. Its EV/EBITDA valuation ratio is high, but not relative to its superior EBITDA, and its EV/EBITDA vs. EBITDA ratio is markedly more attractive than many of its competitors. PEGI seeks to pay out 80% of EBITDA, and if the company performs as estimated it should be able to meet both that benchmark and its dividend growth targets. If the company does meet those growth targets its annual dividend in 2017 will be $1.67. All things being equal, if the yield were to remain at 4.1% that would potentially make for a 2017 price of $40 a share. Inversely, if the price were to stay close to $32.00, the 2017 yield will have ballooned to 5.2%.

     While acknowledging many positives, I do see some risk in owning shares in these firms. Firstly, Yield Co’s stock valuations, like traditional dividend paying utilities, often considered bond proxy’s, or any high yield investment instrument for that matter, have negative exposure to a rising interest rate environment. A seven, six, or even five percent yield might seem extremely attractive when the Ten Year U.S. Treasury Note is yielding just 2.52%, but if or when benchmark interest rates return to more historical norms income investors may not be willing to pay today’s prices for shares with those same yields. To offer some context, in 1995 the Fed Funds rate was 5.5%. In the minutes from the most recent Federal Reserve meeting, released on July 9th, FOMC members anticipated the fund rate will be at 1% in 2015, 2.5% in 2016, and 3.75% in the longer term. To preserve share prices in a rising interest rate environment Yield Co’s will need to be able to increase their dividends commensurately.

Also, as the number of publicly listed renewable energy Yield Co’s has risen, the demand from these firms to secure renewable electricity generation projects has also spiked, leading to less attractive pricing and revenue metrics on third party, competitive bid acquisitions.

Another potential risk that Yield Co’s face, albeit in the longer term, is the threat to the traditional “Hub and Spoke” electricity generation and distribution model. This is far and away the model of the majority of the holdings in Yield Co portfolios. As the generation and storage technologies that will bring about distributed and eventually autonomous energy production advance this utility model will become increasingly less economically viable. I know of only a handful of Yield Co’s at this time, NRG Yield Inc. (NYLD), Hannon Armstrong Sustainable Infrastructure Capital, Inc. (HASI), and TerraForm Power, Inc. (TERP), that have distributed solar assets in their current portfolio of holdings. This is clearly a longer term concern and doesn’t affect my near term analysis of the space or any individual companies. However, it is something I will continue to monitor.

In my view Yield Co’s clearly have a role to play in any diversified equity investment model, particularly one designed to generate dividend income.
                                                                                                                      
Disclosure and Sources:

Green Alpha Advisors is long PEGI and HASI, and has no position in NYLD or TERP.  Data on PEGI is sourced from Thomson Reuters as of 08/05/2014.  This information is for information purposes only and should not be construed as legal, tax, investment or other advice.  This information does not constitute an offer to sell or the solicitation of any offer to buy any security.  Some of the information contained herein constitutes “forward-looking information” which is based on numerous assumptions and is speculative in nature and may vary significantly from actual results.  Green Alpha is a registered trademark of Green Alpha Advisors, LLC.

About The Author

Robert Muir is a Partner and Senior Vice President at Green Alpha Advisors, LLC. He is a member of the Shelton Green Alpha Fund (NEXTX) Investment Committee.  An earlier version of this article was first published on Green Alpha's Next Economy blog.

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Oil and Gas




August 05, 2014

Ten Clean Energy Stocks For 2014: August Update

Tom Konrad CFA

July was a hard month for the stock market and clean energy stocks in particular.  My broad market benchmark of small cap stocks, IWM,  fell 7% and is down 2.7% for the year, while my clean energy benchmark PBW fell 9% and has slid into the red for the first time.  It is down 0.1% for the year to date.  The mostly defensive stocks in my 10 Clean Energy Stocks for 2014 model portfolio fared relatively well, but they were still down 2% for the month.  For the year to date, the model portfolio has held up well, with a total return of 4.8%.

(Note that the monthly numbers are for July 3rd to August 5th, and the YTD numbers are from December 26th to August 5th.  I use numbers as of when I have time to write, rather than strict month-end in order to make these updates as timely as possible.)

10 for 14 - Aug.png

Individual Stock Notes

(Current prices as of August 5th, 2014.  The "High Target" and "Low Target" represent my December predictions of the ranges within which  these stocks would end the year, barring extraordinary events.)

1. Hannon Armstrong Sustainable Infrastructure (NYSE:HASI).
12/26/2013 Price: $13.85.     Low Target: $13.  High Target: $16.  Annualized Dividend: $0.88.
Current Price: $13.57.  YTD Total US$ Return: 1.2

Sustainable Infrastructure REIT Hannon Armstrong has fallen fairly sharply in recent weeks, on minimal news.  The company announced a deal to finance home solar projects for Sunpower (NASD:SPWR) which I would expect to have a small positive effect on the stock price.  I find the decline puzzling, but consider it a buying opportunity.  Although Hannon Armstrong is already my largest holding, I recently sold some $12.50 March 2015 puts.

If there is trouble that the market knows about but I don't, you can find out when HASI reports second quarter earnings on August 11th.  I'll find out when I come back from a week long backpacking trip on the 16th, but I'm not worried.

For readers wanting a detailed overview of HASI all in one place, an excellent one just came out on Seeking Alpha.

2. PFB Corporation (TSX:PFB, OTC:PFBOF).
12/26/2013 Price: C$4.85.   Low Target: C$4.  High Target: C$6. 
Annualized Dividend: C$0.24.
Current Price: C$4.36. YTD Total C$ Return: -7.6%.  YTD Total US$ Return: -9.7%

Green building company PFB has been declining as well, also for unknown reasons.  Second quarter results were better than the previous year, with higher earnings and profit margin.

3. Capstone Infrastructure Corp (TSX:CSE. OTC:MCQPF)
.

12/26/2013 Price: C$4.44.   Low Target: C$3.  High Target: C$5.  
Annualized Dividend: C$0.30.
Current Price: C$4.46.  YTD Total C$ Return: 33.5% .  YTD Total US$ Return: 30.5%

Independent power producer Capstone Infrastructure held steady throughout the month, without significant news.  The gain for the month arose from the payment of its regular C$0.075 quarterly dividend.

4. Primary Energy Recycling Corp (TSX:PRI, OTC:PENGF).
12/26/2013 Price: C$4.93.   Low Target: C$4.  High Target: C$7. 
Annualized Dividend: US$0.28. 
Current Price: C$6.00.  YTD Total C$ Return: 24.4% .  YTD Total US$ Return: 22.3%

Waste heat recovery firm Primary Energy announced a regular quarterly dividend of 7¢ US to holders of record on August 15th. but there was no other significant news.  The gain shown here was mostly a big jump at the close today (Aug 5th.) It might just be a blip (the stock is thinly traded), or there may be trading based on rumors of some real news about to be announced.

Update: The jump seems to be due to the immanent acquisition of Primary Energy by Fortistar.  The Wall Street Journal reported that a deal was "near" shortly after the close.

5. Accell Group (Amsterdam:ACC [formerly ACCEL], OTC:ACGPF).
 
12/26/2013 Price: €13.59.  Annual Dividend €0.55 Low Target: 11.5.  High Target: €18.
Current Price: €13.90. YTD Total  Return: 6.3% .  YTD Total US$ Return: 3.5% 

Bicycle manufacturer and distributor Accell Group reported strong results for the first half of the year, and said it expects the strength to continue in the second half.  Since the company resets its dividend annually based on profits, we can expect next year's dividend to be significantly higher than this year's €0.55. The company has been streamlining its operations discontinuing its relatively unprofitable mass market bicycles, and focusing on its higher end models.  The company also sold its small fitness unit.  Both of these moves mean that Accell will be better able to capitalize on its leadership in e-bikes as the market for assisted pedaling continues to grow rapidly.

6. New Flyer Industries (TSX:NFI, OTC:NFYEF).
12/26/2013 Price: C$10.57.  Low Target: C$8.  High Target: C$16. 
Annualized Dividend: C$0.585.
Current Price: C$12.89.  YTD Total C$ Return: 25.2% .  YTD Total US$ Return: 22.3%.

Leading transit bus manufacturer New Flyer will announce second quarter results about the same time this will be published on August 5th.  The market expects good news, if price action is any indication.

7. Ameresco, Inc. (NASD:AMRC).
12/26/2013 Price: $9.64Low Target: $8.  High Target: $16.  No Dividend.
Current Price: $7.58  YTD Total US$ Return: -21.4%.

The stock of energy performance contracting firm Ameresco jumped in response to its second quarter results on July 31st.  Although the company did not raise its guidance for the year, management's tone regarding the market for its services was very positive.  This was a big change after two years of mostly negative surprises caused by customers delaying and scaling back projects. 

Management also noted that they may be able to upgrade some of their existing landfill gas plants to take advantage of new rules allowing higher quality landfill gas to qualify for the incentives designed to encourage cellulosic biofuels.

8. Power REIT (NYSE:PW).
12/26/2013 Price: $8.42Low Target: $7.  High Target: $20.  Dividend currently suspended.
Current Price: $8.95 YTD Total US$ Return: 6.3%

There was no significant news for solar and rail real estate investment trust Power REIT.

9. MiX Telematics Limited (NASD:MIXT).
12/26/2013 Price: $12.17Low Target: $8.  High Target: $25.
No Dividend.
Current Price: $9.86. YTD Total ZAR Return: -12.3%. YTD Total US$ Return: -15.8%

Global provider of software as a service fleet and mobile asset management, MiX Telematics did not report any significant news.

10. Alterra Power Corp. (TSX:AXY, OTC:MGMXF).
12/26/2013 Price: C$0.28. Low Target: C$0.20.  High Target: C$0.60. No Dividend.
Current Price: C$0.315   YTD Total C$ Return: 12.5% .  YTD Total US$ Return: 9.9%.

Renewable energy developer and operator Alterra Power gave updates on its uninterrupted progress on its Jimmie Creek run-of-river hydro and Shannon Wind projects, as well as a loan it is negotiating to finances those investments.  It expects to close on the loan in the third quarter.

Two Speculative Clean Energy Penny Stocks for 2014

Ram Power Corp (TSX:RPG, OTC:RAMPF)
12/26/2013 Price: C$0.08.  Low Target: C$0.00.  High Target: C$0.22. No Dividend.
Current Price: C$0.02   YTD Total C$ Return: -75% .  YTD Total US$ Return: -75.5%
Terminal US$ Return -57% (when I said to sell on June 3rd.)

Geothermal power developer Ram Power's stock continued to slide since the company has not announced any progress in negotiation with its creditors. 

Finavera Wind Energy (TSX-V:FVR, OTC:FNVRF). 
12/26/2013 Price: C$0.075.  Low Target: C$0.00.  High Target: C$0.22. No Dividend.
Current Price: C$0.11   YTD Total C$ Return: 46.7% .  YTD Total US$ Return: 43.3%.

Wind project developer Finavera received the final payment from Pattern Energy Group (NASD:PEGI) for its Miekle Wind project.  This follows the announcement of the sale of its 10% stake in Cloosh Wind project in Ireland.  Comparing the announced payments to my March estimates, the Cloosh payment was at the low end of my expected range, but the Miekle payment was towards the high end.  All together, I estimate Finavera's net cash per share is at least twice the current stock price of C$0.11.

The company now has cash to more than settle all its outstanding liabilities, and will provide details of its long-awaited strategic plan in advance of the Company's annual general meeting on September 12th.  The company's CEO, Jason Bak, says that the reason it has taken so long to present this plan to shareholders was courtesy to its potential partners, who did not want to publicly commit to the plan until the money was available to implement it.

If shareholders do not like the plan when they find out what it is, Bak has previously said that we will have the option of voting for the strategic plan or for returning the cash to shareholders.

Conclusion

Although the market pulled back in July, earnings announcements for these picks have generally been positive.  This is especially for Ameresco, where two years of disappointments seem to be ending, and Accell Group which is showing the benefits of a couple years of reorganization into a leaner, more focused operation.

In addition to the good news in the main portfolio, speculative pick Finavera seems to be on the cusp of paying off more than enough to compensate for the losses realized in June on the other speculative pick, Ram Power.

Disclosure: Long HASI, PFB, CSE, ACC, NFI, PRI, AMRC, MIXT, PW, AXY, FVR, PEGI.  

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 01, 2014

Solazyme: Return On Dream (and ROI Next Year)

Jim Lane solazyme logo 

Signature AkzoNobel deal expansion highlights Solazyme’s Q2 results.

But there’s something more to this company than the cash that sustains it, though sustain it cash does, and necessarily so.

In California, Solazyme (SZYM) and AkzoNobel announced that they have expanded their multi-year agreement with supply terms targeting 10,000 MT annually of algal oils for a new proprietary surfactant and with funding for the joint-development. The parties said that they expect Solazyme’s algal oil to replace both petroleum- and palm oil-derived chemicals. Product development is expected to commence immediately, and the parties anticipate entering into a definitive supply agreement as they near completion of product development.

At the same time, Solazyme announced a net loss for the quarter of $42.9M on Q2 revenues of $15.9M. For Q2 2013, the company lost $25.8M on revenues of $11.2M.

The 43% revenue jump

In May, Solazyme’s joint venture with Bunge (BG) started producing commercially saleable products at the Solazyme Bunge Renewable Oils plant in Brazil and has subsequently begun shipping. Both oil and encapsulated lubricant, Encapso, products have been manufactured using full-scale production lines that include the 625,000L fermentation tanks. In addition, Solazyme expanded its customer base and increased total output by >40% from Q1 2014 to Q2 2014 at its Clinton/Galva processing facility in Iowa.

Reviewing the commercial highlights

Highlights include:

  • AlgaVia brand launched at the International Food Technology (IFT) Food Expo, Solazyme’s High Stability High Oleic oil won a prestigious 2014 IFT Innovation Award, and Solazyme added key food ingredient customer, and distribution agreements. Solazyme secured an important new AlgaVia Whole Algal Flour customer, and also signed agreements with two of the top North American food ingredient distributors to meet demand in the US and Mexico.
  • Signed agreement with a leading North American oleochemicals company to commercialize microalgae-derived oleic acids. The agreement is to commercialize kosher certified high oleic algal oils for the oleic fatty acid market. The Soleum base oils, the company says, offer “performance, safety and sustainability.”

Solazyme’s progress

The Solazyme view

“Solazyme made important progress in the second quarter on its commercialization path,” said Jonathan Wolfson, CEO of Solazyme. “We are now manufacturing product in three facilities on two continents. We are shipping multiple oils and have increased production volumes out of our Clinton/Galva, Iowa operations, and we have begun production and shipment from the Solazyme Bunge Renewable Oils plant in Brazil. We are also building commercial momentum, including an expanded multi-year agreement with AkzoNobel involving funded joint development and targeting up to 10,000 MT of oil per year.

“In food ingredients, we launched our AlgaVia brand and won the highly prestigious IFT Food Expo innovation award. We have more work ahead as we progress on our production ramps and continue to build our commercial pipeline, but I believe we have the products, the plants, the capital and the team to execute moving forward.”

“We are continuing to drive fiscal discipline and balance sheet management as we ramp our capacity and focus on delivering products to our customers,” said Tyler Painter, CFO and COO of Solazyme. “We achieved a number of milestones this quarter and continue to strengthen our sales and market application efforts across our targeted markets.”

View from The Street: Bear side, Mike Ritzenthaler, Piper Jaffray

Initial commercial volumes at Moema prove anticlimactic on limited commentary. The framework (non-binding) collaboration expansion with AkzoNobel announced on the call is for up to 10 kMT/yr, and even if converted to a binding sale agreement, still leaves the majority of the 100 kMT capacity unsold. We believe that, ultimately, low sales volumes and high fixed costs will beget poorer than expected economics in an effort to secure volumes. We remain concerned about the alarming cash burn rate, the very limited visibility/obfuscation into tangible production metrics (in order to gauge the underlying health of the ramp), and lack of firm off-take agreements in place, in addition to the standard start-up risks that we have outlined previously. Maintain Underweight rating and $4 target.

View from The Street: Bull side Rob Stone, Cowen & Company

Q2 financial results missed the St., impacted by plant startup and 1x expenses. However, revenue grew 29% Q/Q, shipping customers increased 50%, the AkzoNobel partnership was extended, Encapso is expanding outside N. America, an important food ingredient customer was signed, and Algenist added customers and countries. Revenue grew Q/Q in every segment: Algenist $6MM (+21% Y/Y, 22% Q/Q), funded R&D $6.9MM (+10% Y/Y, +37% Q/Q), chemicals, fuels and nutrition $3MM (vs. $0 last year, +26% Q/Q). At Clinton there are 15 Customers (vs. 10) and 75 Qualifying; Algenist +40% Store Count. Maintain Outperform rating and $18 price target.

View from The Street: Bull side Pavel Molchanov, Raymond James

“The key inflection point for scale-up is materializing in 2014. The balance sheet is also in great shape, with by far the largest cash balance in the peer group, implying optionality of yet-to-be-disclosed growth initiatives. The adjusted loss per share of $(0.43) was below our estimate of $(0.37) and consensus of $(0.36), the delta coming from higher operating expenses, same as in 1Q. Total revenue of $15.9 million was exactly in line, with upside in R&D revenue offsetting slightly slower-than-expected growth in product sales. The latter, while not increasing quite as rapidly as we had modeled, rose 84% y/y (and 23% q/q) to a new record. This was the second quarter with sales from the Clinton plant, where output jumped 40% q/q.

Clinton customer count rises to 15. January marked the first of Solazyme’s major scale-up milestones, as production began at the Clinton, Iowa plant, built with Archer Daniels Midland. Production will ramp over 12 to 18 months until reaching nameplate capacity of 20,000 metric tons per year. Product from Clinton has been shipped to 15 customers to date, up from 10 in 1Q, and another 75 industrial customers (an impressively long list) are prequalifying product. Positive cash flow on deck for 2015. Outperform 2 – Target price = $12.50;

The Digest view

You get a lot of insight from Solazyme’s progress as to the general direction of the industry. Consider this cool chart from Cowen & Co’s Rob Stone:

Screen Shot 2014-07-31 at 6.18.02 AM

The key takeaways, in our view:

1. Ramping capacity and utilization are the story for 2014-17. The company has gone from less than 20,000 metric tons last year (and less than 1 million tons less than four years ago) to a projected 401,000 metric tons by 2017. Utilization is modeled to grow to 85% by 2017.

2. Multiple product lines and application sectors. Algenist skin care products started the company on its road to revenue and profit. It remains a dominant product along with R&D revenue even by 2014. Despite strong YoY growth rates, it is expected to be swamped by fuels and chemicals by 2017, which by then would represent 65% of the revenues.

3. Higher margins in personal care and skin creams.

4. It will have taken 14 years from start-up to $1B in revenues.

The Bottom line

Look at that AkzoNobel announce — tailored algal oils will be replacing not only dread petroleum but (for some) dread palm oil. Up until now, the alternatives have been to pay one heck of a lot more to use an alternative, or simply stop consuming a given product in order to show support. Look how the equation has changed. And that’s not exactly Ed Begley Jr. embracing a new world order – that’s AkzoNobel.

Consider where they are making this product. Anywhere you can grow sugars in reasonable quantities. It happened to be Iowa and Brazil. It could have been sugarbeets in Idaho or Russia, or sugarcane in India or Pakistan or Angola, or ultimately synthetic sugars made by companies like Proterro wherever you can find water and CO2 in concentrated quantities. Any country could have capacity — everyone has access to the riches of the new world.

Because the new world doesn’t consist any more of somewhere you sail to. It’s found within. You don’t have to grab some advantaged geography rich in mineral wealth, to be pumped or dug out of the ground until the country’s wealth is exhausted. It’s not renewable oil, it’s renewable wealth, and distributed opportunity.

A number of years ago, Solazyme put this graphic out. It remains a Digest favorite — just a simple graphic that shows all the places where renewable products touch and change everyday lives.

Solazyme-infographic-jpg

Now, investors will see things through a slightly different lens — not just a case of making a difference, but making one with an attractive yield at an attractive rate of return. Rate matters. They would, for example, measure Van Gogh’s Starry Starry Night by the metric of a financial return. There is more to life than the cash that sustains it, though sustain it cash does, and necessarily so.

Solazyme just changed the world. It happened in your lifetime, you got to see it. Lucky you.

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.

July 31, 2014

EU, LDK & Suntech Undermine Solar Recovery

Doug Young 

The war of words against Chinese solar panel makers is heating up from both sides of the Atlantic, with growing signs that Europe may reconsider anti-dumping duties as the US moves closer to imposing its own new duties on the beleaguered manufacturers. Meantime, 2 of the biggest Chinese victims of the sector’s recent turmoil have risen from the ashes, with LDK (OTC:LDKSY) and Suntech (OTC:STPFQ) both announcing new moves more than a year after each became insolvent. Among those 2 moves, LDK’s looks the most worrisome, potentially bringing major new volumes of polysilicon, the main ingredient in solar panel production, back into a market whose current recovery is still quite weak.

All of these separate developments show the solar industry has yet to reach a new state of stability, and that such a new equilibrium could still be years away as market and government forces intermingle to keep the sector in a state of uncertainty. The latest destabilizing forces began late last week in the US, as Washington moved one step closer to imposing new anti-dumping duties on Chinese panels. (English article) That move was largely expected and aimed at closing a loophole in an earlier ruling, and drew the usual howls of protest from Beijing and most of the country’s major solar panel makers. (English article)

In a new and similar development from Europe, a major local trade group is blasting a compromise agreement reached between China and the EU last year that averted a similar trade war. (English article) I’ll admit I don’t completely understand the logic in the new sounds of dissatisfaction coming from EUProSun, a group that represents about 40 percent of EU solar panel makers, including Germany’s outspoken SolarWorld (Frankfurt: SWVKk, OTC: SRWRF).

But the bottom line is that the European manufacturers believe that last year’s landmark compromise agreement isn’t working. These latest protests come just over a month after the European panel makers previously complained that their Chinese rivals were finding loopholes to evade terms of the same compromise agreement. (previous post)

If there’s any truth to the European complaints, which seems likely, it could soon become difficult for the European Trade Commission to ignore the situation as more local companies struggle and even go bankrupt. Europe’s trade commissioner previously wanted to impose anti-dumping tariffs on the Chinese panel makers similar to those from the US, and was only prevented from doing so after several major EU leaders intervened to seek a compromise solution. Thus if the compromise really isn’t working, the EU could easily reopen its investigation into unfair state support for the Chinese panel makers and impose punitive tariffs as soon as by the end of this year.

Meantime, let’s look quickly at the latest news bits from LDK and Suntech, 2 former sector leaders that both went bankrupt and are just now starting to regroup and resume business after major reorganizations. The most worrisome of the news bits says that LDK is planning to restart a long-idled plant making polysilicon, the main ingredient used to make solar panels. (Chinese article) The massive 10 billion yuan ($1.6 billion) plant had been idled for 2 years, and its return to the market will inevitably put pressure on global polysilicon and panel prices.

Suntech’s news looks a bit more benign, and will see the company open a subsidiary to serve South Africa. (company announcement) The move is one of the first major ones by Suntech since its primary assets were acquired last year by Hong Kong-listed Shunfeng (HKEx: 1165), which is now trying to move ahead with the well-known Suntech name. An aggressive new Suntech in the solar market could also undermine the sector’s recent stabilization, hinting at turbulent times ahead for the sector for the rest of this year and into 2015.

Bottom line: The EU is likely to reopen an anti-dumping probe into Chinese solar panel makers and impose punitive tariffs, while new moves by Suntech and LDK will further undermine the sector’s recovery.

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

July 30, 2014

New Tariffs Likely To Raise US Solar Prices

Jennifer Runyon

The US Department of Commerce announced preliminary findings in the new trade case against Chinese and Taiwanese PV products.

On Friday evening the U.S. Department of Commerce (DOC) announced its preliminary findings in the antidumping duty (AD) investigations of imports of some crystalline silicon PV products from China and Taiwan. Most solar products entering the U.S. market from China and Taiwan will now face import duties.

According to a fact sheet released by the DOC, the AD law “provides U.S. businesses and workers with a transparent and internationally accepted mechanism to seek relief from the market-distorting effects caused by injurious dumping of imports into the United States. The DOC believes that this creates  “an opportunity [for U.S. businesses] to compete on a level playing field.”

The DOC has prelimarily determined that “certain crystalline silicon photovoltaic products from China and Taiwan have been sold in the United States at dumping margins ranging from 26.33 to 58.87 percent, and 27.59 to 44.18 percent, respectively and will be collecting tariffs on the following manufacturers in the following amounts. The tariffs will be collected immediately, although final determinations will not be made until December.

From China:

  • Trina Solar (TSL) – 26.33 percent
  • Rensola (SOL) and Jinko (JKS) – 58.87 percent
  • Suntech (STP) – 42.33 percent
  • Another 42 unspecified manufactures – 42.33 percent
  • China-wide entity (those who didn’t respond to the DOC’s questionnaire) -165.04 percent

From Taiwan:

  • Gintech – 27.69 percent
  • Motech – 44.18 percent
  • All others 35.89 percent

The ruling is inclusive of many pieces of the solar manufacturing puzzle.  According to the DOC fact sheet it includes the following:

Crystalline silicon photovoltaic cells, and modules, laminates and/or panels consisting of crystalline silicon photovoltaic cells, whether or not partially or fully assembled into other products, including building integrated materials.

For purposes of this investigation, subject merchandise also includes modules, laminates and/or panels assembled in the subject country consisting of crystalline silicon photovoltaic cells that are completed or partially manufactured within a customs territory other than that subject country, using ingots that are manufactured in the subject country, wafers that are manufactured in the subject country, or cells where the manufacturing process begins in the subject country and is completed in a non-subject country.

Subject merchandise includes crystalline silicon photovoltaic cells of thickness equal to or greater than 20 micrometers, having a p/n junction formed by any means, whether or not the cell has undergone other processing, including, but not limited to, cleaning etching, coating, and/or addition of materials (including, but not limited to, metallization and conductor patterns) to collect and forward the electricity that is generated by the cell.

Thin-film PV will not face tariffs.  Also excluded are any products that are covered by the existing antidumping and countervailing duties as well as PV cells not exceeding 10,000 mm2 in surface area that are integrated into consumer goods who function to power that consumer good (like a solar-powered calculator).

The DOC estimates that in 2013, the value of solar PV products imported from China and Taiwan was $1.5 billion and $656 million, respectively.

U.S. Industry Reacts

SolarWorld (SRWRF), the solar petitioner in the case against China and Taiwan, commended the DOC’s determination.

“We and our workers are very gratified to hear that the U.S. government once again has moved to block foreign government interference in our economy and clear the way for the domestic production industry to be able to compete on a level playing field,” said Mukesh Dulani, president of SolarWorld Industries America Inc.  “We should not have to compete with dumped imports or the Chinese government.  Today’s actions should help the U.S. solar manufacturing industry to expand and innovate.”

Jigar Shah, president of the Coalition for Affordable Solar Energy (CASE) released a statement calling the determination “another unnecessary obstacle” that he said will “hinder the deployment of clean energy by raising the prices of solar products.”

He said: “Due to these tariffs, previously viable projects will go unbuilt, American workers will go unhired and consumers that could have saved money through solar energy may not be able to benefit.”   

CASE maintains that America’s solar manufacturers are strong and are providing jobs for 29,000 U.S. workers.  In addition almost 100,000 Americans are employed downstream in the system installation, sales, distribution and project development sectors.

The coalition collected the following statements from some of its members:

Ron Corio, President of Array Technologies, based in Albuquerque, NM and representing over 100 jobs said: “As a U.S. solar manufacturing company, we’re very disappointed in today’s anti-dumping determination. By increasing the price of solar power through tariffs, SolarWorld is shrinking the market for our products here in the United States and punishing successful U.S. solar businesses. Our company is proof that American solar manufacturing jobs will decrease under these special trade protections.”

John Morrison, COO of Strata Solar, based in Chapel Hill, NC and representing over 1,000 jobs said: “Due to their scale, the utility and large commercial solar sectors are particularly sensitive to the uncertainty and price increases caused by these tariffs. Until this dispute is resolved, our industry will build fewer projects and install less solar. It’s time to end the litigation, negotiate a solution and put more Americans back to work.”

Ocean Yuan, Founder and CEO of Grape Solar, based in Eugene, OR said: “My company assembles and sells complete solar energy kits directly to customers and in major retail stores across the country. The number one reason customers cite when switching to solar energy is cost savings, but these misguided tariffs are inflating prices. A negotiated solution to this dispute will ensure the continued growth of our industry and small businesses like mine.”

Chinese Industry Reacts

In an interview with Bloomberg news, Sebastian Liu, director of Investor Relations at Jinko Solar said that top Chinese manufacturers would elect to pay the 2012 duties without using cells from Taiwan or a third-country. Jennifer Liang, a Taipei-based analyst from KGI Securities Co told Bloomberg that the duties would hurt producers from Taiwan the most.

Taiwanese solar stocks including Motech, Gintech, E-Ton Solar and Neo Solar dropped in reaction to the news, said Bloomberg.

Organizations Urge a Settlement

CASE’s Shah believes that SolarWorld should work with the U.S. solar industry to end litigation “in favor of a win-win solution like the Solar Energy Industries Association (SEIA) settlement proposal.”

He said that CASE members represent the industry majority and that they “demand a solution that ends uncertainty in the marketplace by preventing further trade litigation and that allows solar power to compete cost-effectively with traditional energy sources, thus enabling the market’s further growth.”

Rhone Resch, president and CEO of SEIA echoed Shah. “Enough is enough. The Department of Commerce continues to rely on an overly broad scope definition for subject imports from China, adversely impacting both American consumers and the vast majority of the U.S. solar industry,” Resch said. “We strongly urge the U.S. and Chinese governments to ‘freeze the playing field’ and focus all efforts on finding a negotiated solution. This continued, unnecessary litigation has already done serious damage, with even more likely to result as the investigations proceed.”

Resch believes that a “win-win” solution is still achievable. “As the old saying goes, ‘where there’s a will, there’s a way.’ Today, the parties are finally engaged and all sides seem committed to finding a negotiated solution. I am encouraging my U.S. and Chinese industry colleagues to roll-up our sleeves, work together, and find a deal that’s good for everyone,” he said.

For more discussion about U.S. trade relations, play the video below.

Timeline for Next Steps

Final determination of the AD investigation is expected on December 15, 2014. If that final determination is affirmative then the International Trade Commission will issue its final determination on January 29, 2015 and the order will be issued on February 5, 2015.

Jennifer Runyon is chief editor of RenewableEnergyWorld.com and Renewable Energy World magazine, coordinating, writing and/or editing columns, features, news stories and blogs for the publications. She also serves as conference chair of Renewable Energy World Conference and Expo, North America. She holds a Master's Degree in English Education from Boston University and a BA in English from the University of Virginia.

This article was originally published on RenewableEnergyWorld.com, and is republished with permission. 

July 29, 2014

Velocys Thinking Big with Microreactors

by Debra Fiakas CFA

Keep the applause down!  Contain your enthusiasm for yet another biomass- or gas-to-liquids company.  Over the past several weeks I have written about a number of privately-held developers of one technology or another intended to produce a drop-in renewable fuel from biomass or natural gas.  There are more,  In this post we check in on Velocys (VCL:  London), which stands out from the rest as a public company.  No matter that it's technology looks like that of the very next renewable fuel company, it is accessible to minority investors.

Until recently Velocys was known as Oxford Catalyst Group, a name that perhaps better describes the technology behind the company.  Velocys has developed a small-scale modular plant that can be deployed in remote locations where stranded natural gas or waste biomass can be found.  Velocys uses the conventional steam reforming and Fischer Tropsch processes, but has added a twist it calls ‘microchannel reactors’ where it deploys a proprietary catalytic effect.  The microchannels, with reduced dimensions, intensify the chemical reactions and deliver greater efficiencies than conventional Fischer Tropsh and steam reforming processes.

The company recorded the first commercial sales of its microchannel reactors in the year 2013.  An important market for Velocys is the oil and gas industry, needs to capture and upgrade stranded gases rather than burning them off in the oil field.  Primus Green Energy, which was discussed in the July 15th post “Primus Wants to Clean up Fossil Fuels” and is also targeting this market with its version of  steam reforming.

The company has some interesting partnerships to help penetrate commercial markets:  waste handler Waste Management (WM:  NYSE) and power generator Pinto Energy.  Velocys has a joint venture with Waste Management in Oklahoma, where the company expects to locate a plant next to one of Waste Management landfills.  Final permits have been submitted and approvals are expected in 2014.

Just as this article was being prepared, Velocys announced its intention to acquire its partner Pinto Energy in a gas-to-liquids project near the Port of Ashtabula in Ohio.  The project is expected to receive final permits yet in 2014 and then convert natural gas from the Marcellus shale region to liquid gas.  Velocys claims Pinto Energy has a string of similar projects in its pipeline.  If that is the case there should be a nice step up in value after the all-stock deal is completed.

Velocys shares traded down on news of the Pinto Energy acquisition.  Perhaps investors would rather see the company report its first profits.  Still investors, even those who have not considered a London Exchange listed company, should take note of VLS.L.  There is some concern about the benefits of switching to natural gas from an environmental standpoint.  Make no mistake about it, natural gas is still a fossil fuel.  However, compared to coal it has some merits.  What is more gas-to-liquids could serve as a valuable interim fuel source for U.S. transportation transitions away foreign oil and gas to electric or another more environmentally friendly fuel source.  What is more, Velocys technology does help clean up one of the dirtier elements of the oil and gas industry  -  burning off waste gases into the atmosphere.

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, 2014

The Utility Death Spiral: Beyond The Rhetoric

by Lynne Kiesling

Unless you follow the electricity industry you may not be aware of the past year’s discussion of the impending “utility death spiral”, ably summarized in this Clean Energy Group post:

There have been several reports out recently predicting that solar + storage systems will soon reach cost parity with grid-purchased electricity, thus presenting the first serious challenge to the centralized utility model. Customers, the theory goes, will soon be able to cut the cord that has bound them to traditional utilities, opting instead to self-generate using cheap PV, with batteries to regulate the intermittent output and carry them through cloudy spells. The plummeting cost of solar panels, plus the imminent increased production and decreased cost of electric vehicle batteries that can be used in stationary applications, have combined to create a technological perfect storm. As grid power costs rise and self-generation costs fall, a tipping point will arrive – within a decade, some analysts are predicting – at which time, it will become economically advantageous for millions of Americans to generate their own power. The “death spiral” for utilities occurs because the more people self-generate, the more utilities will be forced to seek rate increases on a shrinking rate base… thus driving even more customers off the grid.

A January 2013 analysis from the Edison Electric Institute, Disruptive Challenges: Financial Implications and Strategic Responses to a Changing Retail Electric Business, precipitated this conversation. Focusing on the financial market implications for regulated utilities of distributed resources (DER) and technology-enabled demand-side management (an archaic term that I dislike intensely), or DSM, the report notes that:

The financial risks created by disruptive challenges include declining utility revenues, increasing costs, and lower profitability potential, particularly over the long term. As DER and DSM programs continue to capture “market share,” for example, utility revenues will be reduced. Adding the higher costs to integrate DER, increasing subsidies for DSM and direct metering of DER will result in the potential for a squeeze on profitability and, thus, credit metrics. While the regulatory process is expected to allow for recovery of lost revenues in future rate cases, tariff structures in most states call for non-DER customers to pay for (or absorb) lost revenues. As DER penetration increases, this is a cost recovery structure that will lead to political pressure to undo these cross subsidies and may result in utility stranded cost exposure.

I think the apocalyptic “death spiral” rhetoric is overblown and exaggerated, but this is a worthwhile, and perhaps overdue, conversation to have. As it has unfolded over the past year, though, I do think that some of the more essential questions on the topic are not being asked. Over the next few weeks I’m going to explore some of those questions, as I dive into a related new research project.

The theoretical argument for the possibility of death spiral is straightforward. The vertically-integrated, regulated distribution utility is a regulatory creation, intended to enable a financially sustainable business model for providing reliable basic electricity service to the largest possible number of customers for the least feasible cost, taking account of the economies of scale and scope resulting from the electro-mechanical generation and wires technologies implemented in the early 20th century. From a theoretical/benevolent social planner perspective, the objective is, given a market demand for a specific good/service, to minimize the total cost of providing that good/service subject to a zero economic profit constraint for the firm; this will lead to highest feasible output and total surplus combination (and lowest deadweight loss) consistent with the financial sustainability of the firm.

The regulatory mechanism for implementing this model to achieve this objective is to erect a legal entry barrier into the market for that specific good/service, and to assure the regulated monopolist cost recovery, including its opportunity cost of capital, otherwise known as rate-of-return regulation. In return, the regulated monopolist commits to serve all customers reliably through its vertically-integrated generation, transmission, distribution, and retail functions. The monopolist’s costs and opportunity cost of capital determine its revenue requirement, out of which we can derive flat, averaged retail prices that forecasts suggest will enable the monopolist to earn that amount of revenue.

That’s the regulatory model + business model that has existed with little substantive evolution since the early 20th century, and it did achieve the social policy objectives of the 20th century — widespread electrification and low, stable prices, which have enabled follow-on economic growth and well-distributed increased living standards. It’s a regulatory+business model, though, that is premised on a few things:

  1. Defining a market by defining the characteristics of the product/service sold in that market, in this case electricity with a particular physical (volts, amps, hertz) definition and a particular reliability level (paraphrasing Fred Kahn …)
  2. The economies of scale (those big central generators and big wires) and economies of scope (lower total cost when producing two or more products compared to producing those products separately) that exist due to large-scale electro-mechanical technologies
  3. The architectural implications of connecting large-scale electro-mechanical technologies together in a network via a set of centralized control nodes — technology -> architecture -> market environment, and in this case large-scale electro-mechanical technologies -> distributed wires network with centralized control points rather than distributed control points throughout the network, including the edge of the network (paraphrasing Larry Lessig …)
  4. The financial implications of having invested so many resources in long-lived physical assets to create that network and its control nodes — if demand is growing at a stable rate, and regulators can assure cost recovery, then the regulated monopolist can arrange financing for investments at attractive interest rates, as long as this arrangement is likely to be stable for the 30-to-40-year life of the assets

As long as those conditions are stable, regulatory cost recovery will sustain this business model. And that’s precisely the effect of smart grid technologies, distributed generation technologies, microgrid technologies — they violate one or more of those four premises, and can make it not just feasible, but actually beneficial for customers to change their behavior in ways that reduce the regulation-supported revenue of the regulated monopolist.

Digital technologies that enable greater consumer control and more choice of products and services break down the regulatory market boundaries that are required to regulate product quality. Generation innovations, from the combined-cycle gas turbine of the 1980s to small-scale Stirling engines, reduce the economies of scale that have driven the regulation of and investment in the industry for over a century. Wires networks with centralized control built to capitalize on those large-scale technologies may have less value in an environment with smaller-scale generation and digital, automated detection, response, and control. But those generation and wires assets are long-lived, and in a cost-recovery-based business model, have to be paid for even if they become the destruction in creative destruction. We saw that happen in the restructuring that occurred in the 1990s, with the liberalization of wholesale power markets and the unbundling of generation from the vertically-integrated monopolists in those states; part of the political bargain in restructuring was to compensate them for the “stranded costs” associated with having made those investments based on a regulatory commitment that they would receive cost recovery on them.

Thus the death spiral rhetoric, and the concern that the existing utility business model will not survive. But if my framing of the situation is accurate, then what we should be examining in more detail is the regulatory model, since the utility business model is itself a regulatory creation. This relationship between digital innovation (encompassing smart grid, distributed resources, and microgrids) and regulation is what I’m exploring. How should the regulatory model and the associated utility business model change in light of digital innovation?

Lynne Kiesling is a Distinguished Senior Lecturer in the Department of Economics at Northwestern University. Her economic specialty is industrial organization, regulatory policy and market design in the electricity industry.  In particular, she examines the interaction of market design and innovation in the development of retail markets, products and services and the economics of “smart grid” technologies. She also teaches undergraduate courses in principles of economics, energy economics, environmental economics, and history of economic thought, and she writes about economics as the editor/owner at the website Knowledge Problem, where this post first appeared.

July 26, 2014

The Quick Guide To A Green Stock Portfolio

Tom Konrad, CFA

I recently published a quick guide to a green or fossil fuel free stock portfolio aimed at the small investor.  For most people, the best options will be to use mutual funds or an investment advisor.  Some of us like to do things ourselves, and build a portfolio from scratch, using individual stocks.  Doing so could rapidly become a full-time job, but it does not have to be.  Instead, you can use information which mutual funds disclose to piggy-back on their research.  Garvin Jabusch, Co-Founder and CIO of Green Alpha Advisors in Boulder, Colorado, recently told me, "If I were a doctor or a lawyer, I'd probably use this strategy."

The Stock Lists
Technology
Ticker
Beta
Yield
INTC
1.60
3.5%
CSCO
1.26
2.9%
IBM
0.67
2.1%
QCOM
0.85
1.8%
AMAT
1.82
2.0%
ORCL
1.14*
1.1%
GOOGL
0.94
-
FSLR
5.9
-
CSIQ
2.84
-
SCTY
5.7*
-
Healthcare
Ticker
Beta
Yield
MRK
0.50*
3.1%
RHHBY
0.77
2.9%
NVO
1.08
1.4%
GILD
0.98
-
NVZMY
0.50
0.6%
Industrial
VE
1.75
5.3%
PNR
1.24
1.3%
PWR
0.62
-
GNRC
0.89
-
Consumer Defensive
Ticker
Beta
Yield
PG
0.41
3.1%
PEP
0.31
2.6%
UNFI
0.65
-
Consumer Cyclical
JCI
1.77
1.8%
TSLA
1.37
-
Financial
TD
0.56
3.4%
MET
2.20
2.4%
Real Estate
JLL
2.02
0.4%
Utilities
ITC
-0.10
1.5%
Data from Morningstar.com except * from Yahoo! Finance
The Securities and Exchange Commission (SEC) requires that mutual funds disclose their portfolios quarterly, but many often disclose their holdings more frequently on their websites.  Start by selecting a few green mutual funds which you feel reflect your idea of what "green" investing is.  For the purpose of this article, I'm going to use three funds which describe themselves as fossil fuel free.  They are: Green Century Equity (GCEQX), Portfolio 21 (PORTX), and Jabusch's Shelton Green Alpha (NEXTX). The links connect to each funds' list of holdings on Morningstar.

I've used the top 10 holdings of these three funds to compile the list of stocks shown in the box at right.  The sector designations (Technology, Healthcare, etc.) are the categorizations given by Morningstar.  I also used Morningstar (with a supplement from Yahoo! finance to determine each company's dividend yield and Beta, which is a widely used measure of a stock's market risk.

"If I were a doctor or a lawyer, I'd probably use this strategy."
        -- Garvin Jabusch, co-manager of the Shelton Green Alpha mutual fund.

When compiling your own such list, you may use more or less than the top ten holdings, or use different funds, if you think they are a better match for what you consider "green."  A variety of other sources, such as gofossilfree.org's Extracting Fossil Fuels from Your Portfolio [pdf] also include useful stock lists. 

One criticism of green mutual funds is that they tend to be heavy on technology and healthcare stocks, and you can see this is clearly the case with the list I've compiled to the right.  The next step is to correct for this bias.

Balancing The Portfolio

A "Balanced Portfolio" usually refers to a portfolio containing a "balance" of different security types, usually equities (stocks) and fixed income (bonds.)  According to conventional financial theory, the right "balance" for you depends on your financial resources and risk tolerance.  There are any number of online calculators and questionnaires available which will take this sort of personal data and produce a portfolio allocation. 

This article is mostly about the stock or equity portion of the portfolio.  For the fixed income portion of the portfolio, the best choice is to reduce your debt.  Your own debt is probably someone else's fixed income security.  By paying down that debt, you are essentially buying it back from that investor, and also saving yourself the overhead costs that are built into the loan.  If you have no debt, you will be able to bear more risk and invest more in equities.

Other green income options include increasing the energy efficiency of your home, installing solar (and paying for it up front as opposed to using a lease, which is financially similar to purchasing the solar system with debt), the crowd funding site Solar Mosaic (when they have projects available), or a bank CD with a relatively green bank such as Capital Pacific Bancorp (CPBO) or Toronto-Dominion Bank (TD), which also happens to be included in the stock list to the right. 

I personally feel that current interest rates are too low to make traditional fixed income investing attractive, and instead use a portfolio of high-income equities.  While the financial theory that gives us the portfolio allocation referenced above assumes that there is a natural trade-off between return and risk, real world research only finds that trade-off between asset classes (i.e. stocks have higher risk and return than bonds) but not within asset classes (risky stocks do not have higher returns than safer stocks.)  This is called the low-risk anomaly (a.k.a. low-beta anomaly or low-volatility anomaly.)  Historically, low-risk stocks have actually produced higher returns than high-risk stocks. 

A consequence of the low-risk anomaly is that a portfolio of low-risk, high yield stocks is likely to have higher returns and yield than typical portfolios of stocks or bonds, or combinations of the two.  This is why my annual portfolio of ten clean energy stocks contains six high-yield stocks this year.  That list could also be substituted for the holdings of a mutual fund when generating the list of stocks to build your portfolio.

Diversification

The benefit of owning a large number of stocks is diversification: so your investment can't be lost due to bad news for a single company or sector. For the small stock investor, diversification comes with a trade-of  of higher transaction costs.  To keep these costs low, I try to keep brokerage commissions to no less than 0.5% or 1/200th of any transaction, and trade as little as possible.  That means that if you pay $8 per transaction, each position should be at least $1,600 (=$8 x 200.)  For a $20,000 account, that means you can have as many as 12 positions.  If your portfolio is too small to have 10 positions using this rule, you're probably better off opting to the diversification of a mutual fund until you can increase it.  As the account grows, let your transaction size grow, to further reduce investment costs.  20 positions should be plenty for the purpose of diversification if you are careful to select stocks in a wide range of industries so that they behave differently in various economic conditions.

To select a 10 stock portfolio from the list I have compiled to the right, I first select the stock with the best combination of low beta (to take advantage of the low beta anomaly) and high yield (to compensate for not including fixed income.)  That gives me eight stocks: INTC, MRK, VE, PG, JCI, TD, JLL, and ITC. I then choose the next two highest yielding low beta stocks, making sure I don't have more than two in any industry: RHHBY and PEP. 

If you buy equal dollar amounts of each, you have a moderately diversified, low cost, low beta, relatively high yield (2.8%), fossil-free portfolio.

Closing The Circle

I discussed this strategy with Jan Schalkwijk, a green investment advisor at JPS Global Investments.  He pointed out that it is very important not just to buy the stocks and forget about them, but also "close the circle."  To follow this strategy effectively, you need to put in place a plan to update the portfolio periodically.  In 2009, I put together a 5-stock "tracking portfolio" that was designed to mimic the performance of the alternative energy mutual funds using a similar procedure. I checked back on the portfolio six months later, and it was out performing the funds, but then I forgot about it until I started thinking about this article.  I checked the performance, and the portfolio was up only 1.5% over five years, equal to the worst performing of the three mutual funds, and far behind the average return of 61%.  The biggest reason for the relatively poor performance was the inclusion of the now-bankrupt Suntech Power in the tracking portfolio. The mutual funds probably avoided some similar losses by getting out once the dire situation at Suntech became clear.

A good procedure for updating the portfolio would be to repeat the exercise whenever you add or withdraw money, but at least every two years.  If a stock in the portfolio no longer appears in any of your mutual fund holdings (not just the top 10 stocks), you should assume something is wrong and sell it.  You should also sell half of any position which has doubled in value since you bought it.

Re-invest the funds (as well as any new savings) by finding the new stock or stocks which maintain or increase your industry diversification, and also have relatively high yield and low beta.

DISCLOSURE: Long VE.

This article was first published on Renewable Energy World and in Renewable Energy World Magazine.

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 24, 2014

Charging Your Portfolio With Tesla's Gigafactory

By Jeff Siegel

Last week, Tesla (NASDAQ: TSLA) announced that its next electric offering — a competitively priced electric vehicle — will hit the market in 2017.

Dubbed the Model III, the 200-mile-range electric vehicle will go for $35,000.

Certainly this was big news for electric car enthusiasts — particularly those who can't afford an $85,000 Model S but yearn to drive one. But if you regularly follow trends in the electric vehicle space, at least the way I do, you know Tesla's announcement was just one of many big moves in the space over the past few months.

Truth is, the electric vehicle sector is hotter than ever. And despite continued empty criticisms by internal combustion apologists, electric vehicles are here to stay.

This is great news for those who love driving on homegrown electrons, and it's great news for investors who are looking for more than one way to make a few bucks in the energy space...

$50 Billion Bonanza

Around the same time we learned about Tesla's new Model III, we also got some fresh energy storage market data from the folks over at Lux Research.

According to the research firm's latest analysis, energy storage, driven largely by plug-in electric vehicles, will grow at a compounded annual growth rate of 8% to $50 billion in 2020.

That's less than six years away.

Researchers note that electric vehicles are the largest opportunity in transportation. With modest sales of 440,000 units, electric vehicles still will use $6.3 billion worth of energy storage — more than the micro-hybrids, which will have sales two orders of magnitude higher at 59 million units.

luxrpt[1].jpg

Internal Combustion Blues

One of the more intriguing bits from this recent report is the following statement...
“...incremental evolutions like start-stop technology are leading to significant changes in the energy storage market. With global sales of 59 million, a 53% market share and $6.1 billion in annual revenue, micro-hybrids will, for the first time, overtake the conventional internal combustion engine and emerge the most popular drivetrain by 2020.”
I have to be honest; I never thought I'd see the day when the most popular drivetrain would be something other than that of conventional internal combustion.

Of course, this doesn't mean internal combustion is going gently into that good night. Such a suggestion would not only be naïve, but also a bit dishonest. However, it is interesting to see how rapidly technology is transitioning the personal transportation market.

Heck, I remember when the Toyota Prius was the technologically superior vehicle when it came to fuel economy. In many ways, it still is. But it's so common now that we almost don't even notice those little hybrid superstars anymore. With more than 3 million units sold, such a thing is understandable.

So will the same be said for electric vehicles in another ten years? I think so.

My prediction is that Tesla will continue to be the most innovative and aggressive electric vehicle player in the market. Nissan and GM will continue to push their electric offerings, most likely with worthwhile upgrades by the end of the decade that'll enable increased range and lower pricing.

Asian players like BYD Company (OTCBB: BYDDF), Kandi Technologies (NASDAQ: KNDI), and Tata (NYSE: TTM) will also remain aggressive on non-conventional internal combustion offerings.

Of course, if you're looking for a way to profit from the growth in energy storage applications, look no further than Tesla's new Gigafactory.

GigaProfits!

If you're unfamiliar, the Gigafactory is a $5 billion battery manufacturing facility that Tesla is building right here in the United States.
When completed, the plant will be massive — capable of producing ten times the current production level available today. This equates to the production of 500,000 electric cars every year starting in 2020.

And with this production capability comes economies of scale that will allow Tesla to slash battery costs. Batteries, by the way, represent the most expensive component of electric cars.

My friends, Tesla's current Model S runs about $85,000. But with the new Gigafactory in place, the company will be able to sell you its next model — the Model III — for $35,000.

This is a huge game changer, and those who play it right will make a ton of money.

Now let me clarify: I'm not recommending investing in Tesla here. I'm talking about investing in the batteries — more specifically, the companies that will provide Tesla's Gigafactory with the key ingredients it will need to produce these batteries.

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

July 23, 2014

Chinese Policy Tailwinds For Ruifeng Renew

by William Gregozeski, CFA

China Ruifeng Renewable Energy Holdings Limited [HK:0527 (“Ruifeng Renew”)] is a holding company with ownership interests in three energy-related businesses.  Its current focus is on wind farm operations, via its majority holdings in Hongsong, a long established wind farm, and Langcheng, a greenfield wind farm (after various purchases and sales of ownership interests it will own 85.36% of the two wind farms on a beneficial level and 68.17% on a direct equity level.  These wind farms have a current installed capacity of 398.4MW, and are expected to increase to 1,190.4MW by the end of 2017.  It also owns a power grid construction business that installs transmission lines and related energy infrastructure for the State Grid and Southern Grid, as well as installs turbines and transmission infrastructure for its wind farms.  The Company also owns a wind turbine blade assembly plant in Chengde, where it builds blades for AVIC Huiteng Windpower, one of the large turbine blade manufacturers in China.
 
Hongsong was established in 2001 as the first wind farm in Hebei Province with its installation of 2.4MW of capacity, which was comprised of four Goldwind [HK:2208, OTC:XJNGF] turbines, making Hongsong one of Goldwind’s earliest customers.  Since then, Hongsong has completed eight phases of capacity expansion, each adding 49.5MW of capacity using 492 Goldwind turbines.  Hongsong’s current installed capacity stands at 398.4MW, with the expectation that 49.5MW will be added annually through 2017, bringing its final installed capacity to 596.4MW.  Hongsong is taxed at the full 25% rate, however all new phases of installed capacity (starting with Phase 8) will enjoy a full tax exemption for three years, followed by a 50% reduction for the following three years, after which it will pay the full tax rate.  
 
Langcheng was established in 2005 to develop a 594MW wind farm in Hexigten Qi in Inner Mongolia.  With the initial infrastructure in place, the Company intends to begin installing wind turbines in 2014, aiming to add three phases of 49.5MW each year through 2017.  Like Hongsong, each new phase of installed capacity will enjoy a full tax exemption for three years, followed by a 50% reduction for the following three years, after which it will pay the full tax rate.  
 
Ruifeng Renew enjoys a number of benefits from its ownership of Hongsong and Langcheng.  The two wind farms are located 30km apart, which allows for shared management and shared substation distribution; Hongsong currently has the infrastructure to support the distribution of up to 596MW of wind power, which will be ramped up to meet the expected increase capacity over the next three years.  The Company’s Power Grid Construction business is expected to install the turbines and distribution systems, which will help reduce the capital expenditure of each phase of increased capacity, while creating additional revenue for that business.  The most recent expansion, Phase 9 at Hongsong, cost approximately RMB270 million and we estimate future phases of increased capacity will cost RMB 270 to RMB 300 million, below the market rate for other producers, which enables management to obtain funding for most of the expansion with near PBOC rate bank debt.
 
Management intends to add capacity in 49.5MW increments, as any wind farm addition of 50MW must apply for a license from the NDRC (National Development and Resource Commission) at the national level, whereas capacity additions below 50MW can receive license approval from the regional arm of the NDRC.  The expectation is that all turbine purchases will be from Goldwind, the third largest wind turbine manufacturer in the world, who grants the Company favorable pricing on turbines due to the longstanding relationship between Hongsong and Goldwind.
 
Ruifeng Renew’s Wind Farm Operations generate revenue primarily from the sale of turbine-generated electricity sold to the State Grid Corporation of China, the seventh largest company in the world according to Forbes.  The State Grid does not enter into formal power purchase agreements (PPAs) with individual producers, but rather commits to buy electricity put on the grid at a fixed price set twice a year, which is currently RMB 0.43/kWh.  Renewable energy producers also receive RMB 0.11/kWh in subsidy revenue from the Finance Ministry, resulting in a total energy tariff of RMB 0.54/kWh.  The average wind farm in China operated for 2,000 hours in 2013, up from 1,900 hours in 2012, but still well below the historic average of roughly 2,250 hours at Hongsong and the expected 2,300 to 2,350 hours at Langcheng.
 
Based on the information above, and put in the context of the growth drivers of the energy and wind power market in China as described in our last article, we believe Ruifeng Renew is ideally positioned to build shareholder value in the coming years.  
 
William Gregozeski, CFA is the Director of Research at Greenridge Global, a provider of institutional-based sell-side services to underfollowed Asian-based companies and special situation stocks.  The author of this article, Greenridge Global and its affiliates do not have a beneficial ownership in the companies mentioned herein or any other disclosable conflicts of interest.
 

July 22, 2014

Fifteen Clean Energy Yield Cos: Where's The Yield?

Tom Konrad CFA

 In the first article of this survey of yield cos, I noted that many of the recent yield co IPOs have risen so far as to "lend the very term "yield co" a hint of irony" because rising stock prices are accompanied by falling annual dividend yields.

Yield Co Worries

Because yield cos invest in clean energy infrastructure such as wind farms and solar facilities, conservative income investors may worry about the durability of the technology.  Will solar panels still be producing power twenty years from now?  Others have brought up the credit quality of utility counter parties, and the untested nature of residential solar leases.

All of these concerns are real.  Some solar panels will fail sooner than expected, and possibly many at a single solar farm.  Utilities in Europe are already struggling financially, in part due to regulatory policies which were designed to promote renewable power.  The residential solar lease model is only a few years old.  Many solar leases contain inflation escalators which cause the price of solar power to rise by a few percent a year.

If electricity prices fall with the cost of power generated from wind and solar, what will homeowners do if they find they are suddenly paying more for electricity from their solar panels than they would for grid electricity?  Might populist politicians pass laws declaring solar leases invalid because the lessees feel like they've gotten a raw deal?

While all of these risks are real, most can be dealt with by diversification.  Falling prices of solar panels will make it cheaper to replace ones that fail prematurely.  Both electricity prices and politics are local, meaning that geographic diversification can do much to manage these risks. Technological risks can be dealt with by diversifying between technologies.  See the second article in this series for details on the types of power generation owned by each yield co.

The Biggest Risk

While all these risks are real, they are fairly standard investment risks, and can be dealt with through portfolio diversification: Don't own just one yield co (especially the smaller ones that own only a few facilities), and don't focus all your holdings on wind or solar. 

The biggest risk, and the one that can't be diversified away is the risk of paying too much.  For yield cos, which are designed to pay healthy dividends, not paying too much means getting a decent yield, now or in the near future.  For me, "decent" means at least 2% more than long term government bonds.  Even 2% is a fairly thin margin to compensate for the risks discussed above.  The ten year US Treasury note currently pays 2.5%, and the 30-year bond pays 3.3%, so anything below a 4-5% dividend yield is too little to be taken seriously, unless we are very confident that dividend growth can continue at a rapid pace for many years to come.

High Expectations For Growth

Most US-listed yield cos have outlined aggressive plans for dividend growth.  NRG Yield (NYLD) is the most ambitious, and expects to grow its dividend by 15% to 18% for five years.  In order of decreasing ambition, Terraform Power (TERP) aims for 15% growth for 3 years, NextEra Energy Partners (NEP) expects 12% to 15% growth for three years, Hannon Armstrong Sustainable Infrastructure (HASI) expects 13% to 15% growth for two years, Pattern Energy Group (PEGI) aims for 10% to 12% for three years, and Abengoa Yield is aiming for relatively modest 6.5% growth over the next 12 months.  Canadian yield cos, like TransAlta Renewables (TRSWF or RNW.TO) and Brookfield Renewable Energy Partners (BEP, BEP-UN.TO) have not laid out specific dividend growth targets, but do have reasonably aggressive growth plans which are likely to boost distributable cash flow and dividends over time.

The three London-listed yield cos, The Renewables Infrastructure Group (TRIG.L), Greencoat Wind (UKW.L), and Bluefield Solar Income Fund (BSIF.L) are less aggressive, and aim simply to increase distributions in line with inflation.

Sources Of Growth

Investing Cash Flow
Since yield cos return most of their investable cash to shareholders, most expected future dividend growth cannot come from re-investing earnings, as we would expect from traditional growth companies.  Hence, dividend growth will have to come either from issuing debt and using that to buy assets, or from buying assets (with debt or new equity) at low prices which make those assets significantly accretive to cash flow per share.

Debt
If debt is used to buy new assets, this will generally increase the dividend, but it will also increase overall risk to shareholders.  There is also a natural limit to debt, because there will come a point where lenders will become unwilling to provide additional funds.  Because of the increased risk inherent in using debt to buy assets and boost the dividend, I do not ascribe much value to dividend increases arising from increasing debt.

Developing Assets In House
In contrast, the ability of a company to obtain clean energy assets such as wind and solar farms at low prices has real value.  With the exception of TransAlta Renewables, the Canadian yield cos including Brookfield Renewable Energy, Primary Energy Recycling (PENGF, PRI.TO), Innergex Renewable Energy (INGXF, INE.TO), and Capstone Infrastructure (MCQPF, CSE.TO) have a tradition of developing projects in house as well as purchasing them from other developers when such projects are available at attractive prices.

In contrast, the US listed yield cos rely on others to develop projects for them.  Hannon Armstrong is fairly unique in this regard, because it is an investment bank which has relationships with a number of blue chip companies that develop energy efficiency and other sustainable infrastructure projects for which it obtains the financing.  Before Hannon Armstrong's IPO, it financed these projects by bundling the debt and selling it to institutional investors like pension funds. Now, while it still creates packages of investments for pension funds, it also keeps some such projects on the books.

I expect that Hannon Armstrong's position as the leading investment bank for such projects as well as its existing relationships should continue to enable the company to invest at attractive prices and continue increasing its dividend.

ROFOs
The other yield cos (NRG Yield, NextEra Energy Partners, Terraform Power, Abengoa Yield, Pattern Energy Group, and TransAlta Renewables) are relying on "Right Of First Offer" or ROFO agreements with their parent companies to obtain projects at attractive prices.  The parent companies are all experienced project developers, and those parents with large portfolios assets and concrete road maps for dropping them down to their yield co offspring have been rewarded with the highest yield co share prices and the lowest current yields

The highest yield among the US-listed ROFO yield co is Pattern Energy Group.  Its parent, Pattern Development is a private company with only a handful of projects that it is currently developing. The other ROFO yield cos all have publicly listed parents which already own significant clean energy assets, and are developing new ones as well.  They have low yields and high stock prices to match. 

The one exception is TransAlta Renewables, which trades at a 6.5% yield, compared to the 2% to 4% yields available on US listed ROFO yield cos.   Its low price and high yield are due in part to the fact that its parent, TransAlta Corp (TAC), has not explained precisely which assets it plans to sell to TransAlta Renewables, and at what prices.  TransAlta Renewables' lack of a US listing is also likely to be part of the reason for its high yield, but even given these factors, I consider TransAlta Renewables to be massively undervalued compared to the other ROFO yield cos.

Finite Growth

The flood of new capital which current and expected future yield cos are bringing to the market is likely to have significant effects on the price clean energy projects sell for.  Most such projects take years to develop, and so the short term supply is limited.  A large source of new capital chasing a finite number of projects is likely to boost the value of those projects on the market. 

As project prices rise and ROFO agreements expire, we can expect that they will be renewed only with prices which are less attractive to the yield cos. Yield cos which develop projects in house will also find that their costs rise as other developers enter the market in order to sell projects into a robust market fueled by cheap yield co money.

Hence, while yield cos many be able to hit their aggressive short term dividend growth targets, this growth must slow over the longer term.  I personally am only willing to believe current projections one to three years into the future.  To reflect that, I have put together the following chart of the 15 yield cos current yield and expected yield growth over the next two years.


Yieldcos by yield.png
The horizontal lines show current yield, the x-axis shows how much yield is expected to increase over the next two years, and the diagonal lines combine these two to show expected yield in two years.

The Best

Paying a high price for a yield co not only reduces its current yield, it also reduces the effect of even very aggressive dividend growth targets.  The chart reflects NRG Yield's extremely aggressive dividend growth target (15% to 18%) with an assumed annual dividend growth of 16.5%.  Because NRG Yield has such a high price, its current yield is only 2.8%, and two years of compounded 16.5% growth bring it up to only 3.8%. Pattern Energy Group may have a less impressive (but still proven) parent in Pattern Development, but it offers a 3.8% yield today. With that sort of head start, it will have no trouble staying ahead of its US-listed ROFO yield co brethren.

Looking at the upper right hand corner of the chart, we see Hannon Armstrong and TransAlta Renewables.  These offer current yields of 6.1% and 6.5% respectively.  NRG Yield would have to grow its dividend at 16.5% per year for five years just to get to where Hannon Armstrong is today.  NextEra Energy Partners, TerraForm Power, and Abengoa Yield would require even longer to get there.

In short, a dividend today is worth more than years of potential dividend growth.  Among the current crop of yield cos, I consider TransAlta Renewables, Hannon Armstrong, Capstone Infrastructure, Brookfield Renewable Energy Partners, Primary Energy Recycling, and Innergex Renewable the most attractive, in that order.  The London listed yield cos are also attractive, especially for geographic diversification, but are extremely difficult to buy for US based investors.  The only one I've been able to purchase is The Renewables Infrastructure Group (TRIG.L).

This ranking of yield cos is almost entirely based on current and future expected yield.  Primary Energy gets a slight boost in the rankings because of the real possibility of a takeover offer in the near future.  In the last article, I looked into how each of the yield cos were structured.  There, I noted that some (especially Abengoa Yield, NextEra Energy Partners, and Terraform Power) have structures which don't completely align management incentives with the interests common shareholders.  That said, the most of the yield cos with the highest yield also have the best alignment of management and shareholder interests.  My analysis of yield co structure only served to re-enforce my preference for those yield cos with the highest current yields.

In the end, is there any fairer way to evaluate yield cos than on the basis of yield?  Without yield, the term "yield co" is just PR.

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.


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