November 07, 2014

Will Falling Oil Prices Destroy Tesla?

By Jeff Siegel

Oh my God! Oh my God!

Saudi Arabia cut oil prices and crude fell all the way to $75.84 today.

Sell it, dump it, run for the hills!

How far will it go? No one knows. But hold on to your asses, because things are going to get crazy!

We're awash in oil, demand is waning, the Saudi plan to wipe out the U.S. shale market is underway.

Gas prices will fall back to $2.00 a gallon, everyone will be happy, gas-guzzlers will make a comeback, and electric cars are dead in the water. Take that you stupid treehuggers!

Saudi Supply

As you know, I hate low oil prices.

Low oil prices equate to lower gasoline prices. Lower gasoline prices chip away at the economic case for owning an electric car. As it is, that case is still a bit flimsy and will remain that way for a few more years until the Tesla (NASDAQ: TSLA) gigafactory starts pumping out cheaper batteries.

That being said, low oil prices are not a death sentence for electric cars – despite a lot of wishful thinking from those who have cursed Elon Musk since proving to the world that an electric car can be more than a glorified golf cart.

First, consider that the Saudis cannot shoulder price cuts for an extended period of time.

Saudi Arabia has its own economic issues to deal with, including some pretty burdensome unemployment rates. Back in 2012, King Abdullah actually announced a $130 billion plan to create jobs, build subsidized housing and support the religious establishment that backed the ban on domestic protests.

Some have suggested this outflow of capital was used as a way to maintain the status quo during the Arab Spring. I don't know whether or not that's true, but the Saudi economy is an oil economy. And while the Saudis are competing against the U.S. shale revolution, they must also balance those efforts with their plan to use less of their fossil fuel resources for their own consumption so they can sell them abroad at higher prices.

This is why we've seen such a big push for nuclear and solar power development in Saudi Arabia.

In any event, don't count on the Saudis for a long-term supply of cheap oil.

Supply and Demand

Second, consider demand.

Demand is falling, and will likely continue to fall for some time. The global economy is not rebounding as fast as some claim, and increases in fuel economy for U.S. cars and trucks are having a small, but noticeable impact.

That being said, in the absence of another global economic meltdown (which isn't out of the question), I suspect demand will pick up steam again in a few more years.

Above $70

Even if demand does remain stagnant, most shale producers can't frack for less than $70 a barrel. Because the U.S. economy is so directly tied to the price of oil, and because the U.S. government is so reliant upon royalties from oil production, I find it hard to believe that the state won't devise a plan to manipulate the price of oil in an effort to keep it above $70.

Of course, I don't have a crystal ball. And maybe I'm wrong. Maybe I'm just full of crap and I'm doing little more than picking at straws here. But for the sake of electric vehicle adoption, I'm not even so sure cheap oil even matters.

Perhaps it does more for the less expensive electric vehicle models, like the Nissan LEAF for instance. Which, incidentally just broke its own record for most electric cars sold in the U.S. in a single year. To date, Nissan has sold more than 66,500 LEAFs in the United States.

But for a company like Tesla, it's not entirely relevant.

Folks who can shell out $85,000 for a Tesla Model S don't tend to be the types who worry about the price of gas. These are innovators and early adopters. They chest pound over access to new technologies and love nothing more than to show off their shiny new toys.

You also have environmentalists who will happily forgo cable or financial security in exchange for an emissions-free vehicle.

Point is, Tesla is at no risk of being sideswiped by cheap oil. The company is a beast, and even if it craps the bed on Q3 earnings tomorrow, it's not going away. Tesla is here to stay. It's going to continue to disrupt the hell of the auto market, and no amount of Saudi influence, state manipulation or demand destruction in the oil space will change that.


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

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Oil and Gas

November 05, 2014

HydroPhi: Turbocharging Trucks With Hydrogen

by Debra Fiakas CFA

Casting about for alternatives to burning fossil fuels for energy, hydrogen is a logical candidate.  It is the most abundant chemical on the planet and the energy density of compressed hydrogen is about 5.6 milli-joules per liter.  This compares to 32.4 mj/l for gasoline and 4.3 mj/l for a lithium ion battery.  That is where the romance ends and the realities of hydrogen begin.  Hydrogen poses a safety risks, particularly in transportation and distribution.  Hydrogen gas leaking into the air may spontaneously ignite.  Extremely low temperatures will turn it into a liquid, but that represents added cost.  Furthermore, the most common production method for hydrogen is steam reformation of natural gas, which hardly represents an alternative to fossil fuels.

Included in our novel renewable energy data base is a very small group of companies attempting to develop technologies to produce hydrogen using an alternative methods not dependent upon fossil fuel.  Water molecules are subjected to direct current that leads to a chemical reaction and the separation of the hydrogen and oxygen elements in water.   One of the most recent additions to the group Hydrogen Electrolysis in the Mothers of Invention Index is HydroPhi Technologies Group, Inc. (HPTG:  Other OTC). 

HydroPhi is trying to turn distilled water into a hydrogen-based catalyst for engines using fossil fuels.  The catalyst is injected into the air intake of the engine to improve fuel efficiency and thereby reduce greenhouse gas emissions.  HydroPhi’s electrolysis system is right on-board the vehicle, thereby avoiding the thorny transportation dilemmas.  The company has planned a demonstration project in Poland for heavy duty trucks.

Earlier this week HydroPhi received good news from the European Union’s LIFE Program for environmental protection and water conservation.  The program has given preliminary approved a grant for 577,813 Euros or about US$722,000.  HydroPhi needs approximately $1.3 million to complete the demonstration.  Success with the project should take HydroPhi one step closer to commercialization of its hydrogen fuel catalyst system.

HydroPhi is a very early stage company that is still using cash resources to support development work.  In the most recently reported twelve months, the company used $741,250 to support operations.  It only had $111,730 on the balance sheet at the end of June 2014, revealing the HydroPhi really needs the money from the grant to carry out the demonstration project in Poland.

HPTG trades for just one penny and the market cap of the company is $1.4 million.  Investors interested in the potential in hydrogen could consider the stock as a very inexpensive option on the idea of making it possible for truckers to drive around with their very own hydrogen plant under the hood of their truck.  Pay-off is probably a couple years down the road (no pun intended).  

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 04, 2014

Bureaucratic Roadblocks To China's EV Plans

Doug Young

Bottom line: Bureaucracy at the homeowner level is providing a major obstacle to China’s ambitious new energy vehicle build-up plan, with new government directives unlikely to fix the problem.

A new report is showing just why new energy vehicles are failing to gain any traction among Chinese consumers, despite huge government efforts to promote the technology. The main culprit in this case is the country’s huge bureaucracy, which affects everything from the largest government programs all the way down to something as simple as installing a vehicle charger in an apartment building.

In most western cities, the installation of an electric vehicle (EV) charger at a person’s home would be a simple matter, involving a visit from a specialist to hook up the proper equipment. Apartments could be slightly more complex though still manageable, since they would involve modifications at collectively owned buildings. But in China, where most people live in apartments, the bureaucracy of installing chargers in such buildings rises to a whole new level, creating a major obstacle that’s unlikely to go away anytime soon.

The new report in the English-language China Daily starts with some sobering figures involving license plates for electric vehicles (EVs). (English article) Unlike the west, license plates in major Chinese cities like Beijing and Shanghai are quite expensive and often cost $10,000 or more, due to auction and lottery systems used to control the number of new plates entering the market. In a bid to encourage EV ownership, big cities have begun awarding new license plates for those cars at much lower prices.

Beijing launched its system in February and named an initial batch of 1,424 license winners. And yet some 980 of those — or 70 percent of the total — ultimately forfeited their rights to those licenses after failing to actually purchase an EV by an October 26 deadline. Of the people who gave up their licenses, more than half said they did so because there was no realistic place for them to charge their vehicles.

Welcome to the world of Chinese bureaucracy, where something as simple as installing a vehicle charger takes on new meaning in terms of complexity. Anyone who lives in China knows that most buildings have neighborhood committees that tightly control what can and cannot be done on the premises. Added to that are an additional layer of management companies at most newer buildings, which are often reluctant to do anything that could upset the status quo and draw attention from nearby police or neighborhood committees.

The result of all this bureaucracy is a state of gridlock at most buildings, whose managers suddenly become paralyzed when confronted by a resident who wants to do something revolutionary like install a vehicle charger in their parking space. Adding to the issues are the complexity of fees for electricity, since separate metering systems would have to be set up to charge individual residents for the large amounts of power their EVs consume.

In its usual authoritarian style, the Beijing city government is trying to fix the problem by ordering all new buildings in the city to install charging outlets in 18 percent of their parking spaces. That kind of target-oriented approach is typically Chinese, and leads companies and individuals to look for creative loopholes to officially meet the targets without actually advancing the real objective of the goals.

None of this bodes well for China’s EV program, and looks especially troublesome for most domestic names like BYD (HKEx: 1211; Shenzhen: 002594; OTC:BYDDF), SAIC (Shanghai: 600104) and Geely (HKEx: 175), which were pinning their new energy hopes on eventual demand from mainstream consumers. Even high-end producer Tesla (Nasdaq: TSLA) is showing some strains, as reflected by its recent program to build more charging stations. But at the end of the day a niche player like Tesla should feel less impact, since many of its affluent customers have the resources to make sure chargers get installed in their homes.

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.

November 03, 2014

Earnings Season For The BioEconomy: Novozymes, Green Plains & Pacific Ethanol

Jim Lane 

In the first half of November we will be hearing from a slew of companies regarding Q3 earnings — but earnings season is well underway already, and we have good indicators from the likes of Novozymes, Clariant, BP, Pacific Ethanol and Green Plains about the overall environment for energy, speciality chemicals, industrial biotechnology — and specifically, biofuels.

Let’s take a look.

Novozymes-logoIndustrial biotechnology — robust growth at Novozymes.

Also this week, Novozymes (NVZMY) announced 9% organic sales growth for Q3 and 8 percent growth for the nine months of 2014 to date. The company is saying that growth is “broadly based” but highlighted that sales in Household Care and in the bioenergy business have been growing in line with expectations.

Outlook: In comments on the earnings call as reported by Seeking Alpha, CFO Andy Fordyce said that China “provides some headwinds” with “more competition” but described bioenergy as the “brightest star this year” with “23% organic sales growth” this year to date. Fordyne noted that the “U.S. ethanol market product is up around 10% this year so far” and alluded to “new innovation” in the “bioenergy pipeline” within the next six months.

SVP Thomas Videbæk highlighted the opening of celluloisc next-gen plants by Abengoa, GranmBio and POET-DSM as expected, but still great to see” and noted that upgrades at the Beta Renewables’ Crescentino “have started to contribute to higher production volumes” and that “Capacity utilization is increasing” while hailing Italy’s 1% advanced biofuels mandate. But Videbæk said that Crescentino is not yet running at full capacity though Novozymes remains “confident we’ll get there.”

He added that it has been “a significant ramp of time for Crescentino” and stated that “we certainly hope that the other ones will be able to do it faster.”

In looking at the company’s planned target of 15 biomass conversion plants by 2015, Videbæk described the target as “a very challenging and ambitious target” but did not back down from the target, saying that “There’s no indication that this is no longer possible,” while conceding that “It’s not going to be a walk in the park.”

On the 15 by 17 target, CEO Peder Holk Nielsen added that “it’s going to depend a lot on how many new investments goes into these plants in 2015.” On E15, CFO Benny Loft commented that on E15, “we certainly must commit or say that it’s really difficult to see where the E15 – when it will come.”

On the impact of US elections, CEO Nielsen commented that “there’s some risk around the U.S. midterm election and that will create a different mood around bioenergy in the U.S.” He also said that the company is watching for “a potential slowdown in Europe and the emerging markets.”

green-plainsEthanol — big earnings growth at Green Plains

In Nebraska, Green Plains (GPRE) announced its financial results for the third quarter of 2014. Net income for the quarter was $41.7 million, or $1.03 per diluted share, compared to net income of $9.4 million, or $0.28 per diluted share, for the same period in 2013. Revenues were $833.9 million for the third quarter of 2014 compared to $758.0 million for the same period in 2013.

During the third quarter, Green Plains had record production of 246.9 million gallons of ethanol, or approximately 96% of its daily average production capacity. Non-ethanol operating income from the corn oil production, agribusiness, and marketing and distribution segments was $22.2 million in the third quarter of 2014 compared to $14.2 million for the same period in 2013. Non-ethanol operating income for the nine-month period ended September 30, 2014 was $79.9 million compared to $52.7 million for the same period in 2013.

Revenues were $2.4 billion for the nine-month period ended September 30, 2014 compared to $2.3 billion for the same period in 2013. Net income for the nine-month period ended September 30, 2014 was $117.3 million, or $2.90 per diluted share, compared to net income of $17.9 million, or $0.56 per diluted share, for the same period in 2013.

For the nine-month period ending September 30, 2014, EBITDA was $260.0 million compared to $92.7 million for the same period in 2013.
The earnings took Wall Street by surprise, with Zacks Investment Research reporting a consensus Street estimate of 89 cents — so a 12% beat. However, Zacks reported a consensus Street expectation of $987.2M, with the company dragging in $833.9M — so a 15% miss there. Obviously a huge swing in margin — 5% margin delivered compared to Street expectations of 3.7%.

CEO Todd Becker commented, “U.S. ethanol production margins continue to reflect strong demand, both domestically and globally. As a result of this environment, we are reaffirming our mid-year guidance of stronger earnings per share performance in the second half of 2014,” added Becker.

Green Plains had $414.3 million in total cash and equivalents and $167.7 million available under committed loan agreements at subsidiaries (subject to borrowing base restrictions and other specified lending conditions) at September 30, 2014.

peixConfirming the ethanol trend – Pacific Ethanol reports record gallons, big growth in revenues, earnings.

In California, Pacific Ethanol (PEIX) reported net sales of $275.6M, an increase of 18%, compared to $233.9M for Q3 2013. The company’s increase in net sales is attributable to its record total gallons sold resulting from increases in both production and third party gallons.

Gross profit was $18.0M, compared to $3.5M for Q3 2013. The improvement in gross profit was driven by significantly improved production margins and corn oil production. Operating income was $13.6M, compared to $1.0M for Q3 2013. Net income available to common stockholders was $3.7M, or $0.15 per diluted share, compared to a net loss of $0.40 loss per share for Q3 2013.

CEO Neil Kohler noted: “We delivered solid financial results for the third quarter of 2014, supported by efficient operations and continued strong ethanol market fundamentals.” CFO Bryon McGregor, added: “Since December 31, 2013, we increased our cash balances by over $51.1 million. As a result, our working capital increased to approximately $93.3 million from $51.2 million at the end of 2013.”

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 02, 2014

Ten Clean Energy Stocks For 2014: Spooky October

 HalloweenOctober was a spooky month for clean energy stocks.  My benchmark Powershares Wilderhill Clean Energy Index (PBW) cringed down 2.9% like the young Supergirl who jumped when a mechanical ghost startled her at my door Haloween night.   My 10 Clean Energy Stocks for 2014 model portfolio was more like Supergirl's slightly older brother, who was dressed as a SWAT team member and insisted that he wasn't scared: It rose a slim 0.9% since the last update on October 3rd.  For the ten months since I launched the portfolio on December 26th, PBW is down 2.6% while the model portfolio is up 2.4%

Meanwhile, the broader market of small cap stocks clawed its way out of a premature grave, digging its way up 6.3% for the month to end up 2.1% (as measured by the Russell 2000 index ETF, IWM.) 

Individual Stock Notes

The chart and discussion detail the performance of individual stocks in the 10 Clean Energy Stocks for 2014 model portfolio, along with relevant news items since the last update.
performance chart

(Current prices as of October 31st, 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: $1.04.
Current Price: $13.98.  YTD Total US$ Return: 5.7

Last month I predicted Sustainable Infrastructure REIT Hannon Armstrong would raise its fourth quarter dividend to 24¢ from 22¢.  I was too conservative.  In conjunction with the announcement of a $144 million investment in ten operating wind projects, President and CEO Jeffrey Eckel stated: "This investment should enable us to achieve core earnings of $0.25 in the fourth quarter and, in anticipation of further 2015 earnings growth, to support the declaration of an increase in our December dividend to $0.26 per share."

The stock rally from the increased dividend was cut short a week later when the company announced a secondary equity offering of 4.6 million shares at $13.60, for gross proceeds of $63.56 million.  The company has a target leverage ratio of 2:1 debt to equity, and since the company has not raised equity since $70 million (at $13.00/share) in April, this smaller offering should have come as no surprise. 

The stock pull-back in response to the equity offering should be seen as a buying opportunity.  At $13.89, the company's forward yield is 7.4%, and this dividend was achieved by investing the roughly $10/share raised in the IPO and April offering. Any money raised at $13.60 a share should increase both book value per share and per share dividend once it is invested.

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$3.98. YTD Total C$ Return: -14.2%.  YTD Total US$ Return:

Green building company PFB continued to decline until October 30th, when the company announced its third quarter results.  Earnings per share increased to C$0.23 from C$0.14 in the third quarter of 2013, along with a 7% increase in revenue and an increase in gross margin.  Full financial statements for the quarter will be filed on or before November 14th.

The company announced its regular 6¢ dividend, payable to shareholders of record on November 14th.  This amounts to a 6% annual dividend at the $4 current price.

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

12/26/2013 Price: C$3.55.   Low Target: C$3.  High Target: C$5.  
Annualized Dividend: C$0.30.
Current Price: C$4.27.  YTD Total C$ Return: 30.8%.  YTD Total US$ Return: 24.4%

Independent power producer Capstone Infrastructure will release third quarter results after the close on November 11th.

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 (suspended pending buyout.)
Current Price: C$5.82.  YTD Total C$ Return: 22.3% .  YTD Total US$ Return: 16.3%

Waste heat recovery firm Primary Energy Recycling rallied on the news that the board's strategic review had resulted in a buyout offer from a group of investors led by Fortistar at US$5.40 per share.  The deal seems very likely to win shareholder approval, since it has the unanimous approval of the board, and investors controlling 44.5% of common shares are subject to a lock up agreement to vote their shares in favor of the deal.  Only 66⅔% of outstanding shares is needed to approve the deal.

5. Accell Group (Amsterdam: ACCEL, OTC:ACGPF).
  12/26/2013 Price:
13.59.  Annual Dividend 0.55 Low Target: 11.5.  High Target: 18.
Current Price: €12.73. YTD Total 
Return: -2.3% .  YTD Total US$ Return: -10.9% 

SNS Securities increased its price target for Netherlands based bicycle manufacturer and distributor Accell Group from €13 to €14, but the stock posted a small decline along with European stocks in general. 

Accell continues to integrate last year's acquisition of Raleigh, which will now distribute its Dutch-based Koga brand in the UK.  Its Sparta brand sold its 1000th speed pedelec (an electric-assisted bike with unrestricted top speed which must be registered as a motorized vehicle) in October. Sparta leads the accelerating Dutch market for speed pedelecs with roughly 60% of the market.

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$13.00.  YTD Total C$ Return: 27.6% .  YTD Total US$ Return:

Leading transit bus manufacturer New Flyer made headlines with its delivery of two fully electric buses to the Chicago Transit Authority.  The purchase shows that fuel savings alone do not yet support purchase of electric buses by transit agencies, as they cost $400,000 more than conventional diesel buses, but will save approximately $300,000 in fuel costs over their 12 year lifetime.   However, they deliver other benefits such as no exhaust (a benefit to anyone standing or driving behind them), a smoother and quieter ride for passengers, and likely lower maintenance costs.

The company will announce its third quarter results on November 5th and hold a conference call on November 6th.  It paid its regular monthly dividend of C$0.0475.

7. Ameresco, Inc. (NASD:AMRC).
12/26/2013 Price: $9.64.  Low Target: $8.  High Target: $16.
  No Dividend.
Current Price: $8.24  YTD Total US$ Return: -14.5%.

The stock of energy performance contracting firm Ameresco recovered 11% from previous lows, but remains down for the year. Part of the jump was likely the result of a series of transactions by the new New York Green Bank which will provide funding for the types of projects Ameresco specializes in.  The announced projects have a large number of financial partners, but the only developers were Ameresco and privately held BQ Energy.

I also expect that the October rise is partly in anticipation of likely positive third quarter results and outlook.  The second quarter was the first relatively upbeat conference call after a series of disappointments starting in 2012.  If the third quarter outlook (to be announced on November 6th) is also upbeat, expect the climb to continue this month.

8. Power REIT (NYSE:PW)
12/26/2013 Price:
$8.42.  Low Target: $7.  High Target: $20.  Dividend currently suspended.
Current Price: $10.12 YTD Total US$ Return: 20.2%

Solar and rail real estate investment trust Power REIT and its opponents Norfolk Southern Corp. (NYSE:NSC) and its sublease Wheeling & Lake Erie Railway filed responses to each others motions for summary judgment in their civil case.  The filings can be found on the Power REIT website.

Both a litigation researcher on Seeking Alpha and I think the case may be nearing a finish, and we published our analyses virtually simultaneously.  My analysis is here, and a more pessimistic view by a new anonymous author is here.  The author, "Small Cap Litigation Research" or SCLR claims not to have a position in the stock (I am long) and I feel he or she missed several subtleties of the very complex case despite a legal background.

To summarize the article, SCLR believes that

  1. Power REIT's attempt to discount the performance of the lease in its interpretation is unlikely to succeed.
  2. NSC is demonstrating its confidence by continuing to omit the lawsuit as a legal risk in its SEC filings.
  3. At the current price of $10, current shareholders are betting on a windfall profit.

I'll take each of these points in turn.

1. Performance under the lease.

Since I'm not a legal expert, I don't have an opinion on how relevant the performance of the parties over the last 50 years will be to the judge's decision.  Even if SCLR is correct that performance is very relevant to the interpretation of the lease, there are many possible defaults under the lease to which performance is irrelevant because they have not come up previously.  In particular, the lease provides that the lessees pay legal expenses which are "necessary or desirable" for the maintenance of PW's interest in its property, so long as these expenses are "not for the sole benefit of its shareholders."  Since the lessees have paid some legal expenses in the past, this part of the case (which could lead to total default under the lease) rests not on performance, but on the court's interpretation of what is for the "sole" benefit of shareholders, and what is "desirable."  I discuss in my article why Power REIT's case seems strong in this regard. 

Another possible default under the lease to which performance is not relevant would be WLE's sale of mineral rights, which are not explicitly conveyed by the lease.  PW only became aware of this over the course of the lawsuit, so could not have previously acquiesced to such sales.

2. NSC's apparent confidence.

SCLR fails to distinguish between NSC and WLE.  While it is true that NSC has not disclosed this lawsuit in the legal risks section of any of its SEC filings, it is WLE, the sublessee, which will be responsible for paying the majority of any award.  As I discussed in an article linked to by SCLR, the sublease agreement limits NSC's liability to the $7,466,951.42 balance of a "settlement account" described in the lease as of the closing date of the sublease agreement.  This liability is most likely already disclosed on NSC's books as long term debt.  Given its tiny size relative NSC's $34 billion market cap, the outcome of the lawsuit would only be material to NSC if the judge were to award back interest on the settlement account.  In my judgment, NSC is probably correct in its confidence that back interest will not be awarded, and so the results of the case are not likely to be material to NSC.  I still believe NSC should be disclosing the lawsuit despite its confidence, accompanying the disclosure with a statement that the chances of the lawsuit resulting in a material liability to NSC are low, if that is the opinion of management.  The intent of such disclosures is not to predict what will likely happen, but rather to disclose what might happen..

WLE, on the other hand, is potentially responsible for more than half of the $16 million balance of the settlement account, PW's legal bills, may be forced to renegotiate the lease if it is found in default, and has a chance of owing back interest as well.  While these potential liabilities are certainly material to WLE, the company is privately held and so has no responsibility to make public statements about the lawsuit. 

Hence, NSC's apparent confidence is only relevant to the possibility that back interest might be awarded, and has no bearing on most of the matters of contention.

3. Are investors betting on a windfall?

Neither SCLR nor I provided a valuation of PW in our articles, so it is difficult to judge from them if shareholders are betting on a windfall profit.  I did however, provide a back-of-the-envelope valuation in response to a comment.  I responded,

PW has about $1.9 million in annual revenue from its leases (Rail and Solar.) Recurring expenses are about $0.8M, including interest, so we have about $1M to pay dividends each year. As of the end of June (the last 10Q), there were 130,000 preferred outstanding, with an annual dividend of $0.25M. That leaves $0.75M to pay dividends on 1.73M common shares, or 40-45 cents a share.
If PW lost, they would write off the settlement account, meaning that dividends would become classified as return of capital for the next 16 years or so. The ending of the lawsuit would also remove uncertainty, and allow Lesser to resume the yieldco business plan as well as make it easier to refinance the debt used in the solar acquisition. So the answer to your question depends on what you think the market would pay for a stock with a 40 cent annual return of capital dividend (i.e. deferred income taxed at the LT cap gains rate) and some potential for growth.  I personally would be happy to buy such a stock at a 5% yield (the cheapest yieldcos trade at 4%), which would be $8 to $9, but it would probably fall below $8 in the short term, especially since the dividend would not be resumed until unpaid attorneys fees had been paid off. Those will probably amount to $2 million or so, so the dividend would likely remain suspended for 3 years. Hence, we should discount back my $8 estimate by 3 years at something like 15%, which also gives me a $5 downside.
My best guesses on the probabilities of various outcomes and valuations are:
  • 25% - PW loses on all counts - $5
  • 40% - PW collects a portion of settlement account and legal fees - $10
  • 30% - PW collects entire settlement account & legal fees - $15
  • 5% - PW collects legal fees, settlement account, and also has upside from renegotiating lease and from some asset sales or interest not included in NSC/WLE version of settlement account - $20+
The weighted average of these outcomes is $10.75.
If my estimates are correct, shareholders are only betting on a mixed result to the lawsuit, which I gave a 40% likelihood among the scenarios I evaluated.  

In summary, the flaws in SCLR's analysis all of favor the lessees over PW.  SCLR claims to have no position in the stock, which could be the reason for a lack of diligent research.  Another possibility is that the writer is actually short the stock, and is looking to profit from a decline caused by the article.  If that is the case, SCLR is unfortunate that we were working on our articles simultaneously.

  9. MiX Telematics Limited (NASD:MIXT).
12/26/2013 Price:
$12.17.  Low Target: $8.  High Target: $25.
No Dividend.
Current Price: $8.91. YTD Total ZAR Return: -21.6%. YTD Total US$ Return:

South Africa based global provider of software as a service fleet and mobile asset management, MiX Telematics will announce its fiscal second quarter 2015 results on November 6th.

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$0.32   YTD Total C$ Return: 14.3% .  YTD Total US$ Return: 8.6%.

Renewable energy developer and operator Alterra Power completed the construction financing for its 62 MW Jimmie Creek run-of-river hydroelectric expansion in conjunction with its development partner, Fiera Axium.  The company will announce its third quarter results after market close on November 12th.


Although October spooked many clean energy stocks, my model portfolio did not take fright.  Hannon Armstrong's larger than expected dividend increase, and the announcement culmination of Primary Energy's strategic review helped keep the ghosts at bay.  I included both in the list because I knew these positive events reasonably likely, and am glad they came at such an opportune time.

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

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.

October 31, 2014

Hoping Tesla Will Fail

By Jeff Siegel

If you don't believe that folks are waiting impatiently for Tesla Motors (NASDAQ: TSLA) to slip up, look no further than today's action on the stock.

After the Wall Street Journal reported that the company was selling fewer cars and offering new incentives, the stock tanked 6 percent.

Of course, as it turned out, the decline in sales was only in the U.S. And it didn't take long for super genius Elon Musk to tweet the following message:

Credit Suisse analyst Daniel Galves followed up on the piece, noting that the article was “too misleading to ignore.”

No doubt!

The Wall Street Journal piece also suggested the company was offering two new sales incentives. The incentives to which they referred were regarding the company's new lease offer.

Galves clarified this, stating that the U.S. Bancorp lease is not an incentive and is 25 percent lower because the bank has a lower cost of funding and is likely taking a less conservative view on residual value.

I tell ya, I've never seen so many people so eager to see a company fail.

From its very inception, Tesla has been a punching bag for every ignorant bureaucrat and knuckle-dragging media whore that wants to believe nothing more than the illusion that electric cars are glorified golf cars designed for wealthy eccentrics and overzealous treehuggers.

Nothing can be further from the truth. But rest assured, if there's blood in the water (or reports of blood in the water), the sharks will circle.

In the meantime, Tesla continues to lead the way, showing the old guard automakers how cars will be made in the future. Just ask Ford CEO Mark Fields who last week announced that Ford has the expertise and ability to build a Tesla-style full-size, high-tech, high-performance, long-range electric vehicle.

I guess they only decided they had the expertise and ability to do this after Tesla came along and disrupted a market that was in desperate need of disruption.

Regardless, Tesla has built a better mousetrap. And while I'm not rushing out to buy the stock right now, rest assured, my next car will be a Tesla. Just like so many other Americans who value quality and performance over mediocrity and complacency.


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

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.

October 29, 2014

Hydrogenics: Powering Up

by Debra Fiakas CFA

In the last post on Hydrogenics, Inc. (HYGS:  Nasdaq) in April 2014, the stock seemed to be languishing on news of a potentially dilutive common stock offering.  At the time profits still seem illusive.  However, over the last few months circumstances have improved.  Shares of Hydrogenics have moved higher on the company’s recent introduction of a fuel cell power system for medium and heavy duty vehicles.  Additionally, in July this year Hydrogenics was chosen by Ontario as one of five grid storage projects.  This has turned HYGS into an interesting stock to watch.

What sets Hydrogenis apart from the rest of the fuel cell developers is the company’s innovation of low pressure, dry air stack technology.  There is no need for air compressors or humidification equipment, offering a compelling value proposition.  Hydrogenics management is confident the manufacturers of large vehicles such as buses or heavy duty trucks find its fuel cell system easy to integrate.

The company is in a good position to move on the market opportunity for fuel cell cell systems.  Hydrogenics raised approximately $14 million in new capital in May 2014, through a common stock offering.  Cash balance at the end of June 2014, was $16.7 million.  Operations still require cash support, but we expect the cash burn rate to decline in the coming quarters.

The clutch of analysts following Hydrogenics have projected the company will report its first profits in the final quarter of 2014.  In the full year 2014, the consensus estimate is for earnings per share of $0.07 on $71.9 million in total sales.  Hydrogenics is scheduled to release third quarter 2014, financial results in early November.    It is worthwhile tuning in for that report.  Management should be able to provide some clues as to whether the consensus estimate is achievable.      

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.

October 27, 2014

Will Investors Flock to SunEdison’s Emerging-Market YieldCo?

by Tom Konrad CFA

SunEdison is proposing something entirely new: a YieldCo with a focus on projects in Africa and Asia, but it's a long way between an S-1 filing with the SEC and and IPO.

The June launch of SunEdison's (SUNE) first YieldCo, TerraForm Power (NASD:TERP), transformed the parent company's prospects. Now it wants to repeat the performance with a first-of-its kind YieldCo that will focus on investment in Africa and Asia.

A YieldCo is a publicly traded company that is formed to own operating clean energy assets that produce a steady cash flow, most of which is returned to shareholders in the form of dividends. Like many other renewable energy developers, SunEdison formed TerraForm Power in order to appeal to a pool of income-oriented investors who would never consider owning the company's common stock. Such investors look for reliable income streams generated by existing businesses, and often won't even consider buying stock in a company that does not pay a regular dividend. 

The low interest rate climate over the past few years has made income-oriented investors, many of who rely on dividend payments to support current expenditures, increasingly desperate for yield and much more willing to enter new asset classes in order to find it. YieldCos and the renewable energy developers that formed them have been direct beneficiaries. 

Arguably, no energy developer has benefited more from forming a YieldCo than SunEdison. Unlike large utilities that have formed YieldCos, includng NRG Energy, NextEra, Abengoa SA and TransAlta Corp., SunEdison does not have a history of profits and dividendimg

These utilities' YieldCos, NRG Yield (NYSE:NYLD), NextEra Energy Partners (NYSE:NEP), Abengoa Yield (NASD:ABY), and TransAlta Renewables (TSX:RNW), appeal to investors who might have been interested in the parent companies' stock, but like the higher yield and relatively greener assets offered by the YieldCo subsidiaries.

YeildCo Sponsor earnings.png

In contrast, SunEdison has never paid a dividend, and has not been profitable under generally accepted accounting principals (GAAP) since before 2011. On an adjusted basis (in which items deemed to be one-off by management are eliminated), the small profits in 2011 and 2012 were more than wiped out in 2013, and analysts expect losses to continue at least through 2015 (see the chart above).

While the lack of earnings and dividends makes SunEdison's stock unattractive to income investors, they have rushed to buy the stock of TerraForm Power. According to one estimate, investors are effectively paying $5 per watt for TerraForm's projects when they buy the stock. When such projects are sold in private transactions, they typically fetch only $3 per watt, so TerraForm investors are willing to pay a 67 percent premium over the going market price.

SunEdison has a huge appetite for investor capital.  According to its cash flow statements, the company has raised an average of $1.2 billion in debt and equity in each of the last three years. So it's not surprising that after seeing the appetite of income investors for the mostly developed-market assets owned by TerraForm Power, SunEdison is hoping income investors will also be interested in projects in Asia and Africa.

To date, YieldCos hold a majority of their assets in the developed world, especially the U.S., Canada, and Europe. The reasons for this are simple: income investors consider the safety of a company's income stream to be extremely important, and developed electricity markets offer long-term contracted power-purchase agreements.

In contrast, electricity markets and grids in Asia and Africa range from the state-controlled to the unreliable and even the nonexistent. The lack of reliable grid infrastructure in some Asian and African countries means that renewable power is often competing with electricity from diesel generators on price. The following slide is from a 2012 presentation by Christian Breyer of the Reiner Lemoine Institut. The green and yellow areas on the map denote places where the economics of displacing some diesel power generation with solar during the daytime is highly economical, even without subsidies. These areas have expanded as solar prices have fallen over the last two years.

PV displacing diesel.png


Clearly, sub-Saharan Africa and Asia's interior are both excellent prospects for solar from a purely economic standpoint, without any subsidies whatsoever. Indeed, the slide above shows that diesel subsidies serve to limit the number of countries in which replacing diesel with solar generation makes economic sense.

One problem is that these parts of Asia and Africa are better known for outbreaks of disease and terrorism than for the stable political and economic conditions that usually give rise to businesses producing reliable long-term dividends.

Perhaps SunEdison intends to focus on more stable parts of Asia and Africa, but that will make its projects more dependent on local political support to produce the reliable returns that income investors expect. 

Either way, SunEdison is proposing something entirely new. From the perspective of using the power of markets to fight climate change, it's entirely welcome. What remains unclear is if income investors are ready for the idea. If the new YieldCo can pay a dividend high enough to attract such investors despite the risks, it will be a big win for the planet -- and for SunEdison's current shareholders.


Disclosure: Long RNW, Short NYLD.

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

October 26, 2014

Solar Bonds and Other Green Income Investments Compared

by Tom Konrad CFA

Clean-energy stocks’ performance over the last couple of years proves that it’s possible to do well – sometimes very well – while doing good. Unfortunately, it’s also possible to lose a lot of money.

Case in point: solar installer SolarCity’s stock (SCTY) price has more than quintupled since its 2012 IPO, but has fallen 40% since the start of the year. Swings like these are just too wild for many investors to stomach.

So the news that California-based SolarCity launched the first public offering of solar bonds last week likely piqued the interest of sustainability-minded investors seeking more stability. But how do these bonds really stack up against other sustainable investment options?

SolarCity’s bonds, which are available to retail investors in all 50 states, represent energy projects across the country. They start at $1,000, mature in one to seven years, and pay up to 4% interest. Buyers face no price risk – unlike volatile stock values, the bonds pay a fixed amount – but the bonds are backed only by the company’s ability to pay.

This could be a problem for skittish investors: as the bonds are not currently traded on any market, investors will not be able to redeem or sell them if they suspect the company will have financial difficulties before the bonds mature. And given that SolarCity is itself only eight years old, investing in a seven-year bond could be a little unnerving.

While SolarCity’s bonds are a significant innovation, they are hardly the first green investment on the market. Aside from directly investing in companies via stock, there are clean-energy mutual funds, certificates of deposit (CDs) and even home improvements. As with all investments, these options involve tradeoffs between risk, liquidity and income.

With that in mind, here’s a look at the costs and benefits of five of the most promising green investment options:

Solar bonds

While SolarCity’s bonds are the first such product to be nationally registered, Mosaic has been offering very similar state-registered bonds in California and New York since April 2013. Like SolarCity’s bonds, Mosaic’s are not traded and must be held to maturity. However, they are available in smaller increments – the least expensive cost as little as $25 – and often offer higher interest rates. Most offerings have been priced to yield 4.5%, although they often have longer maturities as well.

Asked to comment on the differences between SolarCity and Mosaic’s offerings, Tim Newell, SolarCity’s vice president for financial products, highlighted the advantages of his product’s diversification: SolarCity’s bonds are being backed by the cash flows from its solar leases around the country.

In reality, this is both an advantage and a disadvantage. While SolarCity can draw on the income from a large number of solar leases to repay its bonds, none of these leases are specifically dedicated to repaying the retail bonds. For example, there is nothing to prevent SolarCity from using the cash flows from its existing leases to back new issues of commercial asset-backed bonds. The company has issued $327.1m of such bonds since November 2013.

For Mosaic’s bonds, on the other hand, the greatest weakness is their lack of availability. Currently, the site is not funding any projects or offering any new bonds, which means that interested investors are – currently, at least – out of luck. When Mosaic does have investments available, they sell out quickly. The new bonds from SolarCity may help fill the demand by providing an alternative.

Green CDs

The safest sustainable income investment remains a CD from a sustainable bank. Some of these banks are Certified B Corporations, which shows a commitment to the environment and promoting social good. Beneficial State Bank, Capital Pacific Bank, New Resource Bank and Virginia Community Capital Bank all offer FDIC-insured CDs.

But while CDs are safe, they come with a trade-off: income. As the chart below shows, the interest rates on CDs are anemic when compared to SolarCity bonds with similar bond and CD rates.pngSolar power systems

One of the most reliable, consistent and non-volatile sustainable investments is a home solar power system. Like a more traditional income investment, a solar power system produces a monthly cash flow; of course, rather than putting money into your account, it works the opposite way – cutting expenses by reducing the cost of your utility bills. Even better, these savings don’t count as income, so they aren’t taxable.

To give a concrete example, I recently installed solar on my house in New York. Even assuming that electric rate increases are only enough to compensate for maintenance, the equivalent tax-free interest rate for the investment comes to approximately 11%. Improving a home’s energy efficiency can produce even higher returns, although those returns can be much harder to measure.

New York has excellent solar incentives and high electricity prices, but a solar installation in any state is likely to be a much better investment than SolarCity’s bonds. When Newell was asked to compare the interest rate on MyPower, the company’s solar loan program, he avoided the question, saying the two products were like “apples and oranges”.

His reluctance is understandable: SolarCity’s profits come from the difference between the rates at which it lends (or the embedded rates in its power purchase agreements) and the rates at which it borrows. It’s not diplomatic to highlight the large gap between them, especially when talking to small investors or potential customers.

Admittedly, the economic benefits of home solar are largely limited to homeowners. For renters and homeowners without suitable roofs, however, some states have passed legislation to enable community solar, also known as Solar Gardens. These are commercial scale solar farms in which local individuals can invest and get benefits similar to those of a solar system.

Preferred stock

Buying stock in green companies is one of the most common types of sustainable income investments. But while these investments have recently produced very attractive returns, they’re highly volatile. To make matters worse, few clean energy stocks produce any income at all.

Preferred stocks, a hybrid between stocks and bonds, offer a bit more security. Holders have rights to a “preferred” dividend before common shareholders, but have fewer rights than bondholders in a bankruptcy.

One example of this is Power REIT (PW), a real estate investment trust that owns railway track and invests in the land under solar farms. The company’s Series A Preferred shares (PW-PA) yield 7.75% at $25 and trade on the NYSE MKT. Although they have a higher risk of loss than bonds, they also have a much higher yield – and can be held in an IRA. Perhaps best of all, they offer a much greater deal of freedom. Unlike bonds, which lock in purchasers, Power REIT’s preferred shares can be bought and sold on a daily basis.


Yield-oriented companies, or “yieldcos” are designed to produce a stable cash flow by separating a company’s volatile day-to-day activities from its operating assets. Put another way, a company that is involved in generating energy could partially insulate its investors from risks caused by regulatory changes by sequestering its stable assets in a separate, income-generating business.

Over the last two years, seven yieldcos owning renewable energy and energy efficiency projects have listed on US markets. All can be traded and held in IRAs, but they’re more volatile than any of the investments listed above. Given the nature of their assets, most have lower risk of bankruptcy than SolarCity or Power REIT. The following chart shows 14 yieldcos and similar companies listed on US, Canadian, and UK stock exchanges.

Unlike other income investments, yieldcos have the potential to increase their dividends over time. All things being equal, this would also result in a higher stock price.  The yieldco with the highest yield is currently Hannon Armstrong Sustainable Infrastructure (HASI) at 7.3%, followed by Brookfield Renewable Energy Partners (BEP), Pattern Energy Group (PEGI), Terraform Power (TERP), NRG Yield (NYLD), Abengoa Yield (ABY) and NextEra Energy Partners (NEP).

Ultimately, SolarCity’s new solar bonds fill an important niche in the sustainable investment market. They are easy to buy and have much higher interest rates than similar bank CDs; at the same time, they are also riskier and cannot yet be sold or held in self-directed retirement accounts.

On the other hand, they are safer (but have a lower yield) than preferred stocks and yieldcos. In this context, they’re ideal for small investors who cannot invest in clean energy for their own homes, or who want more solar income investments.

Tom Konrad is a freelance writer and portfolio manager specializing in clean energy and income investments.

Disclosure: Tom Konrad and his clients own shares of Power REIT (both common and preferred) as well as Hannon Armstrong, Brookfield Renewable Energy, Pattern Energy Group. He also has a short position in the shares of NRG Yield.

Disclosure: Tom Konrad and/or his clients have long positions in HASI, BEP, PW, PW-PA, and short positions in NYLD.

This article was first published on The Guardian, and is republished with permission. Further reprints require permission from The Guardian.

October 22, 2014

Five Solar Stocks For 2015

By Jeff Siegel

Times sure have changed!

In 2006, I attended my first Solar Power International (SPI) conference in D.C.

It was a no-frills event but loaded with valuable information I used to help Energy and Capital readers get a jump on the solar bull market that ran from 2006 to 2008.

Truth be told, we cleaned up. But nothing lasts forever. And when the market nosedived in 2008, solar stocks were not exempt from the ravenous bears that mauled everything in their path.

Of course, as the broader market began to inch back up in 2010, solar stocks didn’t miss a beat... at least the handful that were still viable.

Since 2010, solar stocks have enjoyed a fantastic ride. First Solar (NASDAQ: FSLR), SunPower (NASDAQ: SPWR), and JA Solar (NASDAQ: JASO), just to name a few, showed non-believers that the solar industry was no longer a niche market catering only to tree huggers and wealthy eccentrics. And when I arrived at this year’s solar conference, I expected to hear more cheering and chest pounding from the gatekeepers of this industry.

What I heard instead was something every energy investor should know about — because there’s a very real possibility that the solar industry could soon be heading face-first into another meltdown.

A Solar Nightmare

I should preface this section by telling you that despite some ominous news, the solar industry has still put up some pretty impressive numbers. Consider the following:

  • Annual solar installations in 2014 will be 70 times higher than they were in 2006.
  • By the end of 2014, there will be nearly 30 times more solar capacity online than in 2006.
  • Solar has gone from being an $800 million industry in 2006 to a $15 billion industry today.
  • The price to install a solar rooftop system has been cut in half, while utility systems have dropped by 70%.
  • It took the U.S. solar industry 40 years to install the first 20 gigawatts (GW) of solar. It’ll install the next 20 GW in the next two years.
  • During every week of 2014, the solar industry installed more capacity than it did in the entire year of 2006.

Now, the reason I focused on 2006 in this list is because this is when the solar Investment Tax Credit (ITC) kicked in.

The solar ITC is a 30% tax credit for solar systems on residential and commercial properties. And it is the ITC that, without a doubt, has been one of the most important federal policy mechanisms supporting the deployment of solar energy in the U.S.

It’s also scheduled to expire in 2016.

Now, if you’re a regular reader of these pages, you know I’m not a fan of energy subsidies. There is no greater threat to a free market than government intervention. And in the case of energy, it’s these subsidies that push lawmakers to pick and choose winners in the energy industry. This goes for everything from solar and wind to fossil fuels and nuclear.

That being said, I completely understand why Rhone Resch, president and CEO of the Solar Energy Industries Association, said the following at the opening session of SPI:

It’s absolutely imperative... job #1... that we extend the 30 percent solar Investment Tax Credit past 2016.

 2015: The Year of Solar

The truth is, no one actually knows whether or not the ITC will be extended beyond 2016.

If I had to put money on it, I’d say it’ll get extended for at least another four years, taking us into 2020. But when it comes to policy, nothing’s certain until all the votes are counted.

So as a result, many in the solar industry are now operating at a capacity that suggests 2015 will be the last year for that 30% tax credit. In other words, they’re kicking it up a notch in 2015 in an effort to take full advantage of the ITC before it expires.

I suppose it’s a bit of an uncomfortable indicator for solar supporters, but for energy investors, it is a call to action: Ride the wave of aggressive integration in 2015.

There’s no doubt that the big dogs in the solar sector are treating 2015 as if it’s the last year for the ITC. Although that may not be the case, it’s still a precautionary measure that’rsquo;ll help these companies hedge against uncertainty as 2016 approaches.

No solar company will take it slow in 2015, but there are five solar companies (or companies with skin in the solar game) in particular that I believe will intensify marketing, acquisition, and development efforts so much that they’re going to blow the doors off and deliver record revenues before 2016 arrives.

Not surprisingly, these are the companies that are currently well capitalized and already have competitive and first-mover advantages. And for the sake of full disclosure, the success of these companies does put money in my pocket:

  1. SunPower (NASDAQ: SPWR)
  2. First Solar (NASDAQ: FSLR)
  3. SolarCity (NASDAQ: SCTY)
  4. SunEdison (NYSE: SUNE)
  5. Hannon Armstrong Sustainable Infrastructure (NASDAQ: HASI)

Of course, if the solar ITC is extended, then 2015 will just be icing on the cake. And while I certainly won’t vocally support any subsidy for energy, as long as fossil fuels and nuclear continue benefitting from direct and indirect subsidies — just as they have been for decades — then it should not come as a surprise when the solar industry gets the go-ahead to wet its beak from the government trough, too.

So invest accordingly.

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


Jeff Siegel is Editor of Energy and Capital, where this article was first published.  follow basic@JeffSiegel on Twitter

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