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Tom Konrad, CFA
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Tom Konrad, PhD., CFA is a financial analyst, freelance writer, and portfolio manager specializing in renewable energy and energy efficiency. He manages portfolios for individuals and institutions and is head of research for a green hedge fund, the Green Economy Fund at JPS Global Investments,... More
My company:
Green Alpha Global Enhanced Equity Income Fund
My blog:
Alt Energy Stocks
My book:
Fleeing Vesuvius: Overcoming the Risks of Economic and Environmental Collapse
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  • Ten Clean Energy Stocks for 2012

    There is a silver lining to the horrible year clean energy stocks had in 2011: the opportunity to buy clean energy stocks (often considered a growth sector) at prices one would expect from value stocks.

    Each year since 2008 I have published an annual list of ten clean energy stocks I thought were good buys at the beginning of the year.  While the 2008 list was not really intended as an investment portfolio, my annual lists quickly evolved into a mini-portfolio of stock intended for hands-off investors who did not want to pay the high fees of clean energy mutual funds, but who, like me, saw shortcomings in the available clean energy exchange traded funds.  In particular, the clean energy exchange traded funds (ETFs) and most clean energy mutual funds) are far too focused on high profile sectors like solar and have hardly any exposure to the most economic clean energy sectors, such as energy efficiency, alternative transportation, and biomass.  Most clean energy ETFs come with relatively high costs for ETFs (usually around 0.6% to 0.7%), which is expensive enough that a small portfolio of clean energy stocks can be acquired for less over a modest holding period.

    With that in mind, I now focus my annual list on the most economic clean energy sectors.  Within those sectors, I include stocks I currently consider relatively good values, similar to the clean energy model portfolio I wrote about in late 2009.

    The relative results have been good, when compared to the returns investors would have gotten if they had invested in the clean energy ETFs I use as a benchmark.  (I've currently settled on the Powershares Wilderhill Clean Energy ETF (PBW) as a benchmark, because it is the most widely held of all clean energy ETFs, but I used GEX and ICLN in the early years.)  Over the past four years, my picks have outperformed the benchmark by 12% in 2008, 45% in 2009, 10% in 2010, and most recently by 4% in 2011, despite company-specific bad news for three of the stocks in the portfolio.

    The Best Opportunity Since Early 2009

    Despite the good relative performance, the last four years have been so bad for clean energy in general that someone who had been following the portfolio since 2008 would still be down because of large losses in 2008 and 2011.  The upside of this poor performance is that now is the best time to buy clean energy stocks since the start of 2009. 

    In both 2010 and 2011, I cautioned readers that the stocks I listed were only good values relative to clean energy stocks in general.  This year, as in 2009, I have the pleasure of bringing you a list of ten clean energy stocks I think are good values at current prices.   This does not mean that my current crop of clean energy names can't fall, but it does mean that they have much more upside potential than they did in either of the last two years.  If this portfolio ends 2012 lower than it is now, I'm confident the decline will have been caused by a fall of the stock market as a whole: Bad news specific to clean energy seems to be more than adequately reflected in the current prices of clean energy stocks.

    That said, the fragile economy and political paralysis in both the US and Europe hold many risks for the stock market in general in 2012, so investors in these stocks would probably be wise to hedge their positions with puts on broad market ETFs such as SPY and IWM.

    The Picks Energy Efficiency

    LED            Downlight
    A dimmable LED downlight. Photo by author
    Energy Efficiency has long been a staple of my annual lists, because energy efficiency measures make sense in both good times and bad, both as a way to save money, and to stimulate the economy.  Because energy efficiency measures cost less than conventional energy, they stimulate economic activity twice: first when they are installed (as would any investment) and then for years to come, as the energy cost savings are spent on other goods.

    My energy efficiency picks are:

     1.Waterfurance Renewable Energy (WFIFF.PK $15.3455, WFI.TO), a perennial favorite because of their profitable business selling geothermal heat pumps.  Waterfurnace recently increased their quarterly dividend to $0.24, for a 6% annual yield.

    2. Lime Energy (LIME, $3.18) was one of my two top picks in the energy services sector, the other being Ameresco (AMRC.) I chose to include LIME in this list rather than AMRC because AMRC is already up 35% since I recommended it.  While I still like AMRC at current prices, I think LIME has better potential upside.

    3. Honeywell (HON, $54.35) has a strong business providing building controls and efficient heating and cooling equipment, as well as a performance contracting arm.  I currently like the company's relatively modest trailing and forward P/E's of 16 and 12, respectively, strong cash flow, low debt, and 2.7% annual dividend yield.

    4. Rockwool International (RKWBF.PK $82.29, ROCK-B.CO 473 DKK10) is an international insulation manufacturer whose share price has fallen because of the EU crisis along with many other Eutopean stocks.  Yet with only 43% of 2010 revenues originating in Europe and headquarters outside the Euro zone, the company seems relatively insulated from the full effects of a Euro crisis.  Rockwool pays an annual dividend, and has a yield of 2% based on the most recent dividend payment.

    Schrotthaufen Berlin
    By S. Müller (Own work) [CC-BY-2.5], via Wikimedia Commons

    I think one of the best ways to play cellulosic biofuels is to buy the companies which control the cheapest potential feedstocks.  I'm not sure that the best use of trash is to make biofuel, but whether it is recycled, composted, digested, incinerated, or converted in to biofuel, I see trash as a future source of revenue in a resource constrained world, and who better to profit from trash than the companies that collect it?

    Last summer, I highlighted environmental services companies as a way to invest in biomass in my article Trash Stocks Trashed: An Income Opportunity? 

    5. Waste Management (WM, $32.71) was my top pick at the time.  Since then, the stock has since risen over $2 while continuing to pay its $0.34 quarterly dividend.

    6. Veolia Environnement SA (VE, $11.05) was then trading around $16, and I was cautious about the compnay.  Today, Veolia seems too cheap to pass up, despite the fact that I expect its 2012 annual dividend to be significantly lower than the $1.47 (13.3%) paid in 2011.

    Alternative Transport
    TriMet 1990 Gillig bus carrying bike
    By Steve Morgan (Own work) [CC-BY-SA-3.0 or GFDL], via Wikimedia Commons

    Electric vehicles (EVs) may be cool and appeal to early-adopter techies and some conspicuously consuming greens, but I think EV adoption will be a long, hard slog.  The technologies which are likely to advance faster are those that are already economic, but also save transportation fuel.  Alternative transportation such as biking, light rail, and buses top my list.

    7. Accell Group (ACCEL.AS, €14.15/$18.33) is a Netherlands based bicycle maker which I recently highlighted as a peak oil investment to buy now, because the  company has been battered by the EU crisis.  Accell is up 11% since then, although the stock still has significant Europe risk.

    8. New Flyer Industries (NFYEF.PK $5.6492, NFI.TO) is the largest North American manufacturer of heavy duty transit buses, and currently looks like a steal, despite the fact that the cyclical bus industry is in a downturn, undermining profits. 

    Both alternative transportation stocks pay healthy dividends, with Accell's over 6%, and New Flyer's expected to fall next year to a still healthy 8% to 9% at the current stock price.

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

    With overcapacity among solar module and wind turbine manufacturers, the consumers solar modules and wind turbines seem best placed to benefit.  Low prices are not only good if you are a homeowner looking to put a small PV system on your roof, they are also good for renewable energy developers.

    Government subsidies may be cut, but manufacturers still have product to sell, and they'll continue to do so as long as the price exceeds their marginal cost of production... even if that means they'll never recoup the capital invested in their factories.

    This is good news for renewable project developers who have projects locked in with the current subsidy regime, and who have the financing to build them.  The improved economics of owning solar farms can not be more aptly demonstrated by the purchase of a second solar farm by Warren Buffett controlled MidAmerican Energy Holdings.

    While selling renewable energy equipment can be an extremely competitive business with constantly eroding margins, power production is one of the most defensive businesses there is, with electricity usually sold under long term (15-20 years) contracts at pre-determined prices.  Nevertheless, small renewable energy power producers are looking cheap compared to their future discounted cash flows. 

    8. Finavera Wind Energy (FNVRF.PK, $0.409) is a wind project developer in Ireland and British Columbia.  Although the company is small, risk is much reduced by joint development agreements with industry heavyweight like GE Energy (GE), which will be providing the equity needed to develop the company's first 77 MW project in British Columbia, and has indicated interest in additional projects on similar terms.  This outside financial muscle is good, since the company's balance sheet is weak, but the company is working to rectify that:  Finavera just closed a $442M private placement at $0.45 a unit (1 share plus half a 12 month $0.55 warrant.)

    9. Western Wind Energy Corp (WNDEF.PK, $1.96) just completed its 120 MW Windstar project in time to qualify for the 30% federal cash grant before it expired at the end of 2011.  Based just on the company's completed and advanced projects, I think the discounted cash flow value of Western Wind is now approximately $6, making the company a safe bet with an easy 2-3x upside.

    10. Alterra Power Corp. (MGMXF.PK $0.40, AXY.TO), formed by the merger of Magma Energy and Plutonic Power Corp, Alterra has a solid cash position and a diversified base of producing assets across both technologies and geographies.  As the company continues to develop projects in-house and bulk up through mergers and acquisitions, I expect the stock price to increase towards the value of its assets, leading to outsize gains for investors who buy at the currently depressed price, which is currently half of book value, and includes $0.10 a share in cash.
    Hedge Hedge (NYSE:<a href='' title='Cohen & Steers Select Preferred and Income Fund, Inc.'>PSF</a>)

    As discussed above, I think 2012 is a good year to hedge against a broad market decline, and buying puts is the simplest and safest way to do this. 

    SPY ($125.50) tracks the S&P 500 and has a fairly liquid options.  In order to be able to hedge ten stocks with an equal investment in puts, we'll need to buy significantly out-of-the money puts.  For a complete hedge, we'd want the notional value of the underlying shares of SPY to be equal to the value of the hedged portfolio times the portfolio's beta.  Since I don't put a lot of faith in such calcualtions because betas and other correlations tend to change during market crises, so I'll just guess and use:

    SPY January 2013 $110 Put (SPY130119P00110000, $7.81).  For every $781 put contract, the notional value of the underlyng is $11000.  If we assume our portfolio's beta is 1.1, each such put contract would be sufficient to hedge a $10,000 portfolio.  The beta of 1.1 is just a guess, but it makes for round numbers.  Betas are generally near 1, and are usually higher for riskier stocks.

    This hedge not only provides us with some insurance against a large (greater than 13.4% = 1-110/125.5) decline in the S&P 500, it also makes the hedged portfolio greener than the unhedged one.  Puts and shorts are effectively dis-investments in the underlying stock or ETF, and to the extent that companies in the S&P 500 index reflect the generally "brown" economy, the hedged portfolio is greener than the unhedged one.

    What will 2012 Bring?

    I'm optimistic about 2012.  Unless we see a total economic meltdown (for which I suggest readers hedge their portfolios, as discussed above), I expect strong appreciation of this portfolio of undervalued clean energy stocks in 2012.

    As usual, I'll track the performance with quarterly updates, with the stock picks benchmarked against PBW. 

    This article was first published on as Ten Clean Energy Stocks for 2012.


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

    Jan 03 3:35 PM | Link | Comment!
  • Western Wind: A Clean Energy Rodney Dangerfield?
    Renewable energy power producer Western Wind Energy Corp (WNDEF.PK, WND.V) feels it gets no respect.  In particular, they have long felt that the investing public does not recognize the value of the company's existing and nearly completed wind farms. 

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

    Independent Valuation

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

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


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



    Kingman I



    Project type and size

    120MW wind

    10MW wind, 0.5MW Solar

    30 MW Wind

    30MW Solar

    Commercial operation date in valuation model

    Dec 31, 2011

    Dec 31, 2011

    Existing operations

    Dec 1, 2012

    Remaining asset life

    30 years

    30 years

    20 years (older assets)

    30 years

    Power Purchase Agreement  (NYSEARCA:PPA)

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

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

    fixed price per CPUC MPR for years 1-20

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









    27 year right of way

    40 year lease

    Tax incentives

    30% cash grant and 100% bonus depreciation

    30% cash grant and 100% bonus depreciation


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

    Source of key assumptions

    Independent engineer

    Independent engineer



    Debt --to-capital ratio





    Term of debt

    20 years

    20 years

    15 years

    20 years

    Cost of debt





    Discount rate on equity returns

    Under PPA: 11.48% Merchant generator:15.75%

    Under PPA: 11.51% Merchant generator:15.85%

    Under PPA: 10.52%
    Merchant generator:NA

    Under PPA: 10.96% Merchant generator:14.74%

    Weighting of income approach vs cost approach





    Construction cost contingencies





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

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

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

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

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

    Project Valuations from DAI
      Windstar Kingman I Mesa Yabucoa
    Project Valuation $358 million $32 million $25 million $206 million
    Project Liabilities $275 million $24 million nil $152 million
    Value of Western Wind's Equity stake $203 million $16 million $24 million $110 million
    Value Per diluted share (70m shares) $2.90 $0.23 $0.34 $1.57

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

    Share Valuation Value (millions $) Value per diluted share
    (70 million shares)
    Total DAI Company Valuation (including above projects plus project pipeline) $383 $5.47
    Tax Asset (loss carry forward) $9 $0.13
    Value of Cash Paid for Exercise of Warrants & Options $12 $0.18
    Total $404 $5.78
    Share price (10/31/11) $1.60
    Appreciation needed to reach fair value 3.6x

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

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

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

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

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

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

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

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

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

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

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

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

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

    What it Means

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

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

    Give Western Wind Some Respect

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

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

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

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


    This article was first published on as Western Wind: A Clean Energy Rodney Dangerfield?
    Nov 04 11:41 AM | Link | 6 Comments
  • Three Upcoming Public Appearances
    Tuesday, Oct 19, 6pm-8pm, Springfield MA.  Which Clean energy Investments are Right for You?

    Thursday Nov 4, Making Plays in Alternative Energy, Panel at Inside Commodities Conference, The New York Stock Exchange, NYC.

    Tuesday, March 8, 2011, 2pm-5pm.  Half day workshop.  Greening Your Portfolio: How to Select Clean Energy Mutual Funds, Exchange Traded Funds and Stocks

    Click the links for details.  Hope to see you there!

    Oct 13 2:54 PM | Link | 2 Comments
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