ABGOY Archives - Alternative Energy Stocks

Ten Clean Energy Stocks For 2018: Second Quarter Earnings

Tom Konrad Ph.D., CFA — Sun, 09 Sep 2018 08:10:12 +0000

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Tom Konrad Ph.D., CFA

July and August saw some mild recovery for the stock market after a difficult first half of 2018. Clean energy income stocks continue to lag the broader market, but my Ten Clean Energy Stocks model portfolio has managed to maintain its lead over its broad market benchmark.

Through August 31st, the model portfolio is up 7.5%, compared to its broad dividend income benchmark SDY, which is up 5.3%. Its clean energy income benchmark YLCO is down 1.2, even after dividend income. The private portfolio I manage, the Green Global Equity Income Portfolio (GGEIP), is slightly behind the broad market of income stocks at 4.6%, but well ahead of YLCO.

Over the two months, most of these companies announced their second quarter earnings, and for most of them, there were few surprises, which no doubt contributed to the steady performance of most of the portfolio.

Details of the stocks’ performance are shown in the chart below.

Top Picks

In July, I highlighted Brookfield (BEP), Covanta (CVA) and Atlantica (AY) as my top short term picks. These three stocks were up 2.4%, 7.1%, and 3.9% over the last two months. This average increase of 4.5% was solidly above the portfolio as a whole at 2.3%. I currently think CVA, GPP and TERP have the best prospects for short term gains. Not that these prospects are great; I am taking an increasingly cautious approach towards the market as a whole and increasing my allocation to cash.

Stock discussion

Seaspan Corporation (NYSE:SSW)
12/31/17 Price: $6.75. Annual Dividend: $0.50 (7.4%). Expected 2018 dividend: $0.50 (7.4%). Low Target: $5. High Target: $20.
8/31/18 Price: $9.22 YTD dividend: $0.375 (5.56%) YTD Total Return: 43.3%

Leading independent charter owner of container ships Seaspan’s gave back a little of its gains from earlier in the year. The second quarter earnings call was “steady as she goes,” so I see the decline as mostly profit taking after the earlier large gains. I took some gains myself.

Covanta Holding Corp. (NYSE:CVA)
12/31/17 Price: $16.90. Annual Dividend: $1.00(5.9%). Expected 2018 dividend: $1.00 (5.9%). Low Target: $15. High Target: $25.
8/31/18 Price: $17.65 YTD dividend: $0.50 (2.96%) YTD Total Return: 7.8%

Covanta, the US leader in the construction and operation of energy from waste (EfW) plants reported second quarter earnings in July. The company is seeing improvements in profitability in most parts of its operations, and now expects full year results to come in at the high end of its previous guidance.

In August, the company reported several financial transactions that should improve overall profitability. It sold a small (13MW) hydroelectric project in Washington state to Atlantic Power (AT), and assumed the operation and maintenance of two EfW facilities in Florida. Since Covanta already operates six other EfW facilities in Florida, it should be able to achieve synergies in these operations that were not possible for the hydroelectric plant in Washington.

The company also enlarged and lengthened the term of its senior loans, and refinanced a number of tax exempt bonds leading to a reduction in interest expense. Given the company’s size, the move is likely to only result in a $0.01 per share improvement in annual earnings, but every improvement is good to see.

Clearway Energy, Inc (NYSE: NYLD and NYLD/A)
12/31/17 Price: $18.90 / $18.85. Annual Dividend: $1.133(6.0%). Expected 2018 dividend: $1.26(6.7%) Low Target: $14. High Target: $25.
8/31/18 Price: $18.50/$18.44 YTD dividend: $0.927 (4.90%) YTD Total Return: 10.1%

Yieldco NRG Yield announced that Global Infrastructure Partners (GIP) had completed the purchase of NRG’ Energy’s (NRG) controlling stake in the Yieldco and had become its new sponsor. NRG Yield has changed its name to Clearway Energy, Inc, and will be holding a conference call to discuss its plans for the future on September 11th. GIP is also acquiring NRG’s renewable energy assets and development platform.

Clearway’s stock has been advancing since the announcement, most likely in anticipation of renewed growth under its new sponsor.

Atlantica Yield, PLC (NASD:AY)
12/31/17 Price: $21.21. Annual Dividend: $1.16(5.6%). Expected 2018 dividend: $1.39 (6.6%). Low Target: $18. High Target: $30.
8/31/18 Price: $20.64 YTD dividend: $0.97 (4.57%) YTD Total Return: 2.2%

Atlantica Yield’s new sponsor, Algonquin Power (AQN) has been in place since early this year, and the Yieldco has been taking advantage of the stronger sponsor to refinance its debt at lower interest rates while continuing to pay down existing debt with retained cash flow. The aftermath of Atlantica’s former sponsor Abengoa’s (ABG.MC, ABGOY, ABGOF) bankruptcy led to Atlantica focusing on paying down debt rather than growth for the last two years, but now that looks ready to change. The company states that it is in discussions for the acquisition of $200 million in equity worth of accretive investments.

That would represent an approximate 10% increase in the company’s size if all the deals were consummated. If we assume cash flow margins 20% to 30% above returns to current equity, we could see cash flow per share growth of 2 to 3 percent from these transactions. I expect a return to even such modest growth will be welcomed by shareholders.

Pattern Energy Group (NASD:PEGI)

12/31/17 Price: $21.49. Annual Dividend: $1.688(7.9%). Expected 2018 dividend: $1.70(7.9%). Low Target: $20. High Target: $30.
8/31/18 Price: $20.38 YTD dividend: $0.844 (3.93%) YTD Total Return: -0.7%

Yieldco Pattern Energy Group’s stock is starting to recover from lows earlier this year as the company’s path to renewed dividend growth becomes clearer. The company had been paying out nearly 100% of cash flow available for distribution (CAFD) in 2017, and has a goal of bringing this nearly unsustainable payout ratio down to 80%. To do that without a dividend cut requires growing CAFD by approximately 25% over 2017.

Strong second quarter results increased CAFD by 8% in the first half of 2018 over the same period in 2017, despite a decline in the first quarter. 8% is a far cry from the 25% needed before Pattern is likely to resume dividend increases, but it does give the company breathing room. Combine this with the completed sale of PEGI’s Chilean assets and the acquisition of higher yielding assets in Japan and Quebec and investors seem ready to put their fears of a dividend cut to rest.

I do not expect any dividend increases for the next year or two as Pattern brings down its payout ratio towards its 80% target, but at a current yield over 8%, increases are not necessary to make the stock an attractive investment.

Terraform Power (NASD: TERP)
12/31/17 Price: $11.96. Annual Dividend: $0. Expected 2018 dividend: $0.72 (6.0%) Low Target: $10. High Target: $16.
8/31/18 Price: $11.18 YTD dividend: $0.38 (3.18%) YTD Total Return: -3.4%

Yieldco Terraform Power completed its acquisition of European Yieldco Saeta Yield, and is now turning its focus on improving the operations at its fleet to improve profitability. Terraform’s former sponsor, the now bankrupt SunEdison, operated the Yieldco’s fleet of wind and solar farms. With the distraction of bankruptcy proceedings, such operations were doubtlessly neglected over the last two years. Now, with a new operations agreement with General Electric (GE), TERP plans to invest in its existing fleet (which now includes Saeta’s as well) to improve operations.

The Yieldco says that these plans, along with the Saeta acquisition, give it a clear path to meeting its 5 percent to 8 percent dividend growth target through 2022 while maintaining its payout ratio below 85%. Such a long term growth target is rare among Yieldcos, especially one which already has a 6.8% yield.

Brookfield Renewable Partners, LP (NYSE:BEP)
12/31/17 Price: $34.91. Annual Dividend: $1.872(5.4%). Expected 2018 dividend: $2.02(5.8%). Low Target: $28. High Target: $45.
8/31/18 Price: $30.77 YTD dividend: $0.98 (2.81%) YTD Total Return: -9.0%

Brookfield Renewable Partners reported a weak second quarter results because of low production from hydropower. The stock sold off as a result, and now looks quite attractive. Brookfield’s large base of hydropower and limited partnership structure (you get a K-1 but it is safe to hold in a retirement account because it does not produce UBTI.)

In other words, BEP is a great diversifier in a Yieldco-heavy portfolio, and now looks like a good time to add it to that portfolio if you have not already.

Green Plains Partners, LP (NASD: GPP)
12/31/17 Price: $18.70. Annual Dividend: $1.84(9.8%). Expected 2018 dividend: $1.90(10.2%). Low Target: $13. High Target: $27.
8/31/18 Price: $15.20 YTD dividend: $0.945 (5.05%) YTD Total Return: -14.3%

Ethanol MLP and Yieldco Green Plains Partners has been selling off in large part due to the Trump EPA’s attacks on the ethanol industry. These include diluting the Renewable Fuel Standard, and granting waivers to oil refiners who don’t really need those waivers. In other words, it is tough times for GPP and its parent GPRE.

At this point, however, I think much of the bad news is priced in, and there is some “good” news in the form of higher gas prices, as well as the tariffs that China and others are putting on corn. This bad news for corn growers is good news for corn users, like Green Plains. China has also put a tariff on ethanol, but since ethanol can be substituted for gasoline (to a point), the price of gas should put a floor on the price of ethanol. That is not true for the price of corn.

There are definitely risks with this stock, but the 12%+ yield is some very healthy compensation for those risks.

InfraREIT, Inc. (NYSE: HIFR)
12/31/17 Price: $18.58. Annual Dividend: $1.00(5.4%). Expected 2018 dividend: $1.00 (5.4%). Low Target: $16. High Target: $30.
8/31/18 Price: $20.89 YTD dividend: $0.50 (2.69%) YTD Total Return: 15.2%

Electricity transmission REIT InfraREIT reported much improved income and cash flow per share over the year earlier due to asset acquisitions. The company is maintaining its $1 annual dividend while it re-evaluates its corporate structure. It lost most of the advantages it gained by being a REIT as a result of the 2017 Republican tax bill. At this point, the company could decide to become a normal corporation, be sold, or combine with another corporation. There is also uncertainty around restructuring various long term lease transactions with its parent, Hunt Corporation so that they work with any new corporate structure and the new tax laws.

Earlier this year, the speculation about a possible go-private transaction drove the stock into the mid-$22 dollar range, at which point I wrote that I was “selling calls to lock in some profits in InfraREIT.” Now that the stock has pulled back a bit, I’m happy to hold at the current price, collect my dividends, and see what happens. I expect that there is more upside profit potential in a possible future transaction than downside risk, and I like the improving earnings numbers. Finally, the company reached a beneficial tax settlement with the State of Texas, which was also good news. With this positive backdrop, investor uncertainty about the company’s future corporate structure is likely leading to some current undervaluation.

Enviva Partners, LP. (NYSE:EVA)
12/31/17 Price: $27.65. Annual Dividend: $2.46(8.9%). Expected 2018 dividend: $2.65 (9.6%). Low Target: $25. High Target: $40.
8/31/18 Price: $32.00 YTD dividend: $1.875 (6.78%) YTD Total Return: 23.2%

Wood pellet Yieldco and Master Limited Partnership Enviva reported another strong quarter, with new long term contract signed for additional wood pellet supplies to both Europe and Japan. Although the stock is up significantly this year, I am not ready to start taking profits, given its strong growth and and prospects.

Final Thoughts

While I’m happy that this model portfolio and GGEIP are both now comfortably up for the year, stock market valuation and political turmoil are making me increasingly cautious about the market going forward. Although there are a few stocks here that I think are good values, I believe caution is increasingly warranted. I see this as a great time to wait and see, while holding a healthy allocation in cash.

Disclosure: Long PEGI, NYLD/A, CVA, HIFR, AY, SSW, SSW-PRG, TERP, BEP, EVA, HIFR, GPP, AQN, GE.

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.

The post Ten Clean Energy Stocks For 2018: Second Quarter Earnings appeared first on Alternative Energy Stocks.

List of Solar Farm Owner and Developer Stocks

Tom Konrad Ph.D., CFA — Wed, 20 Jun 2018 14:39:38 +0000

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Solar farm owner and developer stocks are publicly traded companies who develop or manufacture equipment that converts sunlight into other types of useful energy. Includes manufacturers and developers of both solar photovoltaic and solar thermal equipment, as well as their supply chain.

This list was last updated on 3/21/2022.

7C Solarparken AG (HRPK.DE)
Abengoa SA (ABG.MC, ABGOY, ABGOF)
Acciona, S.A. (ANA.MC, ACXIF)
Adani Green Energy (ADANIGREEN.NSE)
Algonquin Power and Utilities (AQN, AQN.TO)
Atlantica Yield PLC (AY)
Azure Power Global Ltd. (AZRE)
Bluefield Solar Income Fund (BSIF.L)
Boralex (BLX.TO, BRLXF)
Brookfield Renewable Energy Partners (BEP)
Canadian Solar (CSIQ)
Capital Stage AG (CAP.DE)
Clearway Energy, Inc. (CWEN, CWEN-A)
Edisun Power Europe AG (ESUN.SW)
Etrion Corp. (ETX.TO, ETRXF)
Canadian Solar (CSIQ)
First Solar Inc (FSLR)
GCL-Poly Energy Holdings Ltd. (3800.HK)
Iberdrola, S.A. (IBE.MC, IBDSF, IBDRY)
Infigen Energy Limited (IFN.AX, IFGNF)
Infraestructura Energética Nova, S.A.B. de C.V. (IENOVA.MX)
Innergex Renewable Energy Inc. (INE.TO, INGXF)
JinkoSolar Holding Co. (JKS)
Greenbriar Capital Corp. (GRB.V)
Guggenheim Global Solar ETF (TAN)
Neoen S.A (NEOEN.PA)
New Energy Exchange Limited (EBODF)
NextEra Energy Partners, LP (NEP)
NextEra Energy, Inc. (NEE)
Northland Power Inc. (NPI.TO, NPIFF)
Panda Green Energy Group Limited (0686.HK)
Premier Power Renewable Energy (PPRW)
Principal Solar (PSWW)
Renesola Ltd. (SOL)
ReNew Energy Global plc (RNW)
RGS Energy (RGSE)
Scatec Solar ASA (SSO.OL)
Shunfeng International Clean Energy Limited (1165.HK)
Sky Solar Holdings Ltd. (SKYS)
Solar Wind Energy Tower (SWET)
Solaria Energía y Medio Ambiente, S.A. (SLR.MC, SEYMF)
Sunpower (SPWR)
Sunvalley Solar, Inc. (SSOL)
Sunworks, Inc. (SUNW)
Terraform Power, Inc. (TERP)
The Renewables Infrastructure Group (TRIG.L)
US Solar Fund PLC (USF.L)
UGE International (UGE.V)
Vivint Solar (VSLR)
Yingli Green Energy Holding Company (YGEHY)

If you know of any solar farm developer or owner stock that is not listed here and should be, please let us know by leaving a comment. Also for stocks in the list that you think should be removed.

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Ten Clean Energy Stocks For 2017: Summer Harvest

Tom Konrad Ph.D., CFA — Mon, 07 Aug 2017 10:38:08 +0000

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Tom Konrad Ph.D., CFA

Colossal Fossil Failure

With a president actively hostile towards renewable energy and focused on promoting fossil fuels, it would be easy to think that clean energy stocks would underperform their fossil cousins. The exact opposite has been true. Despite the administrations’ efforts and tweets bragging about new highs for the Dow, energy funds are down over 10% for the year. For example, the Energy Select Sector SPDR (XLE), largely composed of oil and gas companies, is down 13% for the year. The tiny coal sector did better, with the VanEck Vectors Coal ETF up 18%.

Even so, Trump’s favorite industry was behind the one he seems to hate the most, clean energy. The broadly held Clean Energy ETF (PBW) which I use as a benchmark for my growth stock picks is up 24% year to date, which my clean energy income stock benchmark (the Yieldco ETF YLCO) is up 20%.

Perhaps this administrations’ ineffectiveness is simply the result of the chaos resulting from the many investigations into the possible corrupt practices that may have helped bring this administration into power. Or perhaps the media spotlight has helped the solar and wind industries bring the message to a broad audience that solar, wind and energy efficiency are the most cost effective energy resources. The President can remove environmental regulations and allow coal companies to increase their profits from existing plants and the expense of citizens’ health, but he can’t make new coal plants more economic than solar and wind, no matter how many regulations he removes. Wind and solar have simply come too far for a mature technology like coal to catch up.

In short, the President may brag about the stock market, be his efforts have little to do with its actual performance.

While clean energy has been doing well, and my Ten Clean Energy Stocks model portfolio has been doing better. For the year to July 31st, the portfolio is up 24.7% compared to 20.8% for its benchmark. The success has been driven by the core eight income stocks (up 24.8% vs 19.6% for YLCO.) My real managed Green Global Equity Income Portfolio (GGEIP) is up 19.9%, slightly ahead of the same benchmark. My two growth picks are up 22.2%, closing in on their benchmark PBW at 23.8%.

See the chart below for detailed performance over the two months since the May 31st update.

Stock discussion

Income Stocks

Pattern Energy Group (NASD:PEGI)

12/31/16 Price: $18.99. Annual Dividend: $1.63 (8.6%). Expected 2017 dividend: $1.64 to $1.67. Low Target: $18. High Target: $30.
7/31/17 Price: $25.10. YTD Dividend: $0.832 (4.4%). Annualized Dividend: $1.655. YTD Total Return: 37.3%

Wind-focused Yieldco Pattern Energy Group made a strong 13% gain in June and July without any significant news.

This move is mostly in line with other Yieldcos, most of which made gains for the two months. The Yieldco ETF (YLCO) was up 7%. I believe this trend is mostly due to the market realizing that the Trump administration can do little to undermine Yieldco profitability, combined with a return to more normal valuations in the wake of the 2015 Yieldco bust. Pattern’s somewhat stronger move compared to other Yieldcos is most likely a function of better valuation.

8point3 Energy Partners (NASD:CAFD)
12/31/16 Price: $12.98. Annual Dividend: $1.00 (7.7%). Expected 2017 dividend: $1.00 to $1.05. Low Target: $10. High Target: $20.
7/31/17 Price: $14.75. YTD Dividend: $0.521 (4.0%) Annualized Dividend: $1.04. YTD Total Return: 17.9%

8point3 Energy Partners gained 10% for the two months, also ahead of the average Yieldco. This is most likely due to its relatively high dividend yield.

I believe that 8point3 is somewhat overvalued at the current price. Both its parent companies, First Solar (FSLR) and SunPower (SPWR) have said that they want to sell their stakes, and an examination of the Yieldco’s financials leads me to believe that they are unlikely to find a buyer for more than $13 a share. If they can’t find a buyer, I believe that 8point3 will be forced to drastically cut its dividend in the next one to three years, a move which will almost certainly send the share price tumbling.

I have sold my position in CAFD and sold short calls on the stock.

Hannon Armstrong Sustainable Infrastructure (NYSE:HASI).

12/31/16 Price: $18.99. Annual Dividend: $1.32 (7.0%). Expected 2017 dividend: $1.34 to $1.36. Low Target: $15. High Target: $30.
75/31/17 Price: $23.25. YTD Dividend: $0.66 (3.5%). Annualized Dividend: $1.32. YTD Total Return: 26.0%

Sustainable infrastructure and clean energy financier Hannon Armstrong continued to advance over the last two months. On August 3rd, it announced solid second quarter results slightly ahead of analysts’ forecasts, and continued its slow advance. Its 34 cents of core earnings for the quarter topped its current dividend of 33 cents. This is significant because HASI has a target of paying out 100% of core earnings as dividends over the course of a year.

Given the core earnings growth trend, I expect the company to raise its quarterly dividend to at least 35 cents per share in December. Previously, my low end estimate was 34 cents. My high end estimate remains at 37 cents per share.

NRG Yield, A shares (NYSE:NYLD/A)

12/31/16 Price: $15.36. Annual Dividend: $1.00 (6.5%). Expected 2017 dividend: $1.00 to $1.10. Low Target: $12. High Target: $25.
7/31/17 Price: $18.23. YTD Dividend: $0.53 (2.6%). Annualized Dividend: $1.08. YTD Total Return: 22.4%

In July, Yieldco NRG Yield’s (NYLD and NYLD/A) parent, NRG Energy (NRG), announced that it was looking for a buyer for its stake. NRG Yield’s stock rose on the news, but at the current price of $18, I don’t expect that there is much room for a buyer to pay a premium. Using a similar methodology as I used for 8point3, I estimate that a buyer should be willing to pay between $15 and $21 per share for 8point3, based on my estimate of sustainable CAFD per share of approximately $1.50 to $1.70.

Atlantica Yield, PLC (NASD:ABY)
12/31/16 Price: $19.35. Annual Dividend: $0.65 (3.4%). Expected 2017 dividend: $0.65 to $1.45. Low Target: $10. High Target: $30.
7/31/17 Price: $21.61. YTD Dividend: $0.25 (2.6%). Annualized Dividend: $1.00. YTD Total Return: 14.4%

Atlantica Yield did not participate fully in the general Yieldco rally, gaining only 3.5% over the two month period. The company continues to be held back by the delay in obtaining a waiver from the creditors of its ACT cogeneration power station in Mexico. The plant itself has been performing well, according to the Yieldco’s second quarter earnings release on August 3rd. The company also announced a quarterly dividend increase to $0.26 “reflecting a positive outlook regarding the resolution of some of our last remaining waivers.”

I like Atlanica’s cautious approach with its dividend, which allows the company to retain cash and make small acquisitions like a 4 MW mini-hydro plant in Peru on July 20th, despite the company’s current depressed stock price. I was hopeful, however, that Atlantica would have obtained the necessary waivers by this point, and increased the dividend much further.

NextEra Energy Partners (NYSE:NEP)
12/31/16 Price: $25.54. Annual Dividend: $1.36 (5.3%). Expected 2017 dividend: $1.38 to $1.50. Low Target: $20. High Target: $40.
7/31/17 Price: $41.22. YTD Dividend: $0.718 (2.8%). Annualized Dividend: $1.52. YTD Total Return: 65.0%

NextEra Energy Partners continues to be the star of the Yieldco space, and has now reached a point where it should be able to fund acquisitions with secondary offerings of stock. As long as investors are willing to buy more shares at its current yield of below 4%, NEP should be able to maintain its target annual per share dividend growth of 12% to 15%.

I personally prefer Yieldcos with higher current yields and lower growth prospects, and so have been taking profits on my position.

I am happy to see NEP’s share price recovery, and not just because of the capital gains. The long term dividend growth NextEra Energy Partners hopes to deliver will require the purchase of ever larger numbers of clean energy projects, or even entire Yieldcos. This renewed appetite for clean energy projects will lower the capital costs for future wind and solar farms, increasing the number that will be built.

Other Income Stocks

Covanta Holding Corp. (NYSE:CVA)
12/31/16 Price: $15.60. Annual Dividend: $1.00 (6.4%). Expected 2017 dividend: $1.00 to $1.06. Low Target: $10. High Target: $30.
7/31/17 Price: $15.10. YTD Dividend: $0.50 (3.2%) Annualized Dividend: $1.00. YTD Total Return: 0.2%

Waste-to-energy developer and operator Covanta reported strong second quarter results on July 27th. The company reported a strong waste disposal market. Covanta President and CEO called it a “good time to be a waste company” on the conference call. Revenue per ton increased 3.3% year over year. The company also expects increases in the prices it will get for recycled metals because of a new sorting facility. The one sour note was continued weakness in energy markets.

With the completion of company’s new Dublin Facility to be financed entirely with non-recourse debt, Covanta expects to begin to pay down debt towards the end of the year.

The market liked what it heard, reversing a 9% decline in June with a 14% increase in July.

Seaspan Corporation, Series G Preferred (NYSE:SSW-PRG)

12/31/16 Price: $19.94. Annual Dividend: $2.05 (10.3%). Expected 2017 dividend: $2.05. Low Target: $18. High Target: $27.
7/31/17 Price: $22.26. YTD Dividend: $1.53 (7.7%). Annualized Dividend: $2.05. YTD Total Return: 19.4%

Leading independent charter owner of container ships Seaspan reported second quarter results on August first. The market for container ship leases continues to improve, as does Seaspan’s balance sheet. The company paid down $147 million in net debt over the quarter, in part ($34 million) financed by the issuance of new common shares. For holders of the preferred stock, this is unadulterated good news, since we suffer no dilution from the new common stock (which is junior to preferred) but still gain from the stronger balance sheet.

Growth Stocks

MiX Telematics Limited (NASD:MIXT).
12/31/16 Price: $6.19. Annual Dividend: $0.14 (2.3%). Expected 2017 dividend: $0.14 to $0.16. Low Target: $4. High Target: $15.
7/31/17 Price: $8.14. YTD Dividend: $0.076 (1.2%). Annualized Dividend: $0.14. YTD Total Return: 32.8%

Vehicle and fleet management software as a service provider MiX Telematics reported quarterly results on August 3rd, with subscriber growth running ahead of expectations. The company also raised its quarterly dividend by 25%. As CEO Stephan Joselowitz put it, “the company has reached an inflection point in regards to margin accretion, particularly as MiX is moving out of a heavy investment cycle into a phase where we are starting to enjoy the returns on these investments.”

Shareholders should buckle their seat-belts and continue to enjoy the ride.

Aspen Aerogels (NYSE:ASPN)

12/31/16 Price: $4.13. Annual Dividend and expected 2017 dividend: None. Low Target: $3. High Target: $10.
7/31/17 Price: $4.61. YTD Total Return: 11.6%

In recent updates, I’ve predicted that aerogel insulation manufacturer Aspen’s stock would underperform, although I maintained a positive long term outlook. In fact, it has been in a slow rising trend, even if it was a little slower than clean energy stocks in general. On August 3rd, Aspen reported second quarter results, and the market reacted positively to the improving (if still weak) business fundamentals.

For me, it looks like Aspen will likely be “the one that got away,” but I will continue to monitor the stock for readers who did not sell at the bottom, as I did.

My Trades

I’ve added to my positions in Seaspan Preferred and Covanta in the last two months. I have reduced my effective position in NRG Yield (and taken some profits) by selling covered calls. I’ve increased my short position in 8point3 by selling uncovered calls.

Final Thoughts

Although the economics of clean energy are strong, recent stock market highs, the likely slow increase in interest rates, and political uncertainty make the stock market a risky place to be right now. While I am skeptical about the sustainability of 8point3’s dividend, my short calls on the stock also serve the function of partially hedging my investments in other Yieldcos.

Despite (or because of) the recent gains in the market and clean energy stocks, now seems a good time to invest cautiously.

Disclosure: Long HASI, MIXT, PEGI, NYLD/A, CVA, ABY, NEP, SSW-PRG, ASPN, GLBL, TERP. Long puts on SSW (an effective short position held as a hedge on SSW-PRG. Short calls on CAFD.)

The post Ten Clean Energy Stocks For 2017: Summer Harvest appeared first on Alternative Energy Stocks.

Stock Picks for US Energy Dominance

Tom Konrad Ph.D., CFA — Fri, 30 Jun 2017 19:45:05 +0000

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Tom Konrad, Ph.D. CFA

Thursday night (Friday morning in Sinapore) CNBC Asia’s Street Signs program must have had an interview cancellation, because they needed someone to give them 3 energy stock picks in response the Trump’s “Energy Dominance” speech on last minute notice. They sent me (and probably a bunch of other people) an email two and a half hours before air. I did not see it until 20 minutes before the actual interview. I warned them that I do clean energy, not fossil fuels, but apparently they had no other takers who were awake and able to give energy stock picks at 11:23pm ET on a moment’s notice.

I think they found me because I was on Capital Connection Asia in late January.

I don’t think I was quite what the host, Martin Soong was looking for. He improvised well by turning from the Trump clip saying “if you want to do something entirely different, you might invest in alternative energy…”

I’m still trying to get video, but here’s my memory of the interview.

MS: How is clean energy doing under Trump?
TK: Great. There was a little stumble after he was elected, but then the market figured out that he’s living in the 20th century while the economy has moved on to the 21st. Clean energy has turned the corner, and is now the cheapest source of new electricity. The market is realizing that, even if Trump doesn’t.

MS: Do you have stock picks?

TK: Atlantica Yield (ABY), Covanta Holding Co (CVA), and General Cable (BGC).
I went on to describe why I like Atlantica – you can read about that and Covanta in my last 10 Clean Energy Stocks for 2017 update.
General Cable was a last minute add for me. I’m very nervous about the market right now, so there are not many stocks I’m enthusiastic about. I was tempted to mention Seaspan (SSW) Preferred shares (SSW-PRG), but they’d asked for energy stocks, not efficient transportation. You can read about Seaspan Preferred in my recent update as well.

My picks in January had been Pattern Energy Group (PEGI), and Hannon Armstrong (HASI.) Both have gained significantly (17% and 22%) since then, and so they’re still top holdings, but not the most likely to make further large gains in the near term.

I picked General Cable instead. It’s a bit of a stretch to call it an energy stock, but at least the connection between the manufacturer of electric and communication cables and the energy sector is obvious. Given more than 20 minutes, I might have picked something else, or just stuck with the two I’m most enthusiastic about.

Martin Soong wanted to talk about ETFs, we did not talk about Covanta or General Cable at all.

MS: What about clean energy ETFs? I’ve looked at six that are up about 10% for the year.

TK: ETFs are okay if you’re unwilling to pick stocks, but clean energy is such a new sector, pricing is not yet efficient, and there is a lot of room for stock pickers to get an edge.

MS: But the ETFs are up 10% for the year. Why not just invest in those?

TK: My Green Global Equity Income Portfolio is up 17%.

MS: I have to admit, that’s good performance.

And he ended the interview.

Unfortunately, I had misstated my performance. I don’t spend much time thinking about past performance: Future performance and how I can improve it is much more interesting. For the record, my Green Global Equity Income Portfolio (GGEIP) was up 13.5% for the year to date…. not as good as I’d thought, but still ahead of the alternative energy ETFs he was looking at.

Despite my mistake on my track record, I stick to my assertion that clean energy remains a stock picker’s market. Until clean energy investing becomes main stream, there will be a lot of room for stock pickers like me to beat the indexes. Perhaps I should have mentioned that GGEIP was up 30.5% in 2016, although I achieved that using options and other strategies not available in clean energy ETFs, not just stock picking.

DISCLOSURE: Tom Konrad has long positions in ABY, CVA, BGC, PEGI, HASI, and SSW-PRG, and own puts on SSW (an effective short position.)

The post Stock Picks for US Energy Dominance appeared first on Alternative Energy Stocks.

Ten Clean Energy Stocks For 2017: First Quarter Earnings

Tom Konrad Ph.D., CFA — Sun, 04 Jun 2017 19:06:09 +0000

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Tom Konrad Ph.D., CFA

In the two months since the last update, most of the stocks in my Ten Clean Energy Stocks model portfolio have reported first quarter earnings. There were few surprises, and those were mostly pleasant ones, allowing the model portfolio to add to its gains, and pull a little farther ahead of its benchmark.

For the year to the end of May, the model portfolio is up 13.8%, 2% ahead of its benchmark. The benchmark is an 80/20 blend of the clean energy income benchmark (the Yieldco ETF YLCO) and the clean energy growth benchmark (Clean Energy ETF PBW), with the ratio matching the 80/20 mix of income and growth stocks in the model portfolio.

The 8 income stocks again led the pack, with an average total return of 15.2% for the year to date. The Green Global Equity Income Portfolio (GGEIP), an income and green focused strategy I manage also did well, up 13.5%. For comparison, the income benchmark YLCO produced a solid 11.4% return.

The two growth stocks recovered from losses early in the year and are now up 9.4%, but still behind PBW at 12.9%.

Stock discussion

Income Stocks

Pattern Energy Group (NASD:PEGI)

12/31/16 Price: $18.99. Annual Dividend: $1.63 (8.6%). Expected 2017 dividend: $1.64 to $1.67. Low Target: $18. High Target: $30.
5/31/17 Price: $22.56. YTD Dividend: $0.408 (2.2%). Annualized Dividend: $1.655. YTD Total Return: 21.2%

Wind-focused Yieldco Pattern Energy Group advanced in strongly in April ahead of first quarter earnings. Earnings did not disappoint, and the Yieldco added to those gains in May. Guidance for 2017 Cash Flow Available for Distribution (CAFD) is $140 to $165 million, which would be 5% to 24% increase on 2016 CAFD.

Growth has been slowing for Pattern, mainly because the low share price following the Yieldco bust at the end of 2015 has prevented the company from raising much equity capital. I expect that the share price will need to rise into the high 20s before we see large equity issuance from Pattern. With lower growth, they are also lowering their quarterly dividend increases. Since the IPO in 2014, the average quarterly increase has been 2.7%, but the company only increased its dividend 2% in the fourth quarter of 2016 and 1.4% this quarter. This lower rate of increases seems prudent, given that CAFD may only grow 5% this year at the low end.

Less prudent in a time when the company needs to be careful with its cash is the Yeildco’s consideration of an investment in the early stage projects of its parent, Pattern Development. In general, I think it is a good idea for Yieldcos to invest in project development with some of their resources, and eventually, as they grow larger, do much of their project development in house. That said, the time to invest in relatively risky but potentially high return businesses is when the stock is highly valued. When money is tight, as it is now for Patten and most other Yieldcos, it’s best to focus on investments that will increase the dividend in the short term. The time to invest in Pattern Development will be after the stock price recovers. Even small investments in early stage projects like the one being considered will only delay further stock price recovery.

8point3 Energy Partners (NASD:CAFD)
12/31/16 Price: $12.98. Annual Dividend: $1.00 (7.7%). Expected 2017 dividend: $1.00 to $1.05. Low Target: $10. High Target: $20.
5/31/17 Price: $13.64. YTD Dividend: $0.257 (2.0%) Annualized Dividend: $1.028. YTD Total Return: 7.1%

I took a deeper look at Solar-only Yieldco 8point3’s plans to refinance its company level debt with amortizing debt in March. The company abandoned these plans April when one of its sponsors, First Solar (FSLR), announced that it was considering selling its stake in the Yieldco.

While I believe the refinancing plans were prudent, I found that they would have reduced 8point3’s CAFD below the level needed to sustain its current dividend. To make matters worse, the Yieldco announced a dividend increase while the refinancing plans were still in place. This behavior basically meant that 8point3 was hoping that its unsustainable dividend increases would cause investors to buy the stock and drive up the stock price. This hoped-for stock rebound would allow 8point3 to make new investments and increase cash flow enough to avoid a dividend cut.

In short, 8point3 was acting like it expected a return to the Yieldco bubble of 2014 and early 2015.

The abandonment of 8point3’s (prudent) plans to refinance its company-level interest only debt with project-level amortizing debt leaves sufficient cash flow to pay its current dividend, but does not address the reason for that plan in the first place. 8point3’s debt matures in 2020, and it is an open question if lenders will be willing to refinance it at comparable terms. If the stock price recovers, the company will issue new equity and grow itself out of the problem. If not, the only option open to 8point3 in 2019 may be refinancing with project level, amortizing debt. That will greatly reduce CAFD, leading to a large dividend cut. The company’s recent dividend increases only make this future problem worse.

This strategy of hoping that the stock market will bail the company out of its financing problems, at the same time as one (if not both) of its sponsors are looking for the exits is, in my opinion, irresponsible corporate management. While the high yield puts a floor on the stock price in the near term, I believe that long term investors are becoming increasingly skeptical of the company. This skepticism should also put a ceiling on the share price, and prevent management’s hopes of a share price recovery from coming to fruition.

As the maturity of 8point3’s debt moves closer, the consequences of the inevitable refinancing will loom larger in investors’ minds. I don’t know when it will happen, but at some point, the stock price will have to drop to reflect 8point3’s much lower expected CAFD and dividend after refinancing.

Because of this, I have started selling short calls on the stock, in order to profit from my prediction that the share price is likely to be capped in the near term, and fall in the medium term.

Hannon Armstrong Sustainable Infrastructure (NYSE:HASI).

12/31/16 Price: $18.99. Annual Dividend: $1.32 (7.0%). Expected 2017 dividend: $1.34 to $1.36. Low Target: $15. High Target: $30.
5/31/17 Price: $21.91. YTD
Dividend: $0.33 (1.7%). Annualized Dividend: $1.32. YTD Total Return: 17.1%

In my last update, I said that Hannon Armstrong’s recent secondary stock offering had depressed the stock and that the then current price of $19.20 represented a buying opportunity. The stock of this sustainable infrastructure financier has since risen 14%. The dividend is still attractive and it still has plenty of room for gains, but is no longer a screaming deal.

The first quarter earnings release was admirably boring, showing steady growth.

NRG Yield, A shares (NYSE:NYLD/A)
12/31/16 Price: $15.36. Annual Dividend: $1.00 (6.5%). Expected 2017 dividend: $1.00 to $1.10. Low Target: $12. High Target: $25.
5/31/17 Price: $17.20. YTD Dividend: $0.53. Annualized Dividend: $1.08. YTD Total Return: 15.5%

Yieldco NRG Yield (NYLD and NYLD/A) had a mixed quarter, with improved availability of its wind and solar assets, offset by unfavorable weather. It does not matter how well your solar plant is running if it does not stop raining. The company’s conventional fleet also had problems with forced outages, although some of the losses were recovered through insurance.

These problems were mostly offset by new acquisitions. Although, like many Yieldcos, NRG Yield’s share price has been depressed, its stock price has been recovering and it is able to raise some equity capital to accretively invest in new projects. It also has $144 million in availability from its existing borrowing facilities. This growth potential means that the Yeildco is still on track to raise its dividend by 15% in 2017 over the previous year.

Nor should it lack for projects to buy. In addition to its identified ROFO list, its parent NRG is under pressure to sell its renewable businesses from an activist shareholder. This might lead to accelerated purchases of some assets at better-than-expected prices.

Atlantica Yield, PLC (NASD:ABY)
12/31/16 Price: $19.35. Annual Dividend: $0.65 (3.4%). Expected 2017 dividend: $0.65 to $1.45. Low Target: $10. High Target: $30.
5/31/17 Price: $20.89. YTD Dividend: $0.25 (2.6%). Annualized Dividend: $1.00. YTD Total Return: 10.6%

Atlantica Yield continues to impress me, but not the market. Along with first quarter earnings, the company announced that it had “obtained a waiver in Kaxu which waives any past potential cross-default with Abengoa in the project finance agreement.” After Kaxu, the company needs to obtain only one more such waiver in order to free itself from the after-effects of its former parent Abengoa’s bankruptcy.

The remaining project, ACT, represents 300 MW of conventional power generation in Mexico, and accounted for 13% of revenue in 2016. The muted reaction of investors to first quarter earnings may have been in response to the company’s decision not to raise the dividend until it obtains the final waiver for ACT. Given ACT’s share for revenue and cash flow, the board could have easily justified increasing the quarterly dividend to $0.30. The fact that they chose to keep the dividend at $0.25 is the exact opposite of the “raise the dividend and hope investors come” strategy that concerns me at 8point3 Energy Partners (see above.)

Contrasting Atlantica and 8point3

In sharp contrast to 8point3, Atlantica is preserving corporate capital and using it to make small investments which will lead to long term dividend growth, such as the $10 million investment in a California-Arizona transmission line announced in the first quarter.

Like all income investors, I like dividend increases, but I like prudent uses of capital even more. With Yieldco stocks still out of favor, it’s much better to fund growth with retained cash flow as Atlantica is doing than to squander current resources in the hope that the stock price will recover and shareholders will be willing to fund today’s dividend increase after it has already happened.

Another telling point of contrast between Atlantica and 8point3 is Atlantica’s stated 3x target for the ratio of corporate level debt to pre-debt service CAFD. For Atlanica, this ratio stood at a cautious 2.6 at the end of the first quarter. 8point3 does not use (or at least disclose) this ratio, but we can estimate it. For 2017, 8point3 is projecting approximately $95 million of CAFD and $25 million of debt service. All $714 million debt is corporate level, so 8point3’s outlook puts the same ratio at just below 6- twice Atlantica’s target.

The point of a ratio like this is to ensure that changes in the cost of servicing corporate debt will have a limited impact on dividends. 8point3 is currently paying 3.5% per year for debt service. This must be refinanced by 2020. If it is all refinanced at the same 5% rate as Atlantica just refinanced some of their corporate level interest-only debt, the annual debt service cost will rise from $25 million to $36 million, reducing annual CAFD to $80 million, or $1 per share.

Even this is a best-case scenario that assumes no the company can refinance everything with interest only debt. If 8point3 tried to meet Atlanitca’s 3 times target, it would need to refinance more than half of its debt with amortizing project level debt, annual CAFD would fall to $0.88 a share. That puts the current dividend rate of $1.08/year at 123% of 8point3’s long term sustainable CAFD. This ratio of dividends to CAFD is called the payout ratio, and most Yieldcos target payout ratios of 80% to 90%. Atlantica’s target payout ratio is 80%, and its current dividend of $0.25 per quarter is only 56% of CAFD guidance for 2017. This leaves a lot of room for Atlantica to increase its dividend later this year.

NextEra Energy Partners (NYSE:NEP)
12/31/16 Price: $25.54. Annual Dividend: $1.36 (5.3%). Expected 2017 dividend: $1.38 to $1.50. Low Target: $20. High Target: $40.
5/31/17 Price: $34.54. YTD Dividend: $0.718 (2.8%). Annualized Dividend: $1.46. YTD Total Return: 21.9%

NextEra Energy Partners also compares favorably with other Yieldcos on measures such as payout ratio and company level debt. Its outlook for long term CAFD from its current properties is approximately $310-340 million, or $2 to $2.20 per share, compared to 2017 distributions of $1.58-$1.62 per share. That gives a payout ratio of around 80%.

Management does not plan not to issue additional equity until the share price recovers. If the share price does not recover, the company may have trouble delivering on it 5 year dividend growth target of 12% to 15% per year, but not until at least 2019, and there is no danger of a dividend cut like the one we could see for 8point3 in the same time frame. And in Nextera Energy Partners’ case, the necessary share price recovery is already underway.

Other Income Stocks

Covanta Holding Corp. (NYSE:CVA)
12/31/16 Price: $15.60. Annual Dividend: $1.00 (6.4%). Expected 2017 dividend: $1.00 to $1.06. Low Target: $10. High Target: $30.
5/31/17 Price: $14.75. YTD Dividend: $0.25 (1.6%) Annualized Dividend: $1.00. YTD Total Return: -3.9%

Along with Atlantica, waste-to-energy developer and operator Covanta continues to suffer because of market weakness in power prices and commodity metals. Earnings were significantly negative at -$0.41 per share, but like Yieldcos, much of this loss is in the form of depreciation, and so it does not have much bearing on the company’s ability to maintain its dividend. The company’s Free Cash Flow guidance for 2017 is $100 million to $150 million, which should be sufficient to maintain its $129 million in annual dividend payments until cash flow increases because of growth investments or recovering commodity markets.

The company’s Dublin facility accepted its first waste delivery and remains on track for commercial operation in the fourth quarter of this year.

Seaspan Corporation, Series G Preferred (NYSE:SSW-PRG)

12/31/16 Price: $19.94. Annual Dividend: $2.05 (10.3%). Expected 2017 dividend: $2.05. Low Target: $18. High Target: $27.
5/31/17 Price: $21.22. YTD Dividend: $1.023 (5.1%). Annualized Dividend: $2.05. YTD Total Return: 11.3%

Leading independent charter owner of container ships had a very bullish first quarter earnings report, noting that the weakness in pricing container ship leases seemed to have hit bottom. Other shipping companies, such as Maersk (MAERSK-B.CO) have noted similar improvements. Despite this, the company’s common stock continued to drop in May, and its preferred stock (such as SSW-PRG) has not delivered significant gains. I think this makes now a particularly good time to buy the company’s preferred shares, or even speculate on a sharp recovery of the common stock. I did both in recent weeks, buying a little of both the preferred E and H series shares, and buying some long dated $7.5 calls on the common stock as it temporarily fell to near $5.

Growth Stocks

MiX Telematics Limited (NASD:MIXT).
12/31/16 Price: $6.19. Annual Dividend: $0.14 (2.3%). Expected 2017 dividend: $0.14 to $0.16. Low Target: $4. High Target: $15.
5/31/17 Price: $7.12. YTD Dividend: $0.037 (0.6%). Annualized Dividend: $0.14. YTD Total Return: 9.5%

Everything seems to be coming together for vehicle and fleet management software as a service provider MiX Telematics. For the last 2-3 quarters, we’ve been seeing renewed growth in subscriptions in most of the company’s segments. Subscription revenue came in ahead of guidance for the fourth quarter and fiscal year ending March 31st.

The recovery of oil prices to around $50 a barrel has led to a rapid increase in activity should lead to renewed growth in subscriptions MiX’s oil and gas customers. This segment was a drag on MiX’s results in 2016, but should continue to be a tailwind for the rest of this year.

Aspen Aerogels (NYSE:ASPN)

12/31/16 Price: $4.13. Annual Dividend and expected 2017 dividend: None. Low Target: $3. High Target: $10.
5/31/17 Price: $4.52. YTD Total Return: 9.4%

As I expected, Aspen Aerogels delivered unimpressive first quarter earnings. What I did not expect was that the stock would rally for no reason I could see other than a good long term valuation even if the near term prospects still seem weak. When a stock falls for no reason I can determine, I usually buy. When it rises, as Aspen did, I remain on the sidelines.

Final Thoughts

Although the world political and economic climate remains volatile, the US stock market has remained calm so far this year. How long that can continue is anyone’s guess, but I think defensive investments like cash, attractively valued income stocks, and real income investments like home solar remain the best places to put your money.

On home solar, I recently published an article comparing it as an investment to commonly held mutual funds. Spoiler: the mutual funds did not fare well. For defensive income stocks, Atlantica Yield, Covanta, and Seaspan Preferred shares are all looking very attractive right now. As for cash, keep some around. I suspect we will see some much better valuations in the stock market over the next 6 months to a year.

Disclosure: Long HASI, MIXT, PEGI, NYLD/A, CVA, ABY, NEP, SSW-PRG, ASPN, GLBL, TERP. Long puts on SSW (an effective short position held as a hedge on SSW-PRG. Short calls on CAFD.)

The post Ten Clean Energy Stocks For 2017: First Quarter Earnings appeared first on Alternative Energy Stocks.

Ten Clean Energy Stocks For 2017: Earnings Season

Tom Konrad Ph.D., CFA — Sun, 19 Mar 2017 18:55:14 +0000

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Tom Konrad Ph.D., CFA

Earnings season began in earnest in February. My Ten Clean Energy Stocks model portfolio gave back a little of its large January gains because a mix of good and bad earnings mostly offset each other. One pick (Seaspan Preferred) gave back its large January gains. Neither the original gain nor the loss were driven by news. Instead, they seemed driven by investors changing expectations for global trade in an uncertain political environment.

For the year to March 17th, the portfolio and its income and growth subportfolios were all up 7.7%, 8.8%, and 5.4%. Clean energy stocks in general also did well, with my three respective benchmarks up 7.0%, 6.6%, and 8.0%. (I use the Yieldco ETF YLCO as a benchmark for the income stocks, the Clean Energy ETF PBW as a benchmark for the growth stocks, and an 80/20 blend of the two as a benchmark for the whole portfolio.) The Green Global Equity Income Portfolio (GGEIP), an income and green focused strategy I manage returned 6.7%.

The overall and growth portfolios all continue to out-perform their benchmarks, while PBW shot ahead of my two growth picks in February.

Detailed performance is shown in the chart below:

Stock discussion

Below I describe each of the stocks and groups of stocks in more detail.

Income Stocks

Pattern Energy Group (NASD:PEGI)

12/31/16 Price: $18.99. Annual Dividend: $1.63 (8.6%). Expected 2017 dividend: $1.64 to $1.67. Low Target: $18. High Target: $30.
2/28/17 Price: $20.79. YTD Dividend: $0. Annualized Dividend: $1.655. YTD Total Return: 9.5%
3/17/17 Price: $20.41 YTD Total Return: 7.5%

Wind-focused Yieldco Pattern Energy Group reported fourth quarter and full year 2016 results on March 1st, increasing the quarterly dividend 1.4%. I did not see anything to be concerned about in the earnings report, and I like the fact that Pattern, unlike many Yieldcos, has a focus on managing its assets efficiently rather than being content to be a passive owner of wind farms.

The stock declined slightly in response to the report, most likely because the firm’s accountants reported a material weakness in Pattern’s internal accounting controls. Management announced the discovery of this weakness in its third quarter earnings report, and they are working to correct it and continue to certify the accuracy of their financial statements.

Some investors will only invest in companies where the independent accountants have no reservations, and this report is the first one to be audited since the weakness was discovered. This is why I expect the stock fell slightly in response to an otherwise solid earnings announcement.

While not yet relevant to Yieldco shareholders, Pattern Energy’s parent, Pattern Development, completed the largest wind power project in British Columbia, the 184.6 MW Meikle Wind farm. Long-time readers will recognize Meikle as the same project that Finavera (a speculative extra pick in 2014) sold to Pattern Development that year. My track record picking such speculative stocks is poor (Finavera was no exception,) which is why I don’t do it any more, and stick to companies with long term solid cash flows like Pattern.

Solar-only Yieldco 8point3 reported fourth quarter earnings on January 26th, and I covered them at the start of February. As I said at the time, the market is concerned about the Yieldco’s plans to refinance its interest-only company level debt with amortizing project level debt, and the impact this might have on its ability to grow its dividend.

I personally like the move, as it increases the safety of the stock, and I don’t require dividend growth to think that a company with a 7.8% yield is a decent value. Worries that 8point3 will not be able to refinance its debt and comparisons to bankrupt SunEdison are overblown. Unlike SunEdison, the overall level of 8point3’s debt ($673 million, per the Q4 Earnings Presentation) is easily manageable given its current annual EBITDA ($106 to $133 million expected for 2017.) The weighted average of 8point3’s power purchase agreements is over 20 years, and the company currently pays LIBOR+2% (less than 4%) interest on most of its debt. If we assume the company refinances with amortizing project level debt at a 5% interest rate and an average 20 year term, the annual payment (interest plus principal) will be about $50 million, compared to the current annual interest-only payment of $25 million.

The company’s outlook is for $91 to $101 million in 2017 cash available for distribution. Since this number likely includes some principal payments, we can expect that even if all of the Yieldco’s debt is immediately replaced with amortizing debt, there will be $80 million to $90 million in CAFD available to continue paying the current $1 annual dividend on the company’s 79.1 million class A and B shares.

As a worst-case scenario for shareholders, we should consider buying the stock at its current price, and receiving the current $1 dividend for 20 years, after which the stock becomes valueless. The internal rate of return for this cash flow stream is 4.8%: not particularly attractive, but something I’m quite comfortable with as a worst-case scenario.

I’ve been selling puts on the stock in order to add to my position if the stock price falls any further, or collect income if it does not.

Hannon Armstrong Sustainable Infrastructure (NYSE:HASI).

12/31/16 Price: $18.99. Annual Dividend: $1.32 (7.0%). Expected 2017 dividend: $1.34 to $1.36. Low Target: $15. High Target: $30.
2/28/17 Price: $19.79. YTD Dividend: $0. Annualized Dividend: $1.32. YTD Total Return: 4.2%
3/17/17 Price: $19.20&nbs
p; YTD Total Return: 1.1%

Real Estate Investment Trust and investment bank specializing in financing sustainable infrastructure Hannon Armstrong reported earnings after the close on February 22nd.

As I’ve previously discussed, the stock has been depressed recently because of worries about the possibility that the company might lose its REIT status. I have long believed that the company’s REIT status is not in danger, and, if it were, the impact on distributions would be minimal. In the earnings conference call, CEO Jeff Eckel addressed these concerns, saying that he did not expect the IRS to question HASI’s REIT status. He went on to say that if the company chose to convert to a taxable corporation, it could do so without any impact to its core earnings or distributions.

Shortly after the earnings announcement, the company conducted a secondary offering of common stock. The company typically makes several small secondary offerings each year shortly after earnings announcements. The new supply of stock temporarily depresses the stock price and provides an excellent buying opportunity for stock market investors. The current price of $19.20 represents such an opportunity.

NRG Yield, A shares (NYSE:NYLD/A)
12/31/16 Price: $15.36. Annual Dividend: $1.00 (6.5%). Expected 2017 dividend: $1.00 to $1.10. Low Target: $12. High Target: $25.
2/28/17 Price: $16.82. YTD Dividend: $0.26. Annualized Dividend: $1.04. YTD Total Return: 11.2%
3/17/17 Price: $16.70 YTD Total Return: 10.4%

Yieldco NRG Yield (NYLD and NYLD/A) announced 4th quarter earnings on February 28th and increased its quarterly dividend 4% to $0.26. The company is targeting continued annual per-share dividend growth of 15% through 2018. While such growth is likely for the next few quarters, I believe analysts’ dividend expectations will be scaled back for 2018 unless the stock price recovers and allows the company to raise new equity at more attractive prices.

One sour note was a $183 million non-cash impairment charge on certain wind farms acquired in 2015. $162 million of this was pure accounting fiction, and simply reflects that the price at which the assets were originally recorded on the books was more than NRG Yield had actually paid for them, but the other $21 million has to do with a change in NRG’s assumed long term power prices after the Power Purchase Agreements expire in 2017, 2022, and 2025. In other words, NRG Yield is admitting that, in hindsight, it overpaid for these three wind farms by at least $21 million, or about $0.20/share because of overly rosy long term assumptions about the value of the wind farms.

I believe many Yieldcos make overly rosy assumptions about the value of their assets after contract expiration, which is part of the reason why I have always preferred Yieldcos with high current dividends over ones promising high levels of long term growth. It’s easy to come up with assumptions that can justify very attractive long term growth rates, but that does not mean that those assumptions will be true. Dividends paid today are much harder to manufacture with accounting gimmickry.

Atlantica Yield, PLC (NASD:ABY)
12/31/16 Price: $19.35. Annual Dividend: $0.65 (3.4%). Expected 2017 dividend: $0.65 to $1.45. Low Target: $10. High Target: $30.
2/28/17 Price: $21.76. YTD Dividend: $0. Annualized Dividend: $1.00. YTD Total Return: 12.5%
3/17/17 Price: $21.67 YTD Total Return: 12.0%

Atlantica Yield announced its fourth quarter and full year results on February 27th. As expected following the receipt of forbearances from the Department on Energy on January 13th (and discussed here), the Yieldco raised its dividend 53% to $0.25. I expected a larger increase, to near $0.29 a share, but the firm still says that it will be able to increase the dividend to a sustainable rate of $1.60 when/if it is able to obtain forbearances on two projects in Mexico. Reduced dividends in 2016 gave the company the opportunity to reduce corporate debt by 4% in 2016 even while making acquisitions.

The company has a conservative capital structure of mostly amortizing project level debt, as well as a conservative 80% target payout ratio and no IDRs. Without a sponsor, the Yieldco has the freedom to use the retained cash flow to make targeted acquisitions from third parties. Most other Yieldcos are committed to only making acquisitions from their sponsors, reducing competition for attractive projects. All this means that Atlantica, now that the last effects of its former sponsor’s bankrupt are being dealt with, is better positioned for growth than most Yieldcos (with the possible exception of NEP.)

I’ve also been selling puts on ABY, and think the stock remains attractive at the current price.

NextEra Energy Partners (NYSE:NEP)
12/31/16 Price: $25.54. Annual Dividend: $1.36 (5.3%). Expected 2017 dividend: $1.38 to $1.50. Low Target: $20. High Target: $40.
2/28/17 Price: $30.79. YTD Dividend: $0.353. Annualized Dividend: $1.41. YTD Total Return: 21.9%
3/17/17 Price: $33.51 YTD Total Return: 32.7%

NextEra Energy Partners stock continues to advance after the release of its fourth quarter earnings in January, most likely due to analysts continuing to increase their price targets in response to the reduced IDR (see the last update for details.)

Other Income Stocks

Covanta Holding Corp. (NYSE:CVA)
12/31/16 Price: $15.60. Annual Dividend: $1.00 (6.4%). Expected 2017 dividend: $1.00 to $1.06. Low Target: $10. High Target: $30.
2/28/17 Price: $16.18. YTD Dividend: $0. Annualized Dividend: $1.00. YTD Total Return: 3.7%
3/17/17 Price: $15.65 YTD Total Return: 0.3%

Waste-to-energy developer and operator Covanta reported fourth quarter and annual results on February 16th. Earnings and revenues fell short of analysts’ expectations, although they were in line with company guidance. With the commencement of operations at the company’s Dublin facility, and higher metals recovery, the company is guiding for modest EBITDA growth but lower Free Cash Flow growth in 2017. The lower free cash flow for 2017 does not seem likely to be the beginning of a trend. Rather, it will be mostly driven by the reversal of a decline in working capital in 2016.

The company also declared its regular $0.25
dividend payable to shareholders of record on March 30th. It also issued $400 million of 5.875% notes due in 2025 to refinance debt with an interest rate of 7.25% and maturing in 2020. The net effect of this transaction should be to lower the company’s interest payments while extending the maturity of its outstanding debt.

The company is preparing to commence operations at its newest facility in Dublin, Ireland in March.

Seaspan Corporation, Series G Preferred (NYSE:SSW-PRG)
12/31/16 Price: $19.94. Annual Dividend: $2.05 (10.3%). Expected 2017 dividend: $2.05. Low Target: $18. High Target: $27.
2/28/17 Price: $20.56. YTD Dividend: $0.51. Annualized Dividend: $2.05. YTD Total Return: 5.4%
3/17/17 Price: $20.41 YTD Total Return: 4.7%

Leading independent charter owner of container ships reported earnings on March 1st, with a two-thirds cut to the common stock dividend. A dividend cut was expected, and this cut was at the high end of the expected range. This is good news for preferred shareholders, since the less money is paid to common share holders and is instead used to strengthen the company’s balance sheet and operations, the safer the (fixed) preferred dividends become.

Operationally, the company also delivered good news, with cost controls resulting in an 11.7% reduction in vessel ownership costs in the fourth quarter.

The common stock fell, as would be expected with such a large dividend cut, but the preferred shares have also declined slightly. I’ve added to my already large position in the preferred since the earnings announcement.

Growth Stocks

Vehicle and fleet management software as a service provider MiX Telematics announced the results of its third fiscal quarter on February 2nd, delivering strong subscription revenue and increasing its guidance for its 2017 fiscal year, which ends on March 31st. I find it encouraging that the strong results came from strength in virtually every aspect of MiX’s business, rather than a couple of large sales. The growth and increase in subscription revenue is also allowing the company to increase its profitability because subscriptions produce higher margins than equipment sales, and spreading its fixed cost over a larger revenue base reduces per-unit overhead.

Investors initially reacted favorably to the strong quarter, sending the stock upward. It has since fallen back somewhat. If you do not already have a position in the stock, I see this as an excellent opportunity to take advantage of the company’s strengthening growth prospects before they are fully priced in by the market.

Aspen Aerogels (NYSE:ASPN)

12/31/16 Price: $4.13. Annual Dividend and expected 2017 dividend: None. Low Target: $3. High Target: $10.
2/28/17 Price: $4.13. YTD Total Return: 0%
3/17/17 Price: $4.08 YTD Total Return: -1.2%

Aspen Aerogels fourth quarter earnings were worse than expected, with the important subsea segment reducing revenue even below the company’s already bearish guidance. The company has made progress expanding the customer base, but this is a slow process and the company does not expect any large sales to single customers like it has had in the past. While the growing base of smaller customers should lead to better long term income stability and growth, they are currently only filling the gap left by the disappearance of larger one-off sales.

The company’s long term prospects remain encouraging, but investors should be prepared for a couple more quarters for disappointing growth. I have sold my position in anticipation of short term stock weakness which should allow me to repurchase the stock at a lower price, most likely after first or second quarter earnings announcements.

Final Thoughts

Broad stock market valuations remain high despite an unpredictable political climate. I think that investors should continue to position themselves companies with long term contracted cash flows that are unlikely to be significantly affected by possible economic disruptions. Given the anti-renewable energy rhetoric coming from Washington DC, Clean Energy Yieldcos like PEGI, ABY, HASI, and CAFD seem to have the perfect mix of low valuations combined with very safe revenue streams. Worries about global trade also seem to be causing investors to undervalue the security of the dividends on Seaspan’s preferred shares.

I’ve been increasingly focusing my investments on these names, while reducing exposure to the market in general. These tactics are unlikely to deliver the 20-30% portfolio returns I managed last year, but right now I think investors should be wise to focus on protecting themselves from potential market disruptions.

Disclosure: Long HASI, MIXT, PEGI, NYLD/A, CAFD, CVA, ABY, NEP, SSW-PRG, ASPN, GLBL, TERP. Long puts on SSW (an effective short position held as a hedge on SSW-PRG.)

The post Ten Clean Energy Stocks For 2017: Earnings Season appeared first on Alternative Energy Stocks.

Ten Clean Energy Stocks For 2017: Finessing Trump

Tom Konrad Ph.D., CFA — Tue, 03 Jan 2017 18:42:28 +0000

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Tom Konrad Ph.D., CFA

The History of the “10 Clean Energy Stocks” Model Portfolios

2017 will be the ninth year I publish a list of ten clean energy stocks I expect to do well in the coming year. This series has evolved from a simple, off-the-cuff list in 2008, to a full blown model portfolio, with predetermined benchmarks and (mostly) monthly updates on performance and significant news for the 10 stocks.

While there is much overlap between the model portfolio and my own holdings (both personal and in the Green Global Equity Income Portfolio (GGEIP), a clean energy focused dividend income strategy I manage), the model portfolio is designed to be easily reproduced by a small investor who only spends a few hours a year on his or her investments. Trading is kept to a minimum by retaining many names from each annual list, and only trading in the middle of the year in extreme cases. There have been only a couple trades in the middle of the year so far, once because one of my picks was bought out, and another because of what I believed to be fraudulent accounting.

Despite (or perhaps because of) the lack of trading, the model portfolio has performed well, and outstandingly well compared to clean energy stocks in general. It has outperformed its benchmark every year since 2008 except 2013. That year it returned 25% compared to the benchmark’s 60% return. Over the past five years (2012 through 2016) the model portfolio has grown at a compound annual rate of 10%, or a 62% cumulative gain. Despite the large gain in 2013, its benchmark has fallen at a compound annual rate of 3% for a total lost over 5 years of 15.3%. See the chart below (click for a larger version):

I will provide a detailed update on the final performance of the 2016 model portfolio later this month.

In the early years, the model portfolio mirrored the Clean Energy sector’s notorious volatility. More recently, I have attempted to focus the portfolio on less risky stocks, and this has allowed the portfolio to consistently outperform its benchmarks. I’ve also been emphasizing more income stocks since I began managing GGEIP at the end of 2013. GGEIP returned 12.8% in 2016.

How To Finesse Trump

In the game of bridge, “trump” is one suit that’s more powerful than all the others; the highest trump card played wins a trick. There’s also a technique called a finesse, which can be used to win a trick even when the opponents hold a more powerful card (including a trump) which they could play potentially play on that trick.

“Finessing Trump” may not be a perfect analogy for picking clean energy stocks which should do well despite a hostile White House under the eponymous President-elect, but I’ll run with it. The relative strength of the cards held by fossil fuel industries are certainly a lot stronger relative to those held by the clean energy industries than they were just a few months ago.

On the other hand, clean energy’s hands are still full of honors (aces and face cards.) According to the US Energy Information Administration, new coal and nuclear powered power plants are now far more expensive to build than new wind or solar. Investments in renewable energy create more jobs than the same amount of investment fossil energy, these jobs typically do not require a college education, and are often in rural areas. This is a perfect combination to deliver on Trump’s promises to his core voters. The rural nature of wind and biofuel jobs also give these technologies solid political support in the Republican controlled Congress.

President-elect Trump and the Republicans have made many grand promises, to deliver jobs, to renegotiate our relationship with allies and opponents alike, to dismantle regulations, and to lower taxes. They will not be able to deliver on all of them, and many contradict each other. Given this backdrop of political uncertainty and speculation, the focus of the 10 Clean Energy Stocks for 2017 list will be on companies that rely little on support from the federal government, and which should be relatively unaffected by the possible reversal of President Obama’s attempts to encourage Clean energy.

Two of the picks this year are also well positioned to benefit from a revival in oil and gas drilling. OPEC’s recent agreement to limit production has already set the stage for a slow revival in 2017, and Trump’s promises to ease environmental restrictions can only push in the same direction.

Benchmarks

Last January, I used a weighted average of the Global X YieldCo ETF (YLCO) and the Powershares Clean Energy ETF (PBW) as my benchmark. The 70% weight on the income-focused YLCO reflected the 7 of 10 income stocks in the portfolio, while the 30% weight on PBW matched the three growth stocks. Given my greater caution this year, the 2017 portfolio contains eight income and only two growth stocks. Hence the portfolio’s benchmark will be a weighted average of 80% YLCO and 20% PBW.

The Making of 10 for 2017

Over the last few decades, stock market research has poked a number a gaping holes in the basic assumption of Modern Portfolio Theory that, other than diversification, there is no reliable way to reduce portfolio risk without sacrificing expected returns. Several of these potentially counter-intuitive findings have become important to my investment selection process:

Selecting high dividend stocks reduces portfolio risk without reducing expected returns. When the stocks are small and mid-cap stocks, expected returns actually increase. (What Difference Do Dividends Make? C. Mitchell Conover, CFA, CIPM, Gerald R. Jensen, CFA, and Marc W. Simpson, CFA)
Selecting stocks with low market correlation (Beta) or low volatility reduces risk without sacrificing returns. (Low-Risk Investing without Industry Bets Clifford S. Asness, Andrea Frazzini, and Lasse H. Pedersen, and many others.)
Small capitalization stocks and stocks with lower liquidity tend to outperform their larger and more liquid counterparts. (Liquidity and Stock Returns, Yakov Amihud and Haim Mendelson)
Selecting a portfolio of individual stocks is a more effective way to take advantage of multiple such market anomalies than buying a collection of “Smart Beta” ETFs, which only focus on anomalies individually. (Fundamentals of Efficient Factor Investing, Roger Clarke, Harindra de Silva, CFA, and Steven Thorley, CFA)

You will find that this year’s list tilts towards high dividends (average yield 6%), and low Beta (average Beta 0.63 – anything less than 1 is low.). All are small capitalization stocks, or near that range ($300 million to $2 billion) in market capitalization. Other factors I consider are traditional value metrics such as EV/EBITDA, Price to Book ratio, and dividend coverage, and trading of the st
ock by company insiders. This year, I’ve also added my own estimates of the risks and potential rewards of action by the Republicans in Congress and the White House.

Only Green

I believe that technology continues to advance, and that the world and individual US states will continue confronting our environmental problems no matter what the federal government does. I’m also a moral investor, with the core belief that the actions taken by companies I invest in are as much my moral responsibility as actions I take myself.

Hence, I only consider green companies for this list and my managed portfolios. That does not mean just wind, solar and electric cars. It means that the company should be doing net good for the environment. For each company, I ask myself,

“If this company did not exist, would the environment be worse off?”

If the answer is “yes,” then I’ll consider the company for my portfolio. This can lead to a few unconventional picks. In this list are companies involved in energy from waste (Covanta (CVA)) and container shipping (Seaspan SSW-PRG). Another is an insulation company whose main customers are fossil fuel drillers and refiners. These companies are, in my opinion, better for the environment than the alternatives (landfills, air transport or less efficient container shipping, and oil refining with less effective insulation.) You may disagree on these admittedly qualitative judgements. If you do, you should omit these specific stocks from you portfolio.

Ten Clean Energy Stocks for 2017

Below is Ten Clean Energy Stocks for 2017 list, along with some of the metrics discussed in the stock selection section above. Data is as of December 31st, 2016.

Company	Ticker	Yield	Beta	Market Cap	Insiders
Pattern Energy Group	PEGI	8.6%	1.1	$1.6B	Some buying
8point3 Energy Partners	CAFD	7.7%	0.6	$368M	None
Hannon Armstrong Sustainable Infrastructure	HASI	7.0%	1.1	$906M	Strong Buying
NRG Yield, A Shares	NYLD/A	6.5%	0.7	$2.2B	Strong Buying
Atlantica Yield	ABY	3.4%	0.4	$1.9B	None
NextEra Energy Partners, LP	NEP	5.3%	0.5	$1.4B	Strong Buying
Covanta Holding Corp.	CVA	6.4%	0.9	$2.0B	None
Seaspan Corporation, Series G Preferred	SSW -PG	10.3%	0.3	$939M	None
Mix Telematics	MIXT	2.3%	1.0	$136M	Some Selling
Aspen Aerogels, Inc.	ASPN	–	-0.3	$97M	Strong Buying

Stock discussion

Below I describe each of the stocks and groups of stocks in more detail. I include with each stock “Low” and “High” Targets, which give the range of stock prices within which I expect each stock to end 2017. In 2016, all but two of the stocks ended the year within these ranges. One (Terraform Global GLBL) ended the year 1% below my low target, and another (Enviva EVA) ended 3% above my high target.

Yieldcos

Yieldcos are companies with a business focused on the ownership or financing of of operating clean energy assets, and use most of the resulting cash flow to pay dividends to shareholders. Operating clean energy assets include wind farms, solar farms, biomass and biofuel plants, and other sustainable infrastructure which reduces overall greenhouse gas emissions. Yieldcos often have a developer “sponsor” which holds a majority of the Yieldco’s stock, and gives the Yieldco the first opportunity to buy many of the developer’s projects, called a “Right of First Offer” or ROFO.

Because Yieldcos own existing infrastructure and sell renewable energy, they are much less dependent on the continuation of government subsidies for clean energy than many renewable energy companies that have to sell or install products to make a profit. The stability of Yieldco cash flows (and dividends) depend much more on counter-parties (usually investment grade utilities) living up to their obligations than on government policy.

Even wind farms, which often receive an ongoing tax subsidy in the form of the federal Production Tax Credit (PTC) are relatively safe. When the PTC has been allowed to lapse in the past, the change has only applied to new wind farms, not wind farms already in production.

This stability and current low valuations led me to include six Yieldcos in the list for 2017. The current low valuations mean that most Yieldcos cannot now issue new stock to fund acquisitions and grow quickly, but the resulting high dividends mean that there is significant protection against further declines because income investors do not require significant growth prospects to buy high dividend stocks as long as they believe the dividend is safe.

The biggest risk from a Trump administration for Yieldco investors is the same as the risk borne by every income investor: Increased spending and tax cuts may lead to ballooning federal deficits, which will in turn cause interest rates to rise. Rising interest rates could make Yieldco stock pr
ices fall in order for the yield to rise along with other interest rates. I believe that most Yieldco prices have already fallen enough to account for most of this risk.

Pattern Energy Group (NASD:PEGI)

12/31/16 Price: $18.99. Annual Dividend: $1.63 (8.6%). Expected 2017 dividend: $1.64 to $1.67. Low Target: $18. High Target: $30.

Pattern is a Yieldco owning mostly wind projects in North America. While Pattern is smaller than most other Yieldcos, and has a more limited development pipeline from its sponsor, it has historically been able to acquire new projects at higher cash flow yields than its bigger rivals with higher profile sponsors. This advantage is in large part due to Pattern’s focus on the less competitive market for wind farms (as compared to solar farms).

Wind Yieldcos vs. Solar Yieldcos

Wind farms also tend to have higher returns than solar because wind production varies more from year to year than solar, and the higher cash flow yields are compensation for higher risk.

One other advantage of wind over solar for Yieldcos is very long term. Wind farms need large scale to be cost competitive, and certain locations such as ridges have much better wind resources than most other locations nearby. These factors mean that, in 15 or 20 years when utility power purchase agreements (PPAs) expire, the utility will have difficulty replacing the power from an existing wind farm with another next door. This is much less the case with solar, where my neighbor’s solar resource is almost identical to mine.

I believe that wind farms will have higher residual value at the end of their power purchase agreements than will solar farms. The wind farm location and existing towers should retain more value even in the face of the falling price of wind technology than will the location and other infrastructure of solar farms.

Pattern’s stock has sold off since its third quarter earnings call when the company announced that it had discovered a material weakness in its internal controls over financial reporting. As I wrote at the time, a weakness in financial controls means that they believe it would be possible for some financial data to be misreported, not that this has happened. The weakness arose because the company’s systems had not kept up with rising headcount in 2016.

The company is working to fix this, but it will probably take a couple more quarters. Unless some material mistakes are found in the meantime, the stock should recover when it reports the problem has been resolved.

8point3 Energy Partners (NASD:CAFD)
12/31/16 Price: $12.98. Annual Dividend: $1.00 (7.7%). Expected 2017 dividend: $1.00 to $1.05. Low Target: $10. High Target: $20.

8point3 is a solar-only Yieldco started by joint sponsors, First Solar (FSLR) and SunPower (SPWR.) Because of recent rapid decline in the price of solar modules, both have recently been struggling to find a way to profitability.

On the sunny side, 8point3 has relatively little debt compared to most Yeildcos, and this relatively low debt give it great flexibility even in the face of weak sponsors. All of this debt is held at the company level (other Yieldcos use specific projects to back much of their debt.) Company level debt typically has a slightly lower interest rate than project level debt, and it typically requires only interest payments. Both of these factors help increase short term Cash Available For Distribution (CAFD, and the reason for 8point3’s choice of ticker symbol.) High current CAFD allows 8point3 to pay a higher dividend than it otherwise would.

On the cloudy side, CAFD’s focus on solar and its reliance on non-amortizing company level debt could be storing up trouble for the long term, when PPAs start to expire in 15-20 years. As I discussed in the Pattern Energy section, I believe that solar farms will have greatly diminished cash flows and residual value when 8point3’s current PPAs expire. While project level debt is paid off over the life of the project PPA, company level debt is not. Unless 8point3’s share price recovers in the next few years, allowing the company to return to growth, 8point3 Partners could face the prospect of greatly diminished income and undiminished debt when PPAs begin to expire in 15-20 years.

Fifteen years is a long time, so it is not yet time to run from the shadow of this possible future, but it does make sense to expect a slightly higher dividend from 8point3 than other Yieldcos in order to compensate for this risk. 7.7% will do the trick for me.

Hannon Armstrong Sustainable Infrastructure (NYSE:HASI).

12/31/16 Price: $18.99. Annual Dividend: $1.32 (7.0%). Expected 2017 dividend: $1.34 to $1.36. Low Target: $15. High Target: $30.

Hannon Armstrong is a Real Estate Investment Trust and investment bank specializing in financing sustainable infrastructure. It’s a leader in the disclosure of the net effect on greenhouse gas emissions caused by its activities. Hannon Armstrong has been in this list since 2014, the year after it became public.

Hannon Armstrong is unique among Yieldcos in two ways. First, it invests in senior securities of clean energy projects, meaning that Hannon Armstrong will be paid before equity investors such as the other Yieldcos. It also has a broader focus, and its expertise in in financing allows it to invest in energy efficiency projects as well as the energy production and transmission infrastructure that other Yieldcos invest in.

When Hannon Armstrong’s stock price is strong, it issues new stock in secondary offerings, and uses that money to invest in projects. This boosts the long term growth of the dividend.

When the stock price is relatively weak, it continues to finance clean energy projects, but it sells the assets to third parties. This boosts short term earnings, but does not help the dividend in the long term. The bursting of the 2015 Yieldco bubble kept HASI’s stock priced depressed in early 2016, and the company did more than the usual number of third party financings. It signaled a planned return to investing on its own account in the second half of 2016, but the lower level of investment had the effect of lowering its dividend growth for 2017 to 10%, compared to the 12-15% it had grown in previous years.

The election result, the lower than expected dividend increase, and two negative articles from a short seller on Seeking Alpha have combined to push the stock price down almost to its level at the start of 2016, when it was already cheap. With a 10% dividend increase since then, this is the best opportunity to buy Hannon Armstrong since early 2015.

Hannon Armstrong unique and relatively low risk business model should make it a core holding for any investor wanting to invest in clean energy. &
nbsp; If you do not already own it, this is an excellent entry point.

NRG Yield, A shares (NYSE:NYLD/A)
12/31/16 Price: $15.36. Annual Dividend: $1.00 (6.5%). Expected 2017 dividend: $1.00 to $1.10. Low Target: $12. High Target: $25.

The term “Yieldco” was first applied to NRG Yield (NYLD and NYLD/A), and the company rode the Yieldco bubble in 2014 and early 2015. During this period, I was often short the stock, as a hedge against the other, significantly better valued, Yieldcos. I added NRG Yield to the list last year, and the stock has advanced along with its dividend.

The company’s parent, NRG, develops both conventional and renewable energy projects, but remains committed to large scale renewable projects suitable for acquisition by NRG Yield. Such dropdowns will be limited, however, until the Yieldco’s stock price recovers, allowing it to issue new equity to fund the acquisitions.

NRG Yield remains in the 2017 list because of good traditional valuation measures (Price/Book and EV/EBITDA) and significant insider buying of the stock.

The reason I focus on the less liquid A shares rather than the more liquid and widely held C shares (NYSE:NYLD) is because this list is mostly targeted towards small investors for whom A shares should be sufficiently liquid for unconstrained trading. Other than liquidity, all the advantages lie with NYLD/A. Both classes of stock pay the same absolute dividend, but A shares are less expensive and produce a higher yield. A shares also have more votes, which will make them more valuable in any potential restructuring of the Yieldco.

Large investors who do face liquidity constraints may consider splitting their purchase between the two share classes.

Atlantica Yield, PLC (NASD:ABY)
12/31/16 Price: $19.35. Annual Dividend: $0.65 (3.4%). Expected 2017 dividend: $0.65 to $1.45. Low Target: $10. High Target: $30.

Atlantica Yield was formerly called Abengoa Yield after its now bankrupt sponsor, Abengoa SA. Over the last year, Atlantica has made substantial progress disentangling itself from its former sponsor. Most importantly, it has achieved full autonomy and is now responsible for the entirety of its own operations.

The main remaining obstacle to its divorce from Abengoa are waivers to covenants on certain project debt which were triggered by Abengoa’s bankruptcy. The largest of these are needed from the US Department of Energy due to loan guarantees granted as part of the ARRA financial stimulus package in 2009. The Yieldco states that these negotiations are “very advanced” and I expect that the DOE will do everything in its power to finalize them before control shifts to the new administration on January 20th.

If it fails to do so, the likely new Energy secretary Rick Perry has shown himself to be pro-business when it comes to clean energy technologies, despite his denial of the science of climate change. He had a record of promoting renewable energy as an economic driver in his 14 year term as governor of Texas. I expect that Secretary Perry will focus on dismantling those parts of the Department of Energy which he believes interfere with companies’ ability to go about their business. I expect that will include granting the necessary waivers to Atlantica.

As Atlantica is able to finalize the necessary waivers, it will increase its dividend accordingly. If all had been achieved at the end of the third quarter, that would have been an annual dividend of $1.45, or a current yield of 7.5%.

NextEra Energy Partners (NYSE:NEP)
12/31/16 Price: $25.54. Annual Dividend: $1.36 (5.3%). Expected 2017 dividend: $1.38 to $1.50. Low Target: $20. High Target: $40.

NextEra Energy Partners’ is the poster boy for the widely held investor belief that Yieldco’s with strong sponsors deserve a premium price. I have long been skeptical of this belief on the grounds that the main constraint on Yieldco growth is not access to quality projects from a sponsor, but access to inexpensive capital from investors. But Yieldcos with strong sponsors do command a premium, and that can help the Yieldco to grow faster as long as the premium lasts.

That strength lasted for NRG Yield until NRG ran into trouble in 2015. Along with the Terraforms (TERP and GLBL) and Atlantica, NRG Yield proved that the sponsor could as easily be a source of Yieldco weakness as a source of strength. Uniquely among Yieldcos, NEP’s sponsor, NextEra (NEE) remains strong.

When NextEra was trading at $40-$45 in 2014 and 2015, it topped my list of overvalued Yieldcos. In early 2016 at the bottom of the Yieldco bust, it traded as low as $23, and I missed a chance to buy it because I was using all the available capital I had (as well as some borrowed money) to buy other massively undervalued Yieldcos I was more familiar with, and which had higher yields. I took profits on most of those trades last summer and fall. NEP is now starting to look relatively fairly valued because of a combination of strong dividend growth and a relatively flat stock trajectory. Unless the stock recovers, even NEP will not be able to achieve its annual 12% to 15% distribution growth targets through 2020, but a 5.3% current yield is high enough that I’m now willing to buy some and wait to see.

Other Income Stocks

Covanta Holding Corp. (NYSE:CVA)
12/31/16 Price: $15.60. Annual Dividend: $1.00 (6.4%). Expected 2017 dividend: $1.00 to $1.06. Low Target: $10. High Target: $30.

Covanta is the US leader in the construction and operation of waste-to-energy plants. These plants incinerate trash (often called municipal solid waste or MSW) and use the resulting heat to generate electricity. Recyclable metals are recovered from the ash.

Waste to energy has a bad name among many environmentalists because it is a less valuable use for recyclable materials, and because improperly operated incineration of waste can lead to toxic emissions, such as dioxins, especially if the combustion temperature is too low. I include Covanta as a green stock because, as I discussed above, I believe its operations are a net positive for the environment. The MSW Covanta burns includes some recyclables, but this is also true for any MSW which is headed for landfills. In a landfill, the organic component of MSW emits methane which is an extremely powerful greenhouse gas, and the incineration allows the recovery of metals which would otherwise be land filled. Electricity generated from waste displaces electricity which might otherwise be generated from fossil fuels.

When it comes to dangerous pollutants from incineration, Covanta has
shown that it has the technical capabilities to operate safely, and emissions from incineration must also be compared to emissions from land filled waste and from the electricity generation that Covanta’s operations displace.

Trump and Covanta

In addition to an attractive current valuation, high yield, and strong insider buying, Covanta is well placed to benefit from possible initiatives of a Trump administration.

First, while Covanta is quite capable of controlling the emissions of its plants, loosening limits on power plant emissions in order to benefit coal are equally likely to benefit Covanta. Second, any large investment in domestic infrastructure is likely to increase the production of waste going to Covanta’s facilities, and to increase the prices of the metals Covanta recycles.

Seaspan Corporation, Series G Preferred (NYSE:SSW-PRG)
12/31/16 Price: $19.94. Annual Dividend: $2.05 (10.3%). Expected 2017 dividend: $2.05. Low Target: $18. High Target: $27.

Seaspan is a leading independent charter owner of container ships. On the whole, its fleet is newer, has larger capacity, and is more efficient than the worldwide fleet.

Container shipping is in the depths of a worldwide downturn, leading to massive industry overcapacity and low prices for ships and their leases. The long term nature of Seaspan’s contracts largely insulates it from these prices, but there is some turnover and leases cannot currently be renewed at prices which are anything like the old contracts.

While the current environment holds some risk for Seaspan, it also presents opportunities. The company recently scrapped some of its oldest ships and was able to replace them with newer, more efficient ships at close to the scrap price it received for the older ones. As low prices lead older ships to be scrapped, the overall supply of container ships will fall. This will in turn lead to higher leasing prices when the industry recovers.

I took an in-depth look at Seaspan and both its common (SSW) and preferred shares in November. You can read it here. Since then, the price of the preferred has fallen slightly, while the common had fallen less. This makes the case for investing in the Preferred even stronger than it was then. This investment can be done with or without the put hedge I describe in the article. I don’t think the put hedge will actually be needed, and I recommend it only for investors who take very large positions in the preferred relative to the size of their whole portfolio. This is what I have done: Seaspan Preferred shares are currently my largest holding.

Seaspan has several other classes of preferred stock, as well as exchange-traded notes. The notes (SSWN) have not fallen nearly as much as the preferred series have, so I find them less interesting. The different preferred shares are all similar, varying only in maturity date, interest rate, and market price. Since I wanted to pick one, I chose G because it is the farthest from maturity, but series D, E, and H could easily be substituted.

Trump and Seaspan

A Trump administration presents some risks for the global shipping industry because of the President-elect’s negative attitude towards trade. If his aggressive negotiation tactics lead to a global trade war, it will almost certainly worsen the shipping industry’s troubles. This is part of the reason I strongly prefer SSW-PRG over the company’s common shares. I think it’s very unlikely that the company will cease paying dividends on its preferred shares, but a substantial dividend cut on the common shares is very likely. I may become interested in buying SSW after that cut happens, if the cut is large enough that I become confident there are no further cuts in the future.

Growth Stocks

MiX Telematics Limited (NASD:MIXT).
12/31/16 Price: $6.19. Annual Dividend: $0.14 (2.3%). Expected 2017 dividend: $0.14 to $0.16. Low Target: $4. High Target: $15.

MiX provides vehicle and fleet management solutions to customers in 112 countries. The company’s customers benefit from increased safety, efficiency and security. The company’s core customers are large, international corporations with large fleets. Many of these customers are in the oil and gas industry, and these have been reducing their vehicle fleets during the oil price downturn. The oil price recovery, which seems to have begun because of OPEC’s recent agreement to limit output should contribute to MiX’s growth this year. Despite the oil price headwind, MiX has managed year over year subscription growth of 10% or more in recent quarters.

Many of MiX’s other customers are in the logistics and transportation industries. All customers benefit from reduced fuel usage, better safety, and lower insurance premiums after implementing the company’s vehicle management solutions. Even when fuel prices are low, the increased safety and insurance savings can easily pay for MiX’s services.

In August, MiX repurchased 25% of their outstanding stock with cash on hand. This will lead to a 33% year over year growth in revenue and earnings per share for the next few quarters.

Trump and MiX
If Trump manages to accelerate the oil and gas drilling in the US, it should cause MiX current customers to purchase more vehicles, automatically adding to MiX’s subscriber base. If large industrial companies are involved in promised infrastructure investment or border-wall building, this will also add to the growth of the fleets of MiX’s current customers, easily adding to MiX’s top line growth without the cost of new sales.

Aspen Aerogels (NYSE:ASPN)
12/31/16 Price: $4.13. Annual Dividend and expected 2017 dividend: None. Low Target: $3. High Target: $10.

Aspen Aerogels manufactures one of the highest performing types of insulation available with current technology. The company’s largest markets are in the most demanding industries where aerogel’s high R value, moisture resistance, and ability to withstand extreme temperatures command a substantial premium. The company’s largest applications are in refining. petrochemical processing, liquified natural gas (LNG), and power generation. The company is expanding into building products through a license agreement with Cabot Corporation.

2016 earnings have been disappointing for Aspen because of low oil and gas prices (which affect its refining and subsea markets), and because it has had to pursue patent enforcement actions at the US International trade Commission and in German courts.

The general uncertainty in the energy industry and the slowdown in its subsea markets has led Aspen to delay plans for a new manufacturing plant. Construction of this plant had previously been planned to begin this year. Management will commence ordering long lead time items needed for construction when they are again confident that end markets will support the additional supply.

Aspen and Trump

Recovering oil markets and offshore drilling should cause demand for Aspen’s products to follow suit, but its status as
a supplier to the oil industry means that an oil industry revival is not yet reflected in the stock price.

The disappointments of 2016 give investors the opportunity to purchase this company with its leading energy efficiency technology at a substantial discount to its 2014 IPO price of $11.

What’s Not In The List

I emailed a draft version of this article a day to a number of paying subscribers, and asked for their feedback. (I’m thinking about launching a premium service, and wanted to get a feel for demand from people who were actually willing to pay. One common question was about the stocks that did not quite make it, and the changes from the 2016 list. I will write a Year in Review article discussing the stocks in the 2016 list soon.

The reason I don’t typically mention stocks other stocks that I consider is simply to keep the workload down. There are five stocks that almost made it and are also in my portfolio. Here are the tickers: TSX:PIF, TSX:AXY, TSX:PUR, BEP, and AGR.

Final Thoughts

The incoming Trump administration and Republican Congress promise a weakening of federal support for many types of clean energy and stronger support for its fossil fuel competitors. This has not been lost on investors, who have been selling most well known clean energy stocks since the election.

Despite investors’ understandable fear, many if not most clean energy companies are unlikely to be harmed by the actions of a Trump administration. US support for clean energy has always been tepid, with the Republican Congress blocking most of the Obama administration’s efforts for the last eight years. The US has never given clean energy the support it deserves given the severity of the climate crisis, and coming attempts to withdraw what little support there is and bolster fossil fuel industries will come as advancing clean technology is increasingly making those fossil technologies obsolete. The transition to a clean energy economy can be slowed, but at this point it is inevitable.

Green minded investment advisors and climate activists I have been speaking to have also noticed another effect of the election. Voters who understand the challenge of climate change are reacting to frustration at the ballot box by looking for other levers they can pull to create change. Environmentally responsible investing is one such massively underused lever. The fossil fuel industry’s market cap is gigantic, while the market cap of all clean energy companies is tiny in comparison. A small shift of investment out of fossil fuels into clean stocks will not do much to hurt fossil fuel companies, but it can do a lot to help their clean energy cousins.

Selecting lower-risk clean energy companies such as most of the ones in this list means that the environmental investment lever can be pulled without increasing the risk of most investors’ portfolios. And it can do a lot for the companies you buy. Most of the Yieldcos in this list were beginning to issue new shares to acquire more assets and grow last summer, when stock prices had only recovered to a fraction of their losses from the popping of the 2015 Yieldco bubble. Bringing their stock prices back up to those levels will mean their growth will resume, and continue to finance new wind and solar farms.

It’s even harder to predict what will happen to the stock market in 2017 than usual. Certain market sectors like banking seem overvalued, but when I look at these stocks, I think they are undervalued. The broad market is overdue for a correction, but Yieldcos have already had one. With this backdrop, I am buying well valued stock opportunistically, but keeping a large allocation of cash in reserve in case we have a real market crash.

Disclosure: Long HASI, MIXT, PEGI, NYLD/A, CAFD, CVA, ABY, NEP, SSW-PRG, ASPN, GLBL, TERP. Long puts on SSW (an effective short position held as a hedge on SSW-PRG.)

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Election Jitters Spell Opportunity: Ten Clean Energy Stocks For 2016

Tom Konrad Ph.D., CFA — Sun, 06 Nov 2016 18:38:43 +0000

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Tom Konrad, Ph.D., CFA

This October saw falling leaves and falling stocks. Then came the first week of November with its election jitters and stripped the trees of the rest of their leaves like a fifty mile an hour wind sending stocks flying as well.

While Donald Trump’s unpredictable performance has the whole stock market rattled (at least when it looks like he might win), his anti-environment and pro fossil fuel rhetoric have had stocks in the sector quaking like the leaves on an aspen.

Although all its benchmarks were decidedly in the red for October and the first week of November, my Ten Clean Energy Stocks for 2016 fared relatively well. Although the portfolio, its growth and income subportfolios, and my privately managed Green Global Equity Income Portfolio all fell, their declines were smaller than their benchmarks. For the year to date, their out-performance ranged from 11% to 31% over their benchmarks.

Detailed performance for the growth and income subportfolios, my Green Global Income Portfolio, and their various subportfolios can be found in the chart below.

See the original 2016 article for a description of the benchmarks.

The chart below and the following discussion gives detailed performance and discussion for the individual stocks. Click for a larger version.

Income Stocks

Pattern Energy Group (NASD:PEGI)

12/31/15 Price: $20.91. Dec 31st Annual Dividend: $1.488 (7.1%). Beta: 1.22. Low Target: $18. High Target: $35.
10/31/16 Price: $22.35. YTD Dividend: $1.171. Expected 2016 Dividend:$1.58 (7.1%) YTD Total Return: 12.9%
11/4/16 Price: 21.62 . YTD Total Return: 9.3%

Wind Yieldco Pattern Energy will release its third quarter earnings on November 7th. Wind speeds were a little disappointing in the first half of the year because of El Nino. Investors will be watching for higher revenues from wind generation now that El Nino is no longer affecting wind patterns. This seems likely, considering that other companies (see NRG Yield and TransAlta Renewables, below) have been reporting strong wind production for the quarter.

Enviva Partners, LP (NYSE:EVA)

12/31/15 Price: $18.15. Dec 31st Annual Dividend: $1.76 (9.7%). Low Target: $13. High Target: $26.
10/31/16 Price: $27.25. YTD Dividend: $1.495 Expected 2016 Dividend: $2.10 (7.7%) YTD Total Return: 49.9%
11/4/16 Price: 27.00 . YTD Total Return: 58.9%

Wood pellet focused Master Limited Partnership (MLP) and Yieldco Enviva Partners announced its earnings on Thursday, November 4th. The company agreed to terms with its sponsor for its second drop-down acquisition which should allow the cash flow and dividend per share growth to continue in 2017. This particular drop-down also has the effect of increasing Enviva’s number of customers, helping to diversify the partnership’s future revenue streams.

Enviva forecasts a per share distribution in 2017 of $2.35 per a share, which would amount to an increase of approximately 12% over 2016.

Green Plains Partners, LP (NYSE:GPP)

12/31/15 Price: $16.25. Dec 31st Annual Dividend: $1.60 (9.8%). Low Target: $12. High Target: $22.
10/31/16 Price: $21.25. YTD Dividend: $1.218. Expected 2016 Dividend: $1.64 (7.7%) YTD Total Return: 41.8%
11/4/16 Price: 18.60. YTD Total Return: 24.1%

Ethanol production Yieldco Green Plains Partners also announced 3rd quarter results. The partnership increased its quarterly distribution to $0.42 per unit, and reported $0.43 in per unit income for the quarter. It’s parent company, Green Plains (GPRE) produced a record volume of ethanol in the second quarter. Revenues increased due to a reviving ethanol market and new ethanol storage acquired out of the Abengoa (ABGB) bankruptcy.

However, the stock’s strong performance so far this year led analysts at Stifel Nicolaus to downgrade the stock from “Buy” to Hold. That and the general election jitters caused the partnership’s units for fall more than 10% in the first week of November, although it still shows significant gains for the year to date.

NRG Yield, A shares (NYSE:NYLD/A)

12/31/15 Price: $13.91. Dec 31st Annual Dividend: $0.86 (6.2%). Beta: 1.02. Low Target: $11. High Target: $25.
10/31/16 Price: $14.73. YTD Dividend: $0.695. Expected 2016 Dividend: $0.96 (6.5%) YTD Total Return: 11.2%
11/4/16 Price: $14.75. YTD Total Return: 11.3%

Yieldco NRG Yield (NYLD and NYLD/A) announced 3rd quarter results on November 4th. Revenues were strong, in large part due to good production from the company’s wind farms. It increased its quarterly dividend to $0.25 (16% year over year growth.) The strong quarter is doubtless why the stock made a slight gain in the first week of November despite the market turmoil.

The company released guidance for 2017, and re-affirmed its targeted 15% annual dividend per share growth of 15% through 2018.

Terraform Global (NASD: GLBL)

12/31/15 Price: $5.59. Dec 31st Annual Dividend: $1.10 (19.7%). Beta: 1.22. Low Target: $4. High Target: $15.
10/31/16 Price: $3.7
5. YTD Dividend: $0.275. Expected 2016 Dividend: $0.60 (16.0%). YTD Total Return: -25.2%
11/4/16 Price: 3.75. YTD Total Return: -25.2%

Yieldco Terraform Global has still not released its much delayed financial statements (although some preliminary information was released in July.) The stock’s decline in October has been mostly driven by rumors about the possible sale or non-sale of its much larger sister Yieldco, Terraform Power (TERP.) These included rumors that SunEdison intended to keep its stake in Terraform Power and restructure the company around that holding, as well as Brookfield ruling itself out as a buyer for Terraform Power.

Hannon Armstrong Sustainable Infrastructure (NYSE:HASI).

12/31/15 Price: $18.92. Dec 31st Annual Dividend: $1.20 (6.3%). Beta: 1.22. Low Target: $17. High Target: $27.
10/31/16 Price: $23.86. YTD Dividend: $0.90. Expected 2016 Dividend: $1.25 (5.5%). YTD Total Return: 26.0%
11/4/16 Price: $19.96 . YTD Total Return: 10.0%

After clean energy financier and REIT Hannon Armstrong reported second quarter core earnings in August, I wrote:

Hannon Armstrong has a target of paying out 100% of core earnings in dividends and a policy of increasing the dividend once per year in the fourth quarter. Since Core Earnings have historically always increased or held constant from quarter to quarter, they typically lag the dividend in the first two quarters, but exceed them in the second half of the year.

I expect this year to be different. Results in the first half of the year were boosted by a larger securitizations (selling assets to third parties rather than keeping them on the books.) While producing strong earnings in the quarter when they happen, securitizations produce no ongoing income. After raising $91 million in equity in June, the company will again return to placing more transactions on the balance sheet, a change which I expect to reduce core earnings in the third quarter before returning to growth in the fourth quarter.

I expect my anticipated decline in third quarter earnings in early November to catch some investors by surprise. Investors looking to buy the stock should wait until then. Investors considering taking some gains may want to sell before the November announcement.

My prediction was on the mark. Core earnings fell from $0.32 per share in the second quarter, to $0.29 this quarter. The stock decline was compounded by the company issuing an additional 3.5 million shares in a secondary offering priced at $20. I remain confident that earnings growth will resume in the fourth quarter and that the company will again raise its quarterly dividend in December to at least $0.34.

The current price of $19.96 seems an excellent and likely fleeting buying opportunity.

TransAlta Renewables Inc. (TSX:RNW, OTC:TRSWF)
12/31/15 Price: C$10.37. Dec 31st Annual Dividend: C$0.84 (8.1%). Low Target: C$10. High Target: C$15.
10/31/16 Price: C$14.81. YTD Dividend: C$0.733 Expected 2016 Dividend: C$0.88 (5.9%) YTD Total Return (US$): 56.2%
11/4/16 Price: C$14.26 . YTD Total Return: 50.6%.

Canadian listed Yieldco TransAlta Renewables’ third quarter results showed expected growth due to previous acquisitions, and the construction of the company’s Australian South Hedland facility continues as planned. Like NRG Yield, the company had a strong quarter of production at its Canadian Wind farms.

Growth Stocks

Renewable Energy Group (NASD:REGI)

12/31/15 Price: $9.29.  Annual Dividend: $0. Beta: 1.01. Low Target: $7. High Target: $25.
10/31/16 Price: $8.75.    YTD Total Return: -5.8%
11/4/16 Price:   8.40. YTD Total Return: -9.6%

Advanced biofuel producer Renewable Energy Group reported strong earnings growth in the third quarter, but not as strong as many analysts had been expecting. This combined with the inclusion of REGI in The Street’s “Clinton Portfolio” sent the shares tumbling in the first week of November. I personally think that the “Clinton Portfolio” was very badly designed, and would have weighted such a portfolio much more heavily towards solar installers and manufacturers, rather than biodiesel which has much stronger bipartisan support than solar.

I continue to think REGI is an excellent buy at the current price of $8.40, even if Trump wins the election.

MiX Telematics Limited (NASD:MIXT; JSE:MIX).
12/31/15 Price: $4.22 / R2.80. Dec 31st Annual Dividend: R0.08 (2.9%). Beta: -0.13. Low Target: $4. High Target: $15.
10/31/16 Price: $6.29 / R3.35. YTD Dividend: R0.06/$0.101 Expected 2016 Dividend: R0.08 (2.1%) YTD Total Return: 52.6%
11/4/16 Price: $6.05 / R3.23. YTD Total Return: 46.7%

Software as a service fleet management provider MiX Telematics announced the results for the second quarter of its 2017 fiscal year, which starts in April. Subscriber growth remained weak (8% year over year) due to the depressed energy sector, but showed signs of acceleration late in the quarter. The company is continuing to make progress in its long term strategy of steering customers towards its bundled offerings, which improve margins in the long term at the cost of greater up-front investments.

Ameresco, Inc. (NASD:AMRC).
Current Price: $6.25. Annual Dividend: $0. Beta: 1.1. L
ow Target: $5. High Target: $15.
10/31/16 Price: $4.80. YTD Total Return: -8.7%
11/4/16 Price: 4.95 . YTD Total Return: -18.0%

Energy service contractor Ameresco’s third quarter results continued recover. The company is also increasing its project backlog and investments in owned renewable energy facilities (mostly landfill gas), both of which increase the level and predictability of its future earnings. Giving the company’s improving results and prospects, Ameresco would be a highlight of my own “Clinton Portfolio” if I were to construct one (see comments on Renewable Energy Group, above.) Because Ameresco does much of its business with the federal government, the stock would likely suffer under a Trump administration.

Final Thoughts

The possibility of a Trump victory on Tuesday has many clean energy investors running for the hills. This creates buying opportunities among stocks that are relatively immune to decisions in the White House, such as Pattern, Renewable Energy Group, and Hannon Armstrong, both of which should advance no matter who is in the White House. Ameresco is my top pick to benefit from a Clinton victory.

Disclosure: Long HASI, AMRC, MIXT,, RNW/TRSWF, PEGI, EVA, GPP, NYLD/A, REGI, GLBL, TERP, GPRE

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Green Plains Primes The Pump

Debra Fiakas CFA — Mon, 20 Jun 2016 09:10:50 +0000

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by Debra Fiakas CFA

Ethanol producer Green Plains Renewable Energy, Inc. (GPRE: Nasdaq) announced today plans to build a fuel terminal point in Beaumont, Texas. The terminal will be located at a facility owned by Green Plains’ partner in the venture, Jefferson Gulf Coast Energy Partners. It will be helpful to have a friend in the project that is expected to cost $55 million to complete just ethanol storage and throughput capacity. Planned storage capacity is equivalent to 500,000 barrels, with the potential to expand to 1.0 million barrels. Capacity to handle biofuels or other hydrocarbon fuels will be added later. The terminal should give Green Plains better access to world fuel markets through railroad, barge and ocean tankers connections at the terminal.

This is the second terminal project for Green Plains. In November 2015, the company announced plans to build an ethanol terminal in Maumelle, Arkansas for access to the Union Pacific rail line. The terminal will have the capacity to unload trains as long as 110 cars in one day and will be able to store as much as 4.2 million gallons of ethanol. The price tag is projected to be $12 million, which will be split equally between Green Plains and a partner, Delek US Holdings. A downstream refining and distribution company, Delek is experienced in fuel logistics and has connections to convenience stores.

The two projects should smooth the way for Green Plains to economically reach customers both in the U.S. and around the world. Lower cost distribution can also give Green Plains a competitive edge in striking deals. Now the company needs to ‘fill the pipe,’ so to speak. The altered strategic plans of some competing ethanol producers may be giving Green Plains an opportunity to do just that.

Abengoa SA (ABG: Madrid or ABGB: Nasdaq) has debt issues back home and is putting its U.S. operation into bankruptcy. Green Plains has offered $200 million in cash for Abengoa’s ethanol plants in Illinois and Indiana. The deal will give Green Plains another 180 million gallons in production capacity and elevate it from fourth to third largest ethanol producer in the U.S., passing up Valero Energy (VLO: NYSE).

Even top-dog Archer Daniels Midland (ADM: NYSE), with its 1.7 billion gallon ethanol production capacity, is rethinking its ethanol priorities. In February 2016, ADM announced its two dry mill ethanol plants that grind and crush corn feedstock were under scrutiny. At that time ethanol prices had slumped to the $1.34 to $1.40 range and renewable fuels policy seemed unclear. Since then the profit potential in ethanol has improved as prices have come back to the $1.65 to $1.70 price range. ADM may ‘think’ its strategy right back to the starting point. In the meantime, Green Plains management can still speculate about grabbing up even more capacity.

Acquiring production capacity during a market downturn, is a tactic well known by number two ethanol supplier Poet, LLC (private). Based in Sioux Falls, SD, Poet has a long history of buying up bankrupt and otherwise beleaguered ethanol producers and then installing its own proprietary technologies to improve efficiency. Poet itself might have an interest in ADM’s dry mill plants if either or both of them get put up on the auction block. Poet has patented its proprietary dry mill process and is the largest ethanol producer in the country in terms of dry mill plant capacity.

Green Plains ambitions may be tempered by the condition of its balance sheet. The company has not shied away from debt to finance its expansion in the ethanol sector. At the end of March 2016, long-term debt and notes totaled $765.9 million, representing an 82.4% debt-to-equity ratio. A look at assets helps put leverage into clear focus. Book value of property, plant and equipment assets net of accumulated depreciation was $920.5 million in March 2016, representing a multiple of 1.2 times debt obligations. A current ratio of 2.10 should also provide some comfort to shareholders and creditors.

The company had $383.4 million in cash on the balance sheet at the end of the last quarter, suggesting nice little treasure trove. Unfortunately, during the period of weakened ethanol prices in late 2015 and early 2016, Green Plains was using cash to support operations – $259 million in the twelve months ending March 2016. In my view, a company generating nearly $3.0 billion in annual sales needs as much as $450 million to $600 million in cash just for working capital purposes. This is especially important when at the trough of the business cycle and profits have been reduced. Against this ruler the treasure trove is more like a bare bones reserve.

Green Plains will need to come up with $33.5 million to support commitments to the two terminal joint ventures. Then there is the $200 million bid for the Abengoa assets. The company has some alternatives. Green Plains Partners, LP (GPP: NYSE), the holder of the company’s downstream assets, could use some of the $49 million in remaining credit on a revolving line of credit facility opened in 2015. The parent company has a revolving line of credit as well. However, to be meaningful in the current investment scenario, the company would need to petition the agent to exercise the $75.0 million accordion feature that was built into the facility. Of course, new common stock could be issued through either the parent (GPRE) or the downstream limited partnership (GPP). GPRE current commands a multiple of 13.5 times projected earnings, while GPP is trading at 8.3 times expected earnings in 2017.

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.

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Yieldcos: Boom, Bust, and (Now) Beyond

Tom Konrad Ph.D., CFA — Thu, 26 May 2016 09:35:30 +0000

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The Yieldco model is not broken. But investor expectations have changed.

by Tom Konrad Ph.D., CFA

The Yieldco bubble popped almost exactly a year ago after a virtuous cycle turned vicious.

Last May, I explained how these public companies (which own solar farms, wind farms and similar assets) could grow their dividends at double-digit rates despite no internal growth or retained earnings. This “weird trick” can work so long as the Yieldco’s stock price is rising, allowing it to sell stock at higher valuations and increase the amount of money invested per share.

As long as investors expected dividends to continue to rise rapidly, they fed this virtuous cycle by bidding the stock price up, which in turn increased the expected dividend growth. Many Yieldcos increased their dividend increase projections in 2014 and early 2015, when the bubble was at its height.

Yieldco boom and bust

Then the Yieldcos got greedy.

In the spring of 2015, new Yieldco IPOs and secondary offerings reached a crescendo, with every Yieldco raising new money over a three-month period. There were two IPOS: 8point3 Energy Partners’ (CAFD) for $420 million in June and TerraForm Global (GLBL) for $675 million in July.

In addition, TransAlta Renewables (TSX:RNW) raised $226 million in April; Abengoa (now Atlantica) Yield (ABY) raised $670 million in May; NextEra Energy Partners (NEP) raised $109 million in May; NRG Yield (NYLD) raised $540 million in June; Hannon Armstrong (HASI) raised $18 million in June; TerraForm Power (TERP) raised $689 million in June; and Pattern Energy Group (PEGI) raised $225 million in July.

Before that flurry of new offerings, the existing seven Yieldcos had raised only $12.5 billion in total capital. The additional $3.5 billion flooded the market and halted the rise of most stocks. Investors began to scale back their estimates of future dividend increases accordingly. Lower dividend estimates led to lower demand for the stocks, even lower stock prices, and the cycle began to feed on itself in reverse.

Over the next few months, the departing tide of Yieldco shares deprived sponsors of an important source of cheap finance for over-leveraged business models. It soon became clear which sponsors had been swimming naked: SunEdison (SUNEQ) and Abengoa (ABGB).

Mostly unbroken

SunEdison’s downfall in particular led many to ask if the Yieldco model is broken. Reporters (not to mention investors) have asked me this questio n on multiple occasions. My answer has always been “No except…”

The exception is the double-digit dividend per share growth that Yieldcos led investors to expect during the bubble. With the Yieldco bust in the rearview mirror, I don’t think that investors are likely to bid up stock prices to the point where Yieldcos can restart the virtuous cycle of secondary offerings at higher and higher prices feeding back to rapid dividend increases.

What isn’t broken is the idea of funding clean energy projects with (relatively) cheap stock market capital. When Yieldco stocks were near their bottom, solar and wind developers were openly talking about private equity being a more cost-effective form of capital than the public markets and Yieldcos.

That situation is inherently unsustainable. The liquidity, better information, and broader spectrum of participants in the public markets ensure that private capital will not remain cheaper than public equity permanently. Private-market participants have the ability to operate in public markets as well. When the prices are better in the public markets, that is where they will go.

The opposite is not true for most public market investors: Regulations, lack of knowledge, and the need for liquidity keep them in publicly traded stocks and bonds, even when the returns are better elsewhere. It was only investor hesitancy in the wake of a crash that kept Yieldco stock prices so low for as long as it did. Now Yieldco prices are rising, and these entities can once again think about raising new equity on reasonable terms.

Pulling out the ATM cards

While clouds of uncertainty remain over the TerraForms because of SunEdison’s bankruptcy, other Yieldco stocks have begun to recover, and many are returning to the capital markets to issue new equity.

The strongest (and lowest yielding) Yieldco, NextEra Energy Partners, announced an “At The Market” or ATM program to sell small amounts of equity during its third-quarter 2015 conference call. Subsequently, NEP raised $26 million in the fourth quarter and approximately $40 million in the first quarter by issuing equity via the ATM. It also closed a $252 million secondary offering in the first quarter.

Toronto-listed Yieldco TransAlta Renewables has also returned to the capital markets by selling CAN $172 million of new equity in December. Unlike American Yieldcos, it never promised double-digit dividend growth, did not see its stock price spike during the bubble, and did not suffer a severe decline when the bubble burst. What decline it did see has now been completely erased by its recent stock rally.

In their first-quarter conference calls, both Pattern Energy Group and Hannon Armstrong put ATM sales agreements in place to enable more flexibility depending on market conditions.

“We view this ATM as one tool in a broader toolkit, and we intend to use it judiciously for future project-related investments that are accretive and other corporate purposes. Again, to be clear, we do not plan on issuing under the ATM at this time, and at the current stock price. The ATM is only an option for the future,” said Pattern CEO Mike Garland.

Hannon Armstrong seems a little closer to using its ATM than Pa
ttern. Hannon CFO Brendan Herron described it as a “filler to help us increase leverage as the larger equity raises result in a lower leverage until we can reinvest and de-lever. We believe…the ATM will benefit shareholders and do not expect it to be a primary source of equity.”

Clearly, neither Hannon nor Pattern is planning on issuing large amounts of equity with this mechanism. But it’s a positive signal that they are getting ready to tap the public equity markets.

Most Yieldcos have rallied significantly from their post-bubble lows, but are still far below their highs a year ago. This recovery has allowed several to once again begin to tap the markets for new equity, an early sign of the return to normalcy.

Because of the Yieldcos’ lower share prices and the relatively small size of these new equity offerings, they will not increase the investable funds per share nearly as much as previous offerings. Hence, despite better prices available for the clean energy assets Yieldcos buy, the investments made with the funds will have more modest effects on the Yieldcos’ dividends per share.

Yieldcos are returning to normalcy. We are no longer in the bubble.

***

Disclosure: Tom Konrad manages and has a stake in the Green Global Equity Income Portfolio (GGEIP), a private fund which invests in Yieldcos and other high-income green stocks. GGEIP holdings currently include CAFD, GLBL,TSX:RNW, ABY, NYLD/A, HASI, TERP and PEGI.

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