“Best Renewable Energy Investment for Decades to Come?”

By Travis Johnson, Stock Gumshoe, September 30, 2008

This wee teaser comes to us from an ad for the Alternative Energy Speculator, which is the newsletter that came into being about a year ago and has so far been popping up like a Whack-A-Mole every couple months to push Westport Innovations and some solar power companies.

And this time around, it’s a wind power company. I know a lot of my readers are very interested in wind power, and when I wrote about Vestas a few weeks ago, there was a lot of chatter about the potential for that one. The teaser for Vestas was from Green Chip Stocks, which is a cousin of the Alternative Energy Speculator (it was a “buy right now” teaser, and doing so would have you down about 25%, but that’s neither here nor there).

But there are certainly many reasons to be positive about wind energy — it isn’t perfect, but it stands with hydropower and geothermal as the three renewable energy resources that could probably stand on their own without subsidies. Windmills are expensive and by some accounts the turbines and parts are in short supply, and probably subsidies are needed for big projects, but wind energy in many areas is very low cost and competitive with coal and natural gas. As long as the wind is blowing.

Alternative Energy Speculator will cost you either $500 or $200 a year, depending on whether it’s
“on sale” when you get the urge … but of course, the Gumshoe will freely dispense what little wisdom I can share about this particular stock, so you needn’t pony up anything just to find the name and ticker and get a little head start on your own research.

Here’s the excerpt that apparently caught the attention of several of my readers:

“Right now, I’m personally building a position in a very unique investment vehicle. It’s an investment that allows you to take an ownership position in 63 wind turbines.

“Green guru Jeff Siegel and I researched this investment inside and out. And after we were finished kicking the tires, we realized we were looking at possibly one of the best renewable energy investments for decades to come.

“You see, for just a small investment of about $5.90, you’ll get access to the monthly cash flow these 63 wind turbines kick off. That’s right, every month… you’ll get a check from the electricity that this wind farm produces and sells.

“I’ve been receiving checks from these wind turbines since June. Believe me, it helps in this crazy market. Not only do I get piece of mind that these checks show up consistently every month… but this is an investment that’s almost guaranteed to go up as our economy converts over to a renewable energy complex.

“In the coming weeks Jeff and I will show you how you can receive monthly cash flow from these wind turbines. It’s very simple. And… you don’t need to be an accredited investor, which makes this investment very attractive.

“I know the current market turmoil can be nerve-wracking, but this is when fortunes are made.”

So … I generally agree with that last sentence (though of course, it’s also when fortunes are lost — the people who swoop in and buy stocks now are buying them from someone, from people who are forced, by panic or by margin calls, or by a sense of impending doom, to sell them). That’s not to say this is a “bottom” — I have no idea, and I can’t blame anyone who wants to stuff their mattress with gold coins and sit in the corner sucking a thumb right now. But personally, I feel more like buying than selling right now.

That’s not the point, of course — the point is that these fine newsletter folks have an idea for us. So what is it?

Well, there are a few possibilities — but the likely solution is …

Algonquin Power (APF in Toronto, AGQNF on the pink sheets)

Algonquin Power is an open-ended investment trust that owns renewable energy projects. They do own a big wind farm in Manitoba called St. Leon, which does run 63 wind turbines, but that’s actually a relatively small part of their overall business — they also own a lot of hydroelectric assets, some water treatment plants, some power plants that burn waste to produce energy, and a few other power-related investments. And the per-unit price is right around the price they teased, currently it’s trading at C$5.75, about US$5.43.

This fund has been around for a long time, though they bought the Manitoba project just about two years ago by buying out the AirSource Power LP fund. They do bring in enough cash flow to pay the current distribution, though that wasn’t always the case (for several years they distributed more cash than they brought in, which isn’t all that unusual for these income-focused trusts). They have distributed 92 cents per share annually for about eight years, and as of last year distributable cash stood at 95 cents.

If you haven’t done the math, that’s a pretty dramatic yield — about 16%. There may be tax issues, particularly for US investors who will see Canadian withholding hit their dividends (which is why many folks warn against holding trusts in any retirement account — you can’t take credit for foreign taxes paid in a tax-deferred accoiunt, but you still have the taxes withheld … I’m not a tax guy, so consider that to be an uninformed aside). I would assume that the company is probably subject to the new tax structure for Canadian trusts that goes into effect in 2011, so that would cut into profits unless there are offsetting tax credits. Since this is a politically friendly kind of company, largely in alternative energy, it’s possible that they’ll have offsetting tax credits, it’s probably worth investigating before investing.

So … is this the kind of thing you want to invest in? Clearly, you’d want to read their annual report and try to understand the company a bit first, but it is certainly appealing on its face: A diversified portfolio of renewable energy generation facilities (and other stuff, including some natural gas generation), a high dividend, and a continuing push from power customers for cleaner energy. The shares have been beaten up significantly, and they got even below $5 recently, but they appear to have a pretty solid balance sheet compared to other power generating companies, and no real problems in getting financing for what are generally long-lived, stable cash flow-generating assets.

The last quarter’s results were slightly worse than most expected, and they have diluted unitholders with an acquisition this year. I’ve read two analyst reports on this one, with one saying that financial flexibility is limited with a weak cash position, and pointing out that unlike last year, this year they are distributing more than 100% of their cash flow; the other pointed out that the shares are unfairly depressed and this is a huge buying opportunity. The more negative report pegged a price target of C$8, the more positive one had a price target of $9.50.

They’re probably not going to grow very fast organically, but they are a serial acquirer so they will probably find a way to grow, and they are particularly looking for more hydroelectric assets. I would expect that this fund won’t trade at a 16% yield for very long — considering the stability of their assets, it seems likely that the price would go up in a more stable and less fearful market, assuming that they do maintain the ability to distribute funds at the current rate (this seems likely, since they have had the same distribution rate for several years and seem to be committed to it). The share price might go down first, of course, particularly if they decide to cut the dividend or make some dilutive deals, but I can see why the Alternative Energy Speculator folks would like this one.

Oh, and if you don’t care about income but do believe in wind, there’s also a reasonable way to get a diversified piece of the sector — there’s a relatively new wind energy ETF from First Trust, ticker FAN. This is particularly interesting for folks who hate pink sheets trading, since most of the big wind companies, like Vestas, Gamesa, and the like, are European and do not have exchange-listed ADRs that US investors can easily trade. It’s near its lows, as is almost everything else these days, and trades at a trailing PE of about 21.

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Happy investing, and may a good wind blow your way soon.



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September 30, 2008 11:15 am

I bought some APF back when the loony was on a par with the dollar.
And it’s in my IRA.
But at this price, even if I lose a tad in currency fluctuations and withholding, I still make a very good return.
In fact, it may turn out to be a good hedge against the dollar.
It closed at $5.24 yesterday. I may buy some more.
Thanks for the good work.

Mark Bohana
September 30, 2008 4:34 pm

As an FYI referencing the Canadian Royalty Income Trusts, there is a tax involved, although the following are trusts with distribution on a monthly basis. The yearly interest is as of today according to my end of day scanning/charting software.
I personally own PGH & PVX.

PGH – (16.3) PVX (14.2) AAV (14.2%)PWE (15.8)
My only complaint is a very short window to sell for cap gains and still buy back to be eligible for the monthly distribution. Although today the trend has been down, so instead I am accumulating. There are a great many of these trusts available, most need Canadian $$, and I would recommend doing your homework at dbrs.com/intlweb/

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September 30, 2008 5:15 pm

I backtrack to read the teaser on VESTAS. A lot of comments think politics has no bearing on stocks. LOOK WHAT HAPPENED TO THE MARKET WHEN POLITICIANS COULD NOT AGREE ON THE $700B BAILOUT. Politics runs everything in business and government.

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October 1, 2008 7:51 am