Friday File Retread: “Green ATF Seizes Canadian Power Grid,” and a “Secret Ammunition” bonus

By Travis Johnson, Stock Gumshoe, March 31, 2010

I continued to get a lot of questions about this “Green ATF” teaser from the Green Chip folks over the last week or so, and now that it’s been several weeks since I first wrote about the teaser in the Friday File it seems fair to share it with everyone here on the free site. What follows is the Friday File from March 5, it has not been updated or edited — the “green” stock spiked for a little while following the initial excitement of this ad, but has since fallen back to a price slightly below where it was when I wrote this three weeks ago (the “bonus” pick that I mention first is priced about the same). And don’t worry, I’ll get back to writing something new for y’all tomorrow — thanks!

Before I get started with the focus of today’s Friday File, a green energy stock, I wanted to give you a quick bonus idea: You might have noticed that I wrote about Matt Badiali’s teasting of Denbury Resources yesterday, the oil stock that’s using CO2 injection to boost production, but he also teased a couple other ideas in that letter.

One of those ideas was for another oil services stock, one that makes the “secret ammunition” for extracting oil from shale fields. In this case he wasn’t talking about CO2 injection (that was the “magic drug”), but about proppants. These are little balls, essentially, that are injected in the wells as they fracture the shale, helping to hold open space so more oil can be extracted (at least, that’s my “I don’t understand this stuff” explanation).

And Badiali was kind enough to include some patent numbers in this tease (7,615,172… 7,387,752… 7,255,815… 7,119,039… 7,036,591… 5,188,175), so I can tell you that this proppant maker is the dominant producer of one particular kind of proppant, the ceramic variety: Carbo Ceramics (CRR).

I haven’t had a chance to look at this one very carefully yet, but it is a fairly low-profile, billion dollar company, and they are profitable and expected to grow earnings — the forward PE is about 17, the PEG ratio (price/estimated earnings/future growth) of about 1.3, so not terribly expensive on its face. Then again, their last earnings report came in worse than the Street expected, and there is a large short position (almost 20% of the float). The stock bounced back fast from the crash, doubling since last March, and despite a dip over the last couple months the shares are still within $10 or so of all-time highs. No debt, and decent margins, but I don’t know anything about the fundamentals of the business or the competitors — and particularly, how essential their product is and whether other non-ceramic proppants perform well in comparison.

So that’s a quickie for your consideration, just thought you’d want to know.

Today I want to take a look at another green energy teaser for the Friday File — in part because the “green” investing stuff seems to be heating up again after a good hiatus when a lot of these capital-intensive projects took a hit during the market crash (and the oil crash), and in part because it sounded like it might be an interesting opportunity, despite the overhyped ridiculousness of the ad.

Here’s how the Green Chip Stocks folks pitch their idea:

“Historic policy coup creates a $30 billion market overnight… Leaving you as few as 7 days to claim 171% gains….

“A few months ago, British Columbia Premier Gordon Campbell authorized the formation of a new task force.

“Its mission: To systematically shut down the province’s oil, gas and coal power industries…

“While at the same time transferring over $30 billion in tax dollars to a small group of relatively unknown, clean power producers.

“And it’s about to turn one very special small-cap company into a cash-rich energy powerhouse.”

To further the frightening “big government” fears, which are pretty easily stoked in a large portion of the investing public, they also include a quote from a reputable newspaper:

“The government is using ‘intentionally secretive’ methods to block scrutiny of its [Green ATF] … The task force is excluded from compliance with both information and privacy laws…” — Vancouver Sun, January 28, 2010.

That quote, by the way, is from a singularly boring Sun article about the complaints over the machinations of this task force — including that the task force used Google email accounts instead of government ones. You can read the article here if you like.

The spiel is that the ATF (the Bureau of Alcohol, Tobacco, Firearms and Explosives in the Justice Department) is the most “feared” agency in the Western World (they include references to Ruby Ridge, and the David Koresh standoff in Waco), but that this new task force in British Columbia is even more all-powerful. Here’s how they put it:

“Outside of Communist Russia, modern China, and a few other dictator-states in the Eastern Hemisphere, no other government agency’s scope and impact could compare to that of the U.S. BATF.

“But that all changed on November 2, 2009, when British Columbia Premier Gordon Campbell established the Green Energy Advisory Task Force.

“Their single mission: to enforce Canada’s emerging energy policies.

“And as jack-booted government agencies go, they’re the new kings of the hill.

“However, unlike the U.S. Bureau of Alcohol Tobacco and Firearms, this new Green Energy Advisory Task Force can actually make you rich… “

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I know, pretty ridiculous, no? It’s pretty hard to picture green energy bureaucrats in jackboots, even those vicious bureaucrats from Western Canada … but still, we’ll let them have their fearmongering imagery and we’ll just look and see how this is supposed to be profitable for Green Chip Stocks subscribers.

Here’s how the tease describes the new regulatory guidelines:

“You see, British Columbia’s parliament recently passed a radical environmental-initiative called the BC Energy Plan.

“And to ensure that this campaign is successful in drastically reducing the region’s carbon footprint, the Green ATF is taking control of a vast market that spans the entire British Columbian territory…

“Below are just a few regulatory ‘guidelines’ that the Green ATF is imposing, even as you read these words:

* Zero greenhouse gas emissions from existing coal fired electricity generation;
* All new electricity generation projects to have zero net greenhouse gas emissions;
* Zero net greenhouse gas emissions from existing thermal generation power plants by 2016;
* Ensure clean or renewable electricity generation continues to account for at least 90% of total generation;
* A total moratorium on nuclear power;
* Eliminate all routine flaring at oil and gas producing wells and production facilities by 2016, with an interim goal to reduce flaring by half (50%) by 2011.

“And that’s not even close to the whole list…

“All in all, the BC Energy Plan outlines 55 green policy actions to be executed between now and 2016.”

So where’s the profit? Do note, by the way, that thanks to hydroelectric power British Columbia has been largely powered by clean energy for decades, anyway — this is not necessarily as revolutionary as it is in other places (like California), as evidenced by the “continued” 90% renewable requirement above.

“You see, what this list of noble goals doesn’t mention is the $30 billion in government funds that have been allocated to select private companies to make the transformation to carbon neutrality happen….

“One firm in particular has already signed a contract worth 264% the company’s entire market capitalization.

“That’s a single project worth more than two and half times the company’s total current value.

“It’s a major undertaking, projected to generate enough revenue to boost the stock price as much as 171% in the short term.”

And yes, that “one firm” is apparently the one we’re looking for today to bring us our massive pile of jackbooted, green riches.

What kind of firm is it? This is a company that’s developing “run of river” power. You might have heard of this kind of hydropower before, it essentially is a way to develop hydroelectric energy on a smaller scale, without constructing massive dams or flooding large areas. It basically involves diverting a portion of a river through a pipe, which runs through a turbine and generates electricity before returning the water to the river a little ways downstream, and it seems particularly well-suited to the smallish, fast-moving rivers that run the melting snow and glacier run-off down the BC mountains and, eventually, into the Pacific Ocean.

Here’s some more about this particular project, and why the Green Chippers think this is a good bet:

“For hydroelectric, smaller, more efficient, less habitat-harmful operations such as run-of-river technology represent the future.

“But there’s another reason why this gem of a cleantech company is on its way to becoming a powerhouse of the rapidly growing carbon-neutral industrial movement.

“And it’s all got to do with financial backing.

“Partners and Owners: A Recipe for Success

“It’s not easy for a company to take on a project that’s valued at more than three times the company’s own market cap.

“Especially today, when credit is harder to get than it has been in well over a decade.

“So when investments are made, they’re made for a reason.

“To finance the construction of this $630 million hydroelectric facility, my new recommendation has partnered with one of the biggest names in energy for more than a century…

“None other than Thomas Edison’s own General Electric….

“It could easily catapult this stock from its current price of around $3.50, to well above $9.50

“That’s an increase of over 171%.

“And that’s not all.

“With a $70 million financing deal recently closed on one of the biggest wind farms in North America, and a number of other projects in various stages of development around the continent, this small cap company is well on its way to becoming a mid-cap cleantech powerhouse.”

And finally, there has to be some urgency to the spiel — or why would we SUBSCRIBE RIGHT NOW, right? That’s where the “within seven days” stuff comes in:

“My newest discovery has positioned itself better than any company of its kind operating today.

“It won’t take 8 years. In fact, it may not even take 8 weeks…

“With some mid-ranged media outlets like the Vancouver Sun reporting these developments already, it may be just days before this one blows its top.

“In fact, with the Green ATF’s in-depth evaluations already in the hands of the Premier, this $30 billion in funding may be disbursed at any moment.

“Now, from my experience, it’s never more than two or three days before a policy as aggressive as this starts to make waves through mainstream economic sources like the Wall Street Journal.

“For this particular opportunity, it’ll be a week on the outside.”

So there we go — a cleantech company, developing run of river hydropower in partnership with GE and moving forward on a big wind farm, priced around $3.50. So who is it?

Thinkolator sez: Plutonic Power (PCC in Toronto, PUOPF on the pink sheets)

They actually say that their flagship facility, currently under construction, will end up costing about $660 million, not $630 million — that’s the East Toba and Montrose run of river project, which is scheduled to complete construction this July. Here’s how the company describes itself on its website:

“Plutonic Power is a clean energy company currently developing a suite of renewable energy projects in British Columbia. The company has two projects under construction with a division of General Electric. The company’s flagship hydro project, the 196 Mega-watt East Toba and Montrose project, is currently under construction, with operations beginning in 2010. The 144 MW Dokie Wind Project is slated for construction in January 2010, with operations beginning in 2011.”

The shares do currently trade for just about C$3.50, which actually is awfully close to US$3.50 again with the increasing parity of the greenback and loony. The shares were a spectacular hit in the clean-energy bull market of 2006-2008, getting up to about $9 for a while, but they collapsed dramatically when everything else fell, getting a bit below $2 for a brief while, and have been relatively stable in the $3-4 range since last Summer. And in case you were concerned that there might be another match to these clues (there are other “range of river” hydro companies, but none that match nearly as exactly or that are partnering with GE in this way), we can throw on the additional clue that some of the images in the Green Chip Stocks teaser appear to have been lifted directly from a Plutonics Power brochure.

So will this company end up being profitable? They have built up a good partnership with GE that has GE supplying a large share of the startup costs for their under-construction and proposed facilities in exhange for equity in those facilities, and supplying them with debt financing for the lion’s share of construction costs, so that’s encouraging (though it also makes them very dependent on GE, which was part of the reason investors were worried about Plutonic during GE’s dark days — despite the fact that GE’s potential equity investments in these plants would total less than a billion dollars).

From the first two plants that are projected to come online, the Toba Montrose plant and the Dokie windpower project, the company projects that they will receive at least C$16 million annually starting in 2011 as their share of the free cash flow. There are about 65 million shares outstanding after their fundraising last quarter, so that’s a market cap of about $240 million if you don’t count the ~5 million stock options. There aren’t going to be earnings for a long time, one would assume, thanks to big depreciation charges, and there will continue to be big capital costs and probably more equity raising if they move forward on building their other proposed run of river projects, but that does at least show a reasonable potential profit for these long-lived projects down the road — the run of river plants are designed to operate for decades with relatively low operating costs, so it’s certainly possible to imagine a very profitable operating company in the decades to come. This first project, Toba Montrose, has a power sales agreement in place already for 35 years of generation, lining up nicely with the 38 year term of their financing, so the economics of the project appear to work.

It just might be a little tough to get there, since expanding to a profitable scale will require more development — from looking at their planned projects, it seems like the one that will really bring a dramatic change for the company is the proposed Bute Inlet project. The current Toba Montrose project consists of two facilities with capacity of 196 MW, Bute Inlet covers a broader geographic area and a ton of small rivers and will be, if constructed, 17 facilities with a total capacity of 1,027 MW. Bute and Upper Toba, another smaller project, are both planned to start operation as early as 2013, though neither is fully approved yet and both could (and if past is prologue, probably will) experience delays in the permitting and review process.

In an investor presentation from last Summer, Plutonic estimated that they need about $75 million in cash over the next year — to pay for their portion of the acquisition of the Dokie wind project, to build the transmission line for the Toba project (which will also connect through to their other projects if they move forward), to handle their regular annual cash burn of about $10 million, and to push forward on permitting for the large Bute project so they can earn in GE’s next equity investment for that. They say that they have the flexibility to borrow more from GE if it’s not a good time to raise equity, but they were able to sell about 20 million shares last Fall at C$3.35, which brought in about $70 million, so that should take care of much of the immediate capital needs.

Their future cash flow seems to be relatively assured, since there are so many green energy plans moving forward in BC and there’s a growing focus on using BC’s natural bounty (including wind and glacial runoff) to make it a green electricity exporter — but I have no idea whether they’re likely to get an additional funding source from the current plans. They do already have long-term power sales arrangements either in place or nearly in place for the expected output of their two most advanced projects, so that gives investors some confidence.

And Plutonic Power does have their “Powell River” projects (including Bute Inlet) submitted as “proponents” for the BC Hydro Clean Power Call, which is a request for proposals for supplying green energy — and it looks like BC Hydro has pushed back the deadline for making a decision on those proposals until the end of this month (it had been due at the end of December). That “Clean Power Call” was initiated way back in 2008 and appears to have gotten kind of mired, but they are apparently trying to push it through, and in addition to BC Hydro’s focus on acquiring more clean generation capacity there are also grant funding programs that I suppose Plutonic’s projects might qualify for. This is not an undiscovered or unknown trend in BC, however, and there are dozens of other hydropower projects that have responded to the Clean Power Call, as well as lots of other renewable energy proposals. Still, that means there’s some potential for a catalyst, either good or bad, when Clean Power Call decisions are made by BC Hydro (BC Hydro and the BC electrical transmission system, by the way, are both controlled by the provincial government).

So this is an interesting company, one of many pursuing run of river projects in BC but also, from what I can tell, one of the juniors that has the largest number of projects in development and permitting and the strongest financial partnership, so that’s certainly positive. The future orientation of the company, and the importantce of large projects like Bute Inlet that have not yet even been permitted, means it’s awfully tough to put a value on the shares, however.

The company argues for a stronger valuation by comparing their market capitalization to the equity investments that GE has made or is scheduled to make in their projects — if GE is willing to make $820 million in equity investments in their three run of river hydroelectric projects (they’ve only actually made the $100 million Toba Montrose investment so far, but have apparently agreed to the others), then that implies, based on the percentage of equity they would get, that Plutonic’s equity in those projects, in total, would be worth $570 million. That doesn’t include any value for the non-developed projects in their potential pipeline, or the Dokie wind project, and that total is a bit more than twice the market capitalization of the company right now, so if you assume that GE is making wise investment decisions then perhaps Plutonic is a value at these prices for patient investors … as long as you assume that the regulatory push for green energy will continue, that people will continue to consider run of river plants as relatively low-impact, and that the next five years will see big steps forward in developing Bute Inlet and advancing the pipeline of their other projects (Plutonic is responsible for development through the permitting stage, when many projects presumably die, at which point GE steps in to help finance).

Compared to lots of the run of river developers Plutonic looks like a fairly large and stable firm, despite their small size — you can find other run of river developers that are much earlier in the exploration and licensing process like Swift Power (SPC in Toronto), with a market cap of just about $5 million, and, of course, there are also run of river developers that are more diversified and advanced, like Innergex, which might have a less dramatic potential upside but which also has the advantage of paying a nice dividend (Innergex is merging with its sister income fund to sidestep the trust tax problem).

If you’d like to see the BC Energy Plan details, they’re available here. And Plutonic’s website does a pretty good job of providing basic info on their projects. If you’d like to follow up on the regulatory and funding issues the Vancouver Sun has run a lot of interesting articles, here are a few that I found interesting:

Proponents, critics seek ‘clarity’ from Victoria on clean power strategy

GE bullish on province’s green power sector
Ashlu project ships power to BC Hydro’s grid [Innergex project]
Run-of-the-river projects threaten efforts to become green
Myths abound in the debate over Independent Power Projects [rebuttal to above]
Electricity: A new industrial pillar for the B. C economy