Harris Roen, Editor
Roen Financial Report
May 10, 2012

The Initial Public Offering (IPO) of Facebook Inc. has been dominating the news, but I am more interested in another IPO that is developing. One of the largest solar installers in the country, SolarCity, has filed a confidential application to the SEC to create an IPO of its shares. This is an exciting development, and is reflective of a new theme in solar investing that is worth following.

The smart alternative energy money is moving toward solar installation companies, not solar component manufacturers. Considering that there has been much focus on solar bankruptcies in the past year, including Solar Millennium, Evergreen Solar, Solar Trust of America, and the infamous case of Solyndra, this solar IPO looks to be the hallmark of a new trend. And how this IPO turns out should be very telling as to whether or not this trend has legs.

Since the application was just submitted at the end of April, it will take time for the regulators to review the request and for the company to finalize preparations. Because this is a confidential application, details are murky so it is hard to analyze whether shares will be a good investment or not. One promising clue comes from Technology Review, published by MIT. It reports that SolarCity has more than doubled its market share of the residential installation market between 2010 and 2011.

Just the fact that an investment banker is willing to sponsor the IPO, though, is also a good sign. It likely means the bank’s research shows that SolarCity has a sufficiently large market, a competitive edge, a profitable business plan and a management team that can execute. Nevertheless, we will have to wait a few months to see if the IPO is a success.

The feature article of the most recent issue of the Roen Financial Report talks of the advantage solar installation companies have, given the steady drop in photovoltaic component prices (the article names three other companies that should benefit from this trend, and also details two other forward-looking alternative energy investment themes).

Sometime around August of this year, however, when the SolarCity shares will likely go public, investors will see clearly whether solar installers will be the profit centers of the future. Stay tuned to follow developments in this dynamic area.

Harris Roen, Editor
Roen Financial Report
May 5, 2012

Historians may look back at the current military era as pivotal to a U.S. shift away from dependency on fossil fuels. In a recent speech, the Secretary of Defense outlined security issues involved with military reliance on fossil fuels. He also laid the framework for major reductions in the use of oil. There is historical evidence for military decisions molding the future of global energy patterns, so this is not an inconsequential decision.

Speaking at the annual meeting of the Environmental Defense Fund, Defense Secretary Leon Panetta made the case for why it is imperative that the military reduce its use of oil. His remarks focused on two areas.

First, he argued that climate change could overwhelm military capability. “Rising sea levels, severe droughts, the melting of the polar caps, the more frequent and devastating natural disasters…” would all raise demand for military responses. Second, Panetta disclosed that the Department of Defense spent about $15 billion on fuel for military operations in 2011, and consumes more than 50 million gallons of fuel each month.

The secretary’s plan calls for more than a billion dollars of investment in energy efficiency and alternative energy technologies directly related to combat readiness, including:

• more efficient aircraft

• hybrid electric drives for ships

• improved generators

• microgrids for combat bases

• combat vehicle energy-efficient programs

He also indicated that the Department of Defense will put another billion dollars toward making domestic military installations more energy-efficient.

A fateful decision by another military leader changed the course of history in a previous era. It is described in Daniel Yergin’s impressive book The Prize: the Epic Quest for Oil, Money & Power. Winston Churchill, First Lord of the British Admiralty at the time, made the difficult decision to switch all war ships away from using dirty and inefficient coal to cleaner, faster, more efficient fuel oil. He executed this switch even though this meant abandoning a reliable, locally controlled energy source in exchange for importing oil from volatile regions in Persia. Churchill knew that mastery of the seas using a modern fleet was absolutely necessary to ward off threats from the German Kaiser in World War 1. This switch to oil was one of the key turning points in shifting the global energy equation that allowed oil to dominate the modern industrial world.

In a similar fashion, the current move by the Department of Defense will lead to large-scale research, development and application of fuel-saving technologies and practices that should lead to spinoffs that will affect the greater society. It is an ironic twist of fate that today’s military decisions could again change the global military landscape, this time to molding a secure future that is less dependent on foreign oil.

Harris Roen, Editor
Roen Financial Report
April 18, 2012

Regular readers know that I support domestic natural gas as an important fuel source. Natural Gas is critical to achieving a smaller carbon footprint, while at the same time promoting jobs and energy independence in the U.S. Even though all energy choices have environmental impacts, natural gas has a particularly thorny pollution problem. The drilling method used to make domestic wells so productive, hydraulic fracturing or fracing, has many known issues. It also has some large looming questions that need to be resolved. In a positive move, the Obama administration recently decided to directly take on the issues associated with fracing.

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An Executive Order was issued this week to establish a “high-level, interagency working group” to facilitate efforts to “support safe and responsible unconventional domestic natural gas development” (what the President means by ‘unconventional gas’ is shale gas that is extracted using hydraulic fracturing). The goal is to untangle overlapping and complicated federal regulations in order to smooth the way for shale gas development, while still having an eye on environmentally safe practices.

The Executive Order named 13 agencies to be involved in the coordinating effort, including the Departments of the Interior, Health and Human Services, Energy, and the Environmental Protection Agency (EPA). The Order also recognizes states as the primary regulators on non-federal lands, which is where the bulk of shale gas lies.

Overall, industry has responded favorably to the Executive Order. The American Gas Association was “pleased” to see the action, and the Business Roundtable calls it a “solid first step” to “cut through these complications.” On the environmental side, many groups want to encourage natural gas as the best choice among fossil fuels, but are concerned about company practices. For example, the Sierra Club looks forward to engaging with the Interagency Working Group to “provide the support and policy solutions they need to be successful in protecting American families from an industry run amok.”

The problem lies in the fact that the natural gas industry has enjoyed a lack of environmental protections to date. Back in 2005, Congress exempted hydraulic fracturing from federal environmental regulations and laws, including the Safe Drinking Water Act, as a result of efforts by lobbyists and then Vice President Dick Cheney which has come to be called the “Halliburton Rule.” The ensuing unregulated environmental problems are catching up to the industry.

Resolving problems associated with fracing is a must-solve issue, since shale gas is projected to make up almost half of natural gas production in the U.S. in the next 25 years. While there is no perfect way to supply all the energy needed to sate the appetite for power consumption in this country, natural gas appears to be the best alternative to coal and nuclear for base-load electricity in the near future.

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What does this Interagency Working Group mean to investors? If successful, it will allow the natural gas industry to continue to grow in the U.S. Though domestic natural gas producers are attractive as a long-term investment, low natural gas prices, due to an abundant supply, have made it a very competitive field with thin profit margins.

There are two excellent ways to invest in the future of domestic natural gas. First, look at utilities that use natural gas as a power source. Second, invest in companies involved in building and maintaining natural gas power generation. Companies I like in these regards are NextEra Energy (NEE) and MasTec, Inc. (MTZ).

NEE is a large Florida-based utility with over 4.5 million customers that generates more than half of its power from natural gas. Its PE is in a reasonable range, between 13 and 14, and NEE is paying a generous 3.9% dividend. Earnings per share are very healthy at around 5.5. NEE always posts high net profit margin and return on assets when compared to other utilities in its industry. I would consider NEE at a fair price if it trades below $51/share.

MTZ is an infrastructure construction company that is active in natural gas (as well as wind and solar). MTZ has had positive earnings since 2008, and annual sales that have increased each year since 2005. It also has a reasonable PE of around 15, and has acceptable debt levels. MTZ looks well priced where it is currently trading, in the $16-17/share range.

Because of the triple benefit of domestic natural gas – reducing pollution, helping the local economy and increasing energy independence – and because there are abundant natural gas supplies, there is no doubt that the government and industry will do what is necessary to allow markets for natural gas to grow.

IMPORTANT INFORMATION

Individuals involved with the Roen Financial Report and Swiftwood Press LLC do not own or control shares of any companies mentioned in this article. Any advice and/or recommendations made in this article are of a general nature and are not to be considered specific investment advice. Individuals should seek advice from their investment professional before making any important financial decisions. See Terms of Use for more information.

Harris Roen, Editor
Roen Financial Report
April 5, 2012

There are many reasons to be bullish on alternative energy as an investment. The advantages of wind, solar and other renewables over their fossil fuel counterparts are many, including:

• Enhancing energy independence by not relying on imported fossil fuels
• Reduced green house gas emissions and other pollutants
• Diminished risk of toxic spills
• Low equipment maintenance costs

Another advantage, of course, is that after the initial capital costs, electricity from wind and solar is produced without fuel expenditures. So as technologies improve and upfront costs continue to drop, rates should become more and more competitive. In fact, for a short while this week at the European Energy Exchange, rates for electricity actually went to zero!

The European Energy Exchange (EEX) is a place where utilities can sell electricity to industry and other end users. Users buy the power one day in advance, so it is essentially a short-term futures market. The EEX operates in a similar fashion to the APX Power Market in the U.S.

Here is what happened: electric prices for night demand are fixed within a range between 2 and 4 euro cents per kilowatt hour. On the night of April 1, it fluctuated between €0.02 and €0.03. Demand was just below 35 gigawatts, and rose to 50 gigawatts by noon. Despite this increased demand, there was a rapid increase in wind and solar power during the course of the day. So for a short time in the afternoon, electricity prices fell to zero. Average peak electricity prices for the day, between the hours of 8 am and 8 pm, were 1.893 euro cents per kilowatt hour. This was lower than the average price for the whole 24 hour period, which was 2.41 euro cents.

So even though demand was greater during the day, the increased solar gain and wind velocities were more than enough to make up for the rising demand.

Though this was only a short-term phenomenon, capital costs for renewable energy are getting lower, and will no doubt continue to do so. For example, Solarbuzz calculates that costs for commercial and industrial solar installations dropped 7% in the past year. Also, Photon reports that the cost for solar modules on the German spot market fell over 45% in the last 12 months.

Considering that Europe is far ahead of other industrialized nations in renewable energy installations, having eclectic costs go to zero may be a sign of the future for other regions of the world who commit to alternative energy. This is just one more reason we are bullish on alternative energy companies for the long-term investor.

Harris Roen, Editor
Roen Financial Report
March 29, 2012

An article from the Roen Financial Report has been chosen as one of the 100 best submissions on a top financial websites. Seeking Alpha, one of the most useful investor communities, is billed as “the premier website for actionable stock market opinion and analysis, and vibrant, intelligent finance discussion.” Seeking Alpha is a web powerhouse with 1 million registered users. Over 320,000 articles have been submitted to Seeking Alpha from over 5,300 contributors, so getting listed as a top article is quite an honor.

Titled “What Is Driving Oil Prices and How Can Investors Benefit?” the article explains how oil prices have become less about supply and demand of oil itself, and more of a proxy for the world economy through the stock market. Oil as a retail commodity has become oil as a retail investment. This in turn has ramifications for alternative energy projects, which live or die on the price of fossil fuels.

If you are not yet on Seeking Alpha, I highly recommend it. The site has a strong focus on alternative energy companies, and is filled with valuable information from experts in many fields.