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Dave Zgodzinski

Dave Zgodzinski

Dave Zgodzinski is the editor of the Green Miner newsletter and thegreenminer.com web site.  The Green Miner is dedicated to searching out valuable investments in…

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Syria and Solar Panels

War by social media. Should the US bomb Syria? - Like or dislike.

The US, as a social media nation, has thousands of points of view on this complicated issue. President Obama throwing the jump ball to Congress means that the decision will likely be talked to death long before it’s made.

One argument against taking military action is that this conflict is a civil war in a far-off country and there is no direct threat to voters over here. So let them fight it out on their own. After a decade of interminable and indecisive wars in the region, Americans are understandably hesitant to join another battle.

But this time there is a feeling that we’re moving closer to a bigger bout. The main event.

Israelis don’t live far from Syria, they live next door.

They see the domestic violence at their neighbours’ and have a clear understanding of what it means to them. If Assad is willing to gas his own people because he has the weapon, would Iran hesitate to nuke Tel Aviv if they had that weapon?

It’s a somber start to the New Year for Israelis. Where the US is split on Syria, this event could sway public opinion in Israel more decisively towards a pre-emptive strike on Iran. If the US decides not to attack Assad’s regime, Israelis will feel more isolated and understand that their destiny is up to themselves alone. If the US does attack and there is some kind of retaliation by Hezbullah, Syria or Iran against Israel, there is another avenue towards escalation.

Either way, the tension between these enemies gets cranked up.

Every day the market gets to vote on the pluses and minuses of yet another excursion in the Middle East. And nowadays the stocks of renewable energy companies receive buying interest as do petroleum producers when the situation over there heats up. Solar and wind stocks have been moving much higher as tensions rise in Syria. Perceptions are changing, and petroleum is no longer the only beneficiary of Middle Eastern geopolitics. The move to renewable energy is being accelerated by the turmoil.

As an example of the changing climate, the US military is now spending real money on renewable energy.  According to Greentechmedia.com, the Department of Defence signed $7 billion worth of power purchase agreements last month for solar generated electricity. Solar is getting over 50% of the DOD’s renewable business, but there are also contracts being signed for wind and geothermal power.

Related article: Why Work Should Begin on Elon Musk’s Hyperloop Immediately!

Marines And Solar Panels
Marines And Solar Panels: Photo - sfgate.com

The military understands that over-dependence on petroleum is a dangerous handicap. Fuel supply lines are a vulnerable target. According to an article last month in the San Francisco Chronicle, 3000 Americans died in fuel supply convoy attacks in Iraq between 2003 and 2007. Much of this fuel was being moved to run generators that supply electricity to military camps. Awareness of this weakness is focusing attention on renewable power sources – for tactical reasons.

President George W. Bush signed a target for the Department of Defence to achieve a level of 25% of total military energy use derived from renewable sources by 2025.

The military likes new technology if it gives them an advantage over the enemy. Away from the battlefield, politics take over. It’s still peculiar that renewable energy and green technology is the darling of liberal democrats while tea party members tend to see solar energy, electric cars, wind turbines and the like as big government boondoggles that don’t work.

But there is a new drive on the right wing to make the US less of an interventionist power. Fiscal conservatives like Rand Paul are gaining prominence. They want to spend less money on foreign wars and don’t want the US to be the constant watchdog of the world, involved in every battle.    

At some point, when they realize that home grown renewable energy reduces the need for fighting wars to protect petroleum supplies, more libertarian minded Republicans will have a change of heart about green power.

Transalta Corp. and Transalta Renewables

The difference between manufacturers of renewable energy equipment and companies that produce renewable energy is like the difference between truck manufacturers and trucking companies. One makes the truck, the other uses it.

There are times when energy equipment manufacturers are in the driver’s seat, and there are times when the power producers that use the equipment are more desirable. In the renewable energy world, the stocks of power producers have become, like utilities - dividend plays. They trade inversely to bond yields. When interest rates were falling, renewable power producers traded higher because of their high dividends. And when interest rates started to move back up, the stocks of power producers went down because the dividends they pay are less competitive with the interest from bonds.

Lately, the stocks of equipment manufacturers and service companies for solar and wind have been rising fast while the stocks of companies that use this equipment to make and sell electricity have been falling.

Related article: Suntech Solar Reels as Directors Quit Over Cash Flow

At some point this process gets stretched and even reverses. For example, if interest rates continue to rise and financing for new projects becomes too difficult or expensive to obtain, producers could cut back on new projects and manufacturers suffer as a result.

I first wrote about Transalta Corp. in April of last year. Transalta Corp. is a hybrid. The company owns and operates old coal fired electricity plants, some large hydro projects and new wind energy developments and some new run-of-river hydro plants. I was looking at all the renewable energy assets of the company and hoping that good things would come as the company evolved.

Unfortunately, Transalta had operational problems with a couple of its large old coal fired plants, and the company has been having trouble defining its future direction. The stock dropped despite its hefty dividend. Transalta pays 8.48% at Friday’s closing price of $13.68 Can.

In June, the company came out with a plan to spin off its renewable energy assets into a separate company – Transalta Renewables. The deal worked as follows:

Transalta Renewables purchased the majority of the renewable energy projects in the portfolio of Transalta Corp. These assets include 28 power plants – hydro power and wind farms. The total net generating capacity of these plants is 1112 megawatts. The power plants are all fully contracted. The purchase price was the carrying value of $1.9 billion.


That deal makes Transalta Renewables a large renewable energy player. For example, the company is now the single largest wind farm operator in Canada.

In August, Transalta Renewables completed an initial public offering –IPO - of about $220 million. The money was used to pay down debt that this new company incurred when it purchased the renewable energy assets from its parent – Transalta Corp.

Transalta Renewables' Wind Farm
Transalta Renewables' Wind Farm

After the issue of the shares, Transalta Corp. retained an approximately 80% ownership in Transalta Renewables. So the new company is basically a green mini-Me. It will not have truly independent decision making because 80% of the shares are held by Transalta senior.

The problem with this deal is that it appears to be better for the company than for investors. Translata hoped to “unlock the value of Transalta’s renewable asset platform.” Transalta looked longingly on pure renewable energy companies and their valuations and tried to shift around some corporate structures in the hope of being rewarded by the market with a higher stock price.

But the market didn’t like the deal much. There was a bit of a boost to Transalta’s stock when the spinoff was announced, but it has backed off since. Presumably some of the pressure on the stock is the same as the pressure on other power producers – their stocks compete with bonds, and when bonds go down, so do these stocks. The deal was cooked up when interest rates were still dropping and the stocks of renewable power producers that paid good dividends were climbing. But by the time the deal came to market, the tide had turned.

The valuation of Transalta Renewables is relatively attractive. The company plans on paying a healthy dividend – a 7.49% yield at the stock’s closing price on Friday of $10.01 ( a penny higher than the IPO price). The dividends will be about 83% of the available cash flow  - a reasonable number. The company can grow by developing other Transalta Corp. renewable projects.

What is left of Transalta Corp. is even less of a renewable energy company, except for its majority holding in Transalta renewables. Transalta Corp. will still retain outright ownership of just over 1 Gigawatt of renewable power plants and new projects. Some of these projects will be absorbed by Transalta Renewables as that company grows. With the spin-off of the renewable energy business, the parent company will be an old energy company. Translata’s stock is probably cheap at these levels but it’s no longer of interest. I hold it for the dividend, but will sell at the next opportunity.

I will watch Transalta Renewables and see if that stock becomes a bargain as the power producers sell-off may be getting overdone.

By. Dave Zgodzinski

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