Global Energy Sector Overview

Global Energy and Clean Tech Sector Overview
– and –

Investment Approach and Select Ideas for Discussion

Jeffrey Walkenhorst
commonstocksense@gmail.com
September 2, 2009

Please see Risk Factors and Disclosure at the back of this presentation.

© 2009 Jeffrey Walkenhorst

Outline

• Macro Overview: Big Picture Global Trends
• Renewable Energy Consumption: U.S. and U.K.
• Wind Power: Status, Trends, and Challenges
• Solar: Status, Trends, and Challenges
• Water: Brief Look at Supply/Demand Imbalance
• Investment Analysis and Research Approach
• Searching for Ideas
• Potential Longs
• Potential Shorts
• Conclusion: Plenty of Opportunities to Assess

© 2009 Jeffrey Walkenhorst 2

Macro: Global Energy Supply by Fuel and Region (IEA)

Source: IEA, 2008, http://www.iea.org/textbase/nppdf/free/2008/key_stats_2008.pdf .


Macro: Nuclear and Hydro Production (IEA)



Macro: World Energy 2020/2030 Outlook (IEA and AES)


Source: AES 6/09/08 investor presentation. Source: AES 5/27/09 investor presentation.

Macro: CO2 Emissions and Power Needs/Sources


Source: AES 5/27/09 investor presentation.


Renewable: U.S. Energy Consumption (EIA)

• Renewable energy consumption increased 7% Y/Y in 2008 despite a 2% Y/Y decline in total energy consumption.
• Total renewable energy consumption increased by 487 trillion Btu to 7,301 trillion Btu, “the highest level attained
based on EIA estimates of renewable energy back to 1949 … due to substantial increases in the use of biofuels,
wind and solar energy”.
• Renewable energy’s share of total U.S. energy consumption was over 7% in 2008, up from 6% in 2004.

Source: Energy Information Administration, Renewable Energy Consumption and Electricity Preliminary Statistics 2008,
July 2009, http://www.eia.doe.gov/cneaf/alternate/page/renew_energy_consump/rea_prereport.html .


Renewable: U.K. Energy Consumption (DECC)
• “In spring 2007 the [UK] Government helped secure EU agreement to an ambitious target to obtain 20% of the
EU’s total energy consumption – a combination of electricity, heat and transport – from renewable sources by
2020.”
• However, DECC noted: “Our latest modeling also suggests that solar heat may deliver less than we had
envisaged in our Renewable Energy Strategy consultation last year. This is due to a reduction in our estimates of
average heat output from this technology.”

Source: UK, The Department of Energy and Climate Change (DECC), The Renewable Energy Strategy (RES), July 2009,
http://www.decc.gov.uk/en/content/cms/what_we_do/uk_supply/energy_mix/renewable/res/res.aspx .


Wind Power: Global Capacity Snapshot (GWEC)
• Installed global capacity of 120.8 GW at year-end 2008, with the U.S. at 21% of total capacity.

Source: Global Wind Energy Council, Global Wind 2008 Report, http://www.gwec.net/fileadmin/documents/Global%20Wind%202008%20Report.pdf .


Wind Power: Global Forecast and Public Policy

Source: National Renewable Energy Laboratory / Wind Powering America,
Source: Global Wind Energy Council, Global Wind 2008 Report. “Wind Energy Update”, August 2009,
http://www.windpoweringamerica.gov/pdfs/wpa/wpa_update.pdf .

Source: AES 5/27/09 investor presentation.


Wind Power: U.S. Trends for FPL’s NextEra

Source: FPL 5/27/09 investor presentation.


Wind Power: Not Without Current Challenges
• FPL expressed caution about reaching the company’s wind forecast – summarized by 7/30/09
WSJ article “Wind Power: Best of Times, or Worst of
Times?”http://blogs.wsj.com/environmentalcapital/2009/07/30/wind-power-best-of-times-or-worst-of-times/?mod=wsjcrmain
• … “Getting to the low end of our previously announced 2008 to 2012 new wind range of 7,000 to 9,000
megawatts may be overly optimistic given the current economic environment,” chief financial officer
Armando Pimentel Jr. said on a conference call….
• FPL said that utilities, which are seeing less demand for electricity, are less eager than in the past to sign
up for long-term agreements to purchase the electricity generated by wind farms. Without those long-term
agreements, it is tough to secure financing for new wind farms.

• On 8/18/09, Vestas maintained its 2009 outlook for revenue Y/Y growth of 20% with an EBIT
margin of 11-13% but noted the following:
• “Since the autumn of 2008, the credit crisis has impacted the wind power industry, causing limited order
intake during the past nine months and keeping it well short of the level of the same period in 2007/2008.
Many customers have been unable to finance scheduled projects either due to increasing funding costs or
an actual lack of funding. Moreover, some of the banks that were previously key players in the wind turbine
market are no longer active.”

• Zoltek, a maker of carbon fiber, talked of a “perfect storm” in its 8/10/09 F3Q09 report, pointing to
delays related to uncertainty over government spending, frozen credit markets, and price
decreases.


Solar: Global Deployment (EPIA) – Europe Dominates

• At year-end 2008, cumulative global capacity increased by 5.6 GW to ~15 GW with Europe at more than 9 GW
(65% of worldwide capacity), Japan at 2.1 GW (15%) and the US at 1.2 GW (8%).
• The Spanish market almost quintupled in 2008 to more than 2,511 MW (45% of WW capacity).
• Approximately 1.5 GW was installed in Germany, 342 MW in the US, 230 MW in Japan, 274 MW in South
Korea,258 MW in Italy, 105 MW in France, 51MW in the Czech Republic, 50MW in Portugal, and 48 MW in
Belgium.

Source: The European Photovoltaic Industry Association (EPIA), Global Market Outlook For Photovoltaics Until 2013,
http://www.epia.org/index.php?id=18 .

Solar: Public Policies and Two Large Utility Players

• xxxxx
– xxxxxx

• xxxxxx
– Xxxx


Solar: Transition Phase and Two Scenario Forecast

Source: The European Photovoltaic Industry Association (EPIA), Global Market
Source: First Solar Analyst Day presentation, 6/24/09. Outlook For Photovoltaics Until 2013, http://www.epia.org/index.php?id=18 .


Solar: Which Solution is Best? Depends Who You Ask
First Solar (FSLR): Energy Conversion Devices (ENER):

Suntech (STP): Sunpower (SPWRA):

commonstocksense@gmail.com Source: recent corporate management presentations.

Solar: Challenges Highlighted by ENER and FSLR

• From Energy Conversion Devices 8/27/09 report: "Demand for solar products in our target markets weakened
further from the third quarter into the fourth quarter as commercial construction declined, building owners deferred
reroofing projects, and project financing constraints continued.”
• From First Solar’s 7/30/09 report:
– xxxxxx

• xxxxxx
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Solar: Need to Watch Supply / Demand Imbalance

• BusinessWeek, “Solar Update: More Volatility On The Cards”,
8/25/09http://www.businessweek.com/investing/green_business/archives/2009/08/solar_update_mo.html
• Highlights directly from article:
• … According to Credit Suisse: “Stable, but much lower [polysilicon] pricing from [the
second quarter of 2010] will pull in the mythical grid parity in several global markets to [the
second half of next year], triggering demand elasticity.”
• … that means tumbling polysilicon prices next year, coupled with an oversupply of other solar
materials, could bring prices roughly inline with conventional energy sources, such as coal and
natural gas.
• Yet … researcher iSuppli reckons the massive oversupply of solar materials, particularly panels,
won’t be corrected until 2012. An Aug. 10 report says:
• “Total solar panel production in 2009 will grow by 14.3% to 7.5 Gigawatts (GW), up from
6.5GW in 2008. However, only 3.9 GW-worth of installations will take place this year. That
means almost one out of every two panels produced in 2009 will not be installed but stored
in inventory.”
• And according to iSuppli’s Henning Wicht: “This inventory glut will have a long-term impact on the
solar business, with panels set to remain in a state of oversupply until 2012.”


Water: Different Type of Supply/Demand Imbalance

Source: Energy Recovery August 2009 investor presentation.

Source: Pico Holdings May 2009 investor presentation. Source: GE 12/4/08 investor presentation.


Investment Approach: Focus on Business Model

• The Clean Tech universe offers wide variety of companies in which to invest and trade: high
quality businesses that will likely be bigger, better, stronger in several years (long candidates) and
low quality businesses that may not survive (short candidates)
• Long side: invest in growing, high quality business models with sustainable competitive
advantages that support high or improving returns on invested capital over time
• Preference for high margins, limited leverage, current year growth, and low valuation multiples
• Seek improving fundamentals and identifiable positive catalysts within next six to 12 months not
appreciated by the Street

• Margin of safety should be supported by replacement cost and/or difficult-to-replicate assets/franchise

• Short side: target the opposite – low quality business models with identifiable weaknesses
or challenges that are destroying shareholder capital as illustrated by low/negative returns
on invested capital
• Weaknesses might include poor quality of earnings and declining/low margins, as well as high leverage and
negative free cash flow
• Seek deteriorating fundamentals and identifiable negative catalysts within next six to 12 months not
appreciated by the Street
• No margin of safety and no difficult-to-replicate assets/franchise


Searching for Ideas – Two Minute Drill

• Quick analysis of income statement, balance sheet, and cash flow trends, as well as valuation,
recent results, forward expectations, insider ownership, insider buying/selling, and institutional
ownership (could establish quantitative screen)
• Interesting as potential Longs:
• Calgon Carbon Corporation (CCC) – water and air purification through manufacture and sale of activated
carbon and other treatment systems
• Casella Waste Systems (CWST) – integrated solid waste and recycling services; focused on “resource
transformation” with five landfill gas-to-energy facilities and 37 recycling facilities
• Energy Recovery (ERII) – devices for sea water reverse osmosis (SWRO) desalination

• Interesting as potential Shorts:
• First Solar (FSLR) – thin film solar modules made from cadmium telluride
• Ener1, Inc. (HEV) - rechargeable lithium-ion batteries and battery systems
• Universal Display Corp. (PANL) – R&D into and commercialization of organic light emitting diode (OLED)
technologies and materials


Potential Longs – Summary Analysis

• Calgon Carbon Corporation (CCC) – stable • Casella Waste Systems (CWST) – share price is • Energy Recovery (ERII) – current short favorite
business (2Q09 revenue down only 5% Y/Y and, up 5x from March lows, yet well below a 52-week (11% of float) on reduced near-term demand for
on FX neutral basis, was up slightly Y/Y) serving high of $14.49 last September; levered 4.8x TTM SWRO product and some insider selling (mostly in
diverse end-markets with pricing power EBITDA, but multi-year investment cycle to $7-8 range, insiders still own ~47% of company);
(somewhat offsetting lower volumes), healthy expand landfill capacity (now ~30 years) and however, company is a market leader in category
margins (11% TTM OM), and favorable secular modernize treatment (gas-to-energy and sorting) (~70% share per management) with favorable
trends; at 28x TTM earnings and 18x NTM are complete; management pulling levers to secular trends, IPR protection (5 U.S. patents, 9
forecast earnings, CCC doesn’t appear improve free cash flow and reduce debt (e.g. international), $500M in announced projects
inexpensive, yet all remaining holders of $75M in higher pricing, cost controls) despite challenged (versus 2009E revenue of $50-55M), a strong
convertible notes (issued August 2006) recently fundamentals; potential positive catalysts include financial position ($1.60 cash per share, virtually
converted notes into common shares (company bottom-line improvement from pricing initiatives no debt), and solid operating metrics (21% TTM
now almost debt free) and two insiders made and value recognition of North Eastern landfill OM, 26% TTM ROE excluding cash); potential
recent sizable purchases; potential positive assets; CWST trades at an EV/EBITDA of 5.4x positive catalysts include incremental project wins
catalysts include additional contract awards for and P/S of 0.12x compared to RSG at 9.6x and and better-than-expected 4Q09 seasonality
flue gas mercury removal and UV drinking water 1.6x, respectively – company reports results related to year-end budget flushes
disinfection, as well as increased activated carbon 9/2/09
use in Asia

Stock graphs and data from Yahoo! Finance as of 9/1/09 market close.


Potential Shorts – Summary Analysis

• First Solar (FSLR) – share price down sharply in • Ener1, Inc. (HEV) – market enthusiastic about • Universal Display Corp. (PANL) – innovative
recent weeks as investors focus on recent program wins and DOE grants, yet leader in OLED technology with 942 patents
supply/demand imbalance (see rising inventory enterprise value of 15x NTM revenue appears issued/pending (at 12/31/08), yet similar story to
levels), quality of earnings, related party egregious for capital intensive, competitive Ener1: even with strong IPR portfolio, sales
agreements, and changing economics (much business with no history of profitability, still growth has NOT materialized as the company as
lower polysilicon prices that arguably eliminate substantial operating losses, and potentially not yet monetized IPR; EV of 19x NTM seems rich
First Solar’s prior cost advantage); high historic optimistic forward expectations for a company with no history of profitability and
margins and ROIC mitigate some risk, yet more still substantial operating losses (cash burn)
downside probable as near-term challenges
impact business model and expectations likely
adjust downward
• Caveat: the business models of both Ener1 and
Universal Display are not necessarily broken and
the Market is awarding rich valuations based on
seemingly gigantic future potential – specific
negative catalysts other than potential earnings
disappointments are unclear – requires more
research and industry scuttlebutt

Stock graphs and data from Yahoo! Finance as of 9/1/09 market close.


Conclusion – Plenty of L/S Opportunities to Assess

• “Clean Tech” universe is large, diverse, and dynamic
• More research necessary – analysis herein is only tip of iceberg
• Strive to develop deep fundamental understanding of all potential
investment ideas, with emphasis on business models –
• Review annual reports and other SEC filings, conference calls, company and
industry news releases
• Analyze historical financials, key drivers (macro and micro), and forward
expectations
• Develop financial model and derive scenario-based intrinsic value estimates
• Meet with and/or speak with management
• Establish industry contacts to understand scuttlebutt and better frame potential
positive/negative catalysts

• Leverage knowledge to manage risk, preserve capital, and generate alpha
on both long/short side


Thank You + Contact + Risk Factors and Disclosure

Jeffrey Walkenhorst
Questions or Feedback?

http://commonstocksense.blogspot.com/

http://twitter.com/jeffwalkenhorst

• Risk Factors and Disclosure
• The content and/or views contained herein represent only the personal opinions of Mr. Walkenhorst based on his own research
and analysis.
• All data, information, and opinions expressed, are subject to change without notice. Mr. Walkenhorst currently has no
positions in companies mentioned herein.
• Under no circumstances is this message an offer to sell or a solicitation to buy securities suggested herein.
• Invest at your own risk – all equity investments are subject to risk and an investor can lose some or all of his/her money.
• Any investment decisions you make should be based solely on your evaluation of your financial circumstances, investment
objectives, risk tolerance, and liquidity needs.


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