Tuesday, April 29, 2008

Politics as Usual

Analysts trying to fine tune earnings models for alternative energy companies will probably have to wait abit longer to factor in government incentives for renewable and alternative energy. The U.S. House of Representatives passed HR 5351 in early February 2008, extending and expanding incentive programs for a variety of alternative energy technologies and solutions from solar to ethanol to hydrogen.

It only takes an affirmative vote on HR 5351 in the U.S. Senate and the President's signature to give investors greater certainty on sales and costs for alternative energy companies. We all know what certainty means in the capital markets - higher valuation and greater availability of capital - two things that lead to success for an industry or a company.

Unfortunately it is business as usual in the Senate. So far they have failed to take up HR 5351 and instead tacked a hastily crafted amendment to a housing bill - HR 3221 - that is intended to provide relief to homeowners facing foreclosure. Senator Maria Cantwell, who co-sponsored the amendment to extend renewable and alternative enrgy incentives, justified the connection between housing and energy by explaining that it is lack of jobs and rising energy costs that are putting homeowners in jeopardy.

That seems like a weak link to me, but even the "amendment" approach would be acceptable if it did not otherwise smell of politics as usual. Cantwell fails to mention that the primary difference between the House's attempt at an energy policy is the HR 5351 also eliminates $18 billion worth of tax incentives for oil companies. The Senate cannot appear reluctant to act on renewable energy, but they are apparently also unwilling to stand up to the oil industry and make a true policy shift from supporting fossil fuel development in favor of renewable energy.

Perhaps legislators should step back and decide who really needs help. First Solar (FLSR: Nasdaq) just reported $46.6 million in net income on $196.9 million in sales in the March 2008 quarter. First Solar manufactures solar modules using thin film semiconductor processes and has seen mushrooming demand for its solar modules as electric utilities scramble to meet regulatory requirements for "green" power generation. Last week ConocoPhillips (COP: NYSE) reported $4.1 billion in net income on $54.9 billion in sales in the same quarter. Profit margins expanded for the company in the March quarter as higher crude oil prices drove the top-line to a record level.

Both companies generated strong cash flows, bringing into question whether their respective industries have gone past the point where the U.S. government needs to keep holding their hands.

Contrast the solar cell and oil industry leaders with other renewable energy developers. Ballard Power Systems (BLDP: Nasdaq), FuelCell Energy, Inc. (FCEL: Nasdaq) along with a half dozen or so other hydrogen energy companies in the Crystal Equity Research Fuel Cell Index are not fairing as well. None of the fuel cell developers have producers profits as they continue to invest heavily in technology and product development. Negative operating cash flows means capital resources are still required. Government incentives could change the projected return dynamic enough to accerlate the flow of capital to the most promising competitor.

Unfortuantely, we have a legislative body in the Senate that would rather pander to which ever special interest is at the door. Last year it was ethanol companies and the corn producers lobby, this month it is the oil industry. Perhaps hydrogen, wind, wave power and waste-to-energy companies should just band together and hire a really good lobbyist to grease the wheels of legislative action.


Neither the author of the Small Cap Copy web log, Crystal Equity Research nor its affiliates has a beneficial interest in the companies mentioned herein.

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