Vincent Gasparro, managing director of The Green Tomorrow Fund, focuses on socially responsible investing with an emphasis on solar power. Here, he discusses the long-term outlook for the solar sector and highlights some of his favorite Canadian and US-based solar investment ideas.
Steven Halpern: Our guest today is Vincent Gasparro, a socially-responsible investing expert and managing director of The Green Tomorrow Fund, a merchant bank focused on renewable energy projects, environmentally sustainable businesses, and businesses that, in general, support the green economy. How are you doing today, Vince?
Vincent Gasparro: Good, Steven. Thanks for having me, I appreciate it.
Steven Halpern: Well, thank you for joining us. First, tell our listeners a little about The Green Tomorrow Fund.
Vincent Gasparro: Sure. The Green Tomorrow Fund was started in 2010. We are an independent, sustainable merchant bank that invests in renewable energy projects—primarily solar—and we’ve made investments in the Province of Ontario—that’s where we’re based—we’re based out of Toronto, Canada.
We’ve made investments primarily in Ontario where there is a significant premium paid to renewable energy producers, and to a lesser extent, we’ve invested in the Caribbean.
Steven Halpern: Now green investing encompasses a number of varied markets, but as you mentioned you focus specifically on solar power. Could you give us an overview of the state of the solar market today and the long-term role you see for this market?
Vincent Gasparro: Sure, absolutely. Global energy output from solar, as of 2014, was approximately 2% and that number will increase to about 16% in 2020 according to Bloomberg, and other agencies and news outlets, and, more specifically, by 2050 solar will be the single largest power producing segment in the world.
You’re seeing explosive growth from renewable energy, and in particular, solar. More directly, Ontario has one of the most generous renewable energy premiums in North America.
The Provincial government traded The Green Energy Act, which was created in 2008 by providing a Feed-in-Tariff, which, in essence, is a 20-year purchase power agreement with the Province of Ontario. At that time, the first generation of the Feed-in-Tariff program was approximately 0.71 cents per Kilowatt hour.
Now, the last generation of the Feed-in-Tariff program, which was the Feed-in-Tariff III, that premium was reduced to about 0.33 cents per kilowatt hour, basically, reflecting the dramatic decrease in solar installations or the price to install solar assets.
You are still generating—in Ontario—really, depending on where you fall in the capital structure, about 9.5% to a 10% unlevered IRR. Because of these substantially risk-adjusted rates of return in Ontario, and other parts of North America, you have large financial institutions, pension funds, and sovereign wealth funds deploying significant capital into the renewable energy space, and in particular, solar.
Therefore, because of the dramatic flow of institutional capital, combined with the decrease in solar installations on a per watt basis—and you’ll be hearing me talk about that often—plus the continuing increase in retail electricity rates, solar has already hit grid parity in many jurisdictions. The growth of the solar market generally—not only in Canada, and in Ontario, but in North America—is booming.
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Steven Halpern: Many of our listeners will be interested specifically in how they can invest in this sector, and within Canadian companies, you’ve highlighted Canadian Solar with the symbol (CSIQ), Brookfield Renewable Energy Partners, which trades as units with the symbol (BEP), and Trans Alta, which trades on the Toronto Exchange with the symbol (TAC). Could you walk us through these three ideas and explain what type of investors should be looking at these?
Vincent Gasparro: Sure, absolutely. Brookfield Renewable Energy Partners, they own their own hydroelectric and wind farms. They currently have about 6700 megawatts of renewable power under long-term, fully contracted purchase power agreements, basically, therefore, mitigating any power price risk.
They have a low-risk, high-quality portfolio of assets with a long life and relatively low cost, combined with very a competent management team. Brookfield Renewable Energy Partners has strong EBITDA growth and sustainably high EBITDA margins.
The stock is currently trading at roughly $38.90; I think investors should see capital gains into 2015. Combine that with a 5.5% dividend yield, it’s a great way for investors to invest in the renewable energy industry and it’s just a solid, solid company.
Canadian Solar, who you mentioned ticker symbol CSIQ, they manufacture solar panels in China, and to a lesser extent, in Canada. What I like about Canadian Solar is that they are now developing and financing commercial-grade solar projects and keeping those assets on their balance sheet.
They will have these revenues generating government-backed assets, which are strengthening their balance sheet and providing an ongoing revenue stream.
This is allowing Canadian Solar to diversify a way for manufacturing, which is seeing market squeeze really because of economies of scale being derived from solar manufacturers generally, as well as some oversupply that still exists in the marketplace, but is being drastically used up, where, actually, I think you’ll see an increase in panel prices in 2016.
You saw strong revenue growth from 2013 to 2014 and I think you should expect to see that moving forward as well with Canadian Solar.
In terms of Trans Alta, I’m using them as an illustration. They’re not necessarily a, sort of, a green play, but what I like about them is they are a sort of traditional energy producer. They have mainly coal and natural gas, diesel, and hydro-generating facilities, and they have some wind and geothermal.
What I like about Trans Alta is they have gone out and tried to modernize their assets. Their asset base generally is old and is declining, but they are modernizing quickly with strategic purchases of renewable energy assets that have long-term PPA contracts (that’s purchase power agreement contracts).
A perfect example of what they’re doing—and other electricity producers are doing the same—is they recently purchased multiple large-scale wind farms in Wyoming. This happened in early 2014.
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A lot of electrical producers, like I mentioned, are out in the marketplace looking for these assets and they are trying to inorganically grow their asset base with these modern assets and that’s one of the other benefits of renewable energy, generally, is that companies can inorganically modernize their asset base with these purchases.
Those are my three recommendations—two real recommendations—Brookfield Renewable Energy Partners and Canadian Solar—and like I said, Trans Alta is an example of an electricity company that’s sort of modernizing their asset base.
Steve Halpern: Before I let you go, let’s turn to two US-based firms that you’ve highlighted and one is SunEdison with the symbol (SUNE), and also, Solar City with the symbol (SCTY). Could you briefly tell us the attraction for both of these companies?
Vincent Gasparro: For sure. SunEdison, as some of your investors or your listeners would know, they provide solar energy services that integrate design, installation, finance, and monitoring, as well as operation and maintenance to downstream solar market customers. Just so you know, downstream means constructing, operating, and owning solar projects.
They also have a battery storage solutions business. Their operating margins are increasing, which is excellent. SunEdison has about five gigawatts of solar assets and they have about 2.1 gigawatts in their pipeline, so there’s strong demand for SunEdison services.
What I like is that they’re holding some of these assets moving forward on their balance sheet. The implication is that it may hinder short-term profitability, but it will benefit longer-term margins and shareholder value. They also have other competitive advantages from a financing perspective.
They launched a YieldCo called TerraForm (TERP). Just for your listeners, a YieldCo is a corporation which has solar assets put onto its balance sheet. A management team is put in place. The YieldCo is then sold onto a major stock exchange, which then pays a dividend back to the parent company.
What this does is it reduces leverage on the balance sheet, because most solar projects tend to have somewhere between 70% to 80% debt and also provides an ongoing revenue stream. I expect capital gains in 2015 with this stock and it’s currently trading around $24.50. I think a reasonable target is about $28.
In terms of SolarCity, obviously a high-profile company, they design and install, and through the sale of the lease of solar energy systems to residential and commercial customers. There is strong demand in the residential sector via leasing and continued strong commercial demand.
I also see Solar City having—through inorganic growth, like the acquisition of Silevo—Solar City is lowering their cost of installation on a per watt basis, which will definitely help profitability.
The current price of Solar City is approximately $48.89 and I see a strong 12-month target of about $60. It’s a great, great company, another great way for retail investors to get into the renewable energy sector.
Steven Halpern: Again, our guest is Vince Gasparro of The Green Tomorrow Fund. Thank you for joining us, today.
Vincent Gasparro: Thank you, very much.
