October, 2003

Feature Story:

Energy Update

by Bob Preston

OPEC spoiled the winning streak of the S&P 500 as the cartel unexpectedly announced a production reduction of 900,000 barrels a day. This announcement, demonstrating their continued strength, wreaked havoc in the small cap growth companies during the last days of trading. Fortunately, I had taken "chips off the table" earlier from a number of stocks that had accumulated unsustainable gains.

I sold two entire positions in the energy technology area, Energy Conversion Devices (ECD) +40% and Quantum Fuel Systems +70%. These stocks exemplify the volatility in the small capitalized growth sector over the month. ECD had recently broken away from two joint venture partners who had previously helped finance two production facilities. The loss of this support may place ECD's finances at risk. I sold Quantum, on the other hand, because the stock price had appreciated +250% since our original purchase in May, on no solid announcements.

We initiated positions in Calpine Corporation, a North American power company engaged in the development, ownership and operation of power generation facilities, primarily natural gas-fired combustion turbine and geothermal. They also have rights to natural gas supplies in Canada and would benefit from the development of liquid natural gas (LNG) terminals. The amount of natural gas in Africa and Asia could supply these terminals with gas at reasonable prices for many years to come.

Also added was NEG-Micon, a Danish supplier of wind turbines for power generation and a provider of turnkey wind turbine solutions. I believe wind and natural gas energy resources could benefit from The Energy Policy Act of 2003 currently being debated by Senate and House conferees.

Wind energy is quickly becoming cost competitive. Even without production tax credits, project investors in wind development are finding rates of return (9-11%) that are risk competitive with ten-year treasury rates (4.2%). The largest wind project developer in the States is the FPL Group (FPL) doing business as Florida Power & Light Company and Florida Energy, LLC. Wind turbines now generate over 20% of their electricity, a meaningful and material percentage. The stock was recently rated an "Overweight" by Prudential for its growth and income potential. The stock trades less than 20 times its current earnings and has a dividend yield of 3.7%.

FPL is in our portfolio but it may not fit many SRI investors' criteria. Although FPL continues to buy wind assets at an impressive rate, 80% of the company is still involved in conventional energy. FPL also sells wind bonds that are directly linked to their wind projects. Any investor can purchase them but the issuance is quite small - about $300 million - so they may be a bit hard to unearth. Interested investors might call FPL and get contact information.

Investors are still having some difficulty figuring out how to make money in the wind industry. Do you make investments in wind projects or in utilities that buy wind energy, or do you invest in turbine or component manufacturers?

General Electric (GE) is starting to dominate the U.S. wind market. It is the largest U.S. wind manufacturer and is now one of the top five players in the world. But if you purchase GE's stock you would be hard pressed to say you own a wind stock. Revenues from wind are probably at about 1% of GE's total.

NEG Micon (NEGMF) is up over the past 3 months or so after taking a big hit about a year ago. Some orders were delayed in Germany and they surprised the Street with revenue and earnings much less than were expected. Vestas (VWSYF) has performed well this year. Vestas and NEG have American Depository Receipts (ADRs) that can be bought through most brokerage firms.

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Robert S. Preston has 25 years investment experience with senior positions at AXA, Nomura, Rothschild and Paine Webber. Founder of Craigmillar LLC, General Partner to Craigmillar Partners LP and Craigmillar Energy LP. Contact him: bob.preston@craigmillar.com or through his web site www.craigmillar.com The following stocks mentioned in this article are currently owned or advised by Craigmillar: FPL Group, NEG-Micon, Calpine.