Going GREEN without bleeding RED

It's often argued that money and the environment don't mix when it comes to investing. While we all may try to love Mother Nature the best that we can, many of us have investment portfolios that tell a different story.

Let's face it: Many equity-based mutual fund portfolios owned by Canadians are heavily invested in oil and gas and mining, or financial institutions that receive a significant amount of revenue from financing these sectors.

Even the socially responsible investment funds -- be it mutual funds or the handful of Canadian exchange-traded funds -- are not very focused on up-and-coming green firms.

Then again, it's tough to blame anyone serious about investment returns for shunning the green-tech and renewable-energy sectors. For the most part, these firms are in their fledgling phases. They have promising ideas, but they lack the funding to get off the ground in many cases because the markets for their products and services are not yet fully developed, either.

"I think there is a lack of knowledge about and of capital for these companies," says Stephen Whipp, a board member with the Social Investment Organization and investment adviser with Manulife Securities in Victoria.

"And you really need capital in order to raise capital."

The federal and many provincial governments, however, have over the last 15 years put in place many tax breaks and other incentives aimed at lowering the cost of green-tech development. Among the best known is the federal Canadian renewable and conservation expense, in place since the mid-'90s and aimed at providing firms a tax break on the expenses they incur in the development of renewable energy and related technology.

The credit is similar to the one offered to the oil and gas and mining sectors called the Canadian exploration expenses credit. Both credits provide incentive for firms to risk capital on projects where revenues are anything but assured.

And like the resource-exploration sectors, these tax-credit savings can be passed on to investors in the form of flow-through shares.

"We have a longstanding history in Canada since '54 of supporting the development of energy and mining with the use of flow-through, but what a lot of people don't know is we've had this green infrastructure since 1996 that investors can participate in the green sectors of energy," says Sheldon Stier, president of Manitoba exempt market investment dealer Hatch Alternative Investments.

Flow-through share offerings are a way for companies to attract investment by passing on the tax incentive they receive to investors, reducing the amount of invested capital at risk.

On an investment of $10,000, an investor at the highest marginal tax rate would receive about $4,640 back in taxes. Even more tax savings could be realized the following year by investing the credit money into RRSPs, providing an additional tax refund.

Stier says it's also possible to receive further tax savings after the flow-through shares' tax deductions have been realized because the shares may become eligible for an RRSP. But investors should seek expert tax advice in this regard to be sure they abide by the rules under the Income Tax Act, he adds.

Tax incentives aside, however, the renewable-energy sector is becoming a viable investment sector, he says.

And unlike conventional resource exploration, in which the firms aim to discover resources that, if found in large enough quantities, can then be sold to another company to develop, renewable energy firms can often quantify the potential upside of their ventures, says Bob Fraser, CEO of Syntaris Power, a B.C.-based green-tech firm that has a flow-through share offering available in Manitoba through Hatch.

Syntaris develops small hydroelectric projects, called run-of-river. These involve diverting a portion of a stream on a steep mountainside. The rerouted water flows into a pipe called a penstock down a precipitous grade to a small wheelhouse at the bottom.

Fraser says the company is able to project its potential output by studying stream-flow outputs over several years.

"For a very small amount of money, we can know what the energy output will be and what the projects will look like," he says.

Of course, being able to project output is one thing. Having a market to sell the energy to is another.

Because of new legislation to promote renewable energy, Fraser says run-of-river and other green energy projects now have growing markets.

In both B.C. and Ontario, renewable energy projects -- once approved -- benefit from guarantees from Crown corporation providers such as B.C. Hydro to purchase electricity at a set price for decades, Fraser says.

Syntaris has 40 projects in the proposal and development stage, including two that are expected to begin construction next year, and Fraser says the total cost of the projects could be more than $1 billion, generating 500 megawatts of power.

Of course, as with all firms in development stages, investors are taking on several risks. In fact, these are outlined in the firm's offering memorandum -- a legal document used by firms offering exempt market securities investments, which are not publicly traded on a stock exchange.

First off, because the company isn't publicly traded, the shares are not liquid. Investors often cannot sell these investments until they are listed on an exchange through an initial public offering (IPO) or the company is purchased by a larger competitor.

Second, while the firm may have projections of potential, future revenues, these are not guaranteed. Most of the projects are in the application and permitting stages, and in many instances, Syntaris is not the only bidder.

Gary Godard, an adviser with Godard Derlago Wealth Management Advisors in Calgary, part of Wellington West Capital, says it's important for investors considering buying flow-through shares to look beyond the tax savings.

"The argument will always be as 'Yeah, well, I've got the tax writeoff, that will account for about 50 per cent anyway,'" says Godard, also a board member with Social Investment Organization. "But that's not really investing. That's a bit of bookkeeping."

Investors should look at the underlying investment and determine whether it would be profitable.

"Is there an investment behind it? Nine times out of 10 that's where flow-through fails."

Godard, who is not involved with the Syntaris offering but is familiar with the company, says the firm makes a good case with its business model. But he would be concerned about liquidity -- the bugbear of many of these projects. Still, that doesn't mean it won't turn out to be successful.

"We've had wind farms here we've invested in Pincher Creek that have been wonderful investments that we've held with no liquidity," he says. "It was the same type of concept; we were stuck holding shares of a private company that we had no idea (when we would be able to sell them)."

The point is, he says, people need to do their homework and understand these ventures involve a lot of risk in exchange for a high return that isn't guaranteed.

"It falls into the asset allocation of risk," he says, adding these higher-risk investments should only make up a small portion of an overall portfolio.

"I still say to investors, even though you have a social conscience at heart, it still comes down to making money in the proper allocation within your portfolio."

giganticsmile@gmail.com

Power points

Renewable energy on the verge of going mainstream?

Two reports issued over the summer found green power is not just becoming a viable alternative source of electricity. It's now the leading new source of electricity to power grids in the United States and Europe, according to the United Nations Environment Program and the Renewable Energy Policy Network, based in Paris. By the end of this year or next, capacity additions of renewable sources of electricity will outpace those from conventional sources of energy, the Globe and Mail reported in July on the organizations' findings.

What about Canada?

Ontario recently launched its renewable energy feed-in tariff program that offers a guaranteed pricing structure for renewable electricity production. The program provides stable prices for electricity from wind, solar, hydro and biomass. B.C. also passed legislation for a similar incentive called the standing offer program. It provides a means for smaller, green electricity projects to get price and market certainty from the province's Crown power corporation B.C. Hydro. Syntaris Power CEO Bob Fraser says it's part of an initiative by the province to meet B.C.'s growing power demands using green-friendly sources, such as hydro, wind and solar. Incidentally, both of these provinces have to import power and much of the power they generate themselves is by burning fossil fuels, unlike in Manitoba, where Manitoba Hydro produces almost all of its power -- and surplus power -- with hydroelectric dams.

Exempt market and its investors

Almost everyone can invest in the exempt market. Regardless of income and asset tests, Manitobans can invest up to $10,000 in a deal that has an offering memorandum, which outlines the nature of the investment and its risks. Only eligible and accredited investors may invest larger amounts of capital. These are individuals and institutions deemed to have higher net worth than the average investor and, as a result, are able to bring a higher level of analysis -- legal, taxation and investment advice -- to bear on private deals. And advice in this sector is warranted because exempt-marjet investments are not traded with a prospectus, a rigorous, detailed report available for the public, vetted by securities regulators. For more information on who can invest in the exempt market, consult the Manitoba Securities Commission website.

Republished from the Winnipeg Free Press print edition December 11, 2010 B14