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Wood: The Wayback Machine of the Environmental Movement

SolarCity (NASDAQ: SCTY  ) is at the cutting edge of the move toward cleaner energy. Rentech (NASDAQ: RTK  ) , by comparison, looks like it's stuck in the stone age. But there could be opportunity in seeing value where others see boring.

Bleeding into a new world
SolarCity installs solar on residential and business rooftops. It handles all the hard stuff (permitting, installation, etc.) and even takes the brunt of the upfront cost. What it gets in return are long-term agreements from customers to buy the power their roofs generate. Better yet, excess power can be sold back to utilities in many markets at advantageous prices.

In 2010, SolarCity had about 30 megawatts of installed capacity. By the end of 2014, it's hoping to have a gigawatt. To be fair, that's tiny by utility standards, but the growth SolarCity has achieved shows that there's huge potential ahead. And that's buttressed by the fact that solar made up less than 1% of the power consumed domestically last year.

Source: EIA

What might be even more impressive about SolarCity, however, is the lead it's taken on the financial side. The company is wrapping its solar leases into bonds. During the company's first quarter conference call, CFO Bob Kelly noted, "we started the rating agency process to our next securitization transaction, which is expected to be considerably larger than our prior offerings."

Using the bond market to help fund growth via securitization helps create a self-funding model. That's financial alchemy and solar power all in one. SolarCity continues to lose money as it builds out its "power" system, and it's reliant on government subsidies to some degree. However, once it gets economies of scale, look for a dramatic bottom line improvement and a steady profit picture. There's no doubt that SolarCity is an exciting opportunity in the energy market.

Now that's a throwback
Now, take a gander at a less cutting edge option on the energy front—wood. Yes, we've been burning wood for thousands of years, but as far as fuels go it's pretty desirable. It does, literally, grow on trees. It's biodegradable. And while new trees are growing to replace the ones we cut down they help clean up the air around us. As long as sustainable forestry is employed trees and wood products are, arguably, the ultimate renewable product.

(Source: D-Kuru, via Wikimedia Commons)

That's why Rentech is an outside the box name to look at. The company operates in the fertilizer and wood spaces. In fertilizer, the company acts as the general partner of an LP. This relationship accounted for about 70% of revenues in the fourth quarter of 2013. The rest largely came from wood, which is a current focus area for Rentech.

In fact, Rentech just received a $150 million investment from Blackstone Group (NYSE: BX  ) that includes two Blackstone representatives joining Rentech's board. Although this is a relatively small outlay for Blackstone, it's big news for $500 million market cap Rentech. And it's already put the money to good use buying a company with a 15% share of the domestic wood pellet heating market.

If you think this can't be a real business, you're wrong. Rentech highlights a 95% retention rate over the past 25 years in the wood businesses it now owns. And its customer list includes names like $20 billion market cap International Paper. Rentech is looking to "Become a global leader in wood fibre processing" and plans to set up a limited partnership along the way to help fund further growth.

Building it out
SolarCity and Rentech are both building businesses in the energy space. SolarCity's model is cutting edge, and growth has been impressive. With the stock off some $30 a share from its highs around $85, it might be worth a look. Rentech is an outlier, trying to build scale in an age-old, and boring, wood business. Its shares have muddled along in the low single-digits, but once it builds scale in wood it will have a solid core to pair with its more volatile fertilizer arm. And having Blackstone as a partner in the process is a pretty good endorsement.

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Read/Post Comments (3) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 26, 2014, at 3:15 PM, ronwiserinvestor wrote:

    Now that pricing for a purchased solar system has reached the sub $2.20 per watt level after applying the ITC. The leasing companies will have a far tougher time selling virtually any rate, be it 17 cents per kilowatt hour in San Diego or 9 to11 cents per kilowatt hour in other areas when compared to 0 cents per kilowatt hour after a short 4 to 5 year payback period for a purchased system.

    With the exception of the cost for a relatively inexpensive inverter replacement at year 10 to 13 (when compared to the overall cost of a lease/PPA) and maybe, the inexpensive labor costs to remove and replace a few solar panels after the 10 year labor warranty expires.(which by the way, includes a 25 year performance warranty), It is far less costly to own your solar system rather than pay 9 to 17 cents per kilowatt hour with a possible 2.9% annual payment escalator for the next 20 years.

    I'll take a nearly 0 cent per kilowatt hour rate over a 9 to 17 cents per kilowatt hour rate any day of the week.

    A gigawatt ? I don't think so, not while charging 9 to 17 cents per kilowatt hour when you can get your electricity nearly for free for the next 25 to 30 years with a purchased system.

  • Report this Comment On May 26, 2014, at 10:20 PM, Garn333 wrote:

    You again old “wise” one… (“ronwiseinvesstor”). You and your buddy Ray Boggs sure are busy these days commenting on every solar article that does not have the same business model as you.

    How about this, instead of you two spending all of your time out blogging, trying to tear down other companies that are progressing, maybe take that time and spend it working on your own business models. That way you would no longer have to try to knock others in an attempt to prove how superior you business models are.

    If you had a better system/plan your posts wouldn’t be necessary. I don’t recall the companies that you complain about having been out posting in the comment sections of “other peoples” articles trying to build their businesses by knocking down their competition in order to get where they are currently. Seems like a pretty low bar way to try to drum up support for your business. Hey, I guess it is a cost effective way (Free) of advertising. So that is one smart part of your business plan.

  • Report this Comment On May 27, 2014, at 12:00 PM, ronwiserinvestor wrote:

    But on the other hand, we didn't borrow hundreds of millions of dollars to start our business nor do we take the 30% federal tax credits and cash rebates that were meant for consumers while inflating our pricing to collect higher tax credit amounts from the American taxpayer.

    We don't try to tear down other businesses, we simply provide information. The leasing company salesman will never tell their customer that he or she can get a better return on investment if they purchase outright, nor will he tell his customer about the existence of $0 down solar loans.

    In any industry, there must be balance. If I didn't provide the other side of the solar story (lower priced systems coupled with $0 down solar loans with tax deductible interest), then you'd have the makings of a solar lease/PPA monopoly.

    We're simply a 16 year pioneer in the solar industry that provides information. In the end, the consumer will decide what's best for him or her.

    Besides, how on Earth am I getting "a cost effective way (Free) of advertising" when I don't even mention my company's name in my post ???

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Reuben Brewer

Reuben Gregg Brewer believes dividends are a window into a company's soul. He tries to invest in good souls.

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