Robert Chisholm // Portfolio Manager // Center Coast MLP Focus (CCCAX)

Comments & Outlook

We project the expansion of the US domestic energy infrastructure will cost between $150 billion and $250 billion over the next 10 to 15 years. With their ability to access the capital markets, master limited partnerships (MLP) are the most efficient vehicle for financing investments in our domestic energy infrastructure. Indeed, most energy infrastructure projects are now initiated by MLPs. As a result, we expect MLPs to grow their distributions by 6 percent to 8 percent annually over the next three to five years.

I doubt we’ll see other deals as large as Kinder Morgan’s (NYSE: KMI) $21.1 billion acquisition of El Paso Corp (NYSE: EP). But the MLP space should experience more consolidation, especially as general partners acquire assets to help their underlying limited partners grow.

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The sustainability of an MLP’s current distribution is paramount when evaluating it as an investment. If an MLP has to suspend or cut its distribution, it’s going to underperform the market. We also assess an MLP’s ability to grow its distribution.

Additionally, we try to limit our exposure to commodity prices. Most investors already have exposure to commodity prices through investments in major oil companies, so we favor MLPs that are less focused on exploration and production (E&P). Additionally, E&P-focused MLPs tend to have more volatile distributions.

What to Buy Now

Despite offering roughly the same yield and investment profile as Kinder Morgan Energy Partners (NYSE: KMP), Kinder Morgan Management (NYSE: KMR) trades at a steep discount because it pays its distribution in shares instead of cash. Management expects to maintain the MLP’s 7 percent distribution over the next three to five years. Kinder Morgan Management’s high yield and high levels of growth present investors with a compelling potential for total return.

Though it’s out of favor with the market, we also like TC Pipelines (NSDQ: TCLP). In the second quarter, the MLPacquired an interest in two pipelines from its sponsor TransCanada (TSX: TRP, NYSE: TRP) that will drivegrowth,but that’s not yet reflected in the stock’s share price.

Jackson W. Robinson // Chief Investment Officer // Winslow Management

Comments & Outlook

During the renewable energy industry’s infancy, it couldn’t compete with what was already on the grid from traditional energy sources. But as the price of fossil fuels has continued to rise, the cost of the core technologies in the renewable space—including wind, solar, geothermal and water—has become more economic.

Efficiency is also an increasingly important sub-category of renewable energy. Efficiency expands the concept of green energy to other categories, including green building products and water management. Today, the green building space is one of the fastest growing segments of the construction industry.

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Historically, there’s been almost a direct correlation between alternative energy production and the price of oil. But because many of these renewable energy sources are economic when oil is over $50 per barrel, that correlation is becoming less pronounced even if that perception lingers.

The US doesn’t have an energy policy. That makes it difficult for corporations to make long-term economic decisions if they don’t know how the government’s ad-hoc decision-making will impact the availability of the energy sources upon which they rely. That’s causing incremental volatility in the energy sector in general.

What to Buy Now

Abengoa (Spain: ABG, OTC: ABGOY) is a diversified renewable energy play with a top-notch management team. Though it’s a

Spanish firm, less than 20 percent of its revenue is derived from Spain. The firm is well established globally with an increasing amount of its business in North and South America.

World Energy Solutions (NSDQ: XWES) is a tiny company with a $35 million market cap. The firm enables companies to buy and sell energy via an online auction system. In addition, it hosts exchanges for carbon credits. Companies also enlist the firm to audit their energy usage so they can determine how to operate more efficiently. The firm turned profitable in late 2010 and has no debt. It is growing both organically and via acquisition.

In addition to these two plays, is there a more general technology in the renewable energy space that deserves investors’ attention?

On the hydropower side, our focus is on run-of-the-river hydroelectricity production, as opposed to the hydroelectricity produced by large dams. Run-of-the-river power is generated by a string of small turbines that are dispersed in a fast-moving river to capture its current and convert that current into energy. So the general concept is not dissimilar to how large dams are used toward that end.

The technology works fine, but it’s limited by the fact that there are a finite number of fast-moving rivers. Nevertheless, it’s an attractive technology because it’s on-demand, whereas wind and solar are not.

How dependent is renewable energy development upon government subsidies?

Today, renewable energy is less dependent upon government subsidies than it has been in the past. In order to advance these technologies, some form of indirect subsidy is useful.

But the scandal that’s unfolding in Washington with regard to solar-panel manufacturer Solyndra’s Chapter 11 bankruptcy filing is not good for the renewable energy industry in any way. The government’s $535 million loan to Solyndra essentially amounted to a venture capital investment.

The government is better suited to providing assistance to more proven technologies via tax credits.

What sort of fallout might the renewable energy space experience as a result of Solyndra?

The Solyndra scandal is negative for all forms of subsidies, not just for renewable energy and clean technology. The government’s already under pressure to cut its spending on multiple fronts, so subsidies of all kinds are under close scrutiny.

One subsidy that has never made sense is the corn ethanol subsidy of 50 cents per gallon. Corn is in increasingly short supply worldwide, and the carbon footprint resulting from its conversion into ethanol is greater than that of a gallon of gasoline. So this subsidy policy is neither financially nor environmentally sound.

There are subsidies in other arenas that similarly don’t make sense, so there will be multiple cutbacks to reduce these political giveaway programs.

What is the difference between how the US brings renewable energy technologies to market and how other countries do so?

The last time I was in Europe, the cost of a gallon of gasoline was 2.5 times what we pay in this country. That’s simply because of the tariffs those countries have chosen to apply to those BTUs (British thermal units).

In a country where a traditional energy source is much more expensive, it makes eminently more sense to develop alternatives that would be less expensive. It’s all about the cost per BTU ultimately. Unlike the US, these countries haven’t had to subsidize renewable energy technologies because of that.

But renewable energy can even make sense for those countries in which traditional energy, such as oil, is cheap and plentiful. Middle-Eastern countries produce oil and sell it on the global markets for $90 per barrel. Meanwhile, they also sell that oil in their own countries at the cost of production.

Instead, those countries could increase their reliance on renewable energy sources, which would then enable them to generate even more revenue by exporting additional oil to the rest of the world. Some Middle Eastern governments have already determined that even though a renewable energy source may cost more than oil to generate power, that initial cost is more than offset by the net margin they receive from selling more of their oil in the global markets.

Solar energy makes sense for a country that’s largely desert, particularly given the fact that solar energy is approaching grid parity. So one of the markets for renewable energy, particularly solar, is going to be Middle Eastern countries.