If Cape Wind Flies, Small Caps Could Follow

Late Breaking Comment

Andrew Tarsy and Mitch Tyson wrote an interesting cost-benefit analysis commentary on the Cape Wind project. http://www.boston.com/bostonglobe/editorial_opinion/letters/articles/2010/05/12/our_energy_use_calls_for_a_transformation/

After nine years of regulatory review, the nation’s first offshore wind farm, known as Cape Wind, won approval from the federal government (http://www.nytimes.com/2010/04/27/business/energyenvironment/27wind.html?ref=earth). While challenges remain to be heard, there’s little doubt that the announcement that Cape Wind will fly will be a tremendous boon to the burgeoning wind power industry. Indeed, Interior Secretary Ken Salazar told the media throng at a news conference that “this will be the first of many projects up and down the Atlantic Coast.”

Cape Wind CEO Jim Gordon told CNN that his company has spent more than $45 million–most of it from his own pockets–to get this far since 2001 when he first sought a permit (http://www.cnn.com/2010/TECH/04/29/cape.wind.ceo.profile/index/html). Gordon has refused to disclose potential earnings for his company; critics say Cape Wind stands to gain hundreds of millions in tax credits and subsidies. Among the hurdles still to clear is a final purchase power agreement with a utility. However, Tom King, the president of National Grid, the utility company that covers the area, said in a statement that negotiations with Cape Wind were “going very well…”

Some of the Cape Wind statistics are intriguing:

–Developers claim the wind farm will produce about 75 percent of the power for Cape Cod, Nantucket and Martha’s Vineyard.

–Cape Wind will stretch across 25 square miles of Nantucket Sound, like about 5 miles from the nearest shore on the mainland and about 14 miles from Nantucket.

–The tip of the highest blade of each of the 130 turbines would reach 440 feet above the water.

–Carbon dioxide emissions will be reduced by the equivalent of taking 175,000 cars off the road.

–1,000 construction jobs will be provided.

–Outside the U.S. there are more than 800 giant wind turbines off the coasts of Denmark, Great Britain and seven other European countries. China’s first offshore wind farm goes online this month with more in the pipeline.

Several large household names have jumped into the windpower business including Siemens, General Electric and Vestas, a Danish company that has the largest installed base. But there are small caps involved, too, and privately held companies that should benefit from the progress in Cape Cod.

Kaydon (NYSE:KDN, http://www.kaydon.com) is a fair sized ($1.3 billion market cap) Ann Arbor, MI-based company that makes parts such as custom bearings for windmills. In 2008 they built a manufacturing facility in Monterrey, Mexico devoted to servicing the wind energy industry. Investors seem to be connecting them to the Cape Cod news. The stock is now trading at more than $45, well over its 52-week high of $42.56.

Otter Tail Corp. (Nasdaq: OTTR, http://www.ottertail.com) is a Fergus Falls, Minn.-based electric utility ($807 million market cap) that manufactures and markets wind towers and also distributes electricity in Minnesota, North Dakota and South Dakota. Nearly a week after the Cape Wind announcement their stock was trading at $22.50. Its 52-week range is $18.63–$25.40.

Western Wind Energy (TSX:WND, http://www.westernwindenergy.com) is a Canadian company ($75 million market cap) with more than 500 wind turbines in California. Shortly following the announcement shares were trading at $1.52, up $.06, and headed toward their 52-week high of $1.99.

Two other non-U.S. companies might deserve a look. In Japan, an interesting windmill company is Loopwing (www.loopwing.co.jp). It’s unusal design is said to greatly reduce vibration an noise as compared to more traditional designs. And across the pond, privately-held, Suffolk-based Wind Power Ltd. (www.windpower.ltd.uk) develops large scale vertical axis wind turbine technology. The company began as a small research group but now offers a range of products and services.

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