ITEM 1 BUSINESS
BUSINESS OVERVIEW
Juhl Energy is an established leader in the clean and renewable-energy industry and provides a full range of clean energy solutions with a focus on wind, solar, biomass and natural gas systems. Juhl Energy historically focused on community wind power development, management and ownership, throughout the United States. We are one of the few companies other than utility based conglomerates that handle all aspects of wind project development, through our operating subsidiaries, including full development and ownership of wind farms, general consultation on wind projects, construction management of wind farm projects and system operations and maintenance for completed wind farms, which results in multiple revenue streams. The primary focus of our wind power development business has been to build 5 MW to 80 MW wind farms jointly owned by local communities, farm owners, environmentally-concerned investors, and our Company. The wind farms are connected to the general utility electric grid to produce clean, environmentally-sound wind power. Our development of community wind power systems generally results in landowners owning a portion of the long-term equity in the wind farm that resides on their land. We pioneered community wind power systems in developing the currently accepted financial, operational and legal structure providing local ownership of medium to large scale wind farms. Since 1999, we have completed 24 wind farm projects, accounting for approximately 260 MW of wind power that currently operate in the Midwest region of the United States (which are over approximately $510 million in value), and we provide operation management and oversight to wind generation facilities generating approximately 88 MW, through our subsidiary, Juhl Energy Services. Currently, we have 21 projects in various stages of development with an aggregate wind power generating capacity of approximately 445 MW (4 of which we are actively developing with an aggregate wind power generating capacity of approximately 176 MW and 17 of which are mid to early stage wind development opportunities, which includes projects undergoing feasibility analysis, with an aggregate wind power generating capacity of approximately 269 MW). The 21 wind farm projects, all of which are onshore type projects, are located in the United States and make up our development pipeline.
Historically, our wind power projects are based on the formation of partnerships with the local owners upon whose land the wind turbines are installed. Over the years, this type of wind power has been labeled “community wind power” because the systems are locally owned by the landowners (often farmers). Community wind power is a specialized sector in the wind energy industry that differs from the large, utility-owned wind power systems also being built in the United States. Community wind power is a form of community-based energy development (C-BED). Various states, including Minnesota and Nebraska (where we have projects in development), have enacted C-BED initiatives, which include mechanisms to support community wind power and are intended to make it easier for community wind power projects to be successful without placing an excessive burden on utilities. This results in community wind power being not only environmentally sustainable but also serving as an economic stimulus for the rural areas that it encompasses. Community wind projects generally sell power to utilities. We are striving to expand our model nationally where we can take advantage of higher energy rates, and our currently evaluating projects in Indiana, Oregon and South Dakota.
As community wind projects have become more difficult to develop due in part to difficulty in obtaining contracts with utilities, Juhl Energy has begun to develop projects for end customers, such as Honda Transmission Manufacturing of America (“Honda”) as described below and small utility companies, which are examples of projects that fit our distributed generation model. Generally, distributed generation allows for small and mid-sized wind and solar projects to be constructed at the site of the energy user (such as a manufacturing facility or university), which eliminates the build out of new transmission networks. Such distribution model differentiates from the centralized utility model which often requires electricity to be transmitted over long distances.
As part of our innovative role in renewable energy development services, we partnered with Honda to serve as the primary developer on a project to construct the first ever on-site industrial wind project for the automotive company, with a generation capacity of 3.4 MW. In January 2014, Honda finalized installation and began operation of two power producing wind turbines at its automotive manufacturing facility in Russells Point, Ohio, where it is the first such facility in the United States to obtain a portion of its electricity directly from wind turbines located on its property. The two wind turbines will supply approximately 10 percent of the plant’s electricity. Based on the location of the two wind turbines and actual wind speeds, combined output from the two wind turbines is estimated at 10,000 megawatt hours (MWH) per year, which will supply approximately 10 percent of the facility’s electricity. The Honda wind project represents a growing niche within our renewable energy development services, which includes installing wind and solar facilities for large industrial electricity users and corporate clients. Our goal is to continue to grow this sector of our business by providing quality development services to companies that are looking to utilize renewable energy at their planned or existing facilities.
To continue to build on the Honda project model, we plan to pursue additional distributed generation projects that consist of wind, solar or other technologies, or in combination, to fulfill the need of manufacturers and other institutions seeking to reduce their carbon footprint and meet some of their own electricity demand.
Our nationally-diverse development pipeline of wind projects (as exemplified above) continues to be our springboard in the clean and energy industry and allows us to capitalize our relationships in the industry. Development fees from wind projects have historically been the foundation of our revenue generation. In December 2014, we worked with a financing partner to complete a 20 MW wind farm project in South Dakota, where we were able to collect a $1,500,000 development services fee. To further our revenue generation from the development of wind farms, our goal is to use capitalization from the Company’s financing partners and possibly money derived from our other diverse operating subsidiaries (as discussed below) to have the ability to pre-fund development costs. This will allow us to bring projects through the early development and construction stages more quickly by pre-funding development costs to secure the successful completion of projects and alleviate the uncertainty related to securing lender and third party financing commitments. We believe that this will lead to sustainable revenue growth from development fees.
As mentioned above, significant to our overall role in the clean energy industry, as discussed in more detail below, we continue to expand the scope of our business to include other alternative energy sources in addition to wind. Two illustrations of the Company’s broadening base of our services include (1) our acquisition of Power Engineers Collaborative to provide engineering services in the renewable energy field and (2) the expansion of Juhl Renewable Energy Systems to encompass small scale renewables in solar and small wind turbines to provide offerings to additional end customers. While we continue to leverage our experience as leaders in the wind energy industry, we will look for opportunities for expansion in the broader arena of alternative energy.
One of the unique aspects at Juhl Energy is the diversity and integration of its subsidiaries which make up our business model. The Company operates through the following subsidiaries (with further description set forth below):
Juhl Renewable Assets
renewable assets ownership
Juhl Energy Development
wind farm development
Juhl Energy Services
wind farm management and turbine maintenance services
Juhl Renewable Energy Systems
small scale renewable systems
Next Generation Power Systems
refurbished turbines and maintenance support
Power Engineers Collaborative
engineering services
Diversifying Strategy and Execution
Beyond wind, Juhl Energy’s diversification strategy to become a diverse and balanced clean energy company focuses upon the delivery of sustainable revenue growth to augment our wind farm development and construction fee revenue. As such, the acquisition of additional energy assets (including complimentary, higher margin, industry service providers) remains a meaningful part of our focus on the growth of our revenue and net income. Thus, we continue to focus on recurring, repeatable and strong base of annual revenue contracts with a focus on: (i) ownership of wind farms and other forms of renewable energy ownership and operations (Juhl Renewable Assets); (ii) operations and services (Juhl Energy Services); (iii) engineering expertise (Power Engineers Collaborative); and (iv) the distributive solar market (Juhl Renewable Energy Systems).
In addition to development, we position our growth through targeted acquisitions of ownership positions in wind farms and invest in other renewable energy assets through our preferred renewable asset equity vehicle, Juhl Renewable Assets. To date, we have funded three wind farms. In August 2014, we added to our portfolio of wind farms through Juhl Renewable Assets’ purchase of the 100% membership interest in 5045 Wind Partners, LLC, an Iowa limited liability company which in turn owns 100% of two Iowa wind projects, Windwalkers, LLC and Roeder Family Wind Farm, which is each comprised of one 1.6 MW wind turbine in the central Iowa region.
One of our strategies for growth is to acquire complementary, higher-margin industry service providers. Notably, in 2012, we acquired Power Engineers Collaborative, LLC (“PEC”), which is an engineering services company. We believe that the expansion into engineering consulting services with the acquisition of PEC in 2012 has significantly increased our ability to grow our revenues beyond development and construction of community wind projects into the full range of clean energy projects including natural gas, biomass, waste-to-energy, medium-to-large on-site solar, and support to larger wind farm construction. We have experienced growth in revenues for PEC and expect this to continue, complimented by our experience in wind farm development and construction. As our engineering arm, PEC participates as the Owner's Engineer throughout the development and execution of projects utilizing biomass, waste products, and other renewable sources including both wind and solar.
In the first quarter of 2014, we acquired the assets of PVPower, Inc., a business focused on the sale of solar power products, through non-traditional sales channels, specifically through an online distributor network, in which Juhl Renewable Assets had made an investment in the third quarter of 2011. This allows us to augment our offerings in solar. We will now distribute solar-related system products through Juhl Renewable Energy Systems to consumers and small businesses using the online system developed by PVPower.
As we experience growth in small-scale solar through our acquisition of PV Power, the Company announced in July 2014 that Juhl Renewable Energy Systems was named as lead contractor for all rooftop installations completed through the “Solar Chicago Program”. The “Solar Chicago Program” provides affordable and efficient renewable energy solutions for its residential property owners throughout the Chicago metro area. Juhl Renewable Energy Systems has completed approximately eleven projects as of March 2015 and expects to complete up to 30 more projects in the first half of 2015, using the assistance of two qualified subcontractors. Further, PEC, our engineering subsidiary, will support the Company’s project management efforts including energy modeling, and the design and installation of the solar projects. In addition to the PVPower Platform and the design and installation of rooftop solar in Chicago, Juhl Renewable Energy Systems offers small wind and solar products for onsite energy generation and battery backup, such as SolarBank®, and is exploring additional battery storage partnerships, and intend to pioneer new wind/solar/storage hybrid renewable systems. Juhl Renewable Energy Systems has approximately 285 kw of projects with a contract value of approximately $1.1 million, including the Solar Chicago program and other projects in Minnesota.
Overall, Juhl Energy’s diverse business strategy has allowed us to remain well-positioned for future growth despite the uncertainty surrounding federal policy with respect to tax incentives which have impacted businesses operating in the wind industry. Our business and operating strategy, among other things, is to continue to develop into an innovative, diverse and balanced clean energy company. We will work to leverage our portfolio of existing community wind power projects, develop new wind farm projects, including at industrial plants to help reduce the carbon footprint of manufacturers, and take equity ownership positions in existing community-based wind farms. Further, we are continuing to diversify our business operations by expanding our product offerings to energy conscious consumers with the development of our small scale renewables, including wind turbines and solar products, and expanding our services offerings to provide engineering services for our clients. More recently, we expanded our maintenance services capabilities to include cellular towers but due to lack of profitability and inability to generate positive cash flows, we discontinued operations in the fourth quarter of 2014, and such entity is now dissolved.
Our evolving business and operating strategy relies heavily on the expertise of our management team. Our Chairman and Principal Executive Officer, Daniel J. Juhl has been involved in the wind industry since 1978 and was one of the creators of community wind power projects in the United States. He is one of the most sought after wind energy developers by land owners and potential investors of wind projects in the United States. In addition to Mr. Juhl’s expertise, John Mitola, our President, is also considered an expert in the energy field having focused his career on energy efficiency, demand side management and independent power development. Mr. Mitola has significant experience in the energy industry and electric industry regulation, oversight and governmental policy. The prominence of Mr. Juhl and Mr. Mitola in the wind industry will maximize the quantity and quality of projects available for consideration.
Corporate Organizational Diagram:
Juhl Energy, Inc. is a holding company whose subsidiaries and affiliates are organized as set forth in the corporate organizational diagram below:
OVERVIEW OF OPERATING SUBSIDIARIES
As discussed in detail throughout this report, we provide the following portfolio of services and products, through our operating subsidiaries identified below, which allows us to diversify our offerings and benefit from tiered revenue streams, as well as integrate our operations:
Juhl Renewable Assets - Renewable Assets Ownership
Juhl Renewable Assets focuses on the acquisition of ownership positions in new and existing wind farms and investment in other renewable energy assets, thus building an asset base with predictable cash flows. Through Juhl Renewable Assets, we also look for revenue contribution through acquisition of related business services that provide strong operating margins, such as engineering, consulting and related facilities. As discussed herein, Juhl Renewable Assets has taken an ownership position in the following wind farms: the 10 MW Valley View wind farm (February 2011), the 10.2 MW Woodstock Hills wind farm (April 2011) and the Iowa Wind Farms (August 2014).
Our business and operating strategy is to take equity ownership positions in existing community-based wind farms and other renewable assets, such as solar projects. We select projects where the following important conditions exist for successful projects that provide predictable revenue: acceptable wind resources, suitable transmission access, an appropriate regulatory framework providing acceptable power purchase agreements and long-term utility agreements. Further, we believe that there are existing wind farms that are or will become available for sale by equity owners who have fully utilized the tax attributes or no longer have the desire to continue ownership.
We continue to evolve our strategy and increase our portfolio capacity through acquisitions that build recurring annual revenue streams, and take advantage of the growth occurring in the wind industry. As the renewable asset acquisition vehicle for our parent company, we focus on acquisitions that strengthen our balance sheet, allowing us to continue to actively seek additional project acquisitions.
Juhl Energy Development - Wind Farm Development
Through Juhl Energy Development, we provide our core development services for community wind farms, including the following: initial feasibility studies and project design; formation of required land rights agreements to accommodate turbine placement on each project’s specific farm land, assistance in the application process to obtain environmental, zoning and building permits for the project; studies, design and agreements with utilities; turbine selection and delivery coordination; negotiation and execution of power purchase agreements; access and consultation regarding construction financing; coordination of vendor terms, including vendor financing; introduction to equity and debt project financing services; construction oversight and complete balance of plant construction services; and project commissioning.
Since 1999, we have completed 24 wind farm projects, accounting for approximately 260 MW of wind power that currently operate primarily in the Midwest region of the United States. Currently, we have 21 projects in various stages of development with an aggregate wind power generating capacity of approximately 445 MW of wind power generating capacity (4 of which we are actively developing with an aggregate wind power generating capacity of approximately 176 MW and 17 of which are early stage wind development opportunities with an aggregate wind power generating capacity of approximately 269 MW). The 21 wind farm projects, all of which are on-shore type projects, are located in the United States and Canada and make up our development pipeline.
Juhl Energy Services - Wind Farm Operations, Management and Maintenance Services
Through Juhl Energy Services, we earn revenue through administrative, management, maintenance and warranty services agreements with wind generation facilities, and such revenues are recognized as the in-field services are provided. We can either provide services to wind farms that we have developed or contract with existing wind farms developed by others. Currently, Juhl Energy Services provides operations management and oversight to wind generation facilities generating approximately 111 MW of wind farm projects, together with turbine maintenance services to 71 MW of wind farm projects.
As previously reported, Juhl Energy Services, in early 2013, formed a wholly-owned subsidiary, Juhl Tower Services, which performed implementation and maintenance activities on cellular communication towers. In late 2014, the Company discontinued operations for Juhl Tower Services, due to lack of profitability and not meeting our expectations for generating cash flows to support our operations.
Juhl Renewable Energy Systems - Small Scale Renewables
Through Juhl Renewable Energy Systems, we specialize in advanced conservation technologies focused on smaller scale wind and solar energy systems to the energy consumer, including farming operations, small to medium sized businesses and municipalities. Juhl Renewable Energy Systems is focused on the sales and installation of on-site renewable energy systems in the Upper Midwest. In the first quarter of 2014, we acquired the assets of PVPower, Inc., a business focused on the sale of solar power products, through non-traditional sales channels, specifically through an online distributor network. This allows us to augment our offerings in solar by distributing solar-related system products to consumers and small businesses using the online system developed by PVPower, including Solarbank® an on-site solar system; and Powerbank®, a simple onsite backup power system. Juhl Renewable Energy Systems handles projects from start to finish, including design, sales, financing and service. Juhl Renewable Energy Systems offers several financing structures through independent third parties. Juhl Renewable Energy Systems is reviewing its business strategy on moving into additional target markets offering opportunities for revenue growth, including possible acquisition of existing service providers in those markets.
Power Engineers Collaborative - Engineering Services
Through our wholly-owned subsidiary, Power Engineers Collaborative, we provide engineering services to clients, which primarily consist of electric utilities, independent power producers and large electricity users who operate central plant systems. PEC's core business includes assisting clients in site selection, environmental permitting, equipment studies, preparation of contract documents, bid evaluation, contract awards, preparation of detailed construction documents, design of auxiliary facilities, engineering services during construction and training of operating and maintenance personnel.
PEC’s clients and target clientele encompass primarily the utility industry and central power plants of large institutions or commercial/industrial enterprises to which it provides consulting services. PEC has designed a consulting program to help utility clients work within their resource planning initiatives in order to address the requirements of their existing resource plan, need for clean power that can be cost-effectively dispatched, and maintenance of transmission and distribution system integrity.
Next Generation Power Systems - Refurbished Turbines and Maintenance Support
Next Generation Power Systems is in the business of refurbishing turbines and maintaining this fleet. We do not expect to sell additional refurbished turbines, but periodically we are requested to perform work on turbines previously sold to customers.
INDUSTRY AND MARKET OVERVIEW
This report includes market and industry data that we have developed from publicly available information, various industry publications and other published industry sources, and our internal data and estimates (as of the date of this report). Although we believe the publications and reports are reliable, we have not independently verified the data. Our internal data, estimates, and forecasts are based upon information obtained from trade and business organizations and other contacts in the market in which we operate, as well as our management’s understanding of industry conditions.
Governmental Programs and Incentives
In keeping with the government’s efforts to reduce fossil fuel emissions, the Environmental Protection Agency (EPA) proposed the Clean Power Plan (the “Plan”) in June 2014. The Plan, which the EPA hopes to finalize by mid-summer 2015, aims to cut carbon pollution from power plants. The Plan sets state-specific, rate-based goals for carbon dioxide emission in the power sector. The proposed guidelines are based on and would reinforce the actions already being taken by states and utilities to upgrade aging electricity infrastructure with twenty-first century technologies. Under the Plan: (i) each state must develop a plan to achieve an emission performance level that corresponds to the state goal; and (ii) the state plans must establish standards of performance for the affected Electric Utility Generating Units (EGUs) and include measures that implement and enforce those standards. We believe that wind power will be a key tool for states to utilize in order to comply with the EPA’s first-ever proposed rule to reduce carbon pollution at existing power plants while maintaining an affordable, reliable energy system.
Substituting wind energy and other renewable energy sources for traditional fossil fuel-fired generation would help reduce carbon dioxide emissions due to their environmentally-friendly attributes. According to the U.S. Department of Energy, U.S. Energy Information Administration (EIA) annual report “Emissions of Greenhouse Gases in the United States 2009,” published in March 2011 (which was the final publication of this report), the electric power sector (which consists of those companies whose primary business is the generation of electricity) is the largest source of all energy-related carbon dioxide emissions; this report also stated, however, that emissions from the electric power sector declined in 2009 by 9.0%. The EIA’s International Energy Outlook (2014) found that although generation in the electric power sector will increase by 25% from 2012 to 2040, the sector’s carbon dioxide emissions are expected to increase by only 11% over the same period. In general, the growth of renewable generation is associated with an increase in electric power generation coinciding with a reduction in carbon dioxide emissions.
Another example of the national trend toward renewable energy sources is evidenced in the growth of jobs in the renewable energy sector. According to the EIA’s December 19, 2014 “Today in Energy,” the electric power generation sector lost more than 5,800 jobs from January 2011 through June 2014, coinciding with a period in which the United States has experienced declining year-over-year electricity sales, driven, among other things, by energy efficiency improvements and the growth in wind and solar energy production. This loss was offset somewhat by 1,800 jobs gained in the renewable electricity generation industry. According to the EIA’s Short Term Energy Outlook, published February 2015, the EIA projects that total renewables used for electricity and heat generation will grow by 3.8% in 2015. Conventional hydropower generation is expected to increase by 5.7%, while there is an anticipated 2.9% increase in non-hydropower renewables generation. In 2016, total renewables consumption for electric power and heat generation is predicted to increase by 2.9% as a result of an expected 3.2% decline in hydropower and a 6.0% increase in non-hydropower renewables.
State and federal legislation designed to encourage the development and deployment of renewable energy technologies is also driving the growth in the United States’ wind energy market and other renewable energy markets (as described generally above) by guaranteeing revenues and reducing costs of projects. This support includes:
Renewable Portfolio Standards (RPS)
In response to the push for cleaner power generation and more secure energy supplies, many states have enacted RPS programs. A RPS program (sometimes called a Renewable Energy Standard, or RES), is a program that either: (i) requires state-regulated electric utilities and other retail energy suppliers to produce or acquire a certain percentage of their annual electricity consumption from renewable power generation resources or, (ii) as in the case of New York, designate an entity to administer the central procurement of Renewable Energy Certificates (“RECs”) for the state. Typically, utilities comply with such standards by qualifying for renewable energy credits evidencing the share of electricity that was produced from renewable sources. These standards have spurred significant growth in the wind energy industry and a corresponding demand for our services. The enactment of renewable energy portfolio standards in additional states or changes to existing renewable energy portfolio standards may impact the demand for our services. Similar to federal incentives discussed below, the elimination of, or reduction in, state governmental policies that support renewable energy could have a material adverse impact on our business, results of operations, financial performance, and future development efforts.
According to the RPS Summary Map (which provides information about state RPS programs), published by the U.S. Department of Energy Database of State Incentives for Renewables & Efficiency (DSIRE), as of September 2014, 29 states, plus the District of Columbia and two territories, have legislated renewable energy portfolio standards, and nine more states and two territories have adopted voluntary renewable portfolio goals. Almost every state that has implemented an RPS program will need considerable additional renewable energy capacity to meet its RPS requirements.
Renewable Energy Certificates (REC)
A REC is a stand-alone tradable instrument representing the attributes associated with one megawatt hour of energy produced from a renewable energy source. These attributes typically include reduced air and water pollution, reduced greenhouse gas emissions, and increased use of domestic energy sources. Many states use RECs to track and verify compliance with their RPS programs. Retail energy suppliers can meet the requirements by purchasing RECs from renewable energy generators, in addition to producing or acquiring the electricity from renewable sources. Under many RPS programs, energy providers that fail to meet RPS requirements are assessed a penalty for the shortfall, usually known as an alternative compliance payment. Because RECs can be purchased to satisfy the RPS requirements and avoid an alternative compliance payment, the amount of the alternative compliance payment effectively sets a cap on REC prices. In situations where REC supply is short, REC prices approach the alternative compliance payment, which in several states reach approximately $50 per megawatt hour. As a result, REC prices can rival the price of energy and RECs can represent a significant additional revenue stream for wind energy generators.
Federal Tax and Economic Incentives
U.S. federal, state, and local governments have established various incentives and financial mechanisms to reduce the cost of wind and solar energy and to accelerate the adoption of renewable energy. These mechanisms have been established in response to the stated intent by the U.S. Department of Energy to double renewable energy generation by 2020. These incentives include tax credits, accelerated depreciation, rebates, and net metering programs. These incentives help catalyze private sector investments in energy projects, such as utility scale wind farm and solar projects as well as smaller scale projects such as small wind turbines and residential and commercial solar energy systems.
Federal Production Tax Credits and Investment Tax Credits
Wind energy. The federal government provides economic incentives to the owners of wind energy facilities, including the PTC, or alternatively, an investment tax credit ("ITC"). The credit represents tax savings of $0.023 per KWh generated from wind, geothermal, and closed-loop biomass systems and $0.011 per KWh from other eligible renewable technologies. The PTC was extended by the American Recovery and Reinvestment Act in February 2009, and further extended by the American Taxpayer Relief Act (“ATRA”) in January 2013. The Tax Increase Prevention Act of 2014, passed into law on December 19, 2014, extended the PTC expiration date to December 31, 2014. It provides the owner of a qualifying wind energy facility under construction before the end of 2014 (or alternatively meeting safe harbor provisions such as incurring at least 5% of total project costs by such date) with a ten-year tax credit against the owner's federal income tax obligations based on the amount of electricity generated by the facility and sold to unrelated third parties. Alternatively, eligible projects are allowed to elect a 30% ITC in lieu of the PTC. The ITC may be taken after the plant has commenced commercial operation.
Solar energy. The federal government provides an uncapped investment tax credit, or Federal ITC, that allows a taxpayer to claim a credit of 30% of qualified expenditures for a residential or commercial solar energy system that is placed in service on or before December 31, 2016. This credit is scheduled to be reduced to 10% effective January 1, 2017.
Accelerated Tax Depreciation. Tax depreciation is a non-cash expense meant to approximate the loss of an asset’s value over time and is generally the portion of an investment in an asset that can be deducted from taxable income in any given tax period. Current federal income tax law requires taxpayers to depreciate most tangible personal property placed in service after 1986 using the modified accelerated cost recovery system, or MACRS, under which taxpayers are entitled to use the 200% or 150% declining balance method depending on the class of property, rather than the straight line method. Under MACRS, a significant portion of wind farm assets is deemed to have depreciable life of five years which is substantially shorter than the 15 to 25 year depreciable lives of many non-renewable power supply assets. This shorter depreciable life and the accelerated and bonus depreciation methods result in a significantly accelerated realization of tax depreciation for wind farms compared to other types of power projects. For 2013, bonus depreciation was 50% of the eligible basis. This bonus depreciation was extended retroactively throughout 2014 by the Tax Increase Prevention Act of 2014. Wind energy generators with insufficient taxable income to benefit from this accelerated depreciation often monetize the accelerated depreciation, along with the PTCs, through forming a limited liability company with third parties.
Extension of the Federal Tax Incentives
For the immediate short term, we believe that the PTC will allow continued growth of wind energy, based on the number of wind power projects under construction at the end of 2014, and will help to propel wind energy as a major source of electricity generation through 2017. However, we recognize that the PTC expiration on December 31, 2014, creates financial uncertainty for new development projects going forward. The uncertainty around the tax credit will likely make mid- and long-term planning in the renewable energy industry difficult because the tax credit has such a significant impact on the financial viability of projects. This uncertainty is exacerbated by the PTC’s erratic extension history. That being said, higher electricity prices have made wind and solar technologies economically attractive alternatives, especially as their technology costs have come down in recent years.
We recognize that the uncertainty of a permanent national energy policy focusing on renewable energy may have an adverse effect for our business, results of operation, financial performance and future development efforts of wind energy projects. Thus, we believe it is necessary to evolve and diversify in our asset, product and service portfolio to reduce our exposure to the uncertainty of future renewals of tax incentives and other favorable governmental policies currently supporting the U.S. wind industry and renewable energy sector. However, even without the PTC, demand for all forms of renewable energy continues to rise in the U.S., according to the EIA. As a result of this increased demand and lower costs, the market for wind energy will survive the expiration of the PTC.
The expiration of the PTC creates an additional opportunity for income generation as well. As credits expire and depreciation schedules run their course, many current wind farm owners will be looking to exit the industry. Juhl Energy’s experience and expertise for operating small wind farms may provide opportunities for financially viable acquisition transactions in the next three years. There are an estimated 500 small wind farms under 50MW in the U.S. that are financially viable. By acquiring some of these small farms from motivated sellers, we can avoid installation costs, minimize operating costs, and scale our investment arm strategically.
Energy Demand and Sources for Electricity Generation
Demand for electricity in the U.S. is expected to increase on an average 0.9% per year from 2012 through 2040 according to the Reference Case in the Annual Energy Outlook 2014 published by the EIA (the “EIA 2014 Outlook”). New capacity for electricity generation will be required to meet this anticipated demand. According to the EIA 2014 Outlook, 37% of all electricity produced in the United States in 2012 was generated by coal, which is the largest source of carbon dioxide emissions in the atmosphere. Other major sources of electricity in 2012 were natural gas (30%), renewables (12%), nuclear (19%) and oil and other liquids (1%).
By their very nature, fossil fuels are nonrenewable resources that are depleted faster than they can be replenished. Coal, natural gas, and oil will eventually be depleted beyond economic viability. Based on research completed by the EIA and EPA, as the supply of nonrenewable resources diminishes, prices will rise. Renewable energies like solar and wind, on the other hand, are not depleted when harvested. As prices of production and technology continually decrease and demand for energy persists, we believe the market for renewable resources will expand. In addition to the economic benefits, renewable energy is environmentally superior because it produces far less greenhouse gases than the production of nonrenewable electricity via fossil fuels.
In 2015, we believe that higher natural gas market share may occur as a result of lower prices in the past year, inventory levels and heavy production involving hydraulic fracturing methods. In EIA’s “Short Term Energy Outlook” published February 2015, natural gas is expected to provide 28.4% of power generation during 2015, 1.2% higher than 2014, as a result of decreasing natural gas prices. The availability of cheaper natural gas creates steep competition for renewable energy generation. We believe that the push in governmental mandates and initiatives to source energy from renewables lessens the competitive edge of non-renewables, such as natural gas.
According to the EIA Reference Case detailed in the EIA 2014 Outlook, total coal consumption is projected to increase from 17.3 quadrillion BTU in 2012 to 18.75 quadrillion BTU in 2040. Even with consumption of fossil fuels rising and prices falling (such as natural gas), the EIA specifically discredits theories that increased oil availability will damage the renewable energy sector. Instead, because of governmental support lasting for at least the next decade, renewable and nonrenewable energy are not in direct competition with one another in most sectors.
Wind Power Generation
Because of uncertainty regarding extension of the federal wind energy PTC in 2013 and again in 2014, developers waited to see whether Congress would extend the PTC. The credit was extended for projects that began construction by December 31, 2013 and by December 31, 2014, respectively. Due to the timing of the late extensions of the PTCs by Congress (January 2014 and December 2014, respectively), we believe such extensions did little to spur significant additional development activity beyond what developers had already planned. However, the wind industry is gradually establishing its independence from government incentives. This is evidenced by the continual growth in the industry despite uncertainties about the availability of future tax credits. According to the EIA Short Term Energy Outlook, published February 2015, wind capacity grew 7.7% in 2014, and the rate of increase is expected to more than double in 2015, from 7.7% to 16.1%. In the aftermath of the 2013 wind development standstill caused by PTC renewal uncertainty, this level of growth we believe is a positive trajectory for the renewable energy industry.
Wind is intermittent and electricity generated from wind power can be highly variable. Good site selection and advantageous positioning of turbines on a selected site are critical to the economic production of electricity by wind energy. In our experience, the primary cost of producing wind-powered electricity is the turbine equipment and construction cost, which cost has been on the decline in recent years (as discussed more fully below). Wind energy itself has no fuel costs and relatively low maintenance costs. As an intermittent resource, wind power must be carefully positioned into the electric grid along with other generation resources, and we believe Juhl Energy has demonstrated the expertise necessary to work with local electric utilities to create viable integration plans. Therefore, we intend to continue to identify new sites to produce wind energy through the community wind model throughout the United States and Canada as well as look for opportunities to acquire wind projects and other renewable assets that meet our criteria.
Turbine Costs & Wind Project Costs Decreasing
Since 2008, the cost of wind turbines has declined, and the decline has been accompanied by improved turbine technology and more favorable terms for turbine purchasers (such as reduced turbine delivery lead times, longer initial operations and management contracts and improved warranty terms), according to the U.S. Department of Energy’s “2013 Wind Technologies Market Report.” The U.S. Department of Energy’s “Wind Technologies Market Report” also predicted that all of the foregoing is expected, over time, to exert downward pressure on total wind project costs and wind power prices. Installed project costs are found to exhibit some economies of scale, at least at the low end of the project size range.
The declining prices are significant because lower equipment prices make wind energy more competitive with fossil fuels, such as coal and gas, on a dollar-per-megawatt-hour basis. As evidence of more competitive pricing, the Department of Energy’s “2013 Wind Technologies Market Report” reports that the capacity-weighted average levelized price for projects with power purchase agreements signed in 2011 was $35/MWh, as compared to $59/MWh for projects with agreements signed in 2010 and $72/MWh in 2009. These price drops accelerated in 2013 when prices decreased to $22/MWh for the Interior Region of the U.S., the geographic Midwest below the Great Lakes and between the Coasts, as shown in the 2013 Wind Technologies Report. Falling project prices increase demand for renewable energy generation by making it more affordable to purchase and install.
As reported in the U.S. Department of Energy’s “2013 Wind Technologies Market Report,” among a large sample of wind power projects installed in 2013, the capacity-weighted average installed cost of $1,940/KW, down almost $200/KW from the reported average cost in 2011 and down almost $300/KW from the reported average cost in both 2009 and 2010. With respect to specific regions in the U.S., the “2013 Wind Technologies Market Report” stated that the U.S. interior was the lowest-cost region for wind power projects, while the west coast was the highest-cost region.
Solar Power Generation
We believe that increased global demand for electricity in connection with modern technology and emerging market industrialization has placed a significant burden on the world’s available electricity supply, focusing international attention on solutions to maintain access to adequate energy supplies. Solar photovoltaic modules have no moving parts, operate quietly without carbon or other emissions and are capable of short and long-term use with minimal maintenance. Solar energy is renewable and creates no short-term waste and uses almost no water. We believe the “environmental footprint” of solar energy is negligible, as the energy it takes to make a solar power system is typically recouped by the energy costs saved over a period of one to three years. We believe that solar energy, like wind energy, has the potential to advance the goals of reducing the world’s dependence on conventional fuels, satisfying the growing demand for energy, enhancing national security by reducing dependence on imported fossil fuels, and reducing greenhouse gas emissions.
Solar energy, like wind energy, provides several advantages over fossil fuel, nuclear and other forms of renewable power generation. One fundamental benefit is that sunlight, the source of the electricity, is available without any mining or transportation. If sufficient sunlight is available, a solar power generation facility can be located where the power is needed, thus avoiding the need for, and cost of, lengthy distribution and transmissions lines along with other upgrades to the grid. Solar energy is also a scalable technology, able to produce power according to load demand and available land or space. It is also delivered on-peak, generating the most power during the time of the day when load typically demands it.
As with wind power generation, the primary potential disadvantage to solar power is that it relies upon an intermittent resource. Unlike some generators, it cannot increase or decrease its productivity at the request of grid operators. It also does not generate power when the modules are not receiving light at certain levels such as night time. Further, solar power requires space for the arrays of solar photovoltaic modules, which can limit its use in urban areas. We believe innovations in energy storage solutions, the type of service offered by Juhl Renewable Energy Systems, could resolve some of these issues. Also, unlike wind, the intermittent production of solar power naturally coincides with peak demand for residential power usage, thereby creating value in increasing available power during such peak periods.
We have seen a recent decline in photovoltaic solar costs. The price decline in photovoltaic equipment reflects a more competitive environment, an increase in efficiency of the solar cells, improvements in technology and economies of scale. We view the shifts in the solar industry as an opportunity for us to develop solar power projects that can generate power at prices which are lower than the retail prices charged by utilities and provide solutions using solar energy as a back-up power source in the case of a power outage.
In the EIA Short Term Energy Outlook, published February 2015, the EIA projects continued rapid growth of utility-scale solar generation through 2016. A projected 80 GWh per day will be produced solely by solar arrays by 2016. Although solar capabilities have historically been concentrated in residential and spot-use areas, utility-scale solar arrays are projected to dramatically increase by up to 60% between the end of 2014 and the end of 2016. We are uniquely positioned to capitalize on this rapid growth in both demand and capacity, given that our installation capabilities are already in place. In capturing a portion of this expanding market share, solar installation will become a central product offering.
According to the U.S. Department of Energy’s “SunShot Initiative,” a program launched in 2011 aimed at increasing solar power use and innovation in the U.S., the U.S. is the world’s second largest consumer of electricity, but also has the largest solar resource of any industrialized country. The SunShot Initiative aims to reduce the total installed cost of solar energy systems by 75% by 2020 through reduction of solar technology costs, reduction of grid integration costs and acceleration of solar deployment.
The SunShot Initiative’s SunShot Vision Study (published in February 2012) stated that, in 2010, solar energy provided less than only 0.1% of the U.S. electricity demand. Technical potential, however, for solar energy’s contribution to the U.S. energy demand is enormous. For example, one estimate suggested that the area required to supply an amount of electricity equivalent to all end-use electricity in the United States using solar power is only about 0.6% of the country’s total land area.
According to the Sunshot Initiative’s Photovoltaic System Pricing Trends Report, published in September 2014, every utilized projection methodology demonstrates that the pricing of photovoltaic systems will dramatically decrease between 2014 and 2016. This enhances the viability of photovoltaic systems for use both residentially and on the utility-scale. Since 1998, photovoltaic system pricing has dropped an average of 6-8% per year. This trend has only accelerated in recent years, dropping 12% for small systems and 15% for large systems in 2012-2013.
According to the Department of Energy’s Interactive Chart entitled “The Falling Price of Utility-Scale Solar Photovoltaic (PV) Projects”, just as the popularity of photovoltaic (“PV”) systems is rising, the price of utility-scale PV projects has been precipitously declining since 2010. In 2010, the cost of electricity, in cents per kilowatt hours, was 21.4 c/kwh, nearly four times as much as the 2020 goal of 6 c/kwh. As of 2013, the cost of electricity nearly halved, at 11.2 c/kwh.
Solar power is also gaining in popularity in the individual U.S. states and cities, as rooftop solar power systems are becoming more prevalent as energy choices for residences and businesses. According to “Solar and the City,” an article posted on the U. S. Department of Energy’s website, in 2007 San Francisco developed an online “solar map,” and New York developed one in 2011. The “solar maps” are tools that allow people to determine the solar potential of their homes and businesses and have played a big part in supporting residents interested in solar power. When San Francisco first developed its solar map in 2007, for example, there were only 554 solar installations marked on the map. As of July 22, 2014, there were 3,747 PV systems installed in San Francisco, according to the San Francisco Department of the Environment’s Solar Map. Even President Obama is taking notice of the brisk growth of the solar industry, indicating in his most recent State of the Union address that every three weeks, more solar power is brought online in the U.S. than was built in all of 2008 (as reported in the Department of Energy’s January 29, 2015 press release, entitled “Energy Department Announces More Than $59 Million Investment in Solar”)(the “DOE’s January 29, 2015Announcement”). This rapid growth is indicative of a major shift towards solar power in the U.S. We believe our solar products, focused on storage solutions and solar installations, are ideally positioned to take advantage of the attention solar energy is receiving in urban environments where wind projects are not practical.
As mentioned above, U.S. federal, state and local governments have established various incentives and financial mechanisms to reduce the cost of solar energy and to accelerate the adoption of solar energy. These incentives include tax credits, cash grants, tax abatements, rebates, and net energy metering, or net metering, programs. These incentives help catalyze private sector investments in solar energy, energy efficiency and energy storage measures, including the installation and operation of residential and commercial solar energy systems. Further, the federal government provides an uncapped investment tax credit, or Federal ITC, that allows a taxpayer to claim a credit of 30% of qualified expenditures for a residential or commercial solar energy system that is placed in service on or before December 31, 2016. This credit is scheduled to be reduced to 10% effective January 1, 2017. Solar energy systems that began construction prior to the end of 2011 are eligible to receive a 30% federal cash grant paid by the U.S. Treasury Department under Section 1603 of the American Recovery and Reinvestment Act of 2009, or the U.S. Treasury grant, in lieu of the Federal ITC. The federal government also provides accelerated depreciation for eligible solar energy systems.
Solar power installation has in fact been on the incline in the past several years. According to the U.S. Department of Energy, the amount of solar power installed in the U.S. increased from 1.2 gigawatts (GW) in 2008 to an estimated 17.5 GW as of the end of the third quarter of 2014. On January 29, 2015, the U.S. Department of Energy announced a $59 million funding award to support solar energy innovation, comprising of the following: (i) $45 million in funding to bring innovative solar manufacturing technologies to the marketplace, with the goal of reducing the costs of photovoltaics and power electronics and (ii) $14 million in funding to 15 selected projects through the Solar Market Pathways project, as reported in the DOE’s January 29, 2015 Announcement. . As provided in that announcement, the Solar Market Pathways program provides funding support to its recipients, including, for example, not for profits, utilities, industry associations, universities, and state and local jurisdictions in California, Illinois, Minnesota, among others, to further its own development plan to install solar electricity over a multi-year period for residential, community and commercial properties. Through its selected projects, the Solar Market Pathways program focuses on “soft costs” of solar, including permitting, financing, and connecting to the electric grid, and to utilize the results and experiences from these projects to eventually provide similar jurisdictions with a road map for implementing solar projects in a faster, simpler and more cost-effective manner throughout the country. Ultimately, we believe these Department of Energy programs promote the overall advancement of solar energy as a viable source of electricity.
COMPETITIVE ADVANTAGES/STRENGTHS
Our Company is a fully-diversified clean energy company built upon our roots as a pioneer in the wind farm development industry with particular expertise in the community wind sector. We believe that we have a number of competitive advantages in the clean renewable energy sector in addition to our nationally-recognized community wind development:
Tiered Service Offering Results in Multiple Revenue Streams. One of our key advantages is that we generate revenue from our operating subsidiaries offering diversified products and services in all segments of the renewable clean energy sector rather than relying solely on one operating subsidiary to produce revenue:
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Juhl Renewable Assets focuses on the acquisition of ownership positions in wind farms and investment in other renewable energy assets which provide highly predictable revenues and strong operating margins. Capitalizing on the unique knowledge base of our parent company, Juhl Renewable Assets acquires new and existing wind farms and other renewable assets, thus building an asset base with predictable cash flows.
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Juhl Energy Development is our wind farm development subsidiary, where revenue is generated from development, service and construction fees earned from each of the wind farms that we develop.
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Juhl Energy Services is our wind farm operations and maintenance subsidiary, where revenue is earned from administrative, management and maintenance services agreements.
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Juhl Renewable Energy Systems is our small scale renewable subsidiary, where revenue is contributed through the sale and installation of renewable energy systems, including solar products and small scale wind turbines, to the energy consumer (including agricultural-related businesses and municipalities) which provide modern options in terms of cost effectiveness, performance, and reliability.
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Power Engineers Collaborative expands our professional capacities beyond wind and into the full range of clean energy sectors including natural gas, biomass, waste-to-energy, medium-to-large on-site solar, and support to larger wind farm construction.
Proven Record in Developing Wind Farm Projects. One of our key advantages is that we have completed 24 community wind farm projects to date, representing approximately 260 MW of generating capacity of electricity, and currently have projects in various stages of development, amounting to a total of 445 MW of wind power generating capacity of electricity. Due to our strength in development, revenue from development has been a strong cash revenue generator for the Company. However, we continue to strive to diversity our sources of revenue through our operational subsidiaries so that we are not dependent solely on a revenue stream from development.
For community wind projects to be completed successfully, projects must be constructed in a cost-effective manner. In the course of completing 24 wind projects to date, we have been able to demonstrate to project owners, equity investors and lenders that we can build wind farms on a cost-effective basis. To further our development of wind farms, our goal is to use capitalization from the Company’s other diverse operating subsidiaries to have the ability to pre-fund development costs. By pre-funding development costs, we would be able to alleviate dependence on third party financing and lenders to pre-fund the development costs of the project. Securing financing for the development of our wind farm projects is critical, and having the ability to pre-fund such development costs with our own capital helps ensure that such project will come to fruition, resulting in a development fee on the project.
With the fluctuating renewable energy industry, experienced participants with comprehensive offerings (such as Juhl Energy) are more likely to prosper in the long term especially considering the uncertainty of a long-term federal energy policy. Our expansion into a fully-diversified clean energy company while continuing as a leading participant in the community wind niche provides a broad base to support growth, maintain agility and achieve longevity.
Experienced Management Team. Led by an industry leader, Dan Juhl, we believe our development team is highly qualified in its experience, credibility and track record.
Mr. Juhl is an expert in the wind power field and is considered a pioneer in the wind industry having been active in this field since 1978. He was a leader in the passage of specific legislation supporting wind power development in the states of Minnesota and Nebraska, as well as contributing to the development of the currently accepted, financial, operational and legal structure providing local ownership of medium-to-large scale wind farms. John Mitola, our President, is also considered an expert in the energy field having focused his career on energy efficiency, demand side management and independent power development. He has significant experience in the energy industry and electric industry regulation, oversight and government policy. As such, Currently Dan Juhl is one of the most sought after wind energy developers by land owners and potential investors of wind projects in the U.S. The rest of our management team has collectively been involved in the wind power industry for more than 30 years.
We believe that our experience in developing community wind farms in new market areas and operating energy companies will enable us to continue to successfully expand our development portfolio. Further, we believe our management’s understanding of deregulated energy markets enables us to maximize the value of our development portfolio. Our team has experience in site selection, market analysis, land acquisition, community relations, permitting, financing, regulation and construction.
As we build on our diverse renewable energy business through strategic acquisitions or joint ventures with other industry partners on specific renewable energy projects, our experienced management team’s position in the industry will be elevated which will enhance our ability to secure projects that meet our criteria and move forward on those renewable energy projects.
Established Local Presence and Credibility. In the Midwest U.S. markets where we are active, our management team maintains a local presence and promotes community stakeholder involvement. By maintaining our principal office in Pipestone, Minnesota and satellite offices in Minneapolis, Minnesota, Milwaukee, Wisconsin and Chicago, Illinois, and becoming involved in local community affairs, we develop a meaningful local presence, which we believe provides us with a significant advantage when working through the local permitting processes and helps to enlist the support of our local communities for wind farms. We believe that our local approach has enabled us to secure approvals and support for our projects in regions that have historically voiced opposition and has given us a significant advantage over competitors, who are not as active in the local communities in which we are developing wind farms. Our management’s active participation in the state and local regulatory and legislative processes has led to the growth of community wind across the Midwest.
We plan to use the credibility that has been built in the local communities to expand our presence outside of the Midwest U.S. market, where we can take advantage of higher electricity rates. Currently, we are providing development services to a project in upstate New York to capitalize on higher electricity rates, which we expect to be completed during 2015, and evaluating development and acquisition wind projects in Oregon, South Dakota and Indiana.
Turbine Access. We maintain good working relationships with most turbine suppliers who are actively marketing turbine equipment in our market area with extensive experience to determine suitability of turbine technologies for our projects. In order to continue to survive long term in this industry, we need to continue to control costs. Thus, the ability to purchase turbines in bulk, possibly through a frame agreement, provides access to the lowest price. Further, in many of our wind farm projects, we have been willing to use technology of new turbine manufacturing entrants which provides reliability and favorable access to the supply chain and provides lenders with comfort in terms of financing a project. Further, newer wind turbine models are more efficient and offer improved capacity factors with prices continuing to fall to record levels.
Ownership-Sharing Structure with Land Owners. Through our community wind approach, we involve local stakeholders (such as farmers) by working with them to establish a limited liability company that extends ownership to the participants along with the initial equity investor. Landowners are critical to any wind farm because wind turbines must be placed in open areas requiring a large amount of land necessary to “harvest the wind.” Turbines are typically placed on a small plot of land, and less than one acre is removed from normal use (such as farming or grazing) for each 50 acres of wind resource captured. Turbines must be spaced a certain minimum distance apart to avoid “shadowing” each other and reducing power output. By integrating the land owners into the land rights and ownership structures, we can allow a wind-enabled farm to more than double the annual net income from cultivation or grazing. As a project developer, we assist in finding financing, securing the contract with a utility to buy the electricity produced, negotiating a turbine supply agreement, constructing the system, and operating the wind farm.
As an established leader of community wind power, we have been able to offer what we believe is a unique ownership-sharing formula to landowners and local communities that affords us an ongoing competitive advantage in this large and open sector of the wind energy arena. The advantages of our development of medium-sized projects include lower installation costs, quicker construction, benefits to the local community, simpler land aggregation, less expensive power transmission, easier regulatory compliance and availability of financing.
While mega-wind projects have gained wide attention, we believe we are uniquely positioned as the only publicly-traded community wind power company in the U.S. committed to and building projects in the 1 MW to 50 MW sector, and we believe we are a leader in such sector. As such, we have received considerable attention in the industry. This market is largely overlooked by larger developers. This oversight provides an opportunity to rapidly increase our market share and expansion plans. We believe such advantages outweigh the higher transactional costs encountered by a smaller wind project with smaller numbers of turbines, generating lower electrical production and sales.
Strategic Acquisition Subsidiary - Juhl Renewable Assets. Juhl Renewable Assets is our vehicle for strategic acquisitions to supplement our wind energy business and take advantage of the growth occurring in the community wind industry. Our strategic acquisition plan focuses on projects that in our opinion meet the following investment criteria:
(i) an energy project that (A) is currently operational, (B) has a contract for the purchase of the electric, heating, cooling or steam output of the facility, with at least five years remaining on the term of such agreement, and (C) has a positive net present value, including any monetization of tax benefits; or
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is not operational, but has commenced construction or is ready to commence construction at the time of the investment by Juhl Renewable Assets, and such project has: (A) a contract for the purchase of the electric, heating, cooling or steam output of the facility, with a term of at least 10 years, (B) all permits required for the construction and operation of the facility, (C) an executed interconnection agreement to connect the facility to transmission or distribution system, and (D) a positive net present value, including any monetization of tax benefits.
Overall, many projects that meet such criteria as set forth above have the following attributes: acceptable wind or solar resources, suitable transmission access, an appropriate regulatory framework providing acceptable power purchase agreements and long-term utility agreements, that result in successful projects that provide predictable revenue. Further, many of the existing wind projects that meet the investment criteria that are acquisition targets are for sale by equity owners who have fully utilized the tax attributes or no longer have the desire to continue ownership or whose assets are the subject of bankruptcy hearings.
Currently, Juhl Renewable Assets owns or has an interest in the following operating wind farms:
Valley View Wind Farm. Juhl Renewable Assets holds a 36.6% voting interest in Juhl Valley View, LLC and we have an additional 13.9% voting power through a voting trust arrangement with three other investors. Pursuant to a subscription agreement, Juhl Valley View, LLC invested approximately $1.8 million, in addition to other amounts raised, into Valley View Wind Investors, LLC, which owns 99% financial rights and 49% governing rights of Valley View Transmission, LLC, which operates the 10 MW Valley View wind farm. The Valley View entity is included in the financial statements as a consolidated variable interest entity.
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Valley View Transmission, LLC, is a community-owned and operated 10 MW (megawatt) wind project located in Southwestern Minnesota. The project consists of 5 Gamesa G87 (2.0MW) wind turbines and generates enough energy to power over 3,000 homes annually. Since the project’s commercial operation date in December 2011, Valley View has been performing at a level that has exceeded all initial performance projections and continues to consistently provide clean, reliable power to Xcel Energy on a monthly basis. Valley View has entered into a 20-year power purchase contract with Xcel Energy (expiring in 2031) such that Xcel will purchase all of the wind farm electricity output.
Woodstock Hills Wind Farm. Juhl Renewable Assets owns a 99.9% ownership interest in a 10.2 MW wind farm, Woodstock Hills, located in Woodstock, Minnesota. The Woodstock Hills wind farm has been operating as a wind energy generation facility since 1999 and was originally developed by the Company’s CEO, who remains the .1% minority interest member. The Woodstock Hills wind farm entered into a power purchase agreement (PPA) with Northern States Power (NSP) in 1997.
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Woodstock Hills Wind Farm, LLC, is a community-owned and operated 10.2 MW (megawatt) wind project located in Southwestern Minnesota. The project consists of 17 Vestas V44 (600kW) wind turbines and generates enough energy to power over 2,000 homes annually. Since the project’s official commercial operation date in May 2004, Woodstock Hills has performed consistently to provide clean, reliable power to Xcel Energy on a monthly basis. Woodstock Hills operates under a 30-year power purchase contract with Xcel Energy (expiring in 2034) that requires the utility to purchase all of energy produced by the project.
Iowa Wind Farms. Juhl Renewable Assets directly holds a 100% interest in 5045 Wind Partners, LLC, an Iowa limited liability company, which acquired two Iowa wind projects comprised of two 1.6 MW wind turbines in the Central Iowa Region.
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Kensett, Iowa Wind Project consists of a single turbine wind farm located in Kensett, Iowa. The turbine is a 2011 GE XLE turbine with an 82.5 meter rotor on an 80 meter tower. 5045 Partners has interconnection and power purchase agreements in place with Alliant Energy, an Iowa based subsidiary of Interstate Power and Light. The Power Purchase agreement is a 10-year agreement through 2021.
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Manly, Iowa Wind Project consists of a single turbine wind farm located in Manly, Iowa. The turbine is a 2011 GE XLE turbine with an 82.5 meter rotor on an 80 meter tower. 5045 Partners has interconnection and power purchase agreements in place with Alliant Energy, an Iowa based subsidiary of Interstate Power and Light. The Power Purchase agreement is a 10-year agreement through 2021.
Currently, Juhl Energy Development owns 100% of the following operating wind farm:
Winona Wind. Juhl Energy Development holds 100% of the ownership interest in Winona County Wind Holdings, LLC, the operator of Winona Wind, a 1.5 MW (megawatt) wind project located in Winona County, Minnesota. The project consists of 2 Unison 750 kW direct drive wind turbines. Juhl Energy Development was the developer of this project and subscribed into ownership until such time as outside financing can be arranged for the project. Financing for the project is not expected to occur until production history for these new-to-market turbines provide for consistent operating results. This project is subject to legal proceedings with the turbine supplier. See Item 3 of this report.
Recent Development/Achievements for Juhl Energy
During the past 18 months, we have achieved several significant milestones:
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To date, Juhl Renewable Assets, our acquisition subsidiary, sold approximately $4.9 million in private sales of Series A Preferred Stock of Juhl Renewable Assets. We used $2.4 million of such proceeds to replenish our cash fund that was previously invested into three wind farm projects from internal operations and we used approximately $1,800,000 of the proceeds to purchase the Iowa Wind Farms in August 2014.
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In September 2013, Juhl Energy Development entered into a co-development agreement for the Purdue Energy Park development project to construct a 20MW wind energy generation project in conjunction with Purdue University. Initial construction has commenced and the project is currently reviewing its interconnection cost requirements and the impact on the power sale rate before moving forward with additional physical project activity.
● Our acquisition of Power Engineers Collaborative in 2012 has proved to be a successful acquisition which has added approximately $6 million in average revenue annual run rate, and allows us to provide engineering services in the alternative energy space to complement our core wind business.
● Juhl Energy Development was selected as development partner for the state of New York's first community wind project, the Black Oak Wind Project, which is a proposed 11.9 MW facility. Construction is currently scheduled for completion during 2015.
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In January 2014, we finalized installation and began operation of two power-producing wind turbines, at Honda Transmission Manufacturing of America, Inc. (“Honda”) plant in Russells Point, Ohio, a $9.0 million on-site 3.4 MW wind project, which supplies approximately 10% of the plant’s electricity. Honda is the first major automotive plant to obtain a portion of its electricity generated from wind turbines located on its property.
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In February 2014, we acquired certain assets of PVPower, Inc., a leading on-line distributor of solar power systems and solar components to industry professionals, contractors and consumers nationally through the PVPower platform. Such acquisition enables the sale of solar products through Juhl Renewable Energy Systems. Juhl Renewable Assets had previously made a minority equity interest investment in PVPower in 2011.
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In March 2014, the nonrecourse debt of the Valley View wind farm was refinanced through a new bank in order to improve cash flow through interest and cost savings over the term of the loan.
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On April 1, 2014, the Company closed on its transaction whereby it repurchased shares of preferred stock held by Vision Opportunity Master Fund, Ltd. (“Vision”). As a result of the transaction, we simplified our capital structure by eliminating a majority of our preferred stock outstanding and removing the quarterly dividend payments that accompanied the preferred equity held by Vision.
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In July 2014, Juhl Renewable Energy Systems was named one of two principal contractors for all rooftop installations completed through the “Solar Chicago Program”. The “Solar Chicago Program” provides affordable and efficient renewable energy solutions for its residential property owners throughout the Chicago metro area. Juhl Renewable Energy Systems has completed approximately eleven projects as of March 2015 and expects to complete up to 30 projects in 2015, using the assistance of two qualified subcontractors. Further, PEC, our engineering subsidiary, will support the Company’s project management efforts including energy modeling, and the design and installation of the solar projects.
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On August 6, 2014, the Company closed on its underwritten public offering of 10,750,000 shares of its common stock with gross proceeds of $2,150,000 prior to deducting underwriting commissions and offering expenses.
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In August 2014, Juhl Renewable Assets completed a $4.3 million acquisition of two operating wind farms in Iowa, with aggregate electricity generation capacity of 3.2 MW, and bringing total owned and operated wind farm assets to over $30 million for Juhl Renewable Assets.
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In late 2014, the Company discontinued its tower services division operated by Juhl Tower Services that had incurred substantial cash flow and operating losses since its launch in February 2013. As of March 15, 2015, the tower services entity has been dissolved and the Company is currently working on winding up its affairs.
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In December 2014, we collected a $1.5 million development fee from development support services work by Juhl Energy Development related to a wind farm in South Dakota, which is comprised of eleven wind turbines with a combined capacity of approximately 20 MW and began commercial operations in late 2014.
Growth Strategies/Opportunities
Our growth strategy is to continue to develop as an innovative, diverse and balanced clean energy company with emphasis on diversification and expansion into new markets. To achieve this, we will seek additional growth through targeted acquisitions in the clean energy sector and pursue opportunities for development directly with the end customer while working to leverage our portfolio of community wind farms. Our goal is to build a diversified business designed to build and sustain revenue growth to supplement our core revenue sources of development and construction fees associated with wind farms, upon which we have historically relied. Our strategy focuses on opportunities that aim to reduce the risk related to the wind industry, especially risks associated with the unpredictability of federal policy related to the long-term availability of tax incentives such as the production tax credit.
Opportunities for Development of Projects for End Customers:
We recognize that one of the primary challenges in developing wind farms is obtaining contracts with utilities to purchase the electricity generated by wind farm developments. Thus, we have begun to develop wind projects for specific end users. In doing so, we have found a growing niche within our renewable energy development services where we work with large industrial electricity users and corporate clients to install “behind the meter” wind and solar facilities. As discussed above under Recent Developments/Achievements, we partnered with Honda in an industry-leading initiative to provide electricity to its transmission plant in Russells Point, Ohio through the generation of wind power, which was completed and went online in January 2014 and has reportedly exceeded power output by 6.3% in its first six months of operation. Our goal is to continue to grow this sector of our business by providing quality development services to organizations looking to utilize renewable energy at their planned or existing facilities and to add distributed generation projects where energy is generated at or close to its point of use and potentially hybrid projects where wind, solar and battery storage can be integrated together. We estimate that there are hundreds of manufacturing facilities similar in size to Honda’s transmission plant. We believe that Juhl Energy is well positioned (as a recognized industry leader and proven developer of 260 MWs of wind power to date) to acquire additional projects throughout the United States to assist in the reduction of manufacturers’ carbon footprint as they strive to diminish the adverse impact of their operations on the environment. Going forward, we plan to participate in wind, solar and hybrid energy projects through acquisition and/or joint venture vehicles. As we work toward our goal of adding distributed generation projects, our ability to provide quality solar power solutions will be central to our success because solar may be preferable to wind power in certain situations. We will, therefore, focus on solar/wind hybrid projects as a growing market for the Company.
Wind Farm Development, Construction and Management Services:
Our growth strategy as a leader in the renewable-energy industry is anchored by the competitive advantage of our portfolio of completed projects coupled with the projects we currently have under development, including projects for end users, such as the Honda Wind Project (discussed above). One component of our plan is to continue to provide the full range of services across each phase of development, including construction and management, which enhances our ability to add value to projects which we expect, will grow our revenue and profitability.
We are currently providing development services to wind development projects in South Dakota, Indiana, and Oregon representing around 169 MW of wind projects. In our development capacity, we work to introduce equity investors and lenders who we have worked in the past to fund the development and construction costs of the project. Financing is crucial to development wind projects and ultimately successful financing determines whether such projects come to fruition.
However, many of these development projects hit roadblocks as a result of a lack of funding. Thus, we are focused to continue on our road toward proper capitalization to allow us balance sheet strength to pre-fund development costs or acquire early to mid-stage projects. We believe that the formation of Juhl Renewable Assets will provide us the ability in the future to provide supplemental funding to our wind farm development projects (through a preferred renewable asset equity vehicle).
In addition to growing our revenue per project, we will continue to grow our projects under development by utilizing competitive strengths and taking advantage of market conditions to build long-term growth, as follows:
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We are moving into larger markets with on-site, municipal and projects with potential to combine wind and solar technologies, targeting smaller wind projects 5 to 80 MW. In the State of Minnesota alone, industry experts have suggested there exists over 6,000 MW of achievable electricity utilizing our community wind power model. Thus, we expect to increase our capacity by entering regional markets through organic development and strategic acquisitions of existing wind farms that meet our criteria (as discussed below). In connection with our organic development, we endeavor to become a leading wind energy operator and an influential voice within the region as we enter the market. We strive to develop projects in-house from the initial site selection through construction and operation.
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In addition to development, we are focusing on providing an overall service component that includes construction and development management by developing relationships with contractors, turbine suppliers, and financing partners in the wind farm industry. In addition, we are expanding our services to include turbine maintenance services for wind farms in the Upper Midwest. We are growing our service business through our operations and maintenance subsidiary Juhl Energy Services.
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We expect to create relationships as a community stakeholder. We value the creation of strong community relationships that we believe are essential to generating support and securing land and permits necessary for our wind farms. Our team works closely with the landowners who will host the wind farms to ensure that they fully understand the impact of the turbines. Throughout the development process, we assess and monitor the community’s receptiveness and willingness to host a wind farm in the project area. This proactive involvement in the community also enables us to submit permit applications that comply with local regulations while addressing local concerns.
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Although we see opportunity to expand our pipeline of projects in the Upper Midwest, we are also actively looking to diversify our development portfolio by adding projects throughout North America and in regions that experience higher electric rates, and working with independent firms who can assist us in marketing electricity production in regions with higher energy rates.
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We expect to work with governmental agencies to help us incentivize the creation of community wind farms and their ability to obtain power purchase agreements and offer favorable tax treatment for owners and investors. Further, we intend to use tax equity financing arrangements in order to monetize the value generated by production tax credits, investment tax credits, and accelerated tax depreciation available to wind generation projects.
Growth through Targeted Acquisitions:
We believe the key to accelerated growth of Juhl Energy is through targeted acquisitions of energy assets to increase our capacity of wind farm and solar projects in our pipeline and grow our revenue and profitability. Such acquisitions remain a meaningful element in our growth strategy, which is the main focus of our acquisition subsidiary Juhl Renewable Assets, a renewable asset preferred equity vehicle.
Our targeted acquisition strategy will help us strengthen our business in the following areas:
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targeting other segments of our industry, such as solar and hybrid energy projects and additional wind service businesses including operation and maintenance providers and wind consulting providers (such as our acquisition of PEC, an engineering firm focusing on the clean energy sector);
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acquiring ownership of existing wind farms that fit our distributed generation model and the size projects we typically develop (under 50 MW) and meet our investment criteria as described above. We estimate that there are over 500 small wind farms under 50 MW that exist in the United States, and we believe that the owners are motivated to sell for the following reasons:
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Assets are fully depreciated (5 year amortization);
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Federal tax credits (PTCs) are expiring:
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Equipment warranties are expiring;
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Wind farms comprise only a small portion of seller’s current business; or
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Located in a remote location with high operating costs; and
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acquiring or participating in joint ventures with other industry partners on specific projects (given that so many other independent developers have been unable to move projects in their own pipeline). Our preferred business model is to participate in a joint venture to share various elements of fees and profits, including development fees, general construction, construction management and operations and maintenance.
Consumer-Focused Renewable Energy Products - Smaller On-Site Wind Power and Solar Systems:
Juhl Renewable Energy Systems provides small scale renewable energy systems and specializes in advanced conservation technologies focused on commercial and residential systems. Juhl Renewable Energy Systems is focused on the sales and installation of on-site renewable energy systems - including Solarbank®, a proven on-site solar system; Powerbank®, a simple on-site backup power system; small scale wind turbines and residential and small commercial solar installations. Juhl Renewable Energy Systems handles projects from start to finish including design, sales, installation and service. Juhl Renewable Energy Systems provides third party financing structures to end-user customers.
Juhl Renewable Energy Systems capitalizes on Juhl Energy’s extensive experience with a wide variety of energy saving and environmentally-sound production systems such as small wind, solar, back-up power, and stand alone power systems., and operates as our consumer-focused renewable energy products subsidiary. Its product line builds upon our diverse experience to assist energy consumers in controlling, and in some cases eliminating, their ever burdensome energy costs. Juhl Renewable Energy Systems supports a transition to a sustainable energy economy which relies on clean, renewable resources to satisfy societal needs, and offers energy consumers (including agricultural related businesses and municipalities) attractive alternatives in terms of cost effectiveness, performance and reliability.
With our acquisition of certain assets of PVPower, Inc. in February 2014, we continue to advance our solar initiatives. We can now distribute solar-related system products through Juhl Renewable Energy Systems to consumers and small businesses using the online system developed by PVPower. Further, as we experience growth in small-scale solar through our acquisition of PV Power, the Company announced in July 2014 that Juhl Renewable Energy Systems was named as one of two principal contractors for all rooftop installations completed through the “Solar Chicago Program”. The “Solar Chicago Program” provides affordable and efficient renewable energy solutions for its residential property owners throughout the Chicago metro area. Further, PEC, our engineering subsidiary, will support the Company’s project management efforts including energy modeling, and the design and installation of the solar projects.
Historically, our wholly-owned subsidiary, NextGen, has sold refurbished turbines as part of our smaller on-site wind power products. At this time, NextGen is maintaining only its current inventory of refurbished turbines and does not expect to sell any refurbished turbines going forward.
In line with our products mentioned herein, we are also exploring battery storage, whereby the battery stores the energy produced by the renewable energy source (such as wind or solar) for use during periods of low or no renewable energy production. Juhl Energy plans to continue to develop diversified product offerings, including expanding its product offerings to energy-conscious consumers with the development of small-scale renewables, such as new wind turbines and solar products. In addition, the Company is exploring battery storage technologies and partnerships for storing the renewable energy produced by its medium-scale renewable energy development and owned projects, in order to use later during periods of low or no renewable energy production from sun or wind as the case may be. Juhl Energy’s research and development (R&D) efforts further include developing distributed generation facilities that allow power users to operate behind the meter and developing utility-scale battery storage capabilities. The availability of battery backup and storage for renewable energy systems is an important advance which promotes greater adoption of distributed generation systems going forward and could represent an expanding market for us.
Addition of Complementary Services - As discussed throughout this section, we have expanded into several segments of the clean energy industry and extended our expertise beyond community wind as a genuine participant in the overall clean energy industry. Our experience and success in wind project development has allowed us to add complementary services such as full scale energy engineering through our PEC subsidiary, ownership of our own clean energy assets, advanced solar and wind power systems for small business and homes, and day-to-day administration and maintenance services for third party utility, wind tower assets. Further, with the acquisition of the assets of PVPower, we are able to provide customers technology for planning and pricing materials for solar installers and direct sales of solar PV (photovoltaic) products.
Long-Term Survival in Industry - Ability to Add Value and be Cost Effective - For long term survival in the renewable energy space, especially wind, we continue to be adaptable to the changing conditions of the U.S. wind industry and market, increasingly diversifying our offerings, in order to reduce our exposure to the unpredictable extension or renewal of tax incentives and other favorable governmental policies that have historically supported the U.S. wind industry and other renewables. Other areas in which we believe we can add value to wind farm projects (in addition to our core development, maintenance and management services) include continued research and development in the following areas:
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distributed generation facilities that allow power users to operate “behind the meter” (such as the Honda wind project);
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dedicated storage facilities to help address intermittency in transmission systems (such as Solarbank® and Powerbank®);
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development and utilization of utility scale battery storage is advancing rapidly;
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state RPS requirements remain unfulfilled, opportunity for Juhl Energy portfolio;
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design of projects to meet specific needs of output purchasers (such as the Honda Wind Project); and
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exploration of battery storage partnerships.
Sales and Marketing
The Company derived approximately 46% of its revenue for the year ended December 31, 2014 from three customers primarily as a result of renewable energy development and construction revenue (10%), energy and field services (15%) and power plant ownership (21%). The Company derived approximately 57% of its revenue for the year ended December 31, 2013 from three customers primarily as a result of renewable energy development and construction revenue (23%), energy and field services (14%) and power plant ownership (20%). At December 31, 2014 and 2013, 64% and 69% of the Company's accounts receivable were due from four and two customers, respectively.
Historically, Juhl Energy Services and Juhl Energy Development have not relied on any direct sales or marketing efforts for wind farm development and management but have gained exposure through trade publications, word of mouth and industry conferences. We currently have a pipeline of projects we believe will last at least two years and it is being supplemented on an on-going basis without direct selling efforts. We anticipate being able to add a significant number of projects to this pipeline driven primarily by Dan Juhl, John Mitola and an expanding development team, trade publications, industry events and word of mouth. Our web site, www.juhlenergy.com, also serves as a marketing tool. If, at some point, management determines the pipeline of potential customers is less than anticipated or desired, or if we are unable to sustain our desired rate of growth and expansion with these sales and marketing methods, we will reevaluate the sales and marketing efforts and address the issue at that time.
Juhl Renewable Energy Services currently utilizes a combination of internal direct selling efforts and online advertising for the sale of solar installation products and services, as well as maintaining the PVPower online website for sales of solar-related products. We plan to increase our efforts to establish sales channels through subcontractors who demonstrate technical knowledge in the renewable energy marketplace and have sales expertise that would provide us with product sale and engineering services opportunities.
Intellectual Property
We depend on our ability to develop and maintain the proprietary aspects of our technology to distinguish our products from our competitors’ products. To protect our proprietary technology, we rely primarily on a combination of confidentiality procedures. It is our policy to require certain employees and consultants to execute confidentiality agreements and invention assignment agreements upon the commencement of their relationship with us. These agreements provide that confidential information developed or made known during the course of their relationship with us must be kept confidential and not disclosed to third parties except in specific circumstances and intellectual property rights developed within the scope of the employment relationship will be assigned to us.
We have no patents, licenses, franchises, concessions or royalty agreements, other than a July 2009 manufacturing license arrangement with an Ohio company that includes the use of proprietary software controlling the power electronics of the NextGen wind turbine unit and other related documentation. The term of the manufacturing license arrangement is 20 years and does not allow the licensee to access the software or provide such software to any other party.
We have registered trademarks with the United States Patent and Trademark Office for Solarbank® and Powerbank®.
Competition
Wind Farm Development
Within the U.S. wind power market itself, there is a high degree of competition, with growth opportunities in all sectors of the industry regularly attracting new entrants. Juhl Energy competes with energy marketers, public utilities and other independent power producers, particularly providers of renewable energy. These companies may have competitive advantages as a result of scale, the location of their generation facilities, greater access to credit and other financial resources, lower cost structure, greater ability to withstand losses and larger staffs.
The American Recovery and Reinvestment Act created a tax incentive for companies in the renewable energy industry, which has provided an incentive for developers to enter the wind power development market. However, as noted, the production tax credits were not extended past 2014, and are not available for wind projects that commence construction in 2015. As a result of the unavailability of the tax credits for projects commencing in 2015, we believe many new entrants (especially developers of wind farms) will not enter the market in 2015.
Further, we believe the ATRA extension of the PTCs, and subsequent extension under the Tax Increase Prevention Act of 2014, provided an advantage to companies that have a strong balance sheet and large amounts of capital as they were able to begin project construction in 2013 and 2014 to maximize the utility of the “begin construction” rule. These companies have the resources to finance a pipeline of wind farms eligible for the PTC that will be finished and placed in service in future years. Developers with less capital are at a disadvantage if they were unable to take advantage of the PTC extension. Some market analysts have forecast that the ATRA /TIPA extensions of the PTCs will lend themselves to capitalized developers stockpiling PTC projects and effectively crowding out less capitalized developers who did not commence construction in 2013 or 2014.
Due to the uncertainty surrounding favorable future renewable energy legislation, we believe that the opportunity to develop future wind farm projects is likely to diminish from levels in the past (especially for projects that begin construction in 2015 and beyond, as such projects would not be PTC eligible under current legislation). Without dependence on the tax incentives, developers with cash flow from existing projects that are well capitalized will be able to continue to develop projects. Further, the developers with projects that generate a higher capacity of energy will be able to spread capital costs over a larger production base, which is an advantage over our community wind farm target of 5 to 50 MWs. Finally, developers who are able to access project financing (for future projects that begin construction in 2015 and beyond, as such projects would not be PTC eligible under current legislation) would shift from unleveraged tax equity to more traditional financing, where companies with large balance sheets would have an advantage with traditional project lenders. Developers, such as Juhl Energy, would also need to continue to pursue alternative financing arrangements, such as vendor financing for construction, as we have successfully done in the past.
The cost of wind turbines continues to be a key component to control costs in this transition time of the industry (especially with the expiration of the PTCs for projects commencing construction in 2015). Typically, the capital cost of purchasing turbines has been high. However, the average price for wind energy equipment, including turbines, continues to fall based on the production of newer wind turbine models and increased competition of manufacturers in China and continues to drop in cost. Thus, each wind farm developer will need to have the funding now to take advantage of the low turbine prices. As stated above, the more capitalized developers will be able to fund the purchases of the turbines and control costs of the wind development projects.
In addition to the cost of turbines, new entrants in the wind power development market face certain barriers to entry. There is increased difficulty and uncertainty in obtaining long-term power purchase contracts from utilities, even in the face renewable energy portfolio standards in 29 states. Other significant factors include the cost of land acquisition, the availability of transmission lines, land use considerations and the environmental impact of construction and operations. Finally, another critical barrier to entry into the wind power development business is the necessary experience required to bring projects to the point where they are able to secure agreements to connect to the existing electricity transmission network, power purchase agreements and project financing for construction.
We are aware of a few companies working in the community wind power area which are competitive with certain of the services we offer. Given Juhl Energy’s industry standing and the number of existing projects, we do not view these as threats or potential disruption to our business.
With respect to the production and sale of consumer-owned renewable energy products, there are numerous businesses operating in the U.S. that are associated with the manufacture, sale, distribution and installation of products and services. The competition in this field is not dominated by any one particular company or group of companies.
Engineering Services
The engineering consulting services that we provide, through PEC, to the utility and building systems industries are highly competitive and, for the most part, require substantial resources and highly skilled and experienced technical personnel. There are a significant number of large engineering firms competing in the power generation markets served by our business, including U.S.-based companies such as Sega, Inc., Sargent & Lundy, Stanley Consultants, HDR, Inc. and others. Competition is based on an ability to provide the design, engineering, and project execution skills required to complete complex projects in a safe, timely and cost-efficient manner. Our engineering business derives its competitive strength from our lengthy experience with a wide range of services and technologies, excellence in execution, reputation for quality, knowledge of cost-effective technology, and project management expertise. Barriers to entry are both financially and logistically low, with the result that the industry is highly fragmented with no single company being dominant. Competition in those markets is generally driven by reputation, price and the capability to perform.
Suppliers
As the primary operating equipment for our wind farm development projects, wind turbines are integral to our wind project development. As compared with demand for wind turbines, there are a limited number of turbine suppliers, which limits the current production capacity. Thus, the cost of wind turbines represents a substantial portion of investment costs in our wind energy projects.
Wind turbines come in a variety of sizes, depending upon the use of the electricity. A large, utility-scale turbine described above may have blades over 40 meters (130 feet) long, meaning the diameter of the rotor is over 80 meters (260 feet) (nearly the length of a football field). Such wind turbines might be mounted on towers 80 meters (260 feet) tall (one blade would extend half way down the tower), produce 1.8 MW of power (1800 kilowatts), supply enough electricity for 600 homes and cost over $1.5 million. Wind turbines designed to supply part of the electricity used by a home or business is much smaller and less costly. A residential or farm-sized turbine may have a rotor up to 15 meters (50 feet) in diameter mounted on a metal lattice tower up to 35 meters (115 feet) tall. These turbines may cost from as little as a few thousand dollars for very small units and up to $80,000 excluding installation costs.
The principal suppliers for our wind farm projects primarily consist of suppliers of wind turbines, wind turbine parts and various electrical supplies and services relating to wind turbine operation. We also source, as needed, wind studies and electrical engineering expertise from outside suppliers. With respect to wind turbines and related items, to date, our principal suppliers have been General Electric, Suzlon Energy Limited, Alstom Power, Gamesa Wind US, and Vestas Wind Support Systems A/S for turbines and Michels Corporation, Fagen, Inc. and Ryan Companies, Inc. for subcontracted construction services. We have used WindLogics, Inc, V-Bar and AWS Truewind for wind studies and Consulting Engineer Group, Inc. and Hoerauf Consultants, Inc. for specialized electrical engineering. Our business is not dependent on any one supplier and our list of suppliers is changing and expanding on an ongoing basis as the market for wind power continues to expand and new suppliers enter the market offering advanced products, technologies and services.
Renewable Power Plant Ownership
Our wind farm projects sell electricity and associated RECs primarily to local utilities under multi-year power purchase agreements, or PPAs. A PPA is a contract that provides for the purchase of power at an agreed-upon price for a period of time, which is typically 20 years for wind projects. For the year ended December 31, 2014, Xcel Energy d/b/a Northern States Power Company represented 91% of our electricity sales and approximately 21% of consolidated revenue. The electric utility company normally maintains ownership of any Renewable Energy Certificates (“green tags”) that are associated with the power generated by the projects. Since the primary cost of wind power is the initial capital cost of the system, each wind farm benefits from a steady stream of reliable revenue and cash flow for decades.
Renewable Energy Development
Our renewable energy development revenues primarily consist of wind farm development services and construction revenue. The customer is generally an entity formed for the purpose of owning the underlying wind farm, and as such, the target customer changes for each development. During 2014, the services in late 2014 related to a South Dakota wind farm resulted in approximately 50% of our revenue from Renewable Energy Development and approximately 10% of consolidated revenue. We continue to expect that our wind farm development and construction customers will continue to be sold to location-specific customers. Further, we expect to obtain revenues from online solar product sales and solar installations from individuals and small commercial entities, none of which would be expected to provide more than 10% of our consolidated revenue.
Energy and Field Services
Our business-to-business engineering consulting services, asset management, and turbine maintenance services, are generally comprised of customers who are not expected, on an individual basis, to exceed 10% of total consolidated revenues. However, during 2014, one customer accounted for 15% of total consolidated revenue. We have developed ongoing relationships with customers for engineering services in addition to expanding the engineering services we provide to these customers. Tower maintenance services related to our subsidiary, Juhl Tower Services, is no longer included in continuing operations for the Energy and Field Services segment and has been separately reported as a discontinued operation for both 2014 and 2013 comparisons.
Government Regulation
Overview - Utility Regulation
Traditionally, utility markets in the United States have been highly regulated. The U.S. power industry is currently in transition as it moves toward a more competitive environment in wholesale and retail markets. The commercial viability of wind power will increasingly depend upon pricing as the trend toward deregulation continues.
Our operations are subject to extensive regulation. To the extent of our involvement in project development, construction, ownership, operation and maintenance of wind farms, including the sale of electricity to utilities, we are subject to energy, environmental and other governmental laws and regulations by various federal, state and local government agencies. The federal government regulates the use of electric energy, capacity and the wholesale sale and transmission of electricity in interstate commerce and regulates certain environmental matters. States and local governments regulate the construction of electricity generating and transmission facilities, the intrastate sale of electricity, and environmental matters. Below is a brief summary of some of the pertinent laws that are applicable to our business, but such disclosure is not exhaustive of all such laws that we encounter in the operation of our business.
Federal Energy Regulatory Commission
As a company that generates electricity through our wind farm projects, our projects may be subject to government regulation as “public utilities” by the Federal Energy Regulatory Commission (the “FERC”) under the Federal Power Act of 1935 (the “FPA”). The FERC regulates as "public utilities" those entities that own or operate facilities used for the wholesale sale of electric energy in interstate commerce.
Certain small power production facilities may qualify as "qualifying facilities" ("QFs") if the wind powered generating facility has a generating capacity of 80 MW or less. QFs whose primary source is renewable energy such as wind have the right to sell energy or capacity to a utility through an interconnection agreement and is exempt from certain laws including, but not limited to, rate regulation and reporting and accounting requirements of the FPA, for facilities with a generating capacity of 30 MW or less. However, FERC must first make a determination that a QF has non-discriminatory access to wholesale energy markets having certain characteristics, including non-discriminatory transmission and interconnection services provided by a regional transmission entity in certain circumstances with respect to its exemption from rate regulation. Any of our projects that are non-exempt from the jurisdiction of the FERC are subject to rate regulation and the obligation to obtain FERC rate schedules for wholesale sales of energy and capacity.
Most of our wind development projects have a generating capacity of 80 MW or less and qualify as QFs and are exempt from most aspects of FERC regulation.
Minnesota Public Utility Commission
Our wind farm projects in Minnesota are subject to the rules and regulations under the jurisdiction of the Minnesota Public Utility Commission’s Energy Facilities Unit (the “Minnesota Utility Commission”), which manages state oversight of proposals to construct energy facilities in Minnesota including wind power generation plants and facilities. The Minnesota Utility Commission’s jurisdiction may require a state Certificate of Need and/or a state Site or Route Permit. Applications for projects subject to the Minnesota Utility Commission’s jurisdiction, such as wind power generation power facilities, are filed with the Minnesota Utility Commission in compliance with Minnesota state statues and administrative rules. The Minnesota Utility Commission's procedures for review of proposed energy facilities incorporate compliance with the Minnesota Environmental Policy Act and provide for broad spectrum public participation, including timely public notice and multiple opportunities for public comment. The Minnesota Utility Commission's decisions preempt local jurisdictional authority.
Environmental Regulation
As part of our wind farm development, including construction management and system operations, we oversee the installation of wind turbines and construction of transmission lines and related facilities, including access roads and substations. As such, we are subject to numerous restrictions and requirements under federal and state environmental laws and regulations with respect to our operations which affect the timing, cost, location, design, construction and operation of new facilities. In certain circumstances, such laws and regulations require us to obtain and maintain permits and approvals and undergo an environmental review process, which may include performing environmental impact studies on the location of the project. Compliance with these regulations requires a significant investment of time by our employees and imposes substantial costs on our Company.
Our failure to comply with these laws and regulations, including the failure to obtain the necessary permits, may result the denial or revocation of permits or authorizations to proceed with a project or in some instances the assessment of administrative, civil and criminal penalties.
In order to comply with these laws and regulations and to obtain the necessary permits, we incur costs in the ordinary course of business. As of the date of this report, we do not consider such compliance costs to be material capital expenditures. However, future changes to federal and state environmental laws may require us to expend more of our capital to comply with such laws.
Some of the regulations, to which we are or may be subject to include the following:
Federal Clean Water Act
The Federal Clean Water Act protects the waters of the United States, including wetlands and streams. Regulations under the Clean Water Act govern critical operating parameters at generating facilities. In connection with our projects, we may be required to obtain permits for the discharge of dredged or fill material into U.S. waters, or for water discharges, such as storm water runoff associated with construction activities.
Federal Bureau of Land Management (BLM) Permits
To date, none of our wind farm projects have been developed on BLM lands. However, as we expand, some of our projects may be sited on BLM lands. In that case, as developer of such a project, we would be required to obtain rights-of-way from the BLM. In order to obtain such a permit, we would need to demonstrate that our wind farm project would protect environmental and archeological resources.
Endangered Species Act and Migratory Bird Treaty Act
In the event that our wind farm projects require a permit from a federal agency, such agency would also consider the impact on endangered species and their habitat under the Endangered Species Act, which prohibits and imposes stringent penalties for harming endangered species and their habitats. Due to the size and operation of our wind turbines, and the potential harmful impact on birds, our projects also need to comply with the Migratory Bird Treaty Act and the Bald and Golden Eagle Protection Act, which protect migratory birds and bald and golden eagles and are administered by the U.S. Fish and Wildlife Service. State and federal agencies may also require ongoing monitoring or mitigation activities as a condition to approving a project, and may refuse to issue a permit if the mitigation options are insufficient to address the risks to birds.
National Historic Preservation Act
In addition, federal agencies may consider a wind farm project's impact on historic or archeological resources under the National Historic Preservation Act and may require us to conduct archeological surveys or take other measures to protect these resources.
Other State and Local Programs
In addition to federal requirements, we are subject to a variety of state environmental review and permitting requirements. Minnesota, where many of our wind farm projects are located or are being developed, have laws that require state agencies to evaluate our wind farm projects for impacts on the environment, wildlife, historic sites, water resources and agriculture, before granting permits. Such requirements typically consist of obtaining a special use or conditional use permit under the provisions of the applicable land use ordinance.
Employees
As of March 15, 2015, we employed approximately 56 full-time employees and no part-time employees, excluding employees and consultants of any affiliated companies that are not at least 50%-owned subsidiaries of ours. None of our employees are subject to a collective bargaining agreement and we believe that relations with our employees are very good. We also frequently use third-party consultants to assist in the completion of various projects. Third parties are instrumental to us in keeping the construction and development of projects on time and on budget.
ITEM 1A
ITEM 1A RISK FACTORS
Not applicable for smaller reporting companies.
ITEM 1B
ITEM 1B UNRESOLVED STAFF COMMENTS
Not applicable for smaller reporting companies.
ITEM 2
ITEM 2 PROPERTIES
Our corporate office is located at 1502 17th Street SE, Pipestone, Minnesota 56164, which consists of a 5,300 square foot commercial building that contains production, warehousing and general and administrative space. We also have entered into a two year lease arrangement for purposes of office and meeting space in Minneapolis, Minnesota and a five-year office and production space arrangement in Red Lake Falls, Minnesota for Juhl Renewable Energy Systems’ activities. We also lease office locations in Brookfield, Wisconsin and Chicago, Illinois for the PEC operations and general and administrative purposes.
Generation Facilities.
At December 31, 2014, Juhl Energy, through its subsidiary Juhl Renewable Assets and Juhl Energy Development, held ownership interests in the following electric generating facilities:
Juhl Energy Facilities
Location
Geographic Region
Fuel
Total Facility
Capability (MW) 1
Winona Wind Farm 2
Winona County, MN
Upper Midwest
Wind
1.5
Woodstock Hills Wind Farm 3
Woodstock, MN
Upper Midwest
Wind
10.2
Valley View Wind Farm 4
Murray County, MN
Upper Midwest
Wind
Iowa Wind Farms 5
Central Iowa
Upper Midwest
Wind
3.2
Total
24.9
1 Represents total facility capability; Juhl Renewable Assets’ or Juhl Energy Development’s net ownership interest in facility capacity exists to the same extent as its ownership interest in such facility.
2 Juhl Energy Development owns 100% of Winona Wind Holdings, LLC, which owns 100% of Winona County Wind, LLC, the operator of a 1.5 megawatt wind farm.
3 Juhl Renewable Assets owns 99.9% of this wind facility.
4 Juhl Renewable Assets owns 32.6% in this wind facility (specifically, Juhl Renewable Assets has a 36.6% voting interest in Juhl Valley View, LLC, and has an additional 13.9% voting power through a voting trust agreement with three other investors. Juhl Valley View, LLC owns 99% financial rights and 49% governing rights of Valley View Transmission, LLC, which operates the Valley View wind farm).
5 Juhl Renewable Assets’ owns 100% of the membership interests in 5045 Wind Partners, LLC, which owns 100% of Windwalkers, LLC and Roeder Family Wind Farm, LLC, each an Iowa wind project comprised of one 1.6 MW wind turbine in the central Iowa region.
Character of Ownership
Juhl Renewable Assets or Juhl Energy Development has a controlling interest in these wind farms. Such wind farms are not owned in fee and may be encumbered by liens through securing nonrecourse financings. Additionally, the generating facilities are located on leased land from owners of private property.
ITEM 3
ITEM 3 LEGAL PROCEEDINGS
The Company is subject to legal proceedings and claims which arise in the ordinary course of its business. While the ultimate outcome of these matters is not presently determinable, the company believes that the resolution of outstanding claims will not have a material adverse effect on the Company. Due to the uncertainties in the settlement process, it is at least reasonably possible that management’s view of outcomes will change in the near term.
On December 5, 2013, Unison Co., Ltd. (“Plaintiff”) filed a civil complaint against Juhl Energy, Juhl Energy Development, Winona Wind Holdings, LLC, Winona County Wind, LLC, members of management, and others (the “Defendants”) in the U.S. District Court for the District of Minnesota. The lawsuit arises out of the purchase of two wind turbine generators from Plaintiff, whereby Juhl Energy Development financed the cost of the wind turbines by obtaining a loan from Plaintiff. The wind turbines were installed at a wind farm project in Winona County, Minnesota. The complaint purports to state causes of action for (i) fraudulent inducement, (ii) breach of Juhl Energy Development’s Financing Agreement with Unison: (iii) breach of the implied covenant of good faith and fair dealing; (iv) tortious interference with contractual relationship; and (v) unjust enrichment. Plaintiff is seeking the following: (i) awarding Plaintiff money damages in amount in excess of $75,000 together with pre-judgment and post-judgment interest as allowable by law; (ii) awarding Plaintiff amounts by which Defendants were unjustly enriched; and (iii) awarding Plaintiff its attorney fees, costs, and disbursements by law or equity. The Defendants, including the Company, dispute all allegations in the complaint and are defending the action. The Defendants, including the Company, have filed a counterclaim in arbitration in accordance with transaction documents for breach of turbine warranty and other claims.
ITEM 4
ITEM 4 MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5
ITEM 5 MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our shares of common stock are currently quoted and listed for trading on the OTCQB under the symbol JUHL. The following table sets forth the high and low closing price per share for our common stock for the periods indicated. These prices reflect inter-dealer prices, without retail markups, markdowns, commissions or adjustments and may not necessarily represent actual transactions.
On December 31, 2014, the closing price of our common stock, as reported by the OTC Bulletin Board, was $0.20 per share.
Holders
As of March 27, 2015, there were 36,424,826 shares of our common stock outstanding and approximately 72 holders of record of our common stock. However, we believe that there are significantly more beneficial holders of our common stock as many beneficial holders hold their stock in “street name.”
Dividend Policy
We do not expect to pay a dividend on our common stock in the foreseeable future. The payment of dividends on our common stock is within the discretion of our Board of Directors, subject to our Certificate of Incorporation. We intend to retain any earnings for use in our operations and the expansion of our business. Payment of dividends in the future will depend on our future earnings, future capital needs and our operating and financial condition, among other factors.
Unregistered Sales of Securities
Effective February 1, 2014, we issued an aggregate of 250,000 restricted shares of common stock to a consultant which vest over a 15-month period and are subject to lock-up restrictions. The stock was awarded pursuant to a Restricted Stock Award Agreement, the form of which is attached hereto as Exhibit 10.12, under our Amended and Restated 2008 Incentive Compensation Plan. The restricted stock was not registered under the Securities Act, or the securities laws of any state, and was issued in reliance on the exemption from registration afforded by Section 4(a)(2) under the Securities Act and corresponding provisions of state securities laws. Such securities may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements and certificates evidencing such shares contain a legend stating the same.
Effective February 5, 2014, we issued 600,000 restricted shares of common stock to PVPower, Inc. in connection with the Company’s purchase of substantially all of the assets of PVPower, Inc. pursuant to the terms of an Asset Purchase Agreement, the form of which is attached hereto as Exhibit 10.13. The restricted stock was not registered under the Securities Act, or the securities laws of any state, and was issued in reliance on the exemption from registration afforded by Section 4(a)(2) under the Securities Act and corresponding provisions of state securities laws. Such securities may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements and the certificate evidencing such shares contain a legend stating the same. Of the 600,000 shares issued in the asset acquisition, 168,461 shares were attributed to the Company as a result of a previous minority investment made in 2011, and those shares were retired immediately following issuance.
Effective February 18, 2014, we issued warrants to purchase an aggregate of 3,500,000 shares of common stock to executive officers at an exercise price of $0.21 per share (the closing price of the stock as of the date of issuance). The warrants were issued pursuant to Warrant Agreements, the form of which is attached hereto as Exhibit 10.14. The warrants and the underlying common stock was not registered under the Securities Act, or the securities laws of any state, and were issued in reliance on the exemption from registration afforded by Section 4(a)(2) under the Securities Act and corresponding provisions of state securities laws. Such securities may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements and certificates evidencing such shares contain a legend stating the same. In conjunction with these warrant issuances, previous grants of stock options to executive officers to purchase an aggregate of 760,000 shares of common stock were cancelled.
Effective March 19, 2014, we issued warrants to purchase an aggregate of 2,020,000 shares of common stock to our three outside directors and two service providers at an exercise price of $0.35 per share (the closing price of the stock as of the date of issuance). The warrants were issued pursuant to Warrant Agreements, the form of which is attached hereto as Exhibit 10.15. Further, the warrants issued to the service providers were for future services provided to the Company. The warrants and the underlying common stock was not registered under the Securities Act, or the securities laws of any state, and were issued in reliance on the exemption from registration afforded by Section 4(a)(2) under the Securities Act and corresponding provisions of state securities laws. Such securities may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements and certificates evidencing such shares contain a legend stating the same. In conjunction with these warrant issuances, previous grants of stock options to the three outside directors to purchase an aggregate of 560,000 shares of common stock were cancelled.
Effective April 9, 2014, we issued a stock warrant to purchase an aggregate of 200,000 shares of common stock to an outside director at an exercise price of $0.40 per share (the closing price of the stock as of the date of issuance). The warrants were issued pursuant to a Warrant Agreement, the form of which is incorporated by reference as Exhibit 10.16. The warrant was issued in conjunction with an appointment as an independent director. Neither the warrant nor the underlying common stock was registered under the Securities Act, or the securities laws of any state, but were issued in reliance on the exemption from registration afforded by Section 4(a)(2) under the Securities Act and corresponding provisions of state securities laws. Such securities may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements, and the Warrant Agreement and any stock certificates issued upon exercise thereof shall contain a legend stating the same.
Effective August 6, 2014, we issued a stock warrant to purchase an aggregate of 537,500 shares of common stock to an underwriter at an exercise price of $0.23 per share. The warrants were issued pursuant to a Warrant Agreement, the form of which is incorporated by reference as Exhibit 10.17. The warrant was issued in conjunction with the public offering of 10,750,000 shares of the common stock registered on the Company’s Registration Statement on Form S-1 filed with the U.S. Securities and Exchange Commission. Neither the warrant nor the underlying common stock was registered under the Securities Act, or the securities laws of any state, but were issued in reliance on the exemption from registration afforded by Section 4(a)(2) under the Securities Act and corresponding provisions of state securities laws. Such securities may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements, and the Warrant Agreement and any stock certificates issued upon exercise thereof shall contain a legend stating the same.
Effective December 11, 2014, we issued an aggregate of 500,000 restricted shares of common stock to three Sellers as a portion of the Contingent Purchase Price under the terms of the Unit Purchase Agreement dated April 30, 2012, the form of which is incorporated by reference as Exhibit 10.10, under which the Company acquired the membership interests of Power Engineers Collaborative. The restricted stock was not registered under the Securities Act, or the securities laws of any state, and was issued in reliance on the exemption from registration afforded by Section 4(a)(2) under the Securities Act and corresponding provisions of state securities laws. Such securities may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements and the certificates evidencing such shares contain legends stating the same
Transfer Agent
Our transfer agent is Empire Stock Transfer, 1859 Whitney Mesa Dr., Henderson, NV 89014.
ITEM 6
ITEM 6 SELECTED FINANCIAL DATA
Not applicable for smaller reporting companies.
ITEM 7
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto included in this Report beginning on page. The results shown herein are not necessarily indicative of the results to be expected in any future periods. This discussion contains forward-looking statements based on current expectations, which involve uncertainties. Actual results and the timing of events could differ materially from the forward-looking statements as a result of a number of factors.
Overview
Juhl Energy is an established leader in the clean and renewable-energy industry. Juhl Energy historically focused on community wind power development, management and ownership, throughout the United States. We are one of the few companies other than utility based conglomerates that handle all aspects of wind project development, through our operating subsidiaries, including full development and ownership of wind farms, general consultation on wind projects, construction management of wind farm projects and system operations and maintenance for completed wind farms, which results in multiple revenue streams. The primary focus of our wind power development business has been to build 5 MW to 80 MW wind farms jointly owned by local communities, farm owners, environmentally-concerned investors, and our Company. The wind farms are connected to the general utility electric grid to produce clean, environmentally-sound wind power. Our development of community wind power systems generally results in landowners owning a portion of the long-term equity in the wind farm that resides on their land. We pioneered community wind power systems in developing the currently accepted financial, operational and legal structure providing local ownership of medium to large scale wind farms. Since 1999, we have completed 24 wind farm projects, accounting for approximately 260 MW of wind power that currently operate in the Midwest region of the United States, and we provide operation management and oversight to wind generation facilities generating approximately 88 MW, through our subsidiary, Juhl Energy Services. Currently, we have 21 projects in various stages of development with an aggregate wind power generating capacity of approximately 445 MW (4 of which we are actively developing with an aggregate wind power generating capacity of approximately 176 MW and 17 of which are early stage wind development opportunities with an aggregate wind power generating capacity of approximately 269 MW). The 21 wind farm projects, all of which are on-shore type projects, are located in the United States and Canada and make up our development pipeline.
Juhl Energy’s diversification strategy focuses upon the delivery of sustainable revenue growth outside of wind farm development and construction fee revenue. As such, the acquisition of additional energy assets remains a meaningful part or our focus on the growth of our revenue and net income.
We are expanding the scope of our business to include other alternative energy sources in addition to wind. Two illustrations of the Company’s broadening base of our services include (1) our acquisition of PEC to provide engineering services in the renewable energy field and (2) the expansion of Juhl Renewable Energy Systems to encompass small scale renewables in solar and small wind turbines to provide offerings to additional end customers. While we continue to leverage our experience as leaders in the wind energy industry, we will look for opportunities for expansion in the broader arena of alternative energy.
Maintenance services offered through Juhl Tower Services on cellular towers in the telecommunications industry since its launch in 2013 are no longer being offered as a result of our decision to discontinue all operations of Juhl Tower Services and its cell tower services work in late 2014. We did not meet profitability and revenue growth expectations. We have dissolved the operations of Juhl Tower Services in first quarter of 2015 and are winding up the affairs of that subsidiary. We will now continue to focus our maintenance and operations services business growth on renewable power systems.
How We Operate
The Company's business segments are separate business units that offer different products. A review of our business segments provides a better understanding of the how the Company manages and evaluates its businesses. The Company groups its operations into three business segments:
Renewable Energy Development
Wind, solar and cogeneration energy development, construction and related products and services.
Renewable Power Plant Ownership
Ownership and operations of consolidated wind farms or other clean energy investments.
Energy and Field Services
Business-to-business engineering consulting services, asset management, and turbine maintenance services.
The accounting policies for each segment are the same as those described in the summary of significant accounting policies (as set forth in the notes to the consolidated financial statements). Segment income or loss does not include any allocation of shared-service costs. Segment assets are those that are directly used in or identified with segment operations, including cash, accounts receivable, prepaid expenses, inventory, work-in-progress, property and equipment and escrow deposits. Unallocated assets include corporate cash, short-term investments, deferred tax amounts and other corporate assets. Inter-segment balances and transactions have been eliminated.
Our wind farm development projects most commonly involve fee contracts with entities specially formed by local farmers or business owners upon whose land the wind turbines are installed. Revenue is also derived from our services we provide throughout the development process. Revenue is derived primarily from the following four major components: feasibility studies, development fees, operations and management oversight and construction contract revenue.
We hold contract rights, are involved with projects in development and under negotiation, and provide development activities in the wind power industry. After wind farms are operational, we seek administrative services agreements to provide for management and administrative services to operating wind farms, along with turbine and balance of plant maintenance services. Our current assets include four development services agreements, ownership of two project entities that carry power purchase contracts, twelve projects in early development stages, and three agreements to conduct wind power feasibility studies.
The renewable power plant ownership segment of our business primarily includes the sales of electricity generated from wind energy facilities with long-term, take-or-pay power purchase contracts with a utility purchaser. The electricity sales are typically billed on a monthly basis to the utility. The wind farms’ operational expenses generally include turbine and balance of plant maintenance fees, equipment repairs, land lease payments, administrative expenses, and debt service costs.
Due to the anticipated increased demand for electricity from alternative energy sources in 2015 and beyond, we believe the demand for wind energy developments and consumer-owned renewable energy products will be stable or will increase in the foreseeable future. Our revenues from wind farm development will continue to be subject to shifts in timing due to project development delays resulting from our ability to obtain financing and regulatory and permitting approvals among other reasons. Thus, our strategy is to remain well-positioned for predictable revenue growth with the addition of new products and service offerings such as engineering consulting services and solar-powered installations that are outside the scope of wind farm development projects.
Factors Affecting Our Operating Results
We expect that our results of operations will be affected by a number of factors and will primarily depend on the size of our portfolio of wind farms and renewable assets, demand for renewable energy, governmental policies, general market conditions (including financing of renewable energy projects), site selection for our development projects and our discontinued operations in the telecommunications industry as of the beginning of the 2015 fiscal year.
Our Portfolio of Renewable Energy Projects
Our portfolio of renewable energy generating assets, including the wind farms that we own in whole or part, provides a significant and stable revenue source. Through our acquisition subsidiary, Juhl Renewable Assets, we focus on acquisition and investment in existing renewable energy generating assets that fit our distributed generation model and are consistent with the size projects we typically develop, such as the acquisition of the Iowa Wind Farms in August 2014. We believe that ownership of such renewable energy generating assets (in part or in whole) provide us with the ability to expand services related to those assets and create recurring and predictable annual revenue streams for our business. Our portfolio of acquired ownership in wind farms and other renewable assets may grow at an uneven pace because acquisition opportunities are unpredictable. The level of new portfolio activity will fluctuate based on supply and demand for those assets, our ability to identity existing renewable energy generating assets that meet our criteria, the competitive nature of asset acquirers, and the volume of projects that are available for sale by equity owners. Our ability to acquire such existing renewable energy generating assets, in whole or in part, will directly impact future revenue.
Demand for Renewable Energy
Growth in wind power and other renewables is being driven by several environmental and socioeconomic factors including:
ongoing increases in demand for electricity as a result of population growth and growth in energy consuming devices such as computers, televisions and air conditioning systems;
the fluctuating costs of fuel required to operate existing conventional electric generation facilities such as coal, natural gas, nuclear and oil;
uncertainty surrounding the growth potential of nuclear power plants and decommissioning of coal-fired power plants;
the decrease in the costs associated with solar energy; and
the increase in governmental incentive programs to encourage use of renewable energy products.
In light of these factors, we will continue to develop our capabilities in the renewable energy space with the development of distributed generation projects, such as wind/solar hybrid projects, onsite wind turbines for manufacturing companies seeking to reduce their carbon footprint and meet some of their own electricity demand and the development and sale of small scale renewable systems including wind and solar projects. If we are not able to diversify our offerings or if demand for renewable energy becomes less robust, our operating results may be negatively impacted.
Government Policies
Historically, our wind projects have been subject in part to various federal, state or local governmental policies that support or incentivize projects from an economic standpoint. Such policies include legislation that aims to reduce energy usage and dependence and promote the use of renewable energy. Incentives provided by the federal government may include tax credits (such as PTCs), tax deductions, accelerated depreciation, and federal grants and loan guarantees. Incentives provided by state governments include renewable portfolio standards (RPS) which specify what portion of total energy utilized by local utilities that must be derived from sources of clean energy including wind and solar. A number of federal government incentives focused on reducing costs of wind energy production have expired. Specifically, the PTC was extended in January 2013 and applied to all wind projects that began construction in 2013, and then it was extended again in late December 2014 and applied to all wind projects that began construction in 2014, even if estimated completion was one to two years out. The PTCs have now expired for wind projects commencing construction in 2015.
Overall, governmental failure to renew these or similar incentives in the future and the absence of a long-term stable energy policy that focuses on the sustainability of the renewable energy industry could have a material adverse impact on our business, results of operation, financial performance and future development of our wind energy projects.
Telecommunications Industry
In 2013, we entered into the telecommunications industry through Juhl Tower Services. To date, we have incurred significant costs for start-up and organizational purposes, establishing our presence in the market, and managing productivity, and we made a significant investment and incurred operating losses in 2013 and 2014 together with negative cash flow. We have not met profitability and revenue growth expectations despite changing our business approaches including in the last half of 2014 focusing on daily rate and short cycle projects. Therefore, in late 2014 we decided to significantly wind down the operations of Juhl Tower Services, and in February 2015 we have dissolved the tower services entity, and Juhl Tower Services is treated as a discontinued operation. See Notes 2 and 24 to the consolidated financial statements.
Debt and Equity Financing Markets
Although demand for wind power and other renewables is likely to continue to trend upward for reasons described above, arranging project financing, particularly construction financing, has become increasingly difficult. The timing of our construction and turbine supply revenues associated with the development of wind farms is heavily impacted by our ability to complete debt and equity financing arrangements. Such financing may not be available in the future and would negatively affect our operations.
At the initial stage of a project's development, we use a combination of our own balance sheet capital in combination with other financing made possible by equipment vendors and services companies to cover development expenses and equipment costs. Once a project moves to the construction phase, we use a combination of equity capital and construction loans to finance the construction of the project and also use our balance sheet capital and the resources of subcontractors for funding balance of plant and start-up costs. Proceeds from construction loans are typically used to fund construction and installation costs as well as to pay equipment costs such as wind turbines. Finally, once a project is complete and commercial operations begin, we permanently finance the project through a combination of term loans, tax equity financing transactions or other fixed-rate mezzanine capital, the proceeds of which are used to retire the construction loans and pay other service providers.
Many of these development projects do not come to fruition due to lack of funding. Thus, we continue to seek capital to allow us to pre-fund development costs through our subsidiaries, such as Juhl Renewable Assets. We believe that the use of Juhl Renewable Assets will provide us the ability in the future to provide supplemental funding to our wind farm development projects (through a renewable asset preferred equity vehicle). This will allow us to bring projects through the early development and construction stages more quickly by pre-funding development costs to secure the successful completion of projects and alleviate the uncertainty related to securing lender and third party financing commitments. We believe this will lead to sustainable revenue growth from development fees.
Results of Operations - Year ended December 31, 2014 Compared to Year ended December 31, 2013
Our general activity during the year ended 2014 was primarily focused on the following activities (as broken down by our segments):
Renewable Energy Development
Renewable Energy Development consists of wind farm development services efforts provided by Juhl Energy Development, together with construction revenue on certain projects that Juhl Energy Development may act as general contractor. In addition, Juhl Renewable Energy Systems has become more active in the installation of small scale solar systems together with the sale of related solar products sold through its PVPower website.
In 2014, Juhl Energy Development completed the Honda development and related construction which carried over from 2013. In addition, Juhl Energy Development provided development services and assistance to a wind farm developer on a 20 MW wind farm in South Dakota for a fee of $1.5 million in the fourth quarter 2014.
As a result of investments made in the acquisition of PVPower in February 2014 along with establishing sales capabilities in the area of small commercial and residential solar installations, we are generating revenue streams from online solar product sales and have been building a pipeline of projects for residential and small commercial installations. During 2014, the solar-related revenues exceeded $800,000. Juhl Renewable Energy Systems has approximately 285 KW of projects of accepted sales proposals with a completed project value of approximately $1.1 million, including the Solar Chicago program and other projects in Minnesota.
Renewable Power Plant Ownership
We continued our focus on identifying existing renewable energy generating assets for purposes of acquiring ownership by our subsidiary, Juhl Renewable Assets. In August 2014, the Company completed the purchase of 100% of the membership interests of limited liabilities companies comprising 3.2 MW of wind energy facilities in Iowa. The purchase price was paid using approximately $1.9 million of proceeds raised by Juhl Renewable Assets along with a new $2.5 million bank note that is recourse only to the underlying wind farm assets.
With the acquisition of the Iowa Wind Farms in August 2014, we now have ownership in approximately 25 MW of wind energy projects.
Energy & Field Services
During the year ended 2014, we continued efforts in growing revenues in our engineering consulting area where we focus our engineering services to the power industry and commercial central plant facilities. In particular, we entered into a services contract in June 2014 for a guaranteed maximum price of approximately $3.4 million with a customer to provide engineering services associated with the construction of a 350 MW natural gas combustion facility in Texas. The engineering consulting services are largely focused on projects involving the utility industry and central plants.
Tower maintenance services related to our subsidiary, Juhl Tower Services, is no longer included in continuing operations for the Energy and Field Services segment and has been separately reported as a discontinued operation for both 2014 and 2013 comparisons.
Revenue
Total revenue increased by approximately $745,000, or 5.6%, from approximately $13,399,000 for the year ended December 31, 2013, to approximately $14,144,000, for the year ended December 31, 2014.
A comparison of our revenue for the years ended December 31, 2014 and 2013 is as follows:
Renewable Energy Development:
Revenue in the Renewable Energy Development segment decreased by approximately $879,000 for the year ended December 31, 2014 compared to the year ended December 31, 2013, primarily a result of approximately $3,283,000 in higher construction and development fee revenue recognized in 2013 related to the completion of the wind facility for Honda in Russells Point, OH, offset by approximately $887,000 of additional revenue from online solar product sales and small renewable energy projects and approximately $1,500,000 development fee earned in 2014 from services related to the completion of a 20 MW wind farm project in South Dakota.
Our revenues from development and construction are normally dependent upon a number of factors including project financing arrangements, our ability to reach contractual agreements for turbine supply and construction services, permitting and variable interest entity rules.
We expect to enter into additional development services agreements as a result of finding early to mid-stage projects that need our development services expertise. For solar installation services, we have a contract backlog of approximately $1.1 million and revenue growth is expected in this area as customer demand has increased due to federal and state government subsidies combined with lower product costs related to solar modules and related equipment.
Renewable Power Plant Ownership:
Revenue for electricity sales for the year ended December 31, 2014 increased by approximately $483,000 over 2013. The increases was primarily related to the acquisition of the Iowa wind farms in August 2014 combined with higher wind speeds in 2014 as compared to a year ago. Revenues will fluctuate as a result of wind speeds in the geographical areas of these wind farms and therefore revenues will vary accordingly. In addition, electricity sales revenue is adjusted based on the use of an accounting revenue recognition policy that reduces the current billing amounts to the average rate over the term of the power purchase contract. Electricity revenue relates to the five wind farms in which the Company maintains controlling ownership or is considered the primary beneficiary under variable interest entity accounting rules, including our newly acquired Iowa Wind Farms. We are currently considering acquisition of additional wind farm facilities for 2015.
Energy and Field Services:
Revenue in the Energy & Field Services segment increased by approximately $1,184,000, or 16.7%, from approximately $7,070,000 for the year ended December 31, 2013, to approximately $8,254,000 for the year ended December 31, 2014. The increase was almost entirely related to revenue growth in our engineering consulting services division and its success in contracting revenue from new customers in the utility industry.
We expect that our revenues for 2015 will increase as a result of the acquisition from the Iowa Wind Farms acquired in August along with solar project installations. Our completed wind farm developments typically result in new revenue streams for management services. In addition, we expect to make bid proposals on existing wind farms for maintenance services and to the extent we are successful in our bids, our revenues will grow accordingly. We have opportunities for additional revenue increases in the renewable energy development segment with regard to wind farm development for 2015, but at this time it is not possible to be assured of the timing of such revenue, if any.
Cost of Revenues
Cost of revenues increased by approximately $839,000, or 8.5% from approximately $9,879,000 for the year ended December 31, 2013 to approximately $10,719,000 for the year ended December 31, 2014. The 2013 amounts have been adjusted to exclude the portion of cost of revenues related to our discontinued tower services division.
The comparison of December 31, 2014 to December 31, 2013 is affected by the following primary factors:
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cost of revenues in 2014 includes an increase of approximately $812,000 as we invested in additional engineering personnel and subcontracted capabilities as compared to 2013 to support our higher revenue stream;
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cost of revenues in 2014 includes an impairment charge of $1,830,000 related to the Winona Wind turbine assets as a result of a discounted cash flow analysis;
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cost of revenues in 2014 include approximately $526,000 for costs related to solar products sold primarily through online sales; and
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cost of revenues in 2013 included approximately $2,008,000 more construction costs than 2014 relating to the wind farm project at Honda in Ohio.
Gross margins for the year ended December 31, 2014 were approximately $94,000 lower than a year ago. The decreased margins were primarily attributable to a number of factors: approximately $712,000 lower gross margins recognized from construction of the Honda wind farm project; the $1,830,000 impairment charge noted above, with offsets by approximately $1,425,000 in additional development fee revenue in 2014, approximately $360,000 in increased solar installation and product margins, approximately $278,000 in increased from engineering services and approximately $300,000 from increased electricity sales from the higher wind speeds and Iowa wind farm acquisition.
Operating Expenses
General and Administrative Expenses. General and administrative expenses increased by approximately $247,000, or 10.0%, from approximately $2,463,000 for the year ended December 31, 2013 to approximately $2,710,000 for the year ended December 31, 2014.
The increase in general and administrative expenses includes increased professional fees of approximately $301,000 primarily related to legal defense costs not covered by insurance. Other increases include approximately $115,000 in consulting fees, increases in computer software costs of approximately $101,000 for the engineering consulting services, and advertising costs of approximately $116,000, offset by a reduction of approximately $227,000 in amortization charges stemming from intangible assets associated with previous acquisitions, and writeoff of abandoned stock issuance costs of approximately $244,000 recorded in 2013 whereas no such costs are included in 2014.
Payroll and Employee Benefits. Payroll and employee benefits expenses increased by approximately $742,000, or 33.9%, from approximately $2,189,000 for the year ended December 31, 2013 to approximately $2,931,000 for the year ended December 31, 2014.
The increase in payroll and employee benefits is primarily related to:
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increase of approximately $83,000 of office and sales salaries and expenses related to the the JRES solar business ramp up; and
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increase in stock-based compensation expense of approximately $571,000.
The payroll expenses related to engineering consulting employees who are directly performing engineering activities are recorded in cost of revenues. Payroll related to maintenance services employees are also considered as a part of cost of revenues.
Wind Farm Administration Expenses. Wind farm administration expenses represent costs that we incur to perform administrative services with respect to our management services contracts, as well as the general and administrative expenses incurred directly within the wind farm entities, Valley View, Winona Wind, Woodstock Hills and the Iowa Wind Farms that we are consolidating. Wind farm administration expenses increased by approximately $243,000, or 68.0%, from approximately $358,000 for the year ended December 31, 2013 to approximately $601,000 for the year ended December 31, 2014.
The increase in expenses was primarily attributable to approximately $48,000 in subcontract project management expenses that are variable based on the revenue performance from the wind farms, together with approximately $185,000 in legal expenses with respect to legal actions taken against a turbine supplier for turbine performance issues.
Operating Income (Loss)
Our operating loss increased approximately $1,328,000, from an operating loss of approximately $1,489,000 for the year ended December 31, 2013 compared to an operating loss of approximately $2,817,000 for the year ended December 31, 2014.
With regard to the increase of approximately $1,328,000 in our operating loss for the year ended December 31, 2014, approximately $1,830,000 is related to the impairment of the Winona Wind turbine assets, together with approximately $571,000 increase in stock compensation expense, and increased professional fees of approximately $485,000 primarily associated with legal defense costs, offset by the $1,500,000 wind farm development fee.
Other Income (Expense)
Other expense increased approximately $800,000 for the year ended December 31, 2014 compared to December 31, 2013 and the increase is primarily the year-over-year change in fair value of the interest rate swap liability on the Valley View wind farm project, which changed from a gain of approximately $664,000 for the year ended December 31, 2013 to a loss of approximately $75,000 for the year ended December 31, 2014, a change of approximately $739,000. The fair value of the interest rate swap arrangement was subject to fluctuation due to changes in the LIBO rate market and no further adjustments in 2015 will be required because the swap arrangement was terminated in March 2014. Interest expense increased approximately $61,000 for the year ended December 31, 2014 compared with December 31, 2013 primarily relating to the recently acquired Iowa Wind Farms and the Vision note obligation, offset by lower interest payments on amortizing loans.
Discontinued Operations
Discontinued operations losses of approximately $1,812,000 and $1,403,000 for the years ended December 31, 2014 and 2013, respectively, includes the net operating results of the tower maintenance services subsidiary, Juhl Tower Services. A summary of these operating results is provided in the financial statement footnote 24 included in the report. There may be some ongoing impact of discontinued operations in 2015 as a result of the dissolution and winding up the affairs of Juhl Tower Services. However, we do not expect such results to be material.
Net Income (Loss)
Net loss increased by approximately $2,537,000, or 83.3%, from approximately $3,046,000 for the year ended December 31, 2013 to approximately $5,583,000 for the year ended December 31, 2014.
The increase in the yearly net loss between December 31, 2014 and 2013 is primarily attributable to the reasons noted in the Operating Income (Loss) above for the turbine asset impairment and increases in stock compensation expense and professional fees, together with the variation in the fair valuation adjustments to the interest rate swap of $738,000.
The net loss for the year ended December 31, 2014 is indicative of the inconsistent revenue patterns of our wind farm development services business as revenue recognition is significantly impacted by the timing of the development fee revenue and our focus on establishing recurring profitable revenue streams through either acquisition or start-ups (such as the Iowa Wind Farms and PEC).
Changes in the Financial Condition for the Period ended December 31, 2014
Accounts Receivable
Traditional credit terms are extended to customers in the normal course of business. We perform ongoing credit evaluations of our customers’ financial condition and generally require no collateral. Accounts receivable of approximately $1,252,000 at December 31, 2014 included approximately $701,000 for engineering consulting, and approximately $383,000 related to receivables from selling electrical power to a credit-rated utility company. The receivables include an allowance for doubtful accounts of approximately $41,000 which we believe are sufficient to cover any potential uncollectible amounts. Accounts receivable of approximately $2,427,000 at December 31, 2013 included approximately $1,373,000 for construction receivables, approximately $804,000 for engineering consulting and field services, and approximately $247,000 related to receivables from selling electrical power to a credit-rated utility company.
Property and Equipment
As of December 31, 2014 and December 31, 2013, we held approximately $24,448,000 and $23,748,000 in net book value of property and equipment, respectively. The assets include approximately $27,986,000 (at recorded cost) in wind turbine assets of Woodstock Hills, Valley View, Winona County and Iowa Wind Farms. The wind farm assets were booked at fair value at the time of the acquisition for the Woodstock Hills, Valley View and Iowa Wind Farm entities, and at book value for Winona County due to common control. Other assets included in property and equipment includes land, buildings, office equipment, shop equipment and service vehicles. The Winona Wind assets have been impaired by $1,830,000 through an adjustment made in 2014. See Note 2 to the accompanying consolidated financial statements.
Liquidity and Capital Resources
Juhl Energy, as a holding company, does not directly operate or have any ownership in any revenue-producing generation facilities. Thus, it has no material assets other than the stock of its subsidiaries and depends upon transfers of funds from its subsidiaries to meet its obligations.
Liquidity is a measure of our ability to meet potential short-term (within one year) and long-term cash requirements, which includes our ability to repay debt, fund and maintain our services offerings and projects, and other general business needs.
At December 31, 2014, we carried approximately $3,144,000 in cash on the balance sheet (excluding restricted cash). Our unrestricted cash balances increased by approximately $1,905,000 during 2014. The increase in cash resources since the beginning of the year is primarily related to a common stock sale netting approximately $1.6 million, net of issuance costs in August 2014, proceeds from the sale of preferred stock of our Juhl Renewable Assets subsidiary, collection of a $1.5 million development fee in late 2014, and a reduction in restricted cash as a result of the release of an escrow reserve account from a previous lender in conjunction with the refinancing of the Valley View loan. In addition, we have managed accounts payable balances commensurate with collection of our receivables, offset by the cash needed to absorb working capital needs for the Juhl Tower Services business and increases in operating expenses such as professional fees, consulting and software expenses. Further explanation of the changes within our cash balances is included in the commentary below regarding operating, investing and financing activities.
The Company currently has negative working capital, a history of recurring losses, a stockholders’ equity deficit, and has not yet established a source of cash funding to retire debt obligations coming due within the next twelve months, particularly the July 2015 balloon payment obligation of approximately $1.6 million with respect to the Amended Note (defined below), originally in favor of Vision Opportunity Master Fund, which has now been assigned and is payable to Airdrie Partners (as described below under Note Obligation). As a result, our auditors have issued a going concern opinion in its audit report included in the consolidated financial statements that are a part of this annual report. The Company is currently working to sustain a stabilized source of revenues and operating income sufficient to cover operating costs over an extended period of time. Critical elements of these steps include continued acquisition of operating wind farms, winding down the tower services division and balancing its development division activities between acquisition of existing assets and new developments such that the Company’s Renewable Energy Development segment generates a more consistent stream of fee revenue and profitability in each calendar year as opposed to the large swings we have experienced historically. Management has taken measures and believes it has established annual profitability in the Energy and Field Services and Power Plant Ownership segments (and believes that no further asset impairment issues will arise).
During years ended 2013 and 2014, the Company incurred losses from operations and experienced negative cash flows from operating activities. This is primarily attributable to the highly cyclical nature of the wind farm development and construction aspects of our business model, which is subject to risks and uncertainties surrounding project timing, financing and legislated energy policy, and the launch of maintenance services to the telecommunications industry in March 2013. These factors, together with the balloon payment requirement with respect to the obligation due under the Amended Note, raise substantial doubt about the Company's ability to continue as a going concern (see Note 5 to the consolidated financial statements). The Company has worked to stabilize its operations by diversifying its business model with recurring revenue and profit streams in order to offset or minimize the fluctuations in our wind farm development and construction operating activities, together with winding down the unprofitable tower services activities.
Public Offering Completed August 2014
In August 2014, the Company received net proceeds of approximately $1.6 million, net of issuance costs in accounts payable through an underwritten registered public offering of 10,750,000 shares of its common stock in order to provide working capital and potential funding with respect to the obligations due under the Note (as defined and described below under Note Obligation). The offering did not achieve a level of cash proceeds that allowed any significant payment on the Note; however, the offering proceeds did provide working capital sufficient for the Company to continue operations over the next six months until such time that we recognized development services fees on the South Dakota wind farm project.
Juhl Renewable Assets preferred stock and other redeemable preferred membership interests
During 2014, our subsidiary, Juhl Renewable Assets, sold approximately $3,152,000 of its Series A Preferred Stock, net of costs of raising the capital, in private sales for the acquisition of specific assets of comparable value, and for other purposes. The preferred stock provides for a 9% annual dividend to its holders, payable quarterly. The Company has utilized the proceeds raised primarily to provide funding assistance for the acquisition of wind farm assets located in Iowa (see Note 22 to the consolidated financial statements) and to replenish previous advances made by the Company back in 2011 in acquiring its existing ownership interests in wind farms.
In addition, one holder of redeemable preferred membership interests in the Valley View wind farm has exercised its put option (for approximately $518,000) in October 2013 and the Company was obligated to repurchase such interests by June 1, 2014. The Company anticipates the share repurchase obligation of approximately $518,000 will be made by Juhl Renewable Assets during 2015. Since the Company is currently in default in this repurchase of the redeemable membership interests in Valley View, the holder of the preferred membership interests has rights and remedies available to it at law or in equity including, but not limited to, the right to provide written demand to the Manager to sell assets of the limited liability company to which the preferred stock in Valley View was issued. The 12% dividend payments on the redeemable preferred stock of Valley View have been kept current.
Note Obligation
In February 2014, the Company entered into a Securities Purchase Agreement with the primary Series A Preferred stockholder whereby the Company agreed to purchase 10,398,750 shares of Preferred Stock of the Company held by Vision Opportunity Master Fund, Ltd. (“Vision”) (consisting of 4,560,000 shares of Series A Preferred Stock and 5,838,750 shares of Series B Preferred Stock) for a total purchase price of approximately $2,184,000 (the “Purchase Price”). The Company agreed to pay the purchase price in the following manner: (i) pay a non-refundable $40,000 deposit on date of execution of the Purchase Agreement; (ii) pay a non-refundable payment of $40,000 on or before March 15, 2014; and (iii) issue Seller an amortizing promissory note on April 1, 2014, with a principal sum of approximately $2,104,000 for the remaining balance of the Purchase Price, with an interest rate of 8% and a maturity date of May 1, 2015 (the “Note”). The Purchase Price was satisfied and the conditions were met, and the transaction closed on April 1, 2014. The outstanding balance on the Note, as amended, at December 31, 2014 is approximately $1,800,000, including accrued interest, and requires monthly payments of $40,000 until the maturity date. The Company has been making each of the $40,000 monthly payments. The Company intended to use 50% of the proceeds from its underwritten public offering of its common stock to accelerate principal payments on the Note. The Company paid Vision a one-time payment of $100,000 in August 2014 instead of the 50% of the offering proceeds from the common stock underwritten public offering.
On August 18, 2014, The Company and Vision entered into an amendment agreement with respect to the Note (the “Amendment No. 1”), whereby Vision agreed that the Company is not in default under the Note. Further, Vision agreed to extend the maturity date of the Note to July 31, 2015 for a one-time principal payment of $100,000. The Amendment No. 1 to the Note does not change the requirement for the Company to make minimum cash payments of $40,000 per month through the new maturity date. The Company modified the use of proceeds from the offering so that only $100,000 of the proceeds are used for a one-time payment of the principal due under the Note and the remaining proceeds have been allocated among the other uses of proceeds described in the prospectus for the offering, including new project development and acquisition of assets, as well as to provide liquidity for working capital and for general corporate purposes.
On October 31, 2014, Vision sold all of its outstanding Juhl Energy securities to Airdrie Partners, LP (“ Partners”) including assigning the Note, as amended by Amendment No. 1, to Airdrie Partners. On that date, we entered into a second amendment agreement to the Note with Airdrie Partners I, LP (“Airdrie Partners”) changing the name of the holder from Vision to Airdrie Partners and addressing other administrative matters (the “Amendment No. 2”). All other terms of the Note and Amendment No. 1 to the Note remain the same. For purposes hereof, the Note, Amendment No. 1 to the Note and Amendment No. 2 to the Note are referred to as the “Amended Note”.
In the event that the Company cannot repay the Amended Note or negotiate a change in the current terms of the Amended Note, we will need to find additional sources of capital to fund the balloon payment of the Amended Note which is expected to be approximately $1.6 million including interest and assuming that the Company makes all monthly $40,000 payments until the due date (July 31, 2015) of the balloon payment. There are no assurances that additional sources of capital will be available to refinance the Amended Note when due.
Turbine Supply Note and Legal Proceedings
Our balance sheet at December 31, 2014 includes a promissory note payable of approximately $3,223,000 to a turbine supplier for amounts due for turbines on the Winona County wind project. The note was initially payable in April 2012 assuming that the project was able to raise permanent project debt financing. It has proven difficult for the underlying project to obtain outside debt or equity financing as a result of the nature of turbines being a new introduction to the U.S. market together with turbine performance issues. Until such time that debt or other sources of outside financing is achieved, the note is payable through free cash flows available from the Winona County wind project, and as such, approximately $3,061,000 has been classified as long-term based on our assessment of future cash flows that are expected beyond one year. The Company has a secured interest in the Winona County wind project.
The turbine supplier has filed a suit against the Winona County wind project and the Company (and other defendants) for non-payment of the note, among other claims, which the defendants, including the Company, dispute such allegations (as described more fully under “Legal Proceedings”). We do not expect that our liquidity will be affected other than the ongoing defense costs related to the suit and costs to arbitrate our counterclaims for breach of contract.
Working Capital Financing
We have established a $600,000 bank line of credit for the engineering services business to assist in the funding of business activities using accounts receivable as a borrowing base; however, the bank lines are subject to the amount of open receivables and eligibility requirements, and must be renewed annually. In addition, we have a $500,000 bank line of credit for the tower services business that matures in April 2015 that will require us to either pay off with assets of the discontinued tower services division, or funds made available from the parent company, acting as guarantor of the loan balance of approximately $96,000 at March 27, 2015. We have not yet determined if we will be able to seek any further extension from the lender pending future decisions about timing and extent of our ability to settle outstanding receivables, possible asset sales and continuance of the parent guarantee. We have been in noncompliance with certain covenants with respect to the tower services loan.
Our ability to continue our operations is dependent on management’s plans, which include new development revenue, the raising of capital through debt and/or equity markets with some additional funding from other traditional financing sources, until such time that funds provided by operations are sufficient to fund working capital requirements. We may need to incur additional liabilities with certain related parties to sustain our existence. If we were not to continue as a going concern, we would likely not be able to realize our assets at values comparable to the carrying value or the fair value estimates reflected in the balances set out in the preparation of our financial statements.
There can be no assurances that the Company will be successful in generating additional cash from equity or debt financings or other sources to be used for operations. Should the Company not be successful in generating cash resources from new development revenue, current contractual agreements, cost controls, and strategic funding, the Company would need to curtail certain or all operational activities and/or contemplate the sale of its assets, if necessary.
Future Growth and Financing
We are currently analyzing existing wind farm or solar portfolios of owners who may be interested in selling their ownership interests in such portfolios. We would expect to primarily utilize sales of Juhl Renewable Assets Series A Preferred Stock in combination with resources that we believe will be available to us from outside debt or tax equity resources. We have identified various projects for further analysis, but it is not yet possible to predict whether we will be successful in any negotiations for the acquisition of any such projects. An example of an acquisition occurred on August 11, 2014, whereby the Company closed on the purchase of 100% of the membership interests of limited liability companies comprising 3.2 MW of wind energy facilities in Iowa. The purchase price was paid using approximately $1.9 million of proceeds raised by Juhl Renewable Assets along with a new $2.5 million bank note that is recourse only to the underlying wind farm assets.
We will continue our internal efforts to assist project owners in arranging financing terms for each wind farm and solar project under development, and also to acquire energy assets. The ability to assist project owners with obtaining debt and equity financing, or obtaining financing for asset purchases, is a material factor in producing our future development fee and electricity sales revenue streams and cash flow. Further, as discussed throughout this report, our goal is to be able to use our capitalization resulting from our subsidiaries such as Juhl Renewable Assets, a preferred renewable asset equity vehicle, to pre-fund development costs to help alleviate the dependence on third parties to loan money to project owners and to help secure development fees from such projects to stabilize revenue streams and cash flow.
Despite the political climate which has resulted in uncertainty around federal energy policy, we have been able to secure development rights for late stage wind farm development opportunities that could enable us to complete wind farm projects for large corporations or small utilities who desire to purchase electricity from these projects. We will seek to obtain additional sources of recurring revenue from maintenance, administrative and services businesses through securing new business or undertaking additional mergers or acquisitions, and offset the inconsistent revenue patterns that we see in our wind farm development business.
Subject to our ability to address our current liquidity issues as referenced above, our future growth strategy is dependent upon diversifying our service offerings in the renewable energy space through the integration of our operating subsidiaries to generate a predictable revenue stream. Specific to wind, we will continue to pursue new community wind farm developments in order to maintain an active backlog of projects, including distributed generation projects that involve corporate businesses that, like utilities, express a desire to purchase electricity produced by wind farms on long-term contracts. However, we cannot assure that actions will be successful. Should revenue decline to a level significantly below our current expectations, we would reduce capital expenditures and implement cost-reduction initiatives which we believe will be sufficient to ensure that funds generated from operations, together with existing cash and funds available from borrowing under any open credit agreement.
In conjunction with our financing activities as described above, we believe that we would be able to more quickly bring wind farm or solar projects through the early development and construction stages if we were able to access a funding mechanism that we could utilize in sponsoring wind farm developments. Like much of the U.S. economy that relies on extension of credit, the community wind industry in general has experienced difficulties in obtaining sources of funding from the current equity and debt financing marketplace, as cited above under “Factors Affecting Our Operating Results”.
The formation of Juhl Renewable Assets provides us with the ability to acquire ownership of existing wind farms that fit our distributed generation model and the size range of products that we typically develop. We intend to raise funds to purchase such wind and related assets through the selling of preferred stock in Juhl Renewable Assets in order to fund our strategic acquisition operations. This may avoid delays and difficulties of obtaining financing from traditional lending sources and continue to provide access to financing.
Upon completion of the Vision Purchase Agreement on April 1, 2014 and the completion of the conversion of shares of Series A Preferred Stock with the remaining holder of Series A Preferred Stock, Juhl Energy’s capital structure has now been simplified by eliminating all of the Series A Preferred Stock and removing the current quarterly dividend payment that has accompanied the preferred equity held by Vision and Daybreak.
Net Cash - Operating Activities
Net cash provided by operating activities increased by approximately $1,194,000, from the net cash used in operating activities of approximately $869,000 for the year ended December 31, 2013 to net cash provided by operating activities of approximately $325,000 for the year ended December 31, 2014.
The increase in net cash provided by operating activities of approximately $1,194,000 is primarily due to: 1) a development fee of approximately $1,500,000 from a wind farm project that has provided a significant improvement to our balance sheet; 2) a reduction in the net cash used in operating the Juhl Tower Services subsidiary of approximately $688,000, which is reflected as a discontinued operation in the cash flow statement. We will continue to manage operating expenses for cash flow control as we seek to diversify our revenue base.
Net Cash - Investing Activities
Net cash used in investing activities increased by approximately $1,465,000, from the net cash used in investing activities of approximately $554,000 for the year ended December 31, 2013 to net cash used in investing activities of approximately $2,019,000 for the year ended December 31, 2014. The change is primarily attributable to approximately $1,855,000 paid for the acquisition of the Iowa Wind Farms in 2014, offset by approximately $736,000 of cash payments made in the prior year for the PEC acquisition. In addition, the prior year included approximately $548,000 of cash proceeds from the maturity of a certificate of deposit. Property and equipment additions were approximately $89,000 and $203,000 during the years ended December 31, 2014 and 2013, respectively, excluding any acquisitions related to discontinued tower operations.
Net Cash - Financing Activities
Net cash flow provided by financing activities increased by approximately $2,902,000, from the net cash flow provided by financing activities of approximately $673,000 for the year ended December 31, 2013 to net cash provided by financing activities of approximately $3,575,000 for the year ended December 31, 2014.
The increase in cash provided by financing activities is primarily attributable to approximately $1,800,000 in net proceeds from the August 2014 common stock offering, before payment of approximately $165,000 of offering costs included in accounts payable, an increase of approximately $1,752,000 in net proceeds from the sale of preferred stock of our subsidiary Juhl Renewable Assets, a reduction in restricted cash of approximately $483,000 and release of approximately $268,000 from lender escrow reserves in excess of current year escrow contributions, offset by approximately $196,000 in loan financing costs, approximately $80,000 in payments to repurchase preferred stock of Vision, and increased dividend payments of approximately $210,000 as a result in the growth of Juhl Renewable Assets preferred stock.
Reconciliation of Non-GAAP Financial Measure
Adjusted EBITDA is a non-GAAP financial measure and as used herein represents net income before interest expense, depreciation and amortization, and other charges including unrealized gain/loss on an interest rate swap arrangement, revenue levelization accounting on power purchase contracts, stock compensation expense, stock issuance cost writedown, asset impairment charges, and discontinued operations. We present Adjusted EBITDA because we believe it is an important supplemental measure of our performance that is frequently used by others in evaluating companies in our industry. Adjusted EBITDA is not a measurement of our financial performance under GAAP and should not be considered as an alternative to net income, operating income or any other performance measure derived in accordance with GAAP or as an alternative to net cash provided by operating activities as a measure of our profitability or liquidity. Adjusted EBITDA has significant limitations, including that it does not reflect our cash requirements for capital expenditures, contractual commitments, working capital or debt service. In addition, other companies may calculate Adjusted EBITDA differently than we do, limiting their usefulness as comparative measures.
The following table sets forth a reconciliation of net income (loss) as determined in accordance with GAAP to Adjusted EBITDA for the periods indicated:
Impact of Inflation
We expect to be able to pass inflationary increases on to our customers through price increases, as required, and do not expect inflation to be a significant factor in our business.
Seasonality
Although our operating history is limited, we do not believe our services are seasonal except for future wind farm construction and operating revenue which may be impacted by climate in the Upper Midwest.
Off-Balance Sheet Arrangements
We have made certain guarantees of indebtedness or offered indemnifications of warranties and representations in conjunction with the funding activities of the Valley View and Grant County wind farms.
In conjunction the closing of an equity commitment on the Honda project in November 2013, the Company has made certain parent company guarantees to the equity investor involving the satisfactory performance of its subsidiaries for the completion of the project construction and the warranty obligations under the construction agreement. If such guarantees would result in amounts due under the guarantees to be more than 50% of the approximate $10 million project cost, the Company would have the option to repurchase the project from the equity investor for the project cost.
The Company agreed to guarantee certain payments to investors in the Valley View wind farm project as set forth below:
●
The timely payment of any and all guaranteed payments required to be paid to preferred membership investors (who contributed approximately $2.5 million) as they may become due under the respective LLC operating agreements, and the timely payment of any and all amounts payable upon exercise of a put right by such preferred members. The put right is outside the control of the Company and may occur either in two years or in certain cases, ten years. The Company does have up to six months from the date that to make such put right payment, and should the Company fail to make the put right payment within such six month period, the principal amount owed by the Company is subject to a penalty of an additional 10%. In October 2013, one of the parties representing $518,000 of the preferred membership investors, exercised their put right and the Company expects that it will redeem such interests during 2015.
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The Company has agreed, with respect to a put right made available to one of the Common Members in the Valley View wind farm project (who contributed $500,000) to redeem any of its units then held by the respective individual investor for a price in cash equal to the present value of the (i) estimate future distributions to be made to Purchaser net of (ii) estimated future income allocations for which no distributions are projected to be made (“Put Right Purchase Amount”). If the Company fails to pay in full the Put Right Purchase Amount in cash on the due date, the Company shall issue a promissory note with a maturity date not exceeding 36 months and pay interest thereon.
●
The Company has made certain representations and warranties with regard to indemnifications in conjunction with the funding activities of the Grant County wind farm, including potential liabilities for Section 1603 Treasury Grant recapture or tax liabilities attributable to the period prior to the closing date.
Aside from these arrangements, we believe that there are no off-balance sheet arrangements between us and any other entity that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders.
Critical Accounting Policies
The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires our management to exercise its judgment. We exercise considerable judgment with respect to establishing sound accounting policies and in making estimates and assumptions that affect the reported amounts of our assets and liabilities, our recognition of revenues and expenses, and disclosures of commitments and contingencies at the date of the financial statements.
On an ongoing basis, we evaluate our estimates and judgments. We base our estimates and judgments on a variety factors including our historical experience, knowledge of our business and industry, current and expected economic conditions, the composition of our products/services and the regulatory environment. We periodically re-evaluate our estimates and assumptions with respect to these judgments and modify our approach when circumstances indicate that modifications are necessary.
While we believe that the factors we evaluate provide us with a meaningful basis for establishing and applying sound accounting policies, we cannot guarantee that the results will always be accurate. Since the determination of these estimates requires the exercise of judgment, actual results could differ from such estimates. A description of significant accounting policies that require us to make estimates and assumptions in the preparation of our consolidated financial statements is as follows:
Wind Farm Development Services
The Company normally earns a development service fee from each of the wind farm projects that it develops in cooperation with wind farm investors. These development services arrangements are evaluated under authoritative guidance relating to “Revenue Arrangements with Multiple Deliverables,” which addresses certain aspects of accounting by a vendor for arrangements under which the vendor will perform multiple revenue generating activities.
The development services fee revenue is recognized as follows:
• Proceeds received upon the signing of a Development Services Agreement are amortized over the expected period of the development process, which is generally three years. The amortization period is re-assessed by management as new timelines are established for the project in-service date, and the amortization period is adjusted.
• The remaining proceeds are allocated to the following deliverables based on vendor specific objective evidence (“VSOE”) (the actual selling prices of similar deliverables sold on a standalone basis) or, in the absence of VSOE, the Company best estimate of the selling price, of each item: 1) achievement of a signed Power Purchase Agreement (“PPA”) with an electrical utility, and 2) final commissioning of the wind farm turbines. Management has determined that these deliverables have stand-alone value, and the Company has established fair value of the undelivered services that are considered probable and in the control of the Company. Factors considered by the Company in determining estimated selling prices for applicable elements generally include overall economic conditions, customer demand, costs incurred by the Company to provide the deliverable, as well as the Company’s historical pricing practices. Under these arrangements, revenue associated with each delivered element is recognized in an amount equal to the lesser of the consideration initially allocated to the delivered element or the amount for which payment is not deemed contingent upon future delivery of other elements in the arrangement.
Licensing Revenue
Revenues earned from licensing agreements are amortized using the straight-line method over the term of the agreement.
Engineering consulting services
Revenues are primarily generated from professional services provided to clients and are based on either hours of service performed or on a fixed-fee basis. Revenues are accrued through the reporting date for services performed. Services are billable to customers based on terms of the underlying contract and amounts that are not yet billable at the reporting date are included in work-in-progress in the accompanying consolidated financial statements.
Provisions for estimated losses on work-in-process are made in the period in which such losses are determined. Changes in project performance, project conditions, and estimated profitability may result in revisions to costs and revenues and are recognized in the period in which the revisions are determined.
Our contracts come up for renewal periodically and at the time of renewal may be subject to renegotiation, which could impact the profitability on that contract. In addition, during the term of a contract, public agencies may request additional or revised services which may impact the economics of the transaction. Most of our contracts permit our clients, with prior notice, to terminate the contracts at any time without cause.
Wind Farm Management and Maintenance Services
Revenues earned from administrative, management and maintenance services agreements are recognized as the services are provided. The administrative and management services agreements generally call for quarterly payments in advance or arrears of services rendered based on the terms of the agreement. The administrative and management services payments received in advance are carried as deferred revenue and recognized monthly as services are performed. Wind farm maintenance services are generally billed on a quarterly basis based on the terms of underlying agreement. Revenues from wind farm maintenance services work are recognized when services are performed.
Wind Farm Construction
The Company recognizes revenue on wind farm construction contracts on the percentage of completion method with costs and estimated profits included in contract revenue as work is performed. Contracts generally provide that customers accept completion of progress to date and compensate the Company for services rendered measured in terms of units installed, hours expended or some other measure of progress. Percentage of completion for construction contracts is measured principally by the percentage of costs incurred as part of the balance of plant contract (which excludes the wind turbines) and accrued to date for each contract to the estimated total cost for each contract at completion. The Company generally considers contracts to be substantially complete upon departure from the work site and acceptance by the customer. Contract costs include all direct material (excluding wind turbines) or solar installation services agreement, labor and insurance costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and depreciation costs. Changes in job performance, job conditions, estimated contract costs and profitability and final contract settlements may result in revisions to costs and income, with the effects of these revisions are recognized in the period in which the revisions are determined. Provisions for total estimated losses on uncompleted contracts are made in the period in which such losses are determined. The balances billed but not paid by customers pursuant to retainage provisions in construction contracts or solar installation services agreement will be due upon completion of the contracts and acceptance by the customer. Based on the Company’s experience with similar contracts in recent years, the retention balance at each balance sheet date will be collected within the subsequent fiscal year.
The asset “Costs and estimated profits in excess of billings on uncompleted contracts” represents revenues recognized in excess of amounts billed which management estimates will be billed and collected within the next twelve months. The liability “Billings in excess of costs and estimated earnings on uncompleted contracts” represents billings in excess of revenues recognized. Costs and estimated earnings in excess of billings on uncompleted contracts are amounts considered recoverable from customers based on different measures of performance, including achievement of specific milestones, or at the completion of the contract.
Solar System Installation Services
The Company installs solar photovoltaic energy systems for residential and commercial/industrial customers in the continental U.S. Services are generally performed under installation services agreements and generally are fixed price contracts. Revenue from these services are recorded using the completed contract method of accounting in accordance with Accounting Standards Codification, or ASC, 605, Revenue Recognition because the duration of the installation work is short in nature (typically four weeks or less). Under the completed contract method, revenues and costs related to the projects are recognized only upon completion of the services at a project site. Accordingly, during the period of performance, costs are accumulated on the balance sheet under work-in-progress, but no revenue or income is recorded before completion of the work. Direct costs typically include direct materials, labor and subcontractor costs, and other direct costs related to contract performance, such as permits, supplies, freight, and engineering assessments. Provisions for estimated losses on uncompleted contracts are recognized when it has been determined that a loss is probable.
Electricity Sales
Electricity sales by wind energy facilities to its utility purchaser are recognized as electrical energy is produced. In accordance with generally accepted accounting principles, revenue levelization is required whenever there is a variable pricing arrangement such as the power purchase agreement (PPA) with Woodstock Hills and Valley View. This requires that the revenue be levelized over the term of the agreement. The revenue recognized is determined by the megawatt hours made available during the period multiplied by the average revenue per megawatt hour over the life of the PPA.
The Woodstock Hills wind farm is credited with producing Renewable Energy Credits (REC’s). These have a market value, and are occasionally sold on the open market. The proceeds are recorded as revenue at the time of the sale.
Variable Interest Entities
The Company has determined that one of its wind farm projects is variable interest entity (“VIE”). The footnotes to our consolidated financial statements in this report provide our analysis and judgments with respect to whether or not the Company should consider consolidation of these VIE’s into our financial statements. We have consolidated one VIE because we believe that we had implicit power to significantly impact the economic performance of the limited liability company associated with that wind farm project.
ITEM 7A
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable for smaller reporting companies.
ITEM 8
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
of Juhl Energy, Inc. and Subsidiaries
Pipestone, Minnesota
We have audited the accompanying consolidated balance sheets of Juhl Energy, Inc. and Subsidiaries (the “Company”) as of December 31, 2014 and 2013, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2014. Juhl Energy, Inc. and Subsidiaries’ management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Juhl Energy, Inc. and Subsidiaries as of December 31, 2014 and 2013, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2014 in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 5 to the consolidated financial statements, the Company currently has negative working capital, negative stockholders’ equity, a history of recurring losses and recurring negative cash flow from operating activities, and has not yet established a source of cash funding to retire obligations coming due within the next twelve months. These conditions raise substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters also are described in Note 5. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Boulay PLLP
Certified Public Accountants
Minneapolis, Minnesota
April 2, 2015
JUHL ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2014 AND 2013
The following table presents information on assets and liabilities related to a VIE that is consolidated by the Company at December 31, 2014 and December 31, 2013. The difference between total VIE assets and liabilities represents the Company's interests in those entities, which were eliminated in consolidation.
The assets of the consolidated VIEs are used to settle the liabilities of those entities. Liabilities are nonrecourse to the general credit of the Company.
The accompanying notes are an integral part of these consolidated statements.
JUHL ENERGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
The accompanying notes are an integral part of these consolidated statements.
JUHL ENERGY, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2014 and 2013
The accompanying notes are an integral part of these consolidated statements.
JUHL ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
The accompanying notes are an integral part of these consolidated statements.
JUHL ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
1.
ORGANIZATION
Juhl Energy, Inc. (“Juhl Energy” or the “Company”) conducts business under the following subsidiaries, Juhl Energy Services, Inc. (“JES”), Juhl Energy Development, Inc. (“JEDI”), Juhl Renewable Assets, Inc. (“JRA”), Next Generation Power Systems, Inc. (“NextGen”), Juhl Renewable Energy Systems, Inc. (“JRES”), Power Engineers Collaborative, LLC (“PEC”), Juhl Tower Services, Inc. (“JTS”) (which was a wholly-owned subsidiary of JES through 2014 and since dissolved) and ownership and operational duties over the following operating wind farms: Woodstock Hills LLC (“Woodstock Hills”), Winona County Wind, LLC (“Winona”), Valley View Transmission, LLC (“Valley View”) and 5045 Wind Partners LLC (“Iowa wind farms”). The JTS entity has been dissolved in 2015 and is considered a discontinued operation for all years presented. See Note 24.
Juhl Energy is an established leader in the renewable energy industry with a focus on community-based wind power development and ownership of clean energy assets throughout the United States and Canada. In addition, the Company provides asset management and maintenance services to renewable energy entities and engineering and project management services to the utility industry.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. The Company uses estimates and assumptions in accounting for the following significant matters, among others: revenue recognition; realizability of accounts receivable; determination of the primary beneficiary of a variable interest entity; the assumptions used in the impairment analysis of long-lived assets and goodwill; the assumptions used in analysis of going concern, valuation of deferred tax assets, deferred power purchase contract revenue, stock-based compensation and warrants, asset retirement obligations, derivative instruments, assumptions used in the computation of contingent liabilities and estimating the fair value of acquired assets and liabilities, and other contingencies. It is at least reasonably possible that these estimates will change in the future. Actual amounts may differ from these estimates, and such differences may be material to the consolidated financial statements. The Company periodically reviews estimates and assumptions, and the effects of any such revisions are reflected in the period in which the revision is made.
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles, or GAAP, and reflect the accounts and operations of the Company and those of its subsidiaries in which the Company has a controlling financial interest. In accordance with the provisions of Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, 810, Consolidation, the Company consolidates any variable interest entity, or VIE, of which it is the primary beneficiary. The typical condition for a controlling financial interest ownership is holding a majority of the voting interests of an entity; however, a controlling financial interest may also exist in entities, such as VIEs, through arrangements that do not involve controlling voting interests. ASC 810 requires a variable interest holder to consolidate a VIE if that party has the power to direct the activities of the VIE that most significantly impacts the VIE’s economic performance, and the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. The Company does not consolidate a VIE in which it has a majority ownership interest when the Company is not considered the primary beneficiary. The Company has determined that it is the primary beneficiary of a VIE-refer to Note 21, Variable Interest Entities. The Company evaluates its relationships with the VIE on an ongoing basis to ensure that it continues to be the primary beneficiary. All intercompany transactions and balances have been eliminated in consolidation. Non-controlling interests in the equity of the Company’s subsidiaries are shown separately in the equity section of the consolidated balance sheets.
CASH
The Company maintains cash balances at various financial institutions. Accounts are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. At times throughout the year cash balances may exceed the FDIC insurance limits. The Company monitors its cash balances to ensure adequacy of collateral for depository balances at financial institutions that exceed FDIC insured amounts. The Company does not believe it is exposed to any significant credit risk on its cash accounts.
JUHL ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
RESTRICTED CASH AND ESCROW RESERVES
Restricted cash and escrow reserves for lenders include deposits held in bank accounts under the control by the lender or the power purchaser for which the use of funds, as required by financing agreements, is restricted to meet specific project obligations and debt service requirements. Restricted cash may be distributable to the Company only upon written request of the lender and normally only at certain times of the year (usually coinciding with a debt service payment date) and provided that debt service covenants are in compliance.
RESTRICTED SHORT TERM INVESTMENTS
Restricted short-term investments include certificates of deposit maintained at various financial institutions and totaled approximately $80,000 and $90,000 at December 31, 2014 and 2013, respectively. These restricted investments include accrued interest receivable. The certificates are intended to be held for investment purposes through their maturity dates that occur at various times throughout the next twelve months. These investments are classified as restricted as they are being held as collateral against a note payable to a bank.
ACCOUNTS RECEIVABLE
Credit terms are extended to customers in the normal course of business. The Company performs ongoing credit evaluations of its customers’ financial condition and, generally, requires no collateral.
Trade accounts receivable are recorded at their estimated net realizable value. Accounts are considered past due if payment is not made on a timely basis in accordance with the Company’s credit terms. Accounts receivable also includes unbilled amounts for maintenance and development services activities performed in the period for which an invoice to the respective customers are issued subsequent to the reporting date. Accounts considered uncollectible are written off. The Company follows a policy of providing an allowance for doubtful accounts. Based on historical experience, and its evaluation of the current status of receivables, the Company has recorded an allowance of approximately $41,000 and $36,000 at December 31, 2014 and 2013, respectively.
SECTION 1603 GRANTS
Section 1603 of the American Recovery and Reinvestment Act of 2009 allows the Treasury Department to provide a cash grant in lieu of Investment Tax Credits (a “Section 1603 grant”) for renewable energy generation property. The grant is approximately 30% of the allowed tax basis capital expenditures for the wind farm. Section 1603 grants are deferred on the consolidated balance sheets as deferred revenue. Amortization of the deferred revenue is recognized over the estimated useful life of the wind turbines and recorded as a reduction to depreciation expense.
INVENTORY
Inventory consists primarily of parts and materials relating to the production of small scale wind turbines and large scale turbines purchased for, but not yet allocated to, various construction projects, are stated at the lower of cost (determined by the first-in, first-out method) or market value. Inventory as of December 31, 2013 is presented net of an impairment of approximately $172,000.
PROJECT DEVELOPMENT COSTS
Project development costs represent amounts paid by the Company for projects that Juhl Energy is either: (1) the wind farm developer and project owner, (2) a partial project owner, or (3) is the primary beneficiary of the project. Project development costs are carried as a long-term asset until such time that the Company receives a reimbursement as a part of the permanent debt or equity financing of a commissioned wind farm project, or alternatively, the Company may convert these costs into an investment in the project.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Major renewals and improvements are capitalized, while replacements, maintenance and repairs which do not improve or extend the life of the respective assets are expensed currently. Property and equipment are being depreciated over their estimated useful lives using the straight-line method. Major categories of property and equipment and their depreciable lives are as follows:
JUHL ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
DEFERRED FINANCING COSTS
Costs related to the nonrecourse debt financing are capitalized as incurred. The Company amortizes these costs over the term of the related debt using the effective interest method and they are recognized as a component of interest expense on the statement of operations. Amortization expense was approximately $29,000 and $3,000 for the years ended December 31, 2014 and 2013, respectively.
LONG-LIVED ASSETS
Long-lived assets, such as property and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by an asset to the carrying value of the asset. If the carrying value of the long-lived asset is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including, but not limited to, discounted cash flow models, quoted market values and third-party independent appraisals. Based on lowered revenue expectations as a result of overdue operational improvements to be performed on the turbines and poor operational performance in the recent past, the Company recorded an impairment charge of $1,830,000 on certain wind farm assets during the year ended December 31, 2014. The impairment is related to a reduction in the carrying value of the wind turbine assets of the Winona Wind farm based on estimated discounted future cash flows from the project. The impairment charge is recorded within cost of goods sold in the consolidated Statement of Operations. In addition, see Note 24 for description of the impairment of assets of discontinued operations.
ESCROW CASH RESERVES FOR CONTRACTUAL COMMITMENTS
Cash amounts that have been deposited into reserve funds in connection with note or line of credit arrangements are considered to be non-current assets.
GOODWILL AND OTHER INTANGIBLE ASSETS
The Company accounts for goodwill and intangible assets in accordance with the accounting guidance which requires that goodwill and other intangibles with indefinite lives be tested for impairment annually or on an interim basis if events or circumstances indicate that the fair value of an asset has decreased below its carrying value. Finite life intangibles are amortized over their estimated useful lives using the straight-line method.
Goodwill includes the excess of the purchase price over the fair value of net assets acquired in a business combination. The Codification requires that goodwill be tested for impairment at the reporting unit level. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value. Significant judgment is required to estimate the fair value of reporting units which includes estimating future cash flows, determining appropriate discount rates and other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value and/or goodwill impairment.
The Company reviews reporting units for possible goodwill impairment by comparing the fair values of each of the reporting units to the carrying value of their respective net assets. If the fair values exceed the carrying values of the net assets, no goodwill impairment is deemed to exist. If the fair values of the reporting units do not exceed the carrying values of the net assets, goodwill is tested for impairment and written down to its implied value if it is determined to be impaired. No impairment was recorded for the years ended December 31, 2014 or 2013.
During 2013, deferred issuance costs of approximately $244,000 were written off once it became unlikely to issue shares in conjunction with an equity line arrangement.
STOCK OPTION PLANS
Upon issuance of employee stock options on June 24, 2008 (plan inception date), the Company adopted authoritative guidance relating to “Share-Based Payments.” This guidance requires that all stock-based compensation be recognized as an expense in the consolidated financial statements and that such cost be measured at the fair value of the award at the performance commitment or completion date. The Company recognizes compensation expense to employees based on the estimated grant date fair value using the Black-Scholes option-pricing model.
The Company accounts for stock-based instruments granted to nonemployees under the fair value method. Stock-based instruments usually are recorded at their underlying fair value. In certain instances, the fair value of the goods or services is used to determine the value of the equity instrument as it is a better measure of fair value.
JUHL ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's accounting for fair value measurements of assets and liabilities that are recognized or disclosed at fair value in the consolidated financial statements on a recurring or nonrecurring basis adhere to the Financial Accounting Standards Board (FASB) fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The Company has adopted guidance for fair value measurement related to nonfinancial items that are recognized and disclosed at fair value in the consolidated financial statements on a nonrecurring basis. The guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements).
The three levels of the fair value hierarchy are as follows:
•
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
•
Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.
•
Level 3 inputs are unobservable inputs for the asset or liability.
The level in the fair value hierarchy within which a fair measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its entirety.
Except for those assets and liabilities which are required by authoritative accounting guidance to be recorded at fair value in our consolidated balance sheets, the Company has elected not to record any other assets or liabilities at fair value. Other than the impairment on wind farm assets recorded on the Winona Wind project, no events occurred during the years ended December 31, 2014 and 2013 that required adjustment to the recognized balances of assets or liabilities, which are recorded at fair value on a nonrecurring basis.
The carrying value of cash, accounts receivable, and accounts payable, and other working capital items approximate fair value due to the short maturity nature of these instruments. The carrying value of restricted cash and short-term investments approximate their fair value based on quoted market prices. The Company believes the carrying value of the interest rate swap approximates fair value based on widely accepted valuation techniques including discounted cash flow analysis which includes observable market-based inputs. The Company believes the carrying amount of the long-term debt approximates the fair value due to the fact that we refinanced a significant portion in the current period, bringing our interest rate to current market rates.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company had an interest rate swap agreement that effectively converted 75% of a certain nonrecourse loan from a variable interest rate to a fixed interest rate. The swap agreement was terminated in March 2014. The fair value of the interest rate swap liability was recorded in the consolidated balance sheets, and changes in fair value of the interest rate swap agreement were recognized as other income (expense) in the consolidated statements of operations. Further information related to the interest rate swap is discussed in Note 12.
REVENUE RECOGNITION
Wind Farm Development Services
The Company normally earns a development service fee from each of the wind farm projects that it develops in cooperation with wind farm investors. These development services arrangements are evaluated under authoritative guidance relating to “Revenue Arrangements with Multiple Deliverables,” which addresses certain aspects of accounting by a vendor for arrangements under which the vendor will perform multiple revenue generating activities.
The development services fee revenue is recognized as follows:
●
Proceeds received upon the signing of a Development Services Agreement are amortized over the expected period of the development process, which is generally three years. The amortization period is re-assessed by management as new timelines are established for the project in-service date, and the amortization period is adjusted.
JUHL ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
●
The remaining proceeds are allocated to the following deliverables based on vendor specific objective evidence (“VSOE”) (the actual selling prices of similar deliverables sold on a standalone basis) or, in the absence of VSOE, the Company’s best estimate of the selling price, of each item: 1) achievement of a signed Power Purchase Agreement (“PPA”) with an electrical utility, and 2) final commissioning of the wind farm turbines. Management has determined that these deliverables have stand-alone value, and the Company has established fair value of the undelivered services that are considered probable and in the control of the Company. Factors considered by the Company in determining estimated selling prices for applicable elements generally include overall economic conditions, customer demand, costs incurred by the Company to provide the deliverable, as well as the Company’s historical pricing practices. Under these arrangements, revenue associated with each delivered element is recognized in an amount equal to the lesser of the consideration initially allocated to the delivered element or the amount for which payment is not deemed contingent upon future delivery of other elements in the arrangement.
Licensing Revenue
Revenues earned from licensing agreements are amortized using the straight-line method over the term of the agreement.
Engineering consulting services
Revenues are primarily generated from professional services provided to clients and are based on either hours of service performed or on a fixed-fee basis. Revenues are accrued through the reporting date for services performed. Services are billable to customers based on terms of the underlying contract and amounts that are not yet billable at the reporting date are included in work-in-progress in the accompanying consolidated financial statements.
Provisions for estimated losses on work-in-process are made in the period in which such losses are determined. Changes in project performance, project conditions, and estimated profitability may result in revisions to costs and revenues and are recognized in the period in which the revisions are determined.
Our contracts come up for renewal periodically and at the time of renewal may be subject to renegotiation, which could impact the profitability of that contract. In addition, during the term of a contract, public agencies may request additional or revised services which may impact the economics of the transaction. Most of our contracts permit our clients, with prior notice, to terminate the contracts at any time without cause.
Wind Farm Management and Maintenance Services
Revenues earned from administrative, management and maintenance services agreements are recognized as the services are provided. The administrative and management services agreements generally call for quarterly payments in advance or arrears of services rendered based on the terms of the agreement. The administrative and management services payments received in advance are carried as deferred revenue and recognized monthly as services are performed. Wind farm maintenance services are generally billed on a quarterly basis based on the terms of underlying agreement. Revenues from wind farm maintenance services work are recognized when services are performed.
JUHL ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
Wind Farm Construction
The Company recognizes revenue on wind farm construction contracts on the percentage of completion method with costs and estimated profits included in contract revenue as work is performed. Contracts generally provide that customers accept completion of progress to date and compensate the Company for services rendered measured in terms of units installed, hours expended or some other measure of progress. Percentage of completion for construction contracts is measured principally by the percentage of costs incurred as part of the balance of plant contract (which excludes the wind turbines) and accrued to date for each contract to the estimated total cost for each contract at completion. The Company generally considers contracts to be substantially complete upon departure from the work site and acceptance by the customer. Contract costs include all direct material (excluding wind turbines), labor and insurance costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and depreciation costs. Changes in job performance, job conditions, estimated contract costs and profitability and final contract settlements may result in revisions to costs and income, with the effects of these revisions being recognized in the period in which the revisions are determined. Provisions for total estimated losses on uncompleted contracts are made in the period in which such losses are determined. The balances billed but not paid by customers pursuant to retainage provisions in construction contracts or solar installation services agreement will be due upon completion of the contracts and acceptance by the customer. Based on the Company’s experience with similar contracts in recent years, the retention balance at each balance sheet date will be collected within the subsequent fiscal year.
The asset “Costs and estimated profits in excess of billings on uncompleted contracts” represents revenues recognized in excess of amounts billed which management estimates will be billed and collected within the next twelve months. The liability “Billings in excess of costs and estimated earnings on uncompleted contracts” represents billings in excess of revenues recognized. Costs and estimated earnings in excess of billings on uncompleted contracts are amounts considered recoverable from customers based on different measures of performance, including achievement of specific milestones, or at the completion of the contract.
Solar System Installation Services
The Company installs solar photovoltaic energy systems for residential and commercial/industrial customers in the continental U.S. Services are generally performed under installation services agreements and generally are fixed price contracts. Revenue from these services is recorded using the completed contract method of accounting in accordance with Accounting Standards Codification, or ASC, 605, Revenue Recognition because the duration of the installation work is short in nature (typically four weeks or less). Under the completed contract method, revenues and costs related to the projects are recognized only upon completion of the services at a project site. Accordingly, during the period of performance, costs are accumulated on the balance sheet under work-in-progress, but no revenue or income is recorded before completion of the work. Direct costs typically include direct materials, labor and subcontractor costs, and other direct costs related to contract performance, such as permits, supplies, freight, and engineering assessments. Provisions for estimated losses on uncompleted contracts are recognized when it has been determined that a loss is probable.
Electricity Sales
Electricity sales by wind energy facilities to its utility purchaser are recognized as electrical energy is produced. In accordance with generally accepted accounting principles, revenue levelization is required whenever there is a variable pricing arrangement such as the power purchase agreement (PPA) with Woodstock Hills and Valley View. This requires that the revenue be levelized over the term of the agreement. The revenue recognized is determined by the megawatt hours made available during the period multiplied by the average revenue per megawatt hour over the life of the PPA.
The Woodstock Hills wind farm is credited with producing Renewable Energy Credits (REC’s). These have a market value, and are occasionally sold on the open market. The proceeds are recorded as revenue at the time of the sale.
EARNINGS (LOSS) PER SHARE
Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares outstanding during the period. Diluted net income per share is computed by dividing net income (loss) by the weighted average number of shares and share equivalents outstanding during the period. For the years ended December 31, 2014 and 2013, the Company had no share equivalents outstanding relating to outstanding stock options and warrants because their respective exercise prices were greater than the average closing market price of the Company’s common stock. In addition, due to losses reported, share equivalents would have an antidilutive effect, which also excludes them from the presentation of diluted net income per share.
JUHL ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
INCOME TAXES
Deferred income taxes are provided for timing differences between financial statements and income tax reporting, primarily from the use of accelerated depreciation methods for income tax purposes, stock-based compensation, prepaid expenses, accrued liabilities, deferred revenue and net operating losses that are available to offset future taxable income. The measurement of deferred tax assets and liabilities is based on provisions of the benefits and liabilities when realization of the tax position is uncertain. The first step is to determine whether the tax positions meet the more-likely-than-not condition for recognition and the second step is to determine the amount to be recognized based on the cumulative probability that exceeds 50%.
The Company recognizes in its consolidated financial statements only those tax positions that are "more-likely-than-not" of being sustained upon examination by taxing authorities, based on the technical merits of the position. The Company performed a comprehensive review of its material tax positions in accordance with recognition and measurement standards. Based on this review, the Company has concluded that there are no significant uncertain tax positions that would require recognition or disclosure within the consolidated financial statements.
The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. With a few exceptions, the Company is no longer subject to U.S. federal, state, or local income tax examinations by tax authorities for years before 2011. The Company's policy is to recognize interest and penalties related to uncertain tax benefits in income tax expense. The Company has no significant accrued interest or penalties related to uncertain tax positions as of December 31, 2014 or 2013 and such uncertain tax positions as of each date are insignificant.
RECLASSIFICATIONS
Certain reclassifications were made to the previously issued 2013 financial statements in the consolidated financial statements in order to apply the presentation requirements to retrospectively present 2014 discontinued operations. These reclassifications of financial information related to discontinued operations have no effect on net income, operating cash flow or stockholders’ equity as previously reported.
RecentLY ISSUED Accounting Pronouncements, BUT NOT YET ADOPTED
On May 28, 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective. The new standard is effective for us on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. We are currently evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting.
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern. ASU 2014-15 defines management's responsibility to evaluate whether there is substantial doubt about an organization's ability to continue as a going concern and to provide related footnote disclosures. Under GAAP, financial statements are prepared under the presumption that the reporting organization will continue to operate as a going concern, except in limited circumstances. The going concern basis of accounting is critical to financial reporting because it establishes the fundamental basis for measuring and classifying assets and liabilities. Currently, GAAP lacks guidance about management's responsibility to evaluate whether there is substantial doubt about the organization's ability to continue as a going concern or to provide related footnote disclosures. The ASU is effective for annual and interim periods beginning after December 15, 2016, and should be applied prospectively. Early adoption is permitted. We have not determined the effect of the standard on our ongoing financial reporting.
In April 2014, FASB issued ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. Under the new guidance, a disposal of part of an organization that has a major effect on its operations and financial results is a discontinued operation. The amendments will be effective for the Company for annual periods and interim periods within those annual periods beginning after December 15, 2014, with early implementation of the guidance permitted. The Company does not expect these amendments to have a material effect on its financial statements.
In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810) - Amendments to the Consolidation Analysis, (ASU 2015-02). ASU 2015-02 modifies existing consolidation guidance related to (i) limited partnerships and similar legal entities, (ii) the evaluation of variable interests for fees paid to decision makers or service providers, (iii) the effect of fee arrangements and related parties on the primary beneficiary determination, and (iv) certain investment funds. These changes reduce the number of consolidation models from four to two and place more emphasis on the risk of loss when determining a controlling financial interest. This guidance is effective for public companies for fiscal years beginning after December 15, 2015. We are in the process of evaluating the adoption of this ASU, and do not expect this to have a material effect on our consolidated results of operations and financial condition.
JUHL ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
In June 2014, the FASB issued ASU 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved After the Requisite Service Period . The amendments in the ASU require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718, Compensation - Stock Compensation, as it relates to awards with performance conditions that affect vesting to account for such awards. The performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company's financial position and results of operations.
3.
PREFERRED STOCK
Preferred stock transactions involving Series A and Series B shares
Effective February 18, 2014, the Company entered into a Securities Purchase Agreement with Vision Opportunity Master Fund, Ltd., (“Vision”), the primary Series A Preferred stockholder, whereby the Company agreed to purchase 10,398,750 shares of Preferred Stock of the Company held by such stockholder (consisting of 4,560,000 shares of Series A Preferred Stock and 5,838,750 shares of Series B Preferred Stock) for a total purchase price of approximately $2,184,000. The Company agreed to pay the purchase price in the following manner: (i) pay a non-refundable $40,000 deposit on date of execution of the Purchase Agreement; (ii) pay a non-refundable payment of $40,000 on or before March 15, 2014; and (iii) issue Seller an amortizing promissory note on April 1, 2014, with a principal sum of approximately $2,104,000 for the remaining balance of the Purchase Price, with an interest rate of 8% and a maturity date of May 1, 2015. The Purchase Price was satisfied and the conditions were met, and the transaction closed on April 1, 2014. The note, as amended, will be repaid via minimum cash payments of $40,000 per month, with the remaining principal due in July 2015. The note was amended to extend the maturity date to July 31, 2015 and an accelerated one-time payment of $100,000 in August 2014. As a result of the Securities Purchase Agreement, the Company recorded a reduction of approximately $2,387,000 and $11,152,000 related to the carrying value of the Series A and B Preferred Stock, respectively.
As part of the Securities Purchase Agreement, Vision agreed to the following: (i) waiver of dividends due on its Series A Preferred due on April 1, 2014 on the closing date of the Purchase Agreement, (ii) issuance of a proxy to the Company to vote on matters submitted to holders of the Company’s Series A Preferred and Series B Preferred Stock until April 1, 2014, and (iii) entry into a lock up agreement to restrict the sale of its holdings of common stock of the Company during the periods provided therein.
Vision also agreed to reduce its dividend which was payable on January 1, 2014 by 50% and accepted a promissory note bearing interest at 8% for the remaining dividend, or $46,613, payable in cash in May 2015.
On October 31, 2014, Vision sold all of its outstanding Juhl Energy securities to Airdrie Partners I, LP (“Airdrie Partners”) and assigned the Note, as amended, to Airdrie Partners. On that date, we entered into a second amendment agreement to the Note with Airdrie Partners changing the name of the holder from Vision to Airdrie Partners and addressing other administrative matters. All other terms of the Note, as amended, remain the same.
On February 20, 2014, we entered into a Conversion Agreement with Daybreak Special Situations Master Fund, LTD., (“Daybreak”), the other holder of our Series A Preferred Stock with Vision, whereby Daybreak converted its 260,000 shares of Series A Preferred Stock of the Company into 260,000 shares of common stock of the Company. In consideration for such conversion, the Company delivered the following to Daybreak: $10,000 along with a put option for 60,000 shares of common stock of the Company, in which Daybreak had the right to require the Company to purchase such shares at $.25 during the 90 day period following the closing of the transaction. Daybreak exercised its put right and accordingly the Company purchased such shares in June 2014.
As a result of these preferred stock transactions, at December 31, 2014, the Company has no shares issued or outstanding of its Series A Preferred Stock, and 128,042 shares of Series B shares remain issued and outstanding.
Series B Preferred Stock contains the following terms:
Conversion Rights of Series B
At any time, each share of Series B is convertible into one share of common stock. However, the number of shares of common stock issuable upon conversion of Series B is subject to adjustment upon the occurrence of certain customary events, including, among others, a stock split, reverse stock split or combination of our common stock; an issuance of our common stock or other securities as a dividend or distribution on the common stock; a reclassification, exchange or substitution of the common stock; or a capital reorganization of the Company.
JUHL ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
Voting Rights of Series B
Holders of Series B are not entitled to vote their shares with the holders of our common stock, except for certain extraordinary corporate transactions, in which case they vote as a separate class. Holders of Series B also have any voting rights to which they are entitled by Delaware law.
Liquidation Rights of Series B
In the event of any voluntary or involuntary liquidation, dissolution or winding-up of the Company, the holders of Series B will be entitled to receive out of our assets available for distribution to stockholders, a pro rata liquidating distribution on a pari passu basis with holders of the Company’s common stock based on the number of shares convertible from the then outstanding Series B shares. Liquidation does not include a change in control transaction or a merger or consolidation of the Company, any sale of all or substantially all of its assets in one transaction or series of related transactions, or any tender offer or exchange offer to which the holders of common stock are permitted to tender or exchange their shares for other securities, cash or property. Liquidation rights of Series A are expressly senior to the rights of Series B.
Redemption Rights of Series B
Series B contains no redemption rights and is considered a perpetual preferred stock.
Dividends Rights of Series B
Series B has no cumulative preferred dividend provisions. Series B shall participate in any dividends declared and paid by the Company on its common stock on an as-converted basis.
Anti-Dilution Rights of Series B
Series B contains provisions whereby at any time at least 25% of the Series B is outstanding, the Company may not issue rights, options or warrants to all holders of common stock entitling them to subscribe for or purchase shares of common stock at a price per share that is lower than the volume weighted average price on the date of the Series B agreement without issuing the same rights, options or warrants to all holders on an as-converted to common stock basis.
Subsidiary preferred stock sales
During 2014, our subsidiary, Juhl Renewable Assets, sold approximately $3,152,000 of its Series A Preferred Stock, net of costs of raising the capital, in private sales for the acquisition of specific assets of comparable value, and for other purposes. The preferred stock provides for a 9% annual dividend to its holders, payable quarterly. Accretion charge was approximately $166,000 on the funds raised during 2014. The Company has utilized the proceeds raised primarily to provide funding assistance for the acquisition of wind farm assets located in Iowa (see Note 22) and to replenish previous advances made by the Company in acquiring its existing ownership interests in wind farms.
Holders of the JRA Preferred Stock will be entitled to receive, to the extent of legally available funds, a dividend of 9% per annum, payable quarterly. Dividends for the years ended December 31, 2014 and 2013 were approximately $264,000 and $72,000, respectively. The preferred shares carry limited voting rights and have a liquidation preference over common stockholders of the subsidiary. The Company has the call protection right whereby it has the right, but not an obligation, to redeem any outstanding shares subject to the provisions in the certificate of designation. The holders of the preferred stock can require the Company to redeem the shares after June 30, 2015 subject to the terms of the amended certificate of designation. Based on the designations and rights offered to preferred shareholders, the preferred stock is being carried outside of permanent equity on the consolidated balance sheets as Redeemable Cumulative Preferred Stock of Subsidiary at their current redemption value.
JUHL ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
4.
CONCENTRATIONS
The Company derived approximately 46% of its revenue for the year ended December 31, 2014 from three customers primarily as a result of renewable energy development and construction revenue (10%), energy and field services (15%) and power plant ownership (21%). The Company derived approximately 57% of its revenue for the year ended December 31, 2013 from three customers primarily as a result of renewable energy development and construction revenue (23%), energy and field services (14%) and power plant ownership (20%). At December 31, 2014 and 2013, 64% and 69% of the Company's accounts receivable were due from four and two customers, respectively.
5.
GOING CONCERN
The accompanying consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles, which contemplate continuation of the Company as a going concern. The Company currently has negative working capital, negative stockholder’s equity, a history of recurring losses and recurring negative cash flow from operating activities, and has not yet established a source of cash funding to retire obligations coming due within the next twelve months, namely the Company will need to find additional sources of capital to fund the balloon payment of Vision Opportunity Fund note obligation which has been assigned and is now payable to Airdrie Partners (see Note 3). Additionally, the Company was unable to meet profitability and revenue growth expectations with its JTS subsidiary and, as a result, it was decided in late 2014 to discontinue the operations of this subsidiary. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management anticipates that the Company will be dependent, for the near term, on the proceeds from financing as a part of the acquisition of additional wind projects and the financing for construction of its larger scale development projects, fee income from development services and additional capital to fund operating activities. There is no assurance that such capital will be available. The Company intends to position itself so that it may be able to raise additional funds through the capital markets. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
6.
ACCOUNTS RECEIVABLE
Accounts receivable consists of the following:
JUHL ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
7.
PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
Depreciation expense, including amounts for grant liability amortization, was approximately $1,364,000 and $1,280,000 for the years ended December 31, 2014 and 2013, respectively. The Company recorded impairment charges of $1,830,000 and $0 during the years ended December 31, 2014 and 2013, respectively. The impairment of $1,830,000 is related to a reduction in the carrying value of the wind turbine assets of the Winona County Wind farm within the renewable power plant ownership segment.
8.
INTANGIBLE ASSETS
A summary of intangible assets as of December 31, 2014 is as follows:
A summary of intangible assets as of December 31, 2013 is as follows:
JUHL ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
Approximate aggregate amortization expense for each of the next five years is as follows:
Amortization expense, including amounts for deferred loan costs, for the years ended December 31, 2014, and 2013 was approximately $78,000 and $305,000, respectively.
9.
INCOME TAXES
The Company files a consolidated tax return inclusive of each of its wholly-owned subsidiaries, JES, JEDI, JRA, JRES, PEC, JTS, 5045 Wind, Winona Wind and NextGen.
The Company has recorded deferred tax assets and liabilities arising from the anticipated timing differences recorded in the consolidated financial statements and income tax returns for various accrued expenses, accounting methods used in computing depreciation and revenue recognition and benefits from net operating loss carryforwards.
The income tax provision (benefit) for the years ended December 31, 2014 and 2013 consists of the following components:
JUHL ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
The components of the deferred income tax asset and liability as of December 31, 2014 and December 31, 2013 are as follows:
Deferred income taxes are presented on the consolidated balance sheets under the following captions at December 31, 2014 and 2013:
In assessing the realization of deferred tax assets, the Company’s management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The Company’s management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. As of December 31, 2014 and 2013, a valuation allowance of $5,831,000 and $3,492,000, respectively, has been recognized for deferred tax assets, primarily for deferred revenue/other, stock-based compensation, and net operating losses.
JUHL ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
The following represents the reconciliation of the statutory federal tax rate and the effective tax rate for the twelve months ended December 31, 2014 and 2013:
The nondeductible income/expense item is predominately comprised of the tax effect of including the income from the VIE entity in the consolidated net income (loss) of the Company. A portion of the income from the VIE is not taxed within the U.S. consolidated tax return of the Company, and therefore, the tax effect of this income must be reconciled above.
At December 31, 2014, the Company has a federal net operating loss carryforward of approximately $13,100,000, together with approximately $57,000 in investment and other tax credits, which can be used to offset future federal taxable income. The loss carryforward expires in years from 2028 to 2034 if not used.
JUHL ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
10.
NOTES PAYABLE
Notes payable consists of the following:
The future minimum principal payments of notes payable are as follows:
JUHL ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
11.
NONRECOURSE DEBT
Nonrecourse debt obligations consist of the following:
JUHL ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
The future minimum principal payments of the nonrecourse debt are as follows:
In conjunction with the Woodstock Hills nonrecourse bank note, a maintenance and repair reserve of $250,000 is required to be maintained. During 2013 and 2014, the maintenance reserve was utilized for approximately $197,000 for a maintenance project. In lieu of maintaining the reserve at the required level over the remaining one year term of the loan, the bank is permitting this reserve to be replenished at $8,500 per quarter until 2016. The balance of the cash reserve is approximately $87,000 at December 31, 2014 and is included in long-term assets under the caption Escrow Cash Reserves for Contractual Commitments.
In conjunction with the Iowa wind farms notes payable, a maintenance reserve of $75,000 is required to be maintained with monthly deposits of $6,800 during the term of the loan. In addition, a debt service reserve is required of $100,000. Both reserves are carried in the balance sheet under the caption Escrow Cash Reserves for Contractual Commitments.
Refinancing of nonrecourse debt
The nonrecourse debt of the Valley View wind farm was refinanced in March 2014 through a new bank in order to improve cash flow through interest savings over the term of the loan. The new facility provides for a loan of $9,750,000 together with letter of credit instruments to meet credit obligations under the power purchase contract and a $500,000 debt service reserve. The cumulative weighted average interest rate of the loan is approximately 5.8%. The interest rate swap arrangement described in Note 12 was terminated as a part of the refinancing and settled for approximately $632,000 in March 2014.
Under the new loan agreement, the Company is required to maintain escrow reserves of $499,000 at December 31, 2014 which is comprised of a maintenance reserve of $300,000 and operation and maintenance reserve of $199,000. The Company will deposit an additional $50,000 semi-annually during April and October in each fiscal year until the maintenance reserve account reaches a balance of $500,000. Under the previous debt agreement, the Company was required to maintain escrow reserves of $800,000 at December 31, 2013 which is comprised of a major component repair reserve of $200,000, an operation and maintenance reserve of $150,000, and a debt service reserve of $450,000. Amounts held in reserve accounts are included under the caption Escrowed Cash Reserves for Contractual Commitments. In addition, the previous loan agreement required the Company to maintain certain of its cash balances in a bank account controlled by the lender. For the year ended December 31, 2013, the balances in this lender-controlled bank account of approximately $374,000 were reflected as restricted cash for balance sheet purposes. Under the current loan agreement, there is no similar lender-controlled bank account.
12.
DERIVATIVE FINANCIAL INSTRUMENT INTEREST RATE SWAP
The Company had an interest rate swap agreement to effectively convert borrowings under a long-term nonrecourse debt arrangement from a variable interest rate to a fixed interest rate of approximately 6.96% during its 15-year term. The interest rate swap arrangement was terminated in March 2014 with a payment of approximately $632,000 which included accrued monthly settlements through the date of termination as a part of a refinancing of the related loan.
The fair value of the interest rate swap agreement obligation (Level 2 in the fair value hierarchy) approximated $460,000 at December 31, 2013 was recorded as a current and long-term liability on the balance sheet. The Company determined the fair value of the interest rate swap by using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of the instrument.
JUHL ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
The following table provides details regarding the gains and (losses) from the Company's derivative instruments in the consolidated statements of operations, none of which are designated as effective hedging instruments:
13.
FAIR VALUE
The following tables summarize the bases used to measure financial liabilities that are carried at fair value on a recurring basis in the consolidated balance sheets.
The Company determined the fair value of the interest rate swap by using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of the instrument. The analysis reflected the contractual terms of the swap agreement, including the period to maturity and uses observable market-based inputs and uses the market standard methodology of netting the discounted future fixed cash receipts and the discounted expected variable cash payments.
Management estimates the probable term of the contingent payments related to sale of wind farm project to be 20 years, which is the term of the PPA. The interest rate used to discount the estimated royalty payments is 10.8%, which is comprised of the Company’s incremental borrowing rate of approximately 5.8% for secured positions plus a consideration of an estimated payment risk premium of 5.0% attributable to similar unsecured long-term borrowings that the Company could otherwise obtain in the marketplace.
The following table is a reconciliation of changes in the fair value of contingent payments related to sale of wind farm project liability classified as Level 3 in the hierarchy. The reconciliation of changes in the fair value for 2013 is not presented as the initial measurement approximated fair value as of December 31, 2013 and no settlements were made during that period.
JUHL ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
14.
POWER PURCHASE CONTRACT LIABILITY
Woodstock Hills wind farm
The Woodstock Hills wind farm entered into a power purchase agreement (PPA) with Northern States Power (NSP) in 1997. The agreement, among other things, requires NSP to purchase all of the electricity output from the Woodstock Hills wind energy generation facility over a 30-year period following its commercial operation date at rates provided in the agreement. The commercial operation date has been deemed to be May 1, 2004. The power purchase rates were set at a higher level in the early years of the agreement in order to assist Woodstock Hills in obtaining financing. The PPA power purchase rates will range from $16 to $45 per megawatt hour over the remaining 23 years of the PPA term, with an average of approximately $29 per megawatt hour over the duration of the agreement.
In accordance with our revenue recognition policy in Note 2, revenue levelization is used to recognize revenue from the electricity sales of Woodstock Hills. Revenue deferred under this levelization calculation for the years ended December 31, 2014 and 2013 was approximately $332,000 and $324,000, respectively.
At the time of acquisition of Woodstock Hills in April 2011, the power purchase rates in the PPA between Woodstock Hills and NSP were considered unfavorable when compared with market conditions at the time of the acquisition. As a result, an unfavorable contract liability of approximately $3,700,000 was recognized on the acquisition date. The amount of this liability was determined based on the estimated current market rate that power purchasers were paying for electrical power compared to the average PPA rate over the life of the contract, net of the fair value of the renewable energy credits that Woodstock Hills could be expected to realize during the term of the PPA.
The Company has recorded the following liabilities in its consolidated financial statements in relation to the PPA:
The PPA requires Woodstock Hills to provide security to NSP in the form of a letter of credit for the decommissioning, front-loaded rates and overall agreement compliance. At December 31, 2014 and 2013, Woodstock has obtained letters of credit from a bank in the amounts of $500,000 and $255,000 to provide the required security to NSP for front-loaded rates and decommissioning, respectively. NSP has not exercised any of its rights to draw upon the security during the term of the PPA. The letters of credit are renewable on an annual basis.
The $500,000 letter of credit agreement requires a cash escrow to be funded over time with an initial deposit of $50,000 made in December 2010, and minimum payments of $28,125 per quarter beginning April 2012. The $255,000 line of credit agreement requires a cash escrow to be funded over time with minimum payments of $12,750 per quarter beginning April 2011. At December 31, 2014, Woodstock Hills has escrowed approximately $553,000 in cash toward the escrow requirements. These escrowed deposits are reflected within the noncurrent asset called Escrowed Cash Reserves for Contractual Commitments.
Valley View wind farm
The PPA requires the Valley View wind farm to provide security to NSP in the form of a letter of credit as security for the contract obligations. Valley View has obtained a $750,000 letter of credit as a part of its nonrecourse credit facility provided by the current lender. NSP has not exercised any of its rights to draw upon the security during the term of the PPA. The letters of credit are renewable on an annual basis.
In accordance with our revenue recognition policy in Note 2, revenue levelization is used to recognize revenue from the electricity sales of Valley View. Revenue deferred under this levelization calculation for the years ended December 31, 2014 and 2013 was approximately $15,000 and $13,000, respectively.
15.
STOCK-BASED COMPENSATION
The Company has an incentive compensation plan to provide stock options, stock issuances and other equity interests in the Company to employees, directors, consultants, independent contractors, and advisors of the Company and any other person who is determined by the Committee of the Board of Directors of the Company to have made (or expected to make) contributions to the Company. The maximum shares reserved under the plan is 4,500,000 shares. As of December 31, 2014, the Company had 3,660,000 shares available for award under the plan.
Stock Options
The Company has granted to key employees and directors of the Company 590,000 options to purchase common shares under the above plan. The outstanding stock options carry an exercise price ranging from of $.38-$2.00 per share and expire ten years from the date of grant. Grants under the plan are discretionary and typically vest over four years. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. For grants issued in 2014, the following Black-Scholes option-pricing model assumptions were used, underlying price of $0.38, dividend yield of 0%, expected volatility of 117%, risk-free interest rate of 2.78%, and average expected life of 5.25 years. Based on the pricing model, the Company expensed approximately $39,000 and $36,000 in the years ended December 31, 2014 and 2013, respectively.
JUHL ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
A summary of the Company’s stock option plan as of December 31, 2014 and 2013 and changes during the years then ended is listed below:
The weighted average fair value of options granted during 2014 was $0.32 per share. There was no intrinsic value in the options outstanding or exercisable as of December 31, 2014 or 2013, as the exercise prices were greater than the last traded price of the Company's common stock.
The following table summarizes information for options outstanding and exercisable at December 31, 2014:
Stock warrants
In February, March and April 2014, the Company issued stock warrants to purchase an aggregate of 5,720,000 shares of common stock to directors, officers and service providers at an exercise prices ranging from $0.21 to $0.40 per share (the closing price of the stock as of the date of issuance) which expire ten years from the grant date. The warrants were issued pursuant to Warrant Agreements that are outside of the incentive compensation plan. The warrants vest over 17 to 20 months. These warrants were issued in conjunction with cancellation of the 1,370,000 options shown above. The fair value of each warrant is estimated on the date of issuance using the Black-Scholes option-pricing model. For warrants issued in 2014, the following Black-Scholes option-pricing model assumptions were used, underlying price of $0.21-$0.40, dividend yield of 0%, expected volatility of 116.4%, risk-free interest rate of 2.78%, and average expected life of 5.75 years. The weighted average fair value of warrants granted in 2014 was $0.19.
In August 2014, the Company issued stock warrants to purchase an aggregate of 537,500 shares of common stock to the underwriter of a public offering at an exercise price of $0.23 per share and expires five years from the grant date. The fair value of each warrant is estimated on the date of issuance using the Black-Scholes option-pricing model. For these warrants issued in 2014, the following Black-Scholes option-pricing model assumptions were used, underlying price of $0.23, dividend yield of 0%, expected volatility of 117%, risk-free interest rate of 2.49%, and average expected life of five years. Based on the pricing model, the Company estimates the warrants have a fair value of approximately $101,000. During 2014, 100,000 stock warrants expired that contained a weighted average exercise price of $1.25 per share.
JUHL ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
The following table summarizes information for warrants outstanding and vested at December 31, 2014:
Restricted stock issuance
In February 2014, the Company issued 250,000 restricted shares of common stock to a consultant which vest over a 15-month period and are subject to lock-up restrictions. The fair value of the stock issuance was estimated using the closing stock price at the date of grant. The Company expensed approximately $31,000 in the year ended December 31, 2014.
Stock compensation expense
For the year ended December 31, 2014, the Company recognized approximately $613,000 of stock compensation expense including approximately $543,000 for warrants issued to directors, officers and service providers, approximately $39,000 for stock options and approximately $31,000 for restricted stock. For the year ended December 31, 2013, the Company recognized stock compensation expense of approximately $42,000. As of December 31, 2014, there was approximately $587,000 total unrecognized compensation expense cost. This cost is expected to be recognized over a weighted-average period of approximately one year.
16.
LICENSING ARRANGEMENT
In July 2009, NextGen entered into a non-exclusive Manufacturing License and Reseller agreement with an unrelated company. The agreement provides that NextGen will license its small turbine technology and, among other things, grants a right to manufacture units over a twenty year period. The agreement also provides for exclusive distribution rights in certain areas of the United States. Revenue is being amortized over the twenty year period. For the years ended December 31, 2014 and 2013, licensing revenue totaled approximately $50,000 and is included in revenue in the consolidated financial statements. Deferred licensing revenue of approximately $729,000 and $779,000 is included on the consolidated balance sheets in current and long-term deferred revenue as of December 31, 2014 and 2013, respectively.
17.
COMMON STOCK EQUITY OFFERING
On August 7, 2014, the Company received gross cash proceeds of approximately $2,150,000 before costs of raising capital pursuant to an underwritten public offering for 10,750,000 shares of common stock. The lead underwriter received a stock warrant for 537,500 shares of common stock exercisable at any time at the option of the Underwriter over five years at a strike price of $0.23 per share, with a fair value of approximately $101,000. Offering expenses of approximately $515,000 have been recorded as a reduction to additional paid-in capital. The net cash proceeds of the offering, approximately $1,635,000 will be primarily used by the Company for working capital and general corporate purposes. No additional accelerated principal payments on the amortizing promissory note dated April 1, 2014, as amended, other than a $100,000 payment as agreed with the Vision Opportunity Fund was made. See Note 3.
JUHL ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
18.
BUSINESS SEGMENTS
The Company’s reportable business segments are organized based on the nature of markets and customers and how we manage and view the business. The Company groups its operations into three business segments:
Segment reporting is intended to give financial statement users a better view of how the Company manages and evaluates its businesses. The accounting policies for each segment are the same as those described in the summary of significant accounting policies. Segment income or loss does not include any allocation of shared-service costs. Segment assets are those that are directly used in or identified with segment operations, including cash, accounts receivable, prepaid expenses, inventory, work-in-progress, property and equipment and escrow deposits. Unallocated assets include corporate cash and cash equivalents, short-term investments, deferred tax amounts and other corporate assets. Inter-segment balances and transactions have been eliminated. Assets of discontinued operations have been combined with corporate/other.
Segment profit excludes results reported as discontinued operations and accounting changes. Segment profit also excludes the portion of earnings or loss attributable to noncontrolling interests of consolidated subsidiaries, and as such only includes the portion of earnings or loss attributable to our share of the consolidated earnings or loss of consolidated subsidiaries. The segment information presented below recasts 2013 information to remove the effect of discontinued operations of the tower services revenue and expenses.
The following tables summarize financial information by segment and provide a reconciliation of segment contribution to operating income:
JUHL ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
19.
TRANSACTIONS WITH RELATED PARTIES
Pursuant to the limited liability company operating agreement of Woodstock Hills, the Company’s ownership percentage of cash, income, gain, loss, and deductions of 99.9% will be reduced to 20% at the time that it has received a cumulative 12% annual cash-on-cash return on its original investment of $400,000 which is not expected to occur for at least five years. The Company’s CEO, Daniel Juhl, is the sole minority interest member.
In the fourth quarter of 2013, the Company converted approximately $75,000 of payables to Common Stock. The Company issued 524,838 shares, of which 267,847 were issued to officers and directors, for the payables and $20,000 of cash received.
20.
COMMITMENTS AND CONTINGENCIES
Asset Retirement Obligation
At the time that the turbines in the Woodstock Hills, Winona, Iowa wind farms, or Valley View projects are retired or upon the end of the land lease, there is an obligation to restore the underlying real estate to its original condition. This includes removal of all personal property and to some extent, the concrete foundations. The estimated fair value of this obligation is undeterminable; however, it is reasonable that the salvage value of the wind turbines would cover any expenses for removal of certain aspects of the wind turbine foundations and substation and restoration of the real estate.
Share Purchase Obligation
One holder of redeemable preferred membership interests in the Valley View wind farm has exercised its put option (for approximately $518,000) in October 2013 and the Company was required to redeem such interests by June 1, 2014. The Company anticipates the redemption payment of approximately $518,000 will be made by the subsidiary during 2015 and has been recorded as a current liability. Since the Company is currently in default in the redemption of the redeemable membership interests in Valley View, the holder of the preferred membership interests has rights and remedies available to it including, but not limited to, the right to provide written demand to the Manager to sell assets of the limited liability company to which the preferred stock was issued. The 12% dividend payments on the redeemable preferred stock in Valley View have been kept current.
Guarantees
The Company agreed to guarantee certain payments to investors in the Valley View wind farm project as set forth below:
●
The timely payment of any and all guaranteed payments required to be paid to preferred membership investors (who contributed approximately $2.5 million) as they may become due under the respective LLC operating agreements, and the timely payment of any and all amounts payable upon exercise of a put right by such preferred members. The put right is outside the control of the Company and may occur either in two years or in certain cases, ten years. The Company does have up to six months from the date that to make such Put Right Payment, and should the Company fail to make the Put Right Payment within such six month period, the principal amount owed by the Company is subject to a penalty of an additional 10%.
●
The Company has agreed, with respect to a put right made available to one of the Preferred Members in the Valley View project (who contributed $500,000) to redeem any of its units then held by the Purchaser for a price in cash equal to the present value of the (i) estimated future distributions to be made to Purchaser net of (ii) estimated future income allocations for which no distributions are projected to be made. If the Company fails to pay in full the put right purchase amount in cash on the due date, the Company shall issue a promissory note with a maturity date not exceeding 36 months and pay interest thereon. The put right is only exercisable after January 1, 2017.
●
The Company has made certain representations and warranties with regard to indemnifications in conjunction with the funding activities of the Valley View and Grant County wind farms, including potential liabilities for Section 1603 Treasury Grant recapture or tax liabilities attributable to the period prior to the closing date.
JUHL ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
Contingent Payment on Sale of Wind Farm Project
The Company entered into a contingent payment arrangement with a former developer of a wind farm project under which it agrees to pay the former developer a payment based on a percentage ranging from 5-15% of annual gross revenues generated over the life of the project, commencing with the commercial operation. The payments are payable quarterly. The payment stream is guaranteed by Juhl Energy.
The following is a schedule showing the future estimated payments by year and the present value of the estimated future payments as of December 31, 2014.
The current maturities are included in accrued expenses on the consolidated balance sheet and the long-term portion is reflected in other long-term liabilities. See Note 13 for assumptions used to calculate the fair value of the contingent payment.
Operating Lease arrangements
Land Leases:
The Company’s four wind farm investments (Woodstock Hills, Winona, 5045 Wind, and Valley View) maintain lease agreements with landowners for the real estate related to the wind energy generation facilities. The leases will expire between 2017 and 2036.
Office Space leases:
The Company has entered into seven operating leases for office and warehouse space in connection with its administrative and ongoing operations. The lease agreements require that the Company pay certain maintenance, insurance, and other operating costs. The leases expire at various dates through 2020.
The minimum lease payments for the next five years under these lease arrangements are as follows:
Rent expense under the above leases was approximately $268,000 and $280,000 (excluding discontinued operations) for the years ended December 31, 2014 and 2013, respectively.
JUHL ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
Legal fee retainer agreement
The Company is a party to a legal services fee arrangement whereby it has retained the services from an unrelated legal firm for $20,000 per month through December 31, 2018. The monthly fee may increase at the option of the legal services firm based on the Consumer Price Index up to a maximum of 5%. Additional fees may be incurred by the Company for reimbursable expenses and specific projects that are deemed to be outside the general scope of the retainer arrangement.
21.
VARIABLE INTEREST ENTITIES
The Company’s evaluation of whether it qualifies as the primary beneficiary of VIEs is highly complex and involves significant judgments, estimates and assumptions. The Company generally utilizes expected cash flow scenarios to determine the Company’s interest in the expected losses or residual returns of VIEs and perform qualitative analysis of the activities that most significantly impact the VIEs’ economic performance and whether the Company has the power to direct those activities.
Consolidated Variable Interest Entities
Valley View Transmission, LLC
The Company has determined it is the primary beneficiary in Valley View Transmission by reference to provisions within the contractual arrangements with Valley View Transmission together with investment and ownership considerations. The Company has a 32.6% voting interest in Valley View, and has an additional 13.9% voting power through a voting trust arrangement with three other investors. The Company acts as the managing agent to make decisions that affect the operation of Valley View and our CEO is also on the Board of Governors of Valley View. In addition, the Company agreed to guarantee certain payments to investors in order to secure the required equity capital and to enable the term loan conversion by the lender.
The Company consolidates in its financial statements the financial position, results of operations, and cash flows of Valley View Transmission, and all intercompany balances and transactions between the Company and Valley View are eliminated in the consolidated financial statements. Assets and liabilities of Valley View were recorded at their respective estimated fair values using generally accepted accounting principles for business combinations.
The assets of a consolidated VIE are used to settle the liabilities of that entity. The liabilities of a consolidated VIE do not have recourse to the general credit of the Company.
See Note 20 Commitments and Contingencies with regard to guarantees made by the Company in connection with acquiring additional equity in the project from certain investors.
JUHL ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
22.
BUSINESS ACQUISITIONS
Iowa Wind Farms
In August 2014, the Company closed on the purchase of 100% of the membership interests of limited liability companies comprising 3.2 MW of wind energy facilities in Iowa (the “Iowa wind farms”). The total consideration was approximately $4,346,000. The primary sources of payment of the acquisition price were approximately $1,855,000 (net of cash acquired) along with proceeds of $2,500,000 from three bank notes less loan costs of approximately $83,000 that is recourse only to the underlying wind farm assets. The cash consideration was provided out of proceeds raised by Juhl Renewable Assets. See Note 11 for terms of the bank financing. The purchase of the wind facilities includes a power purchase agreement with a regulated utility that expires in November 2021.
The acquisition is being accounted for under the acquisition method and, accordingly, the operating results for the Iowa wind farms have been included in these consolidated statements from the date of acquisition. The assets and liabilities of Iowa wind farms were recorded at their respective estimated fair values as of the date of the acquisition using generally accepted accounting principles for business combinations. The Company used a combination of the market and cost approaches that included unobservable level three inputs to estimate the fair values of the Iowa wind farms assets acquired.
The following table summarizes the purchase price allocation using estimated fair values of Iowa wind farm’s assets acquired:
Pro forma information:
The acquired Iowa wind farms contributed revenues of approximately $104,000 and earnings of approximately $26,000 to the Company for the period from the date of acquisition through December 31, 2014. The following unaudited pro forma summary presents consolidated information of Juhl Energy, Inc. as if the business combination had occurred on January 1, 2013:
Juhl Energy, Inc. did not have any material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. Costs of acquiring the Iowa Wind Farms is not considered material for purposes of the pro forma adjustments.
These pro forma amounts have been calculated after applying the Company's accounting policies and adjusting the results of the Iowa wind farms to reflect the additional depreciation and amortization that would have been charged assuming the fair value adjustments to property, plant, and equipment, and intangible assets had been applied from January 1, 2013, with the consequential tax effects.
PVPower
The net assets acquired from PVPower, Inc. of less than $100,000 have been incorporated into our subsidiary, JRES, as of the acquisition date in February 2014. The 431,539 of shares of common stock issued to PVPower in the acquisition as shown in the statement of changes in stockholders’ equity includes the effect of retiring the 168,461 shares of common stock that the Company received as its portion of the share consideration resulting from its previous ownership interest in PVPower.
PEC
In December 2014, we issued 500,000 restricted shares of common stock to the former owners of PEC as a portion of the contingent purchase price under the terms of the agreement to acquire PEC in April 2012.
JUHL ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
23.
LEGAL PROCEEDINGS
The Company is subject to legal proceedings and claims which arise in the ordinary course of its business. While the ultimate outcome of these matters is not presently determinable, it is in the opinion of management that the resolution of outstanding claims will not have a material adverse effect on the financial position or results of operations of the Company. Due to the uncertainties in the settlement process, it is at least reasonably possible that management’s view of outcomes will change in the near term.
The Winona project is the subject of a lawsuit initiated in the U. S. District Court for the District of Minnesota in December 2013 by Unison Co., Ltd. against the Company, Juhl Energy Development, a Company subsidiary, the wind project ownership entities, members of management, and others. The Unison action arises out of the purchase of the wind turbine generators from Unison and purports to state causes of action for (i) fraudulent inducement, (ii) breach of the Financing Agreement with Unison: (iii) breach of the implied covenant of good faith and fair dealing; (iv) tortious interference with contractual relationship; and (v) unjust enrichment. The Company disputes the allegations and is vigorously defending the action. The Company has recorded the original turbine supply purchase obligation in its consolidated financial statements together with accrued interest thereon, and carries the amount in the current and long term liability sections under the original understanding with Unison that the turbine supplier would be paid out of project cash flows in the event that the project was unable to obtain financing. The project has been unable to successfully obtain debt financing or obtain any further equity proceeds as a result of limited operating history of this wind turbine model in the U.S. market, inconsistent operating performance and poor financial performance of the project. Although the Company believes it will prevail in the Unison action, an outcome of the Unison action could be divesting ownership of the project. The Company, together with all of the defendants, have filed a counterclaim in arbitration in accordance with the underlying transaction documents for breach of turbine warranty and other claims. The Company recorded a turbine asset impairment charge in 2014 as a result of the poor operating performance history of the Winona wind farm (see Notes 2 and 7).
24.
DISCONTINUED OPERATIONS
Discontinued operations is comprised of the operations of Juhl Tower Services, a company that performed cellular communication tower maintenance services until late 2014. The associated results of operations, financial position and cash flows are separately reported as discontinued operations for all periods presented.
Services were generally performed under master or other services agreements and were billed on a contractually agreed price per unit on a work order basis. Revenue from these services were recorded using the completed contract method of accounting in accordance with Accounting Standards Codification, or ASC, 605, Revenue Recognition because the duration of service orders is short in nature (typically two weeks or less). Under the completed contract method, revenues and costs related to the projects were recognized only upon completion of the services at a project site. Accordingly, during the period of performance, costs were accumulated on the balance sheet under work in progress, but no revenue or income was recorded before completion of the work.
JUHL ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
Assets and liabilities of discontinued operations are reflected in separate classifications of current assets, non-current assets and current liabilities. Assets are valued based on estimated realizable values. To arrive at estimated realizable values at December 31, 2014, the Company recorded an impairment charge of approximately $94,000 within the net loss attributed to discontinued operations. Liabilities are reflected based on amounts at which the underlying obligations will be settled.
Liabilities include the following bank line of credit obligation:
At December 31, 2014 and as of the date of these consolidated financial statements, we were not in compliance with certain debt covenants with respect to the bank note and as such, the note is subject to a payoff demand by the lender. The non-compliance has no impact on the classification of the note as it is recorded as a current liability. The note is also subject to a parent guarantee. The Company expects to retire the note at the due date in April 2015 through payment in full or reach another agreement with the bank using re-negotiated payment terms. There can be no assurance that any debt covenant waivers or amendments will be obtained, or that the debt could be refinanced with other financial institutions on favorable terms.
ITEM 9
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A
ITEM 9A CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Principal Executive Officer and our Principal Financial Officer, evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of December 31, 2014, the end of the period covered by this report. Based upon management’s evaluation, our Principal Executive Officer and our Principal Financial Officer concluded that, as of December 31, 2014, our disclosure controls and procedures were not effective at a reasonable assurance level, based on the material weakness defined below, to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Principal Executive Officer and our Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the U.S. Our internal control over financial reporting includes those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the U.S., and that receipts and expenditures of the Company are being made only in accordance with authorization of management and directors of the Company; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on our consolidated financial statements.
Management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2014, based on the 1992 framework in Internal Control-Integrated Framework (the “Original Framework”) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this evaluation, management concluded that our internal control over financial reporting was not effective as of December 31, 2014 based on the criteria in the Original Framework issued by the COSO. Management reviewed the results of its assessment with our audit committee, which is comprised of our independent directors. On May 14, 2013, COSO released its revisions and updates (the “Updated Framework”) to the Original Framework. The Company utilized the Original Framework in evaluating its internal control over financial reporting. As soon as is feasible, the Company will transition to using the Updated Framework in assessing its internal control over financial reporting.
In connection with the assessment described above, management identified the following control deficiency that represents a material weakness at December 31, 2014:
●
The Company did not maintain effective controls over the period-end financial reporting process, including controls over the financial closing process, and supporting documentation with respect to journal entries, and proper segregation of duties.
MANAGEMENT’S REMEDIATION PLAN
Based on the material weakness identified above, we have designed a plan to implement, or in some cases have already implemented, the specific remediation initiatives described below:
•
We are committed to establishing procedures and utilizing experienced individuals with professional supervision to properly segregate duties, prepare and approve the consolidated financial statements and footnote disclosures in accordance with US GAAP.
•
We have initiated efforts to hire a corporate controller who will assist the CFO in implementing a formalized financial reporting process that includes properly supported and reviewed journal entries, proper segregation of duties, and a properly completed and approved close checklist and calendar.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Our management’s report was not subject to attestation by our registered public accounting firm pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, which permits us to provide only management’s report in this annual report.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during our last fiscal quarter ended December 31, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B
ITEM 9B OTHER INFORMATION
None
PART III
ITEM 10
ITEM 10 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The following table shows the positions held by our Board of Directors and executive officers, and their ages as of March 27, 2015:
The principal occupations for the past five years (and, in some instances, for prior years) of each of our directors and executive officers are as follows:
Daniel J. Juhl became our Chairman of the Board and Chief Executive Officer on June 24, 2008, and had served as President of Juhl Energy Development since September 2007 and Juhl Energy Services, since January 1989. Mr. Juhl has been involved in the wind power industry for more than 30 years. He has experience in the design, manufacture, maintenance and sale of wind turbines. He also provides consulting services in the wind power industry helping farmers develop wind projects that qualify for Minnesota’s renewable energy production incentives. Mr. Juhl has been involved in the development of about 1,500 megawatts of wind generation in his 30+ years of experience in the field. He has served as the principal technology officer of Next Generation Power Systems, Inc. from October 2005 until the present. He has been the principal consultant for wind energy projects to Edison Capital, John Deere Capital, Vestas, EWT, Suzlon Turbine Manufacturing, and various public and private utilities throughout the United States and Canada. He has appeared before numerous state and federal governmental bodies advocating wind power and community-based energy development on behalf of landowners, farmers and ranchers. Mr. Juhl wrote the popular wind energy reference guidebook, “Harvesting Wind Energy as a Cash Crop.”
Mr. Juhl’s extensive experience in the wind power industry and his specific experience as founder of Juhl Energy Development and Juhl Energy Services, the related companies which are now our wholly-owned subsidiaries, provide the Company with a solid foundation of knowledge about the industry, lends stability to the Company’s position in the industry and makes Mr. Juhl uniquely qualified to serve as CEO and a director of the Company.
John P. Mitola became our President and a member of our Board of Directors on June 24, 2008, and had served in similar positions with Juhl Energy Development since April 2008. Mr. Mitola has more than 20 years of experience in the energy and environmental industries, real estate development, venture capital, engineering and construction. He was a managing partner with Kingsdale Capital International, a private equity and capital advisory firm that specialized in merchant banking, leveraged buyouts and corporate finance, since August 2006. From 2003 to 2009 Mr. Mitola served as Chairman of the Illinois Toll Highway Authority, one of the largest agencies in Illinois and one of the largest transportation agencies in North America with a $600 million annual operating budget and a $6.3 billion capital program, operating over 274 miles of roadway serving the Chicago metro region.
Most recently, Mr. Mitola was Chief Executive Officer and a director of Electric City Corp., a publicly-held company that specialized in energy efficiency systems, where he served from January 2000 to February 2006. Prior to his role at Electric City, Mr. Mitola was vice president and general manager of Exelon Thermal Technologies, a subsidiary of Exelon Corp. that designed and built alternative energy systems, from March 1997 to December 1999. Prior to serving as its general manager, Mr. Mitola served in various leadership roles at Exelon Thermal Technologies from January 1990 until his move to Electric City Corp. in January 2000. Mr. Mitola is also a member of the board of directors of another publicly-traded company, IDO Security Inc. He is a member of the American Society of Heating, Refrigerating and Air-Conditioning Engineers, and the Association of Energy Engineers. His community affiliations include membership in the Economic Club of Chicago, City Club of Chicago, Union League Club and the governing board of the Christopher House Board of Directors. He is also a member of the board of the Illinois Council Against Handgun Violence. Mr. Mitola received his B.S. degree in engineering from the University of Illinois at Urbana-Champaign and J.D. degree from DePaul University College of Law.
Mr. Mitola’s varied experience in energy-related businesses, his public company experience and the administrative skills he has acquired over his career make him particularly capable to lead the Company’s management team and serve as one of its directors.
John J. Brand became our Chief Financial Officer in January 2009. Mr. Brand is a former certified public accountant with 14 years of audit, tax and consulting experience in public accounting firms, including Grant Thornton. He has significant experience in the financial management of both public and early stage high growth technology companies, as well as a record of achievement in assisting the growth of emerging companies. Immediately prior to joining Juhl Energy, and since 2002, Mr. Brand served as the Chief Financial Officer of CMS Direct, Inc. (now CognitiveDATA, Inc., a subsidiary of Merkle, Inc. subsequent to acquisition), a marketing services and database technology firm serving predominantly the retail industry. From 1993-1999, he served as Chief Financial Officer of MTI Group, a start-up computer network technology services firm that grew to $60 million revenue until its acquisition by Comdisco (a $2B leasing and services firm on NYSE), where he acted as Division Controller in the Network Services Division. From 1999- 2002, Mr. Brand held Chief Financial Officer positions in two start-up business enterprises, a search engine software development endeavor for Subjex Corporation and an energy storage device manufacturer, Powerbanc Corporation. Mr. Brand received his B.S. degree in Accounting from St. Cloud State University.
Edward C. Hurley became a director of our Company in July 2008 following our reverse public offering transaction and is a member of our audit committee as of November 2009. Mr. Hurley also serves on the nominations and governance committee and chairs our compensation committee. Mr. Hurley is a partner with Foley & Lardner LLP where he is a member of the Energy Industry Team, focusing his practice on public utility regulation, a position he has held since May 2010.
Mr. Hurley dedicated over 16 years of his career at the Illinois Commerce Commission ("ICC") where he served as the agency's chairman, as well as a commissioner and an administrative law judge. During his tenure at the ICC, Mr. Hurley was involved in resolving complex issues impacting Illinois businesses governed by the ICC, including the deregulation of the electric energy markets, the process for procurement of electricity by electric utilities, and mergers and acquisitions of telecommunications, electric, and natural gas utilities. He also served as the Special Director of the Office of Emergency Energy Assistance for the State of Illinois, being responsible for the successful implementation of the "Keep Warm Illinois" and "Keep Cool Illinois" Campaigns that were driven by anticipated increases in the costs of natural gas and electricity.
Mr. Hurley also has been involved in regulatory issues at a national level. While at the ICC, Mr. Hurley was active in the National Association of Regulatory Utility Commissioners, where he served on the board of directors as well as the Water Committee. In these roles, Mr. Hurley gained a national perspective regarding the regulatory requirements imposed upon utilities operating in newly competitive markets. He continues to be an active participant, as well as a guest speaker, at numerous conferences relating to issues impacting businesses that operate in regulated industries, including energy, telecommunications and investor-owned water systems. Also, Mr. Hurley has been a member of the National Coal Council since 2004. Prior to joining Foley, Mr. Hurley was of counsel with Chico & Nunes, P.C. He began his career representing clients in litigation in private practice and as an Illinois Assistant Attorney General. Mr. Hurley received his J.D. from John Marshall Law School in 1980 and his B.S.B.A. from Marquette University in 1976.
The Company believes that Mr. Hurley’s significant experience in his leadership role at a large public agency in the energy arena adds valuable depth to the Company’s Board of Directors.
James W. Beck became a director of our Company in November 2009, and is a member of our audit committee as of November 2009 of which he currently serves as chair. He is also a member of our compensation committee and our nominations and corporate governance committee. Mr. Beck is a majority owner of Intepro, a company engaged in the development of software for vertical markets having to meet requirements for regulatory compliance, and is a co-owner of EMCllc, a firm engaged in the engineering, design and implementation of energy efficient lighting systems in industrial and commercial applications throughout North America for new construction and retrofit markets. Mr. Beck has previously been involved with companies engaged in the evaluation and implementation of energy usage, alternative energy sources, electrical continuation, and energy conservation. Mr. Beck earned a B.S. degree in business from the University of Minnesota. Mr. Beck serves as a member of the Board of Directors of AIA Insurance Services in Lewiston, Idaho, serves as a member of the Advisory Committee of Summit Academy in Minneapolis, Minnesota and is involved in various other community and civic activities.
The Company’s addition of Mr. Beck as a director was founded upon his expertise in the areas of energy usage and conventional and alternative energy and his practical experience in the application of that knowledge to commercial markets which the Company believes will be a valuable asset to its Board.
Chuck Templeton became a director of our Company on April 9, 2014. Mr. Templeton is currently the Chairman of Impact Engine, Inc., a venture accelerator for entrepreneurs seeking to address environmental issues or societal challenges, and where he also served as Executive Director from January 2012 until April 2014, and currently serves as a director of AuctionsByCellular, LLC and a director of Getable, Inc. Mr. Templeton was a founder of OpenTable.com. From November 2007 to June 2013, Mr. Templeton served as Chairman of the Board of GrubHub, Inc. (NYSE GRUB). Mr. Templeton served as a director of TaskRabbit, Inc. from August 2012 to April 2014 and as a director of I-Go Cars from February 2010 to February 2013. Mr. Templeton founded OhSoWe.com in 2009 and served as President from 2009 until 2011.
The Company believes that Mr. Templeton’s focus on environmental issues as well as his demonstrated past success and business acumen will be an asset to the Board.
Our Board of Directors is divided into three classes designated as Class I, Class II and Class III and are elected to hold office for three-year terms. Officers are elected annually by the Board of Directors and serve at the discretion of the Board under the terms of their respective employment agreements discussed herein.
Involvement in Certain Legal Proceedings
To the best of our knowledge, none of our directors or executive officers has, during the past ten years, been involved in any of the items below that the Company deems material to their service on behalf of the Company:
• been convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
• had any bankruptcy petition filed by or against the business or property of the person, or of any partnership, corporation or business association of which he was a general partner or executive officer, either at the time of the bankruptcy filing or within two years prior to that time;
• been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or federal or state authority, permanently or temporarily enjoining, barring, suspending or otherwise limiting, his involvement in any type of business, securities, futures, commodities, investment, banking, savings and loan, or insurance activities, or to be associated with persons engaged in any such activity;
• been found by a court of competent jurisdiction in a civil action or by the SEC or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated;
• been the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated (not including any settlement of a civil proceeding among private litigants), relating to an alleged violation of any federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or
• been the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Securities Exchange Act of 1934, as amended (“Exchange Act”)), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.
Independent Directors
Mr. Ed Hurley, Mr. James Beck and Mr. Chuck Templeton serve on our Board of Directors as “independent directors” defined under NASDAQ rules and by the regulations of the Securities Exchange Act of 1934.
Board Composition and Meetings of Board of Directors
The Board of Directors is currently composed of five members. All actions of the Board of Directors require the approval of a majority of the directors in attendance at a meeting at which a quorum is present. In 2014, our Board of Directors met in person one time and acted by written consent four times.
Board Committees
The Company has established an audit committee and has created a compensation committee and a nominations and governance committee, in compliance with established corporate governance requirements. Currently, Mr. Hurley, Mr. Beck and Mr. Templeton are our only “independent” directors, as that term is defined under NASDAQ rules and by the regulations of the Securities Exchange Act of 1934.
Audit Committee. The Board of Directors of the Company established an Audit Committee on November 24, 2009. Mr. Beck serves as Audit Committee Chairman, and Mr. Hurley and Mr. Templeton serve as members of the Audit Committee. As a result, the Audit Committee is comprised of our "independent" directors as defined in NASDAQ Marketplace Rule 5605(a) (2). The Board of Directors of the Company adopted an Audit Committee Charter on April 8, 2010. The Audit Committee reviews the results and scope of the audit and the financial recommendations provided by our independent registered public accounting firm. Further, the Audit Committee reviews the scope, timing and fees for the annual audit and the results of audit examinations performed by the internal auditors and independent public accountants, including their recommendations to improve the system of accounting and internal controls.
The Company does not have a member of its audit committee who qualifies as a “financial expert” at this time. The Company believes that the relevant business experience of its current board of directors and audit committee members provides adequate oversight of accounting and financial reporting and internal controls. The Company expects, however, to consider the addition of an audit committee financial expert in the future as may be required by a national stock exchange.
Compensation Committee. The Board of Directors of the Company established a Compensation Committee on April 8, 2010. The Compensation Committee is comprised of our “independent” directors as defined in NASDAQ Marketplace Rule 5605(a)(2). Mr. Hurley serves as Chair of the Compensation Committee. The Compensation Committee reviews and approves our salary and benefit policies, including compensation of executive officers. Further, the Compensation Committee administers our Incentive Compensation Plan, and recommends and approves grants of stock options, restricted stock and other awards under that plan.
Nominations and Governance Committee. The Board of Directors of the Company established a Nominations and Governance Committee on April 8, 2010 meeting. The Nominations and Governance Committee is comprised of our “independent” directors as defined in NASDAQ Marketplace Rule 5605(a)(2). Mr. Templeton serves as Chair of the Nominations and Governance Committee. The Nominations and Governance Committee reviews the qualifications of prospective directors for consideration by the board of directors as management’s nominees for directors. The purpose of the Nominations and Governance Committee is to select, or recommend for our entire board’s selection, the individuals to stand for election as directors at the annual meeting of stockholders and to oversee the selection and composition of committees of our board. The Nominations and Governance Committee’s duties also include considering the adequacy of our corporate governance and overseeing and approving management continuity planning processes.
We will consider nominations for directors submitted by stockholders. Stockholder nominations for election to the board of directors must be made by written notification received by us not later than sixty days prior to the next annual meeting of stockholders. Such notification shall contain, at a minimum, the following information:
1.
The name and residential address of the proposed nominee and of each notifying stockholder;
2.
The principal occupation of the proposed nominee;
3.
A representation that the notifying stockholder intends to appear in person or by proxy at the meeting to nominate the person specified in the notice;
4.
The total number of our shares owned by the notifying stockholder;
5.
A description of all arrangements or understandings between the notifying stockholder and the proposed nominee and any other person or persons pursuant to which the nomination is to be made by the notifying stockholder;
6.
Any other information regarding the nominee that would be required to be included in a proxy statement filed with the SEC; and
7.
The consent of the nominee to serve as one of our directors, if elected.
The Nominations and Governance Committee will return, without consideration, any notice of proposed nomination which does not contain the foregoing information.
The Nominations and Governance Committee has not established specific criteria or minimum qualifications that must be met by committee-nominated or shareholder-nominated nominees for director. Regardless of the source of a given nominee’s nomination, the Nominations and Governance Committee evaluates each nominee based solely upon his/her educational attainments, relevant experience and professional stature. The Nominations and Governance Committee primarily seeks nominations for director from institutional security holders, members of the investment banking community and current directors.
Indebtedness of Directors and Executive Officers
None of our directors or executive officers or their respective associates or affiliates is indebted to us.
Family Relationships
There are no family relationships among our directors and executive officers.
Amended and Restated 2008 Incentive Compensation Plan
In June 2008, our Board of Directors and shareholders adopted and approved the 2008 Incentive Compensation Plan. In June 2012, our Compensation Committee, Board of Directors and shareholders adopted and approved the Amended and Restated 2008 Incentive Compensation Plan. The Amended and Restated Plan is attached hereto as Exhibit 10.2. The purpose of our Incentive Compensation Plan is to provide stock options, stock issuances and other equity interests to employees, officers, directors, consultants, independent contractors, advisors and other persons who have made or are expected to make contributions to our company.
Administration. Our Incentive Compensation Plan is to be administered by our Compensation Committee, provided, however, that except as otherwise expressly provided in the plan, the committee may delegate some or all of its power or authority to our President, Principal Executive Officer or other executive officer. Subject to the terms of our plan, the committee is authorized to construe and determine the stock option agreements, other agreements, awards and the plan, prescribe, amend and rescind rules and regulations relating to the plan and awards, determine acceleration of vesting schedules or award payments and forfeitures, determine terms and provisions of stock options agreements (which need not be identical), grant awards for performance goals and option awards and stock appreciation rights based upon a vesting schedule and correct defects, supply omissions or reconcile inconsistencies in the plan or any award thereunder, and make all other determinations as the committee may deem necessary or desirable for the administration and interpretation of our plan.
Eligibility. The persons eligible to receive awards under our Incentive Compensation Plan are the employee, officers, directors, consultants, independent contractors and advisors of our company or any parent or subsidiary of our company and other persons who have made or are expected to make contributions to our company.
Types of Awards. Our Incentive Compensation Plan provides for the issuance of stock options, incentive stock options, restricted compensation shares, restricted compensation share units, stock appreciation rights (or SARs), performance shares, award shares and other stock-based awards. Performance share awards entitle recipients to acquire shares of common stock upon the attainment of specified performance goals within a specified performance period, as determined by the committee.
Shares Available for Awards. Subject to certain recapitalization events described in our plan, the aggregate number of shares of common stock that may be issued pursuant to our Incentive Compensation Plan at any time during the term of such plan is 4,500,000 shares, and as of December 31, 2014, there were a total of 865,000 shares outstanding under such plan. If any award expires, or is terminated, surrendered or forfeited, the common stock covered by such award will again be available for the grant of awards under our plan.
Stock Options and Stock Appreciation Rights. The committee is authorized to grant stock options, including both incentive stock options (or ISOs) and non-qualified stock options, restricted compensation shares, restricted compensation share units, stock appreciation rights, performance shares and award shares. The terms and conditions of awards under the plan including number of shares covered, exercise price per share and term are determined by the committee, but in the case of an ISO, the exercise price must not be less than the fair market value of a share of common stock on the date of grant. For purposes of our Incentive Compensation Plan, if at the time of a grant, our company’s common stock is publicly traded, the term “fair market value” means (i) if listed on an established stock exchange or national market system, the last reported sales price or the closing bid if no sales were reported on such exchange or system, or (ii) the average of the closing bid and asked prices last quoted by an established quotation service for over-the-counter securities if the common stock is not reported on a national market system. In the absence of an established market for our common stock, the fair market value shall be determined in good faith by the committee. The number of shares covered by each option or stock appreciation right, the times at which each option or stock appreciation right will be exercisable, and provisions requiring forfeiture of unexercised options or stock appreciation rights at or following termination of employment generally are fixed by the committee, except that no option or stock appreciation right may have a term exceeding ten years. The committee also determines the terms and conditions of restricted compensation shares, restricted compensation share units, performance shares, award shares and other stock-based awards under our plan.
Restricted Compensation Shares and Restricted Compensation Share Units. The committee is authorized to grant restricted compensation shares and restricted compensation shares units. An award of restricted compensation shares is a grant which entitles recipients to acquire shares of common stock subject to restrictions on transfer and which may be forfeited if all specified employment, vesting and/or performance conditions as determined by the committee are not met. An award of restricted compensation share units confers upon a recipient the right to acquire, at some time in the future, restricted compensation shares, subject to forfeiture if all specified award conditions as determined by the committee are not met.,
Performance Shares and Award Shares. The committee is authorized to grant awards entitling recipients to acquire shares of common stock upon the attainment of specified performance goals and grant awards entitling recipients to acquire shares of common stock subject to such terms, restrictions, conditions, performance criteria, vesting requirements and payment needs as determined by the committee, subject to such other terms as the committee may specify.
Other Stock-Based Awards. The committee is authorized to grant other awards based upon the common stock having such terms and conditions as the committee may determine including, without limitation, the grant of securities convertible into common stock and the grant of phantom stock awards or stock units.
Performance Goals and Other Criteria. The committee shall establish objective performance goals for participants or groups of participants for performance-based awards under the plan excluding options and stock appreciation rights. With respect to participants who are “covered employees” (within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended), an award other than an option or a stock appreciation right may be based only on performance factors that are compliant with applicable regulations.
Other Terms of Awards. Options may be exercised by written notice of exercise to us by way of cashless exercise, settlement of which shall be made solely in cash. Unless otherwise determined by the committee, awards may not be transferred except by will or the laws of descent and distribution and, during the life of the participant, may be exercisable only by the participant. However, except as the committee may otherwise determine, non-statutory options and restricted compensation shares may be transferred pursuant to a qualified domestic relations order (as defined by ERISA) or pursuant to certain estate-planning vehicles. To the extent not inconsistent with the plan or applicable law, the committee may include additional provisions in awards such as, among other things, restrictions on transfer, commitments to pay cash bonuses and guaranty loans. The committee shall determine the effect on awards of disability, death, retirement, leave of absence or other change in participant status. We have the right to deduct applicable taxes from payments to award recipients. Participants have no right to continued employment or other relationship with us, and subject to award provisions, participants have no rights as stockholders of our company until becoming record stockholders.
Acceleration or Extension of Vesting; Change in Control. The committee may, in its discretion, accelerate the dates on which all or any particular option or award under the plan may be exercised and may extend the dates during which all or any particular option or award under the plan may be exercised or vest. In the case of a “change in control” of our company, as defined in our Incentive Compensation Plan, we will take one or a combination of the following actions: (a) make appropriate provision for the continuation or assumption of the awards; (b) acceleration of exercise or vesting of the awards; (c) exchange of the awards for the right to participate in a benefit plan of a successor; (d) repurchase of awards; or (e) termination of awards immediately prior to a change in control.
Amendment and Termination. The board of directors may amend, suspend or terminate our Incentive Compensation Plan provided, however, that no amendment may be made without stockholder approval if such approval is necessary to comply with any applicable law, rules or regulations. Our plan became effective upon the date it was adopted by the committee and approved by our stockholders, and no awards may be granted under the plan after the completion of ten years thereafter. Awards previously granted may extend beyond that date.
Section 16(a) Beneficial Ownership Reporting Compliance
We have securities registered under Section 12 of the Exchange Act and, accordingly, our directors, officers and affiliates are required to file reports under Section 16(a) of the Exchange Act.
All of our officers and directors are current in their filing of their beneficial ownership reports pursuant to Section 16(a) of the Exchange Act.
Code of Ethics
Our Board of Directors has adopted a code of ethics, which applies to all our directors, officers and employees. Our code of ethics is intended to comply with the requirements of Item 406 of Regulation S-K.
Our code of ethics is posted on our Internet website at www.juhlenergy.com. We will provide our code of ethics in print without charge to any stockholder who makes a written request to us at Juhl Energy, Inc., 1502 17th St SE, Pipestone, Minnesota 56164. Any waivers of the application, and any amendments to, our code of ethics must be made by our Board of Directors. Any waivers of, and any amendments to, our code of ethics will be disclosed promptly on our Internet website, www.juhlenergy.com.
ITEM 11
ITEM 11 EXECUTIVE COMPENSATION
The following table sets forth, for the most recent two fiscal years, all cash compensation paid, distributed or accrued, including salary and bonus amounts, for services rendered to us by our Principal Executive Officer and two other executive officers in such year who received or are entitled to receive remuneration in excess of $100,000 during the stated period and any individuals for whom disclosure would have been made in this table but for the fact that the individual was not serving as an executive officer as at December 31, 2014:
1The determination of the value of warrant awards is based upon the Black-Scholes Option pricing model, details and assumptions of which are set out in Note 15 in the financial statements included in this Annual Report. The amounts represent the incremental grant date fair value computed in accordance with FASB Accounting Standards Codification Topic 718 (“FASB ASC 718”), of stock warrants granted to the named executive officers giving effect to cancellation of all previous stock options that had been issued to such named executive officer.
2Represents a grant of warrants on February 18, 2014, to purchase 500,000 shares of common stock, vesting quarterly over an 18-month period
3Represents Car Allowance, taxable insurance benefits and Health Savings Account contribution
4Represents a grant of warrants on February 18, 2014, to purchase 1,500,000 shares of common stock, vesting quarterly over an 18-month period; options to purchase an aggregate of 510,000 shares of common stock were simultaneously cancelled.
5Represents a grant of warrants on February 18, 2014, to purchase 1,500,000 shares of common stock, vesting quarterly over an 18-month period; options to purchase an aggregate of 250,000 shares of common stock were simultaneously cancelled.
The aggregate amount of benefits in each of the years indicated did not exceed the lesser of $50,000 or 10% of the compensation of any named officer.
Outstanding Equity Awards at Fiscal Year-End
Compensation of Directors
Directors are expected to timely and fully participate in all regular and special board meetings, and all meetings of committees on which they serve. Through 2013, we compensated directors through stock options granted under our 2008 Incentive Compensation Plan and an annual cash stipend. Effective March 19, 2014, we cancelled the options outstanding as of December 31, 2013 described below and issued warrants to directors for the purchase of common stock in lieu thereof pursuant to the terms of Warrant Agreements, the forms of which are attached hereto as Exhibit 10.15 and Exhibit 10.16.
In July of 2008, Edward C. Hurley was appointed as a director of the Company. From his appointment through 2011, we granted Mr. Hurley stock options to purchase an aggregate of 20,000 shares of Company common stock. Such options were cancelled effective March 19, 2014, at which time warrants were granted to Mr. Hurley to purchase 100,000 shares of common stock exercisable according to the vesting schedule at $0.35 per share, the closing price of the stock on the grant date. Pursuant to the vesting schedule, 12,500 warrant shares were exercisable as of the grant date, and the warrants vest thereafter at the rate of 12,500 shares on the first day of each quarter thereafter until fully vested on October 1, 2015. The warrants expire on March 19, 2014. Mr. Hurley also receives cash compensation of $4,000 per quarter, $700 per quarter as Chair of the Compensation Committee and $500 for attendance at any Board committee meeting.
General Wesley K. Clark served as a director of the Company from 2009 until April 9, 2014, at which time he resigned as a director and assumed the position as Special Advisor to the Board. From his appointment through 2011, we granted General Clark stock options to purchase an aggregate of 520,000 shares of Company common. Such options were cancelled effective March 19, 2014, at which time warrants were granted to General Clark to purchase 520,000 shares of common stock exercisable according to the vesting schedule at $0.35 per share, the closing price of the stock on the grant date. Pursuant to the vesting schedule, 65,000 warrant shares were exercisable as of the grant date, and the warrants vest thereafter at the rate of 65,000 shares on the first day of each quarter thereafter until fully vested on October 1, 2015. The warrants expire on March 19, 2024. During his tenure as a director, General Clark also received cash compensation of $4,000 per quarter, $700 per quarter as Chair of the Nominations and Governance Committee and $500 for attendance at any Board committee meeting. There is no change to General Clark’s compensation in his position as Senior Advisor to the Board.
On November 24, 2009, James W. Beck was appointed as a director of the Company. From his appointment through 2011, we granted Mr. Beck stock options to purchase an aggregate of 20,000 shares of Company common stock. Such options were cancelled effective March 19, 2014, at which time warrants were granted to Mr. Beck to purchase 100,000 shares of common stock exercisable according to the vesting schedule at $0.35 per share, the closing price of the stock on the grant date. Pursuant to the vesting schedule, 12,500 warrant shares were exercisable as of the grant date, and the warrants vest thereafter at the rate of 12,500 shares on the first day of each quarter thereafter until fully vested on October 1, 2015. The warrants expire on January 2, 2024. Mr. Beck also receives cash compensation of $4,000 per quarter, $1,000 per quarter as Chair of the Audit Committee and $500 for attendance at any Board committee meeting.
On April 9, 2014, Chuck Templeton was appointed as a director of the Company. In connection with his appointment, we granted Mr. Templeton warrants to purchase 200,000 shares of Company common stock exercisable according to the vesting schedule at $0.40 per share, the closing price of the stock on the grant date. Pursuant to the vesting schedule, 25,000 warrant shares were exercisable as of the grant date, and the warrants vest thereafter at the rate of 25,000 shares on the first day of each quarter thereafter until fully vested on January 1, 2016. The warrants expire on April 9, 2024. Mr. Templeton also receives cash compensation of $4,000 per quarter and $500 for attendance at any Board committee meeting.
The table below summarizes the compensation that we paid to non-management directors for the fiscal year ended December 31, 2014.
Director Compensation
1Fees are earned but unpaid
2The determination of value of warrant awards is based upon the Black-Scholes Option pricing model, details and assumptions of which are set out in Note 15 in the financial statements included in this Annual Report. The amounts represent the incremental grant date fair value computed in accordance with FASB ASC 718, of stock warrants granted to the respective director giving effect to cancellation of all previous stock options that had been issued to such director.
3Represents warrants to purchase 100,000 shares of common stock exercisable at $0.35 per share vesting quarterly until fully vested on October 1, 2015. Options to purchase an aggregate of 20,000 shares of common stock were cancelled simultaneously with the grant of the warrants.
4General Clark served as a director until his resignation on April 9, 2014
5Represents warrants to purchase 520,000 shares of common stock exercisable at $0.35 per share vesting quarterly until fully vested on October 1, 2015. Options to purchase an aggregate of 520,000 shares of common stock were cancelled simultaneously with the grant of the warrants.
6Mr. Templeton was appointed as a director on April 9, 2015.
7Represents warrants to purchase 200,000 shares of common stock exercisable at $0.40 per share vesting quarterly until fully vested on October 1, 2015.
Employment Agreements
Daniel J. Juhl is employed under the terms of an Executive Employment Agreement dated January 1, 2012, as amended January 1, 2014 (the “Juhl Employment Agreement”). Under the Juhl Employment Agreement, we employ Mr. Juhl as Chief Executive Officer for a term ending on December 31, 2021. During the first year of the term, Mr. Juhl’s monthly salary was $19,687.50, and Mr. Juhl’s monthly salary is increased by five percent (5%) during each remaining year of the term. We are obligated to pay Mr. Juhl an annual performance bonus of a maximum of his annual salary upon reaching certain goals established by the Board of Directors. The performance bonus is conditioned upon (a) profitable operations of our company for the full year for which the bonus is to be paid and (b) minimum revenue growth during the year for which the bonus is to be paid as established by the Board of Directors. Mr. Juhl was granted warrants to purchase 500,000 shares of common stock of the Company, receives an automobile allowance of $750 per month, 20 days of paid annual vacation and other employee benefits provided to similarly-situated employees. Mr. Juhl is entitled to severance compensation in an amount equal to 90 days’ pay in the event he terminates his employment for good reason. The 2012 Employment Agreement and the 2014 Amendment to Employment Agreement are attached hereto as Exhibit 10.4 and Exhibit 10.5, respectively.
John M. Mitola is employed under the terms of an Executive Employment Agreement dated January 1, 2012, as amended January 1, 2014 (the “Mitola Employment Agreement”). Under the Mitola Employment Agreement, we employ Mr. Mitola as President for a term ending on December 31, 2021. During the first year of the term, Mr. Mitola’s monthly salary was $19,687.50, and Mr. Mitola’s monthly salary is increased by five percent (5%) during each remaining year of the term. We are obligated to pay Mr. Mitola an annual performance bonus of a maximum of his annual salary upon reaching certain goals established by the Board of Directors. The performance bonus is conditioned upon (a) profitable operations of our company for the full year for which the bonus is to be paid and (b) minimum revenue growth during the year for which the bonus is to be paid as established by the Board of Directors. Mr. Mitola was granted warrants to purchase 1,500,000 shares of common stock of the Company, receives an automobile allowance of $750 per month, 20 days of paid annual vacation and other employee benefits provided to similarly-situated employees. Mr. Mitola is entitled to severance compensation in an amount equal to 90 days’ pay in the event he terminates his employment for good reason. The 2012 Employment Agreement and the 2014 Amendment to Employment Agreement are attached hereto as Exhibit 10.6 and Exhibit 10.7, respectively.
John J. Brand is employed under the terms of an Executive Employment Agreement dated January 1, 2012, as amended January 1, 2014 (the “Brand Employment Agreement”). Under the Brand Employment Agreement, we will employ Mr. Brand as Chief Financial Officer for a term ending on December 31, 2021. During the first year of the term, Mr. Brand’s monthly salary was $15,000, and Mr. Brand’s monthly salary is increased in the range of three percent (3%) to five percent (5%) annually based on the judgment of the Board of Directors as recommended by the Compensation Committee based on the balance sheet health of the Company and other relevant factors. We are obligated to pay Mr. Brand an annual performance bonus of a maximum of his annual salary upon reaching certain goals established by the Board of Directors. Mr. Brand was granted warrants to purchase 1,500,000 shares of common stock of the Company, receives an automobile allowance of $750 per month, 20 days of paid annual vacation and other employee benefits provided to similarly-situated employees. Mr. Brand is entitled to severance compensation in an amount equal to 90 days’ pay in the event he terminates his employment for good reason. The 2012 Employment Agreement and the 2014 Amendment to Employment Agreement are attached hereto as Exhibit 10.8 and Exhibit 10.9, respectively.
ITEM 12
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Equity Compensation Plan Information
On June 16, 2008, we adopted the 2008 Incentive Compensation Plan, and on October 1, 2012 adopted the Amended and Restated 2008 Incentive Compensation Plan.
The following table provides information as of December 31, 2014, with respect to the shares of common stock that may be issued under our existing equity compensation plan.
Equity Compensation Plan Information
The material provisions of the Amended and Restated 2008 Incentive Compensation Plan approved by security holders are described herein. A copy of the Amended and Restated 2008 Incentive Compensation Plan and a copy of the form of option agreement thereunder are included as Exhibits 10.1 and 10.2, respectively, to this Report.
The 6,307,500 options and warrants granted as of December 31, 2014 under equity compensation plans not approved by security holders include the following:
●
Warrants granted September 12, 2012 as compensation to a consultant to purchase 50,000 shares of common stock at $0.50 per share, which warrants expire September 12, 2015. The form of this Warrant Agreement is attached hereto as Exhibit 10.3 to this Report.
●
Warrants granted on February 18, 2014, to executive officers to purchase an aggregate of 3,500,000 shares of common stock at $0.21 per share, exercisable over an 18-month period, which warrants expire February 18, 2024. The form of these Warrant Agreements is attached hereto as Exhibit 10.14 to this Report. Previous option awards to executive officers to purchase an aggregate of 760,000 shares of common stock were cancelled in connection with these warrant grants.
●
Warrants granted on March 19, 2014, to three outside directors and two service providers to purchase an aggregate of 2,020,000 shares of common stock at $0.35 per share, exercisable over an 18-month period, which warrants expire March 19, 2014. The form of these Warrant Agreements is attached hereto as Exhibit 10.15 to this Report. Previous option awards to three outside directors to purchase an aggregate of 560,000 shares of common stock were cancelled in connection with these warrant grants.
●
Warrants granted on April 9, 2014, to an outside director to purchase 200,000 shares of common stock at $0.40 per share, exercisable over an 18-month period, which warrants expire April 9, 2024. The form of this Warrant Agreement is attached hereto as Exhibit 10.16.
●
Warrants granted on August 6, 2014, to an underwriter to purchase 537,500 shares of common stock at $0.23 per share, which warrants expire July 31, 2019. The form of this Warrant Agreement is attached hereto as Exhibit 10.17. These warrants were granted to the underwriter in conjunction with a public offering of the Company’s common stock.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information regarding the number of shares of our common stock beneficially owned on March 27, 2015 by:
•
each person who is known by us to beneficially own 5% or more of our common stock,
•
each of our directors and executive officers, and
•
all of our directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Shares of our common stock which may be acquired upon exercise of stock options or warrants which are currently exercisable or which become exercisable within 60 days after the date indicated in the table are deemed beneficially owned by the holders. Subject to any applicable community property laws, the persons or entities named in the table above have sole voting and investment power with respect to all shares indicated as beneficially owned by them.
*
Represents less than 1%.
1 Other than the 5% Stockholder listed above, the address of each person is c/o Juhl Energy, Inc., 1502 17th Street SE, Pipestone, Minnesota 56186.
2 Unless otherwise indicated, includes shares owned by a spouse, minor children and relatives sharing the same home, as well as entities owned or controlled by the named person. Also includes shares if the named person has the right to acquire those shares within 60 days after March 27, 2015, by the exercise or conversion of any warrant, stock option or convertible preferred stock. Unless otherwise noted, shares are owned of record and beneficially by the named person.
3 The calculation in this column is based upon 36,424,826 shares of common stock outstanding on March 27, 2015. The 189,604 treasury shares beneficially held by the Company are excluded from the number of shares of common stock outstanding and are not deemed outstanding for purposes of computing the percentages in this column. The shares of common stock underlying warrants, stock options and convertible preferred stock are deemed outstanding for purposes of computing the percentage of the person holding them but are not deemed outstanding for the purpose of computing the percentage of any other person.
4 The address for Airdrie Partners I, LP is 101 California Street, 13th Floor, San Francisco, CA 94111.
5 Includes (a) 3,500,000 shares of common stock held by Mr. Juhl (b) 3,500,000 shares of common stock held by Mary Juhl, Mr. Juhl’s spouse, (c) 7,000,000 shares of common stock held by the Juhl Family Limited Partnership, a Delaware limited partnership of which Mr. Juhl is the general partner, and (d) 375,000 shares of common stock issuable upon the exercise of stock warrants exercisable within 60 days; does not include 50,000 shares of Series A Preferred Stock of Juhl Renewable Assets, Inc., a wholly-owned subsidiary of the Company, held by Dan Juhl and Mary Juhl.
6 Includes (a) 1,183,997 shares of common stock held by Mr. Mitola, (b) 125,000 shares of common stock held by the Mitola Family Limited Partnership, a Delaware limited partnership of which Mr. Mitola is the general partner and (c) 1,125,000 shares of common stock issuable upon the exercise of stock warrants exercisable within 60 days; does not include 50,000 shares of Series A Preferred Stock of Juhl Renewable Assets, Inc., a wholly-owned subsidiary of the Company, held by an IRA for the benefit of Mr. Mitola.
7 Includes (a) 117,994 shares of common stock held in an IRA for the benefit of Mr. Brand and (b) 1,125,000 shares of common stock issuable upon the exercise of stock warrants exercisable within 60 days; does not include 50,000 shares of Series A Preferred Stock of Juhl Renewable Assets, Inc., a wholly-owned subsidiary of the Company, held by an IRA for the benefit of Mr. Brand.
8 Includes (a) 30,678 shares of common stock held by Mr. Hurley and (b) 75,000 shares of common stock issuable upon the exercise of stock warrants exercisable within 60 days.
9 Includes (a) 32,448 shares of common stock held by Mr. Beck and (b) 75,000 shares of common stock issuable upon the exercise of stock warrants exercisable within 60 days.
10 Includes (a) 49,936 shares of common stock held by the Chuck Templeton Living Trust, of which Mr. Templeton is a trustee, and (b) 125,000 shares of common stock issuable upon the exercise of stock warrants exercisable within 60 days; does not include an aggregate of 500,000 shares of Series A Preferred Stock of Juhl Renewable Assets, Inc., a wholly-owned subsidiary of the Company, held by the Chuck Templeton Living Trust, of which Mr. Templeton is a trustee, and IRAs for the benefit of Mr. Templeton and Julie Templeton (Mr. Templeton’s spouse).
ITEM 13
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Juhl Energy provides management, administrative and accounting services to four wind farm operations in which Dan Juhl and immediate family members have less than 5% equity interests in each entity. The revenues earned by the Company in the years ended December 31, 2014 and 2013 was approximately $15,000 per year.
Our CEO, Dan Juhl, is the .1% minority interest member of the 10.2 MW Woodstock Hills wind farm, which the Company acquired a 99.9% membership interest.
Three of our directors, Edward C. Hurley, Chuck Templeton, and James W. Beck are “independent” directors as that term is defined under NASDAQ rules and by the regulations of the Securities Exchange Act of 1934.
Juhl Energy leases office space provided by our CEO, Dan Juhl, at the rate of $1,600 per month over a five year term ending December 31, 2019.
ITEM 14
ITEM 14 PRINCIPAL ACCOUNTING FEES AND SERVICES
For the year ended December 31, 2014, the total fees charged to the Company for audit services were approximately $308,000. These audit fees were incurred for the audit of the Company’s annual financial statements included within Form 10-K, review of the consolidated financial statements included in the Company’s quarterly reports on Form 10-Q, required procedures performed related to the Company Form S-1 registration statement, and the review of the various required periodic reporting filings. The Company incurred approximately $22,000 for tax or other various financial statement consulting services for the year ended December 31, 2014.
For the year ended December 31, 2013, the total fees charged to the Company for audit services were approximately $236,000. These audit fees were incurred for the audit of the Company’s annual financial statements included within Form 10-K, review of the consolidated financial statements included in the Company’s quarterly reports on Form 10-Q, and the review of the various required periodic reporting filings. The Company incurred approximately $29,000 for tax or other various financial statement consulting services for the year ended December 31, 2013.
The current policy of the board of directors is to approve the appointment of the principal auditing firm and any permissible audit-related services. The audit and audit-related fees have been approved by specific board action in 2014 and 2013.
PART IV
ITEM 15
ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The Company’s financial statements filed as part of this annual report are listed in the Table of Contents and provided in response to Item 8.
Exhibits required by Item 601 of Regulation S-K:
3.5
Amended and Restated Certificate of Designation of Preferences, Rights and Limitations of Series B Convertible Preferred Stock filed September 28, 2009
3(i)
Form 8-K
File No. 333-141010
September 28, 2009
3.6
Certificate of Amendment of Certificate of Incorporation filed December 18, 2012 and Certificate of Amendment of Certificate of Amendment of Certificate of Incorporation filed December 20, 2012
3.1
Form 8-K
File No. 000-54080
January 2, 2013
3.7
Amended and Restated Bylaws
Form 8-K
File No. 000-54080
August 22, 2011
Specimen common stock certificate
Form 10-K
File No. 000-54080
April 1, 2013
10.1
Amended and Restated 2008 Incentive Compensation Plan
10.1
Form 10-K
File No. 000-54080
April 1, 2013
10.2
Form of Option Agreement under Amended and Restated 2008 Incentive Compensation Plan
10.2
Form 10-K
File No. 000-54080
April 1, 2013
10.3
Form of warrant agreement with consultants dated September 12, 2012
10.16
Form 10-K
File No. 000-54080
March 30, 2012
10.4
Form of employment Agreement dated January 1, 2012, between the Company and Dan Juhl
10.29
Form 10-K
File No. 000-54080
March 30, 2012
10.5
Form of amendment to employment agreement effective as of January 1, 2014, between the Company and Dan Juhl
10.6
Form 10-K
File No. 000-54080
April 7, 2014
10.6
Form of employment agreement dated January 1, 2012 between the Company and John Mitola
10.30
Form 10-K
File No. 000-54080
March 30, 2012
10.7
Form of amendment to employment agreement effective as of January 1, 2014, between the Company and John Mitola
10.8
Form 10-K
File No. 000-54080
April 7, 2014
10.8
Form of employment agreement dated January 1, 2012 between the Company and John Brand
10.31
Form 10-K
File No. 000-54080
March 30, 2012
10.9
Form of amendment to employment agreement effective as of January 1, 2014 between the Company and John Brand
10.10
Form 10-K
File No. 000-54080
April 7, 2014
10.10
Unit Purchase Agreement dated as of April 30, 2012 between the Company and George Shibayama, Matt Brown and Bryan Eskra (excluding exhibits)
10.1
Form 8-K
File No. 000-54080
May 3, 2012
10.11
Form of Securities Purchase Agreement effective as of February 18, 2014 between the Company and Vision Master Opportunity Fund, Ltd. (excluding exhibits)
10.1
Form 8-K
File No. 000-54080
February 24, 2014
10.12
Form of Restricted Stock Award Agreement effective as of February 1, 2014 between the Company and Consultant
10.13
Form 10-K
File No. 000-54080
April 7, 2014
10.13
Form of Asset Purchase Agreement effective as of February 5, 2014 between the Company and PVPower, Inc. (excluding exhibits and schedules)
10.1
Form 8-K
File No. 000-54080
February 11, 2014
10.14
Form of Warrant for Executive Officers
10.1
Form 10-Q
File No. 000-54080
May 19, 2014
10.15
Form of Warrant for Directors and Service Providers
10.2
Form 10-Q
File No. 000-54080
May 19, 2014
10.16
Form of Warrant for Director
10.1
Form 10-Q
File No. 000-54080
August 19, 2014
10.17
Form of Warrant Issued to Northland Securities, Inc.
10.16
Form S-1/A
File No. 333-195636
June 6, 2014
10.18
Form of Agreement Among Members, by and among, Juhl Valley View, LLC, beneficial owners of common units of Juhl Valley View, LLC and Juhl Renewable Assets, Inc. (formerly Juhl Wind Asset Investment, Inc.)
10.17
Form S-1/A
File No. 333-195636
June 6, 2014
10.19
Amended and Restated Operating and Member Control Agreement of Valley View Transmission, LLC
10.18
Form S-1/A
File No. 333-195636
June 23, 2014
Code of Ethics
Form 10-K
File No. 333-141010
March 31, 2009
Subsidiaries of the Registrant
X
31.1
Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
X
31.2
Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
X
32.1
Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
X
32.2
Certification of Principal Financial Officer Pursuant 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
X
101.INS
XBRL Instance Document*
X
101.SCH
XBRL Taxonomy Extension Schema Document*
X
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document*
X
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document*
X
101.LAB
XBRL Taxonomy Extension Label Linkbase Document*
X
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document*
X
* Pursuant to Rule 406T of Regulation S-T, the interactive files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
JUHL ENERGY, INC.
Date: April 2, 2015
By: /s/ John P. Mitola
John P. Mitola
President
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/John P. Mitola
John P. Mitola
President and Director
(Principal Executive Officer)
April 2, 2015
/s/Daniel J. Juhl
Daniel J. Juhl
Chairman of the Board, Chief Executive Officer and Director
April 2, 2015
/s/John J. Brand
John J. Brand
Chief Financial Officer
(Principal Financial and Accounting Officer)
April 2, 2015
/s/Edward C. Hurley
Edward C. Hurley
Director
April 2, 2015
/s/James W. Beck
James W. Beck
Director
April 2, 2015
/s/Chuck Templeton
Chuck Templeton
Director
April 2, 2015