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JUHL > SEC Filings for JUHL > Form 10-K on 1-Apr-2013All Recent SEC Filings

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Form 10-K for JUHL ENERGY, INC


1-Apr-2013

Annual Report


ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following description of our financial condition and results of operations in conjunction with the financial statements and accompanying notes included in this Report beginning on page F-1.

Overview

Juhl Energy is a leader in the 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 22 wind farm projects, accounting for approximately 237 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 85 MW, through our subsidiary, Juhl Energy Services. Currently, we have projects in various stages of development, amounting to a total of 168 MW of wind power generating capacity. The wind farm developments that are in process are located in the United States, Canada and Ireland. We have also identified an additional 380 MW of wind power generating capacity in early stage wind farm development opportunities at various sites within North America. This development pipeline consists of approximately 25 wind farm projects all of which are on-shore type projects. In 2013, we acquired, through Juhl Energy Development, the assets of two early stage development wind farms in Ohio, representing approximately 8 MW of wind power.

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 Services 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.

How We Operate

One of the unique aspects of Juhl Energy is the diversity and integration of its
six major subsidiaries which make up our business model. The Company operates
through the following subsidiaries:

Juhl Renewable Assets  renewable assets ownership
Juhl Energy            wind farm development
Development
Juhl Energy Services   wind farm management and turbine
                       maintenance services together with
                       cellular communication tower maintenance
                       activities
Juhl Renewable Energy  small scale renewable systems
Systems
Next Generation Power  refurbishing turbines and maintenance
Systems                support
Power Engineers        engineering consulting services
Collaborative


The Company's business segments are separate business units that offer different products. A review of the business segments provides a better understanding of the how the Company manages and evaluates its businesses. During the year ended December 31, 2012, the Company's reportable segments were changed to add the Engineering Consulting Services segment (resulting from the PEC acquisition in April 2012) together with a re-naming of the other segments. The Company groups its operations into four business segments:

           BUSINESS SEGMENT                   DESCRIPTION OF BUSINESS SEGMENT
Project Services (formerly titled wind    Wind farm development and construction,
farm development and management           asset management and maintenance
services )                                services
Clean Energy Asset Ownership and          Ownership and operations of consolidated
Operations (formerly titled Wind Farm     wind farms or other clean energy
Ownership and Operation)                  investments
Engineering Consulting Services           Business-to-business engineering
                                          consulting services
Consumer-Owned Renewable Energy           Sales and distribution of small scale
Products                                  wind and solar products

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.

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 five development services agreements, twelve projects in early development stages, and three agreements to conduct wind power feasibility studies.

The clean energy asset ownership and operations 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 2013 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 (even if the production tax credits expire for new projects commencing in 2014). 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 cellular tower maintenance services 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 and site selection for our development projects.

Our Portfolio of Renewable Energy Projects

The size of our wind farm portfolio, including the wind farms that we own in whole or part, is a significant revenue driver. Through our acquisition subsidiary, Juhl Renewable Assets, we focus on the acquisition and construction of existing wind farms that fit our distributed generation model and size projects we typically develop. We believe that ownership of such wind farms (in part or in whole) provide an ability to expand services to wind farm operations and to 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 as acquisition opportunities are generally unpredictable. The level of new portfolio activity will fluctuate depending upon the acquisition of such assets, based on supply and demand for those assets, our ability to identity existing wind farms that meet our criteria, and the volume of projects that are available for sale by equity owners who have fully utilized the tax attributes or no longer have the desire to continue ownership. Our ability to acquire such existing wind farms and other renewable assets, in whole or in part, will directly impact future revenue.

Demand for Renewable Energy

Political support for the development of renewable energy and the United States energy independence has caused a rapid increase in the demand for wind power in the United States over the last several years. As provided in the Industry and Market Overview, of the AWEA's "U.S. Wind Industry Fourth Quarter 2012 Market Report," wind generation set a new record in 2012 with the installation of 42% of all new electrical generating capacity in the United States. All renewables together (including solar) accounted for 55% of all new generating capacity in the United States. Due to the Congressional delay of the extension of the PTC, we expect the growth of wind power developments in 2013 may fall below 2012 levels, since the development of wind energy projects requires extensive lead time and many developers tabled projects going forward until there was certainty with respect to an extension of the PTC. The demand for wind power will also likely be inhibited by the continuing low price of natural gas.


2013 will not be a record year for new wind power installations. However, since the PTC extension applies to all wind projects that "begin construction" in 2013, even if estimated completion is one to two years out, we believe the PTC extension will help support the development of American wind energy resources, and sustain its growth.

Growth in wind power and other renewables is being driven by several environmental, socio-economic and energy policy factors including:

ongoing increases in electricity demand due to population growth and growth in energy consuming devices such as computers, televisions and air conditioning systems, as coal and oil resources need replacing;

higher commodity prices arising from increasing global per capita consumption and the ongoing depletion of conventional natural resources (such as oil and coal);

the fluctuating costs of fuel required to operate the existing fleet of conventional electric generation facilities such as coal, natural gas, nuclear and oil, (especially since low (subsidized) wind prices are roughly competitive with natural gas);

national security risks associated with energy procurement that threaten energy supply and increase the potential for price volatility;

existing and growing legislative and regulatory mandates for "cleaner" forms of electric generation, including state renewable portfolio standards and the U.S. federal tax incentives for wind and solar generation, including the Recovery and Reinvestment Act enacted in February 2009 (and the one-year extension of PTCs and ITCs for wind development projects that "begin construction" in 2013) ;

the expectation that the Environmental Protection Agency will enact regulations and standards accelerating the retirement of aging coal plants and impacting the life of natural gas plants, thus increasing the need for replacement of resources;

uncertainty surrounding the growth potential of nuclear power plants;

the shorter development time frame of wind projects as compared with natural gas plants and the greater flexibility of wind projects to adapt to changing conditions;

worldwide concern over greenhouse gas emissions and calls to reduce global warming due to the carbon dioxide produced by conventional electric generation; and

the increased efficiency of newer wind turbine models (such as advances in wind turbine blade aerodynamics, development of variable speed generators, advances in remote operation and monitoring systems, improvements in wind monitoring and forecasting tools and advances in turbine maintenance), improved capacity factors, and more competitive pricing of wind power systems as compared with coal and gas on a dollar-per-megawatt-hour basis due in part to cost competition among suppliers.

In light of these factors and the resulting increase in demand for wind power and other renewables, we believe that we are positioned to experience significant year-over-year growth with the diversity and integration of our service offerings that build upon our wind farm development. We can provide full-scale development of wind farms across a broad spectrum including performing initial feasibility studies, assisting in power purchase agreement negotiations, arranging equity and debt project financing, providing equipment and construction services, and managing operations. Further, 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, wind facilities for manufacturing companies seeking to reduce their carbon footprint, and small scale renewable systems including solar projects. We believe it is necessary to evolve and diversify in our asset, product and service portfolio to reduce our exposure to uncertainty related to renewal of tax incentives and other favorable governmental policies currently supporting the wind industry in the United States.

Government Policies

Historically, our wind projects have been subject in part on 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, bonus depreciation, and federal grants and loan guarantees. Incentives provided by state governments include renewable portfolio standards (RPS) which specify the amount of energy utilized by local utility companies that must be derived from sources of clean energy including wind and solar. A number of federal government incentives focused on reducing costs of such products have recently expired or our set to expire in the near term. Further changes to governmental policies could negatively impact our operating results.

Further, until there is a long term energy policy that focuses on the sustainability of the renewable energy industry, failure to extend or renew these or similar incentives in the future could have a material adverse impact on our business, results of operation, financial performance and future development of wind energy projects.

Although development of wind farms has been incentivized over the past 20 years by PTCs (and other favorable tax incentives) and that the future of PTCs beyond 2013 remains uncertain (as PTCs expire for any projects that commence construction after 2013), we believe that there still is impetus in the United States to increase its generation of electrical power through renewable energy. We believe we can maintain the market for community wind power and distributed generation projects as our model for ongoing installations of wind power given the constraints of transmission capacity and utility power purchases currently affecting the growth of larger scale projects.


Debt and Equity Financing Markets

Although demand for wind power and other renewables are likely to continue to trend upward for reasons described above, arranging project financing, particularly construction financing, has become increasingly difficult. The timing of the Company's 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.

Wind farm development projects are dependent on the ability to raise debt and equity financing to fund the turbine and substation components, construction costs and other development expenses. We assist project owners in identifying sources of debt and equity capital as a part of our development efforts. We have expended significant efforts on behalf of our construction-ready wind farm projects to identify sources of debt and equity financing in order to proceed to the actual construction phase. Typically, renewable energy projects are financed on a project basis by large banks, institutional investors, tax equity investors, private equity firms, developers, corporations, and through government subsidies. Debt and equity sources include some financiers who are based in foreign countries and have experience in wind energy projects. However, over the last several years, due to the global financial crisis and more stringent capital requirements, certain funding sources, including such European banks, have reduced their funding to such projects, especially with respect to construction financing. The difficulties in obtaining project financing are especially evident within banking institutions with liquidity issues resulting from the recent recessionary conditions and the banking crisis that led to U.S. government bailout programs in 2008. It is our belief that many community wind farm project owners and developers across the U.S. are facing similar difficulties in arranging project financing from domestic as well as European lending institutions. In light of the difficulties in arranging project financing, we are noticing that turbine suppliers are also becoming a source of capital in construction financing for wind farm projects. We expect credit conditions to improve and we will assist project owners in examining federal and loan guarantee programs as an additional means of securing project financing.

Our wind farm development projects are financed with a combination of debt, tax equity financing and other equity capital. At the initial stage of a project's development, we use a combination of equity capital and turbine supply loans to cover development expenses and turbine costs. Turbine supply loans are employed to finance a majority of the cost of a project's turbines. 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 and the resources of subcontractors for funding balance of plant and start-up costs. Proceeds from the construction loans are typically used to fund construction and installation costs as well as to retire the turbine supply loans. 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.

We believe there is sufficient interest by individual investors and private equity funds that desire to make renewable energy investments with a fixed rate of return to support an offering of preferred stock by our subsidiary, Juhl Renewable Assets. We would use the capital raised in the offering for future project developments.

Site Selection

With respect to our wind projects, good site selection and advantageous positioning of turbines on a selected site are critical to the economic production of electricity by wind energy, as wind is intermittent and electricity generated from wind power can be highly variable. In our experience, the primary costs of producing wind-powered electricity are the turbine equipment and construction costs. As an intermittent resource, wind power must be carefully positioned in the electric grid along with other generation resources. We believe Juhl Energy has demonstrated the expertise necessary to work with local electric utilities to establish proper integration plans.

Site selection also includes identification of sites suitable for development and basic analysis of site viability for wind development projects. We make initial assessments of potential sites for our community wind farms based on a number of criteria including topography, wind resource suitability, construction access, access to transmission networks, site size, land ownership and environmental, zoning and other local and state laws and regulations. We consider our business and operating strategy in making these assessments. We then proceed with an initial environmental screening, usually conducted on the basis of public available information and sometimes supplemented with a site visit by a qualified professional to identify environmentally sensitive areas. After a site passes this initial review, we begin more detailed site-specific environmental assessments in connection with our permitting efforts, and establish constraints for turbine siting and civil and site engineering. These typically include detailed mapping and other studies, all aimed at ensuring that we can safely operate a potential project without detrimental impact on the local environment.

Our site selection effort is enhanced by establishing close working relationships with local permitting authorities, communities and other local stakeholders such as farmers. We believe that by entering into dialogue with these constituents early, we are better able to address local concerns during our site assessment, leading to effective permit applications and expedited completion of our projects. We believe our ability to understand and interpret site information has been and will continue to be a key factor in our success in identifying desirable project sites for our community wind farm developments.

Basis of Presentation

Our consolidated financial statements are prepared in accordance with generally accepted accounting principles and the rules and regulations of the SEC.


We acquired the wind farm development and management business of Juhl Energy Development and Juhl Energy Services, and Juhl Energy Development and Juhl Energy Services became our wholly-owned subsidiaries. For accounting purposes, Juhl Energy Development was the acquirer in the share exchange transaction, and consequently the transaction is treated as a recapitalization of the company. Juhl Energy Services was accounted for in a manner similar to pooling of interests due to common control ownership.

In October 2008, we acquired all of the issued and outstanding shares of common stock of NextGen. Our acquisition of NextGen was accounted for in a manner similar to pooling of interests due to common control ownership. The assets and liabilities of NextGen were combined at historical cost for the portion (54%) under common control and at fair value for the non-controlling interest. The activities of NextGen are included in the accompanying consolidated financial statements.

On May 19, 2010, we formed Juhl Renewable Assets, Inc., in the state of Delaware, as our wholly-owned subsidiary. Juhl Renewable Assets revenue and expense activities are reported on our financial statements on a consolidated basis in a similar manner as to Juhl Energy Services, Juhl Energy Development and NextGen.

On April 29, 2011, we acquired 99.9% of the membership interests of Woodstock Hills LLC ("Woodstock Hills"), a 10.2 MW wind energy facility. The financial activities of Woodstock Hills have been consolidated into our financial statements subsequent to the purchase date.

On October 13, 2011, Juhl Renewable Assets became a 100% equity owner in Winona Wind Holdings, LLC ("WWH"), which in turn owns 100% of the Winona County Wind, LLC ("WCW"), the operator of a 1.5 MW wind energy facility. Prior to this acquisition, we had been consolidating the financial activities of WCW as a variable interest entity. The financial activities of WWH and WCW were already incorporated into our consolidated financial statements prior to this acquisition.

In February 2012, we established Juhl Renewable Energy Systems to develop our own small scale wind turbine and solar-related products and services. Juhl Renewable Energy Systems has not recorded revenues to-date as it has been in the process of developing product ideas, prototyping wind and solar products, and performing the necessary business requirements surrounding the manufacturing, distribution and support of such products.

On April 30, 2012, Juhl Energy became the sole equity owner in Power Engineers Collaborative, L.L.C., an Illinois limited liability company ("PEC"), which provides engineering services to clients in the energy, industry and building systems markets. The financial activities of PEC have been consolidated into our financial statements subsequent to the purchase date.

In February 2013, we formed Juhl Tower Services and began acquiring assets and personnel necessary to perform services with regard to maintenance of cellular communication towers. We anticipate revenue from this subsidiary beginning in the second quarter of 2013.

Generally accepted accounting principles require certain variable interest entities ("VIE"s) to be consolidated if a party with an ownership, contractual, or other financial interest in the VIE (a variable interest holder) has the power to direct the VIE's most significant activities and the obligation to absorb losses or right to receive benefits of the VIE that could be significant to the VIE. A variable interest holder that consolidates the VIE is called the primary beneficiary. Upon consolidation, the primary beneficiary generally must initially record all of the VIE's assets, liabilities, and non-controlling interests at fair value and subsequently account for the VIE as if it were consolidated based on majority voting interest. Juhl Energy has determined that Valley View Transmission, LLC ("Valley View"), a 10 MW wind farm that reached commercial operation in November 2011, is a VIE and that Juhl Energy is the primary beneficiary. Our financial statement footnotes describe in more detail the considerations made in determining that Valley View is a VIE, including the equity investment made in the Valley View project at the time of commercial operation.

Woodstock Hills, Valley View and Winona are wind energy generating facilities and in that regard, those activities are considered a business segment in our financial statement disclosures called Wind Farm Ownership and Operation. PEC is considered a new business segment called Engineering Consulting Services.

The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included in this report.

Significant Accounting Estimates

We review all significant estimates affecting our consolidated financial . . .

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