November 27, 2015

Abengoa Seeks Insolvency Protection

Jim Lane

In New York, NASDAQ shares in Abengoa SA (ABGB) plunged 49% in Wednesday trading after the embattled renewable energy developer said it would seek bankruptcy protection as it seeks to reorganize nearly $9.4 billion in debt. The protective filing was announced after an expected infusion of nearly $300 million from Spanish steelmaker Gonvarri did not materialize.

The company’s debt had been previously downgraded to a B3 rating by Moody’s, six rungs on the ladder beneath investment grade. Last week, Moody’s described the company’s cash reserves as “insufficient” and expressed that asset sales and a round of investment by existing backers would not be enough to stabilize the company’s finances.

Abengoa in an SEC filing Wednesday stated:

“In relation to the Material Fact (Hecho relevante) of November 6, 2015 (No. 230768) concerning the framework agreement entered into with Gonvarri Corporación Financiera (“Gonvarri”), the Company announces that it has received notice from Gonvarri that the framework agreement is terminated considering that the conditions to which that agreement was subject have not been satisfied.

“The Company will continue negotiations with its creditors with the objective of reaching an agreement that ensures the Company’s financial viability, under the protection of article 5 bis of the Spanish Insolvency Law (Ley Concursal) , which the Company intends to apply for as soon as possible.”

The company did not elaborate on the problems in meeting Gonvarri’s conditions. At the time of the announcement of the proposed investment, which would have made Gonvarri the largest shareholder in Abengoa, the companies said that “the Investment Agreement is subject to certain conditions such as the standby underwriting of the share capital increase by the underwriters announced on September 24th, 2015 continuing to be in force and the signing of a substantial package of financial support in favour of the Company by a group of financial institutions.”

The company developed the 25 million gallons cellulosic ethanol facility in Hugoton, Kansas, and is a major operator of ethanol and biodiesel production assets in the US and Europe.

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

November 22, 2015

Zumtobel Turns LED into Dividends

by Debra Fiakas CFA

Based on Austria, Zumtobel Group (ZMTBF:  OTC or ZAG:  Vienna) is a supplier of modern lighting products using Light Emitting Diode (LED) technology.  Zumtobel sells its lights and components under three international brands Thorn, Tridonic and Zumtobel and two regional brands ACDC and Reiss.  Zumtobel has a long history in lighting with its foundation in the 1950s in Dr. Zumtobel’s Electrogerate und Kunstharzpresswerk.  The Thorn brand, which was acquired in 2000, dates back to the 1920s when founder Jules Thorn set up the Electric Lamp Service Company. 

Zumtobel sells lights in over 90 countries and its sells a lot of lights.  The company’s lighting products can be used both indoors and outdoors.    Revenue has grown in each of the last four fiscal years.  In the twelve months ending June 2015, revenue was Euros 1.3 billion, providing Euros 66.5 million in operating income.  That represents cash earnings profit margin of 5.1%, well above the 3.8% profit margin recorded in the prior year. 

The company did not enter the race to LED lights until 2001, but the technology has been a winning proposition for Zumtobel.  LED products provided more than 50% of the company’s revenue in the last fiscal year.

The LED segment of the lighting market is large and growing.  In June 2015, industry research firm ResearchMoz issued a forecast of 45% compound annual growth for LED lighting and a market size of US$42 billion by 2019.  LED lights use only a fraction of the energy required to drive an incandescent light bulb.  As a consequence LED lights produce 90% less heat.  Most importantly, LED lights offer a lifetime of 50,000 hours of illumination.  Mix long life and low cost of use, the resulting value proposition is hard to resist for either homeowners or businesses.  Suppliers of LED lighting get support from electric utilities which often advocate switching from conventional bulbs to LED in order to create efficiencies in electricity usage.

Zumtobel has some competition in the LED light market.  There are over 150 different LED lighting systems offered around the world today.  The proliferation in LED bulbs and lamp styles has helped draw new customers to the technology.  The result has been decreases in production cost and more competitive pricing.  According to Statistica, LED is expected to reach a 53% penetration level of the global lighting market.

Investors should be attracted to Zumtobel for its building profitability.  The company’s dividend of Euros 0.22 per share and dividend yield of 1.1% are good reasons fall in love.  Granted the price-earnings multiple of 55.6 times trailing earnings for ZAG might sour the relationship, but that multiple seems more palatable against the company’s secure foothold in a large and growing market

Debra Fiakas is the Managing Director of
Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. 

November 20, 2015

Recurrent Energy And Sunpower Charging Up

Bottom line: Major new financing for Recurrent Energy and Apple’s growing partnership with SunPower reflect technology advances that are making solar power plants increasingly competitive with traditional sources.

Two solar power plant builders are in the headlines today, reflecting a shift that is seeing this new generation of companies take the spotlight from older solar panel makers that are desperately seeking new buyers for their products. The first headline has solar panel maker Canadian Solar (Nasdaq: CSIQ) announcing that its Recurrent Energy plant-building unit has secured financing for a major new US project, as Recurrent gets set for its own New York IPO as a separate company. The second story has US-based SunPower (Nasdaq: SPWR) emerging as the main partner for Apple’s (Nasdaq: AAPL) recent ambitious plans to build solar power plants in China.

The bigger picture behind both of these stories is that plant builders like Recurrent and SunPower could emerge as the next hot tickets in the solar energy sector. That’s because these companies are quickly gaining expertise in the field of solar plant construction and operation, and could benefit from a future boom when such plants should finally become commercially competitive with plants powered by traditional fossil fuels.

Let’s begin with the news on Recurrent Energy, which was purchased this year by Canadian Solar for $265 million, and earlier this month made its first filing for a separate listing in New York. (previous post) According to Canadian Solar, Recurrent Energy has just received a sizable $260 million in new financing for its 100 megawatt Astoria solar power project in California. (company announcement)

Financiers for the project include the new energy financing unit of General Electric (NYSE: GE), as well as a banking consortium that includes Spain’s Santander Bank and the Netherlands’ Rabobank. Completion of the plant is set for the end of next year, and I expect that much of the equipment for its construction will come from GE and Canadian Solar. Recurrent will become the plant’s long-term owner and operator upon completion.

This particular deal marks the fourth partnership for a US plant this year between Recurrent and Santander. Recurent’s growing stable of high-profile partners underscores its strong credentials as a major builder of solar power plants, and is undoubtedly aimed at raising its profile in the run-up to its IPO that could come by the end of this year.

SunPowered by Apple

Next there’s the SunPower news, which details the company’s role in Apple’s plans to become a major builder of solar plants in China. Apple first announced those plans back in April, saying it would build plants with 80 megawatts of capacity in partnership with SunPower. (previous post) It later sharply boosted that total, with a target of building plants with 200 megawatts of capacity. (previous post)

Now SunPower is coming out with its own announcement saying it will build 3 solar farms in China’s Inner Mongolia region with a total capacity of 170 megawatts. (English article) Upon completion of those plants, SunPower will become one of the long-term owners, alongside a Chinese investor and a third, unnamed party that is most likely Apple.

This particular announcement indicates that SunPower is likely to become one of the main partners in Apple’s unusual push into new energy. This initiative is someone unusual for Apple, better known for its smartphones and computers, but is part of a broader campaign to improve its image in China. If the strategy works well in China, SunPower could benefit if Apple decides to expand the program to other countries.

At the end of the day, both of these news items appear to show that solar plant construction is finally gaining some momentum, as reflected by backing from big names like Santander, Rabobank and Apple. That change reflects improving technology that is helping to boost solar energy’s competitiveness, and could help to power SunPower’s shares and also boost sentiment for Recurrent Energy’s upcoming IPO.

Doug Young has lived and worked in China for 20 years, much of that as a journalist, writing about publicly listed Chinese companies. He currently lives in Shanghai where, in addition to his role as editor of Young’s China Business Blog, he teaches financial journalism at Fudan University, one of China’s top journalism programs.  He writes daily on his blog, Young´s China Business Blog, commenting on the latest developments at Chinese companies listed in the US, China and Hong Kong. He is also author of a new book about the media in China, The Party Line: How The Media Dictates Public Opinion in Modern China.

November 19, 2015

Energy Infrastructure Construction Made Easy

by Debra Fiakas CFA

Electric power companies need plenty of generating plants and distribution works to bring electricity to our doors.  Electric utilities are very good at generating electricity and managing relationships with the families and businesses that use the power, but building all that infrastructure  -  drawing up plans, hauling in materials and fastening girders  -  is not necessarily a power company’s strong suit.  Enter Quanta, Inc. (PWR:  NYSE) with a full menu of design, engineering and construction services for electricity generation and distribution infrastructure.

Solving problems for electric utilities is good business for Quanta.  The company does leave all its eggs in one basket.  Quanta has developed expertise in building pipelines and production facilities for the oil and gas industry as well.  The company earned $211.4 million in net income or $1.82 per share on $7.8 billion in total sales during the twelve months ending September 2015.  Even more significantly the company generated $690.3 million in cash during the period.

It is not entirely a bed of roses for Quanta.  Sales grew 22% in 2014, but the growth rate has sputtered in recent months leaving year-over-year comparisons flat in recent periods.  While Quanta managed to report earnings that beat the consensus estimate by a penny in the quarter ending September 2015, the company missed expectations by a wide margin in the previous three quarters.  The dozen or so analysts who follow Quanta closely have forecast a ‘down year’ in sales and have estimated only low single digit growth next year.  Quanta’s heyday in the infrastructure market may have come and gone  -  at least for now.

Quanta may have the financial strength to withstand a difficult period.  At the end of September 2015, the company had $350.6 million in total debt, representing a 10.9 debt-to-equity ratio.  This compares to an average debt-to-equity ratio of 122.1 times for the general contracting industry.  The balance sheet has been aided by the sale earlier this year of Quanta’s fiber optic licensing operation to Crown Castle International for $830 million after taxes.

Quanta now has $49.2 million in cash resources on the balance sheet that can help tied the company over in a tough time.  Even under slow growth conditions Quanta is expected to remain profitable and generate operating cash flow.  

The company had been a bit stingy with its cash, foregoing a dividend.  However, leadership opened up the purse strings to buy back 14.4 million shares of common stock for a total of $406 million in the first nine months of 2015.   Then in August 2015, the stock repurchase plan was extended by $1.25 billion that will be available through 2017.

PWR is trading at 11.4 times trailing earnings compared to an average of 16.1 times trailing earnings for Quanta peers in the construction industry.  It appears PWR trading at a discount because of expectations for slowing growth in the next year.  Investors in PWR get a good value with the promise of support from the company’s stock repurchases over the next year.    

Debra Fiakas is the Managing Director of
Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. 

November 18, 2015

Growing Market Skepticism Towards Chinese Renewable Energy

Bottom line: Weak share reactions to upbeat news from Trina, ReneSola and Ming Yang reflect investor skepticism towards new energy stocks, as they face lingering issues of overcapacity and phasing out of government subsidies.

A flurry of upbeat news is in the headlines today from 3 of China’s largest new energy equipment makers, led by a return to the profit column for solar panel maker ReneSola (NYSE: SOL) after a year in the red. At the same time, wind power equipment maker Ming Yang (NYSE: MY) also announced its latest quarterly results that were quite upbeat, and solar panel maker Trina (NYSE: TSL) said it obtained a modest new financing from some major global lenders.

But contrary to expectation, investors greeted the string of upbeat news by dumping shares of all 3 companies, reflecting a high degree of skepticism in the market. Ming Yang led the downward migration, with its shares slipping 3.7 percent after it announced its latest quarterly results. Its shares now trade more than 17 percent below the price for a previously announced buyout bid to take the company private.

ReneSola shares didn’t fare much better, shedding 1.5 percent after it announced its return to the black. Trina did the best of the trio, with its shares only closing marginally lower after it announced it received $90 million in new financing in two different facilities from US banking giant Wells Fargo and Britian’s Barclays Bank.

It’s worth noting that shares of all 3 companies are all well above lows reached back in September when skepticism about the sector’s future was highest. But a looming end to state subsidies for new energy power plants in many major markets is creating worries that these manufacturers could struggle if their products can’t become more competitive with conventional energy sources.

Ming Yang highlighted that potential risk in its otherwise upbeat quarterly report, which showed that its profit jumped nearly 30 percent in the third quarter to 91.5 million yuan ($14.4 million), as revenue grew slightly to 1.7 billion yuan. (company announcement) The improved profitability came partly on rising prices, even as the company warned that China was likely to phase out wind power subsidies over the next 5 years.

ReneSola Returns to Black

Next there was ReneSola, which reported its return to the profit column in this year’s third quarter after a year of losses. Most of China’s solar panel makers sunk into the loss column during a major sector downturn 4 years ago, but the stronger ones have all managed to return to profitability and stay there over the last 2 years.

ReneSola returned to the profitable club with its announcement of an $8.6 million net profit in the third quarter, reversing a $2.3 million loss in the previous quarter. But the return to the black came as the company also posted a slight year-on-year decline in quarterly revenue, reflecting its new focuses on building power plants with less emphasis on boosting output.

Last there was Trina, which announced it has received credit facilities worth $60 million and $30 million from Wells Fargo and Barclays, respectively. (company announcement) Neither sum is particularly large, but the more important signal is that Trina could get such private sector funding at all. Until recently, many of these panel makers were forced to look to government sources for funding, and were largely shunned by commercial banks due to their shaky financial position.

All that brings us back to the original issue of the latest market sentiment towards these companies, as they search for formulas to ensure their long term survival. There’s clearly a big degree of skepticism towards the group, which is facing double challenges of overcapacity and pressure from changing government policies. Some of the stronger names like Canadian Solar (Nasdaq: CSIQ) still look like good bets over the longer term, though we probably still need to see some consolidation before the broader sector can be said to be back on solid footing.

Doug Young has lived and worked in China for 15 years, much of that as a journalist for Reuters writing about Chinese companies. He currently lives in Shanghai where he teaches financial journalism at Fudan University. He writes daily on his blog, Young´s China Business Blog, commenting on the latest developments at Chinese companies listed in the US, China and Hong Kong. He is also author of a new book about the media in China, The Party Line: How The Media Dictates Public Opinion in Modern China.

November 17, 2015

The Wind in Spain is Mostly in GAMESA

by Debra Fiakas CFA

In the second week of November 2015, GAMESA Corporation (GTQ1: Berlin, GAM: Madrid, or GCTAF: OTC), Spain’s wind turbine manufacturer, reported double the net profit in the nine months ending September 2015, on revenue that was 30% higher than the same period last year.  During the period GAMESA has received orders from customers in twenty-five different countries for wind turbines with generating capacity of 2,841 megawatts.   Backlog at the end of September 2015 was 3,034 megawatts, representing a 43% increases over backlog a year ago.  At a time when some companies are struggling amidst weak demand, GAMESA’s success stands out.

Part of GAMESA’s good fortune appears to be the result of an expanded product line.  The company introduced a new 2.5 megawatt turbine for low winds earlier in the year.  The first turbine in a 3.3 megawatt family is to be launched at the European Wind Energy Association event in Paris in late November.  The broader selection of size seems to have given GAMESA better reception in markets like Canada, South Africa and northern Europe, where onshore wind energy projects are underway.

GAMESA has a solid presence in the U.S. market with an installed base of 4,150 megawatts across the continent.  Sales the U.S. accounted for 15% of total sales in the first half of the year.  The company’s most recent sale in the U.S. was for a wind project in New York to will rely on thirty-seven of GAMESA’s 2.1 megawatt turbines to generate 78 megawatts of total power.  GAMESA also has a joint development agreement with renewable energy giant SunEdison (SUNE:  NYSE) to jointly develop wind projects totaling at least one gigawatt of power.

Strong sales and higher profit margins have generated strong cash flows.  GAMESA has been able to pay down debt.  During the year the company has used Euros 238 in cash to reduce net debt to Euros 70 by the end of September 2015.  Management’s focus on deleveraging the balance sheet has not left shareholders in the cold.

The company recently reinstated a dividend and pledged to pay out 25% of profits.   The company paid Euros 23 million to shareholders in the September quarter.  The current forward dividend yield of 0.6% may not be impressive, but it is encouraging that the company has been able to reinstate a dividend.

Taking a position in GAMESA by U.S. investors requires stepping out to the Madrid or one of the German exchanges.  Most U.S. brokers have layered on sufficient platform services to facilitate trading securities in listed on exchanges in outside the U.S.  A position in GAMESA gives shareholders a stake in a leading wind turbine manufacturer with sufficient strength to serve the world market.  The stock has moved higher in the year and is not the beaten down bargain it was a few months back.  However, the stock is still trading at 25 times trailing and 19 times forward earnings, representing potential upside of 38% even without valuation expansion.  

Debra Fiakas is the Managing Director of
Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. 

November 15, 2015

Dyadic Sells Industrial Technology Business To Dupont

Jim Lane

As Dyadic cashes out of industrial biotech and retains a C1 license for pharma, DSM and Syngenta also announce a partnership. Companies are girding their loins for the long haul. The Digest takes a look,

In Florida, DuPont (DD) Industrial Biosciences will acquire substantially all of the enzyme and technology assets Dyadic’s (DYAI) Industrial Technology business for $75 million, including Dyadic’s C1 platform, a technology for producing enzyme products used in a broad range of industries.

DuPont has granted back to Dyadic co-exclusive rights to the C1 technology for use in human and animal pharmaceutical applications, with exclusive ability to enter into sub-license agreements in that field. DuPont will retain certain rights to utilize the C1 technology for development and production of pharmaceutical products, for which it will make royalty payments to Dyadic upon commercialization.

The Agreement provides for $8 million of the purchase price to be held in an escrow account for 18 months to ensure Dyadic’s obligations with respect to certain indemnity claims and working capital adjustments. Dyadic expects to utilize approximately $66 million of its net operating loss carryovers to substantially offset the gain realized from this transaction. Closing is expected by the end of 2015.

Dyadic, post-closing

Bootom line, Dyadic has $5-$6M cash in the bank, this adds $75M, debt is around $10M of which around $8.6 is convertible. Worst case scenario — that is, none of the debt converts to equity — we’re looking at a company with a lot of cash, a C1 license for the pharma sector, and a lawsuit. In some ways, it feels like a shell, until Dyadic ramps up in pharma.

To that end, we see in the official release on the transaction: Dyadic also intends to continue its existing programs with Sanofi Pasteur and its involvement within the EU-funded ZAPI program. Dyadic plans to focus its research programs on the development and manufacturing of human and animal vaccines, monoclonal antibodies, biosimilars and/or biobetters, and other therapeutic proteins.

What’s that code for? “Hopefully., we’ll come up with something amazing with Sanofi and they’ll buy us,” or possibly “we’ll come up with amazing things elsewhere in pharma and someone else will buy us”. In the interim, Dyadic retains the right to sub-licemse, so stand by for more developments with the C1 platform.

DuPont, post-closing

Overall, a big win for DuPont even if not bad at all for Dyadic. Dyadic, before it fell into the corporate tussle that prompted the Greenberg Trairig lawsuit and some heft 7-figure settlements already, was trading at $5.30 per share — based on today’s shareholdings, that would be a market cap of $164 million.So, DuPont picked up a nice bargain. It has the Abengoa license and BASF to generate revemue right away, and DuPont is bound to take the C1 platform to new heights.

How negative can investors get?

Overall, Dyadic took a big jump in trading, but way short of what they should have received. Here’s a company that is going to have $70M in free cash on its balance sheet, has a good lawsuit and a license to a valuable technology, and has a market cap of $46M. That’s a down in the dumps investor. By the same investment logic, Facebook would be trading at $3.63 instead of $109.

Status of Professional Liability Litigation

The Agreement provides that Dyadic will retain all of the potential rights and obligations associated with its ongoing professional services liability litigation against the law firms Greenberg, Traurigand Bilzin, Sumberg Baena Price and Axelrod. The parties have voluntarily agreed to participate in non-binding mediation on November 18, 2015.

On July 31, 2015, the Company reached a settlement with another defendant law firm and on August 12, 2015, the Company received full payment of this low seven-figure settlement, which is net of fees and expenses which will be reported in the Company’s consolidated statement of operations for the quarter ending September 30, 2015.

DSM, Syngenta to develop biological solutions for agriculture

In the Netherlands, DSM and Syngenta announced an R&D partnership to develop microbial-based agricultural solutions, including bio-controls, bio-pesticides and bio-stimulants. The companies aim to jointly commercialize solutions from their discovery platform.

The collaboration aims to accelerate the delivery of a broad spectrum of products based on naturally occurring micro-organisms for pre- and post-harvest application around the world. These organisms can protect crops from pests and diseases, combat resistance and enhance plant productivity and fertility.

DSM will contribute its unique microbial database, discovery platform and decades of experience in scaling and manufacturing of microbial products. Syngenta will complement this with its specialized know-how in agronomic applications and plant biotechnology, as well as its global market access and commercial strength. Syngenta will also provide a dedicated R&D program for the selection of relevant micro-organisms.

One-offs, or consolidation trend?

As we examined in our story on Merger Mania, we see this as a strategic period of consolidation. We see Renewable Energy Group (REGI), on the diesel side, and Green Plains (GPRE) on the ethanol side, also actively acquiring first-gen biofuels technologies; meanwhie, there are rumored talks between DuPont, Syngenta and Dow which may produce a super-combination in the agricultural sector.

In the case of DSM and Syngenta, it’s a collaborative effort rather than consolidative, but it provides fresh evidence that companies are seeking to stretch or limit their investments through partnership.

What next?

Under-capitalized technologies abound that are moving more slowly than desired in the industrial biotechnology arena. Consider the slow progress in driving down costs in advanced jet fuels as one example; the slow progress in deploying blender pumps and other infrastructure that has led to a pause at the EPA in growing the renewable volume obligation on blenders.

The classic opportunities in consolidation are: 1) market share, acquiring additional production capacity or new customers for an established product; 2) efficiency, acquiring core or new technologies that have enhanced performance; 3) expansion, acquiring new technologies for growth, new market entry or enhanced geography; or 4) vertical integration, resulting in a stronger value proposition that commands a bigger chunk of the end-customer dollar. Green Plains is active in #1, DuPont’s C1 acquisition fits in #2, Evolva’s Allylix acquisition as well as BASF’s acquisition of Verenium assets; Cargill’s acquisition of OPX technology fits in #3; REG’s Imperium acquisition works for both #1 and, in its terminal assets, #4 as well.

The opportunities in vertical integration

Overall, we see vertical integration or collaboration to connect supply and demand through renewable fuel distribution assets as a major opportunity. Clearly, for example, every cellulosic ethanol play has a value-crushing dependency on blender pump and retail expansion.

But the economics are tough on simply acquiring outlets. In California, the introduction of blender pumps adds an average of 30,000 gallons of E85 that retail on average for $60,000, for an intial investment of that generally ranges between $50,000-$100,000 per station. That math is pretty solid, but acquiring 33,000 outlets in order to expand the market by 1 billion gallons, that’s huge capital.

But, consider as an alternative that the industry doesn’t need ownership of retail assets, it needs franchising and fuels distribution agreements. A big brand. Something that Propel has been developing, as well as Protec, and Minnoco. We’ll see how those brands grow and whether they access the capital they need to connect supply and demand for renewable fuels.

Who’s Next?

Clearly, there are technologies that are developing single molecules that have overwhelming demands on them to also develop financial, sales, marketing, and operations capabilities. Expect there may be combinations through partnership, merger — or for more acquisitinos by industry giants interested in distributing high-performance molecules to their customers. Virent is an example of a tasty target — intense interest in its capacity to produce drop-in fuels and industrial molecules, from the likes of Coca-Cola and Shell. Much the same could be said for Avantium and its YXY platform. Someone might ultimately recognize that Solazyme and Amyris are developing products in remarkably similar segments, and that they have more to gain together than apart. Verdezyne is a tempting target as it reaches for scale. Just to name a few.

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

November 12, 2015

Enviva: Wood Pellets Into Dividends

by Debra Fiakas CFA

Last week Enviva Partners, LP (EVA:  NYSE) reported financial performance for its wood pellets business in its quarter ending September 2015.  Sales totaled a whopping $116.6 million, representing a 53% increase compared to $40.5 million in the same quarter last year.  The big jump in revenue resulted from higher volumes to larger customers.  Distributable cash flow totaled $12.6 million compared to $8.2 million in the year ago period.  Quarter performance made possible a declared cash distribution of $0.44 per common unit, which is 7% higher than the minimum quarterly distribution.

At its current price EVA provides a yield of 12.6%, a figure that should get the attention of just about every investor.  Double digit dividend yields are rare, so the skeptical investor has to wonder whether it is sustainable.

Enviva management is quick to describe rapid developments in the energy industry that favor the use of wood pellets as fuel.  Wood pellets offer better consistency, density, and energy efficiency compared to burning raw wood directly.  Although approximately twice the cost of unprocessed wood, the energy content of wood pellets is also double that of green wood.  It appears the conversion of coal-to-biomass is a prominent driver of demand for wood pellets especially in Europe.  Using wood for energy is generally regarded as having a much smaller carbon footprint than coal and other fossil fuels.

During the earnings conference call management provided a laundry list of new power  and existing power plants gearing up to use wood pellet feedstock.  According to the U.S. International Trade Commission production capacity in the United States has increased from less than 3 million metric tons in 2008 to over 12 million metric tons in 2014.   Wood pellets have become a significant segment of the forest products industry in the south.  The production capacity expansion has been prompted by increasing demand.  Estimates of global wood pellet consumption vary, but are currently on the order of 22 to 25 million metric tons per year and are projected to rise to between 50 and 80 million metric tons by 2020.

Wood pellets are made from compacted sawdust and other wastes that result from the production of lumber and furniture.  The company operates five wood pellet production facilities with a combined capacity of 1.7 million metric tons per year.    Production capacity is about to expand by another 510,000 tons through the acquisition of a wood pellet production plant in Virginia.  The plant is currently owned by Enviva’s sponsor, which has an off-take agreement in place to receive 500,000 tons of wood materials.  The deal is expected to close in December 2015.   A second plant in Sampson County, North Carolina with similar capacity is on the calendar for acquisition from the sponsor later in 2016.  

Favorable demand trends and capacity expansion bode well for continued strong cash flows…and distribution to common unit holders.  Financial strength to seize the opportunity is another matter.  Enviva held $75.2 million in total cash at the end of September 2015, and debt totaled $176.8 million after paying down long-term debt by $183.2 million since the beginning of 2015.  Enviva is not a large company, but certainly in a good position to access capital through more debt.

EVA is currently trading at 33.0 times trailing earnings, which may seem a bit pricey.  However, in terms of future earnings EVA might be a bargain.  The stock is priced at 12.6 times the consensus estimate for 2016.

Debra Fiakas is the Managing Director of
Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. 

November 11, 2015

Investors Awaken to NextEra YieldCo

by Debra Fiakas CFA

Last week NextEra Energy Partners, LP (NEP:  NYSE) reported financial results for the third quarter ending September 2015.  The numbers were released in along with quarter results from its parent, Florida-based utility NextEra Energy, Inc. (NEE:  NYSE).  The partnership is the operating arm of clean energy projects originated by the NextEra parent.  The ‘yieldco’ as these operating entities have been kindly dubbed by shareholders, delivered $1.0 million in reported net income, but operating cash flow was a whopping $36 million in the quarter.

The consensus estimate had been for $0.24 in earnings per share, but NEP delivered only a nickel.  The shortfall should not have been such a surprise.  The company has missed the consensus estimate in each of the last four quarters.  This might be due in part to the fact that NEP has only been public for just over a year.  Analysts may still be having trouble rationalizing NEP’s business prospects after the Company’s well publicized initial public offering last year.

Over the previous two and a half years NEP had converted 53.3% of sales to operating cash flow.  True enough the sales-to-cash conversion rate did slip slightly to 35% in the recently reported quarter.  However, some seasonal variability is expected in the wind and solar energy sources that comprise NEP’s revenue sources.  The company ended the September quarter with $696 million in cash and equivalents derived in part from operating activities.

Cash is a critical element in NEP’s growth strategy.  The company is expected to continue acquiring renewable and alternative energy assets, some of which could come from the stream of energy projects under development by its parent or sponsor NextEra Energy.  NEP recently acquired natural gas pipelines in Texas and a wind project in Canada.

The company also raised $319 million in new capital from the sale of new common units during the first nine months of 2015.  Going forward NEP has announced a new $150 million ‘dribble program’ whereby the company could issue new common units from time to time.  This program will allow the parent NextEra Energy to purchase units in periods of undervalued.

NEP management has suggested that acquisition plans to grow its portfolio of energy assets could eventually support distributions in excess of $1.20 per unit over the next five years.  This compares to the current distribution rate at $1.08 per unit.  The current distribution rate represents a current yield of 4.0%.

The yield might appear attractive, but the stock appears to be priced at a premium with a price-to-earnings multiple of 92.2 times trailing earnings.  Importantly, the price-to-cash flow multiple on a trailing basis is 5.2 times.  Since cash generation is NextEra’s forte, it seems appropriate to price the the basis of cash flows rather than reported earnings that include considerable noise from non-cash charges.

The stock hit 52-week low of $19.34 in late September as traders had seemed to remain stubbornly focused on each successive quarter earnings miss.  There appears to have been an awakening among traders to the value in NEP.  The stock has been attempting a comeback in recent weeks.  Money flows into the stock turned positive in late October just as the company was preparing to release third quarter results.  In my view, NEP is at an interesting point and is worth a serious look for yield-hungry investors.

Debra Fiakas is the Managing Director of
Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. 

November 10, 2015

MEMC and SunEdison, a Tale of Two Companies

by Paula Mints

SunEdison (SUNE) has been in the news of late and with a confusing acquisition strategy, interesting financial decisions, layoffs and high debt -- it is beginning to look a lot like MEMC. 

This is really a tale of two companies – one a raw material manufacturer and pioneer in silicon wafer technology founded decades ago, the other a pioneering developer in the commercial PV space, and how in becoming one, the combined company took on the personality of the raw material company.

In the past MEMC engaged in an aggressive acquisition strategy similar to the one currently followed by SunEdison. MEMC was a semiconductor material manufacturer and its acquisitions and expansions were capital intensive and related to its core business.

SunEdison’s acquisitions and expansions are capital intensive and in renewable commercial project development (wind and solar), solar residential leasing, micro-grids in the developing world, YieldCos, and technology licensing (LCPV/BIPV company Solaria’s Zero White Space technology for module assembly). SunEdison’s various acquisitions, expansions and agreements all require different skill sets and strategies.

At Solar Power International SunEdison announced a new venture to develop micro-grids in the developing world. The vision of SunEdison’s Frontier Power is energy, connectivity and water, viewed through the lens of an off grid utility where SunEdison owns the assets. The
company will own and operate remote mini grids to serve households and SMEs, anchor loads, water pumping and connectivity (the internet). An anchor load could potentially connect a mini grid to the utility grid. The initial focus is on communities in India and on the continent of Africa where it will set tariffs and develop local partnerships and joint ventures pooling debt financing from DFIs (development financing institutions). The strategy is to develop pilot mini grids in the target countries and use the experience to ramp up and scale.

Missing in this strategy are specifics as to how the company will make money developing small utilities in areas of the world where affordability has been and remains a significant roadblock. Can a capital intensive strategy that seems to be a combination of commercial
microgrid and residential lease in areas where people live on less than $1.00 a day succeed?

Memory Lane

To understand the company’s current behavior, it is important to consider its past. MEMC’s
history predates its PV industry activities and acquisition of SunEdison.

Some MEMC pre-and post PV history:

  •  1959: Monsanto Chemical Company founds Monsanto Electronic Materials Company (MEMC) as a merchant manufacturer of 19-mm silicon wafers.
  •  1961: Dynamit Nobel Silicon, (DNS) builds a polysilicon and Czochralski ingot plant in Merano, Italy
  •  1962: MEMC pioneers the chemical mechanical polishing process (CMP). MEMC begins using the recently developed Czochralski (CZ) crystal growing process.
  •  1966: MEMC begins production of 1.5 inch wafers 
  • 1970: MEMC’s plant in Kuala Lumpur, Malaysia begins producing 2.25 inch wafers.
  •  1979: MEMC introduces 125 mm wafers
  •  1982: MEMC develops EPI wafers for CMOS applications
  •  1984: MEMC begins producing 200mm wafers and builds a pilot plant to make granular polysilicon
  •  1987: Ethyl Corporation acquires the FBR technology developed under its Jet Propulsion Laboratory contract by General Atomic and Eagle Picher and begins production of granular silicon. MEMC develops feeders to use the finished product and is the primary customer for FBR material. Ethyl later splits into two divisions. One of the divisions is named Albemarle (after one of the Ethyl pioneers). The Albemarle division owns the poly plant.
  •  1989: Hüls AG of Marl, Germany, and a subsidiary of VEBA AG, buys MEMC throughDNS naming the combined company MEMC Materials
  •  1994 Ethyl Corporation spins off its Albemarle division
  •  1995: MEMC acquires granular polysilicon (FBR) facility from Albemarle and renames it MEMC Pasadena 
  • 1995: MEMC launches IPO
  •  2000: VEBA AG merges with VIAG AG to become E.ON AG
  •  2000: E.ON AG increases ownership of MEMC from 53.1% to 71.8%
  •  2000: MEMC has a net loss of 68-million Euros on revenues of 944-million Euros
  •  2001: E.ON considers bankruptcy for MEMC
  •  2001: The Texas Pacific Group (TPG) buys the 71.8% of MEMC owned by Germany Utility E.ON, restructures debt and replaces the CEO. At the time of the sale, for the symbolic amount of $1.00, MEMC stated that it only had enough cash to operate through September of that year. Texas Pacific Group agreed to revise the purchase price if MEMC improved its financial performance and to offer it debt financing
  •  2002: Nabeel Gareeb is named CEO of struggling MEMC
  •  2002: TPG converts preferred stock to common stock increasing its ownership of MEMC to 90%
  •  2003: With perfect timing – just as growth in the PV industry begins accelerating, SunEdison is founded as a commercial PV developer of PPA projects
  •  2004: MEMC enters a licensing agreement with Silicon Genesis Corp (SiGen) to manufacture wafers using SiGen’s layer transfer technology  2004: PV industry demand begins to surge as crystalline supplies become constrained. Prices for wafers at >$3.00/Wp
  •  2006: MEMC agrees to supply Suntech Power (STPFQ) with solar grade silicon wafers for ten years and receives a warrant to purchase a 4.9% stake in Suntech
  •  2006: Polysilicon prices spike with spot prices at >$400/kilogram
  •  2008: Nabeel Gareeb resigns as MEMC CEO
  •  2009: BP Solar sues MEMC for ~$140-million for failing to supply the company with polysilicon in 2006 and 2007 under a three year supply agreement, winning $8.8-million
  •  2009: MEMC acquires SunEdison
  •  2010: MEMC acquires crystal growth technology company Solaicx for $66-million
  •  2011: MEMC idles its polysilicon manufacturing facility in Merano, Italy, reduces capacity
  • in Oregon and scales back its facility in Malaysia as well as laying off ~1,400
  • employees globally
  •  2011: Enters a joint venture with Samsung Fine Chemicals and MEMC’s affiliate, MEMC Singapore, to produce high purity polysilicon in Ulsan, Korea using the FBR process.
  •  2011: BP exits PV manufacturing 
  •  Suntech files for bankruptcy protection
  •  2013: MEMC changes company name to SunEdison
  •  2014: SunEdison spins off its semiconductor business as SunEdison Semiconductor
  •  2014: SunEdison launches Yieldco TerraForm Power (TERP)
  •  2014: SunEdison announces Zero White Space module technology, purported to increase electricity output by 15% by eliminating space between cells 
  • 2015: SunEdison sells shares of SunEdison Semiconductor to help finance acquisition of First Wind, eventually would sell all shares in SunEdison Semiconductor
  •  2015: SunEdison goes on a shopping spree buying First Wind, Globeleq Mesoamerica Energy, Continuum Wind Energy, Vivint and Solar Grid Storage
  •  2015: SunEdison announces layoffs of 15% of 7260 employees
  •  2015 SunEdison licenses LCPV/BIPV company Solaria’s Zero White Space technology

that essentially involves slicing cells into thin strips and assembling the strips into a modules without spaces in-between the slices

Back to the present

When MEMC changed its name to SunEdison it did not take on the culture and personality of
the original SunEdison. MEMC essentially bought itself a fresh start through the vehicle of a
name change.

SunEdison is highly leveraged, adding concern to its recent capital intensive acquisition
strategy. The company’s recent quarterly filing showed a net loss and negative operating cash
flow. The company’s current ratio (an indication of its ability to pay short term debt) was below
one – a poor result. The acid test ratio for the company was well below one, indicating that
SunEdison does not have sufficient liquid assets to pay its current liabilities. On October 30
its stock price, a measure of investor confidence, closed at $7.30, down significantly from the
July 20, 2015 price of $31.66. The company’s YieldCo, TerraForm (again, launched for the
purpose of funding future SunEdison project development) closed at $18.25 a share on October
30, down from a high of $42.15 a share on April 22, 2015.

Paula Mints is founder of SPV Market Research, a classic solar market research practice focused on gathering data through primary research and providing analyses of the global solar industry.  You can find her on Twitter @PaulaMints1 and read her blog here.
This article was originally published in the October 31 issue of  SolarFlare, a bimonthly executive report on the solar industry, and is republished with permission.

November 09, 2015

China’s Solar Power Inc Eyes $300 Mln NY IPO

Doug Young

Bottom line: New York IPO plans by a Canadian Solar unit and Solar Power Inc could auger a new wave of similar listings by Chinese new energy power plant builders, offering investors a higher growth alternative to traditional utilities.

Just a day after solar panel maker Canadian Solar (Nasdaq: CSIQ) announced it has spun off its fast-growing solar power plant-building unit for a US listing, another China-based peer is discussing plans for a similar IPO. This time a company called Solar Power Inc is the one disclosing plans for a New York listing to raise up to $300 million, in an emerging trend that’s seeing the rise of a new generation of specialty solar energy plant builders and operators.

A secondary trend in this sudden spurt of new activity also looks encouraging for New York, which has become a pariah these days among Chinese companies that feel US investors are undervaluing their stocks. These 2 new listing plans by Canadian Solar and now Solar Power acknowledge that New York is still an attractive option for certain kinds of Chinese companies, which I’ll address towards the end of this post.

First let’s take a closer look at the new media interview that quotes Solar Power CEO Roger Ye discussing his plans for a $300 million New York IPO at an unspecified future date. (English article) While Ye doesn’t give a timetable, the fact that he’s discussing his plan and giving a fund-raising target probably indicate that Solar Power has hired an investment bank and hopes to make an offering in the next 12 months.

Set up at the start of this year, Solar Power is a China new energy play that clearly operates in the area of solar power plant construction and ownership. The company was founded by 2 leading Chinese entrepreneurs, one from the online gaming sector and the other in real estate.

The company originally hoped to secure much of its money through crowd funding sources that let individuals invest as little as 1,000 yuan ($160) each. But this latest move seems to show that the micro-funding approach probably isn’t raising as much money as the company’s founders originally hoped. That’s not a huge surprise due to relatively low return rates from power generation projects in general that might fail to excite many smaller investors.

Global Aspirations?

One analyst points out the move to list in New York shows that Solar Power wants to become a global plant constructor, though I do suspect the company will initially mostly build plants in its home China market. That contrasts a bit with the more globally-focused Canadian Solar, which this week announced it will spin off its own solar plant construction unit and list it in New York. (previous post) I speculated that offering could raise at least $100 million, but Solar Power’s figure could indicate that Canadian Solar’s target could be a bit higher.

Traditional solar panel makers have been some of the most abused companies on Wall Street over the last 3 years, which makes it somewhat surprising that these 2 new listings are both being proposed for New York. Solar Power’s Ye cites the greater stability of US capital markets for his selection of New York over China, and that’s certainly true. What’s more, Chinese investors are unlikely to show much interest in these companies, since their rates of return are quite steady in the mid- to high single-digit rates.

That means these companies’ stocks are unlikely to get the double- or triple-digit growth that many Chinese punters like to believe they can get in their local markets that are more like casinos than serious financial markets. By comparison, the US has a large field of mature institutional investors that like to buy more conservative but dependable assets like electric power utilities. These new solar plant operators would provide an interesting new product in that space, offering investments with higher risk but also return rates and growth potential than traditional electric utilities.

Doug Young has lived and worked in China for 15 years, much of that as a journalist for Reuters writing about Chinese companies. He currently lives in Shanghai where he teaches financial journalism at Fudan University. He writes daily on his blog, Young´s China Business Blog, commenting on the latest developments at Chinese companies listed in the US, China and Hong Kong. He is also author of a new book about the media in China, The Party Line: How The Media Dictates Public Opinion in Modern China.

November 08, 2015

Ormat Eyeing Storage M&A for Geothermal Projects

Jennifer Delony

Reno, Nev.-based Ormat Technologies (ORA) is seeking mergers and acquisitions that will help the company enhance its geothermal projects with energy storage technologies, Ormat CEO Isaac Angel said on Nov. 4.

“On the storage solutions side, we are progressing well,” Angle said during a 3Q15 earnings webcast. “I’m very optimistic that we will be able to add a lot of MW … and profitability to our existing power plants.”

Angle said that he also is optimistic that the company will secure a deal soon that will initiate Ormat’s energy storage strategy.

“We’re almost there,” he said.

According to Angel, Ormat also plans to expand its strategy to include project opportunities that have solar energy as part of a “blended solution.”

“This is a long process,” he said. “And it will take at least another year to come up with more and more enhanced power plants.”

Addressing ongoing project construction during the webcast, Angel said that Ormat expects an earlier completion of its 24 MW project in Olkaria, Kenya, as a result of improvements in construction lead time.

The company originally expected to complete the project in the second half of 2016, but now expects the completion date to fall in 1Q16.

In addition, Angel said that infrastructure work on Ormat’s 14 MW portion of the 330 MW geothermal project under construction in Sarulla, Indonesia, has been “substantially completed.”

“The drilling of production and injection wells are also in progress for the project, however, the project company is experiencing delays in drilling,” he said, adding that Ormat expects the first phase of operation to begin by the end of next year. The remaining phases of operation are scheduled to begin in 2018.

Angel said during the webcast that, despite strong competition from low solar power prices in the U.S., some utilities still are seeking geothermal solutions at “reasonable prices.”

“It would be naïve to say that solar prices are not having an impact on geothermal prices, but on the other hand, the new [renewable portfolio standard in California] is giving us some back wind,” Angel said. “We are negotiating more than several [power purchase agreements], and I am happy with their prices as they stand today.”

On Nov. 3, Ormat reported total revenues for 3Q15 of $162.9 million, compared to $140.2 million for 3Q14. The company reported electricity revenues for 3Q15 of $97.2 million, compared to $102.5 million in 3Q14. In addition, Ormat increased and narrowed its revenue guidance range for the year to between $570 million and $585 million.

Jennifer Delony is associate editor for She worked previously as an analyst for PennWell's TransmissionHub. Jennifer started her career as a B2B news editor in the local and long-distance telecommunications industries in the '90s. She began covering renewable energy issues at the local level in 2005 and covered U.S. and Canadian utility-scale wind energy as editor of North American Windpower magazine from 2006-2009. She also provides analysis for the oil and natural gas sectors as editor of Oilman magazine.

This article was first published on, and is republished with permission.

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