June 19, 2017

China Everbright Greentech

by Debra Fiakas CFA

Investors based in the U.S. need to look far and wide for new stock issues from renewable energy companies.  Capital markets activity has slowed in the last couple of years, in part to due to their own success.  In reaching new efficiency in energy production, renewable energy companies are generating their own internal capital and are not as dependent upon the capital markets.  The Hong Kong market has come to the rescue of U.S. investors with a ‘green’ offering

China Everbright Greentech Ltd
. is now trading on the Hong Kong Exchange with the stock code 1257 following a successful offering of 560 million shares in April 2017.  The company raised $385.6 million (HK$3.0 billion) in new capital that will be used to develop business in the People’s Republic of China as well as research and development in advanced technologies.

A spin-off of parent China Everbright International, the waste-to-energy and water treatment developer, China Everbright Greentech invests in a variety of renewable energy projects.  These projects are capital-hungry and sometimes deliver volatile returns.  The spin out should help the parent to present more stable financial results.  Investors in the spinout are getting a more speculative play at a more compelling valuation.
China Everbright Greentech is a self-described “specialty environmental protection service provider.”  Its portfolio includes biomass, solar and wind energy production as well as hazardous waste treatment facilities.  Total energy product at the time of the IPO was 125.9 megawatts from solar and wind facilities and another 810 megawatts from biomass projects currently in the planning and construction stages.  Current hazardous waste treatment capacity is in excess of 500,000 tons per year.

Management has wasted no time in deploying new capital.  In late May 2017, the company announced definitive agreements for three new hazardous waste treatment projects in mainland China.  The total investment of US$102 million (RMB680 million) will add 120,000 tons per year in waste processing capacity after all construction phases are completed.

The company’s public offering document provides details on revenue and profits.  Sales value has increased in each of the last three years, with profits following.  In 2016, the company delivered HK$629.5 million (US$81.8 million) in profit on HK$3.0 billion (US$390.0 million) in total sales, representing a profit margin of 21%.  Operations generated HK$886.2 million (US$115.2 million) in cash flow.

China Everbright International remains the controlling shareholder in its greentech spin-off.  However, the offering makes room for investors of all stripes to participate in what appears to be a successful formula for growth and income.

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.

June 14, 2017

Should I Sell My Mutual Fund To Go Solar?

by Tom Konrad Ph.D., CFA

An enthusiastic solar volunteer recently asked me: “What can I invest in to prepare for the next financial crisis?”

The situation made the question deeply ironic. The woman asking me was trying to help people invest in solar systems through Solarize, a nonprofit, community-sponsored group buying and discount program. Our town of Marbletown, New York and the neighboring towns of Rochester and Olive have just launched Solarize Rondout Valley, a campaign open to residential and commercial building owners in Ulster County.

Solarize campaigns are designed to make it easier and cheaper to go solar. While defensive stock market investments are my specialty, I can't think of a single financial investment that combines the expected high returns and relatively low risk of a home solar system. 

Just like buying value stocks when they are cheap, buying your solar system at a discount through Solarize or a similar program only increases the expected returns while lowering the risk. Solarize Rondout Valley offers a 14 percent discount compared to installers' standard prices. The installers can afford this discount because volunteers help them reach new customers.

Customer acquisition costs make up nearly 17 percent of the cost of a typical home solar system. The customers benefit because it boosts their returns. Even New York state and the federal government benefit, because lower prices reduce the size of tax credits, which are currently 25 percent and 30 percent of the purchase price of the solar system, respectively (capped at $5,000 for the state credit).

It turned out that my fellow volunteer had a roof she thought would be great for solar, but was hesitant about signing up herself. I told her solar was one of the best investments I know of for a financial crisis, because it will still be generating the same amount of electricity and savings, no matter what the markets do. And I asked her what sort of payback she thought she was getting from her mutual funds.

Two minutes later, she was our next signup for a free home solar assessment.

If you finish this article, live in Ulster County and own a home without solar, I'm betting you will be our next registrant. But even if you don't have a Solarize campaign going on near you, this article should give you the tools you need to evaluate any installer's bid as a financial investment.

Investment criteria

When considering any investment, most professional investors focus on these criteria:

 1.    Expected return, or how much you expect to make on your investment.

 2.    Risk, which has two components:

 a)    The likelihood of things going wrong

 b)    The expected losses if things go wrong

 3.    Liquidity/cash flow: Can you get your money back when you need it?

Many professional investors, including myself, also focus on the moral aspect of our investments, but I will not focus on that variable here. If you think it's important to promote your local economy or reduce carbon emissions, it's clear to just about everyone that a home solar installation is the best choice. The financial comparison is a lot less readily discernible, so that is what I will focus on here.

A note on mutual funds

There are more mutual funds than anyone can count, so, for simplicity, I will focus on two that readers are most likely to own. According to Investopedia, the two biggest mutual funds this year are the Vanguard 500 Index Fund Admiral Shares (VFIAX) and Fidelity Government Cash Reserves (FDRXX). These funds hold more investor money than any other mutual funds. Even if you do not own either of these funds, most investors own something similar.

VFIAX is a stock market index fund, designed to mimic the return of buying a proportionate share of the entire market. For the purposes of this analysis, most funds that contain the words “stock market index” in their name will have substantially similar investment characteristics. If it makes sense for you to sell VFIAX to invest in home solar, it will make sense to sell any of these other stock market index funds for the same reasons.

FDRXX is a money market fund, and almost every investor owns some money market or short-term bond fund in their portfolio. If it makes sense for you to sell FDRXX to invest in home solar, it will make sense to sell any of these other money market or short term bond funds for the same purpose.

Example home solar installations

The economics of home solar vary widely depending on local and state incentives, future local electricity prices, installation cost, local climate and the angle and degree of shading of your roof. In my experience, a reputable local installer is likely to give you reliable estimates for all of these except for future electricity prices. 

As examples, I will use two fairly typical installations using prices from Solarize Rondout Valley. The first system is a best-case scenario, installed on a house with a large, open section of roof with moderate tilt oriented at least a little south and with limited shading. A 5-kilowatt installation using 18 panels and 320 square feet of roof space will cost $3 per watt ($15,000) before state and federal tax incentives at the discounted Solarize price. The New York state tax incentive is 25 percent of installation cost up to $5,000, while the federal Investment Tax Credit is 30 percent, so the net cost after incentives for this installation will be $6,750. Because of the orientation and limited shading, this array will produce about 1,300 kilowatt-hours per year, per installed kilowatt (6,500 kilowatt-hours total) in Ulster County. Call this System A.

On the other end of the spectrum, consider a 7-kilowatt array on two sides of a building with the panels facing due east and west, and with some shading. The customer has high electricity usage and wants to get as much production out of the given roof space as possible, and so opts to use 19 of SunPower's (SPWR) highly efficient 360-watt AC panels using only 340 square feet of roof space. Each of these panels has its own microinverter to best handle the shading. While this installation will probably still produce 7,000 kilowatt-hours per year (1,000 kilowatt-hours per year, per installed kilowatt) despite the less-than-optimal conditions, the premium SunPower panels will cost $4 per watt, or $28,000 before tax incentives. After tax, the system will cost $14,600. Call this System B.

To find out the financial returns, we also have to make assumptions about the price of electricity saved. I will use 14 cents per kilowatt-hour, increasing at a rate of 1 percent for the next 25 years. This is more conservative than most installers' assumptions of annual electricity price increases of 3 percent or more, but I find it pays to be conservative when making investment decisions.


With these assumptions, we can use an online return calculator such as PVCalc. Below are the assumptions for System A, as I entered them into PVCalc.

I assumed a 25-year life, 1,300 kilowatt-hours produced and skipped the “own consumption," as well as "feed-in tariffs" and "tax" sections -- which do not apply in New York state. Setup cost is the cost per kilowatt after tax incentives ($6,750 for 5 kilowatts), and financing is 100 percent the customer's funds, because we are considering selling a mutual fund to pay for the system.

(Note that the euro '€' symbol is displayed by default in this European calculator under levelized cost, even though the levelized energy cost displayed is actually $0.076, not €0.076.)

PVCalc gives the following results for System A.

System A Results

I think the most useful factors here are “levelized energy cost" and internal rate of return (IRR). 

The levelized energy cost of 7.6 cents per kilowatt-hour is far below the price we pay for retail electricity in New York. IRR is a financial measure that allows us to compare the system on an apples-to-apples basis with fixed price investments that bear interest, such as CDs, bonds and money market funds like FDRXX. An IRR of 12.7 percent is a better return by far than you can find on any investment available to the retail public.

The economics of System B are less attractive because we're paying for an additional panel and more expensive panels in order to produce only a little more electricity than System A on a suboptimal roof.

Still, System B may be a better bet than many mutual funds. Here are the results from PVCalc.

System B results
You will note that the levelized energy cost is close to break-even at 14.9 cents compared to the 14 cents, plus the 1 percent annual increase I used for this scenario. That said, the IRR is 4.3 percent, meaning that it is still worth considering selling a money market mutual fund like FDRXX to buy this system. FDRXX has a yield of just 0.1 percent. So as long as the risks and limited liquidity of a home solar system (discussed below) are acceptable to you, it will make financial sense to sell a money market mutual fund like FDRXX to buy System B.

It is more difficult to gauge the expected return of a stock market mutual fund like VFIAX, but over 25 years, it is possible to come up with some reasonable estimates. Since we are looking at a 25-year life of the solar system, we should consider a similar time period for our mutual funds. Historically, long-term stock market returns have been driven by the valuation of the stock market at the beginning of the period. One widely used valuation measure is Robert Shiller's cyclically adjusted price-to-earnings ratio (CAPE). The CAPE is currently high by historical standards, meaning that stock market and VFIAX returns for the next 25 years are likely to be below par. 

Extremely long-term stock market returns have been in the 9 percent to 10 percent range, but a CAPE this high has usually preceded long periods where returns have much lower, like in 1929 and 1966. The CAPE was even higher in 2000, and stock market annual returns have been around 3 percent over the past 17 years. With these past results as a guide, we can expect long-term stock market returns to be between 3 percent and 8 percent over the next 25 years.

From this we should subtract the expense ratio of a mutual fund, which is a negligible 0.1 percent for VFIAX, but could be much higher for other stock market mutual funds. We should also reduce the return to reflect the expected tax on dividends and capital gains of about 15 percent. All together, the expected return for VFIAX is between 2.5 percent and 7.5 percent. People in high income-tax brackets should reduce these expected returns even further.

If you are worried about future stock market returns, even the mediocre 4.3 percent expected annual return from System B looks good against a 2.5 percent after tax return for VFIAX. If you are a stock market optimist, you should jump at the chance to sell VFIAX if you can get the expected 12.7 percent annual return from System A, but you will probably find System B less enticing.


Risks for mutual funds

Expected return is not the only consideration; we also need to consider risk. Stock market mutual funds like VFIAX are known to be risky, and in the next 25 years, we can reasonably expect to have one or two financial crises like we saw in 2001 and 2008. Given the high CAPE ratio discussed above, a bear market in the next few years seems more likely than not. 

Over long periods, the stock market does tend to make up for past losses, so a 2.5 percent annual return for VFIAX over the next 25 years is a reasonable worst-case scenario. 

The attraction of a money market mutual fund like FDRXX is the limited downside. The fund should be able to pay its 0.1 percent interest without losing value (at least before inflation) over the next 25 years. The biggest risk for FDRXX is actually inflation itself. If inflation accelerates, and short term interest rates do not keep up, the real value of FDRXX will fall faster than the dividends it pays can make up for. Even if dividend payments rise to keep up with higher inflation, these are taxable, and they are very likely to continue to fall short of inflation after tax.

Given the the country's high debt, and the Trump administration's stimulus plans, rising inflation is quite possible. If it does rise, the interest paid to holders of FDRXX should rise with it.  Since that interest is taxable, rising inflation will lead to small net losses for holders of FDRXX.

Risks for solar

Unlike FDRXX, a solar installation should benefit in the high-inflation scenario, since electricity prices and savings should rise with inflation. Nor should a prolonged stock market downturn hurt the returns from a solar installation. Another way to put this is that, as investments, solar installations have the attractive property of holding their value when financial investments are falling. This makes investing in even a relatively unattractive solar installation like System B a good way to diversify a larger investment portfolio.

The main risks for solar installations are falling electricity prices, the chance that the system breaks down, and the chance it is damaged in a house fire and insurance does not cover its replacement. There is also regulatory risk: the chance that regulators may change the way solar owners are paid for the electricity they generate.

The breakdown of solar risks

Falling electricity prices

Lower electricity prices equate to lower savings from solar. Most people assume that electricity prices will continue to rise over the long term, as they always have in the past, but this may not be a valid assumption. The falling prices for renewables and, perhaps most importantly, natural gas have been causing electricity prices to fall in recent years, and renewable energy technologies like wind and solar are almost certain to continue their price declines. These price declines are likely to be at least partially offset by the need to repair and expand our aging electric transmission and distribution infrastructure. How these two trends will balance is hard to predict. 

A scenario where we see electricity prices continue to fall as fast as 1 percent per year seems quite possible. If we put this 1 percent annual decline into PVCalc, the IRR of each system falls by 2 percent. The IRR for System A becomes 10.7 percent, which is still pretty hard to beat. The IRR for System B falls to an unattractive 2.2 percent, but this is still better than we can expect from a money market mutual fund like FDRXX.


Most home solar systems come with warranties. Solar panels usually have a 25-year power warranty that guarantees that electricity generation will not fall too much faster than expected. The expected return calculations already account for some degradation, the rate of which is specified in the “degradation” field of PVCalc. The rest of the system usually carries a 10- to 12-year product warranty, and the electricity produced in the first years of a solar system is the most important in determining the expected return. 

If, for instance, in the highly unlikely case that System A were to break down and be completely worthless after 15 years, we can see the effect on return by putting 15 into the “useful life” field. In this case, the IRR of System A falls only to 10.2 percent from the initial 12.7 percent, still a far better return than we should expect from a stock market mutual fund over the next 15 years.

Part of the reason System B was more expensive was that it was made with SunPower AC panels, which come with a comprehensive 25-year warranty on all of the expensive system components. Hence, if System B were to fail during the 25-year useful life I assumed (and it will likely last longer), it could be fixed under warranty.

House fires

Including an annual insurance premium of 0.5 percent of the initial system cost reduces the expected return for System A to 11.2 percent. In that scenario, the expected return for System B changes to to 4.0 percent from 4.3 percent, so the cost of insuring against property damage to a solar system is manageable. Such insurance makes sense if the solar system is accounts for a significant portion of your net assets.

Regulatory risk

In the stock market, companies often deal with regulatory risk. Large importers like Walmart are worried about President Trump's proposal for a “border adjustment tax,” because it would increase their costs. A recent petition filed by bankrupt Suniva with the International Trade Commission could result in a 40 cents per watt tariff levied on solar cells imported into the U.S. This worries solar financiers and residential solar installers.

The recent rise of stock market index mutual funds like VFIAX since the election also has to do with regulation, namely, the anticipation that regulations will be reduced and businesses will become more profitable. If those reforms fail to happen or the profits fail to materialize, the market and mutual funds will fall.

Regulatory risk can also affect the value of a home solar system by changing the expected future payments. Net metering and other payment structures to compensate homeowners for the power they send to the grid are created by state regulators, and what regulators give, regulators can take away. Although state utility commissions have a great deal of power to change rates, they are generally appointed by elected state officials. As such, they are subject to political pressure, and usually avoid actions that will be unpopular with a large number of voters. Yet they also have a mandate to ensure the financial stability of the utilities they oversee. This can lead to unpleasant surprises for solar customers if utilities persuade regulators that their financial health is at risk.

The most stark example of regulatory risk for solar was when the Nevada Public Utilities Commission reduced solar customers' payment for net excess generation by three-quarters in December 2015. The commission also tripled fixed charges -- and retroactively applied all of these changes to existing solar customers. For someone considering investing in home solar today, it is the fact that the change was retroactive which should be most disconcerting, since the possibility of a future retroactive change makes it impossible to accurately estimate the future returns for solar.

Any possibility for a retroactive change should concern homeowners considering going solar, but the Nevada example should be comforting to many. This is because it is the exception that proves the rule: No other state regulator has ever retroactively reduced payments for existing solar customers. Moreover, the public outcry was such that the retroactive aspects of the ruling were eventually reversed.

Although regulatory risk is generally low for home solar, it does vary from state to state. The safest states are those like New York that have recently reached decisions regarding the compensation for home solar.  The New York PSC recently ruled that existing residential solar customers could keep net metering for the life of their systems, while homeowners who install solar over the next five years would benefit from net metering for 20 years. The certainty of receiving net metering rates for 20 years should be sufficient for New York homeowners to make an informed investment decision.

Most homeowners should be fairly confident that whatever rules apply to their system at the time it is installed will last (at least for them) a long time. But there is still some chance of retroactive changes. The reason the Nevada regulators' action was so drastic was that the rapid growth of solar caught them by surprise. State regulators that are currently planning ahead for the time when solar takes off in their state should be able to manage a more orderly transition to new rules that adequately address both the costs and benefits of adding large amounts of residential solar on the grid.

All told, regulatory risk should be less of a worry for home solar customers than for owners of stock market mutual funds like VFIAX. Money market funds like FDRXX have minimal regulatory risk; however, it is even less than that of solar.  

Opportunity cost and timing

If you are considering selling a mutual fund, opportunity cost is the risk that it will go up in price after you sell. Nobody likes to sell today, only to find that they could have sold for a lot more at a later date.  Conversely, the opportunity cost of not selling a mutual fund is that the price of the fund may fall before it is sold.

For a homeowner installing solar, opportunity cost is the risk that the cost of home solar installations will fall after they sign the contract. The opportunity costs of not installing solar are that the cost to install a solar system might go up, or that the compensation and incentives may fall.

Although the costs of solar installations have been declining over the long term, in the shorter term, prices seem more likely to rise than fall. The Suniva petition mentioned above could add 40 cents per watt to the cost of solar cells manufactured outside of the U.S. within the next year. Since the U.S. no longer has a significant manufacturing base, that cost will directly increase the cost of a solar installation. 

The Trump administration and Congress are also planning on tax reform in the near term. The largest solar incentive, the 30 percent Investment Tax Credit (ITC), could be a target for cuts in order to pay for Republicans' tax priorities. It is very unlikely that tax reform will be retroactive, so solar installations completed in 2017 should still be able to benefit from the ITC. Even if the ITC is not cut as part of tax reform, it is currently scheduled to phase out between 2019 and 2021.

State incentives for solar may also decline in the near term. In New York, the NY-Sun state incentive for solar installers is set to decline from its current 40 cents per watt to 20 cents sometime this summer. Your solar installer should be able to tell you what is happening with incentives in your state, although what they say should be taken with a grain of salt, since they have an incentive to exaggerate any upcoming declines. There are also other resources. DSIRE, for instance, offers a comprehensive database for both state and federal renewable energy and energy efficiency incentives.

Finally, for people in my home Ulster County or nearby Orange County who are currently or about to sponsor group buying discount campaigns like Solarize, these campaigns only run for three months. The discount will end on July 31 in Ulster County and September 1 in Orange County.

All told, the medium-term trend for the cost of a home solar installation is likely to be up.

While the price of a money market mutual fund like FDRXX does not change over time, the price of a stock market fund like VFIAX will rise or fall with the market as a whole. Two widely used methods for evaluating the near-term risk/reward of the stock market are the CAPE ratio discussed in the expected return section and the VIX, or Volatility Index. 

The CAPE ratio is currently high by historical standards, meaning that the risk of a stock market decline is greater than usual, while the chance of the stock market going up in the near term is lower than usual.

Conversely, the VIX is usually high when stock prices are low, and low when stock prices are high. In mid-June, the VIX was trading around $10.50, which is lower than it has been at any time in the last 10 years. It is currently lower than it was at any time since before the financial crisis in 2008. As the VIX fell to its recent low from a 2008 high, VFIAX has risen 167 percent, or a compounded 12 percent per year for the last eight and a half years.

In terms of timing and opportunity cost, taking money out of mutual funds and putting it into solar seems like an excellent risk/reward tradeoff in June 2017.


The biggest downside for a home solar installation is liquidity. The only way to get your money out of a solar system is to sell your home, or wait for it to come back to you over time in utility bill savings. The great virtue of mutual funds is that you can sell them and get cash within 24 hours. If you expect to need the money you have in mutual funds in the next few years, you are better off using some other sort of financing such as a loan to pay for your solar system than selling your mutual funds.


For a homeowner looking for a long-term investment, or one with money in mutual funds looking for more attractive investments, home solar is an excellent choice. For many homeowners, it offers very attractive returns compared to almost any mutual fund. Since every solar installation is different, finding that expected return is best done using a dedicated solar or other financial calculator, such as PVCalc. 

While a higher expected return is often a good reason to invest in solar, there are usually other important considerations. People who expect to need the money they are investing in the next few years should avoid difficult-to-sell investments like solar. 

Most other considerations favor a solar investment over most mutual funds:

  • Stock or equity mutual funds are generally considered much more risky than a home solar installation.
  • Gains from mutual funds are taxable, while electricity bill savings from solar are not.
  • Current stock market indicators show greater-than-usual risks and lower-than-usual potential rewards.
  • While the price of solar is likely to decline over the long term, recent sharp declines and political and regulatory risks mean that solar installations could easily become more expensive over the next few months or years.

You may not own a home, or your roof may be shaded, in need of replacement, or otherwise unsuitable for solar. If it is, a reputable solar installer will tell you so. 

If your roof is right for solar, there may never be a better time to sell your risky mutual fund and put it in something that is as safe as houses: a home solar system.

Tom Konrad Ph.D., CFA is the editor of AltEnergyStocks.com and an investment analyst specializing in environmentally responsible dividend income investing. He is Chair of the Environmental Conservation Commission for the Town of Marbletown , New York.

June 12, 2017

Electrovaya's Battery Bargain

by Debra Fiakas CFA

Last week management of Electrovaya Inc. (EFL: TSX; EFLVF:  OTC/QB) were forced to issue a statement stating there were no fundamental developments to explain a dramatic decline in its share price.  The stock was trimmed back by 30% in two days under exceptional trading volume.  Electrovaya has developed proprietary lithium ion polymer batteries for grid storage and transportation applications.  Other than financial results for the quarter ending March 2017, the Company has had little to tell investors about the batteries, its customers or any other topic.

Electrovaya distinguishes its lithium ion batteries among competitors with a ceramic separator that improves battery safety.  Zero hazardous accidents have been reported for the batteries with this innovation used in smart cars.  Competitors have reported battery failures some of which have resulted in car fires.  Inadequate insulation of electrodes is often cited as a reason for such ‘thermal runaway’ in batteries.

The company’s business pipeline appears to be gaining volume.  During the last earnings conference call management reported new orders in the materials handling sector.  Additionally, one of its battery modules in being tested for residential energy storage applications in the U.S., Europe and Asia.

Management has characterized the year 2017 as a transition year for Electrovaya.  The company reported CDN$19.5 million in total sales in the fiscal year ending September 2016.    At this level of production, gross profit was 25% of sale and not large enough to cover operating costs.  Nonetheless, greater efficiency is expected as the company increases utilization of new production capacity recently acquired in Germany.
The company used CDN$8.1 million in cash to support operations in the 2016 fiscal year.  Cash resources were dangerously depleted at the end of September 2016, at CDN$668,000.  A new loan of $17 million has fortified the coffers.  We estimate the company has sufficient resources to support operations for at least another year, longer if the pace of business picks up.  An expansion in order volume could lead to greater production efficiency is and higher gross margin.

For investors with confidence in Electrovaya management to deliver on its strategic plan, the dramatic decline in price represents a compelling opportunity to pick up shares at a bargain price.  The company recently appointed a new director of sales for the U.S. materials handling market.  The plan is to build on recent new relationship with a Fortune 100 company with a fleet of forklifts.

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.

June 08, 2017

From Paris to Drawdown

by John Fullerton

Yes, it was a shameful poke in the world’s eye by the dangerously narcissistic, temporary occupant of the White House.

Like other unconscionable and unfathomable acts of the early 21st century—a period of historic great change already—Trump’s pulling out of the Paris Climate Agreement has sent me searching for the deeper meaning of it all, while the pundits flail away.  

The attack on the World Trade Center, an iconic symbol of globalization if there ever was one, triggered for me a period of introspection and a personal existential crisis as it opened up a possible dark side of my previously unquestioned Wall Street-influenced worldview.  Then the financial crisis drove a stake in the heart of our failed neoliberal economics and finance ideology, leaving in its wake profound and still unanswered questions.  Brexit shined a light on the flawed architecture and economic assumptions underlying the European Union, while Trump’s unimaginable election should force America’s self-anointed elites, in particular, to face their own shadow.

Is there not a deeper message being offered up to us as we undergo the shock therapy that is the Trump phenomenon, with his extraordinary ignorance, egotism, and moral ineptitude, most recently evidenced by his unconscionable withdrawal from Paris?  It’s worth our reflection: Trump as cosmic messenger, the wake-up call we deserve.

Consider the reality. The Paris Agreement is not an enforceable treaty with binding emissions limits.  Nor is it even an adequate statement of intention, since even if all signatories live up to their promises, the best scientific projections suggest we will not stay below the intended 2-degree warming ceiling.  And, we know we actually need to stay below 1.5 degrees warming, a radically different proposition.  Finally, nothing in the Agreement addresses the existential threat it poses to all Petro States since the math implies that 80% of existing fossil fuel reserves, the lifeblood of these societies, must remain in the ground, demanding unprecedented economic transitions requiring a new development paradigm, and that it will that take decades of investment and hard work.  See Venezuela for a preview of the challenges to come.

Russia is such a Petro-State.  Hmm…Calling Jared?

So perhaps the first deeper message we need to hear, disguised below Trump’s disgraceful act is: “The Paris Agreement amounts to little more than appeasement; get serious, people.”  

So far, the initial response within the United States and globally is actually quite hopeful.  States led by California, cities led by Pittsburgh, and a vast cross-section of the business community have been emboldened to show the world (and ourselves) that the “current occupant” does not get to decide for its people on a matter of such grave importance.  “We’re still in!”  Perhaps the sleeping bear – we, the people – has finally been poked?

Second, one primary reason the Agreement was not a binding treaty is that all participants understood that Obama could never deliver the dysfunctional U.S. Congress.  So the deeper message we must confront is that many of the leading global institutions of governance, from the United Nations to the United States, to the European Union, are all incapable of addressing the urgent and interconnected global governance crises of the 21st century.  Where are the serious plans to address this reality, while at the same time reacting to the unending crises of the day?

Third, despite decades of scientific analysis and diplomacy around climate change, we are still working off a horribly inadequate playbook that reduces the complex challenge of restoring balance to the earth’s carbon cycle to simply a call by nations to “cut fossil fuel emissions” by some seemingly random, politically negotiated amount based on what each nation was willing to commit to, that collectively is grossly inadequate to the task at hand.

Just in time, Paul Hawken and colleagues have recently published Drawdown. The name calls out the real goal we must embrace: “drawdown” of the concentration of greenhouse gasses in the atmosphere, rather than the insufficient objective of reducing emissions.  We are at 402 PPM today and need to get below 350 in the face of a growing population and rising standards of living for the majority of humanity.  That’s the task.  It demands an integrated, multi-dimensional, rigorous plan.  Drawdown provides the analytical foundation for such a plan, documenting the 100 top viable solutions using available technology, and conservative assumptions about their realistic scale-up rates and economics over a thirty-year period between 2020 and 2050.  

Good news:  the math says we can do this!  It identifies 1000 Giga Tons reduction in atmospheric CO2 (or equivalent), and requires collectively a highly diversified investment of $30 trillion over thirty years, generating economic savings (in the aggregate) of two and half times that amount, on top of avoiding the worst-case consequences of climate change.  To be clear, this represents a profound and unprecedented shift in the allocation of resources from business as usual.  That’s the deal.

The results from the Drawdown analysis are not what most will expect.  First of all, the single largest solution is not solar or wind.  It’s refrigerant management.  HFCs, the “solution” to the ozone layer problem of the past, turns out to have somewhere between 1,000 and 9,000 times the greenhouse effect of CO2.  We must simply swap out the AC, which will have nine times the impact of converting to electric vehicles (only number 26 on the Drawdown list).  Who will be the Elon Musk of AC?

Perhaps more revealing is the combined impact of family planning and educating women, which, when looked at together, would move to the top, exceeding onshore and offshore wind combined.  Population is often a taboo subject.  But an extra billion people all desiring to live a middle-class lifestyle makes a massive difference, so we need to be able to talk about it as part of a comprehensive plan.

And perhaps most hopeful, the report rightly turns our attention to the amazing natural “technology” we take for granted: photosynthesis, the basis of all life on this planet.  Drawdown demands we focus on the massive carbon sinks where carbon is safely stored, in addition to reducing emissions.  Remarkably, few realize that our soils are the second largest carbon sink after the oceans, comparable to the world’s forests.  Small, achievable percentage changes in the stock of carbon held in our soils, through profitable regenerative agriculture hold massive potential for drawdown, without even factoring in all the ancillary benefits to human health and, therefore, our healthcare crisis, water retention, desertification, and species loss.  The role of regenerative agriculture and land use of all varieties, from no-till crop farming to holistic grazing accounts for fifteen of the top twenty-five drawdown solutions.

So the message we need to hear underlying Trump’s Paris fiasco:  The current occupant will be judged by history; but so will we:  wake-up call.  The U.S Congress and the Trump enablers in his Administration have a chance to restore their integrity, but no one is depending on it.  National leadership on climate has long been outside the U.S. federal government and that’s OK, but it’s a lost opportunity.  U.S. states, cities, the U.S. military, and the private sector are already mobilized and that will now only accelerate.  

We must shift our attention from grand diplomatic gestures by institutions of governance designed for a different time to a rigorous, empowering plan where there is no silver bullet but unlimited and empowering opportunities where the real leaders are already defining our future.  Those leaders are us.

The goal is simple: drawdown.  It’s no easy feat, and time is not on our side.  Let’s roll, people.

John Fullerton is the founder and president of Capital Institute, a collaborative working to illuminate how our economy and financial system can operate to promote a more just, regenerative, and thus sustainable way of living on this earth. He is the author of “Regenerative Capitalism: How Universal Principles and Patterns Will Shape the New Economy.” Through the work of Capital Institute, regular public speaking engagements, and university lectures, John has become a recognized thought leader, exploring the future of Capitalism. John is also a recognized “impact investment” practitioner as the principal of Level 3 Capital Advisors, LLC.

June 04, 2017

Ten Clean Energy Stocks For 2017: First Quarter Earnings

Tom Konrad Ph.D., CFA

In the two months since the last update, most of the stocks in my Ten Clean Energy Stocks model portfolio have reported first quarter earnings.  There were few surprises, and those were mostly pleasant ones, allowing the model portfolio to add to its gains, and pull a little farther ahead of its benchmark. 

For the year to the end of May, the model portfolio is up 13.8%, 2% ahead of its benchmark.  The benchmark is an 80/20 blend of the clean energy income benchmark (the Yieldco ETF YLCO) and the clean energy growth benchmark (Clean Energy ETF PBW), with the ratio matching the 80/20 mix of income and growth stocks in the model portfolio.

The 8 income stocks again led the pack, with an average total return of 15.2% for the year to date.  The Green Global Equity Income Portfolio (GGEIP), an income and green focused strategy I manage also did well, up 13.5%.  For comparison, the income benchmark YLCO produced a solid 11.4% return.

The two growth stocks recovered from losses early in the year and are now up 9.4%, but still behind PBW at 12.9%.

10 for 17 total return


Stock discussion

Income Stocks

Pattern Energy Group (NASD:PEGI)

12/31/16 Price: $18.99.  Annual Dividend: $1.63 (8.6%). Expected 2017 dividend: $1.64 to $1.67.  Low Target: $18.  High Target: $30. 
5/31/17 Price: $22.56.  YTD Dividend: $0.408 (2.2%).  Annualized Dividend: $1.655.  YTD Total Return: 21.2%

Wind-focused Yieldco Pattern Energy Group advanced in strongly in April ahead of first quarter earnings.  Earnings did not disappoint, and the Yieldco added to those gains in May.  Guidance for 2017 Cash Flow Available for Distribution (CAFD) is $140 to $165 million, which would be 5% to 24% increase on 2016 CAFD. 

Growth has been slowing for Pattern, mainly because the low share price following the Yieldco bust at the end of 2015 has prevented the company from raising much equity capital.  I expect that the share price will need to rise into the high 20s before we see large equity issuance from Pattern.  With lower growth, they are also lowering their quarterly dividend increases.  Since the IPO in 2014, the average quarterly increase has been 2.7%, but the company only increased its dividend 2% in the fourth quarter of 2016 and 1.4% this quarter.  This lower rate of increases seems prudent, given that CAFD may only grow 5% this year at the low end.

Less prudent in a time when the company needs to be careful with its cash is the Yeildco's consideration of an investment in the early stage projects of its parent, Pattern Development.  In general, I think it is a good idea for Yieldcos to invest in project development with some of their resources, and eventually, as they grow larger, do much of their project development in house.  That said, the time to invest in relatively risky but potentially high return businesses is when the stock is highly valued.  When money is tight, as it is now for Patten and most other Yieldcos, it's best to focus on investments that will increase the dividend in the short term.  The time to invest in Pattern Development will be after the stock price recovers. Even small investments in early stage projects like the one being considered will only delay further stock price recovery.

8point3 Energy Partners (NASD:CAFD)
12/31/16 Price: $12.98.  Annual Dividend: $1.00 (7.7%). Expected 2017 dividend: $1.00 to $1.05.  Low Target: $10.  High Target: $20.
5/31/17 Price: $13.64.  YTD Dividend: $0.257 (2.0%)  Annualized Dividend: $1.028.  YTD Total Return: 7.1%

I took a deeper look at Solar-only Yieldco 8point3's plans to refinance its company level debt with amortizing debt in March.  The company abandoned these plans April when one of its sponsors, First Solar (FSLR), announced that it was considering selling its stake in the Yieldco.

While I believe the refinancing plans were prudent, I found that they would have reduced 8point3's CAFD below the level needed to sustain its current dividend.  To make matters worse, the Yieldco announced a dividend increase while the refinancing plans were still in place.  This behavior basically meant that 8point3 was hoping that its unsustainable dividend increases would cause investors to buy the stock and drive up the stock price.  This hoped-for stock rebound would allow 8point3 to make new investments and increase cash flow enough to avoid a dividend cut.

In short, 8point3 was acting like it expected a return to the Yieldco bubble of 2014 and early 2015.

The abandonment of 8point3's (prudent) plans to refinance its company-level interest only debt with project-level amortizing debt leaves sufficient cash flow to pay its current dividend, but does not address the reason for that plan in the first place.  8point3's debt matures in 2020, and it is an open question if lenders will be willing to refinance it at comparable terms.  If the stock price recovers, the company will issue new equity and grow itself out of the problem.  If not, the only option open to 8point3 in 2019 may be refinancing with project level, amortizing debt.  That will greatly reduce CAFD, leading to a large dividend cut.  The company's recent dividend increases only make this future problem worse.

This strategy of hoping that the stock market will bail the company out of its financing problems, at the same time as one (if not both) of its sponsors are looking for the exits is, in my opinion, irresponsible corporate management.  While the high yield puts a floor on the stock price in the near term, I believe that long term investors are becoming increasingly skeptical of the company.  This skepticism should also put a ceiling on the share price, and prevent management's hopes of a share price recovery from coming to fruition. 

As the maturity of 8point3's debt moves closer, the consequences of the inevitable refinancing will loom larger in investors' minds.  I don't know when it will happen, but at some point, the stock price will have to drop to reflect 8point3's much lower expected CAFD and dividend after refinancing.

Because of this, I have started selling short calls on the stock, in order to profit from my prediction that the share price is likely to be capped in the near term, and fall in the medium term.

Hannon Armstrong Sustainable Infrastructure (NYSE:HASI)

12/31/16 Price: $18.99.  Annual Dividend: $1.32 (7.0%).  Expected 2017 dividend: $1.34 to $1.36.  Low Target: $15.  High Target: $30. 
5/31/17 Price: $21.91.  YTD Dividend: $0.33 (1.7%).  Annualized Dividend: $1.32.  YTD Total Return: 17.1%

In my last update, I said that Hannon Armstrong's recent secondary stock offering had depressed the stock and that the then current price of $19.20 represented a buying opportunity.  The stock of this sustainable infrastructure financier has since risen 14%.  The dividend is still attractive and it still has plenty of room for gains, but is no longer a screaming deal.

The first quarter earnings release was admirably boring, showing steady growth. 

NRG Yield, A shares (NYSE:NYLD/A)
12/31/16 Price: $15.36.  Annual Dividend: $1.00 (6.5%). 
Expected 2017 dividend: $1.00 to $1.10.  Low Target: $12.  High Target: $25. 
5/31/17 Price: $17.20.  YTD Dividend: $0.53.  Annualized Dividend: $1.08.  YTD Total Return: 15.5%

Yieldco NRG Yield (NYLD and NYLD/A) had a mixed quarter, with improved availability of its wind and solar assets, offset by unfavorable weather.  It does not matter how well your solar plant is running if it does not stop raining.  The company's conventional fleet also had problems with forced outages, although some of the losses were recovered through insurance.

These problems were mostly offset by new acquisitions.  Although, like many Yieldcos, NRG Yield's share price has been depressed, its stock price has been recovering and it is able to raise some equity capital to accretively invest in new projects.  It also has $144 million in availability from its existing borrowing facilities.  This growth potential means that the Yeildco is still on track to raise its dividend by 15% in 2017 over the previous year. 

Nor should it lack for projects to buy.  In addition to its identified ROFO list, its parent NRG is under pressure to sell its renewable businesses from an activist shareholder.  This might lead to accelerated purchases of some assets at better-than-expected prices.

Atlantica Yield, PLC (NASD:ABY)
12/31/16 Price: $19.35.  Annual Dividend: $0.65 (3.4%). Expected 2017 dividend: $0.65 to $1.45. Low Target: $10.  High Target: $30.
5/31/17 Price: $20.89.  YTD Dividend: $0.25 (2.6%).  Annualized Dividend: $1.00.  YTD Total Return: 10.6%

Atlantica Yield continues to impress me, but not the market.  Along with first quarter earnings, the company announced that it had "obtained a waiver in Kaxu which waives any past potential cross-default with Abengoa in the project finance agreement." After Kaxu, the company needs to obtain only one more such waiver in order to free itself from the after-effects of its former parent Abengoa's bankruptcy. 

The remaining project, ACT, represents 300 MW of conventional power generation in Mexico, and accounted for 13% of revenue in 2016.  The muted reaction of investors to first quarter earnings may have been in response to the company's decision not to raise the dividend until it obtains the final waiver for ACT.  Given ACT's share for revenue and cash flow, the board could have easily justified increasing the quarterly dividend to $0.30.  The fact that they chose to keep the dividend at $0.25 is the exact opposite of the "raise the dividend and hope investors come" strategy that concerns me at 8point3 Energy Partners (see above.) 

Contrasting Atlantica and 8point3

In sharp contrast to 8point3, Atlantica is preserving corporate capital and using it to make small investments which will lead to long term dividend growth, such as the $10 million investment in a California-Arizona transmission line announced in the first quarter. 

Like all income investors, I like dividend increases, but I like prudent uses of capital even more.  With Yieldco stocks still out of favor, it's much better to fund growth with retained cash flow as Atlantica is doing than to squander current resources in the hope that the stock price will recover and shareholders will be willing to fund today's dividend increase after it has already happened.

Another telling point of contrast between Atlantica and 8point3 is Atlantica's stated 3x target for the ratio of corporate level debt to pre-debt service CAFD.  For Atlanica, this ratio stood at a cautious 2.6 at the end of the first quarter.  8point3 does not use (or at least disclose) this ratio, but we can estimate it.  For 2017, 8point3 is projecting approximately $95 million of CAFD and $25 million of debt service.  All $714 million debt is corporate level, so 8point3's outlook puts the same ratio at just below 6- twice Atlantica's target.

The point of a ratio like this is to ensure that changes in the cost of servicing corporate debt will have a limited impact on dividends.  8point3 is currently paying 3.5% per year for debt service.  This must be refinanced by 2020.  If it is all refinanced at the same 5% rate as Atlantica just refinanced some of their corporate level interest-only debt, the annual debt service cost will rise from $25 million to $36 million, reducing annual CAFD to $80 million, or $1 per share. 

Even this is a best-case scenario that assumes no the company can refinance everything with interest only debt.  If 8point3 tried to meet Atlanitca's 3 times target, it would need to refinance more than half of its debt with amortizing project level debt, annual CAFD would fall to $0.88 a share. That puts the current dividend rate of $1.08/year at 123% of 8point3's long term sustainable CAFD.  This ratio of dividends to CAFD is called the payout ratio, and most Yieldcos target payout ratios of 80% to 90%.   Atlantica's target payout ratio is 80%, and its current dividend of $0.25 per quarter is only 56% of CAFD guidance for 2017.  This leaves a lot of room for Atlantica to increase its dividend later this year.

NextEra Energy Partners (NYSE:NEP)
12/31/16 Price: $25.54.  Annual Dividend: $1.36 (5.3%). 
Expected 2017 dividend: $1.38 to $1.50.  Low Target: $20.  High Target: $40. 
5/31/17 Price: $34.54.  YTD Dividend: $0.718 (2.8%).  Annualized Dividend: $1.46.  YTD Total Return: 21.9%

NextEra Energy Partners also compares favorably with other Yieldcos on measures such as payout ratio and company level debt.  Its outlook for long term CAFD from its current properties is approximately $310-340 million, or $2 to $2.20 per share, compared to 2017 distributions of $1.58-$1.62 per share.  That gives a payout ratio of around 80%. 

Management does not plan not to issue additional equity until the share price recovers.  If the share price does not recover, the company may have trouble delivering on it 5 year dividend growth target of 12% to 15% per year, but not until at least 2019, and there is no danger of a dividend cut like the one we could see for 8point3 in the same time frame.  And in Nextera Energy Partners' case, the necessary share price recovery is already underway.

Other Income Stocks

Covanta Holding Corp. (NYSE:CVA)
12/31/16 Price: $15.60.  Annual Dividend: $1.00 (6.4%).  Expected 2017 dividend: $1.00 to $1.06.  Low Target: $10.  High Target: $30. 
5/31/17 Price: $14.75.  YTD Dividend: $0.25 (1.6%)  Annualized Dividend: $1.00.  YTD Total Return: -3.9%

Along with Atlantica, waste-to-energy developer and operator Covanta continues to suffer because of market weakness in power prices and commodity metals.  Earnings were significantly negative at -$0.41 per share, but like Yieldcos, much of this loss is in the form of depreciation, and so it does not have much bearing on the company's ability to maintain its dividend.  The company's Free Cash Flow guidance for 2017 is $100 million to $150 million, which should be sufficient to maintain its $129 million in annual dividend payments until cash flow increases because of growth investments or recovering commodity markets.

The company's Dublin facility accepted its first waste delivery and remains on track  for commercial operation in the fourth quarter of this year. 

Seaspan Corporation, Series G Preferred (NYSE:SSW-PRG)

12/31/16 Price: $19.94.  Annual Dividend: $2.05 (10.3%).  Expected 2017 dividend: $2.05.  Low Target: $18.  High Target: $27. 
5/31/17 Price: $21.22.  YTD Dividend: $1.023 (5.1%).  Annualized Dividend: $2.05.  YTD Total Return: 11.3%

Leading independent charter owner of container ships had a very bullish first quarter earnings report, noting that the weakness in pricing container ship leases seemed to have hit bottom.  Other shipping companies, such as Maersk (MAERSK-B.CO) have noted similar improvements.  Despite this, the company's common stock continued to drop in May, and its preferred stock (such as SSW-PRG) has not delivered significant gains.  I think this makes now a particularly good time to buy the company's preferred shares, or even speculate on a sharp recovery of the common stock.  I did both in recent weeks, buying a little of both the preferred E and H series shares, and buying some long dated $7.5 calls on the common stock as it temporarily fell to near $5.

Growth Stocks

MiX Telematics Limited (NASD:MIXT).
12/31/16 Price: $6.19.  Annual Dividend: $0.14 (2.3%).  Expected 2017 dividend: $0.14 to $0.16.  Low Target: $4.  High Target: $15. 
5/31/17 Price: $7.12.  YTD Dividend: $0.037 (0.6%).  Annualized Dividend: $0.14.  YTD Total Return: 9.5%

Everything seems to be coming together for vehicle and fleet management software as a service provider MiX Telematics.  For the last 2-3 quarters, we've been seeing renewed growth in subscriptions in most of the company's segments.  Subscription revenue came in ahead of guidance for the fourth quarter and fiscal year ending March 31st. 

The recovery of oil prices to around $50 a barrel has led to a rapid increase in activity should lead to renewed growth in subscriptions MiX's oil and gas customers.  This segment was a drag on MiX's results in 2016, but should continue to be a tailwind for the rest of this year.

Aspen Aerogels (NYSE:ASPN)

12/31/16 Price: $4.13.  Annual Dividend and expected 2017 dividend: None.  Low Target: $3.  High Target: $10. 
5/31/17 Price: $4.52.  YTD Total Return: 9.4%

As I expected, Aspen Aerogels delivered unimpressive first quarter earnings.  What I did not expect was that the stock would rally for no reason I could see other than a good long term valuation even if the near term prospects still seem weak.  When a stock falls for no reason I can determine, I usually buy.  When it rises, as Aspen did, I remain on the sidelines. 

Final Thoughts

Although the world political and economic climate remains volatile, the US stock market has remained calm so far this year.  How long that can continue is anyone's guess, but I think defensive investments like cash, attractively valued income stocks, and real income investments like home solar remain the best places to put your money. 

On home solar, I recently published an article comparing it as an investment to commonly held mutual funds.  Spoiler: the mutual funds did not fare well.  For defensive income stocks, Atlantica Yield, Covanta, and Seaspan Preferred shares are all looking very attractive right now.  As for cash, keep some around.  I suspect we will see some much better valuations in the stock market over the next 6 months to a year.
Disclosure: Long HASI, MIXT, PEGI, NYLD/A, CVA, ABY, NEP, SSW-PRG, ASPN, GLBL, TERP.  Long puts on SSW (an effective short position held as a hedge on SSW-PRG.  Short calls on CAFD.)

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

May 30, 2017

Smarting Up Electrical Grids

by Debra Fiakas CFA

My recent post “Bull Case in Rick Perry’s Grid Study” highlighted efforts by U.S. Energy Secretary Rick Perry to help the coal industry with a study of the U.S. electrical grid.  Coal has long claimed advantage as a ‘dispatchable’ power source, i.e. a consistently available power source suitable to supply power for the base load.  Technology is making base load less important.  Indeed, modernized or ‘smart’ electrical grids are making it possible to take advantage of low-cost renewable power sources even though they produce power intermittently and are therefore considered ‘not dispatchable’.

The preference of market-based electric grids for the lowest-cost producer is what has got the coal industry in a knot as power generated from cheap natural gas wins out the daily bidding process.  Even intermittent power sources such as wind and solar can beat out coal-fired power plants.      When wind and power sources are in operation at some scale their marginal cost is low (and getting lower according to the National Renewable Energy Laboratory) and therefore the asking price to the electrical grid is low.  As electricity demand escalates the grid operator casts about for additional power from the next lowest priced power source.  At some time during normal operating conditions, as more power is needed, wind and solar sources will rank as the next lowest-cost power source and beat out a coal-fired power source.

Investors can take a cue from the Perry grid study by going long companies with technologies and know-how that make it possible to deliver power at the lowest possible cost.  Following are few companies that are helping to ‘smart up’ the U.S. electricity grid.

An electric grid is smart when its can optimize electricity utilization and interact with consumers and markets.  EnerNOC, Inc. (ENOC:  Nasdaq) describes itself as a world leader in energy intelligence.  Among other energy management products for industry and business, the company provides demand response solutions and energy management software to customers in the U.S. and around the world.
Demand response is a communications link between the power grid operator and large electricity users, making it possible for grid operators to cue these large customers that electricity demand is on the rise.  Participating electricity users can then temporarily reduce their energy use during these periods of peak demand and get rewarded with special low rates.  Even with offering lower rates the utilities and grid operator benefit from the smoothing effect the demand response system has on electricity demand.  The grid operator does not as frequently have to reach out to higher-cost power providers and can more frequently tap power from intermittent power generators.

EnerNOC reported a net loss of $41.9 million on total revenue of $398.7 million in total sales during the twelve months ending March 2017.  As worrisome as that large loss might seem, it is not as troubling as the fact that the company burned up $39 million in cash resources to support operations during that period.  To keep things going as EnerNOC struggles to right the ship, the company has tapped credit markets.  The total debt to equity ratio is 141.88.  The company has $74 million in cash on its balance sheet suggesting that it still has some staying power to see its strategic growth plan back to breakeven.   

MasTec, Inc. (MTZ:  NYSE) is an engineering, procurement and construction company focused on the energy and utility infrastructure sector.  An electric grid is considered smart when its can self-monitor its equipment and components.  Among a long list of infrastructures, MasTec delivers on smart grid projects for utilities, including smart-metering, energy controls and monitors, and other technology solutions designed to regulate power flows.

The company is also experienced in wind, solar and geothermal power construction, but has made wind power a specialty.  For example, MasTec constructed 32 miles of 34 kilovolt electric power lines to collected power from a new wind farm for Transcanada.  In White Lake, South Dakota, MasTec erected 108 wind towers with 1.5 megawatt turbines for the Crow Lake Wind Farm owned by the Basin Electric Power Cooperative.  MasTec uses its extensive knowledge of electric generation and transmission to connect and deliver high voltage power in the most efficient network.

In the twelve months ending March 2017, MasTec earned $174.9 million in net income or $2.13 per share on $5.3 billion in total revenue.  Operating cash flow generated during the period totaled $343.9 million, representing a sales-to-cash conversion rate of 6.5%.  If that achievement is not impressive enough, note that return on equity is 17%.

Analysts expect the good times to continue rolling for MasTec. The consensus estimate is for $2.46 per share in the year 2017.  This represents a growth rate of 15.5%.  We note that MTZ shares are trading at 15.1 times forward earnings, suggesting that the stock is just at fair value. 
Quanta Services (PWR:  NYSE) is another engineering, procurement and construction company based in the U.S. and claims to be the largest electric transmission and distribution specialty contractor in North America.  The company has an engineering design and planning team focused exclusively on smart grid technologies.  The company puts particular emphasis on information technology systems as needed for achieving a truly ‘smart’ grid.  Two-way communications systems, automated feeder switches and phasor measurement units to monitor grid stability are part of a sophisticated network solution.  With a robust IT solution the grid is able to integrate renewable energy sources by nimbly switching among sources as they generate power.  This process levels out power availability, thereby reducing dependence upon high-cost ‘dispatchable’ sources.

Quanta is significantly larger than MasTec as an EPC services provider, but is not quite as profitable.  Quanta reported net income of $226.5 million or $1.45 per share on $8.1 billion in total sales in the twelve months ending March 2017.  Sales-to-cash conversion was only 2.1% in the year.  Furthermore, Quanta is only earned 6.9% on equity.

Shares of Quanta are priced at 13.4 times forward earnings and therefore present a bit of a bargain compared to MTZ.  Perhaps more importantly, PWR shares are a less volatile with a beta of 0.74 compared to a beta of 1.88 for MTZ.

Silver Springs Network, Inc
. (SSNI:  Nasdaq) offers a solutions to enable communications between devices and the power grid.  The SilverLink system provides utilities with data to improve and even automate power management decisions.  The company is particularly focused on integrating distributed energy resources to the electrical grid, and touts its communications and intelligent control solutions for utilities.  Silver Springs also uses a novel concept of ‘virtual power plants’ to created greater reliability in distributed energy resources.
Silver Springs reported a loss of $26.3 million or $0.51 per share on $312.7 million in total sales in the twelve months ending March 2017.  However, cash flow from operations was a healthy $18.6 million or 5.9% of sales.  The benefits of internal cash generation can be seen on the balance sheet with $116.6 million in cash at the end of March 2017 and no debt.

Analysts anticipate even better times ahead the consensus estimate is for net profits $0.30 per share in 2018.  The stock is currently trading at 32.8 times that consensus estimate.

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.

May 24, 2017

Amyris: 90 Days To Build The Future

Jim Lane

In California, Amyris (AMRS) reported Q1 revenues of $13.0M compared with $8.8M for Q1 2016, and touted the “significant increase in product sales, primarily in the personal care and health and nutrition markets, offset by a slight decline in collaboration revenue.” Collaboration revenues contributed $4.7M and product sales added $8.3M for the quarter.

Big Q1 miss vs analyst expectations

As Jeff Osborne at Cowen & Co noted, “Amyris reported revenue of $13.0mn, well below our estimate of $37.1mn due to much lower collaboration payments than we had anticipated. Management has highlighted that these payments can be very lumpy in nature, and attributed the miss to a failed milestone payment from Ginkgo Bioworks. Gross Margin of 2% was well below our estimate of 40% due to the lower collaboration payments.”

A turning point of interest

We liked one item more than anything.

In Q1 2016, product sales were $5.2M and the cost of product sales were $11.2M, and a number of informed observers became alarmed that the company was losing money on every product produced, and that growth would be unsustainable. The company noted the concerns but said that future sales would arrive with stronger gross margins.

So, let’s look at Q1 2017.

And indeed, the company has staged a turnaround in that critical metric. In Q1 2017, product sales were $13.2M and the cost of product sales were $12.8M. IIt’s a rretunr to the kind of gross margins that company had achieved by Q3 2016 — but with a 50% jump in revenues. Long ways to go before the company is out the financial woods, but we may see here a turning point.

The big hit is Biossance

The company recorded record quarterly Biossance sales following successful launch into Sephora with the brand delivering high growth and expected to drive much better than expected 2017 results — growing from approximately $500,000 in 2016 total retail sales to over $10 million expected for 2017

The big miss is Ginkgo

There wasn’t much insight offered regarding the Ginkgo situaiton, excepting that a mysterious milestone payment was missed — apparently, a huge one, because the miss on revenues compared to analyst expectations was almost $24M.

Indeed, the scale-up news from the Ginkgo universe this past week went in a completely different direction. Ginkgo Bioworks and Robertet USA completed the commercial-scale fermentation of “a key flavor and fragrance ingredient” – which one, we don’t yet know. The specific scale was 50,000 liters.

But think along the lines of rose oil ingredients and lactone ingredients — that’s the Robertet sector. Overall, Ginkgo has a portfolio of over 40 products under contract with 20 customers.

The Q1 developments that will impact 2017 and 2018

The company highlighted three major developments that will positvely impact the company this year and next:

  • Growing Farnesene for Vitamin E oil from around $6 million in 2016 to around $20 million in 2017
  • Significant progress in healthy sweeteners with expected commercial production in 2018 of low cost, best performing healthy sweetener to focus on sugar replacement market
  • Announced up to $95 million in anticipated equity financing led by Royal DSM along with institutional investors over two tranches and announced in-process reduction of the company’s debt by approximately $75 million, significantly strengthening the company’s balance sheet

Happy Campers at Camp Amyris

“We are pleased with our continued execution delivering increased product sales and very healthy revenue growth for Amyris,” said John Melo, Amyris President & CEO. “We are very excited to join with Royal DSM to accelerate product sales in health and nutrition markets, deliver better performing products and accelerate market access. With their support and that of our investors we have significantly strengthened our balance sheet and the company’s foundation as a leading company in its sector.”

Continued Melo, “Our product portfolio is growing at a faster rate than we expected within nutraceuticals, skin care and fragrance ingredients. We have evolved our business to predictable quarter on quarter product sales and continue to deliver on our strategic milestones for delivery of our collaboration revenue. While our competitors struggle to deliver material revenue and predictable growth we expect to deliver around $60 million of product revenue for 2017, or more than double from 2016, and we expect total revenue to be better than our 2017 plan.

The Bottom Line

It’s the 5th consecutive quater of year on year product revemue growth, and the company is targeting $115-120M in revenue in 2017 and of that $60M is expected to come from product sales.

In 2018, guidance is at $160M for product sales.

All that’s the good news. Here’s the bad news, Amyris has been pushing back it’s time to $100M in revenue for some time. Back in May 2016 we heard from AMyris that it was “On track to execute 2016 business plan with expected non-GAAP revenue of $90-$105 million for the year.” The company ended up with $67M for the year — and with a $13M result in Q1, the company will need to average out at $33M per quarter to reach its $115M target in 2017.

Needless to say, the next 90 days are perhaps the most important in the company’s lifespan. There’s a time for building the long-term future and there’s a time for delivering on stated goals. Wall Street may well be able to put the past in the past with all forgive if Amyris can break out and hit that $100M revenue threshold, and even with a strong second half, the company will need to reach something like $30M in Q2 revenue to maintain belief, given the 2016 miss.

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.

May 21, 2017

Ethanol and Biodiesel: Production Cost and Profitability

For a number of years, this (now old and outdated, but) very useful chart has been in circulation in energy circles, mapping the supply of energy to the world by looking not at prices, but at production costs.

For one thing, it goes a long way to explaining why the price of oil can tumble so quickly when there is a fall off in demand, and explains why OPEC is troubled by unconventional oil in a way it is not so bothered by other energy sources such as renewable fuels.

Renewables not only have been traditionally at the expensive end of the curve, the supply has been generally quite limited when we look at total global demand. OPEC makes so much money off $100 oil that they don’t mind sacrificing a few market share points to other fuels, when demand spikes and prices reach those levels.

The shale oil revolution and its impact

Conversely, shale oils uncovered through US fracking operations — to use another example — are able to supply lots of oil to meet world demand at prices well below the OPEC target, and they can also be competitive with some of the more expensive conventional oils. So, they bite into market share and also price.

Updating the charts: Where does ethanol fit now in the cost curve?

Back then, ethanol fitted in the $90-$120 per barrel slot. But today, the cost of production has changed, dramatically. You can see it in this wonderful data set that Bruce Babcock and the Center for Agricultural and Rural Development at Iowa State have maintained for many years.

As you can see from the hard data, the production cost for ethanol today is $1.22 per gallon, which translates to $51.24 per barrel. Now, on an energy basis — given that ethanol has 67% of the energy content of a barrel of oil, that translates to $76.86 on a barrel-of-oil-equivalent basis.

To make a fair comparison, we have to take into account the refining cost of making gasoline — we need to compare finished ethanol and finished gasoline, not compare corn to gasoline or ethanol to crude oil. Estimates of the variable cost of refining are not easy to obtain and vary based on the product mix, cost of utility power and so on, but tacking on at least $4 per barrel is fair (this older estimate from PSU puts it at $20). The EIA has this data from 2012, here.

$76 is well above today’s oil price, even if you tack on $4 for refining costs to make gasoline. But it’s not well above the price that oil is expected to reach by next year, according to the wizards at Raymond James (whose energy desk correctly forecast the collapse in oil prices, so we approach their forecasts with great respect, although timing is always an issue with any projection). They expect oil to reach around $70 per barrel by the end of 2017. Of course, we’ll wait to see what impact that might have on corn prices, the price for DDGs and for corn oil — but it would be a remarkable step in ethanol’s journey.

We’ve put the latest data from the IMF, and the new numbers for renewables, into the chart you see below.

As Aemetis CEO Eric McAfee notes:

“The general perception is that biofuels are more expensive to produce than petroleum fuel products. That perception is not accurate for the net cost of production of ethanol in the US after considering the value of animal feed byproducts (DGrain and corn oil) and CO2 production for the human food market.”

The impact of carbon on profitability

Let’s look at the impact of carbon.

Under the Renewable Fuel Standard, there’s an implied carbon credit for ethanol, and that’s in the value of the D6 RIN.

And that tells you that there’s a significant inflection point in ethanol and gasoline prices, and it’s this. If, one day, the production cost + the RIN cost of corn ethanol falls below any given source of conventional oils, it just makes economic sense for an obligated party to switch towards increased renewables production (as opposed to, say, investing in tight oil operations) — not because of obligations to government, but because of obligations to shareholders. That’s a step-change.

And it’s getting close. Thanks to the pricing data from our friends at PFL, we see that the D6 RIN is trading at 41 cents per gallon.

That adds $17.22 in carbon value to a barrel of ethanol. Putting the ethanol production price together with the RIN price, it makes sense to buy or make as much ethanol as you can stuff into the system — mandated or not — starting at $55 per barrel.

That’s not far at all from the world oil price.

Over to the biodiesel side

All the same math applies in the world of biodiesel, but there are different data points. So let’s look at those.

Starting again with CARD’s data on operating costs, the production cost of biodiesel right now is at $2.76 per gallon, or $115 per barrel.

It happens that CARD data is based on the soybean oil price of $0.31 cents per pound. Technologies that can use recycled oils that are sold as low as $0.22 per pound will have a production cost of roughly $2.61 per gallon. Now, biodiesel is much closer to petroleum on energy density — it’s between gasoline and diesel. So, depending on whether you want to compare biodiesel back to gasoline that comes out of a barrel of oil or to diesel, you’ll come up with a production cost range (on a barrel of oil equivalent basis) of $105-$115, after we’ve adjusted for energy density.

So, biodiesel is well above the $52 Brent crude oil price, right now. But biodiesel RINs are more valuable, and close the gap a little. According to PFL, D4 biomass-based diesel RINs are trading at $1.03 per gallon, and are adding $43.26 to the value of the barrel.

Putting the production price together with the RIN price, it makes sense to buy or make as much biodiesel as you can stuff into the system — mandated or not — starting at $62-$72 per barrel. That’s high compared to today’s price, but inside the predicted crude oil price of $70 that we referenced above.

So, we live in interesting times — and we’ve charted the costs and supply figures, taking carbon into account, in the chart below.

Considering California

When we look at the California market and its Low Carbon Fuel Standard (and Oregon, too, which also has an LCFS) we are looking at a different animal, since the carbon value is added on top of RIN credit values.

Right now, our friend at PFL advise that the LCFS credit price is at $74 per ton of carbon avoided. For locally-produced ethanol, that means around an additional $6.21 per barrel for ethanol delivered into the California market.

For biodiesel, the credit bites harder because biodiesel really, really reduces carbon. The LCFS credit translates into around $26.64 in added value for biodiesel.

Putting the ethanol production price together with the RIN price, it makes sense to buy or make as much ethanol as you can stuff into the California system — mandated or not — starting at $49 per barrel.

Putting the production price together with the RIN price, it makes sense to buy or make as much biodiesel as you can stuff into the system — mandated or not — starting at $36-$46 per barrel.

We’ve charted all that in this California-only chart below.

Two Takeaways

The current barrel of oil costs $49.38 (WTI) and $52.52 (Brent) right now. Which tells you two things:

1. The renewable fuel credit markets work with remarkable efficiency, after just a few years in operation. The credits reach almost exactly where they should, because a credit should in some ways make a mandate obsolete, it should incentivize a market player exactly to the point where they have a financial gain from deploying a renewable fuel. In the real world, incumbents don’t act with perfect economic rational actors, but you get the idea.

2. In California at least, a remarkable threshold has in fact been reached. In the actual markets that exist – carbon and fuel markets — ethanol and biodiesel have achieved market parity. Now, you can argue all night that carbon markets are not free markets — they are created by government fiat. And, you can argue all night that fuel markets are not free markets — they are created by cartel fiat. And you’ll find supporters and detractors by the zillions, and the shouting will drive you crazy.

But they are markets, and they are the markets we have. And don’t get me started on how free and transparent financial markets really are, Mr. Madoff. But they are the markets we have, and in the markets we really have, we can say that markets in California are telling us this:

You can make more money producing ethanol than producing gasoline from petroleum, according to our math. And investors might take note — because making money is generally what investors are trying to accomplish in the petroleum markets.

So, a step change worth noting.

[A brief explanatory note. As a sharp-eyed Digest reader noted, the CARD model tracks what may be considered “operating costs” and excludes amortization, depreciation and so forth — if all those were added in, the “production cost” would be higher — as high as $1.46 per gallon, vs $1.22 per gallon. So, why exclude those? As it happens, the EIA model for oil refinery costs (that we noted above) also excludes amortization, depreciation and so forth, which is why the refining add-on is $4 per barrel instead of $20-$30. Since we don’t have a good source of overall oil refinery costs, these capex related costs were excluded for both, to esnure that we are comparing apples to apples. If you like, you can add $10-$15 per barrel to both sides of the equation to account for these charges, and it doesn’t change the comparison, but you may feel that although it would be an approximation, it may be closer to a fully-loaded “production cost” as opposed to an “operating cost”.]

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.

May 18, 2017

US Geothermal Fizzles

by Debra Fiakas CFA

Geothermal power generator US Geothermal (HTM:  NYSE) came up short in reporting financial results for the first quarter ending 2017  -  at least from the perspective of the four analysts with published sales and earnings expectations for the company.  Operating revenue of $8.4 million slipped slightly from the same period a year ago, but produced slightly lower net income of $1.1 million.  The company’s share was $260,000 or a penny per share.  Not good enough say the analyst’s who were collectively looking for two pennies per share in earnings!

Missing earnings expectations has become a bad habit for US Geothermal, having failed to clear the consensus hurdle three quarters in a row.  The previous missed had resulted in modest trimming of expectations.  Investors should be prepared for another round of nipping and tucking in revenue, profit margin and earnings predictions.  The steady drumbeat of lower numbers, and the muted commentary that comes along with it, is usually a drag on share price.

Investors have to question whether a period of price weakness is a good time to pick up shares of a quality company at bargain prices…or a time to run for the hills.  It is May after all, when it is ‘time to sell’.

From a revenue standpoint, US Geothermal benefited from increased output at its Raft River facility after installation of a new production pump at one of the Raft River wells.  That installation was completed in late March 2017, suggesting that the real impact will not be observed until report of the June 2017 financial results.  Unfortunately, the company also faced a setback in the quarter.  The Neal Hot Springs Unit 1 was out of production for five weeks in late January and early February 2017, after vaporizer tubes froze.  The company reported a negative impact on power generation valued at $830,000 due to the equipment failure at Neal Hot Springs.

Total generation was 89,613 megawatt hours in the quarter compared to 93,787 megawatt hours in the same quarter last year.  With Raft River up 100% during the quarter and San Emidio follow up in second place with 98.6% availability for the quarter, it was really Neal Hot Springs with just 82.5% availability that was the cause of the slippage in power production in the quarter. Fortunately, business interruption insurance will cover about 38% of the lost revenue. Property insurance will provide another $2.0 million to repair and replace the damaged equipment.

Management seemed unfazed by turn of events at Neal Hot Springs, reiterating previous guidance for revenue and earnings in 2017.  Revenue is expected in a range of $30 million to $34 million, providing net income in a range of $4 million to $8 million.  US Geothermal’s cut of net income would be $1 million to $4 million.  Thus it would seem that Neal Hot Springs is fully back to normal and with the increased production at Raft River, management is apparently expecting another decent year.  The increased output from Raft River in the first quarter was valued at $200,000 for about one week of power generation.  Simple math provides an incremental addition of $1.2 million for a full quarter, more than enough to make up for the shortfall from Neal Hot Springs in the first quarter.

Importantly, management’s guidance is based on existing production facilities.  There are expansion projects in the works, but potential power from these projects is not included.  Altogether the development pipeline encompasses 115 megawatts of incremental power production capacity.
  • Progress has been made at the Geysers in California where the company is at the point of sourcing turbine generators and is negotiating a power purchase agreement with a single buyer.  The company is targeting end of 2018 for bringing the project on-line.
  •  The company has received permits to deepen three wells in its San Emidio II reservoir in Nevada that could elevate power production at that location from the current 10 megawatts to over 40 megawatts.    Drilling will commence this year when spring weather conditions allow.
  • Additionally, at San Emidio an application for new development of three power plants, twenty wells and a power transmission line has already been submitted to the U.S. Bureau of Land Management.  The company has targeted 25 megawatts to 45 megawatts as the ultimate resource size for this latter expansion project.
  • A geothermal power production project in El Ceibillo in Guatemala is awaiting a request for proposals from the government, to which US Geothermal is planning a competitive bid.  The process is expected to unfold yet in 2017.
Successful commissioning of all these projects would more than triple the size of US Geothermal’s power production capacity, which is around 45 megawatts today.  It will not be accomplished at the hand of current chief executive officer Dennis Gilles.  In late April 2017, the board of directors issued a cryptic press release indicated they would not be extending the employment agreement with Gilles.  A search committee will be looking for a successor to take over after Gilles’ current contract expires in July 2017.  Gilles may still have an influence over operations through an advisory agreement.  If the board could not accept an extension to his employment agreement, what foundation could be built into an advisory role that would be more palatable?

The market has had an opportunity to fully digest the news of Gilles department as CEO.  However, slippage in the first quarter production reminds investors of the many moving parts and sources of business risk inherent in geothermal power production.  Knowledgeable leadership is a key hedge against those risks.  The specter of a shuffle in the boardroom is likely to resurface as a source of worry in the coming weeks.  Thus the price weakness that might ensue following a 'quarter earnings miss' might be deeper and more protracted than usual because of leadership change.

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.

May 15, 2017

Ocean Power’s Stock Offering

by Debra Fiakas CFA

The first two lines of the prospectus for the April 2017 public stock offering by Ocean Power Technologies (OPTT:  Nasdaq) say all investors need to know about the market opportunity for the company’s wave power generation products.  First, the earth’s surface is covered 70% by water.  Second, over 40% of the world’s population lives within 150 miles of a coastline.  If the earth is dominated by water and a good share of our energy-hungry population lives near that water, doesn’t it make sense to turn the ocean into a renewable energy source?
If market opportunity based on common sense was all required for a stock offering, Ocean Power might have been able to sell new shares nearer its 52-week high price of $15.65 rather than a penny below the 52-week low of $1.31.  In the final trading days leading up the pricing on April 27th traders paid as much as $3.67 for the shares.  However, underwriters were frightened off, setting the offer price at a NEW 52-week low.

Perhaps there is more to prove than market opportunity…or market opportunity is not what it seems.

One question mark could be the company’s flagship technology.  Ocean Power Technology is on the cusp of commercializing a line of ocean wave conversion systems branded PowerBouy.  The PB3 PowerBuoy is intended for use in remote locations off-shore and can generate up to three kilowatts of peak power.  It comes with an energy storage system that has a 150 kilowatt hour capacity.  As we have noted an earlier article in September 2016, “Navy Buoys Up Ocean Power Tech”, the U.S. Navy has been an early and loyal follower.  The Navy’s product development grant was on top of a deal discussed in an earlier article “Ocean Power Nets A Discerning Buyer” in June 2016, which described a lease of the PB3 by Mitsui Engineering and Shipbuilding.

Thus it seems PB3 PowerBuoy is likely a strong product, built on sound technology and delivering the performance its engineers have promised.  Testing by two high-profile customers provides strong endorsement.  However, the intended applications for the PB3 in remote locations are a long way from “the 40% of the world population that lives 150 miles from the coast.” If the intended market is only in remote locations, market opportunity might not be as suggested by the opening lines of Ocean Power’s prospectus.

Ocean Power has identified four different types of customers:  oil and gas, defense and security, ocean observing and communications.  The ocean is a busy place and there are numerous installations in each of the four categories.  On the plus side, potential customers would be easy to identify and target with marketing and sales campaigns.  Ocean Power is even narrowing its target markets to certain of plum geographies to make the most of its new capital resources.  Then again, demand, especially in the oil and gas sector, might be subject to periodic peaks and lows as each customer group contends with own business cycles.  Perhaps most important, the remote location market will be rife with competing energy solutions, such as solar power, fuel cells or systems using conventional fuel.  Management contends its solutions will be viewed as a cost-competitive solution, and this may be necessary to gain a place at the table.

Investors might now be getting a hint as to why the OPTT offer price was set at a record low level rather than at a high.  Even if market opportunity is not as significant as is implied by the ‘40% of the population’ opening line of the prospectus, Ocean Power may still have a place in the hydrokinetic energy industry.  The company will be among few bringing ocean power solutions to remote installations in those very waters.  That should provide some upside to the $1.30 follow-on offering price.

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.

May 11, 2017

Icahn’s Pig in a Poke

By Brent Erickson, Biotechnology Innovation Organization

Members of the U.S. Senate are questioning whether Carl Icahn’s lobbying to change the Renewable Fuel Standard creates an ethics conflict with his role as advisor in the Trump administration. In addition to the ethics question, Members of Congress and some in the biofuels industry should examine whether Icahn could even deliver on the purported quid-pro-quo even if he wanted to.

In late February 2017, Icahn and a biofuel trade association reportedly discussed a presidential executive order to make Icahn’s desired change to the RFS Point of Obligation (the so-called POO) in exchange for modifications to unconnected policy priorities for biofuel producers. The proposed “deal” essentially was a non-starter, since altering federal policies is a far more challenging task than Icahn or his partners care to admit publicly. In short, the reported “deal” cannot be accomplished simply by waving a magic wand or through a presidential executive order.

Icahn claims the RFS exacts a disproportionate toll on his business interests, and he therefore wants to move the POO as far from CVR as possible. Icahn Enterprises owns 82 percent of CVR Energy, which includes two oil refineries – one in Kansas and a small one in Oklahoma – and a rack marketing terminal for selling finished fuel. Despite owning the rack terminal, CVR protests it cannot blend enough biofuel to meet the obligation and must therefore buy Renewable Identification Numbers (RINs) on the market. However, Reuters has reported that CVR sold RINs on several occasions in the past year, creating a short position in the market and apparently gambling that it can escape the obligation or buy the RINs back at a deflated price. Based on Reuters’ reporting, Icahn has made a $50 million windfall on the deal, and Senators are now asking whether he influenced RIN prices through his connections to the administration and campaign while making the trades.

When Icahn was named a special advisor to the President on regulatory reform in December 2016, many different stakeholders erroneously believed he would quickly push through changes to the RFS and exempt his refineries from having to purchase RINs. Indeed, the “deal” presented to the White House by Icahn this past February was purported to be “non-negotiable.” But federal laws are made of sturdier stuff than that and several prior attempts to move the POO are now stumbling blocks to Icahn’s goal.

In November 2016, EPA proposed to deny petitions filed by the American Fuel and Petrochemical Manufacturers and several independent refiners asking the agency to change the point of obligation. Notably, not all petitioners agreed on who should be obligated, and some of the various petitions may not have exempted CVR. EPA made a strong economic case that moving the POO would not increase production and use of biofuels, as petitioners claimed; in fact it would likely disrupt RFS stakeholders’ investments and thereby decrease biofuel use. By law, if EPA now decided to reverse itself and move the POO, it would have to present a rational argument for doing so – one that countered its own previous evidence. An executive order to change the POO would likely face a Court challenge. EPA would have to undertake a new rulemaking and respond to comments from numerous groups opposed to moving the POO, including most biofuel producers and several oil producers.

The other part of the February “deal” floated by Icahn offered a few tidbits for the ethanol industry. Chief among them was a waiver of gasoline volatility standards for blends of 15 percent ethanol (E15) to allow E15 to be sold in summer months. Gasoline evaporation contributes to ozone formation. Ethanol burns cleanly, decreasing engine tailpipe emissions, and therefore the standard 10 percent ethanol gasoline blend (E10) earns a small waiver of evaporative emissions limits. E15 blends reduce both evaporative and tailpipe emissions compared to E10 but don’t qualify for the waiver because Congress’s 1990 amendments to the federal Clean Air Act specify E10. A White House executive order on E15 does nothing to change EPA’s well-documented position on the matter or alter the legal or procedural landscape around the issue. Even worse, EO’s are not legally binding. So the biofuels industry would have no recourse to force regulators to follow through on the E15 waiver.

Icahn’s “deal” was rumored to offer the ethanol industry changes to EPA’s Motor Vehicle Emission Simulator (MOVES) model, which is used by the agency and states to develop policies to meet National Ambient Air Quality Standards (NAAQS). The MOVES model is indeed flawed because it uses input parameters from an April 2013 fuel study that was basically designed to attribute tailpipe emissions to the ethanol content in the gasoline. So, to correct the flaws in the model, EPA must redo the study. But in April, the Trump administration proposed to eliminate funding for the EPA office that conducts fuel and engine tests, creating a new potential hurdle that – at a minimum – would conflict with any potential executive order to change the MOVES model.

The most absurd part of the Icahn “deal” was a proposal for the extension of the $1 per gallon biodiesel tax credit, which expired at the end of 2016. The White House does not have the authority to grant this or any other tax policy via executive order. Tax policy is set by Congress and Presidential recommendations mean little on Capitol Hill.

The biofuels industry has opposed moving the POO primarily because it would require lengthy rulemaking and disrupt an RFS program that only recently got back on track. Further delays and uncertainty on something as fundamental as who’s obligated will hurt advanced biofuels producers more than most. Even the American Petroleum Institute (API) opposes changes to the POO.

But the real problem here is even if you like the alleged carrots Icahn dangled in front of ethanol producers to justify moving the point of obligation, an executive order does nothing to change the federal Administrative Procedures Act or the other bodies of law that will prevent the industry from collecting on the “deal” after we’ve given Carl Icahn what he wants.

Brent Erickson is executive vice president in charge of the Industrial and Environmental Section at the Biotechnology Innovation Organization (BIO). BIO represents more than 1,200 biotechnology companies, academic institutions, and state biotechnology centers across the United States and in more than 30 other nations.

This article was originally published on Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

May 04, 2017

Amyris Boards The Sweet Fleet

Jim Lane

Back in September 2015, we reported that Amyris inked a multi-year agreement with the US Defense Advance Research Projects Agency, the famed DARPA that gave us everything from kevlar to the Global Positioning System and the Internet — the goal in this $35M agreement with the Biological Technologies Office was to create new research and development tools and technologies — compressing the time to market for any new molecule by at least 10-fold in both time and cost.

The story expanded this week when we heard from Amyris (AMRS) that it had completed strain engineering and optimization to 26 key metabolic precursors across multiple organisms – including many different pathways beyond terpenoids allows Amyris to develop an industrial-scale fermentation process for virtually any biological molecule.

In addition to the expansion of the range of metabolic precursors, Amyris has revealed that it has now expanded its high-throughput yeast strain construction and testing pipeline to several other industrially-relevant organisms.

Living Foundries

The DARPA was called Living Foundries.

The molecules were anticipated to include chemical building blocks for accessing radical new materials that are impossible to create with traditional petroleum-based feedstocks.

These advancements have the cumulative effect of drastically reducing the R&D costs and timelines for developing a commercial process for any biological target, irrespective of the final application of the molecule. This is empowering Amyris with additional resources to develop next-generation capabilities to further advance its competitive position and accelerate its capabilities to produce go-to-market sustainable supply solutions at industrial scale for its partners.

“The DARPA-funded TIA has allowed us to continue our pioneering efforts at applying automation, next-generation analytics, and machine learning algorithms to find biological solutions to the bio-manufacturing sector,” said John Melo, Amyris President and CEO. “Amyris has always been at the forefront of utilizing big-data analytics and cutting-edge tools in the biotechnology sector, and our recent R&D results continue to pave the way toward expanding our footprint in multiple markets where fermentation-derived products offer our partners and consumers a sustainable, scalable source of supply.”

The new sweetener

Not completely unrelated to Amyris’ new-found chops in strain construction is the news that Amyris has “made significant progress” in the development of its healthy sweetener product technology and expects industrial production to occur in 2018. We reported on this earlier this week in our sister publication, Nuu.

Amyris is making a No Compromise sweetener and says it is “on track to be the low cost leader at industrial scale production” with a natural-like sweetener with very low calories that is sustainably sourced. Amyris’s target is to sell the world’s leading sweetener at a lower cost than sugar without any negative taste. Consumers love soda but hate sugar — Amyris wants to make soda taste the same and be healthy. The company expects this product opportunity in partnership with its partner to deliver over $100 million in annual revenue by 2020.

Beyond conventional sugar as a starting point

One of the things that the announcement portends is a step beyond conventional sugars as a feedstock in a conventional way. Note that Amyris will be selling at a lower cost than sugar.— and that rules out starting from conventional sugars in a conventional way.

One possibility? The company could be targeting something like xylitol — which is a C5 sugar and used as sweetener. Or, sorbitol — which is a C6 sugar alcohol that the human body metabolizes more slowly than conventional sugars. A patent search has not yet revealed any particular targets coming out of Fortress Amyris.

Polyalcohols are often used in foods like gum or even toothpaste because they offer the sweet taste without the cavities. However, they aren’t cheap as they can’t be found easily in nature and when produced industrially, they need very specific and controlled environments making it a pain for wide scale production.

We reported in Nuu last December that the Institute of Chemical Research of Catalonia and the Swiss Federal Institute of Technology researchers found a way to get polyalcohol sweeteners like mannitol or ribitol from cheap renewable sources like glucose. By being able to reorganize sugar atoms, researchers found a way to get the valuable polyalcohols from regular sugar easily and more affordably, bringing a smile to candy, gum and toothpaste manufacturers around the world.

Or, the company is proceeding from a novel sugar precursor where it can generate a higher yield. such as starting from unprocessed cane juice, which has the molasses still in the mix (in conventional white sugar refining, all the molasses is removed).

So, there are questions to be answered and we are standing by on that.

“Our focus on supplying the lowest cost, best performing products into Health & Nutrition and Personal Care markets by partnering with the leading brands has very strong momentum,” said John Melo Amyris President & CEO. “Our efforts to give the consumer sustainably sourced, best performing products without dangerous ingredients is really starting to payoff. We believe we have the leading market position for sustainable, healthy sweeteners and we are very excited about helping the world transition away from unhealthy sugars and accelerate the use of healthy sweeteners by providing the consumer a better taste experience and our partners better economics.”

The Race for a Next-Gen Sweetener

The race for the next big sweet-tooth satisfier has been heating up significantly.

We reported in April that Cargill and Evolva inked a major collaboration pact for the production and commercialization of EverSweet, the next-generation stevia sweetener. This product is on track for a 2018 launch, securing its first-mover advantage.

Over the next three years, principally in 2018 and 2019, Evolva expects to invest an estimated USD 60 million in the combined fermentation and bioprocessing facilities for EverSweet and its other products. The recent CHF 30 million equity commitment from Yorkville serves as a foundation for this investment and Evolva expects to secure an additional project financing package of around CHF 30 million by end 2017, which will enable full execution of the plans.

We reported in Nuu in February that MIT spin-out Manus Bio is using multivariate modular metabolic engineering to design microbial pathways that produce larger volumes of commercially interesting compounds.

Using MMME, the company has developed a fermentation-based process to produce Rebaudioside M with greater than 95% product purity. Currently, the alternative sweetener is derived in low yields from the stevia plant.

“Slapping genes together to make a product is fine, but this doesn’t give you a platform for producing something economically,” Stephanopoulos says. “There’s a big jump between making a few milligrams of a compound and a few grams, which is what you need to make it commercially viable.”

MMME involves using enzymes to “cut the linear pathway into a network of separate, distinct modules that can be more easily controlled and modified.”

Manus is also working on developing a route to nootkatone, a grapefruit extract that is a natural insect repellent. Traditional nootkatone production methods cost several thousand dollars per kilogram.

We also reported last October that S2G BioChem had entered into a license and collaboration agreement with Mondelēz International — a leader in biscuits, chocolate, gum, candy and powdered beverages — to help commercialize a sustainably-sourced supply of the food ingredient xylitol using a proprietary co-production technology.

Commercial-scale production of the sustainably-sourced food ingredient xylitol is expected to begin in 2018. Mondelēz owns billion-dollar brands such as Cadbury, Nabisco, Oreo, Trident and Dentyne.

We also reported last November that DSM asked Europe’s food safety regulators to approve the use of stevia produced using fermentation. The popular sweetener has already been okayed for consumption in Europe, although the regulation stipulates it be produced via water extraction of the Stevia rebaudiana plant followed purification and recrystallization. DSM’s process uses fermentation with a genetically engineered yeast to steviol glycoside.

The Bottom Line

New targets at new speeds — that’s what DARPA is trying to change. Clearly they’re looking not only for next-generation materials that have advanced properties with potential military applications — they’re looking to endow friendlies with the capability to make them faster. That not only changes the economics; it changes the potential that science can respond more effectively to the shortages, disruptions, and theater-level strategic opportunities that conflict brings.

The connection between DARPA and sugar might not be obvious. Of course, not everyone saw the point of demonstrating an internet, either, back in the days of ARPA.

The connection here is that a commercially-relevant challenge like a sugar alternative — and the race to get to market at the lowest cost — presents an opportunity to develop tools that DARPA will need for a host of molecules that no one knows how to make affordably and commercially — if we know how to make them at all.

Stronger materials, more flexible materials, materials that think, materials that respond to conditions — whether it is lightweighting military vehicles or providing better protection to military personnel, or just finding things that explode better — DARPA has a real stake in developing manufacturing and, for military applications, speed has an incredible premium.

DARPA shares a passion for pace with every company chasing a new sweetener — and also with every investor who would like industrial molecules to come out at scale, faster, from the new industrialists like Amyris. The collaborations are getting mighty interesting.

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.

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