October 17, 2014

Solar Bonds For Small Investors

By Beate Sonerud

SolarCity (NASD:SCTY) is issuing US$200m of asset-linked retail bonds, with maturities ranging from 1-7 years and interest rates from 2-4%. Wells Fargo is the banking partner. While the bonds are registered,SolarCity expects the bonds to be buy and hold, and not traded in the secondary markets.

The bond is issued for small-scale investors, with investment starting at US$1000, giving this bond issuance a crowdfunding aspect. Choosing such a different structure allows SolarCity to diversify their investor base – the company stresses that small-scale investors are a complement, not substitute, for large-scale institutional investors. While this is the first public offering of solar bonds in the US, in the UK, such small-scale retail and mini-bonds in the solar and wind sectors have been popular for some time.

SolarCity is the largest installer of residential solar in the US, and this is not the first time they are pioneering in the green bond space. In November last year, SolarCity was the first US company to issue asset-backed securities for solar. Since then, it has issued another two rounds of ABS backed by power-purchase agreements from their customers. All of these issuances have been private placement offerings.

SolarCity’s securitisation offerings have shown a steady decline in coupon, providing the company with cheaper funding. The company’s first issuance was rated BBB+ with coupon at 4.80% - right off the bat achieving investment grade rating with no credit enhancement. In April this year, the second issuance, US$70.2m, was also rated BBB+, but achieved a better coupon at 4.60%. In July 2014, the third issuance, for US$201.5m, achieved a lower coupon still. The upper tranche of this issuance achieved rating of BBB+, and a coupon of 4.026%, with the lower BB tranche getting 5.45%, providing an overall coupon of 4.32%.

In September, SolarCity also issued US$500m of 5-year convertible bonds, with a 1.625% coupon. We like the wide range of different structures of green bonds they are using.

In terms of the green credentials, we consider SolarCity a pure-play company aligned with a climate economy, although it’s worth noting that their bonds are not labelled green bonds. We do think there is room for labelling also for solar companies like SolarCity, mostly because it would make it easier for investors to identify the company’s bond issuances as green. Although easy investor identification is less relevant for this specific retail bond, it is something to consider for future issuances. It is also a much simpler process to label solar than non-pure play companies - check out our solar standards for details of what we’d expect from a labelled solar bond.

We look forward to see what SolarCity will do next as a green bonds pioneer. The company seems to just be getting started, as SolarCity states that: “(…) this is the first of fairly continuous offerings”. Great stuff!

———  Beate Sonerud is a policy analyst at the Climate Bonds Initiative, an "investor-focused" not-for-profit promoting long-term debt models to fund a rapid, global transition to a low-carbon economy. 

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Oil and Gas




October 16, 2014

Fuel Cell Follies: Off-Roading

by Debra Fiakas CFA

Consumer adoption of hydrogen-fueled vehicles could have quite a catalytic impact on the entire fuel cell industry.  Two of the public fuel cell technology companies come to mind first:  Plug Power, Inc. (PLUG:  Nasdaq), FuelCell Energy, Inc. (FCEL:  Nasdaq) and Ballard Power Systems, Inc. (BLDP:  Nasdaq).  These companies have been toiling away for years on fuel cell technologies, finding success on the periphery with industrial, campus and power generation solutions.  All three companies trade at modest prices and could look like great bargains for investors with an extended investment horizon. 

Forklift Fuel Cells

Plug Power has found considerable success by focusing on commercial and industrial users with campus or warehouse applications.  The company has packaged its flagship hydrogen fueled membrane fuel cell with central refueling stations, winning high-profile customers like Walmart in Canada, Kroger, FedEx and even Volkswagen that have fleets of materials handling vehicles.  Sales have been growing and Plug Power was able to post $35.6 million in total sales for the twelve months ending June 2014.  However, the company has yet to produce an operating profit and required $35.9 million in cash to support operations during that twelve month period.  The company reported near $168 million in cash resources at the end of June 2014.

As was noted in the article “Investor Unplugging from  Plug Power” in April 2014, the stock has been under considerable selling pressure over the last several months.  The company’s sometimes erratic investor communications could be part of the problem.  More recently the stock has been among the victims of the correction in the U.S. equity markets.  In September 2014, the stock formed what is called a ‘double bottom breakdown’ in technical parlance, signaling a bearish sentiment pervades trading in the stock.  Momentum oscillators for the stock suggest there is little to turn around the free fall in the stock price that began in early August.  There might good reason to take a long position in PLUG if your investment horizon is far off, but there could be opportunities yet to acquire PLUG at even lower prices than today.

Fuel Cell Power Plants

The stock of FuelCell Energy has been looking oversold and the slide downward that began in early September and shows little sign of stopping. Last week FCEL completed an especially bearish formation called a ‘descending triple bottom breakdown’ by technicians who use point and figure charts.  The measure was so strong it suggests the stock could fall as low as $0.25 per share.

If FCEL trades that low, it might be considered a good value. The company’s technology transforms various fuels such as natural gas or methanol or biogas to power through its proprietary fuel cell power plants.  The company has gained some traction in the market and has over 50 installations in the power generation industry, waste water treatment plants, healthcare facilities and other locations that require always-on power sources.  FuelCell reported $181.0 million in total revenue in the six months ending July 2014, and posted a net loss of $46.3 million.

FuelCell Energy’s technology successes appear to have been enough to convince a player in the energy industry to commission a study of direct fuel cell power plants.  FuelCell Energy did not release its customers name or the value of the contract.  The development revenue will be added to $3.2 million awarded by the U.S. Energy Department to study advanced materials.

Power Stronghold in the Caribbean

Ballard Power Systems is giving FuelCell Energy some competition.  Ballard has developed technology for proton exchange membrane (PEM) fuel cells that has been commercialized for mobile and stationary power plant applications.  Ballard reported $66.8 million in total sales in the most recently reported twelve months, resulting in a net loss of $15.2 million.  Cash usage in the same period was $15.0 million.  At that cash burn rate, Ballard could last another two years or so just by relying on its cash resources that totaled $36.4 million at the end of June 2014.

Management at Ballard might not be so worried about their bank account balance.  Ballard has been supplying Plug Power with fuel cell stacks for Plug Power’s GenDrive systems deployed in forklift trucks.  A new agreement extends the supply arrangement to 2017.  Wait, there is more!  Digicell Group, a communications provider in the Caribbean and Central America, recently placed the second tranche of an order for Ballard’s ElectraGen methanol-fuel cells to be deployed around Jamaica for back-up power.  After selling these thirteen additional systems to Digicell, Ballard can boast 161 ElectraGen systems deployed and operating in the Caribbean.

The wild card in the Ballard story is new leadership.  Ballard’s chief executive officer of eight years is retiring, making room for Randy MacEwan as the new CEO.  MacEwan has industrial gas supply knowhow and extensive executive level experience in the clean energy industry.  Even with a long list of credentials there MacEwan will still have a learning curve and it is not clear if he has the ability to sketch out a road map to profitability.

It should be no surprise that Ballard shares has the same negative sentiment permeating in its trading as we have observed in PLUG and FCEL.  There appears to be little support at any price level to keep the stock from trading to below buck.  The bearish price target for BLDP is $0.75.

Summary

Three companies with recent positive fundamental developments that indicate market acceptance of their technologies and products.  Skies above these fuel cell producers are getting blue as recent developments in the automotive industry suggest a growing interest in fuel cell technologies for consumer on-road vehicle as well as commercial off-road vehicles and stationary solutions.   Three undervalued stocks with weakening trading patterns that suggest things could get worse before they get better.  For me that adds up to three stocks that should be on a watch list until the equity market finds its bottom.

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.

October 15, 2014

Beijing Calls Taxis For Stalled Chinese EV Firms

Doug Young

Beijing is turning to an old trick in its bid to boost new energy vehicles, with word of a major new program requiring local governments to buy huge volumes of electric taxis and buses to jump-start the struggling sector. I have to slightly commend China’s government leaders for their determination to boost clean energy vehicles with this kind of program that’s likely to produce a major jump in new sales. But at the same time this kind of program also looks quite ominous, as it will result in a flood of immature technology coming onto China’s roads as local governments rush to meet centrally-set quotas without regard for the commercial viability of what they’re buying. That could result in huge wasted government spending that could ultimately hinder the sector’s development due to lack of pressure to innovate.

This kind of program is far too common in China, where the central government is obsessed with setting targets and then doing everything it can to achieve those goals. In this case, Beijing has taken numerous steps to try and entice Chinese consumers to buy new energy vehicles, realizing that consumers make their decisions based on commercial factors and thus will force manufacturers to make good products. What’s more, only the consumer market can really supply the volume of sales needed to make the sector succeed.

Yet despite all the efforts, which include an infrastructure building campaign and numerous financial incentives, Chinese consumers haven’t embraced the technology yet and sales remain anemic. New energy vehicle sales totaled just 5,000 in August, up 11 times from a year earlier but still well short of the volume needed to reach Beijing’s ambitious target of having 5 million electric vehicles (EVs) on the road by 2020.

Despite consumer reluctance to buy new energy vehicles, one group that has shown much more enthusiasm for the technology is local governments, most notably in big cities like Shenzhen and Shanghai. Such governments are not only relatively cash rich, but also are often home to EV car and bus makers like Shenzhen-based BYD (HKEx: 1211; Shenzhen: 002594; OTC: BYDDF), and Shanghai-based SAIC (Shanghai: 600104). Thus those governments often formulate big plans to buy such taxis and buses, and then do most of their purchasing from local manufacturers to help meet their centrally set economic growth targets.

Realizing that local governments are far more responsive to these kind of target-setting games, Beijing has just rolled out a major new program that requires 30 percent of public transport and publicly owned logistics vehicles to use new energy technology by 2020. (English article) The directive was released by the Ministry of Transport earlier this month, and calls for new energy technology to power 200,000 buses, 50,000 taxis and 50,000 government delivery vehicles by 2020.

Some quick math will show those figures add up to 300,000, or about 6 percent of the 5 million new energy vehicle target for all of China by 2020. The new plan is specifically targeted at cities with well-developed infrastructure, meaning smaller, less affluent cities won’t have to plow their scarce financial resources into this target-driven charade.

As I’ve said above, Beijing should be at least slightly commended for this new approach, which will instantly provide a major boost for new energy vehicle makers. But as I’ve also said, this kind of new demand is largely artificial and based on government directives rather than commercial factors. Western governments seldom resort to these kinds of directives, for the simple reason that they don’t have the desired effect of building long-term viable industries. That’s likely to be the case with this newest Beijing program, which will put thousands of clean but problematic new vehicles on China’s roads.

Bottom line: China’s latest program to sharply boost clean energy vehicles through government buying looks well intentioned but misguided, and is ultimately likely to fail.

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

October 14, 2014

China Plans Aggressive Renewables Deployment But Falling Incentives

Doug Young

Lofty targets contained in a new report show that China intends to push ahead with ambitious plans to build up its renewable energy sector. But perhaps the most interesting thing about this new report is word that Beijing finally intends to sharply reduce the inflated state-set fees now paid for solar and wind-produced power, in one of the sharpest indicators that it expects the industry to stop depending on government support and become commercially viable on its own. Such state support through a wide array of measures, which also include export credits and low-interest loans, have become a huge sticking point that has led to a series of trade wars between China and the west.

All that said, let’s jump right in and look at the latest aggressive targets now being finalized by Beijing under its upcoming 5 year plan for the sector between 2016 and 2020. China makes such 5 year plans for all major sectors, a relic of a Soviet-era practice for centrally planned economies. Under revised figures for its current 5-year plan, Beijing announced late last year it was aiming for national solar power-generating capacity of 35 gigawatts by the end of 2015, a very ambitious target for a country that had virtually no such capacity just 3 years earlier. (previous post)

Anyone who thought that figure looked ambitious will probably think the newest plan looks even more aggressive, aiming to build up solar generating capacity to 100 gigawatts by 2020. (English article) The country has even more ambitious plans for the wind power industry, with a target of 200 gigawatts of capacity by 2020.

At the same time, officials who are leaking details of the upcoming plan are also making it clear that state support will be phased out over the next 6 years for makers of solar panels and wind generation equipment. One of the biggest forms of support comes via artificially high state-set prices for renewable energy, which force big power companies to buy such clean energy at rates that are well above the cost of power from more conventional fossil fuels. The use of such high, state-set fees is also common in the west, used as a policy tool to promote the clean energy sector’s development.

Under the new 5 year plan, China’s tariffs for solar generated power will be reduced by a hefty 50 percent by 2020, falling from the current 0.9 yuan per kilowatt-hour to 0.6 yuan, according to an unnamed government energy official. Wind power tariffs will also be cut sharply, falling to 0.4 yuan per kilowatt-hour from the current 0.6 yuan. Equally interesting is a more general quote from the official saying the solar panel and wind equipment makers should improve the efficiency of their products “instead of depending on government subsidies.”

This is one of the first times I’ve seen a government official openly acknowledge what western governments have been saying all along, namely that Chinese solar panel makers like Trina (NYSE: TSL), Yingli (NYSE: YGE) and Canadian Solar (Nasdaq: CSIQ) get a big advantage over their western rivals due to extremely strong state support through a wide range of favorable policies from Beijing. Such support led Washington to slap anti-dumping tariffs on Chinese solar panels last year, and the European Union has also considered taking similar action.

So what does this flood of new information mean for the Chinese panel industry? The ambitious construction target means that Beijing will continue to push for construction of new solar power plants, even if such plants aren’t economically viable. That problem could become worse as solar power prices are lowered, leading to a bumper crop of unusable solar and wind power plants by 2020. That means that the big Chinese solar panel makers could see strong business over the next 5 years from a domestic building boom, but could then see a sharp slowdown if many new projects prove to be economically unviable.

Bottom line: China’s aggressive new energy power goals and determination to reduce state support could result in a building boom of economically unviable solar and wind power generation plants.

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

October 13, 2014

Earth to Cellulosic Ethanol: Glad You’re Here, What Took So Long?

Jim Lane 

Part I of II

Cellulosic ethanol arrives at scale — “The five years away forever” put to rest — but are there troubling waters still ahead? For whom, and why?

There’s a gigantic disconnect between two sections in the country as to whether the United States should be celebrating the success or the failure of cellulosic biofuels — biofuels made from crop residues, energy crops, and other feedstocks including municipal solid waste, and which feature a 60 percent or greater full-lifecycle reduction of greenhouse gas emissions compared to conventional gasoline.

The supporters

On the one hand are the supporters — including project developers, growers, the US Department of Energy, Department of Agriculture, several foreign governments (particularly in the EU) and supporters of renewable fuels.

They point to the growing number of commercial-scale biorefineries, and the reaching of cost-competitiveness with $100 oil, as signature achievements of the renewable fuels movement.

Many of the supporters will be gathered in Hugoton, Kansas next week for the official opening of Abengoa (ABGB) Bioenergy’s commercial-scale cellulosic biorefinery, which at 25 millions gallons of capacity will (for a period of a few months) be the world’s largest of its type.

Typical of supporter enthusiasm is this report from the Department of Energy:

In September 2012, conversion technologies were demonstrated at the National Renewable Energy Laboratory…where scientists led pilot-scale projects for two cellulosic ethanol production processes: biochemical conversion and thermochemical conversion. Both…demonstrated process yield and operating cost…At the biochemical pilot plant, cellulosic ethanol was produced at a modeled commercial-scale cost of $2.15 per gallon—a process that was approximately $9 per gallon just a decade ago. For the thermochemical pilot plant, cellulosic ethanol was produced at a modeled commercial-scale cost of $2.05 per gallon.

Beta Renewables

The detractors

On the other hand are ranged a number of detractors — oil companies, some environmentalists, skeptics of government R&D for renewables, and mandate-hating conservatives.

Typical of their critique is a report from Jonathan Fahey of the Associated Press that ran last November:

“As refineries churn out this so-called cellulosic fuel, it has become clear, even to the industry’s allies, that the benefits remain, as ever, years away…The failure so far of cellulosic fuel is central to the debate over corn-based ethanol…Ethanol from corn has proven far more damaging to the environment than the government predicted, and cellulosic fuel hasn’t emerged as a replacement…Cellulosic makers are expected to turn out at most 6 million gallons of fuel this year, the government says. That’s enough fuel to meet U.S. demand for 11 minutes…Corn ethanol…has limited environmental benefits and some drastic side effects…Despite the mandate and government subsidies, cellulosic fuels haven’t performed. This year will be the fourth in a row the biofuels industry failed by large margins to meet required targets for cellulosic biofuels….

“The Obama administration’s annual estimates of cellulosic fuel production have proven wildly inaccurate…supporters acknowledge there is almost no chance to meet the law’s original yearly targets that top out at 16 billion gallons by 2022…expectations were simply set too high. To attract support from Washington and money from investors, the industry underestimated and understated the difficulty of turning cellulose into fuel…

Fahey continues, “The industry was also dealt a setback by the global financial crisis, which all but stopped commercial lending soon after the biofuel mandates were established in 2007…Hundreds of companies failed that had attracted hundreds of millions of dollars from venture capitalists and government financing.”

You’ve come a long ways, baby

Part of the excitement around competitive-cost cellulosic biofuels is the magnitude of the effort and the achievement. Just a few years ago, the projected cost per gallon was $9.00. Just a few years ago, a kilogram was a tough quantity to find produced in the United States.

A problem of targets and language

One of the biggest confusions over the Renewable Fuel Standard is the language of the “cellulosic mandate”. It’s not much of a mandate, at the end of the day. Congress set a maximum target of 21 billion gallons of advanced (that is, no-corn ethanol) fuel by 2022, which included biodiesel, all other forms of advanced fuels that EPA qualified, and cellulosic fuels.

DuPont's Nevada cellulosic biofuels plant, as of August.
The core technology and fermenter units can be seen at center;
at left center, biomass intake; at left, storage and
distillation

DuPont’s Nevada cellulosic biofuels plant, as of earlier this year. The core technology and fermenter units can be seen at center; at left center, biomass intake; at left, storage and distillation

The maximum target for cellulosic was 16 billion gallons by 2022 — but it was specifically tied back to actual capacity levels, given that the fuel was, in 2007, only available in labs. EPA was required to reset the mandate each year to actual production volumes.

In other words, no production, no mandate. It’s not exactly right to say that the Congress “mandated” the blending of 16 billion gallons of cellulosic biofuels in 2022. It is true to say that Congress intended to mandate that, if the industry produced the volumes, Congress would require obligated parties (such as oil refiners and marketers) to blend the (competing) fuels into their petroleum fuels, or pay for waiver credits. Which is to say, if the detractors could come up with some way of frightening the heck out of investors and otherwise frustrate efforts to build capacity, the mandate would disappear.

Imagine an EPA mandate that says, in effect, “we mandate lower levels of arsenic and mercury in groundwater if someone comes up with a product to substitute for the one causing the arsenic and mercury problem. If no one produces a substitute, you can go on polluting.” Well, imagine the galvanizing impact on polluters. They could take the hard road of developing cost-effective alternatives, or the easier road of demonizing all the substitutes and thereby keeping them out of the market.

The Projection Problem

POET-DSM's Project LIBERTY under construction last winter.
The project opened to great fanfare this summer.

POET-DSM’s Project LIBERTY under construction last winter. The project opened to great fanfare this summer.

One of the difficulties relates back to the difference between capacity and production. What happens if someone builds a 10 million gallon integrated biorefinery that can make fuels or chemicals — and market conditions change radically mid-year to make either fuels or chemicals wildly more profitable or unprofitable?

A normal industrial response to changing commodity demand is to alter production – shift to a higher-value market, and tune up or down the volumes. At some times, it makes sense to idle or limit a plant’s production capacity — and definitely, industry will make $5 chemicals over $3 fuels every time, if the input costs are the same.

INEOS Bio New Planet Energy's 8 million gallon cellulosic
ethanol plant in Vero Beach, FL — also producing a healthy
stream of renewable power.

INEOS Bio New Planet Energy’s 8 million gallon cellulosic ethanol plant in Vero Beach, FL — also producing a healthy stream of renewable power.

Another problem. When is a plant market-ready, as opposed to mechanically complete? No plant operates at full capacity until it has gone through a commissioning period — and that can range from moths to several years as bottlenecks in a design are worked out.

Take for example Gevo (GEVO). It has four production lines, which can a) produce ethanol b) produce isobutanol for the fuel markets c) produce isobutanol for the chemical markets or d) be idled individually or in total because of input/output commodity price imbalances, commissioning troubles, or technology upgrades.

Cópia de GranBio_1_Crédito_Divulgação

The 21.6 million gallon per year GranBio project which just opened in Alagoas, Brazil.

So, EPA has the tricky job of projecting production volumes, as opposed to “mechanically-complete production capacity”. In the short-term, it will have troubles projecting production volumes from new plants that may intend to be in full production with, say, 6 months, but encounter more bottlenecks than expected. In the long-term, it has the problem of deciding how much fuel will be made for a domestic market, how much may be exported, and how much production capacity might be devoted to making higher-value specialty chemicals.

Industry’s optimistic timelines

The cellulosic fuels movement and industry probably didn’t help itself much back in 2007 when the first commercial-scale DOE grants were awarded to six projects.

The project and promise. “Abengoa Bioenergy Biomass of Kansas LLC received $76 million for a proposed plant in Colwich, Kan. The facility will thermochemically and biochemically produce 11.4 MMgy of ethanol from 700 tons per day of corn stover, wheat straw, milo stubble, switchgrass and other feedstocks. The project is expected to start construction in late 2008. Abengoa is also building a pilot-scale cellulose facility in York, Neb.”

The actual outcome. The project grew to 25 million gallons, shifted to Hugoton, Kansas from Colwich — and is opening this year after starting construction in late 2011.

The project and promise. “ALICO Inc. received $33 million for a 13.9 MMgy project in LaBelle, Fla. The project is also proposed to produce electric power, hydrogen and ammonia from 770 tons per day of yard, wood and vegetative wastes. Construction is slated to begin in 2008 with start-up in 2010.”

The actual outcome. ALICO backed out, their partners New Planet Energy stayed in and ultimately partnered with INEOS Bio. The partners shifted the project to 8 million gallons of ethanol and 4MW of renewable power in Vero Beach, FL, started construction in 2011, completed in 2012. The project remains in a commissioning period — which may possibly finish up by year end when equipment upgrading is complete.

The project and promise. “BlueFire Ethanol Inc. received up to $40 million for a proposed facility in southern California. The facility will be sited on an existing landfill and produce about 19 MMgy of ethanol from 700 tons per day of sorted green waste and wood waste from landfills. Construction is slated to begin in 2008.”

The actual outcome. The company (now known as Bluefire Renewables (BFRE)) has struggled to complete financing, and is still intending to build but has not yet commenced construction although site-prep work has been done and designs are in place. Ultimately, BlueFire shifted the project to Natchez, Mississippi and attracted a total of $87 million in grants when this project was re-awarded out of Recovery Act funds.

The project and promise. “Broin Companies received up to $80 million for its Project Liberty proposal. The company plans to add cellulosic ethanol production to its existing corn dry mill in Emmetsburg, Iowa. Construction is expected to begin later this year.” At the time Ethanol Producer observed, “The company plans to convert the company’s existing 50 MMgy Emmetsburg, Iowa, corn dry mill plant to also handle cellulosic feedstocks, mainly corn stover. The expansion is slated to take approximately 30 months and increase the facility’s capacity to 125 MMgy of ethanol.”

The actual outcome. The company, now known as POET, formed POET-DSM Advanced Biofuels in a JV with DSM, and opened the 20 million gallon Project Liberty this year in Emmetsburg,

The project and promise. “Iogen Biorefinery Partners received up to $80 million to build its proposed 18 MMgy facility in Shelley, Idaho. Iogen already operates a demonstration-scale wheat straw-to-ethanol facility in Canada.”

The actual outcome. The company ultimately abandoned the project. The Shell-Cosan JV Raizen broke ground last November on a $100 million, 10 million gallons first commercial facility in Piricicaba, Brazil that was expected to open by the end of this year.

The project and promise. Range Fuels was awarded up to $76 million for a proposed project near Soperton, Ga. The 40 MMgy ethanol plant would also produce 9 MMgy of methanol from 1,200 tons per day of wood residues and wood-based energy crops. Construction on the Khosla Ventures-backed project is expected to begin this year.

The actual outcome. The company and project ultimately failed, and the site was sold to LanzaTech, which maintains a pilot facility there to this day — although LanzaTech is focused at this point on developing its first commercial-scale capacity in China.

Some unexpected big wins along the way

The project and promise. Beta Renewables was not formed in time to compete for the 2007 DOE grants, or the round of grants announced under the Recovery Act in late 2009. Chemtex was developing a technology at the time, and ultimately formed Beta with investors Texas Pacific Group and Novozymes (NVZMY).

The actual outcome. The company opened a 20 million gallon commercial-scale facility in Crescentino, Italy in 2012, which is now operating at full capacity. The company has signed firm deals for new plants in China and Slovakia, and is developing a project on its own balance sheet for North Carolina. More licenses are expected over the next 12 months.

The project and promise. GranBio was not formed in time to compete for the 2007 DOE grants, or the round of grants announced under the Recovery Act in late 2009.

The actual outcome. The company opened a 21.6 million gallon commercial-scale facility in Alagoas state in Brazil this past month, which is currently the world’s largest. The company has announced plans to invest $724.5 million in five cellulosic ethanol plants during the next few years.

The project and promise. DuPont (DD) Industrial Biosciences (operating than as the JV DuPont Danisco Cellulosic Ethanol) either did not compete or did not win a 2007 DOE grant, or in the round of grants announced under the Recovery Act in late 2009.

The actual outcome. The company is expected to open what will become the world’s largest cellulosic ethanol facility in the world when its 30 million gallon, $200M Nevada, Iowa plant is completed by the end of December.

The project and promise. Enerkem’s Edmonton project was not legible for a DOE grant because it is in Canada — but it did pick up a grant for a future project in Pontotoc, Mississippi.

The actual outcome. The company just opened its first commercial 10 million gallon facility — which owing to trends in commodity prices, is currently producing methanol instead of ethanol. All of it, though, from Edmonton’s supply of municipal solid waste.

The tale of the tape

Six commercial-scale projects were originally envisioned by the DOE in 2007. Ultimately, we have four open, one more this week, two more by the end of the year, four in development, and ultimately a whole generation of new technology competitors with at-scale capabliities. One failed.

The timelines were not pretty. We’re seeing the real wave hit the beach in 2014, something like 5 years late.

Were the targets “juiced”?

According to a Digest source employed in a senior role at Iogen during 2007, when the EISA Act established the cellulosic targets:

“There was no way those targets were going to get met. We were the only company at the time that had reached demonstration scale, and we did not believe that we would be ready with a first commercial facility by that timetable. Knowing how long it takes to get to pilot and demonstration scale, a first commercial and then a fleet of new plants.

“Most experts agreed that we need until the mid-decade to really start ramping up capacity. And this was before the 2008-09 financial crisis and other factors causing slowdowns. We told everyone this, and originally the timetables and targets were much more conservative. But one prominent investor in the sector was far more bullish, called the more conservative targets “a joke”, and at some stage Congress became convinced that a more aggressive timetable was the right way to go.”

[Editor's note: The DOE timetables for first commercials in the 2007 grants indicated that 159 million gallons in capacity would have reached mechanical completion by 2010, with Iogen's 18 million gallons coming on-line after that — but only if all projects were financed and all were successful technologically. At the time, one of the six had reached demonstration-scale, and another one or two had reached pilot-scale. It is virtually impossible to imagine how the projects would have reached steady-state operations in 2011 without skipping a minimum-scale full demonstration step altogether. The absence of a proven demonstration at scale of the technologies would prove to be, in some cases — fatal to projects which proceeding to jump to scale prematurely — and a delaying factor in financing for the rest.]

How realistic were the targets and timelines given the state of technical readiness?

It’s easy to answer this one. Given the outcomes, the projects were real, the timelines were not.

For example, POET’s 2007 projections indicated a construction start in 2007 and and opening as soon as 2010. But the company only reached pilot-scale at Scotland, South Dakota in the 4th quarter of 2008 and began producing cellulosic ethanol in Q1 2009. Commercial biomass harvesting began in Q3 2010.

Now, realistic timelines and realistic projects are two different things. The United State originally hoped to invade France in 1943, 19 months after Pearl Harbor, and ended up staging Operation Overlord in June 1944, 12 months and 63% later than the original targets. The winning of the war was vastly more important than the timeline. And in the case of POET-DSM — the opening of the plant in 2014 is proof that the journey had a successful ending.

Which brings us to the problem of financing. As we’ll continue in PART II of this special report, which you can find here.


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.

Earth to Cellulosic Ethanol: Glad You’re Here, What Took So Long?

Jim Lane 

Part II of II

Cellulosic ethanol arrives at scale — “The five years away forever” put to rest — but are there troubling waters still ahead? For whom, and why?

There’s a gigantic disconnect between two sections in the country as to whether the United States should be celebrating the success or the failure of cellulosic biofuels. Supporters and detractors alike saying that the wave of commercial-scale cellulosic ethanol refineries is a new wave in technology or the latest round in a wave of unimportant hype.

We looked at the supporters, the detractors, the problems of targets, the Projection Problem, optimistic timelines — and the question of whether targets were “juiced” - in part I, here.

Which brings us to the problem of financing. As we’ll continue in PART II of this special report.

The smoking gun: the failed loan guarantee program for cellulosics

Beta Renewables_Cellulosic Ethanol Deliveries_3

No one ever, ever thought that cellulosic fuels would get off the ground without a loan guarantee program. First-of-kind technologies are simply too risky for conventional project finance lenders and costs — and credit-card interest rates made the projects not economically viable.

So, DOE-backed projects — into which DOE would have extraordinary oversight and insight — weresupposed to have access to DOE-backed loan guarantees for their first commercial projects — which theoretically would allow them to zero out the project risk to the lender and allow them to tap conventional project finance at conventional interest rates — something like 4-7 percent. After the first commercial, the technology risk would be eliminated, and the companies could tap conventional project finance on their own — so went the theory.

Did DOE get a start on the program? Sure, In fact, it was not authorized under the 2007 EISA Act, one was originally established under the 2005 Energy Policy Act. By 2007, Ethanol Producer was reporting, “The DOE is also developing a loan guarantee program for cellulosic projects as authorized in the Energy Policy Act of 2005.”

As of today, the DOE has only two loan guarantees in its portfolio for this 1703 program — both for nuclear energy.

What happened?

Bottom line, of the 11 projects we outlined, only one received one of those DOE loan guarantees, and that one was not finalized until September 2011 — $132.4M for the Abengoa Bioenergy project. The INEOS New Planet Energy project and Range Fuels (ironically) received USDA loan guarantees. BlueFire has a conditional USDA loan guarantee commitment, but no lender of record yet. The rest of them had to find wealthy corporate backers.

Numerous projects attempted to attract DOE loan guarantees, and no dice.

A house oversight committee found that:

“DOE invested a disproportionate amount of its funds into solar technology leaving taxpayers vulnerable by overemphasizing a single technology. 16 of the 27 1705-backed projects employed solar technology – that represented 80 percent of DOE’s funds.”

And noted that:

“DOE has engaged in a disturbing pattern of suspending the approval of a credible project that adheres to all stated standards, only to later approve massive funding for a project proven to be nowhere nearly as far along in the process as DOE purported. DOE’s favoritism significantly harmed numerous companies that had relied on the promise of 1705 financing. The perception is that DOE actively misleads applicants about the status of their loan application, thereby encouraging these firms to misallocate capital, which has led to financial harm.”

Bottom line, financing woes have been the biggest cause of delay — primarily, the government’s inability to construct the loan guarantee program it knew would be needed for first commercials.

The Abengoa project that received funding was, in fact, the lowest-rated project in the DOE’s entire technology loan portfolio — receiving a CCC rating, which is rated as a “highly-speculative investment”. In fact., Abengoa was exposed to criticism in the House Oversight Report because of the Abengoa Bioenergy loan:

A single Spanish firm, Abengoa, received an aggregate $2.45 billion in loans and loan guarantees plus $818 million in Treasury cash grants.54 This reveals excessive risk and subsidies provided to a single firm via multiple subsidiaries. Abengoa has a credit rating of BB, which is considered Junk, thus making this concentration of investment in one company speculative and highly questionable. Exemplifying the risk DOE took in the case of Abengoa, the company managed to obtain a DOE loan commitment for the lowest rated project across the entire DOE Junk portfolio; Abengoa Bioenergy Biomass of Kansas received an extraordinarily low CCC rating and yet the DOE approved a direct loan to the project.

In a 2011 independent review of loan guarantees ordered by the White House, former Assistant Secretary of the Treasury, Herbert Allison, found:

” A lack of clarity in the lines of authority within the loan program office; A lack of clear guidance regarding DOE’s standard of “reasonable prospect of repayment;” and “A lack of clarity with regard to DOE’s goals and tradeoffs with respect to financial goals versus policy goals”

The crisis of innovative technology financing

The problem of the Loan Guarantee program is that it simultaneously required a “reasonable prospect of repayment” while at the same time focusing, in the language of the Energy Policy Act:

The Secretary may only make loan guarantees under §1703 for projects that employ “new or significantly improved technologies.” DOE’s implementing regulation defines this as an energy technology “that is not a Commercial Technology, and that has either (1) Only recently been developed, discovered, or learned; or (2) Involves or constitutes one or more meaningful and important improvements in productivity and value, in comparison to Commercial Technologies in use in the United States. . . .”

Common-sense tells us that energy technology “that is not a Commercial Technology” and has “Only recently been developed, discovered, or learned” or “Involves or constitutes one or more meaningful and important improvements in productivity and value, in comparison to Commercial Technologies” is by definition a first-of-kind project.

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Common-sense also tells us that first-of-kind projects are not going to have “investment-grade” project ratings.

Fitch, the project finance rating agency, in commenting on the DOE’s newest round of loan guarantee funds, noted:

“The DOE will favor projects that may be unable to obtain full commercial financing due to perceived risks accompanying newer technologies. Eligible projects offering a catalytic effect on subsequent projects, which replicate or extend the innovative features of eligible projects, may also be favored. In determining which applicants advance, the DOE will assess whether a project provides a reasonable prospect of repaying all project debt, and whether available capital from all sources will be sufficient to carry out a project. No minimum credit rating is specified for this solicitation.”

‘Projects seeking funding must use new or significantly improved technology,” said Gregory Remec, Senior Director with Fitch’s Global Infrastructure Group.

The repayment problem in the face of feedstock and product price risk

What we are left with is this, that borrowers must provide:

“An analysis demonstrating that, at the time of the Application, there is a reasonable prospect that Borrower will be able to repay the Guaranteed Obligations (including interest) according to their terms, and a complete description of the operational and financial assumptions and methodologies on which this demonstration is based.”

Which isn’t much. The definition of “reasonability” is critical in the case of first-of-kind technologies, and was left so entirely vague that a DOE Loan Programs officer could rightly determine that repayment prospects could and should be entirely based on a Fitch rating where feedstock and commodity market risk would be heaped on biofuels — vs, say wind or solar that have free feedstock and fixed power contracts with utilities — and that left the financing of cellulosic biofuels in the lurch.

The First Lien Problem

Another critical failure in the Loan Guarantee program. Despite no specific language requiring this in the Energy Policy Act of 2005, the DOE Loan Program rules specified that:

‘‘[t]he [guaranteed] obligation shall be subject to the condition that the obligation is not subordinate to other financing.’ and that ‘‘[t]he rights of the Secretary, with respect to any property acquired pursuant to a guarantee or related agreements, shall be superior to the rights of any other person with respect to the property.’’

What does that mean, exactly? Comes down to interpretation. In this case, in 2007 DOE issued a final rule implementing Title XVII, and issued regulations which requiring a first lien security interest in all project assets as an incident to making a guarantee.

Now, if you’ve tried to get a home loan, and had a parent or relative guarantee the loan, you know that the guarantor is not going to wrest the first lien away from the bank. The bank remains first in line with a right to foreclose. It was a non-starter for many projects, all across the energy spectrum.

It was bad news for energy projects. As DOE itself reflected in late 2009, “nowhere does section 1702 itself require that the Secretary receive a first lien on all project assets as a condition of his ability to make a loan guarantee. Instead the statute requires only that the Secretary’s guaranteed obligation ‘‘not be subordinate to other financing.’’ In fact, section 1702 does not require that the lender or the Secretary receive any collateral as a statutory requirement for making a loan guarantee.

DOE reexamined the statute, particularly its text and structure, and now concludes that “A first lien on all project assets is better understood as one element that the Secretary may require for a particular project, but is not compelled by the statute to require,” and amended its rules. Pushing back the start date for many projects by almost four years.

Now, keep in mind that cellulosic targets were set to commence in 2011, just 13 months after the clarifications on the 1703 loan guarantee program. And the rules for the cellulosic provisions of RFS2 itself — the critical rules that would underpin any efforts commercially to build capacity to meet of those targets — were finalized by EPA in early 2010.

The impact of the rule problems

All this unsophisticated hoo-hah about “missed targets”. And, also, companies put the extra time to good use in developing more cost-effective technology and logistic operations. So, in the long-term the delay produced better technologies and more of them.

So — that’s the technology — but what about market access?

E10 saturation

One thing that supporters and detractors can agree on is that, in the United States, E10 (10 percent ethanol blends) have reached a saturation point, with around 13.5 billion gallons of ethanol blended into roughly 135 billion gallons of gasoline. The overwhelming majority of that fuel is corn ethanol — which has advantages in cost and availability over cellulosic fuels.

Ethanol vs gasoline, which costs less?

Today, in fact, on an energy basis, ethanol is so cheap that what was once a subsidized fuel — and criticized as such in some quarters — is right at parity with gasoline on an energy basis. As GasBuddy.com pointed out here, ethanol-free gasoline costs 10-15 cents more per gallon than E10 unleaded.

And there’s good reason for that. November ethanol futures were trading at $1.59 on the Chicago Board of trade, while the November RBOB gasoline contract was trading at $2.30. RBOB is blended with 10% ethanol content to make 87-octane regular unleaded fuel — with ethanol supplying an extra boost of octane.

What’s the market access debate over now?

Most of the debate focuses on where fuels go, past the E10 saturation point. That’s not the base for biodiesel or drop-in fuels — but for first-generation and cellulosic ethanol, and for obligated blenders, it’s the big issue on the table.

One option is E15 blending, which is now EPA-approved for vehicles made in 2001 or later. But adoption rates have been cruelly slow — a handful of outlets offer E15. Opinions differ on whether that reflects petroleum industry influence or retailer resistance.

Another option is E85, which is very cost effective for consumers, but it is only available at fewer than 3,000 fuel stations (out of 150,000 nationally), mostly in the Midwest. Retailers balk at the cost of retrofitting for E85 without government help — and in general E85 is marked up way higher at retail than the market will bear. We reported on that here.

Bottom line, there’s no clear path for added ethanol capacity to reach a market at the moment. And corn ethanol is going to be more cost competitive right now. With corn trading at $3.41 per bushel for the December contract, there’s a notional cost of $0.78 per gallon for the corn feedstock right now (even without considering renewable fuel credit values – RINs) — and that’s impossible for cellulosic fuel to compete with right now.

Which puts a brake on financing until the market access picture clears up.

E85 vs gasoline, which costs less?

On a wholesale basis, E85 wins. It’s priced as low as $1.39, wholesale, if you avoid buying it from petroleum companies. That’s a savings of 32 cents per gallon, vs RBOB gasoline, after allowing for differences in energy density.

The Bottom Line

The technologies were hamstrung by a combination of:

1. Overly optimistic views of construction and development timelines from pilot to demonstration, to first commercial, to steady-state operations at scale, to the multiple facility scale. The project developers point out that they are creating several new industries, from scratch (e.g. in many cases, biomass harvesting, pre-treatment, cellulosic hydrolysis, and fermentation) and there is much to be considered in the fact that they did what they said they’d do, in greater numbers, only later.

2. Unlucky timing in terms of the 2008-09 financing crisis and the shutdown of project finance markets.

3. No emergence of consensus on how to deal with the E10 saturation point — which accelerated in the face of falling gasoline demand.

4. Poor structure of loan guarantee program, in a way that virtually shut out liquid transportation fuels, even though they were the primary focus of “ending the oil addiction” and the 2005 and 2007 energy policy legislation.

In the short-term, much of the excitement of their arrival, in the general public view — has been dampened by the exhaustive timeline of the journey. Many in the public have moved on, to electrics, cheap natural gas, or to taking more selfies.

In the long-term, the market access problem looms large. Unless that is solved — perhaps through confrontation, perhaps through confrontation — this wave of cellulosic ethanol technologies will not be joined by a second wave, at least in the United States. Asia and Latin America have become the most likely candidates for deployment now.


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.

October 12, 2014

In the Middle(sex) of the Organics-to-Power Sector

by Debra Fiakas CFA

A post in June featured Middlesex Water Company (MSEX: Nasdaq) as an unlikely player in the waste-to-energy game.  However, Middlesex has proven a capable project integrator, capitalizing on its collective knowledge of process engineering to launch a turnkey alternative energy service.  A successful waste-to-energy project in the Village of Ridgewood, New Jersey has placed Middlesex squarely in the middle of the organics-to-power sector.  Ridgewood taps its waste water for methane to power an electric generator.  The power is used at the Ridgewood Water Pollution Control Plant, making the plant self-sufficient for electricity.

The Ridgewood project could be just a one-off deal.  However, I think Middlesex could have some success in capturing more of the market.  Besides engineering savvy, Middlesex has a number of important municipal relationships.  A bit of networking, and Middlesex should be able to parlay its first success in Ridgewood into more situations with municipalities eager to find solutions to dwindling landfill space, ever-increasing solid and waste streams and the need to find new, lower-cost energy and fuel sources.  Municipalities have all the problems and few can manage the solutions on their own.

This provides one very good reason to put Middlesex in our list of waste-to-energy.  The second reason is the Middlesex dividend.  MSEX is currently providing a yield of 3.8%.  With a beta of 0.70, the stock can be expected to remain relatively stable as market conditions unfold.  Importantly, the stock is valued at 16.8 times 2015 earnings, making it just a bit more expensive that the rest of the industry that is priced at 15.0 times earnings.

Middlesex is also looking quite oversold at its current price level, at least according to a review of the technical indicator Commodity Channel Index for MSEX.  The stock fell through a key level of price support around mid-September 2014.  I view this as just a good chance to pick up some shares at good value.  It does not seem likely that the stock will continue to fall lower.  There is another level of support at the $19.25 price level, off which the stock bounced in early May this year.   Indeed, it appears the stock may be reversing course already.

There is not a great deal of upward momentum for small-capitalization companies in the current market conditions.  Contrarian investors with a buy and hold strategy and a taste for a strong dividend could find MSEX a compellingly priced stock with a ‘green’ revenue stream.

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. Solar Wind Energy (SWET) is included in the Wind Group of Crystal Equity Research’s Electric Earth Index of company exploiting earth’s natural formations to create energy.

October 11, 2014

Politics and Debt Rain On Chinese Solar

Doug Young

The solar power sector has become a highly volatile place these days, with company stocks rallying one week on upbeat news, only to tumble days later on more downbeat signals. Much of the volatility owes to 2 factors that have created big uncertainty: protectionism and doubts about funding for many new power plants now being announced. Both of those factors are at play in a new string of downbeat news on industry lead Canadian Solar (Nasdaq: CSIQ), as well as struggling Chaori Solar (Shenzhen: 002506) and the now defunct former superstar Suntech.

Of these 3 companies, only Canadian Solar is currently a serious player, though it is seeing early trouble signs in the important Japan market. Suntech has been mostly liquidated after being forced into bankruptcy last year. But ghosts from its past continue to haunt the company, with word that Suntech is being sued by a former customer. Chaori is also undergoing its own painful reorganization after defaulting on a domestic bond earlier this year, and the latest reports say that debt holders will end up losing most of their money.

Let’s begin with Canadian Solar, which has just announced that some of its projects in Japan are now running into problems after the government stopped approving connection of new solar power plants to the national grid. (company announcement) Japan has become a major bright spot for many Chinese solar panel makers over the last year, as that country tries to wean itself from reliance on nuclear power following a major disaster in 2011.

Canadian Solar now has 500 megawatts in late-stage projects in Japan, and aims to increase that by up to 20 percent by the end of this year. The Japanese government’s suspension of new approvals has affected Canadian Solar’s projects with about 135 megawatts of combined capacity, though the company said it expects to win eventual approval of the projects and sees no near-term impact on its sales.

I’m no expert on Japanese politics, but I do expect that these affected projects should eventually win approval since the country is under a lot of pressure to develop safer power sources. Still, I’ve also heard that protectionist forces may be growing, as Tokyo tries to promote domestic panel manufacturers. If that’s the case, politics could place a damper on future sales to Japan by Canadian Solar and other Chinese solar panel makers.

Next let’s look at the other 2 cases, starting with word that Suntech is being sued by a former customer named ZKenergy for failing to deliver 206 million yuan ($33.5 million) worth of solar panels. (company announcement) In this case the amount isn’t huge, but it could cause problems for Hong Kong-listed Shunfeng Photovoltaic (HKEx: 1165), which acquired Suntech’s manufacturing assets during the bankruptcy liquidation.

Shunfeng is already reeling from bad news 2 weeks ago, when media reported a 500 million yuan, 130 megawatt solar farm being built with the company’s panels had run into trouble. (previous post) Shuntech shares have fallen sharply since that report, and the stock could see more turmoil if other former Suntech customers start stepping forward with similar lawsuits.

Lastly there’s Chaori, which made headlines early this year when it became the first company in modern history to default on a Chinese domestic bond offering. Other struggling solar panel makers like Suntech had previously defaulted on bonds, but all of those were dollar-denominated and sold to more sophisticated international investors.

According to the latest report, Chaori is working on an agreement with its bond holders that could see them ultimately recoup as little as 20 percent of their original investment. (English article) Such payouts aren’t that unusual for this kind of default, and Suntech bondholders probably received similar rates. But the figures do underscore the ongoing risk for solar investors, as the industry continues to clean up after its prolonged downturn that saw many mid-sized and smaller firms go out of business.

Bottom line: A new report from Canadian Solar indicates politics could dampen Chinese panel maker sales in Japan, while separate reports indicate heavy debt continues to plague the sector.

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

October 10, 2014

Two New Reasons to Buy SolarCity

By Jeff Siegel

DISCLOSURE: Long SCTY.

SolarCity truck Well, SolarCity's (NASDAQ:SCTY) latest news probably won't be enough to silence the bears and scare off shorty, but it has stopped the bleeding a bit.

After falling more than 25% over the past month, SCTY has stabilized after announcing a new loan program that will allow customers to buy a solar energy system outright instead of leasing a system.

Thanks to the company's massive scale and low cost of capital, SCTY will now lend directly to customers. This is a huge advantage over having customers seek out loans provided by third-party banks. And as far as I know, no other installer offers such an option.

Users of the company's new loan program, called MyPower, will also still benefit from SolarCity's 30-year warranties, production guarantees and monitoring services.

Bank of America analyst Krish Sankar chimed in on the news today, reiterating his buy rating and $95 price target on the stock. Of course Sankar also noted that the loan product was expected.

In any event, SCTY is still going to be a roller coaster ride throughout the rest of the year. Many of those who bought at the top are likely going to sell in an effort to offset capital gains liabilities for 2014. But folks like me, who bought in on the dip and see the long-term potential of SCTY will hold tight, and maybe even pick up more while the stock is still relatively cheap.

Also worth noting today is the recently renewed partnership between SolarCity and Honda (NYSE:HMC) to finance $50 million in new solar projects for Honda and Acura customers and dealerships in the U.S.

This is actually a pretty big deal, but the news is getting overshadowed by SCTY's new loan announcement.

Nevertheless, I remain bullish on SCTY and see any major dips below $70 as a buying opportunity.

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Jeff Siegel is Editor of Energy and Capital, where this article was first published.

October 09, 2014

Do Falling Alternative Energy Funds Returns Signal Danger?

By Harris Roen

Green Mutual Fund Returns Falter

Returns for green mutual funds have slid as of late. Longer term, however, alternative energy MFs are still showing strong gains. All MFs are in positive territory for the past 12 months, and 6 out of 14 funds are up double digits. Three year returns have faired even better, showing an annualized return of 14.3% on average.

Short term, however, almost all the funds have given up a significant amount of their recent gains. For example, Firsthand Alternative Energy (ALTEX), the MF with the best one-year returns, gave up 6.1% of its gains in September. In fact all MFs are trading down in the past month, and 11 out of 14 funds are in the red for the past quarter…

Alternative Energy Mutual Fund Returns

Alternative Energy ETFs Lower Gains

Alternative energy ETFs are down substantially from the levels they were at earlier this year. ETFs are up over 9% on average in 12 months, but this is much below the 28% average gains ETFs had in June, and the 65% average annual returns ETFs were seeing in November 2013. All ETFs are down for the month, and 15 out of 17 show losses for the quarter.

The ETF with the best one-year return is Guggenheim Solar (TAN), up over 30% in the past 12 months. This is not surprising, considering TAN holds many high-flying solar stocks, including SolarCity (SCTY), Enphase Energy (ENPH) and SunPower (SPWR)…

Alternative Energy ETF Returns


DISCLOSURE

Individuals involved with the Roen Financial Report and Swiftwood Press LLC do not own or control shares of any companies mentioned in this article. It is also possible that individuals may own or control shares of one or more of the underlying securities contained in the Mutual Funds or Exchange Traded Funds mentioned in this article. Any advice and/or recommendations made in this article are of a general nature and are not to be considered specific investment advice. Individuals should seek advice from their investment professional before making any important financial decisions. See Terms of Use for more information.

About the author

Harris Roen is Editor of the “ROEN FINANCIAL REPORT” by Swiftwood Press LLC, 82 Church Street, Suite 303, Burlington, VT 05401. © Copyright 2010 Swiftwood Press LLC. All rights reserved; reprinting by permission only. For reprints please contact us at cservice@swiftwood.com. POSTMASTER: Send address changes to Roen Financial Report, 82 Church Street, Suite 303, Burlington, VT 05401. Application to Mail at Periodicals Postage Prices is Pending at Burlington VT and additional Mailing offices.
Remember to always consult with your investment professional before making important financial decisions.

October 08, 2014

Investing In Water Desalination

By Jeff Siegel

The million-dollar manicured lawns of Montecito, CA have withered, died, and gone to seed.

The polo fields are little more than dust now, and many have traded the good china for paper plates so as to avoid using the dishwasher.

There’s no doubt about it — Mother Nature doesn’t care if you’re rich or poor, black or white, fat or skinny. When she lays the smack down, we all feel it. And there is no better example of this than the debilitating drought that’s wringing the Golden State dry.

Of course, for those who can afford it, it’s not all doom and gloom.

Turns out the richest one percent in one of the wealthiest California zip codes is battling the drought with fat wads of cash.

While the “regular people” are forced to deal with the first-world problems of dry lawns and unwashed cars, the big money of Montecito is having its liquid gold trucked in from other regions. Exact locations are still a bit of a mystery.

Of course, trucking in all that water isn't cheap. One unit of water (748 gallons), which used to cost less than seven bucks, will run you up to $80 now. Still, when you consider what it takes to collect, maintain, clean, and deliver that water, $80 isn't really all that much.

No More Golf Courses

One of the reasons the Southwest is having so much difficulty with the drought is not necessarily because of climate change, but because of the lack of a real free market for water.

If folks in the American desert had to pay a price that directly correlated with the cost of bringing fresh water to those regions — regions where it doesn't really belong to begin with — they would be paying a lot more and wasting a lot less.

I suspect that at $80 a unit, there would be far fewer grassy lawns in Phoenix and certainly not as many public golf courses in Palm Springs. As well, the agricultural communities in those regions would all be on drip irrigation, every home would be equipped with rain barrels, and waterless urinals would be found in every single mall, restaurant, and government building from Santa Cruz to San Antonio.

The bottom line is that while we all swoon over oil and gold, it's rare to find folks, particularly investors, who understand just how valuable water is.

Truth is, pitching water investment opportunities has never been easy. Most investors find it to be a boring subject, and unless there's a drought, no one's really interested. Hell, even when there is a drought, few seem to care.

But the way I see it, if you're looking for a steady, long-term investment opportunity, there's one sector you should be drooling over: desalination.

Making Out With Salma Hayek

Now, I'll be perfectly honest: I don't think desalination in the United States is a pressing issue. Or rather, it wouldn't have to be a pressing issue if we just used water a little more responsibly.

But I'm a realist, and I know that asking Americans to responsibly use water is like me asking Salma Hayek to make out. I can make the request, but it's not going to happen.

So instead of lamenting rejections, we should capitalize on them. And when it comes to water scarcity, a great way to do that is by tapping the desalination sector. After all, the most recent data suggests the global desalination market will enjoy an 8.9% CAGR from 2013 to 2018. Not bad.

As a side note, desalination is actually a pretty expensive adventure. A recently approved desalination plant in San Diego will cost $922 million (and I'm sure it'll creep up closer to $1 billion after cost overruns), and that'll provide the city with 7% of its drinking water.

In any event, you still have to strike while the iron's hot. And in a world of scarce water resources, desalination is scorching.

Get Exposed

Most of the bigger plays in desalination are not pure plays. I'm talking about companies like GE (NYSE: GE), Veolia Environment (NYSE: VE), and Acciona (OTC: ACXIF).

If you're looking for more of pure play, there's Consolidated Water Co. (NASDAQ: CWCO), which builds and operates desalination plants and water distribution systems throughout the Caribbean. There's also Tetra Tech (NASDAQ: TTEK), which, while not a pure play, is a solid player in the water space and also builds desalination plants in the United States.  Finally, there's Energy Recovery, Inc. (NASDAQ: ERII), which sells energy recovery devices used in desalination and other high pressure industrial processes.

Of course, you can also get some exposure to water and water infrastructure through water ETFs, such as the Guggenheim S&P Global Water ETF (NYSE: CGW), First Trust ISE Water ETF (NYSE: FIW), and the PowerShares Water Resources ETF (NYSE: PHO).

Now, for the record, I'm not telling you to drop everything and load up the boat with desalination plays and water ETFs. Just gain a little exposure here, because the truth is, severe droughts are likely going to be a regular occurrence for years to come. Might as well take advantage of the situation.

After all, it may not be long before you'll have to shell out $80 for 748 gallons of water, too.

Jeff Siegel is Editor of Energy and Capital, where this article was first published.

October 07, 2014

Waste Management: Biogas with a Dividend

by Debra Fiakas CFA

The biogas industry has attracted a number of new entrants.  Blue Sphere (BLSP:  OTCQB) described in the recent post “Turning Potato Peels to Power” and RDX Technologies (RDX: TO, described here) are both newcomers to the biogas power generation.  Both companies show much promise and will likely grow dramatically over the next few years.  Shareholders are counting on the stock prices to follow.
Landfill+Methane[1].jpg
Investors who are less interested in the big growth play and more interested in stability and current income are not left out.  There are larger, more established companies in the waste-to-energy market.  Covanta Holding (CVA: NYSE), which was discussed on the post “Big Player in Waste-to-Energy”, is one of them.  Its dividend yield is enticing and the stock has a very modest volatility as measured by beta of 0.10.  However, I concluded that Covanta is overbought.  The stock trades at a multiple of 35.3 times 2015 earnings, well above the average for the S&P 500 Index.
 
Fortunately, there are other choices for yield-hungry investors.  Like Covanta, Waste Management, Inc. (WM:  NYSE) got into the waste-to-energy business as a collector of wastes.  Based in Texas, the company operates a fleet of waste collection trucks and routes for municipal, commercial and residential customers.  While Waste Management still carts waste the landfills it owns, much of the waste is now sent through recycling and recovery processes to reclaim metals and extract energy from both organic materials.
 
Unlike Covanta that has been willing to own and operate, Waste Management has kept to what it knows best, waste collection and handling.  Instead Waste Management has used joint ventures to dip its toe into the waste-to-energy field. In March 2014, Waste Management announced a team-up with Ventech Engineers International, NRG Energy (NRG:  NYSE) and Velocys Plc (VLS:  LSE) to produce renewable fuel from methane gas coming from landfills.  Ventech and NRG will provide engineering and project management functions, while Velocys brings the gas-to-liquids technologies to the table.  Waste Management just has to keep the waste coming and make gas from its landfills available for processing.

Waste Management has converted about 17.6% of its sales to operating cash over the past three and a half years.  This sort of efficiency and profitability is critical for a capital-intensive operation.  Over half of the company’s $22.2 billion in assets are represented by plant, property and equipment.  Waste Management invests an average of $1.4 billion each year in new capital equipment and property improvements.  Free cash flow has averaged $1.0 billion per year over the last three years.  With such strong internal funds available, Waste Management is in a position to move aggressively in new businesses, including waste-to-energy projects.

WM offers a dividend yield of 3.2% at the current price level.  Although is not so impressive as the yield offered by Covanta even at its pumped up price, WM shares are trading at a more modest multiple of 19 times its 2015 projected earnings.  That is about on par with the average for the S&P 500 Index, making WM look quite affordable.  A review of historic trading patterns suggests the stock has developed considerable upward momentum, set off in late July by a triple top breakout seen in the 'point and figure' chart for WM.  The stock has been unfazed by the recent sell-off observed in the broader market in September and early October.  WM has continued its march higher without only minor pulls back from a new 52-week high set in mid September.  WM is also a fairly stable stock, with beta measure of 0.64.  Thus WM could give income-conscious investors an appealing dividend and a relatively stable and compellingly priced stock.  Oh, and you get some biogas with the bargain.

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.

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