December 04, 2016

Ten Clean Energy Stocks Under Trump (November 2016)

Tom Konrad, Ph.D., CFA

So far, the broad stock market seems to like the idea of a tax and regulation-cutting and infrastructure spending Trump administration and Republican controlled Congress.  The bond market is less pleased at the rapidly growing deficits such a "borrow and spend" policy will inevitably entail.  While the S&P 500 advanced 3.4% in November, bond funds fell in the face of rising interest rates.  The iShares 20+ Year Treasury Bond (TLT) fell 8.4%.

Clean energy stocks were also hurt by the incoming President's climate change skepticism and his promises to undo environmental regulations put in place by the Obama administration.  While the PowerShares WilderHill Clean Energy ETF (PBW) fell only 0.1%, clean energy income stocks such as Yieldcos were hit by the double-whammy of rising interest rates and anti-environmental rhetoric. The Global X YieldCo ETF (YLCO) fell 5.6%.

Against this backdrop, my income-heavy Ten Clean Energy Stocks for 2016 model portfolio fared relatively well. While the seven income stocks matched YLCO's 5.6% losses, the three growth stocks shot up 9.6% (one for little apparent reason.)  This kept the overall portfolios' losses to a modest 1.0% for the month.

For the year, the model portfolio, its income and growth sub-portfolios, and the Green Global Equity Income Portfolio (GGEIP) which I manage all widened their large leads against their benchmarks. (The benchmarks are PBW for the growth stocks, YLCO for the income stocks and GGEIP, and a 30/70 blend of the two for the Ten Clean Energy Stocks model portfolio, as specified in the original 2016 article.)

Detailed performance is shown in the chart below.

2016 nov composites

How Trump Will Affect Yieldcos

While rising interest rates are bad for all income stocks, a roll-back of environmental regulations such as Obama's Clean Power Plan and a withdrawal from the Paris Climate Agreement should have little if any financial impact on Yieldcos.  This is because Yieldcos own existing renewable energy generation assets which have already received their subsidies.  Even if the last year's solar and wind tax credit extensions were to be rolled back (which most observers think is unlikely), existing solar and wind farms would almost certainly be unaffected.

In fact, a decrease in incentives to future wind farms could even help the owners of existing farms, since it would reduce competition from new, less subsidized, solar and wind when existing Power Purchase Agreements (PPAs) expire (in 10-20 years) and Yieldcos need to find new buyers for their power production.

Despite this reality, investors who are increasingly worried about coming regulatory changes and increasing interest rates are likely to use any minor hiccup at Yieldcos and other clean energy companies as an excuse to sell.

The chart below and the following discussion gives detailed performance for the individual stocks, and the reasons for it.  Click for a larger version.

10 for 16 Nov.png

Income Stocks

Pattern Energy Group (NASD:PEGI)

12/31/15 Price: $20.91.  12/31/15 Annual Dividend: $1.488 (7.1%).  Beta: 1.22.  Low Target: $18.  High Target: $35. 
11/30/16 Price:  $19.63.  YTD Dividend: $1.17. 
Expected 2016 Dividend:$1.58 (8.0%) YTD Total Return: -0.8%

Wind Yieldco Pattern Energy released its third quarter earnings on November 7th.  Power production was good, and the company increased its dividend to $0.408 per share, but the investor reaction was hijacked by the statement that the company had found a material weakness in its internal controls. 
"Management believes that the Company's internal control over financial reporting was not effective as of September 30, 2016 , due to the aggregation of internal control deficiencies related to the implementation, design, maintenance and operating effectiveness of various transaction, process level, and monitoring controls. These deficiencies largely have arisen during fiscal 2016 because of growth of the Company, increases in employee headcount to support growth, and frequent changes in organizational structure were not adequately supported by elements of its internal control over financial reporting. However, management has concluded that the consolidated financial statements present fairly, in all material respects, the Company's financial position, results of operations and cash flows for the periods disclosed in conformity with U.S. generally accepted accounting principles (GAAP).  Management has developed a plan to remediate the material weaknesses. Management expects the remediation plan to extend over multiple financial reporting periods; therefore, the Company will receive an adverse opinion on its internal control over financial reporting as of December 31, 2016 ."
In other words, while something could go wrong with financial reporting, they are confident that nothing has so far, and they have a plan to fix the problem over several months.  They're telling us now because this is not the type of thing you should try to cover up, and the company's auditors will also be saying something in the annual report, anyway.

While I never like to see any questions about accounting, it seems like Pattern caught this one early before any harm was done, and they are working to fix it.  I consider the current sell-off a buying opportunity, and have added to my position.

Enviva Partners, LP (NYSE:EVA)

12/31/15 Price: $18.15.  12/31/15 Annual Dividend: $1.76 (9.7%).  Low Target: $13.  High Target: $26. 
11/30/16 Price:  $28.20.  YTD Dividend: $2.025  Expected 2016 Dividend: $2.025 (7.2%) YTD Total Return: 69.1%

Wood pellet focused Master Limited Partnership (MLP) and Yieldco Enviva Partners has been my biggest winner for the year, and it is potentially more vulnerable to the fallout of a Trump Presidency than most of the other companies in this list.  Like most Yieldcos, its revenue comes from long term contracts with investment grade utilities, so those operations should be safe. 

Most of Enviva's potential growth prospects are with existing coal plants which want to convert to much less carbon intensive wood pellets, which Enviva supplies.  Coal plants convert to wood because it is one of the most cost effective ways to comply with greenhouse gas and other emissions rules.  In the US, Trump promises to roll back these Obama era regulations, and his promise to abandon the Paris Climate agreement may lead to Europe (the home of the majority of Enviva's current customers) taking a less aggressive stance on greenhouse gasses.

I would not see any of this as a problem if Enviva were yielding more than the current 7.5%.  I expect a higher yield from MLPs than other companies, because their special tax structure makes it difficult for many investors to own them.  I sold my entire holdings of Enviva the morning after the election.  I will continue watching the stock for opportunities to buy back in at a lower level.

Green Plains Partners, LP (NYSE:GPP)

12/31/15 Price: $16.25. 
12/31/15 Annual Dividend: $1.60 (9.8%).  Low Target: $12.  High Target: $22. 
11/30/16 Price:  $18.25.  YTD Dividend: $1.638.  Expected 2016 Dividend: $1.638 (9.0%) YTD Total Return: 24.5%

Ethanol production MLP and Yieldco Green Plains Partners may or may not benefit from a Trump administration.  The oil industry hates the EPA's Renewable Fuel Standard (RFS), which requires a minimum volume of ethanol to be blended with gasoline, and Trump has strong ties and large investments in the industry. 

On the other hand, ethanol is a domestic fuel source which reduces imports and (gallon for gallon) creates more jobs, especially in the Midwest.  In 2013, the ethanol industry created 387 thousand jobs and sold 13.3 billion gallons, or one job for every 34 million gallons.  According to industry numbers, an increase of 1.2 million barrels per day would be associated with an increase of 394 thousand US jobs.  1.2 million barrels/day equates to 15.3 billion gallons per year, or one job for every 39 million gallons per year.  If Trump's main goal is to increase domestic jobs, he will favor ethanol over his friends in the oil industry.

The EPA recently released its RFS targets for 2017-18, and for the first time in a long time, the ethanol industry felt that the EPA had released a standard in accordance with the law.  Trumps pick to head the EPA, Myron Ebell is not only a climate change denier, but also a critic of ethanol.  His libertarian Competitive Enterprise Institute often released reports critical of the ethanol mandate, so I think we can be fairly confident that future EPA ethanol mandates will be more to the satisfaction of oil refiners, even if the 2017-18 targets are not watered down.

GPP is also less protected from policy changes and market forces than other Yieldcos, because it only has long term contracts with its parent, ethanol producer Green Plains (GPRE).  Green Plains' ability to honor these obligations depends on its ability to remain solvent, which in turn depends on the ethanol market.

With this in mind, I have sold most of my shares of GPP.

NRG Yield, A shares (NYSE:NYLD/A)

12/31/15 Price: $13.91.  12/31/15 Annual Dividend: $0.86 (6.2%). Beta: 1.02.  Low Target: $11.  High Target: $25. 
11/30/16 Price:  $14.59.  YTD Dividend: $0.695.  Expected 2016 Dividend: $0.945 (6.5%) YTD Total Return: 10.1%

The only likely impact on Yieldco NRG Yield's (NYLD and NYLD/A) prospects due to a Trump administration is a rise in interest rates.  Given the recent decline of the stock, I've been increasing my holdings of the company's A shares.

Terraform Global (NASD: GLBL)

12/31/15 Price: $5.59.  12/31/15 Annual Dividend: $1.10 (19.7%). Beta: 1.22.  Low Target: $4.  High Target: $15. 
11/30/16 Price:  $3.78.  YTD Dividend: $0.275.  Current Expected 2016 Dividend: $0.275 (7.3%). YTD Total Return: -24.7%

Yieldco Terraform Global released an investor update on November 29th.  The company expects to be back in compliance with NASDAQ reporting requirements in advance of its extended March 2017 deadline, but they are still negotiating with bondholders about failure to meet covenants, including timely reporting requirements.  It expects to be fully operationally independent by January.

Underlying the company's long term viability are the fact that its portfolio of solar and wind projects continue to perform well, and a hefty cash pile.  Some of this cash was used to pay down corporate level revolving debt.  Unrestricted cash at the company level was $583 million at the end of the third quarter, or approximately $3.38 per share (including both A and B shares.)  This should allow the company operational flexibility while negotiating with bondholders.

The company released a number of preliminary financial estimates for 2016, but did not include CAFD, which measures the company's ability to pay dividends to shareholders.
GLBL 9-30 estimates of FY results

If we compare these to the first quarter estimates on which I based my July 20th valuations of the stock, we can see how the numbers have changed:
GLBL 1Q preliminary numbers
As we can see, owned operational solar and wind farms have increased by 57 MW (part of which I knew about when writing the July article), power production has increased by 15% to 22% from the numbers I used for that article, capacity factor, revenue, and revenue per MWh have all also improved.  In July, I put the company's net debt at the holdco level at $461 million.  In the third quarter, net debt increased by $52 million, or by $0.91 for every new owned MW. 

Plugging these numbers into the same spreadsheet as I used for the July valuation, I revise the more conservative asset based valuation down to a range of $4.12 to $5.19 per share.  Given the lack of CAFD estimate, I can't revise the CAFD based estimate of $4.00 to $8.50, except to say that CAFD should probably have fallen slightly along with the Adjusted EBITDA estimate, which fell from an annualized $168-$192 million to the current $150-180 million.

In short, resolving Terraform Global's problems is taking longer and costing more than I had hoped, but I'm still comfortable that the company is worth well over $4, which is in turn above the current $3.78 stock price.   I continue to hold my shares but do not regret having sold a number of covered calls with a $5 strike price.

Hannon Armstrong Sustainable Infrastructure (NYSE:HASI).

12/31/15 Price: $18.92.  12/31/15 Annual Dividend: $1.20 (6.3%).  Beta: 1.22.  Low Target: $17.  High Target: $27. 
11/30/16 Price:  $19.88.  YTD Dividend: $0.90.  Expected 2016 Dividend: $1.24  (6.2%). YTD Total Return: 9.6%

Clean energy financier and REIT Hannon Armstrong has fallen due to rising interest rates and concern that it might lose its status as a REIT.
I feel the risk of a potential loss of REIT status has been overblown.  REIT expert Brad Thomas provides a good summary: The short version is, don't panic! 

I added slightly to my Hannon Armstrong position after it dipped below $20.

TransAlta Renewables Inc. (TSX:RNW, OTC:TRSWF)
12/31/15 Price: C$10.37.  12/31/15 Annual Dividend: C$0.84 (8.1%).   Low Target: C$10.  High Target: C$15. 
11/30/16 Price:  C$13.73.  YTD Dividend: C$0.8063  Expected 2016 Dividend: C$0.88 (6.4%) YTD Total Return (US$): 45.4%

Canadian listed Yieldco TransAlta Renewables' fell sharply after the US election, as did many Canadian income stocks, which in general fell more than their US brethren.  I'm not sure why this is other than the fact that Canadian stocks had been trading at higher valuations than US stocks in the run-up to the election.  The stock has begun to recover from its sharp fall since November 14th.

Given TransAlta's relatively rich valuation compared to my other Yieldco holdings, I sold most of my position on November 9th, and only bought a little of that back after the stock fell 10% over the next couple days.

Growth Stocks

Renewable Energy Group (NASD:REGI)

12/31/15 Price: $9.29.  Annual Dividend: $0. Beta: 1.01.  Low Target: $7.  High Target: $25. 
11/30/16 Price:  $9.75.    YTD Total Return: 5.0%

Advanced biofuel producer Renewable Energy Group, like ethanol producers (see the Green Plains Partners discussion above), is potentially more vulnerable to action by an administration skeptical of renewable energy than are Yieldcos.   That said, the company remains very attractively valued, and I don't know if I made the right move in selling most of my holdings in response to the election.

MiX Telematics Limited (NASD:MIXT; JSE:MIX).
12/31/15 Price: $4.22 / R2.80. 12/31/15 Annual Dividend: R0.08 (2.9%).  Beta:  -0.13.  Low Target: $4.  High Target: $15.
11/30/16 Price:  $5.83 / R3.28.  YTD Dividend: R0.08/$0.138  Expected 2016 Dividend: R0.08 (2.4%)  YTD Total Return: 42.3%

Software as a service fleet management provider MiX Telematics is a significant potential beneficiary of a Trump administration.  First, many of MiX's largest clients are part of the global oil and gas industry.  The drilling revival that Trump hopes to bring about should lead these customers to buy more vehicles, and they pay MiX for fleet management on a per-vehicle basis.

Even if the oil market continues to revive, this South Africa based company's stock price is vulnerable to a flight to safety triggered by the greater global uncertainty which an unprecedented and relatively unpredictable Trump administration may bring.

Ameresco, Inc. (NASD:AMRC).
Current Price: $6.25
Annual Dividend: $0.  Beta: 1.1.  Low Target: $5.  High Target: $15. 
11/30/16 Price:  $5.95.  YTD Total Return: -1.7%

Energy service contractor Ameresco is the company in this list which I deem most vulnerable to action by a Trump administration.  This is because the company's bread and butter is energy service contracts with federal government agencies.  In recent years, these contracts have been driven by increasingly ambitious targets for energy saving in Federal buildings set by the Obama administration.  These targets are among the executive actions which Trump could easily reverse with the stroke of a pen.

Such energy saving initiatives save money and create jobs, so it would be irrational for Trump to reverse these particular executive actions.  That said, I do not have a lot of confidence he will do (or refrain from doing) anything just because it makes sense.  The market seems to think otherwise, as Ameresco rallied 24% in November.  Perhaps investors are simply buying stocks of companies that do a lot of business with the Federal government because of the expected surge in infrastructure spending?  I'm open to your ideas.

Sneak Peek: 10 Clean Energy Stocks for 2017

I and the owners of AltEnergyStocks.com are considering launching a premium service for paying subscribers.  This would include early or exclusive looks at my most actionable investment ideas, like the one I recently wrote about Seaspan Worldwide.  It will also likely include more timely comments on news events as they affect the stocks I follow.  The details will depend on what you tell us you want and are willing to pay for.  The people I'll pay the most attention to are those who have demonstrated a willingness to pay for my writing in the past.

To that end, I'm offering an opportunity to see next year's list of 10 Clean Energy Stocks one trading day before it's published, but only to people who think my writing is worth paying something for. If you are one of those people, please send $5 to me at tom at alt energy stocks dot com (no spaces), and I will email you a draft version of the article a full trading day before it is published on AltEnergyStocks.com. If you don't use PayPal, send me a note and I will respond with the address for a check.

I don't usually decide on the stocks in my annual list until after Christmas, since last minute changes in valuation sometimes make a difference as to how well I think a stock will do in the following year. With that caveat, this year's list looks likely to include at least one thinly traded energy efficiency stock that, like MiX Telematics, should benefit from an revival of the oil and gas industry but which is too small to be on most investors' radar.

If you think an early look at next year's list is not worth $5, but think some of my future writing might be worth paying for, just PayPal me (your) two cents, and I'll add you to the list of people who get to have input into what might be included in future AltEnergyStocks premium content, and how much it should cost.

Final Thoughts

Last month, I was optimistic for the chances of a Clinton victory, and saw the market's sell-off in the months running up to the election as an opportunity to buy relatively cheap names like Hannon Armstrong and Pattern which have good prospects not matter who is in the White House.  I still like these names, but I am deeply puzzled that one stock I thought could really benefit from a Clinton victory, Ameresco, has advanced the most.

Disclosure: Long HASI, AMRC, MIXT,,  RNW/TRSWF, PEGI, GPP, NYLD/A, REGI, GLBL, TERP, GPRE

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.

December 02, 2016

3 Biofuels Reports We Can Ignore, and One We Can't

Jim Lane

This week, in Washington and Brussels, four news flashes on global renewable fuel volumes appeared on the radar. Can you safely ignore them and get on with other work, or is there something to get deeply informed about? Let’s look into it.

Ignore This #1. The Point of Obligation RFS Crisis.

The issue.

Several parties petitioned the US EPA to shift obligations under the Renewable Fuel Standard from them to someone else. Basically, to anyone else. The petitioners want relief from buying RINs, thinking about renewables, or experiencing any pain associated with the change in the fuels marketplace which the Congress mandated in the 2007 EISA Act.

The Bottom Line:

Unless EPA goes completely insane, it’s a no-brainer to ignore.

Why We’re Talking About It:

The EPA has proposed to deny the petitions, but hasn’t actually finalized the denial. And, the EPA has proposed to open up a broader comments period on the issue. In short, it’s done everything it can to p—s off the losers and not yet make winners feel secure.

The Latest News:

A group of trade associations representing various segments of the fuel industry (which don’t usually agree on anything) have signed onto a letter – for the first time ever – that will go to EPA Administrator Gina McCarthy and will help inform the Trump transition team.

Get this: the list includes, the American Petroleum Institute, Advanced Biofuels Association, Growth Energy, National Association of Convenience Stores, Renewable Fuels Association, National Association of Truck Stop Operators, Petroleum Marketers Association of America, Society of Independent Gasoline Marketers of America. So you have renewable fuel producers, retailers, and oil refiners.

Why you can safely ignore:

It’s a change no one of any importance really wants.

Ignore This #2 The US GAO Report

“Renewable Fuel Standard, Program Unlikely to Meet its Targets for Reducing Greenhouse Gas Emissions.”

The issue:

Senator James Lankford of Oklahoma, chairing a Senate subcommittee, requested a report from the Government Accounting Office on the issues related to advanced biofuels R&D. Specifically, how the federal government has supported advanced biofuels R&D in recent years and where its efforts have been targeted and expert views on the extent to which advanced biofuels are technologically understood and the factors that will affect the speed and volume of production.

Lankford, in case you were wondering, introduced a bill to repeal the corn ethanol mandate in 2013 with the Ghost Fuels Deletion Act and again in 2014 with the Phantom Fuels Elimination Act. He again called for repealing the RFS in June 2015. So, if you regarded this report as a political exercise, you wouldn’t be alone.

The Bottom Line:

You can safely ignore this 38-pager.

Why We’re Talking About It:

The issuing of the Report gives occasion for renewable fuel-haters to Dis the RFS and say that the program is not working. Meanwhile, BIO has used the report as an opportunity for EPA shaming, stating:

“EPA’s delays and methodology for setting the annual RFS chilled investment in advanced biofuels…Further, EPA continues to be too slow in making decisions on RFS pathway review and approval process…BIO has repeatedly pointed out that EPA’s delays and reductions in the annual volumes have caused increases in transportation-related greenhouse gas emissions.”

The Latest News:

The GAO report is here. The 1-pager is here. Here’s an excerpt to give you the flavor.

Biofuels that are technologically well understood include biodiesel, renewable diesel, renewable natural gas, cellulosic ethanol, and some drop-in fuels. A few of these fuels, such as biodiesel and renewable diesel, are being produced in significant volumes…[but have]…feedstock limitations. Current production of cellulosic biofuels is far below the statutory volumes and… production costs are currently too high…Drop-in fuels are…too costly. Among the factors…the low price of fossil fuels relative to advanced biofuels…Experts also cited uncertainty about government policy…the RFS and federal tax credits…investors do not see them as reliable and thus discount their potential benefits when considering whether to invest.

Why You Can Safely Ignore:

Everyone already knows all this, the GAO report is a statement of the obvious. We might add, the entire report was written based only on talking to academics and government officials. This is a political haymaking and not much more.

Consider this as a Warning Label for the Report: “No Actual Fuel Producer, Oil Refiner, Technology Developer or Investor was disturbed during the Making of this Report.”

Ignore This #3 The Canada Course Correction

The Issue:

Canada’s Ecofiscal Commission recently released a report entitled Course Correction, which calls on the Canadian government to rethink its biofuels policies.

The Bottom Line.

Skip it. Everyone else did. Including the Canadian government, who celebrated the report’s criticism of biofuels policies but announcing an expanded national Low Carbon Fuel Standard.

Why We’re Talking About it:

Probably because so many economists, academics, technical experts, and businesses have rejected the report’s data, methodology and findings. Keeping it perversely alive.

Why You Can Safely Ignore:

As Gord Miller, former Environmental Commissioner of Ontario told the National Post: “As I see it, Ecofiscal’s Course Correction report, if embraced, would have the following net result: greenhouse gas emissions would increase, urban air quality would deteriorate, and consumers would pay more for fueling their vehicles. Moreover, all access to the liquid transportation fuel market for current and future renewable or alternative fuels would be eliminated, and research and development of biofuels would be shut down. If anything, it’s Ecofiscal’s work that needs a thorough review from a broader perspective.”

One You Can't Ignore: The European Commission’s new Clean Energy Package

Report proposes to phase out, or significantly reduce, the use of conventional biofuels in Europe.

The issue:

In the proposed Renewable Energy Directive for the period post-2020, the European Commission proposed to reduce the maximum contribution of conventional biofuels, such as ethanol made from corn, wheat and sugar beet, to the EU 2030 renewable target – from a maximum of 7% of transport fuels in 2021 to 3.8% in 2030. The Commission also proposed a binding blending obligation of 6.8 % to promote other ‘low emissions fuels’ such as renewable electricity and advanced biofuels used in transport.

The Bottom Line:

Sorry, this one you have to pay attention to.

Why We’re Talking About it:

As Novozymes (NVZMY) Vice-President for Biorefining Thomas Schrøder summed it up perfectly: “The proposed gradual phase out of all conventional biofuels would only increase the share of fossil fuels in transport and add GHG emissions. By 2020, the aim was to have 10% renewables in transport, by 2030, the ambition is lowered to 6.8%. The European Commission failed to reflect in its proposal the latest science and evidence that demonstrate the very high sustainability profile of a series of conventional biofuels. For example, conventional ethanol effectively reduces GHG emissions today (by 64% on average compared to petrol) even when indirect impacts are accounted for. They have a legitimate role to play in the EU energy mix.”

Schrøder adds: “As far as advanced biofuels are concerned, the proposal to have a specific mandate of minimum 3.6% by 2030 is welcomed…However, advanced biofuels are not meant to replace perfectly sustainable conventional biofuels; they are meant to replace an increasing share of fossil fuels and reduce more GHG emissions.”

Why You Can’t Safely Ignore:

The proposal is likely to make it’s way into the EU’s Renewable Energy Directive, and it’s not going to be a simple case of switching all the stranded ethanol production over to advanced biofuels. This is not an attack on ethanol, it’s an attack on feedstock. Or, rather the perception of scarcity implicit in the “food vs fuel” debate. EU regulators hope to secure food for Europeans by phasing out the conversion of grains and oils to fuels. Yet, what happens when supply outstrips demand? Commodity prices fall, and production exits the market, reducing the very grains and oil supply that the new directive is supposed to secure.

The fashionable beliefs in the EU about the nature of agricultural commodity markets, remind us of the European idea, fashionable in the 1920s, that you could end the catastrophe of war through unilateral disarmament. Instead, European democracies were simply unprepared for the military crises of the late 1930s and Europe experienced its greatest catastrophe since the 30 Years War and the Black Death as a result. Never underestimate the EU Commission’s appetite for policies that could plunge the region into a food and emissions crisis, while proclaiming all the while its interest in the opposite result.

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

November 30, 2016

SBM Offshore Trades Offprice

by Debra Fiakas CFA

The November 8th post “Trident Winds Floats a Plan for Morro Bay” described plans for one of the first wind energy projects off the western shores of the U.S.   Trident has perfected new technologies for a floating platform that makes possible the location of wind turbines in areas where ocean depths prohibit conventional wind turbines towers anchored to the sea floor.  Investors interested in wind energy technology do not have to wait for Trident to prove out to get a stake in ‘floating offshore’ wind energy. 

Based in Europe, SBM Offshore (SBMO:  AEX) is a leader in the market for Floating Production Storage and Offloading platforms (FPSO).  The company is part of a consortium of electric utility and technical firms to win a contract from the French government to build and operate a pilot floating wind farm.  SBM Offshore will supply its proprietary floating system.  Three Siemens 8-megawatt turbines will be installed on the platforms.  The project is one of four being supported by French government programs, which have identified floating wind turbines as key to renewable energy production for France given the great ocean depths around the country.

Shares in SBM Offshore give an investor more than a stake in offshore wind.  Indeed, floating platform solutions are among the newest seaworthy products offered by the company.  SBM Offshore has a lengthy history in deep water infrastructure with swivel stacks, turret mooring systems, semi-submersibles, and well-head platforms.  The company has been in business continuously for over 150 years under various names and product lines.

The company reported $2.6 billion in total sales in 2015, providing $24 million in net income.  Sales and earnings were off in the year compared to the previous year as low crude oil prices hobbled order patterns by its oil and gas industry customers.  Backlog declined 13% in 2015.  Unfortunately, as the year 2016 has unfolded, things have not improved.  The company reported $936 million in sales and $38 million in net income in the first six months of 2016, marking an even deeper decline in fortunes for SBM.  Cultivation of new markets for SBM’s unique expertise in deep ocean conditions could be a salvation for the company weakened top-line.

The stock price has followed revenue down the mountain.  The stock, which trades in the Euro on the Amsterdam exchange, has declined by 54% from its historic high price of Euro 30.32 in July 2007.  The stock has been so weak, SBM leadership decided to use excess cash to repurchase shares with up to Euro 150 million.  As of mid-November 2016, repurchases valued at approximately Euro 108 million had been completed.  The repurchase program seems to have put a strong line of price support about 25% below the current stock price, suggesting there is a floor but its represents a significant downside risk for investors one the share repurchase has run its course.

Despite these near-term trading issues, SBM Offshore is an interesting company to watch.  Even the most modest turnaround in its established deep water solutions or progress with the new offshore wind business would be a plus for the stock.   When the recovery is imminent, the smart investor could do well buying the stock ‘offprice.’

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

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

November 28, 2016

Shipping Panic Creates Preferred Arbitrage Opportunity

Tom Konrad, Ph.D., CFA

  • Seaspan Worldwide has several classes of publicly traded securities, with different claims on its income streams.
  • The company owns container ships leased under long term contracts to shipping companies. 
  • The shipping industry is in a massive downturn, raising concerns about its customers' ability to pay.
  • The company's preferred shares have sold off more than half as far as its common stock- far more than justified by its relatively low risk.
  • There exists a 5.5% yield opportunity to buy the preferred and hedge the risk by buying puts on the common.

Seaspan Corporation operates as an independent charter owner and manager of containerships. The company charters its containerships under to long-term, fixed-rate time charters to various container liner companies. Its fleet consists of 92 vessels, which are typically newer, larger, and more fuel efficient than other fleets.

Seaspan's top customers included COSCO Container Lines, Mitsui O.S.K. Lines, MOL, Yang Mine and Hapag-Lloyd.  It also had three ships chartered to bankrupt Hanjin shipping.  Although one of these ships has already been rechartered, the bankruptcy highlighted the fact that Seaspan's income and (more importantly) dividend are not safe.

Available Cash Flow

A recent article on Seaspan by transportation professional James Sands looks at the prospects of a dividend cut going forward.  He seems to think that a dividend cut is possible, and may even be likely because the company may decide to expand its fleet by purchasing vessels for sale at distressed prices.

Seaspan's dividends currently amount to $13 million a quarter to preferred shareholders, and $38.3 million to common shareholders.  Cash available for distribution to common shareholders (CAFD) was $90 million in the third quarter (after the $13 million payment to preferred shareholders.)  Third quarter revenue was $225 million.

Understanding Cumulative Preferred Stock

The company's preferred shares (SSW-PD, SSW-PE, SSW-PH, and SSW-PG) are what is known as "cumulative" preferred.  Preferred equity falls in between common stock and debt (bonds) on the spectrum of risk and reward: safer with less potential for upside than common stock, but higher yield and riskier than bonds.  Preferred shares must receive their full dividend so long as any dividend is paid to the common shareholders.  Cumulative preferred shares have the additional provision that, if dividends are ever suspended, all unpaid preferred dividends must be paid in arrears before any dividend is paid to common shareholders.

This means that preferred dividends are much less risky than common dividends.  Expenses are mostly fixed, so declines in revenue will flow mostly flow through directly to CAFD, so let us assume that each $10 decrease in revenue reduces CAFD by $9.

Dividend Cut Estimates

Under these assumptions, let us consider the effects of the following percentage declines in quarterly revenue:

Seaspan Quarterly Revenue, CAFD, and dividends.  All numbers in million $.
% Decline in Revenue
Quarterly Revenue
CAFD
Common dividend
Preferred divideds
no decline
$225
$90
$38.3 (2.3x coverage)
$13 (safe)
10% decline
$202
$70
$38.3 (1.8x coverage) - cut possible
$13 (safe)
20% decline
$180
$50
$38.3 (1.3x coverage) - likely to be cut
$13 (safe)
30% decline
$157
$29
Dividend cut inevitable, possibly to 0
3.25x coverage, may be delayed
40% decline
$135
$9
Dividend will be cut to 0
1.7x coverage, likely to be delayed
50% decline
$112
-$11
cannot be paid
cut to $0, will only be paid if revenues recover.

In summary, Seaspan will continue to have enough cash flow to continue paying the preferred dividends unless revenue falls by more than 50%.  Since the vast majority of Seaspan's revenue comes from long term leases with major shipping companies, this would require that at least a third of its customers (as a percentage of revenues) go bankrupt- the only way to avoid paying a long term lease.  Revenue may also decline over time as leases end, offset as Seaspan re-leases the vessels, possibly at lower rates.

Now comes the tricky part- predicting the future.  If a large number of shipping companies go bankrupt and scrap or idle older, less efficient vessels, revenues and lease rates should improve for the remaining vessels.  Since Seaspan's vessels are generally newer and cheaper to operate than most of the world fleet, Seaspan should be a net beneficiary of this trend.  Hence, a 50% decline in revenue seems nearly impossible.  Keeping this in mind, here are my guesstimates of the likelihood of the above scenarios:

% Decline in Revenue
Likelihood
Expected common dividend cut
Expected preferred dividend cut
no decline
10%
20%
no cut
10% decline
30%
30%
no cut
20% decline
30%
50%
no cut
30% decline
20%
80%
10%
40% decline
5%
100%
50%
50% decline
5%
100%
80%

Using these probabilities, I can estimate the expected dividend cuts for both the common and preferred.  Using these probabilities, the overall expected dividend cut for the common is 52%, and the expected dividend cut for the preferred is 8.5%.

If my guesstimates are correct, another way to say this is that the common dividend is likely to be cut six times as much as the preferred dividends.  This makes sense, since the common dividend has to be cut to $0 before there can be any cut to the preferred dividends.

Effects on the Stock Price

Understanding the effects of dividend cuts on the stock price requires knowing why shareholders own the stock.  Preferred shareholders are income investors, and so are motivated almost exclusively by dividends.  Common shareholders are motivated by a mix of income and potential capital gains.  SSW investors are likely more motivated by income than average, given that the stock's dividend yield is currently over 15%.  Let's say that common shareholders are motivated one third by capital gains and two-thirds by income.

If that is the case, my estimated dividend cuts should have led to an approximate 35% decline in the common shares, and an 8.5% decline in the preferred.  Reality has been different, as shown by the chart below:

ssw vs preferreds

Over the last 6 months, SSW (black line) has fallen 36% (close to my estimate), while the preferred share classes (red and orange lines) have fallen about 19%, more than half as much as the common.  Also shown are Seaspan's exchange traded notes SSWN (blue line), which have declined only 2%, a fall which could be completely explained by recent increases in interest rates.  The performance of SSWN shows that the market thinks that Seaspan is little more likely to go bankrupt than it was six months ago.

Arbitrage

While the decline in SSW is eerily close to my very rough estimate (36% vs 35%), the decline in the preferred shares is completely out of proportion.  The preferred shares have fallen more than twice as far as my model would predict.

I believe this is due to excessive risk aversion among the preferred shareholders.  Valuing income above all else, I believe that the preferred shareholders are over-reacting to the actual risks.  The only other options are that my model is wrong, or that common shareholders are not taking the risks seriously enough.

While my model is very rough, the fact that risks for common shareholders are much higher than those for preferred shareholders is an inevitable consequence of the way preferred shares are designed.  Perhaps the expected common dividend cut should not be six times the expected preferred cut, but it could as easily be ten times as large or three times as large.  The resulting declines in the common stock should hence be a significant multiple of the declines in the preferred.  I find the actual ratio of only 1.9x far too small.

Investors could in theory take advantage of this mispricing by buying the preferred stock and shorting the common.  If the common "should" decline 3x as much as the preferred, they can short $1 of the common for every $3 of the preferred they buy.  Taking SSW-PG, the company's cumulative 8.2% preferred as an example (currently yielding 10% at $20.50) an investor could short 1000 shares of SSW for $9,500, with an annual cost of $1500 in dividends, and buy 1390 shares of SSW-PG for $28,500 which pay annual dividends of $2,850.  Hence, a net investment of $19,000 would yield a net $1,350 in dividends (6.8%) and be largely hedged against risks to the company.

Unfortunately, Seaspan shares are difficult to borrow, and so a more achievable hedge is to use long-dated puts.  May 2017 SSW $7.50 puts can currently be bought at approximately $0.60 per share.  While these do not insulate the investor against small declines in SSW, they are an excellent hedge against the large declines in the stock, which would occur if the common dividend were cut to $0 and the preferred dividends were at risk.  For a hedge similar to the 1000 shares of SSW sold short above, an investor would need 10 contracts which would cost $600 plus commission and hedge the position for six months.  During that time, the 1390 shares of SSW-PG would pay $1425 in dividends, so the net annual yield would be 5.5% on the whole hedged position, assuming that new puts could be sold for similar prices every 6 months.

5.5% is an attractive yield for a stock market investment, made even more attractive by the relatively low risk nature of this hedged investment in preferred stock.  It also has the potential of significant capital gains if the preferred shares recover to something closer to their true value.

This is why I have been buying SSW-PG and hedging part of that position with puts on SSW.

Endnote: Is Seaspan Green?

Regular readers may wonder why I'm interested in Seaspan at all, given that I do almost exclusively green investing.  Global container shipping is a key part of world trade, the antithesis of the "buy local" movement.  Buying local is often seen as green, but in my opinion, that depends on what you are buying and how it was made. 

I admit that this is very subjective, so if you think that global trade is always bad, you should avoid investing in Seaspan. That said, here is why I consider Seaspan green:
  1. Shipping is, pound for pound, the most fuel efficient way to move goods over long distances.
  2. Seaspan's ships are among the world's most efficient.
  3. Fuel efficiency can be further improved by "slow steaming," a.k.a. going more slowly.  Slow steaming requires more ships to move a fixed number of goods the same distance in the same amount of time, and so this easy way to reduce fuel use has the effect of increasing the demand for ships, which in turn benefits Seaspan.

In short, I expect that Seaspan should be a net beneficiary of worldwide efforts to reduce greenhouse gas emissions and fuel use.  This precisely my definition for a "green" stock.  I invest in companies I believe will gain from efforts to fight climate change and other environmental problems.

DISCLOSURE: Long SSW-PG. Long Puts on SSW common.

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.

November 27, 2016

The Collapse of KiOR

The Inside True Story of a Company Gone Wrong, Part 5

by Jim Lane

In 2011, KiOR raised $150 million in its June IPO, claiming that it was generating yields of 67 gallons per ton in its Demo unit operations. But it was miles short of that.

In our previous installments, we have charted how KiOR moved from a promising early-stage technology to a public company with serious technological flaws that could have been fixed, but were ignored in what a senior team member speaking for the record, Dennis Stamires, characterized as a “reckless rush to commercial”.

By 2012, numerous KiOR staffers of the time believed that the company had a management problem more than a technology problem. No matter how dire the technological challenges seemed. As Paul O’Connor observed, “no one [in power] analyzed the pilot plant data. Andre [Ditsch] would say ‘oh, go out and hire MIT PhDs.’ But they are not the ones who are going to scale up a process. Fred let Andre go his way, and they hired too many people from Albemarle across the street. Catalysts are important; you need a few people. But you need a lot of process people, and that balance went wrong.” The right people? “KiOR forced them out or fired them or they left because of the poor professional working environment,” said one team member of the time.

The balance was precarious, as 2012 dawned. Everything was riding on the performance in the first commercial plant.

If 2012 was another year of private failure and public bravado, a year of living disingenuously, 2013 would be the year in which the multiple streams of fiction and non-fiction would merge into a river of raw data that would make the truth clear. The company had reached scale, but was still in the slow process of commissioning, so there was still room for doubt, or hope.

Skeptics, promoters, innovators — who would be proven right?

Read the previous Parts in this Series

KiOR: The inside true story of a company gone wrong, Part 1

KiOR: the inside true story of a company gone wrong, Part 2

KiOR: The inside true story of a company gone wrong. Part 3, “You’ve Cooked the Books”

KiOR: The inside true story of a company gone wrong. Part 4, “The Year Of Living Disingenuously”

On March 27, 2013, O’Connor emailed Samir Kaul and Vinod Khosla a message he titled, Present & Future of KiOR. According to the state of Mississippi,O’Connor explained that he remained fearful that KiOR’s stock price would sink further.”

He followed up on May 1st, once again addressing the problem of the yields. He wrote:

After the mechanical completion of the Columbus plant it took quite a long time, before the plant actually started producing products. Of course I was concerned and in preparation of the Annual shareholders meeting in May 2013, I sent a letter to Fred Cannon asking some important questions ( Attachment D ). At the annual meeting I had a separate meeting with Fred and Samir Kaul. Fred’s response was that I was too negative: “ We (= KiOR) have made tremendous progress in the last 18 months in R&D.”

This concern of mine is not new, and I have expressed it already for a while, also during my tenure as director on the KiOR board and an official memo to the board and management: “KiOR Technology R&D: Assessment & Recommendations ” of April 21st 2012, one year ago. As far as I know these recommendations have not been followed up, while they remain at least just as relevant today as they were a year ago.

While I already for some time, no longer have any official function at KiOR and I do not have any non-public information of KiOR, I am regularly being approached by shareholders from BIOeCON heritage, but also by other institutional investors and the press, asking me critical questions, amongst others why I am not actively helping the KiOR team to solve their problems?

Keep in mind that the success or failure of KiOR is for me not only a financial issue, but also as main inventor one of honor. Although KiOR never properly acknowledges the origin and heritage of the technology: BIOeCON and myself as primary inventor, most informed outsiders are smart enough to figure that out.

I cannot just stand back and watch; As I see it now, the only thing I can really do is to ask critical questions at the annual shareholder meeting on the 30th of May next in Houston with the hope to get the ball moving in the direction of the corrective actions needed to speed up the transition towards a profitable and prosperous business.

I understand that US securities laws requires that any answers must be released to the public via press release, so I am sending the questions for KiOR management and/or board of directors before the quarterly report of May 9th , so that management and/or the board of directors has the option to include answers in the press release(s) of May 9th and/or in a second press release before or on the 30th of May.

Attached the questions, which I intend to raise at the shareholders meeting.

Separate to that, I would like the opportunity to present and discuss my thoughts on how to tackle the issues raised by these questions with CEO Fred Cannon and Samir Kaul as key representative of Khosla Ventures (the controlling shareholder) in the board of directors.

QUESTIONS for KiOR management at the shareholders meeting:

1) KiOR has disclosed that the expected yield…mentioned at the IPO will be achieved in the Natchez plant. How sure is KiOR about that? What are the overall product yields achieved at present in the R&D pilot plant(s) the demo plant and at Columbus? and how and when does KiOR expect to reach the more ambitious target?

2) Two of KiOR’s previous operations managers (Coates and Lyle) have stepped down, leaving KiOR without a COO or VP Operations. The delay in starting up and getting Columbus on stream could be related to this lack of operational leadership. Does KiOR have sufficient high-level staff with sufficient operational hands-on experience in the FCC and HPC processes to start up and run Columbus and a second plant in Natchez.

3) Does KiOR have a Scientific and/or Technological Advisory Board in place? How does KiOR ensure an independent technical audit of their R&D and Operations to ensure quality and progress in development?

4) When does KiOR expect to have the financing of the Natchez plant finalized?

Khosla responded to O’Connor on May 5, 2013, and after the annual shareholder meeting, Fred Cannon advised O’Connor that advances had been made in research and development over the course of the previous eighteen months.

But the State of Mississippi concluded that “O’Connor’s attempt to steer KiOR toward an honest assessment of its technology was once again unsuccessful” and stated that Cannon’s characterization of R&D advances was “a gross misrepresentation.”

Good news for public consumption

In May 2013, the company reported relatively rosy news to the public. As KiOR disclosed in its quarterly SEC 10-Q filing:

In 2012, the Company completed construction of its first, initial-scale commercial production facility in Columbus, Mississippi. This facility is designed to produce up to 13 million gallons of cellulosic diesel and gasoline per year. During the fourth quarter of 2012, the Company successfully commissioned its proprietary biomass fluid catalytic cracking, or BFCC, operation, and produced its first “on spec” cellulosic intermediate oil in limited quantities. During the first quarter of 2013, the Company successfully commissioned the plant’s hydrotreater and fractionation units, and began the Company’s first cellulosic diesel shipments in March 2013. The Company has had limited continuous production at its Columbus facility and has not yet reached “steady state” production.

No mention of the massive shortfall in yields. And to date, the costs had been high. Again, from the SEC Q2 report:

The Company has incurred substantial net losses since its inception, generating cumulative operating net losses of $234.1 million and an accumulated deficit of $258.1 million as of March 31, 2013. The Company expects to continue to incur operating losses through at least 2015 as it moves into the commercialization stage of its business.

“You are not lying, but stating a future number that is possible.”

On June 5, 2013, Mark Ross joined KiOR, appointed as Senior Biomass Fluid Catalytic Cracking Engineer. Ross was based in the Pasadena, Texas facility. During his first week of employment, Ross received an email warning him “to be careful about the politics at KiOR” because “the management at KiOR does not want to hear the truth about what is actually going on with the process.”

The troubled KiOR facility in Columbus, Mississippi

The troubled KiOR facility in Columbus, Mississippi

Nevertheless, Ross undertook a candid assessment of the Columbus plant’s operations, and in late June he emailed Mitch Loescher regarding the actual state of KiOR’s yields.

The State of Mississippi alleges that “Ross walked into Loescher’s office to discuss his concerns “about the yields that I observed at the plant versus the fraudulent numbers quoted to the public by Fred Cannon the CEO … Mitch’s reply was something like this (although I don’t remember the exact words), ‘Assume you just started a new restaurant and you were being interviewed about your restaurant. The interviewer asks you how many people you are serving every night. You answer 200 although you are only actually serving 20. You are not lying because you designed the restaurant to handle 200 a night even though you only have 20 a night currently. Eventually you will be serving 200 a night so you are not lying but stating a future number that is possible. You are just not telling the whole truth.’”

In July 2013, Ross approached KiOR’s Chief Fellow Scientist, Dennis Stamires, looking for more confirmation of what he termed his “quick back of the envelope calculation” that “the Columbus facility was only producing 22 gallons of oil per ton.”

As Ross explained in a sworn statement:

“I wanted to check the numbers to make sure I was calculating the yields correctly. Dennis was noticeably concerned about what I was telling him because he only knew what Fred was telling him which was the fraudulent 72 gallons per ton of dry wood. I told Dennis I would look into this in more detail and get back with him. I ran the calculations several more times and kept coming up with the same numbers, about 22 gallons of oil per ton of dry wood. I was still alarmed so I sought out Neil Wang and Gil Ceballos, who share an office. Neil was a Senior Process Engineer and Gil a Technologist and both were responsible for the material balances around the Demo Plant and the Columbus unit… Neil and Gil both confirmed that indeed the numbers I calculated were the same they had calculated and they too had raised concerns in the past but it fell on deaf ears. Gil had told me that to the best of his knowledge “the management at KiOR was not interested in hearing about the actual yields.”

Shortly afterwards, Ross explained in his sworn statement that he also sought the advice of KiOR’s Process Engineering Manager, Chris Cargill.

Cargill explained to Ross “that if it was possible to extract all of the potential hydrocarbons from the water and gas produced in the process we could improve the yields slightly but not 72 gallons per dry ton of wood. I asked Chris if any computer simulations were performed to simulate the recovery of the hydrocarbons from the water and gas and he suggested I speak to Senior Process Engineer, Agnes Dydak.”

Yep, 22 gallons per ton, and that’s it.

Ross next approached Dydak. According to Ross, she said that “that the simulation could only recover about 22 gallons per ton of dry wood which is what I was calculating.”

That same week, Dydak quit KiOR.

Despite the warning given to him by a colleague about not speaking up, Ross persevered. According to the State of Mississippi in its lawsuit, his “persistent warnings earned him the nickname, Dr. Doom, within the company’s Pasadena, Texas headquarters.”

Yet as of August 2013, the State of Mississippi alleged in a lawsuit that:

KiOR had in fact been unable to prove that its biocrude could be successfully refined without having routine and persistent shut downs that would drive up costs, drive down production and render the process commercially unviable. These and the reasons for them were the exact concerns that CLE had expressed to KiOR in May 2010, well before the MDA ever loaned a single dollar to the Company. KiOR had not only failed to prove that its biocrude could be successfully refined by an oil company in its existing infrastructure; KiOR had been unable to successfully refine its biocrude in extended runs in its own refining equipment.

The ring closes in around KiOR

By the summer of 2013, with the public disclosures required of the company as a public company, and with sufficient alarms raised not only by senior staff but by figures such as Paul O’Connor with direct access to the board, the management team came under more and more direct pressure regarding KiOR’s yields.

KiOR-graphic

And, money was drying up. On July 26, 2013, the company reported to the SEC:

As previously disclosed, on March 17, 2013, KiOR, Inc. entered into an amendment to the Loan and Security Agreement, dated as of January 26, 2012 with the Company and KiOR Columbus as borrowers, 1538731 Alberta Ltd. as agent and lender, and 1538716 Alberta Ltd., as lender, and KFT Trust, Vinod Khosla, Trustee.

Pursuant to the original Loan and Security Agreement, the Alberta Lenders had made a term loan to the Borrowers in the principal amount of $50 million and Khosla had made a term loan to the Borrowers in the principal amount $25 million, for a total of $75 million in principal amount. The Amendment, among other things, increased the amount available under the facility by $50 million, which the Borrowers may borrow from Khosla, based on the Borrowers’s capital needs, before March 31, 2014.

The rest of the SEC filing told the tale of consistent borrowing from Khosla:

On July 26, 2013, the Company borrowed $10 million from Khosla…on April 30, 2013, the Company borrowed $10 million from Khosla on April 24, 2013…on May 23, 2013, the Company borrowed $10 million from Khosla on May 17, 2013…on June 19, 2013, the Company borrowed $10 million from Khosla on June 17, 2013.

Why was Khosla making loans, rather than injecting equity into KiOR? No one has said for sure — but it would be worth pointing out that by establishing itself as a significant lender and senior debt-holder, Khosla and his allied entities would have stronger rights in a bankruptcy than as equity investors.

Meanwhile, more bad news came via further confirmation on poor yields from engineer Charlie Zhang, working at the Columbus plant, who supplied actual yield data from Columbus to Dennis Stamires that confirmed at Ross’ figures were correct. Ross had previously indicated that the yields were in the 22 per gallon range, a frightful shortfall from the 67 gallons per ton yields indicated in the company’s IPO documentation.

screen-shot-2016-11-24-at-12-39-17-pm

A crisis was looming.

On July 11, 2013, sources indicated to The Digest that Vinod Khosla, Samir Kaul and Fred Cannon held a dinner meeting in which the situation with the yields at Columbus was reviewed. At the dinner, Cannon received a directive that Paul O’Connor be permitted to review KiOR’s state of technology and progress.

A strike at Stamires

At the same time as Khosla and Saul were initiating an investigation from the top down, by September, Stamires had determined to have another showdown with KiOR’s top management and according to Stamires and the state of Mississippi, he:

called a meeting with Fred Cannon and Chris Artzer to discuss the disparity between the target yield of 72 gallons per BDT and the actual yields being achieved in Columbus. Stamires notified Cannon and Artzer that he had seen the actual yield data and was going to report the real yields being achieved to the Board of Directors.

According to the State of Mississippi, “Cannon and Artzer attempted to bribe Stamires.” The offer was straightforward. “If Stamires would avoid revealing the yield data to the Board of Directors, they would ensure that KiOR paid him the approximately $60,000 in outstanding travel expenses he was owed at the time and they would further ensure that he was paid additional shares of KiOR stock over the course of the next five years.”

Stamires rejected the offer, his contract with KiOR was not renewed, and Mark Ross stated that “he was told by Mitch Loescher to stop talking to Dennis Stamires.” Ross recalled:

“Dennis was causing a problem. I complied with Mitch’s request and later that week I noticed that Dennis’ office was cleaned out. I never saw Dennis again at KiOR.”

KiOR admits a problem with establishing steady-state operations and considers a re-design

On September 26, 2013, KiOR reported to the SEC:

In 2012, the Company completed construction of its first, initial-scale commercial production facility in Columbus, Mississippi…The Company has had limited continuous production at its Columbus facility and has not yet reached “steady state” production. The Company is currently considering two options for its next commercial-scale facility.

One option is to design, engineer and construct a second initial scale commercial facility adjacent to its current initial scale commercial facility in Columbus, Mississippi, which would have a capacity of 500 bone dry tons, or BDT, per day. The Company is considering this option because it believes that a second initial scale commercial facility in Columbus may allow it to (i) accelerate its ability to achieve overall positive cash from operations with less need for capital from external sources and risk of financing, (ii) reduce design, engineering and construction costs due to its ability to leverage its experience from the construction of the current Columbus facility, (iii) incorporate the most recent improvements to its technology into both the existing facility and the planned facility in Columbus, (iv) achieve operational synergies as a result of shared personnel, infrastructure and operational knowledge with the existing Columbus facility, and (v) leverage existing feedstock relationships while introducing other types of lower cost feedstocks such as hardwood, energy crops, and waste products such as railroad ties.

screen-shot-2016-11-24-at-12-39-28-pm

The cost would be high. As KiOR disclosed:

The Company currently estimates on a preliminary basis that the total cost of this second initial scale commercial facility Columbus, Mississippi would be approximately $175 million to $225 million, based upon expected design and engineering savings combined with its recent experience of designing, engineering and constructing the current Columbus facility for approximately $213 million.

Gasoline costs rising fast

Meanwhile, KiOR in this SEC filing backed away from the $1.80 per gallon target discussed in its IPO.

The Company estimates on a preliminary basis that the combined Columbus facilities will be able to produce cellulosic gasoline and diesel at a per-unit, unsubsidized cost between $2.60 and $2.80 per gallon at its current proven yields of 72 gallons per BDT, excluding costs of financing and facility depreciation, which would decrease to between $2.15 and $2.35 per gallon if it is able to achieve its short-term yield target of 92 gallons per BDT.

Yet, even this revised production cost target could be described as ridiculous, given that the company had not achieved anywhere near the 72 gallons per ton yields.

And, the company, even at this late stage, is clinging not only to a yield target of 92 gallons per ton, it is describing its 72 gallon per ton figure as “current proven yields”. There is no evidence available that KiOR had data to support such a submission to the Securities & Exchange Commission.

screen-shot-2016-11-24-at-12-39-36-pm

Costs soar again, this time the capex

By November, KiOR again reported to the SEC on its plans for Columbus II, but costs had skyrocketed. KiOR reported:

The Company currently estimates on a preliminary basis that the total cost of this second initial scale commercial facility in Columbus, Mississippi would be approximately $216 million to $232 million.

And, the company continued to stand behind its 72 gallon per ton yield claim, which was wholly unfounded in the scientific data according to every insider the Digest has spoken with. In November, KiOR claimed:

The Company estimates on a preliminary basis that the combined Columbus facilities will be able to produce cellulosic gasoline and diesel at a per-unit, unsubsidized cost between $2.60 and $2.80 per gallon at its current proven yields at its research and development facilities of 72 gallons per BDT, excluding costs of financing and facility depreciation, which would decrease to between $2.15 and $2.35 per gallon if it is able to achieve its yield target of 92 gallons per BDT.

CFO Karnes resigns

The bleeding of personnel turned briefly to a hemorrhage when, on December 1 2013, John Karnes resigned as Chief Financial Officer. Although the true reasons were not made public at the time — a simple statement of fact was released to the public — Karnes had become convinced that KiOR’s technological claims were “unreasonable,” as one source put it. Before leaving, Karnes authored a devastating review of KiOR’s progress from Q2 2012 through Q4, and recalled several attempts he had made over the years to bring KiOR’s technological distress to board attention.

Stamires whistle-blows directly to a KiOR board member

In late December 2013, Stamires’ contract had not been renewed and he began e-mailing board member Will Roach with allegations regarding the true state of KiOR’s yields and alleging that Cannon and Artzer has attempted to “to purchase his silence” as one source put it. Stamires detailed in his email that KiOR’s executive team had been fully advised of technical problems and the true state of yields but had “refused since 2010 to undertake adequate efforts to increase oil yields”.

Following his submission of emails to Will Roach, the state of Mississippi reports that little immediately came of his efforts:

Stamires attended a meeting that was also attended by Roach and two attorneys, Peter Buckland and Paul Coggins. Buckland had served as counsel for KiOR for several years, whereas Coggins had been hired by the outside directors of the Board of Directors to conduct an internal investigation of KiOR. Stamires recounted in the meeting the circumstances and complaints he had been making since 2010. Stamires thereafter provided copies of his file materials to Coggins in conjunction with Coggins’ securities fraud investigation of KiOR.”

But the company did not make a public correction of its yield claims at this time.

Columbus shuts down

In early spring 2014, KiOR reported again on its progress to the SEC. This time, there was not much sugar-coating on the state of operations at Columbus II:

Until recently, we have focused our efforts on research and development and the construction and operation of our initial-scale commercial production facility in Columbus, Mississippi, or our Columbus facility. We did not reach “steady state” operations at our Columbus facility nor were we able to achieve the throughput and yield targets for the facility because of structural bottlenecks, reliability and mechanical issues, and catalyst performance.

The problems were legion. According toi KiOR, there were issues with process and with the catalyst. In catalytic pyrolysis, that’s essentially the whole she-bang.

KiOR stated:

In January 2014, we elected to temporarily discontinue operations at our Columbus facility in order to attempt to complete a series of optimization projects and upgrades that are intended to help achieve operational targets that we believe are attainable based on the design of the facility. While we have completed some of these projects and upgrades, we have elected to suspend further optimization work and bring the Columbus facility to a safe, idle state, which we believe will enable us to restart the facility upon the achievement of additional research and development milestones, consisting of process improvements and catalyst design, financing and completion of the optimization work.

But the blame was shifted to the front-end of the process, where biomass was delivered into the reactor — rather than to the catalyst performance and reactor design identified by its scientific team as the primary issue.

Rather, KiOR claimed:

In terms of throughput, we have experienced issues with structural design bottlenecks and reliability that have limited the amount of wood that we can introduce to our BFCC system. These issues have caused the Columbus facility to run significantly below its nameplate capacity for biomass of 500 bone dry tons per day and limited our ability to produce cellulosic gasoline and diesel. We have identified and intend to implement changes to the BFCC, hydrotreater and wood yard that we believe will alleviate these issues.

The company blamed the slow delivery of a new catalyst, and “mechanical problems”.

In terms of yield, we have identified additional enhancements that we believe will improve the overall yield of transportation fuels from each ton of biomass from the Columbus facility, which has been lower than expected due to a delay introducing our new generation of catalyst to the facility and mechanical failures impeding desired chemical reactions in the BFCC reactor. In terms of overall process efficiency and reliability, we have previously generated products with an unfavorable mix that includes higher percentages of fuel oil and off specification product.

The fixes were in hand, said KiOR, but money had run out? The company stated: “We do not expect to complete these optimization projects until we achieve additional research and development milestones and receive additional financing.”

Raising the question, of course, as to why the company could not raise money just when all the fixes had been identified to make a $600 million project perform as designed. As KiOR stated:

Since inception, the Company has generated significant losses. As of March 31, 2014, the Company had an accumulated deficit of $604.9 million, and it expects to continue to incur operating losses until it has constructed its first standard commercial production facility and it is operational.

With that kind of capital invested in the project, there would be equity investors at significant risk should the company collapse. Why the troubles raising cash, if the fixes were really fixes.

Were the fixes really fixes? Had investors lost confidence in the executive team’s claims?

KiOR looks at a merger, restructuring or sale

In July 2014, the Company announced that it had engaged Guggenheim Securities, LLC as the Company’s financial advisor and investment banker to provide financial advisory and investment banking services and to assist the Company in reviewing and evaluating various financing, transactional and strategic alternatives, including a possible merger, restructuring or sale of the Company.

By then, the losses had mounted to $629.3 milion, the plant was not operating, there was no capital to implement “fixes” that would allow re-start, and there was no revenue coming in the door and even when fuels had been produced, the production levels had been catastrophically below forecasts.

O’Connor resigns

In late August 2014, Paul O’Connor resigned from the company. His letter of resignation is a poignant summary of all that went wrong with the company as it failed to advance what had been a promising technology, and of the actions undertaken during the first half of 2014.

LETTER OF RESIGNATION

Hoevelaken, August 31st 2014

From: Paul O’Connor

To: The board of directors of KiOR Inc.

Dear fellow directors

As you know the KiOR technology to convert waste biomass into fuels and chemicals via catalytic pyrolysis (or cracking) originated from a Dutch company called BIOeCON, which invented and explored this concept in 2006 and 2007. I am one of the principal inventors of this technology. Other key inventors are Prof’s Avelino Corma, Jacob Moulijn, Dr. Dennis Stamires, Dr. Igor Babich and Sjoerd Daamen B.Sc. all working and cooperating with BIOeCON since early 2006.

At the end of 2007 BIOeCON and Khosla Ventures (KV) formed KiOR Inc., whereby BIOeCON contributed the technological ideas and the IP, and KV the funding. In 2008 at my suggestion KiOR hired Fred Cannon as their CEO. Fred Cannon had been my boss earlier at Akzo Nobel and Albemarle and I valued Fred for his excellent people skills. During the Akzo years I worked very close with Fred, whereby I lead the technology development together with 2 other colleagues (One of them Dr. Hans Heinerman, who also worked for KiOR in 2008-2009). Fred was always able to get the financial support from the Akzo Nobel board for the funding so we could execute our innovative projects, which greatly enhanced the profitability and value of the Akzo Nobel Catalyst group.

During the first two years of KiOR 2008-2009, I worked as CTO with Fred in building up the organization, proving the concept in a modified FCC pilot plant and leading the research into improved catalysts. Already then we had some technical disagreements about the road forward and managerial issues about the experience and quality of the people being hired. Unfortunately Fred broke off the links to the BIOeCON origin of the technology and so KiOR lost some very valuable experience and insights from the strong European experts connected with BIOeCON. My two-year contract, as CTO was not renewed in October 2009. I did stay on the board of KiOR, until May of 2011. During this period on the board my access to technical information was restricted and limited as the MT and Khosla Ventures were uneasy about my known other activities in the area of biomass conversion in cooperation with PETROBRAS. This cooperation by the way is outside of the KiOR scope as was agreed with Khosla Ventures during the formation of KiOR.

Initially I was not too concerned about the further development of KiOR technology as one of the few figures presented to the board of directors in February of 2011 (See Attachment A) indicated some good progress in increasing the yields in gallons per ton. At the end of 2011 however, I received some additional data (See attachment B) and I was shocked to see that the yields were lower than reported in February…and that hardly any progress had been made since the end of 2009. I immediately informed KiOR’s CEO, Fred Cannon and Samir Kaul (Director for Khosla Venture, as BIOeCON’s partner and main shareholder of KiOR) about my concerns regarding the limited improvements achieved. After several e-mail and phone discussions with Fred Cannon and Samir Kaul, I received the opportunity to visit KiOR for a technology review. Unfortunately the review was very restricted and limited. Still with the limited data made available to me during my review I could conclude that part of the problem of the lower yields…My main conclusions were:

The present overall yield of saleable liquid products, roughly estimated from the information received falls short of [claims] and has not improved significantly over the last two years.

At the last board meeting where I was present (April/May 2012) the R&D director after a Technology Update, under questioning by myself admitted that we should not expect to reach the [projected yields] at Columbus, but possibly at the next commercial plant including further reactor modifications. I estimated that based on the R&D data given to me at that time, that the real yields for Columbus would be closer to [much lower figures]. Unfortunately none of my recommendations was followed up.

It is obvious for all of us today that KiOR is going through some difficult times, and may even not survive as a company. The reason for this, in my opinion, is not because of the failure of the technology itself, but because of several wrong choices made during the development and commercialization of the technology. Over the years there have been several warning signals (internal & external), one of which as I mentioned in the foregoing has been my own technology audit report in March/April of 2011. Notwithstanding these warnings KiOR’s MT continued on their set course. In mean time everyone else hoped for the best.

After the mechanical completion of the Columbus plant it took quite a long time, before the plant actually started producing products. Of course I was concerned and in preparation of the Annual shareholders meeting in May 2013, I sent a letter to Fred Cannon asking some important questions. At the annual meeting I had a separate meeting with Fred and Samir Kaul. Fred’s response was that I was too negative: “ We (= KiOR) have made tremendous progress in the last 18 months in R&D ”

The real proof-of-the-pudding however would be a successful start-up and operation of Columbus in 2013. Unfortunately this did not work out the way, which everyone had hoped for and several problems were encountered leading to production rates [at much lower percentages compared to] the actual design case. The first impression was that this was related to “normal” start-up issues. After an audit requested by the KiOR board and Khosla Ventures in November of 2013 it became clear however that the product yields were in fact much lower than projected…while the on-stream times were also way too low…I have stressed to the board that in my opinion a clear change (Plan B/Re-set) in technology strategy as well as leadership style (Openness & Transparency) is essential to solve the issues. I reported this to Will Roach and the board in early February…Near the end of March you as KiOR board asked me to join the board and to assist as a technical advisor, while I would be empowered to lead a taskforce of KiOR’s R&D and technology to address and solve the existing issues in KiOR’s technology.

I started forming this taskforce in April, with apparent approval of the MT, after making some difficult compromises with the MT, as the MT still had very different views on how to improve the technology. These different views resulted in strong differences of opinions with regards to the priorities to be given, the organization, people decisions etc. I persisted with my task and returned to Houston after a short stay in Europe in May. I was then requested by the board to postpone my visits to KiOR, because of my critical attitude towards the MT (sic). This meant that my efforts to lead the taskforce and make the necessary changes at KiOR stopped: In my opinion KiOR hereby lost some crucial months and also some good people. I tried to meet with the MT to reestablish a mode of working together, but the MT did not respond…

Concluding:

I am of the opinion that KiOR’s MT professionally has not performed in evolving the KiOR technology to a commercial success; furthermore the MT in my opinion has not provided the board of directors of KiOR with the adequate, right and relevant information to do their job. I therefore am of the opinion that the MT needs to resign and to be replaced in order to improve the chances of success of KiOR and/or any other potential new ventures based on KiOR technology in the future.

In the mean time, as I do not have the opportunity to help KiOR as originally intended, I have resigned from the board as of August 31st 2014. Although I am no longer on the board, I remain a strong supporter of KiOR technology and the company and hope you as board will wisely decide on the future of KiOR.

Very best regards

/s/ Paul O’Connor

31 Aug 2014

Paul O’Connor

KiOR files for bankruptcy

On November 9th 2014, as the state of Mississippi noted, “the KiOR house of cards had fully collapsed,” and KiOR filed for Chapter 11 bankruptcy protection. Mississippi also noted that “Vinod Khosla and those individuals and entities affiliated with him are seeking to be released from any derivative liability they may have to KiOR.”

The Mississippi Development Authority contested Khosla’s bid “to whitewash his fault” and attempted to convert the Chapter 11 proceeding into a Chapter 7 proceeding. Ultimately, the KiOR Columbus facility assets were sold at auction for pennies on the dollar, and the KiOR technology and its pilot plant and offices in Pasadena , Texas were re-organized as Anaeris Technologies, and the company continues to pursue its technology today.

As Mississippi stated in its lawsuit, the SEC launched a securities fraud investigation:

KiOR and certain of its officers and directors were named defendants in a securities fraud class action and a shareholders’ derivative lawsuit that were consolidated in federal court in Houston, Texas. Mark Ross has filed a whistleblower action against KiOR in which he alleges that he was wrongfully terminated for continually bringing the disparities between the company’s financial modeling and actual performance to light.

Finally, the Attorney General of the State of Mississippi sued the individuals and entities he held responsible for “the commission and cover-up of one of the largest frauds ever perpetrated on the State of Mississippi.” Among the targets were Vinod Khosla and Samir Kaul. As “the deep pockets” in any judgment or settlement, it was vital to Mississippi’s recovery of money to link Khosla and Kaul to a conspiracy. Otherwise, they might be treated as victims themselves — investors who had also suffered financial damage. Leaving Mississippi without a bundle of cash to chase in recompense.

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Mississippi alleged:

Kaul was on the KiOR Board of Directors from the outset of the company and was actively involved in monitoring the Company’s progress, including the development of the Company’s technology and the Company’s short and long

term financial projections. Khosla and Kaul received regular, detailed updates on the status of the Company’s technology and financial projections from the founding of the Company through the present day. In fact, Khosla exercised such control over KiOR and was so involved its management that the Company’s lead director, Gary Whitlock, has testified that KiOR belonged to Vinod Khosla prior to the Company’s initial public offering of stock and Khosla was free to do with the Company as he pleased.

Khosla interviewed and approved most or all of KiOR’s senior management and members of the Board before they were hired or appointed. Vinod Khosla has at all times had the ability to terminate or demand the termination or resignation of KiOR’s senior executives and, upon information and belief, has threaten to exercise and/or has exercised such ability in order to control KiOR.

Samir Kaul and Vinod Khosla directed and controlled the representations made by Khosla Ventures’ agent, Dennis Cuneo, while Cuneo was acting within the course and scope of his agency. Kaul and Khosla were aware of Cuneo’s misrepresentations and undertook no efforts to amend or correct them, precisely because Cuneo’s misrepresentations were consistent with Kaul’s and Khosla’s directives.

Mississippi recounted the specific failures of the company’s technology and the cover-up that ensued.

1. KiOR’s total process yields were not high enough to render the Company profitable.

2. KiOR’s catalyst costs, catalyst replacement rate and capacity creep all contributed to render the Company unprofitable.

3. KiOR did not make a high quality crude oil, but instead made a biocrude that was high in oxygen and acids which made the biocrude difficult to refine within the standard equipment of major oil companies.

4. KiOR had been informed by [Catchlight Energy] and other major oil companies that they were unable and unwilling to refine the Company’s biocrude in quantities that the parties found acceptable.

5. Due to its inability to convince a major oil company to refine its biocrude, KiOR was forced to construct and operate its own refinery in Columbus. These additional costs had not been included in the Company’s financial modeling and projections.

The End of an Era

And so, with the November 2014 bankruptcy filing at KiOR, the era of development and deployment gave way to an era of restructuring and recrimination. The company had once been hailed as one of titanic promise, but had been revealed as one of titanic promises which were not matched by performance.

At the heart of the failure? The 22 gallon per ton yields at Columbus, following on from the 30+ per gallon yields at the demonstration plant, and the 40+ gallons per ton yields at the pilot plant. KiOR has banked on steady improvement of yields, but instead there was a steady decline as the company moved towards scale.

As Paul O’Connor observed in August 2014:

Around that time the KiOR board (via Will Roach and Samir Kaul) approached me to help KiOR as a technical expert in reviewing the situation at KiOR and in January of 2014 I signed an NDA and started reviewing the data from Columbus and R&D. My observation was that the low yields and on-stream times at Columbus were reasonably in line with the results and experience in the DEMO plant in Houston.

This means that the main problems at Columbus are already discernible in the DEMO operations and are therefore structural and not “just” operational issues. My belief then and still now is, that these problems can be solved, but that this will require a different approach in catalyst selection and operation strategy.

But these are technical issues, and virtually every new technology is replete with stories of ideas that did not work out, clashes between technologists with differing opinion as to how improvement is to be made.

What distinguished KiOR, almost alone among a class of technologies the Digest has covered for a decade, are the management responses to issues. Even at the end, KiOR management was trying the same failed strategy of rosy projections that could not be achieved by its technology at the time. Even in the final months before filing bankruptcy, when cash flow was critical and new investment or even sale of the company was urgently under consideration, O’Connor observed:

In the mean time KiOR has started a marketing process (via Guggenheim) to explore investment and/or sale opportunities for the company. This is a good initiative, as it may help to salvage this interesting and promising technology. However, it is also my conviction that in order to maximize the value and “survivability” of KiOR, KiOR should use the time and funds still available, to focus on the alternative approaches that I have proposed, which I believe will be able to prove on the DEMO scale that the yields and on-stream times of KiOR technology can be substantially improved.

Unfortunately the MT is still not receptive to this and has distributed, what I believe are poorly substantiated projections for Guggenheim to pitch KiOR to potential investors and/or buyers. These projections do not include the crucial learning’s from the DEMO and Columbus. Keep in mind that the MT also convinced the board at the time to build and start-up Columbus based on projections, which have not been substantiated in the DEMO, while we now know that the DEMO predicted reasonably well the poor yields and on-stream times at Columbus. As already communicated to you earlier I cannot support this approach.

The KiOR reorganization that wasn’t

On November 9, 2014, KiOR reported that it had filed Chapter 11, and would continue to operate its businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.

Interestingly, KiOR Columbus LLC KiOR’s wholly-owned subsidiary, was “not a party to the Chapter 11 Case”. Clearly it was the troubles at Columbus that led to the bankruptcy event. Clearly the company had for some time indicated that a goal in restructuring the company was to “restart its Columbus facility, build its next commercial production facility and subsequent facilities, continue the development of its technology and products, commercialize any products resulting from its research and development efforts, and satisfy its debt service obligations.”

Even more interesting, KiOR wasn’t headed for a reorganization. Rather, the filing stated the preferred outcome right up front:

KiOR currently intends to seek approval from the Bankruptcy Court for an auction and sale of its assets under Section 363 of the Bankruptcy Code.

Keep in mind these are not the Columbus assets — the plant itself. Rather, these were the KiOR technology assets. These would eventually re-emerge as Anaeris — and, perhaps not surprisingly — remained under the ownership of Khosla’s investment interests.

A footnote: Slap on the wrist for management

In September 2016, the US Securities and Exchange Commission reported:

SEC Charges Alternative Fuels Company and Former Executive for Key Omissions Regarding Technology

On September 26, 2016, the Securities and Exchange Commission charged Texas-based Mard, Inc., formerly known as KiOR, Inc., (“KiOR”), and its former CEO and President Fred Cannon for failing to disclose important assumptions about the yield that KiOR had claimed to have achieved through the company’s proprietary process of converting wood and other biomass into crude oil – a key metric that was critical to KiOR’s viability.

According to the SEC’s complaint filed in Houston federal court, beginning in April 2011 with the filing of KiOR’s registration statement for its initial public offering, KiOR and Cannon claimed that the company had “achieved” a yield of 67 gallons of fuel per ton of biomass. But they did not disclose that this yield was based on significant assumptions about technologies that remained under development. Absent these assumptions, internal KiOR documents reflected test results with yields of approximately 18-30 percent less than the disclosed yield. Cannon signed and approved the registration statement and subsequent filings that continued to tout the 67 gallon yield figure without disclosing the underlying assumptions. KiOR and Cannon knew or should have known that disclosure of these assumptions was necessary to provide complete and accurate information to KiOR investors about the actual yield. In November 2014, KiOR declared Chapter 11 bankruptcy, emerging as a privately-owned entity in June 2015.

Without admitting or denying the SEC’s charges, KiOR and Cannon agreed to settle the claims against them. Both have agreed to the entry of a final judgment permanently enjoining them from violating Section 17(a)(2) and (3) of the Securities Act of 1933, and Cannon has agreed to pay a civil penalty of $100,000. The settlement is pending final approval by the court.

Management or board?

If O’Connor’s thesis is correct and KiOR’s troubles are the result of a management failure, the board’s failure to properly supervise its executive officers stands out as a hallmark of what KiOR ultimately became.

The board’s powers to structure a company to the faking of data is absolute and requires no specific mandate. It is the purpose for which boards are established: to ensure transparency and protection for the shareholders who have elected the board. The directors may well escape the trident and net of the courts — as they often do — but whether they escape the judgement of public opinion: that is up to the public.

But was it all simply board inattention? Some point fingers at the payday which KiOR represented to employees — paychecks, bonuses, fees, stock options. Of course, one of the most ironic features of KiOR’s demise were the occasions on which KiOR obtained silence in return for shares — the ultimately worthless shares of the company.

Was simple greed the key factor which kept doubt from turning into active revolt — which kept whistle-blowing activity to a minimum until by 2013-14 and the company was unable to meet its bills?

As Dennis Stamires outlined:

Paul O’Connor comes in 2012 comes to Kior sent by the board to see how things are going along with the technology. The KiOR guys, Chris Artzer and John Hacskaylo, they had it pretty well-organized what they were going to tell Paul. I was not invited to be present but I found out later that what they presented to him was very limited, and was highly censored by Chris [Artzer], Hacskaylo and Fred [Cannon]. He gets only partial and maybe some misleading information and he’s supposed to go back and write a report for the board. Paul comes to me, and said, Dennis, I’m here representing the Board. I said, wonderful. You’re representing the Board? I’m going to open my heart to you.”

Here I am, givcing this information to Paul, everything, and he said, well this is what’s really happening? I gave him all the details because said I am was representing the Board. Meantime, I want to get to the Board, because Gary [Whitlock] had not called me and I wanted to get to the Board. Great opportunity. So I did that. And he was going to go to the Board. Except what I did not like when the IPO came out, Paul knew exactly what’s going on. He knew the story. He knew what was going on at KiOR. He knew that KiOR was going to go down. He dumped his shares and made $12 million.”

It’s an allegation, not a fact — whether O’Connor had enough information in 2012 to decide that “KiOR was going to go down” is open to interpretation. Even Stamires, who makes the allegation, didn’t exit the company for another year, all the while making desperate attempts to bring the faked data and real yields to the Board. So, there must have been some hope for KiOR even at the late stage that new technology could be deployed, and that KiOR’s technological failures did not ensure a company failure, until the very end when the cash ran out when the actual results of biocrude production at the Columbus plant could not be hidden.

It may well come down to this: a belief that scale-up itself could be changed through innovation. KiOR was not just about innovative technology, but about an innovative path to commercial success. As this presentation slide demonstrated, the KiOR ethos focused on “don’t listen to the naysayers” principles: the company was about breaking free from the shackles of ossified thinking about how to go about things. To an extent, reality may well have been dismissed as “naysaying”, and dissenters branded as “old school”.

For KiOR, the model companies were not Chevron or AkzoNobel, but Google, eBay and Amazon.com. All which belonged in the digital economy, rather than the physical economy. An attempt to port concepts from one sector to another may well have been at the heart of KiOR’s troubles.

Never, never land

The bottom line? For KiOR, there were the three nevers.

The first never. The 67 gallon per ton claim in the IPO. We asked Denis Stamires, point-blank: was there any result, ever, using KiOR technology, with refinery-compatible oxygen levels — in the 67 gallon per ton range, or even in the 50s?

Stamires was emphatic. “No. Never.”

Was it a complete fabrication? “It is. It has to be.” Stamires said. “I was the top scientist, and I had no idea that the [S-1] had even been written for the SEC.”

The second never. We asked Stamires. Did you ever have a chance to review the yield claims prior to the IPO?

“Never. And they even put my name on it. How did I found out? After it had gone out into the public, my son who is a business executive, found it from his Wall Street friends. I got a copy from Wall Street, and I was at KiOR. It blows your mind. When I saw the 67, I said ‘where the hell does this come from’? But what killed me was the $1.80 per gallon. We’re talking about a few dollars, but not $1.80.”

The third never. Had 67 gallons per ton been achieved, could $1.80 been achieved?

“Absolutely not. Not even close,” said Stamires. The problem there?

“The cost of the catalyst. It wasn’t lasting long. But you are using a catalyst that costs between $5 and $10 a pound. You’re not making pharmaceuticals, you’re making bio-oil.”

The catalyst design was fatal to the technology’s cost objective? “Absolutely. High use of a catalyst at a high price? You don’t have anything.”

What about catalyst loss? “You might lose up to 1% in a normal operation,” Stamires told The Digest. “But KiOR was losing over 10%. The whole thing was becoming academic. The process had a lot of metals, and was severe, and the biomass contains metals, and the process, the velocities and the contact time. It was the process time. It deactivated pretty fast. You get plugged pores. But it was the metals in the biomass. We were not removing them, we were adding them, in pre-treatment with salts.”

Never, never, never. That’s the story of KiOR.

For the public and investors, the focus may better be placed on “never again”.

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

November 24, 2016

EPA Issues On-time, Robust Renewable Fuel Standard For 2017-18

Jim Lane

In Washington, the US Environmental Protection Agency released the 2017 renewable fuel volume obligations (and the 2018 volume obligations for biomass-based diesel), with a strong push beyond what has been termed the “blend wall” and stimulating refiners to implement more “cost-effective changes at their refineries to blend more renewable fuel.”

The agency finalized a total renewable fuel volume of 19.28 billion gallons, of which 4.28 BG is advanced biofuel and 311 million gallons is cellulosic biofuel. Thus, the implied RVO for conventional biofuels like corn ethanol will be 15BG—up from the 14.8 BG proposed in May.

“Renewable fuel volumes continue to increase across the board compared to 2016 levels,” said Janet McCabe, the agency’s acting assistant administrator for the Office of Air and Radiation. “These final standards will boost production, providing for ambitious yet achievable growth of biofuels in the transportation sector. By implementing the program enacted by Congress, we are expanding the nation’s renewable fuels sector while reducing our reliance on imported oil.”

The Top Line Numbers

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Breaking the Blend Wall

The key? The EPA has essentially abandoned its previous attempt to slow the adoption of renewable fuel by citing the oil industry’s lack of infrastructure-building as a “supply constraint”. Under the Clean Air Act, the EPA has authority to waive down Congressionally-targeted volumes in the case of supply constraints, which members of Congress said they intended to mean a lack of renewable fuel production, rather than a lack of infrastructure deployed by refiners to distribute renewable fuel.

Renewable fuel producers had contended that should refiners have the ability to stall deployment of renewable fuels by not deploying infrastructure, obligated parties would have gained veto power over the Clean Air Act and Congress.

Biomass-based diesel numbers still below industry capacity

Under the new RFS rule, Biomass-Based Diesel standards would move to 2.1 billion gallons in 2018 up from 2 billion gallons in 2017. The Biomass-Based Diesel category – a diesel subset of the overall Advanced Biofuel category – is made up of biodiesel and renewable diesel, another diesel alternative made from the same feedstocks using a different technology.

The new standards reflect modest growth in the standards but remain below the more than 2.6 billion gallons of biodiesel and renewable hydrocarbon diesel expected in 2016.

Figures substantially boosted from original proposal

The EPA substantially boosted volumes from the original proposals issued earlier in the year. They were:

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Cellulosic fuels were essentially flat from the original proposal, but advanced biofuels were boosted nearly 300 million gallons and, overall, renewable fuel obligations were boosted 448 million gallons.

Reaction from the Stakeholders

Advanced Biofuels Association

Michael McAdams, ABFA President:
“We congratulate EPA on getting the RVO rule out ahead of schedule. Like last year, it sends a clear signal to the market of the federal government’s intention to stand behind the RFS program. We are also happy to see the confidence and support of the biomass-based diesel pool by continuing to recognize the fact it is growing steadily. And, we welcome increases in both the advanced and cellulosic pools. Those are truly the fuels of the future that deliver the most significant contribution to sustainability.”

Biotechnology Innovation Organization (BIO)

Brent Erickson, executive vice president of BIO’s Industrial & Environmental Section:
“By abandoning its legally flawed reliance on general waiver authority as a basis for departing from statutory biofuels volumes requirements, EPA has sent a strong signal that it will support the biofuels industry and grow advanced and cellulosic biofuel production. BIO and its members welcome this change in course by EPA; today’s rule adheres to Congress’s intent in enacting the RFS statute and ends several years of instability in the RFS program.” Read More

National Biodiesel Board

NBB CEO Donnell Rehagen
“The real winners with this announcement are American consumers who will now have access to even more cleaner burning, advanced biofuels. These benefits extend far beyond the biodiesel industry, supporting high paying jobs and clean air across the nation. Though we are poised to top these numbers this year, growth in advanced biofuels still sends positive signals to the marketplace.”

“While NBB applauds the increased volumes, there is room for more aggressive growth. The U.S. biodiesel industry can do more. The production capacity and feedstock are clearly available as the market is already topping these levels. We will work with the incoming Administration to help them understand the benefits provided by our growing domestic biodiesel industry and the potential to support additional jobs and investment in rural economies.”

Advanced Biofuels Business Council

Brooke Coleman, Executive Director
“Administrator McCarthy and her team deserve a lot of credit. Administrator McCarthy said they would get the RFS back on track and they did. It’s a strong rule across the board and moves the conversation forward. We have moved past the imaginary blend wall. The biofuels industry continues to innovate. The merchant refiners saying they cannot comply with the RFS are now implementing cost-effective changes at their refineries to blend more renewable fuel. President-elect Trump will no doubt hear from a shrinking group of RFS naysayers, but I think he understands that the RFS is working, supports a strong manufacturing base across the country and reduces our dependence on foreign oil. We are looking forward to working with EPA and the next Administration on further accelerating the commercial deployment of advanced biofuels.” Read More

Renewable Fuels Association (RFA)

Bob Dinneen, President and CEO
“We can all be thankful EPA has raised the conventional biofuel requirement to the 15 billion gallon level required by the statute. The move will send a positive signal to investors, rippling throughout our economy and environment. By signaling its commitment to a growing biofuels market, the agency will stimulate new interest in cellulosic ethanol and other advanced biofuels, drive investment in infrastructure to accommodate E15 and higher ethanol blends, and make a further dent in reducing greenhouse gas emissions.” Read More

Growth Energy

Emily Skor, CEO:
“We are pleased that the EPA’s rule finally achieves the statutory volume for conventional biofuel as called for by Congress. The Renewable Fuel Standard is our country’s most successful energy policy. It continues to inject much needed competition and consumer choice into the vehicle fuels marketplace. It enables greater consumer adoption of cleaner biofuels that displace toxic emissions and reduce harmful emissions, while creating American jobs, spurring innovation and lowering the price at the pump.” Read More

American Coalition for Ethanol (ACE)

Brian Jennings, Executive Vice President
“As more ethanol was blended with record-high consumption of gasoline this year, ACE urged EPA to increase the 2017 implied conventional biofuel volume to the statutory level of 15 billion gallons and we are very pleased EPA has agreed to do so. For the last couple of years, EPA has unfortunately sided with oil companies and refiners instead of rural voters to ‘ride the brakes’ on RFS blending volumes, relying on excuses such as the make-believe E10 ‘blend wall’ and lower gasoline use to reduce renewable fuel use below statutory levels. But we are supportive of the move to increase volumes for 2017 without a ‘blend wall’ excuse. U.S. gasoline use is expected to rise again in 2017, so increasing RFS volumes will help restore some confidence to the rural economy and reassure retailers that it makes sense to offer E15 and flex fuels like E30 and E85 to their customers.”

“Nevertheless, we remain opposed to EPA’s misapplication of the RFS general waiver authority to use ‘infrastructure constraints’ as an excuse to limit renewable fuel use below statutory levels for 2014, 2015, and 2016, which is why we are party to Americans for Clean Energy et al. vs EPA, a lawsuit pending in the U.S. Court of Appeals for D.C. We look forward to the Court taking up our case early in 2017 and deciding in our favor.”

National Corn Growers Association

Wesley Spurlock, farmer and President:
“Today the EPA moved in the right direction by increasing the 2017 ethanol volume to statute. This is critical for farmers facing difficult economic times, as well as for consumers who care about clean air, affordable fuel choices, and lowering our dependence on foreign oil.” Read More

Renewable Energy Group (REGI)

Daniel Oh, CEO
“While our industry has shown that higher volumes of biomass-based diesel can and will be produced and consumed, this final rule elevates the growth trajectory for our cleaner, lower carbon intensity advanced biofuel,” said Daniel J. Oh, President and Chief Executive Officer. “Biomass-based diesel will continue to lead the way. We appreciate the support of those at the EPA, many others throughout the Administration and our bi-partisan champions on Capitol Hill who all helped make this possible.”

Novozymes (NVZMY)

Adam Monroe, President, Americas
“Since its inception, the RFS has created more than 357,000 good-paying American jobs that can’t be outsourced. These workers, and the biofuel they produce, have helped us all breathe easier by reducing toxic emissions and protecting people’s health. They’ve also led America to a resurgence in American manufacturing, reducing our dependence on foreign oil. The RFS is a key reason America is achieving its economic, health and climate goals.”

“Novozymes has 1,200 employees in the United States and has invested hundreds of millions of dollars in biofuel technology development, putting scientists to work finding ways to turn biomass into biofuel, and building facilities like our $200 million enzyme manufacturing plant in Blair, Nebraska. We made these investments because the Renewable Fuel Standard is strong, stable and clear. With today’s decision, it remains that way.”

POET

Jeff Broin, CEO:
“The grain ethanol industry is ready and able to meet its obligation under the Renewable Fuel Standard, and today’s rule from the EPA reflects that reality. I commend the EPA on holding firm to the letter of the law despite enormous pressure from oil interests. These numbers reflect the intent of Congress in making homegrown, renewable biofuels a sizable portion of our transportation fuel supply.” Read More

The Bottom Line

With the proposal, the EPA ensured that only one turkey will be on the table this Thanksgiving — the actual Thanksgiving Day turkey, and no evidence of an RFS turkey in sight.

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

November 11, 2016

President-Elect Trump: A Gift?

by John Fullerton

Imagine if you can, Donald Trump has arrived as a gift, to illuminate for us the American “shadow” at this pivotal moment in history. The Swiss Psychiatrist C.G. Jung refers to “the shadow” as the dark side of one’s self. The shadow, Jung wrote in 1963, “is that hidden, repressed, for the most part inferior and guilt-laden” aspect of our personality hiding out in the unconscious. Failure to recognize our shadow leaves us exposed to the destructive possession by our disowned shadow.

Are we prepared to see the message of the shadow, illuminating our ongoing collective cultural flaws—more prevalent and tolerated than we would like to admit—from narcissism and misogyny to racism and bigotry? Are we prepared to face the fact that our extractive neoliberal economic ideology has utterly failed us, including trade policies that Trump has shined a light on? Will we now address the lost dignity and fear among a majority of hard-working Americans while wealth soars among a small percentage of Americans to grotesque levels? Do we finally acknowledge the corruption of the special-interest-owned polity controlled by the donor and ruling classes who operate under different rules from the rest of us? The shadow points to lost trust in our institutions for good reason, from government to Wall Street to big business to mainstream media. Do we now see that wealth and winning at all cost is not success, that we lack urgency in dealing with the crisis in American education, or in our mental health crisis? (Yes, Trump appears mentally unstable.) Finally, and perhaps most dangerous in the long run, the shadow points to our lack of moral responsibility to deal with climate change with an urgency that is far beyond anything Obama has proposed.

Trump is of course a dangerous conman. The opportunist wants to “make America great again,” invoking a sense of loss among the vulnerable and cruelly seducing with false promises. But more deeply, is this call to recover our greatness not the shadow pointing to our inflated pride in the idea of American Exceptionalism? Is it not time we honor the greater and higher ideals America was founded upon – life, liberty, and the pursuit of happiness – and the timeless and universal values of humility, grace, gratitude, and loving membership within the beautiful and diverse humanity we share with one another, and with all life itself?

A prescient article on the collapse of American Oligarchy, written by Capital Institute’s Science Advisor Dr. Sally Goerner in April, is well worth a revisit on this new “morning in America.” And her timely analysis of the psychological underpinnings of Trump when he won the Republican nomination has now become essential reading if we are to understand why “this neo-fascist upsurge is a classic consequence of the breakdown of the bonds of love, strength, and intelligence that hold a society together and why rebuilding these bonds is critical to our survival.”

It’s been a slippery slope to our current predicament in my adult lifetime. I experienced this slide first hand on Wall Street beginning in the early 1980s, where our terminal, finance-driven neoliberal ideology first manifested, and then metastasized throughout society. So blame me. Turns out we were more clever than smart.

On one level, waking up on 11-9 felt worse than when I experienced 9-11 first hand. I have had very difficult conversations with my children, one of whom had to field questions from her second graders about whether “grandma would be deported.” It’s all incomprehensible, terrifying, and as my daughter said, it’s an embarrassment.

And yet…

The “great change” we must usher in was not happening before. It was not going to happen under Hillary Clinton. The mere fact that the Clintons have amassed a $200mm fortune since the former President left office, without creating any economic enterprise, is beyond unseemly. With hindsight, it was a mistake of the Democratic Party to allow her to run, despite her unmatched experience and the appeal of the first woman to reach the White House. The self-important Party hacks were simply “not serious” about the real systemic change that awaits, and which is required. And that decision now has very real consequences. They could be catastrophic. Or maybe not? The stock market recovered quickly, predictions are a fool’s errand when the future is truly unknowable. Maybe this is just the jolt we need to seriously begin to question who we are as a nation…what values we stand for… And what responsibility the elite-in politics, business and finance, and in the media-has to the health of the greater whole.

Will we devolve into a second civil war? Will we destroy our last chance to deal with climate change responsibly? It’s unknowable today.

Or perhaps we will usher in a positive 21st century American Revolution and inspire the world again. Such a revolution will be built on a new story to replace the growth-at-all-costs, extreme neoliberalism that we have most certainly outgrown, and is conflict with our understanding of how complex systems behave. This new story of the Integral Age entails a fundamental and profound shift to holistic thinking across all domains, with dynamic networks replacing failed command and control institutions. It demands clarifying means and ends in our economics and aligning them with the universal principles that define all other systems that survive over time, and the emergence of a regenerative society that is most certainly underway. Not overseen by Trump of course, but in the opportunity he will afford us, difficult as it is, to stare at our shadow over the coming four years, a mere blip in the course of history.

Peace!

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.

November 09, 2016

An Investor's Reaction to a Trump Victory

See my response here: https://www.greentechmedia.com/articles/read/how-one-clean-energy-investor-is-reacting-to-a-trump-victory Tom Konrad

The Implications Of Trump's Election For Solar

by Paula Mints
 

The US election will have an affect on the US climate policy potentially swaying it much more towards
conventional energy including fracking for natural gas and oil and away from deployment of renewables and
incentives towards this end. The Clean Power Plan as established is unlikely to survive and states will start pulling
back plans – not all states, but many of them.
  • The Three Branches of Government: The Republican Party now controls the Executive, Judicial and Legislativebranches of government this means that the agenda followed by the country for at least two years until the midterm elections and potentially for decades because of the Supreme Court will be that of the party in power.
  • The Supreme Court: The next justice will set the tone for the country on wide ranging cases including the Clean Power Plan
  • The Clean Power Plan: President Elect Trump has vowed to turn back all reforms and likely will – and – cases reaching the Supreme Court may not fare well.
  • The DoE and NREL: The new president will select the energy secretary who will set the direction, tone and budget at the DoE. Funding for solar and all RE is at risk.
  • The ITC: Though this is a bipartisan agreement and a law, it can be overturned. Best case, it continues as planned. Worst case it is overturned by the new president and congress.
  • The EPA: President Nixon, a republican, established the EPA so it is not a foregone conclusion that it’s powers will be decreased. However, the president appoints its administrator and the direction is likely to be far less focused on the environment than it has been.
  • The Paris Climate Change Agreement: President Elect Trump has made it clear that he plans to exit theagreement and he is likely to do so.

This is all against a backdrop of ongoing oversupply in the solar PV market.

  1. China: Along with decreasing its FiT rate and continued high curtailment, China has decreased its solar deployment goal from 150-GWp to 110-GWp by 2020 and increased coal production from 900-GW to 1100-GW by 2020. The goal is to install 60-GWp of DG, 45-GWp of ground mounted and 5-GW of CSP. At the end of 2016 China will have installed ~78-GWp of solar PV, only 15-GWp of which is DG. This means that China’s annual PV installations will be reduced from 15-GWp (~30-GWp in 2016) to ~9-GWp. This also means that manufacturers based in China are significantly overcapacity.
  2. Global Curtailment: Globally, curtailment is a trend and with low bidding on tenders also a global trend quality is a concern and margins will continue to be tight.
  3. India: Low bidding in India is a crisis and as a result, low quality will be a crisis. This incentive driven market is a bubble and this bubble will pop.
  4. Module Price Crash Dive: With the changes in China’s solar PV deployment goals the PV industry is now significantly overcapacity. Module prices will be held down throughout 2016 and well into 2017. Manufacturers outside of China and N-type manufacturers will feel significant price and margin pressure going forward.
  5. Low PPA bidding: Overcapacity means that it is a buyer’s market for modules and also means that developers of commercial (including Utility scale) solar PV must compete with developers from China. Basically, with solar deployment in China constrained in 2017 Chinese developers must seek out new markets. This will push tender bidding to new lows and will threaten profitability globally.

Paula Mints is founder of SPV Market Research, a classic solar market research practice focused on gathering data through primary research and providing analyses of the global solar industry.  You can find her on Twitter @PaulaMints1 and read her blog here.

This article was adapted from the SPV Market Research November 2016 quarterly call presentation and is printed with permission.

What Trump's Victory Means For The Bioeconomy

Jim Lane

In Washington, Donald Trump captured the US Presidency in an upset victory that confounded pollsters and political pundits even as it delighted supporters of his maverick candidacy based on themes of immigration and trade reform coupled with a message that government policies of the past generation had failed for too many Americans.

An unexpected series of wins across US Midwestern states – capturing Iowa, Pennsylvania, Wisconsin and Ohio which had gone for Obama in 2012 – provided a comfortable margin of victory in the Electoral College and the popular vote.

5 Themes

Some immediate themes emerge for the global bioeconomy as the US turns now from its lengthy election process to the transition period between Administrations.

1. Trade rebalancing is front and center on the agenda. That’s not entirely bad for the bieconomy and for US-based manufacturing. Over at the Renewable Fuels Association, CEO Bob Dinneen noted:

“A core principle of the Trump campaign has been putting America first and more aggressively pursuing fair trade agreements that recognize the value of American products.”

2. Climate action is likely to be scaled back sharply. The President-elect is opposed to the Paris Climate Agreement — we’ll have to see how that translates into meeting obligations imposed by that deal. At the very least, leadership on climate activities is likely to pass to others, and a shift back towards policies that favor US domestic production of coal, oil and natural gas is likely.

3. First-gen biofuels less impacted. Owing to fitting in to Trump’s themes of economic nationalism, manufacturing revival and domestic energy security, a Bush-era emphasis on the energy security aspects of shifting from imported fuels to biofuels is likely to remain in favor. Trump himself strongly backed the Renewable Fuel Standard, almost alone among front-runners for the Republican nomination, and Iowa Governor Terry Branstad, and Bruce Rastetter, the president of Summit Ag Group, had been appointed to Donald Trump’s agricultural advisory panel in August. Eric Branstad, the governor’s son. led anti-Cruz forces in the state a year ago and was chairman of the successful Trump campaign in Iowa.

RFA CEO Bob Dinneen added:

“The president-elect repeatedly expressed strong support for ethanol, generally, and the Renewable Fuel Standard (RFS), specifically, on the campaign trail. He understands the importance of clean, domestic energy resources and the economic power of value-added agriculture. We are confident Mr. Trump will continue to support the expanded production and use of fuel ethanol. Moreover, the president-elect is committed to removing regulatory barriers that impede growth. We look forward to working with a Trump administration to remove unnecessary volatility restrictions that have discouraged market acceptance of higher level ethanol blends like E15 and created unreasonable administrative burdens on gasoline marketers willing to offer these fuels to consumers. FWe are eager to work with the new Administration on myriad trade challenges currently facing the U.S. ethanol industry.”

Adam Monroe, President Americas for Novozymes (NVZMY) said:

“During the campaign, the President-elect expressed support for biotechnology generally and bioenergy and agriculture specifically, all core to America’s economy and keeping our country on the leading edge of innovation and discovery. At Novozymes, we’re looking forward to supporting those ambitions.

“President-elect Trump understands the need for good policy to help foster American innovation. It’s incumbent on the private sector to imagine and build cutting-edge solutions to solve society’s challenges – but we count on the President-elect to encourage that kind of groundbreaking innovation with smart, consistently-administered policy, fueling our economy and creating products used across the world.”

4. Reduced emphasis on government spending and a reduction in the government’s role in the economy can be expected to impact applied government R&D programs. However, the incoming Administration has not run on an anti-R&D program, but rather an anti-regulatory program and we can expect more action at this stage in rolling back EPA’s influenace rather than in wholesale slashing of government research.

5. A Farm Bill is due in 2018 and spending and priorities until then will largely continue along the lines established in the 2014 Farm Bill. Pro-domestic energy forces in the Midwest largely supported the Trump candidacy, and there’s no evidence yet that there will be wholesale changes in US domestic agricultural policies. A focus on renegotiating or exiting NAFTA will have impact on agricultural prices.

Looking at the result for meaning

1. A mirror of 2008. At the Digest, we see this election in many ways as a mirror of 2008 — a candidate campaigning on “change you can believe in” and pointing to “inconvenient truths” in trade and immigration – but aimed at reversing Obama’s policies rather than Bush’s. We may well see, as a result, an unwinding of portions, or the whole of, the US health care reform authorized under the Affordable Care Act — and changes in foreign policy. Supporters of the President-elect may well find that change is harder to deliver than it is to vote for — we’ll see whether this President grapples more effectively to deliver on his ambitions and permanently embed change into the US way of life.

2. Too many left behind? Most experts believe that the shift towards global free trade is, on the average, better for all. Also, that the shift towards an advanced economy based around the innovation center of Silicon Valley, the policy center of Washington and the financial center of New York is, on average, better for all.

But experts also agree that trade deals and seismic shifts in the economy create winners and losers. The average economic result, for example, of NAFTA may well be positive. But it creates a have/have-not equation in sophisticated economies, and we have seen a concentration of wealth and power in recent years — and a decline in the prosperity of the middle class. It is not controversial to say that people are left behind as economies and countries evolve, and in the US it appears that voters feel too many have been left behind. There simply are not as many affluent Americans who are for “more of the same” as there used to be, as wealth concentrates into the hands of fewer and fewer.

The discussion of how to spread the wealth of any nation is one that parties grapple with — should it be through unleashing more opportunity for those left behind, or through redistributive tax and spending policies. Last night, the US public spoke on that one.

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

November 07, 2016

US Geothermal: Can A Reverse Split Heat Up This Stock?

by Debra Fiakas CFA

US Geothermal (HTM:  NYSE) has been on our radar for some time.  Despite considerable accomplishment in terms of building electricity output from a portfolio of geothermal power installations, investors seem reluctant to embrace the company and its stock.  Earlier this week, US Geothermal management issued its usual quarterly update on its development work, this time detailing progress in expanding capacity and improving well performance on three of its geothermal installations.  Altogether an incremental 90 megawatts are under development, which would triple the current power generation capacity of 45 megawatts.  The company press release was met by investors with a yawn.  Perhaps most are waiting for the earnings press release scheduled for November 10th.

The consensus estimate is for a penny in net profits per share on $7.2 million in total sales for the quarter ending September 2016.  Compared to the same quarter last year, that prediction represents flat earnings on slightly higher revenue.  US Geothermal appears to have done a good job of conditioning its analyst following to the current potential in sales and earnings.  At any rate, the company mostly meets the consensus expectation and rarely exceeds the earnings per share hurdle by more than a penny.

 If investors are not willing to bid the stock above the $1.00 price level, the company is going to force the stock to whole dollars.  The day before the earnings announcement a 1-for-6 reverse split will be executed, leaving the stock price quoted at about $3.90 per share and the shares outstanding near 18.9 million shares.

Whether HTM remains at current levels is another matter.  The stock is valued at 22 times earnings expectations for 2017.   That might seem a bit expensive to some investors who are not impressed by pennies in earnings per share.  For those who have the patience to wait for the company to build out its power generation portfolio, the current stock price could be considered a bargain.  US Geothermal has assets that, if developed, management claims could triple current output.  Granted there will be capital investment requirements to reach this goal.  Debt outstanding is currently $110.6 million and the debt-to-equity ratio is currently 85:1.   Yet the company has hardly reached its limits in terms of raising either debt or equity capital.  Current cash balances of $18.3 million imply net debt of $92.3 million, and there is more cash where that came from.    In the twelve months ending June 2016, the company converted 41% of its revenue to operating cash flow, a performance metric that should cheer both creditors and equity investors. 

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

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

November 06, 2016

Election Jitters Spell Opportunity: Ten Clean Energy Stocks For 2016

Tom Konrad, Ph.D., CFA

This October saw falling leaves and falling stocks. Then came the first week of November with its election jitters and stripped the trees of the rest of their leaves like a fifty mile an hour wind sending stocks flying as well.

While Donald Trump's unpredictable performance has the whole stock market rattled (at least when it looks like he might win), his anti-environment and pro fossil fuel rhetoric have had stocks in the sector quaking like the leaves on an aspen.

Although all its benchmarks were decidedly in the red for October and the first week of November, my Ten Clean Energy Stocks for 2016 fared relatively well.  Although the portfolio, its growth and income subportfolios, and my privately managed Green Global Equity Income Portfolio all fell, their declines were smaller than their benchmarks.  For the year to date, their out-performance ranged from 11% to 31% over their benchmarks.

Detailed performance for the growth and income subportfolios, my Green Global Income Portfolio, and their various subportfolios can be found in the chart below.

2016 ovt nov composites
See the original 2016 article for a description of the benchmarks.

The chart below and the following discussion gives detailed performance and discussion for the individual stocks.  Click for a larger version.

10 for 16 OctNov.png

Income Stocks

Pattern Energy Group (NASD:PEGI)

12/31/15 Price: $20.91.  Dec 31st Annual Dividend: $1.488 (7.1%).  Beta: 1.22.  Low Target: $18.  High Target: $35. 
10/31/16 Price:  $22.35.  YTD Dividend: $1.171. 
Expected 2016 Dividend:$1.58 (7.1%) YTD Total Return: 12.9%
11/4/16 Price:  21.62 .  YTD Total Return: 9.3%

Wind Yieldco Pattern Energy will release its third quarter earnings on November 7th.  Wind speeds were a little disappointing in the first half of the year because of El Nino.  Investors will be watching for higher revenues from wind generation now that El Nino is no longer affecting wind patterns.  This seems likely, considering that other companies (see NRG Yield and TransAlta Renewables, below) have been reporting strong wind production for the quarter.

Enviva Partners, LP (NYSE:EVA)

12/31/15 Price: $18.15.  Dec 31st Annual Dividend: $1.76 (9.7%).  Low Target: $13.  High Target: $26. 
10/31/16 Price:  $27.25.  YTD Dividend: $1.495  Expected 2016 Dividend: $2.10 (7.7%) YTD Total Return: 49.9%
11/4/16 Price:  27.00 .  YTD Total Return: 58.9%

Wood pellet focused Master Limited Partnership (MLP) and Yieldco Enviva Partners announced its earnings on Thursday, November 4th.  The company agreed to terms with its sponsor for its second drop-down acquisition which should allow the cash flow and dividend per share growth to continue in 2017.  This particular drop-down also has the effect of increasing Enviva's number of customers, helping to diversify the partnership's future revenue streams.

Enviva forecasts a per share distribution in 2017 of $2.35 per a share, which would amount to an increase of approximately 12% over 2016.

Green Plains Partners, LP (NYSE:GPP)

12/31/15 Price: $16.25. 
Dec 31st Annual Dividend: $1.60 (9.8%).  Low Target: $12.  High Target: $22. 
10/31/16 Price:  $21.25.  YTD Dividend: $1.218.  Expected 2016 Dividend: $1.64 (7.7%) YTD Total Return: 41.8%
11/4/16 Price:   18.60.  YTD Total Return: 24.1%

Ethanol production Yieldco Green Plains Partners also announced 3rd quarter results.  The partnership increased its quarterly distribution to $0.42 per unit, and reported $0.43 in per unit income for the quarter.  It's parent company, Green Plains (GPRE) produced a record volume of ethanol in the second quarter.  Revenues increased due to a reviving ethanol market and new ethanol storage acquired out of the Abengoa (ABGB) bankruptcy.

However, the stock's strong performance so far this year led analysts at Stifel Nicolaus to downgrade the stock from "Buy" to Hold. That and the general election jitters caused the partnership's units for fall more than 10% in the first week of November, although it still shows significant gains for the year to date.

NRG Yield, A shares (NYSE:NYLD/A)

12/31/15 Price: $13.91.  Dec 31st Annual Dividend: $0.86 (6.2%). Beta: 1.02.  Low Target: $11.  High Target: $25. 
10/31/16 Price:  $14.73.  YTD Dividend: $0.695.  Expected 2016 Dividend: $0.96 (6.5%) YTD Total Return: 11.2%
11/4/16 Price:   $14.75.  YTD Total Return: 11.3%

Yieldco NRG Yield (NYLD and NYLD/A) announced 3rd quarter results on November 4th.  Revenues were strong, in large part due to good production from the company's wind farms.  It increased its quarterly dividend to $0.25 (16% year over year growth.)  The strong quarter is doubtless why the stock made a slight gain in the first week of November despite the market turmoil.

The company released guidance for 2017, and re-affirmed its targeted 15% annual dividend per share growth of 15% through 2018.

Terraform Global (NASD: GLBL)

12/31/15 Price: $5.59.  Dec 31st Annual Dividend: $1.10 (19.7%). Beta: 1.22.  Low Target: $4.  High Target: $15. 
10/31/16 Price:  $3.75.  YTD Dividend: $0.275.  Expected 2016 Dividend: $0.60 (16.0%). YTD Total Return: -25.2%
11/4/16 Price:  3.75.  YTD Total Return: -25.2%

Yieldco Terraform Global has still not released its much delayed financial statements (although some preliminary information was released in July.)  The stock's decline in October has been mostly driven by rumors about the possible sale or non-sale of its much larger sister Yieldco, Terraform Power (TERP.)  These included rumors that SunEdison intended to keep its stake in Terraform Power and restructure the company around that holding, as well as Brookfield ruling itself out as a buyer for Terraform Power.

Hannon Armstrong Sustainable Infrastructure (NYSE:HASI).

12/31/15 Price: $18.92.  Dec 31st Annual Dividend: $1.20 (6.3%).  Beta: 1.22.  Low Target: $17.  High Target: $27. 
10/31/16 Price:  $23.86.  YTD Dividend: $0.90.  Expected 2016 Dividend: $1.25  (5.5%). YTD Total Return: 26.0%
11/4/16 Price:  $19.96 .  YTD Total Return: 10.0%

After clean energy financier and REIT Hannon Armstrong reported second quarter core earnings in August, I wrote:

Hannon Armstrong has a target of paying out 100% of core earnings in dividends and a policy of increasing the dividend once per year in the fourth quarter.  Since Core Earnings have historically always increased or held constant from quarter to quarter, they typically lag the dividend in the first two quarters, but exceed them in the second half of the year. 

I expect this year to be different.  Results in the first half of the year were boosted by a larger securitizations (selling assets to third parties rather than keeping them on the books.)  While producing strong earnings in the quarter when they happen, securitizations produce no ongoing income.  After raising $91 million in equity in June, the company will again return to placing more transactions on the balance sheet, a change which I expect to reduce core earnings in the third quarter before returning to growth in the fourth quarter. 

I expect my anticipated decline in third quarter earnings in early November to catch some investors by surprise.  Investors looking to buy the stock should wait until then.  Investors considering taking some gains may want to sell before the November announcement.

My prediction was on the mark.  Core earnings fell from $0.32 per share in the second quarter, to $0.29 this quarter.  The stock decline was compounded by the company issuing an additional 3.5 million shares in a secondary offering priced at $20.  I remain confident that earnings growth will resume in the fourth quarter and that the company will again raise its quarterly dividend in December to at least $0.34.

The current price of $19.96 seems an excellent and likely fleeting buying opportunity.

TransAlta Renewables Inc. (TSX:RNW, OTC:TRSWF)
12/31/15 Price: C$10.37.  Dec 31st Annual Dividend: C$0.84 (8.1%).   Low Target: C$10.  High Target: C$15. 
10/31/16 Price:  C$14.81.  YTD Dividend: C$0.733  Expected 2016 Dividend: C$0.88 (5.9%) YTD Total Return (US$): 56.2%
11/4/16 Price:  C$14.26 .  YTD Total Return: 50.6%.

Canadian listed Yieldco TransAlta Renewables' third quarter  results showed expected growth due to previous acquisitions, and the construction of the company's Australian South Hedland facility continues as planned.  Like NRG Yield, the company had a strong quarter of production at its Canadian Wind farms.

Growth Stocks

Renewable Energy Group (NASD:REGI)

12/31/15 Price: $9.29.  Annual Dividend: $0. Beta: 1.01.  Low Target: $7.  High Target: $25. 
10/31/16 Price:  $8.75.    YTD Total Return: -5.8%
11/4/16 Price:   8.40.  YTD Total Return: -9.6%

Advanced biofuel producer Renewable Energy Group reported strong earnings growth in the third quarter, but not as strong as many analysts had been expecting.  This combined with the inclusion of REGI in The Street's "Clinton Portfolio" sent the shares tumbling in the first week of November.  I personally think  that the "Clinton Portfolio" was very badly designed, and would have weighted such a portfolio much more heavily towards solar installers and manufacturers, rather than biodiesel which has much stronger bipartisan support than solar. 

I continue to think REGI is an excellent buy at the current price of $8.40, even if Trump wins the election.

MiX Telematics Limited (NASD:MIXT; JSE:MIX).
12/31/15 Price: $4.22 / R2.80. Dec 31st Annual Dividend: R0.08 (2.9%).  Beta:  -0.13.  Low Target: $4.  High Target: $15.
10/31/16 Price:  $6.29 / R3.35.  YTD Dividend: R0.06/$0.101  Expected 2016 Dividend: R0.08 (2.1%)  YTD Total Return: 52.6%
11/4/16 Price:  $6.05 / R3.23.  YTD Total Return: 46.7%

Software as a service fleet management provider MiX Telematics announced the results for the second quarter of its 2017 fiscal year, which starts in April.  Subscriber growth remained weak (8% year over year) due to the depressed energy sector, but showed signs of acceleration late in the quarter.  The company is continuing to make progress in its long term strategy of steering customers towards its bundled offerings, which improve margins in the long term at the cost of greater up-front investments.

Ameresco, Inc. (NASD:AMRC).
Current Price: $6.25
Annual Dividend: $0.  Beta: 1.1.  Low Target: $5.  High Target: $15. 
10/31/16 Price:  $4.80.  YTD Total Return: -8.7%
11/4/16 Price:  4.95 .  YTD Total Return: -18.0%

Energy service contractor Ameresco's third quarter results continued recover.  The company is also increasing its project backlog and investments in owned renewable energy facilities (mostly landfill gas), both of which increase the level and predictability of its future earnings.  Giving the company's improving results and prospects, Ameresco would be a highlight of my own "Clinton Portfolio" if I were to construct one (see comments on Renewable Energy Group, above.)  Because Ameresco does much of its business with the federal government, the stock would likely suffer under a Trump administration.

Final Thoughts

The possibility of a Trump victory on Tuesday has many clean energy investors running for the hills.  This creates buying opportunities among stocks that are relatively immune to decisions in the White House, such as Pattern, Renewable Energy Group, and Hannon Armstrong, both of which should advance no matter who is in the White House.  Ameresco is my top pick to benefit from a Clinton victory.

Disclosure: Long HASI, AMRC, MIXT,,  RNW/TRSWF, PEGI, EVA, GPP, NYLD/A, REGI, GLBL, TERP, GPRE

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.

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