« November 2012 | Main | January 2013 »

December 31, 2012

Ten Clean Energy Stocks for 2013

Tom Konrad CFA

Every year since 2008, I've published a list of ten (or eleven in 2012) clean energy stocks I expect to do well over the coming year.  The list is intended as a model portfolio which could be used by a small investor looking to avoid the relatively high costs of clean energy mutual funds, most of which have expense ratios around 2%, in addition to the trading costs they incur with fairly high turnover ratios. 

My list also reflects my belief that the best returns and least risk in clean energy stocks are to be found in relatively boring companies involved in using energy and resources more efficiently, rather than from the sexier but less cost effective renewable technologies such as solar manufacturing.  Rapid price declines have served to make solar an attractive investment in many places given current subsidies, but the industry remains vulnerable to subsidy cuts.

This belief has served me and readers well.  An equally weighted portfolio of my ten stock picks has beaten the clean energy ETF I've used as a benchmark for each of the last four years, often by a substantial margin (see chart.)  The benchmark has changed from year to year, but, following industry best practice, I've chosen the benchmark at the start of the year so readers know I am not retroactively inflating my relative results by choosing a poorly performing benchmark in any given year.  In 2013, I will be sticking with the same benchmark I've been using for the last three years, the Powershares Wilderhill Clean Energy ETF (PBW), which is the most widely held and liquid clean energy ETF and hence likely to be the best indication of the results of the average clean energy investor.  Since I tend to favor small and micro-cap companies, I also use the small cap focused iShares Russell 2000 Index ETF (IWM) to track my portfolio's performance against the broad market.

track record 08-12.png
The data used to compile this chart can be found in my annual review articles from 2008, 2009, 2010, and 2011.  I plan to publish a 2012 year in review article on January 1st or 2nd.

Last year, I said I was finally seeing great values among the available clean energy stocks.  Those values translated into a positive return in 2012, despite the significant decline of clean energy stocks in general.  While I had been hoping for a repeat of 2009's stellar performance, I am presented this year with yet another opportunity to pick stocks from an even broader selection of deeply discounted value and dividend paying clean energy stocks.

Without further ado, here is my list of 10 clean energy stocks for 2013, along with their price as of the close on December 28th:

Energy Efficiency

Last Used
Waterfurnace Renewable Energy (TSX: WFI / OTC: WFIFF) $14.29
Lime Energy (NASD:LIME) $0.56

PFB Corporation (TSX:PFB / OTC:PFBOF)


Efficient and Alternative Transportation

Last Used
Maxwell Technologies (NASD:MXWL) $8.18
Accell Group (Amsterdam:ACCEL) $17.59
Zoltek Companies, Inc. (NASD:ZOLT) $7.52
Kandi Technologies (NASD:KNDI) $3.90

Renewable Energy Developers

Last Used
Finavera Wind Energy (TSX-V:FVR, OTC:FNVRF) $0.225
Alterra Power (TSX:AXY / OTC:MGMXF) $0.396
Environmental Services
Last Used
Waste Management (NYSE:WM)

Last Used
Powershares Wilderhill Clean Energy (PBW) $4.03
iShares Russell 2000 Index (IWM)

For those of you wondering why Tesla (NASD:TSLA), Solazyme (NASD:SZYM), Solar City (NASD:SCTY) and other household names are missing from my list, this reflects my belief that the best values are to be found among stocks that few people have ever heard of.  These stocks have significant potential to gain as a broader pool of investors become familiar enough with them to invest.  With a stock like Tesla, there is a much smaller pool of new investors.

Widely known stocks are also followed by more analysts and professional investors, meaning that it requires much more time and effort to learn something about a stock that other investors are not already familiar with.  Given limited time, I choose to focus my research time where it's liable to be most effective at unearthing the new information that might give me an investing edge.

I chose to focus on the Energy Efficiency and Efficient/Alternative Transportation sectors because these are the most cost-effective alternative energy opportunities, as well as the least reliant on government subsidies.  My third sector of focus is renewable energy developers.  These stocks are currently deeply out of favor, and have reached such low valuations that mainstream companies and utilities are beginning to see them as very attractive investment opportunities based solely on the reliable cash flows they receive from sales of clean energy.  As Finavera Wind Energy's CEO, Jason Bak recently told me in an interview, small renewable energy developers are so out of favor that he would prefer to take the company private, if funding were available.

Individual Companies

Waterfurnace Renewable Energy (TSX: WFI / OTC: WFIFF)
Waterfurnace has appeared in my annual picks several times over the years because they are a pure-play leader in geothermal heat pumps, which the US EPA calls "the most efficient way to heat and cool a building."  Heat pumps have a high up-front cost, and so they benefit from low interest rates and a high price of heating alternatives, such as natural gas.  Recent low natural gas prices have been hurting Waterfurnace's business, which has recently driven the stock price down and brought the dividend yield up to a very attractive 6.74%.

Lime Energy (NASD:LIME)
Lime Energy's core business is running energy efficiency programs for small utilities, a business which is expanding rapidly.  The stock is currently trading at rock-bottom prices because the company has been conducting an internal review of its past revenue recognition policies since July 2012.  The review has recently been expanded to include possible improper revenue recognition all the way back to 2008 and up to and including the first quarter of 2012, and may include up to $15 million in fictitious revenue in the more recent years. 

Lime has not published a quarterly financial report since the first quarter, and says all its financial statements as far back as 2008 are not to be relied on, so investors abandoned the company in droves in 2012. While I have my own doubts about how the review has been handled, I think the worst case scenario has more than been priced in.  Since Lime expects to report the results of the review in the first quarter of 2013, I estimate that investors who get in today are likely to see price appreciation of 50% or more when that happens. 

While Lime has large upside potential at the current price, many investors may feel this stock is inappropriate for their portfolios given the large cloud of uncertainty surrounding the company.  For that reason, I will be publishing a follow-up article in the next couple of days discussing six alternative picks which I nearly included in this list from which you can pick alternatives.
UPDATE: That article is now available here.

PFB Corporation (TSX:PFB / OTC:PFBOF)
PFB is a leading North American manufacturer of expanded polystyrene (EPS, aka "Styrofoam") building products such as insulated concrete forms and structural insulated panels.  The stock trades infrequently, and did not trade at all on December 28th, so I will be using the midpoint of the bid and ask for the purpose of measuring its return over the coming year.  At $5.53, PFB pays a 5.75% annual yield.

The stock price has fallen significantly after the planned purchase of NOVA Chemicals' Performance Styrenics business as a move towards vertical integration with the acquisition of the EPS manufacturer.  This deal fell though, and many investors sold the stock, driving it down from the mid $7 range to the mid $5 range where it is today.   Already a good value, PFB stands to gain from continued recovery in the housing market or any increase in investor recognition.  However, since the stock is so illiquid, larger investors will probably want to substitute one of my upcoming alternative picks for PFB, while small investors should limit themselves to good-til-cancelled limit orders to avoid paying over the odds for their shares.

Maxwell Technologies (NASD:MXWL)
Maxwell Technologies is a leading manufacturer of electrodes for ultracapacitors.  Ultracapacitors are electricity storage devices which excel in applications requiring high power but low energy and extremely long life.  In layman's terms, they pack a big punch, but have little staying power.  They pair well with batteries, which are best in low power, high energy applications.

Ultracapacitors are used in a wide variety of electronics and electricity transmission and distribution applications, as well as in wind turbines and heavy-duty hybrid vehicles, such as buses. They expect to have a large and growing market in "stop-start" hybrid cars.  Stop-start technology is one of the most cost effective measures for improving automotive fuel economy, and auto manufacturers are scrambling to meet increasingly stringent fuel economy standards in both the US and Europe. 

The main reason for Maxwell's current low price has been the lack of a design win with a major manufacturer for start-stop technology using Maxwell's ultracapacitors.  Many investors were anticipating such a win in 2012, and the lack of one so far and slower revenue growth overall led to extreme investor disappointment, driving the stock from over $21 at the start of the year to the low $8 range where it has been recently trading.  Maxwell insiders, including the CEO, David Schramm, have been demonstrating their faith in the company's prospects since the stock fell to $10 with large stock purchases.  They have acquired 128,400 shares since then.

Accell Group (Amsterdam:ACCEL)
Accell is a leading bicycle manufacturer and a leader in electric bikes based in the Netherlands with worldwide sales mostly in Europe but expanding rapidly in the United States and Asia.  The company's strategy is to leverage its strong distribution network by acquiring strong brands in a highly fragmented industry.  In 2012, they acquired Raleigh, which was a slightly larger than usual acquisition.  Integrating Raleigh took longer than management expected, and depressed third quarter earnings and the company's current share price.  The company has a variable annual dividend, but based on the last payment of 0.782 euros, it's currently trading at a 5.9% annual yield.  Stock appreciation in 2013 could be driven by the start of synergies from the Raleigh acquisition, increased adoption of electric bikes in the US, or easing of uncertainty in Europe.

Because smaller investors may find Accell difficult to buy through their broker's foreign trading desk, they may want to substitute one of my upcoming alternative picks.

Zoltek Companies (NASD:ZOLT)
Zoltek is a leading manufacturer of carbon fiber, which are used for a wide variety of applications requiring high strength to weight ratios.  Consumers may be familiar with carbon fiber tennis rackets and racing bicycles, but carbon fiber is also used to manufacture wind turbine blades (Zolek's largest source of revenue) and to replace heavier steel and aluminum in transportation applications such as Boeing's Dreamliner 787, performance cars and electric vehicles.  I think it's likely that automakers pursuit of fuel efficiency standards will lead to more carbon fiber being used in more mass market vehicles to reduce weight and lead to improved fuel economy without sacrificing safety.

The company never recovered from its fall in 2008-9, but company insiders, including its CEO have been buying ZOLT shares since it fell to the $10 range last year, and the company's fundamentals have been improving even as the stock traded basically flat for the last 3 years.  Having lost money in 2010 and 2011, Zoltek made a profit of $0.66 per share on record sales in its Fiscal 2012, which ended on September 30th.  Analysts expect $0.52 per share earnings in 2013, for a forward P/E of 14.  The company has a strong balance sheet with no net debt and several unused lines of credit at favorable interest rates, and the company has several opportunities to achieve high growth as carbon fiber usage expands in its existing markets and breaks into new markets.

One misgiving I've long had about Zoltek is the centralization of power in the hands of its Founder, Chairman, President, and CEO Zsolt Rumy. This concern is ameliorated by his recent stock purchases.  These, along with the historically low valuation, led me to add Zoltek to my annual clean energy stock list for the first time.

Kandi Technologies (NASD:KNDI)
Kandi is a manufacturer of ATVs which is creating a new class of mini electric vehicles (EV) for congested Chinese cities.  Kandi's mini-EVs are well suited for rental and leasing programs where the ownership of the the batteries is often separate from the vehicles, which are designed for quick battery swapping.  One early agreement has Kandi selling its EVs without the batteries to China's State Grid utility, which owns the batteries and uses them for grid stabilization when they are not in EVs in use by commuters.

As a Chinese stock which achieved a US listing through a reverse merger, Kandi has been the target of a number of short sellers and articles claiming to expose shadowy self-dealing among industry insiders which has kept the stock at its low current valuation.  However, unlike many of Kandi's Chinese peers, its detractors have yet to uncover the sort of shoddy accounting we saw at such disasters as SinoForest, but not for want of trying.

In 2011, Kandi earned $0.30 a share based almost entirely on its legacy off-road vehicle business.  The company's fans have estimated that just Kandi's existing EV deals could generate $4.42 in annual earnings in their first year of ramp-up, which could be as soon as 2014 or '15.  I'm not comfortable projecting that far into the future, but I think that $0.60 to $1.20 of earnings in 2013 is quite likely, and would leave the current stock price of $3.90 looking quite cheap at only four to six times earnings in a rapidly growing company.

Finavera Wind Energy (TSX-V:FVR, OTC:FNVRF)
Finavera is a hold-over from 2012 which I had until a week ago expected to drop from this year's list.  That's because the company had put itself up for sale for a lack of another way to refinance a past-due note from General Electric (NYSE:GE).  I expected a sale to be completed early in 2013, which would have meant that followers of my portfolio would have to redeploy funds early in the year. 

On December 23rd, Finavera announced a deal to obtain financing from and sell its projects for C$40 to Pattern Renewable Energy Holdings.  Investor disappointment at it not being a sale caused the stock to plunge in the thinly traded holiday market to what I anticipate will be a very short-lived buying opportunity in the 20-30 cent range.  I just posted a valuation of Finavera stock in light of the Pattern deal here.

Alterra Power (TSX:AXY / OTC:MGMXF)
Alterra is another hold-over from 2012, which I also expected to remove from the list until the stock unexpectedly declined over the last few weeks.  Alterra owns a portfolio of run-of-river hydroelectric and Wind projects in Western Canada, as well as geothermal projects in the Western US, Iceland, and Chile.  With its diverse and growing portfolio of operating renewable energy projects, Alterra is one of the most stable of the small renewable energy developers, but not yet so big that its assets are fully valued. 

A recent agreement with Philippine utility EDC could easily lead to significant price appreciation if the companies jointly develop Alterra's projects in Peru and Chile as envisioned in the agreement.

Waste Management (NYSE:WM)
The only household name in this year's list, Waste Management is coming back for an encore performance in 2013.  WM is the North American leader in recycling and renewable biogas among waste and environmental services companies.  The industry has been in a cyclical downturn, and WM's well-covered 4.2% dividend makes it a solid anchor for this portfolio of small and micro-cap clean energy stocks.


I'm very optimistic about the prospects for these 10 stocks this year.  Two of them (Finavera and Lime) are trading at significantly depressed prices by what I expect are temporary situations; I would be surprised if both are not up 50% by the end of the first quarter.  The other eight seem to be temporarily out of favor, driven not so much by company specific events but by the general economic weakness leading them to disappoint previously inflated shareholder expectations.  Yet the revised outlook for these stocks is more than enough to justify their current prices, and good news or a more realistic appraisal of their prospects could drive significant prices rises as well.  

Even if the world economy worsens or these stocks remain out of favor, Waterfurnace, PFB, Accell, and Waste Management all have high yields (averaging 5.65%) which should provide return and protection against large price declines even if the market tanks.  All except Lime, Finavera, and Alterra have profitable operations which should protect them even if the world economy worsens.

That said, the goal of this portfolio is to produce a return that is significantly better than my chosen clean energy benchmark, PBW.  If clean energy has another horrible year like 2008 or 2011, we're liable to see a negative return from this portfolio as well.  On the other hand, PBW has recently reversed it former trend, and significantly outperformed the broad market in December.  Clean energy stock prices are currently so depressed that I would not be surprised if clean energy stocks gain in 2013 even if the broader stock market falls.

See also: Six More Clean Energy Stocks for 2013


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.

Solar Bits: LDK Woes, Hanwha Loan

Doug Young

A couple of news bits from the solar sector are showing at once how companies continue to struggle with fallout from the ongoing downturn even as some larger players continue to receive lifelines from Beijing. In the former category, floundering giant LDK (NYSE: LDK) has just announced an arbitration panel's ruling that it must pay hundreds of millions of yuan for equipment that it ordered at the height of the solar boom but which it no longer wants or needs. Meantime in the latter category, mid-sized player Hanwha SolarOne (Nasdaq: HSOL) has just received a major new credit line from a Beijing bank, becoming the latest to get state funding to continue its operations pending the roll-out of a larger industry overhaul plan.

Let's start out with LDK, which is in the slow and painful process of being taken over by the state as it struggles under billions of dollars in debt that it has no way to repay. The company has just announced that a Chinese trade arbitration panel ruled it must honor a contract it signed with a company called JYT Corp to buy equipment worth nearly 300 million yuan, or about $50 million, for making polysilicon, the main ingredient in solar cells. (company announcement)

LDK signed the deal in 2008 when polysilicon prices were soaring and it anticipated demand would continue to rise sharply as Chinese and other global manufacturers ramped up their production of solar panels. Of course anyone who follows the industry will know that soaring production led to a huge supply glut that caused prices to collapse starting early last year, leaving companies like LDK with commitments like this new equipment contract that they no longer needed.

Former industry leader Suntech (NYSE: STP) found itself in a similar situation when it became locked into a long-term agreement to buy polysilicon from MEMC Electronic Materials (NYSE:WFR) at prices that were extremely expensive after the market collapsed. (previous post) Suntech later negotiated an early end to the agreement, but undoubtedly paid tens of millions of dollars in penalties for the termination.

This latest $30 million penalty for LDK wouldn't normally be a huge liability for a healthy company in a healthy industry. But of course LDK is anything but healthy, and this sudden $30 million liability is the last thing the company needs as it tries to renegotiate its huge debt.

From here, let's move on to Hanwha, which has announced its receipt of a $475 million credit line from state-run Bank of Beijing to help it continue funding its operations. (English article) Ironically, the size of the loan is more than 5 times Hanwha's current market value, which has plummeted along with everyone else in the sector during the current crisis. But investors are clearly no longer looking at market values or even companies' long-term prospects, and instead are waiting to see what kind of bigger bail-out package will ultimately come from Beijing and whether their shares will be worth anything after the much-need retrenchment occurs.

We saw clear signs last week that Beijing is prepared to let smaller companies fail as it tries to clear out excess capacity at less efficient firms. (previous post) Perhaps investors sense this latest loan to Hanwha hints the company will ultimately be one of the survivors after the coming clean-up, since Hanwha shares rose 7 percent after the company announced the loan. But if I were a stock buyer, I wouldn't bet on receive much if any money for my shares when the bailout finally comes. More likely, most or all of these Chinese companies will be forced to reorganize under bankruptcy protection, wiping out all of their share value as part of the rescue plan coordinated by Beijing.

Bottom line: LDK's newest liability and Hanwha's new funding to continue operations both reflect lingering fallout in the struggling solar panel sector as it awaits a broader, Beijing-led bailout.

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

December 30, 2012

Three Money Managers See LED Industry Shining in 2013; Their Stock Picks

Tom Konrad

Xmas LEDs.jpgLED lights on an outdoor tree. Photo by author
This is the third article in my series based on my panel of green money managers’ predictions for 2013.  The first article looked at what they expect 2013 holds for the Solar industry, and the second looked at their predictions  for the Smart Grid.  This installment focuses on the LED industry.

Jeff Cianci: Faster than Anyone Expects

Jeff Cianci is Chief Investment Officer at equity investment fund Green Science Partners.

Cianci says “The trend toward LED lighting for energy efficiency will move more quickly this year than anyone expects, driven by cost declines, regulatory incentives and rapidly increasing consumer awareness.”   He thinks the place to be is Organic LEDs (OLEDs), and thinks OLED research and intellectual property license shop Universal Display Corp. (NASD:PANL) “Could double from here.  The launch of OLED TVs will complement rapid growth in smartphone and tablet screens.  PANL is a high margin royalty play on all of this surface ‘real estate’.  Everyone will want an OLED screen as the costs come down.”

Rafael Coven: Building Momentum

Rafael Coven is Managing Director at the Cleantech Group, and manager of the Cleantech index (^CTIUS) which underlies the Powershares Cleantech ETF (NYSE:PZD.)

Coven expects “Stronger momentum into LED Lighting especially as the economics improve enough that it can start really challenging replacing T8, T5, and other fluorescent lighting applications.   This should help LED manufacturers such as Cree (NASD:CREE), Philips (NYSE:PHG), and component makers such as Advanced Energy Industries (NASD:AEIS) and Rubicon (NASD:RBCN) but really punish the old line lighting companies that haven’t kept up in the space such as Siemens (NYSE:SI) and General Electric (NYSE:GE), among others.”

Jan Schalkwijk: A Cyclical Bottom

Jan Schalkwijk, CFA is a portfolio manager with a focus on Green Economy investment strategies at JPS Global Investments in Portland, OR.

Schalkwijk thinks the adoption of LED lighting has yet to take off, but he sees its acceleration will help Veeco Instruments (NASD:VECO.)  Veeco makes LED manufacturing equipment tools, and he thinks it is currently cheap because “A pending reassessment of revenue timing has delayed its quarterly filing, and orders last quarter came in low. The latter I believe is more a cyclical bottoming out than an indication of poor future orders.”

He adds a note of caution, saying Veeco is volatile and “Wall Street does not always know what to make of it.”

Bottom Line

The future of LEDs is bright, and these three experts think 2013 could be the year when they really take off.  I tend to be cautious when there seems to be an investment concensus for a sector, because it means that the stocks are unlikely to be cheap.  That’s certainly true for Cianci’s pick PANL, which trades for 32 times expected 2013 earnings.  Analysts’ prediction of 25% expected growth over the next five years isn’t enough to justify that valuation.

Even while Schalkwijk’s Veeco is trading 22% off its 2012 high because of the uncertainty surrounding the stock, it’s still priced at 22 times expected 2013 earnings.  That might seem a relative bargain compared to PANL, but not if you believe analysts’ predictions that the company will shrink an average of 4.6% for each of the next five years.

To own either of these stocks, you need to believe that Cianci is right and LEDs will light up “faster than anyone expects.”  For “anyone” read “most other investors,”  and hope that the investor who sells the stock to you is one of the most surprised.

Disclosure: I have no position in any of the stocks mentioned.  Green Science Partners owns PANL and Schalkwijk and his clients own VECO.

This article was first published on the author's Forbes.com blog, Green Stocks on December 19th.

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 29, 2012

Amyris hits the comeback trail

Jim Lane

Amyris[1].jpgBiofene production starts up in Paraiso, Brazil – sales expected to commence in Q1 2013 – Total, Temasek, Biolding inject fresh capital.

What’s next for biofuels’ “Comeback Kid”?

By now, most of the “smart set” that found itself excited about Amyris (AMRS), and about advanced synthetic biofuels during the IPO fever, have moved on.

They read Dan Grushkin’s “The Rise And Fall Of The Company That Was Going To Have Us All Using Biofuels” in Fast Company, wrote off Amyris and possibly the entire sector, and presumably migrated their enthusiasm to low-cost natural gas, battery technology, or tablet computers.

But Amyris is still there, and this week achieved what, for many, was the last-chance, must-hit milestone. The company’s purpose-built, 50 million liter industrial fermentation facility in Paraiso, Brazil has successfully begun production of Biofene, Amyris’s brand of renewable farnesene.

“Our own farnesene plant at Paraiso has been successfully commissioned, with initial farnesene production underway. We anticipate sales from this facility during the first quarter of 2013,” Melo concluded.”

So what exactly is farnesene, again? It’s a fragrant oil chemical – that distinctive acrid odor you detect in a Granny Smith Apple, that’s it. You also find traces of it in the hops used for some very nice Czech pilasters and Irish lager beers. It’s used as a component in its own right by manufacturers around the world.

Amyris’ storied IPO and post-IPO peril

The Amyris strategy — commercialize farnesene for the chemical markets, then turn to farnesane, which you produce by adding hydrogen. Farnesane is the company’s showcase diesel molecule, and forms the basis of its breakout from a speciality pharma and chemicals maker to a fuel player, though that business will ultimately be run by Total.

In its 2010 IPO, there were partnerships announced with Bunge (BG) and Cosan (CZZ) for lubricants, Soliance for renewable cosmetics, M&G for PET production (the key ingredient in clear plastic bottles) and a series of deals with Procter & Gamble to incorporate farnesene in specialty chemical applications within P&G’s products.

Then came the expected ramp-up to 6-9 million liters of production for 2011 – and then the story changed when the company’s scale up timetable imploded and it was forced in early 2012 to pull its guidance on future production.

Back in 2010, in “Amyris: Farnesene and the pursuit of value, valuations, validation and vroom,” Biofuels Digest warned, “There are concerns about how robust the engineered yeast will prove in an industrial-scale setting. Concerns generally raised by those familiar with Amyris’s technical challenges.”

We noted that “a flurry of JVs and partnerships focused both on the chemicals and fuels markets, demonstrates that Amyris is fully embarked on an integrated strategy of flexible product lines, an impressive array of partnerships and contract manufacturing arrangements to keep the company on its “capital light” path.” But we flagged the “Major open question? Performance of the magic bug at industrial scale.”

Following the failure to achieve its stated production goals, post-IPO, the stock was crushed — from a high of $33 to a low point of $1.45 – recovering in recent months to yesterday’s close of $2.64. The company restructured management, and put all its chips on getting its 50 million liter Paraiso plant up and running.

Fresh Capital Raised

Meanwhile, its key investors — notably, French oil giant Total — hung tough, and stayed with the vision. This week, with Biolding, Total and Temasek pumping in another $42.5 million, in acquiring another 14.2 million shares, or an additional 19 percent of the company’s equity.

Singapore’s sovereign wealth investment fund, Temasek, was the largest investor in the round, adding $15 million to their investment total, putting them behind only Total on the shareholder tote board.

The deal didn’t come cheap for Amyris — by contrast, it sold 17 percent of the equity, just before the IPO, to Total for $133 million.

“Cash proceeds were $37.25 million, plus Total converted $5 million from an outstanding convertible note,” said Raymond James equity analyst Pavel Molchanov in a note to investors yesterday. “The “implied” equity sales price is $2.98, a small premium to yesterday’s closing price, though there is no getting around the fact that this is still a substantially dilutive deal.”

“A private placement with existing investors should help fund operations,” wrote Cowen & Company’s Rob Stone and James Medvedeff, “but we already model $20MM/year in funded R&D as well as $146MM additional debt to fund losses and Sao Martinho capex in 2013-15.”

But it’s a capital lifeline and as CEO John Melo noted, “We are encouraged by the continued, strong commitment from our major investors, particularly as we start up our new industrial fermentation facility for the production of our renewable hydrocarbons in Brazil.”

The new scale-up timeline

Amyris these days doesn’t offer forward production guidance although they noted that farnesene sales from Pariso were expected in Q1 2013. “We expect the plant to ramp throughout 2013 and achieve full utilization by 1Q14,” said Molchanov.

Stone and Medvedeff added, “Ramp risk remains and we model losses through 2015. [We] lifted 2014-15E shipments about 8% and 11%, but we trimmed 2013E 19% as we see a slow ramp. We estimate feedstock and operating cost may be 15-20% higher, but AMRS should still benefit from additional sales and spreading of fixed costs, particularly as initial volume is targeted at higher value end products.”

READ MORE: Captive company for Total?

The bottom line

The capital raise is dilutive, and the opening of Paraiso was expected — accordingly, AMRS shares dropped yesterday on NASDAQ following the announcement.

But it’s a remarkable production milestone for the company — substantially de-risking the venture as a whole and offering hope to Amyris’ investors and backers that the company is getting back to playing offense and putting points on the board after a lengthy period in which the doubters reigned.

Next steps: producing at capacity at Pariso and — the big challenge moving forward— moving down the cost curve so that the company continues its journey towards the long-desired markets in fuels and larger volume lubricants and chemicals.

Disclosure: None.
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.

December 28, 2012

The Smart Grid in 2013: Three Green Money Managers Square Off on EnerNOC

Tom Konrad

What will the New Year hold for Clean Energy?  

For the people who manage clean energy portfolios, mutual funds, and indexes the question is more than idle curiosity.  Getting the answer right means finding the stocks which will put a shine on your solar portfolio’s returns.  Getting it wrong means the competition will blow away your wind stocks.

I asked my network of green money managers for their predictions.  This is the second in a series on their predictions and stock picks from my panel.  This first article focused on what they had to say about trends in the solar sector, this article will take a look at their predictions for the Smart Grid.

Image representing EnerNoc as depicted in Crun...

Sam Healy: Regulatory Certainty Boosts EnerNOC

Sam Healy is a portfolio manager at Lamassu Capital.   Healy’s top trend for 2013 is the maturation of the Demand Response (DR) industry, and its implications for DR leader EnerNOC (NASD:ENOC).  He says,

At this point, most of the [DR] rules and reg[ulations] are set, with the exception of the pending EPA decision regarding diesel generator use as back up power for DR which is due the 14th but may be pushed back.  Assuming this issue gets settled ENOC will finally have a clean regulatory situation, pricing as a tail wind, and visibility into a nice 2013 and 2014.  If this plays out the company could really start to generate FCF [free cash flow] and EPS [earnings per share] and I suspect the investor worries will decrease.

Healy and Lamassu Capital own shares of  EnerNOC.

 Garvin Jabusch: Increased Spending on Smart Grid 

Garvin Jabusch is cofounder and chief investment officer of Green Alpha ® Advisors, and is co-manager of the Green Alpha ® Next Economy Index, or GANEX and the Sierra Club Green Alpha PortfolioHe also authors the blog ”Green Alpha’s Next Economy.”

Healy gets some support from Jabusch, who thinks “infrastructure upgrades to accommodate a renewables-friendly distributed smart grid (especially where networks have been damaged (such as in the wake of superstorm Sandy)” will have a significant impact on clean energy stocks in 2013.   Demand response is probably the cheapest way to increase grid stability, and back-up generatiors many firms install in response to Sandy-style blackouts can also be used to provide DR, with firms like EnerNOC acting as middlemen between the owners of back-up units and the utility.

Rafael Coven: EnerNOC and Smart Meters Under Pressure

Rafael Coven is Managing Director at the Cleantech Group, and manager of the Cleantech index (^CTIUS) which underlies the Powershares Cleantech ETF (NYSE:PZD.)
While Coven thinks the market will have a “Greater focus on generating cash flow and the ability to be profitable without… government largess,” he’s skeptical of EnerNOC’s ability to make the grade.  He expects a

Stronger entry of major utilities and industrial companies into the Demand Response/Demand Management space.  This will put increasing pressure on the likes of EnerNOC and could either severely hurt ENOC or push it to be acquired by an Electric Utility or services company.

He asks, “If a stand alone company’s product [like EnerNOC's Demand Response] is really that good, then one should ask why hasn’t one of the big boys licensed the technology or bought the company?”  He predicts

Continued aggressive acquisitions by conglomerates such as ABB Group (NYSE:ABB), Siemens (NYSE:SI), Schneider Electric (Paris:SU, OTC:SBGSF), General Electric (NYSE:GE), Eaton (NYSE:ETN), Johnson Controls (NYSE:JCI), Honeywell (NYSE:HON), and Emerson (NYSE:EMR) of energy controls, sensor, software, and services companies. … These are the companies than can really leverage the technologies and scale them into global businesses.  As such truly innovative companies in smart energy space are perfect candidates for acquisition.

Demand Response is not the only Smart Grid business Coven sees coming under pressure.  He also expects “ Increasing commoditization of smart meter business.   The buyers buy in bulk, and bid on price.  If the products aren’t truly innovative to the degree that they can charge higher prices, I suspect that pricing will get worse.”

Coven does see one bright spot: Grid security, where expects increasing spending.

Bottom Line

While Healy and Jabusch see tail winds for the smart grid and demand response industries, Coven may be right that increased revenues may not lead to greater profitability.   The last few years of booming solar installations and crashing solar stock prices should serve as an object lesson in that regard.

On the other hand, if Coven’s prediction of aggressive acquisitions by conglomerates bears fruit, EnerNOC’s shareholders may benefit if more or more of these well capitalized companies decides they want EnerNOC’s technology or customers.

Disclosure: I own ABB and JCI.  I have no positions in the other stocks mentioned.  Sam Healy owns ENOC.

This article was first published on the author's Forbes.com blog, Green Stocks on December 17th.

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 27, 2012

What Does 2013 Hold for Solar? Predictions From Four Green Money Managers

Tom Konrad

What will the New Year hold for Clean Energy?  

For the people who manage clean energy portfolios, mutual funds, and indexes the question is more than idle curiosity.  Getting the answer right means finding the stocks which will put a shine on your solar portfolio’s returns.  Getting it wrong means the competition will blow away your wind stocks.

I asked my network of green money managers what they thought, and they gave me a lot more than I expected.  This is the start of a series on the predictions and stock picks from my panel.  This first article focuses on what they had to say about trends in the solar sector.

Shawn Kravetz: Solar Reversal

Shawn Kravetz is President of Esplanade Capital LLC, a Boston based investment management company one of whose funds is focused on solar and companies impacted by the emergence of solar.

Unlike most of my panel, Kravetz is a solar specialist, so I’m giving him first billing in this article.  His prediction is also somewhat surprising in that it is not “more of the same.”  He says,

After four years of rapid growth, global solar installations will have their first roughly flat year since 2009, but paradoxically the broad solar indices will have their first profitable year after nearly four years of Olympic-sized losses.

Garvin Jabusch: Consolidation, New Models

Garvin Jabusch is cofounder and chief investment officer of Green Alpha ® Advisors, and is co-manager of the Green Alpha ® Next Economy Index, or GANEX and the Sierra Club Green Alpha Portfolio. He also authors the blog ”Green Alpha’s Next Economy.”

Jabusch expects to see continued consolidation in the solar manufacturing industry, particularly in China, and the emergence of new ways to monetize electric utility revenues from large scale solar plants.  In terms of new ways to monetize solar, one came across my desk last week, in a PR from Solar Mosaic, a company that is bringing crowd-funding large scale solar projects.

Rafael Coven: Terrible Economics, Dropping Subsidies

Rafael Coven is Managing Director at the Cleantech Group, and manager of the Cleantech index (^CTIUS) which underlies the Powershares Cleantech ETF (NYSE:PZD.)

Coven also expects “Consolidation in the wind turbine and solar PV [photovoltaic] business; there are too many players and the economics are terrible.  It reminds me of the steel industry.  Products are differentiated enough to earn price premiums, or governments play favorites with local suppliers.”

He also expects reduced subsidies for residential solar PV, especially in northern states, a trend he refers to as “a return to sanity.”

Rob Wilder: Three Potential Calalysts

Dr. Rob Wilder is Index Committee Chair for WilderHill Clean Energy Index (ECO), the first to capture and track this sector.   ECO underlies the PowerShares WilderHill Clean Energy ETF (NYSE:PBW.)

Dr. Wilder prefers not to make outright predictions, but he shared three possible trends he expects would have large impacts on the solar industry, if they emerge.   He notes “Solar hardware costs too have seen a great fall from poly to panels. But what resisted coming down are the ‘softer’ costs of solar like the permitting, balance of system in installation: we pay far more than Germany to install solar. ”  Bringing down these other costs would have a large impact on the solar industry.

He also thinks that quickening industry consolidation or increased “ subsidies in places like China and India” which could lead to “gigawatts more solar in just the next couple years.”

Bottom Line

If Kravetz is right, and 2013 will not see any growth in solar installations, this will put pressure on an industry already struggling with “too many players” and terrible economics, as Coven puts it.  Coven’s prediction of reduced subsidies also worsens the economics.  All of this could hasten the industry consolidation expected by all these experts.

Even in such a harsh climate, the current rock-bottom solar stock prices could allow solar indexes and ETFs to rally, as  companies are bought for pennies on the dollar.  Investors re-deploying the cash from buyouts into other solar stocks would only accelerate such a rally.  If last week’s extra $1.1 billion of Chinese solar subsidies is the beginning of a trend, the “return to sanity” that Coven expects in the reduction of US subsidies could be more than offset by increased “insanity” in the East.

US solar investors would do well to look beyond what is happening at home.

The solar market is a global one, and the sun rises in the East.

Disclosure: No position in the stocks or ETFs mentioned.

This article was first published on the author's Forbes.com blog, Green Stocks on December 17th.

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 24, 2012

Renewable Energy REITs or MLPs Would Unlock Billions

Jennifer Runyon

According to Richard Kauffman, Senior Advisor to the Secretary, DOE, making REITs or MLPs available for renewable energy project financing is the key to advancing the industry.
Top engineering, procurement and construction firms gathered to network, learn and do business with corporate-level project developers at the PGI Financial Forum, one of four co-located events that took place in Orlando, Fla. earlier this month. Richard Kauffman, Senior Advisor to the Secretary of the U.S. Department of Energy, gave the keynote address during a luncheon that took place during the conference.
Jennifer Runyon is managing editor of RenewableEnergyWorld.com and Renewable Energy World North America magazine. She also serves as conference chair of Solar Power-Gen Conference and Exhibition and Renewable Energy World North America Conference and Expo.

This article was originally published on RenewableEnergyWorld.com, and is republished with permission. 

December 22, 2012

How The Micro-hybrid Revolution Will Radically Change The Battery Market

John Petersen

In late October I gave a keynote presentation at Batteries 2012, one of the largest lithium-ion battery conferences in the world. During the conference, I was buttonholed for a couple hours by the chairman's global strategy team for one of the top three lithium-ion battery manufacturers in the world. They started by explaining that their Global 100 company is abandoning the plug-in vehicle market to focus on sensible applications where it can earn a reasonable margin. Then they started drilling down with a series of detailed and probing questions about whether any of the principal lead-acid battery markets might be an attractive opportunity for a company with their size, scale and stature.

While it may strike some of my readers as heresy, I told them that the lead-acid battery sector's biggest vulnerability was in the rapidly evolving micro-hybrid market where industry leaders Johnson Controls (JCI) and Exide Technologies (XIDE) were focusing on the battery products they wanted to sell instead of the battery solutions their customers needed. After all, if legacy industry leaders won't respond to changing customer needs, then it's high time for new leaders that will respond.

The micro-hybrid revolution

Micro-hybrids are the most sensible automotive fuel efficiency technology imaginable. The primary goal of all micro-hybrids is simple: turn the engine off when it's not powering the wheels. Last February, in a report titled “Every Last Drop: Micro‐ And Mild Hybrids Drive a Huge Market for Fuel‐Efficient Vehicles,” Lux Research segregated micro-hybrids into three broad classes:
  • Light Micro-Hybrids, which reduce fuel consumption by about 5%, are typically compact and sub-compact cars that offer limited stop-start functionality and don't have regenerative braking.
  • Medium Micro-Hybrids, which reduce fuel consumption by about 10%, are sub-compact through full-size cars that offer greater stop-start functionality and may offer limited regenerative braking.
  • Heavy Micro-Hybrids, which reduce fuel consumption by up to 15%, are usually mid- and full-size cars that offer the highest level of stop-start functionality, take full advantage of regenerative braking and offer a variety of advanced fuel economy innovations like high speed coasting.
While micro-hybrids are a new idea to most Americans, over half of new cars sold in Europe already use the technology and the U.S. is certain to follow suit over the next few years as automakers scramble to meet these short-term corporate average fuel economy standards.

Passenger Light Combined
Model Year Cars

(mpg) (mpg) (mpg)
2012 33.3 25.4 29.7
2013 34.2 26.0 30.5
2014 34.9 26.6 31.3
2015 36.2 27.5 32.6
2016 37.8 28.8 34.1

This graph from Lux shows how the global micro-hybrid market is expected to evolve over the next five years and grow from about five million units in 2011 to almost forty million units a year by 2017.

12.21.12 Lux Graph.png

On a regional basis, Lux forecasts that:
  • The European micro-hybrid market will grow from over 4 million units in 2011 to 12.6 million units by 2017.
  • The North American micro-hybrid market will grow from a standstill in 2011 to over 8 million units by 2017.
  • The Japanese micro-hybrid market will grow from about 400,000 units in 2011 to over 6 million units by 2017.
  • The Chinese micro-hybrid market will grow from under 300,000 units in 2011 to 8.9 million units by 2017.
It will be the fastest technology revolution in automotive history. The reason for the speedy ramp is simple. Micro-hybrid technology won't be a consumer option. Instead it will be standard fuel economy equipment.

The mechanical changes required to implement micro-hybrid technology are simple and cheap. One big challenge is that a micro-hybrid turns its engine off at every stop and turns it back on when the driver takes his foot off the brake. A second and even bigger challenge is that automakers want micro-hybrid systems to be transparent to their customers. The accessories have to keep working when the engine is off and they can't stutter or fade when the engine restarts. It's an immense challenge for the conventional lead-acid batteries we've all come to know and hate.

This graph from BMW shows the typical load on a micro-hybrid battery during an engine off event and the subsequent charge recovery cycle.

12.21.12 Duty Cycle.png

The block on the left (in red) represents the engine off period. The accessories draw 575 watts of power for a minute (34,500 watt-seconds) and the starter draws an additional 3,600 watts for one second. The car doesn't start re-charging the battery (in green) until it's done accelerating. Once the battery has recovered, the car draws 80 watts of power for another minute (4,800 watt seconds) before the next engine off event. In total, the duty cycle requires the battery to deliver and recover 42,300 watt seconds of power per cycle. With an average of one engine off event per mile, a micro-hybrid will demand 654,000 watt-seconds from its battery during a 16 mile commute where a conventional car would only need 6,000 watt-seconds.

The bottom line is that micro-hybrids require their batteries to do 100 times the work and if the batteries can't stand the strain, the mechanical systems can't deliver the fuel savings. Micro-hybrid systems that fail quickly because of feeble batteries are nothing more than green-wash. The automakers understand that problem and over the medium- to long-term they can't settle for less. There's always a bit of regulatory rubber when new technologies are being introduced and refined, but once a new technology becomes widespread the regulators get far more demanding.

Legacy manufacturers' initial response

Last week I wrote an exclusive article for Seeking Alpha that explained the differences between the two principal classes of lead acid batteries. It described flooded lead acid batteries as "Lead-acid 1.0" and AGM batteries as "Lead-acid 2.0." It further explained that the various types of enhanced flooded batteries are the equivalent of Lead-acid 1.x while various types of enhanced AGM batteries are the equivalent of Lead-acid 2.x. Since the analogy resonated deeply with many readers who were previously confused about the issue, I've decided to continue using that classification system.

This graph from a presentation at the recent European Lead Battery Conference shows what happens to the dynamic charge acceptance of three different types of AGM batteries over one year of simulated service using the BMW micro-hybrid duty cycle. The basic AGM battery, Lead-acid 2.0, is the blue line on the bottom. An enhanced AGM battery with graphite paste additives, Lead-acid 2.x, is the red line in the middle. A second type of enhanced AGM battery with expanded graphite and activated carbon paste additives, Lead-acid 2.x.y, is the green line.

12.21.12 AGM DCA.png

A brand new AGM battery that can accept a 50 amp charging current will take 72 seconds to recover the energy consumed during an engine off cycle. A one-year-old AGM battery that can only accept a 10 amp charging current will take 430 seconds to recover that energy. A micro-hybrid that can turn the engine off once a minute will always save more fuel than a micro-hybrid that can only turn the engine off once every seven minutes.

This graph is the main reason I told the lithium-ion battery manufacturer that the lead-acid battery industry was vulnerable in the micro-hybrid market. Instead of recognizing and accepting the reality that Lead-acid 1.x and 2.x will never be suitable for micro-hybrids, the industry leaders were stubbornly promoting improved versions of legacy products that can't provide the performance the automakers must have. Since my meeting in October the dynamic has gotten significantly better and if it continues, my concerns over vulnerability will rapidly pass.

Legacy manufacturers' evolving responses

The last two months have been a fascinating time as the two biggest legacy manufacturers started to back away from their earlier insistence that Lead-acid 1.x and 2.x would be ideal solutions for micro-hybrids.

The first legacy manufacturer to soften it's position was Exide Technologies, which announced a strategic alliance with Maxwell Technologies (MXWL) in mid-November. The two companies plan to jointly develop and market integrated battery-ultracapacitor solutions for a wide array of transportation and industrial applications. While the details remain sketchy, it appears that the Maxwell-Exide alliance will offer a micro-hybrid solution that's similar to a system launched by Maxwell and Continental AG in the fall of 2010. That system pairs an AGM battery from Continental with a 2,400 Farad ultracapacitor module from Maxwell. The combination is reportedly very good at avoiding voltage sags and accessory fade when the engine restarts, but it can't address the biggest energy drain in a micro-hybrid; the 60-seconds of accessory use during an engine off interval. Since the Maxwell-Continental system only addresses the engine restart loads, the problems with rapidly declining dynamic charge acceptance in the AGM battery remain and so do the performance deterioration issues.

The second legacy manufacturer to significantly change its position was Johnson Controls which surprised many during last week's "Strategic Review and 2013 Outlook Analyst Presentation." In that presentation the president of JCI's Power Solutions unit came right out and said that Lead-acid 1.x and 2.x were not adequate solutions for heavy micro-hybrids. He then went on to explain that JCI was planning to launch an integrated lead-acid and lithium-ion battery solution that would use a 12-volt lead-acid battery for the engine start load and a 42-volt lithium-ion battery for the accessory loads. Curiously, JCI continues to claim that Lead-acid 1.x and 2.x will be ideal solutions for light and medium micro-hybrids even though those vehicles just have a milder case of the battery problems that plague heavy micro-hybrids. I expect that position to evolve into something more reasonable over the next couple years.

The emergence of Lead-acid 3.0

Over the last decade immense progress has been made in the development of an entirely new class of lead-acid battery that integrates components from conventional lead-acid batteries and supercapacitors into an entirely new class of device. These asymmetric lead-carbon capacitors, Lead-acid 3.0, use normal pasted lead-grids for their positive electrodes and sophisticated carbon electrode assemblies for their negative electrodes. One of these devices, the PbC battery from Axion Power International (AXPW.OB) has proven to be a very promising solution for the power demands of micro-hybrids. This graph from Axion's recent presentation at the European Lead Battery Conference shows why.

12.21.12 PbC DCA.png

While a top-quality AGM battery starts out with the ability to accept a 50 amp charging current but rapidly fades over the first year of service, the PbC is able to accept a 100 amp charging current for almost five years without degradation and its charge acceptance doesn't fall into the 50 amp range for almost nine years. The PbC recently completed a three-year performance-testing regime at BMW, which has reportedly sent its results to a third-party for an independent peer review. The next logical step in the process will be fleet testing prior to a production decision. When BMW conducted fleet testing of AGM batteries for micro-hybrids in 2007, the work took six months. While testing of the PbC may take more time, it shouldn't take much longer because there's very little an OEM can learn in a car that it hasn't already learned in the laboratory.

Three years ago the PbC was a promising dark horse contender in the battle for position in the micro-hybrid battery space, but it hadn't proven its mettle in performance and validation testing by automakers. Today the principal validation and testing work has been completed and while there's a chance that fleet testing will reveal issues that weren't discovered in the testing laboratories, that possibility is remote. My inner optimist wants to believe fleet testing can be completed in time for a 2014 model year design win next September. My inner pragmatist thinks a design win for the 2015 model year is more likely.

The next likely steps

The recent actions of Exide and JCI evidence a dawning realization that the micro-hybrid revolution will require more robust and more costly energy storage systems than automakers are used to buying. In JCI's strategic review Mr. Molinaroli spent a good deal of time discussing the economic constraints on battery manufacturers. He said that while consumers were willing to accept a three-year payback on fuel economy systems, they weren't willing to pay more. That suggests that automakers will strive to reach the following price targets for the battery systems in the three classes of micro-hybrids assuming fuel savings of 5%, 10% and 15%, and gasoline prices of $3.50 and $4.00 a gallon.

Vehicle Class
$3.50 Gas
$4.00 gas
Light Micro-hybrid 5% $210 $240
Medium Micro-hybrid 10% $420 $480
Heavy Micro-hybrid 15% $630 $720

These are challenging price points, particularly when you get into systems that integrate two different types of energy storage devices and have to design sophisticated control electronics to accommodate the differences.

In all probability, Lead-acid 1.x and 2.x will be the only viable solutions for light-micro hybrids because the price targets are so low. The most likely solution will be dual battery system that uses a flooded battery for the engine start loads and an AGM battery for the accessory loads. The probability that a single battery system will survive over the long term is remote.

The medium micro-hybrid space presents a significant challenge for both the automakers and the battery industry. The dual battery systems that are likely to dominate the light micro-hybrid space won't be adequate for the heavier demands of medium micro-hybrids. In particular, the rapidly declining charge acceptance of Lead-acid 1.x and 2.x will preclude extensive use of regenerative braking which depends on the battery's ability to rapidly accept a regenerative charge during a short braking interval. While the capabilities of integrated battery-ultracapacitor systems are better than dual battery systems alone, the medium micro-hybrid niche is a natural target for the PbC once it finishes the performance and validation testing process.

The heavy micro-hybrid space is shaping up as a battleground between the dual chemistry systems proposed by JCI and Axion's PbC. Lithium-ion batteries have the high charge acceptance needed for large accessory loads and they can handle aggressive regenerative braking loads but they're expensive and very complex, particularly when you get into higher voltage batteries that require extensive changes to existing automotive control and accessory systems. In the heavy micro-hybrid market, I believe the PbC will enjoy a significant cost advantage.

Who benefits and when?

I love talking about the intricacies of battery technologies but understand full well that the primary question in the minds of investors is "who benefits and when?" The short sweet answer is every company in the sector.

Automakers are building micro-hybrids today and they want to build more aggressive micro-hybrids next year and the year after that. The only battery manufacturers who have the near-term ability to satisfy the automakers needs for better energy storage systems are the legacy leaders JCI and Exide. Both of these companies can expect significant increases in their per vehicle revenues and margins over the next few years. The rapid revenue and margin gains already baked into the business cake but they're not yet reflected in the stock prices. No matter how the micro-hybrid battery market develops, these legacy leaders will remain leaders for years to come.

Another near-term beneficiary is Maxwell which should see its ultracapacitor sales ramp rapidly as automakers strive to minimize voltage sags and accessory fade during engine restart cycles. The integrated AGM battery and ultracapacitor combination is not an ideal long-term solution to the dynamic charge acceptance problems that plague Lead-acid 1.x and 2.x, but it is a very good solution for automakers that want their micro-hybrid systems to remain transparent to drivers.

In the medium- to long-term, I believe Axion's PbC presents the greatest upside potential and the greatest risk. OEM testing has proven that the PbC offers extraordinary performance in the micro-hybrid duty cycle. While the test results have been great, the critical steps of fleet testing and contract negotiation haven't started yet, so the PbC is still a year or two away from a formal design win. First generation PbC batteries are relatively expensive, but the materials used in a PbC battery are no  more costly than the materials used in a conventional AGM battery. As Axion increases production from start-up volumes to credible commercial quantities, its opportunities for economies of scale and experience curve effects are tremendous. Over the longer term Axion wants to become a component supplier to the legacy leaders, rather than a competitor. While it will have to overcome a good deal of "not invented here" thinking, if the automakers demand the PbC's performance, their battery suppliers will have no choice.

While pharmaceutical and biotech investors understand that stock values change rapidly when R&D stage companies advance from Phase II clinical testing to Phase III efficacy trials, unique new battery technologies are rare enough that the market hasn't quite come to grips with the striking differences between where the PbC technology was in 2009 and where it is today. The last three years have been a veritable PR drought because there isn't much to talk about while OEM testing is being conducted. That dynamic will change significantly over the next year as first tier OEMs and battery users in automotive, railroad, heavy trucking and stationary applications launch a series of large scale demonstration projects as a prelude to rapid commercialization.

Disclosure: Author is a former director of Axion Power International (AXPW.OB) and holds a substantial long position in its common stock.

December 21, 2012

Why I'm Selling Rockwool

Tom Konrad CFA

Photo: Cubes made of rockwool for indoor cannabis cultivation by D-Kuru/Wikimedia Commons. While some users may use Rockwool insulation to grow their highs, the recent highs in the stock price have led me to sell part of my holdings.

Earlier this year, I bought Rockwool International A/S (COP:ROCK-B, OTC:RKWBF) with the intention of holding it for the long term.

I chose Rockwool because it was expanding in the US, provides excellent international diversification, has a strong balance sheet with no net debt, and (not least) is a leader in the greenest part of the construction sector: insulation.

Most other major insulation industry players are divisions of large conglomerates like Berkshire Hathaway (NYSE:BRK-B, BRK-A), and Saint Gobain (Paris:SGO).  Berkshire Hathaway owns Johns-Manville while Sain Gobain owns CertainTeed.

US-based Owens Corning (NYSE:OC) is the only pure-play exception, but trades at a premium.  With a trailing P/E of almost 50, and a forward P/E of 17, OC is still only slightly above book value because of the slow housing sector.  With a debt to equity ratio of 60%, OC has significant although not unmanageable debt, and pays no dividend.  At the current $34/share it simply is not very attractive to a value investor.

While Rockwool was no bargain basement stock, it looked relatively attractive compared to Owens Corning this spring when I bought it.  But a recent price run-up from DKK450 to DKK620 over the last year has mosty closed the gap.  The company expects full year earnings of at least DKK700 million ($5.57/share or a forward P/E of around 19.)  The dividend yield is only 1.5% – better than nothing, but not exactly large, and the company trades at 1.6x book value, slightly higher than Owens Corning’s 1.14.


While I continue to value Rockwool for the exposure to building insulation and good international diversification, the 25% price increase since I last added to my position this spring (and consequent higher valuation and lower dividend) has led me to reduce my holdings.   It’s also been one of the best performers in my 2012 annual Clean Energy model portfolio, but I’m unlikely to include Rockwool in the portfolio for 2013.

While I think the North American housing market recovery will continue, I currently see much more attractive sector players, such as Waterfurnace Renewable Energy (TSX:WFI, OTC:WFIFF) and PFB Corporation (TSX:PFB, OTC:PFBOF).

Disclosure: Long RKWBF, WFIFF, PFBOF

This article was first published on the author's Forbes.com blog, Green Stocks on December 11th.

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 20, 2012

Beijing Administers Tough Medicine to Solar Cos

Doug Young

Solar Injection photo via Bigstock
A report in Thursday's China Daily is providing the clearest indication yet that Beijing is delivering some tough medicine to many of the nation's smaller solar panel and polysilicon makers by letting them go backrupt to return the struggling sector to health. Up until now, much of the talk in China has focused on rescuing the money-bleeding sector through a comprehensive bailout plan designed to create about a dozen major players as the industry's backbone. But little has been said about the bankruptcies and closures that also need to accompany such a clean-up, in a country where state support due to local factors often allows companies to keep running even after they become hopelessly mired in the loss column.

The China Daily article, which isn't available online, starts off with the usual rosy headline "Solar industry to get jolt from new policies", and leads with discussion of a program that will allow more solar energy producers connect to then national electricity grid. But the discussion quickly turns a bit more pragmatic after that, saying the government will limit new projects to make both solar panels and polysilicon, the main ingredient used to make panels.

It's not until near the end of the article that we learn that more than 80 percent of China's top 43 polysilicon companies have stopped production due to the global supply glut. And it's not until the very end that an industry official is quoted saying that the government is working hard to help the industry, but that "the companies still need to rely on themselves and adjust their plans to the new changes."

Those words come from Meng Xiangan, deputy director of the China Renewable Energy Society, who was speaking at a meeting of the State Council led by outgoing Premier Wen Jiaobao himself. The presence of such influential people and the high level of the meeting means the discussion most likely reflects Beijing's increasingly pragmatic stance as it crafts a bailout for this once promising sector that has fallen on difficult times.

Anyone who watches the industry has known all along that mass closures of smaller, less efficient manufacturers in China are a critical element to putting the solar sector back on a sustainable path that includes earning profits. But in China the words "bankruptcy" and "closure" are still largely taboo, especially as the nation's economy slows and government officials are loathe to see unemployment rise. The necessary layoffs are even more unappealing because solar has been designated by Beijing as a key focus industry, meaning regional officials won't want to see the closure of manufacturers that are the pride of their local economies.

China's top 150 solar cell makers alone can produce panels with 40 gigawatts worth of capacity each year, even though global demand for panels is only expected to range between 20-40 gigawatts annually for the next 2 years, according to the report. All of this points to the sobering fact that officials in Beijing are finally realizing that closures, while painful, are a necessary step to bringing the country's solar industry back to health.

That message is probably already being sent out to local governments, which are being told to allow many smaller producers in their areas to quickly close shop and not intervene with financial assistance. Look for these closures to quietly continue for the smallest, least efficient players. Meantime, many mid-sized producers will most likely be combined with some of the largest players after Beijing announces a broader sector rescue plan most likely in the first half of next year.

Bottom line: Beijing is finally taking the necessary step of letting many of its smaller solar manufacturers close as it part of a broader sector rescue plan.

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

BYD Boosts EV Network With California Bus Plant

Doug Young

BYD e6 - Electric Taxi in Shenzhen, China.
Photo by Brücke-Osteuropa
If struggling car maker BYD (HKEx: 1211; Shenzhen: 002594; Pink:BYDDF) ultimately fails in its dream to become a leader in new energy vehicles, at least it will have lots of global assets to leave as a record of its efforts. Perhaps I'm sounding a bit too cynical in my latest musings on this company, since I really am starting to become more convinced that perhaps BYD's electric dreams could actually someday become a reality, especially with its new announcement of plans to build an electric bus manufacturing plant in the US. (English article)

After punishing BYD's stock for much of the last 2 years as sales for its traditional gas-powered vehicles tumbled and its profits evaporated, investors also seem to be cautiously returning to this beaten-down company, which first powered onto the global stage after billionaire investor Warren Buffett purchased a 10 percent stake in 2008. BYD shares have jumped about 50 percent over the last 2 months, as the company's traditional car business starts to stabilize and perhaps as investors start to believe in BYD's vision of becoming a global leader in electric vehicles (EVs).

After building its dreams at least partly on hopes of tapping the mass consumer market, BYD has largely abandoned that part of its vision for now in favor of focusing on big buyers such as bus and taxi operators. Such a move looks smart, as those kinds of buyers tend to have more stable driving patterns that make recharging EVs more practical. They also have the resources to build necessary infrastructure for maintaining their fleets.

Such buyers can also work closely with BYD to improve and maintain their vehicles, and can start off with pilot programs that they slowly build up over time as they become more confident in the technology. This slower, more targeted approach has seen BYD sign a series of global deals to sell electric buses and taxis to operators in markets ranging from Britain and Germany in Europe, to Singapore in Asia, and the US and Canada in North America.

To be closer to those customers, the company has recently begun an ambitious program of building a series of manufacturing facilities around the world. Just last week the company formally signed a deal to form a joint venture EV plant in Bulgaria (English article), and earlier this year it announced plans to serve the Latin American market with a new plant in Argentina. (previous post)

Now a company official has disclosed that BYD also plans to set up a wholly owned electric bus-making plant in California, with a formal announcement to come in 3 or 4 months. That plant should come into operation later next year, and should slowly ramp up production to an annual capacity of more than 500 buses by 2015.

BYD isn't saying how it will finance all these new investments, but I suspect the company is getting strong support from China's state-run banks, which are under orders from Beijing to support the new energy sector. BYD already gets very strong support from the government in its hometown of Shenzhen, which has recently discussed plans to have 50 percent of the city's buses and all of its taxis powered by electricity by 2015. Beijing has also rolled out other recent incentives to encourage other cities to try out EVs and hybrid vehicles (previous post).

After being bearish on BYD for much of the last 2 years, I'm starting to become interested in the growing momentum of the company's EV campaign, though I still think there are many obstacles ahead. Still, a continuation of this kind of new investment and more orders from both home and abroad are positive signals that could hint that BYD has finally turned the corner after a prolonged difficult period.

Bottom line: Plans for a new US manufacturing plant are the latest sign that BYD may finally be turning a corner and its EV program gaining momentum following a 2-year downturn.

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

December 19, 2012

Energy Trends That Matter For Investors

By Harris Roen

The US is by far the world’s greatest user of energy per capita in the world. Each American uses about 87,000 kilowatt-hours per year – that is twice as much as the European Union (EU), the next closest consumer! Understanding energy trends in this country is extremely important for investors who want to understand how the energy landscape will look 10, 20 or 30 years from now. fig1.jpg
Figure 1: Global Per Capita Energy Use

The U.S. Energy Information Agency (EIA) made public an early release of its in-depth Annual Energy Outlook. This comprehensive report details likely trends in production, consumption, prices, and sources of energy out to 2040.

Figure 2: Total Energy Consumption

Figure 2 shows that although energy consumption will likely be lower in the next five years, this is only a short-term trend. The immediate reduction in energy use is mostly due to increased fuel efficiency standards kicking in, as well as other conservation and efficiency efforts.

Over the longer term, however, total U.S. energy consumption in 2040 is projected to continue to grow by an average of 0.3% annually, to between 9-10% above current levels. Consumption of liquid fuels (oil, gas, etc) is actually projected to drop by about 4.5%, while use of natural gas is expected to increase by almost a quarter above current levels.

The use of biofuels and renewables such as wind and solar are also expected to increase dramatically. Utilization of biofuels is expected to increase by 60%, and use of other renewables should be three quarters greater than they are now.

Figure 3: Percent Consumption by Fuel Type

Figure 3 shows the same information in a different format. Each fuel type is shown as a percent of the total fuels consumed. A sharp eye can see a decrease in the amount of liquid fuels used, and an increase in renewables. Still, those renewables will comprise less than 10% of the overall energy picture, even projected 30 years out! Put another way, fossil fuels are expected to account for 80% of the energy consumed in 2040, which is only 5% less than they do now. The days of drilling and coal mining are not coming to an end any time soon.

Figure 4: Production Net Consumption

Figure 4 illustrates that between 20-25% the oil will remain imported, despite the domestic oil boom going on now in and around North Dakota. Supplies of domestic natural gas, however, are expected to continue to increase at a greater rate than they are being consumed domestically which should feed expanded export markets (this is an investment opportunity for another article).

Figure 5: Average Annual Growth in Renewable Electric Generation

Despite what looks like a continued status quo for several decades, the dramatic increase in renewables is something energy investors need to pay attention to. Figure 5 reveals the projected growth of electric generation by type of renewable. Photovoltaic is slated to grow by 15% annually, which should make solar panels at least 25 times more ubiquitous by 2040!

The pie slices in Figure 5 measure the share of the projected growth that each type of renewable source will have. It is clear to see that photovoltaic and solar thermal combined should account for well over half of the growth in renewables.

Figure 6: Solar Stocks

What does this mean for alternative investors today? Despite the fact solar as a sector has been extremely beaten down, it would be foolish for the long-term investor to ignore the industry as a whole. Photovoltaic manufacturers are hurting because of the overproduction of cells. Additionally, the industry is suffering from a widening tariff war between China, the U.S. and the E.U., an atmosphere that is never good for business.

Buying individual photovoltaic stocks now may be a bit like catching a falling knife, since there will likely be more bankruptcies and other disappointments. Having said that, 15% annual growth cannot be disregarded. A well-diversified portfolio of solar stocks could be an excellent move for the long-term investor.

I have written before that I like installation companies as a group within the solar sector. Investors that scooped up shares of the newly issued solar installer SolarCity (SCTY) have done extremely well, up over 20% from its opening on December 13. While SolarCity may be a good long-term play as part of a speculative portfolio, it is not for the faint of heart considering that it has nowhere near positive earnings yet.

An additional installation company that the Roen Financial Report tracks is Ameresco Inc (AMRC). Its stock price was beaten down in November on an earnings release. The company showed decent growth in profits and earnings per share since March, but still showed a 25% drop in revenues compared to the same quarter last year. In addition, the company dropped its revenue guidance to between 7-10% lower than analyst expectations. Still, I think the company is fairly valued in the $10/share range.

In summary, the EIA foresees no game-changing shift in the U.S. energy landscape, and caution is advised for the alternative energy investor. If you want to be where the growth is, though, solar needs to be on your radar.

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

DISCLOSURE: No positions in or plans to purchase any of the stocks mentioned,

DISCLAIMER: Swiftwood Press LLC is a publishing firm located in the State of Vermont. Swiftwood Press LLC is not an Investment Advisory firm. Advice and/or recommendations presented in this newsletter are of a general nature and are not to be construed as individual investment advice. Considerations such as risk tolerance, asset allocation, investment time horizon, and other factors are critical to making informed investment decisions. It is therefore recommended that individuals seek advice from their personal investment advisor before investing.

These published hypothetical results may not reflect the impact that material economic and market factors might have had on an advisor’s decision making if the advisor were actually managing client assets. Hypothetical performance does not reflect advisory fees, brokerage or other commissions, and any other expenses that an investor would have paid.

Some of the information given in this publication has been produced by unaffiliated third parties and, while it is deemed reliable, Swiftwood Press LLC does not guarantee its timeliness, sequence, accuracy, adequacy, or completeness, and makes no warranties with respect to results obtained from its use. Data sources include, but are not limited to, Thomson Reuters, National Bureau of Economic Research, FRED® (Federal Reserve Economic Data), Morningstar, American Association of Individual Investors, MSN Money, sentimenTrader, and Yahoo Finance.

December 18, 2012

Graftech Takes a Leg Down

by Debra Fiakas CFA
Shares of graphite producer Graftech International (GTI:  NYSE) took another long step downward in trading earlier this week, extending a lengthy slide since the beginning of the year.  The shares have attempted a comeback at least twice, but with no success.  GTI has sunk back near its three-year low.  For contrarian investors, this is a good time to take a new look at Graftech  -  a company that has become habitually profitable.

After successive losses in the difficult economic period that ensued just after the start of the new millennium, Graftech management regained their corporate mojo with cost cutting and right-sizing.  The result was continued profitability straight through the 2008-2009 recession.

Graftech Sales, EBIT

Graftech is in an old line business, producing graphite materials and products from natural and synthetic graphite.  Industrial Products such as electrodes used in manufacturing steel and refractory products used in blast furnaces represent more than 80% of total sales.  Despite a 14% decrease in sales year-over-year, the Industrial segment earned a profit margin of 14.5% in the first nine months of 2012, largely unchanged from the prior year.

The company’s growth is in its Engineered Solutions segment of advanced graphite materials for electronics, aerospace, solar and metallurgy, among other fast growing, high-tech applications.  The segment contributed 18% of total sales in the first nine months of 2012, after achieving 18.4% year-over-year growth.  Unfortunately, this rallying segment has yet to build profit margins.  Engineered Solutions earned just 6.2% in operating income in the first nine months of 2012.

Graftech has a strong balance sheet with ample cash and a nominal debt level.  In 2010, the company floated $200 million in new senior subordinated debt to finance the acquisitions of Seadrift Coke and C/G Electrodes.  At the end of September 2012, these notes were reflected as $161.4 million on Graftech’s balance sheet.  Additionally, the company owed $430.0 million from a revolving credit facility.  The revolving facility had an effective interest rate of 2.2% so far in 2012, while the senior subordinated notes had an implied interest rate of 7.0%.  In November 2012, Graftech sold $300 million in new senior notes which will pay interest at a rate of 6.375%.  Total debt will not increase as the company plans to use the proceeds to pay down balances on the revolving credit facility.  With all this, debt-to-equity is 0.45, just below the 0.55 average for Graftech’s industrial segment peers.

With the steel industry treading water, investors are rightly concerned about growth prospects for Graftech’s bread and butter electrode products.  Investors should not ignore Graftech’s nibbles around advanced graphite materials applications.  This is no high tech company, but Graftech has a credible market share in this promising segment.  Despite all the worry over growth, the gaggle of analysts following Graftech has pegged earnings expansion over the next five years at 10%.

If growth is the principal factor driving the stock price, investors are ignoring a list of positives.  In my view, Graftech management has not been given credit for bringing about a lean operating structure.  Granted cost controls do not drive earnings growth, but an efficient configuration helps ensure profits even in thin times.  Furthermore, Graftech is among the strongest companies in the industrial materials sector at least as far as its balance sheet is concerned.  I think this makes it possible for Graftech to dominate during the cycle trough when other operations are at risk of loss or default.  Even after the two deals in 2010, that secured raw materials (Seadrift Coke) and extended the electrode market footprint (C/G Electrodes).

Investors still adhering to the “buy low, sell high” strategy might find the current stock price presents a compelling point to grab a well run company that is positioned to dominate its sector when macroeconomic growth resumes.  I acknowledge that GTI is trading at 10.5 times the consensus estimate for 2013, just a smidge over the expected earnings growth rate.  So investors with abhorrence for PEG ratios (Price Earnings to Growth Rate) over 1.0, might need an even lower price point to get involved.  Did I mention the stock is trading near its three-year low?
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. 

December 17, 2012

Solazyme Crosses the Rubicon

Jim Lane

Solazyme logo.pngNext-gen renewable oils producer achieves first linear scale-up to 500,000 liter fermenters — clears path for large commercial production volumes.

In biofuels, the “ethanol blend wall” gets a tremendous amount of attention. This is the restriction on ethanol blending in gasoline to (today) 10 percent. It limits overall US ethanol distribution, and vexes ethanol producers and corn growers. But that’s only the second most critical wall.

Over in advanced biofuels — which are expected to provide 21 billion of the 36 billion gallons of renewable fuel targeted in the Renewable Fuel Standard by 2022 — there’s the ferment wall.

What is the ferment wall? To date, no next-generation producer had successfully achieved linear scale-up in 500,000 liter (or larger) fermenters. Now, it’s simply impossible for fermentation-based technologies to affordably produce fuels and chemicals in small fermentation tanks — its way too much capex, too much opex to produce, say, 10,000 liters at a time.

So it is big news that Solazyme (SZYM) has announced the completion of multiple initial fermentations in 500,000 liter fermenters at Archer-Daniels-Midland Company’s (ADM) Clinton, Iowa facility — about four times the scale of the vessels in Solazyme’s own Peoria, IL facility.

According to the company, Solazyme achieved commercial scale production metrics, exhibited linear scalability of its process from laboratory scale, and demonstrated the ability to run at this scale without contamination. Solazyme is initially targeting annual production of 20,000 metric tons of oil starting in early 2014 at the ADM facility, with targeted expansion to 100,000 metric tons.

Next across the river – Gevo and Amyris?

It was not originally expected that Solazyme would be the first next-gen company to break the barrier. Both Gevo (GEVO) and Amyris (AMRS) had built up enough of a lead in the race that they were expected to reach linear scale-up earlier this year, in Gevo’s case, and late last year at Amyris.

Amyris began its attempt at linear scale-up to 200,000 fermenter scale in June of last year, after installing two large fermenters at the Biomin facility, in Brazil’s Sao Paulo state. As Daniel Grushkin at Fast Company memorably recalled, “The plant, which began running in June 2011, was beset with problems. Sometimes the process worked as it had in the California labs. Other times, the enormous tanks frothed with the carcasses of exploded yeast cells.”

By February, we reported that “Amyris announced major changes to its financing, strategy and near-term production targets, disclosing that it has produced only 1 million liters of biofene to date at three tolling facilities, compared to a 2011 target of 9 million liters originally set in April 2011, and reduced to 1-2 million liters in an update later in the year.”

In July of this year, Gevo went for it, targeting scale-up in 1,000,000 liter fermenters at its newly retrofitted facility in Luverne, MN. At first, all seemed well. “We are pleased with the progress to date in our initial startup campaign, CEO Pat Gruber, reported. “We’ve shown that we can successfully ferment isobutanol in large (250,000 gallon) commercial fermenters, isolate the product and get it into tanks and railcars.”

But by September, it was clear that, although the process works well, linear scale-up was not happening and production rates were behind expectations. Late in the month, Gruber announced “Early indications are that, while we are making significant progress towards economic production levels, we will not achieve our desired year-end run rate – instead we would expect to achieve that during 2013 — and ceased isobutanol production at Luverne until early 2013 while it fixed its process.

Cracking the 100,000 liter barrier – LS9, Solazyme

Some companies had already cracked the 100,000 liter barrier. In Florida this fall, LS9 announced the completion of its first production run of fatty alcohols at its new facility in Okeechobee. The first run at 135,000 liter scale produced several tons of fatty alcohol with “excellent replication of technical metrics”.

“We are very pleased that our very first run at 135,000 liter scale went so well,” LS9 CEO Ed Dineen said at the time. “We plan to perform additional fatty alcohol runs to demonstrate the robustness of our technology platform and then switch to diesel fuel and ester chemical production to further demonstrate the production optionality of the technology.”

And Solazyme, itself, had achieved linear scale-up in its own 125,000 liter fermenters in Illinois.

Reaction at Solazyme

“Working with ADM’s world class fermentation team to achieve commercial scale operations at the ADM facility shortly after announcing the partnership exhibits our ability to rapidly and successfully scale in large commercial fermentation facilities,” stated Peter Licari, CTO, Solazyme. “Solazyme is currently developing commercial facilities in the US, France and Brazil, and with these runs we have now achieved linear scale-up of over 70,000-fold from our labs.”

De-risking the company — and the sector?

In the case of Solazyme — and all next-gen producers — concerns about scale-up have been affecting the stock price. Investors and equity analysts have also expressed concerns about the absence of sufficient offtake deals for the company’s tailored renewable oils – but scale-up has been a near term issue.

As Piper Jaffray’s Mike Ritzenthaler wrote a month ago, “Although sector valuations have compressed substantially, and shares of SZYM in particular are down ~55% since early April, we still believe more downside lies ahead for shares…our rating and price target reflect our view on four key factors: building capacity ahead of firm demand (disallowing lofty margin projections), the relative lack of control over growth drivers, the potential for scale-up problems, and the lack of visibility or clarity of co-product value or offtake (which is important for lowering net production costs).”

ADM taking equity in Solazyme

An interesting twist, buried in the latest news from Iowa — as part of the contract arrangements between Solazyme and ADM, the companies have agreed that certain payments can be funded with Solazyme equity, rather than cash. , Solazyme has the ability to fund certain payments with equity rather than cash.  To facilitate the equity payments, the Company filed a registration statement with the SEC, writing:

“In connection with the strategic collaboration agreement we entered into with Archer-Daniels-Midland Company (“ADM”) in November 2012, we agreed to grant ADM a warrant to purchase 500,000 shares of our common stock…In addition, under our strategic collaboration agreement with ADM, we will pay ADM annual fees for use and operation of certain production facilities, a portion of which may be paid for in our common stock.”

The bottom line

500,000 liters is a big deal – it represents production at the kind of scale that supports moving down the cost curve from markets in exotic, high-priced oils into the world of commodity fuels and chemicals where the margins are tight but the pools are vast. Last step on the journey? Hardly.

But a momentous crossing of the industry’s Rubicon – that is, widely contemplated, critical for all that follows, hitherto not successfully achieved. Sure, it’s that. Now begins the march on Rome.

Disclosure: None.

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.

December 16, 2012

Zoltek: High in Fiber, Low in Valuation

by Debra Fiakas CFA
  The Stohr DSR has an all carbon fiber body (Photo credit: Rhots/Wikimedia Commons)
Zoltek Companies (ZOLT:  Nasdaq) is in the business of fibers, mostly carbon fibers.  Plain, simple fibers may not seem very impressive.  However, Zoltek’s carbon fibers are in wide demand for renewable energy applications such as wind turbines blades and deep sea oil and gas wells.  After two years swimming in red ink, Zoltek has managed to bring sales back up to 2008 levels.  The company earned $22.9 million in net income on $186.3 million in total sales in the fiscal year ending September 2012.  During the same period Zoltek cleared 9.3% of total sales as operating cash flow.

Analysts are expecting modest growth in the next fiscal year.  The consensus estimate is $0.69 on $189 million in total sales in fiscal year 2013.  The estimate has remained unchanged in the most recent weeks, even though Graftek failed to meet earnings expectations for the September 2012 quarter.

Zoltek’s management is a bit more enthusiastic about its future.  That is because the carbon content of durable goods is rising at a fast pace  -  so fast some manufacturers are concerned about a shortage of carbon fibers in the future.  For example, aircraft are adopting carbon composites for floors, luggage bins and even seats as a means to reduce overall aircraft weight.  Boeing’s Dreamliner 787 is the first large-scale commercial aircraft made using 50% composite materials including plastics and carbon fiber.

The company has been working on new technologies for cutting and milling carbon fibers to facilitate mixing carbon fibers with thermoplastics.  Such plastics are now used in electronics such as computer hard drives and printers.  Lacing the thermoplastic with carbon would add durability and extend the range of potential applications. Most likely new markets would be automotive and aerospace.

Zoltek has spent $23.8 million or 5% of sales on research and development efforts over the past three years.  Indeed, R&D has taken on added visibility over the past couple of years with the central effort carried out at the company’s plant in St. Peters, Missouri.  Much of the effort is aimed at improving production processes, but management is also keen on finding new ways to use carbon.

The automotive industry figures prominently in Zoltek’s growth plans.  In 2010, the company formed a new subsidiary, Zoltek Automotive, to help facilitate the adoption of carbon materials in cars and trucks.  Tesla Motors (TSLA:  Nasdaq) already uses Zoltek fibers for its electric sports cars.

Zoltek can afford to move aggressively on market opportunities.  At the end of September 2012, there was $29.9 million in cash on its balance sheet.  Debt totaled $27.1 million, but the debt to equity ratio is a modest 0.09.

We have added Zoltek to the Materials Group in our Mothers of Invention Index for innovators in energy, efficiency and conservation.  The stock trades at 11.1 times forward earnings, which looks like a bargain for a well-capitalized company that appears poised to offering significantly higher growth.
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. 

December 15, 2012

Solar Installations Booming, EV Sales Soar: The Week In Cleantech, 12-15-2012

Jeff Siegel

December 10: 47,500 Electric Cars

  • Electric Car Sales Soar. . .Again

    In case you missed it, Todd Woody over at Forbes reported last week that electric car sales reached a record in November for the fourth consecutive month. Total sales of electric cars for 2012 are now up to 47,500.

    You can read the entire piece here.

  • Chinese Win Bid for US Battery Maker

    Well, we thought Johnson Controls (NYSE:JCI) was going to take the lead on this one. We were wrong. Wanxiang America Corporation has just picked up nearly all of A123's assets for $256.6 million. A bargain if we've ever seen one. The only thing Wanxiang didn't get were military contracts, which have been acquired by U.S.-based Navitas Systems for $2.25 million. You can read more here.

  • 100 Megawatts of South African Solar

    Suntech (NYSE:STP) and Siemens (NYSE:SI) are getting ready to supply about 100 megawatts of solar panels for two projects being developed in South Africa. The systems are expected to produce about 180 gigawatt-hours of electricity, or enough to power about 15,000 homes.

December 11: Solar Installations Booming

  • According to a new report, 684 megawatts of solar panels were installed in the US during the third quarter. This is 44 percent more than Q3 of last year. And solar installations in the current quarter may nearly double from Q3 to 1,200 megawatts. This would represent the most installations ever in a three-month period. The U.S. Now has more than 6.4 gigawatts of installed solar electric capacity, or enough to power more than one million average American households. You can read more here.
  • Shell Goes Solar

    Royal Dutch Shell, along with three venture capital firms, is pumping $26 million into GlassPoint Solar – a California solar startup that uses the sun to heat water and create steam for enhanced oil recovery. Most of these operations burn natural gas to create steam, but GlassPoint claims its technology is cheaper. You can read more about that here.

12-12-12: Is 99% Renewable Energy Possible?

  • 99% Renewable Energy

    According to a new study by the University of Delaware and Delaware Technical Community College, a well-designed combination of wind, solar, storage and fuel cells could nearly exceed electricity demands while keeping costs low.

    You can check on the details here.
  • Electric, Natural Gas Fleets Mandated in Indianapolis

    By 2025, Indianapolis Mayor Greg Ballard hopes to transition the city's entire fleet of vehicles to electric and natural-gas powered vehicles. The Mayor says this transition should save taxpayers $1,200 a year per car. You can read more here.

December 13: Is China's Solar Industry Getting Desperate?

  • Another Billion Dollars for Chinese Solar

    Well it looks like the Chinese government is jumping in again to save its struggling solar industry. The Middle Kingdom's finance minister recently reported that China will raise its subsidies for its solar sector by $1.1 billion this year. As well, the nation will continue to integrate more solar domestically in an effort to work through excess inventory.

  • Nissan Ready to Ramp-Up Production of Electric Car

    Nissan announced this week the launch of the United States' largest lithium-ion automotive battery plant in Smyrna, TN. The facility, which is making battery components for the ramp-up of production of the all-electric Nissan LEAF early next year, is one of three of its kind operated by a major automaker. Check out the video below. . .

DISCLOSURE: No positions

Jeff Siegel is Editor of Energy and Capital, where his notes were first published.

December 14, 2012

When Isn't a $68M Civil Action Material?

Tom Konrad CFA


David and Goliath (Photo credit: Wikipedia)

Last week, I investigated the Goliath vs. David civil action in which Norfolk Southern Corp. (NYSE:NSC) and Wheeling & Lake Erie Railroad (WLE) are attempting to prevent Power REIT (NYSE:PW) from foreclosing on the lease of the 112 miles of track owned by Power REIT and operated by WLE under a sublease with NSC.

As in Biblical times, Power REIT, in its role as David, looks likely to surprise the market with a legal victory.  I calculated that any victory could lead to payments ranging from $16 million to $70 million dollars or more, or $10 to $43 a share, which is truly enormous for a stock trading at $8 a share.  At the time, I had not seen NSC’s sublease agreement with WLE, but have since found it in an attachment to NSC’s and WLE’s legal complaint.  The lease led me to revise my estimate of NSC’s potential  liability to approximately $68 million, and WLE’s to $15.9 million (see below.)

As counter-intuitive as it sounds, even a legal defeat would still bring significant benefits to PW shareholders, leading to a win-win situation for PW shareholders.

But the case should also interest Norfolk Southern shareholders, because it raises significant questions about corporate disclosure.

Goliath Not Paying Attention

Even for a $18.5 billion Goliath like Norfolk Southern, the potential award amounts to real money.  With 316 million shares outstanding, $68 million is 21 cents a share.  That would be far from crippling for a company with $708 million in cash on its books and $402 million in income last quarter, but it’s certainly material.

That’s why I was shocked to find that the company’s 2011 annual report did not mention the action.   When I attempted to contact the parties, I was told by an NSC spokesman that ”We don’t generally comment on matters of litigation.”  WLE’s Director of Law & Government Relations referred me to their attorneys in the matter, who also said it is their policy not to comment on pending litigation.  I also contacted two of NSC’s leading stock analysts, only to find they were not familiar with the case.

I did get an email response from Michael Hostutler, NSC’s director of investor relations, who told me that the case “is not material to Norfolk Southern,” which is why it’s not in the annual report.  When I asked him on what basis the case was immaterial, he did not respond.

The omission of the case from NSC’s annual report is inconsistent with NSC’s apparent disclosure policy.

This policy seems to be to include legal proceedings in its annual report even when they are immaterial.  The report discusses two ”penalties in excess of $100,000″ and a class action against NSC and other class 1 railroads regarding fuel surcharges, despite the fact that the the report characterizes all three as  not having material effects on NSC’s “financial position, results of operations, or liquidity.”

Surely an action in which the potential award is in the millions of dollars bears mentioning if the policy is to discus any award in excess of $100 thousand.

The Nature of the Liability

Paragraph 2 of NSC’s 1990 sublease agreement with WLE states,

The Sublessee [WLE] hereby expressly assumes during the term of the Agreement all of the duties, obligations, liabilities and commitments of NW [NSC] as lessee under the Lease except the balance in the account due Lessor [PW] because of dispositions of property under Section 9 or the Lease, hereafter the “Settlement Account,” on the Closing Date… The balance of the Settlement Account on the Closing Date is $7,466,951.42, for which NW will remain solely responsible.

If NSC’s potential liability were limited to $7,466,951.42, I would agree that this would not have a material impact on the company.  That amount is likely already carried on NSC’s books as a long term liability.  Even if the court decides that it is due immediately, the small size of the settlement account relative to NSC’s cash flow should render it immaterial.

However, PW’s counterclaim in the case seeks payment not only of the settlement account, but of back interest at the Applicable Federal Rate (AFR.)  Because NSC’s portion of the settlement account began accruing in 1967, and more than two decades have passed since then, my estimate of the total interest on that $7,466,951.22 is approximately $60.6 million, for a total of $68 million.  (WLE’s portion would be approximately $8.4 million principal and $5.9 million interest, for a total of $15.9 million.)  Note that my interest calculations are approximate, since the AFR changes monthly, and I only put in one interest rate each year in my spreadsheet.  Further, I don’t have data for the AFR before 1990, so I approximated with the long term treasury rate less one percent.  You can access my spreadsheet to test your own assumptions here.

The approximately $60.6 million in back interest is almost certainly not already on NSC’s books, and so it would be a new liability.  If the court were to award back interest on the settlement account, it would reduce NSC’s earnings by about 19 cents a share in the quarter which it was awarded, most likely sometime in 2013.

Conclusion: Class Action Lawsuits May Follow Stinging Pebbles

Goliath probably thought David’s sling was immaterial, but in the end it proved decisive.  While there is no chance that a relative pebble like an award of even $68 million will take down Norfolk Southern, it would have a material impact on NSC’s books.  If it did, the shareholder lawsuits that follow losses stemming from undisclosed risks would then sting a lot more than pebbles.

It’s admirable that NSC management discusses legal actions involving awards over $100 thousand.  My guess as to why they are not talking about this one is that top NSC management is simply unaware of the potential award of back interest on the settlement account.  My guess is that this lack of awareness arose because WLE is taking the lead in the case, not because of some cover-up on the part of NSC’s management.  But if this slipped by them, their inattention a little worrying in and of itself.

It will be interesting to see what legal disclosures appear in NSC’s 2012 Annual Report, now that my articles and questions to Mr. Hostutler should have brought this pebble to their attention.

Disclosure: Long PW

This article was first published on the author's Forbes.com blog, Green Stocks on December 4th.

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 13, 2012

US Should Approve A123's Sale

Doug Young

A123 Systems battery cell products (Source: A123)
In writing this blog, I generally try to keep my own views muted and focus instead on the latest news and what it means for the companies involved. But I'm making one of my occasional exceptions to that rule today to say that the US really should go ahead and approve the sale of bankrupt battery maker A123 Systems (OTC:AONEQ) to a Chinese company, since this deal seems to have few if any national security implications and blocking it would send a bad signal about Washington's commitment to fair trade.

Rather than bow to opponents of the deal, who appear to have their own agenda that's unrelated to national security, the US should follow the lead of Canada, which last week approved another controversial sale of energy exploration company Nexen (Toronto: NXY) to Chinese oil major CNOOC (HKEx: 883; NYSE: CEO). (previous post) Approval of that sale took a lot of courage from the administration of Canadian Prime Minister Stephen Harper, and now the US Obama administration should show similar determination to let the A123 purchase go forward.

Let's look at the latest reports on A123, which is making headlines that are far bigger than the deal would otherwise get due to the fact that the buyer of the company is Chinese auto parts seller Wanxiang Group. According to the reports, a US bankruptcy judge has formally approved Wanxiang's bid for most of of the assets of A123, which makes batteries used in alternate energy vehicles. (English article)

The judge in the case was unusually frank in his comments after approving the deal, saying he was concerned that another potential bidder, Johnson Controls (NYSE:JCI), might be working behind the scenes to kill the sale by asking Washington to block it on national security and other grounds. The deal is sensitive for 2 reasons. One of those is actually related to national security, since A123 sells some of its batteries to the US Defense Department. The other reason is more political, since A123 previously received a $250 million US government grant to develop lithium ion batteries.

Wanxiang has addressed the defense-related concerns by only bidding for the portion of A123's business that does not include the Defense Department contracts. As to the $250 million government grant, this point looks like a non-issue to me. Governments frequently subsidize companies that ultimately fail, and the reason for providing such subsidies is often because such companies can't get similar funding from commercial sources.

The fact that a Chinese buyer is acquiring the failed company's assets is irrelevant, and is simply the result of an auction driven by market forces. If Johnson Controls really wanted A123, it should have submitted a more competitive bid rather than trying to use this kind of tactic to get a bargain.

The US has already sent negative signals in its use of the national security excuse with its recent decision to block construction of a wind farm in the state of Oregon being built by a Chinese company, and its blocking of Chinese telecoms equipment makers from selling into the US. Both of those moves did seem to have real implications for national security, but this latest deal doesn't seem to meet that standard. Accordingly, Washington should stand aside and let the deal proceed, showing it will let commercial forces run the market except for in a handful of cases that truly do pose a risk to national security.

Bottom line: The US should approve the sale of bankrupt battery maker A123 to a Chinese buyer, to demonstrate it is committed to fair trade when national security isn't at risk.

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

December 12, 2012

Solar Stocks Rise on Bejing Subsidies

Doug Young

Sunrise over Mount Huang in China.
China's solar panel industry is starting to look more and more like a beggar kneeling on the doorstep of Beijing, with the latest word that the central government is preparing to hand out an additional $1.1 billion in subsidies to the struggling sector. That news comes just after a government official was quoted saying Beijing is considering a plan to double its already ambitious target for a massive building spree of new solar electricity plants, again in a bid to support the struggling sector.

Shares of embattled solar panel makers -- many of which are now trading below the $1 mark -- rallied on this "double happiness" pair of reports, with the healthiest companies notching the biggest gains.Among those, Yingli (NYSE: YGE) posted the biggest gains of about 18 percent, with Trina (NYSE: TSL) and Canadian Solar (Nasdaq: CSIQ) both up around 10 percent. Even Suntech (NYSE: STP) and LDK (NYSE: LDK), 2 of the worst hit companies, notched similar strong gains.

That leads me to my next point, which is that investors expect this latest news to be followed soon by a bigger bailout for the entire sector. Before we look at that part of the bigger picture, let's step back and have a look at the latest reports, both of which are coming from the official Xinhua news agency that often acts as an informal spokesman for policymakers in Beijing.

According to the reports, China has allocated an additional $1.1 billion in subsidies to the solar sector, more than doubling the amount of previously announced handouts given out this year. (Englsih article) That news comes a day after another Xinhua report quoted a government official saying Beijing is considering a plan to raise its target for construction of new solar power plants to 40 gigawatts of installed capacity by 2015, nearly double the previous target that itself was just raised in September.

It's interesting that solar shares rallied on the report about new subsidies, since the $1.1 billion in additional support is really quite minor and won't make a huge difference to any individual company. By comparison, the doubling of the construction target is much bigger and could translate to major new orders not only for the Chinese firms but also for foreign players like First Solar (Nasdaq: FSLR) if Beijing really executes the plan.

My view is that investors are betting that these latest 2 solar signals from Beijing are both just a prelude to a bigger state-led bailout package for the entire industry that is likely to come in the next 3-4 months. That package could see Beijing provide new funding for around a dozen of the industry's strongest players, which would then act as consolidators for the many smaller producers that would either be closed or merged with bigger rivals.

Investors are clearly becoming optimistic that sunnier days could be ahead for the sector in 2013, fueled by this state-led consolidation and a new boom in demand from China. I would partly agree with this view, though would also caution that there could be some hiccups in implementing such massive new plans. As a result, any meaningful pickup probably won't come until 2014.

Bottom line: New signals from Beijing indicate a rescue package for solar panel makers is drawing near, though a true turnaround for the sector is unlikely until 2014.

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

Dyadic: a 5-Minute Guide

Jim Lane

Dyadic LogoDyadic International, Inc. is a global biotechnology company that uses its patented and proprietary technologies to conduct research, development and commercial activities for the discovery, development, manufacture and sale of products and solutions for the bioenergy, industrial enzyme and biopharmaceutical industries.


140 Intracoastal Pointe Drive
Suite 404
Jupiter, Florida 33477

Year founded:


Stock Ticker:

Pink Sheets: DYAI

Type of Technology(ies)

Patented and proprietary C1 platform technology based on a unique fungal microorganism which is programmable and scalable in producing enzymes and proteins in large quantities


Dyadic’s C1 platform technology is effective in producing enzymes from a broad variety of feedstocks

Fuel Type

Dyadic’s C1 platform technology can be used to produce many types of biofuels including, but not limited to, cellulosic ethanol, biobutanol and biodiesel.

Offtake partners

    Abengoa Bioenergy (ABGOY)
    Codexis Inc. (CDXS)

Co-products (if applicable)

Industrial Enzymes

3 Top Milestones for 2010-12
  •     Entered into non-exclusive license agreement with Abengoa Bioenergy
  •     Reported record revenues and profits for fiscal year 2009
  •     Signed term sheet for potential exclusive outlicense of C1 technology for biopharmaceutical applications to EnGen Bio, Inc.
3 Major Milestone Goals for 2013-15
  •     Consummate additional licensing and other strategic collaborations to monetize Dyadic’s technologies
  •     Increase sales of industrial enzymes
  •     Consummate additional research and development collaborations
Business Model: (e.g. owner-operator, technology licensor, fee-based industry supplier, investor)
  •     Technology licensor
  •     Industrial enzyme sales
Competitive Edge(s):
  •     Patented and proprietary C1 technology
  •     C1 platform technology is programmable (genome has been sequenced and annotated)
  •     C1 technology can produce enzymes and proteins on commercial scale (up to 150,000 liter fermentors)
  •     Dyadic provides partners with ability to license the C1 platform technology for in-house/on-site manufacturing of customized enzymes and proteins
Distribution, Research, Marketing or Production Partnerships or Alliances.
  •     Non-Exclusive License Agreement with Codexis Inc.for use of C1 technology for biofuels, chemicals and pharmaceutical intermediate production
  •     Non-Exclusive License Agreement with Abengoa Bioenergy New Technologies, Inc.for use of C1 technology for biofuels, chemicals and/or power production
  •     Non-binding term sheet with EnGen Bio, Inc. for potential outlicense of C1 technology for biopharmaceutical applications
  •     Multiple research partnerships

Dyadic has been producing enzymes in up to 150,000 liter fermentors for over a decade

Demonstration and soon-to-be commercial stage through Dyadic’s licensees and partners



Disclosure: None.

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.

December 11, 2012

Tesla: Time to Take Profits?

by Debra Fiakas CFA
English: Photo of the Tesla Model S, from the ...
The Tesla Model S, from the unveiling on 26-Mar-2009. (Photo credit: Wikimedia Commons)
The Wall Street Journal reported on Friday morning that Blackrock has cut its position in electric sports car innovator Tesla Motors (TSLA:  Nasdaq).  Blackrock is a widely known and respected fund manager.  I imagine more than just a few investors grabbed whatever device might be available at the time and punched in sell orders on the supposition that smart money always know best.  The really smart investors had already looked at Blackrock’s filing with the SEC detailing the reduction in its TSLA holding by a whopping 0.66% from the beginning of the year.  Most probably these investors had already concluded it prudent to hold their hand.

Even though Blackrock appears to be holding onto its position in Tesla Motors for the time being, it does not mean that smart investors should not question Tesla’s future.  Recently the Wall Street Journal also reported Elon Musk used the Twitter social platform to declare Tesla on the cusp of positive cash flow.  Musk’s interests in Twitter aside, it was a bold statement.  Tesla used $233.1 million in cash to support operations over the twelve months ending September 2012.  For clarity, that is $19.4 million per month on average.  Musk’s declaration might suggest that the situation is improving.

However, in the most recently reported three months, Tesla was using even more cash than usual  -  an average $32 million per quarter.  The Company started shipping its Model S in June 2012 and geared up for volume production by investing in its supply chain.  Tesla reported that it manufactured 350 cars in the quarter ending September.

The question is whether available cash will be enough to see the Company through until cash starts coming in from selling those 350 Model S cars.  Tesla has been able draw down funds from a Department of Energy Loan.  The Company reported taking the last $33.3 million of the total $465.0 million DOE loan in the third quarter.  With the $85.7 million in unrestricted cash it had on its balance sheet at the end of September 2012, and at the average cash burn rate, Tesla could have lasted through the end of January 2012.

Musk, who seems to be forever speaking into a reporter’s microphone, promised to take as much as $1 million of the 6.9 shares Tesla offered in a follow-on offering staged at the beginning of October 2012.  The shares were sold at $27.89 per share.  The stock has climbed steadily since, ending trading the day before this post near $34.00 per share.  Trading in TSLA shares may have temporarily run out of steam, probably because shareholders like Blackrock are tempted to take profits by the rising price and ample trading volume.  I do not believe the stock is not likely to challenge the 52-week high near $40 until investors hear how many of those 350 Model S cars have been sold.
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. 

December 10, 2012

Suntech's Woes Drag On

Doug Young

Suntech logo] The woes at fast-fading former solar superstar Suntech Power (NYSE: STP) keep on coming, with the company releasing its latest earnings report that shows its woes are likely to continue until its increasingly inevitable takeover by the state. That takeover, if and when it comes, is likely to be as filled with fireworks as Suntech's actual decline, with all signs indicating that founder Shi Zhengrong won't easily yield control of his company to the government-backed funding sources he needs to provide it with desperately needed new capital.

Before we delve too deeply into that part of the story, let's step back and take a look at the actual preliminary results that show the company's business continues to decline as it grapples with a massive global supply glut for solar panels. (results announcement)

Other media are focusing on a part of the announcement that says Suntech will have to restate its results for 2010, as the company adds a provision for that year related to a fraud case it recently discovered involving one of its associated affiliates. That case itself is a bit complicated, but the bottom line is that Suntech thought it had received bonds from the associated affiliate and was using those bonds to guarantee a $600 million loan. It later discovered it never received those bonds, and now is having to use its own funds to guarantee the loan.

In my view, this restatement almost looks like the only bit of "good news" in the report, since everyone already knew about this problem and the final $60-$80 million figure in funds that Suntech will need to guarantee the loan isn't too large and will be recorded in the past.

The much worse news comes in the present, with Suntech reporting that its situation continued to deteriorate in the third quarter with no signs of relief in sight. That's important, because it could mean the company's few remaining customers are starting to abandon Suntech and perhaps going to its rivals, amid growing signs that Suntech's operations could be severely disrupted in an upcoming restructuring that will likely involve an ugly battle for control of the company.

According to its preliminary results announcement, Suntech's revenue for the third quarter will come in around $387 million, about half of the $743 million in reported a year earlier. It added it expects the weakness to continue into at least the first part of next year, which looks slightly more pessimistic than some rivals that have given signs that their business could start to stabilize following the sectors prolonged downturn.

Equally important, Suntech said it is still working to resolve its debt problems, a reference to the fact that nearly $600 million of its bonds will come due in March next year and it has no way to repay the funds. One of my sources previously told me that Shi would like to find a way to repay the bonds using a solution that doesn't require a bail-out from Beijing. But that kind of solution looks increasingly difficult, as bond holders are unlikely to make the kinds of concessions that Suntech would need to repay the debt without government help.

Progress in these negotiations will be the key factor to watch in the next 2 months, as it will determine whether Suntech remains an independent company or gets taken over by the government. I suspect a government takeover will be the ultimate result, as both debt holders and especially Beijing are increasingly losing their patience with Shi and would like to see him leave the company. That would pave the way for a fresh new management team to come in and try to turn around this former solar superstar.

Bottom line: Suntech's latest results indicate the company's deteriorating situation will continue into next year, making a government takeover likely as it struggles to repay its big debt.

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

EPA Makes Sorghum an Advanced Biofuel Feedstock

by Debra Fiakas CFA
Sorghum Bicolor photo by Matt Lavin
 Like the Fairy Godmother in Cinderella, the Environmental Protection Agency has waved a wand and given sorghum a new dress and slippers.  Sorghum has been designated as an eligible feedstock under the Renewable Fuels Standards for production of advanced biofuel.  Only biofuels produced from non-corn starch, sugar, or lingo-cellulosic biomass, which reduces carbon intensity by 50% or more from a gasoline baseline, qualify as ‘advanced.’

Sorghum qualifies for advanced fuel status as the result of a 53% reduction in greenhouse gas emissions.  The plant is hardy and requires grows with modest moisture conditions and requires little fertilizer.  Indeed, in comparison to corn, sorghum requires one-third less water but produces an equal amount of ethanol.

As an advanced fuel, sorghum-based ethanol with benefit from higher prices.  The prospect has ethanol producers salivating.  Western Plains Energy in Kansas has indicated interest in as much as 17 million bushels of grain sorghum from farmers in the area and its facilities are being converting to methanol from natural gas as a production fuel source.  The company is targeting 50 million gallons of ethanol that will qualify as ‘advanced.’  Pacific Ethanol (PEIX:  OTC/BB) announced that sorghum provided 30% of the feedstock used in third quarter 2012.  The sorghum was sourced from farms in California.

Do not expect a sweeping conversion of ethanol plants from corn to sorghum.  The preponderance of ethanol plants is located in the Corn Belt precisely because the corn is there.  While there are a few sorghum fields in Iowa and Illinois, most of red grain is raised in the central and southern plains  -  Texas, Oklahoma, Kansas, Colorado, Nebraska and South Dakota.  This means that for the time being the ethanol facilities in these states will likely be the sorghum lottery winners.

If I am right in this view, then there are likely a string of ethanol stocks that could get a boost for the development.  Abengoa’s (ABGOY:  OTC/PK) Bioenergy has plants in Kansas and Nebraska.  In Nebraska is home to plants operated by Aventine Renewable Energy (AVRW:  OTC/BB) and Green Plains Renewable Energy (GPRE:   Nasdaq).  In South Dakota Valero’s (VLO:  NYSE) Renewable Fuel produces as much as 12% of the one billion gallons of ethanol that is presently originated in the state.  Two private producers, POET Biorefining and Glacial Lakes Energy, account for over half the state’s output.  The added value from the switch to sorghum could be the catalyst that enables POET's long-awaited public offering.
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. 

December 09, 2012

Power REIT: Good if They Lose, Much Better if They Win

Tom Konrad CFA

It’s Good to be Small

Small investors have an advantage over big hedge funds and other professional investors: They don’t have as much money.

Why is not having much money an advantage?  It allows us to invest in stocks that large investors simply cannot touch because of lack of liquidity.  If a stock only trades $50,000 worth of shares a day, a even a relatively small $50 million dollar hedge fund would have to buy all of the shares traded for two weeks just to allocate 1% to the stock, and would have to do the same if it were to sell.  As you can easily imagine, that would send the stock price rocketing (or plummeting when the fund sold), and remove much potential for profit.

If the big funds can’t buy a stock, they’re not going to spend any time researching it.  Likewise, analysts, who make their money selling their research to large investors, are not going to research it either.   With professionals out of the picture, it’s relatively easy for a small investor to gain an informational advantage: We just have to dig a little deeper than others.  The fewer investors who are paying attention, the easier that is.

That’s not to say that all (or even most) illiquid stocks are a good buy.  You still have to do some digging.  Yet unlike with more widely followed companies, the stock price can occasionally be much less than the value of the company, especially if that value is not yet shown on the company’s books.

pwlogo5[1].jpgA Very Illiquid Stock

Which brings me to Power REIT (NYSE:PW.)  The stock’s average daily volume is about 1300 shares, or only $10,000.  With a market cap of $13 million, if a $100 million dollar hedge fund tried to allocate just 1% to PW, it would send the price skyrocketing as it attempted to purchase as much stock as normally trades in five months.  The fund would also end up owning over 5% of the company, becoming subject to extra restrictions on trading and disclosure.

With a stock this illiquid, even small orders of a few hundred shares can move the price five to ten percent, so it’s best to use limit orders to make sure you’re not paying a lot more than you expected.  Even limit orders will move the price over time, however.   That said, the current stock price of $8.10 is more than justified by the current 4.9% annual yield alone.  Which means the large upside potential I’ll discuss below is essentially free.

What Most Investors See

I mentioned Power REIT in my recent article on the possibility of Solar REITs, as well as profiling the company earlier this year.  I think the comments I’ve received are indicative of what most small investors see when they look at PW:

Personally, I consider a 5% yield attractive in the current interest rate environment, but it’s the litigation with Norfolk Southern Corp. (NYSE:NSC) that provides the opportunity to dig deeper than most other investors have.

According to Power REIT’s recent quarterly report and court documents, the substance of the litigation is this:

  • Power REIT believes that  NSC, and its sub-lessee, Wheeling & Lake Erie Railroad (WLE) are in default on their lease with Power REIT’s wholly owned subsidiary, Pittsburgh & West Virginia Railroad (P&WV.)   That leased property is 112 miles of railroad track and railroad property in Pennsylvania, West Virginia and Ohio, and is Power REIT’s main asset.  For the sake of brevity, I will refer to NSC and WLE collectively as the lessees from this point forward.
  • The lessees are seeking a judgment that they are not in default of the lease.   If they are not declared in default  they have the right to unlimited renewals of the 99-year lease on the current terms which are very favorable to them.
  • If the court declares the lessees in default, they would have to re-negotiate terms for using P&WV’s property.  In addition, a substantial “indebtedness” arising from tax payments made by P&WV on NSC’s behalf and asset sales of unused portions of the leased property would come due.  The court may also declare the lessees owe back interest on the indebtedness.  NSC has not provided access to the books which would document the size of this indebtedness, but it was carried (without interest) on P&WV’s 2009 tax return (prepared by NSC) at $15,517,325.  It has since increased to at least $15,882,651, according to an exhibit filed by Power REIT.  The lessees refer to this indebtedness as the “settlement account.”  The lease limits the size of this indebtedness to a tiny fraction of the size of the current settlement account.
  • P&WV believes that the lessees are in default for at least three reasons, which they state in their answer legal filing:
    1. Failure to pay specific P&WV’s legal fees which it believes the lessees were required to pay under the lease after 60 days notice.
    2. Failure reimburse P&WV in cash for Federal tax payments made under the terms of the lease.
    3. Failure to allow P&WV to inspect books and records regarding its property or inspect its track.

Payment of Legal Fees

The lessees argue that the lease does not require them to pay P&WV’s legal fees.  The relevant section of the lease, 4(b)(6), states that the lessee is

[R]equired to pay all obligations reasonably incurred by [P&WV] … for … all acts and things necessary or desirable for the protection [of P&WV]’s rights …. pursuant to this Lease, except such obligations … solely for the benefit of its stockholders.

While I’m not an attorney, it seems clear to me that the legal fees Power REIT has incurred to determine its rights under the lease and to protect its interest in the current litigation are both “necessary or desirable” to protect its rights under the lease.  While everything Power REIT does should eventually be for the benefit of its stock holders, that clause is not relevant here because, as P&WV points out in its legal filings, NSC has not historically applied that exemption to paying any of P&WV’s taxes.  These tax payments are also required under the lease subject to the same exemption.

Payment of Taxes

The lease allows the lessees to use the depreciation of the property to reduce their tax bills, so long as they compensate P&WV for the taxes then owed.  Section 4(b)7 of the lease states such taxes (as well as the legal fees discussed above) “shall be paid or discharged by Lessee as and when they become due and payable.”

Rather than paying these taxes for P&WV, the lessees have simply been increasing their “indebtedness” to P&WV, as discussed above, forcing P&WV to pay the taxes out of its own cash.  This is another reason Power REIT argues that the lessees are in default.

P&WV Rout Map
Pittsburgh and West Virginia Railway Route Map, pre-1967 from Wikipedia

Refusal to Allow Inspections

NSC has also refused to allow Power REIT to inspect NSC’s books, despite the fact that section 8(a)3 of the lease seems crystal clear that it should be allowed to do so:

[NSC and WLE] shall permit at any and all reasonable times such person or persons as [P&WV] may designate to inspect the books and records of [NSC or WLE] for any purpose whatsoever.

As far as I can tell, the track inspection Power REIT requested is not required by the lease, but the refusal to allow an inspection of NSC’s books seems sufficient to declare NSC to be in default.

WLE amp A portion of Wheeling and Lake Erie Railway's Route Map

Timing and Likely Outcomes

The case is pending in Federal Court in Pittsburgh, PA.  The litigation is currently in the active discovery phase.  While it’s extremely difficult to predict how long the litigation might continue, and what the cost might be, both parties are asking the court for a summary judgment, which means that there could be a judgment soon after this phase is over.

The various issues that will need to be decided are:

  • Can Power REIT terminate the lease?
  • How should the “indebtedness” in the settlement account be treated?
  • Are the lessees responsible for any of Power REIT’s legal costs?

From reading the filings, it seems to me that WLE and NSC’s strongest argument is that they have been doing things this way for 45 years, and P&WV has never objected before.  Hence, the argument goes, P&WV implicitly agreed to their procedures with its lack of objection over four decades.  Power REIT’s counter is that P&WV was for all intents and purposes a captive of NSC.  NSC controlled PW’s board (WLE’s President was chairman of the board.)  NSC even prepared P&WV’s taxes.   Since P&WV did not have the capacity to object, its previous silence did not constitute assent.

Termination of the Lease

It seems clear to me that WLE and NSC are in default of the lease on several counts, and the lease  is quite clear that there is no remedy once a default has occurred.  That said, the court might still decide that the possibility of economic disruption  would be too great if Power REIT were allowed to completely revoke the lease, and so might simply change the terms of the lease, or order that they negotiate a new lease that the court deems fair.

Any of these outcomes would most likely be favorable to Power REIT, since the current lease has no provision for inflation, past or future, and the current rent is far below a market rate.  The worst-case scenario for Power REIT would be if the court were to rule in WLE and NSC’s favor, and re-affirm the status quo.

If the court finds the lease in default, then WLE or some other railway will need to renegotiate a lease with Power REIT.  Given the fact that the current lease is 50 years old and has no inflation adjustment, it seems reasonable to expect that any new lease would be considerably more lucrative for Power REIT than the old one.  It’s also worth considering that the rail in question lies on top of the active Marcellus Shale natural gas play.  While the environmental impacts of shale gas drilling are in question, the impact on rail usage are not: shale gas drilling requires incredible volumes of water, sand, and drilling chemicals to be hauled, and rail is far more economical for moving bulk goods than roads.   Any new market lease would probably be worth many times the $915,000 per year ($0.55 per PW share) paid under the old lease.


The lease does not define the terms of the “indebtedness” represented by the almost $16 million in the “settlement account,” and is silent on when the indebtedness is due.  PW argues that because the lease is silent on the matter, the money is payable on demand.

Even if Power REIT is not able to demand the money immediately, the lease caps the settlement account at five percent of P&WV’s assets, which, depending on how assets are valued, is almost certainly less than $1 million.

Hence, there are a large number of avenues by which the court might decide that at least $15 million of the settlement account is due and payable immediately.  Since Power REIT has only 1.62 million shares outstanding, that amount to a payment of over $9 a share.  As I write, Power REIT’s stock last traded at $8.10.

In any case, the court may decide that the balance is subject (as Power REIT argues) to interest at the Applicable Federal Rate (AFR).  I was only able to find AFR data back to 1990, but the long term AFR appears to be about 1% less than the 10 year Treasury rate for those years, so I used this approximation for 1967 to 1989.  If we assume that the settlement balance has accrued in straight-line fashion over the 45 years since the beginning of the lease, we get a total (with compounded interest) of around $70.7 million.

While the legal argument that a debt should accrue interest seems sound to me, I have trouble believing that the court would award $70 million to a company with a $13 million market cap.  On the other hand, much stranger things have been known to happen.

Payment of Legal Costs

The lease seems quite clear that the lessee should pay all P&WV’s tax payments and legal costs that are not strictly for the benefit of shareholders.

The legal costs are disclosed in Power REIT’s 10Q, and amount to $366,000, or $0.23 a share.    Although these legal costs are recoverable under the lease, GAAP accounting rules require them to be booked as an expense, and this has been depressing earnings over the last few quarters.  There was also a smaller amount spent in 2011.

Power REIT management believes that the lessees will have to reimburse these legal fees.  This confidence makes this tiny company willing to take on a behemoth like NSC in a legal battle.  The expense might be hurting the stock now, but the cost is much easier to bear when it’s likely your opponent will be paying your expenses.  This also means the lessees have an incentive to wrap the case up quickly.

When the case is over, the worst case scenario is that the court decides NSC will not have to reimburse any of these expenditures or taxes.  In that case, the bleeding will stop, and PW’s earnings per share will return to their former level of about $0.44 a year based on the rent from the lease.  Otherwise, we will see a one-time earnings boost of $0.23 a share or more, some of which might have to be returned to shareholders as a special dividend in order for Power REIT to retain its REIT status.

Implications for Power REIT

This litigation has so far prevented Power REIT from progressing with its plans to diversify its business into Renewable Energy Real Estate.  I have also spoken to multiple investors who are unwilling to invest in the company until the dispute is resolved.  I think such investors are being overly cautious.

Potential moneys that the lessees might be ordered to pay are

  • $0.23 per share or more in legal fees.  I think this is very likely.
  • $15,882,651 or $9.80 a share for the value of the settlement account.  I think there is a decent chance that the court will order NSC to pay this one way or another, although it might not come as a lump sum.
  • Interest on the above amount.   If the court does award interest, it would come to about $55 million ($34 per PW share) of compound interest on top of the $15.5 million principal if they use the long term AFR.
  • Increased rent under a renegotiated lease, which could be many times the current lease payment.  The current lease pays $915,000, or $0.56 per PW share per year.

The downside for Power REIT would simply be that the court orders that the status quo be maintained (in which case they could still order the lessees to reimburse Power REIT’s legal fees.)  In this case, the legal spending will stop, investors will have greater certainty and still own a REIT yielding over 5% which has plans to expand its asset base into renewable energy real estate.  As I have previously written, that expansion is likely to allow PW to increase its per share dividend.

In addition, Power REIT could write off the noncollectable settlement account against future income.  This has been carried on Power REIT’s tax returns as a receivable. 

While no cash would change hands, writing off the $15,882,651 against future income would allow Power REIT to return $9.58 per share to shareholders as a tax-exempt return of capital, rather than as unqualified dividends.  At the current quarterly dividend rate of $0.10 per share, that would mean that all Power REIT’s dividends would be exempt from tax for the next almost 24.5 years.

With the stock price at $8.10, PW’s annual yield is 4.9%.  While the write-off would make no difference to a tax-exempt investor, a taxable investor in the 30% tax bracket would get an after-tax income stream comparable to another REIT yielding  7%, a substantial difference which I do not believe is yet priced into the stock.

Normally, I would suggest that any investor with the option should purchase a REIT in a tax-advantaged account, such as an IRA.  In this case, if you think the chances of Power REIT being able to collect on the indebtedness are low, a taxable account would be most appropriate.

Heads: Win Big, Tails: Win Small

PW is a $8.1 stock carrying no debt whose price can be justified on the basis of current assets and dividend alone.  On top of that, it has a decent (in my opinion) chance of a legal victory in 2013 that could result in payments significantly in excess of the company’s entire market capitalization.  If they lose, they can still write off the noncollectable $15,517,325 settlement account, allowing the company to characterize distributions to shareholders as non-taxable capital gains for many years to come.

That’s an investment even a large investor would love… if only they did not have too much money to buy it.

Disclosure: Long PW.

This article is derived from two articles published on the author's Forbes.com blog, Green Stocks on November 27th and 29th.

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 08, 2012

350.org's Smart New Campaign

Garvin Jabusch

Many parallels exist between the college campus divestiture campaigns of the 1980s and today. Both were/are seeking to apply intense student and community pressure to persuade boards of trustees to get endowment monies out of investments in businesses or locations perceived as undesirable. In the '80s it was South Africa and Apartheid that students objected to. Back then, one could almost conceive of college students versus a beleaguered South African government as something of a fair fistfight between entities with comparable chances of winning popular opinion and thus investment dollars to their side. And indeed the students did ultimately prevail, redirecting investment capital away from South Africa, thus driving government capitulation on Apartheid, a historical bright spot that is now giving inspiration and belief in the power of action to a new generation.

Brune Do the Math
Sierra Club Executive director Michael Brune speaks at Bill Mckibben's "Do the Math" 350.org tour in Durham, N.C., November 19, 2012 (Image source: Appalachian Voices, photo by Kevin Sewell).

But this time is different. This time the enemy, the target of proposed divestiture, is not a group of entrenched old men clinging to their racist past, but instead the wealthiest and most profitable industry in human history, fossil fuels. The fossil fuels industry and its several parts and cronies, big oil, big coal, natural gas, and some large financial institutions, will not retire as quietly into the night. Indeed, they began firing the first shots in this war decades ago when they first perceived that renewables could one day disrupt their extremely efficient and profitable businesses. Media disinformation about climate and renewables, influencing elections, lobbying, buying fossil fuels favorable policy; these are just some of the ways they've been pre-fighting the war of divestiture for decades.

Further, the fossil fuels industry along with its allies on Wall Street has actually been waging a divestment campaign on renewables stocks, particularly over the last two years. Using major media outlets to decry renewable energies and label them "pipe dreams," and "untenable" "job killers"(they’re actually the reverse), and using tactics such as misrepresenting renewable energy companies' earnings on-air, they have been mounting an economy-wide renewables divestiture campaign under the guise of normal financial coverage and popular opinion. This push to dictate conventional wisdom and thus discourage anyone from wanting to invest in renewables is also given legitimacy via biased bank research reports. Finally, renewable stocks are beaten down to their penny-stock graves by concentrated short selling attacks where multiple banks and other institutions join in selling as many shares of the target company as they can -- whether or not they actually have the shares to sell -- to drive the price down to where no reasonable lay investor can still imagine there is any value.

They have been working hard and long, and largely successfully, to maintain their status quo. This time, it’ll take more than a few campus shanty towns and disrupted trustee board meetings to earn change.

So to me it seems like 350.org's divestiture campaign to get money out of fossil fuels stocks is brilliant in that it is the first time we're fighting fire directly with fire. We need to understand that this time around we're bringing the fistfight to an armored division, and that we're bringing it maybe two decades late. But, finally, rather than just protesting, we're sending - or trying to send- the only message oil bosses understand: that there now may be a threat to their equity share prices, public opinion, and, soon, even short term revenues. We’re finally getting onto their turf.

So, just maybe, speaking their language will get them to understand that we must and will transform our energy society into one that can thrive on a finite earth, and also that the builders and inventors of the tech and systems that will get us there stand to earn enormous profits. Joining in this new wave of innovation, in other words, is the way forward for these behemoths of the past if they want to maintain their relevance in the final scheme of things. Impacting their share price is a good way to start attracting their attention.

Finally, let's recall that in the U.S., support of ending Apartheid became a non-partisan issue -- college students now have the opportunity show big oil that this isn't a republican or democrat issue; renewables aren't just supported by liberals, but by all people who are hopeful for our future and feel a responsibility to right the course of the planet's economies.

So please, charge on with the divestment campaign, we'll even be here to help, but remember that unlike last time, our adversary is resourceful and unfathomably rich, so there will certainly be some blowback along the way. If we can advance by baby steps -- divestiture of a college or two here and there -- I would hail that as a tremendous start and a victory, then, rebel like, we can leverage those early gains, combined with stories about times when we were set back, into tales that inspire faith that the world's largest industry really can be challenged.

Garvin Jabusch is co-founder and chief investment officer of Green Alpha ® Advisors, and is co-manager of the Green Alpha ® Next Economy Index, or GANEX and the Sierra Club Green Alpha Portfolio. He also authors the blog “Green Alpha's Next Economy."

December 07, 2012

Zombie LDK Stops Production, Fires Thousands

by Sneha Shah

ldk logo

LDK Solar (NYSE:LDK) which used to be the biggest solar wafer producer has completely stopped production of polysilicon and sharply reduced shipments to preserve cash. The company is effectively bankrupt and surviving due the largesse of state owned Chinese banks which have given $3 billion in loans to the company. LDK has almost no chance of paying down this monstrous debt given that it has been operating on negative gross margins for the last few quarters.

LDK cost structure is way too high compared to its competitors

LDK has a much higher cost structure in most solar segments. Its wafer processing cost is 25c/watt compared to 12c/watt for Renesola (NYSE:SOL), its polysilicon cost is around $30/kg compared to $23/kg for Renesola and $17/kg for GCL Poly (3800.HK). Given that even Renesola and GCL are making losses, the situation for LDK is dire. LDK has diversified into production of cells, modules as well as solar plant construction. However these efforts like the others have also failed spectacularly with its German acquisition also near bankruptcy.

LDKs Giant Polysilicon Plant stops Production

LDK’s biggest failure has been in building up its polysilicon production. The plant took too much time and too much money to get built and never managed to reduce its costs to a competitive level. Despite building a plant with 15000 tons of capacity making it one of the top polysilicon players, the company has never managed to ramp production to make decent profits. Not its plant lies idle as polysilicon prices have crashed to $15/kg almost half that of its cost of $30/kg. It remains to be seen whether this plant will ever restart. The only chance for it to do that is if the Chinese government imposes duties on imports of polysilicon.

LDK Management has no clue what to do

The Management of LDK Solar has performed disastrously right from building the polysilicon plant to diversification into thin film solar panels (Best Solar), acquiring solar system companies (Germany, USA), managing debt etc. They kept on spending money and building capacity even as the whole house of cards collapsed around them. Even as recently as last year , they signed a deal to build a massive polysilicon plant in China’s Inner Mongolia province even as they could not run their poly plant profitably. The company had forecast more than $2.5 billion in sales at the beginning of the year and now they have reduced it to less than $1 billion.

LDK has fired thousands of employees this year and will continue to do so

The company in its latest quarterly results reported a sharp decline in cash as the company continued to burn cash. LDK management has fired 2500 workers as its utilization fell sharply and has fired almost 9,000 workers or 40% of its workforce this year. Given its uncompetitive structure, the company will continue to fire workers. LDK has almost 4 GW of wafer capacity and has used less than 50% of that capacity this quarter.

LDK is Bankrupt but the Chinese Government does not want to let go

LDK is bankrupt and one can easily make that out going through its balance sheet. The company has almost $3.7 billion of plant assets which in reality are of much lower value. If the company takes even a 10% asset writedown of its PPE, it will have a negative worth given that it has only $50 million of equity listed on its balance sheet. LDK has more than $3 billion in loans and it has been reported that a small bank Shanghai Rural Commercial Bank for overdue loans worth 100 million yuan has already sued LDK to recover that loan. LDK recently sold a 20% equity stake for a pittance to a state owned vehicle Heng Rui Xin Energy and changed its management structure. The Xinyu government has also given it a grant. But given its massive problems all loans and grants will only prolong the pain given that LDK has no chance of coming out of this downturn unless a miracle happens.

Sneha Shah is the, editor of Greenworldinvestor.com, a blog about Global Green Industry and Renewable Energy Industry, focusing on Solar Energy, Wind Energy, Energy Storage, Efficiency etc.

Mockumentary: This is Western Wind

Tom Konrad CFA

Windstar wind farm
The Windstar Wind Farm. Photo credit: Western Wind Energy
If the sale of Western Wind Energy Corp (TSXV:WND, OTC:WNDEF) were a movie it would be a satire like This Is Spinal Tap, the 1984 Rob Reiner classic Mockumentary profiling a “Heavy Metal band on the verge of spontaneous combustion.”

I doubt any wind turbines are about to spontaneously burst into flame, but the news keeps getting weirder.

First, there was the hedge fund (Savitr) which began pressuring management to put the company up for sale after Western Wind huffily refused an unsolicited C$2.50 per share offer from Algonquin Power (TSX:AQN, OTC:AQUNF) late last year.  This pressure included personal attacks and dirt digging on the part of a private eye (not necessarily connected to Savitr) who claimed to be able to connect Western Wind’s CEO, Jeff Ciachurski with criminal elements.

Ciachurski played his part as rock diva well, displaying a thin skin and hot temper (at least by the standards of corporate press releases.)  First, he dismissed the Algonquin offer out of hand as “extremely low-ball,” and only formed a special committee to consider formal offers under pressure two weeks later.  Quite possibly not wishing to be part of the drama, Algonquin dropped its informal offer a week later, and the special committee was apparently wound up after having considered a grand total of zero formal offers.

In August, after Western Wind’s stock had plummeted into the low C$1 range by the negative rumors circulating about management and an unexpected cut in a Federal tax grant, Ciachurski gave Savitr what he thought the fund wanted: he put the company up for sale.  But even that did not go smoothly, with Savitr keeping up the pressure by running their own slate for the board of directors, with the stated goal of doing exactly what Ciachurski & Co. were already doing: selling the company to the highest bidder.  Accusations continued fast and thick on both sides, with each impugning the other’s willingness and ability to get the best deal for shareholders.

In September, Brookfield Renewable Energy Partners (“Brookfield”, TSX:BRP.UN, OTC: BRPFF) entered the fray, signalling its intention to bid for Western Wind by acquiring the 18.6% of shares and warrants owned by the company’s largest shareholder and the voting rights which went with them.  At the time, I thought Brookfield’s motivation was to influence the outcome of the proxy battle, perhaps calculating that it could get a better deal out of the eager to sell Savitr than the reluctant salesman Ciachurski.

Today, that intuition was proved correct.  According to a company press release, Brookfield has not been participating in management’s sale process, and has instead attempted to form its own bilateral agreement with Western Wind.  Brookfield representatives also appeared at the company’s annual meeting in the company of the dissent board backed by Savitr.  Since Ciachurski successfully saw off the proxy challenge, Brookfield made it’s own informal offer (again at C$2.50) on Friday, having refused to sign the non-disclosure and standstill agreements signed by the other participants in the auction process, some of whom the Company claims have already (informally) expressed willingness to pay considerably more than C$2.50 a share.

Perhaps all the drama is more of a low-brow made-for TV movie than classic Mockumentary, but the box office returns in the form of the stock’s reaction today (up 12% at C$2.72) have been quite good.

Disclosure: Long WNDEF, AQUNF, BRPFF

This article was first published on the author's Forbes.com blog, Green Stocks on November 26th

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 06, 2012

ePower’s Series Hybrid Electric Drive – Unmatched Fuel Economy for Heavy Trucks

John Petersen

Over the last couple weeks there’s been a lot of message board chatter about ePower Engine Systems, a transportation technology company that has selected the PbC® battery from Axion Power International (AXPW) for its series hybrid electric drivetrain for over-the-road freight haulers who drive heavy Class 8 tractors. Since I introduced ePower to Axion and have tracked their progress for a couple years, I called ePower’s CEO Andy Claypole to ask his permission to share what I’ve learned about ePower’s hybrid electric drivetrain.

12.6.12 Tractor.png

After a series of phone calls and e-mails, Andy graciously sent me a technical presentation on ePower's series hybrid drive and gave me permission to share the presentation with readers and discuss ePower and its technology in greater detail. Click here to download a copy of ePower's presentation.

ePower Engine Systems LLC is a closely-held advanced transportation technology developer that’s using inexpensive off-the-shelf components to bring series electric drive, the mainstay of the nation’s rail transportation system, to highway transportation. Their goal is to narrow the fuel efficiency gap between 480 ton miles per gallon for railroads and 110 ton miles per gallon for heavy trucks.

In a truck with series electric drive, there is no mechanical connection between the engine and the wheels. Instead, the engine powers a generator and electricity from the generator powers an electric drive motor. This configuration maximizes fuel efficiency by running the engine at its optimal RPM and eliminates the need for complex heavy truck transmissions while delivering the instantaneous peak torque of an electric motor.

In furtherance of their goal to maximize fuel efficiency, ePower takes series electric drive a step further by sizing the generator for steady vehicle state operations at highway speed and using an array of 52 PbC batteries to provide additional power for acceleration and hill climbing, and increased energy savings from regenerative braking. The ePower drivetrain is a true series hybrid electric drive and a first for the trucking industry. The design is suboptimal for mountainous routes with substantial elevation changes, but it’s extremely efficient in flatter terrain.

12.6.12 Schematic.png

While a typical Class 8 tractor operating in the US with an 80,000 pound gross vehicle weight achieves fuel economy in the 5.2 mpg range, the same truck with an ePower system will deliver fuel economy of 10 to 14 mpg, values that crush the DOE’s 2018 SuperTruck target of 6.8 mpg for conventional heavy trucks. It works out to an annual fuel savings of roughly 11,500 gallons per vehicle.

During the startup phase, ePower has focused on the retrofit market because around 37% of the 2.7 million trucks in the US-fleet are more than five but less than twelve years old. These trucks have outlived their original drivetrain warranties and are often less efficient than newer trucks, but they have substantial remaining useful life in their chassis, bodies and other components.

The cost of converting a tractor with a conventional diesel drivetrain to a series hybrid electric drivetrain is approximately $70,000 (batteries included) and ePower believes its retrofits will pay for themselves through fuel savings alone in 18 to 24 months.

Currently, ePower is doing all required retrofit work in its own facility. Once its system is fully developed and proven, ePower intends to provide the necessary conversion components in kit form for sale to certified installers including fleet operators and other service entities. It also hopes to license its technologies and systems upstream into the OEM market.

ePower’s original design used absorbed glass mat, or AGM, batteries to provide acceleration and hill climbing boost. Unfortunately, the AGM batteries were poorly suited to long-string use and ePower was not satisfied with the frequency of battery failures. The AGM batteries also tended to degrade rapidly, which impaired acceleration and hill climbing boost while diminishing the efficiency of regenerative braking systems. ePower believes the long-string behavior and high dynamic charge acceptance of Axion’s PbC battery will overcome both of these challenges.

The PbC batteries were delivered to ePower in mid-November and installed in swappable battery boxes that will give ePower the ability to switch back and forth between the old AGM batteries and the new PbC batteries in a couple of hours. During the first week in December, ePower plans to conduct a series of benchmarking tests to compare the on-road performance of the two battery systems in the same vehicle. It will then devote the rest of December to a road show for potential customers. In early January, the first PbC powered truck will be delivered to ePower’s customer and a second AGM powered truck will be brought back into the shop for a PbC upgrade.

I believe the ePower system is intriguing for several reasons. Firstly, it’s a frontal assault on fuel costs, the biggest expense burden in the trucking industry. Secondly, ePower’s initial marketing efforts are directed at medium to large fleet operators who are more inclined to assume the risk of testing an idea in real world conditions instead of devoting years to laboratory work. Thirdly, the ePower system is an extremely efficient use of batteries. Finally, it doesn’t take much market penetration in a million-unit fleet to represent a substantial revenue base for ePower and Axion.

If results from ePower’s prototype demonstrations are favorable, there is a significant likelihood that several large freight operators will purchase multiple retrofits for similar testing programs to determine where series hybrid electric drivetrain would fit into their operations. ePower’s series hybrid electric drive system is not a silver bullet solution for all truckers and all routes, but the economics can be very compelling for firms with established routes and schedules where a series hybrid electric drivetrain can do the required work at a lower cost.

Author is a former director of Axion Power International (AXPW) and holds a substantial long position in its common stock.

Should “Green” Funds Invest in Fossil Fuels?

Marc Gunther

Do the mathBill McKibben’s groundbreaking Rolling Stone story (Global Warming’s Terrifying New Math) and 350.org’s “Do the Math” divestment campaign raise important and difficult questions about fossil fuels. One that is starting to roil the world of socially-responsibly investing is this: How should mutual funds that strive to be “green” or “sustainable” or “socially responsible” deal with the fossil fuel companies in their portfolios? Should they divest, as McKibben argues?

That was the topic of a column I wrote last week for the Guardian Sustainable Business, which generated some noteworthy responses. It’s part of the British newspaper The Guardian, which has one of the most popular English language media websites in the world. Here’s how the column begins:

“We’re going after the fossil fuel industry,” Bill McKibben tells about 1,800 cheering fans in a Washington, DC, theatre. “They’re trying to wreck the future, so we’re going after some of their money.”

Al Gore notwithstanding, McKibben – an author, academic and founder of the grassroots climate group 350.org – is America’s leading environmental activist. His 21-city Do The Math tour begins a campaign to persuade colleges, churches, foundations and governments to divest their holdings in coal, oil and natural gas companies.

“It does not make sense,” McKibben tells the Washington audience, “to invest my retirement money in a company whose business plan means that there won’t be an earth to retire on.”

He’s right about that, but the divestment campaign raises a thorny question: where can investors who worry about climate change put their money?

Divest for our Future, 350.org’s divestment website, recommends “environmentally and socially responsible funds“. The trouble is, the biggest and best-known mutual funds that call themselves environmentally and socially responsible also invest in fossil fuel companies. They evidently haven’t heard McKibben’s message.

Is this green?

The column–you can read the rest here–goes on to report that the Parnassus Equity Income Fund  holds about 14% of its assets in oil, natural gas companies and electric utilities that burn fossil fuels, that the TIAA-CREF Social Choice Equity Fund owns shares in dozens of oil and gas firms including Hess, Marathon and Sunoco, and a pair of shale gas giants, Devon Energy and Range Resources, that the Calvert Equity Portfolio  has about 10% of its portfolio in fossil fuels, including  Suncor, which says on its website that it was “the first company to develop the oil sands, creating an industry that is now a key contributor to Canada’s prosperity,” and that the Domini Social Equity Fund has, among its top 10 holdings, Apache Corp, an oil and gas exploration and production company.

Are you surprised to learn that these funds invest in oil and gas companies, including those in the Canadian Tar Sands? Perhaps naively, I was.

If you believe McKibben’s math, as I do — and it hasn’t been challenged by the fossil fuel industry–the idea of exploring for new oil and gas is folly. Using data from the Carbon Tracker Initiative, McKibben estimated that the earth could burn another 565 gigatons of carbon dioxide and stay below 2°C of warming. Fossil fuel corporations have 2,795 gigatons in their reported reserves – five times the safe amount. We don’t need any more.

My Guardian column–which is the first of a series that I’ll be doing for the newspaper–was intended to highlight the fact that SRI funds weren’t as clean and green as many probably believe them to be. It didn’t set out to answer the question in the headline: Where can investors who worry about climate change put their pension?

After the story ran, I heard from the managers of two socially-responsible funds that, as a matter of policy, work hard to stay away from fossil fuels.

Carsten Henningsen, chairman of Portfolio 21 Investments,  emailed me to say that his company for the most part avoids fossil fuel companies, including those that extract natural gas (but not those that burn it). Here’s the policy:

Portfolio 21 Investments does not invest in companies directly involved in the extraction and production of fossil fuels ?coal, oil, and natural gas.  Natural gas has a lower greenhouse gas (GHG) emissions profile than either oil or coal.  Despite natural gas’s lower GHG profile, it is a combustible mixture of hydrocarbon gases, formed primarily of methane.  Deposits are found at varying depths beneath the Earth’s crust, both onshore and offshore, requiring the use of both conventional and unconventional extraction methods.  Given the elevated environmental risks associated with extraction, Portfolio 21 Investments will not invest in extraction and production.  However, due to the current limitations of renewables (in terms of current capacity and financial attractiveness), and  the lower GHG profile of natural gas, Portfolio 21 Investments will invest in companies involved in the transmission and distribution of natural gas as well as in utilities that utilize natural gas as a fuel source.

I also heard from Leslie Samuelrich, senior vice president, Green Century Capital Management, a fund company that was started in 1991 by environmental groups. She writes:

Investors concerned about climate change should look to use their investments as a vehicle to address the problem.

That’s why Green Century offers a mutual fund, the Green Century Balanced Fund (GCBLX), that is fossil fuel-free.

The Balanced Fund is an actively managed fund that holds a mix of stocks and bonds that meet tested environmental criteria. The Fund does not invest in the exploration, drilling, refining or production of oil, gas or coal.  The Balanced Fund provides an opportunity to invest in sustainable companies and environmental innovators.  The Fund also seeks to provide competitive returns to its investors and has a four star overall rating from Morningstar.

I’m not offering investment advice here, of course, but I do think socially-conscious investors should look into their funds’ portfolios, which are made public twice a year. If you want your mutual fund to divest fossil fuel companies, let them know.

A final thought. I have a lot of respect for the people I know at Calvert and Domini (where I’ve been an investor). They both do lots of shareholder activism around environmental issues. Here, in full, is the thoughtful reply that I got from Domini’s Adam Kanzer when I asked him about this issue:

Of course we’re reconsidering our approach to fossil fuels. We would expect anyone who has taken a close look at the science to regularly reassess their exposure to fossil fuels. Bill McKibben is absolutely right to focus attention on fossil fuel investment, and I fear his math is correct. Personally, I think the Carbon Tracker report is one of the most important reports I’ve read in a long time. Investors – and society – ignore these facts at their peril.

The question for us is how we can be most effective in our role as investors. How can we adequately reflect both our shareholders’ desires and our own principles, and also have a positive impact on climate? These discussions are ongoing and will continue. We believe a range of strategies need to be brought to bear on the problem.  We currently exclude individual companies that, in our view, fail to responsibly address the key sustainability challenges they face. We exclude industries where we believe the core business model is inherently destructive, and incapable of reform.  Nuclear weapons are a good example. In the energy sector, we currently exclude coal, nuclear and the major integrated oil companies. With respect to coal, we also generally exclude coal-based utilities, railway companies that derive most of their revenue from transporting coal, and we have also excluded marine shipping companies for which transporting oil and coal is a substantial part of their business. We also seek to exclude companies that derive significant revenues from tar sands development.

Our funds’ energy exposure is currently tilted toward natural gas, which we continue to view as a ‘transitional’ fuel towards a renewable energy future. At least for the near term, the lower carbon intensity of natural gas is important (We are well aware of the current debate around fugitive methane emissions, and are tracking this closely). We recognize natural gas is a short-term solution.  However this approach appears to be yielding benefits.  The abundance of natural gas, for example, has reportedly driven down the price and production levels of coal. http://www.sfgate.com/business/article/Cheap-natural-gas-drives-down-coal-industry-3519986.php  A move away from fossil fuels can’t happen overnight, and it’s important to support “better” sources of energy even as we look to alternatives. We believe it is important to remain flexible, and to adjust our policies and priorities as new information comes in.

We have also actively engaged with natural gas companies in our portfolio about hydraulic fracturing, and are engaged in a number of climate change initiatives, including corporate engagement on sustainable forestry and coal financing.

One way of viewing social screening is that it is a way to make a statement and send a signal to the marketplace. So the question for us on screening out industries is: have we made a strong enough statement about an issue? With fossil fuels we have made a strong statement by excluding coal, coal-burning utilities and most large integrated oil companies.  What we are considering now is whether we need to make an even stronger statement by re-evaluating our position on natural gas.

It’d be interesting to see Domini or Calvert poll their investors on this topic: Would they be willing to accept lower returns, in the short run, in exchange for a portfolio free of fossil fuels? Would you?

Marc Gunther writer for Fortune, GreenBiz and Sustainable Business Forum co-chair, Fortune Brainstorm Green 2012 and a blogger at www.marcgunther.com.  His book, Suck It Up: How capturing carbon from the air can help solve the climate crisis, has been published as an Amazon Kindle Single. You can buy it here for $1.99.

December 05, 2012

China Solar Update: LDK, Canadian Solar, First Solar & Sunpower

Doug Young

There're quite a few news bits coming from the solar sector today, with more downbeat news from struggling LDK Solar (NYSE: LDK) even as 2 western panel makers make important new inroads to the China market. Meantime, Canadian Solar (Nasdaq: CSIQ) is also getting some good news in the form of new financing from a major western commercial lender for a new solar power project in Canada.

Let's start with the LDK news, as it's easily the most downbeat in this flurry of new reports. For anyone who doesn't follow the sector too closely, LDK is one of the weakest major players in an industry suffering through a massive supply glut. Its weak financial position has left LDK tottering on the brink of insolvency for much of this year, and the company is actually in the process of a slow and painful takeover by a coalition of state-backed Chinese government bodies. (previous post)

Its latest results show that both the pain and the broader retrenchment continue, with LDK reporting another massive loss of $137 million for the quarter, although that figure was actually an improvement over the loss of $253 million in the previous quarter. (company announcement) The company said it cut another 2,600 jobs during the third quarter, meaning its workforce is now about half of where it was at the beginning of this year as LDK tries desperately to conserve cash.

But its huge debt pile means there's really no way the company can survive without a government bailout, which is likely to be finalized by the end of next year's first quarter. Investors sold off LDK shares after the report came out, with the stock down 10 percent as many are probably betting their shares could become worthless under an eventual state-led takeover.

Meantime, western companies First Solar (Nasdaq: FSLR) and SunPower (Nasdaq: SPWR) have both announced new projects in China, as Beijing embarks on an ambitious plan to support its solar panel makers by building up major new solar power plants. (English article; First Solar announcement) First Solar said it will supply 2 megawatts of thin-film solar panels for a demonstration project in Xinjiang in far western China; meanwhile SunPower said it will form a joint venture to sell its solar panels into the China market. First Solar had previously announced it was setting up shop in China to take advantage of what is expected to be a major construction boom for new solar power plants over the next 5 years. (previous post)

It will be interesting to watch and see how First Solar, SunPower and the handful of other surviving western players do in the China market, where they will face stiff competition from local players like Trina (NYSE: TSL) and Yingli (NYSE: YGE). Both Washington and the European Union have taken recent actions to punish Chinese panel makers for receiving unfair support from Beijing, so it's still quite possible we could see Beijing retaliate by excluding foreign companies like First Solar and SunPower from receiving major orders in China. I suspect we'll probably see some bias towards the Chinese panel makers for these new Chinese projects, but that western companies should also be able to get some sizable orders.

Lastly, let's take a quick look at Canadian Solar, which has secured $139 million in financing from Germany's Deutsche Bank to build a project in Canada. (company announcement) Canadian Solar seems to be trumpeting the announcement as a sign that it can get financing for projects from real commercial banks and isn't dependent on Chinese state-owned banks that often lend for more political than commercial reasons. But in this case, the loan is just a short term one to pay for construction of a major new plant. Once it's built, the plant will be immediately sold to its longer term owner, meaning the risk to Deutsch Bank is relatively small. Still, it's encouraging to see that commercial lenders are still interested in this kind of project, which shows the sector still has some longer term potential as a viable business.

Bottom line: LDK's move toward a state-led takeover continues with its latest poor results, while foreign solar panel makers are likely to benefit from China's plans to build up its solar power sector.

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

SEC Charges Chinese Units of Five Accounting Firms; Chinese Cos Defect

Doug Young

Media are buzzing with word that the US securities regulator is once again tussling with major auditors over access to the accounting records of US-listed Chinese firms, in the latest chapter of an ongoing story; but what has me more intrigued is the scramble that is probably taking place behind the scenes, as those same auditors try to figure out what they will do when the inevitable happens and they are forced to share their records with the US Securities and Exchange Administration (SEC).

Right now I can imagine what is happening: the auditors, including big names like Ernest & Young and Deloitte, are probably frantically poring over all their audits for US-listed Chinese firms from the last 2-3 years, and trying to decide which firms to sever their ties with. While big names like Baidu (Nasdaq: BIDU) and Sina (Nasdaq: SINA) are unlikely to see any big changes in their accounting partnerships, mid-sized and smaller players could see a big shuffling of the cards as their auditors abandon them over concerns about some of their past accounting practices.

Let's take a step back and look at the history of this current tussle between the SEC and Chinese firms, which began last summer at the height of a series of scandals caused by aggressive or even fraudulent accounting by some US-listed Chinese firms. As the SEC began to investigate some of those cases, it quickly discovered that the companies' external accountants, which often included big names like Deloitte, were unwilling to share information from their audits. (previous post)

The auditors said they weren't allowed to share such information, since all of the companies being examined were based in China and therefore only Chinese regulators had the authority to demand such sharing of information. Of course, many observers, myself included, suspected the auditors were using the jurisdictional argument to avoid sharing data that would show they had either neglected their duty as auditors or, even worse, had actually colluded with Chinese companies to defraud investors.

The SEC responded by approaching Beijing and opening landmark talks with Chinese authorities designed to facilitate the access to auditing records they were seeking. Those talks are still in progress and could finally result in a breakthrough information sharing agreement by the end of next year.

But in the latest development of this ongoing case, the SEC has taken the equally aggressive tact of actually charging the Chinese units of 5 US accounting firms, including the so-called "Big Four" auditors, of potentially defrauding investors related to their accounting for 9 US-listed Chinese firms. (English article) The auditors have reportedly cited China's "state secrets" law for their refusal to hand over the records, relying on this arcane and highly ambiguous law to avoid complying with the SEC's order.

This SEC move to file criminal charges will add to the pressure on the auditors, and I suspect that we're likely to see some cooperation between the 2 sides before the end of 2013. As this inevitable outcome approaches, the auditors are likely to quickly determine which of their clients might become the biggest liabilities and sever their relationships with those companies sooner rather than later.

We already saw solar panel maker Trina (NYSE: TSL) cut its ties with Deloitte back in June, though it's unclear who initiated the split. (previous post) We should expect to see more similar divorces in the months ahead, with the rate accelerating as the SEC and auditors move closer to their final cooperation. As that happens, look for lots of volatility in the share prices of companies that get dumped by their auditors, as investors fret that such companies could eventually become the targets of SEC investigations and eventual de-listings.

Bottom line: Big US auditors are likely to sever their relations with a growing number of mid-sized and smaller US-listed Chinese firms in 2013 as they face growing pressure to comply with SEC investigations.

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

December 04, 2012

December Update: 11 Clean Energy Stocks for 2012

Tom Konrad CFA

What the Election Brought to Energy Stocks

Obama's reelection did not bring on a new bull market for Clean Energy stocks, as some had hoped.  My Clean Energy model portfolio was flat (+0.4%) for the month, while the widely held Powershares Wilderhill Clean Energy ETF (PBW) fell 1.6%.  In contrast, the broad market, as measured by the Russell 2000 ETF, (IWM) rose 1.1%. 

If Obama's re-election had a strong effect on any energy sector, it was coal stocks: the Market Vectors Coal ETF (KOL) was down 8.5% over the same period.  The market seems to be saying that the Republican-controlled House will be able to block any significant legislation which might favor clean energy, but Obama's re-election will allow the EPA to continue its efforts to tighten emissions regulations in power generation.  Such regulations force power plants to bear more of the costs of the pollution they produce, and make burning dirty fuels like coal less attractive.

For the year, my clean energy model portfolio leads PBW by 26% but lags the broad market by 8%.  The unhedged portfolio is up 4.8% for the year, while the hedged portfolio is down 2.3%, having lost money on the hedge as the broad market rose.  For comparison, PBW is down 21.9% and  IWM is up 12.5%.

For details on the performance of my individual picks, see the chart and discussion below.
11 for 12 Dec.png

Stock Notes

Among the significant movers in the model portfolio this month were Waterfurnace Renewable Energy (TSX:WFI / OTC:WFIFF), which announced disappointing third quarter results of 24 cents per share, compared to 38 cents in 2011.  The company attributed the poor results to low natural gas an propane prices.  The stock fell 19%, bringing the yield over 7% at the current stock price of C$13.60.  Since I think current low prices in natural gas and natural gas liquids are unsustainable, with drillers unable to recover their full costs at these prices, I've added to my position in the company.

Western Wind Energy (TSX-V:WND / OTC: WNDEF) rose 17% on the news that Brookfield Renewable Energy Partners (TSX:BRP.UN, OTC: BRPFF) had made a C$2.50 cash offer for the company, outside Western Wind's organized bidding process.  This led Western Wind to comment that it had received multiple expressions of interest from parties involved in the process indicating a willingness to pay considerably more than C$2.50, and pushed the stock into the high C$2.70 range.  The company then got an additional boost from the announcement of a supplemental cash grant payment of $4,132,980 (6 cents a share.)  This supplemental grant is the result of Western Wind's perseverance in discussions with the US Treasury over the reduced award on its 1603 cash grant for its Windstar project.  While the supplemental grant only makes up for a third of the $12.2 million shortfall, I was pleasantly surprised that they received anything more, despite the fact that management has never wavered in their belief that additional money would be forthcoming.

Rockwool International A/S (COP:ROCK-B / OTC:RKWBF) rose 16% on strong third quarter earnings.  For the first nine months of 2012, sales increased 8% compared to the first nine months of 2011, and the company expects sales for the whole year to be up 6%.  The company raised its target for full year earnings from DKK 650-700 million ($5.18-$5.57 per share) to at least DKK 700 million ($5.57 per share).

Accell Group (Amsterdam:ACCEL) fell 9%, on the announcement that the company expects 2012 profits despite organic sales growth.  Company CEO Ren Takens attributes lower profits to the costs of integrating the recent Raleigh and Diamondback acquisitions, with limited synergies expected this year.  Takens expects positive synergies to emerge from the acquisitions over the longer term.

Finavera Wind Energy (TSX:FVR, OTC:FNVRF) was flat, after falling early in the month, and then receiving a strong boost when the company announced it had received initial offers from four companies in its sale process.  The offers are currently being reviewed by Finavera's M&A advisory firm. 

Veolia Environnement S.A. (NYSE:VE) rebounded 8% after an 8% fall the previous month.

Honeywell, Inc. (NYSE:HON) fell 2% despite slightly better than expected quarterly results.

Lime Energy (NASD:LIME) continued its slide, falling another 3% after delaying its third quarter results because of its ongoing investigation into previously disclosed accounting problems.

Alterra Power (TSX:AXY / OTC: MGMXF) fell 7% without significant news. Analyst John McIlveen says this company "has a number of events that could make it a very interesting story" but investors are not yet paying attention.

New Flyer Industries (TSX: NFI / OTC:NFYEF) rose 4% despite 13% lower quarterly earnings caused by a previously disclosed delayed bus order which disrupted its production schedule.  

Waste Management (NYSE:WM) rose 2% after reporting quarterly earnings which beat street expectations by 1 cent per share.


Looking forward to the end of the year, it seems almost certain that my model portfolio will once again outperform its clean energy index.  Chances of outperforming the broad market seem slim, but I would not be surprised if the gap narrows significantly on more buyout news from Western Wind or Finavera.


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 01, 2012

Yingli: Sunnier Days Ahead?

Doug Young

Yingli logoStruggling solar panel maker Yingli (NYSE: YGE) is trying the good news-bad news approach to distract investors from its latest downbeat earnings, announcing its biggest-ever new order on the same day it released its dismal third-quarter results. Based on shareholder reaction, the approach has been quite successful, with Yingli's stock surging more than 13 percent in Wednesday trade after both announcements came out. Investors seem to clearly be focused on the big new order, and are hoping that Yingli may actually be able to manufacture profitably by the time it delivers the solar cells to this major new customer.

Let's start with the good news, since that's clearly the focus of investors who are desperately looking for any signs of optimism in this beaten-down sector suffering through its worst-ever downturn due to a huge global supply glut. The new order will see Yingli supply solar cells with 200 megawatts of direct current capacity to a project being built near San Diego, California. (company announcement)

The massive project was designed to be one of the world's biggest solar power plants to date. The fact that it's in the US is also significant, because that means the plant was designed to be profitable and easily connected to the national power grid -- factors that are sometimes absent in big Chinese projects where politics is often a bigger factor in construction of such plants.

Equally interesting is the fact that the builder of this plant chose Yingli despite a recent US decision levying big anti-dumping tariffs against many Chinese solar panels. Yingli didn't comment on whether the panels it will supply under this agreement are subject to the new tariffs; but I suspect they probably aren't since the addition of such taxes would make such a sale highly unprofitable, rather than just slightly unprofitable under current market conditions.

On the subject of unprofitable, let's move on and take a look at Yingli's latest earnings report that is quite a bit uglier than the new order announcement. There are so many bad numbers in the report that it's hard to know where to start. The company's revenue tumbled by nearly half to about $350 million, and its loss grew more than 5-fold to more than $150 million. (results announcement)

Its margins also tumbled deeply into the negative range, meaning it will be selling the panels from this massive new order at a loss unless its situation improves by the time it delivers the goods. Based on Yingli's stock reaction, investors must believe the company can start to manufacture panels at a profit within the next 6 months or so, which is when the company will probably start to deliver the bulk of its panels under this big new order.

That kind of optimism looks a bit bullish to me, but perhaps could be possible if Beijing rolls out a rumored rescue package for the sector before the end of the next year's first quarter. That package would reportedly see Beijing, using state-owned banks, recapitalize the industry and force a major consolidation around 10-12 of the biggest, healthiest players. This big new order seems to indicate that Yingli could well emerge as one of those consolidators, and could ultimately become a leading global player if and when the solar panel-making sector ever returns to health.

Bottom line: Yingli's award of a major new order from the US indicates it is likely to be chosen as a consolidator when Beijing bails out its solar sector, and could ultimately emerge as a leading player.

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

« November 2012 | Main | January 2013 »

Search This Site

Share Us


Subscribe to this Blog

Enter your email address:

Delivered by FeedBurner

Subscribe by RSS Feed


Certifications and Site Mentions

New York Times

Wall Street Journal

USA Today


The Scientist

USA Today

Seeking Alpha Certified

Seeking Alpha Certified

Twitter Updates